Canada Sees Improving Finances in Budget Update: Key Takeaways

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Prime Minister Justin Trudeau’s government released new budget estimates Tuesday that showed federal finances in better shape than expected, though the numbers don’t include the bulk of the election campaign promises his Liberal Party made earlier this year.

Key Takeaways

• The document from Finance Minister Chrystia Freeland is a straightforward update of the fiscal and economic picture, with little in terms of new agenda-like spending though there are some new measures around Indigenous funding and Covid support. It is essentially a placeholder document ahead of a full budget early next year
• The numbers show a much better trajectory for revenue and deficits than what was projected in last April’s budget thanks to stronger-than-expected growth in national income
• Yet, little of the Liberal government’s post-election agenda is accounted for. Without new spending, the government projects a near balanced budget by 2026

Fiscal Projections

• The government forecasts smaller deficits in every year along the forecast horizon, with the gap dropping to C$13.1 billion ($10.2 billion) in the fiscal year that begins in April 2026
• Nominal gross domestic product is projected to average about C$90 billion more annually through 2026. Revenue is projected to be higher by an average C$18 billion per year
• Program expenses that were budgeted in April are also coming in less than initially expected over the 2020-2022 period, though they are higher than projected beyond that
• The overall cushion compared with April -- more revenue and adjustments to already budgeted program spending -- was C$36 billion in the fiscal year that ended in March. The cushion is projected at C$38.5 billion this fiscal year and between C$11 billion and C$15 billion in future years

New Spending

• The bulk of the Liberal campaign spending promises -- worth C$78 billion over five years -- are not yet budgeted. The government does, however, have new spending for Covid-19 related expenses and compensation and other funding associated with the Indigenous child welfare system. The total cost of this new spending totals C$71 billion over seven years
• The net impact of all the changes and new forecasts are smaller projected deficits. The final deficit for the last fiscal year -- announced Tuesday for the first time -- was C$327.7 billion, versus C$354.2 billion projected in April. The budget gap in the current fiscal year is seen at C$144.5 billion, versus C$154.7 billion in the April budget. Deficits in the following five years are projected at C$58.4 billion, C$43.9 billion, C$29.1 billion, C$22.7 billion and C$13.1 billion

Borrowing Requirement

• Given the improved fiscal outlook for the current fiscal year, the government’s financial requirement will be C$35 billion less than budgeted in April. Expected bond issuance has been reduced by C$31 billion, to C$255 billion
• Debt to GDP levels are also projected to be lower across the board, while continuing a downward trajectory through the forecast horizon
• The debt ratio will peak at 48% this year, before dropping to 44% by 2026. It was seen reaching 51.2% in the April budget

Tax Measures

• The budget update includes details on the implementation of several new tax measures, but not the 3% surtax on profit over C$1 billion at Canada’s big banks and insurers announced during the election campaign
• Homes owned by non-resident foreigners that are considered to be “vacant or underused” will be taxed 1% annually, beginning in 2022. There will be exemptions, including for certain vacation properties if the owner uses the home at least four weeks a year
• A 3% digital services tax will be imposed on large businesses “that rely on data and content contributions from Canadian users,” such as social media platforms, beginning in 2024 -- but only if a global deal for taxing tech giants doesn’t take effect by then

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