‘If they don’t do anything on affordability, it will look like they’re not responding to what people are concerned about. If they do too much of it, they’ll add to inflation’
OTTAWA – Finance Minister Chrystia Freeland’s third budget will be a “very tricky balancing act” in responding to the United States’ Inflation Reduction Act (IRA) and Canadians’ concerns about affordability, if she also intends to show fiscal restraint.
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Two former economic advisors to the Trudeau government believe that Freeland had to deal with a series of challenges in crafting her budget this year, given the softening indicators in overall economic activity and the emergence of stress in the financial market due to higher interest rates, which make it more difficult to spend.
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Tyler Meredith, former adviser to Prime Minister Justin Trudeau as well as to Freeland and former finance minister Bill Morneau, said that the government has to deal with a decline of the nominal GDP, which means that it is more and more difficult to spend on new budget items.
“When the economic context changes, it changes the entire fiscal picture,” said Meredith, co-founder of Meredith Boessenkool Policy Advisors. “It changes the fiscal track, it changes the output of the economy, and it changes the space that you would have to be able to invest. And that’s a challenge that we, as a government, haven’t faced in a long time and it makes for a hard planning cycle.”
Robert Asselin, Morneau’s former main policy adviser and now senior vice-president of policy at the Business Council of Canada, said that the federal government does not have the fiscal room it used to have but that has not really stopped it from spending billions and billions in past economic exercises.
“But I do think that this time, it’s much trickier for them to take these gambles with a huge spending budget,” he said.
Freeland has highlighted in recent speeches that the federal government’s spending capacity is not infinite and she would be exercising fiscal restraint in this new budget. But she is also expected to detail the Canadian response to the IRA and announce some targeted measures to help those struggling with the high cost of living.
Trudeau told reporters on Monday that a “big part of the budget” will be focused on measures to provide government subsidies in targeted ways, including benefits intended to offset the cost of groceries.
Meredith noted that the GST tax credit announced last year would probably be extended in the budget to help lower-income families, and that it is something that NDP leader Jagmeet Singh has invested lots of time and energy promoting as part of his party’s confidence-and-supply agreement with the Liberals.
“If they don’t do anything on affordability, it will look like they’re not responding to what people are concerned about. If they do too much of it, they’ll add to inflation – which will be counterproductive,” said Asselin about the measures to come.
Asselin also said Canada has no choice but to respond to the hundreds of billions of dollars in subsidies the Biden administration is spending on industry and lower-carbon technology. But he thinks it might not be an easy sell politically to taxpayers who might not see the value of corporate subsidies.
“This long-term competitiveness… is hard to sell in a budget. So I think politically that will be a challenge for the government,” he said.
Meredith said that some big-ticket items — such as the clean-technology manufacturing tax credit, the hydrogen development production credit and the tax credit for carbon capture utilization and storage — have already been announced in the fall economic statement and the final amounts would be detailed in the budget.
There might be other funds needed to attract other projects and changes on the regulatory side to support and accelerate investments in critical minerals projects, he said.
The fall economic statement promised a budget surplus as soon as 2027, but the credibility of that promise is in doubt given higher interest rates, which lead to higher debt-servicing costs, and expected sluggish growth delivering less revenue for the government, Asselin explained.
“It’s a very difficult budget to be in and hard to sell, for any minister, not just her,” said Asselin.
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