The most important sentence in the 2022 Federal Budget appears on page 26. It references a recent study by the Organization for Economic Cooperation and Development (OECD) showing that Canada will rank dead last among all advanced economies in the growth of output (GDP) per capita over the next few decades.
Several factors lie behind this dismal projection, including waning competitiveness, a pattern of feeble productivity growth, sluggish business investment, weak private sector innovation and now an increasing scarcity of skilled workers. The only remedy is a stronger policy focus on bolstering Canada’s productive capacity.
While Finance Minister Chrystia Freeland deserves credit for acknowledging the OECD report, her new budget unfortunately does little to fix the “supply side” problems destined to weigh on per capita economic and income growth in the coming years. The budget does roll out a handful of useful new measures: an increase in the threshold at which SMEs lose access to the preferential small business tax rate; a refundable tax credit to encourage investment in carbon capture, use and storage; a commitment to a “critical minerals” strategy to expand Canadian production of raw materials to support the low-carbon transition; and a slug of cash to improve the resilience of key supply chains. In addition, Ottawa is earmarking money to boost innovation and plans to establish a new “Canada Growth Fund” that apparently will align with the Trudeau government’s low-carbon aspirations.
Overall, however, Budget 2022 mainly sticks with the policy and political priorities embraced by the Liberal government in the past six years: climate change, reconciliation with First Nations and further extending Ottawa’s reach into areas of provincial jurisdiction (notably natural resources, health care and social services). To this list, one can now add housing, as the federal government belatedly steps up efforts to tame Canada’s runaway housing prices and encourage the development of more “affordable” dwelling units in the country’s cities. But as always, federal housing policy suffers from the discomfort that stems from sucking and blowing at the same time. Budget 2022 contains more than 20 housing measures totalling $10 billion over five years. Some have the laudable goals of spurring new rental supply and more non-market housing. But others will juice housing demand, thereby putting pressure on prices. And the government also pledges to ramp up already record-high levels of immigration, which can only aggravate housing affordability challenges across the metropolitan regions where most newcomers settle.
This is not so much a “tax and spend” budget as one that reflects the government’s inclination to “spend and borrow.” For the moment, the continued economic rebound from the 2020 COVID-induced recession coupled with soaring inflation have padded government revenue, resulting in smaller than expected deficits. Indeed, compared with the projections published last fall, the Budget estimates an $86 billion cumulative improvement in the government’s bottom line from 2020 through 2025. While the numerous COVID-related programs introduced in the past two years are being wound down, several new spending initiatives were announced. The net result is that the deficit falls from a revised $114 billion last year (equal to 4.6 per cent of GDP) to $53 billion in 2022-23 (two per cent of GDP), with only modest declines pencilled in over the subsequent four years. There is no commitment to return to a balanced budget.
Examining Budget 2022 in a broader macroeconomic context, we worry that Ottawa will continue to run sizable operating deficits and stimulate the demand-side of the economy even as the central bank moves to engineer several interest rate hikes over the next 12 to 18 months to temper skyrocketing inflation. While Ottawa still has its foot on the spending gas pedal, the Bank of Canada is hitting the economic brakes. As Bill Robson of the C.D. Howe Institute recently warned, “monetary tightening and fiscal excess prefigure a wild economic ride ahead.”
At this stage, what Canada badly needs – but didn’t get in Budget 2022 – is a paradigm shift in its economic policy settings. This requires recognizing that fostering “inclusive and sustainable growth” cannot continue to rely on the repeated doses of macroeconomic stimulus that Ottawa has favoured. Improving the foundations of growth can only be achieved through structural reforms, targeted policies to increase productivity and innovation and smart infrastructure investments that augment the productive capacity of our economy. Most of the work necessary to advance that agenda is still to be done.
As published in Business in Vancouver.