2021 Federal Budget Analysis
By Scott Munnoch, Temple Scott Associates
Yesterday, in the midst of the third – and severest – wave of COVID-19 in Canada, Finance Minister Chrystia Freeland tabled the first Federal Budget in more than two years.
Minister Freeland framed the Budget by stating in her speech to the (virtual) House of Commons that it is simultaneously about three themes, specifically: “finishing the fight against COVID”, “healing the economic wounds left by the COVID recession”, and “creating more jobs and prosperity”.
Of course, most governments traditionally seek to build their budgets around easily-communicated themes. However, the chosen themes for this budget are so broad that almost any type of spending or programming could fit under them. And, indeed, that seems to be what happened. Every stakeholder will find at least one thing to like in the Budget, essentially making it a blueprint for the Liberal platform in the next election that is widely expected to occur at some point this year.
The major elements of the Budget are ultimately either spending on public health and fighting COVID-19 or spending on longer term programming for a range of topics not linked to the pandemic. Notable budget allocations in each of those categories are:
COVID-related programs: Extension of the pandemic support programs for businesses and individuals, a $2.2 billion investment in domestic biomanufacturing capacity, and a $3 billion allocation to work with the Provinces to improve the standards of care in long-term care facilities; and
Other: A $30 billion allocation to create a national early learning and child care program, direct supports for large and small businesses, and $17.6 billion in new environmental spending, as well as many, many other initiatives.
Though much of Minister Freeland’s speech when presenting the Budget in the House of Commons was focussed on the near-term response to COVID-19, the bulk of the budget in print is concerned with more forward-looking and long-term policies. That said, in what is likely a deliberate political strategy, there are so many proposed programs in the Budget that no minority government could hope to design and implement them during one term of government. As such, stakeholders should expect many of the proposals advanced by the Liberals today to be future topics for re-election campaign speeches leading to the next election.
A Deeper Dive
Chrystia Freeland’s mandate letter asks her to avoid creating “new permanent spending” in her role as Finance Minster. But, on top of COVID-related spending, some measures in this budget – notably the proposed early learning and child care program – could permanently increase the size of the Federal government. In any event, the current national balance sheet is unprecedented in nature.
Federal Fiscal Snapshot
The budgetary deficit for fiscal year 2020-21, while lower than projected in the 2020 Fall Economic Statement, was a whopping $354.2 billion – or 49% of GDP.
Looking ahead, annual deficits will continue for the foreseeable future, although they are projected to shrink significantly. Projected deficits in the near-term are $154.7 billion in 2021-22 and $59.7 billion in 2022-23, reaching a low of $30.7 billion – or 1.1% of GDP – at the end of the fiscal horizon of the Budget, in 2025-26.
The dramatic decline in projected deficits over the fiscal horizon of the Budget demonstrates that there is room to cut Federal spending substantially by scaling back pandemic-related programs. However, for those projections to be true, pandemic programs would have to sunset and the Government would have to avoid announcing significant new spending for the next few years.
Highlighting the unprecedented scale of Federal spending over the past fiscal year and in the coming years is the fact that Federal debt as a percentage of GDP was not planned to rise above 30% in the Liberal government’s pre-pandemic fiscal planning. Now, that measurement is projected to hover between 49 and 52% for the foreseeable future.
Fighting COVID-19 and Its Economic Effects
The Liberals will say that spending is essential and worth it in the long run – an argument that they may well choose or be forced take to voters in an election before the end of the year.
The Budget extends the major pandemic support programs for individuals and businesses – the Canada Emergency Wage Subsidy, the Canada Recovery Benefit, the Canada Emergency Rent Subsidy and lock-down support – until at least September. The Budget also proposes to invest $8.9 billion over six years in additional support for low-wage workers, establish a $15/hour federal minimum wage, and extend the EI sickness benefit from 15 to 26 weeks.
Overlapping with that programming, a new Canada Recovery Hiring Program will run from June to November and will provide $595 million to incentivize businesses to hire back laid-off workers or to bring on new ones.
The Budget also allocates $3 billion to improve the standards of care in long-term care facilities, sets aside funds to increase Old Age Security for those 75 years of age and older, and announces a $2.2 billion fund to develop domestic biomanufacturing capacity. Combined, those measures were positioned by the Government as being crucial to addressing the ongoing pandemic, variants of COVID-19, and the potential need for booster vaccines in the coming years.
Clearly absent in the Budget is any mention of the Canada Health Transfer. This has been identified by the provincial Premiers as the key issue during the pandemic period, while the Federal government has repeatedly stated that the pandemic was not the time to deal with the transfers. The difference is significant and promises to be an irritant for the Federal government in the months ahead.
Long-Term Economic Recovery
Perhaps the biggest ticket item in the Budget is a commitment of up to $30 billion over five years, reaching $8.3 billion every year, permanently, to build a high-quality, affordable and accessible early learning and child care system across Canada. The Liberals are positioning that spending as an economic measure – and an issue of equality – that will grow the economy by allowing more parents – especially women – to work.
If implemented it would require substantial negotiation and partnership with the Provinces - that funding would allow for a 50% reduction in average fees for regulated early learning and child care in all provinces other than Quebec, to be delivered by the end of 2022, and annual growth of the number of affordable child care spaces across the country. The system would be based on the Quebec model and aim to provide daycare services across the country for an average of $10/day within five years.
The Budget also seeks to directly grow businesses both large and small through a recapitalization of the Strategic Innovation Fund, dedicated support for women and black entrepreneurs, and $4 billion in assistance for small businesses to compete in the digital economy and transition to e-commerce business models.
Climate and The Environment
Budget 2021 pledges that the Government will announce “new, more ambitious 2030 climate targets in the coming days” and allocates $17.6 billion in new investments to creating green jobs, greening the economy, and fighting climate change.
The climate and environment policy context changed last week when the Conservatives announced a plan to combat climate change. That plan includes a pledge to meet Canada’s 2030 emissions reduction targets under the Paris Agreement and includes both a price on carbon and a clean fuel standard – two policies that the Conservatives previously opposed.
With today’s budget, the Liberal government is essentially trying to set a new national bar for climate policy, pledging to achieve GHG emissions reductions of 36% from 2005 levels by 2030 (which goes beyond the Paris targets) and reach net-zero emissions by 2050. If achieved, these would be internationally significant and word-leading standards.
The Prime Minister and several Cabinet members will attend the U.S.-hosted Leaders’ Climate Summit this week, so stakeholders should monitor for even further announcements in this policy area. The credibility and ambition of each party’s climate policy will doubtlessly be a prominent issue in the next election.
Official Opposition Leader Erin O’Toole said that this was an election budget – a statement that may well turn out to be true. He also criticized the Government for foregoing a traditional fiscal anchor and said that the Budget does not present a serious plan for economic recovery or for supporting workers and businesses. The Conservative Party announced that it will propose amendments to the Budget, and the Conservative Caucus is expected to vote against the Budget.
NDP Leader Jagmeet Singh reiterated his calls for a wealth tax and criticized the Liberals for saying great things but lacking follow through on policies like childcare and pharmacare. Green Party Leader Annamie Paul shared the latter feeling and expressed doubt that this Parliament will last long enough to implement the programs proposed in the Budget.
Bloc Leader Yves-François Blanchet was more reserved in his judgement of the Budget, but called again for increasing the Canada Health Transfer to the Provinces.
Importantly, the NDP has already indicated that it will not vote against the Budget, so the Government likely won’t fall on the confidence votes on this fiscal plan. The Budget will be debated for four days and will face three votes during that time – each of which can be considered a confidence vote. The outcome of these votes is predictable and the chance of an election immediately post-budget is low.
The next major battle between the parties is more likely to be over the passage of the first Budget Implementation Act (BIA) through Parliament. For stakeholders, getting your spending in that BIA and seeing it passed before the end of this Parliamentary session could mean the difference between seeing relevant spending flow by spring or facing the uncertainty of a federal election.
Meanwhile, there is still opportunity to engage all of Cabinet to influence some of the details and funding for specific programs outlined in this budget – and that is especially the case for the $100 billion in post-COVID economic stimulus spending.
In the longer term, it’s easy to see the battle lines for a 2021 election being drawn around this budget. Conservatives will criticize the amount of spending and the NDP will question the Liberal Party’s credibility on actually delivering the promised programs, while the Liberals will ask voters to trust them on both issues.
Ultimately, though, election timing will be dependent on the still-uncertain vaccination rollout and public health conditions caused by the pandemic. Vaccine supply has been far from guaranteed and has been interrupted or delayed by all suppliers. Minister Freeland’s speech highlighted that the Government expects to receive 100 million doses of vaccines by September 2021 – enough for two doses for every adult that wants them.