Federal Budget Analysis 2023
Government budgets are always important in at least one sense — they provide the framework for future government spending. Once a budget passes, we know what programs and projects will receive funding for the next several years. That’s vital information for stakeholders. Some budgets are politically important. If the public likes a budget the governing party can win support in the polls. Budget 2023 found favour with the opposition New Democratic Party, meaning the Liberal minority government will survive for the time being. Then there is policy.
Budget 2023 stands almost alone in recent times as a policy landmark. Finance Minister Freeland’s budget is likely to shape Canada’s energy policy for the next 25 years. Yes, it provides at least some policy direction in many sectors but more than anything it reacts to President Biden’s Inflation Reduction Act (IRA), probably the most important energy and environmental policy ever seen in the US. For many of Canada’s biggest stakeholders Budget 2023 must meet the competitiveness challenges created by the IRA or risk losing tens of thousands of jobs and billions of dollars in investment to the United States.
Energy companies are looking to mitigate the emissions from their operations. If they can do that more economically in the United States than Canada, that’s where they’ll go. They won’t wait in the hope that future budgets will improve incentives. Clean tech companies in Canada will crunch the numbers to find out if Budget 2023’s initiatives make them competitive. For Alberta, Saskatchewan, and Newfoundland, the economic stakes are high, and so are feelings. All provinces worry about fair treatment from the federal government, especially in Saskatchewan and Alberta, and in Alberta a provincial election looms.
So far stakeholders have both raised red flags and cheered the Liberal measures. We look at these measures below. We are also watching the important changes on We are also watching the important changes on electricity, manufacturing, and healthcare, to name a few.
As with all budgets, everything hinges on the specific measures. We touch on the most important of those measures in the pages ahead.
What Does Budget 2023 Mean for Canada’s Economy?
Sustainable Jobs, Energy Policy, Transition
The Fall Economic Statement hinted that Canada's transition to a low-carbon economy was a Budget priority. Taken together, initiatives to jump start clean projects will receive $20.9 billion in funding for various programs. Over half of this amount, $10.5 billion, has been allocated to support clean technology manufacturing and hydrogen energy projects through business subsidies.
The tax credits include investment in new machinery and equipment, clean hydrogen projects, clean energy, and carbon capture, utilization and storage. Businesses eligible for the highest rates of these investment credits must pay their employees a total compensation package equal to the existing union wage. The budget also earmarks $650 million over ten years for monitoring, assessment, and environmental restoration in major bodies of water.
Competitiveness and a Response to the US Inflation Reduction Act (IRA)
The Liberal government’s approach to competing in the global economy for investment dollars is to “crowd-in” new private investment by leveraging public investment and government policy. The three areas in which the government is hoping to incent investment are clean tech, clean fuels, and clean electricity.
On electricity the Government is proposing a refundable investment tax credit of 15% for new and refurbished infrastructure used to reduce the emissions associated with the production, storage and distribution of electricity, and continued availability of financing through the Canada Infrastructure Bank.
On clean tech the government is offering a refundable 30% tax credit for investments made in clean technology manufacturing, clean hydrogen, zero-emission technologies, and carbon capture and storage. The Canada Growth Fund will also deploy financial instruments known as contracts for difference, which will help to mitigate risks by making carbon pricing more predictable.
On clean fuels, the government has created the Clean Hydrogen Investment Tax Credit, with levels of support varying between 15% and 40% of eligible costs, with cleaner hydrogen projects claiming bigger credits. Meanwhile, the government will consult industry on biofuels policy to determine how best to responds to generous credits present in the US IRA.
Innovation
$500 million over ten years will be added to the existing Strategic Innovation Fund (SIF) to support new clean technologies. A commitment to review the Scientific Research and Experimental Development tax credit was promised in the last budget - only to be repeated in this year’s document. There is new funding for colleges through the Natural Sciences and Engineering Research Council, and $1.1 billion over 14 years for the Canada Space Agency.
Fiscal “Responsibility”
The Budget aims to cut spending on consulting, professional services, and travel by 15% of planned 2023-24 discretionary spending in these areas, resulting in $7.1 billion savings over 5 years and $1.7 billion ongoing. Reductions will be targeted on management consulting. Further, Departments and agencies' eligible spending will face a phased 3% reduction by 2026-27, reducing government spending by $7.0 billion over 4 years and $2.4 billion ongoing. However, it won't affect direct benefits and services to Canadians, transfers to other governments and Indigenous communities, and the Canadian Armed Forces. Federal Crown corporations will be required to achieve comparable spending reductions, accounting for an estimated $1.3 billion over 4 years starting in 2024-25 and $450 million ongoing.
Changes to Tax Policy
Budget 2023 featured a few changes to federal tax policy, mostly aimed at buffeting the country’s finances at the expense of high income earners and profitable corporations. Tax changes proposed in the Budget include:
A proposed 2% tax on share buybacks by public corporations in Canada beginning in 2024, an estimated revenue increase of $2.5 billion over five years.
An update to the Alternative Minimum Tax (AMT) to target high income earners who pay little personal income tax. The changes (limiting exemptions, deductions, and credits, increasing the rate, and raising the exemption) are expected to raise $3 billion for the federal treasury over five years.
The Government will begin taxing dividends received by Canadian financial institutions on Canadian shares.
Efforts to Reduce Inflation
Budget 2023 gives a nod to the macroeconomic forces pushing inflation higher, noting the impacts of the pandemic, labour markets, supply chains, and the ongoing war in Ukraine. The government argues that inflation relief programs (more on that below) are targeted to the most vulnerable in order to avoid further inflationary pressures, and that the economic advantages of investments made in the Budget outweigh the inflationary effects. The Budget notes that further action to battle inflation may be necessary in the coming year to ensure that high inflation is as transitory as possible.
What Does Budget 2023 Mean Politically?
Healthcare
Increases to the Canada Health Transfer are accounted for in the Budget. Following negotiations with the provinces and territories in February, the federal government will transfer $22.23 billion in new money over the next five years. This is the single largest new spending item this year. Middle- and lower-income Canadians will also see public dental coverage begin by the end of 2023, with no co-payments for families with less than $70,000 of income. At a cost of $13 billion over five years, this is also a big new line item for the Liberals to keep the NDP happy.
Affordability
While the Budget does little to tackle the root causes of inflation, the Government has included several initiatives it claims will help Canadians with steeply rising prices. In addition to investments made in dental care (see above), Minister Freeland unveiled new spending to help household budgets, including:
A Grocery Rebate for Canadians to be rolled out through the GST rebate system, providing up to $467 to a family of four.
Cracking down on predatory lending by lowering the criminal interest rate to 35% APR.
Promised action on “junk fees,” common chargers for electronic devices, and ensuring Canadians can repair their own appliances.
What are the Reviews of Budget 2023?
Conservative Party of Canada
Conservative Leader Pierre Pollievre took to social media moments after the embargo was lifted, saying “Conservatives will VOTE AGAINST Trudeau’s plan to add billions of new inflationary debt & tax hikes on heat, gas & groceries. Time to bring home a country that works for the people who do the work, with lower prices, more homes & powerful paycheques.”
Pollievre described the Budget as a lavish spending spree and an aggressive assault on taxpayers. Additionally, he seized the opportunity to attack the government's lack of action on housing in this budget. Poilievre accused the NDP-supported government of driving up inflation and leaving young people stuck living in their parents' homes while also burdening households with insurmountable debt. Poilievre pledged that if he were in charge, his government would eliminate unspecified "gatekeepers" and build millions of new homes.
NDP Reaction
NDP Leader Jagmeet Singh expressed satisfaction with his party’s success in pressuring the Liberal government to continue to grow access to dental care, the grocery rebate, and the inclusion of prevailing wage conditions in the investment tax credits announced. While expressing disappointment on what he called inaction on the housing crisis, Singh announced that his party would support the Budget, thus abiding by the Liberal-NDP confidence and supply agreement and avoiding an election this spring.
Bloc Reaction
Bloc leader Yves-François Blanchet “rejected” the deal that Ottawa and the provinces signed on healthcare, stating that the amounts were “clearly insufficient.” For the BQ, the budget was “thin” and a “copy-paste of the Fall Economic Statement,” with no action on EI reform or income top-ups for seniors between age 65 and 75. Blanchet accused the government of “greenwashing” with its investor tax credits, and announced that his party would not vote for the document.
Business Community Reaction
The Business Council of Canada responded to Budget 2023 by lauding the government’s commitment to expediting impact assessment and permitting processes for major projects, while expressing concern about the government’s fiscal position and record on spending. The organization also recognized the investment tax credits in the Budget, and the ways in which they will improve competitiveness with a post-IRA US. The Canadian Chamber of Commerce criticized the budget saying that it wouldn’t close the “growth gap” between Canada and competitor economies. Though pleased with the investment credits and the commitment to a National Supply Chain Strategy, the Chamber noted little action on labour market issues.
A Significant Budget
Budgets come and go. Few are remembered beyond Budget Day but Budget 2023 will have staying power. Future governments may tinker with the energy policy in Minister Freeland’s budget, but they will not reverse it. Canadian companies have looked across the US border with envy, musing out loud that they may have to head south to fully leverage the rich energy and environmental incentives in the Inflation Reduction Act. Big questions remain around matters like carbon capture, utilization and storage, but for now Budget 2023 has most stakeholders hopeful that Canada can now compete against the elephant next door.