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Election-Style Canadian Budget Contains Something for Everyone – Particularly the Government

by Karl Schamotta | April 19, 2021

Canada’s Liberal government has unveiled its budget for fiscal 2021-22, ramping up spending in more than 240 areas, while promising a return to smaller deficits over the next four years. With the left-leaning New Democratic Party expected to vote in favour, the 724-page budget is likely to gain Parliamentary approval.

A raft of policy measures designed to heal the pandemic-scarred job market were proposed. Wage supports were extended to September, $5.7 billion was devoted to in tuition aid and job retraining, and a new stimulus package – the Canada Recovery Hiring Program – was created to direct monthly subsidies toward businesses which employ new workers in the coming months.

A long-awaited national initiative will provide $30 billion in funding over five years to give parents access to daycare services at a $10 daily cost. This is unlikely to provide beleaguered families much support during the pandemic, but officials at the Bank of Canada have spoken approvingly of a similar program in Quebec, and most economists expect that the plan will help raise female participation in the labor force – something that would lift overall long-term economic productivity.

The increase in infrastructure spending is also significant, but with few of the proposed projects at a shovel-ready stage, could have a relatively modest impact on economic growth in the near term. $8.6 billion in new spending is proposed, with $5.94 billion going into a public transit fund, $4.18 billion going toward technology adoption by small businesses, and $1 billion into bringing broadband access to remote communities. $7 billion will be invested over seven years in “green” technologies, $4.4 billion will be spent on subsidies for homeowners adopting energy efficient technologies, and $4.3 billion on conservation projects.

In an attempt to support first-time homebuyers entering the country’s searingly-hot real estate market, the government will spend $3.8 billion on building and repairing housing units. A 1% foreign buyer tax will be implemented in 2022, applying to vacant or underused properties held by non-resident, non-Canadian owners – a move that is unlikely to impact fundamentals in a material way, but one that could help shift market psychology.

The government adopted a new “fiscal anchor”, suggesting that it will try to reduce debt as a share of GDP over the “medium term” – but no firm definitions were provided to guide market expectations. The government’s estimates suggest that the country’s deficit topped $354.2 billion – roughly 16.1% of GDP – in fiscal 2020-2021, and the plans announced today are expected to keep the budget gap at $154.7 billion in 2021-22. Federal debt is expected to rise to 51.2% this year, before falling to 49.2% in 2025.

Policymakers also hedged against a rise in interest rates. Under the plan, 40% of the bonds created to pay for new spending will be issued between the 10- and 50-year maturities – helping to ensure that today’s historically low rates are locked in over long time horizons, while also increasing the likelihood that underlying economic growth outpaces any increase in carrying costs.

10- and 30-year bond yields climbed, but currency markets – which, since the pandemic struck, have generally applauded fiscally expansionist government policy platforms – reacted very weakly. The new five-year budget projections are broadly in alignment with those issued in November, meaning that little has changed from a fiscal sustainability perspective. And with many critical parts of the document leaked to the Canadian Broadcasting Corporation, Reuters and the Toronto Star over the last 24 hours, surprises were kept to a minimum.

Taken in sum, this is a budget designed to appeal to many constituencies and smooth Justin Trudeau’s re-election campaign – but it might be worth remembering the poet John Lydgate’s admonition: “You can please some of the people all of the time, you can please all of the people some of the time, but you can’t please all of the people all of the time”. Although the newly-announced spending pledges aren’t likely to jeopardize Canadian federal finances today, a massive expansion in the government’s role in the economy has gotten underway, and unintended consequences could prove dangerous in the long run.

Karl Schamotta
Chief Market Strategist
@vsualst

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