Budget with unexpected no red ink11/12/2023 The latter is revised wider from $36.4 billion in the Fall Economic Statement (FES), as increased spending dwarfs a further in-year improvement resulting from the economy. The budget deficit is pegged at $40.1 billion in FY23/24 (1.4% of GDP), improved slightly from $43 billion in FY22/23. Oft-rumoured and more contentious policy measures (e.g., broad capital gains inclusion rate, top income tax rate and principal residence exemption) are again unchanged in this budget.Īll told, this budget continues to push fiscal priorities against a weaker and riskier economic backdrop, leaving behind a deeper deficit path. While inflation has shown signs of cooling, the Bank of Canada remains in a dog fight with price and wage pressures, rendering stimulative measures counterproductive (like direct support payments), although Ottawa just couldn’t fully resist on that front. Most importantly, large-scale immediate fiscal stimulus is held in check with net new measures weighing at around 0.2% of GDP this year. This budget also avoids doing a number of things. More money flows into health and dental care, and there are some more tax increases aimed at higher-income Canadians and businesses worth roughly $4 billion annually a few years down the road. Finally, on the policy front, there are measures aimed at the clean energy sector in a response to the U.S. While the baseline economic assumptions are based on a private-sector consensus, the downside scenario features a recession-like 0.2% decline in real GDP in 2023 that comes with a $47 billion deficit. Ottawa is also acknowledging the possibility of recession this year through a stress test of how finances would look in a below-expected economic outlook, which Finance is now making common practice. This adds to more than $10 billion of “inflation relief” already seen last year at the provincial level. There are immediate direct household transfers of $2.5 billion, curiously billed as a “grocery rebate” even though groceries have nothing to do with it. To be fair, the average price level in Canada is up about 13% from before the pandemic, and the population has expanded by another 4%, but we’re still seeing program spending hold above pre-COVID norms in real per-capita terms and as a share of GDP. In that sense, there has been some permanence to the jump in government spending that has prevented more fiscal consolidation. But, program spending has also jumped by $110 billion, even after massive pandemic-era support spending has fallen away. Over that period, revenues have surged by $120 billion, helped by a strong economic recovery and high inflation. It’s notable that the FY23/24 deficit of $40.1 billion is now very much in line with the pre-COVID balance ($39 billion deficit in FY19/20). Indeed, the first hint of a balanced budget that we’ve seen in years, which showed up in the Fall Economic Statement for the out-years, lasted all of four months. While tax revenues are raised in a few areas and there is some trimming of government operations, the budget deficit sits at $43.0 billion in FY22/23, and about $10 billion per-year deeper through the forecast horizon, with no plan to balance the books. That mostly comes through targeted spending and a swath of tax credits aimed at the clean energy sector. Despite uncertainty on a number of fronts, and a weaker-than-expected underlying budget balance, Ottawa continues to roll out net new stimulus to the tune of $4.8 billion in FY23/24, and $43 billion over six years. The 2023 Federal Budget is set against a backdrop of still-elevated inflation, disruption in the global financial sector and a likely looming recession.
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