Introduction

Deputy Prime Minister and Minister of Finance Chrystia Freeland tabled the 2022 Fall Economic Statement (FES) in the House of Commons on Thursday afternoon.

The Liberal government is signaling a shift in its fiscal posture with this update. After years of high spending on COVID-19 relief measures, the government is now indicating that it is committed to acting with fiscal restraint. In the current economic context, with a possible recession on the horizon and the cost of living putting strain on Canadians' finances, Minister Freeland has set deficit reduction and fiscal responsibility as priorities amid ongoing uncertainty.

Nonetheless, this FES promises $30.6 billion in new spending over the next six years, including $6.1B in new spending for 2022-23.

Background & context

Inflation is at its highest rate since the early 1980s, and projections indicate that a prolonged recession may be possible.

The Bank of Canada has raised its benchmark interest rate from 0.25 per cent to 3.75 per cent since March through six consecutive rate hikes. Further rate increases are still possible. The central bank believes that inflation has peaked but remains too high, and economic growth is likely to stall in the coming months.

The FES comes one day after the U.S. Federal Reserve increased its key interest rate by 0.75 per cent, the sixth U.S. rate increase this year. Earlier on Thursday, the Bank of England raised its interest rate by 0.75 per cent, the largest hike in three decades, with its rate now sitting at 3 per cent. The Bank of England also warned of a prolonged recession, likely to be the longest on record.

Minister Freeland warned in October that Canadians can expect challenging days ahead, with high interest rates driving up the cost of living. Indeed, the FES explicitly acknowledges that "recession risks have risen." Notably, Minister Freeland did not refer to a "recession" in her House of Commons speech, perhaps to avoid injecting further anxiety into the market (which, according to economists, could stifle spending and expedite the onset of a recession). She did state, however, that "Canada cannot avoid the global slowdown, any more than we could have avoided COVID once it had begun infecting the world."

Prior to this update, Minister Freeland repeated in public appearances that the Government of Canada will not implement universal relief measures, despite the government's willingness to introduce sweeping supports at the height of the COVID-19 pandemic. Accordingly, the proposed measures are targeted.

The federal government's fiscal anchor remains unwinding COVID-19-related deficits and reducing the debt-to-GDP ratio over the medium term.

State of federal finances

Government finances are strong despite uncertain economic conditions.

The federal government has seen tax revenues rise over the last year, driven in large part by inflation itself. Minister Freeland said Canada has also had a relatively strong recovery from COVID-19, and that the economy is showing positive growth in the first half of 2022. However, economic growth has slowed significantly from May to August, due in part to elevated inflation, rising interests rates, and lower equity prices. Moderation of commodity prices is also depressing export revenues.

In her speech in the House of Commons, Minister Freeland stated that Canada has the lowest deficit and debt-to-GDP ratio in the G7.

The FES projects a federal deficit of $36.4 billion for the 2022-23 fiscal year, far lower than the $52.8 billion deficit projected in the spring budget. The deficit is projected to shrink over the coming years, turning to a surplus in 2027-28. The federal debt is on track to hit $1.177 trillion. There is some uncertainty as to whether these deficit projections will prove accurate, as the economic future remains unpredictable.

Minister Freeland highlighted the government's existing responses to the affordability crisis, which seek to address economic anxieties through a set of targeted policy measures. These include:

  • The Canada Child Benefit and cutting childcare fees;
  • Old Age Security and Guaranteed Income Supplement increases;
  • Doubling the Canada Student Grant;
  • A six-month doubling of the GST/HST credit for low- and modest-income Canadians;
  • The first phase of national dental care for children under 12 in households with a family income below $90,000; and
  • A top-up of the $500 Canada Housing Benefit established as a one-time payment.

GST credit cheques will start arriving for eligible families on Friday. The GST credit will be doubled for the next six months.

Bill C-31, An Act respecting cost of living relief measures related to dental care and rental housing is at consideration in committee in the Senate. It is anticipated that Bill C-31 will receive Royal Assent before Parliament adjourns in December for its winter break.

Notable proposals

The FES acknowledges that Canada must boost investment in response to current economic challenges. The federal government recognizes the need for significant investment from the public and private sectors to reach net-zero targets, address supply chain vulnerabilities, and ensure Canadian competitiveness.

A number of measures proposed in the FES respond to the U.S. Inflation Reduction Act (IRA), which came into effect in August 2022. Most notably, tax measures and clean energy investment incentives are reflective of policies first implemented through the IRA.

1. Tax on corporate stock buybacks

The FES includes a new 2 per cent tax on corporate stock buybacks. The tax applies to all forms of buybacks by Canadian public corporations. This policy intends to incentivize reinvestment and expansion of operations in Canada. Details of the tax will be announced in Budget 2023, with the tax coming into force in 2024.

The IRA also contained a new 1 per cent corporate stock buyback in the U.S.

2. Net-zero transition and clean energy incentives

This FES proposes new tax incentives to spur growth in clean and renewable energies, including hydrogen. These measures are, in part, responsive to tax incentives introduced in the U.S. through the IRA.

The first tax credit, called the Investment Tax Credit for Clean Technologies, is a refundable tax credit equaling up to 30 per cent of the capital cost of investments in clean energy (examples include solar, nuclear, small modular reactors (SMRs), wind, and hydro). The credit also applies to electricity storage, low-carbon heat, and industrial zero-emission vehicles.

Secondly, the Government of Canada will launch consultations on how best to implement an Investment Tax Credit for Clean Hydrogen, which could mirror similar measures introduced in the IRA.

3. ​International tax reform commitments

Through the FES, the federal government reiterates its commitment to the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). That framework proposes a reallocation of taxing rights and a global minimum tax applicable to multinational corporations.

4. Investments for sustainable jobs

The FES proposes government investments of $250 million over five years to Employment and Social Development Canada to ensure Canadian labour competitiveness in a changing economy. Investments would begin in 2023-24.

The FES proposes the establishment of the Sustainable Jobs Training Centre, the Sustainable Jobs Secretariat, and a sustainable jobs stream under the Union Training and Innovation Program.

Existing federal, provincial, and territorial programs that target sustainable job creation could also receive supplemental federal supports. The government has proposed investments totaling $60 million over the next three years for such supplemental supports.

5. ​Canadian innovation and investment agency

The FES launches the Canadian Innovation and Investment Agency, which was first announced in Budget 2022. Initial operations will be supported by $1 billion in government funds over five years, starting in 2022-23. The agency will support new and existing Canadian firms to scale up and commercialize to create new business and employment opportunities in Canada.

The agency will operate independently from the government but remain accountable to Parliament. A blueprint for the agency is scheduled for release in the coming weeks, which will offer more details. The government intends to model the new agency on similar agencies in Finland and Israel.

6. Canada growth fund

The FES also outlines the specifics of the Canada Growth Fund, which was announced in Budget 2022. The target for launch is end of year 2022.

The mandate of the fund is to make significant concessionary investments designed to attract private sector investment in a net-zero economy. General objectives include emissions reduction, deployment of innovative technologies (e.g., low-carbon hydrogen, carbon capture), scale up existing Canadian firms, and strengthen natural resource supply chains.

The fund will initially be a subsidiary of the Canada Development Investment Corporation (CDEV). It will later be operated independently from government by a team of professional investors reporting to an expert board of directors. The government will then impose a reporting framework to ensure accountability and transparency. Transition to independent operation will commence in the first half of 2023.

7. Manufacturing competitiveness

The government is launching consultations with industry, experts, and other stakeholders to improve Canada's attractiveness as a manufacturing center for clean technologies. Specific measures will be announced in Budget 2023 following consultations.

The government also committed in the FES to pursue opportunities and attract investment in furtherance of Canada's Critical Mineral Strategy, which was announced in Budget 2022.

8. Lowering credit card rates for small business

The Government of Canada will seek to negotiate with the payment industry and business to reduce credit card transaction fees for small businesses. The government's position will be modeled off of its proposed amendments to the Payment Card Networks Act.

If there is no industry agreement, the government will proceed with legislating those draft amendments in the new year. The government would also seek to regulate credit card transaction fees.

9. Eliminating federal portion of interest on student loans

The FES proposes to eliminate interest on the federal portion of all Canada Student Loans and Canada Apprentice Loans. This measure would include loans that are currently being repaid.

10. Quarterly Canada workers benefit

The FES proposes a new, quarterly, Canada Workers Benefit. The benefit would be automatically issued in advance payments to those who qualified in the previous year. This measure would commence in July 2023 for the 2023 taxation year. Today's FES provides $4 billion over six years for the updates benefit.

Opposition responses

Unsurprisingly, the Conservatives will not support the FES. Conservative leader Pierre Poilievre has been vocal since the tabling of the FES this afternoon, arguing that the government's plan will drive up inflation and worsen the cost of living. Mr. Poilievre is specifically targeting new spending measures introduced in the FES and the government's plan to increase the carbon tax despite the cost of living crisis. The Conservative Party has been critical of the Liberal government for maintaining high levels of pandemic spending longer than necessary. Sustained elevated spending has also reportedly caused concern within the Liberal caucus.

The NDP is claiming a victory with the doubling of the GST rebate, stating that they were able to pressure the Liberals to do so through the supply-and-confidence agreement between the parties. Nonetheless, NDP Leader Jagmeet Singh said that the Liberals have failed to alleviate cost of living pressures on Canadian families.

The Bloc Quebecois is reportedly "disappointed" with the FES. The Bloc will not vote directly on the FES, but it will decide its position on each measure.

The Green Party stated that it will likely support the Fall Economic Statement.

Conclusion

Today's FES is a signal by the Liberal government that it is willing to take targeted steps to support Canadians and the Canadian economy, while continuing to dial back its broad support measures introduced during the pandemic.

Minister Freeland expressed confidence in Canada's ability to weather the impending downturn, suggesting that Canada is well-positioned not only to support itself, but support its global partners as well. Canada is well-equipped to be an indispensable friend and ally, but good policy and confident investment are necessary to realize Canada's potential in a changing world.

Minister Freeland stated that like-minded allies must now rely on each other as they navigate turbulence, uncertainty, and aggression from adversaries– a theme that she has reiterated in recent weeks. In her speech today, she stated that "The global economy is at a turning point. We are entering an era of friendshoring—a time when our democratic partners and their most important companies are looking to shift their dependence from dictatorships to democracies."

We can expect that much interest will be paid to the measures proposed as economic anxieties continue to increase. It is also anticipated the government will act with conviction to maintain the confidence it seeks across the country in support of the vision shared through its Fall Economic Statement.