Freeland’s budget has to tread a narrow path between competing demands for cash: sources

The 2023 federal budget, set to be unveiled on March 28, will focus on three main priorities: affordability measures, investments in the clean industrial economy and the new money promised to provinces for health care.

That’s according to government sources familiar with the budget who are not authorized to speak publicly about it. But while ticking all three boxes would require billions of dollars in new spending, those sources acknowledge this year’s budget will be constrained by a worsening fiscal situation caused by a global economic slowdown.

“Economic fundamentals are strong,” said one senior government official. “But it’s a much tighter fiscal landscape than immediately post-COVID, and tighter than (November’s) Fall Economic Statement.”

Inflation has eased since hitting a record high, mostly due to eight consecutive Bank of Canada interest rate hikes. But many Canadians, especially those getting by on low incomes, are still struggling with the cost of living.

“The federal government can’t do everything. It can’t solve it overnight. But people are still feeling their money doesn’t go as far,” said the official.

“So our thinking is, what is useful but will not exacerbate inflation? So on offer will be some things for people as a recognition of their anxieties and pressures they are under.”

Expect those “things” to be much like the federal government’s previous measures to address the cost of living, such as the doubling of the GST tax credit and the one-time rental housing top-up for low income renters.

Finance Minister Chrystia Freeland has spoken before about the need for a modern and robust industrial strategy for Canada and the transition to a green economy. Efforts to combine those two will be central to this year’s budget — particularly the measures planned in response to the Inflation Reduction Act (IRA), which is expected to pump about $500 billion US into the United States’ clean tech and manufacturing sectors.

“We can’t afford to delay these investments just because of the (worsening) fiscal situation,” said a second senior government official. “The question is not whether to do it, but how to do it.”

The IRA is turning out to be an accelerant, driving countries around the world to transition to a clean economy and to compete for the investment dollars to pay for it.

“The United States’ Inflation Reduction Act has rocked the global balance of power and it has lit a fire under all of the countries,” said Merran Smith, founder of Clean Energy Canada, a think tank based at Simon Fraser University.

“It has changed the trajectory of energy and our economies from today to this new industrial approach. Some people are calling this the next industrial revolution.”

Canada cannot afford to compete dollar-to-dollar against the U.S. Experts argue the federal government needs to be strategic and focus on the country’s strengths.

“If you look at the last three budgets, there’s a lot of money that has been announced in different funds,” said Robert Asselin, senior vice president of policy at the Business Council of Canada and a budget director under former finance minister Bill Morneau.

“The problem is they lack sectoral focus. Canada’s innovation policy is to try to spread the peanut butter across the spectrum, across regions, and this has yielded very limited results.”

Already, the government has demonstrated an early focus on electric vehicles, batteries and critical minerals. Experts say that if Ottawa added aerospace, green manufacturing, biosciences and expanding the electrical grid to the mix, it would have itself a plan.

And since this transition will require a shift in job skills, many observers say the budget needs a training component.

“We’re looking for some kind of commitment to real training,” said Dennis Darby, president and CEO of the Canadian Manufacturers and Exporters. “You can buy equipment, you can buy robots, but you have to train people and develop the software.”

Darby suggested making existing, temporary federal job grant programs permanent.

The Council of Canadian Innovators was pleased with some of the announcements in last year’s budget, such as the promises to reform certain tax credits that are the cornerstone of the innovation economy and to establish a regime that would keep more intellectual property in Canada.

“What we haven’t seen is the urgency to follow through on those commitments,” said Nick Schiavo, director of federal affairs with the council. Sometimes, he said, well-intentioned tax credits end up benefiting multinationals that don’t really need the help.

“Let’s make sure we’re not disadvantaging Canadian firms,” he said.

Experts are also warning the government that new incentives, credits and programs have to be simple to access. Ease of access is one of the competitive advantage of measures in the IRA.

The third main area of spending in this year’s budget will be, of course, health care. The money promised to increase the Canada Health Transfer to the provinces, and to fund additional bilateral agreements, will be set aside in the budget — $198.6 billion over 10 years, $49 billion of it new spending.

“Health care is a no-brainer,” said the second senior government official. “The majority of provinces are in surplus right now and have the money right now to deal with the crisis.

“But we understand that they are loath to spend if they don’t have certainty of long-term sustainability. And so that’s what we have done with the agreements.”

Nine provinces have signed agreements in principle with the federal government on health. Only Quebec and the territories have yet to settle.

While the numbers have already been announced, the budget will provide insight into the financial implications of the health packages on Canada’s bottom line.

The Fall Economic Statement projected a balanced budget by 2028 — the first time the Trudeau government had projected a balanced budget since first being elected in 2015.

Sources tell CBC there’s a very real chance that the impact of slower economic growth will undo that projection.

Sources also tell CBC that there will be few surprises or “sleeper” issues in the budget.

But some budget watchers are wondering how long Ottawa can hold off on making major defence spending commitments, with the Canadian military already stretched to its limits as it continues to help Ukraine defend itself from Russia.