ARCHIVE: ECONOMIC PERFORMANCE AND TRENDS
A Budget in Sync With the Times
Pedro Antunes, Director, National and Provincial Forecast
Winter 2009
Big spending is the main theme of Budget 2009. The federal government plans to inject just over $43 billion to stimulate the economy over the next four years. The effectiveness of the government’s recession-fighting measures will depend on how quickly programs can be implemented, and their impact on boosting economic growth and creating jobs. The budget marks a concerted shift toward bolder, more active fiscal stimulus. Many of the measures are aligned with The Conference Board of Canada’s recommendations to mitigate the effects of the recession. The budget includes measures proposed by the Conference Board, including a boost to Employment Insurance coverage; targeted training programs for the unemployed; and increased financial support for low-income Canadians through the Child Tax Credit and the Working Income Benefit. The budget marks a concerted shift toward bolder, more active fiscal stimulus. Infrastructure Boost Infrastructure spending is an efficient form of stimulus; the Conference Board estimates that every dollar spent on infrastructure increases real gross domestic product (GDP) by $1.20. The Board had proposed increased infrastructure investment in “shovel-ready” projects that have already passed all regulatory hurdles, along with a commitment to boost infrastructure spending over the medium term. The federal government has exceeded the Board’s expectations on this last item—just over 50 per cent of fiscal stimulus over the next two years is geared toward public infrastructure and housing. This figure includes $1 billion in federal investment over the next two years for general renovations on 200,000 social housing units (an estimated 30 per cent of all units in Canada), including energy upgrades and improved access for persons with disabilities. In addition, it includes $400 million apiece over two years for new social housing for seniors and First Nations housing, respectively. The budget also includes $500 million for infrastructure in Aboriginal communities, as well as $3.1 billion for post-secondary and research infrastructure. When the federal and provincial contributions to infrastructure and social housing are included, the budget will inject over $15 billion into the economy this year in construction investment alone. Infrastructure spending of this magnitude, however, may be very difficult to put in place as quickly as planned. The Conference Board’s Canadian Outlook Economic Forecast: Winter 2009 forecast tax and spending measures reflected in the budget, but the Board’s outlook projected less than $3 billion in infrastructure spending this year. Should all the announced measures be implemented, real GDP growth in fiscal year 2009–10 could be lifted by as much as 1 per cent above what was forecast in the Conference Board’s latest national forecast, which calls for real GDP to contract 0.5 per cent in 2009, followed by a strong rebound of 3.6 per cent in 2010. Return to Deficits The federal deficit will balloon over the next two years, due to the costs of the economic stimulus package, a falloff in tax revenues, and permanent tax cuts. Direct program spending is expected to grow by a whopping 13.1 per cent in fiscal year 2009–10—the fastest rate of increase since comparable data were first published 25 years ago. The federal government now expects to run a cumulative deficit of $76.5 billion over the next three fiscal years. These measures will drive up the federal debt to $542.4 billion, erase 10 years of debt payback, and push up interest payments required to service that debt by $9.7 billion per year within three years. As the economy rebounds, the federal government will have to make a concerted effort to return to balancing its books. Targeted Tax Relief and Business Support Budget 2009 offers targeted tax relief—to both households and businesses—to resuscitate domestic spending, although the total tax relief package is modest in relation to the complete stimulus. Low- and middle-income Canadians, who are disproportionately affected by the economic downturn, are targeted for tax cuts and credits. Innovative measures will provide much-needed support for residential renovation and resale activity, with the centrepiece being the new temporary Home Renovation Tax Credit (HRTC) at a cost of $500 million in 2008–09 and $2.5 billion in 2009–10. The budget extends modest fiscal stimulus to businesses, with the total increase in outlays ranging from $385 million in 2009–10 to $135 million in 2013–14. Targeted initiatives are provided for automobile manufacturers, agriculture, small and medium-sized enterprises, and tourism to help these firms and sectors adjust to changing market conditions. The Conference Board is a strong proponent of ensuring that firms have access to credit. The federal government espouses similar priorities in the budget by providing support of up to $200 billion in financing to business. The risks facing the global economy are particularly high in Canada, since the economic turmoil has led to low and volatile commodity prices. There is considerable uncertainty about how commodity prices will affect nominal GDP growth. Overall, there is significant downside risk, which could reduce the projected level of budgetary revenues.
Related Events
2009 Economic Outlook Conference: Weathering the Global Storm, Calgary, April 6
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