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Federal Fiscal Update Targets Business Investment

Nov 21, 2018

The Conference Board of Canada’s Chief Economist, Pedro Antunes offers the following perspectives on the federal Fall Economic Statement.

Quote

The measures targeting business investment in today’s federal fiscal update are a welcomed development given the competitive challenges facing the country. An improving revenue outlook allowed the government to absorb most of the cost of these new measures resulting in only a slight upward revision to the deficit projection.
—Pedro Antunes, Chief Economist, The Conference Board of Canada.

Insights

  • Recent measures to improve the attractiveness of the U.S. as a destination for investment, including lower corporate taxes and reductions in regulatory oversight, has intensified concerns that Canada is becoming less competitive when it comes to attracting private sector investment.
  • This update looked to address the widening competitive gap by introducing three measures designed to lower the cost of making investments in Canada:
    • Immediate expensing for manufacturers and processors – 100 per cent of the cost of machinery and equipment can be written off in the year of purchase beginning now, phased out beginning in 2024.
    • Immediate expensing for clean energy investments – 100 per cent of the cost of specified clean energy equipment can be written off in the year of purchase, again beginning now and phased out starting in 2024.
    • Accelerated investment incentive – triples the current first year rate on capital investments on a range of spending from software to buildings and patents. Some examples of first year deductions under this incentive are: 100 per cent of software investments, 82.5 per cent of the cost of computers and 60 per cent of spending on trucks and tractors for hauling. This also begins immediately and will begin being phased out starting in 2024.
  • In total, the accelerated depreciation measures are expected to cost $14 billion over the five and a half years covered in the fiscal projection, with the largest costs expected in the next two fiscal years.
  • Additional measures include support for Canadian journalism, extra funding for the Strategic Innovation Fund and funding designed to improve export diversification with a large portion of the export funding going towards highways, marine ports and rail infrastructure.
  • On the revenue side, forecasts have improved since Budget 2018. Revenue estimates are on average about $5 billion higher each year, stemming mostly from higher estimates for personal income and sales tax revenues.
  • If Budget 2018’s spending plan was used with the new revenue forecast, the deficit would have improved to under $8 billion by 2023–23. But with the new spending initiatives, a deficit of $12.6 billion is expected in 2022–23—larger than the Budget 2018 forecast given that spending increases outweigh the revenue improvements.
  • The government was in a difficult place heading into its fall fiscal update. There was an unquestionable need to shore up investor sentiment while also being mindful of the need to reduce its deficit. Furthermore, the government likely wanted to leave itself with some fiscal capacity to introduce new measures in its 2019 Budget—the last fiscal projection before the next federal election.
  • Overall, the government was able to deliver on measures to help entice business investment, a welcome development given the competitive challenges facing the country. Indeed, the measures introduced today provide upside risk to the investment outlook outlined in our latest Canadian Outlook although several risks remain on the investment front.

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