Canada’s Economic Anchor Left Drifting: Our Analysis of the 2024 Fall Economic Statement

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Moving targets disrupt government initiatives

The latest fiscal update shows continued difficulty for the Liberals to stick to their budget plans with a worsening of the long-term deficit picture. The federal government’s fiscal capacity deteriorated since Budget 2024, which was tabled last April. According to the 2024 Fall Economic Statement (FES), government revenue projections are largely unchanged from Budget 2024 but additional spending measures amount to a cumulative $23.3 billion over the six-year projection horizon.

The 2023-24 deficit was revised from $40 billion to $61.9 billion with the government expecting to record expenses totaling $16.4 billion related to Indigenous contingent liabilities and another $4.7 billion related to the COVID-19 pandemic losses.

Over the forecast horizon, the federal government fails to meet its fiscal targets set out in Budget 2024. The budget deficit is now $48.3 billion for fiscal 2024-25, $42.2 billion in 2025-26 and it’s not until 2026-27 that the government plans to bring the deficit to below one per cent of nominal GDP. By fiscal 2029-30, the budget deficit is expected to shrink to $23 billion. Still, the government’s fiscal anchor, the debt-to-GDP ratio, remains closely aligned with Budget 2024 estimates, owing to a stronger economic forecast for nominal GDP.

Chart 1

Revenue and expenditure creep
($ billions)

Sources: The Conference Board of Canada; Finance Canada.

New spending will total around $22.4 billion more over the next six fiscal years, with more important sums allotted to the GST tax break, re-implementing the accelerated investment tax credit, and more spending on securing our borders. There was some upward movement on revenue projections in the fiscal update. Little of the upward revision was because of tax revenues, as non-tax revenues such as interest related revenues drove the increase. Although income tax will be lower by around $700 million annual on average over the 2024-25 to 2028-29 period (due to decline in corporate profits), revenues generated from employment insurance premiums are expected to be higher over the projection period, driven by a growing labour force and higher wages. And while reducing immigration may help to relieve some pressures in the housing market, restraints to immigration, however, do weigh on government revenue.

In FES 2024, real GDP growth for 2024 was stronger than expected in the spring budget, with growth of 1.3 per cent forecast for 2024. Economic growth will slow to 1.7 per cent in 2025, in line with our Autumn 2024 economic outlook. Economic growth is forecast to pick up to around 2 to 2.1 per cent annually over the rest of the planning horizon to 2029-30.

FES 2024’s forecast for the Canadian economy is reasonable, however, our country is dealing with more economic risks than usual. The economic environment is currently clouded with uncertainty, particularly on the trade front as the threat of steep tariffs has the potential to upend the entire economy.

Productivity gets attention

The bulk of new spending announced on Monday was aimed at improving productivity and investment. A key measure includes the reintroduction of the Accelerated Investment Incentive. The credit allows for specific investments to be expensed immediately, applying to capital investments made between the start of 2025 and the end of 2030 and includes a 3-year phase out. The total cost of the program is expected to be $17.4 billion before the phaseout. At a critical time for competition with the United States for capital investment, any movement towards making Canada more attractive is welcome.

Tax holiday was out of place

Monday’s FES costed out the Tax Break for All Canadians Act, which removes the GST/HST from select goods for the next two months. The tax break will cost the federal government $1.6 billion, with another $1.1 billion in lost revenues at the provincial level, and save households an average of around $160. However, that figure is highly dependent on whether the family resides in a province with harmonized sales tax.

In our view, this tax holiday misses the mark. Wages and incomes have held up reasonably well in 2024, and consumer spending is poised to round the corner given the declining interest rate environment. Further, we do not see the tax break boosting household spending by much and would have preferred the government to focus on a smaller deficit.

NATO target remains out of sight

The 2024 FES proposes a $1.3 billion border security package, a clear response to tariff threats from the incoming U.S. administration. Although specifics were sparse, we see this spending as necessary, as avoiding a trade war should be a priority. Additionally, spending on defense is sitting around 1.3 per cent of GDP, well below NATO’s 2.0 per cent target. Although the border security package announced won’t move this figure significantly, it is a small step in the right direction, but a lack of commitment to reach the target for the entirety of the next U.S. administration’s tenure could force Canada’s defense spending shortfalls to be a bargaining chip for other U.S. policy interests.

Housing policy at the forefront

While many of the policies were announced, the fall update re-enforced the important place housing policy has in the political discussion. Ongoing actions include adding the First-Home saving account, various policies to simplify the home building process for builders, the Canada housing fund, and policies to make mortgage payments and entry to the market cheaper through lower requirements on down payments and 30-year amortizations.

One of the more impactful policies on homeownership are the changes to immigration targets that were announced ahead of the FES. These will have substantial impacts on housing demand, which when coupled with the upswing in supply, will likely benefit affordability. However, they come with economic costs, as we estimate the weaker population growth will reduce real GDP by $16.2 billion in 2026, and reduce federal revenues by $3.8 billion on an ongoing basis.

Much ado about nothing

Overall, the Fall Economic Statement was overshadowed by the day’s politics, but the document itself came with few major surprises. The significant downgrade in last year’s deficit was undoubtedly one of those surprises, but the impact is temporary and has little impact on broader spending initiatives. The longer-term fiscal picture was similar to what was projected in the Budget 2024, although the worsening deficit picture that seems to come with each new planning document is an unwelcome trend.

There was some positive movement in the budget on key challenges that Canada will face on the strategic front with the United States. The investment tax credit was a welcome reinstatement and should help move Canada’s weak business investment performance in the right direction, although the incoming administration is doing all it can to re-direct investment South of the border. There are other strategic interests that went unaddressed, including no plan to reach NATO’s 2.0 per cent target in an expedited fashion, which could eventually be a negotiating chip once Trump re-enters office, especially as Canada becomes part of an ever-smaller group of delinquent nations.

The concern with this budget is one that we have been raising for some time. Over the past two years, the federal government has moved away from a plan to balance its books at a time when the economy was running close to capacity and inflation was boosting revenues. We are now entering a phase of slow economic growth, accrued competition with the United States for business investment and a difficult global trade environment. Years of deficits, including deficits penciled in for the next 6-years, will give the government little ability to adapt to the challenges and risks associated with the fast-pace of our changing global economic environment.