Federal Budget 2019 Economic Analysis

A Pre-Election Sprinkling of Spending

Budget 2019 offers a little to many, with new spending available for middle-class workers, students, and seniors. The budget does not offer incentives for business investment to address Canada’s lagging productivity.

In its 2018 Fall Economic Statement, the government committed billions in funding to offer corporate Canada incentives to increase their investment spending. In Budget 2019, the government went back to the platform that got it elected four years ago—investing in the middle class. But with limited ability to increase spending without increasing deficits, the additional spending announced in this budget was small at just $3.8 billion a year. Further, the new spending was scattered across a host of new measures designed to appeal to seniors and millennials ahead of an upcoming federal election.

The budget was delivered against a backdrop of economic uncertainty. Canada’s economic growth has slowed sharply, and while our own forecast calls for the slump to be short-lived, there are numerous risks to the outlook. A prolonged economic slowdown would certainly have negative implications for the government’s deficit projections. While there was little that the government could have done to prevent the current slowdown in economic growth, it could have done more to address Canada’s poor level of business investment and lagging productivity.

After years of relying on households to fuel economic growth, we need a turnaround in investment and exports to pull the Canadian economy out of its recent slump.

The government is likely to point to measures in the fall statement as sufficient to address the business sector’s concerns about lagging competitiveness. However, early indications are that these measures had little effect. Our most recent Index of Business Confidence was conducted largely after the fall statement (between November 16, 2018, and January 17, 2019). Just 30 per cent of respondents said that it was a good time to invest in machinery and equipment—the lowest level since the financial crisis. This is extremely concerning as, after years of relying on households to fuel economic growth, we need a turnaround in investment and exports to pull the Canadian economy out of its recent slump. In this briefing, we look at the most notable measures in Budget 2019, assess what they mean for the economy, and evaluate the government’s fiscal outlook using our own economic projections.

New and Notable in Budget 2019

Since being elected in 2015, the government has primarily focused on measures that benefit the middle class. Thus, it is not surprising that the government’s final budget before the 2019 election contains many items targeted at the same group. This year’s budget did not contain many big-ticket items, although it did take a tentative first step toward a pharmacare plan (and the creation of a Canadian Drug Agency should combat rising drug prices in the long term). It also introduced some modest spending initiatives aimed at middle-class workers, students, seniors, and Indigenous communities.

Notable Spending Initiatives, 2018–19 to 2023–24

Housing Affordability
  • First-time homeowners can take advantage of the new CMHC First-Time Home Buyer Incentive, which will allow first-time buyers to share the cost of buying a home with CMHC through a shared-equity mortgage. For new homes, a 10 per cent shared-equity mortgage is available, and existing homes are eligible for a 5 per cent shared-equity mortgage. While the equity would have to be repaid upon selling the house, the budget was unclear whether this would be an interest-free loan or not. ($121 million, with money from the current fiscal envelope)
  • The Home Buyers’ Plan, which allows first-time buyers to borrow from their RRSP without tax penalty, will have a higher borrowing limit, increasing from $25,000 to $35,000. ($145 million)
  • Expanding rental construction financing initiative. ($385 million)
  • Encouraging innovation to improve housing supply. ($250 million)
Enhancing Skills and Training
  • New EI Training Support Benefit will be available for users beginning in late 2020, providing up to four weeks of income support. ($1.2 billion)
  • A new Canadian Training Credit will allow workers with incomes between $10,000 to $150,000 to accumulate $250 per year up to a maximum of $5,000 to help pay for training fees. ($815 million)
  • Supporting Indigenous post-secondary education. ($540 million)
  • Expanding the Student Work Placement Program. ($631 million)
Income Supports
  • Lower interest rates on Canada Student Loans. ($1.7 billion)
  • Increased eligibility for Guaranteed Income Supplement for seniors. ($1.8 billion)
  • Additional funding to make drugs for rare diseases more accessible. ($1 billion)
Productivity Enhancers
  • New infrastructure funding for local communities. ($2.2 billion)
  • Affordable electricity and clean economy. ($1.5 billion)
  • Broadband high-speed Internet investment. ($717 million)
  • Innovation ($1.1 billion) and research ($459 million) funding.
Advancing Reconciliation
  • Forgiving and reimbursing loans. ($1.3 billion)
  • Better services for First Nations and Inuit children. ($1.4 billion)
  • Eliminating the cause of boil-water advisories. ($739 million)
Total budget measures: $22.8 billion from 2018–19 to 2023–24

Economic Impacts of Budget Measures

Overall, the budget announced a modest increase in spending scattered across a multitude of programs that will have little impact on the economy. While the measures to boost training and skills development are generally a positive for economic growth, they are likely too small to have a significant impact. On the business front, providing new funding for training will help alleviate some of the issues Canadian employers are currently having finding employees. Additionally, skills training broadens an individual’s employment opportunities while enabling more Canadians to participate in the labour market. A higher-skilled workforce can also boost productivity. Even though training and skills development was one of the largest spending items in the budget, the measures announced today are too small to meaningfully affect the economy.

The budget also contained a sprinkling of income support measures, such as higher GIS payments and reduced interest payments on student loans. By boosting household incomes through these targeted measures, the government can mitigate some of the risk that consumers will reduce their spending by more than expected. But again, the measures are too small to have much impact on the aggregate economy.

Despite stronger revenue growth, the deficit predicted in Budget 2019 for 2018–19 is little changed from the estimate contained in the fall statement.

One of the hallmarks of the budget was a variety of measures to improve housing affordability. The new CMHC First-Time Home Buyer Incentive and the expanded amounts homebuyers can withdraw under the Home Buyers’ Plan will help stoke demand for housing. These measures will create a positive short-term economic impact by making it more affordable for first-time homebuyers to enter the housing market. The downside of these initiatives is that they encourage people to take on more debt. That increases the risk of household financial vulnerabilities down the road and poses a risk to the economy over the longer term. The policy also has the potential to push home prices higher by stimulating demand, which will work against recent policy measures (the stress test and provincial foreign buyers taxes) designed to cool growth in home prices. To help alleviate this risk, the budget introduced some measures designed to boost housing supply (higher incentives on new housing compared with resale homes, encouraging more rental construction, and supporting an acceleration in construction approvals and densification).

Budget 2019 also earmarked a small amount of funding toward productivity-enhancing measures. This includes funding for expanding high-speed internet access, as well as research and innovation funding. These measures may be impactful for certain individuals or businesses, but on aggregate, are simply too small to have any noticeable impact on our productivity.

Certainly, the most glaring omission from this budget was the lack of measures to encourage business investment. With business investment intentions remaining weak and better investment spending required to support economic growth, it was disappointing to not see something targeted at business investment.

Are the Budget Fiscal Projections Realistic?

Budget 2019 continued the trend we’ve seen over the past few fall updates and budgets—the improvements in the budget balance since the last estimate were used to fund new measures. Despite much stronger revenue growth than expected this year, the $14.9-billion deficit predicted in Budget 2019 for 2018–19 is little changed from the $15.1 billion (not adjusted for contingency) estimate contained in the fall statement. Indeed, the deficit projection in the budget is similar to the one in the fall statement, with a slightly higher deficit now expected in 2020–21 and a slightly lower deficit in the outer years of the forecast. In this latest budget, the federal government estimates that their deficit will not fall below the $10-billion mark until 2023–24. (See Chart.) Underpinning these estimates is the expectation that revenue growth will average 3.6 per cent from 2019–20 to 2023–24, higher than the average 3.0 per cent growth in expenditures during this period. With the deficit on a downward trajectory, the debt-to-GDP ratio will fall from 34.6 per cent this fiscal year to 32.1 per cent at the end of the forecast.

Deficits Persist but Debt-to-GDP Expected to Fall
(surplus/deficit, $ billion; net debt as share of nominal GDP, per cent)

Chart showing persistent deficits and debt-to-GDP ratio

f = forecast
*surplus/deficit includes contingency
Sources: Budget 2019; The Conference Board of Canada.

The government’s fiscal outlook is dependent on the outlook for GDP since nominal GDP is the broadest measure of the government’s tax base and is a key driver of public sector revenue growth. Therefore, we can assess how realistic the government’s fiscal projections are by looking at their assumptions for GDP versus our own just-completed forecast. This is especially instructive this year, as Canadian real GDP growth has decelerated much more sharply than expected, and many forecasters have subsequently issued revised economic forecasts with lowered expectations.

One glaring deficiency in this budget was the lack of further measures to boost our competitiveness and stimulate business investment.

The real GDP growth assumed for 2019 in the budget projections is 1.8 per cent. Our new Canadian Outlook calls for growth of just 1.4 per cent this year—a significant difference. When we take our lower growth estimates and calculate what it means for federal revenue growth, we find that the softer economic outlook will add $3 billion to the deficit estimate in 2019–20. In other years of the forecast, our projection is similar to the governments’, resulting in only a small difference in deficit estimates. Overall, our analysis suggests that the economic assumptions used to generate the fiscal estimates in the budget are realistic, although there is downside risk to their deficit projection for 2019–20.

Final Thoughts

Many households will find something for them in the current budget, particularly millennials and seniors. However, heading into a fall election, the budget tried to be too much to too many people with what little funds they had available. As a result, funding was spread too thin to really have an impact in any one area. Given the risks to the economic outlook, one glaring deficiency in this budget was the lack of further measures to boost our competitiveness and stimulate business investment. This is an area where Canada’s economic performance has continued to lag. And with higher investment and productivity key to driving economic growth and improving our standard of living, the lack of support for business investment was a crucial miss in a budget that tried to be too much for too many.

Our federal budget experts are ready to provide impartial, evidence-based, and non-partisan economic analysis of Canada’s 2019 federal budget.

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