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Budget 2023: health care, clean energy…and deficits

The Canadian federal government released its 2023 budget yesterday, outlining the policy priorities for the next year onward. In preparation of the budget, the liberal government faces deteriorating economic conditions, leaving less money on the table relative to the last time it provided an economic update in November 2022. However, as is often said in economics, policymakers face unlimited needs under constrained resources. Across the country, labor shortages are hurting the delivery, and sometimes quality, of social, education, and healthcare services that the population needs. With interest rates at their highest level since 2007, housing has rarely been this unaffordable to the average Canadian. Moreover, facing lackluster productivity growth coming out of the COVID-19 pandemic, Canada has to respond to the massive 2022 U.S. Inflation Reduction Act (IRA) in order to attract private investment and develop the clean technologies of the future.

Clean energy and healthcare take center stage

The bulk of Budget 2023’s new spending goes to healthcare and an ambitious plan to develop clean energy and tackle climate change. In addition to previously announced increases in healthcare transfers to the provinces, the government formally introduced a national Canadian Dental Care Plan in order to improve access to these services, largely paid through private insurance at the moment. However, with acute labor shortages in these industries, it's worth noting that training and retaining workers in health and social workplaces must remain a top priority for all governments.

Perhaps the most ambitious part of the 2023 budget is the Clean Energy Plan ($21B over six years). The goal is to attract private investment in clean technology and electricity, making sure Canada isn't left behind in the global development of industries relevant to the climate transition. Admittedly, it's a tough ask considering the sheer size of the U.S. IRA, at US$369 billion. With the majority of the Canadian plan taking the form of tax credits (for electricity, manufacturing, hydrogen, etc.), it remains to be seen how successful the plan will become, although it’s clearly a step in the right direction.

What about affordability and housing?

A large section of Budget 2023’s new spending had to be introduced due to economic imperatives (competing with the U.S. and other developed nations) or political ones. However, given a downwardly revised economic outlook, other important items such as helping Canadians face inflation or lodging issues have taken a position of lesser importance. Granted, the government reintroduced a one-time goods and services tax (GST) credit for low- and modest-income Canadians (rebranded the grocery rebate) but largely stayed the course on previously announced measures for housing such as the creation of a Tax-Free First Home Savings Account. However, chronic undersupply remains the biggest issue with regard to housing; as such, an update or even an expansion of measures to incentivize home construction such as Budget 2022's Rapid Housing Initiative would have been valuable. With the population growing at its fastest pace in several decades, housing needs remain acute.

Larger deficits ahead of a likely recession

Where does that leave us? It’s hard to argue against the urgent need to address competitiveness and improve healthcare, but the 2023 budget suggests it still results in a larger-than-expected deficit over the forecast horizon (–$40B in fiscal year (FY) 2023/24). While the government previously planned to balance its budget in FY 2027/28, it now expects a $14 billion deficit down the road—with no clear plan to eliminate it. Moreover, the federal debt-to-GDP ratio will rise to 43.5% this year and only slowly decline to 39.9% over the next four years. In itself, that ratio will remain below that of most other developed nations; however, accumulating debt in an elevated interest-rate environment will lead to higher debt service payments down the road, leaving less money available to fund services. Finally, we see downside risks to the economic outlook, with the most likely scenario falling in between the government’s base case and pessimistic case (0.3% and –0.2% real GDP growth in 2023, respectively). The risks that revenue falls short of expectations going into an economic downturn only adds to the uncertainty pertaining to Budget 2023. 

 

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Dominique Lapointe, CFA

Dominique Lapointe, CFA, 

Global Macro Strategist, Multi-Asset Solutions Team

Manulife Investment Management

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