Taking stock of Budget 2024: Three key takeaways
THE CANADIAN PRESS/Sean Kilpatrick
Finance Minister Chrystia Freeland, pictured with Prime Minister Justin Trudeau. ‘As part of a recent communications pivot, Trudeau and Freeland have decided to begin acknowledging the big economic challenges faced by the electorate, particularly young people who were the primary political target of the budget,’ writes Theo Argitis.
Canada’s 2024 budget is now at the 10-day mark since being tabled by Finance Minister Chrystia Freeland on April 16 - enough time to take stock of and process reaction from stakeholders. Here are three takeaways:
1. Canadians like the measures individually. But as a whole, the plan has left the public unimpressed.
Polling by Angus Reid Institute has provided some great insight here. Based on an online survey between April 19 and April 23, the organization found more than 70 per cent of Canadians approve of proposals around pharmacare, dental care and the new disability benefit. The government also gets very high marks on some of its housing funding.
Even on the higher capital gains taxes, about 50 per cent of Canadians think it’s a good idea, according to the Angus Reid poll. (Other polls have shown more negative responses).
Yet, the poll also found that 56 per cent believe the budget makes them more pessimistic about the future. And despite a month-long sales effort by the government that predated the document’s actual tabling, the Liberals are still badly trailing the Conservatives in voting intention in most polls since the budget. Prime Minister Justin Trudeau’s disapproval ratings are near record highs.
Cue the punditry, which goes something like this: It’s not the message but the messenger and as long as the unpopular Trudeau is still prime minister, Canadians won’t be willing to give the government any goodwill.
There are other possible nuances in parsing the public’s reaction.
As part of a recent communications pivot, Trudeau and Freeland have decided to begin acknowledging the big economic challenges faced by the electorate, particularly young people who were the primary political target of the budget.
While the aim is to show empathy and seriousness, the end result may simply be to amplify worries and make young people feel even worse about their predicament. Fundamentally, Canadians don’t believe there are any quick fixes to the challenges around affordability in housing. The budget is simply accentuating that fact.
Another theory: The government is seen as trying to fix the problems they created - and don’t deserve any goodwill.
2. Is this a growth budget?
The measures to spur new housing construction are long overdue and funding for research and AI are commendable, but there’s a criticism that the plan doesn’t do enough to address our poor productivity and grow the economy. In fact, many are making the case that the fiscal plan takes us backward thanks to the higher capital gains taxes.
As others have noted, putting more resources into home building could actually lower our productivity since housing construction is a low-productivity endeavour.
The capital gains tax increase also moves the needle in the wrong direction. While the business community was relieved that new taxes weren’t imposed on profit, the tech sector and mining companies (which rely on flow-through share structures) could be significantly impacted – undermining investment and risk-taking in those industries.
And at a time when the lack of private sector investment may be the Canadian economy’s biggest structural economic problem, the higher taxes send a terrible signal.
Reminder: This is not the first time this government has taxed corporations. Freeland has already imposed new special taxes on banks and insurers.
Put yourself into the mind of a CEO or CFO considering where to allocate capital. Even if Canada’s current corporate tax levels remain viable, any investment thesis will need to incorporate two types of new political uncertainty: the fiscal trajectory and poll numbers.
Since the Liberals have pledged not to tax the middle class, companies know they may end up footing the bill should the deficit turn out to be a lot worse than expected – as evidenced by the 2024 budget. They also know the government – in an attempt to improve its electability - would be happy to turn their bottom line into a political wedge should they see fit.
It's not a great look.
3. Is the budget inflationary?
Bank of Canada Governor Tiff Macklem doesn’t sound too concerned about the impact of the Canadian government’s budget on inflation.
Macklem was in Washington to attend semi-annual meetings at the International Monetary Fund the same week the budget was released. According to the Globe and Mail, Macklem told reporters that “on net, the fiscal track has not substantially changed relative to the fall economic statement.”
“At a macro level there’s more money going out, there’s more money coming in,’’ he said, according to the Globe.
It seems that Macklem doesn’t think the budget materially adds to demand in the economy. The higher taxes on capital gains will withdraw enough demand from the economy to offset the increased spending. The deficit trajectory hasn’t changed, so there’s no net new stimulus to stoke inflationary pressures.
This won’t be an uncontested assertion. No one is expecting a major push on inflation. But there could be some on the margin.
For one, there’s a heightened level of uncertainty around the government’s revenue projections. The federal government is assuming corporations will rush to sell assets ahead of a June 24 cutoff for the capital gains tax to be implemented. More than one-third of the $19 billion in projected revenue from the tax is budgeted to be collected this year. That’s not an iron-clad assumption.
Second caveat, taking money from rich people and corporations and spending it is not demand-neutral. The wealthy have a much lower propensity to consume, so it’s very likely we will get a net addition to demand even if revenue neutral.
Third caveat, any negative impact on investment will undermine the supply side of the economy – i.e. our potential to grow without stoking inflation. That would be long-term negative on the inflation front.
A last observation: Macklem’s comments that equate inflationary pressures with the deficit track is a slight deviation from how the Bank of Canada has been talking about fiscal policy’s impact on inflation.
Up until this month, he’s been equating inflation pressures with spending. Now, after the government increased spending, the focus has turned to deficits. It’s a wonky observation but at a time when many Conservatives continue to question the central bank’s biases, more consistent messaging may be a good idea.
