If you’ve been following the news over the last week, you’ll know that the Liberals already slow-walked most of their biggest budget announcements before tabling it in the House yesterday afternoon. The Government signalled its intent to stem pandemic supports, tackle housing affordability, launch the NDP’s dental care initiative, fulfill the pledge to fund the national childcare rollout and boost our military spending. The bill, entitled “A Plan to Grow Our Economy and Make Life More Affordable” contains few surprises.
On the back foot due to the recent NDP/Liberal agreement, federal Conservatives were predictably critical. Citing national debt levels, a lack of sufficient attention to innovation and growth, and the rising spectre of tax increases, Conservatives leaned into the message that this spendthrift government is doing little to address inflation and global gas prices currently squeezing Canadians’ pocketbooks.
The truth, as they say, is often somewhere in the middle.
The budget keeps the commitment to steadily lower Canada’s debt relative to GDP. It is built on a forecast of 3.9 percent economic growth this year, which is expected to slow to an average of about 2.9 percent over the next four years. Inflation is still part of the equation, but this budget also presumes we will see inflation fall within the range of the Bank of Canada’s target of two percent by next year.
Therefore, this budget suggests the current administration is betting on the idea that it has some time to further develop its policy directions before another Federal election. Barring any major shocks (which is far from a certainty!), the budget does provide opportunities that are forward-focused on several industry fronts. Execution will be key.
R&D and Innovation.
- Currently, Canada ranks last among G7 countries in R&D spending. This budget pledges $1 billion over five years, starting in 2022-23, to create an independent federal innovation and investment agency. With this, the government hopes to overcome Canada’s challenge of low private business investment capacity in research, development, and the uptake of new technologies.
This announcement also signals a step back from the US DARPA “moonshot” approach the Liberals campaigned on, instead suggesting the Israeli and Finnish models, both of which have put market-oriented technology and innovation at the core of their economy, are more Canada’s speed.
- Augmenting that, the Government promises the creation of a Canada Growth Fund, a new public investment vehicle seeded with a reprofiled $15 billion in existing funding over the next five years with a stated goal that every dollar invested by the fund, will leverage at least three dollars additional of private capital. According to the budget document, this new fund will be calibrated to stimulate investments in emissions reduction, growth in low-carbon industries and technologies, and the restructuring of critical supply chains including the natural resources sector.
The Green Economy.
- When it comes to the Green Economy, according to a newly available data set, the Energy Policy Tracker, which looks at energy policy and investments among the G20 nations, Canada is significantly expanding the proportion of its investments in policies aimed at reducing emissions even though we to continue to support the development of fossil fuel projects, such as the Bay du Nord offshore oil megaproject which was confirmed just one day before this budget was tabled. Whether this represents an aspect of the “just transition” this government has promised or curries favour with certain regions of the country remains a matter of debate.
- We can expect $ 1.7 billion in new funding over the next five years starting in 2022-23 to help make zero-emission vehicles more affordable for people. Canada’s Infrastructure Bank will be given $500 million to continue strengthening the National e-vehicle infrastructure including an additional 1,500 charging stations across Canada. Several Canadian industries will potentially benefit here – the automotive industry certainly, but also critical minerals mining, battery development and manufacturing, along with semiconductor development and manufacturing just to name a few. It also helps the average citizen make a more painless transition to cleaner energy transportation which is particularly attractive given the global rise in gas prices.
- Businesses too will be supported. A total of $ 547 million over four years starting in 2022-23 has been committed to helping businesses upgrade their fleets to zero-emission vehicles.
- The expansion of the Low Carbon Economy Fund and a new tax credit for carbon capture, utilization and storage. In place since 2017, the Low Carbon Economy Fund received an extension of $2.2 billion over the next seven years, starting in 2022-23. The tax credit aims at incentivizing business investments in clean energy equipment and proposes a 50 percent reduction of the general corporate and small business income tax rates has been proposed for zero-emission technology manufacturers, with a special note to include manufacturers of air-source heat pumps.
Here are a few other announcements I believe are noteworthy:
- Tax structure changes incentivize growth for small and medium-sized businesses.
- The budget would raise the capital threshold for the lower small business tax rate of 9% from $15 million to $50 million before the 15% tax rate kicks in. Government says this would allow more medium-sized businesses to benefit and deliver $660 million in tax savings over five years. Some argue that not enough was committed to helping small and medium businesses survive the impact of the global pandemic, but the government has obviously decided to shift its focus to growth over survival. This may be a boon to some, and a death knell to others. Time will tell.
- As it stands, the goal of this proposed change to the tax structure is intended to incentivize more small businesses to make the leap to becoming medium-sized enterprises without suffering huge tax implications that have traditionally factored into this growth equation. Currently, the tax structure incentivizes businesses to remain small.
A new opportunity for employees to get ahead.
The pandemic laid bare several truths about the old labour market and a new labour market is emerging. While common in other countries, Canada was discouraging the rise of employee-owned businesses because it lacked the necessary investment structures. This budget commits to developing an Employee Ownership Trust, a new, dedicated type of trust under the Income Tax Act to support employee ownership. In Canada, this initiative has been aggressively championed by Social Capital Partners, a national leader in innovatively exploring the use of existing market tools (like business ownership) to create more social value. While not stated as such, this is aligned with the government’s earlier commitments to social finance instruments. Given the conservative estimate that more than 60 percent of Canada’s small and medium-sized business owners are aged 50 or older, and four in ten are likely to leave their businesses within the next five years, with no succession plan in place, this could also be a way to ensure these established businesses are not taken out of the economy.
Distributing some of the wealth a little more equitably.
Finally, this budget laid out the intention to make Canada’s banks, insurance providers and biggest income earners pay a greater share. For example, Canada’s financial institutions will be expected to pay 15-per-cent tax on income above $1 billion in 2021. Further, the budget proposes increasing the tax rate on income above $100 million to 16.5 percent, compared with 15 percent for other corporations. Together, these measures are expected to put $6.1 billion into government coffers over five years. The 1.5 percent permanent tax on banking and life insurance groups is expected to contribute $445 million on an ongoing basis. The banks complained, arguing they were being singled out and that digging into profits would only hurt investors, but given that bank’s profits have outpaced all expectations during a global pandemic, while the average Canadian has been pushed into greater levels of debt makes this position a little too “rich” for my taste.
These are the 2022 Budget highlights from my perspective. Drop me a line and let me know what stands out for you.