Fall Economic Statement

House Leader Karina Gould tabled the federal government’s Fall Economic Statement today, following the stunning resignation of Finance Minister and Deputy Prime Minister Chrystia Freeland. Ms. Freeland resigned after Prime Minister Justin Trudeau informed her last Friday that she would be replaced in that position in the upcoming cabinet shuffle.

Setting the scene

The federal government’s Fall Economic Statement (FES) is a recurring staple of the federal government’s annual legislative and financial agenda. It’s typically presented in mid-November each year and is an opportunity for the finance minister to:

• Describe the major economic developments since her most recent budget, and to present a status report on the national economy, summarizing major developments and trends.
• Provide updates on the differences between earlier and current forecasts of economic growth and government spending, and to make future predictions.
• Present a fiscal update, covering recent trends in government revenues, spending, deficits and the national debt since the spring budget.
• Table necessary financial authorizations for measures introduced by the government since the spring budget.
• Announce new federal spending measures that the government wishes to place before the House of Commons.

For several reasons, events this year conspired to make the presentation of the FES a complex and difficult issue.

First, the normal business of the House has been blocked for more than two months by a Conservative filibuster over the release of government documents related to misspending at Sustainable Development Technology Canada (STDC).

Second, the government’s mandate is now in its fourth year, and political partisanship is at an all-time high. As the political parties count down to the next election, they have been in no mood to cooperate with the government. Today’s tabling of the FES was preceded by difficult negotiations to pause the filibuster to allow the Minister of Finance to present the update.

Third, on November 25, President-elect Donald Trump threatened that on assuming office in January next year, he will sign an Executive Order “to charge Mexico and Canada a 25% tariff on all products coming into the United States,” unless both countries stop what he called an “invasion” of drugs and illegal immigrants into the United States.

The problem this presented for Finance Minister Chrystia Freeland is that the FES normally presents forecasts and scenarios for economic growth and the economic uncertainty resulting from these threats makes these forecasts virtually impossible. Professor Trevor Tombe of the University of Calgary has estimated that a 25% tariff would result in a hit to Canada’s Gross Domestic Product of about 2.6% — the equivalent of roughly $2,000 CAD per person.

Analysis

Today’s FES is itself a reflection of the internal struggles that led to today’s resignation and political crisis as it tries to reconcile the differing priorities within the document. Whether it will survive the coming political turmoil is an open question but if it does, it is worth parsing.

The statement comes at a time of deep future economic and fiscal uncertainty combined with a lagging economy. Growth is stagnant, GDP per capita and productivity are declining as the government braces for the shocks to come from the U.S. in the form of both tariffs and increased competitiveness as U.S. industry benefits from Mr. Trump’s mercantilist policies. It is clear that Finance (as opposed to the PMO) is quite concerned and is shifting its policy focus from affordability (despite the politically driven GST holiday and housing measures) to different economic and taxation levers that respond to the U.S. threat, including new border measures.

Expecting the breach of fiscal guidelines would be the dominant media and public narrative of the FES, the government pre-released or leaked a suite of business-friendly measures designed to promote investment over the medium to long-term. The timelines serve to provide some certainty about the future investment climate in the face of the U.S. threat (as far as that is possible) while backloading the fiscal cost. The government is using the business tax system to target sectors and behaviour that underlie productivity, including potential growth engines like artificial intelligence, enhanced incentives for research and development, extending the tax regime for fast write downs for investment (by far the most expensive item) and enhanced support for business start-ups.

However, there is no escaping what would have been a strong hit to Ms. Freeland’s credibility of the failure to adhere to the fiscal guardrails she so vociferously embraced in the budget less than a year ago. That lack of credibility now taints the PM, PCO and Finance. Dominic Leblanc comes in with a strong reputation for calm management and communications. If the government lasts and if he stays there (as he continues on as public safety minister), he will have a need to reestablish credibility and to put some policy distance between him and the PM. As probably the minister closest to the PM, that will take some doing.

Along with today’s resignation, and what happens in the next hours, the dramatic increase in the deficit for 2023/24 will garner significant headlines. To be fair, it is largely the result of one-off accounting issues including a recognition of contingent liabilities in the Indigenous space and write downs of inappropriate COVID payouts that can’t be recovered. But the absolute number and overshoot of the budget projection will form the narrative, not the reasons for them.

Off cycle spending in the current fiscal year, (most of it deliberate including the affordability package, some event-driven) continued to distort budgetary projections in what has become a predictable process.

The FES tries to highlight the more positive economic indicators (like stabilizing inflation within the target band, lower interest rates and tighter fiscal management compared to G7 partners) and presents projections that hew relatively close to the budget 2024 guardrails going forward.

However, the threats from president-elect Trump have rendered any future projections virtually meaningless without knowing the scale and scope of the U.S. tariffs. Finance has tried to model a downside scenario, but the reality is that economic and fiscal planning is virtually impossible to do or believe in the current circumstance. The mainline projections in the statement reflect an early fall survey of private sector economists done before the US election. If they end up being close to accurate (a debatable proposition), the debt/GDP ratio will continue to fall slightly and the deficit/GDP ratio will hover around one percent, the lowest in the G7 – both past budget guardrails.

The downside scenario moderately increases the deficit, the debt/GDP ratio and deficit/GDP ratio but does NOT try to quantify the impact of any level of US tariffs. The range of outcomes would obviously be far wider and much more negative if the U.S. proceeds with its threats.

There are also significant issues about the implementation of many of the initiatives in the current political environment. Many of them require legislation, some at a minimum require the passage of main or supplementary spending estimates. All of that can’t happen until Parliament returns in late January. The two-month shut down of the House this fall does not bode well for the orderly management of the FES initiatives, let alone Budget 2025. And, of course, if there is a prorogation or election before passage, everything dies.

The key numbers in today’s update

The fiscal guardrails and the government’s fiscal position

In last November’s FES, the federal government announced that, in the future, it would be focused on the following fiscal guardrails in preparing for Budget 2024:

• Maintaining the 2023-24 deficit at or below the Budget 2023 projection of $40.1 billion.
• Lowering the debt-to-GDP ratio in 2024-25, relative to the 2023 FES and keeping it on a declining track thereafter.
• Maintaining a declining deficit-to-GDP ratio in 2024-25 and keeping deficits below 1 per cent of GDP in 2026-27 and future years.

Budget 2024 projected a deficit of $39.8 billion in 2024-25, falling to $30.8 billion by 2026-27 and $20 billion by 2028-29. This would mean a deficit of 1.3% of GDP for 2024-25, declining to 0.9% by 2026-27 and 0.6% by 2028-29.

Today’s Fall Economic Statement updates these numbers, saying that the deficit for 2023-24 is $61.9 billion, significantly past the Budget 2024 forecast. The government’s deficit for 2023-24 was negatively affected by significant unexpected expenses related to Indigenous contingent liabilities and allowances for COVID-19 supports. These charges added $21.1 billion to the deficit, which would have come in at the government’s $40 billion target without these expenses.

For the current fiscal year, 2024-25, the deficit is forecast to be $42.8 billion. This is before policy measures and actions to be taken by the government. These measures are expected to lower the deficit to:

• 2024-24 – $42.8 billion
• 2025-26 – $37.4 billion
• 2026-27 – $27.9 billion
• 2027-28 – $29.4 billion
• 2028-29 – $23 billion
• 2029-30 – $18.7 billion

The deficit-to-GDP ratio is expected to fall to under 1 per cent of GDP in 2026-27, consistent with the ongoing fiscal objective set out in Budget 2024.

The national economy

The private sector economists surveyed by Finance Canada expect real GDP growth to be 1.3 per cent in 2024 rising to 1.7 per cent in 2025.

The unemployment rate is expected to rise to 6.9 per cent in the fourth quarter of this year before stabilizing and then easing to 6.6 per cent by the end of 2025. The unemployment rate is expected to average 6.4 per cent in 2024 and 6.7 per cent in 2025, declining to an average of 6.2 per cent in 2026, before reaching 5.7 per cent by 2029.

The CPI inflation rate is expected to remain at about 2 per cent over the rest of this year, averaging 2.5 per cent for the year as a whole, the same as projected in Budget 2024, and 2 per cent in 2025 (compared to 2.1 per cent in Budget 2024). Inflation is expected to remain close to 2 per cent over the 2025-2029 projection period.

Reflecting upward revisions to the near-term outlook for real GDP, the level of nominal GDP is expected to be higher by $17 billion in 2024 and by $9 billion, on average, per year from 2025 through 2028

Federal spending plans

The FES lists $24.2 billion in new investments; the largest of which include:

• $17.4 billion to extend the Accelerated Investment Incentive.
• $1.1 billion to boost the Scientific Research and Experimental Tax incentive program.
• $1.6 billion for GST Tax Break for all Canadians.

Border security and internal trade

• $1.3 billion for a comprehensive border security package.
• Interprovincial Trade measures: the government will publish a list of specific, restrictive measures that each province and territory has in place and will consider applying conditions to major federal transfers that require the elimination of trade and labour mobility.
• The Minister of Intergovernmental Affairs will review the Canadian Free Trade Agreement.
• FES 2024 announces Canada’s intent to impose tariffs on imports of certain solar products and critical minerals from China in the early new year. Canada also intends to impose tariffs on Chinese semiconductors, permanent magnets and natural graphite beginning in 2026.
• The government also signalled its intent to make changes to the Export and Import Permits Act, to allow government to restrict importation or exportation of items in response to actions of another country that harm Canada.

Housing

• The loan limit under the Canada Secondary Suite Loan Program will be doubled from $40,000 to $80,000. Beginning on January 15, 2025, homeowners will be able to refinance with their insured mortgages to help cover the cost of adding a secondary suite. Lenders and insurers will allow mortgage refinancing of up to 90 percent of the post-renovation of their home up to $2 million, amortized over a period of up to 30 years.
• Accelerating $2 billion in low-cost financing for the Apartment Construction Loan Program.
• Government is working with CMHC to explore ways to use mortgage loan insurance to support building more 2-4 unit homes.
• $362.7 million over 5-years, starting in 2028-29 to extend the Federal Community Housing Initiative to build more non-profit and Co-Op Housing units.
• Intent to launch Consultations on improving the structure and effectiveness of the stress test on insured mortgages.
• Intent to launch consultations on the market development of long-term mortgages.
• $600 million in additional funding for the Canada Greener Homes Loan Program.

Support for pension funds to invest in Canada

• The federal government will invest $15 billion in loans and equity investments to attract pension fund investments in data centres for artificial intelligence.
  • The government estimates that this investment of $15 billion will draw in an additional $30 billion in investments from pension funds.
• To make it easier for pension funds to own controlling stakes in Canadian companies, the federal government is proposing to remove a rule that limits the voting shares a fund can control to 30 per cent, and work with airports and pension funds to encourage development on airport lands.
• The plan also includes changes to rules that stop retirement-savings plans from taking large stakes in companies, and lifting limits on private investments in airports and power utilities.

Scientific Research & Experimental Development (SR&ED)

• SR&ED is a long-running tax incentive program that supports Canadian controlled companies and public corporations in their R&D activities.
• Today’s FES promised $1.9 billion in new investments over the next six years to allow Canadian-controlled private corporations to earn a 35-per-cent tax credit on the first $4.5 million of qualifying annual SR&ED expenditures, up from the 15 per cent non-refundable credit they were previously entitled to, raising the threshold from $3 million. That will increase their tax credit by up to $570,000 each year per company. Qualified expenses above that still qualify for a 15-per-cent tax credit.
• In addition, Canadian public corporations will also be made eligible for the 35-per-cent credit.

Investing in start-ups and larger companies

• The federal government will provide $1 billion in new funding for the Venture Capital Catalyst Initiative and create more generous terms for pension funds and institutional investors to take part.
• The government also pledged today to spend up to $1 billion to create a new investment fund for mid-cap companies; it will provide 25% of the capital and aims to attract the rest from private investors.

Environment/Clean Tech/ITCs

• The government announced its intent to amend the physical activities regulations (the project list, which sets out the types of projects that are subject to the Impact Assessment Act), set to include only physical activities, that carry high potential for impacts in areas of federal jurisdiction.
• They will also remove some physical activities to have a greater influence by federal lifecycle regulators, like the Canadian Nuclear Safety commission for example, instead of requiring a federal impact assessment.
• They stated they will focus the impact of assessments of provincially regulated projects, exclusively on effects within federal areas of jurisdictions.
• Additionally announced was the federal intent to backstop up to $500 million in enriched nuclear fuel purchase contracts from the US and other allied counties.

Banking and financial institutions

Today’s FES announces several initiatives impacting the banking and financial institution sectors:

• It announces the government’s intent to introduce legislation for the remaining elements of Canada’s Consumer-Driven Banking Framework, including accreditation and common rules, with a framework to be announced by early 2026.
• The government intends to provide FCAC with $44.3 million over 3-years, starting in 2025-26, on a cash basis to implement the consumer driven banking framework.
• The FES announced the Government’s intent to amend the payday lending exemption in the Criminal Code to prohibit the sale of credit insurance products in connection with a payday loan and the intent to change payday lending exemption to ensure minimum payday repayment terms of 42-days and ensure lenders accept installment payments. The government will provide 12-months for industry to transition.
• The government will add civil remedies for non-compliance with the bankruptcy and insolvency act and increase max fines from $5000 to $100,000 for individuals, and to $1 million for corporations.
• The government is also considering legislative measures to compel payment processors to fully pass credit card processing fee savings onto consumers.

Tax measures

• The government included that it is developing legislation that will allow the CRA to automatically file a tax return on behalf of certain lower-income Canadians starting in the 2025 tax year.
• Preparation of legislation to create a new refundable tax credit for personal support workers. The timeline on this being stated as soon as possible.
• Intent to produce legislation to exempt the Canada Disability Benefit from being treated as income on tax filings.
• The government’s proposal to modify design elements of the Canada Carbon Rebate for Small businesses, starting 2024-25 to ensure smaller businesses are receiving more support by creating a new base payment.
• $451.5 million over 5-years starting in 2025-26, for CRA to conclude audits of emergency business subsidy amounts and close major tax compliance gaps.