2023 Fall Economic Statement runs counter to Ottawa’s claims of fiscal prudence

In the 2023 Fall Economic Statement tabled yesterday, the federal government was keen to boast about maintaining its ‘fiscal anchor’—the budget guardrails that seek to limit spending and deficits. Yet its recent policy commitments suggest otherwise.

With debt-servicing costs skyrocketing, the fiscal picture is anything but pleasant. While the 2023 Fall Economic Statement is light on new programs, since the March budget the government has announced more than $20 billion in additional spending commitments over six years. Contrast that new spending with the Fall Economic Statement’s commitment to maintain “… a declining deficit-to-GDP ratio in 2024-25 and keeping deficits below 1 per cent of GDP in 2026-27 and future years,” while limiting the 2023-24 deficit to the $40.1 billion projected in Budget 2023. Future deficits would not be allowed to exceed about $32 billion after the 2026-27 fiscal year.

Adhering to that fiscal anchor will be aspirational, at best. Interest costs on the federal debt alone are projected to reach $46.5 billion for 2023-24—roughly twice the annual defence budget—before escalating in the years ahead to claim an ever-larger chunk of our national gross domestic product. The recent spate of new spending is fuelling, rather than cooling inflation, sparking friction between the federal treasury and Bank of Canada as fiscal and monetary policies move in opposing directions.

The government is predicting that the Canadian economy will not slide into recession in the year ahead, but it’s fair to argue that we’ve already arrived. Increasing layoffs, sector-wide slowdowns, the real estate slump and stalled or cancelled projects indicate that economic reality—and that of Canada’s entrepreneurs—is clashing with the government’s policy priorities.

In the meantime, the federal government has kept to its affordability talking points, particularly on the housing file. The 2023 Fall Economic Statement included several new housing-related measures in addition to the billions of dollars already committed to helping Canadians cope with the rising cost of living. Unfortunately, these policies are poised to fall flat in addressing core housing supply shortage issues and soaring costs related to everything from regulatory red tape to material and construction expenses.

The housing-related measures include:

A GST exemption on new rental housing for co-operative housing projects that provide long-term rental accommodation. This expands on the previously announced GST exemption for purpose-built rental construction
An additional $15 billion in new loan funding for the Apartment Construction Loan Program, beginning in 2025-26
An additional $1 billion over three years for the Affordable Housing Fund, beginning in 2025-26
$309 million in new funding for the Co-operative Housing Development Program
A plan to rename Infrastructure Canada the Department of Housing, Infrastructure and Communities
Initiatives to reduce internal labour mobility friction between provinces, including “… working with provinces and territories towards full interprovincial labour mobility for construction and health care workers to meet labour market needs”; improving the interprovincial mobility of tradespeople; working with the provinces and territories to accept health care professionals from across the country; and taking steps at the federal level to remove some federal exceptions in the Canadian Free Trade Agreement
Beginning January 1^st, 2024, a change that would deny income tax deductions for expenses (including interest) incurred to earn income on short-term rentals, such as AirBnB listings. The change would apply to short-term rental operators who operate in violation of municipal licensing, permitting, or registration requirements. Ottawa also intends to provide $50 million in funding to help municipalities enforce restrictions on short-term rentals
A new Canadian Mortgage Charter to provide relief to mortgage holders in financial difficulty, including requiring financial institutions to: temporarily extend amortization periods for at-risk mortgage holders; waive fees and costs related to relief measures; waive requirements for insured mortgage holders to requalify under the insured minimum qualifying rate when switching lenders at mortgage renewal; allow at-risk mortgage holders to make lump sum payments without prepayment penalties (or sell their principal residence) to avoid negative amortization; not charge interest on interest if relief efforts result in a temporary period of negative amortization

There were two good news policy announcements that came out of the 2023 Fall Economic Statement.

The first is a proposal designed to encourage more business owners to sell to an Employee Ownership Trust. The policy would exempt the first $10 million in capital gains realized on the sale of a business to an Employee Ownership Trust, presenting a more tax effective pathway for entrepreneurs to exit their business.

The next are proposed steps to simplify compliance under the new Underused Housing Tax (UHT)—a move sure to please Canadian property owners, including many high net-worth families and entrepreneurs.

Under the proposed rule amendments, the federal government would eliminate the reporting requirement for certain categories of ‘owners’ of residential properties in Canada (thus redefining them as ‘excluded owners’). Entities that would be added to the list of ‘excluded owners’ for UHT purposes would include specified Canadian corporations, partners of specified Canadian partnerships and trustees of specified Canadian trusts. The changes would take effect for the 2023 calendar year.

For the 2022 calendar year, minimum penalties for failing to file a UHT return for a residential property would be reduced to $1,000 for individuals (per failure) from the current $5,000, and $2,000 for corporations (per failure) from the current $10,000. In addition, the government plans to introduce a new UHT exemption for residential properties when used as a residence for employees, while excluding ‘condominiumized’ apartment buildings from the definition of ‘residential properties’ and changing the law to ensure that an “… an individual or a spousal unit can claim the UHT ‘vacation property’ exemption for only one residential property for a calendar year.” The latter change would take effect in 2024.

Other notable measures in the 2023 Fall Economic Statement include:

Proposed amendments to the Competition Act that would empower the Competition Bureau to crack down on perceived predatory pricing by large companies, modernize merger reviews, enhance protections that would prohibit misleading ‘greenwashing’ claims, make it easier to bring cases before the Competition Tribunal (and receive payments, if successful), while enhancing ‘right to repair’ laws to require manufacturers to make it easier for consumers to repair existing devices and products
A review of international mobile roaming charges by the Canadian Radio-television and Telecommunications Commission
A pledge to further crack down on so-called junk fees by airlines, banks, telecoms and other service providers
A proposal to provide a GST/HST exemption on services rendered by psychotherapists and counselling therapists
The introduction of a new 15-week shareable Employment Insurance adoption benefit, along with up to four additional weeks of EI regular benefits to eligible seasonal workers in 13 economic regions
A proposal to enhance the Canadian journalism labour tax credit to increase “… the yearly limit on labour costs that can be claimed per eligible employee from $55,000 to $85,000, and temporarily increase the tax credit rate from 25 per cent to 35 per cent for a period of four years”
An expansion of eligibility for the 30 per cent Clean Technology investment tax credit and the 15 per cent Clean Electricity investment tax credit “… to include systems that produce electricity, heat, or both electricity and heat from waste biomass”

These announcements are in addition to tax policies and related measures announced in Budget 2023 and in the leadup to the 2023 Fall Economic Statement that are proceeding. Read the full overview here.

With economic uncertainty looming and the prospect of a more significant recession than the government expects, its claims of fiscal prudence are suspect. Factor in an election call due before the end of 2025—and a supply and confidence agreement with the New Democratic Party that calls for greater spending on a national pharmacare program, the cost of which could reach $11.2 billion for federal and provincial governments in the first year, and $13.4 billion in five years, according to the parliamentary budget officer—and the country’s finances are poised to suffer.

The odds are high that the federal Liberals will weigh that so-called fiscal anchor and continue to spend freely.

For more information on the 2023 Fall Economic Statement, contact a member of our team.

Armando Iannuzzi, Co-Managing Partner