The long-awaited 2021 Federal Budget was tabled yesterday and, in short, it disappoints. The Federal government is proposing a level of program spending unmatched in Canadian history and intends to borrow very, very heavily to pay for it. With an expected deficit of over $350 billion for 2020-2021 and a forecasted deficit of over $150 billion for 2021-2022, we are looking at a total debt of over one trillion dollars, with zero plan in place to pay it back.
Business growth is the key to post-pandemic recovery, yet this Budget does little to support Canadian businesses and their entrepreneurial leaders—with the possible exception of Green Tech companies. The promises contained in the Budget to conquer COVID-19, “punch our way out of the COVID recession”, and build a better, fairer, more prosperous, and more innovative future ring hollow, despite the 724 pages used to communicate them.
Below is our commentary on the 2021 Federal Budget:
Tax Measures
We were surprised by the lack of tax changes in the Budget, as there had been significant rumours to the contrary. There was no change proposed to the capital gains inclusion rate, no elimination of the principal residence exemption, no wealth tax introduced, and no increase in personal and corporate tax rates. This all equals good news for the vast majority of our clients.
That said, someone will eventually need to pay for all this proposed spending. Today’s deficit usually results in tomorrow’s taxes. In the absence of a long-term plan to balance the Budget, business owners have been left with a high level of uncertainty—and unease—regarding how much they may be on the hook for down the road.
The few new tax measures that were proposed in the Budget include a luxury tax on six-figure vehicles, a Digital Services Tax, and the application of HST to e-commerce. None of which is expected to have any significant fiscal impact.
The Budget also includes measures to crack down on tax evasion and aggressive tax avoidance.
Some companies and high net worth individuals will be affected by the additional tax disclosures proposed for complex tax arrangements, and large international companies will need to contend with increased limitations on interest deductions through the adoption of BEPS measures.
COVID-19
Although the Budget contains a significant amount of non-COVID spending, it does extend some of the current business support programs. The Budget proposes to extend the Canada Emergency Wage Subsidy (CEWS) and the Canada Emergency Rent Subsidy (CERS)—both scheduled to expire in June—to at least the end of September, although the subsidy rates for both programs would gradually decline after July 4th. The Budget also proposes the introduction a new COVID-19 support program called the Canada Recovery Hiring Program.
Climate Change
The Budget promises about $17 billion to promote a “green” recovery out of the COVID-19 pandemic and create jobs in the years ahead. It sets out a plan to help achieve GHG emissions reductions of 36 per cent from 2005 levels by 2030, and net-zero emissions by 2050.
We are having a great deal of difficulty understanding what this all means for businesses and consumers.
For weeks we have been wondering how can we turn our firm into a net-zero carbon emitter. The truth: we don’t think we can. We live in Canada. In Toronto, the average temperature is below 15 degrees Celsius for 8 months of the year—sometimes well below—and so we consume natural gas to keep our office warm. Our office infrastructure depends on energy purchased from Alectra Utilities, who are in turn dependent on Ontario’s electricity supply mix—which supports excess demand by burning natural gas.
We can renovate, insulate, replace old furnaces, install solar panels—but none of those activities are carbon neutral. Even if the Federal government provides help financing these initiatives—we are not sure it will move the needle.
To be clear, we believe in climate change. But we also believe that the Climate Change Initiative of taxing the consumption of fossil fuels and then rebating the collected funds back to taxpayers is not really a plan. And in truth, does it really matter what Canada does, if India and China are unwilling to make changes to their rapid development?
Child care
Here’s the Budget’s BHAG: access to high quality early learning and child care for an average of $10 a day.
The Budget describes child care as a “tax on a segment of the population that Canada requires to drive economic growth.” The Federal government is looking at spending $30 billion over the next 5 years and then $8.3 billion in perpetuity, hoping that it will generate net new GDP growth of 1.5 to 2.8 times the investment. How could they ever possibly begin to measure that?
This initiative requires the provinces to play ball and share costs with the Federal government. The last time we checked, the provinces and territories were all running significant and unprecedented deficits, and unable to keep up with the demands on their health care systems. How is a province expected to prioritize child care over health care? The recent Ontario Budget forecasted a deficit of $33.1 billion for next year, declining to $27.7 billion with mounting interest costs—enough interest alone to construct a new hospital each month ($1.1 billion).
Is 2021 the time to implement this measure? In the throes of a recession and in the middle of the third wave of a pandemic? Maybe it is if you want is to go to the polls and seek a majority mandate…
Canada’s Cash Flow Statement
The best way to analyze the 2021 Federal Budget is through a cash flow statement. We have taken data from both the 2019 and 2021 Federal Budgets and tracked the change in Federal debt from 2019 until 2026 using information supplied in the Federal Budget documents. (see details here)
Here are our key findings:
- The undeclared fiscal anchor of our Federal Budget would appear to be Federal debt equal to about 50% of our total GDP. This is in sharp contrast to 2019, when debt was equal to about 30% of GDP. This is contrary to the recommendation of constraining the cost of interest (public debt charges) to 10% of revenues.
- Annual program spending is about $40 billion greater in the 2021 Budget versus the 2019 Budget.
- There is no such thing as a positive budgetary balance, there are only deficits—more expenditures than revenue.
- We are projecting that interest rates on the Federal debt over the next 5 years are going to be less than 3%, which is lower than projected in 2019. “In today’s low interest rate environment, not only can we afford these investments in Canada’s future, it would be short-sighted of us not to make them.” We’re not so sure.
- We have no safety net, rainy day fund, flexibility, shock absorber—call it what you like. We are borrowing an amount of money that is hard for most of us to understand during a global pandemic, with a healthcare system stretched beyond its limit.
Conclusion
The 2021 Federal Budget does not build us back better. Instead, it reads like an election platform—with goodies and future promises sprinkled with pixie dust for everyone, and payment terms to be worked out much, much later. It passes the buck down the road to our children and future governments on the basis that we can afford to borrow up to 50% of our annual GDP. Unfortunately, investment in business—the key to economic recovery—has taken a back seat to spending.