Federal Budget 2023: Economic impact

Tara: Hi, I'm Tara Benham, National Tax Leader for Grant Thornton. The 2023 federal budget was released on March 28th.This budget was influenced by a range of economic factors including: 

the need to demonstrate fiscal responsibility after posing deficits during the pandemic, 

stay competitive in the transition towards a green economy,and  

to address the cost of living pressures Canadians are faced with. 

I'm joined by Stephen Tapp, Chief Economist at the Canadian Chamber of Commerce, to get his insights on the budget. Thanks for joining me Stephen. 

Stephen: It’s a pleasure to be here. Thanks for having me.  

Tara: So, Steve, what did we see as the key themes in the budget? And what, if anything, was missing from your perspective? 

Stephen: Well, I think if you look at the messaging from the government prior to the budget, they were focused on talking about affordability, talking about overall restraint, and making sure that this budget was sort of right size for the times. What I like to do as an economist is follow the numbers and look through the tables and see where the money is going and so probably the biggest ticket item in this budget was related to federal provincial transfers. So, the federal government’s sending more money to the provinces. For health transfers, we also saw a relatively big improvement or enhancement of dental care federal plan in Canada. You see some new measures for incentives for businesses to invest in the green economy, which was a pretty big part of this budget. We saw some reprofiling of government funds, so existing measures that have been taken before are being rethought and moved around a little bit. And then we see a bit more of a focus on progressive taxation from the federal government. 

And the other side, you talked about the second part of the question and what do we see as missing? I think for the Chamber of Commerce, for us, primarily, we wanted to see a bit more of a focus on economic growth than we got in the budget. This could be improving regulation, bringing down internal trade barriers, looking at trade enhancing infrastructure. And while there were some of those moves in the budget, we'd like to have see a more stronger push on those measures because Canada's competitiveness and productivity has been lagging for for quite some time now, and we really need to be pretty bold to encourage investment in businesses, not just in the green economy, but more broadly. Yeah, I know what you're saying. And what we got was a little bit more complex than what we were hoping for, which is the simplicity. 

Tara: So next question is what was the economic outlook presented in the budget forecast?  

Stephen: Well, it wasn't wasn't so rosy this time around. The budget takes their forecasts from the private sector forecasters in Canada. And for 2023, we're now building in recession a shallow or mild recession, however you want to characterize it, that is looking at actually three negative quarters of growth for the first three quarters of this 2023 year. 

So we have a more or less stagnant growth profile over the year with overall growth about 0.3% in real GDP terms, which is really pretty, pretty weak year. If you look beyond Canada's borders, there's weaker global growth and that's obviously impacting growth here at home. There's softer commodity prices and when you factor those all in, we have smaller growth in the overall government tax base, and so let's a nominal GDP measure. 

That's down by $60 billion over the government's projection, which represents about 2%, so about 2% lower on the economy overall. And I think we do have, of course, some elevated risk right now with financial market turmoil and some concerns about what's happening south of the border. But Canada's economy so far in January and February, data that we've got has been pretty resilient and I guess, if anything, the forecasters were looking for a recession, but that's going to have to wait for the first quarter because it looks like we're off to probably 2 or 3% growth in the first quarter of the year, which is pretty resilient, pretty strong. And if if we're lucky, we might be able to get out of this without a big major recession in Canada. 

Tara: I agree with that. We do not want the recession. So the federal budget now expects deficits for at least the next five years. Was that a surprise to you? 

Stephen: Well, we certainly expected there to be deficits. I think the surprise comes at the very end point of the projection. And so in previous budgets, everyone has a so-called fiscal anchor, and that's to reduce the debt to GDP ratio over the projection, which they're still doing in this period, although this rises for the first few years. The big change, though, is there's no return to balance. So before we had returned to budget balance and the surplus position and given the fact that we have a weaker economy in Canada, given the fact that we have some new measures which represent about $43 billion over the whole projection for all these all these measures I talked about before.

When you put those two things together, you have bigger deficits and the deficit track is obviously bigger and lower than it was before. And the very final period of this projection we have, the deficit is about $20 billion bigger than it was last time. So that's not a huge surprise that things would be worse, but surprising that we didn't see a push back to return to balance at the very end of the projection. 

Tara: Yes, I agree. Very surprising and a little bit worrying. Which brings me to my next question, which is, are you worried about the government's fiscal position?  

Stephen: There's a lot of fiscal pundits out there that are concerned about the fiscal position for the federal government. I would say at this point in time, the overall projection, if you look at estimates in parliamentary budget officer or Finance Canada who's done longer term projections, we still seem to be on a sustainable path federally where we have deficits that essentially are manageable at this point in time, about one and a half percent of GDP. But as long as we have the economy growing, that's something which which we can manage and sustain over time. We're obviously carrying more pandemic debt. So we had a big shock to the economy and a lot of new programs. So the big risk would really be if inflation does not come down lower interest rates will be higher with higher interest rates and slower growth. That's going to be a problem for the overall federal government, other deficits government’s trying to service your deficits. So, I think the big risk is really whether inflation comes down or not. And so that's sort of, I think, where we’d be looking. 

Tara: Great. And that leads me to my next and final question, which is if you had a crystal ball, what would you say about inflation? 

Stephen: Well, the Bank of Canada is certainly looking forward and trying to bring inflation under control. We had inflation peaking at about 8% last summer in Canada, which is obviously very elevated as high as it's been in about four years or so. We're down now to a little bit over 5.2% in the most recent data.So we have seen some improvements thus far in the inflation outlook. And the expectation is going forward that inflation probably will get down closer to the bank of Canada's target and getting below 3% by the summer because we did have a big increase in prices last year when Russia invaded the Ukraine. And we're starting to compare these prices now to a year ago.

So we're starting to see some improvements just on the basis of that. But the slowdown in the economy is essentially part and parcel going to bring that down. So there there certainly is a risk that inflation could maintain an elevated level. It'll be harder to get back down to 2%.But we're certainly on a path down below 3% in the short term and hopefully back to 2%, let's say, by 2024. 

Tara: Thanks so much, Steve, for joining us today and sharing your insights. 

Stephen: Thanks a lot for having me here. Appreciate it.