2024 Federal Budget

While higher interest rates work to normalize inflation and cool the economy, Canada’s 2024 budget operated at cross purposes, proposing a significant 6.4% jump in spending over the coming year. The budget focuses on new spending initiatives, prominently for affordable housing, healthcare, the military, and Artificial Intelligence (AI). This is set to be funded in part by higher capitaffl gains taxes.

The 2024 fiscal plan anticipates a deficit of $39.8 billion for the 2024/2025 year, about $1.4 billion more than the figures released in the fall. Fiscal prudence continues to take a back seat to the government’s scope of providing additional services. Canadian government spending now amounts to 15.6% of GDP, well above the 13.2% average over the two decades prior to the pandemic. Remarkably, the number of federal public employees has increased by 40% since 2014/2015. The NDP is likely to support the minority Liberal government.

New spending initiatives include:

The proposed new spending will cost an additional $52.9 billion over five years, and includes: ▪ Targeted spending focused on making new and existing housing more affordable. This includes: – $15 billion in loans for rental constructions, and $600 million in loans to build new homes more quickly.

– $6 billion to support new housing infrastructure through investment in critical water, waste, and storm sewer systems. These come with provincial conditions, including loosening zoning rules and adopting the renters’ bill of rights – a national standard lease agreement aimed to help protect renters.

– $1.5 billion in loans and $470 million in contributions to non-profit organizations, community housing providers, and other partners to help buy affordable rental buildings.

▪ A national pharmacare program that was introduced in February will cover most prescription contraceptives and diabetes medicine. This is expected to cost $1.5 billion over five years for the first phase.

▪ $8.1 billion in new spending on the Canadian Armed Forces over the next five years, and $73 billion in the next two decades on military infrastructure ($41.6 billion), equipment ($28.3 billion), and personnel services ($2.7 billion). Despite this, spending is still projected to be below the NATO target spend of 2% of GDP in 2029.

▪ $6.1 billion in funding over the next six years for low-income working-age persons with disabilities, with a maximum of $2,400 per year and clawbacks based on family income.

▪ $2.4 billion to accelerate Canada’s AI sector, most of which ($2 billion) will go towards increasing access to computing and technological infrastructure, with smaller amounts invested in AI start-ups, and AI integration within businesses.

▪ $2.5 billion in carbon-price rebates to small businesses with 499 or fewer employees, paid separately from tax refunds.

▪ $1 billion over five years for a national school food program aimed to combat raising food prices, and $1 billion in low-cost loans, grants and student loan forgiveness to expand childcare centres across Canada. Spending cuts and revenue generation: To offset some of these planned expenditures, $21.9 billion will be funded primarily through increases to capital gains taxes and excise duties on tobacco and vaping products.

Other notable measures include:

▪ The lifetime capital gains exemption for small businesses has been increased from $1.0 million to $1.25 million.

▪ A new Canadian Entrepreneurs’ Incentive will lower the capital gains inclusion rate for certain industries to just onethird. In effect, most Canadians will experience an unchanged capital gains inclusion rate, some will suffer the higher rate, while a small number will enjoy this reduced rate.

▪ The government is proceeding with its longstanding plan to introduce a digital services tax, to be followed by a global minimum corporate tax rate of 15%.

▪ A tax exemption supporting the transition of small-business ownership through Employee Ownership Trusts (EOTs).

▪ First-time homebuyers can withdraw double the amount from their RRSPs to put toward a down payment on a house or condo, raising the limit from $35,000 to $60,000, and giving five years (up from two) to start paying back. Renters can also build credit scores through rental payments.

▪ Mortgage repayment terms extended to 30-year terms, instead of 25 years for first-time homebuyers who purchase newly constructed homes, existing insured mortgages, or homes worth less than $1 million.

▪ A new Secondary Suite Loan Program to enable homeowners to access up to $40,000 in low-interest loans to add secondary suites to their homes.

Economic implications and considerations

The federal debt is projected to improve marginally over the coming five years, from 42.1% of GDP today to 39.0% in 2028-2029. By the fifth year, the deficit is projected to shrink by roughly half, to $20 billion.

While the deficit itself is fairly tame at 1.3% of GDP – and quite modest in an international context – it is nevertheless distressing how projected spending notches higher each year. In 2021, the government forecasted federal spending of $429 billion for 2026. Spending for that year is now expected to total $499 billion – a 16% increase, and with two more years of potential slippage to come.

While addressing a number of social issues, the budget fails to significantly address Canada’s productivity shortfall and doesn’t help in the effort to reduce inflation. Despite the Liberal government’s minority status, this budget should easily pass given the party’s confidence agreement with the NDP

By Kevin Deckert, CFA, Portfolio Analyst, RBC Global Asset Management