Federal 2021 Budget Analysis

Tabling a plan to spend roughly 4.2% of Canada’s GDP in pandemic fiscal supports over the next four years, and more than $100B planned in new spending, the Federal government released one of its most impactful budgets to date since taking office in the Fall of 2015. With significant investments in infrastructure development, workforce development, and technology adoption, the government has come out swinging in its attempt to ensure the economy has sufficient opportunity to re-assert itself on the global stage once recovery efforts begin in earnest. 

Below, the Board has identified several priority areas for members the Board feels it and its membership should know, watch, and continue to advocate for.  

What to Know

Child Care 

Increased access to childcare will mean that more parents will be able to reach their full economic potential. Childcare accessibility is a critical component to maximizing labour participation. The $10 a day provision for childcare could prove transformative for the nation’s workforce development opportunities. The Trudeau government is prepared to commit more than $8 billion per year, an investment that it estimates would more than pay for itself by adding 240,000 workers to the labour force and raising GDP by as much as 1.2 per cent. As suggested by a recent National Post article, “It would be a positive shock to growth on par with the original North American Free Trade Agreement”.  

Digital Connectivity

The pandemic has seen the digital needs of the region’s businesses advance in one year what would have normally taken many. This budget acknowledges this rapid change through investments in digital connectivity and technology adoption, which will prove integral to the region’s continued global competitiveness and help businesses of all sizes ‘digitize’ their value offering in preparation for the post-pandemic new normal. Further investment of $1B in the universal Broadband Fund will support installation of a high-speed internet “backbone” that will help to overcome the digital divide throughout the region, offering 98% of the population high-speed internet by 2026.  

Pandemic financial supports

In addition to a $12 billion plan to extend key business aid programs and more than $4B to reform EI and ensure maintenance of worker supports, the federal government is allocating 2 more than $3B to reform the ailing long-term care system and mental health supports to bolster pandemic vulnerabilities against future threats.  

What to Watch

Young Canadians  

Young Canadians have been one of the demographic groups hardest hit by pandemic-induced layoffs, in part due to the COVID restriction measures. Exacerbated by the pandemic, youth are experiencing high unemployment levels and significant challenges with gaining on-the-job skills development and work experience. The government’s commitment of over $1.4 billion over the next two to five years to help connect youth with over 100,000 new, quality job placement opportunities and to create at least 85,000 work-integrated learning placements is commendable. This investment is a major step toward ensuring that youth can access and gain valuable skills and work experience needed to prepare them for the future of work. It is also a major step towards ensuring an inclusive recovery.  

Skilled workforce 

The government’s commitment of $470 million over three years to Employment and Social Development Canada to establish a new Apprenticeship Service is very timely, in light of the plethora of infrastructure projects in the pipeline (both pre-COVID and as part of the economic recovery) and the limited trades capacity to meet those demands. This funding is anticipated to help 55,000 first-year apprentices in construction and manufacturing Red Seal trades connect with opportunities at SMEs. It is also intended to provide an incentive for employers to hire traditionally underrepresented groups in the skilled trades, including women, racialized Canadians, and persons with disabilities. This is a welcomed step toward closing the skilled trades gap and helping to remove the apprenticeship/work experience barrier for skilled tradespeople, and especially young people, to be able to secure well-paying jobs in this space. 

The green economy

With a green recovery expected to be a major theme in this budget, the government has chosen to focus on supporting decarbonization of major industry. The Net Zero Accelerator – first announced last fall – has received an additional $5 billion over seven years to incentivize uptake of cleantech and emissions-reduction innovations in heavy-emitting sectors. Few details are available on the program, and its design will be critical to ensuring that these investments help economically critical sectors to adopt transformational decarbonization measures.  

Private investment  

This government’s strong spending regime is supported by the assumption that such spending will better position the economy to grow. Future repayment of the debt that is used to fund immediate expenditures relies on the additional government revenue that will be accrued by this future, larger economy that will be able to support a larger budget. Therefore, if the economy enters another recession or fails to grow in the long term, the federal fiscal outlook will be grim.  

 Notably, former Bank of Canada Governor Stephen Poloz is among the leading economists who say deficits can be managed if the rate of economic growth exceeds the interest rate governments pay to borrow.

Visitor Economy

The arts, recreation, and tourism sector has arguably been the hardest hit during the pandemic. Re-ignition of the visitor economy will be critical to ensuring the region’s continued global prominence, as it plays a critical role in positioning the region as a global destination. It ensures the continued viability of many industries that rely on the region’s rich cultural offering to both augment development of business relationships and draw skilled labour. This budget’s pledge to spend more than a ½ a billion dollars stimulating the visitor economy signifies a heavy swing to hit this mark. 

Transportation

The government has committed to major infrastructure spending, including permanent annual capital funding for urban transit and $500 million for VIA Rail upgrades. The details of projects funded by these investments will be determined in the future, and they must be chosen to maximize economic benefits. The VIA investment includes a feasibility study for the High Frequency Rail project between Toronto, Ottawa, and Montreal.  

Innovation Economy 

Canada spends the least out of all G7 countries ion research and development, according to Statistics Canada. Enhanced funding for digital connectivity and technology adoption through more than $5B allocated to the Venture Capital Initiative, tech adoption, small business financing, and directed pandemic financial relief, enhance the value of investment in technology and innovation. If successful in spurring domestic innovation, the funding allocation could reassert Canada as a global leader in technology development and innovation capability.  

What's Still Needed

Industrial Investment  

While the ambitious spending regime signifies a favourable outlook for the economy’s ability to recover, it will all be for naught if businesses fail to adopt the same attitude. If business do not view this stimulus as creating an opportune time to re-invest in themselves and their industries, much of the spending could simply end in inflation. To this end, easing trade barriers between the provinces, using the tax code to encourage companies to invest, spending on productivity-enhancing infrastructure, such as childcare, will be of critical importance.  

Sovereign Debt  

This government’s strong spending regime is supported by the assumption that it will better position the economy to grow. Future repayment of the debt that is used to fund immediate expenditures relies on the additional government revenue that will be accrued by this future, 4 larger economy that will be able to support a larger budget. Therefore, if the economy enters another recession or fails to grow in the long term, the federal fiscal outlook will be grim. These risks are further compounded by weighty debts taken on at the provincial level—per capita sovereign debt at the federal level now exceeds $65k, and $23k at the provincial level. Understanding this, the government predicts that the nation’s debt-to-GDP burden will peak in the coming year and begin to decline in subsequent years as GDP grows in comparison to debt.  

Notably, Former Bank of Canada Governor Stephen Poloz is among the leading economists who say deficits can be managed as long as the rate of economic growth exceeds the interest rate governments pay to borrow.  

Digital Service Tax

The government has indicated plans to implement a ‘digital services tax’ that will levy a 3-percent tax, effective Jan 1, 2022, on digital services that “rely on data and content contributions from Canadian users” and would apply to businesses with gross revenue of $750 million or more. Given the borderless nature of digital services, the harmonization of digital services taxes across international border may be needed to ensure continuity. If digital service businesses begin to adjust offerings across borders to better suit the local tax regime, Canada may be left at a disadvantage. A multilateral consensus-based tax solution had originally been planned with other countries in the OECD, though prolonged negotiations compelled the federal government to act unilaterally. 

Housing  

The Budget provided important new investments in housing, including topping up the Rapid Housing Initiative, which helps municipalities acquire buildings to provide affordable housing. However, these amounts were less than proponents called for, and may not make much of a dent in the needs of Toronto and other large urban regions. Despite calls from major banks and media, there was also little action to cool the rapidly heating housing market. If house prices continue to rise, further government action may be needed to prevent increased unaffordability.  

As you know, the Toronto Region Board of Trade is deeply involved in strategy and recovery plans with all three levels of government. If you feel that any other issues need to be flagged, please do not hesitate to share your views with us via rmartino@bot.com.