Risk of recession rising, deficit projected at $36.4B in 2022-23: fall economic statement

The federal government's fall economic update makes it clear that while the deficit is declining, the risk that Canada enters into a recession is rising.

The pared-down fiscal update presented by Deputy Prime Minister and Finance Minister Chrystia Freeland shows how the federal pocketbook has benefited from increased revenues, but as anticipated, the government is offering little in terms of new measures to help most Canadians navigate the high cost of living, as to not exacerbate inflation.

The Liberals are instead prioritizing targeted measures for low-income Canadians and those with student debt; a new tax on share buybacks by large corporations; as well as launching the promised Canada Growth Fund meant to bring in new private investment to help reduce emissions and create new jobs.

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The fall economic statement projects the federal deficit at $36.4 billion in 2022-23, down from the $52.8 billion forecast in the April 2022 federal budget. Freeland is also forecasting that federal coffers could be back to balance by 2027-28.

Speaking with reporters inside the lockup in advance of her speaking in House of Commons, Freeland sought to make it clear that while the Canadian economy is slowing, the country is in a position of strength, citing Canada's near-record-low unemployment rate and the lowest net debt and deficit-to-GDP ratios in the G7.

"What we're announcing today, what we've been doing throughout is to strike a balance between necessary compassion and support for Canadians, and fiscal responsibility," Freeland said. "And we know we need to strike that balance because… We really don't want to make the central bank's job harder. We don't want to put the Bank of Canada in a position where it has to raise rates higher and keep them there for longer."

The current climate requires steadiness, said a senior government official speaking with reporters on a not-for-attribution basis inside the mini-budget lockup. The official spoke about how the federal government needs to maintain its flexibility to react to changing economic events, while also taking some steps to make it easier for workers and companies to navigate this uncertainty.

Just five pages into the federal government's 92-page economic statement, it notes in bold that "global growth is expected to slow, and recession risks have risen," outlining how the global economy is at risk of falling into recession, and consumer confidence is deteriorating.

In a "downside scenario" based on the government's survey of private sector forecasters, the fall economic statement warns that Canada could enter "a mild recession in the first quarter of 2023."

Chief economist with Deloitte Canada Craig Alexander told CTV News that offering this downside scenario shows that the government is recognizing the economic risks out there, but anticipates Canada will likely still stack up favourably to other countries.

FEW NEW AFFORDABILITY MEASURES

Continuing the retreat from pandemic-era massive stimulus spending, the economic statement includes $6.1 billion in new spending in 2022-23, including a $1 billion provision for "anticipated near-term pressures." Overall the measures included in the fall economic statement total $30.6 billion over six years.

This includes funding for some pre-announced items including the Liberals' trio of affordability offerings introduced in Parliament this fall, as well as the commitment to offer rebuilding funding to Atlantic Canada and Eastern Quebec following Hurricane Fiona.

The number of new affordability measures proposed in the fall economic statement are minimal, but the Liberals are promising to:

• Permanently eliminate interest on federal student and apprentice loans. The Liberals are proposing to make the federal portion of all Canada Student Loans and Canada Apprentice Loans permanently interest-free, including those currently being repaid, at a cost of $2.8 billion over five years;
• Advance payments and shift the Canada Workers Benefit to be quarterly. This refundable tax credit would top-up the income of Canada's lowest-paid workers in increments over the course of the year, rather than the way this relief is currently offered: through tax returns. To begin issuing advance payments for those already qualified, the fiscal update proposes $4.6 billion over six years; and
• Consult with credit card companies and small businesses with the intention of lowering and regulating credit card transaction fees.

In an apparent effort to bolster this rather minimal new spending, the Liberals opted to make note in the update of their commitment to deliver on housing affordability commitments already outlined in the 2022 federal budget, including creating a tax-free savings account for first-time buyers and other measures to crack down on house flippers and foreign buyers.

Freeland's fiscal statement also touts pre-existing initiatives, such as the temporary doubling of the GST tax credit passed through Bill C-30, which is set to cost $2.4 billion and will start hitting their bank accounts starting on Friday, and the planned toping-up the Canada Housing Benefit and initial dental coverage for children under 12 contained in the yet-to-be-passed Bill C-31.

ECONOMIC GROWTH, INVESTMENT PLANS

The fall economic update includes a plan to implement a two per cent tax on share buybacks by public corporations in Canada, which Freeland sees as a way to encourage investing in their profits and workers in Canada, while ensuring these large corporations pay their fair share.

The Liberals estimate this move, similar to a measure recently introduced in the United States, would boost federal revenues by $2.1 billion over five years, starting in 2023-24.

On Thursday, the Liberals announced plans to launch their promised "Canada Growth Fund" by the end of 2022, and offered new details on its design, how it will operate, and what the overall strategy will be.

The federal government sees this fund as a new way to attract private capital to Canada, with a focus on helping Canada's green energy sector grow and accelerate deploying new technology such as carbon capture.

In unveiling a new investment tax credit for clean technologies in the fall economic statement, the federal government emphasized how U.S. President Joe Biden's recent passage of the Inflation Reduction Act has created a sense of urgency for Canada to remain competitive.

Thursday's update also pledges:

• $250 million over the next five years aimed at helping workers adjust to the changing global demands. This spending will go towards a new sustainable jobs training centre; a new sustainable jobs stream for 20,000 apprentices and journeypersons; and a new sustainable jobs secretariat;
• $60 million over the next three years to create a new "rapid response fund for workers"; and
• $802.1 million over three years, for the pre-existing youth employment and skills strategy.

DEFICIT ON THE DECLINE, BACK TO BALANCE?

With government revenues benefiting from inflation and a stronger post-pandemic economic rebound earlier in the year, should Canada remain on the government's "baseline" trajectory, the deficit over the next five years is set to keep declining more than what was forecast in the 2022 federal budget.

"What that reflects is the fact that tax revenues have been significantly higher, and their spending has also been a bit lower," Alexander said. "The revenue side really reflects the fact that high inflation means also higher tax revenues for the Government of Canada."

Should Canada remain on this economic track, the deficit could be down to $3.4 billion by 2026-27, an improved outlook from the $8.4 billion projected in the federal budget. Then, by 2027-28, after the next federal election, the country could potentially see a $4.5 billion budget surplus for the first time since the Liberals came to power and quickly broke their pledge to run maximum deficits of $10 billion and balance the books by 2019.

However, in the short term under the federal government's "downside scenario" it's possible that should a recession hit, the 2022-23 deficit could be $49.1 billion, and rise to $52.4 billion in 2023-24, before heading back on the decline over the following few years.

"What's important is you know, when you compare it to where we were during the pandemic, the deficit remains manageable," Alexander said.

The fall economic statement notes that relative to Budget 2022, public debt charges are higher, and are expected to increase to $34.7 billion in 2022-23, due to the sharp rise in short-term interest rates. They then may fall slightly in 2024-25 should inflation and interest rates start to subside.

CONSERVATIVES CONDEMN 'INFLATIONARY SPENDING'

In addition to the economic consequence of the fall fiscal figures, the update is already making waves on Parliament Hill, as the Liberals have tried to straddle competing demands from the opposition parties.

The Conservatives were calling for no new taxes and no new spending unless it was offset by savings, while the NDP wanted to see more supports for people and more measures to target "corporate greed."

Reacting to the economic update in the House of Commons, Conservative Leader Pierre Poilievre focused on the government's decision to keep spending, rather than directing all of the increased tax revenue windfall into paying down the deficit.

"Now, Liberals will pretend that they had no choice but to double the debt. This prime minister will claim that it's not his fault that he added more debt than all previous prime ministers combined," Poilievre said. "So Conservatives will stand for the common people, their paychecks, their homes, their savings, and we will vote against this inflationary spending," he said.

NDP Leader Jagmeet Singh said that while the update indicates that instead of having the backs of Canadians in tough times, the Liberals are turning their backs on Canadians, his party still plans to support the update and coming legislation to implement it.

In an interview on CTV News Channel's Power Play, Singh was critical of the fiscal update not including a windfall tax on oil and gas companies that are making record profits, nor the NDP's requested EI system reforms. Still, Singh said they won't let up on the pressure that they have to leverage with the Liberals thanks to their confidence-and-supply agreement.

"We're going to continue to look for those victories for Canadians," Singh said.

Bloc Quebecois MP and public accounts critic Nathalie Sinclair-Desgagne said Thursday that her party was also disappointed by the document, suggesting it didn't offer much new. The Bloc Quebecois has yet to say whether it'll vote to support the bill stemming from this update.

"We don't feel like the government is listening to its opposition nor is it listening to the provinces or its people," Sinclair-Desgagne said. "The fall economic statement is completely disconnected." 

FALL CONSULTATIONS ANNOUNCED

Alongside the economic update, the Government of Canada announced the launch of a series of consultations on future fiscal policy changes.

It is asking for industry and Canadians' feedback on:

• Lowering credit card fees for small business. The government says if negotiations with the credit card industry and merchants don't result in an agreed solution, they'll move to legislate a fee reduction in the new year;
• Addressing the digitalization of money. This review is stemming from the Liberals' desire to "maintain financial sector stability and security in the face of digital assets and cryptocurrencies;"
• Ensuring tax fairness amid the growing digital economy. The government is looking for feedback on its plans to adopt the Organisation for Economic Co-operation and Development (OECD) rules for income reporting by digital platforms; and
• Ensuring large and multinational companies pay their fair share of tax. The government plans to limit "excessive interest deductions" and is now looking for more feedback on draft legislation and how soon this policy should come into effect.