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Ottawa released a federal budget aimed at leading the country through the COVID-19 crisis and to a post-pandemic economic recovery. Kim Parlee speaks with James Marple, Senior Economist, TD Bank, about the government’s plans to build the economy back.
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Well, the federal budget is out in Canada and it is a big one here to dissect what it is and everything that was in it, it was jam packed, is James Marple. He's Managing Director and Senior Economist with TD Economics. James, thanks for doing this. I know you've been very busy with the last little while, trying to figure out everything that's going on. Can we start with the big picture? 100 billion dollars being spent over the next three years. But what kind of– just give us a sense of the amount of money and what kind of fiscal situation it puts Canada in to start with?
Sure. Well, we're following absolutely the biggest budget deficit, really, I think we've ever seen. 350 billion in the last fiscal year, over 16 % of GDP. Now, going into the next fiscal year, that that's falling bit. We'll have a deficit of 150 billion or so, still significant, but obviously reflecting an economy that's through the worst in terms of the pandemic. And not needing quite the same level of support that it did but still looking at deficits that are just a sea change from what we saw prior to the pandemic. We were looking at deficits of 20 billion or maybe 30 billion just prior to the pandemic and thinking these are worrisome. Well, we're way past that level now. Of course, we see that in the debt-to-GDP ratio which prior to the pandemic was running around the 30% mark. We're now up around 50 and expected to head a little bit north of 50 over the next year before gradually heading lower. I think it reflects obviously just the scope of the crisis and the policy response. In fairness, the policy response, I think, really helped the economy come through better than expected. We actually have seen an economic recovery that, even according to the government's own numbers, performed better over the past year and as come into this year, performing quite a bit better. The recent variant and lockdowns notwithstanding.
You talk about scope and the breadth of this budget is significant. It covers a lot of areas. There's a lot of money going to lots of different places. I want to touch on some of the key ones because I don't think we have enough time quite frankly to get through all of them. Thirty billion dollars being spent over five years for a national child care program. That was one of the big ticket items. Your thoughts on that?
Yeah, just to say that in terms of the scope, the document is 750 pages, I couldn't get through all of it. I just had to try to skim through the most of the biggest elements. But yes, absolutely. The headline grabbing number and something that people have been looking for a federal government that has committed to for quite a long time is investments in a national child care program. They came at least in terms of the numbers, 30 billion over six years and a long term commitment of 9 billion a year following that. So it's permanent. This is a permanent new federal spending program. It remains to be seen exactly how it will work because, of course, early childhood development and education is a provincial area of jurisdiction. They will now have to go to the provinces and offer these funds in exchange for what they hope is matching funds from the province. Their idea is that they spend 50 percent and the provinces spend the remainder. That will be potentially challenging in some of the more fiscally constrained provinces. But it's a big investment. It's significant in terms of the share of GDP. It's about what we've seen spent in Quebec. And Quebec really is the model here where back in 1997, they went to a model of having affordable day care with a goal of having it less than $10. But It was much less than $10 when they announced it. But $10 day for parents and they really have seen the benefits of that in terms of increasing participation, especially for women in the workforce. If you look at Quebec prior to their national child care program, they had a lower rate of female participation in the labour force. And now they lead the rest of the country and they have about half the gap among core working age people between men and women that exists in the rest of the country. If the rest of the country can get to just where Quebec is, it means potentially up to 250,000 more women in the workforce. And that means higher potential GDP. Really, it's an investment that certainly has some upfront costs. But it could pay for itself over the long run in terms of higher GDP. That means higher government revenues, but also productivity because a lot of the research suggests that this early childhood education is really important to raising productivity and avoiding negative outcomes. Sorry, if I went on a little longer.
But it's an important one. Anyone who's been working from home who was also educating their kids at home can speak to that productivity. I think in terms of trying to make everything work at the same time. You talk about on your note that there was a lot of major social spending in this budget. And again, we're not going to be able to get into everything. But you talk about new funding for students, the Canada Student Grant, more funding for the Canada Workers Benefit. We've seen additional income for seniors, the OAS being increased by 10 % for those over 75. How significant are each one of these, would you say?
I think it speaks to the fact that this is also a budget that is likely going to be a pre-election budget. And they wanted to make sure to just sprinkle some social benefits to everyone. I think in terms of the student element, it's a good idea to make post-secondary education more affordable. There was some concern especially about the older participants in the OAS program and this is universal. So they really just were throwing money at a problem. I think there's maybe some fair criticism of could they have targeted some of these things a little better? But they really wanted to to, I think, hit every possible constituency. And they managed to do that with some pretty some pretty flashy numbers in terms of the totals that they intend to spend.
If I shift gears and think a bit more about industries and green climate commitments, the green sector. How would you characterize the budget in terms of what's being delivered there?
The government had already announced so much in terms of investments in green energy, as the budget itself said, 60 billion over the past five years. This maybe didn't have as much in terms of new money but what they have put they've also announced a target to reduce their greenhouse gas emissions even more than they had previously envisioned. So with everything else that they had put in place, the plan was to bring greenhouse gas emissions 30 % below 2005 levels and now they're aiming for 36 %. They do that with a range of investments. There's obviously money for retrofitting zero interest rate loans and audits for both residential and businesses to do that. I mean, that could be quite significant, especially HVAC systems that are a significant source of greenhouse gas emissions. That could go a long way. But also just through this net zero accelerator which aims to be sort of like a sovereign investment fund aimed at putting more toward building up capacity in the non-carbonization or decarbonization economy. It remains to be seen how well those funds are allocated over time. But certainly you can't doubt their commitment in terms of the numbers.
And again, I would encourage people to crack open that 750 pages or read your report when it comes out because there's so much in there. But the one thing that also caught my eye that you talked about in your note is that there is a lot of things happening but there really isn't a lot to generate revenue for the government over the next little while. I should mention, of course, that in the spending cap, they extended a lot of the pandemic benefits. They'll be scaled down a bit over time. But in terms of bringing money in, we didn't see a lot of tax changes.
Well, that makes some sense, too. If you think you want to go into an election, you may not want to raise taxes much. But there were some have potentially headline-grabbing things. We did see a tax on large foreign digital service providers. And that's been something that's been been longstanding that they maybe avoided taxation in Canada. So a 3 % tax. And it's actually not huge, but it's not insignificant in terms of how much revenue it will raise. It's certainly into the billions. They also had a luxury tax. So buy your yacht Kim before before the next while because it's going to be a 10 % tax on yachts and personal jets and expensive vehicles. That won't raise very much at all, 500 million, I believe, over several years. But more of a signaling device that we're all in this together perhaps, and concern about the rising inequality. And then finally, there was the tax on on empty homes, vacant homes owned by non residents. So aimed at going after the segment of the market where they feel could be driving up home prices and lowering affordability. That is a pretty small share of the market and they still expect to raise some revenue on it. But I mean, I think the key, as you said, among all these things is there more signaling than something that really changes the overall trajectory of of deficits? They would have to do something much more substantial if they were going to solve or reduce deficits with the revenue side of the balance sheet
Despite the revenue side. Also, again, quoting your note, you do say that the Government of Canada is 2021 budget is a historic document, maybe tell me a bit more about why you think it is such a historic document?
Certainly just in terms of what we've seen, what we've come through, the amount allocated, the additional 100 billion. I mean, just fascinating in terms of the numbers, the change in the deficit over the fiscal year that just ended was 35 billion in terms of an upgrade. So the starting point was 35 billion dollars better. That's bigger than deficits were in the decade running prior to the pandemic. So the numbers are just staggering both just in terms of deficits and also in terms of spending. But I think the child care commitment that they've tried in the past and this puts real dollars in front of it. I think there's obviously quite a bit of momentum there. Hopefully that moves forward the commitments to pivot toward longer term investments. I mean, there were a lot of other investments we didn't talk about in terms of the digital economy and trying to help businesses invest in more digital technologies obviously also coming out of the experience of the pandemic. But just the details even on the 100 billion over the next three years. That in itself is 3 % of GDP. The extension of the wage supports and other supports for businesses. We've just never seen anything like this really in the recent past. Finally, just getting back to a deficit that was close to but still higher than where we were prior to the pandemic. It speaks to the ongoing challenges we will have to get back to normal coming out of this health and economic crisis.
Well, it is a historic budget for historic time. James, thanks so much for taking us through it. We do appreciate it.
You're very welcome.
Sure. Well, we're following absolutely the biggest budget deficit, really, I think we've ever seen. 350 billion in the last fiscal year, over 16 % of GDP. Now, going into the next fiscal year, that that's falling bit. We'll have a deficit of 150 billion or so, still significant, but obviously reflecting an economy that's through the worst in terms of the pandemic. And not needing quite the same level of support that it did but still looking at deficits that are just a sea change from what we saw prior to the pandemic. We were looking at deficits of 20 billion or maybe 30 billion just prior to the pandemic and thinking these are worrisome. Well, we're way past that level now. Of course, we see that in the debt-to-GDP ratio which prior to the pandemic was running around the 30% mark. We're now up around 50 and expected to head a little bit north of 50 over the next year before gradually heading lower. I think it reflects obviously just the scope of the crisis and the policy response. In fairness, the policy response, I think, really helped the economy come through better than expected. We actually have seen an economic recovery that, even according to the government's own numbers, performed better over the past year and as come into this year, performing quite a bit better. The recent variant and lockdowns notwithstanding.
You talk about scope and the breadth of this budget is significant. It covers a lot of areas. There's a lot of money going to lots of different places. I want to touch on some of the key ones because I don't think we have enough time quite frankly to get through all of them. Thirty billion dollars being spent over five years for a national child care program. That was one of the big ticket items. Your thoughts on that?
Yeah, just to say that in terms of the scope, the document is 750 pages, I couldn't get through all of it. I just had to try to skim through the most of the biggest elements. But yes, absolutely. The headline grabbing number and something that people have been looking for a federal government that has committed to for quite a long time is investments in a national child care program. They came at least in terms of the numbers, 30 billion over six years and a long term commitment of 9 billion a year following that. So it's permanent. This is a permanent new federal spending program. It remains to be seen exactly how it will work because, of course, early childhood development and education is a provincial area of jurisdiction. They will now have to go to the provinces and offer these funds in exchange for what they hope is matching funds from the province. Their idea is that they spend 50 percent and the provinces spend the remainder. That will be potentially challenging in some of the more fiscally constrained provinces. But it's a big investment. It's significant in terms of the share of GDP. It's about what we've seen spent in Quebec. And Quebec really is the model here where back in 1997, they went to a model of having affordable day care with a goal of having it less than $10. But It was much less than $10 when they announced it. But $10 day for parents and they really have seen the benefits of that in terms of increasing participation, especially for women in the workforce. If you look at Quebec prior to their national child care program, they had a lower rate of female participation in the labour force. And now they lead the rest of the country and they have about half the gap among core working age people between men and women that exists in the rest of the country. If the rest of the country can get to just where Quebec is, it means potentially up to 250,000 more women in the workforce. And that means higher potential GDP. Really, it's an investment that certainly has some upfront costs. But it could pay for itself over the long run in terms of higher GDP. That means higher government revenues, but also productivity because a lot of the research suggests that this early childhood education is really important to raising productivity and avoiding negative outcomes. Sorry, if I went on a little longer.
But it's an important one. Anyone who's been working from home who was also educating their kids at home can speak to that productivity. I think in terms of trying to make everything work at the same time. You talk about on your note that there was a lot of major social spending in this budget. And again, we're not going to be able to get into everything. But you talk about new funding for students, the Canada Student Grant, more funding for the Canada Workers Benefit. We've seen additional income for seniors, the OAS being increased by 10 % for those over 75. How significant are each one of these, would you say?
I think it speaks to the fact that this is also a budget that is likely going to be a pre-election budget. And they wanted to make sure to just sprinkle some social benefits to everyone. I think in terms of the student element, it's a good idea to make post-secondary education more affordable. There was some concern especially about the older participants in the OAS program and this is universal. So they really just were throwing money at a problem. I think there's maybe some fair criticism of could they have targeted some of these things a little better? But they really wanted to to, I think, hit every possible constituency. And they managed to do that with some pretty some pretty flashy numbers in terms of the totals that they intend to spend.
If I shift gears and think a bit more about industries and green climate commitments, the green sector. How would you characterize the budget in terms of what's being delivered there?
The government had already announced so much in terms of investments in green energy, as the budget itself said, 60 billion over the past five years. This maybe didn't have as much in terms of new money but what they have put they've also announced a target to reduce their greenhouse gas emissions even more than they had previously envisioned. So with everything else that they had put in place, the plan was to bring greenhouse gas emissions 30 % below 2005 levels and now they're aiming for 36 %. They do that with a range of investments. There's obviously money for retrofitting zero interest rate loans and audits for both residential and businesses to do that. I mean, that could be quite significant, especially HVAC systems that are a significant source of greenhouse gas emissions. That could go a long way. But also just through this net zero accelerator which aims to be sort of like a sovereign investment fund aimed at putting more toward building up capacity in the non-carbonization or decarbonization economy. It remains to be seen how well those funds are allocated over time. But certainly you can't doubt their commitment in terms of the numbers.
And again, I would encourage people to crack open that 750 pages or read your report when it comes out because there's so much in there. But the one thing that also caught my eye that you talked about in your note is that there is a lot of things happening but there really isn't a lot to generate revenue for the government over the next little while. I should mention, of course, that in the spending cap, they extended a lot of the pandemic benefits. They'll be scaled down a bit over time. But in terms of bringing money in, we didn't see a lot of tax changes.
Well, that makes some sense, too. If you think you want to go into an election, you may not want to raise taxes much. But there were some have potentially headline-grabbing things. We did see a tax on large foreign digital service providers. And that's been something that's been been longstanding that they maybe avoided taxation in Canada. So a 3 % tax. And it's actually not huge, but it's not insignificant in terms of how much revenue it will raise. It's certainly into the billions. They also had a luxury tax. So buy your yacht Kim before before the next while because it's going to be a 10 % tax on yachts and personal jets and expensive vehicles. That won't raise very much at all, 500 million, I believe, over several years. But more of a signaling device that we're all in this together perhaps, and concern about the rising inequality. And then finally, there was the tax on on empty homes, vacant homes owned by non residents. So aimed at going after the segment of the market where they feel could be driving up home prices and lowering affordability. That is a pretty small share of the market and they still expect to raise some revenue on it. But I mean, I think the key, as you said, among all these things is there more signaling than something that really changes the overall trajectory of of deficits? They would have to do something much more substantial if they were going to solve or reduce deficits with the revenue side of the balance sheet
Despite the revenue side. Also, again, quoting your note, you do say that the Government of Canada is 2021 budget is a historic document, maybe tell me a bit more about why you think it is such a historic document?
Certainly just in terms of what we've seen, what we've come through, the amount allocated, the additional 100 billion. I mean, just fascinating in terms of the numbers, the change in the deficit over the fiscal year that just ended was 35 billion in terms of an upgrade. So the starting point was 35 billion dollars better. That's bigger than deficits were in the decade running prior to the pandemic. So the numbers are just staggering both just in terms of deficits and also in terms of spending. But I think the child care commitment that they've tried in the past and this puts real dollars in front of it. I think there's obviously quite a bit of momentum there. Hopefully that moves forward the commitments to pivot toward longer term investments. I mean, there were a lot of other investments we didn't talk about in terms of the digital economy and trying to help businesses invest in more digital technologies obviously also coming out of the experience of the pandemic. But just the details even on the 100 billion over the next three years. That in itself is 3 % of GDP. The extension of the wage supports and other supports for businesses. We've just never seen anything like this really in the recent past. Finally, just getting back to a deficit that was close to but still higher than where we were prior to the pandemic. It speaks to the ongoing challenges we will have to get back to normal coming out of this health and economic crisis.
Well, it is a historic budget for historic time. James, thanks so much for taking us through it. We do appreciate it.
You're very welcome.
