The federal government has released its 2024 budget with a focus on new taxes, increased spending and housing affordability. Derek Burleton, Vice President and Deputy Chief Economist at TD, speaks with Greg Bonnell about the economic implications.
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* The liberal government has released a federal budget with some $53 billion in new spending commitments over the next five years and some proposed tax changes for wealthy Canadians and corporations. Let's break down some of the details, and let's start with those proposed tax changes. Now, this has to do with an increase to the capital gains inclusion rate to 2/3. This would be on gains of over $250,000 annually, targeting both individuals and corporations. Now, the government says that this change should bring in more than $19 billion over the next five years. Now, despite the fact that they expect this increased revenue from this stream, TD Economics notes that the deficit will actually widen over the next five years. Of course, affordability has been a key issue for Canadians for quite some time now. This budget proposes $8.5 billion in new spending, aimed at building millions of homes over the next several years. Joining us now to help break down federal budget 2024, what it could mean for the economy, Derek Burleton, Deputy Chief Economist at TD. Derek, always great to have you with us. We got a lot to go through here. Let's start with that new spending I was just talking about. $53 billion over five years. What's the potential economic impact here?
* Well, it's a lot of spending. There's no doubt. I mean, $10 billion a year, it's not chump change. In terms of economic impact, you could think, wow, that's going to be very inflationary. But when you look at it, at the end of the day, it's the deficit that matters. What they've done is-- well, they've raised spending. They're raising taxes as well, and that'll mitigate some of the impact. The deficit hasn't really changed that much. The five-year deficit plan largely intact to what it was back at the time of the fall update. That's, to me, what drives my economic forecast. So I wouldn't be changing my economic forecast significantly because-- and you know, Freeland did that for a reason. I think she sold this budget in advance as being a budget that's going to create the conditions for interest rates to fall. So the way she mitigated the spending impact, a lot of it, was to raise taxes. So hence why I don't think it's going to have a big impact on the economy.
* That's the big question. You talked about it there. Inflationary, right? Because we know that the work that the Bank of Canada has been doing to try to bring inflation back down to target, they have to be mindful of the work that's happening on the fiscal side. So when you look at this document, you don't think by making those calculations they're not presenting an inflationary sort of scenario for the economy.
* I don't think so, not the federal government. Again, the deficits are large, but we knew they were large. So in terms of the added spending impact, the fact is, it's been largely offset by higher taxes, will mitigate that. But keep in mind, the provinces have been busy spending and raising their deficits. So something that Macklem last week pointed out, that they raised their forecasts in part because of the provincial budget. So net government sector is going to be inflationary in 2024 budget season.
* I can't think of how many years I've gone into federal budgets or covered them here since I've joined the bank where the capital gains inclusion rate was always being whispered about heading into it. On the other side of it, nothing there. We got the surprise today. We got it. Let's walk through it. I mean, this is aimed at wealthy Canadians and corporations. What could the impact be here?
* Well, and we're looking through the budget, looking at impacts. It would have been nice, for example, we know that it's going to affect about 0.16% of Canadians. That's based on some of the budget numbers on average gross income of $1.4 million. So you're not talking about many, many Canadians but it still is-- I think it's about a $9 billion revenue impact just from the household sector over the next five years. So again, yeah, I mean, it could be impactful in terms of a disinvestment incentive. I worry about that. We haven't seen any productivity growth in Canada for a long time now, and this won't help. The business sector, I think, is part of that equation. I think, again, the budget provides some impacts that it's going to be not a lot of corporations. I think it's 2% or something like that. It's not a big amount. But at the same time, these are large corporations. I'd like to know which industries it's going to affect. That wasn't in the budget. But you have to know that it's going to affect some of Canada's most capital intensive industries. So yeah, I worry about some of the impacts on productivity, something that our record has been so poor in recent years.
* Heading into this budget, I think the government had said, we're worried about productivity as well, and they'll be measures in here. But when I hear you talk about it that way, it seems like we have more concerns than things that say, hey, here's something that will help our productivity longer term.
* Yeah, and I think they released the AI information, the 2.4 billion in the AI sector. More computing. That's all productivity enhancing. But what they giveth, they taketh away in terms of that inclusion rate. I do worry about the impacts of how that's going to more than offset it. It's hard to sell productivity in this budget with that kind of impact. But yeah, to your point, I mean, it's something we expected every year. I never thought it would happen. And I'm trying to get sorted out in my head because there was some rumors that they'd raised corporate income tax rates. There are other ways, and a wealth tax. That would have been hard, I think to manage.
* Things that didn't show up in this budget.
* Things that didn't show up. So this would have been kind of the third or fourth thing I would have expected. But the same time, yeah, I think-- sorry to see that in effect. On the one hand, the government's going to say a buck's a buck a buck. The fact that capital gains are taxed at a lower rate, you could argue from an equity perspective, it wasn't ideal. But it's the timing of it, at a time where our productivity is so weak. That's not a good thing, I don't think.
* Obviously, another big issue for the budget is affordability, right? Canadians have been suffering under affordability issues. On the housing file, $8.5 billion. Trying to build millions of new homes over the next several years. What kind of impact does $8.5 billion have when we talk about the housing problem we're facing?
* Yeah, it's going to have some impact. There's no doubt. Because you have to add on other measures they've implemented in the fall update. Some measures that lowered taxation of rental construction. This just adds to those measures and others in recent years. So when you start adding up all the supply-side effects, it will have an impact. Now, how big? I think what I worry about is, for example, capacity of the construction sector to expand. It's not just building of homes. It's all the infrastructure, their funding.
* People to build them, yeah.
* Yeah, and we already have a huge shortage within the sector. Employment in the sector is about 8% of the labor force. That's at a record level. And yet, you've got people retiring every year. It's an aging workforce within construction. A lot of the migration hasn't been in construction. So I think that will be the big impediment to growing. But I think the bigger impact on household affordability is going to be on some of the population changes. Those were impactful, the ones that were announced ahead of the budget on immigration, capping international students. It'll hit the rental market the hardest in terms of demand. Now, is it going to revert rental demand back to, say, three four years ago? It isn't because we still have a lot bigger population. What it'll do, it'll slow rent growth, and it'll make the housing sector more affordable. I think that-- so it's going to be more of the demand-side impact rather than any kind of supply-side, even if it helps to some extent.
* Also, I want to ask you, you said the deficit projections aren't getting that much larger, just widening out a bit. At the same time, the cost of service, the growing national debt. Do we have any concerns there?
* Well, I mean when you look at the number, $64 billion is the estimated debt service hit in the current year. That's going to grow with the debt. If you compare to pre-pandemic, as a share of GDP, it's about 1.8%. That's double that pre-pandemic. So the growth in that with the higher rates, with the higher deficits, is not chump change. Now, is it at a point where I get alarmed? No, I don't think this budget in itself is going to affect the Canada's AAA credit rating, mainly because the deficit profile hasn't greatly changed. And in fact, with GDP numbers being upgraded, thanks to a better year this year for projected growth, some of the ratios get flatter. So I don't think the rating agencies are going to be losing sleep, so that's one good thing. I think, again, my worries would be more on the productivity side and some of the areas where I thought there'd be a little bit more work done to improve.
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* Well, it's a lot of spending. There's no doubt. I mean, $10 billion a year, it's not chump change. In terms of economic impact, you could think, wow, that's going to be very inflationary. But when you look at it, at the end of the day, it's the deficit that matters. What they've done is-- well, they've raised spending. They're raising taxes as well, and that'll mitigate some of the impact. The deficit hasn't really changed that much. The five-year deficit plan largely intact to what it was back at the time of the fall update. That's, to me, what drives my economic forecast. So I wouldn't be changing my economic forecast significantly because-- and you know, Freeland did that for a reason. I think she sold this budget in advance as being a budget that's going to create the conditions for interest rates to fall. So the way she mitigated the spending impact, a lot of it, was to raise taxes. So hence why I don't think it's going to have a big impact on the economy.
* That's the big question. You talked about it there. Inflationary, right? Because we know that the work that the Bank of Canada has been doing to try to bring inflation back down to target, they have to be mindful of the work that's happening on the fiscal side. So when you look at this document, you don't think by making those calculations they're not presenting an inflationary sort of scenario for the economy.
* I don't think so, not the federal government. Again, the deficits are large, but we knew they were large. So in terms of the added spending impact, the fact is, it's been largely offset by higher taxes, will mitigate that. But keep in mind, the provinces have been busy spending and raising their deficits. So something that Macklem last week pointed out, that they raised their forecasts in part because of the provincial budget. So net government sector is going to be inflationary in 2024 budget season.
* I can't think of how many years I've gone into federal budgets or covered them here since I've joined the bank where the capital gains inclusion rate was always being whispered about heading into it. On the other side of it, nothing there. We got the surprise today. We got it. Let's walk through it. I mean, this is aimed at wealthy Canadians and corporations. What could the impact be here?
* Well, and we're looking through the budget, looking at impacts. It would have been nice, for example, we know that it's going to affect about 0.16% of Canadians. That's based on some of the budget numbers on average gross income of $1.4 million. So you're not talking about many, many Canadians but it still is-- I think it's about a $9 billion revenue impact just from the household sector over the next five years. So again, yeah, I mean, it could be impactful in terms of a disinvestment incentive. I worry about that. We haven't seen any productivity growth in Canada for a long time now, and this won't help. The business sector, I think, is part of that equation. I think, again, the budget provides some impacts that it's going to be not a lot of corporations. I think it's 2% or something like that. It's not a big amount. But at the same time, these are large corporations. I'd like to know which industries it's going to affect. That wasn't in the budget. But you have to know that it's going to affect some of Canada's most capital intensive industries. So yeah, I worry about some of the impacts on productivity, something that our record has been so poor in recent years.
* Heading into this budget, I think the government had said, we're worried about productivity as well, and they'll be measures in here. But when I hear you talk about it that way, it seems like we have more concerns than things that say, hey, here's something that will help our productivity longer term.
* Yeah, and I think they released the AI information, the 2.4 billion in the AI sector. More computing. That's all productivity enhancing. But what they giveth, they taketh away in terms of that inclusion rate. I do worry about the impacts of how that's going to more than offset it. It's hard to sell productivity in this budget with that kind of impact. But yeah, to your point, I mean, it's something we expected every year. I never thought it would happen. And I'm trying to get sorted out in my head because there was some rumors that they'd raised corporate income tax rates. There are other ways, and a wealth tax. That would have been hard, I think to manage.
* Things that didn't show up in this budget.
* Things that didn't show up. So this would have been kind of the third or fourth thing I would have expected. But the same time, yeah, I think-- sorry to see that in effect. On the one hand, the government's going to say a buck's a buck a buck. The fact that capital gains are taxed at a lower rate, you could argue from an equity perspective, it wasn't ideal. But it's the timing of it, at a time where our productivity is so weak. That's not a good thing, I don't think.
* Obviously, another big issue for the budget is affordability, right? Canadians have been suffering under affordability issues. On the housing file, $8.5 billion. Trying to build millions of new homes over the next several years. What kind of impact does $8.5 billion have when we talk about the housing problem we're facing?
* Yeah, it's going to have some impact. There's no doubt. Because you have to add on other measures they've implemented in the fall update. Some measures that lowered taxation of rental construction. This just adds to those measures and others in recent years. So when you start adding up all the supply-side effects, it will have an impact. Now, how big? I think what I worry about is, for example, capacity of the construction sector to expand. It's not just building of homes. It's all the infrastructure, their funding.
* People to build them, yeah.
* Yeah, and we already have a huge shortage within the sector. Employment in the sector is about 8% of the labor force. That's at a record level. And yet, you've got people retiring every year. It's an aging workforce within construction. A lot of the migration hasn't been in construction. So I think that will be the big impediment to growing. But I think the bigger impact on household affordability is going to be on some of the population changes. Those were impactful, the ones that were announced ahead of the budget on immigration, capping international students. It'll hit the rental market the hardest in terms of demand. Now, is it going to revert rental demand back to, say, three four years ago? It isn't because we still have a lot bigger population. What it'll do, it'll slow rent growth, and it'll make the housing sector more affordable. I think that-- so it's going to be more of the demand-side impact rather than any kind of supply-side, even if it helps to some extent.
* Also, I want to ask you, you said the deficit projections aren't getting that much larger, just widening out a bit. At the same time, the cost of service, the growing national debt. Do we have any concerns there?
* Well, I mean when you look at the number, $64 billion is the estimated debt service hit in the current year. That's going to grow with the debt. If you compare to pre-pandemic, as a share of GDP, it's about 1.8%. That's double that pre-pandemic. So the growth in that with the higher rates, with the higher deficits, is not chump change. Now, is it at a point where I get alarmed? No, I don't think this budget in itself is going to affect the Canada's AAA credit rating, mainly because the deficit profile hasn't greatly changed. And in fact, with GDP numbers being upgraded, thanks to a better year this year for projected growth, some of the ratios get flatter. So I don't think the rating agencies are going to be losing sleep, so that's one good thing. I think, again, my worries would be more on the productivity side and some of the areas where I thought there'd be a little bit more work done to improve.
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