23 Mar

Budget 2017 – A Step Towards Stronger Potential Growth

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Posted by: Cory Kline

Budget 2017 continues the government’s commitment to support the middle class by enhancing Canada’s long-term growth potential. Investments to foster innovation, skills and the ability to attract top talent from around the world are included. An important and growing competitive advantage is Canada’s openness to trade and immigration, having a broader range of free trade agreements than any other G-7 country. This is particularly potent today as the US is aiming to retrench from free trade and even potentially impose trade restrictions and border adjustment taxes. As well, the US has become an unwelcome destination for many talented immigrants. With Canada’s free trade agreement with the EU, for example, American firms might find it more attractive to locate in Canada to conduct their European activities. Similarly, Canada behooves Canada to finalize plans to join the Trans Pacific Partnership, which was rejected by the Trump Administration.

In direct contrast to the US, Canada is encouraging the immigration of talent and improving the temporary foreign worker program that is so important to tech companies. In addition, the budget introduces measures to improve skills and training for adults and children. Preparing for the digital economy will continue as children’s training in science, technology, engineering and mathematics will be enhanced–the same for adults, both employed and unemployed.

Ottawa is also targeting a few high-potential sectors for government support. These targeted areas are advanced manufacturing, agri-food, clean technology (a sector that the Trump Administration might well be abandoning), digital industries, health/bio sciences and clean resources (also very different from proposed US policy), with the hope of enhancing growth and creating jobs.

The budget also takes to heart the recommendations of the Advisory Council on Economic Growth to retool existing innovation programs, eliminating those that aren’t working, redirecting resources and adopting the analytical framework to effectively help Canada to compete globally. Some of these actions include the development of super clusters, coordinating cross fertilization between educational institutions and private business, and the implementation a new Innovation Fund. The Strategic Innovation Fund will be supported by banks, pension funds and other investors as well as government. Funding for venture capital will be promoted by additional capital for the Business Development Bank of Canada. Improvements to Canada’s Intellectual Property regime will also be introduced.

Infrastructure spending will continue, augmented by the Canada Infrastructure Bank. Private funding and expertise will stretch public monies and accelerate public transit spending and other infrastructure plans.

Other measures include encouraging increased international tourism, which is highly attractive given the weakness in the Canadian dollar and the widespread supply of foreign-speaking Canadians to service these tourists. Additional measures to improve long-term growth potential are summarized in the following table. What is not included is any increase in defense spending despite President Trump’s assertion that NATO members are not paying their fair share. Indeed, Canadian defense spending is expected to decline moderately.

Fiscal Prudence

Notably, this budget posts deficits as far as the eye can see. However, the good news is that Ottawa re-introduced a contingency reserve to adjust for potential risk of $3.0 billion per year. This reserve fund was a long-standing practice of prior governments and was absent from Budget 2016. Ottawa, however, continues to focus on a reduction in the debt-to-GDP ratio rather than deficit elimination. This will no doubt be criticized by conservatives.

Tax Measures

Basically, there aren’t any major tax measures. Specifically, there is no change in the tax treatment of capital gains, a red-hot issue in the media for the past few weeks. Finance is cracking down on the use of private corporations to sprinkle income among family members to reduce taxes. These private corporations are subject to lower tax rates than personal income tax rates. Similarly, passive investment portfolios held inside private corporations will be audited. Clearly, the Canada Revenue Agency will be scrutinizing these private corporations in the future, to assure tax fairness for the middle class.

Eliminating tax loop holes, evasion (both domestically and internationally) and avoidance is expected to increase revenues by $2.5 billion over five years.

There will also be a renovation to the current caregiver credit system and extension of the eligibility for the tuition tax credit. Measures will also be taken to strengthen the financial services sector, although these are technical and supervisory and do not affect mortgage lending specifically as some in the industry had feared. The details of these tax measures are presented in the table below.

2016 Canada Budget

Housing Initiatives

Many were concerned that the government would take additional action to slow the housing market, particularly in Toronto where it continues to be very strong. No such action was taken. The Budget document does comment on the high level of household debt relative to income and the affordability concerns in Vancouver and Toronto, however the Budget 2017 suggests that “recent government actions (announced in October) will help mitigate risk and ensure a healthy and stable housing market.”

Budget 2017 proposes to invest more than $11.2 billion over 11 years in a variety of initiatives to build, renew and repair Canada’s stock of affordable housing. A new National Housing Fund will be administered through CMHC to expand lending for new rental housing supply and renewal, support innovation in affordable housing, preserve the affordability of social housing and support a strong and sustainable social housing sector. More federal lands will be available for affordable housing. Details to come later this year.

What Budget 2017 does do is to allocate just shy of $40 million to Statistics Canada over five years to develop and implement a new housing data base, the Housing Statistics Framework (HSF). The HSF builds on the money allocated in last year’s budget to collect data on foreign ownership of housing. “The HSF will leverage existing data from provincial-territorial land registries, property assessment programs and administrative records to create a nationwide database of all residential properties in Canada, and provide up-to-date data on purchases and sales. Statistics Canada will begin publishing initial data in the fall of 2017. The HSF will represent a significant jump forward in the quality and type of housing data available and will yield significant ongoing benefits by enhancing the ability of housing participants, commentators and policy-makers to monitor and analyze the housing market.”

Bottom Line:

Budget 2017 does no harm. It essentially ignores the impact of potential actions of the Trump Administration on Canada. While the US economic outlook has been upgraded owing to the likelihood of tax cuts, infrastructure spending and energy sector deregulation, there is no assumption about the impact of a NAFTA renegotiation or the threatened implementation of a border tax. Given the uncertainty surrounding these issues, Ottawa’s approach is prudent.

The Canadian economy has improved considerably since last year’s budget. While oil prices, the Canadian dollar and US interest rates are uncertain, it appears that the economy could grow at roughly a 2.3% annual rate with the jobless rate in Canada remaining below 7%. The resilience of the Canadian economy has been supported by government actions in the 2016 budget as well as accommodative monetary policy.

While I would like to see a plan to return to a balanced budget, Canada will have no trouble in funding its debt or maintaining its triple-A credit rating.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
10 Feb

Canadian Job Surge in January

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Posted by: Cory Kline

January’s payroll gain was a huge 48,300 Statistics Canada said on Friday in Ottawa, well above economists’ forecast of a loss of 10,000 jobs. This follows a gain of a whopping 46,100 in December. The unemployment rate fell by 0.1 percentage points to 6.8%.

Employment growth has been strong since August. Canada posted the best quarterly hiring gain since 2010 in the final quarter of last year. Full-time employment held steady following a substantial increase in December. This may signal the country’s economy is finally turning the corner after two years of pain induced by the collapse in oil prices.

Most of the job gains were for men aged 25 to 54, with the increase of about 30,000, the largest in more than two years.

Gains in the average hourly wages of permanent employees slowed to 1% in January from a year earlier, the smallest gain since 2003, from the 1.5% pace in the last two months.

Hours worked also fell 0.8% from a year earlier.

Thus, the report continued to show signs of an uneven job market, something that has led Bank of Canada Governor Stephen Poloz to stress there’s much more labour slack than in the US, meaning there could be further divergence in monetary policy as the Fed continues to gradually hike rates and the Bank of Canada remains on the sidelines this year.

Demand for financial and business services led the way in January.  Employment in finance, insurance, real estate, rental and leasing increased by 21,000, bringing gains from 12 months earlier to 59,000 (+5.3%), with most of this increase concentrated in the last six months. There were 16,000 more people working in business, building and other support services last month. On a year-over-year basis, employment in this industry was little changed.

Compared with December, employment rose in Ontario, British Columbia, Nova Scotia and Newfoundland and Labrador. In contrast, there were fewer people working in New Brunswick. Employment was little changed in the remaining provinces.

Canadian labour markets have improved relative to the US, as labour force participation rates remain above unusually weak levels in the US. Adjusted to the measurement concepts in the US, the unemployment rate in Canada was 5.7% in January, compared with 4.8% in the US. Over the past year, the jobless rate fell 0.5 percentage points in Canada, while it was little changed in the US as it nears full-employment.

In January, the labour force participation rate was 65.8% in Canada (adjusted to US concepts) and 62.9% in the US. On a year-over-year basis, the participation rate was unchanged in Canada, while it increased slightly in the US as some discouraged workers resumed their job search.

In a separate report, Canada posted a second consecutive monthly trade surplus. Exports increased 0.8% on the strength of higher energy product prices. Imports increased 1.0%, mainly reflecting stronger imports of aircraft and industrial machinery.

Canada’s merchandise trade surplus with the United States narrowed from $4.7 billion in November to $4.4 billion in December. This will no doubt be a topic of discussion on Monday in Washington when PM Trudeau meets with President Trump. Those discussions will likely be cordial, although the renegotiation of NAFTA and Trump’s threat of a border tax has jeopardized the stability of one of the largest two-way trading partnerships in the world.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres