Date Published: November 21, 2018
Late today, Federal Finance Minister Bill Morneau delivered the government’s annual fall update to its fiscal and economic outlook. In his discussions with business leaders earlier this fall, competitiveness issues were reportedly front and centre, and it appears that Minister Morneau has taken these concerns to heart. The update includes immediate expensing of equipment costs for a number of industries, through 2027. Government calculations suggest that this will lower the average overall tax rate on new business investment from 17% to about 14%. Other measures announced today include incentives for the media, notably news organizations, and plans to further increase exports via initiatives across a number of departments.
All these measures come with a price tag. Roughly $16 billion in net new spending is envisioned, with tax changes making up the bulk. Helping pay for these is a better-than-expected economic backdrop that generates a fiscal windfall (Table 1). Real GDP for 2019 has been upgraded to 2.0%, with a slowing envisioned thereafter. This narrows the deficit by roughly $4 billion per year through fiscal 2023/24, all else equal, and provides the starting point for today’s announcements. Even with new spending measures added in, the result is a slightly lower deficit for this fiscal year than initially envisioned, of $18.1 billion (Budget 2018: $18.8 billion), and only modestly wider deficits thereafter. While deficits may be a hair higher, they are still expected to bend lower as time passes, alongside the debt-to-GDP ratio (Table 2).
This update was all about the investment environment, at least from a spending perspective. Of the $16 billion fiscal impact through 2023/24, more than $14 billion can be attributed to tax changes. The government’s response to U.S. tax changes took the form of two major initiatives. The first allows firms to write off 100% of the cost of manufacturing equipment, clean energy equipment, and software. The allowance for spending on computers has also been increased significantly. The second part is broader, effectively tripling the speed at which businesses can write off capital costs not covered in the first change.
These changes will enter into immediate effect, and be in full effect through 2024, then entering a phase-out period before returning to previous levels by the end of 2027. A change of this magnitude entails significant costs. The net impact on fiscal 2019/2020 is to increase the budget deficit by roughly $5bn. This impact fades through time, leaving the average impact over the next five fiscal years at roughly $2.8 billion per year. While sizeable, this is less than the $3.5 billion the Office of the Parliamentary Budget Officer estimates that just a 2 percentage point cut to the corporate tax rate would have cost per year.
It took a bit longer than might have been expected, but these measures should help address the competiveness challenge by incentivizing further investment. Indeed, the government’s actions align closely with what we had counseled ahead of today’s update. Temporary, targeted tax measures like those introduced today have the advantage of encouraging new investment at a relatively small fiscal cost, particularly when compared with more broad-based tax cuts. While difficult to assess immediately, we expect these changes should be at least marginally positive for business investment in Canada going forward. While it is not encouraging that the government seems to have made a habit of spending most (or in today’s case, all) of its fiscal windfalls, today’s response to competitiveness challenges is a welcome use of funds.
|Table 1: Economic Assumptions|
|Annual, Per Cent Change (Unless Otherwise Indicated)|
|November 2018 Update||2.0||2.0||1.6||1.6||1.9|
|TD Economics Nov 2018||2.1||2.1||1.8||1.7||1.7|
|November 2018 Update||4.2||4.1||3.3||3.7||4.0|
|TD Economics Nov 2018||4.2||4.3||3.8||3.7||3.7|
|Unemployment Rate (%)|
|November 2018 Update||5.9||5.8||6.0||6.1||6.0|
|TD Economics Nov 2018||5.9||5.9||5.9||5.9||5.9|
|3-Month T-Bill Rate|
|November 2018 Update||1.4||2.1||2.4||2.4||2.4|
|TD Economics Nov 2018||1.4||2.2||2.5||2.5||2.5|
|10-Year Gov't Bond Yield|
|November 2018 Update||2.3||2.8||3.0||3.1||3.2|
|TD Economics Nov 2018||2.3||2.7||2.8||2.9||2.9|
|Source: Department of Finance Canada, Statistics Canada, Bank of Canada, TD Economics|
|Table 2: November 2018 Federal Fiscal Update Forecast Summary|
|(C$ Billion, Unless Otherwise Specificed)|
|Public Debt Charges||23.8||27.5||29.9||31.8||32.7||34.3|
|Per Cent of GDP|
|Public Debt Charges||1.1||1.2||1.2||1.3||1.3||1.3|
|Source: Department of Finance Canada, TD Economics. Budget Balances Include $3bn Risk Adjustment.|
This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.