Fall Economic Statement 2023: Federal government backloads new spending, maintains near-term bottom line

• The federal government announces $20.8 billion in net new policy action over 6 years since Budget 2023 – 30% of which ($6.3 billion) will be allocated to housing affordability initiatives.
• Near-term spending is restrained as the bulk of new measures aren’t slated until FY2025-26.
• The deficit projection for this year is a notch lower to $40 billion (from $40.1 billion) in FY 2023-24 relative to the Budget 2023 projection.
• However, backloaded new spending will bump up the shortfall in the outyears of the fiscal plan compared to Budget 2023 projections.
• A lower-than-expected deficit in FY2022-23 helped improve the government’s debt-to-GDP ratio near-term profile relative to Budget 2023 baseline.

The federal government’s Fall Economic Statement (FES) comes at a time when affordability challenges are front-and-centre in the public discourse. Ahead of this update, Finance Minister Chrystia Freeland faced conflicting demands to spend more to alleviate affordability stress while showing some fiscal restraint to ease inflation pressures and put government finances on a better path. In the end, she opted to prioritize measures to address Canada’s housing affordability crisis but slated the new measures for later years so as not to widen this year’s projected deficit.

A pleasant surprise – at $40 billion the federal deficit is effectively unchanged from what the government projected in Budget 2023. This will be achieved despite a weaker economic backdrop dampening revenue projections by $600 million, and higher public debt charges and net actuarial losses than previously expected. The offset will come from muted program spending growth (0.8%).

The expenditure restraint won’t last long, though. Program spending is slated to re-accelerate by 5.6% and 3.9% in the next two years, respectively. This re-acceleration will lead to higher deficits to the tune of $36 billion over the next four years relative to Budget 2023.

Over the fiscal horizon, cumulative revenues are expected to be $68.5 billion higher by FY 2028-29 than projected in Budget 2023. The revenue boost is thanks to proceeds from the pollution pricing framework and higher interest revenue from Crown corporations, tax debt, and net foreign exchange account holdings. And with economic growth expectations largely in line with our own, we don’t view these projections as overly optimistic. Still, this windfall will be more than offset by additional program spending ramping up in the coming years.

Housing affordability measures take centre stage

In an effort to restrain program spending in the near-term, only 30% of the $20.8 billion in net new policy actions (since Budget 2023) over the fiscal planning horizon will be booked before FY 2025-26.
Housing affordability came out as the dominant theme in today’s announcement. Housing-related initiatives secured a total of $6.3 billion in new spending since Budget 2023 over the six years to FY 2028-29 (including the previously announced GST exemption for purpose-built rental housing).

Key new measures include:

• $15 billion in additional low-cost loan funding for rental apartments. Starting in FY 2025-26, the Apartment Rental Construction Loan Program (previously known as the Rental Construction Financing Initiative) is set to support the development of more than 30,000 additional new homes across Canada.
• $1 billion to support non-profit, co-op and public housing over three years. Starting in FY 2025-26, the Affordable Housing Fund (previously known as the National Housing Co-Investment Fund) is set to support the development of more than 7,000 new homes by 2028.
• $309 million in new funding for the Co-operative Housing Development Program scheduled to launch in early-2024.
• Crackdown on non-compliant short-term rentals. The government intends to deny operators income tax deductions in provinces and municipalities where short-term rentals are prohibited. It will also provide $50 million over three years to support municipal enforcement of restrictions.
• Piggybacking on the previously announced GST exemption for purpose-built rental housing, the 2023 FES announced plans to extend the GST rebate to co-op housing. The rebate, however, won’t apply to substantial renovations of existing residential complexes.
• New mortgage charter. It will provide additional guidance and expectations for how federally-regulated financial institutions “are to work with Canadians to provide tailored relief and ensure payments are reasonable for borrowers”.

These measures come on the heels of a steady stream of announcements in recent months that included the disbursement of financial incentives from the $4-billion Housing Accelerator Fund (first introduced in Budget 2022) to various municipalities to speed up the construction of new housing.

We’re pleased to see the suite of supply-side initiatives in this year’s FES and believe the federal government’s new initiatives will be helpful in addressing Canada’s housing affordability crisis. We think concerted efforts focused on growing the supply of homes Canadians can afford are the best way to improve the situation on a sustained basis. But they won’t be quick fixes. Building the number of homes needed is a protracted effort requiring investment, improved efficiencies to the development process, and time.

Overall, the federal government opted to keep fiscal spending in closer step to monetary policy objectives – offering few measures ($168 million over 6 years) to combat the rising cost of living for households (outside of housing).

Green investments also returned as a main theme this year’s FES. New key measures for this initiative include:

• $850 million for Clean Technology and Clean Electricity Investment Tax Credits over five years starting in FY 2024-25. The initiative is intended to support the use of waste biomass to generate heat and electricity.
• Though not a conventional investment, the federal government also released plans for the long-awaited Indigenous Loan Guarantee Program – an effort to facilitate equity ownership in major projects in the natural resources sector.

Federal balance sheet improves this year with deeper deficits expected later on

Soaring inflation and solid economic recovery from pandemic shutdowns helped improve government indebtedness metrics (measured relative to the size of the economy in nominal terms) in the past two years. The federal debt-to-GDP ratio is expected to tick higher to 42.4% from 41.7% in FY 2022-23. By the end of the fiscal horizon, Canada’s debt-to-GDP ratio is expected to fall to 39.1%, in line with the government’s fiscal anchor- a commitment to reducing federal debt to GDP over the medium-term.

Higher public debt charges have resulted in a $2.6 billion increase to Canada’s expenses in FY 2023-24, with a cumulative $32.9 billion added through FY 2027-28 from Budget 2023. Public debt charges are projected to soar 73% over the next six years. By FY 2028-29, the federal government will spend nearly as much on debt charges ($61 billion) as on health transfers ($63 billion).

The government also committed to purchasing Canada Mortgage Bonds (CMBs) up to an annual max of $30 million each year, starting as soon as February 2024. But the purchase of these CMBs is not expected to add to Canada’s debt charges over the fiscal horizon. Revenues generated from this hybrid approach to the program are expected to be sufficient to offset debt charges, while funding affordable – housing a win-win for the federal government and investors.

While we’re glad to see the FY 2023-24 deficit virtually unchanged from the Budget 2023 projection, the deeper deficits in the outer-years of the fiscal plan contradict the “slim” fiscal plan the federal government advertised. Stricter fiscal guardrails would help enhance fiscal flexibility in the event Canada’s economic growth recovery is slower than expected.

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