The federal Liberals have more than $85 billion in new spending room from a booming economic rebound and plan to spend some of the windfall on a series of measures aimed at keeping the good growth going – including key initiatives that could boost Ottawa’s tech sector.
The 2022 budget released Thursday includes more than $31 billion in new spending over the next five years.
It’s targeted at speeding the flow of goods through the country’s supply chains, boosting housing supply and jolting businesses out of an anemic period of investment.
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The new spending has increased the fiscal year’s deficit to $52.8 billion from earlier estimates of $44.1 billion.
Government officials framed the spending as a hedge against near-term economic uncertainty created by Russia’s unprovoked invasion of Ukraine and the sixth wave of the COVID-19 pandemic.
But the Liberals also say the spending is aimed at the long-term as well to address structural issues within the national economy that could hold back growth.
It’s why the government is reprofiling $15 billion in existing spending for a new fund designed to lower business investment risk for research and new technologies, $3.8 billion over eight years for a critical minerals strategy, and $450 million over five years to unclog supply chains.
The document also commits to spending money from budgets past by forcing provinces to allocate nearly $7.3 billion in outstanding infrastructure dollars by next March or risk losing the money. Timelines to spend the money have also been pushed back from 2027 to 2033.
Some of the measures in Thursday’s budget could give a jolt to Ottawa’s tech sector.
For example, the Trudeau Liberals are promising to create two new arm’s-length bodies to handle billions in federal funds to prod businesses to invest in themselves.
The measures unveiled in the 2022 federal budget would see $15 billion over five years put into a fund designed to alleviate risks for private companies to make it more palatable to spend on research and technology.
The cash for what the Liberals call the “Canada Growth Fund” will come through existing dollars baked into the government’s fiscal framework.
Money would go to companies through loans and equity stakes that the government expects to largely earn back, although some of it may ultimately not flow back to federal coffers.
Carbon-capture investments
The fund would be set up over the next year with the first investments expected in the ensuing 12-month period under the projections set out in the budget.
The fund and a sister agency to help commercialize new discoveries add to the handful of arm’s-length agencies the Liberals have created over the years, which experts say have a mixed track record.
One of those agencies, the Canada Infrastructure Bank, received another change to its mandate in Thursday’s budget to allow it to invest in technologies like small modular reactors and carbon capture and storage.
Meanwhile, the Liberals are also looking at revamping another policy lever that many Ottawa tech firms employ to make it more cost-effective for them to fund research.
The government says it plans to review the Scientific Research and Experimental Development (SR&ED) program, which provides tax incentives to encourage Canadian businesses to conduct R&D.
The Liberals say they want to make sure the SR&ED program is “effective in encouraging R&D that benefits Canada,” adding they plan to “explore opportunities to modernize and simplify it.”
The government also says it wants to examine whether the tax system can play a role in “encouraging the development and retention of intellectual property stemming from R&D conducted in Canada” – another key issue for many growing tech firms.
Ottawa’s semiconductor industry could also get a boost.
The feds say they’re planning to commit an additional $45 million over four years to work with manufacturers and back projects that will strengthen the country’s semiconductor sector. The money adds to the $150 million the government committed in February to help boost the development and supply of semiconductors.
The Liberals also unveiled a major new tax credit for carbon capture and storage technology, an area in which a growing number of local startups are looking to make their mark.
The Liberals said they will allocate $2.6 billion over five years to a tax credit for companies investing in projects that employ the technology, which traps greenhouse gas emissions from industrial sources and stores them deep in the ground to prevent them from being released into the atmosphere.
Starting in 2022, companies will be able to claim a tax credit of up to 60 per cent for direct air capture projects and 50 per cent for all other eligible carbon capture projects. The government will decrease the tax credit rates by 50 per cent in 2031 in an effort to get companies to build their carbon capture projects now, not later.
The Liberals also pledged to deliver some tax relief to growing small businesses in all sectors.
Small businesses currently pay a federal tax rate of nine per cent on their first $500,000 of taxable income, compared with the general federal corporate tax rate of 15 per cent.
That benefit ends, however, once a business employs at least $15 million worth of capital in Canada – a threshold the Liberals now plan to raise to $50 million. The feds say the change would result in an estimated $660 million in tax savings to small businesses over the next five years.
Little new support for tourism
Meanwhile, Ottawa’s all-important tourism sector – among the industries hit hardest by the pandemic – had little to cheer about in Thursday’s budget.
After pledging $1 billion to support the national tourism sector a year ago, the Liberals unveiled much more modest measures in Thursday’s document. They include $20 million over two years to back a new Indigenous Tourism Fund and another $4.8 million over two years for the Indigenous Tourism Association of Canada to help rebuild the country’s Indigenous tourism sector.
Overall, the budget points to a government admitting there are hurdles to Canada’s long-term growth prospects, though falls short of a detailed economic strategy, said Robert Asselin, senior vice-president policy with the Business Council of Canada.
The budget forecasts 3.9 per cent economic growth this year but expects that to slow over the ensuing four years to average 2.9 per cent annual growth in real gross domestic product. Inflation too is expected to fall from 3.9 per cent this year – an upward revision to December’s fiscal update – before starting next year to fall toward the Bank of Canada’s target of two per cent.
Unemployment is expected to stay at a low of 5.5 per cent over the forecast horizon.
Economist Armine Yalnizyan, an Atkinson Fellow on the Future of Workers, said the budget was a missed opportunity to invest in health-care workers – for example, to keep workers from leaving the care economy that accounts for one-fifth of GDP, and which other workers rely on.
Total spending this fiscal year will decline to $452.3 billion, including debt servicing costs, from the $497.9 billion in the preceding 12-month period as emergency pandemic aid measures end.
Even with the emergency spending, the budget forecasts the debt as a percentage of the economy will hit 45.1 per cent this year and decline over the coming years, including in a worst-case scenario envisioned in the document.
Randall Bartlett, senior director of Canadian economics at Desjardins, said the government has put some of its financial windfall into the bank for a rainy day given the uncertain environment, and held back on moving ahead with a handful of election promises in this budget.
To pay for some of the new spending, the government is rolling out a tax on excess profits at banks and insurance companies that the Finance Department expects to reel in $6.1 billion over five years. There is also a warning shot to the country’s top earners that the government plans to change their minimum tax, with details expected to come later this year.
The Liberals are also promising a spending review to find $6 billion in savings over five years. A progress report is promised for next year’s budget.
– With additional reporting from OBJ staff
