Federal budget 2019: Five things to watch for today

This week, Justin Trudeau’s Liberals are expected to lay out big spending promises ahead of this fall’s federal election. Here’s what you need to know

Globeandmail.com
March 19, 2019
Matt Lundy and Tom Cardoso

The federal Liberals will table a budget Tuesday that is widely expected to include new program spending, but arrives during a period of economic uncertainty as growth cools.

For the Liberals, it’s also an opportunity to pitch Canadians on key initiatives ahead of this year’s federal election and divert attention from the ongoing SNC-Lavalin Inc. affair, which polls suggest has inflicted reputational damage to the party with months remaining in its current term.

The government’s fiscal position leaves it primed to spend big, RBC Economics said in a recent research report. Through the first nine months of the current 2018-19 fiscal year, accounts showed a $324-million surplus – vastly different from the government’s projected $18.1-billion deficit.

“In all likelihood, this favourable fiscal performance has only opened the door wider to aggressive spending for a Liberal government that has shown no interest in balancing the budget,” wrote Craig Wright, chief economist at RBC.

He noted that March, the final month of the federal fiscal year, typically sees the largest deficits. Over the past decade, March had an average deficit of $7.3-billion, with an average of $10-billion under Finance Minister Bill Morneau.

“With that history in mind, we anticipate the March madness to continue in the form of substantial spending announcements,” Mr. Wright continued.

Which areas will see action? Here’s what to look for on Tuesday.

Budget balance

Federal budget balances, by fiscal year

Every year, budget chatter inevitably boils down to one question: Where will the balance end up?

During the 2015 election campaign, the Liberals promised a return to balance by 2019. Instead, the government scrapped those plans in favour of sustained deficits, part of a pledge by Mr. Morneau to focus on the debt-to-GDP ratio and stoke a sluggish economy. The government’s most recent projection for the coming 2019-20 fiscal year is a $19.6-billion deficit.

It could, however, post a slimmer deficit. Over the past year, there’s been “spectacular revenue growth,” Bank of Nova Scotia economists said in a recent report.

They estimated federal revenue will be roughly $10-billion higher than projected this fiscal year, and about $7-billion higher in 2019-20. The intake was helped by growth in personal and corporate income tax revenues.

So, with an election looming, how will the Liberals use their stronger fiscal position?

“The current political challenges facing [Prime Minister Justin Trudeau’s] government make it more likely in our view that the government will use the budgetary windfall to increase their odds of re-election,” said Scotiabank’s Jean-François Perrault and Rebekah Young.

“On the policy front, if history is any guide, Ottawa will likely prioritize program spending over tax relief,” wrote Robert Kavcic, senior economist at BMO Nesbitt Burns, in a report.

There is concern, however, that the revenue outlook has weakened. Canada’s economic growth nearly ground to a halt in the fourth quarter of 2018, when inflation-adjusted GDP grew at a meagre 0.4 per cent. Private-sector economists expect the weakness to extend into 2019, with growth picking up later in the year.

That said, a weaker economy could inspire the Liberals to ramp up spending.

“With the economy now operating below its potential, the government will use this backdrop to make the case for the continuation of a supportive policy environment,” the Scotiabank economists said.

Housing

Homeownership rate for households aged under 35

Mr. Morneau has said the government is looking at how to help millennials with home affordability. Some of the prebudget speculation has centred on mortgage amortization periods. Real-estate industry groups have lobbied Ottawa in recent months on several items, including increasing the maximum amortization for first-time insured buyers to 30 years from 25 years. (An insured home buyer is one who makes a down payment of less than 20 per cent of the home’s purchase price, and is thereby required to get mortgage default insurance.)

In theory, this move would make monthly mortgage payments less onerous and help some buyers qualify for pricier home purchases. On the other hand, a buyer would also pay more total interest over the course of a longer loan period. For the industry, the policy could inject some life into a housing market that has slowed down since Canada’s banking regulator implemented stress tests for uninsured mortgages in January, 2018.

That said, RBC Economics has questioned whether the industry’s ideas truly address the country’s housing woes. In a recent note, the group said that “most of the proposed solutions [from the real-estate industry] would actually make home ownership more challenging by inflating prices, unless they were accompanied by measures to improve supply.”

Pharmacare

Average out-of-pocket drug spending per household in 2015

One of last year’s major budget announcements was the formation of a panel looking into the feasibility of a national prescription-drug program, an idea which has been discussed in the federal government for decades.

The Advisory Council on the Implementation of National Pharmacare released an interim report earlier this month, in which it recommended the creation of a new federal drug agency and a master prescription medication list, but was otherwise thin on specifics. The group will issue a full set of recommendations by the end of June. “Nothing has been ruled in or ruled out,” said Dr. Eric Hoskins, the council’s chair and former Ontario health minister, after the interim report came out.

According to a report from the Parliamentary Budget Officer in 2017, a national pharmacare program could mean collective savings to the tune of $4.2-billion annually and average cost reductions of 90 per cent for patients currently paying for prescription medications.

Given that the advisory council’s final report is due after the budget is tabled, expect some additional details on pharmacare in the budget. “We’re going to talk about our twin goals of ensuring that our pharmaceutical system is both appropriate in terms of its costs and that we find a way for better coverage for all
Canadians,” said Pierre-Olivier Herbert, a spokesperson for Mr. Morneau.

Seniors

Percentage of seniors working at some point during the year

Full year, full time Part year and/or part time

Mr. Morneau has promised the budget will include items designed to support seniors.

In a prebudget submission, the Canadian Association of Retired Persons recommended the government eliminate mandatory minimum withdrawal rules for Registered Retirement Income Funds (RRIFs). (All Registered Retirement Savings Plans must be converted to RRIFs, annuities or paid out as a lump sum when a person is 71 years old.) A 2015 C.D. Howe report found that current minimum withdrawal rules, combined with lower returns on invested retirement funds and seniors’ longer lifespans, put today’s seniors at a greater risk of emptying out their retirement savings too early.

An increasing number of Canadians is working well into its retirement years. A 2017 Statistics Canada study found that one in five Canadians aged 65 or older -- 1.1 million seniors -- reported working at some point during the year, the highest proportion since at least 1980.

Enhanced pension protections may also be on the table. When Sears Canada started its bankruptcy process in 2017, it left pensioners without health and dental benefits, and a 30-per-cent cut in pension payments. Since then, the government has been consulting with advocacy groups for both seniors and pension managers, and last year Ottawa held consultations on how to encourage private-sector companies to better protect and fund their pensions.

“We’re going to make sure that seniors feel a sense of optimism,” said Mr. Herbert.

Skills training

Firms reporting labour shortages

Does your firm face any shortages of labour that restrict your ability to meet demand?

It’s all but assured the budget will include new measures aimed at helping older Canadians boost their job skills.

As part of his prebudget photo shoot, Mr. Morneau said full-time workers who wish to take time away to receive training for a new position should receive financial assistance from Ottawa. The federal government has identified skills training as a key priority heading into the budget, and it’s possible other skills-related measures will be included in Tuesday’s document.

For one, The Globe and Mail’s Bill Curry has reported that hopes are running high the government will include money to help students study abroad. Mr. Morneau’s fall update said Global Affairs Canada and Employment and Social Development Canada will work to develop a new “international education strategy.”

Despite a hiring boom that’s driven the jobless rate close to an all-time low, Canadian employers are struggling to hire enough workers. The percentage of companies reporting labour shortages has risen to a near 10-year high, according to the Bank of Canada’s business outlook survey. Moreover, the number of national job vacancies topped 550,000 in the third quarter of 2018, based on the most recent available data, an increase of 36 per cent from two years earlier.

In a speech last year, BoC Governor Stephen Poloz said “we hear from business leaders that many of these vacancies are going unfilled because they cannot find workers with the right skills.”