Federal Budget 2024: addressing long-term challenges takes time

Budget 2024: an overview

In a nutshell, Canada’s fiscal profile is virtually unchanged from the last time the government released its economic update in November 2023. Indeed, both the deficit and the debt forecasts—key metrics watched by investors—remain on a slow, downward trajectory for the next five years. Considering the weak, but nonetheless positive, growth environment, a $40 billion net revenue shortfall for 2024/25 looks elevated; however, it appears more manageable when understood as a percentage of GDP (1.4%)¹ and when compared with other advanced economies that are currently registering significantly higher levels of deficits. 

That said, an unchanged fiscal profile doesn’t mean that Tuesday’s budget announcement contained nothing of significance. In fact, total spending from the federal government is projected to be $68 billion higher over the next five years relative to the outlook that was published in November. In doing so, the government intends to fix long-standing issues that have hurt Canada’s social and economic well-being. On the opposite side of the equation, to finance all these initiatives, the government announced plans to introduce select tax measures and aims to find savings within its own operations, all on the back of a somewhat optimistic economic outlook.

Fixing housing affordability won’t be easy

The most salient announcements concern Canada’s decades-long imbalance between housing supply and demand. The federal government’s Budget 2024 housing plan hopes to build 2 million more homes by 2031 on top of the 1.9 million that are already expected to be built outside of the plan.

To do so, many major programs are being introduced, including an Apartment Construction Loan Program, a Canada Builds collaborative program (which involves working with provinces to accelerate local initiatives), and a top-up of the Housing Accelerator Fund, which aims to fast-track building in municipal areas. Finally, the government also launched an infrastructure fund to improve water and waste infrastructure needed in homes.

While the funding is impressive, it remains to be seen how collaboration with provinces and local and native governments can be rapidly achieved for these programs to deliver results. It will be important for the government to stay on track with this priority; in our view, it will take many years to reverse what we believe to be decades of underconstruction in the country. 

More help for prospective homebuyers

In regard to prospective homeowners, the federal government is also working to address the issue of affordability. On top of the Tax-Free First Home Savings Account introduced last year, the government will also increase the maximum withdrawal amount from a Registered Retirement Savings Plan account from $35,000 to $60,000 for first-time homebuyers. The maximum mortgage amortization period that can be offered by a financial institution will also increase from 25 years to 30 years, potentially reducing annual payments. However, if these measures can provide short-term help to Canadian households looking to buy their first properties, we believe that supporting demand extensively could also put additional upward pressure on house prices, which in the end would make them less effective.

Healthcare remains a top priority, but productivity should stay in focus

On top of continuing to deploy its Dental Care Plan, introduced in 2023, the government will provide additional support for people living with disabilities and will proceed with introducing the heavily discussed Universal National Pharmacare program. Nonetheless, as is the case for several sectors, healthcare providers face significant supply constraints, particularly in terms of labour and technology.

These issues underpin the need for the government to focus on improving productivity growth across the country. To that end, initiatives to secure artificial intelligence computing power capacity in Canada (as opposed to dispersed abroad) as well as $3.5 billion in additional funding for strategic research infrastructure built in Canada are steps in the right direction.

That said, programs to retrain skilled foreign workers who have relocated to Canada as well as initiatives to simplify small business rules and regulations should be emphasized. Indeed, we think it will take many years and a lot of initiative to reverse systemic productivity underperformance in Canada, especially when compared against the United States. 

Fiscal sustainability is also a long-run issue to keep in mind

All in all, Budget 2024 addresses structural imbalances that have been built over many years in the Canadian economy. With the right focus on supply-side factors, this could be overcome over many years. That said, it also needs to be recognized that efforts to resolve these structural imbalances are achieved by accumulating a higher amount of debt, which poses a fiscal vulnerability in the medium to long run if, as we expect, interest rates stay more elevated than they were during the past decade. Future budgets will also have to address how to correct for this vulnerability, with an increased focus on fiscal sustainability. 

1 Bloomberg, as of April 16, 2024.