Economists say uncertainty hangs over the federal government’s latest fiscal update, in the form of domestic political volatility and trade tensions with the U.S.
On Monday, Ottawa released its fall economic statement hours after Chrystia Freeland, the now former finance minister, announced her resignation from Prime Minister Justin Trudeau’s cabinet. The Department of Finance’s budget update reported a deficit of $61.9 billion for 2023-24, coming in higher than expected, along with various other measures, some aimed at spurring investment in Canada to counter moves toward economic protectionism from the U.S.
“Given the political uncertainty facing Canada, the fate of many of the measures announced in the 2024 Fall Economic Statement is highly uncertain,” economists at Royal Bank of Canada said in a report Monday.
Some of the highlights of the fiscal update, according to RBC Economics, include the extension for the Accelerated Investment Inventive, which will cost $17.4 billion over six years and had been scheduled to be phased out between 2024 and 2027.
“This effort provides enhanced first-year capital cost allowance for most depreciable capital property acquired on or before Jan. 1, 2025, and becomes available for use before 2030,” RBC Economics said in its report.
Other measures include $1.3 billion on border security over six years, easing the 30 per cent stake limit for pension funds and a GST holiday. The economists at RBC noted that the fiscal update still provides a “snapshot” of the trajectory of the economy.
“Lower revenues and new spending measures have resulted in deeper deficits over the course of the fiscal plan—including a whopping $22 billion downward revision to the 2023-24 bottom line to $61.9 billion. The 2024-25 deficit has also deteriorated by $8.5 billion to $48.3 billion,” the economists said.
A report from TD Economics Monday noted that the fall economic statement provided a “window into the government’s economic plan” ahead of U.S. President-elect Donald Trump’s return to office.
“However, political uncertainty looms large with a significant cabinet shuffle and an election looming,” the report said.
Tu Nguyen, economist with assurance, tax and consultancy firm RSM Canada, said in a statement to BNNBloomberg.ca Monday that she also thinks political uncertainty is impacting the country’s economic outlook.
“Chrystia Freeland’s resignation as Canada’s finance minister highlights the increasing uncertainty in the country’s political environment that inevitably impacts its financial outlook,” she said.
Additionally, Nguyen noted potential implications for foreign investment.
“Although the impact on the financial markets has been moderate, an event like this could contribute to Canada’s challenge to attract foreign investments in 2025, when a Trump administration comes with trade policy uncertainty with Canada,” she said.
‘United front’
James Orlando, a director and senior economist at TD Bank, who is also one of the authors of the report, said in an interview with BNNBloomberg.ca Tuesday that there will be a lot of negotiations next year regarding trade and security. He added that having a “united front” is very important.
“We’re going to learn a lot in the next few weeks about the direction of government. Because this really was a federal economic statement that was starting to show a pivot where the government has focused on redistribution to consumers, to they’re going to have to make some heavy investments to make Canada more competitive,” he said.
Included in the fall economics statement was a proposed measure to enhance border security with a $1.3 billion package over six years starting in 2024-25 to various organizations like the Royal Canadian Mounted Police and the Canada Border Services Agency.
Central to trade tensions between the U.S. and Canada is tariff threats form the incoming Trump administration of 25 per cent on imports from Canada and Mexico unless the nations address issues related to the U.S. border.
Orlando said the Trump administration will likely see Canada’s proposed border spending as a “tip of the hat” for the government to signify it is working toward meeting some of the U.S. expectations on border security.
“It’s obviously not going to be enough. Canada still is not spending the two per cent NATO target, and I think that’s going to be something that’s going to have to be coming forward in future budgets is ramping up defense spending, not just on border security, but in general, to really get on par,” he said.