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Finance Minister Chrystia Freeland delivers the 2020 fiscal update in the House of Commons last fall. Next week, she presents the first federal budget in more than two years.

Sean Kilpatrick/The Canadian Press

After more than a year of emergency government spending at levels not seen since the Second World War, the Liberal government is ready to unveil its postpandemic recovery plan.

When Finance Minister Chrystia Freeland rises in a near-empty House of Commons on Monday, she will seek to balance promises of more spending without scaring off voters or international investors.

Ms. Freeland, in preparing the government’s first budget in more than two years, worked closely with Michael Sabia, a former corporate executive Ottawa recruited as her deputy minister. They created a fiscal road map that puts the state at the centre of Canada’s economic recovery.

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Mr. Sabia has described the pandemic as a “precious opportunity” to retool spending on green technology, infrastructure, education and other major government responsibilities.

The third wave and slow vaccine rollout are indications that COVID-19 is far from over, and the budget will include more funding to get the country through the worst. But what comes next is what Liberals have been itching to talk about for months.

Ms. Freeland has already indicated that the government will be spending between $70-billion and $100-billion in stimulus over the next three years. On top of that, the Liberal Party’s perpetual pledge to launch a national child-care program will be backed up with new federal cash.

Ambitious climate-change plans that were sidelined during the pandemic are moving to the forefront as well, with an added urgency now that U.S. President Joe Biden has proposed extensive stimulus packed with green spending on electric vehicles and cleaner energy.


Canada’s debt in context

Government of Canada debt

As a percentage of GDP, 1870 to 2025

Actual

Projection*

120%

100

80

60

40

20

0

1870

1891

1919

1947

1975

2003

2024

*The data and projections were compiled earlier this year

by the Library of Parliament, using the federal government’s

November economic statement and other sources. They do

not account for new spending that will be announced

in Monday’s budget.

THE GLOBE AND MAIL

SOURCE: library of parliament

Government of Canada debt

As a percentage of GDP, 1870 to 2025

Actual

Projection*

120%

100

80

60

40

20

0

1870

1891

1905

1919

1933

1947

1961

1975

1989

2003

2024

*The data and projections were compiled earlier this year by the Library

of Parliament, using the federal government’s November economic

statement and other sources. They do not account for new spending that

will be announced in Monday’s budget.

THE GLOBE AND MAIL, SOURCE: library of parliament

Government of Canada debt

As a percentage of GDP, 1870 to 2025

Actual

Projection*

120%

100

80

60

40

20

0

1870

1891

1905

1919

1933

1947

1961

1975

1989

2003

2024

*The data and projections were compiled earlier this year by the Library of Parliament, using the federal government’s

November economic statement and other sources. They do not account for new spending that will be announced

in Monday’s budget.

THE GLOBE AND MAIL, SOURCE: library of parliament

Government of Canada public debt charges

As a percentage of revenues, 1867 to 2025

Actual

Projection*

50%

40

30

20

10

0

1867

1891

1927

1945

1963

1981

1999

2023

1909

*The data and projections were compiled earlier this year

by the Library of Parliament, using the federal government’s

November economic statement and other sources. They do

not account for new spending that will be announced

in Monday’s budget.

THE GLOBE AND MAIL

SOURCE: library of parliament

Government of Canada public debt charges

As a percentage of revenues, 1867 to 2025

Actual

Projection*

50%

40

30

20

10

0

1867

1891

1927

1945

1963

1981

1999

2023

1909

*The data and projections were compiled earlier this year by the Library

of Parliament, using the federal government’s November economic

statement and other sources. They do not account for new spending that

will be announced in Monday’s budget.

THE GLOBE AND MAIL, SOURCE: library of parliament

Government of Canada public debt charges

As a percentage of revenues, 1867 to 2025

Actual

Projection*

50%

40

30

20

10

0

1867

1891

1909

1927

1945

1963

1981

1999

2023

*The data and projections were compiled earlier this year by the Library of Parliament, using the federal government’s

November economic statement and other sources. They do not account for new spending that will be announced

in Monday’s budget.

THE GLOBE AND MAIL, SOURCE: library of parliament

Provincial and federal debt

As a percentage of GDP

As of March 31, 2020

As of March 31, 2021

60%

50

40

30

20

10

0

Sask.

Alta.

B.C.

PEI

Man.

N.S.

N.B.

Que.

Ont.

Can.

NL

THE GLOBE AND MAIL

SOURCE: library of parliament

Provincial and federal debt

As a percentage of GDP

As of March 31, 2020

As of March 31, 2021

60%

50

40

30

20

10

0

Sask.

Alta.

B.C.

PEI

Man.

N.S.

N.B.

Que.

Ont.

Can.

NL

THE GLOBE AND MAIL, SOURCE: library of parliament

Provincial and federal debt

As a percentage of GDP

As of March 31, 2020

As of March 31, 2021

60%

50

40

30

20

10

0

Sask.

Alta.

B.C.

PEI

Man.

N.S.

N.B.

Que.

Ont.

Can.

NL

THE GLOBE AND MAIL, SOURCE: library of parliament


Stimulus

Federal sources say the plan to spend up to $100-billion on stimulus measures will include programs such as hiring incentives for young people, who have been particularly hard hit because of pandemic-related shutdowns. There will also be new money for student loans and grants.

The government has made no secret of the fact that a big part of its stimulus package is expected to focus heavily on climate change and housing. Home energy retrofits and zero-emission vehicles were highlighted in Ms. Freeland’s November economic update as some of the government’s priorities to deliver on a pledge to create one million jobs.

The budget will include support for clean technology and green jobs, the sources say. The Globe and Mail is not identifying the sources so that they could speak candidly about the budget.

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Environmentalists have high expectations that they will see action in areas such as support for electric-vehicle battery supply chains.

“The world is going carbon neutral and Canada can supply the building blocks to make that happen,” said Merran Smith, executive director of Clean Energy Canada. “There’s huge opportunities for Canada here, especially with decarbonizing heavy industries, like steel and mining and cement. But Canada needs to act now. It’s our race to lose.”

Ottawa’s spending during the pandemic pushed the deficit to nearly $400-billion, according to the November estimate. Whether Canada went too far – and is now at risk of making matters worse in this budget – is a central concern among fiscal policy experts.

“Do we really need to stimulate this economy by incurring more deficit and more debt?” said Goldy Hyder, president of the Business Council of Canada. “It’s like throwing a huge party and it’s fine when the party is going on but the next morning, we have a headache and mess to clean up.”

By international standards, Canada’s stimulus spending has been middle of the pack. It looked to be out of step in the fall, when the International Monetary Fund released a report in October showing that Canada’s combined government deficit for 2020 would be the largest among advanced economies, at 19.9 per cent of GDP. The IMF shaved that forecast significantly in April, down to 10.7 per cent. That’s smaller than the Group of 20 average of 12.7 per cent and the U.S. deficit of 15.8 per cent of GDP, but larger than the 7.6-per-cent average among European countries.

Another international benchmark is the IMF’s data on the size of government measures specifically related to the pandemic. Canadian governments contributed 14.6 per cent of GDP on additional spending or forgone revenue. They also set aside 4 per cent of GDP in equity and loans.

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That is broadly in line, on average, with other advanced economies. The European Union spent much less – 3.8 per cent on spending and 6.8 per cent on equity and loans – while the U.S. contributed significantly more: 25.5 per cent of GDP on spending and 2.4 per cent on equity and loans.

The IMF is one of several voices questioning whether Ottawa has justified a need to spend as much as $100-billion on stimulus. Bay Street executives and Parliamentary Budget Officer Yves Giroux have also said that may be too much.

In a report last month, Mr. Giroux said the fact that the labour market is projected to fully rebound by the end of the current fiscal year suggests a $100-billion stimulus plan “may be miscalibrated.”

Ms. Freeland’s press secretary, Katherine Cuplinskas, has consistently defended the plan in response to critics, telling The Globe recently that the risk of government doing too little outweighs the risk of doing too much.

Conservative finance critic Ed Fast sent a letter this week to Ms. Freeland outlining the Official Opposition’s expectations for the budget.

Mr. Fast said it “must not be an avalanche of spending” aimed at the next election and should include a plan for managing the higher debt load.

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“We owe it to future generations of Canadians to provide them with the confidence of knowing that their government has a plan to manage our massive national debt in a manner that allows them to look forward to a bright and prosperous future,” he said.

NDP finance critic Peter Julian said the federal Liberals should follow the Biden administration’s lead and package stimulus spending with tax increases focused on the wealthy and corporations to offset the cost. He also called on the Liberals to finally deliver on policies that his party has long advocated for, such as child care and pharmacare.

Regardless of Ms. Freeland’s response on Monday, the minority Liberal government will likely not fall on the budget. The NDP has said it will not trigger an election during the pandemic.


The she-covery budget

A masked woman walks past a child-care centre in Toronto, then closed during the pandemic's first wave, in Toronto last spring.

Nathan Denette/The Canadian Press

“Child care is something we need to do as a country,” Prime Minister Justin Trudeau told reporters at a press conference in Ottawa last week. “[It] is not simply a social argument, or a social program, it’s fundamentally an economic program.”

The line may sound familiar. Jean Chrétien’s Liberal red book during the 1993 election campaign stated that “the availability of quality child care is an economic issue.” The party vowed then to create tens of thousands of new child-care spaces, “if it can obtain the agreement of the provinces.” Twenty-eight years later, that remains a big if.

“Budget 2021 will outline a plan to provide affordable, accessible and high-quality child care from ocean, to ocean to ocean,” Ms. Freeland wrote in November.

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The promised publicly funded national daycare system has won backing from many business groups. In its prebudget report, the House of Commons finance committee recommended that the government allocate $2-billion toward a national system this year alone.

Canadian Labour Congress president Hassan Yussuff said Ottawa wants the provinces to adopt a version of the Quebec daycare model, which offers publicly funded and affordable care.

“They really believe this not-for-profit model is the one that will work best,” he said. “The big challenge will be the negotiations with the provinces.”

But Mr. Yussuff said Ottawa will attach strings to federal money as an inducement to get the provinces to sign on to publicly funded daycare as well as early learning in public schools.

The Finance Minister has yet to say how she intends to resolve the jurisdictional issues. In early March, she announced the creation of an 18-member task force on women and the economy. The panel includes economist Armine Yalnizyan, who has popularized the phrase that there is “no recovery without she-covery, no she-covery without child care.”

Some policy experts are advising Ms. Freeland to hand billions over to the provinces through a permanent new transfer, building on the $7.5-billion that Ottawa set aside in 2017 for early learning and child care over an 11-year period.

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Jennifer Robson, a Carleton University associate professor of political management, recently co-authored a paper for the C.D. Howe Institute that argued for a new child-care transfer – in addition to the Canada Health Transfer and partly carved out of the existing Canada Social Transfer.

The paper also recommends replacing the Child Care Expenses Deduction with a more progressive tax credit that is paid monthly. Regardless of the details, Prof. Robson says the economic data showing the disproportionate negative effects on women during the pandemic demonstrate that Ottawa must act.

“This is fundamentally an issue of ethics and good governance and just doing the right damn thing,” she said.


Taxes

The Canada Revenue Agency's headquarters in Ottawa.

Justin Tang/The Canadian Press

The biggest tax news on Monday may be what’s not in the budget. Sources say Ottawa will not introduce a new tax on the sale of primary residences. Nor will the government change the capital-gains inclusion rate.

The government’s rhetoric on extreme wealth – combined with the recent spike in house prices – has fuelled speculation about both measures. Some observers have suggested that Ottawa might curb access to the capital-gains exemption for primary residences. When a primary residence is sold in Canada, the increase in value is not currently subject to capital-gains taxes. The U.S. caps this exemption at US$250,000 for singles and US$500,000 for couples, but no such cap is coming in Monday’s budget.

On other capital gains, such as the sale of stocks or a secondary residence, only half of the increase in value is currently subject to tax. The inclusion rate was previously as high as 75 per cent in the 1990s, before it was reduced to 50 per cent in 2000. Sources say the inclusion rate will not change on Monday.

The budget will include measures dealing with tax avoidance and compliance, sources say.

Several other tax measures can be expected. Mr. Trudeau’s January mandate letter to the Finance Minister asked her to “identify additional ways to tax extreme wealth inequality.” This will likely include new limits to the stock-option deduction for high-income individuals at large companies. The government has also said it will require international digital companies operating in Canada to collect and remit federal sales tax.

Ottawa has said it will keep working toward a global deal on corporate taxation at the Organization for Economic Co-operation and Development and is prepared to act alone if no deal is reached. Those talks took a dramatic twist this month, when U.S. Treasury Secretary Janet Yellen endorsed a global minimum corporate tax rate. The Biden administration is also proposing to raise the U.S. federal corporate tax rate to 28 per cent from 21 per cent.

The budget is expected to provide details on the government’s promise to impose a national tax to curb foreign speculation in Canada’s housing market, along the lines of tax initiatives for vacant properties in British Columbia and Ontario.

Kim Moody, the chief executive and director of Canadian tax advisory, Moodys Tax Law LLP, says he doesn’t expect major tax surprises in Monday’s budget beyond what Ottawa has already signalled. He said the Finance Department usually prefers to consult on large tax changes before making final budget decisions.

“I tend to think this is going to be a huge spend budget, with moderate tax adjustments,” he said. “I just don’t think the time is right – the pandemic’s not over – to bring in massive tax changes right now.”


Support programs

A woman walks by a closed-up retail shop on Calgary's 17th Avenue.

Todd Korol/The Globe and Mail

Extending wage and rent support programs is the top request of the business community. Sources say extensions through the summer months will in fact be announced and the budget will have a heavy focus on this sector as a key driver of job creation. This will include financial assistance to help small business to digitize.

Few sectors of the economy have been impacted as hard from the pandemic as small business. The Canadian Federation of Independent Business estimates that one in six small businesses, especially in retail, hospitality and tourism, is at risk.

“Small businesses have been particularly hard hit during the pandemic because they have had to accumulate debt and they haven’t had cash reserves, particularly in the retail sector where we have had this yo-yo effect of openings and closings,” Canadian Chamber of Commerce president Perrin Beatty said.

Mr. Beatty worries that there could be another wave of bankruptcies just as the economy begins to reopen if the government were to pull back support for small business too soon.

He said that while support for small businesses to digitize their sales is important, existing wage and rent subsidies need to be extended through the summer, including targeted support for sectors such as the tourism industry.

Mr. Beatty is also concerned about when the billions in stimulus dollars will begin to flow, saying it should be geared to later in the year once most Canadians are vaccinated and the economy is on the other side of the pandemic.

“If they push it [stimulus] out early, many small businesses simply won’t be able to take advantage of it because they will be locked down or are struggling to get themselves reopened,” he said.

Mr. Beatty says large and small business want to see a clear strategy in the budget for restarting the economy so they can plan for the reopening of the border, as well as what measures are being taken in the short term to control the spread of COVID-19.


Innovation

A masked man checks his phone as the sun sets in Vancouver's English Bay.

Jonathan Hayward/The Canadian Press

In preparing the budget, Mr. Sabia, the Finance deputy minister, has focused on how a recovery plan should accelerate an economic shift toward digitization of the economy. He told MPs last month that it’s an area he is personally engaged in, “because that’s where the jobs and Canada’s economic growth will come from in the years ahead.”

Mr. Sabia has reached out to experts in areas such as artificial intelligence, biotech, machine learning and cleantech for ideas on how to boost jobs in a knowledge-based world.

Intellectual property and big data are among the world’s most valuable businesses and significant job creators and are areas where Canada has lagged behind the U.S., Europe, Japan and China.

Tech leaders, such as Jim Balsillie, chair of the Council of Canadian Innovators (CCI), expect to see the budget come up with strategies to help Canadian innovators develop new ideas and sell them at home and abroad.

They are calling for a major scale-up in high-tech investment through a new Canada Innovation Fund and a framework for all the information being generated by Canada’s increasingly digitalized economy. One idea, first broached in the 2018 budget, is a patent collective to hold ideas for the benefit of multiple participating companies.

The CCI is looking for programs that protect Canadian startups from foreign takeovers and address chronic talent shortages in the tech sector. The group is also pushing to ensure Canada’s personal and corporate tax regime remains competitive.

The Business Council of Canada would like Ottawa to set up an agency similar to the U.S.’s Defense Advanced Research Projects Agency (DARPA) that ensures publicly funded research and development is closely tied to industry. In essence, that would create an intellectual-property pipeline for Canadian businesses.

Many observers expect the federal government, caught out by a lack of vaccine production capacity during the pandemic, to invest in the biotechnology sector made up of early stage drug developers. The sector has been thriving and drawing record levels of investment in recent years.

BIOTECanada, which represents Canadian biotechs, is pushing government to create a $500-million venture-capital fund dedicated to life-sciences companies. “This is a sector that has continued to grow throughout the pandemic and can be central to both [future] pandemic preparedness and the economic rebuild,” BIOTECanada CEO Andrew Casey said.

The Canadian Venture Capital and Private Equity Association (CVCA) is also asking Ottawa for money to fund biotechnology.

“We’ve had multiple touchpoints with government,” said Kim Fulong, CEO of the CVCA. “Everyone in principle supports venture capital. Our members feel very strongly there’s no better time and there’s a sense of urgency.”


With reports from Sean Silcoff and Mark Rendell


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