OTTAWA — The federal Liberals’ new budget again has them running from behind, reacting to the United States’s massive new green industrial policy.

Canada faces “a slowing global economy, elevated interest rates around the world, and inflation that is still too high,” Finance Minister Chrystia Freeland said in the introduction of her 2023 budget. But it also faces “remarkable opportunities” from a global drive toward cleaner economic production, supplying goods and raw materials to friendly countries that no longer want to depend on sources such as Russia and China.

“Our budget is a direct response to these essential challenges,” she told reporters.

Her key tools for seizing those opportunities without worsening inflation or blowing out the national accounts are tax credits—focusing on investment inputs rather than output-based tax credits, as the U.S. does for producing select new products in clean and other advanced technologies.

The central object, according to the senior finance official assigned to take questions about the budget on condition the official not be named, is boosting production of clean electricity to support cleaner industries, to export, to fuel green vehicles. “We are going to build a clean electrical grid that connects Canadians from coast to coast to coast, protects our environment and delivers cleaner, more affordable electricity to Canadians and Canadian businesses,” Freeland herself said in the text of her speech.

The 2022 budget saw Freeland trying to attack Canada’s longtime problem of low productivity gains and a clogged pipeline between ideas and tangible products in the Canadian economy, while coping with rising inflation and the consequences of Russia’s invasion of Ukraine.

She produced promises of a new innovation agency and the growth fund. Neither of those is operational; the agency has a blueprint and a two-year startup plan, while the fund has had money allocated to it but has not spent any. (The new budget says the fund will be managed by the Public Sector Pension Investment Board, which runs government workers’ pension funds.)

Before the agency or the fund could get its organizational feet under it, the United States came up with a whole new industrial policy, anchored by the Inflation Reduction Act and the CHIPS and Science Act, which together promise hundreds of billions of dollars for green industry and building domestic semiconductor production.

Despite the fond talk of North American teamwork in a difficult world when President Joe Biden visited Ottawa last week, all that U.S. money changes the competitive landscape between the two countries, and the Canadian government has spent months figuring out how to respond. After years of trying to avoid disadvantaging Canadian industry by moving too far, too fast, the Biden administration’s million-horsepower thrust has the Liberals chasing again.

“Capital investment is the key to success here. We need a lot of it,” the official said. Canada needs to double its clean-power generating capacity, which means doubling national investment in green energy from about $20 billion a year to $40 billion or more. 

“It is a very big part of the plan. It is absolutely essential to the clean economy,” Freeland told The Logic. 

Time is running out on Canada’s goal to have a “net-zero” power grid by 2035—hydro dams and transmission lines don’t go up in a weekend. Besides that, Prime Minister Justin Trudeau said during Biden’s visit, the world is at an inflection point for greening industry and securing the jobs that come with it.

Tax credits are the best way to catch up to our southern neighbour, in the government’s view. For the power grid, the Liberals propose a 15 per cent credit for investments in green-energy production, storage and transmission, though only to 2034.

The budget says such credits are clear and relatively easy to understand and broadly available, unlike “expenditure programs,” in which government blesses this project or that company with a cheque, often following intense lobbying by its executives or hired guns in Ottawa.

As the federal government has just done with Volkswagen, for instance. Or with its signature Strategic Innovation Fund. Or with its promised but not-yet-functional $15-billion Canada Growth Fund.

Freeland said the one-off payments and the tax credits are part of a complex of government incentives that includes regulations and charges like carbon taxes.

“I see all four of these layers as working together, and I think we have a really strong, robust plan that is going to do two really big things,” she said. “The first is to pull in private investments, both Canadian private capital and capital from around the world. And second, pulling in all this private capital is going to create a lot of great middle-class jobs in the country.”

Bringing in private capital was one of the goals of the Canada Infrastructure Bank, which has not lived up to its initial billing. The budget instructs the bank to spend $10 billion on clean energy and $10 billion on green infrastructure, without allocating it any more money.

Tax credits are a good tool, said Mike Moffatt, an economist and senior director of policy and innovation at the University of Ottawa’s Smart Prosperity Institute. Especially refundable tax credits of the type that Freeland proposes.

“They don’t require that companies be profitable. I think that’s really important,” Moffatt said. “A lot of the companies doing interesting things in this space are pre-profit startups. My concerns are on the implementation side—how complex will this be to administer, both on the government and for the startups that need to collect those credits?”

With the clean-energy tax credit, the federal government will also need mechanisms for delivering tax credits to Crown corporations and provincial utilities that do much of Canada’s power generating and transmitting, and don’t pay federal taxes.

The senior Finance Department official said the Canadian government thinks investment-based tax credits are superior to the U.S.’s production-based credits partly because it’s easier to predict what they’ll cost, and partly because they give companies incentives to increase their productivity—to maximize the output they get from the government-subsidized inputs.

Last fall, in her regular update on the economy and spending plans in the middle of the federal fiscal year, Freeland said the government needed to keep its powder dry—that with the Bank of Canada squeezing the economy to fight inflation, the Liberals would not make that job harder by pumping out more federal cash. But inflation has continued to decline while the job market has stayed strong, and the government believes it has room to manoeuvre again.

Despite the prospect of a recession this year, the Liberals predict steady improvement over the next five years, with the deficit shrinking to $14 billion by 2027–28. That improvement is underwritten by over $2.4 billion in cuts by the same year—phasing in, according to the budget, a “roughly three per cent” reduction by 2026–27 to spending that isn’t for direct benefits and service delivery, transfers to provinces or the military.

It also involves tax and fee increases, including on financial institutions and international corporations, reaching $4 billion a year in 2027–28.

A crackdown on phoney transfers of family businesses from one generation to the next (raising $260 million in revenue by 2027–28) could be a time bomb. When Bill Morneau was finance minister, the Liberals tried to go after a different kind of financial transfer within families, “income sprinkling” by well-paid professionals such as doctors who employ family members, and it went so badly they ended up withdrawing the proposal and cutting small-business taxes instead.

That’s an illustration of how much easier many of these things are to say than they are to do. Last year’s biggest innovation-promotion measures, the growth fund and the innovation agency, are still fledging. This year’s will take time to design. Meanwhile, the race is already on.