OTTAWA — The Liberal government’s first economic update following re-election is more a check-in on the state of the country’s finances than a vision for the next few years. “This is not the master plan for the Canadian economy going forward,” Finance Minister Chrystia Freeland told reporters on Tuesday. “That will be in [next year’s] budget.”

Economic and fiscal updates have no formal status, no required elements—the government isn’t required to deliver one at all. But they are opportunities to introduce significant changes of direction if the government chooses.

This update focuses on continuing to fight what Freeland called “a sneaky and unpredictable virus,” with updates on some of the Liberals’ pre-election policy promises.

But it doesn’t, for instance, put into effect Prime Minister Justin Trudeau’s campaign pledges to hike taxes on Canada’s big banks and to create a $4-billion fund to help cities build more housing. Those are matters to be dealt with in a spring budget, a senior Finance Department official told reporters Tuesday.

Here’s what the fiscal update does say about issues important to the innovation economy.

Inflation

The country’s annualized inflation rate hit an 18-year high of 4.7 per cent in October, and the Bank of Canada projects it’ll hover around 3.4 per cent in 2022. The update acknowledged the rapidly rising cost of living, attributing it to COVID-19 and global factors. 

In her speech, Freeland noted that consumers had fewer services on which to spend their money during the pandemic, prompting them to pay instead for “renovations, new furniture, appliances and cars.” As a result, “it will take some time for supply chains to catch up and for our economy to rebalance itself,” she said.  

In a nod to the issue, the National Trade Corridors Fund will spend up to $50 million on projects that help ports expand cargo-storage capacity and other ways of untangling logistics congestion. That’s not new money, but a reallocation from the existing $4.2-billion infrastructure program established by the 2017 budget. 

The update also cites the Liberal government’s agreements on child-care funding with its provincial counterparts; Ontario remains the last without a deal. 

Labour shortages

The national unemployment rate is almost back to where it was before COVID-19 struck the country, with the economy having more than made up the quantum of jobs lost during the pandemic. As of September, employers had more than a million open positions to fill.

The update proposes to fill some of those gaps via immigration, allocating $85 million to speed up the processing of temporary- and permanent-residence applications.

But bigger measures designed to address the mismatch of workers and jobs will have to wait. The Liberal platform promised a $2-billion fund to reskill the energy-industry workforce for green-economy roles, and policy changes to economic-stream permanent-residence programs. And the government has yet to implement the Canada Training Benefit mid-career continuing-education incentive that was the centrepiece of the 2019 budget.

COVID-19

“Canada’s best economic policy continues to be finishing the fight against COVID-19,” the update’s second substantial paragraph says.

To that end, it promises $1.7 billion to help provinces and territories buy rapid tests for schools and workplaces, and up to $2 billion over two years to buy therapeutic drugs for people who catch COVID-19. And it proposes a new tax credit to cover 25 per cent of the costs for small businesses to invest in better ventilation and air filtration, in addition to boosting existing programs for ventilation in schools and public buildings.

Other measures targeted at businesses (many first revealed in October) include extending credit and wage- and rent-subsidy programs in sectors that are slow to recover from the pandemic, and in locations that might be subject to further public health lockdowns.

The Canada Recovery Hiring Program is to be extended until May 7, for employers with revenue losses of more than than 10 per cent, and will cover half the wages of workers they hire back (total cost: just under $2.2 billion).

The worst-affected businesses can tap subsidies for rent and all wages of up to 50 per cent. And a program specifically for tourism and hospitality businesses will subsidize wages and rents up to 75 per cent (total cost: just under $3.2 billion).

For individuals, the Liberals want to raise the temporary home-office tax credit from $400 to $500 for 2021 and 2022, at an estimated total cost of $385 million. And they answer NDP demands to deal with benefits clawbacks for seniors with a promise of $742.4 million worth of one-time payments.

Although the update includes several references to COVID-19’s Omicron variant, they’re largely used to demonstrate that the path of the pandemic from here is uncertain. The update allocates $4.5 billion to respond to the new variant, without being certain how that money might be spent. It also anticipates up to $5 billion will be needed to help British Columbia cope with its recent devastating floods.

Economy of the future

Economists and policy experts have criticized the Liberal government for failing to focus on measures designed to stimulate private-sector investment, amid a concerning slump in capital. The update doesn’t contain policies directly addressing those worries, but Freeland appeared to acknowledge them Tuesday. “We know that our national focus, as we emerge from COVID-19, must be growth and competitiveness,” Freeland told reporters. “Measures to promote them will figure prominently in the budget.”

The senior Finance Department official said the government will address the tax on bank profits and make significant moves on housing, climate change and innovation in the spring budget. These are “structural issues” in the Canadian economy that need to be addressed but only once the pandemic is definitely waning, he said.

The update offers a few specifics on what to expect, though:

• A one per cent annual tax on the value of vacant or “underused” residential real estate owned by foreigners who live outside Canada, to take effect in January.
• Legislation to create a digital-services tax that would apply starting Jan. 1, 2024, unless an international agreement on tax reform supersedes it. If that international agreement falls apart, the update says, international digital companies doing business in Canada will owe the three per cent DST retroactively to Jan. 1, 2022.
• The next budget will include the final design of a planned investment-tax credit on carbon-capture, -utilization and -storage projects, the update says.
• Next quarter, the government will unveil a framework for selling $5 billion of green bonds by the end of the fiscal year.

The Liberal government’s ambitions to turn the country into an engine of electric-vehicle manufacturing could be threatened by new buyer tax incentives in the U.S.—the biggest market for Canadian-made cars—that favour U.S.-made models. This week, Trudeau suggested Ottawa could try to match up its subsidies with the Biden administration’s, as a way of resolving the issue. In the interim, the update adds $73 million to the existing federal zero-emissions-vehicle incentive.

Absent from the update: amendments to the rules on credit-card transaction fees, which the government consulted on through the fall and specifically promised would be in the next economic update.

The bottom line

The government’s books are in marginally better shape than the 2021 federal budget anticipated. The update says the feds will run a $144.5-billion deficit this fiscal year, improved from the $154.7 billion projected in the spring—and much better than the $327.7-billion deficit it ran last year.

Each upcoming year also shows small improvements. By the 2025–26 fiscal year, the update says the government will have a $22.7-billion deficit, improved from the $30.7-billion projected in the spring.