April 14, 2021

Five things to get right in the 2021 Federal Budget

What we are looking for in the 2021 Federal Budget
Next week’s budget will signal Canada’s policy trajectory from pandemic response to recovery and resilience. Here are five things we’ll be watching for movement on, which are priorities for the people and businesses of Alberta:

1. Environment: Climate-related stimulus spending that focuses on Alberta’s unique emissions profile
2. Jobs: A plan to reverse Canada’s trend on long-term business investment
3. People: A plan to improve access to child care
4. Nation of Innovation: A challenge-driven innovation strategy for Canada
5. Fiscal Pathway: A fiscal anchor and a credible plan to return to sustainable spending levels

On April 19th, the federal government will table its first budget in a little more than two years. To say that the world has changed in that time would be a gross understatement. The pandemic and associated economic shutdowns have had an untold effect on Canadians’ lives and on our economy. In response, the federal government introduced a wide range of emergency support programs aimed at helping Canadians weather the storm.

While those programs have been invaluable in keeping the economy afloat, the cost has been considerable. As per November’s Fall Economic Update, the federal government is on track to post a deficit of $381.6 billion in 2020/21. As a percentage of our economy, that will be the largest budget shortfall Canada has ever experienced outside of the Second World War.

But we are now hitting the transition point in the pandemic. Vaccine rollouts are underway, and Canadians are looking forward to returning to some semblance of normalcy later this year. Income supports will still be needed in the short term as long as the virus is spreading and restrictions are in place, but Canada will soon be at the point where we are able to pivot away from this kind of spending and debt accumulation.

So, what comes next? Barring a major setback, the economy is expected to begin the path to recovery in 2021, driven in part by pent-up consumer demand. To add fuel to the fire, the federal government has signalled its intention to spend up to $100 billion over three years on measures to further accelerate economic recovery. Meanwhile, it continues to pursue its climate goals: exceeding its Paris Agreement commitments of reducing greenhouse gas emissions by 30% compared to 2005 levels; and achieving net zero emissions by 2050.

While these priorities have been clearly articulated by the federal government, our fiscal situation has become, and will become, significantly more precarious. Once the immediate pandemic danger has passed, action will be needed to return to a more fiscally sustainable footing. That necessarily means putting limits on new post-pandemic spending and focusing on the kinds of investments that build the foundation for long-term economic growth.

On their surface, economic recovery, climate action, deficit reduction, and planting the seeds for long-term economic growth could be seen as conflicting priorities. How will the federal government balance these concerns while also putting in place the conditions necessary for Canadians to prosper and thrive in the years ahead?

Here are five things we’ll be looking for on April 19.

Environment: Climate-related stimulus spending that focuses on Alberta’s unique emissions profile

As Canada’s economy begins to climb out of the pandemic-induced recession, the federal government has remained focused on significantly reducing GHG emissions while promoting resilient, sustainable economic growth. Canada has committed to 30% emissions reductions below 2005 levels by 2030 and net-zero emissions by 2050. With only nine years until 2030, GHG emissions will need to be cut at speed and scale to reach these goals.

Achieving these targets will not be easy, but the federal government has an opportunity to make significant progress by focusing its efforts on reducing industrial emissions in Alberta. Because the province is home to an outsized portion of Canada’s heavy industry and oil and gas activity, it is a major source of both economic activity and GHG emissions. Industrial emissions make up approximately 70% of Alberta’s total emissions, and account for more emissions than any other province produces on its own.

For these reasons, Alberta’s industrial economic base affords the federal government an incredible opportunity to make significant progress in achieving climate commitments while growing the economy. As such, we will be looking for Budget 2021 to establish the proper incentives and direct spending necessary to rapidly deploy proven emissions-reducing technology in the oil and gas industry—like Carbon Capture Utilization and Storage (CCUS), natural gas, electrification, and hydrogen development. Not only does this stand to deeply reduce Canada’s total emissions in short order, but it will continue economic activity that is vital to Canada’s overall recovery and prosperity, and could help kickstart new cleantech and low carbon fuel opportunities while sustainably maintaining Alberta’s outsized contributions to national prosperity.

READ MORE: Seizing Alberta’s outsized opportunity to reduce emissions

Jobs: A plan to reverse Canada’s trend on long-term business investment

Even for years before COVID, Canada has struggled with declining business investment and a sluggish economy. In the five years pre-pandemic, non-residential business investment in Canada fell by nearly 21%. This decline has contributed to faltering growth in quality jobs and median incomes across the country; the average Canadian earns barely more than they did five years ago. To drive economic growth—well beyond the recovery of the pandemic—Canada needs a plan to reverse this trend.

One key issue commonly cited among business leaders is an onerous business environment in Canada. This is supported by the data: Canada’s position on the World Bank’s Ease of Doing Business Index has declined from 4th in 2007 to 23rd in 2020. Certain indicators within the index paint a picture of inefficiencies which inhibit business activity and growth. For instance, Canada ranks 100th in the world on the enforcement of contracts, and it is among the very worst in the entire world when it comes to the time it takes to get construction projects underway—an average of 249 days compared to just 81 in the US.

To improve the health of the business environment overall in Canada, we hope to see a plan to build a more robust, dynamic, and efficient regulatory environment in Canada. With ambitions to be global leaders in hydrogen, rare earth minerals, and value-added agriculture, Canada will need to ensure we develop new linear transport and create transport corridors and seamless global-scale infrastructure that will match those ambitions. However, our own regulatory and approvals process is poised to be an obstacle to our goals. But there is a chance to transform. As an example of how this could be done, Germany and Denmark have created an independent oversight agency which assesses the impact of business regulation on the economy in order to help governments to prioritize reform efforts to increase speed, transparency and accountability. Ultimately, Canada needs a business environment encouraging, instead of deterring, private sector investment and growth.

People: A plan to improve access to early learning and childcare

Successive federal governments have repeatedly promised to better support childcare access and affordability in Canada but have taken little action. With talk of a national childcare strategy picking up, we hope to finally see meaningful steps taken in this year’s federal budget to support provinces in improving the quality, reliability, and affordability of childcare across Canada. 

Childcare access is critical to enabling more Canadians—especially women who disproportionately bear this responsibility—to participate in the workforce. The pandemic has shone a light on just how vital childcare is to ensure parents can fully engage in their work and support the stability and health of the broader economy.

More than that, high quality, well-structured childcare is important for the development of our most valuable resource—the next generation of Canadians. Research is increasingly conclusive that there is a large return on high-quality early childhood education, and that this return is highest among the poorest and most vulnerable children. Strategic investments in childcare can help Canada to unlock its full potential, by taking steps to ensure this potential is not squandered from the start.

Nation of Innovation: A challenge-driven innovation strategy for Canada

As we emerge from the depths of the COVID recession, our collective ability to improve the lives of all Canadians from generation to generation requires improving Canada’s lagging productivity growth. Canada’s productivity has stalled for decades, contributing to stagnating wages and slow economic growth. Addressing this issue will be pivotal to securing a strong and stable long-term economic future for the country, and for creating the growth needed to help pay down Canada’s large and growing debt.

Much of Canada’s productivity problem stems from our country’s poor track record in innovation, and more specifically, our challenges with transforming innovative ideas into large-scale commercial opportunities. Part of the issue is that compared to many other advanced economies, Canada is home to a relatively large share of small- and medium-sized businesses, but it is large companies that typically have the necessary resources to spend on R&D and drive competition and productivity gains at scale.

Canada has the knowledge base and the institutions that drive new ideas, but we need a long-term, future-oriented innovation strategy that can help businesses test, pilot, and commercialize innovative ideas here at home. We will be looking for bold investments in programs and independent institutions that can bridge the gap between R&D and commercialization, and transform Canada into a country of bold innovators who turn ideas into new products and services.

Organizations such as the Business Council of Canada, CD Howe Institute, and others have pointed to the US Defence Advanced Research Projects Agency (DARPA) as a useful model for Canada to follow in this regard. They note that, if well-executed, a Canadian DARPA would bridge public-private research, streamline commercialization, and help build an IP pipeline for Canadian businesses. It would be a key ingredient in a complex recipe to solve Canada’s innovation challenges.

This kind of strategy can be aimed at those areas that represent Canada’s natural strengths—a challenge-driven approach that has proven successful in places like Israel and the Silicon Valley. Such an innovation strategy can help drive economy-wide productivity gains and spur further private sector investment.

READ MORE: Productivity: Unlocking Canadian Potential: How Canada Can Enable Growth and Build Prosperity for Generations

Fiscal Pathway: A fiscal anchor and a credible plan to return to sustainable spending levels

The past year has seen an unprecedented spike in federal government borrowing and debt. This was an important—and essential—part of supporting individuals and businesses through the crisis and will help to ensure a full recovery.

Although there is light at the end of the tunnel, this work is not yet done. The 2021 budget will still contain a massive deficit, the likes of which would have been shocking in any other year. However, as the gravity of the situation lessens and restrictions are eased, we are looking for a credible plan to constrain future spending, return to a more sustainable fiscal footing and eventually begin to chip away at the overall debt burden on Canadians.

This is critical to our future prosperity for two reasons. First, it will limit the share of current and future tax dollars that must be allocated to financing debt as opposed to funding valuable government services. Second, it will solidify confidence in our future, sending the message that Canada will not need massive spending cuts or tax increases down the road when our fiscal situation is more dire than it is today. This would threaten Canada’s attractiveness as a wonderful place in which to live, work, and invest.

To credibly reduce the post-recovery deficit, the quality of short-term government spending will be as important as the quantity. As such, we hope to see that any and all new spending is evaluated with respect to broader economic policy objectives, such as increasing Canadian competitiveness and productivity—and ultimately prosperity. Doing so will increase the tax base and help to support a sustainable fiscal future.

Additionally, we hope to see the government establish fiscal guardrails in the near term to ensure that debt-servicing costs remain manageable into the future. This does not mean the immediate elimination of the federal deficit, but it does mean putting some limits on spending growth and focusing public investments in areas that yield significant economic returns. Doing so will help the government to set clear spending priorities, to ensure tax dollars are well spent to the biggest benefit of Canadians, and to support its sustainability goals—sending a strong signal to investors of Canada’s fiscal stability now, and into the future. 

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