Last week, the federal government tabled Budget 2022. This budget comes at an increasingly tumultuous time, with ongoing pandemic uncertainties; supply chain challenges; inflationary pressures; increasing concern for climate change mitigation; and an ongoing Russian invasion of Ukraine and the associated global food and energy security concerns.
The government’s spending and policy priorities in Budget 2022 are wide-ranging. This budget reduces the government’s emphasis on direct COVID-19 stimulus spending and instead shifts its focus to areas like housing affordability, dental care, and climate change mitigation and adaptation.
What were we looking for?
Prior to the budget’s release, the Business Council of Alberta (BCA) published a list of five key themes we were hoping to see represented in the government’s fiscal and policy priorities. Here’s how we think the budget measured up on each one:
Environment: Enabling businesses to make long-term climate investments now
Canada’s greenhouse gas (GHG) reduction goals are ambitious, and time is running short. With less than 8 years remaining to reduce economy-wide GHGs by 40-45%—and given the concentration of large, energy-intensive, hard-to-decarbonize sectors in Alberta—much of the heavy lifting will have to be done here.
As Budget 2022 notes, it will take an anticipated $125-$140 billion in annual investment between now and 2050 to achieve net zero. Current investment is at about 1/10th that level and much of the gap will need to be filled by the private sector. As such, we were looking for more long-term, market-based policy certainty, and for policies that help set the stage for major decarbonization project investments at an unprecedented pace and scale.
This budget did not lay out a long-term carbon price trajectory beyond 2030, nor did it clear a path for carbon pricing to replace inefficient, opaque climate policies. However, there are early indications in the government’s Emissions Reduction Plan (ERP) that it will begin exploring carbon contracts for differences that help de-risk changes in the future carbon price trajectory. Depending on how the details are ironed out, we were happy to see Budget 2022 create a natural funding home for this kind of mechanism within the proposed $15 billion Canada Growth Fund.
Second, BCA was looking for a clear signal that the government intends to reduce emissions without curbing production—especially for Alberta’s energy-intensive, trade exposed sectors. While there are indications in both Budget 2022 and in the ERP to that effect, greater certainty is still needed on how Canada will balance growing global demand for our energy exports with increasingly stringent climate mitigation policies.
Finally, and perhaps most importantly, we were looking for a strong commitment to reducing regulatory review timelines so that Alberta businesses can build the necessary decarbonization infrastructure within the government’s Paris Agreement commitment timelines. Unfortunately, regulatory bottlenecks were not addressed in this budget. Without a serious commitment from Canada to speed project approval processes, the 2030 target will not be met despite all the best efforts.
Environment: Supporting Alberta as a secure global supplier of low-carbon energy; and of the globally-relevant clean tech solutions researched, developed, and deployed (RD&D) at home
Energy market dynamics have shifted significantly since the depths of the pandemic and Russia’s invasion of Ukraine. With the right investments, Alberta can position itself as an important producer and global supplier of clean, secure, and affordable energy as well as clean tech solutions. As such, we were looking for big commitments from the federal government to advance that goal.
To that end, we were very pleased to see Budget 2022 introduce a refundable investment tax credit (ITC) for multiple components of the carbon capture value chain, including a 50% credit through 2030 for carbon capture equipment and a 37.5% credit for transportation, storage, and use equipment. That said, we believe that the decision to exclude enhanced oil recovery from eligibility undermines the rapid scalability of the technology in the near term. We also note that the tax credit decreases in value by 50% after 2030. While designed to incentivize immediate investments, this creates a tight timeline given Canada’s slow major project approval processes. More conversations are also needed between the provincial and federal governments on supporting specific projects. However, this ITC is a major positive step forward in decarbonizing Alberta’s industrial economic base while accelerating new clean hydrogen production opportunities.
We also wanted to see the Government of Canada support export development like liquefied natural gas that can verifiably displace higher emitting energy sources like coal. On this measure the budget fell short, with very little mention of how Canada can workably scale lower carbon energy exports to reduce global emissions.
Third, the global momentum in support of low-carbon hydrogen production is growing and Alberta should be playing a major part. We were looking for Budget 2022 to provide significant investments to establish Edmonton and its industrial clusters as Canada’s first major hydrogen hub.
The carbon capture ITC announced will certainly bolster efforts in this regard, particularly given recent provincial support for CCUS infrastructure hubs and their concentration around Alberta’s Industrial Heartland. We are also happy to see the Canada Infrastructure Bank’s mandate broaden to include support of private sector investment into hydrogen and CCUS infrastructure, though questions remain about how much of the Bank’s existing funding pool is earmarked for such investments. Likewise, it is positive to see the expansion of Canada’s clean technology investment tax credit regime to include hydrogen, and the proposed creation of the arms-length Canada Growth Fund to leverage private investment in decarbonization, though details for both initiatives will not come until Fall 2022.
On the clean tech RD&D and export side, we were hoping to see concerted long-term federal investments in establishing Alberta as the world’s ‘living lab’ for industrial clean tech solutions, including for technologies like small modular nuclear reactors (SMRs), critical minerals extraction, bitumen beyond combustion, biofuels, geothermal power, and battery storage solutions.
Although the budget did not contain large, immediate capital cost deduction allowances for investments in these technologies, we were happy to see funding in support of SMRs; a focus on exploration tax credits and project funding streams for critical minerals and associated clean tech supply chains; and the expansion of clean tech investment tax credits. How these measures will bolster Alberta’s position as the natural home of RD&D remains unclear, but they are positive developments, nonetheless.
Pandemic recovery: Balancing economic recovery with continued uncertainty
Thanks to widespread vaccination; new and advanced treatments for fighting COVID infections; and the decreased severity of the Omicron variant, there is good reason to believe that the time has come for Canadians to learn to live with the virus while maintaining vigilance about unforeseen pandemic threats.
While the pandemic remains a fluid situation, we believe government must strike a balance that protects those at risk from COVID without causing excess economic and mental health hardship on the broader population. This balance should be commensurate to the lowering level of risk facing most Canadians, and necessary financial supports should be targeted to those disproportionately impacted by necessary public health restrictions.
Prior to the budget we were happy to see the federal government announce that it is rolling back its pre-arrival COVID testing for vaccinated travelers to Canada. Budget 2022 continued to indicate that the federal government recognizes the decreased risk currently posed by the pandemic, with large-scale direct COVID financial supports significantly winding down. We see this as a positive step forward, but also one that can be reversed if the pandemic risk profile worsens.
Long-term growth strategy: Creating an innovative, sustainable, and growing economy to support vital services
Key macro-level labour market indicators suggest that the worst of the pandemic recession has passed. While this ought to be celebrated, there are still clear indications that Canada’s overall productivity—its ability to create more value with the same amount of work—is lagging many of its OECD peers. And what’s more, the long-term forecast for economic growth isn’t optimistic.
We were looking for Budget 2022 to drive forward a long-term growth agenda focused on innovation and increasing the Canadian economy’s capacity for supply-side growth and productivity gains. For example, we wanted to see Canada improve the policy environment to help our innovators and our small- and medium-sized businesses scale into large businesses, and our large businesses and economic drivers to have a favourable investment environment.
At the same time, labour market indicators are clear that demand-side pandemic stimulus has run its course; misdirected future government spending could further inflame underlying inflationary pressures. And what’s more, as interest rates rise there is good reason to be wary of large sums of inefficient or unproductive long-term operational spending promises that can threaten a competitive business environment.
On these measures, Budget 2022 has mixed results. There are certainly policy measures and funding commitments that are quite positive, and the tone of the document suggests movement in the right direction. However, most of the announced measures lack detail. And there was a missed opportunity to reduce the regulatory and project approval burden on businesses.
First, we were happy to see several election platform agenda items included in the budget. We look forward to the creation of a Council of Economic Advisors to guide strategic growth-promoting policy advice to government. Similarly, we are excited to see the formation of a new Canadian Innovation and Investment Agency modeled after DARPA in the United States to help scale ideas into successful ventures. BCA has advocated for both initiatives. While we were hoping to see more detail in the budget, we await them in the fall economic update.
We were also pleased that the government announced a review aimed at modernizing and simplifying tax support to R&D and intellectual property, as well as a Scientific Research and Experimental Development (SR&ED) program review. We hope these reviews will result in changes that spark more business investment risk-taking in Canada to improve our lagging performance in R&D investment.
Furthermore, we are very excited to see Budget 2022 propose a more gradual phase-out of access to the lower small business tax rate. Canada has struggled to scale its small- and medium-sized businesses in the past, and this measure will remove a key barrier that discourages growth. We want to see as many small businesses become big businesses as possible.
Secondly, we were hoping to see Budget 2022 tackle Canada’s diminishing reputation as a place to do business on account of our slow and inefficient regulatory processes. These inefficiencies dissuade major project investments and undermine decarbonization efforts. BCA was hoping to see an independent oversight agency mandated to assess regulatory frameworks and propose solutions. Moreover, we were hoping to see a stronger commitment to an outcomes-based major project approval framework that aligns approval times with comparable nations; and the development of a ‘regulatory Nexus card’ to fast-track approvals for trusted project proponents and for major decarbonization buildouts. Regulatory reform was not a priority in this budget, so this major barrier to growth remains unaddressed.
And finally, we were looking for this budget to wind down its pandemic stimulus spending and to commit to a clear fiscal anchor. On these points, the budget picture was generally positive. The debt-to-GDP ratio—this government’s measure of fiscal stability—is going in the right direction, but largely on the back of higher-than-expected revenues due in no small part to a turnaround in the oil and gas sector. So long as this ratio is declining, the federal government has the capacity to pay for its spending priorities. But in light of rising interest rates, we hope to see the government pay close attention to reducing debt servicing costs. Every dollar spent servicing the debt is a dollar that cannot be spent on other important priorities. This is particularly important given the government’s added long-term operational spending.
Jobs and training: Workforce development for the economy of tomorrow
A long-term growth agenda can only succeed if Canada has the human capital to drive the economy of tomorrow. Forces such as automation, technology development, and the transition to a low-carbon economy have converged with the pandemic to create stubbornly high long-term unemployment levels in Alberta. While improving, persistently high rates impose significant social and economic costs. As such, Canadians need the federal government to support them in developing the skills they need to succeed.
We were looking for Budget 2022 to incorporate several workforce retraining initiatives, including direct federal contributions to the Employment Insurance (EI) program to incentivize the pursuit of skills upgrades; an annual top-up to the Canada-Alberta Workforce Development Agreement (WDA); and an effort to consolidate and simplify workforce development programs with the provincial government through a one-stop window for accessing all available supports.
For the most part we found Budget 2022 light on detail and ambition concerning workforce development. While we appreciate plans to consult on modernizing and simplifying EI to support experienced workers and help them transition to new careers, details on specific reforms were light. There were no explicit mentions of increased funding for the WDA, or any measures to simplify access to available supports.
We were happy to see some steps taken to improve labour mobility and to help alleviate labour shortages. These included: funding in support of a trusted employer model that reduces red tape for employers accessing temporary foreign workers in high-demand fields; the introduction of a labour mobility deduction of up to $4000 for relocation expenses and eligible travel for tradespeople; and increased efforts to recognize foreign credentials of health care workers.
Finally, we were looking to see the federal government support just transition programs and spending in a way that aligns with the needs and desires of Alberta’s workforce and business community rather than shoehorning people into a predetermined career trajectory. We were hoping to see committed funding to the proposed Futures Fund for regional economic diversification, with a strong commitment to develop the fund in consultation with impacted Albertans. However, there was little in the way of just transition policy development, and no new details on progress in establishing the Futures Fund for Alberta nor the ERP’s promise of a Clean Jobs Training Centre.
Budget 2022 represents a sweeping effort to address many key areas of concern for this federal government. There are positive steps being taken—particularly on carbon capture and clean tech supports—and positive indications from the government that it is taking long-term growth and fiscal sustainability seriously, even if many details are lacking and opportunities missed. As the federal government looks to flesh out some of the details, the Business Council looks forward to working closely with our federal partners to promote a prosperous Alberta within a strong, united Canada.