Budget 2024: Lack of spending restraint offset by revenue surprise and tax hikes

Budget 2024 showed a slightly worse bottom line throughout the federal government's fiscal plan compared to previous estimates but kept the deficit within target. To achieve this, however, the government introduced several new taxes after a myriad of new spending was rolled out in recent weeks. The lack of spending restraint was offset by a surprise upside in revenue projections.

A series of new tax measures including increases to the capital gains inclusion rate, implementation of a new Digital Service Tax, and a new global minimum tax are set to boost revenues (7%). But the new taxes are less than what was feared. The government's spending spree has been counteracted by higher revenue. Revenues are up by 2% ($8.9 billion in 2023-24) from the previous forecast, creating a higher baseline for an average of $7 billion per year over the projection period.

Budget 2024 by the numbers

• Budget shortfall to remain virtually unchanged at $39.8 billion in fiscal 2024-25-just below the $40.1 billion deficit maximum.
• Budget 2024 increases the inclusion rate on capital gains realized annually above $250,000 from 50% to 67% for individuals and on all capital gains realized by corporations and trusts effective June 25, 2024.
• Retroactive taxes on revenues earned by large global and digital corporations since January 2022 through a new 3% Digital Services Tax.
• Implementation of a new global minimum effective tax rate of 15% on profits of large multinational corporations.
• $4.5 billion over five years to support housing needs for low-income Canadians and refugees including $1.2 billion towards Canada's Homelessness Plan and $1.1 billion to extend housing support to asylum seekers.
• $4 billion over five years to increase housing supply including $1.5 billion for a new Housing Infrastructure Fund and $1 billion to expedite the construction of new purpose-built apartments.
• $4.9 billion over five years for a new Canada Disability Benefit including payments for eligible Canadians (starting July 2025) and amendments to eligible expenses for Disability Support Deductions.
• $8.1 billion in new defence spending over five years. This would bring Canada's defence spending up to 1.76% of GDP by fiscal 2029-30, a big step closer to meeting the NATO target of 2%.

Government spends revenue surprise, raises taxes

Several tax changes will be implemented to overcome budgetary hurdles. These include an increase to the capital gains inclusion rate (to 67% from 50%) on income exceeding $250,000 effective June 2024. This measure is anticipated to generate an additional $19.4 billion in personal and corporate tax revenue over five years-including a hefty $6.9 billion in fiscal 2024-25 as businesses and individuals rush to crystalize capital gains ahead of the change this June.

Tax changes for global and digital corporations are other key measures taking effect this fiscal year. Retroactive taxes on global and digital corporate revenue earned since January 2022 will be applied to large businesses (both foreign and domestic) that earn total revenue over 750 million euros ($1.1 billion) and earn more than $20 million of Canadian "in-scope" revenue in the calendar year. In-scope revenue includes those earned from online marketplace services, digital advertising services, social media, or user data. This measure is set to generate $5.9 billion over five years starting in fiscal 2024-25.

The government will also implement a global minimum top-up tax on corporate income, subjecting large multinational businesses to a minimum effective tax rate of 15%. This measure will be applied for fiscal years of taxpayers that begin this calendar year and is projected to increase revenues by $6.6 billion over three years starting in fiscal 2026-27.

Spending as share of GDP will continue to increase

In last year's Fall Economic Statement, the government tightened up its fiscal anchors, promising three fiscal objectives:

• Maintain the 2023-24 deficit at or below the Budget 2023 projection of $40.1 billion.
• Lower the debt-to-gross domestic product ratio in 2024-25, relative to the Fall Economic Statement, and keep it on a declining track thereafter.
• Maintain a declining deficit-to-GDP ratio in 2024-25 and keep deficits below 1% of GDP in 2026-27 and future years.

Budget 2024 includes plans to achieve all three, signalling a shift away from past practices of resetting targets after failing to meet them. But Ottawa doesn't plan to hit its targets through spending restraint. In fact, spending as a share of GDP is set to continue increasing over the course of the fiscal plan-reaching 19.7% this fiscal year from 17.2% in 2023-24 before settling down to 19.1% by fiscal 2028-29. That's the highest we've seen since the 1990s, outside of a pandemic year (fiscal 2020-21).

Housing, health and defence make up bulk of new spending

Expenditures are set to jump a whopping 7.1% in fiscal 2024-25 (to $538 billion) from the last fiscal year-with most of the increase going to housing, health (including pharmacare and disability benefits), and defence.

Housing

Housing affordability remained a major theme in Budget 2024, securing $8.5 billion on net-$1 billion of which is expected to take effect this fiscal year. New measures come as many markets across the country battle deteriorating housing affordability with some even reaching an all-time worst.

Measures to expand the supply of housing secured $3.9 billion over five years, including $1.5 billion for a new Canada Housing Infrastructure Fund and $1.1 billion over five years to accelerate the construction of new purpose-built rental projects. Capital cost allowances (which increased from 4% to 10%) will be available for new rental projects that begin construction immediately and are move-in ready by Jan. 1, 2036.

Measures for homelessness and asylum seekers topped these investments-securing $4.5 billion over five years. These measures include $1.3 billion for Canada's Homelessness Strategy and $1.1 billion to extend the interim Housing Assistance Program to asylum claimants.

Extending the amortization period for first-time buyers' insured mortgages on newly built homes (from 25 years to 30 years) and almost doubling RRSP withdrawal limits for first-time homebuyers (to $60,000 from $35,000) were other announcements included in Budget 2024, aimed at promoting greater housing affordability.

New housing-related funding and policies, however, weren't just focused on ownership. A new $1.5 billion tenant protection fund also made it to the agenda to acquire and preserve more rental housing. A Renters' Bill of Rights to be developed in partnership with the provinces is also in the works. This includes amendments to the Canadian Mortgage Charter to ensure rental history is accounted for in credit scores. If passed, the bill of rights will also require landlords to disclose a history of rental pricing.

The inclusion of student residents on the previously announced rental construction GST exemption, a review of federal lands for housing, and an extension of the foreign buyer ban until 2027 were other notable housing-related announcements.

Disability support and pharmacare

The government's long-awaited pharmacare also made its debut in this year's budget. Starting in fiscal 2024-25, the government will support access through funding of select prescription medications. The new program comes with a price tag of $1.5 billion over five years.

Canada's new disability benefit was another hefty line item, securing $4.9 billion over five years. The program includes payments for eligible Canadians beginning July 2025, and amendments to eligible expenses for disability supports deduction.

Debt servicing costs

Debt servicing costs are ballooning as expected. The cost of debt is now expected to cross the $50 billion mark in fiscal 2024-25-making up 10% ($54 billion) of total expenses. That's more than Canada's health transfers to provinces, territories and municipalities ($52 billion).

In addition, these costs are projected to grow 84% from fiscal 2022-23, reaching $64 billion by the end of the fiscal plan in 2028-29. At this rate, debt charges are projected to eclipse all other spending categories (aside from the $100 billion set aside for elderly benefits).

Higher business costs will hit consumers

While we're glad to see the government abide by fiscal anchors-and note this as a step towards building up credibility near-term-we're weary of the impact that these new taxes could have on the Canadian economy over the medium and longer term.

We continue to see the narrow targeting of revenue measures weighing on business investment-which is key to bringing Canada's productivity growth up to more sustainable levels. Canada already levies the highest tax on corporate profits among triple A-rated countries and G7 economies.

We also think the likelihood of higher business costs being passed down to consumers further exacerbates Canada's affordability challenge and high inflation. Disciplined spending is a preferred strategy to achieve Ottawa's fiscal anchors-and is one that would shield households and businesses from rising federal debt funding costs.

The Canadian economy has been beating expectations, prompting the government to increase its revenue growth projections markedly from the 2023 Fall Economic Statement-and spend it fast. While economic growth assumptions are prudent and continue to align with our own, hefty spending is pushing the boundaries of the fed's fiscal anchors-leaving little room to address any potential negative developments.

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