Given the political uncertainty facing Canada, the fate of many of the measures announced in the 2024 Fall Economic Statement is highly uncertain.
However, the fiscal update still serves as a snapshot of where the economy is headed and how upcoming challenges could be tackled going forward.
As expected, the federal government pared back on projections of revenues from taxation since Budget 2024 (-$6.5 billion in 2024-25), reflecting a sharper economic downturn and a reversal of Canada’s post-pandemic immigration plan.
Lower revenues and new spending measures have resulted in deeper deficits over the course of the fiscal plan—including a whopping $22 billion downward revision to the 2023-24 bottom line to $61.9 billion. The 2024-25 deficit has also deteriorated by $8.5 billion to $48.3 billion.
Here are the highlights:
- Deeper deficits over the course of the fiscal plan.
- Breaches one fiscal anchor and is running close to the two others.
- Extension of the Accelerated Investment Incentive (costing $17.4 billion over five years).
- $1.9 billion for tax incentives for scientific research and experimental development over five years.
- $1.6 billion for GST holiday effective Dec. 14 until Feb. 14, 2025.
- $1.3 billion on border security over six years.
- Relaxation of the 30% stake limit on pension funds.
- Pledge to send most working Canadians $250 cheques was absent in fiscal update.
New U.S. administration weighs on spending priorities
The incoming U.S. administration has already made a mark on Canadian finances. Campaign promises from the U.S. president-elect are expected to boost business opportunities south of the border, making the Canadian business environment increasingly important after being on the back burner for years.
The most notable benefits for Canadian businesses in the fiscal update included the extension of the Accelerated Investment Incentive, costing $17.4 billion over six years. This effort provides enhanced first-year capital cost allowance for most depreciable capital property acquired on or before Jan. 1, 2025, and becomes available for use before 2030. This incentive was originally set to be phased out between 2024 and 2027—the new period will be 2030-2033.
About $1.9 billion over six years has been allocated for tax reforms to incentivize scientific research and experimental development—including tax credits and new rules on the deductibility of such expenditures.
The long-standing 30% stake limit on pension funds will also be relaxed, unlocking billions in investments that could benefit businesses.
Another $15 billion has also been earmarked for new green data centres to support greater adoption of AI and productivity gains in Canada.
A fourth round of the Venture Capital Catalyst initiative ($1 billion) and 25% concessional financing (up to $1 billion) for new private investments for mid-cap companies were among the other notable announcements, along with the one-year rollover of capital gain on business investment.
Meanwhile, spending on border security is expected to grow $1.3 billion over six years— likely to demonstrate aligned priorities with the incoming U.S. administration.
Not all spending will be growth-enhancing
The economic update also included $1.6 billion this fiscal year for the two-month GST holiday between December 2024 and February 2025.
The move could offer a short-term burst to spending, but it is more likely to boost demand for goods and services across the spectrum, which could bid up prices unless met by a corresponding increase in supply.
Interest on debt will also be up relative to Budget 2024, despite deeper interest rate cuts than previously projected. This is a result of the heavier debt burden since the spring plan, adding $1.4 billion over six years to the deficit, making it nearly double the Canada Child Benefit this fiscal year.
Canada set to breach fiscal anchors
Just a year after tightening its fiscal anchors, the federal government announced plans to breach at least one of its objectives, while running quite close to two others.
The 2023-24 deficit will exceed Budget 2024’s $40.1 billion by a whopping $22 billion, due to contingent liabilities related to Indigenous litigation and write-downs of COVID loans.
The deficit-to-GDP ratio promise has technically remained intact—the ratio declines in 2024-25 (albeit from a higher number) and remains 1% below post-2026-27 projections.
The debt-to-GDP ratio continues to decline.
Going forward, the changing economic environment could easily see the government breach the two other anchors. Its own downside economic projections would lead to breached anchors and it’s worth noting that our forecast is less optimistic than the September private sector survey on which the update numbers are based. As noted previously, we were looking for a risk adjustment or contingency measures that would leave federal finances robust to changing economic conditions.
Markets unlikely to punish growth-enhancing measures
As we argued before, prudent fiscal management is not only reflected in the deficit or debt numbers, but in the totality of the fiscal plan.
The government’s enhanced focus on encouraging business investment should grow the economy and can be sustainably financed, without adding to inflationary pressures or complicating the Bank of Canada’s easing path. However, soft fiscal anchors, and other less growth-focused spending continue to be a mark against Canada’s fiscal credibility.
Beth Arseneau, FMA, CIM
Portfolio Manager
416-960-4592
beth.arseneau@rbc.com