Commentary,  Fiscal Policy,  Macroeconomics

Commentary on 2024 Federal Budget

Canada’s Finance Minister Chrystia Freeland tabled the 2024-25 federal budget on April 16. The one major revenue measures in the budget (a change in the partial inclusion rate for capital gains income above a threshold of $250,000 per year) has sparked great outrage from powerful financial interests – but will have no direct impact on 99.9% of personal tax filers.

Centre for Future Work Director Jim Stanford provided several commentaries on the budget, including:

  • An in-depth interview on The Big Story podcast (produced by the Rogers radio network), hosted by Jordan Heath-Rawlings.
  • A commentary for on the surprising stability of federal deficit projections, despite new spending on several initiatives.
  • An interview with CHCH-TV’s Trending Now program on the implications of the budget for the cost of living.
Re-published below is a version of Jim’s commentary:

The Non-Story of Budget 2024: The Deficit

The biggest focus of the 2024 Federal Budget was addressing the housing crisis in Canada, with a wide range of policies: including building new houses on federally-owned land, big fiscal support for new housing projects, and even converting underused federal office buildings into apartments.

The budget also contained a suite of measures aimed at addressing other aspects of the cost-of-living challenges facing Canadians: including funding for free school lunches, the new pharmacare and dental care programs (negotiated by the NDP through its supply and confidence arrangement with the government), the first tranche of a new Canada Disability Benefit, and expanded grants and loans for university and college students.

The biggest non-event in the budget was the deficit. Freeland’s forecast hardly changed from last year’s trajectory for the deficit: $40 billion in 2023-24 (the fiscal year just ended), and gradually declining after that. The previous deficit targets were maintained despite the new spending on cost-of-living initiatives, defense, and other budget items.

The budget is able to spend more yet still meet deficit targets partly because of new revenue from an important and welcome change in the tax treatment of capital gains. Capital gains are income earned for selling an asset for more than its purchase price; they do not directly involve work or production.

In future, corporations and some individuals (those with capital gains exceeding $250,000 in a year) will now have to include two-thirds of their capital gains as taxable income (up from half at present, but below the 75% inclusion rate that prevailed in the 1990s).

Only about 40,000 Canadians (the richest 0.1% of the population) will pay more personal taxes because of this change in capital gains inclusion, which will nevertheless raise close to $20- billion in revenue over the next five years. It is hard to imagine a revenue measure more closely targeted at the wealthiest elite in Canadian society.

And despite complaints from the investment community, capital gains (which are highly concentrated among very wealthy individuals) will continue to be taxed less heavily than labour income – and the economic rationale for this favourable treatment is dubious.

However, the main factor helping Freeland maintain her deficit targets is continuing strength in government revenues, which have consistently outpaced forecasts. Freeland (like Finance Ministers before her) has incorporated deliberately pessimistic revenue forecasts into her budget, to provide a hidden cushion against unforeseen events. This will likely create room for positive budget ‘surprises’ to be announced before the 2025 election.

Conservative critics have invested much in attacking the government for new spending and planning to run bigger deficits. The stable deficit numbers, however, will disarm those criticisms. And focusing attention on the deficit seems largely beside the point, for Canadians struggling with the cost of living.

After all, a smaller deficit does nothing to help Canadian households pay their bills. But direct help with the necessities of life (through the measures noted above) will make an incremental difference to Canadians struggling to make ends meet. Most Canadians will receive something from one or more of those programs.

Moreover, it is important to keep in mind that the main cause of the cost of living crisis in Canada is not government. Rather, it’s companies charging more for what they sell (driving corporate profits to all-time records after COVID lockdowns ended, and sparking the wave of inflation that is only now subsiding), and failing to pay workers enough to keep up.

The federal budget’s cost of living remedies work on the margin of this bigger problem: they are not a magic bullet to solve cost-of-living pressures caused mostly by the private sector. But they’re pushing in the right direction.

Canada’s deficit remains small relative to other countries (especially compared to the U.S., where deficits are large but the economy is performing much better than in Canada), and both the deficit and debt are falling relative to GDP. Conservative scaremongering about the federal government ‘bankrupting’ the country is economic misinformation, and Canadians should ignore it.

Jim Stanford is Economist and Director of the Centre for Future Work. He divides his time between Sydney, Australia and Vancouver, Canada. Jim is one of Canada’s best-known economic commentators. He served for over 20 years as Economist and Director of Policy with Unifor, Canada’s largest private-sector trade union.