Budget 2016—Billed As ‘Growing the Middle Class’

Matt Chan • March 24, 2016

Today’s budget included everything I expected and nothing that I feared. The fears first— there is no change in the tax treatment of capital gains or stock options , despite continued rumours and speculation. Indeed, in a press conference in the lock-up, Minister Morneau said that stock options tax changes are off the table because they are so important to young innovative companies. There is also nothing in the budget designed to tighten credit conditions in the housing markets.

With respect to housing, Ottawa will support the collection of data regarding foreign purchases of Canadian residential real estate, providing additional funding to Stats Canada working with CMHC and British Columbia. Evidence-based assessment of the situation is important.1 Hopefully, governments at all levels will refrain from discouraging foreign investment in housing in a misplaced effort to create more affordable housing. The budget does express concern about affordable housing by investing $2.3 billion over two years for social infrastructure in communities where it is most needed, including $739 million for First Nations, Inuit and northern housing.

Budget 2016 states that “stable and secure housing markets protect the greatest investment of many middle class Canadian families. On December 11, 2015, the government announced coordinated actions to strengthen the resiliency of Canada’s housing finance system, increase market discipline in residential lending, and promote long-term stability and balanced economic growth. The government will continue to closely monitor vulnerabilities related to housing and consumer debt and is prepared to implement further measures, should they be needed.”

This is all good—no messing around with the housing market in this year’s budget, but reasserting a watchful eye on excesses and potential bubbles. There is a growing concern among U.S. hedge fund managers regarding the Canadian housing market and Canadian household debt as many expect a U.S.-style meltdown in Canada, similar to what happened in the U.S. in 2007-2009. This is nothing new, as Canadian pundits and media have been suggesting something similar for several years now. However, vigilance against fraud and insufficient qualifying conditions for credit is important to maintaining the financial stability of our economy and our financial institutions.

Household debt levels are at record highs relative to income and interest rates are at record lows. The Bank of Canada estimates that roughly 8% of households are severely indebted and vulnerable to rising interest rates in the future and/or a job loss owing to economic shocks. The oil price rout has already tested these conditions in Alberta and Newfoundland where credit card delinquency rates are already rising. The use of homes as piggy banks is a concern as home equity lines of credit have grown rapidly. As well, auto loans and credit card borrowing may well be too readily available for a segment of the population that is overstretched.

Budget Fundamentals

As expected, the current fiscal year budget deficit is forecast to come in at just shy of $30 billion ($29.4 billion, to be exact) and to fall only a bit next year (to $29.0 billion), nearly three times the size of deficit promised during the election campaign. As well, deficits will remain over the five-year forecast horizon. There is some cushion here in that these numbers include a $6 billion contingency reserve. But to the surprise of some, there is no estimate of when the federal budget will be balanced.

Despite these large deficits, the federal debt-to-GDP ratio–while rising in the fiscal year (FY) that begins April 1 from 31.2% to 32.5%–will fall over each of the next five years to end FY 2020-21 at 30.9%. Canada has the lowest debt-to-GDP ratio by far in the G7, so no worries here. With interest rates so low, debt servicing costs have dropped sharply.

SUMMARY OF FISCAL DEVELOPMENTS SINCE THE FEBRUARY OUTLOOK
billions of dollars

The major initiatives in this budget were pre-announced. The biggest single spending item on the Liberal docket is the new Canada Child Benefit that swallows four former benefits — including the universal child care benefit and income splitting — into a single new payment targeting middle and lower income Canadian families. The program won’t roll out until July 1, however, as the federal government continues to fine-tune details with the provinces. With a maximum $6,400 a year per child under five and $5,400 annually for kids six to 17, the new benefit is an effort to reduce income equality. The Canada Child Benefit provides a net fiscal stimulus of $3.7 billion this year and $4.3 billion next year, accumulating to just under $8.0 billion over the next five years.

The middle class tax cut was announced last December effective January 1. While it is estimated to provide a net boost to the economy of $1.3 billion this year, the hike in tax rates for incomes over $200,000–which is called “the tax fairness measure” in the budget documents—is estimated to have a net negative economic impact of $0.7 billion over the same period. The negative impact of this tax increase could be substantially greater, especially over the longer term as it dampens entrepreneurial spirit and makes it more difficult to attract and retain talent and new high-growth businesses in Canada.

In addition, budget 2016 extends EI regular benefits by 5 weeks to all eligible claimants, and provides up to an additional 20 weeks of EI regular benefits to long-tenured workers, in the following EI economic regions:

• Newfoundland/Labrador
• Sudbury
• Northern Ontario
• Northern Manitoba
• Saskatoon
• Northern Saskatchewan
• Calgary
• Northern Alberta
• Southern Alberta
• Northern British Columbia
• Whitehorse
• Nunavut

Infrastructure spending increases in the budget are also pretty much as advertised. Phase 1 of the infrastructure plan provides $11.9 billion over five years for public transit, green investments and social infrastructure.

Ottawa estimates that the GDP impact of the combined fiscal stimulus will be 0.5% for FY 2016-17 and 1.0% for the following fiscal year. I forecast that the GDP growth rate in 2016 will be roughly 1.7%, rising to about 2.0% next year.

The big loser in this budget is the energy sector. The government repeatedly states in the budget documents that it will subsidize clean energy initiatives and reduce Canada’s carbon footprint. For example, “the government will invest in electric vehicle and alternative transportation fuel infrastructure.” Ottawa has promised that Canada will be a leader in addressing the causes of climate change. We already know the Liberals are not supporting the Gateway pipeline or pipeline development in general.

The assumption for oil prices in 2016 is $40 (U.S. per barrel for West Texas Intermediate crude oil)—slightly above the current level and well above the lows posted early this year. Oil prices are expected to rise from there to $52 in 2017 and $63 in 2020, still well below the levels posted during the oil boom.

The other economic assumptions in the budget are consistent with the average of private sector forecasts, which have been revised down considerably from budget 2015 because of the larger than expected oil price decline. As well, the Canadian dollar is forecast in the budget to average 72.1 cents U.S. in 2016, well below current levels of 76 cents plus. The loonie is forecast to edge upward gradually over the next five years.

Bottom Line: While there will no doubt be quibbles about the specifics of today’s budget, the good news is that it will provide economic stimulus without threatening Canada’s solid financial position. There is no doubt we will maintain our triple-A rating. The government was urged by some to spend more and by others to spend less, so they have reached a reasonable balance without raising the tax burden further on high-income Canadians. The actions taken will help, at least at the margin, to assure a minimum standard of living for all.

FOOTNOTE:

1 Also on the data collection front, the government will re-introduce the long form census, a move that will be applauded by all economic and demographic researchers.

CONTACT

Share

RECENT POSTS

RRSP As A Downpayment

By Matthew Chan • April 23, 2025
Did you know there’s a program that allows you to use your RRSP to help come up with your downpayment to buy a home? It’s called the Home Buyer’s Plan (or HBP for short), and it’s made possible by the government of Canada. While the program is pretty straightforward, there are a few things you need to know. Your first home (with some exceptions) To qualify, you need to be buying your first home. However, when you look into the fine print, you find that technically, you must not have owned a home in the last four years or have lived in a house that your spouse owned in the previous four years. Another exception is for those with a disability or those helping someone with a disability. In this case, you can withdraw from an RRSP for a home purchase at any time. You have to pay back the RRSP You have 15 years to pay back the RRSP, and you start the second year after the withdrawal. While you won’t pay any tax on this particular withdrawal, it does come with some conditions. You’ll have to pay back the total amount you withdrew over 15 years. The CRA will send you an HBP Statement of Account every year to advise how much you owe the RRSP that year. Your repayments will not count as contributions as you’ve already received the tax break from those funds. Access to funds The funds you withdraw from the RRSP must have been there for at least 90 days. You can still technically withdraw the money from your RRSP and use it for your down-payment, but it won’t be tax-deductible and won’t be part of the HBP. You can access up to $35,000 individually or $70,00 per couple through the HBP. Please connect anytime if you’d like to know more about the HBP and how it could work for you as you plan your downpayment. It would be a pleasure to work with you.

Bank of Canada Rate Announcement Apr 16th, 2025

By Matthew Chan • April 16, 2025
Bank of Canada holds policy rate at 2¾%. FOR IMMEDIATE RELEASE Media Relations Ottawa, Ontario April 16, 2025 The Bank of Canada today maintained its target for the overnight rate at 2.75%, with the Bank Rate at 3% and the deposit rate at 2.70%. The major shift in direction of US trade policy and the unpredictability of tariffs have increased uncertainty, diminished prospects for economic growth, and raised inflation expectations. Pervasive uncertainty makes it unusually challenging to project GDP growth and inflation in Canada and globally. Instead, the April Monetary Policy Report (MPR) presents two scenarios that explore different paths for US trade policy. In the first scenario, uncertainty is high but tariffs are limited in scope. Canadian growth weakens temporarily and inflation remains around the 2% target. In the second scenario, a protracted trade war causes Canada’s economy to fall into recession this year and inflation rises temporarily above 3% next year. Many other trade policy scenarios are possible. There is also an unusual degree of uncertainty about the economic outcomes within any scenario, since the magnitude and speed of the shift in US trade policy are unprecedented. Global economic growth was solid in late 2024 and inflation has been easing towards central bank targets. However, tariffs and uncertainty have weakened the outlook. In the United States, the economy is showing signs of slowing amid rising policy uncertainty and rapidly deteriorating sentiment, while inflation expectations have risen. In the euro area, growth has been modest in early 2025, with continued weakness in the manufacturing sector. China’s economy was strong at the end of 2024 but more recent data shows it slowing modestly. Financial markets have been roiled by serial tariff announcements, postponements and continued threats of escalation. This extreme market volatility is adding to uncertainty. Oil prices have declined substantially since January, mainly reflecting weaker prospects for global growth. Canada’s exchange rate has recently appreciated as a result of broad US dollar weakness. In Canada, the economy is slowing as tariff announcements and uncertainty pull down consumer and business confidence. Consumption, residential investment and business spending all look to have weakened in the first quarter. Trade tensions are also disrupting recovery in the labour market. Employment declined in March and businesses are reporting plans to slow their hiring. Wage growth continues to show signs of moderation. Inflation was 2.3% in March, lower than in February but still higher than 1.8% at the time of the January MPR. The higher inflation in the last couple of months reflects some rebound in goods price inflation and the end of the temporary suspension of the GST/HST. Starting in April, CPI inflation will be pulled down for one year by the removal of the consumer carbon tax. Lower global oil prices will also dampen inflation in the near term. However, we expect tariffs and supply chain disruptions to push up some prices. How much upward pressure this puts on inflation will depend on the evolution of tariffs and how quickly businesses pass on higher costs to consumers. Short-term inflation expectations have moved up, as businesses and consumers anticipate higher costs from trade conflict and supply disruptions. Longer term inflation expectations are little changed. Governing Council will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs. Our focus will be on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. This means we will support economic growth while ensuring that inflation remains well controlled. Governing Council will proceed carefully, with particular attention to the risks and uncertainties facing the Canadian economy. These include: the extent to which higher tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve. Monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war. What it can and must do is maintain price stability for Canadians. Information note The next scheduled date for announcing the overnight rate target is June 4, 2025. The Bank will publish its next MPR on July 30, 2025. Read the April 16th, 2025 Monetary Report

Selling Your Property? Let's Talk

By Matthew Chan • April 9, 2025
If you’ve been thinking about selling your existing property, for whatever reason, it would be in your best interest to connect with an independent mortgage professional before calling your real estate agent or listing it yourself. And while talking with your mortgage professional might not sound like the most logical place to start, here are a few scenarios that explain why it makes the most sense. If you’re buying a new property If you’re selling your property, chances are, you’ll have to move somewhere! So, if you plan on buying a new property using the equity from the sale of your existing property, chances are you’ll need a new mortgage. Don’t assume that just because you’ve secured mortgage financing before, that you’ll qualify again. Mortgage rules are constantly changing; make sure you have a pre-approval in place before you list your property. Also, by connecting with a mortgage professional first, you can look into your existing mortgage terms. You might be able to port your mortgage instead of getting a new one, which could save you some money. If you’re not buying a new property Even if you aren’t buying a new property and want to sell your existing property, it’s still a good idea to connect with a mortgage professional first, as we can look at the cost of breaking your mortgage together. Unless you have an open mortgage, or a line of credit, there will be a penalty to break your mortgage. The goal is to work on a plan to minimize your penalty. Because of how mortgage penalties work, sometimes it’s just a matter of waiting a few months to save thousands. You'll never know unless you take a look at the details. Marital breakdown The simple truth is that marriages break down. When that happens, often, people want closure, and unfortunately, they make decisions without really thinking them through or seeing the full picture. So, instead of simply selling the family home because that feels like the only option, please know that special programs exist that allow one party to buy out the former spouse. The key here is to have a legal separation agreement is in place. If you’d like to discuss the sale of your property and your plans for the future, connect anytime. It would be a pleasure to work with you!