2015 federal budget targets machinery, jobs and growth
Toronto – Federal Finance Minister Joe Oliver presented his last budget before the next federal election, announcing several tax measures and plans for a balanced budget by 2015-16.
Characterizing the budget as focused on “jobs, growth, and long-term prosperity,” Oliver said that after a $1.4 billion deficit for the fiscal year 2014-15, the government projects surpluses of $1.4 billion and $1.7 billion over the next two years. The government also indicated that it would introduce balanced-budget legislation.
Private businesses will benefit from the budget as the small business tax rate will be incrementally reduced from 11% to 9% by 2019. “While Canadian corporate tax rates were already competitive on a global basis, this reduction ensures Canada’s attractiveness for business investment will translate into continued opportunities for growth and innovation,” explained Keith MacIntyre, national tax leader, Grant Thornton LLP in Canada.
Cities across the country also received a welcome boost in the form of $5.8 billion over six years to help pay for new infrastructure. The new Public Transit Fund provides an additional $750 million over two years starting in 2017-18, and $1 billion per year ongoing thereafter. National security was also a highlight, with resources earmarked to help security agencies carry out enhanced responsibilities under Canada’s new anti-terrorism legislation, which is currently before the Senate.
Grant Thornton has released a detailed summary of the tax measures that were announced in this budget. For manufacturing, the budget would extend the accelerated Capital Cost Allowance rate for manufacturing and processing machinery and equipment acquired after 2015 and prior to 2026. This is good news for manufacturers and is intended to encourage investment in manufacturing capacity and efficiency.
A number of measures have been introduced to enhance trade and to develop export markets. Among other measures, $50 million will be provided over five years to create an export market development program to assist small and medium-sized enterprises in exploring new export opportunities.
According to the Conference Board of Canada, Ottawa, the plunge in oil prices and deteriorating economic conditions have taken a substantial toll on the federal government’s fiscal situation. A weakened economic performance, including a large drop in corporate profits, is expected take a substantial bite out of government revenues this year, the Board reports. It continues:
If it were not for the sale of its remaining General Motors shares and a reduction in the amount it sets aside for contingency, the government would have posted a small deficit this year and could expect a surplus of less than $1 billion in 2016-17. Thanks to a reduction in the amount of sick leave entitlement for federal employees and selected tax reforms, the government was able to create a little room for a few small spending measures while maintaining its plan to keep its books balanced over the next several years.
Economic conditions have deteriorated significantly since the government’s last Fiscal and Economic Update, released in September 2014, as the plunge in oil prices has had a significant and negative impact on the Canadian economy. The government relies on the consensus of 15 private sector economists for the economic assumptions used in its budgetary projections. According to this consensus, economic growth has slowed significantly and may have been flat in the first quarter. Growth is expected to remain sluggish in the current quarter before picking up in the second half of the year.
The consensus of private sector economists calls for economic growth to average just 2% in 2015, down from the 2.6% projected by the government in its September update. However, government revenues are driven more by nominal GDP, which is essentially the sum of personal and corporate incomes. With the collapse in oil prices, corporate profits will see a substantial decline. At the same time, slack in the labour market will keep wage growth contained. This will restrain nominal GDP growth to just 1.6% for 2015 and put a substantial damper on the government’s revenue projections. Economic conditions are expected to improve only modestly in 2016. According to the consensus forecast, the potential economic growth rate is quickly slowing and will eventually fall to 2%, largely as a result of the aging of the population. From 2016 to 2019, real economic growth is expected to average less than 2.2% per year.
The Conference Board of Canada’s economic outlook is similar to the consensus forecast contained in the budget. A lack of business investment has combined with slowing labour force growth to dampen Canada’s economic potential. And the Board expects real economic growth will be slightly lower than consensus (1.9% versus 2%) this year.
It expects economic growth to improve only slightly over the medium term, with an average of just 2.2% projected over the 2016 to 2019 period, in line with the budget’s forecast. However, by 2019, nominal GDP under its outlook is about $12 billion lower than the consensus forecast. And if the Board is correct, that would wipe out about half the contingency reserve incorporated in the government’s planning assumptions for that year, it predicts.