2023 federal budget analysis

Introduction

In the context of a tightening economy, the 2023 budget strikes a balance between investing in key policy priorities while maintaining a measure of fiscal restraint.

Our analysis examines the government’s fiscal choices and its approach in five key areas: addressing labour market shortages, offering targeted inflation supports, providing quality health care, investing in Canada’s clean economy, and reworking Canada’s supply chain.

Overall, our assessment of the budget is mixed. We find that the government’s fiscal approach is reasonable but lacks a clear anchor. We find that increased immigration and participation in the labour market by underrepresented groups has potential to meet labour market needs, but only if the right supports are in place. We believe that targeted inflation supports for lower income Canadians make sense, but that there is more to do on other affordability issues, like housing supply. We think that substantial investment in health care is welcome but it would benefit from more attention to address the health care worker shortages. We see significant potential in the clean economy investments made to drive growth, especially in the context of a renewed emphasis on securing critical products from reliable sources. And we welcome the first steps taken in Budget 2023 to address supply chain resilience and await the full plan expected later this year.

The economic and fiscal context 

Budget 2023 was a balancing act that aimed to address the government’s priority areas—health and dental care, support for lower-income households, tax incentives for clean energy investments, and reconciliation with Indigenous populations—while trying to maintain a measure of fiscal responsibility in the face of slowing economic growth.

Deloitte’s most recent economic outlook anticipates a milder recession than previously forecasted. Higher interest rates are cooling consumer spending while businesses are limiting investment given the increased economic uncertainty. This has resulted in a softer pace of growth than many expected after last year’s Fall Economic Statement.

According to the government’s new economic projections, lower GDP growth will reduce revenues by an average of $5.7 billion a year over the next five years compared to its projections in the Fall Economic Statement. This deterioration has left the federal government in a deficit of $35.3 billion for 2023. New spending will total an average of $6 billion a year over the next five years in addition to $13 billion booked to the current fiscal year. However, this spending is net of planned reductions in spending and some small tax increases which are expected to recover $2.1 billion per year. Including the new announcements, the federal government is facing a larger deficit of $40.1 billion this year. This is expected to decline to a $14 billion deficit by fiscal 2027-28, meaning the government is no longer projected to balance the budget within the current projection period. 

Although the planned increases in the deficit remain sustainable, debt payments are expected to more than double to over $50 billion a year by 2027-28, up from $24.5 billion in 2021-22. Notably, while debt-to-GDP ratios are projected to decline in future years, the budget does not include a clear fiscal anchor.

Addressing labour market shortages

Long before the pandemic, the changing nature of work, digital transformation, an aging demographic, and globalization were all having an impact on the labour market in Canada. The Canadian economy has been recovering well, but businesses and governments continue to struggle with a shortage of skilled workers.

The federal government has centred its response to these challenges on measures to increase the country’s population, primarily through immigration. It has previously announced new immigration targets, hoping to admit 500,000 permanent residents annually by 2025. It has also focused on programs to increase the workforce participation of people who have been unable to do so meaningfully.

Supporting this increase in immigration requires investment in both systems and integration. The 2023 budget makes investments in digitizing the immigration system and easing the process of coming to Canada, which should help in the government’s efforts to address the backlog in processing applications. The budget does not, however, identify an increase in funding for settlement service provider organizations (SPO), which provide critical support to ensure newcomers maximize their economic potential. More broadly, the federal government does not yet show how it will align its immigration targets with provincial and municipal health, housing, and social policies to support a growing population to ensure it thrives.

Beyond the efforts to address the general worker shortage by boosting immigration, as mentioned earlier, the federal government can help address the shortfall in this sector by facilitating the adoption of national licensure for health care professionals. This would enable health care providers to work in more than one province, thereby improving their mobility and flexibility without an expensive and lengthy application process. While regulation and licensing is a provincial and territorial responsibility, in exchange for the new funding earmarked in the 2023 budget, the federal government is asking provinces and territories to “advance multi-jurisdictional credential recognition.” The budget does not, however, detail how it might further incentivize pan-Canadian licensure. 

The primary care system also needs a substantial boost to improve service across the country. One idea that continues to gain traction is to connect every Canadian to a primary-care team within 30 minutes of their home or workplace³. While the mechanics of enabling this would largely happen at the provincial level, the federal government can play a role. The new funding transfers also stipulate that the provinces and territories develop action plans to measure and report progress on improved access to family health services. Such data, which should include how many Canadians have regular access to primary care and how many primary care practitioners have joined the system, will be critical to determining if the funding is having the desired impact.

Investing in the clean economy

The federal government identifies greening the economy as Canada’s greatest economic growth opportunity. To capitalize on it, Budget 2023 makes $20.9 billion in new investments over the next five years that aim to respond to the United States’ Inflation Reduction Act (IRA), accelerate decarbonization, drive economic growth and competitiveness, and strengthen Canada’s transition to clean energy.

Central to the government’s strategy is a suite of new and enhanced investment tax credits to attract critical investments that enable Canada to lean on its competitive advantages and lead in the global clean economy. The credits incentivize investments in clean technology manufacturing and adoption, clean hydrogen, and carbon capture utilization and storage. While these measures will drive investments and growth, production tax credits—a low-risk measure introduced by the US government’s IRA to reward preferred outcomes—could complement investment tax credits and provide greater certainty that Canada’s long-term objectives will be met.

The Government of Canada also intends to attach labour requirements to several of its investment tax credits in order for businesses to receive the full credit rate. The requirements are designed to help address challenges in attracting and retaining talent in these industries, with conditions including an obligation to pay fair wages and create apprenticeships. To meet the workforce needs of Canada’s clean economy, it will become increasingly important to review and enhance training programs and to support efforts to fill the jobs created by major project developments.

The importance of free, prior, and informed consent, and collaboration and participation by Indigenous peoples in clean energy projects cannot be overstated. The federal government proposed several funding streams in Budget 2023 for progress on reconciliation and the Crown’s duty to consult Indigenous peoples. Notably, the budget commits $8.7 million to support deeper engagement with Indigenous partners and rights-holders and toward the National Benefits-Sharing Framework.

The Canada Infrastructure Bank will also provide loans to Indigenous communities to purchase equity stakes in infrastructure projects. As Canada expands clean energy and critical mineral projects, the benefit-sharing opportunities that arise provide crucial economic participation and access to capital for Indigenous communities in these major projects.

To continue to advance reconciliation, the government should look to incentivize partnerships with Indigenous-led workforce training organizations to provide more opportunities for Indigenous peoples to participate in the clean economy’s growing labour market demands.

Each of these dynamics generates both animperative and an opportunity for the Canadian economy.As stated in the previous section, Budget 2023 makes major investments in clean electricity and clean technology. In addition to supporting the decarbonization of the economy, these investments represent a significant effort to maintain and enhance Canada’s global competitiveness in clean tech sectors, and to position Canada as a reliable global supplier of critical products including clean energy, critical minerals, and electric vehicles.

Beyond Budget 2023, Canada should examine additional areas of opportunity to enhance growth and productivity in the context of decoupling and friend-shoring. These areas could include intellectual property protection and promotion, and monitoring the progress of the Canada Innovation Corporation. They could also include other previously announced innovation focuses, deepening efforts to support business investment beyond the energy and clean tech sectors, and furthering efforts to position Canada as a global leader on food supply.

Considering the strains on supply chains created by the pandemic and climate-related weather events, the federal government established a National Supply Chain Task Force. The task force reported its findings in October 2022, in response to which the government will release a strategy in the coming months. Budget 2023 announced a series of measures labelled a “down payment” on that strategy, which include investments to create the Transportation Supply Chain Office to respond to disruptions, better co-ordinate action to promote the resilience of Canada’s supply chains, and improve supply chain data. Tests for the broader supply chain strategy will include its effectiveness in easing port congestion, addressing labour shortage and retention challenges, and progress in harmonizing regulations across provinces and with the United States.