2024 federal budget analysis

Introduction

Budget 2024 arrives in a context of financial strain on household and government finances alike. Deloitte’s latest economic outlook finds that while Canada has likely dodged a recession, there remains a number of worrying trends for the Canadian economy, including declining productivity and soft investment intentions.

The Government of Canada was challenged in this latest budget to take decisive action to spur long-term, productivity-led growth and address key affordability challenges, starting with the nation-wide housing crisis. At the same time, we hoped the government would maintain sufficient fiscal discipline for inflation to continue to abate, allowing the Bank of Canada to cut interest rates, which would in turn ease household borrowing costs and spur investment. Our analysis explores the extent to which the budget meets those tests.

Budget 2024 proposes to increase program spending by $5.3 billion for 2024-25 and $30.6 billion from 2025-26 through 2028-29 more than the 2023 Fall Economic Statement (FES) projection, including $10 billion in the next five years for defence, $8.5 billion for a range of housing initiatives, and $4.8 billion for the new Canada Disability Benefit. Meanwhile, it projects revenues to increase by $14.4 billion for 2024-25 and $43.4 billion from 2025-26 through 2028-29, due in part to increased growth projections in the short term and in part to tax measures. Over the next five years, the government forecasts $19.4 billion in additional revenue from an increase in the capital gains inclusion rate, $6.6 billion from the global minimum tax, and $5.9 billion from the Digital Services Tax.

Budget 2024 projects a deficit of $39.8 billion in 2024-25, falling to $30.8 billion by 2026-27 and $20 billion by 2028-29. This would mean a deficit of 1.3% of GDP for 2024-25, declining to 0.9% by 2026-27 and 0.6% by 2028-29. Interest on debt is now projected to rise from $54.9 billion in 2024-25 to $64.3 billion in 2028-29. It would remain relatively constant as a percentage of revenue, at 10.6% to 11.0%, over the same period, higher than in most similar countries.

In the 2023 FES, the government set out three guardrails to indicate its commitment to fiscal discipline, each of which it has maintained through Budget 2024. Namely, it set out to maintain its projection of a 2023-24 deficit of $40.0 billion; improve upon its projection that federal debt for 2024-25 would stand at 42.7% of GDP (now projected at 41.9% and to decline thereafter); and achieve deficits below 1% of GDP from 2026-27 onward (now projected to sit at 0.9% of GDP in 2026-27 and to decline thereafter). While these metrics represent a relatively modest commitment to fiscal discipline, it’s encouraging that they have been maintained.

Unless growth exceeds forecasts, maintaining this trajectory over the longer term may prove challenging, as the government is in the beginning phases of implementing a number of potentially costly initiatives. These include the National Pharmacare Plan, a renewed defence policy review, and a significant acceleration of housing programs.

Productivity-led growth

Canada has a persistent productivity problem, largely driven by low levels of business investment. According to research published by the Library of Parliament, from 1980 to 2022 Canada’s productivity decreased from 102% to 77% of the rate of the United States, and from 108% to 93% of the average rate of the G7. The challenge is currently particularly acute, with per-capita GDP having declined in five of the past six quarters, falling by 1.7% in 2023 and potentially facing a similar decline this year. In the long term, the Organisation for Economic Co-operation and Development projects Canada will have the slowest real per-capita GDP growth among advanced economies. If these patterns persist, Canadians will face meaningful declines in their standard of living as governments struggle to deliver expected public services.

While future growth must be led by the private sector, we believe that to achieve a thriving future, the federal government must put productivity-led growth at the centre of its policy agenda. This requires bringing a productivity lens to all government decision-making. It means an urgent and sustained focus on measures to increase business investment levels, particularly in research and development, technology, and training. It means supporting full workforce participation for all Canadians, particularly for women, Indigenous Peoples, and newcomers. And it means making deliberate choices to capitalize on areas of significant strategic opportunity.

Budget 2024 proposes some measures that align with such a productivity-led growth agenda. One promising initiative is an investment of $2.4 billion over five years in Canada’s future in artificial intelligence. This package of measures focuses on computing power, bringing new technologies to market, supporting small businesses and non-traditional sectors to deploy AI solutions, and establishing an AI Safety Institute of Canada. Other notable measures include the investment in core research funding of $1.8 billion, increased support for graduate student research, and $600 million over four years to R&D tax credits.

The budget also sets out continued support for Canada’s net-zero economy, including launching the promised Indigenous Loan Guarantee Program, which will make up to $5 billion in loan guarantees available to First Nations, Inuit and Métis governments and their controlled entities to support equity participation in natural resource projects. The budget also delivers on promised major investment tax credits, commits to a new 10% Electric Vehicle Supply Chain investment tax credit, and continues the rollout of the Canada Growth Fund. Underpinning progress on this transition to net-zero is the need to accelerate major project approvals; with this budget, there is an acknowledgement and commitment to advance this work.

Overall, however, Budget 2024 signals a more-of-the-same approach to fostering productivity at a time when bold action is needed. It lacks a clear change strategy to catalyze a new era of productivity growth. And it includes new measures—like the capital gains tax increase—that will signal to some that supporting investment isn’t a priority.

Housing

Budget 2024’s most aggressive policy moves centre on housing, and include action on most elements in the government’s newly released housing strategy: Solving the Housing Crisis: Canada’s Housing Plan. Rightly so, with the Canada Mortgage and Housing Corporation (CMHC) estimating that 3.5 million units of housing are needed by 2030 to achieve housing affordability for everyone. The affordability crisis is impacting household finances and decisions about where to live, especially for younger Canadians and newcomers. And it is a significant and growing drag on growth.

The three-part plan focuses on increasing construction of both owner-occupied and rental housing, addressing specific challenges in renting and home ownership, and supporting efforts to build and protect non-market housing for vulnerable Canadians. The plan is at its strongest in its efforts to get more housing built, with the government projecting that its strategy will result in 3.87 million new homes by 2031.

For owner-occupied housing construction, the plan builds on the success of the $4 billion Housing Accelerator Fund—which has delivered 179 agreements with municipalities and an estimated 750,000 additional new homes—by using federal funding to influence policy change at provincial and municipal levels. Specifically, the federal government makes provincial and municipal access to an additional $400 million in the Housing Accelerator Fund, $6 billion of a new Housing Infrastructure Fund, and future transit funding contingent on their actions to build housing faster and at a lower cost. Executing this approach will require navigating tension with some provinces and municipalities concerned about federal intrusion into an area of their jurisdiction. If negotiation around the Housing Accelerator Fund is indicative, this strategy may lead to significant pro-housing reforms to provincial and municipal planning policies.

On the rental front, the government is introducing several measures to support the construction of rental housing. These include accelerating the capital cost allowance from 4% to 10% for new rental apartment construction projects begun between now and 2031, adding $15 billion to the apartment loan construction program, and launching a new Canada Builds initiative to partner with provinces interested in accelerating apartment construction. Other measures include making additional public lands available for building new homes and expanding the availability of Canada Mortgage Bonds. These measures significantly tip the scales in favour of building rental housing, which should increase rental vacancy rates and reduce pressure on rental housing prices over time.

Funding will also start to flow in 2024-25 to the seven-year, $4.3-billion Urban, Rural and Northern Indigenous Housing Strategy, delivered by First Nations, Inuit, and Metis governments through a new Indigenous-led National Indigenous Housing Centre.

Taken together, these measures have the potential to add a significant swathe of much-needed new housing.

However, the plan will be limited in its effect without a significant expansion of building capacity. As it stands, the budget introduces measures to simplify building through innovation (in factory home building, for example), invest in trades training, recognize foreign trades credentials, and facilitate internal labour mobility. On balance, these measures are positive but insufficient to address the capacity required.

In an effort to address challenges faced in particular by younger Canadians, the plan introduces a mixed bag of initiatives to help renters and prospective homeowners. Many of these measures are marginal, ranging from good ideas like having rent payments contribute to credit ratings to likely unnecessary intrusions into areas of provincial responsibility like tenant protection and even some potentially counter-productive measures like extending the maximum length of mortgage amortization on new homes to 30 years. The most notable and constructive element here is the introduction of a $900-million Greener Homes Affordability Program to support cost-saving, energy-efficient retrofits.

Finally, the plan introduces a number of measures to help Canadians who can’t afford a home. These include a $1-billion top-up to the Affordable Housing Fund, the introduction of a rapid housing stream into that fund, a $1.5-billion co-operative housing fund, and a $1.5-billion fund to allow non-profit providers to acquire apartments at risk of being sold to investors. It also includes a $1-billion enhancement to programs to end homelessness and $250 million to support permanent housing options for people who are unsheltered or living in encampments, with specific funding to shelter asylum claimants and to address homelessness experienced by military veterans. While this funding is welcome, it’s unclear how much progress it will be able to make in addressing shortages in the non-market housing sector or in reducing homelessness.

Care and affordability

Canadians’ cost-of-living challenges extend well beyond housing. Since many of these challenges are tied to inflation, the government must be careful not to spend in a way that impedes the slowing of inflation. At the same time, the government faces pressure to curb particularly sharp cost issues and to act in areas where it’s a service provider.

Budget 2024 attempts to walk that line by proposing modest investments in key social programs designed to reduce household costs, such as pharmacare and childcare, while deferring most potential spending to future years. These measures include:

• An investment of $1.5 billion over five years to support the launch of the National Pharmacare Plan. This plan will be delivered through agreements with provinces and territories, and will begin with coverage of contraceptives and diabetes medications.
• The continued rollout of the Canadian Dental Care Plan, extending coverage in 2024 to all eligible seniors, children, and persons with valid Disability Tax Credit certificates. The government expects that by 2025, nine million Canadians will be covered.
• The launch of a $1-billion Child Care Expansion Loan Program to accelerate progress toward the goal of creating 250,000 new childcare spaces by 2026, of which over 100,000 have already been announced.
• The creation of a National School Food Program, allocating $1 billion over five years to work with provinces, territories, and Indigenous partners to expand school food programs.

In addition to these investments, Budget 2024 proposes several regulatory measures to address affordability through enhanced consumer protection and stronger competition. These include actions to protect no-fee switching between telecom plans, increased transparency requirements for airline fees, stronger measures to crack down on predatory lending, and regulations to help Canadians avoid non-sufficient funds fees, including a $10 cap on those fees.

The relative modesty of these investments and measures demonstrate that lower inflation is a cornerstone of the strategy to ease cost-of-living pressures. The government is proceeding in fiscally cautious ways, limiting its up-front spending on key programs that may grow over time. In this way, it seeks to signal its concern on affordability issues, while also focusing on slowing the inflation that’s causing those cost pressures.