Federal budget to announce $7-billion in savings on outsourcing and travel, source says

Finance Minister Chrystia Freeland’s 2023 budget will announce plans to save about $7-billion over five years through cuts to federal travel and reduced outsourcing, with a particular focus on using fewer management consultants, according to a senior government official.

The Globe is not identifying the official, because they were not authorized to be named when discussing the contents of the budget. The savings represent one side of what will be a challenging political balancing act for the government as it presents this year’s spending plan on Tuesday.

Ms. Freeland’s budget will aim to show that the government is focused on fiscal responsibility after posting massive deficits during the pandemic. At the same time, the plan will promote billions in increased spending in areas such as dental care, direct support for low-income Canadians, and a major package of new programs to boost the clean economy.

The government’s decision to cut back on outsourcing follows a series of reports by The Globe and Mail that highlighted how federal spending in this area – officially called professional and special services – has spiked under the Liberals, from $8.4-billion in 2015-16 to an estimated $21.4-billion this current fiscal year.

Parliamentary Budget Officer Yves Giroux recently reported that while federal spending on management consultants is only 5 per cent of that total, it is a category that has grown by 95 per cent under the Trudeau government.

Mr. Giroux has questioned why spending on outsourcing has increased while the size of the federal public service has jumped by 28 per cent since 2017.

The government operations committee is currently engaged in three separate studies of the growth in federal outsourcing, including one on management consulting firms such as McKinsey & Co. and another on the ArriveCan app, which is on pace to cost over $54-million and was built through extensive use of outside contractors.

The savings on outsourcing and travel will be worth about $7-billion over five years and $1.7-billion for each year after that, the official said. The plan is meant to show that Ottawa will exceed last year’s target of finding $6-billion in internal savings over five years.

Another item that will be in the budget, according to the official, is an announcement that the government will move ahead with reforms to the alternative minimum tax. The AMT, which is intended to prevent excessive use of deductions by providing an alternative way for wealthy taxpayers to calculate their obligations, has been in place since 1986. The 2021 Liberal campaign platform and 2022 fall economic statement both said it needs to be updated to ensure wealthy people can’t excessively lower their overall tax bills.

The budget will also announce a clean technology manufacturing tax credit worth more than $3-billion over five years.

Companies will be able to use the 30-per-cent tax credit to offset the cost of equipment for mining and processing critical minerals, which are in high demand as the global economy seeks to expand the use of renewable energy and electric vehicles.

The budget will also include an extension of the six-month increase to the GST rebate, which temporarily doubled the amount sent to recipients starting in the fall. The GST rebate is a payment targeted toward lower-income Canadians. It is meant to help offset the costs of paying sales taxes.

The government plans to promote the extension as a “grocery rebate,” even though many grocery items are exempt from sales tax. There will be no obligation on recipients to spend the money on groceries.

NDP Leader Jagmeet Singh, who is seeking support for lower-income Canadians in Tuesday’s budget, responded to the grocery-themed rebate plan after it was reported Monday by CBC News.

“It looks like one of the things we’ve asked for is going to be there,” he told reporters on Parliament Hill. “We still want to see confirmation of the dental-care expansion to include seniors, people living with disabilities, and kids 18 and under. We really want this budget to save money for people.”

In public comments over the past few weeks, Ms. Freeland, who is also Deputy Prime Minister, has clearly signalled the budget’s main elements.

The government will “invest aggressively” in various clean-energy programs, partly to compete with massive new tax breaks and other incentives that were announced last year in the United States through the Inflation Reduction Act and other policies. The budget will also lay out a detailed spending plan for increased health transfers to the provinces and territories, which were announced in February.

A third category of spending will be under the heading of affordability measures, partly in response to cost-of-living pressures driven by inflation. This will include the extension of the GST credit increase and an expanded dental-care plan, as called for by the NDP, which is supporting the minority Liberal government in exchange for action on a list of policy priorities.

Lana Payne, president of Unifor, which represents thousands of Canadian autoworkers, met with Prime Minister Justin Trudeau last week just ahead of the budget. She said in an interview that U.S. policies to encourage the manufacturing and purchasing of electric vehicles and other emission-reducing measures are a “game changer” that require a strong Canadian response.

“We are in a very important moment in time, I think, economically speaking,” she said. “We can’t lose track of things right now. Because we’ve had a decade or two in which we haven’t been doing that well in terms of attracting new manufacturing investment to Canada.”

Canadian Chamber of Commerce president Perrin Beatty said he hopes to see a budget with one clear theme.

“The thing that we believe the government needs to focus on is growth. Everything flows from that,” he said. “How do we create the conditions for private-sector-led economic growth in Canada? And that doesn’t mean bringing in massive new spending programs.”

On the tax front, outside experts are not expecting major changes on Tuesday. The government has already signalled that Canadians can expect more detail on tax changes that had been previously announced, but had not yet been launched or fully explained.

These include a proposed 2-per-cent tax on share buybacks for public companies, and the updated alternative minimum tax for high-net-worth individuals.

Last year’s budget said the minimum tax change is aimed at an “unfair” situation in which thousands of wealthy Canadians pay little to no personal income tax each year because of tax credits and deductions.

Brian Ernewein, a former Finance Department assistant deputy minister for tax legislation who is now a senior adviser with KPMG, said he’ll be watching to see if the proposal indirectly limits access to the capital gains exemption for some people.

Currently in Canada, only 50 per cent of a capital gain – such as the profit on a stock sale or an investment property – is taxable. There has long been a policy debate over whether that inclusion rate should be increased. Mr. Ernewein said a minimum tax could have an impact.

“There’s at least some reason I would think for speculating that effectively, maybe not directly, but effectively, they might be changing the tax burden on capital gains through the minimum tax,” he said.

While governments frequently signal a budget’s contents in advance, tax changes are generally closely guarded, given their potential to move markets.

Bruce Ball, vice-president of taxation with the Chartered Professional Accountants of Canada, said he is not expecting major changes to personal or corporate tax rates.

He does, however, expect to see a fair number of smaller tax announcements.

“The government does have a lot of unfinished business, things that they’ve talked about before,” he said, pointing to a promised reform of business tax incentives for scientific research and experimental development as an example.

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