Finance Minister Chrystia Freeland says clean energy and green technology spending may not have been the big-ticket items of the 2023 federal budget if it weren’t for the need to compete with infrastructure spending in the United States.

After she tabled the budget in the House of Commons Tuesday, Freeland told CTV’s Power Play host Vassy Kapelos that her government has been “at this for a long time,” campaigning on “the economy and the environment going together.”

Still, she said she doesn’t think it would have invested in a clean economy at the scale of the 2023 budget if it weren’t for the need to compete with the Inflation Reduction Act, which offers billions of dollars in energy incentives south of the border.

“I don’t think we would have done as much, had the IRA not been introduced,” Freeland said, adding the Liberal government has been pushing for clean economy policies for years, and citing the carbon price as an example.

“It’s also true that the U.S. plan, the IRA, is a game changer,” she also said. “They have put a ton of money on the table, and it was really important for us, having been ahead in this race, not to fall behind.”

Freeland discusses the 2023 federal budget in the video at the top of this article.

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The federal government is banking on a suite of new tax credits, a clean electricity grid and the carbon tax to spur the transition to a clean economy and counter vast subsidies rolled out by the United States that risk pulling capital south of the border.

In its budget unveiled Tuesday, Ottawa announced $20.9-billion over five years, the majority of which will go to new investment tax credits for clean electricity, clean hydrogen and clean technology manufacturing. It also expanded eligibility for tax credits for clean technology adoption and carbon capture, utilization and storage (CCUS).

The budget shows Prime Minister Justin Trudeau’s government betting on investment tax credits to compete with incentives rolled out by the Biden administration as part of its US$369-billion Inflation Reduction Act. The spending document also shifts the Trudeau government’s focus from climate change mitigation to the economic incentives required to meet emissions reduction targets.

In her speech to Parliament, Finance Minister Chrystia Freeland said new fiscal measures would ensure Canada’s economy is not left behind during the clean transition, and position the country to benefit from new critical supply chains among allies that cut out unreliable dictatorships.

“We will ensure that Canada seizes the historic opportunity before us,” she said.

The majority of the investment tax credits end in 2034 – lining up with Canada’s goal for a net-zero electricity grid by 2035.

About 83 per cent of Canada’s electricity supply comes from non-emitting sources. To bring that up to 100 per cent within 12 years, the government will implement a 15-per-cent refundable tax credit available to public, private and Indigenous power producers. It can be used to cover large-scale hydrogen and nuclear power projects, some abated natural-gas-fired generation, and equipment for electric transmission between provinces and territories.

The budget estimates the cost of the clean electricity tax credit over the next five years at $6.3-billion. The goal is to encourage electric utilities to build an east-west grid.

On top of that, as promised in the Fall Economic Statement, the budget introduces a clean hydrogen refundable tax credit which will cover between 15 per cent and 40 per cent of eligible project costs. The tax credit is estimated to cost $5.6-billion over five years.

The budget also rolls out a 30-per-cent clean technology manufacturing tax credit aimed at spurring business investment in areas such as the extraction, processing and recycling of critical minerals. It is expected to cost the treasury $4.5-billion over five years.

The clean electricity tax credit is in addition to a previously announced clean technology tax credit that covers 30 per cent of private-sector investments in areas such as wind, solar and small modular nuclear reactors. Eligibility for that program was expanded in this budget and its five-year cost is estimated at $6.7-billion. Companies cannot draw on both tax credits for the same project.

And the budget extends eligibility for the CCUS tax credit, increasing its costs by $516-million over five years to a total of $4.1-billion.

The federal government promised a substantive response to the U.S. Inflation Reduction Act in the budget in large part because of serious concerns in the business community that the Biden administration’s measure would drive investment out of Canada. The American spending also pushes protectionist Buy America policies that Mr. Trudeau’s government is threatening to mirror.

The budget says Canada is considering introducing new tit-for-tat parameters in the tax credits that would only grant foreign companies the equivalent access to tax credits that Canadian companies are eligible for in their respective countries. The move is meant to give Canada leverage as it tries to secure carve-outs from protectionist U.S. policies.

Robert Asselin, a senior vice-president with the Business Council of Canada, told The Globe and Mail that the path charted by Ms. Freeland is “generally good,” in particular the focus on greening the electricity grid.

“It’s foundational to everything else. If we don’t have enough clean electricity, we’ll struggle to decarbonize the economy,” he said, adding that the government got “the big things right.”

He said that investment-based tax credits give the government more predictability for its long-term budgeting and that copying the production tax credits offered by the U.S. would have “blown the bank.”

However, Mr. Asselin said the budget falls short when it comes to incentives to develop new economic sectors. “There’s nothing on research and development, nothing on industrial research,” he said.

Chris Severson-Baker, the executive director of the Pembina Institute, a think tank, agreed that the focus on a cleaner grid is essential to a greener economy. But, he added: “We’re not done.”

“There certainly will be a role for future budgets to keep moving forward to get to net zero by 2050.”

The Pathways Alliance, whose membership covers about 95 per cent of oil sands production, welcomed the expansion of CCUS supports but said it’s still waiting on a better understanding of the government’s intentions for carbon contracts for differences. The contracts, details of which have been promised by Ottawa, would provide a predictable price on carbon pollution and carbon credits, thereby ensuring that businesses can plan long-term investments in decarbonization and clean technologies.

Not yet accounted for amid the billions in new spending announced Tuesday is how much money the federal government paid to convince Volkswagen to build its first overseas electric vehicle battery manufacturing “gigafactory” in Ontario. Government officials told reporters the spending is accounted for within the budget but declined to disclose the cost. A formal announcement is expected in about a month.

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Canada’s Liberal government is in a tight spot heading into the 2023 federal budget.

A year of surging prices and rising interest rates has put fresh stress on Canadian households struggling to make ends meet.

Landmark investments in the green transition from the United States have turned up the heat on the Canadian government as it looks to stay competitive with the economic juggernaut south of the border.

And after years of higher spending and a surging recovery from the COVID-19 pandemic, storm clouds are gathering in the economy, putting new scrutiny on government coffers.

Chrystia Freeland, the government’s finance minister and deputy prime minister, has pledged that the 2023 budget will include “targeted” support to help vulnerable Canadians but will not “pour fuel on the fire of inflation.”

Can Ottawa thread the needle through the competing pressures and economic uncertainty while still meeting Canadians’ ends?

Here’s what economists think.

The federal budget comes at a “challenging time” for Freeland and Prime Minister Justin Trudeau, says Sahir Khan, vice-president at the University of Ottawa’s Institute of Fiscal Studies and Democracy.

Now in their third term of governing, Khan tells Global News that the Liberals’ second budget of their current mandate is set to arrive amid a “change in context.”

He says the Liberals have had the “good fortune” of inheriting large revenue surprises in previous budgets, which has helped the government spend more while staying fiscally sustainable.

But government revenues are set to dry up with the economy slowing, Khan warns, even as spending priorities mount.

Among the pressures facing the government are commitments already made on a new health-care accord with the provinces, defence spending both at home and in Ukraine and the green energy transition.

“Storm clouds” are gathering for a possible recession on the horizon, Khan notes, and the federal government will feel pressure to “keep some of their powder dry” for emergency spending to resuscitate the economy if the worst-case scenarios come to pass.

Randall Bartlett, senior director of Canadian economics at Desjardins, says that even with the first quarter of the year off to a stronger start than most economists anticipated, the government still finds itself in a bind with uncertainty about how much the economy slows this year.

“It’s a challenging environment to do budget planning overall,” he tells Global News.

A surging economy through the COVID-19 recovery helped push government revenues higher and Ottawa spent much of this money on support for Canadians hit hard by the pandemic.

While those programs have largely wound up, a recent analysis from the Bank of Montreal showed that government spending per capita is still 11.3 per cent higher than in the pre-pandemic era.

Bartlett says that while government revenues generally see a boost amid high inflationary periods, the federal government is about to experience the “insidious” nature of rising price pressures on the downturn.

Government spending supports that are indexed to inflation, such as Old Age Security (OAS), are now costing more, just as subsiding inflation and a cooling economy are set to slow government revenue growth, he says.

“We’re going to continue to see those knock-on effects of high inflation on the spending side, even as those tailwinds to revenues start to fade,” Bartlett says.

But Bartlett adds that the government is facing “a lot of political pressure” to continue to spend to support vulnerable households.

Some economists worry that too much direct financial support from the federal government will end up fuelling inflation, as Canadians use their contributions to buy more goods and services and end up stimulating the economy all over again.

Top officials at the Bank of Canada, which has raised its benchmark interest rate aggressively over the past year to cool the economy and tame inflation, have said that letting up on pandemic-era stimulus sooner could have limited inflation.

In order to avoid driving inflation higher with government support, Ottawa will need to be “well-targeted” in its spending plans, says Lindsay Tedds, associate professor of economics at the University of Calgary.

Rather than sweeping tax cuts, which would lessen the burden on households but could inadvertently spur more spending, Tedds tells Global News that the Liberals could again double the GST credit or top up guaranteed income supplements.

Doing it this way would ensure government spending goes more towards Canadians who need it to make ends meet on the basic necessities, she says.

“We’re talking about just trying to get them through being able to pay rent and buy groceries and things like that. So it doesn’t have an inflationary impact,” she says.

Khan says the government could also “stagger” its promises, with spending ramping up in years three, four and five of its budget horizon. Doing so could allow the Liberals to keep money back to respond to emergencies while also showing Canadians they’re listening to affordability concerns, he says.

Economists who spoke to Global News say the federal government is feeling pressure to respond to the U.S.’s Inflation Reduction Act, which rolled out a number of incentives for companies to make investments in the green economy south of the border.

Despite restrictions on the government coffers, the Liberals will need to put a “down payment” on some of the clean energy priorities it has talked about for years, Khan says.

If Ottawa does not roll out its own incentives to compete with the U.S., Canada risks losing jobs and investment from large-scale companies in the green economy, he argues.

“They will suck that capital and those jobs out if we don’t look like we’re doing the same for our industry,” Khan says of the U.S.

“There’s going to have to be something actually quite tangible in this budget. It can’t just all be narrative.”

Tedds agrees and notes that announcements on measures like carbon capture and storage will be attractive in Alberta.

Ottawa can’t necessarily go toe-to-toe with American capital, however, and Bartlett says the government should focus spending on industries where Canada has a “comparative advantage.”

He highlights critical minerals as one such area where Canada could position itself in the green economy.

Tedds says Canadians should “moderate their expectations” for the upcoming budget.

While it’s possible Canada avoids the worst of the economic downturn, the outlook is “too unpredictable” for the Liberal government to offer significant relief or big-ticket items in this budget, she says.

Tedds notes she’d like to see an overhaul of the employment insurance program to ensure that when and if Canada’s jobless rate starts to rise, the government is ready to support Canadians through the downturn.

“We really should be recession-ready. There are some sectors that are really hurting, tech being one of them. We’ve seen massive layoffs, especially here in Calgary. And so there are people hurting,” she says.

Despite all the pressures facing the Liberals in their third term in office, Khan says the Trudeau government will need to demonstrate that it’s still “got some fire in its belly” and can deliver results for Canadians.

“I think this time it’s going to be less about aspiration and more about perspiration,” he says.

As opposed to a newly elected government delivering a budget of change in its first spending plans, the Liberals will have to prove they still have ideas and can make progress on projects that matter to Canadians, Khan says.

He expects the Liberals will devote a fair bit of the budget text to the already announced health-care spending announced in February as a “victory lap” of sorts.

If the government wants to hit every spending priority while maintaining the federal debt-to-GDP ratio — a key fiscal guardrail watched not only by the government but by credit rating agencies and international observers — it may have to find new sources of funding.

Bartlett says that with the revenue sources drying up and the Liberals under pressure to maintain their fiscal guardrails, tax hikes could be on the table, likely aimed at corporations or higher-income earners.

Otherwise, he says the Liberals might have “champagne tastes,” but they’re working with a “beer bottle budget.”

“They’re not going to get everything on their wish list,” he says. “And so they need to they need to be mindful of that and exercise some genuine prudence.”

— with files from Global News’ Touria Izri

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