Freeland’s economic update warns of 2023 recession, announces new tax on corporate share buybacks

Finance Minister Chrystia Freeland delivered a fall economic update Thursday that warns of a potential recession in 2023, presenting two fiscal forecasts based on whether or not that downturn occurs.

The update also announces plans for a new tax on share buybacks and significant incentives for green energy investment aimed at responding to a major package of tax and climate policy reforms approved this year through the U.S. Inflation Reduction Act.

The handful of new spending measures announced Thursday include making all Canada student and apprentice loans permanently interest free, at a cost of $2.7-billion over five years, and $4-billion over six years to automatically issue advance payments of the Canada Workers Benefit to people who had qualified the previous year.

But the overall message that Ms. Freeland sought to deliver is that the federal government is preparing for harder times ahead.

“We are keeping our powder dry,” she said in her speech to the House of Commons.

In what the government views as the most likely scenario, Canada’s economy will continue to grow modestly through next year and the federal deficit for this fiscal year will be $36.4-billion, an improvement over the $52.8-billion deficit forecast in the April budget, driven in large part by higher than expected inflation. The update’s baseline scenario projects a $4.5-billion surplus by 2027-28.

However, Thursday’s report also includes a “downside” scenario in which the economy slides into recession in 2023, which would push the deficit for this fiscal year to $49.1-billion and erase the forecasted return to balanced books.

“It’s important, as both the Deputy Prime Minister and the Minister of Finance, that I’m honest with Canadians about the challenges that lie ahead,” said Ms. Freeland. “Interest rates are rising as the central bank steps in to tackle inflation. And that means our economy is slowing down. … Anyone who claims they could prevent the challenges ahead is wrong.”

The new spending announced in the update adds up to $22.1-billion over six years, or $3.7-billion a year on average. The baseline scenario adds a further $8.5-billion over six years to cover “pressures that are anticipated to materialize in the near term.” That is separate from the “downside” scenario.

The new measures specifically related to boosting business investment are worth $10.9-billion over six years. They include $250-million over five years for a package of new job training programs. There is also a new Investment Tax Credit for Clean Technologies that will offer a refundable tax credit equal to 30 per cent of the capital cost of investments in energy projects such as solar, wind and small nuclear reactors. The Finance Department is planning consultations to include labour conditions in order to access the full credit.

The department will also consult on an Investment Tax Credit for Clean Hydrogen, which was first announced in the April budget. To encourage faster approval of major resource projects, the update announced $1.28-billion over six years for the Impact Assessment Agency of Canada and the Canada Energy Regulator to increase their workload capacity.

The proposed tax on share buybacks had not previously been signalled and is sure to generate significant policy debate, as it has south of the border.

The U.S. Inflation Reduction Act includes a 1-per-cent excise tax on stock buybacks, which refers to situations when companies use excess cash to purchase their own shares. U.S. Democrats said the tax will raise billions in new revenue while also encouraging companies to put excess cash toward investment and wages. The economic impact of the tax and buybacks in general is a matter of considerable policy debate.

Ms. Freeland’s update proposes a 2-per-cent tax that would apply on the net value of all types of share buybacks by public corporations in Canada. The government says details of the new tax will be announced in the 2023 budget and would come into force on Jan. 1, 2024.

“We’re taxing share buybacks, to make sure that large corporations pay their fair share, and to encourage them to reinvest their profits in workers and in Canada,” Ms. Freeland said in her speech.

Five years ago, the members of the S&P/TSX 60 Index – some of Canada’s biggest companies – spent nearly twice as much cash paying dividends to shareholders as they did repurchasing their shares. Now, stock buybacks outpace dividend payments.

The TSX 60 companies spent $67.1-billion in the past 12 months repurchasing their common shares, according to S&P Global Market Intelligence. That compares to $26.1-billion five years ago.

Robert Asselin, senior vice-president of policy for the Business Council of Canada, said he was skeptical about Ms. Freeland’s vow of fiscal prudence.

“They are spending about 45 per cent of the revenue windfall they are getting for a very inflationary economy. For me, that is not fiscal prudence,” Mr. Asselin said in an interview, adding all of their windfall should have been directed at deficit reduction.

He also said the measures being taken to advance Canadian competitiveness vis-à-vis the United States are “very preliminary first steps.”

“At least they understand the magnitude of the problem and, to their credit, they say it was a first step. They will come back with more. But in itself, I don’t think these measures will bring us where we need to be on competitiveness.”

He said the measures on affordability, in the statement, struck him as a political response to concerns about inflation given the government has already made significant investments in its past two budgets to help with affordability concerns.

“So I am not sure it was needed, to be honest, but I think they felt the political pressure to be seen as helping people who needed help.”

Thursday’s economic update projects federal revenue for the current fiscal year will be $445.9-billion, an 8-per-cent increase over the previous year, while program expenses will be $437.8-billion, a nearly 7-per-cent decrease.

Randall Bartlett, senior director of Canadian economics with Desjardins, agreed with the minister’s comment that the government is largely keeping its powder dry in the event of a 2023 recession. He noted, however, that the update implies more spending announcements are coming in the 2023 budget that are not yet booked.

“When you layer those on top of that, if there is an economic downturn, it means that the deficit outlook is going to be that much deeper,” he said.

With reports from Ian Bailey and David Milstead

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