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Ottawa gives $20.9-billion over five years in tax credits to stay competitive with U.S. on clean economy spending

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Deputy Prime Minister and Minister of Finance Chrystia Freeland receives applause as she delivers the federal budget in the House of Commons on March 28.Sean Kilpatrick/CP

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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Here is Trump economy: Slower growth, higher prices and a bigger national debt

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If Donald Trump is re-elected president of the United States in November, Americans can expect higher inflation, slower economic growth and a larger national debt, according to economists.

Trump’s economic agenda for a second term in office includes raising tariffs on imports, cutting taxes and deporting millions of undocumented migrants.

“Inflation will be the main impact” of a second Trump presidency, Bernard Yaros, lead US economist at Oxford Economics, told Al Jazeera.

“That’s ultimately the biggest risk. If Trump is president, tariffs are going up for sure. The question is how high do they go and how widespread are they,” Yaros said.

Trump has proposed imposing a 10 percent across-the-board tariff on all imported goods and levies of 60 percent or higher on Chinese imports.

During Trump’s first term in office from 2017 to 2021, his administration introduced tariff increases that at their peak affected about 10 percent of imports, mostly goods from China, Moody’s Analytics said in a report released in June.

Those levies nonetheless inflicted “measurable economic damage”, particularly to the agriculture, manufacturing and transportation sectors, according to the report.

“A tariff increase covering nearly all goods imports, as Trump recently proposed, goes far beyond any previous action,” Moody’s Analytics said in its report.

Businesses typically pass higher tariffs on to their customers, raising prices for consumers. They could also affect businesses’ decisions about how and where to invest.

“There are three main tenets of Trump’s campaign, and they all point in the same inflationary direction,” Matt Colyar, assistant director at Moody’s Analytics, told Al Jazeera.

“We didn’t even think of including retaliatory tariffs in our modelling because who knows how widespread and what form the tit-for-tat model could involve,” Colyar added.

‘Recession becomes a serious threat’

When the US opened its borders after the COVID-19 pandemic, the inflow of immigrants helped to ease labour shortages in a range of industries such as construction, manufacturing, leisure and hospitality.

The recovery of the labour market in turn helped to bring down inflation from its mid-2022 peak of 9.1 percent.

Trump has not only proposed the mass deportation of 15 million to 20 million undocumented migrants but also restricting the inflow of visa-holding migrant workers too.

That, along with a wave of retiring Baby Boomers – an estimated 10,000 of whom are exiting the workforce every day – would put pressure on wages as it did during the pandemic, a trend that only recently started to ease.

“We can assume he will throw enough sand into the gears of the immigration process so you have meaningfully less immigration, which is inflationary,” Yaros said.

Since labour costs and inflation are two important measures that the US Federal Reserve weighs when setting its benchmark interest rate, the central bank could announce further rate hikes, or at least wait longer to cut rates.

That would make recession a “serious threat once again”, according to Moody’s.

Adding to those inflationary concerns are Trump’s proposals to extend his 2017 tax cuts and further lower the corporate tax rate from 21 percent to 20 percent.

While Trump’s proposed tariff hikes would offset some lost revenue, they would not make up the shortfall entirely.

According to Moody’s, the US government would generate $1.7 trillion in revenue from Trump’s tariffs while his tax cuts would cost $3.4 trillion.

Yaros said government spending is also likely to rise as Republicans seek bigger defence budgets and Democrats push for greater social expenditures, further stoking inflation.

If President Joe Biden is re-elected, economists expect no philosophical change in his approach to import taxes. They think he will continue to use targeted tariff increases, much like the recently announced 100 percent tariffs on Chinese electric vehicles and solar panels, to help US companies compete with government-supported Chinese firms.

With Trump’s tax cuts set to expire in 2025, a second Biden term would see some of those cuts extended, but not all, Colyar said. Primarily, the tax cuts to higher earners like those making more than $400,000 a year would expire.

Although Biden has said he would hike corporate taxes from 21 percent to 28 percent, given the divided Congress, it is unlikely he would be able to push that through.

The contrasting economic visions of the two presidential candidates have created unwelcome uncertainty for businesses, Colyar said.

“Firms and investors are having a hard time staying on top of [their plans] given the two different ways the US elections could go,” Colyar said.

“In my entire tenure, geopolitical risk has never been such an important consideration as it is today,” he added.

 

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China Stainless Steel Mogul Fights to Avoid a Second Collapse

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Chinese metal tycoon Dai Guofang’s first steel empire was brought down by a government campaign to rein in market exuberance, tax evasion accusations and a spell behind bars. Two decades on, he’s once again fighting for survival.

A one-time scrap-metal collector, he built and rebuilt a fortune as China boomed. Now with the economy cooling, Dai faces a debt crisis that threatens the future of one of the world’s top stainless steel producers, Jiangsu Delong Nickel Industry Co., along with plants held by his wife and son. Its demise would send ripples through the country’s vast manufacturing sector and the embattled global nickel market.

 

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Why Trump’s re-election could hit Europe’s economy by at least €150 billion

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A Trump victory could trigger a 1% GDP hit to the eurozone economy, with Germany, Italy, and Finland most affected. Renewed NATO demands and potential cessation of US aid to Ukraine could further strain Europe.

The potential re-election of Donald Trump as US President poses a significant threat to the eurozone economy, with economists warning of a possible €150 billion hit, equivalent to about 1% of the region’s gross domestic product. This impact stems from anticipated negative trade repercussions and increased defence expenditures.

The recent attack in Butler, Pennsylvania, where former President Trump sustained an ear injury, has boosted his re-election odds. Prediction markets now place Trump’s chances of winning at 71%, a significant rise from earlier figures, while his opponent, Joe Biden, has experienced a sharp decline, with his chances dropping to 18% from a peak of 45% just two months ago.

Rising trade uncertainty and economic impact from tariffs

Economists James Moberly and Sven Jari Stehn from Goldman Sachs have raised alarms over the looming uncertainty in global trade policies, drawing parallels to the volatility experienced in 2018 and 2019. They argue that Trump’s aggressive trade stance could reignite these uncertainties.

“Trump has pledged to impose an across-the-board 10% tariff on all US imports including from Europe,” Goldman Sachs outlined in a recent note.

The economists predict that the surge in trade policy uncertainty, which previously reduced Euro area industrial production by 2% in 2018-19, could now result in a 1% decline in Euro area gross domestic product.

Germany to bear the brunt, followed by Italy

Germany, Europe’s industrial powerhouse, is expected to bear the brunt of this impact.

“We estimate that the negative effects of trade policy uncertainty are larger in Germany than elsewhere in the Euro area, reflecting its greater openness and reliance on industrial activity,” Goldman Sachs explained.

The report highlighted that Germany’s industrial sector is more vulnerable to trade disruptions compared to other major Eurozone economies such as France.

After Germany, Italy and Finland are projected to be the second and third most affected countries respectively, due to the relatively higher weight of manufacturing activity in their economies.

According to a Eurostat study published in February 2024, Germany (€157.7 billion), Italy (€67.3 billion), and Ireland (€51.6 billion) were the three largest European Union exporters to the United States in 2023.

Germany also maintained the largest trade surplus (€85.8 billion), followed by Italy (€42.1 billion).

Defence, security pressures and financial condition shifts

A Trump victory would also be likely to bring renewed defence and security pressures to Europe. Trump has consistently pushed for NATO members to meet their 2% GDP defence spending commitments. Currently, EU members spend about 1.75% of GDP on defence, necessitating an increase of 0.25% to meet the target.

Moreover, Trump has indicated that he might cease US military aid to Ukraine, compelling European nations to step in. The US currently allocates approximately €40bn annually (or 0.25% of EU GDP) for Ukrainian support. Consequently, meeting NATO’s 2% GDP defence spending requirement and offsetting the potential reduction in US military aid could cost the EU an additional 0.5% of GDP per year.

Additional economic shocks from Trump’s potential re-election include heightened US foreign demand due to tax cuts and the risk of tighter financial conditions driven by a stronger dollar.

However, Goldman Sachs believes that the benefits from a looser US fiscal policy would be marginal for the European economy, with by a mere 0.1% boost in economic activity.

“A Trump victory in the November election would likely come with significant financial market shifts,” Goldman Sachs wrote.

Reflecting on the aftermath of the 2016 election, long-term yields surged, equity prices soared, and the dollar appreciated significantly. Despite these movements, the Euro area Financial Conditions Index (FCI) only experienced a slight tightening, as a weaker euro counterbalanced higher interest rates and wider sovereign spreads.

In conclusion, Trump’s potential re-election could have far-reaching economic implications for Europe, exacerbating trade uncertainties and imposing new financial and defence burdens on the continent.

 

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