Fall Economic Statement: Deficits, Housing and Carbon in the Spotlight

Canada's Liberal government today pledged to keep a lid on budget deficits and avoid exacerbating central bank efforts to slow inflation back to its preferred 2% target.

The promise made comes as sharply higher borrowing costs are expected to lead to a doubling of the government's debt-financing charges, and to weigh on household consumption for the coming years as homeowners renew mortgages at steeper rates.

In the Fall Economic Update, Finance Minister Chrystia Freeland predicted Canada would avoid a recession although face a period of subdued growth. The unemployment rate, she said, is expected to peak in the second quarter at 6.5% from its current 5.7% level.

The Liberal government would ensure the budget deficit for the current fiscal year, ending March 31, 2024, doesn't exceed $40.1 billion, and lower the debt-to-gross domestic product ratio after it peaks at 42.7% in 2024-25, she said. Canada is expected to record annual budget deficits in the $40 billion range until 2026-27.

"We are taking care not to feed inflation -- by carefully targeting new investments towards the priorities of Canadians today, and towards the future growth that makes our finances sustainable," she said in a speech to lawmakers. Earlier Tuesday, Statistics Canada reported that inflation slowed in Canada to 3.1% in October, compared to 3.8% in the previous month and a peak of 8.1% in June of 2022.

"The single biggest challenge right now is finding the balance in making the necessary investments for Canadians, while ensuring our plan is fiscally responsible. We have found that balance," she said.

Key investments in the report include measures aimed at accelerating construction of new homes, in an effort to find residences for Canada's fast-growing population and wrestle down shelter costs. Overall, Freeland unveiled new government spending of over 10 billion Canadian dollars, or the equivalent of $7.2 billion, for this fiscal year and the next two.

Homes and Action on Short-Term Rentals for Housing Affordability

The government is also pushing to increase housing supply by targeting Airbnbs and other short-term rentals that keep homes off the market through tax action. "The federal government intends to deny income tax deductions for expenses incurred to earn short-term rental income, including interest expenses, in provinces and municipalities that have prohibited short-term rentals," the statement said, "In addition, the federal government is taking action to support municipalities that are cracking down on non-compliant short-term rentals. The 2023 Fall Economic Statement proposes $50 million over three years, starting in 2024-25, to support municipal enforcement of restrictions on short-term rentals. This will support municipalities with strict regulatory regimes that are having a significant and measurable impact in returning short-term rentals back to the long-term housing market."

Canada Mortgage Bond Program Debt Backstop

The government also said would begin acquiring up to half of new debt issued through the Canada Mortgage Bond program, starting as early as February, 2024.

Earlier this year, Canada said it wanted to consult with market participants about the future of the Canada Mortgage Bond program, with an eye toward bringing CMBs -- which are issued by state-owned Canada Mortgage and Housing Corp. -- under the main Government of Canada borrowing program. This was due to concerns about the cost to issue the mortgage bonds relative to Government of Canada debt, even though both are backed by the state.

Just two months ago, Canada said it would boost the annual limit for CMB issuance to $60 billion in an effort to unlock financing for the construction of rental apartments to boost much-needed housing supply.

In Canada's economic update, introduced to the country's parliament on Tuesday, the government said it would be prepared to acquire up to $30 billion of the bonds to help backstop the market. The decision, the government said, reflects "the objective of supporting stable, cost-effective funding for mortgage lenders."

Clean Energy Tax Credits

On the energy front, to reduce biowaste and support new affordable electricity and heat generation in Canada, the economic statement proposes to expand eligibility for the 30% Clean Technology investment tax credit to include systems that produce electricity, heat, or both electricity and heat from waste biomass. "This expansion of the Clean Technology Investment Tax Credit would be available to businesses investing in eligible property that is acquired and becomes available for use on or after the date of the 2023 Fall Economic Statement," the statement said.

Carbon Contracts

To support clean energy, the government is also launching carbon contracts for difference (CCfDs) through a $15 billion Canada Growth Fund. "Carbon contracts for difference will backstop the future price of carbon and provide predictability to businesses in order to de-risk important emission-reducing projects," the statement said, "the Canada Growth Fund will be the principal federal entity issuing carbon contracts for difference. The Canada Growth Fund will allocate, on a priority basis, up to $7 billion of its current $15 billion in capital to issue all forms of contracts for difference and offtake agreements."