The federal Liberal government has released Budget 2024. Among the key items for Canadian investors to follow are initiatives on housing, clean energy and “tax fairness.”
Titled “Fairness for Every Generation,” the document projects federal public debt charges of 64.3 billion dollars in 2028-29, up from 35 billion in 2022-23, with new spending to improve the country’s housing supply and social programs.
While the debt figures around the budget may seem daunting, “The short-term macroeconomics impact of this budget will be basically null,” assesses Jules Boudreau, senior economist at Mackenzie Investments, “It’s an austere budget in terms of net new spending, at least compared to the budgets of recent years. Accumulated deficits aren’t much increased, and there’s no big stimulus measure like last year’s 'grocery rebate'.”
New Taxes for High Earners
To fund the new spending going forward, the budget includes an increase in taxes on capital gains for Canada’s highest earners by increasing the inclusion rate on capital gains realized above $250,000 and on all capital gains realized by corporations and trusts from one-half to two-thirds. “The tax increases are salient, but shouldn’t have an immediate impact on spending in the Canadian economy,” says Boudreau. Affecting long-term growth, however, an increase in capital gains inclusion “will probably be a drag in investment,” he notes.
“The good news is that Canadians will have up to $250,000 per year where they can still benefit from a 50% inclusion rate,” reminds Frank DiPietro, assistant vice president at Mackenzie Investments, “Also, capital gains from the sale of a principal residence continue to be exempt from tax.”
Housing Benefits for Builders, First-Time Buyers
One major expense in the budget is the promise to build 3.87 million homes by 2031. The government also proposes increasing the capital cost allowance rate for apartments from 4% to 10%, allowing builders to increase after-tax returns on investment. First-time homebuyers may also benefit from the budget’s plan to extend mortgage amortization to 30 years.
Boudreau, however, doesn’t see the initatives tilting the scales enough to fix supply problems in Canada: “The housing plan is a nothingburger, and won’t do much to loosen land and housing constraints in Canada, the chief force holding back productivity growth,” he says, “The federal government can’t do much on the housing supply side, which is mostly in the hands of provincial and local governments. The decrease in non-permanent residents over the next few years will have an effect on housing demand, but that was announced long ago.”
Clean Energy Commitments
Another major pledge in the budget includes more than $800 million over five years to support the direct installation of energy efficiency retrofits for Canadian households with low- to median incomes.
For businesses, the budget proposes a 10% investment tax credit on the cost of buildings used in key segments of the electric vehicle supply chain, including electric vehicle assembly, and electric vehicle battery production.
“The government is going all-in on supporting electric vehicle (EV) manufacturing,” says Boudreau. But what impact will this have on the Canadian economy? “While the slew of programs and subsidies will create a few high-paying (but costly for the government) jobs,” he says, “its impact on long-term economic growth is uncertain, especially with the U.S. government competing directly with Canada’s industrial plan.”
Is Canada Still on for an Interest Rate Cut?
Boudreau says the impact on long-term prospects for the Canadian economy from the budget may be "muted." “This budget won’t derail the Bank of Canada’s plans to cut rates over the coming months, and shouldn’t have an impact on either Canadian interest rates or the Canadian dollar,” he says, “Fears of a loss of Canada’s AAA credit rating are assuaged.”
