TD Economics

2024 Federal Budget

Beata Caranci, SVP & Chief Economist | 416-982-8067
Francis Fong, Managing Director & Senior Economist
James Orlando, CFA, Director | 416-413-3180
April 16, 2024

Highlights

• Budget 2024 re-upped the Liberal government’s efforts to improve affordability for low-and-moderate income
Canadians, with new spending totaling $53 billion earmarked over the five-year horizon ($57 billion including
spending since the FES).

• Programs to fast-track the building of new homes and improve affordability were a key focus, with the cost
amounting to $8.5 billion. Most of the spending is occurring in the middle years of the forecast horizon.

• Details on the national pharmacare program lay the groundwork for a more fulsome program down the road,
but spending in this budget is on the low end at $1.5 billion over five years.

• While the government talked up productivity enhancing policies ($2.4 billion), largely in A.I. and computer infra-
structure, only time will tell if these efforts improve the trajectory of the Canadian economy.

• Some may question this notion given the “surprise” increase in the capital gains inclusion rate to two-thirds on
capital gains over $250,000 and for all capital gains earned by corporations. As an offset on the business side,
the government increased the lifetime capital gains exemption from $1 million to $1.25 million and introduced
a new Entrepreneur’s Incentive.

• The deficit is expected to ease from $40 billion in FY 2023-24 (1.4% of GDP) and $20 billion in 2028-29 (0.6% of
GDP, slightly higher than in the FES). The debt-to-GDP ratio is expected to peak at 42.1% in the current fiscal year,
before moving lower over the remainder of the budget forecast.

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 2024 Federal Budget

establishing a foundation for national pharmacare.

Interestingly, the largest line item was supporting na-
tional defence ($10.7 billion). The government has par-
tially counterbalanced these budget impacts through
a combination of tax increases ($18.2 billion/5 years,
$19.4 billion from a new capital gains inclusion rate)
and a follow through on past promises to improve
government spending efficiency ($15.8 billion/5 years
since Budget 2023).

The higher deficit next year causes the debt-to-GDP

ratio to peak at 41.9%, before easing over the remain-
der of the budget horizon. Meanwhile, the deficit-to-
GDP peaked at 1.4% in the current fiscal year and is
expected to move below the government’s target of 1%
The federal government largely maintained the medi- in 2026-27.
um-term deficit profile it set out in the 2023 Fall Eco-
The budget is expected to pass in Parliament due to
nomic Statement (FES). Thanks in part to a late-year
the existing partnership agreement between the Lib-
upswing in economic growth, the deficit for FY 2023-
eral minority government and the NDP.
24 came in at the $40 billion target, equivalent to 1.4%
of GDP. In what seems to be a familiar pattern, the Strong economy paves way for more
deficit was upgraded, albeit modestly, to $156.3 billion spending
over the next five years, versus a previous estimate of
$146.1 billion in the FES (Chart 1). Ambitious new spend- An upgrade to economic growth partly explains why
ing amounts to a hefty $53 billion ($57 billion including the government was able to increase spending com-
new spending since the FES) over the budget horizon, mitments without breaching its fiscal anchors (Ta-
with the focus on improving housing affordability and ble 1 and 2). Nominal GDP growth for 2023 came in

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 2024 Federal Budget

stronger than expected (2.7% from 2.0%), while 2024 New programs in Budget 2024
was upgraded based on private sector forecasts (3.8%
from 2.5%). From 2025 through 2028, nominal GDP is Budget 2024 continues to build on past efforts related
expected to average 4.1%, slightly less than what was to affordability, with specific focus on housing and
expected in the FES (4.3%), but above our TD Econom- pharmacare. While most of the new programs were
ics view (4.0%). leaked ahead of the budget announcement, details
provided greater context on the cost and timing of the
A better-than-expected GDP performance contributed spending commitments.
to government revenues being upgraded by $8.9 billion
for FY 2023-24 relative to FES. This better starting point Housing: Affordability has been a major focus for the
is assumed to carry forward into future years, leading government, with Budget 2024 adding on to past poli-
to roughly $25 billion in additional fiscal space over the cies. The budget opened with the government’s plan
next five years. In addition, the government is expect- to lease public lands to build new housing, reducing
ing coffers to benefit from $19.4 billion in new tax mea- upfront costs for builders, while attempting to cut red
sures and in particular new capital gains on wealthy tape on permit approval times. The highly contested
Canadians. Importantly, the government isn’t ‘banking’ (Alberta and Ontario) $6 billion program to develop
this fiscal improvement, as new spending more than critical housing infrastructure related to water and
offsets the improvement in revenues. sewers is spread out evenly from 2025-29. But given
the requirements of provinces to eliminate single fam-
New spending measures were consistent with the gov- ily zoning and implement a three-year freeze on devel-
ernment’s announcements prior to the release of Bud- opment charges for larger cities, the uptake, and con-
get 2024. New program spending has been upgraded sequently, the program’s success, remains uncertain.
by $53 billion, spread out evenly over 2025-29. An additional $400 million has also been added to the
Housing Accelerator Fund program, which is believed
Spending as a percent of GDP will remain elevated be- to add an additional 12k homes.
tween 15.5% to 16.0%. That’s well above the 13.2% aver-
age over the 20 years prior to the pandemic and much The measures above will help address housing supply,
closer to the 16% average of the early/mid-1990s – a but on the demand side, there are also several new ini-
time when Canada’s credit rating was under threat. tiatives. The government will increase the withdrawal
limit on the Home Buyers’ Plan, which allows First-Time
Interest cost pressures will continue to challenge the Homebuyers to withdraw $60k from an RRSP to buy
government in the coming years. While the Bank of a home (up from $35k). This will help households en-
Canada (BoC) is expected to start cutting its policy rate hance their down payments (and reduce their mort-
in 2024, the policy path is expected to remain higher gage), but an extra $25k ($50k per household) is only
than previously thought over the coming years. Con- marginally going to move the needle in terms of stimu-
sequently, debt service charges are expected to rise lating sales or prices. Also helping first time home buy-
to approximately $64.3 billion by 2028-29. That’s $3.6 ers is the increase in amortizations for insured mort-
billion more than expected just six months ago. As a gages from 25- to 30-years. This only applies to newly
share of GDP, interest costs are expected to average built homes and given that most housing sales are for
1.8% from 2024-29, about double the rate prior to the existing homes, this will have a minimal impact on our
pandemic. The last time interest costs as a percent of sales/price forecast.
GDP averaged this level was 1966-69, when the BoC
policy rate averaged close to 6%. Interestingly, this On the rental side, the Apartment Construction Loan
was the start of an unrelenting rise in government debt program offers loans to builders that reserve 20% of
costs, which took 40 years to get under control. a rental project to affordable housing has been in-
creased by $15 billion. The total loan program will now
reach $55 billion, with the intent to build 131k rental

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 2024 Federal Budget

units by 2031-32. This is a good start, but our popu-

lation forecast infers that Canada needs 385k – 415k
new rental units over the next five years.

To support renters, the government launched a ‘rent-

ers’ bill of rights’, which isn’t costly, but will provide
useful support, such as a nationwide standard lease
agreement, allowing rental history to be used for cred-
it assessments, and a requirement for landlords to dis-
close past rental pricing. The Canada Greener Homes
Grant to incentivize investment in green home reno-
vations has been renewed with a price tag of $800
million, but this time the focus is on helping lower in-
come homeowners and renters. There is also the $1.5
billion fund to buy existing apartment buildings and
keep them available for Canadians with low income. jor industries, according to Bank of Canada analysis.
This mimics the B.C. Rental Protection Fund (started in ii Given that the government thinks it can achieve the
January 2023), which has been hailed as a proof-of- PBOs housing supply goal, it is banking on the con-
concept. So far, B.C.’s $500 million fund has preserved struction sector reaching a level of productivity that it
700 units, with a goal to secure 2,000 additional units. has never been able to achieve.
These policies add on to the ever-increasing list of ef- While these new supply-side policies likely won’t sig-
forts by the government to increase housing supply nificantly move the needle on affordability, what
in Canada, such as the Tax-Free First Home Savings will have a bigger impact on housing inflation is the
Account and enhanced GST rebate on purpose-built government’s announcements ahead of the budget
rental properties. We’d argue that the government is around changes in population policy. Last year saw
moving in the right direction, by setting a strong foun- the population jump by nearly 1.3 million, with the
dation to spur greater home building activity. majority driven by non-permanent residents. We had
previously called out this policy, which was focused
The issue is that the supply deficit is so great that the
on helping firms fill low wage job vacancies with for-
government’s policies won’t be able to bring afford-
eign workers, without considering the need for housing
ability back down to levels hoped for by Canadians.
(and other) infrastructure around them. The new poli-
We’d note that the pace of building is currently trend-
cies to reduce the number of NPRs, limit immigration,
ing at about 245k units (on a 6-month annualized ba-
and cap the number of international students will not
sis). High financing costs have slowed this from a pace
unwind the negative impact of past policy on afford-
of 270k in 2021, before the BoC started to hike rates.
ability. Rather, it will slow the rapid pace of shelter in-
The PBO estimates that Canada needs to build ap-
flation. The best example can be seen with rent infla-
proximately 181k more units alone per year ($3.87 mil-
tion. Rent price growth is running at 8% annually and
lion new housing units by 2031) to bring the vacancy
this was unlikely to ease much without the government
rate back to historical averages.i We believe the gov-
intervening. Importantly, the new immigration policies
ernment’s new policies objectives will be stunted due
mentioned above will have a big impact, causing our
capacity constraints in the private sector. The number
forecast for rent price growth to decelerate relatively
of construction workers in Canada have consistently
quick to around 4%. This is still high, but closer to his-
comprised 8% of Canada’s labour force since 2011, and
torical averages prior to the recent population surge.
there has been no ability to punch above that share.
This makes some sense given that newcomers tend to Pharmacare/Disability Benefit: The new pharmacare
get into construction at a lesser rate than all other ma- program is budgeted to cost $1.5 billion over the bud-

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 2024 Federal Budget

get horizon, much lower than the expected $1 billion qualifying investments in the Canadian-controlled pri-
per year that was expected prior to the release of the vate corporation (CCPC) up to an additional $2 million.
budget. This program aims to provide coverage for
According to government estimates, only 0.13% of Ca-
contraceptives and diabetes medications. The ques-
nadians will be impacted, who earn an average gross
tion is whether this program grows to include more
income of $1.4 million per year. In addition, they esti-
prescriptions over the coming years. Canadians are
mate only 12.6% of corporations earn capital gains with
spending $27 billion annually on private drug plans, so
an average taxable income of $702,000. Despite the
the current government program is just dipping its toes
supposed small percentage of households and busi-
into the costs related to a universal national plan. A
nesses impacted, the revenue estimated to be gener-
new addition to the budget was the $6.1 billion Canada
ated is significant, amounting to $19.4 billion over
Disability Benefit. This bridges the gap between the ex-
five years. It would have been helpful to know which
isting child and old age security benefits. This will pro-
industries are largely impacted and whether these
vide a maximum of $2.4k per year for low-income per-
corporations are large contributors to investment. For
sons with disabilities between ages 18-64 (estimated
individuals, the usual exemptions still apply, including
600k people).
principal residences and financial assets held in tax-
Productivity: To support AI investment in Canada, the preferred accounts, including RRSPs and TFSAs.
government is allocating $2.4 billion to be spent over
This follows up on previous consideration under then
five years. The intention is to increase AI adoption
Finance Minister Bill Morneau to raise the entire capital
across sectors, help research efforts, and enable busi-
gains inclusion rate. Government ultimately never fol-
nesses to scale-up faster. The majority of the money
lowed through with it then given its potential impact on
will go to build computing infrastructure. The govern-
Canadians at all income levels, but there are broader
ment will also allow firms to write off costs relative to
productivity implications to consider here. Canada is
patents and a host of electronic infrastructure. There
already in the midst of a prolonged slump in capital
is also a $1.8 billion allocation to enhance scientific re-
spending, itself a consequence of slow growth and high
search and improve research coordination across vari-
interest rates and higher tax rates on capital can fur-
ous research groups.
ther disincentivize business owners from re-investing
We won’t mince words on this: Canada’s productivity capital gains back into the economy. Re-focusing the
has been abysmal. It has grown just 0.3% since 2019, higher inclusion rate to high-income individuals along
while U.S. productivity has grown at a robust pace of with the introducing of higher lifetime capital gains
1.5% annually. Low investment is a huge problem. Intel- exemptions and a progressive, graduated rate for
lectual property investment as a share of GDP is three entrepreneurs does go some way in mitigating these
times larger in the U.S. compared to Canada. The gov- negative effects, but this design does not completely
ernment has tried to boost this with prior policies, such remove the disincentive. Consider the decision of an
as tech-driven superclusters in 2018, without any im- entrepreneur deciding where to locate their start-up.
provement in productivity. Considering the entire package of possible tax treat-
ment of both the business and the longer-term treat-
On that front, the biggest surprise in the budget was ment of divestment, a higher tax on that divestment
in the announcement of a new increase to the capital could very well be the straw that breaks the camel’s
gains inclusion rate to two-thirds for annual net capital back and pushes that new firm elsewhere in a globally
gains above $250,000 for individuals and for all capi- competitive environment. To be clear, taxing capital
tal gains earned by corporations. In exchange, the gov- gains at a rate closer to income is consistent with Can-
ernment announced an increase to the lifetime capital ada’s position, “a buck is a buck is a buck”. However,
gains exemption for the sale of small businesses from in our current economic environment, it is at best un-
$1 million to $1.25 million (indexed to inflation thereaf- helpful in promoting capital investment that Canada
ter) and a new Entrepreneur’s Incentive which would desperately needs.
reduce the inclusion rate to one-third for the sale of

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 2024 Federal Budget

Clean Energy: This year’s affordability and cost-of-liv- Bottom Line

ing budget included a focus on the clean energy econ-
omy. Much of the budget reiterated actions already Going into Budget 2024, Minister Freeland had indicat-
taken, including moving existing tax credit legislation ed the government would help create the conditions
through parliament. However, the budget did feature for interest rates to fall. Was that achieved? The results
a new $1 billion for a new 10% EV supply chain invest- are mixed. Using tax increases may dampen the infla-
ment tax credit, which applies to eligible property for tionary force of new spending, but deficits are on track
firms already claiming the clean technology manufac- to widen over the next five years. Moreover, provinces
turing tax credit in 3 segments: EV assembly, battery are ramping up spending and deficits in the near-term,
production, and active cathode production. This new so the overall government sector is still getting in the
credit is primarily concerned with ensuring the entirety BoC’s way. As for the risk to Canada’s AAA credit rat-
of the supply chain locates here in Canada by incentiv- ing, the country is not currently on a negative watch.
izing large incumbents from locating different parts of And given that this budget didn’t stray too far from the
the supply chain here. While the credit is sized at over FES, it shouldn’t change the narrative much around the
$1 billion, much of it is backloaded beyond the forecast credit rating.
horizon. The fiscal impact was estimated at just $80
Having said that, the fiscal plan is still reliant on a
million through 2028-29.
steadily expanding economy, even if modest. Any ma-
Outside of that, the budget also reiterated a commit- jor economic potholes would leave Canada vulnerable
ment by government to bring down energy and mineral to missing the fiscal anchors. While the government
project approval timelines through a re-jigged assess- will tout the potential for its new policies to boost eco-
ment act – this is critical if Canada is to ensure its po- nomic growth though higher productivity, new taxes
sition in global supply chains of goods needed in the on capital gains may run afoul. All told, higher taxes
energy transition. Natural Resources minister Wilkin- won’t be beneficial to investment, something which is
son has already made public comments suggesting sorely needed given the significant underperformance
government aims to bring down mine approval times. in capital spending, meaning it will not improve the
The budget commits to an assessment and permitting trajectory of Canadian economic growth nor boost the
timelines of 2 years or less for non-federally designat- real incomes of Canadians.
ed projects and 5-years or less for federally designated
ones. Importantly, government committed to amend-
ing the impact assessment act while remaining con-
sistent with the UN Declaration on the Rights of Indig-
enous Peoples Act.

Indigenous reconciliation: The federal government lift-

ed the veil on their highly-anticipated Indigenous Loan
Guarantee Program, aimed at helping indigenous com-
munities take equity investments in resource extraction
projects. The program includes $5 billion in loan guar-
antees covering projects across any sector relevant for
economic reconciliation and self-determination. The
budget also includes $16.5 million for capacity build-
ing among indigenous communities in making appli-
cations for loans through the program, which will be
administered by a new subsidiary crown corporation
under the department of finance.

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 2024 Federal Budget

Exhibits

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 2024 Federal Budget

Disclaimer
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are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed
to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial
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