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A snapshot of the Canadian Federal Budget 2016-17

Posted on February 5, 2018 by Jivan Sanghera

As expected, the Federal Budget is largely focused on the delivery of the Liberal government’s election platform commitments.
The Budget is well designed to support the middle class, the previously announced middle class tax cut and related measures, investments in a range of infrastructure projects, social housing, and additional support for low-income seniors. In addition, the Government is moving forward with an array of small measures designed to appeal to a range of stakeholders.

A modest amount of assistance is provided to regions and workers most affected by the decline in commodity prices. The key element is an extension of Employment Insurance benefits in the 12 regions that have experienced the sharpest increase in unemployment.
The economic impact may be important and, with a stronger start to 2016 for the Canadian economy, that should reduce the odds of a cut by the Bank of Canada.
According to Scotia Bank, the next move should be a rise in interest rates, but only in mid-2017.
If the economic impacts are as large as those put forward by the Government, the output gap could well be closed by the end of 2017. This, in conjunction with a stronger start to the year and higher commodity prices, should eliminate the odds of a cut in the Bank of Canada’s policy rate going forward. This could provide some support to the Canadian dollar.
Some key points:
- Deficits of roughly $29 billion (1.4% of GDP) are projected for each of the next two fiscal years, narrowing to a $14.3 billion shortfall (0.6% of GDP) by fiscal 2020-21 (FY21).
- The federal debt is expected to rise from 31.0% of GDP as of March 2015 to a peak of 32.5% of GDP during FY16.
- There is a significant increase in program expenditures in the current plan. From FY16 to FY18, the planned rise in program spending totals almost $51 billion, contrasting with the $5½ billion increase over the five years to FY15. Policy measures total $11 billion in FY17 and $13.5 billion in FY18.
- The Government’s estimate of the growth impact of its Budget measures is 0.5% per year for FY17 and FY18, is likely overly optimistic, but the effect is still probably substantial.
- The government’s market debt is expected to rise by $37 billion in FY17, after a $20 billion increase this year.

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