Federal budget won’t move market outlook: economists

Investors anxiously awaiting tomorrow’s federal budget needn’t fear they’ll be up into the wee hours perusing the details.

“For content that will impact investors, both positively or negatively, this is likely to be relatively thin reading,” says CIBC chief economist Avery Shenfeld in a weekly economics report.

For example, the Liberals have essentially already enacted tax policy from their election platform. On details for passive investments, Shenfeld says: “We’re expecting some relief, at least for the accounting profession, in terms of trying to simplify compliance.”

And the finance minister has ruled out an effort to respond directly to the challenge of U.S. tax reform, in favour of a careful analysis, says Shenfeld.

“We’d like to at least see a line committing the government to such an analysis, perhaps also throwing in regulatory issues that impact competitiveness across the border,” he says.

Likewise, Derek Holt, vice-president and head of capital markets economics at Scotiabank, says in a weekly economics report that he’s not expecting major consequences for markets.

Referring to U.S. tax reform, Holt says, “With an election looming next year, the more likely outcome is to expect some powder to be kept dry now in order to respond as desired either this October in the fall update, or about a year from now in the next full budget.”

How Canada can get competitive

The lack of action on Canada’s competitiveness is a potential problem, highlighted in a budget preview report from RBC.

The past year in Canada saw the introduction of higher personal and corporate taxes (though small businesses saw a tax cut), a move to carbon pricing in some provinces and minimum-wage hikes, says RBC—all of which have eroded Canada’s competitiveness.

That’s before even considering U.S. tax reform, which “will threaten Canadian economic growth both in the short and long term,” says RBC.

To rectify Canada’s position, the bank suggests the feds consider their budget initiatives through a competitive lens: “if [any initiative] further harms our competitive position, it should be tossed out,” says RBC.

The bank has its own suggestions for what should be in the budget to tackle competitiveness: smarter regulation, tax relief and full expensing of capital investment—as in the U.S.

That might be wishful thinking.

Holt says this budget will likely be about a limited focus on social policy goals and innovation. For example, the government is expected to reveal initiatives on gender and science.

Benjamin Reitzes, Canadian rates and macro strategist at BMO, says in a weekly financial digest, “From a policy perspective, the recent chatter has surrounded measures to promote gender equality and, from an economic perspective, that could cover issues such as equal pay and labour market participation. What policy levers Ottawa will pull to achieve those goals remain to be seen.”

Says RBC: “Female participation in the workforce in Canada is the highest among G7 countries, and further narrowing the gap with the male participation rate would yield substantial returns, including boosting GDP by up to 4%.”

No noteworthy spending

Shenfeld notes that now isn’t the time for a stimulative boost in government spending, what with an economy running near capacity.

“We still have plenty of infrastructure dollars coming, and potential stimulus from election year budgets in Ontario and Quebec,” he says. “Better to save some federal spending power for the next recession.”

Holt doesn’t expect further stimulus for households. “The massive increase to child benefit payments that occurred from July 2016 onward is the gift that keeps on giving to parents of younger children who fall under the income thresholds, and so further stimulus to the household sector is unlikely.”

Politically, Shenfeld calls this a placeholder budget, because the government will likely wait until closer to 2019 before revealing new spending measures.

Says Shefeld: “If you’re worried about higher taxes on capital gains, hoping for Ottawa to match the U.S. on immediate expensing of capital equipment or advocating something big on the spending side, wait until next year.”

Read the full reports from CIBC, Scotiabank, RBC, and BMO.