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March 29, 2023

Budget 2023: health care, clean energy…and deficits

The Canadian federal government released its 2023 budget yesterday, outlining the policy priorities for the next year onward. In preparation of the budget, the liberal government faces deteriorating economic conditions, leaving less money on the table relative to the last time it provided an economic update in November 2022. However, as is often said in economics, policymakers face unlimited needs under constrained resources. Across the country, labor shortages are hurting the delivery, and sometimes quality, of social, education, and healthcare services that the population needs. With interest rates at their highest level since 2007, housing has rarely been this unaffordable to the average Canadian. Moreover, facing lackluster productivity growth coming out of the COVID-19 pandemic, Canada has to respond to the massive 2022 U.S. Inflation Reduction Act (IRA) in order to attract private investment and develop the clean technologies of the future.

Global market turmoil—what does it mean for Canada?

Clean energy and healthcare take center stage

The bulk of Budget 2023’s new spending goes to healthcare and an ambitious plan to develop clean energy and tackle climate change. In addition to previously announced increases in healthcare transfers to the provinces, the government formally introduced a national Canadian Dental Care Plan in order to improve access to these services, largely paid through private insurance at the moment. However, with acute labor shortages in these industries, it's worth noting that training and retaining workers in health and social workplaces must remain a top priority for all governments.

Perhaps the most ambitious part of the 2023 budget is the Clean Energy Plan ($21B over six years). The goal is to attract private investment in clean technology and electricity, making sure Canada isn't left behind in the global development of industries relevant to the climate transition. Admittedly, it's a tough ask considering the sheer size of the U.S. IRA, at US$369 billion. With the majority of the Canadian plan taking the form of tax credits (for electricity, manufacturing, hydrogen, etc.), it remains to be seen how successful the plan will become, although it’s clearly a step in the right direction.

What about affordability and housing?

A large section of Budget 2023’s new spending had to be introduced due to economic imperatives (competing with the U.S. and other developed nations) or political ones. However, given a downwardly revised economic outlook, other important items such as helping Canadians face inflation or lodging issues have taken a position of lesser importance. Granted, the government reintroduced a one-time goods and services tax (GST) credit for low- and modest-income Canadians (rebranded the grocery rebate) but largely stayed the course on previously announced measures for housing such as the creation of a Tax-Free First Home Savings Account. However, chronic undersupply remains the biggest issue with regard to housing; as such, an update or even an expansion of measures to incentivize home construction such as Budget 2022's Rapid Housing Initiative would have been valuable. With the population growing at its fastest pace in several decades, housing needs remain acute.

Larger deficits ahead of a likely recession

Where does that leave us? It’s hard to argue against the urgent need to address competitiveness and improve healthcare, but the 2023 budget suggests it still results in a larger-than-expected deficit over the forecast horizon (–$40B in fiscal year (FY) 2023/24). While the government previously planned to balance its budget in FY 2027/28, it now expects a $14 billion deficit down the road—with no clear plan to eliminate it. Moreover, the federal debt-to-GDP ratio will rise to 43.5% this year and only slowly decline to 39.9% over the next four years. In itself, that ratio will remain below that of most other developed nations; however, accumulating debt in an elevated interest-rate environment will lead to higher debt service payments down the road, leaving less money available to fund services. Finally, we see downside risks to the economic outlook, with the most likely scenario falling in between the government’s base case and pessimistic case (0.3% and –0.2% real GDP growth in 2023, respectively). The risks that revenue falls short of expectations going into an economic downturn only adds to the uncertainty pertaining to Budget 2023.

Important disclosures

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person.

All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment, or legal advice. Clients and prospects should seek professional advice for their particular situation. Neither Manulife Investment Management, nor any of its affiliates or representatives (collectively Manulife Investment Management) are providing tax, investment, or legal advice.

This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Manulife Investment Management shall not assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment approach, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation doesn’t guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.

A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.

This material has not been reviewed by, and is not registered with, any securities or other regulatory authority, and may, where appropriate, be distributed by Manulife Investment Management and its subsidiaries and affiliates, which includes the John Hancock Investment Management brand.

Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

2818818

Dominique Lapointe, CFA,

Global Macro Strategist, Multi-Asset Solutions Team

Manulife Investment Management

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Clean energy and healthcare take center stage

What about affordability and housing?

Larger deficits ahead of a likely recession

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Global market turmoil—what does it mean for Canada?

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