(Ottawa) Did the federal government have a choice? The answer is no. Except that once again, the Trudeau-Freeland administration forgets the zero deficit to get there and shovels the biggest bill in the future.
The government had no choice, it absolutely had to respond to the major offensive of the Americans to take the turn of the green economy, offensive which is in the badly named Inflation Reduction Act (IRA) American.
The government had no choice, it is today that the green economy of tomorrow is written, today that multinationals choose in which countries they will invest, in particular for the automotive sector1. And with the mountain of IRA grants, the US now looks like a vacuum cleaner for green investments.
The Trudeau government does not go out of its way to respond. It will pay out $82.7 billion in various tax credits over 11 years for green energy, electric car batteries, clean hydrogen, clean technology and carbon capture projects.
Are you investing 10 million in a wind project? Ottawa gives you a tax credit of 30% of the sum or in other words, the project costs you 3 million less. wow!2
Even state corporations, such as Hydro-Québec, are entitled to their candy, this time up to 15% of the investment, whether it concerns renovations of power stations, wind projects or new dams, located in Quebec or, who knows, in the waters of the Churchill River, in Newfoundland…
There is no doubt that Pierre Fitzgibbon will be happy with the announcement, he who is trying by all means to attract manufacturers of battery components, in particular cathodes, to Quebec. The 30% federal tax credit will be added to the 15 to 25% tax holiday in Quebec and the probable advantageous electricity rates for this type of business.
In short, for 10 million investments, Quebec and Ottawa give about 5 million, in addition to attractive electricity rates. Isn’t that enticing?
That’s not all. Ottawa is asking the Canada Infrastructure Bank to allocate 20 of its 35 billion funds to finance, on favorable terms, clean energy projects ($10 billion) and green infrastructure projects ($10 billion).
Some of the money will go to funding the Atlantic Loop electric transmission line, Ottawa hopes. If realized, this loop will send green energy from Quebec to New Brunswick and Nova Scotia in order to eliminate the production of coal-fired energy in these two provinces.
The Bank’s $35 billion has been provided by the federal government in recent years, but only $8.7 billion has been committed to date.
That’s not all yet. The federal government will transfer 15 billion over the next 5 years – inflating its debt by the same amount – into the new Canada Growth Fund. This fund could take equity stakes in industrial decarbonization projects, for example.
The federal response is therefore strong. However, this injection comes with an invoice, which we will receive especially in a few years.
The $82.7 billion 11-year plan will have a modest impact of $1.2 billion on the current year budget (2023-2024), but the effect grows larger each year thereafter, reaching $8.9 billion in year 5 of the five-year plan3.
Above all, only a third of these 82.7 billion will be spent in the current five-year plan described in the budget and the other two thirds (54.9 billion) in the following 6 years. In short, the recurring annual effect of this plan on the deficit will become obese thereafter, much more than the 8.9 billion in year 5 (in 2027-2028).
It is not for nothing that the deficit for the current year (2023-24), of 40.1 billion, will only gradually decrease in the coming years, without ever reaching the famous zero in five years (but rather 14 billion ). For the rest, it’s green nothingness…
To curb the growth of this deficit, the government says it wants to reduce its spending by 3% over the next 5 years, like that of its government corporations, thus saving $2.6 billion per year on a recurring basis, or $12.8 billion over 5 years.
Another source to reduce the deficit, an increase in similar revenues (12.8 billion), drawn from new taxes on share buybacks and taxes on financial institutions and high-income individuals.
The most important cash inflow, however, is the possible minimum tax of 15% imposed on multinationals (2.8 billion per year from 2026-2027), which is very uncertain since it depends on an international tax reform…
In short, Ottawa must have had an ambitious green plan, but it forgot to balance the budget for several years. Luckily, Canada still has a very respectable debt, although at a 20-year high (43.5% of GDP for the federal government as of March 31, 2024), which is still much lower than in the other G7 countries.
In a way, it is the Americans who are writing our deficits for the next few years, and the companies who are rubbing their hands…
1. For example, the manufacturer Volkswagen announced on March 13 the construction of a “giga-factory” of batteries in Ontario. The federal government will announce the details of its assistance when the agreement is final, in the coming weeks. The impact is included in the budget, but not specified.
2. The federal government preferred this credit on investment rather than a credit per unit produced, as in the United States. Our neighbours, for example, offer a subsidy per kilowatt hour of battery produced. Investment credit is easier to estimate and more likely to boost productivity.
3. Part of the 82.7 billion and these recurring annual impacts had been budgeted in the fall 2022 update (13.4 billion) and another part in the 2022 budget (15.3 billion).