Analysis of the 2023 Federal Budget

The Honourable Chrystia Freeland delivered the 2023-2024 Budget yesterday, March 28, in Ottawa. The Deputy Prime Minister and Minister of Finance produced a fiscal plan that falls between the most optimistic scenario and the ‘downside scenario’ from the Fall Economic Statement released just four months ago. While many economic indicators remain strong, there have been decreases in government revenue and increased costs of debt servicing due to higher interest rates. The Budget makes clear a concern for the fiscal stability of Canada and as such a hesitation to spend large sums of new money which would contribute to more inflationary pressure. There is a clear expectation in the budget that Canada will experience a small, short-term recession later in 2023 with a return to growth in early 2024. For context, it is expected that the economic decline will be approximately 90% less severe than the Great Recession of 2008 for Canada.

In global terms, Canada has fared well compared to G7 economies on gaining employment since COVID-19 and on curbing the worst effects of inflation since 2022. Minister Freeland gives the sense that she wants to maintain this trajectory and has no desire to make things worse by borrowing heavily to finance new investments.

At the same time, the federal government is making commitments to invest in new, long-term solutions that the it believes will put Canada in a more competitive position in the global economy. The government’s plan for “Investing Responsibly in Canada’s Future” is to grow the economy and create good jobs, strengthen universal public health care and provide dental care, and protect the environment. These pillars are the big picture, but they are not the ‘story’ of the budget.

Following today’s budget, the government is advancing 6 key areas to support its narrative:

Making life more affordable and supporting the middle class
Investing in Public Health Canada and affordable dental care
A made-in-Canada plan for affordable energy, good jobs, and a growing clean economy advancing reconciliation and building a Canada that works for everyone
Supporting Canada’s leadership in the world
An effective Government and a fair tax system

Bottom Line for Consulting Engineering Companies

ACEC was very involved in the budget deliberation process, sharing ideas as early as last September with officials at Finance Canada. As a result, we had representation at the budget lockup today on Parliament Hill.

Yesterday's budget will create a significant amount of new opportunity for many consulting engineering companies over the years ahead. While there was no mention of the National Infrastructure Assessment or procurement reform, there was an enormous emphasis placed on attracting investment for major projects to Canada's shores. We expect in turn that will create an opportunity for further discussions about how best to ensure infrastructure meets the needs of local communities, while connecting Canada's vast natural resources to a global supply chain. Whether we have matched the boldness of the Inflation Reduction Act in the United States will be clearer in time, but this budget charts what is likely the best path forward given the current fiscal pressures facing the Department of Finance.

We are beginning to see the funding match the rhetoric around Canada's new industrial strategy. That includes incentives to promote carbon capture and storage, as well as more ambition around harnessing hydrogen as a cleaner, viable fuel source for the future.  ACEC had also advocated alongside infrastructure sector partners for investments in the electricity grid which will themselves spur more investments in new community infrastructure projects beyond generation and transmission.

Over the months ahead, policy will come up against reality and discussions about how to deliver major projects across provincial, territorial, and municipal boundaries will inevitably bring the concept of a national infrastructure corridor – described by ACEC as the Canada Infrastructure Network – back into the public dialogue. ACEC will be ready to promote that important approach as a viable solution.

ACEC will be hosting energy and resource sector stakeholders on April 5 in Ottawa to discuss the Canada Infrastructure Network and how this bold idea can drive many of the long-term goals of the budget.

ACEC will continue to promote qualifications based selection as a procurement model that encourages a life-cycle approach to achieving many of the government’s policy goals and lead to greater returns on investments in Canada’s infrastructure and energy future.

ACEC was also pleased to see support for the creation of Employee Ownership Trusts that could greatly assist the succession plans of employee-owned firms.


Fiscal and Economic Outlook

Major news items in this budget will relate to consumer support and sentiment, including a grocery rebate (increase to the GST rebate), restrictions on predatory lending, investments in clean, green energy, building affordable housing, and supporting students and seniors financially. There are also substantially beneficial investments for Indigenous reconciliation, national defence, and tax changes for large, publicly traded businesses.
Government Fiscal Situation
"There will be good jobs for: auto workers manufacturing electric vehicles: construction workers and tradespeople retrofitting energy efficient homes; resource workers mining the critical minerals the world needs; mill and smelter workers making the cleanest aluminum and steel in the world; aerospace workers building the next generation of greener planes and helicopters; engineers designing hydrogen plants and fuel cells; mechanics who keep zero-emission vehicles running well;...And, of course, the next generation of small business entrepreneurs dreaming up solutions to the new challenges of the 21st century." – Honourable Chrystia Freeland.
Canada’s economy is now 103% the size it was before the pandemic.
A record high of 80% of Canadians aged 15 to 64 years are now participating in the workforce; 2.7 million fewer Canadians are living in poverty, a 56% decrease.
With a decline of 0.4%, the contraction in real GDP is significantly smaller than during the 2008-09 recession (-4.4 percent) and is less severe than the 1.6 per cent decline considered in the 2022 Fall Economic Statement downside scenario.
On an annual basis, real GDP growth is projected to decelerate from 3.4% in 2022 to 0.3% in 2023, before rebounding to 1.5% in 2024.
Compared to the Fall Economic Statement of 2022, which expected a budget surplus by 2027-2028,  Finance Canada now projects a deficit of $14 billion by that time.
Economic Realities
Private sector economists expect Canada’s economy to slow more than was projected in the 2022 Fall Economic Statement, and project a "shallow recession".
Deficit is 1.4% of GDP, the lowest deficit of all G7 countries.
The unemployment rate is at 5%, which means 830,000 more people are working in Canada than before the pandemic.
Inflation is at 5.2% year-over-year for February 2023, down from 8.1% in June 2022. 
The Bank of Canada expects inflation to decline to 2.6% by December 2023.
The economy is slowing both in Canada, and globally.
There is a race underway to build clean economies and critical supply chains.
People with lower incomes face greater challenges adjusting to high rates of inflation. People with fixed incomes like those receiving provincial social assistance, Old Age Security, The Guaranteed Income Supplement and student loan recipients are among the hardest hit by inflation.

Selected Funding and Program Commitments

Supporting Employee Ownership Trusts
Budget 2023 proposes to introduce tax changes to facilitate the creation of Employee Ownership Trusts. Selling the business to employees would become a more attractive proposition for owners looking to exit, and employee-owned businesses would be able to re-invest more of their profits in growth.
The government has indicated it will welcome stakeholder feedback on how best to enhance employee rights and participation in the governance of such trusts. 
These changes would take effect for the 2024 tax year, and would reduce federal revenues by $20 million over five years, starting in 2023-24.
New Investments - Ensuring Fairness for Canadian Workers with Federal Reciprocal Procurement
Budget 2023 announces the government will undertake targeted engagement with provinces and territories, industry stakeholders, and workers and unions on concrete reciprocal procurement measures, so they can be implemented in the near term.
The proposed measures will include placing conditions on foreign suppliers’ participation in federally-funded infrastructure projects, applying strict reciprocity to federal procurement, and creating a preference program for Canadian small businesses.
Getting Major Projects Done
Budget 2023 announces that, by the end of 2023, the government will outline a concrete plan to improve the efficiency of the impact assessment and permitting processes for major projects, which will include clarifying and reducing timelines, mitigating inefficiencies, and improving engagement and partnerships.
In addition, Budget 2023 proposes to provide $11.4 million over three years, starting in 2023-24, to Crown-Indigenous Relations and Northern Affairs Canada to engage with Indigenous communities and to update the federal guidelines for federal officials to fulfill the Crown’s duty to consult Indigenous peoples and accommodate impacts on their rights. This will support the implementation of the United Nations Declaration on the Rights of Indigenous Peoples Act and provide more clarity on how the government will proceed to ensure an effective and efficient whole-of-government approach to consultation and accommodation.
A Clean Electricity Focus for the Canada Infrastructure Bank
Budget 2023 announces that the Canada Infrastructure Bank will invest at least $10 billion through its Clean Power priority area, and at least $10 billion through its Green Infrastructure priority area. This will allow the Canada Infrastructure Bank to invest at least $20 billion to support the building of major clean electricity and clean growth infrastructure projects. These investments will be sourced from existing resources.
New Investments - Investment Tax Credit for Clean Electricity
Budget 2023 introduces a 15% refundable tax credit for eligible investments in:
Non-emitting electricity generation systems: wind, concentrated solar, solar photovoltaic, hydro (including large-scale), wave, tidal, nuclear (including large-scale and small modular reactors).
Abated natural gas-fired electricity generation (which would be subject to an emissions intensity threshold compatible with a net-zero grid by 2035). Stationary electricity storage systems that do not use fossil fuels in operation, such as batteries, pumped hydroelectric storage, and compressed air storage; and, Equipment for the transmission of electricity between provinces and territories.
New and refurbishment projects will be eligible.
Taxable and non-taxable entities will be eligible.
Supporting Clean Electricity Projects
Budget 2023 proposes to provide $3.0 billion over 13 years, starting in 2023-24, to Natural Resources Canada to:
Recapitalize funding for the Smart Renewables and Electrification Pathways Program to support critical regional priorities and Indigenous-led projects, and add transmission projects to the program’s eligibility;
Renew the Smart Grid program to continue to support electricity grid innovation; and,
Create new investments in science-based activities to help capitalize on Canada’s offshore wind potential, particularly off the coasts of Nova Scotia and Newfoundland and Labrador.
Delivering the Canada Growth Fund
Budget 2023 announces that the government intends to introduce legislative amendments to enable the Public Sector Pension Investment Board (PSP Investments) to manage the assets of the Canada Growth Fund to deliver on the Growth Fund’s mandate of attracting private capital to invest in Canada’s clean economy.
The Canada Growth Fund was announced in the 2022 Fall Economic Statement and will deliver $15 billion to attract private capital to build Canada’s clean economy by using investment instruments that absorb certain risks in order to encourage private investments in low carbon projects, technologies, businesses and supply chains.

New Investments

An Investment Tax Credit for Clean Hydrogen
Budget 2023 announces the details of the Clean Hydrogen Investment Tax Credit with the following key design features:
The levels of support will vary between 15 and 40 per cent of eligible project costs, with the projects that produce the cleanest hydrogen receiving the highest levels of support.
The Clean Hydrogen Investment Tax Credit will also extend a 15 per cent tax credit to equipment needed to convert hydrogen into ammonia, in order to transport the hydrogen. The tax credit will only be available to the extent the ammonia production is associated with the production of clean hydrogen.
Labour requirements will need to be met to receive the maximum tax credit rates. If labour requirements are not met, credit rates will be reduced by ten percentage points. These labour requirements will come into effect on October 1, 2023.
Growing Canada’s Biofuels Sector
In the months ahead, the federal government will engage with the biofuels industry to explore opportunities to promote its growth in Canada. This will include an examination of different support mechanisms that could support the sector in meeting the growing demand for low emissions fuels.
Supporting Clean Technology Projects
Budget 2023 proposes to provide $500 million over ten years to the Strategic Innovation Fund to support the development and application of clean technologies in Canada. The Strategic Innovation Fund will also direct up to $1.5 billion of its existing resources towards projects in sectors including clean technologies, critical minerals, and industrial transformation.
Strengthening Canada’s Trade Corridors
To further strengthen Canada’s transportation systems and supply chain infrastructure, Budget 2023 proposes to:
Provide $27.2 million over five years, starting in 2023-24, to Transport Canada to establish a Transportation Supply Chain Office to work with industry and other orders of government to respond to disruptions and better coordinate action to increase the capacity, efficiency, and reliability of Canada’s transportation supply chain infrastructure;
Collaborate with industry, provinces, territories, and Indigenous Peoples to develop a long-term roadmap for Canada’s transportation infrastructure to better plan and coordinate investments required to support future trade growth; Provide $25 million over five years, starting in 2023-24, to Transport Canada to work with Statistics Canada to develop transportation supply chain data that will help reduce congestion, make our supply chains more efficient, and inform future infrastructure planning. This measure will be advanced using existing Transport Canada resources;
Introduce amendments to the Canada Transportation Act to provide the Minister of Transport with the authority to compel data sharing by shippers accessing federally regulated transportation services;
Introduce amendments to the Canada Transportation Act for a temporary extension, on a pilot basis, of the inter-switching limit in the prairie provinces to strengthen rail competition; and,
Launch a review of the Shipping Conferences Exemption Act to improve marine shipping competition.

Reiterated Promises

The Atlantic Loop
The federal government is committed to advancing the Atlantic Loop—a series of interprovincial transmission lines that will provide clean electricity between Quebec, New Brunswick, and Nova Scotia—and is currently negotiating with provinces and utilities to identify a clear path to deliver the project by 2030.
Securing Major Battery Manufacturing in Canada
The government is reiterating its support for major announcements made earlier in March 2023 related to battery manufacturing.
Enhancing the Carbon Capture, Utilization, and Storage Investment Tax Credit
Budget 2023 proposes that the Investment Tax Credit for Carbon Capture, Utilization, and Storage:
Include dual use heat and/or power equipment and water use equipment, with tax support prorated in proportion to the use of energy or material in the carbon capture, utilization, and storage process, subject to certain conditions;
In addition to Saskatchewan and Alberta, be available to projects that would store CO2 using dedicated geological storage in British Columbia;
Require projects storing CO2 in concrete to have their concrete storage process validated by a third-party based on an ISO standard prior to claiming the investment tax credit; and,
Include a recovery calculation for the investment tax credit in respect of refurbishment property.

This communication has been prepared by ACEC and its government relations partner First Lake Solutions for the convenience of its member firms. It is not intended as a comprehensive guide to the budget. For details on Budget 2023, please visit the Government of Canada’s Budget 2023 website.