(Bloomberg) -- Canadian Finance Minister Chrystia Freeland released a much more prudent budget than expected, keeping new spending in check while allocating much of a revenue windfall toward deficit reduction. The plan sees the nation’s finances nearly in balance within five years.

Key Takeaways

  • Thursday’s budget recognizes the need for more fiscal caution at a time of rising inflation and global uncertainties casting a cloud on the global economic outlook. It marks a major pivot for Prime Minister Justin Trudeau, whose government has faced heavy criticism over spending, with debt levels doubling since his Liberals came to power in 2015. In the past, Trudeau has typically spent revenue windfalls
  • Net costs of budget measures -- new spending minus revenue from new taxes -- will be C$31.2 billion ($24.8 billion) in the six fiscal years through March 2027. Some economists were anticipating that number would be closer to C$100 billion. (New spending appears to be just over C$60 billion, while revenue from new taxes and repofiling of past spending will total about C$30 billion.)
  • The government reallocated billions in funds that were already in the fiscal framework to finance new initiatives, and chose not to deliver on a number of election promises. Freeland is also banking on more than C$25 billion from a combination of new taxes on financial institutions, elimination of loopholes and tax avoidance strategies, and a review of existing spending and programs
  • Housing measures totaling C$10 billion over six years are the budget’s centerpiece, including a C$4 billion accelerator fund that will give incentives to cities that create more supply. There are other growth initiatives: a fund to top up green investments by businesses, a new investment agency for entrepreneurs, and a generous tax credit for investments in carbon capture technology

Deficits and Debt

  • Cumulative deficits through 2027 will be C$50 billion lower than forecast in a December fiscal update, with revenue exceeding projections by about C$90 billion over that time
  • The deficit for the fiscal year that ended last month came in at C$114 billion and is seen falling to C$8.4 billion by 2026. In the December update, the government anticipated a C$144.5 billion deficit last year that would gradually decline to C$13.1 billion over the same time frame
  • The budget gap for the current fiscal year is projected at C$52.8 billion, versus C$58.4 billion in December
  • Debt-to-GDP is seen falling to 41.5% of output by 2026, from 46.5% -- also a considerable improvement from the fiscal update

Tax Measures

  • Freeland delivered on a pledge to tax large banks and insurance companies, which will see their corporate income tax rate increase by 1.5 percentage points on a permanent basis. Banks and insurers will also pay a one-time 15% surtax on income above C$1 billion for the 2021 tax year. Those measures are expected to raise C$6.1 billion over the forecast horizon
  • Another measure, worth C$4.2 billion, would prevent Canadian-controlled private corporations from avoiding taxes by setting up in low-tax foreign jurisdictions
  • The government is also providing a refundable tax credit for businesses that invest in carbon capture and storage. It’s set at 60% for direct air capture and 50% for all other projects

Debt Management

  • Including an increase of the stock of treasury bills to C$213 billion, the government plans gross issuance of C$425 billion
  • Total bond issuance is seen at C$212 billion, versus C$255 billion in the previous fiscal year. The decline will be accounted almost fully in long-bond issuance, which is seen dropping to C$75 billion from C$114 billion
  • Canada’s government plans to continue issuing the ultra-long 50-year bond

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