In last year’s budget, Ottawa was cautious in the face of contentious NAFTA negotiations and a more competitive U.S. corporate tax regime. But in Budget 2019, Finance Minister Bill Morneau proposed a number of social initiatives, including measures targeting home affordability. He also said the government would offer skills training grants to help Canadians deal with a changing job market and took further steps toward creation of a national pharmacare program.

Michelle Connolly, Director, Tax and Estate Planning, says the budget stays the course in announcing strategic investing and targeted spending of increased tax revenues realized over the past year. The government goal, she says, is to help maintain economic growth over the long term (in light of headwinds).  The alternative, she says, is paying down the debt and making cuts to government support and services. Says Connolly: “Budget 2019 announced strategic investment and targeted spending focussed on individual Canadians, not corporations.”

Morneau presented his budget against signs of slowing economic growth in Canada and globally. However, government revenues came in higher than forecast, with the 2019 deficit projected to be $19.8 billion. The government expects this to drop to $9.8 billion in 2023/24. As a percentage of GDP, the government’s projected debt would fall from 30.4% to 28.6% in 2023-24. Canada’s net debt to GDP ratio is already the lowest among G7 countries.

The emphasis on social programs built on the government’s previous proposals to improve the standing of middle-class Canadians.  “We live in a world that is changing rapidly,” Morneau said in his budget speech. “Canadians understand that... All they ask for is a chance to find their way in this new world, with help from the government so that they can have their best shot at building a good future for themselves, and their children and grandchildren.”

What’s not in the budget

While skills training could help improve the country’s competitiveness, the budget did not address corporate taxes, which came into focus following a decision by the U.S. to lower its corporate rates. The status quo decision leaves Canadian corporate taxes higher than U.S. rates. “I think this was a missed opportunity to help stimulate Canada’s economy,” says Sadiq Adatia, CIO of Sun Life Global Investments. “Lowering taxes clearly was one of the things that may have improved the U.S. economy."

The 2019 budget initiatives are highlighted here in more detail:     

  • Help for homeowners: CMHC will help first-time buyers by taking up to a 10% stake in a newly constructed home or 5% of an existing home. Families with a household income of more than $120,000 annually won’t qualify, and there’s a cap on the value of homes that are eligible.
  • Financial aid for retraining: The Canada Training Benefit could be used to refund up to half the costs of taking a course or enrolling in a training program with a lifetime limit of $5,000.
  • Next steps for pharmacare. To make prescription drugs more affordable, the government will create an agency that would work with the provinces to develop a plan to coordinate prescription drug purchases.
  • Help in retirement:Among a number of initiatives, the annual income threshold to receive the Guaranteed Income Supplement (GIS) was raised from $3,500 to potentially $15,000. Two new types of annuities were also introduced, which focus on addressing longevity risk and providing flexibility.
  • Tightening stock options:New tax legislation will put a $200,000 cap on employee stock grants that have received tax-preferred treatment in the past from large, established employers (likely those publicly listed).
  • Promoting electric cars: Buyers of a zero-emissions vehicle under $45,000 will receive a grant of $5,000. The government will also support the building of new recharging and refueling stations.

As we headed into Budget 2019, the S&P 500 had been moving higher since the start of the year. Sadiq Adatia is cautious, however, pointing out that the risks triggering the extreme volatility we saw in the latter half of 2018, have not gone away.

The slowdown in global growth, including in China’s bellwether economy continues. At the same time, the U.S. and China have yet to resolve their trade dispute. And in Europe, the protracted negotiations surrounding Britain’s exit from the European Union continue.

Despite solid job growth the Canadian economy also shows signs of slowing. Adatia says the recent positive employment data tends to disguise a number of concerns. “While some of the measures in the budget could help,” explains Adatia, “we believe the correction we’ve started to see in the housing market, along with high consumer debt and low oil prices, could weigh on the economy.”

The U.S. is the one major economy that is performing well. But whether the S&P 500 extends its record-breaking run, could depend on the successful completion of U.S./China trade talks, and the pace of interest rate increases.

Clearly, the market wants a deal – often rallying on good US/China trade news and selling off on bad. The market also moved higher when the U.S. Federal Reserve shifted from a hawkish to a dovish stance on rate increases earlier in the year. However, if stronger economic data forces the Fed to reverse course and accelerate the pace of rate increases, Adatia says it may trigger more volatility.

The outlook for interest rates in Canada is less certain. The Bank of Canada has indicated that it wants to continue its push to normalize rates, and it could point to the strong job numbers to support its case. As noted, some of the budget measures could help stimulate growth. But with the economy slowing, Adatia says the BoC could be on hold in the months ahead.

With the market reacting to continued uncertainty, we may see higher volatility. However, says Adatia, “Investors should work with an advisor to develop a diversified portfolio that suits their risk tolerance, and focus on the long term.”

This document is published by Sun Life Global Investments (Canada) Inc. and contains information in summary form. This document is provided for information purposes only and is not intended to provide specific individual financial, investment, tax or legal advice. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any mutual funds managed by Sun Life Global Investments (Canada) Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.

Information contained in this document has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy. This document may contain forward-looking statements about the economy, and markets; their future performance, strategies or prospects. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon.

Please speak with your professional advisors, such as your advisor or tax specialist, and refer to the Budget as published by the Government of Canada for details before acting on any of the information.

© Sun Life Global Investments (Canada) Inc., 2019.

Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.