Back to Business as Usual

1. 2017 FEDERAL BUDGET
TD Economics
Last year’s budget was a big bang on tax and spend initiatives. This year, not so much. The government
announced a net $4.4 billion in new initiatives over a five year period. For comparison, this is roughly
one-fifth the amount announced last year, spread over a longer timeframe. Hot-button issues, such as
changes to the capital gains tax and the potential sale of airports, were not acted upon. This budget was
more about trimming the edges on labour market and tax inefficiencies. By applying conservative as-
sumptions on economic growth, the government shows a debt-to-GDP ratio that holds steady, edging
down only modestly from 31.5% to 30.9% by 2021/22. This is
a market-neutral budget, with nothing of note to rattle financial
markets.
Just a bit more borrowing
The near term outlook for the federal deficit has improved
(Chart 1), with a budgetary balance of -$23 billion forecast for the
current fiscal year. Relative to what was presented in last year’s
5-year plan, slightly wider deficits are projected in Budget 2017,
resulting in a modest $6.4 billion in net additional borrowing over
the 2015/16 to 2020/21 period.
Underpinning these projections are more conservative assump-
tions on the future pace of economic growth. This stems from the
use of a somewhat outdated survey (from December 2016; Table 1),
which doesn’t capture the significant improvement in the near-term
BACK TO BUSINESS AS USUAL
Highlights
• The government expects to run a deficit of $28.5 billion (about 1.3% of GDP) in the coming fiscal
year, roughly in line with 2016 budget projections.
• Deficits continue over the forecast horizon, declining somewhat in size. The result is a level of federal
debt expected to settle around 31% of GDP by fiscal 2021.
• Digging into the details revealed a largely business as usual budget, focused on continuing to imple-
ment the sizeable promises made in Budget 2016. Only $4.4 billion in net new spending is planned
over a five year horizon.
• Notable by their absence were any major changes to the tax system. Small tweaks were made around
the edges, but the capital gains inclusion rate was left untouched, as were other major tax rates.
• While some might have been hoping for significant changes in policy, the cautious approach shown
today appears warranted. Big spending measures from last year still need to be implemented, while
global and domestic economic uncertainty remains elevated.
March 22, 2017
Beata Caranci, VP & Chief Economist, 416-982-8067
Brian DePratto, Senior Economist, 416-944-5069
@TD_Economics
-5.4
-29.4
-29
-22.8
-17.7
-14.3
-1
-23
-28.5 -27.4
-23.4
-21.7
-18.8
-35
-30
-25
-20
-15
-10
-5
0
5
2015/2016 2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022
CHART 1: SMALLER NEAR-TERM DEFICITS
OFFSET BY BALLOONING BACK-END
Budget 2016
Budget 2017
Source: Department of Finance Canada, TD Economics.
Budgetary balance ($ billion)
N/A

2. TD Economics | www.td.com/economics
2March 22, 2017
economic outlook, and thus likely overstates the near-term
deficit outlook. Conversely, the December survey does ap-
pear to better reflect the medium-term growth headwinds
facing Canada, presenting a lower long-term growth profile
than that used in Budget 2016.
Even this slower profile does not fully reflect the longer-
term headwinds facing Canada. TD Economics remains
of the view that growth is likely to trend closer to 1.4% in
coming years, creating a potential fiscal headwind. Perhaps
reflecting this, the government has reintroduced a ‘risk ad-
justment’, adding $3 billion per year to the projected deficit
from fiscal 2017/18 onwards. This, in combination with the
government’s growth outlook, suggests that near-term defi-
cits may come in smaller than what has been indicated today.
Persistent deficits
A largely unchanged deficit outlook means that there
remains nothing but red ink on the horizon. The size of the
deficits are fairly small in the grand scheme of things, and
the federal debt-to-GDPratio is set to stabilize through time,
settling at around 31% of GDP by fiscal 2021-22 (Table 2).
Despite this, gone from today’s budget are explicit refer-
ences to a target level of the debt ratio. While the best fiscal
anchor could be debated (we would suggest a modestly
declining debt-to-GDP ratio as a reasonable target), having
a fiscal anchor, whatever it may be, provides reassurances to
markets that some form of fiscal restraint is in place.Areturn
to an explicit anchor would thus be a welcome development.
Spending what was planned
Today’s budget is largely focused on implementing exist-
ing promises. The government made significant spending
commitments in key areas such as housing, but the bulk
of the funds allocated are back-end-loaded. The rubber
hits the road over the five year fiscal horizon, where only
$5.2 billion in net new spending was introduced in today’s
budget, as the impact of newly announced measures were
offset by shifting funds from other areas. For instance, the
government announced $6.6 billion in planned spending
to support skills and innovation. But, once the reshuffling
of pre-existing commitments is taken into account, the net
impact on the deficit is expected to be $2.9 billion. In some
areas, the government has actually reduced its planned
spending (on net) over the near-term horizon. These include
what the government calls “Communities Built for Change”,
such as infrastructure spending, early learning and childcare
initiatives, and indigenous communities.
When it comes to existing spending commitments, the
government provided an indication of progress to date.
Most major areas are reported to be largely on track (in
terms of Budget 2016 commitments), with the exception of
infrastructure spending, where only 50% to 75% of projects
are reported to be on track. From an economic growth per-
spective, even this statistic may be somewhat misleading,
as it tracks cash disbursements, not shovels in the ground.
Indeed, data from Infrastructure Canada indicates that only a
smallfractionofprojectsapprovedsincethetimeoflastyear’s
budgethaveactuallybegunconstruction.ThusTDEconomics
remains of the view that the majority of the growth impact
from existing spending commitments is yet to come, and will
extend into 2018 given delays already observed.
2016-17 2017-18 2018-19 2019-20 2020-21 2021-22
Budgetary Revenues 292.1 304.7 315.6 327.7 340.3 356.0
% change -1.2 4.3 3.6 3.8 3.8 4.6
Program Expenses 290.9 305.4 313.7 319.8 328.6 338.5
% change 7.4 5.0 2.7 1.9 2.8 3.0
Public Debt Charges 24.3 24.7 26.3 28.3 30.4 33.3
% change -5.1 1.6 6.5 7.6 7.4 9.5
Total Expenditures 315.1 330.2 340.0 348.1 359.0 371.8
% change 6.3 4.8 3.0 2.4 3.1 3.6
Risk Adjustment - 3.0 3.0 3.0 3.0 3.0
Budgetary Balance -23.0 -28.5 -27.4 -23.4 -21.7 -18.8
Federal Debt 637.1 665.5 692.9 716.3 738.1 756.9
% change 3.4 4.5 4.1 3.4 3.0 2.5
Per cent of GDP
Budgetary Revenues 14.4 14.4 14.4 14.4 14.4 14.5
Program Expenses 14.4 14.5 14.3 14.1 13.9 13.8
Public Debt Charges 1.2 1.2 1.2 1.2 1.3 1.4
Budgetary Balance -1.1 -1.4 -1.2 -1.0 -0.9 -0.8
Federal Debt 31.5 31.6 31.6 31.5 31.3 30.9
Table 2: 2017 Federal Budget Forecast Summary
(C$ billion, unless otherwise specificed)
Source: Department of Finance Canada.
Calendar Year 2016 2017 2018 2019 2020 2021
Real GDP
Budget 2017 1.3 1.9 2.0 1.7 1.7 1.8
TD Forecast 1.4 2.3 1.9 1.6 1.4 1.4
Nominal GDP
Budget 2017 2.0 4.1 4.0 3.5 3.8 3.8
TD Forecast 2.1 4.7 4.0 3.6 3.4 3.5
Nominal GDP ($ billion)
Budget 2017 2,025 2,109 2,194 2,271 2,357 2,447
TD Forecast 2,027 2,123 2,207 2,286 2,365 2,447
3-Month T-Bill Rate
Budget 2017 0.5 0.6 0.9 1.4 1.8 2.3
TD Forecast 0.5 0.5 0.8 1.3 1.9 2.3
Budget 2017 1.3 1.8 1.3 2.7 3.0 3.3
TD Forecast 1.3 2.1 2.7 3.0 3.3 3.3
Table 1: Economic Assumptions for Canada
Annual, percent change (unless otherwise indicated)
10-Year Gov't Bond Yield
Source: Department of Finance Canada, TD Economics

3. TD Economics | www.td.com/economics
3March 22, 2017
Nothing comprehensive, but some tax tweaks in the
offing
The federal government had been planning a compre-
hensive tax expenditure review, but it was not to be found
in today’s budget. Nor were changes to the inclusion rate for
capital gains, or the treatment of stock option compensation.
Still, many tweaks around the edges were brought into play.
Key among these:
• Elimination of the public transit tax credit
• The tax credit for oil and gas exploration is being
tweaked to gradually decline over time, rather than
deducted immediately
• The alcohol tax will be nudged up immediately, and
continue to increase in line with the pace of consumer
inflation.
• The definition of a taxi service is to be changed such
that ridesharing services such as Uber are taxed in the
same way as traditional taxi services.
• Last year’s increase in CRA vigilance will be met with
a further budget increase aimed at cracking down on tax
evasion.
The cautious approach to the tax system shown today is
likely warranted in light of the significant uncertainty ema-
nating from south of the border. Discussions and negotia-
tions are underway that could result in significant reductions
in U.S. corporate tax burdens, impacting Canada’s current
competitive advantage. At the same time, it would have
been unusual to see significant changes around capital gains
or stock options as part of a budget focused on innovation.
Ultimately though, while caution was today’s watchword,
this is not the end of the story. It would hardly be surprising
to see the tax system revisited once there is more certainty
around Canada’s relative competitiveness on this front.
Innovation a focus
As was communicated heading into the budget, a sig-
nificant portion of the document was devoted to Canadian
innovation. Measures included funds aimed at supporting
innovation “superclusters”, the creation of a “Strategic In-
novation Fund” that consolidates and expands a number of
existing funds and initiatives, and spending to support Clean-
Tech and AgTech development. A focus was also placed
on support for skills training. A welcome development is a
change to the EI qualification system, allowing EI recipients
to pursue education without losing their EI payments.
Potential market reaction
Ahead of the budget, rumours were swirling around
potential tax changes – particularly the treatment of capital
gains. In the event, no major changes were in the offing, with
the changes that were put in place generally consisting of
minor tweaks. As a result, it is unlikely that today’s budget
will have any meaningful market impact.
The theme of minor tweaks extends to the debt manage-
ment strategy. Reflecting the modest spending commitments,
gross bond issuance is expected to reach $142 billion in fiscal
2017-18, an increase of $7 billion from the year prior. The
focus is likely to remain again on shorter-term debt (2-, 3-,
and 5-year bonds), and no changes to the target maturity
pattern or benchmark sizes are planned. There is no explicit
plan, but the government again indicated a willingness to
issue ultra-long maturity bonds on a ‘tactical’ basis.
Bottom Line
Ultimately, what the government delivered felt more like
a fiscal update than a budget. Little was on offer in terms of
new spending, while at the same time much of the concern
around significant tax changes proved misplaced. This lack
of excitement may not be a bad thing. The economic land-
scape remains shrouded by uncertainty, presenting a strong
case for today’s wait and see approach.

4. TD Economics | www.td.com/economics
4March 22, 2017
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