What a difference a year makes.
Last year's razor-thin budget surplus is a distant memory, with the Liberal government's fiscal blueprint showing a projected deficit for 2016/17 of $29.4 billion. Finance Minister Bill Morneau acknowledges that falling commodity prices have hurt the economy, but he also says "circumstances for investment are ideal." He calls Budget 2016 "an essential step in a sustained, strategic effort to restore prosperity and optimism."
Factors leading to the shortfall include reduced revenue, income tax breaks and new spending on infrastructure, among many other spending initiatives. And it doesn't look like balance will be restored any time soon, with a $14 billion shortfall predicted for fiscal 2020/21.
"A year ago we were warning of the potential economic 'ripple effects' from the threat of persistently low oil prices," says Sadiq S. Adatia, Chief Investment Officer for Sun Life Global Investments. "Those ripple effects have turned into waves, particularly for some of the western provinces. We do agree that fiscal stimulus is in order, deficit or no deficit."
As expected, the budget is largely focused on initiatives intended to support the middle class and bolster the economy. Some of the initiatives, including a cut to the income tax rate for middle-income earners and a higher rate for the highest earners, have already been put into motion.
One of the main culprits behind the government's weaker fiscal position is low oil prices.
"Despite a modest recovery in the past few weeks, oil prices have fallen further and stayed lower for longer than even we had anticipated," says Adatia. "The effect on the domestic stock market is one thing, but what's more worrying are the longer-term economic implications. Job losses, reduced business investment, segments of the population more reluctant to spend – these effects can take a long time to sort themselves out and the economy will need to adjust."
- Canada Child Benefit. The budget proposes a new Canada Child Benefit (CCB). Families with combined incomes under $30,000 will receive $6,400 per child under the age of 6, and $5,400 per child from ages 6 to 17. CCB benefits will be phased out as family income rises. The CCB will replace the current Canada Child Tax Benefit and Universal Child Care Benefit.
- OAS and GIS. The budget proposes to restore the eligibility ages for Old Age Security and Guaranteed Income Supplement benefits to 65 (from 67), and Allowance benefits to 60 (from 62). The planned increases were supposed to have taken effect from 2023 to 2029. In addition, the budget proposes to increase the GIS top-up benefit by up to $947 annually, starting in July.
- Help for students and young people. The budget proposes to enhance the Canada Student Grants program by 50%, raising the maximum grant from $2,000 to $3,000 per year for students from low-income families, from $800 to $1,200 per year for students from middle-income families and from $1,200 to $1,800 per year for part-time students. In addition, the budget proposes to double the size of the Canada Summer Jobs Program.
- Phasing out of the children's fitness and arts tax credits. These are to be cut in half for the 2016 tax year, and eliminated entirely for 2017.
Adatia is confident that given time, the combination of fiscal stimulus from Ottawa and monetary stimulus from the Bank of Canada will help keep the economy on track. Though he warns it's going to be a bumpy road – especially with all the recent stock market volatility.
It's times like these that investors may want to regroup with their financial advisor, says Adatia. "If you're concerned about your portfolio, get together with your advisor," he suggests. "If your portfolio is well-constructed, there may be nothing to do. Keeping clients focused on their long-term goals no matter what's happening in the market – that's the kind of value a good financial advisor brings to the table. Take advantage of it."
This summary contains information in summary format for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this summary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and shall not be liable for any errors and omissions. This summary is intended to provide you with general information and should be not be construed as providing specific individual financial, investment, tax, legal or accounting advice. Please note, any future or forward looking statements contained in this report are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors, such as your financial 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., 2016.
Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.