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budget 2016

CRED’s Take on Budget 2016

federal budget 2016

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The new federal government recently came down with its much-anticipated first budget.  Finance Minister Bill Morneau stated that the Liberal government is making “the investments needed to boost the economy over the long term.”

Pundits had speculated for weeks about the size of the projected deficit, how vital infrastructure investments will be made and which industries would be targeted for support in light of the professed movement toward a lower-carbon economy.

The headline budget item is $120 billion for infrastructure over the next decade.  As expected, many line items and themes relate to our discussions around responsible economic development here in British Columbia. Consensus thus far seems to suggest that BC was well considered in the drafting of this budget.  While the headlines pronounced that this budget is all about families and cities, many details remain opaque.

For policy wonks who love getting deep in to the details, you can find the complete summarized budget here.

Here are a few of the key points specific to the BC economy:


 Transit Funding

  • $3.4 billion over five years allocated across major Canadian cities
  • Federal government willing to extend up to 50% capital cost support to some projects

The commitment to public transit will be welcome news across all levels of government across the country. Better still, the federal government in some instances is willing to extend its support beyond the traditional “1/3 each” inter-government funding model, and provide up to 50% of capital costs for major projects.

What does this mean for BC?  

For municipal governments that have relatively little ability to meet the terms of a ‘third each’ funding model, this is a major boon. In the short term, BC’s 13.6% of national ridership means that BC major municipalities can expect nearly $460 million from the Public Transit Infrastructure Fund. It could allow Translink to target the Broadway Skytrain line as well as the light rail transit network in Surrey, with an initial investment of $370 million to start the planning process.

Serious questions remain, though, about the provincial government-mandated plebiscite requirement for any transit funding through new municipal taxes – a requirement which many observers feel dooms Translink and the municipalities’ abilities to move forward on major capital projects.  So far, the BC provincial government is saying all the right things about continuing to be “all-in” for their own 1/3 capital commitment.  The impact of the failed 2015 transit plebiscite looms large over transit planning, however, and Premier Clark has not yet ruled out another one should mayors choose to attempt to raise their share of project costs through a new tax structure. The Premier needs to act to ensure mayors and Translink have the tools they require to effectively move forward and take advantage of this flood of transit infrastructure money.

Shovel-Ready Infrastructure

  • $1.8 billion in immediate funding over next 2 years for ‘shovel-ready’ green infrastructure

While most announced infrastructure funding will accrue 3-10 years out, the ‘shovel-ready’ commitment is part of a broader $4 billion line item for ‘miscellaneous’ infrastructure. This will provide immediate benefit here in BC, and is on top of Ottawa confirming their willingness to expedite deployment of ~$9 billion remaining from previous infrastructure fund.

A welcome example of the immediate benefit to BC is the announcement of $106 million to rebuild the Lions Gate Wastewater Treatment Plant.

Massey Bridge

  • Proposed $3.5-billion replacement bridge for the George Massey tunnel was nowhere to be found in the federal budget

CRED supports fact-based discussions around investments that reflect the new economy, and how certain generational infrastructure projects (such as pipelines and massive toll bridges) may not necessarily reflect a growth model for the region that is desired, nor supported by dubious economic modeling.

Lower mainland municipalities and the provincial government are grappling with early-stage lessons learned – at a cost of $100 million+ loss per year – of the recent Port Mann bridge reconstruction.  What could this mean for the proposed demolition of the Massey Tunnel, which will open up the south Fraser river for the movement of goods, and open up land south of the Fraser for residential, commercial and industrial development?  A recent public meeting in Richmond demonstrated just how fervently many local residents and political leaders feel in opposition to the proposed bridge.

Clearly there is a space for more public dialogue into infrastructure. The lack of financial support in this budget does not necessarily mean that the federal government opposes the bridge, but it does allow residents and municipal governments to contemplate what the potential implications for bridge development could be before making another massive investment.

Federal Government Support to Fossil Fuels Industry

LNG Subsidies

In spite of international commitments made before the G20, and bold targets made before the Paris COP21 conference on climate change, the federal government has decided to maintain fossil fuel subsidies for the nascent Liquefied Natural Gas (LNG) industry in Canada.

In an era of advanced discussions on how to de-carbonize the Canadian economy, this will come as welcome news to oilsands and pipeline proponents as well as LNG project developers. It will vex those Canadians who feel it is time to make bold policy to appropriately price and/or put a cap on carbon, while focusing on infrastructure and industry supports which will drive the new economy, as opposed to what are widely seen as ‘sunset’ industries.

This decision projects subsidies to LNG until the end of 2024, as a continuation of the capital cost allowance, and was very welcome news to the BC government that has staked its jobs plan over the past few years on natural gas export. With historical low prices and flat global demand for LNG, most industry watchers suggest that BC may have missed its window to enter into forward contracts for our methane, which would in turn spur final investment decisions by the three remaining major LNG project proponents (Shell, Petronas and Woodfibre).

The decision to subsidize the industry is seen as a life ring thrown to industry and the BC government by the feds, so as not to send project proponents mixed messages at a critical time in their decision making processes.

Investments in Oilsands Innovation

CRED and others consistently raise the question: what is the role of bitumen and natural gas in a low-carbon economy?

The oilsands industry needs to explain clearly to Canadians how their high-carbon footprint, high-cost of production product fits in to a model of sustainability and lower carbon.  This is particularly important during this era of low oil and gas prices and weak, stagnant, over-supplied markets. Given the substantial opportunity cost of massive pipeline investments which are meant to last generations, CRED suggests that short-term market access thinking should never trump long-term opportunities.

Perhaps as a nod towards how the new federal government intends to support the oil & gas industry to define this very role, the budget proposes $50 million in investment over the next two years, starting immediately, to support technologies that will reduce greenhouse gas (GHG) emissions from the oil and gas sector.  This initiative will run through Natural Resources Canada.

As we publish this blog, CRED is hearing that oilsands operations, refineries and upgraders are to be amongst the businesses exempt from the recently-announced Alberta carbon tax. There is no better time to have discussions around how we intend-to de-carbonize our economy.

Oil Price Estimates

CRED finds it curious that the government just established an extremely conservative oil price estimate for the coming year.  At a US$40 per barrel estimate, the government is effectively confirming that weakness in oil prices will endure at a level which few industry watchers or economists feel the Canadian oilsands industry could survive at, long term. While some argue that the government did this to allow ‘wiggle room’ for future deficit reduction and down-the-line ‘good news’ budget results, questions remain about the role of bitumen in a future economy where our own government estimates the product’s market value at less than our industry is able to produce it and get it to market.

What does this say about the business case for building more bitumen pipelines to tidewater?

Clean Technology

  • $2 billion Low Carbon Economy Fund
  • $100 million per year clean technology fund through regional development hubs
  • Recapitalization of Sustainable Development Technology Canada

Perhaps the clear winner in this budget was clean technology, and hopefully as a result, our environment as we move towards a lower-carbon economy.

Coming out of commitments made by Canada in Paris at the COP21, and the recent first ministers meeting in Vancouver, the federal government is working up a Pan-Canadian Framework on Clean Growth and Climate Change.  The budget outlines strategic early stage funding for projects to position Canada as a leader in the clean technology space, while enhancing environmental performance. This is welcome news to CRED, as it was a key part of our recommendations in our research on the Future of BC’s Tech Sector.

As part of the framework, Minister Morneau rolled out a $2-billion Low Carbon Economy Fund, which was teased earlier this month with Canada’s premiers at their meeting to discuss Canada’s climate change strategy. The Fund will subsidize those provinces and territories that participate in a national climate agreement, underwriting activities that will tangibly reduce GHG emissions. Finance Canada clarified that “resources will be allocated to those projects that yield the greatest absolute greenhouse gas reductions for the lowest cost.”

While no national carbon pricing strategy is yet in place, perhaps due to resistance from the premier of Saskatchewan, it is expected that these incentives might help draw the provinces together to support an as yet-undefined national strategy.

As one of the regional development agencies, Western Economic Diversification will get part of a $100 million per year clean technology fund.  This will go to support economic and community development by leveraging local networks and capabilities, and will represent a doubling of the previous clean energy disbursement within the WED portfolio.

The budget includes a re-capitalization of Sustainable Development Technology Canada (SDTC), which serves as a venture capital provider for green and alternate technologies, addressing gaps in current project financing structures. Natural Resources Canada (NRC) will also see significant resources targeted at boosting research and commercialization of clean technology, as well as the advancement of electric, natural gas and hydrogen-powered vehicle technology deployment.

Kitsilano Coast Guard Station

  • $24 million has been committed to re-open the coast guard station.

This is of particular interest to CRED, given our deep concerns around maritime safety and oil spill response. The budget allocation includes expanded environmental response capability.  In 2015, CRED produced research on the economic impacts of the Burrard Inlet oil spill, and how the loss of the Kitsilano coast guard station may have impacted response times.

While the re-opening of the station is fantastic for recreational boaters, commercial traffic and visitors to our beaches alike, CRED wonders whether this announcement were a prelude to the federal government approving the Kinder Morgan bitumen pipeline expansion later this year.

Corporate Taxation

Finally, no major changes were announced to corporate tax rates in Budget 2016.

This will be a disappointment to BC small businesses, many of who were expecting a continuation of the previous government’s promise to drop rates from 11% to 9% on the first $500,000 of qualifying income.  Instead, the rate will drop to 10.5% with future cuts deferred.

Many details remain to be finalized around the 2016 budget. Stay tuned as CRED will continue to explore the budget and how it will impact British Columbia’s business community and those who hope to continue moving us toward a dynamic low-carbon economy.