Add $8 Billion for Defense

Under our NATO commitments, Canada should spend 2% of its GDP on defense. Last year, 1.36% was spent. To meet its NATO commitment, the government would need to set aside $20 to 25 billion a year, the parliamentary budget officer said. The 2022 budget is $8 billion over many years, and there is no plan to meet our NATO spending commitments.

If Canada ends up spending 2% of its GDP on defense, significant tax revenues would be needed. That could be an increase in income tax rates or even HST.

Investing in the Canada Growth Fund

Canada is joining the global trend to support electric vehicles and clean energy development, which should raise the eyebrows of Canadian investors. Sustainable companies were a common investment theme in my Making Sense of the Markets sections. There are opportunities to capitalize on these powerful long-term trends. I continue to add to my green energy supercycle ETF (GMET), plus uranium (HURA) and lithium (HLIT), and the EV ecosystem (BATT).

The 2022 budget proposes the creation of the Canada Growth Fund to attract private sector investment. The fund will initially be capitalized at $15 billion over the next five years, targeting $3 in private capital for every $1 invested.

The fund will help to achieve these national economic policy goals:

Reduce emissions and contribute to Canada’s climate goals Diversify the economy and strengthen exports by investing in the growth of low-carbon industries and new technologies in new and traditional sectors of Canada’s industrial base. Canada’s Future Prosperity, Including the Natural Resources Sector

Investors are largely unscathed for the time being

Fortunately, the capital gains tax rate remains at 50% and we still have the primary residence exemption, which means you don’t have to pay tax on the capital gain realized from the sale of the property where you live. The federal personal income tax rates remain unchanged. Matt Poyner wrote about budget from a self-directed investor’s perspective for his site

That said, high earners have been notified. They may soon have to pay their “fair share” of income taxes.

A major risk for taxpayers and investors is the slow growth in Canada, which would put a brake on tax revenues. Inflation and the environment of rising interest rates can significantly increase our debt servicing costs. Critics suggest the budget could fuel even more inflation.

In addition, recessions are a normal part of the economic cycle. A recession would put enormous pressure on government revenues. During the recession caused by the financial crisis (2008-2009), revenues fell by 35%. The decline was greater during the brief COVID-related recession.

This post Budget 2022: How it could affect Canadians’ finances and investments

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