Government to the rescue, again

“Minister Freeland has highlighted the importance of rolling out a vaccine and providing additional support to households and businesses through what will be a tough winter for many Canadians. The additional spending coupled with a lasting negative hit to government revenues will add copiously to the federal debt—boosting the net debt-to-GDP ratio from 35 per cent pre-COVID to around 54 per cent over the medium term. If debt financing costs remain low, the federal government can manage but there’s no doubt that the COVID-19 crisis will constrain federal finances for decades to come.”

Speech highlights and insights

• In the first proper fiscal update since this time last year, the government outlined broadly its recovery plan as Canada looks to exit the pandemic induced recession.
• The government deserves credit for expediency of the measures enacted in short order at the beginnings of the pandemic. Additionally, the government is prudently bracing—by outlining multiple scenarios and associated costs—for a tough winter before a successful vaccine is distributed next year.
• The government expects the deficit to balloon to $381.6 billion this year, with the possibility that the virus resurgence could lead the deficit to reaching $400 billion. Finance Canada currently expects the deficit to be well under control by 2025–26 where the deficit improves to below $25 billion, or $33.4 billion in the case of a virus resurgence.
• The recovery will be aided by further stimulus over the next three fiscal years to the tune of $70 to $100 billion which were not detailed at this time but will be explored further in the spring. There was no mention of pharmacare or a national day care plan that were hinted at in the September throne speech.
• In addition, prior to the fall update, the government had tallied an estimate of over $250 billion this year and around $30 billion in new direct measures next fiscal year. This update added $22 billion each this year and next, which is separate from the unspecified stimulus discussed in the previous bullet.

New measures include:

• Wage subsidy increased and extended to June 2021 ($15 billion this year, $16 billion next)
• Canada Emergency Rent Subsidy ($2 billion this year)
• Support for arts (182 million next year), air sector (540 million next year), and credit availability for tourism sector
• Overhauling tax system by closing loopholes (7 billion over 5 years)
• Nearly tripling the fiscal stabilization cap from $60 per capita to $170 per capita.
• To give context of how hard-hit revenues will be this year we can compare the outlook for nominal GDP in our latest forecast to our pre-COVID forecast completed in December 2019 (see Chart). Over the four-year period displayed, the loss in nominal GDP sums to $500 billion—a substantial hit to profits, household incomes and government revenues.
• Overall, the government expects a string of deficits that will total $597 billion from 2020–21 to 2023–24, not including the $70 to $100 billion additional stimulus.
• Federal government debt is forecast to be manageable despite the significant increase as the government can finance these new measures at rock bottom rates. There is a risk, however, that bond yields could rise above what the government expects, given the massive increases to government debt issuance in Canada and globally.
• Canadian taxpayers will also be liable for record provincial deficits—we expect federal and provincial net debt to reach $2 trillion or over 92 per cent of GDP, levels not seen since the early 1990s.

Pedro Antunes, Chief Economist at The Conference Board of Canada