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Four months into the pandemic, where do things stand? - DFSIN - SFL

Four months into the pandemic, where do things stand?

Canada’s Finance Minister, Bill Morneau, presented an “economic and fiscal snapshot” last Wednesday, almost four months after the COVID-19 pandemic was declared. Here are five main take-away points.

July 08, 2020

Instead of a budget – which could not be tabled this past spring –, federal Finance Minister Bill Morneau presented a “snapshot” in the House of Commons on July 8, bringing some degree of clarity to the state of the public purse and the fiscal outlook for Canadians.

1. A $343.2 billion deficit

In mid-June, the Parliamentary Budget Officer forecast that the deficit for the 2020-2021 budget year would be about $256 billion. Now, according to the Finance Minister, this figure is expected to be $343.2 billion. Needless to say, this amount stems from increased spending and fiscal easing, but also from a significant decline in tax revenue.
By comparison, in 2018-2019 the deficit was just under $15 billion, and in 2019-2020 it was $34.4 billion, based on figures from the Department of Finance. It should be noted that, according to the Finance Minister, the level of spending that contributed to this historic deficit is comparable to Canada’s spending during World War II.

Bar graph illustrating Canada’s budgetary balance based on the economic snapshot presented on July 8, 2020. While the deficit was about $14 billion in 2018-2019 and about $34 billion in 2019-2020, it is projected to be around $343 billion in 2020-2021.


2. $228 billion in response measures

The government estimates the cost of all the pandemic-related aid measures for individuals and businesses to be around $228.9 billion, or about 14% of the gross domestic product. Among these measures, the Canada Emergency Wage Subsidy (CEWS), the Canada Emergency Response Benefit (CERB) and support for businesses account for the largest portion:

  • Canada Emergency Wage Subsidy 82.3 billion
  • Canada Emergency Response Benefit 73.1 billion
  • Support for businesses 21.3 billion

3. Debt exceeds target values

As a consequence of the unusually large deficit forecast for the current fiscal year, the government needs to borrow heavily, which will increase the size of the federal debt. This debt has equalled slightly more than 30% of the gross domestic product since the start of the decade, but in March 2021 it could reach $1,200 billion, or 49.1% of GDP. This is far beyond the target set by the government in late 2019, which anticipated bringing the debt-to-GDP ratio below 30%. Nonetheless, the Finance Minister still regards this ratio to be favourable compared to that of other countries. He also estimates that, given the very low interest rates, the cost of servicing the debt will not exceed 1% of GDP in spite of the cost of all the measures introduced. For context, 25 years ago, Canada’s debt-to-GDP ratio was 66.8%.

4. No tax increases on the table

The economic and fiscal snapshot does not set out any economic recovery measures, although these are expected in the coming months. However, Minister Morneau let it be known that raising taxes to refill the government’s coffers is an approach he feels would be counterproductive, and that he plans to rely on investment to restart the economy. As for the existing aid programs, he put forward the idea that the wage subsidy and employment insurance could, over time, take the place of the Canada Emergency Response Benefit.

5. The economy: two scenarios

Finally, with respect to the economic outlook, the Minister envisions two main scenarios. The first, optimistic, would see a 9.6% drop in real GDP in 2020, while the second, pessimistic, would put the drop at 11.2%. In the former scenario, the economic recovery would be uneven and gradual; in the latter, the country would experience a resurgence of the virus before the end of the year, and this would again dampen business momentum.

It is no surprise that the minister is not willing to make projections farther into the future, since he views the situation as very uncertain. For this reason, he plans to wait until next fall to deliver a more detailed fiscal update, or perhaps even a full budget, to the House of Commons.

So it’s a date, then, for a few months from now.



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