BILL CURRY| DANIEL LEBLANC
July 8, 2020
The federal government is forecasting a deficit of $343.2-billion this year due to a sharp decline in tax revenue and massive emergency spending in response to the coronavirus pandemic.
That one-year deficit figure is nearly the same size as total federal spending in a normal year.
The big spike in deficit spending will push the federal debt through the one trillion dollar mark for the first time, up from $716.8-billion in the previous fiscal year.
Finance Minister Bill Morneau released the figures Wednesday as part of an economic and fiscal “snapshot,” which provides the first estimate of Ottawa’s bottom line since a December report that was released prior to the pandemic.
“Faced with the most profound downturn since the Great Depression, our government acted to support the economy. Every investment we made was in response to the COVID-19 crisis and was time limited,” Mr. Morneau told the House of Commons Wednesday, according to his prepared remarks. “Some will criticize us on the cost of action… Our government knew that the cost of inaction would have been far greater. Those who would have us do less ignore that without government action, millions of jobs would have been lost, putting the burden of debt onto families and jeopardizing Canada’s resilience.”
The 168-page document includes a section aimed at making the case that the larger debt load is manageable in light of historically low interest rates. Ottawa intends to lock in these lower rates by increasing the percentage of debt that is issued through long-term bonds. The government notes the cost to service the federal debt will actually be slightly lower this year than the previous year.
Mr. Morneau said the federal government decided to take on extra debt so that provinces and households did not have to shoulder as much.
“Canada’s debt structure is prudent, it’s spread out over the long term, and it compares well to our G7 peers,” said Mr. Morneau.
Prior to the pandemic, Mr. Morneau had projected a deficit of $28.1-billion in the fiscal year that started on April 1.
The cause of the larger deficit is primarily due to a $71.1-billion decline in tax revenues, combined with $227.9-billion in direct spending and tax measures in response to COVID-19 and other adjustments to the fiscal forecast.
The update states the the drop in federal revenues is the steepest since the Great Depression and twice as large as the decline that occurred during the 2009-10 global financial crisis.
The $343.2-billion deficit figure represents 15.9 per cent of GDP and brings the federal debt-to-GDP ratio to 49.1 per cent.
For context, the federal debt-to-GDP ratio reached a peak of 66.8 per cent in the 1995-96 fiscal year, which prompted strong concern from global lenders and triggered an era of deep fiscal restraint to bring the federal deficits and debt back in line.
Another point of comparison is the size of this year’s projected deficit to total government spending. The 2016-17 fiscal year was the first time ever that total government spending was higher than $300-billion. In 2018-19, total federal spending was $346-billion.
The government’s projections are based on an average of private sector forecasts. Those average forecasts show the Canadian economy will shrink by 6.8 per cent in 2020.
The snapshot primarily focuses on outlining the measures announced to date and is largely silent on the government’s future plans for the economy.
Mr. Morneau told reporters Wednesday that the government intends to release a budget or full fiscal update in the fall. He said the government could potentially announce additional spending measures to support an economic recovery that are now accounted for in Wednesday’s fiscal snapshot.
The snapshot said the Canadian economy bottomed out in April, adding the “worst is behind us.”
While there will be “large rebounds in real GDP growth” as sectors of the economy reopen, the snapshot predicts that “the pace of economic growth is likely to remain soft as some containment measures, such as travel restrictions, will remain for some time.”
The snapshot said the economic crisis would have been much worse without the federal government’s intervention earlier this year, as the employment rate fell to its lowest level on record.
“The decisive and substantial support provided by the government helped prevent further damage to the economy this year by replacing lost income and avoiding higher unemployment,” the document said. “Department of Finance estimates suggest that real GDP could have fallen by over 10 per cent in 2020 without this support, with the unemployment rate rising by a further two percentage points.”
The service sector has been particularly hit by the pandemic, with women having faced “slightly larger reduction in hours worked and lost their jobs earlier than men.”
The pandemic had a devastating impact on sectors such as accommodation and food services, culture and recreation, according to the report. Falling oil prices created an additional challenge in oil-producing regions.
“Job losses remain acute in many lower-wage industries and fewer women were able to get back to work as the economy began to recover in May,” the snapshot said. “However, losses have also been severe in the goods sector as manufacturing and construction industries have had to deal with severe drops in both domestic and foreign demand as well as some government-ordered restrictions on activity.”
The government is now predicting an “uneven and gradual recovery,” the pace of which will be dictated in part by the state of the pandemic.
“Canadians are likely to remain cautious until they are assured that risks from the virus are low, potentially delaying a return to work. Parents’ return to work could also be delayed by childcare responsibilities, most likely to impact mothers’ employment status,” the report said. “Canadians may also choose to delay major purchases such as cars or houses until signs that hiring and the recovery is well underway.”
For illustrative purposes, the government also presented two scenarios for a slower recovery.
In the event of a “virus resurgence,” under which new cases of COVID-19 would start to accelerate at an exponential rate, there would be a GDP drop of 11.2 per cent in 2020. Under this scenario, the GDP would remain “below that of even the most pessimistic private sector forecast by the end of 2021.”
If, under another scenario, the return to normal activity for households and businesses is slower than currently expected because of “repetitive peaks of viral transmission,” the GDP would fall by 9.6 per cent in 2020.
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