Canada's "fiscal snapshot"

After a whole lot of prompting from the opposition parties and the media, Canada's federal Finance Minister Bill Morneau today delivered a "fiscal snapshot" to outline how the government sees the economic and fiscal outlook almost half a year into the pandemic. The independent Parliamentary Budget Office (PBO) had already pegged the deficit for this fiscal year (April-March) at C$ 256 million, up from a pre-COVID forecast near C$ 28 billion. Morneau's main task today, aside from updating that estimate, was primarily to offer reassurance that the Government is at least thinking about what happens next.

So what did Morneau have to say?  Considering that the PBO estimate was made less than three weeks ago, it is remarkable to see that the Government is now pegging the deficit for this year at $343 billion, twelve times the pre-COVID expectation.  Interestingly, Morneau has now offered the Government's estimates for how that much higher figure is broken down. Much the largest part is accounted for by the array of programs hastily created and rolled out in the past four months: those amount to $212 billion of the projected shortfall. It appears the Government will soon announce the continuation of some of these measures beyond the current end date of August 31.

Aside from those programs, it is estimated that the impact of the economic slowdown on revenues and spending accounts for a further $ 81 billion. This can be seen as the economy's "automatic stabilizers" kicking in, on a scale never seen before, yet still far too small to cushion the economy from the impact of the pandemic -- hence, of course, the need for all the temporary programs.

All in all, the massive increase in the deficit will push net Federal debt to C$ 1.2 trillion and boost the debt/GDP ratio to 49 percent from 31 percent pre-pandemic.  This is startling, but would still be well below even the pre-pandemic debt/GDPs ratio of other developed economies, and of course those countries are also seeing a huge deterioration in their fiscal outlooks this year.  Morneau sought to stress the relative ease of servicing this debt in the current low interest rate environment: surprisingly, debt service costs for 2020/21 will actually be lower than in the preceding fiscal year. 

As for the economy, Morneau reported that the Government is looking at a real GDP decline of 6.8 percent for this year. Most of that decline is concentrated in the second quarter, with a fall of close to 40 percent (at annualized rates) quite possible. In fact we can be even more specific than that: barring a second major wave of the virus, it is all but certain that the entire fall in GDP took place in the months of March and April, when lockdowns were at their most stringent.

The government expects GDP to grow 5.5 percent in real terms in 2021 -- a strong recovery by historical standards, but one that means that GDP will not regain its pre-COVID level until at least 2022. Statistically speaking, much of the growth projected for 2021 in fact reflects expectations of a sharp rebound in the current quarter: quarter-on-quarter growth rates through 2021 are expected to be relatively tepid.  In keeping with the Government's normal practices, these projections all fall within the range of private sector forecasts provided by banks and other institutions.

The disappointing thing about this snapshot is the absence of any real indication of how the government will attempt to restore momentum to the economy once the crisis is fully in the rear view mirror. Lame duck Conservative leader Andrew Scheer has already pounced on this, saying the absence of such a plan means the fiscal snapshot is a "wasted opportunity".

Scheer is right about that, but one dreads to think what his successor as party leader, due to be selected in August, might think such a plan should contain. There are plenty of people on the right of the political spectrum warning of the need for massive tax hikes and spending cuts to deal with the "unmanageable" debt burden.  That would, of course, be a sure-fire way to turn recession into depression, but the lessons of the 1930s or, more recently, the UK's disastrous austerity program after the 2008 financial crisis, never do seem to sink in.
.
Canada has dealt with a debt-and-deficit problem before, though on that occasion it could be described as chronic, where the current crisis is acute. Unfortunately, it's almost received wisdom among media commentators, and even many business economists, that Canada resolved its deficit problem in the 1990s through massive spending cuts.  That's not really true, as I pointed out in this long-ago post. The key to eliminating the deficit back then was a huge jump in revenues.  That can only happen if the economy is growing smartly.  Trying to force down the deficit in short order by cutting spending and raising taxes will only make the post-COVID fiscal problem worse.