The Morning Brief – 10.01.20

By Bruce Carson


If even some of the Speech from the Throne promises are kept, spending will rise

Will there be a fiscal anchor?

Is there an economic growth plan involving the private sector?

The Parliamentary Budget Officer’s Report on Economic and Fiscal Outlook, September 2020

With the PBO’s report on Canada’s economic and fiscal outlook published this week, we now have a better idea of the costs involved in Canada’s fight against COVID-19, but only a hazy gaze into the future. There is no projection of future spending and there is no fiscal anchor for government spending.

The PBO’s report states that the deficit is on track to hit $328.5 billion this year, a number slightly lower than projected in former Finance Minister Morneau’s recent economic snapshot. The reason for this discrepancy is that the PBO is more optimistic regarding the strength of government revenues.

The PBO’s projected deficit amounts to 15% of GDP, the largest number in the fifty years of making this calculation.

The budget deficit is projected to fall to $$73.8 billion next year and continue to fall after that, with deficits averaging in the $40 billion range or perhaps slightly higher.

These numbers are based on three assumptions: 1) the public health measures stay in place for the next 12-18 months, 2) COVID-19 support measures are withdrawn as scheduled and 3) monetary policy (interest rates) remain where it is now.

The PBO projects real GDP will return to pre-crisis levels by early 2021. However, it is noted that the oil price shock and COVID-19 will have a permanent impact on Canada’s economy.

Also federal debt to GDP ratio will peak at 48.3% in 2022-23 up 18.3% from where it was in 2019, prior to the outbreak. It is predicted that this ratio will rise and then decline in the medium term. This is due to the expiry of spending measures and interest rates remaining low.

It should be noted that the PBO did not take into account spending measures that were set out in the SFT in this report.

Revenues are estimated to be $228 billion in 2020-21, a decline of $51 billion (15%) from 2019-20.

Bill Curry writing in the Globe emphasized the point that the deficit set out by the PBO did not include any spending measures from the SFT.

Commenting on his report, the PBO, Ives Giroux said that as long as temporary pandemic spending is wound down as currently planned, federal finances are sustainable but “barely.” He went on to say that “it wouldn’t take much in terms of new spending, or even tax cuts, for federal debt to become unsustainable, or an increase in interest rates that would be faster than anticipated.”

He then added “if we get into a prolonged pandemic or if the economy was to fare less well than we anticipate, or there was to be significant long term spending commitments made, then there would probably need to be something done to ensure that the fiscal sustainability of federal finances are guaranteed in the medium term. And that could be a reduction in spending elsewhere or tax increases.”

Giroux listed four scenarios which could make the fiscal forecast worse. First, a second wave of COVID-19 causes more lockdowns. Second, federal support programs are extended. Third, new federal spending programs are launched or fourth, there is a rise in interest rates on government debt.

The SFT contains a number of large spending commitments such as pledges to fight climate change involving retrofitting houses and buildings. Also child care and early learning across the country is to be expanded and a national pharmacare program is to be put in place along with a commitment to create one million jobs. The cost of all of these measures would be layered on top of the pandemic support for business and households.

The National Post in an editorial last weekend dealt with what it called Canada’s “quickly deteriorating fiscal situation.” It was referring to the projected deficit which does not include SFT spending. The Post raised the concern that with the support of the NDP, the government would double down on “reckless spending.” The editorial recommended that Canada focus on getting through the healthcare crisis to avert a fiscal crisis.

Nothing discussed above focusses on growing the economy and job creation. William (Bill) A. Macdonald, former corporate lawyer and author of the recent book “Might Nature be Canadian” in his recent Globe article entitled “Canada faces its third great post war battle” begins that conversation.

Macdonald points out that Canada faces three challenges; national unity, the economy and relations with the United States all at the same time, along with fighting COVID-19 and reconciliation with Indigenous people.

He believes Canada needs a new shared vision, new ideas and projects. He writes “we need a prime minister surrounded by strong private sector oriented ministers and public officials as well as a broad cross-section of top business leaders.” This doesn’t sound like anything close to what we have now.

His vision for Canada is as the best place for people of every kind to live, work and build wealth and businesses. Canada, he believes can be the beneficiary of a “brain gain.”

He proposes a deferred tax on reinvested capital gains to help get the economy moving again and attract investment. Also Canada would benefit from a Trudeau, Ford, Legault, Horgan and Kenney conference on Canada’s Economy of Tomorrow styled after the Confederation of Tomorrow Conference.

The focus of this conference would be getting Canada on a sustainable track. Canada in his view needs visionary political, civil service and business leaders –those who can see around two corners.

Also Canada needs a budget “sooner the better.” One that deals with two jobs that need doing at the moment; fighting COVID-19 and building Canada’s private sector economy over the next ten years. Former PBO Kevin Page who now heads up the Institute of Fiscal Studies and Democracy at the University of Ottawa writing in Policy Magazine concurs with Macdonald’s call for a budget this fall.

Page also cautions that “all proposals for future deficit financed programs must be carefully scrutinized by parliament.” He is also concerned about fairness to future generations so we need to be careful with future debt buildup.

Canada’s economy now is being fuelled by government spending as it should be to protect and help those who are suffering loss due to the pandemic. However, as Macdonald points out there will come a time, once we have wrestled COVID to the ground, for Canada to build with the support of the private sector. The conditions that make government spending attractive now will fade, and Canada needs to be ready to work with the private sector to grow the economy and jobs.

To Come

October 6
  • International trade numbers for August to be released
October 6-7
  • NHL draft takes place
October 7
  • Vice Presidential debate
October 8
  • Speech to be delivered by Bank of Canada Governor Tiff Macklem
October 9
  • Job numbers for September to be released

The Morning Brief returns on Wednesday, October 7.

– BC