Finance Minister Bill Morneau tabled a fiscal snapshot today that shows the federal government’s deficit is expected to hit $343 billion this year — an eye-popping figure largely attributed to pandemic-related support programs that have pushed federal spending to a level not seen since the Second World War.
The 168-page snapshot offers a short-term economic analysis and a detailed account of what the government has spent already to shore up an economy on life support. It presents little in the way of a long-term plan to return the economy to pre-pandemic normalcy.
“Some will criticize us on the cost of action,” Morneau said in a speech in the House of Commons today. “But our government knew that the cost of inaction would’ve 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.”
Watch: Finance Minister Bill Morneau presents fiscal ‘snapshot’
The government has rolled out big-ticket items in recent months like the Canada emergency relief benefit (CERB) — to help the sick and unemployed during the pandemic — and the Canada emergency wage subsidy (CEWS) to help businesses keep employees on the payroll amid massive shifts in sales and revenue.
The government also has created the Canada emergency business account (CEBA) to float partly forgivable loans to businesses in need, and has set aside some $9 billion to help students this summer.
What we’ve learned from this fiscal snapshot:
- Deficit for 2020-21 rises to $343.2 billion from $34.4 billion projected before pandemic.
- Net federal debt will hit $1.2 trillion.
- Federal debt-to-GDP ratio is expected to rise to 49% in 2020-21 from 31%
- Direct federal support for Canadians and businesses: $212 billion.
- COVID-19 slowdown has cost the federal treasury an additional $81.3 billion.
- GDP will shrink by projected 6.8% this year — worst since the Great Depression.
- Economy is expected to bounce back by 5.5% next year.
Seniors have received one-time Old Age Security bonuses and families eligible for the Canada Child Benefit got an extra $2 billion in payouts in May.
The government estimates that these programs, and dozens of others, have resulted in $236 billion in new spending to date.
But the government is projecting that, by the end of the 2020-21 fiscal year next March, it will have spent about $469 billion more than planned when it last set spending targets in December 2019.
Wage subsidy to be extended
These numbers are significantly higher than what Parliamentary Budget Officer Yves Giroux projected in June.
Senior finance officials, speaking on background to reporters at a technical briefing, said that is largely attributable to higher projections for uptake of the wage subsidy and the CERB.
One official said the government will soon announce details of a proposed extension to the wage subsidy beyond its current August 2020 end date.
“We know there’s some things that need to change so we can get people back to work,” Morneau said of the program. “We’ll have more to say in the very near term.”
As of June 15, the government had approved $13.28 billion in payroll help for 223,918 companies.
But in the fiscal snapshot, the government is projecting the subsidy program will cost $82.3 billion in 2020-21 — a sign that the government expects many more businesses to avail themselves to the 75 per cent wage support after some tweaks to the existing program.
Beyond new spending, the deficit has been pushed higher by a significant dip in the amount of revenue that Canada is expected to collect this year.
Personal income taxes alone are projected to dip by some 30 per cent and corporate taxes will be roughly 11 per cent lower.
Debt tops $1 trillion
“The projected contraction in federal budgetary revenues is unprecedented since the Great Depression, with an expected decline in 2020-21 more than twice as big as in 2009-10, following the global financial crisis,” the fiscal update says.
All told, the mounting deficit has pushed the federal government’s total debt level to more than $1 trillion — a number never before seen in Canada.
The projected debt will be $1.2 trillion by March 2021, up from $765 billion a year earlier.
“The reality is we’ve witnessed an unprecedented shock to our system,” Morneau told reporters.
“With a crisis of this magnitude, someone was going to have to shoulder the costs and the federal government was uniquely placed to take this responsibility on. We took on this role because it was the right thing to do.”
The debt-to-GDP ratio, the government’s favoured fiscal marker, also has jumped to 49.1 per cent from the 30.1 per cent projected last December. That ratio shows how the debt compares to the size of the country’s economy.
That nearly 20-point swing is attributed to a diminished economy — restaurants, hotels, oil rig drilling and home and motor vehicle sales experienced particularly massive declines in business activity in the last fiscal quarter.
Conservative Leader Andrew Scheer called Morneau’s fiscal update a “dire picture of Canada’s finances.”
He said the document shows the government has no plan to stimulate growth, attract business investment or create the conditions for job growth.
“The prime minister’s track record proves that he cannot be trusted to lead Canada through the recovery,” he said.
Scheer said Canada is the only G7 country that has had its credit rating cut during the pandemic — one of the U.S.’s big 3 credit agencies downgraded the rating last month — and Canada has the highest unemployment rate among the group of developed nations.
“That should be a real wake-up call for this government,” he said, adding that even Greece has more people employed now than Canada.
He said issuing a fiscal snapshot without much of a plan to support the economy as it reopens is a “wasted opportunity.”
Partial rebound forecast for next year
Citing private sector economists, the federal government says that the size of the economy is projected to shrink 6.8 per cent this year before growing by some 5.5 per cent next year.
The unemployment rate peaked at nearly 14 per cent in the second quarter of 2020, the government said, but it expects that rate to return to levels closer to the pre-pandemic era — roughly 7 per cent — by the end of 2021.
“This is truly the challenge of our lifetime. As temporary investment measures come to an end and GDP recovers over time, deficits are expected to retreat,” the fiscal update document says.
The government did not give fiscal projections for the years ahead.
“Due to the unprecedented degree of uncertainty clouding the economic outlook, providing a fiscal forecast beyond the current fiscal year with an appropriate degree of confidence is not possible at this time, and would potentially be misleading,” the document reads.
Morneau said that the government is hoping for a “successful relaunch of the economy” that will improve the fiscal outlook. He said he could not pinpoint when the government might return to a balanced budget.
“The dynamic nature of the challenge is such that we’re not going to make assumptions about the future that we can’t know today,” Morneau said.
While the size of debt has exploded, the government said that the cost to service the debt will actually be $4 billion lower this year than what was projected last December.
The government said it has been able to issue debt at lower interest rates — and for longer terms — because there is such a strong demand from bondholders looking to buy Canadian debt.
“That’s a better situation than we could have ever managed,” Morneau said. “The cost of our debt is lower than it’s ever been before.”
Watch: Scheer presses Trudeau government for recovery plan