The end of the Canadian government’s 2020/21 fiscal year will mark a grim milestone: one full year since COVID-19 took a steep toll on Canada’s population and economy. As we look forward to Minister Freeland’s first official budget document, here are the things we’re watching.
Ballooning expenses to offset better-than-expected revenues
Monday’s update will likely fall short of a full fiscal plan, focusing on the next two years rather than the typical five. Given uncertainty around virus spread, we’re likely to see a range of economic scenarios. We do not expect a commitment to a fiscal anchor, as both the Prime Minister and Minister Freeland have signaled, though the government is likely to reiterate the strength of its balance sheet despite the significant cost of supporting the economy. Since Canada remains in the throes of a second virus wave, we expect the update to add red ink to the government’s bottom line.
The outlook is somewhat less dire than when the government released a fiscal snapshot in July. The unemployment rate at 8.9% is down materially from May’s 13.7% high but well above February’s 5.6%. The economy recovered ground through the third quarter, trimming our view of the annual GDP decline to 5.6%, smaller than the average summer forecast of -6.8%.
This improvement suggests Minister Freeland’s revenue projections are likely to be somewhat stronger than in the July fiscal snapshot. Additional spending since then will have the opposite impact.
We expect the government to show a 2020/21 deficit of close to $370 billion, an overshoot of the $343 billion expected in July. We already see some stimulus bleeding into next year, with current announcements bringing the deficit to at least $90 billion in 2021/22. Extension of existing supports (CRB, CEWS) are likely and could add $40 billion through the end of 2021, even before new spending announcements. We expect sizeable but more manageable deficits around $35 billion per year thereafter, if COVID-19 spending winds down.
Targeting investment to address a fragmented recovery
New spending will likely continue to focus on bridging the economy through an ongoing crisis.
Goods-producing industries are faring better and are nearer pre-COVID activity levels, while many services continue to suffer significant disruption. Consumers are spending strongly in some ways, but eschewing other categories almost entirely. Accordingly, we expect new business supports to be targeted at industries that have been hard-hit and are likely to continue feeling a squeeze even after a vaccine is widely distributed (e.g., transportation, tourism, and the energy sector).
The government has thus far edited or expanded existing programs, so we may see enhancements to the flagship wage subsidy for locked-down businesses mirroring the lockdown support in the new rent subsidy, or more targeted public investments like those in energy-sector environmental projects. We expect more of the latter, too, given the government’s focus on climate change in September’s Throne Speech. These changes could be costly: a 25% lockdown top-up to CEWs could easily add $5 billion if more widespread lockdowns become necessary.
Supporting the recovery means more targeted household programs, too. Until its recent wind-down, CERB did much to support lower-income Canadians; many of those laid off earned more on CERB than their pre-COVID wages. CRB will continue that support, but expect the government to focus on those looking to get back to work. Recent RBC Economics analysis suggests women with young children have suffered significant labour market impacts, above those suffered by men. Investments to create more socially distanced daycare spaces and a (temporary) boost to the Canada Child Benefit (CCB) to help cover costs for those comfortable sending children to daycare may be in the cards. Small changes to CCB eligibility criteria, or boosts in the payout could quickly add red ink. May’s one-time $300 per child payment cost about $2 billion. Other social programs have also been on the government’s radar, including pharmacare reforms, and a “21st century” EI system. While we can’t rule out progress towards these goals, we think bigger, structural ambitions rather than cyclical stimulus will come in a spring budget.
Eyeing the medium term and getting debt-to-GDP back on a downward slope
With so many potential supports, we’re watching the outlook past next year. We worry little about whether the government can sustain a massive deficit this year—it can, given low debt levels entering the crisis and historically low interest rates. But now that it has no fiscal guardrails, there’s risk debt-to-GDP will continue to rise in the medium term if it continues to spend ambitiously.
The government may be tempted to add new revenue sources to help fund future spending ambitions. That would be misguided given the fragility of the recovery.
Having rightly abandoned its pledge to keep debt-to-GDP on a downward path this year, the government may wish to keep the fiscal taps open over the medium term. Should spending stay high, with vaccines on the horizon, we’d be more concerned about overdoing the stimulus than underdoing it. As it stands, Canada’s programs have been generous and household-focused, as compared to our G7 peers. If the path for debt-to-GDP is to return to its downward slope—the least we should do—we’ll need to be strategic and ensure lasting spending is focused on future growth. With so many ambitious policies signaled in the Throne Speech, the details of announced policies will be key for assessing whether the debt they incur will remain sustainable.
Colin Guldimann is an economist at RBC. He works primarily on issues related to the public sector, energy, and climate change. Prior to joining RBC, Colin worked on housing policy and macroeconomic research at the Department of Finance in Ottawa.
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