MNI INTERVIEW: Canada Budget Officer Sees Red Ink Cresting

--Further Significant Upward Revisions To Deficit Forecast Less Likely

--Budget Officer Says End To Lockdown To Ease Fiscal Pressure

By Greg Quinn

     OTTAWA (MNI) - Canada's parliamentary budget officer says further

significant upward revisions to his estimate of a 2020 federal deficit of 13% of

GDP are becoming less likely, telling MNI that pressure on government spending

and tax revenue should ease as businesses reopen from the Covid-19 lockdown.

     While data Friday showed two million jobs lost in April, Yves Giroux said

employment declines should moderate. The record low employment rate of 52% was

only two percentage points below the budget office's projection for the second

quarter, suggesting no big markdown of fiscal numbers.

     "April was what we think was probably the worst because everything was shut

down, and there is very gradual but some re-openings, so the employment rate

could edge up in May and June," Giroux, also a former senior finance department

official, said in an interview.

     Prime Minister Justin Trudeau within hours of the job report extended a

pricey wage subsidy program, but Giroux said fewer people should need the checks

by June 6 when the second phase starts. The government estimated the wage

program's cost at CAD73 billion over its first 12 weeks.

     "It will for sure add to the deficit, but extending these benefits is

probably not going to be as expensive as if you just added a third to the cost,

because by July presumably there will be more re-openings," he said.

     --FAST SPENDING

     Giroux reports independently to Parliament and made shockwaves with an Apr.

30 estimate for the deficit to reach about CAD250 billion or 13% of GDP, both

postwar records and CAD68 billion more than his office estimated just three

weeks prior.

     The government's pre-pandemic deficit forecast was around CAD30 billion,

and Trudeau has refused to schedule a budget that usually is delivered before

the fiscal year that starts Apr. 1.

     Giroux says his biggest surprise has been the speed with which a government

that can take years to design programs moved out relief checks, boosting

spending by about half in just weeks to aid households and business owners.

Canada created new payout systems to deliver cash, and even this week set up

other programs to lend to large firms and send payouts to seniors.

     While the Liberal government needs opposition support to stay in power,

opposition parties have raised no major objections to the massive spending

boost.

     Swift action may help the economy turn around, easing the fiscal burden in

the long run if things can return to normal, though the PBO projects a record

12% decline in GDP for 2020.

     --TRIPLE-A?

     "The moment we start to see an uptick in nominal GDP, it has a positive

impact on federal revenues," Giroux said.

     Canada's long-term finances are fairly strong and low interest rates make

adding debt easier, the PBO said in its last report. Even the potential

downgrade of Canada's triple-A credit rating may not be overly problematic,

Giroux said, given the country's relative fiscal health compared to major peers.

     "It would be surprising for Canada to be downgraded and for other countries

to remain unaffected," he said. "Even if we were downgraded a notch or two, it

would increase the interest rates we have to pay on our debt, but it would not

push them to levels that are out of whack with other countries."

     Projecting deficit figures is harder today than in a traditional recession,

and PBO reports are now based on assumptions around easing of health

restrictions. Fiscal results could swing a lot based on the trajectory of the

restart. "It's very sensitive because economic activity has a very direct link

to federal revenues," Giroux said.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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