MNI POLICY: Canada Budget Office Sees CAD329B Deficit

Canada's Parliamentary Budget Officer said Tuesday this year's budget deficit would be CAD329 billion or a postwar record 15% of GDP, based on costs tallied before the government made major new commitments last week.

The PBO figure is still lower than the government's July estimate of CAD343 billion, a difference based mostly on assumptions of how much Covid-19 will hurt revenue and drive emergency spending. The new PBO figure is still higher than its June estimate of CAD256 billion or 12% of GDP.

The deficit may climb much higher after Prime Minister Justin Trudeau re-opened Parliament last week with pledges to move towards new programs for prescription drugs and national child care. Trudeau's Liberals also need opposition support to stay in power and last week the NDP also forced them to cancel a planned cut in the most expensive program of relief checks for people laid off during the pandemic. A former budget director told MNI the deficit could reach CAD450 billion, while Deloitte's chief economist told MNI a short term surge in debt is likely affordable.

The PBO also said that while federal debt will jump to 47.9% of GDP from 31.3% this year and peak at 48.3%, the medium-term outlook is sustainable.

"Based on current policy, the record increase in spending in 2020-21 should be temporary. We project the budgetary deficit to decrease to CAD73.8 billion (3.2% of GDP) in 2021-22 and continue to decline thereafter," the PBO report said.

SUSTAINABILITY RISK

"Nevertheless, beyond 2020-21, we are projecting budgetary deficits that are roughly CAD40 billion larger each year, on average, compared to our November 2019 outlook."

The government's interest cost will still fall to a record low in the next few years because of rock-bottom global bond yields, PBO said. That's the argument Trudeau used last week to justify a plan to borrow for new programs using mostly long-term debt.

"Should these commitments translate into new programs that are deficit financed, there is a risk that the sustainable debt-to-GDP trajectory over the medium term is reversed," the PBO report said.

Federal debt will rise to CAD1.05 trillion from CAD721 billion this fiscal year, the PBO says. While the debt-to-GDP ratio will reach the highest since 1999, it's still well below the postwar record of 66.6% in 1995. That was when foreign investors started to pull back on financing Canada's deficits, forcing years of painful austerity. This year Fitch took away Canada's AAA credit rating and last week warned another downgrade was possible.