MNI POLICY: Canada Sees CAD343B Deficit, Record 15.9% of GDP

--Finance Minister Morneau Says Will Do More As Needed To Fight Covid

--Canada Plans Record 10- and 30-Year Bond Sales To Lock In Low Rates

By Greg Quinn

     OTTAWA (MNI) - Canada's budget deficit will be a record CAD343 billion or

15.9% of GDP this year, and Finance Minister Bill Morneau said Wednesday he's

prepared for more to battle Covid-19, including unprecedented long-term bond

sales to lock in low borrowing costs. 

     The shortfall for the year that began April 1 is six times greater than the

postwar record of CAD56.4 billion in 2009-10, or twice the 1984 deficit that was

8.1% of GDP.

     Spending rises to CAD612 billion from CAD375 billion in fiscal 2020-21,

while revenue declines to CAD269 billion from CAD341 billion. The report

abandoned the past practice of projecting out as much as five years, calling

that exercise "misleading." 

     Federal debt rises to CAD1.06 trillion from CAD717 million, or by a record

18pp to 49.1% of GDP. The debt-to-GDP ratio was well over 60% through most of

the 1990s when there was a painful reckoning in foreign bond markets.

     "If there is a resurgence, we are ready to do more," Morneau said in the

text of a speech to Parliament that has been scaled back to observe social

distancing rules. The plan already takes program spending to 27.5% of GDP from

15.2% last year.

     --FALL BUDGET?

     Canada's GDP will fall 6.8% this year and expand 5.5% in 2021, according to

a "snapshot" that leaves the full budget required this year to the fall session

of Parliament. Justin Trudeau's Liberal minority government faces little risk of

losing a confidence vote on spending that was often encouraged by opposition

parties to help Canadians through the worst recession since the 1930s. 

     Major fiscal action has helped contain the virus and protect the economy

from a steeper downturn, Morneau argued. Canada's low debt relative to G7 peers

and rock-bottom interest rates provide the means to do what's needed if there

are further coronavirus outbreaks, he said. 

     There was almost no reference to a fiscal anchor or a plan to scale back

the deficit, besides Morneau saying the debt structure is "prudent" and will

remain so as the pandemic passes. 

     "The current environment provides a unique opportunity for the government

to issue an unprecedented level of long-term bonds at historically low interest

rates," according to an annual bond strategy paper. "This will ensure Canada's

debt remains affordable and is less vulnerable to increases in interest rates

for future generations." 

     --BOND DELUGE

     Sales of 10- and 30-year bonds will grow to CAD106 billion from CAD17

billion last year. Total sales will rise CAD285 billion to CAD409 billion and

benchmarks will be added at 3 years and 10 years. 

     The stock of t-bills will rise by CAD142 billion to CAD294 billion. Weekly

t-bill sales, a faster pace than before the pandemic, will continue this year

and be more focused on 6- to 12-month maturities.

     The need for cash is eased by the BOC's plan to buy at least CAD5 billion a

week of federal debt. New BOC Governor Tiff Macklem will likely keep the

benchmark interest rate at 0.25% on July 15 and is prepared to expand QE as

needed.

     Deficits have done nothing to stall a rally that's taken government yields

to record lows, and they have been stable since Fitch took away Canada's

triple-A credit rating June 24. 

     --MORE DAMAGE

     Morneau's projection is higher than the Parliamentary Budget Officer's

prediction last month of CAD256 billion, or 11.8% of GDP. In December Morneau

projected a CAD28.1 billion deficit based on GDP growing 1.6% in 2020, and since

then 11 million Canadians -- almost a third of the population -- have been

supported by government relief.

     "This pandemic is not over and we cannot let up on our commitment to one

other," Morneau said. "Around the world, we've seen what happens when reopening

is rushed."

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

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