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Government won't restore fiscal anchor until economy recovers
Canada's budget deficit will be a record CAD382 billion this fiscal year or 17.5% of GDP, and Finance Minister Chrystia Freeland pledged Monday to spend whatever the economy needs until the pandemic passes and fiscal "guardrails" can be restored, while locking in low interest rates with 50-year and green bonds.
The cash shortfall for the year that began April 1 is almost seven times the record of CAD56.4 billion set in 2009-10, and double the 1984 deficit that was 8.1% of GDP. Canada's biggest ever deficit since the nation was founded in 1867 was 22.5% of GDP set during World War II, and Freeland compared today to that time and the Spanish Flu pandemic.
Spending rises to CAD642 billion from CAD363 billion, while revenue declines to CAD275 billion from CAD334 billion.
The informal budget report restored the practice abandoned in a July update of making projections up to five years into the future, citing more stability in the economy and progress on a vaccine. Deficits were projected at CAD121 billion in fiscal 2021-22, then over the next four years at CAD51 billion, CAD43 billion, CAD31 billion, and CAD25 billion. Those figures don't include up to another CAD100 billion of spending the government will introduce over the next three years, or 3% to 4% of GDP.
"We will do whatever it takes to help Canadians through this crisis," Freeland said in her first major update since taking over from Bill Morneau, who in July estimated a CAD343 billion deficit this fiscal year. "We will ensure the Canadian economy that emerges from this pandemic is greener, more inclusive, more innovative, and more competitive than the one that preceded it, with a stronger, more resilient middle class."
BEYOND THE RECOVERY
The update focused on some expensive measures beyond sustaining the economy through the pandemic, touting the need to put a "down payment" on issues such as fighting climate change, helping racial minorities and a national childcare system. Business leaders and government advisors have told MNI this will threaten fiscal stability over time.
Federal debt rises to CAD1.11 trillion this year from CAD721 billion, or by a record 19.5pp to 50.7% of GDP, the report said. The debt-to-GDP ratio was well over 60% through most of the 1990s when there was a painful reckoning in foreign bond markets.
Canada's GDP will fall 5.8% this year and grow 4.8% in 2021, compared with July projections of a 6.8% contraction and a rebound of 5.5% in 2021. The government also said the second Covid-19 wave presents downside risks and output may decline heading into next year. The deficit could widen to as much as CAD399 billion in a scenario of escalated Covid restrictions.
"When the economy has recovered, the time-limited stimulus will be withdrawn and Canada will resume its long-standing, prudent and responsible fiscal path, based on a long-term fiscal anchor, which we will outline when the economy is more stable," Freeland said in a speech to a Parliament scaled back for social distancing rules.
The government says Canada's low debt relative to G7 peers and rock-bottom interest rates provide the means to do what's needed, and it is boosting long-term debt sales to reduce rollover risks and lock in historically low interest rates. Government bond yields have remained at or near record lows this year, with investors shrugging off Fitch's move to strip Canada of its triple-A credit rating June 24.
The government targeted relief for tourism and airlines more towards small business financing and infrastructure projects than money for major airlines or hotel companies. Other big-ticket items include extending a wage subsidy and small business rent assistance, and a fund to plant 2 billion trees across Canada. The government will also push for online merchants including ones based outside Canada to start paying federal sales taxes next year, pledging to act unilaterally if international rules aren't ready.
Prime Minister Justin Trudeau's Liberal government only needs one party to generate enough votes to pass budgets and avoid an early election. The NDP and Bloc Quebecois have backed more spending to support the unemployed and other social programs, while the Conservatives have sought more restraint.
The borrowing limit will be raised to CAD1.83 trillion through fiscal 2023-24 from CAD1.17 trillion. MNI first reported last week that the government had deferred raising the borrowing limit.