The flood of federal spending in response to the coronavirus pandemic and the ensuing economic crisis will see the deficit soar to $343 billion this year, as officials warn the economy might never go back to normal.
At the same time, Finance Minister Bill Morneau provided no indication of a roadmap for when or how the government plans to rein in spending. But he insisted in the 168-page fiscal snapshot that the country remains well-positioned to handle the weight of that deficit because of historically low interest rates .
That lack of clarity means there are few clues as to what Canadian taxpayers can expect down the road, either in terms of potentially higher taxes or service cuts.
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What the snapshot does make clear is that there is a very real likelihood that the Canadian economy and consumer habits may not soon — if ever — return to what they were pre-COVID-19, and that the level of further spending required to spur recovery will depend on how seriously Canadians continue working to flatten the curve.
“Uncertainty is inherent in any forecast. However, in the current context, uncertainty is magnified to unprecedented levels. In addition to recovery being driven by public health outcomes, it may not follow historical patterns – crises can have a profound impact on economies that lead to permanent change,” the fiscal snapshot stated.
“The economy may not be able to produce the same level of goods and services, even if demand returns to pre-crisis levels.”
The fiscal snapshot cited as an example that will likely mean fewer seats at restaurants, leading to fewer jobs and less money for businesses.
Continued restrictions on travel, it also noted, could impact immigration, which would lead to slower growth in the workforce and employer’s ability to fill key jobs and services.
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The fiscal snapshot comes after months of economic pain that has seen Canadian unemployment levels hit their highest-ever levels.
While national unemployment was at a record low of 5.5 per cent in January, the coronavirus crisis and the nationwide shutdown led to an unemployment rate of 13.7 per cent in May and a total of 30 per cent of the workforce either losing hours or unemployed.
“The recession likely reached its lowest point in late April, although a large share of the economy still remains idled,” the snapshot suggested.
But even if the worst may have passed, that doesn’t mean the outlook is positive for businesses that will have to continue to find ways to adapt in difficult circumstances, the document warned.
“Even without resurgence of uncontrolled transmission, global uncertainty is likely to remain for some time. In the face of this, businesses have to decide when to start hiring and investing again,” the snapshot stated.
“There is a risk that this process could be prolonged until there is more certainty that the virus is no longer a threat and that the global economic recovery is solidly underway. In the interim, many businesses will have to follow strict physical distancing protocols and will be operating at greatly reduced capacity. “
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In short: any businesses or consumers hoping for a return to the life they once knew appear to be out of luck for quite a while yet.
Perrin Beatty, CEO of the Canadian Chamber of Commerce, also cautioned the government in response to the fiscal snapshot that Canadian businesses need clear guidance now.
“We need a longer-term fiscal plan and forward guidance from the government. Today should have been an opportunity to offer Canadians a clear picture of the challenges and a coherent strategy to address them,” he said in a statement.
“What businesses, investors, analysts and Canadians alike wanted to hear was how we will move away from the short-term measures that are quickly draining the federal treasury to helping families and businesses once again become self-sufficient.”
Conservative Leader Andrew Scheer also criticized the snapshot for failing to provide clearer details on how the government plans to shape the country’s economic recovery.
He described the financial outlook in the snapshot as “dire.”
“Every single country on the planet will be desperately competing for the same opportunities and the same investments so where is the prime minister sending us?” he said.
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“The prime minister has absolutely no plan … spending billions of dollars does not create economic growth.”
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The unprecedented economic shutdown sparked by the need to limit spread of the highly contagious virus saw the government roll out $212 billion in spending on income replacement and scientific research, business loans and grants to vulnerable Canadians.
Among those measures was the wage subsidy and the Canada Emergency Response Benefit, a $2,000 per month benefit for Canadians earning less than $1,000 per month because of the economic shutdown.
More than eight million Canadians have received the CERB. As well, 1.2 million who had previously claimed the benefit stopped doing so in May as lockdown measures began to ease.
The government also said in the snapshot that it will extend the wage subsidy for an unspecified amount of time beyond the most recent extension to Aug. 29.
“We will have more to say on that in the very near term as we finalize those details as how it can be used to help us get back to work,” Finance Minister Bill Morneau said in a press conference on Wednesday when asked about the extension.
The snapshot does not provide an estimate for the precise cost of whatever further extension is planned but noted when the program was first announced, it was earmarked to cost $45 billion and the three-month extension of the program to Aug. 29 upped that cost to $82.3 billion.
Parliamentary Budget Officer Yves Giroux had said in June that the cost of those programs would create a deficit of roughly $256 billion this fiscal year alone.
Officials speaking to reporters on background acknowledged the $343 billion deficit now projected could get worse if the uneven recovery forecast in several possible future scenario models included in the document come to pass, though said they did not see that as likely.
Sahir Khan, executive vice-president of the University of Ottawa’s Institute of Fiscal Studies and Democracy, said to a certain extent, he did not expect much in the way of concrete numbers from the government given the “unprecedented times.”
“Whatever number you put out, it’s going to be wrong no matter what,” he said.
He said while he thinks there are many Canadians who are pleased with the government support provided so far, the time is coming when the bill will have to be paid.
“At some point, the taps are going to have to be turned off and the economy is going to have to take us forward,” he said, adding he wants to see a strategy for the government to chart that course.
Khan added that the financial strain on many provinces and municipalities adds to the focus on the federal government and puts further emphasis on their role in guiding any recovery.
“For better or for worse, I think we are looking at the federal government as the resource that can restart this economy because I think we don’t have anywhere else to turn.”
Low interest rates billed as way to limit coronavirus debt pain
For consumers, all of this effectively means uncertainty will continue to be the key watchword for the foreseeable future.
A further fiscal projection will come in the fall but there’s no commitment from the government right now to any kind of fiscal anchor or attempt to adjust its forecasts for possible future risks.
What the government is doing, however, is trying to lock in the historically low interest rates that officials have repeatedly cited in defence of their massive spending.
The government will lock in long-term bonds at current low levels, meaning it will pay current levels of interest on future payments it makes towards getting rid of the deficit.
Because of the low interest rates, the government expects to pay $4 billion less on debt charges than it had planned to just last year.
“As challenging as this situation is, we’re in a position that the cost of our debt is lower than it’s ever been before,” said Morneau in a press conference.
When the pandemic first hit in January, the Bank of Canada has set its prime interest rate — which effectively acts as a guide for the rates given to consumers at their regular banks — at 1.75 per cent. But it has slashed that three times since, with the rate now at 0.25 per cent.
The debt-to-GDP ratio will rise from 31 per cent to 49 per cent because of the coronavirus emergency spending, the fiscal snapshot noted.
But overall, there fiscal snapshot puts an emphasis on the unpredictability of the coronavirus pandemic and the uncertainty that causes for trying to create any kind of economic forecast.
Whether the economy begins to slowly recover or whether it contracts again due to another shutdown, officials said, comes down to public health and whether Canadians stop the spread.
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