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Canada ‘bets the farm’ on deficit spending amid coronavirus resurgence

Click to play video 'Coronavirus: Trudeau says government will keep investing to ‘shoulder debt’ over Canadians' Coronavirus: Trudeau says government will keep investing to ‘shoulder debt’ over Canadians
Prime Minister Justin Trudeau on Wednesday said that the federal government would keep investing to help Canadians because he would rather the government “shoulder debt” over the public, including by extending the Canada Emergency Response Benefit (CERB) through to next summer. He said the Canada Emergency Business Account would also be expanded to help business owners.

Canada‘s vow to double down on pandemic-related spending to keep the economic recovery underway in the face of a second wave of COVID-19 infections will support activity but raises questions over the burgeoning deficit, economists say.

The Liberal government on Wednesday made sweeping promises of major new investments and policy initiatives saying “this is not the time for austerity,” while giving few details on how those plans would be financed and at what cost.

READ MORE: Throne speech pledges extended wage subsidy, help for women and taxes

An economic update, including fiscal projections, will be released later this fall, it said.

Click to play video 'Throne speech: Conservatives say they will not support Liberals’ plan' Throne speech: Conservatives say they will not support Liberals’ plan
Throne speech: Conservatives say they will not support Liberals’ plan

“It seems like they’ve bet the farm and doubled down on spending,” said Ian Lee, associate professor of management at Ottawa’s Carleton University. “The commitments certainly suggest that the budget deficit is going to become much larger.”

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In a rare national address, Prime Minister Justin Trudeau said Canada has entered a second wave of the coronavirus pandemic and warned the country was on the brink of a surge in cases if people did not follow public health guidelines.

READ MORE: Canada ‘on the brink’ of coronavirus surge, second wave underway in some regions, Trudeau says

The government has already spent billions on pandemic aid, pushing this fiscal year’s forecast deficit to $343, which at about 16 per cent of GDP is the largest shortfall since World War II.

New measures since then will likely tack another $30 billion onto that, while next fiscal year’s deficit could be around $200 billion, Doug Porter, chief economist at BMO Capital Markets, said in a note on Wednesday.

“Massive support programs currently underway won’t fully roll off next year and, even as some do, there will be more spending to fill some of the void,” Porter said in the note.

Click to play video 'Throne speech: NDP Leader Jagmeet Singh says Liberal plan doesn’t go far enough' Throne speech: NDP Leader Jagmeet Singh says Liberal plan doesn’t go far enough
Throne speech: NDP Leader Jagmeet Singh says Liberal plan doesn’t go far enough

All hands on deck

The so-called Speech from the Throne included the big-ticket pledges of a national prescription drug plan and universal childcare. But economists say some of these programs could be more aspirational than immediate as Ottawa keeps some powder dry to fight the pandemic.

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“If we don’t survive the short term, there is no sense worrying about the medium to longer term. It’s all hands on deck,” said Craig Wright, chief economist at Royal Bank of Canada.

Still, an “activist approach to fiscal policy” could bolster the economy, leading to stronger-than-expected GDP growth in 2021 and 2022, said Stephen Brown, chief Canada economist at Capital Economics in a note.

Click to play video 'Energy sector encouraged by messaging in speech from the throne' Energy sector encouraged by messaging in speech from the throne
Energy sector encouraged by messaging in speech from the throne

While supporting the economy is seen as a priority in the short-term, economists look for the fall fiscal update to provide some indication of when debt will peak.

“All deficits are not created equal,” said Royce Mendes, senior economist at CIBC Capital Markets. “When you’re in such a deep hole and you’re facing a pandemic head-on, most Canadians seem to be alright with spending.”

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“Where you start to get broader disagreement is: what happens when the economy has healed? Will these initiatives transition into structural deficits and that’s where you really have a lot of concern,” Mendes said.

READ MORE: Trudeau dangles national childcare system in throne speech with few hints of fiscal restraint

For Carleton’s Lee, the specter of a shift from emergency measures to a larger structural deficit is very real and something he fears markets will not take lightly.

“What this throne speech is signaling is that this is not going to be temporary. They are transforming the temporary deficit into a structural permanent deficit,” he said.