Jeffrey Bugg, Shannon Smith and Kevin Page

December 1, 2020

Hippocrates said that desperate diseases demand desperate remedies. The COVID-19 pathogen is a novel coronavirus. It is highly transmissible and deadly. The Fall Economic Statement is a novel approach to budget planning. In a period of radical uncertainty, the fall statement lays out economic scenarios with potential fiscal responses contingent on the evolution of key labour market indicators.

The government’s commitment to backstop the economy through the pandemic is underscored by record increases in spending, deficits and debt.

Finance Minister Chrystia Freeland’s first major financial document is an important one. Parliament gets a much-needed accounting update of evolving COVID-19 fiscal supports. The government launches the pre-budget debate on the role it will play in supporting the post-pandemic recovery. Following the script set out in the fall Speech from the Throne (SFT), the economic statement laid out medium term economic and fiscal projections and new measures. The measures were framed along themes in the SFT: fighting COVID-19; supporting Canadians through the pandemic; and “Building Back Better”.

The economic outlook is tied to the evolution of the virus. Using the average private sector forecast, real GDP is expected to decline 5.8 percent in 2020 and rebound by 4.8 percent in 2021. The unemployment rate declines from an average of 9.7 percent in 2020 to 8.1 percent in 2021. Interest rates stay low for as far as the eye can see, edging upwards only by basis points per year. The analysis in the economic statement highlights the uneven economic and labour market impacts and longer-term concerns relating to Canada’s future growth from weak business investment. The case is made for fiscal stimulus to jumpstart the recovery and policies to support inclusion.

Given the uncertainty around the evolution of the virus before the full positive impact of vaccine distribution can take place, two negative economic scenarios are added to the outlook involving virus resurgence and greater economic restrictions. Downside risks prevail. The glass is half empty. In this world, economic growth is more sluggish in 2021. The case is made for a debate around appropriate fiscal responses.

The fiscal numbers are staggering and can only be understood in the context of a pandemic and great recession. The government’s policy mantra is genuine — it will do “whatever it takes to help Canadians through the crisis.” To steal a line from John Hammond in the movie Jurassic Park, the government “will spare no expense”.

Table 1: Developments since Economic and Fiscal Snapshot (EFS) July 2020 and Policy Actions and Investments
Billions of Dollar
	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024	2024-2025	2025-2026
Budgetary Balance – EFS 2020	-34.4	-343.2
Policy Actions since EFS 2020		-54.5	-29.5	-2.2	-1.2	-0.3	0.0
Investments in the Fall Economic Statement 2020		-25.1	-26.6	-1.1	-0.6	-0.3	0.9
Budgetary balance – FES 2020	-39.4	-381.6	-121.2	-50.7	-43.3	-30.9	-24.9
Of which: COVID-19 economic response plan	-7.2	-275.2	-50.6	-3.8	-1.2	-0.1	-0.4
Note: Planned stimulus spending	$70-to-$100 billion over 3 years
Budgetary balance before planned stimulus (% of GDP)	-1.7	-17.5	-5.2	-2.1	-1.7	-1.2	-0.9
Federal debt before planned stimulus (% of GDP)	31.2	50.7	52.6	52.1	51.6	50.6	49.6

Source: Fall Economic Statement 2020, Department of Finance.

The estimated budgetary deficit will go from $39.4 billion (1.7 percent of GDP) in 2019-20 to $381.6 billion (17.5 percent) in 2020-21. As a percent of GDP, the 2020-21 deficit is more than twice as high as the largest recorded federal deficit since the Second World War. When compared with other advanced countries, Canada will record the largest year-over-year increase in the deficit, even though a number of these countries will likely experience a steeper recession.

Why the record high estimated deficit? Canada has provided very large fiscal supports during the pandemic and lockdown. In 2020-21, these supports now total $275 billion — up almost $80 billion since the 2020 Economic and Fiscal Snapshot (EFS). Almost $55 billion related to previously announced measures (e.g., creation of new programs to transition away for Canada Emergency Response Benefit; safe restart agreement with Canada’s First Ministers; etc) and about $25 billion in new spending initiatives highlighted in the SFT to support inclusion and start a green recovery.

Over the medium term, the budgetary deficit trends downward as the economy strengthens and fiscal supports unwind. Some additional revenue enhancements regarding the taxation of digital companies and stock options will make a modest contribution to the decline in the deficit. Without additional fiscal stimulus measures, the budgetary deficit as a percent of GDP could look similar to pre-COVID levels in about four years. It is a long and winding road to fiscal normalcy, even with record low projected interest rates.

Perhaps the most novel fiscal policy construct in the economic statement is the use forward guidance. Very much like central bankers since the 2008 global financial crisis talking about maintaining policy interest rates for an extended period of time, Finance Minister Freeland is signaling potential fiscal policy responses tied to outcomes related to the labour market – employment, hours worked, unemployment. The fiscal responses are driven from a more pessimistic economic scenario and include three years of stimulus ranging from $70 to $100 billion (cumulatively) starting in 2021-22. In all of these scenarios, the debt-to- GDP ratio remains above 55 percent over the medium term — about 24 percentage points higher than the pre-pandemic level.

While other countries have indicated the need and willingness for fiscal stimulus, the use of fiscal guardrails (labour market outcomes) to shape the size and timing of stimulus would be a significant policy innovation.

Let the debates begin. Is $100 billion over three years an appropriate level of stimulus (e.g., additional fiscal supports announced since the 2020 EFS far exceed $100 billion over two years)? What initiatives should be eligible for stimulus? Should initiatives like child care, basic income, and pharmacare be financed through tax increases to maintain fiscal sustainability? How should we fund infrastructure investments to address climate change? How much debt is too much? What fiscal anchors and rules should be established? How can Parliament improve enforceability of fiscal anchors? How do we address the fiscal imbalance in the federation between different levels of government? The list of questions goes on.

Jeffrey Bugg and Shannon Smith are undergraduate economic students at the University of Ottawa. Kevin Page is founder and CEO of the Institute of Fiscal Studies and Democracy, University of Ottawa.