The Deficit Nobody Could Have Predicted

Don Newman

July 8, 2020


It’s big.

The projected deficit for the current fiscal year has ballooned to over the $343 Billion because of the COVID-19 pandemic. The size of that deficit will push the National Debt to $1.2 trillion. That’s right, $1.2 trillion.

The bad news was unveiled by Finance Minister Bill Morneau in his “fiscal snapshot” in the House of Commons on Wednesday.

The good news is that despite the huge financial carnage reaped by the pandemic it is, at least in the short term, manageable. The deficit that added to the debt was created by a combination of extensive support programs to keep people afloat when the economy was shut down in mid-March, and the collapse of government revenues because of the shut down.

Some of those support programs will wind down as the economy comes back to life, bringing an end to exceptional spending requirements. And the money already borrowed will be financed at historically low interest rates.

The Bank of Canada, which has been buying government debt throughout the pandemic, has an interest rate of .25 per cent — that`s one quarter of one percent — on its trend-setting bank rate. In fact, interest rates are so low that Morneau told the Commons the government debt servicing costs this fiscal year will be less than they were a year ago when the deficit was around $20 Billion.

Some more prediction by the numbers: Using an average of private sector forecasts, the Government expects the economy to shrink by 6.8 percent this year, and then rebound in 2021 by 5.5 percent. Unemployment is expected to average 10 percent this year and 8 percent next year.

The cost of all the spending to counter COVID-19  and the $343 billion deficit means the debt-to-GDP ratio has jumped. The ratio is the metric most often used to measure the health of the economy. Pre-pandemic, it stood at around 30 percent, the lowest among G7 countries. Now, with the COVID spending, it will hit 49.1 percent. Still, that is not the highest it has been in the last 30 years.

There was even some new spending in the “snapshot.” Fifty billion will be added to the wage support program to encourage employers to bring workers back on company payrolls, and $10 billion will be added to the Employment Insurance Fund. Both moves are designed to get people off the popular CERB — The Canadian Emergency Relief Benefit – and into the job market.

The fiscal snapshot reveals just how devastating the COVID-19 pandemic has been to the economy. But Morneau told the House of Commons “the cost of inaction would have been worse.”

And Prime Minister Justin Trudeau, at an earlier briefing, said “We took on debt so Canadians didn’t have to.”

The “snapshot” also points out that future economic developments will be controlled by what happens next on the health front. If COVID-19 comes back with a second wave, a lot more government spending could be required. If it has only sporadic flare-ups, things will continue to improve. That would seem obvious, but to some extent it does underline what the prime minister said back on June 9th when the government was resisting any economic update in the middle of such unpredictable conditions. The government later relented and Wednesday’s “snapshot” is the result. But at the time Trudeau said:

“Any predictions would be wildly unreliable and totally uncertain.”

We shall see.

Columnist Don Newman is Executive Vice President of Rubicon Strategies in Ottawa, and a lifetime member of the Parliamentary Press Gallery.