Will There be a Fiscal Reckoning? Yes.

Parliamentary Budget Officer Yves Giroux has forecast a federal deficit for 2020-21 that could reach the pandemic-adjusted sum of $252 billion. His predecessor, Policy contributor Kevin Page, has filed this response.

Kevin Page

May 1, 2020

The PBO should be commended for providing updated economic and fiscal projections. Notwithstanding unprecedented economic uncertainty, Parliamentarians and Canadians need to have realistic perspectives on the size of the economic problem.

Let’s hope the latest scenario presented by the PBO represents the outer bound of the depth of the economic recession in 2020. A 12 percent annual decline in real GDP in 2020 has no real comparators since the 1930s in Canada.

It is a significant and bold forecast revision. More than twice the average decline presented by PBO just a few weeks ago. It is twice the decline assumed for Canada by the IMF. It is twice the decline assumed for the US by the Congressional Budget Office.

Is it likely that the IMF and CBO will revise down their respective forecasts as more information becomes available? Yes.

How will Canada cope with a federal budgetary deficit in the neighborhood of $250 billion, about 12 percent of GDP?

Canadians are committed to saving lives with social distancing measures. The fiscal choices and trade-offs are relatively clear. Run up the deficit and debt to help households and businesses deal with the economic lockdown thereby enhancing prospects for recovery and longer-term growth. Or, provide reduced fiscal supports to minimize future debt burdens and run the risk of a weaker recovery and diminished long-term growth prospects. By all accounts, people believe the government and Parliament are on the right policy path. Onward through the fog.

Will there be a fiscal reckoning? Yes.

All countries will wake up after the global pandemic with much higher debt levels. Canada is fortunate because we are starting at a much lower net debt-to-GDP level. If low interest rates are maintained there is no good policy case for rushing to austerity — either spending cuts or tax increases. The economic recovery will likely be much too weak and fragile for austerity.

Governments with fiscal room like Canada’s must move expeditiously to design appropriate short-to-medium fiscal stimulus programs. With record low interest rates, the time is perfect for a massive public investment program led and financed by the federal government. With political will and courage, we need to develop infrastructure to address climate change and promote economic opportunities. Governments made bold moves to address the pandemic. We need bold policies to address the future.

Contributing Writer Kevin Page, Canada’s first Parliamentary Budget Officer, is founding President and CEO of the Institute for Fiscal Studies and Democracy at University of Ottawa.