E-Sight November 30: Federal Fall Economic Statement – Big Numbers, Little Details

Today the Government of Canada tabled its Fall Economic Statement, providing an updated tracking for this year’s deficit, its first longer-term view of what its operating shortfall will look like over the coming years, and a few fiscal stimulus announcements. 

Unsurprisingly, the deficit numbers are staggering. This year, the deficit is expected to come in between $382 and $399 billion, depending on how the economic outlook unfolds. In terms of new measures, the update was light on new spending commitments and also on details of how it will stimulate the economy after a vaccine is available. Overall, there was around $50 billion in new near-term spending measures and a promise to spend between $70 to $100 billion after the virus is under control to support the post-pandemic recovery. 

Given the significant level of uncertainty in the economic environment, the government presented two alternative downside economic scenarios and four different scenarios for the timing and size of future stimulus spending. This is a prudent approach given that we simply don’t know how long and how severe the restrictions will need to be to contain the second wave of the virus, nor the timeline for vaccinating Canadians. The economic scenarios presented in the statement align with Deloitte’s current expectations for how the outlook could unfold and are a reasonable basis for government planning purposes. Moreover, the new policy measures do not significant alter our economic forecast for weak economic growth over the next four to six months, but a strong acceleration of growth thereafter.

The update did acknowledge those looking for a fiscal anchor, but did not provide one, noting that a fiscal anchor will guide long-term planning but only once the economy has stabilized. This will be important for the government to follow through on. Credit rating agencies will be mindful of the deterioration in fiscal balances and the potential risks posed when debt service costs rise during the recovery and the early years of expansion. 

However, charting a credible fiscal path does not imply drastic fiscal austerity. The government will have scope to maintain stimulus for a considerable time and make strategic investments to enhance growth that will help with the future fiscal rebalancing. As outlined in the Deloitte Catalyst report, there is an opportunity to enhance labour market outcomes and promote productivity enhancing public and private investment. Such measures were not in the Economic Statement, but we expect more details of the federal government’s fiscal stimulus plans in Budget 2021, which is likely to be next March or April. 

Economic backdrop and fiscal outlook

Today’s Economic Statement reflects the high levels of uncertainty we are seeing in the economy. The government fiscal projections are based on the average of private sector forecasts. While these forecasts were created just two months ago in September, a lot has changed. Since the release of the private sector forecasts, we have seen a resurgence in virus counts and renewed lockdowns in many parts of the country which are projected to negatively impact growth in the coming quarters. Consequently, the government created two downside scenarios to the private sector consensus that reflect a slower projected rebound in economic activity. The more optimistic economic scenario assumes regional outbreaks and the continuation of targeted restrictions into 2021. However, these are limited to high personal contact business in the food, accommodation, arts and entertainment sectors. In this scenario, real GDP is projected to decline by 5.5 per cent in 2020 and rebound by 4.1 per cent in 2021. 

The more pessimistic scenario, and the one we feel is now more likely, includes some renewed business closures, some time-limited school closures and further delays of non-urgent medical procedures. In this scenario, real GDP is projected to decline by 5.6 per cent in 2020 before seeing growth of just 2.9 per cent in 2021. 

Given the size of the downturn and weak recovery included in the two scenarios, the federal government is projecting large deficits over the next few years. In its more optimistic scenario, the deficit is projected to reach $388.8 billion this fiscal year, decline to $127.7 in fiscal 2021-22 and fall back to $28.6 billion by fiscal year 2025-26. In its more negative scenario, the deficit is projected to be about $10 billion worse this year and next and about $5 billion worse over 2022-23 to 2025-26. These deficit figures do not include the government’s planned post-COVID recovery plan.

While much of the fiscal update spoke about transforming the economy to be greener and more equitable, the actual spending included in today’s release is modest. The fiscal update includes funding of $25.1 billion this year and $26.6 next year largely related to supporting Canadians in the pandemic. The remaining amounts are small. We will have to wait until a Budget 2021, which is likely four-to-five months away, for details on a future stimulus plan. The government pegs its recovery plan to be in the range of $70 to $100 billion over 2021-22 to 2023-24. The exact amounts and the timing of that spending will depend on the degree of the downturn. 

Depending on the economic scenario and timing and size of the government’s stimulus plan, the final deficit could reach as high as $400 billion this year before trending down over the next several years. Based on these estimates, by fiscal year 2025-26, the federal debt could rise by as much as $820 billion. This would push the federal debt to GDP ratio up to 58.5 per cent, levels not seen since the late 90’s. While the extremely low interest rates make the level of borrowing affordable—federal interest payments are actually projected to decline this year—the plan is not without some risk. Although not our base case, a stronger-than-expected recovery would lift interest rates in a way that could concern credit rating agencies. Moreover, provincial deficits have also skyrocketed due to the pandemic. Many of these provinces will struggle to pay for the rising costs of health care due to an aging population and will need federal help. And in the event of a future renewed economic shock and downturn, the current sustainable fiscal situation could rapidly turn into an unsustainable one. But for now, the government’s debt remains affordable and something to monitor to ensure it stays that way.

New Spending Measures

The fiscal update presented today contained a mix of spending announcements designed to help the economy weather the pandemic and others that are designed to help support the economic recovery once a vaccine is deployed. Most measures with details were relatively small.

Short Term Measures to Provide Immediate Relief

While the federal government has provided significant support to households and businesses already, with the second wave hitting Canada and countries around the world beginning to plan vaccination campaigns, today’s update provided some new funding directly aimed at fighting the pandemic and supporting the economy in the interim.

  • A $1 billion fund for infection control measures in long term care homes.
  • An additional $2.7 billion for the procurement and storage of PPE.
  • $2.4 billion in extra Canada Child Benefit payments to low- and moderate-income families. Families earning less than $120,000 per year will be eligible for $1,200 for each child under the age of six.
  • A Highly Affected Sectors Credit Availability Program that will work with financial institutions to offer 100% government backed loans of up to $1 million to businesses in hard hit sectors at below market interest rates. The cost of the program was not specified, but is likely to be several billion dollars. 
  • Increase funding by $182 million for the Department of Canadian Heritage and the Canadian Council of the Arts to support the creation of safe events.

Stimulus Measures

To help kickstart the economy once a vaccine is deployed and life begins to normalize, the government will spend between $70 and $100 billion over three fiscal years, starting in 2021-22, to support economic growth. Details of the spending plan were relatively sparse in the fall statement with more information planned to be released in the next budget. The measures that were mentioned aligned with priorities announced in the Speech from the Throne designed to create a more inclusive, green, innovative and competitive economy. 

  • $20 million over 5 years to create a federal secretariat on early learning and childcare to analyze childcare policies.
  • Grants to help up to 700,000 households invest in energy efficiency enhancements at a cost of $2.6 billion over 5 years.
  • Build net-zero emission electric vehicle charging stations at a cost of $150 million.
  • A plan to plant 2 billion trees over 10 years at a cost of $1.3 billion over the first five years.
  • An additional $1.5 billion for infrastructure (including clean water) in Indigenous communities.
  • Eliminate the federal government interest portion of student loans for fiscal year 2021-22, saving students $329 million next year.
  • Nearly $700 million over six years for airports to make infrastructure improvements.

Other notable items

Foreign-based companies selling digital products or services in Canada will be required to pay GST/HST on their taxable sales effective January 1, 2021. The government also indicated that it will implement a digital tax directly on corporations providing digital services and that the tax will take effect on January 1, 2022.  These measures are not a surprise, as the government was flagging their intent to such actions in the Speech from the Throne.

Categories: E-Sight, Economics, Federal Budget

Tags: , , , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: