Last week’s federal fiscal snapshot unveiled numbers so awful that a reasonable person might suspect an expectations-management exercise. The projected deficit of $343 billion for this year was nearly $100 billion worse than the Parliamentary Budget Officer’s June 18 projection and $40 billion worse than the most pessimistic numbers circulating. If realized, it would be the same as last year’s total federal revenues. It would mean the federal government will borrow more than half the money it spends this year. It would increase Ottawa’s net debt by almost half in one year.
Adding to the impression in the snapshot’s numbers of an unfolding fiscal catastrophe was the absence in its commentary of either any acknowledgement that this path is perilous or any plan to get off it. Avoiding some future combination of drastic spending cuts and tax hikes will take more than good luck.
Private-sector forecasters anticipate a relatively strong rebound in 2021: their projections for nominal GDP growth average almost eight per cent. That, plus continued low interest rates, a timely wind-down of emergency spending, and restraint in the federal government’s operating costs, could stabilize the ratio of federal debt to GDP over the next few years.
But a strong rebound is not a given. Quite aside from the potential for resurgences of COVID-19 both here and abroad, concerns about the consequences of out-of-control federal finances will sap the confidence of investors and business managers.
Though interest rates are likely to stay low for now, there’s an element of risk there, too. Combined federal and provincial net debt is set to increase by more than 25 per cent of GDP this year. Though the long-term outlook for provincial governments’ finances was grim even before the pandemic, the fiscal prudence of past federal governments had underpinned solid credit ratings for senior governments generally. As the downgrade of Ottawa’s debt by Fitch in June highlighted, bottom-line considerations have been less of a priority for the current federal government.
Which gets us to the most critical assumptions of all: that emergency spending will wind down in a timely way and the government will address the recent rapid growth of other program spending.
Perhaps those things will happen. Perhaps the snapshot’s awful numbers are setting us up to celebrate a final deficit less than $340 billion. Its projections for the Canada Emergency Wage Subsidy did anticipate Monday’s announcement of the program’s extension but, absent long-awaited changes to its eligibility criteria, may still be high. There might be other padding in the numbers — not least a $9-billion boost to baseline spending since the fall update, of which almost half is “non-announced measures.”
But an alternative explanation for the awful numbers is that they are designed to soften us up for yet more spending and borrowing still to come. Extensions to the CERB and continued growth in the federal government’s operating costs and other program spending could easily produce deficits of $50-$100 billion in fiscal 2021-22 and beyond — as well as a continued rise in the debt-to-GDP ratio.
If that happens, pressure for tax increases and cuts to other federal programs, such as transfers to the provinces, will grow. That is an unwelcome prospect. Tax increases, whether on Ottawa’s part or by provinces struggling with health-care and social assistance costs, will undermine economic growth, further exacerbating the adverse debt dynamics. We have plenty of evidence from our own past and from other countries that reining in the federal government’s own programs, especially its rapidly growing operating costs, would be less damaging to growth and more effective in achieving fiscal stability.
Canadians would be far better off if the next federal budget, which should be no later than this coming September, confirmed a shift to a lower-spending, lower-borrowing government. Until then, it is reasonable to worry that the awful numbers in the fiscal snapshot are a prelude to even worse in the years ahead.
Published in the Financial Post
Alexandre Laurin is research director at the C.D. Howe Institute, where William Robson is CEO and Miles Wu is a researcher.