Canadians got their first glimpse of the financial toll the pandemic has had on the economy earlier this week when Federal Finance Minister Bill Morneau delivered his Federal Economic and Fiscal Snapshot. Morneau was forced to delay the spring budget in March as the financial costs to businesses and households deepened and the need for emergency measures became clear.
As Scotiabank Economists Rebekah Young, Director, Fiscal & Provincial Economics and Marc Desormeaux, Senior Economist, noted, there were no surprises with countries worldwide finding themselves in the same boat — and in some cases in even worse debt.
The Finance Minister’s snapshot forecasts real GDP will contract by 6.8% in 2020, followed by a 5.5% rebound in 2021. Those numbers are based on the average of private-sector economists’ forecasts, which estimates an annualized decline of more than 40% in Canada’s real GDP in the second quarter of this year.
The one-two punch of a shortfall in revenue and the COVID-19 related spending has the government projecting a deficit of $343 billion, or 15.9% of GDP in 2020.
The blow to government revenues will make up nearly a third of that shortfall, with corporate tax receipts plummeting 22%, compared to 2019, and personal income tax and GST receipts falling 14% and 20%, respectively. A large portion comes from COVID-19 spending, which rose to $230 billion. The money was distributed to Canadians mainly through the Canadian Emergency Response Benefit and onetime payments to seniors and families and for GST relief, expenditures that are expected to drop off quickly as the economy recovers.
“Fundamentally, Canada’s economic recovery hinges on its ability to effectively keep COVID-19 transmission down according to the Snapshot,” the economists wrote in their report. “Its outlook focuses predominantly on pandemic-related downside risks in an environment where there is no shortage of other risks including various geopolitical and trade tensions. Needless to say, uncertainty clouds the horizon.”
The snapshot didn’t forecast the deficit for 2021, but it is clear the recovery will continue to weigh on government revenues and increased expenditures.Factoring out any new discretionary spending, Scotiabank Economics estimates the deficit will be in the vicinity of -5% of GDP next year. In a June report on the government’s reaction to COVID-19 financial woes, Scotiabank noted that economic output losses could have been about 3 percentage points higher without the substantial and timely support from the government to mainly low-income workers affected by shutdowns.
Canada’s accumulated net debt is expected to rise to 49% of GDP in 2020, up from a projection of 31% before the pandemic. However, Canada’s higher debt load and the recent downgrade of its AAA rating by Fitch Rating Agency — it is still ranked as a top tier borrower with S&P Global Ratings and Moody's — have had no material effect on the market. That’s likely because countries worldwide are taking on similar liabilities, and in many cases at a faster pace and from higher starting points. In fact, Canada’s general government net debt is still projected to be the lowest among G7 countries at 41% in 2020, while its general government gross debt is among the lowest, Scotiabank Economics and International Monetary Fund data show.
The snapshot didn’t speculate on any future policy decisions including how fiscal policy will evolve over time to support the recovery in the context of a longer-term framework to rein in debt. However, it did highlight which industries were hit hardest and where recovery will be slowed by physical distancing constraints, such as the restaurant, accommodation, and travel sectors, but noted that few industries will be spared as discretionary spending takes a hit from loss of incomes.
The Liberal government will have to pull off its biggest challenge yet in the months ahead, the economists wrote.
“It will need to resist pressures from the right to consolidate prematurely in a manner that could throw into jeopardy Canada’s fragile recovery, while pushing back against pressures to ramp up indefinitely social spending on borrowed credit,” the report said. “All the while, finding a middle ground that unifies Canadians (and Canada’s multi-layered governance structures) around a vision for more ambitious economic growth—and an unobjectionably sustainable medium-term fiscal trajectory—for the country as a whole.”
To read the full Scotiabank Economics report, click here.