“We took on debt so Canadians wouldn’t have to,” Prime Minister Justin Trudeau said this morning, foreshadowing the $343 billion projected deficit revealed by Finance Minister Bill Morneau’s Economic and Fiscal Snapshot. This figure is 10 times higher than pre-pandemic forecasts and rivalled historically only by the Second World War effort as a share of Canada’s GDP.
However, Trudeau’s commitment to keep debt off the backs of Canadians makes more sense in light of the one saving grace of the current economic situation – the government’s ability to borrow at 0.25%. This has left public debt charges at 1% of GDP, well below the crippling 6% rate of the early 1990s. As a result, even with the higher deficit, the cost of servicing Canada’s $1.2 trillion debt is $4 billion lower than forecast last fall. Canada’s net debt remains the lowest as a share of GDP in the G7. Morneau pointed out that over the last quarter century, provincial debt has outpaced federal debt by $225 billion, leaving the provinces with comparatively less fiscal firepower. However, the government will need to ensure that this spending remains one-time in order to keep it manageable and to prevent it from spiraling out of control.
While Canada’s battle with the first wave of COVID-19 appears to be behind us, it has come at a significant price, over and above the human cost: $236 billion in new pandemic spending including $212 billion in direct support to businesses and individuals impacted by the economic shutdown, plus a further $81 billion in lost government revenues. Canada’s total direct support when combined with tax deferrals was second in the G7 only to Germany as a share of GDP. Morneau said that nearly nine out of every 10 dollars in COVID-19-related direct support delivered to individuals and businesses was financed by the federal government. Among the supports were:
- 3 million Canadian workers remained employed with support from the Canada Emergency Wage Subsidy – an uptake figure that is lower than the government would have liked. The $82 billion figure in the snapshot includes $50 billion in unspent funds, which the government will deploy soon via a revamped program to entice employers to rehire and restart.
- 8 million Canadians received $53 billion from the Canada Emergency Response Benefit – a figure the government hopes will decrease in the coming months as Canadians return to work. The government is earmarking an additional $10 billion in Employment Insurance for Canadians who transition off CERB but cannot find work.
- $5.8 billion for federal, provincial and territorial action to strengthen critical health care systems, purchase personal protective equipment and support critical medical research and vaccine developments.
- $1.4 billion to help Indigenous communities with pandemic preparedness and supports.
Today’s snapshot contained little in the way of new spending initiatives, as the government is only now starting to plan for a future recovery phase, the scale of which will depend on the success of the current reopening phase. The government continues to warn Canadians to remain vigilant of a possible second wave and does not plan for full economic recovery until a vaccine or effective treatment is widely available, likely in late 2021. The snapshot was also conspicuously silent on the economic impact of COVID-19’s troubling resurgence in the United States.
While forecasts are a moving target in the current environment, Finance projects 5.5% GDP growth in 2021, largely wiping out the 6.8% GDP hit in 2020, which was the greatest blow to the economy since the Great Depression. Unemployment spiked from 6% pre-pandemic to 13% in April and is expected to gradually return to just under 8% next year. 5.5 million Canadians – approximately one-third of the workforce – lost their jobs or experienced significantly reduced hours.
The snapshot provided little in the way of industry specific plans, speaking only to past investments from recent months for hard hit sectors including agriculture, oil & gas, aviation and broadcasting. No mention was made of any private sector uptake of programs like the Large Employer Emergency Financing Facility. The snapshot revealed that only 29,000 small businesses have benefitted from federal rent relief totaling $221 million, with applications for a further 25,000 small businesses being processed.
Among the hardest hit sectors of the economy, hospitality took the brunt, followed by arts & recreation, social services and retail – all female dominated industries, leading many to conclude that we are in a “She-cession” where young workers are also disproportionately impacted.
These factors set the stage for what the next phase of the reopening could look like. Morneau spoke of the government’s plans to “invest in a safe, sufficient and adequate supply of child care so that parents, especially mothers, don’t have to choose between going to work and ensuring their children are taken care of.” He also called for investing in a future economy that is “greener and more diverse,” but provided no specifics. We can also expect a new federal focus on long-term care, given the loss of life in that sector exposed by the pandemic.
Front and centre over the coming months is the federal government’s plan to work with provinces and territories on a $14 billion “Safe Restart Agreement.” While the federal government remains committed to this proposal, to date, provincial governments have balked at this figure as insufficient given the wide-ranging objectives for the funding:
- Scale capacity to conduct testing and contact tracing;
- Build health care system capacity and strengthen infection prevention and control measures;
- Address immediate needs and gaps in mental health and problematic substance use challenges;
- Address immediate needs and gaps in long-term care and home care
- Provide health and social supports for other vulnerable groups;
- Ensure health care and essential workers have access to personal protective equipment;
- Ensure a safe and adapted supply of child care for returning workers as the economy re-opens;
- Ensure Canadians have up to 10 days of paid sick leave should they contract or show symptoms of COVID-19; and,
- Provide municipalities with the support they need to address the increased costs associated with COVID-19.
Today’s snapshot allowed the federal government to pat themselves on the back for an unprecedented effort to launch new programs and fight the pandemic while working under extremely challenging conditions. Recent public opinion polling shows that Canadians give the Liberals credit for their performance – reaching new highs that would be tempting for any government seeking to test the confidence of the House.
With Conservative Party members soon to begin voting for their new leader and the NDP mired in election debt, the government would feel even more emboldened, were it not for the strange political circumstances we find ourselves in. With millions of Canadians still feeling the pain of the current recession, they might not appreciate finding themselves at the polls prematurely, even with CERB payments in their bank accounts.
This sets the stage for a fall session where the Liberal government will feel like they have a strong hand to play to cast the recovery on their own terms. The opposition parties may want to think twice before levelling too many demands – or they will find the Liberals calling their bluff.