The Top Line
Today, Finance Minister Bill Morneau delivered a ‘snapshot’ of Canada’s economic and fiscal outlook through March 31, 2021. The snapshot laid bare the scale of the Government’s response to COVID-19, which amounts to the highest federal spending as a percentage of GDP since the Second World War.
The snapshot accounts for the Government’s spending to date in fiscal year 2020/21 and offers fairly detailed projections for the remaining quarters of the year. However, the Government purposefully avoided making projections beyond March 31, 2021, arguing that doing so would be misleading in the current, uncertain public health context.
Given the near-unprecedented spending, the snapshot is largely devoted to contextualizing and rationalizing the Government’s outlay of money since March. The Government makes the case that, in the face of the pandemic and the unprecedented reduction of economic activity and tax revenues that it caused, significant federal spending was both essential to bolstering the economy and preferable to inaction, and that the Federal COVID-19 programs are time-limited and sustainable.
Those programs have grown the projected federal deficit for 2020/21 to $343.2 billion, or 16% of GDP, from the $28.1 billion that was forecast in Fiscal Update 2019. By the end of the fiscal year, Federal debt is projected to be $1.2 trillion, or 49% of GDP, which would be the first time that Federal debt has surpassed $1 trillion.
Despite those eye-watering numbers, the snapshot supposes that the worst of the impact of COVID-19 has passed. Private sector projections solicited for the snapshot predict an annualized decline of over 40% in Canada’s real GDP in Q2 2020, a total economic contraction of 6.8% in 2020, and an economic growth rate of 5.5% in 2021.
That being said, the tone of the snapshot strongly suggests that the Government will continue to support businesses and Canadians in the coming months, and the Government emphasized repeatedly in its communications today that the fiscal outlook for the foreseeable future is “uncertain and highly-dependent on public health”.
A Deeper Dive
The Government’s COVID-19 Economic Response Plan includes more than $230 billion in measures to support Canadians and businesses. The snapshot is formatted to give the Government flexibility to scale those programs up or down in the coming months, stating that the Government will announce measures to support economic recovery as needed – though no details were offered about what those measures could be.
Most notably for businesses, the snapshot indicates that changes to the Canada Emergency Wage Subsidy are forthcoming, to “stimulate rehiring, provide support to businesses during reopening and help them adapt to the new normal”. In anticipation of that, the Government set aside additional funding for the program, perhaps indicating that it will be extended beyond August 29th, when it is currently set to end. Notably, no additional funding was set aside for the Canada Emergency Response Benefit, which is also due to end that day.
The impact of COVID-19 on employment has been significant, with approximately 30% of the workforce either losing their jobs or having their hours reduced at the start of the pandemic. However, the Government believes that its response to COVID-19 prevented greater economic damage, arguing that federal programs replaced more than $40 billion in lost income, prevented the real GDP contraction from reaching over 10% in 2020, and stopped the unemployment rate from rising a further 2% over the course of the year.
The snapshot accounts for the $14 billion Safe Restart Agreement that is currently being negotiated with the Provinces, but it does not provide greater detail on how that money will be spent, beyond making broad commitments to prioritize healthcare capacity, testing and tracing, personal protective equipment, childcare, and support for municipalities. Minister Morneau promised to announce details of the Agreement as they are decided.
Although no Parliamentary vote is required to pass the “snapshot”, NDP Leader Jagmeet Singh stated that his support for the Government could be contingent on its contents, and the other Opposition leaders were also vocal in setting criteria for the fiscal update.
The NDP gave the snapshot a “C+”, primarily criticizing the lack of support for persons living with disabilities and absence of action to increase taxes on the wealthy and eliminate tax havens.
The Conservatives argued that the Government lacks a plan to stimulate growth, attract business investment, and get Canadians back to work and they also sounded alarm over the size of the Federal debt. The Bloc Quebecois also called for more measures to get Canadians back to work.
Marked by both the fiscal snapshot and the virtual Cabinet retreat this week, it is clear that the Government is attempting to transition from crisis management of the pandemic to charting a pathway to a new normal. However, judging by the tone of the snapshot, that transition will be cautious and the Government remains open to further spending in response to COVID-19.
Minister Morneau did not fix a date for Budget 2020 today, or even commit to tabling one before Budget 2021. He did commit to providing further details on Federal finances in the Fall, and indicated that the tabling of a full budget at that time will depend on how successfully the pandemic and its economic fallout are limited.
Meanwhile, the House of Commons Finance Committee is authorized to continue a virtual meeting schedule over the summer, and it could, in theory, choose to study today’s snapshot, which could result in an appearance by the Finance Minister before the Committee.