The Top Line
Finance Minister Chrystia Freeland presented the 2020 Fall Economic Statement (FES) today, providing the first detailed disclosure of the Federal government’s spending plans since Budget 2019, as Budget 2020 was postponed indefinitely. With the financial markets, businesses, and many individual Canadians closely following the Government’s spending and programs during the COVID-19 pandemic, the FES was the first step in assessing the extent of deficit spending during the pandemic and charting a return of Federal finances to their normal “tracks”.
The Federal government undertook substantial new spending in response to the pandemic, as a result of which the annual deficit will reach a record $381.6 billion in fiscal year 2019-20, with no return to balanced budgets in view. Nevertheless, the FES focused on new and topped-up programs to respond to the ongoing, second wave of the pandemic. Minister Freeland said that the “safety net” created by the Government to combat COVID-19 will remain in place until 2021. She also unveiled further, substantial Federal spending for virus testing and tracing, procurement of personal protective equipment (PPE), and pandemic-related supports for businesses and families.
Throughout the pandemic, the Liberals have been subject – particularly as a minority government – to pressure from left-leaning opposition parties and voters to maintain a long-term commitment to progressive policies on climate change, the economy, housing, and other issues. The negative reaction to the Government’s failure to achieve its targets for tree planting for carbon sinks and eliminating boil-water advisories in First Nations communities – each re-announced and re-funded in the FES – demonstrated the electoral perils for the Government on that front. However, the FES contains only a few fully-funded, “big picture” progressive policies – notably a grant program for energy efficiency retrofits to residential homes and the creation of a Federal Secretariat on Early Learning and Child Care. Those announcements were framed as a down payment on a fiscal stimulus program of up to $100 billion over the next three years that will be announced in Budget 2021.
Financial markets and some media commentators are increasingly interested in seeing the Federal government commit to a long-term plan to restrain pandemic spending and reduce debt. As such, it is notable that, while Minister Freeland stated that COVID-related programs are “limited and temporary”, the FES does not commit to a new fiscal anchor to limit Federal spending. Instead, the Government proposes several “fiscal guardrails” – notably the employment rate and total hours worked – that will inform the Government’s decision of when to unwind pandemic-related spending. The Government will undoubtedly face continued pressure to return to more traditional fiscal markers in the near future.
With all of that in mind, the FES should be viewed as a relatively short-term fiscal plan. Budget 2021 will likely emerge as the defining political statement of the Liberal Party coming out of the COVID-19 pandemic, and the public and political reactions to it will define long-term Federal spending. In the meantime, the FES provided a clearer picture of the depth of Canada’s pandemic-era spending, which will not abate until well into 2021.
A Deeper Dive
The FES is consistent with the Speech from the Throne in September and Minister Freeland’s speech to the Toronto Economic Forum in October, in that it maintains the Government’s commitment to record-shattering Federal spending in response to COVID-19. As with both of those aforementioned speeches, the Government communicated in the FES that it believes that this spending is affordable, especially due to very low interest rates.
Federal Fiscal Snapshot
After a record-setting deficit in fiscal year 2019-20, annual deficits will continue for the foreseeable future. Projected deficits in the near-term are $381.6 billion in 2020-21, $121.2 billion in 2021-22, and $50.7 billion in 2022-23, reaching a low of $24.9 billion – or 0.9 percent of GDP – at the end of the fiscal horizon of the FES, in 2025-26. Note that those figures do not include the impact of the proposed fiscal stimulus program.
The Federal debt to GDP ratio is projected to rise from 31.2 percent in 2019-20, to 50.7 percent in 2020-21, to 52.6 percent in 2021-22, and 52.1 percent in 2022-23. Over that same fiscal horizon, Federal debt charges are projected to fall below 1 percent of GDP in 2020-21 before increasing to 1.2 percent by 2025-26.
The FES does not include any tax increases on consumers or most businesses. However, it does provide details on the Government’s plans to impose Canadian taxes on global internet-based corporations. This may be one of the only ways for the Government to increase tax revenues in a way that is not politically contentious. As of July 1, 2021, the Government will levy the GST on cross border digital products and services (i.e. Netflix or Spotify), sales to Canadians of goods from Canadian fulfillment warehouses (i.e. Amazon), and short-term accommodation through digital platforms (i.e. Airbnb).
Both the FES and Minister Freeland’s public remarks about it emphasized the Government’s commitment to do – and spend – “whatever it takes” to help Canadians through the pandemic. Again, this was consistent with the 2020 Throne Speech and the Government’s ongoing communications about COVID-19.
For the public health response to COVID-19, the FES allocates the following new spending:
- $565.4 million to Health Canada and the Public Health Agency of Canada for testing and tracing supplies.
- $1.5 billion for the procurement of PPE, other medical supplies, and related distribution infrastructure.
- Up to $1 billion for a Safe Long-term Care Fund, to help provinces and territories protect people in long-term care. That spending will be supported by new national standards for long-term care, drafted collaboratively with provinces and territories.
To support business in overcoming the economic impacts of COVID-19, the FES commits to:
- Creating a Highly Affected Sectors Credit Availability Program to offer 100 percent government-guaranteed loans of up to $1 million for the sectors most impacted by COVID-19 (e.g. tourism and hospitality, hotels, and arts and entertainment).
- Increasing the maximum subsidy rate of the Canada Emergency Wage Subsidy to 75 percent, beginning December 20 until March 13, 2021.
- Extending until March 13, 2021, the current subsidy rates under the Canada Emergency Rent Subsidy and the Lockdown Support Program.
- Targeted rent relief and capital and operational support for airlines and airports.
- Disbursing an additional $500 million to the Regional Development Agencies and the Community Futures Network of Canada and imposing a rule that 25 percent of those programs’ spending must be for tourism sector initiatives.
Note that the Wage and Rent program changes will require legislative changes and, as such, the support of at least one other party in the minority Parliament.
The FES commits the Government to augmenting its signature Canada Child Benefit program with temporary support of $1,200 in 2021 for each child under the age of 6 in low- and middle-income families. Meanwhile, an allocation of $20 million over 5 years, starting in 2021-22, will support work – including the founding of a Federal Secretariat on Early Learning and Child Care – to begin developing a national daycare policy.
While the FES was overwhelmingly focused on the response to COVID-19, Minister Freeland took pains to underline the Government’s ongoing commitment to creating a greener and more inclusive economy – long the central tenets of the Liberal Party’s fiscal policy. To that end, the FES commits the Government to:
- Allocate $2.6 billion over 7 years, starting in 2020-21, to provide up to 700,000 grants of up to $5,000 to homeowners for energy-efficient home improvements; and
- Allocate $150 million over 3 years, starting in 2021-22, for investments in infrastructure for zero-emission vehicles, such as charging stations.
Along with the priorly-announced top-up of $1.5 billion for employment skills training programs administered by the Provinces, those announcements were portrayed as the government’s down payment on more significant spending on green, high-tech, and inclusivity initiatives for economic growth in Budget 2021. Many progressives may view that as a muted commitment to those causes, but the FES states that the Government feels such spending must wait until the threat of further outbreaks of COVID-19 subsides.
The Official Opposition Conservative Party released a statement from Erin O’Toole characterizing the Liberal response to the pandemic as “erratic and confused” and demanding that the Government release a plan for vaccine distribution, as a cornerstone of economic recovery. Both Bloc Quebecois Leader Yves-François Blanchet and NDP Leader Jagmeet Singh likewise called for more details about the Federal plan to vaccinate Canadians, while Mr. Singh also called for the Government to increase taxes on wealthy individuals and corporations to fund Federal supports for individuals.
The most substantial outcome of the FES for most stakeholders was the announcement of the planned $100 billion fiscal stimulus program. The Government is still determining how that program will be structured and is committed to public consultations on what the stimulus should be spent on. That presents a substantial opportunity for stakeholders to inform Federal spending for the recovery from COVID-19 and thereafter. With Departmental submissions to the Finance Canada budget development process due imminently, stakeholders should seek to engage policymakers as soon as possible.
Meanwhile, in early December, the Prime Minister and the Premiers will hold a First Ministers meeting about long-term funding of the Canada Health Transfer, which will dictate a big portion of long-term Federal spending. The FES appears to set an adversarial basis for the Federal government’s approach to those negotiations, noting that $8 out of every $10 dollars spent on the response to COVID-19 have been Federal funds and that Federal health supports to the provinces already increased 23 percent this year.
Finally, the sole overt reference to the recent U.S. Election in the FES bears monitoring. The Government is exploring the idea of imposing border carbon adjustments and will discuss doing so with international partners. Border carbon adjustments – the imposition of an import levy on goods that are manufactured in countries that do not price carbon pollution in some way – were an element of President-elect Joe Biden’s election policy platform and are also being explored by the European Union.