OPINION: Morneau’s grim economic update highlights Canada’s deluge of debt

July 24, 2020
Colin Wong

It arrived like an unwanted and disorienting thunderbolt.

Federal Finance Minister Bill Morneau’s Economic and Fiscal Snapshot 2020, delivered on July 8, can fairly be described as breathtaking – just not in a positive way.

Clocking in at almost 200 pages, the document lays bare the country’s shattered economy and the disastrous impact on the public finances resulting from plunging GDP, eye-watering job losses and the extraordinary measures the national government has taken to keep the ship afloat.

Start with the economic backdrop.

Based on recent private sector forecasts, the minister expects Canada’s economy to shrink by 6.8% in 2020, the sharpest decline on record, followed by a rebound of 5.5% in 2021. We don’t quarrel with the contraction projected for 2020, but would caution that the healthy economic bounce-back assumed for 2021 rests on an optimistic view of what lies ahead – no second wave of COVID-19 infections, no dramatic increase in business closures and insolvencies and a reopened Canada-U.S. border.

We also wonder where the U.S. economy is headed as most American states grapple with surging infection rates and the Donald Trump administration looks to be utterly incapable of providing effective leadership.

The most shocking numbers in the snapshot are those that detail the gusher of red ink caused by slumping tax revenue and the unprecedented suite of spending programs the federal government has rolled out to assist workers, households and businesses.

According to Morneau, Canada is now on track for a $343 billion deficit in 2020-21, equal to 16% of GDP and sufficient to lift the all-important debt/GDP ratio up to 49%. When the year began, the federal deficit was pegged at less than $30 billion and the debt/GDP ratio was hovering at less than 33%. Thank goodness interest rates are plumbing new depths as the government prepares to borrow on an epic scale.

In truth, the Canadian economy is facing such stiff headwinds and the government is spending money at such a dizzying pace that the fiscal shortfall for 2020-21 will almost certainty exceed $343 billion – our guess is something close to $400 billion.

We don’t see the Justin Trudeau government dialling back current support measures in the near term, which points to higher spending levels than even the snapshot contemplates.

And the hit to government revenue delivered by the sudden decline in economic activity and what we believe will be a bumpy recovery is likely to be greater than the $72 billion drop reported by the minister.

Amid a global pandemic, governments across the world are facing similar adjustments in the fiscal landscape. Canada is not alone.

We do not dispute the case for a determined and costly federal government response to the devastation wrought by COVID-19. Absent the dramatic surge in federal spending and the liquidity and credit support provided by the Bank of Canada, the economic downturn would have been even more savage and the damage more long-lasting.

But we are disappointed the government has yet to provide even a hint of any strategy to move the economy forward and return – eventually – to a sustainable fiscal position. Morneau evidently intends to fill in the gaps with a fall economic statement that presumably will include medium-term forecasts for spending, revenue and the overall economy.

The July 2020 snapshot leaves many questions important unanswered.

Which industries and categories of spending will fuel the economic recovery that Canadians are hoping for? When will Ottawa’s alphabet soup of hastily developed support programs wind down? Will the Trudeau government be hiking taxes in 2021 or 2022 to help reduce the deficit – and if so, how will it ensure that future tax increases don’t cripple Canada’s productive potential or chase away the entrepreneurial, technical and management talent the country needs to prosper in an increasingly digital world?

When will Parliament again be able to provide meaningful oversight of federal spending and programming after the chaos of the past few months? What does the federal government plan to do to address Canada’s waning global competitiveness?

At this point there are no answers to such questions. Morneau and his cabinet colleagues have much to do over in the summer months if they aspire to lay the foundations for a rapid and sustained recovery from the COVID-19 recession. •

Jock Finlayson is the Business Council of British Columbia’s Executive Vice President and Chief Policy Officer; Ken Peacock is the Council’s Chief Economist.

As published in Business in Vancouver.

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