Canada’s deficit expected to reach $343 billion in 2020-21 fiscal year: Morneau

Law360 Canada (July 8, 2020, 4:04 PM EDT) -- The federal government has provided a picture of its finances after undertaking a massive economic stimulus in response to the COVID-19 pandemic, and as the picture comes into focus it is showing Ottawa reaching levels of spending not seen since the Second World War.

Finance Minister Bill Morneau, who revealed the economic and fiscal snapshot July 8, noted the deficit for the 2020-21 fiscal year is now projected to stand at $343.2 billion, with the federal debt load expected to reach $1.2 trillion by March 2021. This massive hit is the result of decreasing tax revenues, the impact of economic shutdowns and the government’s own COVID-19 economic response plan, which Morneau characterized as the most comprehensive and substantial peacetime investment in Canada’s history, representing more than $212 billion in direct support and nearly 14 per cent of GDP in total support.

But he said the cost of inaction “would have been far greater.”

“Those who would have us do less ignore that without government action, millions of jobs would have been lost, putting the burden of debt on to families and jeopardizing Canada’s resilience,” he said. “At a time when Canadian workers and families are facing significant hardship, austerity and tightening your belt is not the answer. Our fiscal discipline in the years leading up to this, combined with Canadians’ hard work and entrepreneurial spirit, meant that Canada was resilient and ready to face this challenge.”

Personal income tax revenues, which are the largest component of budgetary revenues, are projected to decrease to $146.3 billion, or 14.4 per cent, reflecting the projected labour market impacts from the COVID-19 crisis through layoffs, work absences and fewer hours worked, particularly in Canada’s service sector. Corporate income tax revenues are projected to decrease by $11 billion, or 22.3 per cent, to $38.3 billion in 2020-21. The government said lower corporate profitability and general economic weakness due to the COVID-19 quarantine measures primarily explain the decline. Goods and Services Tax (GST) revenues are forecast to fall to $30.9 billion, reflecting the temporary shutdown of large portions of the retail sector and the introduction of the enhanced GST credit.

Morneau said Canada’s net debt-to-GDP ratio, combined with historically low interest rates, gave the government the balance sheet to “deploy our fiscal firepower to support Canadians through the pandemic.”

“But we, the collective we, will have to face up to our borrowing and ensure it is sustainable for future generations,” he said. “The road to economic recovery will be long and uncertain. Going forward, anything we do must be about growth, resilience and creating opportunity for those who were most impacted by this crisis.”

The snapshot also revealed the Canada Emergency Response Benefit (CERB) has provided over $53 billion in benefit payments to over eight million individuals, with the Canada Emergency Business Account (CEBA), which provides loans to small businesses and not-for-profits, disbursing approximately $27 billion in funds. And the Canada Emergency Wage Subsidy (CEWS) has supported about three million employees by helping them stay in the workforce or return to work.

Prime Minister Justin Trudeau said the government made a “very specific and deliberate choice” to recognize people had suddenly found themselves in a precarious situation and needed support.

“So, as a federal government, given the historically low interest rates and the low debt servicing costs that we have, and given our extremely strong fiscal position going in, we decided to take on that debt to prevent Canadians from having to do it,” he said. “I know there are people out there who said we should have done less, but I think that’s wrong.”

The important thing to focus on right now is the safe restart of the Canadian economy, said Morneau, pointing to a $14-billion agreement the government is working on with the provinces and territories. But he added raising taxes would be “exactly the wrong response” to the continuing challenge of COVID-19.

“We know that this is a very dynamic challenge,” he said. “Our economic outcomes will be very much about how we successfully manage the health challenge, so we will continue to make decisions in a dynamic way.”

In response, federal Conservative Party Leader Andrew Scheer said the snapshot “makes it clear that Justin Trudeau has no plan to help Canadians get back to work or to restart our economy.”

“Under Justin Trudeau’s watch, Canada is falling behind. We have the highest unemployment rate in the G7. We are the only G7 country to have lost its AAA credit rating. And we are the only G7 country without a recovery plan,” he said. “In order to be competitive, we need to unleash the power of the private sector. Help Canadians get back to work. Support small businesses. Lower taxes, cut red tape and make Canada an attractive place to do business once again.”

And Perrin Beatty, president and CEO of the Canadian Chamber of Commerce, said the deficit represents a sum “that will undermine Canada’s fiscal capacity for decades.”

“The lockdowns were an appropriate response to a threat that no one fully understood at the time, and the government’s crisis response provided urgently needed assistance to Canadian workers and businesses, so they could be there to propel our economic recovery,” he said. “But as today’s snapshot demonstrates, these measures have come at an enormous price — one that far exceeds even the most pessimistic estimates — and their cost will continue to mount throughout the coming year and beyond. Declining government revenues mean that the burden will be borne by an economic infrastructure that has been badly damaged.”

The government is expected to table another fiscal update in the fall.

With files from John Schofield.

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