In the first two months of the COVID-19 pandemic, the federal government announced emergency support spending of nearly $150 billion. For context, total federal program expenses were forecast to be $330 billion in the 2019 budget. There’s no question this is a very large increase. It’s also clear we can afford to increase federal spending.
While Stephen Harper’s Conservative government equated fiscal responsibility with balancing the budget, Justin Trudeau’s Liberal government has used the debt-to-GDP ratio as their fiscal anchor. The debt-to-GDP ratio compares what the country owes long-term with the Gross Domestic Product – the dollar value of goods and services produced in a specific year. This measure does a better job reflecting the reality that government budgets aren’t the same as household budgets and should be approached differently.
Unlike households, governments plan over longer time horizons, and play an important role in stabilizing the economy during downturns, and providing critical infrastructure and services. Thinking in terms of debt-to-GDP allows us to take into account the economic benefit of government spending over time. If the government borrows now to invest in something that enables stronger economic growth in the future, our debt will increase, but so will our expected GDP showing the decision to be fiscally sustainable in the long term.
The Parliamentary Budget Officer (PBO) estimates that the deficit (the difference between revenue and spending in a given budget year) will rise to $252 billion in 2020-21, as the federal government spends more and receives less revenue. The PBO also estimates that Canada’s economy may shrink by 12 per cent in 2020, which would result in a debt-to-GDP ratio of 48.4 per cent. This is a sharp increase from the pre-pandemic ratio of 30 per cent, but still nowhere close to the mid-1990s levels of around 70 per cent.
Despite these very big numbers, there is no reason to panic. Most of the new spending is temporary bridging money that will help people and communities weather this crisis, allowing the economy to bounce back faster once the pandemic has passed. While we don’t know how quickly GDP will bounce back, we do know that our economy will be healthier because of the spending measures that have been put in place.
As well, overall debt servicing costs will be lower in this fiscal year than they have been in the past, because interest rates are so low. The primary way that governments borrow is by issuing bonds. The rate for 30-year federal government bonds is at two per cent, and 10-year bonds are below one per cent. The Bank of Canada is supporting federal and provincial governments by purchasing bonds directly and in secondary markets, ensuring that governments have a willing lender. This is another reason why 2020 isn’t the same as 1995, when the federal Liberals introduced deep cuts to health and social transfers. In the 1990s, the federal government claimed they had difficulty finding anyone willing to purchase government bonds, even with relatively higher rates of return.
Before the COVID-19 pandemic, the PBO estimated that the federal government had the fiscal room to increase spending by $40 billion annually and keep the debt-to-GDP ratio stable. The 2020 Alternative Federal Budget prepared by the Canadian Centre for Policy Alternatives estimates that reversing decades of revenue cuts and increasing tax fairness could raise an additional $50 billion. This makes sense when we think about the scale of tax cuts over the past 20 years. Together, Jean Chrétien and Stephen Harper cut corporate taxes in half, from 29 per cent to 15 per cent. In the mid-2000s Stephen Harper cut the equivalent of $17 billion in 2020 dollars from federal revenue, when he cut the GST from seven to five per cent. Justin Trudeau’s second ‘middle class’ tax cut that primarily benefits wealthier families will cost $6 billion a year when fully implemented.
Whether we borrow at historically low rates, increase revenue to ensure tax fairness, or some combination of the two, we can well afford to increase federal spending. In fact, if we make public investments in sectors like health care, child care, livable communities, and energy efficient buildings, we’ll see a stronger impact on economic growth alongside lower inequality and improved well-being.
Federal pandemic supports
The federal government has already announced several large emergency programs to help bridge people and businesses through the pandemic. All costs are estimates, as economic and public health responses continue to evolve.
- Canada Emergency Wage Subsidy (CEWS): repays eligible employers 75 per cent of wages paid to employees, up to $847 per week. $75 billion was budgeted for this program, but early reports indicate that take-up has been lower than expected.
- Canada Emergency Response Benefit (CERB): provides a taxable benefit of $500 per week, for up to 16 weeks, directly to eligible workers. The PBO forecasts this program will cost $35 billion.
- Canada Emergency Student Benefit (CESB): provides a taxable benefit of $1,250 to $2,000 per four-week period, at an estimated cost of $9 billion.
- Canada Emergency Business Account (CEBA): provides interest free loans of up to $40,000 to small businesses and not-for-profits, with 25 per cent forgiven if repaid on schedule. The cost is expected to be $9 billion.
- Canada Emergency Commercial Rent Assistance: provides forgivable loans to property owners that are leasing property to eligible small businesses. The PBO estimates this program will cost $500 million.
- Enhanced Canada Child Benefit and GST Credit: A one-time top up to recipients of the GST Credit and CCB, expected to cost around $7.5 billion.
- Targeted packages for agriculture, airlines, tourism, energy, and the non-profit and charitable sector, total cost uncertain.
- Support for banks and other lenders through the Office of the Superintendent of Financial Institutions (OSFI), the Canadian Mortgage and Housing Corporation (CMHC), and the Bank of Canada (BoC), which increased their lending capacity by more than $750 billion.