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Liberals to post $381B deficit as debt levels as percentage of economy surge higher

Economists are largely in agreement that the federal government does not face an immediate fiscal crisis while pandemic spending continues to climb, as low interest rates bring borrowing costs close to record lows.
Economists are largely in agreement that the federal government does not face an immediate fiscal crisis while pandemic spending continues to climb, as low interest rates bring borrowing costs close to record lows.

OTTAWA —The Liberal government expects to post a $381-billion deficit in 2021, not including a new pool of stimulus funds announced on Monday that will put further strain on Ottawa’s finances as pandemic spending continues to climb.

Finance Minister Chrystia Freeland tabled the updated figures in her fiscal update, which showed the deficit rising still higher than Ottawa’s earlier projection of $343 billion in 2020-21.

The Liberals on Monday also promised another $70 billion to $100 billion over the next three years in stimulus measures, but declined to outline the details of the new spending, saying it was “highly dependent on the evolving health and economic situation” in Canada.

If Ottawa spends all of the additional $100 billion, Canada’s total debt as a percentage of GDP is expected to reach 58.5 per cent by 2024 — a level that is nearing those of the early 1990s, when a 66 per cent debt-to-GDP ratio triggered a wave of deep austerity measures. Projections by Finance Canada suggest that the debt-to-GDP ratio could fall back to 56.6 per cent by 2026, as COVID-19 spending is gradually wound down.

Rising debt levels underscore the substantially weakened fiscal position of the federal government as it doles out hundreds of billions in emergency spending as a way to keep businesses open and help unemployed people pay their bills. That is sure to raise concerns among critics over whether Freeland is prepared to rein in spending as the economy gradually recovers.

The Liberal government had previously touted its declining debt-to-GDP ratio as evidence of its fiscal prudence, but abandoned that key fiscal anchor when the pandemic struck. Freeland, like her predecessor Bill Morneau, has declined to provide an updated fiscal anchor, which has ballooned from 30 per cent before the pandemic to as high as 58 per cent in coming years.

The fiscal update on Monday sought to temper concerns about rising spending, saying it would be “limited and temporary.” It said current projected deficits “are distinct from the structural deficits of the 1990s” and were used to battle a “once-in-a-century kind of crisis.”

“The COVID-19 recession is unique in the sense that its origin cannot be traced to any fundamental weakness in the economy,” the update said.

Economists are largely in agreement that Ottawa does not face an immediate fiscal crisis as pandemic spending continues to climb, as low interest rates bring borrowing costs close to record lows. But many say the government is long overdue in laying out a long-term plan to return to normal spending levels.

The deficit is projected to fall sharply after 2021, down to $121.2 billion in 2022 and to $24.9 billion in 2026.

But Liberal members of Parliament have meanwhile spelled out plans to “build back better” in a way that would expand spending on social priorities like housing, childcare and the environment, causing the Parliamentary Budget Officer and other observers to warn against unsustainable and structural spending hikes.

Much of the direct spending during COVID-19 has gone towards either the Canada Emergency Response Benefit (CERB), which gave unemployed people $2,000 per month to cover expenses, and the Canada Emergency Wage Subsidy (CEWS), which covered a portion of wage costs for companies.

Total program spending in 2020-21 is expected to reach $621 billion, almost double the $338 spent on programs in the previous year.

Meanwhile, economic growth is expected to average well below pre-pandemic levels, with the Canadian economy expected to grow at an average 1.4 per cent per year between 2020 and 2025. Earlier estimates before the pandemic estimated 1.8 per cent growth over the same five-year period.

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