Relief to Recovery – Freeland releases first Fall Economic Statement

Finance Minister and Deputy Prime Minister Chrystia Freeland’s first Fall Economic Statement (FES) represented the federal government’s second move to shift from short-term COVID relief to a longer-term plan for Canada’s post-pandemic recovery. The first move was September’s Speech from the Throne and the next in this three-part plan will be the spring budget.

Freeland’s speech included a plan to establish a National Childcare Program as the centerpiece of that recovery, an ambitious promise that could serve as the lynchpin of Liberal re-election efforts or, if achieved quickly, the Trudeau government’s version of Obamacare – a major signature social-policy legacy. The Liberals have highlighted shared prosperity, quality of life, competitiveness, and green transformation as their priorities for post-pandemic stimulus spending, but a permanent new social policy program is the terrain the Liberals have chosen for the fight to secure their majority.

This FES is the first set piece economic address delivered to Parliament since March 2019, after the election timing downgraded the 2019 FES to a written report and COVID-19 cancelled the 2020 spring budget. As such, it had to focus on addressing the unrelenting, urgent demands of the pandemic against a broader plan for the post-COVID recovery, while projecting the fiscal situation forward into an unknowable future. While it leaves many questions unanswered, the FES looks more to the future than July’s Economic Snapshot and provides scenarios for how the fiscal situation could play out long term.

During the pandemic, the federal government planned to move through stages of support measures, relief, restart, and recovery. Thus far, most measures announced were relief, with the Canada Emergency Wage Subsidy (CEWS) or Canada Emergency Business Account (CEBA) helping Canadians and businesses weather the pandemic, with some elements of restart for getting the economy operating during the pandemic. To date, recovery measures have only been the subject of speculation, but the government’s priorities are a bit clearer today.

The FES saw new relief aimed at Canada’s hardest hit businesses like hotels and regional air carriers and planned restart support to improve ventilation in public buildings. The recovery plan is a three-year stimulus package worth roughly 3 to 4 per cent of GDP or up to $100 billion. Further details on the recovery stimulus spending will be announced in the spring budget, with detailed consultations feeding into the process.

So far, Ottawa’s pandemic support for business has taken the form of broad programs that are agnostic to sector or geography, like CEWS, CEBA, and the rent subsidy programs. This approach was partially driven by the need to get supports out quickly with limited bandwidth. It was also driven by concerns to be fair to all sectors by offering the same programming to everyone. The FES breaks away from this sector agnostic rule and introduces large sector specific initiatives for the first time, with a Highly Effected Sector Credit Availability Program offering 100% government guaranteed loans to firms in tourism and hospitality, hotels, arts and entertainment. This opens the door to other sectors to seek their own specific programming. The government also adapted one of the cornerstone universal programs for the slow winter months, raising the maximum wage subsidy back to 75% and extending the current 65% subsidy rate for the Canada Emergency Rent Subsidy program for the December 20th to March 13 period.

One element that the FES does not address is the provincial and territorial demand for increases in the Canada Health Transfer, which is the main agenda item for the upcoming First Ministers Meeting in early December. Nor does it address municipal demands for emergency support or provide details on infrastructure spending deals. But the FES does repeatedly note that the federal government has provided more than 8 out of every 10 dollars spent in Canada to fight COVID-19 and support Canadians, and pledges to continue to be there for provinces and municipalities for one-time investments in health care, PPE, business stabilization, and the economic restart.

Of course, this remains a minority Parliament, and the Liberals will need to seek support to pass the implementation legislation and sustain confidence in the government. The government does not expect a battle over the legislation and will try to avoid brinksmanship. Notably, an increase in the Canada Child Benefit for January is contingent on securing passage before Christmas, but if the legislation is delayed it can be implemented for February or March. Expect to see the Liberals attempt to avoid confrontation or controversy on this vote.

Fiscal State of the Nation

As mentioned above, the Fall Economic Statement extends the federal government’s commitment to support Canadians and businesses through the pandemic. Extraordinary spending is time-limited, with the government emphasizing that this extraordinary deficit spending is distinct from the structural deficits of the 1990s. While a fiscal anchor is absent, the FES establishes fiscal “guardrails” to guide the winding down of supports, tracking progress against several related indicators including the employment rate, total hours worked, and the level of unemployment in the economy.

Despite private sector economists showing considerable alignment in the projected path forward, the government chose a more pessimistic view of the fiscal situation, citing the potential for more severe economic restrictions to be put in place by the provinces. This additional prudence of fiscal projections provides the government with three future opportunities that they can use to their advantage:

  1. “Everything has gone wrong” scenario – In this scenario, the government will have presaged other fiscal and economic projectors and can show well-earned prudence that can be used to political advantage.
  2. “Prudent fiscal management” scenario – Using the strategy of previous Liberal Finance Minister Paul Martin, the Liberal government can overperform to put a positive spin on a fiscal position that is much better than projected.
  3. “Extra spending room” scenario – Extra fiscal room in projections can help finance a “Building Back Better” plan, potentially including a new childcare program.

The government is billing the fiscal stimulus and deficit plan as temporary in nature, and the fiscal outlook certainly shows a steep decline in deficits from $380B in 2020-21 to $25B in 2025-26. However, the government has also committed to spending $100 billion in stimulus the next three years but, as it states, “this additional spending has not been formally included in the government’s fiscal framework.” Within the context of an uncertain fiscal situation, a large downgrade in private sector forecasts, and one of the largest stimulus programs ever announced that has yet to be fiscally forecasted, where the deficit actually ends up remains an open question.

The government introduces the concept of “fiscal guardrails” that track levels of employment. However, the measures one would expect when tracking a fiscal situation (net debt-to-GDP, deficit, bond rates, credit ratings, etc.) are absent from its calculation. While it may be too soon to project a “fiscal anchor,” many will still be challenging the government to find a new one in the months ahead.