The Federal Economic Snapshot: COVID Edition

After four months of uncertainty due to the COVID-19 pandemic and subsequent financial crisis, federal Finance Minister Bill Morneau presented the Snapshot of the country’s economic and fiscal picture. While the projected deficit of $343 billion for the current fiscal year will garner headlines, there are other signals of where the Trudeau government intends to go.

The Snapshot

Prior to Minister Morneau’s speech, Prime Minister Justin Trudeau set the stage around the government’s response. His main point was that his government “spent so that Canadians didn’t have to take on extra debt.” With Bank of Canada rates at 0.25 per cent and international credit markets still believing in our solvency, the government has flexibility around short-term borrowing, but recovery will not be smooth. Any economic bounce back will certainly be uneven, depending on individual households and businesses, the industrial sector, and regionality.

In terms of the economic outlook, there remains a high level of uncertainty on the fiscal situation, and the Snapshot considered only the current fiscal year (2020-21). Government expenses increased significantly, with over $230 billion in direct supports. At the same time, the decline in economic activity experienced since March also causes tax revenues to decline. In addition, unemployment has gone from a low of 5.5 per cent in January to a high of 13.7 per cent in May.

GDP is expected to decline 6.8 per cent in 2020 and to grow by 5.5 per cent in 2021 according to private sector economists. When considered on a quarterly basis, the depth of the decline and the uncertainty it causes becomes more obvious. In the second quarter of 2020, GDP is expected to fall by 41 per cent on an annualized basis and estimates on growth in the third quarter diverge widely, reflecting great uncertainty on the pace of recovery.

Without government intervention, the Department of Finance estimates that real GDP could have fallen by over 10 per cent in 2020, with unemployment rising by a further 2 per cent. But that came at a cost. In addition to a record deficit, for the first time in Canadian history the federal debt will reach $1 trillion dollars. Despite reaching those new heights, public debt charges for 2020-21 are expected to be less than 1 per cent of GDP, saving government about $4 billion this year, thanks to low interest rates.

In terms of overall economic fortunes, the government projects that early provincial re-openings provided a soft rebound in measures of mobility and workplace attendance, with sales starting to pick up, as well as home sales and listings. As economic activity increases, it is projected that real GDP will rebound, but remain soft as border and other restrictions remain in place. The anticipated “second wave” of coronavirus in the fall and associated public health measures also add uncertainty on the pace of economic growth.

The Snapshot also notes that the federal government is looking to incorporate quality of life measurements into decision-making, including the development and implementation of the COVID-19 Economic Response Plan.

Addressing the COVID Response

Minister Morneau’s speech in the House of Commons largely focused on the progress of the government’s COVID-19 Economic Response Plan, including:

• $232 billion in direct supports (14% of Canada’s GDP)
• Over 600,000 students received the Canada Emergency Student Benefit, with $1.4 billion paid as of July 2
• 680,000 small businesses received the Canada Emergency Business Account loans, with a total of $27.4 billion disbursed
• 3 million workers have received the Canada Emergency Wage Subsidy (CEWS), and
• Over 8 million Canadians have received the Canada Emergency Response Benefit (CERB), with $54 billion paid out

Morneau’s speech emphasized that the strong fiscal position and low levels of debt of the federal government enabled the government to borrow and fund the response. In contrast, provincial debt has outpaced federal debt by $225 billion over the last 25 years, with household debt to disposable income increased to over 175 per cent. As a result, nearly 9 out of every 10 dollars in COVID-19 response was financed by the federal government.

The “Safe Restart”

In his speech, Morneau argued that the best economic policy is to contain the spread of the virus and highlighted the work towards a $14 billion “Safe Restart Agreement” with the provinces. This would include scaling capacity to conduct testing and contact tracing, increasing capacity in the health care system, addressing gaps in long-term and home care, ensuring health care workers have access to PPE, paid sick leave and additional funding for municipalities around COVID-19.

However, as previously noted, many of these responsibilities lie within provincial authority where in some cases, the feds only possess the power to cajole. Increasingly since March, divergence between federal and provincial governments, including on health care spending, has grown and remains a flashpoint over any proposed way forward.

Opposition Reaction

Opposition parties unsurprisingly had their own views on the fiscal snapshot. Interim Conservative Leader Andrew Scheer was critical of the lack of a specific plan to get the economy back on a stable footing, pointing out that Canada has the highest unemployment rate in the G7 and has also lost its AAA credit rating. He also focused on the lack of funding for the Office of the Auditor General to examine all the government’s COVID spending.

The Bloc Quebecois noted the provinces had borne significant additional health care costs to respond to the pandemic and sought additional, unconditional funds for the provinces. Jagmeet Singh and the NDP were critical of the government’s lack of action on the tax system and reiterated previous calls to make “the ultra rich pay”, as well as calling on the government to crack down on the use of offshore tax havens. They were also critical of support provided to Canada’s banks during the pandemic.

Looking Ahead

Like a polaroid picture, the snapshot comes into focus over time. Obviously, the deficit and debt numbers will generate headlines, but they are estimates at best and guesses at worst. It is also possible that the government presented a worst-case scenario so they can later demonstrate fiscal rigour by doing better over the course of the year (or to set expectations if the second wave is worse that the first).

More telling is where the government sees future spending. The end of summer marks the end of two key support programs: the CEWS and the CERB. There is significant discussion within government of how to move Canadians from the CERB basic income to the CEWS wage supports and get more people working and doing it safely. The federal government is expected to soon announce changes and accompanying legislation to try and stimulate rehiring, provide support to businesses and to help them adapt to the new normal, with additional funding set aside to support this. It appears the government may be hoping to transition CEWS from a furlough into a rehiring program over the fall, but much depends on the size and impact of a second wave of cases then.

Beyond these immediate programs, there remain significant hurdles to a safe and successful reopening, particularly childcare and public schools. In addition, there have also been challenges and low uptake of certain business support programs, such as the commercial rent subsidy and supports to large businesses. Unlike previous recessions, where infrastructure dollars were used to stimulate the economy, the government is wrestling with the right prescription for recovery spending and this week’s Cabinet Retreat is expected to begin those discussions.

Yesterday’s Snapshot also has political ramifications given that Justin Trudeau and the Liberals remain in a minority Parliament. First, the government has some permission to rethink of the priorities they want to focus on. Major spending promises may or may not proceed quickly, given the drastically changes fiscal situation. Second, every political leader will also be thinking about what this means in terms of electoral math and the timing of the next federal election. Expect the Liberals to have some confidence that the opposition parties will avoid risking taking the blame for an election by voting down key legislation, particularly when the government is enjoying majority level public support.

Third, the federation itself is altered by the size of this crisis. Ottawa continues to have spending capacity; the provinces are all, to varying degrees, tapped out by the demands already on them or the crushing future health and long-term care demands pending. Municipalities are even more economically stressed and require a solvency injection to avoid brutal cuts next spring. As a result, the federal government is more paramount than ever.

Finally, the pandemic revealed vulnerabilities in the social safety net, including the challenges around long-term care and a debate about what kind of care Canadians want to see (and the costs of that care). Through new programs like CERB, it has also created space for a discussion around issues like a universal basic income. With a transformation of government spending and programming, there will no doubt be a wider debate across the spectrum on how to address challenges to the revenue side of the government’s balance sheet. Public policy is likely to shift in its understanding of what is possible, perhaps dramatically in the months and years ahead.

Ontario Update

In addition to tabling legislation to lift the Provincial Declaration of Emergency while maintaining existing orders put into place in response to COVID-19, the Ford government has introduced the COVID-19 Economic Recovery Act, 2020.

The omnibus bill, which impacts several ministries is being touted as a “first step” that will lay the foundation for the province’s COVID-19 recovery. At the centerpiece of this legislation are several measures to support the building of key infrastructure projects faster, with the intention of boosting Ontario’s economic recovery, attract investment, and create jobs.

Additional details can be found here.