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June 05, 2020 | 14:32
Counting Canada's Fiscal Costs
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Counting Canada's Fiscal Costs |
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The COVID-19 shock is carving a massive hole in government finances around the world; and, Canada is no exception. But, given the vast amount of uncertainty around the economic backdrop, and rapidly evolving programs to cushion the blow, we’ve heard precious little on the impact on government fiscal balances. Ottawa hasn’t provided firm timing for a fiscal update, but the provinces should begin to roll out some estimates later this month. In the meantime, we look at how the fiscal situation might evolve as the year unfolds. Federal Fiscal OutlookBMO Economics estimates that the federal government is on pace to post a deficit of at least $225 billion in FY20/21 before any further measures are announced (such as $14 billion to the provinces announced Friday, with details pending). That's much deeper than the $28.1 billion deficit forecasted in the 2019 Economic and Fiscal Update. Of course, a lot has changed since then. Ottawa estimates roughly $153 billion in direct support measures in FY20/21 largely to keep households and businesses afloat during the pandemic (Table 1). The Canada Emergency Response Benefit (pegged at $60 billion) and the Canada Emergency Wage Subsidy ($45 billion) account for the vast majority of the total. Notably, the take-up on the former has been much stronger than expected versus lower-than-expected use of the latter. But, the latest estimates don’t incorporate a 12-week extension to the CEWS program, so there is likely further upside to these figures (and downside to the deficit). The economy has also deteriorated since Ottawa’s September outlook. After applying the Department of Finance’s sensitivity estimates to our current forecast, we estimate that the shock amounts to $44 billion in lower revenues and increased spending. Some of the larger deficit forecasts floating around are based on deeper economic declines. The Parliamentary Budget Office, for example, is now assuming a $260 billion shortfall, but that is based on a 12% decline in calendar 2020 real GDP (we are at -6.0%). Still, given further likely upward spending pressure, our estimate is probably the starting point. |
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All told, a $225 billion deficit would weigh in at 10% of GDP, making it the deepest fiscal hole on record dating back to the mid-1980s (Chart 1). And, we expect the all-important federal debt-to-GDP ratio to jump to 43% in FY20/21, as the government has long abandoned its only fiscal anchor. That would take the ratio back to levels last seen in 2001, but still comfortably below the 1995 high of nearly 67%. Importantly, record-low long-term interest rates and Bank of Canada buying will keep debt service costs contained. Debt costs fell to just 7% of revenues pre-COVID, versus more than 20% in the early-2000s and nearly 40% in the early-1990s. So, while the deficit numbers will start to look harsh, and debt will lurch higher, the fiscal strain is still a long way away from previous challenging periods. After this year, policy would ideally transition from maintaining solvency (of households and businesses) to incenting growth, job market participation and business creation (or re-creation) in order to push the economy back to capacity. Then, the longer challenge of rebuilding fiscal capacity will begin. Provincial Fiscal Outlook |
Provincial revenues have clearly fallen off, and combined direct provincial COVID-19 support measures look to be in the $30 billion range overall (Table 2). The deep plunge in oil prices is another factor, which adds a further impact on the producing provinces. All told, we estimate that the combined provincial deficit will run at roughly $72 billion this fiscal year, or 3.0% of GDP, while net debt will jump to 34% of GDP after dipping below 30% last year (Chart 2). Borrowing programs have ramped up significantly, and the provincial total could run at around $150 bln this fiscal year. Here is a quick look at the fiscal situation in each province ahead of more meaningful fiscal updates later in the year. In all cases, we’ve estimated total COVID-related spending increases, scaled revenues based on our current economic outlook versus each province’s pre-COVID assumption, and accounted for other special factors (such as resource royalties) where appropriate: British Columbia: The last remaining AAA credit was recently put on negative outlook by S&P. The Province entered the downturn in the strongest fiscal position in Canada, and will likely remain there, even with the deficit expected near $8 billion. That includes roughly $5 billion in COVID support measures including a support benefit for those unable to work, and an increased/expanded BC Climate Action Tax Credit. Alberta: COVID-support measures are compounded by the decline in oil prices, which will pull royalties down sharply (near zero). One issue is how quickly those royalties recover even if oil prices do, given that current-year losses might be carried forward for some time. The deficit is likely to be near $20 billion this fiscal year, or more than 5% of GDP. Saskatchewan: The oil price decline has hit the province as well and will dig into the budget balance even if direct COVID-support measures are somewhat lower than in other jurisdictions. The deficit will likely come in at more than $2 billion, topping 2.5% of GDP, though the budget was effectively balanced last year. Manitoba: The province is typically the least volatile from an economic and fiscal perspective given the diverse industry base—recall the much shallower decline during the financial crisis. However, given the nature of this downturn, that buffer won’t be nearly as large. The economic impact and various support measures should push the deficit to nearly $3 billion. |
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Ontario: An early look at the fiscal impact of COVID-19 pegged the deficit at $20.5 billion. While there were ample contingencies in that outlook, we suspect there is still some further downside. For example, real GDP was expected to be flat for 2020 versus our current -6.0% call. At the other extreme, the FAO pegged the deficit at $41 billion alongside a 9% decline in real GDP. While possible given the vast uncertainty, we’d view that as the high end of the range. Quebec: The Province has informally guided, on multiple occasions, to a deficit in the $12-to-$15 billion range. Details of the revenue impact and support measures are expected later this month. Keep in mind that Quebec entered this downturn with very strong fiscal momentum. New Brunswick: Our estimate is roughly in line with a late-May fiscal update that pegged the deficit at $300 million, though with potential for further COVID-related spending to come. Nova Scotia: The Province is coming off a run of five consecutive balanced budgets and a steadily declining net debt-to-GDP ratio. A solid economy and sound fiscal management left Nova Scotia in good position to weather this downturn from a fiscal perspective. At around 1% of GDP, the deficit should remain modest, but there is much uncertainty around this estimate. Note that provinces with a high share of federal transfer revenue, tax collection agreements and less Crown corporation reliance will have more stable cash flow, regardless of accrual deficit accounting—Nova Scotia is among the most stable from that perspective. Prince Edward Island: There was a quiet economic boom on the island pre-COVID, and real GDP growth actually led the country by a wide margin at 4.5% last year. This year is going to look much different, with the tourism sector likely under intense pressure this summer. Newfoundland & Labrador: Low oil prices will again weigh heavy on the province, with the deficit expected to widen above $2 billion again. Note that the deficit peaked at $2.2 billion in FY15/16 when the Province was under fiscal stress. |