PBO sees $363 billion deficit, warns of pitfalls from Liberals’ promised stimulus

OTTAWA — The federal response to the COVID-19 pandemic should send the deficit to $363.4 billion, Parliament’s spending watchdog says in an outlook on federal finances just under three weeks out from the Liberal government’s first budget in two years.

The government’s economic update in November projected the deficit to hit $381.6 billion for the 2020-2021 fiscal year, which closed Wednesday, but warned it could rise to $400 billion if severe restrictions and lockdowns were required over the winter months.

The April 19 budget should provide the government’s updated deficit outlook for the past 12 months, and future fiscal years.

Budget officer Yves Giroux’s report said the deficit should fall over time as emergency spending measures wind down over the next 12 months.

The economy is faring better than the parliamentary budget office anticipated, a result experts say can be traced in part to federal aid doled out since last March and April. Giroux’s office revised its projections for growth starting in the second half of this year.

With the economy doing better than expected, and the deficit falling over time, the budget office expected federal finances to become sustainable.

Giroux said the economy could also get a boost from the Liberals’ promised fiscal stimulus of up to $100 billion, which the government has said will be outlined in the budget.

The budget office didn’t account for that spending in its updated outlook because of the lack of detail about how it will be used. But Giroux warned it would result in larger deficits that might spin out of control if new, permanent programs are financed through steeper deficits.

His report also suggested not all the money might be needed.

Statistics Canada said Wednesday the economy grew 0.7 per cent in January, and offered a preliminary estimate of growth of 0.5 per cent in February, suggesting companies and sectors had adapted to restrictions and lockdowns.

BMO chief economist Douglas Porter said part of the reason the economy hung in well at the start of the year was all the spending the Liberals doled out during the pandemic.

By Giroux’s calculations, the government will have spent about $330.6 billion on COVID-19 response measures, with the wage subsidy at $104.6 billion, and the Canada Emergency Response Benefit at $74.1 billion, making up the largest pieces of the spending pie.

Conservative finance critic Ed Fast said all that spending has happened without “any meaningful parliamentary oversight or scrutiny” as the government didn’t table a budget last year.

“What Canada needs is a serious plan to secure jobs and rebuild the economy, not Justin Trudeau’s reimagined economy,” he said.

The Liberals have promised to spend between $70 billion and $100 billion over three years in fiscal stimulus.

The outlook for the country is still mired in uncertainty, so it is reasonable for Ottawa to be prepared to still spend heavily to support the economy over the next 12 months, Porter said.

“I suspect that when we get out into 2022 and beyond, there’s just not going to be need for nearly this kind of fiscal support that they’ve been talking about,” he said.

Giroux’s office expected employment to reach its pre-pandemic level by the end of this calendar year, and the unemployment rate to drop steadily and in or just after 2023 reach its pre-pandemic level.

The improving conditions would be on the back of a stronger U.S. recovery and earlier-than-expected arrival of vaccines on both sides of the border.

Trevin Stratton, chief economist at the Canadian Chamber of Commerce, said the short-term outlook suggests stimulus spending likely won’t be necessary to jump start growth.

He said the government’s budget should focus on getting businesses to invest, which would grow wages and job numbers, help companies compete internationally, and remove barriers to interprovincial trade.

“Addressing these issues will be the key to transforming our high growth rates from this year’s rebound into longer term prosperity, job creation, and economic recovery,” Stratton said.

This report by The Canadian Press was first published March 31, 2021.

Jordan Press, The Canadian Press