Billions in projected losses at Crown corporations raises concern over COVID-19 credit plans: PBO

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Parliamentary Budget Officer Yves Giroux is raising concern over billions of dollars in projected losses at commercial Crown corporations, including the Business Development Bank of Canada, Export Development Canada and Canada’s central bank.

In a report to Parliament Thursday, Mr. Giroux says the federal government is not providing MPs with the information they need to properly assess the role these Crown corporations are playing in federal efforts to manage the economic fallout of COVID-19.

Thursday’s report is the PBO’s response to Finance Minister Bill Morneau’s economic and fiscal snapshot, which revealed last week that Ottawa expects a federal deficit of $343.2-billion this year. That would push the size of the federal debt above the $1-trillion threshold for the first time.

“While I am pleased that the Government has finally released some information on the impacts of the pandemic on federal finances, more details are still needed on its fiscal plan going forward, and in particular on the losses expected by enterprise Crown corporations,” Mr. Giroux said in an e-mailed statement.

The snapshot stated that those Crown corporations – including the Bank of Canada, BDC, EDC, Canada Mortgage and Housing Corp. and others – will collectively record losses of $12-billion in the current fiscal year, compared with collective gains of $7.3-billion in 2019-20.

Crown corporations such as EDC and BDC traditionally focus on filling gaps in the lending market by granting loans to businesses that may be considered higher-risk by traditional lenders. These programs generally lead to annual profits, allowing the Crown corporations to finance their operations without federal transfers.

The projected losses at Crown corporations for the current fiscal year “have not been well-substantiated,” according to the PBO.

“Enterprise Crown corporations, by definition, should be profitable. They operate on commercial terms and are financially self-sustaining without budgetary support. Losses for these corporations are unusual. … Parliamentarians should have access to up-to-date projections of program size and estimates of expected gains or losses by enterprise Crown corporations. ... PBO lacks essential detail on the credit risk of borrowers and the quality of collateral,” the report states.

The report adds that most of these reported losses may simply be because of accounting, by pulling future expenses into the current fiscal year. The Bank of Canada is involved in several emergency liquidity efforts, including large-scale purchases of government and corporate bonds.

The BDC and EDC have key roles in managing emergency loan programs for businesses affected by the pandemic.

The BDC and EDC are responsible for the Business Credit Availability Program, which the government has said will provide at least $65-billion in additional credit to small and medium-sized enterprises.

A report this week by the Senate’s national finance committee also expressed concern with the transparency surrounding liquidity measures provided by Crown corporations, which the federal government has said will add up to about $386-billion.

Bank of Canada spokeswoman Josianne Ménard said the bank has pledged to publish transaction-level details of all of its special programs with a five-year lag or shortly after they are wound up, whichever comes first. “Our goal is to be transparent while protecting commercially sensitive information and trade-specific [details] that could impact the fair market value of the bank’s purchases,” she said in a statement.

Mr. Morneau’s office did not respond to a request for comment by this newspaper’s deadline.

Thursday’s PBO report is primarily focused on explaining why the fiscal snapshot’s projected deficit of $343.2-billion is $87.2-billion greater than what the PBO had estimated in a June 18 report. It said most of the difference is related to $42.3-billion in additional spending announcements for COVID-19 measures such as the extension of income support programs.

The second largest difference, at $36.5-billion, is related to different assumptions about economic growth and about the revenues for enterprise Crown corporations.

Another difference is $9-billion in new spending unrelated to COVID-19. The PBO report said MPs should ask questions about a reference in the snapshot to $4.4-billion that has been booked for measures that haven’t been announced yet.

The report also says that total federal borrowing allowed under the Borrowing Authority Act could soon surpass the legal maximum of $1.17-trillion. The Finance Minister is legally required to report to Parliament by November on whether that limit should be increased.

Another key issue raised in the PBO report is the fact that the fiscal snapshot made no reference to fiscal anchors, a term used to describe a government’s guiding approach to managing the deficit. The Liberal government has abandoned earlier fiscal anchors such as erasing the deficit by 2019. Prior to the pandemic, Mr. Morneau suggested the government’s fiscal anchors included lowering the federal debt-to-GDP ratio and maintaining Canada’s triple-A credit rating.

The fiscal snapshot said the federal debt-to-GDP ratio would climb to 49.1 per cent in 2020-21, up from 31.1 per cent the previous year.

Last month, Fitch Ratings downgraded Canada’s triple-A credit rating to double-A-plus in light of the increased debt incurred during the pandemic. Other major rating agencies have so far maintained their triple-A credit ratings for Canada.

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