Budget watchdog projects $363.4-billion deficit, questions need for $100-billion stimulus

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Parliamentary Budget Officer Yves Giroux is questioning the Liberal government’s plan to announce up to $100-billion in stimulus spending in the April 19 federal budget, via a report that pegs the estimated size of the deficit at $363.4-billion.

Wednesday’s report is the spending watchdog’s most up-to-date forecast of federal finances, providing the public and MPs with an independent assessment before Finance Minister Chrystia Freeland releases the government’s first budget in more than two years.

The PBO projects a deficit of $363.4-billion in the 2020-21 fiscal year, which ended Wednesday, and a deficit of $121.1-billion the following year.

When it comes to stimulus, a smaller, focused approach may be the solution

Ms. Freeland’s Nov. 30 fall economic statement said the deficit, before including new stimulus, would be $381.6-billion in 2020-21 and $121.2-billion in 2021-22. The document also said the 2020-21 deficit could be closer to $400-billion if additional spending on support measures would be needed during the final four months of that fiscal year.

What is generating considerable debate in the run-up to the budget is the government’s pledge in the fall economic statement to spend between $70-billion and $100-billion over three years on stimulus measures. The pledge was not factored into deficit projections announced by the government in November. The government promised to provide details on this plan in the 2021 budget. The November statement said the size and timing of the stimulus would be based on “fiscal guardrails,” including the employment rate, total hours worked and the level of unemployment in the economy.

The PBO report states the data trends for those guardrails would support arguments for scaling back those stimulus plans.

“Almost all of the ground lost in the labour market due to the pandemic will be made up by the end of 2021-22, the first year in which the earmarked stimulus would be implemented. This would again suggest that the size and timing of the $70[-billion]-to-$100-billion for stimulus may be miscalibrated,” the report states.

Several other budget observers have expressed similar concern with the Liberal government’s stimulus plans, including the International Monetary Fund and a team of fiscal policy experts assembled by the C.D. Howe Institute.

The Finance Minister’s office stood by the stimulus plan Wednesday in response to the PBO report. Spokesperson Katherine Cuplinskas said it is premature to project how the recovery will play out in light of the uncertainty of the virus.

“That is why the government is committed to spending 3 to 4 per cent of GDP, over three years, in order to make smart, targeted, and data-driven investments to create jobs and boost growth,” she said in an e-mail. “Previous recessions have taught us that the risk of government doing too little outweighs the risk of doing too much.”

Jean-François Perrault, chief economist at Bank of Nova Scotia, said he agrees with the PBO that high-level economic indicators, such as growth and employment, are improving more quickly than anticipated, which could be an argument for scaling back on stimulus. However Mr. Perrault said he suspects the Liberal government will still go ahead with its plans and possibly even spend more.

He said the government could point to the fact the hardest-hit sectors of the economy, such as tourism, will still need help this year. Mr. Perrault also said Canada is likely watching the Biden administration’s massive stimulus announcements south of the border with an eye to doing something similar in Canada as part of a stated desire to “build back better” after the COVID-19 pandemic.

“I would think that they are looking at what’s happening [in the U.S.] and drawing some conclusions about what it is that they may need to do here, and I think that would push them in the direction of doing more than they said they were going to do, rather than less, irrespective of the speed at which we’re recovering,” he said.

Conservative finance critic Ed Fast said he’s consulted with many economists who agree with the sentiment that $100-billion in stimulus is not necessary, given that the Canadian economy will benefit from the recent buildup in personal savings and the spillover effect of U.S. spending.

“We may not need a full $100-billion worth of stimulus, so I share the PBO’s concerns,” Mr. Fast said in an interview. “The other thing I would say is, if you’re going to spend stimulus, it has to be on the right investments. Those investments have to be focused on productivity and competitiveness.”

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