Fall Economic Update

Dear Constituents,

The Liberal government this week released its long-awaited economic update.  This report to Canadians is the government’s answer for failing to introduce a budget since February 2019. This update tells us what we suspected – that the government continues to take on massive new debt, and that there are really no limits going forward in terms of how much more money they are willing to borrow.  Beyond the staggering debt numbers, the document offered what has become typical for this government; immense virtue signaling, lots of lofty promises, and little actual detail.

The Deficit

The budget deficit for the current fiscal year is projected to rise to $381 billion up from $343 billion predicted just a few months ago by the previous Minister of Finance Bill Morneau.

Constituents will remember from a previous email of mine that the first projected deficit number the Parliamentary Budget Officer provided to Canadians in May, because the government refused to table a spring budget, was $260 billion. When the Liberals finally provided an economic update last June the number had already ballooned to $343 billion.

These numbers are hard to digest – but think about it this way, in 2019-20 all estimated federal spending was expected to total around $350 billion. Because the government has not presented a budget for over a year and a half, we don’t know the exact figures for the year that ended last March. Our deficit this year is projected to be $380 billion at a minimum.  We have now taken on more debt in one year than the total cost to run the Government of Canada and all its programs for an entire year with total spending this fiscal year now two thirds of a trillion dollars.

Most of these dollars are already spent. This week’s update includes very little new spending on the pandemic in this fiscal year and assumes an optimistic situation in terms of the impact of continued restrictions on the economy. Since we are only halfway through the current fiscal year it is unlikely this projection will be the true final picture.

Back in April, I said in an email to constituents that “it is conceivable the federal budget deficit this current year (April 1, 2020 – March 31, 2021), when these massive expenditures are combined with a significant drop in revenue, could equal or exceed the entire $350 billion budget of the just completed fiscal year 2019-20.”  It is now very clear that this will indeed be the case – with a significant debt margin to spare.

Total federal debt has now surpassed $1 trillion. The economic update also pledged to spend another $100 billion over the next three years to stimulate the economy.  The government intends to run a $100 billion deficit in 21-22 and a $50 billion deficit in 22-23. If the government sticks to this plan our total debt to GDP will be just shy of 60%. In 1992 when that ratio hit 65% the government could no longer borrow any money and severe austerity measures were required.

A further concern is that government believes going deeply into debt shouldn’t be a concern because of extremely low interest rates. While that may be technically correct, 50% of government borrowing today is in 90-day short term bonds, with another 25% of borrowing locked-in for less than 4 years.  We have not locked in a low rate, like you would have on a fixed mortgage.  The smallest increase in interest rates will drive the debt level much higher and the servicing costs will increase rapidly. Even with low interest rates prior to the pandemic, more was spent by government on servicing the debt than on health care transfers to the provinces.

Measures in the Fall Economic Statement

Here is a summary of measures included in the Fall Economic Statement:

• The extension of the Canada Emergency Wage Subsidy at an increased rate of 75%.

• An additional top up of $20,000 to the Canada Emergency Business Account – businesses must apply before December 31st to gain access to this top up.

• The Canada Child Benefit will be topped up for 2021.  Families with annual incomes below $120,000 will receive an additional $1,200 per child under the age of 6, and families with incomes over $120,000 will receive half of that amount.

• The Highly Affected Sectors Credit Availability Program (HASCAP) will offer government backed loans for sectors that have experienced significant disruptions due to COVID-19 including tourism, hospitality, and the arts.  No further details are available.

• Simplification of tax credits for people with home offices.

• No interest on student loans for the 2021-2022 fiscal year.

• A statement to create 1 million new jobs and to put “climate action at the center,” again with no details on how this will be achieved.

• $2.6 billion to retrofit homes to be more energy efficient, again details to follow.

• New money for supports for marginalized and racialized women, Indigenous peoples, persons with disabilities and new Canadians, again with no details.

• A new tax on digital content distributors such as Netflix, Amazon, and Facebook but won’t be effective until 2022.

• A statement of willingness to invest up to $100 billion in the economic recovery over the next three years (pushing the spending to GDP ratio to close to 60%).

• $3 billion to plant trees, similar to a promise made by the Prime Minister in the 2019 election campaign and to date not a single tree has been planted.

The struggling airline industry and airport authorities will receive some financial assistance primarily in rent relief and to improve health and safety infrastructure. This falls far short however of what the major airlines have been asking for. The government continues to say it is in negotiation with airlines for a financial package. The Minister has stated however that no financial assistance will be forthcoming without a commitment by the airlines to return all funds customers are owed for cancelled flights due to the pandemic – something we have been calling for since the start of the pandemic. Since there was no announcement this week one can only assume these negotiations are not going well.

You can read more details from the government’s budget website here: https://budget.gc.ca/

Vaccine Rollout

Much of the Economic Update deals with the pandemic and the need to continue strict health measures. There was no plan however for the rollout of the various COVID-19 vaccinations, something Conservatives and all the Premiers have been requesting for weeks.  There has been a great deal of conflicting information regarding where Canada “is in the line” to get the various COVID-19 vaccines. Health Canada is indicating that approval could come by mid-December.

Canadians are becoming anxious and that anxiety will start to increase as British residents begin to receive vaccinations as early as next week with the Americans not far behind. Meanwhile, on our end, despite assurances that we have multiple agreements with manufacturers, no vaccinations have been approved to date, and there is no large-scale distribution plan.  The Prime Minister has mused that most people will be vaccinated “by September” – 9 months from now.  Let us hope that the government puts their foot on the gas and gets this done – and we certainly will be doing all we can to encourage them along.

Commentary

The government has introduced legislation to enact some of the expenditures. The Prime Minister has indicated once again that approval or rejection of this legislation will be a confidence vote and if not passed by Parliament an election would result. In the past these threats have resulted in the NDP backing down and supporting the government. Funding for programs such as pharmacare and day care is not included in the economic update. It is hard to see the NDP supporting a government this time that talks a lot about programs near and dear to their hearts but not supported with dollars. Indeed, they have called the federal spending proposed “austerity”.  One wonders how much they would propose we spend.

The government is indicating such legislation doesn’t have to be passed by Parliament before adjournment next Friday. This could mean Parliament will deal with this legislation on resumption in late January and if not supported by the opposition parties, it will play right into the hands of the Prime Minister who appears to want a spring election more and more with each passing day.

Ron Liepert