Ottawa had no alternative to massive debt, former watchdog says By: Dylan Robertson Posted: 7:00 PM CDT Wednesday, Jul. 8, 2020

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This article was published 08/07/2020 (1668 days ago), so information in it may no longer be current.

OTTAWA — Canada’s deficit has ballooned to $343.2 billion — 10 times its amount from a year ago — in response to the pandemic, yet Ottawa’s fiscal “snapshot” released Wednesday shows hope for a slow but manageable economic recovery.

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It also hints at intensifying pressure from Ottawa to have provinces boost their own spending, despite many premiers having been elected on belt-tightening platforms.

“When you look at those GDP declines, which are historic… the declines would have been much more significant and longer lasting, if we didn’t allow the federal government to provide fiscal supports,” Kevin Page, the former budget watchdog, told the Free Press Wednesday.

“This very severe recession — which is historic both internationally and in Canadian terms —would have been much larger; there would have been a depression, with the long-term impacts of bankruptcies (both) personal and corporate.”

Page leads the Institute of Fiscal Studies and Democracy at the University of Ottawa after spending five years scrutinizing federal expenditures as the Parliamentary Budget Officer.

The fiscal snapshot shows Ottawa holding a high amount of debt for years to come, but Page noted those debts were taken on at extremely low interest rates.

Reading Wednesday’s projections, he expects Ottawa to get by for years with a high ratio of debt compared with the size of the economy. That would be similar to Canada’s finances in the 1990s, which is not an optimal situation, but a manageable one, he said, considering how much economic activity stopped this year.

Finance Minister Bill Morneau told reporters Wednesday he’s trying to drum up economic growth to pay off the debts instead of increasing tax rates.

“The reality is that we’ve faced an enormous shock to our system. We know that the federal government was in the best position to deliver support,” he said.

Still, the federal Liberals will face continued criticism for opting in years past to spend on infrastructure and job-training programs instead of saving for a rainy day.

“I’m very worried about the future of our country, based upon the amount of indebtedness that has been piling up. Trudeau was spending during the good times,” said Conservative MP James Bezan, who represents the Interlake.

The Trudeau government abandoned a conventional “fiscal anchor” three years ago, which is a defined point at which the government restrains its spending, in order to shore up its credibility with lenders.

Ottawa continues to net good credit ratings, but one firm issued a slight downgrade two weeks ago.

Yet the federal government can still borrow at a cheaper rate than provinces, which will likely fuel more demands for Ottawa to pay the tab.

“The reality is that we’ve faced an enormous shock to our system. We know that the federal government was in the best position to deliver support.” – Finance Minister Bill Morneau

Wednesday’s snapshot notes that provinces and territories account for just 14 per cent of the $469 billion allocated to prop up the economy so far, which includes both spending and deferrals of taxes and fees.

It highlights that wage subsidies and Canada Emergency Response Benefit cheques “are also providing significant support to provinces” by keeping Canadians spending and thus contributing to provinces’ income- and sales-tax revenues.

A bond-buying program has Canada’s central bank guaranteeing debts, in a bid to make sure there is enough of a marketplace for provinces to take on debt as needed.

Manitoba Premier Brian Pallister has asked the Bank of Canada to instead borrow on behalf of provinces at a lower interest rate. Page said the current federal approach seems to work instead, as “kind of a shock-absorber” to prevent provinces and municipalities from going bust.

“The federal government has used its ability to borrow money, and its strong credit rating, to actually take on the big hit,” Page said.

“By providing these supports to households and businesses, it’s lessened the burden on provinces, which have less fiscal room.”

Ottawa is weeks into talks with provinces over a $14-billion package meant to provide everything from daycare and transit to protective equipment.

While negotiations are private, many expect the funding to be contingent on provinces matching some of those costs.

At the same time, cities have been crying out for help, given how little they’re collecting in fees, while premiers want Ottawa to pay more health-care costs.

“Provinces are also stretched — and municipalities are extremely stretched — so there’s going to be a significant federal-provincial discussion around transfers,” Page predicted.

The European Union is months into debates over how much the central body should pay for economic supports, versus individual countries with varying wealth and needs.

Stingier countries have faced peer pressure to spend in a bid to keep that continent from an economic collapse.

“It’s not quite the same federation as we have, but it’s sounding quite similar,” Page said.

dylan.robertson@freepress.mb.ca