Deficit on track to hit $330 billion with COVID effects lasting years, says PBO

OTTAWA – The parliamentary budget office says the federal deficit for the year is on track to hit $328.5 billion as a result of COVID-19.

That figure released this morning reflects measures announced as of the start of the month, including an estimated $225.9 billion in emergency aid in response to the pandemic.

Relative to the size of the economy, the deficit amounts to 15 per cent of gross domestic product, making it the largest over 50-plus years of comparable data.

The Liberals said in July that the deficit would be $343.2 billion, but that didn’t include new possible spending, or measures coming in under budget.

Much of the spending is expected to be temporary, as the government tries to put a financial floor under households and businesses feeling economic pressure from the pandemic.

Budget officer Yves Giroux says in his report that the budget deficit will fall to about $73.8 billion next year and continue to fall in ensuing fiscal years.

But in a nod to how dramatically the government’s fiscal position has changed, his report estimates deficits roughly $40 billion larger each year, on average, compared to the outlook the office provided pre-pandemic.

The report paints one possible picture of the path federal spending will take in the coming months, envisioning a world where pandemic-related restrictions stay in place for the next 12 to 18 months while a vaccine is developed and then widely distributed.

Giroux says there is much that could throw off this baseline scenario for parliamentarians to follow, such as the timing of a vaccine, an extension of any pandemic-related aid, changes to interest rates, or the creation of new programs.

For instance, should the government debt-finance some or all of the proposed measures in its recent throne speech, the medium-term outlook for federal finances could change dramatically.

Overall, things are likely to be worse than they are likely to be better in the scenario Giroux lays out.

He says federal finances are sustainable, “but barely,” noting it wouldn’t take much in terms of new spending or tax cuts for the federal debt to become unsustainable.

The debt this year is expected to push past $1 trillion, and continue to climb. As a percentage of the economy, which had been the Liberals’ preferred fiscal anchor, the debt could be about 48 per cent of GDP this year and next, peaking at 48.3 per cent in 2023 before finally falling under the scenario Giroux lays out.

Giroux estimates the economy won’t get back to its pre-pandemic levels until early 2022, but even then there will be some permanent loss in productivity from the one-two punch of COVID-19 and falling oil prices.

Jordan Press, The Canadian Press