Watchdog warns against ‘structural’ and prolonged spending binge

Budget officer warns spending hard to reverse

OT TAWA • As the Liberal government opens the fiscal taps to combat the economic fallout from COVID-19, the federal budget watchdog is urging Ottawa to ensure that recent spending hikes do not lead to “structural and permanent deficits” after the virus has retreated.

In a report on Friday, the Parliamentary Budget Officer projected that the Liberals would post a $ 112.7- billion deficit in 2021, not including another $ 25 billion announced earlier this week to expand employment insurance benefits. Wage subsidies for small businesses were also expanded to cover up to 75 per cent of payroll, adding to the fiscal weight load.

The spending measures are widely seen as necessary as Canadian economic activity evaporates. But they also run the risk of getting into the budgetary water supply after the broader economy returns to health, Parliamentary Budget Officer Yves Giroux warned.

“There will be tremendous pressure on the government to extend these programs,” he said.

Giroux and others have stressed that the federal balance sheet still provides Finance Minister Bill Morneau plenty of fiscal room to address the economic crisis. But many programs, like substantially more generous EI benefits that extend to the self- employed, will be politically challenging to phase out.

“These programs typically prove difficult to claw back or to let sunset,” he said.

“Even if the COVID-19 pandemic has gone away by August, for example, there will still be people who need or want these types of benefits. They’ll say that they are in dire financial situations, that their jobs have disappeared.”

Morneau had already faced criticism over his successive budgetary deficits before the COVID-19 outbreak, and was expecting to post a roughly $ 28 billion shortfall in 2021. After a number of new spending programs were announced in recent days, many observers now see the annual deficit easily blowing past $150 billion.

The Liberals introduced legislation earlier this week that effectively triggered the spending programs that it has announced in recent weeks, including expanded employment i nsurance benefits. The legislation puts a final deadline on EI applications of Dec. 2, 2020, which Ottawa could be under pressure to extend or transfer into other programs if economic growth remains tepid.

The deficit projection of $ 112.7 billion is equal to about 38 per cent of Canada’s total GDP, according to the PBO estimates.

Giroux sees the figure as highly manageable, and far below the deficits of the early 1990s that reached 66 per cent of GDP. But the increased debt- to- GDP ratio still blows away a key fiscal anchor often cited by the Liberal government as a sign of its fiscal prudence, and is certain to make the climb back to surplus all the more difficult.

“We still have the firepower,” Giroux said. “It is manageable as long as this doesn’t lead to structural and permanent deficits of this magnitude.”

The Liberal government had initially promised in 2015 to run a deficit of $ 10 billion, partly to fund a massive infrastructure program to boost the economy, which it promised to bring back to surplus by 2019. Prime Minister Justin Trudeau has since abandoned the promise to return to balance.

Also in its report on Friday, the PBO forecast unemployment reaching 15 per cent, substantially higher than the near- historic lows Ottawa had enjoyed before the pandemic spread of the virus.

The Canadian economy is expected to contract at an annualized rate of 5.1 per cent in 2020 — a far deeper cut than the 2008 financial crisis, and the lowest economic numbers since the 196os.

Philip Cross, senior fellow at the Macdonald- Laurier Institute, said that throughout history, times of extraordinary spending have typically translated into permanent spending requirements.

The Family Allowances program, for example, was introduced as a temporary measure in 1945 but remained in place until the ’ 70s, when it was restructured toward lower- income families. Employment Insurance was a measure introduced in 1940 that has remained permanently in place as social expectations around welfare payments have shifted.

“History isn’t on the government’s side,” Cross said.

He also said Ottawa could be facing structural damage on the revenue side as well, if the economic rebound does not come as briskly as some economists have projected. The oil market rout in particular could have deeper ramifications across the economy.

“There’s going to be tremendous damage in some sectors of the economy, and that’s not going to come roaring back,” he said.

THERE WILL BE TREMENDOUS PRESSURE ... TO EXTEND THESE PROGRAMS.