Debt to surpass $1 trillion as Liberals to spend big again.

Debt level as percentage of economy surges

OTTAWA • The Liberal government expects to post a $381-billion deficit in 2021, not including a new round of pandemic spending announced on Monday that will put further strain on Ottawa’s finances.

Finance Minister Chrystia Freeland tabled the figures in her fiscal update, which showed the deficit rising still higher than Ottawa’s earlier projection of $343 billion in 2020-21.

The Liberals, who have delivered the biggest COVID-19 fiscal response in the industrialized world, also promised another $70 billion to $100 billion over the next three years in stimulus measures. But they have declined to outline the details of the new spending, saying it was “highly dependent on the evolving health and economic situation” in Canada.

If Ottawa spends all of the additional $100 billion, Canada’s total debt as a percentage of GDP is expected to reach 58.5 per cent by 2024 — a level that is nearing those of the early 1990s, when a 66-per-cent debt-toGDP ratio triggered a wave of deep austerity measures. Projections by Finance Canada suggest that the debtto-GDP ratio could fall back to 56.6 per cent by 2026, as COVID-19 spending is gradually wound down.

Rising debt levels under score the substantially weakened fiscal position of the federal government as it doles out hundreds of billions in emergency spending as a way to keep businesses open and help the jobless pay their bills. That is sure to raise concerns among critics over whether Freeland is prepared to rein in spending as the economy gradually recovers.

The Liberal government had previously touted its declining debt-to-GDP ratio as evidence of its fiscal prudence but abandoned that key fiscal anchor when the pandemic struck. Freeland, like her predecessor Bill Morneau, has declined to provide an updated fiscal anchor, which is expected to balloon from 30 per cent before the pandemic to as high as 58 per cent in coming years.

The fiscal update on Monday sought to temper concerns about rising spending, saying it would be “limited and temporary.” It said current projected deficits “are distinct from the structural deficits of the 1990s” and were instead used to battle a “once-in-a-century kind of crisis.”

A new fiscal anchor will be set “when the economy is more stable,” the update said, adding that “a timeline for the recovery should not be locked into a rigid predetermined calendar.”

Finance officials will establish additional “fiscal guardrails” in coming months, in which unemployment figures and hours worked by Canadians would help guide the levels of any future stimulus spending.

Kevin Page, former Parliamentary Budget Officer and founder of the Institute of Fiscal Studies and Democracy, applauded the decision to include employment considerations in future spending.

“That’s a little bit on the creative side. ‘Guardrail’ is not a term that is typically used in that sort of context,” he said.

The absence of a fiscal anchor means Canada’s fiscal position will remain cloudy for some time, he said.

Conservative Leader Erin O’ Toole warned that the nearly $400-billion deficit is simply an extension of the Liberal government’s spendthrift ways, after it ran successive budget shortfalls even before the pandemic struck in early 2020.

“The Canadian economy was already showing serious signs of weakness before the pandemic hit,” he said in a written statement.

Economists are largely in agreement that Ottawa does not face an immediate fiscal crisis while pandemic spending continues to climb, as low interest rates bring borrowing costs close to record lows. But many say the government is long overdue in laying out a long-term plan to return to normal spending levels.

The deficit is projected to fall sharply after 2021, down to $121.2 billion in 2022 and to $24.9 billion in 2026.

But Liberal members of Parliament have meanwhile spelled out plans to “build back better” in a way that would expand spending on such social priorities as housing, child care and the environment, causing the Parliamentary Budget Officer and other observers to warn against unsustainable and structural spending hikes.

Much of the direct spending during COVID-19 has gone toward either the Canada Emergency Response Benefit (CERB), which gave unemployed people $2,000 per month to cover expenses, and the Canada Emergency Wage Subsidy (CEWS), which covered a portion of wage costs for companies.

Total program spending in 2020-21 is expected to reach $621 billion, almost double the $338 billion spent on programs in the previous year.

Meanwhile, economic growth is expected to average well below pre-pandemic levels, with the Canadian economy projected to grow at an average 1.4 per cent per year between 2020 and 2025. Earlier estimates before the pandemic estimated 1.8-percent growth over the same five-year period.