OTTAWA FACES FISCAL RESET DILEMMA
The pandemic has put Canada on a high-risk fiscal trajectory. Timing the exit won't be easy.
Future Canadian policy-makers will know how much it costs to prevent a recession from turning into a depression thanks to this week’s major economic events: roughly $340 billion in 2020 dollars.
Finance Minister Bill Morneau’s spending estimate for his fight against the COVID-19 crisis, characterized by more than one pundit as “eye-popping,” caused some consternation when he released his fiscal update on July 8.
The estimated budget shortfall — in precise terms, $343.2 billion, or 16 per cent of gross domestic product, compared with about one per cent of GDP two years ago — will push the federal debt to more than $1 trillion, a figure that represents both a financial and political burden that Morneau could struggle to pay.
It’s a jarring sum for a country that likes to think of itself as prudent, and the new debt likely will weigh on policy making for years, depending on how the government decides to reset to confront the recovery from the recession.
“In the coming months, the Liberal government will have to pull off its biggest challenge yet,” Bank of Nova Scotia economists rebekah young and Marc desormeaux said in a report. “It will need to resist pressures from the right to consolidate prematurely in a manner that could throw into jeopardy Canada’s fragile recovery, while pushing back against pressures to ramp up indefinitely social spending on borrowed credit.”
The federal debt is now 50 per cent of GDP, manageable, but high enough to conjure memories of the mid1990s, when a debt-to-gdp ratio of around 67 per cent nearly triggered a financial crisis. Prime Minister Justin Trudeau’s government has used up most, if not all, of the fiscal space bequeathed to it by previous administrations.
Ideally, Morneau will find ways to foster growth by reallocating his budget in favour of programs that boost productivity, while at the same time showing he is serious about reducing the debt to pre-crisis levels. unfortunately, the current Liberal government has demonstrated a preference for solving problems by increasing discretionary spending. There is reason to be skeptical that Trudeau and Morneau are even capable of recognizing a budget constraint.
“I am a little bit cynical about the ability of Canada to rally around a vision that would lift growth potential substantially,” young said in an email.
For now, however, Morneau has earned the benefit of the doubt because his rescue effort, however imperfect, appears to be working.
Statistics Canada followed the fiscal update with a more positive stunner, reporting on July 10 that employers had created 953,000 jobs in June, by far the biggest monthly increase in data going back to 1976.
The jobless rate dropped to 12.3 per cent from 13.7 per cent the previous month, while total hours worked increased, a positive signal that the recovery is gaining momentum.
All those numbers will blunt criticism that Morneau’s spending is wasteful. No doubt some programs could be better executed, but if the goal was to keep the economy from coming undone during the COVID-19 lockdowns, data indicate the effort has been a success.
The employment rate, which measures the percentage of the working age population that is employed, jumped to 56 per cent from 52.9 per cent in May and 52.1 per cent in April. The figure was 61.8 per cent in February, so there still is some distance to cover, but the rebound is happening faster than many expected at the onset of the crisis in early March, when many commentators were liberally comparing the pandemic to the Great depression.
“The jobs numbers for June join a growing number of economic indicators that have been less bad than feared early in the economic recovery,” said Nathan Janzen, an economist at royal Bank.
Brendon Bernard, an economist at Indeed, the hiring website, observed that fired workers were finding jobs in June, whereas much of the hiring previously was the result of furloughed workers being called back. “Some of the sectors that experienced the sharpest job losses earlier in the crisis, like accommodation and food services, saw noticeable snapbacks,” he said.
There’s reason to feel optimistic about the recovery.
The Great recession persisted because governments were too stingy with stimulus money. In the united States, Congress and the White House settled on a sum that was considerably lower than what most economists said would be needed, and in Canada, Prime Minister Stephen Harper’s government sought to return to a budget surplus before the economy was ready to stand on its own.
This time, countries have decided to err on the side of too much debt.
Morneau’s update included an estimate that gross domestic product would have contracted by more than 10 per cent if he had done nothing, but will instead decline by about seven per cent. (A separate analysis by Scotiabank’s economics department produced a similar result.) That’s still a deep hole, but one that feels scaleable, assuming health authorities and the pharmaceutical companies devise ways to contain the spread of the coronavirus that causes COVID-19.
To be sure, there still is a long way to go. Some 1.8 million who had jobs in February remain unemployed and most GDP forecasts don’t see a return to precrisis levels until 2022. And there are worries that the recovery will fade as soon as the government rescue packages run dry. Confidence is shaky.
“until we get through that initial shock of the relief capital going through the system, it’s hard to know where we’re at,” Adam Felesky, chief executive of Portag3 Ventures LP, the venture-capital arm of Power Corp. of Canada, said in an interview this week. “The data for certain from April on has been much better than anyone would have expected, but we are cautious about whether that’s a false positive.”
Morneau stopped a depression. That was probably the easy part.