National Post (National Edition)

Conference Board warns of `gigantic fiscal hole.'

- JESSE SNYDER

OTTAWA • Plunging revenues and unsustaina­ble large deficits will leave Canadian government­s in a deep fiscal hole for years to come, a new report says, underscori­ng the need for provincial and federal leaders to considerab­ly alter their fiscal plans.

The Conference Board of Canada is warning about the “inescapabl­e” ramificati­ons of record-high debts amassed during the COVID-19 pandemic, particular­ly as a slow economic recovery threatens to crimp government revenues for years.

Concerns over Canada's fiscal stability, laid out in the new report Challenges Ahead: Canada's Post Pandemic Fiscal Prospects, is the latest alarm raised by experts, who say finance officials need to introduce major course correction­s in their fiscal plans in order to avoid catastroph­e down the road.

Government­s, consumed by the immediate crisis, have not yet reckoned with the mountains of new debts they have assumed and how they will make up the shortfall, said Pedro Antunes, chief economist at the Conference Board and report author.

“Many provinces and territorie­s, and the federal government, are going to have trouble reining in their big deficits in the near term,” Antunes said. “And when you look longer term, the situation is one where it's essentiall­y untenable.”

The Internatio­nal Monetary Fund, in a report earlier this week, said the federal government under Prime Minster Justin Trudeau “needs further justificat­ion” for its sizable spending plans, and warned that any additional unnecessar­y expenditur­es “could weaken the credibilit­y of the fiscal framework.”

That was followed on Wednesday by a report from the Toronto-based C.D. Howe Institute, which raised concerns over Ottawa's promise to roll out up to $100 billion in stimulus funds over the next three years, saying it “remained unconvince­d that a large stimulus package is appropriat­e at this time.” With federal debt burdens poised to rise, “any new permanent programs should be tax-financed,” they said.

Calls for a course correction come as the Trudeau government has sought to frame its massive spending plans as temporary measures that can eventually be wound down, thereby minimizing any long-term fiscal effects. Finance Minister Chrystia Freeland's mandate letter calls for emergency measures that will also “avoid creating new permanent spending.”

Even so, the Liberal government has already promised a range of seemingly permanent spending measures, unveiled in its speech from the throne last year. Ottawa said it would boost old age security benefits; expand employment insurance to include the self-employed; increase childcare benefits; widen worker training programs, and increase spending on energy efficient retrofits and electric cars, among other things.

Adding to those fiscal burdens, the Conference

Board report says, will be a deepening dependency on Ottawa by the provinces, whose fiscal positions were pummelled over the last year amid pandemic lockdowns. Tax increases or spending cuts will be required to make up the difference, Antunes said.

The Conference Board and others are nearly unanimous that initial emergency measures introduced by Ottawa and the provinces were entirely necessary. Low interest rates also create substantia­l cushion for government­s in the short term, they say. But the Conference Board also warned on Thursday that the extra fiscal wiggle room might not continue indefinite­ly.

“Rock-bottom financing rates will help government­s manage the near-term financing challenges associated with the additional debt burden, but the ramificati­ons of this massive and sudden buildup in public debt are inescapabl­e over the longer term,” the report said. “As such, a long-term policy objective for government­s must be to stabilize and then reduce their aggregate debt as a share of GDP so as to enable Canada to fend off future crises, which are bound to occur.”

The warnings come as the federal government prepares to post a $385-billion deficit in 2021, due largely to massive pandemic relief benefits for businesses and unemployed people. Provinces and territorie­s will amass another $92 billion in deficits in 2021, according to the report, bringing the total fiscal gap to 22 per cent of GDP.

Combined government debts will reach 95 per cent of GDP shortly after the pandemic — “levels last seen in the early 1990s when surging deficits led to nearly a decade of fiscal restraint,” according to the report. Based on government­s' current fiscal plans, that figure will continue to climb in the coming decade, surpassing 100 per cent of GDP by 2030, according to the conference board.

“The lasting impact on revenues and expenditur­es suggests that government­s in Canada will struggle over

the near and longer terms to dig themselves out of this gigantic fiscal hole,” the report said. “In fact, even as the economy recovers, our outlook for modest economic growth suggests that the federal and aggregate provincial/territoria­l government­s will not be able to rein in their deficits without additional revenue measures or cuts to spending.”

The weakest aspects of Canada's fiscal situation lies mostly with the provinces, according to the Conference Board, which will in turn lean more heavily on federal supports in coming years.

Deepening dependency among the provinces, including for major expenditur­es like health care to care for an aging population, will continue to put a drag on economic growth more broadly. Provincial and territoria­l expenditur­es are expected to rise 3.9 per cent annually after 2022, outpacing revenue growth of just 3.6 per cent.

“The situation results in a vicious cycle where escalating debt-servicing costs eat up a growing portion of revenues — a clear measure of fiscal unsustaina­bility,” the conference board report said.

Even if the federal government is able to stabilize its net debt-to-GDP ratio, as the conference board expects, aggregate provincial debts “will rise to well above 100 per cent and then continue to increase through 2034– 35,” the report said.

Experts say the provinces and Ottawa will need to begin introducin­g potentiall­y unpopular new measures to balance the books, consisting of either tax hikes or spending cuts. Ottawa has already ruled out broadbased tax increases, saying it would only place more burden on the eventual economic recovery.

THE SITUATION (LONG-TERM) IS ESSENTIALL­Y UNTENABLE.

 ?? SEAN KILPATRICK / THE CANADIAN PRESS FILES ?? Finance Minister Chrystia Freeland's has called for emergency measures that
will “avoid creating new permanent spending.”
SEAN KILPATRICK / THE CANADIAN PRESS FILES Finance Minister Chrystia Freeland's has called for emergency measures that will “avoid creating new permanent spending.”

Newspapers in English

Newspapers from Canada