“$343 Billion” was trending on Twitter on Wednesday, July 8th. This came after Finance Minister Bill Morneau revealed that the COVID-19 pandemic has left Canada with a projected 2020 budget deficit of $343.2 billion.
For context, in December 2019, the Liberal government predicted a $28.1 billion deficit in the 2020 budget.
Morneau also stated that total government spending could hit $612 billion by 2021 – almost double the $346 billion spent during 2019. The largest government expenses included the Canada Emergency Response Benefit (CERB) and Canada Emergency Student Benefits (CESB) programs and the loans and subsidies for small businesses like the emergency wage subsidy and Canada Emergency Business Account loans. Many speculate that these programs could continue as they are or in an alternate form in the months to come.
This massive deficit comes at a time when tax revenues are declining due to rising unemployment. Business Council of British Columbia Chief Economist Ken Peacock has already suggested that this deficit could take the next ten years to pay down.
Hearing these staggering numbers, many Canadians want to know how exactly the government plans to pay back this debt. Will it simply lead to higher taxes in the near future?
While there’s no definitive plan on how the country intends to fight this battle, many experts and politicians have weighed in. Conservative Party leader Andrew Scheer responded to the July 8th economic snapshot by calling out Prime Minister Trudeau’s plan, or lack thereof: “Coming out of the pandemic, every single country on the planet will be desperately competing for the same opportunities and the same investments. So where is the Prime Minister’s plan to set us apart?”
Scheer’s comments hint toward the importance of private corporate investment; international businesses that can be wooed through increased incentives, such as lower corporate tax rates, to invest in Canada.
Meanwhile, NDP leader Jagmeet Singh took Wednesday’s economic snapshot as an opportunity to suggest that a wealth tax should push the wealthiest Canadians to “bear the brunt” of the pandemic. Singh also suggested that the Liberal government raise tax revenues by forcing corporations to return money from offshore tax havens to Canada.
Although the amount of debt that Canada now carries is high, the COVID-19 pandemic has also brought interest rates to a new low. If the country needs a decade to repay its COVID-relief spending, it can do so by borrowing at a 10-year rate of approximately 0.04%.
Such a low interest rate could mean the government would be able to finance its spending without raising taxes or cutting spending. However, nothing is for certain, and a second wave of the pandemic or another ‘significant’ event could throw such a plan off course.
Trevor Tombe, an associate professor of economics at the University of Calgary, proposed that the federal government could pay for COVID-related costs through a COVID Debt Repayment Fund. The fund would receive revenues from a special tax, such as a COVID sales tax that would act similarly to HST or GST. This fund would be managed by a group like the Canada Pension Plan, and then used to repay debts when they become due. However, Tombe acknowledges that this could also be a potentially terrible idea (as he hasn’t examined it in depth), but it at least seems like a concept worth investigating more.
The Canadian government’s fiscal response to COVID-19 is in line with other comparable countries. And it’s expected that Canada will come out of the crisis with a lower debt advantage than its G7 counterparts.
The UK, for instance, predicts that their budget deficit will likely go beyond the £300 billion mark ($512 billion CDN). This comes after the UK government announced a series of sales tax cuts and job support programs.
Meanwhile, south of the border, the US Congressional Budget Office published an $863 billion USD ($1.165 Trillion CDN) budget deficit for June 2020. In June 2019, the US deficit was just $8 billion USD ($10.8 billion CDN).
Although the UK and US have significantly higher deficits than Canada, it’s important to remember that their economies and populations are larger too.
It’s impossible to tell how Canada or any country will pay back its COVID-spending debt. The longer that it takes for the world to find a vaccine, the more likely governments will have to keep up these expenditures. Whether there will be new corporate investment incentives, a wealth tax, or a COVID sales tax remains to be a mystery.
Just as we’ve done for the past four months, we’ll have to continue to wait and see what this pandemic has in store for us.