Show Transcript
Canada’s fiscal response to the COVID-19 pandemic has gone a long way in reducing the economic fallout. But it comes with a massive price tag. Anthony Okolie speaks with Omar Abdelrahman, Economist, TD Bank Group, about what we can expect in the upcoming 2021-22 Federal Budget.
Print Transcript
- Omar, Canada's fiscal response to COVID-19 has gone a long way in reducing the economic fallout from the crisis. But as you mentioned in your latest report which previews the upcoming federal budget, it comes with a massive price tag. So what are the current Canadian deficit levels, and where are they going?
- Anthony, thank you for having me. So the deficit in the previous fiscal year stood around $382 billion. That's roughly 17% to 17 and 1/2% of GDP.
The fall economic statement also anticipated a significant drop in the deficit level to around $120 billion, which is roughly 5% of GDP. Since then, economic growth has been coming in better than expected. So this definitely leaves room for some upside surprises on the revenue side of the ledger. However, this will likely be more than offset by increases on the expense side of the ledger since the statement was released, namely the extension to income and rent- and wage-support programs.
- What about the debt-to-GDP ratio? Will it pick up, and should we be concerned?
- The biggest spike in the debt to GDP ratio was seen in the prior year where the debt burden jumped from around just above 30% of GDP to around 50% of GDP. Going forward, the debt burden is expected to continue ticking up slightly because of the expectation of continued deficits.
However, debt markets, currency markets did not signal significant concern with this. Credit-rating agencies, for example, did not change Canada's credit rating for the most part. There was one downgrade, but for the most part, otherwise it remained unchanged.
And going forward, the focus will be on the trajectory of that debt burden. So this budget season will certainly be closely watched for signals of fiscal discipline and how governments plan their exit strategies from these historic deficits.
- And do you expect the government to tighten spending in the near term, or do you see them sort of tapering it off?
- Well, just by nature of the economic recovery, the reopening, and the fact that growth is gaining traction, we expect spending to downshift significantly from last year's levels. But still, that would be to levels above prepandemic-- above where they were prepandemic. So it wouldn't be considered tightening per se. In fact, some of the emergency supports, as mentioned before, have been extended.
Now, we also know that the fall economic statement signaled a possible $70 to $100 billion in additional stimulus that wasn't allocated for in these deficit estimates. So there might be some increases in spending elsewhere as well. The things we considered going forward is how much emergency support is still required considering the economic recovery is not yet fully complete? How much spending is really needed considering that growth is coming in better than expected from a stimulus perspective? And, of course, from a medium-term perspective, a signal of fiscal discipline going forward.
- And with interest rates ticking up, could we see a pickup in Canada's debt servicing and costs as a result of this?
- So it's a great question. Debt servicing costs were estimated to increase in most budgets and fiscal updates. It's just that bond yields have been coming in slightly better than anticipated in these updates. So at TD Economics, we expect bond yields to continue ticking up in 2021 and 2022 but only modestly so.
So it's important to look at things from a historical perspective. If you compare these bond yields to, for example, where they were in the late '80s and the 1990s where debt-servicing costs were really a source of strain on finances if you compare them, for example, as a percentage of revenues, then going forward, at least for the time being, debt-servicing costs are expected to remain relatively manageable.
However, so with that said, it's definitely certainly something to consider. But the focus this time around will be more so on the program spending line item within total expenses and revenues and how these two will evolve going forward to bring finances to a more sustainable level.
- Omar, thank you very much for your time.
- Thanks, Anthony.
[MUSIC PLAYING]
- Anthony, thank you for having me. So the deficit in the previous fiscal year stood around $382 billion. That's roughly 17% to 17 and 1/2% of GDP.
The fall economic statement also anticipated a significant drop in the deficit level to around $120 billion, which is roughly 5% of GDP. Since then, economic growth has been coming in better than expected. So this definitely leaves room for some upside surprises on the revenue side of the ledger. However, this will likely be more than offset by increases on the expense side of the ledger since the statement was released, namely the extension to income and rent- and wage-support programs.
- What about the debt-to-GDP ratio? Will it pick up, and should we be concerned?
- The biggest spike in the debt to GDP ratio was seen in the prior year where the debt burden jumped from around just above 30% of GDP to around 50% of GDP. Going forward, the debt burden is expected to continue ticking up slightly because of the expectation of continued deficits.
However, debt markets, currency markets did not signal significant concern with this. Credit-rating agencies, for example, did not change Canada's credit rating for the most part. There was one downgrade, but for the most part, otherwise it remained unchanged.
And going forward, the focus will be on the trajectory of that debt burden. So this budget season will certainly be closely watched for signals of fiscal discipline and how governments plan their exit strategies from these historic deficits.
- And do you expect the government to tighten spending in the near term, or do you see them sort of tapering it off?
- Well, just by nature of the economic recovery, the reopening, and the fact that growth is gaining traction, we expect spending to downshift significantly from last year's levels. But still, that would be to levels above prepandemic-- above where they were prepandemic. So it wouldn't be considered tightening per se. In fact, some of the emergency supports, as mentioned before, have been extended.
Now, we also know that the fall economic statement signaled a possible $70 to $100 billion in additional stimulus that wasn't allocated for in these deficit estimates. So there might be some increases in spending elsewhere as well. The things we considered going forward is how much emergency support is still required considering the economic recovery is not yet fully complete? How much spending is really needed considering that growth is coming in better than expected from a stimulus perspective? And, of course, from a medium-term perspective, a signal of fiscal discipline going forward.
- And with interest rates ticking up, could we see a pickup in Canada's debt servicing and costs as a result of this?
- So it's a great question. Debt servicing costs were estimated to increase in most budgets and fiscal updates. It's just that bond yields have been coming in slightly better than anticipated in these updates. So at TD Economics, we expect bond yields to continue ticking up in 2021 and 2022 but only modestly so.
So it's important to look at things from a historical perspective. If you compare these bond yields to, for example, where they were in the late '80s and the 1990s where debt-servicing costs were really a source of strain on finances if you compare them, for example, as a percentage of revenues, then going forward, at least for the time being, debt-servicing costs are expected to remain relatively manageable.
However, so with that said, it's definitely certainly something to consider. But the focus this time around will be more so on the program spending line item within total expenses and revenues and how these two will evolve going forward to bring finances to a more sustainable level.
- Omar, thank you very much for your time.
- Thanks, Anthony.
[MUSIC PLAYING]
