Yesterday’s Federal Fall Economic Statement is actually quite a remarkable document. On the one hand, given the expectations being raised that the deficit for 2020-21 might reach $450 billion, coming in an $381.6 billion has probably caused many to heave a sigh of relief. That was probably the intention. Of course, that $381.6 billion figure is the lower bound estimate given economic assumptions and could be as high as just under $400 billion. Moreover, none of the scenario deficit projections were factoring in the $70-$100 billion in stimulus spending that was to be spread over 3 years once the pandemic was brought under control.
The Fall Economic Statement appears to be as much a political as it was an economic and fiscal document in that it continues federal spending and support for the pandemic as well as positions the government for substantial spending announcements of stimulus spending in the spring probably in advance of a federal election once the pandemic appears to be under control – which it currently is not.
If one takes the base case scenario, revenues for 2020-21 will be $275.4 billion and spending $641.6 billion for a deficit (after actuarial adjustment of federal liabilities – the recent twist in federal finance reporting) of $381.6 billion. For 2021-22, revenues are expected to rise to $335.9 billion and spending decline to $441.5 billion for a deficit of $121.2 billion. After that, deficits will continue to decline reaching $24.9 billion by 2025-26 and returning us to the deficit range of the 2018 to 2019 period. This period of deficits will take the federal net debt from $772.1 billion in 2018 to reach $1.494 trillion by 2025.
The document is quite clever because it lays out a fiscal plan with a target – which critics have been clamouring for – without actually stating there is a fiscal target. The pandemic is essentially a dis-equilibrium situation for the federal government’s finances and the federal government hopes to return to its version of equilibrium finances by 2025 at which point revenues will be higher at $417.3 billion and spending at $484.4 billion.
If one takes their
GDP growth forecasts into account, the deficit to GDP ratio for 2020-21 is
actually just over 16 percent but will decline to 5 percent the year after and
then essentially reach 1 percent. Prior
to the pandemic, a deficit to GDP ratio of 1 percent was what the federal
government saw as perfectly reasonable given low interest rates and GDP growth
rates and that is what they want to get back to. It is the 1 percent solution.
To place all of this in very long term visual perspective, data from the Jorda-Schularick-Taylor MacroHistory Data Base, Statistics Canada, my federal fiscal history and the 2020 Fall Economic Statement is used to generate figures 1 and 2 below. Figure 1 shows real per capita federal revenues and spending from 1870 to 2018 and then forecasts from 2019 to 2025.
If all pans out as forecast, then the surge in spending and revenue collapse of the pandemic will subside with real per capita revenues and spending eventually up 2.5 percent and 3.4 percent respectively from their 2018 amounts. That will be viewed as a perfectly acceptable growth when spread over 5 years. Figure 2 presents the deficit to GDP ratio with the pandemic showing the second largest deficit to GDP ratio in history but with a return to roughly where it was just prior to the pandemic.
This is the shape of federal fiscal things to come, assuming the federal government’s vision pans out.
