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In his press conference on Monday, Finance Minister Bill Morneau stated that there was sufficient flexibility in his fiscal framework to address the fiscal impact of the coronavirus and the dramatic drop in oil prices. But how much flexibility does he have, especially when he maintains that the federal debt to gross domestic product (GDP) ratio will continue to decline?

In his December 2019 Economic and Fiscal Update (Update), the debt-to-GDP was already expected to increase in 2019-20 from 2018-19, albeit marginally.  For 2020-21, the Update forecast that it would be unchanged from 2019-20. Increasing the deficit by only $100 million in 2020-21 from that forecast in the Update would result in an increase in the debt-to-GDP ratio. If nominal GDP is $5 billion lower than currently forecast in 2020, the debt-to-GDP ratio would also be higher in 2020-21 than in 2019-20. Most economists are now expecting it to be much lower. Real GDP growth is now forecast to be no more than 1.0 per cent for 2020 from the 1.6 per cent forecast in the Update. However, nominal GDP is the function of both real GDP and GDP inflation. With the dramatic decline in oil prices, GDP inflation will also be lower. We could see nominal GDP grow by no more than  2.0 per cent for 2020, resulting in a 0.6 percentage point increase in the federal debt to GDP ratio, all other things remaining equal. So Mr. Morneau’s pledge to adhere to a declining debt-to-GDP ratio is wishful thinking.

However, he does have some flexibility.  The Update included a risk adjustment factor (Contingency Reserve) of $1.5 billion for 2020-21 and $3 billion over each of the next four years. Whether this is enough will depend upon how soon coronavirus is brought under control and oil prices rebound.

The 2020 Budget was largely finalized before February – before the blockages, the severity of the coronavirus, the drop in oil prices and the decline in the stock market. Its focus was likely on advancing the Government’s agenda as set out in its election platform.  That document must now be discarded completely or delayed to a future date. The NDP can forget about a national pharmacare and free dental programs at this time.

What is needed now is another Economic and Fiscal Update, detailing how the Government is going to manage the coronavirus crisis, the decline in oil prices and the accompanying adverse effects on economic growth. Given the uncertainties, it should focus only on 2019-20 and 2020-21 and contain short-term measures only. Given that Mr. Morneau already has no credibility on his fiscal anchor, the debt-to-GDP should be allowed to increase.  These are extraordinary times.  During the 2008 financial crisis, Mr. Harper allowed the deficit to increase to $56.4 billion in 2009-10, after recording a surplus only two years earlier. Canada’s debt-to-GDP ratio is the lowest among the G-7 countries and the lowest since 1984-85, on a comparable basis.

The federal government could provide the provinces and territories with a one-time payment for coronavirus related expenses. Depending how this payment is structured, the federal government could book this in 2019-20, while the provinces and territories could allocate their portion to 2020-21 or beyond.

For those employees and those self-employed, who are in quarantined due to coronavirus and have no access to sickness benefits, temporary changes could be made to allow them to be eligible for employment insurance benefits.  These could be subsequently financed through higher premium rates in 2021 and beyond or out of general government revenues as was the case during the 2008 financial crisis. CMHC could also provide assistance to help those unable to make their mortgage payments.

A special fund or low interest loans could be structured to help industries severely affected by the coronavirus crisis and the lower oil prices as was done for the auto sector during the financial crisis.  There are still billions of federal infrastructure dollars waiting to be allocated. Those that are shovel-ready should be advanced. However, priority should be given to those that will provide future economic benefits.

Mr. Morneau should monitor the situation and, if required, take additional measures.  Only when it is clear that the current situation is under control should an agenda-based budget be tabled. This is what was done after 9/11.  An Economic and Fiscal Update dealing with the fall out was tabled in November 2001, containing measures to stimulate economic growth and increased security-related funding.  No budget was tabled in 2002.

C. Scott Clark held a number of senior positions in the Canadian Government, including Deputy Minister of Finance from 1998-2001.  He has a PhD in Economics from the University of California at Berkeley and is currently President of C. S. Clark Consulting.

From 1990 to 2005, Peter C. DeVries served as Director, Fiscal Policy Division, at the Department of Finance.  In that capacity he was responsible for overall preparation of the federal budget.  He is currently a consultant in fiscal policy and public management issues.

Their Blog is 3dpolicy.ca

The views, opinions and analyses expressed in the articles on National Newswatch are those of the contributor(s) and do not necessarily reflect the views or opinions of the publishers.
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