Permanent hit to the Canadian economy from pandemic and lower oil prices; Federal debt ratio elevated but stable under current policy, says PBO

The Parliamentary Budget Officer (PBO) today released his latest Economic and Fiscal Outlook. The report incorporates announced federal budgetary measures as of September 1, 2020 and does not reflect any of the commitments made in the recent Speech from the Throne.

The PBO’s report provides a baseline projection to help parliamentarians gauge potential outcomes under current policy settings. It is not a prediction of future economic and budgetary outcomes. The outlook assumes that the pandemic will follow a “slow burn” scenario.

Compared to the PBO’s November 2019 outlook, real GDP is projected to be 3.6 per cent lower in the fourth quarter of 2021 and 1.6 per cent lower by the end of 2024. “We expect that the COVID-19 pandemic and oil price shocks will have a permanent impact on the Canadian economy,” says PBO Yves Giroux. “As the labour market recovers and household and business confidence improve, the economy will slowly recuperate, with real GDP projected to reach its pre-crisis level by early-2022.”

According to the PBO, the federal deficit under current policy is projected to be $328.5 billion in 2020-21, including an estimated $226 billion in COVID-19 response measures. Relative to the size of the economy, the deficit amounts to 15 per cent of GDP—the largest budgetary deficit since the beginning of the series in 1966-67.

Based on current policy, but not considering possible measures related to the Speech from the Throne, the record increase in spending in 2020-21 should be temporary. In such a case, the PBO projects the budgetary deficit to decrease to $73.8 billion (3.2 per cent of GDP) in 2021-22 and continue to decline thereafter.

In addition, without new expenditures the PBO projects the federal debt ratio to peak at 48.3 per cent of GDP in 2022-23 but then gradually decline over the medium term. “Despite the record deficit this year and the persistent deficits that are likely to follow, as long as COVID-19 spending measures are temporary and no new spending measures are introduced, the Government’s debt-to-GDP ratio will gradually decline from its peak,” adds Mr. Giroux. “Based on a return to pre-crisis policy settings and our economic outlook, federal fiscal policy over the medium term would be sustainable.”

The report is available here: Economic and Fiscal Outlook – September 2020.