Federal Finance Minister Bill Morneau has forecast a $343-billion budget deficit that is equivalent to 16% of the country’s gross domestic product (GDP).
The budget deficit is now at a level not seen since World War II as federal officials spent billions of dollars in response to the COVID-19 pandemic that has sent Canada into its deepest recession in almost a century.
Direct federal support to individuals and businesses will total $212 billion this year, driving spending levels to their highest since 1945. The recession has also taken a toll on the government’s revenue, which will drop as a share of the economy to the lowest level since 1929.
In response to the current fiscal situation, Ottawa will issue an unprecedented amount of debt, including $106 billion in the 10-year and 30-year bonds this fiscal year. Yields rose across the curve, especially on longer-dated debt. The yield on benchmark 30-year debt increased 10.8 basis points to 1.092%, according to data from Bloomberg.
While the announced deficit was larger than anticipated – most economists expected a deficit of just over $250 billion – the government of Liberal Prime Minister Justin Trudeau is justifying the budget shortfall as the lesser of two evils. Morneau argued that the economy would be in much worse shape were it not for the government’s response, in part to thwart the need for households to take on more personal debt.
The government now projects that debt will rise to 49.1% of GDP in the fiscal year that started on April 1 of this year, up from 31.1% last year. In his speech, Morneau didn’t provide any forecasts beyond 2020, or provide any indication of future fiscal plans other than to say that Canada will continue to hold its low-debt advantage relative to other major economies.
