TLTP
NEW YORK
The recent announcement for significant additional spending by the Canadian federal government will support Canada’s economic recovery but will also widen the deficit, underscoring the risks surrounding future fiscal consolidation and the trajectory of public debt, said Fitch Ratings.
While Fitch Ratings expects the government spending to drop back sharply starting in 2021, a significantly widened deficit will make medium-term consolidation of the general government debt and deficit more challenging.
The Canadian government announced on August 20 that it would increase federal spending by CAD37 billion (approximately 1.6% of GDP) through an extension of the main income support program, the Canada Emergency Response Benefit (CERB), and the launch of new targeted Employment Insurance auxiliary programs. As of early July, about CAD52 billion of CAD80 billion that had been allocated for the CERB had been disbursed.
This followed recent announcements by several provincial governments that expanded fiscal responses while widening forecast deficits. Ontario, for example, announced that its deficit would nearly double to CAD38.5 billion from an earlier projection of CAD 20.5 billion.
Significant fiscal deterioration in 2020 was a key factor in Canada’s downgrade to ‘AA+’/Stable in June and the latest announcements point to continued risks of further deficit widening, said Fitch Ratings.
These measures, and the federal government’s CAD343 billion estimate of the upsized fiscal 2020/2021 deficit announced in the July fiscal snapshot point to a general government deficit above 21% of GDP in 2020, wider than our 16.1% of GDP estimate at the time of the downgrade. The gross general government debt to GDP ratio will rise above 120% of GDP, significantly higher than the ‘AA’ median.
Regardless of which party is in power after 2020, the government faces deep fiscal and economic policy challenges and risks. According to Fitch’s recent medium-term growth potential study, the coronavirus shock has taken a permanent toll on potential economic output in Canada (and elsewhere) and lowered potential growth to around 1%, making fiscal consolidation more challenging. Actual growth rates will exceed that, on the assumption that the currently large output gap narrows and economic output reaches its new (lower) potential level by 2025, said Fitch.
