Canada’s federal and provincial governments may have underestimated the power of the economy to rebound from the pandemic-induced recession this year.
By, like, $35-billion or so.
That’s how much National Bank of Canada economist Warren Lovely estimates government revenues will exceed federal and provincial budgets for 2021-22. In a recent research paper, Mr. Lovely argued this “enormous unplanned fiscal windfall” could pave the way to “accelerate deficit reduction, slow debt accumulation and cut borrowing needs down to size,” especially among the provinces.
That is, if governments can be disciplined enough to keep their hands off it.
The found billions are a result of what now, just a few months after those budgets were issued, look like far too conservative estimates of economic growth. Without question, many governments leaned toward caution in their economic assumptions, amid a highly uncertain global health crisis. Regardless, the recovery has been faster and stronger than the vast majority of economists predicted a few months ago.
Despite a small pullback in the economy during the pandemic’s third wave this spring (Statistics Canada reported last week that real gross domestic product fell 0.3 per cent in April), economists said the slowdown was less than expected, setting the stage for a resumption of robust recovery in the second half of the year. Most forecasts put real growth (i.e. excluding inflation) for the full year above 6 per cent; at the start of the year, those same economists were projecting something more like 4.5 per cent.
National Bank forecast nominal GDP – which is a better gauge of growth in the tax base – will surge 12.6 per cent this year. That’s more than three percentage points higher than assumed in the federal budget and almost double the growth baked into provincial budgets. (The federal budget was released roughly a month later than the average provincial budget, so Ottawa’s forecasts captured more of the fast-improving economic outlook.)
“Yawning gaps between our latest nominal GDP forecasts and official planning assumptions hint at billions upon billions of above-plan government revenue for Ottawa and the provinces,” Mr. Lovely wrote in the report.
He estimated the revenue gain for Ottawa is probably relatively small – between $9-billion and $11-billion, against a budgeted deficit of $155-billion. But for the provinces, the gains add up to as much as $24-billion, representing a substantial bite of their combined 2021-22 budget deficits of $79-billion.
The upside will be greater for key energy-producing provinces such as Alberta and Saskatchewan, which will also gain from the stronger-than-budgeted resurgence in oil prices. Alberta’s 2021-22 budget, released in February, assumed an average price for the benchmark West Texas Intermediate of US$46 a barrel; the price hasn’t been that low since December, and last week it approached US$75 a barrel. (Newfoundland and Labrador’s budget, which didn’t come out until the end of May, contained a US$64-a-barrel price assumption.)
These oversized gains in revenues are, at least in part, a dividend from the aggressive spending the federal and provincial governments undertook early in the health crisis. Those actions significantly limited the damage from the pandemic and the measures to contain it, which helped clear the path for the exceptional rebound that is under way.
Many governments are already witnessing the payoff. Last week, Alberta reported its deficit for the fiscal year ended March 31, 2021, was $16.9-billion – $3.2-billion less than forecast. Similarly, Quebec recently estimated its 2020-21 deficit was $2-billion less than expected, at $10-billion. Ontario’s Financial Accountability Office (FAO), the province’s fiscal watchdog, last month projected a deficit of $26.5-billion in 2021-22, almost $6-billion less than the March budget’s figure, citing rising revenue projections.
These revenue windfalls will become commonplace as the recovery continues and more numbers roll out. Higher revenues now also build a stronger base from which revenues will continue to grow in subsequent years – suggesting budgets are poised to be ahead of schedule for the next few years to come, too, at least on the revenue side of the ledger.
The question is what governments will choose to do with their new-found money. The federal government, for instance, showed a willingness to spend above-budget revenues before the pandemic, and it likely has an election to fight before the end of the year. There may be a temptation to pour the money into new programs rather than accelerate deficit reduction. After a couple of years of economic hardship and fiscal strains, some provincial governments may similarly feel the urge to spend at least part of their windfalls.
Still, as Mr. Lovely points out, “it’s not as though federal-provincial governments were particularly stingy when setting out their expenditure plans for 2021-2022.” In Ottawa, budgeted program spending is 40 per cent higher than prepandemic levels, even with many emergency spending measures winding down. Given such historically huge spending plans, there may be both less need and less temptation to tap into any windfall.
Better, then, to convert this good fortune into a head start on righting fiscal ships that have been swamped by the pandemic. Governments have spent an awful lot to keep the economy afloat. It’s time to let the economy start repaying the favour.
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