Deputy Prime Minister and Minister of Finance Chrystia Freeland looks on as she participates in a meetings with Canadian Prime Minister Justin Trudeau and virtually with United States President Joe Biden on Parliament Hill in Ottawa on Feb. 23, 2021.Adrian Wyld/The Canadian Press
Mostafa Askari, Sahir Khan and Kevin Page
Institute of Fiscal Studies and Democracy, University of Ottawa
It is almost two years since the federal government presented a full budget plan. The coming budget will be prepared in a difficult economic and fiscal context. The Finance Minister has indicated that this could be one of the most important budgets of our lifetimes. Even with the new vaccines coming onstream it is not certain when the economy can return to normal. All governments have raised their spending to unprecedented levels, leading to a much higher risk of a debt crisis and a debt-driven recession.
In this context, the government needs to table a comprehensive budget plan. The budget must present a strategy on how fiscal policy will be used to support both recovery and long-term transformation of the Canadian economy. The transformation must be underpinned by a public investment plan that will draw in private investment and help drive a shift to a net zero carbon economy over the next 30 years and a renewed social safety net.
We believe the 2021 budget must include the following:
First, a detailed and transparent accounting of COVID-19-related spending (including planned spending on vaccines), how much, who received them, indicators of achieving the initial goals of the programs, and lessons learned regarding the design and delivery of the programs. This could include a sectoral analysis of the economic effects of the pandemic and the effectiveness of the policy measures for the severely affected sectors.
Second, the degree of success in vaccinating Canadians over the next nine months will determine how rapidly physical distancing and lockdown measures can be relaxed, which has a direct impact on economic activity and finances of the government. The budget should provide economic outlook scenarios that cover the range of possible outcomes in this regard.
Third, the budget must include temporary and targeted stimulus measures to help the economy return to its normal path quickly. The government’s fall economic statement (FES) proposed up to $100-billion in stimulus funding over the next three years and linked the level of stimulus spending in each year to certain guardrails. The budget must articulate how the guardrails will be used and where the stimulus funds will be spent. To get the maximum bang for the buck it is necessary to allocate a significant portion of the stimulus funds to infrastructure spending and research and development. These types of investment have large multipliers and do not lead to permanent increases in government spending. They can support recovery and transformation.
Fourth, given the sharp increase in government spending and public debt, it is essential to establish a fiscal framework that imposes discipline on future spending plans. The guardrails proposed in the FES are only relevant to the short-term stimulus plan. The fiscal framework needs measurable fiscal anchors that can guide future fiscal plans. Without them, the government will be risking its fiscal credibility, which could lead to a downgrade by bond rating agencies. Given the size of the current public debt, even a small increase in the risk premium of government bonds will cause a significant increase in debt charges.
Finally, the budget needs to renew the government’s commitment to provide annual analysis of the long-term sustainability of federal finances. Such analysis guides the government in planning policy commitments that may permanently increase spending or reduce tax revenues.
According to the most recent analysis by the Parliamentary Budget Officer, despite the unprecedented rise in government spending and the deep recession, federal finances continue to be sustainable in the long run. This means that, in the long run, the federal debt-to-GDP ratio should decline below its 2019 level.
Yet estimates from the Institute of Fiscal Studies and Democracy show that the fiscal situation could become unsustainable if interest rates rise or the government introduces a new permanent spending program. For example, a 150-basis-point increase in interest rates, or an increase in the Canada Health Transfers by $28-billion, as requested by the premiers, could render the fiscal situation unsustainable. This means any new permanent spending commitments in the budget must be funded by new tax revenues or reallocation from other programs.
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