There’s less to this snapshot than meets the eye

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A snapshot captures an image of the present – or rather a present, an instant. But snapshots conceal as much as they reveal. They do not show what happened immediately before or after the picture was taken. Neither do they show what lurks just outside the frame. They show you only what the photographer chose to show you, depending on where he pointed the camera and when.

“Economic and Fiscal Snapshot” is an oddly flippant name for a document whose purpose is, ostensibly, to describe the state of the government’s finances, amid the worst economic crisis since the Great Depression, to the public that will have to pay for it all. But that, apparently, is the best this government can do or at any rate the most it will do. Not a budget or a plan or even an update, but a 168-page brochure, most of it given over to a recitation of all the many good things this government has done (“the government has taken strong, immediate, and effective action … the government has delivered a robust and comprehensive economic response … the government is leading the way”) to combat an economic crisis it helped create in response to a public-health crisis for which it utterly failed to prepare.

As for the rest (outside the 47 pages of disposable gibberish squadrons of suffering bureaucrats commanded to assemble in the name of “gender-based analysis”), there is indeed a brief discussion of current estimates for the federal deficit and debt, vastly greater in either case than had previously even been guessed at, immediately followed by pages of soothing explanations as to why none of this matters: lowest debt-to-GDP ratio in the G7, historically low interest costs, etc., etc. But not a line about what happens next, how much worse federal finances are likely to get or what, if anything, the government plans to do about any of it.

Well, alright, it’s a snapshot. What does the snapshot tell us? The deficit and debt estimates are eye-popping enough: $343-billion and $1.06-trillion, respectively, or 16 per cent and 49 per cent of GDP, largely driven by a $242-billion increase in spending, most of it for pandemic-relief measures. But even as a portrait of the present, this is misleading. If the government were interested in levelling with the people, it would explain:

• This isn’t the half of it. That $343-billion estimate is only for the portion of the government’s current borrowing that is on budget. The actual “financial requirement” this year, including the tens of billions it is borrowing on behalf of various Crown corporations and private businesses, is $469-billion. (For comparison, the financial requirement for fiscal 2019 was $12.7-billion, slightly less than the $14-billion official deficit.) Add in $244-billion to refinance existing debt, and total federal borrowing for this year comes to $713-billion – almost as much as the entire national debt as of the start of the fiscal year.
• This is the optimistic scenario. The deficit estimate, like the estimates for revenues and spending on which it is based, assumes a decline in GDP this year of 6.3 per cent (6.8 per cent in real terms), with a drop of 45.5 per cent (annualized) in the second quarter followed by a rise of 37 per cent in the third. As the snapshot notes, however, such forecasts are highly contingent on the progress of the pandemic. The baseline case assumes “slow, steady and relatively low levels of ongoing community transmission of the virus.” If, on the other hand, the economy does not bounce back as sharply as that – if pandemic-spooked consumers “continue to avoid most public spaces,” while businesses either remain closed or are forced to operate at reduced capacity – or if there is a second wave of the virus, the economic toll could be much greater and the deficit much larger.
• This is only the start. If the deficit, even at 16 per cent of GDP, were only a one-off, followed by a quick return to balance – rather as deficits were converted into surpluses after the Second World War – that would be one thing. But large deficits are likely to persist for some years. In part this is because, unlike the wartime experience, revenues have suffered such a cataclysmic decline – down $72-billion, or 21 per cent, from last year. Even rapid growth from such a diminished base will leave a substantial shortfall on the most stringent assumptions about the future course of spending.

Revenues this year are estimated at $269-billion, against $612-billion in total spending. Suppose revenues rebound strongly next year – say, by 15 per cent. And suppose substantially all of this year’s $212-billion in pandemic relief spending is wound up by year’s end. Suppose anything you like about interest costs. You’re still looking at a deficit in excess of $100-billion next year, or 5 per cent of GDP. And almost as much the following year. And the year after that.

Well, what of it? Interest costs really are at historic lows. Public-debt charges, at just $20-billion this year – $5-billion less than last year – are a mere 1 per cent of GDP. They were 6 per cent of GDP back in the 1990s, the last time we fretted about deficits and debt. And the government has a plan to lock in those low interest rates by converting much of the debt it now owes in short-term securities into longer-term bonds.

That’s true – it plans to do so. Much of the new borrowing to date, however, has been in short-term treasury bills, many of these sold to the Bank of Canada. That can’t last. What will the government do when it can no longer borrow from itself? Will it be able to persuade others to buy its bonds in such unprecedented quantities – $317-billion, net of maturing issues – at today’s yields, at a time when every other borrower, in Canada and around the world, is also flooding the market? That’s not so clear. The snapshot says only that “the government will consult with market participants and experts to assess and review the market’s capacity for long-term debt.”

Should this capacity prove not so robust as assumed, the risk of rising interest rates comes back into play. What can offset that? Not economic growth. Remember, we’ve already pencilled in the best-case scenario in the short term. Longer term, we’re still facing the same dire combination of population aging and sluggish productivity growth as before; where growth in the postwar era averaged 5 per cent annually after inflation, nowadays we’re lucky if it’s a third of that. All of which may explain why Fitch recently downgraded the federal government’s credit rating. And that’s leaving aside the much greater problems among the provinces and the likelihood of one or more of them either defaulting or having to be bailed out by the feds.

How we got here is of less concern than how we get out of it. Virtually everyone agrees that much of the federal deficit was unavoidable, given the dimensions of the crisis. But not all of it was. Spending was already at historic highs going into the pandemic and growing rapidly. And not all of what has been spent on pandemic relief was well considered. The combined cost of the two main programs, the Canada Emergency Response Benefit and the Canada Emergency Wage Subsidy, is now put at more than $160-billion. They were originally projected to cost a little more than $100-billion. What explains the difference? Did flaws in program design, notably the punitive terms facing CERB recipients contemplating a return to work, contribute?

Fine. In a crisis, speed comes before efficiency. What is more troubling is the government’s apparent unconcern with the risks of continuing to spend and borrow at such a clip, to the point of refusing to offer even a hint of a plan for stabilizing federal finances. A snapshot is all very well, but at some point we’re going to need a compass and a map.

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