A limping economy and massive deficits wrought by stimulus and bailout spending have created an “inescapable” fiscal reckoning for the country, a new report from the Conference Board of Canada (CBC) warns.
The government of prime minister Justin Trudeau has pledged to spend $100 billion and up to 4 percent of GDP over the next three years to stimulate the nation’s economy
The national and provincial governments have piled on debt during the pandemic, while the devastated economy will be able to provide only modest tax revenues for years to come, the CBC contends.
Those governments have not yet formulated plans to deal with the deep deficits, Pedro Antunes, the CBC’s chief economist, said in comments quoted by The Canadian Press news service.
“Many provinces and territories, and the federal government, are going to have trouble reining in their big deficits in the near term,” he said. “When you look longer term, the situation is essentially untenable.”
The board joins other experts warning that Canada’s governments must radically alter spending plans to avoid a fiscal collapse in the years ahead.
The Trudeau administration “needs further justification” for its unaltered sizeable future spending plans, the IMF said in a report earlier this month. It added that “if deemed unjustified, the additional spending could weaken the credibility of the fiscal framework.”
Any stimulus plan needs to be designed carefully so that it supports “full capacity growth” and prevents “permanent damage to output,” the agency said.
Reviewing Trudeau’s plan to bathe the economy in $100 billion in stimulus spending over the next three years, Canada’s own C.D. Howe Institute said it “remains unconvinced that a large stimulus package is appropriate at this time.”
Any new spending programs should be financed by taxes, not debt, the institute added.
However, prime minister Justin Trudeau has offered no plan to cut spending and has said he is “certain” he will not call for tax hikes.
Making matters more dire, Canadian provinces and territories will be pressing the federal government for aid to rescue their devastated economies, the CBC report said. Regional governments are facing tax increases, sharp spending cuts, or both, Antunes noted.
“Rock-bottom financing rates will help governments manage the near-term financing challenges associated with the additional debt burden, but the ramifications of this massive and sudden build-up of public debt are inescapable over the longer term,” the CBC report said.
“A long-term policy objective for governments must be to stabilize and then reduce their debt as a share of GCP to enable Canada to fend off future crises, which are bound to occur,” it urged.
Canada’s federal government has predicted a $385-billion deficit this fiscal year, with provinces and territories booking another $92 billion in red ink. That would raise the nation’s total public deficit for 2021 to 22 percent of GDP.
That annual deficit would bring the country’s total national debt to 95 percent of GDP, a level not seen since the early 1900s “when surging deficits led to nearly a decade of fiscal restraint,” the CBC wrote.
“The lasting impact on revenues and expenditures suggests that governments in Canada will struggle” for years “to dig themselves out of this giant fiscal hole,” the report concluded, adding that governments at all levels face stark cuts in spending or spikes in taxes.
TREND FORECAST: As with other nations, the more money governments pump into economies and the deeper they go in debt, the further the value of the currencies will fall and the higher inflation will rise… thus costing more to buy goods and services with devalued currencies. And the higher inflation rises, the stronger the demand for safe-haven assets such as gold and silver.
