Canada deficit seen higher, government eyes up to C$100 billion in stimulus spending

OTTAWA (Reuters) – Canada’s budget deficit is forecast to hit a historic C$381.6 billion ($293.9 billion) on COVID-19 emergency aid, with the federal government eyeing C$100 billion in stimulus to be rolled out once the virus is under control, the finance department said on Monday.

The forecast deficit is 11.2% higher than projected in July, mostly due to C$25.1 billion in new COVID-19 and recovery spending, along with higher emergency support costs. Total federal debt is now set to top C$1.12 trillion this year.

“We are living through a very virulent second wave of the coronavirus and I think we all know winter will be difficult,” Finance Minister Chrystia Freeland told reporters.

“We have a plan to get through the winter, we have a plan to provide vaccines to Canadians, and we have a plan to build our economy back.”

Canada has spent C$1 billion on vaccine agreements to secure 429 million doses from seven candidates, the document showed. It has spent C$322 billion on direct COVID-19 supports so far.

Once the virus is under control, Freeland said the Liberal-led government will invest up to C$100 billion over three years to “jump-start” the recovery.

The finance department did not include that money in its current fiscal framework, instead giving four scenarios for how it could be rolled out starting in fiscal 2021-22.

“Make no mistake: We commit to providing fiscal support until the economy is firmly back on track,” the government said.

The measures will be subject to a confidence vote, which means the Liberal-led minority administration would be toppled if it failed to gain enough support among legislators.

A government source though predicted “I don’t expect any type of electioneering,” given the importance of the measures being announced.

CHILDCARE, GREEN SPENDING

Some of the stimulus includes a C$20 million “down payment” to fund the design and implementation of a national childcare program, along with more direct supports for low- and middle-income families with young children this year. (See Factbox [L8N2IG6YS])

Canada will also spend more than C$3 billion over 10 years to plant two billion trees, and C$2.6 billion over seven years to help people make their homes more energy efficient.

The additional stimulus will end once the economy has recovered, at which point Canada will resume a “prudent and responsible fiscal path,” the finance department said.

It did not outline a fiscal anchor, but promised to do so once “the economy is more stable.”

The federal debt-to-GDP ratio is forecast to hit 50.7% in 2020-21, up from 49.1% forecast seen in July. It will peak at 52.6% in 2021-22, then decline in subsequent years, the document showed.

“To see the debt-to-GDP ratio falling over the medium term is a good sign for investors who were questioning the government’s commitment to a fiscal anchor,” said Royce Mendes, a senior economist at CIBC Capital Markets.

The Canadian dollar was trading nearly unchanged at 1.2987 to the greenback, or 77.00 U.S. cents, having pulled back from an earlier two-year high at 1.2923.