Ottawa’s Spending Spree Was the Right Thing to Do, Economists Say

The federal government’s massive increase in spending in response to the COVID-19 pandemic is contributing to “substantially better” economic outcomes than would have been the case without those measures, while raising net debt levels only marginally over what they would have been, a new Scotiabank Economics report says.

The economic impact of the pandemic on households and businesses would also have been worse without the stimulus, with unemployment reaching 15% as opposed to the anticipated 13%, the report says.

“Canada’s decisive fiscal response to COVID-19 underpins its growth outlook,” the report says. “We estimate that real GDP growth would fall by 10.3% in 2020 absent the current discretionary fiscal response. Furthermore, the recovery would be elongated by an additional year with the output gap closing only by 2023.”

Deficit spending undertaken in response to the crisis, at about $260 billion, or 12% of GDP, is unprecedented, the report says. During the global financial crisis of 2008-09, it was just shy of 4%. Nonetheless, it was essential to Canada’s economic recovery, and will continue to be into next year.

“Fiscal support will continue to be an important component of Canada’s recovery. A deficit in the order of 5.3% of GDP next year is not only likely, but also warranted, from an economic perspective given the multi-year economic recovery ahead,” say the report’s authors, René Lalonde, Director, Modelling and Forecasting, and Rebekah Young, Director, Fiscal & Provincial Economics.

The economists expect the federal debt as a share of GDP to peak in the first half of next year at about 47%. Debt servicing costs – interest paid on the federal debt – should level off under 2%. (In the early ‘90s, the report points out, debt levels were in the high 60s as a percentage of GDP, and debt servicing costs hovered around 6% of GDP.)

“Fiscal policy calibrated to a highly uncertain recovery path should matter most to markets (and Canadians) at present as a premature withdrawal of support could do more harm than good,” the economists say.

To read the full Scotiabank Economics report, click here.