Ottawa does not have the financial capacity to resist another economic deadlock and must seek to curb spending: report

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OTTAWA – According to a group of academics and executives led by a former Governor of the Bank of Canada, Canada cannot afford to shut down the economy completely in the second wave of coronavirus.

New CD Report The Howe Institute Warns Liberal Government Against “Transformation From One-Time Deficits To Structural Deficits” As Canada Wraps Up COVID-19 Wave and Urges Ottawa To “Restore Fiscal Room” as soon as possible.

Ottawa must seek to contain spending to fill its growing deficit in the coming months and create new sources of revenue, such as possibly taxing international tech giants like Google, Facebook and Netflix.

“If there is a second wave, then we simply do not have the fiscal capacity to close as we have done,” Jeremy Kronick of the C.D. Howe Institute said in an interview. “It just won’t be possible to start over. “

Report says Canada is unable to implement another complete shutdown if new COVID-19 cases start to climb as provinces, federal government and Canadian households assume responsibility ‘huge debts.

David Dodge, former Governor of the Bank of Canada, and Mark Zelmer, former Deputy Superintendent, Office of the Superintendent of Financial Institutions (OSFI), are co-chairs of the C.D. Howe Group that wrote the report, released on Monday.

The recommendations are part of a broader debate in Canada over how long the country should be locked up and whether future viral outbreaks should be addressed by more targeted or limited economic closures.

“Placing the economy in a partial coma made sense during the first wave of the pandemic, but if there is a second wave, a second downturn in the economy should be avoided in favor of more targeted approaches that are effective and avoid further erosion of public finances. and the risk of hitting the walls of debt and the loss of borrowing capacity, “the report said.

The group said that the financial measures put in place by Prime Minister Justin Trudeau were ultimately the right decision in the face of the pandemic, bringing the necessary relief to businesses and the unemployed. But it also indicates that Ottawa must begin to chart a course for fiscal recovery as the economy begins to gradually reopen.

If there is a second wave, a second downturn in the economy should be avoided in favor of more targeted approaches

Finance Minister Bill Morneau has already delayed his annual budget, which is generally presented around March, and has refused to provide an updated financial outlook, saying the state of the federal balance sheet is “very fluid” and therefore too volatile for predict it.

Increased spending during the pandemic has already exploded federal net debt as a portion of GDP, a key tax anchor often touted by Trudeau’s Liberals. The CD. The Howe Group has said that Ottawa should restore this tax anchor as soon as possible, or risk running structural deficits that could cost taxpayers dearly.

Economists generally agree that the costs of servicing Canada’s federal debt are currently sustainable, particularly in the past decade of low interest rates. But that could start to change as the economy recovers to full capacity and high borrowing levels around the world increase the cost of debt.

“This is not a free lunch,” said Kronick. “Interest rates are low, and that’s important. But they don’t always have to stay low. “

Ottawa may also need to seek new sources of revenue to close the budget gap, the report said. Notably, he says the “tax base needs to expand” to include international tech giants like Google, Facebook and Netflix, who pay relatively little tax in Canada compared to the massive revenues they earn in the country.

“All jurisdictions have looked at this issue of digital taxation because what is happening right now is that companies sell services and are really not taxed on those services,” said Kronick.

It’s not a free lunch

Representatives of the private industry echoed concerns expressed by C.D. Howe on Monday, arguing that successive closings would permanently hamper supply chains and confuse corporate workers.

“If we close it again, we will probably not reappear for months, and you will suffer incredible damage,” Donald Walker, chief executive officer of Magna International, told the parliamentary committee on Monday. The company is one of the largest auto parts manufacturers in Canada.

The report comes at a time of unprecedented federal spending in response to the pandemic.

Federal spending per Canadian is now 50% higher than it was during the 2008-2009 financial crisis, according to a report by the Fraser Institute on Tuesday. Total federal government spending in 2020 will reach $ 13,226 per person, compared to $ 8,775 per person in 2009.

Former Prime Minister Stephen Harper ran a $ 56 billion deficit in response to the recession – the largest ever recorded at the time – which he gradually recovered over the next few years.

Trudeau’s deficit is expected to reach $ 250 billion in 2021, according to the Parliamentary Budget Officer, which would bring the total federal debt to about $ 1 trillion. Total federal debt was approximately $ 612 billion when Trudeau took office in 2015.

The federal government currently pays about $ 22.5 billion annually to service its debt.

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