BUSINESS
03/27/2020 09:54 EDT | Updated 03/27/2020 09:55 EDT

Canada's Budget Deficit To Grow 4-Fold As Economy Hits Record Slump: PBO

Our huge borrowing binge will still be way less, proportionally, than what the U.S. is about to do.

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In this stock photo, the spires of the central block of Parliament in Ottawa are seen on a sunny day. Stimulus spending in response to the novel coronavirus pandemic may not do much to fire up the economy, the PBO noted. 

MONTREAL ― Canada’s federal budget watchdog isn’t willing to make any hard predictions about where the economy is headed in this unprecedented COVID-19 crisis, but its best guess is pretty grim.

In a “fiscal and economic scenario” laid out in a report for parliamentarians on Friday, the Parliamentary Budget Office (PBO) sees Canada’s budget deficit more than quadrupling as the economy shrinks at a 25-per-cent annual rate in the April to June period ― the fastest pace in comparable records going back to 1962.

In this scenario, the unemployment rate rises to 15 per cent in the second half of the year.

Watch: The coronavirus pandemic’s economic impact on the world. Story continues below.

 

Overall, the economy would end the year 5.1 per cent smaller than it started. The federal deficit would soar to $112.7 billion in the fiscal year starting on April 1, up from $26.7 billion in the fiscal year just ending.

The report stressed that “this scenario is not a forecast of the most likely outcome. It is an illustrative scenario of one possible outcome.”

The scenario takes into account the $82 billion in emergency spending and tax deferrals the federal government announced last week, but not the $25 billion in additional spending announced this past Wednesday. Even so, the PBO expects the Liberals’ plans “will prevent widespread personal and business bankruptcies.”

But because the COVID-19 lockdown is such a unique situation, stimulus spending may not do much to fire up the economy, the PBO noted. 

In its scenario, the PBO assumes social distancing and self-isolation measures will last until August, or some six months. It also assumes “flattening the curve” will work, and Canada’s health-care systems won’t get overwhelmed by the spike in COVID-19 cases ― though the authors admit this is “purely conjecture” at this point.

The PBO noted that the last time Canada ran a budget deficit as high as the ones it sees in this scenario was in the early to mid-1990s, when Canada’s debt was considered so out of control that the Wall Street Journal famously declared the country “an honourary member of the third world.”

But at 5.1 per cent of the country’s economic output, Canada’s deficit in this scenario would still be much smaller than in the U.S., where ― after the passage of Washington’s stimulus plans this week ― the deficit is set to soar to between 10 and 13 per cent of the economy, early estimates show.