Despite fiscal double-whammy from lockdown recession, government has a chance to insulate taxpayers
In the face of the coronavirus pandemic, Canada has joined other countries around the world in imposing economically painful lockdown measures, while extending a host of relief measures to support struggling businesses and ordinary Canadians.
With the country’s tax revenues depressed and government spending increased, the Parliamentary Budget Officer (PBO) has estimated that the budget deficit for 2020-21 will reach $252 billion, dwarfing the $25 billion deficit in 2019-20. As of April 24, the PBO estimated that the government’s coronavirus-related expenses already reached $146 billion.
This aggressive spending has caused many to worry higher taxes and government austerity in the aftermath of the COVID-19 crisis. But according to Patrick Leblond, CN – Paul M. Tellier Chair on Business and Public Policy at the University of Ottawa, the cost to Canadian taxpayers and beneficiaries of government services should be minimal.
In a blog post published by The Conversation, Leblond explained that the federal government’s borrowing is mainly financed by large corporations, as well as domestic and foreign financial institutions that buy its bonds. In the current context, one might expect that because such institutions are struggling because of the pandemic, the government would be forced to entice investment with high interest rates on its bond issuances to finance its current spending.
But according to the Bank of Canada, interest rates on government bonds have declined considerably in the past two months. “The bank’s unprecedented actions to support the economy and financial markets during the COVID-19 crisis have brought down the cost of borrowing,” Leblond said.
He cited the Government of Canada Bond Purchase Program, under which the central bank will purchase at least $5 billion of federal government bonds in the secondary market, has provided an indirect lift on the demand for federal government bonds.
“In fact, it is as if the Bank of Canada was lending directly to the government at very low interest rates,” Leblond said. “[I]t currently costs the government 0.35 cents for every dollar that it borrows for three to five years.”
That means the annual cost of borrowing represented by the PBO’s $252-billion deficit projection for three to five years, he said, would be just $882 million, adding just 0.04 per cent of GDP to the federal government’s future yearly deficits.
And assuming that federal government spending and Canadian economic activity return to normal ranges when the pandemic passes, Leblond said the government will be able to roll over its debt into the future and, consequently, not have to pay back any of it.
“In other words, as long as investors are willing to buy the government’s bonds, then it can issue new bonds to pay back old bonds that are coming due,” he said. “And if the economy grows faster than the deficit, then the debt-to-GDP ratio decreases, as it has in the last decade.”