Ahead of fiscal update, RBC projects $265B deficit

Ahead of the federal government’s replacement for this year’s budget — a “fiscal snapshot” slated for Wednesday — economists at Royal Bank of Canada (RBC) are predicting massive deficits, which could worsen.

In a new report, RBC Economics projects that the federal budget deficit will reach $265 billion this year, up from Finance’s December 2019 projection of $28 billion.

“It’s hard to fathom how much has changed in a few months,” the report said, noting the large drop in economic growth and big surge in unemployment generated by Covid-19 lockdowns.

“We expect the precipitous fall in GDP of the past few months to partly reverse over the rest of the year. But we’re still penciling in an economy nearly 6% smaller at the end of this year relative to 2019,” it said.

As the economy climbs out of this hole in the years ahead, RBC said that deficits will persist.

“Based on our economic forecasts out to 2024, deficits could be close to double those predicted by the government just six months ago, as weaker tax revenues take a significant toll,” it said. “We expect the revenue shortfall over the same period could total nearly $120 billion, largely this year and next.”

Additionally, the huge costs of supporting the economy — RBC said that the stimulus measures currently total about $192 billion — could grow.

“Any negative virus developments that worsen the recovery would further weigh on revenues. If unemployment benefits via CERB are extended further, or adjustments to EI are forthcoming once CERB benefits expire, spending could also increase or bleed into future years,” the report said.

And if more firms start taking advantage of wage subsidies, “the deficit in fiscal 2020/21 may exceed our $265 billion estimate.”

Any longer-term stimulus “should be focused on investments that add to the productive capacity of the economy and help the government maintain a sustainable debt position,” RBC said.

At this point, though, ballooning deficits are manageable: “This spending is needed, and if largely contained to this year won’t meaningfully darken the fiscal outlook.”

While the decline in government revenues may weaken Canada’s credit rating, RBC maintains “it’s critical that Ottawa stay the course and avoid austerity while the economy is still recovering.”

Canada’s federal debt remains “on a sustainable track” and is well below levels seen in the 1990s, the report said.

Additionally, rock-bottom interest rates have borrowing costs at historic lows.

“With smart management going forward (and no further coronavirus surprises) the debt remains sustainable,” the report said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.