Economic Update: Unprecedented $713 Billion to be Borrowed in 2020-21

Evelyn Jacks & Beth Graddon

According to the July 8 Economic Snapshot, the Canadian economy is projected to shrink by 6.8%, the worst economic contraction since the Great Depression.  Worse, Canadians face an unprecedented total market debt level of $1.236 Trillion dollars projected for the end of 2020-21 and the government plans to finance $713 billion of that, which means that each of Canada’s 37,742,154 people, now face a liability of $32,748.66.  It’s no wonder the PBO issued a report on a “wealth tax” the same day.

That $713 billion shortfall will require a historic level of bond issuance in the 10-year and 30-year bonds and a significant reliance on borrowing through the issuance of treasury bills, which will have weekly maturities for 3-, 6- and 12-month bonds until the end of this year.  

The 2020-21 deficit is expected to be even higher than recent projections by the Parliamentary Budget Officer ($256 billion) and CD Howe ($275.6 billion).  It comes in at $343.2 billion which is ten times higher than projections in the December Economic and Fiscal Update 2019.  The pandemic response benefits have contributed to $212 billion, while the economic slowdown contributing to an additional $81.3 billion.

This brings the current Debt-to-GDP ratio up to 49.1% for 2020-2021, up significantly from 31% in 2019-2020. The projected numbers from the Snapshot appear in billions below for 2020 and where indication, 2021.

A bright spot on the horizon: lower interest rates will save over $4 billion in public debt charges, compared to what was forecasted in the 2019 Economic and Fiscal Update from December 2019. 

You will note on the following chart the significant change in the numbers since the December 2019 Economic and Fiscal Update.  In particular, note the significant reduction in T-Bill rates, which will match GDP inflation of 0.5% in 2020 and 10 Year government bond rates, which will barely surpass it at 0.8%.    

Table 2.3
Average Private Sector Economic Forecasts
per cent, unless otherwise indicated

Note that real and nominal GDP Growth is expected to rebound in 2021 from the significant contraction in 2020; however 3 month treasury bill rates will decline to 0.3% at the same time GDP inflation is expected to rise to 2.2%.   10 Year Government bond rates will lose ground too at a projected interest rate of 1.0%.  Investors, in other words are not making a real return after inflation and taxes; they in fact will lose real dollar value, while borrowers will be tempted to lock in these very low interest rates as long as possible.  

Canada’s Debt Management Strategy

The government has stated that the low cost of borrowing has occurred due to the current economic climate which has allowed for long-term bonds to be issued by the government at historically low-interest rates. The promise is that this will ensure Canada’s increased debt remains affordable and is less vulnerable to interest rate increased.

Table A3.1
Planned/Actual Sources and Uses of Borrowings for Fiscal Year 2020-21
billions of dollars

At this time the government has not released any information on where they are expecting revenues from – including potential tax increases as part of this Economic Snapshot.

Additional educational resources: Join us live, online at The Meeting of the Minds July 9 at 11:30 EST. This free event is of special interest to advisors in the tax, accounting, bookkeeping, legal and financial services. Join a virtual, national conversation to discuss key issues of concern in overcoming financial obstacles using a Real Wealth Management™ Framework. Evelyn Jacks will also be providing a live overview of this federal Economic Snapshot.

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