Deficit reduction will have to wait for the economic recovery, federal officials say

As the fallout from COVID-19 adds hundreds of billions of dollars to the national debt, senior federal officials say there will be no aggressive attempts at deficit reduction until Canada's economic recovery is well underway.

Instead, the immediate aimwill be to keep using the government's balance sheet to extend federal aid programs and eventually ramp up stimulus spending, instead oftrying to quickly reduce the deficit.

"I think [deficit reduction]really can't happen until you know the full extent of the damage and until you get a measurement of what this did to us," said a senior federal official speaking on background.

"If you want to make this as painless as possible for people, you wouldn't rush it."

The federal deficit is ballooning due to the combination of multi-billion dollar aid programs and an economic slump that dwarfs any other recession in modern history.

5.5 million Canadians in trouble

Parliamentary Budget Officer [PBO]Yves Giroux forecast the deficit for this year will amount to at least $250 billion essentially more than a decade of the Trudeau government's annual deficits in a single year.

As troubling as those numbers are,there are others that worry the government more.

The most recent data from Statistics Canada show that threemillion Canadianslost their jobs during the first stage of the pandemic. Millions more have lost most of their work hours. In total, 5.5 million people have either lost their jobs or have been working far less since the week of April 12.

"These numbers tell us what we already knew that right now, Canadians are hurting because of this pandemic," Prime Minister Justin Trudeau said Friday.

The hurt likely goes even deeper than those numbers suggest.

Already, 7.7 million Canadians are gettingchequesthrough the Canadian Emergency Response Benefit, while 1.7million workers have qualified for the federal emergency wage subsidy. More than 45per cent of the labour force is now receiving some sort of federal government support.

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A choice between bad and much worse

Even as some provinces inch towardreopening their economies, there are few signs of rapid economic improvement. The PBO's office projects the economy could shrink by as much as 30 per cent in the second quarter.

In a recent article for Policy Magazine, former parliamentary budget officer Kevin Page said the staggering economic data left the government with two clear choices: run up the debt to help households and businesses and increase the odds of recoveryand longer-term growth or offer less help, minimize debt growth and diminish the chances of recovery.

"All countries will wake up after the global pandemic with much higher debt levels. Canada is fortunate because we are starting at a much lower net debt-to-GDP level," Page wrote. "If low interest rates are maintained, there is no good policy case for rushing to austerity either spending cuts or tax increases. The economic recovery will likely be much too weak and fragile for austerity."

'Glide and launch'

Federal bureaucrats are in the middle of a review of pandemic-related aid programs, primarily to see if they need to be tweaked or extended. What could emerge from that process is what the seniorofficial described as a "glide-and-launch phase," where some direct aid programs slowly wind down while economic stimulus programs are launched.

Trudeau revealedone of the first steps of that review on Friday when he announced that the wage subsidy program would continue beyond June to help kick-start the reopening of provincialeconomiesand allow people to move from the CERB to paid work.

"We need an economy to come back to and direct support is a key part of that," said a finance official speaking on background."Everything is going to be largely dependent on where we are and what the needs are."

But even as the federal government prepares for the next phase of its pandemic response, it'sstill busy trying to deal with the first wave of challenges. The already-extended wage subsidy is still in the getting-money-out-the-door phase. There's also theunfulfilled promise of direct financial help for seniors to address. And hard-hit sectors such as airlines, energy and hospitality will need some kind of sector-specific bailouts.

"The big business bailout is the hardest one to do out of all of them," said the senior federal official. "How do you bridge people to a better time and what do you get in return for that?"

The political risks of business bailouts

Part of the government'sconcern here is the risk of being seen bailing out companies that use tax havens or engage in tax avoidance. There's a desire at the federal levelto make sure that any bailout includes a degree of public oversight and can supportthe argument that it was done in the public's interest.

"We will, over the coming days, start looking at specific sectoral supports," Trudeau said Friday. "But even then, our focus will be on the workers and not on the corporate well-being of an industry or sector."

And while airlines have been promised some sort of help, public transit companies are also knocking on Ottawa's door.The Trudeau government is a big booster of mass publictransit and a big spenderwhen it comes to capital investment to boost transit capacity.

But transit operations are largely a municipal responsibility. Ottawa is trying to find a way to help that sector without becoming a long-term player in transit policy.

'We are not yet talking about stimulus'

As this crisis continues, jurisdictional lines are blurring. Many municipal and provincial governments were inprecariousfinancial situations going into the pandemic and will be even morevulnerable as they emerge from it. The Bank of Canada alreadyhas launched a multi-billion dollar program to buy provincial government bonds because provinces like Newfoundland and Labrador have had trouble borrowing on the open market.

All of this will require Ottawa's attention when the dust settles and billions of dollars more in federal spending may be required. Senior Liberals are already conceding they may need to go slower and be less aggressive on their campaign commitments, because the virushas presented them with an urgent newset of priorities.

"We are not yet talking about stimulus," Trudeau said. "We are still very much in the support and emergency phase right now."

But the costs will keep growing. We still have no clear idea of how much this will cost the country. And the government's view is that it's still too early to talk about paying the bill.