Pandemic Uncertainty Places Advocacy on Budget 2021 Stimulus

3 minute read

The federal government should tread carefully on its stimulus plan, according to foreboding reports released this week by the C.D. Howe Institute and the IMF. The reports both cautioned Canada against using up its remaining fiscal headroom on premature, non-essential, long-term stimulus spending or risk a long-term low growth cycle and worsened living standards. The government could face pressure to use stimulus in Budget 2021 for short-term electoral gain rather than the long-term good of the national economy, warned panel members from the C.D. Howe Fiscal and Tax Working Group. While budgets are inherently political, the stakes are particularly high for this one and uncertainty over vaccines and variants has the country very concerned. As a result, the government should consider only what is essential as it sits on the razor’s edge between recovery and a protracted recession.

The Fall Economic Statement 2020 was heralded as a mini-budget when it was tabled on November 30 by Minister of Finance Chrystia Freeland. There was good reason to view the FES as more than the usual fall update from the finance department. That was partly because it laid out in general terms a plan for the federal government to implement $70 billion to $100 billion in stimulus spending through 2023/24. Tabled more than 20 months after the last budget, the FES pledged the stimulus plan would be fleshed out in Budget 2021. Now that vaccine distribution issues and new variants have mucked up the pandemic response plan, economists and tax experts are saying it’s time for the government to put the breaks on stimulus spending. 

The C.D. Howe Institute concluded that financial risks are too great to justify any unnecessary stimulus spending, especially an economic “reset”, and that the government has not yet illustrated that stimulus spending is necessary. 
“Federal spending should focus on getting us through the pandemic as quickly and unscathed as possible. Longer-term, policies should be geared towards improving the economy’s productive capacity. Risks to the fiscal outlook abound, so any new permanent initiatives should be funded. Stimulus, if any, should be tightly targeted and strictly temporary.”
Household savings resulting from the federal government’s pandemic emergency response measures will act as a pre-loaded stimulus once members of the public return to regular economic activities, the working group argued. The government has not proven that any further economic stimulus is necessary, it said. 

The International Monetary Fund released a report with similar conclusions on Tuesday of last week. The report highlighted that the federal government has not done enough to justify its promised stimulus spending. Federal policymakers should carefully weigh planned stimulus against its objectives: to allow the economy to operate at its full capacity and to stop COVID-19 from doing long-term damage to output. The IMF said the government has yet to do so, explaining that “while the government still has some fiscal space, the additional spending, if deemed unjustified, could weaken the credibility of the fiscal framework.” 

Uncertainty over the vaccination effort and a possible 3rd wave brought in by new variants could result in the need for further emergency government spending, and that risk makes it even harder for the government to justify rolling out stimulus this spring. Even as recently as Friday, the Prime Minister announced that some of the federal government’s emergency pandemic supports would be extended. So, stakeholders seeking to engage government on stimulus plans in the budget should align their strategy with the government’s top-line goals for stimulus: allow the economy to operate at its full capacity; curtail long-term damage to output.

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