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Factbox: Canada's deficit to rocket to C$343.2 billion on COVID-19 spending

OTTAWA (Reuters) - Canada’s budget deficit is forecast to hit C$343.2 billion ($253.9 billion), the largest shortfall since World War Two, amid record emergency aid spending in response to the COVID-19 pandemic, Canada’s finance department said on Wednesday.

Following are excerpts from the “fiscal snapshot” on growth, the budget deficit, debt and planned borrowing during the 2020-21 fiscal year, which started April 1:

ON GROSS DOMESTIC PRODUCT

“Private sector economists expect a record contraction in real GDP of around 6.8% in 2020 with an unprecedented decline to occur in the first half of 2020. The economy is expected to gradually recover, rebounding by 5.5% in 2021. ... The unemployment rate is expected to rise to reach close to 10% on average in 2020 and to decline at about 8% in 2021, still above its pre-COVID-19 level.”

ON DEFICIT

“Canada’s COVID-19 Economic Response Plan includes more than C$230 billion in measures to protect the health and safety of Canadians and provide direct support to Canadian workers and businesses. It includes a further C$85 billion in tax and customs duty payment deferrals to meet liquidity needs of businesses and households and help stabilize the Canadian economy. Combined, these measures represent nearly 14% of Canada’s GDP. ...

“Coupled with the severe deterioration in the economic outlook, these result in a projected deficit of C$343.2 billion in 2020-21. By comparison, this spending level is on par with but lower than the peak deficit (as a percentage of GDP) experienced by Canada during the Second World War.

“Due to the unprecedented degree of uncertainty clouding the economic outlook, providing a fiscal forecast beyond the current fiscal year with an appropriate degree of confidence is not possible at this time, and would potentially be misleading. As a result this snapshot provides an update of the current economic and fiscal outlook to the end of 2020-21.”

ON DEBT AND LOW INTEREST RATES

“Due to COVID-19-related spending, the federal debt-to-GDP ratio is expected to rise from 31% in 2019-20 to 49% in 2020-21. ... In addition, given higher borrowing requirements, the government is taking a prudent approach by issuing an unprecedented level of long-term bonds in order to lock in funding at historically low interest rates.”

ON PLANNED BORROWING IN 2020-21

“The aggregate principal amount to be borrowed in 2020-21 is C$713 billion, which is C$437 billion higher than the issuance for 2019-20, and the total stock of market debt is projected to reach C$1,236 billion by the end of 2020-21.

“Given the rapid increase in the stock of treasury bills, the bond program for 2020-21 is also significantly increasing across all nominal bond sectors, including an unprecedented level of 10-year and 30-year bonds, to make Canada’s borrowings less vulnerable to increases in interest rates and maintain issuance capacity in the treasury bill sector.

“Annual gross bond issuance is planned to be about C$409 billion in 2020-21, C$285 billion higher than the C$124

billion issued for 2019-20. The total bond stock is planned to increase by C$317 billion to C$915 billion. As 2020-21 progresses, almost 70% of financial requirements is projected to be funded with bonds. The government is issuing a combined C$106 billion in 10-year and 30-year bonds, compared to C$17

billion in 2019-20. ...

“To put the government’s focus on long-term bonds into perspective, the share of bond issuances allocated to long maturities (10-years or greater) will nearly double this year, rising from 14% of annual issuance in 2019-20 to 26% in 2020-21.”

Reporting by Steve Scherer; Editing by Leslie Adler

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