On July 8th, the federal government will release its first fiscal update since December 16, 2019.
The aborted spring budget, which was set to be released on March 30th, 2020, was swept away in the need for emergency action to support Canadians as COVID-19 forced the shut down of our economy.
Preliminary estimates from the Parliamentary Budget Office (PBO), and common sense, show that the major new programs that the federal government implemented this spring in emergency response to COVID-19 will lead to a historically large federal deficit.
Given the scale of what was necessary to support Canadians during the COVID-19 forced closure, there was little objection to these supports in the spring. However, with updated deficit figures, the politically motivated calls for cutbacks and austerity will no doubt result. That would be a mistake.
What is often missing from the “deficit=bad” debate is that a deficit in one sector of the economy, like the federal government, always results in a surplus of the same size in another sector.
It’s fairly easy to see why: if the government taxes households $90 but spends $100 on them, it has run a $10 deficit. However, from the households’ perspective, they have received a $10 surplus in that they’ve received $100 in services but only paid $90 in taxes.
Across the entire economy, all deficits must result in an equally sized surplus in another sector so that the sum of all deficits and surpluses across the economy equals zero. For every transaction in the economy, there is someone on the other side: someone who is paying money always has someone on the other side receiving it.
The real question around deficits isn’t should they occur, which they do for all sectors. The question is: which sectors are on the surplus side of any deficit?
As a practical example, when the federal and provincial government ran consistent surpluses during the 2000s, they did it at the expense of households. The federal government reduced Employment Insurance (EI) payments and health care transfers, for example, in the mid-1990s. The direct effect was on households who didn’t get as much support when laid off or sick. They made up that difference by digging into savings or taking on more debt, resulting in massive deficits among households—deficits that households been running since the early 2000s.
Coming into the crisis, the federal and provincial governments were running small deficits. The household sector continued running the massive deficit as it had been since federal cuts of the 1990s. Households spent $64.4 billion more than they received in income between April 2019 and March 2020.
The household and government deficits last year funded surpluses in the corporate and international sectors. Financial corporations ran a surplus of $28 billion in the past year, roughly in line with previous years. The non-financial corporate sector ran a surplus of $13 billion.
However, the real winner recently has been non-residents. Since the Great Recession of 2008-09, Canada has been importing much more than it exports. To pay the tab, deficits in domestic sectors have been necessary in order to export our wealth to non-residents.
The June PBO report estimated the 2020-21 deficit at $256.0 billion, including all measures up to June 12th. However, this didn’t include the Canada Emergency Response Benefit (CERB) extension announced on June 16th. Including this program would put the 2020-21 federal deficit at $273.8 billion, using the PBO’s costing for the CERB extension.
Given the position of the various sectors and the nature of the federal programs, which sectors will receive the surpluses created by the federal deficit?
The household sector receives the largest surplus by far: $202.9 billion in 2020-21. This should be sufficient to move the household sector into surplus, a position it hasn’t enjoyed since 1997 (as shown in the first graph).
The corporate sector sees the second largest benefit from the federal deficit: $37.1 billion.
The provinces and municipalities see the third largest benefit from the federal deficit, largely through the proposed $14 billion support package.
Non-residents also benefit from the federal deficit, although to a lesser extent through lower non-resident income taxes (as a result of lower economic activity elsewhere) and interest paid to them on the federal debt.
The largest projected beneficiaries of the federal deficit are those who’ve lost their jobs or their hours during the pandemic. This portion of the deficit encompasses the Canadian Emergency Response Benefit (CERB) but also the EI benefits that will continue long after the CERB wraps up in August (as is presently the plan).
The second largest group benefiting from the deficit are those at risk of losing their jobs but supported through various payroll supports as business revenues tanked. The most important of these supports was the Canadian Emergency Wage Subsidy (CEWS).
Households will also benefit from lower taxes both income and the GST. However, these lower taxes are due to making less (due to job/hours loss) and buying less due to lower incomes.
Students are the next largest category benefiting from the Canada Emergency Student Benefit (CESB) and no interest owing on student loans over the summer. One-time payments on various transfer programs also helped certain types of Canadians, including low-income ones (GST credit), seniors (Old Age Security/Guaranteed Income Security) and families with children (Canada Child Benefit).
The corporate benefit from the federal deficit is split roughly evenly between three areas: lower taxes, direct aid, and interest. Corporate profits in some industries will be much lower due to the shut down and, therefore, taxes owing on those profits will also be lower. Several direct aid programs were initiated for corporations, the largest of which is the Canada Emergency Business Account. And third, corporations own much of the federal debt and, as such, benefit from the interest paid on it.
It is unclear at this point how much the payroll support will aid businesses vs workers. In this analysis, payroll support was placed on the household (workers) side, as it is directly related to wages. But it is only in the final tally of sectoral surpluses or deficits that we’ll know which sector was net better off and by how much.
Ultimately, this is an initial estimate of who benefits from the federal deficit only. It won’t be until the final tracking of money through the economy at year’s end that we’ll know where each sector’s deficit or surplus ends up. What is likely is that the large federal deficit, combined with smaller provincial ones, will result in large private sector surpluses, particularly among households.
It’s important to remember through all this that as federal deficits can create surpluses in other areas, the opposite is also true. Federal surpluses, through cutbacks and austerity, must force another sector into deficit by the same amount.
For instance, the federal government could have had an $89 billion smaller deficit if it had never implemented CERB and at the same time cut off all EI benefit payments for the year. However, this would have created an $89 billion larger deficit on the household side, particularly among those who’d lost their jobs, with devastating economic and personal impacts.
Deficits or surpluses in any sector never happen in a vacuum, another sector of the Canadian economy has to be on the other side.
David Macdonald is a senior economist with the Canadian Centre for Policy Alternatives. Follow him on Twitter at @DavidMacCdn.