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.