RBC Economics expects stronger support measures and higher deficits in next week’s economic update from the federal government, even as the outlook has brightened since the government’s July update.
In a new report, RBC projects that the government will report a deficit of around $370 billion for the current fiscal year, up from the $343 billion forecast back in July.
“We already see some stimulus bleeding into next year, with current announcements bringing the deficit to at least $90 billion in 2021-2022,” it said, noting that extensions of existing government supports could add $40 billion to deficits through the end of 2021 “even before new spending announcements.”
Once this temporary pandemic-driven spending winds down, RBC said that it expects the government to be facing “more manageable” deficits of about $35 billion per year.
However, the coming update will likely stick to a two-year projection horizon, rather than the typical five years, RBC said. As well, the bank expects the update to include a range of possible economic scenarios, given the uncertainty posed by the second wave of Covid-19.
Despite the deteriorating deficit outlook, RBC noted that the economic environment looks much better now than it did back in July.
“The unemployment rate at 8.9% is down materially from May’s 13.7% high but well above February’s 5.6%. The economy recovered ground through the third quarter, trimming our view of the annual GDP decline to 5.6%, smaller than the average summer forecast of -6.8%,” it said.
As a result, it expects that the government’s revenue forecasts will look stronger than they did in July too, albeit not strong enough to outweigh the rising spending demands.
On that front, RBC expects the government to focus its spending plans on cushioning the ongoing effects of the disruption created by the pandemic.
“We may see enhancements to the flagship wage subsidy for locked-down businesses mirroring the lockdown support in the new rent subsidy, or more targeted public investments like those in energy-sector environmental projects,” it said.
The bank also expects targeted government assistance for particularly hard hit industries, such as transportation, tourism and the energy sector.
For households, the RBC report suggested that more support for childcare could be coming too.
“Investments to create more socially distanced daycare spaces and a (temporary) boost to the Canada Child Benefit (CCB) to help cover costs for those comfortable sending children to daycare may be in the cards,” it said.
Yet, with several potential vaccines on the horizon, RBC said that it would be more concerned about overdoing stimulus this time around.
“If the path for debt-to-GDP is to return to its downward slope — the least we should do —we’ll need to be strategic and ensure lasting spending is focused on future growth,” it said.
As for financing all of this spending, RBC said it would be a mistake for the government to look for additional revenues at this point.
“That would be misguided given the fragility of the recovery,” it said.