Ottawa increased spending during pandemic far beyond what was necessary to tackle COVID

Storm Without End: The Economic and Fiscal Impact of COVID in Canada

The COVID-19 pandemic created enormous economic and fiscal disruption in both Canada and around the world. As revenues dropped and pandemic-related spending soared, governments incurred large deficits. Globally, the IMF has estimated that in 2020 world governments ran a negative general government fiscal balance of 10.2%. This was forecast to decline to 7.9% in 2021 and 5.2% in 2022. Canada did not escape this fiscal impact of the pandemic. According to the IMF, Canada saw a negative fiscal balance of 10.9% in 2020 with a forecast 7.5% in 2021 and 2.2% in 2022. However, the pandemic affected the public finances of the federal and provincial governments differently.

Whereas the federal government saw total revenues fall by 5.3% in 2020/21, the provinces saw total revenues grow by 2.9%. It is estimated that, in the subsequent year, both tiers saw total revenues rise with the federal government experiencing revenue growth of 17% and the provinces collectively 10%. Federal government spending rose 73% to $644.2 billion in 2020/21 before declining 21% to an estimated $508 billion in 2021/22. Total spending by provincial governments rose 9.2% in 2020/21 to $504.4 billion and an estimated further 5.6% to $532.9 billion in 2021/22.

Between 2019/20 and 2020/21, the federal deficit-to-GDP ratio went from 1.8% to 13.2% while the collective deficit-to-GDP ratio of the provinces went from 0.8% to 1.9%. At the provincial level, deficits appear somewhat correlated with the intensity of the pandemic impact. Federally, over half the deficit incurred during the pandemic was related to COVID-19—either health transfers or income support to people and business—while the remainder was spending independent of the pandemic that represents a permanent long-term ramping up of federal expenditure.

Along with substantial amounts of income support to individuals and business with emergency response benefits, the federal government during the pandemic engineered a substantial permanent increase in its own spending levels that deserves particular attention. The spending forecast in the federal 2022 spring budget shows that, compared to the pre-pandemic fiscal year 2019/20, total spending in 2022/23 will be about 27% higher, an average annual increase of 9% per year. This means a bigger federal government expenditure footprint.

As well, health spending deserves some mention. Total health spending was estimated to have increased by nearly 13% between 2019 and 2020 to deal with the pandemic, a rate of increase not seen in more than 30 years and triple the steady 4% growth rate from 2015 to 2019. While total health spending is up, closing of outpatient departments and postponing of medical visits and procedures during the height of the pandemic meant a reduction in some aspects of health services and spending. When provincial-territorial governments are examined, their real per-capita total health spending in 2020 rose 8.1%. However, once the COVID-19 response is factored out, their spending declined by about one percent in 2020, though it is expected to rebound in 2021. The biggest declines in real per-capita health spending by provincial governments net of COVID-19 response funding in 2020 were in New Brunswick, Quebec, and Alberta.

Summarizing the fiscal effects of the pandemic in Canada, both tiers of government saw revenues decline early on in the pandemic and then recover, with the provinces recovering faster in part because of transfers provided by the federal government. Both tiers also saw expenditures rise with an associated rise in both deficits and debt. However, collectively, the effects on Canada’s provinces were more modest, producing smaller ratios of deficit and debt to GDP than was the case for the federal government.