A Primer on the Federal Fiscal Response to COVID-19 in Canada

Rebekah YoungDirector, Fiscal & Provincial EconomicsScotiabank Economics

July 7, 2020

2SCOTIABANK ECONOMICS

Anticipating the Federal Economic & Fiscal Update

• On July 8th, Federal Finance Minister Morneau will provide the first economic and financial update since the onset of the pandemic

• A “V” shaped recovery is the likely baseline as the Ministry relies on private sector forecasters

…but with an abundance of downside risks flagged, ranging from growing COVID-19 cases in the US to renewed trade tension, and other geopolitical risks

• Discretionary pandemic-related spending (last tallied at $174 bn) likely to surge above $200 bn against a variety of pressures and contingencies

• Deficit likely to surge above 14% of GDP (versus PBO projections at 12%) for 2020

• Federal net debt (accumulated deficit) likely closer to 48% of GDP (relative to a pre-crisis 30.6%)

• No fiscal anchor likely beyond downward debt as a share of the economy…for now

• In short, nothing expected to move markets

3SCOTIABANK ECONOMICS

1,400

1,600

1,800

2,000

2,200

2,400

Q1-18 Q1-19 Q1-20 Q1-21 Q1-22

Range of Scenarios for Canadian GDP

CAD bn, chained 2012 dollars

Scotiabank Economics(Jun. 5)

Bank of Canada illustrative scenarios (Apr MPR)

Sources:Scotiabank Economics, Bank of Canada.

2020 = -7.3%2021 = 6.6%

70

75

80

85

90

95

100

105

110

19Q4 20Q4 21Q4 22Q4 23Q4

Canadian Real GDP

Index, 2019Q4=100

Sources: Scotiabank Economics.

V-shaped recovery

Pre-COVID trajectory

U-shaped recovery

L-shaped recovery

0

2

4

6

8

10

12

14

16

18

20

19 20 21 22 23

Canadian Unemployment Rate

%

Sources: Scotiabank Economics.

V-shaped recovery

Pre-COVID trajectory

U-shaped recovery

L-shaped recovery

Calibrating Fiscal Policy to a Range of Potential Outcomes

4SCOTIABANK ECONOMICS

Federal Response Middle-of-the-Pack

• Canada’s federal fiscal response more heavily weighted towards direct transfers to business and households relative to most G7 (except the US)

CAD (bn) % of GDP

Health supports (incl. $14 bn to P/T still under negotiation)*

$19 0.9%

Direct transfers to households & businesses*

$174 8.3%

Tax deferrals $85 4.0%

Credit support (not incl. BoC, CMHC, OSFI, FIs)

$86 4.1%

* deficit-financed est. (CAD193 bn)

0

5

10

15

20

25

30

35

40

45Direct support

Loans, equity, & guarantees

G7 Fiscal Response to COVID-19

% of GDP

Note: Fiscal response data up to June 12th. Loan deferrals not included.Sources: Scotiabank Economics, IMF.

5SCOTIABANK ECONOMICS

Bulk of Support Targeting Employment

0.0

2.0

4.0

6.0

8.0

10.0

0

20

40

60

80

100

120

140

160

180

200

DirectSpending

OtherMeasures

Th

ou

san

ds

Federal Government Fiscal Support

Other transfers (bus)Other transfers (ind)

Employment benefits

Wage subsidies

Sources: Scotiabank Economics, Government of Canada.

CAD bn

Credit programs

Tax deferrals

% of GDP• Three quarters of direct spending

supporting employment:

• $80bn in employment benefits (Canada Emergency Response Benefit - CERB)

• $45 bn in wage subsidies (Canada Emergency Wage Subsidy - CEWS)

6SCOTIABANK ECONOMICS

Disbursement well-underway (~50%)

Household transfers deployed rapidly:

• Effective mid-March

• 8 mn Canadians received CERB (of a workforce of 19 mn)

• $52 bn disbursed against $80 bn planned

• Likely upward pressure on revamped income support and/or further CERB extensions

Slower uptake on wage subsidy program:

• Effective end-April

• $16 bn paid out (to 500k businesses) against $45 bn planned

• Uptake likely to increase with re-openings

• Limited data on other programs but general sense is strong uptake for tax and payment deferrals; mediocre uptake for concessional loans; low uptake for non-concessional loan/equity programs

0

20

40

60

80

100

120

140

160

180

Households(direct)

Business(direct)

Business(other*)

Tho

usa

nd

s

Federal Government Disbursements

CommittedDisbursed

*Includes credit, liquidty and deferrals. Disbursements highly uncertain given limited reporting.

Sources: Scotiabank Economics, Government of Canada.

CAD bn

7SCOTIABANK ECONOMICS

Income Support Underpinning Rebound in Consumption

0

1,000

2,000

3,000

4,000

Bo

tto

m

Mid

dle

Top

Bo

tto

m

Mid

dle

Top

Mortgage holder Renter

Sources: Scotiabank Economics, Bank of Canada.

CAD monthly

Core Expenses Across Canadian Households

unemployment benefit

total core expenses

core expenses with mortgage deferral

Household Purchases (BNS Debit and Credit Patterns)

8SCOTIABANK ECONOMICS

Fiscal Multipliers to be Amplified

• Wide range of estimates for fiscal multipliers in Canada

• Current spending expected to have reasonable multipliers: 0.67 in 2020 and 0.80 in 2021 according to Scotiabank Economics modeling

• Income replacement in particular well-targeted to households facing income loss (& three-quarters of job losses have occurred in low-wage sectors) suggesting higher propensity to spend (as economies re-open)

• Inflation outlook suggests policy rate to remain at lower bound over course of recovery which will amplify fiscal multipliers via a lower real policy rate

Fiscal Multipliers: Timing, Targets and Tools Matter

% impact on real GDP

Recession (Budget 2009)

Stable(Budget 2016)

Yr 1 Yr 2 Yr 1 Yr 2FY10 FY11 FY17 FY18

Infrastructure investment 1.0 1.5 0.2 0.4

Housing investment 1.0 1.4 0.1 0.1

Measures for low-income households

0.8 1.5 0.2 0.4

Personal income tax measures 0.4 0.9 0 0

Corporate income tax measures 0.1 0.2 0 0

Source: Scotiabank Economics, Finance Canada.

9SCOTIABANK ECONOMICS

• Parliamentary Budget Officer (PBO) projects a deficit of 12.3% of GDP for FY21

• Scotiabank Economics assessment concurs, while projecting a 5% deficit in FY22 taking into account automatic stabilizers (but no additional discretionary spending)

• Current fiscal position is broadly consistent with economic conditions, i.e., anticipated path for output gap

• Step-change in federal net debt (and debt servicing) in near term, but should stabilize at relatively low levels in medium term

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2

19 20 21 22 23

Base Case: Output Gap and Deficit/GDP

% deviation

Sources: Scotiabank Economics.

Output gap

Deficit/GDP

0

1

2

3

4

5

6

7

91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25

Federal Government Debt Servicing Costs

% of GDP

Sources: Scotiabank Economics, Department of Finance Canada, Statistics Canada.

Forecast

20

30

40

50

60

70

80

88 92 96 00 04 08 12 16 20

Base Case: Federal Net Debt / GDP

Sources: Scotiabank Economics, Department of Finance Canada.

%

Forecast

Fiscal Position Consistent with Economic Conditions (so far…)

10SCOTIABANK ECONOMICS

• Scotiabank Economics estimates a real GDP decline of -10.3% would have been likely absent current discretionary fiscal spending by the federal government while unemployment would have peaked higher

• Debt as a share of GDP would only settle on a modestly lower trajectory over the medium term (numerator and denominator effects)

-25

-20

-15

-10

-5

0

5

19 20 21 22 23

Fiscal Stimulus Impact on Output Gap

% deviation

Sources: Scotiabank Economics.

Output gap, base case

Output gap, no stimulus

25

30

35

40

45

50

19 20 21 22 23

Fiscal Stimulus Impact on Net Federal Debt/GDP

% of GDP

Sources: Scotiabank Economics.

Debt/GDP, base case

Debt/GDP, no stimulus

0

2

4

6

8

10

12

14

16

19 20 21 22 23

Fiscal Stimulus Impact on Unemployment Rate

%

Sources: Scotiabank Economics.

Unemployment rate,base case

Unemployment rate,no stimulus

Federal Spending Avoiding Potentially Worse Outcomes

11SCOTIABANK ECONOMICS

0

20

40

60

80

100

120

140

160

180

11 12 13 14 15 16 17 18 19 20 21US ItalyJapan CanadaUK GermanyFrance

General Government Net Debt in G7 Countries

% of GDP*

Sources: Scotiabank Economics, IMF.*As of April 2020

50

100

150

200

250

300

11 12 13 14 15 16 17 18 19 20 21US Italy Japan

Canada UK Germany

France

General Government Gross Debt in G7 Countries

% of GDP*

Sources: Scotiabank Economics, IMF.*Data as of June 2020

• Canada’s general government gross debt (i.e., central and sub-national governments) is broadly in line with peers

• Canada’s general government net debt the lowest among theG7 (notably, public pension assets including CPP and QPP offset gross debt)• About half of Canada’s financial assets are considered liquid according to IMF

• Furthermore, public sector pensions (separate from public pensions) are not incorporated in gross/net debt metrics given limited data • Canada broadly funds its public sector pension plans whereas it represents a liability of 50%+ GDP

for some European countries such as Germany and the UK

Comparative Debt Metrics Underestimate Canada’s Assets

12SCOTIABANK ECONOMICS

• Provinces hold more than half of Canada’s general government gross debt

• Pre-pandemic projections by the PBO suggest federal fiscal position sustainable in the long run whereas provincial positions to come under pressure in light of aging demographics and health-related costs

• General government projections sustainable in the long run

-100

-75

-50

-25

0

25

50

75

100

15 25 35 45 55 65 75 85

Federal Government

Subnational Government

Public Pension Plans

Total General Governement

Government Net Debt to GDP*

Sources: Scotiabank Economics, Statistics Canada, Parliamentary Budget Officer. *Projections as of Feb. 2020 (does not include COVID-19 fiscal impacts).

% of GDP

Federal Fiscal Outlook on Stronger Footing

13SCOTIABANK ECONOMICS

• Provinces expected to run deficits in the order of 3-4% of GDP (less or more in some cases) as a result of extraordinary federal support

• Net debt levels to increase more modestly as a share of GDP

• Active negotiations ongoing with respect to further direct transfers to provinces (with federal starting position $14 bn), not including potential additional amounts under the Fiscal Stabilization Fund (for provinces facing large resource revenue shocks)

• Indirect support foreseeable through potentially ramped up federal infrastructure funds

Federal Government Shouldering Brunt of COVID-19 Response

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

FED NL PE* NS NB* QC* ON* MB* SK* AB** BC

Budget Balance Projections for FY21 (% of GDP)

* Reflects fiscal updates provided by provinces where available. **Premier has stated up to a $20bn deficit in media.Sources: Scotiabank Economics, Budget Documents, PBO

% of GDP

0

5

10

15

20

25

30

35

40

45

50

FED NL PE* NS NB* QC* ON* MB* SK* AB** BC

Net Debt to GDP by Province

* Reflects fiscal updates provided by provinces where available. **Premier has stated up to a $20bn deficit in media.Sources: Scotiabank Economics, Budget Documents, PBO.

% of GDP 2019 2020f

prov. average

14SCOTIABANK ECONOMICS

Other Fiscal Pressure Points

Pressure to spend:

• Pressure to extend income support with unemployment to remain high (and old EI scheme with too many gaps)

• Pressure for larger provincial transfers (including Fiscal Stabilization Transfers)

• Possible further stimulus measures (phase 2) to secure the recovery

• Pre-pandemic election commitments still unfunded (e.g., universal pharma among others)

Versus pressure to consolidate:

• A stronger recovery could warrant a faster pace of consolidation

• Nature of fiscal supports should evolve to support stronger growth potential (versus shorter term stimulus)

SCOTIABANK ECONOMICS

This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and

are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or

implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or

consequential loss arising from any use of this report or its contents.

These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall

this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not

intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434

and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a

swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or

be in the process of acquiring or disposing of positions, referred to in this report.

Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public

offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result

of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and

employees of Scotiabank and its affiliates may serve as directors of corporations.

Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and

consult with any advisors they deem necessary prior to making any investment.

This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written

consent of Scotiabank.

™Trademark of The Bank of Nova Scotia. Used under license, where applicable.

Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and

certain of its affiliates in the countries where they operate, including, Scotiabanc Inc.; Citadel Hill Advisors L.L.C.; The Bank of Nova Scotia Trust Company of New York; Scotiabank Europe plc;

Scotiabank (Ireland) Limited; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Scotia Inverlat Casa de Bolsa S.A. de C.V., Scotia Inverlat Derivados S.A. de C.V. – all members of the

Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the

Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorised by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct

Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available

from us on request. Scotiabank Europe plc is authorised by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation

Authority.

Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V., and Scotia Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.

Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.

Disclaimer