Canada's Budget Deficit Will Narrow In 2021, 2022 But Remain Wider Than Pre-Covid-19 Levels

• The Canadian fiscal deficit will narrow to 7.8% of GDP in FY2021/22 and 7.3% in FY2022/23, yet remain significantly wider than pre-2020 levels. In 2020, the pandemic and economic downturn caused public revenues to fall 10.4%, while Prime Minister Justin Trudeau’s government passed a series of countercyclical spending measures to ease the economic strain on households and businesses.
• Due to significant expansions in the Canada Emergency Response Benefit (CERB) and Canada Emergency Wage Subsidy (CEWS) programs, public expenditures increased 80.1% in FY2020/21 (April 2020 – March 2021), which widened the budget deficit to an estimated 13.5% of GDP. While Fitch is increasingly upbeat on the Canadian economy in 2021 and 2022 and expects public revenues will strengthen over the coming quarters, sustained stimulus will keep the deficit wide in the short-to-medium term. 
• Public spending will remain elevated, at 22.3% of GDP in FY2021/22, but will decrease from 27.1% of GDP in FY2020/21. Improving economic conditions will help reduce public expenditures on transfer payments and limit the amount of subsidies paid out to Canadians impacted by COVID-19, which drove the substantial increase in spending in FY2020/21. That being said, the government’s FY2021/22 budget, which passed in April, extended short-term unemployment schemes and subsidies on wages and rent. 
• Long-term public spending will remain structurally higher than pre-pandemic levels as the government expands and implements several progressive programs.

(Source: Fitch Solutions)