“Canada holds the distinction of being the nation whose financial position is expected to worsen the most in 2020 (19.6% of GDP) as per the IMF’s October Fiscal Monitor. Put more positively, this also implies that no other country has provided as much fiscal support for the economic recovery as Canada has.” (National Bank Financial, Hot Charts, October 2019)

In its recent Fiscal Monitor report (October 2020), the IMF reviewed how most advanced countries have managed the economic downturn triggered by the pandemic and the lockdowns.

The report focused on central bank actions and government fiscal measures which were used to minimize the harm from the widespread global downturn. In fact, since the start of the pandemic recession in February, the governments in most advanced countries indicated that they would do whatever it takes to limit the downturn.

And of course, to some extent, their economic measures have had some success against the pandemic recession in that they protected some civilian incomes and preserved some jobs.

At the same time, their support measures massively increased budget deficits and added to the debts of all governments. 

Moreover, it should be remembered that even before the pandemic surfaced early this year, global debt was on the rise virtually everywhere.

Nonetheless to its credit, Canada’s federal government deliberately increased spending to support the economy. While its initial relief measures were made rather hastily, still they supported the economy and were applauded by most Canadians. Nonetheless, currently, Ontario’s budget deficit is about $38 billion while the federal government’s deficit is $328 billion. Both deficits are huge and in different times and circumstances would be alarming.

And as the following chart illustrates, relative to the size of its economy, Canada has posted the largest discretionary fiscal response to battle the pandemic recession of any of the G20 countries. Next in line in terms of relative fiscal support are the United Kingdom and the United States.

Personally, I think the Canadian approach (mostly due to the federal government) has been smart, not irresponsible.

However, at some point, the public and the financial markets will start to worry about the massive size of these discretionary deficits. 

A related worry is the timing of any change in the direction towards tightening up of fiscal policy -- i.e. when will the federal government call a halt on new spending and bailing out the provinces?

Let’s hope that this does not happen too quickly. We live in extraordinary times.

(Click on image to enlarge)