On April 19, 2021, the federal government released its first budget in over two years. It was a historic document, containing a little something for everyone. Perhaps that’s why this was the longest budget in Canadian history, running well over 700 pages.
Despite the multitude of promises, certain priorities stood out in the 2021 fiscal plan: continued near-term supports to bridge Canadians through to the other side of the pandemic, and a national childcare plan. On the former, prior to the release of the budget, there were calls for less additional stimulus to fuel the immediate recovery. The economy was improving considerably faster than what most had expected as households and businesses were better adapting to the pandemic and associated restrictions. Still, the hardest hit segments of the population were struggling, and the third wave of the pandemic was threatening to make life even harder for Canadians. With this in mind, policymakers extended existing support programs such as the Canada Recovery Benefit, the Canada Emergency Wage Subsidy, and the Canada Emergency Rent Subsidy out to late-September. In addition, the government proposed a new hiring incentive called the Canada Recovery Hiring Program (CRHP), which would subsidize the cost of labour for employers through June to November. These programs will help support the economy in the near-term.
Over the longer term, the federal budget prioritized the creation of a national childcare program to build Canada’s economic capacity. Allocating $30 billion over the next five years, the government aims to lower the cost of childcare to $10/day on average across the country. This will be an impressive feat, especially with childcare costs soaring in some provinces.
By making childcare more accessible and affordable, the economy could see material benefits as it would enable more women to enter the workforce. Indeed, in Quebec where a subsidized childcare system already exists, a larger share of women aged 25 to 54 participate in the labour market compared to the national average. If the rest of Canada could boost female labour market participation to that of Quebec’s, the overall labour force could grow by 1%, providing a permanent lift to Canada’s economic potential.
The measures listed out in the federal budget are useful but expensive. COVID-19 ravaged government finances, resulting in a 20-percentage point increase in Canada’s debt to GDP ratio to 49% in 2020. The budget projects that the debt burden will rise to 51% in 2021 before gradually falling to 49% again by 2025. Although debt loads will be elevated for several years to come, the government noted that debt services costs are historically low given low interest rates. And as long as economic growth outpaces interest rates, the larger debt burden appears sustainable.
However, there are potential risks up ahead. If faced with another economic crisis in the coming years, Canada would have less room to respond with stimulative policy. It will be important for policymakers to commit to the fiscal targets outlined in the budget to remain credible in the eyes of investors. In addition, prioritization of projects that boosts the long-run growth potential of Canada’s economy will also help ease the debt burden. Ultimately, the pandemic has created a debt mountain, but that doesn’t necessarily mean austerity is needed. Carefully managed finances could lessen fiscal worries as Canada enters a new chapter in the post-pandemic period.
Sri Thanabalasingam is a Senior Economist at TD , and serves on the Board of Directors for Tamils in Finance.
This article is re-published from the April 2021 issue of “Street Talk”, TiF’s flagship publication. Interested in writing for us? Click here for our submission guidelines.