What Happens to the Federal Deficit if a Recession Occurs in 2019?

Summary

• In its latest fiscal update, the Trudeau government revealed that it intends to continue running sizeable budget deficits for the foreseeable future. There are several risks inherent in the federal government’s current approach to fiscal policy and criticism has frequently revolved around the potential for federal finances to deteriorate rapidly if a recession were to occur.
• In the event of a recession, aside from any policy changes the federal government might make, government revenues will decline and program spending will increase, resulting in larger deficits (or reduced surpluses).
• To assess how a potential recession would affect Canada’s federal finances, this bulletin uses the latest fiscal sensitivity tables from the Parliamentary Budget Officer (PBO) and historical economic data from the 1991/92 (mild), 2000/01 (moderate), and 2008/09 (severe) recessions or slowdowns. The analysis excludes the effect of any potential discretionary spending.
• The bulletin finds that the 2019/20 deficit could increase from its current expected level of $19.6 billion to anywhere between $28.2 billion to $34.4 billion depending on the severity of the next recession. In addition, the five-year accumulated deficit from 2019/20 to 2023/24 could increase from its current budgeted level of $76.8 billion to between $114.6 billion and $142.3 billion (an increase of between $37.8 billion and $65.5 billion).
• This bulletin’s estimates for what the deficit might look like when a recession occurs are conservative. The deficit will likely be much higher than these estimates once the federal government enacts policy changes to stimulate the economy. Regardless of the severity of the recession, the risks posed to federal finances are considerable. The federal government needs to alter Canada’s current trajectory by emphasizing deficit reduction in future budgets.