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Canada’s fiscal deficit for 2020-21 is a staggering C$354.2 billion, informed Finance Minister Chrystia Freeland’s while presenting her first budget. The Liberal government is spending beyond its means in the wake of the pandemic was a concern for many.
Is fiscal deficit bad for any economy? Is having a surplus good economics?
Let’s know the basics.
What is fiscal deficit?
When a government spends more than its revenues during any fiscal year (accounting year for budget), it incurs a deficit. In simple terms, a government that has total revenue of C$100, but its total expenditure is, say C$120. So, the fiscal deficit is C$20. By contrast, if the government with same revenue figure decides to have only C$80 as expenses, that’s surplus of C$20.
Indeed, that was just a way to put it simply. Government budgets are bulky and so is fiscal surplus or deficit. In fiscal year 2020, the US, world’s largest economy, had a deficit of US$3.1 trillion.
Is fiscal deficit bad?
The answer is complicated. Imagine a business that has a certain sum of money to start with. This sum, however, falls short of the amount needed to build the factory and buy machinery. Should the business decide to close even before having begun operations?
No. This is where the concept of debt comes handy.
Financial institutions lend money to the business at a certain interest rate, and the business not only starts, but also flourishes in a booming economic environment.
Governments function along the same lines.
Fiscal deficit, in contrast to popular belief, can be quite good for the economy. Increased spending, even when it is more than revenues collected through tax levies and other measures, not only generates jobs, it also boosts consumption, the key driver of any economy.
Undeniably, there are limits to overspending, just like a company cannot have unsustainable debt that it cannot service from its future revenues.
Is Canada’s fiscal deficit a problem?
It can be, but only when it is unsustainable. Canada’s fiscal deficit for fiscal year ending 2020 was nearly C$39.4 billion. In fact, the federal government’s total revenue for that year was C$334 billion. When one is to compare this revenue with deficit of C$381.6 billion for 2021, it may sound unmanageable.
But what about government’s total spending of nearly C$70 billion in fiscal year 2021 on just one of its pandemic-relief measure, Canada Emergency Wage Subsidy (CEWS)?
That’s no mean feat.
This figure went into saving many jobs that otherwise would have been lost given the revenue loss of companies due to COVID pandemic-induced lockdowns and disruption of global trade and commerce.
The fiscal year 2021 did bring with it unparalleled crisis to Canada’s economy. Indeed, budget deficit is now up at an all-time high of C$354.2 billion. Canada budget 2021 is set to be fiercely debated for its deficit part, but not all deficits are bad, at least British economist John Keynes said so.
