Scenario Analysis Update: COVID-19 Pandemic and Oil Price Shocks

PBO published its first scenario analysis of COVID-19 pandemic and oil price shocks on March 27 to help parliamentarians gauge potential economic and fiscal implications.

This report provides an updated scenario analysis that incorporates new federal measures announced up to and including April 7, as well as revised estimates of previously announced fiscal measures. The economic scenario is unchanged from our March 27 report. PBO will update its economic scenario in a future report.

As indicated in our previous report, we stress that this scenario is not a forecast of the most likely outcome. It is an illustrative scenario of one possible outcome.

Fiscal scenario

Our fiscal results include $105.5 billion in federal budgetary measures that have been announced as of April 7 based on Finance Canada and PBO cost estimates.

  • Based on our economic scenario and including announced federal measures, the budget deficit would increase to $27.4 billion in 2019‑20 and then to $184.2 billion in 2020-21.
  • Relative to the size of the Canadian economy, the deficit would be 1.2 per cent of GDP in 2019-20 and 8.5 per cent of GDP in 2020-21.

To put this in historical perspective, the last time the budgetary deficit was near 8.5 per cent of GDP was in 1984-85. Compared to our March 27 scenario, the deficit is $0.7 billion higher in 2019-20 and $71.5 billion higher in 2020‑21.

  • Rising budget deficits and lower nominal GDP boost the federal debt-to-GDP ratio to 41.4 per cent in 2020-21.
  • The last time the federal debt-to-GDP ratio was above 41.4 per cent was in 2002-03. This level, however, remains well below the peak (since 1966-67) of 66.6 per cent of GDP reached in 1995-96.

Despite the recently announced measures, additional fiscal measures may be required to support the economy in the coming months.

Moreover, after support measures are provided, fiscal stimulus measures may be required to ensure that the economy reaches lift‑off speed, especially if consumer and business behaviour does not quickly revert back to “normal” conditions.

Recall that prior to the COVID-19 and oil price shocks, the Government’s balance sheet was healthy. Further, given credit market access at historically low rates, and looking to historical experience, suggests that the Government could undertake additional significant borrowing if required.

Related posts

  • 27 March 2020

    This report provides a scenario analysis to help parliamentarians gauge potential economic and fiscal implications of the COVID-19 pandemic and recent oil market developments. This report incorporates data available up to and including 23 March 2020. Unless otherwise specified, all rates are reported at annual rates.