COVID’s economic, fiscal and health effects—a mixed bag for Canada

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Appeared in National Newswatch, May 16, 2023
COVID’s economic, fiscal and health effects—a mixed bag for Canada

As the COVID-19 pandemic recedes into history, it’s important for governments in Canada to understand the effects so they can better manage future pandemics.

In terms of the public health response, Canada performed reasonably well by international standards. Among the IMF’s advanced economies, by June 2022 Canada had the 4th lowest incidence rate at 103,874 total cases per million population, was 27th in mortality at 1,103 COVID-19 deaths per million population (with Japan the lowest at 248), had the 7th highest vaccine uptake rate (at 227 vaccinations per 100 population) but also had the 3rd highest level of “stringency” in its government responses (e.g. lockdowns) to the pandemic as measured by the Oxford University’s COVID‐19 Government Response Tracker.

In terms of economic effects, out of 40 IMF advanced economies, Canada ranked 29th in estimated real per-capita GDP growth from 2019 to 2022 and second-worst in the G7. And during the first pandemic year, Canada had the second-worst employment drop at 5.1 per cent, just ahead of the United States. However, during the rebound in 2021, Canada had the second-highest employment growth. With respect to inflation, in 2021 Canada was mid-ranked (19th highest). However, a high share of Canada’s inflation appears to be linked to demand-side rather than supply-side factors. As well, Canada ranked 9th out of 30 OECD comparator countries for the size of the pandemic increase in housing prices.

The pandemic elicited a particularly strong fiscal response in Canada, ranking 25th out of 194 IMF countries with an increase in government spending of 19.7 per cent in 2020—well above the world average of approximately 9 per cent, the G7 average of 13 per cent, and the IMF advanced economies average of nearly 11 per cent. Canada also averaged a 2.2 per cent drop in general government revenue in 2020 according to the IMF; not as severe as the average drops for both the IMF advanced economies and the G7. The world saw its negative fiscal balance widen from 3.6 per cent of GDP in 2019 to over 10 per cent in 2020 before starting to decline to under 8 per cent in 2021 to just over 5 per cent in 2022.

According to the IMF, Canada saw a negative fiscal balance in 2020 of 11.4 per cent of GDP, with forecasts of 4.7 per cent in 2021 and 2.1 per cent in 2022. As well, Canada saw its gross debt-to-GDP ratio increase by nearly 25 percentage points from 2019 to 2021, the 15th largest increase in the world. It’s worth noting that the increased government debt accumulated during the pandemic in Canada was incurred mainly by the federal rather than provincial governments.

Overall, Canada’s performance in controlling COVID-19 incidence and vaccine uptake was good but it was accompanied by lower COVID testing rates and higher “crude mortality”—that is, deaths from COVID divided by the number of COVID cases. In terms of pandemic economic performance, Canada fared poorly in per-capita GDP growth; employment growth was also initially low, though this did improve in 2021. Canada was generally mid-ranked for inflation compared to the IMF advanced economies, though it appears to have had a higher proportion of its inflation driven by demand-side factors. Canada’s success in some aspects of dealing with COVID appears to have come at an exceptionally high economic price, particularly from negative short-term employment effects, weaker per-capita GDP growth and more robust demand-side inflation.

Canada’s fiscal response was exceptionally large mostly due to the federal response. In some respects, the ability of Canada to ramp up its fiscal response in time of need reflects its long-term prudent fiscal management and resulting low debt-to-GDP ratio achieved in the decades after the federal fiscal crisis of the 1990s. At the same time, the size of the deficit and fiscal response during the pandemic should not be allowed to become a long-term feature of public finances given the recent rise in interest rates, especially as it limits the ability and fiscal flexibility for responses to future events.

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