Photo: Frank Gunn, The canadian Press
Many wonder where will the money announced by the government of Justin Trudeau, that Canada has not, in a context where the whole world seeks to finance itself.
Eric Desrosiers and
May 7, 2020
The pandemic of COVID-19 disrupts the public finances of almost all countries of the world and Canada is no exception. The federal government has announced programs of direct assistance totalling for the time being 146 billion. And as the paused of the economy will melt the income tax to Ottawa and to increase certain other expenses (such as employment insurance), the deficit for 2020-2021 could reach 252 billion, according to estimates by the parliamentary budget officer.
To put this amount in perspective, remember that the annual budget of the federal government amounted to approximately 330 billion in normal times, that the deficit that had been anticipated before the pandemic broke out, was nine times smaller ($28.1 billion) and the debt of Canada amounted to $ 685,5 billion in 2018-2019, the last year for which figures are available.
Many wonder where will these billions that Canada has not, in a context where the whole world seeks to finance itself. Short answer ? Canada “prints” money. Virtually means. Tour of the horizon.
How the Canadase finance-t-il ?
Canada is financed through three main instruments : Treasury bills, short-term investments range from 30 days to 12 months ; bonds, long-term investments ranging from 1 to 30 years ; and, to a lesser extent, the savings bonds for individuals. The good and the obligations are sold by the Bank of Canada to institutional investors (investment funds, banks, etc.). The savings bonds they bought, for example, grand-dad to his grand children are still in circulation, but the Canada no longer issues new.
It is the deficit that could be achieved for 2020-2021, according to an estimate from the parliamentary budget officer.
Who owns Canada’s debt ?
Canadians or canadian entities, to 70 %. Last year, about one-quarter of canadian government debt was held by large insurance companies and pension funds. Another 21 % was held by financial institutions. The Bank of Canada held approximately 13 % of bonds and bills of the country. Individuals and small investors held the rest. The balance of approximately 30 % was owned by foreign investors. Because of the pandemic, the Bank of Canada has increased its share. It has increased from 25 % to 40 % the maximum proportion of new issues of Treasury bonds that it can buy, she bought it for the first time in its history, bonds issued by canadian provinces (including Newfoundland, which is in a very precarious situation), and it buys bonds on the secondary market (resale). So the balance sheet of the Bank of Canada has tripled, from $ 120 billion to $ 380 billion.
Print-does it really money ?
Yes and no. Not in the sense that the person at the Bank of Canada has not turned on the printing presses to print sheets of $ 100 and pass them along to Justin Trudeau for no consideration. The dictatorships that have done this in the past now found themselves with a runaway inflation and a devaluation of their currency. But yes in the sense that there truly is creation of new money. By buying in these days the Treasury bills and bonds issued by Ottawa, the Bank of Canada provides in return the government money that did not exist before. Dated as of April 24, 133 billion dollars have been well created. But this money is not artificial to the extent that the Bank receives in return a kind of acknowledgement of debt. When it will gradually be refunded or re-sold to investors, the money artificial will disappear.
The dashboard on the evolution of the coronavirus in Quebec, in Canada and in the world
Can we afford it ?
The credit rating of Canada remains excellent, among the best in the world, ex aequo with that of several european countries. The pandemic generates a global demand of credit is very high, but the investments canadians are still sought after — and find takers — because of this good credit rating. The increase in the canadian debt (or accumulated deficit) will, however, come at a cost. In 2018-2019, the interest charges on the debt amounted to 23.3 billion, or 6.7 % of all annual expenditures of the federal government. Higher debt will lead to higher interest, especially if interest rates were to one day again start to increase. This will be so much money which will not have the government to pay for services to citizens. But it will be still far from the peaks reached in 1990-1991 and in 1996-1997, when the interest charges on the debt accounted for almost one-third of all spending by the federal government (respectively 29.3% and 29.8 per cent).
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