ECONOMIC AND FISCAL OUTLOOK - SEPTEMBER 2020: Parliamentary Budget Office

The recent Covid -19 related developments in the Canadian economy have forced the federal government to react in unprecedent ways that cover new fiscal measures such as CERB, CRB, CEWS, etc. As a result of these massive spending, several studies have begun sounding the alarm pointing out a very narrow path Ottawa will need to walk to keep the country's deficit and debt on a sustainable trajectory. ..........................For the current fiscal year, 2020-21, the PBO projects a budgetary deficit of $328.5 billion- Table below:

$ billions	2020-2021
Budgetary Revenues	288.3
Program Expenses	594.9
Interest Debt Charges	22.0
Total Expenses	616.9
Budgetary Balance	-328.5
Federal Debt/GDP	47.9%
Federal Deficit/GDP	-15.0%

a. Write the algebraic relationship for the government budget balance as defined inclass and then correspond the components in this relationship to the table figures above. ( 6 marks )

b. Conceptually, what is the relationship between the budget deficit and debt? Answer in one line. (2 marks)

c. What do debt and deficit sustainability, as referred to above, mean? Answer in short or in a mathematical relationship.(4 marks)

Despite the record deficit in 2020-21 and persistent budgetary deficits thereafter, and absent new policy measures, we project the Government's debt-to-GDP ratio to rise initially but then gradually decline over the medium term. This is primarily due to the expiry of COVID-19 response measures and a return to pre-crisis fiscal policy settings, the sustained historically low interest rates , and sharply higher nominal GDP levels.

d. Your task in this part is to discuss the role of the following factors in explaining the above optimistic projection: (10 marks)

1. economic growth,
2. interest rates,