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UPDATE 3-Canada to post largest deficit since WWII on COVID-19 spending

Published 2020-07-08, 11:57 a/m
Updated 2020-07-08, 04:24 p/m

(Adds Morneau quote, bond move, details)

By Julie Gordon and Kelsey Johnson

OTTAWA, July 8 (Reuters) - Canada's budget deficit is expected to hit C$343.2 billion ($253.4 billion), the largest shortfall since the Second World War, due to record emergency aid spending in response to the COVID-19 pandemic, Canada's finance department said Wednesday.

The forecast for fiscal year 2020-21 is far higher than the C$28.1 billion projected back in December 2019, before much of the Canadian economy was temporarily shut down to curb the spread of the novel coronavirus. fiscal snapshot did not outline future deficits or give details on plans for a longer-term economic recovery.

"I think Canadians know that we are in a situation where the ability to forecast is extremely difficult," Finance Minister Bill Morneau told reporters. "It's hard to know where we will be in a month, or two months, or in six months."

Canada has provided more than C$212 billion in direct COVID-19 support and nearly 14% of gross domestic product in total support, Morneau said.

Budgetary revenues, meanwhile, are set to plunge by levels not seen since the Great Depression and fall twice as much as in the aftermath of the 2008 global financial crisis.

"It's a big number (the deficit). It's a big hole that we've dug in response to the virus," Darcy Briggs, a portfolio manager at Franklin Templeton Canada, adding: "If recovery gets delayed those numbers are going to continue to grow."

The Canadian dollar CAD=D4 added to earlier gains to post a two-week high at 1.3489 per U.S. dollar, or 74.13 U.S. cents.

Canada's national debt is set to rise to C$1.2 trillion by March 2021, with the federal debt-to-GDP ratio now forecast to hit 49.1% in 2020-21, from 30.9% forecast seen in December 2019.

The government said it will take on more longer-term debt to take advantage of low interest rates, and said servicing costs would be lower this fiscal year than was previously forecast.

"Historically low interest rates mean manageable borrowing costs as we continue to invest in Canadians and the economy," Trudeau told reporters.

Morneau, when asked, did not rule out issuing 50-year or even 100-year bonds.

Yields on longer-dated Canadian bonds climbed, with the 30-year up 8 basis points at 1.07%, its biggest jump since mid-March.

He also said the government will provide "an economic update or budget in the fall, as it's appropriate at that time."

The finance department projected real GDP growth would fall 6.8% in 2020, but rise 5.5% in 2021.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ FACTBOX-Canada's deficit to rocket to C$343.2 billion on COVID-19 spending

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