Fiscal implications of the pandemic

This paper studies the Canadian fiscal finances in the aftermath of the pandemic. We use a rich set of fiscal categories to estimate their responsiveness to debt. We find that debt has been financed historically mainly by tax revenue. We use our estimates to derive the Canadian debt limit, the maximum level of debt beyond which debt solvency is in doubt. We use a small open economy model which is subject to exogenous pandemic shocks. The pandemic shocks reduce the hours worked and consumption, which in turn lower output, reduce the tax revenue and raise the debt level. We then investigate whether adverse shocks caused by the pandemic can push the debt beyond its debt limit. We find that even in the worst case scenario, the Canadian government will not breach its debt limit.