Why Deficits Often Rise in Recessions and Emergencies

Automatic stabilizers

When employment and profits fall, income-tax and consumption-tax revenues weaken. At the same time, Employment Insurance and some income-support payments can rise.

These changes occur under existing rules and help cushion household income, but they worsen the annual budget balance.

Discretionary response

Governments may add temporary transfers, wage supports, health spending, infrastructure or tax relief. The size, targeting and duration of these measures determine their additional fiscal effect.

Emergency spending should be reviewed separately from permanent structural deficits, because the policy problem and exit strategy differ.

Canada’s pandemic example

The audited federal deficit reached $327.7 billion in 2020–21 during the COVID-19 emergency, compared with $39.4 billion in 2019–20. Federal accumulated debt rose sharply at the same time.

The episode shows why a one-year deficit can change quickly and why long-term charts need context rather than a straight-line interpretation.