The Morning Brief – 07.15.20

By Bruce Carson


Economy—Economic Snapshot—Numbers were Difficult to Digest

No Suggestion that Spending will Slow Down

When the Music Stops—what are the Options Available for Balancing the Books?

Later this morning the Bank of Canada will deliver its decision on interest rates, they will remain untouched, and it will release its Monetary Policy Report. It is the Monetary Policy Report which will attract the most attention as the Bank’s Governor Tiff Macklem has previously stated that it will contain a glimpse into the future through the presentation of various scenarios.

The Bank may also elaborate on quantitative easing and its discussions with Statistics Canada on changes regarding the calculation of inflation using a more COVID-19 relevant basket of goods.

The hope this morning is that the Bank will to a certain extent fill in a number of the blanks left by last week’s Snapshot.

While the Bank may attempt to set out forecast scenarios it won’t be dealing with how the extraordinary numbers delivered a week ago by Finance Minister Morneau will be dealt with in future federal budgets.

One of the fundamental lines used last week by both the prime minister and the finance minister was that “we (the government) took on debt so Canadians wouldn’t have to.” The line was usually followed by Trudeau or Morneau talking about Canadians maxing out credit cards and getting further into debt in order to cope with layoffs or job losses caused by COVID-19.

The statement of taking on debt so Canadians wouldn’t have to is only partially true. Canadians will eventually repay the pandemic money spent just as the recipients of the Canada Child Benefit, because it is paid for with borrowed money, will be paying for this benefit long into adulthood.

As the Snapshot did not provide numbers going forward or suggestions as to how Canadians will cope with the deficit and debt, others have come forward with their suggestions as to how the future might unfold.

The C.D. Howe Institute, Kevin Page, Kevin Carmichael along with Scott Clark and Peter De Vries in their piece about a fall budget have all offered views on that future.

The C.D. Howe Institute in a report published on the same day the Snapshot was released suggested that federal and provincial governments consider raising consumption taxes and institute digital taxes in order to reduce the deficit. These taxes should be accompanied by reductions in personal and corporate income taxes in order to stimulate the economy.

It is recognized that governments will have to spend “to stimulate and revive parts of the economy.” According to C.D. Howe wealth taxes have not been successful in Europe as they don’t generate hoped for revenues and are difficult to administer and hurt growth.

“Increasing consumption taxes should be the main area for consideration when raising revenues” concludes the Institute. It is also suggested that corporations be taxed not on income, but on a cash flow basis or an economic rent basis.

Taxing cash flow allows the immediate deduction of current expenses and investments in machinery and equipment and dealing with economic rent, profits are taxed when they exceed a specific rate of return.

Kevin Page now head of the Institute of Fiscal Studies and Democracy at the University of Ottawa stated that the Snapshot raises big questions about the future. He added that the size of the economic problem “is a big ugly hole filled with economic hardship and uncertainty, historic declines in output and employment.”

He believes that because there was no forward looking strategy or plan to address the economic recovery in the Snapshot there will be increasing pressure on the government to release such a document in the fall when Parliament returns.

Page sets out a number of questions that such a document should address.

How will fiscal supports be unwound?

Will there be replacement supports if unemployment stays in double digits?

What will the policy response be to a second wave?

What will be the fiscal stance in an economy where households are overloaded with debt, where businesses see too many clouds to invest and where global trade is shrinking?

How much will it cost to build a sustainable, resilient and more equitable economy?  No doubt this would address both childcare and long term care for the elderly.

Page concludes by stating “we need to see and debate the recovery plan before our elected representatives give the go-ahead.”

In his article on Canada’s economic situation Kevin Carmichael makes the point that the spending may have been necessary, but “the hard part will be digging our way out”

He quotes Rebekah Young of Scotiabank as saying “the government will need to resist pressures from the right to consolidate prematurely in a manner that could throw off a fragile recovery- but push back on pressures to ramp up indefinitely social spending on borrowed credit.”

Programs are needed to boost productivity and reducing debt to pre-crisis levels.  Carmichael adds there is “reason to be skeptical that Trudeau and Morneau are even capable of recognizing a budget constraint.” Young added “I am a little bit cynical about the ability of Canadians to rally around a vision that would lift growth potential substantially.”

Carmichael concluded “Morneau stopped a depression. That was probably the easy part.”

Finally Scott Clark and Peter De Vries, both formerly senior officials in the federal Department of Finance describe the need to plan for a fall budget. They believe the fiscal situation is going to get worse with the deficit being higher than $342 billion.

The objectives of a fall budget should be to “quell fear, reduce uncertainty and create confidence.” Confidence is needed for economic growth.

The fall budget should present a fiscally credible plan. It should be realistic, balancing challenges and risks with financial prospects. It should support long term economic growth and be committed to a declining GDP ratio. It should present a new fiscal anchor. It should set out how the spending is to be paid for—a surcharge on the GST. It should be prudent with a reserve to allow for errors and transparent in that research and analysis should be fully disclosed.

When all of the above suggestions are taken together, a pattern emerges. While there is doubt that this government can control spending, it is seen as necessary to set out how the spending will be paid for. Rather than kicking this can down the road, the consensus seems to be that it should be paid for by those who benefitted from the spending through consumption taxes.

Spending now should be targeted and focussed. It is not enough to announce that the wage subsidy program will be extended until the end of December without providing details as to how it will be changed to allow for more business to qualify for support.

Those currently receiving CERB payments must be assured that there will be supports through EI or otherwise, should they not be able to secure employment. As noted above unemployment could remain in double digits into 2021 and beyond so supports are needed.

In addition to financial supports, childcare and long term care must be addressed for the economy to fully open. The $14 billion that the federal government has been promising the provinces in order to deal with reopening will have to be increased to accommodate present and future needs.

A federal budget dealing with revenues and expenditures containing fiscal forecasts should be presented when Parliament resumes in September.

To Come

  • Bank of Canada deals with interest rates and presents its Monetary Policy Report
  • Second day of the OPEC Technical Committee meeting dealing with output
  • Monthly survey of manufacturing for May to be released
July 16
  • House of Commons Finance Committee meeting on WE contract
  • FMM by teleconference
July 17
  • House of Commons Ethics Committee meeting
July 21
  • Retail trade numbers for May to be released
July 22
  • CPI numbers for June to be released
  • House of Commons resumes sitting for one day