The Morning Brief – 09.03.20

By Bruce Carson


Economic Situation that underpins the coming Speech from the Throne

Does Canada’s fiscal situation matter to “transformational Liberals?”

Sailing towards a Speech from the Throne without a fiscal Anchor

Perhaps the best place to start looking for answers and forecasts regarding Canada’s fiscal future, at least in the near term, is the Bank of Canada’s most recent Monetary Policy Report released in mid-July.

The bottom line numbers that day were that the interest rate remained unchanged at 0.25% and the forecast was that 40% of the collapse in the first six months caused by shuttering the economy due to COVID-19 would be recouped in Q3 of 2020.

It was made clear in the statement from the Bank that it “is prepared to provide further monetary stimulus as needed.” It also stated that “Governing Council will keep policy interest rate at the effective lower band until economic slack is absorbed so that 2% inflation target is sustainably achieved.”

In its Monetary Policy Report the Bank forecast a strong bounce back from reopening the economy but that would give way to a recuperative phase with the pace of recovery moderating. The economy will undergo widespread adjustment, including the energy sector.

The moderating growth in the recuperative phase results from the effect of continued physical distancing and the slow rebound in foreign demand, uncertainty and subdued confidence from households.

The recuperative phase was described by Bank of Canada Governor Tiff Macklem as “long and uneven” as well as “bumpy and protracted.”

In mid-July, Rebekah Young of Scotiabank said “the government  will need to resist pressure from the right to consolidate prematurely in a manner that could cut through the fragile recovery-but push back on pressures to ramp up indefinitely social spending on borrowed credit.” She offered that programs are needed to boost productivity.

These comments, of course came before Bill Morneau resigned from his post as finance minister and before we knew we were headed towards a Speech from the Throne (SFT) which would ramp up spending even more.

On August 18, when Chrystia Freeland became finance minister in addition to her role as deputy prime minister, she faced challenges such as 40% of the three million workers who lost their jobs due to the pandemic are still unemployed and there is a pressing need to phase CERB into a revised EI, but that concern was alleviated for a month as CERB was extended as prorogation caused the agenda to be reset.

In addition, the deficit was then at $343 billion, 16% of GDP, and the debt to GDP ratio had moved from a pre-pandemic 30% to 49%. It was at this time that the Business Council stated that it wanted to see clear fiscal targets.

The Conference Board in its release on August 24 concluded that the pandemic impact will be twice as bad as forecast by the Board in April. GDP is shrinking by 8.2% this year. The conclusion was that the “economy will be operating well below pre-pandemic levels for longer.”

Also the Board does not expect business investment to pick up until spring 2021 and the decline in household spending won’t be corrected until 2022.

The University of Calgary’s Jack Mintz in his article ‘Building Back Better’ stated that the focus should be “on how to manage the health pandemic and how to get people back to work.”

However, it was John Ivison that dramatically pointed out the perils of proceeding without a fiscal anchor. He quotes former Bank of Canada Governor David Dodge as saying “the public mood is that there is free money out there and the government should distribute it.” Dodge adds “but when they say, the government has your back, that’s absolute bullshit. It means future generations have the back of the people borrowing now.”  “That’s fine but at least be honest about it,” Dodge added.

Dodge went on to say “my own view is that the current government –and it will be worse after throne speech-is saying we can go on extending programs and no one will have to pay for it. That’s not right.” Future spending should be linked to improving future levels of GDP.

The need for a fiscal anchor was reiterated in “The challenge of post-COVID budget planning” by C. Scott Clark and Peter DeVries. They had three questions for Freeland: 1) how much fiscal flexibility should be built into the fiscal framework in the short term to manage a potential second waive; 2) once COVID is behind us (end of 2021) what fiscal anchor should the government use in the post-COVID budget plan; 3) what will it take to achieve the anchor?”

The authors set out that until a vaccine is found new support measures will be necessary. They see the deficit falling until it settles at $27 billion in 2024-25, without new measures being added. But the debt to GDP ratio will stall at 50% in 2024-25. Annual surpluses would be needed to have a significant reduction in the debt ratio.

This, in their view would mean no new programs in the SFT without raising taxes or a reduction in existing programs.

They also raise two other important matters: “it is unlikely that the current increase in the federal debt will ever be significantly addressed” and the government cannot borrow as required from the Bank of Canada as this “would mean the end of the Bank as being independent.”

Finally, Frances Donald of Manulife in a Blomberg article argues that the economic recovery will “stall out” in September or October as social distancing measures will still be hurting the travel sector. With regard to jobs, Canada still needs 1.3 million to be hired to get back to pre-pandemic levels.

Tomorrow the August job numbers will be released. Scotiabank forecasts the hiring of 250,000 or more workers, TD sees 225,000 hired and BMO is most optimistic at 375,000 hired. Even the most optimistic forecast is well short of 1.3 million workers.

The purpose of the above is to offer a counsel of caution to a government bent on increasing spending. Few would argue against additional spending to keep Canadians safe or to ensure that income lost to COVID is replaced.

But as pointed out above, the Trudeau government can’t use the Bank of Canada as its own piggy bank; the Bank must maintain its independence of government. And as David Dodge points out in the Ivison article, someone has to pay, there is no such thing as free money.

Next week, The Morning Brief will take a look at “Build Back Better” and the plusses and minuses it presents.

To Come

  • International trade numbers for July to be released
  • New PBO report entitled “Federal Support through Major Transfers to Provincial and Territorial governments” to be released
September 4
  • Job numbers for August to be released
September 9
  • Bank of Canada deals with interest rates
September 10
  • Bank of Canada Governor Tiff Macklem delivers a speech
September 14
  • New Brunswick provincial election

The Morning Brief will return after the Labour Day weekend on Wednesday, September 9.

– BC