Wednesday , May 27 2020
Home / Soberlook / Sober Look 2015-11-25 21:09:00

Sober Look 2015-11-25 21:09:00

Summary:
Canada Need Not Fear Deficit FinancingAs the new Liberal Government takes shape, all eyes will be focussed on how it proposes to finance its ambitious agenda . Deficit financing will be at the centre of all discussions concerning jobs and economic growth over the next five years. In its latest Economic and Fiscal Update (November, 2015), Canada's Finance Department recognizes  the damage that has already occurred from plunging commodity prices, the deterioration in the country's terms of trade and the worldwide slowdown . The major question facing the Government is : to what extent can it  undertake deficit financing to achieve its economic goals.? What is the capacity of the Federal finances to meet this challenge? Fiscal Outlook Table 1 is a summary of the fiscal outlook to financial year 2021 prepared by Finance Canada, the department responsible for the national budget.  Their budget projections used the former (Harper) government’s 2015 fiscal framework , updated to November, 2015. None of the new government's revenue or  expenditure programs are included. Table 1  Fiscal Outlook A couple key metrics standout. First,  over the next three years ( 2016-19) the Federal deficit will average 0.1% of GDP--- well within a comfort zone and not out of line historically.

Topics:
Sober Look considers the following as important:

This could be interesting, too:

Tyler Durden writes YouTube Caught Censoring Comments Deemed ‘Offensive’ To The Communist Party

Tyler Durden writes How To Prepare For What Comes Next

Tyler Durden writes In Unprecedented Move, Twitter Tags Trump Tweets As ‘Misinformation’

Tyler Durden writes “This Should Trouble Us All” – Auto-Snitching COVID-Tracking Bracelets Flood Market

 Canada Need Not Fear Deficit Financing

As the new Liberal Government takes shape, all eyes will be focussed on how it proposes to finance its ambitious agenda . Deficit financing will be at the centre of all discussions concerning jobs and economic growth over the next five years. In its latest Economic and Fiscal Update (November, 2015), Canada's Finance Department recognizes  the damage that has already occurred from plunging commodity prices, the deterioration in the country's terms of trade and the worldwide slowdown . The major question facing the Government is : to what extent can it  undertake deficit financing to achieve its economic goals.? What is the capacity of the Federal finances to meet this challenge? 

Fiscal Outlook

 Table 1 is a summary of the fiscal outlook to financial year 2021 prepared by Finance Canada, the department responsible for the national budget.  Their budget projections used the former (Harper) government’s 2015 fiscal framework , updated to November, 2015. None of the new government's revenue or  expenditure programs are included.

Table 1  Fiscal Outlook

A couple key metrics standout. First,  over the next three years ( 2016-19) the Federal deficit will average 0.1% of GDP--- well within a comfort zone and not out of line historically.  Expected economic growth, although modest over the  next 5 years, will likely provide sufficient revenues to absorb the annual deficits so that the level of Federal debt at the end of period remains largely unchanged.

Second, the Federal debt as a percent of GDP actually falls from 31% in 2015/16 to 25.2% by 2020/21.  Comparing these levels of debt/GDP , the levels represent the lowest in over  30 years, especially in periods of good economic growth in the latter half of the 1990s. ( see Chart 1).  .

Chart 1   Federal Debt as % of GDP

          

 Canada has always been well-received in the capital markets at home and abroad ; bond auctions continue to be  well covered and receive firm bids.  More importantly, as Chart 2 demonstrates, the entire  Canadian government yield curve has shifted downwards , a reflection of low inflation expectations and confidence in the quality of the security sold. Of late, there has been shift towards issuing longer dated bonds to take advantage of the falling long term rates ( 10-30 year terms). Accordingly, the weighted average rate of interest on public  market debt has fallen to 2.37 per cent in 2013–14 ; this average rate , now stands above the current yield  for bonds  10years and up. Any additional long-term issuance will  contribute to a reduction in refinancing risk at a low cost .

Chart 2

The IMF refers to 'fiscal space' as " the room in a government's that allows it to
provide resources for a desire purpose without jeopardizing the sustainability of its financial position" . Canada is  in no way jeopardizing the Federal budget , given the low interest rate environment. More importantly, should the fiscal restraints be relaxed to accommodate additional borrowing aimed at developing infrastructure projects, these projects can  pay for themselves over the longer term.

Comparison to US Stimulus Programs

 Parliament opens the first week of December at which time Canadians will learn more of the programs and policies that will constitute the Federal budget and hence the anticipated future deficits. At this point we can assume that the Liberal's platform , featuring infrastructure spending,  individual spending programs, and  tax changes aimed at the redistribution of income will be at the centre of the next Federal budget. The platform  anticipates a budget deficit not to exceed $10 billion in any year.  

American readers  should note that what is proposed by the Canadian  government is quite different from  the American Recovery and Reinvestment Act, 2009( Stimulus Bill ) . That bill was designed  as an emergency measure to kick start the US economy after the financial crisis of 2008. The main thrust was tax relief for  the individuals  and corporations to save and create new jobs;  a much small component included  spending on new infrastructure . A secondary goal was to provide immediate relief to those state and local governments hardest hit by the steep recession. 

 
Sober Look
Sober Look is a no-hype financial blog that relies on data analysis and primary sources. Posts are intended to be succinct, to the point, with no self-promoting nonsense, and no long-winded opinions. If you are looking for Armageddon predictions or conspiracy theories, you will be thoroughly disappointed. Topics include U.S. and global economic developments and financial markets. We often cover asset management, energy/commodities markets, derivatives, regulation, and policy - with a particular focus on capital markets and financial risk.

Leave a Reply

Your email address will not be published. Required fields are marked *