The reality show which is U.S. trade policy continues to lurch forward, with each episode seemingly ending in a “To be continued …” as opposed to a season finale. The Trump administration remains hellbent on raising the cost of imports for American consumers and businesses by slapping tariffs on a hodgepodge of goods from abroad. Canada has been drawn into the fray as a consequence, reluctantly putting retaliatory tariffs on imports from the US in July following the introduction of levies on steel and aluminum headed to the Good Ole US of A.
The market for Government of Canada securities is closely scrutinized by analysts, market participants, and government officials themselves. The market for provincial bonds generally receives less attention. However, at $642 billion in 2017 and representing 27% of capital markets in Canada, the market for provincial bonds was larger in size than that of the federal government at 23%. As some provinces will likely continue to finance important deficits by borrowing from financial markets and diversifying their borrowing methods, it is crucial to understand the dynamics at play in this segment of the market.
An accurate measurement of the labour market is essential for making useful macroeconomic forecasts. Even the best models are only as good as the input data––as the saying goes, garbage in, garbage out. Statistics Canada has two programs to measure employment levels and trends: the Labour Force Survey (LFS) and the Survey of Employment, Payroll and Hours (SEPH). In the private sector, Automatic Data Processing, Inc. (ADP) publishes a report—the ADP Canada National Employment Report (NER)—that seeks to align with the SEPH. The ADP NER is relatively new to Canada and is not followed as closely as the LFS or the SEPH, but its timeliness is a plus. In contrast, the SEPH is the most delayed measure, but because of the nature of its underlying data, it provides very useful insights into short-term dynamics of the economy.
Following the release of Statistics Canada’s June 2018 Labour Force Survey (LFS), the Institute of Fiscal Studies and Democracy (IFSD) has updated its Canada JØLTS for May 2018. It has also launched its new Nowcast of the Bank of Canada’s (BoC’s) Wage Common measure of underlying wage growth.
On June 11, 2018, the federal government announced its redesigned homeless program, Reaching Home. While details remain scant, Reaching Home leaves the impression that the government is prepared to take a number of bold and promising steps forward but is willing to risk progress with one big step backwards.
Moments of major change can set a country, a policy issue, or an organization on a new course. But how do you get there? Can you force that change or is there a magical alignment of interests and forces required for a critical juncture? Not all change has to come from major shocks, sometimes change can be gradual and build up over time, creating important – albeit gradual – shifts in course and outcomes. Major change, however, tends to come from a major shock.
In its March 2018 Fiscal Monitor, the federal government stated that is deficit estimate for the 2017-18 fiscal year was “… broadly in line with a $19.4-billion deficit projected in Budget 2018 for 2017–18.” For any government, a deficit outlook in line with the recent planning expectations is always good news, being second only to an upside surprise. And, indeed, at the Institute for Fiscal Studies and Democracy (IFSD) we think there is room for the deficit in the 2017-18 fiscal year to come in slightly smaller than was anticipated in Budget 2018 and the Fiscal Monitor.
You don’t have to be a builder to appreciate the importance of a sturdy foundation. When it comes to houses, a solid foundation keeps the house dry and warm, and protects it against the natural movements of the earth around it.
No matter how you slice it, 2017 was a standout year for the Canadian economy. Real GDP growth hit 3%, the unemployment rate touched its lowest level in decades, and inflation remained below the central bank’s 2% target. Characterized as the ‘sweet spot’ by Bank of Canada Governor Stephen Poloz, this robust economic activity prompted two interest rate hikes in 2017, and another in January 2018, as central bankers adopted a cautionary, and now gradual, approach toward monetary policy normalization.
As the Canada Infrastructure Bank (CIB) takes shape, it is worth taking a look at how the organization is structured to understand the governance outcomes it may generate from both fiscal and accountability perspectives. There are infrastructure and investment banks around the world with various mandates, accountability structures, stakeholders, and sources of capital. However, the CIB’s structure appears to be somewhat novel when compared to other OECD countries. Novelty can be associated with both innovation and risk and it is worth considering how similar institutions govern themselves. To put the CIB in perspective, we will consider a subset of infrastructure and investment banks across three parameters:
On April 9, 2018, the Institute of International Finance (IIF) reported that global debt reached $US237 trillion at the end of last year, a $US21 trillion increase from the end of 2016. Narrowing this gigantic measure to countries reporting to the Bank for International Settlements (BIS), total credit extended to the non-financial sector was more than $US173 trillion in the fourth quarter of 2017. Of that “core debt,” $US22 trillion (70%) was outstanding in what are usually called “advanced economies”. Also, $US61 trillion (35%) was owed by general governments. The latter is almost double what it was just a decade ago. Since the BIS does not include insurance and pension liabilities and other accounts payable by governments in its measure of “core,” $122 trillion only represents a partial picture of public liabilities.
Following the release of Statistics Canada’s March 2018 Labour Force Survey (LFS), the Institute of Fiscal Studies and Democracy (IFSD) has updated its Canada JØLTS for February 2018.
Ontario is the largest province in Canada, both by population and by GDP. In the 2016-17 fiscal year, Ontario spent nearly $140 billion on over a hundred programs spanning more than thirty ministries and departments. Chart 1 illustrates the Government of Ontario’s budget expenditures of $136 billion in fiscal 2016-17, spread across what are known as ‘standard objects’ (SOs). Notably, while close to $25 billion is spent by the ministries on things like salaries and other operating expenses, over 80% of the $136 billion in budget spending is in the form of transfer payments. Transfer payments move money from the provincial government to various other levels of government, non-governmental groups, and individuals. These groups can include municipalities as well as smaller entities such as school boards and regional healthcare providers, and also people.
It was Daniel Patrick Moynihan who once said: “Everyone is entitled to his own opinion, but not his own facts.” Nowhere is this more true than in the alchemy of forecasting, where statistical models come head-to-head against old-school gut instinct. As such, there is always space for a wide range of oft-times conflicting views. And there’s no way to get around it, as even the best econometric models can’t predict an unseasonable shutdown at an automaker or an oilfield innovation leading to a rapid drop in oil prices.
It’s been a good few weeks for the Institute of Fiscal Studies and Democracy (IFSD). Not only have we had an opportunity to ‘kick the tires’ on Budget 2018, one could argue we’ve ‘driven that lemon into the ground’ with the generous opportunities the media has given us to comment on it. But, there is still room for more commentary on this budget, as the ample fiscal room of roughly $21.5 billion over six years that magically appeared in Budget 2018 to fund new spending becomes ever more mysterious the further one digs (Chart 1).
Major budget documents usually dedicate a section to the debt management and borrowing strategy of the federal government. And while those pages usually do not make headline news like the major policy announcements and bottom-line deficits, they are of tremendous importance. The financial markets’ community, and taxpayers in general, can find useful information in that such a section about how the government borrows money to finance its budgetary balance, non-budgetary transactions and maturing pre-existing debt stock. In Budget 2018, while no major changes were brought to debt management objectives, several changes in their implementation going forward are worth highlighting. Most importantly, the reference to “an increased focus on the issuance of short- and medium-term bonds (2-, 3- and 5-year maturities)” has been dropped. Therefore, in the coming fiscal year, the issuances of bonds will be reduced while the issuances of treasury bills will increase. In the near term, this will have an impact on the supply of those various types of Government of Canada securities available for sale. In the medium term, those decision, keeping everything else constant, will also have important fiscal implications through higher public debt charges (PDC).
Much like the moment when the wizard is discovered in the classic movie The Wizard of OZ, the Government of Canada is asking Canadians and parliamentarians to ignore what’s going on behind the curtain of its spending forecast. Specifically, Direct Program Expenses (DPE) – the discretionary part of federal government spending – is an impenetrable black box when presented in budget documents. Indeed, the budget forecasts are so high-level that elected representatives don’t know with certainty what the government plans to spend on personnel, how many employees it expects to have in a couple of years’ time, what it plans to invest in capital, among many other unknowns.
Recent developments in global market interest rates have raised concerns over the fiscal impact of higher interest rates for the first time in almost ten years. The Canadian yield curve has been rapidly reshaping in the last year. It is now both higher and flatter (meaning short-term borrowing rates have been rising faster than long-term). The Institute of Fiscal Studies and Democracy (IFSD) expects a continuation of the tightening cycle by the Bank of Canada, thereby contributing to even higher interest rates in the next five years. Higher rates, coupled with a debt management strategy focused on short- and medium-term bonds, should raise Treasury bills debt charges from $0.7 billion in the 2016-17 fiscal year to $4.0 billion in fiscal 2021-22. Nominal bonds charges should rise from $12.6 billion in fiscal 2016-17 to $18.3 billion in the 2021-22 fiscal year. Combined, those will represent 0.9% of GDP in 2021, from 0.5% today.
Infrastructure investments have become a popular political and policy tool with governments these days in order to improve productivity, economic growth, and the standard of living. The current Government of Canada was elected in 2015 on a platform that included a promise to invest in infrastructure projects that “our country needs”. Canada’s aging infrastructure, historically low interest rates, and election commitment to run modest deficits in the short-term before soon returning to balance were key underpinnings of this election promise.