News & Updates

    The Morning Brief - 12.12.18

    Posted by Bruce Carson on Dec 12, 2018 8:22:48 AM


    Economy—Parliamentary Budget Office’s Report on the Government’s Fall Economic Statement—IMF Concerns about Pending Global Recession

    PBO’s Report on the Federal Fall Economic Statement

    For months now the Conservative Party has been unwavering in question period pursuing the Trudeau Liberals on the subject of not only running deficits for longer than they promised in their 2015 platform, but the deficits they have announced are virtually double what was promised in the election campaign. Every now and then economic data or some economists publish papers addressing the need to balance the budget, especially in good economic times. But for the most part, the party has been a voice crying in the political wilderness on this subject.

    Those Conservative MPs who served in opposition when Stephen Harper was the party leader may remember his words during endless questioning on the sponsorship scandal, when those questions seemed to be leading nowhere. He would say that when MPs reach the stage where they are sick and tired of hearing themselves on the subject, that will be the time when others are starting to pay attention.

    As the Conservatives deal with the subject of debt and deficits they have been able to make the case that the money borrowed to pay for the Canada Child Benefit and similar programs will be paid back through the taxes of the present recipients when they start earning a living. With no plan to balance, the spending can go on and on. And the tax liabilities for future generations will continue to accumulate.

    So in a time of rising interest rates the Trudeau government is adding to the liability and will be diverting spending from much needed social spending programs into paying interest on Canada’s debt.

    Yesterday, the PBO walked into this debate on debt and deficit when it released its report on the government’s fall economic statement.

    The first point made by the PBO was that when reviewing the fiscal outlook, the deficits will be larger than forecast. The PBO’s October Economic and Fiscal Outlook predicted the deficit to be $8 billion larger than set out in the government’s numbers. This means in the most optimistic case, when one takes away the $3 billion risk adjustment, there is another $5 billion to be added annually to the deficit between 2018-19 and 2023-24.

    The difference between the government’s numbers and those of the PBO come from lower tax revenues, lower GST revenues and higher operating expenses forecast by the PBO.

    Second, there are financial risks emanating from lower oil prices. The report notes that lower oil prices pose a downside risk to the economy and the fiscal outlook. Reduced prices could lower GDP by $37 billion over the years 2019 to 2023. This would reduce budgetary balance by $3.5 billion per year from 2019-2023-24.

    Third, the government’s statement has $9.5 billion set aside over the years 2018-19 to 2023-24 for measures it has yet to announce. The PBO suggests to parliamentarians, as that is the group this report targets, that they may wish to seek details underlying the $9.5 billion commitment.

    Fourth, the report looks at the two government spending anchors in order to determine if they are holding. The 2015 Liberal platform promised that there would be a balanced budget by 2019-20. It also committed to continue to reduce the debt to GDP ratio throughout its mandate. The PBO’ report says there is near zero likelihood of balance in the allotted time but it looks like the debt to GDP ratio will be below 31.8% in 2020-21.

    Finally in order to give maximum opportunity for parliamentarians to review the Annual Financial Report unaudited statements could be provided three months before the close of the fiscal year.

    When considering putting the Parliamentary Budget Office in place Stephen Harper, Gilles Duceppe and Jack Layton believed MPs needed something, perhaps not on the scale of the Congressional Budget Office, like a group within parliament that could test and perhaps challenge the economic numbers produced by the government’s Department of Finance. With the appointment of the indefatigable Kevin Page as the first PBO, reports from this office came back to bite the Harper government on a number of occasions and when Jim Flaherty was finance minister the courts became involved as the PBO sought information that Flaherty believed it was not entitled to or was not within the mandate of the PBO.

    Attempts to change the nature of the office and how it would conduct its business by the Trudeau government failed and the dynamic tension that existed between the office and the Harper government continues to the present. The PBO has become an essential tool used by MPs to hold the government to account, providing detailed fiscal information in an understandable yet comprehensive format.

    The report released yesterday contains information that should put the government on notice that it is going down a path which if it continues may detract from its ability to introduce and fund social programs in the future.

    IMF Concerns about Pending Global Recession

    The opposition Conservative Party must have thought Christmas had come early when it reviewed the speech of David Lipton, IMF Deputy Director delivered yesterday in London. The main message was that the IMF believes another global recession is on the horizon. Its view is that the global community and institutions remain woefully unprepared for the next financial crisis.

    He described his lobbying efforts to bring about awareness of the pending downturn as meeting with limited success as he said it is hard to get countries “to fix the roof while the sun shines.” He said “I see storm clouds building, and fear the work on crisis prevention is incomplete.” He hopes that with adequate preparation the next recession may be just a “garden variety recession.”

    BlackRock is concerned that the world may slip into recession in 2019 and if not, the possibility increases as we move towards 2021.

    As far as Canada is concerned, at present, Bank of Canada Governor Poloz is concerned about oil prices but doesn’t see a national downturn on the horizon. He is still concerned with containing inflation and raising interest rates.  The question is whether this is the right approach in the circumstances and what will be the long term effect when Canada’s national government going in one direction while the Bank of Canada pursues measures to tighten monetary policy. Or as some have described it, the Bank of Canada keeps trying unsuccessfully to remove the punch bowl from the government’s spending party.

    One wonders whether Canada is one of the countries Lipton described as hard to get interested in rainy day preparations when the weather is warm and pleasant.

    Whether interested in preparations or not, one thing the Trudeau government will not want to do is fight an election as a recession approaches or has landed in Canada in 2019. All of the matters  set out here earlier in the week point to an election call shortly after the 2019 budget is presented or at least before summer. That timing would allow spending promises to be made before resources, should a recession take place, have to be directed to maintaining Canadians’ standard of living as was done in 2009.

    To Come

    --today, no doubt more developments in the case of the Huawei CFO, now out on bail and the connection made yesterday by President Trump between the request by the U.S. for her extradition and the trade treaty that the president is trying to negotiate with China. As he said yesterday “I would certainly intervene if I thought it was necessary” presumably to save a trade deal. Does the president’s intervention undermine Canada’s argument about an independent judicial process operating in this matter? It certainly doesn’t seem supportive of the arguments that Canada has been making. Will Trump’s statement put even more pressure on Canada to release Huawei’s Meng Wanzhou? And would Trump include the release of former Canadian diplomat now under arrest in China as part of the finalization of a trade agreement?

    --December 13, new house price index for October to be released

    --December 18-19, U.S. Fed meets on interest rates

    --December 18, monthly survey of manufacturing for October to be released

    --December 19, CPI numbers for November to be released

    --December 21, retail trade numbers for October to be released


    The Morning Brief takes an extra day off before returning on Monday, December 17--bc 


    Topics: Morning Brief

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