Thursday, 23 March 2017

Canada budget: nothing to see here

The Federal budget tabled by Finance Minister Bill Morneau on Wednesday was a remarkably uninspiring document.  By some calculations, new spending initiatives amounted to "only" C$ 1,3 billion, the smallest amount in living memory.  Rumours of significant tax changes targetting the wealthy proved unfounded, with the only significant changes being minor hikes in "sin taxes" and an "Uber tax" designed to ensure that ride-sharing is subject to the same sales taxes as conventional taxis.

The lack of action, at least by comparison with Morneau's first budget a year ago, prompted the Toronto Star, which never saw a deficit it didn't like, to warn the government not to "lose its nerve" on fiscal policy.  This is surely misguided advice.  Last year's budget set Federal spending on a sharply higher course than the previous Tory government had envisaged -- indeed, a higher course than most voters had expected when they supported Justin Trudeau's promise of fiscal stimulus.  That higher spending track remains intact, and is reflected in the C$ 28.5 billion deficit projected for the current fiscal year.  That's $3 billion higher than projected in the fall fiscal update, although this week's figure includes restoration of the long-established $3 billion annual "contingency",  so there is no real deterioration in the near-term outlook.

The big spending plans outlined by Morneau last year, including a boost in infrastructure spending, were always intended to roll out over several years.  That's still the case, although there is now evidence of a slightly cynical adjustment in the spending trajectory to ensure maximum impact just before the next election. The medium term deficit projections, never worth the paper they're printed on, show the shortfall only gradually shrinking, reaching $18.8 billion in 2021/22. So, pace the Toronto Star, we do not appear to be returning to Tory-style austerity.

It seems clear that the Liberals lack the political courage to take any more steps on the revenue side, having introduced a higher income tax rate for top earners a year ago.  There were rumours that the favourable tax treatment of stock options, which largely benefits the top executives of large corporations (and costs the government close to $1 billion a year) might be scaled back.  Despite pre-election pledges to do this, Morneau has kept this egregious break in place.

There were also pre-budget rumours of a change in capital gains taxation, which is currently levied at half the rate of tax on other forms of personal income.  Again, nothing, even though such a measure might have helped to rein in speculative property purchases. Indeed, Ontario's provincial Finance Minister had almost begged Morneau to enact such a measure.  Interestingly, however, the government is now collecting data on home sales as part of individuals' annual income tax filings, so in the event that they ever do decide to alter this tax, they will have a much better database to work from.

All-in-all, then, a stay-the-course kid of budget -- and that may not be a bad thing.   After all, it is still very unclear how the economic policies of the new Trump administration may affect Canada, especially in terms of a possible renegotiation of the NAFTA agreement.  Moreover, it is arguable that the economy really does not need any further government stimulus at this time.  Recent data on employment, external trade and wholesale and retail trade all suggest that the economy has picked up considerable momentum in the past half-year or so.  Better for Morneau to stay on his existing course and keep his options open, in case more action is needed in the future.

Last and very much least, the budget signals the demise of the venerable Canada Savings Bond (CSB) program, once described to me by a colleague as "the biggest goddamn Christmas club in the world".  With the costs of conventional borrowing so low, the expense of tapping individuals' savings through this program no longer make sense.  It won't be missed.

Thursday, 16 March 2017

Canada's debt spiral

Another day, another record level of household debt in Canada.  It was reported yesterday that the ratio of Canadian household debt to disposable income reached a new record of 1.673 (i.e. $1.673 in debt per $1 of income) in the final quarter of 2016.  It was only a couple of years ago that this ratio topped the 1.63 peak seen in the US just before the financial crisis, and it's only been onwards and upwards since then.

An economist at my old shop, Toronto Dominion, Diana Petramala, tries to find comfort where she may: "Debt growth has accelerated somewhat, but it is not growing at the double digit pace that would normally be considered dangerous".  I'm not sure where that rule comes from, and I would suggest to Ms Petramala that if a ratio reaches an all-time record high at a time when interest rates are at a record low, that might be danger enough to be going along with.

The other thing that is regularly trotted out as a reason not to worry about the level of debt is the seeming rise in household net worth. Sure enough, that's being cited again now, but it's still a dangerous fallacy.  Your home is a very illiquid asset, especially in the event of a downturn in the market.  High  house prices have only been possible because of rising debt; when the music stops, a large number of people are going to find themselves unable to find the financing to keep up their debt payments.

Canada may, in fact, be close to a situation in which the household debt burden is unmanageable whether the economy expands or falters. If growth continues at the pace seen in recent months, the Bank of Canada will be forced to follow the Fed in raising rates, which would immediately push some of the most highly indebted households over the brink.  And if growth stalls and people start losing their jobs, widespread mortgage defaults would be inevitable.  Stress tests supposedly show that bank balance sheets could easily withstand a significant housing market correction.  Let's hope so.  

Wednesday, 15 March 2017

Bank bashing

Canada's Big Five banks are racking up record profits, so I guess it's no surprise that there's a ready market for stories suggesting they're doing so by nefarious means.  Step forward the public broadcaster, CBC, which began last week by calling out my former firm, Toronto-Dominion, but is now widening the net to include all of the banks.  It seems there are plenty of whistleblowers among the employees of each bank willing to tell tales (anonymously, of course) to the CBC.

All of the stories basically say the same thing: bank counter staff and others are under ever-increasing pressure to boost revenues by selling things to customers that they didn't ask for, don't need or can't afford.  I have to say that some of the commonly-cited examples make no sense to me.  Supposedly, bank staff increase a lot of people's credit card or overdraft limits without asking them first.  How exactly does this hurt the customer?  My credit card fee is not affected by my credit card limit, and a higher credit card limit only affects me if I actually use it.  You could also ask, by the way, how raising such limits without the customer's knowledge helps the bank, but I'd have to leave it to the bank to answer that, as I can't figure it out.

I'm ten years retired from TD and was never involved in the retail side of things, so I have no real direct knowledge of that business.  I did touch base with a fellow retiree who is in a position to know, and was told that the number of customer complaints about aggressive selling is extremely small.  Moreover, bank front-line staff are judged not only on their sales success but also on their customer satisfaction rankings, so excessive aggression would almost certainly be counterproductive.

My own local TD branch shows no signs of the kind of behaviour that CBC is talking about here; maybe that's a benefit of living in a smaller community.  In any case, I'm wondering whether the people complaining about bank selling practices have had any dealings recently with a car dealership, or an appliance store, or an insurance agent, all of which have a well-documented history of pressure tactics -- remember William H. Macy's car salesman in "Fargo"?

All of that said, the bank staff coming forward to tell tales to the CBC do seem to have one common complaint: they're under increasing pressure to produce revenues, and fear losing their jobs if they don't succeed.  This is, perhaps, a clue to the whole story.  Bricks-and-mortar banking is being increasingly supplanted by the internet, even for quite complex transactions.  Branch staff are surely aware of this, and aware that banks are quietly closing money-losing locations all across the country. Those fears of losing their jobs are very likely well-founded, whether they resort to dodgy sales techniques or not.

TD and all of the other banks have responded to the CBC stories by stressing that all of their staff are expected to abide by a code of conduct.  However, the Financial Consumer Agency of Canada (which I confess I had never heard of before) has now announced an investigation, starting next month, and politicians are demanding action.  Bank-bashing season may well last all year long.    

Friday, 10 March 2017

Jobs, jobs, jobs

To the best of my knowledge, Donald Trump has not yet claimed credit for the yuuuge non-farm labour data released this morning, though others on the right are trying to do that for him.  The US economy added 235,000 jobs in February, above the Wall St consensus for a gain of about 200,000. The numbers may have been boosted by a surge in construction industry hiring, reflecting the early spring in parts of the country, but it's still an impressive showing.  What's more, average hourly earnings, which have been steadily ticking higher for many months, rose 2.8 percent from a year ago,  the unemployment rate edged down to 4.7 percent and the participation rate rose, all clear signs of a tightening labour market.

With these data to hand, a Fed rate hike later this month must now be considered a done deal.  Just how will the White House respond to that?  Trump said during the election campaign that he would fire Fed Chair Janet Yellen, simply on the grounds that she is not a card-carrying Republican.  There have been few signs of a feud between the new administration and the Fed, but it remains to be seen whether there are enough cool heads in the President's inner circle to warn him that ditching Yellen would be a sure-fire way of derailing the economy and the markets.

There was positive jobs news in Canada this morning also, as the economy added 15,000 jobs in February, versus an analysts consensus of a loss of 5,000 jobs. (Is it my imagination, or is the consensus becoming less and less reliable?)  As ever, the details of the report warrant caution, as StatsCan estimates that the economy added 105,000 full-time jobs in the month, offset by a loss of 90,000 part-time positions.  This is a sharp reversal of the pattern seen over the past year and more. Given that job gains were confined to three Provinces that make up just 20 percent of the national population (BC, Saskatchewan and Manitoba), there are reasons aplenty to take today's data with a grain of salt.

All of that said, the employment data for the past several months add to a picture of an economy that is performing more strongly than expected.  Most notably, Canada recorded three straight months of trade surpluses from November to January, with exports reaching a record high.  The data may well translate into revenue gains for the Federal government, making Finance Minister Morneau's task easier as he prepares to deliver his second budget on March 22.  It is widely expected to be a stand-pat document, with the government still not sure what to expect from the Trump administration.  Also standing pat, despite the run of strong data: the Bank of Canada, which remains most unlikely to follow any Fed rate moves over the balance of this year.


Tuesday, 7 March 2017

In one pocket and out of the other

Last week I posted ("There is no free power") about the Ontario Liberal government's desperate scheme to stem voter anger about the Province's sky-high costs for electricity -- or hydro, as it's still sometime called here.  The political opposition and just about all media commentators have seen the scheme for what it is: a shell game that will push the costs of the Liberals' myriad past mistakes onto future generations of taxpayers, while adding further costs in the form of higher financing charges.

Even though it already seems unlikely that Premier Kathleen Wynne and her cabinet of incompetents will reap any electoral benefit from the scheme,  you can't accuse her of not trying.  Today the devoutly pro-Liberal Toronto Star gave over a large chunk of its op-ed page for an article by Wynne that attempts to explain the new program.  A couple of paragraphs are worth quoting in full:

The other structural change has to do with the way we finance programs that help low-income families afford hydro and that subsidize the high cost of delivering electricity to rural and remote customers. Previously, the costs of both programs fell to ratepayers. That, too, was not fair.
Hydro is a necessity. The province, not ratepayers, should ensure everyone can afford to access to it. So, we’re moving those programs off your bill and accounting for them in the provincial budget.
Don't you just love that stuff about how "the Province" rather than power users should be paying for these subsidies?  Close to 100 percent of Ontarians use electricity; close to 100 percent pay taxes.  Ultimately the Province has no money to spend except whatever it can pilfer from the citizenry, who are exactly the same people as the hydro ratepayers.  So we have two possibilities here: either Ms Wynne is unaware of these basic truths, in which case she is unqualified for the job she holds; or she understands all of this perfectly well, but is shamelessly hoping that she can pull the wool over the eyes of enough voters to get her party re-elected just over a year from now.

Based on the reaction to her plan over the past week, that's looking like a very bad bet indeed.

Friday, 3 March 2017

Economic illiteracy

The business sections of the print media are replete with columns trying to impart financial literacy to their readers. Problem is, a lot of the business and finance reporters themselves are woefully lacking.

Last night two business economists were being interviewed on the CTV evening news about the strong Canadian GDP data released earlier in the day. GDP rose at a 2.6 percent annualized rate in the final quarter of 2016, way above expectations, as you can read here.

First up, the interviewer was completely foxed by the fact that a fall in imports in any particular period has the statistical effect of raising the GDP growth rate*, although it has to be said that the two economists did a very bad job of explaining what happened.  Imports in Q3 had been boosted by the importation of a massive piece of offshore drilling equipment; that didn't recur in Q4, so imports appeared to fall at a double-digit annualized rate, and that increased GDP growth.

That's a bit technical, so maybe we can give the interviewer a mulligan there.  Not on the next doozy, though. One of the economists said that if Canada's economy lagged the US, the Bank of Canada would not follow any rate hikes by the Fed, and that might cause the CAD exchange rate to weaken, "maybe to 1.40".  The reporter visibly flinched and said "So, a 60-cent dollar then"!  Well, no, the reciprocal of 1.40 is actually 71.42 cents (US), which is only a few cents weaker than the currency is presently trading.

It's hard to come up with any real excuse for such an elementary error, especially as the strength or otherwise of the Canadian dollar is a staple of every business news bulletin.  No wonder the Canadian public has so much trouble managing its finances!

* In simplified terms, GDP = C + I + G + (X-M), where C = consumption, I = investment, G = government spending, X = exports and M = imports.  So if the change in M is negative, that boosts GDP. 

Thursday, 2 March 2017

There is no free power

Ontario's Liberal government, in power for the past fourteen years, is quite staggeringly incompetent on all fronts.  A couple of examples will suffice here. "Reforms" to the bargaining process for teachers' unions were introduced before the last election, purely to ensure labour peace during the campaign.  Since then, scarcely a month has gone by without one group of teachers or another working to rule, on strike or threatening job action, because the reforms were so ill considered. Or consider the Province's doctors who, after working without a contract for many months, turned down a proposed new agreement with the Ministry of Health and are now contemplating a partial withdrawal of services that could well put patients' lives at risk.

These failures are bad enough, but nothing riles up Ontarians more than the soaring cost of electricity -- or "hydro", as it's still commonly known, even though most of it is now generated by nuclear or gas-fired plants or renewables.  Truth to tell, the Liberals' Tory predecessors deserve part of the blame here, but most of it justly falls on current Premier Kathleen Wynne and her erstwhile boss, former Premier Dalton McGuinty.

McGuinty it was who pushed through a rapid decommissioning of Ontario's coal-fired generation capacity, mainly to burnish his green credentials. To keep the lights on, the Province then offered wildly generous contracts for the development of renewables, plus of course the gas-fired backups needed for when the wind don't blow and the sun don't shine.  Oh, and McGuinty, with Wynne at his side, tried to win a couple of key seats in the last-but-one Provincial election by cancelling a couple of unpopular gas generating plants, at a cost to taxpayers of $ 1 billion or more.  (Sadly, it worked).

Ontario now regularly finds itself with so much power that it is forced to sell the surplus to neighbouring jurisdictions, mainly in the United States,  at a loss.  And Ontario residents and businesses confront soaring monthly bills loaded with bizarre "global adjustment charges" and "delivery charges" to pay for all this folly.

Facing an election in 2018, Premier Wynne is trying to defuse the voters' anger by cutting power prices.  At the start of the year, the Province removed its own portion of the harmonized (i.e. Federal/Provincial) sales tax from electricity bills, which amounted to an 8 percent cut.  And today she has announced further steps that will supposedly reduce bills by a further 17 percent, for a 25 percent reduction in total.

Sounds good, but it's actually just a shell game. Part of the reduction will be achieved by shifting a program that helps lower income power users into general spending, so taxpayers will simply be paying out the money in a different way at a different time of the year, the hope presumably being that they won't notice.  The biggest part of the reduction, however, comes by spreading out the cost of all the good and bad things that have been done over the past decade over a much longer period.

Cancelling the contracts was never an option, of course, so this is the only available course.  Now, there's arguably a case for matching the term of financing more closely to the expected life of the assets.  However,  there should be no mistaking the fact that the cost of reducing power bills now will be higher bills much further out into the future, because of the added years of borrowing that will now have to be paid for.  Again, Ms Wynne and her colleagues must be hoping that the taxpayers and voters won't notice.  

Will it work?  The opposition parties will be quick to point out the flaws in the scheme.  And maybe Ms Wynne has acted too soon: people may be grateful for the rate relief when it shows up on their bills come the summer, but will they still feel that way when polling day rolls around in the spring of 2018?  I'd bet against it, especially as experience suggests that the Liberals will pull of at least one more monster screw-up between now and then.