Justin Trudeau's government delivered its long-awaited verdict on three pending pipeline projects yesterday, approving two (Trans Mountain and Line Three) and nixing one (Northern Gateway). Right on cue, protesters immediately took to the streets, in Vancouver and elsewhere, to protest the government's temerity in approving any pipeline construction at all.
I don't suppose Trudeau and his colleagues need me to tell them this, but here goes anyway: for environmentalists, opposition to these projects (or to the much bigger Keystone XL pipeline, which may be revived under a Trump presidency) is not about the pipelines. The environmentalists want to see fossil fuel use phased out as quickly as possible, so they are opposed to anything that allows fossil fuels to be brought to market. There is no compromise possible here. If God were to come down from heaven and declare that the Trans Mountain pipeline would never leak, the environmentalists would still oppose it. They want the fossil fuels to stay in the ground.
The fact that many indigenous communities are also opposed to pipelines -- in the ongoing Standing Rock confrontation, or in the areas in northern British Columbia that have successfully seen off the Northern Gateway project -- is a blessing for the environmentalists. It allows them to cloak their opposition with a higher cause: native rights. Truth to tell, however, if the Standing Rock community did a U-turn and decided to support the pipeline, the environmentalists would abandon them in a trice and find another basis for their opposition. They just want the fossil fuels to stay in the ground.
What about those indigenous groups and their own objections to these projects? Some of the fears over the potential for polluting vital watercourses are undoubtedly justified, but there's more to it than that. These communities would be no happier if the proposed project was a railway across their territory, or an airport*. Once again, it's not really about the pipelines.
I'm probably giving the impression here that I'm all gung-ho to build pipelines hither and yon, and damn the ecology. Far from it: as the leader of Canada's Green Party, Elizabeth May, has pointed out, with world fossil fuel consumption seemingly having peaked, with fossil fuel supplies abundant, and with the cost of renewable energy falling fast, the economic case for any of these pipelines is far from being established. Any or all of them may turn out to be a white elephant from day one.
The truth is that "debate" and "compromise" are no longer terms that have any relevance when it comes to pipeline projects, because one side has its mind firmly made up. That being the case, Trudeau's announcement yesterday just sets the stage for endless rancorous legal debates in the months and years to come -- and by the time any of the projects is approved, let alone built, the economic rationale will very likely have dwindled even further.
* Or, as The Donald may be about to discover, a wall. There's a 70-mile stretch of the US-Mexico border that's part of a historic, treaty-protected indigenous homeland. The people there are determined not to allow Trump or anyone else to put a wall across their land, and the courts will very likely support them.
Wednesday 30 November 2016
Monday 28 November 2016
"Pastcasting"?
We need a new word for something that I did for much of my career as a business economist. A big part of the job is to try to estimate what key economic numbers will be before they're actually released by the statistical agencies. This may sound pretty futile to the non-specialist -- why not wait until the real number comes out, and then you'll know for sure? -- but in fact it's one of the key ways an economist can contribute to the bottom line, especially in a dealing room.
How is that possible? Well, markets don't just react to economic data in a vacuum. Traders try to set themselves up ahead of time, in order to profit from the data if they've figured it out correctly. This means that the market doesn't react to the data per se -- it reacts to how the data differs from the market consensus. A business economist who can estimate the data releases better than his or her peers will therefore set the traders up to make more money than the competition.
You may have noticed that I have been trying hard not to use the word "forecasting" for this function -- because it's not, is it? You'll regularly read things in the business press like "economists forecast that GDP grew 1.2 percent in the third quarter of the year; official data will be released today", even though the quarter for which they're "forecasting" ended two months earlier. There's an old saying that "forecasting is difficult, especially when it's about the future"; the customary inaccuracy of the "analysts' consensus" for economic releases often suggests that "forecasting" the past isn't much easier.
What brought on this mini-rant was this story from the Toronto Star today. It appears that the OECD is going out on a limb and "forecasting" that the Canadian economy "will" grow by 1.2 percent -- THIS YEAR! By my count there are 33 days left in the year, so for the most part, whatever is going to happen has already happened. It's not exactly brave, and it's not going to cause anyone to change their behaviour.
So, as I said, we need a new word for this vital but slightly bizarre activity -- but "pastcasting" probably isn't it.
How is that possible? Well, markets don't just react to economic data in a vacuum. Traders try to set themselves up ahead of time, in order to profit from the data if they've figured it out correctly. This means that the market doesn't react to the data per se -- it reacts to how the data differs from the market consensus. A business economist who can estimate the data releases better than his or her peers will therefore set the traders up to make more money than the competition.
You may have noticed that I have been trying hard not to use the word "forecasting" for this function -- because it's not, is it? You'll regularly read things in the business press like "economists forecast that GDP grew 1.2 percent in the third quarter of the year; official data will be released today", even though the quarter for which they're "forecasting" ended two months earlier. There's an old saying that "forecasting is difficult, especially when it's about the future"; the customary inaccuracy of the "analysts' consensus" for economic releases often suggests that "forecasting" the past isn't much easier.
What brought on this mini-rant was this story from the Toronto Star today. It appears that the OECD is going out on a limb and "forecasting" that the Canadian economy "will" grow by 1.2 percent -- THIS YEAR! By my count there are 33 days left in the year, so for the most part, whatever is going to happen has already happened. It's not exactly brave, and it's not going to cause anyone to change their behaviour.
So, as I said, we need a new word for this vital but slightly bizarre activity -- but "pastcasting" probably isn't it.
Thursday 24 November 2016
Was this what you voted for?
The UK economy has held up surprisingly well since the Brexit referendum back in June, leading many of the pro-Leave side to start crowing "I told you so". But wait....
Chancellor of the Exchequer Phillip Hammond, unveiling his Autumn Statement (i.e. mini-budget) this week, revealed that economic weakness and uncertainty caused by the Brexit vote will boost government borrowing by more than 120 billion pounds in the years ahead. Plans to eliminate the budget deficit -- which previous Chancellor George Osborne originally promised to have got rid of by now -- have gone by the wayside.
Now the Institute for Fiscal Studies is warning that the squeeze on real wages triggered by Brexit will be the worst the UK has seen since the aftermath of World War II. A lot of the older folks who voted Leave seemed to be hankering after an idealized vision of what Britain was like in their youth. Looks like they're going to get it. It may not be quite as idyllic as they remember it.
Chancellor of the Exchequer Phillip Hammond, unveiling his Autumn Statement (i.e. mini-budget) this week, revealed that economic weakness and uncertainty caused by the Brexit vote will boost government borrowing by more than 120 billion pounds in the years ahead. Plans to eliminate the budget deficit -- which previous Chancellor George Osborne originally promised to have got rid of by now -- have gone by the wayside.
Now the Institute for Fiscal Studies is warning that the squeeze on real wages triggered by Brexit will be the worst the UK has seen since the aftermath of World War II. A lot of the older folks who voted Leave seemed to be hankering after an idealized vision of what Britain was like in their youth. Looks like they're going to get it. It may not be quite as idyllic as they remember it.
Sunday 20 November 2016
Donald Trump, theatre critic
US commentators are amused and slightly alarmed that President-elect Trump is wasting his time and his self-imposed Twitter ration on going after the cast of the Broadway musical Hamilton, for supposedly harassing Veep-elect Mike Pence. See this piece from Slate, for example.
Should anyone really be surprised by Trump's behaviour here? I'd say not. In the first place, the man is remarkably thin-skinned, a trait which is unlikely to do him any favours once he actually assumes office. More importantly, though, I suspect Trump is setting a precedent for how he will behave in the White House.
It's difficult to imagine a less Trump-friendly crowd than the people attending a hip-hop musical on Broadway: aside from Mike Pence and his party, you could probably count the number of GOP voters in the house on Friday night on the fingers of one hand. Criticizing people like this plays really well with Trump's electoral base, and he's not about to stop. The more he can portray his opponents as sore losers, the easier it will be for him to blame them when the wheels start coming off his administration -- which, given the Cabinet of Deplorables he seems to be putting together, may not take long.
The precedent here, as it has been for much of the US election cycle, is the Brexit vote. Leave campaigners have wasted no time in rounding on the Remain voters, or on anyone they deem insufficiently keen to leave the EU: Bank of England Governor Mark Carney, for example. The tabloid press has demanded that the "Bremoaners" shut up, and one Tory MP has even suggested that opposing Brexit should be a treasonable offence. This all sets things up for a nasty bout of finger-pointing (or worse) when the UK economy starts to feel the negative impact of the Brexit vote, as it inevitably will.
Populists always have to smear their foes at every turn in order to keep their supporters riled up. For Donald Trump, the Hamilton cast is a convenient early target. It surely won't be the last.
Monday 14 November 2016
Uncomfortably dumb
The Provincial government in Ontario, under the leadership of Kathleen Wynne, is wildly unpopular. Ms Wynne's personal approval rating is below 20 percent, badly trailing the leaders of the two main opposition parties -- who are not exactly well-liked themselves. So, with a provincial election now less than two years away, the Liberals are starting to come up with cockamamie schemes to try to win back support.
One of the main reasons for the government's unpopularity is the soaring cost of electricity, which is, now more expensive here than anywhere else in North America. The price increases are largely the result of the ill-considered "green" measures instituted by Ms Wynne's predecessor, Dalton McGuinty. He mandated the immediate closure of coal-fired power generation and shoveled vast sums into unreliable wind power, which people in rural areas like mine have been trying to fend off ever since. Ontario routinely sells surplus power below cost to neighbouring jurisdictions.
What to do? A few months ago, Ms Wynne announced that the Province would remove the provincial portion of the so-called harmonized sales tax (HST) from household electrical bills. That was good for a few upbeat headlines, but it didn't take long for people to realize that the pennies-per-day benefit of this cut would be immediately outweighed by fresh "green" levies that have already been approved. Despite the tax cut, Ontarians will be paying more, not less, for power in 2017.
Today, Wynne's Finance Minister, Charles Sousa, tabled his fall Economic Statement. A couple of weeks ago, Sousa trailed the idea that housing in Toronto was becoming unaffordable for first time buyers, and hinted that he was going to try to do something about that. Today we find that the "something" is a doubling, to $4000, of the existing rebate on the land transfer tax paid by first time buyers, to be financed (allegedly) by a higher tax rate on more expensive homes.
Politicians never learn, do they? The most certain consequence of a tax break like this is that the asking price for starter homes in the Toronto area will rise by $2000 almost overnight. That's bad enough, but consider this: a few weeks ago, Federal Finance Minister Bill Morneau announced a tightening of mortgage rules mainly aimed at first-time buyers, with the aim of curbing the unsustainable rise in house prices. And today we see Sousa, whose jurisdiction includes the frothiest market of them all, Toronto, introducing a measure that will have precisely the opposite effect. Brilliant!
One of the main reasons for the government's unpopularity is the soaring cost of electricity, which is, now more expensive here than anywhere else in North America. The price increases are largely the result of the ill-considered "green" measures instituted by Ms Wynne's predecessor, Dalton McGuinty. He mandated the immediate closure of coal-fired power generation and shoveled vast sums into unreliable wind power, which people in rural areas like mine have been trying to fend off ever since. Ontario routinely sells surplus power below cost to neighbouring jurisdictions.
What to do? A few months ago, Ms Wynne announced that the Province would remove the provincial portion of the so-called harmonized sales tax (HST) from household electrical bills. That was good for a few upbeat headlines, but it didn't take long for people to realize that the pennies-per-day benefit of this cut would be immediately outweighed by fresh "green" levies that have already been approved. Despite the tax cut, Ontarians will be paying more, not less, for power in 2017.
Today, Wynne's Finance Minister, Charles Sousa, tabled his fall Economic Statement. A couple of weeks ago, Sousa trailed the idea that housing in Toronto was becoming unaffordable for first time buyers, and hinted that he was going to try to do something about that. Today we find that the "something" is a doubling, to $4000, of the existing rebate on the land transfer tax paid by first time buyers, to be financed (allegedly) by a higher tax rate on more expensive homes.
Politicians never learn, do they? The most certain consequence of a tax break like this is that the asking price for starter homes in the Toronto area will rise by $2000 almost overnight. That's bad enough, but consider this: a few weeks ago, Federal Finance Minister Bill Morneau announced a tightening of mortgage rules mainly aimed at first-time buyers, with the aim of curbing the unsustainable rise in house prices. And today we see Sousa, whose jurisdiction includes the frothiest market of them all, Toronto, introducing a measure that will have precisely the opposite effect. Brilliant!
Sunday 13 November 2016
All Keynesians now
The title phrase goes all the way back to the Nixon years, but it seems even more apt now. Looking for some consolation in the wake of Donald Trump's electoral victory? This may be it.
Go back just one year, and there only seemed to be one lonely advocate for stimulative fiscal policy in the world: newly-elected Canadian PM Justin Trudeau. He latched on to the idea of fiscal stimulus about half way through the endless election campaign, and reportedly told his wife, "I think I just won us the election". So it proved, and in the succeeding months he and his government have dramatically scaled up the infrastructure spending plans that got them elected.
Over in the UK, the Cameron government had been preaching austerity, and to some extent delivering it, ever since it was first elected. During the Brexit referendum campaign, Chancellor of the Exchequer George Osborne was rash enough to threaten a "punishment" budget of even more spending cuts if the Leave side were victorious. After the vote, Cameron and Osborne exited the stage as if pursued by a bear, and the fiscal outlook changed abruptly. New Chancellor Philip Hammond, recognizing the potential for damage to the economy during the two years and more before Brexit actually happens, has pledged to keep the spending taps open, delaying sine die any return to fiscal balance.
And then there's Donald Trump. Much of his economic platform is downright scary, given his focus on trade deals that he perceives as unfair to America. However, he has also pledged to start a multi-billion dollar spending program to rebuild the country's aging infrastructure. Since this is something that Democrats will find easy to support, it's very likely to be one of the first thing that Trump does when he assumes office on January 20. Trump may be a Republican in name only, but he seems sure to follow in a time-honoured tradition of GOP Presidents -- rail against the fiscal irresponsibility of Democrats while campaigning, then spend at a dizzying rate once in office.
I've argued numerous times in this blog that the policy mix governments have used since the financial crisis has been wrong: too much monetary ease, not enough fiscal stimulus. With the Fed likely to raise rates in December and several more times after that, we may be about to find out if I was right.
Go back just one year, and there only seemed to be one lonely advocate for stimulative fiscal policy in the world: newly-elected Canadian PM Justin Trudeau. He latched on to the idea of fiscal stimulus about half way through the endless election campaign, and reportedly told his wife, "I think I just won us the election". So it proved, and in the succeeding months he and his government have dramatically scaled up the infrastructure spending plans that got them elected.
Over in the UK, the Cameron government had been preaching austerity, and to some extent delivering it, ever since it was first elected. During the Brexit referendum campaign, Chancellor of the Exchequer George Osborne was rash enough to threaten a "punishment" budget of even more spending cuts if the Leave side were victorious. After the vote, Cameron and Osborne exited the stage as if pursued by a bear, and the fiscal outlook changed abruptly. New Chancellor Philip Hammond, recognizing the potential for damage to the economy during the two years and more before Brexit actually happens, has pledged to keep the spending taps open, delaying sine die any return to fiscal balance.
And then there's Donald Trump. Much of his economic platform is downright scary, given his focus on trade deals that he perceives as unfair to America. However, he has also pledged to start a multi-billion dollar spending program to rebuild the country's aging infrastructure. Since this is something that Democrats will find easy to support, it's very likely to be one of the first thing that Trump does when he assumes office on January 20. Trump may be a Republican in name only, but he seems sure to follow in a time-honoured tradition of GOP Presidents -- rail against the fiscal irresponsibility of Democrats while campaigning, then spend at a dizzying rate once in office.
I've argued numerous times in this blog that the policy mix governments have used since the financial crisis has been wrong: too much monetary ease, not enough fiscal stimulus. With the Fed likely to raise rates in December and several more times after that, we may be about to find out if I was right.
Wednesday 9 November 2016
Misunderestimated
I guess we should have seen that coming, because Donald Trump certainly did. The Brexit vote in the UK back in June showed how easily a shameless populist could capitalize on the ill-defined anger* that seems to permeate most "advanced" societies these days. Trump regularly boasted that he would achieve a "Brexit plus" on election day, and so it has proved.
George W. Bush's accidental coinage about himself, "misunderestimated", provides a useful basis for analyzing what happened yesterday. It's clear that the leadership of the Democratic Party misunderestimated the challenges of the campaign in both a tactical and strategic sense.
Tactically, the Dems woefully misjudged Trump's persistence and his appeal. That didn't start with them, of course. Back during the primary season, Trump's rivals for his own party's nomination assumed he would flame out or lose interest. Instead of taking him on directly, they attacked each other, and all in their turn fell by the wayside, leaving Trump with no real opponent for the nomination.
Once the general election started, the Democrats made a similar error, largely relying on Trump's own endless gaffes to defeat him, rather than forcing him to concentrate on the issues, on which he was (and is) conspicuously weak. Hillary Clinton's policy positions were much more detailed and well-articulated than Trump's, but the Democrats were never able to make that count. Trump, like a certain other right-wing demagogue back in the 1930s, just kept playing the same tune to his captive audience over and over again, and it worked.
Strategically, the Democrats misunderestimated the sheer anger felt throughout the electorate. The feeling that Washington is a corrupt and incestuous cesspool, completely out of touch with the problems facing Americans in their day-to-day lives, is all-pervading. This election turned out to be about change, yet the Democrats offered up a nominee who stood foursquare for more of the same. Donald Trump never had to spell out in any great detail what changes he would make if elected: the simple fact that he was not Hillary Clinton was enough for many of his supporters.
This raises the question: if the Democrats had offered up a "change" candidate of their own, would the result have been any different? Maybe, but it's unlikely that the change candidate in the Democratic primaries -- Bernie Sanders -- would have done very well. While CNN was waiting for the results to start coming in last evening, it displayed the results of a number of exit polls it had conducted during the day. One of these asked respondents what direction of change they would like to see under the incoming President; only 15 percent wanted a "more liberal" shift; a far higher percentage wanted a more conservative government. This would not have translated into support for Bernie Sanders.
So, what's next? Trump is already 70 years old, and although he appears to be in robust health (and is abstemious in his habits), he is bound to run out of energy sooner rather than later. Moreover, although he will enter office with GOP majorities in both the House and the Senate, the next set of mid-term elections, in November 2018, see the entire House up for grabs again. Realistically, Trump will have no more than a year to make his mark before the electoral machine starts cranking up again. That is, of course, plenty of time for him to do some real damage. However, perhaps the greater concern is that he will not have either the ideas or the time to deliver the kind of change that his electoral "base" is seeking. In that case, the anger that has made this election such an unseemly spectacle at times will be redoubled.
* Ill defined, but by no means inexplicable. Living standards across Europe have been stagnant or going backwards since the financial crisis, and most analyses show that the average US worker is no better off in real terms than they were in the 1970s. Add in the astounding rise in income inequality, and it's no surprise that people are angry.
George W. Bush's accidental coinage about himself, "misunderestimated", provides a useful basis for analyzing what happened yesterday. It's clear that the leadership of the Democratic Party misunderestimated the challenges of the campaign in both a tactical and strategic sense.
Tactically, the Dems woefully misjudged Trump's persistence and his appeal. That didn't start with them, of course. Back during the primary season, Trump's rivals for his own party's nomination assumed he would flame out or lose interest. Instead of taking him on directly, they attacked each other, and all in their turn fell by the wayside, leaving Trump with no real opponent for the nomination.
Once the general election started, the Democrats made a similar error, largely relying on Trump's own endless gaffes to defeat him, rather than forcing him to concentrate on the issues, on which he was (and is) conspicuously weak. Hillary Clinton's policy positions were much more detailed and well-articulated than Trump's, but the Democrats were never able to make that count. Trump, like a certain other right-wing demagogue back in the 1930s, just kept playing the same tune to his captive audience over and over again, and it worked.
Strategically, the Democrats misunderestimated the sheer anger felt throughout the electorate. The feeling that Washington is a corrupt and incestuous cesspool, completely out of touch with the problems facing Americans in their day-to-day lives, is all-pervading. This election turned out to be about change, yet the Democrats offered up a nominee who stood foursquare for more of the same. Donald Trump never had to spell out in any great detail what changes he would make if elected: the simple fact that he was not Hillary Clinton was enough for many of his supporters.
This raises the question: if the Democrats had offered up a "change" candidate of their own, would the result have been any different? Maybe, but it's unlikely that the change candidate in the Democratic primaries -- Bernie Sanders -- would have done very well. While CNN was waiting for the results to start coming in last evening, it displayed the results of a number of exit polls it had conducted during the day. One of these asked respondents what direction of change they would like to see under the incoming President; only 15 percent wanted a "more liberal" shift; a far higher percentage wanted a more conservative government. This would not have translated into support for Bernie Sanders.
So, what's next? Trump is already 70 years old, and although he appears to be in robust health (and is abstemious in his habits), he is bound to run out of energy sooner rather than later. Moreover, although he will enter office with GOP majorities in both the House and the Senate, the next set of mid-term elections, in November 2018, see the entire House up for grabs again. Realistically, Trump will have no more than a year to make his mark before the electoral machine starts cranking up again. That is, of course, plenty of time for him to do some real damage. However, perhaps the greater concern is that he will not have either the ideas or the time to deliver the kind of change that his electoral "base" is seeking. In that case, the anger that has made this election such an unseemly spectacle at times will be redoubled.
* Ill defined, but by no means inexplicable. Living standards across Europe have been stagnant or going backwards since the financial crisis, and most analyses show that the average US worker is no better off in real terms than they were in the 1970s. Add in the astounding rise in income inequality, and it's no surprise that people are angry.
Friday 4 November 2016
Ignore the headline!
Another month, another confusing employment report from Statistics Canada.
The agency reported today that the economy added 44,000 jobs in October, far higher than the 15,000 consensus expectation. But......
Take from all this what you will! The headline number provides a wholly misleading impression, given the loss of full-time jobs and the uneven geographic distribution of new positions. The most plausible interpretation of the data is that after the post-fire bounceback during Q3, the economy has continued to expand gradually in the final quarter of the year. There's nothing here to change Bank of Canada policy.
The agency reported today that the economy added 44,000 jobs in October, far higher than the 15,000 consensus expectation. But......
- All of the jobs added in the month were part-time -- in fact, part-time employment rose more than 67,000 in the month, offset by a 23,000 decline in full-time jobs.
- The preponderance of part-time jobs in October reflects a longer term pattern: over the past year, the economy has added 124,000 part-time jobs, but only 15,500 full-time.
- Half of October's new jobs (24,000) were in the construction sector; as the colder months set in, it is unlikely that this sector will remain a source of strength.
- Manufacturing continues to struggle, losing 7500 jobs in the month, which brings the loss over the past year to more than 25,000.
- Fully 40,000 of the jobs created in October were in Ontario and British Columbia; the remaining Provinces saw almost no change in employment in the month.
- Despite the rise in the headline employment number, the unemployment rate was unchanged at 7.0 percent. However, to the extent that this reflects an increase in the participation rate, it can be interpreted as a sign of improving worker sentiment.
Take from all this what you will! The headline number provides a wholly misleading impression, given the loss of full-time jobs and the uneven geographic distribution of new positions. The most plausible interpretation of the data is that after the post-fire bounceback during Q3, the economy has continued to expand gradually in the final quarter of the year. There's nothing here to change Bank of Canada policy.
Wednesday 2 November 2016
Deficits stretching all the way to the horizon
Whatever you may think of the specifics of Canadian Finance Minister Bill Morneau's fall fiscal update, tabled yesterday, you can't deny that he's playing a long game. The key measures Morneau is proposing, especially as regards infrastructure financing, will only be truly effective (or not) over a term far exceeding the life of the current Parliament. And given the size of the deficits Morneau expects to run in the short term, any course correction after the next election is likely to be very painful.
Let's start with those deficits. Morneau is now projecting a shortfall of C$25.1 billion for this year. That is, to put it mildly, a pretty stunning change from last year's $1 billion shortfall. Although last March's budget initially projected a $29.4 billion deficit this year, that number included a $6 billion "contingency" amount, which has now been eliminated. This means that the underlying deficit is actually $1.7 billion higher than was foreseen eight months ago.
Looking forward, Morneau expects the deficit to rise to almost $28 billion next year, then fall gradually, reaching $14.6 billion in 2021 -- which is, of course, well into the life of the next Parliament. There is no timetable for a return to a balanced budget. What's more, these numbers include no contingency or cushion whatsoever. In other words, in this fall statement, which is not even a full budget, Morneau has tossed away two of the tools that served Paul Martin well when he was struggling with an even larger deficit problems two decades ago: the contingency provision (which regularly allowed Martin to bring in deficits below original forecasts) and the focus on a two-year planning horizon. This looks ominous.
As for the infrastructure plans, the proposed sums are huge. Ottawa is proposing to spend up to $186 billion on transportation, water, green initiatives and the rest over an 11-year timeframe -- that's more than two Parliaments' worth. This is a 50 percent increase over the amount proposed just eight months ago. Much of the money will go into joint investments with Provinces and municipalities in the usual way -- and cities like Toronto already have their noses in the trough -- but the really interesting part of Morneau's plan is the so-called Canada Infrastructure Bank.
This bank, which will not be set up until early 2017, will be partly capitalized by the Federal government, to the tune of somewhere between $15 and $35 billion, with the exact amount determined by how successful the bank is in persuading the private sector to co-invest. Will this work?
It's certainly true that big pension funds, including the major global sovereign wealth funds and Canadian players like Quebec's Caisse de depots or Ontario's teachers' retirement funds, have increasingly been looking to invest in infrastructure as an alternative to equities and bonds. However, these investors in general show little appetite for what bankers call "completion risk", which is an inevitable element of getting new infrastructure built. Investors have generally preferred to let the public sector take that risk, and then step in to buy once the project is up and running. Ontario had a disastrous experience with this with the 407-ETR toll highway north of Toronto, which the provincial government of the day built and then virtually gave away to private investors. Similarly, private investment in the UK-France Channel Tunnel only materialized when the tunnel was open and operating.
Morneau is gambling that his Canada Investment Bank will be able to change that pattern, attracting institutional investors to become involved at the outset. If he's right, the government will be able to leverage its own funds to produce far more infrastructure spending than the public purse could finance on its own. If he's wrong, however, the expected boost to GDP from infrastructure investment will be much lower than the Government has been counting on. It's a worthwhile experiment -- heaven knows, there are not many alternatives available -- but it's by no means guaranteed to work, and it's certainly not going to help much in the immediate future.
Let's start with those deficits. Morneau is now projecting a shortfall of C$25.1 billion for this year. That is, to put it mildly, a pretty stunning change from last year's $1 billion shortfall. Although last March's budget initially projected a $29.4 billion deficit this year, that number included a $6 billion "contingency" amount, which has now been eliminated. This means that the underlying deficit is actually $1.7 billion higher than was foreseen eight months ago.
Looking forward, Morneau expects the deficit to rise to almost $28 billion next year, then fall gradually, reaching $14.6 billion in 2021 -- which is, of course, well into the life of the next Parliament. There is no timetable for a return to a balanced budget. What's more, these numbers include no contingency or cushion whatsoever. In other words, in this fall statement, which is not even a full budget, Morneau has tossed away two of the tools that served Paul Martin well when he was struggling with an even larger deficit problems two decades ago: the contingency provision (which regularly allowed Martin to bring in deficits below original forecasts) and the focus on a two-year planning horizon. This looks ominous.
As for the infrastructure plans, the proposed sums are huge. Ottawa is proposing to spend up to $186 billion on transportation, water, green initiatives and the rest over an 11-year timeframe -- that's more than two Parliaments' worth. This is a 50 percent increase over the amount proposed just eight months ago. Much of the money will go into joint investments with Provinces and municipalities in the usual way -- and cities like Toronto already have their noses in the trough -- but the really interesting part of Morneau's plan is the so-called Canada Infrastructure Bank.
This bank, which will not be set up until early 2017, will be partly capitalized by the Federal government, to the tune of somewhere between $15 and $35 billion, with the exact amount determined by how successful the bank is in persuading the private sector to co-invest. Will this work?
It's certainly true that big pension funds, including the major global sovereign wealth funds and Canadian players like Quebec's Caisse de depots or Ontario's teachers' retirement funds, have increasingly been looking to invest in infrastructure as an alternative to equities and bonds. However, these investors in general show little appetite for what bankers call "completion risk", which is an inevitable element of getting new infrastructure built. Investors have generally preferred to let the public sector take that risk, and then step in to buy once the project is up and running. Ontario had a disastrous experience with this with the 407-ETR toll highway north of Toronto, which the provincial government of the day built and then virtually gave away to private investors. Similarly, private investment in the UK-France Channel Tunnel only materialized when the tunnel was open and operating.
Morneau is gambling that his Canada Investment Bank will be able to change that pattern, attracting institutional investors to become involved at the outset. If he's right, the government will be able to leverage its own funds to produce far more infrastructure spending than the public purse could finance on its own. If he's wrong, however, the expected boost to GDP from infrastructure investment will be much lower than the Government has been counting on. It's a worthwhile experiment -- heaven knows, there are not many alternatives available -- but it's by no means guaranteed to work, and it's certainly not going to help much in the immediate future.
Tuesday 1 November 2016
"Outsized"??
The big event for the Canadian economy today will be Finance Minister Bill Morneau's fall fiscal update, in which he is widely expected to put more flesh on the bones of the government's infrastructure plans. He will probably also admit that the budget deficit is likely to be higher than previously forecast because the economy is growing so slowly. More on this tomorrow.
Speaking of growth, however, today saw the release of August GDP data. The economy grew 0.2 percent in the month, but July's growth was revised down to 0.4 percent from the 0.5 percent first reported. You can see the details here, but think about this: a "rebound" on this scale, after the dismal (albeit wildfire-related) numbers posted back in the spring has analysts dipping into the thesaurus and coming up with the adjective "outsized". It's a sign of how accustomed we have become, in the years since the financial crisis, to seeing the economy perpetually teetering on the brink of recession.
Can Bill Morneau do anything about that? We'll find out later today.
Speaking of growth, however, today saw the release of August GDP data. The economy grew 0.2 percent in the month, but July's growth was revised down to 0.4 percent from the 0.5 percent first reported. You can see the details here, but think about this: a "rebound" on this scale, after the dismal (albeit wildfire-related) numbers posted back in the spring has analysts dipping into the thesaurus and coming up with the adjective "outsized". It's a sign of how accustomed we have become, in the years since the financial crisis, to seeing the economy perpetually teetering on the brink of recession.
Can Bill Morneau do anything about that? We'll find out later today.
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