Could have been worse

Prior to Finance Minister Chrystia Freeland's Fall Economic Update today, there had been widespread speculation that she might announce a budget deficit for the current fiscal year (ending March 2021) of more than C$ 400 billion. In the event, the figure actually tabled was "only" $381 billion. The increase from the $343 billion projected back in July reflects the severity of the second wave of COVID, and of course there remains the possibility that the final figure could be even higher, depending mainly on how long current lockdowns and restrictions last.

The Government has been trailing the idea of a "Great Reset" for the economy in a post-pandemic world, and today's statement provides a "down payment" on the cost of that, which doubles as a post-pandemic shot of stimulus to get the economy back on track. The stimulus will amount to $70-100 billion over three years, with a focus on developing "a greener, more inclusive, more innovative and competitive economy". The new spending will start once a vaccine has been deployed and life begins to return to normal. Note that Prime Minister Trudeau suggested yesterday that he expects most Canadians will be vaccinated by September 2021, so the new spending will presumably kick in around that time.  

The Government warned some weeks ago that the Fall Update would not include any form of so-called "fiscal anchor", such as a target for the debt/GDP ratio. Somewhat surprisingly, however, Freeland did provide a longer-term fiscal projection, covering the same five-year term offered under more normal circumstances. This shows the deficit falling by more than two-thirds in FY 2021/22, to $121 billion, and continuing to move steadily downwards to $24.9 billion by 2025/26.  In current circumstances, these projections must of course be treated with even more caution than usual.  However, they do appear to show that leaks attributed to Ottawa insiders in recent weeks, suggesting that Freeland's fiscal plans were "terrifying", might have been exaggerated.

We wait to see how the Opposition parties will respond. The NDP will no doubt be happy to see a commitment to child care and "green" spending. The Tories will probably focus almost exclusively on the short-term deficit projections, while aiming a few blows at the whole idea of a "Great Reset".  The Government will likely see its fiscal plans as an issue of confidence, so one or two cliffhanger votes in Parliament may be in prospect.  

Think twice, act once

My late father-in-law, an architect, frequently used the aphorism "measure twice, cut once". It's certainly good advice if you are a carpenter or a builder, but it has much broader applicability. It's advice that seems to have been lost on politicians as they struggle to come up with policy responses to the COVID pandemic. Here are a couple of local examples. 

The Premier of the Province of Ontario, Doug Ford, was initially judged by the media and public to be doing a good job of handling the pandemic. He was empathetic -- which not even his closest friends would have predicted -- and seemed willing to listen to experts.  No longer: as the second wave of the pandemic has unfolded, Ford has been unable to strike the right balance between keeping people safe and keeping as much of the economy open as possible. Given that he is a businessman, it is perhaps not surprising that the interests of the business community have seemed  to be top of mind for him.

Ford, flanked by a rotating cast of members of his Cabinet, holds a news conference just about every day. And just about every day, he has a new announcement to make -- tighter restrictions here, looser restrictions there, seemingly driven by the news cycle of the past 24-hours rather than by any overriding strategy. The latest set of Province-wide rules, establishing five colour-coded regimens based on the severity of the outbreak in each location, was introduced barely two weeks ago, yet already the Province has tabled fresh guidelines for household gatherings during the Christmas season.  It's no wonder people are confused, no wonder that willingness to comply with the restrictions is waning.  

Now we hear that Ford is looking to micro-manage the food delivery business, which has seen booming business in the past few months.  Responding to complaints from restaurants, he wants to limit delivery fees to 15 percent of the value of the food order. Now I hold no brief whatsoever for Uber Eats and the like, but I can do the math. Most of the restaurants in my small town are about five miles from my front door. If I order a couple of burgers and some fries for say $20, the delivery service will be allowed to charge me just $3 for a delivery run that is likely to take them at least twenty minutes. For comparison, the minimum wage in the Province is currently $14.25. If Ford's idea is put into practice, it will be a whole lot harder to get food delivered during the winter months. 

There's folly at the local level too. The region of Peel, west of Toronto, is currently under strict lockdown rules because of the high incidence of COVID.  Bonnie Crombie is the Mayor of Mississauga, the largest city in Peel. The lockdown rules there mean that small non-food businesses can only offer curbside delivery, whereas big box stores like Costco or Walmart are allowed to offer in-store shopping for food and non-food items alike.

Small business owners are upset and Ms Crombie wants to help. Her proposal is to ban the big box stores from selling non-food items for as long as the lockdown remains in place. That may or may not help the little guys -- we don't know how much appetite there will be for curbside pickup when the curb is covered by a foot of snow -- but there is one very predictable consequence. A whole lot of minimum wage workers at Costco and Walmart will find themselves out of a job just before Christmas. That's not what Ms Crombie wants, but it's what her city may well get if she doesn't take time to think again.  

Is that all there is?

Canada and the United Kingdom have announced a new trade deal to govern economic relations between the two countries once the UK-EU transition period ends on January 1. Bizarrely, the deal was announced on Saturday, via an international Zoom call featuring Justin Trudeau, Boris Johnson and their respective trade ministers.  The timing was presumably set to coincide with the G-20 summit hosted by Saudi Arabia over the weekend. 

Johnson's trade minister, Liz Truss, is certainly all in on the deal, writing in the Daily Telegraph (behind a paywall, sorry!) that it will allow the UK to change the world. That seems just slightly exaggerated. What has actually been agreed is that the terms of the existing EU-Canada trade deal, CETA, will be extended bilaterally by the UK and Canada once the transition period ends. It is simply the status quo, in other words, although the two countries will now embark on negotiations that may lead to a "bespoke" agreement at some point in the future.

The deal with Canada comes just a month after the UK scored its first post-Brexit bilateral deal, with Japan. The UK government, with Ms Truss again front-and-centre,  celebrated this deal by crowing that it would allow UK consumers to pay less for soy sauce, only to have it pointed out that soy sauce already attracted a zero tariff under the existing EU-Japan trade deal. As with the Canada deal, the UK's "new" deal with Japan is in effect just a rollover of the existing trade agreement with the EU, though with the addition of a new chapter on digital trade. It is expected to boost UK GDP by.....0.07 percent. 

This, then, is how the UK's trade relations are shaping up as it exercises the independence it has supposedly regained by leaving the EU. Trade with important but geographically distant countries like Canada and Japan will continue on almost exactly the same basis as before: no country can be expected to afford the UK a better deal than it affords the much larger EU bloc. UK trade with the larger and much closer EU, by contrast, will take place on significantly worse terms than at present -- possibly even on WTO terms, if last-ditch efforts to come up with a deal fall short. This is not what voters were promised back in 2016 when they voted for Brexit, and it is now too imminent and concrete a prospect to be written off as "Project Fear".

There may be no real economic benefit to the UK from these deals, but Boris Johnson may well have other things in mind. With deals in place with two G-7 countries, it will be easier for Boris Johnson to place the blame on the "intransigent" EU if those last-minute trade negotiations fail. In Brexit world, that blame game seems to be all that counts.   

Trudeau's zero content, zero emissions plan

The Justin Trudeau government has unveiled its "plan" or "road map" for Canada to achieve zero net carbon emissions by 2050.  I have placed those terms in quotes because this isn't much of a plan, and it's no kind of a road map. It is at most a statement of intent, another example of the government's addiction to virtue signalling.

The zero emissions by 2050 goal is one the government has been talking about for some time. Today it has tabled legislation, Bill C-12, which the CBC website, quoting Trudeau, portrays as "an accountability framework that will "ensure we reach this net-zero goal in a way that gives Canadians confidence."  At first blush that sounds pretty vague, and the details do nothing to correct that impression. Let's return to the CBC article for more:

" (The) bill doesn't set out exactly how the federal government should go about reducing emissions — it does not mandate further increases to the carbon tax, for example. It simply stipulates that Ottawa must set a goal and work to achieve it through measures that are deemed effective".

So there are no details?  How about a timetable, then? Well, sort of: 

"The legislation also requires that the minister table a plan in Parliament outlining how Ottawa plans to meet those targets. The legislation does not stipulate what role the provinces and territories will play in this national emissions reduction plan.

The first emissions reduction target, and the plan to meet it, would be tabled nine months after the bill is passed through Parliament. That first target would be for the year 2030.

Nine months after the bill is passed, so in all likelihood a year or more from today! Didn't Trudeau tell the media this morning that Canadians "want climate action now"? Oh well, there must at least be meaningful consequences if the interim or final targets are not reached, right? Far from it!

"While the government describes this legislation as "legally binding," there would be no tangible penalty applied if the country fails to drive down emissions as promised.

The government would simply have to state publicly in Parliament that it failed to meet its goals. There would be no meaningful legal consequences if Ottawa falls short. "

What's more, "A future government also could simply repeal the law and do away with reporting obligations altogether."

I accept the science regarding climate change and accept that we have to do something about it, though I'm no eco-warrior. This legislation is astoundingly vacuous and almost completely pointless. Can't wait to hear what Greta Thunberg has to say about it. 

It's all about the lettuce

Statistics Canada reported this morning that Canada's headline consumer price index (CPI) rose 0.7 percent year-on-year in October, up from 0.5 percent in September. The increase was mainly attributable to higher prices for food, notably lettuce, up more than 25 percent as a result of supply issues, and fresh meat, particularly chicken. The increase was significantly above the analysts' consensus expectation, which called for an increase of 0.4 percent.

Excluding gasoline, which remains more than 10 percent lower in price than a year ago, the annual increase in CPI was 1.0 percent, the same as in September.  The Bank of Canada's three preferred measures of core inflation also show a rate significantly above the headline, averaging an increase of just below 1.8 percent for October, up from 1.7 percent in September. Since the COVID pandemic began, these measures have been receiving even less attention than they did previously. In any case, there is nothing in today's data to suggest any change in the Bank's policy stance. Now Governor Tiff Macklem has indicated that the Bank wants to see CPI consistently above the 2 percent target before it considers tightening policy, which means rates are likely to remain on hold for a long time to come.

As promised last month, the Bank has now provided Canadians with an early Christmas gift: a Personal Inflation Calculator for people to figure out their own inflation experience, based on their personal spending patterns.  It is simple enough to use, though it is doubtful that most people will have to hand the data they need to use it accurately. 

As an experiment, I entered some very rough estimates of my own household spending patterns into the calculator. The results suggested that my personal rate of inflation pre-pandemic was slightly lower than the headline figure, which makes sense, given that I neither pay rent nor have a mortgage. Ever since the pandemic began, however, my rate has been consistently above the headline figure. Anecdotal evidence suggests that this is most Canadians' perception of the underlying inflation picture. We can confidently expect that plenty of journalists are running various scenarios through the calculator even as we speak. It will be interesting to see how they use and interpret the results in the weeks and months ahead.  

Weird science

The astrophysicist Neil deGrasse Tyson likes to say that the great thing about science is that it's true whether you believe it or not.  That proposition has been tested to the breaking point during the coronavirus pandemic as expert advice, from the WHO down to your local health authority, seems to have lighted on a different definition of the truth on almost a weekly basis.

Masks!  From the outset of the pandemic, the advice has been to wear masks whenever social distancing is difficult, particularly in indoor settings. We should do this, so we were told, not because the masks protected the wearer from inhaling the virus, but because they helped reduce the quantity of virus particles that an infected person might breathe out and pass on to others.

This never did seem entirely logical. Layers of fabric don't have any way of distinguishing whether a wearer is breathing in or out.  If a mask can intercept virus particles on their way out of the lungs, it seems more than likely that it can also intercept some on their way in. 

Lo and behold, the Centers for Disease Control (CDC) in the United States are now admitting this. This week the CDC has updated its guidance on mask wearing: it now says that cloth masks act both as a "source control" to limit exhalation of virus particles, and as "filtration for personal protection" to limit inhalation of particles shed by others. The new guidance quotes various studies on the benefits of increased mask usage, including the suggestion that a 15 percent increase in mask usage could prevent economic losses of as much as $ 1 trillion.

A lot of people have been conscientiously following masking rules for many months now, so does this  change of heart really matter? It almost certainly does. In societies with relatively limited social cohesion -- a category in which I would include most of the developed world, including the US and Canada -- asking people to do something purely for the benefit of others is not going to work for a significant portion of the citizenry. Asking them to do it for their own health and safety is likely to produce a much higher level of compliance. If the CDC had issued this advice months ago, and if it had been backed up by local health authorities, it's not hard to imagine that many thousands of lives would have been saved. 

Still, better late than never, right? Not necessarily. It's a safe bet that there are plenty of people out there who will ignore the CDC's advice -- I mean, you're admitting that what you told us all along was wrong, so why should we believe that you've got it right now? 

Canada's job market in October: not too shabby

Statistics Canada reported this morning that employment across the country grew by 84,000 in October, leaving the unemployment rate unchanged at 8.9 percent. This was a better than expected outcome, and came despite the imposition of new restrictions all across the country as the second wave of the pandemic set in. 

The media, predictable as ever, opted to focus on the fact that this was the slowest growth in employment since May. This headline on the CBC website, for example, refers to "only 84,000 jobs", even though that pace, if it lasted for a full year, would see employment grow by a full million jobs, something that has never even come close to actually happening. However, it must be acknowledged that there are still 630,000 fewer persons employed in Canada than there were before the pandemic hit, with a further 430,000 working less than 50 percent of their normal hours.   

The details of the report were generally favourable. Full-time jobs accounted for 69,000 of the monthly increase. Although there remains a hard core of over 800,000 part-time workers who would prefer to have full-time positions, total hours worked across the economy grew faster than employment, as underutilization in the labour force continues to edge lower. Three sectors -- wholesale trade, professional services and educational services -- have now surpassed their pre-COVID employment levels.  

It is inevitable that employment growth will slow further in the coming months. The "easy" part of the bounce-back from the first wave of the pandemic is over, and it is only now becoming clear which sectors of the economy may never regain their pre-pandemic levels of activity and employment. Moreover, new restrictions are now in place across most of Canada, although as StatsCan notes, these are more targeted than the restrictions imposed in March, and should thus have a smaller impact on employment. A fresh round of outright job losses may be avoided between now and year-end, but employment will not complete its return to pre-pandemic levels until a vaccine becomes widely available. 

Meanwhile in Toronto...

It's hard to know if the Province of Ontario scheduled its much-delayed 2020 budget for this week in the hope that the bad news would be overshadowed by the US Presidential election. You wouldn't entirely blame them if they did, because the budget tabled on Thursday contains a whole lot of red ink, and no path back to balance. 

The projected budget deficit for this fiscal year (which is, of course, already half over) is C$ 38.5 billion, almost four times larger than the pre-pandemic forecast. Total spending is projected at a record $185 billion, but the forecast deficit is also the result of a sharp fall in major revenue streams as a result of the pandemic*. The Government promises to set out a path for a return to balance in next year's budget but in the meantime offers three scenarios. In the base case, which assumes moderate but steady economic growth, the deficit falls to $ 33 billion in fiscal 2021/22 and $ 28 billion in the year after that. Slower growth would see a deficit of almost $ 36 billion in 2021/22, while a more optimistic economic scenario would cut that figure to under $ 28 billion.  

There are a lot of new measures in the budget, some specifically relating to the pandemic, others designed to help the economy to recover once the situation starts to improve. Total COVID-related spending is estimated at $ 45 billion over three years, although as much as two-thirds of this has already been spent. There will be $ 7.5 billion in new health care spending over the three year budget horizon, but this does not include any costs for the Government's recently-announced plan for improvements to the long-term care home sector. 

In terms of plans to boost the economic recovery, the budget offers relief for  businesses' electricity bills and property taxes. Smaller businesses will be relieved of the burden of paying a portion of their employees' health care costs. Interestingly, the Province will also make permanent a measure it introduced earlier in the year to allow restaurants to sell alcohol for consumption off the premises, for example with take-home meals -- one more remnant of "Ontario the Good" cast into the garbage can of history. 

Truth to tell, the Doug Ford government is at the mercy of events here, as it has been basically since the pandemic started. Depending on how things evolve, the actual outcomes, especially beyond this year, may be very much different from what was tabled yesterday. One striking thing about the deficit projections is worth noting: although the Provincial deficit has ballooned to unprecedented levels, the projected 300 percent increase in the shortfall for this year is way smaller than more than tenfold increase projected at the Federal level. It's Ottawa that has been carrying most of the weight here, and will continue to do so. No wonder Doug Ford is making nice with Justin Trudeau.  

* The major exceptions to this: revenue from liquor and cannabis sales, both of which are sharply higher.