Canada turns to a fiscal stimulus

It was only on Monday that I discussed the issue of fiscal stimuli where the European Central Bank in particular had shifted its mood music in favour. This of course is quite a contrast to the policies it has enforced in Greece and Italy for example. The whole debate has come about because in the junkie culture world of monetary policy they are seeing a similar situation to what is happening with antibiotics where far from being futile resistance is ongoing. Thus they need a new drug and so fiscal policy has been brought out again. Yesterday saw an example of this in Canada as the new Liberal government of Justin Trudeau announced its Budget. There is a follow through to the UK because the Bank of England Governor Mark Carney had strong links with the Liberal party so strong in fact that they invoked criticism for an “independent” Governor of the Bank of Canada.

The policy

First we got some Open Mouth Operations rhetoric and a dose of Hopium.

Today, we begin to restore hope for the middle class.

Who knew that things were so bad in a Canada that avoided much of the pain of the credit crunch via riding the commodity price boom as it resources industry cleaned up. Although of course just under 2 years ago the mood changed.

The decline in the price of oil and other commodities has hurt whole regions and provinces.

There was also a nod to a long running theme of this website.

Wages haven’t grown significantly since the 1970s.

It is rare that we get official admittals of that situation and we also get a suggestion that it might continue.

It’s no surprise that many Canadians feel they are worse off than their parents were at the same age—and that they feel the next generation will do worse than their own.

The Numbers

The speech itself was rather devoid of such details so let us turn towards the Financial Times.

Justin Trudeau has pledged C$60bn (US$46bn) in new infrastructure spending over the next 10 years, hoping to revive sluggish growth in Canada’s resource-rich economy.

It goes further with a suggestion of the economic benefits which might be provided by this.

The finance minister forecast that the stimulus would raise gross domestic product 0.5 per cent in the coming year and 1 per cent in 2017-18, creating an estimated 100,000 jobs over two years.

The particular winners were universities, green technologies, those with children ( Child Benefit increases), and poor pensioners.

Can Canada afford it?

There are changes here as the proposed fiscal deficit of around Canadian $ 10 billion has been replaced by one of this below.

The government said its deficit would deepen in 2016-17, to C$29.4bn, or 1.5 per cent of GDP,

According to the government the deficit would rapidly shrink.

but pledged to cut the deficit in half by 2020-21.

Rather oddly in the circumstances there was in the Budget speech something of a nod to the Fiscal Charter of UK Chancellor George Osborne.

By the end of our first mandate, Canada’s debt‑to-GDP ratio will be lower than it is today.

The track record of politicians making such statements is simply dreadful! However of course this cannot apply to Justin Trudeau who has only just taken office. Also the Canadian public finances are in better shape than those of the UK. The Fraser Institute summarised the numbers in January.

Combined federal and provincial net debt has increased from $834 billion in 2007/08 to a projected $1.3 trillion in 2015/16. This combined debt equals 64.8% of the economy or $35,827 for every man, woman, and child living in Canada.

Not quite as low as I was expecting but if we switch to the Statistics Canada numbers we see that central government owed Canadian $974 billion at the end of 2015 so like Spain a fair bit of borrowing is done at regional/provincial level.

Canada like so many other nations can borrow cheaply as its ten-year yield is 1.33% so for the next decade or so any borrowing can be financed at low nominal interest-rates.

Debt exists outside governments

Let me switch to an article in the Globe and Mail from Sherry Cooper of Dominion Lending Centres..

The housing industry is a strong feature of the Canadian economy right now.

In fact so strong that we see this.

Housing, particularly in the Toronto and Vancouver markets, remains one of the pillars of the Canadian economy……….Housing affordability in these two cities has been a concern

Sound familiar?

Affordable housing is a social issue for sure,…

I always enjoy this style of justification for a boom.

As well, household balance sheets have improved over all as household wealth has grown faster than indebtedness.

What she means is that house prices have risen so fast this has happened which of course hints at a trap as what happens if the growth stalls,ends or reverses?

We get a clue from the Bank of Canada.

Low interest rates and higher house prices have led to strong growth in mortgage credit, recently pushing up the year-over-year growth of overall household credit to 5 per cent.

And more from Statistics Canada.

The ratio of household credit market debt to disposable income (excluding pension entitlements) rose to 165.4% in the fourth quarter from 164.5% (revised from 163.7%) in the third quarter. In other words, households held $1.65 in credit market debt for every dollar of disposable income. Disposable income increased 0.6%, a slower pace than that of household credit market debt (+1.2%).

So we find that rather like in Ireland if one was looking for a debt problem in Canada we are more likely to find it at the household and bank level than at the national one. The housing bust in Ireland socialised a large amount of this debt and turned a strong public fiscal position into a dreadful one pretty much overnight. So the risk for Canada is concentrated in the housing and banking sectors.


If we look for the Why? of the fiscal stimulus then the Globe and Mail  pretty much gave us the rationale.

Unemployment, especially in the all-important energy sector, is reaching scary heights. Nationwide, the jobless rate hit a three-year high in February (7.3 per cent), and it could move higher.

So Canada has seen the good side of moving contracyclically with the rest of the world and is now seeing the bad. Expected growth of 1.4% this year ( Bank of Canada) would do little if anything to change that and so you can see the case for fiscal policy which has so many advocates right now. Also for the forseeable future it is cheap in bond yield terms.

The other side of the coin is what in Japan is called pork barrel politics or how well the money will be spent. Those who worry about official denials will note that one has been got in early.

smart investments and an unwavering belief

Ironically the Bank of England Underground Blog has just issued some research suggesting that it may not be all apple pie and sunny days.

Second, we revisit the magnitude of the government spending multiplier at the ZLB to document that demand-side fiscal stimulus can be much weaker than previously thought.

ZLB is the Zero Lower Bound for interest-rates which is the zone in which Canada is in at 0.5% albeit that they lower bound may get lower. Perhaps they should tell the international bodies cheerleading for a fiscal stimulus.

as governments are being urged to do by everyone from the IMF to the OECD to the G20.

Is that the same IMF that imposed a fiscal contraction on Greece, Ireland and Portugal or a different one? Remember this from 2013 when it admitted it had been wrong?

Finally, it is worth emphasizing that deciding on the appropriate stance of fiscal policy requires much more than an assessment regarding the size of short-term fiscal multipliers. Thus, our results should not be construed as arguing for any specific fiscal policy stance in any specific country. In particular, the results do not imply that fiscal consolidation is undesirable.

So let me leave the IMF singing along to Linkin Park.

I’ll face myself
To cross out what I’ve become
Erase myself
And let go of what I’ve done
For what I’ve done



5 thoughts on “Canada turns to a fiscal stimulus

  1. Thank you very much for writing a blog about the Canadian federal budget, Shaun. Great job as usual. It is a pity that you are not writing for the Report on Business at the Globe and Mail, but I guess you would have to move to Toronto if you wanted to do that.
    You really touch a nerve when you compare Canada to Ireland before the global financial crisis. You probably noticed that in Finance Minister Morneau’s budget speech he makes a point of saying: “our interest rates have never been lower, so we can borrow on excellent terms”. Since he is talking about infrastructure spending over the next four years, the logical conclusion is that the federal government plans to keep them interest rates low for long. And Mr. Morneau certainly can make it happen. He must renegotiate a renewal of the inflation-control agreement with Governor Poloz this year for the next five years. Although he doesn’t hand the governor his remit like the UK Chancellor of the Exchequer, in any such negotiation the Finance Minister definitely has the upper hand. So it seems that Canadians will be encouraged to build a larger mortgage debt mountain than we already have. It could all end in tears.
    The lovely Kristine Owram of the Financial Post remarked that although there is a lot of infrastructure spending in the budget, there was no marquee project like a new Champlain Bridge (referring to a bridge across the St. Lawrence River in Montreal) that the government could point to. A lot of people here in Ottawa were hoping for a new bridge between Ottawa and Gatineau but nothing like this was announced either. In 2002, under PM Chrétien, our own Champlain Bridge across the Ottawa River (it is the westmost bridge between Ottawa and Gatineau) was replaced in a single day, expanding from two lanes to three, with a reversible lane in the middle going towards Ottawa in the morning and Gatineau in the evening. It was awesome to watch a big new bridge go up so fast.

    • Hi Andrew

      Toronto is a long way from Battersea but on the other side of the coin when I worked abroad I did go even further (Tokyo). I am intrigued by the references to bridges which is partly shared in London as there are debates over a new bridge or two and what form they will take ( one proposal is for greenery on it and another for a pedestrian bridge). But the main issue local to me is the arrival of the “Tube” to this part of South London. I am no expert on Canadian infrastructure but in London you could build extra transport almost anywhere and it would work!

      As to low interest-rates and bond yields well that is the message coming from Tokyo and especially from Frankfurt as the new ECB LTLTROs stretch into 2021. However if you look south there will be pressure from the US Federal Reserve in the other direction and I am increasingly thinking April could see a move. Although I am thinking of the presidential election in that if they plan to move in 2016 they will want to keep it clear of that.

  2. Shaun,interesting piece.

    I think many thought Canada had managed to dodge the GFC because of it’s commodities.It turns out Paul Hodges (and others were right) and that demand wasn’t the driving force for higher prices but rather ‘financialization’ of derivatives in a QE/ZIRP world.

    From what I understand a lot of Chinese money has gone into Canadian properties,and as you point out
    ‘As well, household balance sheets have improved over all as household wealth has grown faster than indebtedness.’,that’s a rather hollow excuse for allowing an asset bubble to continue.It’s like saying,
    ‘real wages have gone nowhere but thankfully asset values are going higher more quickly than the debt that drives them.’

    Crazy times.Makes it ironic that we got Mark Carney for such a big transfer fee as if it makes him a better player?

    • Hello, Dutch. You are right about foreigners investing massively in Canadian housing. Tuesday’s budget had something to say about it (p.224):
      “Households rely on housing market data to make informed decisions in buying and selling their homes, while governments depend on data to design effective housing policies. Currently it is not possible to fully understand the role of foreign homebuyers in Canada’s housing market since a comprehensive and reliable data set on the number of homes sold to foreign homebuyers does not exist.
      “Budget 2016 proposes to address this data gap by allocating $500,000 to Statistics Canada in 2016–17 to develop methods for gathering data on purchases of Canadian housing by foreign homebuyers. This initiative could involve collaboration with the provinces, such as British Columbia, which recently announced its intention to have homebuyers disclose whether they are citizens or permanent residents of Canada or another country.”
      PM Harper promised something similar during the 2015 election campaign.


    Is this the BoE blog you refer too Shaun?

    Looks interesting although I doubt their definition of ‘challenging orthodoxies’ will be anything like mine.
    ‘Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies.

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