Curve Your Enthusiasm

After you get past the "wow!"

Episode Summary

Royce breaks down what’s ahead now that there’s a price-tag for the federal government’s pandemic response. He also welcomes the Hon. Lisa Raitt to the program to share her expert analysis of the government’s Economic and Fiscal Snapshot.

Episode Transcription

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Royce Mendes: Welcome, everyone, to Curve Your Enthusiasm. I'm your host. Royce Mendes, Executive Director and Senior Economist at CIBC Capital Markets. My usual co-host, Ian Pollick, Global Head of Fixed Strategy, is off this week. But I'm not alone. I'm thrilled to be joined today by a special guest on the program. Before I introduce her, however, let's do a quick rundown of what was announced earlier this week in the Government of Canada's fiscal snapshot. Obviously, everyone is talking about the headline deficit reading of three hundred and forty three billion dollars this year. But once you get past the initial gut reaction of saying, wow, that is a really huge number, you have to remember that this deficit is being driven by a shock to the economy like nothing we've experienced in our lifetimes. The initial hits to employment and business activity were orders of magnitude worse than the 2008 2009 financial crisis and occurred at a much, much faster pace. The consensus on Bay Street heading into the snapshot was for a slightly narrower deficit, but that was in large part because we didn't know there would be additional money allocated to the wage subsidy program and the traditional employment insurance scheme. The new spending suggests to me that we'll see the government trying to phase out the CERB after the extension runs out and transition support towards the wage subsidy and EI programs. I'd expect some sort of announcement in the next month or so since the wage subsidies were supposed to expire at the end of August. The other big news came from the drastic changes in the debt management strategy towards issuing far more in the long end of the curve. As Ian mentioned in his research, this probably means that Canadian duration has little chance of outperforming its G7 peers, particularly since the additional issuance is focused in the parts of the curve, which are most elastic to global rates. The move also calls into question the Bank of Canada's future QE considerations. We had expected that the central bank would transition its large scale asset purchase program towards a yield curve control method, focusing on the five year sector since many mortgages in Canada are priced off of that part of the curve. But the increased issuance, in tens and thirties, might mean that the central bank needs to pivot to keep long rates tamped down. Anyways, I'll leave it there and introduce our special guest for today's episode, who will provide us with her expert takeaways from this week's snapshot, the Honorable Lisa Raitt, former Minister of Natural Resources, Minister of Labor and Minister of Transportation, and now a Vice-Chair at CIBC Capital Markets. Welcome to the show, Lisa.

Lisa Raitt: Thank you very much, Royce. Good to be here.

Royce Mendes: By the way, for those wondering, she did tell me I could call her Lisa. I asked permission.

Lisa Raitt: No problem.

Royce Mendes: Lisa, what stood out to you most in the release?

Lisa Raitt: Well, there is a lot of information, but there's not a lot of plan. If you contrast what the Minister of Finance stood up in the House and delivered yesterday with what the chancellor of the Exchequer stood up in his house in London yesterday and announced, you'll see a stark difference. Our governments here in Canada is still trying to figure out how much money it is that is actually being spent, what the fiscal situation looks like, and very little in terms of what they're going to do next. And in London yesterday, it was all about, we are going to support jobs, we are going to protect jobs, and we're going to encourage job creation. So I would say that yesterday was a bit of a half step and that the big step to come is, OK, now that we know the damage, how are we going to make sure that the damages it stemmed, first of all? And then secondly, how are we going to make sure that we grow the economy again?

Royce Mendes: What were your political takeaways? And maybe talk about what you see as some of the priorities of the government?

Lisa Raitt: First of all, putting on my political and partisan hat, I would say that running an election on what kind of plan we have in order to restore the economy and to bring us back to pre COVID days would be an excellent platform. And I'm sure that their parties are trying to figure out right now whether or not this is something that should be put to the electorate in the form of an election. Everyone competes not on how much money is spent, but on how you plan on bringing us through this through this pandemic and the economic results. So if I take a look yesterday, Royce, at what was announced, I would, for listeners, I would give you my perspective as a former critic and a former minister. The way they presented it is pretty simple when you look at it, it's one hundred fifty three pages, which is a slog to get through. But for anyone who's wanting to check out what's going on, it's the last twenty five pages. That's the most important, because that's where they actually just give you the numbers and the detail as to what they've done and what they're going to do. So they start with where they said in the economic financial update in 2019, what the deficit would be next year. And that's twenty eight point one billion dollars, which, by the way, as a conservative, I was completely lighting my hair on fire. What a terrible number. Little did I know what we'd be facing in the months before and after. The first batch of numbers that come out from the government in terms of showing just what kind of fiscal hole we're in are the numbers associated with economic and fiscal developments? So the kinds of things that have had to happen, the loss of revenues, what they've done in taxes, in terms of deferring payment, and they say that that's going to cost about eighty one billion dollars. After that, they tell you how much their COVID-19 response has cost to date and they go through all of the actions that they've taken. And that comes out to about two hundred twenty seven, two hundred twenty eight billion dollars. And that third batch is what I find interesting. Our policy actions that they've taken that they haven't announced. That they've come in to say it's about nine billion dollars. Why I find that interesting is this is, I believe, what would have been in Bill Morneau's budget, dad you been able to present the 2020 budget in the normal timeframe of March of 2020. And it's in there, you see some non COVID things that they were going to try to do from a policy point of view. So you see the fact that they want to set up a sustainable financed public private commission to bring forward and to make Canada a market for sustainable finance. And you see the fact that they're focusing on mining, that they're going to renew a program that I had years ago when I was at Natural Resources called the GEM Program that actually helps you map the minerals and the resources in the north for the use of other companies so that the developers have a better idea. The way we used to say it is we will map out the haystacks and it's up to the companies to find the needles. So it's in that tranche that I find some interesting information as well as to how the normal functioning of the country is supposed to happen in the economy, heavy on environmental matters with a fair amount of money in there for the resources area as well. So those three buckets are incredibly important. Those three buckets are things that could change. We may need to spend more money on COVID. They're definitely going to come up with different policy actions. And then the third one about the economic and fiscal developments. It'll be interesting to see how that's going to do bounce around in terms of how people are reacting. The last thing I would say is in terms of the Canada Emergency Benefit, it is noted in the document that they have increased how much money they think they're going to have to spend in EI, Employment Insurance, in September as a result of people transitioning off of CERB. So to me, at the very least in the Department of Finance, they don't think that they're going to be extending the CERB beyond the end of September or the amount of weeks that they've already promised to Canadians.

Royce Mendes: That's great and aligns with our economics group's longstanding belief that we'll need to see a transition away from the CERB and towards programs that better align with incentives during the recovery. Now you talked about political parties using different recovery plans for potential election platforms. But I want to know how much you think the Canadian electorate cares about the actual level of the debt or deficits versus how much they're worried about support being there through what we expect to be a very long and winding recovery.

Lisa Raitt: Yeah, that's, first of all, I think Canadians can care about both and not have to be in one camp or another. They can care about the debt and the deficit and they can care about where the future is bringing you. And one thing that we've been starting to notice here in Canada is the level of anxiety and impatience that Canadians are expressing with one another. And I don't mean in the big protests that are happening. Notice yourself in your day to day contact, whether or not people have a bit of a shorter fuse and psychologists are now looking at it and nodding and saying yeah, we are noticing that there is this pent up emotion and it's a lot of stress on people, hearing about these large numbers, worrying about how we're ever going to dig out of it if should we dig out of it. And finally, what's going to happen next, pandemic, what's happening in the United States. So there's a lot of uncertainty. But I would say this. I would say that Canadians are going to be concerned about things that matter to their pocketbook and their house. So they're going to care very much about whether or not they're going to have a steady job, what's going to happen to their company and whether or not they can continue to live their life the way that they had lived their life pre COVID. And the other thing that I would say as well, and it's not by any means, it's an observation from a politician, a former politician myself, and one that's been mentioned many times in the political world, which is which is this. And it's not a slag on Canadians at all, but it's just a truism. If you're talking about a scandal, for example, that involves a 16 dollar glass of orange juice or somebody writing a check for ninety thousand dollars for expenses, Canadians can understand what that number is. And they know they have a point of reference, right? Oh, my gosh. Who would pay fifty dollars for a glass of orange juice? That's ridiculous. How dare they do that? But the minute you get into these humongous numbers in the billions, in the hundreds of billions, there's really not a big difference between 23 billion and 300 billion. It's just another set of numbers for them. And they have no grasp. Therefore, they're not going to be as in touch with what a three hundred billion dollar debt or deficit is going to be in a trillion dollar debt, it's going to be scary numbers, but they're not going to feel it themselves. What is closer to them is how they're going to be able to live day to day. So if you see taxes go up, if you see their kids not getting jobs, if they have continued problems in their work, then they're going to react to that as opposed to the bigger question. It doesn't mean they don't care about it. It just means it's not as close to their understanding of their world right now.

Royce Mendes: I'm going to pick out one word you said, and it was taxes. You know, the government is not committing to raising taxes or cutting program spending just yet. And a lot of mainstream economists would say that that's probably the right thing to do right now. Let's not focus on austerity or tightening our belts just yet. Let's focus on supporting the economy, because we know there are large multipliers involved with stimulus when the economy is in such a depressed state. We've seen estimates of every dollar of stimulus adds a dollar fifty of GDP and every dollar of tax hikes or program spending cuts could take as much as a dollar fifty out of GDP. Now, if you were in government at the moment, I'm going to put you on the spot a little bit and you can put your political hat back on or partisan hat back on. What would be the most important part of your recovery plan?

Lisa Raitt: So I would be giving you an idea of what a recovery plan would look like even before the Liberals have shown what a recovery plan looks like, because there hasn't been one that's been put forward yet in our government system, What we are currently dealing with is understanding what the impact on the revenues is going to be. We're understanding how we're just going to make it through this incredibly difficult time and make sure individuals aren't going to be impacted to the point where they're going to really end up suffering and hopefully all within a timeframe so that we're just waiting to see if we can find a vaccine or a treatment that's going to work so that we can unleash the economy again and hope that it goes back to what it was pre COVID. But all bets are off as to whether or not that's going to happen. One of the things that was always of concern when it came to this kind of stimulus spending or spending in lieu of having an actual economy functioning right now is what happens in the size of government. Conservatives, of which I am one, are always concerned about the size of government. And they should be, because once you start expanding the sizes of departments within the government, it's sticky money. It's easy to pump in, really difficult to get out. And as a result, you may end up with what we call structural deficits, meaning that the deficit is baked into the numbers every year going forward and without some kind of increase in revenues coming in, taxes, royalties, however else you can raise money from the Canadian public, then you're going to be stuck with these kinds of structural deficits. And during this COVID-19 response, there has been an increase in government not just to deal with the pandemic, but in general, like I said, there are different batches or different buckets of spending that the government released the last couple of days talking about where they saw their loss of revenues, where they're spending COVID-19 money and the policy actions that they have taken. And as a result of changes that they've decided they wanted to make in fulfilling their mandate that they were given in the Fall. And we have to make sure that as this stuff is rolled out, that the spending makes sense and that it's not just creating a larger bureaucracy. And to give some context, I would say right now there's probably about two hundred and seventy five thousand to three hundred thousand federal Canadian workers. And when I was in government and when I was a member of parliament, we used very shorthand calculation that each full time equivalent FTE was worth about, it costs about one hundred thousand dollars. And that, to me, as you can see, is as a fairly large number. And that when you talk about trying to curb costs, it's raise taxes or shrink the size of government because there's no way you should be looking at the other transfers that the government makes, which is to provinces or to individuals or through the employment insurance system. Those should be sacred. Those should be red circled. They should not be touched. That's the approach that we took as Conservatives. So there's only two places where you can work, you can increase your revenues or you can decrease the cost of the government that you control. And if the government you control is predominantly human resources costs, then politically really difficult to run on the notion that you're going to shrink government. Conservatives will love it, but everyone else will worry about whether or not their daughter or their son themselves is going to have a job. And that is the dilemma that politicians will face. So Conservatives will say, we're going to look at the government and make sure that it's the right size and that we're controlling our costs. The Liberals will deny that they're going to raise taxes. But at the end, if you can't grow the economy and by the way, this isn't post-World War Two when the last time we saw this kind of spending, it's a very different situation. If you can't grow the economy, there's only one place left to go, and that's either, well, two places really, to continue to run up a hundred million dollar deficits every single year and add to the debt because money is cheap and worry about your debt to GDP and all those kinds of things that the Liberals tell themselves. Or you raise taxes and you try to bring down what the difference is between what you're bringing in and what you're spending. One of them has to move. And it seems very simplistic, but it truly is as straightforward as that.

Royce Mendes: That's really where the difficulty is. It's worrying about how much this year's deficit is going to continue for years into the future. The hope is that the pandemic related spending will automatically almost wind itself down as the economy starts to recover. But as you point out, it's possible that some of this spending lingers for longer than we might like. You know, we've talked about in CIBC Economics, not needing to raise taxes or cut program spending, because if you take a one-time hit to the deficit and even if it's large or huge, like it is projected to be for this fiscal year, you can work that down if your economy is growing faster than your debt is compounding. And over the next 10 years, we certainly expect that to be true. If the government is borrowing at the moment for 10 years at zero point six or zero point seven percent. That's what it's compounding at each year. But we expect the economy to grow at roughly four percent in terms of nominal GDP. The problem is, if you can't bring those deficits back down, because then you start to have an issue with debt sustainability. And that's, I guess the crux of this conversation is when we see this update, which includes multiple years, the question is how much of the deficit is going to go away next year? You know, I could argue that we might still be in a position where pandemic related spending is necessary, but hopefully by 2022 we have a vaccine. And a lot of this is in the rear view mirror. Can we see the government commit to lowering that deficit? And not only, as you say, commit to having a stable debt to GDP ratio, but really commit to see it fall because moving forward, you know, it's going to be difficult with this large debt pile that we've accumulated for the government to enact some of the policies that it believed was in its mandate. For example, universal pharma care. You know, you've spent a lot of money on other things now. It will be incumbent at some point to figure out how we move away from worrying about GDP and the economy at the moment, which I think all mainstream economists agree is the right thing to do to discussing the fiscal sustainability moving forward. Now time for our last question. If there is ever a Prime Minister rate, are you going to promise to come back on our show?

Lisa Raitt: Well, it's not going to be me, Royce, maybe one of my kids may want to do it one day. That seems to be the way things are done here in Canada. But my time in politics was a wonderful time. Eleven years is a long time. And it's kind of, we kind of talk about it in the sense of how you do prison time. You know, I did my eleven years. I'm good. I'm fine. I'm happy to be out. And I'm really enjoying being back into the real world. I have to say, there's a lot of challenges that are going to be facing political parties and leadership in this country. They have to make sure that they're going to put aside ideologies and do the best that they can to bring us into what a post COVID world is going to look like. And it's got to be a realization as well that it's not going to look like the way it did prior to us all going home from work in early March. It's going to be a far different world and governments are going to have to be nimble and they're going to have to be able to meet the people where they need to be met.

Royce Mendes: Well, we're happy that you're staying here with us at CIBC Capital Markets. I'm going to leave it there. We thank everyone who tuned in this week and I'll leave you with the quote. No bonds were hurt in the making of this episode.

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