• Posthaste: Canada's soaring debt isn’t as bad as the ‘90s fiscal crisis yet — but it’s getting there

    Source: Financial Post - Top Stories / 13 Aug 2020 08:47:09   America/New_York

    Good morning! Canada has pulled out the stops to support the economy through the coronavirus crisis, flooding the system with aid while piling on record debt. Four months into the lockdown we are now getting a sense of the damage. Federal government aid programs such as CERB and CEWS have yielded an unprecedented peacetime deficit and debt near 50% of GDP, up from 31% before the pandemic, TD economists Derek Burton and Rishi Sondhi say in their update on government finances this week. The economists say the combined federal-provincial shortfall is on track to reach about $420 billion or about 20% of GDP this year. The combined debt level is poised to surge to an unprecedented $1.9 trillion or 85% of GDP. “This latter measure remains shy of the heights recorded during the 1990s fiscal crisis. However, that gap could close as governments likely undertake further transitionary support during the recovery phase in the months ahead,” they said. The federal government has shouldered most of the burden, but TD still expects provincial budget deficits to rise roughly to the peak seen during the fiscal crisis in the early 1990s. Ontario this week projected its budget deficit would widen to a record $38.5 billion this year, almost double the $20.5 billion forecast before the pandemic. However, provincial credit ratings, for the most part, have remained sound, which will keep borrowing costs down, TD said. Municipalities are another matter. The pandemic is costing cities more through extra sanitation and taking care of those in need, while sapping their revenue. Transit ridership has tanked, but these systems have to keep running. Big cities also tend to be hot spots for the virus, which will slow the reopening of the economy. Legally unable to run a deficit, local governments have had to cut jobs to reduce costs. The Federation of Canadian Municipalities in April warned that cities could face a fiscal hole of at least $10-$15 billion. The federal and provincial governments have since announced support that could total $10 billion, but TD predicts more will be needed. But there is good news. The big difference between this crisis and the early 1990s is the cost of borrowing. Back then debt service costs were rising unsustainably; now they are historically low. TD expects ultra-low interest rates will keep Canada’s debt burden manageable, but more work needs to be done. Canada has so far kept one of the highest debt ratings among major economies, though Fitch did downgrade its rating to AA+ from AAA. TD said fixed income investors have been “turning a blind eye to mounting government debt loads,” but that won’t last forever. To address this Ottawa needs to map out how it plans to get its finances back on track as soon as possible, said the economists, who hope for an update in the fall. “Without a path to fiscal sustainability, further credit rating downgrades will likely follow,” they said. _____________________________________________ Was this newsletter forwarded to you? Sign up here to get it delivered to your inbox. _____________________________________________________________ BUMPER CROP Farmers harvest winter wheat near Brunkild, Manitoba this week. Wheat production in Canada, excluding durum, may reach 31.9 million metric tons, up 16% from a year earlier and the biggest harvest ever, according to results reaped from a crop tour by FarmLink. “Wheat was beyond good looking in the samples,” said Neil Townsend, chief market analyst at FarmLink. The crop “consistently looked like record or near record potential.” Durum output is forecast at 7 million tons, a 41% increase from last year, according to the data. Canola production is seen rising to 20.2 million tons, up 8.5% from a year earlier and one of the biggest harvests ever. Shannon VanRaes/Bloomberg _______________________________________________________ International Energy Agency releases monthly oil market report The Parliamentary Budget Officer will post a new PBO legislative costing note entitled Canada Emergency Wage Subsidy (CEWS) Catherine McKenna, Minister of Infrastructure and Communities, announces a new initiative to support communities as they adjust their public infrastructure priorities to the realities of the COVID-19 pandemic CRTC deadline for comments on process for setting wholesale telecom rates AirBoss of America’s president speaks at Canaccord Genuity’s 40th Annual Growth Conference Todays’ Data: U.S. initial jobless claims Notable Earnings: Brookfield Asset Management, Chorus aviation ___________________________________________________ _______________________________________________________ CMHC says its share of mortgage market has shrunk to dangerous levels because of tougher rules Groggy Europe keeps stocks shy of record highs Oil steady after IEA lowers demand forecast, U.S. stocks fall Bank of Canada extends oversight to Interac’s e-Transfer service as digital payments surge Ontario forecast for budget deficit almost doubles to $38.5 billion For this shopaholic millennial lawyer, lockdown on CERB was a financial wake-up call Howard Levitt: When there’s a conflict, senior executives must declare it. Ex-McDonald’s CEO Easterbrook did not Cannabis industry gearing up for wave of mergers and acquisitions amid prospect of U.S. legalization Canadian french fry maker McCain comes to the rescue of U.K.’s struggling potato farmers ____________________________________________________ The market share of the Canada Mortgage and Housing Corp. is shrinking and that has its CEO worried about the economy. In a letter urging lenders to “reconsider” offering mortgages to highly-indebted borrowers obtained by Bloomberg, CEO Evan Siddall said tighter rules introduced earlier this summer has reduced its share of the mortgage insurance market. “We are approaching a level of minimum market share that we require to be able to protect the mortgage market in times of crisis,” he said. Siddall believes house prices will fall as government aid programs run out later this year, which could put highly-leveraged home buyers under water, as loan defaults increase in a flagging economy. ____________________________________________________ In Canada, 50% of capital gains are taxable. That means if you sell an investment for more than you paid, half of that profit gets added to your taxable income. Our content partners at Moneywise can help you calculate how much tax you owe and how to offset the tax hit with these strategies. ____________________________________________________ Today’s Posthaste was written by Pamela Heaven (@pamheaven), with files from The Canadian Press, Thomson Reuters and Bloomberg. Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? 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