We have had excellent news this week about how governments are supporting individual Canadians and businesses to bridge this period of time when businesses are closed and workers are staying at home. Today we will look at economic growth under a magnifying glass, explore the ways we are benefitting from this stimulus, and how the benefits may be funded.
1. Federal Fiscal Stimulus
On March 25, the federal government approved up to $52 billion in funds to directly help Canadians, nearly double the $27 billion amount announced a week earlier. The Canada Emergency Response Benefit will offer $2,000 monthly in direct support to Canadians who lose their jobs because of COVID-19, and provide top-ups for child benefits and GST cheques. Businesses will be able to defer paying taxes, access loans of up to $40,000 through the new Canada Emergency Business Account program, and be elilgible for a wage subsidy of 75% to allow small and medium-sized businesses to keep employees on their payroll.
2. Ontario Fiscal Stimulus
The Ontario government unveiled a $17-billion plan on March 25 to protect businesses, households and public services from the financial fallout of the novel coronavirus. Ontario announced an increase to payments to parents and new spending for healthcare. Ontario has also announced power costs will be at the lowest levels 24/7 instead of extra charges for use during peak times. Students will receive relief on provincial loans and interest. For business, Ontario proposes a five-month holiday from penalties for tax filings, deferral of WSIB expenses, a refundable corportae income tax credit, and an exemption to employer health premiums.
3. Monetary Stimulus
To address the economic impact of the coronavirus and to stimulate economic growth, the Bank of Canada cut its benchmark rate by 50 basis points on March 27, following its March 16th rate cut of 50 basis points, so that today the benchmark interest rate is just 0.25%. In addition, the Bank of Canada announced a Commercial Paper Purchase Program, a type of Quantitative Easing. Quantitative Easing (QE) is monetary policy whereby a central bank buys predetermined amounts of government bonds or other financial assets in order to add money directly into the economy. The Bank of Canada rate decisions impacts short-term rates, and with an aim to reduce long-term rates, the Bank of Canada will begin acquiring long-term debt or bonds on the secondary market. The lower interest rates are intended to stimulate borrowing, spending, and economic growth. This week, the Canadian dollar dropped on the news that Canada is introducing Quantitative Easing, and the lower the dollar and is intended to boost exports and help our economy. The US Federal reserve has also announced it is reviving its QE program.
How might this economic stimulus be funded? While we cannot say what will happen in future, here are a few means of funding the current support for our economy.
1. Public Debt
With the rise in spending and a declining tax base, federal deficits could grow to 5.2% of GDP in 2020-2021. The Parliamentary Budget Office (PBO) released a report on March 27th stating the federal government's deficit for 2019-2020 will be $5.5 billion higher than in the November 2019 projections, and the deficit may grow to $112.7 billion in 2020-21. These estimates could bring Canada's debt-to-GDP ratio to 38.1%. Finance Minister Bill Morneau has said that Canada remains in a good position, having lowered our debt as a percent of the economy compared to other nations. Ontario’s deficit for 2020-2021 is now also projected to be $20.5 billion, up from an estimated $9.2 billion a year prior. The emergency federal bill to help anxious Canadian families and employers was passed March 25th. The final bill backed down on an earlier draft that would have given the government unilateral authority to spend, borrow, or change taxation levels for 21 months without parliamentary approval. Going forward, we can expect proposals and parliamentary debates on increased spending, borrowing, fees or taxation and it would be prudent to manage your finanial planning accordingly.
Inflation means increasing the cost of goods and services. Some economists, such as Milton Friedman suggest that inflation can effectively be a form of tax, as consumers are able to buy less with their income. Inflation hurts lower-income earners disproprtionately as they spend a higher percent of their incomes on necessities. During the last decade, we saw that QE can stabilize banking operations, keep interest rates low, and increase confidence to boost the economy. QE was also intended to increase lending to business to increase their operations and hire more workers, yet instead of creating true economic growth, QE resulted in the creation of "asset bubbles" overvaluing real assets such as commodities, real estate, and stocks. As the price of stocks was reported in more dollars, the price/earnings ratios rose, and that boosed the share prices. Since Quantitative Easing increases the money supply, it reduces the value of each dollar so that foreign currency costs more, and real assets are quoted in more dollars. Public debt is now such that QE may become permanent means to help governments service their debts, and central banks may select corporate bonds to purchase or private corporations to receive this support. From an economic perspective, debasement of our currency hurts those who save or hold cash, and rewards those who have debt or who have real assets (stocks, real estate, gold).
3. Bank Recapitalization (Bail-In)
Remember the government bail-outs of corporations in the financial crisis of 2008/09? As a result of that, in 2015 the G20 countries including Canada have passed policies for Bank Recapitalization "Bail-In" regimes. In Canada legislation was introduced in 2016 and passed in 2018 so that in the unlikely event oa a large bank failure, the bank would be reinvorced by shareholders and bond holders, not by taxpayers or government bail-outs. Banks regulated federally have deposit insurance from CDIC while Ontario credit unions have deposit insurance from DICO. Those at risk of a bail-in in the event of a failure are subordinated debt holders, bondholders, preferred shareholders and any accounts in excess of amounts covered by deposit insurance. Their bonds, preferred shares, or deposits could be converted to capital to re-capitalize the banks. This scenario is not expected, as Canada's banking sector is extremely secure, but one would be wise to observe and remain within the deposit insurance limits to protect your deposits.
In summary, we appreciate the leadership we have seen to encourage Canadians to work together against the health and economic impact of COVID-19. It is wonderful to see communities pulling together to support and protect and help one another. From an economic perspective, it would seem wise to keep cash values within deposit insurance levels, to prepare for increased inflation (debasement of currency and increased costs), potential bubbles in the value of real assets, and increased taxation.
This article is for educational purposes only and ideas for future performance should not be relied on for advice. Please speak with your professional investment advisor before taking any action.
As always, you may contact our office should you wish to discuss your financial plans or portfolios.
Elaine Kelly MBA CFP FCSI
Senior Investment Advisor Manulife Securities Incorporated
Stocks, bonds and mutual funds are offered through Manulife Securities Incorporated.
This publication contains opinions of the writer and may not reflect opinions of Manulife Securities Incorporated. The information contained herein was obtained from sources believed to be reliable, but no representation, or warranty, express or implied, is made by the writer of Manulife Securities Incorporated or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of any offer to buy any of the securities. The securities discussed in this publication may not be eligible for sale in some jurisdictions. If you are not a Canadian resident, this report should not have been delivered to you. This publication is not meant to provide legal or account advice. As each situation is different you should consult your own professional Advisor for advice based on your specific situation.