Friday, 24 April 2015

Ontario budget 2015: no jams tomorrow

It's a penny-pinching austerity budget!  It's an irresponsible spending blowout!  It's a fire sale of precious public assets! Judging from the media reaction, Ontario's 2015 budget, tabled on Thursday by Finance Minister Charles Sousa, can be interpreted in many different ways, depending largely on where the interpreter is sitting.  Let's take a look.

As far as the "austerity" part is concerned, the Province is sticking to its goal of eliminating its budget deficit by 2017/18. Considering Ontario's fiscal follies over the last decade -- which have seen debt balloon to about $300 billion, and attracted something like horrified contempt from the ratings agencies -- Sousa probably felt he had very little choice in the matter.  In order to meet the deficit target, which many economists think is entirely unrealistic, the Government plans to cut most program spending by about 5 percent this year, with the exception of health care and education, which will be allowed increases below the rate of inflation.

And the "spending blowout"? The big-ticket item is what appears at first glance to be a massively ambitious infrastructure investment program, with particular focus on transit and transportation, costing $130 billion.  Anyone who has tried to drive in rush hour in the Toronto area, or in any of the Province's other major cities, will understand the need for action before gridlock becomes even worse.  However,  it's not clear how much of this is really new money; for example, it includes the UP Express train to Toronto airport, which is basically complete and is set to open in just over a month. More importantly, and taking a leaf from the Federal budget unveiled earlier in the week, the money is to be spent over the course of a decade. For those interested in the details, there's an excellent analysis of the transit portion of the infrastructure plans here.

So how does the Government square its commitment to eliminating the deficit with all this infrastructure spending?  This may in the end prove to be the most contentious part of the entire budget.  One element of the plan is a loosening of Ontario's byzantine and anachronistic rules on the sale of alcoholic beverages.  The unloved "Beer Store" run by the major brewers (all now foreign-owned) will shortly start to face "competition" from supermarkets; "competition" in quotes because there will be no price competition allowed, the supermarkets will only be allowed to sell 6-packs, and only a limited number of stores will be granted licenses. Wine sales will also  be revamped later, if the Province can figure out a way to favour domestic producers without attracting lawsuits from every wine producer from California to Chile. This is all well and good, but all of these changes -- plus a small increase in the tax on beer, the only new tax in the entire budget -- will only bring in about $100 million per year, which doesn't build a lot of streetcar tracks.

More contentious is the previously announced plan, now firmed up, to sell about 60 percent of Hydro One, the power distribution network, to private investors. This is supposed to bring in $4 billion, which may help to close the deficit on a one-time basis, but will ever after deprive the Province of much of the hundreds of millions that Hydro One pays in dividends each year.

This sale is a real head-scratcher. Ontario governments of all stripes have badly botched past privatizations, at untold cost to the taxpayer.   Edmund Clark, former CEO of TD Bank (full disclosure: also my former boss), who was hired by Premier Kathleen Wynne to seek out ways to monetize public assets, initially recommended against it.  As a former banker, Clark no doubt realized that in the current low interest rate environment, it would be possible to raise far more money by hypothecating a portion of those dividends in support of debt issuance than by selling off a stake in the company.  Evidently the Government's desire to be "fiscally responsible" (i.e. not to borrow even when borrowing makes sense) has won out, and the die is cast.

In a sense, then, all three characterizations of the budget that we started out with -- austerity, spending spree, asset fire-sale -- are sort of true.  The Government is trying to spin all three of them as positives, in the face of scorn from the opposition parties and cries of pain from vested interests. In the end, boxed in by the toxic fiscal legacy of their predecessors, notably the feckless Dalton McGuinty, Wynne and Sousa maybe did as well as they could with the cards they were dealt.    

Wednesday, 22 April 2015

Canada's Federal budget 2015: jam tomorrow

Finance Minister Joe Oliver delivered the Harper government's budget on Tuesday. There were few surprises -- many of the key measures had been announced well before budget day, as the Tories build their platform for the October election. Truth to tell, there was also very little substance, despite the documents running to well over 500 pages.

The Harperites have been insisting since the last election that they would achieve a balanced budget this year, and on the face of it, they seem to have achieved that -- but only just, and only through some accounting trickery. The surplus for the year is expected to be C$ 1.4 billion, compared to a year-ago expectation of $ 6 billion. But even this tiny surplus is only being achieved by booking the profits on the sale of the government's GM shares (taken on as part of the bailout at the height of the financial crisis) and reducing the contingency allowance in the budget from $ 3 billion to $ 1 billion. Those contingencies started to appear in budgets all the way back in the days of Paul Martin's tenure at Finance, two decades ago.  The annual amount has always been kept at $ 3 billion, so the fact that Oliver has been compelled to go for a much smaller amount is a significant admission of failure.

Oliver announced before budget day that the government would introduce balanced budget legislation, a remarkable act of chutzpah for a government that's run deficits for seven years in a row.  Fiscal projections for the out years show a succession of balanced budgets, but this is only achieved by maintaining the annual contingency at $ 1 billion. The budget leaves the government (or its successor after the election) with almost no wriggle room in the event that revenue growth falls short of expectations -- and there are no more GM shares to be disposed of.

On the personal tax front, the Tories have gone ahead with two previously-announced measures that have been widely condemned as benefiting only the better-off. A so-called family tax credit will allow income splitting between couples, where one of the partners is in a higher tax bracket than the other. If you're a hedge fund manager and your partner is flipping patties at Mickey D's, you'll make out like a bandit; otherwise, not so much.

The Government will also almost double the allowable contribution to tax free savings accounts (TFSAs), to $10,000 per annum. In one sense this seems almost pointless: almost 90 percent of the theoretical maximum capacity for individuals to contribute to TFSAs is unutilized anyway. Needless to say, however, wealthier Canadians will be quick to take advantage of the increased tax shelter. The less well-off can only look on.

There's an interesting sideline here, by the way, and it casts some light on the fecklessness of the Harper government.  One argument against increasing the TFSA limits has been that it will hit Federal and provincial tax revenues down the road; interest or dividends earned on any money put into a TFSA is not taxed, and withdrawals from the accounts are also tax-free. Asked about this today, Joe Oliver said that problem should be left to Stephen Harper's grand-daughter to solve!  Well, at least we now have confirmation of how far ahead the government can be bothered to think.

As far as measures not previously leaked are concerned, there were plenty of announcements and some grand-sounding numbers, but mostly with one common characteristic: no actual money will start to flow for several years. For example, the government will set up a fund to partner with the private sector in developing transit systems, but the amount is picayune in comparison to what's needed -- never rising to more than $ 1 billion a year -- and there will be no money at all until 2017.  A long-anticipated tax cut for small business is included in the budget, but it will be phased in over four years.

It hardly need to be pointed out that promises of spending or tax cuts several years out are essentially meaningless.  They're not binding even on this government, let alone any government of a different stripe that might take over after the election. Liberal leader Justin Trudeau has already said he will  reverse the TFSA hike if he wins in October. (Note to self: get over to the bank right away!)  In a sense, this is just the kind of reaction Harper and Oliver are hoping for. Put all kinds of goodies, real and promised, out there, and defy the opposition to say they'd take them back. There's a lot of visceral dislike for Harper in the land, but if he can persuade enough people to put that aside and vote their pocketbooks, he just might manage to squeak back into office.

Friday, 17 April 2015

Don't Bank on it

Sorry if I seem to keep coming back to this topic, but....

At its monthly policy-setting meeting this week, the Bank of Canada opted to maintain its key interest rate at 0.75 percent.  The Bank lowered its GDP growth forecast for the full year to 1.9 percent, but now seems to expect the economy to bounce back reasonably smartly from the setback caused by the collapse in world oil prices.  As the Bank expresses it, the impact of the oil price plunge is turning out to be more front-loaded than it previously assumed.

It would be fair to say that a good number of the usual experts on Bay Street do not share the Bank's optimism, and it's not hard to see why.  This is the same Bank that blindsided everyone by cutting rates in January, sounding almost panic-stricken.  Then it blithely suggested that it had the luxury of time to assess whether the January move would suffice to get the economy back on an even keel.  Then Governor Poloz warned that economic data for the first quarter of the year would be "atrocious", just days before StatsCan reported that GDP in January recorded an almost insignificant decline. And now the Bank is again on the sunny side of the street, stating in effect that the impact of the oil price decline is largely behind us.

The stream-of-consciousness approach to monetary policy that the Bank has adopted under Gov. Poloz is without recent precedent*.  Most central bankers strive for consistency in the message they provide to markets and to the general populace.  It's hard to know what Poloz imagines he is up to, but no doubt the volatility he is creating just about every week will continue to be welcome news for currency and money market traders.

* Unless perhaps Poloz is modelling himself on the time that Che Guevara was in charge of the central bank in Cuba right after the revolution!  

Tuesday, 14 April 2015

Ontario's year of the CAT

The Ontario government has announced that the Province will introduce a so-called "cap-and-trade"  (CAT) system in a further effort to curb greenhouse gas emissions.  Smart move, too little too late, or just another tax grab? Let's take a look.

We can begin by addressing one of the criticisms that's already been heard from the environmental movement: instead of CAT, Ontario should have imposed an outright carbon tax in order to change behaviour all across the economy. Well, there may not be anything actually labelled as a carbon tax in Ontario at the moment, but look at the facts.
  • Ontarians already pay some of the highest prices in North America for electricity, despite having one of the world's most recognizable and long-established renewable power sources at Niagara Falls. Power bills have shot up in recent years as a result of previous governments' commitment to phase out coal-based generation (now accomplished) and to provide hefty subsidies to renewable alternatives, such as wind and solar. The generating system is so messed up that surplus power frequently ends up being sold at a loss to neighbouring jurisdictions.  Millions of "smart meters" have been installed to allow punitive rates to be charged for electricity use in peak periods. Yet the Energy Minister recently pointed out, with something that sounded almost like pride, that electricity bills will rise by a further 10 percent in each of the next three years, as Ontario continues to pursue its "green" goals. 
  • Fuel for transportation is already heavily taxed by the Province, with the result that the recent rout in global energy prices is far from being fully reflected at the gas pumps.

All in all, you'd have to say that if high energy prices were sufficient to persuade corporations and citizens to curb their energy use, Ontario should already be one of the least-polluting jurisdictions on the continent. But it isn't, so maybe it's no surprise to find the Province looking at the more dirigiste  approach of CAT instead.

CAT, as the name implies, involves setting an overall cap on carbon emissions, with businesses then allocated pollution quotas. Those quotas can be sold (traded) by companies that don't need them to those that do. This is supposed to create incentives for companies to become more fuel efficient over time.  Ontario has provided absolutely no details of how its scheme will work, but two things seem certain: there will be a lot of bureaucracy, and all manner of investment banks and such will be gleefully figuring out ways to get in on the "trade" part of the action. Come to think of it, that means that three things are certain, the third being that someone (ultimately the taxpayer) is going to be footing the bill.

Business reaction has been muted so far. General Motors almost seemed to welcome the CAT announcement, seizing on the opportunity to toot the horn for its expanding line of electric and hybrid vehicles. However, Jayson Myers of the Canadian Manufacturers Association was more cautious, warning that CAT might prove to be just another factor helping to force businesses out of the Province, unless some of the revenues were used to help firms to pay for more efficient equipment. I suspect that the Government will retort that it's businesses' own responsibility to do that, and in any case it's clear that the money is already spoken for, as far as the Government is concerned. The proceeds will apparently be applied to environmentally-friendly uses such as transit expansion, an area in which Ontario's needs are immense.

In adopting CAT, Ontario is joining its neighbour in Quebec and a number of other significant North American jurisdictions, including California and British Columbia, in attempting direct controls on polluting activities. Even after the wholesale factory closures in recent years, Ontario is much more dependent on the manufacturing sector than any of those other jurisdictions, so it has more to lose if the scheme goes awry and, as the CMA's Myers warns, drives more businesses out of the Province. As more details of the likely costs emerge, CAT is likely to become unpopular among voters, and success is far from assured.  Still relatively early in her term in office, Premier Kathleen Wynne is taking her biggest gamble.      

Sunday, 12 April 2015


According to this article, the weird North American weather this past couple of winters -- benign out west, frigid in the east -- may be due to a "blob" of warm water that's parked itself in the Pacific.  That's according to one group of scientists, who are risking their careers by suggesting (those of a sensitive disposition should skip the next few words) that the blob may not actually be the result of global warming.

Up till now, the favoured theory has been that global warming is inducing a loosening of the "polar vortex", the wind circulation that normally bottles up the coldest air in the Arctic, and that this has been forcing cold air to the south and east.  Then again, if you read on in the linked article, you'll find a reference to another guy who thinks the culprit is warm water a whole lot further south, near Papua New Guinea.

And the theories don't end there. Meteorologists in North America have discerned a link between the snow pack in Siberia and winter temperatures in eastern North America. The last two years have seen exceptionally large snow pack in Siberia, and sure enough, there have been two very cold winters in a row from the eastern Prairies all the way to the Atlantic coast.

So if there are four possible explanations for recent weather just in this part of the world, how can climatologists claim that "the science is settled", when it obviously isn't? And why do the rest of us allow ourselves to be cowed into submission by the bully-boy fringe among climatologists, when it's clear they don't understand nearly as much as they want us to think they do?

Still, enough about the climate -- let's talk about the weather!  Beautiful spring day today in God's country, under cloudless skies. Neighbours coming out of hibernation, trees and vines starting to bud.  Bring it on!  

Thursday, 9 April 2015

The income tax maze

If you could design an ideal income tax system, what would it look like? ("None" is not an acceptable answer).  Progressive, probably, if your politics lean to the left; flat rate, if to the right.  All types of income treated the same, if your politics lean to the left; special treatment for investment income and capital gains, if to the right. But regardless of your politics, you'd probably want to keep the system simple and transparent, and make it as hard as possible for people to avoid paying their due.

So how on earth did Canada end up with the system it currently has?  Income is taxed at different rates by the Federal Government and each of the provinces, with different exemptions and thresholds.  The array of possible deductions and wheezes is growing exponentially by the year.  Let's just take a look at some of the items in the 2014 Federal tax return as applied in the Province of Ontario.  Note that I'm not saying that all of these are unreasonable, but there are just so damn many that it's all but impossible to know whether the system is fair any more.  

There's a "disability supports deduction", but there's also an "infirm dependants amount" and a "caregiver/disability" amount.  There's a "Canadian forces police deduction" and one for "volunteers (firefighters/rescue)".  You can claim deductions for security options, physical and artistic activities and public transit passes.  You can get tax credits for making contributions to a political party, or to something called a labour-sponsored fund.  If your employer helps with your moving expenses, that's taxable, but if you receive a loan to help you relocate, the interest payments are deductible.

And so on, and on.  The origins of some of these things are lost in the mists of time (I wouldn't be surprised if "labour-sponsored funds" are mentioned in the Old Testament), but others are of much more recent vintage. The current Tory government is particularly fond of targeted tax relief aimed at shoring up its core voter base, but to be fair that doesn't really differentiate them at all from their predecessors.

Tax reform and simplification is long overdue, but each of these targeted deductions and credits and what all else has built up its own little constituency over time.  There'd be hell to pay for any party that proposed throwing the whole lot onto the bonfire, so in all likelihood the system will just keep getting more and more complicated, further and further removed from the ideals of fairness and simplicity.

Monday, 6 April 2015

Poloz of confusion

These are confusing times for anyone trying to make sense of what's happening in the Canadian economy -- and the Bank of Canada seems determined to add to the confusion.

Recall that back in January, Bank Governor Stephen Poloz surprised just about everyone by cutting the Bank's key interest rate by a quarter point, citing oil-based weakness in the economy. His comments to the media, then and subsequently, led most experts to forecast that another rate cut was imminent. By early March, however, Poloz signalled that the Bank in fact had plenty of time to assess whether the January move would prove effective; no further cut was forthcoming, and some pundits came to the conclusion that the latest mini easing cycle might be at an end.

Then, a week ago, Poloz was at it again, warning that growth in the economy in Q1/2015 would be "atrocious".  He could perhaps have timed his remarks better, because just a day later, StatsCan released GDP results for the month of January that showed a nugatory 0.1 percent decline -- disappointing, no doubt, but hardly atrocious. Now of course, Poloz was talking about the entire quarter, not just a single month, but the net result of his warning of impending doom and the subsequent blah data just added to the confusion. That's something central bankers should try to avoid.

And now this. Today the Bank has released its quarterly Business Outlook Survey, which is based on a survey of 100 companies across Canada.  Truth to tell, the report is not that bad: 80 percent of respondents say they will be hiring as many or more workers in the coming months as in the recent past, and the pace of overall sales growth is expected to remain near recent levels. There's weakness in the oil patch and related sectors, but companies with strong business links to the US are upbeat, reflecting both the weaker exchange rate and the continuing expansion in the US economy. The report may not be gangbusters, but it's not atrocious, either.

But how do the media portray it?  Well, check this out at the CBC website. It's true that the media will always look for the dark side of any story. Still, the Bank can have only itself to blame, in current circumstances, if a report that seems to show that the current policy stance, and especially the weak dollar, may be working as the Bank hopes, is presented to the public as new evidence that the economy is in precipitous decline. In the current jittery mood, that could prove to be a self-fulfilling prophecy.

It's not bad news for everyone, though.  It seems that Poloz's capriciousness has helped push volatility in the Canadian government bond market to the highest level seen in two decades. Lots of money to be made for astute Masters of the Universe, then.  I'm sure we're all happy about that.