Month: January 2017

Ep 16: The O’Leary Factor

Sick of President Trump already? Let’s talk about who everyone’s calling Canada’s Trump instead: Kevin O’Leary! Yes, he’s finally entered the Conservative Party leadership race, but will he get eaten in the shark tank? Next, a real newspaper – The New York Times even – noticed BC politics. Will their expose on BC’s “Kafkaesque” fundraising rules swing the election? And Prime Minister Justin Trudeau is on a storytime tour to connect with real Canadians but seems to only be running from gaffe to gaffe. Will this harm his next term?

And in our quick takes, we look at a lawsuit launched by First Nations groups against the Kinder Morgan pipeline, a Mainstreet poll showing Gregor Robertson is the least popular mayor out of 10, a curious shakeup in the military and whatever the hell is going on in Alberta’s Progressive Conservative Party leadership race.

All this and more on this week’s PolitiCoast.

Links

The O’Leary Factor

Someone noticed us!

Trudeau storytime

Quick takes

Ep 15: Trudeau’s friends with benefits

Trudeau shuffles his cabinet to to get burned by the Washington dumpster fire. The Prime Minister’s ethics are questioned after revelations of a secret vacation with a family friend, the Aga Khan who also runs a nonprofit receiving government funding. The Prime Minister’s flight to the island on Khan-Air likely broke the Conflict of Interest Act. The BC government gives approval to Kinder Morgan with additional conditions. Department of Finance projects deficits until 2055. Focus groups conducted by the Federal Government hint at possible, Netflix taxes, “moonshots” and air and sea port privatization on the agenda for 2017. Richmond decides to ban Airbnb but doesn’t know how. Finally BC election nominations as “bear rescuer” Bryce Casavant becomes the NDP challenger to Green Party Leader Andrew Weaver and independent Vicki Huntington, decides not running again.

All this and more on the latest PolitiCoast. Please make sure to subscribe and rate us.

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Looming Fiscal Crisis? Why the Latest Finance Report is Neither a Harbinger of Doom Nor Cause for Complacency

Last week the Toronto Sun published article with the alarming, but not out of character headline Buried government report reveals looming fiscal crisis about the Update of Long-Term Economic and Fiscal Projections report from the Department of Finance Canada, which was released just prior to Christmas. The Department of Finance’s report projects the federal budget will remain in deficit until the year 2055. In a reaction that will surprise no one, the Conservatives and right of center pundits worked themselves up into a frenzy over the news. I got fundraising emails railing against Trudeau’s reckless spending from more or less the entire slate of Conservative leadership candidates. They do have a point. When the previous conservative government left office the budget deficit was around  $5 billion and projected to be balanced in the upcoming fiscal year. And even when Trudeau promised deficits they were to be small and end by 2019. Even with the new spending the debt to GDP ratio would decline every year. Going from a 4 year deficit to a 30 year deficit is understandably a cause for concern.

 

Fortunately politics is ever the lover of hyperbole and the damage to Canada’s fiscal health falls far short of “crisis”. Projected federal debt to GDP peaks at 31.9% in 2018-2019 FY. The trend line goes in the wrong direction but does not cross into the Danger Zone. Furthermore as Yogi Berra is alleged to have said “predictions are hard, especially about the future”. The projections are based on extrapolating current spending forward and applying demographic and economic forecasts to those extrapolations. The probability of no change in government spending beyond merely adjusting to changing demand over the next 29 years is low, its very low. Even Justin Trudeau doesn’t hope he is PM in 2055.  Long run governments do keep the same policies in place year after year, they change as circumstances and the political winds change. This is the scenario where the budget is left to balance itself, as Trudeau famously quipped. In all likelihood some Prime Minister between now and 2055 will endeavor to balance the budget.

 

Chart 4 – Federal Debt to GDP Ratio

Whether those efforts will be successful is another question. A lot can happen on the time span of decades [citation needed]. There is too much uncertainty to brush off the concerns with a “don’t worry everything will be alright”.  As Chart 4 in the report shows there are a wide range of possible outcomes just from moderately adjusting the variables in the model. We could pay off the whole $636 billion federal debt or have a spiraling debt that pushes debt:GDP up by more than 20 percentage points. By far the biggest factor is labour productivity. With sufficient productivity growth the deficit gets overwhelmed by economic growth. Unfortunately Canada generally has lower productivity growth than many other developed nations. Although this has been a long running concern the current government has placed little emphasis on addressing the country’s anemic productivity growth.

As with all projections the quality is only as good as the assumptions and scope. While the demographic assumptions appear to be reasonable (any demographers out there; feel free to correct me), the fiscal assumptions are less solid. Notably the Canada Health Transfer (CHT) only growing in line with nominal GDP. As the recent circus around renegotiating the CHT attests there is constant political pressure from the provinces to increase the rate well above nominal GDP growth. A factor that will only grow more pronounced as the population ages and the strain on provincial health budgets magnifies. It is well within the range of possibilities that a future government will acquiesce to the provinces’ demands and grow the CHT well above NGDP growth. The projections also fail to account for unforeseen negative economic events. And while that is quite reasonable within the context of this document, as the economics profession has yet to develop a reliable method of predicting recessions, it never the less presents a more rosy picture than actually exists. A deep recession with a resulting large deficit could blow these projections apart and leave the country in much worse fiscal shape.

 

Perhaps the biggest limitation of the Department of Finance’s projection is the projection is of Federal not national fiscal situation. The federal debt to GDP ratio is a healthy 31.8% thanks to multi-decade and multi-partisan governing philosophy of fiscal resistant. But the federal government is not the only government with debt in Canada. The provinces have considerable debt putting the total government debt to GDP ratio at 91.5%; up from 66.5% in 2007. While there is no hard and fast rule regarding when a country’s debt load becomes too great, the rule of thumb is that ratios over 100% are cause for concern. While most of the 25 percentage point growth in debt to GDP can be laid at the feet the recession it highlights the vulnerability of the debt to recessions. With the recession over and the economy experiencing slow but positive growth now is the time to bring the deficit and debt to GDP ratio down so we have fiscal maneuvering room should another recession hit. The many provinces, including the two largest, Ontario and Quebec, have large debts and are facing increasing budgetary pressure from bearing the brunt of the demographic related rising healthcare costs. There is precious little room to absorb another economic shock without adversely impairing the fiscal health of the country. Should a provincial bail out become necessary or a future Prime Minister decide to take on more of the load from an aging population at the federal level the health federal balance sheet could rapidly deteriorate.

 

There no guarantee such a scenario does happen. I certainly hope it does not. The projection gives an overall positive outlook for the federal government’s fiscal situation.  However it would be prudent to prepare for the possible negative scenarios not outlined in the report. With an uncertain global economy and a looming demographic bomb on the horizon now is the time to strengthen our fiscal position at all levels of government. Unfortunately the short term trend lines are moving in the opposite direction. Fiscal discipline and policy of only incurring debt for productivity enhancing infrastructure investments would be an excellent first step. I will be eagerly watching the course this government lays in the 2017 Budget.

2017 Predictions

On our Year End Episode (Ep 14) Ian and I discussed what we were watching in the up coming year. Below is an expanded list of what I will be keeping an eye on and what I predict will happen.  Attached to each prediction is a confidence level, expressed in percentage terms. If my confidence is properly calibrated it should match the odds of the prediction coming true. In other words, if I make ten 60% prediction then 6 of them should happen. At the end of the 2017 I will score these to see how many I got right.

1. Star Wars Episode VIII will set a new box office record. 90%
2. Moonlight will win Best Picture 60%
3. Rouge One will win a Technical Oscar 55%
4. Jon Snow, Daenerys and Cersei Lannister will be alive at the end of the upcoming Game of Thrones season 55%
5. 2016 sucked jokes will stop being funny after Jan 20th 95%
6. At least one Trump cabinet pick will not be confirmed 70%
6. A) Contingent on #6 the reason will be close ties to Russia 80%
7. Trump’s pick to replace Justice Scalia will be confirmed 90%
8. There will not be a second SCOTUS vacancy 80%
9. Trump will have a major (defined as dominating the media for a period greater than 7 days or a drop of 5 percentage points in approval rating) scandal within 3 months of taking office 80%
10. Trump will have a scandal involving his business interests and the emoluments clause within 6 months 90%
11. There will be one serious call by the democrats for impeachment within 6 months 60%
11. A) Contingent on #11 House Republicans will vote down such measures 80%
12. Democrats will succumb to infighting rather than present a united front against Trump 60%
13. A secession movement in the pacific states will not reach or surpass 10% popular support 90%
14. There will be a major diplomatic incident in the first 3 months of the Trump administration 50%
15. There will be a major diplomatic incident in the first 6 months of the Trump administration 65%
16. There will be a major diplomatic incident in the first year of the Trump administration 80%
17. Relations between Trump and House/Senate Republicans will sour 60%
18. Relations between Trump and House/Senate Republicans will not sour to the point where the GOP congressmen vote to impeach 85%
19. Trump will not develop a serious health problem 80%
20. Mike Pence will not become the 46th President 90%
21. Trump will attempt to renegotiate NAFTA 80%
22. The US-Canada trade relationship will not significantly change 60%
23. Trudeau’s popularity will drop below that of 19 Oct 2015 70%
24. No legislation to enact electoral reform or initiate a referendum on the matter will be passed by parliament 70%
25. There will be changes to Canadian federal political finance laws 70%
26. The 2017 Federal budget will have a larger deficit than the 2016 budget projected 55%
27. Kinder Morgan gets stalled in court and no significant construction takes place 80%
28. There will be a federal cabinet shuffle 80%
28. A) Contingent on #28 Maryam Monsef will be removed from cabinet 90%
29. Nathan Cullen will become the NDP Leader 55%
30. NDP does not adopt the LEAP Manifesto 55%
31. CPC Leadership is too uncertain but rough odds are: Andrew Scheer 40%, Maxime Bernier 30%, Michael Chong 30%
32. Kevin O’Leary does not enter the CPC leadership race 60%
33. Christy Clark will win reelection 60%
34. The BC Green Party will increase its seat count 60%
35. Kathleen Wynne does not resign 60%
36. Britain does not invoke Article 50 60%
37. Angela Merkel remains Chancellor of Germany 70%
38. No other EU country will announce plans to leave 70%
39. Far Right/Alt Right does better than expected in at least on European election 60%
40. China does not have political turmoil on par with or surpassing Tiananmen Square 90%
41. North Korea’s regime will remain in place. 90%
42. Assad remains President of Syria 95%
43. ISIS remains a functioning organization 85%
44. ISIS losses territory 80%
45. There will be no terror attack with >100 casualties in the USA 95%
46. There will be no terror attack with >100 casualties in Canada 95%
47. There will be no terror attack with >100 casualties in EU 80%
48. No major intifada in Israel this year ( >250 Israeli deaths) 80%
49. No major Israeli military operation against its neighbors (>500 casualties) 80%
50. US will not get involved in any new major war with death toll of > 100 US soldiers 55%
51. No major war (>100 military casualties) in Asia 90%
52. Canadian Forces does not deploy a battle group size force to a new theatre 55%
53. Canadian Forces deploys a force smaller than a battle group to a new theatre 60%
54. There will be a cyber-attack attributed (but not confirmed) to a state actor on a NATO country 70%
55. Global extreme poverty will decrease 90%
56. Average global life expectancy will increase 90%
57. Vancouver Housing prices will drop 60%
58. House Prices will not drop >20% 70%
59. Broadway subway to UBC will receive funding 55%
60. Vancouver implements congestion pricing 55%
61. There will be no major changes to Vancouver land use policy 90%
62. Massey Tunnel replacement will face at least one delay 65%
63. Queen Elizabeth will pass away 55%
64. A Republican movement does not gain traction in Canada 90%
65. The Alt Right does not gain a foothold in Canada, defined as an affiliated party gaining a seat or a candidate winning a leadership race in an established party at any level 90%
66. S&P 500 will close lower at the end of 2017 than 2016 (2,238.83) 55%
67. Oil will closer higher at the end of 2017 than 2016 (WTI Crude $53.72) 70%
68. US Federal Reserve will raise interest rates 70%
69. Bank of Canada will raise interest rate 60%
70. Canadian GDP will grow less than 2.1% 55%
71. Canada’s per capita carbon emissions will fall 80%
72. America’s per capita carbon emissions will fall 60%
73. Alberta’s per capita carbon emissions will fall 60%
74. Tesla will announce a delay for the model 3 60%
75. SpaceX will successfully relaunch a previously used rocket 70%
76. SpaceX will launch, recover and re-launch a rocket within two weeks 50%
77. The US announces a major new manned space initiative 50%
78. Controversy over the EM drive is resolved 50%
79. The US will install more renewable electricity generating capacity than non-renewable 80%
80. Canada has at least one record setting extreme weather event 80%
81. BC has at least one record setting extreme weather event 50%
82. A weather related natural disaster in Canada causes at least $1B in damage 50%
83. The Cascadia subduction zone does not have an Earthquake of 9.0 or greater 98%
84. Canucks win the Stanley Cup. A wildly optimistic 90%

Feel free to post yours in the comments.