This time, it’s different.
Those four words have been the source of many a tale of woe in the investing world. Enron? Different. The dot-com boom? Different. Securitized mortgages? Different. Or, as it turned out, not so different after all. Eventually, the laws of economics reasserted themselves.
During the pandemic, Ottawa has sought to reassure Canadians that this time, it’s different, when it comes to record-shattering deficits and a sharp increase in the national debt. The core of Ottawa’s case: Interest rates are at rock-bottom levels, so borrowing billions of dollars – or even hundreds of billions of dollars – doesn’t threaten Canada’s fiscal sustainability. So long as the debt is growing slower than the economy, all is well.
As of the Nov. 30 economic statement, that logic was intact. Interest costs were projected to be lower in fiscal 2020-21 than in the previous year, even with a much higher debt burden.
But as I write in this week’s Tax and Spend, bond markets are starting to diverge from the government’s vision of years of low interest rates, with yields surging for 10-year Canada bonds since the start of 2021. Real interest rates are still in negative territory, but it’s clear that the ground is shifting quickly – 10-year bond yields are already higher than what the government predicted they would hit not just for this year, but 2022 as well.
Will that be enough to deter the federal government from spending another $70-billion to $100-billion on a stimulus package and prompt it to pare the deficit? Or will Ottawa continue to insist that, despite the fiscal lessons of the past, this time, it’s different?
Taxing Questions
Responding to recent stories on equalization here and here, a reader posted a comment pointing out the seeming paradox of Newfoundland and Labrador not receiving equalization payments, even though its finances are in dire shape.
That diagnosis of the state of Newfoundland’s finances is certainly correct. Plummeting offshore oil revenues have resulted in deepening fiscal crisis in the province. When the budget for fiscal 2019-20 was originally tabled, Newfoundland was projecting overall revenue of $10.3-billion. By the time of its July, 2020 fiscal update, revenue for the past fiscal year had declined to $9.4-billion, with a projected deficit of $2.1-billion (in a province already carrying a high debt burden).
But the real pain has arrived in the current fiscal year; in July, total revenue was estimated to be $6.8-billion, a breathtaking decline of more than a third from the original projections for the previous fiscal year. One small bright spot: oil prices have strengthened recently, enough that the average oil price to date for the 2020-21 fiscal year is slightly above the province’s forecasted levels.
So, given all that, why isn’t Newfoundland receiving equalization? Part of the reason is that Newfoundland’s fiscal woes aren’t only the result of its revenue base being too small (the problem that equalization is designed to address.) The province is also a relative high spender, on a per capita basis. That wasn’t a problem when oil revenues were plentiful; it is now.
But a good deal of the answer has to do with the nature of the equalization program. It isn’t designed to compensate with sudden economic changes of fortune. Another program, fiscal stabilization, serves that purpose, though it is much less generous than equalization.
The details of the equalization formula also play a role. Since 2004, yearly equalization payments have been based on a weighted three-year rolling average of past payments (with a two-year delay). That means that if a province’s fiscal capacity deteriorates drastically and suddenly, it will take years – four, to be precise – for that change to be fully accounted for by the equalization formula.
Have a Taxing Question? Send it to me here.
Protesting doesn’t pay: The self-described tax protester movement continues its losing streak in court, with two Montreal men sentenced last week to four years in jail. The Canada Revenue Agency said Pierre Cardin and Jean-Marc Paquin were both found guilty in December, 2020 of one count of fraud under the Criminal Code.
A CRA investigation showed that the two men, part of a tax-protester group, “advised and enabled” 49 people to evade or to attempt to evade $1.057-million in income tax by wrongly claiming losses against their taxable income.
Tax protesters have argued that they should not have to pay income taxes for a variety of reasons, including that the Income Tax Act is unconstitutional or that they are “natural persons” not subject to its provisions.
Dark cloud to a silver lining: Employment is bouncing back faster than expected, according to the most recent data, but that doesn’t mean there aren’t major issues in the labour market. Wilfrid Laurier economics professor Tammy Schirle highlights one of the biggest in a graph-packed tweet stream: the growing proportion of jobless workers who have been unemployed for more than six months.
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