By Guest Blogger Ryan Lewenza
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Last week we got the summer fiscal update from the Federal Libs and it wasn’t pretty. This year our Federal deficit is projected to hit a staggering $343 billion, more than 5x the previous record of $56 billion set back in 2010. Let that sink in for a second.
As a consequence of our accumulated deficits, T2’s increased spending and deficits over the last 5 years, and the economic fallout from this terrible global pandemic, our total Federal debt will surpass $1 trillion dollars by year-end (it was $500 billion 10 years ago!).
Now I’m all for Keynesian economics, which posits that governments should increase government spending during economic downturns to stimulate economic activity and growth, but I want to know there’s a credit limit on the government credit card (AKA our tax dollars).
It gets even worse, unfortunately. Garth asked me recently on a weekly client conference call what I was looking for in this fiscal update and I responded “a plan and rough timeline for returning to balanced budgets over the medium to long-term.” Not only did our Finance Minister not provide this, he even backed away from the governments “fiscal anchor”, which was what the Liberal government previously provided as a target to drive the debt-to-GDP ratio to 30% over the long-term.
When asked about this shift away from the “fiscal anchor” and the record spending and deficits, our Finance Minister responded with his token and regurgitative answer, “We’re investing in people and jobs”. Unfortunately, this non-answer fails to address the previous $55 billion of deficits under T2 and does nothing to address many Canadians concerns about our deteriorating financial position. That’s the key thing: We should be running balanced budgets (or minimal deficits) during good times, so that we can be prepared to respond during these downturns.
When completing the research for this week’s blog post and updating my charts to reflect these new breathtaking numbers, an odd/sad thing occurred in my charts. Here is a chart of our yearly government budget balances before this year’s projected record deficit.
Canada’s Budget Balances Before COVID
Source: Bloomberg, Turner Investments
And here is that same chart when we include this year’s $343 billion deficit. Note that: 1) this year’s deficit is 5x larger than our previous record deficit in 2010 following the financial crisis; and 2) the dramatic change in scaling. Basically this number is so large that it “squeezes” the old historical data, making the previous deficits/surplus look like a rounding error. When seeing this it hit me like a ton of bricks, realizing just how meaningful this increased spending and deficits are.
Canada’s Budget Balances After COVID (Note the scaling)
Source: Bloomberg, Turner Investments
Now it wasn’t always this way. Back in the 1990s we got into some trouble with our then out of control deficits, until my Windsor pal, Paul Martin (I grew up (on the other side of the tracks) just blocks away from Paul Martin Sr’s family home). The Honourable Paul Martin saw the writing on the wall and slashed government spending, helping to balance our budgets and return us to a more sustainable fiscal path.
Garth’s pal, the Honourable Steven Harper, then maintained this approach by having balanced budgets from 2006 till 2009, when the financial crisis hit and the Canadian government agreed to a pledge by all G20 countries to spend 2% of GDP to help combat the effects of the financial crisis. From 2010 to 2014 Canada experienced large deficits before basically getting back to even in 2015.
But all of this changed when T2 took over and from a fiscal perspective, it’s been nothing short of a disaster. To be clear, I’m no T2 hater and I believe he’s a done a few good things (e.g., NAFTA renegotiations, gender equality, legalization of marijuana). However, on the fiscal file I think it’s fair to say he’s been a complete dud. But based on my analysis, maybe we shouldn’t be surprised by this given his family lineage and history. Let me explain.
The Trudeau’s (Pierre from 1968 to 1984 and Justin more recently) are very comfortable with increasing government spending to support their progressive initiatives and running large deficits. As proof of this I ran some numbers with pretty telling results.
I calculated the cumulative total of our Federal annual deficits since 1968 (when T1 became PM), which amounts to $1 trillion or the amount of our total Federal debt by end of year. I then calculated the total deficits realized under Pierre ($151 billion) and Justin ($397 blillion). So of our total $1 trillion in Federal debt that exists today, the Trudeau family has accounted for $548 billion or 55% of our total outstanding Canadian government debt. That’s a lot of red ink that has been amassed under one family.
Cumulative Federal Deficits Since 1968
Source: Bloomberg, Turner Investments
What’s the end game from all this spending and deficits?
I see only three potential outcomes. First, the government spending helps usher in a recovery and higher economic growth over the long-run making it easier to pay back the debt and getting the situation under control (laughable). Second, the current (or future) government finally see’s the errors of its ways and slashes spending similar to that seen under Paul Martin and put our country on a path to a balanced budget (highly unlikely). Finally, the last and most likely scenario to address our record deficits are through sizable increases in taxes. If I was a betting man I would bet on the higher taxes option, given this government’s previous track record.
So there you have it. Red ink as far as the eye can see, with no plan to return to our old ways of fiscal prudence and balanced budgets. Tack on the worst global pandemic in a century, escalating racial tensions in the US and Kanye West recently announcing his run for the US presidential election, 2020 is shaping up to be the worst year in as long as I can remember.
Have a great weekend all!
Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.