September 23, 2020 | 16:23
Throne Speech: Goals Galore
Today’s Throne Speech from Ottawa was one of the most hotly anticipated in years, landing in the middle of a clear resurgence of COVID cases, and against the backdrop of a minority government with a new Finance Minister. While the most aggressive talk about long-term plans was scaled back somewhat due to the recent upswing in virus cases, there were still plenty of ambitious proposals. Throne Speeches are normally long on rhetoric and bold statements, and short on specifics, but there was some real meat and hard numbers in today’s effort. The government avowed that it will be guided by “sustainability and prudence”, but the key takeaway from a near-term perspective is that the “fiscal firepower” will do “whatever it takes” to get the economy through this highly unfortunate episode.
Here are some key proposals and highlights from the speech (from Reuters):
Fiscal impact: The Throne Speech notes that a fiscal outlook will be presented in the fall. The current-year deficit (FY20/21) is currently pegged at $343 billion, or roughly 16% of GDP, on the back of about $240 billion in direct support measures. While some major programs, such as the Canada Emergency Wage Subsidy, are seemingly coming in under budget, other measures such as the modified EI program and new Canada Recovery Benefit should tack on more than $30 billion. Regardless, it’s looking like the deficit will fall somewhere in the $340 biilion-to-$375 billion range this fiscal year.
But, the real question is how FY21/22 will look. Suffice it to say that massive support programs currently underway won’t fully roll off next year and, even as some do, there will be more spending to fill some of the void. The CEWS extension is one example, though it remains to be seen if low take-up this year just stretches the current funding envelope into next fiscal year. Other measures such as the pledge to create one million jobs, direct support for hard-hit industries and the overall pledge to use “whatever fiscal firepower is needed” in the short term, suggest that spending will still remain well above the pre-COVID baseline next year. Indeed, some of the items noted above are big-ticket in nature. As such, even as revenues rebound, the deficit could still hold around $200 billion in FY21/22 (8.5% of GDP)—we’ll get the first projection from Ottawa in the fall update.
Market impact: With next year’s deficit likely to still have 12 digits, FY21/22 will see another year of healthy Government of Canada bond issuance. While some of the programs outlined in the Throne Speech will have an impact on this fiscal year, the bulk of the costs are likely to come next year. In addition to the spending, there’s $96 billion in maturing debt that needs to be refinanced. Adding it all up, gross issuance looks to come in around $300 billion (with a very wide margin for error), down from $409 billion this year, but still about triple pre-pandemic levels. Recall that the Bank of Canada’s QE program is absorbing much of this year’s issuance, and next year’s expected hefty borrowing suggests that the BoC will have to continue supporting the market with ongoing purchases. Look for the Bank to taper its QE buying somewhat once the issuance profile becomes clear (assuming we’re correct on the decline in borrowing). A complete exit from QE seems unlikely as it’s unclear whether the market can absorb such a massive volume of debt without a sizeable back-up in interest rates, a key component to keeping the surge in debt affordable. Earlier this week, DBRS reaffirmed Canada's AAA credit rating, and we'll be waiting to see how the ratings agencies view another year of huge deficits.
Economic impact: The clear commitment to continue spending aggressively to support household incomes (including the extension of the CEWS), as well as proposed support for heavily impacted sectors are the key notes for the outlook over the next few quarters. Essentially, Ottawa is bracing for the impact of a second wave. And, we believe that while the recovery will inevitably slow (and perhaps sharply), the pullback will be considerably lighter than the hit from earlier this year. At this point, we remain broadly comfortable with our forecast, depending of course on where the virus takes things in coming weeks and how public officials respond. Looking further out, the underlying pledges in today’s Speech, while unsurprising, reinforce the outlook for an aggressive, expansionary fiscal policy over the medium term.