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Canada's Optimistic Fiscal Projections
From derailedcapitalism.com:
The Department of Finance released their latest economic and fiscal budget projections up until 2015, and to no one’s surprise, it is extremely optimistic. There are many positive data points in the report, highlighting the positive employment situation, the strong fiscal position ‘relative’ to other G-7 nations, and solid growth in GDP. The federal government expects to run a budget surplus, 2.6B CAD in 2016, from a budget deficit of 55.6B CAD in fiscal 2010. While Flaherty, finance minister, claims we are not facing structural deficits like other nations, a large number of citizens are facing retirement in the next few years and will place a increasingly greater burden on our public finances, including current unfunded liabilities. He expects the federal budgetary deficit balance to decline from a high of 55.6B to a surplus of 2.6B in 2015-2016. This will help reduce our debt burden as a percentage of GDP.
How does the government plan to reduce this deficit, is it from increased top-line growth or cutting government expenses? Expenses are expected to lag revenues over the next 6 years, with revenues projected to increase 40% (+87.3B) while expenses are projected to increase by 8.5% (+20.6B). With an expected average 10-year bond yield of 4.0%, interest expense is projected to increase from 29.4B currently to 37.8B in 2015-2016, an increase of 29% (+8.4B). On the revenue side, a 40% increase is extremely optimistic. Lets say that the 5.0% nominal growth in GDP is accurate, the economy is expected to grow a cumulative 34% over the next 6 years. Government revenues are projected to grow at a faster pace than the economy (+40%), tax increases will be required to meet these budget projections.
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 |
| 100.00 | 105.00 | 110.25 | 115.76 | 121.55 | 127.63 | 134.01 |
| 0 | 5% | 5% | 5% | 5% | 5% | 5% |
Where is this 87.3B in additional tax revenue coming from? As you probably have guessed, the individual tax payer! Personal income tax is expected to grow from a current 103.9B to 151.7B in 2015-2016, an increase of 46% or 5.5%/year. Personal income tax is expected to grow to 7.5% of GDP in 2015-2016 from 6.8% today. Corporate income tax, non-resident taxes, and excise taxes are increasing at a much slower rate.
From the report:
“Personal income tax revenues—the largest component of budgetary revenues—are projected to increase 8.8 per cent in 2010–11. This increase reflects growth in personal income, combined with the expiration of the Home Renovation Tax Credit. Over the planning period, personal income tax revenues increase somewhat faster than growth in GDP, reflecting the progressive nature of the income tax system combined with real income gains.”
With metro housing prices in a bubble (Vancouver, Calgary, Toronto), our largest trading partner devaluing their dollar to increase exports, and the China housing market in need for a correction (which will impact growth and commodities prices), where is this 5% nominal growth over the next 6 years expected to come from?
The government outlines the shocks of a 1% decline in real GDP, expecting it to reduce the budgetary balance by $3.1B in 1st year and $3.4B in 2nd year. If the US economy goes into a double dip recession, expect GDP growth in Canada to remain anemic at best.
The expense side, like the revenue side, looks extremely optimistic. Major transfers to persons, which include: elderly benefits, Employment Insurance (EI) benefits, children’s benefits are expected to grow by a total 15.8% over the next 6 years. As mentioned in a previous article, many seniors have not saved the necessary funds due to the stock market crash of 2007-2008 and the current bond bubble which has brought rates to a record low. They have two choices, work longer into their retirement or require additional benefits from the government. Either younger generations will need to claim employment insurance as baby boomers work longer or retirees require additional benefits from the government. Both of these choices will place an additional burden on major transfers to persons. Major transfers to other levels of government remain relatively flat, increasing slowly from 57B in 2009-2010 to 65.4B in 2015-2016. With the provinces being increasingly more responsible for education, health care and social programs, major transfers to other levels of government need to rise at a rapid clip or the federal government needs to subsidize a greater percentage of these costs. These expenses are highly optimistic and may place additional strain on the expense side in the coming years.
As illustrated, Canada’s on a much better path than other sovereign nations including: France, Greece, and the UK and does not need to implement austerity to reach budgetary projections. However, the optimistic revenue projections and program expenses may be difficult to fully realize, putting public finances into a structural deficit for years to come.
Here is the full budgetary report from the Department of Finance:
Canada Fiscal 2010 October Projections
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thanks for the posting DeRailed
No problem, glad you enjoyed it. While the situation in Canada is currently much different than in the US, I can't help but feel that we are heading down the same path as them:
- Housing bubble fueled by cheap credit and moral hazard (CMHC)
- Large budget deficits that may becoming 'structural' in nature
- Negative trade balance, Canada is in an export recession though currently masked by high commodities prices
Any bump in the global economy may be enough to send the Canadian economy into a tailspin...We know what the secret of canada's success is, do you?
http://covert2.wordpress.com
Yet not a word about the CMHC catastrophe that is about to unfold, and wreak havoc on the government's balance sheet (CMHC, for those who don't know, is a government mortgage insurance provider that has $9B of equity to back $900B of sub-prime mortgages, and the real estate slide hasn't even begun in earnest in Canada yet!).
What is going to push the market into this state of havoc? You failed to mention a catalyst, for your forecast. I could see interest rates doing it, or a bear market in commodities doing it. If you know of another catalyst, I'd like to hear it.
FACT: Canadian's own 74% of their homes.
FACT: 4 out of 5 homes have at least 20% equity.
FACT: Only 9% of home owners have less than 10% equity down.
This is 2010 report of 2009 data, from CMHC. Right, it could all be fiction. But, even if the data is smeared, it looks pretty healthy.
My government puts restrictions on building new-home "inventory". That means, builders need buyers in order to build excessive amounts of new homes or condos.
There are currently financial dis-incentives to put less than 20% down.
The aforementioned, are facts. I am all ears, looking for a bearish catalyst. I am neither a bull, nor a bear, just a guy who happens to own one very affordable house, because I am scared, of some moderate/rational inflation kicking in soon.
FACT: Canadian's own 74% of their homes.
To sustain current pricing, that number would need to continue to grow. Can it? Probably not. Everyone who wants to 'own' their home already does.
FACT: 4 out of 5 homes have at least 20% equity.
Why then is CMHC on the hook for $900B of loan guarantees? Most people get rid of CMHC insurance once they have 20% equity so they can take out a HELOC. This figure is highly suspect since the stock of Canadian housing is not worth $4.5 trillion.
This is 2010 report of 2009 data, from CMHC. Right, it could all be fiction. But, even if the data is smeared, it looks pretty healthy.
What's fictional about CMHC having $900B of subprime debt backed with only $9B in equity, for 100:1 leverage? That's right in the CMHC annual report (2009) as well.
The aforementioned, are facts. I am all ears, looking for a bearish catalyst. I am neither a bull, nor a bear, just a guy who happens to own one very affordable house, because I am scared, of some moderate/rational inflation kicking in soon.
What about the fact that it takes 80% of one's gross salary in Vancouver to pay, at historically low interest rates, the expense of living in a house in Vancouver? What about declining rents? Rising interest rates. Overcapacity. Seriously, you sound like one of those people in California in 2005 who believed the bubble could race on forever. The fact remains, the average Canadian family makes ~$60k/year, and at a 3X multiple, the most that Canadian house prices should be are approximately $180k, not double that.
In 2008, the average total income, for a family of "two or more", in Canada, was $89,700.
I paid 2.47x my family's income. I'm not in the 2005 California retard camp, I believe there is a possible down-side.
Yah Vancouver, for a two storey home, is at 80%. Calgary, it's 40% for a 2 storey. Toronto is at 60%. Ottawa, 40%. Montreal 55%. All of Canada is under 50%. You stated, the outlier, and by no means the largest city. Vancouver = 0.5M people. Toronto = 2.5M. Of course, we can argue city boundaries all day long. But, that's why the data from RBC, on this topic, is skewed. If you drew a line, around the most expensive area in a metropolitan area, and called it a city, then yah, that city would be a pretty expensive "city" to live. Enlarge the area, and include the lower priced homes, the "average" for the "city" drops.
National average price for Aug 2010 = $324,928. 3.6x the 2008 average family income. So, by your measure, there is a 20% downside, to fair value, from 2008 income levels. Ok. I'll hold, and cross my fingers governments print at least 2% worth of inflation for 5 years.
Interesting points, but you're cherrypicking numbers. Not all Canadian families are "2 or more". $89.7k is a massive exxageration (do you have a source for that??). And your numbers for percentage of income is all at historically low interest rates, which are certain to rise with the inflation that is sweeping the system.
Inflation suppresses house prices, and doesn't raise them, BTW, as it causes interest rates to rise.
Stats Canada, is my source. So, I did exclude single people, living alone.
http://www40.statcan.gc.ca/l01/cst01/FAMIL05A-eng.htm
They aren't my numbers, they are RBC's numbers. And I realize that. I said, interest rates rising, could be one catalyst.
Careful, you can't make the broad sweeping statement that inflation suppresses home prices. In a supply constrained (ie, Government Manipulated, eg. Canada) housing market, inflation would cause housing prices to rise. Assuming builders take into consideration, the price of materials to build homes. And, Assuming positive population growth. Interest rates climbing, would also push up rental yields.
Expect serious revision once the "Great White North" real estate market crash kicks in (3 - 6 months)... they're still in denial, praying the beast can still be capped before it explodes... this will not end well.
Precisely! With $900B of mortgage guarantees against sub-prime loans, they could easily be taking $50B per year losses for a few years just inside CMHC alone. Not to mention a significant source of income tax (from rents and the construction industry) and capital gains tax (from house flipping and taxable RE transactions) would simply dissappear.
Wow!,I'm still hurting about that losing that security council seat to fucking Portugal and now this.
I'm actually happy that we aren't there anymore, honestly what has Canada contributed to the security council in 60 years other than the permission to sit at the big kids table for a year?
Other than the security council has anyone actually figured out what the UN does anyways?
Its not the seat,its the loss to Portugal.
Would a much cooler country like Tongo been better?
As for the United States:
Daily Bell: Has Barack Obama begun doing a better job?
Doug Casey: I can only think about two good things about Barack Obama. #1 he's a smoker and #2 he's a one-term president. He has a high IQ, true, but how did a minor league ward heeler from Chicago ever get to be president? Where do they get these people? As bad as he is, though, the people he has around him who are worse – uniformly hard-core collectivists and statists. None of them have ever had a real job. They're all academics and political hacks. But there's humor in this farce. Timothy Geithner, for instance, bears an uncanny resemblance to Beavis, of that cartoon series from the 90's "Beavis and Butthead."
http://www.lewrockwell.com/holland/holland30.1.html
It's fine, they've been painting the financial canvas with shit and calling it art in Canada for 50 years.
I for one welcome the idea of just a plain old tax revolt and aversion. Last I looked they don't have anyone left alive at CRA that can actually find anybody if they don't have a facebook account (I wish i were kidding).
Just the usual delusional projections intended to fool the suckers for a while longer. Canada is in a long demographic decline, like most socialist countries.
How do you define a "socialist country," and what qualifies Canada (other than universal heath care which is no more socialist than medicare)?
Oh, Glenn said so you say... then I stand corrected... when do we invade?
I prefer to call my country's government raging fucking communists.
They are so very busy in a tax grab right now they don't seem to understand when all of us say "fuck it" and promptly ignore them.
Canuck buck is on parity again. Tommorrow there will be red across the board on commodities costing so bloody much.