Transcript Christopher Ragan

A Federal Budget
Designed for the Times
The Economic Action Plan of 2009
Christopher Ragan
McGill University
and
Department of Finance
May 7, 2009
Outline of Talk
1.
Global Economic Context, January 2009
2.
Canadian Economic Context, January 2009
3.
Three Key Budget Themes
4.
Final Bits
-- no politics
2
Global Economic Context,
January 2009
3
A collapse in the U.S. housing market …
U.S. Housing Starts and
Months Supply of Existing Homes
thousands,
at annual rates
U.S. S&P/Case-Shiller Home Price
Index
level, months supply at
current sales rate
2,400
2,000
12
20
11
15
10
9
1,600
Housing Starts (left scale)
1,200
Months supply of existing
homes (right scale)
10
5
8
0
7
6
800
per cent, year over year
-5
5
-10
4
-15
400
3
Jan Jan Jan Jan Jan Jan Jan Jan Jan
2001 2002 2003 2004 2005 2006 2007 2008 2009
-20
2001 2002 2003 2004 2005 2006 2007 2008
Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
4
… led to losses in U.S. banks and huge writedowns worldwide.
U.S. Write-downs and Losses
Global Write-downs and
Losses Exceed $1 trillion
Billions, USD
Billions, USD
110
100
90
80
70
60
50
40
30
20
10
0
1400
1200
1000
800
Lehman Brothers
Merrill Lynch
Morgan Stanley
Goldman Sachs
JP Morgan Chase
Bank of America
Citigroup
600
400
200
0
World
Canada
U.S.
Europe
Asia
Source: Bloomberg. April 17, 2009
5
What was initially viewed largely as a
problem of liquidity…
…became a problem of systemic stability
after the fall of Lehman Brothers on
September 15.
6
Equity markets contributed to the global financial
carnage.
World Equity Markets
% change since January 1, 2007
IMF’s Estimates of Financial Sector
Potential Writedowns (2007-2010)
Billions, USD
0
4500
-10
4000
-20
3500
3000
-30
2500
-40
2000
-50
1500
-60
Total
1000
Banks
-70
500
Canada
U.S. (S&P U.K. (FTSE
(S&P/TSX)
500)
100)
EMU (DJ
Euro
STOXX)
Source: Bloomberg. Up to and including April 24, 2009.
0
World
U.S.
Europe*
Japan
*Europe includes Euro area and the U.K.
Source: IMF’s Global Financial Stability Report, April 2009.
7
Credit spreads increased sharply…
Credit Spreads
basis points
400
360
320
Canada (CDOR - OIS)
280
U.S. (LIBOR - OIS)
240
Euro area (LIBOR - OIS)
200
160
120
80
40
0
-40
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
Notes: These spreads are a measure of banks’ funding costs relative to a risk-free rate and are a gauge of financial market stress and banks’
financing pressures. The rate on the overnight-indexed swap (OIS) is used as a proxy for expected overnight rates. LIBOR is the London Interbank
Offered Rate. CDOR is the Canadian Dealer Offered Rate.
Daily data up to and including April 24, 2009.
Source: Bloomberg.
8
… and (with a lag) affected credit growth.
Credit growth
Year-over-year percentage change
14
12
10
8
6
4
2
0
2005
historical averages:
1992-present
2006
Household Credit
Source: Bank of Canada.
2007
2008
2009
Business Credit
9
Central banks were aggressive and also “creative”
in their actions.
Global actions to support the
financial sector
Policy Interest Rates
per cent
• Capital Injections
7.0
U.S. Federal Reserve
Bank of Canada
European Central Bank
Bank of England
6.0
5.0
• Guaranteeing the liabilities of financial
institutions
• U.S., Ireland, U.K.
4.0
• Nationalization
3.0
• Fannie Mae, Freddie Mac, Icelandic banks
• Purchase of “toxic assets”
2.0
• Public-Private Investment Fund, Asset Protection
Scheme (UK)
1.0
• Supporting financial markets
0.0
Sep
2007
• Troubled Assets Relief Program
• Direct investments in financial institutions, e.g.
Barclays, ING, AIG, Fortis
Dec
2007
Mar
2008
Jun
2008
Sep
2008
Dec
2008
Mar
2009
• Commercial Paper Funding Facility, Term AssetBacked Securities Loan Facility, Canadian
Secured Credit Facility
Sources: Bank of Canada, U.S. Federal Reserve, European Central Bank
and Bank of England.
10
Financial markets and the “real” economy?
Can we really speak of the financial
sector separately from the “real”
economy?
Economists were soon reminded of the
importance of credit to production and
employment.
11
Industrial production in major economies slowed
sharply ... and then fell off a cliff!
Industrial Production
Year-over-year percentage change
10
0
-10
United States
Germany
-20
Japan
-30
-40
2005
2006
2007
2008
2009
Source: Bank of Canada.
12
We were faced with the first synchronized global
recession in over sixty years …
World Economic Growth
per cent
IMF’s threshold for
a global recession
7
6
Actual
5
4
3
2
1
0
Forecast
-1
-2
1970
1975
1980
1985
1990
1995
2000
2005
Note: World real GDP growth on a purchasing-power parity basis.
Source: International Monetary Fund World Economic Outlook, April 2009.
13
… with considerable uncertainty about the global
economic outlook.
Mean of Private-Sector Forecasts for 2009 Real GDP Growth
per cent
per cent
9.5
3
2
1
0
8.5
-1
China (left)
-2
Canada (right)
7.5
6.5
Jan-08
-3
U.S. (right)
Eurozone (right)
-4
Japan (right)
-5
-6
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
Date of forecast
Source: Blue Chip Economic Indicators - January 2008 to April 2009.
14
The knowledge that recessions triggered by
financial stress tend to be longer and deeper …
Duration and output loss
Duration (quarters)
Output loss (%)
All recessions
Financial crises
Highly synchronized
recessions
0
1
2
3
4
5
6
Source: IMF World Economic Outlook, April 2009.
15
… led to an internationally coordinated response.
• G-20 Commitments:
• Restoring global growth by coordinated fiscal actions and
a full range of monetary policy instruments.
• Strengthening the financial system by the introduction of
stronger regulation and improvements to international
cooperation.
• IMF recommendation to provide fiscal stimulus of 2
percent of GDP.
16
Canadian Economic Context,
January 2009
17
Canadian banks were less leveraged than banks in
other developed countries …
Bank Leverage Ratios
assets as a multiple of capital
35
Canada
US
UK
Euro area
30
25
20
15
2000
2001
2002
2003
2004
2005
2006
2007
2008
Note: Based on data for the big six Canadian banks, seven major banks from the Euro area, six major UK banks and five large U.S.
commercial banks. Canadian data are based on the regulatory ratio of assets (including some off-balance sheet items) to adjusted
Tier 1 and Tier 2 capital. Leverage for other countries is measured as the ratio of balance sheet assets to shareholders' equity.
Sources: Bloomberg; financial statements.
18
… and were also more highly capitalized …
Tier 1 Capital Ratio
(Tier 1 capital as a percentage of risk-weighted assets)
11
10
9
8
U.S (Commercial Banks)
7
Canada
U.K.
EU
6
5
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Bloomberg and bank financial statements
19
… but the global credit crisis was still affecting
credit markets in Canada.
Business Lending Conditions
balance of opinion, percentage points
100
Price
80
Non-price
terms
60
40
Tightening
20
0
-20
Easing
-40
-60
1999
2001
2003
2005
2007
2009
Note: Pricing conditions refer largely to the cost of borrowing, whereas non-pricing conditions refer to access to credit and lending terms.
The balance of opinion is calculated as the weighted percentage of respondents reporting tightened credit conditions minus the weighted
percentage reporting eased credit conditions.
Source: Bank of Canada - Senior Loan Officer Survey.
20
Household balance sheets were in better shape in
Canada than in the United States …
Net Worth to Personal
Disposable Income
Household Debt to Net Worth
ratio
ratio
6.5
28
Canada
26
U.S.
U.S.
6.0
24
Canada
22
5.5
20
5.0
18
16
4.5
14
4.0
1990
Q1
1993
Q1
1996
Q1
1999
Q1
2002
Q1
Sources: Statistics Canada; Department of Finance.
2005
Q1
2008
Q1
12
1990 1992
Q1
Q3
1995 1997 2000
Q1
Q3
Q1
2002 2005 2007
Q3
Q1
Q3
Source: U.S. Federal Reserve Board, Statistics Canada.
21
… but the decline in consumer confidence still
pointed to some likely retrenchment.
Consumer Confidence
Index, 2002=100 for Canada, 1985=100 for U.S.
160
Canada
140
U.S.
120
100
80
60
40
20
1978Q1 1984Q1 1990Q1 1996Q1 2002Q1 2008Q1
Sources: The Conference Board of Canada; The Conference Board.
*2009Q2 data is preliminary as it includes only April 2009.
22
Canadian public finances were in good shape …
Total Government Net Debt
to GDP Ratio
Federal Net Debt
per cent of GDP
per cent
80
60
Actual
Forecast
70
55
Canada
G7 average
50
60
45
50
40
40
35
30
30
20
25
10
20
0
1979-1980
15
1989-1990
1999-2000
Sources: Department of Finance; Statistics Canada.
Public Accounts basis.
2009-2010
2006
2007
2008
2009
2010
Source OECD Economic Outlook (March 2009 update);
Department of Finance calculations.
National Accounts basis.
23
… but that could not shield Canada from a U.S.
recession.
U.S. Real Final Domestic Demand
and Canadian Real Exports Growth
per cent
8
Canada - Real Exports
6
U.S. - Real Final Domestic Demand
4
2
0
In 2008, 73% of
Canadian exports
went to the U.S.
-2
-4
1981
1990
1999
2008
Sources: Statistics Canada; U.S. Bureau of Economic Analysis.
24
World commodity prices had collapsed …
Commodity Prices (in U.S. dollars)
index 1997=100
index 1997=100
225
650
Total (left scale)
Non-Energy (left scale)
200
550
Energy (right scale)
175
450
150
350
125
250
100
150
75
Jan 2002
50
Jan 2003
Jan 2004
Jan 2005
Jan 2006
Jan 2007
Jan 2008
Jan 2009
Source: Department of Finance Commodity Price Index.
Note: April 2009 includes data up to April 24, 2009.
25
… Canada’s exports had declined sharply …
Exports and Imports Levels
$ billions, annual rates
650
600
550
500
450
400
350
Exports fall by 10% in Q4;
imports fall by 2%
300
250
Exports of goods and services
200
150
Imports of goods and services
100
50
0
92Q1
95Q1
98Q1
01Q1
04Q1
07Q1
26
… real income (GDI) had declined sharply …
Growth Per Capita Real Gross Domestic Income
per cent
U.S. up just 7.3% over the
same period; over 15% in Canada
25
20
Real GDP per capita
15
Real GDI per capita
10
5
0
2002
2003
2004
2005
2006
2007
2008
Sources: Statistics Canada; Department of Finance.
27
… and employment losses had already begun.
Unemployment Rates
Employment Rates
per cent
per cent
14
67
Canada*
Canada
12
U.S.
65
10
63
8
61
6
59
4
57
2
55
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Sources: Statistics Canada, U.S. Bureau of Labor Statistics.
U.S.
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
* Calculated using U.S. methodology.
28
A Budget Designed for the Times
29
(My) Three Themes:
1. Financial-Market Measures
2. The Dual Need for Fiscal Stimulus
3. The Importance of Fiscal Prudence
30
Theme 1: Ensuring a Sound Financial System
The Government had taken some actions in 2008
to strengthen the financial system.
Budget 2009 established the Extraordinary
Financing Framework, containing several
measures.
31
The Extraordinary Financing Framework
Insured Mortgage Purchase Program
$125 billion
New 10-year Canada Mortgage Bond
$10 billion
Canadian Lenders Assurance Facility
-
Canadian Life Insurers Facility
-
Expanded Activities for EDC and BDC
$13 billion
ABS Facility (by EDC)
$12 billion
(excluding actions by Bank of Canada)
32
Potential concerns with the EFF?
1. Efficiency of government involvement
in allocation of credit?
2. What is the exit strategy?
33
Canadian monetary policy had already been very
aggressive …
Target for Overnight Interest Rate
per cent
5.0
4.0
3.0
2.0
1.0
0.0
Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09
34
… but rate reductions had not always been
reflected in credit markets …
Change in Interest Rates Since September 2007*
basis points
-425
Policy Rates
Canada
-500
U.S.
-285
1-year mortgage
rates
-78
-174
5-year mortgage
rates
-130
121
10-year +
corporate bond
137
-600
-400
-200
0
200
Basis points
*As of the week of April 22, 2009.
35
… and perhaps would not be sufficient anyway.
Consumer Confidence
Index, 2002=100 for Canada, 1985=100 for U.S.
160
Canada
140
U.S.
Business Confidence
Index, 2002=100
diffusion index (50=no growth)
140
65
120
60
120
55
100
100
50
80
80
45
60
60
40
20
1978Q1 1984Q1 1990Q1 1996Q1 2002Q1 2008Q1
Sources: The Conference Board of Canada; The Conference Board.
*2009Q2 data is preliminary as it includes only April 2009.
40
Canada (left)
40
20
98Q1
35
U.S. (right)
30
00Q1
02Q1
04Q1
06Q1
08Q1
Sources: The Conference Board of Canada, Institute for Supply
Management (ISM) non-manufacturing survey.
36
Theme 2: A dual need for fiscal stimulus
1. Dampen the economic slowdown
2. Protect the most vulnerable Canadians
 Suggested a targeted mix of spending
and tax measures
37
Short-Run Expenditure and Tax Multipliers
2
1.5
1
1.7
1.6
1.5
1
0.5
0
Measures for lowincome households
Infrastructure
investment
Housing investment Personal income tax
measures
measures
*Dollar impact on the level of real GDP after 8 quarters of a permanent one dollar increase in fiscal measures.
Measures for low-income households include: all EI measures, training for non-EI eligible clients, wage earner
protection program, increase to the National Child Benefit and Canada Child Tax Benefit, and enhancement to WITB.
38
New spending combined infrastructure and
housing measures …
1. Provincial, territorial and municipal infrastructure
•
Direct, low-cost loans to municipalities for projects
2. Federal infrastructure
3. First Nations infrastructure
4. “Knowledge” infrastructure
•
PSE, CFI, electronic health records, broadband
5. Social housing for low-income Canadians
6. Support for home ownership and renovation
39
… with a variety of “sectoral” measures.
• Capital Cost Allowance
• Computers
• Manufacturing and processing M&E
• Tariff relief on machinery and equipment
• Sectoral adjustment
•
•
•
•
Community Adjustment Fund
Support to automotive sector in collaboration with Ontario
Support for culture and the arts
Clean energy technologies
• Support to small businesses
40
Income-tax cuts were aimed at low- and middleincome earners.
1. Significant personal income tax relief
• Increases in basic personal amount
2. Increases to the National Child Benefit and Canada
Child Tax Benefit
3. Doubling the tax relief provided by the Working Income
Tax Benefit (WITB)
• Reduction in MTR for very-low-income earners
4. Increase to the Age Credit amount
41
Labour-market measures also figured
prominently.
• EI benefits strengthened:
• Expansion of work-sharing
• Extra five weeks of EI benefits
• Additional benefits for participants in longer-term training
• Enhanced availability of training:
• Additional support for training programs
• Targeted support for older workers
• Apprenticeship completion grant introduced
• EI contribution rates were frozen for 2009 and 2010
42
A $40 billion stimulus package (over 2 years)
2009
2010
Total
(billions of dollars - cash basis)
EI changes, Personal tax reductions, Skills and
Training
5.9
6.9
12.8
Tax measures to support housing, Social housing
investments
5.4
2.3
7.8
Infrastructure programming
6.2
5.6
11.8
Tax and Tariff changes, Sectoral adjustment measures
5.3
2.3
7.5
Total Federal Stimulus
22.7
17.2
39.9
Total Stimulus (with Leverage)
29.3
22.3
51.6
Total federal stimulus
1.5
1.1
2.5
Total stimulus (with leverage)
1.9
1.4
3.2
As a share of GDP (%)
Tax measures account for $10.1 billion of total stimulus
Spending measures represent $29.9 billion of total stimulus
43
Theme 3: The importance of fiscal prudence
• The low debt-to-GDP ratio suggested to many
that the government could have done much
more than it did:
• Bigger increase to spending
• Bigger tax reductions or EI improvements
• Could it?
44
Debt-to-GDP Ratio: 68  29 in 14 years
(Net) Debt-to-GDP Ratio
per cent of GDP
80.00
70.00
Actual
Projection
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13
45
Actual and projected budgetary balance
Budgetary Balance-to-GDP Ratio
per cent of GDP
Actual
Projection
4.0
2.0
0.0
-2.0
-4.0
-6.0
1990-91
1993-94
1996-97
1999-00
2002-03
2005-06
2008-09
2011-12
46
Can policies be scaled up or reversed?
1. Infrastructure is difficult to scale up
2. Tax cuts and EI changes are difficult to reverse
 Government struck a balance between what
was feasible and what was affordable over the
medium term
47
Fiscal discipline will be necessary …
… to ensure that G/GDP comes back to current levels
in the medium term.
… to repay the current deficits once surpluses return.
… over the next 10 years to prepare for the coming
fiscal challenges caused by demographic change.
48
Summary
The 2009 budget was designed to:
•
Improve Canadians’ access to credit and restore
their confidence in the financial system;
•
Dampen the slowing effects of the global recession;
•
Protect and assist the most vulnerable individuals
during these challenging times;
•
Retain Canada’s hard-won fiscal prudence so that we
are prepared for future challenges.
50
Measures to accelerate Budget Implementation
• BIA 2009 received Royal Assent on March 12th (compared to
June 18th for BIA 2008)
• Included $7.6 billion in spending authority for a range of measures,
many of which would normally be funded through the annual
appropriations process
• Streamlined process for Cabinet and Treasury Board
consideration and approval
• New Central Vote in the Main Estimates allows for the release of
Budget 2009 funds between April and June subject to Treasury
Board approval
• Spring Supplementary Estimates expected to be tabled in midMay with supply obtained early June
51
Thank you