Trudeau's big dreams could actually do more to hurt than help the Canadian economy
The federal government throne speech from Wednesday was an incredible 17 pages long, and only six of them were actually devoted to dealing with the COVID-19 pandemic. Nobody is going to quibble over the need for ongoing income support until either a vaccine arrives or we miraculously develop herd immunity. But this was an amazing speech that implies a future of “Big Government” and its tentacles spread across the economy and social fabric.
We counted more than 30 new (or beefed-up) initiatives in the document, the future cost unknown, but, at face value, we could well be talking about $100-billion annual deficits as far as the eye can see (the rating agencies must be licking their chops), and the vast majority of these measures have nothing to do with fighting the pandemic and its fallout. It's mostly about the feds rewriting a whole new social contract with its citizens, but hardly any reference at all about who really is going to pay for this extravaganza.
If the prime minister is anything, he is dreamy. Justin Trudeau said in the document that he wants to support the middle class, but that is the only area of the economy that has the income he will need to tax in order to finance his wish list — unless the Bank of Canada monetizes the whole thing (which will tank the Canadian dollar and this alone will end up sharply reducing real purchasing power in the local economy). If he thinks that foreign investors are lining up to buy Canadian debt (especially at a yield discount to U.s. Treasuries), someone should inform him that in June and July (most recent available data), non-residents were net sellers of Canadian federal government bonds to the tune of $7 billion.
The throne speech was one part COVID-19 and three parts using COVID-19 as a rationale for more government intervention. The word “COVID-19” was used 17 times — oh, but the word “investment” was used 29 times. Come on folks: Government bureaucrats don't “invest,” they “spend.”
In the national accounts, the components are labelled “government spending” and “business investment” for a reason, and there is a difference. Governments have a well-documented history of embarking on spending sprees with typically no future productivity payback, and then decide whether to fund their expenditure adventures with taxes or borrowing. There wasn't much on taxes in the document, but there was a rationale provided that the largesse being proposed will be financed in the public debt markets (or, better yet, the Bank of Canada's balance sheet).
If you want to see what productivity looks like in the public sector, it is down nearly four per cent over the past year and is actually lower today than it was in 2007. Private-sector productivity, at the same time, is up more than three per cent in the past year and since 2007 has expanded 14 per cent. But the throne speech was all about what your government can do for you — and far beyond matters that apply to public health.
Over the past two decades, the correlation between the ratio of Canadian federal government spending to GDP and the pace of economic activity has been -26 per cent. That's right, more government spending actually does more to hurt than help the economy. Beware of governments or economists telling you that more government involvement in the economy means more growth.
If one thing is obvious, it is that the Liberals have outflanked the NDP as Canada's left-leaning party. Shades of Pierre here — pursuit of the “Just(in) Society.” No stone was left unturned. Fiscal support, not just for those affected by the pandemic, but something for everyone: women, Indigenous Peoples, youth, immigrants, rural areas, the middle class, the elderly, the disabled, Quebeckers and the fight against racism and wealth inequality. Who can argue against these? Will any party dare vote “no confidence” over motherhood?
There were plenty of sound bites, enough to exhaust anyone typing them all out, but if there was one statement that really resonated, it was this one: “The economic impact of COVID-19 on Canadians has already been worse than the 2008 financial crisis. These consequences will not be short-lived.”
For investors, that means hunker down and continue to focus on the asset classes and securities that will benefit from what is likely to be a harsh winter. That means the “stay-at-home” plays will remain dominant and the cyclicals and reopening segments of the market will likely lag far behind.