Wednesday, January 28, 2009

Budget Reactions

(National Post)

A round up of reactions to yesterday’s Conservative budget from various economists:

“The 2009 budget details put some meat on the bones of the details that were released earlier this week. A number of spending initiatives were announced across a broad cross section of industries, but perhaps the juiciest tidbit was the $20 billion tax cut promised to middle class Canadians. The government will also ramp up its involvement in financial markets. It will purchase more mortgages, and will start buying car leases. All in all, a lot of the details were known beforehand, ostensibly to mitigate the “sticker shock” of having to run a budget deficit for the first time in over a decade. These are exceptional times and the Department of Finance clearly sees the need for exceptional measures and in this case it means running a budget deficit until the economy gets some traction.”
— Charmaine Buskas, Senior Economics Strategist at TD Bank Financial Group

“The 2009 Canadian budget is chock-full of government spending and rather light on the side of tax cuts, but the truth is that domestic fiscal stimulus can only ease the pain of the global recession and credit crisis. This budget is palliative by necessity, but that is better than nothing. Arguably, the budget will enhance domestic financial stability, which is the most we can hope for right now. Ottawa has granted the Bank of Canada, Canadian Deposit Insurance Corporation (CDIC), and the Minister of Finance broadened authorities to respond to a banking crisis of the sort plaguing the U.S. and Europe. Hopefully, these authorities will not be tapped because Canadian banks are relatively strong. But setting up the mechanism for bank bailouts is prudent and in compliance with the G-20 Finance Ministers Agreement. On balance, the fiscal measures in this budget represent about 1.5%-to-2% of GDP in 2009. This is a large stimulus, but relative to the plans in the U.S. and China, it is relatively light and it should be. This budget is merely triage to help the hardest hit to bear the pain through temporary pain killers. At this stage, that’s about as much as Ottawa can do.”
— Sherry Cooper, Chief Economist at BMO Capital Markets

“Today’s budget is unlikely to have much of an impact on the Canadian dollar. The net new stimulus was largely as expected, and is more moderate than the expected U.S. package, which could total $825 billion over two years (3% of GDP). Even with the expected five-year string of deficits, Canada will still boast the lowest debt/GDP ratio among the major industrialized economies. The hefty new fiscal stimulus measures, largely flagged beforehand, should support domestic demand. In addition, Ottawa will need to crank up its net new borrowing in the year ahead, with a total financial requirement of more than $100 billion, a significant acceleration from the recent years of economic plenty. However, the big driver for bond yields (and also for the Canadian dollar) will continue to revolve around the much bigger issue of when global risk aversion will recede. That also applies for equity markets, which saw precious little in new measures in this year’s budget.”
— Douglas Porter, deputy chief economist at BMO Capital Markets

“This budget is unique, not so much because of its focus on policy but rather on politics. There is no surprise that the Conservative government delivered a budget that aims to deliver relief, in the form of tax cuts to individuals and corporations and stimulus for a broad number of sectors. After all, for this government to help stabilize and revive the economy through fiscal policy, it first needs to ensure that the budget is not defeated by the opposition parties and so it had to utilize a shotgun approach. All in all, badly needed spending on education, transportation, health, childcare, farming, the arts, tourism and recreation; support for mining, forestry, sustainable energy and agriculture; a reduction in taxes for individuals and businesses, small and large in the form of tax credits and cuts; better assistance to the unemployed and homeowners, is just what is needed right now to help stabilize the ailing Canadian economy. With the Bank of Canada’s monetary policy very accommodative, the government’s mandate was to deliver enough stimulus to restore confidence to consumers and businesses and encourage spending, which I think it has done, given the political tightrope it was walking.”
— Paul L. Vaillancourt, Director Portfolio Strategy Franklin Templeton Managed Investment Solutions

“As promised, the federal budget has clearly moved towards stimulus to the tune of about 1% of GDP in each of the next two years. A component of these initiatives is meant to directly address the credit tightening that is the primary cause of the weakening in growth not only in Canada but in the US (and the globe). The greater amount of funds allocated in today’s budget is meant to replace lost incomes resulting from falling employment both directly through tax cuts and indirectly by boosting hiring through infrastructure spending. The initiatives are relatively aggressive and consistent with a Canadian economy in recession (the budget document reflects the assumption of a drop in GDP growth of 0.8% in 2009.) The various measures have been well chosen to kick in relatively quickly though the risk remains, will it be fast enough? which is equivalent to about 2% of nominal GDP.”
— Paul Ferley, Assistant Chief Economist, RBC Economics Research

”It's clearly a document that tries to balance politics and policy. We think the level of stimulus is probably appropriate. I'm not a big believer in permenant tax cuts because their fiscal impact is ongoing. But at least there is a bit of stimulus there. I guess the most important this is they understand the need to provide cash spending right now. It has a lot of money for infrastructure. It's actually geared largely towards working Canadians. All in all, I think frankly it is a fairly judicious balance.”
Glen Hodgson, Senior Vice-President and Chief Economist at The Conference Board of Canada

“The Government of Canada is set to do a great deal of borrowing over the span of the next few years, and this will show up via additional bond issuance. Although this might normally increase the level of bond yields, we believe other factors are likely to dominate, including economic woes, rock-bottom central bank rates, and deflationary fears. All of these should keep yields down. Relative to other countries, Canada’s borrowing needs are but a trifle. And although the scale of bond issuance may be at a record high for Canada, the starting point – with a low debt-GDP ratio and an economy much larger than in the mid-1990s – should leave the Canadian bond market in relatively good stead.”
— Eric Lascelles, Chief Economics and Rates Strategist at TD Securities