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Archive for the ‘Economy’ Category

It has been a big week from a political standpoint; Parliament reconvened with a Speech from the Throne on Wednesday and Federal Finance Minister Jim Flaherty tabled his governments latest federal budget on Thursday. Before taking a look through the federal budget, I would like to take some time to examine the BC Provincial Budget that was unveiled by Provincial Finance Minister Colin Hansen on Tuesday.

The first thing to always remind oneself of when paying any heed to a budget, whether it is a provincial or federal one, is that it is a hybrid of a policy document and a political one. A good example of this fact can be found by reading through the 2010 Budget Highlights. Only once in that document does the word ‘deficit’ appear, and that is as an axis label in this graphic:

BC Provincial Budget: 2001-2009, with 2010-2014 forecasts

Well, at least they used the word once! This graphic does get to the crux of any budget; is there a surplus or a deficit and how big is it? For the fiscal year of 2010/11 a deficit of $1.715 billion dollars is projected.  This is a figure that is 38% lower than last years deficit of $2.775 billion and represents about 1% of provincial GDP*. The budget forecast sees that deficit dropping to $945 million the next year (45% less than the projection for this year) $145 million in 2012 and turning to a surplus of $410 million by 2013. Considering the depth and breadth of the just now turning around recession, especially in the US housing market (the primary destination of much of BC’s forestry products) I’d say these numbers look rather good on balance. My very limited economics sense tells me that with interest rates as low as they are now and no strong signs pointing towards a spike in inflation an even higher short term deficit could be in order. All and all though, these forecasts seem reasonable to me.

Next, let’s take a look over the goodies contained within the budget. ‘Goodies’ are new spending announcements or reallocations for very specific programs. These specific allocations will serve as the basis for a whole years worth of generic talking points: “Our Government believes in X, that’s why we created the Y program in this years budget, funding it with Z dollars over the next year(s).” Every single one of these expenditures may be warranted, and perhaps many deserve more funding,  and none of this suggests that these programs should be cut. I just feel it is important to remember the political aspect to them. So what are the goodies? By far the largest share of funding increases comes in the form of a $2 billion dollar increase from the 2009/10 budget levels for healthcare over the next three years, with over half of that number going directly to health authorities for front line expenditures. Pivoting off of the just finished Olympic Games, $30 million in new funding was announced for youth participation in sports, and another $30 million for provincial art investments. The LiveSmartBC program, designed to assist homeowners in improving energy efficiency, returns with $35 million in funding. A big item in the budget, for homeowners with kids at least, is the new ability to defer payment on property taxes until one sells their home. It’s hard to put a price tag on this item, but I imagine it will prove to be extremely popular. The last ‘goody’ I can pick out easily is a grant of up to $200 for homeowners outside of the Lower Mainland and the Victoria area.

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CBC and The New York Post both have stories up at their sites discussing the potential future of Intrawest, the company that owns the Whistler-Blackcomb ski resort that will play host to the alpine events during the 2010 Olympics. The whole scenario is a somewhat confusing mix of creditors and debt holders, so you should just go and read either of the articles, but there seems to me to be two different elements to this story. The first angle is the leveraged buyout of Intrawest that occurred in 2006 by the hedge fund Fortress Investment Group. This purchase was highly leveraged, and wouldn’t you know it, the Lehman Brothers happen to be one of the creditors in that deal (you remember the Lehman Brothers, right?) Fortress recently missed a $524 million payment on the debt incurred during the purchase of Intrawest. As Lehman is currently restructuring under bankruptcy protection, they are looking for funds wherever they can find it to make good on the more $1ooo billion creditor claims against them. As such, they have indicated that they could foreclose against Intrawest as early as February 19th (right in the middle of the games) and begin to auction of it’s assets (including Whistler-Blackcomb.)

Further to Fortress’s tangling with Lehman Brothers, the hedge fund has also been sparring with VANOC/the Canadian Government. According to the New York Post,

VANOC guaranteed that it would make Intrawest whole for the time that its events take place at its resorts. But now, according to a source, Canadian officials are threatening to pull that roughly $50 million guarantee. That, the source said, has compelled [Fortress fund manager Wesley] Edens to privately say he has a legal right to keep the Games from taking place at Whistler.

There’s nothing like a sexy story about the possibility of Olympic events not taking place! I do think that it is important to give credence to what Bill Singer, a securities lawyer in New York had to say to the CBC:

I can’t imagine that it will ultimately mean much, because I would assume between [Canadian] government interest and the Olympic Committee there would be something that would be accomplished just to forestall [this.]

For their part, Intrawest had this to say:

We have a 2002 agreement with VANOC to host the Winter Olympics and have every confidence that VANOC will honour its financial commitments. Intrawest is looking forward to a successful Olympic Games.

The word ‘bankruptcy’ is a loaded one in the English language, and it carries even more weight these days in light of the past few years of economic turmoil. It is easy to forget that well established procedures are in place for navigating corporate entities through bankruptcy protection, and more often than not they emerge from protection as a viable company. And while this story is an interesting one that deserves to be followed, I too, in my extremely limited understanding of financial wizardry would not expect this current story to prevent a successful games from happening.

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I’ll have more to say on this later today, but it looks like  all of the tax cuts that Prime Minister Harper and Finance Minister Jim Flaherty have enacted during their tenure (4 years in February!) have come home to roost. What prize have our fine feathered friends brought us? Why it’s nothing less than a forecast return to structural budgetary deficits. A brief historical view of Canada’s budgetary balance and debt in visual form:

*Figures from The Department of Finances Fiscal Reference Tables

What you’ll notice is that for the first half or so of this graph outlays were consistently higher than revenues, ie. we consistently had yearly deficits, hence that ballooning green area, which is the Accumulated Deficit (Debt). For many years we had deficits, so that debt line just kept going up and up. But then things changed. You can see that around 1997 revenues started to exceed outlays. We went from consistently having a deficit (a ‘structural deficit’) to having a surplus. We even used some of that surplus to pay down the debt (the green line going down.) If you’ve actually looked at the above graphic, one of the most important pieces of information is what is not on it, and that is any data from 2009. That’s the time period where all economic graphs you look at have a daunting cliff dive.(Update: I have replaced the original graph in this post with a more accurate one that also includes projections through 2014.) Now look at the most recent points for 2008-9. Revenues have been significantly down in this period. During this same time the government has enacted a series of ‘stimulative’ measures, something I happen to agree with, that equals higher expenditures in 2009 than what has been the trend. That means we are back in a deficit situation. And the Parliamentary Budget Officer says that is going to continue for at least the next four years. That does not jive with Mr. Harper and Flaherty’s assessment of having a balanced budget by that point in time. More to come. I have read that Mr. Flaherty believes that we will be returning to balanced budgets shortly (trying to find a source of this still) and that “the government says it won’t increase taxes or cut provincial transfers to balance the budget.” Clearly when we are facing structural budgetary shortfalls we should decide ahead of time against using one of the two possible mechanisms for fixing this situation. And for some inane reason, ever time I hear this reported on the choices are phrased as either there can be tax increases or cuts in spending. I’ll have to teach those Conservatives a lesson their mothers and fathers should have already taken care of; using both strategies.

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Something that I’ve tended to think about the current tenure of Prime Minister Stephen Harper is that although his government has pushed through (or tried to push through) much legislation that I personally disagree with (cuts to the CBC, cuts to arts funding, “tough on crime” legislation), by and large the government has been competent (there have been exceptions to this though too.) Being one who has never had much love for the media, Harper had made no public comments on his recent prorogation of the Canadian parliament until he recently deigned to sit down with the CBC’s Peter Mansbridge for an interview:

At 5:24 into the piece, Mansbridge asks the PM about his decision to prorogue the current parliamentary session; in a very casual manner, and apparently doing his best to dissuade me of my belief in his government’s competency, Harper says “coming off an extraordinary year [2009][...]we want to take some time to recalibrate the government’s agenda, both on the economy and on some other matters.” What kind of government is not capable of evaluating what you’ve done in the past, realign goals for the future and govern at the same time? Not one worthy of governing in my opinion. Unfortunately this video clip cuts off without showing Harper’s comment that since the controversy about the transfer of Afghan detainee’s isn’t on Canadian’s radar at large it’s not something that his government is going to be concerned with. To see that as well as Mansbridge’s logical followup question “Just because it’s not an issue in polls, does that not make it important?” you can view the full clip here.

Something I find rather interesting is to compare our PM’s assertion that the government needs two months to ‘recalibrate’ and that they are focused on the economy, not silly little things like the rule of law and how we adhere to international treaties, with the constant criticism that President Obama faces in the US that he is not ‘focused’ enough for his decision to deal with the terrible legacies Bush left in the GWOT, healthcare, the economy, Iraq, Iran, Afghanistan/Pakistan and whatever other issues an effective executive needs to deal with. The blogosphere in the States makes the easy analogy that one can walk and chew gum at the same time to illustrate that good governments needs to be multifaceted, as we are a multifaceted society. It’s a shame our PM either feels that is not the case, or crassly makes that case to defend his current politicking.

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Felix Salmon, economics blogger for Reuters had this post up a few days ago:

Mike Mandel has four nominees for his “Economic Statistic of the Decade” award, including home prices (obvs), Chinese growth, and global trade. But the most startling one, for me, is US household borrowing:

I like the time frame that Mike has chosen here, since it shows not only the huge increase in borrowing during the credit boom and the stomach-churning plunge thereafter, but also, for much of the 1990s, what “normal” should look like.

Mike notes that the data for this chart includes domestic hedge funds, so it shouldn’t be taken entirely at face value. But it’s the best visual representation I’ve seen of the credit boom and bust.

There’s also a nice riposte in comments to someone whining about the current decade not being over yet:

There is one full year remaining in the decade that consists of the first ten years of the 21st century. There are no more years remaining in the decade that consists of the ten years beginning with 2-0-0. Each of them is “the current decade” (as is the decade that consists of the years 2007 through 2016). It turns out that the overwhelming majority of the population finds it most appealing to review the history of a decade defined as the set of years with the same three initial digits, and they are in no way wrong to do so.

Exactly. Enjoy this new decade. And borrow sensibly! I’ll see if I can’t find the same data for Canadian households. I imagine it is only somewhat more prudent…

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