A Federal Budget Designed for the Times The Economic Action Plan of 2009
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Transcript of A Federal Budget Designed for the Times The Economic Action Plan of 2009
A Federal Budget Designed for the Times
The Economic Action Plan of 2009
A Federal Budget Designed for the Times
The Economic Action Plan of 2009
Christopher RaganMcGill University
and Department of Finance
May 7, 2009
2
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
3
Global Economic Context,
January 2009
4
-20
-15
-10
-5
0
5
10
15
20
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
A collapse in the U.S. housing market …A collapse in the U.S. housing market …
U.S. Housing Starts and Months Supply of Existing HomesU.S. Housing Starts and Months Supply of Existing Homes
U.S. S&P/Case-Shiller Home Price Index U.S. S&P/Case-Shiller Home Price Index
per cent, year over year
400
800
1,200
1,600
2,000
2,400
Jan2001
Jan2002
Jan2003
Jan2004
Jan2005
Jan2006
Jan2007
Jan2008
Jan2009
3
4
5
6
7
8
9
10
11
12
thousands,at annual rates
level, months supply atcurrent sales rate
Housing Starts (left scale)
Months supply of existing homes (right scale)
5
… led to losses in U.S. banks and huge write-downs worldwide.… led to losses in U.S. banks and huge write-downs worldwide.
U.S. Write-downs and LossesU.S. Write-downs and Losses
0102030405060708090
100110
Citi
gro
up
Ban
k o
f A
me
ric
a
JP
Mo
rga
n C
ha
se
Go
ldm
an
Sa
ch
s
Mo
rga
n S
tan
ley
Me
rrill
Ly
nc
h
Le
hm
an
Bro
the
rs
Billions, USD
Source: Bloomberg. April 17, 2009
Global Write-downs and Losses Exceed $1 trillionGlobal Write-downs and Losses Exceed $1 trillion
0
200
400
600
800
1000
1200
1400
World Canada U.S. Europe Asia
Billions, USD
6
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.
7
Equity markets contributed to the global financial carnage.Equity markets contributed to the global financial carnage.
Source: Bloomberg. Up to and including April 24, 2009.
IMF’s Estimates of Financial Sector Potential Writedowns (2007-2010)
0
500
1000
1500
2000
2500
3000
3500
4000
4500
World U.S. Europe* Japan
Billions, USD
-70
-60
-50
-40
-30
-20
-10
0
Canada(S&P/TSX)
U.S. (S&P500)
U.K. (FTSE100)
EMU (DJEuro
STOXX)
Total
Banks
World Equity Markets
% change since January 1, 2007
*Europe includes Euro area and the U.K.Source: IMF’s Global Financial Stability Report, April 2009.
8
Credit spreads increased sharply…Credit spreads increased sharply…
Credit Spreads
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.
basis points
-40
0
40
80
120
160
200
240
280
320
360
400
Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09
Canada (CDOR - OIS)
U.S. (LIBOR - OIS)
Euro area (LIBOR - OIS)
9
Credit growth
Source: Bank of Canada.
Year-over-year percentage change
0
2
4
6
8
10
12
14
2005 2006 2007 2008 2009
Household Credit Business Credit
… and (with a lag) affected credit growth.… and (with a lag) affected credit growth.
historical averages:1992-present
10
Central banks were aggressive and also “creative” in their actions.Central banks were aggressive and also “creative” in their actions.
• Capital Injections• Troubled Assets Relief Program• Direct investments in financial institutions, e.g.
Barclays, ING, AIG, Fortis
• Guaranteeing the liabilities of financial institutions
• U.S., Ireland, U.K.
• Nationalization • Fannie Mae, Freddie Mac, Icelandic banks
• Purchase of “toxic assets” • Public-Private Investment Fund, Asset Protection
Scheme (UK)
• Supporting financial markets • Commercial Paper Funding Facility, Term Asset-
Backed Securities Loan Facility, Canadian Secured Credit Facility
Policy Interest Rates
per cent
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Sep2007
Dec2007
Mar2008
Jun2008
Sep2008
Dec2008
Mar2009
U.S. Federal Reserve
Bank of Canada
European Central BankBank of England
Sources: Bank of Canada, U.S. Federal Reserve, European Central Bank and Bank of England.
Global actions to support the financial sector
11
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.
Financial markets and the “real” economy?Financial markets and the “real” economy?
12
Source: Bank of Canada.
Year-over-year percentage change
Industrial production in major economies slowed sharply ... and then fell off a cliff!Industrial production in major economies slowed sharply ... and then fell off a cliff!
Industrial Production
-40
-30
-20
-10
0
10
2005 2006 2007 2008 2009
United States
Germany
Japan
13
We were faced with the first synchronized global recession in over sixty years …We were faced with the first synchronized global recession in over sixty years …
World Economic Growth
-2
-1
0
1
2
3
4
5
6
7
1970 1975 1980 1985 1990 1995 2000 2005
per cent
Forecast
Actual
Note: World real GDP growth on a purchasing-power parity basis.Source: International Monetary Fund World Economic Outlook, April 2009.
IMF’s threshold for a global recession
14
… with considerable uncertainty about the global economic outlook.… with considerable uncertainty about the global economic outlook.
Mean of Private-Sector Forecasts for 2009 Real GDP Growth
per cent
Source: Blue Chip Economic Indicators - January 2008 to April 2009.
Date of forecast
6.5
7.5
8.5
9.5
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09
-6
-5
-4
-3
-2
-1
0
1
2
3
China (left)
Canada (right)
U.S. (right)
Eurozone (right)
Japan (right)
per cent
15
The knowledge that recessions triggered by financial stress tend to be longer and deeper … The knowledge that recessions triggered by financial stress tend to be longer and deeper …
Source: IMF World Economic Outlook, April 2009.
Duration and output loss
0 1 2 3 4 5 6
All recessions
Financial crises
Highly synchronizedrecessions
Duration (quarters)
Output loss (%)
16
… led to an internationally coordinated response.… 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.
17
Canadian Economic Context, January 2009
18
Canadian banks were less leveraged than banks in other developed countries …Canadian banks were less leveraged than banks in other developed countries …
Bank Leverage Ratiosassets as a multiple of capital
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.
15
20
25
30
35
2000 2001 2002 2003 2004 2005 2006 2007 2008
Canada US
UK Euro area
19
Tier 1 Capital Ratio(Tier 1 capital as a percentage of risk-weighted assets)
5
6
7
8
9
10
11
2000 2001 2002 2003 2004 2005 2006 2007 2008
U.S (Commercial Banks)
Canada
U.K.
EU
Source: Bloomberg and bank financial statements
… and were also more highly capitalized … … and were also more highly capitalized …
20
… but the global credit crisis was still affecting credit markets in Canada. … but the global credit crisis was still affecting credit markets in Canada.
Business Lending Conditions
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.
balance of opinion, percentage points
-60
-40
-20
0
20
40
60
80
100
1999 2001 2003 2005 2007 2009
Price
Non-priceterms
Easing
Tightening
21
Household balance sheets were in better shape in Canada than in the United States … Household balance sheets were in better shape in Canada than in the United States …
Net Worth to Personal Disposable Income
Sources: Statistics Canada; Department of Finance.
4.0
4.5
5.0
5.5
6.0
6.5
1990Q1
1993Q1
1996Q1
1999Q1
2002Q1
2005Q1
2008Q1
Canada
U.S.
ratio
12
14
16
18
20
22
24
26
28
1990Q1
1992Q3
1995Q1
1997Q3
2000Q1
2002Q3
2005Q1
2007Q3
U.S.
Canada
Household Debt to Net Worth
ratio
Source: U.S. Federal Reserve Board, Statistics Canada.
22
… but the decline in consumer confidence still pointed to some likely retrenchment. … but the decline in consumer confidence still pointed to some likely retrenchment.
Consumer Confidence
20
40
60
80
100
120
140
160
1978Q1 1984Q1 1990Q1 1996Q1 2002Q1 2008Q1
Canada
U.S.
Index, 2002=100 for Canada, 1985=100 for U.S.
Sources: The Conference Board of Canada; The Conference Board.*2009Q2 data is preliminary as it includes only April 2009.
23
Canadian public finances were in good shape …Canadian public finances were in good shape …
15
20
25
30
35
40
45
50
55
60
2006 2007 2008 2009 2010
Canada
G7 average
Total Government Net Debt to GDP Ratio
per cent
Federal Net Debt
0
10
20
30
40
50
60
70
80
1979-1980 1989-1990 1999-2000 2009-2010
per cent of GDP
Actual Forecast
Sources: Department of Finance; Statistics Canada.Public Accounts basis.
Source OECD Economic Outlook (March 2009 update); Department of Finance calculations.National Accounts basis.
24
… but that could not shield Canada from a U.S. recession. … but that could not shield Canada from a U.S. recession.
U.S. Real Final Domestic Demand and Canadian Real Exports Growth
per cent
-4
-2
0
2
4
6
8
1981 1990 1999 2008
Canada - Real Exports
U.S. - Real Final Domestic Demand
In 2008, 73% of Canadian exports went to the U.S.
Sources: Statistics Canada; U.S. Bureau of Economic Analysis.
25
World commodity prices had collapsed …World commodity prices had collapsed …
Commodity Prices (in U.S. dollars)
index 1997=100
Source: Department of Finance Commodity Price Index.Note: April 2009 includes data up to April 24, 2009.
index 1997=100
75
100
125
150
175
200
225
Jan 2002 Jan 2003 Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009
50
150
250
350
450
550
650
Total (left scale)
Non-Energy (left scale)
Energy (right scale)
26
… Canada’s exports had declined sharply … … Canada’s exports had declined sharply …
Exports and Imports Levels
$ billions, annual rates
0
50
100
150
200
250
300
350
400
450
500
550
600
650
92Q1 95Q1 98Q1 01Q1 04Q1 07Q1
Exports of goods and services
Imports of goods and services
Exports fall by 10% in Q4; imports fall by 2%
27
Growth Per Capita Real Gross Domestic Income
per cent
Sources: Statistics Canada; Department of Finance.
… real income (GDI) had declined sharply … … real income (GDI) had declined sharply …
0
5
10
15
20
25
2002 2003 2004 2005 2006 2007 2008
Real GDP per capita
Real GDI per capita
U.S. up just 7.3% over the same period; over 15% in Canada
28
2
4
6
8
10
12
14
Jan1976
Jan1979
Jan1982
Jan1985
Jan1988
Jan1991
Jan1994
Jan1997
Jan2000
Jan2003
Jan2006
Jan2009
Canada
U.S.
… and employment losses had already begun. … and employment losses had already begun.
55
57
59
61
63
65
67
Jan1976
Jan1979
Jan1982
Jan1985
Jan1988
Jan1991
Jan1994
Jan1997
Jan2000
Jan2003
Jan2006
Jan2009
Canada*
U.S.
per cent
* Calculated using U.S. methodology.
Unemployment Rates
per cent
Employment Rates
Sources: Statistics Canada, U.S. Bureau of Labor Statistics.
29
A Budget Designed for the Times
30
(My) Three Themes:
1. Financial-Market Measures
2. The Dual Need for Fiscal Stimulus
3. The Importance of Fiscal Prudence
31
Theme 1: Ensuring a Sound Financial SystemTheme 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.
32
The Extraordinary Financing FrameworkThe 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)
33
Potential concerns with the EFF?Potential concerns with the EFF?
1. Efficiency of government involvement in allocation of credit?
2. What is the exit strategy?
34
Target for Overnight Interest Rateper cent
0.0
1.0
2.0
3.0
4.0
5.0
Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09
Canadian monetary policy had already been very aggressive …Canadian monetary policy had already been very aggressive …
35
… but rate reductions had not always been reflected in credit markets … … but rate reductions had not always been reflected in credit markets …
basis points
Change in Interest Rates Since September 2007*
*As of the week of April 22, 2009.
Basis points
Policy Rates
1-year mortgage rates
5-year mortgage rates
10-year + corporate bond
Canada
U.S.
-425
-285
-174
121
-500
-78
-130
137
-600 -400 -200 0 200
36
… and perhaps would not be sufficient anyway. … and perhaps would not be sufficient anyway.
Consumer Confidence Business Confidence
Index, 2002=100 diffusion index (50=no growth)
Sources: The Conference Board of Canada, Institute for Supply Management (ISM) non-manufacturing survey.
20
40
60
80
100
120
140
98Q1 00Q1 02Q1 04Q1 06Q1 08Q130
35
40
45
50
55
60
65
Canada (left)
U.S. (right)
20
40
60
80
100
120
140
160
1978Q1 1984Q1 1990Q1 1996Q1 2002Q1 2008Q1
Canada
U.S.
Index, 2002=100 for Canada, 1985=100 for U.S.
Sources: The Conference Board of Canada; The Conference Board.*2009Q2 data is preliminary as it includes only April 2009.
37
1. Dampen the economic slowdown
2. Protect the most vulnerable Canadians
Suggested a targeted mix of spending and tax measures
Theme 2: A dual need for fiscal stimulusTheme 2: A dual need for fiscal stimulus
38
Short-Run Expenditure and Tax MultipliersShort-Run Expenditure and Tax Multipliers
*Dollar impact on the level of real GDP after 8 quarters of a permanent one dollar increase in fiscal measures.
1.7 1.6 1.5
1
0
0.5
1
1.5
2
Measures for low-income households
Infrastructureinvestment
Housing investmentmeasures
Personal income taxmeasures
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.
39
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
New spending combined infrastructure and housing measures … New spending combined infrastructure and housing measures …
40
… with a variety of “sectoral” measures. … 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
41
Income-tax cuts were aimed at low- and middle-income earners.Income-tax cuts were aimed at low- and middle-income 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
42
• 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
Labour-market measures also figured prominently.Labour-market measures also figured prominently.
43
A $40 billion stimulus package (over 2 years)A $40 billion stimulus package (over 2 years)
Tax measures account for $10.1 billion of total stimulus
Spending measures represent $29.9 billion of total stimulus
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
As a share of GDP (%)
Total federal stimulus 1.5 1.1 2.5
Total stimulus (with leverage) 1.9 1.4 3.2
44
• 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?
Theme 3: The importance of fiscal prudenceTheme 3: The importance of fiscal prudence
45
Debt-to-GDP Ratio: 68 29 in 14 yearsDebt-to-GDP Ratio: 68 29 in 14 years
(Net) Debt-to-GDP Ratio
per cent of GDP
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13
Projection Actual
46
Actual and projected budgetary balanceActual and projected budgetary balance
-6.0
-4.0
-2.0
0.0
2.0
4.0
1990-91 1993-94 1996-97 1999-00 2002-03 2005-06 2008-09 2011-12
per cent of GDP Projection Actual
Budgetary Balance-to-GDP Ratio
47
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
Can policies be scaled up or reversed?Can policies be scaled up or reversed?
48
… 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.
Fiscal discipline will be necessary …Fiscal discipline will be necessary …
Summary
50
The 2009 budget was designed to: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.
51
Measures to accelerate Budget ImplementationMeasures 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 mid-May with supply obtained early June
Thank youThank you