THE 2009 BRITISH COLUMBIA BUDGET TD Economics

Interesting TD Economics article by Pascal Gauthier with a focus on British Columbia. Enjoy!

HIGHLIGHTS

• After a small $50 million surplus in fiscal year (FY) 2008-09, planning deficits are estimated at $495 million in FY 2009-10 and $245 million in FY 2010-11
• Return to balanced budget by FY 2011-12, with the help of cost savings worth $1.9 billion over 3 years
• No forecast allowance, but prudent growth forecasts and contingency amounts
• $9 out of every $10 in new spending towards health care
• Few new tax measures, back-end loaded to FY 2011-12
• Capital spending in infrastructure ramped up significantly (+ $14 billion)

British Columbia is feeling the pinch from the severe ongoing global recession, like every other region in the country. Compared to last September’s quarterly fiscal update, downward revisions to growth forecasts by the private sector have translated into a massive revenue shortfall of $6.6 billion over the Province’s 3-year fiscal planning horizon. As a result, for the first time in six years, the province is faced with a deficit. However, the deficits are expected to be modest both in absolute size (cumulating to $740 million over two years) and relative to the size of the economy (at 0.2% of nominal GDP in fiscal year 2009-10). The government has chosen not to include a forecast allowance as in previous years. However, in order to mitigate risks to its projections, it will use economic growth forecasts significantly below the private-sector consensus, and contingency amounts of $250 million to $385 million per year.

Economic and Revenue Outlook

The private-sector consensus forecast for real GDP growth calls for no growth (0.0%) in 2009. Akin to the prudent approach taken by the Federal Finance Department, B.C. Finance is playing it safe by using a forecast significantly below the private-sector average. Their assumption is for a contraction of real GDP of 0.9% this year, which is very close to our own call for a contraction of 1.0%. When compared to the Budget 2008 plan, the downward adjustment to revenue projections is broadly based, but most badly hit are own-source revenues in the form of resource royalties, corporate income taxes, and property transfer taxes. Similarly, but with a lesser difference, their real GDP growth forecast of 2.4% for 2010 lies below the private-sector forecast of 2.8%. Our own forecast for next year is more bullish and suggests some upside risk vis-à-vis their projection, with the main difference hinging mostly on the projected direct and indirect boost to growth from hosting the 2010 Winter Olympics.

Spending measures

Savings worth $1.9 billion over the 3-year planning horizon are being targeted, $250 million of which are yet to be identified. Administrative spending will be put under the microscope, while the number of senior executives in government will be slashed by 20% and no additional planned wage increases are being budgeted for upcoming rounds of public sector negotiations. The expected savings are being recycled towards key spending areas, but mostly health care. In fact, $4.8 billion, or 90% of all additional spending, is slated for health care. The remainder of additional spending will go to education, social services, safety, communities, and the environment.

Very much in line with a theme omnipresent in the Federal Budget and very likely to show up in other upcoming provincial Budgets, infrastructure spending is being ramped up significantly – to the tune of $14 billion over 3 years. Of this amount, $10.6 billion is for approved projects within the Province’s capital expenditure plan, while $2 billion is provided on a cost-shared basis with the Federal government, and the remaining $1.4 billion is for local infrastructure in partnership with the Federal and local governments.

Tax measures

The very few new tax measures introduced were understandably back-end loaded to FY 2011-12 and beyond. As announced in November, a 2-year property tax deferment program is being introduced. The B.C. Mining Flow-Through Share (non-refundable) Tax Credit is being extended by one year to the end of 2009. Expiry dates for film tax credits are being eliminated, while the credits themselves will be made available to other Canadian (non-B.C.-based) companies. Furthermore, starting in FY 2011-12,

The industrial property tax credit will increase from 50% to 60%, saving mills, mines, and other industrial employers $11 million per year. This tax relief will be funded from carbon tax revenues (intended to be revenue-neutral).

The Low Income Climate Action Tax Credit will increase by 10%, representing foregone revenue of $15 million per year.

A Northern and Rural homeowner benefit increase of $200/year, also funded by carbon tax revenues.

The farm land school property tax will decrease by 50%.
Bottom line

Faced with such a U-turn in economic fortunes in a short amount of time, the government has elected to modify its balanced budget legislation to allow for a cyclical deficit. Not having done so, and forcing taxes hikes and/or more drastic spending cuts could have meant exacerbating the recession. In the current context, leaning against this recession, along with other governments, and allowing a modest deficit while ramping up capital spending seems appropriate. As a result of these deficits and additional capital spending, the (taxpayer-supported) debt-to-GDP ratio will end up 2 percentage points (from 13.8% in FY 2008-09 to 15.8% in FY 2011-12) higher by the time a balanced budget is within reach. This would still lie below the 16.1% level recorded in FY 2005-06 and leave the province in a healthy fiscal position once the economic recovery has taken hold.

Pascal Gauthier, Economist
416-944-5730

RE:RE: Soundness of the Canadian Banking System

Chart from the Geneva-based World Economic Forum that rates the ‘soundness’ of each countries banking system. Enjoy!!

 

 

 

 

 

soundness-of-banks-ranking

Bank Of Canada To Buy More Mortgages

Remember a few weeks back that the Bank Of Canada would purchase mortgage securities worth $25 Billion from the crown owned and controlled CMHC (Canadian Mortgage and Housing Corporation)?

Well today it was announced that the Bank of Canada will increase the amount of mortgage securities to $75 Billion total to help the floundering Canadian housing market.

Although on paper this looks impressive, the fact is clear that CMHC who the government is purchasing the securities from is 100% crown backed, they are simply pushing around paper on balance sheets. The commercial banks should follow suit and lower there risk models and allow more cash flow into the would-be-homeowners.

The Government collects the funds to purchase the mortgages by issuing bonds with an average rate of return today at 2.7% and will buy the mortgages that should yield a return of 3.78%. It certainly would be nice to have access to the collective clout of the Government, sure would make your returns more impressive!

Here is the article from the Vancouver Sun

RE: Canadian Banking Ranking

This has been quite the topic of conversation as of late, and quite frankly I would have to agree with Reuven Brenner “If you look at…all these rankings, they’re meaningless,” So what if our banking system is at the top of glossy chart that is a product of the Geneva-based World Economic Forum, how does that help the everyday Canadian who earn a decent wage and pay their bills on time, but is struggle ling to secure that loan to keep there small business afloat?
It’s interesting to note that if JD Power slaps a ‘highest ranking in initial quality’ on a ‘B’ vehicle brand, its not going to sway the masses that have their eyes set on Canada’s top selling vehicle the Honda Civic.

Many of us are huge fans of Consumer Reports, what a great way to make sure that you are buying the best product for your money, I love reading the reviews and looking at the nifty little red and black circles that put the elusive stamp on our consumer goods. But Consumer Reports shares the same problem with the Geneva Economic article- Macro Focus-
In the US and Canada there are well over 100 automobile magazine publications that test, review and employ experts in the industry to grade automobiles and only automobiles. I am simply floored when a friend tells me that they are considering purchasing a new fancy Lexus but are concerned that the consumer reports said it has poor visibility…..People are you really going to make a $80,000 purchase on the results of a magazine that compares rakes, hoses and toaster’s??

Due to the economic fundamentals of our global economy (gosh that sounds McCain like) banks lend over border lines just as easily as streets, and the global pipeline has been shut – to even the ‘top rated’ Canadian banks. While we are all enamored at the usefulness of a financial institutions home page and color schemes, we should really be caring about is access to the funds that are being choked out of the system. After all what good is first place if it gets you nothing!

Here are the “Top Rated Banks”

Great article by Kelly McParland posted today in the National Post

David Akin: Are Canada’s banks really world’s safest?
Posted: November 13, 2008, 4:15 PM by Kelly McParland
Full Comment, david akin, Canadian politics

Just about any time these days that Finance Minister Jim Flaherty or Prime Minister Stephen Harper talk about the global fiscal and economic crisis, you will almost certainly hear them assert that Canada’s banks are “the soundest in the world.” Indeed, that was the first thing Flaherty said Wednesday morning just as he was announcing a suite of measures to help the banks do their job better.
It’s a claim Canada’s politicians have been making ever since the Geneva-based World Economic Forum published a report Oct. 8 that ranked Canada’s banking system the “soundest” among 134 countries surveyed.
But is Canada’s banking system really that sound? Should Canadians and politicians be putting much stock in the World Economic Forum’s report?
“If you look at . . . all these rankings, they’re meaningless,” said Reuven Brenner, a professor in the Desautels faculty of management at McGill University.
Banking policy experts worry such a ranking may lull Canadians and politicians into a false sense of security or reduce the impetus to make changes and regulatory reforms they say are needed to make our financial services sector stronger.
“Our banks aren’t perfect,” said Louis Gagnon, an associate professor at Queen’s University business school.
“They do venture sometimes, at a cost, into markets where they don’t belong. There’s no question that a review in processes would be useful. There’s a measure of transparency that hasn’t existed. We’d like to know more about our banks.”
Officials, on orders from Prime Minister Stephen Har-per, are reviewing the regulatory system, although Ottawa has not provided details about the scope or purpose of the review.
The WEF report contained a ranking of 134 countries on a broad array of issues that affect a country’s ability to attract and retain new business investment.
So, for example, Canada ranked 19th in the world on intellectual property protection, 34th when it comes to co-operation in labour-employer relations, and 10th on the quality of overall infrastructure. Canada ranked first on “soundness of banks.”
But no one from the World Economic Forum objectively researched all these variables. All the WEF did was to circulate surveys to small groups of business executives in each country.
In Canada, just 75 business executives were asked their opinion about each of these factors.
As it turns out, those 75 Canadians essentially thought Canada’s banks were more sound than any group of another country’s executives thought about their country’s banking system.
“It’s important that people who are using these statistics recognize that one question by itself doesn’t give you the full answer,” said James Milway, executive director of the Institute for Competitiveness and Prosperity at the University of Toronto.
Milway’s institute was the World Economic Forum’s Canadian partner. It found the Canadian executives and administered the survey.
The survey “is really speaking to the perceptions of business executives in Canada to similar business executives around the world talking about their own country. The ranking is not the result of a thorough and deep analysis done by analysts who are looking at various ratios and measures of banking systems,” Milway said.
National Post
Gemini Award-winning reporter David Akin is the National Affairs Correspondent for Canwest News Service and is based at the CNS Parliamentary Bureau in Ottawa, Ontario, Canada.  Read more at his blog, On the Hill
Photo: Bank of Canada Governor Mark Carney pauses during a news conference upon the release of the Monetary Policy Report in Ottawa October 23, 2008. (REUTERS/Chris Wattie)

Bank of Canada’s half-point cut becomes a quarter-point cut for borrowers

Canada’s central bank moved Wednesday to cut short-term interest rates by half a percentage point, but Canadian banks are cutting rates only half that much.

Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and TD Canada Trust said they will trim their prime lending rates by 25 basis points — meaning a quarter of a percentage point — effective Thursday.

The prime lending rate is what banks charge credit-worthy business customers on short-term loans. Other interest rates, including certain mortgage rates, may be linked to the prime rate but set several points higher.

Tim Hockey, CEO of TD Canada Trust, issued a statement saying his bank is doing its best to help the central bank.

“Continuing market turmoil has steadily driven up the cost of borrowing for financial institutions. This makes it challenging to match the Bank of Canada rate cut at this time,” he said.

“We recognize the efforts the Bank of Canada is making and, despite the fact that our cost of funds remains high, we have decided to reduce our rate by 25 basis points. We see this as a balanced move in managing our funds and passing along the intended benefits to our customers.”

The other banks issued one-sentence notes saying they will cut their prime rates to 4.5 per cent from 4.75 per cent, the same cut announced by TD.

The Bank of Canada, in a move co-ordinated with the U.S. Federal Reserve and other central banks, cut its target for the overnight rate half of a percentage point to 2.5 per cent. The central bank describes that rate as its key policy interest rate, signalling its intentions to credit markets.

http://www.cbc.ca/money/story/2008/10/08/prime-rate.html?ref=rss&loomia_si=t

TD Canada Trust is leading the way for lending practices in Canada, with the ripple effects from Global Economic concerns tricling down it is interesting to note why the banks are only following with half of the centeral banks discount.

Liquidity on the international market has lead to higher expectations for for gin investors, simply put for gin investors want a higher return on lending funds to Banks- this premium demand has forced the Canadain banks to pay higher returns in exchange for forgin cash infusions. This has the bank changing it’s pricing policys in these unprecedented times. It will be interesting to watch what other actions will be taken in the near future with regards to Mortgage rates and HELOC produts from all of the Canadian lending institutions.