Resurgent growth could see deficit reduction accelerated or spending
TORONTO, June 6, 2013 /CNW/ - A rebounding global economy could see
Canadian governments back in the black a lot earlier than forecast,
finds a new report from CIBC World Markets Inc.
"Canadian governments are selling themselves short," write CIBC
economists Warren Lovely and Emanuella Enenajor. "With ample insulation
against today's still-tepid economic climate and prospects of a more
forceful 2014/15 global expansion, federal and provincial governments
will enjoy some important fiscal breathing room. In response, deficit
elimination timelines could be accelerated, recovering ground given up
in the past year.
"Alternatively, some governments will be in a position to ease up on
spending restraint without jeopardizing budget targets, hinting at a
less onerous medium-term fiscal drag. Incremental wiggle room also
creates scope for new fiscal initiatives that could hold the key to
re-election for some."
The economists note that while a weak global economy and debt conscious
Canadian households have seen GDP disappoint, government budget targets
are likely still well protected. Federal and provincial governments set
aside $5 billion in explicit reserves/forecast allowances in 2013/14,
enough to absorb at least a full percentage point miss on nominal
The report adds that government bottom lines will also be helped by
another year of low interest rates and resulting lower-than-planned
debt service charges. In addition, some high-profile headaches in the
energy sector—transportation bottlenecks and a discount between Alberta
and international crudes—have been less painful of late.
"At this stage, it's hard for us to see 2013/14 fiscal results being
thrown off track," say Mr. Lovely and Ms. Enenajor. "Further out,
Canadian governments clearly expect better things for 2014/15 and
2015/16, as resurgent growth lops some $30 billion from the combined
federal-provincial deficit over those two years.
"That already sounds impressive enough. But if anything, Canada's
finance ministers could end up being even more pleasantly surprised.
Powered by external markets, we see Canadian nominal GDP growth topping
five per cent in both 2014 and 2015, comfortably north of the weighted
average growth forecast built into current fiscal plans."
They note that, all told, the combination of above-plan growth and
budgetary prudence is equivalent to roughly $10 billion in
federal-provincial fiscal cushioning for 2014/15 and an even greater
$15 billion the year after. "Add that to the insurance built into the
current fiscal year and the cumulative leeway exceeds $30 billion.
That's $30 billion in deficits that theoretically need not materialize,
suggesting that in some cases, deficit elimination timelines could be
Mr. Lovely and Ms. Enenajor think a more likely scenario would see "take
a less aggressive stance on spending restraint relative to current
thinking. If all their fiscal upside was applied to spending, Canada's
provinces would have room to grow their spending by roughly an extra
1.5 percentage points per year (on average) through 2015/16—a near
doubling relative to the ultra-lean 1.8 per cent average annual gain
now officially projected."
Canada's commodity rich regions will once again be the primary
beneficiaries of accelerated global expansion. While a shrinking fiscal
drag stateside means better times ahead for U.S.-levered regions like
Ontario, an elevated loonie will hurt the factory sector's ability to
fully capitalize on America's resurgence. These trends could re-ignite
the relative economic, fiscal and spread outperformance of Canada's
Western provinces starting next year.
A return to deficit reduction would further curb the government bond
market. Currently, Canada is the only sovereign in the G7 where the
stock of central government bonds is effectively topping out. Net
provincial issuance is also on the wane, likely to amount to roughly
$30 billion this fiscal year, off notably from $40 billion-plus
digested in 2012/13. By the time 2015/16 rolls around, combined
federal-provincial net bond issuance—once so plentiful—could be
"The likelihood of better-than-expected fiscal results should ultimately
defuse a lingering threat to select provincial credit ratings," add the
CIBC economists. They note this will "result in an even scarcer supply
of bonds, supporting Government of Canada yields and provincial credit
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eijun13.pdf.
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SOURCE: CIBC World Markets
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