The government will need to get at least one opposition party to support it to avoid a pandemic election this spring. Much of the redistributive ‘investments’ and social spending is right up the NDP’s alley, so that should be no problem.

Canada’s net debt is now over $1 trillion for the first time, after a $354 billion deficit for the pandemic year just over. It is expected to keep climbing with deficits of $155 billion this year and $60 billion in 2022-23.

That is driven in part by more than $100 billion in new spending over the next three years, including costs to maintain federal wage and rent subsidies and aid for laid-off workers, until September now, instead of cutting them off in June.

Freeland is also looking ahead to the post-pandemic Canada the Liberals want to see, one with $10-a-day childcare, the ability to produce its own vaccines, national long-term care standards and small- and medium-sized businesses equipped with the workers and technology they need to survive.

It also includes a greener, cleaner Canada, with a promise of more than $17 billion in climate change programs, much of it in the form of incentives to encourage heavy industry to curb their emissions and grow Canada’s clean technology sector.

All of it comes with a pandemic-sized asterisk that things could still change drastically if vaccine supplies are delayed, or they prove not to work that well against emerging variants of the virus. The budget includes alternative scenarios that show where the fiscal picture might go if the worst-case scenarios of the pandemic play out.

Those risks seem even more real as the country is battling the worst wave of the pandemic yet with record hospitalizations and patients in critical care and doctors and nurses repeatedly warning of a health care system on the brink of collapse.

The debt-to-GDP ratio will rise again to 51.2%, up from 49.0% in FY20/21 and just over 31% before the pandemic. However, this year should mark the peak for that ratio before declining below 50% by FY25/26.

The Budget aims to create 500,000 training and work opportunities. It pledges $2.4 billion over three years to develop skills and trades, with about 40 percent earmarked for training in sectors ranging from health care to construction.It adds on $8.9 billion more to beef up the Canada Workers Benefit in a boost to low-wage workers, who will have a higher income threshold at which their benefit starts to shrink.

Other measures include bumping the federal minimum wage to $15, pledging $300 million to programs for Black and women entrepreneurs and other underrepresented groups, and recommitting to protect gig workers through promised amendments to the Canada Labour Code.

About 300,000 Canadians who had a job before the pandemic are still out of work.

Help for Small Businesses, Tourism Industry and the Arts

The government announced extending the Canada Emergency Rent Subsidy (CERS) and Canada Emergency Wage Subsidy (CEWS) past their current June 5 deadline but added it is planning to wind them down gradually by the end of September. The government also announced a new hiring credit and some aid programs for the hard-hit tourism and arts industries. Firms that collect the CEWS will face a clawback of the aid if their executives earn more in 2021 than they did before the pandemic. A step critics said should have been taken when the subsidy first came into force in mid-2020.

The hard-hit tourism sector is also getting $500 million for a Tourism Relief Fund, to be administered by regional development agencies to help local tourism businesses recover from the COVID recession. Another $100 million is going to a marketing campaign that will encourage Canadians to visit vacation spots in this country. Never mind that they are fully booked for the rest of the year.

The budget also unveiled $200 million in spending to support major arts and cultural festivals, which will flow through regional development agencies.

The Trudeau Government Is Betting Measures Will Improve Productivity and Pay For Themselves

The government’s budget estimates its spending plan will create or maintain some 330,000 jobs next year and add about two percentage points to economic growth, part of a three-year boost from $101.4 billion in new spending over that time.

The largest contributor is almost $30 billion over five years to drive down fees in licensed daycares to reach $10 a day by 2026. That money is on top of already planned child-care spending. However, the problem is that it will take provincial buy-in as it requires a 50/50 split of the expenses. This could cause untold delays.

There is also more money for broadband infrastructure and $7 billion in cash, financing and advice to help companies adopt and invest in new technologies intended to address ongoing concerns about the country’s productivity gap.

The labour market has mostly recovered from the pandemic. The number of employed Canadians is down by roughly 300,000, or 1.5 percent, from pre-pandemic levels. At this point, the damage is mostly confined to a handful of sectors – such as hospitality – that are curtailed by public-health measures. At the same time, employment has increased in many white-collar industries.

Housing and Real Estate

Much like past budgets, the federal government has proposed a series of measures on housing, although they are unlikely to curb the robust activity and speculation of the past year.

Canada will impose a 1% tax on the value of real estate held by foreigners if the property is left vacant, beginning in 2022. It follows foreign buyers’ taxes in British Columbia and Ontario. The move is estimated to bring in $700-million in revenue over four years, starting in 2022-23.The budget also proposes to send an extra $2.5-billion to the CMHC for various initiatives, including the construction of affordable housing units and plans to reallocate $1.3-billion for such things as the conversion of vacant offices into housing.

However, the budget was just as notable for what wasn’t there: new measures aimed directly at cooling the real estate market.

Measures For The Elderly, The Green Economy, Reduced Tax Evasion, And Luxury Taxes on Yachts, Expensive Cars…

If all goes well, and the pandemic is largely behind us by September, the government forecasts a marked drop in deficits and debt over the five-year planning horizon.

• As a share of the economy, the fiscal track is about where it was in November, with annual deficits averaging 5.8% of GDP over five years versus 5.7%.
• Bond issuance in 2021 will decline to C$286 billion, from C$374 billion in the previous fiscal year. The government wants to issue more than 40% of its bonds in maturities of 10-years or more, up from 15% pre-pandemic. That includes a re-opening of 50-year issues.
• The government pledged to reduce federal debt as a share of the economy over “the medium-term” in defining its new fiscal anchor.
• Canada plans to implement a digital services tax on tech giants at a rate of 3% of revenue. It would be effective Jan. 1, 2022, “until an acceptable multilateral approach comes into effect.” The tax is projected to raise C$3.4 billion in revenue over five years

Bottom Line

There is no plan to balance the budget, but one area of focus ahead of the budget was whether Ottawa would commit to a specific fiscal anchor. And while a precise figure was not mentioned, the budget states: “The government is committed to unwinding COVID-related deficits and reducing the federal debt as a share of the economy over the medium-term.” With the proviso that the economy recovers roughly in line with consensus expectations and that borrowing costs don’t flare dramatically higher, this suggests that the anchor is a 50% debt/GDP ratio. For the deficit, this implies a reversion to pre-pandemic levels of around 1% of GDP (or about $30 billion later in the decade). In a sense, then, the pandemic has been “paid for” by a one-time level step-up in the debt/GDP ratio from 30% to 50%.

Employment surged by a whopping 303,100 in March after a gain of 259,200 in February. The jobless rate fell to 7.5%, the lowest since before the pandemic. However, there remain many discouraged workers who are no longer actively looking for jobs but would prefer to be gainfully employed. Many of them might well be mothers who could not afford or find quality daycare or needed to help children with remote learning.

The employment rate–the percentage of the population aged 15 and older that is employed—increased 0.9 percentage points to 60.3%, which was still 1.5 percentage points below the rate seen in February 2020.

The COVID-19 pandemic continues to impact the labour market. Compared with February 2020, there were 296,000 (-1.5%) fewer people employed in March 2021 and 247,000 (+30.4%) more people working less than half of their usual hours. The number of workers affected by the COVID-19 economic shutdown peaked at 5.5 million in April 2020, including a drop in employment of 3.0 million and an increase in COVID-related absences from work of 2.5 million.

Total hours worked rose 2.0% in March, driven by gains in several industries, including educational services, retail trade, and construction. Building on a steady upward trend since April 2020, this brought total hours to within 1.2% of February 2020 levels. Hours worked among the self-employed continued to be much further behind (-7.7%) February 2020 levels, while hours among employees returned to pre-pandemic levels.

The unemployment rate falls to the lowest level since the start of the pandemic

The unemployment rate declined for the second consecutive month, falling 0.7 percentage points to 7.5% in March, the lowest since February 2020. This reflected strong employment growth that exceeded the number of people entering the labour market.

The number of people unemployed fell 148,000 (-8.9%) in March, with the majority (59.0%) of people leaving unemployment becoming employed. Despite sharp reductions in both February and March, the number of people unemployed stood at 1.5 million, up 371,000 (+32.4%) compared with February 2020.

The number of long-term unemployed—people who had been looking for work or on temporary layoff for 27 weeks or more—held steady in March. There were 286,000 (+159.5%) more people in long-term unemployment compared with February 2020. These are the folks that could be permanently scarred by the pandemic and for whom job training may well be helpful.

While Friday’s jobs report surprised on the upside, there are still concerns around an uneven recovery and the impact of the third-wave shutdown in the economy. As the virus becomes more contagious and lethal, the economic recovery remains at risk, heightened by the vaccine’s very slow rollout. The reduces the importance of this employment report for the Bank of Canada even though it is the last report before the central bank’s April policy decision. No doubt the Bank of Canada will highlight the rising risk of contagion on the economic recovery.

Prime Minister Justin Trudeau’s government will release its 2021 budget on April 19 and has already promised an additional spending dose. The Bank of Canada’s next policy decision is on April 21. The Bank will thus maintain the overnight rate at 25 basis points and refrain from tapering quantitative easing.

Based on posted rates of the country’s six largest lenders, the current threshold is at 4.79%. Before the pandemic, the posted rate was widely considered too high relative to much lower contract rates. Remember, Canada’s six largest lenders under OSFI’s jurisdiction set the posted rate each week when they submit to the Bank of Canada the so-called ‘conventional 5-year mortgage rate’. It has increasingly born little relationship to actual contract rates.

OSFI, once again, shows itself to cozy up to the Canadian banking oligopoly. Keep in mind that delinquency rates on the Canadian banks’ mortgage books are very low–both in historical terms and compared with financial institutions in the rest of the world. OSFI couched this proposal in terms of “the importance of sound mortgage underwriting.”

In the release, OSFI said, “The minimum qualifying rate adds a margin of safety that ensures borrowers will have the ability to make mortgage payments in the event of a change in circumstances, such as the reduction of income or a rise in mortgage interest rates. As mortgages are one of the largest exposures that most banks carry, ensuring that borrowers can repay their loans strongly contributes to the continued safety and soundness of Canada’s financial system.”

The comment period ends on May 7. OSFI reported that they would communicate the revised B-20 Guideline by May 24, with an implementation date of June 1, 2021.

This all but ensures that the current boom in home buying will accelerate further in the spring market–providing an impetus for borrowers to get in under the June 1 deadline. OSFI’s move will trigger an even hotter spring housing market as demand is pulled forward just as it was before the January 1, 2018 implementation date of the current B-20 ruling.

This will not impact non-federally regulated FI’s such as credit unions, mono-lines and private lenders, nor does it immediately impact insured-mortgage borrowers.

The federal government is in charge of mortgage qualification for insured mortgages. CMHC and the finance department could well follow OSFI’s lead in tightening qualifying rules for insured loans.

Bottom Line

It is noteworthy to remember that on January 24, 2020, OSFI indicated that it was reviewing the benchmark rate (or floor) used for qualifying uninsured mortgages. At that time, the thought was that the widening gap between the posted rate and the contract mortgage rate was too large and that OSFI and the Bank of Canada would publish a mortgage rate weekly that would better reflect the contract rates. The new qualifying rate would be that contract mortgage rate plus 200 basis points. This consultation was suspended on March 13, 2020, in response to challenges posed by the COVID-19 pandemic.