Budget 2016

Income tax policy, rules, problems, strategy and software. Property and consumption taxes too.
brucecohen
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Re: Budget 2016

Post by brucecohen »

Spidey wrote:I think I could have accepted a 10 billion deficit mostly directed to infrastructure spending. There is a certain rationale to borrowing for these projects at low rates. A 30 billion deficit with no apparent plan to balance the budget is somewhat worrisome. Definitely not a Chretien-Martin style budget.
Agreed. While beauty is always in the eye of the beholder, ISTM there's a lot of silly spending planned. Aboriginal causes are getting too much without enough accountability. I've always complained about arts funding, especially for the CBC, and there's a hefty amount. Haven't looked closely enough at all the clean energy projects. I don't get the new office of counter-radicalization, if that's what it's called.

The saving grace, to some extent, is that they built in a $6 billion contingency reserve -- twice what the Harper govt budgeted -- and David Dodge said recently that their last set of numbers -- fiscal update? -- was very conservative. He suggested that Morneau might be using the ploy Paul Martin used as finance minister to keep generating better-than-expected fiscal results. We'll see in a year. Forgot to mention that oil price appears to have bottomed and certainly up sharply from the trough. Hopefully it'll stay firm or rise.
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Shakespeare
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Re: Budget 2016

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Since there is little of interest to investors in the budget, perhaps this thread should be moved to the WC.
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AltaRed
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Re: Budget 2016

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brucecohen wrote:The saving grace, to some extent, is that they built in a $6 billion contingency reserve -- twice what the Harper govt budgeted -- and David Dodge said recently that their last set of numbers -- fiscal update? -- was very conservative. He suggested that Morneau might be using the ploy Paul Martin used as finance minister to keep generating better-than-expected fiscal results. We'll see in a year. Forgot to mention that oil price appears to have bottomed and certainly up sharply from the trough. Hopefully it'll stay firm or rise.
May be something to that. I don't remember many people being upset with Martin at the time, but maybe I was too busy in megacorp to pay much attention.

However, he is probably right to be pessimistic about oil prices. Even if current prices do stick in a trading range around $40-45, at best this is going to just result in some additional corporate taxes being paid in 2016, and perhaps even 2017. Investment is not going to come back quickly and thus jobs et al associated with the economic multipliers will not return quickly. Given my past experience in major oil downturns, the taps are not turned back on quickly, taking the time to repair balance sheets first.
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Re: Budget 2016

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I also have concerns regarding what appears to be an lack of accountability regarding future aboriginal spending. I sincerely hope that I'm wrong and that we see an improvement in aboriginal lifestyles commensurate with the additional dollars spent.

Even though I'm a beneficiary, I also question whether it makes sense to borrow to provide a middle-class tax hike. Seems comparable to a company borrowing to pay a dividend - can be done for a year or so but does not make sense on a long-term basis.

Infrastructure on the other hand may be a sensible long-term debt commitment, particularly at low interest-rates, as the benefits will also be long-term. Some of the economic spin-offs may not be readily apparent. Having high-speed trains between some of our major cities may spur economic growth and make us a more desirable tourist destination for both domestic and international tourists. Ditto for rapid transit within cities. On some level it must be more cost-effective and clean to move people in a train than to have most people in single vehicle automobiles. Also would like to see some sort of contribution toward the energy-east project but much discussion of that topic may move us into water-cooler territory.
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AltaRed
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Re: Budget 2016

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Spidey wrote:I also have concerns regarding what appears to be an lack of accountability regarding future aboriginal spending. I sincerely hope that I'm wrong and that we see an improvement in aboriginal lifestyles commensurate with the additional dollars spent.
It is a huge bet. On the one hand, the social, health, housing and education conditions on many reserves, particularly the more northern isolated communities, are deplorable and it appears there is no way any of those communities can dig themselves out of the hole themselves. It almost becomes a moral obligation to help them build up to some 'first world' standards that we take for granted. OTOH, whether this provides the jumpstart for these communities to think better of themselves, pull up their bootstraps and be motivated to be better is unlikely unless hope and opportunity can be established. That said, looked at in a more cynical, and perhaps the more realistic way, there is nothing for people in these isolated communities to do. No industry, no jobs, no anything and they will slide backwards when the money and photo ops are gone. It is just too bad these communities are where they are.

From my perspective, metering out small(ish) amounts of 'fix' money as has been done in the past has not worked. So it is incumbent on 'us' to give them a meaningful/strong near term boost (for a change) to see if something material will stick this time. For that, I am willing to support this gamble.
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Re: Budget 2016

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FWIW: Federal deficits since 1965-66. The red bars are the Trudeau govt's projections.

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Re: Budget 2016

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Bruce, do you have a link to this chart? I cannot read it, but based on guessing only, I don't see a -29.4B red bar as laid down in the budget this week.
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Re: Budget 2016

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AltaRed wrote:Bruce, do you have a link to this chart? I cannot read it, but based on guessing only, I don't see a -29.4B red bar as laid down in the budget this week.
Sorry, I mislabelled it. It's not a chart of deficits in dollars but rather as % of revenue. I assume this means, for example, spending = 110% or 125% of receipts. Here is the source.
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Re: Budget 2016

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Okay...now I understand. Sure does show how and why we hit the wall in the '90s. That chart does make it look like this is a mere blip on a GDP basis BUT it also does mask that over $100B will be added to our debt balance of circa $600B if the deficits as projected become reality, with no promise of when that will stop accummulating.

That is a significant percentage increase and while Bill may be able to say now is a good time to borrow when interest rates are low (no argument from me there), he apparently has not answered how he would pay interest on debt should interest rates double in 5 years on a $700B debt balance. To me, that is akin to Canadian consumers leveraging up on mortgage debt at 2.9% because money is cheap. Time will tell.
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ghariton
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Re: Budget 2016

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Chart by Jordan Brennan, economist for Unifor, eh?

Anyway, the pattern shown by the chart is roughly what I expected. But I think that the chart is misleading:

(1) It doesn't show provincial deficits. In Ontario at least, 5those have been growing significantly over time. And we know that, when one level of government gets into trouble, it tries to offload onto the other level.

(2) Historically, large deficits were incurred in periods when the growth potential of the economy was high. Population was growing strongly, free trade was expanding our markets, and multifactor productivity was (relatively) high. Now, population is growing slowly and aging quickly. Expanded free trade is more or less on hold, across the world. Productivity growth is abysmal, for whatever reason. Entrenched special interests are making any major change almost impossible.

So where is the growth going to come from, to help pay off the debt?

(3) In the 1970s and 1980s, inflation was high. Inflation by itself does a great job in shrinking one's debt. Indeed, that was how the "winners" of World War II managed to get their wartime debts under control. But I doubt inflation will come along to help this time.

(4) In 1982, Canada was in a sharp cyclical recession, and spending did seem like a good idea. Today, we are seeing slow growth. We may not like that slow growth, but chances are good that it is the new trend line. It should not be mistaken for a cyclical (i.e. temporary) downturn. So while increased spending in the 1980s was seen correctly as a temporary measure (although it lasted a long time, as government spending programs tend to do), there was light at the end of the tunnel. Today, there is no reason to believe that slow growth will change unless we make structural improvements (of which I saw no signs in the budget book). So this deficit spending looks as if it will be ongoing.

As for the argument that now is a great time to borrow because interest rates are low, it all depends on why you are borrowing. If it is to invest in projects that will have a positive net present value (counting spillovers), yes. Low interest rates lower the discount rate, and so some marginal projects become positive. But low interest rates should not be a blank cheque to take on just any project.

Sort of like my advising my daughter to take on the largest mortgage possible when her mortgage comes up for renewal in August. Why not? After all, the money is almost free.

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Re: Budget 2016

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George,
Well stated!
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Re: Budget 2016

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For an understanding of what's happening you guys should reread "Animal Farm" by George Orwell
http://www.george-orwell.org/animal_farm/9.html
Just think of our politicians as the pigs , We have now reached the chapter where the windmill was being destroyed---
The parallels are uncanny,a timeless parable!
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Re: Budget 2016

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Morneau tells Canadian Press that the govt wants to review all tax breaks expenditures. Would be the first overall review since the Carter Royal Commission in 1966. Linked article includes comments on the budget from Jack Mintz, who reviewed the business tax structure 20 years ago, and spokesmen for two taxpayer groups, one left-wing and one right-wing.
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Re: Budget 2016

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brucecohen wrote:Morneau tells Canadian Press that the govt wants to review all tax breaks expenditures.
yet: "His first budget ... added a new boutique credit for teachers who buy classroom supplies."
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Re: Budget 2016

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Could have just as easily gone into the OAS thread http://www.huffingtonpost.ca/2016/03/24 ... 37414.html but I think this vested interest has gotten the numbers wrong on what bringing back OAS eligibility from age 67 to 65 really costs. The source seems to have forgotten the 10 year phase in period did nothing to reduce near term costs.
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Re: Budget 2016

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AltaRed wrote:Could have just as easily gone into the OAS thread http://www.huffingtonpost.ca/2016/03/24 ... 37414.html but I think this vested interest has gotten the numbers wrong on what bringing back OAS eligibility from age 67 to 65 really costs. The source seems to have forgotten the 10 year phase in period did nothing to reduce near term costs.
Of course, things may change again, but assuming the status quo, he forgets to mention the roll back will result in every millennial getting OAS two years earlier, so that's a perk for them. Also, the rollback should encourage people to retire a bit earlier, freeing up jobs for millennials.
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Re: Budget 2016

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I am betting OAS will look radically different in 20 years. Millenials won't be getting it in its current form or in benefits.

Added: The can can only be kicked down the road so many years before it fills with lead.
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Re: Budget 2016

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AltaRed wrote:I am betting OAS will look radically different in 20 years. Millenials won't be getting it in its current form or in benefits.
That's not what the actuarial report on OAS/GIS says.

AltaRed, with all due respect, I prefer to believe the assessment of Canada's Chief Actuary over yours.

I think that people should stop thinking in terms of partisan politics and start looking at actual numbers. Unlike Social Security, in the US, where the entire retirement system is on a pay-as-you-go basis, in Canada our system has multiple layers with OAS/GIS (pay-as-you-go) at the bottom, CPP/QPP which are properly funded by employees and employers, over, and other tax shelters (RRPSs, pensions, TFSAs) as well as personal savings (house, portfolio, art, etc.) on top.

A look at actual numbers would show that the current OAS clawback is regressive, and thus could be considered unfair. There's nothing wrong with a basic, insufficient in itself, guaranteed income for retirees. Canada can afford it. It's only a taxable $6,500 per year, after all. It's not much, but it can make a lot of difference in retirement planning, as it is guaranteed for life and indexed to inflation.
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AltaRed
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Re: Budget 2016

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No partisan politics here at all, so don't go there on this thread. I simply don't believe 'longer term' forecasting assumptions from anyone...at any time. Actuaries screw up as much as anyone. There is a growing consensus future investment returns will not be as robust as in the past and that is based on two things, a growing consensus that global growth will not be as great in the future as in the past, and population growth will ultimately stall as well (so says the UN). IOW, it is my belief that forecasters will be proven overly optimistic in their assumptions.

IF global GDP growth slows and world population growth (birth rate) slows, so does tax revenue growth (significantly).
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Re: Budget 2016

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AltaRed wrote:I simply don't believe 'longer term' forecasting assumptions from anyone...at any time.
AltaRed wrote:There is a growing consensus future investment returns will not be as robust as in the past
Interesting. Personally, I don't believe any prediction about the future returns of broad asset classes (e.g. total-market index bond and stock funds). I might also agree with you, on second thought, that actuarial forecasting assumptions are no better.

Still, I don't see a problem for funding $6,500 in OAS to retirees on a pay-as-you-go basis. If I was to worry about that, I would also worry about paying for health care and education on a pay-as-you-go basis. Both health care and education cost way more than OAS.
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Re: Budget 2016

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To put things in perspective, here's a chart from the Actuarial Report:

Image

Assumptions might be off a little, but I don't think that the Chief Actuary can be too off future probabilities; demographic curves don't move as fast as the stock market and interest rates. Of course, his GDP projections could be way off, though.
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Re: Budget 2016

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longinvest wrote:
AltaRed wrote:I am betting OAS will look radically different in 20 years. Millenials won't be getting it in its current form or in benefits.
That's not what the actuarial report on OAS/GIS says.
You do realize that one of the assumptions of that report is that OAS starting age will be delayed from 65 to 67. This serves to offset some of the factors that otherwise would increase the cost.

Even with the assumption that the start age will be retarded, the report estimates that OAS benefit6s will grow from $33 billion in 2013 to $74 billion in 2025 and $144 billion in 2050.

But, as the government likes to emphasize, the important aspect is not the total dollar amount, but rather as a percentage of GDP. Fine. The ratio of OAS benefits to GDP is projected to stay under 3.5%, even under unfavourable sensitivities.

Unfortunately, nowhere does the report give an assumption for growth in GDP. Indeed, GDP is estimated by looking at the historic relationship between GDP and total employment earnings, with a few minor tweaks. So GDP is assumed to grow as total employment earnings grow, more or less. But it turns out that OAS benefits also grow in line with total employment earnings, more or less. Again, there are a few adjustments in growth rates, but given the increase in OAS eligibility age, these more or less wash out. (Indeed, the two-year delay almost exactly cancels out the increased benefits due to increases in longevity.)

So we have both OAS benefits and GDP growing more or less at the same rate as total employment earnings. Is it any surprise that the ratio is stable? I would say that it is almost a tautology.

Oh, and how rapidly can we expect total employment earnings to grow? There are demographic assumptions, of course, but there are also two key economic assumptions:
(a) Long run unemployment rate will be 6.0%
(b) labour productivity growth will be 1.3% annually in the long run.

Those assumptions may have been reasonable in 2014. I question their validity given what we know today -- especially the labour productivity one.

This is not to find fault with the actuaries. Forecasting GDP growth is notoriously difficult for the next year or two, never mind the long run. But that is an important point. The future is very uncertain. Surely it is wise to build in contingencies. The possibility of reducing the start age for OAS, which after all amounted to a ten-year advance notice of the possibility is one way to reduce the risk.

George
Last edited by ghariton on 25 Mar 2016 19:02, edited 2 times in total.
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Re: Budget 2016

Post by Shakespeare »

In terms of total costs, the elephant is health care, not OAS.
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Re: Budget 2016

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Shakespeare wrote:In terms of total costs, the elephant is health care, not OAS.
Yeah, but that was not a budget item...for this thread. :wink: But I agree it will play havoc with general revenues no matter how one cuts it.
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Re: Budget 2016

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Shakespeare wrote:In terms of total costs, the elephant is health care, not OAS.
True.

But every bit helps -- or hurts.

In any case, I think that, within a decade, we will see a hybrid public-private health care system evolve. We just won't be able to continue with our present approach. As a precedent of what could happen here, I offer Sweden.

In passing, I saw very little discussion of health care in the budget documents. Granted, it is provincial jurisdiction, But as you say, it will impact all spending of all levels of government. We are heading for massive deficits.

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