The stimulator

I promise. This is the last post about it.

So what is the impact of our non-financial Finance Minister’s budget on mortgage rates? The smarties at the Bank of Canada? The price of a sidesplit in Hope?

As the actress said to the bishop, it’s all about stimulus. And Chrystia is one stimulative human. Just take a look at the raw numbers contained in Tuesday’s opus.

Source: Department of Finance. Click to enlarge.

So the story is simple. Ottawa will increase spending by about $100 billion over the next six years, collect $20 billion more in taxes annually (maybe), adding $232 billion in deficits. So the national debt grows another $200+ billion and over these few years we flush away $373 billion in debt service charges.

There is no balanced budget in sight. It’s not even a suggestion. Deficits and more debt as far as the eye can see with per-year interest charges of over $64 billion barreling towards us – more than Canada spends on anything else.

This is stimulus. New federal spending – apart from the debt blood – is $52 billion. Thus, this is the spendiest, biggest, most expensive, all-embracing and dominating federal government in Canadian history. Apparently that’s how most people like it. They also love the fact 40% of all citizens pay no net federal tax since they receive more in benefits than their obligations amount to. Increasingly the burden narrows on the minority. The budget did more of that by raising the capital gains tax load.

What does all this spending on programs, the federal bureaucracy delivering them, and even the debt service charges mean?

Yup, stimulus. It’s $232 billion in fresh borrowing by Ottawa that will be pumped into the economy. New bonds will flutter like the wings of sparrows. In essence, debt will furnish newly-created money. Billions in federal interest will flow into pension funds, which then invest in the economy. The component of government in the GDP grows. Our condo-&-civil-servant economy flourishes.

Now, what about Tiff and the CB?

For the past two years those guys have been trying to corral growth, expansion, rising prices, house lust and the cost of groceries. Ten rate hikes, from one quarter of one per cent all the way to five. It’s been an aggressive and historic tightening cycle. And it worked. Inflation of 8%+ has now been sub-3% for the past three months. The latest great number (2.9%) dropped on the morning of budget day.

In other words, what the CB has been trying to accomplish with interest rates that crushed real estate in many places, hurt businesses and reduced consumer credit is being erased by a free-spending government dishing out new billions in the desperate hope of re-election next year.

The bottom line is that hopes for interest rate declines are being frayed. Core inflation has been falling, but now Chrystia is throwing the gas can around. Meanwhile in the US, the economy is firing on all cylinders with full employment, robust corporate profits, heady GDP growth and the stimulative nature of a presidential election year. Inflation continues to run a little hotter to the south and expectations of a rate decline a little cooler.

Traders now expect one or two Fed chops in 2024, down drastically from the six many anticipated as the year dawned. Some folks actually say none will occur until after the Trump-Biden slugfest in November.

Our guys usually follow the Fed pretty closely, but until the federal budget there was a broad consensus Canadian rates would drop before the US moved due to our far-weaker economy. Now Chrystia may have dashed that. Her fiscal policy is undermining Tiff’s monetary moves. And as a result we may see two reductions – for a total of half of one per cent – in 2024, down from the full 1% drop economists called for two months ago.

And remember, says Scotia Economics, that real estate in Canada could ignite again:

There are clear signs that the housing market is turning the corner as buyers look to lower interest rates as a signal to jump back into the market. The government’s decision to extend the maximum amortization length for first-time home buyers on insured mortgages for new construction as of August 1st should lead to more activity in the lead-up to that occurring given the intense supply-demand imbalances that exist in the market. Cutting rates well ahead of that change could add further upward momentum to what is arguably the most rate-sensitive part of the economy.

The big bank is urging our CB to wait, “until the third quarter, at least” to drop the hammer. “While inflation is lower than expected, growth is much stronger than forecast, in part because of government fiscal plans.”

We told ya. Thirty-year mortgages. A huge jump in the RRSP homebuyer’s grab. The first-home savings account. Tens of billions into housing loans and incentives. Big deficits. Record debt. Obscene interest charges. And now rates will stay higher for longer.

We suck. We blow. We’re Canada.

About the picture: “Just a quick note to say thanks as always for all the great info and the insightful and calm perspective you offer,” writes Dmitry, “and to provide a pooch pic in return.  I spotted this ferocious beast standing guard at the doorway of a little shop here in Chiang Mai, Thailand. Have a great day!”

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