The economic policy response to the pandemic has been compared to wartime. Coronavirus has changed many things, not least the terms of the debate about government intervention in the economy. The raw numbers speak for themselves.
In Ireland, the initial response consisted of measures that totalled around €24.5 billion. This amounted to 14 per cent of the annual size of the economy, as measured by GNI* – which tries to strip out some of the distortions caused by the multinational sector. The cost has grown as restrictions have been extended. The eventual size of the bill will, of course, depend on how long those restrictions last.
Fourteen per cent (and growing) of your economy is a bill that would have been unimaginable a year ago, particularly as most of it has been borrowed. Most economists would have said that it is a fiscal trick impossible to pull off, at least not without a crisis in government debt markets.
We haven’t had a crisis because most of the money was lent to us by the ECB. Depending on which looking glass you use, we are either borrowing from ourselves or printing the money. Or, ultimately, a bit of both.
The UK chancellor, Rishi Sunak, last week made, by my calculations, his 16th fiscal announcement of the pandemic. He called it a budget. It was really just another update (albeit an extensive one) on spending and taxation in the wake of the crisis. Pages of estimates and pure guesses about the future of the UK economy revealed a pandemic bill, so far, reckoned to be £407 billion. That’s about 19 per cent of UK GDP. Sunak stated, correctly, that nothing like this has ever been seen, apart from during the two world wars.
So it looks like the UK has been more generous than Ireland. But we are probably not comparing like with like. It is too early to be reaching that kind of judgement. Either way, we are looking at jaw-droppingly large numbers, amounts of borrowed money that have caused barely a flutter of excitement in government debt markets. Until very recently, at least.
That wartime comparison was also drawn recently by Ken Rogoff, former chief economist at the IMF. During the great financial crisis, Rogoff became famous in certain circles for warning that governments shouldn’t allow debt to reach, let alone exceed, 100 per cent of GDP. Such thinking lead to the subsequent decade of austerity. Conventional wisdom dictated that debt had to be stabilised and preferably reduced.
Rogoff recanted this week, Well, sort of. He admitted that his 100 per cent warning was, in reality, just a rule of thumb for normal times. Recognising just how abnormal current circumstances are, he suggested that today’s priority should be spending on pandemic relief and, I think, trying to grow your way out the problem.
Rule of thumb
Debt-to-GDP is a ratio. All we have are Rogoff-style rules of thumb about what is sustainable – or not. Economics provides zero precision about the right ratio. Austerity was about managing down the numerator: that focus on borrowing. The current crisis means that we should focus on the denominator: get growth up.
It’s a point of view not shared by Sunak. He presented a gloomy outlook for the UK economy and did nothing about that outlook: the pandemic will leave permanent scars. In the short term, he extended supports and reliefs until September. For the medium term all that awaits the UK are tax hikes and spending cuts. It was, said Simon Wren-Lewis, professor at Oxford, an austerity budget resonant of the Cameron-Osborne years.
Sunak laid claim “to levelling with the British people”. He didn’t. He should have said that we have little idea about where the economy will be in the years following the pandemic’s end and that he will act appropriately when we do know.
If anyone believes he means to raise taxes and slash spending in the run-up to the next general election, I have a bridge to sell them. He should have said that all the forecasts, slavishly followed by all of the media, will all be wrong.
Sunak said nothing about Brexit costs, the green economy or the social care crisis. There was no extra money for front line workers. He did nothing for the UK’s rate of economic growth. It was all about the numerator, not the denominator.
The Economist newspaper this week called for a post-pandemic rewrite of the social contract. Sunak’s response was a big raspberry.
If Paschal Donohue is looking for pointers about what to do in a post-crisis world he should not take any cues from the UK. Sunak got it wrong and revealed a mindset unmoved by the seismic changes wrought by the pandemic. A century ago Keynes wrote prophetically about the post-war fiscal settlement and the awful consequences of wrong-headed orthodoxy. He would marvel about how little has changed.
Pandemic relief is one thing, the next is growth. The US is where all of the new thinking – and action – is going on. The bet – not without risks – is that we have to focus on the denominator.
Bond markets may or may not in future be so quiescent but much power here lies in the hands of the ECB. Growing our economies – and that social contract rethink – are the mammoth tasks that await.
Canada’s budget to include pandemic and childcare supports, luxury tax
By Steve Scherer
OTTAWA (Reuters) – Canada will present a budget on Monday with billions of dollars for pandemic recovery measures as COVID-19 infections skyrocket, C$2 billion ($1.6 billion) toward national childcare, and new taxes on luxury goods.
Liberal Prime Minister Justin Trudeau’s first budget in two years will also set aside C$12 billion ($9.6 billion) to extend wage and rent subsidy programs to the autumn, the Toronto Star reported on Sunday.
Finance Minister Chrystia Freeland is due to present the budget at about 4 p.m. (2000 GMT).
The document promises in excess of C$2 billion as a “starting point” for a national childcare program, the Canadian Broadcasting Corp said, adding that the 2020-2021 federal deficit had come in under C$400 billion.
In November, the government forecast a deficit of C$381.6 billion, which would be its highest level since World War Two. [https://tmsnrt.rs/3wSJPcm]
The budget will also include a luxury tax effective from 2022 on new cars and private aircraft valued at more than C$100,000 ($79,970), and boats worth over C$250,000, government sources familiar with the document told Reuters.
There will be a sales tax for online platforms and e-commerce warehouses from July, and a digital services tax for Web giants like Alphabet Inc’s Google and Facebook Inc from 2022.
Freeland promised in November up to C$100 billion in stimulus over three years to “jump-start” an economic recovery during what is likely to be an election year, and the government so far not backed away from that commitment.
Environment Minister Jonathan Wilkinson, speaking to the CBC, confirmed that the budget would be “ambitious” and that the government would “invest for jobs and growth to rebuild this economy,” although he added there would be “fiscal guardrails” to put spending on a “sustainable track.”
Amid a spiking third wave of infections, Ontario, Canada‘s most-populous province, announced new public health restrictions on Friday, including closing the province’s borders to non-essential domestic travel.
Canada has been ramping up its vaccination campaign but still has a smaller percentage of its population inoculated than dozens of other countries, including the United States and Britain.
($1 = 1.2514 Canadian dollars)
(Reporting by Steve Scherer; Editing by Nick Zieminski and Peter Cooney)
TSX extends gains as gold prices rise, set to rise for third week
(Reuters) -Canada’s main stock index extended its rise on Friday after hitting a record high a day earlier as gold prices advanced, and was set to gain for a third straight week.
* At 9:40 a.m. ET (13:38 GMT), the Toronto Stock Exchange‘s S&P/TSX composite index was up 24.24 points, or 0.1%, at 19,326.16.
* The Canadian economy is likely to grow at a slower pace in this quarter and the next than previously expected, but tighter lockdown restrictions from another wave of coronavirus were unlikely to derail the economic recovery, a Reuters poll showed.
* The energy sector climbed 0.6% even as U.S. crude prices slipped 0.1% a barrel. Brent crude added 0.1%. [O/R]
* The materials sector, which includes precious and base metals miners and fertilizer companies, added 0.3% as gold futures rose 0.7% to $1,777.9 an ounce. [GOL/] [MET/L]
* The financials sector gained 0.2%. The industrials sector rose 0.1%.
* On the TSX, 117 issues advanced, while 102 issues declined in a 1.15-to-1 ratio favoring gainers, with 14.26 million shares traded.
* The largest percentage gainers on the TSX were Cascades Inc, which jumped 4.2%, and Ballard Power Systems, which rose 2.9%.
* Lghtspeed POS fell 5.6%, the most on the TSX, while the second biggest decliner was goeasy, down 4.9%.
* The most heavily traded shares by volume were Zenabis Global Inc, Bombardier and Royal Bank of Canada.
* The TSX posted 23 new 52-week highs and no new low.
* Across Canadian issues, there were 160 new 52-week highs and 12 new lows, with total volume of 29.68 million shares.
(Reporting by Shashank Nayar in Bengaluru;Editing by Vinay Dwivedi)
Canadian economy likely to slow, but COVID-19 threat to growth low
By Indradip Ghosh and Mumal Rathore
BENGALURU (Reuters) – The Canadian economy is likely to grow at a slower pace this quarter and next than previously expected, but tighter lockdown restrictions from another wave of coronavirus were unlikely to derail the economic recovery, a Reuters poll showed.
Restrictions have been renewed in some provinces as they struggle with a rapid spread of the virus, which has already infected over 1 million people in the country.
After an expected 5.6% growth in the first quarter, the economy was forecast to expand 3.6% this quarter, a sharp downgrade from 6.7% predicted in January.
It was then forecast to grow 6.0% in the third quarter and 5.5% in the fourth, compared with 6.8% and 5.0% forecast previously.
But over three-quarters of economists, or 16 of 21, in response to an additional question said tighter curbs from another COVID-19 wave were unlikely to derail the economic recovery, including one respondent who said “very unlikely”.
“Canada is undergoing a third wave of the virus and while case loads are accelerating, the resiliency the economy has shown in the face of the second wave suggests it can ride out the third wave as well, without considerable economic consequences,” said Sri Thanabalasingam, senior economist at TD Economics.
The April 12-16 poll of 40 economists forecast the commodity-driven economy would grow on average 5.8% this year, the fastest pace of annual expansion in 13 years and the highest prediction since polling began in April 2019.
For next year, the consensus was upgraded to 4.0% from 3.6% growth predicted in January.
What is likely to help is the promise of a fiscal package by Prime Minister Justin Trudeau late last year, which the Canadian government was expected to outline, at least partly, in its first federal budget in two years, on April 19.
When asked what impact that would have, over half, or 11 of 20 economists, said it would boost the economy significantly. Eight respondents said it would have little impact and one said it would have an adverse impact.
“The economic impact of the federal government’s promised C$100 billion fiscal stimulus will depend most importantly on its make up,” said Tony Stillo, director of Canada economics at Oxford Economics.
“A stimulus package that enhances the economy’s potential could provide a material boost to growth without stoking price pressures.”
All but two of 17 economists expected the Bank of Canada to announce a taper to the amount of its weekly bond purchases at its April 21 meeting. The consensus showed interest rates left unchanged at 0.25% until 2023 at least.
“The BoC is set to cut the pace of its asset purchases next week,” noted Stephen Brown, senior Canada economist at Capital Economics.
“While it will also upgrade its GDP forecasts, we expect it to make an offsetting change to its estimate of the economy’s potential, implying the Bank will not materially alter its assessment of when interest rates need to rise.”
(Reporting and polling by Indradip Ghosh and Mumal Rathore; editing by Rahul Karunakar, Larry King)
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