Ford government’s first fiscal update sees Ontario changing business tax policies

The Ontario government proposed on Thursday to take steps to try to shore up the province’s competitiveness for business investment.

A fiscal and economic update tabled Thursday at the Ontario legislature says the province would mirror the federal government if Ottawa opts to offer companies accelerated expensing of depreciable assets, which is a policy that corporate Canada has been requesting.

“This would support jobs and growth opportunities in Ontario and strengthen Ontario’s competitiveness in the global economy,” noted the province’s 2018 economic outlook and fiscal review, a sort-of mini-budget tabled Thursday at Queen’s Park.

The province’s finance and economic development ministers had already written to the federal government calling for the accelerated depreciation. There have also been rumblings that Ottawa is preparing some measures aimed at Canada’s competitiveness in its own upcoming fall update.

Ontario’s update said Thursday that reform in the U.S. have wiped out the province’s “tax advantage” and made the province less attractive for business investment.

Yet in keeping with the work of new Premier Doug Ford, the Ontario update also proposes to try to undo some of the work of the province’s previous Liberal government.

For example, today’s Progressive Conservative government at Queen’s Park says it is proposing to break ranks with Ottawa on another measure: phasing out access to the federal small business tax rate based on how much passive investment income is earned by a corporation.

Ontario had proposed to match this measure for the province’s own small business deduction, which the government estimated would have hiked taxes on those smaller firms by about $160 million a year by 2020-21. Now, the Tories say they plan on ditching this move, and not paralleling Ottawa’s decision.

The new government also says it will be reviewing its research and development-related tax support and will not implement the previous regime’s plan to link the rates of an R&D and innovation tax credit to a company’s level of investment.

This is all in addition to the savings that the new regime says they are providing to businesses by cancelling the province’s cap-and-trade carbon-pricing system, as well as by freezing Ontario’s minimum wage at $14 per hour. Businesses are also set to pay less in the way of Workplace Safety and Insurance Board premiums.

Under the watch of Premier Ford, Ontario would also no longer “stand in the way” of pipelines transporting oil to or through the province from Western Canada, the update says.

Fedeli’s remarks to the legislature said that Ontario would “unilaterally relinquish our veto over new pipeline construction within our borders.”

“Pipelines create good jobs, both in Ontario and across the country,” added the update. “In every way possible, Ontario will support its partners looking to expand oil distribution, and at the same time, protect their competitiveness from the federal carbon tax.”

Ontario’s former Liberal government had projected a $6.7-billion deficit for 2018-19 in its spring budget, with no plan to balance the books until 2024-25. The Liberals had also forecast a $600-million surplus for 2017-18.

But Ford’s government had ordered up an independent inquiry into the province’s finances after winning a majority in June’s election. The commission of inquiry revised the province’s financial figures, pegging the projected deficit for 2018-19 at $15 billion, and the Tories declared that Ontario actually ran a $3.7-billion deficit for 2017-18.

The fall update now says that the province is projecting a $14.5-billion deficit for 2018-19, down $500 million from what the inquiry laid out. When the province would return to a balanced budget under Ford, or if it would this term, remains to be seen.

Also in the province’s fall update was a new tax measure for lower-income Ontarians, the Low-income Individuals and Families Credit, or LIFT credit, which the government said would result in a single, full-time worker making minimum wage would pay no provincial personal income tax in Ontario.

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Ontario sharpens axe as it readies plan to cut mounting $15-billion deficit

Investors will be watching for hints as how Ontario plans to start tackling the world’s largest largest pile of sub-sovereign debt when the Canadian province gives a snapshot of its finances on Thursday.

Finance Minister Victor Fedeli will unveil the new government’s economic and fiscal outlook in the provincial legislature starting at about 1:15 p.m. While not an official budget, the document will outline the government’s initial assessment of a province that’s growing moderately while steadily racking up debt.

Ontario’s deficit is poised to reach about $15 billion (US$11 billion) in the fiscal year ending March 31, more than double the previous government’s forecast, while net debt stands at about $338 billion, the highest of any sub-sovereign borrower rated by Moody’s Investors Service.

“Given that the new government stands for good management, I would expect them to address the deficit as a priority,” Robert Hogue, senior economist at Royal Bank of Canada, said in a telephone interview. “I would expect a significant reduction of the deficit fairly early in its mandate.”

Premier Doug Ford has committed to balancing the books over time and has already begun to rein in spending, scrapping a pilot basic income program and capping social assistance. Together with other measures, that could save $2 billion this year, according to report from Toronto-Dominion Bank last week. Allowing other programs to lapse could save another $1 billion while freezing a minimum wage hike may support employment and boost revenues, the bank said.

Rising Rates

But the Progressive Conservative government, which swept to power in June, also made some costly campaign pledges which could push the budget shortfall to as high as $18.7 billion in 2019-20, according to TD. Those promises included a cut to corporate and personal income taxes and reduction in the gas tax.

“How this is going to line up with the campaign promise to balance is going to be interesting,” said Joey Mack, Toronto-based director of fixed income at GMP Securities LP. “But given all the announcements pointing to huge deficits, I don’t think we will get too much reaction” if the deficit stays below $18 billion, he said.

Ontario is expected to grow at about 2 per cent this year and 1.9 per cent next year according economists’ forecasts compiled by Bloomberg.

Ontario bonds have declined 1.5 per cent this year, trailing the 1.3 per cent drop for Quebec and 1.1 per cent for the Bank of America/Merrill Lynch bond index of provincial borrowers. Investors in Ontario’s 2.9 per cent bonds due 20128 demand about 67 basis points over similar duration federal Canada debt, according to bid prices in Bloomberg.

While risk premiums aren’t a source of big concern, the absolute yields are rising as the Bank of Canada and other central banks around the world increase interest rates to cool inflationary pressures. Since the end of June, when Ford took office, the yield investors demand to hold province’s debt maturing between three months and five years have increased between 40 and 50 basis points, Bloomberg data show.

“An interest rate increase of 25 basis points will cost Ontario taxpayers an additional $100 million a year in interest payments,” Fedeli wrote in a Nov. 1 opinion column for the Toronto Sun. “For the government of Ontario, interest rate increases pose a significant challenge.”

Bitcoin and the crypto market is once again crashing hard

It’s not been a pretty year for anyone who owns Bitcoin, but the last 24 hours has been a period to forget as the cryptocurrency dropped below $100 billion in market cap for the first time in more than a year.

You have to go back to the end of October — the 29th to be precise — for the last time that the total circulation of Bitcoin in the market dropped below $100 billion.

It looks like this will be the first 24-hour period to hold that rate — so much for the relative price stability that many in the industry had complained about, be careful what you wish for!

The dip follows a decline that took Bitcoin’s price below the mark $6,000 for the first time this year — it has since plunged below $5,600. That, in turn, caused havoc in the altcoin market with valuations plummeting double-digit percentages nearly across nearly all of the top 100 valued tokens. Of the top ten, Cardano is down 14 percent, Litecoin 13 percent and Ethereum and EOS 12 percent. The changing prices also saw Ripple’s XRP token rise above Ethereum to become the second most valued cryptocurrency behind only Bitcoin.

As ever, the source of the malaise is tough to diagnose.

Bitcoin Cash, which is about to undergo a hard fork, looks to be the most likely cause.

Bitcoin Cash is about to undergo a hard fork that’ll result in two different chains — Bitcoin Cash ABC (BCHABC) and Bitcoin Cash SV (BCHSV) — and that has caused a great deal of uncertainty in the market.

You could argue that this situation caused the value of Bitcoin to decrease, that often draws owners of altcoins who trade their tokens for the cheaper Bitcoin. That movement can negatively impact both Bitcoin and the altcoins that are traded.

Of course, there are a wide number of theories as to what is happening out there. One thing that is for sure is that the markets are bleeding pretty hard today.

Note: The author owns a small amount of cryptocurrency. Enough to gain an understanding, not enough to change a life.

Canada’s economic Achilles heel: A mountain of household debt

I bought the Stephen Harper book, and I look forward to reading it. However, I hope his analysis of populist politics is more credible than his assessment of his time in office. The former prime minister’s rearview mirror has some blind spots.

“Under my government, Canada avoided the worst of the crisis and came out of it all the stronger,” Harper writes in the excerpt of Right Here, Right Now that was published in the National Post on Oct. 5. “By any measure, we left the country in good shape.”  

A lot of measures, sure; but not every one.

The ratio of household debt to disposable income was 167 per cent when Harper’s Conservatives lost to Justin Trudeau’s Liberals in the autumn of 2015, compared with 132 per cent at the start of 2006, when Harper began his nine-year run as prime minister.

As has been pointed out often, Americans took on a similar burden ahead of the financial crisis. And now household debt is the economy’s Achilles’ heel. Joblessness is at a level that economists associate with full employment, and exports touched records earlier this year. But all that debt makes Canada vulnerable to a shock; say an economic crisis in China that crushes global demand and sinks commodity prices.

In such a scenario, all those exporters who were loving life this summer would be in trouble. The unemployment rate would rise, investment would plunge, and a wave of defaults likely would follow. It could be bad, which is why the Bank of Canada is raising interest rates so slowly.

High levels of employment and surveys that show companies are struggling to keep up with orders imply upward pressure on the inflation rate, which the central bank is mandated to contain. But policy makers don’t want to be the cause of one of those negative shocks by raising interest rates faster than indebted households can bear. (The Canadian debt binge continued after Harper left office: the ratio peaked at 170 per cent in 2017 and is now around 169 per cent.)

“Debt to income is still really high,” Carolyn Wilkins, the Bank of Canada’s senior deputy governor, told reporters in Ottawa on Wednesday.

Wilkins isn’t exactly media shy, but she tends not to speak in public for the sake of it. Her decision to give a little time to journalists was meant to emphasize that the central bank is doing a lot of work on debt and the threat it presents.

The Bank of Canada this week unveiled its Financial System Hub, an online magazine that will serve as a clearing house for its latest research on the housing market, credit conditions and other matters that influence the stability of the financial system. (The Financial System Review, formerly published twice a year, will now be published only once, in June.) Wilkins said the latest batch of research suggests the threat of a debt-driven bust is receding, but only slowly; Canada’s debt mountain will cast a shadow over monetary policy for a long time.

One of the central bank’s new research papers explains why.

A team of seven staffers ran a series of models to anticipate what would happen if the average Canadian house price plunged by 20 per cent, led by even bigger drops in Toronto and Vancouver. (They stress that they see this hypothetical scenario as “low-probability” event.)

The good news: they found that Canada would avoid an actual financial crisis, in part because the country’s banks have enough cash in storage to weather such a storm. But the damage still would be severe.

Mortgage rates would remain stable, but only because policy makers would be forced to cut the benchmark lending rate to offset a five-percentage-point decline in gross domestic product over two years. Ontario and British Columbia would be hit hardest. Consumption would drop, in part because homeowners suddenly would feel poorer. Some would actually be poorer because they would be without jobs. Companies would find it more difficult to get loans as banks retrenched.

“Losses are not large enough to trigger funding withdrawals or asset fire sales,” the authors conclude. “Still, pro-cyclical behaviour in the financial system could amplify macroeconomic effects, even though financial system resilience is not threatened.”

Some think a housing bust is inevitable. This vocal minority say Stephen Poloz, the Bank of Canada governor, and his predecessor, Mark Carney, left interest rates too low for too long after the worst of the financial crisis had passed. History suggests these critics could be right; the counter from Poloz is that inflation was weak, and that a stronger economy will put households in a better position to pay off their debts.  

But if the Bank of Canada must bear responsibility for the country’s excessive debt burden, so must Harper, who was consistently reluctant to use the government’s regulatory authority to curb Canadians’ hunger for low-interest loans.

A separate research paper released by the central bank shows that stricter lending conditions are making the financial system safer. For example, newly mandated tests of a borrower’s ability to pay if economic conditions worsen prompted a bid drop in new mortgages with loan-to-income ratios in excess of 450 per cent; such high-wire lending represented six per cent of home loans in the second quarter, compared with 20 per cent at the end of 2016.

Harper made balancing the budget his main priority after the Great Recession was over. That decision removed stimulus from an economy that still needed some, forcing the central bank to keep interest rates low. So federal finances were indeed in good shape when Harper left office. Household balance sheets, on the other hand, were in terrible shape and we’re still paying for it.

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Mortgage risks fading as Bank of Canada sees dramatic drop in highly indebted borrowers

OTTAWA — The Bank of Canada is releasing data Wednesday that provides a closer look at just how much stricter mortgage rules and higher interest rates have helped slow the growth of new highly indebted households.

The central bank is on a clear rate-hiking path and the pace of future increases hinges significantly on the ability of households — particularly those with high levels of debt — to adapt to higher borrowing costs.

The bank’s analysis says tougher mortgage qualification tests have reduced the share of new high-leverage, insured loans — those of more than 4.5 times a borrower’s annual income — to six per cent in the second quarter of 2018 from 20 per cent in late 2016.

The report also says another rule change this year aimed at uninsured mortgages dropped the share of these new loans to 14 per cent in the second quarter of 2018, compared with 20 per cent a year earlier.

Senior deputy governor Carolyn Wilkins says the new mortgage rules are improving the quality and reducing the quantity of new mortgages.

Wilkins says household debt remains very high and has created a vulnerability in the financial system — but she argues the better quality of loans will put the economy on a more-solid footing to withstand future adverse economic developments.

Senior Democrat says Trump must change USMCA deal if he wants Congress to pass it

U.S. President Donald Trump’s new trade deal with Canada and Mexico needs changes to secure support from Democrats, according to a senior House Democrat in line to play a leading role on trade policy in the new Congress.

There needs “to be not only changes in the legislation but more enforcement” if the Trump administration wants votes from Democrats, said New Jersey Representative Bill Pascrell, who is in line to chair the Ways and Means Trade subcommittee, on Wednesday.

All three nations are preparing to sign the agreement during the Group of 20 leaders’ summit in Argentina taking place from Nov. 30-Dec. 1. The new trade deal will require approval by the new U.S. Congress that convenes next year.

The Canadian dollar erased an earlier advance of as much as 0.2 per cent and traded 0.1 per cent lower on the day as of 10:20 a.m. in New York, while the Mexican peso reversed most of its 0.9 per cent to trade up by around 0.1 per cent.

–With assistance from Benjamin Purvis.

‘Be more entrepreneurial’: Chance for Canada to lure investments as world sours on Trump

Canada should take advantage of fraught relations between the U.S. and nations including China to lure capital and skilled workers, according to the chairman of a new agency tasked with attracting foreign capital.

While Canada can’t ignore tax cuts that have given the U.S. a fiscal edge over its northern neighbour, it can benefit from the trade battles the Trump administration has initiated with China and other countries and from growing restrictions on immigration visas, Invest in Canada Chairman Mitch Garber said. Canada’s advantages include welcoming immigration policies, an educated workforce, low crime and government stability, he said.

The Trump administration has provided a unique window for foreign direct investment in Canada, Garber told the business community at a event in Montreal Tuesday. “That window won’t be open for the rest of our lives but it’s open now.”

Canadian business groups have called on Prime Minister Justin Trudeau to address weakening competitiveness, which is showing in tepid foreign direct investment. Invest in Canada was created earlier this year and Finance Minister Bill Morneau is expected to announce targeted measures to spur competitiveness when releasing a budget update next week.

While he’s all but ruled out an across-the-board cut to the tax rate on business income, companies have indicated they’d welcome other steps such as an accelerated write-off allowance on capital investment and increased deductibility of interest payments.

Garber, a Montreal businessman who’s also chairman of Cirque du Soleil Entertainment Group, said Canada’s new fast-track visa approval process has responded to one of investors’ top concerns over the pace of bureaucratic procedures. He plans to step up marketing spending to have Canada represented in all major international conferences where investors mingle.

“We understood we need to be more entrepreneurial, and faster” he told reporters after the event at the Montreal Council on Foreign Relations. “If you are competing with someone who needs two weeks to do something and you need six weeks, you’re going to lose.”

Bloomberg News

Trudeau says Canada wants a free trade deal with southeast Asian nations

SINGAPORE — Canada wants to walk down the path towards a free trade agreement with a bloc of 10 Asian nations as early as next spring, Prime Minister Justin Trudeau said Wednesday in his only opportunity to directly address the leaders of the Association of Southeast Asian Nations.

A preliminary study of a Canada-ASEAN trade agreement has been done, but experts suggest it could take years to finalize an agreement with the 10-nation bloc, which includes the Philippines, Indonesia, Brunei, Singapore, Malaysia, Thailand, Vietnam, Laos, Cambodia and Burma.

Trudeau told a leaders’ luncheon that exploratory talks could be wrapped up by the spring and negotiations to begin soon thereafter — timing that would be close to next fall’s federal election.

ASEAN nations combined have nearly 650 million people, an economy of US$2.8 trillion, and are already Canada’s sixth-biggest trading partner.

“Canada is resolutely pro-trade and Canada is very aware that the centre of economic gravity in the world is certainly shifting towards Asia and specifically towards southeast Asia,” Trudeau said during his remarks.

“The ASEAN nations represent extremely exciting, growing economies, looking to take their place in the world and Canada is very excited about working with you on that.”

He also made a pitch at the luncheon for ASEAN’s support when Canada bids for a seat on the United Nations security council.

Carlo Dade, an expert on Pacific trade with the Canada West Foundation, said there is no benefit to having a trade deal with ASEAN, since four of them — Brunei, Malaysia, Singapore and Vietnam — are already part of the Pacific trade deal and others have expressed interest in joining.

The agreement, known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership — or CPTPP for short — is an ambitious agreement that likely won’t be matched if Canada negotiates one-on-one with ASEAN because their deals tend to be less comprehensive, Dade said.

“I’ll just be blunt: Trade negotiations with ASEAN, I think, would largely be a waste of time.”

Trudeau has spent two days in Singapore trying to situate Canada as a more favourable place for Asian companies than the United States, playing up Canada as a stable location economically and politically for trade and investment.

On Wednesday, he also met with Chinese Premier Li Keqiang, kicking off the meeting by saying the two leaders would have a “frank and open” talk.

International Trade Minister Jim Carr said the government remains interested in having a deal that helps female entrepreneurs, Indigenous Peoples and promotes other Canadian values, but warned a final agreement will take time to pull together.

“There is an opportunity for us to work with the Chinese government and the Chinese people in order to create opportunity — opportunity so people can fulfil their aspirations,” he said.

Later in the day, the Prime Minister’s Office said the two talked about expanding trade in agriculture, energy and clean technology sectors. The prime minister also raised concerns about China’s treatment of Uyghur Muslims and other minorities in China’s Xinjiang region during the meeting, Trudeau’s office said.

While the two sides did agree to find ways to reduce plastics and pollution in the planet’s oceans, countries, including those in Asia, are trying to find a counterbalance to China’s growing influence in the region, said Shuvaloy Majumdar, a Munk Senior Fellow at the Macdonald-Laurier Institute.

“It strikes me that the prime minister is moving in exactly the wrong direction with the wrong partner,” he said.

Coupled with the fact that Trudeau left last year’s ASEAN summit having angered the host nation’s leader, Majumdar said he doesn’t think Canada is well positioned in the region.

Trudeau angered Philippine President Rodrigo Duterte last year over comments about the Philippine government’s war on drugs, which has earned widespread condemnation for leaving thousands of suspects dead. And in September, MPs voted unanimously to strip Myanmar’s leader, Aung San Suu Kyi, of her honorary Canadian citizenship for her role in the atrocities against her country’s Rohingya people.

Trudeau’s meeting with China’s Li included talk to address to Rohingya crisis.