Tag Archives: deficit

Ontario’s Debt: Down the Rabbit Hole

I have written in the past about the duplicity of the Ontario Liberal budgets in speaking only of net debt. The 2018-19 provincial budget was released on March 29 and I will comment briefly on how it handles the topics of debt and deficit. But first a discussion of net and total debt.

Bits and Pieces – 20170124, Tuesday

Commentary: If Trump achieves half or maybe a quarter of what he wants to he will go down as a “great” American president. I suspect a significant piece of what he would want is impossible, not because of political obstacles but because some things will not be possible.

A lot of jobs that went offshore don’t exist anymore and can’t come back. Companies on-shoring will build new plants populated with robots and highly automated assembly lines. They would have done so anyway for economic reasons and this trend had started before Trump.

His trade policies may backfire. Raising tax barriers and tariff walls will start trade wars – may already have done so – so the imports will be cut but so will the exports. How this will affect the balance of trade is a question. In fact the trade deficits were the only way the US dollar could become the world reserve currency. Trump cannot control the currency – at least not for long. Any attempt to declare China a currency manipulator will lead to the depreciation of the yuan and strengthen the dollar, affecting exports and negating the effect of tariffs on imports.

He has a deeply divided country and he can’t fix this because the divide is to a large part caused by people who hate him and this he can’t change. Read: Trump: America for the Americans! He has inherited trillion dollar deficits and a 20 trillion dollar debt that goes as high as 200 trillion with unfunded liabilities included. The only fix for this is to press the reset button and the reset will be global.

This is going to be a wild ride.

The Ontario 2014-2015 Fudgit

In Ontar-I-Owe we updated the actual or total debt figure projections for 2013-14. Based on the numbers available from the Ministry of Finance, the figure was $292.8 billion (B). Looking at the 2014-15 budget released today we turn to Chapter 6 where the numbers reside. Table 3 contains the Total Debt figures which are the key ones for analyzing Ontario’s debt position. Consider Table 1 below taken from Table 6.3 of the Budget paper. The current number for the last fiscal year stands at $295.8 B.

Table 1. Total debt by fiscal year with year over year change, all in billions of dollars.

Year 2012–13 Interim 2013–14 Plan 2014–15
Total Debt 281.065 295.770 310.549
YOY Difference 23.787 14.705 14.779

The composition of this debt is shown in Chart 6.9, Total Debt Composition, which is consistent with picture of the Province’s Consolidated Debt Portfolio shown by the Ontario Financing Authority. As we have noted in past writing, the total debt or simply debt in common terms, is the amount of money that is owed third parties and the amount of money on which interest is paid. The government however will never use this figure. They prefer the lesser Net Debt which is optically better. For 2014-15, the net debt is estimated to be $289.251 B. The media will only use this number.

In Table 6.1, the government states that the 2013-14 deficit will be $11.3 B. We would be more inclined to view the year over year increase in the total debt of $14.7 B as the real deficit. It is certainly the extra borrowing the province incurred. In any case, in Table 6.2, they show a $12.5 B deficit for this fiscal year.

The Finance Minister is quoted in theStar.com: We are committed to balancing the budget in 2017. Someone needs to tell him that he has to reduce deficits to achieve this goal and not increase them, even for the purpose of buying an election.

Flash Point: ‘Co-opted By Optimism’

Just before New Years and the dreaded ‘fiscal cliff’, we played around with a possible article aimed at highlighting what we consider to be the real fiscal cliff: the unrepayable US sovereign debt. We studied the Wikipedia article on the fiscal cliff and in the end decided the complexity of the issue which was shortly to become a moot point, was not worth the resource expenditure. The article cited the work of the Congressional Budget Office (CBO) in analyzing the trajectory of the US debt under different scenarios. In particular, the following Figure stood out:

Figure 1. Two CBO debt projections into 2022 (click to open in new window).

Source: An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022

Our concern was that the CBO debt projections might be somewhere between optimistic and wildly optimistic, dependent on their economic and fiscal assumptions. For example, we doubt that their projections have an allowance for new wars although they consider military activity, but it is hard to imagine that the US will not be involved in at least one major new war in the next decade, especially if Kyle Bass (Kyle Bass: One Smart Man; see the Dec. 22 entry and video link) and others are right. In a more mundane vein, we wondered what the GDP estimates  were that they used. John Mauldin’s latest eletter, Somewhere Over the Rainbow motivated us to revisit the issue from the perspective of GDP.

Reality Check – Five Mainstream Economists Sound a Warning

Here is Gary’s essay, Five Mainstream Economists Sound a Warning. For more by Gary, visit his website at http://www.garynorth.com/.

Gary reviews the situation of the US deficit:

  • the on-budget deficit: a mere $1.2 trillion a year.
  • the real federal deficit, which reflects the unfunded liabilities of the federal government, primarily in Social Security, Medicare, and Medicaid … has a present value of $222 trillion.
  • It cannot, except by one technique, namely, default.
  • The Fed now owns one in six dollars of the national debt
  • The five’s conclusion: The problems are close to being unmanageable now. If we stay on the current path, they will wind up being completely unmanageable, culminating in an unwelcome explosion and crisis.

Gary’s conclusion:

Nothing will change Congress. Nothing will change the executive. There will be no cutback in spending until the numbers force the Great Default. … Americans will not be ready. State and local governments will not be ready. … Will you be ready?

The Policy of Doom

We’ve finally found the long-awaited (due to a browser refresh issue?) Hoisington Investment Management Quarterly Review and Outlook, Second Quarter 2012. As usual, Dr. Lacy Hunt has produced a 4-page newsletter based on solid economic theory but written in a manner that a layman may understand. This one is centered on Interest Rates and Over-indebtedness. He is basing his discussion on three recent papers, especially research [that] includes the first systematic evidence of the association between high public debt and real interest rates. As he states:

both low long [bond] rates and the stagnant economic growth [the current US ‘recovery’] are symptoms of the excessive indebtedness [current sovereign debt levels] and/or low quality debt usage [government spending].

Although he relates the studies to the interest rate on the long bond, an important issue for investors, especially pension funds, there are more important broader implications for Western economies in general.

Ontario Is Not California

A comment comparing Ontario’s fiscal situation to California’s recently hit the news (e.g. Ont. compared to cash-strapped Calif.) It was meant as a warning to Ontarians. After some debate, we’ve decided to weigh in on the issue. The issue raised above centers on a comparison of California’s fiscal situation, among the worst of all the states in the US, to Ontario’s. As we shall see, California’s situation is significantly better than Ontario’s. To make the issue clear, we reverse this statement: Ontario’s situation is significantly worse than California’s. To find out why, read on.

Ontario, You Are In Really Deep Trouble

In December, we wrote in Ontario, You Are In Deep Trouble:

So Dwight, tear up all those projections of GDP growth, deficit reductions and balanced budget time frames and start over. If you can’t do it, Moody’s will.

Well he didn’t and they did!

Following on the heals of an S&P’s downgrade of the outlook on Ontario’s debt (see S&P ratings agency puts Ontario on credit watch; Moody’s did same last fall), Moody’s has downgraded Ontario’s credit rating from Aa1 to Aa2.

Ontario, You Are In Deep Trouble

Regarding the announcement that Moody’s has placed Ontario on a downgrade watch, CTV News reports Ontario Finance Minister Dwight Duncan as saying:

That is not a downgrade. Spin take: while not being a downgrade on debt, it is certainly a downgrade in outlook.

This does signal that they will continue to watch us carefully. No kidding.

It challenges us to continue to meet the targets that we have so far met. Spin take: we’re not sure, Dwight, how you continue to meet a target that is already met unless there is a real risk that the result of meeting the targets is at risk of being reversed. In other words, we’re in over our heads and barely treading water.

But Dwight has a solution as the Vancouver Sun reports: We are going to have to be relentless in pursuit of transformation to ensure we are focusing our resources on those pivotal areas for job growth in the future. Huh? Such as the “green” jobs the province has been promoting? We’re living in a Dilbert cartoon.
Zero Hedge has a more in-depth discussion of Moody’s assessment. They quote a Ms. Wong of Moodys:  If a credible plan to address the fiscal imbalance and stabilize the debt burden is not implemented in the next provincial budget, expected in March 2012, downward pressure on the province’s Aa1 rating would emerge.

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