Tag Archives: capital

Canada Debt Becoming Unmanageable Economists Warn

With the Canadian government’s high debt-to-GDP ratios, such as a ratio of debt to nominal GDP sitting at 68 percent in March 2023, economists warn that government debt could become unsustainably high if Ottawa fails to reduce spending, increase productivity, and re-establish business confidence.

“We’re not growing our income per capita, which means that we’re not going to get the tax revenues that we need, plus we’re getting a lot of people retiring. So the situation could end up becoming quite unmanageable if we keep our pace that we’re going,” said Jack Mintz, president’s fellow at the University of Calgary’s School of Public Policy.

The federal government has run back-to-back budget deficits since the 2008 financial recession, with government spending spiking during the COVID-19 pandemic. As a result, Canada’s debt as a percentage of nominal GDP rose from around 51 percent in 2009 to 74 percent by 2021, for example. Nominal refers to the current value for the particular year without taking inflation into account.

The two previous federal budgets have attempted to lower government spending, but the federal government will still post a $40 billion deficit in 2023–24, which they project will shrink to a $20 billion deficit by 2028–29.

The Liberal government’s response to criticism by the opposition that Canada’s debt could lead the country into a financial crisis has been that Canada has among the best debt-to-GDP ratios in the G7.

According to Mr. Mintz, while Canada’s debt situation is not as bad as it once was, it doesn’t mean that it may not impact Canada’s prosperity prospects.

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Mr. Mintz points out that Canada’s debt situation is not nearly as bad as in 1996. The government’s ratio of debt to nominal GDP ratio reached 83 percent that year.

Mr. Mintz also noted that Canada continues to have a triple-A credit rating according to the world’s leading credit agencies, meaning the country’s debt is not yet seen as problematic.

“We’re still viewed as having a much better credit line compared to a number of other countries. … But at some point, the credit agencies might look at that gross debt number and start asking the question, ‘Is it starting to become unsustainable?’” he said.

Lower Productivity Hampering Debt Payments

The federal government’s ability to pay off its debt could be hampered by low productivity, according to Steve Ambler, professor emeritus of economics at Université du Québec à Montréal.

“The thing that worries me in terms of federal government debt is we are currently in a period of extremely low productivity growth and low overall growth,” he said.

In March, the Bank of Canada’s senior deputy governor Carolyn Rogers warned that Canada’s poor productivity had reached emergency levels.

Although Statistics Canada said the country’s labour productivity showed a small gain at the end of 2023, that came after six consecutive quarters of productivity decline.

The right honourable Jean Chrétien.

Mr. Ambler said an appropriate way to lower the debt-to-GDP ratio is to keep government spending from increasing while also raising productivity to increase tax revenues. He said this was the strategy of Prime Minister Jean Chrétien, whose Liberal government established a budget surplus in three years by growing the economy and keeping government spending stagnant.

To lower Canada’s debt-to-GDP ratio, Mr. Ambler said the government should focus on increasing worker productivity, allowing its resource sector to grow, and easing back on discretionary spending.

He also cited a November 2023 C.D. Howe paper showing that business investment per worker in Canada has shrunk relative to the United States since 2015. Investments such as better tools for workers would increase productivity, while productivity growth would in turn create opportunities and competitive threats that spur businesses to invest, the paper said.

“Re-establishing business confidence would be almost the number one priority, especially in the resource sector,” Mr. Ambler said, adding that a future government might also be wise to lower the feds’ “wildly extravagant subsidy programs” for the electric vehicle (EV) sector.

The Liberal government has given tens of billions of dollars in subsidies for EV manufacturing projects in Canada since 2020, saying the factories will eventually create thousands of new jobs.

‘No Cushion’ to Mitigate Debt Issue

Joseph Barbuto, director of research at the Economic Longwave Research Group, has a more pessimistic view of Canada’s debt. He says that while federal debt is at levels similar to the 1990s, the crisis will be “larger” because the government does not have the “fiscal room to mitigate the downturn.”

Mr. Barbuto said that while the Canadian government was able to help alleviate its debt issues in the 1930s and 1990s by lowering its interest rates, it does not have that same luxury in 2024. The Bank of Canada lowered its key policy rate from 1.25 percent to 0.25 percent in 2020, and was forced to raise it to 5 percent by 2023 in response to rising inflation.

“There’s no interest rate cushion on the other side. Interest rates can only fall back to zero,” Mr. Barbuto said, noting that higher interest rates make it more difficult for governments to service their debt.

“The problem with the monetary system is there’s no fiscal discipline that is pushed on governments, unlike [individuals] or corporations,” he said.

“There will be a point where because of the accumulated interest with rising interest rates, eventually it’s going to overwhelm the government and then people will not lend the government any kind of capital.”

Mr. Barbuto also expressed concern over Canada’s private debt-to-GDP ratio. Private debt refers to debt owed by private, non-financial entities such as businesses and households, as opposed to public debt owed by governments and banks. Canada’s ratio of private debt to nominal GDP sat at 217 percent in December 2023 compared to 124 percent in 1995.

Mr. Barbuto said Canada’s private debt-to-GDP ratio is higher than that of Japan’s in the 1990s, and pointed out that the Japanese economy had stagnated after the country’s asset price bubble burst in 1992.

The research director believes the Canadian economy will eventually see a debt crisis and collapse in real estate that will result in austerity measures, a shrinkage in the size of government, and the “creative destruction” of the old political and economic system. He said this would be the continuation of an economic cycle that has repeatedly happened throughout history.

“[It’s] inevitable and necessary. A debt detox or deleveraging is the same thing as a drug detox. Nobody likes it, … but it’s a necessary part of the cycle for it then to go back up,” he said.

For the Silo, Matthew Horwood/Epoch Times.

International Monetary Fund- World Economy Still Recovering

The IMF announced today (Tuesday, April 11, 2023) in the World Economic Outlook’s press briefing that the baseline forecast for global output growth is 0.1 percentage point lower than predicted in the January 2023 WEO Update, before rising to 3.0 percent in 2024.

“The world economy is still recovering from the unprecedented upheavals of the last three years, and the recent banking turmoil has increased uncertainties.”

“We expect global output growth to fall from 3.4% last year to 2.8% in 2023, before rising to 3% in 2024, mostly unchanged from our January projections. Advanced economies are expected to see an especially pronounced growth slowdown from 2.7% in 2022 to 1.3% in 2023. Global headline inflation is set to fall from 8.7% in 2022 to 7% in 2023 on the back of lower commodity prices but underlying core inflation is proving to be stickier. Importantly, this outlook assumes that recent financial stresses remain contained,” said Pierre-Olivier Gourinchas, the IMF’s Chief Economist.

Much uncertainty clouds the short- and medium-term outlook as the global economy adjusts to the shocks of 2020–22 and the recent financial sector turmoil. Recession concerns have gained prominence, while worries about stubbornly high inflation persist.

Chart- world economic outlook projections including Canada.

“Once again, risks are heavily tilted to the downside, they have risen with the recent financial turmoil. Most prominently, recent banking system turbulence could result in a sharper and more persistent tightening of global financial conditions. The simultaneous rate hikes across countries could have more contractionary effects than expected, especially as debt levels are at historical highs. There might be a need for more monetary tightening if inflation remains stickier than expected. These risks and more could all materialize at a time when policymakers face much more limited policy space to offset negative shocks, especially in low-income countries,” added Gourinchas.

With the fog around current and prospective economic conditions thickening, policymakers have a narrow path to walk towards restoring price stability while avoiding a recession and maintaining financial stability. Achieving strong, sustainable, and inclusive growth will require policymakers to stay agile and be ready to adjust as information becomes available.

“First, as long as financial stress is not systemic as it is now, the fight against inflation should remain the priority for central banks. Second, to safeguard financial stability, central banks should use separate tools and communicate their objectives clearly to avoid unwarranted volatility. Financial policies should remain laser focused on preserving financial stability and watch for any buildup of risks in banks, non-banks, and the real estate sectors. Third, in many countries fiscal policy should tighten to ease inflation pressures, restore debt sustainability, and rebuild fiscal buffers. Finally, in the event of capital outflows that raise financial stability risks, emerging market and developing economies should use the integrated Policy framework, combining temporary targeted foreign exchange interventions and capital flow measures where appropriate,” said Gourinchas.

Threat to Prosperity: Canada Should Mind Business Investment Gap

August, 2022 – Business investment in Canada is so weak that capital per member of the labour force is falling, and the implications for incomes and competitiveness are ominous. Governments, particularly the federal government, need to get serious about growth to get workers more of the tools they require to compete and thrive, according to a new report from the C.D. Howe Institute.

In “Decapitalization: Weak Business Investment Threatens Canadian Prosperity”, authors William B.P. Robson and Mawakina Bafale write that since 2015 Canada’s stock of capital per available worker has been declining and its rate of gross investment per worker has been well below that in the United States and other OECD countries.

Capital= Business “bread and butter”

They examine why Canada might be lagging as well as what action to take.

“Business investment and productivity are closely related: productivity growth inspires investment by creating opportunities, and investment drives productivity growth by equipping workers with more and better tools,” says Robson. “Investment per available worker lower in Canada than abroad tells us that businesses see less opportunity in Canada, and prefigures weaker growth in Canadian earnings and living standards than in other OECD countries.”

New investment per available worker in Canada, adjusted for purchasing power, was only slightly above 50 cents for every dollar of investment per available United States worker in 2021 – lower than at any point since the beginning of the 1990s. In addition, in 2022, OECD projections show that Canadian workers will likely enjoy only 73 cents of new capital for every dollar enjoyed by their counterparts in the OECD excluding the US, according to Robson and Bafale.

The authors’ calculations from OECD projections for 2022 show $20,400 of new capital per available worker this year for OECD countries excluding the United States, compared to $14,800 for Canada.

In other words, new capital per available worker in Canada will be more than one-quarter less than in those countries this year.

Declines in the stock of machinery and equipment (M&E) and intellectual property (IPP) per member of the workforce are particularly worrisome, the authors explain, because those types of capital may be particularly important for economy-wide productivity. “Whatever special messages the recent M&E and IPP numbers may convey, the message from stocks of business capital overall is clear: the average member of Canada’s labour force began 2022 with less capital to work with than she or he had in 2014,” says Bafale.

Robson and Bafale identify a few probable causes for Canada’s dismal investment performance. These include: weak business in the natural resource industries; restricted access to finance for small and mid-size firms; a loss in Canada’s competitive edge in business taxation, notably against the United States; an uncongenial environment for IP investment; regulatory uncertainly; unpredictable fiscal policy; and governments’ in-house spending and transfers to households that are steering resources into consumption and housing rather than non-residential investment.

Is business investment capital trajectory predetermined?

“The prospect that Canadians will find themselves increasingly relegated to lower value-added activities relative to workers in the United States and elsewhere, who are raising their productivity and earnings faster, should spur Canadian policymakers to action,” conclude Robson and Bafale. “The first step is to recognize that recent trends are a symptom of threats to Canada’s prosperity and competitiveness – that low business investment is a problem that governments can and should address.”

Supplemental- Are you a small Canadian business frustrated with the difficulties involved in accessing capital? For example, our experience has shown that the multitude of Business Development Corporations operate with autonomy but without accountability, poor vision and nepotism. Essentially, gleaning business plans and strategies before revealing ‘jump through these application hoops” which include personal finance and personal life details. It is sobering to discover that they also receive a hefty commission % for every applicant they ‘certify as successful’. Do you agree or have you had a more positive experience? We want to hear from you in the comments below.

Should You Take Out a Second Mortgage?

With housing prices cooling off a bit but still generally soaring in cities across Canada, many homeowners are asking themselves how they can cash in on the market without actually having to sell their property. For many, a second mortgage will be the ideal way to do so.  

Second mortgages are one of the perfect mortgage solutions for homeowners who want to tap into their home equity to get lump-sum cash payments at low rates of interest. If you want to know if a second mortgage is right for you, here are three questions you should ask yourself. 

1. How Much Home Equity Do I Have? 

Before you start approaching mortgage brokers about a second mortgage, it’s a good idea to do some calculations around home equity, as the amount of money available to you through a second mortgage is determined by how much home equity you have.  

Fortunately, home equity is easy to calculate: simply subtract your existing mortgage from the current market value of your property. The difference is your home equity — the amount of your home value that you own outright.  

If you don’t know how much your home is worth, you can use a free calculator like this one to get a general estimate based on the going rate for properties in your neighbourhood. 

2. Should I Get a Home Equity Loan or Refinance? 

Generally speaking, there are two ways a homeowner can cash out a percentage of their equity: through refinancing or through a second mortgage. Both can be good ways to unlock capital, but which option you go for will depend in part on your financial situation. 

  • Refinancing: When you refinance your home, you replace an existing mortgage loan with a new mortgage loan. This new loan can be negotiated to include a cash payout based on your home equity, and while cashing out will likely extend the time it takes to pay off your mortgage, you will still only be dealing with a single mortgage loan.  
  • Second Mortgage: A second mortgage is an additional mortgage loan taken on against your home equity. Because it is an additional loan, it will usually come at a higher interest rate. 

In Canada, most mortgages are refinanced every five years, but they can also be refinanced more frequently. But if you already have a low interest rate on your existing mortgage and rates are increasing, a second mortgage may be the cheapest way to turn equity into cash. 

3. Will this Loan Save Me Money? 

A second mortgage can be a powerful financial tool, but it isn’t free money: you will still need to pay it back with interest, so you should be careful about how you use it.  

Taking out a second mortgage to consolidate debt, or to build an addition on your house, are smart investments because they put your money to work by reducing your interest payments or enhancing the value of your property. This puts you in a better financial position than you would have been if you didn’t borrow the money.  

Doing a cost/benefit analysis and working out how much money borrowing against home equity will save you is the key to making a strategic decision. 

Given how much real estate values have gone up over the past few years, figuring out how you can use your newfound wealth to improve your financial situation is essential for good money management. If you want to know more about whether a second mortgage is right for you, get in touch with a local mortgage broker to explore interest rates and options.  

Feautured image: Precondo CA Via Unsplash/ Silo Content Production

5 Home Renos That Add The Most Home Value

Whether you wish to improve your living space or you are going to sell your home, a home renovation will add instant value to your property. 

Many home buyers are looking for homes that are ‘move in ready’ and don’t require much or any work prior to moving in. Because of this desirability, many homeowners are deciding to make upgrades to their home to increase the resale value. If you have a number of projects in mind that are on your ‘wish list’, but aren’t sure which one to start with, you might find these suggestions helpful. 

  1. Kitchen Remodel – This is probably the biggest project that you will undergo, but the one that has the most impact. The kitchen is the most used room in a house and the central hub for most activities. Thus, it makes sense to have a kitchen that is both functional and attractive. If the cabinets are old looking and the countertops are in poor condition, it is hard to overlook. For some, a major renovation might be out of reach, but there are smaller scale options that will also work to spruce up the appearance. You can add a fresh coat of paint or even just reface the cabinetry with new wood panels and hardware. Overall, you can likely recoup 60% to 80% of the cost of the kitchen remodel. 
     
  1. Garage Door Replacement – A garage door makes a great design element to your home as it is one of the first things people see when they come to your home. Although it doesn’t always top the list of most popular projects, it should not be overlooked in terms of overall home value and curb appeal. Over 80% of Realtors believe a new garage door can impact home value – all the more reason to take on this project. 
     
  1. Fiberglass Entry Door Replacement – Nothing makes a more impactful statement than the attractiveness of your front door. Replacing the standard fiberglass entry door to something more stylized to your home will add to the ‘first impression’ element of your home. There are many attractive alternatives for a front door and finding a suitable design that goes with the home will add value straight away without having to undergo a major renovation. According to a recent study, replacing your front door has an average ROI of 75%.   
     
  1. Window Replacement – Having old windows with cracked or chipped frames greatly affects the look of your home. Potential buyers will notice them and so do appraisers. If you’ve got questions about buying new windows, get the answer from a reputable company before you buy. Replacing the windows in your home can add thousands of dollars to its market value, and with an average  ROI of up to 85%, so it makes sense to consider it as a priority upgrade option, especially if you are planning on selling in the near future.  
     
  1. Deck Addition – A wood deck addition falls on the inexpensive side of remodeling projects, but it’s one of the more valuable. In fact, some experts claim that installing a deck can increase the value of your home significantly more than if you were to add another bathroom or living room at a fraction of the cost. The overall cost of installing a deck will largely depend on the size of the deck and material you use. However, most homeowners will recoup nearly 70% of the build cost after they have sold their home.  

If you want to take on any of these home improvement projects, but don’t have the immediate cash on hand to make them a reality, then a home improvement loan might be something to consider.  

3 Best Steps To Find The Best Home Renovation Contractor For Your House |  listofinformation

What is a home improvement loan? 

A home improvement loan can be a home equity loan, a HELOC loan, or any loan using home equity used for home improvement purposes. Borrowers will typically use these types of loans to access the capital they need to build on their investment. 

According to a recent study, the value of residential mortgage loans from alternative lenders is steadily growing. Canadians are choosing to opt-out of traditional lenders’ extended waiting periods and paperwork and are finding that working with a mortgage broker is an easier, more streamlined process that saves time, effort and money. If you are a homeowner considering a renovation to your home, a reputable broker such as Burke Financial can help you with every stage of the process.