by Thomas Walkom
The fallout from Donald Trump’s election victory continues. One casualty could be Justin Trudeau’s ambitious infrastructure plan.
Ironically, that’s because Trump has his own infrastructure scheme. The U.S. president-elect has promised to put $1 trillion over the next decade toward problems such as crumbling highways.
Like Trudeau, the billionaire developer hopes he can convince the private sector to put up most of the capital for these projects in return for unspecified revenue streams (read road tolls and user fees).
Like Canada’s prime minister, Trump is not particularly spooked by the spectre of big budgetary deficits. On top of increasing spending, he also wants to reduce taxes.
True, his tax cuts would benefit the rich more than Trudeau’s. But the fiscal effects of his double whammy on taxes and spending would be the same – bigger deficits and more government borrowing.
When there is more demand for money, the cost of that money – otherwise known as the interest rate or yield – tends to rise.
That’s already started to happen. The yield on benchmark 10-year U.S. treasury notes has jumped by half a percentage point since Trump’s election. The yield on equivalent Canadian government 10-year bonds has gone up by about one-quarter of a percentage point.
Citing, in part, the higher cost of financing, the Royal Bank raised its mortgage rates Tuesday.
Is all of this just a blip? Maybe. There is a lot of capital swishing around the world. That fact alone could depress interest rates again.
But the U.S. economy is still the biggest in the world. Canada’s borrowing has no discernable effect on global interest rates. America’s does.
All of this could spell trouble for Trudeau’s economic agenda.
The prime minister came to power last year on a pledge to spend. His government, he said, wouldn’t fret about balancing the budget each year. Instead, it would look at the ratio of federal government debt to the overall economy as measured by gross domestic product.
As long as this debt-to-GDP ratio was constant or falling, he said, the government would be satisfied.
In his economic update earlier this month, Finance Minister Bill Morneau made the bold admission that, under the Liberal plan, Canada’s books will remain in the red for at least another five years.
At a time of low growth, this was probably the wisest path to follow. At a time of low interest rates, this was also an opportune moment for Ottawa to borrow money to spend on infrastructure.
The government plans to spend $95 billion on such things as sewers and bridges over the next 12 years. On top of this, it wants to entice private investors to pony up an additional $140 billion in return for unspecified goodies.
The debate to date has been about whether it makes sense for Ottawa to rely on private-public
partnerships that will ultimately cost more in the form of both profit and borrowing costs. David Macdonald, an economist with the Canadian Centre for Policy Alternatives, estimates this extra cost to the public at $6.2 billion.
At a meeting with the Star editorial board last week, Morneau didn’t dispute the fact that rebuilding Canadian infrastructure on the public dime would be cheaper in the long run. His real motive for involving private-sector entities, such as pension funds, appears to be political – a desire to show that the government can limit its borrowing.
Now, we have the Trump problem.
Sorting out the total economic effect of a Trump presidency is complicated. His wide-open spending plans, if permitted by Congress, could boost the Canadian economy. His protectionist trade policy could depress it.
His effect on interest rates remains a wild card. Rates are still well within the bounds predicted in Morneau’s March budget. But the Finance department calculates that every one percentage point hike in interest rates boosts the deficit by $1 billion in the first year alone.
If borrowing costs do begin to rise significantly, the Liberal government will find it hard to maintain its delightfully insouciant approach to deficits. If bond yields increase, the pension funds that Ottawa hopes to attract into infrastructure spending will have other places to invest their cash.
Much of Trudeau’s economic strategy has been designed for a low interest-rate world. What happens if, thanks in part to Donald Trump, that world ends?
Copyright 2016-Torstar Syndication Services
