Throne speech agenda signals ‘healthy’ bond issuance, continued QE

The Liberal government’s throne speech Wednesday didn’t move financial markets, but it signalled another year of elevated government bond issuance and continued quantitative easing from the Bank of Canada, economists say.

Justin Trudeau’s minority government promised to support “people and businesses through this crisis as long as it lasts, whatever it takes,” with an agenda that includes extending the federal wage subsidy and tackling economic inequality.

The deficit for the current fiscal year is pegged at $343 billion, but the big question is where that number goes next year, Bank of Montreal economists said in a research note.

Projections will come in a fiscal update this fall, but the speech suggests “spending will still remain well above the pre-Covid baseline next year,” the research note said, with a deficit likely topping $200 billion.

“Suffice it to say that massive support programs currently underway won’t fully roll off next year and, even as some do, there will be more spending to fill some of the void,” the BMO economists wrote.

That indicates “another year of healthy Government of Canada bond issuance.”

In addition to government spending plans, $96 billion in maturing debt next year means gross bond issuance could come in around $300 billion, the note said, down from $409 billion this year.

With the Bank of Canada absorbing much of this year’s issuance through its quantitative easing (QE) program, “a complete exit from QE seems unlikely as it’s unclear whether the market can absorb such a massive volume of debt without a sizeable back-up in interest rates, a key component to keeping the surge in debt affordable,” said the research note.

The BMO economists noted that DBRS reaffirmed Canada’s AAA rating this week, but said they’ll be waiting to see how rating agencies respond to another year of big borrowing.

A research note from Scotiabank said the Liberals had hinted at greater fiscal activism in the weeks leading up to the speech—which may have contributed to lowering yields—but markets would need more concrete details before responding to Trudeau’s agenda.

“It could take a while for the fuller effects of this speech to be priced in, and implications will likely only be known once a budget is tabled,” the note said.

The Liberals are still determining how much they can borrow before markets begin to worry, Scotiabank said, and Canada will likely have one of the lowest net debt levels in the G7.

Old priorities updated

The throne speech also mentioned Liberal priorities from the 2019 federal budget and last fall’s election campaign.

The government will “identify additional ways to tax extreme wealth inequality, including by concluding work to limit the stock option deduction for wealthy individuals at large, established corporations, and addressing corporate tax avoidance by digital giants,” it said.

Last year the Liberals delayed proposed changes to employee stock options that were planned to take effect on Jan. 1, saying the details would follow in the 2020 federal budget. The budget was postponed in March due to the Covid-19 pandemic.

Draft legislation for the stock option changes proposed a $200,000 annual limit for certain companies on employee stock option grants that can be taxed effectively at the capital gains rate. The limit would not apply to Canadian-controlled private corporations.

The Liberals also campaigned on a 10% tax on luxury boats, cars and personal aircraft that cost over $100,000 — a pledge that was repeated in post-election mandate letters.