Written by Keith Oland, Global Strategist at IceCap Asset Management
On August 18th, 2020, the Prime Minister of Canada Justin Trudeau asked Governor General Julie Payette to prorogue Parliament.
This means all parliamentary activity stops until a new session of parliament is opened with what is called a Speech from the Throne. This also means that all business conducted by the House of Commons must be restarted in the new session. A Speech from the Throne is where the government introduces its direction and goals.
The Speech from the Throne is currently scheduled for September 23rd, 2020.
It is our belief that the Liberal Government of Canada may introduce significant new spending programs in the upcoming Speech from the Throne, setting a precedent for other countries to implement similar programs.
In the past few years there has been a major shift, particularly amongst western countries, towards expanded fiscal deficit spending. The current environment of historically low interest rates encourages borrowing to fund these programs. Canada has positioned itself to be one of the first major countries to rapidly expand spending, regardless of fiscal anchors such as the net national debt, and debt to GDP ratio. We could see the first indication of this shift in the Speech from the Throne on September 23rd, 2020.
If major spending initiatives are announced without accompanying sources of income to fund them, we can infer that the national debt will surge. Markets will be watching closely, and if reactions to the anticipated shift are muted then this will give tacit permission for other comparable countries and sub sovereigns to do the same. This could also be a major step in bringing modern monetary theory (MMT) into the mainstream.
The Speech from the Throne is significant because we will hear in detail what the Liberal Government plans to do with their time in government. We believe there is a real possibility of a significant shift to the left in government policy, accompanied by increased deficit spending. The reasons for this are as follows:
The coronavirus pandemic, and the resultant need to stimulate the economy.
Low interest rates where the cost of money is essentially free (0.25% nominal interest rates, and negative real rates).
The need to shift attention away from the WE Charity scandal.
The ability to displace the New Democratic Party on the political spectrum and position the Liberals in a place where they can expect to have success in the next election.
Leaks to the media demonstrating the Trudeau government’s preference for increased spending, although messaging from the Liberals has become more mixed in recent days.
This paper will give a brief overview of how the Canadian system of government works, what we expect to happen with the Speech from the Throne, and the impact on the national debt and the economy.