Freeland Eyes Power of Canada's Pension Funds?
We’ve been conditioned to dismiss federal budgets and fiscal updates s as political documents. That, and a shaggy carpet under which to obscure things the government would rather avoid talking about. But the big-picture thinkers usually manage to add some seriousness to the process. There’s direction on how Ottawa intends to confront the forces that are shaping the world. In this way, Finance Minister Chrystia Freeland’s fall economic statement was more interesting than she indicated it would be. She is considering a rethink of Canada’s approach to retirement by working “collaboratively” with Canadian pension funds to encourage them to invest more in Canada.
That could be a game-changer at a time when higher interest rates have changed how investors think about risk, making venture capital harder to come by. But it also opens a door to political influence over pension management that the designers of Canada’s current approach to retirement worked hard to close. Freeland’s proposal isn’t radical, but it’s more evidence of how disruption is shaking Canada’s trust in markets to solve most of our problems. Ottawa is setting up to build more at home
It will be tempting to dismiss much of what Freeland has to say. Prime Minister Justin Trudeau’s poll numbers this fall have caused many to give up on his government. And yet, an election still is (probably) two years away. He’s not a lame duck. The world order that enabled Canada to grow rich over the last few decades is falling apart, and it will be Trudeau who starts work on a new policy consensus for this difficult moment in history.
Freeland’s update represents a pivot from the runaway spending that started under the COVID-19 pandemic, while at the same time making clear this government thinks balanced budgets are a policy for another time. She promised to keep debt as a percentage of the economy on a downward track, but not before letting it creep up to about 42.7 per cent of gross domestic product next year, from 42.4 per cent the current fiscal year.
The deficit will be 1.5 per cent in the fiscal year that ended March 31, and 1.4 per cent in the current fiscal year. That’s no one’s definition of austerity, but it won’t cost Canada its AAA credit rating. Trudeau appears to have acknowledged that there are limits to what Canada can borrow.
Some—perhaps even many—will say that will leave Canada open to attacks from bond vigilantes. Interest rates already have climbed higher than anyone foresaw a few years ago. If bond traders lose faith in Canada’s ability and/or willingness to make good on its debts, those rates will rise even more. A deficit closer to one per cent of GDP might have been a more convincing sign that Trudeau and Freeland are truly committed to protecting Canada’s reputation safe credit risk.
But resiliency has become more complex than generating a clean balance sheet. Hedge fund billionaire Ray Dalio says the world is being reshaped by five forces: the “debt, money and economic” force; internal political instability; geopolitical instability and war; environmental changes driven by climate change; and technology, especially AI. That’s as good a sketch of what’s going on as any, and legacies will now be defined by how well leaders respond to those forces.
A country (or a company or an individual) could reasonably choose to cower in front of the forces that Dalio describes. But there would be an opportunity cost to that approach. Disruption of the sort that is taking place represents a rare opportunity to build resiliency through growth, too.
In the ‘90s, manufacturing represented about 14 per cent of GDP in both Canada and Australia. It would decline in both countries, but more so in Australia, where manufacturing now represents about six per cent of GDP, compared with about nine per cent in Canada. Along the way, the Australian government decided to stop subsidizing automobile production; the country’s last automotive factory closed in 2017. Australia’s decision made sense in a world where China was a trusted trade partner and globalization was taken as a given. It’s fair to wonder if Australia would do things differently today.
Trudeau and the governments of Ontario and Quebec have deployed hundreds of billions to stay in the great game of competing with U.S. subsidies for green technology. Freeland’s update details “clean economy industrial supports” of about $8.5 billion through 2029. Canada is back in the business of picking winners.
Canada isn’t the U.S. and it can’t match the Inflation Reduction Act dollar for dollar. Freeland’s update suggests the federal treasury has committed all it can.
But Canada is a wealthy country, and it has $3 trillion in assets under management at its world-renowned pension funds, according to the fall economic statement. Freeland appears to think that it’s in the national interest to tap some of that money to help build houses and infrastructure and invest in the companies that stand to gain from technological disruption. She said the government will work with pension funds to “create an environment that encourages and identifies more opportunities for investments in Canada.”
That’s fuzzy. Less abstract was an announcement that the government will modify a rule that blocks Canadian pension funds from owning more than 30 per cent of voting shares of Canadian corporations. She also said the government intends to require large federally regulated funds to disclose their investments to the federal banking regulator, a measure that would reveal the extent to which pension funds are exposed to places that have ended up on the opposite side of the new geopolitical divide.
The policy changes that allowed pension funds to pile up foreign assets were controversial, as they invited more risk. Now, the bigger risk could be that we’re sending too much of our wealth overseas, jeopardizing the country’s ability to generate economic growth over the longer term.
Forget what you thought you knew. Everything’s up for discussion.
I'm not against more transparency but I'm against governments interfering with our pension funds.
Let me begin by making something crystal clear here which I posted on LinkedIn late this afternoon:
She has NO power over pension funds, NONE whatsoever, so I don't know what the hell she's talking about. It takes all provincial finance ministers to sign off on any changes to the CPP Fund and they have no say in what large pension funds invest in. Let's keep it that way.
When I read she is considering ways of working “collaboratively” with Canadian pension funds to encourage them to invest more in Canada, the hair behind my neck stood up.
The Government of Canada shouldn't be hinting at how or where Canada's large pension funds invest.
That's different, the Government didn't force PSP to take on this mandate, it was suggested and PSP gladly accepted. And the Government made the funds available for PSP to invest.
Importantly, you cannot force Canadian pension funds to invest more in Canada, all you can do is create winning conditions so they invest more in infrastructure.
But the Canada Infrastructure Bank has been a big flop in terms of attracting large inflows from our large pension funds and I fear the same for the newly created Ontario Infrastructure Bank.
Earlier today, I was talking to an infrastructure expert and told him we need to create a platform where all of Canada's large pension funds invest in building and operating nuclear power plants in Canada.
It's a win, win, win but to do this properly, politicians need to create the winning conditions.
What else? Fully or partially privatize airports, ports and more infrastructure so our large pension funds can invest more in Canada.
Right now, the cash-strapped federal government is spending taxpayers' monies on low value-add projects.
And this at a time when Canada's debt charges are ballooning as Freeland tables a gloomy fall economic statement:
The federal Liberal government has run a deficit every year since it was elected. It posted even bigger deficits during the COVID-19 pandemic as it scrambled to shore up an economy on the ropes during an unprecedented health crisis.
Now, with interest rates at a 20-year high, the cost to borrow all that money has spiked from $20.3 billion in 2020-21 to $46.5 billion in this fiscal year. The debt service charges will march even higher in the years ahead. Carrying the debt is expected to cost the federal treasury $60.7 billion in 2028-29, according to the economic statement.
That means debt service charges are now among the most costly line items in the federal budget.
To put that in perspective, Ottawa will spend $28.9 billion on the Canadian Armed Forces this fiscal year — about $18 billion less than what the government will send in payments to the banks and bondholders carrying Canada's debt.
The government's debt costs this year are $20 billion higher than the sum it has earmarked for one of its signature policies — the Canada Child Benefit, which sends cheques to families with kids.
The debt charges are also more than double what the employment insurance (EI) program will cost Ottawa this year.
The $2.6 billion increase to the cost of servicing the debt this year is roughly equal to all of the new measures Freeland announced today for 2023-24 ($2.7 billion). Some of the new measures are meant to address the housing crisis and persistent affordability issues.
Kevin Page, the former parliamentary budget officer, said it was "inevitable" that debt servicing costs would rise once the government decided to backstop the entire economy during the pandemic.
"There was an enormous increase in debt. There were really massive increases in debt. Now it's going to come back to bite us," he told CBC News.
The federal debt has doubled from $619.3 billion in 2015-16, the first year of Trudeau's government, to $1.2 trillion last year. It's expected to climb to $1.4 trillion by 2028-29.
The government has less fiscal leeway now to address issues like the housing supply crunch because it's spending so much more on servicing that debt, Page said.
"The government is losing fiscal space because of rising debt interest charges relative to GDP. Debt is growing and it's not insignificant. When people say, 'I want to do this' and 'I want to do that,' the government just doesn't have the fiscal room. It's getting eaten up effectively by the credit card bills," he said.
While the amount of new spending in this economic statement is lower than it has been in past budgets or fiscal updates presented by the Trudeau government, Freeland's plan still includes $20.8 billion more for new measures over the next six years beyond what she laid out in the spring budget.
My big fear is we are headed straight for another major fiscal crisis similar to the one that occurred in the mid-1990s.
Only difference is back then, Paul Martin had the courage to introduce the budget that changed Canada.
Nowadays, there is a leadership vacuum in Ottawa and we are entering the fiscal abyss, a point of no return.
So forgive me if I'm not enamored with the idea of Ottawa using our national pension funds to "work collaboratively" (ie. to coerce them) to invest more in Canada.
Ottawa has dropped the ball, it's now looking for a Canadian pension solution to bail it out and that's crossing a very slippery and dangerous governance line.
We Canadians need to be aware of this or else we risk jeopardizing the long-term health of our mighty pension funds.
Below, Deputy Prime Minister and Finance Minister Chrystia Freeland on Tuesday tabled the government’s fall economic statement, which introduces a Canadian Mortgage Charter and other measures meant to make life more affordable for Canadians.
Canada received more foreign direct investment than the US or other G7 countries? Come on, is this a joke? Who in their right mind would invest in Canada? There hasn't been any major investment in Canada since the Liberals took over, except maybe the recent Northvolt announcement which was heavily subsidized.
I'll tell you what else is a joke, measures to tackle the housing crunch.
As my former colleague Stefane Marion noted earlier today: "The just-released CPI report, showed annual rent inflation jumping to 8.2% in October, the highest level in over 40 years. Unless Ottawa revises its immigration quotas downward, we don't expect much relief for the 37% of Canadian households that rent."
What does this mean? Expect homelessness to explode across Canada over the next couple of years. The situation is dire and it will only get worse, a lot worse, unless policymakers tackle it on all fronts.
Lastly, Goldy Hyder, president and CEO of the Business Council of Canada, and Rona Ambrose, deputy chair at TD Securities and former interim leader of the Conservative Party, join BNN Bloomberg to discuss the fall fiscal update, that shows the federal government borrowed more, and added billions in spending.
It's too bad Rona Ambrose wasn't the leader of the Conservative Party, let's hope PP doesn't drop the ball, the next elections are crucial.
Update: Bernard Dussault, Canada's former Chief Actuary, sent me this after reading my comment:
The limited power that the federal financial minster has over the CPP is that he/she may and can propose to the 10 province ministers to amend the CPP as she so wishes. And any of her wishes would be realized if and when the finance ministers of at least 7 provinces covering at least 2/3 of the Canadian population would approve her proposal.
I thank him for sharing this information as I wasn't aware it takes seven provinces covering at least 2/3 of the Canadian population to approve any proposed amendments to CPP.