CANADA’S

SEPTEMBER 2020
SPEECH FROM
THE THRONE
The Liberal Government’s Expected Fiscal Shift

Keith Oland, Global Strategist

IceCap Asset Management Limited
September 21, 2020
Introduction ...................................................................................................................................................... 4
The Canadian Political System .......................................................................................................................... 5
Prorogation ....................................................................................................................................................... 6
WE Charity scandal and Bill Morneau .............................................................................................................. 7
The Speech from the Throne ............................................................................................................................ 9
The Liberal Party’s shift to the left ................................................................................................................. 11
How far will the shift be? ................................................................................................................................ 12
Reasons why the Liberal Party will significantly increase deficit spending ................................................... 13
Consequences of an increase in the national debt ........................................................................................ 15
Interest rates............................................................................................................................................... 15
Canada’s credit rating ................................................................................................................................. 16
Credit spreads ............................................................................................................................................. 16
Provincial debt ............................................................................................................................................ 16
Canadian Dollar ........................................................................................................................................... 17
Canadian economic growth ........................................................................................................................ 17
Foreign government budgets ..................................................................................................................... 17
Conclusion ....................................................................................................................................................... 18
About the Author ............................................................................................................................................ 19

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 Disclaimer

An investment in any strategy, including the strategy described herein, involves a high degree of risk. There is no
guarantee that the investment objective will be achieved. Past performance of these strategies is not necessarily
indicative of future results. There is the possibility of loss and all investment involves risk including the loss of
principal.

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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.

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Introduction
On August 18th, 2020, the Prime Minister of Canada Justin Trudeau asked Governor General Julie Payette to prorogue
Parliament.1 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. This is
currently scheduled for September 23rd, 2020.
In our opinion, there is a financial market risk that Canada may announce programs in the upcoming Speech from the
Throne that will lead to significantly greater than expected future deficits and debts. This has the potential to
significantly change foreign investor perception of Canadian debt, equity, and currency markets.
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:
1) The coronavirus pandemic, and the resultant need to stimulate the economy.
2) Low interest rates where the cost of money is essentially free (0.25% nominal interest rates, and negative
real rates).2
3) The need to shift attention away from the WE Charity scandal.
4) 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.
5) 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.
While it is difficult to predict with certainty exactly what new policies will be announced in the Speech from the
Throne, we believe that there is a high probability that the new policies will increase fiscal spending and be funded
with debt.
On July 8th, 2020, former Finance Minister Bill Morneau announced an expected C$343 Billion deficit for 2020.3 It was
also announced that the net federal debt would increase to $1.2 Trillion and that the federal debt to GDP would
increase from 31% to 49%.4 This does not include Canadian corporate debt, household debt, municipal debt, or
provincial debt, and clearly does not include new policy initiatives that will be announced during the Speech from the
Throne. This constitutes a major shift in Canadian fiscal policy and the government’s attitudes towards the national
debt and deficit.
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 what the impact on the national debt and the economy will be. What this paper
will not do is give a critique of the Liberal government or assess the rightness or wrongness of potential policies.
IceCap Asset Management is a non-partisan firm, and we have always taken pride in positioning our portfolios not
based on what governments and central banks should do, but rather on what they are likely to do.
The reason that this paper is important is that we may see a significant shift in policy that will be closely watched by
other governments. If market reaction to the increased spending and debt is muted, then this will be viewed as implicit
support for other governments to do the same. This will have an impact on debt and currency markets across the
world. This could also be a major step in bringing modern monetary theory (MMT) into the mainstream.

1 Source: CBC News

2 Source: Bloomberg
3 Source: CBC News
4 Source: CBC News

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The Canadian Political System
The Canadian political system is based on the United Kingdom’s system of parliamentary democracy and is a
constitutional monarchy. Parliament is composed of the Queen of Canada, Queen Elizabeth the Second who is
represented by Governor General Julie Payette, the House of Commons whose members are elected by Canadian
citizens, and the Senate whose members are appointed by the Governor General based on the recommendations of
the Prime Minister. The Head of Government is the Prime Minister of Canada, Justin Trudeau. There are currently 338
members in the House of Commons and 105 senators. Elections are mandated to be held at least every five years.
The five parties with representation in the House of Commons are as follows:
The Liberal Party of Canada – Traditionally the most centrist party. They lost their majority government in the 2019
election recently. They are led by Prime Minister Justin Trudeau and currently hold 154 seats in the House of
Commons.
The Conservative Party of Canada – The most right-leaning party. They are currently the Official Opposition and are
the only party (including Conservative predecessor parties) other than the Liberals to ever form a government at the
federal level in Canada. They recently elected a new party leader, Erin O’Toole. The new leader plays better with
centrists than the previous leader Andrew Scheer. The Conservatives currently hold 121 seats in the House of
Commons. The Liberals may look to stoke western alienation, particularly in Alberta, and paint Erin O’Toole as another
Ontarian who does not understand their concerns. The Conservatives vote against the Liberals as a matter of course,
as their role as official opposition in Canada is similar to being opposing council in court.
The Bloc Québécois (The Bloc) – The party in Canada that is focused on Quebec sovereignty and Quebec Nationalism.
On issues not pertaining to Quebec they tend to lean left. Their leader is Yves-François Blanchet, and they hold 32
seats in the House of Commons. They are currently voting against the Liberals as a matter of course.
The New Democratic Party (NDP) – Traditionally the most left-leaning party in Canada. Their leader is Jagmeet Singh
and they have 24 seats in the House of Commons. The party has significant funding issues which will be relevant in
deciding whether to force an election—something they have stated that they are not interested in doing.5 With the
Conservatives and the Bloc consistently voting against the Liberals, the NDP needs to support the Liberal agenda for
laws to be passed.
The Green Party – The party that is most focused on environmental issues. On social and fiscal issues, they are left.
The party’s parliamentary leader is Elizabeth May and the interim party leader is Jo-Ann Roberts. They originally had
trouble breaking into the House of Commons until Elizabeth May won the party’s first seat in 2011. They currently
have three seats in the House of Commons.
There are also two independent Members of Parliament (MPs) and two vacant seats.6

5 Source: CBC News

6 Source: Parliament of Canada

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Figure 1. Map of the House of Commons showing how many seats each party holds.7

Prorogation
Prorogation is the act of discontinuing a session of parliament without dissolving it. When parliament is prorogued,
all current laws, parliamentary committees and investigations are ended until they are re-launched in the new
parliamentary session. It essentially hits the reset button on the current parliamentary session.
Parliament is prorogued when the Prime Minister asks for and receives permission from the Governor General. It was
announced that Governor General Julie Payette prorogued parliament at the request of Justin Trudeau on August
18th. This ended the current parliamentary session until a new one is opened with a Speech from the Throne on
September 23rd.8

Figure 2. Headline announcing Prorogation and Speech from the Throne.9

7 Source: Parliament of Canada

8 Source: CBC News
9 Source: CBC Radio Canada

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The reason that the Trudeau Government gave for proroguing parliament was that the current government policies
and direction from 2019 are no longer valid due to the coronavirus pandemic. As such, a new governmental direction
would need to be outlined in a new Speech from the Throne that incorporates the new COVID-19 response. They also
claim that proroguing parliament does not change anything, as parliament was not set to have another sitting until
September 23rd anyways.10
Despite this explanation, many pundits believe that this prorogation is causally related to the WE Charity scandal.
Another often overlooked reason for proroguing parliament is to reset the government’s agenda to focus not on the
coronavirus pandemic, but to better position the Liberal party for the next election. Minority governments are often
unstable, and their average life in Canada is 18 months. The Liberals are 11 months into their term and see prorogation
as a tool to hold onto power and reposition their agenda in preparation for a new election.

Figure 3. Headline showing the Liberals have been accused of using Prorogation to escape scrutiny from the WE Charity scandal.11

By clearing current legislation from the agenda, the Liberals can introduce new policy initiatives that they believe will
play well in the next election. The government will likely face a confidence vote after the Speech from the Throne,
and another one when the budget is tabled in 2021. Both votes have the potential to trigger an election. The Liberals
will be looking to set a more left-leaning policy agenda and displace a weak NDP. Simultaneously they will likely look
to stoke western alienation in Alberta with green energy policies and potentially even gun control measures. This will
cause dissention in the Conservative Party which recently elected a leader from Ontario. By proroguing parliament,
the Liberals can reset the policy agenda to implement this plan.

WE Charity scandal and Bill Morneau

As mentioned above, there are many valid reasons for the Liberal government to prorogue parliament. However, this
occurring during the WE Charity scandal and the day after Bill Morneau’s departure makes sceptics challenge the
validity of the Liberal government’s reasoning.12 The WE Charity scandal is a major reason why Bill Morneau stepped
down as finance minister and was replaced by Chrystia Freeland. This will have implications for government fiscal
policy moving forward. As such, it is impossible for this paper to avoid discussing the WE Charity scandal.
The WE Charity scandal has been covered in great detail in the press and, as such, only a short synopsis will be provided
for the benefit of our international readers. Canadian readers are likely well acquainted.
In short, the Liberal government awarded a $912 Million student grant contract to WE Charity to administer.13 The
contract was awarded in a non-competitive process. Bill Morneau and Justin Trudeau have close ties to the charity.
Bill Morneau’s daughter works for the charity, and he had unreimbursed travel expenses in the amount $41,000 (the
money was only reimbursed when the investigation into the WE Charity scandal was ongoing). Justin Trudeau’s
mother and brother had received large fees for speaking engagements, and his wife Sophie Grégoire Trudeau is
involved with a WE podcast. Neither Trudeau nor Morneau had recused themselves from the student grant program
selection process. Due to the appearance of a conflict of interest, recusing themselves would be standard practice.
This led to Justin Trudeau’s third ethics investigation, and many believe caused Bill Morneau to step down as finance
minister. 14

10 Source: CBC News

11 Source: CBC News
12 Source: Prime Minister’s Office
13 Source: CBC News
14 Source: CBC News

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Figure 4. Headline outlining Justin Trudeau's family ties to WE Charity.15

Figure 5. Headline showing Bill Morneau's $41,000 in unpaid travel expenses to WE Charity.16

The stated reason for Bill Morneau stepping down was that he did not want to run for election again and therefore a
longer-term finance minister should be put in place. He also announced his decision to put in a bid to be the next
Secretary General for the Organization for Economic Co-operation and Development (OECD). Although Bill Morneau
stated that he was not pushed out of government, there is widespread speculation that he was in fact pushed out,
and his departure is at least in part related to the WE Charity scandal. There were numerous leaks from the Prime
Minster’s Office (PMO), and speculation of rifts between Morneau and Trudeau over WE charity, green spending, and
deficit spending. 17
Recall that Bill Morneau’s resignation happened the day before the Trudeau government prorogued parliament. Most
agree that this is not a coincidence, and the prorogation of parliament was done for the following reasons related to
the WE Charity scandal:
1. To avoid awkward questions about why Bill Morneau was leaving government in the midst of the WE Charity
scandal yet Justin Trudeau, who also had conflicts of interest related to WE Charity and similarly did not
recuse himself, was not resigning as well.
2. When parliament is prorogued, all parliamentary committees and investigations are halted including the
investigation into the WE Charity scandal. While the Trudeau government provided thousands of pages of
documents to the finance committee that is studying the WE Charity scandal, there have been complaints
about redactions.18
3. Hoping that the time that parliament is closed will dampen the relevancy of the scandal.
4. That a new policy agenda set out in the Speech from the Throne will distract attention away from the scandal.

Figure 6: Crowded headline showing Morneau's resignation, the prorogation of Parliament, and Chrystia Freeland's appointment
as finance minister. All within 24 hours.19

15 Source: CBC News

16 Source: CBC News
17 Source: CBC News
18 Source: CBC News
19 Source: Financial Post

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It was also announced that Bill Morneau would be replaced by current Deputy Prime Minister Chrystia Freeland.
Freeland is one of the highest profile cabinet ministers in the Liberal government, most known for negotiating the
new trade deal between Canada, the United States and Mexico that replaced NAFTA. She is Prime Minister Trudeau’s
go to person on high profile files, and it is likely that she will support and facilitate Trudeau’s spending programs.
Canadians are divided on the influence that Bill Morneau had over government policy while in office. Some believe
that he was acting as a fiscal constraint against Trudeau’s spending wishes, although this is tough to reconcile when
considering that while he was finance minister, he presided over increasingly large deficits and spending programs.
An argument for Bill Morneau being a fiscal constraint is that the Liberal government is notoriously centralized around
Prime Minister Trudeau, with the finance department being described as a “vassal state”.20 It is unclear how much
power Bill Morneau had over fiscal policy. Chrystia Freeland, on the other hand, is more closely aligned with Trudeau
on policy. To get a sense of her leanings, in 2012 she wrote a book called Plutocracy: The Rise of the New Global
Super-Rich and the Fall of Everyone Else. It is likely that she will fully facilitate much greater use of deficit spending.

The Speech from the Throne

Every new session of parliament is opened with a Speech from the Throne. Parliament cannot conduct any
government business until the “Throne Speech” is delivered, traditionally by the Governor General. In the Throne
Speech the government outlines its direction and goals. This will give Canadians their first glimpse of new government
programs, and then we can infer what will happen with the national debt. More details will be given on the specifics
of the programs in the fall economic update expected to be given in November, and in the budget in 2021.
After the Speech from the Throne there is usually a confidence vote. If the government loses a confidence vote an
election is called. This means that to avoid an election, either the Conservatives, the Bloc, or the NDP need to support
the Throne Speech. With the Conservatives and the Bloc voting against Liberal policies as a matter of course, the most
likely place that the Liberals will be able to find support is with the NDP. Liberal officials have already warned
opposition parties about forcing an election in the middle of a pandemic calling it irresponsible, although their
messaging has shifted in recent days, saying Canadian institutions are capable of holding an election.
While it is impossible to know for certain what directives will be included in the Throne Speech, there are clues as to
what will be included. Trudeau announced that the speech will be ambitious and responsible. Many political pundits,
and even members of the Liberal party, are expecting the Throne Speech to signal a significant shift to the left,
meaning additional and expanded programs. There is also indication that the Liberals will be abandoning traditional
“fiscal anchors” such as debt to GDP ratio, which would act as a fiscal constraint. 21 While it is unlikely that all the
below policies will be included, it should give the reader a sense of what might happen:
1. Green infrastructure spending – There were rumours of a $100 Billion green energy program being tabled,
but this has been scaled back to avoid the perception that the Liberals were taking advantage of the
coronavirus crisis to push through their agenda. While maybe not $100 Billion, it is likely that there will be
some green infrastructure spending.22
2. Childcare – We should expect big spending on childcare as the government wants to focus on workers,
particularly women, being able to return to work.
3. Housing – There is likely to be new housing initiatives. This was signaled with a government announcement
that $168 Million would be spent on 700 affordable housing units in Ottawa on September 10th.23
4. Employment insurance and social programs – We should expect the government to announce an expansion
of EI with increased flexibility. There will also likely be social programs expanded and potentially announced.
There have even been rumours of universal basic income (UBI) although it is unlikely they would announce

20 Source: National Post

21 Source: CBC News
22 Source: CBC News
23 Source: CBC News

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 this directly. There is a slight chance that we see indefinite payments to people affected by COVID-19 which
would be a step towards UBI. The most likely outcome related to UBI is that the government dips their toe
in the water to gauge reaction.
5. Pharmacare – This is a program that the Liberals have been thinking about for a while, and if they let go of
fiscal anchors such as debt-GDP ratio, then they may decide to pursue this. Like UBI, it is unlikely that they
will go from 0 to 100 and announce full pharmacare. What could happen is a step towards pharmacare by
implementing programs to make drugs more accessible. For example, large government purchases of drug
such as insulin that will then be sold to the provinces at cost.
6. More healthcare spending related to combating COVID-19. Healthcare spending could also be expanded
beyond the coronavirus crisis. We will also likely see the expansion of the disability tax credit.
While there is likely to be a big shift in spending it is unlikely to rival the $343 Billion expected deficit announced in
July. We do know that the government was comfortable with running deficits of approximately $20 Billion in pre-covid
years, and with the shift to the left in fiscal policy, low interest rates, and a finance department that’s more accepting
of deficits, we can state with confidence that the deficits will be much higher than in previous years. We will have to
wait for the fiscal update and budget to know exactly how big the deficits are expected to be, but it is completely
plausible that future deficits could be in excess of $50B per year.

Figure 7. Headline showing that the Liberals were planning on $100 Billion in green spending. It has been rumoured that the have walked back
from this.24

Figure 8. Headline showing some social spending programs to expect in the Throne Speech.25

Figure 9. Headline demonstrating the current commitment to housing. We could see more of this in the Throne Speech.26

24 Source: National Observer

25 Source: Global News
26 Source: Ottawa Citizen

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Figure 10. Opinion headline demonstrating speculation that Liberals have been investigating UBI. 27

Figure 11. Headline showing that pharmacare has been a Liberal focus since before 2019.28

The Liberal Party’s shift to the left

The Liberals usually hold the middle of the political spectrum between the Conservatives and the NDP. However, a
lack of concern for fiscal constraints, the debt, and a preference for social and green spending signal a shift to the left.
Justin Trudeau has always shown a preference for left wing policies, and a key reason for Bill Morneau’s departure
was a clash over fiscal restraint. While most do not believe that this was the case as Bill Morneau presided over
frequent large deficits as finance minister, it still demonstrates Trudeau’s preference for large spending programs
financed with debt.
Politically, a shift to the left by the Liberals will displace the NDP on the political spectrum. This allows the Liberals to
gain support from NDP voters across the country, and even gain support from left-leaning Bloc and Green party voters,
especially if accompanied by green spending. A consequence of this however will be leaving the centre open to the
Conservatives, and if there is lots of green spending then the Liberals are essentially giving up hope on doing well in
oil rich Alberta, where they did not win a single seat in the last election.
Also, the Liberals will need to make a big impact during the Throne Speech to distract attention away from the WE
Charity scandal. To dominate the news cycle and crowd out stories related to the WE Charity scandal and ethics
violations, big policy initiatives will be needed. Shifting to the left accomplishes this.

Figure 12. Headline showing the anticipated shift to the left for the Trudeau Government. This was anticipated as early as 2019.29

27 Source: National Post

28 Source: CBC News
29 Source: Reuters

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How far will the shift be?
This is a question of scale that we will need to gauge from the Throne Speech, economic update, and the 2021 budget.
In late August and early September there was a perception that the Liberals would massively expand spending. This
is because of leaks and hints to the media from the Liberals themselves.30 However, in recent days, the Liberals have
been walking this narrative back. Chrystia Freeland has stated that, “Canada will preserve its hard-earned reputation
for prudent fiscal management.”31
There are a couple of potential reasons for this:
1. The Liberals have recently started consulting opposition parties on the Throne Speech.32
2. There has been pushback from business leaders.33
3. The Liberals may have received some negative polling, although this is speculation.
4. Freeland has been consulting with previous finance ministers, notably the more fiscally conservative Paul
Martin.34
5. To manage expectations on the left.

Figure 13. Headline showing business leaders warning Liberals about the debt.35

Despite this walk back, we still fully expect a significant shift to the left, although potentially less aggressive than would
have been indicated a couple of weeks ago. However, we believe that this is still only a question of scale, and that the
Liberal’s shift to the left is s important for the following reasons:
1. The debt is still likely to increase rapidly, especially while the government looks to combat the coronavirus
pandemic. A $100bn deficit being cut down to $50bn would still be a major increase in the debt.
2. There is still a good chance that spending increases as rapidly as we originally thought. It is important to
remember that this is a notoriously centralized government, and Trudeau pulls the strings. While Freeland
may want to tone down the spending, Trudeau may not. This would be a repeat of the Trudeau/Morneau
narrative.
3. There is still a leftward trend within the Liberal party.
Despite the recent walk back, investors should still be watching the Throne Speech closely and consider what a trend
towards increased deficit spending will mean for their portfolios. The chance for a significant spending increase is still
quite high. This will be discussed later in the paper.

30 Source: Toronto Sun

31 Source: Bloomberg
32 Source: CBC News
33 Source: BNN
34 Source: CBC News
35 Source: BNN

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Reasons why the Liberal Party will significantly increase deficit
spending
The Liberals have stated their reluctance to raise taxes.36 This means that they will need to fund ambitious initiatives
with debt. After already announcing a 2020 deficit of $343 Billion in July, the reasons they feel that they can run larger
deficits are as follows:
1. In response to the COVID-19 crisis, and to stimulate the economy, the Bank of Canada has cut interest rates to
0.25%. This means that the cost of borrowing has never been cheaper. See the Government of Canada yield curve
below.

Figure 14. Yield Curve for Canadian Government Bond.37

2. Canada has a relatively stronger financial position than other comparable countries. The logic is that Canadian
debt will remain attractive relative to other countries despite the increase in the debt. Therefore, Canada should
still be able to gain access to debt financing at attractive rates. This can be seen in the charts on the next page.

36 Source: CBC News

37 Source: World Government Bonds

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Figure 15. Shows 2019 and 2020 federal net debt as a percentage of GDP for the G7. Note that rate of increase in Net debt to GDP for Canada
relative to its peers.38

Figure 16. Shows the track record of federal government deficits and surplus. Note the upward trend in deficit spending since Trudeau was elected,
and the major increase forecast for 2020.39

It is important to qualify that these two charts do not tell the whole story. While Canada’s federal debt to GDP ratio
is less than its G7 peers, it is important to realize that this is only federal debt. The chart below showing federal,
provincial (subnational), and household debt.

38 Source: Government of Canada

39 Source: Department of Finance/ BNN

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Figure 17. Figure showing federal, provincial, and household debt per G7 Country. note of Canada outpaces its peers in provincial debt.40

As we can see, there is less debt at the federal level in Canada because much of the debt resides with households and
most notably provinces. This is because many government responsibilities such as healthcare and education reside
with the provinces, and therefore are not reflected in federal debt metrics.

Consequences of an increase in the national debt

Debt was already an issue in Canada before the COVID-19 crisis and the $343 billion dollar deficit announcement. On
June 24th, 2020, ratings agency Fitch downgraded Canada’s credit rating from AAA to AA+.

Figure 18. Headline showing Canada's pre-July deficit announcement downgrade by Fitch.41

With a large debt load already being an issue in Canada, we believe that an increased debt burden to finance the
increased government spending will have the following effects on markets:

Interest rates
Economic theory states that as a country increases its debt, the interest rate that it pays on that debt should increase
due to the added risk. If the debt significantly increases, we should see the Canadian Dollar (CAD) decline, and the
yield curve to steepen. However, this does not consider intervention from the Bank of Canada (BoC). We fully expect

40 Source: IMF/ TheConversation.com

41 Source: Fitch

15
the BoC to keep interest rates at the short end of the yield curve at 0.25%. While the increased debt burden could
cause rates to rise at the long end of the curve, we expect the BoC to attempt to keep these rates low with significant
Quantitative Easing (QE) or Yield Curve Control (YCC) policies.
We believe that the BoC will take this action because debt levels in Canada are so high that the system cannot afford
higher interest rates. Servicing the debt already competes with other government programs such as healthcare and
education. An increase in rates would exacerbate this problem. Federal and provincial governments and zombie
corporations simply cannot tolerate higher interest rates.

Canada’s credit rating

As mentioned in the introduction to this section, Fitch has already cut Canada’s credit rating from AAA to AA+.
However, the other credit ratings agencies—Moody’s, Standard and Poor’s, and DBRS—all remain at AAA (Aaa for
Moody’s) which is their highest rating.42 There will be an increased probability for Canada to be downgraded by at
least one more major credit ratings agency as a result of the Throne Speech. Fitch may not downgrade again because
they have already done so, but in their report they did state that they had a stable outlook for Canada because they
expect gross government debt to stabilize in the medium term, in line with pre COVID-19 policies. The Speech from
the Throne may invalidate this assumption. Other ratings agencies are likely to cut Canada’s credit rating due to the
increased debt burden and reduced economic output due to COVID-19.

Credit spreads
We expect credit spreads to widen, especially between Canadian federal debt and US Treasuries. When assessing
credit spreads it is important to understand what other countries and sub sovereigns are doing. If Canadian federal
spending outpaces the spending of other governments then we should expect a widening of spreads.

Provincial debt
COVID-19 will already force many provinces to borrow more. However, a less thought about reason for provincial debt
increasing will be the reaction from markets after the Speech from the Throne, the economic update, and the budget.
If market responses are muted after the new debt-financed spending policies at the federal level are announced, then
this will provide implicit support for provincial governments to also increase borrowing. Investors should therefore be
wary of Canadian provincial debt. Considering that the most liquid provincial debt is 5x less liquid than federal debt,
if there is even a slight sell off, then provincial bond yields may potentially increase rapidly.

Figure 19. Headline showing debt problems currently faced by the provinces are being exacerbated by the coronavirus pandemic.43

The Bank of Canada has already implicitly supported provinces, most notably Newfoundland and Labrador, by
implementing a large-scale bond purchasing program in the secondary market. This gives implicit support for
provincial debt and helps to ensure that the provinces will have access to debt financing. It is also a quasi bailout.

42 Source: Trading Economics

43 Source: Calgary Herald

16
Figure 20. Headline showing Bank of Canada "providing relief" for Newfoundland.44

This warning also extends to municipal debt which has similar, but in some cases more severe issues.

Canadian Dollar
The Canadian Dollar should decline on news of an increased debt burden and increased spending. If Canadian
spending and deficits increase substantially, outpacing other peer countries, then foreign investors will find Canada
to be a less attractive place for investment, thereby reducing the demand for Canadian dollars.

Canadian economic growth

While large government spending programs are typically inflationary and promote economic growth, without details
as to the size of the spending programs it is impossible to say for sure what the effect will be, and if it will be enough
to overcome the economic effects of the coronavirus.
The biggest Canadian banks have warned the Trudeau government that it does not have carte blanche to run large
fiscal deficits indefinitely and that it should focus on productivity enhancing measures.45
It is also important to consider that debt fueled growth experiences diminishing marginal returns. The more indebted
a country is, the more units of debt are required to produce a single unit of GDP growth.

Foreign government budgets

Other governments will be paying close attention to the Speech from the Throne, economic update, and 2021 budget.
As details are released, markets will react. Or not. If markets produce a muted response, even when considering the
increased debt load and spending levels, then this will give other governments tacit support to do the same. If markets
react strongly then these other governments will be inclined towards more fiscal constraint. If Canada announces a
Universal Basic Income (UBI) policy, other governments will be watching the implementation closely to assess if they
should do the same in their countries. This will also embolden policy makers who are flirting with the idea of Modern
Monetary Theory (MMT), which argues that countries who issue debt in their own currency can never run out of
money, and therefore do not need to worry about debts and can spend freely.

Figure 21. Opinion headline showing suspicions of Canada moving towards MMT.46

44 Source: CBC
45 Source: BNN Bloomberg
46 Source: CBC

17
Conclusion
The Liberal Government is likely to announce broad new fiscal programs in their Speech from the Throne. Because
they are unlikely to raise taxes, and have stated that they will not be constrained by “fiscal orthodoxy”, Canadians
should expect the federal debt to increase substantially, even beyond the $1.2 Trillion projected federal net debt. This
is the result of the Liberal Party deciding to focus on the left of the political spectrum, and away from the centre. The
Liberal Party view the current environment of low interest rates and comparative fiscal strength at the federal level
as ideal for pushing through social and environmental programs that they have desired for quite some time. This
revised focus towards the left of the political spectrum will also have the added benefit of drawing attention away
from the WE Charity scandal and positioning the government in a way that they feel will benefit them in the next
election.
The new policies and deficit spending will be watched by many other governments around the world. If market
reaction is muted, then we may see other governments adopt similar policies. This will have implications for global
currency and debt markets. It will also require more central bank intervention. This may also be a first step in bringing
MMT into the mainstream.
IceCap remains positioned to protect investor capital by limiting our exposure to Canadian provincial debt, increasing
our exposure to the US Dollar and US T-Bills, while being positioned to benefit from stress and volatility in fixed income
markets.
For accredited investors, fiduciaries, and qualified eligible persons, we have other opportunities. If you are one of the
previously mentioned people and would like to know more about how IceCap is positioned to benefit from our
investment thesis, please reach out to us directly.

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About the Author
Keith Oland joined the IceCap team as a Global Strategist in 2020. He has experience
in Global Banking and Markets with Scotiabank and is currently pursuing a CFA
designation as well as a CPA designation. Keith graduated Summa Cum Laude from
Saint Mary’s University in 2014 with a double major in Finance and Accounting, and
a Certificate in Financial Instrument Analysis. Keith also spent two years at Carleton
University in Ottawa studying Political Science, Law, Economics, and Geopolitics.
While at Saint Mary’s he acted as a Research Analyst and Energy Sector Portfolio
Manager with the IMPACT Fund. Always passionate about education, he has worked
as a tutor for the Athletics Departments of Dalhousie and Saint Mary’s Universities,
been a Student Ambassador for the TMX Group’s Montréal Exchange promoting
financial literacy with a focus on derivatives, and spent a year teaching English in Korea.
Keith is an avid adventurer who has travelled to 73 countries and is always on the lookout for experiences outdoors,
ranging from skiing in the Rockies to trekking in the Himalayas. While in Nova Scotia, his home province, Keith loves
playing hockey, hiking, golfing, and sailing.
1-902-412-9219
KeithOland@IceCapAssetManagement.com
www.icecapassetmanagement.com
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