Boom!

Certainly this was not unexpected, but the reality of seeing it explode puts the newly revised Canadian budget deficit ($343.2B) into a rather harsh perspective. Yes, this has mitigated economic devastation from the coronavirus pandemic and most agree that it was necessary (perhaps there might be debate on the degree, but we can let the political process sort that out).

What we as Canadian taxpayers need to understand is how we are all going to be paying for it in the future. It will not be pretty. It is guaranteed that your personal income taxes are not going down.

Strong economic growth that might normally drive government revenues is not going to be with us for years. That is going to cause a bit of a conundrum. An optimistic return to pre-2020 growth levels by the end of 2021 still puts the deficit at a whopping almost 50% of GDP all this with an unemployment rate of 7.8%. You have to wonder how these numbers all match up. There is no doubt that with unemployment at 7.8%, households will be stretched even more than they were at close to record levels before the crisis. 

The domestic economy will not be bouncing back in a hurry and from the looks of things globally, neither will the export economy.

So, how will the Canadian government gather revenues to manage the surging deficit?

Taxing the wealthy. Who are the wealthy? The owners of property. If there are revenues to be harvested (surely the middle class will already be under enormous financial strain and unable to contribute), they will come in the form of taxes on things that the wealthy own (or owned) and have made profit on. That would, my friends, be called capital gains. Currently capital gains are taxed at 50% (vs. income which is taxed at 100%). There should be no question that this rate of taxation which is lower to encourage risk-taking, will be now at risk.

If one of the major benefits to owning stocks is reduced and stocks are already trading at high valuations (already high risk in owning this asset class), that is going to further elevate the risk inherent in stock ownership.

My friends, if there is no net economic growth from 2019 to the end of 2021 (or perhaps longer), expecting returns from your investments to give you anything better is a fantasy. If they are to be taxed less favourably, that is going to be an added burden.

We all want growth in our portfolios, but we have to manage our expectations, certainly over the shorter term. The longer-term will allow a return to better economic conditions and real growth in the economy and investment portfolios, but in the interim be very, very careful about chasing mythical (unrealistic, overly optimistic) returns that are fraught with ever increasing levels of risk.

At High Rock, we always manage risk first. And by virtue of that, over the longer-term, we have out-performed all the comparative indexes on a return per unit of risk taken basis.

There are plenty of challenges ahead: economic, planning, investing. There will be difficult times. Make good choices. Manage your exposure to risk. Flatten your risk curve.