Government finances in a real estate bust

While the Canadian banks should withstand a collapsing housing market because CMHC will absorb the losses,  government debt could spiral higher.  I have written about how the City of Saskatoon has almost doubled spending in 5 years, while the Provincial Government has increased spending by over 30% since the Sask Party took office.  The Federal Government is in deficit spending until 2015 ( or so they say).  Now all three entities may know that they need to get their spending under control but what they are not forecasting is the collapse in tax revenues that is associated with a housing bust.  I think the Feds have the best handle on this as they know that tax revenues plummet due to the experience of Europe and the US bursting housing and credit bubbles.  The commodity collapse of 2009 should give the Provincial Government the idea that revenues do not always go up and spending would need to reigned in if there is a protracted slowdown.  But as the recent Budget shows us, the Provincial Government is still going into debt during the "boom".  As for the City of Saskatoon, yikes.  I feel that once they get spending under control, the city will saddled with massive debts if many of the projects they have proposed are done.  In the future, expect significant tax increases to pay for the debt once the housing bubble bursts.

THE AFTERMATH OF FINANCIAL CRISES

This paper examines the depth and duration of the slump that invariably follows severe financial crises, which tend to be protracted affairs. We find that asset market collapses are deep and prolonged. On a peak-to-trough basis, real housing price declines average 35 percent stretched out over six years,while equity price collapses average 55 percent over a downturn of about three and a half years. Not surprisingly, banking crises are associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls an average of over 9 percent, although the duration of the downturn is considerably shorter than for unemployment. The real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes. The main cause of debt explosions is usually not the widely cited costs of bailing out and recapitalizing the banking system. The collapse in tax revenues in the wake of deep and prolonged economic contractions is a critical factor in explaining the large budget deficits and increases in debt that follow the crisis. Our estimates of the rise in government debt are likely to be conservative, as these do not include increases in government guarantees, which also expand briskly during these episodes.

Every level of Government in Canada has many guarantees, from pensions to healthcare to many other different social programs.  Some will get cut, some will get squeezed.  In regards to housing, CMHC will take a hit, and if the housing bust is bad enough, CMHC will need to be bailed out by taxpayers as has been mentioned by a few economic think tanks this year. And in Saskatoon, their Mortgage Flexibility Support Program will be toast.  If you are taxpaying citizen, remember you are back stopping this. 

Now to add to all this, is that Provinces and Cities have not addressed obligations such as infrastructure that will need to addressed very soon.  For instance, in Saskatchewan,

Regina recently reported that it needs $2.1-billion over 10 years to repair and maintain its infrastructure. With 80,000 households, the average Regina home owes $25,000.  Saskatoon is not too far behind.

Our University needs some cash:The fact that our deferred maintenance costs have risen over decades to $617 million is of concern to the U of S and to the provincial government.

Add in the demographic time bomb in this Country where 30% of our population are baby boomers. This demographic will lead to a rise in health care spending and a slowdown in consumer spending.  As well, Canadian households have debt to income levels higher than the Americans before their housing bubble burst. 

Now the scary thing is that during Saskatoon's "boom", debt has increased from 27 million to over 175 million in about 7 years.  Spending has doubled in 5 years.  The Provincial Government is drinking the same kool-aid as well.   On the Federal level, want to see how fiscal mismanagement has led to our 500 Billion dollar public debt? Go here.

From past history in Saskatchewan, we know that the commodity and housing boom then bust during the late 70's early 80's left Saskatchewan with huge debt loads that we see to this day.  Irresponsible Government spending at it's finest as they thought the boom would never end and when it did they thought it would come back soon. So they continued spending during the 80's that if continued would have bankrupted the province.  Spudco? Really?

With a housing bust, along will come the wealth effect... in reverse. An economy that is 58% to 65% consumer spending receives one heck of a wake up when the credit bubble busts. One glance south of the border and we see many States are clinging on by the skin of their teeth.  "Endless growth" was the phrase during the good times, so they ramped up spending.  When revenues collapsed, the debt remained, not to mention many obligations.  In Canada, Governments have more obligations than down south.  That is one of the reasons why Canadians are taxed more than Americans.  With a housing bust in Canada, expect debt levels to rise throughout all levels of Government even with cuts to social programs.  And you know what that means for Joe taxpayer.