Of Tantrum & Policy
Over the past few years, we have adopted many new words and phrases, introduced to us by policy makers, economists and the media including, “European Debt Crisis”, “Debt Ceiling”, “Fiscal Cliff”, “Sequester”, and finally “Tapering”. These are all economic and political events that have served to shape and constrain the landscape following the “Credit Crisis”. It is these events that the next wave of policy makers and future economists will study when they eventually attend institutions of higher learning.
While most would argue that policy makers have by and large done a good job, over the past few years, in their efforts to minimize the extent of recessions and to spur economic growth and job creation, their efforts will forever be critiqued in the classroom.
For instance, one question that professors may pose of their students is, “When did the European debt crisis begin?” While the answer to this question may be the subject of great debate, it can be argued that this crisis started back in 1992 when the members of the European Union signed the Maastricht Treaty. Under this agreement, Europeans were to be offered high levels of freedom, security and justice and in exchange members agreed by and large to limit their deficit spending and debt levels. However, a combination of low interest rates and a strong Euro led to excessive borrowing and government spending, to the extent that, five Euro-zone countries have required assistance from other Eurozone members in order to ensure the ongoing solvency of their financial institutions. As a result, austerity in the form of increased taxation and reduction in spending on social programs has become commonplace as has unemployment (especially amongst younger workers) and has led to social unrest and protests that challenge leadership and ask for an end to the economic ache brought on by these events.
While the impact of Europe’s debt issues has impacted economies and financial markets deeply, the US has emerged from their own crisis nicely as the Standard & Poor’s 500-stock index in May closed above 1,500 for the first time since September 2000. Despite this success, the decisions that US policy makers have made over the past few years will also be scrutinized and analyzed in the classroom just as much as the decisions made by European policymakers.
Starting with the US debt ceiling, perhaps you remember the angst that most investors felt in the summer of 2011 in the days leading up to the senate vote that everyone hoped would approve an increase to the $14.3 trillion debt ceiling and reign in government spending. After much deliberation approval was granted and the “Debt Ceiling” then led to the “Fiscal Cliff”, a combination of expiring tax cuts and across-the-board government spending cuts that were to come into effect on December 31, 2012. The Fiscal Cliff delayed the implementation of this Sequester (of spending cuts), which went into effect on March 1 and includes spending reductions of approximately $85 billion during 2013, with similar cuts through to 2021.
While all of this transpired, “Quantitative Easing” (QE) continued. This latest round of QE (there have been 2 previously) called for $85 Billion in government bonds to be purchased by the US Federal Reserve, monthly, in the hopes that this increased liquidity would increase both lending by banks and spending by corporations.
While students and professors will forever debate the effects of these policies and stimulus, one thing is abundantly clear; financial markets (at least in the short term) are now very much dependant on the direction and guidance of policy makers. The latest evidence came in late May when the Federal Reserve merely hinted at the eventual end to quantitative easing. This talk of “Tapering” its bond purchase program sent all markets into what many have termed as a “taper tantrum” whereby stock prices immediately dropped sharply and bond yields rose. This negative volatility continued until U.S. Federal Reserve chairman Ben Bernanke raised the prospect that the central bank’s monetary stimulus may in fact stay in place a little longer than expected.
So while policy makers will continue to debate the implementation of the next fiscal or monetary stimulus, or merely what to name it, the fact remains that navigating today’s market environment is a tricky affair and must be done with consideration given to balancing investor’s risk tolerance against their investment goals. As a result, determining the most beneficial asset allocation (the mix of stocks, bonds and cash) has perhaps never been more important.
A Costly Matter!
If you are about to become a parent you will soon learn what other parents already know – that children are expensive! And, as is the case with boomerang kids, sometimes they are an expense that comes back. However, the expenses associated with our children are an expense that we can live with. According to a recent TD Bank study, one-in-five boomers (a person who was born in the years after World War 11 between 1946 and 1964) admit they would put their own financial security at risk to help their children.
So how much is the cost associated with raising a child?
Unfortunately, from a Canadian perspective, there does not seem to be as much quantifiable data on this subject as there is in the US. The US Department of Agriculture provides an annual report on the cost of child rearing until the age of 18, and last year that average number was $235,000 until the age of 18. That number is up $210,000 from 1960 when the cost to raise a child from birth until the age of 18 was just over $25,000. Of course once inflation is factored in $25,000, 50 plus years later looks a lot more like over $200,000.
Some costs to consider include maternity leave and the lost wages due to time away from work, child care, food, clothing and shelter, as well as necessities such as strollers, cribs and for teenagers let’s not forget iPhones and iPads.
Some strategies that parents can take to ease the financial burden include applying for some of the following programs:
Universal child care benefit (UCCB) – this program provides parents with a taxable benefit of 100/month/child under the age of six. As this is a taxable benefit it should be claimed by the lower income earning spouse. Enrolment for the UCCB is processed through the Canada child benefits application.
Canada child tax benefit (CCTB) – this program provides a tax-free monthly payment that is paid to eligible families to help them with the cost of raising children under age 18. Associated programs that fall under the CCTB include the National child benefit supplement and the Child disability benefit.
Child tax credit – this is a federal tax credit of $2,191 for each child under 18 which works out to a tax savings of around $329 per child.
Child care deduction – this is a deduction, as opposed to a tax credit, and as a result lowers the taxable income of the parent with the lower income, who may claim up to $7,000 in expenses for each child under the age of seven and $4,000 for children age seven to 16. Parents should be aware that eligible child care expenses include the cost of summer camps.
Tuition, education and textbook amounts – These tax student credits (if unused by the student) may be transferred to a parent, grandparent, spouse or common law partner up to a maximum of $5,000.
Transit passes cost – Public transit passes used by children who were younger than 19 at the end of the tax year can be claimed by either parent (including common-law partners).
Talk about budgeting and saving!
It’s never too early or too late to start talking to your children about the importance of budgeting and saving. In fact there are even a few savings strategies that parents may want to consider beyond contributing to a Registered Education Savings Plan such as establishing an investment plan in the name of your child with the proceeds received from the CCTB and UCCB as any investment income earned is not attributed back to the parents.
The joys of being the diligent parent never end!