Budget 2009 commentary: Perceptions count

In that sense, the 2009 budget is a landmark. It signals the end of a 14-year period that began with the 1995 budget. That budget, in turn, marked the end of another era that dawned in 1981.

It’s more about perception than what the budget actually does, though this budget does do many things. Consider how much perception governs much of our lives. We don’t greet every morning sceptically, wondering whether transit will run or the traffic lights are working. We expect things to carry on much as they always have. It’s only when a shock upsets our settled perceptions that we begin to question what we’ve long taken for granted.

And the past year or so has been full of shocks, from the meltdown of the asset-backed commerical paper market and the collapse of some major U.S. banking firms, to a sharp and severe equity markets downturn. Of course, every turning point is different, but in returning Canada to deficits, the 2009 budget is a turning point, one that will help to set perceptions for some time to come.

Consider the regime that has just ended, and the perceptions people — your clients — nurtured.

For a decade and a half, Canadians have lived under governments that have largely eschewed big-ticket spending commitments. They have come to expect lower taxes. They have also seen only modest inflation within a cycle of sustainable of economic growth. It is up to the econometricians to sort out what’s what.

But it is up to financial advisors to consider what that confluence of beneficent trends brought — or rather, how it drove client behaviour. Economic stability made for more risk-taking whether in stock markets or housing markets. Lower inflation allowed for consumers to get more bang for their buck, be it computers or clothing. Lower taxes encouraged more savings and investment — or should have.

Contrast that to the perceptions that prevailed before 1995. The pattern was set in 1981. Yes, there was a controversial budget. But the context was very different. Inflation was cresting. The federal government was less expansionary than it had been a decade earlier, trying to keep spending increases at below the rate of inflation. Taxes were increasing to get budgets under control, and programme chops were not yet on the table. Still, it was a time of tiny cuts.

That made for a very different climate of perception. People counted on inflation, not only as prices rose, but as taxes rose. The conjunction of the two could be seen in excise taxes for such things as liquor, tobacco and gasoline, where a price increase was compounded by a per-unit tax increase. They were nervous about their jobs — the 1981-82 recession saw the rise of the rust belt, and that was followed a decade later by a downturn almost as steep.

In that climate, only a few were equity investors. To be sure, Canadians saved more against uncertainty, but they saved it in GICs. Rates were higher then, but inflation ate into available savings too. So people relied more on wages than on investing to fund their retirements — at a time when DB plans were still the workplace norm.

For advisors, the bulk of their clients — the back end of the baby-boom — probably had their formative experiences then.

Most of the rest will have had their outlook determined by a very different era, when, to meet baby-boomer needs, social services were rapidly expanded. As inflation threatened, workers demanded and got COLA or cost of living increases, easing the pain of higher prices. That was the world from the late heady 1960s through the stagflating 1970s to the cusp of the 1980s recession.

Whether that virtuous cycle, the Great Moderation, has come to an end remains to be seen. Indeed, many are frightened of the prospect of a new depression. But that’s why perception matters: Depression-era clients, now well into retirement, have not let go of their formative experiences when it comes to money matters.

It’s not too difficult to extrapolate this thinking to the three following generations. The first half of the baby-boomer cohort, now headed for retirement, is still moved by the expansive 1960s, whereas those middle-aged clients — the back half of the baby boom — have more restrained outlooks, the product of the 1980s. A still-younger generation of clients, who grew up in the relatively low-inflation economy of the late 1990s and the past decade, will have quite another outlook.

In times of turmoil — and we don’t know how long this spasm will last — it’s worthwhile for advisors to pay attention to one specific line on the new account opening forms: date of birth.

(01/27/09)

This Advisor.ca budget coverage is sponsored by: