Finance Minister Chrystia Freeland responds to questions from MPs after she delivered the federal budget in the House of Commons in Ottawa on Monday April 19, 2021. THE CANADIAN PRESS/Sean Kilpatrick

Finance Minister Chrystia Freeland responds to questions from MPs after she delivered the federal budget in the House of Commons in Ottawa on Monday April 19, 2021. THE CANADIAN PRESS/Sean Kilpatrick

Rising interest rates could dampen stimulus impact from federal budget, PBO says

The Bank of Canada is expected to raise its trendsetting interest rate before the end of next year

The parliamentary budget officer is pouring cold water on the economic fires from the government’s latest spending plan, saying that an expected rise in interest rates should temper the amount of stimulus from the Trudeau Liberals’ budget.

The Liberals have said their budget plan unveiled in April, and currently being scrutinized by parliamentarians, would create thousands of jobs and pull the country out of the economic hole the pandemic has dug.

The Opposition Conservatives contend the effects won’t be as widespread as the Liberals tout, pointing to warnings from the budget officer Yves Giroux himself that rising price pressures and expected increases in interest rates could add to federal costs.

Taking into account rising rates, Giroux now estimates the budget could bump economic growth this year by 0.6 percentage points above what he previously forecasted, shouldered by consumer spending, as well as residential and business investment.

He also estimated that the budget’s measures would create 89,000 more net new jobs by the end of 2025 compared to the path Giroux saw for the labour market before the budget’s unveiling.

As the economy recovers, Giroux expect the Bank of Canada will raise its trendsetting interest rate before the end of next year from the rock-bottom level of 0.25 per cent where it has been as since March 2020 at the onset of the pandemic.

Giroux foresees the central bank raising the rate by half a percentage point in the second half of 2022, and rising thereafter until it hits 2.25 per cent, which would affect rates charged on things like mortgages and business loans.

Higher interest rates “will dampen the stimulative impact” from the budget, Giroux said, meaning government revenues won’t get the bump they need to pay for measures and the costs to pay down the debt will also go up.

Giroux estimated that budget deficits over the next five years will in total be $117.1 billion more than his pre-budget forecasts, which he said suggested that only a small portion of the nearly $140 billion in new spending the budget proposed would be offset by economic growth.

While the budget estimated a deficit in the last fiscal year of $354.2 billion, Giroux estimates the figure will clock in at $370.9 billion as a result of unprecedented spending to counter the financial fallout from COVID-19.

The report landed hours after Finance Minister Chrystia Freeland gave a stern defence of her spending plan under hours of questioning by opposition parties in the House of Commons.

On Wednesday night, Freeland said the budget was a significant investment towards long-term growth for the country, pointing in particular to the pledge for a national child-care system that aims to help parents, particularly women, gain a better foothold in the job market.

Later Thursday, she was scheduled to appear before a Senate committee on the government’s budget bill.

Conservative finance critic Ed Fast said Giroux’s report supports what his party has been saying about the increased debt and fiscal risk from the Liberals’ spending spree.

“The Liberal budget completely missed the mark on key figures on revenues, debt, deficit, and the cost to Canadians of the Liberal debt,” Fast said. “It’s clear that Canadian’s can’t afford more of the same from the Trudeau Liberals.”

Separately Thursday, the government tabled updating spending estimates in the House of Commons for the current fiscal year that started in April. The documents outlined $41.2 billion in new spending, of which MPs will have to vote on $24 billion.

Among the measures captured in the documents is the budget’s $1.5 billion top-up to help cities quickly build affordable housing and a similar amount for the Public Health Agency of Canada for medical research and COVID-19 vaccine development.

There is also $1.7 billion for $500, one-time payments this summer to old age security recipients 75 and older. New Democrats have pushed for the payments to be expanded to all OAS recipients.

Jordan Press, The Canadian Press


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