Reining in government spending could take some of the pressure off the Bank of Canada in tamping down inflation and help limit pain for debt-ridden Canadians, according to a new report from CIBC.
The central bank’s return to rate hikes last week with a 25-basis-point increase has economic forecasters hurriedly revising their outlooks for inflation and interest rates, with CIBC also turning its lens on the role played by fiscal policymakers.
In the report released Monday from chief economist Avery Shenfeld and senior economist Andrew Grantham, CIBC forecasts another rate hike of a quarter percentage point from the Bank of Canada in July or September, which would bring the policy rate to 5.0 per cent.
Rate cuts, meanwhile, aren’t expected to come until June 2024, according to CIBC forecasts. The central bank policy rate is projected to fall to 3.5 per cent by the end of next year, CIBC predicts.
Rates are going to have to stay higher for longer in the status quo, the CIBC economists argue, unless there’s a shift in approach from federal and provincial governments to help the Bank of Canada with its goal of getting inflation back to its two per cent goal.
While the Bank of Canada’s primary tool to achieve its inflation mandate is to set the cost of borrowing using its benchmark rate, governments can have an impact on that progress by slowing or ramping up demand based on their spending and policy objectives.
Fiscal stimulus that puts more money in the pockets of Canadians, for example, can fuel demand and inflation, in turn.
Federal Finance Minister Chrystia Freeland often noted in presenting the Liberals’ 2023 budget that she would exercise “fiscal responsibility” in charting the country through a period of cooling-but-still-high inflation and economic uncertainty on the horizon.
That budget, which passed through the House of Commons last week in Ottawa, has been heavily criticized by the federal Conservatives as overspending.
Public sector spending not helping cool inflation: CIBC
The authors argue in the CIBC report that while each level of government was effective in winding down stimulus tied to the COVID-19 pandemic in 2022, fiscal restraint has since been waning.
“It’s not that fiscal policy is significantly fueling the inflation we’re now seeing, it’s that it would be even better if, at least in the near term, it was actually putting some downward pressure on inflation by helping to cool off the fire,” the report reads.
And while the federal opposition has put the Liberal government’s spending plans in the crosshairs, the CIBC report points primarily at the provincial spending plans as fuelling demand.
The “drag on growth” needed to rein in inflation “would have been much larger without a surge in provincial spending,” the report states.
More on Money
Much of this extra spending came in the form of tax rebates branded as ways to help Canadians cope with high inflation — but CIBC argues this support went past inflation relief and verged into stimulus.
While the provinces could be chastised for last year’s spending plans, Ottawa has its share of blame in the 2023 federal budget, Shenfeld and Grantham argue.
The upcoming “grocery rebate,” which will be distributed next month, will add a projected 0.4 percentage points to gross domestic product (GDP) in the second quarter of the year if all spent, according to CIBC’s projections.
Altogether, the federal and provincial spending plans won’t end up as much of a drag on growth this year, leaving the Bank of Canada’s interest rates left to do the bulk of the work, according to CIBC.
The higher interest rates need to go, and the longer they stay there, will have other knock-on effects, per the report.
Housing impacts
Governments at all levels have identified home construction as something that will need to speed up to accommodate Canada’s population growth in the years ahead, but high interest rates have an acute impact here, slowing down the pace at which shovels get into the ground.
“That’s hardly ideal in an environment in which a shortage of housing is pressuring apartment rents and the overall cost of home ownership,” the report reads.
Canadian homeowners coming up for mortgage renewals in the next couple of years are also slated for significant pain as their payments rise to reflect higher interest rates; CIBC calls this a “significant risk to household financial stability” if the Bank of Canada’s policy rate remains at high levels.
A “somewhat tighter fiscal path” would allow the central bank to start cutting its interest rate sooner, the authors say, or limit how high monetary policymakers have to take the rate in the first place.
CIBC looks ahead to the fall fiscal updates from the provinces and federal government and warns of announcing additional spending as a risk for higher interest rates and more financial pain for Canadian households.
Freeland, speaking after the Bank of Canada’s latest rate decision last week, was asked whether higher-than-anticipated government spending in the 2023 federal budget was a concern she had discussed with Bank of Canada governor Tiff Macklem.
She reiterated that Ottawa and the central bank operate independently in setting fiscal and monetary policy but have “clear lines of communication.”
OTTAWA – The federal government is expected to boost the minimum hourly wage that must be paid to temporary foreign workers in the high-wage stream as a way to encourage employers to hire more Canadian staff.
Under the current program’s high-wage labour market impact assessment (LMIA) stream, an employer must pay at least the median income in their province to qualify for a permit. A government official, who The Canadian Press is not naming because they are not authorized to speak publicly about the change, said Employment Minister Randy Boissonnault will announce Tuesday that the threshold will increase to 20 per cent above the provincial median hourly wage.
The change is scheduled to come into force on Nov. 8.
As with previous changes to the Temporary Foreign Worker program, the government’s goal is to encourage employers to hire more Canadian workers. The Liberal government has faced criticism for increasing the number of temporary residents allowed into Canada, which many have linked to housing shortages and a higher cost of living.
The program has also come under fire for allegations of mistreatment of workers.
A LMIA is required for an employer to hire a temporary foreign worker, and is used to demonstrate there aren’t enough Canadian workers to fill the positions they are filling.
In Ontario, the median hourly wage is $28.39 for the high-wage bracket, so once the change takes effect an employer will need to pay at least $34.07 per hour.
The government official estimates this change will affect up to 34,000 workers under the LMIA high-wage stream. Existing work permits will not be affected, but the official said the planned change will affect their renewals.
According to public data from Immigration, Refugees and Citizenship Canada, 183,820 temporary foreign worker permits became effective in 2023. That was up from 98,025 in 2019 — an 88 per cent increase.
The upcoming change is the latest in a series of moves to tighten eligibility rules in order to limit temporary residents, including international students and foreign workers. Those changes include imposing caps on the percentage of low-wage foreign workers in some sectors and ending permits in metropolitan areas with high unemployment rates.
Temporary foreign workers in the agriculture sector are not affected by past rule changes.
This report by The Canadian Press was first published Oct. 21, 2024.
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
