(Ottawa) The federal government and the provinces must slow down the pace of their spending over the next year if they want to contribute to the fight against inflation that the Bank of Canada is leading in all directions, says the big boss of this institution , Governor Tiff Macklem.
The growth rate of combined spending by Ottawa and the provinces for the next 12 months is expected to reach 2.5%, which is likely to fuel inflation because it is above potential. of the Canadian economy. According to calculations by the Bank of Canada, government spending should not exceed 2% to have a neutral effect.
Such a situation risks complicating the task of the Bank of Canada, which has already had to increase the key rate 10 times over the last 18 months in order to control inflation, argued Mr. Macklem. Especially since it is still too early to declare victory and decree that the increase in consumer prices has returned to the Bank of Canada’s 2% target, he said.
Testifying before the powerful House of Commons finance committee less than a week after announcing the key rate would remain at 5%, Mr. Macklem acknowledged that the Bank of Canada, which is responsible for monetary policy, and the governments, which propose budgetary plans, “do not row in the same direction”.
“We look at the plans of the provincial and federal governments and we estimate that the growth rate of budgetary expenditures will be around 2.5% and this is beyond our forecast for the potential of the economy. If all these plans are carried out, there is a risk that fiscal spending will grow more than supply and this will not help reduce inflation,” Mr Macklem warned.
Macklem issued the warning as Finance Minister Chrystia Freeland prepares to deliver an economic and financial update in November. Mme Freeland and other federal ministers have already telegraphed the Trudeau government’s intention to increase spending in order to tackle the housing crisis and the rising cost of living.
The Minister of Finance of Quebec, Eric Girard, must present an economic update on November 7. The Legault government has also indicated that it intends to announce significant investments to accelerate the construction of new housing.
According to Governor Tiff Macklem, a level of combined spending that is 0.5% above the economy’s potential is not catastrophic, “but it is a risk.” “Especially if governments add more spending, certainly that can create problems in reducing inflation,” he explained.
He also wanted to emphasize that government spending in various areas does not have the same effect on the inflation rate. For example, direct financial aid to all households quickly fuels inflation. But long-term investments in housing can help increase supply and reduce inflationary pressures in the housing sector.
Before answering questions, Mr. Macklem provided an overview of progress in the fight against inflation in recent months and the obstacles that are looming on the horizon.
In his presentation, he highlighted that the rapid and unprecedented increase in interest rates decreed by the Bank of Canada had the effect of slowing the growth of the Canadian economy. A low growth rate is also forecast for “a few quarters”.
“It is now clearer that higher interest rates moderate spending and price pressures. Economic growth has entered a slower phase. It has been around 1% on average for a year. It is expected to remain below 1% until the end of 2024,” he said.
He said inflation should gradually return to the 2% target in 2025, but higher energy prices could slow that progress, he warned.
Result: consumers should not expect a reduction in the key rate for some time to come. In fact, Mr. Macklem reiterated that he does not rule out a further increase if inflationary pressures persist. “Increasing global tensions, particularly the war in Israel and Gaza, have increased the risk that energy prices will rise and supply chains will be disrupted again, leading to higher inflation in the whole world,” he said.