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

OTTAWA — 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 dug by the pandemic.

The Opposition Conservatives contend the effects won’t be as widespread as the Liberals tout, pointing to warnings from 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 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 expects 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.

Finance Minister Chrystia Freeland spent Wednesday night and parts of Thursday defending her spending plan under in the House of Commons, calling the budget a significant investment towards long-term growth for the country.

The budget bill, known as C-30, passed second reading Thursday afternoon with support from the Bloc Quebecois, New Democrats and a handful of independents.

Testifying afterward at a Senate committee, Freeland said the government decided to spread stimulus spending over a three-year period to prevent any recovery from stalling.

“I am of the view that we must not take the recovery for granted,” Freeland said, noting repeatedly that the budget’s economic outlook is based on the views of private-sector economists.

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.”

NDP finance critic Peter Julian said the report’s findings that revenues won’t be as high as the government expects underlines the need to increase the proposed one per cent tax on foreign homebuyers, and institute a wealth tax on the super-rich.

“The Liberals aren’t taking the necessary action to help everyday Canadians who had an incredibly hard year financially,” he said.

“Instead of standing up for everyday Canadians, the Liberals have proposed ineffective half-measures like their tax on foreign home ownership or their tax on luxury items. Theses steps are nowhere near good enough.”

The report from Giroux was one of several his office released Thursday looking at the costs of various budget measures. In one, he estimated that the government may rake in hundreds of millions more in revenues than it expects from a tax on digital platforms, and in another his office expected the a new hiring credit would cost less than the Liberals forecasted.

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.

This report by The Canadian Press was first published May 27, 2021.

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