Canada’s Government Spending Will Fuel Inflation Next Year, Central Banker Says – Reuters

By Steve Scherer and Ismail Shakil

OTTAWA – According to Bank of Canada (BoC) Governor Tiff Macklem, if current spending plans are upheld, government expenditures at both federal and provincial levels are expected to contribute to inflation next year.

Macklem informed a Senate committee that if the government proceeds with its proposed spending for 2024, it could hinder efforts to achieve the inflation target of 2%. He noted that inflation was measured at 3.8% in September, and the BoC indicated last week that it might not return to the target until the latter half of 2025.

"We have incorporated that into our forecast. While we expect to reach the target, it will take time," Macklem stated. He also mentioned that reducing government spending could make it easier to lower inflation.

The federal government’s Fall Economic Statement (FES) could be released as early as next week. This statement typically updates fiscal and economic projections but often includes new spending initiatives as well.

There appears to be an inclination towards increased federal spending, as Finance Minister Chrystia Freeland has indicated plans to introduce measures in the FES aimed at addressing housing and affordability issues for Canadians.

As Canada faces the possibility of a recession and the highest debt costs it has seen in over twenty years, economists suggest that Prime Minister Justin Trudeau should consider reducing spending to preserve future policy options.

BoC Senior Deputy Governor Carolyn Rogers informed the Senate committee that approximately 40% of households have already renegotiated their mortgages at higher rates following the bank’s decision to raise rates to a 22-year peak of 5.0% from March of last year to July 2023.

"Certainly, there is pressure on households, and we do not want to downplay it; however, the data does not indicate that households are experiencing a significant increase in stress due to mortgages," Rogers noted.