Government spending is to blame for at least 2 percent of the 4.75 percent hike in interest rates that Canadians have seen over the past few years, according to a Scotiabank analysis.
“Rising government consumption and the pandemic transfers account for roughly 200 basis points of the 475 basis points increase in the Bank of Canada’s policy rate,” the report says.
The authors said that while all levels of government spending are contributing to the economic climate, provincial governments are out-spending the federal government.
“Given that provincial government consumption of goods and services is more than triple that of the Federal government, provincial spending alone accounts for about a third of the increase in the policy rate,” they wrote.
The report also notes that all levels of government spending have fed into a rise in inflation.
“Government final consumption on goods and services has risen sharply since the end of 2019 across all levels of government,” the authors wrote.
“The economy would not have been in excess demand were it not for this surge in government spending.”
It’s a message that is also coming from the Bank of Canada (BoC).
BoC Gov. Tiff Macklem has said that government spending at all levels is hindering the impact that bank’s interest rate increases could have in bringing down inflation.
Federal and provincial governments have indicated there will be a 2.5 percent increase in spending, which when compared with Canada’s expected 2 percent economic growth, could add “undue inflationary pressures,” he said.
Carbon Tax Causing Inflation
During a meeting of the House of Commons finance committee on Oct. 30, Mr. Macklem said the federal government’s carbon tax is responsible for 16 percent of Canada’s inflation.“That would create a one-time drop in inflation of 0.6 percentage points,” he said in response to a question from Conservative MP Philip Lawrence. Inflation is currently at 3.8 percent.
