MNI INTERVIEW:Canada Budget Clashes With BOC Tightening-Beatty

Canada's continued budget deficits clash with a central bank moving to raise interest rates and businesses will suffer as borrowing costs rise and inflation persists, former revenue minister and national chamber of commerce head Perrin Beatty told MNI.

The spending plan announced late Thursday was a "mixed bag" of various supports for business that provide some help bringing in skilled immigrants and growing small firms, while prioritizing increased spending at the wrong time, he said.

“There’s a mixed message being sent out here, the government spending on the one hand, continuing to pump money into the economy, and then the central bank raising interest rates to prevent an overheating," Beatty said. "We really need both sides of the administration to function in concert with one another.”

The Bank of Canada is expected on Wednesday to raise interest rates 50bp following a 25bp move last month amid the fastest inflation since 1991 when the Bank adopted inflation targets. Former BOC Governor David Dodge has also told MNI the central bank should quickly move rates up to neutral to keep price expectations in check and governments should avoid quick-fix spending.

SPENDING THE WINDFALL

“Our central bank and other central banks around the world will be raising interest rates more quickly than might have been anticipated” given the jump in inflation, Beatty said. “Inflation is exceptionally costly for both businesses and consumers,” while boosting government tax revenue, he said.

Finance Minister Chrystia Freeland's budget projected years of deficits and is spending more than half the fiscal improvement from an economic rebound, while pledging an "anchor" of lowering debt to GDP ratio each year, a goal sources said will be kept.

“Inflation has given them a windfall, and most of the windfall they have doled out to spending,” Beatty said. “I would have liked to have seen more restraint on new spending,” and move towards a “return to balanced budgets.” Beatty did credit the budget for "substantially" lowering the debt booked for the fiscal year that just ended, a period where most of the extra cash went to paring the shortfall.

Governments must also bear in mind that rising interest rates mean debt service charges could eat into revenue that would normally go to other priorities, Beatty said.