MNI INTERVIEW: Canada Budget Keeps BOC On Pause: Ex Official

Canada’s budget met its goal of making sure new spending is modest enough to prevent the Bank of Canada from raising interest rates again to control inflation, former senior finance department official Mostafa Askari told MNI.

Most of the spending comes towards the end of the five-year plan Finance Minister Chrystia Freeland presented Tuesday, according to Askari, now chief economist at the University of Ottawa’s Institute of Fiscal Studies and Democracy.

“I don’t think there’s any inflationary risk here from this budget," Askari said. "Hopefully the inflation numbers that we have seen if they go down as we have seen so far, we will get to a more normal area.”

Freeland said her budget offers targeted spending that won’t add “fuel to the fire of inflation” such as a one-time CAD2.5 billion payout to low-income families to cover grocery costs growing at 10%. With overall inflation more than double the Bank of Canada’s 2% target, Governor Tiff Macklem held his policy rate at 4.5% earlier this month and said he’s done unless inflation remains stubbornly high.

PROJECTIONS TOO OPTIMISTIC

“The Bank of Canada isn’t planning to increase interest rates further from where they are,” Askari said.

The budget doesn’t do much to relieve short-term supply bottlenecks that central bankers said were causing inflation, but that may not be a critical omission, he said. “The supply side issues are gradually disappearing. So that’s not a major issue anymore, as it seemed to be.”

The budget did show larger deficits and even that projection is optimistic because it relies on hard-to-realize cost cuts within government and a projection of only a mild recession, Askari said.

That puts the government’s new plan to resume lowering the debt-to-GDP ratio next year at risk, he said.

ANCHOR AT RISK

“The debt to GDP ratio, that decline may not be there or if there it’s even smaller than what they are showing right now. So the anchor is at risk.”

So will be the easier goal now of slimming a CAD40 billion deficit to CAD14 billion over five years, he said. Again, that goal will be hard to make within the budget’s optimistic projections, he said.

“The economy was much weaker than they expected, interest rates higher than what they expected, those two factors by themselves would add something like that, ten billion dollars, fourteen billion,” he said.

“The bottom line in my view is going to be weaker than what they are showing,” Askari said.

“I don’t think we are actually behind anyone else, at least not the Europeans and the Americans,” he said. “We are definitely not ahead of them.”