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Economic update: Still nothing to help tame inflation

Montreal, November 21, 2023 – The Trudeau government has missed an opportunity to help the Bank of Canada fight inflation in its latest economic update, says a researcher at the Montreal Economic Institute.

“With the Bank of Canada asking it for help to tame inflation, the Trudeau government is adding fuel to the fire,” says Gabriel Giguère, public policy analyst at the MEI. “Ultimately, Canadians are seeing the effects in the high prices they’re paying at the grocery store and in their rapidly rising mortgage payments.”

In October, Bank of Canada Governor Tiff Macklem asked the various levels of government to reduce spending growth in order to help in the fight against inflation.

Government spending in recent years is directly responsible for a two-percentage-point increase in interest rates according to a Scotiabank report released on Friday. The federal government alone is responsible for 1.1 percentage points of this increase.

The update tabled today does not contain a plan for returning to budgetary balance. It instead proposes a $35.9 billion increase in the cumulative deficit by 2027-28, compared to what had been announced in the budget this past March.

The Trudeau government now expects interest payments on its debt to total $46.5 billion this year, representing an increase of $2.6 billion compared to last March’s projections.

“Besides inflation, there is the issue of interest rates that should encourage the Trudeau government to stop increasing its deficits,” explains Mr. Giguère. “After all, each dollar spent on interest payments is a dollar that is not put into healthcare, education, or tax cuts.”

The government expects to spend $58.4 billion on interest payments on its debt in 2027-2028, or $1,456 per Canadian.

The federal debt will reach $1.2 trillion on March 31 of next year, according to the Department of Finance’s projections.

In addition, the MEI researcher criticizes the government’s decision to modify the tax treatment of the expenses of owners of short-term rental apartments.

“It’s not as if we’re a handful of Airbnbs away from solving Canada’s housing shortage,” explains Mr. Giguère. “Any solution that does not involve a massive increase in the housing supply is unfortunately just a distraction.”

The country would need 5.1 million housing units built by 2030 in order to return to 2004 price levels, according to Canada Mortgage and Housing Corporation estimates.

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The MEI is an independent public policy think tank with offices in Montreal and Calgary. Through its publications, media appearances, and advisory services to policy-makers, the MEI stimulates public policy debate and reforms based on sound economics and entrepreneurship.

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