Scotiabank Says 2 Percent of Interest Rate Increase Due to Government Spending

by EditorT

A file photo of a Canadian dollar coin, or a “Loonie.” (Mark Blinch/Reuters)

By Chandra Philip

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.

To Spend or Not to Spend? That is the Monetary Question” looks at the high rate of spending at all levels of government as well as the financial support the federal government offered throughout the pandemic.

“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.

basis point is the unit of measurement for interest rates, with one basis point equal to 0.01 percent.

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 report 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 governor Tiff Macklem has said that government spending at all levels is hindering the impact that BoC interest rate increases could have in bringing down inflation.

“If all those spending plans are realized, government spending will be adding to demand more than supply is growing. And in an environment where we’re trying to moderate spending and get inflation down, that’s not helpful,” Mr. Macklem said  during an interest rate announcement on Oct. 25.

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,” Mr. Macklem told reporters.

He said that if monetary and fiscal policy were “rowing in the same direction” it would be easier to battle inflation.

Carbon Tax Causing Inflation

Mr. Macklem has previously said that the federal government’s carbon tax is responsible for 16 percent of inflation in the country.

He gave the information during a meeting of the House of Commons finance committee on Oct. 30.

“That would create a one-time drop in inflation of 0.6 percentage points,” said Mr. Macklem in response to a question from Conservative MP Philip Lawrence. Inflation is currently at 3.8 percent in Canada.

BoC senior deputy governor Carolyn Rogers said that Canadians should adjust to living with high interest rates in the long term.

Ms. Rogers made the comments during a speech at a meeting of Advocis, the Financial Advisors Association of Canada, in Vancouver on Nov. 9.

“It’s not hard to see a world where interest rates could be persistently higher than what we’ve all grown accustomed to,” Ms. Rogers said during her speech.

“It could be very tempting to think that rates will not stay but will return back to those very low rates, but there are reasons to think they may not.”

The BoC is set to make another interest rate announcement on Dec. 6.

Noé Chartier and Matthew Horwood contributed to this report. 

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