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PBO Warns That Higher Rates Will Impact Government Stimulus Measures

The Parliamentary Budget Officer (PBO) says higher interest rates should temper the amount of federal stimulus allocated in the latest budget.

The Liberal government of Prime Minister Justin Trudeau has said that its budget unveiled in April will create thousands of jobs and pull the country out of the COVID-19 pandemic.

However, budget officer Yves Giroux says that rising price pressures and expected increases in interest rates could add to federal costs in coming months and years.

Considering rising interest rates, Giroux now estimates the budget could increase Canada’s economic growth this year by 0.6 percentage points. He also estimates the budget's measures will create 89,000 net new jobs by the end of 2025.

As the economy recovers, Giroux expects the Bank of Canada will raise its benchmark interest rate before the end of next year (2022) from its current rock-bottom level of 0.25% where it has been since March 2020 at the onset of the pandemic.

Giroux foresees the central bank raising interest rates by half a percentage point in the second half of 2022, and rising thereafter until it hits 2.25%, which would affect rates charged on things such as mortgages and business loans.

Higher interest rates "will dampen the stimulative impact" from the budget, Giroux said, meaning government revenues won't get the increase they need to pay for measures, and the costs to pay down the national debt will also go up.

Giroux estimates that budget deficits over the next five years will total $117.1 billion more than his pre-budget forecast, which he said suggested that only a small portion of the nearly $140 billion in new spending the budget proposed would be offset by economic growth.

While the federal government’s budget estimated a deficit in the last fiscal year of $354.2 billion, Giroux estimates the figure will total $370.9 billion as a result of unprecedented spending to counter the financial fallout from COVID-19.

The report from Giroux was one of several his office released Thursday (May 27) looking at the costs of various budget measures. In one, he estimates that the government may rake in hundreds of millions more in revenues than it expects from a tax on digital platforms, and in another his office said it expects a new hiring credit will cost less than the Liberals forecast.