Macklem Sees Little Impact of Canada Budget on Fiscal Track


Bank of Canada Governor Tiff Macklem suggested Prime Minister Justin Trudeau’s recent budget — which offset hefty spending increases with a capital-gains tax hike and higher revenue forecasts — did not materially add to inflationary pressures.

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(Bloomberg) — Bank of Canada Governor Tiff Macklem suggested Prime Minister Justin Trudeau’s recent budget — which offset hefty spending increases with a capital-gains tax hike and higher revenue forecasts — did not materially add to inflationary pressures.

The budget did not significantly change the government’s fiscal track from its November fiscal update, Macklem told reporters Friday. Finance Minister Chrystia Freeland kept her pledge to maintain the deficit around C$40 billion and to plan to reduce shortfalls to 1% of gross domestic product starting in 2026-2027, he pointed out.

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“The budget also commits to those guardrails going forward and that is helpful,” he said after attending the annual meetings of the International Monetary Fund and World Bank Group in Washington.  

While he avoided answering questions about budget measures in detail, saying it was the job of lawmakers to debate the government’s fiscal plan, he said there appeared to be “no big change” on a macro level. 

“There’s more money going out, there’s more money coming in on net.”

The 2024 budget, announced Tuesday, projected revenue gains from better economic output and tax hikes for the richest Canadians and corporations, while adding sizeable increases in spending for housing and defense. Some analysts had raised concerns that these expenditures would add to the expansionary policies of provinces, making the bank’s job in taming price pressures much harder. 

Read More: Former Bank of Canada Governor Says Budget Harms Inflation Fight

Macklem reiterated that policymakers are seeing promising signs on inflation, and noted while some indicators are making more progress than others, “they’re all headed in the right direction.”

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“We’re encouraged by the progress we’ve made,” Macklem said, adding that the proportion of price pressures rising above a yearly pace of 3% has fallen below 40%, which he described as getting “closer to normal.”

Macklem said the last three inflation prints showed “further downward momentum“ but the bank is looking to see that this downward momentum “is sustained,“ he added.

“We just need to see it for longer to be confident that the progress towards price stability will be maintained.“

He cautioned that geopolitical tensions, particularly wars in the Middle East and Ukraine, were casting a long shadow over the global economy. The Bank of Canada is particularly focused on core inflation, but it will take into account any spikes in oil prices, he said.

“We’ve been above our target for at least two years. We are wary of upside risks. We’ve made a lot of progress getting inflation back down to our target. We don’t want to see that jeopardized,” Macklem said.

Macklem also spoke of potential divergence in monetary policy across countries.

“As we enter the next phase of disinflation countries may progress at different speeds,” Macklem said, adding that while countries around the world have made significant progress on inflation, global growth is running hotter-than-expected — especially in the US.

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“We’re all working toward similar objectives and asking the same questions, but ultimately we gear monetary policy decisions to our own domestic circumstances,” Macklem said.

Read More: Fed’s Uncertain Path Creates Bind for Bank of Canada’s Macklem

Macklem and his officials next set the key policy rate on June 5, after another inflation print as well as April jobs and first-quarter output data. About 60% of economists in a Bloomberg survey expect a 25 basis-point reduction in June, which would mark the start of an easing cycle after policymakers held borrowing costs at 5% for six straight meetings. 

Earlier this week, the International Monetary Fund lifted its projection for global economic growth to 3.2% this year, up 0.1 percentage point from its January estimate. Canada’s 2024 growth, however, was revised down to 1.2%, from 1.4%. The forecast for next year was unchanged at 2.3%.

Macklem said economic strength in the first quarter will be sustained through 2024 but quarterly GDP growth will likely continue to be “choppy,” with household spending falling.

(Adds quotes, details.)

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