Federal budget | Poof, no more inflation!

(Ottawa) If the budget is anything to be respected, the current economic problem – excessive inflation – will disappear next year. And after all, interest rates will only slightly increase. Poof, gone, the main irritant!

Posted April 7

I know, the budget forecasts are based on the crystal balls of 13 major institutions, including the Caisse de dépôt, the Mouvement Desjardins and the Royal Bank. I don’t doubt their abilities, but the numbers are astonishing nonetheless.

The budget predicts that the consumer price index (CPI) will rise by just 2.4% in 2023, after an average increase of 3.9% this year. The rate would then quickly fall within the range set by the Bank of Canada, from 1% to 3%.

What is striking is the contrast with the recent monthly data (5.7% in February), which affect the purchasing power of consumers.

How is it possible ? According to the Ministry of Finance, the impact of the pandemic and the war in Ukraine on global supply problems will fade in the coming months. Just like the effects of the labor shortage or even those of the global situation on oil prices (a barrel is currently at $ 100, but is expected to drop to $ 74 next year).

In short, inflation is transient, according to Freeland’s budget.

If I may say so, last year’s budget foresaw exactly the same transitional effect, which in the end did not materialize. We saw inflation at 2.2% in 2021, but the CPI increase averaged 3.4% instead. And for 2022 we thought it would only drop to 2%, but for now we are at 5.7% (February).

Given the great uncertainty, the budget presented two alternative scenarios – optimistic and pessimistic – but once again the inflation rate remains below 3% in 2023 and below 2% the following year. Hallelujah!

The consequence of this forecast is that the instrument for containing inflation, the key rate of the Bank of Canada, would increase slightly. The increase will fluctuate between 1.2 and 1.8 percentage points by 2023, depending on the scenarios, and then stabilize in subsequent years. The bank’s peak rate would therefore be around 2.2%, which is nothing exciting. Same type of increase expected for 10-year bond rates⁠1.

We’ll see, as the Bank of Canada is expected to comment on the matter next Tuesday, April 13, and many are predicting a 0.5 percentage point jump, which would push the rate up to 1%. Further hikes are expected from the market in the coming months.

Be that as it may, we must admit that this inflationary situation has not damaged federal finances, quite the opposite. The deficit for the current year (2021-2022) was “only” 113.8 billion, much less than the 144.5 billion forecast just 5 months ago. Or that the 328 billion of 2020-2021.

This deficit will continue to decline during the current year, to 52.8 billion, and during the following year, to 39.9 billion (2023-2024). It will therefore represent 1.4% of GDP, far from 15% of GDP in 2020-2021.

The federal government is benefiting from the strong rebound in the economy, and in particular from the increase in the price of raw materials, of which Canada is a major producer. So much so that in the next two years, revenues will increase by 9%, while expenses will decrease by the same amount, with the end of the injections of funds for COVID-19.

And also, in the worst of the alternative budget scenarios, the deficit will not exceed 44 billion in 2023-2024. With any luck, we will be on the verge of zero deficit in 2026-2027. A nice change in such a short time …

This financial recovery will promote our national debt relief. Our debt (1161 billion as of March 31, 2022) is equivalent to 46.5% of GDP and this level will gradually decrease to 41.5% of GDP in 2026-2027.

Assuming these scenarios come true, of course …

A word to conclude the federal government’s effort to help Aborigines, in the wake of the shameful events of recent years (burial of children in residential schools, missing girls and women, limited access to running water, poor infrastructure and housing, etc.) .

In the budget, the government is spending $ 10.6 billion over 5 years. This sum comes in addition to the $ 13 billion of the latest budget and the $ 4.6 billion of the previous budget. In short, on three budgets, the government has increased spending in this area by $ 28 billion over several years, which is huge.

To better understand, we need to see the annual impact of these fund injections. In 2015-2016, when the Liberals took power, the federal government spent $ 11.5 billion on indigenous communities that year. The sum has progressively increased, and today it reaches 27 billion for the year 2022-2023 alone.

In short, First Nations funds represent the equivalent of 6.4% of today’s budget, up from 4.4% in 2015-2016.

It is to be hoped that these funds, while legitimate, will be managed wisely and will restore Aboriginal people to the Canadian average standard of living.

1. In February, the economic forecasts of the financial institutions on which the Ministry of Finance is based were made; however, the Russians invaded Ukraine on 24 February. However, nothing prevented the Ministry from adjusting the forecasts and the budget also mentions the effects of the war.

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