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Federal budget | Poof, no more inflation!



(Ottawa) If the budget is anything to go by, the current economic problem – excessive inflation – will disappear next year. And interest rates will rise fairly little after all. Poof, gone, the major irritant!

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 skills, but all the same, the numbers are surprising.

The budget projects that the consumer price index (CPI) will climb just 2.4% in 2023, after an average increase of 3.9% this year. The rate would therefore quickly fall back into the range targeted by the Bank of Canada, from 1% to 3%.

The contrast is striking with the recent monthly figures (5.7% in February), which eat away at consumers’ purchasing power.

How is it possible ? According to the Ministry of Finance, the impacts 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 US$100, but should fall to US$74 next year).

In short, inflation is transitory, according to the Freeland budget.

If I may say so, last year’s budget provided for exactly the same transitory effect, which ultimately did not materialize. We saw inflation at 2.2% in 2021, but the rise in the CPI was instead 3.4%, on average. And for 2022, we thought it would go down to just 2%, but for now, we are at 5.7% (February).

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

The consequence of this forecast is that the tool for curbing inflation, the Bank of Canada’s key rate, would rise fairly little. The increase will oscillate between 1.2 and 1.8 percentage points by 2023, depending on the scenarios, before stabilizing during the following years. The Bank’s flagship rate would then be around 2.2%, nothing to write home about. Same kind of rise expected for 10-year bond rates⁠1.

We’ll see, since the Bank of Canada is due to rule on the subject next Tuesday, April 13, and many foresee a jump of 0.5 percentage points, which would push the rate up to 1%. Further increases are expected by the market in the coming months.

Be that as it may, we have to admit that this inflationary situation has not harmed federal finances, on the contrary. 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 shrink during the current year, to 52.8 billion, and during the following year, to 39.9 billion (2023-2024). It will then represent 1.4% of GDP, far from the 15% of GDP of 2020-2021.

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

And even, in the worst of the budget alternative scenarios, the deficit will not exceed 44 billion in 2023-2024. With any luck, we will be at the zero deficit threshold in 2026-2027. Quite a change in such a short time…

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

Assuming these scenarios come true, of course…

A word in closing on the federal government’s effort to help Aboriginal people, 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, infrastructure and housing deficient, etc).

In the budget, the government is spending $10.6 billion over 5 years. This amount is in addition to the $13 billion from the last budget and the $4.6 billion from the previous budget. In short, over three budgets, the government has increased spending in this area by $28 billion over several years, which is enormous.

To better understand, we must see the annual impact of these injections of funds. In 2015-2016, when the Liberals took power, the federal government was spending $11.5 billion on Indigenous communities that year. The sum has gradually increased, and today it reaches 27 billion for the year 2022-2023 alone.

In short, funds for First Nations represent the equivalent of 6.4% of the budget today, compared to 4.4% in 2015-2016.

It is to be hoped that these funds, while legitimate, will be wisely managed, and that they will bring aboriginal people back to the standard of living of the Canadian average.

1. The economic forecasts of the financial institutions on which the Ministry of Finance bases itself were carried out in February; however, the Russians invaded Ukraine on February 24th. Nothing prevented the Ministry from adjusting the forecasts, however, and the budget also mentions the effects of the war.

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