CIBC Report Calls on Governments to Dampen Spending

People shop for produce in Vancouver on July 20, 2022. (Darryl Dyck/The Canadian Press)

A new report by CIBC Capital Markets, released June 12, says governments could be doing more in the battle against inflation by keeping a tighter grip on their wallets.

Across the country, Canadians are struggling with rising costs in everything from groceries to rent.

But the report said loose spending by governments is boosting growth, at the same time that the Bank of Canada is trying to reduce growth by raising interest rates.

Last week, the Bank of Canada raised its rate by a quarter of a percent in an effort to cool inflation, which is currently running around 4.4 percent. Inflation has dropped from last year but is still causing pain. The report warns that more rate hikes are probably coming in a further effort to slow inflation. That could make life more painful for people renewing their mortgages, because rising interest rates mean they’ll have to pay more.

“Mortgage renewals for Canadians in 2024 and 2025 could be a significant risk to household financial stability if the Bank of Canada hasn’t sufficiently eased policy by then,” the report warns.

It adds that any reduction in interest rates is at least a year away.

A further negative effect, it said, is that higher interest rates will also dampen housing construction, at a time when many around the country are calling for more home construction.

“One negative of an exclusive reliance on higher interest rates is that it puts housing construction at the centre of the resulting economic slowdown,” said the report. “That’s hardly ideal in an environment in which a shortage of housing is pressuring apartment rents and the overall cost of home ownership.”

The report said both federal and provincial governments should be reining in spending.

“A deeper fiscal belt tightening could accomplish the same thing, and as we argue here, would have had side benefits for the country that we won’t see by letting monetary policy fly solo,” it said.

Those benefits could include keeping interest rates a little lower and not adding quite so much debt to government ledgers.

“Canada’s overall public debt burden is still manageable, but it has deteriorated … it does mean that future federal and provincial budgets will collectively face a higher debt servicing bill, leaving somewhat less room for programs,” said the report.

The report puts blame on both provincial and federal governments for spending that is fueling inflation, although it said lately, some provincial governments have been the worst offenders.

“While much of the [provincial] spending was labelled as a way of helping households with the cost of living, the bump up in transfers went above and beyond inflation and represents a stimulus in real terms,” it said.

But it adds the federal grocery rebate will also have an impact.

“The second quarter will see a boost coming from the ‘grocery rebate’ sent by the federal government, which if all spent in the second quarter would lift GDP by an annualized 0.4 per cent.’”

At the same time, government hiring has outpaced private-sector employment, it said, which could add more fuel to the inflationary fire.

“The tightness of the labour market, and its impact on wage inflation, is a key concern for the Bank of Canada,” it said.

And finally, it said, combining slowing down spending, with interest rate changes, would create a friendlier environment for business investment.

“A policy mix that was tougher on fiscal policy, and easier on interest rates, would provide a broader improvement in the capital spending backdrop,” it said.