The Bank of Canada has recorded a 4.75 percent hike in interest rates over the last few years, and a Scotiabank analysis has found that 2 percent of this increase is attributable to government spending. The rise in government consumption and pandemic transfers account for around 200 basis points of the 475 basis points increase in the Bank of Canada’s policy rate.
The report’s authors suggest that provincial governments are out-spending the federal government, and this accounts for around a third of the increase in the policy rate, given that provincial government consumption is more than triple that of the federal government.
The report also indicates that government spending at all levels has contributed to a rise in inflation. This increase has also affected demand and supply in the economy. Bank of Canada Governor Tiff Macklem has shared the same view, stating that government spending is hindering the impact of Bank of Canada interest rate increases on inflation.
It has been indicated by the federal and provincial governments themselves that there will be a 2.5 percent increase in spending, which could generate undue inflationary pressure when compared with Canada’s expected 2 percent economic growth. Moreover, it has been suggested that taxes, such as the carbon tax, are also factors contributing to inflation. The Bank of Canada is expected to make another interest rate announcement on December 6, 2023.