Wider deficits in 2024 federal budget could delay Bank of Canada rate cuts

The 2024 federal budget projects a steady diet of wider deficits over the next five years, adding new spending only partly supported by new revenues. The government showed less restraint than we expected, but our analysis finds the new measures will provide a modest boost to GDP and inflation in the near term.

What you will learn:

• The federal budget will not likely prompt the Bank of Canada to hike rates, but it could delay the start of rate cuts until after June 2024, which we currently expect, especially with increased spending in recent provincial government budgets.
• While it may improve fairness, raising the capital gains tax at this time is not the best policy approach to support new spending given Canada’s pressing need for much greater capital investment to boost its lagging productivity. Our analysis finds that this measure, while not the calamity some fear, could harm private investment and the economy’s long-term potential. Rather than piecemeal changes, a long-overdue comprehensive tax reform would be optimal.
• Our modelling finds the new measures in the budget will boost GDP by 0.3ppts and lift the CPI by 0.1ppt by late 2024. Still, this will not be enough to prevent the shallow recession we expect from Q1 to Q3 this year, and the economy will stagnate on an annual average basis.