Canada’s Finance Minister, Chrystia Freeland, unveiled a strategic shift in the upcoming budget, prioritizing the creation of economic conditions conducive to lowering interest rates. The move comes in response to the current 22-year high of 5% in interest rates, a concern acknowledged by Freeland during a press briefing in Ottawa.
“We definitely are conscious as our priority, when it comes to economic policy, of acting in such a way that creates conditions that will make it possible for interest rates to come down,” stated Freeland.
This announcement aligns with Bank of Canada Governor Tiff Macklem’s recent caution about potential obstacles to reducing inflation with significant spending increases in the upcoming budget. The budget, expected to be presented in Parliament in March or April, aims to address the fiscal deficit that Prime Minister Justin Trudeau’s government has faced due to ballooning debt servicing costs.
Trudeau’s Liberal government, initially committed to reducing the federal debt as a percentage of GDP, faced setbacks as it twice postponed debt-reduction goals. The recent fiscal anchors set a deficit cap of C$40.1 billion ($29.6 billion) for the 2023-24 fiscal year, representing about 1.4% of GDP. Further proposals include lowering the debt-to-GDP target for 2024-25 and maintaining a declining ratio thereafter, with a commitment to keep the deficit below 1% of GDP from 2026-27.
“We intend to hit those (fiscal) targets,” asserted Freeland.
While the Bank of Canada has kept borrowing costs steady at 5% in the past four meetings, this has impacted mortgage costs, house prices, and rents. Despite contributing to a decrease in inflation from 8.1% in June 2022 to 3.4% in December, the central bank remains cautious about initiating interest rate cuts, citing persistent underlying inflation. The upcoming budget signals Canada’s commitment to balancing economic stability, fiscal responsibility, and addressing the challenges posed by the current economic landscape.
