Trudeau government’s fiscal ineptitude leading cause of high inflation and higher interest rates
Despite the Bank of Canada’s calls for assistance, the Trudeau government continues to add fuel to the fire.
Whereas the central bank is trying to contain demand to tame inflation, the federal government has announced that the cumulative deficit for the next five years will be $35.9 billion higher than projected in the last budget.
Unfortunately, the past few years have shown us the effect that government spending can have on inflation and, thus, on the interest rate increases required to fight that inflation.
If it hadn’t been for the excessive government spending of recent years, interest rates today would be two percentage points lower than they are, according to a recent Scotiabank study. The policy interest rate would, therefore, not be five percent but three percent, with this increase affecting all of our loans.
To really understand what two additional percentage points of interest represent in a family’s budget, imagine a young couple buying their first home.
They’ve found themselves something nice, not too far from the city, for which they’re paying $450,000 – a little on the expensive side for them, but in the current market, it was that or nothing.
Once their down payment is made, the rest – including the CMHC premium – is covered by a mortgage of $405,000, to be paid back over 25 years and with a seven percent interest rate.
For this young couple, two percentage points less of interest – five percent rather than seven – would represent a savings of around $481 a month in their budget.
At the end of the year, that would mean $5,774 more in their pockets.
After 25 years, paying two percentage points of additional interest each month represents a cost of $144,354 for this young family.
That’s an enormous sum!
And insofar as excessive spending is responsible for the interest rate hikes that are foisting this additional bill on Canadians, we might expect one of the main culprits – the federal government – to think twice before piling on even more.
It must also be noted that the country’s financial picture is not what it used to be. The federal debt is nearly twice as high today as it was when the Trudeau government took office.
The result is that we are now paying $46.5 billion in interest payments each year, or $1,160 per Canadian.
That’s money that isn’t going into health or education or back into our pockets in the form of tax cuts. These billions are just paying for the excesses of the past.
Let’s recall, too, that just like for mortgages and other loans, the interest rates charged on all of the government’s new borrowing have also gone up.
Despite this, the federal government continues to postpone a return to budgetary balance indefinitely, having never tabled any budget setting an amount at which it expected its revenues to cover all of its expenditures.
It is important to mention that in addition to the critical issues of taming inflation and controlling the portion of our spending that is gobbled up by interest payments, several international observers are concerned about Canada’s financial situation.
As recently as this past June, the International Monetary Fund recommended that Canada adopt a clear debt target not to be exceeded or at least present a concrete plan for addressing its rapidly growing debt.
The IMF has been repeating this same recommendation for three years. The Trudeau government has taken note of it for three years but refuses to act on it.
And if the IMF is saying it, it’s a safe bet that, behind closed doors, many others who lend our country money and those who work for rating agencies share the same concerns.
While it has missed its chance this month, we can only hope the federal government will take action in its next budget.
But I’m not holding my breath.
Gabriel Giguère is a public policy analyst with the Montreal Economic Institute.
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