Higher Interest Rates Dampen Stimulative Impact of Budget 2021

The Parliamentary Budget Officer (PBO) today released his impact assessment of Budget 2021 measures.

The report extends the PBO’s previous assessment of Budget 2021 stimulus spending to include additional budgetary measures, as well as the potential monetary policy response. The report also provides a sensitivity analysis on the resulting post-budget scenario.

“We estimate that Budget 2021 measures will provide a temporary boost to real GDP growth in 2021 and 2022. By the end of 2025, we estimate that Budget 2021 measures will increase employment by 89,000 net new jobs,” says PBO Yves Giroux.

In the PBO’s assessment, monetary policy responds to the increase in economic activity and higher inflation, raising the policy rate by 50 basis points in the second half of 2022, relative to the PBO’s pre-budget outlook.

“Higher interest rates will dampen the stimulative impact of Budget 2021 measures. This means that government revenues will not increase to their full extent. The cost of servicing the Government’s existing debt will also be higher,” adds Mr. Giroux.

The PBO’s post-budget scenario does not include any new economic developments since the March pre-budget outlook. It reflects only the impacts of Budget 2021 measures relative to the PBO’s pre-budget outlook.

Under the PBO’s post-budget scenario, the budgetary deficit reaches $36 billion (1.2 % of GDP) in 2025-26 and the federal debt settles at 49.2 % of GDP in 2025-26.

To illustrate the uncertainty surrounding the post-budget scenario, the report presents distributions of possible future outcomes based on the past forecast performance of private sector economists in Finance’s Canada survey.

“Assuming no future policy actions, we estimate that there is only a 5% chance the budget will be balanced or in a surplus position in 2025-26. We also estimate that there is a 35% chance the federal debt ratio in 2025-26 will be above its 2021-22 level of 51.3% of GDP,” says PBO Yves Giroux.