OTTAWA, March 20 (Reuters) - Ottawa’s heavy spending plans, outlined in its 2007-08 budget on Monday, have raised concerns of a fiscal stimulus that increases the chances the Bank of Canada’s next rate move will be a hike rather than a cut.
Two-thirds of the new spending envisaged for the next two years, or about C$12.7 billion ($10.9 billion), is cash that will be showered on the provinces to settle an age-old dispute over how to share revenues among the different levels of government.
The remaining C$7 billion ($6.03 billion) is devoted mainly to a vast array of targeted tax breaks and environmental initiatives.
Pundits were so struck by Finance Minister Jim Flaherty’s free-flowing cash that one Ottawa newspaper on Tuesday sported a front-page caricature of him as an Easter “money bunny” carrying a basket full of treats.
“It is stimulative,” said Michael Gregory, senior economist at BMO Capital Markets. “You have governments that will be adding to the spending, whether it is the federal government or the provincial government ... and that is augmenting a still pretty healthy pace of spending by consumers.”
“That makes the Bank of Canada less interested in cutting rates any time soon,” he said.
Whether or not the budget will trigger overheated economy arguably depends on how the provinces use their windfall. Quebec Premier Jean Charest announced on Tuesday he would use the C$2.2 billion from Ottawa to cut the province’s own taxes by C$700 million.
David Wolf, chief economist and strategist for Canada at Merrill Lynch, expects Bank of Canada Governor David Dodge to see a finance minister who puts about as much back into the economy as he takes out of it in terms of taxes.
“It depends on your baseline assumption. The Bank of Canada’s assumption is that governments will keep their budgets roughly balanced. The feds did that yesterday,” Wolf said.
In fact, if Ottawa had chosen to sit on its massive surplus, Dodge may have had to worry about a restrictive monetary effect, he argued.
The real risk, Wolf believes, is of a budget deficit when the economic times turn bad, especially if the coffers are not allowed to accumulate surpluses in good times.
Others lamented that the surplus was not used to cut taxes more, with accusations of “overspending”, “lack of discipline” and a “missed opportunity” pouring in from the Canadian Chamber of Commerce, the Canadian Taxpayers Federation and others.
In his defense, Flaherty justified his spending by saying on Monday that the so-called fiscal imbalance between Ottawa and the provinces required a one-time settlement. He promised to keep spending within the rate of nominal gross domestic product growth in coming years.