Too much of a good thing?
RBC is cautioning the federal Liberals against “excessive” stimulus spending when the first budget in two years is presented in the House of Commons Monday.
“An improving economic outlook has weakened the case for stimulus worth 3-4% of GDP, though the government’s appetite to spend likely hasn’t changed,” RBC senior economist Josh Nye said in a report.
Economists at the bank had originally projected nominal GDP growth of 6.9% for 2021 when the government presented its fall economic statement in November 2020. RBC is now forecasting 9.5% growth.
“The current fiscal year will coincide with dramatic improvement in Canada’s economy. Growth was surprisingly resilient through the second wave of COVID-19, and while a third wave is clouding the near-term outlook, we expect accelerating vaccine rollout will help the economy build momentum over the summer,” Nye said.
“This is all the more important as excessive stimulus spending could generate inflationary pressure, put upward pressure on interest rates and crowd out private investment, and threaten debt sustainability.”
He expects the government to offer further extensions to wage and rent subsidies as well as income support for self-employed Canadians.
“These programs should be phased out over the current fiscal year but a firm timeline for their withdrawal is unlikely at this stage," Nye said, referring to the Canada Emergency Wage Subsidy, Canada Emergency Rent Subsidy and the Canada Recovery Benefit.
“Phasing out expensive but necessary support programs for households and businesses doesn’t mean the government’s spending days are over."
Nye estimated the next fiscal year will see $70 billion to $100 billion earmarked for “targeted stimulus” over the next three years, which he believes would be excessive in light of the improving economic situation.
The government may instead wish to focus on longer-term programs that would generate revenue over time.
“To that end, we expect child care and early learning will be a key priority,” he said.
“Well-designed child care policies have the potential to boost women’s labour force participation, stimulating growth and tax revenue.”
