Oct 12, 2022
IMF says Canada should resist pressure to spend revenue windfall
Canada could enter a recession in the first quarter of 2023: David Doyle
Canadian governments need to resist pressure to spend revenue windfalls from higher commodity prices in order to help slow inflation and shore up the nation’s balance sheet, the International Monetary Fund said.
The IMF said inflation in Canada is being fueled in part by excess demand and a tight labor market, and continued monetary and fiscal tightening will be required to rein in price gains. The federal government, meanwhile, should consider reestablishing fiscal anchors to enhance credibility.
“Revenue windfalls at both federal and provincial levels should be saved,” the IMF said from Washington in its Canadian mission’s annual statement. “While some space could be made for limited and highly targeted programs to buffer vulnerable households from high fuel and food prices, more generalized spending increases should be avoided so as not to undercut monetary policy.”
So far this year, Prime Minister Justin Trudeau’s government has been pulling in billions more than anticipated thanks to surging incomes on the back of inflation and higher commodity prices.
For the first four months of the current fiscal year -- April through July -- the government ran a budget surplus, a surprise start given the $53 billion (US$38.4 billion) deficit Finance Minister Chrystia Freeland projected for the year. The preliminary deficit for the fiscal year that ended March 31 was below $100 billion, versus $114 billion forecast in her April budget.
On the monetary side, the IMF expects the Bank of Canada will continue raising its benchmark interest rate to at least four per cent by the end of this year and keep it there for “several quarters” to put inflation on a downward path.
Canada’s growth rate is forecast to slow to 1.5 per cent next year, from 3.3 per cent in 2022, with a growing chance of a contraction.
“Staff expect a substantial further cooling of the economy, with risks to growth tilted to the downside, and shocks could easily push the economy into a mild recession,” the IMF said.