By James Langton
(February 25 – 17:30 ET) – Next week’s budget will be sold on basis of tax cuts and spending initiatives, says CIBC World Markets senior economist Avery Shenfeld. But he predicts it will be short on debt reduction. Shenfeld contends the current $3 billion-a-year debt reduction program has the country on track for debt elimination in the year 2192. By comparison, he adds, the U.S. debt is slated to disappear by 2013.
Shenfeld predicts the budget won’t tighten monetary policy, nor will planned tax cuts do much to close the gap with the U.S. Canadian cuts will be modest, he says, but the U.S. is leaning toward cutting their taxes further too. Shenfeld laments likely, increased spending to further the Liberal’s political agenda.
While CIBC is slamming the upcoming federal budget, BMO Nesbitt Burns senior economist David Rosenberg seems to be girding for large interest rate hikes. Rosenberg says inflation indicators outlined in policy statements by the Bank of Canada justify 100 basis points in hikes over the course of the year, possibly even more depending on what the U.S. Federal Reserve Board does.
He says that despite soft Consumer Price Index data the Bank has raised its core inflation forecast for the first quarter. “The Bank’s cadence would then suggest that any move in core inflation above the forecast would send policy into a more vigorous posture.” Rosenberg suggests that our rate picture is dependent on whether the BOC will match the Fed or exceed it. There’s little room for it to be softer than the Fed, he says.
As for the budget, the fiscal stimulus of tax cuts and spending increases will likely exhaust any capacity left in the Canadian economy, Nesbitt suggests. Proposed budget initiatives could fuel another 1% in annual GDP growth, equivalent to 100 bps in rate cuts, says Nesbitt.