The latest federal budget promised fiscal stimulus that will add incremental growth in the short term — but, if done right, may end up raising the economy’s potential in the long term, according to CIBC World Markets Inc.
In a new report, CIBC’s economists project the stimulus that was signalled in the budget will “add a couple of decimal places added to Canada’s annualized real GDP growth rate in upcoming quarters, ramping up to about half a percentage point by the end of 2027 as capital spending kicks in.”
“For some, that will sound disappointing, but in an economy otherwise chugging along at a mid-1% growth pace, every decimal counts,” the report said.
The fact that the economic payoff likely won’t be quick, or large, reflects a couple of factors, the report noted.
For one, it takes time for major spending projects to get launched. And, maybe more importantly, the provinces have a big part to play in how federal stimulus lands.
Indeed, the report stressed that the provincial governments collectively outweigh the federal government in terms of fiscal policy heft, so their efforts to curb deficits may temper the impact of federal ambitions.
Additionally, it’s the provinces that dictate where a lot of the actual government spending actually happens, given that about 20% of federal spending involves transfers to the provinces, the report noted.
“The combination of loose fiscal policy last year and a commitment to rein in operating spending, results in a muted impulse in 2026,” it said. “The slowdown in provincial spending is already showing up in GDP data, and results in the overall fiscal impulse being a drag at the start of this year.”
That said, the long-term effect of increased federal investment could last well beyond the next couple of years.
“We estimate that Canada’s long-term potential output growth could be higher by a quarter of a percentage point,” the report said.
That could materialize if government spending proves to be a catalyst for increased private investment too, the report said. Such a situation can arise “when the public infrastructure makes the private investments more profitable, when there’s enough economic slack to undertake both types of projects, and when the way deficits are financed and monetary policy prevent a squeeze on the private sector’s cost of capital.”
However, that will likely depend on just how government money is deployed.
“Outcomes will depend on which capital projects get funded, how efficiently they are executed, and their specific contributions to productivity and economic capacity. Beyond dollars and cents, we’ll need the right backdrop of regulatory, trade and other elements of public policy to maximize the longer term lift to Canada’s prospects,” the report added.
“Those hoping for a burst of fiscal stimulus will be disappointed. But this fiscal program is a slow and steady wins the race type of approach, that could deliver big benefits down the road, rather than a short-lived spike in spending that quickly fades away when the government taps are turned off,” it concluded.