Trudeau should curb spending to make way for rate cuts, economists say

investing.com:

By Promit Mukherjee

OTTAWA (Reuters) — Canadian Prime Minister Justin Trudeau should rein in spending in his upcoming budget if he wants interest rates to come down quickly and alleviate the cost-of-living pressures slamming his polling numbers, economists said.

«If (the government) did hold back its spending… that would help to provide more of a disinflationary impulse to the Canadian economy,» Randall Bartlett, senior director of Canadian Economics with Desjardins Group.

The government had expected direct program expenses to fall by 8% this year, but instead they have jumped by 6%, Bartlett said, adding that further increases in spending in the budget would mean «the (central) bank can't start cutting rates as early or as quickly as Canadians would prefer».

Trudeau has expanded support of public health programs and social services over the past eight years. During the pandemic, spending expanded further and in 2020 Canada posted its biggest deficit since World War Two.

Economists and analysts said time was running out for Trudeau to get his fiscal house in order. A delay would not only damage his credibility at a time when his poll numbers were abysmal but also could force the central bank to keep rates higher for longer.

This year's budget will be presented to parliament on April 16, the Finance Ministry said on Monday.

The Bank of Canada (BoC) has kept its key overnight rate at 5% in its last four meetings as housing costs, food prices and wages continue to stoke underlying inflation. The bank is again expected to keep rates on hold at its next rate announcement on Wednesday.

The Liberals' spending habits have put it at odds with the central bank. BoC governor Tiff Macklem has repeatedly warned that the level of