Pace of government spending ‘not helpful’ in efforts to tame inflation: Macklem

The governor of the Bank of Canada is urging governments' fiscal policymakers to keep the inflationary impact of their spending plans in mind when setting their budgets.

The Bank of Canada’s efforts to tame inflation by raising interest rates are at odds with the projected pace of government spending, says governor Tiff Macklem.

Macklem spoke to reporters on Wednesday after the Bank of Canada opted to keep its benchmark interest rate steady for the second consecutive decision.

That hold comes despite new forecasts from the Bank of Canada that inflation will be higher in the near term than initially expected, though monetary policymakers still expect annual price pressures will cool to the central bank’s two per cent target by mid-2025.

Macklem was asked what impact government spending plans are having on the path for inflation. He reiterated that fiscal policy is the purview of elected officials, and that the central bank’s role there is only to bake government spending plans into its forecast.

But citing the Bank of Canada’s latest outlook, Macklem said that based on the current spending plans in the budgets of all federal and provincial governments, fiscal spending is expected to grow at a rate of 2.5 per cent next year.

“So what that means is if all those spending plans are realized, government spending will be adding to demand more than supply is growing,” he said. “And in an environment where we’re trying to moderate spending, get inflation down — that’s not helpful.”

Macklem went on to urge fiscal policymakers to consider the “inflationary impact” of their spending decisions when making up their budgets.

“It’s going to be easier to get inflation down if monetary and fiscal policy are rowing in the same direction,” he said.