The federal government has tabled a budget that promises billions of dollars for housing, social programs and defence. Kim Parlee speaks with James Orlando, Director of Economics, TD Bank, about the budget’s key themes.
You and I were chatting just a moment ago, and I know you said that you were taking a look at this to understand what the real impact is going to be on the country, and inflation, and the Bank of Canada. I'm going to make people wait a couple of moments to find what they think that is. But first, just what's your take overall on this budget? How would you characterize it?
- Yeah, so it really is a whole bunch of spending on a whole laundry list of items. We have net new spending in Canada, a lot of widely expected spending. We had the liberal platform from the election. We knew that the liberals signed up with the NDP on agreeing on some new spending as well. So a lot of these things were kind of leaked ahead of time.
The level is really what we were looking for. So this $56 billion net new spending is kind of the number we're watching for. Because we're in an economy right now in Canada where everything is humming along at a strong pace. So we need to see how much extra fuel the government wants to put on this fire right now.
- OK, I'm changing my mind. I do want to tell me what net, net the impact is on the economy and inflation. And then we'll get into the buckets of spending. But what do you see?
- Yeah, so this is really the focus for me at least. When we are looking at GDP growth, obviously we're adding this spending right on there. When it comes to overall long-term growth, this is not something that we're too certain about. There's a lot of calls before this budget came out that we wanted to see a lot of productivity-enhancing investments going on. We have some of that.
But a lot of this is spending that is really going to help out things like dental care, things like building more homes. That sort of thing is-- it's going to be having an impact on GDP, but it's not something that we're necessarily going to say it's going to stimulate the economy and improve our productivity in this country. What it does do is it looks like it's going to be impacting inflation on the margin here. We already have incredibly hot inflation above 5% with what's happening in Russia and Ukraine right now, the commodity price spikes.
That inflation is really just going to keep taking off. The Bank of Canada is aggressively saying it's going to tackle that. I'm sure they're looking at this budget and saying, OK, there's going to be a lot more spending. This is going to be adding more and more to GDP. It's going to be pushing us more into excess demand. So that's definitely something we need to watch out for.
- Let's talk about some of those buckets that were announced. Housing was a big one. I think for most people that'd be the one they'll feel the most. In terms of new savings vehicles for housing, extension of credits, limiting foreign buyers, there's a lot there. What is going to be the net impact, from your perspective, on the Canadian housing market?
- Yeah, so this budget tried to tackle housing from a lot of different angles. We know that there's the foreign buyers that have been mentioned a lot in the news. There's the supply issue, the fact that we're severely undersupplied in Canada with respect to housing. Now all of these things on the margin probably going to impact housing prices. It's also trying to help first-time homebuyers get in the market.
But one thing that we think that is going to be more impactful going forward is the fact that interest rates have risen so much. So this aggressive hiking cycle by the Bank of Canada-- anyone that's paid attention to financial markets over 2022 knows that government bond yields have gone up. Anyone that's spoken to a bank about interest rates knows that mortgage rates are going up. And we saw that there's been a slight slowdown in housing over the last month.
And that factor is going to be the main driver for housing. So even though the Bank of Canada says we need government policies in place, macroprudential policies we call them-- like the budget's trying to embed right now. Although we need those-- yes, we do. We also need to watch out for those interest rates. And those interest rates are rising, and we think that's going to be a bigger factor on housing.
- Yeah. What about climate? I think I saw various numbers to further mention-- $2.6 billion investment in tax credits for carbon capture, big bucks for zero-emission vehicles-- both personal and fleets. There's a lot happening there. What do you see with that?
- So we see that the government is trying to do everything it can to get that net-zero emission target. It's not just all these tax credits, but it's also the incentivization or greater investment in this space. We've had a green bond issuance in Canada. So the fact that we're doing that-- you and I were speaking earlier about even being involved in the entire supply chain in the electric vehicle space. So everyone that's been going around trying to fill up their gas tank right now is seeing high gas prices. And it's caused a lot of people to start reconsidering electric vehicles. We know this is going to be a big purchase, a big wave of demand in the future.
Now what part of the supply chain does Canada want to be a part of? We heard the interior minister of finance talk about the Ring of Fire in Northern Ontario. Rich in minerals-- everything we need to be able to help spur the supply chains for the electric vehicle industry. The question is-- this investment we're willing to do-- are we just going to do extraction or are we going to be a part of the entire supply chain? We're setting up the table nicely, but we need to see how the execution comes through.
- Yeah. And these aren't tomorrow investments, as you highlighted before. These things take time. Yeah, the critical minerals supply chain piece was interesting. I'm sure it perked up a lot of ears in terms of that front. Defense-- I don't think was on the radar of most finance ministers around the world up until about three or four months ago. It's getting a big lift as well.
- Yeah, absolutely. So there's always the talk about how Canada has been under-investing in defense. There's the NATO target of 2% of GDP. We were well under that. This budget probably won't get us even to that level either. So we are increasing spending in that area, but it's still under investing relative to what our target was before. And so this budget, yes, it's moving the needle a little bit. But it's really not something that we're paying attention to with respect to how much it's going to be getting to that target. I don't think we're going to be able to get the 2% target. This budget is very much clearly not going to do that.
- James, final question for you. Great run-through in terms of what we saw. What kind of reaction do you think we might see from this in terms of markets, currency? Does anything change, I think, for Canada's perception of how it operates?
- Yeah, that's a great question. When we're looking at the initial market reaction, it's pretty muted truthfully. I think a lot of this stuff was expected. We mentioned earlier in our discussion that a lot of this information was leaked, a lot of it is filling promises in the election platform. The numbers make a lot of sense. The numbers are actually showing that, for example, numbers like debt-to-GDP are declining significantly.
So with respect to government bond yields-- the Canada 10-year for example-- it's up maybe a basis point right now. So it's not moving very much, the Canadian dollar as well. One thing to consider, though, is we are looking at more spending. That's going to have to be funded from somewhere. We mentioned the bank. We mentioned that we know there's issues with respect to raising money through increasing taxes. But this is one area where we're actually going to be funding through debt.
And debt is going to be an issue because, remember, the Bank of Canada is embarking on quantitative tightening. So the government of Canada is going to be issuing debt. They have a lot of the gross issuance coming up in the next year at the same time that the biggest buyer of that debt is actually letting that stuff run off. And they're walking away. So that's something to consider when it comes to financial markets going forward.
- That's an excellent point. James, thanks so much for your time.
- Thank you.