With Canada’s debt and interest payments rising, the federal government pledged this week to exercise restraint in spending.
The announcement, which came Tuesday in the government’s Fall Economic Statement, comes amid rising pressure for Canada to avoid fueling inflation with more spending, especially as the Bank of Canada embraces tighter monetary policy to restrain price increases.
The good news in the fall economic update? Canada is poised to avoid a recession, as we expected. The bad news? With high interest rates, the cost of borrowing is high, not just for households and businesses, but also for governments.
Housing
But if there was one place to spend, that would be to address the acute shortage of housing, which has become increasingly unaffordable for many households.
October’s consumer price index report showed that the bulk of current inflation comes from housing. Excluding shelter, inflation is already back down to 1.9%. Rental prices increased by 8.2% on a year-over-year basis, which highlights the shortage.
To address the housing crisis, the Canadian government committed to invest an additional $15 billion in loans for apartment construction and $1 billion in the Affordable Housing Fund—all of which is aimed at increasing supply.
Put simply, housing policies can be split in two buckets: those that boost housing supply and those that do not. In the long run, policies that boost supply work.
The government also proposed steps to restrict short-term rentals in an effort to have them converted to long-term rentals for residents.
But federal spending alone is not enough to solve the housing puzzle. The proposed funding would add more than 100,000 units to the market, a fraction of the 3.5 million units needed by 2030, as estimated by CMHC.
In addition to government spending, regulation reform that makes building easier, faster and cheaper could be more effective in increasing supply and achieving affordability.
Clean energy
The economic statement also outlined expanded tax credits to encourage clean energy systems, specifically those that produce electricity and heat from waste biomass. Tax credits are a crucial tool that can spur private investments and propel Canada toward a decarbonized future.
Yet Canada has been behind other nations when it comes to clean technologies. More than a year ago, the U.S. Inflation Reduction Act was signed into law, kickstarting unprecedented flows of private investments in clean energy.
To remain competitive in the global market and have a shot at meeting climate targets, the federal government will need to move faster on implementing a clean electricity investment tax credit, as well as additional policies meant to encourage climate investments.
The takeaway
The federal government is not immune to rising borrowing costs, and will need to exercise restraint to avoid getting in the way of monetary policy. Still, investments in housing and clean energy remain crucial for Canada’s growth.
