Canada's new Government spending supports an improved growth outlook

On Tuesday last week, Canadian government unveiled its first budget in which a number of new spending initiatives were introduced. The Budget is well designed to support the middle class and the economic impact may be significant. The Canadian Government estimates the growth impact of its Budget measures to raise real GDP by 0.5% per year for FY17 and FY18. Thought the estimate is likely overly optimistic, the budget supports an improved outlook.

"Government spending, together with robust near-term economic momentum, has led us to upgrade our growth outlook for Canada. Real GDP is expected to grow by 1.9% this year, ticking up to 2.0% growth in 2017," says TD Economics in a report to clients.

There is a significant increase in program expenditures in the current plan. From FY16 to FY18, the planned rise in program spending totals almost $51 billion, contrasting with the $5½ billion increase over the five years to FY15. Relative to the February PreBudget Update, policy measures total $11 billion in FY17 and $13.5 billion in FY18.

"The budget and a stronger start to 2016 for the Canadian economy should reduce the odds of a cut by the Bank of Canada. We continue to believe that the next move will be a rise in interest rates, but only in mid-2017," notes Scotiabank in a report.