Canada’s fiscal course is shifting toward a methodical, incremental contribution to economic activity, according to a new report authored by CIBC economists Ali Jaffery and Avery Shenfeld. The paper stresses that although Ottawa’s spending decisions attract public attention, provincial governments collectively represent a larger aggregate spending footprint and their discipline matters materially for the national fiscal impulse.
With further easing of interest rates appearing unlikely, the economists argue that any policy-driven boost to growth will arrive mainly through the delayed effects of earlier rate cuts and enacted fiscal measures. The authors emphasize the importance of scale when assessing economic impact - noting that understanding the magnitude and timing of the fiscal lift requires careful number-crunching.
Jaffery and Shenfeld’s calculations indicate the near-term contribution from fiscal measures - including multiplier effects - will initially amount to a few tenths of a percentage point added to the annualized real GDP growth rate in coming quarters. That contribution is expected to build over time and could reach roughly a half percentage point by the end of 2027 as capital spending projects ramp up.
The report highlights how federal spending has grown as a share of output, rising from about 10% of GDP before the pandemic to a projected 14% more recently. By contrast, provinces are generally working to curb deficits to meet their fiscal targets, which tempers the aggregate fiscal impulse relative to what a fully expansionary stance across all levels of government would deliver.
A substantial portion of the anticipated gain comes from the "G component" of GDP - direct government expenditures such as civil service compensation and public infrastructure work. The economists point out that if publicly funded projects successfully "crowd-in" private investment, the effect could lift Canada’s long-run potential output by around 0.25 percentage point.
However, the report underscores that the ultimate payoff hinges on execution - the timely delivery of capital projects and a regulatory environment that facilitates private participation. In their assessment, the stimulus is unlikely to produce a dramatic short-term turnaround; instead, it represents a meaningful, though measured, contribution to an economy currently expanding at a mid-1% pace.
Implications for markets and sectors
- Infrastructure and construction activity stand to benefit as capital projects are implemented.
- Public-sector compensation contributes to the government-spending component of GDP.
- If projects attract private spending, broader equipment, engineering and materials sectors could see positive spillovers.