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Spending sprees by governments across Canada help fuel inflation and high interest rates

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4 minute read

From the Fraser Institute

By Jake Fuss and Grady Munro

While the prime minister and many premiers justified their high spending levels during the pandemic as merely a temporary development, the federal government and seven provincial governments still plan to run budget deficits this year

Earlier this year, premiers in Ontario, British Columbia, and Newfoundland and Labrador wrote  letters to Tiff Macklem, Governor of the Bank of Canada, cautioning against further interest rate hikes, citing the potential negative effects on residents including homeowners with mortgages. But instead of blaming the central bank, Canadian premiers—and the prime minister—should stop their spending sprees, which help fuel inflation and increase interest rates.

Indeed, when governments increase spending, particularly when financed by debt, they add more money to the economy and can help fuel inflation. And high rates of government spending put pressure on the Bank of Canada to maintain interest rates at current levels, or even hike the rate further, to counteract inflation. According to a recent report from Scotiabank, government spending has contributed significantly to higher interest rates in Canada, accounting for an estimated 42 per cent of the increase in the Bank of Canada’s rate since the first quarter of 2022.

Yet the spending sprees continue.

While the prime minister and many premiers justified their high spending levels during the pandemic as merely a temporary development, the federal government and seven provincial governments still plan to run budget deficits this year. Government spending across the country remains at elevated levels or, in some cases, even increased beyond pandemic levels.

Ontario is a prime example. Provincial program spending (total spending minus interest costs) will reach an estimated $193.0 billion in 2023/24—$24.0 billion more than at the peak of COVID. Debt interest costs have also grown due to debt accumulation and rising interest rates.

Despite a considerable increase in revenue over recent years, the Ford government had planned for a $1.3 billion deficit in its spring budget. By November, the government increased spending again and quadrupled the projected deficit to $5.6 billion.

Similarly, British Columbia outlined plans in February to increase program spending and run a $4.2 billion deficit while adding $13.1 billion in debt to the books this year. Just over a half-year later, the B.C. government increased spending again and the deficit was revised to $5.6 billion with debt rising by $14.0 billion instead of $13.1 billion.

Prime Minister Trudeau and his government followed a similar path. According to the recent federal fiscal update, between 2024/25 and 2027/28, the government has increased projected spending by $30.7 billion more than previously forecasted.

According to projections, only two provinces (Alberta and New Brunswick) will run budget surpluses this year, but in Alberta this is largely due to elevated resource revenues stemming from high commodity prices rather than any significant spending restraint. If resource revenues declined to historical average levels, the Smith government in Alberta would likely run deficits similar to other provinces.

Simply put, the excessive spending habits of many premiers and the prime minister are a big reason why interest rates have climbed and inflation remains sticky.

If Canadian politicians want to help tame inflation and bring down interest rates, they should look in the mirror for solutions and show leadership. Complaining about elevated interest rates helps no one, but ensuring fiscal policy is rowing in the same direction as monetary policy would be a good start.

Business

Musk: X to sue groups that conspire to boycott conservative news sites

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From The Center Square

“That system guarantees that advertising dollars flow only to left-leaning media brands.”

Tesla founder and X owner Elon Musk said Thursday he plans to file a lawsuit against a collaboration of people and organizations that work to prevent advertising dollars from going to conservative news media brands.

Musk announced his intention on X while sharing video of Daily Wire co-founder Ben Shapiro’s Congressional testimony on the topic from Wednesday.

“Having seen the evidence unearthed today by Congress, 𝕏 has no choice but to file suit against the perpetrators and collaborators in the advertising boycott racket,” Musk wrote. “Hopefully, some states will consider criminal prosecution.”

At Wednesday’s House Judiciary Committee hearing on “Collusion in the Global Alliance for Responsible Media,” Shapiro told lawmakers that legacy media and their political allies conspire with online advertising gatekeepers to paint conservative news organizations as “dangerous,” limiting their opportunity to receive advertising revenue.

“There is in fact an internal pressure system created by Democratic legislators, this White House, legacy media, advertisers and pseudo-objective brand safety organizations,” Shapiro testified. “That system guarantees that advertising dollars flow only to left-leaning media brands.”

Shapiro identified the Global Alliance for Responsible Media (GARM) as one of those gatekeepers of online advertising revenue.

“In reality, GARM acts as a cartel. Its members account for 90% of ad spending in the United States, almost a trillion dollars,” he testified. “In other words, if you’re not getting ad dollars from GARM members, it’s nearly impossible to run an ad-based business. And if you’re not following their preferred political narratives … you will not be deemed brand safe. Your business will be throttled.”

​Dan McCaleb is the executive editor of The Center Square. He welcomes your comments. Contact Dan at [email protected].

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Artificial Intelligence

Elon Musk is building the ‘most powerful Artificial Intelligence training cluster in the world’

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News release from The Deep View

Elon Musk’s xAI has ended talks with Oracle to rent more specialized Nvidia chips — in what could have been a $10 billion deal — according to The Information.
Musk is instead buying the chips himself, all to begin putting together his planned “gigafactory of compute.”
The details: Musk confirmed in a post on Twitter that xAI is now working to build the “gigafactory” internally.
  • Musk explained that the reason behind the shift is “that our fundamental competitiveness depends on being faster than any other AI company. This is the only way to catch up.”
  • “xAI is building the 100k H100 system itself for fastest time to completion,” he said. “Aiming to begin training later this month. It will be the most powerful training cluster in the world by a large margin.”
xAI isn’t the only one trying to build a supercomputer; Microsoft and OpenAI, also according to The Information, have been working on plans for a $100 billion supercomputer nicknamed “Stargate.”
Why it matters: The industry is keen to pour more and more resources into the generation of abstractly more powerful AI models, and VC investments into AI companies, as we noted yesterday, are growing.
But at the same time, concerns about revenue and return on investment are growing as well, with a growing number of analysts gaining confidence in the idea that we are in a bubble of high costs and low returns, something that could be compounded by multi-billion-dollar supercomputers.
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