Canada’s Parliamentary Budget Officer (PBO) has updated estimates of fiscal multipliers on 20 November 2024.
To assist parliamentarians’ deliberations of the current economic and fiscal situation, this additional analysis provides PBO’s updated estimates of potential impacts of government spending and tax measures on the Canadian economy.
Fiscal multipliers provide an estimate of the potential impact of government policy measures on the economy. They are defined as the impact on real gross domestic product (GDP) from a permanent one‑dollar increase in budgetary measures (that is, new spending or tax reductions).
Different macroeconomic models will typically generate different estimates of fiscal multipliers.
Depending on the economic context, monetary policy may respond to new budgetary measures to prevent the economy from overheating and inflation rising above its target.
Macroeconomic conditions in Canada have evolved considerably since PBO last published its fiscal multiplier estimates during the post-Covid economic recovery in 2021. Interest rates are projected to normalise as inflation remains close to its 2% target and the economy gradually absorbs excess capacity over the medium term.
PBO’s updated fiscal multiplier estimates are lower than those published in 2021. These differences primarily reflect our assumption that, unlike in 2021, when the economy was grappling with the uncertainty of the COVID-19 pandemic, monetary policy will respond to offset some of the economic impact of fiscal policy on real GDP and inflation.
The PBO’s estimates reveal that personal income tax measures have a first-year multiplier of CAD 0.30, while corporate income tax measures have the lowest at CAD 0.20 per dollar in the first year.
Business investment measures have a first-year multiplier of CAD 0.60, while measures targeting low- and modest-income households generate CAD 0.70 in GDP increase per dollar spent. Tax credit policies for these households generate CAD 0.70 in GDP for every dollar invested within the first year.
