‘Tis the season of giving in Canadian politics, as our government officials open not just their hearts, but also their wallets with taxpayer funds as we approach election season. Brace yourselves for the upcoming wave of holiday cheer in the form of stimulus checks and a temporary reprieve from the GST sales tax. It seems that our leaders are feeling extra generous this year, but what does this mean for our economy and the Bank of Canada’s rate cuts?

Canada’s Giving: GST Holiday and Stimulus Cheques Galore

• The Federal Government has declared a “GST holiday” on essential items from December 14 to February 15, 2025.
• Eligible goods and services for this tax break include restaurant meals, children’s clothing, video games, select alcohol, and Christmas trees.
• Workers earning less than $150k annually will receive a $250 cheque in the upcoming Spring.

But wait, there’s more! The province of Ontario is also spreading the holiday spirit with $200 cheques to taxpayers and an additional $200 for each dependent child claimed. What’s noteworthy is that there is no income cutoff for this program, which means a larger portion of the population will benefit.

Handing Out 0.3 Points of GDP: Canada & Ontario’s Generous Gesture

These stimulus initiatives may seem modest on an individual level, but when you look at the bigger picture, they pack quite a punch. The Federal cheques total a staggering $6 billion, while Ontario’s program amounts to $3 billion. Combined, they represent 0.3% of GDP—a substantial injection of funds into the economy.

BMO economists suggest that while a portion of the stimulus cheques may be saved, the GST/HST rebate is expected to drive additional consumer spending. Consequently, GDP growth projections have been revised upwards for the first quarter of 2025. This surge in economic activity is a welcome boost, especially in the lead-up to an election year.

Government Stimulus: Impacting Bank of Canada Rate Cuts

These expansive stimulus measures are typically employed during times of economic hardship, but that’s not the case this time around. With significant deficits and a robust economy, both levels of government are strategically leveraging these initiatives to stimulate demand further. However, this may cause some concern for the Bank of Canada.

Initially anticipating a substantial rate cut of 50 basis points, the market sentiment has shifted. The combined effects of new stimulus, a more cautious Fed stance, and an expected GDP revision have prompted a more conservative forecast of a 25 bp rate cut in December. This revised outlook is poised to reshape the direction of Canadian bonds in the coming months.

As we navigate through this flurry of fiscal activity, it’s evident that our political leaders are gearing up for a pivotal year ahead. The impact of these stimulus measures will undoubtedly shape the economic landscape as we head into the upcoming election season. So, buckle up, Canada—it’s going to be an eventful ride towards a brighter financial future.