Fiscal multipliers
This additional analysis provides PBO’s updated estimates of the potential impacts of revenue and spending measures on the Canadian economy.
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
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 normalize[^1] as inflation remains close to its 2 per cent target and the economy gradually absorbs excess capacity over the medium-term.
Our estimates assume that monetary policy would respond to new fiscal policy measures. The table below summarizes fiscal multipliers based on the macroeconomic and fiscal model used in PBO’s October 2024 Economic and Fiscal Outlook.
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.[^2]