Central bank issues stimulus warning: Bank of Canada cautions provinces, Ottawa on plans for budget surpluses: The Bank of Canada has issued a rare warning to federal and
provincial governments that they should not use their windfalls to take
actions that would overheat the Canadian economy and provoke
inflationary pressure.

The economy is operating at close to capacity, a senior bank
official said yesterday, and governments — some of which are
unexpectedly flush with cash this year — need to keep this in mind
when making fiscal decisions.

…

While the Bank of Canada’s comments are too late to sway much in
terms of government spending and taxation policy this fiscal year,
governments are now gearing up for next year’s budgets. As well,
elections are pending in Ontario, and possibly Quebec and at the
federal level as well — which usually mean higher levels of spending.

"It’s more of a warning into next year’s budget season," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

The central bank probably wants to avoid a repeat of the 1980s, when
monetary policy was trying to slow down the economy but governments,
especially Ontario, were spending money as fast as it came in, he said.

"It’s a preliminary shot," said Peter Dungan, economics professor at
the University of Toronto. "It reinforces the idea that we are close to
capacity, so don’t rock the boat."

On the other hand, if the US economy does slow down over the next few months and reduces imports from Canada, then that extra fiscal stimulus could be useful in maintaining aggregate demand.