Cutting spending could help fight inflation, but Trudeau won’t

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The Bank of Canada must do something about inflation; however, it is the only tool the government uses, and it will hit many like a wrecking ball.

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On Wednesday, the bank announced its latest interest rate hike of 75 basis points, taking the overnight rate from 2.5% to 3.25%.

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Bank officials have also promised further hikes in the coming months.

At the start of the year, the rate was 0.25%, where it had been since March 2020. We have been through an unusually long period of low interest rates, the last time the rate was as high as it is currently, it was in the spring of 2008.

According to calculations by Lowestrates.ca, people who bought homes earlier this year at the local average price and used an adjustable rate mortgage could see huge increases in monthly payments as a result of this rate hike. . In Toronto, they calculate that the average payment increases by $351 per month; in Vancouver, $394 per month; in Calgary, $194 per month; and in Edmonton, $146 per month.

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This is for people who have adjustable rate mortgages. Those who have made payments in recent years on low fixed rate mortgages and are about to renew will see huge jumps. Homeowners are poised to pay a heavy price as the Bank of Canada seeks to tame inflation, but they are not alone.

Personal and business lines of credit are about to become more expensive to maintain, as are many credit card balances.

Interest rate hikes shouldn’t be the only tool

The Trudeau government has been warned about inflation for over a year now and has done nothing to act, leaving everything to the central bank. Last June, Scotiabank called on the Trudeau Liberals to cut government spending to help the bank fight inflation.

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« Lower government spending on goods and services could help reduce inflation, » the Scotiabank report said.

Chrystia Freeland, Trudeau’s finance minister and deputy prime minister, dismissed that idea at the time, saying she had already done her part by ending COVID support measures. It’s true that these COVID measures have ended, but government spending is still on the rise, from $317 billion in total spending in the 2016 budget to $428 billion in the 2022 budget.

That’s a massive increase of $111 billion.

Even adjusting for inflation, in constant 2022 dollars, spending rose $52 billion after the government said it tightened its belt and ended COVID relief programs. Increasing spending by 14% in 2022 constant dollars will lead to inflation — it will inevitably happen — and everyone can see that except the Trudeau government.

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Over the past few months, the Trudeau government has tried to blame all the blame for inflation on outside forces. Supply chain disruptions due to COVID-19 and Russia’s invasion of Ukraine are the most cited sources, and while there is some truth to this, it is not. is not the whole story.

Government spending has contributed to the growth of inflation, both domestic and international factors are at play, and anyone who says it’s just one of those factors while denying the other isn’t telling you the truth. Now comes a disturbing report from TD Economics.

In a note to clients regarding the Bank of Canada’s interest rate hike, TD Bank Chief Economist Beata Caranci and Senior Economist James Orlando say domestic factors are becoming the « main influencer on the inflation situation in Canada.

What’s worse is that inflation is now hitting the services sector rather than just the goods sector, and that will keep inflation high for some time.

Freeland was asked what her government would do about inflation and whether the central bank raising interest rates was the best idea at the time, but she offered little more than platitudes. The Trudeau government’s message: move on.

That’s what you get when you elect a prime minister who doesn’t think about monetary policy.