Federal spending is fueling inflation, but it’s worth it: Desjardins – National

A new report calls on Ottawa to stick to its spending plans amid criticism that the federal government is not doing enough to tackle soaring inflation, while some experts suggest policymakers could clamp down excessive prices without adding fuel to the fire.

Decades-high levels of inflation in Canada have mounted political pressure on Ottawa in recent weeks.

A Scotiabank report earlier this month accused federal authorities of abandoning their « joint responsibility » to reduce inflation with the Bank of Canada and of « doing nothing » to significantly reduce pressures on the costs.

These projections indicated that if Ottawa reduced its planned spending increases over the next few years, the Bank of Canada would not have to raise interest rates as high, which could save economic difficulties in the months to come.

While most economists point to the war in Ukraine and other supply constraints keeping inflation high through the first half of 2022, many also point to the role of increased government spending – as well that of the lowest interest rates – during the pandemic as having stirred up the inflationary environment in the first place.

Former Bank of Canada Governor Stephen Poloz justified emergency monetary and fiscal policies with the analogy that no one blames firefighters for using too much water when saving the house.

« At the end of the day, that’s to some extent what we’re seeing now is people looking back and saying, well, that was probably more than we needed, and that helps current inflation, » Randall Bartlett, senior director of the Canadian economy at Desjardins, said in an interview with Global News.

Bartlett is the author of a report released Thursday that attempts to respond to criticisms of government spending and inflation.

The report did not deny the role that the Canadian government – and indeed governments around the world – have played in fueling the current inflationary pressure as part of a global effort to protect the economy from steep downturns in the pandemic.

But Bartlett and his colleagues write that while spending is part of what got the world into this mess, intense austerity isn’t necessarily the answer.

“While we agree that past and ongoing federal spending is contributing to inflation, we believe it would be a mistake for the federal government to cut spending from its current fiscal plan,” says The report.

Desjardins noted that while spending as a share of Canada’s gross domestic product is expected to remain high in coming years, indexed to inflation, projected increases in federal spending are expected to be roughly flat.

Deputy Prime Minister and Minister of Finance Chrystia Freeland also defended the 2022 federal budget against such criticism and said last week that she had refused to announce new spending to help Canadians cope with the crisis. cautious inflation.

“We understand that fiscal policy has a role to play. That’s why we made this decision in April to continue on the path of … fiscal tightening,” she told reporters.

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Bartlett noted in the report that avoiding higher interest rates in an effort to lessen the impact on Canadians would circumvent the vital role that rate hikes play: slowing down Canada’s fiery economy, particularly the market of the dwelling.

Since the central bank launched its rate hike cycle a few months ago, cities across Canada have seen the rampant growth in house prices due to the pandemic slow considerably as the costs of mortgages and borrowing increase. .

« This is a correction that must occur to improve housing affordability and reduce vulnerabilities in the Canadian economy, » the report said.

If the government embarked on yet another austerity drive, Bartlett wonders where it would find the cuts.

Reducing social spending for the most vulnerable Canadians, for example, would be a mistake in his view. Programs that provide additional spending in Budget 2022, such as an increase in Old Age Security and Canada Child Benefit payments, can help low-income households « get through this period of uncertainty and economic hardship, » he said.

“People at the bottom of the income scale are feeling the effects of higher inflation the most. And that’s a big part of why we don’t think the federal government should engage in aggressive austerity at this point,” he said.

Instead of cutting spending, there are policies Ottawa could put in place that would help slow the economy, experts say.

David MacDonald, senior economist at the Canadian Center for Policy Alternatives, told Global News that the recovery from COVID-19 has seen corporate profits among oil and gas producers and some grocery chains soar.

Wages, meanwhile, have not kept pace with inflation, suggesting that companies are seeing their profits rise at the expense of the consumer.

« It may well be that the business sector simply has more ability to raise prices much faster than workers are able to raise their wages to try to keep pace with inflation, » MacDonald said. « So the companies got ahead of that, in essence. »

While the last budget provided for the introduction of a 1.5% surtax targeting banks and life insurance companies, MacDonald argues that such a tax should apply to all corporate profits in Canada, whatever the sector.

Proceeds from such a tax could fund support programs for low-income Canadians struggling with inflation, he suggests.

Armine Yalnizyan, an economist and researcher at the Atkinson Institute, told Global News that the call to cut government spending is a « useless argument » because the ultimate causes of inflation are supply-side and inherently world.

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She said Ottawa can play a bigger role in monitoring « price gouging » in sectors where there is little competition and where consumers buy essential goods.

“Governments can and should pay more attention to how prices are set in sectors that don’t have much competition. It would be the grocery store. That would be mining. It would be gas. Gasoline prices at the pump. There are very few players in these markets,” she said.

Whether economists or consumers are pointing the finger at the federal government or the Bank of Canada for stimulating demand or for not acting quickly enough to curb inflation, Yalnizyan said the hard truth is that neither the other doesn’t have as big a role to play in global price pressures as critics will say.

“What can the federal government do? … What can central banks do? There are some things they can do, but it’s limited,” she says.

“We won’t get out of this until the pandemic subsides and the war, Russia’s invasion of Ukraine, is converted into peace. It is as simple and as complex.

– with files from Anne Gaviola of Global News