In order to ease the pain of those hurt most by high inflation, Justin Trudeau has decided to extend the pain of everyone.
At least, I assume it’s a conscious decision. I assume the federal government’s experts and advisers understand the economic implications of the $4.6-billion inflation-relief package that the Prime Minister unveiled this week. I assume he has been well briefed about the trade-off that this involves.
Because what Mr. Trudeau has just announced amounts to a fiscal stimulus for an economy that needs no stimulation. Quite the contrary. The economy is already running too hot – too much demand for goods and services, not enough supply to meet it – a condition that has been fuelling the very inflation condition from which this package is meant to provide some respite.
The new supports – a temporary increase of the Goods and Services Tax credit, increased rent supports, a new dental benefit for uninsured children – will, to some degree, lend a hand to the lowest-income Canadians who most acutely feel the strain of this year’s 40-year-high inflation. In doing so, they will, effectively, deliver more demand to an economy that already has more than it can handle.
This will contribute to higher inflationary pressures for longer. It will mean higher interest rates for longer, too, as this fiscal stimulus leans against the efforts of the Bank of Canada to use rate increases to slow demand and restrain economic activity. Bottom line: This will prolong the inflation fight, and the pain, for all Canadians, even as these supports mitigate the pressures on those most in need.
“The problem with spending more money as a solution to inflation is that it simply pours more gasoline on the inflationary fire,” Conservative Leader Pierre Poilievre said in reaction to the announcement.
He’s absolutely right. But that doesn’t automatically make it bad policy.
It’s certainly consistent with the position espoused by this government to have the backs of Canadians who have struggled, and continue to struggle, with the COVID-19 pandemic and its economic aftershocks. If everyone bears the cost of lending a helping hand to those less fortunate, in the form of all of us living with elevated inflation and its ramifications for a bit longer, then maybe that’s reasonable. As long as you understand that choice.
And while this package does amount to a degree of fiscal stimulus, it should be put in some perspective before we bemoan its inflationary contribution too stridently. The $4.6-billion is equivalent to about 0.2 per cent of gross domestic product. As far as inflationary fiscal stimulus goes, this is not big.
In fact, the government has been a beneficiary of rising inflation, as higher prices for goods and services have contributed to higher tax revenues. Those gains to the budget bottom line are on track to far outweigh the cost of these relief measures. It seems both reasonable and affordable to pass some of that windfall back to the country’s most stressed households.
Still, Ottawa’s contribution to total consumption and economic activity is still considerably elevated in the wake of the COVID crisis, even though the vast bulk of its supports introduced in the crisis have ended. Federal spending as a share of GDP is about 17 per cent this year, compared with 13 per cent to 15 per cent for most of the decade before the pandemic.
Simply put, the government is placing more demand on the Canadian economy than it has in years, outside of a recession – and it’s doing so at a time when supply can’t keep up. The inflation-relief measures exacerbate that – perhaps only a little. But nevertheless, it moves the needle in the wrong direction in terms of helping ease broader inflation pressures.
In doing so, Ottawa may be at least as motivated by political priorities as economic ones. It has been under considerable pressure from critics and opponents, who have said the Liberals have been complacent, even in denial, about the inflation problem. And the dental benefit addresses the party’s pledge to the NDP, its supporter in a minority government, to move forward on a public plan – a move that looks more like political self-interest than economic policy.
The Bank of Canada, which has been aggressively raising interest rates over the past six months in an effort to cool demand and slow inflation, has argued that the best way for it to help the most Canadians is to bring inflation back down to earth. For the central bank, the trade-offs – a slower economy, higher borrowing costs, strains on the most indebted households and businesses – are the price that must be paid to achieve the bigger goal, for the greater benefit.
The government has just leaned the other way. Let’s hope it is doing so with its eyes wide open, and for the right reasons. This is the wrong time to let fiscal policy lose sight of the bigger picture, even if it must keep the country’s most vulnerable in view.