At the start of the pandemic, the federal Liberals often proclaimed that Ottawa was taking on debt so that Canadians wouldn’t have to.
Hundreds of billions of dollars in added federal debt and an unprecedented rise in household savings were testament to the Liberals’ dedication to living up to that mantra.
Two years on, however, the rise of inflation has turned that mantra upside down. Now, you’ll have to cut your household budget – because Ottawa won’t cut its spending.
A new research note published today from the Bank of Nova Scotia spells out the economic logic behind that statement, as well as handily demolishing the well-worn line that supply-chain constraints, not fiscal stimulus, is the root cause of inflation in Canada and most other advanced economies.
Governments should not leave all the heavy lifting up to central banks, and should instead coordinate fiscal policy with monetary policy, wrote Jean-François Perreault, senior vice-president and chief economist at Scotiabank, and René Lalonde, director of modelling and forecasting.
As a starting point, the Scotiabank economists point out the obvious: Massive fiscal stimulus by governments across the globe avoided a catastrophic economic collapse in early 2020 but also subsequently boosted demand. There were kinks in global supply chains, to be sure, but the effect of those bottlenecks were magnified by fiscal stimulus.
Obvious as that point is, it’s not one that the federal Liberals are embracing. Finance Minister Chrystia Freeland still pointed to global factors as the root cause of inflation in her Thursday speech to the Empire Club of Canada. Questioned by reporters on the need to trim the federal budget, her response was: Been there, done that, in April.
But Mr. Perreault argues that more action is needed. Without a reduction in federal spending, the government will continue to compete with the private sector for relatively scarce goods and services, intensifying inflationary pressures.
The result is that the Bank of Canada will be forced to increase interest rates more than it would have otherwise, increasing the financial pressure on private-sector businesses and households. In essence, Ottawa is offloading its fiscal pain.
“There’s a tradeoff there,” Mr. Perreault said in an interview.
Rather than taking that path, Ottawa could pull back on its own spending, he said. That would not necessarily mean aiming for a balanced budget and would not entail cutting transfers to individuals. Instead, the federal government should focus on reducing its own purchases of goods and services. One of the most obvious examples: slowing down the pace of filling any vacancies in the civil service.
Draconian measures wouldn’t be needed to ease that burden. Consumption spending by all levels of government is forecast to rise by 4.8 per cent through to 2024, Scotiabank’s report says. If that spending rose by 2.5 per cent instead, the resulting fiscal room would be the equivalent of a 75-point hike in interest rates.
In that scenario, the Bank of Canada would only need to raise its benchmark rate to 2.25 per cent (from the current 1.5 per cent) to dampen inflationary pressures, rather than the expected 3 per cent. In turn, that would cushion the financial pain for consumers with variable-rate debt and reduce the risk of a recession.
Or to put it another way, Ottawa would be paring back its spending – so you don’t have to.
Taxing questions
Responding to last week’s Tax and Spend on the indexation of federal benefits lagging inflation, one online reader questioned the need to worry about delays in increasing Old Age Security and Canada Pension Plan payments, writing that relatively well off Canadians receive those benefits.
That’s true, particularly in the case of the CPP. Those payments are not clawed back for higher-income workers, although they are subject to income tax. OAS benefits, however, are slightly more targeted. Clawbacks start once an individual’s income exceeds $79,054, with the full benefit disappearing once an individual’s income reaches $128,149. (That maximum can be a bit higher for those who have deferred OAS benefits.)
Clearly, someone with nearly $80,000 could not be categorized as low income. What’s more, the clawback is not applied on a household basis, so a couple could have a joint income of nearly $160,000 before OAS payments began to diminish.
That makes it all the more curious why the Liberals chose to increase OAS payments by 10 per cent for seniors 75 and older, starting in July. The putative reason was to help out those struggling financially. If that were truly the case, there is a much more efficient way of doing so: the Guaranteed Income Supplement. The GIS is tightly targeted to low income seniors. Its clawback has a much lower ceiling, with payments fully clawed back once an individual’s income reaches $19,656 (excluding OAS payments).
The Liberals, if they had so chosen, could have taken the $1.66-billion cost of increasing OAS and given a much bigger boost in income to the poorest of seniors.
Line Item
A tax on nothing: When is nothing something? Tax time, is when. A recent Tax Court of Canada decision, highlighted in Tax Interpretations, illustrates that point. Back in October, 2007, the federal Conservative government announced that it would reduce the GST to 5 per cent from 6 per cent. The wording of that announcement indicated that the lower rate would apply “to any supply … made on or after January 1, 2008.”
A condo builder attempted to claim that the lower rate of 5 per cent should apply to yet-to-be-built units. But the judge found that the units had been supplied when buyers acquired the right to acquire a condo unit. That was true even though buyers did not have rights to a specific unit, and the project had not received site plan approval or a building permit. The fact that the project did not exist did not prevent it from being real enough to be taxed.
Unsubscribe from this newsletter
Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.
Sign up for the Tax and Spend newsletter here