As Canadians struggle with record gas prices and rising food costs, the Liberal government is under pressure from the Conservatives and NDP to ease the cost-of-living crisis. But analysts say neither of those parties’ proposals nor the government’s actions are anything other than stop-gap measures, which don’t deal with the underlying problems. They add that government belt-tightening would help the Bank of Canada get red-hot inflation under control.
Philip Cross, former chief economic analyst at Statistics Canada and Munk senior fellow at the Macdonald-Laurier Institute, says proposals from the Opposition Conservatives and the NDP may be popular but won’t remedy the broader inflation problem and can actually make it worse.
“What’s driving up gas prices is not the price of crude oil. It’s the lack of refining capacity. So anything that increases the demand for refined petroleum products is just going to make things worse, whether it’s gas [tax] holidays or putting more money in people’s pockets,” he told The Epoch Times.
What the Liberals say they’ve done is to pass Bill C-8, which provides tax relief to teachers, farmers, and Northerners, among other measures. It received royal assent on June 9. Finance Minister Chrystia Freeland also touted Bill C-19, legislation to implement many of the government’s Budget 2022 commitments.
As an example, “[Bill C-19] will put money back in the pockets of Canadians more regularly, by moving the Climate Action Incentive payments to quarterly payments,” she said on May 31.
Whether it’s tax cuts or credits or paying people, Carleton University business professor Ian Lee suggests that if the feds do anything more, it should be income-based targeted support, such as focusing on the lowest-earning 40 percent of Canadians.
“People are suffering. That calls for a targeted solution,” he told The Epoch Times.
However, Lee adds that inflation has worsened due to government spending when the economy is overheating and that the Conservatives’ and NDP’s proposals are “band-aid solutions” that don’t solve the fundamental issue.
“So maybe at the same time, they [the feds] could say we’re going to reduce spending in other areas for all the income support programs, because all the jobs have been recovered,” Lee said.
Central banks have to contend with a number of factors—both domestic and international—that pull inflation away from the 2 percent target. The Bank of Canada and other central banks have been wrong in their forecasts and expectations repeatedly, but they are now taking decisive action to dampen excess demand by rapidly raising interest rates.
“At the end of the day, it’s the Bank of Canada’s responsibility to control inflation. It’s not the government’s. It’s not up to their fiscal policy, [though] fundamentally fiscal policy can help out at the margin,” Cross said.
“If we keep mailing out $500 cheques to everybody, and cutting gas prices in Alberta to the degree we keep doing, we’re meant to be saying to the Bank of Canada it’s entirely up to you to do your job and reduce demand even more,” he added.
Lee says that at least the Bank of Canada now realizes there’s a problem and is doing something about it, whereas the government continues to spend and makes the central bank’s job harder.
“Our biggest problem right now is on the fiscal policy side. On the monetary policy side, they are going down the right road finally, belatedly, a year late, yes, but at least they’re going down the right road,” he said.
Popular but Flawed
“New Democrats have been calling on the Liberals to stop stalling and immediately get between $500 and $1000 in peoples’ pockets by doubling the GST tax credit and increasing the Canada Child Benefit,” NDP leader Jagmeet Singh said on June 10.
Interim Conservative leader Candice Bergen has instead been pushing the government to suspend GST on fuel and countering the NDP by saying more child benefit payments won’t be good enough to alleviate the cost-of-living crisis.
“We need to see a government that recognizes people don’t need a cheque from the government. They need taxes cut; the best way to provide relief for Canadians is cut their taxes,” she said on June 7.
According to Lee, another idea that’s been put forth by the NDP to help struggling Canadians is flawed.
“The NDP has been calling on the government to stop protecting corporate profits and redistribute money to hardworking Canadians by extending the excess profit tax on financial institutions to include big oil and gas companies and huge corporations making record profits,” Singh said on June 7.
Lee says this will just encourage investors to spend their dollars elsewhere and Canada won’t get the capital it needs to strengthen and grow its economy.
“It’s a terrible idea because what we’re doing is we’re saying that if you become successful, we’re going to discriminate against you for being successful,” he said.
“Companies are increasingly voting with their feet to take capital and invest it outside of Canada.”
Entrenched or Not?
Bank of Canada deputy governor Paul Beaudry said in a June 2 speech that “international developments have pushed inflation the most over the past year.” He referred to the global recovery from the pandemic sparking supply shortages in energy, electronics, and consumer goods, and the war in Ukraine causing prices to surge even higher.
Beaudry’s view is similar to that of the Parliamentary Budget Officer’s June 7 inflation monitor report, which stated that “supply or sector-specific issues are a key driver of high inflation.” The fiscal watchdog elaborated that if inflation was more broad-based, it would be consistent with having stronger total demand being its primary driver.
Beaudry made it clear that the BoC doesn’t believe inflation has become entrenched yet.
“History shows that once high inflation is entrenched, bringing it back down without severely hampering the economy is hard,” he said.
But Cross says inflation is getting awfully close to becoming entrenched, after which point it becomes very difficult to get under control. He explained that inflation becomes entrenched when it gets reflected in wages.
“That tightness that we’re seeing in labour markets is starting to show up in some measures of wages. … It’s not fully entrenched.”
Average hourly wages rose 3.9 percent annually for the year ending in May, which Cross says is worrisome. Canada added 40,000 jobs in May, the unemployment hit a new record low of 5.1 percent, and the number of unfilled positions has topped 1 million.
“If we keep a lid on wages, there’s a chance that maybe early next year, maybe we'll start to see inflation come down into the 4 percent or 5 percent range,” Cross said.
Ontarians can expect some relief at the pumps from July 1 to Dec. 31, when gas and fuel taxes will be reduced, by 5.7 cents per litre and 5.3 cents per litre respectively.
The United States is facing a similar problem, and the Internal Revenue Service has increased the standard mileage rates for the second half of the year. These are used to calculate tax deductions for the use of a vehicle in a business.
“There’s just no reason to think that our prices are going to come down anytime in the short term,” Cross said.
