Federal government needs to act responsibly on inflation

The latest data published by Statistics Canada are unequivocal: The country is being buffeted by surging inflation, which hit 7.7% for the month of May, a 39-year high. Faced with this serious situation that weighs heavily on all Canadians, measures must be adopted to pull inflation back down — first of all, increasing the Bank of Canada’s policy interest rates at the next scheduled announcement in July.

While the 0.9-percentage-point increase in the inflation rate from April to May this year is mainly attributable to exploding fuel prices, let’s not forget that the federal government, with its massive and profligate spending, has played a significant role in bringing about the current situation.

Dousing the spending inferno

The current federal government has spent astronomical sums of money, not only to support the population in a time of crisis, but also (and herein lies the problem) on new programs. These have further expanded Canada’s net federal debt, which topped $1.26 trillion in 2021-22.

The effect of these new programs, along with the excessive growth of the machinery of government, all largely facilitated by the Bank of Canada’s very loose monetary policy, was to stimulate aggregate demand. This created a disequilibrium between the supply of goods and services and the demand for them in the Canadian economy, thus leading to generalized price inflation.

Claiming that these expenditures are good for the population, as the government has done, is therefore disconnected from reality. Indeed, this spending ad nauseum has acted like a veritable fire, seriously harming the Canadian economy. What’s more, the lack of any timeframe for returning to a balanced budget shows how little importance is placed on the sound management of public finances by current policy-makers.

The Bank of Canada, for its part — after having fanned the flames and then having failed to sound the alarm — is at least now trying to play the good firefighter and douse the inferno. Of course, this has some negative repercussions on Canadian families, since water not only extinguishes fire, but also damages wood.

Interest rate increases have a non-negligible impact on people with mortgages, especially those who bought properties in the overheated housing market of the past two years. Higher rates have an impact, too, on companies that have borrowed money to fund their operations. While the priority is indeed to put out the fire, the negative side effects of doing so could be mitigated with certain wise policy measures.

Let’s suspend the gas tax

The current price of fuel being particularly elevated, and having a direct impact on Canadians’ wallets — especially retirees and the less fortunate — a measure that would give the population some respite would be suspending federal fuel taxes. Following U.S. President Joe Biden, who decided to suspend the 18‑cents-per-gallon federal gasoline tax for three months, the Canadian government could and should also suspend the 10-cents-per-litre federal gas tax.

Canada’s Natural Resources Minister Jonathan Wilkinson, though, quickly brushed aside any possibility of coming to the aid of Canadians by eliminating this tax. In the meantime, provincial governments should suspend their own special fuel taxes, as Alberta has done with success.

It is not unreasonable for the population, hit hard by inflation and rising interest rates, to expect that the government, having precipitated this situation with its excessive spending for so long, should get its fiscal house in order, all while adopting targeted measures like the suspension of fuel taxes to give Canadian families a little relief. The time to act is now, but some don’t seem to have gotten the memo.

Gabriel Giguère est analyste en politiques publiques à l’IEDM et Olivier Rancourt est économiste à l’IEDM. Ils signent ce texte à titre personnel.