Canada doesn’t need austerity to fight inflation, although there is “little doubt” that federal spending during the pandemic has amplified the phenomenon, Desjardins concludes in a study published Wednesday.
That’s largely because of Justin Trudeau’s administration’s ambitions in the last budget to gradually reduce spending on federal programs, according to Desjardins senior director for Canada’s economy, Randall Bartlett.
The paper, entitled “Federal spending: neither the sole cause of inflation nor the solution to the problem,” insists that the federal government no longer has much leeway to make major cuts.
“As COVID-19-related expenses quickly disappear in the rearview mirror, other big common expenses — transfers to individuals, transfers to other jurisdictions, and direct program expenses (DPCs) — would be the crucial ones,” explains Mr. Bartlett.
However, this spending is more likely to help those most at risk in dealing with the pandemic, as well as the provinces responsible for the most expensive sectors of administration, namely health and education.
“Pandemic-related programs are phasing out, and traditional household income-support spending is sitting idle thanks to an overheated Canadian job market. We can therefore ask ourselves where the supporters of a stronger austerity policy would like the federal government to make cuts,” explains the economist.
He concedes that “adding new spending would be a mistake” but that “at this time of high inflation and rising interest rates, measures aimed at mitigating the erosion of the purchasing power of vulnerable households are welcome”.
Treasury Secretary Chrystia Freeland recently indicated that while the federal government has a role to play in fighting inflation, that task primarily falls to the Bank of Canada, which is one of its mandates.
Not everyone has the same opinion.
In a paper released June 19 by Scotiabank for its investors, economists argued that federal spending is making it harder to fight inflation.
They also think the Bank of Canada’s dazzling rate hike is shifting the burden of fighting inflation to the private sector, while the government could play a more important role.
“Lower government consumption would lead to a lower policy rate and relieve some of the adjustment burden on the private sector,” say the authors of the Scotiabank report.
Recall that inflation hit 7.7% on an annualized basis in May, the highest since 1983.
Minister Freeland presented a five-point anti-inflation plan. The plan is valued at US$8.9 billion and consists primarily of direct relief efforts for Canadians.