Federal spending causes inflation, but it’s worth it: Desjardins – National

A new report urges Ottawa to stick to its spending plans amid criticism that federal government not enough to resist the increase inflationarywhile some experts say policymakers can prevent price gouging without adding fuel to the fire.

Decade high inflation in Canada has increased the political heat in Ottawa in recent weeks.

A report from Scotiabank earlier this month accused the federations of waiving their “common responsibility” to reduce inflation by Bank of Canada and “doing nothing” to meaningfully relieve price pressure.

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Those projections say if Ottawa cuts its planned spending increase over the next few years, the Bank of Canada won’t have to raise interest rates so high, potentially saving some of the economic troubles in the coming years. next month.

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While most economists point to the war in Ukraine and other supply constraints such as keeping inflation persistently high in the first half of 2022, many also point to the role of higher government spending – as well as bottoming interest rates – through the pandemic. was to stir up the inflationary environment in the first place.

Former Bank of Canada governor Stephen Poloz justified the emergency monetary and fiscal policies with the inference that no one should blame the firefighters for using too much water when saving the house.

Click to play video: 'Living with inflation'

Living with inflation

Living with inflation
“Ultimately, to some extent, what we’re seeing right now is people are looking back and saying, it’s probably more than what we needed, and that’s contributing to detectable inflation. today,” Randall Bartlett, chief economic officer for Canada at Desjardins, said in an interview with Global News.

Bartlett author of a Thursday release report try to respond to criticism of government spending and inflation.

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The report does not deny the role the Canadian government – and indeed administrative agencies around the world – has played in fueling today’s inflationary pressures amid global efforts to insulate the economy from a recession. recession of the pandemic.

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But Bartlett and his colleagues write that while spending is part of what has thrown the world into this mess, austerity is not necessarily the way out.

“While we do not agree that past and ongoing federal spending is contributing to inflation, we believe it would be a mistake for the federal government to cut spending relative to fiscal plan. present,” the report reads.

Desjardins noted that while spending as a share of Canada’s gross domestic product is expected to remain elevated in the coming years, along with inflation, the increase in federal spending is expected to be near zero. change.

Deputy Prime Minister and Finance Minister Chrystia Freeland also protect the federal budget in 2022 opposes such criticism and said last week that she declined to announce new spending to help Canadians deal with inflation as a matter of caution.

“We understand that fiscal policy has a role to play. That is why we made this decision in April to pursue the path of… fiscal tightening,” she told reporters.

Click to play video: 'Freeland defends federal spending after Scotiabank report critical of Trudeau government'

Freeland defends federal spending after Scotiabank report critical of Trudeau government

Freeland defends federal spending after Scotiabank report critical of Trudeau government – June 20, 2022

Experts say the current plan hits the right notes

Bartlett noted in the report that avoiding higher interest rates to reduce the impact on Canadians will affect the important role of rate hikes: weeding out Canada’s red-hot developing economy, especially is the housing market.

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Since the central bank began its rate-raising cycle a few months ago, cities across Canada have seen rampant pandemic-driven home price growth cooled significantly as mortgage costs and debt increased.

“This is an adjustment that needs to happen to improve housing affordability and reduce vulnerabilities in the Canadian economy,” the report said.

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If the government undertakes a new austerity effort, Bartlett wonders where they will find the cuts.

For example, reducing social spending directed at the most vulnerable Canadians would be a mistake in his eyes. Programs set to see additional spending in the 2022 budget, such as an increase in Old Age Security and Canadian Child Benefit payments, could help households, he said. lower income “gets through this period of uncertainty and economic hardship”.

“Those at the bottom end of the income distribution are feeling the effects of inflation the most. And that’s a big part of why we don’t think the federal government should be aggressively austerity at this point,” he said.

Decreasing corporate profits, cutting prices, economists urge

Instead of cutting spending, Ottawa could come up with a number of policies that could help squeeze some of the economy, experts say.

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David MacDonald, senior economist at the Canadian Center for Policy Alternatives, told Global News that the recovery from COVID-19 has seen corporate profits among oil and gas producers and some grocery store chains soar.

Meanwhile, wages have not kept pace with inflation, suggesting businesses are seeing profits grow at the expense of consumers.

“It is possible that the corporate sector is more likely to raise prices much faster than workers can raise wages to try to keep up with inflation,” MacDonald said. “In essence, corporations are already ahead of this.”

While the latest budget suggests the introduction of a 1.5% surcharge tax on banks and life insurers, MacDonald argues that such a tax should be applied to all corporate profits. industry in Canada, regardless of industry.

Proceeds from such a tax could fund programs to help low-income Canadians struggling with inflation, he suggests.

Armine Yalnizyan, economist and fellow at the Atkinson Institute, told Global News that the call to cut government spending is a “junk argument” because the latest cause of inflation is supply and global in nature.

Click to play video: 'Russia's war in Ukraine will affect grocery store shelves'

Russia’s war in Ukraine will affect grocery store shelves

Russia’s war in Ukraine will affect grocery store shelves

She said Ottawa could play a larger role in monitoring “price gouging” in areas with less competition and where consumers shop for essentials.

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“Governments can and should pay more attention to how prices are set in areas where there is not much competition. That would be the grocery store. That would be mining. That would be gas. Gasoline price at the pump. There are very few players in these markets,” she said.

Whether economists or consumers point the finger at the federal government or the Bank of Canada for boosting demand or not acting fast enough to bring down inflation, Yalnizyan says the hard truth is that both are does not play a large role in global price pressures as critics would argue.

“What can the federal government do? … What can central banks do? There are some things they can do, but it’s limited,” she said.

“We will not get over this until the pandemic subsides and the war, the Russian invasion of Ukraine, is turned to peace. It is simple and complex. “

– with files from Global News’ Anne Gaviola

© 2022 Global News, a division of Corus Entertainment Inc.

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