Government spending risks fuelling ‘inflationary fire,’ economists warn
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Canadians are making their frustration with the rising cost of living known — and politicians are listening.
The latest trend among governments in Canada is to send money directly to households to help with decades-high inflation, and this has economists worried.
“While there are times where fiscal largesse is just what the economy needs, these aren’t such times,” CIBC chief economist Avery Shenfeld said in note Friday.
“In a period of high inflation and excess demand, cutting taxes or handing out cheques can add fuel to the inflationary fire, and make the job of a central bank that’s raising rates to cool demand all that more troublesome.”
High energy prices have generated huge revenues for both provincial and federal governments and led to recurring trade surpluses for the first time since 2014, Bloomberg reports.
“What concerns us is that federal and provincial governments in Canada are feeling tempted to ‘do something’ to help their constituents cope with high prices, wrote Shenfeld.
The provinces already are. Either through rebates or income support most residents of Ontario, Quebec, Saskatchewan and Manitoba have or soon will have received payments designed to help with inflation, said Shenfeld.
As Alberta choses a new leader it remains to be seen how much of that province’s $13 billion surplus this year will go to debt reduction, he said.
BMO senior economist Robert Kavcic calculates that provincial measures to help Canadians cope add up to $4.4 billion, or 0.2 per cent of GDP, to date.
And plans were revealed last week that Ottawa will double GST rebates for six months and offer help for Canadians struggling to pay their rent.
‘We’re not going to deny that there are households seriously in need of help right now in this inflationary environment,” Kavcic wrote in a note. “But, from a policy perspective, we all know that sending out money as an inflation-support measure is inherently … inflationary.”
The problem is that unless very narrowly targeted to reach those most in need, these handouts increase spending power and actually add to inflationary pressures, said Shenfeld.
“By helping Chantal pay her food or gasoline bill with a government cheque, you hit John with higher overall inflation, and Carlos with higher mortgage payments as the Bank of Canada responds with a more aggressive rate hike cycle,” he said.
Shenfeld said governments should save their windfall for leaner days because with a recession a “distinct risk” in the next two years it may not last long, especially if commodity prices fall in a global downturn.
“And if another global crisis comes along in future years to sink growth and inflation, whatever fiscal room we can build up now will come in handy, by providing ammunition to hand out cheques, cut taxes, or increase spending when the economy actually needs it,” he wrote.
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