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analysis

Inflation won’t be an economic or political issue by the time Canadians vote in the next federal election, or so goes a certain line of reasoning from some media commentators.

Sure, Pierre Poilievre adeptly exploited today’s red-hot inflation to win the Conservative leadership race, but he won’t be so lucky, they say, when Canadians head to the polls in 2025 (assuming the Liberal-NDP parliamentary alliance holds out that long).

But that thought disregards some basic economics, while also highlighting a woeful disconnect between the media class and Canadian households experiencing real and continuing pain from inflation.

It is true that the Bank of Canada is projecting inflation will fall sharply by the end of 2024. In its July monetary report, the bank said it expects inflation to decrease to 3 per cent by the end of next year, and to its 2-per-cent target by the end of 2024. That does represent a steep decline from an expected annualized rate of 8 per cent in the third quarter of 2022.

But to conclude that the cost of living, then, won’t be a live political issue is shallow thinking indeed. Assuming that the Bank of Canada’s forecast holds true – and given its recent track record, that is far from assured – the Consumer Price Index will have risen 18 per cent between 2020 and 2024.

There is some room within that surge for some prices to decline, but the overall picture is clear. The pinch that households are feeling from the rising cost of living will get worse, not better, through to 2025.

And that’s a best, or at least better, case scenario. The bank acknowledges that if a wage-price spiral takes hold, inflation could still be running at 4 per cent heading into 2025.

Even the more optimistic view only means that today’s high prices (on aggregate) won’t be falling, just will be rising at a less damaging pace. Does anyone believe, for instance, that dairy farmers will press to have the farmgate price of milk reduced in 2023 after securing a rare early increase that comes into effect this month? That the cost of rents is set to collapse?

Of course not. The cost of living (as distinct from the rate of inflation) will still be higher for all Canadians, and painfully high for some. That basic fact of economics eludes the media commentators who contend that the corrosive effects of inflation won’t be a live political issue in 2025. And it also betrays their privileged position in life.

Only someone who hasn’t had to pull budget-busting items out of a grocery cart could possibly talk about inflation not being a ballot issue a couple of years hence.

Taxing questions

Chetan Raina from Toronto wonders about Pierre Poilievre’s contention during the Conservative leadership campaign that a single working mom with three children faces a marginal effective tax rate (the combined weight of taxes and benefit clawbacks) of 80 per cent. “The tax rate and CCB (Canada Child Benefit) clawback seem only to get to the high 40-per-cent range,” Mr. Raina writes in an e-mail. “I’m assuming there are other clawbacks (perhaps provincial?) that he is referring to.”

It’s hard to tell exactly what’s at work in Mr. Poilievre’s example, since his campaign staff declined to provide details. However, if you make a series of favourable assumptions, it is possible to get close to that 80-per-cent figure.

Those assumptions start with picking the province with the highest tax rate for those earning $55,000 in income – namely, Quebec, with its 20-per-cent provincial rate.

Additionally, one will need to assume that Mr. Poilievre is including contributions to Employment Insurance and the Quebec Pension Plan as part of the calculation. That’s not much of a stretch since the (now) Conservative Leader mentioned payroll taxes in his Twitter video on the subject. Some would contend that pension deductions are a form of savings and shouldn’t be counted in calculating marginal effective tax rates. Mr. Poilievre is not one of those people.

Lastly, one would need to assume that the working mom in question is receiving all the federal and provincial income-tested benefits to which she’s entitled.

Now, the math. Federal and provincial taxes add up to 40.5 percentage points (20.5 per cent for federal taxes, 20 per cent for provincial). EI contributions add an additional 1.58 percentage points; QPP contributions, 6.15. That adds up to a total marginal rate of 48.23 percentage points, still well short of Mr. Poilievre’s 80-per-cent claim.

But, just as Mr. Raina supposed, it’s the clawback of benefits that push that total much closer to 80 per cent. Using the federal government’s online calculator, a single mother with three kids and an earned income of $55,000 would lose 28 cents to clawbacks on the next dollar she earned.

Adding that burden to the payroll deductions and you end up with a (rough) marginal effective tax rate of just over 76 per cent. That’s close to Mr. Poilievre’s claim, and certainly validates his point – that a working mother could face a dauntingly high marginal effective tax rate.

Line Item

Fiscal follies: First, the good news for Ottawa and its budgeting practices – it improved since last year, and is no longer at the back of the class. That’s pretty much all the upside to be had in this year’s ranking of fiscal transparency of the federal and provincial governments by the C.D. Howe Institute.

In last year’s report, Ottawa was given an F for fiscal 2020-21, the worst showing by any government, largely because of “its egregious and unprecedented failure to produce a budget,” the report states. This time out, the federal government fared a little better, edging up to a D+ for fiscal 2021-22. A late budget, backdating of expenses to the previous fiscal year and the decision to separate out actuarial pension adjustments from the bottom line all hurt the federal government’s ranking.

The federal Finance Department can take some small consolation in the fact that Ottawa came out ahead of the D ratings of British Columbia, Manitoba and the Northwest Territories. But that will be likely short-lived relief: the institute’s initial assessment of the current fiscal year has the federal government tied for dead last.

Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.