Finance Minister Chrystia Freeland did not offer any new prescriptions Thursday for taming inflation and alleviating the strains consumers are feeling as prices in Canada rise to their highest levels in decades, but vowed that Ottawa will focus on fiscal restraint and helping those most in need.
Ms. Freeland’s lunch-hour speech at Toronto’s Empire Club was primarily aimed at making the case that the federal government is sufficiently dealing with the inflation challenge and is responding to concerns that Ottawa must do more to support long-term growth.
The speech attempted to strike a balance between highlighting growing social programs while also keeping overall spending under control.
Canada is experiencing the biggest inflation threat in a generation. Consumer prices have shot higher over the past year, including prices for essentials such as food, gas and shelter. That’s squeezing Canadian savings and wages and making life less affordable. In April, the annual rate of inflation hit 6.8 per cent – the fastest pace of consumer price growth in three decades.
High inflation is forcing central banks around the world to raise interest rates rapidly. That’s designed to slow down the economy to control inflation. But there are growing concerns that central banks could move too aggressively and force their economies into recession. Canada’s housing market is already slowing down, and global stock markets have plunged in recent months.
Ms. Freeland cautioned that Canada is entering a turbulent period.
“I think it’s important for us to be candid with each other, with Canadians, that this is a volatile economic time and an uncertain economic time,” she said. “And for that reason, I can’t make any promises to Canadians about how the next weeks and months are going to unfold, and I want to be honest about that.”
Ms. Freeland’s speech outlined a package of measures aimed at improving affordability that she said add up to $8.9-billion, while acknowledging that all of the items were announced and accounted for in previous budgets.
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They include a range of enhanced benefits to individuals through programs such as the Canada Workers Benefit, a 10-per-cent increase to Old Age Security for seniors over 75, and increased funding for child care and rent support.
The minister also noted that many federal income-support programs such as the Canada Child Benefit, the goods and services tax credit, Old Age Security and the Guaranteed Income Supplement for low-income seniors are designed to automatically increase in line with inflation.
Speaking directly to those she called fiscal hawks in the audience of Bay Street business leaders, she vowed that the pace of federal spending will complement the Bank of Canada’s work to cool inflation.
“As the Bank of Canada withdraws monetary stimulus, our government is likewise withdrawing fiscal stimulus,” she said. Speaking later with reporters, she said the lack of new policy announcements in the speech was a deliberate decision, but she also left the door open to introducing new inflation relief measures if warranted.
The minister pointed out in her speech that her April budget set a fiscal anchor of reducing the federal debt-to-GDP ratio and pledged to review and reduce government spending.
“The fiscal restraint was very intentional,” she said. “At a time when inflation was elevated, we knew we needed to be careful not to increase aggregate demand. As interest rates were set to rise, we understood the importance of maintaining Canada’s triple-A rating.”
The government’s April budget projected a $52.8-billion deficit for the 2022-23 fiscal year, down from a pandemic peak of $327.7-billion in 2020-21. The size of the deficit is projected to be $8.4-billion by 2025-26.
Robert Asselin, senior vice-president of policy at the Business Council of Canada and a former economic adviser to the Liberal government, suggested that the minister’s talk of restraint should be taken with a grain of salt.
“This speech was big on political rhetoric, but was thin on policy. The reality is that the federal government’s fiscal policy is still expansionary,” he said, noting that total program spending was $473-billion last year, more than $140-billion above prepandemic levels.
“It’s basically all on the central bank now. They will be the ones doing the heavy lifting on inflation,” he said.
Central banks were slow to start pushing back against inflation, hoping that it would be transitory. That proved to be a significant miscalculation, and central banks around the world are now racing to prevent high inflation from becoming entrenched like it was in the 1970s and early 1980s.
On Wednesday, the U.S. Federal Reserve announced its biggest rate hike since 1994 and said that it would keep pushing borrowing costs higher through the rest of the year. The Bank of Canada has likewise been moving quickly: announcing three consecutive interest-rate hikes, including two oversized half-percentage-point moves, while promising that it is prepared to “act more forcefully if needed.”
While containing domestic inflation is primarily the Bank of Canada’s responsibility, the federal government’s fiscal policy – such as the total amount of government spending – can impact the amount of demand in the economy, which influences inflation. Scaling back on federal spending would complement the central bank’s efforts to cool the economy.
Government programs can also respond to cost-of-living concerns. For instance, the Quebec government recently sent $500 cheques to all adults with a net income of $100,000 or less in the name of easing the individual impacts of inflation. Provincial governments in Ontario and Alberta have also announced temporary gas-tax cuts in response to inflation.
While such programs provide a direct benefit to consumers dealing with inflation, they can run counter to the efforts of central banks to cool consumer spending by adding to demand rather than reducing it.
Other countries have been more pro-active in addressing inflationary pressures. The German government announced a massive inflation-relief package in March that included temporary cuts to gas taxes. In the United States, President Joe Biden ordered the release of a million barrels of oil every day for six months from the country’s strategic oil reserve to lower gas prices. The White House has also begun calling on U.S. oil refineries to ramp up production of gasoline and diesel.
Politically, the federal Liberals have played down their responsibility for managing surging inflation, blaming higher costs on global factors. However, opposition parties are raising inflation concerns daily in the House of Commons.
The Conservatives say the government should scale back spending and cut taxes, while the NDP wants Ottawa to impose an “excess-profits” tax on large companies as a way of funding enhanced payments to low-income families through programs such as the GST credit and the Canada Child Benefit.
Conservative finance critic Dan Albas dismissed the Finance Minister’s speech, describing it as a message of “hurry up and wait” for existing programs to rise because they are indexed to inflation.
“We don’t believe that what Chrystia Freeland has put forward is going to help with the struggles Canadians are going through right now,” he said, adding that Canada should follow the lead of Germany and other governments by cutting gas taxes. “We are receiving lectures on inflation, not action.”
NDP Leader Jagmeet Singh criticized the fact that the minister did not announce any new policies to address cost-of-living concerns.
Interest rates and inflation are closely linked, which is why the Bank of Canada has been pushing up its key rate to try and keep inflation to a target of 2%. But it’s a careful balance between controlling inflation and not tipping the economy into a recession. Note - since this video was published in June, inflation has risen to 8.1% in July.
The Globe and Mail
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