Sean Kilpatrick
Aside from the Bank of Canada, the Toronto-based C.D. Howe Institute has led the charge on research into whether Ottawa and the central bank should tinker with the country's inflation-targeting regime, up for renewal late this year.
C.D. Howe's top central bank watchers have recently argued, among other proposals, that the bank's 2-per-cent target should be lowered, to perhaps 1.5 per cent or 1 per cent. Doing so, the argument goes, would slow declines in the value of money, something that's becoming more important as the population ages and more Canadians are living on fixed incomes that aren't adjusted for price gains.
Chris Ragan, a McGill University economist and C.D. Howe's David Dodge Chair in Monetary Policy, goes a step further. He contends that Canada's consumer price index is "biased upward" by about 0.6 of a percentage point, so a target of 1.5 per cent wouldn't represent much "real" change in the first place. In addition, he says, fixing Statistics Canada's measurement of inflation to correct that bias could mean "a few hundred million dollars" of extra fiscal room each year for the Harper government as it tries to balance its budget by 2015, Prof. Ragan says.
That's because over-measuring price changes translates into Ottawa overspending on things like benefits for children and seniors that are indexed to inflation, and results in tax revenue coming in lower than it should. However, Prof. Ragan acknowledges that the economic and fiscal benefits of fine-tuning the system would run up against the inevitable political cost: "Correcting the CPI bias, despite the aggregate benefits generated, offers a way to lose some votes among specific groups of Canadians."
Which helps explain why the latest idea from C.D. Howe is probably a non-starter too, what with a Conservative government on permanent election footing that congratulates itself at every turn for cutting Canadians' taxes and keeping more money in their pockets.
In a paper released Wednesday, C.D. Howe President William Robson and policy analyst Philippe Bergevin lament that inflation-indexed government programs like transfer payments, old-age security, some federal pensions and tax credits are "asymmetrical," because they're structured so that payouts increase when the consumer price index rises, without falling when the CPI declines.
The discrepancy is especially relevant now, they say, because the Bank of Canada is exploring a virtually untested method of managing inflation that would aim to achieve a certain level for the consumer price index over time, as opposed to targeting the rate of change.
Under this framework, Governor Mark Carney would try to make up for past misses by tolerating faster or slower price gains (or drops) for longer than he might under the current system. Backers of this approach say setting a goal for price levels over a specified period would increase price stability, because consumers and investors would have a clearer idea of how to value purchases or longer-term assets.
But since it would seek to offset misses in either direction, Messrs. Robson and Bergevin say inflation-indexed programs and transfer payments should be changed so government coffers dole out or forego less money when the CPI drops.
"Building such provisions into taxes and transfers may have seemed unremarkable at a time when chronic inflation appeared to be an inevitable part of the economic landscape and wage and price declines were rare, but times have changed," the authors wrote. "The intent of indexation is to ensure that key taxes and transfers stay the same in real terms: in the case of transfers, for example, indexation is intended to ensure constant purchasing power. Responding to declines in the CPI with a delay or not responding at all undermines this intent."
Finding ways to repair and protect government balance sheets may be all the rage, and there's of course a strong case to be made for symmetry and fairness in fiscal policy.
But sometimes overcoming political reality is a bridge too far, to say the least.
Inflation is firmly on the radar right now as oil and food costs soar, but imagine if there were another downturn. Imagine unemployment rose, wages started to fall and companies started to slash prices in a desperate bid to keep customers. Then imagine a minority government that wants to stay in power putting itself in a position where, in a slowdown or recession, it it would have to constantly explain why some benefits, pensions or tax credits are shrinking at what, for many recipients, might feel like the worst possible time.
Can't? Me neither.
The argument is undoubtedly more nuanced and complex than what you've just read, so feel free to click here for the full paper.