By Ray Rivers
December 20th, 2021
BURLINGTON, ON
COVID and climate change, not the federal deficit, is driving up prices in this country. Public health measures have led to global supply chain blockages and workplace interruptions. And 2021 has been the absolutely worst year for disastrous climate events, including forest fires, flooding and drought. Prairie grain harvests, for example, are reported to be 30-50% lower this year, which also impacts meat prices.
Conservative finance critic Pierre Poilievre in the House of Commons
So it’s unfortunate that Conservative finance critic Pierre Poilievre is peddling misinformation. He blames the high deficit and debt levels for the country’s current 4.7% increase in the price of an average basket of goods. He argues that it is because government debt has resulted in too much money being printed and circulated in the economy. But that is not what is happening.
To complicate his argument, Poilievre is demanding federal tax cuts, including the revenue neutral carbon tax, which will….put more money in people’s hands and further increase the deficit.
Poilievre is entitled to his opinion but no reputable economists support his thesis. Canada is actually doing better than most OECD nations when it comes to inflation and with an inflation rate a whole third lower than we’re seeing south of the border. Canada’s inflation has been hovering around 4.7% for the last couple of months, though nobody is discounting that it might climb a little higher before it declines again.
In any case,Ha good chunk of Canada’s economy is inflation proofed – our pensions, income tax deductions, etc. which have been indexed to the consumer price index (CPI). And our health and education programs are all publicly funded. So it’s mostly food and other consumables, some of which are waiting to unload at the ports or sitting in a barge adrift in Vancouver Harbour.
The Covid19 virus and the variant Omicron along with Climate Change are the structural changes we are going through right now.
And then there is housing. Housing prices have been rising for a while now. And while low interest rates, allowing more people to qualify for mortgages, are partly responsible, the real culprit is the extremely high rate of immigration. Canada’s immigration target is 400,000 new entrants a year, over 100,000 of those looking for housing in the GTA.
Some level of inflation is not unhealthy in a growing economy and/or one experiencing some measure of structural change. And structural changes is what we are going through right now, thanks to COVID and climate change. The federal government has a number of tools to slow down inflation should it get out of hand. These include tax increases, reducing government spending and transfers, import and export restrictions and controlling the interest rate.
The Finance Minister just renewed the Bank of Canada’s mandate, which includes exercising monetary policy to raise interest rates and attempt to bring inflation down to 2% or less. However, given the still shaky economic situation with an ongoing pandemic, nobody should expect the Bank to jack up rates, particularly for the current bout of price increases which reflect an economy very much in transition.
Higher interest rates will also raise the cost of the government borrowing to finance our debt and deficit. That will lead to increased deficits and possibly eliminate funding for other government programs. In the end higher rates suppress economy activity by reducing consumer demand. That will lead to higher unemployment which no government ever wants.
Raising interest rates would push Canada’s international exchange rate up as foreign investors up their Canadian investments to get the higher rates here. That would prompt exchange rate increases and impact Canada’s international competitiveness as our exports become relatively more expensive and imports relatively cheaper.
This is the situation Brian Mulroney found himself in the late 80’s as he attempted to quell inflation with monetary policy. We ended up with higher unemployment, deterioration in our terms of trade and creating the greatest accumulation of federal debt in Canada’s history – that is until the pandemic hit us.
Over-reacting to Canada’s modest inflation rate can be fraught with these potential complications. The Minister of Finance and Bank of Canada are betting that the supply chain blockages will be resolved and the price pressure will lessen. But given where we are with the pandemic rebounding energetically, and climate change throwing curve balls around every corner, nobody is in a hurry to raise interest rates or cut taxes. That is possibly except for Pierrre Poilievre who has no idea what he’s talking about.
Ray Rivers, a Gazette Contributing Editor, writes regularly applying his more than 25 years as a federal bureaucrat to his thinking. Rivers was once a candidate for provincial office in Burlington. He was the founder of the Burlington citizen committee on sustainability at a time when climate warming was a hotly debated subject. Ray has a post graduate degree in economics that he earned at the University of Ottawa. Tweet @rayzrivers
Background links:
Pierre Poilievre – National Debt – Crop Failures –
Food Prices – Inflation – Fiscal Update –
Actual Fiscal Update – Home Prices –
“our pensions are indexed” … clearly Ray’s pension is funded by actual taxpayers.
Philip is right on. There lies and damn lies. In my opinion Rives is an expert at both.
“Reputable economists” as Ray defines them. Our inflation rate is greater than the mythical basket of goods. Our money is worth 15, maybe 20 percent less.
And you just cannot go to only percentages. That is cherry picking data points. For example the cost of our mobile cellular devices has not gone up as far as I have noticed. Is that good news? No, there really isn’t room for them to go up much at all. Canadians already pay some of the highest fees for mobile phones and wireless devices. You have to consider the starting points, or it is not an apples to apples comparison.
Taxes, do need to come down. To keep the economy limping along. I suppose the writer would like to see them go up, as it would then lower the deficit, in his world. A government cannot tax its way to prosperity. These high taxes are shutting down business’ now. Before I can spend a dollar on myself I have to give more than that away in taxes when I earn it. (last I checked I think federal and provincial taxes added up to 54 percent for myself)
And pay more tax if I spend any of it.
I am still wondering where that 600B dollars went. Ask about it, and all we get are crickets. Taxation is not “earning money” for the government. It is taking earned money away from people who did the earning and investing. And it begins a spiral that cannot easily be repaired in our lifetime.
Carbon tax and such, let it go. We have a pandemic and possible wars breaking out. Global warming can wait for when we can afford it, and the major players actually ramp down their emissions. Not a popular sentiment, but there it is.
I’ll go back to work now. Somebody has to pay the bills….
If we are going to dispute someone’s figures, perhaps a bit of research on your own figures is due. The top tax bracket for federal income tax is 33% of taxable income over $216,000
Adding in provincial tax at the highest bracket of 13.6 on income in excess of $220,000 you would arrive at 49%
While I wholeheartedly disagree with Ray and his trying to spin out of control spending to being a good thing, I also disagree when you say “And you just cannot go to only percentages.“ then use your own percentages to refute his argument.
Ray, this article isn’t about economics or inflation–it’s about politics. Clearly you are afraid, as are many of your fellow Liberal ideologues, of Pierre Poilievre, a leader whose reputation for plain truth has the ability to unify a fractious Conservative Party. But let’s have a look at several of your inaccurate assertions.
While seeking to give Trudeau and the Liberal government a free pass in this developing inflation crisis, you state, “he argues that that it is because government debt has resulted in too much money being printed and circulated in the economy. But that is not what is happening”. But in fact that is exactly what is happening. The Liberals have monetized the debt by selling it to the Bank of Canada, the natural consequence of which has been a rapid escalation in the money supply, suppressing interest rates. These developments in the money market have increased spending putting upward pressure on prices.
Further, you choose to ignore the role that indirect taxation is playing in putting upward cost pressures on prices. Carbon taxes are pushing up transportation costs for business who are not absorbing these costs–they are passing them on directly to consumers in the form of higher prices. In an economy like Canada’s characterized by long transportation and distribution channels, these are a significant factor. Of course, Trudeau will fight this cause of inflation by raising carbon taxes in January–Justinflation indeed! And readers will note, these carbon taxes are being paid by you! They are INDIRECT, you don’t see them and Trudeau is hoping that you don’t as the Liberals continue to peddle the fantasy that “you’re getting back more than you are paying”. Likely 40%+ of Ontarians are taking a significant hit on carbon taxes when you consider how much you are paying in DIRECT and INDIRECT carbon taxes—virtually every Ontario family that lives in a home, has two or less children, and works for a living. A good estimate that it is costing such families $500 to $1000 per year after rebate.
Characterizing an inflation rate of 4.7% as “modest” is at best misleading. While the Bank of Canada’s target rate of 2% provides some stimulative incentive, rates about this start to cause dislocations and negative redistributive effects. Inflation in key sectors–transportation, housing, and food, impacts middle and lower income Canadians the most. Given that nearly 50% of Canadians were living paycheck-to-paycheck prior to the pandemic, these inflationary impacts have certainly made matters worse and negatively impacted their standard of living.
Cutting taxes—particularly INDIRECT taxes, would lessen upward pressure on prices and help people cope with these inflationary impacts, the concept of a “tax cut” is anathema to Liberal orthodoxy.