Unlike many of his global counterparts, Trudeau has refrained from taking new steps recently to ease the burden of rising prices, even with inflation at its highest level since the early 1980s.
This may reflect a growing political sensitivity to criticism that his government overreached during the pandemic, leaving the country with less fiscal room to deal with major future challenges such as climate change. But there is also a wariness that raising money to ease price pain might just lead to higher inflation.
However, staying on the sidelines is becoming increasingly difficult.
Justin Trudeau speaks during a press conference in Montreal on August 22.
Trudeau is low in the polls after nearly seven years in office. And the possible election next month of Pierre Poilievre as the new leader of the Conservative Party will add more urgency to the inflation debate. Poilievre has relentlessly focused on the cost of living during his leadership campaign, using the label “Justinflation” as he lays the blame on Trudeau.
“Politically, this fight will come down to this administration,” Shachi Kurl, president of the Vancouver-based Angus Reid Institute, said by phone. “It’s going to be big and it’s going to be difficult.”
A poll by Kurl’s research group found that four out of five Canadians have been forced to cut back on spending in the face of rising costs.
In the absence of new measures from Trudeau, Canada’s provincial leaders have stepped in.
Ontario, the most populous province, temporarily suspended fuel taxes. Quebec’s premier, who launched his campaign for a second term this weekend, is promising more immediate inflation relief if re-elected. And oil- and fertilizer-producing Saskatchewan is sending an “affordability check” to every resident this fall.
Canada’s economy is doing better than most, thanks to high commodity prices, abundant energy and strong population growth. Labor shortages are widespread. That means the nation would likely struggle more than its peers to absorb more demand-boosting government spending.
“I have noticed that other countries have been increasing their spending in recent months,” Finance Minister Chrystia Freeland told reporters last month after a meeting with her Group of 20 counterparts in Indonesia. “Canada has been constrained there as well, precisely because inflation is high.”
From a short-term fiscal perspective, the government can use the windfall to pay for any new measures it wants to take. The most likely scenario is something on the fringes, targeted at those who need it most and in line with the Trudeau government’s zero commitments — so no blanket rebates for drivers who fill up their cars with gas.
So far this year, the government has pumped in billions more than expected.
National income – the best measure of income – is on track to be almost $US100 billion ($77 billion) higher in 2022 than Freeland forecast in her budget in April. That could mean up to $15 billion in additional revenue.
For the first three months of the current fiscal year — April through June — the federal government ran a surplus, a surprising start given the $53 billion deficit projected for the year. The preliminary deficit for the fiscal year ended March 31 was under $100 billion, compared with $114 billion projected earlier this year.
But it would be a mistake to project these trends forward.
The past 12 months have seen a rare outpouring of strong growth in the real economy as the country emerged from the COVID-19 pandemic along with high inflation – favorable conditions for the federal finances.
The next two years will be different. High inflation will inevitably act as a drag on the real economy. Economists expect growth to slow sharply, with some even predicting a recession.
Chrystia Freeland speaks at a press conference in Toronto on June 20, 2022.
The impact of a weakening economy usually outweighs the potential tax revenue gains from higher inflation. “Eventually, inflation will catch up with us,” said Mostafa Askari, chief economist at the Institute for Fiscal Studies and Democracy at the University of Ottawa.
Add in rising debt servicing costs and it becomes a noxious macroeconomic mix for Freeland’s next budget.
Yields on 10-year Canadian government bonds are currently around 3%, nearly double the average during Trudeau’s tenure. Freeland’s budget projections in April were based on assumptions that the 10-year interest rate would be 2 percent this year.
According to the finance department’s own analysis, a percentage point rate hike would increase public debt charges by about $9 billion a year within five years — or about the same as the annual tab for Trudeau’s child care program.
Which means Freeland’s tone at next week’s cabinet retreat will be one of caution and lowered expectations, even if there are new measures to quell some of the political pressure.
