Canada's fiscal and monetary policies are not aligned: John Manley
A former Canadian finance minister said inflation and the public’s “inflationary expectations” are among the biggest economic challenges facing the federal government as it drafts a budget this year.
In an interview on Monday, John Manley, senior advisor at Bennett Jones LLP, said “inflation is still a major factor,” despite the most recent consumer price index (CPI) report from Statistics Canada suggesting it is beginning to slow.
He said it’s both “a good sign and a worrisome sign” that the Bank of Canada recently said it may pause its rate hike cycle aimed at bringing down inflation. Canadians have become used to the idea that “inflation is continuing to rage,” Manley said, and are demanding higher wages as a result – which could, in turn, put pressure on prices.
“Inflation is both science and art,” he said. “There's lots of data points, and there's lots of computer modeling around what the economy may do, but there's also that whole soft side, the art side of it, which is really psychological. What are people's expectations?”
The federal government must consider this as it goes about drafting the 2023 budget, Manley argued, and he made the case that “fiscal and monetary policy” are not aligned in Canada at the moment. He said the government is running “large fiscal deficits” as the Bank of Canada takes a tightening approach to tame inflation.
Manley made the case for the government cutting back on federal spending while the inflation fight is ongoing.
“I think they have to acknowledge that currently one of their biggest challenges in the economy is inflation and those inflationary expectations,” he said.
“If they continue with the mindset that we're still back three years in the beginning of the pandemic, and it's time to keep holding up the fire hose and spraying the money out just to keep everything going, then I think they're going to fuel inflation rather than to resist it.”