BoC's Rogers taking questions from media
Economists are warning Prime Minister Justin Trudeau’s government against using windfall revenue to add to spending amid concerns about inflation.
The calls come as the government prepares to double federal goods-and-services tax rebates for six months and support Canadian households struggling to pay rent. The plan, meant to be announced Thursday but temporarily delayed by the death of Queen Elizabeth II, is in addition to refunds and cash handouts already distributed by provincial governments.
Canada benefited from surging energy prices earlier this year, which helped the nation swing into recurring trade surpluses for the first time since 2014, and generated large revenues for the federal and provincial governments.
“While there are times where fiscal largesse is just what the economy needs, these aren’t such times,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, said in a report to investors Friday.
“In a period of high inflation and excess demand, cutting taxes or handing out cheques can add fuel to the inflationary fire, and make the job of a central bank that’s raising rates to cool demand all that more troublesome,” Shenfeld said.
On Wednesday, the Bank of Canada raised interest rates by 75 basis points to 3.25 per cent -- the highest policy setting among major advanced economies -- in a bid to bring inflation down to its 2 per cent target. Canadian consumer prices rose 7.6 per cent in July from a year earlier.
“We’re not going to deny that there are households seriously in need of help right now in this inflationary environment,” Robert Kavcic, senior economist at Bank of Montreal, said in a separate report. “But, from a policy perspective, we all know that sending out money as an inflation-support measure is inherently inflationary.”
Provincial measures to date add up to about $4.4 billion, or 0.2 per cent of Canadian gross domestic product, on top of any new direct federal support this year, Kavcic said.
“A recession is a distinct risk in the next two years, so this year’s revenue windfall might not last long,” Shenfeld cautioned. “If another global crisis comes along in future years to sink growth and inflation, whatever fiscal room we can build up now will come in handy.”