Guest Opinion: Trudeau government should help increase productivity to tame inflation

Canada’s inflation rate has hit 7.7%, which will undoubtedly spur more sharp interest rate increases by the Bank of Canada in coming months.

For its part, the federal government seems willing to stand aside and not provoke a conflict with the central bank — even if higher interest rates help trigger a recession.

At the same time, there’s a growing recognition that fiscal policy — including government borrowing and spending — influences current inflation and expectations about future inflation.

Belatedly, even the Trudeau government seems to recognize this dynamic.

In a recent speech, Finance Minister Chrystia Freeland highlighted the government’s commitment to reduce federal spending growth, which, combined with a tax revenue windfall thanks partly to inflation, is reducing Ottawa’s projected budget deficit.

Certainly, if Ottawa reduces spending growth while taking in more tax revenue, the growth of “total demand” (essentially, the demand for all goods and services in the economy) should slow, which in turn should reduce demand-side pressures on future inflation.

 

Guest opinion written by WWU Professor Emeritus in the College of Business and Economics Steven Globerman.

Thursday, June 30, 2022 - 12:39pm