Governments have created the perfect inflation storm

Many factors influence prices, but that doesn’t mean politicians should be let off the hook for the rising cost of living

By Franco Terrazzano
Federal Director
Canadian Taxpayers Federation
Many factors influence prices, but that doesn’t mean politicians should be let off the hook for the rising cost of living. By printing new dollars, propping up consumer demand, discouraging production and raising taxes, Canadian governments have created the perfect storm for rising prices: more dollars chasing fewer goods.

Since February 2020, the Bank of Canada has created about $375 billion by purchasing financial assets. That 300-per-cent growth in the bank’s assets is significantly higher than what occurred during the recessions of the 1970s, 1980s and 1990s.

It’s even higher than the growth that occurred from the beginning of 2008 to the end of February 2020. In fact, the 300 per cent growth during the pandemic rivals the growth in assets held by the central bank during the entire six years of World War II.
Ottawa’s deficit spending directly ties into money printing.

Last year, the feds ran up a $335-billion deficit, while the bank printed up new dollars to purchase $275 billion of government of Canada bonds. Just two days after Finance Minister Chrystia Freeland announced her plan to run a deficit of $3 billion per week in 2021, the Bank of Canada announced its plan to purchase $3 billion worth of government debt per week. That sure left the impression that the government was using the printing press to finance a chunk of its deficits.

A large portion of that deficit spending is artificially inflating demand.
In the second quarter of 2020, the government managed to spend $54 billion to replace $21 billion in lost income. In fact, household disposable income increased in 2020 despite compensation to Canadian workers declining and over half a million net job losses during the year.

These subsidies also discouraged work.
More than 40 per cent of small businesses and nearly two-thirds of those in the hospitality industry reported difficulty finding workers because they were competing with government subsidies. What do we expect to happen to prices when these restaurants, or any other business, can’t find enough employees to serve the surplus of customers who are starved for a date night?

The government may have replaced some income, but it can’t replace lost productivity. Canada’s output is still below pre-pandemic levels, which is to be expected after lockdowns. With consumers starting to feel more confident, higher prices are teaching politicians that all production takes time: turning on an economy to meet that demand isn’t as speedy as turning on the kitchen lights.

The economy is a complex creature. Sometimes natural disasters or pandemics wreak havoc. But Canadian governments deserve a big part of the blame. Reducing the supply of goods through lockdowns and paying people not to work while shovelling out newly created dollars is a sure-fire way to make life more expensive.

The cherry on top: tax hikes. The federal government increased its carbon and alcohol taxes twice during the pandemic. Taxes make up between 31 and 42 per cent of the pump price, depending on the province. Taxes also account for about half of the price of beer, 65 per cent of the price of wine and more than three-quarters of the price of spirits.
Cutting taxes is an easy way to provide some immediate relief. That’s why India, South Korea and Ontario Premier Doug Ford are reducing gas taxes. In stark contrast, Prime Minister Justin Trudeau plans to increase the carbon tax to $170 per tonne by 2030 and impose a second carbon tax through fuel regulations. Taken together, the two carbon taxes will eventually add about $40 to the cost of fueling up a minivan.

Inflation is a huge economic issue facing families. Canadian politicians may not have all the tools to solve our economic woes, but they can start by reining in the unprecedented government spending and providing tax relief.

Franco Terrazzano is the Federal Director of the Canadian Taxpayers Federation.
Franco is a Troy Media Thought Leader.

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