VANCOUVER – POLItICS – According to a new study released today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank, the federal government’s decision to increase its already high levels of spending and continued budget deficits will hinder the Bank of Canada’s efforts to tame inflation. The study, titled “Canada’s Fiscal Policy Has Undermined Efforts to Tackle Inflation,” was authored by Philip Cross, former chief economic analyst at Statistics Canada and a senior fellow at the Fraser Institute.
The report states that during the COVID-19 lockdowns in 2020, the federal government, which was already spending at record-high levels (as measured by per-person spending adjusted for inflation), further increased spending while the Bank of Canada lowered interest rates to near zero. These decisions led to higher inflation, which peaked in July 2022 and remains high today. In response, the Bank of Canada has increased its policy interest rate to discourage consumer spending and cool price increases.
However, the federal government has continued to increase deficit-financed spending and ran a series of large deficits, including a projected $40.1 billion deficit for 2023-24. The study argues that because high government spending and deficits helped trigger today’s higher inflation, the government’s refusal to restrain spending will undermine the Bank of Canada’s efforts to tame inflation.
Philip Cross, the author of the study, notes that “Until the federal government shows some spending restraint, Canadians may continue to face higher prices for goods and services.” He also emphasizes that “Monetary policy and fiscal policy must work together to reduce inflation—a lesson the current federal government seems slow to learn.”