The federal government says it will provide inflation relief for low-income Canadians by temporarily hiking GST credits and providing payments for those struggling to pay rent, but economists warn it will likely add pressure to core inflation.
Prime Minister Justin Trudeau announced on Tuesday that the government will introduce legislation to temporarily double GST payments for six months for low-income earners. It will also provide low-income renters with a one-time $500 top-up to the Canada Housing Benefit.
The government also says it is moving forward on developing a national dental care program, a key part of its supply-and-confidence agreement with the NDP. Ottawa says it will begin the program with children under the age of 12 and provide up to $650 per child for families making less than $90,000 without dental coverage. The government estimates that the dental care program for children under 12 would benefit 500,000 Canadians.
The total cost of these measures is approximately $4.6 billion. Legislation will have to be passed before the programs can be implemented.
"These measures all put people at the centre of our plan to grow the economy. They are targeted to the middle class and people working hard to join it, while we continue to be responsible with public finances," Trudeau said.
"The help we're announcing today will make a big difference for the people who get it in a targeted way that will not stoke inflation."
Who qualifies for inflation relief
Canadians with low and modest incomes that qualify for the GST tax credit will see payments double for six months. The current benefit is up to $467 a year for a single individual without children with a maximum income of just over $49,000, $612 for married or common-law couples and single parents, and another $161 for children under 19 years old. Ottawa estimates that 11 million individuals and families would benefit from the doubling of the GST tax credit.
The one-time rent relief top-up of $500 through the Canada Housing Benefit program will be available to renters with adjusted net incomes below $35,000 for families, or $20,000 for individuals. The government says there are approximately 1.8 million low-income residents, including students, that would be eligible for this program. In order to qualify, applicants for the program will have to attest that they are paying at least 30 per cent of their income on shelter, that they are paying rent for their own primary residence and allow the Canada Revenue Agency to verify this information.
The Trudeau government has been facing mounting pressure to provide inflation relief over the last several months, while many economists have warned of the inflationary risk brought about by new spending measures.
Economists weigh in
Scotiabank's head of capital markets economics Derek Holt said in a note on Tuesday that "it seems sensible to assume that this will add to pressures on measures of core inflation" as well as "aggravate the Bank of Canada's stance on monetary policy."
"Any belief that it will ease inflationary pressures must have studied different economics textbooks," he wrote.
"The information today suggests that the Bank of Canada is likely to be dragged along by the Federal Reserve with domestic fiscal stimulus reinforcing the likelihood that the policy rate breaches 4% by December, if not October."
Trudeau said on Tuesday that the government is confident the measures are "sufficiently targeted" and will not contribute to increased inflation.
Scotiabank is not alone in its warning. CIBC chief economist Avery Shenfeld wrote in a note to clients last Friday that "while there are times where fiscal largesse is just what the economy needs, these aren't such times."
"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 wrote.
"What concerns us is that federal and provincial governments in Canada are feeling tempted to 'do something' to help their constituents cope with high prices... But unless very narrowly targeted to only reach those in the most need of support to put food on the table, or even better, financed by offsetting spending cuts elsewhere, they add to the inflation pressure in the economy by increasing spending power."
Inflation in Canada has soared to nearly 40-year highs this year. While it may have hit its peak in June, the Consumer Price Index (CPI) reached 7.6 per cent in July as the cost of food, shelter and services continued to increase.
Skyrocketing inflation has prompted the Bank of Canada to embark on one of the most aggressive tightening cycles in the central bank's history. The Bank of Canada hiked its benchmark interest rate by 75 basis points last Wednesday, the fourth consecutive outsized hike, while warning that further increases are ahead.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.