Editor’s Edition: How Ottawa should handle inflation

Inflation continues to soar in Canada, with the Consumer Price Index (CPI) jumping 7.7 per cent in May, the biggest year-over increase since Jan. 1983. As many Canadians seek relief from high prices, a Yahoo/Maru Public Opinion poll has found that a majority of Canadians believe Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland have “no solid plan” to tackle inflation and rein prices in.

The Public Policy Forum’s Sean Speer that while pressure grows on governments to respond to the inflation issue, politicians need to be careful in ensuring policies don’t exacerbate the current problem by boosting demand.

“Any policy policies that have the effect of boosting aggregate demand are only going to make the challenge before the Bank of Canada even more difficult,” Speer said.

“It’s going to test out politics, our society and our economy in quite profound ways.”

On this episode of Editor’s Edition, Yahoo Finance Canada’s Alicja Siekierska and the Public Policy Forum’s Sean Speer discuss the political fallout related to inflation and how governments should respond to it. They also dig into recession concerns, Ottawa’s handling of the passport backlog and a new study analyzing Canada’s response to the COVID-19 pandemic.

If you have any policy-related questions, or feedback about the show, please email alicja@yahoofinance.com.

Video Transcript

ALICJA SIEKIERSKA: Welcome to Editor's Edition. I'm Alicja Siekierska. On today's episode, we'll take a look at a study that's comparing Canada's COVID-19 response to that of other nations around the world. And inflation is skyrocketing in Canada. It's reached the highest year over year level in almost 40 years. We're going to discuss how policymakers are approaching rising prices. And with inflation on the rise, the Bank of Canada is also rapidly hiking interest rates, which is also raising fears and concerns about a recession.

We'll talk about Ottawa's response to the economic and uncertainty, as well as the government's handling of a massive passport backlog. To discuss all this, I'm joined by Sean Speer. Sean is a fellow in residence at the Public Policy Forum. And he was also the senior economic advisor for Prime Minister Stephen Harper. He's here to help us dig through some of the policy issues shaping the post-pandemic world. Sean, welcome back to the show.

SEAN SPEER: Thanks for having me, Alicja.

ALICJA SIEKIERSKA: So the "Canadian Medical Association Journal" published a study this week saying Canada handled the first two years of the COVID-19 pandemic better than several other nations with similar health care systems. The study credited Canada's restrictive public health measures as well as its successful vaccination campaign for its position. The only country that surpassed Canada's COVID-19 performance in terms of the number of people that were infected and the number of people that died as a result of COVID-19 was actually Japan. So Sean, what's your key takeaway from this latest study?

SEAN SPEER: Well, there's so much to say about this study. On a positive front, I think it reflects the level of social cohesion and social trust in Canada that, for instance, we were able to achieve such high rates of vaccination. I think, for instance, of the United States, where notwithstanding the fact that the vaccines were developed here and they had first mover advantage in terms of supply. The share of the population that's been fully vaccinated continues to languish because of the sociopolitical disunity and distrust. And so I think in that sense, there's something that Canada and Canadians ought to be proud of. And that's reflected in this study.

I would say on the kind of negative side, I think it's important that while this study raises useful analysis with respect to specific direct performance, there are a series of indirect considerations that won't be reflected in the Canadian population for some time. We don't know, for instance, about the mental health issues that arise from long and stringent lockdowns. I think there's outstanding questions about the educational outcomes for students that remained out of school for longer than most in other peer jurisdictions.

So I guess that's a long way of saying this is a useful first piece of analysis as we kind of work through Canada's overall performance in the pandemic. But I think it'll take a longer kind of more nuanced look at the experience before we're able to kind of truly assess how we performed in absolute terms and how we performed in relative terms with respect to other peer jurisdictions.

ALICJA SIEKIERSKA: Yeah. I think this clearly only tackles the kind of immediate health care aspects of it, just in terms of the numbers of cases and number of COVID-19 deaths. But there were so many more impacts. I mean, you saw that in policymaker decisions, particularly weighing restrictive public health measures against things like economic impacts and how to balance that. So how do you expect that kind of stuff weighs into maybe how people interpret these results and how they will think about this kind of thing going forward?

SEAN SPEER: Yeah. I think that those issues matter a great deal and will probably be reflected in an eventual body of scholarship and analysis that come out of this experience. I mean, for goodness sakes, there'll be a lot of dissertations written over the coming years and decades on COVID-19 responses in Canada and elsewhere. I would just say, though, to the credit of these scholars, they do note that a lot of these questions are fundamentally normative, how you think about these different judgments.

And so while, as you say, I think on these big picture questions with respect to hospitalization death and vaccination rates Canada performed very well, how people think about those trade offs when you consider economic or educational or other considerations are going to be reflected differently depending on the kind of premium that people place on some of these other matters. But I think it's a kind of opening way to think about the country's performance. It's useful. And I think, as I said at the outset, there's a lot here that Canadians ought to feel good about. I think it reflects well on Canadian society, for instance, that we've managed to achieve such high levels of vaccination rate, especially when compared to what's gone on in the United States.

ALICJA SIEKIERSKA: And especially when you think about where we were when vaccines started rolling out and the position that the country found itself in in terms of the supply of vaccines and the fact that we did have that take up as soon as it was available. It is definitely something positive in the fight against COVID-19. But Sean, let's shift over to something that's being discussed by economists, as well as by people at the dinner table across the country. Inflation is just on a tear in Canada. It jumped 7.7% in May, which was above what economists had expected for the month of May. And it was the biggest year over year increase since January of 1983.

Here you can see just how rapidly prices have increased in Canada over the last five years. That dark blue line is the overall Consumer Price Index. And the lighter blue line is excluding the price of gasoline. But as you can see, things have gotten more expensive since the pandemic, and quickly. Sean, we haven't seen this kind of inflation in a very long time. And policymakers really haven't had to deal with it. What kind of challenge does the current economic situation present for policymakers?

SEAN SPEER: It's hard to overstate it, isn't it? There's so much one can say about that chart. I mean, there's the kind of political fallout. We're seeing growing demands of governments, not just in Canada, but really around the world, to enact measures to try to minimize the burden on households. We've seen, for instance, the Biden administration announce a holiday on gas taxes to try to help households that are increasingly burdened by rising gas prices.

Then there's the broader economic question. It seems increasingly likely that efforts to get inflation under control within the Bank of Canada's inflation target may very well produce a recession. Finance Minister Chrystia Freeland said in a speech not that long ago that a soft landing isn't guaranteed. And it seems to me she wasn't just observing that as an external observer. She was effectively pre-positioning with the Canadian public the growing likelihood that we will enter a recession either in 2022 or 2023 as the Bank of Canada struggles to get inflation in check. So it seems to me we've just had a kind of series of crises over the past several years. And this is another one. It's going to test our politics, our society, our economy in quite profound ways.

ALICJA SIEKIERSKA: I want to get into Minister Freeland's latest comments in a little bit. But just in terms of that pressure that is ramping up on policymakers to do something to provide relief for consumers in the wake of these really high prices. And so far, there have been some proposals. And Ontario Premier Doug Ford's government is reducing the gas tax for six months starting on Canada Day. Quebec announced it would limit school tax increases. And one of its ministers said that it's considering reducing the provincial sales tax in light of inflation. Are these the kind of policy tools that governments should be pursuing in this time? How do you view these kind of proposals that we're seeing out of some of the provinces?

SEAN SPEER: I think politicians have to be very careful. Any policies that have the effect of boosting aggregate demand are only going to make the challenge before the Bank of Canada even more difficult. And so I've seen calls for sales tax holidays or temporary sales tax reductions. I think that would result in only higher interest rates, as the bank not only addresses the inflation before us, but actually needs to go even higher to offset the boost in demand that something like those policies might produce.

The one area where I think there probably is a justification for some kind of policy response is in the rising carbon tax, which is, of course, boosting the price of gasoline, amongst other items. The goal, of course, of the carbon tax over time is to raise prices, but not necessarily as dramatically in the short term as we've experienced. And so I think there is a policy rationale that could be characterized as coherent and justified to provide for, at least in the short term, some temporary relief from the carbon tax.

Let the pricing system through the Bank of Canada policy start to get inflation under control. And then the government could go back to moving ahead with its gradual increases to the carbon tax over the coming decade or so. That's one area where I think the government could take action without necessarily producing the kind of challenge for the Bank of Canada.

ALICJA SIEKIERSKA: Right. I think that's an interesting point to raise because this inflation that we're seeing is-- the demand side is what we're trying to control because the supply side is so-- we're seeing so many challenges because of supply chain issues, geopolitical fallout. There's just so many different ways that it's being impacted that it seems that providing some kind of relief that could spur demand is not going to help inflation in the even medium term. But is it important for policymakers to appear to be helping people? How is that playing in to be trying to tackle this affordability crisis that we find ourselves in?

SEAN SPEER: Yeah. I'm sorry. I worked for a politician, as you said at the outset. So I'm not naive to the pressure that politicians are facing. But if we know one thing from the 1970s, Alicja, policy responses to try to minimize the cost of inflation risk only creating more problems and making this issue longer term, more durable in longer term. So where I do think that there probably is scope for policy action is trying to deal with constrained supply. Although, there are probably limits on how much policy can change that in the short term. But issues like regulations are an area where at least governments can act now with the goal of boosting supply, if not immediately, then over time.

Another area I would flag is on collective bargaining. We have teachers in Ontario, nurses in Ontario, as well as public sector negotiations going on elsewhere in the country. If we see governments increase public sector wages at a high level in the name of trying to be responsive to this price inflation, we actually risk creating a kind of vicious cycle where wages and prices kind of move in tandem and the inflation problem becomes even worse.

So this is a really difficult time for politicians because the truth is the most important thing that they can do is, in effect, kind of hold the line. But as you say, the pressure will only grow. I will just say one final point. I was speaking to David Frum, the well-known American and Canadian commentator, who said to me recently that inflation is absolute poison for incumbent governments precisely for some of the issues that we're talking about. And so as we get closer to elections nationally in 2025-- we have midterm elections coming up in the United States-- I think the pressure for politicians to respond will be significant. But I'm afraid that the economic costs of those response may be only higher and longer inflation.

ALICJA SIEKIERSKA: I think you're definitely seeing that pressure especially ramp up on the federal government, and as well on the Bank of Canada, just the fact that the May numbers were so high and the bank has already signaled it's going to be on an aggressive path to hike rates. But now there's even more pressure to hike at a faster clip. The 50 basis point hike was essentially baked in for July. But now most economists are expecting it to be 75 basis points, following what the Federal Reserve did a few weeks ago.

But now there's that concern, as you mentioned, that rapidly rising rates could actually contribute and trigger a recession. Canada's finance minister, Chrystia Freeland, as you mentioned, was asked about these recession concerns on Sunday. Here's what she told the CBC's Rosemary Barton.

CHRYSTIA FREELAND: I think that a soft landing is absolutely possible for Canada. And I actually think of all countries in the G7-- I would say of all of the world's industrialized economies-- Canada has a better chance of accomplishing this soft landing coming out of the COVID recession than any other country I can think of.

ALICJA SIEKIERSKA: So while she is striking an optimistic tone there, she did also say there is no guarantee that the economy would avoid a recession. I think it's important to note that. So let's start with the minister's comments here. What strikes you, Sean, about what she said?

SEAN SPEER: Well, the government will make the case that various policies that it's enacted over the past several years, as the minister says, positions Canada better to kind of go through this transition that we're seeing from a highly stimulative fiscal and monetary policy to a much more constrained fiscal and monetary policy equilibrium.

The one area that I think she's probably understating, though, Alicja, is the country's high level of household debt, including mortgage debt. We've seen various studies over the years from the Bank of Canada, the Department of Finance, and external organizations point out that Canadians are amongst the most indebted households among peer jurisdictions. There's been several pieces of analysis in recent days that shows that if and when Canadians experience significant spikes in the interest rates on their mortgages, it risks putting those costs outside the reach of many people.

So it's fair enough to say that we're reasonably well positioned. But I think that probably understates how challenging a higher interest rate environment will be for Canadian households that have significant mortgage debt, significant credit card debt, and significant student loans, et cetera, et cetera. I don't want to sound hyperbolic. But I do think that the next several months are going to be pretty painful for a lot of Canadian households. And that kind of message will seem a bit out of touch, I think, for the minister and the government.

ALICJA SIEKIERSKA: It's definitely something I think you're seeing-- you saw before the pandemic a lot of talk about Canada's indebtedness and the high levels of debt that Canadian households have on their balance sheets. But it's only gotten worse as house prices have skyrocketed through the pandemic. Now we saw a budget not too long ago that was aiming to address housing affordability. It's hard to believe that this was just a few months ago because it seems like so much has changed and that people are looking to the government to do something to address these issues. So do you think that the pressure for the government to exhibit more fiscal restraint perhaps is just ramping up and will continue to ramp up in the coming months?

SEAN SPEER: That's an interesting question. To the extent that there are calls for fiscal restraint from voices like Pierre Poilievre, of course, the aspiring leader of the Conservative Party of Canada who's made this a key part of this is political proposition. I think it'll be offset by calls for households for some kind of support or dispensation like we've been talking about, whether it's a GST holiday or a gas tax holiday or even some kind of reprieve from the carbon tax.

I will say this, though, Alicja. We're going to talk a bit about delays at passport offices. We've talked in previous weeks about issues at airports. Now we're talking about the extent to which an expansionary fiscal policy has contributed in some way to this high inflation environment in which we're now living. I do think that this set of issues, broadly speaking, probably represents a kind of net harm to progressive ideas about a kind of more active role for the government in the economy and society.

I don't know if viewers will remember in 2010 when the Democrats lost seats in the midterms in the United States, it was less about the public opposing Obamacare itself as a health care agenda so much as it was the Obamacare website not working. That seemed to be symbolic or representative of the kind of limits of progressive thinking about the size and role of government.

And one wonders if the kind of cumulative effect of these sets of issues may actually open the door for Poilievre and others to advance a more constrained view about the capacity of government to kind of engineer economic and social outcomes. I guess that's a long way of saying if we've been living in something of a kind of progressive ascendancy for the past several years, including during the pandemic, one wonders if the net effect of these experiences is to kind of tilt politics in a more conservative direction going forward.

ALICJA SIEKIERSKA: Do you think this puts any of the kind of marquee policies that the Trudeau government has put forward at risk, just the changing economic circumstances that we've seen over the last six months?

SEAN SPEER: That's a good question. I think probably the short answer is no, that the government seems pretty committed to his agenda and of course is dependent on support from the New Democrats, as viewers will know, in Parliament. And so that will probably keep them focused on those issues. But I think we will see the government start to take comments from Bill Morneau and others to heart, that it's been focused too much on redistribution and not enough on growing the economy, particularly on the supply side.

So if the government wants to be perceived as being reactive and responsive to these new and evolving economic conditions, I think it'll have to adjust at least its message, if not its agenda, to focus more on kind of meat and potato issues of economic growth and less away from what one might describe in broad terms as a kind of social justice set of priorities.

ALICJA SIEKIERSKA: Now, Sean, you mentioned the website issues with Obamacare. I think that's a perfect transition to our next topic, which is the passport backlog that we are seeing. We spent a lot of time talking on the show about the chaos at Canadian airports. There are also long lines at Service Canada centers and passport centers across the country. In some cases, people are actually camping out at passport offices overnight to try to get a spot in some of these long lines. Now, the government is dealing with a significant backlog of passport applications.

According to statistics from the Globe and Mail, there were just 363,000 applications in the first year of the pandemic. The following year, that climbed to 1.3 million. So added basically a million new applications the next year. Ottawa has announced a new task force to deal with the delays in immigration and passport processing. Sean, what do you make of that response to this issue?

SEAN SPEER: As I said, Alicja, these kinds of just basic service provision issues are kryptonite for governments. People pay a lot of taxes. Most people don't interact a lot with the government. I don't know about you, but my expectations for my personal sort of relationship with the government is pretty limited at this stage in my life. But I do expect that at some just basic level I should be able to get a passport without having to sleep outside a passport office or sit out there for several hours at a time.

So I think, if anything, the government is probably slow to react to this. And I think you've seen some amount of metaphorical eye rolling to the creation of a task force to deal with such a kind of fundamental problem. It seems to me that if the government doesn't have a more substantive response in the short term, this is the kind of issue that, again, a politician like Poilievre is going to seize on.

And I'll just say one final thing. Governments typically lose elections over time because of issues that are really tangible that people can kind of connect with in a personal way. People don't necessarily always follow or understand some of these like hyper complex political issues. But I think this is an issue that not only will resonate with a lot of people, it's an issue that the perceptions will harden and last for some time. And so if I was working for the Prime Minister, this would be priority number one.

How do you solve for this kind of immediate crisis around lengthy delays? And what's interesting is today in the Globe and Mail-- we're having this conversation on June 28-- a former senior official at Passport Canada set out what struck me as some pretty practical ideas on how to deal with the backlog, including temporary renewals of passports that are expiring, at least to take some of the pressure off the system in the medium term. It's just shocking to me that we haven't seen ideas like that pursued by the government. Instead, a task force comprised of politicians, which just strikes me as the kind of thing that ordinary people roll their eyes at.

ALICJA SIEKIERSKA: Yeah. And I would argue that this situation is slightly worse for the federal government than even the airport delays because it is really involving one level of government, whereas the airport delays you saw blame kind of being pointed around. There's different organizations and groups that are running the airport as provincial involvement. It just seemed like there wasn't one thing to blame there necessarily. Whereas here, it's just, this is getting a service, providing a service to people, and they seem surprised by the backlog that they had through the COVID-19 pandemic. So I mean, how do you think this reflects on the federal government and its ability to provide this kind of basic service?

SEAN SPEER: Let me just start by saying I completely agree with that characterization. I still don't fully understand what's been behind these long lineups at the airport because, as you say, there's a kind of a combination of blame to go around between the government, the airports themselves, and then some of the airlines. Whereas in this case, the blame is more clearly laid at the feet of the federal government.

You mentioned I worked for Stephen Harper. So as to assure viewers that this isn't a kind of partisan view, let me just say that this problem has been a persistent one at Passport Canada for some time. In fact, when the Harper government was in power, the government faced similar issues with long delays for passport renewal or passport issuance. And what the government did at that time was simply double the timeline in which one could have a passport.

So it didn't get to the kind of structural problems. I mean, that was a kind of cosmetic change to effectively overcome structural impediments to passport issuance. And so it does speak to a much deeper kind of structural problem in basic service delivery at the federal level that transcends any one party or government.

But as I said earlier, at a kind of fundamental level, I can't help but think, Alicja, that it will start to erode people's confidence in the ability of government to do more fundamental things. I mean, the Trudeau government is talking about government playing a key role in catalyzing an energy transition, for instance. If you can't get a passport for months, how is the federal government possibly going to help to lead a fundamental change of our energy mix?

And so I can't help but think that whether the blame ought to lie of this particular government or at state capacity more generally, a net effect is if you are a kind of limited government conservative, you're probably heading into a political environment where there'll be more interest and kind of resonance in your ideas than there has been for probably more than a decade, really since prior to the global financial crisis in 2008-2009. So for those viewers who are a bit more skeptical of government, I suppose that may be a good thing. But for ordinary people who just want to go on a trip for the first time in two years, this is a real crisis.

ALICJA SIEKIERSKA: Yeah. And interestingly, that solution to double the length that you can have a passport from 5 years to 10, that was started in 2013. And so we're seeing a lot of those passwords actually expire, which it's interesting, just the timing of that, because you do need to get that and start working on your applications within six months of it expiring.

And I wonder how much that is also just contributing to the backlog in that people are finding themselves in a situation where they're who had it for 10 years and now are facing such significant delays. I'm certainly glad that mine doesn't expire for another few years. But Sean, this is all the time that we have for today. Thank you so much for joining us.

SEAN SPEER: Thanks as always, Alicja.

ALICJA SIEKIERSKA: And as always, if you were looking for the latest business news, please check out our Yahoo Finance Canada website. And if you have any feedback about the show, please feel free to email me. I'm at alicja@yahoofinance.com. Thanks for watching.

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