‘Politicians have to be very careful’ with inflation response

With inflation reaching highs not seen in nearly four decades, pressure is ramping up on governments to provide Canadians with some form of relief from high prices.

But governments will have to be “very careful” when it comes to inflation relief, says the Public Policy Forum’s Sean Speer. He says that some policies, such as sales tax holidays, could result in higher interest rates if the Bank of Canada has to offset further boosts in demand.

However, one area where Speer sees opportunity for the government to provide Canadians with financial relief is with the carbon tax.

“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,” Speer said.

“That's one area where I think the government could take action without necessarily producing (a) challenge for the Bank of Canada.”

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

Video Transcript

[MUSIC PLAYING]

SEAN SPEER: 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. You know, Finance Minister Chrystia Frelund said in a speech not that long ago that a soft landing isn't guaranteed. And it seems to me she wasn't just, you know, observing that as an external observer. She was, you know, 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 Frelund'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. In 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 said-- 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 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. And so, you know, I've seen calls for sales tax holidays or temporary sales tax reductions. You know, 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-- 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, you know, 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.