The time is not ripe for the federal government to engage in further spending, observers say
With the federal government indicating that it will be doubling federal goods-and-services tax rebates for six months and providing support for Canadian households burdened by rents, economists have sounded the alarm on such spending actually further inflaming inflation pressures.
“While there are times where fiscal largesse is just what the economy needs, these aren’t such times,” said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce.
“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.”
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Shenfeld added that the spectre of a potential recession should give the federal government pause when it comes to immediately spending the revenue from the first half of the year.
“A recession is a distinct risk in the next two years, so this year’s revenue windfall might not last long,” Shenfeld said. “If another global crisis comes along in future years to sink growth and inflation, whatever fiscal room we can build up now will come in handy.”
Robert Kavcic, senior economist at Bank of Montreal, said that federal spending could actually do more harm than good in the housing sector.
“We’re not going to deny that there are households seriously in need of help right now in this inflationary environment,” Kavcic said. “But, from a policy perspective, we all know that sending out money as an inflation-support measure is inherently inflationary.”
