The federal government is slated to draft a budget amid sustained inflationary pressures
Inflation, coupled with the public’s “inflationary expectations”, is likely to have an outsized influence on the federal government’s approach as it drafts the 2023 budget, according to former Canadian finance minister John Manley.
This is mainly because Canada’s fiscal and monetary policy are not fully in sync, with fiscal deficits and elevated interest rates occuring at the same time, Manley said in an interview with BNN Bloomberg.
Manley called on the Liberal administration to consider reducing federal spending in the current high-inflation environment.
“If they continue with the mindset that we’re still back three years in the beginning of the pandemic, and it’s time to keep holding up the fire hose and spraying the money out just to keep everything going, then I think they’re going to fuel inflation rather than to resist it,” Manley said.
Complicating matters is that Canadian consumers have adjusted accordingly to the expectations that “inflation is continuing to rage,” Manley said.
“Inflation is both science and art,” he said. “There’s lots of data points, and there’s lots of computer modeling around what the economy may do, but there’s also that whole soft side, the art side of it, which is really psychological. What are people’s expectations?”
A potential risk scenario is a self-sustaining cycle of progressively higher wages and ever-growing pressure on prices, Manley warned.
“I think [the feds] have to acknowledge that currently one of their biggest challenges in the economy is inflation and those inflationary expectations,” he said.
