Federal spending does fuel inflation, but it’s worth the hit: Desjardins

The federal government should not cut spending to tamp down inflation, a new report from Desjardins argues, but economists say there is some action Ottawa could take.

A new report calls on Ottawa to stick to its spending plans amid criticism that the federal government isn’t doing enough to combat surging inflation, while some experts suggest policymakers could crack down on price gouging without adding fuel to the fire.

Decades-high inflation levels in Canada have turned up the political heat on Ottawa in recent weeks.

A report from Scotiabank earlier this month charged the feds with abandoning their “joint responsibility” to tamp down inflation with the Bank of Canada and “doing nothing” to meaningfully reduce price pressures.

Those projections said if Ottawa trimmed its planned spending increases over the next few years, the Bank of Canada wouldn’t have to raise interest rates as high, potentially saving some economic pain in the months to come.

While most economists point to the war in Ukraine and other supply constraints as keeping inflation persistently high through the first half of 2022, many also point to the role of higher government spending — as well as rock-bottom interest rates — through the pandemic as having stirred the inflationary environment in the first place.

Bartlett authored a report released Thursday that attempts to respond to the criticisms about government spending and inflation.

The report did not deny the role the Canadian government — and indeed, administrations around the world — played in fuelling today’s inflationary pressure amid a global effort to protect the economy from the steep downturns of the pandemic.

But Bartlett and his colleagues write that while spending is part of what got the world into this mess, intense austerity is not necessarily the way out.