Prime Minister Justin Trudeau flew out this week for a series of meetings abroad, leaving behind a failed government. While he makes his mark on the international stage — at the Commonwealth, G7 and NATO summits — his ministers become entangled in one crisis after another that challenges their competence. The imbroglios persist in the passport offices and the country’s airports. And, as if this government never learned from its mistakes, accusations of political interference in an RCMP investigation once again put the Prime Minister’s Office in the hot seat, painfully reminiscent of the SNC-Lavalin affair. The future of Mr. Trudeau as leader of the Liberal Party of Canada is suddenly once again a hot topic for many Liberals.
Alas! The one that some see as the natural heiress of Mr. Trudeau, the Minister of Finance and Deputy Prime Minister, Chrystia Freeland, is also in trouble. Even before Statistics Canada revealed this week that inflation rose to 7.7% in May — its highest level since 1983, when Mr. Trudeau’s father occupied 24 Sussex — , Mme Freeland has been accused by several economists of having contributed to the flight of consumer prices with its overly stimulative fiscal policy.
After opening the floodgates during the pandemic, Mme Freeland continues to overspend, even though the unemployment rate is at an all-time low and the economy is booming. To counteract the inflationary effects of the Trudeau government’s fiscal policy, the Bank of Canada must raise interest rates faster than expected. Instead of calming inflation in a gradual and orderly fashion, the central bank is thus forced to administer a strong remedy.
“Right now, the Bank of Canada bears the burden of bringing down exceptionally high inflation on its own, even though it’s clear that most of the rise in inflation since the pandemic has come from by fiscal policies that in Canada (and elsewhere) were designed to protect businesses and households from the economic shocks of the pandemic, wrote Scotiabank Chief Economist Jean-François Perrault in a analysis published earlier this week that made a lot of waves in Ottawa. It is fair to say that in Canada the bureaucracies responsible for fiscal policy are not doing anything big enough to slow inflation. »
Most economists on Bay Street are now forecasting a Bank of Canada rate hike of 75 basis points (or 0.75 percentage points) in July followed by a similar hike in the fall. Mortgage rates would thus skyrocket. A much-desired soft landing for the Canadian economy and real estate market would become mission impossible. Canada would be plunged into a recession with harmful consequences given the country’s high level of household debt.
This is the dilemma facing M.me Freeland as opposition parties urge her to help Canadians cope with rising consumer prices. Lowering taxes at the pump or sending checks to the public would only fan the flames of inflation, forcing the central bank to tighten the screws even further. In a speech to representatives of the business community in Toronto last week, the minister tried to respond to criticism by presenting an $8.9 billion “new support package” to make life more affordable . This plan essentially consists of measures already announced in previous budgets, including the establishment of a ten-dollar-a-day national child care program.
At the same time, she boasted of having demonstrated rigor in her last budget, tabled in April, while recalling that most of the factors responsible for the rise in global inflation are beyond the control of her government. “Canada has no say in Beijing’s public health measures and is certainly not consulted when the Kremlin is making its plans for war,” she said.
Maybe. But neither is she free from blame. Unfortunately for her, the economic situation is likely to prove even more complicated when Parliament returns this fall. If inflation helps to replenish federal coffers in the short term, its impact on government operating costs will inevitably be felt. Since Mme Freeland justified record spending during the pandemic by pointing to the attractiveness of borrowing rates, debt service is likely to become increasingly burdensome as interest rates rise. For the alleged natural heiress of Mr. Trudeau, inflation is confusing the cards. His political future suddenly seems heavily mortgaged.
Please note that this column is on hiatus for a few weeks. She will be back in August.