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Canada: Stagflation Begs for less Government not More



By Lee Harding, Frontier Centre for Pubic Policy


The era of low interest rates and low inflation has ended, and now both are mushrooming higher. Canadian year-over-year inflation was 7.7 per cent in May, the highest in nearly 40 years but this author predicts it will go still higher. It’s a worthy time for governments to show restraint but recent precedent suggests that’s unlikely.

Ten years ago, Parliamentary Budget Officer Kevin Page analyzed compensation in the federal civil service and found that when benefits were included, the average federal worker received $114,000. This was substantially more than the confidential study James Lahey did for the Paul Martin government in 2003, which estimated average compensation at $73,400.

We don’t know what that amount is now, but we can expect it to keep growing in lieu of a resolute commitment to balanced budgets. Otherwise, it’s far easier for governments to keep their unionized workforce happy and shrug their shoulders when taxpayers complain. But from a policy perspective, the timing is terrible. The public sector’s defined-benefit pension plans have stacked up obligations for years, and the retirement of baby boomers has made it payback time.

This would be more tolerable if economic growth kept up with inflation, but it won’t. The World Bank’s recent Global Economic Prospects report anticipated GDP growth to drop from 5.7 per cent in 2021 to around 2.9 per cent this year and next. They expect damages from the pandemic and war in Ukraine to reduce per capita income growth in developing economies to nearly 5 per cent below pre-pandemic levels.

High inflation and stagnant economic growth also occurred in the 1970s, where energy costs and public debts mushroomed. The problem this time around is that that the phenomenon could stick. Our supply chain problems won’t leave soon, our aging demographics can’t be manipulated, and the push for net zero carbon emissions will drive up government spending, energy costs, and inflation for decades.

Inevitably, public sector unions will push for wage increases to outpace inflation. While it’s their job to ask, it’s the government’s job to say no. It is the worst time to make private sector workers dish out more—their incomes are already losing ground to inflation. And taxes and public debt are high enough as it is without more still.

It’s not a high time for governmental restraint. An analysis by the Canadian Taxpayers Federation in January showed that 528,347 government employees got a pay raise during in 2020 and 2021 but none received a pay cut. Worse, the CTF also uncovered a report prepared for Canada Mortgage and Housing Corporation that included recommendations for a home equity tax.

A government that bypasses income to reach for wealth is already desperate and audacious. Canadians can’t afford that, especially when rising interest rates are already cooling housing markets. If the government did so, it would represent a tax grab at the most opportune time—grab it while homeowners have value (because soon they won’t). While federal government childcare programs coax parents out of their homes, that same government could grab a piece of their home to pay for it.

We can hope and pray and push for better government. In the meantime, Canadians will have to hunker down. There’s a storm coming and it won’t pass quickly.


Lee Harding is a Research Associate for the Frontier Centre for Public Policy.