Witness Testimony, Opening Remarks, House of Commons Standing Committee on Finance
Even if our problems are, in part, global, the solution can’t be outsourced to New York, Geneva, or Davos — the solution is right here at home in Canada.
WITNESS TESTIMONY, FINA, HOUSE OF COMMONS, MAY 24, 2022, OPENING REMARKS
Lightly edited from the version shared with the Committee
Vivek Dehejia
Thank you, Mr. Chair. When I gave testimony before this Committee just two months ago, I expressed my concern about rising inflation in Canada. When I was last here, virtually then, it was 5.7 percent. Since then, CPI inflation jumped to 6.7 percent and now 6.8 percent. Inflation remains an issue, and, despite the Bank of Canada’s recent interest rate increase, both the central bank and the government are going to need to remain vigilant that we do what is necessary to bring inflation back under control, for reasons that I went into in detail during my last testimony.
Today, in my opening remarks, what I would like to highlight is the relationship between the large fiscal deficit — which fuels a currently high deficit and debt to GDP ratio — and rising inflation. Whenever the federal government increases its deficit, that money has to come from somewhere, and, in the absence of new taxes, it comes from borrowing. When that happens, it puts upward pressure on interest rates, and creates a problem economists call “crowding out” — public spending sucks up investment dollars and makes private investment more expensive. The net effect is that the share of public spending in total GDP goes up relative to private spending — in other words, our economy becomes more socialized.
The government projects both deficits and the debt as a percentage of GDP to decline, but these depend upon fairly optimistic assumptions about GDP growth. With a protracted war in Ukraine, that now seems more likely than ever, and continued pressure on energy prices and global supply chains, still reeling from the COVID19 pandemic, GDP growth may be low, zero, or even turn negative — taking us into stagflation — with low or stagnant growth and high inflation.
We’ve seen this movie before in Canada, both in the 1970s, when it affected the US and other advanced economies, but again in the late 1980s and early 1990s. It never has a happy ending. Invariably, loose fiscal and monetary policies that lead us to stagflation have to be combatted by tight fiscal and monetary policies — that inevitably cause a recession before the fiscal and monetary house is put in order.
That’s an avoidable scenario — if the government works harder to get onto a steeper and more realistic fiscal consolidation path, and if the Bank of Canada aggressively tackles inflation, by raising interest rates and pushing ahead with quantitative tightening — for which it needs the moral support of the government.
Finally, Mr. Chair, we often hear that the current economic woes we face in Canada are a “global problem”. But, as I told the CBC the other day, this is a half-truth, at best. High inflation in Canada is as much or more a product of a decade or more of loose fiscal and monetary policies as it is due to the pandemic or Ukraine. What’s more, even if our problems are, in part, global, the solution can’t be outsourced to New York, Geneva, or (I daresay) Davos — the solution is right here at home in Canada’s fiscal, monetary, and regulatory policies.
I’ll leave it there, Mr. Chair, and I look forward to your questions.
Vivek Dehejia is Associate Professor of Economics, Carleton University, Ottawa, Canada.
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You can find a link to the meeting announcement and a video recording of the meeting itself here.