This column by Armine Yalnizyan was originally published by the Toronto Star on Friday February 24, 2023. Armine is a Contributing Columnist to Toronto Star Business featured bi-weekly.
At recent closed-door economic roundtables I attended with government and opposition parties, both federal and provincial, the conversation went something like this: Inflation is cooling. But it could go up again soon. Monetary policy is taming inflation. But other factors are at play. You can expect a Canadian recession this year. Or maybe not.
I’ve never witnessed such a lack of consensus among those who are paid to know where the economy is headed.
It’s such a turnaround from the early months of the pandemic, which revealed little light between economists of different persuasions on how to deal with the unknowable. (“Governments, please act. And fast!”)
Today, humility is amply merited.
There are so many countercurrents in the world economy, it’s not possible to be sure which forces will dominate the evolution of inflation. Fractious geopolitics? China’s economic reopening? Increasingly frequent extreme climate events? Re-shoring production and friend-shoring supply chains? Tight labour markets?
Central banks have characterized the main problem as short-term inflation, and the solution as monetary policy designed to cool demand and give supply time to catch up. As we learned, it’s The Plan. And The Plan always works.
In fact, the problem isn’t just wrestling inflation down to the central bank target of two per cent. Even if inflation were to hit zero per cent in the months to come, the problem would remain the affordability — actually unaffordability — of basics such as housing and health care.
Monetary policy can’t fix affordability; in fact in some cases, it makes it worse. Housing prices, I’m looking at you. No, it’s fiscal policy’s turn now, the tool governments use all too rarely to tackle affordability (a striking exception to the rule being the $10-a-day child-care plan).
Instead, Ontario aims for a more secure economic future by focusing on advanced manufacturing, and federal fiscal policy is doubling down on innovation and growth, with another $700 million in recently announced funding. The problem is that innovation is just the icing on the cake. And you can’t ice a cake that’s crumbling.
Ontario is seeing net losses to interprovincial migration, something that hasn’t happened since 1980, notwithstanding the fact that Canada is experiencing the fastest pace of population growth since the 1950s.
Blame it on housing affordability.
Housing affordability, particularly for renters, was a problem long before inflation hit the fan. Monetary policy has made things worse. Mortgage payments are up 21 per cent from a year ago. Rents are up six per cent. Both are the highest rates of increase since the early 1980s.
Food prices have outpaced general inflation for 14 months. Monetary policy hasn’t “cooled demand to let supply catch up” for pasta (up 26 per cent) or cooking oil (up 22 per cent) or eggs (up 16 per cent).
Fuel prices have gone up, and come back down, but are still 36.5 per cent higher than this time last year.
Low-income households are being squeezed most by these relentlessly increasing costs. When central bankers suggest higher unemployment is the ticket to inflation salvation, low-income workers end up paying the highest price for the good of us all.
There’s a better way to cure what ails us. Here are five fiscal approaches that could lower costs, tackle long-term affordability and create more economic resilience:
Reform Employment Insurance: Ensure we are recession-ready, whether the downturn is shallow or deep. Eligibility for jobless benefits should be triggered uniformly, everywhere, if you have 360 hours of employment (in the early 1980s, it was 165 hours, the early 1990s, 255 hours). Duration of benefits should be variable, based on how much unemployment has increased in a region.
Build more affordable rental housing: Make up the difference in escalating borrowing costs due to monetary policy so we don’t delay building a single unit of affordable housing. We’ve lost hundreds of thousands of affordable rental units in the past few years. Federal supports are creating new affordable rentals at about half the pace of the 1970s, while population growth is twice as fast.
Fund school food programs: Food insecurity is on the rise, and locally funded programs are straining to raise funds. Hungry children struggle to learn. According to reports, Canada is the only country in the G7 without federal funding for children’s school food programs. Development of a National School Food Policy is in the mandate letters of the Ministers of Families, Children and Social Development, as well as Agriculture and Agri-Food Canada. With no end in sight for soaring food costs, there’s no time to waste.
Focus on low-income households for energy-efficiency retrofits: Current federal energy efficiency programs reimburse people who qualify for retrofits. That doesn’t help the people who don’t have the cash up front. Provinces and utilities have zero-cost programs for low-income seniors’ and renters that can be bolstered. Doubling down on energy efficiency for low-income households could see public funding achieve double or triple duty: reduce energy bills, lower carbon footprints and create local jobs.
Avoid wasting money in health care: All governments need to prevent the galloping profitization of care, or we will spend more than we need and still not provide care for those most likely to need it: low-income seniors, workers, people with disabilities, Indigenous populations and immigrants. Dental care for kids is an important initiative, but the program should evolve from simply a voucher to see a dentist (the most expensive part of the system) to bringing primary and preventive care to kids in school using dental technicians, like we did in the 1970s.
In all the discussions I’ve participated in recently about what to do next, there’s been essentially no pushback on such policies, which save money and improve lives and would firm up the foundation for whatever happens next.
We all witnessed the power and impact of fiscal policy during the pandemic. Affordability, not just inflation, is the problem we need to tackle, as most economists would agree. Let’s make fiscal policy great again.