Pierre Poilievre says Trudeau’s inflation relief package will hurt Canadians — but it won’t and here’s why

By definition, personal saving is the difference between personal disposable income and personal consumption expenditure. Therefore, savings are the residual – what is left of disposable income after one’s consumption needs have been satisfied.

Although it sounds like a truism, a saver is someone who has the ability to save. That is, someone with a relatively high disposable income—income in excess of what they need to meet their basic and non-basic consumption needs.

As a result, those who cannot save are those with relatively low disposable incomes – income that is sometimes below what they need to meet even their relatively smaller consumption needs. And among this group of non-savers, some may even have to borrow to meet their spending needs, while others may be forced to reduce their consumption to levels that most find unacceptable.

Now that inflation is rampant, everyone is affected, regardless of income. Indeed, inflation reduces everyone’s real disposable income – that is, the purchasing power of income falls with inflation.

Mind you, not everyone is affected equally.

On the one hand, people with a relatively high disposable income do not have to curb their consumption when prices rise. Actually, they can consume as much as before – but now they pay more and thus save less.

On the other hand, some lower-income individuals may need to borrow more to maintain their consumption levels, while others may need to reduce their levels even further.

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As such, inflation appears to be hurting those on low incomes the most — and this group will benefit from the federal government’s recently announced $4.6 billion inflation support package.

While not surprising, the response of some conservative commentators and politicians to this government support initiative seems misguided. Believing that inflation always results from too much money chasing too few goods, their reaction was as expected. Conservative leader Pierre Poilievre, for example, says that “the problem with spending more money as a solution to inflation is that it simply pours more fuel on the inflationary fire”.

Poilievre is right that the government package is not a solution to the inflation problem. But anyway, it doesn’t do that. It’s just an aid package, a band-aid. In other words, it only intends to mitigate the impact of inflation on the most vulnerable members of society.

But if this package isn’t a solution to today’s inflation problem, it isn’t a rate hike either. We must understand that the source of today’s inflation is neither excessive demand nor inadequate wage increases, and therefore today’s inflation is not a job for the Bank of Canada. Therefore, with its restrictive monetary policy, the bank does not attack the domestic source of inflation – namely the greed for profit of large companies – and drags the economy into an unnecessary recession.

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And without a doubt, rate hikes will make things worse for low-income Canadians the most. In fact, those who are laid off first in a recession tend to be the less-skilled workers with lower wages. In addition, higher interest rates contribute to further lowering the standard of living of indebted low-wage earners through rising debt service costs.

At the same time, higher interest rates benefit savers – that is, higher-income Canadians with savings capacity. Indeed, higher interest rates help increase their incomes, thereby helping offset some of the cost inflation that may have been imposed on them. Eventually, rate hikes lead to a transfer of income from borrowers to lenders, a redistribution of income in favor of the pension class.

But Poilievre is right that the $4.6 billion package represents an injection of new money into the economy – as all government spending always does. But that’s a very small addition, accounting for just 0.2 percent of GDP — so it can’t fuel inflation significantly, if at all. And Poilievre’s argument isn’t that lower-income Canadians don’t deserve help in these trying times – rather he’s suggesting that by raising inflation, the government package will somehow make their situation worse.

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Mmmm… doesn’t that sound familiar? Doesn’t it remind you of the argument against raising the minimum wage because it would reduce employment and harm those who are meant to be helped? It does.

However, if the intent is to protect lower-income Canadians from the harm of inflation, why doesn’t the government listen to conservative criticism and implement this bailout without increasing the money supply in the economy? That is, if the package implies an injection of $4.6 billion of “new” money, why doesn’t the government simultaneously pull $4.6 billion of “old” money out of the economy? That way, the inflation stimulus package would not “put more fuel on the inflation fire.”

And if government spending is an injection of “new” money, every government tax is a withdrawal of “old” money. Therefore, I would suggest funding this relief package with a tax hike for those who are not only least affected by inflation, but who will also benefit most from the rate hike – i.e. higher taxes on high-income Canadian savers.

Mmmm…that’s an idea. But undoubtedly an idea that will displease conservatives like Poilievre even more.

Gustavo Indart is Professor Emeritus in the Department of Economics at the University of Toronto.

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