Bank of Canada Governor Tiff Macklem is reminding Canadians it’s not his job to be a part of the federal government’s spending decisions.
He made that point clear at Wednesday’s finance committee meeting, where he was summoned to answer questions about the central bank’s efforts to return inflation back to its two per cent target.
However, that didn’t stop members of Parliament from grilling the governor about the effects of government spending on inflation, and whether Liberal fiscal policies are fuelling or cooling price pressures in Canada.
Macklem pushed back multiple times against this line of questioning from both sides of the political aisle, citing the central bank’s independence and separate spheres of influence on policy.
“We’re not ignoring fiscal policy. But fiscal policy is your job,” he told MPs. “Monetary policy is our job.”
He said the Bank of Canada bakes government spending plans into its inflationary outlooks, adding that while he meets with finance minister Chrystia Freeland on a regular basis, he mostly shares monetary policy updates and only offers his opinion on federal plans if asked.
Macklem did give some broad guidance to MPs about the impact of government spending on inflation, with a few specific examples.
Citing guidance from the International Monetary Fund, Macklem, said government supports that are temporary and targeted towards the most vulnerable Canadians would be ideal to avoid inadvertently fuelling inflation.
When government programs contribute to aggregate demand — they stimulate spending economic output — without accordingly boosting supply. That can push inflation higher, he said.
He cited immigration plans as one area of policy that does both: it adds to the available supply of labour in Canada, but brings in new sources of demand as newcomers earn and spend.
Senior deputy governor Carolyn Rogers, who spoke alongside Macklem, said benefits that support childcare for families has helped boost women’s representation in the labour force. January’s jobs report from Statistics Canada showed the highest-ever participation of women in the workplace on record.
Conservative Party MP Jasraj Hallan asked Macklem what impact the carbon tax has on inflation.
The Bank governor said prescribed annual increases to the carbon tax add about 0.1 percentage points to headline inflation.
He added later that scrapping the carbon tax completely would reduce inflation by half a percentage point in the year that it was done, but would not have any impact on inflation in future years.
Those figures are “pure arithmetic,” Macklem clarified, and don’t factor in other impacts of removing the tax that could offset or stimulate inflation. The Bank of Canada hasn’t undertaken a full study of such a scenario, he said.
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