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, it was 5.7%. Since then, CPI inflation has jumped to 6.7% and now 6.8%, and possibly will go higher.
Inflation remains a big issue, and despite the bank's recent interest rate increase, both the central bank and the government are going to need to remain extremely vigilant that we do what we have to do to bring inflation back under control, for the reasons I went into, in my last testimony, in great detail.
Today I want to highlight the fact that there is an important relationship between the large fiscal deficit, which fuels the current high deficit and debt-to-GDP ratio, and rising inflation.
Whenever the federal government increases the deficit, that money has to come from somewhere. 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 debt to decline, but these depend upon fairly optimistic assumptions about GDP growth. Now, with what is likely to be a protracted war in Ukraine, and pressure on energy prices and global supply chains, GDP growth may be below zero or even turn negative. We may go into recession, and that will create an even bigger problem.
We've seen this movie before in Canada, both in the 1970s and again more recently in the late 1980s and early 1990s, and it never has a happy ending. Invariably, loose fiscal and monetary policies that lead us to stagflation have to be combatted with tight fiscal and monetary policies. They invariably cause a recession to occur as a by-product of fighting high inflation and the stagflation problem. That's an avoidable scenario if the government works harder to get onto a steeper path of debt and deficit reduction and if the bank aggressively tackles inflation by raising interest rates and pushing ahead with its QT policy, meaning that it stops buying government bonds and so forth, for which it needs the moral support of the government.
As a last word, Mr. Chair, we often hear that the current problems we face in Canada are a "global problem", but as I told the CBC a few days ago, this is a half-truth at best. High inflation in Canada is a product of a decade or more of loose monetary policies and high fiscal spending. While it's true that part of the high inflation right now is a by-product of the war in Ukraine and energy price increases, those aren't the whole story. Even if the problem is partly global, we can't outsource the solution to Washington, New York, Geneva, or, I dare say, Davos. The solution is right here at home in our fiscal and monetary policies.
Thanks, Mr. Chair.