As the Bank of Canada increases interest rates to bring inflation back down, it’s encouraging governments to ensure that that their spending doesn’t make inflation worse. Sometimes governments will use this as an excuse to keep wages low for workers, or to avoid making much needed investments in public services.
Making sure that workers’ wages keep pace with the cost of living is a matter of fairness. Right now, workers are taking real wage cuts while government revenues and corporate profits are increasing. In other words, we’re seeing a transfer of wealth from workers to corporations.
The Bank of Canada is warning that we should keep wage increases low to avoid a wage-price spiral. But the simple fact is that workers’ wages are only half of the total value of the economy. To cause a problem, wages would have to increase much faster than inflation – and that’s not happening.
The Bank of Canada also wants to keep wages low to limit “inflation expectations.” Inflation expectations are the rate at which people expect prices to rise in the future. Inflation expectations are often correlated with actual inflation, so the Bank of Canada wants to keep these expectations low. But this does not mean that wages should stagnate. For example, bargaining cost-of-living clauses linked to CPI would create security for workers without a risk of overshooting estimates of future inflation.
Federal and provincial governments have seen their revenues grow substantially due to inflation and can afford to pass those gains on to workers. However, private sector wage gains are outpacing public sector wage increases. Governments should lead by example and ensure their workers’ wages keep pace with inflation.
When governments pull back spending too much, it amplifies the economic forces pushing us towards recession, putting all the pain of inflation on the backs of workers. Governments need to step up and take action to protect workers impacted by the pandemic, by inflation, and by the threat of a recession.
There are ways that governments can reduce the inflationary impact of their spending while maximizing the benefits. Mainstream economists believe that new spending primarily financed by increasing taxes is non-inflationary. Restoring corporate taxes to former, fairer levels can help - especially as we’re now seeing record corporate profits.
Some economists believe that where government money is spent matters even more than where that money comes from. Their work suggests that governments should target spending by providing income supports to those who need it the most. Indexing income supports to inflation, for example, provides immediate help and is far less inflationary than issuing a blanket $250 cheque to every citizen.
Governments can also fight inflation by making medium-term investments that provide lower-cost alternatives for expensive goods. Since in many provinces transportation, energy, and shelter costs are increasing the fastest, these areas are prime candidates for governments to consider. Most of the high-impact spending in these areas – such as building affordable housing, funding deep energy efficiency retrofits, or investing in public transit and rail – might not make an immediate impact, but it is still worthwhile to get started on these efforts now.
If there is a recession next year, as there often is after interest rates are increased so quickly, governments might argue they can’t afford to make these critical investments. It will be important to remind them that public services are what makes our economies healthier – in good times and in bad.