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Trudeau Says New Spending Won’t Fuel Inflation. Scotiabank Disagrees

·3 min read

(Bloomberg) -- Prime Minister Justin Trudeau announced a package of measures to help Canadians cope with steeply rising prices, with a major bank and his main rival warning the new spending will only make the problem worse.

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The government will double for a period of six months a sales tax rebate received by low-income earners, at a cost of C$2.5 billion ($1.9 billion). It will also top up a housing benefit for renters, worth about C$700 million in additional spending, and fund a promised dental-care plan.

Tuesday’s measures are “sufficiently targeted that we are confident they will not contribute to inflation,” Trudeau said in St. Andrews, New Brunswick, where his caucus is meeting. “We are retaining fiscal firepower and at the same time ensuring that those who need support don’t get left behind.”

Unlike many of his global peers, Trudeau has avoided taking new measures to ease the burden of rising prices, even with inflation at its highest level since the early 1980s, in part because of concerns more spending could stoke inflation. But it’s become increasingly difficult to hold off, particularly after Pierre Poilievre’s resounding victory in this weekend’s Conservative Party leadership election.

The populist firebrand focused relentlessly on the cost of living during his campaign. And within hours of Trudeau’s announcement, he hammered the prime minister for unveiling “more inflationary spending that will fail to solve the problem for everyday Canadians.”

Speaking to reporters outside the legislature in Ottawa, Poilievre added: “The problem with spending more money as a solution to inflation is that it simply pours more gasoline on the inflationary fire. And that is exactly what Justin Trudeau continues to do.”

Economists had already begun to warn Trudeau against measures that could worsen inflationary pressures. Since last week, three of the country’s largest commercial lenders -- Canadian Imperial Bank of Commerce, Bank of Montreal and Bank of Nova Scotia -- have released reports expressing concern over using revenue windfalls for additional spending.

Scotia doubled down on its criticism Tuesday. “It seems sensible to assume that this will add to pressures on measures of core inflation,” economist Derek Holt said in a report to investors. “Any belief that it will ease inflationary pressures must have studied different economics textbooks.”

The government also announced plans to start a new dental care program for children in low income families later this year, putting the cost at C$938 million. That funding and housing benefit were outlined in a power-sharing deal the Liberals signed with the left-leaning New Democratic Party earlier this year.

Trudeau said bills to enact these measures will be the first order of business when the parliamentary session gets fully underway next week from its summer break. (Lawmakers will briefly return on Thursday to commemorate the death of Queen Elizabeth II, and the prime minister indicated Monday would be a federal holiday in her honor.)

The government’s affordability measures come as the central bank aggressively tightens policy, raising the benchmark overnight interest rate by 75 basis points to 3.25% last week. That move gave Canada the highest policy rate among major advanced economies.

While Canada’s headline inflation eased in July to 7.6% on a drop in gasoline prices, Bank of Canada policy makers pointed to a broadening of price pressures and increasingly sticky core measures, and said they expect to continue raising rates in the coming months.

Between Trudeau’s new spending measures and a hotter-than-expected US inflation report earlier Tuesday, Holt said the Bank of Canada may have to hike rates beyond 4% before easing its foot off the brakes.

(Updates with reaction from Bank of Nova Scotia and Pierre Poilievre)

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