Inflation to persist over near term, Mintz says

Higher inflation will persist over at least the next couple of years and force the Bank of Canada to raise interest rates as soon as 2022, tax economist Jack Mintz said on Monday.

“If [the Bank of Canada] sees inflation that’s going to be hitting 3%-4% and it starts getting embedded in wage rates, which I think is going to happen because of labour shortages, then I see higher interest rates coming in the future — and we’re going to be looking at it probably starting next year,” said Mintz, president’s fellow at the University of Calgary’s School of Public Policy. Mintz gave an economic outlook presentation Monday at the 2021 virtual Distinguished Advisors Conference.

With tougher monetary policy to fight inflation, higher rates globally will lead to sharply higher public debt charges, he said. The federal government posted a record $354-billion deficit in fiscal 2020-21 while providing pandemic support to businesses and individuals. Canada’s gross debt rose to 118% of GDP, an increase of 36% from the previous year.

“There is now a much bigger base of debt that has to be funded, and Canada has one of the shortest term structures amongst OECD countries when it comes to government debt,” Mintz said. “As a result we will be much more sensitive to rising interest rates than you will find in other places.”

Higher debt payments will leave the government no choice but to delay or shelve costly spending initiatives, he said.

“Minister of Finance [Chrystia Freeland] says we have this low cost of funds — this is the time to make big investments,” Mintz said. “But I think that attitude is going to have to change very quickly; otherwise we’re going to get ourselves in serious trouble.”

Mintz suggested that inflation pressures are being stoked by demand — fuelled in part by government financial support — outstripping supply that’s constrained by rising labour costs, persistent supply chain disruptions and surging commodity costs, particularly energy prices. Based on current trends, he sees Canada posting an inflation rate of close to 4% for 2021.

“In my view, we are in a period of stagflation in the sense that we have this rising unemployment — before the pandemic unemployment was much less — but we also have much higher inflation today compared to pre-pandemic,” Mintz said. “It’s maybe a temporary stagflation, but we are in stagflation right now.”

The unemployment rate in August 2021 was 7.1%, down 0.4% of a point from the previous month, but above the 5.7% rate in February 2020.

In the coming years governments around the world will be challenged by trends such as digitization and the hollowing out of the urban cores in favour of the suburbs, which were accelerated during the pandemic, Mintz said. They will also have to contend with enduring issues that pre-date the pandemic, such as aging populations, lagging investment in innovation, the transition to renewable energy from fossil fuels, inequality, and the potentially growing tax burden of Canadians.

Mintz predicted that the federal government will try to raise revenue by targeting tax increases on high earners and the wealthy, which would be an easier sell politically, particularly for a minority government.

“I expect we’re going to see a lot of naughty [tax increases], where you’re going to see tax being imposed on a very small part of the population, [where there are] fewer people to scream, rather than a broad increase,” Mintz said. However, “there could be broad ones, [such as] eliminating the indexation of tax brackets in the future.”

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.