Inflation is just a symptom. High tax & regulation are the problem

Not all problems can be solved with money; some problems are actually worsened by it. It’s a lesson my parents taught us from a very young age. Unfortunately, it’s a lesson that policy makers across the political spectrum seem to have either missed growing up, or they have forgotten it altogether. Case in point is the response by various governments to inflation we are currently experiencing.

At the risk of oversimplifying a complicated issue, there are only two drivers of real inflation. The first is when the demand for goods and/or services is greater than their availability. When supply cannot keep up with demand, the value of the goods or services in question rises and this is reflected in higher prices.

A second source of inflation is the devaluation of the currency either through poor, or even purposeful, monetary policy. For years the practice of the Bank of Canada has been to promote an annual inflation rate of 2% at the behest of successive federal government, both Liberal and Conservative. Whether by design or accident, the resulting reduction in the value – i.e. the buying power – of our currency manifests itself in rising prices.

But there is another source of increasing prices for consumer goods and services with a direct and immediate impact: taxes, and the cost of regulation. These differ from the aforementioned sources in that they are not indirect and systemic, that is to say they are not the result of market forces or monetary policy. On the contrary, they are directly imposed by government in the form of taxes and/or regulation.

Although the result may be the same, i.e. higher consumer prices, the difference is important. When governments Include this latter source of higher consumer prices with inflation it allows them to dodge direct responsibility for those rising prices.

Prior to the adoption of the GST (Goods and Services Tax) the federal government in Canada used to collect sales taxes on manufactured goods. These taxes were not charged to consumers, they were charged to retailers (or wholesalers) by manufacturers, and remitted to the government by the manufacturer. Consumers never saw these federal sales taxes are were largely unaware of their existence… but they still paid them as part of the over all cost of the product or service they were purchasing. During one six-month period at the height of the inflation crisis of the early 1980s the federal government increased its levy on some goods from 6 to 12 percent. It was able to evade responsibility for this massive tax grab by blaming the consequent rise in prices on “inflation”.

The effect of the GST was stunning. Whatever its economic benefit (or drawback), replacing the bevy of hidden federal sales taxes with a GST charged directly to consumers proved incredibly successful in one respect – voters were able to see how much tax they were being charged by the federal government and hold that government accountable for that level of taxation.

Unfortunately – and ironically – it was the Progressive Conservative government of Brian Mulroney that paid that price after introducing the change in 1991. The PC Party of Canada was reduced to just two seats in Canada’s Parliament in the 1993 general election, an historic defeat from which it never recovered.

The same game played by Pierre Trudeau in the late 1970s and early 1980s is now being played by his son Justin, except this time the conservatives under Pierre Poilievre are playing along.

Whatever else the Trudeau government is doing to contribute to actual core inflation, the biggest driver of rising prices for consumer goods such as food is the higher cost of transporting that food caused by increase fuel prices – the direct result of carbon taxes, and higher energy costs also mean less disposable income available to pay for the food.

By referring to this upward spiral as “inflation” Mr. Trudeau and his colleagues are able to deflect their direct responsibility for the pain, and in this, they are being aided by a conservative opposition that curiously chooses to employ the same obfuscating language.

“The government’s inflationary policies” and similar phrases obscures the true nature of what is going on – this government is taxing and regulating Canadians into poverty.

Period.

Full stop.

None of the measures taken by the government to help Canadians make ends meet would be necessary if not for these stupendous taxes. If anything, these measures and programs exacerbate the situation by baking in big, expensive government that will require continued high taxation in the future. Liberals are often accused of taxing and spending. Really, it’s more accurate to accuse them of spending and taxing, then spending more to mitigate the effect of taxing which, of course, requires more taxation – or borrowing, which is nothing more than deferred taxation.

Ronald Reagan used to point out that government wasn’t the solution to the economic problems his country was confronting in the 1970s, it was the problem. The situation today is not unlike those we faced then. Unfortunately, we are missing leaders like Reagan in America and Margret Thatcher in the UK.

And Brian Mulroney et al right here in Canada who had the courage to put their country before their party’s interests. They certainly weren’t perfect, but on eliminating hidden federal sales taxes and implementing the GST, they got it right.

Spectacularly so.