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Austerity is no solution for inflation

With rising inflation, it's important to consider what governments can—and shouldn't—do about it. Listening to the austerity hawks would do more harm than good.

May 3, 2022

12-minute read

Surely we have enough to worry about without renewed warnings about runaway inflation. 

But even amid all our various crises, inflation continues to make its way into the headlines: “Canada’s inflation rate hits a three-decade high”; “Is Canada’s inflation rate out of control?”; “Trudeau must act to ease worsening inflation.” 

We don’t need economists to tell us prices are going up, and we don’t need politicians to tell us we don’t like it. Just how worried should we be? What are the implications for all of us, especially for people already barely surviving week to week? What’s really causing prices to rise, and what’s to be done?

We are hearing, again, the almost ritualistic argument whenever prices spike that inflation is the inevitable result of generous government spending and that it can be stopped only by governments turning off the taps. Is this true? Is too much government what’s causing the spike in prices, and is cutting it down to size the only solution? 

Simply, no. Another round of austerity won’t deliver what most Canadians want, won’t address the real causes of inflation, won’t make the essentials more affordable. What it will do is make things worse.

Those seeking smaller government, lower taxes, more private, less public have often played on the generalized fear of inflation to win support for their agenda.

After the global financial crisis of 2008, for example, governments cut back too quickly on spending precisely because of exaggerated inflation fears. Most experts now agree that was a mistake. A big boost in spending was needed to pull us out of the 2008-09 recession, but in no time at all, austerity trumped recovery. 

“Fiscal consolidation” is what we called it, but that was just the new name for the same old austerity track we were on before the financial meltdown. And we continue to pay the price.

The pandemic laid bare the painful—even fatal—human costs of decades of squeezing public spending, especially for the marginalized, poorest, and most vulnerable. We learned the hard way that our lack of preparedness, our stretched health care system, the holes in our safety net and weak labour protections not only put our health at risk, they also cause real damage to our social fabric and our economy.

As if COVID-19 isn't enough, the recent devastating fires, floods, and landslides in B.C. and on the East Coast underscore how our failure to rise to the challenges of climate change also comes with enormous human and economic costs—not just in some distant future but right now.

These crises did what crises often do: They shook up our normal, led many of us to question the course we’re on, and helped us see new possibilities.

They allowed us to see, up close, that social and environmental justice are not only the right thing, they're essential for a strong society and healthy economy. 

Summarizing research in France on how the pandemic has affected the public mood, Emanuele Ferragina and Andrew Zola asked: Are we at “the end of austerity as common sense?” Here in Canada, in the U.S. and in Europe, countless headlines heralded a new era: government making a comeback, debt phobia on the wane. 

Governments of all stripes stepped up in ways we hadn’t seen for decades to attack the virus and help people and businesses survive the economic shocks. For a rare moment, nobody was complaining about large deficits and growing debt. After decades of viewing government as “the problem” or, at best, “overhead”, the need for active government was suddenly undeniable. 

In the early days, we seemed to recognize that the great austerity "risk shift" from the collective to individuals and families had dangerously weakened us; we needed each other, were stronger together. 

In the wake of this resurgent solidarity, governments everywhere were promising to “build back better,” fix what’s broken and seriously tackle climate change and inequality. Progressives could be forgiven for thinking that Overton’s window was shifting, that we had rid ourselves of the politics of austerity.

Not so fast. The fiscal hawks may have kept their peace during the worst of the pandemic, but the squawking is back as strong as ever. 

What happened? Prices. 

In the latter part of 2021, inflation in Canada, as measured by the Consumer Price Index (CPI)—changes in the cost of about 200 categories of goods and services—spiked more than it had in decades. It has continued to rise, hitting 5.7 per cent in February 2022, a 31-year high. 

While the problem of prices pales against the loss of life, destruction and suffering caused by Putin’s invasion of Ukraine, the war is driving prices even higher, particularly for fuel and food, threatening widespread food insecurity and adding to the uncertainty about, well, everything. Experts warn that prices haven’t peaked yet and aren’t likely to settle down until mid-2023.

Predictably, the austerity rhetoric is also spiking. Once again, inflation is being portrayed as some dangerous virus with a life of its own that threatens all that we value.

And because price increases affect the quality of our lives, because we experience them directly every time we shop or fill the tank or pay our bills, inflation phobia is easy politics. Little wonder it has always been poison for a progressive agenda. 

Now, when we can least afford it, when we need our collective toolkit to be strong, we can fully expect inflation fears will, yet again, play a central role in our politics, with public spending portrayed as the culprit and some version of austerity as the solution.

Just how worried should we be? Inflation this time around is, after all, something of an aberration—just one more miserable feature of a relentless pandemic and a terrible war, and so the worst of it is likely temporary, though admittedly "temporary" is a pretty elastic word. 

It was entirely predictable that prices would rise, especially when measured against deflated prices in the pandemic lockdown, when we couldn’t as readily shop or go out to eat or travel. And it was entirely predictable that demand would surge and supply lag as we loosened constraints. 

COVID-era staff shortages—sick days, self-isolation, reluctance to work in unsafe workplaces—contributed to bare shelves and unpredictable supply, made worse by unvaccinated truckers being turned away at the border, another reminder that personal choices often have public consequences.

Let’s be clear about which prices are rising. As Canadian Centre for Policy Alternatives Senior Economist David Macdonald showed in a late-2021 analysis, the price spike before the war was largely driven by just four of the over 200 items in the CPI basket, albeit a consequential four: gas, houses, cars, and meat. A fifth—wooden furniture, whose cost is based on lumber prices—came down as quickly as it went up. 

None of these increases can in any way be attributed to government spending.

Prices should also be seen in historical context.

For years, deflation has been a far greater risk than inflation, which has been consistently below the target of two per cent (over 60 per cent of the time) since 2000. If prices of many of the items in the CPI basket had risen by two per cent every year, they would be even higher than they are now. 

Some notable exceptions—particularly the impossibly high cost of shelter, which locks many, especially young Canadians, out of the housing market and leaves many others house poor—made affordability an issue even before the recent spike in other prices. 

The housing crisis no doubt obscured for many the reality that we had, in fact, been living in a relatively low-price world—artificially low—in no small part because workers’ wages haven’t kept pace with productivity growth, and prices haven’t included the environmental costs of our goods. 

Agri-food experts at Dalhousie University have shown how higher prices for staples, such as meat, dairy and groceries, are a result of supply chain kinks caused both by the pandemic and unfavourable weather patterns. 

As Max Fawcett wrote in the National Observer, "while the supply chain disruptions caused by COVID-19 will get better, the potential impact of climate change will only get worse…because the costs we’ve long externalized, from carbon emissions to plastic pollution, are now going to have to be borne by companies and consumers."

So, what does this mean for how governments should approach current inflation risks? First of all, they can’t afford to ignore or minimize the problem and simply wait until prices settle down. Many households are suffering right now and many more are understandably nervous about what price increases mean for their quality of life and life choices. 

Governments have every reason to act, especially to ensure that the poor and vulnerable are not pushed even deeper into poverty. But, equally, we must not allow inflation phobia to blot out everything else, nor should we assume the solutions of the past will work now. 

We need to attack the actual causes of spiking prices and give priority to protecting people who are already struggling. And we really ought to not make things worse.

The first, and most important, thing governments must do is spend whatever it takes to get us out the other end of this damned relentless pandemic and prepare for whatever new bug comes next—and that means fixing the gaping holes in our public health and health care system, including long-term care, dental care and pharmacare, and ensuring vaccine capacity and equity at home and globally.

Governments need now more than ever to ensure that essential services are universally available and affordable.

Investments in health care, child care and seniors care not only address affordability but strengthen the economy and bring more people into the labour market. 

More affordable health and social care will, in fact, reduce inflation directly, as the costs of both are included in the CPI. Caring, it turns out, is not only good for the spirit, it’s good for the social fabric and for the economy.

In addition, while some income supports are indexed to inflation, too many are not, including most provincial tax credits for children and seniors—and, in Alberta as of late-2019, Assured Assistance for the Severely Handicapped (AISH). These benefits should be increased to provide immediate help and rise as the cost of living rises. 

The frequent complaint that “too generous” social programs are the cause of labour shortages not only seriously exaggerates the “generosity” of these benefits, it ignores a range of other, more plausible explanations: an aging population and a spike in retirements, a lack of affordable child care, and most important, low wages and lousy, unsafe working conditions.

Is it any wonder that where we find the lowest wages—in accommodation and food services—we also find the biggest “labour shortage”? 

And if, as research by the Conference Board of Canada suggests, many Canadians have recently taken the opportunity to seek better conditions or to upskill, this is surely a good thing. One of the most important things we can do both to help families struggling with price increases and to address staff shortages in some sectors is to strengthen collective bargaining and labour protections. 

That's especially important after decades of stagnant wages and the increase in employment precarity.

Certainly there’s no quick or easy fix for some of the factors driving inflation this time around. Take, for example, the supply chain disruptions that are a major cause of our current inflation woes. 

Concerns about the social and environmental costs of international outsourcing are, of course, not new. The endless drive to “just-in-time” manufacturing means products are often assembled from parts sourced all around the world in places where wages are cheap and regulations weak. 

Whenever slices of a penny can be saved, manufacturing is outsourced. But the longer a supply chain, the easier it is to disrupt, whether by war or pandemic or both, and these disruptions lead to shortages of goods and higher prices. 

More and more voices are now joining the call for a re-assessment of the costs of global outsourcing, and for new approaches, new policies for this age of crisis.

A no less important issue is corporate concentration in Canada and the power of big firms to set prices and pass on higher costs to consumers.

Corporate profits, soaring before the pandemic, are now breaking records, even as CEOs lead the chorus, complaining of “the dangers of inflation.” 

Our meat industry, for example, is highly concentrated, with only two companies—Cargill and JBS—processing over 80 per cent of Canada’s beef. Profits in the industry have also hit record highs. For big grocery chains too. Little wonder meat prices are going up for consumers, and with little or no gain for ranchers. 

As Vass Bednar wrote in Policy Options, the federal government’s recently announced review of the Competition Act should be just one element of a comprehensive re-imagining of Canada’s approach to the outsized power of big companies.

Our current crises have also made apparent the high costs of financialization: the expanded role of financial markets, financial institutions, and financial motives in our everyday lives. 

Well before the pandemic, human rights experts, including special rapporteurs of the United Nations, highlighted how treating essentials—especially shelter—as commodities for investment and speculation were driving up costs and reducing access. 

The pandemic has forced our attention on how financialization has similarly failed the residents of long-term care facilities, as profit trumped care with, as we now know, disastrous results. Treating shelter and care as commodities rather than rights exacerbates inequality, pushes the vulnerable deeper into poverty, raises the costs of poverty—and raises prices. 

What’s needed is more public provision and a suite of policies and tax reforms to ensure that the pursuit of profit does not trump or undermine these fundamental rights.

We don’t know with any certainty where prices are heading, especially over the short term. We do know that the causes are far more complex than the simple, knee-jerk claims that too much money is sloshing around or too-generous benefits are keeping people home. 

We don’t fix supply chain bottlenecks or corporate concentration by cutting government spending or, for that matter, by hiking interest rates or otherwise tightening money supply.

In truth, the “there’s too much money” approach to inflation raises more questions than it answers. What determines the supply of money? How is money distributed? Who has it and who does not? What features of our system of production explain changes in supply? Which prices are going up, and which down, and what does that tell us about sector-specific problems? What leeway—that is, power—do companies have in setting prices and wages and avoiding taxes?

To understand inflation and reduce its impact, we have to get at not just money supply but the structural problems in our economy.

This includes the impact on prices of corporate concentration and fragile global supply chains; the hidden costs of environmental degradation and climate change; how excessive and untaxed profits contribute to inflation; how treating housing as a commodity for investment and speculation has turned shelter costs into a national crisis; and how decades of eroding bargaining power for workers and squeezing social benefits have made it much harder for many to manage price increases.

Today, all of our systems are undergoing massive change. We’re experiencing the limits of our consumerist society. We’re seeing the inevitable stresses of shifting to a low-carbon economy and the serious consequences of making the shift far too slowly. We’re seeing the huge costs of extreme inequality, of disinvestment in public services, and of treating care and shelter as commodities rather than rights. 

Inflation must be seen in the context of these structural problems.

For too long, we’ve been told that we can’t afford the society we want, that there’s no alternative to some version of austerity, that mitigating fiscal risks—particularly of runaway inflation—takes precedence even over addressing risks to our collective health and well-being. 

But in this age of crisis, we must be clear about what’s most important to us and what we owe to one another, the young and future generations. We can’t entrust the future to the vagaries of the market.

Our approach to inflation should be driven by what best serves public well-being now and for the long-term. This means weighing fiscal risks against the risks posed by climate change, by inequality, by social fragmentation. 

We might even ask whether a little more inflation is necessarily such a bad thing? The costs of inflation aren’t borne equally. There are winners and losers, though much depends on what costs are rising and how government programs are designed. 

Generally, people who hold a lot of cash lose. Debtors gain, creditors lose. As always, the poor feel the consequences most sharply. But if we focus on helping the people already struggling and ensure that all have access to the essentials, is inflation a few points higher than the “preferred rate” of two per cent too high a cost for the transformation we need to meet our multiple challenges?

American journalist Ed Kilgore has traced how inflation phobia has killed progressive agendas since the 1970s. When prices spike, people are more receptive to pro-austerity anti-tax politics. We can’t let that happen now. 

We cannot afford false economies that simply push far higher costs down the road. Canada needs a progressive approach to inflation that takes the issue seriously, without slipping into the failed policies that got us here. 

If there is too much money sloshing around—and landing in the hands of a very few—a straightforward way to extract it is taxes, specifically higher taxes on the wealthy and on corporate profits, which would also strengthen our collective toolkit to get done what needs doing and contribute to reducing inequality. 

Given that corporate profits are breaking records, a tax on “excess profits” across all sectors, rather than just the banking industry, as currently proposed by the federal government, would be an important source of revenue, and would also help fight inflation and ensure that spiking prices aren’t simply serving to make wealthy investors even richer.

We can’t afford to cave in yet again to calls for austerity as the only or best solution to inflation.

A return to austerity will, instead, yield more human suffering and a weaker economy, leave us ill-prepared for the next pandemic, and bring the catastrophic consequences of climate change and nature loss that much closer. 

What's needed now to build a more just and sustainable future is not more market but more democracy, more public investment, more engaged civil society, a re-thinking of risk, and a re-balancing of power. 

Many need help to manage the transition and the inevitable disruptions—including price increases. We should be providing that help. 

We cannot allow inflation phobia to take us backwards.

With thanks to Trish Hennessy, Frum Himelfarb, Jordan Himelfarb, David Macdonald, and Jim(bo) Stanford for comments on earlier drafts.

A shorter version of this paper appeared in the May 2022 edition of Alberta Views, the third installment on the triumvirate of fiscal phobias—tax, debt, and inflationthat has shaped public policy for decades.

Topics addressed in this article

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