Eliminating carbon tax would only have ‘temporary’ effect on inflation, Macklem says

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Eliminating the carbon tax would lead to a one-off drop in inflation, but the effect would only be temporary, Bank of Canada governor Tiff Macklem told a parliamentary committee on Thursday.

“Inflation would drop for one year, and then after that, it would go back to where it otherwise would have been,” Macklem said in response to questioning from members of the House of Commons Standing Committee on Finance.

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The carbon tax has so far had an impact somewhere between 0.1 and 0.15 percentage points on inflation, he said, and the Bank of Canada takes the tax and the government’s scheduled increases into consideration when making its forecasts of the economy.

He added that inflation would be closer to 2.8 per cent instead of the latest reading of 2.9 per cent, if the carbon tax had been held constant and not raised.

The carbon tax was last raised on April 1 by $15 per tonne to $80 per tonne.

Macklem, who was joined by Bank of Canada deputy governor Carolyn Rogers before the committee, said that eliminating the carbon tax altogether would have “a very temporary mechanical effect” on inflation.

He pointed to a historicaI example in 1994, when the government cut the tax on cigarettes in half, which he said had a big effect on inflation. Ahead of that tax cut, inflation was roughly two per cent. That number dropped to zero for a year but went right back at two per cent a year later, he said.

“(In respect of) monetary policy, we knew that once the tax cut was announced, you can see the impact on inflation. We know a year later that’s going to fall out. So effectively we look through that,” he said.

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The central bank governor also answered questions on how the 2024 federal budget, tabled on April 16, will impact the Bank’s monetary policy. The Bank of Canada held its rate at five per cent on April 10 ahead of the budget’s release.

“The net effect, from a macro perspective, probably won’t be that big, so I don’t expect it’ll have a material impact on our forecast,” Macklem said.

The federal budget was not included in the Bank’s most recent monetary policy report, on April 10, but is expected to be assessed in the July forecast.

Provincial budgets and increased deficits that were tabled before the last report were reflected in the last forecast, he said.

“Increasing spending and fiscal deficits when we’re trying to get inflation down is not helpful,” Macklem said.

Spending was also up in the federal budget but was largely matched by an increase in tax revenue. He said the track for the deficit-to-GDP and the debt-to-GDP ratios has not changed significantly from a macro perspective since the fall economic statement.

Removing the Liberals’ controversial measure to increase the capital gains inclusion rate for some people and corporations would result in more red ink.

“If you remove one source of revenue, the deficit will be bigger, certainly,” Macklem said.

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