Bank of Canada’s Governor, Tiff Macklem, informed the House of Commons finance committee that removing the federal carbon tax could lead to a significant, albeit temporary, drop in Canadian inflation. The current rate stands at 3.8%, and Macklem suggests that abandoning the tax could result in a one-time decrease of 0.6 percentage points, bringing the rate down to 3.2%. However, he clarified that this effect would only last for a year.
The carbon tax is said to contribute approximately 0.15 percentage points to inflation annually. It adds over 17 cents per litre to light fuel oil and more than 14 cents to gasoline, thereby raising grocery costs among other things. Amid these circumstances, Statistics Canada reported that 15% of households have had to cut back on food spending to afford energy bills.
Conservative MP Philip Lawrence queried if removing the carbon tax would simplify Macklem’s task due to the potential substantial dip in inflation. Pierre Poilievre’s Conservatives have accused the government of escalating inflation through deficit spending and fuel surcharges, which they argue are exacerbating cost-of-living issues.
In response to these concerns, Justin Trudeau’s Liberals announced a pause on the carbon tax on for three years. This decision primarily impacts Atlantic provinces where heating is less prevalent. Despite this move, the Parliamentary Budget Officer disputes the government’s claims that climate incentive payments outweigh the cost of the carbon tax.
Saskatchewan Premier Scott Moe has also raised questions about the affordability of Trudeau’s carbon tax and threatened to halt its collection if the federal pollution price exemption is not extended to Saskatchewan.
Despite volatile inflation, the Bank has maintained interest rates at five percent, anticipating a return to the target rate of two percent by 2025 and expecting a 3.5% CPI average until mid-2024.
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