Abolishing federal carbon tax would shrink inflation rate by 0.6 percentage points, BoC governor says

Abandoning the federal carbon tax would result in a significant decrease in inflation, the Bank of Canada’s governor has told the House of Commons.

Tiff Macklem said eliminating the levy would cause a one-time drop in the inflation rate of 0.6 percentage points.

That would bring Canada’s current rate of 3.8 per cent down to 3.2 per cent – a 15.8 per cent decline.

Macklem made the statement in response to a question from Conservative MP Philip Lawrence who, along with his party, is strongly opposed to the carbon tax.

In September, the governor said the carbon tax’s direct effect – that is, not including secondary effects such as increased grocery costs due to more expensive fuel – on the inflation rate was about 0.15 percentage points every year.

There you have it. #AxeTheTax and you get immediate relief for all Canadians. pic.twitter.com/k7e4cpPtz7

— Philip Lawrence, MP (@PLawrenceMP) October 30, 2023

Lawrence asked Macklem to elaborate upon his statement.

He said: “One question is how much are the increases in the carbon tax adding to inflation each year? And that number is about 0.15 percentage points of inflation.”

Asked what effect the elimination of the carbon tax would have on the inflation rate, the governor explained: “That would create a one-time drop of 0.6 percentage points,” emphasizing that it would be for one year only.

Macklem’s comments come days after the Bank of Canada held interest rates at five per cent amid what it warned was a period of “volatile” inflation.

The Bank warned that inflation would not return to the target rate of two per cent until 2025, with the CPI expected to average 3.5 per cent through to the middle of 2024.

Separately, Statistics Canada today published a study showing that this year 15 per cent (one in seven) households in the country had been forced to limit expenses on the likes of food just so they could pay their energy bills.

The study found that almost eight per cent of households have had to do this for at least three months.

Last week, meanwhile, Prime Minister Justin Trudeau blindsided the BC government when he announced he would be suspending the carbon tax on home heating oil for three years.

During his session with the Standing Committee on Finance, Macklem said that “it would be helpful if monetary and fiscal policy were rowing in the same direction” when asked if government spending was exacerbating inflation.

He said if spending plans across governments were put into effect next year, then fiscal and monetary policies would diverge and “that would not be helpful.”

“Our biggest concern is that inflation is too high,” the governor explained. “Our biggest concern is that Canadians are struggling with affordability.”

He added: “It’s got to stop. And the way to do that is to get inflation down.

“I think more focus by governments on the inflationary consequences of their spending decisions would be helpful, and more focus on government policies that add to supply and not demand would be helpful.”