Like The Hub?
Join our community.
Join

Steven Globerman: The Trudeau government’s plans to lower prices make no sense

Commentary

Most of the commentary about the Trudeau government’s recent fall economic update has focused on housing initiatives and debt projections. But the update also proposed significant new regulatory burdens on Canadian businesses to ostensibly lower prices for consumers. However, these proposals are ill-conceived, miss the root causes of the problem, and in some cases simply shift costs from one group of consumers to another.

For starters, the Trudeau government wants to amend the Competition Act, the federal law regulating competition in the marketplace, to establish a “Grocery Task Force” to supervise “big grocers,” stabilize prices, and monitor and investigate practices such as “shrinkflation”—that is, when producers reduce the size of products due to rising production costs.

While the government’s proposals are light on details about enforcement, it’s easy to imagine the difficulty the Competition Bureau, the federal law enforcement agency tasked with enforcing such things, would face in determining, for example, what constitutes shrinkflation. If a grocer changes the packaging size and price of a specific product, is that always shrinkflation? Or is that grocer, in an effort to cover their full costs, simply expanding the range of options for consumers who may opt for lower prices over higher volume?

In reality, if the Trudeau government wants to help lower food prices for Canadians, it would reduce tariffs on imported dairy and other food products and eliminate provincial marketing boards. These costs are passed on to consumers at the checkout line. 

Also according to the economic update, the government plans to crack down on so-called “junk fees” such as roaming charges, excessive banking fees, and airline fees. But how would competition authorities determine when certain fees are “junky” while other fees are legitimately meant to recover costs for services customers desire? Clearly, such judgments would be totally arbitrary. And if the government prohibits specific fees, without helping increase competition in the affected sector, the new fee prohibitions will likely result in increased prices for other transactions involving affected businesses. In an effort to reduce prices for Canadians, the Trudeau government will simply push costs from one consumer—or one transaction—to another. 

It’s also noteworthy that the worst-offending industries, in the government’s eyes, are among the most sheltered from foreign competition. Specifically, in Canada, foreign ownership restrictions in sectors such as media/telecommunications and air transportation are among the most restrictive in the developed world. If the government wants to meaningfully protect consumers, it would scrap direct and indirect restrictions on foreign competition in these industries—for example, eliminate “cabotage” regulations that prevent foreign airlines from operating domestic routes within Canada. More competition in the air means lower prices for Canadian air travellers. 

Finally, the Trudeau government wants to address so-called “planned obsolescence” where manufacturers create demand for more expensive new versions of existing products by deliberately designing products (e.g. smartphones) to wear out or function less effectively over a relatively short period of time. But the concept of planned obsolescence is open to debate since informed consumers in a competitive marketplace will purchase products at the lowest available price with “lifespan” (and other factors) in mind.

Furthermore, planned obsolescence is often—if not always—in the consumer’s best interest. “Value engineering” is a design process meant to use as little material as possible in a product while still delivering an acceptable lifespan. For example, the useful life of a smartphone is limited to a few years due to rapid technological improvements in both software and hardware. It would be wasteful to build a smartphone with a physical lifespan much longer than its useful lifespan. Competition policy bureaucrats in Ottawa are likely ill-equipped to distinguish between efficient and inefficient product obsolescence.

Increasing competition in Canada is a worthy objective. Unfortunately, the Trudeau government’s latest proposals seem more designed to win votes than improve the welfare of Canadian consumers.

Theo Argitis: Where’s the prudence? Freeland bets big on soft-landing fiscal plan

Commentary

Heading into the final month of a tough year politically, Prime Minister Justin Trudeau can be thankful for at least one thing: The economic picture could have been a lot worse.

The nation is feeling the strain from higher interest rates and growth is stalling, but we’ve yet to see a deeper economic storm many feared earlier this year.

The labour market continued to churn out jobs this year—more than 400,000—putting 2023 on track to be one of the strongest years ever for employment gains.

For all of 2023, growth is now projected at about one percent—which is not too bad given the circumstances. The federal government had forecast growth of just 0.3 percent in its March budget.

Meanwhile, price pressures have eased with underlying inflation showing some signs it may finally be breaking toward three percent—within striking distance of the Bank of Canada’s target range.

Hope for coveted soft landing

There’s just enough impulse in the data to keep Trudeau and his finance minister, Chrystia Freeland, hopeful that a deep downturn will never come, and that growth will meaningfully resume by the middle of next year with inflation in check and interest rates normalizing. The much-coveted soft landing.

It’s hard to overstate how much Trudeau and Freeland are invested in that soft-landing scenario. Their political futures hinge on it.

Trailing badly in the polls, Trudeau is trying to buy as much time as possible before the next election (which could take place as late as October 2025) hoping tough economic conditions for Canadians reverse course.

Falling inflation and interest rates will not only buoy confidence and keep consumers spending, but they will also give the governing Liberals scope to finance a semblance of an agenda. For a government that has sought to build a political coalition around spending, they’ll be happy to take whatever fiscal room they get.

So, it’s no surprise that Freeland has been more than happy to embrace the soft-landing assumptions as the basis for her budget planning, as evidenced again by her fiscal update last week. After all, it remains the base case scenario of private-sector forecasters and financial markets.

But what is a reasonable basis for fiscal planning is not necessarily judicious or prudent.

The government doesn’t need to be a passive taker of economic assumptions. It’s not forced to accept the prevailing wisdom of economists—who have never been good at predicting major turning points anyway.

Economic assumptions made in budget documents are as much political decisions as they are forecasts.

Nothing new

This is not a very new idea. This is how budgets had been done for much of the past three decades in Canada.

From the mid-1990s right up until the pandemic, both Liberal and Conservative governments applied prudence into their fiscal planning. Building and sustaining credibility was a policy priority of its own.

It began with Liberals in the mid-1990s when then-Finance Minister Paul Martin introduced multiple layers of cautiousness into his budget-making to signal little tolerance for missing budget targets and to establish credibility.

Even as the nation’s underlying finances improved considerably, the practice of adding risk accounting into the budget continued through Stephen Harper and even Trudeau’s first finance minister, Bill Morneau, right up until the pandemic.

During the pandemic, continuing the practice seemed outright pointless. But we are no longer there.

Today, we are paying tens of billions of dollars in interest on the massive debt that we’ve accumulated over the past three years. And in a world of deglobalization and global power conflict, risks to the economic outlook remain elevated.

Is this really the environment where fiscal planning should be based on benign economic scenarios? Is there a case to reintroduce credibility as an explicit government priority?

These are political decisions. No government is beholden to totally accept private-sector forecasts.

The widespread skepticism that has greeted Freeland’s new fiscal anchors (including a pledge to cap deficits at one percent of GDP starting in 2026) should be taken as a warning sign. Almost no one believes the Liberals will keep to these guardrails should the fiscal envelope become stressed.

The thing with credibility is that it’s hard to earn and easy to lose, and you don’t know how much of it you have until you need it.