There is only one sector of the economy that receives a holiday giveaway from inflation. You guessed it, the government

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In this costly vacation time, many families are having a limited budget. With industrial prices up nearly 15 percent year-to-date and wages rising due to labor shortages, companies will be forced to raise consumer prices further to compensate shrinking margins.

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There is only one sector of the economy that receives a holiday giveaway from inflation. You guessed it, the government. As last week’s Federal Economic and Fiscal Update shows, a one percentage point increase in the rate of inflation pushes up federal revenues by $ 3.9 billion per year. With the GDP deflator growing 7.6% in FY2021/22, that means the federal government is pocketing $ 30 billion in additional revenue from taxpayers. Call it an “inflation dividend” – for the government, not for us.

Overall, federal revenues are expected to increase by $ 54 billion by March 31, reflecting both inflation and increased employment and industrial activity. Personal income tax brackets and credits are indexed to inflation, but not to capital gains or net investment income (i.e. dividends, rents, royalties, etc. , less interest expense). So when savers get a little more money from their investments to compensate for the loss of purchasing power of their money, the government willingly taxes it!

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Corporate profits are also not indexed to inflation. Accounting profits are overstated as companies report depreciation, inventory costs, and net interest income on the basis of historical costs rather than present values. (On the other hand, if net interest is negative, which is the normal situation with corporate debt, then inflation benefits firms: borrowers generally benefit from inflation. On the whole, however, Accounting profits are overstated when there is inflation.) Federal crown corporations’ profits also increased by $ 19 billion, which is more than a third of Ottawa’s revenue increase this year. Part of this increase is also due to inflation.

As for government spending, some automatically increase with inflation, but others do not. Many payments are indexed, as are the seniors’ and children’s benefits. Others are indexed to nominal GDP, such as the Canada health transfer and all equalization payments made to the provinces.

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Otherwise, however, government spending might not increase as much as inflation. Most civil servants’ salaries are not indexed to inflation. While contract cost-of-living adjustments were common four decades ago, they cover less than a tenth of employees today. Some payments to provincial governments, such as the Canada Social Transfer, are indexed at a fixed rate (eg, three percent) which is now lower than inflation. Infrastructure costs are skyrocketing, which will reduce actual spending unless budgets for them are increased.

Although most social benefits are indexed, inflation hurts Canadians who lose benefits that are clawed back when their nominal income exceeds a threshold (even if the threshold itself is indexed). For example, low-income seniors could receive indexed CPP benefits. But a senior will lose 50 cents in Guaranteed Income Supplement for every dollar that their CPP benefits increase once their income exceeds $ 15,672. Talk about giving with one hand and taking back with the other!

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  1. The Bank of Canada building in Ottawa on May 23, 2017.

    Jack M. Mintz: Five reasons inflation will persist

  2. A Toronto income tax form on April 13, 2011.

    Jack M. Mintz: “Taxing the rich” won’t work

  3. Jerome Powell, Chairman of the U.S. Federal Reserve, speaks in the Eisenhower Executive Office Building in Washington, DC, November 22, 2021.

    Jack M. Mintz: Who is the chairman of the Fed matters?

Old Age Security payments are also clawed back at 15 cents on the dollar above $ 81,761, so any inflated income will be taxed by the government. If the average investor pulls out a little more capital gains, dividends, and interest income to offset inflation, they could end up being taxed at rates close to 50 percent, including both taxes. personal and OAS recoveries. It hurts.

Ditto for family allowances. They are clawed back seven cents on the dollar above $ 32,028 in family income. So, if a worker with a salary of $ 60,000 receives a year-end bonus of $ 1,000 that helps offset the rising cost of living, 37% is lost in personal taxes and clawed back family allowances.

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Overall, Finance Canada estimates that a one point increase in the GDP deflator increases federal spending by $ 2.2 billion per year, or $ 1.7 billion less than the increase in revenues. The 7.6% GDP deflator this year therefore gives the federal government additional fiscal leeway of $ 13 billion.

But by far the largest part of Ottawa’s inflation dividend is the reduction in the real cost of its debt. Unlike households and businesses, which tend to have more assets than debts, the government is a large net debtor. Thus, inflation translates into a huge transfer of wealth from households and businesses to the public sector. With a net federal debt of $ 1.2 trillion and consumer price inflation of 4.7%, this transfer is equivalent to $ 56 billion. If instead interest rates were raised to compensate investors for losses from inflation, next year’s federal deficit would not be the $ 144 billion forecast in the budget update, but $ 200 billion.

Add it up: $ 56 billion in real debt relief and $ 13 billion in budget gains from inflation. The total federal dividend on inflation is $ 69 billion in 2021. The budget does not take inflation into account. But it should.

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