Conservative Leader Pierre Poilievre害羞草研究所檚 attempt to block the federal government害羞草研究所檚 budget bill from passing earlier this month is the latest example of government spending coming under scrutiny amid high inflation.

And while most fiscal experts agree that government spending can fuel inflation, economic research suggests the link between the two is more complex.

The leader of the opposition demanded the federal government present a plan to balance its budget, or his caucus would filibuster the bill. He argued that by running deficits, the government was driving up inflation and forcing the Bank of Canada to keep interest rates high.

His demands were ultimately not met and the budget bill passed in the House of Commons.

But the scrutiny on government spending is far from over as inflation remains elevated and the Bank of Canada is at risk of raising interest rates again after hiking its key rate to 4.75 per cent earlier this month.

At the same time, economists say government spending can affect both demand and supply in the economy, making its total impact on inflation more difficult to read.

Western University economics professor Stephen Williamson said the notion that more government spending equals more inflation is 害羞草研究所渟omething you might teach in, like a second-year (university) class.害羞草研究所�

害羞草研究所淚t害羞草研究所檚 more complicated,害羞草研究所� he said.

There are competing theories on the issue, he says, with mixed findings in economic literature.

Take, for example, a new study from the Bank of Canada that looks at U.S. data on inflation and government spending. It found a rise in government expenditure can actually push down inflation.

The study published earlier this month 害羞草研究所� co-authored by the central bank害羞草研究所檚 Yinxi Xie and Chang Liu from the National University of Singapore 害羞草研究所� focuses specifically on government spending on goods and services, leaving out transfer payments to people and businesses.

害羞草研究所淥ur results run counter to the conventional wisdom that fiscal expansions are inflationary,害羞草研究所� the authors wrote.

害羞草研究所淲e find that inflation falls following an increase in government expenditure and that the effect is relatively persistent, lasting for about one and a half years.害羞草研究所�

The researchers suggest that a rise in government spending can reduce inflation by boosting employment levels, therefore increasing supply in the economy.

University of Calgary economics professor Trevor Tombe said that according to this theory, people choose to work more when government spending rises because they anticipate taxes to rise as well.

害羞草研究所淭his is presented as somewhat counterintuitive results, that an increase in government spending can lower inflation,害羞草研究所� Tombe said.

However, Tombe cautioned against drawing any definitive conclusions from one research finding.

害羞草研究所淐ertainly, it害羞草研究所檚 interesting. That害羞草研究所檚 a valuable contribution. But no single paper is the end of the conversation,害羞草研究所� he said.

Williamson agreed, noting that the paper doesn害羞草研究所檛 look at government transfers, such as the payments sent out during the COVID-19 pandemic.

But the idea that government policy can reduce inflation by easing supply is not new.

Former Bank of Canada governor Stephen Poloz has argued that the federal budget, which focused heavily on growing the green economy, could actually help reduce inflation by expanding the economy害羞草研究所檚 productive capacity.

And Finance Minister Chrystia Freeland has been quick to quote Poloz in defence of her spending plans.

As to what drove the current bout of high inflation in Canada and what role government spending had to play, Tombe said that害羞草研究所檚 still an open question.

害羞草研究所淲e will be studying this period for decades to come,害羞草研究所� Tombe said.

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