Higher rates, lower taxes needed: banker

REIN IN SPENDING

OTTAWA • A mixture of higher interest rates and lower taxes is needed to rein in unsustainable levels of consumer spending on big-ticket items while encouraging business to invest more in productivitymachinery and equipment, says a senior economist with a Bay Street investment bank.

The suggestion of co- ordinated fiscal and monetary policies was proffered by J.P. Morgan Canada economist Ted Carmichael following this week’s surprising reports of continued record consumer spending on interest rate-sensitive big- ticket purchases of homes and autos.

“ Just a gradual sort of process to encourage businesses to spend more and discourage overspending on the part of some households, so somewhere down the road we don’t find ourselves in a position where spending collapses and the economy is dealt a fairly severe blow,” Mr. Carmichael said in an interview.

The Bank of Canada started doing its part earlier this month with the first in what are expected to be a moderate string of interest rate increases, which may start reducing the appetite of consumers for purchases, such as for homes and cars, usually financed with borrowed money.

The federal government could start doing its part, either this fall or early next winter, with a budget with tax incentives to encourage businesses to invest more of their record-high profits into assets that will boost their productivity, Mr. Carmichael suggested.

“Essentially we’ve got a situation where the household sector is spending more than it’s taking in and the corporate sector is taking in more than it’s spending,” he explained.

Households spending more than they make, resulting in a record negative savings rate, does not pose an immediate risk to the economy but could if there is an unexpectedly sharp increase in interest rates or severe blow to consumer confidence, he said.

That risk could be reduced with a gradual increase in interest rates, which would encourage savings and discourage spending without undermining consumer confidence, he added.

That’s also what most analysts now expect from the Bank of Canada. The policy mix Mr. Carmichael suggests would also see the government increase incentives to encourage business investment, such as increasing the pace at which firms can write off such investments.