Governments' Broad Affordability Policies May Be Set Up to Fail

Many Canadians are concerned about affordability, and governments are responding with promises to address this issue. However, tackling affordability is not as simple as it seems. The concept of affordability means different things to different people: for young adults, it may mean being able to afford rent without living with parents; for young families, it could be about aspiring to home ownership; and for consumers, it might be about groceries fitting within a budget. The root causes of these problems are often unique and require targeted solutions.

The Bank of Canada's inflation target is 2%, and the central bank has managed to keep prices in line with this target since mid-2024. However, price levels remain higher than before, especially for food items. To address affordability, governments need to create economic conditions that support good jobs and strong productivity growth. This will help increase household incomes, which is essential for adjusting to higher prices.

The factors affecting different aspects of affordability are distinct, requiring specific policy remedies. For instance, the challenge of energy affordability is often a trade-off between security, sustainability, and cost. When residential electricity prices rise above 2% to fund new capacity or cleaner sources of supply, governments may rush to keep prices artificially low through subsidies. This approach can be counterproductive.

Ultimately, affordability is not a single problem with a simple solution. Governments need to be more modest in their promises and more effective in tackling specific affordability problems. Effective governing involves clearly defining the issue, setting realistic targets, executing policy changes, and being held accountable for outcomes.