Finance Committee on April 27th, 2010

[The Chair, Conservative, James Rajotte]

We'll go to Ms. Block, please.

[Kelly Block, Conservative, Saskatoon—Rosetown—Biggar, SK]

Thank you very much, Mr. Chair.

Thank you for being here, Mr. Carney.

We've heard numerous times how important it is to keep Canada competitive, and we've seen that Canada has gone a long way in doing just that, especially in relation to business taxes.

KPMG's recent competitive alternatives study showed that we now hold a business cost advantage over the United States. They also noted that Canada, though, cannot rest on its laurels on lower business taxes.

In fact, let me quote them. They say that Canada “must continue to present a clear value proposition to businesses in other areas in order to maintain its attractiveness for international firms”. They also explained this by noting that Canada's “big rivals are no longer developed countries like the U.S., but emerging low-cost economies, such as Mexico”.

This would appear to be a sentiment that you agreed with. In fact, I'd just like to quote a speech that you gave this past March:

Whatever the combination of reasons behind Canada's poor productivity record, there are several avenues available to policy-makers to encourage sustainable longer-run growth. It is important to acknowledge that successive governments have taken many steps in the right direction.... Corporate tax competitiveness–particularly for new investment–has improved markedly over the past decade and is now among the most attractive in the industrialized world. Canada has also actively pursued trade openness through new agreements and unilateral tariff reductions. Staying the course in these regards is likely the single most important contribution of the public sector.

Can you expand on why staying the course on Canada's business competitiveness is that important?

[Mark Carney]

Thank you for the question.

Thanks for reading my speech. It puts you in very select company.

[Some hon. members]

Oh, oh!

[Mark Carney]

There is a variety of factors. One of the points of that speech is that a variety of measures have been taken by a variety of governments over a number of years that have considerably improved the business environment in Canada.

That runs the gamut from investments in primary research and improvements in labour market and other flexibilities, to infrastructure investment, and importantly, as you reference in the point of your question, to a fairly dramatic turnaround in business taxation in the country, and very importantly—and there are still some final measures coming through on this at the provincial level—on the marginal effect of tax rates on investment in the country.

We've seen a big move perspectively in terms of both corporate income tax competitiveness and the competitiveness of new investment with the full implementation of these measures, so yes, that is important to the response.

One of the other messages of the speech, I think, is that there will continue to be requirements for governments to make these investments going forward. But at its core, there is a challenge for the private sector to take full advantage of this business environment, as we would expect them to do and as is now consistent with our forecast in terms of an uptick in investment; and not to just take advantage of the business environment, but also, maybe, less as a competitive threat from emerging markets and more as an opportunity to develop those markets, reflecting a relative shift in the weight of growth between the advanced and emerging economies.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Block.

Monsieur Mulcair, s'il vous plaît.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chairman. I advised Mr. Carney that I wanted to discuss inflation with him.

I must admit, Mr. Carney, that you leave me very impressed. Your talents as a pedagogue serve you well when you explain that what Anglophones like to call

quantitative easing

quantitative easing is no more no less than the printing of bank notes throughout the world. That is just about the best and most frank explanation I have heard to date.

That being said, there does exist a platitude in economics. Inflation is caused when you have too much money and not enough goods. We are therefore going to have a lot of money and a monstrous debt to absorb. I do not want to discuss the war in Irak, but even before the current crisis, the war had already cost the U.S. Treasury more than 1,500 billion US dollars. This debt will have to be offset one way or another, as was done at the end of the Vietnam war. The inflation in the years following the Vietnam war was not foreign to the fact that the money had to be reimbursed. What better way for a government than to reimburse with bank notes of a lesser value. It makes things simpler.

I took note of your 2% target that has not changed. I also took note of what you told us earlier. The stimulus measures are going to drop off despite the fact that, according to you, nothing is decided in advance. As you say, nothing is preordained. Could you nevertheless share with us what you see, realistically, with regard to inflation. Will the rates be similar to those we experienced at the end of the 1970s and at the beginning of the 1980s? I would like, if you will allow me, to tie that in with an excellent initiative taken by the Conservative government — you did hear me correctly —, when the Finance Minister warned those people purchasing their first house to not be to adventuresome given that the low interest rates are somewhat of a trap. Is there a real danger that some young people who are in the process of buying their first house might get into trouble, as we saw in the early 1980s, when interest rates rose beyond 20%?

[Mark Carney]

Thank you for your question. It is complex, but very relevant, given present market conditions. With regard to Canada, allow me to respond in English.

The issue you're identifying--and I appreciate your acknowledgement of our inflation target--and the discipline that imposes on us in terms of the management of our monetary policy is such that this “easy out” on the fiscal side, if you will, or more broadly, is not likely to happen. We have to respond appropriately, anticipating inflationary pressures in this economy, so that one is not in a situation where there's a sharp increase in interest rates down the road--an overshoot, if you will--in the monetary response because of timidity early on.

The intent of major monetary authorities around the world is to follow similar policies. Their intent is to do that, and I have confidence that they will. Whatever they do, though, we have the ability to control the rate of inflation in Canada.

We are masters in our own house, in particular with regard to the inflation rate in Canada.

We will take the necessary steps.

I would say finally that the solution to this--and this is a slightly gratuitous comment, but it's something that has been discussed--the solution to these debt issues in other countries, in our opinion, is not to change the rate of inflation, to try to target a higher level of inflation in order to inflate away the debt in a sort of orderly fashion. It's extremely difficult to move from a low to a higher rate of inflation. I think that view is shared more widely.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Mulcair.

We'll go now to Mr. Pacetti again.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chairman.

On a different subject, you addressed debt. I'm looking at pages 16 and 17. Maybe you can talk a little about the difference between individual debt and business debt. I think chart 15 explains why you feel that the business debt has levelled off but individual debt seems to be on the increase.

I have two questions. Not to be facetious, but why would you care about people's debt or household debt or debt increasing? Shouldn't that be the problem of the lenders? Care is perhaps a strong word, but is your concern or your mandate more to deal with the actual individuals who are doing the lending?

[Mark Carney]

Well, we do care about people's debt, and we care for two reasons. We're here to discuss the monetary policy report, so I'll focus on that aspect, but there's also a financial stability concern.

With respect to monetary policy, our concern is that the rates on debt, the take-up on debt, is one of the factors that obviously influence, in the case of households, residential investment, home buying, renovation, etc., and consumption. So it's indicative of the level of activity and the ease of that activity.

What you've seen is, not surprisingly—and this goes back to a previous question from Mr. Hiebert—the impact of that on economic activity and how we look through from our policy rate to the effective borrowing rate of households and businesses. What's it going to do to activity? What will it then do as part of one of many factors on inflation?

What we've seen in household debt--in borrowing costs, more specifically--in recent weeks is that fixed rate mortgage costs have gone up. That's a product of increases in the underlying funding costs of banks on a term basis, so on a fixed rate basis at five years, which is the five-year fixed rate. That's basically what we've seen: a rise in government yields since our last report--generally that's consistent with an improvement in the global economy--and a slight increase in the funding costs of banks above those government yields. So the combination of those two have raised the cost of debt--

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I'm sorry to interrupt—

[Mark Carney]

No, that's the end.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

You're worried about debt and its effect on monetary policy. If I am a financial institution and it doesn't really matter to me what the Bank of Canada says, and I decide to lend money anyway, is that a problem that you have in terms of your policy? Are the banks going to lend money regardless?

In Canada, they have insurance. They can always collect from CMHC. Do the banks really care that home prices are going to go up? Here's where I'm going with this. Is there a danger that we can copy what went on in the States with their crisis?

[Mark Carney]

In some respects this goes back to the question from Mr. McCallum earlier about the risk of household spending being higher than expected. Our expectation is that there is going to be a slowdown in the rate of debt accumulation of households, most notably through the mortgage side and the residential side. But if that doesn't transpire, yes, it's an issue for us, all things being equal, because there would be the impact that it has on activity and inflation.

All other things aren't equal, ever, so we have to take everything into account. But yes, we do look at the momentum in housing markets and in consumption.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

So in reverse, will the banks stop lending because of the warnings that you put out?

[Mark Carney]

Well, there's a price signal that's sent with higher borrowing costs, and we see the start of higher borrowing costs in fixed rate mortgages. On the margin, some people will not take out a mortgage at those levels, or not as large a mortgage, and that will slow it. It's not stopping lending; it's a reaction to supply and demand.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

To slow it down.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

Monsieur Paillé, s'il vous plaît.

[Daniel Paillé, Bloc, Hochelaga, QC]

You were right in saying earlier that if ever there were an international tax on financial institutions, this should not be left in the hands of a government, because the money could very well no longer be available when needed. The two parties dipped into the banks like that.

You also mentioned that with regard to the monetary policy, there are monetary policy instruments. We sometimes get the impression that the government of Canada never intervened with the chartered banks. It nevertheless remains that, in your statement as governor of the Bank of Canada, there is an increase in government securities. You used a number of repo transactions, in particular Canada Mortgage and Housing Corporation, CMHC, securities. Are we to believe that these mortgage holdings are problem-free, that their valuation is good and that there will be no backlash in the short term?

That is my first question, and I will then follow up with another one.

[Mark Carney]

I would just like to clarify one thing. Since the beginning of the financial crisis, short-term markets have been facing problems. I am talking about the liquidity problems of financial institutions, even those of Canada. Consequently, the Bank of Canada provided liquidities to the banks. We did this through loans guaranteed by securities, for example CMHC securities. Every time we did this, we offered less money than the value of the securities. We are therefore protected. To use a finance world term, the haircuts were rather close related to...

[Daniel Paillé, Bloc, Hochelaga, QC]

And what about the volume or the value of the...

[Mark Carney]

With regard to the value of the liquidities, let us say that our balance sheet is of 50 billion dollars normally. The high for liquidities in the Bank of Canada, not the government of Canada, is approximately 40 billion dollars. Right now, we are talking about 22 or 23 billion dollars. Between now and the end of July 2010, the value of these special liquidities will have dropped right down to zero. It will be finished.

[Daniel Paillé, Bloc, Hochelaga, QC]

The moral suasion of the governor of the Bank of Canada is another instrument of the monetary policy. It is as old as time. Last week, for example, it had been predicted that you were going to be announcing something. For the banks, the rate is perhaps also a way for them of knowing if they can make a move. We have seen mortgage rates, for example, rise considerably. There is also the tightening that SMEs are facing.

Based on what you have said, you are reviewing the availability of capital for SMEs. I once again come back to my pet peeve. When there are housing starts, obviously supported by mortgages, when SMEs are finally getting their heads above water and are requiring capital to increase their investments and renew their cash flow, with the government all the while not offering loan guarantees, the rates go up. Is this a vice they are caught in?

[Mark Carney]

I would first of all like to underscore the fact that the rise in fixed mortgage rates had begun before we made our decision. As I have just said, it was due to an increase in the cost of funds for banks. The main reason was the increase in government of Canada treasury bond rates. With the pursuit of the Canadian recovery, several bond rates in the mortgage market, preferred rates, etc., could increase. This is normal, given that the levels continue to be exceptional. This is what Canadians must take into account. The rates are very low at present. One must therefore be prudent in business.