Industry Committee on May 30th, 2006

[Tony Martin, NDP, Sault Ste. Marie, ON]

To be parochial for a minute, in my own town there was a study done over the last couple of years that indicated there are now 12,000 working families living in poverty. It wasn't nearly that five or ten years ago. So it's a growing phenomenon.

The other issue I wanted to raise with you, because I think you spoke to it on another occasion, is our ability to compete. There's nobody who will deny that our health care system is something that gives us an advantage. We're on the cusp of a new national child care program that some of us feel is going to give us a bit of a competitive advantage in terms of allowing more people to get into the workforce and having them feel more comfortable because their kids are being looked after. Child care is always a huge challenge.

[The Chair, Conservative, James Rajotte]

Mr. Martin, if we could just have a question....

[Tony Martin, NDP, Sault Ste. Marie, ON]

Is that something you'd like to expand on? Are those kinds of programs something that should or could be factored into our ability to be competitive?

[The Chair, Conservative, James Rajotte]

Mr. Dodge.

[David Dodge]

I guess all I'd say is that our strength--to take Dofasco's old line--is always going to be our people. Training and development of people is absolutely critical. It's critical, of course, to the individuals, but it's critical to the health of our firms. The importance of training and development comes up absolutely front and centre every time we're out in the field talking to firms.

[The Chair, Conservative, James Rajotte]

We have Mr. McTeague to start the second round, for five minutes.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Governor, thanks for being here today.

It's good to hear the comments you've made. More than anything else, I think my wife and many others in Canada keep wondering how we made adjustments for a 2% increase in interest rates over the past couple of years. It's to that question that I'd like to canvass some thoughts from you, as to the relationship of the U.S. current account deficit, which you alluded to a little earlier, and its impacts, not just on the Canadian dollar, but, more importantly, for manufacturing and for Canadian consumers.

I note comments you have here suggesting that crude oil will be in the area of $70 U.S. I was relieved to read that. It certainly goes against some of the commentary that's been made by speculators in the industry and various brokerage houses over the past couple of days. British thermal units at $10 U.S. per million, of course, is a reflection of the fact that although the level of supply is still there, if you look at a five-year average, demand and supply, with some exceptions, is static. We see European demand is dropping.

We know there is a certain degree of supply available to meet the world...save and except for the issue of speculation. One thing that seems out of the control of parliamentarians, and perhaps the control of Canadians in general, is the issue of the U.S. current account deficit and its impacts on those two bottom lines for manufacturing. I was wondering if you could shed some light on that.

[David Dodge]

Paul has done a lot of work on this, so let me ask him.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you.

[Paul Jenkins]

Okay, let me start off on that exact point.

The U.S. current account deficit is in the order of 6% to 7% of U.S. GDP. Of course, that's a situation each year. So with each year of deficit, the U.S. is adding to its level of indebtedness to the rest of the world, and that level of indebtedness is now substantially larger than it was 10 years ago.

Fundamentally, what that current account deficit in the United States is telling you is that the U.S. economy is consuming more than they're producing. They're importing a lot of goods and services, and to finance that they're drawing on savings from the rest of the world.

A large part of those savings are coming from Asia. We've talked publicly, and we've certainly talked privately, about this situation. A good part of that surplus in Asia you see in China, but not exclusively in China. This is really a story for most of Asia, in fact. Japan continues to run a large current account surplus as well. More recently, with the increase in energy prices, you're seeing a run-up in current account surpluses of the oil-exporting countries.

This is a complicated story. Fundamentally, to rebalance these imbalances, as we call them, this current account deficit in the United States, in an orderly fashion is going to take two or three things coming together, and we're seeing signs that this is in fact happening.

First of all, you need savings in the United States to rise to help reduce that level of consumption and therefore bring down their current account deficit. But you also need to see, at the same time, demand elsewhere in the world, particularly domestic demand, beginning to pick up. We are seeing clear signs of that in Japan. There's reason to believe some of that is happening in China as well.

The third element that we deem to be important here is this issue of exchange rates and the importance of having more flexibility in those, because movements in exchange rates--we call it relative price movements--help to bring about this change in behaviour that I've just been talking about.

So this is a very important issue for Canada. We are a small, open economy. How these imbalances get resolved will be critical for us, and we've been talking about it quite openly as well in the international forum that we meet in.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

I take it that there will be no interest rate increases for the foreseeable future.

[Paul Jenkins]

That was certainly no comment on the monetary policy going forward.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

I understand.

Finally, if I could just change gears a little bit, Mr. Dodge, you appeared before Humber College last year and you talked about the issue of education, and in particular, as your remarks were entitled, “Canada's Competitiveness: The Importance of Investing in Skills”.

You said:

We need a system of incentives for continuous learning and upgrading of skills, and an infrastructure that delivers the training. This has always been important. But, as I mentioned earlier, it will be particularly important in the next two decades, as labour force growth in Canada slows.

Clearly, the budget offering $80 for textbooks doesn't seem to meet the mark. What do you believe we ought to be doing in that regard, in terms of encouraging substantive change in the way we're looking at that?

In the same speech you talked about early childhood development, the need to build an excellent infrastructure, feeding it into a school system that effectively teaches basic skills.

The current scenario of the government does not in fact go down that road. It removes us from that very important precept. How are you going to be able to square your comments with the direction of this current Conservative government, which seems to be moving in a 180-degree different direction?

[David Dodge]

First, let's be very clear. Most of the specific tools that governments have are tools that are in the provincial domain. We have a few federally, but most of it is in the provincial domain in terms of government.

In terms of employers, and this is really quite important, we have collectively in Canada, and I think it's true virtually in every province, not put as much emphasis on continuing upgrading and provision of skills to the labour force as we should have. We relied heavily in the past on immigration in a way that we will not be able to rely to the same extent in the future. And certainly in what you might call the skilled trades, whether industrial or construction, we have a labour force that is now relatively old, and I don't think one can ask people engaged in some of that very heavy work to extend their working lives to 70 in the way some of us are privileged to be able to do.

There's an obligation, not only on governments but on employers as well, to work very hard at this. It's something that is an age-old problem, and we recognize it when labour markets get tight. Then we somehow collectively have amnesia when the economy gets a little softer.

So one of the most important questions is, how can we operate through the rather softer periods, which is precisely the time when the real cost to the economy of doing the training is the lowest? That is what we need to sit down and agree on now, at a time when everybody's sensitivity to this issue is heightened, and not wait until we have some slowdown and people say it's all taken care of.

I think there is a responsibility on the industry committee as well as on the social policy committees here, because this is absolutely crucial for the future health of Canadian industry, whether it be the manufacturing sector, the resource sector, or the service sector.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McTeague, Mr. Dodge.

We have about six minutes. You have until about 12:10 p.m., do you, Mr. Dodge?

[David Dodge]

Yes, we need to be out of here by 12:15 p.m., I think, Mr. Chairman.

[The Chair, Conservative, James Rajotte]

We also have a second witness for the second meeting and we have four members on the list. So we have six or seven minutes between four members. If we could have members go very quickly and have the responses be just as quick, we'll try to get through everyone.

Mr. Van Kesteren.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Dodge, for being here.

I have a very simple question. I want to go back to our national debt, which stands at about $486 billion, and to service that debt, $31 billion. I would like you to address that. What are the implications, and are we on the right target? The way I understand it, it must be debt to equity ratio, where we want to get to about 25% or something. I think that's the stated government goal. Is that something that's safe, or are we headed toward disaster with that high debt?

Then quickly, if you could, touch on the fact that the American debt is so much more than that, and should they ever come to a situation where.... Are we going to see spiralling inflation?

[David Dodge]

Certainly, the Government of Canada and the governments of most provinces have, since the early nineties, been on a track to try to deal with this. Indeed, Canada kind of stands out among the OECD community as having done a pretty good job on the fiscal side. “Having done” doesn't mean we can relax going forward, because as we work that debt service charge down over time, what it does is it allows us to deal with some of the costs of an aging society without having to raise taxes to deal with it.

I think it's fair to say the governments in Canada have done a good job, but we can't relax. We are in a particularly buoyant period at the moment, where national income is growing very rapidly. We've had the great advantage of this improvement in our terms of trade. So this is actually a time when all levels of government ought to be looking toward staying the course, and indeed improving on the course of getting that debt down.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

As the second part of that question, what about the Americans? Should we see, as some are predicting, some instability because of their—

[David Dodge]

The Americans have a big longer-run problem. They have a short-run problem that I won't really comment on, which they haven't dealt with very well, but they have a huge long-run problem.

First, there's their social security system. We basically dealt with ours in 1996 with the reform of the CPP, and we have a structure of.... The RRSP system is interesting, because of course by providing the deduction up front, we also get the revenues in the 2020s, when we're going to need them. So that side we have dealt with rather well. The Americans have a big problem and have to come to grips with it.

Their problem on the health side is even more severe. They spend roughly the same fraction of GDP publicly on health as we do, but most of it is for the medicare system for the elderly. Of course, the elderly are a very rapidly growing part of the system. While we face a problem in clubs, they face it in no trump on that front.

So they have a long-term structural problem that is very severe, and the longer they wait to deal with it, the more difficult it's going to be. Of course, that poses worries for us, because it could mean a period of rather slow growth in U.S. domestic demand as they come to deal with this in the future.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Van Kesteren.

Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Mr. Dodge, eight components were excluded from the calculations measuring inflation and the increase in value of the Canadian dollar: fruits and vegetables, gas, fuel-oil, natural gas, mortgage interest and the urban rate, and tobacco. Yet counterfeit products, which are now in Canada, and cheap foreign labour are also factors.

Were those two factors also excluded from calculations dealing with the dollar increase and inflation? How can Canadian manufacturers realistically manage the sharp rise in oil prices, the increase in energy costs and the overall 30 per cent appreciation of the Canadian dollar, in so little time?

[David Dodge]

It would be hard to give you a brief answer. This will also require considerable energy.