Finance committee  I won't comment on nuances. It is complex. I guess all I would say, from my conversations with the minister, is that he fully recognizes the complexity of dealing with it, but also the importance of having an Income Tax Act that appears to be reasonable and fair, because after all, we rely largely on voluntary compliance.

Finance committee  Look, no minister of finance wants to throw the baby out with the bathwater, and I'm sure this minister of finance doesn't want to do that either. This is a technically difficult area. At the same time, it is annoying, it is revenue loss, and it brings the belief of Canadians that we have a fair tax system into question when there are some practices that actually go on.

Finance committee  There are really two issues you've raised, and they're both important but different. The first is the evolution of income distribution in this country. For the last 20 years we have seen the distribution of earned income actually grow more unequal. Now, we are certainly not a world leader in this increasing inequality, but earned income is clearly more unequal as we sit here in 2007 than it was in 1987, or in particular than it was in 1977, at the end of the last long productivity boom.

Finance committee  While the Fed doesn't have explicit targets such as we have, the basic objective of every central bank is to keep the economy operating reasonably close to potential and to hold inflation at very low levels. That's essentially the game we're in. Going back to your previous question, that becomes much easier to do, from the standpoint of monetary policy, if the economy is very flexible and adjustments can take place.

Finance committee  The productivity measure remains to us a bit of a puzzle, as we say in our report. We don't fully understand why it is that productivity has been so weak over the last couple of years. It may be that there was actually more output there. When we get all the revisions and statistics, we may find that there's more output there.

Finance committee  It's hard to comment on all those specifics. Let me just go back one step. During the period of the 1990s and the very first years of this decade, it was exports that were the key driver. We had rather weak domestic demand as federally and provincially we were getting our fiscal situation in shape and we really were relying heavily on foreign demand through that period to drive growth.

Finance committee  That is an excellent question, and I'll take a stab at it. There's no exact figure. It will depend on the relative change in the prices of all commodities versus the prices of the manufacturing products. It will also depend on cost adjustments in Canada and on how these costs compare to costs worldwide.

Finance committee  I'll take a stab at that and then let my colleague respond. As we stated the last couple of times we appeared before this committee, we expect the percentage of jobs in the manufacturing sector to drop during this period of extremely high commodity prices coupled with a strong services sector.

Finance committee  And that's why we have worked very hard with the IMF, the International Monetary Fund, and other organizations in order to convince the Chinese authorities that it is in their best interests to have a far most flexible exchange rate than what they currently have. Paul, you have the figures.

Finance committee  As you know, I've been before this committee several times over the last two and a half decades on this issue--in the mid-eighties when we tried to deal with this problem and again in the mid-nineties when we looked at it. First of all, I think all members recognize that this is a very technically difficult area of the Income Tax Act, and trying to deal with abuses without throwing the baby out with the bathwater is just very difficult.

Finance committee  As you're aware, there's a lot of volatility when it comes to exchange rates. We've estimated that in the first quarter of this year adjustments in the rate of exchange were more or less in keeping with the movement in commodity prices and the strength of the Canadian economy. Over the last two or three weeks, we have seen some volatility, and it is hard to comment on this.

Finance committee  That's a very good question. What we do is project on the basis of government balance. Our assumption, as we've prepared our report, is that governments at all levels will basically bring in balanced budgets and operate in balance over the course of the projection period, which runs to 2009.

Finance committee  Thank you very much, Mr. Chairman. It's always a great pleasure for Paul and me to meet with members of this committee. We really do appreciate the opportunity to meet with you a couple of times a year, following the release of our Monetary Policy Report. Certainly we think these meetings provide us an opportunity to keep you informed and, through you, to keep the Canadian public informed about what we are doing at the bank, about our objectives for monetary policy and how we're accomplishing them.

Finance committee  What I said was that a step was taken to level the playing field and it was a step absolutely in the right direction, but that, as Mr. Dancey said, the tax system is complicated, there are incentives in it, and it's always an ongoing process in trying to deal with the tax system to get greater neutrality.

Finance committee  That I really can't answer. You'll have to ask somebody with more tax expertise than I have.