Finance Committee on Oct. 19th, 2006

[The Chair, Conservative, Brian Pallister]

Excuse me, sir.

[David Dodge]

It seems simple, but it is quite difficult.

[The Chair, Conservative, Brian Pallister]

We must move now to Madam Ablonczy.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Yes, thank you.

Welcome, Mr. Dodge and Mr. Jenkins.

The theme of our consultations has been increasing Canada's competitiveness and productivity, so we certainly want you to be able to weigh in on that. You know that with the appreciation of the Canadian dollar over the past few years, it's become tougher for Canadian businesses to remain competitive and of course to maintain Canada's standard of living. So I wonder what suggestions you would have about increasing productivity to make our businesses more competitive. I'm sure there are many things you could suggest, but what would be the main ones you'd want to emphasize?

[David Dodge]

First, just let me say that, as you'll note from the lack of hair on the top of my head, I've been through a number of these cycles before. I remember very well the cycle of the 1970s and then the early 1980s and then the early 1990s, when adjustment in the Canadian economy was slow, when in fact at all levels we tried to cushion the adjustment process, and the result was not great. I've got to say that as I have observed what's happened over the past three or four years, I think one has to be impressed with the resiliency of firms, with the resiliency of workers in adjusting to really rather abrupt changes. And we've adjusted in a way that we certainly didn't 35 or 30 years ago. I think in that sense we have learned from history.

The real question, then, is what we do going forward. The first lesson--and Paul has spoken about this, so I'm going to turn it over to him--is that we have to stay flexible. The second lesson is that we all--whether we're employers, whether we're governments, or whether we're individuals--have to focus on ensuring that we continue to upgrade our skills and be in the forefront.

But Paul's done some work on this, so let me turn to him.

[Paul Jenkins]

Let me start by noting that the governor referred to the 1970s and 1980s and the boom-bust cycles we went through in those years. If you compare the last 10 years to that earlier episode, we've actually gone through substantial shocks. A lot of those have had an international origin or dimension to them. You can think back to the Mexican peso crises; the Asian crises; Russia, long-term capital; bursting of the high-tech bubble; SARS; BSE; corporate malfeasance in the United States. These have all had impacts on our economy. And as the governor indicated, we've really shown quite a bit of resilience in terms of being able to adjust to those shocks.

So the issue here is what we can do to continue to promote the ability of our economy to adjust to what will continue to be developments, probably a lot of them outside our borders. Therefore, policies at the macro level, and, from our point of view, maintaining a low, stable inflation rate are actually very critical. As well, promoting training and mobility of factors of resources--labour--across the country is also very important. So that flexibility to respond to economic developments is very important, and I think we've made some good progress, but we continue to see the need for that.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Are you concerned at all about the efficiency and productivity of the financial markets? And if so, what would you suggest for policy actions there?

[David Dodge]

The answer is yes; we are concerned. We face real competition from the rest of the world, and unless we stay in the forefront in terms of the legal and regulatory structure for our markets and the structure of our industries, then we are going to suffer.

For a number of years, starting from the Porter commission back in the early 1960s, and then with revisions to our structure in 1967, Canada was actually a leader. In that process, we created for ourselves a comparative advantage. We've been slipping, quite frankly, in the last decade in that regard. Or let me put it differently: other countries have been making progress a lot faster than we have been; hence, our competitive position has deteriorated a bit. So yes, we think it is very important that from a legal and regulatory point of view we do everything we can.

Secondly, what we do know is that competition in markets is the real way that innovation is promoted within firms, so we have to ensure that our markets and our institutions really do face enough competition that they're spurred to do the very best. No one likes competition very much, but it certainly is an incentive to enhance productivity.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Mr. Dodge, I have a final question. I know that you have an interest in defined benefit pension plans and Canada's pension plans in general. Of course they're a huge element of future security for Canadians. I wonder if you could share with us some of your thoughts on actions that might need to be taken to strengthen this area of our economy and of our security.

[David Dodge]

Pensions are probably the most complicated area from a technical point of view, and I am not the expert from a legal drafting point of view or from an accounting point of view, but clearly it's very important that firms and workers do have the option and the ability to have defined benefit plans. They may choose not to; that's a different story. But we should have a framework that is not biased against the establishment of those plans.

For various reasons, in terms of accounting and the way some of the judgments have gone in courts, we've created a bias against employers sponsoring these plans and what we've seen is employers increasingly back out.

Now, that's a free choice that people have, but our view is that it is important because these are very important sources of savings for the economy, and for stability in the period going forward. So what we have simply argued is that we ought to have a legal accounting and regulatory framework that is neutral to this, that it doesn't bias the choice of employers against setting up these plans.

With respect to the Canada Pension Plan, we're kind of leaders in the world in having a public pension plan that is pretty sound. But as we all get older, we really have to look, I think, at the way the CPP is structured in terms of the transition from full-time work to full-time retirement. When it was set up back in 1966, that wasn't really thought so much about. That is a difficult issue and one that increasingly we will have to think about if we're to have the right incentives for older workers to continue to participate in the labour force to the extent they want to.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

I'd like to pursue that, but I suspect I won't have time. But thank you very much.

[The Chair, Conservative, Brian Pallister]

Thank you, Madam Ablonczy.

We'll move to Madam Wasylycia-Leis.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you.

Thank you very much for your presentation today.

Let me pursue the issue of pensions, specifically back to the defined pension benefit plans that you publicly stated are important. You've identified the need to address the fact that so many firms are moving to contribution plans as opposed to benefit plans.

We had presentations at our committee from a number of people on this issue, but one in particular was Pam Went from the Bell Pensioners' Group. She suggested that what we need is legislation to ensure that there must be solvency at all times. She says there's such a law in the Netherlands and it's been successful. Also suggested is something similar to what the Province of Quebec is legislating currently, and that is the creation of a reserve fund. That would be available when times are bad and yet, in the short term, can be used as an asset of the company.

Should we move in that direction? Do you see any pitfalls? How do we advance in this area?

[David Dodge]

These are really difficult issues.

First of all, I think we have to be very careful about saying that there should be solvency at all times, because that solvency calculation is based on a whole bunch of hypotheses and a whole bunch of rules. Quite frankly, I worry that we've defined it so tightly that we have plans that are going to be perfectly solvent over a period of time and at another point in time may appear to become insolvent because of our rules.

So I think we have to be quite careful here. The task of trying to find a way to do it, to smooth through the wiggles that take place, is not easy. But the situation we currently have, where everything depends on the interest rate that exists on the last day of a calendar year, is not a very sensible way to look at it. It allows for comparability, but it doesn't make sense from a pension point of view.

The Netherlands one is a bit of a different thing. I think there are lessons in what the Dutch have done. They started with a total disaster and experimented with a way of going about this. I think there are lessons there for Canada that are worth looking at.

Finally, there's one thing I would caution very strongly against, and that is having something like the American Pension Benefit Guarantee Corporation. It really rewards the folks who don't manage their plans well and penalizes those who do. That's really quite a dangerous way to go at it. On the other hand, very clearly, if we run into a real economic or financial disaster, we would want to look at ways to try to stabilize through that. But I don't think the historic way of doing it, through something like the Pension Benefit Guarantee Corporation, is a sensible way.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you for that.

I'll switch topics now and go to the broader matter of the state of the economy, the state of the nation, and what I see as a looming crisis based on the loss of manufacturing jobs, our growing inability to compete with the flood of products from Asian markets, and the lack of programs to actually help workers adjust to new demands and new scenarios.

I don't see that we have the tools to deal with a massive adjustment crisis. In the past when we had economic crises, the manufacturing sector played a role in recovery. We don't have that any more.

What do you see as a way through this?

[David Dodge]

Okay, let's deal with that. There are two issues here, short term and long term. I think we really do want to separate those.

In particular in the automobile industry and the industry that makes the bits and pieces for housing, we are going through a short-term cycle, which we certainly do expect to recover. That's why we have things like unemployment insurance. That is exactly what we expect to happen. That's cyclical. But there is a structural problem, and I think that's really what you're referring to. That structural problem differs across different industries, but clearly, industries that generally rely on lower skill labour--furniture and textiles being two classics--are ones where we are going to cede employment to lower-cost countries, and those industries will in the future likely have fewer employees than currently, although not necessarily as much as we think, because we still retain capacity in design and the specialized end of that. That's one set.

Secondly, we have industries like the forestry industry, which is one that I think concerns all of us, where in terms of pulp and paper we have enormous competition from the Brazils and Indonesias of the world and we have declining demand for our classic product, newsprint. At the same time, particularly in eastern Canada, we have increasing wood costs. So that industry is one that, over time, is going to have to be a bit smaller than what it currently is. It doesn't mean that it needs to be unproductive but that it's probably going to be smaller than it currently is.

The issue then is--and particularly in those industries, since they tend to be located in northern Manitoba, northern Ontario, northern Quebec, in smaller communities--how do we deal with the fact that there won't be in those communities jobs for all the workers who are displaced? In part, this is dealt with, at least in the short run. Since these people are highly skilled and very useful in industries that are expanding, in part that means temporarily working outside of the community. That's easy in a place like Prince Albert, where you can jump on a plane and in half an hour be in Fort McMurray. It's a little tougher in Fort Frances or in Témiscaming to do that. So that is a real issue. I don't have all the answers of how to do that, but it's on the workers in those communities that we have to concentrate.

Finally, over the long haul, of course, what we have to concentrate on is, through education and training, to ensure that younger workers have the skills and flexibility to be flexible across different industries.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

As part of this, the other problem that I see looming, and you've touched on it a bit, is the heated-up housing market. Do you not see, the way things are going, that we could be into a serious crisis with people going in over their heads, turning to some of these, as I understand it, fly-by-night companies to get mortgage insurance when they can't get it anywhere else, or to get mortgages when they can't get one anywhere else, and risking a huge loss and critical downturn for many communities?

[Paul Jenkins]

Let me address that. This is an important area and one we've given quite a bit of attention to in terms of looking at the balance sheet of the household sector and working through different scenarios in terms of how that balance sheet might be affected, for example, by increases in interest rates or declines in house prices.

At the aggregate--and I emphasize at the aggregate--when you look at the household sector balance sheet, and in particular, debt service ratios, which remain very low, we are not concerned that we are in some sort of a serious situation at all. Indeed, although interest rates have gone up somewhat, interest rates, including mortgage rates, remain relatively low, and that's a byproduct of low and stable inflation. We can't forget that.

We also do analysis in terms of the distribution to ensure that even though at the aggregate there is not the risk that across the distribution of households there is a vulnerability. That's an area in which we haven't done as much research as we would like. We have done some. In fact, in our upcoming financial system review that will be out in a month and a half, this exact issue gets addressed. The research to date again suggests, from a distributional point of view, there is not a serious problem.

The third element--

[The Chair, Conservative, Brian Pallister]

I'm sorry, I'll have to interrupt you prior to that important third element. We do have to move on, because we have a number of other members who would like to ask questions as well.

I'd like to conclude, with the committee's acceptance, at five o'clock. We have approximately 40-plus minutes, which would allow everyone who is currently on my list five minutes. I'll move in that direction.

Mr. McKay.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you, Chair.

Thank you, Governor. Thank you, Deputy Governor.

I know you've thought long and hard about productivity. Let me put a question to you that I put yesterday to the executives of Canada's large corporations. The government, over the past 13 years, has done many things that the corporate business community has asked to be done. Debt to GDP is down, interest rates are under control, you could include fiscal stimulus, or contractions--you get it within a band--interest rates are under control, and taxes have been substantially reduced--pretty well everything on the shopping list. Yet year after year our productivity seems to decline, both absolutely and relatively.

I know you've done a lot of thinking about this, and I know you've done a lot of thinking about it with respect to the financial services sector even, which should be a strength. I'd be interested in your opinion as to where we look now.

We arguably have the most generous R and D credits in the world. We have publicly funded research--arguably the most advanced in the world. We have reversed the brain drain, and we are now in a brain gain. What's left is business. So what's the issue?

[David Dodge]

Well, if I knew all the answers to that, I think I would be either a hero or I'd be rich--one or the other. Sorry, we don't know all the answers. This is very hard work as you plow through it.

When we appeared a year ago, we thought we were getting back on track to a long-term productivity gain of about 1.75% per year. We thought so, because we had seen a substantial pickup in investment in machinery and equipment, which is generally a precursor to higher productivity. We thought that a fair bit of adjustment had already taken place. An adjustment, while you're going through that, is actually a negative for productivity.

When we looked at it again in September, as we were preparing this report, we saw two things. First of all, the numbers weren't coming through as strongly as we thought, in spite of the fact that we made more investment in machinery and equipment. Secondly, the adjustment process was clearly more protracted than we had anticipated. For that reason, we said we were maybe a bit too optimistic last year and that we would go back to 1.5%, which is what we had been assuming in the earlier part going forward. For the next couple of years, we still have potential for 2.8% rather than 3%.

Now, it may just be that the adjustment period is more protracted. Certainly if you had to place odds, that is it. We do know that during periods of adjustment, the productivity numbers end up not showing as good a performance.

That having been said, however, and especially since an increasing share of employment is going to be in the services sector--I mean, compared to the United States we have a rather low share in the service sector at the moment--clearly we have to put real emphasis on ensuring that our services sector, which is everything from financial services through to the hospitality sector, community services, health services and so on, is as efficient as possible. It's in that area that I think we're going to have to put more emphasis going forward.

Now, as to what to do, I can't give you any more answers than the ones we talked about earlier.

[The Chair, Conservative, Brian Pallister]

Again, Governor, I'm sorry. I'll give you an indication when there's about a minute remaining in time, so as not to cut you off and allow you to round up your response.

Let us continue with the next speaker.

Welcome, Mr. Bellavance. You have five minutes.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

Thank you, Mr. Chairman.

Thank you, Mr. Dodge and Mr. Jenkins, for your presentations. Today, I am pleased to replace Mr. Paquette, for whom I have already worked.

I will continue in the same vein as Mr. McKay. When I was working for Mr. Paquette, the Bank of Canada would present its report to the committee by putting great emphasis on productivity. Currently, it is much more about inflation.

Has your strategy changed or, as you said, has the productivity or your projections been perhaps too optimistic? You spoke quite vehemently of these things, but it seems that they are less important now.

[David Dodge]

In the medium term, productivity is the biggest challenge, because after 2011-2012, there will be a period of decline in labour. This is why productivity is extremely important.

However, in the short term, we try to stick to our inflation target and we take the evolution of productivity into account for the projected period.

[André Bellavance, Bloc, Richmond—Arthabaska, QC]

What worries me very much and what worries the people in my riding, where there are paper mills like Domtar and Cascades, is the appreciation of the dollar. We often hear that a government cannot have much influence on the appreciation of the dollar. Obviously, there are bad consequences for exporters, but it is also obvious that this is not as bad for importers.

You have a certain leeway regarding inflation rates. Do you also have some leeway for the appreciation of the dollar? What can the Bank of Canada do in such a case?