Finance Committee on Oct. 19th, 2006

[The Chair, Conservative, Brian Pallister]

Unfortunately, there's only time for a very brief answer.

[David Dodge]

The surplus occurs when your projected revenues exceed your projected spending, and it automatically goes to pay down debt.

How much debt should one aim at paying down? The answer is that it depends on where you are in the business cycle. When you have unexpectedly strong revenues, you should aim to use that to pay down debt. In years when revenues are weak, you would not be paying down as much debt. Indeed, it could well be that for one or two years you actually run a deficit, even though you're on track over time to bring it down.

All we've said is that it's really important over the remainder of this decade, given the demographics of this country, to aim to reduce the burden of the debt, both for the federal government and the provinces.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Wallace, and welcome.

To conclude, we'll go to Mr. McCallum.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, Mr. Chair.

I think this is the first time I've had the privilege of asking on a second round. I thank you for that--not that I scored any political points last time, or would expect to this time.

[The Chair, Conservative, Brian Pallister]

Perhaps if you had, sir, you wouldn't have had a second round.

[John McCallum, Liberal, Markham—Unionville, ON]

Yes, perhaps.

I'd like to ask you a purely non-political question--I might get further--on the housing markets. You mentioned the weakness in the U.S. affecting demand for Canadian lumber and all of that. I would like to ask you about the possible link running straight from the U.S. housing market prices to housing prices in Canada.

There is a lot of concern about housing bubbles, in the literature and in the press, especially in the U.S. As, again, a double question, how concerned would you be about Canadian housing markets? Are there reasons to be a lot less concerned about Canada than the U.S. in this regard?

Related to that, if there were a real housing bubble burst in the U.S., would you see a direct transmission to a similar phenomenon in Canada, or do you think our housing markets march to totally different drummers in the two countries?

[David Dodge]

To take your second question first, the link would be indirect. The link would be that with a collapse in the U.S. housing market, U.S. demand really slows down, our exports slow down, income growth in Canada slows down, and then that affects the housing market. I don't think there's a direct link at all.

Going to the first question, how concerned are we? We watch this pretty closely.

The third part of the question, which we didn't get to answer earlier on, is that in fact what we've seen is that household debt to income rises, but debt service costs to income actually have fallen fairly sharply. They've been flat over the last couple of years. They haven't been rising. That is quite a different story than is the case in the United States.

So from the household side, we don't see a particular problem. The question is, are there particular markets?

First of all, I think one has to note that up until 2003, Calgary and Edmonton had one of the lowest ratios of house prices to median incomes in the country. In fact, even though they recently had a very rapid increase, they only got back to where most of the rest of the country is because of their high incomes. Vancouver's lower mainland is probably the one market where the ratio of house prices to incomes clearly looks out of whack. But that would be the one.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

On pensions, I think a number of us might be somewhat concerned that as our private pension system shifts increasingly from defined benefit to defined contribution, the risk of stock market corrections and things of that nature becomes increasingly borne by the individual. Especially with the aging population, that might be a concern, in that public policy might wish to slow down or reverse such a shift.

[David Dodge]

Or at least not contribute to.

[John McCallum, Liberal, Markham—Unionville, ON]

Or at least not contribute to out of their non-neutralities, such as treatment of surpluses and this type of thing. I used to work for a bank, and was on the pension committee, so I know a little bit about that.

Do you think there are good public policy actions that could be taken to reverse or slow that trend towards defined contribution?

[David Dodge]

Yes, I think there are. There are actions that would certainly help to at least make public policy neutral. I talked about one of those in answering Judy's question.

I really am worried about a system that jerks the valuation all over the place. Any prudent corporation doesn't want to have his earnings jerked all around by assumptions that accountants force him to make about an interest rate to value liabilities, for example.

So I think there are clear things that can be done. Exactly how to do them is a much more difficult question, however.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you very much.

[The Chair, Conservative, Brian Pallister]

Thank you on behalf of the committee, gentlemen. It's much appreciated. It's always a pleasure to have you here.

We are adjourned and look forward to seeing the committee on Monday.