Finance Committee on Oct. 19th, 2006

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

Not a physical concept.

[David Dodge]

—so much a physical concept.

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

It's not something we can touch and feel. I can't understand how we cannot—

[David Dodge]

No, it isn't, and that makes it very difficult.

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

I cannot understand how we cannot produce more cars and cannot produce more airplanes, especially Bombardier not at full capacity. I'm only talking about some of the bigger manufacturing sectors that I can think of. I'm sure there are others. We're back to what we were discussing before, in terms of productivity. I don't know if that has anything to do with it.

But if we're saying that if we're operating above capacity then everything is fine, the other side of the medallion is where do we try to peg the dollar? Do we want to peg it so that it's low and try to protect inflation, because we are going at full capacity, or do we peg the dollar to the American and try to simply sit on our saddle? Where's the correlation in terms of our monetary policy?

[David Dodge]

Well, the really difficult thing is that somehow we have to move real resources out of industries where the value added is lower and into industries where the value added is higher. That's how we'll become wealthier over time.

That process of adjustment is not easy. It takes time, it takes investment, it takes retraining, and it takes mobility. All of those factors have to be there to thus relieve some of the bottlenecks. And for supply bottlenecks, in areas where value added is very high, we really do have to take capital and labour from areas where it's lower. That takes time, and it's difficult—

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

I'm sorry to interrupt, but it's because our time is limited.

So to put it in layman's terms, if producing a car in Canada is not efficient or doesn't add enough value, is it not important? Probably “important” is not the right word, but it's not something that we should be targeting toward? Maybe jobs that create more value--is that what we should be heading for? This is going to lead to my question: how do we balance that? Because of the regional differences, there are not the same resources, both physical and human resources, in one area of the country compared to another. How do we address those as well?

[The Chair, Conservative, Brian Pallister]

I'm sorry, sir, but you're going to have to address that in a very short—

[David Dodge]

Thirty seconds.

It's quite easy, or relatively easy, in very deep labour markets, like southern Ontario, the Montreal plain, the lower mainland in B.C., or the Edmonton-Calgary corridor, because people can move the costs of movement. You may have to drive further, but you can move around. The firms are next door, and so on. Where it's difficult, and what we're really struggling with, and what you have to struggle with, as members of Parliament, is the fact that we have a lot of people in industries where we do have to release labour but where these are smaller communities, far from alternative employment. That is the real struggle we have.

[The Chair, Conservative, Brian Pallister]

We'll move to Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

Before I start, I'm happy to be here and joining the committee on a permanent basis, which is—

[The Chair, Conservative, Brian Pallister]

Welcome, Mr. Wallace. Bravo.

[Mike Wallace, Conservative, Burlington, ON]

Mr. Dodge, you're the first person I've spoken to officially as a member of the committee.

I want to tell you, Mr. Dodge, that one of the areas I was interested in at university twenty years ago was macro-economic stuff and banking, and it's an honour that I get to address my first question to the head of the bank.

Here is my first question--nothing to do with banking, in a sense. Part of the role for us as a committee is to look at what you'd like to see in the next budget. You can answer as the head of the bank, or you can answer as an individual if you wish, either one of you. Are there a couple of things you'd like to see the finance minister do? I'd be interested in hearing what your answer is. As a Canadian, what would you want to see in the next budget?

[David Dodge]

That's a question I'm not going to answer.

[Mike Wallace, Conservative, Burlington, ON]

I tried.

[The Chair, Conservative, Brian Pallister]

Not an impressive start for our new committee member.

[David Dodge]

I'll tell you why.

At the bank we are very privileged, in that we have direct access to the Government of Canada to give them advice privately and quietly. We are their banker. We serve the Government of Canada, and we'll serve the provincial governments, in terms of giving them advice on a confidential basis. If we are to do that well, then we have to give them the advice and let them make the choices.

[Mike Wallace, Conservative, Burlington, ON]

I appreciate that. I thought I'd try.

[David Dodge]

It's a good try.

[Mike Wallace, Conservative, Burlington, ON]

You mentioned a couple of times today that you're forecasting a reduction in productivity in the future—not in the short term, but maybe in the long term. Am I accurate?

[David Dodge]

No. A year ago we were looking at our productivity assumption moving up from 1.5% to 1.75%. We made that adjustment in our forecast a year ago. What we've discovered over the past year is that maybe we were a bit too optimistic, so we've moved back to 1.5% for the period through to 2008.

[Mike Wallace, Conservative, Burlington, ON]

It's back to 1.5% and not 1.75%, which you had for last year.

Regarding this process of forecasting, which is obviously important to us in where we're going as an economy and as a country, can you explain in layman terms what goes into that forecast, so I understand how you came to one conclusion, then changed it again?

[David Dodge]

The short answer is a lot of judgment, and I'll let Paul give you the factors.

[Paul Jenkins]

Let me be brief, but talk generally and then more specifically about productivity.

When we put together the projection that goes into our monetary policy report, we draw on analysis from a number of different sources, including our regional offices that are constantly in contact with provincial governments and businesses across the country.

We gather quite a bit of input as we make our decisions and in the end come to a judgment as to what we think are the trends in the Canadian economy. Of course, as you rightly point out, we need to have a sense of what the future looks like, because monetary policy operates with lags. What we do or might do today would affect the economy out over a year to a year and a half.

On the productivity side, we look at the history of productivity growth. We are out talking to businesses and associations, trying to get a sense of what they are doing.

In the end, a lot of it is judgment. But it is critical for us is to have a well-defined paradigm to think about these issues, so that as events unfold, we can assess them in a very logical, coherent framework that leads to judgments about monetary policy.

[Mike Wallace, Conservative, Burlington, ON]

One question I'd lined up was asked previously, about paying down debt and surpluses. In my previous job the issue we had on a surplus—basically we treated it as one-time money that wasn't to go back into programming for government services. I worked at a different level of government.

Does the Bank of Canada have a position on the role of the surplus? Is there a prudent level, as the previous speaker mentioned, or is this something you keep to yourselves and discuss privately?