Finance Committee on April 30th, 2008

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

It is a little bit like the situation between the United States and Canada. You set a rate for the whole of Canada, but it does justice to neither Western Canada, nor Quebec, nor Ontario, nor even the Maritimes, because it is an average for the country.

What tools should we have at our disposal in order to temper this effect? Indeed, for Quebec and Ontario, because of the economic slowdown, we would like to see interest rates as low as possible so as to boost economic recovery, whereas in the West, inflation leads us to another conclusion.

What tools should we have at our disposal in order to change this relationship?

[Mark Carney]

We are managing Canada's monetary policy. I understand your argument, but it further underscores the importance of having a Canadian economy that is sufficiently flexible for there to be movements of goods, services and people within our country.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Pushed to the extreme, that would give us Dutch disease and what happened in the Netherlands. The fact that there is oil in the West, and therefore very strong development, has led to there being a two-tier economy. This was not the idea, but it is what has happened.

Would you agree that in Canada we have the equivalent of a two-tier economy?

[Paul Jenkins]

First of all, do not forget that Ontario and Quebec represent, roughly speaking, 60% of the Canadian economy. With regard to our monetary policy, with a lower inflation rate in Ontario and Quebec, the weighting of the activity in these two provinces is very important. It is the average that exists within the economy that matters. If we based the interest rate solely on the situation that exists out West, it would be higher.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

The rate is lower in the United States. In Canada, it seems that we want to take it into account. But do we do so voluntarily, solely with a view to aligning ourselves on the American rate, or is it simply a consequence of our inflation control aims in Canada?

[Paul Jenkins]

It is a consequence of the inflation rate here, in Canada.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

The rate does not take into account...

[Mark Carney]

We take into account the overall situation in the United States, but the key interest rate in Canada is sometimes 200 base points higher, and at other times, 200 base points lower than that of the United States.

[The Chair, Conservative, Rob Merrifield]

Your time has gone. Thank you very much.

We'll now move to Mr. Del Mastro. You have five minutes.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair.

Governor Carney, I just want to highlight a couple of things.

You mentioned that domestic demand is quite robust in the country. Back in 2006 when we brought forward our first budget, which included a reduction in the GST of 1%, there were a number of individuals who came forward and called that a stimulus at a time when the economy in Canada was in fact overstimulated.

We've now moved forward. We've brought in additional tax reductions. In fact, we've reduced taxes in every way the government collects taxes. But we see that the stimulus is in fact creating a very robust domestic economy.

Can you comment on that and on how it's actually also reducing inflation—perhaps below its real or longer-term level—but it has reduced consumer prices, and so forth?

[Mark Carney]

Sure. To pick up on the second point, just for clarity, the reduction in the GST has taken about 0.5% off the inflation rate. What we've done in this document, because that effect will fall out a year after the reduction, obviously, is adjust the figures for that.

I'd like to underline again, talking about 2% trend inflation at the moment in Canada, that we've also made a judgment in terms of what's happening with automobile prices, which we think are down quite sharply because of a one-time, but important, level adjustment resulting probably from the dollar achieving around parity. So there are those two aspects.

In terms of government fiscal policy, our job at the bank is to take fiscal policy as given and then manage monetary policy accordingly. Obviously we were aware of the steps the government took in the fall and in the most recent budget, and their potential impact on domestic demand—and inflation, for that matter. We've adjusted policy and put that into the mix, if you will, with all of the other factors and have calibrated policy appropriately, we believe.

[Dean Del Mastro, Conservative, Peterborough, ON]

That's great.

I'm going to paraphrase a little bit of what you said for all the folks in Peterborough. Essentially, the reductions in taxes that we've seen are creating a more robust domestic demand and, at the same time, are keeping prices down for Canadians. I think that's a fairly accurate paraphrase of what you said.

Now, there seems to me to be a tremendous opportunity. I think Canadians, with our economy, are very guilty of being very north-south focused. The parliamentary secretary to finance mentioned interprovincial trade barriers, and I think there's a tremendous opportunity. We know, for example, the Alberta energy industry currently supports about half a million jobs in Canada, about 85,000 of which are in Ontario. There's an opportunity to grow that if we can bring down interprovincial trade barriers and begin to look a little more east-west, and if we begin to operate more nationally and focus on building that domestic trade.

I don't know if the bank would have any numbers on this at all, but what is the drag on the Canadian economy currently placed by various interprovincial trade barriers, non-recognition of trade, and the various patchwork systems of taxation? How much would it benefit to move to a harmonized sales tax, a standardized recognition of trade, and to bring down these trade barriers? What's the potential for Canada?

[Mark Carney]

It's a very important question. I'd have to say, though, up front, in terms of estimating the potential costs of that and having the Bank of Canada imprimatur on it, we do not have that level of estimate.

On harmonizing the taxes, there are potentially some advantages in terms of avoiding double taxation around investment and enhancing investment at a time when we do need capital equipment to address some of the issues that were raised in the manufacturing sector, in response to past appreciation of the Canadian dollar.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. McKay now, five minutes.

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

Thank you, Chair.

I expect that exchange between you and Mr. McCallum will be on the evening news. That stuff about deflators was just riveting stuff.

[Some hon. members]

Oh, oh!

[A witness]

Don't we copyright these things?

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

Yes. I expect the novel will be coming out any time.

Going back to the issue that I was on, about this expansion of your authorities, some might call it a power grab, but I wouldn't want to characterize it that way. On the first point, with respect to the inconsistencies and the language--unless there's a good reason why there are distinctions to be made between the Canadian financial system and the Canadian market, etc.--I take your point that the market is within the financial system, but it seems to me the first rule of good drafting is consistency in language. So I'd like to hear why the language is what the language is, from whoever looks at these things.

Actually, I'm more concerned about the overall issue here, which is essentially that you get to decide whether there is or isn't a financial crisis; you get to decide what's going to be on the list and what's going to be off the list; then you publish a list in seven days and then you can go off and buy anything, and there's essentially no oversight. There's no parliamentary oversight to that. Certainly the government can't tell the governor what to do with respect to what the instruments are. You said in your initial response to me that would include, potentially, the purchase of asset-backed commercial paper. Almost the entire financial community didn't understand what it was they were buying there.

What assurances can you give Canadians that in fact this expansion of powers doesn't, in effect, suck the Bank of Canada into the very crisis that you're trying to avoid? It seems to me that the Bank of Canada is where you want the buck to stop, for want of a better phrase.

[Mark Carney]

Those are important questions.

I go back to a couple of things. First, clarity about pre-existing and existing legislation--proposed subparagraph 18(g)(ii), a situation of “severe and unusual stress”, which is an existing power of the Bank of Canada, passed in 1998 or 1999. That is a power that exists, and it is a power that has never been used, but it is a power that could be used in very unusual situations. One could think of situations in Japan in 1990, as an example.

It is not a power we've used, but it is a power we have.

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

Why do you need something, then?

[Mark Carney]

Because the issue we're trying to address is not for situations of severe and unusual stress; i.e., zero interest rate policy, deflation risk, and a financial system that's totally frozen. We're trying to address issues in the middle area, where there are liquidity issues in the financial system. We want to be effective in getting liquidity to the parts of the financial system that need it.

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

Then why do you phrase the section in terms of an unusual or severe financial stress if in fact for severe purposes you apparently have all the authorities you need? Obviously for normal circumstances you have all the authorities you need. You seem to have difficulty in that in-between section.

[Mark Carney]

We're not looking for powers. These are not facilities. We're doing term.... I'll bring it down to the concrete right now. We are undertaking term purchase and resale operations at this moment. We announced it yesterday. We are limited in the type of securities against which we can do those operations. When they're purchased--cash for assets--we take a haircut on those assets and protect the Bank of Canada. They are big haircuts, and it's relatively short term.

But we are not able to go across the full range of fixed-income securities, bond securities. That is very unusual for a central bank. It's an accident of history, of drafting, if you will, and we're trying to get the practical aspect fixed.

Now, what we could do today is take treasury bills, of which we have a large number on our balance sheet, and give those to the financial institution. We could take anything from that financial institution today. So we could effectively do the same thing. It is slightly less useful, but it is economically the same. It's slightly less useful for the financial system to have more treasury bills in a number of these situations than to have cash, but economically it's exactly the same in terms of the Bank of Canada.

[The Chair, Conservative, Rob Merrifield]

Your time is gone.

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

Just let me finish.