Finance Committee on May 12th, 2008

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

Thank you, Chair.

Thank you, witnesses.

I agree completely with you, Mr. Waldman. We have four important issues, four important presentations--and I can't possibly do justice to your presentation so I'm going to ignore you; I apologize.

[Voices]

Oh, oh!

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

I also want to publicly thank Mr. Cunningham for his group's assistance in passing my private member's bill on fire-safe cigarettes. It's an important and groundbreaking piece of legislation, and I understand it's pretty well gone around the world. So I think you need to be able to pat yourself on the back on that.

But I'm going to ignore your issue too, because we have a very limited amount of time and we have a bill that has a lot of extremely important issues to it.

I want to start with you, Mr. Poschmann, on this increase in powers. On a theoretical basis, we sort of agree that the legislative authorities of the Bank of Canada need to be updated. But there is a perverse consequence to this. It appears, in effect, to reward bad behaviour.

If bank X is in difficulty because it bought a whole pile of junk, and bank Y didn't buy junk on the marketplace, now bank X can go to the Bank of Canada and say, “Mr. Governor, I have this pile of paper here and I really need some money for it. Would you mind giving me some money?”

Under these authorities, particularly if there's any hint that maybe the bank has any difficulties with liquidity, the governor will be under an enormous amount of pressure to respond to that request on the part of the bank that behaved poorly in the marketplace.

I'd be interested in your comments on that.

[Finn Poschmann]

Thank you, Mr. Chairman, and Mr. McKay.

I agree that this is exactly the risk ultimately that presents itself to the Bank of Canada when powers are expanded quite liberally and open-endedly the way they are.

I confess to some hesitance about saying so, because it is very important that an institution like the bank, like a monetary authority, should have the discretion it needs to respond to suddenly changing or quickly changing market conditions, but it is a power that must be used with extreme timidity. We should be very nervous about the prospect of a central bank bailing out institutions. We should be nervous about reducing the power or reducing the ability of legislation to construct a barrier between those pressures and the minister.

So that is why, in looking for a middle ground in the act, I suggested something along the lines of slowing down the process so that the bank isn't pushed hurriedly into doing things it might not otherwise like to do.

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

I take your point on the longer lead time, and more prescriptive and less open-ended. I wish that this particular expansion of the powers of the governor were not in this bill. I think you've offered some very thoughtful insights, and I would like to hear from other people who think in this particular....

You made one comment--about subject to “political pressure”--that I didn't quite understand. How would this make the governor more vulnerable to political pressure?

[Finn Poschmann]

First of all, Mr. Chairman, Mr. McKay, the potential pressure from financial institutions or from the political leadership on the Bank of Canada is always there anyway. In other words, the bank governors can read newspapers too, and understand what sort of pressure is out there in the marketplace, economically and politically.

The political pressure can take the face of something we recently saw in the United States, where the U.S. Fed exploited some little-used powers and broadly expanded its activities by way of, for instance, bailing out Bear Stearns. The next thing we found was that Congress had many more things it would like the Fed to do. Perhaps embarrassingly from my perspective, the U.S. Fed immediately turned around and underwrote a portfolio of student loans. That's something I would never have expected to see.

One of the things that legislation can do is construct a wall around the governor that says, “Well, that's very interesting, Mr. Minister or Mr. MP, that you would like me to extend liquidity in this way, but the legislation says I can't.” That can be an important defence.

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

Thank you. You make very valid points. Unfortunately, I'm running out of time.

I want to direct one question to you, Mr. Bédard. The proposal in Bill C-50 seems to me to be a half-pregnant solution. There is an argument to be made that we could set up a separate EI commission, but when you underfund it at $2 billion instead of $15 billion, and talk about the cyclical.... I don't know why you people say pro-cyclical, when I think it's converse-cyclical, but that's just actuary talk.

I think your basic point is quite correct. Have you actually worked out numbers in which, if you projected a certain level of unemployment in a particular scenario, in fact it would have a drag on the economy and make it more difficult for the economy to actually recover?

[Michel Bédard]

We are not economists, so no, we have not analyzed what the drag might be. We can determine, though, that an order of magnitude of $10 billion to $15 billion would be needed to carry us through recessions similar to the ones that have occurred in the past, analyzing the variability in unemployment rates.

The $2 billion, as it stands now, does nothing to stabilize premium rates, because it must be rebuilt each year. You could have a zero in there and you'd have the same net effect. It doesn't really matter.

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

Effectively what you have to do if you're having a down economic cycle, or you're in the down part of the economic cycle, is run around and find $2 billion, and you have to find it out of the people who could least afford to pay for it, mainly the people who are still working, while many of their colleagues might well be unemployed.

[Michel Bédard]

Well, of course, yes, you have to raise premiums from those who are still working, but we say that, mainly, you have to stretch out the period. You cannot take one year at a time. You have to look at it over a longer period.

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

It drives the need for premium revenue. It gets driven right on to the need to replace the $2 billion, or the $1 billion--the $2 billion plus $1 billion that you replaced--instead of being spread on the general revenues of the federal government.

[Michel Bédard]

Indeed, instead of being spread, in our opinion, over...on the $10 billion to $15 billion, on a longer time period, using the reserve--

[The Chair, Conservative, Rob Merrifield]

Thank you very much. I think the point was made.

Monsieur Crête, the floor is yours.

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

Thank you, Mr. Chairman.

Mr. Bédard, were you not a chief actuary for the employment insurance plan a few years ago?

[Michel Bédard]

That is right. I was the chief actuary from 1990 to 2003.

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

The position that you have adopted in your capacity as an actuary is probably based on your personal experience. In your opinion, what effect will the $2-billion limit have on the setting of future premium rates by the government? I believe you said that there could be very definite highs and lows. Could that not cause the current benefits to level out over a number of years, since there is very little room to manoeuvre?

[Michel Bédard]

The decisions related to benefits are different from the funding decisions. What we are saying is that the $2 billion, in its current form, will do nothing to stabilize the plan. There could be a ripple effect on benefits; that has occurred in the past.

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

With $10 to $15 billion, there would be greater stability. If, as some have predicted, a relatively strong economic downturn were to occur, how would that affect the plan?

[Michel Bédard]

As is the case with any economic downturn, the system provided for in Bill C-50 would increase the premium rates. The system provides for a variation limit of about 0.15%, but that could be increased by the ministers at any time.

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

Employers will be terribly worried about short-term increases in premiums during an economic downturn. That will lead to increased political pressure to avoid an increase in benefit rates. There will probably be a tendency to want to leave them alone. The six projects for seasonal workers could remain pilot projects for quite some time.

[Michel Bédard]

I can't comment on pilot projects. There will certainly be pressure on premiums and benefits.

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

In your opinion, why did the government choose this option rather than providing for an entire economic cycle, as was the case in the previous act? The $54-million surplus, that the Supreme Court will deal with tomorrow, was part of that framework. The problem was that the money could be used for other purposes, which the government was very quick to do.

Why did the government decide on a $2-billion threshold rather than $15 billion? It was supposed to have taken into account all of the advice that you have shared with us today before making that choice.

[Michel Bédard]

The government based its decision on all of the options that it had at its disposal. Of course, as a former public servant, that is something that I can acknowledge. As I have already said, the amount of $2 billion, in its current form, will not have any stabilizing effect whatsoever. There would have to be from $10 billion to $15 billion and a five- to seven-year outlook in order to stabilize the premium rates.

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

Therefore, the rule that is put forward in the bill will not achieve the desired results. Even if it is a lot of money, we can say that the $2 billion will achieve absolutely nothing. The premium rates could increase from year to year, which will lead to a great deal of insecurity for the industry and for the contributors, both employers and employees.

[Michel Bédard]

The positive side of this bill is that in the future, costs and premiums will be balanced, with the exception of the interest on the accumulated surplus. Had this system been in place beginning in 1996, we would not have the current surplus. However, the premium rates would have been erratic, going up and down.