Finance Committee on Feb. 10th, 2009

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

I certainly want to listen to what Mr. Jenkins has to say, but from a lay standpoint, there doesn't seem to be a lot of room left here. You've changed your asset mix so that you've in effect degraded your asset mix. When you put those two together, I'm questioning just how much flexibility you actually have.

[Mark Carney]

I want to pick up on the asset mix. The first thing is that we have these term PRA relationships with financial institutions to provide liquidity, as I mentioned. These are basically repo relationships, and they're secured by a range of very high-quality assets, most of which are Government of Canada-related assets. So the actual risk to the bank is de minimis, it's a risk to the Government of Canada effectively, and I think we know what that is, and we're doing that to get liquidity out there.

If it is appropriate, we could continue to expand the scale of those operations. We could expand the term of those operations. We could expand the range of financial institutions with whom we transact. That is an option. Currently we think it's sized appropriately, but we could change that. We could change the duration, as I say, with which we react and we retain flexibility on the policy rate.

But I want to underscore that variable mortgage rates have gone down, that the prime rate has gone down substantially, 325 basis points since we started cutting; that the bankers' acceptance rate, which is effectively the commercial paper market in Canada, has gone down by almost 400 basis points since we started cutting. Even though risk premiums have gone up because of the crisis, the actual cost of credit in this country has gone down since we've cut. And if we were to continue, one could expect an additional stimulus--if that were appropriate, and we're not taking that decision casually.

[The Chair, Conservative, James Rajotte]

Mr. McKay, I'm terribly sorry, your time is up. Thank you.

Monsieur Carrier.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Thank you, Mr. Chairman.

Welcome, Mr. Carney and Mr. Jenkins. I'm very glad that you are here to enlighten us.

Mr. Carney, I was reading in your presentation that there are several reasons for the recovery you are talking about. I took note of the timeliness and scale of our monetary policy response and stimulative fiscal policy measures. I believe that these are two important elements with which we can work, at least within our country.

However, you also mention that the Bank of Canada has eased its monetary policy since December 2007 and it has accelerated this decrease by several basis points since October 2008. I am therefore wondering about the cooperation, or the ties, that you have with the current government. If you began easing monetary policy in December 2007, you must have had some indication of an economic slowdown.

Would it have been appropriate to immediately implement some kind of economic renewal plan at the same time as you say that in October you continued to ease monetary policy? You therefore realized that the situation was worsening while the new government had been elected. To my knowledge, the new government did not present a very convincing stimulus package. That is why the government was prorogued. I'm wondering what the connection is between your planning, which seems appropriate, and the government, which must take steps in line with yours if we want it to be constructive. I would like you to tell us about your thinking with regard to this.

[Mark Carney]

It was clear in October that the situation was beginning to deteriorate, as you mentioned. We made some very radical decisions, including an inter-FAD reduction which would not normally have been on the agenda, and a coordinated reduction with the other major central banks of the G10, which represents an extraordinary situation. We therefore reacted. That is one of the advantages of a monetary policy. We can react quickly, if necessary, and I believe that is what we did.

As far as the government's response is concerned, we accept the response of all Canadian governments. Following those responses, we decide if it is necessary to change our monetary policy. In that regard, we feel it is simple.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

That does not exactly answer my question, because in my opinion the government was not in step with the measures you were taking in an effort to...

[Mark Carney]

That is a question that should be asked of the government.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

I have another question about economic differences among the regions. How does your monetary policy take into account the economic differences that exist among the regions? In the last two years, the value of the Canadian dollar has increased very significantly—something new for Canada. That seemed to indicate that our economy was working well, except that in some regions, particularly Quebec, which depends heavily on exports, the higher value of the Canadian dollar had a negative impact on our exports.

How could you adapt the action you take to the needs of the various regions?

[Paul Jenkins]

First of all, monetary policy is a national policy, one that applies to the country as a whole. However, we do have regional offices that survey local businesses in the context of our analysis of the Canadian economy. So we use our offices as a direct source of information in the decision-making process. The differences are a factor in that world forces have an impact on the various regions—as can be seen clearly in terms of performance. However, ultimately, monetary policy is a national policy. We must therefore make decisions for the country as a whole.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Carrier.

Mr. Bernier, please.

[Maxime Bernier, Conservative, Beauce, QC]

Thank you, Mr. Chair.

Good morning, Mr. Carney, and welcome to our committee.

You said in a speech two weeks ago in Halifax, and I quote:

...monetary policy is concerned with how much money circulates in the economy, and what that money is worth. The single, most direct contribution that monetary policy can make to sound economic performance is to provide Canadians with confidence that their money will retain its purchasing power.

At the same time, you spoke about the inflation target of 2%, which you called the cornerstone of the bank's monetary policy framework.

I'm wondering how money can retain its purchasing power when it loses it by 2% every year. An inflation rate of 2% per year may seem small, but ultimately when you add up 2% depreciation of the monetary unit year after year, you end up with big numbers.

I went to the Bank of Canada website and I used the inflation calculator you provide there to see how much value our dollar has lost over the past few years. Let's take 1990 as a reference point. It is not that long ago, but from 1990 to today, inflation in Canada adds up to 42%. This means that our dollar can now buy the equivalent of only 70¢ compared to 19 years ago.

The fundamental cause of price inflation is that the money supply is continually increasing. We get price inflation because we first have monetary inflation. The more money there is, the more likely it is that overall prices rise and that our dollar will lose its purchasing power.

I also saw on your website that M1, which is one definition of the monetary supply, has increased by 6% to 12% annually over the past 12 years. That's a lot more than the growth rate of our economy. This inflation eats away at the income of every Canadian and it reduces the value of their savings. When your colleague at the Federal Reserve, Mr. Bernanke, appeared before a congressional committee on July 16, 2008, he said that inflation is a tax because people are forced to pay more for the goods and services they buy.

I would like to ask you two questions. The first is whether you agree with the chairman of the Federal Reserve that inflation is a tax. My second question has to do with the 2% inflation target. This implies a very large depreciation of our currency over the years. I wonder why the target is 2% and not a 0% target that will allow a complete preservation of the dollar's purchasing power. I understand that this target is fixed in agreement with the finance department and that you cannot simply decide to change it on your own, but I would like to have your opinion. As an economist, do you think a 0% inflation target would have more advantages, and if not, why not?

[The Chair, Conservative, James Rajotte]

You have two minutes to answer.

[Some hon. members]

Oh, oh!

[Mark Carney]

I'm going to get two minutes. You've been busy, Monsieur Bernier.

I'll mention a couple of things very rapidly; we can have a deeper discussion later.

First, as you referenced, there's a very clear accountability framework for the Bank of Canada. The 2% inflation target is an agreement with the Government of Canada. It runs through 2011, and I would say that since the inception of that agreement in the early 1990s, inflation in Canada, as it's tracked, has averaged exactly on that 2%. So the agreement has been fulfilled. It's important in times like this, where there are some disinflationary pressures, that Canadians have the confidence that inflation will be at that. Those expectations remain.

Let me make a very important point in the current environment. The fact that Canadians can expect, in the medium term, that inflation will be at 2% helps to bring negative real interest rates at very low interest rates at the moment. But I absolutely agree that your calculations are correct: they're based on our calculator, so they'd better be correct. This is a political economy decision. We're doing a lot of research on this, whether it would be better to have a lower target. We will come back to this committee to discuss that research at the appropriate time.

You used depreciation of the currency, and the one thing I want to flag on that is that what is relevant for exports and competitiveness is the real effective exchange rate, which is a product of where the actual headline nominal exchange rate is, and relative inflation rates in countries. So it matters what the inflation rate is in, say, the U.S. relative to Canada.

The last point I'd like to make is on M1 growth in Canada. What's important in this time of crisis--and always important--is the relationship between the narrow monetary aggregates and the broader monetary aggregates. What you're seeing in a variety of other countries is that the velocity of money has shrunk and so the broader monetary aggregates--the credit aggregates--are not growing, even though the monetary base is growing. The issue is to repair those linkages in Canada. You still have a more stable relationship and it's relevant to Monsieur Mulcair's question in terms of the medium term.

My last point is that one thing that has turned in the last month or so is that M1 growth is now above nominal GDP growth globally, which is normally a precursor of expansion.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you very much, Mr. Carney.

This session was obviously too short. You saw the interest from members on all sides. Thank you very much for appearing and for answering our questions. We would certainly welcome you back at any time. Thank you to you and to Mr. Jenkins.

Members, we will suspend for two minutes and then resume back here shortly.

Thank you.

[The Chair, Conservative, James Rajotte]

Members, let's retake our seats.

We have two motions before us today.

I want to remind members that we do have an afternoon session from 3:30 to 5:30 to discuss the supplementary estimates. We have one hour with officials from Finance and one hour with officials from the Canada Revenue Agency.

Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Is this future business?

[The Chair, Conservative, James Rajotte]

We're actually doing the two motions.

We have the notice of motion from Monsieur Laforest.

Monsieur Laforest, would you like to present to the committee your arguments for support of your motion?

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Mr. Chair, the second motion actually applies to two categories of individuals. We would like to have some witnesses discuss such issues as the problem raised last year regarding the tax treatment of post-doctoral fellows.

These are people who have spent many years at university, particularly in universities in Quebec, have earned a doctorate and are now working as researchers. They are sort of being subsidized. They do not necessarily earn very much and they have no social security. In the past, they were entitled to an income tax exemption. This affects a small number of individuals, but it has a major impact on them. During the 2007 taxation year, a change was made to their tax treatment which significantly changed their living conditions. I would even say that some of these individuals now have to give up their research work for which they are receiving grants, and find another job that pays more. They are often unable to meet their needs when they are charged additional income tax, as they are already earning very little.

This situation has had a very harmful effect on research activities in universities in Quebec. We all know the extreme importance of the entire scientific research sector for the economy of the future. We should at least hear those who are directly affected and have their representatives explain the medium and long-term consequences of this situation. Then we could decide whether we should recommend that the Minister of Revenue amend the legislation and go back to the previous situation, so as to facilitate the hiring of these post-doctoral researchers.

The same motion also covers self-employed workers in computer science. And I will ask my colleague, Mr. Carrier, to explain what it is about.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

This is a similar subject, Mr. Chair. It refers to self-employed workers in computer science who work in private companies on contract. In their case as well, the Canada Revenue Agency has changed their tax rate and has now prevented them from making deductions as self-employed workers. These are people with training, an office and secretarial service. Since they can work one year for a particular employer, the Revenue Agency wants to consider them employees of the company, not self-employed workers. That is quite detrimental to them. Some have received notices of assessment for several tens of thousands of dollars. These people have been seriously affected.

Rather than trying to deal with this issue at a private meeting with the minister, we would like to spend one meeting on it. The purpose would be to inform all members of Parliament of the issue. I am sure we are not the only people who have heard about the problem. Having a meeting on it would allow us to shed more light on the situation.

[The Chair, Conservative, James Rajotte]

Merci.

Mr. McKay, please.

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

The motion raises an interesting question and, I would say, certainly to a discrete group of people a very important question. However, today the mover has the perfect opportunity to ask Revenue and Department of Finance officials about the specific issue, so you can allocate your seven minutes to asking that particular question with respect to that particular issue.

The second comment I'd make is that we're generally, as a committee, dealing with macro issues rather than what is a micro issue. As I recollect our work at trying to put together a schedule for the next number of months, we're pretty packed. Frankly, I don't see where you can squeeze in another hour to deal with that.

I would encourage the mover of the motion to ask that particular question of the officials today and see where that leads. It may lead somewhere and it may not lead anywhere at all.

The third point would be that if he wishes to have a private meeting with the minister, I'm sure the parliamentary secretary would be happy to arrange it.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McKay.

Mr. Mulcair.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chair.

The New Democratic Party supports the motion put forward by the Bloc Québécois.

I have had an opportunity to meet with some self-employed computer workers, and I know that this is a very real problem for them, despite the fact that these days self-employment is increasingly the norm. Having a meeting on the subject could provide us with information that could impact many other individuals, particularly in these difficult economic times, when more and more people will want to explore the possibility of self-employment. I think a meeting of this type is an opportunity we should not miss.

With respect to post-doctoral fellows, you need only to have met with some of them to understand their situation. In the past, when they received funding, it was always considered a scholarship, but all of a sudden, they are getting bills for thousands or even tens of thousands of dollars. This is devastating, because they are just beginning their career.

Even though the motion came from the Bloc Québécois, I would suggest that the term “travailleur autonome” is perhaps more appropriate. As everyone knows, the ADQ is pro-autonomy, but the Bloc Québécois is pro-independence. I would suggest the word autonome nonetheless, unless it is supported by the future leader of the ADQ, the member for Beauce.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Menzies, please.