Finance Committee on Oct. 4th, 2010

[The Chair, Conservative, James Rajotte]

Okay.

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

If not, do you think it is taking the right approach overall?

[The Chair, Conservative, James Rajotte]

Okay, Mr. Leitao.

[Carlos Leitao]

I think that, in terms of policy, it is for you to decide.

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

It is also an economic policy.

[Carlos Leitao]

Actually, I think a decision of that nature—whether it be airplanes or houses, one or the other—should be made based on its own merits and not for economic stimulus reasons. You do not buy planes to stimulate the economy, nor, in my opinion, do you build houses to stimulate the economy.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Wallace, please.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

Thank you to our witnesses for coming. We've seen a number of you before. Thank you for coming again.

I have a couple of basic economic questions for you. The one thing that always interests me is that 3% of GDP seems to indicate growth. Three percent is growth and anything under 3% isn't really growth. Can you explain to me why 3% is the magic number? We're still seeing growth at 2.5% or 2.6% or 2.7%.

Some would say that economies that are growing exponentially, like China, at double-digit GDP, are out of control and they can't keep up. Why is 3% such a magic number? Why can't we be satisfied by controlling growth at 2.5%?

[Benjamin Tal]

First of all, let me tell you that the new number will be 2.5%. It will be the number because the potential growth of the economy is slowing down due to all the forces that we mentioned earlier. I won't repeat them.

The potential growth of the economy or the speed limit of the economy is slowing down. This magic number is simply a function of two things: productivity and the increase in the labour force. If you add them together, you've got 3%. Now you will get a little bit less than that, so the point here is that the potential growth of the economy is slowing down.

For China, the potential growth is not 3% but 8% or 9% because of the fact that it's a very young economy. For a mature economy, it's 3% and now 2.5% after this recession.

That is just the way it works, and every year you will overshoot this potential growth or not. And as far as the Bank of Canada is concerned, it basically has a model of what the potential growth should be. If you are below, you have to stimulate the economy, or vice versa.

[Mike Wallace, Conservative, Burlington, ON]

So you're relying on the Bank of Canada analysis to determine whether that 3% is the magic number or not. I've been here about four and a half years now, and from what I've heard, 3% seems to be the number.

Here's a question for you. I don't mean to be rude about it, but you're talking about a slowdown in the economy. Would you be frank and tell me whether you predicted the growth that we have had? No, right? So the growth we have had coming out of the recession was greater than what you guys predicted. Would that be an accurate statement?

[Benjamin Tal]

That's correct. The direction was right. I don't think too many people predicted 6% GDP growth in the first quarter, but maybe some.

[Glen Hodgson]

I'll disagree a little bit. If you go back and compare our forecast against the actual outcome for the last two years, we've been pretty close to spot-on. But we've been seen as a bit of an optimistic forecaster.

[Mike Wallace, Conservative, Burlington, ON]

Okay.

Does anyone else want to comment on that?

[Carlos Leitao]

The economy did bounce back very quickly from the recession. I didn't predict the 6% in Q1, or in Q4 of 2009, but it is now slowing. So when it's all said and done, the rate of growth for 2010 is going to be fairly close to what we had predicted before.

[Mike Wallace, Conservative, Burlington, ON]

I know you talked about consumption taxes. You would admit you don't live in the political world and that these are strictly economic assumptions you've been making. You've seen what's happening in British Columbia and to those who have had their heating bills go up. The question of whether consumption taxes are acceptable or not is a little bit different in the political world.

Our finance minister has been warning us at every opportunity he has had that the recovery is precarious and that we have to be careful even with the growth. So it's not that we disagree with you on that, but is it possible that the slowdown might not be as great as you predict?

[Carlos Leitao]

I'm afraid that in the short term--and by that I mean the next six months--the slowdown might be worse than what we think, not because of what's going on here, but because of what's going on outside of Canada. In the United States in particular there are some very troubling developments. So the very short-term outlook, for the next six months I think, could be even a little worse than what we say.

In the meantime, of course, the U.S. Federal Reserve will do something. They're talking about another wave of quantitative easing and what not, so there will be further policy decisions on the fiscal side as well in the United States. So beyond the first or second quarter of 2011 we could see an acceleration, but in the very short term I think it will be weak.

[Mike Wallace, Conservative, Burlington, ON]

Would you agree that sometimes these things are self-fulfilling philosophies, or whatever the word is? If everyone talks about things slowing down, then confidence goes down, consumer confidence goes down, investment goes down, and all of a sudden there's a slowdown?

[Carlos Leitao]

Certainly. Confidence, whether business or consumer, is crucial. And yes, if there is an overall air of overly pessimistic opinions, then there's an impact. Still, underneath those pessimistic opinions there's a reality. In the U.S. that reality is twofold: there are very high rates of unemployment and very weak personal balance sheets.

[Mike Wallace, Conservative, Burlington, ON]

I'm going to stay positive, Mr. Chair.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Généreux, you have the floor.

[Bernard Généreux, Conservative, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Mr. Chair.

I want to remind my Bloc Québécois colleague that we can walk and chew gum at the same time. We are talking about housing for the most disadvantaged, and I would like to point out that Canada's economic action plan for the past two years has been very clear.

[The Chair, Conservative, James Rajotte]

I have to interrupt you.

I'm sorry. I completely--

[Mike Wallace, Conservative, Burlington, ON]

Let's revolt.

[The Chair, Conservative, James Rajotte]

On my first day as chair I missed Mr. Pacetti. My apologies. I'm sorry.

You will be next, after Mr. Pacetti.

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

I have a better question than you, Bernard.