Finance Committee on Oct. 4th, 2010

[Glen Hodgson]

I agree with you entirely. I think the Quebec budget is very instructive in that. Quebec clearly faces demographic challenges ahead of many other provinces. It was very clear, as that budget was rolled out, that it was thinking about the impact of slowing growth, an aging workforce, and early retirements.

Chris Ragan, by the way, wrote an academic paper; I think it's in the IRPP policy options. He was a visiting scholar at the Department of Finance last year and wrote a very good paper on demographics and fiscal impacts that might be useful for this committee to take a look at. We've done similar analyses. I think it's an excellent question.

[Paul Szabo, Liberal, Mississauga South, ON]

With regard to international trade, whether it be China, India, or Brazil--we've done Colombia and we're looking at other countries--what should be our reasonable expectations that enhanced free trade agreements around the world will be part of the solution to getting us to that balanced budget? Or is there a protracted period that does not follow our domestic activities? Is there a disconnect?

[Glen Hodgson]

I don't think trade automatically flows into fiscal policy, but I think trade is fundamental to our competitiveness going forward.

We just put out a great paper, frankly, on Canada-EU trade, looking at how big it is and in fact reinforcing the case for a Canada-Europe free trade agreement as a way to ensure that we have access to other markets. There are more consumers in Europe than there are in the United States with comparable incomes. So broadening the number of free trade agreements for negotiating and concluding the deal with Europe we think is really critical to Canada's ongoing competitiveness.

[Paul Szabo, Liberal, Mississauga South, ON]

My last question has to do with housing. It seems to me that Canadians can relate to a house and the cost of a house. Last week there was a program that was talking about the high-priced-house areas across the country and indicating that a lot of Canadians have maxed out in terms of the carrying cost as a percentage of their income. In B.C. I think as much as 75% of the income that the family was bringing in was actually for carrying the house.

This is a recipe for disaster, I would think, if we get a correction in the housing market. How bad could that be, given that we know what the experience has been in the United States?

[Benjamin Tal]

That's a very good question. I think the point I made earlier, that we became very sensitive to higher interest rates, is exactly what we are talking about. I do believe that house prices will fall, and that's a good thing, because I think we need this kind of adjustment. I don't think we are in a crash type of situation like in the U.S., because for that you need extremely high interest rates and you need a sub-prime type of situation, and we don't have these preconditions for a crash.

I do see an adjustment in the housing market, and after that I see a housing market that will go nowhere for a long period of time.

[The Chair, Conservative, James Rajotte]

Mr. Dupuis, you have the floor.

[François Dupuis]

As is the case for many markets, I think that increases happen over short periods. So it is my sense that the housing market has grown considerably in recent years and that, given where family incomes and people's salaries are at, we cannot go any further.

That is why I remain optimistic. I see an adjustment taking place and prices remaining relatively stable for a number of years yet. I do not foresee a crash or a spike. I think that we have regained some ground and that things will be much calmer in the next few years.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Szabo.

Mr. Paillé.

[Daniel Paillé, Bloc, Hochelaga, QC]

Economic forecasting is the art of being wrong as little as possible. We know that.

As far as you are concerned, Mr. Hodgson, I would encourage you to exercise caution. If you ever come to Montreal, maybe the price is not right, contrary to what you stated three or four times.

One anecdote deserves another. Back when Mr. Mulcair was having his mortgage problems in Quebec City, I was at the finance department. And in those days, the department's chief economic forecaster was the only one walking around with a smile on his face, saying he told us so, but no one had believed him.

We are currently in an atmosphere where it is being said that none of the experts believed there would be a 6% quarterly increase in GDP. You need a certain number of months, which were known as the months of cyclical dominance. I am not sure whether that still exists, but you need at least a certain number of periods to be able to say the rate has increased.

Let's assume that this slowdown no one wants to see happens and that everyone estimates between 2.5% and 3%—they won't be fighting in the buses in Hochelaga over whether it will be 2.75% or 2.82%. And let's assume that is followed by a truly sluggish economic climate or, worse yet, what no one has dared to mention in the past two hours or so, a deflation. If it has happened elsewhere, it can very well happen here. If we forecast a figure, in other words, we engage in a bit of science-fiction, would you agree that a foolishly Conservative government—and I use the term to mean a number of things, hypothetically speaking—should adopt an interventionist policy? Is it monetarist? Is it Canadian? Which way do you want to go?

Faced with that kind of situation, would it not be a very bad surprise if the government persisted in continuing to curb the economic situation or, in fact, economic activity?

[François Dupuis]

This may not have been mentioned, but I believe my colleagues are of the view that the probability of another recession in the United States is between 20% and 40%; we estimate the odds at 1 in 3. I am not sure, I think it is roughly between 20% and 40%—regardless, it is a pretty significant number.

If there is another U.S. recession, and given current price levels, we could be approaching a period of dramatic disinflation, or even deflation, so negative price growth. But I do not think it will be the same as in Japan.

In my opinion, other government intervention measures will be possible, and since we are talking about an alternative scenario, other stimulus programs will follow. In fact, they are talking about one such program for the Federal Reserve System. There is talk of once again easing monetary restrictions on a large scale to kick-start the economy or stop the slowdown.

I would not be as negative as you and say that we are going to relapse into deflation, that it is going to happen. I think that other major measures will be taken, but the risk will still be there.

[Daniel Paillé, Bloc, Hochelaga, QC]

It is not a matter of being pessimistic. It is that when you....

[François Dupuis]

It is being realistic, yes.

[Daniel Paillé, Bloc, Hochelaga, QC]

When you are managing risks or a portfolio, you need some latitude to be able to say that it could happen.

[François Dupuis]

Yes, of course.

[Daniel Paillé, Bloc, Hochelaga, QC]

The interest rate of 21% or 20.5% that hit Thomas Mulcair could emerge again.

[François Dupuis]

There is one thing I have learned in economics, and that is never say never.

[Daniel Paillé, Bloc, Hochelaga, QC]

Exactly.

[Carlos Leitao]

In that very unlikely scenario—I agree with François that it is not very likely....

[Daniel Paillé, Bloc, Hochelaga, QC]

But it is possible.

[Carlos Leitao]

Indeed, it is possible. In a scenario like that, I think the solution would lie in international cooperation. We saw that in 2008: central banks, governments, including the Canadian, American and English governments, joined forces to coordinate their efforts. If we find ourselves in another situation in 2011, the solution would also lie in very close international cooperation.

[Daniel Paillé, Bloc, Hochelaga, QC]

International cooperation, then, would allow us to stay on track with all the other governments, to uncover tax havens, to close them down, and thus improve the fiscal performance of companies that would then have to stop practising tax evasion. That is what you are saying.

[Carlos Leitao]

That is one measure; there are others.

[Daniel Paillé, Bloc, Hochelaga, QC]

That is not so bad right there.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Paillé.

Mr. Hiebert, you have the floor.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Thank you.

To follow up on some of the questions that have been raised with respect to real estate, Mr. Tal and Mr. Dupuis have both predicted prices to come down and then said “stagnation” and “stable”. Could you unpack that? Why do you make those predictions? Is it a lack of income? Is it over-exposure to personal debt?