Finance Committee on Oct. 26th, 2010

[Mark Carney]

Well, we wouldn't have described 3% as the magic number. I mean, 3% is obviously larger than 2%. That has something to do, I guess, with people's attachment to it.

There's something else, though, that has to do with people's attachment to 3% with respect to Canada: it was more or less our rate of growth of potential for many years in the recent past. Importantly, that rate of growth, the speed limit, if you will, of the economy.... All things being equal, if we had aggregate demand and supply in balance, then the rate at which the economy could grow without creating inflationary pressures--in other words, the rate that the economy could sustainably grow--was a product, as always, of both labour inputs, as in how many people are working and how long they are working, and productivity growth.

Our demographics in the 1990s and early 2000s were such that, with people working longer and a much higher female participation rate in the labour force, and with just the demographic tree.... And when I say “longer”, I mean longer into their careers, not necessarily longer hours--longer in their life.

[Mike Wallace, Conservative, Burlington, ON]

Right.

[Mark Carney]

The combination of all those factors was such that we had a very important contribution of labour input, on the order of one and a half, one and three quarters, depending, bouncing around--

[Mike Wallace, Conservative, Burlington, ON]

Based on that answer—

[Mark Carney]

I'll just finish, Mr. Wallace, by saying that those demographics are starting to move away from us. They will continue to move away from us just as they have in Japan, very importantly, and in much of continental Europe.

[Mike Wallace, Conservative, Burlington, ON]

Okay.

[Mark Carney]

Increasingly, the preponderance or the vast majority of growth in Canada will come from productivity growth, which will explain why sometimes we seem unhappy with the level of productivity growth in the recent past.

[Mike Wallace, Conservative, Burlington, ON]

Right--because if productivity growth was higher, that number could be driven higher.

You talked about sustainability in your answer. Based on that answer, I'm to understand, then, we can.... Previously we could grow at a 3% level and it wouldn't generate inflation. I'm assuming generating past the 2% mark, because there will be....

Inflation isn't a bad thing, as long as it's under control. Is that...? Or do we really want inflation at zero?

That leads me to my second question, which is following up on what Ted was asking you about. Where do you see inflation going? Like, 2% was an agreed amount, in an agreement. If growth is lower, what does that do to...? Is our inflation flexibility lower than 2%? Or where are we going with that?

[The Chair, Conservative, James Rajotte]

You have about 40 seconds.

[Mark Carney]

Thank you.

Well, no, what matters is the growth of demand relative to the growth of supply, and the balance between those in the economy, ultimately, for their impact on inflation.

If we have a lower speed limit in the economy, as we do now, a speed limit that towards the end of our projection horizon is 2% rather than 3%, that means we need to manage monetary policy--given all the other factors that are influencing demand--such that, as growth approaches that level, as the economy approaches that level of potential, the economy will grow consistent with that growth of potential. That will maintain inflation at the level desired and delegated to us by the Government of Canada.

I would say, though, that yes, inflation is a bad thing. What particularly is a bad thing with inflation is unpredictable inflation, volatile inflation. We want low, stable, predictable inflation because business people can't make decisions when they have volatile inflation; the poor are hurt far more than the rich because they can't hedge themselves against inflation; and people have to spend time thinking about inflation, and where it might be, instead of focusing on the things that are truly important to them.

It's far better that we do our job properly and achieve that low, stable, predictable level of inflation so that Canadians can focus on what's important for them.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Wallace.

Mr. Szabo, please.

[Paul Szabo, Liberal, Mississauga South, ON]

Thank you.

Mr. Carney, the elimination of the long-form census has prompted you to express some concern that it's going to take away from your ability to track the Canadian economy and also to formulate monetary policy. Have you been able to identify other alternatives to get the information that you would need? And with these changes, how do you expect them to impact the quality of your analysis and the impact on your operational budget?

[Mark Carney]

Thank you for the question.

I'll be absolutely clear on what I have said, what we have said, with respect to this issue. The issue is that there could be an impact on some data. We don't know what the impact is, and we won't know for some time until after the national household survey is conducted, after Statistics Canada gets the results, after that's all analyzed.

What we have done is we have set up a working arrangement with Statistics Canada to work through that set of questions as the information becomes available. I would like to assure the committee and Canadians that the bank will ensure that we have adequate information to conduct our responsibilities, discharge our responsibilities with respect to monetary policy. We are working closely with Statistics Canada to do that. We'll continue to do that over the coming years in order to make sure that's the case regardless of how they perform their functions.

[Paul Szabo, Liberal, Mississauga South, ON]

I have no doubt, sir.

If I might switch to budget 2010 and the economic update that we received, one of the things we noted is that over the period ending in the five years 2014-15, the economic update shows that the cumulative federal debt is going to increase by $6.6 billion. There's going to be an increase compared to the budget. However, the public debt charges over the same period, budget versus the economic update, are actually going down by $10 billion: $6.6 billion increase in public debt, but a reduction of $10 billion in charges.

It seems to suggest that maybe the government has some of its own forecasts on interest rates over that period. I wonder if the revisions that we see in this do reflect a real change in their view, and I'm wondering if these expectations actually match your expectations over the same timeframe.

[Mark Carney]

Well, thank you for the question.

It's not something that we perform, a detailed analysis audit, if you will, of federal fiscal projections. The federal government uses external forecasters for the fundamental inputs for that analysis, as you know, and it uses the average of those external forecasters.

I will only hypothesize that the adjustment in the debt charges is importantly affected by the level of interest rates. Obviously, the debt charges are the product of the interest rates, long-term and short-term interest rates, duration weighted, and the level of public debt.

There has been an important reduction in the level of global and Canadian long-term interest rates in between the spring and the fall, given the global outlook. That adjustment, I presume, has extended over the forecast horizon for private sector forecasters, but it's to them and to the federal finance department that the question is best directed.

[Paul Szabo, Liberal, Mississauga South, ON]

My time is almost done, but let me just ask you about the whole issue of bank reform. I know that you're interested, and others have called for consideration, even though the Canadian banks performed reasonably well on a comparative basis. What is the state of discussion in terms of bank reform? Is it mission impossible? Are we going to be successful? Are we going to fail on it?

[Mark Carney]

The good news is that since we were last before this committee, considerable progress has been made on bank reform, most importantly agreement on the Basel III capital and liquidity measures. They were endorsed this past week, and they were reviewed and endorsed this past weekend by ministers of finance and governors of the G-20. They will go to leaders in Seoul.

This package considerably improves the quality of capital for banks, the liquidity they have to hold, the level of capital increases, and the level of capital they have to hold. It introduces a series of measures and adjustments that are much more akin to the Canadian system on a global level.

My colleague Mr. Macklem chairs the important committee, the financial stability board, which oversees the implementation of measures such as this and ensures that.... This is a very important point. It's great to have a system that's more like Canada on paper, but it's only really useful if everyone actually implements it. An important part of this process—and if we have time, Mr. Chair, I'll ask him to expand—is ensuring to a peer review process that our peers around the table actually become more Canadian, not just talk about becoming more Canadian.

[The Chair, Conservative, James Rajotte]

I'll make a note of that, because we are over time on this round, but we will come back to that.

I have Mr. Hiebert, please.

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

Thank you, Mr. Chair.

Good to see you, Mr. Carney, Mr. Macklem.

Mr. Carney, in your opening statement you mentioned three downside risks. One of them was a more pronounced correction in the Canadian housing market. Is your view a pan-Canadian correction, or a potential pan-Canadian correction, or do you see pockets of strength, as in the lower mainland, where I come from?

[Mark Carney]

Well, just like we don't publish regional economic forecasts, we don't publish regional housing forecasts, so I'm going to avoid that question--not even skilfully, I'm just going to avoid it.

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

Fair enough.

You also referenced, without answering a question that was posed by one of my colleagues.... The question was, what can be done to increase productivity? You didn't really answer the question; you ran out of time. What could be done? What could the government do to spur greater productivity in Canada?

[Mark Carney]

Well, there is a host of policies that need to be put in place to enhance productivity in this country, and they're required from both the federal and provincial levels of government.

I would say, on the whole, over the course of many years successive governments have put in place a number of the factors that should bring about an increase in productivity. Those include, first and foremost, having our macroeconomic policies in order; sustainable public finances; inflation under control; competitive taxation, both on a corporate and a personal level; liberalizing tariffs to enhance competition; measures to enhance research and development; and then very importantly, a series of investments in human capital, particularly at the university level, so we have the people to help drive productivity.

But we still have a productivity issue in this country, without question. Our overall level of productivity is about 80% of the United States levels.

Importantly, there is a chart in here—I believe it's chart 15 or so—that shows unit labour costs in Canada versus the United States over the course of the last decade. The bottom line of that is Canadian unit labour costs have gone up 80% since 2002. The U.S. unit labour costs measured in the same currency have gone up 10%. So that gap is just one measure of the loss of competitiveness of our industry. So more needs to be done.

It's a bit more of the same, I would say, on the government side. And I don't want to be too prescriptive, obviously, to you on these measures.

But also very importantly, Canadian business needs to invest; it needs to take advantage of the financial system that's functioning; and it needs to take advantage of opportunities that exist in emerging markets. We have just started to see that rebound in investment.

And I'll make one last point. We've also noted in here the level of investment in this recovery versus previous recoveries is surprisingly weak. In fact investment is only about 15% of the level it would normally be at this stage in the recovery. So that has started to turn around, but it needs to continue, as I indicated earlier in my remarks.

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

We had the beginning of a conversation about inflation. What's magic about 2%, and what is the alternative that you're looking at?

[Tiff Macklem]

With respect to 2%, what is very clear is that you want a rate of inflation that is low, and in terms of delivering it, you want to focus on low, stable, and predictable.

There are some good reasons you might not want to go all the way to zero. Since renewing the target at 2% in 2006 there has been a considerable amount of research looking at what would be the best rate of inflation. On balance, I would say the research tends to suggest that it might be a little below 2%. Having said that, it's certainly clear that 2% has worked very well. Our economy has performed well. Our macro-management has been quite successful.

So it's a high bar, and I think you'd want to consider carefully the success we'd had before you made changes.

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

Mr. Carney, you made reference to a possible alternate method of regulating the inflation rate.