Finance Committee on Oct. 26th, 2010

[The Chair, Conservative, James Rajotte]

Just very briefly.

[Mark Carney]

Very quickly, it's called price-level targeting, and the idea there is that whereas in inflation targeting what happens, and what happens presently, is that we get up every day and believe it or not the first thing we think about is how do we get inflation to that 2% mandated target over the forecast rate, and we think about 12 to 18 months out. Bygones are bygones. What's happened in the past is the past. Every day we get up, we worry about that.

On price-level targeting, bygones aren't bygones. If inflation was higher in the past, we'd look to make sure that we made up with some inflation that was lower so that overall the price level grew at whatever level was dictated under the agreement, whether it is 2% or 1% or 0%. And obviously there is the converse: if inflation was lower in the past, the effort would be to get it back up.

I'll make one final comment on it, if I may, Chair. There is some discussion in the public domain about the utility of price-level targeting for other jurisdictions in an environment of intense disinflationary or deflationary pressures. So for example in Japan in the 1990s this was looked at, at that time.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Brison, please.

[Scott Brison, Liberal, Kings—Hants, NS]

For the second straight report, the Bank of Canada has downgraded growth projections, and you have indicated concern about productivity levels in Canada and the stagnant productivity growth in Canada. When we consider the relative weakness of Canadian productivity numbers and the impending demographic shift, what is your forecast for Canadian standards of living for the next several years? Where you do you see the standard of living going? For Canadian families, this is a very important question.

[Mark Carney]

Yes, thank you.

We do see a steady improvement in the standard of living for Canadian families, albeit at a rate less rapid than in the 1990s and early 2000s, because productivity growth will not accelerate, in our opinion, fast enough to make up for the demographic drag. It's a little too strong to call it a drag, but the less rapid contribution from labour to growth, labour as a whole on an economy-wide basis. So we see a less rapid improvement in the standard of living, and the only way to get that up is to get productivity up.

[Scott Brison, Liberal, Kings—Hants, NS]

I find it difficult to understand how we'd see any strengthening in the standard of living if the demographic shift combined with the productivity challenges we already have. Where do you see that growth in the standard of living coming from?

[Mark Carney]

There is some productivity growth that picks up over the forecast horizon and yields the rate-of-growth potential. If you look at the table on page 22 in the English version, we have potential growing at 1.8% in 2011; 2%, as I said earlier, in 2012. That's the underlying improvement in the real growth in the economy, the speed limit of the economy. That's not the precise level of growth we see, but that's the underlying improvement, and if you think of that 2% potential growth extending out into the horizon, that's the potential, if you will. That provides growth to the standard of living.

[Tiff Macklem]

Could I add one point? It's worth stressing that the other element of the welfare of Canadians is getting the economy functioning at its level of potential output. At the moment, there are unused resources. So if you go back to table 2, what you see is that we're growing above potential growth through this projection to absorb those excess unused resources in the economy. So the first step is to get the economy fully utilizing its resources, then the other part you want to pursue at the same time is getting the underlying growth rate as strong as possible.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you.

On October 19 your press release suggests that Canadian growth will rely more on net exports in the future. You say in that report, “The strength of net exports will be sensitive to currency movements...”. I interpret that as a signal that the Bank of Canada will be watching its monetary policy closely to avoid a dangerous ascension of the Canadian dollar relative to the U.S. dollar in terms of its impact on our economy.

How do you reconcile that statement with the government's crusade against currencies being artificially low in some countries? How do you reconcile the government's public statements on competitive devaluation with the bank's positioning of the loonie against the U.S. dollar? Isn't there a pretty clear contradiction there?

[Mark Carney]

There are two things. The first is that we see a contribution of net exports to growth in 2011, but it's a modest contribution of 0.3% on a rate of growth of 2.3% in 2011. The second thing is yes, that will be sensitive. It's sensitive to productivity; it's sensitive to demand in the United States; it's also sensitive to currencies.

The reconciliation I would make is not to reconcile with the government's statement per se, but to reconcile with a different part of the press release that notes heightened tensions in global currency markets. This relates to the discussion we had earlier with Mr. Menzies on the efforts to resolve global imbalances. There are heightened tensions in global currency markets. That does create a risk for the Canadian economy and through the net export channel and back into the economy, including true confidence effects, as Mr. Wallace raised earlier. We are very alert to that and we do watch developments in these markets closely.

[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 thank the witnesses and welcome them to the committee.

Mr. Carney, you indicated that private investment was an extremely important factor driving the recovery. I concur with that. You are no doubt aware that our government committed to reducing the corporate tax rates to 15% by 2012. Yesterday, we heard from representatives of the Canadian Bankers Association and the Conseil du patronat du Québec. They stated that the reduction in corporate taxes was a very effective way to spur private sector growth, investment in private companies and job creation.

Do you share that opinion?

[Mark Carney]

I am sorry, sir, what specific measures are you referring to?

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

I am referring to our government's firm commitment to reduce the corporate tax rate to 15% by 2012.

[Mark Carney]

Very well. Thank you.

It is a bit awkward for me to be giving advice here on tax rates. As I have just indicated in response to a question by Mr. Hiebert, there are a number of factors that influence Canadian and international business productivity, including corporate and personal income tax rates and structures. Of course, the competitiveness of our budgetary system as a whole has a major influence on the productivity of our businesses. That is also the case for investment, as you have indicated.

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

I have another pressing question, and that is the fact that our dollar is now close to parity with the U.S. greenback. At one point, our dollar was worth approximately 70 U.S. cents and under. We are often told that our business exports are greatly influenced by such fluctuations. In certain respects, it becomes difficult for exporters to deal with these near-parity levels. In the short term, do you believe that the exchange rate will return to a level that would better assist our exporters?

[Mark Carney]

I do not want to make overly specific comments on the exchange rate. I apologize, but that is also a sensitive issue.

As we stated in the previous response, there is a risk regarding our economy's net exports, i.e., a risk that the exchange rate is too high and that the strength of our currency is sustained. We are closely monitoring the situation. We will see how things evolve. Ultimately, the Bank of Canada is responsible for managing the monetary policy in order in order to achieve an inflation target, not a specific exchange rate. As we have indicated, the growth rate of total CPI and core inflation are expected to converge to 2% by the end of 2012.

[The Chair, Conservative, James Rajotte]

You have a minute.

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

But all of these elements are highly correlated. That is to say that a balance must be maintained between the exchange rate and the lowest possible level of inflation. Is there such a thing as a perfect balance? That is a good question. Everyone wishes to increase Canada's business productivity, and in so doing, enhance our country's overall growth. However, exerting too much control on the monetary side can lead to contradictory results at times.

[Mark Carney]

What is important, crucial even for our economy, is that our businesses increase their productivity. That is a given. In the end, it all comes down to that.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Mulcair, you have the floor.

[Thomas Mulcair, NDP, Outremont, QC]

I would again like to come back to the case of Timothy Hodgson. In his response, the governor told us about a blind trust for Mr. Hodgson's assets. He told us about the Bank of Canada's own conflict of interest and ethics rules.

Mr. Chair, the word “trust” in English also means “confidence.” I believe that Mr. Carney is quite able to understand, as we all are, that the confidence of Canadians in the institution he so effectively represents—as I have always said and since I have had the pleasure of working with him following his appointment—is of utmost importance.

That said, the appearance of a conflict of interest is also a serious matter. Earlier, Mr. Carney gave us an irrelevant response when he told us we should not be concerned and that his advise or would be governed by all the ethics rules in the course of his mandate. At the end of his response, he even said that he had no idea what Mr. Hodgson would be doing afterward.

With regard to the appearance of conflict of interest, there are no provisions for a cooling-off period. Would the Governor of the Bank of Canada not agree that it is in the interest of the bank, of Canadians and of their confidence in that institution that we implement rules concerning a cooling-off period for Mr. Hodgson and others. Such rules would avoid the use of revolving doors with regard to such positions, in which people are briefed on highly privileged and confidential information, and then immediately return to the private sector. That is the question I am asking him.

I recognize that Mr. Hodgson is one of his former colleagues at Goldman Sachs—he was even the CEO of Goldman Sachs in Canada. He is no doubt extremely qualified, since he was appointed to such a key position. Nevertheless, this raises concerns.

Would it not be in his interest, in the interest of the institution he represents and in the interest of Canadians' confidence in that institution that there be rules governing such matters? If so, what is he waiting for to request them?

[Mark Carney]

Thank you. Now, I understand your question more clearly.

Yes, a cooling-off period must be provided in order to meet the obligations of the Bank of Canada with regards to conflicts of interest. These obligations probably need a cooling-off period that is established with reference to the person's next job. This is absolutely clear.

For instance, if Mr. Hodgson worked in the academic field, he would not necessarily have to go through a very long cooling-off period. It would be different if he had to fill another position in the private sector, as you said.

I can therefore reassure you that the rules and the practices of the Bank of Canada are adequate.

They are put in place to ensure that any transition will be above reproach.

[Thomas Mulcair, NDP, Outremont, QC]

I understand that, but my invitation to the governor was to get him to reflect on what's missing. There is no cooling off period provided for in the statute so far. The code of ethics that he refers to applies while Mr. Hodgson is there. The blind trust rules that he's referring to apply while Mr. Hodgson is there. He is free, because the governor said so in so many words: he doesn't even know where he's going after.

I say that in terms of the confidence of the Canadian public, we should all be working together to give you the same types of rules that we've given ourselves, because the perception of the public with regard to those conflicts is at least as important, if not more important in the case of the Bank of Canada—a key institution for the whole of our economy—than it could be with regard to any individual minister or their staff. If that carence is there, if that lack is demonstrated, we should all be working on it together to fix it.

[Mark Carney]

The responsibilities of the conflict of interest and the broader set of accountability responsibilities apply to the senior deputy governor and me, as GiC appointments by the Government of Canada. We do have conflict of interest provisions; we do enforce—