Finance Committee on Nov. 3rd, 2010

[Mary Webb]

Initially, back when the dollar started to climb, 90¢ was considered very high. A number of our industries made different representations about how difficult it would be to compete with a dollar that was over 85¢. In this particular instance, our work in Scotia economics was focused on the motor vehicle sector and its representations.

Going forward, what the dollar is also doing is a constant skim on the profit that's available, because so many of our contracts are denominated in U.S. dollars. Even outside the manufacturing sector, the dollar has a very significant impact, because if the product is denominated in U.S. dollars, of course you are receiving less.

There's a concern across all industries that as we move through parity, it's another threshold. I think Canadian business has proven to be resilient, but it is tough to be resilient in a global situation where we already have overcapacity in many industries.

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

What exchange rate would be completely unacceptable if the Canadian dollar reaches parity with the American dollar, or perhaps goes even higher? Is there a ceiling that would be unacceptable, that businesses could not deal with?

[Mary Webb]

That's an extremely interesting question, one that we should deal with. We have not dealt with it, and it would obviously vary by industry.

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

Thank you very much.

[The Chair, Conservative, James Rajotte]

You have two minutes left.

Mr. Hiebert, if you have a question, you have two and a half minutes.

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

Thank you.

I think it was Mr. Poschmann who said that with every 1% reduction in corporate tax rates, there's actually an increase in government revenue. Did I hear you correctly?

[Finn Poschmann]

The correct way to put it, Mr. Chairman and honourable members, is on a present value basis the federal government's net revenue is positive, given where the tax rate is right now, if we bring it down one percentage point. It's just a long-term assessment.

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

You said “long-term”. What timeframe are we talking about here, if we reduced with the plan we have right now, with the reduction to 15% by 2012?

[Finn Poschmann]

If you look at the responsiveness of investment to tax rates, a reasonable timeframe to expect, given where we are and a reduction to come somewhere near to paying itself, would be in the four- to ten-year framework.

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

Four to ten years. Okay. So outside the timeframe that we're looking at right now?

[Finn Poschmann]

Arguably. It depends on the investment response and other things that are going on in the economy. For instance, we have a lot of businesses right now sitting on fairly large treasuries. In other words, businesses have been holding back on investment for the last couple of years. Banks are sitting on a lot of reserve capital owing to the fact that they've had to build up their capital stock in the last couple of years. So there are reasons to imagine that in fact there might be quite quick investment responses, but there are a lot of things at play here.

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

Okay.

I wasn't sure who said it, but somebody suggested that we apply the U.K. principles of equity reform, a strong base for the long term. Who was it?

It was you, Ms. Webb? Okay.

Could you elaborate on the application of those principles to the Canadian context? How would you see that happening?

[Mary Webb]

The initial reason I brought it up is that the U.K. is facing such severe austerity and yet they've made the conscious decision that for some capital projects, some of their science and research budgets, they would protect those simply because they have to maintain a longer-term growth base.

I think that's really important to consider in terms of Canada's situation. We do have more flexibility than many other developed nations right now, and therefore it's extremely important to look at the budget paths we want to take while still increasing our productive capital, whether it's physical or human capital or new technological expertise.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Hiebert.

Monsieur Mulcair.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chairman.

I would like to go back to Mr. Burleton to ask him whether, following his analyses, he believes that because of the amount of money that has been printed, once the velocity of that money starts to increase... As he said so well, currently we are not in a situation where there is such an acceleration. We have printed... you used the expression that is used in Great Britain, “quantitative easing”. Réal Caouette used to call that “printing money”.

According to the TD Bank Financial Group, once that money starts to circulate in the economy more quickly, is there a danger that inflation might go higher than the 2% target, for instance, if that acceleration begins in the United States, where trillions of dollars were printed?

[Derek Burleton]

Mr. Chair, I am concerned about what's going on in the United States. This is very uncharted territory, and I'm concerned about inflation in the medium term. In Canada, less so, because we have inflation and targeting, and we didn't get into quantitative easing. I say less so, but what happens in the U.S. bond market, for example, does tend to have an impact up here. We are very much integrated.

It is something that as a medium-term risk I would put right up there with a lot of other things. It's a concern.

[Thomas Mulcair, NDP, Outremont, QC]

Ms. Webb, after the Vietnam war, the only way of reimbursing that debt that had become too unwieldy was to resort to inflation. Once the value of currency changes, reimbursement takes place more quickly, but the value is changing.

Will there be any other way to reimburse these thousands of billion dollars—trillions in English, billions in French—than through high inflation? I have met several economists who are afraid of that. However, whenever we meet with Mr. Carney, he tries to be reassuring.

As your colleague from the TD bank pointed out, our economy is intimately linked to the American market whether we like it or not. Do you have any fears concerning medium-term inflation, like Mr. Burleton?

[Mary Webb]

My sentiments echo Mr. Burleton's. In the U.S. right now, there's also an issue of the velocity of money. It's actually fallen so low that as they've put more money into the system, it doesn't seem to have much impact. It's almost like the “pushing on a string” type of analogy.

Then there's the concern that once you do get the velocity, and that assumes a number of financial institutional changes, as well as consumer and business sentiment, then all of a sudden you could have a jump in that velocity. That's when it becomes an issue.

But the U.S. Federal Reserve has published a number of good papers that have indicated when they see the pre-signs of that happening, they can drain the money quickly. One appreciates their arguments. Again, we are in uncharted territory, so whether they can actually respond quickly and substantively enough remains an issue. Our situation in Canada is so different that I don't see it, except in terms of Canada's tight linkages to the U.S.

In terms of a strategy to deal with debt, high inflation is very punitive for those on fixed incomes--all the reasons we've tried to stay to the 2% target. I think the Bank of Canada has been very clear on that.

[Thomas Mulcair, NDP, Outremont, QC]

There's also another way of looking at things, Mr. Chairman. Some people have no fixed assets. At least homeowners will see the value of their property increase. But tenants will only see their rents increase, without having any assets that will increase in value.

Mr. Page, would you be so kind as to share your opinion on that?

[Kevin Page]

I would echo what's already been said. My reading of what Mr. Bernanke, the Federal Reserve chairman, is doing in the United States—and his concerns are primarily unemployment and deflation—is that it's very much focused on the short term. I think you could probably also see that equity prices have responded to his basic.... We've seen some bolster in equity prices recently connected to his statement that they're going to put more money into the system.

I think there is a concern, though, that as you take on this quantitative easing you add so much extra liquidity in the system. Where is it going to go? Is it going to stay in the United States? Is it going to go to the higher interest rates? We've seen interest rates rise in India and Australia very recently. You've got all these carry trades going on.

Is the money going to actually stay there to have an impact on asset prices in the States? It's hard to say. But I'm sure central bankers are worried everywhere in the world. When you keep these interest rates as low as they are right now, you're going to face bubbles down the road. They must be worried about that.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you very much.

Thank you, Mr. Chairman.

[The Chair, Conservative, James Rajotte]

Thank you. Merci.

We'll now go to Mr. Szabo, please.

[Paul Szabo, Liberal, Mississauga South, ON]

Mr. Page, if the federal government downloads dollars to the provinces, how would that impact the federal situation? Would it be a dollar-for-dollar benefit to the government in terms of dealing with its structural deficit?

[Kevin Page]

Basically, we reduce our federal transfers from where they are right now so the expenditure burden or the federalism imbalance is shifted towards the provinces.

On a federal basis, I think we would be reducing our structural imbalance, and we would be increasing on the provincial basis, which raises the point of why it's so important to look at this from a consolidated point of view.

[Paul Szabo, Liberal, Mississauga South, ON]

Exactly.

What have you assumed with regard to the new health accord?