Finance Committee on Feb. 12th, 2013

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you.

I was reading with interest the January “Monetary Policy Report” from the Bank of Canada. It noted that wage growth has slowed.

You mentioned here today the persistent slack in the labour market, the high levels of involuntary part-time work, the duration of unemployment, and the ongoing relatively low average number of hours worked. I noticed, with regard to the duration, that the proportion of long-term unemployed is particularly stark, climbing last year to 19.2% of the ranks of the jobless from 13.2% in 2007. CIBC has said that “easing long-term unemployment is essential 'to underpin consumer spending, household health indicators and support of broader economic recovery'”. Do you agree with that assessment?

[Mark Carney]

I would agree with the assessment. One of the issues is that the longer individuals are unemployed, the more their skills atrophy; they lose workplace attachment, and it's a self-reinforcing process. I will give you one figure. We have to work on the issues in Canada, so it's not just about being better than the U.S. But to give a sense of the depth of the U.S. recession and the weakness of the recovery, the analogous figure in the U.S. is over 40% long-term unemployed. This is a real issue. To give you an insight in terms of the strength of federal monetary policy, it is in part conditioned on the danger that the 40% long-term unemployed in the U.S. will become, effectively, permanently unemployable, to put it in its starkest terms.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Right. So we're not as bad as the other guys, but it's a problem we need to take seriously. Of course if they don't resolve it in the U.S., it could become a problem for Canada.

[Mark Carney]

It's one of the issues, which means there is a weaker demand from the U.S., all things being equal, than there would be otherwise. In Canada it is one of the aspects of the slack in the labour market. It is still considerable. It is consistent with a substantial monetary policy stimulus. It's one of the reasons interest rates are 1%, even though our financial sector is firing on all cylinders. We have other issues with household debt and other things that you're well aware of.

[Peggy Nash, NDP, Parkdale—High Park, ON]

For my last question, you mentioned earlier that you didn't think the financial transaction tax had worked in Sweden, so I wonder why 11 countries in Europe have brought this in. I know that the IMF has talked about perhaps a financial activity tax, given that there's no value-added tax on financial transactions. Is that something you would favour? Given the actual economic and fiscal moment that we're in—you've spoken about “dead money” in Canada, more than half a trillion with corporations—what are the best methods for revenue generation for governments today? That's an easy one.

[Voices]

Oh, oh!

[Mark Carney]

That's an easy one, yes.

The interesting proposal by the IMF a few years ago.... I'll get my acronyms wrong; it might have been the so-called fat taxes, as you were referencing. But related to taxes on wholesale borrowing by banks, it was to reduce the incentive for banks to borrow in the capital markets, because that borrowing creates a risk to the system as a whole. It creates a negative externality. It makes them too big to fail and it causes the types of crises that we saw. The issue was, well, could you use tax policy to reduce that?

What the regulatory community has done is to use regulation instead of tax policy to do it, in part because of the arbitrage issues I talked about earlier, which suggests...and part of that judgment was based on the ability to evade a tax by changing an instrument slightly or borrowing in a different subsidiary, etc., not having a global approach. I wouldn't recommend it as a good revenue generator.

Am I out of time to answer? Because I was so close to answering what is most efficient....

[The Chair, Conservative, James Rajotte]

Well, we are over time, unfortunately.

I'll talk to you during my round, so perhaps I'll give you 20 seconds to answer that question first, Governor Carney.

[Mark Carney]

Whoa.... Well, thank you, Chair.

[Voices]

Oh, oh!

[Mark Carney]

In general—in general—analysis of relative efficiency of tax from a revenue perspective, from a non-distorting of economic activity perspective.... In general, value-added taxes are the most efficient mechanism. There are issues.... As with all tax policy, though, one has to worry about distributional consequences, regressivity, if you will—that's a word—and other political economy factors. But if you're just looking at efficiency of raising revenue and not distorting economic activity in general, the value-added tax, set at a relatively low level, would be the most efficient mechanism.

[The Chair, Conservative, James Rajotte]

Okay. Thank you for that.

Governor Carney, I want to move next to one of your written responses to the Treasury Select Committee. You talked about the Bank of England having to “enhance its forecasting”, and you've had questions on forecasting for the Bank of Canada from both sides of the table today. Is that a fair point to make about the Bank of Canada as well with respect to forecasts?

[Mark Carney]

Yes. Thank you for the question. It's an important one.

One of the things we've been doing...and I hesitate to suggest things to my successor and successors on the governing council, but periodic review of forecasting, and public discussion, debate, whether at this committee or in other avenues, of how the bank forecasts and how we could improve would be welcome and make sense.

One of the things we have done, though, just to be clear, over the course of the last year or couple of years, is that we have done a detailed analysis and are now putting in place a series of so-called nowcasting tools, tools, in other words, to forecast ahead a quarter or a couple of quarters. We're just starting to put these in place now, using a variety of sophisticated statistical techniques. We always have to overlay judgment on that. You'll see the product of that.

The second point, if I may.... I don't know how much time you can give me.

[The Chair, Conservative, James Rajotte]

And that will be out when?

[Mark Carney]

Okay, but very quickly, the second point is that what we've tried to do as well, and we can continue to improve this, is to make clear.... One of the key things is, what are the key assumptions in the forecast and what drives the forecast? What I would like to leave this committee with, what we would like to leave the committee with, is a clear point...I think it's graph 19, which shows very clearly the contribution from business investment and net exports: the negative contribution over the course of the last few quarters, and the very large positive contribution, the flip, that we see over the next two years.

What matters, really, for our forecast is that we're going to have to see a pickup in business investment, and we'll have to start seeing some penetration on those export markets. If we don't get that, for whatever reason, our forecast is going to be too high, so we need to do as good a job as highlighting the key elements of the forecast to this committee and to Canadians, so people can make their own judgments.

[The Chair, Conservative, James Rajotte]

With respect to that, and with respect to business investment, you were portrayed in the past as being slightly critical of a lot of businesses in Canada for not spending enough on investments. Do you stand by those statements, or would you say that in fact you've seen some activity in recent months that has addressed some of your concerns with respect to spending by Canadian businesses in Canada?

[Mark Carney]

We absolutely stand by the statements. Mr. Macklem, in effect, repeated them in his recent speech, which Mr. Hoback referenced.

There is a chart that looks at Canadian business investment relative to history. We're about average. It's solid. It's not spectacular. It's a little below average. But we're not in average circumstances. We have a big productivity deficit. We need to reorient to new markets. We have a very strong currency.

Investment disappointed in the second half of last year. Now, we think there are some special factors, and particularly around some engineering works and some issues in offshore Newfoundland and in Alberta as well. That will come back. Part of this is uncertainty, given the U.S. and European situations. That's dissipating a bit. The sum of those is one of the reasons we expect things to pick up. If we are here in April—and I hope we are going to be with our next MPR—I think we should be able to point to some signs of a return to solid business investment growth by that point.

[The Chair, Conservative, James Rajotte]

Okay.

My time is up for this round. I'm going to go quickly to Mr. Brison, and then I'll come back with a few more questions.

Mr. Brison, at this point, go ahead quickly.

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

Thank you very much.

I have a couple of follow-up questions to Ms. Glover's questions, actually.

One is on oversight of CMHC. Which ministers are responsible for CMHC oversight?

[Mark Carney]

It's really a question for the government, but I know the answer. Historically, the responsible minister was the Minister for HRSDC, Human Resources and Skills Development. I believe—and I'll be corrected by members of this committee—that now there's a joint responsibility with the Minister of Finance, which, I believe, reflects one of the governance reforms introduced in the last budget.

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

Also as a follow-up to one of Ms. Glover's questions, let's talk about the employment rate—not the unemployment rate, but the ratio of those who are employed to the working-age population. How are we doing in terms of our employment rate compared to what it was before the recession?

[Mark Carney]

Our employment rate is about 62%. As for what it was pre-recession, I don't have that figure at hand. It would be lower than it was pre-recession, because the labour force has continued to grow. I think we're off—and I'll add this to our written submission—just under two percentage points, so it would have been about 64% before, and we're now around 62%. I recall from the U.S. that the fall in the employment rate is about five or six percentage points. The adjustment is quite dramatic. We've highlighted this in previous reports.

So we're seeing that. Some of that is the demographic: as individuals come into their fifties they're less employed. You're fully employed and you're 50, but they're less employed.

[Some hon. members]

Oh, oh!

[Mark Carney]

Anyway, we'll get you the figure. That's another aspect of there being some slack in the—

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

So we haven't recovered to pre-recession levels in terms of employment rate.