Finance Committee on April 23rd, 2013

[Mark Carney]

I think we've had a demonstration of how not to.

[The Chair, Conservative, James Rajotte]

Although we haven't had any today, obviously.

Mr. Jean, please.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you, Chair, and thank you for the opportunity to ask some more questions.

You mentioned, Mr. Carney, in relation to oil prices, just in passing, the difference between the Brent North Sea oil price and the Western Canadian Select. I know we've had this discussion generally before, but I don't think many Canadians realize, first of all, that we had the largest infrastructure investment in our history in Canada over the last five or six years by this particular government, some $33 billion in infrastructure investment over a five-year period. This was somewhere in the neighbourhood of about $3 billion or $4 billion per year. And it's amazing that as a result of the spread last year there was somewhere in the neighbourhood of $30 billion left on the table that wasn't captured by oil companies in Canada, because of the lack of transportation, the lack of infrastructure for pipelines, the inability for the rail to be able to be competitive on moving this oil. Ultimately, it has cost a lot of Canadian jobs, it's cost a lot of Canadian shareholders profits, and the reality is it has cost the federal government and the provincial governments a lot of money in tax revenues, etc. The federal government—many people don't know this—collects somewhere around 52% of the tax revenues from the oil sands.

How important is it for us to have new pipelines? It seems that even if we started today and all of them were approved, nothing would happen before 2015, and we're going to have this continual loss of $30 billion per year to the shareholders and companies of Canada.

[Mark Carney]

Without question, it's an important issue.

Within the course of the past year we've had a very unusual situation in Canada. We had global oil prices go up, and normally that would be net positive for the Canadian economy. There's adjustment, but the flow-through effects, including through government, mean that higher energy prices globally are normally net positive for the Canadian economy. But in that specific situation with higher Brent prices, you had a big discount, so you had this revenue loss in western Canada, and because Brent is more relevant for the pricing of gas in eastern Canada, and central Canada to some extent, you had the loss in terms of disposable income, because higher gas prices outweighed what normally would have been a benefit on the revenue side. Fortunately, since then, the differential has narrowed somewhat, as you know, in recent weeks, but as I said earlier—and we put the data in there just to make this point—it's very volatile. It's a very volatile price because of these infrastructure difficulties you highlighted.

There is no question that there is a wide range of energy infrastructure projects—and obviously we don't favour specific projects or companies—that can benefit Canadian producers and Canadians as a whole, that can reduce at a minimum some of these differentials between high global prices of crude and lower prices received by Canadian producers so you can get gas prices down in eastern Canada, and that can provide an ability to supply reliable energy to the United States. I think one of the things—and we've made this point, but we should make it again—is that there has been an energy revolution in the U.S., and that's positive for the U.S. economy, but the prospect of energy security in the United States is still not within sight. There is North American energy security. In order to have North American energy security over time, there will need to be additional infrastructure investment, which will benefit both economies, but very importantly the Canadian economy as a whole.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

With what's going on with the United States and their desire to become oil independent, what's going on in Canada with our lack of capacity? Can you identify anything more important for governments in Canada to concentrate on that would give us the low-hanging fruit of profitability for the health of the Canadian economy in this particular case? Is there anything more important than working on this and finding a solution for capacity constraints and the limit of customers?

[Mark Carney]

Within the energy complex as a whole, without question Canada needs to develop additional transportation infrastructure. I'll leave it for others to make the judgment about different sectors of the economy.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

In fact, the timing of this is absolutely critical. I know we have the constraints and we have a long-term problem here. But if we don't tackle it immediately, it's going to become a bigger and bigger problem, based on the growth in demand for oil, not just in the U.S. but in the world.

[Mark Carney]

Yes, it is an important issue. As you know, a number of levels of government and private sector entities are seized of this, to the benefit of all.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Jean.

Monsieur Caron.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much, Mr. Chair.

I would like to broach an issue that has not been discussed today and is something we have not talked about for quite some time. I refer to derivative products. You are also the Chair of the Financial Stability Board for the G20. When I think about the work that I did in this sector back in 2007, 2008 and 2009, I still keep hearing the words

credit default swap and asset-backed commercial paper

Nevertheless, we have the impression that this is no longer a priority issue, even though this was what caused the crisis that we experienced and that we are still experiencing. First of all, where do the discussions stand at present? What work has been done by the board and the G20 countries in this sector? Do you feel that the Government of Canada, like the rest of the G7 countries, should be making more efforts to deal with this matter?

Also, I would like to hear your thoughts about an even more problematic situation, namely over-the-counter transactions. This issue appears to be one of your concerns, according to a report published by the Bank of France.

[Mark Carney]

Thank you very much. You are right, as usual. These are extremely important issues for the financial stability of both the world and Canada.

With respect to asset-backed commercial papers, I believe that reforms have been made in the area of standards and security rules for securitization. These reforms will probably take place in a few months time in

money market funds

because they represented the largest investors in such products. To some extent, they no longer pose a problem to financial stability. Nevertheless, over-the-counter products do still represent a tremendous problem for the system. We must continue pursuing the reforms that we started implementing a few years ago.

May I switch to English?

There are three aspects here.

Very quickly, there's transparency where there's been a lot of progress. Canada is in the process of setting up a trade repository. That will help with transparency. In my role at the FSB we've written to all FSB members to ensure they all do the same thing. That's the first point.

The second point is how these products are cleared. The plumbing of the system takes out a lot of risk. There's something called the central counterparty, which ensures that instead of the relationship being directly bilateral between two institutions, it has a central counterparty that ensures that if one of those institutions fails, the other institution can keep going. The Canadian authorities, federal and provincial, have taken a decision to centralize Canadian derivatives-clearing in London for interest rate swaps. This is a hugely important decision, and it will substantially reduce the risk from that in a very efficient way for Canadian institutions.

The third point is a series of rules that regulate cross-border derivatives. If it's a trade between an institution in Montreal and an institution in Europe, two sets of rules potentially apply to that transaction. We need to harmonize those rules to ensure the transactions can be in place. There have been a series of meetings to ensure that. Canadian authorities,

The financial market authorities and

the Ontario Securities Commission, have been involved in those meetings. Through the FSB we're helping to push that along. We had a series of meetings over the course of this past weekend to ensure that meaningful progress is being made on this front. We're trying to bring a number of these reforms to a head by the St. Petersburg G-20 summit in September.

I'd say there's meaningful progress. I would welcome the continued interest of this committee in this issue. It's very complicated, but all the pieces of the reforms have to be put in place for the true, large elements of risk to be substantially reduced in this important market.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

My last question will be brief.

We have talked about a sole regulator in Canada. The debate is still ongoing. Currently, we have a passport system for the provinces, excluding Ontario. What is your assessment of the current passport system for the provincial regulators?

[Mark Carney]

That is a very sensitive issue.

As far as the Bank of Canada is concerned, under the current system, we work very closely with the provincial authorities, the Office of the Superintendent of Financial Institutions, the Federal Department of Finance and all of the other agencies in order to implement reforms like the ones I just described for the derivative product market.

[The Chair, Conservative, James Rajotte]

I'll go to Mr. Braid and Mr. Hoback, please.

Mr. Braid, please go first.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you, Mr. Chair.

I'll share my time with Mr. Hoback.

Particularly as a guest today I would dare not ever politicize the role of the Bank of Canada or of the hiring process to replace the governor. You can both be relieved; I won't go there.

I have a question about the situation in the U.S. It's clear that the U.S. needs to get their fiscal house in order. That's probably the classic understatement of the day today. There's some concern perhaps about the way they're going about that. I'm thinking specifically about sequestration. I was in Washington a couple of weeks ago, and that's all I heard about when I was there. I know you were there recently as well, Mr. Carney.

I'm curious about your thoughts on that. Is sequestration a potential risk factor for Canada and for the Canadian economy in contrast to the U.S. approach to budget cuts, for instance, this automatic meat cleaver approach to the plans and prudent approach of the Canadian government to restrain the cost of government and reduce the size of government?

Could you speak to that?

[Mark Carney]

Let me say a few things. It's a very important question.

Let's be upfront about sequestration. The idea behind sequestration was to create a series of cuts that were so foolish that they would cause U.S. authorities to come to a sensible budget agreement. Well, they didn't come to a sensible budget agreement, and now a series of foolish cuts—punitive cuts, in some respects—are starting to roll out.

We're only starting to see them. For example, in the last few days the reduction in air traffic control hours has started to roll out, with some consequences there. Canadians are potentially going to have this impact on border guards, customs officials in the United States, who do an excellent job, but if you reduce the number of them, there are potential delays there. There is a series of other aspects like this.

Our estimate of the impact of sequestration is that the U.S. economy...it will reduce growth in the United States by about 1.08 percentage points this year. That's the entirety of the U.S. package. I shouldn't say that's all sequestration, but it includes the budget deal on the tax side, the Bush tax cuts and other factors. So it's a 1.08% fiscal drag on the U.S. this year.

We have a 2% growth projection for the United States, given all of that, in 2013. To look at the other side, this gives you a sense of how much the private side has improved in the United States. If the government weren't doing this, it would be almost four percentage points of growth.

We have a front-loaded fiscal adjustment in the United States this year. Next year we see just under one percentage point, specifically 0.8% fiscal drag in the United States, and as a consequence we see higher growth in the U.S., around 3%.

It's an important issue. The U.S. needs to adjust. As you say, it needs to make long-term adjustments, but these are designed to be foolish, short-term adjustments that don't ultimately deliver a path for that longer-term adjuster, which will take some tough decisions, as the American administration knows, on entitlements and other factors—potentially revenue. It's an unfortunate set of events.

That said, from an underlying strength in the U.S. economy perspective, we see the strength in the private sector moving through this. The U.S. economy is still growing at 2% with associated demand for Canadian goods and services, albeit with some friction costs in terms of travel and getting across the border.

[Tiff Macklem]

I'll simply add that our exports are more exposed to U.S. private demand than they are to U.S. government spending on goods and services. Sequestration, clearly, if it creates delays at the border, could affect our exports. But the recovery we're seeing in the U.S. housing sector—and we highlight this in our report. We are really seeing the consequences of that for our lumber industry, and we'll also increasingly see it for higher pieces in the value chain, windows and doors, that sort of thing. So it's the private demand that's key for our exports.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Hoback, you're out of time, but we may well come back to you after the next round.

Mr. Côté, you have five minutes.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you very much, Mr. Chair.

Mr. Carney, we discussed the cash assets of businesses and the pension fund challenge, but I think that you wanted to add something to what you said. Do you recall what you wanted to add at the end of your reply?

[Mark Carney]

Yes, I wanted to point out that this situation is difficult here, in Canada, and in the other advanced economies. There is indeed a problem with defined benefits. Companies need to save and invest money in pension funds. Companies cannot invest in their own businesses. Obviously, this poses a problem. There are several factors involved. There is the bank rate. The Government of Canada implemented reforms that mitigated this effect with

letters of credit in smoothing the discount rate.

There is also a positive aspect related to the easing of monetary policy in the United States. This stimulated monetary policy, such as the one here in Canada. The value of pension shares and bonds has increased.

To some extent, some aspects tend to balance the situation, but of course it remains difficult.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

I would like to hear your thoughts on unused capacity in the Canadian economy.

As the MP for Beauport—Limoilou, I am very proud to represent a region where there has been a high rate of economic activity. The unemployment rate is standing at 5% to 6% whereas 20 years ago, when I left university with my degree in hand, the unemployment rate was about 11% or 12%. This was a very difficult situation. The current situation is the result of the public, parapublic and private sectors mobilizing and deciding to invest in the future and in innovation.

We saw some very wonderful examples at the Mercuriades Gala, with, for example, the TeraXion company which does business throughout the world. In fact, this company hardly does any business here in Canada.

I will not conceal the fact that I am dismayed that we are, to some extent, relying heavily on recovery occurring in other countries. I feel that we should be relying more on ourselves, but this is probably due to my being proud. At any rate, this all remains to be seen.

Could you tell me what you think, first of all, about my pride problem, and then about what means we could use to tap into this unused capacity in Canada to help the Canadian economy?

[Mark Carney]

That is a good question. I will start to answer and I will then let Mr. Macklem continue.

The cost of obtaining a university degree in Canada is about 40%. The average in OECD countries is approximately 50%. So that is one aspect of this issue,

the skills, the mismatch

which currently exists in Canada.

This is not so much about pride, but rather we need to undertake reforms in Canada that will benefit all Canadians.

Mr. Macklem, the floor is yours.

[Tiff Macklem]

Indeed, we share this opinion. Global recovery is important in order to increase demand for exports. So that is one aspect leading to the recovery in Canada.

Over the past two quarters last year, we saw weak exports in Canada. However, this situation will improve once there is a global recovery.

The other aspect that we need to improve is the competitiveness of our exports. This requires greater investment and more development of other markets. We are very focused on the United States. This served us well for a long time, but now we need to do business elsewhere. We should turn to emerging countries that are developing more quickly.

So we should find these markets and invest in them.

[The Chair, Conservative, James Rajotte]

Thank you.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you very much, Mr. Chair.