Evidence of meeting #115 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was economy.

A video is available from Parliament.

On the agenda

MPs speaking

Also speaking

Mark Carney  Governor, Bank of Canada
Tiff Macklem  Senior Deputy Governor, Bank of Canada

9:25 a.m.

Conservative

The Chair Conservative James Rajotte

Thank you very much, and thank you, Mr. Jean.

Mr. Côté, you have the floor.

9:25 a.m.

NDP

Raymond Côté NDP Beauport—Limoilou, QC

Thank you, Mr. Chair.

I would like to thank both Mr. Macklem and Mr. Carney for joining us.

Mr. Carney, you will not remain in your position for much longer. I would like to congratulate you and thank you for bringing Canadian know-how elsewhere in the world. I really appreciate what you are doing, although I am sorry that we are going to be losing you for a few years. But that is another issue.

Governor Carney, I truly appreciated the comment you made at the end of your presentation when you talked about the current monetary easing, which is significant. That says a lot. I believe that your comment pertains to the particular situation that we are experiencing right now in Canada with respect to interest rates and all of the factors that have an impact on our economy.

I would like to discuss a particular topic with you, namely, the record levels of cash assets sitting in our Canadian businesses. According to a January 2013 analysis produced by the Royal Bank of Canada, this number is currently $574 billion. Cash assets must now have grown considerably since then. It is interesting to see that, according to this analysis, this situation is explained by objective factors. I appreciate this point in particular as I am reading an economic essay written by Ms. Esther Duflo, who sits on a poverty panel advising the U.S. President. She looks at individual behaviour to explain certain consequences of objective decisions that are made.

Going back to the Royal Bank report, it looks at a range of factors, focusing on three important ones in particular, to explain this accumulation of cash assets, namely, uncertainty related to the international situation, deficits created by defined benefit pension funds, and changes within businesses to intangible assets, namely intellectual property. Businesses have changed a great deal. The knowledge-based economy has to a large extent replaced the production of yesterday. In your analysis, you say that we can be relatively optimistic about the ability of U.S. demand to help the recovery of the Canadian economy. You say that this could have an impact on current uncertainties, which would explain this accumulation of capital.

I would like you to talk about the pension fund deficits, and, in particular, the weak interest rates, which unfortunately offer few benefits. You have already made some comments on this issue.

How optimistic are you that we will see a rise in the key policy rate in the near future?

How will this help us deal with the deficit created by defined benefit pension funds?

9:30 a.m.

Governor, Bank of Canada

Mark Carney

You ask a lot in your question.

With respect to the uncertainty of businesses and the impact that this has on their pace of investments, a box on pages 30 and 31 of the report shows the results of a Bank of Canada investigation. To some extent, the news is good. Indications are that the current situation is not so much about international uncertainty. This is not the case in Europe. The fiscal cliff in the United States is not a reason either. This was however, the case last summer. This is all good news. Furthermore, this is not about concerns with the Canadian financial system. Access to credit is not an issue.

The bad news is that this demonstrates uncertainty with respect to both Canadian and international demand. So once again you need an acceleration with respect to Canadian and American consumer demand. Banks are expecting this to occur.

As for the pension fund issue, this is in fact a difficult situation for them and this is caused by reduced interest rates everywhere in the world. To a certain extent, this is offset by an increase in other financial assets.

9:30 a.m.

NDP

Raymond Côté NDP Beauport—Limoilou, QC

Have I used all of my time?

9:30 a.m.

Conservative

The Chair Conservative James Rajotte

Unfortunately, that is the case.

9:30 a.m.

NDP

Raymond Côté NDP Beauport—Limoilou, QC

Thank you, Mr. Chair.

9:30 a.m.

Conservative

The Chair Conservative James Rajotte

Merci, Monsieur Côté.

We'll go to Mr. Adler, please.

9:30 a.m.

Conservative

Mark Adler Conservative York Centre, ON

Thank you, Chair.

Thank you, Governor and Deputy Governor, for being here this morning.

There are two issues I want to address during my line of questioning. The second one, which I'll mention first, is the investment accelerator. First, however, I want to talk about the implications for monetary policy in terms of the risks to the outlook. What are both the upside and downside to inflation? Could you just address that? Then we'll move on to the investment accelerator.

9:30 a.m.

Governor, Bank of Canada

Mark Carney

The first thing is—and you know this, but for everyone's benefit—when the bank forms a projection, we try as much as possible to have a balanced projection. There are always upside and downside risks. Unfortunately, over the course of the last several years, those downside risks have felt heavier. So we try to adjust the base case so they're roughly balanced between the upside and the downside risk. As we sit here today, Ms. McLeod and others have talked about the housing risk, which is correct. Household spending can go both ways in Canada. We could see, on the upside, a reacceleration of household spending. We have seen that in the past, when tightening measures were taken in mortgage insurance. There was a period of adjustment and then a reacceleration. We don't think that is in prospect a sharp readjustment, but we have to be vigilant.

We could see also on the upside stronger export performance. One thing we haven't talked about yet this morning is that the Canadian export performance has been particularly weak relative to expectations. We can go into the details of why that is, but I'll simply say that we have held that weakness, if you will, over our projections. So we haven't had a return to the historic relationship between Canadian exports and foreign demand. That means there is an upside risk if things go back to the way they historically were. On the downside, of course, there could be weaker global demand because of events in Europe, impacts in the United States, and the flip side of the housing risk as well.

I'll let you ask your second question.

9:35 a.m.

Conservative

Mark Adler Conservative York Centre, ON

Thank you.

My second question is on the investment accelerator. There are a number of reasons for uncertainty in the marketplace, and we all know businesses prefer certainty over uncertainty. Could you talk a bit about how that uncertainty was not generated domestically but more because of international reasons, global reasons, because of these headwinds that are generated outside of the country, not necessarily because of our own government's policy, and how investment, in terms of certainty...how businesses will not be parking the money any longer but will be more accommodating in spending it?

9:35 a.m.

Governor, Bank of Canada

Mark Carney

As I said to Monsieur Côté, a year or so ago, and for a period of time before that, there was this impact of global uncertainty because of events in Europe, which were particularly fraught. There were fundamental uncertainties about U.S. fiscal policy and therefore U.S. demand, and those were weighing on Canadian businesses. Related to that was the sort of general policy uncertainty as well, policy in Europe, policy in the U.S., and to some extent monetary policy of global central banks as well as uncertainty about the effectiveness of that.

The effect of that on Canadians has dissipated because of steps taken in Europe and because—it's not perfect, but there have been steps taken in the U.S. as you are aware—of the relative effectiveness, particularly of the monetary policy of the Federal Reserve, which has been demonstrated.

So the uncertainties that exist right now for Canadian business have to do with global demand. There is some impact of two Canadian factors, though, which aren't policy related but are just part of the dynamics of demand in Canada. We've had weaker growth in Canada than we would have expected and than businesses would have expected. So that accelerator you talk about is working, in that businesses are holding off—not totally holding off, but holding off until they see a pickup in domestic demand as well.

The other factor, which we highlight in the report, is the impact on the energy sector in Mr. Jean's region. It's page 15 en français, and I think it's page 15 in English as well. We see much higher volatility in Canadian crude. You know that; businesses know that. The level is also lower than WTI. So a lower level, higher volatility, and that sort of uncertainty on the margin, we think, are hitting investment in one of our most important sectors.

9:35 a.m.

Conservative

The Chair Conservative James Rajotte

Thank you.

Thank you, Mr. Adler.

Mr. Rankin, please, we will go to you.

9:35 a.m.

NDP

Murray Rankin NDP Victoria, BC

Thank you, Mr. Chair.

Thank you both for attending this morning.

I'm going to take you to a different place, if I may: the world of tax havens.

Governor Carney, you recently said that tax havens hurt the integrity of the global financial system and diminish the effectiveness of domestic fiscal policy.

Considering your experience on the Financial Stability Board in bringing non-cooperative jurisdictions into the fold, can you tell us what you consider to be the most effective instruments for contending with these jurisdictions? What are the best practices, or perhaps successful but under-studied measures, that the finance committee should know about?

9:35 a.m.

Governor, Bank of Canada

Mark Carney

Thank you for that question, Mr. Rankin.

If I may, I'll start, and then I'm going to ask Mr. Macklem to supplement because he did some work, not on the tax aspect of non-cooperatives, but on the broader aspect of non-cooperative jurisdictions, at the FSB.

There is an initiative that is under way in the G-20. It was highlighted again this past weekend in Washington—and this is very much in the domain of the finance committee and the Minister of Finance—to enhance information exchange. That's one of the key elements of addressing this issue, to ensure there is appropriate, timely, and complete information exchange across jurisdictions, so that home jurisdictions can ensure their citizens, and their corporations, importantly, are paying their appropriate and fair share of tax.

The second element is that there is an OECD action plan that is being developed for the G-20—it's due in July of this year—to address the issue of so-called base shifting, and transfer pricing related to that, of corporations. This is with the big multinational corporations. They have become very effective in ensuring that costs are being booked in jurisdictions such as Canada and other G-7 countries and that revenue is being booked in low-tax jurisdictions, effectively ensuring that they pay relatively low levels of tax.

This is a global issue. Ideally, it will be tackled in a coordinated fashion by the major countries, because if one moves, then it becomes a competitiveness issue for them. At this stage I would say there is encouraging progress being made on both those facts, besides the information exchange and a more comprehensive plan. It is a tough issue, and I obviously defer very much to the committee and the minister.

Mr. Macklem can speak a bit to what's been done with non-cooperative jurisdictions more broadly.

9:40 a.m.

Senior Deputy Governor, Bank of Canada

Tiff Macklem

As the governor indicated, this isn't tax per se, but there's an analog. Just as people try to arbitrage the global tax system, financial institutions may try to arbitrage the global regulatory framework. As the FSB includes 27 countries, there has been a robust commitment and considerable progress to raising the standards of regulation and supervision in those countries. What we don't want is for other countries not to live up to those standards and then for those standards to get arbitraged.

As part of the FSB's initiative, there's an initiative to ensure that other countries are also living up to those standards. The principal way to do this, somewhat similar to the tax situation, is to get information exchange agreements. To make that concrete, suppose you're a securities regulator in Germany and you're overseeing a company that has activities in, say, an offshore financial centre somewhere else. What you need is an information exchange agreement with that offshore jurisdiction so that the securities regulator in Germany can get a line of sight to the company's activities in the offshore financial sector.

With the support of the IMF, and IOSCO, which is the international standards setter for securities regulators, there has been a robust effort to engage in these information exchange agreements. It's not perfect, but it is working, and a lot of these have been signed. The number of jurisdictions that are not cooperating is very low. By putting focus on this, countries have been brought to the table and they are getting on with it. They are signing those agreements, and that needs to continue.

9:40 a.m.

Governor, Bank of Canada

Mark Carney

If I may add very briefly to this, what's important in the process that Mr. Macklem described is that it has to be coordinated across the major jurisdictions. There has to be development of a list of the jurisdictions that are most—let's be neutral on this—potentially problematic. There should be a sort of systematic addressing of that, and a reward, if you will, if you're a compliant jurisdiction versus a non-compliant jurisdiction.

Ultimately, those concepts need to be put in place in order to make steady progress on this. I'll leave it there.

9:40 a.m.

Conservative

The Chair Conservative James Rajotte

Thank you.

Thank you, Mr. Rankin.

Mr. Braid, please.

9:40 a.m.

Conservative

Peter Braid Conservative Kitchener—Waterloo, ON

Thank you very much, Mr. Chair.

It's great to be here today as part of this distinguished group at the finance committee.

Thank you, gentlemen, for your presentations today.

Mr. Carney, you describe the Canadian economy as being on a steady rise. You indicate that you project that we would return to full capacity by 2015, in about nine quarters.

Just for clarity, could you define “full capacity” for us?

9:45 a.m.

Governor, Bank of Canada

Mark Carney

Let me say at the outset that there is some uncertainty about the exact level of capacity or potential in the economy, the level of the economy. But we do a variety of estimates, and then we at the governing council—Mr. Macklem, myself, and four deputy governors—use our judgment, on top of very statistical techniques, to both estimate the level of potential.... Currently we think the level of potential is about 1.25 percentage points above the level at which the Canadian economy is operating at present, so there's what we call a material output gap, a difference between the level at which we're operating and the level of the economy.

The other thing we very importantly have to estimate, and we update this every October, is the rate at which that level of potential grows: Canadians come into the workforce, they work additional hours, there's productivity growth. The sum of those two, the so-called labour input and productivity growth, is the rate of growth of potential in the economy.

Again, it's an estimate. Different people can have slightly different opinions. But it's very important for us to develop that estimate, because over time the difference between the level at which the economy is operating and the potential of the economy has an impact on inflation in Canada, and therefore we calibrate monetary policy appropriately.

Right now we see about a 1.25 percentage point difference between the level of potential and where the economy is operating. Our estimate, as of last year, which holds for today, is a 2.1 percentage point rate of potential growth.

In this quarter, the second quarter, we estimate that the Canadian economy will grow about 1.8 percentage points, but as of the third quarter and fourth quarter, the average of those two is about 2.5 percentage points of growth. So we would start to close that gap—just following the math—and have the impact.

9:45 a.m.

Conservative

Peter Braid Conservative Kitchener—Waterloo, ON

Great. Thank you.

Now, one of the ways to reach our full potential is to leverage and enhance current strengths of the Canadian economy. Could you elaborate, from your perspective, on what you think those current strengths of the Canadian economy are that we need to further leverage?

9:45 a.m.

Governor, Bank of Canada

Mark Carney

There are two aspects to it. I'd answer it slightly differently, in the sense that there is unused potential, and it's a question of ensuring that we have the demand to close the gap. That demand takes various forms. Particularly important for our projection will be a pickup of business investment, and also gradually a pickup of exports.

I mentioned earlier to Mr. Adler that we have, in our view, a conservative forecast for exports in Canada relative to global demand, but that's based on some underperformance in the past.

So those are the two elements that would pick up on the demand side. But in reaching our full potential, I would almost change it slightly, I think, in the spirit of the question, which is that it's a question of further developing our potential.

We have a big demographic challenge in this country, an issue that this committee has studied in the past. We're at a phase where that contribution from labour input right now is about 0.7 to 0.8 percentage points of that 2.1. Five years back, it was about 1.5 percentage points of growth, because we were just that much younger as a population and the increase in participation of all strata of society was such....

What we need, in order to keep that speed limit up, is to grow productivity in this economy. That's going to take investment. That's going to take skills development. That's going to take flexibility of the Canadian labour market.

Our contribution at the bank to all of this is to deliver price stability and contribute to delivering financial stability so that all those good things can happen in an environment of relative certainty.

9:45 a.m.

Conservative

The Chair Conservative James Rajotte

You have time for one brief question, Mr. Braid.

9:45 a.m.

Conservative

Peter Braid Conservative Kitchener—Waterloo, ON

As my final and very brief question, you also mentioned, Mr. Carney, that the price gap between the U.S. and Canada is closing. What factors are driving that?

This is a good thing, of course.

9:45 a.m.

Governor, Bank of Canada

Mark Carney

It is a good thing. The question is whether it's sustained. Obviously, we watch it closely, as others do, but it has moved down from the upper teens to just about south of 8%, which is our most recent figure on that.

There are a couple of factors, one importantly. The tariff adjustments make a difference on the margin. The competition has increased in the retail sector. There have been a number of foreign entrants that have increased competition. As a result, there has been an adjustment there, we think.

Another form of competition is cross-border shopping, which has gone up. I know that's not a favourite of Canadian retailers, but on the margin, that has adjusted the price gap as well.

We should say there are some factors in Canada that may mean we'll never fully close that price gap, given our geography, distribution costs, relatively higher wages, and other factors that we can get into if you wish.

9:50 a.m.

Conservative

The Chair Conservative James Rajotte

Thank you. Thank you, Mr. Braid.

We'll go to Ms. Glover, please, for your round.