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Evidence of meeting #53 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 recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

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

3:35 p.m.

Conservative

The Chair Conservative James Rajotte

I call this meeting to order.

Good afternoon, ladies and gentlemen. It's a pleasure to be here today to welcome, pursuant to Standing Order 108(2) and our study on the report of the Bank of Canada on monetary policy, our witnesses today, the Governor of the Bank of Canada, Mr. Mark Carney—welcome, Mr. Carney—and the senior deputy governor, Mr. Tiff Macklem.

Thank you for being with us here, gentlemen. If I could just indulge you for two minutes, we have a couple of housekeeping items to deal with.

We have a motion by Mr. Mai. Also, we should welcome back to our committee Ms. Nash and Mr. Marston, et bienvenue à M. Caron au Comité permanent des finances. Welcome to the committee.

Mr. Mai, you have a motion to move very quickly, please.

3:35 p.m.

NDP

Hoang Mai NDP Brossard—La Prairie, QC

I will quickly read the motion:

That the Standing Committee on Finance resume its study on tax evasion, that the evidence and documentation received by the committee during the third session of the 40th Parliament on the subject be taken into consideration by the committee in this session, that the committee further examine international tax planning in order to ascertain emerging best practices in foreign jurisdictions, and that the committee make recommendations to the Government of Canada to combat tax evasion and the use of tax havens.

Mr. Chair, I believe you will find unanimous consent for this motion.

3:35 p.m.

Conservative

The Chair Conservative James Rajotte

Okay.

Very briefly, I'll recognize Ms. McLeod, please.

3:35 p.m.

Conservative

Cathy McLeod Conservative Kamloops—Thompson—Cariboo, BC

Thank you. I'll just speak briefly.

Certainly we will be pleased to support the motion. It's always good to finish work. I appreciate the opposition indicating it will not repeat a lot of the work that had been done in the past, and we'll pick up. So again, we're pleased to support this important motion.

3:35 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you.

All in favour?

Mr. Brison, you want to speak to this.

3:35 p.m.

Liberal

Scott Brison Liberal Kings—Hants, NS

Mr. Chair, we support this motion. We think it actually builds on some of the work the committee has done in the past. It's an important opportunity to evaluate best practices.

I think some of our work internationally in terms of cooperation with other governments makes this a particularly important area of public policy, where we can address this constructively and in a non-partisan way. So I support Mr. Mai's motion as well.

3:35 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you, Mr. Brison.

(Motion agreed to)

I see that being unanimous. Thank you very much, colleagues.

Mr. Carney, Mr. Macklem, thank you so much for being with us. As you know, we have this session twice a year with you, and committee members appreciate it very much.

Mr. Carney, I believe you have an opening statement and then you'll have questions from members. Please begin your opening statement.

3:35 p.m.

Mark Carney Governor of the Bank of Canada

Thank you very much, Chair.

Good afternoon, members. Tiff and I are very pleased to be with you today to discuss our April monetary policy report, which the bank published last week. In it we note that the profile for global growth has improved since the bank released its January MPR. Europe is expected to emerge slowly from recession in the second half of this year, although the risks around this outlook remain high.

The profile for U.S. growth is slightly stronger. This reflects the balance of somewhat improved labour markets, financial conditions and confidence on the one hand, and emerging fiscal consolidation and ongoing household deleveraging on the other. Economic activity in emerging market economies is expected to moderate to a still-robust pace over the projection horizon, supported by an easing of macroeconomic policies.

Commodity prices remain elevated owing to improved global economic prospects, supply disruptions, and geopolitical risk. In particular, the international price of oil has risen further and is now considerably higher than that received by Canadian producers. If sustained, these oil price developments could dampen the improvement in economic momentum.

Overall, economic momentum in Canada is slightly firmer than the bank had anticipated in January. The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated. As a result, business confidence and household confidence are improving faster than forecast. The bank projects that private domestic demand will account for almost all of Canada's economic growth over the projection horizon.

In particular, household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the single biggest domestic risk. Business investment is projected to remain robust, reflecting solid balance sheets, very favourable credit conditions, continuing strong terms of trade, and heightened competitive pressures.

The contribution of government spending to growth is expected to be quite modest over the projection horizon, in line with recent federal and provincial budgets. The recovery in net exports is likely to remain weak in light of modest external demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

The bank projects that the economy will grow by 2.4% in both 2012 and 2013 before moderating to 2.2% in 2014. The degree of economic slack has been somewhat smaller than anticipated, and the economy is now expected to return to full capacity in the first half of 2013.

As a result of this reduced slack and higher gasoline prices, the profile for inflation is expected to be somewhat firmer. After moderating this quarter, both total and core inflation are expected to be around 2% over the balance of the projection horizon as the economy reaches its production potential, the growth of labour compensation remains moderate, and inflation expectations stay well anchored.

Despite recent improvements to the outlook for the global and Canadian economies, risks remain elevated. The three main upside risks to inflation in Canada relate to the possibility of higher-than-expected oil prices, stronger-than-expected growth in the U.S. economy and stronger momentum in Canadian household spending.

The two main downside risks to inflation in Canada relate to the reintensification of sovereign debt and banking concerns in Europe, and the possibility that growth in Canadian household spending could be weaker than projected.

Overall, the bank judges that the risks to the inflation outlook in Canada are roughly balanced over the projection period.

Reflecting all of these factors, on the April 17 the bank maintained the target for the overnight rate at 1%. In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2% inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.

With that, Mr. Chair, Tiff and I will be pleased to take members' questions.

3:40 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you, Mr. Carney, for your presentation.

We'll begin members' questions with Ms. Nash, please.

3:40 p.m.

NDP

Peggy Nash NDP Parkdale—High Park, ON

Thank you very much.

Welcome. It's good to see you again.

You say in the report that one of the biggest challenges we're facing in Canada is the level of household debt or personal debt, and these debt levels are unsustainably high, especially with the likelihood of interest rates eventually rising. With these record levels of household debt, and persistent borrowing in spite of the economic conditions, what are the real risks that Canadian households face, and what are the risks to the Canadian economy?

3:40 p.m.

Governor of the Bank of Canada

Mark Carney

Thank you.

Just as one point of clarification, if I may, we didn't say that the levels of household debt are unsustainably high. We were talking about a dynamic in one of the technical boxes of a steady increase in home equity lines of credit. That's an unsustainable dynamic over time that is going to reach a new equilibrium and move from there.

But I think the thrust of your question is on point, which is that this is the biggest single domestic risk to the Canadian economy: the level of household debt and associated developments in the housing market. We have highlighted in the report that this is the major risk to the downside.

I would observe as well that the pace of accumulation of household debt has slowed over the course of the last two years. It has gone from running at a rate of about 9% or 10% per year to present figures, which are around 4% per year.

We think that is in part due to measures that have been taken, not least by the Superintendent of Financial Institutions, to tighten home equity line of credit underwriting standards to increase the capital standards for Canadian banks faster than they are being increased internationally, and in part due to measures that have been taken by the government on three separate occasions to tighten the mortgage insurance rules managed by CMHC, which helps reduce high-ratio mortgages.

But the point, we think, is that Canadians need to continue to be prudent in this environment—interest rates are exceptionally low—when taking on long-term debt, such as for mortgage rates, which are not always going to be this low. Indeed, in our projection we foresee the possibility of some withdrawal of this monetary stimulus over the course of the projection period. So in taking on new debt, Canadians need to think about the carrying cost of that debt over the lifetime of the loan or the mortgage, size it appropriately, and decide between the terms—fixed or variable—appropriately.

I will note as a final point that what we've also seen in recent months is that the proportion of variable rate debt on new debt that's being taken on—new mortgages that have been taken on—has gone down quite substantially and is running in the low teens at present.

3:40 p.m.

NDP

Peggy Nash NDP Parkdale—High Park, ON

So people are locking in.

3:40 p.m.

Governor of the Bank of Canada

Mark Carney

New debt is locking in. The question is whether existing debt is similarly doing the same. Yes.

3:40 p.m.

NDP

Peggy Nash NDP Parkdale—High Park, ON

So there are individual measures that people will take and will try to take. Are there further measures that the government can take? I guess I'm wondering, in the context of an era of government restraint and decreasing public investment, what impact you think that will have on the level of household debt. Are there further measures that the federal government can take to reduce household debt?

3:40 p.m.

Governor of the Bank of Canada

Mark Carney

I assure the member that authorities—the bank, the superintendent, CMHC, and the Government of Canada—are cooperating closely and monitoring the situation. As I referred to in my earlier remarks, a number of measures have been taken, both by the superintendent and by the government. We have a heightened vigilance with the underwriting practices of the banks, so on the supply side there's a variety of measures that have been taken and are resulting in the slowing of the accumulation.

There's always more that could potentially be done, but with these measures there has to be an element of prudence in balancing the pace of the slowing of this phenomenon with the underlying growth of the economy. Now, the housing sector is an important part of the economy; it's not the most important part of the economy. Our focus is on ensuring that this is a sustainable development in the housing sector going forward.

The combination of measures that have been taken, and a clear-eyed perspective of Canadians—which I think they have—that we are in exceptional circumstances in terms of interest rates and we won't always be in those exceptional circumstances, will do much to manage the issue.

3:45 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you.

Thank you, Ms. Nash.

We'll go to Ms. McLeod, please.

3:45 p.m.

Conservative

Cathy McLeod Conservative Kamloops—Thompson—Cariboo, BC

Thank you, Mr. Chair.

Certainly it is always a pleasure to have you here and to get the updates.

When the budget was recently released I looked at the 2009 budget, and at that time, of course, we were heading into a global recession and were looking at stimulus spending. It was certainly indicated we were going to have short-term stimulus spending. In two years, the 2009 budget was saying, we were going to get back to a balanced budget. I think it was looking at 2014-15.

In essence, when I looked at the most recent budget it looked as if we had been following the plan in a pretty effective manner. Certainly I recognize there have been lots of storms and buffeting along the way and lots of changes in the forecast. So I'm really pleased to see that you're looking at the improvement and also the revision and expectations for real GDP growth in 2012 to 2.4% holding steady.

Certainly there are people who have said we need to continue with deficit spending. So at this point could you talk about the importance of a balanced budget and what the results for Canada and other western countries will be if they don't address their fiscal imbalances and continue to engage in a prolonged period of deficit spending without moving toward balanced budgets?

Could you perhaps look at how Canada is doing and where we're going and also talk briefly about some of the other countries in the G-8, in terms of how effectively they're moving back toward their targets?

3:45 p.m.

Governor of the Bank of Canada

Mark Carney

We meet today in an environment where there is certainly enhanced scrutiny by investors on the fiscal positions of all governments: federal, provincial, advanced economy or emerging markets. A premium is placed on fiscal sustainability. That means credible paths back to a budget balance level that is consistent with a sustainable level of debt. Depending on the starting point that can be a balanced budget, it can be a surplus, or it can be a small deficit. It depends on the initial stock of debt and the underlying strength of the economy.

So there is no question that sovereign risk is bearing heightened scrutiny by investors and that a variety of governments around the world, particularly in the advanced economies and across the G-7, are challenged with getting this right and getting the balance of the path of l'assainissement budgétaire, the consolidation of deficits, on the right path. I would note that one of the challenges that face some of the major European economies that are most in the sights of the markets is that there is the challenge of the pace of growth of expansion of nominal GDP, which has a pro-cyclical impact on efforts to reduce deficits and makes it even more challenging for them. One needs to look through to the underlying measures that are taken.

That said, to put Canada in context, Canada is in a leading position within the G-7 in terms of our combined government finances. If you look on a net debt-to-GDP ratio, it's lower than all other G-7 countries. Our deficit path is second to Germany. Given the underlying growth of the economy and measures that have been taken at all levels of government, federal and provincial, there is a strong sense of confidence in markets that is evidenced in our spreads on our bonds to other international bonds, on our spreads on credit default swaps, a strong level of confidence in the credibility of those plans.

3:50 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you, Ms. McLeod.

Mr. Brison, please.

3:50 p.m.

Liberal

Scott Brison Liberal Kings—Hants, NS

I would like to thank the governor and deputy governor for being with us. I want to commend them for their continued important work during difficult times and also to commend the governor for his work globally as chair of the Financial Stability Board.

Governor, back in October you said that you found some elements of the occupy movement protests entirely constructive. You said in an interview that you acknowledged the movement is an understandable product of an increase of inequality, starting with globalization and then made worse by the financial crisis. You said, “You've had a big increase in the ratio of CEO earnings to workers on the shop floor and then on top of that, a financial crisis”.

How important an issue do you believe income inequality is for Canada?

3:50 p.m.

Governor of the Bank of Canada

Mark Carney

Thank you for the question.

First a couple of points of context. Income inequality in Canada has increased, as it has for all OECD countries, over the course of the last two decades. That said, Canada is in sort of the middle tier as measured in the degree of income inequality. There are quite substantial differences between income inequality in Canada before tax-and-transfer and income inequality after tax-and-transfer. It reduces it quite a bit. The Gini coefficient is something like 0.32 for the former, 0.26 for the latter.

That said, as you referenced in your question, there are some big forces that are feeding inequality globally. It starts with trade, which brings tremendous opportunity as well but pushes inequality. Technology and the ability to use technology.... What we're seeing across the OECD, and also very much in Canada, is that the returns to education are much higher.

So is this a big issue? Yes, it's an issue, because it's pointing to differential realizations, if you will, of the opportunities that are being created in the global economy. And if I may, that sort of leads to potentially the approach that can be taken and has been taken in the past here, which is to create greater equality of opportunity in this country.

3:50 p.m.

Liberal

Scott Brison Liberal Kings—Hants, NS

Should Parliament study and address the issue of income inequality?

3:50 p.m.

Governor of the Bank of Canada

Mark Carney

That's obviously a question for the committee to consider.

What I would underscore is that the forces behind this phenomenon affect all major economies. They are longer-term forces, not short-term cyclical forces. Understanding those, and designing policies that address them constructively, is a challenge that all major advanced economies face. So I'd leave it to you to decide.

From the Bank of Canada's perspective, let me say two things, if I have time, Chair. Our single biggest contribution to this issue is to meet our inflation-targeting mandate, because the one thing we know from hard experience is that inflation and inflation volatility hit the worst-off in our society the most. Others can hedge themselves.

The second thing I'll say, which is from an equality or fairness perspective--and you've referenced that quote.... One of the points I was trying to make in my comments, and maybe made poorly, was that one of the issues of fairness is whether the financial sector is special versus every other sector of the economy. In other words, if you have a family farm, crop prices are down, and you have a bad harvest, what things happen? If you have a small business or if you have a big business and you make a series of mistakes, or things move against you, or international competition, you fail. If you have a large financial institution.... What we learned during the financial crisis is that you have to be rescued. And those were legitimate decisions made in economies outside Canada; we didn't have to take these decisions.

But that should change. And a large part—not all of it, but a large part—of the agenda on financial reform, both globally and here in Canada, is to end “too big to fail”, which brings back a true element, in our opinion, of fairness to the system and addresses some of these issues.

3:55 p.m.

Conservative

The Chair Conservative James Rajotte

You have ten seconds.

3:55 p.m.

Liberal

Scott Brison Liberal Kings—Hants, NS

Okay.

TD Bank estimates that the housing market is overvalued by 10% to 15%. Craig Alexander is saying that it could have a significant impact with a correction. Have you done a study on overvaluation? What would be the percentage—