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.
Conservative
Conservative
NDP
Hoang Mai NDP Brossard—La Prairie, QC
Thank you, Mr. Chair.
I would like to use my time to ask Mr. Carney to complete his reply to the question asked by my colleague, Mr. Caron.
Governor of the Bank of Canada
As regards this situation, to a certain extent, we can sum it all up with the issue of Dutch disease. Several people have already spoken about this issue.
First of all, I think that everyone would agree that natural resources have given Canada some excellent opportunities. Secondly, we must recognize that having a weaker currency does not comprise a plan, it is a hope.
I should be careful, and say this in English. To have a strategy that relies on a weak currency—not that you're advocating it—is not wise. It's not wise for businesses or for public authorities. There are a variety of factors that will determine where the currency is. In an environment where safety, fiscal soundness, resources, and sound financial systems are valued, as they are at present, all those factors will support the currency.
The third thing to say is that there are tremendous opportunities for this economy—some of them are being realized, but more can be realized—to capture more of the value-added from our resource sector.
Fourth, there are tremendous opportunities to export knowledge around resource productivity, as I referenced earlier. We can make our economy much more productive in its use of resources, in its energy efficiency, across a range of areas. That is a tremendous gain for this economy from a productivity perspective, but it's also a tremendous export: productivity.
Fifth, not to simplify, but in our opinion there is a symbiotic relationship that comes from engagement with these major emerging markets that opens up other opportunities across a range of consumer goods—cultural exports, management of digital commerce, mass customization, and other true export opportunities—that would also reverberate back positively on our economy.
That being said, to some extent, your colleague's question focused on this idea of an adjustment. Yes, the Canadian economy will go through an adjustment. We have already seen the manufacturing sector proportion of Canadian GDP drop by 20 percentage points. Currently, this percentage is standing at 12.5.
NDP
Hoang Mai NDP Brossard—La Prairie, QC
When you were discussing natural resources and sustainable development, you stated that sustainable development was necessary. Could you explain the advantages of sustainable development to the Canadian economy?
Governor of the Bank of Canada
As I just explained, the advantages would be increased productivity in resource utilization. This is an immediate and direct benefit here, in Canada. This is also an opportunity for the export
of this skill and the products associated with it.
Nearly 85% of all resource market opportunities are found in the emerging countries. This is a huge export opportunity.
Conservative
Conservative
Brian Jean Conservative Fort McMurray—Athabasca, AB
Thank you, Mr. Chair.
Thank you for attending today.
I've had to change my questions, because you kept answering them. That's the advantage of being last, I suppose.
You mentioned that there's no real silver bullet in relation to this major threat to the economy. There are a number of things that can be done in relation to household debt. In particular, there is, of course, reducing indebtedness, not taking on new debt, and locking in long-term or short-term loans and mortgages, etc., right now. There is also, of course, as you mentioned, productivity and growing personal income.
I want to talk about two particular things I think would benefit our economy—both personal economy and the economy in general. The first is the impact on the Canadian economy of the natural resources sector, and not just the site-specific impact. Some people say, for instance, that the only people benefiting from the oil sands are northern Albertans. I live in Fort McMurray, but I don't know many people, of the 130,000 people who live there, from northern Alberta.
The second thing, of course, is labour mobility. They are tied together. Of course that's how in our country we can be very quick in a recovery, because we have so many opportunities.
I'm going to use two examples. The first is the Northern Gateway. You mentioned that we're selling our crude right now for $40 less than we could get in the market if we actually had more pipeline capacity. That was the infrastructure you talked about. In that particular case, even though the oil is from the Fort McMurray area, the reality is that the proposal in place is to build and maintain a pipeline that goes into northern British Columbia and to profit-share with the aboriginals whose land it goes through.
There is also the tax base. I think somewhere in the neighbourhood of $5 billion a year currently comes from the oil sands, for instance. I've looked at some of the numbers. Currently governments are receiving somewhere around $5 billion a year. Based on the expected growth, my gross estimate would put it somewhere around $20 billion per year by 2035, based on projections, by the American government, of somewhere in the neighbourhood of 4.3 million barrels a day.
In the speech in Kitchener--Waterloo you said that one out of twelve oil sands manufacturers and suppliers are from Ontario,
...and Ontario’s exports to Alberta of mining-related services grew 44 per cent in the last year measured. The opportunity to capture more of the value added in commodity production from energy to agriculture remains a tremendous opportunity for all of Canada.
Now, in that statement, which I agree with wholeheartedly, were you speaking in particular of the opportunities for growth in the oil sands, the growth in getting the value added, and the growth from making sure that we get fair market value and don't have just one customer, as we have in the United States?
Governor of the Bank of Canada
All of the above, and even more, if I may. What I was trying to do in that speech was address some of the broader implications and the broader opportunities Canada has on the export side through the diversification of trade.
Let me go to the core of your question.
If we look at the resource sector as a whole, it's a little more than 5% of employment. In the country, it's about 45% of the exports of the country at present. And it is about 11% of GDP. All those figures have gone up in the course of the last several years, as you would expect.
As members will well appreciate, the resource sector in Canada is much larger than just the energy complex. It includes, importantly, metals and mining. We look to the scale of opportunities that exist across the country, notably in northern Quebec and Labrador, and that are currently being developed. They are resulting in considerable additional investment and should result in considerable investment for some time.
You mentioned labour mobility. About a third of the interprovincial mobility has been into Alberta and Newfoundland, even though the combined population of those two provinces is about an eighth of the Canadian population. You see it in Fort McMurray. One sees it in Newfoundland. It's not just Newfoundland going to Fort McMurray any more. It's people from across the country going in both directions, given the scale. That is the strength of the Canadian economy. These are difficult decisions—to move—for people to make.
Conservative
Brian Jean Conservative Fort McMurray—Athabasca, AB
I have 30 seconds left, and the chair is very strict.
So you see a real correlation, and possible success and an acceleration of Canada's success, through encouraging labour mobility into these areas that have potential needs to exploit the natural resources.
Governor of the Bank of Canada
It's part of the adjustment. But as you referenced in your initial remarks, other mechanisms spread the returns across the country, including through other revenues of the federal government that come from these resource developments and through upstream suppliers and potentially through infrastructure, which isn't necessarily just export-oriented infrastructure but could be pan-Canadian infrastructure as well.
Conservative
Conservative
Shelly Glover Conservative Saint Boniface, MB
Thank you, Mr. Chair.
There's been a shuffle since we left for our break. I want to welcome our new members back to committee. We did have a very good working relationship with both Ms. Nash and Mr. Marston.
Mr. Caron, welcome. This will be most pleasant.
Governor Carney and Deputy Governor Macklem, I want to ask you two questions. I'll give you a heads-up as to what they're going to be: I'm going to ask you about the penny and then I'm going to turn to the IMF reforms.
Governor, you and I seem to have this tradition of always talking about our currency when we get together. The reason I want to ask you about the penny is that the penny is made in St. Boniface, which is my riding back home in Winnipeg. As you know, budget 2012 is looking to eliminate the penny. But some have said that they have some concerns that the rounding mechanism may lead to having some kind of inflationary effect. I do know that the bank produced a report in 2005 that demonstrated that the inflationary impact of eliminating the penny would be small or relatively non-existent. So I'd ask you to comment on the study that was made, particularly with respect to the offsetting effects of the rounding.
Governor of the Bank of Canada
Yes, we share a numismatic obsession, I guess, is the point. It's a pretty small club, but we're there.
The first thing in terms of the study is we can provide that to the committee, if it's of interest. We provided the core conclusions of it to the Senate committee that studied this issue a few years ago. Deputy Governor Duguay presented it.
There is experience, and I will get to that in a second, but the first thing to recognize on the issue of rounding is the penny question should only be a question for cash transactions. That's when you use pennies, leave them, or pick them up.
Of course it matters how many items you get. We all think of the $1.99 price. Are they going to round up to $2 or down to $1.95? It matters how many items you buy at the time you're at the till, and where they round up to at that point. They don't necessarily round up to 0.99.
So first, it's only cash, and second, it's how many you get. Third, it's post-tax, as well—sales tax and GST vary by province. The fact is if you're using electronic payment there's no need to make this rounding decision.
The important point as well is that there is experience here. There's experience in New Zealand and Australia. In the case of New Zealand there's the elimination of the one-cent, two-cent, and the nickel. The experience is that there is no discernible.... There are rounding rules. People round down when it's appropriate and they round up when it's appropriate. The fact is that with competition retailers are held accountable, and they know how to serve their customers. So experience shows that it's not inflationary. This deals with a much smaller subset of transactions than one initially thinks.
And the last point, which is not where we would start on this, is it's a penny: we're talking about a penny move. In terms of the overall level of inflation, it is quite modest.
Even all of that said, the experience has been that you get both up and down as appropriate. It's relatively small in terms of the overall transaction, and there's no discernible effect. That is our perspective on what will happen with the elimination of the penny here.
Conservative
Shelly Glover Conservative Saint Boniface, MB
I appreciate that. Hopefully it will reassure those who have concerns.
On the IMF reforms, as you heard recently, our finance minister was in Washington for G-20 meetings and talked a great deal about the IMF's response to the European debt crisis. Specifically, our minister questioned the troika system that is being applied by the IMF in Europe, whereby the agency jointly monitors aid to European countries with the European Union and the European Central Bank.
As Minister Flaherty noted—and I'm going to quote him—“That's not the traditional way the IMF operates. Traditionally, the IMF would direct what needed to be done.”
Could you explore more fully the concerns raised by Canada and explain why the IMF should perhaps re-examine its quest to find sustainable solutions in this crisis?
Conservative
The Chair Conservative James Rajotte
About 30 seconds are left in this round, so we may have to return to this as well. If we could have a brief answer, then we'll return to it.
Governor of the Bank of Canada
Yes, I'll answer very quickly and then maybe we should return.
This is an unusual situation. It grows out of the fact that European authorities are providing, in the program countries—Ireland, Portugal, and Greece—about two thirds of the funds, and one third is coming from the IMF. The minister has raised the issue whether this is appropriate going forward if there were to be other programs. What we succeeded in having underscored is that this is a concern shared by a number of countries. What was clear in the communiqué of the G-20, and understood around the table, is that there should be strict IMF-level conditionality for any new programs, an IMF standard conditionality for any new programs. Now, how exactly that is constructed was not detailed. But it's important to ensure that any potential future IMF lending continues to be done to the high standards of the fund.
Conservative
NDP
Peggy Nash NDP Parkdale—High Park, ON
Thank you.
I'll continue on the issue of Europe and the sovereign debt crisis for some European countries. Obviously with measures that are being taken, there's going to be reduced spending, and the differential between what banks now have to keep on hand as a security measure versus what they lend will have an impact on economic growth. This will obviously have an impact globally and some impact on Canada.
Given this ongoing debt crisis—and there have been a number of measures taken—what is the potential impact on Canada? What would the impact be if a major country, such as Spain, defaulted on its debt?
Governor of the Bank of Canada
The situation in Europe remains challenging, without question. We welcome the measures that European authorities have taken to improve economic governance, to put in place a fiscal compact, the major structural reforms that have been taken and are agreed and are beginning to be implemented in Italy and Spain particularly. We welcome also the moneys that Europeans have put into the so-called firewall through various measures, and that firewall potentially augmented, subject to the last discussion, by the resources in the IMF.
All of that, from our perspective, suggests that the situation in Europe, as difficult as it is, remains contained. And over the course of our projection, our expectation or assumption is that the situation will remain contained. Now, unfortunately, if you're European, if you're living in Spain or Italy, containment vis-à-vis Canada isn't going to feel that nice. A severe recession has begun in those countries. We see Europe only weakly coming out of recession later this year. The risks are still there, and there are risks around the eventual resolution of this, because fundamentally this is not just a fiscal challenge, not just a banking challenge. In fact, our view is that those situations are more a manifestation of a fundamental balance-of-payments problem that exists within the European monetary union.
What's the potential impact on Canada? In an environment of containment, where Europe is having a recession--mild growth, but not spillovers, because of potentially the example you used.... I'm not endorsing that example, but one can think of scenarios that would have spillovers across financial markets. We're not expecting that in the course of our projection. If that were to be the case, through both the financial channel—things tighten up in financial markets across a range of financial markets—and through the confidence channel, where businesses and Canadians would adjust because of uncertainty, it would be a material impact on our projection. It would have a potential to adjust, certainly, the outlook for activity growth in Canada and potentially the outlook for inflation, all other things being equal in Canada, which would potentially have an impact on the path of monetary policy in this country.
The last thing I'll say is just to assure the committee that we are engaged with European authorities, with authorities of the IMF, with my fellow central bank colleagues virtually on a daily basis on this issue and are as well informed as anybody about the potential evolution here.
NDP
Peggy Nash NDP Parkdale—High Park, ON
I have one quick supplementary question on the IMF European firewall. Canada has so far declined to provide any money to that firewall. Can you briefly describe the pros and cons of Canada deciding to add to that firewall?
Governor of the Bank of Canada
This is a decision of the Government of Canada, not the Bank of Canada, as you can appreciate. One of the major issues was highlighted by the previous question, and that is the structure of conditionality—the way money has been dispersed and potentially will be dispersed in future programs. We're concerned about getting the governance right and having the governance of potential future programs be more consistent with previous lending. That's the first point.
The second point is on having a firewall developed out of Europe, where they have immense resources, or developed in conjunction with the IMF or others. The value of this is that the process of adjustment in a number of European economies to solve the underlying balance of payments and fiscal and banking issues will take some time. It will be measured in years, not weeks, weekends, or months. Over the course of that time it is possible that access to markets will not be there, or won't be there on sustainable terms, and there will be a need to draw on these resources. So having sufficient resources to address that possibility is advisable. That's the main argument in favour.
The argument against is partially around governance and resources provided from Europe. Ultimately it's a Government of Canada decision.
The last point is that this all has to be looked at in the context of current resources of the IMF. Are they adequate for potential eventualities? Judgments can be made around that as well.
Conservative
The Chair Conservative James Rajotte
Thank you.
Thank you, Ms. Nash.
I'm going to take the next slot, as the chair. It's challenging, because there are a lot of big questions and a lot of issues we'd like to raise with you.
Governor Carney, perhaps I'll raise a couple of issues. Then there's a third section I want to get your particular response to today.
The first one is on page 29, where you talk about ongoing competitiveness challenges. If you went back ten years and made a list of the things the Government of Canada should do to address productivity or competitiveness, I'd say we have probably fulfilled nine or ten out of the ten—both this government and the past government. In fact many of those changes were made when the two of you were at the Department of Finance, so you're well aware of them. It is a big policy question in terms of how we address the competitiveness issue. So if you have anything further on that, either today or at a later date, I'd certainly appreciate that.
On the second item, in response to Ms. McLeod you talked about the federal government's approach to debt. I wonder if you have any comments about the debt situations of any provinces, particularly the two large provinces of Ontario and Quebec.
The third area is banking sector reforms, and this is the area I'd like you to spend most of your time on. The president of the CBA gave a speech recently in which he said we should perhaps look at pausing on future reforms. I want to get your remarks on the consequences of implementing the Volcker rule, and any comments you may have on the regulation of the shadow banking sector, in your role as governor and also in terms of the Financial Stability Board.
