Finance Committee on Aug. 19th, 2011

[Mark Carney]

Should I take that as a comment, or is that a question?

[The Chair, Conservative, James Rajotte]

You could deflect it to Mr. Macklem if you want.

[Mark Carney]

He's got a one-way ticket to India, and we won't be seeing him.

[Some hon. members]

Oh, oh!

[Mark Carney]

I will say the following: as we've said in the past in terms of elaborating on the specifics of the contribution of the various measures of various levels of government, particularly last year in 2010 when they were most direct, about a third of the growth in our economy was a result of these measures and the multipliers that came from those measures. That was valuable, obviously, because it was at a time of extreme weakness abroad.

It also has to be said that there was a more tentative response of our corporate and business sector at that time than we saw in the U.S. or in Europe, which were at the heart of the crisis. There was more of an investment strike, if you will, at the time. On our business side that has now turned around, and it coincides with the withdrawal of some of the stimulus.

The government is continuing to spend, and smart spending will continue to be important. We've talked about the diversification of markets and the growing of markets as being absolutely essential, as is creating a constructive environment for foreign investment and long-term capital in Canada, as I've tried to emphasize.

Let me make this point: in general, this country is not going to have a problem having access to capital. The question is, what do we do with that access to capital? Do we all enlarge our homes, or do we build our productivity? Do we enlarge our export capacity? Do we consume it, or do we invest it?

There's a right mix, and individuals and businesses have to make those decisions. This is one of the issues that we should collectively be alive to, because in this global environment where capital is looking for a home, Canada is an attractive home; however, it's then incumbent on us and on Canadians to use that capital effectively for the long term.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. Glover.

We'll go to Mr. Marston, please.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you, Mr. Chair, and welcome again to our guests.

It's my understanding that since 2006, the reductions in corporate tax rates in Canada have removed about $45 billion from the Canadian government's fiscal capacity to address the needs of Canadians. We see this government relying on finding savings in government operations and in growth to address the deficit we're now facing.

Could you share with the committee the latest projections of the Bank of Canada in regard to growth and comment on the implications of those projections for inflation and interest rates in our country?

[Mark Carney]

Our most recent projection is the one contained in the July MPR. For the benefit of the committee, I could talk about the process and then ask Mr. Macklem to give some details.

What the bank does is provide full projections four times a year, coinciding with the publication of the MPR. Our next full projection will come out in October. We release that projection to all Canadians at the same time. Obviously, as events happen--positive or negative, domestically or internationally--we update our thinking constantly on where the economy is going. What we do not tend to do is provide a real time, three-decimal place updating of our projections for growth in Canada and growth abroad, etc. We give indications of where things are going, but we're not introducing added volatility from real-time monitoring.

As a last word of introduction, in our view the broader outlines of what we projected in our July monetary policy report, particularly with respect to the domestic economy, still hold. What's changed is that some of those external downside risks have been realized: there is weakness in the U.S., as we've talked about, and weakness in Europe, and there are other factors that will cause challenges on the export side. There is a little tightness in financial conditions as well.

Tiff, could you elaborate?

[Tiff Macklem]

I'll say a few words with respect to the dynamics.

In our July monetary policy report, we were already expecting a fairly weak second quarter, partly as a result of the supply chain effects relating to the earthquake and subsequent disasters in Japan. Also, looking back to the first part of the year, the fairly rapid run-up in gasoline prices was affecting people's budgets.

At the time, we expected the second quarter to come in at 1.5%. As the Governor indicated in his opening statement, given subsequent data, we are expecting the second quarter to be roughly flat, and possibly slightly negative. We continue to expect a recovery in the second half of the year, partly as the supply chain effects come back and partly because we do continue to see growth in the United States, although modest.

However, as indicated in the opening statement, we are seeing somewhat weaker economic momentum globally. That will no doubt affect Canada and, as the Governor indicated, we will be looking at all the incoming data and updating our projections. We have our next monetary policy decision in early September and our next full forecast in our monetary policy report in October.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Governor Carney, it seems to me that in today's climate of very low interest rates--some of the lowest we've had in a long time--it would make sense for the government to start to address the infrastructure deficit that municipalities have been citing for a while. In fact, the members of the NDP have also been calling for that to be addressed.

We've heard today that corporate Canada is sitting on about $500 billion in cash. Would it not be appropriate at this time for the government to take the lead in a robust way to start addressing the infrastructure issue? That may well require borrowing, but with the low interest rates we have now, would it not be an opportune time to do that, and possibly get cash from the corporate community as well?

[The Chair, Conservative, James Rajotte]

Governor Carney, I know a lot of this is about fiscal policy, which—

[Mark Carney]

I'll say that we look forward to reading the report of this committee on this important issue.

[Some hon. members]

Oh, oh!

[The Chair, Conservative, James Rajotte]

Thank you, and thank you, Mr. Marston.

I'm going to take the next round as the chair.

Governor, I want to ask you a couple of broad questions. The first is on the impact on our inflation target of the decision by the chair of the U.S. Federal Reserve to set the target very low over the next several years. I know it's conditional, but it seems to me that their low target makes it somewhat more challenging for us on our inflation target and for the value of the Canadian dollar.

You talked about a third point in your opening statement, personal indebtedness, and I'm glad you did. The point has been made that in terms of raising our rates, we're obviously somewhat limited by the actions in the U.S., and when you keep rates that low, you almost incentivize people to borrow more and may thereby increase the problem of personal indebtedness. This is something you've warned about, and the finance minister has as well.

That's my first issue.

The second one was raised by Mr. Marston and the finance minister. The finance minister was very pointed in saying to this committee to advise businesses to spend more, and I'm glad he did so. A challenge here in Canada, and even more so in the U.S., is that in a sense companies are sitting on capital. What is your analysis as to exactly why they're doing that? Is there anything we should be looking at from a policy point of view to incentivize them to invest and to spend some of that capital?

[Mark Carney]

I heard three very important questions there, and I'll try to be brief.

First off, the decision of the Federal Reserve last week is positive for Canada in that the stimulus it provided, this form of conditional commitment, is something the bank did in the depths of the crisis. Once we got interest rates as low as they could go, we provided greater certainty to Canadians about where we thought the interest rate path would be in the near future, because there were exceptional circumstances. The Fed is in even more exceptional circumstances, obviously, and the guidance they gave last week had an important impact on interest rates further out on the curve, which is quite stimulative for their economy. I won't be overly precise, because it's not an exact science, but what they did is akin to hundreds of billions in additional quantitative easing, and it has been effective. It's slightly more complicated in that they have a dual mandate, which is a more complicated mandate than ours is.

Let me describe the impact of that in terms of Bank of Canada policy. What matters for the Bank of Canada is what happens in the U.S. economy vis-à-vis the United States. What matters is the impact of what happens in the U.S. economy, taken together with all the other domestic and international factors and their impact on the outlook for inflation in Canada. Then we set monetary policy appropriate for conditions in Canada.

We do not outsource monetary policy to the Federal Reserve, as you know. There have been times in the past when interest rates in Canada have been 200 basis points or more above those in the United States, and there have been times when interest rates in Canada have been 200 basis points or more below the policy rate in the United States. That's because that's what was appropriate to achieve our inflation target.

We will do what's right to achieve that target in Canada. There's no question that what happens in the U.S. matters tremendously for Canada, but the policy stance of the Federal Reserve is not the policy stance of the Bank of Canada, as you know.

Second, personal indebtedness is an important issue. This is a difficult time, period, through this crisis, because in the major global economies we have real economic outlooks and outlooks for prices that are broadly consistent with very low interest rates for a long period of time. That has knock-on effects on the overall level of interest rates, through arbitrage and other factors, here in Canada. We also are facing headwinds in this economy, so we've set interest rates at exceptionally low levels for a period of time, and we will use our policy appropriately in the face of those headwinds to achieve the inflation target. This creates stimulus for those who need it, but it also creates the possibility of people borrowing more than they ultimately will be able to afford to repay.

The responsibility does start with the individual and then goes to the financial institution that is lending them the money. However, as we point out, it is important to remember two things: one, interest rates will not always be at these exceptionally low levels, so think about your ability to service a mortgage, for example, over its full life when interest rates are at more normal levels; two, we don't have aspects of, for example, our mortgage insurance system that excessively encourage this type of behaviour.

As I referenced in my opening statement, the government has taken three series of very prudent and timely measures that are having an impact on excessive borrowing. We're not against borrowing, but there is a time and a place. There needs to be an element of prudence in people's personal affairs and a recognition that while we're in exceptional times, we're not always going to be in exceptional times.

[The Chair, Conservative, James Rajotte]

Okay.

[Mark Carney]

If I may, I have one last point on U.S. investment.

U.S. businesses have in fact invested; it may seem as though they've invested less because the commercial real estate sector in the United States has been severely damaged, but their actual investment in machinery and equipment has been much stronger than the investment in Canada in machinery and equipment. They are well above their pre-recession levels in that type of investment.

[The Chair, Conservative, James Rajotte]

Thank you for those comments.

Mr. Giguère, there is a minute left. You have time to ask a quick question.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Thank you, Mr. Chair, but I am going to take a little longer than a minute. I think the Governor of the Bank of Canada can give me five minutes.

Thank you very much, Mr. Carney.

The average household debt in Canada is currently at 147% of its income. There are also strong centrifugal tendencies in some regions. That percentage is actually much higher in some regions than in others.

We are now able to establish a link between the increase in household debt and the average increase in housing prices. Over the past 10 years, housing prices have gone up by nearly 100%, which is not even close to what happened to salaries. With this very high debt rate, what impact will a debt crisis have on the Canadian economy?

[Mark Carney]

That is an important question. Your numbers are correct; that is exactly what is happening in Canada.

It is one of the downside risks that the bank has already identified in its projections. A change in housing prices could actually have a huge impact on household spending. For example, a drop in housing prices could have a greater impact on Canadian household spendings than before because of the burden of debt. It is a major aspect in our projection. We have to look at our forecast as a whole. It is a base forecast that involves some risks, and this is one of the risks.

[The Chair, Conservative, James Rajotte]

Thank you very much.

Governor Carney, thank you so much for being with us here today. Thank you for your remarks and your response to our questions.

Mr. Macklem, thank you for being here as well. We wish you safe travel to India.

Thank you both.

The meeting is adjourned.