Finance Committee on Oct. 30th, 2012

[Mark Carney]

It seems to be an issue that in other venues you might discuss, but I'm not sure that it affects the conduct of monetary policy, if I may answer that way.

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

I will have to take that as a reasonable response. I have to admit, I was trying to put you on the spot a bit.

In trying to talk about monetary policy and relative to the impact such things could have, and I'm trying to be as general as I possibly can with this, if institutions were required to publish financial information that they haven't traditionally put out there, that would open up a whole new venue in the market, in the responsibilities they have. That might be onerous on some.

[Mark Carney]

I'll give you a general answer that goes back to the question Mr. Adler asked.

In terms of financial reform, and the example was on derivatives but there are other examples, there are some initiatives that we're hoping are going to come out next week —I don't want to pre-judge the G-20—that relate to enhanced disclosure of financial institutions, related to their risk profiles, the business models, and other aspects.

In general, we are encouraging greater disclosure of financial information and risk profiles and transactional information. I would say that obviously in all cases, we are encouraging disclosure by all sides so it's not just one financial institution, but all financial institutions and both sides of the trade in a derivative. One of the challenges internationally, of course, is these are international markets. Canada will disclose, but we want to make sure that the Europeans, the Americans, the U.K. etc. disclose as well. That's the way the system works. In the end that's why reforms, such as the two I just referenced, in our opinion, have to be agreed internationally and implemented internationally at the same time to be effective.

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

I think that advice you had at a macro level would apply here to some degree. If two parties are in this, both parties should be disclosing. If one or the other had to, it would be a less balanced situation. I appreciate your comments.

[Mark Carney]

Thank you.

[The Chair, Conservative, James Rajotte]

You have about 30 seconds, if you wish.

Thank you, Mr. Marston.

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

I wanted to follow up, Governor, on a few issues.

First of all, though, I think it's important to say that I thought your statement as governor on the passing of former Bank of Canada governor James Coyne was an outstanding statement. I did want to commend you for that. That was very much appreciated in terms of him as a person, but also in terms of his role in the development of the Bank of Canada.

I did want to follow up on the point about quantitative easing three. I don't know how much you want to say about that, but certainly from our perspective I'd like to hear your thoughts on its impact, positive, negative, or otherwise.

Then, I did want to follow up on the issue of the statement you made with respect to the cash that companies are holding. It was presented as being a sort of critical statement, although in your report itself, on pages 29 and 30, I don't really see it as a criticism, frankly. It's more of an analytical statement at the bottom of page 29 and the beginning of page 30. I did want to get your full response on that, because there has been a lot of dialogue here, certainly dialogue back and forth as to what the government should or should not do with respect to companies and whether they are in fact sitting on too much cash, as it's said colloquially.

If I could get your comment on those two issues, I'd appreciate it.

[Mark Carney]

Thank you.

First, with respect to quantitative easing, we have in the report, as I'm sure you saw in box 1 on page 6 in the English text—I think it's page 7 en français—a technical box that goes through the implications of, in effect, QE3. It's called “U.S. Monetary Policy Developments”. I'll make a couple of observations just to summarize.

The first is on the measures taken by the Federal Reserve, the so-called QE3, which is not just a commitment or an expectation of asset purchases—$40 billion per month until it's no longer necessary—but also a communications strategy associated with that, which included the central tendency expectation that U.S. interest rates would remain at their lowest possible level through the middle of 2015, but also tying that to “substantial improvements in the labour market”. The combination of those, in our opinion, was quite a significant move by the Federal Reserve to provide significant additional stimulus to the U.S. economy.

The question is, what's the net impact of that on Canada? We took the overall level of those measures, and we feel that it will lift the level of U.S. GDP by 1.3%; that's not growth, but the cumulative impact of 1.3% on U.S. GDP by the end of 2014. That's a significant move.

Now, we expected them to do something over the second half of this year, so some of that was already in our projections. Our U.S. projection does not move up by the same amount as that. I won't draw any more on that, but we had something in there because we expected additional U.S. stimulus.

For net for Canada, it's obviously a good thing if the U.S. economy is growing more, but some of that is taken away by upward pressure on the Canadian dollar, which is one of the channels through which quantitative easing works. In fact, any monetary policy easing works. It doesn't have to be unconventional; it can be conventional. That upward pressure on the Canadian dollar takes some of that benefit to Canada back. Our point estimate on the net impact of the U.S. measures is about 0.4% on the level of Canadian GDP measured to the same point in time.

It's something, and it is positive. We do believe that it's positive. One shouldn't put too much faith in the specific estimates. I mean, they're directionally correct and we think order of magnitude correct, but what will matter ultimately is through which channels quantitative easing operates, and how much of that is through the improvement in the value of domestic assets in the United States, which spurs spending and investment in the U.S., and how much is through the exchange rate channel. We can go into more detail if you want.

In terms of the question about cash balances, first off, the original observation was an observation. Yes, it's an observation that if there's cash on the balance sheet and it's not earning the cost of capital, firms ultimately will put that money to work, or they will give it back to shareholders, who will redeploy.

[The Chair, Conservative, James Rajotte]

Yes.

[Mark Carney]

Operating in an environment of uncertainty, the best thing we can do is provide the maximum amount of certainty about as many aspects as possible. It starts with macro policy, goes to regulation, and goes to the structure of structural policy. There is some advantage for consideration. It's for the committee and ultimately the government and the House to decide—for Parliament to decide—the merits of tax measures that have been deployed—

[The Chair, Conservative, James Rajotte]

You mean measures such as the accelerated capital costs.

[Mark Carney]

Yes, and there are other measures that could be like that.

The last thing I will say, and it is for firms to decide, is that what we do have in Canada are tremendous opportunities that don't necessarily exist elsewhere. We have an opportunity to boost productivity, to build market share in major emerging markets, and to take advantage of the strong Canadian dollar to buy machinery and equipment.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Caron, you have the floor.

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

Thank you.

Thank you for being with us today, Mr. Carney.

I would like to come back to the point Ms. Nash started to address: budget austerity. If we look at some countries, Great Britain for example, that have moved fairly aggressively toward budget austerity, we see that they seem to be having a lot of problems with economic growth at present. In a recent report, the International Monetary Fund questioned the multiplier it currently uses to study budgetary effects, and in particular effects associated with budget austerity.

Here in Canada, you probably know that the Parliamentary Budget Officer, using the Department of Finance multipliers, concluded that Canada is not currently realizing its full economic potential. Among other things, he concluded that growth is 1% lower than what it could be if we did not take the austerity approach, and that we have a loss of about 125,000 new jobs.

As things now stand, and in the global climate of economic uncertainty we are experiencing, do you think austerity is the direction we should be going in? Should we not instead examine other alternatives, such as stimulating the economy with infrastructure work, which would provide an injection of sufficient funds to help growth?

[Mark Carney]

I want to start by pointing out that we do not agree with a projection that includes an increase in the output gap by the end of 2014. Here in Canada, there are two macroeconomic policies, and in particular monetary policy. So we could adjust, if that were the case.

If that were the probability, there would be a reaction, via monetary policy, to narrow the gap between the policies, that is, there would be monetary easing.

To discuss multipliers and other aspects, I will yield the floor to Mr. Macklem.

[Tiff Macklem]

I just want to mention two things. First, it is important to distinguish between the situation in Canada and the situation in a lot of other advanced countries. Our situation is quite different. Compared with other countries, Canada has the lowest debt-to-GDP ratio.

As the governor just said in answer to Ms. Nash's question, there were stimulus measures in the budget in Canada. In 2012, it had already reversed. At page 27, in the English version of the Bank of Canada document, we can see that government contributions were negative. That reflects the reversal of the stimulus effect, but it has now ended. For the 2013-14 fiscal year, there is a government contribution to growth of about 0.3%, which is about half the historical average of about 0.6%.

Second, in the other countries, and especially the European countries, much greater emphasis is being placed on budget austerity. Clearly, some of those countries have no choice. They need to resolve their budget situation. It is also important to note that the urban crisis is not just a budget crisis. It is also a balance of payments crisis. They also need major structural measures to reform their economies and improve competition so they can get back to a growth situation. Growth is also important, to improve the budget situation.

So there are these two aspects. It is important to strike a balance between the two.

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

Because I have only 30 seconds, I am going to quickly ask a question.

You say that some countries had no choice but to impose austerity budgets. In the present situation, would you say that Canada can still choose between austerity and economic stimulus-type budgets?

[Tiff Macklem]

Clearly, Canada has more monetary options and more fiscal options. That is an advantage.

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

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Caron.

Mr. Jean, please, for the final round.

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

Thank you for coming today.

I'd like to ask some questions but, first of all, I'd like to congratulate you and your staff on your website and the interactive nature of it and also on having the speech today published so I could read it, even though I wasn't in the room listening. Congratulations. That is very helpful.

I'd like to ask some questions in relation to globalization and the skills shortage generally found in Canada.

In the context of the speech you made to the CAW on August 22, 2012, specifically in regard to building foundations to create prosperity, you mentioned the competitive advantage that we have here in Canada. We are, I would say, more advanced than many countries in resource development. Many countries in Africa, South America, and Central America use our corporations. We lead the world as we have more investments overseas than they have in Canada as far as ownership and management control goes.

Keeping in the thought process the policy tools of mobility of workers, removing barriers—provincial barriers, primarily—and immigration reform, and training and education, do you see, first of all, that the status quo, as we've been operating over the past years, is not good enough and that we have to make changes?

[Mark Carney]

I think that's a good operating principle. We always have to examine the status quo and see how we can continually improve. In fact, in a competitive world, we find that you almost level-peg as a result of doing that, and you're running to stand still. The question is how we can further advance.

With respect to skills and skills shortages in this country, as you reference, first and foremost, we want to make sure we have as flexible interprovincial labour markets as possible so we can maximize opportunities for all Canadians to work where they wish and to realize the advantages in this country. Obviously, targeted immigration and the immigration reforms that have been put in place, in our view, will enhance the productivity of the country and the experience of new Canadians. It's a challenge that goes to equality of opportunity, which we discussed earlier. It's a challenge that goes to productivity, goes to the ability to continue to build the skills of Canadian workers and enhance those skills over their working lifetimes. That's workplace training.

It also goes to the post-secondary education experience in Canada. As you know, a very high proportion of our population pursues post-secondary degrees. The matching of those degrees and those skills and the requirements of a modern, globalized, technologically intensive economy has been less than ideal. We're seeing that in work outcomes for graduates. Therefore, it's an ability to better target, better encourage the skills that Canadians are acquiring in post-secondary education and mapping them to a globalized economy.

I'll hand it back to you. We talked a bit about inequality and equality of opportunity. One of the challenges is that the level of technical and technological expertise that is required for the middle class job continually goes up as globalization extends, and the range of activities, including very importantly, service activities that become tradeable, that technological advantage has to increase. We need to better prepare our children for that.

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

Obviously, some of the moves we've made so far in immigration reform and mobility, as far as removing interprovincial barriers goes, are good, but wouldn't it be fair to say that if we don't go further than what we currently are doing and we make some changes, that it's actually a threat to our economy and our well-being?

[Mark Carney]

Yes, these are areas that need, as I said at the outset, to constantly be evaluated. Some of the good work that has been done on a provincial level has helped in this regard. There have been provincial agreements between, for example, B.C. and Alberta that have proved to be a successor to TILMA .

Do you want to supplement that?

[Tiff Macklem]

Yes, I was just going to add to that. By looking over a longer horizon, as you're aware, the demographics suggest that the growth of the labour force is going to be declining. In fact, it's already started. Effectively, workers are aging. We're all having fewer babies and so the workforce is growing more slowly.

When you look, going forward, increasingly, the challenge will be finding enough good workers for the jobs, so that's going to be partly related to skills.

I would add the need to increasingly improve efforts to tap into areas of the workforce where there's potential for more growth. For example, we're living longer, we're healthier, and the labour participation of older workers is going up. There is scope for that to go higher with more flexible work arrangements.

The aboriginal population is growing rapidly. There are lots of good reasons to improve access to work for aboriginals. The coming demographic squeeze is just another one. Those are a couple of examples, and immigration, yes.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Thank you, Mr. Jean.

I want to thank, on behalf of all the committee, Governor Carney and Mr. Macklem for being here today and responding to our questions. If there's anything further you wish us to consider on any of the topics we raised here today, please do submit it to the committee and I'll ensure all members get it .