Finance Committee on Nov. 4th, 2014

[Andrew Saxton, Conservative, North Vancouver, BC]

One thing that sets Canada aside is that, in balancing the budget, we've actually been able to maintain our low-tax plan. In fact we have even lowered taxes, whereas many other countries have to raise taxes in order to balance the budget. Would you consider that to be an important factor?

[Stephen S. Poloz]

It's potentially an important factor, but I don't have a specific analysis to offer you this morning.

[Andrew Saxton, Conservative, North Vancouver, BC]

Okay.

Finally, in my last seconds, there are some external shocks in other parts of the world. Where would you say the biggest risk is for those external shocks?

[The Chair, Conservative, James Rajotte]

If you would just give us a brief response, Governor, you could return to it later.

[Stephen S. Poloz]

The biggest risk facing us today is coming from Europe, where growth has been extraordinarily slow. It will be an uphill battle for all the restructuring to take place there. I will leave it at that.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Brison, go ahead, please.

[Scott Brison, Liberal, Kings—Hants, NS]

Governor and Deputy Governor, welcome to the committee.

Your report refers to business investment having been very weak and says that a rotation away from household spending towards business investment is essential. Given that you're saying investment is essential in terms of growth today, is there a case to be made, and I think David Dodge may have made it recently, that we ought to take this opportunity of historically low bond yields, real interest rates in a negative territory, slow growth, and soft employment to invest in infrastructure, and what sorts of investments in infrastructure could be stimulative? Should we be encouraging our pension funds and pension funds from other countries to invest in Canadian infrastructure so it doesn't all have to be on government balance sheets? What is your view of the timing today for long-term infrastructure investment?

[Stephen S. Poloz]

Certainly infrastructure is almost always a good thing to invest in. It's a key ingredient in our economic growth story. Upgrading it or modernizing it can only add to it. If that infrastructure development requires borrowing money, with interest rates at truly a generational low, we're in a position to borrow 50-year money at very low rates, so all the conditions are very favourable. As well, the private sector, as you suggest, has capacity. We have a lot of ingredients there. The missing ingredient is probably the uncertainty that I mentioned before. For all types of investment, whether it's buying a new machine or just expanding your plant or it's building a bridge that will be a toll bridge or something like that, what the future will bring is a question mark. That high level of uncertainty drives a wedge between the positive decisions, those investment decisions, and what you might expect to see, just because prices are low.

Most of what you say I can't disagree with. It's totally right. I think to the extent that there is a failure of the private market to build infrastructure, it's usually for a very good reason: public participation is needed, hence the P3 model, which is great at some ends and less able to do it at other ends. But in general, the whole sense of infrastructure is very active. I was at a conference yesterday at which there were 1,200 people interested in infrastructure. There's definitely a very strong business sector at this stage in Canada.

[Scott Brison, Liberal, Kings—Hants, NS]

On infrastructure, do you agree that Canada probably has among the greatest concentration of expertise in the design, construction, and financing of infrastructure in the world resident here in our pension funds?

[Stephen S. Poloz]

I think that's a fair characterization. I became familiar with those shops while I was with EDC. I've seen them investing all around the world, and here of course, in infrastructure. There's not just the investment but the management of those assets, which is a capability that has been well developed in our pension plans. They're widely recognized as that expertise, not just investors but managing active investors that take an airport somewhere and make it run better.

[Scott Brison, Liberal, Kings—Hants, NS]

In a speech yesterday, you spoke about the weak job creation rate in Canada, which is less than 1%. You said it was “well below what one would expect from an economy that is recovering”. You also spoke at some length about the issue around youth underemployment and unemployment, referring to the fact that there are around 200,000 underemployed youth, and referring to adult children living in the basement of their parents' home.

Can you comment on the long-term economic cost to what some, including TD Economics, refer to as the scarring effect on the Canadian economy, the scarring effect of sustained youth underemployment and unemployment?

[Stephen S. Poloz]

Yes, well, it's very hard to be concrete about that. We all acknowledge that if you come out of school and you spend a year or two failing to get something and each year there's another crop of new graduates coming out and competing for the new job that is created, the scarring effect can last for some time. Our belief is that over the next two years, we will manage to close up that gap and use that excess capacity. We're hopeful that it does not last a really long time.

We have to acknowledge that it exists. That's why when I was asked yesterday, I suggested, as I have privately to young folks who ask me what they should be doing in this job environment, that people volunteer to do something which is at least somewhere related to their expertise, so that it's clear they are gaining some learning experience during that period. That's not the same as advocating for very aggressive apprenticeship programs or so on. What I mean is having experience on the CV so the scarring effect is minimized.

[The Chair, Conservative, James Rajotte]

A brief question.

[Scott Brison, Liberal, Kings—Hants, NS]

In what you're suggesting, do you acknowledge that even unpaid internships and getting that experience contributes to income inequality? Children from wealthier families can afford to take those kinds of positions, whereas those in low-income families simply need to get work at any pay.

[The Chair, Conservative, James Rajotte]

A brief response, please.

[Stephen S. Poloz]

I acknowledge that there are issues like the ones you're raising. I wasn't trying to go deeply into this. It's not a monetary policy matter.

I still think that when there are those opportunities, one should grab them because it will reduce the scarring effect, all other things being equal.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Keddy, please.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Welcome to our witnesses. Congratulations. Good to see you again.

I have a couple of questions especially around our export capacity and the room for export expansion. You stated:

The implication is clear: a sustained expansion in our exports not only will represent new demand, it will ignite the rebuilding phase of our business cycle, which will create new supply.

I think we all understand that. You also go on to say, it will take about two years to use up this excess capacity that's in the system now. You go on to say further that continued monetary stimulus is needed.

I want to go a little bit beyond monetary stimulus. We have t a build in Canada plan. We look at our trading partners and the quantitative easing that the Americans have used. They have been much more robust in rebuilding their economy. I think they had to be more robust in rebuilding it. We've been much more prudent, quite frankly, and much more cautious and we've been able to get away with that.

However, in the long term—that's where I'm headed—what happens is we fill that excess capacity that's available to us in the export sector. The Americans are our closest neighbour and our largest trading partner. Regarding the long-term effects of quantitative easing in the States, what happens when they have to start paying back that money over the long term and some of that capacity starts to shrink in their demand for imports?

[Stephen S. Poloz]

Well, I would not expect the last part of the question you posed. In fact, the U.S. did a lot more work than the rest of us because they bore the brunt of this cycle, so it's understandable. I characterize it as a crater that comes after a bubble bursts. Basically you fill that crater up with this extra liquidity that has been created through the quantitative easing and so on and ultra-low interest rates, but while the economy gathers its own natural growth processes again, you're able to pull that away without the negative effect that you have in your question. I don't expect that there will be a setback of that sort at all, but rather that the private sector will be doing the growing and that will be largely investment-based growth, company-to-company growth, which is exactly where our exports have been weak to this point. We're just beginning to see that linkage showing up in our own trade data, and that is the most encouraging element of what we've seen in the last few months. The bottom line is that we need this for a fulsome cycle for us and to get back export and investment demand to offset the need for consumption to slow down.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Thank you for that.

So, you're not expecting to see any retreating in the American economy. They've certainly gone into some substantial debt, and future generations will have to recover that. One of the things we've looked at and one of the things we've used in our export industry in Canada, which you are very familiar with, has been the accelerated capital cost allowance program. At a time like this, when we have capacity we can fill, and we have an export industry looking at new jobs in various parts of the world and expansion in that industry, should we have an enhanced accelerated capital cost allowance?

[Stephen S. Poloz]

It's not for me to comment on specific fiscal measures. We know what ingredients we're looking for, so I think I should leave it at that today.

Thank you.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Okay, thank you for that. I'm going to take that as a maybe.

One of the issues, and you said this in your October monetary policy report, is that certainly the Prime Minister and Minister Oliver continue to say that the recovery is fragile. I think most of us would agree with that. Much of it depends upon the American economy, but how much of our recovery is going to depend on, quite frankly, new markets and the rest of the world? It's similar to the question that Mr. Saxton asked. We'll be looking for a recovery in the EU, which is still sluggish, and with traditional trading partners like Japan, which are still sluggish, so how much of our recovery will be all about new markets in Asia and Southeast Asia and other parts of the world that are not traditional trading partners today?

[Stephen S. Poloz]

I think these things are important building blocks to a future growth strategy for most companies in Canada. We have to admit that in the case of Europe, we won't see much growth over the next couple of years and yet it's still possible for Canadian companies to grow their business there by capturing new customers and more market share in Europe. It's not impossible for us to have growing exports to Europe even if they're flat for a couple of years, and importantly, we look at other markets for which slow means growing at 6% or 7%. That means you can have a very strong increase in sales in a market like that with just one or two customers. You go on one of those trade missions to China or Indonesia or some place, and one contract can make a big difference, because it will grow fast. I think we will be relying on this in the future. I'd like to think of the longer future as one in which most trade in the world will happen between these major emerging markets. I think the trade between Canada and the United States will still be very important to us, but small compared to the big trade flows. We need to get attached to those.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Keddy.

Mr. Caron, you have seven minutes. Please go ahead.

Is the interpretation coming through?

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

I'll do it in English this time.

Thank you, Mr. Chair.

I would also like to thank the governor and the senior deputy governor for joining us today.

I'll ask my questions in English because much of the language is hard to translate.

I want to go back to your decision to move away from forward guidance, to remove it from the tool kit you have at your disposal. The question is on the timing of it. You have emphasized many times that we're not out of the woods, that we still have a large output gap. Why now? Why not wait until the conditions are better in the Canadian economy, which is still uncertain?