Finance Committee on April 23rd, 2018

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

I also want to thank the governor and the deputy governor for being here today, and the work you do for Canadians every day.

Governor, during the pre-budget consultations that we did across the country, there were concerns around NAFTA and competitiveness. I certainly appreciate members raising the need to continue to open up free trade market access for Canadian producers. The challenge, as you know, is that we may be able to open up new markets, but if we do not have competitive products at a competitive price, then we may not be able to succeed in the world.

In the report, on page 19, you mentioned concerns around being able to access global growth in areas like trade specifically because of competitiveness. Is investment going to the United States instead of here, and what steps can we take, as parliamentarians, to encourage the government to do what it can to encourage more investment in this country?

[Stephen S. Poloz]

Our primary source on questions like these is our BOS, our business outlook survey, which is quarterly and quite thorough. Companies for quite some time have been talking about the uncertainty around NAFTA giving them pause in their investment decisions. A pause is one thing; another is a step further, where in a handful of cases, companies that straddle the border and have capacity on both sides of the border may be focusing more of their attention on their U.S. presence because of that uncertainty. It's very early days for this because these are long-term decisions.

Nevertheless, as we say, there are competitiveness challenges, which are, by the way, not actually that new. They've been with us for quite some time. They are often spoken about by the companies we talk to. Their investment, in fact, is doing all right but we think would be stronger without that uncertainty around NAFTA. The sooner it becomes clearer to people, I think, the better it will be for business decision-making

In terms of what happens to other sources of competitiveness, those are obviously very structural things in the Canadian economy, such as energy costs or regulatory burdens. Those are other things that companies mention to us.

Do you want to add something?

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

I appreciate that. In your opening statement, you talked about animal spirits in the United States and how there could be a good as well as a negative side. I guess I would refer to how, while investment is going to the United States because they see opportunities there, and we look at our own lack of business investment or reinvestment and at some of these investment decisions being put off, compounded further by our regulatory structures, whether they be new or higher taxes or new regulatory regimes like Bill C-69 while the energy industry, for example, has said there will be no further pipelines, complicated by the fact.... Speaking of pipelines, there's quite a discussion happening around those things.

That kind of says to Canadian and international investors that we may not have.... Are you concerned that these imposed taxes and regulatory structures may dissuade people from investing here and now in this great country?

[Carolyn A. Wilkins]

You talked about the report. There's an interesting chart in the report that looks at the different sectors in which you can measure capacity. You can see that a lot of companies in different industries are actually at or above their historical capacity constraints. You would think that, given the growth of the U.S. economy, there would be an incentive to invest. In part, that's why businesses, when you look at our survey, say “yes, it is the right time to invest” because of the capacity, but at the same time, we're not seeing it as much in the numbers as you would expect this time in the cycle given what is going on.

Part of what businesses are saying is related to NAFTA and part of it is just related to longer-term structural issues with the Canadian economy. In our outlook, we've decided to take on board some of that uncertainty with respect to investing and to mark down our investment profile. It's still going up but by less than it would have otherwise. We've also done that with our profile for exports, because if you don't invest, you don't have the capacity, and you don't have a market to sell to. You can't sell to a market.

These are things we've taken on board. We still have a positive profile for investments and exports but less so than we would have had otherwise.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

You say “we still have”. I say that we are putting in place further regulatory measures. It says in the very report that there are concerns around regulatory competitiveness issues, but I don't hear you saying that.

Could you please elaborate on it?

[Stephen S. Poloz]

Competitiveness is a very broad kind of concept. Economists usually measure it in terms of unit labour cost measured in a single currency. That's the narrowest version of it. Of course, from a company's point of view, anything that costs them money is part of their competitiveness equation. It could be, as Carolyn mentioned, a regulatory burden or it could be taxes or it could be any of those things. Electricity costs are often mentioned to us. What we're saying is that these are things people are mentioning to us in our survey. We don't have a measure of these things except to look for reasons why the data on exports or investment show that they are not performing as well as our model suggested they would.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you.

[The Vice-Chair, Conservative, Pierre Poilievre]

Mr. McLeod.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you, Mr. Chair.

To the presenters here today, I'm very impressed, as always, that you're able to take a snapshot of where we're going as a country and how well we're doing.

In the north, we've been very happy to see the number of investments being made in infrastructure, housing, and other things, which have really helped us move forward. That includes transportation. However, until we get certainty in our land claims and self-government for our indigenous peoples, and further investment to lower the cost of transportation infrastructure, we will continue to be challenged. We're probably not growing quite as fast as the rest of the country, but it's good to see that the country is doing well.

In your opening comments, you admitted that things were not going as you had forecast. In your first paragraph, you said that some things are taking longer, and in another place, you said that the capacity is growing faster than you expected. I guess it's a hard read at the best of times.

I want to ask if you could elaborate more on the measures in this year's budget that are really leading to the improved economic outlook. Could you tell me that first?

[Stephen S. Poloz]

We don't comment on individual measures, but what we do is take the budget in its entirety and seek out or distill just what its macro effect will be.

[Michael McLeod, Liberal, Northwest Territories, NT]

Maybe I could be a little more specific. In January you had some comments and you have since revised them. Why did that happen?

[Stephen S. Poloz]

Oh, I see. Well, what happened since January was that everybody had a budget. So we update the fiscal stance for all the provinces and the federal government together in one line. What is that adding to the economy? I'd say the biggest contributor to that difference is the Ontario budget. It's significant. Of course, there are budgets in lots of other provinces. The point is that we update that. There is a factor in our model that contains the fiscal stance for all levels of government in Canada, and that has increased since we were last here. It has increased since January.

Yes.

[Michael McLeod, Liberal, Northwest Territories, NT]

My next question is about a recurring theme in your report, that the economy is currently operating at near capacity. I want to know how we got to this level, the implications of being near capacity, and how or if that needs to be addressed.

[Stephen S. Poloz]

Our objective is to get inflation on our target of two per cent. The only time it will sustainably be at two per cent is when the economy is also operating at capacity. If the economy were operating below capacity, there would be downward pressure on inflation, and if it were operating above, there would be some upward pressure on inflation. For quite some time we have been below Canada's capacity and inflation has been struggling to get up to our target. It's only in the past year that we have converged quite close to capacity, and inflation is now at 2.3%, according to the latest data. So we got there, of course, with a combination of a healing economy, after all the damage that we had before and the subsequent damage that came from the oil price shock. Those are the two major things, the global financial crisis and then the oil price shock, that set us back over the last decade. What has brought us back is healing in the various sectors, promoted by both monetary and fiscal policies throughout.

[The Vice-Chair, Conservative, Pierre Poilievre]

You have 35 seconds.

[Michael McLeod, Liberal, Northwest Territories, NT]

I don't see anywhere in your report that you have measured the impact of the government's investment in infrastructure. Is that something you look at, at all? For us in the north, the phase one progress of the investment has been significant. I'm not sure how that factors into what you were....

[Stephen S. Poloz]

Yes, it's definitely there, very carefully.

Do you have anything to add?

[Carolyn A. Wilkins]

I don't have infrastructure separated out by itself, but the federal-led spending, of which infrastructure is a big part, adds 0.1 percentage point to growth in fiscal years 2018-19 to 2020-21 each year. What it does every year is to lift growth somewhat, and the level of GDP at the end of the forecast is higher because of that. It's just not much different from what it was in January. That's all, but it doesn't mean it's not contributing to growth.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you.

[The Vice-Chair, Conservative, Pierre Poilievre]

Thank you very much.

With the committee's approval, I have a few very quick questions on a similar subject.

Does the bank do any research on the composition of lenders to Canadian governments?

[Stephen S. Poloz]

Yes, we do. We have a good touch on where our major debt holders are throughout the world. That's quite well known.

[The Vice-Chair, Conservative, Pierre Poilievre]

What percentage of them are Canadian? What percentage, I should say, in dollars of the debt we're raising on an average year is raised domestically?

[Stephen S. Poloz]

I'm afraid I don't know the answer to that.

We enjoy a very strong demand for our product abroad. It's seen as a very high-quality product. No doubt it fluctuates. I know we can certainly get you data on that and pass it back.

[The Vice-Chair, Conservative, Pierre Poilievre]

The share of the government's borrowing that comes from inside our borders, do we know where that money would be if it were not lent to the government?

[Stephen S. Poloz]

Well, it would be saved in some other form. It would be perhaps saved in the stock market. More likely, a typical investor would have made a decision about fixed income versus non-fixed income, so the government debt would be competing in the fixed income space, rather than against stock market investment.