Finance Committee on April 23rd, 2018

[The Vice-Chair, Conservative, Pierre Poilievre]

So, it would be lent to other governments if it wasn't lent to ours.

[Stephen S. Poloz]

Or bank deposits.

[The Vice-Chair, Conservative, Pierre Poilievre]

The reason I'm asking is that we always assume that deficit spending is stimulative in nature, but we forget sometimes that this money came from somewhere and that if it weren't lent to and then spent by government, it would have been invested somewhere else. Perhaps it would have been invested elsewhere in the world, but with home bias. Probably a large share of it would have been invested here.

I know that, for example, in the Israeli context, one of the great stimuli of the start-up nation, as it's called, was that the government just stopped borrowing so much money. Pre-institutional investors couldn't get 6%, 7%, or 8% by simply buying government bonds. They actually had to invest in productive assets. That's one of the reasons there is an enormous tech boom in that country.

Have you thought at all about the substitution effect of lending to governments?

[Stephen S. Poloz]

Of course, I've thought of that. I think that one of the premises that lies behind that analysis is that the economy is operating at its capacity already. The difficulty that we've had for some ten years now is that the economy has been falling well short of its capacity. Therefore, inflation has been drifting lower below target. Monetary policy has been stimulative throughout that period. Fiscal policy has also, in the last few years, been making a contribution to the overall level of demand in the economy.

We would just say that this is an accounting phenomenon. That's one of the reasons that we got to where we are.

[The Vice-Chair, Conservative, Pierre Poilievre]

In the business cycle, is there any point where it's appropriate for the government to balance its budget?

[Stephen S. Poloz]

I won't pass a judgment on that.

One thing that we have talked about, and I've talked about myself, is the question of what different mixes of fiscal and monetary policy do. If the economy is facing shocks—which we have, of course, and not just shocks, but the legacy of those shocks—it means that the economy is like riding a bike up a hill. It's hard work to get up the hill. In that context, some form of stimulative policy is advisable in order to get the economy back to its potential.

While monetary policy does it through interest rates, it's the household sector that does most of the borrowing for houses and cars, etc. If it's the government that provides the extra stimulus, then it's the government that does the extra borrowing. You can picture two stocks of debt: fiscal debt and household debt. You face a choice by choosing a mix between the policies about who is actually doing the borrowing. Over the past ten years for us, it's been mostly a matter of households, and we have a household debt problem, which is well known.

[The Vice-Chair, Conservative, Pierre Poilievre]

Aren't they the same people?

[Stephen S. Poloz]

Well, they are the same people, but there's a difference between them. I'm just saying that you would have debt one way or the other. I'm not saying what the optimal distribution is. I'm just saying that the choices between those two policies do give this outcome, and it's something we have to acknowledge. That's how we got here.

[The Vice-Chair, Conservative, Pierre Poilievre]

I'd just make the observation that households pay for the government, so when the government's adding debt, we might have the mirage of having a special fund with which we can repay that, but all of the interest costs—which are going to rise spectacularly over the next five years by two-thirds according to the PBO's report just today—are on the shoulders of the very same households that you say are overburdened with their own debts.

[Stephen S. Poloz]

Right, but to go back to your original question, when the economy is in a place where there's a lot of savings but not enough spending or investment, the stabilization of the economy usually demands some form of stimulus. Low interest rates can only do so much of the work, and we still would have had a gap between where we are today and the economy's capacity were it not for some of the fiscal measures that were taken. That's part of the reason we are where we are today.

[The Vice-Chair, Conservative, Pierre Poilievre]

Mr. Albas.

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

Thank you.

To what extent has investment decreased in Canada since the third quarter of 2017?

[Stephen S. Poloz]

How much has...?

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

How much has it decreased?

[Stephen S. Poloz]

Decreased?

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

Yes.

[Stephen S. Poloz]

Investment in Canada? It did not decrease in the fourth quarter. We think it was soft in the first quarter.

[Carolyn A. Wilkins]

It was actually high in the fourth quarter.

[Stephen S. Poloz]

It was very strong in the fourth quarter. What happened is that at the end of the year a number of significant projects in the energy sector reached their natural conclusion. So you have a bulge in spending, which of course only began, I'd say, two years ago, after the oil shock kind of got behind us. There was a bunch of spending that went through over the course of 2017 in particular, and that reached its conclusion. Spending in that sector fell, we think, in the first quarter. It's not because something has gone wrong. It's just that they finished, and the price of WCS is such that people are rethinking longer-term plans in that sector.

Investment in other sectors has continued throughout this piece, and actually, our imports of machinery and equipment continue to be quite strong, which suggests that investment is good, and we have good sentiment indicators in our survey. We're hopeful that whatever lull we're seeing is just a result of the uncertainty around NAFTA that is causing people to delay.

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

Thank you for that.

Just switching gears, I'd like to follow up MP Julian's specific concerns around Vancouver—although the B.C. government has put forward a speculator's tax. As you said, if we're talking about affecting material supply and demand, that may be the intention behind the policy. You said you've done some tracking or an experiment on it. When will that be available to the public?

[Stephen S. Poloz]

When I used the word “experiment,” I was calling these policies a sort of experiment because no one really knew how they would turn out—putting a tax on foreign buyers and that sort of thing. There have been other cases around the world where the same thing has been done and it has had only temporary effects.

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

There is a foreign buyer's tax in British Columbia, and that has been spread out to the interior and to some parts of the island. Also, there is a speculator's tax. I've had a tremendous number of phone calls from Albertans and people in West Kelowna who will be affected; developers aren't bringing their projects forward because they don't feel there may be a market.

Are these kinds of policies something you think the Bank of Canada will track, or are they policies that you don't think have enough national substance to track?

[Stephen S. Poloz]

We will certainly track those developments closely, because we're intensely interested in how the housing sector is evolving and, in particular, in those markets where these things are happening. By the way, it's something like 40% of our housing market in Canada when you just take those two places. It's not just a city thing; it has a macro impact.

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

When will some of that analysis be publicly available?

[Stephen S. Poloz]

We analyze that on a regular basis in our FSR, which will be coming out in June, so there will be supporting analysis there.