Finance Committee on April 19th, 2016

[Stephen S. Poloz]

The International Monetary Fund recently trimmed its forecast for global growth. The accelerating development of the global economy will once again be more moderate. The slowdown we have seen in recent years is discouraging, and there has been a general lack of performance.

China has been the focus of much of the world's attention recently, because it has become a major global driver of growth. The growth factors driving its economy have changed. It has made a huge and crucial shift. Its past situation was unsustainable.

Other countries continue to have difficulties. In Europe, for example, the economy remains weak, but there are some encouraging signs. We have seen some progress thanks to monetary policies and public investment. Infrastructure programs have been brought in. Even the United States, which is enjoying strong economic performance right now, modified its tax policy to implement projects like the highway bill. This project is in addition to other infrastructure projects.

These examples from other countries are encouraging. Things have been improving over the past few months.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you very much.

What I understood from your intervention is that now is the time to invest in strategic infrastructure renewals in order to revive our economy. Our committee is looking, and will look more closely, at this growth factor. As you just pointed out, we are going through a period of weak growth.

Do you see any potential barriers to growth in the structure or regulations of the Canadian economy? Are there any specific issues or factors that stand out as barriers to growth? Is there anything we could address in order help the Canadian economy get out of this phase of weak growth?

[Stephen S. Poloz]

Yes, some barriers do exist, and they can be divided into two categories: natural barriers and unnatural barriers.

Natural barriers include things like population growth, which is slowing down at the moment and will continue to slow. Baby boomers born in the 40s and 50s are retiring. That is a global phenomenon; this situation is not unique to Canada. Global growth potential has been re-evaluated at 3.25%, down from about 4% five years ago. That is a pretty significant slowdown. In Canada, the potential growth rate is 1.5%. The question is, what are we going to do to raise that rate?

Some of the other less natural barriers include things like domestic and international free trade agreements as well as regulatory opportunities. At the G20, when it comes to government priorities, we talk about structural reforms. That is the most important thing. Countries have long lists of things they can do to increase growth. Growth of just 0.1% or 0.2% may seem insignificant, but over the long term, it's important.

Ms. Wilkins, would you like to add anything?

[Carolyn Wilkins]

You explained things very well, Mr. Poloz.

I would just like to add that Canada's demographic profile is not very conducive to growth, which means that output becomes very important. At the same time, what is unique to Canada is the transition we are currently going through. We are in a destruction phase in the sense that part of the energy economy is diminishing. We are trying to transfer all of those resources, in other words, labour and capital, to the part of the Canadian economy that is growing.

Anything that encourages businesses development, including the movement of labour and the things the governor talked about, is especially important right now.

[The Chair, Liberal, Wayne Easter]

Thank you. We're substantially over time.

Mr. Albas, five minutes, if you could.

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

Thank you, Mr. Chair.

I would like to talk about economic growth, and more specifically, free trade.

Governor, you talked in the media last week about your concerns about perspectives in the public sphere around free trade. Could you elaborate a little about that and what that might mean to economic growth prospects for Canada if other countries, and particularly Canadians, start to look more negatively in that area?

[Stephen S. Poloz]

Canada has always been and always will be highly dependent on international trade. In relative terms we're a small country and can't sustain our standard of living without being able to tap into foreign markets in one way or another. Anything that puts that at risk would be something we'd need to take very seriously.

The way I think of it is that the best defence is a good offence, and that is to say aggressively pursing trade agreements with all countries and with all those who are interested at the multilateral level, which is a difficult process. Having that energy always there and also pursuing bilateral arrangements, which simply adds to the momentum through the back door, is something we're likely to benefit from disproportionately. The bigger the country we're dealing with, the more the benefits favour the smaller country.

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

When we discuss terms like the Trans-Pacific Partnership obviously...my riding is in the province of British Columbia and the premier of British Columbia has come out in fierce support of the Trans-Pacific Partnership.

I also note in your report, both in terms of job growth and economic growth, that British Columbia is set to lead Canada as a province.

Do you think that aggressive path...because we have been part of the TPP, do you think arrangements like these are where we should be focused?

[Stephen S. Poloz]

I do, and the comments you refer to from the weekend were around this. If those possibilities are somehow in doubt, or under threat from others, it is our duty as policy-makers to explain them to people as best we can, so they have a clear understanding of what is at issue rather than something that may be motivated by something more political or partisan in certain settings.

I think economists understand free trade so well they almost treat it too simply. Of course it's good, but to those who have to go through the adjustment it sounds like they don't understand the situation on the ground.

We know when we liberalize trade, people's lives change as a result, some positively and others negatively, but the entire nation benefits. It's that second part that often is lost in those discussions. Our income growth allows us to provide cushions, and safety nets, and so on to help the transition, just as we're doing at the moment to help the transition from the energy sector to the rest of the economy.

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

There is another subject that is important to me.

That is free trade within provinces, internal trade.

There has been a variety of different reports over the past several years. Groups like the Canadian Chamber of Commerce have been asking for more comprehensive agreement since the Chrétien government signed the original agreement on internal trade in 1994.

Is there a potential, particularly given that we are seeing so much foreign direct investment washing out of Canada, where it would be an opportunity for domestic producers to scale up, grow their exports to other provinces, and thus our economy?

[Stephen S. Poloz]

I haven't studied the exact question you're asking, but as a principle, the kinds of interprovincial trade barriers are exactly barriers to growth of some form or another, as the other member was talking about. As with all things, they help some people while hurting other people. By changing those things there is always a certain amount of angst around those things.

I think the important principle to bear in mind is that if it's good for the economy as a whole, there's room to manoeuvre around cushioning the blow for those who are affected negatively. That's an important thing that is often forgotten.

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

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Grewal.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you Governor and Deputy Governor for your testimony today.

I'm going to comment on the report a bit. On the Canadian economy it says that the projection for economic activity through 2016-17 has been revised up. Slower foreign demand growth, the higher Canadian dollar, and a downward revision to business investment all had negative impact on the outlook, but are more than offset by the positive effects of the fiscal measures announced in the federal budget.

I'm going to focus on the Canada-U.S. exchange rate. I won't ask what the ideal exchange rate, is because that is determined by the market. Can you comment on if the Canadian dollar is low, or if the Canadian dollar is above the U.S., what are the negative and positive effects on the Canadian economy in both scenarios?

[Stephen S. Poloz]

We think of the Canadian dollar as a general equilibrium variable. I know that sounds like a technical thing, but what I mean is that virtually everything that is going on in the world economy or in our economy has some feedback effect on the currency. That is why it is never simplified in the way you describe.

Oil prices, say, go down, and that causes the Canadian dollar to go down. The Canadian dollar didn't go down by itself, so there are two things happening at the same time. We know that lower oil prices are unambiguously a negative for the Canadian economy. The decline in the Canadian dollar helps to cushion that blow, but in the end we still have a negative for the Canadian economy.

Usually, when people ask questions like that, they think, “Well, if the exchange rate moves all by itself, is that good or bad?”

It is always a double-edged sword because for somebody it's good, and for somebody else it's bad. It is best not to think of it that way. It is more about its usefulness as a thing to keep things moving where they belong and, as you say, markets decide that best.

When the dollar is on the weak side, it is promoting exports of companies for which that matters. There are some that have a lot of imported inputs, so it matters less. For those who are thinking of investing in capital equipment, maybe an imported machine, it would cost more. The lower dollar causes them to slow down that decision, which would be good for economic growth if they did it, while at the same time speeding up demand for their products, which is obviously good. For every company, it is different.

Then, of course, there are the households, because the price for your imports, whether it is a vacation outside of Canada or simply fruits and vegetables, varies according to the exchange rate.

This is an extremely complex question, and I hope you will forgive me for not giving you a simple bottom line.

[Raj Grewal, Liberal, Brampton East, ON]

I appreciate that.

Moving on to a comment that my colleague made—and I am wearing my non-partisan turban today in an act of good faith to Ms. Raitt—historically, what has the multiplier been?

She commented that a lot of the tax cut measures in the budget may not be spent into the economy because of the high levels of household debt. We are making an assumption—every financial forecast has an assumption, whether you are forecasting at a private company or you are forecasting, in our case, the Canadian economy in the budget.

Historically, what has it been? If the government implements a tax cut, how much of that money is seen to trickle into the economy?

[Carolyn Wilkins]

As the governor said earlier, the multipliers for the tax cut are a bit smaller than the multipliers you would see from another type of government expenditure.

You can look at it in a whole pile of ways. All I can give you is a range. If you look at the literature or at the models that the Bank of Canada itself has—there are a number of them that you can look up—historically, in the first year the range is 0.1 to 0.4 percentage points, and 0.1 to 0.6 percentage points in the second year. That is the range.

Of course, those ranges don't take into account.... They are coming from the literature and from models that talk about tax cuts and that are very broad, and if the tax cuts are particular to a group of households that tend to spend more out of their income—modest and lower-income households—you would expect the multipliers to be higher.

[The Chair, Liberal, Wayne Easter]

I am going to have to cut you off there, Mr. Grewal.

Mr. Liepert, you have five minutes.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

I have three fairly quick questions, and then if there is a bit of time left, my colleague will have a very brief question.

First of all, thank you both for being here.

In the budget, we have heard a lot about the number of jobs that would be created. That has certainly been challenged, in some respects.

I was curious about your report containing no job figures. I just want to ask if you did an analysis. If you did not, can you explain why? If you did an analysis, can you explain why there are no job numbers in your report?

[Stephen S. Poloz]

The real question is, what do we need to do monetary policy? That's what the monetary policy report is, our key tool. So for us, what we do is we translate those shocks, such as the oil price shock, or such as the fiscal changes, into the implications for economic growth. That economic growth then is combined with our estimates of how much potential growth there is in the economy to determine what inflation will do as a result of those changes, and that then gives us the full policy discussion.

So for us, although it's interesting it's not a key factor, how many jobs are being created.

Now, the potential output thing that we talked about has a clearer labour market connection, which is that output comes from people working and the productivity that they generate. As all the adjustments in the economy work their way through, we have a convergence on the economy operating at full capacity, and the labour market operating at full capacity also, and that creates jobs of course along the way.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

In the past you've been quite outspoken relative to the jobs being created by the private sector. This budget talks a lot about government creating jobs. I'd just like to hear a little more.

Obviously we would have liked to see incentives that would have had the private sector create jobs because I think we all recognize that's not a strength of government. I'd just like to know if you have any comments relative to that. What kinds of things might have been in the budget that would have incented the private sector more than it did?

[Stephen S. Poloz]

I think it's not for me to comment on the actual policies that were embedded in the budget. For us, as I mentioned a moment ago, what we need to understand is what the change will be in aggregate demand in the economy as a result of the budget, and that therefore is just one ingredient that we have to consider, along with exports, investment, and all those things.

So whether different details would give you something different, long run or short run, is really not our purview.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Did you take into account in your assessment any form of carbon tax? I know, as an example, there's a carbon tax coming in Alberta in 2017. I think there are various other provincial initiatives. We're expecting something from our friends across the way within this term.

In your out-year projections, was carbon tax factored into that at all?

[Stephen S. Poloz]

Well, it's something that is beginning to enter. For us, for the moment, primarily the way it would enter is on our monitoring of inflation. For instance, if there were an additional tax in each litre of gasoline that was related to a carbon tax, that would affect the CPI. It would affect it in a “once and for all” way. CPI would go up the day it went in, and so the inflation rate would be higher for 12 months, and then it would fall back out again, just like any other tax change. We have acknowledged that in our thinking, but it's not an important factor in the underlying inflation story at this stage.

[The Chair, Liberal, Wayne Easter]

Mr. Ouellette, five minutes. You get another round in.