Finance Committee on May 9th, 2018

[Pierre Poilievre, Conservative, Carleton, ON]

Mr. Kingston, my friend Mr. Sorbara wasn't happy with some of the facts you were sharing with him. At the risk of further displeasing him, I'm going to ask for some more of those facts.

To start with, what are the hard numbers on foreign investment in Canada this year as compared to prior years?

[Brian Kingston]

We don't have 2018 data. The most recent data is from the 2017 balance of payments. StatsCan released this in March of this year. FDI in Canada was at $33.8 billion, which is actually an eight-year low for FDI in Canada.

[Pierre Poilievre, Conservative, Carleton, ON]

Is that in nominal or real terms?

[Brian Kingston]

That's in nominal terms.

[Pierre Poilievre, Conservative, Carleton, ON]

It's in nominal terms, so if you took into account inflation, it would be even worse.

[Brian Kingston]

Yes.

[Pierre Poilievre, Conservative, Carleton, ON]

There's also a massive increase in Canadian investment in the United States. I understand it's up 66%, while American investment in Canada is down 50% over the same time period. So our money is leaving and we know that after money leaves, jobs go with it.

What do you think is the major cause of the decline in investment in Canada?

[Brian Kingston]

I think the major cause right now is U.S. tax reform and the serious implication that has for a number of sectors. Secondly, though, I think there's the uncertainty factor, which I discussed a little bit earlier regarding NAFTA. Given that 76% of our exports go to the U.S.—it is our overwhelmingly largest export market—uncertainty around access to that market is definitely trimming investment in Canada.

[Pierre Poilievre, Conservative, Carleton, ON]

Gluskin Sheff's chief economist David Rosenberg amassed all of the debt of households, businesses, and governments in Canada and found it's three times the size of the entire Canadian economy. It's a ratio that puts us above Greece when you put all that aggregated data together.

Do you worry what will happen to the Canadian economy as rates start to drift up over the next several years?

[Brian Kingston]

Absolutely. As rates go up, there will be pressure on Canadian households. There will also be pressure on governments at all levels that have elevated levels of debt. I noted that the growth of direct spending on interest at the federal level is to increase by 36% over the budget horizon. That's using a relatively modest forecast for interest rates.

If interest rates go up at a higher rate than anticipated, which is possible, you could see that growing far faster, which would put the federal government in a very difficult position.

[Pierre Poilievre, Conservative, Carleton, ON]

Actually, you understated the problem because I think you're using this year as the baseline for the horizon. If you use last year, we're going to go from $24 billion a year in interest payments to $39 billion a year in interest payments within four years, which is an increase of 66%. That's money for which we as Canadians get absolutely nothing. The banks and the lenders will like it, of course. They will be getting more free money from taxpayers, but everyone else is worse off.

I note that RBC, TD, and I think CIBC was the latest, raised their posted rate for five-year mortgages. This will mean higher costs for Canadian homebuyers. Many economists linked that increase to the higher government bond yields. Government bonds are now paying, I think, a seven-year high. Banks and other lenders can get more interest by lending to the government, so they are demanding more interest when they lend to households.

Do you see a connection between higher government debt and higher borrowing costs for Canadian households?

[Brian Kingston]

No, I don't. The increases in bank interest rates—and my colleagues from the Canadian Bankers Association may add to this—are largely driven by what the Bank of Canada is doing, and the Bank of Canada is trying to ensure that inflation stays within the target rate. I see that as the main driver of interest rate hikes.

[The Chair, Liberal, Wayne Easter]

Does the Canadian Bankers Association want in?

[Darren Hannah]

The main thing I would say is that pricing decisions are done on an individual institutional basis. Borrowing remains very competitive. Canadians remain a very good credit risk. By and large, that's really about all I need to say.

[The Chair, Liberal, Wayne Easter]

If that's all you want to say, that's fine.

Mr. Poilievre, you have time for one more.

[Pierre Poilievre, Conservative, Carleton, ON]

The level of household debt in Canada is the highest it has been since records have been kept. Do any of the panellists have any information on what the expected increase in interest rates over the next five years will cost an average household?

[Darren Hannah]

I don't have an answer to that specific question, but what I can say is the biggest piece of household debt is typically a household mortgage. OSFI has put in place a stress test—borrowers have to pass a stress test to qualify for a mortgage—to deal with exactly that issue, to ensure that people are able to manage their debt in the instance they face an increase in their interest rate.

[The Chair, Liberal, Wayne Easter]

Thank you all.

We will go to Mr. Sorbara, and then we will come back to Mr. Dusseault.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

I have a couple of comments, and then I will go to the CBA.

First off, the primary reason we have increasing interest rates is not due to an inflation issue. It's actually due to strong economic growth and the economy. If you look at capacity utilization levels, and I can name probably five or six other statistics, they are performing very well economically.

Wouldn't you concur with that? I think the Bank of Canada governor commented on that as well.

[Brian Kingston]

Absolutely. The root cause of inflation is the state of the economy, so yes. I was just noting that the Bank of Canada sets interest rates based on the inflation rate.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

It is based on inflation and on how the economy is performing as well, I would say.

To the CBA, a number of changes have been made to the housing market. I think most of the changes have been very prudent in terms of CMHC insurance levels, the stress test now being applied to low-ratio and high-ratio mortgages to the entire market, and the quality of the debt we're seeing come on to the market and that people are incurring.

If you look at the FICO scores or the credit scores, generally we have been turning the right way. We are taking the prudential measures, as I would call them, for a housing market and for people to incur debt who can afford it, and who had been stressed.

Isn't that generally a characterization of what we're trying to do with all different agencies?

[Darren Hannah]

Arrears rates remain very low. They are historically low, far lower than you see in the U.S. Canadians are historically very creditworthy borrowers, and they remain so.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

I'm done.

[The Chair, Liberal, Wayne Easter]

Mr. Dusseault.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Let's get back to cannabis as such. The Cannabis Canada representatives may be in the best position to answer my question.

Are we taking adequate precautions to ensure that enterprises that ask for a cannabis production licence are not using suspicious funds, whether from abroad or from Canada? The Journal de Montréal and other newspapers have done some good investigations on certain businesses that were financed with money channelled here from tax havens.

In your opinion, is the framework sufficient to protect the recreational cannabis industry from the influence of shady foreign interests?