Evidence of meeting #48 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was impact.
A video is available from Parliament.
3:55 p.m.
Liberal
3:55 p.m.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
Thank you, Mr. Chair.
Welcome, Governor and Ms. Wilkins.
I will speak French and English. I'm the only member of my party here, so I'll do both languages.
I'd like to start by going back to something you said, which is, and I agree with you, that monetary policy is much less effective at such low rates as we have been experiencing, but I do remember that in the last few years we've been debating the famous tool kit and what we have as tools in the tool kit. We talked about quantitative easing. We talked about the possibility of a negative interest rate.
If you think that the right move right now is to actually stand on the sidelines and let the fiscal policy do its work, when would those tools in the tool kit be used if they are not used in the situation right now where monetary policy seems to be less efficient?
3:55 p.m.
Governor, Bank of Canada
Our analysis is that given the shocks we've incorporated into our projection, the economy has slower growth and a larger output gap for longer. That longer period takes us out to the middle of 2018.
On the one side we'd say that's unfortunate. We thought just a few months ago that by the end of 2017 we would be back at full capacity. So adding, say, two quarters onto that process means a longer period of time where someone may be out of a job. It increases the side effects, the scarring, or the loss of skill sets, and so on. We know that's not without cost.
We also must ask ourselves what is the complexity of the trade-off and when is it appropriate to try to speed it up? As we said last week, we actively discussed the possibility of cutting interest rates a little further at this time to try to speed up that process, and given the uncertainties that we're facing, we decided we were best to hold where we are.
When I say uncertainty, I don't necessarily mean something bad. It's just that some things are not as concrete today as they might be in a short time. For instance, a lot of companies mention that the U.S. election is giving them uncertainty about the future. Whether it's about their investment plans, NAFTA, or whatever, it doesn't really matter which candidate ends up winning, there's uncertainty. There's a natural tendency both in the United States and in Canada to delay those kinds of decisions.
It's possible, therefore, that when the election is over some of that uncertainty will be lifted and that would be a positive. It's not all one way. But in that context, we decided the uncertainties were sufficient, that we should watch the export data a little longer and make ourselves more confident in that.
4 p.m.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
You made comments on spending on infrastructure, that deficits might be positive if infrastructure spending is bringing a good rate of return for the economy eventually. You also said that for any decision on the rates there is a lag before you see the effects. I would submit, it's the same thing for infrastructure spending as well. How long are you willing to wait to see results on both sides, either for a decision on the rates or on the impact of infrastructure spending?
4 p.m.
Governor, Bank of Canada
I don't have an answer to that question, but there's nothing mechanical about it. Each of these decisions is a complex combination of risks, and we have to weigh the risks of waiting longer against the costs associated with doing something more immediate.
Certainly, as the first part of your question alludes, if we were to be easing further, we'd be very close to using unconventional tools. That's of course not a decision we would take lightly.
When we have the Canadian economy operating on two tracks, one track doing reasonably well and in certain regions doing quite well, and others adjusting through something quite difficult, it's not as easy as it sounds to speed up the fast growing parts to offset the slow growing parts. If everything were the same it would be an easier decision in many ways to do that kind of thing.
This is what I mean by the uncertainties. They are multi-dimensional. We do a fresh judgment every time. Again, we can't plan it that way. Our best plan right now, we think, is to wait for the next 18 months or so.
4 p.m.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
Thank you.
I have a final question about the agreement, targeting and inflation.
In the document drafted jointly with the Minister of Finance, you stated that is a method that has proven effective since its was created.
Yet we live in a very different world than when it was created. You admit this yourself: we are in a slow growth period, which was not necessarily the case when this mechanism was created.
We are in a situation where the target has always been 2%, plus or minus one percentage point, of course.
Was there any discussion or any possibility of actually trying something different, adding this as one more tool in the tool box, as you just said?
The other question is, have you considered having an agreement for less than five years, just to see if maybe we can try something else? We'll try it for a few years and it might actually bring us different results in a very different economic situation.
4 p.m.
Governor, Bank of Canada
Those are good questions, ones I'm going to pass over to Ms. Wilkins.
4 p.m.
Carolyn Wilkins Senior Deputy Governor, Bank of Canada
With our lower growth rate and a higher savings rate around the world, we note that the neutral rate, the neutral interest rate, is lower. We have questions about the fact that, with a target inflation rate of 2%, there is a greater likelihood of an interest rate that is close to zero or even negative. In the end, we estimated that it was essentially twice that.
We now believe that the lower interest rate is at minus 50 basis points, whereas we thought it was at plus 25 basis points during the crisis. The probability of achieving the lower interest rate and employing conventional monetary policy means that we have consolidated the possibility of increasing the target inflation rate to 3%.
Upon closer examination, we concluded that the costs by far outweighed the possible benefits. It is very intuitive. We have a tax system and the ability to transfer wealth between savers and lenders, but an increase in the inflation rate means that lower-income or older people must bear the cost of that increase.
In this context, we considered employing unconventional tools. Their effects are limited but positive nonetheless. Some studies show that they do work. It is preferable to keep the inflation rate relatively low, stable and predictable.
4:05 p.m.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Welcome Governor and Deputy Governor.
I would like to start off with a couple of comments. It's going to be a three-part question, if I can get it and your response in within the full seven minutes.
First of all, congratulations on the agreement, the policy statement on inflation targeting, going for another five years. Sending price stability to the market is very important for decision-makers, whether you're a saver or investor, and putting capital to work. It's important to know that's in place. So congratulations on that.
My first question deals with fiscal policy.
Governor, in your September 20 speech, “Living with Lower for Longer”, if I can quote you, it says here on policy prescriptions:
One important impediment to business growth that is widely shared globally is weak infrastructure. We know that infrastructure projects spur growth in the short term by boosting demand. More importantly, infrastructure projects can support long-term growth by raising an economy’s potential output.
With that statement from your September 20 speech, and really where monetary policy has done a lot of heavy lifting here in Canada.... The monetary policy transmission mechanism has worked very well here in Canada over the last number of years, but it's time for fiscal policy to take over, in my view. I would love to hear your wise words on that. That's part one.
The second part is to deal with two themes that have been identified in the deputy governor's speech in London that were re-emphasized in the monetary policy report that you've touched on, Governor. One has to do with labour supply, not labour participation rates, because they've held steady if you look from 1976 to now. The other one is productivity/competitiveness.
The labour supply we can deal with it with immigration. I think there's a solution there on the labour supply front, the labour growth rate. On the competitive front, on page 15 of the monetary policy report, there are a number of things that are concerning about our competitiveness and headwinds that are restraining export growth. I would appreciate some feedback on what fiscal policy or policy measures you think we may need to look at in terms of strengthening our ability there.
The third and final part is to deal with some ratios. We widely are given the 170% number for debt to disposable income, but if I look at the Stats Canada report where that number is provided, there are a number of measures on net worth of Canadians that we don't talk about. I'm somewhat, not concerned, but it raises a question on which side of the balance sheet we're looking, because if we look at financial asset ratios, Canadians are generally wealthier than they have ever been. There's a lot more net worth there. If I can get my iPad to open, I could pull them up.
I would like to get your take on the balance of looking at this one ratio, but in that same Stats Canada report, a number of other ratios point to a different picture of how the consumer is doing.
Those are the three questions.
4:05 p.m.
Liberal
The Chair Liberal Wayne Easter
If you could answer those three lengthy questions in three and half a minutes, that would be great.
4:05 p.m.
Governor, Bank of Canada
Okay, so I'm going to take one minute, and then I'm going to give two minutes to Ms. Wilkins.
4:05 p.m.
Governor, Bank of Canada
In my minute then, yes, the speech on “Living with Lower for Longer” talked about our estimate that the Canadian economy can aspire to a long-term trend growth rate of about 1.5% for the foreseeable future. That's our estimate of growth potential.
The whole world has slowed down because of slower demographics. We're not excepted from that, and the U.S. is only slightly higher at 1.7%, with a slightly younger population.
It's 1.5%, and in that context, what is it that we can do to make the trend line higher? We can remove some of the impediments to growth, which are structural things. These are not things that monetary policy is equipped to do much or anything about. Indeed, in the narrow sense, neither is fiscal policy.
By structural things we mean deficient infrastructure, which, of course, would mean providing better infrastructure, but it can be other things such as interprovincial free trade and free trade internationally. These are things that, when changed, can boost that growth rate by 0.1%, 0.2%, 0.3%, and pretty soon you're rounding up to 2.0% instead of 1.5%. That's what I was talking about there, and we have control over many of those policies.
Of course, the one that's happening right now is the infrastructure plan, which will be welcomed by firms. That helps them grow their business. Turning to labour supply, productivity, competitiveness, and the debt-to-income ratio, over to you, Ms. Wilkins.
4:10 p.m.
Senior Deputy Governor, Bank of Canada
In two minutes....
It's interesting that about half of the decline in Canada's growth and potential output is due to slower growth in labour supply. There's a real focus on figuring out how to increase that. Of course, the arithmetics of it are that immigration can do that.
I think there are other things, as well, that we've noticed, and that's just trying to look at the prime-age worker participation rates. Getting those segments of the population, discouraged men and women—women who perhaps haven't yet decided to join the labour force—could increase the labour input to potential output.
There's also the youth. When you look at the participation rates for young people since the crisis, they've declined. The governor's standing line is that they're probably not retiring. I think that's true. Some of them are in school, but some of them aren't. They're looking for work and could be productive.
When I talk to firms, they talk about the need to have the right labour in the right place at the right time. With regard to labour mobility, especially when you have the kind of shock we've had, where some areas are doing less well but there are jobs in another part of the country, that labour mobility is so important. Having the right education to fill the needs that are emerging is important as well.
That's not independent of productivity. The governor already mentioned a few things that firms tell us with respect to productivity. Clearly, regulation in electricity prices and other things affect their decisions about where they're going to locate.
You're right to say that on the measures of the health of the household balance sheet and their financial position, it's always wise to look at a number of indicators. Looking at that aggregate debt-to-income ratio is one way to look at it. We delve in, looking at net worth. That is another thing.
I think the best way to look at the health of the household sector is to look at the distribution of those things. You can have a lot of those average numbers hiding a lot that's underneath.
If you look back at our financial system review in June, you'll see that we did a strong analysis of debt-to-income ratios and loan-to-income ratios, and that a very high and growing percentage of the population is taking on loans that are over 450% of their income. That means that their debt service ratios are very high.
It may be that they have an asset. Most Canadians' assets are their houses. The issue, though, is that if they get into trouble from an employment point of view or an income stream point of view, they don't necessarily have those liquid assets that allow them to keep meeting their debt obligations.
It's great to see that net worth is high, but that depends on the value of the asset and the stability of the value of that asset, but also the liquidity of that asset. It's good to look at a number of indicators and look at the distribution across those indicators.
4:15 p.m.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
Governor, I appreciate your commitment to our country and your service. I appreciate your presence here today and making yourself available to parliamentarians. I'd like to talk a bit about the government's growth plan.
You did an interview on the weekend where you talked about a percentage, or a point of a percentage here or there, that could have a drastic input when we're talking about such anemic numbers: 1% growth versus 1.5% or 1.7%.
Obviously, infrastructure is a big part of that. Now, not all infrastructure is the same. When you speak of infrastructure, productive infrastructure, things that make us more efficient or allow us to grow our economy, what kind of things are you referencing? It's a bit of a hazy bubble out there for a general term.
4:15 p.m.
Governor, Bank of Canada
You're right that not all infrastructure is the same. The term I think I used on Sunday was “targeted growth-enabling infrastructure”. Even that I suppose is a bit vague. The filter that one would want to put on this would be, “Here's my infrastructure proposal.” “Okay, tell me, then, how that would be growth enabling for the economy.”
I hear people sort of saying, “Well, if it's just a bunch of roads...”. They dismiss roads. Well, I'm remembering the project to twin the road to the main border in New Brunswick, which made an enormous difference to seafood producers supplying northeastern United States restaurants. They were able to promise much faster, fresher delivery. We actually saw the impact of that on exports.
4:15 p.m.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
Like the Confederation Bridge? Mr. Easter pointed—
4:15 p.m.
Governor, Bank of Canada
Those kinds of things can make a big difference to business, and those are the kinds of arguments you'd like to hear.
4:15 p.m.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
The challenge I have is that about two-thirds of the $60 billion that the government has put in its fiscal plan over the next two years for infrastructure relates to green and social infrastructure, which doesn't seem to meet the same category. Are you concerned that the government is moving too much money around to too many areas that may not see the growth potential you've been talking about?
4:15 p.m.
Governor, Bank of Canada
I am not going to judge specific things that the government is doing on the fiscal front. I am explaining that, if you can make the argument that something will be growth enabling, then it passes the infrastructure test as I described it. You could think about infrastructure that may help women participate in the workforce more easily. That would be social infrastructure.
4:15 p.m.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
I don't think it's a good idea for us to use terms that become vague and whatnot.
4:15 p.m.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
There is the term “helicopter money”, where the approach is just to deposit money across the country, and there may be some stimulative effect, versus what you said in your comments, which is roads, ports, etc., things that help us sell more of our exports.
I do take the point that there are investments the government can make, but I don't think it's under the terms of infrastructure. Earlier, we talked about interprovincial labour mobility, participation, and education. That's a bit of a different thing.
You have downgraded the amount of growth potential you see, so either the forces outside Canada and some of the things that are happening are worse than expected, or we are not getting as much pep for the fiscal dollars that the government is putting into it. Could you explain how much growth we are getting from the government's fiscal plan?