Finance Committee on Oct. 24th, 2016

[Stephen S. Poloz]

The downgrade is almost entirely from external forces, as has been our series of downgrades. There has been a global disappointment, which has pushed down everybody's forecast, over and over again, over the last five or six years, in our case, primarily the U.S. On the edge of that, it's even a little less for us, because our share of exports to the United States has been gradually declining. That's just to put it into context.

In terms of how much growth we expect from the fiscal plan, that remains something to be monitored. What we have built in is approximately 0.5 percentage points this year, and one percentage point on the level of GDP by the end of the next fiscal year. Of course, that remains to be seen, because there are no signs yet in the data we have available. It's a little early. We had the child benefit in July, so as we go through the rest of this year, we should see something in the retail sales data.

Importantly, there is no category in the StatsCan publication that is going to tell us, “This came from fiscal expansion.” It will tell us how much of a contribution the government made to GDP, but that won't be mapped directly to the fiscal plan. It's important that we understand that.

Years from now, we will be analyzing this episode, and the economists will figure out how much actually came, but that's very common. We referred to the U.S. infrastructure spending, where the components on roads and bridges delivered over an eight-year period three times the initial investment. That came both on the level, because of the spending, and because of the fact that those roads increased the potential growth rate for businesses to move their stuff around.

[The Chair, Liberal, Wayne Easter]

Thank you, both.

After we get through our initial round, Dan, I think we'll have some time for a couple of supplementaries.

Mr. Ouellette, go ahead.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Thank you very much, Governor, for coming here today. I really appreciate it.

Just as a philosophy point, I don't view the Bank of Canada as outside or above the economy, but as an integral part of it.

I was just wondering, how many times a year do you meet with indigenous leaders in this country?

[Stephen S. Poloz]

I'm sorry, could you repeat it?

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

How many times a year do you meet with indigenous leaders? I know you meet with the Prime Minister and other officials. I was just wondering how many times you meet with indigenous officials, or indigenous peoples.

[Stephen S. Poloz]

Personally, I've only met one time with an indigenous leader, when we were visiting Fort McMurray. Oh, excuse me, and then again when we were in Yukon, in Whitehorse. So, for over two years, that is once per year.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

As you are the leader of one of the foundational economic institutions of our country, I was just wondering if you could share some of your views on the nation-to-nation relationship and what you can do to further that relationship.

[Stephen S. Poloz]

Do you mean as the Bank of Canada?

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Yes.

[Stephen S. Poloz]

I don't have any idea how the Bank of Canada monetary policy, which just moves interest rates around, could have any bearing on that relationship.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Statistics are very hard to come by, for instance, on indigenous unemployment in this country on reserves. I know Stats Canada often has difficulty compiling it. I know you use statistics an awful lot—you're economists—and I think if you perhaps would push Stats Canada, maybe it would compile better statistics that would be able to inform your decision-making, because we are making decisions and Canada is made up of many different societies and groups and peoples and nations within this one nation-state. I'm just encouraging you, in a friendly way, to think about those issues.

I guess we are talking about social infrastructure as well, and the middle class and the poor spend a higher proportion of their income on consumer goods in the economy, and they don't save as much as some other groups in society in the upper classes or upper middle classes.

You were talking a bit about the Canada child benefit that we put in place. Do you believe that would have a beneficial impact on people's lives as a social infrastructure? Would that be something that could be money well spent? People could use that money for educational purposes and trying to improve their conditions and economic and educational opportunities.

[Stephen S. Poloz]

I'm not in a position to comment on the specific nature of that policy and all the various effects it could have. From our perspective, our primary interest is in trying to evaluate its impact from a macro point of view: how much of an effect it would have on the economy and therefore on the things we talked about earlier, how much excess capacity we have, and how long it will take us to close the excess capacity gap and get inflation back to target.

In that sense, it plays a role there because it is expansionary. It is clearly an expansionary policy, so it reduces the output gap compared to what we would have without it.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

We were talking about deficits. In some cases we've had low growth for a long period of time. Deficit spending in itself could be seen as being an investment if it's used in the right way in order to increase growth and to get us over the hump so we don't have a recession or other long-term socioeconomic impacts. Would you agree with that statement?

[Stephen S. Poloz]

Well, I would, but importantly, infrastructure spending has two dimensions. One is that you spend the money and that increases jobs in the actual building of the infrastructure. Second, if it's targeted in the way I described before, targeted at growth-enabling investment. It's not really different from what a company does, which is to invest in new machinery or equipment so that the company will grow in the future, and that machinery then pays for itself, as you go through time. Infrastructure should be seen in a very similar way. If it's growth enabling, it will produce more economic growth and therefore tax revenues and so on to support it in the future.

[Robert-Falcon Ouellette, Liberal, Winnipeg Centre, MB]

Thank you.

[The Chair, Liberal, Wayne Easter]

We'll leave it there. I think we are stretching into some areas that the Bank of Canada does not have complete responsibility for, but that's fine. It was a good exchange.

Go ahead, Mr. Liepert.

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

Thank you, and welcome, Governor.

I'm from Alberta. There has been a view in the yesteryear, I think, that if oil prices came down, the dollar would come down with it, exports would increase, and we'd be back to the good old days. That has not happened.

There are strong indications that, regardless of the outcome in the U.S. election, the fed is probably going to increase interest rates in the United States. Maybe you have some information on this that is different from what we are led to believe, and if your monetary policy doesn't track that, the obvious result is going to be a lowering of the dollar.

I'd like you to make some general comments about where the dollar can go, based on some of the monetary policies we have little control over, before it becomes an issue in itself, relative to inflation.

[Stephen S. Poloz]

The relationship between the Canadian dollar and all those things is not very predictable. The one thing we've seen as a steady indicator of the level of the dollar has been our terms of trade, which are highly correlated with the oil price in most periods. It can be other things. If oil is constant and other commodity prices are rising, then the dollar might reflect that. Interest rate differentials, which you mentioned, are also a factor. On any given day, in any period, however, those two things could move in opposite directions. It's not just the actual interest rates; the expectations about interest rates also matter.

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

How low can we go when it comes to the dollar? Where is your head at, relative to the dollar?

[Stephen S. Poloz]

I would decline to comment on the level of the dollar, just as I wouldn't want to make a clear statement about where oil prices might be over a certain horizon. If oil prices were to rise, chances are that the Canadian dollar would rise. If nothing else, we're moving at the same time. If oil prices went down, it would be the same thing.

There is no magic number for us to have on that. It's driven by almost every fundamental in the economy. We tend to think only about those two headline ones, but underneath all that is the economy's competitiveness and the forces acting on it. The exchange rate is a major equilibration channel that is affected by almost everything in the economy and outside of it.

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

Let me change the direction a little bit. One of the things that I continue to hear about, certainly in Alberta, is the continued piling on by government. Increased taxes in Alberta's case, an increase in the minimum wage, Ontario hydro rates—all these are in some way influenced by government policy, be it federal, provincial, or whatever it is. We have a situation now where we have a huge deficit this year, and for the foreseeable future, at the federal level. We have huge accumulating deficits at the provincial level.

Do you have any sense as to how much longer we can continue to build those deficits before it starts to impact the dollar and all of these other numbers we've been talking about?

[Stephen S. Poloz]

I don't have anything exact. Historical experience certainly supports your main point, which is that deficits and government debt matter. These factors matter primarily to international investors' impressions of an economy, and their decisions tend to drive your currency around. We've had episodes in the past, in 1993, 1994, and 1995, where we had very rapidly rising federal debt and markets began to react negatively. There was nothing magic about the level, but it suddenly started to happen that way. No one, including me, thinks this is without limit. However, we don't have, really, measures of those things; we just see tendencies.

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

Maybe you don't have measures, but is it starting to give you concern?

[Stephen S. Poloz]

At this time, no. At this time, our fiscal situation is among the best in the world, so I think for the time being, the government has considerable flexibility on that front.

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

That says to me—