Finance Committee on Oct. 24th, 2016

[The Chair, Liberal, Wayne Easter]

I'm sorry, Ron. We're well over the time.

I'll just throw in a question here.

Where does the debt-to-GDP ratio come into this discussion? We have been holding pre-budget consultations across the country, and to Ron's point, there are people who wonder what the road map is going into the future, where the government is going to end up, but when we talk to Finance officials, they will come back to the debt-to-GDP ratio, which puts Canada in pretty good stead, I understand, so what about in that particular area?

[Stephen S. Poloz]

The federal debt-to-GDP is in the 30-odd per cent range, which is around half of what it was back in the nineties when we had this troublesome period. That is a very large difference. GDP is a very big number. I don't want to say that in some way that gives you the size of the room to manoeuvre, it just says that there's quite a lot of room to manoeuvre from a financial point of view, and I would not want to express a specific limit on it.

[The Chair, Liberal, Wayne Easter]

Thank you, Governor.

Mr. Grewal.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you, Governor and Deputy Governor, for being here with us today.

I want to pick up on a comment that appeared in an article yesterday. The headline read, “Canada has room to run deficits”.

The average Canadian isn't going to understand monetary policy in depth. When they read a headline like that, it gives them confidence. One of the roles of the Bank of Canada is to give consumers confidence in monetary policy.

If we're running these deficits up to almost $30 billion, what is the room? What is the gap? Where do we start to get into trouble in the debt-to-GDP ratio?

[Stephen S. Poloz]

As I was explaining just now, there is no magic number for that. We have seen countries in the past get into trouble, let's just say, at debt-to-GDP ratios that are much higher than what we have here in Canada, and by much higher, I mean double, or in the case of Japan, it's—I'm sorry, I forget—a very large number.

[Raj Grewal, Liberal, Brampton East, ON]

Is it comfortable to say that when you say “room”, that means significant room to run deficits in our country?

[Stephen S. Poloz]

Yes.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you, Governor, for that.

I also want to touch base on the concept of infrastructure. We've travelled the country from coast to coast. We've heard about the importance of government stimulus in growing the economy. Infrastructure is seen as one of the things the government can do to stimulate the economy.

You had a comment in the paper which said that infrastructure can lead to tax revenues, which keeps the system turning. Can you comment a little further on what you meant by it keeps the system turning?

You also mentioned that in the U.S., it's three times the investment from infrastructure spending on roads and bridges. What do you anticipate happening in Canada?

[Stephen S. Poloz]

Let me start with the last part, because I want to be very careful that I'm not confusing you. In the United States, I was referring to a historical study by economists as to what infrastructure spending solely on roads and bridges has done to economic growth. They discovered that, in the short term, it has more or less a dollar-for-dollar effect. However, what happens over the subsequent years, by eight years, which is quite a long time, it gives time for the growth rate to pick up a little, and then for that effect to accumulate. Economists call that a multiplier. How big is your multiplier? In that case, it turned out to be very close to three times the original investment, which over eight years is quite a good return. But that's only one specific study; it's not a rule of thumb, or anything like that.

In the case of the infrastructure program that's been announced here, we have simply assumed that the multipliers would be very conservative, a dollar for a dollar. There's a little more than this, and correct me if I'm wrong, because you're on top of—

[Carolyn Wilkins]

It depends on the source.

[Stephen S. Poloz]

It depends on the source.

[Carolyn Wilkins]

It's less than a dollar for the child tax benefit—

[Stephen S. Poloz]

That's right.

[Carolyn Wilkins]

—and more than a dollar for some of the other ones.

[Stephen S. Poloz]

For the infrastructure side, it's slightly more than one for one, and for the other ones, it's less than one for one.

[Raj Grewal, Liberal, Brampton East, ON]

—on the Canada child benefit.

[Stephen S. Poloz]

Yes.

[Raj Grewal, Liberal, Brampton East, ON]

As my colleague from Alberta also mentioned, we have a lower dollar compared to the U.S. Generally, we would assume that exports would increase, but you opened up your statement saying that we've had a sluggish export market. Do you have any other comments on why that's happening? You also mentioned that the U.S. election is causing consumer confidence to be at an all-time low. What percentage of decreased export demand or investment in the American economy is because people are worried about the outcome of an election?

[Stephen S. Poloz]

It's important that we bear in mind that Canada's exports have recovered tremendously and are now higher than they were pre-crisis. There was a massive decline in the wake of the crisis and global recession, and a very large recovery that took several years to complete. All I was saying before is that even though that recovery has been very impressive, cumulatively it has tended to fall short of what our models predicted. The dollar has had the effect we expected it to have, but on average just a little less than normal, not zero.

We've done a lot of research to try and refine our models to try to capture effects that aren't always in there, and one of the important ones is a shift in mix in the U.S. economy. Investment in the U.S. economy is a really important demand source for our exports, and investment has been weaker in the U.S. and, of course, not only in the U.S. but globally. This is one of the reasons that virtually everybody's trade is slower than it was before. We aren't alone in this. We're experiencing the same thing, and everybody's wrestling with the same issue.

[The Chair, Liberal, Wayne Easter]

You can squeeze in a quick one—

[Raj Grewal, Liberal, Brampton East, ON]

Thank you, Chair.

[The Chair, Liberal, Wayne Easter]

—but quick.

[Raj Grewal, Liberal, Brampton East, ON]

Governor, obviously, your biggest tool in the Bank of Canada is interest rates and the adjustment of the interest-rate variable. People are commenting that from reading the Financial Times or The Wall Street Journal, and you mentioned this in your comments as well, monetary policy isn't as important a stimulus as it used to be, that the economies don't move as much when the interest rates change. We've held the rate the same. My colleagues have mentioned, and I also agree with them, that the rate by the feds may change south of the border. We have countries around the world going into negative interest rates. At this point in time, what would an interest rate cut do for the Canadian economy?

[Stephen S. Poloz]

What we have said is that interest rate cuts in this low-rate environment are likely to have a smaller effect than they did when they were higher, but that's not the same as saying that low interest rates aren't doing anything. In fact, they're doing a lot. What's important to bear in mind is the relationships that we're modelling here are between interest rates and exchange rates and the level of the activity in the economy, the level of GDP, in the case of the dollar, and the level of exports. When those things change, you get a move to a higher level, which means growth picks up. But growth picks up only temporarily. Then when the effect is over, the level stays higher but the growth impact dissipates. We're not usually in this situation for as long as we've been at present, and this is why those comments are more prevalent. The fact is that those things are having a very large effect. Just imagine what it might look like if we stopped. That gives you an idea of the counterfactual.

[The Chair, Liberal, Wayne Easter]

Thank you both. We're considerably over time.

Mr. Caron.