Finance Committee on April 12th, 2017

[Carolyn Wilkins]

Clearly, we updated our potential output this time. We do it every year. When you do that, you need to take a view on productivity. One of the things you hear a lot about with automation is just how much potential there is to get enhancements in productivity.

Of course, we haven't factored any of that into our shorter term productivity growth, because this is a longer term question. It does raise the issue of what this means for employment and what it means for the distribution of income. I'm going to talk about it a lot more next week, but it's early days for our work on this at the Bank of Canada. Our work is very focused on the issues that are relevant for a central bank, so the transmission of monetary policy is one example of that. It's something that's on our radar, for sure.

[The Chair, Liberal, Wayne Easter]

Thank you both. I'll turn to Mr. Albas in a minute. I have a couple of questions and then we'll come back for one more question on the government side.

Just before you start, Dan, I have a couple of questions relating to the discussion with Robert. We did a pre-budget report called, “Creating the Conditions for Economic Growth”. I think it's fair to say that we'll be building on that theme, as we look forward to the pre-budget consultations for next year. Some people have suggested that productivity should be part of that focus, so we'll be interested to see the work that you do on productivity.

You've mentioned that fiscal policy could be part of a suite of policies that might help with economic growth. Do you have any other suggestions for enhancing economic growth? Maybe it's beyond your purview, but productivity is certainly one.

[Stephen S. Poloz]

Just to be clear, the earlier question posed was that if something bad happened in the Canadian economy, what tools would we use to try to create more employment. The question you're framing, I think, is a little different, so I'll answer it differently.

I think what you want to look for are things that we call the “third leg” of the policy suite, namely, structural policies. These are policies that are, in effect, intended to enhance the ability of the economy to grow, usually by removing impediments to growth rather than somehow trying to boost them.

A good example would be CETA, and another one would be CFTA. These are explicitly designed to remove impediments to business growth and job creation. As is often the case with structural policies, they are literally free money. It's not as if it costs money to do these things. It's changing rules or adapting programs that already exist so they're more effective.

What happens then is, let's say you do something that enhances the labour force participation of women. That increases the labour input for the economy and the potential output of the economy, giving us more room to grow. That would be a structural policy, not fiscal per se, and certainly not monetary policy.

It can work in much the same way as a free trade agreement works to enhance the ability of the economy to grow on its own. There is no end of examples that one could come up with.

[The Chair, Liberal, Wayne Easter]

Thank you for that. I think that gives us some food for thought for our fall hearings.

The last question I have, and I think the elephant in the room for our economy, as you mentioned in your submission, is where the United States may go in its trade policies, border adjustment tax, etc.

On a trilateral or global basis, do you have discussions with the U.S. Federal Reserve, and do they talk about how dangerous some of those policies might be to the North American trading relationship and how it might affect all three countries in NAFTA going forward?

I chair the Canada-U.S. committee and that's partly why I ask the question. What happens south of the border, and the great uncertainty that's there now, could really have an impact on our economy and theirs, going forward.

[Stephen S. Poloz]

The central bankers of the world meet every six or eight weeks at the Bank for International Settlements in Switzerland. Those meetings include Mexico and the United States. We have an almost continuous dialogue about these kinds of issues. In addition, those people meet together with the finance ministers at the G-20 or G-7 meetings a little less regularly.

There's a pretty strong consensus around the things you mention. I argued in a speech a couple weeks ago that much of the world's progress over the last 150 years for Canada, in terms of growth and prosperity, have been in periods that you could characterize as open: open to trade, capital, and immigration. All of the periods in which we were not open were very distressed periods here in Canada. It's an easy correlation to see.

The last time we were closed was just prior to Confederation. Confederation and the free trade agreement implied in it was a response to the closing of international markets—any port in a storm.

In the end, I think there is a strong consensus around these things. I'm hopeful that, as we have dialogue and understanding grows, many of these things that we hold dear are preserved.

[The Chair, Liberal, Wayne Easter]

Thank you very much for the openness in that answer.

We'll go to Mr. Albas, then Ms. Taylor.

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

Thank you again, Mr. Chair.

I'll pay you a compliment for the new $10 bill and the Konami code. I thought that was quite witty, coming from that generation. I used the code on the chair earlier, but he wouldn't double my time. He says it doesn't work on older systems, unless they're Japanese.

[Stephen S. Poloz]

Okay.

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

Anyway, I just want to ask a few things.

First of all, I'm glad that in your statement here today you addressed the point that American trade protectionism is a worry. I say this because the first half of the report just mentions trade protectionism in itself—although there are pockets of protectionism in some other parts of the world as well. Again, I know it's a difficult discussion, and I'm not really going to go there further because I think we've explored it as far as we can.

I want to talk a little bit about some of the bright spots you've identified, one of them being services. In the report it says that services are showing some potential. Can you give us more of an idea of this? Have there been any particular breakouts or bright spots in the services industry among certain provinces or industries?

[Stephen S. Poloz]

Indeed. Let met offer a few broad comments, and then I think Ms. Wilkins may have a few details.

In fact, I gave a speech on this at the C.D. Howe Institute back in the fall. There's a whole speech on our website about where the sources of strength are. I'll just mention a couple of the highlights.

The important thing here is that the economy is already transitioning into a much higher percentage of services than goods, and that's primarily because the highest productivity—the new machinery, the new technology—makes the goods sector more efficient. You have supporting businesses being created in the service part of the economy, and they're the ones that are actually very global and, conveniently, have high Canadian content. They benefit the most from a lower Canadian dollar. The situation is very strong in that sector at this time. An example that is really moving hard is IT services. These are very well-paying jobs. Tourism is a big one. Other examples are education services—universities—and health care services.

What have I missed?

[Carolyn Wilkins]

You have missed motion picture and sound recording.

[Stephen S. Poloz]

There you go.

[Carolyn Wilkins]

You get into a lot of industries that, as a share of the total economy, are small, but there are just so many of them. They add up to quite a bit in quite an important way.

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

One of the challenges I have as an MP is that when I talk to people about services, they obviously think of the fast food industry. Again, there's nothing wrong with that. However, what we're talking about here, as you said, are usually services that can be exported now. Some of our new free trade agreements include services.

Do you think those are being tracked well enough? Are you getting enough information to track services overall?

[Stephen S. Poloz]

For the most part, we are.

One of the reasons services are given less of a profile in the media and in general conversation is that we get the trade data each quarter, whereas the monthly report is only about goods. That, I know, is something that StatsCan is working on to improve.

Imagine if the report, every month, included all services. I think we'd all chat about what's going up, what's strong, and so on. When the quarter comes, well, we get the national accounts. Everybody is excited about that, and services take a back seat whereas they actually should be in the front seat.

I'm confident that they're doing everything they can to improve that. For us, it's about those longer trends, anyway. It's not a month-to-month thing that matters.

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

Again, when I go to some of these mills, they may be using German or Scandinavian equipment, but it's been reprogrammed by Canadian IT. It actually makes them more efficient—

[Stephen S. Poloz]

Exactly.

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

—and they get better real-time service.

Anyway, there are a couple of other things I will have to talk about, but I think that covers most of it today.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Albas.

Ms. Petitpas Taylor.

[Ginette Petitpas Taylor, Liberal, Moncton—Riverview—Dieppe, NB]

I have a very quick question.

During the course of the afternoon, you've been asked several questions on the high level of household debt in Canada, and you mentioned that a big part of that is related to mortgages.

At one point you indicated that the stock of debt is more sustainable. Could you elaborate a bit more on that, please?

[Stephen S. Poloz]

Yes. What I mean by that is that the quality of the outstanding stock of debt is improving through time because of the changes the government has put in place.

If today there is this much debt, the person who goes into the bank tonight and negotiates a mortgage has to qualify at a higher rule level, and so when they get their mortgage, that adds to the stock of debt, but we know that they're more sustainable than someone who qualified for a mortgage, let's say, a year ago or two years ago. That's what I meant. It's a little more resilient because they have to qualify at a higher interest rate. That means that, if interest rates were to go up in the way we described, if U.S. interest rates go up, and five-year mortgage rates drift up, they would already be prepared for it because they've already qualified at that higher rate.

[Ginette Petitpas Taylor, Liberal, Moncton—Riverview—Dieppe, NB]

Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Sorbara has one question, and that will close our discussion.

Mr. Sorbara.

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

Very quickly, I've described the budget that we recently rolled out as focused on skills, training, infrastructure, and innovation. I'd just like to focus on the lifelong learning aspect of skills training. In your opening comments, you talked about wages and unit labour costs being depressed, and there's obviously been an oil price shock, with implications for wages and income levels in Canada. Now looking at how we can get wages rising again through productivity, I think the budget rolls with that. I'm not asking for you to opine on the budget, but I am asking what is the importance of lifelong learning for Canadians in skills training, to make sure our workforce is ready.

[Stephen S. Poloz]

I would fit this into the segment I talked about with the chair, which is structural policies, which can be very powerful because they enable the economy to grow under its own force by removing impediments. One impediment would be that when somebody loses their job, they're not able to transition into another job easily, such as, for instance, the oil workers who were laid off in the course of the oil price decline. Investing more into that fluidity between sectors and the ability to, in effect, learn throughout one's career and throughout one's lifetime.... Many of us, such as our kids, are doing jobs that none of us ever imagined. How could we predict that and help them choose the right courses in university or whatever to prepare for that? These days it's more about preparing to be smart and adaptable than about learning specific things, and I think if companies were prepared to do more, under the right sorts of arrangements—on-the-job type of training or apprenticeship-type of programs in a wider array of fields—we could capitalize on smart people who are ready to adapt. We can't just rely on schools to give us turnkey resources in a world that's changing so fast.

I believe the kinds of tools that you talk about can be very important to releasing the capacity of the economy.