Right.
Evidence of meeting #37 for Finance in the 43rd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was bank.
A recording is available from Parliament.
Evidence of meeting #37 for Finance in the 43rd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was bank.
A recording is available from Parliament.
3:20 p.m.
Governor, Bank of Canada
The Government of Canada has delivered an extraordinary amount of support to help bridge Canadians through this. The monetary policy has lowered interest rates to reduce the interest rate costs that Canadians are facing.
3:20 p.m.
Governor, Bank of Canada
That is the best contribution that we can make to getting Canadians back to work, which is the best thing we can do to improve Canadians...to prevent Canadians from going insolvent.
3:20 p.m.
Conservative
Pierre Poilievre Conservative Carleton, ON
Sorry. Mr. Chair, we're well over the response time.
It doesn't sound like you have planned for the prospective future interest rate hikes, and it doesn't sound like you've modelled out what impact they would have on households.
I want to return to a paper you wrote in 1995 about government debt. You said:
In particular higher debt levels require higher tax rates to be sustained, and taxes affect economic activity by driving a wedge between the price the seller receives and [the] price the buyer pays. This wedge imposes an efficiency cost on the economy that is larger the higher taxes are. In labour markets, for example, most studies find that the effect of higher taxes is to reduce desired labour supply, and the disincentive effects of taxation are larger the higher marginal tax rates are.
In other words, higher taxes, fewer jobs; higher taxes, less work. That's what you wrote. I'm wondering if your recent appointment has changed your perspective on this; if you've reversed yourself in order to align with the high-debt and high-tax policies of the government or if you've retained the view that you had in that paper.
3:25 p.m.
Liberal
The Chair Liberal Wayne Easter
Thank you. That will end the questions.
Governor, you have about a minute to answer. Go ahead.
3:25 p.m.
Governor, Bank of Canada
Fiscal policy is the purview of the Minister of Finance. What I wrote as an economist in the 1990s—
3:25 p.m.
Governor, Bank of Canada
I stand by what I wrote. I would remind you, though, that the situation in the 1990s was very different. In the 1991-92 recession, Canada had a very high debt situation. As a result, the government was unable to provide a kind of stimulus, and of course coming out of it, there was a large fiscal consolidation.
Today, the situation is very different. We are reaping the benefits of starting from a very good fiscal situation, and the government is in a position to provide needed stimulus.
3:25 p.m.
Liberal
The Chair Liberal Wayne Easter
Okay, thank you.
Mr. Fraser, you have six minutes or thereabouts. We do have ample time. I want people to have the time to clearly articulate their views. This is an important subject.
Mr. Fraser.
June 16th, 2020 / 3:25 p.m.
Liberal
Sean Fraser Liberal Central Nova, NS
I'll do my best to give the witness time, and I'll focus on real-world examples where possible.
There's a point I want to pick up on from my colleague Mr. Poilievre. It seems as though he wasn't listening to Professor Milligan's testimony before this committee. He pointed out very eloquently that it wasn't government decisions that led to increased cost to Canadians; it was the fact that we have a global pandemic that has created a certain cost. In fact, he said the government's response is probably one of the best ways to mitigate the social costs of the pandemic.
From there we heard testimony from other economists who suggested that the federal government is perhaps in the best position to incur some of the debt that this virus has caused in order to, again, mitigate social consequences. When your predecessor testified, he made the same point: that if anything, this pandemic is likely to have a deflationary effect and that if there was some inflation, it might actually help the economy in these scenarios.
Coming back to the point that Mr. Poilievre led with, which is really about the risk that a higher interest rate could potentially have, I'm curious about something. You mentioned that you don't believe there is a risk at present of that kind of an economic consequence, but why is that? Are there strategic risks we should be turning our mind to that could cause a sudden and unexpected hike in the rate of inflation or, more importantly for the purpose of this line of questioning, the rate of interest?
3:25 p.m.
Governor, Bank of Canada
The bigger risk is falling inflation and even deflation. We are more concerned about the risk of deflation than the risk of inflation, for two reasons.
First of all, deflation is particularly harmful to an economy, particularly an economy with high levels of household indebtedness, because the real value of people's debts goes up and their ability to service those debts goes down. That's why I was saying they're more likely to become insolvent in that situation. Second, we're already in a position such that our policy rate is at the effective lower bound of 25 basis points. Interest rates across the yield curve are already very low, so there's only so much monetary stimulus space available. For both those reasons, you want to really guard against falling inflation, and particularly deflation.
We're starting to see the containment measures coming off across Canada. With that, supply is being reopened and we're starting to see people being called back to work. We're starting to see people make purchases.
We've lost roughly three million jobs. We have about 290,000 of those back, but we're still down 2.7 million jobs. Given that, you can expect that the purchasing power and the confidence of Canadians are going to be severely impacted. That is going to reduce demand more than supply, which will put downward pressure on inflation.
Our actions are really designed to bring inflation back to target, and the way to do that is to support employment and output growth.
3:30 p.m.
Liberal
Sean Fraser Liberal Central Nova, NS
I would like to come back, if there's time, to the issue of whether there are risks we need to be worried about on the other side of the equation. For now, as I have a limited amount of time, I'll pivot in my line of questioning.
You were, of course, heavily involved with the expert panel on sustainable finance. In your new role, you made a point that I think is important about the independence of the bank. Obviously, helping Canada transition towards a greener economy and a more sustainable economy was necessary, in my view, before the pandemic arose.
There's been an enormous coordination between OSFI, the bank and the federal government in the pandemic response. On the issue of sustainable finance or economic growth more broadly, how can we continue to see that level of coordination, which does not interfere with the independence of the bank but allows Canada to position itself most competitively to take advantage of the opportunities that were flagged in the expert panel's report on sustainable finance?
3:30 p.m.
Governor, Bank of Canada
I'm glad you've seen our report. I will underline at the outset that when I chaired that panel I was dean of the Rotman School of Management. Together with the other expert panel members, we delivered that to the Minister of Finance and the Minister of the Environment. It's really up to them now to decide what to do with those recommendations.
I do think that responding to climate change is going to take a whole-of-government and whole-of-economy effort. It's going to take the public sector and, importantly, it's going to take the private sector. Ultimately, the private sector does most of the production in this economy and has a very important role to play too.
I'm going to ask my colleague Deputy Governor Wilkins to say a few words on the bank's research and strategy around climate change, but I will just underline that climate change is a big force on the economy and it's going to be accelerating. We at the bank are going to have to accelerate the work we're doing, as are other organizations and as is the private sector.
Senior Deputy Governor Wilkins, do you want to say a few words about our strategy?
3:30 p.m.
Carolyn A. Wilkins Senior Deputy Governor, Bank of Canada
Absolutely, Governor.
Thank you, Chair.
We do have quite an extensive work program which aims, just as you suggest, to complement the work that's done by governments, but also by the private sector, in areas that you would think about. The physical risks are the ones that are most palpable for people, because when they live them they're affecting their daily lives, but clearly, those risks, including exposures of financial institutions to physical risk and the disruptions that we've seen to economic activity, are important for us to understand.
We're doing work as well on the risk of the transition. Transition to a low-carbon economy can change relative values of asset prices. It could change which sectors do better than others, and that can present risks to the financial system that we need to understand and get ready for. That's a perfect opportunity for us—we're not a bank regulator—to work with OSFI and our private sector partners on trying to understand how to get the right data and do the right analysis so that we are ready for that.
Then, of course, there's this understanding of how the macro economy is going to change. We tend to think about these risks or the transition as being only one-sided and kind of downside, but in fact there are lots of opportunities. Farmers, for example, can invest in big data. They're doing that to improve their crop yields while at the same time they reduce their fuel consumption.
These kinds of changes in the macro economy affect how monetary policy might work and where the jobs are going to be. Again, we need to work with our counterparts to understand those as well.
Finally, we have our own job to do with our own business in making sure that we work to have the carbon footprint that we're happy with. We're committed to doing that and, with that, building in the right amount of transparency over time.
3:35 p.m.
Liberal
Sean Fraser Liberal Central Nova, NS
Mr. Chair, if I could get five seconds....
If you're looking for my feedback on the five-dollar bill, I hope you're thinking about Terry Fox. Thank you.
3:35 p.m.
Liberal
The Chair Liberal Wayne Easter
We have Mr. Ste-Marie, who will be followed by Mr. Julian.
Gabriel, the floor is yours.
3:35 p.m.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you, Mr. Chair.
Good morning and welcome to the committee, Governor Macklem. I congratulate you on your appointment.
Madam Senior Deputy Governor Wilkins, thank you for appearing again at the committee.
Regarding the name of a Canadian personality who deserves to be on the five-dollar bill, Mr. Fraser suggested Terry Fox, and I would like to suggest the chair of our committee, Mr. Easter.
That being said, let's move on to more serious business.
Economists Joseph Stiglitz and Hamid Rashid are concerned that much of the fiscal and monetary policy measures put in place during the COVID-19 pandemic are not being used immediately to stimulate consumption and business investment, but rather to increase reserves. You alluded to that briefly in your presentation. The economists say that this leads to the paradox that we may end up with a massive increase in the money supply and a low use of this liquidity by households and businesses.
Economists are concerned about a possible speculative bubble, especially in the stock markets, as there is a lot of available money that is not being used by consumers and businesses.
Could you give us your opinion on this? What is your analysis of the situation?
3:35 p.m.
Governor, Bank of Canada
You are right; there is a lot of uncertainty. We're using tools that we haven't used in Canada in the past, and it's actually difficult to predict the effects.
Current data show that fiscal expansion has supported household incomes and has almost replaced the loss of income due to the COVID-19 pandemic. We also see that the savings rate has increased somewhat, probably because households cannot go to the shops to spend. This is really good news, because households have reduced their debts and they now have the capacity to buy.
There is a risk that households will lack confidence and not spend. Their savings rate would therefore increase further. This underscores the importance of restoring household confidence, and the most important thing that will strengthen people's confidence is that they have jobs and a predictable income. If households are confident when the economy recovers, they borrow and spend, especially when interest rates are low, and that creates a strong economic recovery. There are certainly risks, and we will do our best to manage them. Fiscal expansion plays an important role because it creates the conditions for economic recovery.
3:40 p.m.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you very much, Mr. Macklem.
I also thank you for answering my question in French.
I would like to draw a parallel with what your predecessor, Mr. Poloz, told us in his last appearance before the committee. In his view, it was very important to put in place budgetary and fiscal policies, since the tools of the Bank of Canada, the central bank, are already widely used.
As interest rates were already low, the previous governor closed the door to the use of negative interest rates. With respect to fiscal and tax policies, Mr. Poloz had strongly criticized the employment insurance system, whose purpose is to ensure income maintenance for workers who lose their jobs. As soon as the crisis began, the system collapsed. That is what led to the introduction of the Canada Emergency Response Benefit and the Emergency Wage Subsidy.
In your opinion, once the pandemic is over, will there be a need for a major review of the current employment insurance system, as suggested by your predecessor?
3:40 p.m.
Governor, Bank of Canada
In reality, the review of the employment insurance system is the responsibility of the Department of Finance and the Government of Canada. This system is very important, but we have seen that it is not enough in times of crisis. The government therefore put in place, during the crisis, emergency initiatives and new temporary programs. However, I will leave it to the Government of Canada to decide on the future evolution of the employment insurance system.