Evidence of meeting #38 for Finance in the 43rd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was sector.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Jean-François Perrault  Chief Economist, Scotiabank
Sherry Cooper  Chief Economist, Dominion Lending Centres
Mathieu D'Anjou  Director and Deputy Chief Economist, Desjardins Group
Avery Shenfeld  Managing Director and Chief Economist, CIBC Capital Markets
Jeff Wareham  Chief Executive Officer, Catch Capital Partners Inc.
David Macdonald  Senior Economist, Canadian Centre for Policy Alternatives
Douglas Porter  Chief Economist, BMO Bank of Montreal
Catherine Cobden  President, Canadian Steel Producers Association
Gary Sands  Senior Vice-President, Small Business Coalition, Canadian Federation of Independent Grocers
Yannis Karlos  Co-Chair, Association for Mountain Parks Protection and Enjoyment
Bill Bewick  Executive Director, Fairness Alberta
Pascale St-Onge  President, Fédération nationale des communications
Sophie Prégent  President of Union des artistes, Fédération nationale des communications
Luc Perreault  Strategic Advisor, Independent Broadcast Group
John Lewis  International Vice-President and Director of Canadian Affairs, International Alliance of Theatrical Stage Employees
Arden Ryshpan  Executive Director of Canadian Actors' Equity Association, International Alliance of Theatrical Stage Employees
Lawrence Morroni  Marketing Manager, Triodetic Sales, Triodetic Ltd
Peter Chabursky  Manager, MultiPoint Foundation Division, Triodetic Ltd
Stuart Back  Co-Chair, Association for Mountain Parks Protection and Enjoyment

3:50 p.m.

Managing Director and Chief Economist, CIBC Capital Markets

Avery Shenfeld

That's just mortgages, though.

3:50 p.m.

Conservative

Pierre Poilievre Conservative Carleton, ON

That's just mortgages, right.

3:50 p.m.

Managing Director and Chief Economist, CIBC Capital Markets

Avery Shenfeld

Banks have lots of other assets, like loans—

3:50 p.m.

Conservative

Pierre Poilievre Conservative Carleton, ON

Of course.

Sometimes I wonder why banks have so little concern about the indebtedness of Canadian households. Not all of them, but some of them have not expressed the kind of alarm that I see when I look at the numbers. It seems to me that's partly because banks are protected against any future serious meltdown and defaults because their largest consumer lending book is to homeowners whose mortgages are backed up by the government, and therefore the risk is really with taxpayers rather than bankers.

I'm very worried about the degree of debt we have in this country. Before the crisis we were at 356% of GDP, public and private debt combined, which is the second-highest ratio in the G7, only after Japan. That was all before COVID-19.

Do any of the witnesses want to comment on the serious possibility of some sort of debt crisis or crunch that could befall our public or private sectors as a result of those high levels of debt and the eventual and inevitable increase in interest rates in the medium term.

3:50 p.m.

Liberal

The Chair Liberal Wayne Easter

Who wants to go for that one?

Ms. Cooper, go ahead.

3:50 p.m.

Chief Economist, Dominion Lending Centres

Dr. Sherry Cooper

I'll take a stab at this.

I think it's important to drill down into the mortgage debt and credit card debt parts of household debt. Let's call it collateralized debt versus credit card debt. In terms of collateralized debt, it's really quite interesting that 40% of Canadian homeowners don't even have a mortgage. The Bank of Canada estimates that roughly 12% of Canadian homeowners have mortgages that are at what the bank considers excessive levels. The fact is that 58% of Canadian households have virtually no debt at all, in other words, debt of less than $25,000.

A lot of the time the policy-makers seem to be most concerned about housing debt as opposed to credit card debt, which is certainly not my point of view. It's not just because I work for a mortgage lender, but because, from a personal perspective, I've never paid just the minimum on a credit card, and I've taught my son not to do that either because interest rates are so high.

3:50 p.m.

Conservative

Pierre Poilievre Conservative Carleton, ON

Ms. Cooper, I think if everyone were as good with money as you are, then our nation would be in spectacular financial shape. I'm concerned about the people who are not within the 40% of mortgage-free group of Canadians. I'm concerned about these others who are mortgaged. The fact there is such a large group of people who have limited debt means that in order for us to arrive at the total household debt ratio of 177%, there must be another group of people who are extraordinarily indebted.

3:50 p.m.

Chief Economist, Dominion Lending Centres

3:50 p.m.

Conservative

Pierre Poilievre Conservative Carleton, ON

Who are these people who are bringing up the national household indebtedness average, and how vulnerable are they to a major credit event?

This question is for Ms. Cooper or anybody who wants to testify.

3:50 p.m.

Liberal

The Chair Liberal Wayne Easter

Who wants to go with that?

Mr. Macdonald, you're on.

3:50 p.m.

Senior Economist, Canadian Centre for Policy Alternatives

David Macdonald

I do want to revise my earlier statement. I have, in fact, looked it up. At the end of the first quarter of 2020, 30% of all mortgages in Canada were insured by the federal government, by CMHC.

In any event, to your point, Mr. Poilievre, the higher debt is primarily held by younger households who did not get into the housing market early enough and therefore did not have substantial amounts of equity that a lot of Canadians have seen being run up since about 2002. They're also more commonly in big cities, where housing prices are very high. Certainly high household debt, as well as high corporate debt—corporate debt has risen quite substantially in the last five years—means that lower interest rates that would otherwise encourage households and businesses to take out more loans are much less effective. Despite the fact we're at zero interest rates, it's not very useful. We're not seeing tremendous economic growth as a result.

3:55 p.m.

Conservative

Pierre Poilievre Conservative Carleton, ON

Is there any chance I can squeeze in one last short question?

3:55 p.m.

Liberal

The Chair Liberal Wayne Easter

You're already a minute over, but I'll be kind today because I know you very much want another question.

3:55 p.m.

Conservative

Pierre Poilievre Conservative Carleton, ON

Thank you very much, Mr. Chairman.

My question is, first, to Mr. Macdonald and then anyone else who wants to jump in.

After the 2008 financial crisis in the United States, massive quantitative easing effectively inflated asset values and represented a major wealth transfer to people who owned assets while effectively reducing the value of the wages that working class and impoverished Americans earned. Now we have this same quantitative easing in Canada, almost $400 billion of it.

Mr. Macdonald, do you believe the creation of all of this money is just going to again inflate the assets of the very wealthy and reduce the real value of the wages of the working class?

Anyone else can jump in if they want.

3:55 p.m.

Liberal

The Chair Liberal Wayne Easter

Okay, Mr. Macdonald, and I'll look for a hand if there's anybody else, and we'll have to move on.

Mr. Macdonald, and then Mr. Shenfeld.

3:55 p.m.

Senior Economist, Canadian Centre for Policy Alternatives

David Macdonald

Thanks so much for the question.

Certainly the Bank of Canada has always been engaged in buying some portion of federal government debt. That's ranged from about 5% in the 1980s to about 15% recently. It was as high as 25% in the 1970s. Given the recent purchases by the Bank of Canada, that percentage will likely rise to in the neighbourhood of 27%. It is certainly higher than we've seen historically, but not out of all range.

The main concern with the Bank of Canada's purchases of that much federal government debt is the creation of inflation, which is a particular concern if the economy is already at capacity. With 25% of our labour force being unemployed since February, or having lost the majority of their hours, as well as two months of negative inflation, not positive inflation, I don't think that's a terrible concern, but that's my answer

3:55 p.m.

Liberal

The Chair Liberal Wayne Easter

Okay.

Mr. Shenfeld, be fairly tight, if you could.

3:55 p.m.

Managing Director and Chief Economist, CIBC Capital Markets

Avery Shenfeld

I would just echo that. Many countries experimented with similar quantitative easing programs after the 2008 recession. Canada had a milder recession, so we didn't have to do that. None of those countries were left with a legacy of inflation, so while the premise of the question is right, that asset values are protected.... We're trying to do that, in fact, to retain some business confidence, but also to suppress interest rates. Remember, the government is borrowing hundreds of billions of dollars to finance this rescue effort. I think it's quite good that they're borrowing at a 0.5% interest rate as opposed to 2%. So the extent that—

3:55 p.m.

Conservative

Pierre Poilievre Conservative Carleton, ON

For now.

3:55 p.m.

Managing Director and Chief Economist, CIBC Capital Markets

Avery Shenfeld

For now. This is giving the government the opportunity to lock in some fairly good, low rates. Again, none of the countries that did QE ended up with soaring interest rates afterwards, nor did they end up with soaring inflation. By and large, I'd say the Bank of Canada is showing a lot of wisdom in using this extraordinary tool to deal with an extraordinary recession.

3:55 p.m.

Liberal

The Chair Liberal Wayne Easter

Okay, we'll have to move on to Mr. Fraser.

I'm sorry, Mr. Fraser, you won't get quite as much time, but go ahead, Sean.

3:55 p.m.

Liberal

Sean Fraser Liberal Central Nova, NS

I can never get a far shake here.

Thanks, Mr. Chair.

I have lots of questions. I'll try to keep them tight, and I'd ask the witnesses do the same in their response.

I'll go first to Mr. Shenfeld.

There is a certain level of optimism, frankly, that I've heard, that within a few years we're probably going to get back to 2019 levels of economic production in Canada. One of the things I'm concerned about is not that we won't get there in a few years, but with what will happen to those people who are living in the bubble in the intervening period? I'm curious if you have advice on what we can do during the transition and recovery, not only to get our GDP and unemployment rate back to where they might have been in 2019, but also to ensure that we mitigate against the possibility of widespread bankruptcies at the household or small business level.

3:55 p.m.

Managing Director and Chief Economist, CIBC Capital Markets

Avery Shenfeld

First of all, getting back to the level of GDP doesn't get you back to the same unemployment rate, because population grows. You actually have to be well above the previous level of GDP. We're going to be in this soup for a while.

I think the premise of your question is absolutely right. Government programs are going to have to play a role in protecting against insolvencies. Yes, I'm a banker, but I actually care about people going bust, because they also have our credit cards, not just mortgages that are insured. Also, as a Canadian, I want to see our economy get through this slumber period, and that means partly ensuring that households have some spending power when this is all done.

I think the right approach is certainly to look at all the various things that we're now doing for businesses and for households. We're going to manage them down, to some extent, as unemployment falls. The cost of these programs will come down. As job opportunities open up, we're going to have to provide appropriate incentives.

For example, the CERB program has one not-so-great feature, which is that if I earn $1,000, I get a $2,000 cheque, but if I earn $1,001, I get nothing. Someone who is earning a $1,000 a month has no incentive to look for a job that's going to pay him another $500. Similarly, the program that was designed for the wage subsidy had a particular cut-off.

We're going to need to re-examine these. Fortunately, we now have some time to do that and to design the programs in a way that provides some incentives.

Nevertheless, the support programs—in some form—have to stay in place, because otherwise we do get a wave of bankruptcies. We're going to see some of that anyway. We can't rescue all businesses. I think Sherry suggested that, and she's right. There are going to be things that unfortunately go under and households that are going to struggle. Banks have taken some pretty big hits in their recent quarterly earnings to provide for the losses associated with that. I think government still has to play a big role here; it's a long wait for the economy to be as good again.

4 p.m.

Liberal

Sean Fraser Liberal Central Nova, NS

Thank you. That's a good segue into my next question, which I'll direct to Mr. Perrault.

Mr. Shenfeld made the point on one occasion during his remarks that it's not particularly costly right now to borrow to cover some of the costs of these programs that were really created by the pandemic. We've made the decision that the federal government is better positioned than households and business to bear those costs.

Mr. Perrault, you made the point that there may come a time when that may not be the case. I'm curious. If the pandemic is the source point of these increased costs, is there a tipping point? What indicators should we be looking for? When should we say that the federal government is no longer the organization that should be bearing this cost and it should perhaps go to a different level of government or to households or businesses? I have a hard time seeing where they will be better positioned to incur these costs than the federal government will be.

4 p.m.

Chief Economist, Scotiabank

Jean-François Perrault

It's a great question. The fundamental challenge that I think the country is dealing with now is.... Sure, there is a lot of debt in the country, there's no question. When you layer it all together, as Mr. Poilievre indicated, we are a highly indebted country. That said, we are in this very difficult economic circumstance that requires a tremendous amount of support to get us through to the other side. The question very much is, who has the best balance sheet to do that?

It's clearly not households. It's clearly not provincial governments. It's clearly not our municipal governments, which can't even do anything. It's going to fall on the federal government. Even in a worst-case scenario with the resurgence of the virus and requiring an extension of the CERB or sustained wage subsidies or massive amounts of money going into training programs, if that were to be required at some point in time, we're still in a world where the federal government is going to be the entity with the best balance sheet to help us manage that.

Now, at some point, markets—