Finance Committee on March 18th, 2021

[The Chair, Liberal, Wayne Easter]

We'll call the meeting to order.

Welcome to meeting number 28 of the House of Commons Standing Committee on Finance. Pursuant to the order of reference of March 8, 2021, the committee is meeting to study Bill C-14, an act to implement certain provisions of the economic statement tabled in Parliament on November 30, 2020, and other measures.

Today's meeting is taking place in the hybrid format pursuant to the House order of January 25, 2021. Therefore, members are attending in person in the room and remotely using the Zoom application. The proceedings will be made available via the House of Commons website. Just so you're aware, the webcast will always show the person speaking rather than the entirety of the committee.

Welcome to our witnesses under this new format. We have three witnesses in the first hour-long panel, and we'll start with Mr. Macdonald with the Canadian Centre for Policy Alternatives.

Mr. Macdonald, could you hold your remarks pretty close to five minutes? We're tight on time.

Go ahead. The floor is yours.

[David Macdonald, Senior Economist, Canadian Centre for Policy Alternatives]

Excellent. Thank you, Mr. Easter.

I hope everyone can hear me.

Thanks so much to the committee for the invitation today.

Certainly, the economic response to COVID-19 from the government has been unprecedented in Canadian history. We'd need to look back at the World Wars to see government expenditures on this scale, although we'd also have to look back to the 1930s, almost a century ago, to see unemployment at this scale, particularly in the early months.

My recent report, “Picking up the tab”, was a comprehensive dataset of all 850 direct federal and provincial COVID-19 measures through the end of December 2020, including the fall fiscal update. The overall conclusion of this compilation is that, when it comes to measures to combat COVID-19, this has been almost entirely paid for by the federal government, with 92% of every dollar spent on measures to combat the coronavirus—everything from the purchase of PPE, to business and individual supports—having come from the federal government. Even in areas of provincial jurisdiction, like health care, 88% of the cost was borne by the federal government.

The largest expenditure, including both federal and provincial programs, has been in support of businesses, amounting to $4,100 a person. Supporting individuals comes in a close second at $3,900 per capita, and health care support is a distant third at $1,200 a person.

In each of the categories examined, except one, federal support was larger than provincial support. The one area where the provinces are spending more is on physical infrastructure to stimulate growth. This is being driven particularly by the western provinces. The federal government's major infrastructure program at this point is the resilience stream of the Canada infrastructure program, although this only reallocates existing funds and doesn't spend new funds.

It's worth pointing out that as the federal government embarks on new rounds of upcoming spending in the spring budget, in the last round of spending many of the provinces didn't properly match federal spending in support of municipal deficits, and many provinces didn't fully access the federal money available to them. In the next phase of the recovery, the federal government should keep a close eye on matching dollars and fund utilization to ensure the maximum impact for its expenditures.

This brings me to the next stage of federal COVID-19 spending, which has been promised at $70 billion to $100 billion in the upcoming spring budget. As I mentioned, infrastructure spending is already budgeted in several western provincial budgets. This is certainly an area where the federal government can back provincial efforts, like it did in the safe restart agreement. New infrastructure spending that reduces the country's carbon footprint can be an important opportunity to build back better, and further encourage central and Atlantic provinces to devote more of their COVID-19 dollars to infrastructure.

I'd also like to take a moment to call members' attention to our annual child care fee survey, published just this morning. It provides a detailed look at child care fees and COVID-19 impact in 37 Canadian cities. This year's survey shows a very concerning decline in enrolment in child care due to COVID-19, at the same time as fees remain high across many cities in the country. The decline in enrolment is worse in cities with high fees, and worse in cities with high unemployment. Without immediate consideration, site closure and/or the loss of staff may make a rapid recovery in the summer and fall impossible as parents can't find spaces for their kids as they hopefully go back to work.

One of the other ongoing lessons of the child care fee survey, which may be instructive for future federal efforts, is that the lowest child care fees are always found in cities where providers receive provincial operational grants, and then charge a low set fee. Just last year, Newfoundland became the fourth province to join Quebec, Manitoba and Prince Edward Island in this approach, and it looks like the Yukon will soon follow suit.

More broadly, I am encouraged that the federal government is committed to rebuilding the economy, rather than being overly preoccupied by federal deficits. Large federal deficits were necessary to avoid much worse deficits in other sectors. Had the federal government not covered expenses, as it had, those deficits would have occurred elsewhere in the economy, particularly in the provinces, as they covered health care costs; for individuals, as they lost jobs and weren't covered by EI; or for businesses, as public health measures wiped out incomes while expenses remained.

A deficit is neither good nor bad on its own. It is merely one side of an accounting relationship, with an equally sized surplus created in another sector. Every dollar comes from somewhere and goes to somewhere. To evaluate the utility of a deficit in a particular sector—say, the federal government sector—we have to track where the surplus was created, the other side of that accounting relationship.

For the past four quarters, the federal deficit of $220 billion has created a surplus of an equal amount, three-quarters of which has ended up in the household sector and one-quarter of which has ended up in the business sector. Thankfully little of the surplus has escaped Canada in the form of financial flows to non-residents.

The federal government isn’t constrained by deficits or debt-to-GDP ratios. It is constrained by the country’s productive capacity. As long as we have people who can’t find jobs, as well as empty stores and restaurants, we aren’t at our productive capacity.

Inflation is the constraint the federal government faces. We have to remember that going into this crisis we managed historically low unemployment and rock-bottom interest rates, and we still weren’t seeing sustained inflation. When we have 800,000 low-wage workers still out of a job compared with the numbers in February last year, we are nowhere near full capacity and inflation will remain subdued for a long time to come.

Thank you. I look forward to your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, David.

We will now turn to Ms. Susie Grynol from the Hotel Association of Canada.

Welcome, Susie. The floor is yours.

[Susie Grynol, President and Chief Executive Officer, Hotel Association of Canada]

Thank you very much.

Thank you for inviting me to join you today.

As I sat down to prepare my remarks, I was struck by the unique challenge that faces the hotel sector, and indeed this committee and the federal government. We face a balancing act. On the positive side, we have hope and a potential recovery on the horizon with vaccinations under way, which could lead to a possible domestic tourism recovery for some segments, such as resorts, this summer.

On the negative, and frankly, more realistic side, if we don't get all Canadians vaccinated by summer and we have a third wave of the virus, if people are encouraged to stay home, domestic and international borders stay closed and mass-gathering bans remain in place, we could enter COVID year two having lost the most important season for our industry once again.

Let me first address the positive summer scenario and what government action would be required. If we get most Canadians vaccinated by June, the government must pivot quickly—all levels of government—to allow for a safe reopening and invest in stimulating our recovery to maximize the summer tourism season.

This should include implementing best practices from other countries that have successfully reopened before us, breaking down provincial barriers to travel, stimulating domestic demand and confidence by providing tax incentives or rebates to people to spend their dollars in Canada, investing in domestic marketing campaigns and aligning with the U.S. Biden administration on an expedited Canada-U.S. border reopening.

In the second scenario, the worst case, in which restrictions are still necessary and remain in place for the summer, the government will need to provide financial support for the tourism and hospitality sectors until the recovery is possible.

I, unfortunately, believe that the worst case is the likely case. While most other sectors bounce back the day after lockdowns are lifted, we do not. Nobody books a trip the next day. Travel takes lead time. Event planning takes lead time, and those events are what drive the movement of people and the core of our business—festivals, fairs, concerts, theatre shows, weddings, major sporting events and conventions. None of these are planned for this summer or fall and are probably not likely until the spring.

We are asking for what Mark Carney called for in his new book: “Support for companies should be targeted at regenerating the most affected industries, rather than provided as expensive blanket support for all”. It is time for the government to tailor CEWS and CERS towards those who need them most.

In this worst-case scenario, we are looking for two things in the federal budget: big subsidy extension until the end of 2021 for the hardest-hit sectors, and an extension and expansion of the CERS program to help cover fixed costs until the end of 2021 while we are not in a position to make revenue.

Today this program is woefully inadequate. It cuts out the M from SMEs with the monthly cap. It does not cover enough eligible expenses, and it fails to account for the rising business costs like insurance, which has skyrocketed in our sector since COVID.

Our members' survey from March showed that 70% of Canadian hotels will go out of business without an extension of CERS and CEWS to the end of the year. This is a massive-scale loss and it is upon us. Simply put, if the government doesn't extend these programs past June and tailor them to the sectors that need them most, we will lose the majority of the hotel industry.

The government deserves credit for rolling out these programs quickly and for providing tailored debt solutions to the hardest hit. These programs are the reason we still have an industry standing today, but now is not the time to pull away from the sectors that will lag behind through no fault of their own.

The anchor businesses in the travel industry, including hotels, need to be preserved. Hotels support essential travel. They are the cornerstone of tourism regions. They allow Canada to compete for global events. They host our country's hockey tournaments and weddings, but they will not be there if the government does not plan adequately for both scenarios.

We need a clear signal in the budget that the government acknowledges our unique challenges and will stand behind us until recovery is possible.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Susie.

Before I go to our last witness on the panel, I will just say that the lineup for questions will start with Mr. Kelly, followed by Ms. Dzerowicz.

We turn now to Mr. Cross with the Macdonald-Laurier Institute.

Welcome, Philip. The floor is yours.

[Philip Cross, Fellow, Macdonald-Laurier Institute]

Thank you, and thanks for having me back.

Because I've addressed this committee before, I'm going to follow up on previous discussions I've had with you. I'm going to focus pretty much exclusively on inflation and interest rates. As Mr. Macdonald said, it's low inflation and low interest rates that make all of this work, so it's worth understanding that a little better.

Now I'll turn to my prepared statement for the translators.

Rising commodity prices early in 2021 are fuelling speculation that inflationary pressures could surface faster than central banks anticipate. Central banks took extreme measures to bolster the economy after the pandemic began, lowering interest rates to historic lows and expanding their balance sheets substantially. This led some to accuse central banks of “printing money”, which risks rekindling inflation.

The money supply has long been at the centre of macroeconomics. This reflects a centuries-long reliance on the quantity theory of money to guide the economy. The quantity theory is based on the identity that the money supply and its velocity determine GDP. Assuming velocity is stable over time and output grows steadily, changes in the money supply would be reflected in prices. Milton Friedman’s famous statement that “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output” summarizes what many believe is the origin of inflation.

Applying quantity theory is not simple or straightforward. There is no universal definition of money. Velocity is the the rate at which money is spent, reflecting the number of times money is turned over while making the transactions that generate nominal GDP. A key tenet of the quantity theory is that velocity is stable, or at least predictable.

However, with interest rates approaching zero in both 2009 and 2020, central banks resorted to quantitative easing to boost the economy. QE involves central banks buying bonds, mortgages and other assets to inject money into the financial system. By adopting QE, once again central banks have become “quantity theorists”.

Canada had a brief experiment with QE in 2008-09; however, the money supply and private sector credit did not accelerate. Even the Fed’s greater use of QE did not spark faster money supply growth. We can say that in 2008-09 these experiments with QE did not disprove the quantity theory of money because the broad money supply did not expand rapidly.

QE failed to deliver its promise to boost output and raise inflation after the financial crisis partly because it could not control whether banks increased lending or whether money was spent on GDP and not on existing assets like housing and the stock market. Since QE did not trigger faster GDP growth, neither did it fuel inflation. A regional Fed president bemoaned in 2012 that “the historical relationships between the amount of reserves, the money supply, and the economy are unlikely to hold in the future”. I'm going to return to that quote in a minute.

In 2020, central banks rapidly resorted to even more QE, in Canada’s case mostly by buying federal debt to keep interest rates low while governments provided emergency pandemic relief. Unlike in 2008, however, the broad money supply soared from a 7% to a 30% growth. However, private sector credit demand has not accelerated.

Both prices and inflationary expectations are rising early in 2021, with the latter rising to 2.2% in the U.S. Economists have warned that the U.S. risks overheating because the Biden’s administration’s $1.9-trillion stimulus is arriving just as the economy reopens with the rapid distribution of their vaccines. Fed chair Jerome Powell cites a “flat Phillips curve” as one reason inflation will not take off. The Phillips curve is the trade-off between inflation and capacity utilization, and a flat one shows resource utilization does not affect inflation.

I'm going to skip a paragraph here.

Easy monetary policy was adopted to directly stimulate the economy and facilitate government borrowing needed to help people during the pandemic. Monetary policy is a tool to stabilize the economy in the short term and control inflation, not to bail out governments from the long-term consequences of their fiscal choices.

If the economy recovers better than expected and inflationary pressures or expectations begin to rise—and nobody knows how pent-up demand will respond to the reopening after an unprecedented pandemic—then central banks will have to choose whether to continue to keep interest rates low to enable ongoing fiscal stimulus or start to tighten. In such a circumstance, I have no doubt that they will focus on inflation. In that case, governments that are slow to withdraw fiscal stimulus will face an unwillingness from central banks to continue to make borrowing easy and cheap.

Central banks will not abandon decades of building confidence in their inflation targets. It would take years and probably decades to restore that confidence. The risk of higher interest rates is much greater than that of inflation. The cost of higher interest rates will quickly be felt by governments with large debt loads.

For example, in Canada the PBO estimates that a 1% rise in interest rates would increase federal costs by $4.5 billion in the first year and $12.8 billion by the fifth year.

Both the Fed and the Bank of Canada will tolerate whatever inflation occurs in 2021 as both transitory and salutary. Inflation will accelerate to at least 3% and probably more because of base period effects. Gasoline prices were unusually low last spring, so automatically that's going to raise inflation this year. As well, firms need to rebuild profit margins and balance sheets, especially in industries such as restaurants, travel, recreation and personal services, as Susie mentioned.

Customers are flush with government transfers and are therefore able to afford higher prices, but if inflation becomes embedded into behaviour and especially expectations in 2022 and 2023, central banks will then take decisive action.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Cross.

We turn now to questions. We have Mr. Kelly first, followed by Ms. Dzerowicz.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Thank you.

I'll keep Mr. Cross going and ask him a question.

Given your testimony just now, what do you make of Bill C-14's unprecedented expansion and raising of Canada's debt ceiling? There's no budget, so we don't know why the debt ceiling would need to be raised. The debt ceiling is part of a second act, and we don't even know why it would necessarily be connected to this bill, which implements the fall economic statement.

Mr. Cross, what do you make of adding hundreds of billions of dollars to Canada's debt ceiling?

[Philip Cross]

As mentioned, a lot depends on the course of inflation and especially interest rates. At near-zero interest rates, almost any amount of debt is affordable and sustainable. The minute interest rates start rising very quickly, this country could find itself in a difficult position.

This was exactly the conundrum the economy faced in the 1994-95 debt crisis. At that point, interest payments especially became unsustainable. The Bank of Canada made it clear that it was not going to bail out the federal government. As the federal government made difficult fiscal choices, the Bank of Canada then maintained lower interest rates to ease that path to restore fiscal equilibrium. A lot depends on the course of interest rates, and a lot of people seem to be counting on interest rates staying low.

A lot of what I said today was based on Chairman Powell's comments for the Federal Reserve board yesterday. He clearly indicated that the central banks will put up with almost any amount of inflation this year. However, going forward, once people start to expect inflation, all bets are off and interest rates could rise quite quickly.

We've already seen interest rates rise this year. The 10-year bond rate in the U.S. has jumped up from less than 1% at the start of the year to 1.7% already. I sit here and watch every day and there's an increase of almost 0.1% a day. This is the story in financial markets these days: How long and how sustainable will the upward movement in interest rates be? That's going to determine everything.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Yes.

The whole sustainability of this plan is predicated on near-zero interest rates forever, it would seem. That's concerning, especially given your testimony.

You also mentioned in your testimony the extent to which quantitative easing contributes to GDP growth as opposed to just inflating the value of assets. At this time, during the worst economic crisis in almost a century, we have seen record real estate market activity and new price hikes in Canada's main real estate markets. We have also seen the stock market perform extremely well—albeit after a huge correction in the spring—with this incredible resurgence and recovery.

To what do you attribute the asset price inflation we've seen and the disconnect between that and GDP activity?

[Philip Cross]

That's been a feature of the economy since 2008. We've seen this huge quantitative easing. This huge stimulus in monetary policy seems to have disproportionately gone into financial assets—the bond market, the stock market. Now we're seeing, in the commodity market, that commodity prices are blowing through the roof. Even oil is up substantially. Crazy stuff like cryptocurrencies such as bitcoin are up, so there seems to be a lot of gambling going on in asset markets.

We're not seeing a lot of this, but a little more than in 2008-09 we're seeing this spillover into areas like retail sales. However, mostly it's gone into financial markets. That's created....

I should mention too that, much more so in Canada than the U.S., it's gone into our housing market. Exactly why I don't know. Obviously our housing market has been more.... The housing market in the U.S. had a tremendous crash in 2008. That's made people nervous down there. A lot of people think we have the conditions for a bubble here. Why exactly that money goes into housing, I don't know.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

This though has a direct impact on the least wealthy and most vulnerable Canadians. When we talk about inflation, economists don't like to include and will typically exclude things they consider too volatile to measure in inflation, things like food, energy and the cost of housing. If you want to subtract the three things that people need to survive, I don't doubt it might be easy to convince people there's no inflation.

What would you say to especially lower-income Canadians who are feeling the pinch of all the things they need to survive, month to month, rising in price?

[The Chair, Liberal, Wayne Easter]

Please give a fairly quick answer, Philip.

[Philip Cross]

That's been one of the features of this recession: the widening of inequality. What's happening in asset markets.... We saw the inequality widen in the labour market because lower-wage workers were obviously the most affected, but what we're seeing in asset prices only reinforces and widens this inequality.

[The Chair, Liberal, Wayne Easter]

Thank you, both.

We will turn now to Ms. Dzerowicz, followed by Mr. Ste-Marie.

Julie.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair.

I want to thank all the presenters for their very thoughtful presentations.

Mr. Macdonald, I'm going to start with you. I love it when people start off with numbers. It's always helpful to have the latest, so thank you for that. You are a true economist.

You mentioned 92% of every dollar to combat COVID-19 comes from the federal government. We have heard quite a bit of commentary from some of our opposition colleagues that we spent too much money on our emergency programs and that the supports we have implemented have caused us to go into massive debt.

We all know we have very few options to actually fund these types of programs, so we're going to have to increase our debt, raise taxes or cut crucial programs. In your opinion, how should the federal government have financed this emergency and extra spending?

[David Macdonald]

Thanks so much for the question.

Certainly, when it comes to debt and deficits, the federal government does not exist alone. It exists within the Canadian economy, across from other large sectors in the economy, and deficits and debt are fungible. In essence, they can move between sectors. In this case, the federal government took on a massive deficit in this year and what that did was create smaller deficits and in fact some surpluses in other sectors of the economy. For every deficit there's a surplus of equal value in another sector of the economy.

The federal government could have decided to spend none of this money. It could have decided to have no CERB, no support for business, no support for provinces and no support for health care and individuals. What would have occurred in that case is that those deficits would not have occurred on the federal books. They would have occurred on provincial government books as they covered health care costs. They would have occurred on household books that incurred deficits because they lost work but still had expenses, or on business books.

Despite the federal and provincial governments' efforts, we've nonetheless seen increases not only in federal debt but also in household and corporate debt at the same time. In fact, the household and corporate sectors are far more leveraged than the federal government is. If we were to see interest rate increases, they would certainly hit the federal government, but they'd hit the household and business sectors much harder. Not only do they pay higher interest rates, but they have a lot more debt.

I think it's worth understanding the federal government and its deficits not on their own, but by how it and those deficits relate to other sectors in the economy.

[Julie Dzerowicz, Liberal, Davenport, ON]

The other thing you're alluding to and you're reminding me about also, Mr. Macdonald, is the fact that if the federal government didn't take on the debt, we have heard from others that there would be worse repercussions for the economy and, as you just mentioned, there would be far higher debt levels whether on corporations or on the provinces.

We have often heard our Minister of Finance say that the government is taking on the debt so that Canadians don't need to. Do you think that's a fair statement?

[David Macdonald]

I think it is a fair statement. The debt could have occurred someplace else. Certainly even in the corporate sector, despite the businesses being the primary beneficiaries of the federal government's COVID-19 efforts, the debt-to-GDP ratio for the corporate sector has risen 15 percentage points in two quarters. It's going to be very difficult for the corporate sector, which already had very high debt, to dig itself out of this, and it would have been much worse had they not received things like the wage subsidy or support for rent.

Despite the help for households, household debt has continued to go up, and despite help for the provinces, provincial debt has gone up over the last three quarters.

Debt has to be understood across the entire economy. It should be looked at not in isolation, at only the federal level or the household level, but also with regard to how it moves and can move between sectors.

[Julie Dzerowicz, Liberal, Davenport, ON]

Maybe the other question...and I didn't mean to ask this, but I think it was just a comment Mr. Cross made at the end of one of his answers. I think there was a real attempt on the part of our government to make sure that our emergency programs really supported right across the income spectrum. I know a recent Stats Canada report indicated that households in the lowest income quintile increased their share of disposable income from 6.1% in the first quarter to as high as 7.2% in the second quarter of 2020, while those in the highest income quintile decreased their share of disposable income from 40.1% to 37.7% over the same period of time.

Would that give an indication that our emergency programs have been helpful and have worked particularly for those on the lower end of the income scale?

[David Macdonald]

I think some of the programs could have been better targeted. We think of top-ups to old age security, for instance, which goes across a large spectrum of seniors. It might have been better to devote that money purely to the guaranteed income supplement. There were broad top-ups across the entirety of people receiving the Canada child benefit, which goes quite a ways up into the income spectrum. Those might have been better targeted particularly to the lower-income recipients of the CCB.

Certainly if we look at some of the big programs to support individuals, like the CERB and its knock-on benefit, the CRB, as well as improvements to EI, the floor for what one can receive in benefits, at $500 a week, would have been a substantial benefit, particularly for lower-income households, which not only benefit from improvements in access in most cases but wouldn't even have gotten into the EI system period. Now even when they get in, they're sustained at a much higher level.

I certainly think that those changes in the CERB, EI and the CRB have been some of the more important ones in supporting low-income households, particularly those attached to the labour force. I certainly hope that going forward those are the types of changes that will be made permanent in upcoming EI reforms, when the CRB program is wound down this summer.

[The Chair, Liberal, Wayne Easter]

We will have to end it there.

Thank you, both.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

We turn now to Mr. Ste-Marie, followed by Mr. Julian.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

First of all, I would like to welcome our guests, including our colleague Geoff Regan, who is joining us today.

My questions go to Ms. Grynol.

Ms. Grynol, thank you for your testimony; it was quite alarming.

As I understand it, if the measures are not extended, 70% of your members are at risk of bankruptcy. Is that correct?