Finance Committee on May 18th, 2021

[The Chair, Liberal, Wayne Easter]

Mr. Fast, for five minutes, followed by Ms. Dzerowicz.

[Ed Fast, Conservative, Abbotsford, BC]

That's what we call “elasticity”, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Okay, good.

[Ed Fast, Conservative, Abbotsford, BC]

Mr. Poloz, Stephen, it's nice to have you back at committee and see you again.

I want to address your opening comments. You referred to the inflationary impacts of stimulus, and you tended to downplay them. I think the word you used was that they are “transitory”.

Now, if they're not transitory and they are more pervasive and persistent, would you agree with me that that would represent a significant challenge to the sustainability premise of the budget?

[Stephen S. Poloz]

It's a highly hypothetical question, isn't it?

To me, the sorts of policies that have been put in place around the world post-COVID all look to people as if they would be inflationary, but what they are doing is counteracting an enormous deflationary force to keep us roughly where we should be.

When things normalize, one would need to transition to a more normalized set of policies across a wide front, and that, of course, is a matter of judgment when that actually takes place. Given that central banks, virtually every one that I know about, are pursuing inflation targets, then you'd expect them to continue to pursue those inflation targets.

To me, it's almost too hypothetical. If you're asking the question what happens to government debt when inflation goes up, indebtedness goes down. The economy, as it's measured in terms of national income.... Today, let's say it goes up, if things settle to normal and we're growing at, let's say, 2% per year real and 2% inflation, that would be 4% nominal growth.

[Ed Fast, Conservative, Abbotsford, BC]

That was not my question. My question was about the premise on which the budget was built.

The stimulus measures that were being introduced, the stimulus that's sitting on the sidelines in savings accounts on the corporate and household side, and the massive stimulus on the American side are all said to be transitory and will not have significant pervasive and sustained impacts on inflation, so we are told not to worry about interest rates, as they're going to stay around where they are right now.

If those assumptions are wrong, if you're wrong about the inflationary impacts of the stimulus, that changes a lot, doesn't it? That's my question.

[Stephen S. Poloz]

If that premise is wrong, then the economy will show signs of being much stronger sooner than expected, and those very same elastic policies that we talked about will immediately retreat and reduce the amount of stimulus that is being delivered. That's the beauty of the automatic formulation that's being used. If you're talking super-hypothetically, is it possible to overstimulate? It is, but I argued in my remarks that going gradually, as occurred during the 2008 to 2010 period, left a long legacy of permanent scars on the economy, and I think that suggests that a more rapid return to normalcy here will reduce the amount of scarring and therefore reduce the permanent effects.

[Ed Fast, Conservative, Abbotsford, BC]

I hope you're right. I really hope you're right.

[Stephen S. Poloz]

I hope so, too.

[Ed Fast, Conservative, Abbotsford, BC]

I want to touch on one other thing. You mentioned that the increase in housing prices isn't necessarily inflationary, that housing price inflation would have to be sustained for it to be considered inflation. Out my way, out on the west coast, we've had sustained housing inflation for a long time. If your statement were just hanging out there, I know it would attract a lot of attention, so do you want to clarify that?

[Stephen S. Poloz]

What I want to clarify is that StatsCan captures the cost of living in a home in your consumer price index—of course it does—and, importantly, that includes not just the price of a house but also the cost of servicing the mortgage that goes with it. If you look at charts that show debt service in the household sector, you see that basically the household sector has maintained a pretty constant level of debt service, because the rise in house prices has been offset by falling interest rates, roughly speaking—not everywhere, but for the aggregate economy. For that reason, we don't see a lot of evidence of skyrocketing house prices showing up as part of consumer prices.

I know that in individual markets the prices have gone up tremendously. As I've said previously, that is a side-effect that is pretty hard to avoid when you're stimulating the economy like this, and it's the main area that's grown, so the best antidote to that is to increase the supply of houses. To me, that's the most important thing. Houses are in short supply.

[Ed Fast, Conservative, Abbotsford, BC]

Of course, that's easier said than done.

[Stephen S. Poloz]

Agreed.

[The Chair, Liberal, Wayne Easter]

We are quite a bit over the time, so we'll have to move on to Ms. Dzerowicz, followed by Mr. Ste-Marie.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair.

I want to thank all three panellists for their excellent presentations.

My first questions are for Mr. Poloz.

Mr. Poloz, welcome back. It's nice to see you. I was very happy to hear your comments about the need to harmonize and reduce interprovincial trade barriers. I have valiantly tried to convince the opposition members on this committee of the need for an urgent study for us to move forward on eliminating interprovincial trade barriers. I have been unsuccessful to date.

You mentioned that it would cost nothing and could boost our economic growth by as much as child care—so up to around 2%. As you have indicated, Budget 2021 does have some money to start tackling the interprovincial trade barriers. Can you maybe talk a bit more about the importance of this and some of our initial steps or what some of the next steps should be?

[Stephen S. Poloz]

First, in my remarks, I indicated that there's twice as much potential economic growth in harmonizing trade barriers across provinces as there is in the child care initiative.

The best empirical work conducted by a professor from the University of Calgary, along with people at the IMF, suggests that for the country as a whole, we could boost national income by about 4% by erasing these inconsistent regulations across provinces.

That, to me, is free money because it just means sitting down and saying that, okay, there are eight different regulatory specifications for furnaces for homes across this country. Imagine if you're the manufacturer of furnaces; you need to manufacture to eight different standards. What is the purpose of that? It's an accidental outcome. Provinces do their own regulation, and over time, you get these divergences.

All we need to do is to have a weekend where everybody rolls up their sleeves and is committed to doing this. If we did this, then you could also leave the room and say, “We think we can do this without raising taxes.” Wouldn't that be a good news item?

To me, the motivation has never been higher than it is today to get down and to get serious about this. Of course, there are some things in there that people will defend very vigorously. Maybe it really is important that the creamers you get in the coffee shop in Montreal must be a different size than the ones you get in a coffee shop in Toronto. Maybe that's really important to someone, but I'm afraid I don't understand it.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Poloz. Thank you for mentioning the investments in immigration that we have in Budget 2021. They, indeed, will also help boost the economy, as well as grow jobs.

My next question for you is this. There's also a significant amount of investment for skills and training. Can you also comment on how this will help boost economic growth and help job creation?

[Stephen S. Poloz]

Skills and training investments ensure that we get the matches we need. We mentioned some shortages before. There are easy-to-identify shortages in the workforce.

I think this is going to become a larger problem as we go through and exit from the pandemic. You've probably heard me talk about the K-shaped economy. At the top part of the K, everything is performing quite well, and it's perhaps 97% of the economy, but then the bottom 3% that is struggling is going to continue to struggle. What we need to do is find ways for those folks to find their way into the top part of the K, just as we did after oil prices collapsed back in 2014-15. There was a K-shaped economy then.

Skills training helps folks find their way into the top part of the K. It improves the matching and the efficiencies and, therefore, the productivity of the economy. We can't do all of this through immigration. We need to do it with the folks who are dislocated by the shocks that hit our economy.

Programs exist, and the programs work, but I think those investments will pay off even more in the future because, basically, the technological revolution is being accelerated by COVID, so the displacement of workers will accelerate. We will need to invest more resources in that transition.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you.

My last question for you is about the economic scarring that you were talking about a little earlier.

We've heard on many occasions that our finance minister has been committed to sustained stimulus spending to ensure a lasting and strong economic recovery. We learned from 2008 that we don't want to be pulling out too quickly.

How do you think we can avoid the mistake of pulling stimulus too early and have a sustained recovery? Do you think we have the timing about right in our budget right now? I think we have the emergency benefits staying in place until late in the year.

[Stephen S. Poloz]

That last part is hard to say. Of course, it depends on the vaccinations, the success of the vaccinations, whether there's a way forward and those kinds of things. I really have no way of forecasting that.

Again, I emphasize the elasticity of the programs that were set up so that—provided that there's a willingness to maintain them a little longer, if necessary—we know that they'll automatically shorten themselves if we succeed with rapid vaccinations and things get back to normal.

We can do that with confidence, knowing that it's not like we're just spending money. We're actually making something available, and people only tap into it when they don't have a job.

That was a good model. It should serve us well as it unfolds. The timing, therefore, is something else. It's beyond any of our control, but the system is designed to accommodate different timing. I think that's appropriate.

In terms of the stimulus afterward, as I said at the beginning, it's a judgment call, really, and I'm not in a position to judge that overall. If for some reason, as Mr. Fast is asking, it turns out to be a little too much, well, the signs will be there. Then it will be possible to adjust policies in different ways in an endogenous fashion.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, both.

Before I turn to Mr. Ste-Marie, I just want to throw in a question to Ms. Kennedy.

I know you're in the Gros Morne area, Ms. Kennedy. You did mention the wage subsidy, and we had people on the previous panel on the emergency wage subsidy. How important is it to your industry and your area that changes be made to Bill C-30 with regard to the wage subsidy?

Second, I know you're in a national park. What difference does the national park in Gros Morne make to your region?

[Colleen Kennedy]

Thanks very much.

The wage subsidy is actually going to be just as important this year as it was last year. In 2020 we lost, as I said, about 95% of our visitors. This year anything that's outside of Newfoundland is going to be a challenge. We are looking forward to the bubble, but we're not sure. We're anticipating probably 15% at the maximum again this year until September and the vaccine rollouts.

A lot of these businesses that didn't open last year and didn't open this year are going to be very challenged to bring their employees back on. Without that wage subsidy, they can't even figure out how to open their doors to the visitors and what the change in behaviour at the workplace is going to be. Actually, they need the investment more this year than they ever did to continue on, to welcome, hopefully, season 2022, which is looking way better.

We're in a national park and we're very blessed, because on the north of the park basically the communities are depending on the fishery and they're very challenged in doing that and in sustaining their communities. Last year you guys, the federal government, made big investments in the Internet and Internet expansion to these communities, which was huge. It was important because it became so important this year to be able to communicate and to stay in the tourism game with the different trade partners they have and tour companies they use.

I know a lot of businesses have lost out this year, with mostly cancellations for this season, but 2022 is not looking too bad. If they don't have the resources to get them to 2022, all is lost. The two-year fight will be lost for them.

As I said, we're very fortunate to be in a national park. We're fairly new in the tourism business. We've been in it for about 40 years, so we're just getting to where our next family of businesses is developing experiences in this region. We have a lot of opportunity. We have a lot of federal presence here with regard to new highways, new experiences, and a lot to show the rest of Canada, so we're hoping that Canadians will look to come and know more about other special spots in Canada.

I do think the government can't underestimate the value of keeping people in that industry in the next year, and they can't do that without your assistance.

[The Chair, Liberal, Wayne Easter]

Thank you very much.

Mr. Ste-Marie.

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

Thank you, Mr. Chair.

I will start with a comment.

I just want to remind our guests that, in my opinion, all members of the committee agree with increasing interprovincial trade. Just because we did not support the idea of the committee doing a study, does not mean that we are against trade of that kind. In my opinion, the issue is the negotiations that have to take place among the provinces. Canada is a federation. It's a historical compromise. Although we are seeing more and more pressure for everything to be decided in Ottawa, the fact remains that we have various levels of administration and not everything is up to “big daddy” in Ottawa.

For example, in Bill C-30, I especially regret the funding for centralizing securities. That is detrimental to Quebec's economy and to its head offices, because it threatens their financial position. The Bloc Québécois clearly cannot support that idea.

My questions go to Mr. Poloz once more.

Mr. Poloz, the extent of the crisis and the responses by governments and central banks, which have implemented measures all around the world, are enough to make one's head spin. Some plans are unprecedented and they seem to be working. However, the sums involved are really high and I understand perfectly the fears about inflation, or deflation, as you said in a previous life.

We also have to be afraid of bubbles in some sectors, especially real estate. We are therefore looking at all the risks to determine what could happen, given that we are losing our reference points a little.

Which sectors, which risks, could lead to the recession becoming longer, or even to a new recession? I talked about inflation and deflation. We could also talk about exchange rates. You mentioned a K-shaped recovery.

In your opinion, could the sectors that recover more slowly represent a risk in terms of a recession becoming longer, or of a new crisis?

Should we actually be assessing the risks in terms of climate change?

Which risks should we be closely monitoring in order to prevent another crisis or an extension of the one we are currently in?