Finance Committee on May 18th, 2021

[Stephen S. Poloz]

Of course there are many risks. As you indicated, we've never been here before, so the signposts that we're reading are not as reliable as usual. I can say flippantly not to worry about inflation; inflation depends on demand and supply and it always has, but we don't know for sure how much demand has been suppressed by COVID-19, how much the policies we're putting in place will translate into more demand, and what the supply side is doing.

When I talk about scarring, I'm talking about permanent losses of companies, jobs, and industrial or commercial capacity. That means that if supply is coming down when demand is rising, of course that would have inflation potential.

The way I portrayed our response is that we should be playing those odds. What risks do we want to manage? Well, let's have policies that increase investment, both directly—such as in infrastructure and social infrastructure like child care—and in incentives to vastly increase investments in carbon capture, for example, which is investment, but on the green line. Those things add to capacity and are anti-inflationary in their effect, so they mitigate that risk of an outbreak of inflation.

Central banks, of course, are watching this much more carefully than I do. Their job is clear, so I have complete faith in how that will turn out. A fourth wave or a fifth wave are major risks that we face. Sectors that are struggling, as I said, can translate into exits.

I would just say on this that there have been many company entries and many firms created during this episode. I was quite amazed: We lost more than 100,000 businesses during last summer, but by the time we got to the end of the year, we had gotten back over 80% of the businesses. They're not the same businesses. They are brand new businesses that are entering the market in the middle of a pandemic. This shows how resilient the Canadian economy is.

The last risk I'll mention is that I think there's a risk that there will be some form of a crisis somewhere else in the world—an emerging market crisis. Some countries do not have the institutional capacity or the fiscal capacity that we have, but they're dealing with the same problems that we are—countries like Brazil, for instance.

[The Chair, Liberal, Wayne Easter]

We have to move on.

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

Thank you.

[The Chair, Liberal, Wayne Easter]

We're going to move on to Mr. Julian followed by Mr. Kelly and Ms. Koutrakis, and we'll have to close there.

Mr. Julian, you have two minutes.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thanks, Mr. Chair.

I have a question for Ms. Kennedy. The government is scaling back substantially on COVID support starting in a few weeks, and we're in the midst of a deadly third wave. Do you think the government is acting prematurely in cutting back all of those supports that people desperately need at a time when we are very much in danger?

[Colleen Kennedy]

Yes, I do. I think the government responded very well to the needs of Canadians when the pandemic started. Yes, we might have the vaccine and we might be getting closer to the end, but we are far from financially independent or wealthy enough in some of these cases for these companies to move on without assistance. We're still probably months out before we're back to even 50% of our business capacity. A lot of that's not going to happen for about six months out.

Like I said, it's not just a matter of getting the vaccine for us. We've lost 19 flights in Atlantic Canada. We almost have to rebuild our traffic routes and our access routes to fill our businesses and our accommodators again, so I don't think pulling out in the next three or four months is a wise idea for us.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you so much.

Mr. Poloz, you talked about growing out of World War II debt. Of course, in World War II, we had strong measures against profiteering, a wealth tax and a 100% excess profits tax at the end of the war, as you well know.

We have a government that has done absolutely nothing about the revenue side—no wealth tax, no pandemic profits tax, no cracking down on overseas tax havens. Do you feel it's important that we start to address tax fairness and the fact that we have billionaires and big corporations making money hand over fist and so many Canadians are struggling at this time and need resources and support?

[Stephen S. Poloz]

Perhaps the question is offered in a very abstract way, but I can just say that Canada has, if not the fairest, one of the fairest tax structures across the OECD. There is an easily available summary of statistics on the OECD website of its cross-country analysis. I'm not saying that it's perfect—of course it's not.

Should the government be considering other things? Well, as I indicated in my opening remarks, whether you believe that stopping the rise in government debt and having it gently decline as a share of national income is sufficient to prepare us for another rainy day, that is more of a political consideration than an analytical one. I'm not going to express an explicit view on it. What I said was that technically it is sustainable in the way it has been presented, but I would listen to someone who thought that it was not good enough for the next crisis that might come along.

For that you would need some other measures, I guess, but I believe that putting those efforts into boosting economic growth is the fastest and the best way to do exactly that—adding to our future resilience. I don't know why we would raise taxes when you have all of those other great opportunities to boost economic growth. That's my position.

[The Chair, Liberal, Wayne Easter]

We will split the time between Mr. Kelly and Ms. Koutrakis for about four minutes each.

Go ahead, Mr. Kelly.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

It's going to be me.

[The Chair, Liberal, Wayne Easter]

It's going to be Ms. Jansen.

All right, you guys, go ahead.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

We're just switching it up here.

Mr. Poloz, originally you said that there would be no inflation, and here we are. Unfortunately, your prediction was wrong, so why should we believe you now when you suggest that inflation won't last?

[Stephen S. Poloz]

Well, I hope you don't mind if I take exception to your question.

When we went through a shock the size that we did, a lot of prices fell. I'll give you an example. I went down to Toronto back in November to do a televised thing. I stayed at the Sheraton in Toronto for $169. I'd been there back in the spring, and it was $469. Now what would we call this? That is deflation, correct?

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

I believe that the government is now charging quarantine hotels, and it's like $3,000 or something.

[Stephen S. Poloz]

I'm not going to comment on that.

When the price of the hotel room goes back up to $269 or whatever it goes up to, you would call it inflation. But I'm saying it's just a return to more normal pricing and it measures as inflation. It's transitory, because when prices go up, unless they go up, up, up year after year, it's not inflation. All it is is a return of prices to normal.

That's as short an answer as I can give.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

Okay.

The biggest source of federal government funds last year came from the central bank—not tax revenue, not lenders, just central bank money-printing. So now we have too many dollars chasing too few goods, meaning working people pay more for housing, food and fuel.

Since the Bank of Canada has committed to continue printing more money, to the tune of $156 billion to cover the $154-billion deficit the Liberals have announced, it would seem that inflation will continue for at least another year. It's not so transitory, as you're suggesting.

Who is a Canadian to believe in regard to inflation—you or their grocery bill?

[Stephen S. Poloz]

I am not going to answer questions that are actually questions for the Governor of the Bank of Canada. I am not the Governor of the Bank of Canada. But what I will explain is that when prices go down and then they go back up again, that so-called inflation stays in the inflation numbers for a whole year. We call it a “base effect”. Then it comes back down.

That is a transitory rise in prices. The prices stay up, but the inflation rate only goes up temporarily and comes back down a year later. That is the sort of phenomenon you're describing.

I'll leave my comments there. I am not here to defend the Bank of Canada's current policies. It's not my job. It's not appropriate.

[Tamara Jansen, Conservative, Cloverdale—Langley City, BC]

Okay—

[The Chair, Liberal, Wayne Easter]

I will have to end it there.

We'll go to Ms. Koutrakis.

You have about three minutes, Annie.

[Annie Koutrakis, Liberal, Vimy, QC]

Thank you, Mr. Chair.

Just for the record, I want to correct my colleague Ms. Jansen. The Government of Canada is not setting prices on how much hotels are charging for the quarantine. I think that's important to put on the record.

Mr. Poloz, we heard from your testimony that a lot of the programs we've put in place have helped save our economy. We've seen higher-than-expected growth rates in the second half of 2020. With the vaccine rollout well under way, we're potentially looking at a recovery from the pandemic that's faster than originally expected.

How do you see our economic recovery progressing over the months and years ahead? What role does this budget play in putting us on track for strong growth?

[Stephen S. Poloz]

I think you're right. We have seen.... The recovery so far, if I can call it a “recovery”, or the period during which measures of output have gone back toward normal, has outpaced all of the forecasts that were laid out last year, in fact all the way up until Christmas, and not just in Canada. It's everywhere. The resilience that I've referred to has been seen in many countries.

As I said in my opening remarks, I believe it has to do with our normal understanding of how recessions work. We think of them as being widespread across the entire economy instead of in certain pockets. In these cases, those things have been shut down. I feel very bad for those people. It's awful. Their businesses are at risk. Their jobs are at risk. But it has stayed in those sectors. It has not spread across the whole economy. Therefore, the recovery goes in a completely different way than normal.

Given that, I'm quite optimistic that once vaccination become more widespread and we are back on firm footing, we're going to see some of the savings that have been made during the pandemic unleashed. I don't think we're going to have the roaring twenties—I think people are going to be fairly conservative—but there's going to be a savings-led mini-boom, at least, by the consumer. I think we're going to see a continuation of growth from there. I think what has to happen next is that the growth leaders have to switch back to investment and exporting, and that's exactly what I would expect to see.

So I can't be anything but optimistic over the next couple of years. I think the right ingredients are present.

[The Chair, Liberal, Wayne Easter]

I'm sorry to all. We could have used another hour here, but the committee meets with another panel in a little less than 30 minutes.

On behalf of the committee, I want to thank all of the witnesses. Thank you all for coming and answering our questions. It's been a very interesting exchange at times, even a little testy, but that happens at the finance committee.

The meeting is adjourned.