Finance Committee on Oct. 30th, 2023

[Tiff Macklem]

The Bank of Canada has one tool to control inflation.

We've talked about the effects of different types of policies on both demand and supply. Those are decisions of elected governments. We're going to take those into account. The more supply is growing, the less we need to cool demand to reduce inflationary pressures.

Government spending also contributes to demand. If it grows faster than supply, it will make it more difficult to get supply and demand into balance and reduce inflationary pressures.

Those are all your decisions. We're going to take those policy decisions as they're given, and we're going to use the tool we have to fulfill our mandate for Canadians.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

If you look at the 20-year period, roughly, from the turn of the century until now.... I talked about the increasing share of GDP that corporate profits represent, but business investment in Canada has gone down from 6% to 3%. Over that same rough timeline, you've seen the corporate tax rate go down from 28% to 15%, which I think suggests that there's certainly, in the Canadian context, no correlation between lower corporate taxes and higher business investment. In fact, if there is a correlation, it's inverse. We've seen similar stagnation or a reduction of productivity in Canada compared to our competitors over that same period of time.

When we talk about the need to see more business investment to raise productivity as another way of helping Canadians combat the adverse effects of inflation, is it not fair to say that corporate tax reductions have not helped in that regard over the last 20 years?

[Tiff Macklem]

I'm going to leave tax questions to the Minister of Finance and the Department of Finance.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Fair enough.

Here's the thing. We touched a bit on the RBC-HSBC merger, and I appreciate.... I think you said to my colleague that you hadn't done an analysis of that transaction, which is fair enough. I appreciate that's not the role of the Bank of Canada. However, I wonder, based on the general principle that you enunciated earlier—which is that competition is a great thing—whether you may have some impressions about having one less financial player in what is already a very small field, the Canadian financial industry. What would it likely mean for Canadian consumers, particularly when the financial institution getting eaten up in this case is one of the ones offering lower mortgage rates than RBC?

[Tiff Macklem]

I don't think you'll be surprised, but I'm not going to comment on any individual financial transaction between two private sector companies.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

When it comes to the housing market—we'll circle back to that—what has to happen in your mind in order to have...? What actions need to be taken, either in the private sector or by the government, in order to start to see a depreciation in the cost of existing housing stock, or at least to see housing stop being one of the major drivers of inflation in Canada today?

[Tiff Macklem]

I don't think we can really add much more than we've already said. We're not the experts in housing. We don't do housing policy. Housing is an important part of the economy, but it's only part of the economy. We have to consider the whole economy.

I think what we can say with some confidence, based on what we've seen over the last decade, is that the fundamental issue is supply. What we've seen over the last decade is.... At first, we used a series of—I say “we”, but this is largely OSFI and, to some extent, the Department of Finance, the federal system—macroprudential measures to reinforce the stability of the system. Those mostly dented demand. When they were brought into place...for example, they lowered the maximum amortization and put in better stress tests. At OSFI, the senior deputy governor was directly involved in some of these in her previous role. Those measures dented demand, and they would bring the market into better balance temporarily, but because supply wasn't growing quickly enough, demand would eventually come back and we'd be in a similar situation.

You've seen us raise interest rates very forcefully. That's had a very direct effect on the housing market. It's very interest-sensitive. The market has cooled and housing prices have come down about 10%, but that's just affecting demand. It's not addressing the fundamental supply issues. The clear message from the experience of the last decade is that we're not going to solve this problem by addressing demand; we have to focus on supply.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Blaikie.

We're in our second round, members and witnesses. MP Scheer, you have five minutes.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

Thank you very much.

I just want to clarify some terms. Obviously, inflation is a massive issue for Canadians, and the interest rates that are rising to fight it. When we talk about monetary policy and fiscal policy, just so I'm clear and everyone watching is clear, monetary policy, that's you. That's the Bank of Canada. You have tools at your disposal. You have interest rates. You have quantitative easing and tightening. That's your department, I guess.

[Tiff Macklem]

Right.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

Okay.

Fiscal policy would be the government. That would be the government's spending decisions, taxation, borrowing and all those types of things. That's fiscal policy.

When you say that you control the monetary policy, and one of your primary objectives as the Bank of Canada.... This is from your website: “We influence the supply of money circulating in the economy, using our monetary policy framework to keep inflation low and stable.” That's your main goal. It's to hit that target on inflation.

While you're using your tools, raising interest rates and tightening up the money supply, now you're saying that the fiscal policy—the government's policy, its spending policy—is not being helpful. Did I understand that correctly?

[Tiff Macklem]

What I said was that over the past year, government spending at all levels, federal and provincial, looks, by our estimates, to have grown at less than 2%. It has not been getting in the way of getting inflation down.

Looking forward, our estimate is that it will grow slightly faster than supply. Against that background, yes, it could begin to make it harder to get inflation down.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

Then it's going to “undo”.

I take your point about how the past is the past. We're here to advise the government. We're here to provide submissions for the fall economic statement and the budget. Going forward, increases in spending will make your job more difficult and will undo some of the work you've done with interest rates.

[Tiff Macklem]

It will definitely make it more difficult to get inflation down if all that spending is spent.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

Thank you very much for that clarification.

If you got to the target rate sooner—if you were able to get inflation down, what with these interest rate hikes that are affecting all Canadians with any kind of debt, mortgage or line of credit—would you be in a position where you could start to consider lowering interest rates?

[Tiff Macklem]

Yes. The sooner we see clear evidence that inflation is headed back towards the 2% target, the sooner we can start discussing reducing interest rates. We don't need to wait until it's back to 2%, but we need to wait until we're clearly on a path to 2%.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

Can you just remind the committee of what your target is?

[Tiff Macklem]

It's 2%.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

Okay.

You've already acknowledged that the carbon tax would be 0.6% off inflation, did you say?

[Tiff Macklem]

For one year.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

But it is important to remember that inflation is cumulative. It's not like you remove the carbon tax and inflation automatically pops up the year after that.

[Tiff Macklem]

Well, prices are cumulative. Inflation is the rate of change of prices.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

Sorry. Yes. So the prices would—

[Tiff Macklem]

It falls back after a year.

[Andrew Scheer, Conservative, Regina—Qu'Appelle, SK]

Right. I just think that's an important clarification.

Do you have a target for government growth, in terms of being helpful? You said the projected rate of government spending increases is unhelpful. Do you have a recommendation to the committee on where government spending growth should be in order to be more helpful?