Finance Committee on Oct. 30th, 2023

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Ste-Marie.

This will be our final questioner until we go for our health break, and then we'll be back.

We'll have MP Blaikie now for three minutes.

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

Thank you, Mr. Chair.

I just want to return to our earlier conversation—I know you were beginning an answer there—and lay out the problem again, which is that as Canadians have been gouged considerably, I think, in certain industries for things they can't do without, the answer has been to raise interest rates in order to combat inflation.

You can see how Canadians feel caught between two impossible situations, so I am wondering where the role is for considerations about equity and fairness in setting monetary policy. We have seen some other central banks given mandates to consider things like housing prices in how they set their rates and to consider things like climate goals in how they set their rates.

Granted, I would accept the claim that it's not currently part of your mandate to care about these issues of equity and fairness, but I would say that it should be, and I think a lot of Canadians would probably feel that there should be a role for that in it. How do you imagine either mandates of central banks or other tools in order to bring some of that question of equity and fairness into rate decisions at the Bank of Canada?

[Tiff Macklem]

With respect to our mandate, we've already got a big job, and that is to control inflation, and I think having a mandate that makes it clear that the job of the central bank is price stability is very helpful.

Those issues that you raised are important issues, but they are properly the issues of elected governments and, ultimately, Parliament. In most democracies, the central bank is charged with controlling inflation and is given the operational independence to use its interest rate to do that. That's a pretty extraordinary thing, and that should be the limit to the job of the central bank.

That doesn't mean we don't care about equity. In fact, one of our deputy governors, Sharon Kozicki, recently gave a speech in which she outlined that with the availability of more detailed datasets, we can now do a better job of seeing the impact of our policies on different segments of society.

At the end of the day, we have one objective and one instrument. We don't have different interest rates for different people or different sectors—

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

I do hear that.

[Tiff Macklem]

—so we can't target, but it is important that we understand it.

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

I wonder if I could just follow up on that, Governor.

[Tiff Macklem]

Yes.

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

When we talk about resource projects now, we talk a lot about social licence. Are you not concerned that there will develop a social licence problem for important institutions that have their hand on important levers of the economy if economic correction seems to be coming always on the back of working-class and middle-class Canadians, particularly when the problems have been caused in large part by corporate players and wealthy individuals that have their hands on some important economic levers, which is access to capital?

[Tiff Macklem]

Well, I'll say two things.

One is that competition is a good thing. I wasn't being glib about that earlier.

If you look at the Canadian economy, one of the things we know is that export-oriented firms tend to have higher productivity than more domestic companies. That suggests—that looks like—competition, and the Competition Bureau has actually recently done a fairly broad study, and I think there's some useful analysis there.

The other thing is that competition results in stronger productivity growth. Stronger productivity growth pays higher wages. Higher productivity growth sustains a rising standard of living, and it would be great to have higher productivity growth in Canada. That makes everything easier.

Coming back to monetary policy and your comments around the most vulnerable and about inequality, I'll say two things.

First of all, it is the most vulnerable members of society who are suffering the most from high inflation. They are feeling the brunt of affordability more than everybody else. They can't just move downmarket. They're already at the bottom of the market. Much of their spending is already on necessities. You can't cut back on that. That's why it is so important that we get inflation down. Inflation is a tax that disproportionately affects the most vulnerable members of society.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, MP Blaikie.

We're going to suspend now for about 10 minutes for a health break, and then we will be back with the governor and senior deputy governor for another hour.

[The Chair, Liberal, Peter Fonseca]

Members, witnesses, we're going to get going again. We're back.

This is quite a marathon session here. We thank the governor and the senior deputy governor for the two and a half hours.

This part of the meeting is focusing on housing, although it can go wherever it may go.

We're starting with the first round, which is six minutes per party.

MP Lawrence, you're up for six minutes.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you, Mr. Chair.

Thank you, Mr. Macklem and Ms. Rogers, for coming here.

For whatever criticisms you may face, I don't think a failure to communicate can be one of them. Thank you for being here.

My questions are going to focus around the carbon tax, and then hopefully, if I have time, productivity.

We've known each other for a while now, Governor Macklem. We had an exchange back in the spring of 2022. I asked you about the inflationary impact of the carbon tax. I have seen it misquoted by both politicians and reporters. I want to clear this up.

What you wrote, and I'll just read it here for the ease of everyone, is that “According to the Bank’s calculations, if the charge were to be removed from the three main fuel components of the consumer price index (gasoline, natural gas and fuel oil) it would reduce the inflation rate by 0.4 percentage points.”

What's been quoted throughout, by politicians and journalists as well, is actually the increase that you said, which would be 0.1%, or 0.15%, which I've seen as well.

We've already had one increase. If I can add 0.4% to the 0.1% or 0.15% that I've also seen quoted, that would be 50 or 55 basis points.

Am I understanding you correctly in that?

[Tiff Macklem]

Yes, that's pretty good. I'll give you the updated numbers.

There are really two separate questions.

The carbon tax is going up over time. One question is how much the increases in the carbon tax are adding to inflation each year. That number is about 0.15 percentage points of inflation. That's the direct impact on those three components.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Perfect. Thank you.

[Tiff Macklem]

The second question you asked me was what the effect on inflation would be if the carbon tax were eliminated. That would create a one-time drop in inflation of 0.6 percentage points. That would last for one year. Since you can only eliminate it once, the next year it would have no effect on inflation.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

For sure. Hopefully, next year inflation won't be as big a concern as it is this year.

Just to reiterate what you said there, it would be 60 basis points or 0.6%. Currently, the inflation rate is at 3.8%, so that equates to almost 15%, if I can do the math quickly.

[Tiff Macklem]

It would be 3.2%.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

That would be a sizable drop in inflation. It would make your job.... To quote you, “it would be helpful”. Would that be correct?

[Tiff Macklem]

It's only going to affect inflation for one year.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

As you said, Mr. Macklem, and as you forecast, inflation, according to your predictions, won't be as big an issue as it will be in the year right now. If we can get a year's relief out of it, it means Canadians who will be able to keep their houses, Canadians who will be able to enter the mortgage market, Canadians who will be able to feed themselves, because of a 10% reduction in inflation.

Isn't that so, Mr. Macklem?

[Tiff Macklem]

It will be down 0.6%.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you very much. I appreciate that.

The other issue I want to talk a little bit about is the carbon tax and the impact it has with respect to productivity, and productivity in general.

Of course, inflation occurs—as you mentioned, and as basic first-year economics textbooks say—when demand and supply get out of equilibrium. The conversation has focused almost completely around the demand side. I realize that demand is what you're there to control to reduce inflation, but supply also plays a big role as well.

As you said in your report, Canada's productivity has flatlined over the last eight years, and that's in contrast with the U.S., which has actually seen a pretty strong growth with respect to productivity. Are you concerned, to the extent that you can say—and I realize it might be limited—about Canada's productivity issues and the impact that they could have on supply?

[Tiff Macklem]

We are concerned about Canada's productivity issues.

This is not an issue of the last quarter, the last year or even the last few years. It's a 20-year issue.

Canada's productivity growth has underperformed for about the last 20 years. If you look at how Canada has grown, you will see that this country has actually done a very good job of growing by adding workers. We have very high rates of labour force participation and we have much higher female labour participation in Canada than in the United States. We have a good immigration system. Companies are good at hiring workers and integrating them into the workforce. That has really been the key to our growth.

What has been disappointing is that we've been much less successful in growing output or productivity per worker. Why that really matters is because higher productivity pays for higher wages; it's the source of sustained increases in our standard of living.

It is a concern to us, but we don't really have any levers that affect productivity growth. We influence demand.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Continuing on with respect to the inflationary impact of the carbon tax, it's my belief, Governor Macklem, that any type of encumbrance that we put on productivity we must try to avoid.

The carbon tax adds another encumbrance in the fact that businesses specifically don't get any rebates, unlike individuals. This is going to make us less and less productive. It's a terrible tax because of what it does to the most vulnerable in our communities, but it's also a terrible tax from an economic perspective in that it is driving down our productivity when we can least afford our productivity to be driven down.

[Tiff Macklem]

We've only analyzed the direct effects of the carbon tax on inflation.