Evidence of meeting #112 for Finance in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was spending.
A video is available from Parliament.
Governor, Bank of Canada
Let me just be very clear. We have a big job. You have a big job. In fact, your job is a lot bigger than our job. You have a lot of priorities—health care, education, security and protecting the most vulnerable. Fiscal decisions are the decisions of the government and Parliament.
In terms of—
Conservative
Andrew Scheer Conservative Regina—Qu'Appelle, SK
If I may, I'm very short on time. I'm not asking you to tell us where to spend or how to spend, but just if you have a target growth rate.
October 30th, 2023 / 5:35 p.m.
Governor, Bank of Canada
Right. I think there are a few things you can look at, but—
Conservative
Governor, Bank of Canada
If you're looking at the direct contribution of government spending on goods and services, we think that potentially the economy is growing at about 2%. If spending is growing 2% or less, it's not adding undue inflationary pressures.
Conservative
Liberal
Rachel Bendayan Liberal Outremont, QC
Thank you, Mr. Chair.
Thank you, Governor, for being with us today.
I'll pick up where Mr. Scheer left off.
You were just saying that spending below 2% would not add undue inflationary pressures. Governor, I believe you said something very similar last week at the press conference: “If you look at government spending over the last year, it was below 2%, so it doesn't look like it's been adding undue inflationary pressures over the last year or so.”
I understand you continue to hold that position.
Liberal
Rachel Bendayan Liberal Outremont, QC
Governor, over the course of your testimony today, you also mentioned that not all spending is equal. Some spending could be inflationary, but you pointed out that some spending is not, particularly with respect to housing.
Ms. Rogers, you mentioned this as well. You stated, “We're really pleased to see the degree of focus that governments are putting on this issue right now. That'll help”, and you continued, Ms. Rogers.
I wonder, Governor, whether you can help Canadians unpack that.
Why is it that not all spending is equal? Can you explain how spending, particularly on housing supply, would be helpful in bringing down inflation?
Governor, Bank of Canada
Why are the impacts of different types of spending different? Again, this is probably better directed at the Department of Finance. We do the best job we can in trying to look at the broad elements of federal and provincial budgets, and to build in the effects of different types of spending.
I'll give you examples.
If you're making an investment in a large infrastructure project that's going to be built over many years, the consequences of that spending are going to be spread out over a long time. You have to look at the profile of when it is. You also have to look at what it is, exactly. If the government builds a new building, it's all getting spent. The direct spending impact is bigger.
If you cut taxes, it will leave more money in the pockets of households, but they're not going to spend it all. They're going to save some of it. Some of it gets spent, some of it will add to demand and some of it will go into savings.
You mentioned, to use an example that was raised, the government's subsidizing of day care. That's having both demand and supply effects. It's making it easier for women with young children—for men with young children, too, but it's largely affecting women—to enter the workforce. That's increasing the supply of workers. Of course, new workers have new incomes. They're going to spend that money, so that's also adding to demand. These are examples of how different policies can have different effects.
When you get to housing, let's say a government gives people money to make it easier to buy a house. Of course, that's going to stimulate the demand for housing. It's not going to create more houses. In the current context, where the problem is supply, that would probably make the situation worse. However, the measures that improve the supply of housing will bring demand and supply into better balance.
Some of these measures are budgetary, but some of them are not budgetary. It's how approvals are done. It's how provinces, municipalities and the federal government are working together. It's not all budgetary items.
Liberal
Liberal
Rachel Bendayan Liberal Outremont, QC
Governor, one of the bank's main roles is ensuring the economic and financial welfare of Canada. I wonder whether you could speak to the importance of keeping Canada's pension plan intact.
I understand the CPP represents over $409 billion of Canadian-owned assets. In your view, is this important in order to keep Canada's sound and efficient financial system intact?
Governor, Bank of Canada
Again, we really don't do pension policy.
I will say that Canada's pension system is admired around the world and it is a great benefit to Canadians, but I don't have any view on the various policy proposals that are under consideration or are being proposed.
Liberal
The Chair Liberal Peter Fonseca
Thank you, and thank you, PS Bendayan.
Now we go to MP Ste-Marie, please.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you, Mr. Chair
As regards the housing market, we've often discussed supply problems, such as the need to build more housing units more quickly. That can obviously be evened out.
I'd like to hear you comment on one demand problem: strong population growth. Statistics Canada has issued an update of those figures.
Have you analyzed the impact that demand has on the housing market, more specifically the portion of demand caused by population growth?
Governor, Bank of Canada
Yes, we've analyzed the effects of immigration on the economy, which are numerous.
In the housing sector, if there are more people in Canada, we obviously need more houses. Furthermore, permanent residents are part of the sharp increase in immigration, but many temporary residents are too. There's also a sharp increase in the number of foreign students, who are mainly in the rental market. This has an impact on the market for houses and the rental market. If there are more people in Canada, demand will rise.
There's another effect. More people mean more workers. We conduct regular surveys of businesses, and there was a major labour shortage last year, although we've seen a strong reversal of that shortage more recently.
Many indicators show that the housing market is still tight, but much less so than previously. I think the sharp increase in labour is associated with immigration and greater participation by the Canadians who are already here.
That's what has helped cool the overheating in the labour sector.
Liberal
NDP
Daniel Blaikie NDP Elmwood—Transcona, MB
Thank you, Mr. Chair.
Jim Stanford, at the Centre for Future Work, has said that since 2019 the amount of corporate profit built into each dollar of real output produced in the economy has gone up by 50%. That's another metric we might use to assess the extent to which corporate profits are driving Canadian inflation.
For the carbon tax, you have a number. If you get rid of the carbon tax, you get a 0.6% drop in inflation for one year. Have you calculated what the impact on inflation would be if corporate pricing behaviour were to change such that we had unit profit costs that were back down to prepandemic levels instead of the 50% higher level that we're currently at?
Governor, Bank of Canada
I don't have a number for you. It's a much more difficult thing to calculate. The carbon tax is a very specific tax. We can see exactly the things it's applied to and we can back out the number. That number that we back out is only the direct effect. The secondary effects are probably pretty small, so it's a reasonable approximation, but—