Finance Committee on Feb. 1st, 2024

[Tiff Macklem]

Well, we're not experts in housing policy, but I think the message is that policies that are focused on supply are going to help fix the situation. Policies that are focused more on demand are simply going to make the situation worse, because prices will just start going up, making houses less affordable. It's really very much policies that are focused on supply, and that does require an unusual level of co-operation among the municipal, provincial and federal governments, because the instruments on supply are spread out across different levels of government.

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

So, a first-time homebuyer's savings account or something like that would be an example of a demand-side measure, whereas recapitalizing the co-investment fund, which has been important to be able to build various kinds of non-market housing across the country, would be an example of a supply-side measure. Is that fair?

[Tiff Macklem]

I think that's reasonable.

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

Okay. Thank you very much.

I don't know how much time I have.

[The Chair, Liberal, Peter Fonseca]

We're at six minutes. We're finished with this round.

Thank you, MP Blaikie.

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

Okay. I had a feeling we were.

[The Chair, Liberal, Peter Fonseca]

That's very good. You were right on time.

We are moving into the second round. It's less time.

It's five minutes for MP Lawrence, please, with the governor.

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

Thank you very much.

Once again, thank you, Governor Macklem, for coming here. I think it's a credit to you and to your institution that you're as present as you are.

My questions will start with GDP and GDP per capita.

To my mind, it's almost getting to the point of a myth of a soft landing. Although our GDP as a whole, as an aggregate, doesn't look terrible, our GDP per capita does. In Q3 of 2022, it was -1%. In Q4 of 2022, it was -3.3%. In Q1 of 2023, it was -0.6%, while in Q2 of 2023.... While our GDP as an aggregate has shown modest growth, our GDP per capita—which I believe is a better, more accurate measure of how Canadians are actually dealing with the economy—is showing that we are in a very difficult time. To quote the leader of the NDP, it's bad; it's very bad.

What are your comments on that statement? Do you agree?

[Tiff Macklem]

Well, there's no question that we have seen weakness in consumption. On a per household, per capita basis, we've actually seen declines in the level of consumption. At an aggregate level, that's being offset because there are more people in the economy, so on average aggregate-level growth has been roughly flat.

However, I agree that it is difficult for Canadians. They're feeling the effects of higher prices. They're feeling the effects of higher interest rates, and we can see how that's affecting their spending. It's particularly affecting their spending on durable goods. They've been cutting back on services. They've been cutting back on non-durables. That's showing up in the weakness in per capita consumption.

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

This is all in the context of the last 10 years. In the United States, the GDP per capita has grown by 47%; in Canada, it has grown by 4.7%. We are in one of the worst economic times since the Great Depression.

I know you've spoken eloquently about this, but the impact, particularly on the vulnerable, of keeping interest rates high and driving per capita GDP even further into the basement has real-life consequences. We see two million people per month going to food banks. I know that you know this, but I think it bears repeating—the pain that's being inflicted on Canadians right now because of the high interest rates and this government's reckless fiscal policy.

[Tiff Macklem]

Look, nothing worries us more. We know that inflation is affecting the most vulnerable Canadians the worst. Food price inflation is high. You can't really economize on your purchase of necessities. They're necessities. So, yes, this is hurting. The best way to solve that problem is to get inflation down. We've made a lot of progress. We need to finish the job.

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

I just want to clarify the discussion you had with my colleagues MP Baker and MP Hallan.

I think you used the threshold of a spending growth rate of two and a quarter per cent. Anything above that in the upcoming budget will be unhelpful for your fight against inflation. Is that correct?

[Tiff Macklem]

If real government spending at all levels of government is growing materially above 2%, that will make it more difficult to get inflation back to 2%.

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

Then I want to return to a conversation that we've had at numerous meetings with respect to the carbon tax. I want to thank you for your candour at the last meeting, saying that the carbon tax was adding 0.6%.

There's been a little bit of a mischaracterization, I think, of some of your comments once again, Governor Macklem, when you said that it's a one-time or one-off impact, when the reality is that, as will happen on April 1, the carbon tax will increase. It's scheduled to increase all the way up to 2030. Presumably, if in our Parliament we axe the tax, not only would that eliminate it one time, but there is also the upcoming increase, which is scheduled to be in the range of 23%. I think you've said at other committee meetings that it would be about 0.1% at every increase.

Could you confirm that if we eliminated the tax—and, of course, presumably, the increases to that tax—we would have an ongoing impact that would reduce inflation?

[Tiff Macklem]

Yes, I think you summarized the numbers.

As you said, there are planned increases in the carbon tax going forward. The direct impact of that on the three fuel components.... It would have an impact of about 0.15% each year on the CPI going forward. If you eliminate the tax, you'll get a one-time 0.6% decrease in inflation. The next year, it will go back to where it was, because you can only eliminate it once.

However, yes, I see your point. You're also eliminating the future increases.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Lawrence.

We'll now go to MP Dzerowicz, who is coming to us virtually.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Governor and Senior Deputy Governor, for joining us today.

I'm going to start off very quickly on the fall economic statement. We included some new fiscal guardrails. I believe you were quoted as saying they were “helpful” from the perspective of monetary policy. Can you elaborate on this?

[Tiff Macklem]

Yes. I think what is helpful about your new fiscal guardrails is that they assign a number and a date. What that does is provide some limits on how much spending can increase going forward. In that respect, I think they are helpful. The—

[Julie Dzerowicz, Liberal, Davenport, ON]

Governor, I'm sorry to interrupt.

I should have clarified this. I think one of our key new commitments is our goal of keeping deficits below 1% of GDP, beginning in 2026-27. That's just for the public to be reminded.

[Tiff Macklem]

That's exactly what I was talking about.

What's important about that is that you have a goal—less than 1%—and you also have a date on it, so that going forward, in order to respect that target, you won't be able to increase spending substantially.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you.

My next question is around wages and productivity. It's a question I often ask you.

Wages, as we know, have been going up. Wages going up, as you indicated, is not a problem if productivity also increases. I believe what's happening, however, is that wages have been going up—which I've been happy to see, because I think they've been stagnating for too long—but, as you've been articulating, productivity has not been going up.

How is it that productivity can be increased without increasing business investment, which interest rates are trying to discourage right now? Hopefully, you have an answer to this. I'm not sure whether you have policy prescriptives, but could you answer this question? How can productivity be improved if monetary policy is trying to discourage business investment?

[Tiff Macklem]

I'm going to ask the senior deputy governor to talk about productivity.

[Carolyn Rogers]

Thanks for that question.

The reason we closely watch the relationship between wages and productivity is that, if wages continue above productivity for a while, what eventually happens is that companies feel the pressure to build those higher wages into their prices, so you can get what we call a wage-price spiral. What we have seen more recently is.... We think most of the wage pickup we're seeing right now is really a catch-up. People have seen their cost of living go up and they are asking for higher wages. That's completely reasonable. However, as you point out, if wages run at a pace above productivity for a while, we worry.

What can be done? I don't know that we're necessarily discouraging business investment. Business investment that goes into increased productivity will always, over the long term, help the economy grow without producing inflation. Businesses can make capital investment, invest in their employees and provide training. There are other ways to increase productivity. You can remove trade barriers. There's more than one way to make the economy more productive than business investment.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you. That's very helpful.

Now I want to go back to housing, since it's top of mind for all of us, and rightfully so. If you ask any resident of any of our ridings, they will indicate that it is the top issue for them, in addition to other affordability-type costs.

Senior Deputy Governor, I think you were talking earlier about how there needs to be an increase in the supply of housing. I think both you and the governor indicated that.

We've been doing a study around inflation and housing. We've also heard of other things that have really contributed to the housing issue we have now. There's the lack of vacancy rent controls, long wait times for approvals and funding at all levels of government, and dysfunctional landlord and tenant boards.

I wonder whether you would agree that in addition to the fact that we need to be building more supply, there are other issues that need to be worked on at all three levels that would be helpful in addressing the housing needs that we have now.

[Carolyn Rogers]

That's exactly the point the governor made a few minutes ago. The one thing about housing is that the type of increase in supply that we need is going to require co-operation across all levels of government, because the levers exist at different levels of government. These are not areas of policy that are our expertise, but we would certainly very much like to see the supply issues addressed, and any effort across those multiple levels of government is welcome.