Finance Committee on Jan. 24th, 2022

[Jean-François Perrault]

In principle, OSFI regulations require that when homeowners qualify for mortgages, they're qualifying at a rate of interest that is dramatically higher than what they're paying now. If, in fact, we're right and rates go up by about 200 basis points between now and, say, sometime next year or the end of this year, that is well within the qualifying rate that is used by banks and other financial organizations to figure out if households are going to be able to afford to continue paying or servicing their debt at a higher rate.

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

Are you confident that the real economy reflects what should be the case given the policy?

[Jean-François Perrault]

I'm not sure I get the question.

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

In a sense, people have that buffer. Are you satisfied that the buffer that's in the policy will act in the way that it should for most households and that interest rates could go up without causing serious stress on household finances to the point of people having to surrender their home?

[The Chair, Liberal, Peter Fonseca]

Could we have a very short answer, please, Mr. Perrault?

[Jean-François Perrault]

Yes.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, Mr. Blaikie. That's time.

We're moving now to the Conservatives, with Mr. Chambers for five minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair.

Thank you to all our witnesses for being with us today virtually.

Mr. Cross, you're currently at the Macdonald-Laurier Institute, but you mentioned that you were the chief economic analyst at Stats Canada and that you were there for a number of years.

We've seen through all parts of the business cycle a federal government that has spent through all stages and a central bank that has kept interest rates artificially low. You even referenced the kind of surprise interest rate cut in 2015, when the economy had record unemployment and things were going well. We had economic growth; we had record unemployment and we were spending money.

The government likes to point to really strong Q3 GDP growth, with a rosy outlook for next year. Do you think the economy requires additional government spending at this point?

[Philip Cross]

I don't think there's any question that we should be withdrawing both monetary and fiscal stimulus. Frankly, we should have started withdrawing it a long time ago.

It became pretty obvious fairly quickly after the pandemic began that it was not an economy-wide shock; the biggest shock was to specific industries providing face-to-face services. At that point, somewhere around May or June 2020, we should have started switching away from an economy-wide stimulus, especially monetary stimulus, and started channelling money targeted specifically at these people. We've just kept at it with the economy-wide monetary stimulus. In retrospect, it's now becoming increasingly obvious that monetary stimulus was not the way to go in this particular crisis.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

We've also learned that stimulus typically is temporary, timely and targeted, but, at least in this circumstance, we got “timely” but missed the other two.

In your opinion, Mr. Cross, is deficit spending contributing to inflation?

[Philip Cross]

Well, it clearly has over the last year. It doesn't always, but in the last year there's no question.... The Bank of Canada has been purchasing government bonds. It has been monetizing that debt. It has been doing that to keep interest rates low and allow the government to continue to run large deficits, but there's no question that the quantitative easing conducted by the Bank of Canada has been reflected in a substantial increase in the money supply.

By the way, there is a big difference between what we're seeing now, in the ongoing monetary stimulus and low interest rates, and after 2008, when we never saw the money supply and credit explode during that period as we have over the last year. Something is clearly different about stimulus since the pandemic began and, not surprisingly, inflation has taken off.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

Our committee is looking in particular at inflation, but specifically also at housing. We see some of the effects of that stimulus in the housing market, with an 85% increase in housing prices since 2015. It follows an incredible amount of government spending and increase of the money supply, as you just mentioned. Bloomberg now says that we have the second-highest inflated housing market in the world.

Interest rates, government spending and money laundering, all these things are within the federal government's remit. You wrote a paper for the Macdonald-Laurier Institute about the increasing money supply and the incredible expansion of the monetary base. Is it a stretch to believe that this money ends up in the real estate market, as it does in other asset classes?

[Philip Cross]

You can't draw a one-to-one, necessarily, but there's no question that the low interest rates.... Part of that increase in the money supply was because the Bank of Canada was buying government debt. It was keeping interest rates low. Keeping interest rates low is going to feed into the housing market.

You can't trace dollar bills going from one to the other, but there's no question that the accommodative fiscal and monetary stimulus was the largest part in the sharp run-up in housing values that we've seen over the last two years.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

I have time for one more question, Mr. Cross. Have you thought about or considered what would have happened to interest rates or the value of the dollar had the government run significant massive deficits and the Bank of Canada had not been the primary purchaser of the debt created by the federal government?

[Philip Cross]

It's an interesting question. There was a sort of period of panic there in March 2020 when the pandemic was just getting under way. We talked about how we lived in an era of low interest rates, but interest rates, for corporations especially, were starting to rise at that time. People were panicking. There was a flight from risk. We saw that even some provincial governments, notably Newfoundland, were having trouble raising money.

Clearly, there could have been.... Without the Bank of Canada's intervening in a lot of these markets, not just government markets but even corporate markets, we could have seen much higher interest rates. How long would that panic have lasted? How quickly would people have realized that this wasn't going to shut down our whole economy, that it was just going to be segments of it? That's a counterfactual that is impossible to answer.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you, Mr. Cross.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Chambers. That's your time.

We're moving to the Liberals and Mr. MacDonald for five minutes.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you, Chair.

Chair, it's interesting to hear this discussion, talking about housing and then bouncing back and forth to the economy. It's good to remind ourselves every once in a while that the pandemic came on within a very short time. Decisions were being made. There was a sense of urgency. There were a lot of people who required food on their tables. A lot of people were out of work. There were barriers after barriers after barriers for families out there who needed staples. I think the government had a short time to react to this, and it reacted immensely and in the right direction. As we've seen with Bill C-2, we have now scaled back the investments and started to target where those priorities are now for government.

As a reminder, in the years leading up to the pandemic, Canadian inflation was relatively stable and close to its formal target of 2%. As suggested by Trevor Tombe, a professor at the department of economics at the University of Calgary:

The pandemic was not only a public-health crisis but also the...sharpest economic contraction in Canadian history. The pace of recovery since those dark early months, however, has been nothing short of remarkable.

I want to ask Mr. Perrault if he can elaborate a bit on what sort of impact minimal action would have had on the economy, including housing, if we hadn't made those investments.

[Jean-François Perrault]

Could I just clarify that, Mr. MacDonald? Are you talking about the investments done in the context of the pandemic or things before the pandemic?

[Heath MacDonald, Liberal, Malpeque, PE]

I meant in the pandemic. Thank you.

[Jean-François Perrault]

Again, counterfactuals are always a little tricky, but it's almost certainly the case that the economic harm would have been significantly larger. Households' financial positions would have been impacted by a significant loss of income, which clearly was more than made up for by the government. It's the same on the business side, so there's no question that whatever was done helped support the Canadian economy.

Did we do the right amount? Did we do the right thing? All countries around the world tried various permutations around similar things, but it's very difficult, in my mind, to conceive of a world in which we came out of the pandemic in reasonably good economic shape and did not ascribe a significant portion of that to what was done by the federal government and provincial governments in Canada to try to keep us afloat in what was a tremendously turbulent time.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you.

We hear economists with various degrees of opinions relevant to the CPI. How much control does any one institution have on the distortion COVID has created? How much control does any institution, any government at any level, have over what COVID has done?

[Jean-François Perrault]

Is that question for me?

[Heath MacDonald, Liberal, Malpeque, PE]

Yes, it is.

[Jean-François Perrault]

Reasonably limited control.... That being said, when governments are in a position to shut down various parts of the economy, clearly that affects the pricing dynamics in that space. However, I'd like to think that much of the inflationary impulse that we are dealing with now in Canada is ultimately the reflection of policy by the Canadian government and other governments around the world to try to get us out of this. That additional firepower—there is strength in numbers—is more responsible for the inflation outlook now than any single thing any one government has done around the world.