Finance Committee on May 2nd, 2024

[Tiff Macklem]

I hope the gap narrows gradually, but yes, I don't think this situation is going to be resolved quickly. It's going to take some time to build new purpose-built rentals.

The other aspect that may take some pressure off is that, as you know, the government has recently announced that they are reducing the number of non-permanent residents coming into Canada. We have included that in our projections. It was announced ahead of the budget. That should take some of the demand pressure off.

Yes, it is difficult to forecast these things.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Davies.

Governor and Senior Deputy Governor, MP Davies is a new permanent member of our committee. We also have PS Turnbull here on our committee now.

We're in our second round, members.

We're going to MP Chambers for five minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you, Mr. Chair.

Governor, thank you for the work you do on behalf of Canadians. I appreciate your coming to committee.

When you were here about six months ago, we talked about fiscal and monetary policy. I believe you said that if the rate of growth in government spending could be at or below 2%, we would be good. Spending growth next year for the federal government is 6.7%.

I'm not steeped in economics and I always learn something from you every time you're here. I'm trying to understand how that is not inflationary pressure.

[Tiff Macklem]

Let me back up a little bit.

First of all, that 2% number I gave you is real government spending on goods and services. It's not nominal spending and it's not public accounts spending; it's the national accounts measure of government spending on goods and services. Those numbers aren't directly comparable.

What I can say in terms of our projection is that if governments are not increasing their deficits and government spending is growing around 2%, the potential output of the economy is growing about 2%, so government spending is not adding more to demand than supply is growing. It's roughly in balance—

[Adam Chambers, Conservative, Simcoe North, ON]

I'm going to jump in right there, if that's okay. Expanding the deficit is expansionary fiscal policy. Is that correct?

[Tiff Macklem]

That is correct.

[Adam Chambers, Conservative, Simcoe North, ON]

In the last year and a half, the government has added net, not gross, new spending of $100 billion to the fiscal framework. That's all deficit financed.

Is it your testimony that we are no longer in an expansionary fiscal environment?

[Tiff Macklem]

My testimony is that the fiscal situation.... Looking at this budget relative to the fall economic statement, the deficit-to-GDP and to the debt-to-GDP track have not changed significantly. I don't expect that there's going to be a significant macro impact relative to our previous forecast. In other words, I don't think that the federal budget is going to have a big impact on the forecast that we published a few weeks ago.

[Adam Chambers, Conservative, Simcoe North, ON]

Would you say now that fiscal and monetary policy are rowing in the same direction?

[Tiff Macklem]

Coming back to our forecast, most of the provinces tabled their budgets ahead of the MPR. They did increase spending, and it was largely deficit financed. That has increased the contribution to growth from government. The last time I was here, I think I said that government spending on goods and services this year was forecast to grow at about 2.25%. That has now moved up to 2.75%. That is somewhat above 2%, so yes, that is not helpful in trying to get inflation down. This is built into our forecast, and we still get inflation back to the 2% target. It gets there gradually.

The final thing I will say is that there a number of risks to our forecast, and we highlight those in the back. To the extent that the federal government sticks to its fiscal guardrails, the risk on government spending is managed. I mean, we see some bigger risk to our inflation forecast coming from geopolitical events. Others have mentioned the housing market. We think those are bigger risks.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much; that's very helpful.

I know you mentioned earlier that we could take a calculator and do it our ourselves, but I certainly appreciate the bank's model on how it's looking at government spending. You can understand how it's a little bit confusing.

I'll move on to my last question.

[Tiff Macklem]

We can talk to you off-line about that. To be honest, it is quite complicated.

[Adam Chambers, Conservative, Simcoe North, ON]

That's very helpful, but I just have one more question, Governor.

All tax increases are not the same with respect to inflation. I'm trying to think about the capital gains tax, where you pull forward a bunch of transactions that would have happened in future years. Concerning that movement of money when someone turns an asset into cash and creates a big cash balance in a new person's bank account, is that not an inflationary pressure even just a little bit?

[Tiff Macklem]

As I said, we're going to have to go through the budget a little more carefully. On the spending side, there are a number of new spending initiatives, as you've highlighted. Those will have different types of fiscal multipliers. For example, military spending that is mostly buying imported U.S. machinery is not going to have much inflationary impact in Canada.

[Adam Chambers, Conservative, Simcoe North, ON]

I'm out of time, but I will look forward to your capital gains explanation.

[Tiff Macklem]

I'm getting to capital gains.

All this is to say that we need to look at the various measures more carefully, and we will do that as we come to July.

My analysis at this point is very macro. There's more spending going into the economy and the government's tax measures are pulling more money out of the economy. From a macro perspective, the net effect isn't that big from an inflationary point of view.

[Adam Chambers, Conservative, Simcoe North, ON]

It's pulling money out, but it's money that wasn't going to be brought out anyway, because the assets weren't going to be sold. That's a bit academic, but maybe we could talk about that offline.

[Tiff Macklem]

It's taking money out of the private sector and into the government.

[The Chair, Liberal, Peter Fonseca]

Thanks, MP Chambers.

We are going to MP Dzerowicz for the next five minutes.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair. I want to thank the governor and the senior deputy governor for being here today.

I'm going to start off with the residents in my riding of Davenport and what they and I are worried about.

You have been very consistent about how core inflation has to be sustained for a long period of time. You've come before our committee many times, and I've listened to a lot of your speeches. You've been very consistent.

What I worry about is that in living memory, my constituents remember a time when for 10 years interest rates were abnormally low. If you look at the whole span of history, you see that it was actually a very abnormal time period.

I feel that when we're talking about.... Whether you do it in June or whether you do it in the fall, if you start reducing interest rates, I'm worried that the perception that constituents in my riding and Canadians will have is that we'll be going back to what was an abnormal interest rate level for a long period of time.

Can you speak to that? Should they have that expectation, or should they be given a bit of a reality check?

[Tiff Macklem]

Look, we are concerned about that too. In fact, I think you gave a whole speech trying to outline the reasons that....

First of all, interest rates are certainly not going back to the low emergency levels we had during COVID, and they're unlikely even to go back to the pre-COVID levels. As you said, from the global financial crisis to COVID, we had an unusually long period of very low interest rates, so we're probably not going back to those types of interest rates.

The other thing I would say is that in our own forecast, once we become more confident that the downward momentum we've seen in core inflation is going to be sustained so that we are solidly on a track back to 2%, it will be appropriate to lower interest rates.

We're going to take decisions one at a time. When you look at our forecast right now, you see that inflation's coming down pretty gradually, so even when we start reducing interest rates, it's likely to be a pretty gradual path.

For both those reasons, in the longer term and the shorter term, I think Canadians should not be expecting that we will go back to pre-COVID levels of interest rates, and they shouldn't be expecting a rapid decline in interest rates.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you for that.

As you know, our government takes climate change seriously. We have a very strong climate plan to decarbonize and to move to net zero by 2050. In your last appearance at committee, you confirmed that the annual increases in carbon pricing would raise the average economy-wide price level by 0.1 percentage points, and you also said this is fairly negligible compared to other determinants of inflation.

What happens is that we say 0.1%, but Canadians don't really understand what that means. Does that mean $200 a month extra for them, or two dollars extra?

First, could you just confirm whether it is negligible, and second, maybe define it for the average Canadian who might not understand why 0.1 percentage points would be negligible according to StatsCan CPI calculations? Could you address that, please?

[Tiff Macklem]

I can follow up if you like with some more representative calculations, but yes, the government has laid out a schedule of increases to the carbon tax, and we can build those into our forecast. Also, yes, they have an impact of somewhere between 0.1 and 0.15 percentage points on inflation.

The latest reading for inflation was 2.9%. If the carbon tax had been held constant and not gone up, it would be closer to 2.8% instead of 2.9%. I can give you some representative calculations, but it's a small number.

[Julie Dzerowicz, Liberal, Davenport, ON]

I just wish there was a way for us to say it, because when the Conservatives say it, that makes it sound like it's a big number, but when we say it, we say it's negligible because the governor says it's negligible.