Finance Committee on May 22nd, 2024

[The Chair, Liberal, Peter Fonseca]

I call the meeting to order.

Welcome to meeting number 143 of the House of Commons Standing Committee on Finance. Pursuant to Standing Order 108(2), the committee is meeting to discuss the subject matter of Bill C-69, an act to implement certain provisions of the budget tabled in Parliament on April 16, 2024.

Today's meeting is taking place in a hybrid format, pursuant to Standing Order 15.1.

Before we begin, I'd like to remind all members and other meeting participants in the room of the following important preventive measures.

To prevent disruptive and potentially harmful audio feedback incidents that can cause injuries, all in-person participants are reminded to keep their earpieces away from all microphones at all times. As indicated in the communiqué from the Speaker to all members on Monday, April 29, the following measures have been taken to help prevent audio feedback incidents.

All earpieces have been replaced by a model that greatly reduces the probability of audio feedback. The new earpieces are black in colour, whereas the former earpieces were grey. Please only use the approved black earpiece. By default, all unused earpieces will be unplugged at the start of a meeting. When you are not using your earpiece, please place it face down on the middle of the sticker for this purpose, which you will find on the table as indicated.

Please consult the cards on the table for guidelines to prevent audio feedback incidents. The room layout has been adjusted to increase the distance between microphones and reduce the chance of feedback from any ambient earpiece.

These measures are in place so we can conduct our business without interruption and protect the health and safety of all participants, including the interpreters. Thank you all for your co-operation.

I'd like to make a few comments for the benefit of the members and witnesses.

Please wait until I recognize you by name before speaking. For members in the room, please raise your hand if you wish to speak. For members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as best we can. We appreciate your understanding in this regard. Remember that all comments should be addressed through the chair.

Now we will resume debate on the motion by Mr. Turnbull, the amendment by Mr. Hallan and the subamendment by Mr. Morantz.

The speaking order I have is from yesterday. Starting off is MP Lawrence, then MP Chambers, MP Genuis and MP Green, if they're around.

MP Lawrence, you have the floor.

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

Thank you—

[Marie-Hélène Gaudreau, Bloc, Laurentides—Labelle, QC]

I have a point of order, Mr. Chair.

I don't want to make you repeat yourself, but I have tried three earpieces. I'm sure the discussion will be quite interesting. However, before I listen to my colleague, I would like to have a piece of equipment that works.

[The Chair, Liberal, Peter Fonseca]

We're going to suspend to make sure everything is working with our sound system.

[The Chair, Liberal, Peter Fonseca]

We are back. The sound seems to be working now.

We are going back to MP Lawrence.

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

Thank you very much, Mr. Chair. It's always a pleasure to be here.

I'll just set the stage for what I hope will be some productive dialogue, either in a formal or informal stance going forward.

Here's where we are right now: A programming motion was put forward by Mr. Turnbull that would substantially limit the amount of debate and discussion on the budget. The budget is a 600-plus-page document, and I don't find it unreasonable at all that it requires sufficient debate. As discussed earlier and suggested by the Liberals, the NDP and, of course, the Conservatives, it is one of the most important documents a government can put forward in a given year. Mr. Davies raised that issue as well when he said we need some more debate. That's one of the issues with this document.

Also, we are well behind the eight ball with respect to money laundering, which has been highlighted by the recent discussion of TD Bank's anti-money laundering protection issues. We definitely need to accomplish some work on studying money laundering. It is completely four-square within the finance committee's mandate to study the anti-money laundering act, as we were asked to do by the Deputy Prime Minister more than a year ago, I believe, so we need to get on with that work.

Finally, the Conservatives have called for Mark Carney to appear as a witness. Mr. Carney, of course, was governor of the Bank of Canada and governor of the Bank of England and is organizing to be the next leader of the Liberal Party. All of that, I believe, is in the public domain and has been reported.

Those are some of the issues that the Conservatives need to get resolved.

The final issue is that, as said, the amount of debate and discussion is being severely limited and curtailed so that clause-by-clause consideration will end at the beginning of June. We all know that things can change and that information could come up with regard to the 600-page budget document. Putting that cap on the study of a 600-page document when significant issues have come up before—such as the SNC-Lavalin affair, in which a deferred prosecution agreement was placed in a large omnibus budget bill and unfortunately wasn't caught until well after the fact—means that due diligence is required there as well.

However, in the spirit of collaboration, Conservatives would like to see us moving forward, and although this proposal doesn't represent the entire solution, hopefully it does move us in the direction of a much-needed study of this budget.

I'll be seeking unanimous consent to, one, withdraw the subamendment moved by Marty Morantz and, two, invite Mark Carney to testify on Bill C-69 by himself for no less than two hours. I think we can make substantial progress if we get unanimous consent on that.

[Yvan Baker, Etobicoke Centre, Lib]

There's no unanimous consent.

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

That is unfortunate. As members are aware, witness invitations are up to the individual parties. This is not actually putting in anything new that we are not allowed to do otherwise. This is a little bit surprising. I would like to continue the process of studying this budget, and with some depth, hopefully, as the budget will affect millions of Canadians. In fact, nearly all Canadians will have some exposure to it.

With that, I would like to talk a bit about the economy this budget will come into. I've noted before, at some length, that our economy is suffering. I'm glad to see that there is considerable conversation about it now. Certainly I wasn't the first to talk about productivity and our economy.

The reality is that our GDP per capita is the worst in the G7, and we continue to struggle with a productivity crisis here in Canada. I'm surprised we don't have more coverage or more discussion about the fact that we are experiencing in Canada a lost decade. For the last 10 years, GDP per capita has basically been flat, and that's extremely challenging. GDP per capita is basically the measure of economic output or the wealth or the prosperity of the average Canadian, and 10 years of zero growth is nearly unprecedented. It's the worst 10 years Canada has experienced since the Great Depression, actually.

We are actually in one of the longest recessions in Canadian history right now, if we measure GDP per capita per quarter. Canada's extensive population growth has masked that fact. Because its population is growing, the country is producing more, but on a per-person basis, a per capita basis, Canadians are actually getting poorer as every year goes by.

I would like to bring to the committee's attention several commentators' thoughts on the economy.

I'll start with Vivek Dehejia. This is from an article he wrote on March 24, 2022. Although some time has elapsed, not much has changed. He wrote the following:

During last fall's election campaign, while the Bank of Canada's mandate was under review, the prime minister made the perplexing claim that he “doesn't think about monetary policy.” Even so, his re-elected government renewed the central bank's inflation target at the two per cent midpoint of a one to three per cent band. But the latest data tell us inflation is now running at 5.7 per cent. That's the highest we've seen it since the early 1990s, and it's rising. The problem it poses is real, pressing and getting worse.

What Vivek is talking about there is the fact that we were facing high inflation. Although inflation is now at 2.7%, it's often said by economists that the last mile of inflation is the hardest to get down. It gets very sticky when you get to or around the target range. The potentially very serious issue is that if the Bank of Canada brings down interest rates prematurely and gets the economy fired up again and the housing prices start to increase and other factors start to increase, it could create a false start. Inflation could really dig in, and the Bank of Canada would have to raise interest rates again, which would obviously be a rough outcome.

The last time a Trudeau was Prime Minister, this is exactly what happened. There was an initial false start, with inflation starting to come down and interest rates starting to come down, and then they had to be brought up again. This is what we want to avoid.

It's particularly dangerous because of the precarious nature of the Canadian mortgage market. There are a series of mortgages issued by some of our major banks that have variable interest rates but level payments. What that means is if you're paying $1,000 every two weeks or $2,000 a month, that payment stays the same. However, the interest rate that underpins the mortgage contracts continues to vary.

This means you can actually get into a position where, because interest rates went up so quickly, you are paying less than the actual interest payment on your mortgage, which creates the effect of the principal actually increasing over time.

Many mortgages in Canada are for five-year renewable terms. If we look back five years ago, we see some very low interest rates. When they renew at these higher rates, it could cause a tremendous shock. That would definitely be exacerbated by a further increase in interest rates. That's why Mr. Macklem is in a difficult position as to when and how quickly he lowers interest rates. If in fact inflation starts again, it could have very serious consequences for Canadians, particularly those in the mortgage industry. He's being very circumspect, and rightly so, about whether he will reduce interest rates.

The odd comment isn't.... I'm quite frankly surprised that we haven't heard more from the media or otherwise from the Liberal Party. In a seemingly flip comment, the Prime Minister did say that he was “sure” that interest rates would go down. Even if he's right with that prediction, it's troubling that he would make it in such a guaranteed, confident way, because there's no way he could know that unless he was inappropriately directing the Bank of Canada. I'm certainly not making that allegation today, but it is very strange that he would make that commitment, that guarantee, that interest rates would go down when he would have no way of doing that except through ways that would be inappropriate.

I actually asked the Governor of the Bank of Canada, Tiff Macklem, about that, and he seemed bemused or confused by it as well. There's certainly no way, through appropriate channels, that a Prime Minister could in any way guarantee that interest rates would go down.

To go on, one of the things that Liberals have said is.... I'll continue with Vivek's article here. He wrote:

The government says inflation is a “global problem” and it's true that most advanced economies are also experiencing rising prices. But that's because they're following the same hyper-expansionary policies. Our own inflation is the creation of the Bank of Canada. The chart shows CPI inflation, as well as the growth of two definitions of the money supply (M1+ and M2++) over the last decade. Money growth was steady for much of the period but began creeping up in the middle of 2019 and has since grown explosively as the bank and the government have worked to prevent a severe economic downturn. Although their growth has tapered off, these aggregates are still growing at extraordinary rates. For example, M1+, which is currency held by the public and all chequable deposits at financial institutions, is still growing at a jaw-dropping 14 per cent.

The reality is that if we perform an objective study with intellectual integrity and vigour, we'll find that the same policies yield more or less the same results. They are socialist policies.

We could, of course, point to obvious examples of these policies in the extreme, such as the Soviet Union and its horrendous record of death and destruction. Millions of Russians, Ukrainians and Poles, among many other ethnic groups, were sent to their deaths and to gulags under these socialist Soviet Union programs. We could point to that. We could point to Cuba or Venezuela, where the people have suffered tremendously. Those are the extremes.

I'd like to use three examples that are not quite as extreme in nature, although they certainly had devastating outcomes on their people.

One would be Israel. We'll start with Israel. Shortly after World War II, they embraced many socialist collectivist policies and, of course, most notably, are known for the kibbutzim, the collective farms that Israel utilized, whereby produce would be gathered and utilized among the collective. It actually didn't have terrible results initially, but a series of economic crises hit, including hyperinflation. You'll see that this is the usual outcome of expansionary socialist money policies. You see economic growth slow down and inflation increase. That's exactly what happened in Israel.

Eventually, it was turned around—in fact, through some of the interventions of Ronald Reagan in pushing Israel to a free market system. The result was that Israel, since the year 2000, has actually had one of the strongest economic records of all countries across the world. It's an amazing story of the difference between socialism and free market capitalism.

The second example I'd like to use is that of the United Kingdom. The United Kingdom similarly, but in a different variation, adopted many socialist policies shortly after World War II, including the nationalization of nearly every major industry. That led to, once again, extremely slow and painful economic growth and high rates of inflation. In fact, by the late seventies, it was referred to as the “sick man of Europe”. Then Margaret Thatcher came to power. Margaret Thatcher, of course, sold off many of the industries and embraced free market policies, and Great Britain tamed inflation and brought economic growth back to the United Kingdom.

The third example I'd like to give you is actually that of the world's largest democracy: India. Even before World War II, India embraced the idea of self-reliance after being put through some very difficult times through colonialism. India was determined to be self-reliant, which is a virtuous goal in itself, I think, but unfortunately that led to isolationism and a scorning of capitalism and free trade, which led India to very poor levels of economic performance and very high rates of inflation. Then India also switched to a more free market and free trade economy, which turned around their economy. We can all see that India's economy is currently taking off. Its record of growth is huge, which is tremendous, because it's that economic growth that will bring a country to prosperity.

We've seen the same playbook here in Canada. We saw some of the socialist policies of Prime Minister Trudeau. Initially, the results weren't that bad because they were living off the legacy of former prime minister Stephen Harper and his fiscal restraint and common-sense approach to taxation, regulation and natural resource exploration, but then you get to the point where these policies.... It's like death by a thousand cuts. Your lack of focus on productivity and economic growth and your over-regulation and overtaxation slowly suffocate economic growth, and where are we?

Well, we are now in the period of a lost decade. Our GDP per capita is among the very slowest and lowest in the G7. Our inflation continues to be painfully high. It has gone down, but the reality of how inflation works, of course, is that it measures the rate of growth. Not only are we dealing with a 2.7% increase; we're still dealing with a legacy of having inflation at 6%, 7% and 8%. Those rates are still built into the prices. Those prices have not come down; they're simply not growing as fast. That pain is still being inflicted on Canada.

Of course, we saw three major reports out today that were calling the Canadian economy further into question.

This happens nearly every time with any type of socialist government. You get to a certain point, and even the most ardent of ideologues and believers struggle with rationalizing the poor results. The only way that they can rationalize it to themselves and to others is to find a bogeyman, a straw man argument—it's someone else's fault.

The Liberal government has tried many different culprits or villains. They've said the economy was a global problem. They've said—this is more the NDP—that the high costs are the result of corporate greed.

The challenge with those narratives is they don't fit the timing of what has happened. It isn't as if grocery stores were all the best citizens, were not self-interested and were benevolent in nature prior to three years ago, and then they all suddenly got greedy. The timing just doesn't work. There's no correlation or causation.

There's no doubt grocery stores, like many other companies, are self-interested. They are profit-seeking organizations. However, that hasn't changed. It was the same five, 10 and 20 years ago. Now there are reforms that we can put in place, such as allowing additional competition, which will push prices down. It doesn't make sense.

Do you know what does fit? It almost jumps off the page, actually. It is the election of the Liberal government in 2015 and a slew of terrible economic data from productivity and GDP per capita. The graphs almost walk in lockstep with the election. If you're not a believer at that point, if you watch a line graph, then you should compare inflation, GDP per capita, and now unemployment numbers, which are now starting to pop up to over 6.1%.

That is with the expansion of the money supply. Milton Friedman, a Nobel Prize-winning economist, said many years ago that inflation is and always will be a monetary policy creation. If you print more money, you get inflation. It's really that simple.

What exacerbates that in Canada—and also in many other failed socialist experiments—is that if you have more dollars chasing fewer goods, then they're going to get more expensive even quicker. What you want is an economy that has a firm monetary policy that allows a dollar to be worth a dollar, but that's also producing a surplus—hopefully a surplus—of goods and services. The more services and goods an economy can provide, by definition, the more the price will go down.

I've only made it to the second paragraph here of this article. I should probably continue. I'll just read the last line so we have some flow here. It says:

For example, M1+, which is currency held by the public in...chequable deposits at financial institutions, is still growing at a jaw-dropping [rate of] 14 per cent.

To put that in perspective: to maintain an inflation rate around two per cent and allow a bit of a margin to prevent deflation, the money supply should grow at [between] five to six per cent.... We are currently [well] above that. Meanwhile, the current policy interest rate is at...0.5 per cent, well below...the most conservative estimates of the “neutral” rate—the rate consistent with full employment and stable inflation, which the bank estimates [at between] 1.75 and 2.75 per cent. Conclusion? Monetary policy is highly inflationary right now.

[Marie-Hélène Gaudreau, Bloc, Laurentides—Labelle, QC]

I have a point of order, Mr. Chair.

The interpreters do an excellent job. However, I think that they're having trouble keeping up with my colleague. He's reading his text too quickly.

I had to interrupt my colleague, since I don't want to miss anything. I would like him to repeat the last two or three sentences. This would provide a break for the interpreters, who again are doing an excellent job.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Gaudreau.

For the interpreters, please slow it down and speak clearly.

[Garnett Genuis, Conservative, Sherwood Park—Fort Saskatchewan, AB]

On the same point of order, Chair—

[The Chair, Liberal, Peter Fonseca]

You don't have the ability to speak, because I don't see implied consent here from the members. The member is not at the table—

[Garnett Genuis, Conservative, Sherwood Park—Fort Saskatchewan, AB]

Chair, I'm raising a point of order regarding interpretation.

[The Chair, Liberal, Peter Fonseca]

We are on MP Lawrence.

Continue, please.

[Garnett Genuis, Conservative, Sherwood Park—Fort Saskatchewan, AB]

It's a point of order, Chair.

[The Chair, Liberal, Peter Fonseca]

MP Lawrence, continue.

[Garnett Genuis, Conservative, Sherwood Park—Fort Saskatchewan, AB]

I have a point of order.

[The Chair, Liberal, Peter Fonseca]

MP Lawrence, continue.

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

I'm sorry. I'll speak more slowly and try to be a little clearer.

To put that in perspective: to maintain an inflation rate around two per cent and allow a bit of a margin to prevent deflation, the money supply should grow at five to six per cent per year. We are currently...above that. Meanwhile, the current policy interest rate is at just 0.5 per cent, well below even the most conservative estimates of the “neutral” rate—the rate consistent with full employment and stable inflation, which the bank estimates to be 1.75 to 2.75 per cent. Conclusion? Monetary policy is highly inflationary right now.

South of the border, after hedging its bets for the last year, the U.S. Federal Reserve has begun an aggressive raising of rates. Last week, the Federal Open Market Committee, the Fed’s policymaking body, raised the policy rate to 0.5 per cent, and it has promised seven more rate hikes, with the goal of getting to 2.8 per cent by...next year. Fed Chairman Jerome Powell has said he is “acutely aware of the need to return the economy to price stability and determined to use...tools to do exactly that.”

That U.S. inflation is running hotter than ours, at 7.9 per cent, is no reason for complacency. Unfortunately, Bank of Canada Governor Tiff Macklem was vague in his comments March 3 before the House of Commons Standing Committee on Finance. Commenting on the previous day’s...hike, he made no specific commitment regarding future hikes; nor did he commit to...ending quantitative easing by reducing the bank’s holding of government bonds.

Now, that's interesting. The bank has actually begun some of its swaps to provide additional liquidity to banks with respect to overnight moving of money that the banks need to carry on their business.

To put this in context, the challenge here is that during or around COVID, the Governor of the Bank of Canada said that interest rates would be “low for a long time.” Millions of Canadians agreed with that and took action and based their financial lives on that.

The largest bill that most middle-class Canadians will face every month is their mortgage. When someone as esteemed as the Governor of the Bank of Canada says that interest rates will be low for a long time, it seems a reasonable conclusion or action to not lock in your interest rate but instead to have a variable rate, thereby reducing your costs. They believed that the Governor of the Bank of Canada was correct when he said that interest rates would be low for a long time, and that cost Canadians billions of dollars. Those dollars went to bondholders and bankers, at the cost of Main Street in great towns like Port Hope, Cobourg, Orono, Newcastle, Brighton and Campbellford, among many others.

This was a really serious error in judgment and a mistake. If the governor didn't know, he should not have said anything, and I think that's quite clear.

What happened was that interest rates quickly went up to levels not seen in 40 years. Governor Macklem, at the time, did say that the bank is determined to control inflation, but it is hard to understand how a policy stance that is clearly inflationary will allow him to hit his target. The danger of moving too slowly is that inflation gets baked into people's expectations, thereby setting a wage-price spiral reminiscent of the stagflation that bedevilled the 1970s. Stagflation is still something that is possible. As I said, on a GDP per capita basis, over seven quarters Canada has experienced one of the longest recessions since the Great Depression.

While Canada may not be in a recession on a national basis, on an individual basis, as I said, Canadians most definitely are. We would have two successive quarters of negative economic growth on a per capita basis. At least with half a check mark, we would achieve that component of stagflation.

The other elements, which are high inflation and high unemployment, are just hovering below those thresholds. Of course, inflation is at 2.7%—and we'll see how that goes forward, as of course inflation is a month-over-month metric—and a spike in gas or fuel prices or a spike in housing prices could certainly drive up inflation going forward, giving that a full check mark.

The other area is unemployment, and that has started to tick up recently, to 6.1%. The most recent unemployment report says that we were flat, but it's been on a generally upward trend for the last year. We are certainly not out of the woods with respect to stagflation.

I'll move forward from there. As interest rates crested, we saw even worse economic growth going forward, and that then caused our governor, Tiff Macklem, to actually pause interest rate increases. We'll read from this article from Bloomberg on the Bank of Canada decision. It says:

The Bank of Canada today held its...overnight rate at 5%, with the Bank Rate of 5¼% and a deposit rate of 5%. The Bank is continuing its policy of quantitative tightening.

The global economy is slowing, and growth is forecast to moderate further as...increases in policy rates and the recent surge in global bond yields continue to weigh on demand. The Bank projects global GDP growth of 2.9% this year, 2.3% in 2024 and 2.6% in 2025. While this global growth outlook is little changed from the July Monetary Policy Report...the composition has shifted, with the U.S. economy proving stronger and economic activity in China weaker than expected. Growth in the euro area has slowed further. Inflation has been easing in most economies, as supply bottlenecks resolve and weaker demand....

In Canada, there is growing evidence that past interest rate increases are dampening economic activity and [reducing] price pressures. Consumption has been subdued, with softer demand for housing, durable goods, and many services. Weaker demand and higher borrowing costs are weighing on business investment. The surge in Canada's population is easing labour market pressures in some sectors while adding to housing demand and consumption. In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease. However, the labour market remains on the tight side in wage pressures....

That has now started to go the other way. We have seen, as I said, unemployment go to 6.1%.

The next article is written by Mr. Philip Cross. Of course, he is no stranger to this finance committee. He's appeared several times and has written about some of the economic pain that Canadians are experiencing. I think he's the first one to write that in the last 10 years we are experiencing the worst GDP per capita that we've seen since the Great Depression.

I'll read from his article, published on July 14, 2023, entitled, “No, you won't tame inflation with more government spending”. It says:

A recent research report from the Bank of Canada makes the improbable claim (based on analysis of U.S. data) that more government spending could reduce inflation, so long as the spending boosts aggregate supply in the economy. Though the relationship between government spending and inflation is complex, the idea that more spending could actually lower inflation does seem far-fetched.

In an economy in which the Bank of Canada has identified aggregate demand exceeding aggregate supply as the main driver of inflation, any additional government spending will fuel inflationary pressures—unless its stimulus to supply exceeds its boost to demand.

Let's unpack that a little bit, because I do believe that this is a misconception that many on the left have. While the relationship is complex, the basics of inflation are fairly simple. If you're producing more money, if you're printing more money than you're increasing your economic output, you have an increase in inflation. If you are printing less new money than you are creating goods, you will see a lowering of inflation.

Unfortunately in Canada, as Carolyn Rogers talked about, our productivity is in a “break the glass” moment. What Ms. Rogers is talking about is the fact that Canadian productivity relative to our peers, most notably the United States of America, is reducing, and reducing quite materially. When that happens, we have a Bank of Canada that has the printing presses in overdrive, flooding the economy with cash. At the same time, our ability to produce goods and services was stagnant if not declining. The reality is that now we have more money and fewer goods to buy with it. What the reality is, in this lap and a hundred out of a hundred times, is that you get more inflation.

We'll continue on. It reads:

But somebody has to explain how exactly such a neat trick can be executed. It won’t be easy. The inflation that erupted during the pandemic surprised central banks, whose models of the economy’s supply side do not extend much beyond using the unemployment rate as a proxy. The supply potential of the economy clearly changed more during the pandemic than policy-makers anticipated. According to the IMF, however, this was not from disruptions in global supply chains but because governments in North America paid millions of workers to stay home, even as Russia’s invasion of Ukraine raised energy prices.

For years, we’ve heard repeated claims that more government spending would pay for itself. Outlays for infrastructure projects were supposed to improve our capital stock, while expanding child care would boost the labour supply. But instead of government spending paying for itself, we’ve seen persistent government deficits and a steady erosion of per capita GDP growth. The OECD secretariat is pessimistic about Canada’s long-term growth potential, projecting we will trail all OECD countries through 2050.

Just to break from the text for a moment to clarify that, the OECD is predicting Canada to have the worst economic growth through to 2050. That has a real impact on Canadians. At that level of growth, we would cease to have an advanced economy. Our economy would fall well out of the G7, which would lower the prosperity for all Canadians.

That is consistent with, as I said, the failed socialist experiments in the past. You nearly always get high inflation, low growth and poverty. The folks who suffer the most aren't the individuals who are at the top of the society. They aren't the folks like Justin Trudeau and other very wealthy individuals who have a trust fund to fall back on. They are Canada's most vulnerable. They're the ones who ultimately pay the price for these socialist policies that reduce growth and reduce economic opportunity.

I'll continue. Mr. Cross uses some colourful language later on, but we'll just power through that.

He wrote:

This latest claim that more government spending can lower inflation looks only at government spending on goods and services, however, not transfers. But while most transfers do reach their intended target (usually households), government spending on goods and services is administered by the civil service, whose sticky fingers latch on to sizeable amounts of money for programs intended to serve the public.

These are his words, not mine. He continues:

For example, the huge increase in health-care spending that followed the recommendations of the 2002 Romanow Report did not improve the supply of health care in Canada. Instead, most of the money was diverted to higher pay for government workers.

If more government spending really did help lower inflation, the veritable orgy of spending during the pandemic should now have us mired in a 1930s-style deflation.

[Adam Chambers, Conservative, Simcoe North, ON]

I have point of order, Mr. Chair.

I'm wondering if that's parliamentary language that Mr. Lawrence just used. Would he like to withdraw that?

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

I would withdraw it.

Sorry, I was just reading the text there.

[The Chair, Liberal, Peter Fonseca]

MP Lawrence, it's been withdrawn.

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

Thank you.

I would like to thank the honourable member for that. I was a little worried about that language, so I appreciate the chance to withdraw it here.

Instead, inflation soared to its highest rate in over three decades in 2022 and remains so stubbornly entrenched that the Bank of Canada has had to continue raising interest rates.

Rates have had to rise sharply in large part because governments have relied on monetary policy alone to fight inflation. Even Paul Volcker, legendary head of the Federal Reserve Board credited with single-handedly slaying the inflation dragon in the 1980s, acknowledged that monetary policy by itself was not enough. Back then, lowering inflation required a co-ordinated effort to reduce regulations, which helped unleash potential growth, as well as a commitment from president Ronald Reagan to shrink government’s footprint in the economy—two examples of how less government [not more] helped lower inflation.

Today’s high inflation, and consequently higher interest rates, will persist until monetary and fiscal policy together rein them in.

I will clarify some of Mr. Cross's comments there. What we have to think about is that inflation actually has two sides to the ledger. On one side you have monetary policy, which is the amount of money that is printed and put into the economy. There are fancy ways of doing that through quantitative easing, which is basically the government buying back its own bonds. The result is that you're injecting more and more cash into the system. It's a fancy, sophisticated way of doing it, but in many ways the effect is the same as just pressing turbo on the printing press.

The other part of the ledger is supply, which is the amount of goods and services that are produced in an economy. If these were to hold equal, you'd get minimal inflation, likely within the target range. If, in fact, the money supply goes up, then likely you're going to get inflation. If, at the same time your money supply goes up, your real economy declines—in other words, your ability to produce goods and services—then you have a good chance of getting very high rates of inflation.

In a nutshell, what happened was actually eminently predictable. The leader of the official opposition, Pierre Poilievre, called it. He called that we were going to get inflation.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

It was me.

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

Marty Morantz did it first, and then Pierre Poilievre.

My apologies, Marty.

Marty knew it because he was a student of Milton Friedman, and he figured out that if you print more money and produce fewer goods, you're going to have higher rates of inflation.

Thank you, Marty, for your service to Canada. My apologies for the omission.

I'd like to read another article by Mr. Cross.

Philip Cross wrote this on July 12, 2023. It's entitled “Hey, Canadians! Does anyone remember what economic growth can do?” His subtitle is “What we desperately need is a cultural environment in which entrepreneurship and innovation thrive”.

Here's what he writes:

Anaemic economic growth has become so routine in Canada since 2014 that it is worth recapitulating the benefits of sustained high growth. Over the centuries, economic growth has powered vast improvements in measures of well-being, such as life expectancy, health, housing quality, leisure time, food intake, energy security, political freedom and democracy. Today faster economic growth would help Canada meet the challenges of the huge debt incurred during the COVID pandemic, a growing population and an aging society. Even the leader of Britain’s Labour Party, Keir Starmer, acknowledges that “economic growth is the absolute foundational stone for everything.”

The British Labour Party is, I guess, the equivalent of our Liberal Party, more or less. It says that “economic growth is the absolute foundational stone for everything.” Actually, many Liberals have said the same thing, including Bill Morneau, who has been, since he left the Liberal government, outspoken about the government's failure to focus on economic growth and, certainly, to produce any economic growth. John Manley, a former Liberal finance minister, has said the same. David Dodge has made similar comments about the critical importance of economic growth. Working Canadians are facing a perfect storm of high interest rates, inflation and a rising cost of living, creating mass amounts of financial stress.

It goes on:

Russia's invasion of Ukraine is a reminder that money is needed to finance a nation's defence and survival in war. Napoleon famously said that three things were needed to fight a war: “The first is money. The second is money. And the third is money.” The history of central banking reflects the importance of finance to waging war. The Bank of England was founded to assist Britain's government to finance war with Napoleon's predecessor, Louis XIV, while the first two attempts at creating a central bank in the United States were made to help deal with the country's war debts.

Almost two and a half centuries after Adam Smith kicked things off, the question of what drives economic growth continues to preoccupy the best minds in economics. The benefits of sustained economic growth are so enormous that, in the words of macroeconomist Robert Lucas, who died recently, “the consequences for human welfare involved in questions like these are simply staggering. Once one starts to think about them, it is hard to think of anything else.” It has become the norm for winners of the Nobel prize for economics (as Lucas was) to then write a book about the sources of long-term economic growth. Most emphasize the role of innovation in a competitive marketplace.

The importance of economic growth is underscored by what happens in its absence. In the words of the British economist Paul Collier, “growth is not a cure-all, but lack of growth is a kill-all.” The Great Depression of the 1930s helped spawn the dictators who provoked the Second World War. Slow growth after 2008 fuelled the growth of populist movements in several countries, leading to Brexit and the election of Donald Trump. As former Bank of England governor Mervyn King concluded, “put simply, our societies are not geared for a world of very low growth.”

Even so, it’s easy to forget that sustained economic growth is a new phenomenon. The libertarian economist Steven Landsburg concisely summarized the long arc of economic development: “Modern humans first emerged about 100,000 years ago. For the next 99,800 years or so, nothing happened.... Then—just a couple of hundred years ago—people started getting richer. And richer and richer still.”

Because it is so new to human experience economists at first struggled to adapt to the emergence of sustained economic growth. As recently as the early 19th century, they focused, as Smith had, on explaining the different levels of national wealth, rather than income growth, because they assumed the level would not change much. Until recently, there was not even a word for productivity growth; the Concise Oxford Dictionary did not have an entry for productivity until 1951.

Economic growth needs to be sustained over decades, not just a few years. Growth over long periods means relatively small changes in growth rates compound to produce radically different results—which is why Albert Einstein correctly called compound growth “the eighth wonder of the world.” It follows that a nations’s growth is best examined over long periods, not the quarters or even years that dominate economic commentary and political debate.

The scary part for the Canadian economy is not the last seven quarters of negative GDP per capita growth; the scary part is the trajectory we are on. Our GDP per capita has basically been flat. It's grown by about 4% over the last 10 years. While the snapshot—and, certainly, the pain Canadians are feeling right now at food banks—is extremely difficult and merits discussion, the part that keeps me up at night, candidly, is the trajectory we're on.

Those 10 years of flat economic growth will have devastating consequences. The damage, in some respects, has already been done, because as Mr. Cross writes, and as Mr. Einstein commented years ago, compound interest is one of the most powerful forces in the universe. This stalling of the economy for a decade will have significant consequences for decades to continue.

If you're in a hole, the first thing you need to do is stop digging. Sometimes, the question will be.... Liberals will say we have all these great initiatives that are going to help Canadians, and that might be believable in a vacuum, but we now have a hundred years of measuring the economic results of socialist policies, and every single time—and I do mean every single time—they have failed. They produce low economic growth, reducing the prosperity of Canadians and reducing the prosperity of citizens around the world—most notably the most vulnerable in our society. They produce high rates of inflation, which is another thief of wealth and, once again, affects the most vulnerable the most.

We then have the fact that this government has been in power for nine years. We have seen its economic growth rate and we've seen the performance of a lost decade. This isn't just me as a Conservative, or conservative economists, talking about this; this is people across the political spectrum. Former Liberal finance minister Bill Morneau, I believe, has written a book on this, talking about the importance of economic growth and the impact it is going to have on our economy. John Manley, a former Liberal finance minister, has also come out and said the economy is unfortunately not producing economic growth. We're even hearing that from David Dodge, a former governor of the Bank of Canada.

What would be interesting would be to ask Mark Carney, a former governor of both the Bank of Canada and the Bank of England, who is organizing to be the next Liberal leader. It would be interesting to hear his comments with respect to this budget, particularly with respect to growth and productivity. He certainly will be weighing in at press conferences and in other forums. They talked about that a little bit in the Senate. I would have some, I think, very legitimate and sincere questions for Mr. Carney, given his pedigree and what he's organizing to do, which is to become the next leader of the Liberal Party and, presumably, Prime Minister of Canada. I would like to ask him about his feelings on economic growth. Unfortunately, it's an absolute no go for the Liberals to have Mr. Carney here and ask him some of these very important questions.

I'll continue reading:

Some concrete examples demonstrate the importance of even seemingly small changes in growth over long periods. If U.S. growth had been one percentage point less per year after 1870, today U.S. GDP would be lower than Mexico's. Even over shorter periods, different growth rates result in much different outcomes. If U.S. growth between 1952 and 2000 had been two per cent instead of the 3.5 per cent it was, per capita U.S. income in 2000 would have been $23,000 at the turn of the millennium instead of $50,000.

That's amazing. Business investments and exports have been declining in Canada since 2015, with the former down 17.6% in volume.

The article goes on:

Canada's recent growth slump has accompanied a shift in policy focus to relentless short-term stimulus and an emphasis on the distribution, not creation, of income. The reality is that redistribution is not an effective way to help low-income people. It subtracts from the growth that benefits poorer people most. As Robert Lucas put it: “of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is the focus on questions of distribution.... The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.”

Policies aimed at redistributing incomes or stabilizing the economy in the short term do not sustain growth, they lower it. What we desperately need is a cultural environment in which entrepreneurship and innovation thrive. Unfortunately, our culture has deteriorated to the point where, as Paul Wells recently pointed out, “in Canada, if you run a successful business, you are made to feel you have done something wrong.”

When Mr. Cross was at committee, I asked him specifically what was the number one issue plaguing the Canadian economy. Mr. Cross is a former head statistician and a highly technical guy, so I was expecting a technical response, but his number one issue was actually the environment in which we are bringing up our new entrepreneurs.

He finishes off with this:

Sustained economic growth will not resume in this country so long as such sentiments prevail.

That's certainly a damning article by Mr. Cross with respect to productivity and the future of the economy.

That's the part that really worries me. We can talk about the way in which this government has in the past gone after business owners, whether that be the changes to passive income within small business corporations or various other tax changes along the way. Of course, the technical and monetary aspects of that have a punitive financial impact, but I'm more concerned, to be honest, about the sentiment that creates. We hear this “eat the rich” rhetoric. It is not a bad thing to be successful. It is not a bad thing to be prosperous. It is not a bad thing to start a business and be successful and create jobs and increase prosperity.

Unfortunately, we hear from all corners of the House of Commons, except for the Conservative Party, that somehow it's the people who go out there and work their tails off and create a successful business who are our problems in society. Nothing could be further from the truth. Our entrepreneurs out there are really the heroes of our economy. As young women go out there, they create new businesses. As newcomers come to our country, often coming with nothing but the shirt on their back, they pull themselves up by their own bootstraps and create new businesses. Those people are heroes, and yet, unfortunately, too much out there by this government, and maybe even just in general, is demonizing these folks once they achieve some level of success.

There are some folks who get lucky—there's no doubt about that—but most of the business owners I've ever talked to who've been successful have worked their tails off. They've given up years, if not decades, of their lives to completely focus on their businesses. Some do it at the cost of spending time with their families. Some do it at the cost of any type of recreation or pleasure or fun. They just work, and they work hard. I hear individuals demonize these folks simply for having made it, for being that “one in 10” business that is actually successful in our country and has overcome the barriers in their own lived experience to be successful. I think we should be there with a helping hand and not demonize these individuals for achieving some level of success.

I'll continue on and talk a little bit about another article by Mr. Cross, entitled “Statcan focuses on inflation trees and misses the forest”. The subtitle is “Real causes of inflation are crazy-high government deficits and too-low interest rates”. Here he's talking a little bit about inflation:

Statistics Canada recently published three short papers that provide a mishmash of data and analysis about the inflation we have experienced since 2020. They claim to pinpoint the impact on prices of imports, wages, profit margins and other non-labour costs. But the results depend on highly questionable assumptions, sometimes are contradictory, and in the end add little to our understanding of inflation’s origins.

Start with “Import prices and inflation in Canada.” This paper suggests import prices rose steadily to contribute about half the increase in GDP prices in 2022. So the government is partly right: some inflation was imported. But not all imports are created equal and their prices move in different rhythms. Imports used in exports are mostly parts needed to manufacture autos, machinery and equipment. They are distinct from imports for domestic consumption, which include a wide array of consumer goods, such as clothing and electronics. After 2019, prices for consumer goods rose 14.4 per cent. But auto prices rose only 5.7 per cent and the prices of electrical equipment actually fell slightly. So inflation pressures from the foreign sector didn’t have a uniform impact.

The study also assumes a full pass-through from import prices to output prices. But businesses' ability to pass price increases along depends on the state of the economy and how competitive markets are. There was no pass-through from the plunging loonie to higher import prices in the first half of 2020 because demand cratered as the pandemic began. Even assuming full pass-through when the recovery was still fragile in 2021 is questionable, but by 2022 demand was so robust one of the companion studies found output prices actually rose more than import prices. With pass-through varying in this way, it's just not possible to have great confidence about import prices' impact on inflation.

The broad thrust of this Statcan paper is that import prices rose after 2020 due to a combination of robust domestic spending and a lower exchange rate, as if these were international factors beyond government's control. But government policies contributed heavily to both the surge in spending and the lower dollar. Though Russia’s invasion of Ukraine sent energy prices soaring the loonie fell because investors knew Canada’s oil and gas industry would not be allowed to expand into Europe—which was confirmed when the prime minister personally and publicly rejected German Chancellor Scholz’s request for more natural gas.

Next up is a study of “Inflationary pressures, wages and profits.” It compares labour costs, which are mostly wages and salaries, to total “non-labour costs”—a hodgepodge of profits, interest, depreciation, and indirect taxes. Unfortunately, lumping all non-labour costs together encourages readers to interpret the results as part of the simplistic “wages versus profits” narrative that dominates public debate. As a result, the study’s conclusion that labour and non-labour costs contributed about equally to the rise of GDP prices is not very informative and potentially quite misleading. In fact, the third Statcan paper suggests profits played only a minor role in non-labour cost increases.

That third paper, “Markups and inflation: Evidence from firm-level data,” looks at firms’ marking up of prices over costs as a contributor to inflation—in other words, “greedflation.” Statcan’s conclusion is that rising markups account for only one-fifth of the increase in consumer prices during the pandemic and are therefore not a “main driver of inflation.” The contribution of markups to GDP price inflation was even smaller at 13.4 per cent. This result suggests that most of the outsized contribution in non-labour costs noted in the second study came from interest rates and indirect taxes, which are largely controlled by governments.

The problem with these three studies is that slicing and dicing particular sources of inflation obscures what’s really going on. The underlying impulse for higher inflation after 2020 was the injection of massive fiscal and monetary stimulus into aggregate demand, including paying millions of Canadians to stay home, just as breakdowns in supply chains sharply reduced overall supply. Although a mechanical approach to prices in specific sectors such as food, shelter and transportation is useful for short-run analysis, inflation’s underlying trend is determined by the gap between potential output and the aggregate demand for it, as the Bank of Canada repeatedly reminds us (even if its actions aren’t always consistent with the reminder).

It is hardly surprising that both workers and firms took advantage of shortages.... But Statcan contributes little to the public’s understanding of inflation by encouraging finger-pointing about whether wages or profits rose more than prices, when it was governments that mismanaged demand and supply and aggravated the disequilibrium between the two in so many markets, thus empowering businesses and workers to raise markups and wages. Worse, Statcan leaves itself open to charges it is helping absolve the government, including the Bank of Canada, of its responsibility to control inflation.

That is a pretty fair discussion regarding the causes of inflation.

I might take a little break at this point. I do want to get back to it, so if you would put me back on the speakers list, Mr. Chair, that would be fantastic. I'll take a little break here, because I know my other colleagues want to talk a little bit.