Finance Committee on Oct. 29th, 2024

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order.

Welcome to meeting number 161 of the Standing Committee on Finance. Today's meeting is taking place in a hybrid format.

I would now like to remind participants of the following points. Please wait until I recognize you by name before speaking. All comments should be addressed through the chair. Members, please raise your hand if you wish to speak, whether participating in person or via Zoom. The clerk and I will manage the speaking order as best we can.

Pursuant to Standing Order 108(2), the committee is resuming its study on the report of the Bank of Canada on monetary policy.

I'd like to welcome our witnesses from the Bank of Canada. We have Governor Tiff Macklem. We also have the senior deputy governor, Carolyn Rogers. Welcome.

Before you get into your opening remarks, I'd like to say thank you on behalf of the residents of Mississauga East—Cooksville. I'm sure I speak for all ridings. I've been knocking on doors for many years, but over the last two years, some of the concerns have been around inflation, of course, and interest rates. We saw over the last while, especially the last rate cut, the jumbo 50-point rate cut, it has made a big difference. It has helped, I could tell you, at the doors. It makes a big difference to people's lives. Thank you for that, Governor and Senior Deputy Governor.

We will go now to your opening remarks, please.

[Tiff Macklem, Governor, Bank of Canada]

Thank you, Chair.

We're very pleased that Canadians are feeling some relief.

We're very pleased to be here at the committee to discuss our recent policy announcement as well as our new outlook in our monetary policy report last week.

As you highlighted, last week we lowered our policy interest rate by 50 basis points. It was our fourth consecutive interest rate cut since June, and it brings the policy rate to 3.75%. We took a bigger step because inflation is now back to the 2% target, and we want to keep it close to the target.

In the past few months, inflation has come down significantly. Headline inflation was 1.6% in September, and both our measures of core inflation were under 2.5%. Price pressures are no longer broad-based. Our surveys also find that business and consumer expectations of inflation have shifted down and are nearing normal. All this suggests we're back to low inflation. That is good news for Canadians.

Now our focus is to maintain low and stable inflation. We need to stick the landing. That means the upward and downward forces on inflation need to balance out. Economic activity picked up this year, but it is still soft. This softness has helped to take the remaining steam out of inflation, but with inflation now back at 2%, we want to see growth strengthen. Last week's interest rate decision should contribute to a pickup in demand.

We expect the economy to gradually strengthen in 2025 and 2026, supported by lower interest rates. Population growth will be slower, but we anticipate consumer spending per capita will be picking up. We also expect growth in residential investment to rise as strong demand for housing boosts sales and spending on renovations. The Bank of Canada expects business investment to strengthen as demand picks up. Exports should remain strong, supported by robust demand from the United States. Our forecast has inflation staying around the target over the projection horizon. The upward pressure from housing and other services is expected to gradually diminish. With stronger demand, the downward pressure on inflation should also dissipate. This will keep the upward and downward forces roughly balanced.

There are risks around our inflation outlook. The biggest downside risk to inflation is that it could take longer than anticipated for household spending and business investment to pick up.

On the upside, lower interest rates could fuel a stronger rebound in housing activity, or wage growth could remain high relative to productivity. We are also facing elevated geopolitical uncertainty and the risk of new shocks. Overall, we view the risks around our inflation forecast as reasonably balanced.

If the economy evolves broadly in line with our forecast, we anticipate cutting our policy rate further to support demand and keep inflation on target. The timing and pace of our interest rate cuts will depend on incoming information and our assessment of its implications for the inflation outlook. In other words, we'll continue to take our monetary policy decisions one at a time.

Let me conclude.

As you highlighted at the outset, Chair, high inflation and interest rates have been a heavy burden on Canadians. Now we're coming out the other side. Monetary policy has worked to get inflation down. With inflation back to target and interest rates continuing to come down, families, businesses and communities should feel some relief.

The bank is committed to maintaining price stability for Canadians by keeping inflation close to the 2% target.

With that, the senior deputy governor and I would be very pleased to take your questions.

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you again, Governor and Senior Deputy Governor. I'm sure there will be many questions from the members.

We are starting with MP Morantz for the first six minutes, please.

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

Thank you, Mr. Chair.

Governor and Senior Deputy Governor, it's great to see you here again at committee.

Governor, it's been widely reported that our GDP per capita is at its lowest growth rate since the 1930s. The GDP per capita has declined now, according to Stats Canada. It declined in the second quarter. That was the fifth consecutive quarter in a row. It's also been reported that Canada lags significantly behind the U.S. in GDP per capita, which is a trend that's continuing. In fact, Canada is now at 71% of the U.S. economy. We rank 18th in the OECD and sixth out of seven in the G7, ahead of only Italy.

Yesterday, at a summit in Toronto, you said, fixing Canada’s productivity problems will likely take a top-to-bottom overhaul of government rules that obstruct people’s ability to do their best work and businesses’ ability to grow: “Monetary policy, fiscal policy, tax policies, competition policy, IP policy—we need to look at those”.

My first question has to do with the increase in the capital gains inclusion rate. Do you find it unhelpful to deal with our productivity crisis, which is the label the senior deputy governor put on it back in the spring, when the government goes and makes such a massive increase to such an important tax?

[Tiff Macklem]

You won't be surprised that I'm not going to comment on specific tax measures.

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

I'm not asking you to. I'm asking you, as an economist, to say whether or not you think an increase in a tax like this is going to adversely affect or be unhelpful in solving the productivity crisis that your own office labelled a “break glass” productivity crisis.

I'm not sure you can label it as a crisis and not respond to a reasonable question about a major tax increase.

[Tiff Macklem]

What I will say, coming back to my remarks from yesterday, is that we have a number of framework policies in this country, including inflation control policies, fiscal policy, competition policy, tax policy and IP policy. My message yesterday was really that, yes, we have a serious productivity problem in this country, and there needs to be a concerted effort to look at these framework policies through the lens of productivity. It's really up to elected officials, up to Parliament and up to governments to decide on specific measures.

I'm not going to comment on specific measures, but I think it would be helpful to look at these through the lens of productivity.

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

As an economist, I'm sure you're familiar with tax incidence theory. If you put a tax on something, do you get less of it?

[Tiff Macklem]

As an economist, I understand how taxes work, but I'm the Governor of the Bank of Canada. I'm not going to comment on specific tax measures.

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

You already opened the door to it when your office put out a grand statement in the spring, saying that Canada was in a productivity crisis. I'm sorry, Governor, but it sounds like you're dodging the question.

The government took a measure that is going to adversely affect the exact problem you warned it needs to solve. I think it is incumbent on you, as the Governor of the Bank of Canada, to say when you increase a tax like this.... Don't you hurt productivity at a time when we need to be enhancing our productivity?

[Tiff Macklem]

Look. It's incumbent on the government, not the Governor of the Bank of Canada, to talk about the tax measures they're taking.

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

Okay, so you're not going to answer that one.

You talked about a top-to-bottom overhaul of government rules that obstruct people's ability to do their best work. Could you specifically point out which policies of the government have obstructed people's ability to do their best work and businesses' abilities to grow?

[Tiff Macklem]

Yes. To back up a little bit to the comments you were quoting from yesterday, I talked about three big buckets that I think need attention if we're going to tackle this very serious productivity problem. We've talked about the first one. There's a broad range of framework policies.

The second one I somewhat provocatively called the “own goals”—the obstacles, the things we've done that were well-intentioned policies but are barriers to increasing productivity growth. Speaking to those, there are many interprovincial trade barriers. There are separate provincial qualifications for lawyers, for electricians and for doctors that make it more difficult for people to move around the country. We've been very good at bringing immigrants into the country. We're not as good at recognizing their credentials so that they can get the most productive job they can in Canada.

There's another thing that certainly I often hear a lot of, particularly when I'm outside the country, from large foreign investors. We're very interested in investing more in Canada. North America is a great place to be. You have the rule of law. You're a stable country. You have many attractive features and lots of talent, but the timeline to get regulatory approvals is very long. It's uncertain. That is a barrier to investing.

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

I'm sorry, Governor. My time is almost up.

[Tiff Macklem]

Those are the things I was talking about.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Morantz.

We'll go to MP Thompson for the next six minutes.

[Joanne Thompson, Liberal, St. John's East, NL]

Actually, I'll be passing my time to PS Bendayan.

[The Chair, Liberal, Peter Fonseca]

Go ahead, PS Bendayan.

[Rachel Bendayan, Liberal, Outremont, QC]

Thank you, Mr. Chair.

Thank you so much for being here with us, Governor.

In the last monetary policy from just last week, the Bank of Canada does point out that wage growth remains elevated at about 4%, which is two and a half times where inflation is currently. We've now had 20 straight months of wage growth outpacing inflation. If we compare this with previous data, we see that the purchasing power of Canadians has also considerably increased. I also saw data showing that consumer confidence in Canada is on the rise. It's actually at a 30-month high, and higher now than it was when Prime Minister Harper left office.

Governor, I know that data isn't everything, but the data does indicate some good news. I wonder, firstly, if you can confirm whether that information or that data is accurate. As well, what I think I hear on doorsteps and what my colleagues hear when they knock on doors is that Canadians are not feeling that right now. Can you give us, firstly, the data picture, but also maybe help explain why there might be some disconnect?

[Tiff Macklem]

With respect to the data picture, it is somewhat mixed. As Mr. Morantz highlighted, consumption per capita has been very weak. Households have felt the impact of higher interest rates. They've cut back on their spending. They've increased their savings. You can see that the savings rate has gone up quite a bit. It's at 8%.

In terms of consumer confidence, it was very low. It has come up, but it's moved up pretty modestly. I think the good news is that it's not going down. It's moving in the right direction, but it's not high. When we do our own surveys of consumers, you can see the combined impact of high inflation and high interest rates on their mood and on their spending plans. Looking forward, we have lowered interest rates now—four times since June—and you are starting to see some impact of that. Some of it is more anecdotal. I expect we will see more in the data going forward.

The way I would put it is that the table is set for growth to pick up. It always takes some time for lower interest rates to pass through and affect households. Some people are affected right away. If you have a variable rate mortgage, the day we cut interest rates it affects you right away. If you're renewing, it takes some time. Different people are affected. It takes some time to pass through. However, we have been cutting since June, so it should start to pass through.

We do expect to see consumption per capita, which has been negative, start to strengthen and actually become positive as you move through next year.

[Rachel Bendayan, Liberal, Outremont, QC]

I also saw that GDP per capita is expected to increase in 2025, as you predicted.

[Tiff Macklem]

That's right. The two are closely related, given that consumption is a big part of GDP.

[Rachel Bendayan, Liberal, Outremont, QC]

You mentioned that this is the fourth straight rate cut. Actually, Canada is the first G7 country to have four straight rate cuts.

Could you comment a little bit about how Canada's economy compares to our G7 peers'? To my mind, certainly, when you look at our global peers, Canada is faring very well and is doing better in terms of a faster economic recovery than others.

[Tiff Macklem]

It depends who you compare it to. The U.S. is certainly doing better than Canada. The U.S. economy has proven very resilient. The U.S. is seeing a very strong investment boom, and you're seeing considerable resilience by U.S. consumers to higher interest rates. Recently, the revisions to its national income and products accounts showed that, actually, income was even higher than we previously thought. Savings in the U.S. are higher—

[Rachel Bendayan, Liberal, Outremont, QC]

I don't mean to interrupt, but Canada is, for the first time, third in the world in foreign direct investment. I agree with you that the U.S. economy is doing well, but—