Finance Committee on Oct. 29th, 2024

[Tiff Macklem]

We've been very much reflecting on that. Let's hope we don't have anything like COVID again, but we have to acknowledge that it is a more shock-prone world. I think successful organizations are learning organizations, so we want to learn the lessons.

It's a big topic. I'll highlight a couple of things.

One, we need a better, more granular understanding of the supply side of the economy. Our interest rates work through demand. We have better data on demand. Most of the time, supply works in the background. When demand goes up, supply responds and comes up. Companies produce more. However, what we saw in the pandemic was that, when the supply system is impaired or disrupted, its ability to respond to demand is very different. That caused very different outcomes.

The related thing I would say we learned is about the standard central bank playbook. When you get supply shocks pushing inflation up, those shocks tend to be pretty temporary, so you raise interest rates. By the time it starts working, inflation is probably back down, so you're better off seeing it through. I think one thing we've learned is that the playbook is a bit too simplistic. How you respond to supply shocks is going to depend more on the state of the economy. What we saw is that, when the economy was very overheated and we got a supply shock, it was very inflationary. For most of the last 30 years, we haven't had supply shocks when the economy was in excess demand. When it is, you get a bigger pop of inflation.

Those are a couple of the things we've learned. We are doing a comprehensive review of our COVID response. That will come out early in the new year, and I'd be pleased to come back to the committee to talk about this some more.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

I just want to finish up—

[The Chair, Liberal, Peter Fonseca]

That's it.

We look forward to hearing about that review, Governor.

Now we'll go to MP Ste-Marie, please.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Mr. Macklem, in 2002, Canada's gross domestic product per capita was about 80% of that of the United States. In 2022, it was 72%. In 2002, Canada's GDP per capita was 8.6% higher than the OECD average. In 2022, it was below the average. Professor Paul Beaudry recently noted that, compared to other countries, Canada is collectively getting poorer.

In your opinion, what are the main drivers of this change, what can the Bank of Canada do to help correct this trend, and to what extent is the strength of the U.S. dollar responsible for this state of affairs?

[Tiff Macklem]

Those are big questions. To sum it up, it's all about productivity. It's productivity that supports growth without creating inflationary pressures. Since 2000 or thereabouts, productivity has been higher in the U.S. than in Canada, and that gap has increased significantly since the end of the COVID-19 pandemic. In the United States, very significant investments are being made, which adds capital. Workers have new computers and tools to do their jobs, so they're more productive. In the United States, new businesses are born in a more dynamic environment. And so the productivity gap has widened. That's why my colleague said there's a crisis here.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

On the same subject, two weeks ago, The Economist reported that, in terms of research and development expenditures calculated as a percentage of GDP, Canada was at the bottom of the pack amongst G7 countries. Is it not in Canada's interest to increase efforts in research and development and education?

[Tiff Macklem]

It's hard to know why productivity is low in Canada. As you say, Canadian companies invest less in research and development, innovation and intellectual property. The more fundamental question we have to ask ourselves is this: Why are there fewer investments in research and development? That's a difficult question for me to answer.

We know that here in Canada, we have companies that are very successful in global markets. So it's not that we can't do it. We have companies that are very successful in every sector, but why aren't we doing more? It's time to go and play in the major leagues.

We can hit home runs in Canada, but our batting average isn't as good as it should be.

[Carolyn Rogers]

We won the Nobel Prize for AI, but we're not commercializing it the way other countries are. There's opportunity.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Ste-Marie.

Now we'll go to MP Davies, please.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thanks.

Although we're all quite happy that inflation's down and the rate at which prices are increasing has slowed across Canada, price levels also remain elevated. According to Stats Canada, compared with September 2021, the CPI rose 12.7% in September. Canadians continue to feel the impact of higher price levels for day-to-day basics such as rent and food purchased from stores, which increased 21% and 20.7%, respectively, during that same three-year period.

In your view, what are the key factors driving these persistently high price levels in Canada? How is the Bank of Canada addressing these underlying issues?

[Carolyn Rogers]

I think you're talking about price level increases versus inflation rates. This comes back to a question we had earlier. Inflation's back to target. We're bringing interest rates down and the economy's growing, so why don't people feel better? I think the answer is really because things are more expensive. We can say, yes, inflation's back to target, but people feel like things are more expensive—and they are more expensive.

[Don Davies, NDP, Vancouver Kingsway, BC]

Do you expect those prices to come down?

[Carolyn Rogers]

No. I think we would be giving people a false sense of hope if we said that prices would come down. We get these questions: Wouldn't a bit of deflation be good after we've had a period of inflation? Wouldn't that get us back to normal? However, just as inflation is a sign of an economy that's out of balance and that's overheating, deflation is a sign of an economy that's not operating at capacity. It's also out of balance.

What happens when you have deflation is the opposite. When inflation is elevated, people are rushing out to make purchases. That demand is going up. It gets a bit of self—

[Don Davies, NDP, Vancouver Kingsway, BC]

I'd like to stop you there. You're sort of anticipating where I'm going.

I know that you're reviewing your mandate, and you made a mention of looking at the last three years. The last three years have been kind of perverse. Corporate profits rose very strongly in Canada in 2021 and 2022 when inflation was accelerating, but corporate profits have moderated as inflation decelerated. With wages, it was the reverse. We have inflation at 1.6%. Wage growth has picked up. Current year-over-year wage growth is running 4% to 5%, depending on which measure you use. Back in 2022, when inflation was at 8%, wage growth was 3%, so inflation slowed down and wage growth sped up.

What does this tell you about the last three years, about what caused this rapid acceleration of prices that Canadians are apparently expected to live with? You have 30 seconds.

[Carolyn Rogers]

The governor covered this when we were talking about what we have learned. In an environment where you have excess demand and you get shocks to supply, you're going to get a bigger reaction in inflation. I think what you're getting at is whether there has been a role for corporate profits.

[Don Davies, NDP, Vancouver Kingsway, BC]

[Inaudible—Editor] at play, I suppose.

[Carolyn Rogers]

I think it's hard to disentangle corporate profits. How much of it was just that excess demand or more volume? How much of it was more margin? We have looked at that. We have seen that, in an environment of excess demand, companies do push their input cost increases through more. They're quicker to make price increases. Prices adapt more quickly, so that's true. We have seen that.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Davies.

Now we will go to MP Morantz, please.

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

Thank you.

Governor, I wanted to circle back to what we were talking about earlier. I had a chance to look up what the mandate of the Bank of Canada is. It says that your mandate is “to promote the economic and financial welfare of Canada”, which begs the question.... When you come to the finance committee and members of Parliament ask you questions related to the economic and financial welfare of Canada, you should answer them.

What I'm also surprised about is that, when I had my first round, you said that you would not answer questions with respect to fiscal policy and that you were here to talk about monetary policy. However, when a Liberal MP asked you a question about fiscal policy, specifically about what would happen if the carbon tax was eliminated and what its effect on prices would be, you answered that question.

I'm starting to feel that if a Liberal asks you a question about fiscal policy, then you're willing to answer it, but if a Conservative asks you, then you're not willing to answer it, so I'm going to try again.

[Tiff Macklem]

I object to that.

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

That's fair enough. I withdraw it.

However, I would like to ask a hypothetical question, which is what my colleague asked you, though. If you make the assumption, based on economic policy, that increasing the capital gains tax would have an adverse effect on GDP—and this is just a hypothetical—would that have a negative impact on tax revenues for the government?

[Tiff Macklem]

What is your question? If the economy slows, will tax revenues be lower? The answer is yes.

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

The answer is yes. If the economy slows, the tax revenues will be less.

[Tiff Macklem]

Would everything else be equal? Yes.

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

The government has projected that the increase in the capital gains inclusion rate will raise about $19 billion over five years. Again, this is just a hypothetical. If, in fact, it becomes true.... There are other economists who are willing to speak to this. Jack Mintz was here and Ian Lee. They all said what you don't want to say, which is that it would adversely affect the GDP.

Would it be fair to say that the projection of the government is not accurate in terms of the tax revenues received?