Finance Committee on March 24th, 2022

[The Chair, Liberal, Peter Fonseca]

Welcome to meeting number 33 of the House of Commons Standing Committee on Finance.

Pursuant to Standing Order 108(2) and the motion adopted by the committee on January 12, 2022, the committee is meeting on inflation in the current Canadian economy.

Today's meeting is taking place in a hybrid format, pursuant to the House order of November 25, 2021. Members are attending in person in the room and remotely using the Zoom application. The proceedings will be made available via the House of Commons website. The webcast will always show the person speaking rather than the entirety of the committee.

Today's meeting is also taking place in webinar format. Webinars are for public committee meetings and are available only to members, their staff and witnesses. Members enter immediately as active participants. All functionalities for active participants remain the same. Staff will be non-active participants, and can therefore view the meeting only in gallery view. I'd like to take this opportunity to remind all participants in this meeting that it is not permitted to take screenshots or photos of your screen.

Given the ongoing pandemic situation, and in light of the recommendations from health authorities as well as the directive of the Board of Internal Economy on October 19, 2021, to remain healthy and safe, all those attending the meeting in person are to maintain a two-metre physical distance; must wear a non-medical mask when circulating in the room; and it's highly recommended that the mask be worn at all times, including when seated. You must maintain proper hand hygiene by using the provided hand sanitizer at the room entrance. As the chair, I'll be enforcing these measures for the duration of the meeting. I thank members in advance for their co-operation.

To ensure an orderly meeting, I would like to outline a few rules to follow. Members and witnesses may speak in the official language of their choice. Interpretation services are available for this meeting. You have the choice at the bottom of your screen of either floor, English or French. If interpretation is lost, please inform me immediately. We will ensure that interpretation is properly restored before resuming the proceedings. The “raise hand” feature at the bottom of the screen can be used at any time if you wish to speak or to alert the chair.

For members participating in person, proceed as you usually would when the whole committee is meeting in person in a committee room. Keep in mind the Board of Internal Economy's guidelines for mask use and health protocols.

Before speaking, wait until I recognize you by name. If you're on the video conference, please click on the microphone icon to unmute yourself. For those in the room, your microphone will be controlled as normal by the proceedings and verification officer. When speaking, please speak slowly and clearly. When you're not speaking, your mike should be on mute. All comments by members and witnesses should be addressed through the chair.

With regard to speaking lists, the committee clerk and I will do the best we can to maintain a consolidated order of speaking for all members, whether they're participating virtually or in person. The committee agreed that during these hearings, the chair will enforce the rule that the response by a witness to a question take no longer than the time taken to ask the question. That being said, I request that members and witnesses treat each other with mutual respect and decorum. If you think the witness has gone beyond the time, it is the member's prerogative to interrupt or ask the next question. To be mindful of other members' time allocation during the meeting, I also request that members not go much over their allotted question time. Though we will not interrupt during a member's allotted time, I'd like to keep you informed that our clerk has two clocks to time our members and witnesses.

I would like to welcome today's witnesses. From Better Dwelling, we have Stephen Punwasi, chief data analyst; from Brigil, Jessy Desjardins, vice-president of development and conception; from the Canadian Centre for Policy Alternatives, David Macdonald, senior economist; from Edge Realty Analytics Ltd., Ben Rabidoux, housing analyst; and from Option consommateurs, Sylvie De Bellefeuille, lawyer, budget and legal adviser, and Alexandre Plourde, lawyer and analyst.

Witnesses, you will have up to five minutes to address the committee with your opening remarks.

We'll start with Better Dwelling and Stephen Punwasi.

You have five minutes, please.

[Stephen Punwasi, Chief Data Analyst, Better Dwelling]

Good afternoon, and thank you for the invite.

My name is Stephen Punwasi. I'm the chief data analyst at Better Dwelling, Canada's largest independent housing news source. Some of you might be familiar with my work, helping to identify the extent of Canada's money laundering problems or the global vacant home crisis. For the rest of you, my expertise is in behavioural finance and the levers that impact the price of assets.

Today I'd like to talk about cats, but I was invited to speak about inflation, so let's do that instead.

Yes, inflation is indeed a global issue. However, it's not because of some outside force of nature. It's due to similar monetary policy missteps rolled out across many countries. Sovereign currency issuers, with a convertible currency like Canada, can control the value of their money and therefore inflation. The key issue is that low interest rates have been too low for too long.

At the beginning of the pandemic, central banks were worried about deflation. The Bank of Canada's primary tool for fighting deflation was to lower interest rates to increase the demand for goods, especially mortgages. The goal was to stimulate demand to overrun supply, creating a non-productive price increase, also known as inflation.

When low rates fail to stimulate enough inflation, central banks will use something called QE or quantitative easing. QE is an unconventional monetary policy tool that's used to create even more inflation. It doesn't shine your shoes. It doesn't make your coffee. It literally only has one purpose, creating more inflation.

It does this by flooding the market with money, providing liquidity to credit markets, and driving down the cost of borrowing. After all, supply and demand apply to every part of the goods and services chain, not just the final product.

For the longest time, we assumed that low interest rates were a good thing. Cheaper money lowers the cost of debt, right? The perfect example of this is housing. A few months ago, the Bank of Canada set out to prove that low rates lowered the cost of housing and, whoops, that's not what happened. It found that consumers adjusted their budgets to incorporate the excess credit available, thus inflating the price of housing across the board for everyone. Buyers didn't see lower carrying costs, but they paid a larger principal.

For the past 30 years, central banks thought they were making housing more affordable with lower rates. It turns out no one did the math until recently.

Why are these points important? In October, Canadian inflation was at 4.7%, more than double the target rate. Remember the QE program I mentioned earlier, the one with the single purpose of creating more inflation. It was still running at this point, and Canada's banks were literally writing to clients saying that the central bank was recklessly ignoring its own research. It's like the Bank of Canada stepping on the gas, and saying the car won't slow down due to external factors. The narrative it's going with is that there is a supply shortage failing to meet demand.

Let's talk about that demand quickly. This isn't regular demand, but demand stimulated by low interest rates. BMO estimates that a third of existing home sales are excess due to the low rate stimulus. Sales are just off the record high, not at an economically repressed level that needs more stimulus. Low rates don't stimulate selling, though. They only create competition, because they are supposed to inflate prices.

Once again, the goal of expansionary monetary policy is to create inflation. Demand is supposed to outrun the supply to create that price increase.

About a third of existing homebuyers are investors. In Toronto, about a quarter of homebuyers are investors, which is a mind-blowing amount for a market of its size. They aren't fulfilling their passion for being landlords; they're looking to capitalize on a capital inefficiency. Overstimulated demand isn't just crowding out end users, but turning them into regular and profitable payments for investors.

Cheap credit isn't just limited to homebuyers with an end use. It's available to everyone. The more leverage you have, the greater your ability to borrow and exploit a system that lends you money at effectively negative interest rates.

I focused on housing inflation, but the same factors drive inflation across the board. Real estate prices are an essential input cost for all goods. Excess demand, not a shortage of supply, is an intended consequence when flooding the market with money.

To review, the Bank of Canada lowered interest rates to create inflation. When the lowered rates weren't producing enough inflation, the bank flooded the market with billions in credit via QE to generate more inflation, and now it thinks external factors are the reasons behind that inflation. We don't need Nancy Drew to figure out where that inflation came from.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Punwasi.

We'll now move to Brigil, and Jessy Desjardins, for five minutes.

[Jessy Desjardins, Vice-President, Development and Conception, Brigil]

Thank you very much, Mr. Chair and members of the committee.

My name is Jessy Desjardins, and I am Vice-President for Development and Conception at Brigil.

First of all, I want to thank you for your kind invitation to appear before you today.

I admit I'm somewhat nervous because this is the first time I've ever testified before a parliamentary committee. I'm nervous but eager to discuss issues that our business and I are passionate about: housing access, the environment and the economy, three indissociable factors.

First, some background on Brigil. We are a private, solely owned family business that operates in the Quebec City region, building housing and living environments. Since 1985, we have built more than 12,000 housing units, 4,500 of which we still own and operate in the retail market. Over the years, we have acquired land on which we plan to build more than 40,000 new housing units in the Quebec City region over the next 20 years.

Many factors have contributed to soaring prices in Canada, including, of course, the impact of global inflation and, more particularly, a shortage of available housing. That shortage is the unfortunate result of poor urban planning in Canada over the past 50 years for which all levels of government are partly responsible. I agree with the Canada Mortgage and Housing Corporation, the CMHC, which appeared before you on January 21 last and stated that the housing supply was lagging behind demand, since Canada has registered the highest demographic growth of all the G7 countries.

We absolutely must build more if we want to balance housing supply and demand. However, many stumbling blocks lie in the way. Long-term planning is lacking at the municipal level and should make a more coherent connection between land use planning and public transit. Excessive municipal requirements, related bureaucratic red tape and administrative delays also increase construction costs and, incidentally, rental costs. In Quebec, in particular, various aspects of the province's Act respecting land use planning and development legitimize the "not in my backyard" syndrome cited by CMHC, which unfortunately attests to a willingness to favour special interests over the collective interest. I can provide an example of this, if you wish.

In my opinion, major housing costs must be considered in the context of total living costs. I'm specifically referring here to automobile operating costs. In addition to representing 22% of all greenhouse gas emissions in Quebec, the use and maintenance of personal motor vehicles result in significant costs to Canadian households. According to CAA Quebec, those costs amount to $833 a month. If urban areas could increase the density of zones bordering public transit lines, automobiles might ultimately become a luxury instead of a necessity. The advent of light rail in Ottawa is an example of this.

Pressure to build more housing is being felt in all industrialized countries, resulting in a scarcity of construction materials and, consequently, inflationary pressure on prices, longer delivery delays and rising competition for materials and skilled labour. In conjunction with this shortage, increasing public infrastructure works are causing soaring construction costs and a sharp decline in the construction industry's ability to deliver habitable units on time. However, some of these projects, such as work on core public transit networks, are essential, whereas others, such as roadworks, have now become debatable since COP26, the 26th ^x Conference of the Parties to the United Nations Framework Convention on Climate Change.

Let's be clear: housing construction depends on an ecosystem of municipal restrictions, transport system development and hard economic reality. Like many other property developers, Brigil would like to be part of the solution.

I'll be pleased to answer your questions.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Desjardins.

Those were excellent opening remarks. Thank you for all of the homes you're building.

We are now moving to the Canadian Centre for Policy Alternatives with David Macdonald, for five minutes, please.

[David Macdonald, Senior Economist, Canadian Centre for Policy Alternatives]

Thank you.

I’d like to thank the committee for the invitation to speak to you today on this pressing issue of inflation. While there were clear inflationary pressures in late 2021, the situation has gotten much worse with the Russian invasion of Ukraine. Despite this, inflation is an average of individual prices, and those prices can be examined in more detail, with possible solutions for those increases devised.

In looking at the data, we see that there are four main drivers of the high consumer price index. I’d like to examine each in turn and then move to what the federal government might be able to do to address those pressures.

The four main drivers of inflation that have seen large increases in the past year and also represent relatively large proportions of the consumer basket are homeowner replacement costs—the cost to buy a new home or a used home—the purchase of cars and trucks, gasoline and home heating oil, and food, particularly meat purchased in grocery stores.

On the first item of home purchase prices, there has been an incredible increase in house prices since the start of the pandemic due to several factors, not least of which is record low interest rates. Recently, this has led to overwhelming investor demand. Investors now make up a quarter of all new mortgage loans in major markets.

It's worth pointing out that sky-high home prices are not due to a lack of new houses. In fact, we’ve built more new houses in the past four years than we’ve created new families. Also, as there's no “one home per family” rule, with investors buying a quarter of all homes, there never could be sufficient supply, as investors scoop up second, third and fourth properties. The federal government didn’t cause this problem, but it's likely the area where the federal government can have the most impact of the four areas I've mentioned.

Recent federal housing affordability measures have often focused on providing homebuyers with additional options for more leverage. CMHC's shared equity mortgage program or tax breaks for first-time homebuyers simply drive up prices further. At this point, the focus should be on investors, whether foreign or domestic, with the goal of changing expectations about the market. This isn’t a problem of fundamentals. It’s a problem of market psychology.

OSFI and CMHC have plenty of tools available to tamp down investor demand and moderate prices as a result. Requiring ever higher down payments for investment properties would be a good first step. Increasing the down payment from 20% to 30% on first investment properties and then requiring an additional 10% down for every additional investment property would send a strong signal. CMHC should also limit borrowed money as a means of down payments—for example, using home equity lines of credit from existing properties. More transparency in bidding and inspections can certainly help, but will likely have a limited impact on prices.

The second big driver of inflation is the price of gasoline and home heating oil. The war in Ukraine is having an immediate impact in this area. Obviously, the federal government doesn’t control international oil prices, nor did it cause these prices to increase—the Russian invasion of Ukraine did. There are some steps in the short, medium and long terms that could help here.

In the short term, oil price booms will lead to record profits in the oil and gas sector in Canada; however, an extraordinary profits tax on oil and gas producers recycled into a transfer for low-income households could offset the impact of higher gasoline prices in the short term. In the medium term, we should accelerate the shift away from gasoline for personal vehicles. Unfortunately, long wait-lists for electric vehicles and key battery metals like nickel and palladium come from Russia, making this more of a medium-term goal. In the long term, we need to kick carbon out of our economy so its variable prices stop affecting the entire transportation supply chain. We need to do this for climate change, obviously, but also, it makes us far less dependent on despotic regimes the world over.

The third category of big price increases is the price of cars and trucks. This is related to supply chain issues and poor purchasing decisions by automakers early in the pandemic, particularly in the cancellation of microchip orders. This is an international problem and not unique to Canada. In the fall, production was resuming, but border disruptions, along with some key inputs again coming from Russia, threaten to prolong higher prices in this area.

The final category driving inflation is high food prices and, in particular, high meat prices. In part, this is related to the drought last summer in the prairies. However, there is also heavy market concentration, particularly in the beef sector, with only three plants in the country processing 90% of all Canadian beef. In fact, one of those companies that runs those plants specifically cites high beef prices as the reason for its record profits in 2021. Not only are companies passing on the price to consumers, but they’re adding an additional margin to pad their own profits.

Unfortunately, there will likely be a further impact from the war in Ukraine via higher wheat and fertilizer costs; however, this impact will likely take longer to materialize.

In conclusion, several of the key drivers of high prices are international and unrelated to government policy. Ever-increasing home prices are a distinctly domestic issue and the federal government could hold back these increases by cutting investors out of the market.

While oil prices are international, our reliance on gasoline to fuel our transportation is not. That's all the more reason to move to a carbon-neutral future in Canada.

Thank you very much. I look forward to your questions.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Macdonald.

We will now move to Edge Reality Analytics Inc. and Ben Rabidoux.

[Ben Rabidoux, Housing Analyst, Edge Realty Analytics Ltd.]

Thank you, Mr. Chair.

Good afternoon, members. Thank you for the invitation to speak here today regarding this study on inflation in Canada, which is a particularly timely topic.

I founded North Cove Advisors in 2013 and since then have covered Canadian housing and household credit trends for institutional investors around the world. More recently, I founded Edge Realty Analytics, which I'm representing today. We work with real estate professionals here in Canada. My main area of expertise is housing, and it's on this topic that I wish to speak today.

To put it simply, housing in Canada is in crisis. I think we all understand that affordability is deteriorating, but it's sometimes helpful to look at the latest data to frame the magnitude of the problem.

The price of the typical house in Canada in February, as measured by the MLS home price index, was 29% more expensive than one year ago. This equates to an annual increase in value of nearly $200,000 for the typical home in this country.

The problem is getting worse. If we go back to 2000, there have been only nine months where prices rose nationally in excess of 2.5% in a single month. Seven of those occurred in the past year and we have had three record-setting monthly gains in the past four months alone. February set a record, with prices rising 3.5%, or the equivalent of $29,000 in a single month.

How did we get here? Price increases of this magnitude provide a clear signal that we have a significant imbalance in supply and demand. How we got to this point and the potential policy responses going forward are a matter of much debate, but I would like to address just a couple of the underlying dynamics that I believe have led us here.

The first is an undersupply of single family homes, which became an acute crisis during the pandemic. Canada has underbuilt single family homes in major metro regions. To frame that for you, consider that in the decades from 1970 through to the 2000s, Canada averaged a population growth of 3.1 million per decade and we completed roughly 1.4 million new single family homes. That's 3.1 million in population growth and 1.4 million single-family homes. However, from 2011 to 2010, population growth surged to 4 million, but new completions fell to 1.1 million, so we had a massive acceleration in population growth and a steep slowdown in new single family housing completions.

When COVID hit, there was an understandable and notable shift in preferences among consumers towards lower-density living, which is exactly the type of housing unit that we had been underbuilding. The consequence is that, today, when we look at the number of single family homes listed for sale in major metros, across the country, we find it's roughly 40% below decade averages. That's the first issue.

Overlay on top of that robust population growth, which has not seen a buy-in from municipalities to deliver the necessary housing. I would say off the top that one of our superpowers as a nation is our ability and our willingness to attract the best and the brightest from around the world. We have consistently enjoyed population growth that's among the highest in the G20. While we should all recognize that this is necessary to maintain long-term economic growth, we have to acknowledge that there are trade-offs, particularly when we are facing a supply-constrained housing market.

The problem as I see it is that immigration policy is set at the federal level, but the ability or, in some cases, the willingness to deliver the housing necessary to accommodate this growth resides at the municipal level. We have seen in recent years a concerted and misguided NIMBY movement—not in my backyard—which has been a major impediment to new supply growth. These voices have disproportionately influenced decision-making at the municipal level. This needs to be addressed, and I was encouraged that in the most recent election, several parties proposed policy solutions that aimed to heavily incentivize municipalities to remove unnecessary red tape and expedite approval for thoughtful developments that would bring much needed new supply to the market.

Part of the current housing crisis can be traced, I believe, to 2019. At that time, population growth in Canada hit nearly 600,000 in a single year, due in part to a record increase of 200,000 non-permanent residents, primarily international students.

I do not believe that we have the capacity in this country, even with buy-in from municipalities, to deliver enough housing to accommodate that level of population growth. Allowing population growth at this level without consideration of the real world constraints is a policy failure that cannot be repeated. We need better coordination in Ottawa to ensure that the combined population growth through international migration and non-permanent resident programs does not exceed the ability of the construction industry to house that growth.

When an asset is perceived to be in scarce supply, it naturally attracts speculation, so there are two sides. A shortage of inventory and speculation are two sides of the same coin. This is particularly true in an environment of low interest rates, where people are forced into riskier investments to earn a return.

Even when we account for strong population growth, home sales on a population-adjusted basis remain about 25% above long-term norms. The dollar volume of homes sold in Canada has surged to $460 billion in the past year alone, which is more than double pre-COVID levels.

Clearly we're dealing with excess demand that cannot be explained by demographics alone. Based on land registry data, I estimate that roughly half of the increase in home sales that we've seen since 2015 is due to a rising share of multi-property owners. Investors and speculators are now disproportionately driving demand and because these investors—

[The Chair, Liberal, Peter Fonseca]

Can you start to conclude, please?

[Ben Rabidoux]

Certainly. There's no silver bullet, but a thoughtful basket of policies can begin to move the needle on this.

I will leave it there.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Rabidoux. There will be a lot of time to answer questions from members when we get there.

Now we now have Madame Sylvie De Bellefeuille and Monsieur Alexandre Plourde from Option consommateurs for up to five minutes, please.

[Alexandre Plourde, Lawyer and Analyst, Option consommateurs]

Good afternoon.

My name is Alexandre Plourde, and I am a lawyer and analyst with Option consommateurs.

I am accompanied by my colleague Sylvie De Bellefeuille, lawyer and budget advisor.

Thank you for this opportunity to present our observations. Option consommateurs is an association whose mission is to help consumers and defend their rights. In the course of our activities, we work with consumers experiencing financial difficulties and debt problems.

Consequently, it goes without saying that the inflationary crisis Canada is experiencing is a major concern for us. Whether it's housing, energy or food, inflation affects basic goods and services that consumers cannot do without. To live, consumers must pay rent, use electricity and buy groceries. These are not luxury items but rather essential needs that consumers cannot disregard or postpone.

Consequently, inflation is particularly problematic for low-income consumers, who have far less budget flexibility to absorb cuts to their purchasing power.

For these consumers, significant price increases therefore mean tough budget choices. Food, for example, is one of the only compressible expenses for most low-income households. As a result, consumers have no choice but to deprive themselves of adequate food in order to pay other expense items. We also see rising numbers of households, increasingly including workers, turning to food banks to meet their needs.

We are of course fully aware that inflation is a complex economic problem that will not go away, as in a fairy tale, with a wave of a magic wand. Despite all efforts by governments to juggle rising prices, we expect consumers will have to deal with declining purchasing power for years. Today, however, we propose four measures that we feel could mitigate inflation's effects on consumers and help them cope with rising prices.

The first measure we propose is obviously that the government provide more support for the most vulnerable consumers. Since low-income individuals may be the hardest hit by inflation, we propose a substantial increase in several government benefits, particularly the GST/HST credit, the Canada child benefit and the guaranteed income supplement. We believe that improving these programs would help mitigate the inflationary shock to the consumers struggling most to make ends meet.

The second measure we propose is that the government ensure that markets are competitive. It is more important than ever that businesses compete so Canadians can get the best price.

Unfortunately, telecommunications, a particularly important sector for consumers, poses a problem in this regard. Canada is still one of the countries with the highest prices for telecommunications services. We believe this situation is attributable to a lack of competition among telecommunications service providers.

To promote greater competition in this market and to exercise downward pressure on prices, we propose that the government compel the major telecommunications companies to share their Internet and mobile network infrastructure with smaller suppliers at low rates.

The third measure we propose is that the government legislate greater transparency for consumer prices. Inflation has encouraged certain merchants to engage in "reduflation", a practice that consists in subtly reducing product quantities while maintaining prices so as to conceal price increases.

In an inflationary context, we feel these practices must be more effectively regulated so consumers can get the information they need to adjust their purchasing behaviour to price increases. Although Canadian regulations require manufacturers to state quantities on their products, we believe the act should go further and ensure that consumers are clearly advised when manufacturers reduce product quantities.

The fourth and final measure we propose is that the government ensure that the consumer goods Canadians buy have an adequate lifespan. Given the sharp increase in prices of appliances and other devices, Canadian legislation should promote the repairability of those consumer goods at an affordable price. To do this, we propose, for example, that the practice of planned obsolescence be prohibited, that a requirement that replacement parts and repair services be available be incorporated in the act and that Canada's Copyright Act be amended to remove intellectual property barriers to the repairing of devices.

Apart from the obvious environmental interest in reducing the replacement cycle of consumer goods, the increased lifespan of goods and devices would free consumers from having to purchase new goods and thus help them deal with price increases.

Thank you for listening to us. We will be pleased to answer your questions.

Thank you for listening to us. We will be pleased to answer your questions.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Plourde.

Witnesses and members, in looking at the time, we will have about 55 minutes for questions before we then will move in camera for our subcommittee meeting.

We are starting on our first round of questions. In this round, each party will have up to six minutes to ask questions.

We're starting with the Conservatives, and we have MP Fast up first.

[Ed Fast, Conservative, Abbotsford, BC]

Thank you very much, Chair.

Thank you to all of our witnesses for sharing your thoughts on inflation in Canada.

My questions are going to be directed to Mr. Punwasi.

I was intrigued by your testimony.

I'm sure you know that the Governor of the Bank of Canada was here not long ago. I certainly tried to tease out of him an admission that his quantitative easing policy might have had an influence on the housing inflation we're seeing today. He did everything possible to resist making that admission. I think he said there was no direct correlation between the two. It sounded a little bit like a weasel word, but in the end, he did admit that there might be a relationship between QE and housing inflation.

It's your view, I think, that housing inflation is directly related to quantitative easing and the low interest rates we have right now. Is that correct?

[Stephen Punwasi]

Yes. I definitely agree with that.

One of the core features of quantitative easing is that they purchase government bonds that end up impacting debt of similar terms.... With the BoC's QE program, they purchased a lot of those five-year bonds intentionally to lower the cost of five-year fixed-rate mortgages. There's no purpose for that other than to increase mortgage demand, which is actually something that the Bank of Canada said itself initially.

At another point, the Bank of Canada also released a study that said that QE resulted in greater wealth and equality and inflated the price of assets. That's kind of in conflict with what the governor said.

[Ed Fast, Conservative, Abbotsford, BC]

Can you comment a bit on the relationship between the government's fiscal policy demands and the demands on the central bank to engage in quantitative easing?

[Stephen Punwasi]

Huh, that's a sore topic, right?

Let's use what the Bank of Canada said in one of its studies. They said, “rising levels of public debt have triggered mounting political pressure and government interference with central banks.”

Essentially, there are two forms of monetary dominance that the Bank of Canada explained in its study, and global pressures from governments have pressured them out of their own mandate. When they're in control, it's called “monetary dominance”, and they get to control the rate of inflation. That's sort of what they do; they only have to target that. When governments lean on a central bank, they create something called “fiscal dominance”. This pressures the central bank to abandon their own inflation mandate as the primary issue and then support their spending.

[Ed Fast, Conservative, Abbotsford, BC]

Let me quickly interrupt you, because that's the nub of the question I have.

Is it your position that the government's fiscal policy or fiscal dominance interfered in the decisions that the bank should have been making?

[Stephen Punwasi]

Definitely.

The central bank itself actually makes that statement in its latest study, which is literally called "The Central Bank Strikes Back!". They suggest that in the future for a crisis like this that a framework be put in place that the government can no longer threaten the credibility of a central bank by pressuring them to support their credit markets. Instead, there has to be some sort of trade-off between the two of them. A government will have to implement some sort of framework that says they'll exercise fiscal prudence and the money they borrow will be very limited in terms of exactly what they need. That way, the central bank will support it.

[Ed Fast, Conservative, Abbotsford, BC]

Just for clarity, when you refer to “fiscal dominance” you are referring to the government's borrowing and spending needs that the central bank then responds to. Is that correct?

[Stephen Punwasi]

Yes. There's a supply and demand issue with credit, too. If the demand for credit, which would include the government borrowing, exceeds the supply of cash, then interest rates rise on that cost. To keep credit markets stable, the central bank will inject liquidity into the market to suppress those rates from rising. The longer the government does this the longer and greater the distortions, and that becoming...in the market, where they're no longer looking at their initial mandate.

[Ed Fast, Conservative, Abbotsford, BC]

As you know, the central bank is supposed to be independent of the government. Yet you're suggesting that the fiscal policy that the government has embarked upon with its spending plans and its need to borrow money has in fact created fiscal dominance which has driven—

[Adam Chambers, Conservative, Simcoe North, ON]

Mr. Chair.

[The Chair, Liberal, Peter Fonseca]

Yes, MP Chambers.

[Adam Chambers, Conservative, Simcoe North, ON]

I'm sorry, Mr. Chair and Mr. Clerk, but for those of us online we lost about 30 seconds of audio there. I don't know if you want to go back to Mr. Fast or maybe add 30 seconds to his clock.

I don't think we could hear anything. It looked like it was for everybody online. I wanted to raise that. Thank you.