Evidence of meeting #77 for Finance in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was spending.
A video is available from Parliament.
Liberal
The Chair Liberal Peter Fonseca
We're moving to the second round, members. MP Hallan is up first, I believe, for five minutes.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
Thank you, Chair.
Governor, it seems, in some of the things you said, that you're counting on a recession to address inflation, or at least a loss of growth over several quarters. In fact, many economists are also expecting a recession in the next 12 months.
What would that recession look like for Canadians, in your opinion?
Governor, Bank of Canada
I'll give you an arithmetical answer, and then I'll give you a sense of what it's going to feel like.
Conservative
Governor, Bank of Canada
Sure. Our own forecast is that growth will be around zero for the first three quarters of the year, and as we get later in the year, we expect to see growth start to resume. What that means is our forecast is around zero. You could get two or three quarters of slightly negative growth or you could get two or three quarters of slightly positive growth. Technically, it could be a mild recession or it could be very weak positive growth.
Either way, it's not going to feel good.
Conservative
Governor, Bank of Canada
We're in the first quarter now. Our own forecasts are that growth will be lower in the fourth quarter than it was in the third. We don't know the last quarter of last year yet. Of the first three quarters, we're in the first quarter.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
I have to move on.
What if a recession doesn't happen? Can you effectively control inflation while the government keeps spending?
Governor, Bank of Canada
If the economy doesn't slow down enough for supply to be able to catch up, yes, domestic inflation won't come down in line with our target and we will have to raise interest rates further—
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
If that was the case, would it be better for you if the government capped its spending? Give a quick yes or no.
Governor, Bank of Canada
I'm going to leave decisions on fiscal policy to governments and parliamentarians.
I will just say that if government spending contributes more to aggregate demand at a time when we're trying to cool the economy, then yes, that wouldn't be helpful.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
Thank you for that.
If Liberal inflation spending continues, at least at the current levels, and we continue to face labour shortages and a lack of supply, does Canada face the risk of inflation remaining high while growth declines, thereby causing stagflation?
Governor, Bank of Canada
Yes, as I said, we're going to take whatever governments decide on fiscal policy as given. That's what we've built into our own forecasts.
Right now, our own forecast has inflation. We built in all the spending plans that have been announced. Right now, we have inflation coming down to around 3% in the middle of this year.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
However, if spending continues, that would have to change.
Governor, Bank of Canada
If there's new spending that is over and above the spending that we built into our forecast, and particularly if that spending stimulates aggregate demand without augmenting supply, yes, other things equal, the economy would be stronger.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
Thank you. I don't have too much time left, but I appreciate the answers.
As you indicated before, the government's increase in spending has contributed to inflation. In your words, inflation is “homegrown”.
At any point since June 2020, did you ever warn the Prime Minister, the finance minister, anyone in the PMO or anyone in any finance department that more spending would increase upward pressures on demand and inflation?
Answer yes or no.
Conservative
Governor, Bank of Canada
—and if she asks me questions, I do my best to give her—
Conservative
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
Okay.
Did you, at any point ever warn them about that? That's something that could be made public.
Governor, Bank of Canada
I largely talk to the minister about monetary policy. If she shares her thinking and she asks me for my opinion, I give it.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
Were you ever worried about the spending in that time? You can tell me that.
Governor, Bank of Canada
Certainly, as I've already said, if government spending contributes more than we've built in on more on aggregate demand—