Finance Committee on Feb. 16th, 2023

[Carolyn Rogers]

I think you've described them well yourself. We're a little bit into speculation mode here with these questions. It's difficult for us to give you precise answers in terms of what the overall effect on inflation would be. As you described, a carefully targeted program that built housing for the most vulnerable Canadians, for people with low incomes, would be an example of a targeted program. Again, without understanding the construct of any program, it's hard for us to give you a precise answer.

What we would say, as I said earlier, is that the bank has long pointed to the imbalances in the housing market as a problem. Adding to the supply of affordable housing, over the long term and again on balance, all things being equal, would be a good thing for the economy.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Blaikie.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

I would like to make a general and concluding statement, Mr. Chair, that not all spending is equal—

[Carolyn Rogers]

Not all spending is equal.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

—in respect of its impact on the aggregate demand that the bank would be looking to assess post-budget, and in respect of its decisions about whether the interest rate pause would continue or whether further action on interest rates would be warranted.

[Carolyn Rogers]

I think that's exactly what the governor said earlier.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Blaikie.

We're moving to the Conservatives and MP Chambers for five minutes.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you, Mr. Chair.

Thank you for joining us again. It's a pleasure to have you back. There are some notable absences at this committee, which we may talk about in the next session.

Governor, you talked about the labour market a little bit. It's very tight. In the last six or seven years the government has added about 12,000 net positions each year, every year. In fact, it has just produced additional human resource plans. I'll give an example. For CRA, there is an additional $400 million to spend on staff in the tightest labour market that we've ever seen. We're trying to build supply to help with inflation, so do you think it's wise that a government is continuing to add people when there's such pressure on the labour market?

[Tiff Macklem]

Look, as I've said, governments have difficult spending decisions. They have to set priorities. What we're going to do is to take those into account and then do what we need to do.

The Bank of Canada is set up with operational independence. We have a clear goal and we have the operational independence to pursue that.

The spending plans, the spending the government has done, and its agreed plans are built into our projections. If the government changes those plans, we'll take that into account and do what we need to do.

[Adam Chambers, Conservative, Simcoe North, ON]

Fair enough.

On a textbook definition of crowding out, you have almost a million job vacancies in the private sector. That's come down a bit, but those are round numbers. It was a million for a long time.

The government is actually hiring a number of people in a tight labour market. Those jobs, if they were filled in the private sector, would increase output capacity, wouldn't they?

[Tiff Macklem]

I'm going to leave fiscal decisions to you.

Whether it's on health, education or the CRA, governments have difficult decisions to make, and that's the role of Parliament.

[Adam Chambers, Conservative, Simcoe North, ON]

Fair enough.

Would getting energy resources to tidewater increase supply? Would it help with the output gap issue?

[Tiff Macklem]

As new pipeline capacity comes online.... Built into our projection, based on the best available information, we have new pipeline capacity coming online that will get more oil to tidewater. That is something that will contribute to growth. It's built into our projection.

[Adam Chambers, Conservative, Simcoe North, ON]

Currently, there are large wage settlement negotiations happening at the federal level. We know the private sector benchmarks a lot from what happens at the federal level with respect to wage settlements.

In your mind, what should people, businesses and the government be planning for in terms of what they think is a reasonable wage settlement offer over the next two to three years?

[Carolyn Rogers]

They should be planning for inflation to come back to 2%.

[Adam Chambers, Conservative, Simcoe North, ON]

Is that it?

Some wage settlements at the provincial level have been higher, but not as much as some of the asks we're seeing at the federal level. You think it's fair to recommend that people expect inflation to come back down to target within a reasonable amount of time when they are making wage settlements.

[Carolyn Rogers]

That's what we're focused on. That's our advice to employers, as we mentioned to Mr. Blaikie earlier.

It's not our role to tell employers what their wage settlements should be. It's not our role to tell employees what wage settlements they should demand. It is our role to tell both employees and employers that we are committed to getting inflation back to 2%, and that you can count on that in settling your wage contracts.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Chambers.

We're moving to our last questioner, Liberal MP Baker, for five minutes. That will be the end of this round and this panel.

Go ahead, MP Baker.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thanks very much, Chair.

Governor, I'll ask for your most concise answers as possible, as I want to leave a minute for my colleague Madame Chatel.

I want to confirm this for folks at home, so that my constituents in Etobicoke Centre or other Canadians who are watching this understand. What I hear you saying, Governor—I'm not trying to put words in your mouth, but I genuinely want to make sure we're very clear with Canadians—is that you've made a projection to the best of your ability of what inflation is going to be. You've taken into account all the various information you take into account to make that projection, including current plans for government spending.

Based on that, you decided to pause interest rate hikes, and you've projected, as you mentioned earlier today, that the inflation rate is heading back very close to target by the end of the year.

Am I adequately summarizing your—

[Tiff Macklem]

With one slight precision, I would agree with you.

Our current forecast is that inflation will be around 3% around the middle of the year and get back to the target next year. If economic developments play out as we've projected—in particular, if inflation comes down in line with that projection—yes, we don't think we'll need to raise interest rates further.

There are a number of things that have to happen for that projection to get realized. If inflation gets stuck and doesn't come all the way back to the 2% target, we're fully prepared to increase interest rates further to get it all the way back.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

I hear you saying that Canadians should be prepared for the fact that you may have to raise interest rates again, but your current projection is for the rate of inflation to come down to 3% by the end of the year, and back down to the target of 2% that you're targeting and that Canadians are accustomed to next year. You've taken into account the best data you have, including current government spending.

[Tiff Macklem]

Yes, that's a good summary.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thank you.

There is one thing I wanted quickly to ask you about. We talked earlier about the spending the government did during the COVID pandemic. You and I had an exchange about that earlier. Inflation is obviously hurting my constituents. It's hurting all Canadians, but to my mind, if the government hadn't made those investments.... I'm thinking about things like CERB and the wage subsidy. Approximately nine million Canadians, for example, had to take advantage of CERB.

The economic damage from not doing that—from not having programs to support Canadians—would have been devastating to our economy and to Canadians.

Is it fair to say that would have been far more devastating than the inflation we are facing here today?

[Tiff Macklem]

It is fair to say that we all faced a completely unprecedented situation. GDP plummeted 15% in a number of months. More than three million Canadians were unemployed and another more than three million were working less than 50% of their normal hours. Inflation actually started to go slightly negative.

There was a real danger that if the governments and the Bank of Canada did not take concerted, bold action, the sharpest recession in history could have become a depression.

Fortunately, the other part of it is that the health response was tremendous. The invention and distribution of vaccines was critical to getting us back to normal. The combination was that we had the fastest recovery on record and we avoided a much worse outcome.

One quick way of looking at it is to look at the projection the Bank of Canada put out in the depths of the recession. In fact, it couldn't really do a projection because there was so much uncertainty. It provided a band and if you look at the actual evolution of the economy relative to that band, it's right at the top end of the band.