Evidence of meeting #83 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.
Governor, Bank of Canada
That's an important question. The first thing I want to say, and I can't stress this enough, is that fiscal plans are the responsibility of elected governments and ultimately parliamentarians. Governments have many priorities. They have difficult decisions to take.
Conservative
Governor, Bank of Canada
It's important to repeat it, though, and it's important that we have a mandate. I'm getting to that. Our job is to control inflation, and we are happy to comment on what the aggregate impact of government spending is on economic growth and on inflation.
In the forecast we presented last week, our monetary policy report does include the new fiscal projections of the federal government and the provincial governments' projections in their recent budgets. On a national accounts basis, those budgets all together add about $25 billion of additional fiscal measures over the next three years. About three quarters of those additional measures are provincial measures. The other quarter, roughly, is federal. You can see the impact of those additional fiscal measures. They show up in our forecast. You can see it in table 2. You can see that the contribution from government spending to growth has increased.
Government spending over this year is running at 2% to 2.5% growth. How is that affecting inflation? One way to look at how government spending is affecting inflation is to compare the rate of growth of government spending to the rate of growth of potential output, the trend growth in the economy. We think trend growth is about 2%, and if government spending were growing well above that, it would be boosting demand further and putting additional pressures on inflation.
Government spending in our projection, based on those budgets, is growing about 2% to 2.5%. It's broadly in line with potential output. The way that I would put it is that government spending plans were not contributing to the slowing of the economy. They were not contributing to the easing of inflationary pressures, but they're not standing in the way of getting inflation back to our target. As I mentioned, in our inflation that incorporates those budget projections, we have inflation coming back to target by the end of 2024.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
In budget 2023, the growth in spending was 4.1%. Previously, in your own undertaking at your last appearance, you said the bank had it priced at 1.4%. That's four times higher than what was projected in your last committee appearance. Does that mean your projections were underestimated? Did you underestimate the impacts of government spending the last time you were here?
Governor, Bank of Canada
In the second half of last year, government spending was growing at about 3.5%, and we did indicate that if that rate was sustained, it would boost demand and could make it more difficult to get inflation back down. Our forecast for the next couple of years is about 2% to 2.5%. As I said, that's broadly in line with potential output. That is an upward revision from what we had in our forecast in January, because it does incorporate the new spending, the new fiscal measures in the latest budget.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
Are you anticipating high pressures, then? Are you forecasting that there are going to be larger than usual deficits that will outpace potential GDP?
Governor, Bank of Canada
We don't really forecast the deficits. We take the government's own fiscal plans as given. Governments have forecast their deficits. As I indicated, the way I would put it is that government spending is growing broadly in line with the trend growth in the economy. It's not boosting or overheating the economy, but it's continually growing, so it's not putting downward pressure on inflation either.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
Given that, are you forecasting entrenched inflation, then? Is that the way you guys are forecasting?
Governor, Bank of Canada
No, we are not forecasting entrenched inflation. As you can see, inflation is actually coming down quite quickly.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
But right now there's a positive output gap.
Governor, Bank of Canada
Last summer it was 8%. It was 4.3% today. We're expecting it to be about 3% this summer, 2.5% by the end of the year and 2% by the end of 2024.
I will say a couple of things on government spending plans. Governments at different levels are spending to protect—
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
I just want to know if you are comfortable with spending being above the 1.4% that you forecast.
Governor, Bank of Canada
It's not really my job to be comfortable with spending. I'm comfortable with our inflation forecast. It's really up to Parliament to decide on the comfort on spending. We've incorporated it into our forecast, and we have inflation coming back to 2%.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
I have to move on. I only have a bit of time.
The government expanded the size of the public service by 30%. This was on top of spending $21.4 billion just on consultants. The labour market remains tight, as you said, and the labour shortages are causing the cost to hire workers to go up.
Would you agree that the public service expansion is making the tightening of the labour market worse?
Governor, Bank of Canada
We look at the labour market overall. The labour market is tight. We are seeing some signs of easing.
Conservative
Jasraj Singh Hallan Conservative Calgary Forest Lawn, AB
We're also paying for more public services and consultants.
Liberal
The Chair Liberal Peter Fonseca
We're at time actually, gentlemen. Thank you, MP Hallan. There will be more rounds.
Now we're going to the Liberals with MP Dzerowicz, for six minutes, please.
Liberal
Julie Dzerowicz Liberal Davenport, ON
Thank you so much, Mr. Chair.
I want to say a huge thanks to you, Governor Macklem and Senior Deputy Governor Rogers, for being with us once again today and for your extraordinary work on behalf of our nation.
My first question for you is about jobs, increased wages and the impact on inflation.
In one of my previous questions to you, Governor, I had asked you if there is always going to be a negative impact on inflation if wages increase. I recall that your response to me was that it is okay if wages go up as long as there's a corresponding increase in productivity. When I'm thinking about wages, it's hard, because I kind of think of them in a big bucket. Many people are paid very well. There are people who are paid what they are worth. There's a huge grouping of people, I believe, in our society who need to be paid more, whether they're nurses, personal support workers or those in some key sections of our hospitality industry. I don't want to discourage wages from going up for those who need to see them go up.
I'm not sure if you're able to comment about what productivity increases might look like in sectors where you need to see wages go up. Again, I mean nurses, personal support workers and key parts of the hospitality industry. Maybe you can comment on that.
Governor, Bank of Canada
As you referred to, higher productivity pays for higher wages. A growing economy with rising productivity supports wage growth. It isn't contributing to inflation.
Right now wage growth is running at about 4% to 5%, and productivity growth is actually declining. To get inflation back to target, we'll need to see some overall moderation in wage growth for the economy as a whole. That doesn't mean wages can't grow faster in some sectors and slower in others. That will reflect demand conditions in those sectors. It will also reflect productivity growth in those sectors.
If we want to sustain higher wage growth over time, we need to improve our productivity growth in this country.
Liberal
Julie Dzerowicz Liberal Davenport, ON
Thank you. That's helpful.
I'll move to my next question.
In your opening statement at the monetary policy report press conference, you indicated the following: “the Bank’s Business Outlook Survey say it's becoming easier to find the workers they need, which suggests that the tightness in the labour market is beginning to ease.”
Do you have any more data on that? There's a mix of people saying there are lots of jobs out there, and then there are those saying they still haven't been able to fill positions. This is the first time I've seen the positive that employers are able to fill the jobs. Has this moved such that 50% of employers were saying before they needed the workers and now it's gone down to 25%? Are you able to put some numbers around that?
Governor, Bank of Canada
I don't have all the numbers from the business outlook survey in front of me. Keep in mind that it is a survey of about 100 companies, so you want to look more at the direction, I would say, rather than be very precise about the various numbers.
I can say a couple of things.
If you look at the big macro numbers, like the unemployment rate or the rate of employment growth, the unemployment rate has stayed at 5%. It really hasn't budged. Certainly if we're looking at the unemployment rate alone, as well as at employment growth, the labour market remains very tight.
When you talk to businesses, you hear they are starting to find it easier to fill positions. They're having more success hiring people. They say that labour is more available. There's less competition from other companies for the same workers. They're starting to find it easier to fill those jobs.
The other thing I would mention in this context is that we have seen a big increase in immigration. Companies have also been using the temporary foreign worker program more. That has brought a lot of additional workers into the country, and that may be one of the reasons you're seeing some easing in the tightness of the labour market.
Liberal
Julie Dzerowicz Liberal Davenport, ON
Given that in January there were strong GDP numbers and there is a continued resilience in the labour market and a continued decline in inflation, as evidenced by this morning's release, do you see the possibility of a soft landing scenario in Canada?
Governor, Bank of Canada
These terms are a little vague, but I think most people would call our forecast a soft landing.
Growth in the first quarter actually looks a bit stronger than we previously thought. Then for the remaining three quarters of this year, we expect growth to be a small positive—less than 1% but above zero. Growth is going to be weak. It's not going to feel good, but it is going to be slightly positive growth, which I think most people would call a soft landing.
There are, of course, risks around that. As we highlighted in the report, the biggest risk is a global recession. We are a very open economy and very integrated with the world, so if that were to happen, growth would be weaker in Canada.