Of course, the chair has established himself as one of the most well-regarded members of Parliament, partly through his exceptional leadership of the finance committee, and before that of the industry committee of the House of Commons.
Let me thank the chair and all of you for the pre-budget consultations that you're going to commence in the next few weeks. Along with my consultations as , the finance committee's pre-budget consultations help to ensure that Canadians have the chance to make their voices heard. Recommendations flowing from this committee's hearings always inform and influence the ultimate budget document.
I am especially heartened to hear the committee explicitly chose to emphasize the importance of the return to balance as a theme of this year's hearings—and is encouraging ideas on potential cost savings.
I would also strongly suggest that the committee urge Canadian businesses this fall to grow and invest in Canada. As I've said before, to ensure that our economy grows and creates jobs to support a sustainable and long-term economic recovery in Canada, we need strong private sector investment in productivity-improving machinery, equipment, hiring, and more.
Today I will talk about three key issues: first of all, the current volatile global environment; second, Canada's economic and fiscal strengths; and finally, the future.
As we have emphasized repeatedly for the past few years, we are in a period where the global economic recovery—especially in the U.S. and Europe—is fragile and growth will be modest.
At the outset, it is important to have context, and the context is that the global economy is in fact largely growing, albeit slowly.
The situation has been compounded recently by questions surrounding the political determination in certain countries to address the structural problems underpinning weak growth and unsustainable fiscal situations. That underscores one major difference between now and the fall of 2008. At that time, we saw an international credit crisis largely triggered by a loss of confidence in international financial institutions; the current situation is largely a problem of confidence in efforts of governments to move forward with credible medium-term solutions to reduce their deficits.
Earlier this week I co-wrote, along with fellow finance ministers from the United Kingdom, Australia, South Africa, and Singapore, a joint op-ed that appeared in the Financial Times, The Globe and Mail, and other publications around the world. That op-ed called for a new global response to support a sustainable recovery based on credible fiscal consolidation in countries with large deficits, matched by a rebalancing of global demand in order to support growth. As my colleagues and I noted, we must address these global challenges decisively and commit now to fundamental medium-term reforms. I repeat that call here today.
Clearly, resolving the problem will require difficult and bold action—primarily in the United States and Europe—to instill confidence in a prolonged recovery.
Mr. Chair, last week and again yesterday we saw extreme swings in global markets reacting to ongoing events, fiscal challenges, and concerns about the pace of the global economic recovery. Canada is a trading nation with exports representing about one-third of our economic output, and the U.S. is our largest trading partner. As such, global economic turmoil in the U.S. and Europe will inevitably impact our existing trading relationships and our economy.
That's why Canada has been a strong voice globally in calling for action to address current concerns, especially credible fiscal plans that set the path to budgetary balance and sustainable public finances.
Indeed, that is what our government is doing—providing a good example of a government that has its economic and fiscal house in hand for others to follow.
Colleagues, in Canada our economic and fiscal fundamentals are sound and sustainable. We have experienced seven consecutive quarters of economic growth, almost 600,000 more Canadians are working today than when the recession ended in July 2009, and both the IMF and the OECD forecast that our economy will be among the strongest in the G-7 this year and next. Recently, Moody's renewed Canada's AAA credit rating, based on Canada's “economic resiliency, very high government financial strength, and a low susceptibility to event risk”.
Canada has by far the lowest net debt burden among G-7 countries, and we're on track to balance the budget. As the IMF declared recently, Canada has “a sound and credible plan to return to budget surpluses”.
But Canada cannot and is not resting on our laurels—we are cognizant and prepared for the challenges ahead.
Recent indicators suggest that global economic growth was uneven in the first half of 2011 both here and abroad.
Indeed, while Canada experienced greater than expected growth in the first quarter of this year, that is expected to be balanced out by a softer than anticipated second quarter, as witnessed in other G-7 countries.
Colleagues, the government adopted prudent planning assumptions in Budget 2011 by adjusting down the level of nominal GDP growth projected by private sector economists by $10 billion. As a result, fiscal results to date have been broadly consistent with the conservative 2011-2012 projections set out in Budget 2011.
I should note that we continue to monitor developments closely and will, as usual, provide an update to Canadians on the economic and fiscal outlook later this year as part of the fall economic update. Our government is squarely focused on the economy and jobs.
We are focused on creating the right conditions for businesses and individuals to succeed for long-term, sustainable economic and job growth by staying the course with the next phase of Canada's Economic Action Plan.
The next phase of Canada's economic action plan contains several measures designed to contribute to a positive growth environment for our economy and Canadians, such as providing a temporary hiring credit for small business to encourage additional hiring by this vital sector, supporting the manufacturing sector by extending the accelerated capital cost allowance rate for investment in manufacturing or processing machinery and equipment for two years, new resources to support leading-edge research and development, and much more.
The plan ensures sound public finances designed to achieve substantial savings for taxpayers through greater efficiency and effectiveness in government. Once it is fully implemented three years from now, the deficit reduction plan will achieve four billion dollars in annual savings and allow the government to return to budget balance by 2014-15, one year earlier than previously planned.
This is a responsible and prudent approach, consistent with the careful management that has been the hallmark of our government's approach to public finances and taxpayers' money.
We are also staying the course with our plan to make Canada a low-tax jurisdiction for both families and businesses. Our low-tax plan is working and the world is increasingly noticing. Indeed, only this past Sunday, on the American news program Meet the Press, the Governor of Iowa, Terry Branstad, lamented the impact of Canada's competitive business environment. He said, “The Canadian government has reduced their corporate income tax. I've had companies that I've called on to come to Iowa say, 'We like Iowa, but if they don't change the federal corporate income tax, we're probably going to go to Canada.' Now, that's a tragedy when now Canada is beating us”.
May I say, with all due respect to the Governor of Iowa, it's not a tragedy up here.
The next phase of Canada's economic action plan will preserve this country's advantage in the global economy; strengthen the financial security of Canadian workers, seniors, and families; and provide the stability necessary to secure our recovery in an uncertain world.
Before I conclude and invite questions from the committee, let me again reassure Canadians that our government remains squarely focused on the economy. We are continually working to implement the next phase of Canada's economic action plan to support the economic recovery and jobs.
We are closely and constantly monitoring global developments and I remain in frequent and regular contact with my global counterparts. While we should not understate the risks, Canadians can be confident that our country is well positioned to face global economic challenges, as we have done successfully in the recent past.
With that, I invite the committee's questions.
Thank you, Chair.
Thank you very much, Mr. Chair, and happy birthday as well.
Thank you for joining us in the middle of summer, Mr. Minister. We really appreciate the opportunity to ask you questions about the government's plan to ensure the financial security of Canadians.
We wanted to invite you here--and others, by the way--because of the global situation. As you mentioned, we have seen the wild stock swings, the sovereign debt crises in Europe, and concerns about another potential recession.
In spite of your reassurances, though, our economy has been underperforming. We have inadequate demand to generate economic activity and investment that would put money in the pockets of Canadians and their families so that they can spend and further boost the Canadian economy.
We have, as you know, 1.7 million Canadians who are out of work or have stopped looking or are underemployed, and their lost wages alone cost our economy about $80 billion. Companies are sitting on about $500 billion of cash that they've been using to pay down debt and pay dividends. It's almost enough to pay down our entire debt in Canada, yet this government's looking at giving them a further corporate tax cut. Consumers are tapped out with very high personal debt levels, and our export deficit is growing.
Clearly, there are concerns about the U.S., where 70% of our exports go, so we can't be complacent as a country. We can't be rigid or inflexible. Your government has chosen to attack the fiscal deficit by cutting spending, thus taking more money out of the economy and increasing unemployment.
My question is, why not attack the jobs deficit? Why not create jobs that will keep the economy moving and also reduce the fiscal deficit through growth? With interest rates at near-record lows, is it not irresponsible for the government to be less proactive? Why not make strategic public investments to serve the people of Canada, create jobs, improve retirement security, boost growth, and through that ultimately lower Canada's debt?
Once again, I would first like to welcome our minister and the witnesses who came here during the summer.
I want to continue with what we were speaking about, if you don't mind, Minister.
The NDP has been critical in recent weeks of our government's plan to undertake a review of spending, a review of how taxpayers' dollars are actually spent. Disappointingly, some in the NDP have dismissed such a review as “an ideological approach”.
As we know, our next phase of Canada's economic action plan lays out a plan to examine roughly $80 billion of direct program spending. The objective is to ensure that we are spending taxpayers' money as effectively and efficiently as possible and that we are reducing spending. I understand this involves ensuring that we are getting maximum value out of current operating expenditures, improving productivity in government, and examining the relevance and effectiveness of programs.
I think small businesses and moms and dads who also have to balance their budgets think it's prudent that we have this kind of review. They think it's reasonable and want to be assured that we are effective in using their money. That's why, unlike the NDP, I think we ought to proceed and I think that's why Canadians agree with us. The government is doing what is necessary, and I urge the government to continue in that vein.
That said, can you speak further about our government's plan to review spending? Could you also comment on how we expect to satisfy the priorities that Canadians are indicating?
Mr. Minister, thank you for being here.
In Canada's Economic Action Plan, the government has stated that investments in infrastructure provide stimulus to the economy. According to Quebec's premier, $14 billion invested in infrastructure are the equivalent of 100,000 direct jobs. Yet Canada has a striking infrastructure deficit.
The Federation of Canadian Municipalities estimated that the municipal infrastructure deficit reached $123 billion in 2007. There are urgent infrastructure needs: water treatment on First Nations, affordable housing, public transportation, roads and bridges, including the Champlain Bridge, just to give a few examples.
We welcome the investment made in the Lower Churchill project, but we would like to have other provinces benefit from such investment.
Mr. Minister, you've been referring a lot to the European debt situation. As you know, this is not Europe. We have the lowest debt-to-GDP ratio in all of the G-7. We also believe in balancing the budget and lowering the deficit, but it's important to make a difference between investment and spending.
In the current economic climate, and since it knows that investing in infrastructure encourages greater productivity for businesses, job creation, economic growth, and, as a result, debt reduction, not to mention better quality of life for families and communities, why does the government not announce major additional investments to rebuild our infrastructure?
Thank you again for sharing your birthday with us, Mr. Rajotte.
Minister Flaherty, thank you again for coming today.
As mentioned in your remarks, our government is staying the course and staying focused on the economy, including implementing the next phase of Canada's economic action plan. I am pleased to note that this plan includes not only many measures to help support Canada's economic recovery but also initiatives to support Canada's families.
In my riding of Vancouver South we have many families. It's a very residential area. We have the highest ethnic diversity in Canada, as well as a disproportionate number of seniors. Many of these measures to support Canadian families are measures about which I've heard positive and glowing remarks, so I want to pass that on to you today, Minister.
I want to also note that in supporting Canadian families, this government has maintained the course in federal-provincial transfer payments. These payments have remained stable, and we have committed to increasing health care transfers by 6% every year. As we know, these are measures that support Canadian families in terms of education, health, etc.
Today I want to specifically mention my constituents' support for the new family caregiver tax credit, which is an impressive new credit. In our ethnic communities in Vancouver, many caregivers do provide care to our aging population, our seniors, as well as to youth who are perhaps in special-needs circumstances. I note that this new tax support for family caregivers is at 15% and for each family is $2,000. It will impact over 500,000 caregivers across Canada. In 2011-12 that is a $40 million investment to support our families, and it is $160 million for the following year.
I also note that we are continuing and extending our ecoENERGY retrofit homes program. As I mentioned earlier, in Vancouver South we are a very residential area, so this program is also welcomed by my constituents. It provides nearly $870 million over two years to address climate change and air quality. It provides homeowners with grants of up to $5,000 to make their homes more energy efficient, which will help reduce the burden of high energy costs. Again, this is a very welcome measure.
Finally, I want to touch upon seniors, because in Vancouver South we have a very high proportion of seniors. The enhanced guaranteed income supplement is going to benefit couples by $840 per year and single seniors by $600. This is a measure that will support families and seniors with up to $3 million per year, impacting 680,000 seniors across Canada.
I mention these measures because I and my constituents are very pleased and happy that in this next phase of the economic action plan, this government is continuing to support families across Canada, which I think is very important.
After talking about families, however, I want to turn a bit to the future and ask the minister to highlight some measures that the government is taking in the next phase of Canada's economic action plan to secure Canada's long-term economic prosperity. Could you specifically highlight measures in relation to innovation, education, and training?
Thank you very much, Mr. Chair, and thank you to the committee for this opportunity to appear this morning. We'll make a short statement and we'll look forward to your questions. Happy birthday, Chair, as well.
We'll start on recent economic and financial developments.
In recent weeks, several downside risks to the bank's July projection have been realized. The European sovereign crisis has intensified, the U.S. credit rating has been downgraded, and a broad range of data has signalled slower global growth.
The United States is in the midst of the weakest recovery since the Great Depression. This is not a surprise as history teaches that recessions involving financial crises tend to be more severe and have recoveries that take twice as long.
Recent benchmark revisions show that the U.S. recession was even deeper and the recovery from the trough has been even shallower than previously reported.
The bank expects that American household spending will remain subdued in the face of high personal debt burdens, large declines in wealth and tough labour market conditions. In addition, fiscal stimulus in the United States will soon turn to fiscal drag.
For well over a year, the bank has been concerned about the prospects for resolving internal tensions within the euro area. Some of these concerns are now being realized, as acute fiscal and financial strains in Europe have triggered a generalized retrenchment from risk-taking and could yet prompt more severe dislocations in global funding markets.
In response to uncertainties in Europe and the evidence of slowing global growth, equity and commodity prices have fallen significantly and financial market volatility has increased markedly. The spillovers to Canadian financial markets have been less pronounced, but are still notable. Importantly, Canadian financial stocks have considerably outperformed their peers in the U.S., the U.K., and Europe, and our core funding markets have remained orderly. This will help ensure an appropriate flow of credit to Canadian households and businesses.
Recent events serve as a reminder that in a world awash with debt, repairing the balance sheets of banks, households, and countries will take years. As a consequence, the pace, pattern, and variability of global economic growth is changing, and Canada must adapt.
In short, the considerable external headwinds that the bank has long identified are now blowing harder. For Canadian producers, the persistent strength of the Canadian dollar is compounding the sluggishness of U.S. demand. Largely reflecting such external factors, recent Canadian data have been consistent with minimal to slightly negative growth in the second quarter. At the same time, labour market developments and business investment intentions suggest continued strength in our domestic economy.
The bank continues to expect that growth will accelerate in the second half of this year, led by business investment and household expenditures. Ongoing strength in major emerging markets should also help maintain commodity prices at relatively high levels. However, relative to our prior expectations, we expect somewhat weaker economic momentum both globally and consequently in Canada, with attendant consequences for resource utilization and inflationary pressures.
Since the crisis began, the broad economic strategy has been to grow domestic demand in the face of these considerable external headwinds and to encourage Canadian businesses to retool and reorient to the new global economy.
In response to the sharp, synchronous global recession, the bank lowered our target rate rapidly to its lowest possible level. We almost doubled our balance sheet to provide the financial sector with exceptional liquidity. And we gave exceptional guidance on the likely path of our target rate, through our conditional commitment.
In tandem, federal and provincial fiscal stimulus provided important further support to domestic demand, contributing significantly to Canadian economic growth through 2009 and 2010.
Owing to the underlying strength of domestic fundamentals, particularly our resilient financial system, these policies proved highly effective. Domestic demand in Canada grew more than twice as fast as in the U.S. Canada has recovered all the output and about 140% of the jobs lost during the recession. Throughout, price stability has been maintained.
As the Minister of Finance has rightly emphasized and as recent events have reinforced, fiscal sustainability is fundamental. It is essential to maintain Canada's fiscal advantage with an appropriately paced fiscal consolidation plan that is consistent with the G-20's Toronto summit commitments.
Similarly, private credit cannot grow without limit. Canadians are now as indebted as the Americans and the British. In an environment of exceptionally low interest rates, we must be careful not to repeat the mistakes of others, who now face the challenges of lowering unsustainable public and private debt burdens simultaneously.
There are five ways in which the bank will continue to support Canada's economic expansion in this difficult external environment.
First, the best contribution that monetary policy can make is to keep inflation low, stable, and predictable. Monetary policy is guided by our 2% inflation target for total CPI inflation. This is a symmetric commitment; that is, the bank cares as much about inflation being below target as above. Since the crisis erupted, the bank has demonstrated its flexibility and nimbleness in the conduct of monetary policy. As Canadian recovery has progressed, we have emphasized that we would be prudent with respect to the possible withdrawal of any degree of monetary stimulus.
As we highlighted in our most recent MPR, our approach will always be guided by comprehensive, considered analysis and informed judgment rather than by mechanical rules. This is particularly important in the current environment of material external headwinds. To state the obvious, if the outlook for growth and inflation changes, the path for monetary policy will be affected accordingly.
Second, the bank will take the necessary steps to ensure that core funding markets remain liquid. In the event of a major systemic shock, the bank has a wide range of tools to provide exceptional liquidity, consistent with a principles-based framework. At the same time, central bank liquidity should not be a substitute for sound risk management by private financial institutions. Accordingly, the bank will continue to work with OSFI to guard against moral hazard by ensuring that private banks maintain adequate liquidity buffers.
Third, we must continue to build a more resilient financial system in Canada and globally. Recent events underscore the importance of implementing G-20 financial reforms, notably the capital liquidity requirements under Basel III. Given the leading positions of our banks and the consistency of the new standards with Canada's, now is not the time for Canada to move from the front to the back of the class. Moreover, it is in Canada's interest to ensure that others follow our example. This will reduce the risk that another foreign financial crisis sideswipes our economy.
Fourth, the bank will continue to work with its federal partners to monitor risks to financial stability and to develop appropriate responses. An example has been the measured approach to rising household indebtedness. Since 2008, the federal government has taken a series of prudent and timely measures to tighten mortgage insurance requirements in order to support the long-term stability of the Canadian housing market.
Finally, since the biggest risks to our economy come from abroad, the bank must work with its international colleagues as they tackle the twin challenges of reducing excessive private and public debt. This situation is most acute in Europe, where credible national fiscal plans need to be supplemented by broader changes to European economic governance and fiscal arrangements.
We are in constant, intensive discussions with our European colleagues bilaterally and through the G-7, the G-20, the Bank for International Settlements and the Financial Stability Board.
As the bank has stressed repeatedly, the core challenge is to rebalance demand between advanced and emerging economies. To this end, the bank is investing in current G-20 efforts to develop a framework for open capital flows, working with the FSB to devise and implement comprehensive financial reforms.
We are also collaborating with our colleagues in the Department of Finance to guide the G-20 framework for strong, sustainable and balanced growth. Rebalancing will require significant changes to fiscal, structural and exchange rate policies across a broad range of countries.
To conclude, the challenges in the current global economic environment are significant, but so too are the opportunities for Canada. Our corporations and governments have strong balance sheets, our financial institutions are among the most resilient in the world, and our economy can be geared to the future sources of global growth. To take advantage of these attributes, we will need continued heavy investment to improve productivity as well as sustained and innovative efforts to develop new markets.
For its part, the bank has a wide range of tools and policy options that it will continue to deploy as appropriate in order to ensure that Canadians can seize these opportunities in an environment of domestic macroeconomic and financial stability.
With that, Mr. Chair, Tiff and I would be pleased to take your questions.
First, regarding the CPI number that came out today, both the headline and the core CPI numbers are consistent with our expectations in the monetary policy report.
Second, to your question on the eurozone, we've long identified the situation in the eurozone as one of the principal downside risks. Some of that risk has been realized, by which I mean the obvious volatility and the moves in financial markets as a result of the situation there. The other aspect of that risk is accelerated fiscal austerity in Europe as a whole, in part to address it, so related to the strains in financial markets are the constraints on the European financial system and its ability to extend credit. Both of those aspects will lower European growth, which is a major part of the global economy. It will have important spillover effects on the global economy and ultimately on Canada.
There is, then, the direct impact of the policy choices that have already been taken. The issue remains, though, as I said in my opening comments, that this is a very delicate situation that has not yet been fully addressed. Moreover, additional significant measures involving pretty fundamental changes to economic governance and fiscal arrangements as well as efficient use of the money that's been put aside already through the EFSF and other facilities are going to be very important in determining the ultimate outcome in Europe and, through both financial and real channels, the impact on Canada.
We've realized some of this downside risk. That's one of the reasons we think there's a little less momentum going forward, and elements of that downside risk unquestionably still exist.
Thank you for the question. It's a very important question, and it goes to the heart of where growth is going to come from for this country over the medium to long term.
One of the main sources of growth is, in our opinion, going to have to come from this trade diversification. Now, let me say at the outset that the United States, for all its difficulties, is still the largest economy in the world. We expect there will be ups and downs, but the U.S. economy is still going to grow at a reasonable pace. It is not going to grow for some time at the formerly torrid pace that it used to, but it's still a good market for Canadian businesses. We have a privileged position in that economy, and obviously we should do everything we can to retain that position.
That said, the opportunities in emerging markets for this country are immense. The simplest and most straightforward opportunity comes through our commodities sector. Whether we trade directly with these economies or not, we feel the benefit of their demand for commodities that we export, from base metals and precious metals through to the energy complex. Emerging economies, and China in particular, are the main drivers of these commodity prices. We get the net income benefit of that.
While there is always going to be volatility around commodity prices, we expect that all things being equal, commodity prices are going to remain relatively elevated for the foreseeable future. In our opinion, that provides a degree of confidence in terms of further longer-term investments in that sector, which could include pipelines, geographic diversification, and other aspects that are being looked at very intensively.
The other aspects, though, are where we have a lot of room. Let's say the glass is half full. We have a lot of room to expand both in the manufacturing sector and in the export of services. We have lost market share in the major emerging markets in those areas in the last decade, so one of our messages is that these economies are accounting for more than half of global growth. It's three-quarters, as you referenced. It's actually probably 80% right now, unfortunately, with the drop in Europe and the U.S. They're accounting for more than half of the growth in manufacturing exports as well, and capital good exports, so there are real businesses that Canadians all the way through the supply chain can take advantage of.
It's not easy, in that it will take a sustained effort to develop these markets and to get into those new supply chains, but the secular trends here are fundamental. I'll give a couple of very quick examples and then stop, Chair.
Let's look at China and India. Every 18 months of urbanization in China and India equals the entire urban population of Canada. They house that many people every year and a half as they move to the cities. As well, globally there are 70 million people moving every year into the middle class from the major emerging markets. There is tremendous opportunity here. Government can obviously help with trade deals such as the deal with Colombia, which I know members of this committee supported, and with other important diversifications.
I have one last thing, which is that the flip side is also important. We need to recognize that these major emerging markets--particularly China, or the Asia complex, if you will--are major providers of long-term capital. We could take advantage of that for inward investment into Canada and use it to export higher quality products to these countries.
I would echo very much your first point in terms of the interest in the lessons from Canada's strength or performance in the financial sector. As Mr. Macklem references, he's in India--we're often in Asia--so that we can learn from each other, but candidly, we're also there so that we can add to the profile of the Canadian financial sector and encourage longer-term relationships to the benefit of our citizens.
In terms of the agenda, there is a very heavy reform agenda, and it can be sometimes mind-numbingly dull or complicated in all the acronyms. That is by design, by the way, so that nobody knows what we're doing.
Voices: Oh, oh!
Mr. Mark Carney: Let me try to strip it down. You referenced Basel III, and that's absolutely right. Basel III is the standard for how much capital and the type of capital that banks have to hold, and how much liquidity they should hold as well. The core of Basel III makes the world's banks look more Canadian.
There are some innovations to the way we did things in Canada as well, but basically we added on top of all the complexity a very simple test that will apply globally, which is how many assets you have over how much base capital. You shouldn't let that get too big, because there are limits to knowledge, and the things you think aren't risky tend to be the things that really do have a lot of risk. That was one of the core lessons of the financial crisis and one of the reasons we did well.
We've added some very common sense elements to the standard. We've stripped out a lot of financial engineering in the quality of capital so that equity is true equity and there is realy some loss absorption base there. The important thing is going to be to make sure that people implement it, and that they implement neither too quickly nor too slowly, but in a timely manner. The world's banks were shown to be woefully undercapitalized as a whole--not the Canadian banks, but the global banks--and that was part of the reasons for the crisis.
We don't have time to go into it now, but one of the things we're really focused on at the bank and through the financial stability board is making sure that all these great rules that have now been written are actually implemented, not just in Canada--where they will be, without question--but also in Europe, the United States, and our major partners.
I will quickly mention the second two things. There are a series of very complex initiatives that work on the plumbing of the financial sector. They work through the short-term repo markets, which are one of the core markets through which banks are funded, and the derivative markets. The point of those initiatives is to remove the types of risks that are still present in global markets in relation to how the failure of a certain bank would affect all the other players. There is still tremendous uncertainty about that. If you can neutralize that risk, then a certain bank can fail if it makes mistakes--and it should fail--but others can get on with their business. Then we won't have to have special sessions during August, although we're always happy to do them.
In terms of the repo market in Canada, we have made some serious changes that should be on stream later this year or early next year. Those changes will further improve our functioning in that area.
The last thing is the other big element of initiative. We have focused on the banking sector as a whole, “we” meaning the global community. Give or take, that is anywhere from a third to a half to a maximum of two-thirds of the financial sector in any given country. In Canada it is about one-half. What about the whole other side? Some people call it “shadow banking”; we prefer the term “market-based finance”, because it's actually about having markets and having the markets working. We need to look at the interaction between markets and banks and ensure that they are resilient, so that we don't get effects from markets cascading back onto the banks and ending up affecting the ability of individuals, Canadians, to have a mortgage or to borrow for somebody's education or for a new business investment.
Thank you for being here.
Thank you so much for your presentation. It really was enlightening to some of us.
I'm going to try to sum up some of the things that I've heard.
Page 2 of your presentation states that “In tandem, federal and provincial fiscal stimulus provided important further support to domestic demand, contributing significantly to Canadian economic growth through 2009 and 2010.”
I was glad to see that, because the NDP voted against the stimulus during that period.
Then, later, you said that it's now entirely appropriate to stop spending, yet here today the NDP is saying, “Spend”.
On the other things that you've commented on, I'm trying to figure out why the NDP and the government are on two sides of this economic page. When you talked about jobs in your presentation, again on page 2, you stated that Canada, thanks to things like Canada's economic action plan, “...has recovered all of the output and about 140% of the jobs lost during the recession”, yet the NDP continues to say that we should focus on creating jobs, something the economic action plan--which they voted against--was doing and is continuing to do as we move forward.
Then you said something very important. You said that trade diversification is at the heart of where growth will come from. We've seen our pursuing that and we've heard Minister Flaherty talking about trade in China. We have negotiated approximately 10 agreements. Given that we have just signed some last week, during the Brazil trip that the Prime Minister took, we have signed more than 10. We are negotiating 50 trade agreements. The Liberals only signed three over 13 years; we're only into our sixth year as government, so I think we're doing pretty well.
At the heart of that, you stated that a government can create an environment to allow the private sector to invest in growth and you pointed out how important it is to do that. Would you agree, sir, that things that we've done as a government, including implementing a hiring credit for businesses, lowering corporate tax rates, extending the accelerated capital cost allowance, and negotiating free trade agreements show that we're on the right track?
He's got a one-way ticket to India, and we won't be seeing him.
Some hon. members: Oh, oh!
Mr. Mark Carney:
I will say the following: as we've said in the past in terms of elaborating on the specifics of the contribution of the various measures of various levels of government, particularly last year in 2010 when they were most direct, about a third of the growth in our economy was a result of these measures and the multipliers that came from those measures. That was valuable, obviously, because it was at a time of extreme weakness abroad.
It also has to be said that there was a more tentative response of our corporate and business sector at that time than we saw in the U.S. or in Europe, which were at the heart of the crisis. There was more of an investment strike, if you will, at the time. On our business side that has now turned around, and it coincides with the withdrawal of some of the stimulus.
The government is continuing to spend, and smart spending will continue to be important. We've talked about the diversification of markets and the growing of markets as being absolutely essential, as is creating a constructive environment for foreign investment and long-term capital in Canada, as I've tried to emphasize.
Let me make this point: in general, this country is not going to have a problem having access to capital. The question is, what do we do with that access to capital? Do we all enlarge our homes, or do we build our productivity? Do we enlarge our export capacity? Do we consume it, or do we invest it?
There's a right mix, and individuals and businesses have to make those decisions. This is one of the issues that we should collectively be alive to, because in this global environment where capital is looking for a home, Canada is an attractive home; however, it's then incumbent on us and on Canadians to use that capital effectively for the long term.
I heard three very important questions there, and I'll try to be brief.
First off, the decision of the Federal Reserve last week is positive for Canada in that the stimulus it provided, this form of conditional commitment, is something the bank did in the depths of the crisis. Once we got interest rates as low as they could go, we provided greater certainty to Canadians about where we thought the interest rate path would be in the near future, because there were exceptional circumstances. The Fed is in even more exceptional circumstances, obviously, and the guidance they gave last week had an important impact on interest rates further out on the curve, which is quite stimulative for their economy. I won't be overly precise, because it's not an exact science, but what they did is akin to hundreds of billions in additional quantitative easing, and it has been effective. It's slightly more complicated in that they have a dual mandate, which is a more complicated mandate than ours is.
Let me describe the impact of that in terms of Bank of Canada policy. What matters for the Bank of Canada is what happens in the U.S. economy vis-à-vis the United States. What matters is the impact of what happens in the U.S. economy, taken together with all the other domestic and international factors and their impact on the outlook for inflation in Canada. Then we set monetary policy appropriate for conditions in Canada.
We do not outsource monetary policy to the Federal Reserve, as you know. There have been times in the past when interest rates in Canada have been 200 basis points or more above those in the United States, and there have been times when interest rates in Canada have been 200 basis points or more below the policy rate in the United States. That's because that's what was appropriate to achieve our inflation target.
We will do what's right to achieve that target in Canada. There's no question that what happens in the U.S. matters tremendously for Canada, but the policy stance of the Federal Reserve is not the policy stance of the Bank of Canada, as you know.
Second, personal indebtedness is an important issue. This is a difficult time, period, through this crisis, because in the major global economies we have real economic outlooks and outlooks for prices that are broadly consistent with very low interest rates for a long period of time. That has knock-on effects on the overall level of interest rates, through arbitrage and other factors, here in Canada. We also are facing headwinds in this economy, so we've set interest rates at exceptionally low levels for a period of time, and we will use our policy appropriately in the face of those headwinds to achieve the inflation target. This creates stimulus for those who need it, but it also creates the possibility of people borrowing more than they ultimately will be able to afford to repay.
The responsibility does start with the individual and then goes to the financial institution that is lending them the money. However, as we point out, it is important to remember two things: one, interest rates will not always be at these exceptionally low levels, so think about your ability to service a mortgage, for example, over its full life when interest rates are at more normal levels; two, we don't have aspects of, for example, our mortgage insurance system that excessively encourage this type of behaviour.
As I referenced in my opening statement, the government has taken three series of very prudent and timely measures that are having an impact on excessive borrowing. We're not against borrowing, but there is a time and a place. There needs to be an element of prudence in people's personal affairs and a recognition that while we're in exceptional times, we're not always going to be in exceptional times.