Thank you and good afternoon, Chair, and committee members. It is an honour to appear before you as the 10th Governor of the Bank of Canada. I look forward to working with parliamentarians over the next seven years through regular appearances before committees of the House and the Senate. These are an important part of the bank's accountability to Canadians.
Today, Senior Deputy Governor Wilkins and I are pleased to be here as part of your study of the government's response to the COVID-19 pandemic. We are particularly looking forward to your questions and feedback on the foremost concerns of Canadians at this very difficult time.
The Bank of Canada is committed to doing everything we can to help the Canadian economy recover from the enormous impact of COVID-19. Today I will talk about the bank’s four main functions and elaborate on how the bank is responding to the pandemic. Then I will say just a few words about our operations in general. After that, we will be happy to answer your questions.
Let me begin with our most visible and tangible function—our bank notes. As a central bank, we provide a public good through a universally accepted means of payment. It is the Bank of Canada’s job to provide Canadians with safe, secure, high-quality bank notes that they can use with confidence.
We know COVID-19 is changing the relationship some Canadians are having with cash, at least temporarily. About a third of Canadians say they are using banknotes less frequently during the pandemic, and we know that some retailers are asking Canadians to use electronic payments instead of cash. The bank strongly advocates that retailers accept cash for two reasons.
First, some Canadians don't have a bank account and many others have accounts that limit the number of debit transactions or subject them to fees. These are often Canadians who are particularly vulnerable economically and they depend on cash to make essential purchases. Refusing cash puts an unfair burden on Canadians who don't have the same ease of access to financial services that the rest of us take for granted.
Second, it's important to note that handling banknotes is no more risky in terms of virus transmission than touching other common surfaces. Because the banknotes are made of polymer, they can be cleaned with soap and water. During this pandemic, public health authorities have stressed to Canadians the importance of hand washing. We should all follow this advice, including those who handle cash.
The pandemic may be accelerating an established trend where Canadians are using bank notes less often relative to electronic payments. About 1 in 10 Canadians claims not to use cash at all. At the same time, the number of bank notes in circulation continues to grow, along with demand. The bank will continue to watch closely to see how the demand for cash evolves, and we will be ready to supply all the bank notes that people and businesses want to hold.
Related to these trends in banknote use, we have also been looking closely at the idea of a central bank digital currency. Earlier this year, deputy governor Tim Lane spoke about the circumstances when it might make sense for the Bank of Canada to issue its own digital currency. This includes a situation in which most Canadians stopped using banknotes. We don't believe that a digital currency is required at this time, but we are moving forward with contingency planning so that if we ever judge that we should issue a digital currency, we would be ready.
The second function I will mention is our funds management role. The bank is the fiscal agent of the government. We advise the government on strategies for its debt and cash management, and we conduct auctions for federal government bonds and treasury bills. We also provide banking services to some financial institutions, Crown corporations, other central banks and international financial institutions.
This is an important function in regular times. We help the government manage its finances in a cost-effective way, but this function has taken on added importance during the pandemic. The government's financing needs have increased at an unprecedented pace this fiscal year with the introduction of needed measures to reduce the pandemic's impact on the Canadian economy. I note that even with the record issuance, Canada's net debt-to-GDP ratio remains the lowest among G7 countries.
Because interest rates on Government of Canada debt serve as the benchmark for many financial markets, it is imperative to keep the government bond markets working well. To do this, the bank has implemented a number of extraordinary measures, and this brings me to our financial system function.
Our third function is the promotion of a stable and efficient financial system. The bank is unique in that it has a system-wide perspective on the stability and efficiency of the system. We bring this perspective to our work with federal and provincial partners to make sure the financial system is working well to support the real economy.
Credit is the lifeblood of modern market-based economies. In a crisis, central banks have a critical imperative to provide the liquidity the financial system needs to keep credit flowing. This traditional role of central banks goes back hundreds of years. In the 1800s, British journalist Walter Bagehot famously said that in a crisis a central bank should lend freely, at a penalty rate, against good collateral. What he meant was that a central bank should always be ready to make sure the financial system has sufficient cash or liquidity during times of stress so that it can help the economy weather the storm, rather than becoming a headwind itself.
The onset of the COVID-19 pandemic was hugely disruptive to many vital financial markets. Liquidity disappeared from markets, as participants sought to protect their own liquidity by increasing their cash holdings. Amid the uncertainty, credit markets began to seize up. The bank’s priority from March to May was to restore proper functioning to financial markets so that Canadian households, businesses and governments could access credit to withstand the crisis. This should also help set the stage for recovery.
Under the leadership of my predecessor, Governor Poloz, as well as Senior Deputy Governor Wilkins, the bank did an outstanding job restoring the smooth functioning of key markets, ensuring ample funding and market liquidity.
The bank revived some emergency programs used during the global financial crisis over a decade ago, and it brought into operation several new measures with remarkable speed and precision. We are pleased to report that demand for liquidity is returning to normal levels and market functioning has improved considerably. The bank, therefore, has scaled back the frequency of some operations because financial market participants are not using them. We stand ready to ramp up these programs again if they are needed.
Finally, let me say a few words about the conduct of monetary policy. Our framework is set out in the inflation targeting agreement established with the government and renewed every five years. The agreement sends an important signal that the democratically elected government and the bank are agreed on our policy goal while giving the bank the operational independence to pursue that goal. This independence is crucial both in normal times and in crisis times.
Through this pandemic, the Bank of Canada, the government and financial Crown corporations and agencies have all been working closely and collaboratively to stabilize the financial system, keep credit flowing and support the economy. The bank's actions are designed to complement the government's fiscal efforts. At the same time, we are cognizant of each other's mandates, and the government has made it clear that it fully respects our independence.
As governor, I will protect the bank's ability to act independently, consistent with our mandate, because that independence is critical to the confidence that Canadians place in us, the credibility of our inflation target and our capacity to achieve it.
Under our policy framework, our mandate is to provide low, stable and predictable inflation. That's the best contribution we can make to the country's economic and financial welfare. Achieving our inflation goals lays the foundation for sustainable economic growth, and keeping inflation close to its target means the economy is running close to capacity with full employment.
Our inflation target takes on added importance during a time of crisis. As the bank moves into uncharted waters using tools it has not deployed before, the inflation target remains our beacon. Our monetary policy actions are anchored in the goal of bringing inflation back to target by helping the economy return to its potential capacity and full employment.
COVID-19 and the measures to contain it represent an economic shock of unprecedented size and scope to our economy. By April more than 3 million Canadians had lost their jobs and another 3.4 million were working fewer than half their regular hours.
With containment measures starting to lift in some parts of the country, we saw a resumption of job growth at a national level in May. We expect this to accelerate as the economy continues to reopen, but we have a long way to go and not all the jobs are going to come back. Important fiscal efforts are keeping as many Canadians as possible attached to their jobs and helping households and companies make it through the crisis. These efforts are supporting Canadians now and will position the economy for recovery.
In our latest interest rate announcement, we said we expect economic growth to resume in the third quarter. With market function improved and containment restrictions easing, the bank's focus will shift to supporting the resumption of growth in output and employment.
The July monetary policy report will provide our updated assessment of the outlook for output and inflation. Given the unknown course of the pandemic, I expect this will be more of a scenario than a forecast, and it will also include a discussion of key risks.
While our monetary policy will continue to be grounded in our inflation-targeting framework, we acknowledge that the consumer price index isn’t currently giving an accurate picture of inflation for many Canadians.
Buying patterns and prices have changed drastically. Bank staff have been working with Statistics Canada to better understand the implications of these changes in buying patterns.
The bank has acted decisively by bringing the policy interest rate to its effective lower bound of 25 basis points. We have also begun large-scale asset purchases. In so doing, we are using our balance sheet to keep core funding markets working well and to deliver monetary stimulus to support the economic recovery. We have committed to continuing to purchase Government of Canada bonds until the recovery is well under way. Any further policy actions will be calibrated to provide the necessary degree of monetary accommodation required to achieve our inflation target.
Let me conclude with a few words about the bank's operations.
Currently, the vast majority of the bank staff are working from home. This is a testament to the flexibility and resilience of the bank's systems and its people. A handful of essential workers are on site, including security staff, IT staff, traders, bank operations colleagues at our head office, as well as staff at our backup site in Calgary and our regional operations centres. Bank staff are delivering for Canadians, and I am confident that this will continue.
The bank has a long tradition of ensuring accountability and transparency, and we are committed to building on this. We will maintain our momentum in a couple of areas. First, we recognize that all Canadians have a right to understand what their central bank is doing and why. This is even more important today as we undertake unprecedented policy actions. We will be transparent about the results of our asset purchase programs, and we will continue to promote the use of plain language to help demystify our operations for interested Canadians.
Second, we have stepped up efforts to engage with a wide variety of stakeholder groups beyond our traditional partners.
Our goals are to reach Canadians directly and increase public knowledge of and participation in our activities in order to broaden understanding of our work and to build trust.
A number of activities to engage the public are upcoming or already underway. These include an online campaign to involve the public in the 2021 renewal of our inflation-targeting framework.
We also just concluded a campaign inviting the public to nominate an iconic Canadian to be featured on the next five-dollar note.
Let me stop there, Chair.
Thank you, Chair.
We do have quite an extensive work program which aims, just as you suggest, to complement the work that's done by governments, but also by the private sector, in areas that you would think about. The physical risks are the ones that are most palpable for people, because when they live them they're affecting their daily lives, but clearly, those risks, including exposures of financial institutions to physical risk and the disruptions that we've seen to economic activity, are important for us to understand.
We're doing work as well on the risk of the transition. Transition to a low-carbon economy can change relative values of asset prices. It could change which sectors do better than others, and that can present risks to the financial system that we need to understand and get ready for. That's a perfect opportunity for us—we're not a bank regulator—to work with OSFI and our private sector partners on trying to understand how to get the right data and do the right analysis so that we are ready for that.
Then, of course, there's this understanding of how the macro economy is going to change. We tend to think about these risks or the transition as being only one-sided and kind of downside, but in fact there are lots of opportunities. Farmers, for example, can invest in big data. They're doing that to improve their crop yields while at the same time they reduce their fuel consumption.
These kinds of changes in the macro economy affect how monetary policy might work and where the jobs are going to be. Again, we need to work with our counterparts to understand those as well.
Finally, we have our own job to do with our own business in making sure that we work to have the carbon footprint that we're happy with. We're committed to doing that and, with that, building in the right amount of transparency over time.
Deputy Governor Wilkins and I are not here to defend the banks, but let me just say a few things.
First of all, as the senior deputy governor highlighted, OSFI regulates the banks. They have imposed some restrictions. The banks can't increase dividends, and they can't increase buybacks. We're not the U.S. We're not the U.K. OSFI is imposing restrictions that are appropriate for Canada.
With respect to the response of the banks, it's worth underlining that this crisis is very different from the one we faced in 2008 and 2009. That was a financial crisis. Banks, particularly in the U.S. and in Europe, were very much at the centre of that crisis. There was a huge credit crunch, and that's what caused the recession. In the last dozen years since the financial crisis, there has been a tremendous reform effort in the financial system. Hundreds of billions of dollars of additional capital have been built up, liquidity is much reinforced and leverage is much lower. That has put the financial system in a position this time to be part of the solution as opposed to the problem.
I recognize that not every person feels like they've been well treated. They're not happy with the pricing and they found the negotiation with their bank unpleasant, but banks in Canada have deferred 700,000 mortgages. They have increased business credit substantially. Loan growth to businesses is up about 30%. Loan growth to households is down, which really reflects what I was talking about earlier. The government has replaced the income that households have lost. Household savings are going up. They're not shopping as much, certainly not for large purchases, so their credit growth has slowed, but banks have dramatically increased their loans to businesses to help businesses bridge across that.
For the Bank of Canada's part, by lowering our policy rate and by embarking on large-scale asset purchases that have lowered yields at the curve, the cost of those loans to businesses has gone down. The interest rate of business loans is reduced by an average of about 140 basis points.
It's not perfect, but they are providing part of the solution.
Good evening, and thank you for the opportunity to appear before the committee to present the Canada Revenue Agency's main estimates for 2020-21, and to answer any questions you may have on the associated funding.
My understanding is that a copy of my full remarks, in both official languages, has been provided to the clerk. To respect the members' time and to avoid technological issues, I will be providing my remarks in one official language and will be prepared to respond in either official language.
I am accompanied today by my colleagues: Frank Vermaeten, assistant commissioner, assessment, benefit and service branch; Geoff Trueman, assistant commissioner, legislative policy and regulatory affairs branch; and Ted Gallivan, assistant commissioner, compliance programs branch.
As you are aware, the CRA is responsible for the administration of federal and certain provincial and territorial tax programs, as well as the delivery of a number of benefit programs. Each year, the agency collects hundreds of billions of dollars of tax revenue for the Government of Canada and distributes timely and accurate benefits to millions of Canadians.
It should be noted that the CRA's 2020-21 main estimates do not reflect incremental resources required for the payments or the administrative costs in support of the Government of Canada's measures to support Canadians and businesses facing hardship as a result of the global COVID-19 pandemic. These measures include, as you know, the Canada emergency response benefit, the Canada emergency wage subsidy and the Canada emergency student benefit, to name a few. The cost of the emergency benefit payments will be funded through statutory authorities, including those under the Department of Employment and Social Development. The funding associated with the administrative costs will be sought separately by the CRA in the coming months. Our priority is to deliver on these measures as quickly as possible.
In the meantime, to fulfill its mandate in 2021, the CRA is seeking a total of $7.9 billion for these main estimates. Of this amount, $3.5 billion requires the approval of Parliament; whereas, the remaining $4.4 billion represents forecasts for statutory authorities that are already approved under separate legislation. These statutory items include the climate action incentive payments, children's special allowance payments, employee benefit plan costs and, according to section 60 of the CRA Act, the spending of revenues received or activities administered on behalf of the provinces and other government departments.
These 2020-21 main estimates represent a net increase of $3.4 billion when compared with the 2019-20 main estimates. Almost the entire amount of this increase is related to the forecasted statutory climate action incentive payments of $3.4 billion, which returns the bulk of direct proceeds from the federal fuel charge to eligible individuals and families living in provinces that have not met the Canada-wide federal standard for reducing carbon pollution. The CRA is responsible for administering the fuel-charge component of the Greenhouse Gas Pollution Pricing Act, which includes the climate action incentive payment.
Excluding the statutory climate action incentive payment, the agency's 2020-21 main estimates represent a net increase of approximately $33 million, or 0.7%, when compared with the 2019-20 main estimates. The largest component of this change is an increase of $69 million for collective bargaining adjustments for some 12,000 employees represented by the Professional Institute of the Public Service of Canada.
Other increases to the agency's budget include a $24-million adjustment to forecasted statutory payments under the Children's Special Allowances Act for eligible children in the care of agencies and foster parents. These payments are equivalent to the Canada child benefit paid to biological and adoptive parents. There is also $27 million in incremental funding for measures to improve tax compliance that were announced in prior budgets. Thanks to the significant investment made in recent years, the CRA has expanded its tools and capacity to target clients who attempt to conceal their assets to avoid paying their share of tax.
To give you a sense of the kind of programs that are being supported by this funding, allow me to touch on some specifics. To further combat tax evasion and aggressive tax avoidance, the CRA has hired additional auditors, conducted outreach and education, and built technical expertise to target non-compliance associated with cryptocurrency transactions and the digital economy. Offshore audit resources have been expanded, which directly supports the fairness and integrity of the tax system by ensuring that wealthy individuals and corporations do not circumvent their tax obligations.
Improved information technology tools and systems, combined with closer international co-operation, allow the CRA to focus on the higher-risk taxpayers. Although efforts in this domain have been affected by COVID-19, preparation for the eventual full resumption of this important work is under way.
These increases are partially offset by a $49-million adjustment associated with changes in the funding profile for various measures announced in previous federal budgets, a $25-million reduction in statutory contributions to employee benefit plans and in the forecast of cost recovery revenues for initiatives administered on behalf of the provinces and other government departments, and $13 million in transfers with other government departments, including an adjustment to accommodation and real property services provided by Public Services and Procurement Canada.
In closing, the CRA is listening to Canadians, changing how it works and improving services. The resources being requested through these estimates will allow the agency to continue to deliver on its mandate to Canadians by making it easier for the vast majority of taxpayers who pay their taxes and more difficult for the small minority who do not, and by ensuring that Canadians have ready access to the information they need about their taxes and benefits.
At this time, we will be pleased to respond to any questions you may have.