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Results: 1 - 15 of 218
Nicolas Moreau
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Nicolas Moreau
2021-03-23 16:29
Chair, I can take this question.
We have explained in the past basically where this number is coming from. It's the sum of the expected financial requirements for the next three years, as presented in the fall economic statement of 2020. To this, we add the overall level of stock that already exists and the money that has been used so far to help fight against the COVID-19 crisis.
When you look at the limit that we're proposing, it's different from providing.... It's a borrowing limit. It's different from approving the spending. By that, I mean that granting borrowing authorities is one thing, and spending is something else, because it needs to go through appropriation bills. It needs to go through different processes in order to be approved. For example, the next budget will propose spending—a new program. This will need to be voted on.
Putting in place a new limit does not per se—does not at all, in fact—provide authorization to spend that money. It's just a limit on the capacity of the government to borrow money from the market.
Nicolas Moreau
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Nicolas Moreau
2021-03-23 16:33
Thank you, Mr. Chair.
Yes. As I said before, any new spending will need to be approved by Parliament. Like I said, this is a borrowing limit. It's only in order to provide for the government to borrow that money in the market.
The reason we're doing this is that in 2017 the government put in place the Borrowing Authority Act in order to increase transparency on government borrowing. By setting a limit, the government is coming in front of Parliament at least every three years in order to make sure it has been transparent and has presented exactly what the government market debt will be. That's the capacity to borrow, basically, in the market.
Nicolas Moreau
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Nicolas Moreau
2021-03-23 16:39
As you've said, there's no comparable measure that exists elsewhere in the world. The closest that exists is in the United States. They have a debt ceiling. It's different from a limit, because in our case, if we were to reach the limit, we would still be able to reissue the debt that's already in circulation and also [Technical difficulty—Editor] the debt limit that exists in Canada compared to the ceiling in the U.S.
Of course, the ceiling in the U.S. is much higher, because they have a much higher debt-to-GDP ratio and a higher debt in circulation. I think the U.S. is close to twofold what we have in terms of debt as a share of GDP when we compare Canada to the U.S. The closest one will be the U.S., but in terms of the level, it will be much higher in the U.S. because they have a higher debt level right now.
Nicolas Moreau
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Nicolas Moreau
2021-03-23 16:41
Thank you, Mr. Chair.
Basically, as you know, we already have a limit in place of $1.168 trillion. We have not reached that limit yet, but in terms of spending that already occurred, we need to look at the stock of debt, and we need to add to this what we've done under the extraordinary borrowing authority. That included $286 billion of spending that was put in place. We produced a report in October 2020 concerning that spending. When we add that to the current limit, yes, we're already above, but as you know, this is something we want to change, and that's in Bill C-14. We want to add the extraordinary borrowing authority to the overall limit.
Therefore, the answer is no. When you look at what we're requesting, we're looking at the expected spending for the next three years—not spending but financial requirements, as presented in the fall economic statement. To this, we're adding prudence by a factor of 5%. This is what we are asking for, and this is why the level is $1.831 trillion.
Nicolas Moreau
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Nicolas Moreau
2021-03-23 16:43
Just to be clear, this amount includes a stock that already exists in the market, as well as expected financial requirements for the next three years.
Nicolas Moreau
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Nicolas Moreau
2021-03-23 16:43
The expectations are based on the forecast that was produced in the fall economic statement, and this is money that has not been spent yet. Basically, those are monies that are expected to be spent in the future.
Nicolas Moreau
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Nicolas Moreau
2021-03-23 16:44
We're asking for the authority to borrow and to be able to increase the debt in the future. It's important that we have that clear territory to move forward in order to be able to put together a debt program moving ahead. We need to inform the market. We need to have the capacity to increase our debt in the future. That money will still need to be approved through the budget and through the other mechanisms that we talked about before. As we know, it's mostly through appropriation acts that the money will be approved.
Nicolas Moreau
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Nicolas Moreau
2021-03-23 16:45
What we want to make sure is that we will have the authority to borrow that money if the decision is taken to spend that money.
David Macdonald
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David Macdonald
2021-03-18 10:03
Excellent. Thank you, Mr. Easter.
I hope everyone can hear me.
Thanks so much to the committee for the invitation today.
Certainly, the economic response to COVID-19 from the government has been unprecedented in Canadian history. We'd need to look back at the World Wars to see government expenditures on this scale, although we'd also have to look back to the 1930s, almost a century ago, to see unemployment at this scale, particularly in the early months.
My recent report, “Picking up the tab”, was a comprehensive dataset of all 850 direct federal and provincial COVID-19 measures through the end of December 2020, including the fall fiscal update. The overall conclusion of this compilation is that, when it comes to measures to combat COVID-19, this has been almost entirely paid for by the federal government, with 92% of every dollar spent on measures to combat the coronavirus—everything from the purchase of PPE, to business and individual supports—having come from the federal government. Even in areas of provincial jurisdiction, like health care, 88% of the cost was borne by the federal government.
The largest expenditure, including both federal and provincial programs, has been in support of businesses, amounting to $4,100 a person. Supporting individuals comes in a close second at $3,900 per capita, and health care support is a distant third at $1,200 a person.
In each of the categories examined, except one, federal support was larger than provincial support. The one area where the provinces are spending more is on physical infrastructure to stimulate growth. This is being driven particularly by the western provinces. The federal government's major infrastructure program at this point is the resilience stream of the Canada infrastructure program, although this only reallocates existing funds and doesn't spend new funds.
It's worth pointing out that as the federal government embarks on new rounds of upcoming spending in the spring budget, in the last round of spending many of the provinces didn't properly match federal spending in support of municipal deficits, and many provinces didn't fully access the federal money available to them. In the next phase of the recovery, the federal government should keep a close eye on matching dollars and fund utilization to ensure the maximum impact for its expenditures.
This brings me to the next stage of federal COVID-19 spending, which has been promised at $70 billion to $100 billion in the upcoming spring budget. As I mentioned, infrastructure spending is already budgeted in several western provincial budgets. This is certainly an area where the federal government can back provincial efforts, like it did in the safe restart agreement. New infrastructure spending that reduces the country's carbon footprint can be an important opportunity to build back better, and further encourage central and Atlantic provinces to devote more of their COVID-19 dollars to infrastructure.
I'd also like to take a moment to call members' attention to our annual child care fee survey, published just this morning. It provides a detailed look at child care fees and COVID-19 impact in 37 Canadian cities. This year's survey shows a very concerning decline in enrolment in child care due to COVID-19, at the same time as fees remain high across many cities in the country. The decline in enrolment is worse in cities with high fees, and worse in cities with high unemployment. Without immediate consideration, site closure and/or the loss of staff may make a rapid recovery in the summer and fall impossible as parents can't find spaces for their kids as they hopefully go back to work.
One of the other ongoing lessons of the child care fee survey, which may be instructive for future federal efforts, is that the lowest child care fees are always found in cities where providers receive provincial operational grants, and then charge a low set fee. Just last year, Newfoundland became the fourth province to join Quebec, Manitoba and Prince Edward Island in this approach, and it looks like the Yukon will soon follow suit.
More broadly, I am encouraged that the federal government is committed to rebuilding the economy, rather than being overly preoccupied by federal deficits. Large federal deficits were necessary to avoid much worse deficits in other sectors. Had the federal government not covered expenses, as it had, those deficits would have occurred elsewhere in the economy, particularly in the provinces, as they covered health care costs; for individuals, as they lost jobs and weren't covered by EI; or for businesses, as public health measures wiped out incomes while expenses remained.
A deficit is neither good nor bad on its own. It is merely one side of an accounting relationship, with an equally sized surplus created in another sector. Every dollar comes from somewhere and goes to somewhere. To evaluate the utility of a deficit in a particular sector—say, the federal government sector—we have to track where the surplus was created, the other side of that accounting relationship.
For the past four quarters, the federal deficit of $220 billion has created a surplus of an equal amount, three-quarters of which has ended up in the household sector and one-quarter of which has ended up in the business sector. Thankfully little of the surplus has escaped Canada in the form of financial flows to non-residents.
The federal government isn’t constrained by deficits or debt-to-GDP ratios. It is constrained by the country’s productive capacity. As long as we have people who can’t find jobs, as well as empty stores and restaurants, we aren’t at our productive capacity.
Inflation is the constraint the federal government faces. We have to remember that going into this crisis we managed historically low unemployment and rock-bottom interest rates, and we still weren’t seeing sustained inflation. When we have 800,000 low-wage workers still out of a job compared with the numbers in February last year, we are nowhere near full capacity and inflation will remain subdued for a long time to come.
Thank you. I look forward to your questions.
Susie Grynol
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Susie Grynol
2021-03-18 10:08
Thank you very much.
Thank you for inviting me to join you today.
As I sat down to prepare my remarks, I was struck by the unique challenge that faces the hotel sector, and indeed this committee and the federal government. We face a balancing act. On the positive side, we have hope and a potential recovery on the horizon with vaccinations under way, which could lead to a possible domestic tourism recovery for some segments, such as resorts, this summer.
On the negative, and frankly, more realistic side, if we don't get all Canadians vaccinated by summer and we have a third wave of the virus, if people are encouraged to stay home, domestic and international borders stay closed and mass-gathering bans remain in place, we could enter COVID year two having lost the most important season for our industry once again.
Let me first address the positive summer scenario and what government action would be required. If we get most Canadians vaccinated by June, the government must pivot quickly—all levels of government—to allow for a safe reopening and invest in stimulating our recovery to maximize the summer tourism season.
This should include implementing best practices from other countries that have successfully reopened before us, breaking down provincial barriers to travel, stimulating domestic demand and confidence by providing tax incentives or rebates to people to spend their dollars in Canada, investing in domestic marketing campaigns and aligning with the U.S. Biden administration on an expedited Canada-U.S. border reopening.
In the second scenario, the worst case, in which restrictions are still necessary and remain in place for the summer, the government will need to provide financial support for the tourism and hospitality sectors until the recovery is possible.
I, unfortunately, believe that the worst case is the likely case. While most other sectors bounce back the day after lockdowns are lifted, we do not. Nobody books a trip the next day. Travel takes lead time. Event planning takes lead time, and those events are what drive the movement of people and the core of our business—festivals, fairs, concerts, theatre shows, weddings, major sporting events and conventions. None of these are planned for this summer or fall and are probably not likely until the spring.
We are asking for what Mark Carney called for in his new book: “Support for companies should be targeted at regenerating the most affected industries, rather than provided as expensive blanket support for all”. It is time for the government to tailor CEWS and CERS towards those who need them most.
In this worst-case scenario, we are looking for two things in the federal budget: big subsidy extension until the end of 2021 for the hardest-hit sectors, and an extension and expansion of the CERS program to help cover fixed costs until the end of 2021 while we are not in a position to make revenue.
Today this program is woefully inadequate. It cuts out the M from SMEs with the monthly cap. It does not cover enough eligible expenses, and it fails to account for the rising business costs like insurance, which has skyrocketed in our sector since COVID.
Our members' survey from March showed that 70% of Canadian hotels will go out of business without an extension of CERS and CEWS to the end of the year. This is a massive-scale loss and it is upon us. Simply put, if the government doesn't extend these programs past June and tailor them to the sectors that need them most, we will lose the majority of the hotel industry.
The government deserves credit for rolling out these programs quickly and for providing tailored debt solutions to the hardest hit. These programs are the reason we still have an industry standing today, but now is not the time to pull away from the sectors that will lag behind through no fault of their own.
The anchor businesses in the travel industry, including hotels, need to be preserved. Hotels support essential travel. They are the cornerstone of tourism regions. They allow Canada to compete for global events. They host our country's hockey tournaments and weddings, but they will not be there if the government does not plan adequately for both scenarios.
We need a clear signal in the budget that the government acknowledges our unique challenges and will stand behind us until recovery is possible.
Thank you.
Philip Cross
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Philip Cross
2021-03-18 10:14
Thank you, and thanks for having me back.
Because I've addressed this committee before, I'm going to follow up on previous discussions I've had with you. I'm going to focus pretty much exclusively on inflation and interest rates. As Mr. Macdonald said, it's low inflation and low interest rates that make all of this work, so it's worth understanding that a little better.
Now I'll turn to my prepared statement for the translators.
Rising commodity prices early in 2021 are fuelling speculation that inflationary pressures could surface faster than central banks anticipate. Central banks took extreme measures to bolster the economy after the pandemic began, lowering interest rates to historic lows and expanding their balance sheets substantially. This led some to accuse central banks of “printing money”, which risks rekindling inflation.
The money supply has long been at the centre of macroeconomics. This reflects a centuries-long reliance on the quantity theory of money to guide the economy. The quantity theory is based on the identity that the money supply and its velocity determine GDP. Assuming velocity is stable over time and output grows steadily, changes in the money supply would be reflected in prices. Milton Friedman’s famous statement that “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output” summarizes what many believe is the origin of inflation.
Applying quantity theory is not simple or straightforward. There is no universal definition of money. Velocity is the the rate at which money is spent, reflecting the number of times money is turned over while making the transactions that generate nominal GDP. A key tenet of the quantity theory is that velocity is stable, or at least predictable.
However, with interest rates approaching zero in both 2009 and 2020, central banks resorted to quantitative easing to boost the economy. QE involves central banks buying bonds, mortgages and other assets to inject money into the financial system. By adopting QE, once again central banks have become “quantity theorists”.
Canada had a brief experiment with QE in 2008-09; however, the money supply and private sector credit did not accelerate. Even the Fed’s greater use of QE did not spark faster money supply growth. We can say that in 2008-09 these experiments with QE did not disprove the quantity theory of money because the broad money supply did not expand rapidly.
QE failed to deliver its promise to boost output and raise inflation after the financial crisis partly because it could not control whether banks increased lending or whether money was spent on GDP and not on existing assets like housing and the stock market. Since QE did not trigger faster GDP growth, neither did it fuel inflation. A regional Fed president bemoaned in 2012 that “the historical relationships between the amount of reserves, the money supply, and the economy are unlikely to hold in the future”. I'm going to return to that quote in a minute.
In 2020, central banks rapidly resorted to even more QE, in Canada’s case mostly by buying federal debt to keep interest rates low while governments provided emergency pandemic relief. Unlike in 2008, however, the broad money supply soared from a 7% to a 30% growth. However, private sector credit demand has not accelerated.
Both prices and inflationary expectations are rising early in 2021, with the latter rising to 2.2% in the U.S. Economists have warned that the U.S. risks overheating because the Biden’s administration’s $1.9-trillion stimulus is arriving just as the economy reopens with the rapid distribution of their vaccines. Fed chair Jerome Powell cites a “flat Phillips curve” as one reason inflation will not take off. The Phillips curve is the trade-off between inflation and capacity utilization, and a flat one shows resource utilization does not affect inflation.
I'm going to skip a paragraph here.
Easy monetary policy was adopted to directly stimulate the economy and facilitate government borrowing needed to help people during the pandemic. Monetary policy is a tool to stabilize the economy in the short term and control inflation, not to bail out governments from the long-term consequences of their fiscal choices.
If the economy recovers better than expected and inflationary pressures or expectations begin to rise—and nobody knows how pent-up demand will respond to the reopening after an unprecedented pandemic—then central banks will have to choose whether to continue to keep interest rates low to enable ongoing fiscal stimulus or start to tighten. In such a circumstance, I have no doubt that they will focus on inflation. In that case, governments that are slow to withdraw fiscal stimulus will face an unwillingness from central banks to continue to make borrowing easy and cheap.
Central banks will not abandon decades of building confidence in their inflation targets. It would take years and probably decades to restore that confidence. The risk of higher interest rates is much greater than that of inflation. The cost of higher interest rates will quickly be felt by governments with large debt loads.
For example, in Canada the PBO estimates that a 1% rise in interest rates would increase federal costs by $4.5 billion in the first year and $12.8 billion by the fifth year.
Both the Fed and the Bank of Canada will tolerate whatever inflation occurs in 2021 as both transitory and salutary. Inflation will accelerate to at least 3% and probably more because of base period effects. Gasoline prices were unusually low last spring, so automatically that's going to raise inflation this year. As well, firms need to rebuild profit margins and balance sheets, especially in industries such as restaurants, travel, recreation and personal services, as Susie mentioned.
Customers are flush with government transfers and are therefore able to afford higher prices, but if inflation becomes embedded into behaviour and especially expectations in 2022 and 2023, central banks will then take decisive action.
Thank you.
Philip Cross
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Philip Cross
2021-03-18 10:21
As mentioned, a lot depends on the course of inflation and especially interest rates. At near-zero interest rates, almost any amount of debt is affordable and sustainable. The minute interest rates start rising very quickly, this country could find itself in a difficult position.
This was exactly the conundrum the economy faced in the 1994-95 debt crisis. At that point, interest payments especially became unsustainable. The Bank of Canada made it clear that it was not going to bail out the federal government. As the federal government made difficult fiscal choices, the Bank of Canada then maintained lower interest rates to ease that path to restore fiscal equilibrium. A lot depends on the course of interest rates, and a lot of people seem to be counting on interest rates staying low.
A lot of what I said today was based on Chairman Powell's comments for the Federal Reserve board yesterday. He clearly indicated that the central banks will put up with almost any amount of inflation this year. However, going forward, once people start to expect inflation, all bets are off and interest rates could rise quite quickly.
We've already seen interest rates rise this year. The 10-year bond rate in the U.S. has jumped up from less than 1% at the start of the year to 1.7% already. I sit here and watch every day and there's an increase of almost 0.1% a day. This is the story in financial markets these days: How long and how sustainable will the upward movement in interest rates be? That's going to determine everything.
Philip Cross
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Philip Cross
2021-03-18 10:24
That's been a feature of the economy since 2008. We've seen this huge quantitative easing. This huge stimulus in monetary policy seems to have disproportionately gone into financial assets—the bond market, the stock market. Now we're seeing, in the commodity market, that commodity prices are blowing through the roof. Even oil is up substantially. Crazy stuff like cryptocurrencies such as bitcoin are up, so there seems to be a lot of gambling going on in asset markets.
We're not seeing a lot of this, but a little more than in 2008-09 we're seeing this spillover into areas like retail sales. However, mostly it's gone into financial markets. That's created....
I should mention too that, much more so in Canada than the U.S., it's gone into our housing market. Exactly why I don't know. Obviously our housing market has been more.... The housing market in the U.S. had a tremendous crash in 2008. That's made people nervous down there. A lot of people think we have the conditions for a bubble here. Why exactly that money goes into housing, I don't know.
Philip Cross
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Philip Cross
2021-03-18 10:26
That's been one of the features of this recession: the widening of inequality. What's happening in asset markets.... We saw the inequality widen in the labour market because lower-wage workers were obviously the most affected, but what we're seeing in asset prices only reinforces and widens this inequality.
David Macdonald
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David Macdonald
2021-03-18 10:27
Thanks so much for the question.
Certainly, when it comes to debt and deficits, the federal government does not exist alone. It exists within the Canadian economy, across from other large sectors in the economy, and deficits and debt are fungible. In essence, they can move between sectors. In this case, the federal government took on a massive deficit in this year and what that did was create smaller deficits and in fact some surpluses in other sectors of the economy. For every deficit there's a surplus of equal value in another sector of the economy.
The federal government could have decided to spend none of this money. It could have decided to have no CERB, no support for business, no support for provinces and no support for health care and individuals. What would have occurred in that case is that those deficits would not have occurred on the federal books. They would have occurred on provincial government books as they covered health care costs. They would have occurred on household books that incurred deficits because they lost work but still had expenses, or on business books.
Despite the federal and provincial governments' efforts, we've nonetheless seen increases not only in federal debt but also in household and corporate debt at the same time. In fact, the household and corporate sectors are far more leveraged than the federal government is. If we were to see interest rate increases, they would certainly hit the federal government, but they'd hit the household and business sectors much harder. Not only do they pay higher interest rates, but they have a lot more debt.
I think it's worth understanding the federal government and its deficits not on their own, but by how it and those deficits relate to other sectors in the economy.
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