Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 18 - Evidence - Meeting of October 26, 2005
OTTAWA, Wednesday, October 26, 2005
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:02 p.m. to examine and report upon the present state of the domestic and international financial system.
Senator Jerahmiel S. Grafstein (Chairman) in the chair.
[English]
The Chairman: Honourable senators, good afternoon. I wish to welcome the men and women in the room with us and all those in our audience listening on the Internet. Governor, we are now seen around the world. Your words and your wisdom will not only be available to Canadians in Canada, but to everyone around the world, including those in Washington, D.C. and New York. We welcome everybody. We may also be viewed on a delayed broadcast by CPAC.
This is the forty-second meeting of the Standing Senate Committee on Banking, Trade and Commerce in this session of Parliament. Today, we continue our hearings into the present state of the domestic and international financial system as it affects Canada. We are honoured once again to have the distinguished Governor of the Bank of Canada, Mr. David Dodge, and the Deputy Governor, Mr. Paul Jenkins, with us today.
Governor, as we mentioned before, heads of central banks are in the newspapers. We will discuss a little later today what has happened to our friends south of the border.
As you know, governor, this committee has been part of the history of the Senate since Parliament first met in November 1867, several months after Confederation. We are the oldest committee of the Senate still in operation.
The committee is well known for its work in relation to our financial system. One of the key roles of the committee is the oversight of the economy as a whole. We are the committee on not only banking, but trade and commerce. This committee has agreed that we should extend our purview to include the entire mandate and bring that alive.
This committee has a long history of examining policies, programs and other initiatives that affect economic growth in this country. We support the high economic growth that leads to the prosperity and productivity that we all want and think we deserve. Clearly, the health of the Canadian economy falls within the scope of the governor of the bank's responsibility and is a key factor in setting Canada's monetary policy.
Members of this committee follow carefully your comments, governor. We welcome your appearances and that of the deputy governor before us, usually twice a year. We are delighted with that.
This year, the committee has been active on some key issues that affect the economy as a whole. In the spring, the committee completed a study on productivity, which you mentioned in your last report. I hope we will talk about that today. In our report tabled in June, the committee concluded that a key component of a federal plan to enhance productivity performance is a comprehensive review of the corporate and personal income tax systems to ensure the incentives inherent in those systems are not counterproductive and result in the desired outcomes we all share.
Earlier this month, the committee heard thought-provoking evidence on demographic changes, which you brought to national attention as well, that will affect us in Canada over the next decade and how our society has to respond if we are to deal with this problem properly. It is clear to all of us that the demographic changes will have a huge impact on Canada's economy and could be disastrous if we do not heed the call to action now.
Our forthcoming report will recommend actions that the federal government may take to avoid what some consider a potential ticking time bomb. I call that the economic ticking time bomb.
In the next few weeks the committee will hear from experts on Canada's domestic and interprovincial trade barriers. We have heard complaints that the Canadian economy is too fragmented and lacks the efficiency to be truly productive. We will continue our focus on productivity when we hear from witnesses about pulling down the barriers to internal trade and the changes that are needed to enhance productivity here at home.
Today, as we hear from the Governor and the Deputy Governor of the Bank of Canada, we know they are certainly in a position to discuss many of the issues that have preoccupied this committee in the last year or so.
Before turning to the governor and his deputy, I want to remind all those who are watching us live over the Internet and on CPAC that we want your input, too. The issues discussed today have a significant impact on the economy as a whole. If you have any comment whatsoever on something you are seeing and hearing today, we urge you to send us an email at banking-banques@sen.parl.gc.ca. That address, which I have not described very well, will be shown on the screen several times during the course of our discussions.
Welcome, governor, and Mr. Jenkins.
David Dodge, Governor, Bank of Canada: Thank you, Mr. Chairman. We at the bank do not have quite as long a history as this committee. In fact, it is probably about half the length of time this committee has been in existence. Nevertheless, I hope we can be of some help to you today.
We appreciate the opportunity to meet with you a couple of times a year following the release of our Monetary Policy Report. These meetings are helpful to us in getting your views. We hope they are helpful to you and to all Canadians in ensuring that people understand the objectives of monetary policy and the actions we take to achieve them.
When Mr. Jenkins and I appeared before you last April, we said that the economy appeared to be operating slightly below its production capacity. We did not expect it to get up to capacity until about the second half of 2006. However, in the Monetary Policy Report released last Thursday, we said that economic growth in the first half of this year has been a little stronger than we had previously expected. Indeed, the global and Canadian economies have continued to grow at a solid pace, and thus our economy now appears to be operating at its full production capacity.
The past and recent movements in energy prices, in the exchange rate for the Canadian dollar, along with competitive pressures from China and other newly industrialized economies, are giving rise to significant adjustments in the Canadian economy. Because of these adjustments and the slow growth of productivity in recent years, which you noted in your recent report, the bank has slightly reduced its estimate of potential output growth in Canada for 2005 and 2006.
We projected the economy will grow in line with this production potential, with growth averaging about 2.8 per cent this year, 2.9 per cent next year, and 3 per cent in 2007.
[Translation]
With the economy operating at capacity and with higher energy prices, pressures on consumer prices are somewhat stronger than they were at the time of the July Monetary Policy Report Update. Assuming energy prices evolve in line with currently prevailing futures prices, CPI inflation is projected to average near 3 per cent through the middle of 2006, before returning to the 2 per cent target in the second half of next year. Core inflation should remain below 2 per cent in coming months, returning to 2 per cent by mid-2006.
The bank raised its key policy interest rate to 3 per cent on October 18. In line with our outlook, some further reduction of monetary stimulus will be required to maintain a balance between aggregate supply and demand over the next four to six quarters, and to keep inflation on target. Short-term risks to this projection appear to be balanced.
But as we look further out to 2007 and beyond, we see increasing risks that the unwinding of global economic imbalances could involve a period of weak world economic growth.
[English]
In light of this, the bank will continue to assess the adjustments and underlying trends in the Canadian economy as well as the balance of risks as we conduct monetary policy to keep inflation on target over the medium term.
Mr. Chairman, we would be happy to answer your questions.
The Chairman: Thank you, governor.
Senator Tkachuk: Welcome.
Mr. Dodge, newspapers reported that in your testimony to the House of Commons Finance Committee yesterday you said that there is no silver bullet that will solve Canada's productivity problem. My sense from that is that you would agree that there is also no one cause of that problem. The Conference Board of Canada has said that the low dollar made Canadian firms lazy and wrapped them in a false sense of security about productivity in this country.
Does the bank take any responsibility for creating that problem by maintaining its low-dollar policy during the 1990s?
Mr. Dodge: Senator, we read the report of this committee, and my summary of that report is basically that there is no single silver bullet. It was an extraordinarily useful report on productivity.
It is interesting that some of the years in which we had our best productivity performance were when the dollar was extraordinarily low. The Canada-U.S. exchange rate does move to reflect realities both in the real world and in the world of finance. It helped us through a difficult adjustment period in the 1990s, especially after 1997, when the price of raw materials fell precipitously following the Asian crisis. It was not unexpected that we would have a recovery in the Canada-U.S. exchange rate at a time when the price of many of our exports, in particular, raw materials, was very high.
Senator Tkachuk: I am not sure what that means. I will go on to my second question, and if I have a little time left, I will go back to the first.
You said yesterday that one of the sectors you watch closely and worry about is the financial service sector, which has done surprisingly badly over the last number of years. How much of the blame for that would you attribute to the government's continuing indecision on large-bank mergers?
Mr. Dodge: First, we are just starting our work on this and it is not absolutely clear why our performance, certainly relative to performance in the United States in this sector, has not been as strong as we might have expected. In part, it could be statistical illusion. In part, it could be because the mix of the sectors is rather different in the two countries. In part, it could be, as you suggest, that there are rules here in Canada preventing the sector's productivity from growing as rapidly as possible. We do not know the answer to that at the moment, and that is why we are engaging in some work to try to find the answer.
Senator Tkachuk: Going back to my first question, we have discussed that matter at length in this committee and many times with former Governor Thiessen. Many of us said that this continuing low-dollar policy would result in productivity problems in the future, which is precisely what has happened. Does the bank take no responsibility for it? Does the bank say that this low-dollar policy did not cause the productivity problems at all? If not, what is causing them?
Mr. Dodge: First, to be clear, in monetary policy we have one instrument and one target, and that target is to keep inflation at about 2 per cent over the medium term. In order to achieve that goal, we absolutely require a flexible exchange rate. Therefore, we do not target the exchange rate. We target inflation, and the exchange rate will move over time in line with fundamentals, as we outlined in the January MPR, but from time to time there can be other factors that cause it to move. Clearly, when there are other factors causing it to move, we have to take that into account as we set monetary policy.
[Translation]
Senator Massicotte: First of all, I would like to thank you, Mr. Jenkins and Mr. Dodge, on behalf of the committee, for being here today. Your testimony is always appreciated. You are a valuable source of information for us and for our viewers.
In answer to the question by Senator Tkachuk, and as your report indicates on page 2, CPI inflation is at about 2 per cent, and will remain at that level, and perhaps drop even lower in the course of 2006. However, your statements imply that interest rates will continue to go up.
Why will interest rates go up, since you appear to be saying that CPI inflation will drop below the 2 per cent target?
Mr. Dodge: I will begin answering your question, then let Mr. Jenkins comment as well.
As you know, we always have to look not at the current situation but at the future, because the impact of monetary policy takes some time — generally 18 to 24 months — to make itself felt.
Looking to the future, we would say that, if our projections for Canadian economic growth turn out to be correct, there could be upward pressure on inflation. As a result, we have to act now to prevent or reduce those pressures, and keep future inflation at 2 per cent.
Mr. Jenkins might like to add something to that.
Paul Jenkins, Senior Deputy Governor, Bank of Canada: As the governor pointed out, future inflation is a crucial factor in the application of monetary policy. With an economy operating near goods and services output capacity, it is important for interest rates to remain at a level that keeps things in balance, that maintains a balance between supply and demand in the economy.
We should also bear in mind that the total CPI is the goal when we apply monetary policy. At present, total CPI inflation is at 3 per cent.
Senator Massicotte: Recent reports indicate that consumer debt is extremely high. Economic transfers are based more on consumer spending than on corporate investment in our society.
However, other reports note that, for a typical household, equity is higher and savings have declined enormously. Some reports even indicate negative savings.
What is the impact of consumer debt on the economy, and what are the foreseeable repercussions of higher interest rates?
Mr. Dodge: Two years ago, we published a study on the growth of mortgage debt and concluded that households' debt-to-income ratio was extremely high, while the capacity to service the debt is, at present, below the average for the past 20 years.
Interest rates could go up by 100 or even 200 basis points before reaching the point where the percentage of household income going to debt service hits the average of the past two decades.
On average, we felt there was no difficulty or risk for households.
[English]
Senator Angus: Welcome, gentlemen, it is always a pleasure to have you here. As the chairman said, we have some time constraints, so let me get to the point on a couple of issues.
You are probably familiar, governor, with this article that appeared on the front page of the Financial Post on December 27 of last year, when you were praised for raising business concerns and bringing issues into focus that perhaps were not being dealt with at the political level.
The Chairman: Do you want that to be part of the written record?
Senator Angus: Absolutely.
The Chairman: So it is not ripped out of context.
Senator Angus: I would read this part, which is in context. It is about the governor's pronouncements on the country's lacklustre record on productivity.
The government's failure to indicate whether or not it will allow bank mergers, and Canada's poor reputation abroad on securities regulation, may not be what Paul Martin, the Prime Minister, and the governing Liberals want to hear. But economic observers are thrilled that someone with Mr. Dodge's presence is willing to talk about issues that others would rather skirt.
The Chairman: Governor, we all agree with the last statement for sure.
Senator Angus: You are familiar with this article. You have no problems with it, I take it?
Mr. Dodge: We have to call things as we see them.
Senator Angus: The point I wanted to make, to see if you and the deputy governor would agree, is you stated before us a number of times that the only technical tool you have to help manage the economy and try to ensure the stability and integrity of our financial system is monetary policy. To supplement that, I suggest, you have another ability, which you are exercising, namely, to speak out on various issues and say how you view things at the moment — as you did yesterday on productivity and as you did here on bank mergers at our April meeting.
One of the subjects we are concerned about today is income trusts. You may have noted we held hearings here on September 28 and 29. Many witnesses told us that the issue had originally been raised by the Bank of Canada. We were led to a major paper that was issued by your organization as early as the beginning of 2003. In the context of the need for certainty and stability in our economy — which you have repeated many times — could you share your views on how this income trust issue was presented, and how it, perhaps unfortunately, led to some uncertainty and instability in the marketplace?
Mr. Dodge: I have real difficulty doing that, senator. Other than the research that we did earlier this decade and some experience in tax policy back in the 1980s I do not have the range of knowledge to comment.
Senator Angus: Within your range of knowledge — which, like the new head of the Federal Reserve designate, includes your Princeton background — I am sure you could share with us at least some wisdom on the income trust issue. It is out there front and centre. It is on the front pages nearly every day. It is an issue that needs to be dealt with. What does the bank think about it?
Mr. Dodge: As I said, we have done no recent work. I can only look back. Initially, the legislation was written essentially with respect to real estate investment trusts and royalty trusts. The analysis we went through back in the 1980s was that this would provide a little balance in the system so that there was not the pressure for companies that had substantial real estate holdings to do further investment; or, on the oil side, that there was not the pressure on companies to punch additional holes in the ground simply because they had cash flow. In that sense, I think the idea of an income trust was a sensible one to try to have a level playing field.
Obviously, since that time, and especially over the past few years, the use of this vehicle has spread much more widely. Frankly, we have not done work on the impact of that, in terms of investment and neutrality, on that wider field. I would think, from the work we had done earlier with respect to the areas where it was originally targeted, that it still makes sense in levelling the playing field. However, I have a real difficulty commenting much beyond that; I just have not done the work.
Senator Moore: My first question also touches on the matter of income trusts. I read the report. It talks about strong productivity; growth is key to income and crucial to increased productivity in coming years to counteract a shrinking workforce. As I understand the income trust concept, the money is stripped out of the company and distributed to the trust unit holders.
We had hearings about that and concern was expressed by a number of people that monies were not left in these companies to invest in plant and equipment, which would lead to more efficient productivity. Have you looked at that and do you have any comment to make?
Mr. Dodge: As I said in reply to Senator Angus' question, we looked at it quite specifically in relation to two areas. One was the oil and gas and natural resource industry and one was related to the real estate industry.
Senator Moore: You did not look at all the manufacturing companies?
Mr. Dodge: No. We have not done a detailed analysis on that.
Senator Moore: Do you intend to do that?
Mr. Dodge: I do not think we have plans to do that. That is the province of the Minister of Finance.
Senator Moore: Up to the cessation of pre-rulings, the listings were ever increasing on the Toronto Stock Exchange and became a larger and larger portion. Maybe it is just for the Minister of Finance. However, if you looked at the other aspects, I do not know why you would not look at that in terms of the decreasing productivity dilemma that you see us facing.
Mr. Dodge: Our focus has been on capital markets and their efficiency. One of the questions that we have asked ourselves, and continue to work on, is about the fact that we do not have a high yield market here in Canada such as exists in the United States. Indeed, many non-investment grade companies in Canada that need to raise debt find themselves going to the United States.
A high yield market, in some sense, deals with some of the same capital needs that the income trust market deals with. They are very different vehicles, but in some sense, they are supplying capital to non-investment grade industry, although the mechanisms are different. When we examined why we do not have a strong non-investment grade or junk bond market here in Canada, we discovered that in part, it was the appetite on the buy side; that is, there was not the appetite on the buy side for this kind of debt to the same extent that there is in the United States market. Second, generally, our companies were smaller. Consequently, their issues would have been $100 million or $150 million. That was rather small potatoes and that market seemed to function better for larger companies.
Senator Moore: On page 15, box 2 of your report, you state that:
The recent productivity slump reflects a marked slowing in both capital deepening and efficiency gains from using capital and labour.
Why less investment in capital? Is the non-availability of funds such as might be caused by the income trust situation or is it just people are not offering securities, are not offering debt, or people do not want to buy it? If we have a need for increased productivity, why are we not doing something about it, namely, encouraging reinvestment?
The Chairman: To put it in a framework of incentives, targeted incentives, so we attract capital in that fashion?
Senator Moore: Thank you, Mr. Chairman.
Mr. Dodge: Our models for the Canadian economy are models for the American economy. When we look around the world at the moment, we find that in North America, Europe and Japan, investment seems to be running below what one might have expected normally and what our models would predict, given that investment in plant and equipment.
Canada, the United States, Europe and Japan all seem to be running somewhat below what one would expect at this time. Given the growth in demand, given the fact that interest rates are low, that liquidity in markets is very high, one would have expected somewhat higher levels of investment in all countries than we have seen. It is difficult to understand why we have not seen this, but it is not unique to Canada.
Senator Oliver: My question is a bit different from some of the others, but it is an extension of the first part of Senator Angus' question.
It concerns your mandate. You have a difficult job as governor because you are independent. However, some academics and writers are saying that perhaps your mandate, as defined by the Bank Act, is being enlarged. Others say perhaps you are construing it narrowly with the emphasis on inflation targets. Under the Bank Act, you have the power to regulate credit and currency; to control and protect the national monetary unit, which is monetary policy; and at the end there is this phrase, ``promote generally the economic welfare of Canada.'' That is the phrase that seems to give you a lot of discretion.
Have recent circumstances prompted you to change the way you interpret your various mandates under the Bank Act?
What prompts me to ask my question is that Terry Corcoran, of The National Post, wrote on June 1, 2005 about his view of the way you are construing your mandate. He said:
Under Mr. Dodge, of course, the line between Liberal and Bank of Canada policy has become ever so blurry. The bank is supposed to be an independent agency distanced from political power. Its job is to implement the core of its narrow legal mandate, keep inflation down. In recent years, however, the bank has issued pronouncements on any number of issues in which it has zero responsibility. We have had remarks on corporate governance, securities regulations, child care, bank mergers, pension reform. Now, Mr. Dodge has begun commenting on China.
What do you think of Mr. Corcoran's interpretation of your mandate and can you tell us how you draw the line to keep within the mandate as you see it?
Mr. Dodge: I would never deign to comment on the irresponsible approach to life that he takes.
Let me talk about —
The Chairman: Governor, would you like to rephrase that? You may pay for that.
Mr. Dodge: I use ``irresponsible'' in the dictionary sense of the word, but let me come directly to the question of how we deal with it.
First, with respect to monetary policy, we have learned from bitter experience over time here in Canada, and from observation of other countries, that probably the best thing that we can do is to try to anchor inflation expectations. We do that through an agreement with the government that we will aim to keep inflation at 2 per cent over the medium term. That is the narrow job of monetary policy. However, as you read absolutely correctly, the Bank Act is written in rather broader terms.
We attempt to fulfill that broader mandate and to help us do our job in fulfilling our monetary policy mandate by conducting research in a number of areas that have impacts on the economy — in particular, across capital markets, because that is the precise domain in which we work.
Obviously, we cannot do our job in terms of monetary policy without understanding the functioning of the Canadian economy, understanding capacity and, hence, the nature of productivity. We cannot do our job without understanding the functioning of labour markets. We must look at the real economy as well as the financial economy in order to come to the best judgments we can on how to run monetary policy to stay on track.
Of course, we have other jobs — we are the government's banker and so on — but in terms of monetary policy, that is our job.
We do have to cover a wide range of territory in our research.
Mr. Jenkins and I and all members of the governing council draw on that research. We make the research public, for one thing, and then we try to draw on that research as we speak, as we come to this committee and do other things.
The Chairman: Senator Oliver, we will come back to you on a second round. It was a long windup to a long response.
[Translation]
Senator Hervieux-Payette: You mentioned a number of factors affecting productivity. I would like to talk about the active workforce. The unemployment rate is not worrisome, but the participation rate is, when you look at the demographic results. I hardly have to tell you that the manifesto published recently in Quebec worries our thinkers in Quebec. I may be one of those thinkers concerned about the aging population.
From this perspective, could the Governor of the Bank of Canada contemplate keeping people in the workforce longer, people with expertise and experience — as you know, experience cannot be bought — which would enable them to contribute to a retirement savings plan until they are 75 years old. We could see to it that some people keep working. Do you think that would have a positive impact in terms of providing for demographic transition?
Mr. Dodge: The short answer is yes. An increase in the participation rate for people aged 60 and over would help a lot. It is important — as you have heard in other meetings of this committee — that there be no barriers to that participation. We are doing a bit of work on that issue, but it is mainly the participation rate at the aggregate level that is being studied and the pension funds that are very important in our capital markets.
Mr. Jenkins: I would like to make another point, a point which is also a theme in our monetary policy report, and that is how important it is to have a very flexible economy. That greatly assists the labour market.
Currently, there are major adjustments going on in the Canadian economy, for example, due to the volatility of energy prices and flexibility in all markets. The labour and capital markets are absolutely critical. In my opinion, that also assists participation in the labour market.
[English]
The Chairman: Mr. Dodge, I would like to introduce you to the next two questioners. Both are new senators: Senator Segal, followed by Senator Goldstein.
Senator Segal, welcome to this committee. We await your first question in this committee with bated breath.
Senator Segal: Mr. Dodge, some of your predecessors have taken the view that monetary policy was one of the tools available to the governor when there was some anxiety about fiscal policy. We recall Governor Crow taking the view, when inflationary pressures were being created by massive expenditures in Ontario by the provincial government at the time that were many times the rate of inflation, that he had a duty to act. He acted with some determination, as you will recall from a previous life.
One issue that we often hear discussed is the notion of the government's present fiscal path, which appears to be improving and reducing the relationship between debt and GDP as a percentage, but some massive, multi-billion dollar commitments have now been made around defence, health funding and equalization, all of which look fine in the context of a steadily growing economy. However, I assume that you and your colleagues at the bank look at risk and what happens in the context of the winding down of the rate of growth.
Can you give us any sense of how you are assessing those risks, specifically with respect to the productivity comments you made earlier and what they may mean in terms of our capacity to generate wealth and, therefore, your capacity to balance the risks in support of a solid monetary policy?
Mr. Dodge: Senator Segal — and it is a tremendous pleasure to call you senator — we have said clearly in our reports that we take governments, federal and provincial, at their word in terms of fiscal policy, that they will try to balance their books going forward. It is certainly true that it makes our job at the bank much easier when governments are operating on that basis.
In fact, Governor King from the Bank of England, talking to the House of Lords yesterday, made that precise point.
We have also informed federal and provincial finance ministers of our view that with the improvement in our terms of trade, Canadian national incomes are running above output at the moment, and hence government revenues are running above what we would normally expect with 3 per cent real growth in the economy; that they should be careful not to assume that revenue growth will continue at an elevated pace relative to the growth of output in the economy into the future.
Indeed, as natural resource prices inevitably, at some point in the future, turn down and our terms of trade reverse, federal and provincial governments could find themselves in a position where revenue growth is running less rapidly and they ought to plan in a way that they can match their expenditures to that lower growth in the future.
We have also said clearly that over this period until 2012, 2015 or 2010 — we are not sure, but somewhere in the first half of the next decade — it would be prudent for governments in Canada to be paying down debt, to put themselves in a position whereby, with lower debt service costs in the future, they will be able to meet rising needs without having to raise tax rates. Those are the two key points that we have made.
Senator Goldstein: Thank you, governor, for your always enlightening remarks.
You are probably aware of the Manulife Bank study at the end of last year that dealt with the level of concern on the part of consumers about their ability to service debt. My recollection of that study is that over 70 per cent of those who responded had some concern about their ability to manage their debt and expressed a greater concern about doing so if interest rates were to rise.
The diminution of savings in the last 20 years has been so great that in the first and second quarters of 2005, and I assume the third quarter, although those figures are not yet out, Canadians had negative savings. There is, apparently, likelihood of further increases in the interest rate for proper monetary policy and fiscal purposes, and I have no quarrel with that, given the primacy of your mandate. However, is there anything within the context of your ability to promote the economic welfare of Canada, and therefore, I assume, the economic welfare of Canadians, that can alleviate this burden? Is it possible to impose some discipline on credit grantors, especially credit card grantors, to, as is being done in the United States, increase minimum monthly payments from 5 per cent to 10 per cent? Is there anything similar that you are able to do in Canada to achieve a somewhat better equilibrium than we are seeing at the moment?
Mr. Dodge: First, Canadian households are very wise, and every household is wise to be concerned about levels of debt. That is prudent financial management at the household level, just as we expect governments to have prudent financial management. I regard it as a healthy aspect of Canadian households that, as the Manulife study indicated, 70 per cent are concerned about this.
Our numbers are averages, and as we always stress, there can be difficulty in that as we do not have very good information. On average, the ratio of indebtedness to the wealth of Canadian households has actually not changed much at all. Wealth has been growing at roughly the same speed as debt. In fact, for a while it was growing a little more rapidly than indebtedness of households.
The average balance sheet of households was improving without saving out of current disposable income. When that is happening, it is not surprising that the measured savings rate, which does not reflect changes in the value of holdings, either housing or financial assets, has come down a lot.
Clearly, should the wealth position change because housing prices fall, because the stock market goes down, or because bond prices fall, there will have to be some saving out of current income in order to maintain that ratio of debt to wealth, and we would expect, and indeed the behaviour of households indicates, that that would occur. That means less consumption and less demand in the economy. In particular, we pointed to the risk that that may happen first south of the border, where there has been a much more rapid increase in housing prices than here in Canada, hence a more rapid increase in mortgage debt. Nevertheless, the risk is here as well.
Senator Stratton: I would like to move to the area of corporate governance. As you are aware, many companies throughout North America and elsewhere are looking at corporate governance with an eye to avoiding the recurrence of scandals such as Enron. The Canadian government has just put forward a position paper by Treasury Board President Alcock on what they are trying to do to prevent events such as those that led to the Gomery inquiry. The Senate Finance Committee, chaired by Senator Oliver, is looking at how to manage corporate governance with respect to the Canadian government.
What has the Bank of Canada changed in this regard over the last several years, and more recently?
Mr. Dodge: Mr. Jenkins looks after this directly on a day-to-day basis for the bank, so I will ask him to respond.
Mr. Jenkins: Over the last five years or longer, the Bank of Canada has taken steps to strengthen its corporate governance. I would start with the importance of having a firm budget planning and strategic planning process in place, which we do.
We have strengthened the financial risk management controls in place at the Bank of Canada as well as conflict of interest regulations. We have taken steps in a number of areas to strengthen the internal governance of the Bank of Canada and we are seeing a clear recognition of this throughout the organization.
This is important from the perspective of managing public funds as a Crown corporation, but it is also important in terms of good decision making to have that discipline within your organization.
Senator Stratton: Are you not still running into problems with respect to management? The Ottawa Citizen has reported that you are having ongoing problems with violations of your own rules.
Mr. Jenkins: Through our board we have an independent audit committee and an internal auditor. The internal auditor regularly reviews the controls that we have in place. With regard to the report to which you are referring, through an ATIP request we regularly put out our audit reports. It is critical to note that management has responded to those reports from the internal auditor and actions have been taken to correct those problems.
Senator Stratton: Therefore, those problems have been dealt with?
Mr. Jenkins: Absolutely.
Senator Harb: I have a question about the infrastructure of institutions in the financial sector in general.
Back in 2002, I think you had a discussion with the financial sector, talking in particular about what kind of mechanism they have in place to ensure that they have a viable system.
First, can you give us an update on what has happened since and tell us what, if anything, Parliament or the government can or should do in terms of legislation that will make your job easier? Are there needs out there in terms of the financial sector that Parliament can take action on?
Mr. Dodge: I think it would be more appropriate to ask the Superintendent of Financial Institutions to give you the detailed recommendations.
However, what we have all been focusing on is the risk management practices that are in place in financial institutions — not just the banks, but right across the board.
Certainly, the banks and the insurance companies have taken many steps to improve their risk management. The boards of those institutions are now much more focused on ensuring that appropriate risk management practices are put in place by their executives.
We have had changes in accounting rules that have put more of a focus on this. Clearly, the focus in Basle was to come forward with the new accord that will put much more emphasis on risk management, both in terms of the capital rules and the so-called Pillar II, so the supervisors put a lot more emphasis on it. Not just in Canada, but around the world, I would say the emphasis has increased enormously and the institutions have responded.
That does not mean we will never have a problem; but the emphasis on managing risk is stronger today than it was even as recently as three years ago.
[Translation]
Senator Plamondon: If I put myself in the shoes of ordinary people listening to this show on CPAC or on the Internet, I do not have your expertise and your answers do not satisfy me. Let me tell you what I am concerned about, and you can explain it to me more clearly so that I can understand.
Apparently, the debt load of Canadians is increasing and they are worried about it. But I take it from your remarks, especially in reference to mortgages, that Canadians can afford to get deeper in debt by a few more points without the situation becoming worrisome.
When it is pointed out that savings are below zero for the time being, you reply that that is no problem because basically, wealth is increasing because people are buying goods.
Let us talk about investment. Retired people are getting no return on their investments and they are digging into their capital. As a result, the Canadians I know are getting poorer. However, your answers are not encouraging to those Canadians. What role could you play to give Canadians renewed hope? That is my first question.
Second, according to your report, interest rates paid in the United States differ from those paid in Canada — 3.75 per cent versus 3 per cent. Do you monitor Canadians who wish to invest in the United States in American funds? Do some huge corporations invest massively in the United States when they see that it is more lucrative? Do you monitor these movements of money? Is there something about that that concerns you, when funds are invested abroad because the return on investment in Canada is not good enough? I would like to know whether anyone in Canada is monitoring that.
My last question is the following. In your monetary policy report, you mention that the Canadian economy is operating at full capacity. At the same time, you expect it to grow. How do you explain that growth if it is at full capacity?
Mr. Dodge: I do not fully understand the last question. So I will turn the floor over to Mr. Jenkins.
Mr. Jenkins: To answer your third question, I would say that it is the difference between the level of economic activity and the future growth rate. After analyzing all of the indicators, the Bank of Canada is of the opinion that the current overall level of activity is equivalent to full capacity. However, in the future, we believe that the rate of economy growth will reach nearly 3 per cent. We therefore think that the economy will continue to grow at a rate of nearly 3 per cent.
Senator Plamondon: Are you talking about one specific industry or in general?
Mr. Jenkins: We are talking generally. That is the answer to your third question, which was an excellent one, by the way.
Senator Plamondon: Do you have an answer to my first and second questions?
Mr. Dodge: I will answer your second question first. We talked about risk management earlier. It is important for pension funds and all funds, including those of large corporations, to be appropriately risk-managed. That means, for pension funds and even for individuals, that there has to be diversification involving industries all around the world in order to minimize the risk.
Our economy, in Canada, provides great opportunities in some areas but not in others. So it is important, in order to have a diversified portfolio, to have investments all over the world. From the risk management standpoint, for individuals and for funds, I think it is important that a certain percentage of the investments be outside Canada. For businesses, it is important to take advantage of the opportunities on global markets. It is important to invest in Canada, of course, but also in activities abroad.
In response to your first question, it is absolutely true that for some people, their investments do not provide a return that would supplement their income.
And unfortunately, there are still others who have invested well and can live, not necessarily in luxury, but well, and others whose investments are not doing so well. That is why we have public pensions.
Senator Plamondon: I have a follow-up question for you. Public pensions are often indexed to the rate of inflation. You do not take into account the increased cost of food and gas in calculating the inflation rate. That does not count? Why? It says in the document that there are eight volatile components, including gas and food, that are excluded from the calculation of the inflation rate. If there is one thing that is putting consumers in the hole, it is the cost of gas.
Mr. Dodge: The CPI is all-encompassing. It is quite true that it is an average. There are families whose basket of consumer purchases differs from the average, but the average includes food, gasoline, et cetera.
Senator Biron: In your opening remarks, you referred to competitive pressures from newly industrialized economies. Given these adjustments and the slow growth of productivity in recent years, the bank has slightly reduced its estimate of potential output growth. When you say output, are you talking about industrial output or the output of all potential economic activities?
Mr. Dodge: Everything.
Senator Biron: On a completely different topic, demographic change has an immediate impact on Canada's economy. That is going to become increasingly significant and have an effect on Canada's monetary policy in the next few years. Is the fact that there will be far more older people a concern for the future?
Mr. Dodge: It is more of a concern for the future. The situation over the next five or six years concerns baby boomers between the ages of 50 and 65. We expect this group to save a fair amount of money for retirement. What worries us a little is that the population is not only aging in Canada and in the United States, but also in Europe, and in Japan, and it will hit China a little later on. There is a risk that the money families want to save over the next 10 to 15 years will be more than planned investments. It is possible that there will be global demand and that the world economy might have a fairly weak growth rate. That would be bad news for Canada. That is why we mentioned this risk in our report.
[English]
The Chairman: First, Governor Dodge, I wish to thank you for your kind comments about our productivity study. I believe we have jointly imprinted this on the public consciousness and it is becoming part of the public dialogue and debate.
I also want to thank my colleagues for supporting Senator Angus, who inspired that study, and the committee for putting out a report that has been well-received. As you know, we recommended in that study some important tax reform. Senator Angus reminded me the other day that we have not had a look at tax reform in this country since Mr. Carter, back in the 1960s. This committee is contemplating a new term of reference that would include a probe of the tax system. It will not be a comprehensive study, but it certainly will be a round-table study. We are anticipating putting this to the committee and to the Senate shortly, and I assume you would welcome that.
I say that in context of the United States, where it is proposed that your colleague, Mr. Bernanke, become the Chairman of the Federal Reserve, your parallel organization. I had the privilege of meeting Mr. Bernanke several weeks ago in Washington and I have studied some of his recent comments. I want to talk to you about two issues to see where you agree or differ with Mr. Bernanke.
My two issues are tax cuts and target of inflation. I will deal with tax cuts briefly. On October 11 of this year, at the National Economic Club in Chicago, Mr. Bernanke — still the chairman of the president's economic council, and obviously the president's man but now shifted to his independent position — said that he supports the multiple rounds of tax cuts proposed and passed under the Bush plan. From a careful analysis, we also know that Mr. Greenspan's previous comments match up with Mr. Bernanke's. Both of them are, in effect, supporting the past and future tax cuts in the United States. I want to know whether you agree or disagree with that and how you differ with him, if that is the case, both as to the quantum and the impact. Our economies are somewhat different but they are locked together.
Second, the debate among the various candidates in the United States for the chairmanship of their Federal Reserve is on transparent targeting of inflation. When I look at your statement today, you say we target an inflation rate of 2 per cent over the medium term. In the United States the debate is between 1 per cent and 2 per cent, and Mr. Bernanke believes there should be a transparent targeting of that. Mr. Greenspan fudged a little on that. He was more flexible, shall we say.
In your statement you have used the phrase ``targeting inflation.'' Today the Financial Times, in a comparative study of inflation in our country and other countries, excluding the United States, showed our inflation this year, 2005, was running at 2.2, and your statement says we are running at 3 per cent through the middle of 2006, so it cannot be far off. It is certainly in excess of the range of 1 per cent to 2 per cent.
Then you go on to say in your statement — this is of great concern to us — that beyond 2007, you see a looming global economic imbalance. That is two questions and I have taken three minutes.
Mr. Dodge: I will be fast then. At the bank we think that it is important to be able to speak out on fiscal balance. That greatly affects what we do. We believe the level of government services, and hence the level of taxes required to pay for those services, is a decision for governments and not really appropriate for us to comment on. We have talked sometimes a little about tax structure issues. We think it is probably not appropriate for us to comment on levels of taxes and expenditures.
While Ben Bernanke was Chairman of the Council of Economic Advisers, it was his job to talk about tax cuts. Now that he is coming back to the Federal Reserve, perhaps he will reflect our judgment that that is the government's prerogative and not the bank's.
In terms of targeting, first, we believe that the system of inflation targeting, which we entered into for the first time through agreement with the government in 1991, has served this country extraordinarily well. Since 1994, we have had a range of 1 to 3 per cent, with a midpoint of 2 per cent. We target on 2 per cent. Roughly speaking, since that time, we have hit that 2 per cent target.
That does not mean we can hit it at any given point. Indeed, we do not try. That would give us what we call ``instrument instability.'' You would have interest rates bouncing all over the place if we tried to target too tightly.
When we get a shock, as we have had with oil and gas prices moving up, it will move the CPI up for a time. If we got a food price shock, it would move it up for a time. We will get, at some point, as we have had over this period, shocks that will drive us well below our target.
We try to return inflation to the target over the medium term. We try to look through the highly volatile items. That is why we use core — not that we target core — as an indication of the underlying rate of inflation in the economy.
Senator Tkachuk: I want to come back to your comment that no single silver bullet will solve Canada's productivity problem. How many silver bullets do we need? What are they? Was the promised but not delivered income tax cut for large corporations in the last budget one of them?
Mr. Dodge: What are they? I think I can answer that simply. You have written in your report on the range of issues that need to be covered. The only thing I would stress is that productivity gain takes place at the level of the workplace, at the level of the enterprise. It is important that we are all focused on that — whether as CEOs of private companies, labour unions or us in a public corporation.
Secondly, I think tax structure certainly does matter. What is clear over time, and across countries, is that the tax systems that focus on relatively low rates of tax and relatively broad tax bases to raise their revenue seem to do the best. All taxes have some distortionary effect on the economy, but low rates and a broad base lead to the least distortion.
[Translation]
I have two brief questions for you. When you look at the Canadian economy, there is a degree of tension between certain regions of Canada, some of which are more prosperous than others. In your projection model, for the next two or three years, do you forecast another major conflict with Alberta, given the high price of oil, since Alberta's economy might grow rapidly, whereas other regions of Canada might be wondering why interest rates are rising, since the economy is already slowing down?
The consumer price index is the benchmark index. Some central banks are increasingly focusing on the price of securities and even on the price of houses. Does the Bank of Canada agree with this approach, or does it take it into account in its decisions regarding monetary policy?
Mr. Dodge: As far as your first question is concerned, what is important is that the Canadian economy remain flexible. The more flexible Canada's economy is, the more the advantages of high growth rates in certain sectors and regions will extend to the economy as a whole.
It is true that, for the moment, there are regions, especially out west, which will grow more rapidly than elsewhere. Some industries will grow faster than others, but the more flexible we are, the more advantageous it is to everyone.
As far as your second question is concerned, we are in the process of renewing our agreement on inflation with the federal government. We are conducting research on asset pricing and asset pricing fluctuations, which may help us manage our system to help us reach our inflation targets.
Some information may be important, but as a means to an end, we do not believe that it is appropriate for a central bank.
[English]
Senator Angus: Governor, when you were here in April, I believe you made the point that one of your main preoccupations and concerns was global economic imbalances. You talked a little about what you meant by that.
Then I notice here in your comments that you handed out, both yesterday at the House of Commons Finance Committee and here today, you were talking about the unwinding of the global economic imbalances. I was not sure what you meant by that and why, if it occurs three or four years down the line, you think it will be a bad thing and could involve a period of weak world economic growth.
Mr. Dodge: The long answer is contained in a speech I gave at Spruce Meadows. It is on our website and I invite you to read it. The short answer is that if we see a rise in the U.S. savings rate, as we think will probably need to take place at some point, and we do not simultaneously see an increase in net absorption in other countries, then demand in the world will grow less rapidly than supply. There will be a downward pressure on growth.
With slow growth in the world economy, we will face a period of slow growth. That is the risk we have pointed out.
Senator Angus: This is a question of semantics, but how does the unwinding of an imbalance present itself?
Mr. Jenkins: We are talking about the current account imbalances that currently exist. You have a large U.S. account deficit. There must be a flip side to that. Most of the surplus is in Asia, not exclusively. The fundamental issue here is how these imbalances move to levels that are more sustainable.
In our projection, we are assuming that imbalance will unwind in an orderly fashion. We are pointing to the risk that it may not happen in an orderly way.
Senator Moore: Is this global phenomenon of less investment in capital an aspect of what you call on the first page of your report the newly industrialized economies in China and India? Are they wrapping up with new, efficient equipment that costs less so there is less incentive to do that in the Western world and in Canada?
Mr. Dodge: That is absolutely the case in some industries. In other industries, changing technology has meant that prices are lower and there is excess supply. Indeed, the investment that does go on will not go to increase the capacity but rather to lower the cost of production.
I do not know why we have seen this global slowdown in the rate of investment against what one might have expected, given relatively strong world growth. We have had three years in a row of 4 per cent global growth. That is very good. We have low interest rates in nominal terms and ample liquidity in most of the world. Under those circumstances, one would anticipate higher levels of investment.
Senator Oliver: My original question was about your mandate, and I asked you about your interpretation and promotion generally of the economic welfare of Canada. You mentioned to Senator Tkachuk looking at the financial sector and productivity and other issues.
Are there any new areas, such as productivity in financial service sectors, you are now studying, given the world situation and the Canadian economic situation?
Mr. Dodge: We published our research plan. I should have brought a copy with me. It is on our website.
Senator Oliver: Can you tell us about any new areas of research that you are looking at now?
Mr. Dodge: I do not quite recall what is new and what we have talked about previously.
We are putting a lot of effort into looking at issues related to the international monetary order at the moment, not just domestic. We are doing a fair amount of work on the role of pension funds in the capital markets. This year we have concentrated on the issue of renewing our inflation targets and the research that we need to do that. I will ensure that you get a copy of our research program.
Mr. Jenkins: The research documentation lays things out by theme as well as particular issues.
Senator Segal: One of the large parts of the unwinding process is the issue of the revaluation of the Chinese currency and the relationship between that and economic reality.
Can you give us any sense of how, in terms of your own risk management context, you are assessing those relative to medium-term impacts on our own monetary issues?
Mr. Dodge: We have spent a lot of time talking to China, and we have been there a couple of times this year.
Our view, which we have stated clearly and publicly to China, is that the most inexpensive way to make some of these adjustments is a nominal appreciation of the RMB against the U.S. dollar.
Second, we have told them, and they are clearly on this path, that they have to do something to increase domestic demand to absorb more of their own production and foreign production as well.
We think it would be helpful if the RMB would appreciate more rapidly against the U.S. dollar in the coming short term.
Senator Goldstein: Governor Dodge, I would like to come back to the question I initially asked and your response to it, which indicated that you were not overly concerned about debt, given the fact that it was appreciating in a manner consistent with the increase of wealth.
However, given that you envisage in your report an increase in the overnight rate that will flow through the economy to an increase in consumer borrowing costs, and borrowing costs throughout, coupled with the conventional wisdom — whatever conventional wisdom may be worth — that we are in a housing bubble that will eventually burst, what effect will that double circumstance have?
In other words, there would be a decrease in the value of household wealth coupled with an increase in current costs, together with an apparently significant increase right across Canada in the municipal tax carrying costs of housing.
Mr. Dodge: I will turn this over to Mr. Jenkins. I invite you to turn to page 20 of the report, which you will need for his answer.
I do want to point out that I did not say we were in a housing bubble.
Senator Goldstein: I am saying that.
Mr. Dodge: With perhaps some very local exceptions, we do not see that housing prices in Canada are out of line with what one would expect, given the growth of Canadian incomes and the Canadian population.
Mr. Jenkins: Chart 14 demonstrates a simple but important point; that is, as we adjust interest rates at the short end, it does not necessarily imply that you will get movement in interest rates out of the medium- and long-term point of your yield curve.
Coming back to the mandate of the Bank of Canada and addressing Senator Massicotte's first question, the focus on inflation control also provides low and stable interest rates. Short-term interest rates will go up and down as circumstances change, but if you keep inflation expectations well anchored, you will keep those medium- and longer- term rates low and stable. That feeds directory through to mortgage rates. That is a critical point.
[Translation]
Senator Hervieux-Payette: This morning, you talked about your concern with the productivity of financial institutions. Can I assume that you are undertaking a study on that issue, or is this only a general concern? Has a study been done or will it be done?
Mr. Dodge: We are in the process of conducting the study.
Senator Hervieux-Payette: I would like you to confirm that you will take a close look at the impact of regulation on the productivity of our financial institutions, and that you will draw comparisons with OECD countries. I have the impression that a major reason for decreasing productivity is due to regulation. I feel that our regulations are akin to men who wear belts and suspenders. In terms of risk management, there is a very low risk of losing one's pants if one wears both a belt and suspenders. But I think that only one of the two is necessary.
I would like this issue to be examined closely, because if you look at how intrusive regulations are in the daily management of business, it is absolutely scandalous.
Mr. Dodge: Yes, that is something which we will be studying.
[English]
The Chairman: Governor, we looked briefly at some studies in our work on productivity. The World Bank did a comparative study of bankruptcy and other regulations in terms of recovery legal systems and so on. That was useful work. I looked at the Canadian numbers and they were really soft. They were not as precise as one would like. However, that might be helpful because I think the senator raised an important point. We are trying to get at the underpinnings of productivity and how we improve on them. That is something we must look at.
Senator Harb: My question has to do with China and the RMB. A large number of corporations from Europe and the United States have established facilities in China. They produce goods in China and ship them to the U.S. to sell. When we talk about this balance of trade account between the U.S. and Asia — in particular, China — do we ever consider that some of that is an American corporation producing goods in China and selling them in the United States?
Have there been any studies looking at foreign investment and the flow of investment that use the same measuring standard as we do when it comes to trade? How much investment is going there and how much is here? How does that fit into the overall equation when we talk about the balance of trade?
With the global economy, it is relevant to the point where you can say that you are not buying this number of a hundred billion dollars more being sold by the Chinese to the Americans, because my assessment would be that if you look deeper into those figures, you will find a good chunk is accounted for by American companies who are producing the goods and selling them to Wal-Mart and other companies in the U.S.
I would appreciate your comments.
Mr. Dodge: It is certainly true that American investment abroad yields a much higher rate of return than foreign investment in the United States. That is incontrovertible.
The factors that lie behind that are complex. Nevertheless, clearly, some level of current account deficit of the United States or surplus of capital-receiving countries such as China can be maintained over a very long period because of differences in rates of return.
One would expect, however, over very long periods that those differences in rates of return would in fact diminish and that a greater balance on current accounts will be necessary in the end. It can occur smoothly and over a long period or suddenly and precipitously. We flag the risk that the longer the imbalance goes on, the greater the chance — we still think it is relatively low — we could have a discontinuous adjustment process and a period of slow global growth.
[Translation]
Senator Plamondon: On page eight of your report, in both the French and English versions, just above chart 1, you state the following:
In line with the bank's outlook, and given that the Canadian economy now appears to be operating at capacity, some further reduction of monetary stimulus will be required...
I would like you to tell me what you mean by ``monetary stimulus.'' Does that mean that you plan to increase or decrease interest rates?
Mr. Dodge: Increase.
Senator Plamondon: Why did you not make that clear?
[English]
The Chairman: To be fair, the governor has a deeper responsibility than responding to our topical questions. He has a way of communicating these questions that I think affects the economy as a whole. Let us not try to corner the governor and force him to say something.
Senator Plamondon: No. In English, it reads, ``some further reduction of monetary stimulus.'' It is hermetic. I did not know whether it was an increase or decrease in interest.
[Translation]
Mr. Dodge: You raise an important point. A reduction in monetary stimulus is required. Our current monetary policy is broad in nature. The matter of monetary stimulus will have to be addressed.
[English]
Senator Segal: We hear often from our colleagues in the banking community that there is no money to be made in corporate credit, that the retail business is important but not necessarily seminal. Many have been involved in hedge fund activity, constructively and appropriately, properly risked and balanced. Many have been involved in foreign currency activities for the purpose of earning a fair return for their shareholders.
Your core role is around liquidity of the banking system. As you assess the risks in some of these more exotic activities, what is your anxiety level about risk generally speaking, and liquidity in particular? As the banker of last resort, it is obviously one of the critical questions on your agenda.
Mr. Dodge: Certainly from our discussions with the major Canadian banks, a number of them are withdrawing from, as you put it, some of these more exotic activities.
As one looks around the world, it is clear that to manage the risks in some of these activities — in particular, credit derivatives — one must be large and professional and engaged in these activities on a significant basis.
Therefore, it is not surprising that some of our banks that started down that road are pulling back somewhat. That is good risk management on their part.
[Translation]
Senator Massicotte: In your economic model, you put forward a hypothesis concerning the relative strength of the Canadian dollar against the American dollar. The United States is a very important partner for Canada. Could you please explain the bank's forecast on the exchange rate of the Canadian dollar versus the U.S. dollar? If your theory were out by 1 per cent, or by one cent, what would be the effect on the Canadian economy?
Mr. Dodge: That would depend. That is why we included the ``small box'' in the January report. Were the Canadian dollar to appreciate or depreciate against the U.S. dollar due to changes in the overall demand for our products and services, or because of changes in the price of crude oil and natural gas, et cetera, there would only be a negligible effect on monetary policy. However, were the U.S. dollar to depreciate against all world currencies, including the Canadian dollar, the impact on Canadian monetary policy would be quite different.
Any significant depreciation of the U.S. dollar against the Canadian dollar, which could not be attributed to a specific cause, would carry consequences for our monetary policy and we would have to consider a reduction in interest rates.
Senator Massicotte: How would GDP growth be affected, in percentage terms, were there to be a 1 per cent change in the value of the Canadian dollar?
Mr. Dodge: It is impossible to say.
Senator Massicotte: What range are we talking about?
Mr. Jenkins: The general rule used in case models is that, all other things being equal, a 10 per cent variation in the value of the dollar will result in a 2 to 3 per cent change in GDP, a change that will be felt two or three years down the road.
Senator Massicotte: Thank you.
Mr. Dodge: It is extremely important to understand the underlying causes of any appreciation or depreciation.
[English]
The Chairman: I have two brief questions. First, could you assist the work of this committee on the payday loan phenomenon? This business would seem to be a bubble in the financial services sector, because it was not around five years ago. It has gone from $1 billion to $5 billion and has created exorbitant costs for certain consumers. We have no direct evidence as to the nature of the problem, but it appears to be unfair to a certain consumer segment that requires these loans on a short-term basis. Do you have any comments on payday loans?
Second, we would appreciate your comments in respect of the current debate on transfer payments and fiscal imbalances. You have heard the complaints of some provinces. Do you have a comment on improving the productivity of the economy as a whole?
Mr. Dodge: I do not have a comment on that. I can repeat what I have said before, that provinces have access to most sources of revenue and to resources that the federal government does not have. It is equally true that the federal government has access to at least one source the provinces do not. It is up to a province and the federal government equally to establish their taxation in response to their revenue needs.
The Chairman: Governor, I thank you and the deputy governor for the candid exchange this evening. No doubt you noticed that we had a full house for this meeting and there is an appetite for more questions. I hope that you or one of your colleagues would consider appearing at our next hearing on interprovincial trade barriers. The committee is trying to get at the root of productivity in the economy. We have a strong sense that there are too many interprovincial trade barriers that inhibit our national economy. If you are unable to appear, we would appreciate access to your studies. We look forward to our next exchange.
Mr. Dodge: Thank you, Mr. Chairman.
The committee adjourned.