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THE STANDING SENATE COMMITTEE ON BANKING, TRADE AND COMMERCE

EVIDENCE

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OTTAWA, Wednesday, March 23, 2022

The Standing Senate Committee on Banking, Trade and Commerce met with videoconference this day at 6:31 p.m. [ET] to study matters relating to banking, trade and commerce generally, as described in rule 12-7(8).

Senator Pamela Wallin (Chair) in the chair.

[English]

The Chair: Good evening, everyone joining us here in the room or remotely, and welcome to the meeting of the Standing Senate Committee on Banking, Trade and Commerce.

I am Pamela Wallin, and I am the chair of this committee.

Before we begin, I would like to remind senators and witnesses to keep their microphones muted at all times unless recognized by the chair. It will solve some technical problems for us.

May I remind everyone that in fairness to others and so that all senators and witnesses may participate, please keep your interventions brief to ensure that every member can have their question answered fully during the short time that we have with the witnesses.

With that, let’s get started. I will introduce the members of the committee participating in the meeting this evening, beginning with the deputy chair, Senator C. Deacon. We have with us as well Senator Bellemare, Senator Gignac, Senator Loffreda, Senator Marshall, Senator Massicotte, Senator Ringuette, Senator Smith, Senator Woo, and Senator Yussuff.

Our meeting tonight, at least the first part of it, will focus on business investment in Canada, although our questions may range far and wide.

Our guest a little later on is David Dodge, the former governor of the Bank of Canada, but to begin, I have the pleasure of welcoming Paul Desmarais III, Chairman and CEO, Sagard Holdings and Co-Founder, Portage Ventures. Thank you for joining us this evening. I gather you have some opening remarks. The floor is yours.

Paul Desmarais III, Chairman and CEO, Sagard Holdings and Co-Founder, Portage Ventures, as an individual: Thank you, Senator Wallin.

[Translation]

Madam Chair, honourable senators, thank you for inviting me today to contribute to your study on matters relating to banking, trade and commerce generally. I appreciate the opportunity to share my views on business investment, which focus on the important role that the financial services sector can play.

[English]

The firm I lead, Sagard, is a multi-strategy alternative asset manager. One of our platforms, Portage Ventures, has become one of the most important early-stage financial services investors globally.

Some of our portfolio companies in Canada include Wealthsimple, Canada’s leading robo-advisor and digital investment services platform; Koho, a Canada-based online and mobile platform offering a suite of financial services; and Dialogue, a telemedicine platform that went public last year. All founded after 2015, these companies have become leaders in their fields and currently employ thousands of people while serving millions of Canadians.

In my view, the fabric of the economy is changing in a few critical ways. The advent of cloud computing and growth of software as a service is accelerating the fragmentation of the economy. Scale is no longer the competitive advantage it once was. Today, renting scale allows for highly successful companies providing segmented offerings to thrive.

This phenomenon is accelerating the pace of innovation. If you think of the adoption of electricity in the 1800s or early 1900s, it took 46 years for 25% of the population to adopt electricity. The World Wide Web took seven. Things like the iPhone and crypto-currencies are being adopted at an even faster pace.

Labour dynamics are being transformed, and more and more people are changing jobs frequently and sometimes even adopting a portfolio approach to their careers. In growth sectors of the economy, I would say that the bargaining power of labour has strongly increased relative to data capital.

The networked organization, meaning a company with many strong partnerships and alliances, is increasingly going to supplant the vertically integrated organization, meaning a company that owns its inputs and operates more centrally.

The growth of distributed organizations and digital assets will transform financial services and other sectors of the economy while attracting large amounts of talent such as we are seeing today. This is likely an indicator that this sector will have a major impact on the economy going forward.

There is a need for the financial services industry to embrace and leverage these trends. Our banks, insurance companies and asset managers are stable and profitable and play an essential role in our traditional economy. They serve the conventional enterprise and its employees very well, but they are less well suited to serve a growing segment of the Canadian economy, including small entrepreneurs, contract workers and those operating in the digital asset sector. They have also struggled historically to serve underrepresented parts of the economy and people who have fewer assets. To build a stronger and more equitable Canada that stimulates and attracts more business investment, we must recognize the need for these changes and adapt accordingly.

We find ourselves at a turning point, at which both governments and regulators have an opportunity to accompany the financial services sector in this transformation. I would humbly put forth three recommendations in this regard.

First, the federal government must continue to push for open banking and real-time rail. I would like to thank the members of the Senate who have been staunch allies in the drive to make these changes necessary. The reported upcoming naming of Abraham Tachjian to help create a new open banking system for Canada is definitely a positive step, but time is of the essence to make open banking a reality, and we must move quickly.

Second, we must facilitate and encourage investment growth in technology and innovation through access to both capital and labour. The government has contributed to increased access to capital through programs like the superclusters, VCCI and the BDC. It has never been more important to be bold in our objectives for talent and immigration to help us enable the most innovative sectors of the economy. We need more ways to facilitate talent growth in Canada, as we have seen it done through programs like Start-up Visa and Global Talent Stream, but more must be done.

Third, we must urgently increase the regulators’ resources to develop frameworks around digital assets. Canada has an opportunity to be a leader in this area, and in doing so has the potential to attract more innovators, capital and talent. I believe digital assets and web3 are the next evolution of innovation in financial services and deserve dedicated attention from our policy-makers.

In closing, the fabric of the economy is evolving rapidly. Our traditional financial services industry and the regulatory framework have a unique occasion to catalyze new growth while prioritizing consumer choice and better access to capital for entrepreneurs.

With that, I will be happy to take questions.

The Chair: Thank you. You have touched on all of the issues that this committee is looking at.

Senator C. Deacon: Thank you, Mr. Desmarais, for being with us today. You have established an investment excellence and ability in investing in young, intangible companies and building those, taking ideas and turning them into opportunities, jobs and prosperity in sectors that are globally competitive.

We’re in a scenario now where Canada has to start worrying about fiscal anchors, and government co-investment may not be — as effective or ineffective as it may be — as available, so I want to drill into one point that you made in your opening comments when you talked about regulation.

In your third point, you spoke about increasing the resources available to regulators so that they can keep up and become globally competitive — we’ve been lagging generationally behind in too many sectors — and attract investment and talent. As you say, talent has the bargaining power more than investment right now.

If we invest in our regulators and make sure that we have globally competitive regulatory environments, that sounds like a pretty crucial point.

I wouldn’t mind you drilling into some examples of where that can be done, where it doesn’t just drive and fuel the growth of the new entrant but also pushes the incumbent to invest more in productivity growth, which is something we’ve been lacking so significantly in Canada.

Mr. Desmarais: Thank you for that question, Senator Deacon. A live example for us is that, at Wealthsimple, we chose to be the first crypto brokerage platform to be regulated in Canada. That actually led the company to having its hands tied behind its back competitively for nearly a year, while foreign platforms that were domiciled in the Caymans, China and whatnot were able to take significant market share in the Canadian market. This was largely because, I believe, that the regulators were under-resourced and didn’t have dedicated focus here. By basically choosing to go the route of regulation, we ended up being at a massive disadvantage relative to other platforms that chose to skirt regulation. That would be a very tangible space.

Ultimately, in the world of decentralized finance, crypto and blockchain, the pace of change is happening so fast because it is totally intangible, it is networked and it is very hard for someone to do that part-time. Ultimately, if we are to stay at the forefront of this, I think that people dedicated to this — potentially including a dedicated regulator — may be very helpful because this may be a place where the fragmentation of our regulators, especially in the securities world, find it challenging to keep up if each one of them has to invest in these resources, which are highly specialized and very difficult to come by today.

I would say that, broadly, regulatory frameworks around the payments, rails and things like that, also definitely need to be evolved and modernized. Historically, financial services companies were totally vertically integrated. We built these great champions that, soup to nuts, had their back offices, and the regulatory systems were built in many ways as a reflection of that. The reality is that I think you are seeing the fragmentation of the financial services base, where you will have people who provide a single sleeve of financial services that ultimately may not make sense for a regulator who takes a complete bank approach to basically impose the same limitations on a fintech that does just a sleeve of it, while not actually having many of the risk components of a larger financial institution.

What we’re calling for is consistent, fit-for-purpose regulation that doesn’t necessarily advantage or disadvantage new entrants, but is more a better reflection of where the economy is going and how financial services are being transformed.

Senator C. Deacon: In the development of those new regulatory bodies, Canada seems to lead in command and control regulations in the OECD. We say this is how you must do it versus this is what we want to have done. That is a risk factor. Have you seen a country that is really leading the way in developing new regulations in a manner that allows for innovation, not just in business but in how we regulate business?

Mr. Desmarais: Yes. I think the U.K. has been a good example of this. Probably more so than the U.S. The U.S. has a very different approach around financial services and the competitive nature of them where, given the fragmentation of the financial services in the United States and the intense competition among all players, I think that there is a natural tendency toward faster innovation versus the U.K. I think their structure is much more similar to ours. I think that the work that they’ve done around open banking is very interesting.

Senator C. Deacon: Thank you, Mr. Desmarais.

The Chair: Mr. Desmarais, do you still believe that you are disadvantaged? We’ve talked a lot about what the regulatory framework and the rules might look like. Are they still too unclear?

Mr. Desmarais: Well, if you are a fintec trying to provide anything that looks like a banking service, I would say that you are more than disadvantaged. You will not succeed in this country. It is actually an insurmountable barrier. If you are trying to offer payment services and you have to transact via one of the charter one banks, it is very hard to end up building something that is best in class or world-class. It basically allows for no creative destruction. I would say it is more than a disadvantage. It is actually a major business model risk.

The Chair: Prohibitive. Thank you. That was a very direct answer.

Senator Smith: Thank you, Mr. Desmarais, for being with us today. I would like to talk a little bit about housing investment versus business investment.

William Robson of the C.D. Howe Institute made an interesting argument recently about the fact that financial institutions have become more inclined to provide residential mortgages than business loans. According to Mr. Robson, mortgage loans are 2.5 times the total of business loans today. The problem or concern is that most mortgages in Canada are backstopped by the federal government or private insurers, which make them relatively safer for banks to engage in compared to business loans.

Could you help us with this question? Do you think federal policies are helping divert credit flows from business investment to residential investment, and is that preventing business investment from taking place here in Canada?

Mr. Desmarais: I am not an expert in the kind of capital allocation of banks, but I don’t think there’s a huge crowding out taking place there. They are very different areas where a CMHC insured mortgage requires a very minimal capital charge on a bank’s balance sheet or any financial institution’s balance sheet versus business investment. But I think that those are generally two very different buckets. We spend a little bit of time in the mortgage base because at Portage Ventures we’ve built the largest online mortgage originator in the country, called nesto. We see that as a kind of service. We see business loans as another service.

I would say one of the challenges of business loans is that a lot of young companies are actually financing their businesses with their credit cards because it is just hard to get a loan, and it is hard to get a loan because there’s often no history. It is a riskier business. I think that one of the opportunities of fintec, and especially things like open banking where you can access data and underwrite businesses with a different set of metrics, by pushing things like open banking, it is exactly this type of policy that will help get more capital in the hands of small entrepreneurs through smart new ways of financing businesses. You know, accounts receivable financing. There are a wide variety of tools to finance business lending that are better than using a credit card. I think things like open banking will definitely facilitate that. I’m not sure there is too much of an overlap between mortgages and business loans, but that would not be my area of expertise.

Senator Smith: The thought behind the question was that over the last decade, business investment appears to have, when we compare Canada’s performance versus other G7 countries, not been as positive as it should be. I guess that the question is, are we doing what we need to do from a policy perspective trying to encourage it, or is this a case where we need to reduce red tape and do other things to encourage business investment?

Mr. Desmarais: I think business investment has been challenged in this country, partly because I think there’s a perception that it is not a business-friendly kind of environment. The connectivity between the business community and the government is, in parts of the country, not as strong.

I would say that in Quebec the government has taken a very pro-business approach. I think you’re seeing a real rebirth of Quebec and the economy in Quebec. I think it is largely driven by very pro-business government policies. I think that there’s an opportunity for messaging to change. Because I think one of the strengths of what we’ve seen in the Quebec case is their messaging is very clear. It is pro-business. It is pro-employment growth. They are very focused on rising prosperity for the average Quebecer. That clear message has sent a message to everybody that Quebec is open for business.

For us, we are now continuously thinking, how can we bring more companies internationally to invest in Quebec? How can we grow the economy here? And I think sometimes that a little more business-friendly messaging could go a long way.

Senator Smith: Thank you.

The Chair: That is great, Senator Smith. We have a lot of people lined up here, so I will ask people to be short and sharp.

[Translation]

Senator Massicotte: Thank you for being with us this evening, Mr. Desmarais. We appreciate it.

I’m going to pick up where Senator Smith left off. The level of business investment has been dropping for a number of years, and attracting new clients is difficult. On top of that, international debt is rising. The federal deficit has also risen significantly. Does the situation worry you? Might it discourage investment in Canada, or is it just a blip that we don’t need to be too concerned about?

Mr. Desmarais: I’m not an expert on macroeconomics, so it’s tough for me to comment on the debt level and its impact on investment.

What I would say is that, historically, Canada is a country where natural resources play an important role in the economy. I think the investment opportunity in those sectors is tremendous, especially in light of the green revolution. The mining sector is going to be a vital part of the green revolution globally. All the solutions we hear about — wind energy and electric vehicles—require an enormous amount of mineral resources, and much of those resources are in Canada. Unfortunately, if the country has an anti-natural resources approach, it will have a very hard time attracting foreign investment. Ultimately, what investors want is certainty.

I’m on the board of a mining company in France. It’s simple. In many European countries today, only brownfield projects receive consideration because the climate is so hostile to the mining industry that greenfield projects are problematic.

I would say any policy that can bring more stability to greenfield mining projects, or even energy projects, would be a tremendous boon for investment in Canada since they have been our leading sectors historically. Canada’s entire technological community would not be able to compensate for a deteriorating investment climate in that sector.

Senator Massicotte: You think there is a bias against mining companies. Is that the case for oil and gas as well?

Mr. Desmarais: There is definitely a bias against the energy economy in Canada today.

Senator Massicotte: Thank you.

[English]

Senator Loffreda: It is nice to see Mr. Desmarais again.

Mr. Desmarais, you are a leading global investor. In Canada, we perform well when it comes to putting dollars into research, but we don’t perform as well when it comes to turning research into dollars.

I would like your insight as a leading global investor. How can we correct that? Is it tax incentives? Is it policies? Is it regulation? How would you prioritize it? You are a leading global investor, and you have seen best practices around the world. Where can we improve?

Mr. Desmarais: Senator Loffreda, that is a fantastic question. It is my experience that the best way to build big companies or to create large champions from commercialized research is through clusters or ecosystems that share best practices.

If you look at Silicon Valley, the reason there are so many champions being created in Silicon Valley is their ecosystem of people who have scaled companies and who are investing in each other, sharing best practices and attracting talent from all around the world who have experience in that scaling.

Canada’s challenged in many ways. One, we are a very fragmented country. Two, there are not a lot of companies that have that experience in scaling; therefore, there is a shortage of information and experience to help those entrepreneurs in scaling. I believe that is gradually changing. There are organizations that create destruction labs. I have just joined the board of the Endeavor Group. In our group, we are dedicated to try to bring those best practices from across the world and bring those insights and that mentorship to help create Canadian champions.

I cannot overemphasize the importance of these networks and these clusters to show the way to scale organizations. Frankly, in many parts of the world, outside of Silicon Valley — that is just a burgeoning area — the more that we can do to support these types of organizations, to help these things happen, the better.

Senator Loffreda: Thank you for that.

Madam Chair, do I have a time for a quick follow-up?

The Chair: Yes, please.

Senator Loffreda: The other issue that keeps me up at night when thinking about the economy is productivity. You travel the world. You invest around the world. Quickly answer this or maybe send it to us in writing: Can Canada do anything to improve our productivity and the long-term consequences of having low domestic investment? Because at this point there is low domestic investment in Canada, although we score fairly well on foreign direct investment.

Mr. Desmarais: I’m not an expert in productivity, but I am optimistic about the long-term path of Canada when it comes to investment because I think a lot of these global disruptions will lead to a re-onshoring of manufacturing. We have huge advantages in Canada — great labour, great talent, low-cost energy if we manage that properly. What we cannot do is follow the path of European countries which have basically caused themselves major industrial challenges that are in many ways self-inflicted.

We have an opportunity to continue going on our path and, if we keep on doing that, we are at great advantage because, with the disruption happening now in supply chains, the need for re‑onshoring is real.

The Chair: Thank you so much for that.

[Translation]

Senator Bellemare: I feel very privileged to have a chance to speak with you, Mr. Desmarais.

I know you’re going to say that you’re not an expert on macroeconomics, but you certainly have to be an expert in order to be able to invest in as many companies around the world as you do.

I have a backwards question for you. The idea is to increase investment here, precisely to raise productivity. You mentioned clusters. My interest in the area goes back to my time working in other sectors, in academia and other research circles, before I became a senator. I became interested in foreign direct investment, and I want to hear your take on this. I learned that a determining factor for those who help foreign companies invest here or elsewhere was labour. In fact, it was a very important determining factor when it came to national, or domestic, investment. That means high-quality and available skilled labour, so a workforce that upgrades its skills on an ongoing basis.

In Canada, however, skills upgrading is an individual responsibility, falling on workers and companies. According to other studies I’ve seen, businesses will invest in employee training if there is a tool to facilitate it or if governments do it. Here, in Canada, we don’t see a lot of investment in ongoing training. What are your thoughts on that? What connection do you see between the labour force and investment in businesses domestically to raise productivity?

Mr. Desmarais: These days, labour is in extremely short supply right across the economy, especially in the technology sector. The engineer shortage is so great that a lot of companies are thinking about opening offices in Eastern Europe to hire engineers outside the country. That is how serious the domestic labour shortage is. As terrible as the war in Ukraine is, I think it presents a huge opportunity to bring Ukrainian and Russian talent to Canada to help alleviate the severe labour shortage.

I think the government should take an aggressive approach and seize the opportunity to bring as many professionals from those countries to Canada as possible. They are an incredible source of talent. In fact, we are currently acquiring a company that has an engineering pool in Ukraine as we speak. We see the situation as a tremendous opportunity because Eastern Europe is home to a major pool of talent — workers who should think of Canada as a country of choice where they can build their future.

As I see it, the first thing we should be doing is bringing in new talent. Of course, training is key. A lot of companies build training programs. However, a host of measures are needed to tackle the severe labour shortage we are currently facing.

Senator Gignac: It’s a pleasure to see you again, Mr. Desmarais. Hearing that Quebec has become the country’s benchmark for business-friendly environments is music to my ears.

When I was an economist at iA Financial Group, I had the chance to hear you speak at various forums for innovation. I remember, one time, you were being interviewed by Kevin Carmichael, and you said that Canada had a bank-friendly environment. The Office of the Superintendent of Financial Institutions doesn’t have a consumer mandate. Its focus is on the soundness of financial institutions. You said the agency’s mandate differed from that of its counterparts in other countries, which had broader mandates that took the needs of consumers into account.

Could you elaborate on that idea? Your point was that it was extremely difficult for new players coming to Canada because the Office of the Superintendent of Financial Institutions was much too focused on the sound financial condition of the banks, as opposed to consumer interests.

Mr. Desmarais: My answer is simple. The agency’s mandate revolves around financial stability, not consumer protection. That has had tremendous benefits, given that we have a sound financial system and strong leaders in the sector. However, ultimately, I think innovation thrives when people are constantly questioning and rethinking what the opportunities for the economy are. Historically, when the regulator focuses on financial solvency, many small businesses that may need the agency’s help or consideration won’t get it because they don’t present a solvency risk.

[English]

They will be an afterthought.

[Translation]

The reality is that many new businesses need that contact to get more clarity on what they can and cannot do.

[English]

Senator Gignac: I have a follow-up question.

What surprised me was an example, I don’t know if it’s still the case. You mentioned when it is online deposit, you receive $100, and you can lend $60. When you go to the branch deposit $100, you can lend $90. Is this still the case, because it has a huge impact and the banking system has a huge advantage to any structure in Canada? Could you elaborate?

Mr. Desmarais: I have not looked at it recently, but it was definitely the case a little while ago. Some of the CEOs of the disrupter banks were vocal about this being very penalizing to certain types of business models. Ultimately it’s true that online deposits may move faster than branch-based deposits, but I think the economy is going that way. So if you’re going to penalize financial services that are digital — and that’s going to be a growing part of the economy — that may not be the best policy.

That said, it is true that those deposits probably have more movement to them and are less sticky, so they do come with higher risk. But I think that’s probably a counterproductive approach.

I don’t know if that was reversed, but I do know for a little while that was the case.

Senator Gignac: Thank you.

Senator Woo: Thank you, Mr. Desmarais. Could you comment on the recent announcement from President Biden on the executive order to develop a national strategy for digital assets? As you know, it covers the U.S. central bank, digital currency, financial stability, consumer protection, national security, even climate change.

My question is: How far do you think this will get in the U.S.? How will it change the game in the U.S., and more importantly, what will it mean for Canada’s efforts to develop some competitiveness in this area? Thinking about your comment earlier about the importance of clusters, is there a danger that a fast-growing, vibrant, dynamic cluster in the United States will divert talent and attention and resources from Canada to the U.S., as we’ve seen in many other technology sectors?

Mr. Desmarais: Canada is so behind here that it’s not even a question. If you are looking to do things in this space, you’d better not do them in Canada. This is going to be a big part of the future economy. It has implications across a range of sectors.

If you think of the green economy, you think of green credits from projects, having those on blockchains makes so much sense. There are so many different applications of this technology, it is going to be so transformative in a lot of different sectors. It is the place that is attracting, from my experience, the most talent. I’ve never seen a talent migration like we are seeing right now toward this sector.

This works on an hourly change pace. Every minute we’re falling behind. It’s not that we could wait a year. This is a very fast, accelerating sector, and if we don’t dramatically change our approach here, we’re going to be very surprised by what ends up happening. It’s a reinvention of the capitalist system. What people need to realize is that you may, all of a sudden, find yourself interfacing with an entity that is decentralized, that has nobody there or no counterparty. And that is a framework that I’m not sure our regulators or policy-makers are really ready or educated to think about. Dedicated resources toward the space is absolutely critical.

Senator Woo: If I could follow up, the answer to the question of what it means for Canada, the U.S. executive order is going to make this discrepancy worse and suck even more talent away from Canada. How important is it, do you think, for Canada to move faster and maybe even bite the bullet and implement a central bank digital currency?

Mr. Desmarais: I am not an expert on central banks. Mr. Dodge is probably a better expert there. I think the debate has been around would a central bank digital currency potentially create instability in the financial services system where, in the case of crisis, deposits would flock toward that entity? I don’t know what kinds of issues are with a digital currency run by the Central Bank, but I do think that a framework around stable dollars in the same way there are stable USD tokens is very valuable.

Because I think this will be an increasing way of transacting, and I think more clear frameworks around that will be very helpful.

The Chair: To follow on that for a moment, because it comes from an earlier comment. The timing on this, we have heard from people in this area that we’re going to look at these frameworks over the next three to five years. You seem to be saying the barn door is already closed.

Mr. Desmarais: It’s a little bit like the early people of North America when the conquistadors showed up. They showed up with boats and armour, and they were like, “Whoa, what is that?” I think it’s going to be the same thing that will happen. Three to five years is an eternity in this space, and what will show up on our shores is going to look very different from anything we’ve ever dealt with, and I think people are going to be scrambling.

This space is moving at a pace that is incredible. It is to the point where we are hiring dedicated people to do nothing but this in our organization, because nobody who is part time in this space is learning fast enough to keep up with the changes here.

The Chair: Is it a question of government getting out of the way? We all know it can’t move at that pace.

Mr. Desmarais: I honestly don’t know. I think getting totally out of the way is probably dangerous. There are millions of crypto accounts that have been opened in Canada in the last 18 months. Just Wealthsimple, the last year, we opened 600,000 accounts. There is a huge amount of exposure in the Canadian consumer base, and I do think there is a need for protection of these consumers. I think where it is possible there should be regulations but it can’t be someone’s part-time job.

The Chair: Depends on the regulations, yes.

Senator Ringuette: This is so very interesting. In the last 15 years, as many of my colleagues have indicated, the business community in Canada faced globalization, was looking into investing in Asia for cheap labour, and now all of a sudden this pandemic has created a new dilemma. You’ve indicated that in your earlier comments. You say that we need to re-anchor our manufacturing with technology, AI, and so forth. From your perspective, what would be two or three key federal public policies to make that happen?

Our neighbours in the U.S. are talking about Buy America, and maybe it’s a slogan that we need, but what are the two or three most important government policies to make that re‑anchoring happen in Canada?

Mr. Desmarais: I’ll stick to my understanding of the technology space here. I would say that the most important thing the Canadian government can do right now is to facilitate more access to engineers in Canada. If I look at the number one pain point we have across all of our companies, it is access to talent.

The feedback we’re getting from a lot of the visa systems is that even though they guarantee two-week access, it’s taking three months. Ultimately, more access to talent is, I would say, probably the number one, two, and three things that need to happen.

We’re very much on the cutting edge of this in the technology space, but we’re hearing the same thing across all sectors. Talent, talent, talent, and getting more people into jobs in Canada is really important. Figuring out immigration and streamlining immigration and attracting people is probably the most important thing. Because all of a sudden — it’s as one of the other senators said — if we have an amazing, available workforce, between our proximity to the United States and with our kind of openness to international labour and with our cheap energy, we will be very competitive.

The other thing I would make sure we do is make sure we keep our cheap energy advantage and not give that up through self-inflicted policies.

Senator Marshall: I think after we got warmed up here during the meeting that some of the comments were very interesting.

I find what you’re saying very discouraging. I know you’ve highlighted there are certain areas we can look at, for example, immigration and attracting talent. But I feel like, based on your discussions that the problems within the country are so pervasive that even to try to solve that area with regard to attracting talent to the country, you have to depend on the immigration system and you have to depend on even our taxation system.

Do you think there is really any signs there for optimism? I feel, after hearing your discussion, almost that there is no hope, that the system is so pervasive, the problems are so pervasive, and the government moves so slow. Even if you take your comments about the open banking, we’ve waited so long and talked so much about open banking, we can’t even seem to get that off the ground.

Do you really see any signs for optimism with regard to the country and the country moving forward? You sort of looked at it in something here, something there, and something elsewhere, but when you step back and look at it, it’s very discouraging. It’s almost overwhelming, the problems.

Do you feel there is a sign there for hope?

Mr. Desmarais: I’m an optimistic person. A few years ago in a speech I said I think Canada is one of the only places in the world where the American dream is still alive. I think there are tremendous things in Canada’s favour. Canada remains today a place where you can move here as an immigrant, come up with an idea, and then you can meet an investor like Portage Ventures who will finance your business, and all of a sudden you will be the CEO of a leading fintec in the country. That is the true dream, and there is an incredible fabric in Canada that makes that possible.

Senator Marshall: But that’s a dream. We look at it, and we see Canadian companies trying to push forward into the U.S. So we talk about the Canadian dream, but is this the land of broken dreams?

Mr. Desmarais: I see those dreams happen and turn into reality every day in my business. Look at Cherif Habib — CEO of Dialogue — who is of Egyptian descent and now the CEO of the largest telemedicine company in the country. These dreams happen all the time. There is just not as much of a celebration in Canada of that entrepreneurial culture.

If there could be more celebration of that entrepreneurial culture, that would be great. I think that celebration of entrepreneurial culture very much exists in Quebec. I think the Quebec government is the most business-friendly government in Canada today. People should look at what they’re doing and emulate, because every day I wake up, and I am like, “How can I invest more in my province?” Things are happening. There is positivity. The economy in Montréal is doing better than it’s done in a very long time, and that’s partly because there is a lot of clear messaging. I think that messaging, if that could be done across the country, I think it would be very positive.

Senator Marshall: Live in hope, I say. Thank you.

The Chair: We need to cheer it on, but we also need to fund it on. That is part of what you’re doing.

Senator C. Deacon: Thank you, Mr. Desmarais, for being here. It is a real pleasure to hear your insights.

I want to look at other ways in which government can cause business growth, productivity growth and investment growth in this country. I want to specifically look at procurement as a tool, not just for helping businesses to grow but also to drive innovation in government. We had a presentation about two weeks ago where we heard from a Toronto blockchain company that is instituting a solution to the excise tax office in Australia and growing their business like crazy in Australia. But it’s a Toronto-based company that doesn’t do any business in Canada in that regard, and that drives me bonkers. I look at it as an opportunity where the government could say, we have a problem here — private sector innovators, can you come up with a better solution? Rather than buying from multinationals like in the past, investing in Canadian innovation. That helps regulators to understand the risks better than they do today so we have more streamlined regulation and business growth in Canada. Could you speak about that from your standpoint as an investor?

Mr. Desmarais: Senator Deacon, that is a great question. The story you heard about this Toronto-based company would probably be the norm in business-to-business innovative companies. There is a strong hesitancy in Canadian corporates to adopt cutting-edge technologies. But I think that is changing. In the five years that we have been building Portage, we have definitely seen an improvement there.

The challenge is that there is an innate fear of failure. In a Canadian corporate, or in many corporates for that matter, if you take a risk and it works out, you don’t necessarily get promoted or a higher salary, you’re basically given a pat on the back. If you take a risk and it doesn’t work out, you potentially get fired. The risk return of these types of procurement risks are skewed toward not taking any risk in many of these corporates, layered on the fact that the sectors not necessarily competitive with each other because most industry sectors are concentrated. There is very little incentive. Whereas in the U.S., every company is competing like crazy. So as a result, you’re always trying to get that additional edge on your competitor. The odds of you being willing to take on that little bit more of a risk is greater.

I would say the other thing is the U.S. fabric of the economy, especially in financial services, is made up of tons of utility players. Because it’s super competitive, everybody has had to outsource non-core functions and really focus on what they do best. In Canada, a lot of the companies are very much vertically integrated. So as a result, choosing to do business with a new innovative person could be disrupting a core part of the business they’ve used historically. The incentives are challenging, but the challenge you made is great.

There are simple things to do when it comes to procurement policy. Some procurement policies we’ve seen say, we will not do business with a company that cannot provide three years of financial statements. Just that basically kills innovators. One way to do it at the government level would be to say that any requirement for long-term financial statements should be done away with.

Another way to encourage procurement and innovation is probably to mandate things around diverse procurement. Because the reality is that a lot of the established companies are not run by diverse groups. By mandating a certain amount of procurement coming from certain diverse groups, you might actually accelerate the pace of adoption of innovative solutions simply because a lot of those companies are younger.

Senator C. Deacon: That’s a really good answer. Thank you for taking the time on that.

The Chair: One final thought on the issue of fear of failure and risk adverseness that you talked about. That is corporately, but that message also comes down from government, regulators and traditional institutions like banks. So the change has to happen there as well.

Mr. Desmarais: Absolutely. Our group’s taken huge risks there. When you think about our building of Wealthsimple, that was a $300 million investment. If you look at the adoption of Dialogue as a telemedicine platform, Sun Life and Canada Life took an incredible risk saying, in a pandemic, we will roll this out to all our clients. That was transformational for Dialogue, and it allowed Dialogue to go public. It was transformational. What is interesting is that, in many ways, without the pandemic, that wouldn’t have happened. There are catalysts that end up happening that facilitate these decisions, but ultimately I think being open-minded on this is really important. Often the RFP process has so many things in it that are anti-innovation that don’t make sense. I mean, sometimes things require a paper signature. In certain account types in banks, as of two years ago, you required a fax.

The Chair: Somebody told me that the other day, that they would only take the information by fax. I thought, even for me, this was a step backwards.

Thank you so very much for your conversation and your contributions tonight. It has been really helpful to where we’re headed with our reports and we’re truly appreciative. Thank you so much.

Mr. Desmarais: Thank you so much, senators.

The Chair: Paul Desmarais III with lots of thoughts on this.

We will begin our second panel with David A. Dodge, currently a Senior Advisor, Bennett Jones LLP, but you will know him over the years as the former governor of the Bank of Canada and a long-time veteran of the federal Finance Department as a deputy there, and someone who regularly comments on — I’m looking at an article, “David Dodge’s big issue with the budget isn’t debt, but lack of growth.” That is exactly one of the issues we want to discuss with you tonight. Welcome. Thank you for being here.

David A. Dodge, Senior Advisor, Bennett Jones LLP, and former governor, Bank of Canada, as an individual: Thank you very much, senator, it’s nice to be with you tonight, if only virtually, to talk about business investment in Canada and what we need to do to get growth going. I’ve prepared a couple of opening words, but they’re just that, to help get the discussion started.

I’d start by saying that, despite the current geopolitical and global economic uncertainties, one thing is really clear. That is, in order to raise or even just maintain our real incomes in Canada in the decades ahead, non-residential investment by business here in Canada must grow. It must grow rapidly and it must grow much faster than the growth of the economy as a whole.

This is a tall order and, to achieve it, government policies, federal, provincial and local, must be geared to support that increase. Why? Because raising real incomes depends on raising productivity of our labour force, and productivity increase depends in turn on raising the quantity and quality of capital that workers have at their disposal. That, in turn, depends critically on raising the capital output ratio through investment.

As you all know, that’s basic economics. Unfortunately, though, our starting point at the moment with respect to productivity and investment and the capital output ratio is not good. Since the great financial crisis, and particularly since 2015, we’ve had a miserable record of low levels of investment, weak productivity growth, both of which are well below most of our G7 counterparts and many of our OECD countries. In particular from 2016 to 2019, our non-residential investment, as a share of national income, was less than 15%. During the COVID years, it dropped to an estimated 14%, the lowest in history. Both were well below Canada’s own long-term leverage of about 15.5% and well below international levels.

These low levels have left Canadian industry with deficient capital stock and, consequently, a low capital to labour ratio by international standards, weak productivity and low future potential growth.

That’s where we’re starting from. Even though global political and economic turmoil makes short-term conditions appear uncertain and unfavourable for investment, a medium- and long-term perspective makes it absolutely clear that there is no scenario for sustainable growth in Canada that does not require an extraordinarily rapid and durable ramp-up of investment by business and complementary action by governments.

After years of public and private investment below international norms and well below our own historical average, Canada’s share of GDP, as I said, fell to an historic low of 14% during the COVID period. We have to raise that, at least as a first start, back to our long-term average of 15.5%.

But to provide the capital deepening necessary to grow the economy in a period of population aging and rapid technological change requires re-establishing our non-residential investment closer to our long-term average. The pursuit of ambitious climate targets necessitates massive added investment, not only to replace and renew the stock of capital for the decarbonization of economic activity but to build the energy infrastructure and ecosystem for Canada to compete in a low-carbon global economy.

Investment in this context includes not only structures, machinery and equipment but, very importantly, Madam Chair, the other drivers of innovation and productivity: R&D, software and intellectual property.

Drawing on the work of the International Energy Agency and work done by researchers at the Royal Bank, my colleagues at Bennett Jones and I have judged that this requires at least an added flow of investment of about 1.5% of GDP. Given the long lead times for planning and execution of large capital projects, decisions have to be taken early, and investment has to ramp up as sharply as the economy can absorb.

To bring non-residential investment to about 17% of GDP by 2030 requires growing investment considerably faster than the overall economy and subsequently increasing investment at roughly the rate of GDP growth.

By way of illustration, Madam Chair, lifting investment to 17% of GDP in 2021, at the GDP levels we had in 2021, would represent an added outlay of something like $80 billion, and that will grow over the next few years.

These numbers, I hasten to add, are indicative only, but they do illustrate the dimensions of the challenge ahead for all of us.

The Chair: Thank you so much for laying that out. We have a very long list of questioners tonight. I again ask people to keep their preambles to their questions brief, and we can concentrate on getting some answers from Mr. Dodge. So glad to have you here.

Senator C. Deacon: Thank you, Mr. Dodge, for being with us. It is nice to see you again, and we are grateful for your taking the time.

When we look at the G7, Canada’s household investments and business investment are almost identical, and we have the highest amount of government investment of any G7 country, whereas household investment is half of the business investment in any other G7 countries. The point that you make is really important.

Given the challenges that we will have fiscally with managing a high level of government debt — and you have some experience in this — and the effect of that on government expenditures in certain areas, I’m looking to options that will cause greater certainty and encourage business to want to invest more consistently in growing their opportunities within Canada and globally.

I wanted you to speak to the regulatory environment that we have in Canada which, in my mind, too often precludes or blocks innovation from occurring within sectors. We have a high level of red tape within many sectors, which can be anti-competitive. I’m not saying to deregulate; I’m just saying we should make sure that our regulations constantly allow for innovation.

Can you speak to that side of things and its importance relative to the really big challenge that you say you see in front of us and with which many of us agree?

Mr. Dodge: Senator, every business has tremendous challenge dealing with the economic uncertainties that are out there. When government rules and regulations and processes pile uncertainties on top of the uncertainties that firms have to face in the normal course of events, that is not helpful in attracting investment to Canada.

Given those problems and uncertainties, investors, whether domestic or foreign, will look to go where they understand the economic uncertainties and how to deal with those — they understand those in the Canadian context — but they will go where they don’t have to contend with a changing and unpredictable regulatory environment.

Business can deal with tough rules, well-defined rules, that are consistent, that are not changing over time and where they have confidence that those rules will not change over time. Then they can lay out an investment pattern for the future, knowing that they will comply with the rules as they are set up at the time they make those initial decisions to invest.

Senator, it is very important. It is not the toughness of the rules. It is the consistency and predictability of those rules that are really important.

The Chair: That is great. Thank you. I think we’ll try to do a quick round here and then come back.

Senator C. Deacon: Thank you, chair.

The Chair: Yes, again, so just keep preambles short and we’ll cover as much ground as we can.

Senator Massicotte: Yes, thank you, Mr. Dodge, for being with us here today. It is much appreciated.

We understand all of the numbers that you gave us. It makes the point that we are in a hole. We have a serious situation. But could you make it simpler for me?

If you were still the governor or deputy minister of Finance, what are the two things that you would do tomorrow morning to get us out of this mess?

Mr. Dodge: I don’t think it is simple. That is the problem, senator. I think that we have to work on all fronts.

Obviously, tax policy which would favour investment out of retained earnings is really very important; labour policy, which facilitates investments in new skills; trade policy designed to reduce the costs of barriers, both internationally and interprovincially, all of those are really important.

In the sector I’ve recently been working in, we need financial sector policy which facilitates competition but improves the digitalization of financial flows. We’re a long way behind in this country in that regard, and better supports, access to capital.

So I don’t think there’s one thing to which I would add — fiscal policies which facilitate domestic innovation. All of those are important.

But pertaining to the last item, senator, essentially the objective of fiscal policy should be to encourage investment and, I will be blunt, at the cost of current consumption. That is very tough for governments to do. Just as it is tough for a business to hold back distribution of earnings to shareholders and reinvest it to have growth in the future. But, on the fiscal policy side, that is probably the key.

If we borrow money for real investment, that is one thing. If we borrow money to facilitate current consumption, then that is not helpful.

The Chair: That is very frank. Thank you for that.

Senator Smith: Thank you, Mr. Dodge, for being with us. Following up on Senator Massicotte’s question, I have one simple question: If you are in the position to create a key initiative, what key initiative will maybe start a movement forward to get Canada in a position that it’s a great place to do business?

Mr. Dodge: Yes. I think what is really important for someone like me who has been in government for a long time is to appreciate that the real initiatives are going to come from individual businesses and entrepreneurs. That is what is going to drive innovations and growth.

In some sense, our job in government is to facilitate those folks in coming forward with those investments. How can you facilitate? Well, we know from observations around the world that building ecosystems for particular groups of industries or for even fairly narrow groups are quite important. Building production sources, not just invention ecosystems, is really important.

Government working with industry can build those. So it is not what the government does, but it is government acting as a partner with business to create those ecosystems on which other entrepreneurs can then build.

The Chair: Thank you for that.

Senator Gignac: Thank you, Madam Chair. Nice to see you again, former deputy governor.

So let’s talk about red tape and the regulation.

In Canada it takes in general 250 days to get a permit for a general construction project. It is three times longer than the U.S. As a matter of fact, now Canada is ranked number 34 in 35 OECD countries for the delay in terms of construction permits. It has deteriorated in the last six years.

My question is: In this underinvestment in Canada compared to the U.S., from 0 to 10 how important is this regulation, red tape, associated with new projects?

Mr. Dodge: Well, from my experience, there is no country in the world where businesses will not complain about, quote, “red tape.” The nature of regulation is that it does provide constraints, and does so for what we have collectively determined are important reasons. That is absolutely the case.

Red tape or process delays or process complexities — I would much rather call it process complexity — it is a problem everywhere. It is a problem at the municipal level, particularly in respect to housing and approval there.

It is a problem at the provincial level. And it is a problem at the federal level. It is something that we, in government, as public servants, as ministers, really have to continue to work on and to remember that the perfect is very often the enemy of the good. And so it is important to move quickly and decisively. But then not to change. Because it is the change that is most difficult and cannot be contemplated and factored in at the time when it is making an investment.

The Chair: Excellent point. Thank you for that.

Senator Loffreda: Thank you, Madam Chair, and to Mr. Dodge for being here.

To what extent does concentration of wealth in real estate among Canadians affect business investment in Canada?

I would like to elaborate on that. You were governor of the Bank of Canada from 2001 to 2008, and the housing market started to rise in the 2000s, but really took off in 2010 after your departure.

We all heard and are aware of the issues that caused it: supply, low interest rates, foreign investment and more. How should we make housing affordable for all Canadians? Should the government prioritize supply, monetary policy, fiscal policy, all of the above? What is the solution to housing affordability, and how do you see that affecting domestic business investment which is a challenge in Canada?

Thank you.

Mr. Dodge: Let me take that in two parts.

One, the general issue of supply. We live in a world that is increasingly supply constrained. For a long period of time, certainly up to and including this century, up to 2019, generally speaking, we faced excess supply, deficient demand. That was generally a problem.

That is not the issue today. Supply constraints are the issue, whether it is in housing, the production of goods or the production of services. So, yes, supply constraints are indeed binding. In the housing area, they are particularly binding, given the rate of growth of our population and given the fact that much of that population growth is occurring in just four or five metropolitan areas of the country.

The answer is that, in part, prices will rise to encourage developers to move in, but the real answer is that municipalities have to remove, with difficulty, restrictions which inhibit the real densification of urban areas and the building of new units at reasonable prices — not low but at reasonable prices.

The Chair: Thank you for that.

Senator Woo: It is nice to see you again, Mr. Dodge. Thank you for appearing.

I want to pick up on your point about the low capital output performance and ask you this two-part question. First, do you think we also have a productivity-of-capital problem, in other words, a poor icor problem, not just a capital output problem and why that might be the case?

Second, I am thinking about what produces investment. You’ve already mentioned it; it is savings that are transformed into investment. Savings can be domestic or foreign savings. It seems to me that we don’t really have a savings problem. There is a surplus of liquidity sloshing around the global economy, including in Canada.

Can you talk about whether there are intermediation problems that are causing the lack of investment in Canada and whether these intermediation problems are at the banking level or at the level of corporations — who are choosing to hold cash because it is a better way for them to reward their shareholders, perhaps — and get a little bit behind this conundrum of savings not being able to translate into investment?

Mr. Dodge: You are absolutely correct that, in recent years, we have had very high savings. We had high savings at the household level during COVID. We have had high savings in industry. In those industries which are highly concentrated, concentration tends to push up business savings over the demand for business investment.

That’s been a problem that has existed not just for us, but it has existed essentially in the OECD world. Government has historically tried to mitigate the problem by creating demand by dissaving themselves, right?

That situation today, in part because of COVID, is changing. It might change much more quickly, spurred by the geopolitical situation that we have at the moment, which is breaking down the international trade order, which we have built painfully since the GATT meeting in Havana in 1947.

Today, when I look out and when central bankers look out, they see supply constraints as the main problem that we’re facing. The supply constraints are leading to price increases. While central banks can raise interest rates to cut off demand — both investment demand and consumer demand, unfortunately — as those interest rates go up — to rebalance demand with the highly constrained supply.

Releasing more supply here in Canada and around the world, we have to turn to government structural policy in order to do that. Those structural policies are difficult. They are painful. They require careful and well-designed legislation.

But we know what some of them are, in order to release it. And that’s why I go back to a couple of things I mentioned earlier. On the regulatory side, clear, simple — never simple but clear and straightforward regulations. Not changing regulations is important.

On the fiscal side, if you think of the tax system, the issue is not the effective statutory rate that is so important in terms of investment. We’ve operated many years with much higher statutory rates, but the reward, if you will, needs to come to companies that reinvest.

Within the tax system, whether it is a change in the CCA structure, whether it is general tax credit operations, is really quite important. Now, that’s a tax issue. Then we have labour market issues to work through, which are very important.

It is very important that we stop discouraging our older workers from staying in by having very high, effective tax rates on lower-income workers through our transfer system.

There are a lot of issues. I think I should stop at that point.

The Chair: We will leave it at that. I have got a long list here, so we will move on. Thank you, Mr. Dodge.

Senator Marshall: Thank you, Mr. Dodge, for being here. Very interesting.

You were saying earlier, that to encourage investment there will not be just one thing to focus on. There is really a multitude of things. You are talking about labour. We’re talking about regulations and the tax system, and on it goes.

Looking at the government spending side, can you just relate the two? We thought, during COVID, that expenditures were going up but that they would come back down again. But they are not. They are continuing to accelerate. Now we have the relationship between the New Democratic Party and the Liberals. If you look at the commitments that the government is focusing on, there is even more spending, more consumption.

Can you just relate the two? If companies are not investing and changes are not being made for businesses to thrive, and yet we’re spending all of this money on the other side, where will we be two or three or four or five years down the road? Where are we going? What is going to happen? I don’t see these changes that you are talking about, this multitude of changes, happening overnight, but the spending is happening overnight. There is a great momentum for spending. Can you just match those two issues together?

Mr. Dodge: Governments spend on many things. The real issue that we’re talking about here today and what is really important is that, to the extent they have capacity to spend and, more particularly, to the extent they have capacity to borrow, then that needs to be directed at investments that will raise productivity in the future.

We have to be very honest with ourselves. That comes at the cost of supporting current consumption, whether it’s consumption of public goods or consumption of private goods through income redistribution. That is the very difficult task of governing, to make that choice.

Our problem in looking forward is if we want our children, or in my case my grandchildren, to have the opportunities that we have had, then we have to refrain a bit from our current spending on current services for people like me and invest more and encourage firms to invest more that will produce output in the future.

There was the old phrase “short-term pain for long-term gain.” That is an awful phrase, but it is actually true. I think it is appropriate to think about it that way. As we march forward over the rest of this decade, especially as we’re trying to deal with technological change, an aging society and climate change, it’s important that 10 years hence, we leave ourselves in a position where we are still growing and still enjoying an improved quality of life.

The Chair: You’ve said twice, Mr. Dodge, that there has to be some tough medicine here, that there has to be some cuts. Where do you think government should turn? Give us two quick examples and then we’ll carry on.

Mr. Dodge: We should continue investing. We should be willing to forego revenues by providing favourable tax treatment for investment and for the reinvestment of retained earnings in particular. Those are the two areas.

I would say that people like me or those who were born in the period just after the war, we were fortunate to be born at the time we were born. In thinking about it, it is appropriate that we pay for the services that we use today and not use the borrowing power of government to pay for our services, but, rather, use the borrowing power of government to make the investments that are going to make life better in the 2030s.

The Chair: We will see if any government wants to take that one on.

Senator Marshall: There is a big mismatch there between what we’re going to have to pay in the future and not generating enough to keep us going. Thank you.

[Translation]

Senator Bellemare: Good afternoon, Mr. Dodge. How nice to see you again. I want to come back to the idea of investing in the labour force.

You said that labour was an important issue when it came to greater public investment. Don’t you think, then, that if governments invested more, through personal training accounts, for instance — we’re getting into public policy territory, here — our investment in skills development would in turn stimulate private investment? I’d like you to comment on the correlation between private investment and investment in training.

[English]

Mr. Dodge: Senator, training or education is really a tripartite responsibility. In part, it’s the responsibility of individuals to train and retrain. In part, it’s our collective responsibility to provide individuals that opportunity. Finally, it’s very important that business itself play a role in that process.

Part of our problem is — as a former academic, I think I can say this — we have divided the world into two parts: what we’re going to do in the walls of academia and what is done on the top floor, and there was very little meeting between the two. We’re doing somewhat better now than we were 30 or 40 years ago when I was a teacher, but nevertheless, it is a combined effort that brings it together.

The idea of having personal training accounts, or whatever you want to call it, where individuals build over time the ability to take time off to go back to school or to bring the classroom to the shop floor, which is a joint effort of the workers and the employer, is extraordinarily important. It’s even more important today than it was 30 or 40 years ago because of the speed of change.

There is a lot we can do better, undoubtedly, but it is a combined effort of individuals and us collectively as a society, through government and employers, to work together on that.

Senator Bellemare: Thank you. We can’t talk too much about social dialogue. That is key to the issue.

Senator Yussuff: Mr. Dodge, it is good to see you again. Thank you for participating with us here today.

You mentioned two areas that I’m curious about, and maybe you could share more of your thoughts. Climate change is a real challenge going forward, not only for us but for the whole world. We all have to figure out how to be innovative and at the same time creative in the context of opportunities provided to our country to grow its economy but also deal with the challenges going forward.

The second issue, of course, is an aging population. Unfortunately, as you look at the screen in front of you, we can’t escape this reality even among ourselves here today. This problem is not going to get better but worse. Equally so, there is untapped talent there that can still contribute enormously to the economy in supporting young people, mentoring them, and equally having transferable skills that are badly needed in the economy.

How can we match these two challenges the country is facing? Other countries are also struggling with the same reality. Our European friends have had a greater challenge on the aging front, but we certainly have an opportunity to learn from their experience. Maybe you could share your thoughts on that.

Mr. Dodge: We have an opportunity here. For a long time, we’ve had a de facto retirement age set somewhere in the mid-60s or upper 60s, and all of our system has been geared historically toward that. The 65-year-old to 75-year-old “retired worker” is an enormous source of additional productivity if we as employers figure out ways — and it’s not just wages but the organization — to make maximum use of those skills. We have not worked very hard on this historically, largely because historically we’ve had a large supply of young workers. That is over and we’ve been relying more on immigration than young workers. But we have still not worked very hard to integrate — let me call it the older worker — back into the labour force. That has changed. It means doing things differently. It means accepting that skills learned on the job without formal credentials are extraordinarily useful in other capacities later in life.

This is an enormous challenge for us, and it is a collective challenge. Again, it’s not something that big G government can orchestrate, but it is certainly something that government can support.

The Chair: Thank you for that answer. We’re going to go to the second round here. Again, we’ll try and be quick.

Senator C. Deacon: Mr. Dodge, I’m going to go out on a very thin limb here and ask you about a point of friction in your comments. That point of friction is the need for regulatory certainty to encourage business investment and the realities of the changing world and changing dynamics around us. You and I have spoken about digital identity and data portability, the huge importance of starting to get control over your own data. That changes business models, changing technologies and blockchain technologies that are highly disintermediating in an economy potentially.

We’re going to be in a period of climate change that Senator Yussuff just spoke about. We’re going to have to be changing regulations. How do we bring certainty that encourages investment needed to grow through this period where we won’t have necessarily regulatory certainty, but we might be able to lay down a direction that gives certainty or a way of giving certainty? Can you just speak to that a little bit? Thank you.

Mr. Dodge: There are two issues here. One suggestion, of course, is what has been called light-touch regulation. You basically set a series of regulatory principles out and you allow the system to work. When it’s quite clear that those basic principles are not working because of technological change — and that happens, a good example is the financial sector — then you do have to be willing to move.

But one of the most important things and the hardest lesson we have to learn is not to be overly ambitious with the detail of our regulation, to be willing to allow some activity that we really are not totally fond of perhaps collectively, but allow that to happen. That’s the degree of flexibility that is required.

To avoid having to go back time and time again to rewrite regulations, or for Parliament to have to go back in time and time again to rework an act — I mean, I spent a long time in the income tax field and we did that every year. We had to adapt. But if you try not to do too much, to overreach in the degree of fine tuning that you think you can achieve, then senator, you can avoid a fair bit of the rewriting of rules by not writing such definite rules in the first place.

The Chair: I think that the phrase “the light touch regulation” is a good thing. Thank you.

Senator Massicotte: I want to clarify a couple of things. I think your position was clear what needs to get done, and your tone of voice was suggesting this is urgent and we need to get on with it.

When you read Stephen Poloz’s book — and he was a witness at this committee — and as well the comments from the current Minister of Finance, they don’t share your sense of urgency and they thought things were going pretty well during COVID when productivity and investment may be increased. How do you square the two? There is a disagreement of what is seen there, but most of it is fact. What are your thoughts on those differences?

Mr. Dodge: First of all, the one thing we know — and we’re experiencing it right now and we’ll experience it next year and probably well into 2023 — is the first impact of unexpected inflation that occurs is to raise revenues quite dramatically for governments, give them room to manœuvre number one.

Number two, that there is a degree of illusion out there, and the losers for a little while don’t feel the real income loss, but after a while they do. When they start to push back as they are in a supply-contained world that we’re in, they can push back very strongly, then indeed we end with a serious problem. To use old-fashioned words, the Central Bank is going to have to step in and take away the punch bowl, which can create side effects that are totally unhelpful.

That’s what I would say. If we fail to make the investments now, when we have the opportunity, if we fail to capitalize on the increased revenues that our natural resources firms have to make new investments, but rather dissipate those through distributions to stockholders, and if governments dissipate their windfall gains that have come through the higher resources prices — because as Canadians, as resource producers, we are better off — but if we dissipate those in current consumption, then we really do have a problem. We will have missed an opportunity that is presented to us today to use those additional revenues, to make additional investments without having to cut back, if you will, as much on current consumption.

The world is uncertain. You will have heard from Mr. Poloz how uncertain it is in his testimony and from his book. And you have to be willing to live with those uncertainties. But you certainly have to hedge against the risks. And the biggest hedge against the risks going forward is to make those investments now rather than to dissipate it through current consumption.

The Chair: Thank you very much for that clear answer.

Senator Woo: Mr. Dodge, you’re the kind of national economic icon that people will attribute to you their own interpretations of what they want to hear which may or may not be what you’ve said. I think you’ve encountered this before. I’m going to try to get your clear understanding of your view on a number of these issues.

What I’m hearing is you’re not worried about government spending as such. You’re not worried about the sustainability of government spending insofar as government spending is focused on investing in the future and able to generate returns that will produce wealth for the future. By definition, investment generates productivity growth —

Mr. Dodge: And higher government revenue.

Senator Woo: And higher government revenue. It’s a virtual cycle. It’s not what a lot of people seem to be thinking you are saying, but I’m going to put those words in your mouth.

The real question is: What qualifies as productive government investment? Because we still have a very high share in non-residential investment. It’s taken up by government investment as opposed to private sector investment, and you seem to be favourably disposed to that in general. What would you consider to be good government investment spending? It’s racking up the debt; there is no question about it. I think it falls in your category of what we should be doing. Tell us what those things are.

Mr. Dodge: Well, as I said — and I hope I said it clearly — I think within the revenue system we need quite a different bias in our revenue system; i.e., we ought to have a bias that actively encourages reinvestment and taxes at a reasonable rate those earnings that are not reinvested. That is probably the simplest one to do.

The labour force, though, is one that we talked about earlier. Those investments are really, really quite important and allow people to move around and have less wasted time, but also to encourage them to participate fully. That’s extraordinarily important, especially older workers. It is reasonable to classify that as an investment.

But in education, whether it’s at the university level or any other level, there is also a certain consumption element to that. One has to be careful in thinking about it as to what in that component is investment.

If we move to another area that’s so critical for governments, and that’s health services, again, investment in people there is very important. We have, for whatever reason, for at least 25 years failed to efficiently move information through the health system, whether it’s electronic health records or whether it’s other forms of information through the system. There are capital investments there that are not only in physical capital but in intellectual capital as well that are really important.

You’re right, senator. There is no right line that separates consumption from investment. In many things there is a mix of both, and the higher the consumption mix, the easier it is to do the spending. The higher the investment mix, the tougher it is. That is sort of where we are, and those are the judgments that you, as parliamentarians, have to make.

I took the easy route of setting out the principles, the light-touch way of doing things, but as legislators you have the hard work of making those decisions, of defining the right line, if you will, between what is really valuable and will be valuable 20 years hence from that which is nice today but gone tomorrow.

Senator Gignac: Let’s talk about U.S.-Canada competitiveness and the federal government climate change policies. The carbon tax will increase next month, and they have a path to increase in a significant way in the next ten years. Is it a risk that if we move, and the U.S. does not move, that puts Canada into a more difficult situation? Not to mention that will contribute to accelerating inflation. I’m just curious to hear you about that.

Mr. Dodge: Yes, that absolutely is a risk. While I’m a very strong proponent of a very simple, straightforward carbon tax rather than a lot of detailed rules as being the right way to go, the downside of the lack of simplicity of a carbon tax comes at the border.

If we are going to move forward, just as the Europeans have moved forward in this, then we have to devise appropriate border adjustments and make those work. That is well within the realm of “do ability,” let me put it that way. It requires a lot of arguments and so on. Nevertheless, it is well within the range of “do ability,” so I don’t think we should allow worries about the border to stop us from using this rather simple and rather effective mechanism to guide private sector investment going forward. I think we should use it but recognize that we will have to work hard on those border-adjustment measures, especially in some of the heavy industries like steel and cement and so on where it is very difficult. Let’s be blunt. It is not so difficult with gasoline. It is very difficult when you get to steel and cement.

The Chair: I feel we can’t have a former governor of the Bank of Canada here without getting your opinion, as we head toward a budget, about what you think about the issue of guardrails — which we seem to have blown through — and whether we need to revert to some fiscal anchor so while you’re doing the investment and the good spending, as you put it, we’re also having some other constraint around that.

Mr. Dodge: Madam Chair, I think that’s critical, because the inflation problem that we have is not just a problem for the Bank of Canada; it is a problem for the Government of Canada and provincial governments as well.

What we have at the moment is a supply-constrained world, supply constraints here in Canada, whether that be labour markets, goods, computer chips, you name it, we have these supply constraints, which are driving up prices.

Over time we can deal with some of those supply constraints. We can ease them through investment. Investment, very importantly, will ease those constraints in the longer run, but not in the shorter run.

In the shorter run, all that the Bank of Canada can do and all the Minister of Finance can do is try to tamp down demand in order to try to match a little bit better this constrained supply.

This is not a problem, Madam Chair, that we are used to having. This was the problem that I grew up with in the 1970s, and we’ve forgotten all about it. We are now in a supply‑constrained world, and we’re going to have to work to tamp down demand, at least in the short run, to avoid the sort of inflation problems we got into earlier.

The Chair: Mr. Dodge, I’ve got to stop you there, but thank you so much for ending us on that note and keeping us focused on the new world we’re in.

David Dodge, of course, former governor of the Bank of Canada, now a Senior Advisor at Bennett Jones and a long-time participant in this debate in our country.

Thank you so much for your time tonight.

(The committee adjourned.)