EVIDENCE Standing Committee on Finance NUMBER 023 1st SESSION 41st PARLIAMENT Tuesday, November 1, 2011 Le mardi er novembre Standing Committee on Finance CANADA [Recorded by Electronic Apparatus] EVIDENCE November 1, 2011 Committee Edited Evidence * Table of Contents * Number 023 (Official Version) Official Report * Table of Contents * Number 023 (Official Version) Témoignages * Table des matières * Numéro 023 (Version officielle) 23 01 11 2011 2011/11/01 10:00:00 House of Commons Comité permanent des finances Standing Committee on Finance FINA Chair Mr. James Rajotte 41 1 (1000) [ English ] The Chair (Mr.

James Rajotte (Edmonton—Leduc, CPC)) : I call this meeting to order. I'll just let our friends in the media sort themselves out. For the information of colleagues, there are two cameras here, and they are properly recording the meeting for, I believe, CTV, Global, and CBC. I just want to make everyone aware of that. Again, it is a pleasure to welcome the Governor of the Bank of Canada, Mark Carney, and the Senior Deputy Governor, Tiff Macklem. It's for the governor's bi-annual report to the finance committee. It's always a pleasure to have the governor and the senior deputy governor here.

You were last with us in August, before going to India. We had a very interesting discussion at that time, and we look forward to your comments today on the Bank of Canada's monetary policy report and on all of the recent goings on in the global economy. Mr. Carney, I'll let you begin with your opening statement. Welcome to the committee, and thank you for coming. [ Technical difficulty--Editor ] (1000)

(1005) The Chair : I call this meeting back to order, the second time lucky, I hope. Again, it's a real pleasure to welcome the Governor of the Bank of Canada, Mr. Carney, and the Senior Deputy Governor, Tiff Macklem, pursuant to Standing Order 108(2), for our study of the report of the Bank of Canada on monetary policy. Mr. Carney, and Mr. Macklem, we welcome you here look forward to your statement and responses to our questions as members. Thank you so much for being here with us today. Mr. Mark Carney (Governor, Bank of Canada) : Thank you very much, Chair, and good morning, members.

Tiff and I are very pleased to be with you this morning to discuss our October monetary policy report, which we published last week. The global economy has slowed markedly, as several downside risks to the projection that we outlined in our July MPR have been realized. Volatility has increased, and there's been a generalized retrenchment from risk taking across financial markets. The combination of ongoing deleveraging by banks and households, increased fiscal austerity, and declining confidence is expected to restrain growth across the advanced economies.

The bank now expects that the euro area, where these dynamics are most acute, will experience a brief recession. The bank's base-case scenario, nonetheless, assumes that the euro area crisis will be contained, although this assumption is clearly subject to downside risk. We welcome the agreement announced last week by euro area leaders on a comprehensive plan to address the ongoing challenges in Europe.

We look forward to additional details on the modalities of the various measures announced, and to their implementation in the coming weeks. [ Translation ] In the United States, real GDP growth is expected be weak through the first half of 2012, reflecting diminished household confidence, tighter financial conditions and increased fiscal drag. Growth in China and other emerging-market economies is projected to moderate to a more sustainable pace. These developments, combined with recent declines in commodity prices, are expected to dampen global inflationary pressures.

The outlook for the Canadian economy has weakened since July, with the significantly less-favourable external environment affecting Canada through financial, confidence and trade channels.

Although Canadian growth rebounded in the third quarter with the unwinding of temporary factors, underlying economic momentum has slowed and is expected to remain modest through the middle of 2012. [ English ] It is projected that household expenditures in Canada will grow relatively modestly, as lower commodity prices and heightened volatility in financial markets weigh on the incomes, wealth, and confidence of Canadian households.

Business fixed investment is still expected to grow solidly in response to very stimulative financial conditions and heightened competitive pressures, although it will be dampened by the weaker and more uncertain global economic environment. Net exports are expected to remain a source of weakness, owing to sluggish foreign demand and the ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

Overall, the bank expects that growth in Canada will be slow through mid-2012 before picking up as the global economic environment improves, uncertainty dissipates, and confidence increases. [ Translation ] The weaker economic outlook implies greater and more persistent economic slack than previously anticipated. The Canadian economy is now expected to return to full capacity by the end of 2013. As a result, core inflation is expected to be slightly softer than previously expected, declining through before returning to 2% by the end of 2013.

The projection for total CPI inflation has also been revised down, reflecting the recent reversal of earlier sharp increases in world energy prices, as well as modestly weaker core inflation. Total CPI inflation is expected to trough around 1% by the middle of before rising with core inflation to the 2% target by the end of 2013, as excess supply in the economy is slowly absorbed. (1010) [ English ] There are several significant risks to the inflation outlook in Canada.

The three main upside risks relate to the possibility of stronger than expected inflationary pressures in the global economy, stronger momentum in Canadian household spending, and the possibility of a faster than expected rebound in business and consumer confidence, due to more decisive policy actions in the major advanced economies. The three major downside risks relate to the sovereign debt and banking concerns in Europe, the increased probability of a recession in the U.S. economy, and the possibility that growth in household spending in Canada could be weaker than expected.

Reflecting all of these factors, last week the bank maintained the target for the overnight rate at 1%. With this target rate near historic lows and our financial system functioning well, there is considerable monetary policy stimulus in Canada. The bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and will set monetary policy consistent with achieving the 2% inflation target over the medium term.

Finally, permit me to say a word about an issue this committee recently raised, the renewal of the bank's inflation control agreement with the Government of Canada. This is central to the bank's mission, and we very much appreciate the committee's interest in it. Since 1991, inflation targeting has proven its worth in both tranquil and turbulent times. Even so, we are always looking for ways to improve the framework. At the time of the last renewal, almost five years ago, the bank committed to continuing its research into potential improvements that might build on the success of the current framework.

A concerted and ambitious research agenda focused on evaluating whether two specific changes--first, targeting a lower rate of inflation, or, second, targeting a path for the level of prices--could provide significant net benefits to the Canadian economy and Canadian households. Subsequently, the experience of the global financial and economic crisis prompted the bank to add a third item to its research agenda, asking to what extent monetary policy should take into account financial stability considerations.

Since 2008, we've had three major conferences for our staff and external researchers to present work on inflation targeting and the monetary policy framework and on these questions. The most important of these research papers have been published in three special issues of the Bank of Canada Review . Related studies by bank staff have been published as working papers, and as well, governing council members, including me, have spoken regularly and publicly about these issues.

We've been pleased to answer questions before this committee in the past on the progress to date towards renewing the inflation target, and Tiff and I would be happy to answer further questions on these issues today, as well as, of course, questions regarding the Canadian and global economies. With that, Mr. Chair, I turn it back to you. The Chair : Thank you very much, Mr. Carney, for your opening statement. We'll begin members' questions with Mr. Julian for a five-minute round, please. Mr. Peter Julian (Burnaby—New Westminster, NDP) : Thank you very much, Mr. Chair. Thank you, Mr. Carney.

I'm a new member of the committee, and so I welcome you here. I was looking over the transcript of your August appearance before the committee, where you paid tribute to federal stimulus that “provided important further support to domestic demand, contributing significantly to Canadian economic growth through and 2010.” I know that most recently you have projected Canada's growth rate dipping to as low as 0.8% in the last three months of the year.

So I'd appreciate any comments you might have about that dilemma or choice between continued fiscal stimulus as opposed to austerity measures, and looking at other tools aside from monetary tools that we as a finance committee might recommend to the government to get through this period of slower growth. Mr. Mark Carney : Thank you, and welcome, I guess, to the committee. It's not my place to welcome you, but thank you for having me. The comments of August relate to, as you know, the important contribution that the stimulus did make to GDP during a very difficult time in the global economy.

Up to one-third of the growth in 2009-10 was contributed by direct government spending. Of course, that is from all levels of government—federal, provincial, and municipal—as there were sizeable stimulus programs put in place at all levels of government. They were timely and they had an impact. Obviously, there are medium- and longer-term requirements for fiscal sustainability. We are seeing that around the world. Those constraints are binding, in many cases, in many advanced economies.

In fact, in most advanced economies there are greater constraints on fiscal flexibility than there is actual or de facto flexibility. I would note that when we look out to the projection, our expectations for the contribution of government are for quite mild fiscal drag. So the actual government spending, the actual program spending, the net spending of government, takes off about 0.1% of GDP growth in 2012. So while there is a drag, it is not the determinative factor in terms of the slowing of the Canadian economy relative to our previous projection.

What is determinative is the global situation that is putting additional pressure on exports, which, in our view, is having an impact and will continue to have an impact on the confidence of households and on the margin of confidence of business and, therefore, on household and business expenditures, particularly investment by businesses. So it's within that context that we see the slowing, as opposed to a rapid slowing in direct government expenditure in this country. (1015) [ Translation ] Mr. Peter Julian : Thank you. You talked about household debt.

I would like to know your thoughts on Canadian household debt levels, which are very high. In this context, you talked about the fact that spending is likely to increase modestly. How do you see Canadian household debt and its evolution in the coming months? Mr. Mark Carney : The Bank of Canada has noted increased Canadian household debt on several occasions. In some cases, it is extremely high. We expect the growth in household debt to continue to slow down. The growth rate of Canadian debt will slow down during the projection period.

The growth of household spending will decline in relation to the rate of wage increases and household income levels towards the end of our projection. This has to do with the measures taken by the government to bring in tighter mortgage market conditions. Debt levels will also have an impact. The Chair : Thank you, Mr. Julian. Mrs. Glover, you have five minutes. Mrs. Shelly Glover (Saint Boniface, CPC) : Thank you for being here today, Governor Carney. It is always a pleasure to have you here at our committee. [ English ] I'm going to ask you about two things, if I get enough time to do so.

First and foremost, something that we've often heard with regard to trade is the need for Canada to diversify its trading relationships, especially when we're considering the prolonged downturn or slowdown in the economy of our largest trading partner, the United States. You've spoken about the critical importance of this issue before, and especially with regard to the rise of emerging markets. There are still people here who believe, contrary to our belief, that perhaps there is no need to become more globalized in the trading area.

And some have even suggested that we actually try to go towards some protectionist measures. I think you've been pretty clear about that, and in fact I'd like to refer to a speech you made at the Saint John Board of Trade in late September, in which you said: To put it bluntly, the U.S. economy can be expected to be relatively weak for some time as households repair balance sheets and governments wrestle with deficits. ...Canada will have to look elsewhere to grow our exports.

Emerging markets already account for almost one-half of the growth in all imports over the past decade. ...We will need to take advantage of such opportunities.... If we do not develop new markets and if we do not improve productivity, the cumulative loss of income from slower potential growth could be almost $30,000 for every Canadian over the next decade. Can you share your views on why Canada needs to engage more aggressively in emerging markets? And what would be the implications if Canada actually stopped pursuing trade diversification?

(1020) Mr. Mark Carney : Thank you very much for your question. Let me say two words on the U.S. first. In the MPR, as I think members know, there is an analysis of this household debt situation that looks specifically at the scale of wealth that U.S. households would need to rebuild. There's a technical box in here, but it gives one a sense of the length of time it's going to take for the households to return to something approaching the levels of wealth they had prior to the crisis—not to the peak prior to the crisis, but something approaching average levels of wealth.

That dynamic, as you suggested with the quote, is going to mean, in our opinion, that the U.S. economy will be more like a 2% growth per year economy than a 3% or 3.5% growth per year economy, the type that Canadian businesses and Canadians have been familiar with virtually all of our working lives. Over time that is a big difference. To simplify things, we've been making the point that while the U.S. is a large market, it is more of a market-share game to export into the United States. You have to look to grow market share as opposed to participating in the growing pie, if you will.

That's possible but that's probably not the best alternative. As you also note, if one looks at the major emerging economies, the growth rate in these economies--in high single digits in real terms, and mid double digits of 13% to 15% in nominal terms--means there is tremendous opportunity. We are under-represented in those markets. They not only account for one-half of the growth in all imports, but emerging markets today also account for one-half of all capital good imports, full stop, to give a sense of the scale of the adjustment there. So there is a big opportunity.

The BRIC countries' share of our overall exports has actually been halved in about the last 10 years. So when we meet in this backdrop of uncertainty in Europe and the ongoing issues in the United States, we can look at the advantages this economy has and where we are under-represented, which is in major emerging markets, and where the true growth opportunities are going to be for the next five to ten years. And the perspective of the bank--and, of course, we have the luxury of being at a very high level--is that those are the best opportunities, on the whole, for Canadian business. Now what does that mean?

It means that in order to realize them, to the extent to which there can be bilateral, multilateral, or regional trade and technology deals that would open up opportunities for Canadian business, they should be pursued. There are other considerations, but they should be pursued. There is a need for a degree of reciprocity in this process, which means not just inbound trade liberalization but also foreign investment liberalization, because that goes hand-in-hand. I'd better stop there, given the time. Mrs. Shelly Glover : Am I out of time already? The Chair : You're out of time, unfortunately. Thank you, Ms.

Glover. We'll go to Mr. Goodale, please, for a five-minute round. Hon. Ralph Goodale (Wascana, Lib.) : Thank you, Mr. Chairman. Governor, and Mr. Macklem, it's very nice to see you again. You are off very shortly to the G-20 meetings later this week. I'm sure on behalf of all of us, congratulations and good luck. We look forward to seeing you return in a larger capacity after those meetings in Europe. In your statement today, you talked about the economic troubles in Europe, the anticipation of a brief recession, and some hope coming out of the agreement that was announced a week ago by European-area leaders.

But today there is news that Greece is now said to be holding a referendum or plebiscite with respect to how it will react to EU policy. I wonder if you would comment on what that potentially means for this anticipated recession in Europe. Could Greece possibly remain in the EU if it were to vote no to the proposition? And is there any conceivable role that you could anticipate for the Financial Stability Board in trying to facilitate some solution vis-à-vis Greece?

Secondly, I'll ask my other question, and leave it for your response, on issue of the inflation targeting agreement and the possibility of changes that you are researching.

When you speak about the necessity or the value of some greater flexibility, going a little bit beyond the careful language in the statement, would that include taking into account, beyond inflation, issues like employment, job creation and job preservation, depending on the economic circumstances affecting the world at any given time, and issues such as the health or not of average disposable household incomes, and the preservation of a healthy, successful middle class in the Canadian economy? We've all seen the articles about the middle class being under great pressure in current circumstances.

That pressure has both economic and democratic consequences, and I'd be interested in your perspective on that. Thank you.

(1025) The Chair : If you can do that in two minutes.... Mr. Mark Carney : Okay, perhaps we'll come back to some of these issues. First, in terms of the Greek measures, obviously in times of difficult structural adjustment—major fiscal austerity, and the tough decisions that governments, such as the Greek government, are contemplating—it is imperative that there be widespread support, broad democratic support, for those measures, because they will unfold over a period of time. And if it's the judgment of the Greek government that this is the best approach to validate that support, we fully respect that.

Obviously, it's Europe's decision about the future there. Let me say one thing, though, in terms of the role of the FSB or Canada. The European decisions were important decisions. They are higher-level decisions, though, and there still are, as I reference in the statement, more details to come about the modalities of how they're going to be put in place, both in terms of the structure of the EFSF and the mechanisms for raising bank capital, or deleveraging the banking system across Europe.

And there are technical aspects to those where the broader experience of some members of the FSB, whether through that mechanism or only bilaterally, could be relevant to help European partners, if they're interested. It's their decisions. Obviously, they are very sophisticated, but we stand ready to help, as appropriate, as they define the details in order to have maximum impact from the decisions.

Quickly on the bigger issue of inflation targeting, our experience has been that targeting 2% inflation is the best contribution that monetary policy can make to low unemployment and to a stable, growing employment market. The experience of pre-inflation and post-inflation targeting, as you're aware, is that of a dramatic fall in unemployment, a reduction in volatility in the economy and of unemployment and inflation. I'll say one thing about the household debt issue, and then we can come back.

When we look at flexible inflation targeting, which is what we've been practising, we have to take into account some of these bigger issues in terms of the time horizon over which we return inflation to that 2% target. And there is some variability in that time horizon, depending on the scale and nature and persistence of various shocks, which could be related to household debt, could be related to Europe, or could be related to the United States, both positively and negatively. And that's part of our core job. I'll leave it there.

(1030) The Chair : Thank you. Thank you Mr. Goodale. We'll go to Ms. McLeod please. Mrs. Cathy McLeod (Kamloops—Thompson—Cariboo, CPC) : Thank you, Chair, and also welcome. It's always a pleasure to have you here. It's always a great session. I'd really like to focus on the area of business investment. Certainly, that's been critical for our sustained economic recovery, so it was with great interest that I noted in your October monetary policy report business fixed investments continued to recover strongly in the second quarter. That certainly seems like a very good sign.

There are links with the trade issue as I look at my riding, where a mill that was shut down then invested $25 million and now has many products going over to China. So there is some good news. If you look at John Manley with the Canadian Council of Chief Executives, he has said that companies, in responding to a council survey, indicated they “plan[ned] to invest close to $110 billion between now and 2013." To put that in context, that's twice what the federal and provincial government combined spent on stimulus during the recession.

So this is important, and this is why our argument is that governments don't need to go out and sprinkle fairy dust all over the country. They should get their fiscal situations in order, as the private sector will take up that slack. That's where we're going to grow out of this. So I'd like you to speak to what you've seen with regard to business investment in the economy in Canada, and what trends you anticipate going forward. How important is increased private sector business investment for Canada's sustained economic recovery? Mr. Mark Carney : Thank you, Ms. McLeod. It's a very important question.

Let me first back up to the experience during the recession, where business fixed investment fell sharply in this country. It fell more sharply than it did in the United States—and particularly, I'm speaking about investment in machinery and equipment. It wasn't entirely clear why that was the case, because the financial system was functioning better here, and the direct impact of the crisis was obviously somewhat derivative. We were affected by a crisis somewhere else, as opposed to being directly in the United States.

As you suggest, over just about the past year and a half, business investment has picked up importantly in this country. In fact, the relevant slide is chart in the MPR , which shows how sharp that decline was relative to previous recessions. It is now stronger than it had been in previous recoveries at this point. We are just at a point where the level of business investment is back to the level it was before the crisis. We've just come back to that point, so this is really the crucial moment or the crucial coming quarters and years for whether we're going to sustain our businesses, as Mr.

Manley suggests, who are going to sustain that pick-up in investment and are going to start to build the productivity that we will need in a tougher global environment. We would say that despite the global uncertainty, all the other conditions are there, as per Ms. Glover's question about emerging markets and those opportunities. Our financial system is functioning very well. This is a fact, not just a slogan. It is true. Our businesses have balance sheets that are in tremendous shape. So there's the ability to invest.

We think there's a need to invest, because of the productivity challenge as well as the opportunity in emerging markets. We expect that there will be continued levels of investment, albeit at a slower pace than over the course of the last year. The reason for that is partly because of the global uncertainty that is, on the margin, slowing plans a bit. It's still positive, and it's still central to the forecast, but it is not quite as aggressive at this stage as it was previously. That's one of the reasons why a resolution of the European crisis will ultimately matter for Canada.

The Chair : You have seconds for a very quick question. Mrs. Cathy McLeod : A quick piece that you didn't get to answer in response to Ms. Glover's question is what would happen if we stopped work in the area of those trading relationships. It was part of Ms. Glover's original question. Mr.

Mark Carney : I would just underscore that continued positive momentum in broadening and deepening our trading relationships, particularly in the faster growing parts of the global economy, such as emerging Asia for example, would appear to be a priority from our perspective—and certainly from the perspective of continued business investment and, ultimately, export-led growth in this economy.

(1035) The Chair : Thank you, Ms. McLeod. Monsieur Mai, s'il vous plait . [ Translation ] Mr. Mai, you have the floor. [ English ] Mr. Hoang Mai (Brossard—La Prairie, NDP) : Thank you, Mr. Chair. Governor, I'm sure I can speak on behalf of the whole finance committee in saying that you have our support in becoming the head of the Financial Stability Board. [ Translation ] I have a brief question. During your presentation, you said that household confidence has diminished. You also said that household debt—in other words, debt relative to family income—has increased to 150%. This is having an impact on people.

We see this with the Occupy movements, which you have supported, such as Occupy Montreal and Occupy Canada. If we also look at the persistence of household borrowing, we see a trend. What risks are Canadian households exposing themselves to, in your opinion? What risks could the Canadian economy face as a result? Mr. Mark Carney : Let me begin with the risks for the Canadian economy as a whole. This situation is creating one of the biggest downside risks for the Canadian economy.

In the short term, there is still an upside risk, for it is possible that Canadian households will continue to accumulate debt at the same pace. However, considering the level of Canadian household debt, it is possible that Canadian households would react more strongly to a shock than before, whether it be housing prices, an economic shock, a shock in terms of employment, or any other shock. This could lead to the paradox of thrift. The Bank of Canada is taking that into consideration at this time. In that case, we would have to create a shock within the Canadian economy, but there is none at this time.

We are working very closely with the Office of the Superintendent of Financial Institutions and the Department of Finance to change mortgage insurance rules in Canada. The rate does not necessarily need to be lowered, but at the very least, the household debt levels of the most vulnerable do need to be reduced. What was the first part of your question? Mr. Hoang Mai : I was asking about excessive debt and the risks those households are exposing themselves to. Mr. Mark Carney : The most obvious risk, in the medium term, remains a possible interest rate hike. That is only normal during economic expansion.

In this fragile climate, some households will have more difficulty. Mr. Hoang Mai : You also mentioned that the growth of household spending could decline because of certain tools the government has implemented. We know the government is currently privatizing the CMHC, in a certain sense, by opening up the market to competitors offering a broader range of services. Could that not lead to greater household debt or the possibility that families will be forced to default on their payments? As for the CMHC, its role is opening up somewhat. The market has been opened up to competitors that offer additional services.

We have seen this, of course, and that is why the CMHC— Mr. Mark Carney : I understand. That is, in fact, one of the advantages of Canada's mortgage insurance system. There are rules, minimum standards for mortgage insurance. And the government has already tightened those rules, even for private mortgage insurance providers. You raise an important point.

(1040) The Chair : Thank you, Mr. Mai. [ English ] We'll go to Mr. Jean. Mr. Brian Jean (Fort McMurray—Athabasca, CPC) : Thank you, Mr. Chair. Thank you for your attendance today and congratulations for your great work on the Canadian economy. I'm a very old person. I grew up in the sixties, seventies, and eighties in Fort McMurray. I saw what the national energy program did during the eighties, in particular in relation to over-inflation. My questions are in relation to inflationary targeting and the agreement of 1991, and what happens if we do have over-inflation.

I remember 22% to 23% interest rates on loans and most companies in Fort McMurray going bankrupt during the late eighties. Most industrialized countries have some form of inflation targeting agreement, except for the U.S. and Japan. Is that correct? Mr. Mark Carney : That is correct, yes. Mr. Brian Jean : The U.S., and Japan in particular, take that into consideration in their fiscal policy. Mr. Mark Carney : In the United States, the Federal Reserve has a dual mandate for both inflation and employment.

In recent years, the Federal Reserve has interpreted that mandate a little more closely to be an inflation targeting mandate, effectively through the members of the Federal Reserve identifying what their medium-term objective is for inflation. In Japan, there is a level of inflation at a bit less than 1%, which is the central objective of the members of the board of the Bank of Japan. It's somewhat similar, but it's not as explicit. One of the advantages of an inflation targeting framework is the clarity that it provides.

When we come in front of this committee, you know what we're supposed to have done on the monetary side. Mr. Brian Jean : There's also the flexibility of the agreement, as well as the ability to continue with reforms in the financial sector globally. Those things all help us manage our economy. Is that fair to say? Mr. Mark Carney : It is fair to say. One of the jobs of the Bank of Canada in managing inflation targeting is to explain where the economy is today, and the nature of the shocks hitting the economy. These can sometimes be positive, sometimes negative.

At the moment, they feel a little more negative from outside, but we also get tailwinds from time to time. We need to explain those and give a sense of what the optimal horizon is to return to that 2% inflation target. Mr. Brian Jean : I agree. I liken the managing of the economy to a fire. You put in too much wood, it burns too much, and you get rid of all the wood. You have to manage a camp-fire just as you manage the economy. You put too much in and it over-inflates and nobody has any wood left, which means everybody has spent his money, because they can't afford the interest rates. It burns too rich.

I've often thought of that in regard to infrastructure investments. Sometimes the opposition calls for $20 billion or $30 billion in continual investment in infrastructure. But if we borrow too much money, if we have interest rates that are too high, if we have over-inflation, those things can destroy an economy. Is that fair as well? Mr.

Mark Carney : Any economy that is running above its potential, whether because of an excess of household expenditures, business investment, government activity, or a combination of all three, will have greater inflationary pressures, which will have the knock-on effect of raising interest rates and also-- Mr. Brian Jean : And borrowing too much money will do the same thing? Mr. Mark Carney : It will in extreme cases. There is not a direct link between borrowing and the inflation rate. It's the activity that's brought it about.

Ultimately, there is the risk that some of that debt would be monetized by the central bank. But that has never been the case in this country. Mr. Brian Jean : Long term, that would have a disastrous effect if it were done on a continuous and significant basis. Would that be fair to say? Mr. Mark Carney : There are many advantages to long-term fiscal sustainability, yes. Mr. Brian Jean : I have a quick question. The C.D. Howe Institute suggested that other factors like financial stability should be taken into consideration when setting interest rate targets. Would that be helpful? Mr.

Mark Carney : It's an important issue. One of the challenges is that considerations of financial stability tend to have a different time horizon from the reasonable time horizon for inflation targeting. We tend to centre on returning inflation to target within around six to eight quarters, but from time to time we go as long as or quarters and sometimes we go to six, depending on the shocks. The financial vulnerabilities can build up. Success in fiscal policy, in monetary policy, and in general financial stability policy can actually start to trigger behaviour that builds up a vulnerability.

And the question is how you address it. What we have favoured are good regulations, micro-regulations, starting with the Superintendent of Financial Institutions. In addition, we have favoured selected macro-prudential tools such as the government has used in the mortgage market. Only after those have been used to their maximum impact, and if there's a generalized issue, is there a role for monetary policy to play within a flexible inflation targeting framework. But that has to be clearly explained and it has to be sequenced in the manner I just outlined.

(1045) Mr. Brian Jean : Thank you. The Chair : Thank you, Mr. Jean. We'll go to Mr. Marston, please. Mr. Wayne Marston (Hamilton East—Stoney Creek, NDP) : Well, thanks, Mr. Marston. Some hon. members: Oh, oh! Mr. Wayne Marston: That's how distracted I am today. The Chair : We're almost related. Mr. Wayne Marston : Almost. Good morning, sir, and welcome. In your presentation, you spoke about the diminished capacity of households, and I would suggest that the high level of household debt has to be concerning to all of us.

But the external pressures we're seeing now because of the euro crisis certainly have to be very, very concerning as well, especially if they continue. Should these roll out further, what do you see as the consequences for the Canadian economy? Mr. Mark Carney : Well, let me say two things. First, embedded in our projection is that we do expect a recession in Europe. We have highlighted that.

The issues—both the scale of the fiscal adjustments that many countries are having to make in Europe and a process of de-leveraging of the banking system that is picking up in that economy—in our view, are going to lead to a brief recession in Europe. That's the first thing. Second, our expectation for the measures that are being taken by European authorities is that they will contain the crisis, but that's different from resolving the issue. Resolving the issue is going to take years, and there may need to be additional steps even in the near term in order to ensure containment.

But containment gets to the issue, in terms of the effect on Canada. Our trading relationship, our direct link with Europe, is relatively modest and so the principal channels to the Canadian economy are two. First are financial conditions as a whole.

Now, again, our banking system does not have a lot of exposure to the European financial system as a whole, so when we talk about financial contagion, we're talking about a generalized reduction in the price of risky assets, such as we're seeing today in financial markets, which of course tightens overall financial conditions, makes it more expensive for Canadian businesses and households. Then second are confidence impacts, because of the knock-on effect of what's happening in Europe on other economies and through to Canadian business and Canadian households.

That's why one of our upside risks is actually that there be more decisive policy actions taken in advanced economies. We think it's fair to say that the overall level of confidence in the ability and willingness of policy-makers in the major economies to take the necessary steps in a timely manner to right their economies and help the global economies has been somewhat diminished by events over the course of the last year. Mr. Wayne Marston : Well, it's been so prolonged; I think that's one of the reasons for it. The other question I have is this.

What do you feel is the level of risk to Canada's banks and our economy, because we're tied so closely to the U.S. and because of the exposure of U.S. banks to what's happening in Greece, in particular, and the impact that could have on them? Mr. Mark Carney : Well, part of what we look at when we look at Canadian bank exposure is not just at the direct link to the European system but, as you suggest, the second-order effects. In other words, what is the impact on the U.S. and therefore what is the impact back into Canada? There is not a significant exposure of the U.S. system to Greece per se.

I think we all need to remember that Greece is very important for the Greek people, but it is 1.5% of the European economy. So the scale of the issue in Greece, from a global perspective, is quite modest. More important, from a global perspective—and it's more important for some institutions than others—is that it's an important indicator of how well the overall process is being managed to solve a range of issues within Europe. We would suggest that. In terms of the health of the Canadian banking system as a whole, I think we're all aware of the experience in 2008-09 and how well our system performed.

Since those years, the liquidity position of Canadian financial institutions has dramatically improved; in other words, they're much more liquid than they were then, at a time of a liquidity crisis. So they're in even better shape now, and this has more than doubled, in terms of the overall liquidity position.

The capital position of the Canadian banks has further improved and, in addition, their risk management—which was strong in our opinion and, I believe, in the opinion of the superintendent—has further improved, because we've been going through stress tests and other analysis of these exact types of situations. We can never be complacent about these issues, and we will stand ready to do what's necessary to keep the system functioning. The system has strengthened at a time when maybe some of that strength might be called upon because of global events.

(1050) The Chair : Thank you, and thank you, Mr. Marston. We'll go to Mr. Hoback, please. Mr. Randy Hoback (Prince Albert, CPC) : Thank you, Chair, and again, welcome to the committee. It's always great to hear you talk, Mark. It's really interesting for me, coming from Saskatchewan. We're still having trouble finding electricians and plumbers and in locating people. To think there's possibly going to be an impact in Saskatchewan from something going on in Europe or in Greece has a lot of people in my constituency wondering just how that will be the case. Why would it ever impact us?

Of course you explained the global economy and how important trade is, and that end of it. Concerning some of the comments you made about deleveraging in the U.S. and how that's going to have an impact on our economy here in Canada, the joint select committee on deficit reduction in Congress is going to have a report in about a month, talking about trillions in government spending cuts. How will that impact us? Will it impact us? Again, is this the cod liver oil that we have to take right now to be healthy as we move forward? Are we moving through the economic crisis in different stages?

Are we at another stage that we're going to progress through until we finally see the light at the end of the tunnel? Where are we on that stage, the period of time in which this drag will affect GDP? I'll stop there and give you time to answer. Mr. Mark Carney : In terms of the overall deleveraging process in the United States, it will be centred first and foremost on the household sector, as we've indicated. There has been a double-digit percentage reduction in the level of household debt in the United States. Unfortunately, it's been done the old-fashioned way; by and large, they defaulted on the debt.

It's been more that than the actual build-up of financial assets. That asset build is starting. In terms of our expectations for the U.S. economy, we expect U.S. household savings rates to be in the neighbourhood of around 5%. You'll see that we believe the U.S. household savings rate was lower than that in the most recent quarter, and that's one of the reasons we see a little less momentum in the U.S. into 2012, as household savings go back to working through deleveraging. Without question, though, what the federal government in the United States does will have a material impact on the economic outlook.

To explain the way our projection is working this time, we are not including any of the provisions of the American Jobs Act in the forecast for the U.S. economy. So there's a little more than 1.2 to 1.3 percentage points of potential growth next year in the U.S., if all aspects of the American Jobs Act were to be passed by Congress. We're including none of that. So one of the things to watch in terms of where the U.S. goes next year is what, if anything, gets passed through that process.

Further on the spending side, as I think you're aware, the spending cuts that are part of the budget deal, including the 50% on the military, we're including because they have been passed. That's legislation until it changes, so we're not trying to read the tea leaves of Congress and adjust accordingly. We will adjust the forecast if there are changes to the spending reductions, and there could be changes that would be net economically positive, less draconian spending reductions—not in the amount, but in the composition of how it's reduced. So we, with others, wait and see.

There is some upside on the fiscal side in the short term for the U.S., depending on how these discussions go in Congress, but we are not counting on them. So for the people of Saskatchewan, if we see budget deals coming out of the U.S., there may be a little more growth that comes from that—but still in the context of overall deleveraging, particularly on the household side. Let me say one other thing, which goes back to the deleveraging point.

One of the issues that can have the biggest impact on the deleveraging side is anything that further facilitates the adjustment to mortgages, the level of--and here I don't want to say the foreclosure process necessarily, but--reworking of the mortgage burden of American households, around a third of whom have negative equity in their homes. This is one of the aspects of that deleveraging that would speed things up and get the U.S. back on its feet sooner. We don't anticipate major moves there, but if we did see something, then it would be material across the country, including Saskatchewan.

(1055) The Chair : Thank you, Mr. Hoback. We'll go to Monsieur Giguère, s'il vous plaît . [ Translation ] Mr. Alain Giguère (Marc-Aurèle-Fortin, NDP) : Thank you for coming today, Mr. Carney. At present, the main goal of your institution is still controlling inflation. However, the current climate of economic stagnation in Canada suggests a few problems, specifically, a major deficit in the balance of payments, low productivity, a lack of investment, higher unemployment, marked by a drop in the participation rate of the population.

Finally, debt levels are so high that they limit the possibility of consumer growth. All of this information indicates that we must continue to support and even stimulate the Canadian economy. Paradoxically, other central banks have introduced additional policy measures to provide monetary easing and promote economic growth. In this regard, I would like to know your thoughts on such interventions to promote economic growth. Could you give us any advice regarding fiscal policies to promote investment? This is a really important factor in addressing many of the problems facing the Canadian economy. Mr.

Mark Carney : I am going to ask Mr. Macklem to answer your question. Mr. Tiff Macklem (Senior Deputy Governor, Bank of Canada) : With regard to other countries, it is important to note that one of the major advantages of a flexible exchange rate is that we can have a monetary policy that is right for our country. As we have already mentioned, when the global recession hit, Canada fared much better than anywhere else. Nevertheless, it was a major recession. Our monetary policy consisted of lowering the key interest rate as much as possible. The government also provided significant fiscal stimulus.

As we stated in our monetary policy review, when we look at the current situation, there is still considerable monetary policy stimulus in Canada. We expect this to allow us to achieve the 2% inflation target. In other words, we think we are on the right track. Furthermore, it is important to note that keeping our inflation target at a low, predictable and stable rate is the best thing our monetary policy can do right now. History has taught us that when we try to target things directly, such as the unemployment rate, in the end, we wind up with a higher unemployment rate and higher inflation.

That is what happened in the 1970s. It is also important to note that our inflation target is flexible. We take factors like debt levels and the unemployment rate into account when adjusting our inflation target. For instance, let's look at a few simple figures. The unemployment rate has gone down since we last targeted inflation. It is more stable. If we look at other indicators, such as the labour market, we see that many of them have improved considerably. Thank you.

(1100) Mr. Alain Giguère : Do I have another minute? The Chair : You have seconds. Mr. Alain Giguère : Oh, dear. This will be brief. I would like to talk about the exchange rate for the Canadian dollar against the U.S. dollar. Many manufacturers have told us that it is a major problem. Some are saying it was the determining factor in the loss of 300,000 jobs in the manufacturing sector, jobs that we cannot get back at this time. Could you suggest any possible intervention strategies for bringing the exchange rate back to a more reasonable level? The Chair : Please answer very briefly. Mr.

Mark Carney : Clearly, the persistent strength of the Canadian dollar is a serious challenge for the Canadian economy. As we said in our report, it poses a risk for the Canadian economy. The Bank of Canada and the Canadian government have an intervention policy on foreign exchange. This policy is very clear and applies to extreme situations. It is up to the Governor of the Bank of Canada and the Minister of Finance to determine whether a situation requires intervention. The Chair : Thank you, Mr. Giguère. [ English ] We'll go to Mr. Van Kesteren please. Mr.

Dave Van Kesteren (Chatham-Kent—Essex, CPC) : Thank you, Mr. Chair, and thank you, Mr. Carney and Mr.Macklem, for appearing again before the finance committee. I want to talk about two things. I'll get my questions out of the way and I'll let you answer them. First of all, there has been a clamouring again for a new financial transaction tax. We hear it pretty loudly in Europe. As a matter of fact, I think when I served in industry there were some parties that were advocating for it in Canada as well. I want to know, Mr.

Carney, what your thoughts are about that and whether that tax would be able to do the things its advocates claim it would do. The second thing that concerns me is something that we've touched on briefly with a number of questions, and that is the danger of ongoing deficits. The previous questioner asked about stimulus spending and whether we should be spending more money. What would be the consequences in this country if we engaged in a policy of ongoing deficits? We've targeted as the time we would wrestle that to the ground. We are now looking 2014.

What would be the consequences if we had a policy that allowed for continued deficits? Those are the two questions, you could say. Mr. Mark Carney : In terms of the financial transaction tax, I think it's always a little difficult answering that question, for two reasons. First, the prospect of a global financial transaction tax is extremely low. In fact, I would say that it's null, so we're into the realm of the hypothetical. The second reason it's difficult is that the proponents' reasons for a financial transaction tax are varied.

Sometimes it's a revenue exercise for a very worthy objective, but it's a revenue exercise. Sometimes it's to stop certain types of bad behaviour or perceived bad behaviour. Let me try to address the second one. What are some of the reasons you would have with a financial transaction tax? What are you trying to get at? The first is to raise additional revenue, obviously, from the financial sector, feeling that the financial sector as a whole doesn't pay sufficient sums. That's a political decision. Different countries will come to different views. There are better ways to tax banks.

Taxing the profits of banks is the most effective way to do it. It causes the fewest distortions. It will raise the most money. We had a long experience in this country of taxing the capital of banks, which was a terrible idea, because it, of course, discouraged them from having adequate capital, which we've learned from the last crisis was not a good idea. That was phased out over the course of the last decade, and I commend various governments for having done that. If it's to raise money from the sector, we would advocate taxing the profits, as is done. The banks, as Mr.

Goodale and others know, are large payers into the federal fisc. The second reason one might have a financial transaction tax is to reduce so-called wholesale funding of banks. In other words, it is not the retail deposits that everyone around this table and your constituents put into banks; it is borrowing in the markets. That type of borrowing, particularly if it's short term, is riskier than retail deposits. It can move quickly away from an institution that's perceived to be in trouble, and those perceptions can become reality. So sometimes there is a desire to use a tax to reduce that type of behaviour.

Again, there's a better way to do it, but it doesn't raise revenue. It's through various liquidity standards that actually encourage institutions to have longer-term borrowing rather than short-term borrowing, and borrowing that more closely matches their assets. It is part of the Basel reforms, the so-called Basel III reforms, that are being put in place now through to the end of this decade. They are actually being implemented.

There are liquidity standards, both short- and long-term liquidity standards, and they will dramatically change the incentive of financial institutions to borrow too much in the short term. The third reason you might have a financial transaction tax, from a policy perspective, is to reduce “speculation” and churning in the markets, or actual market behaviour. The strategy there is to adjust the capital requirement for the trading books of banks.

As part, again, of the Basel III reforms, the capital requirement for the trading book of a financial institution--the capital you put against all those people who are sitting in those dealing rooms and what they are doing--has tripled. That is being put in place from the end of this year. And that will significantly increase that requirement, which is going to, on the margin, reduce this type of activity.

The last point, just to go back to where I started, is that the reason it is not going to come into place, in our view, is that there is significant opposition to it, because it is the second, third, or fourth best way of addressing various issues. Unless everybody does it, activity is going to flow to those jurisdictions where they don't do it. The experience of Sweden and others, who had variants of this tax in the eighties and nineties, has been that they lose money in net terms, because the level of activity that goes abroad is so significant that it overcomes any [ Inaudible--Editor ].

I missed the second bit.

(1105) The Chair : Thank you. Thank you, Mr. Van Kesteren. We'll go to Mr. Adler, please. Mr. Mark Adler (York Centre, CPC) : Thank you, Chair. I'd like to also welcome the Governor and the Deputy Governor to the finance committee. I want to begin by saying that you and the finance minister have for a while now been talking about the dangers of high consumer debt, especially with regard to the housing market. On my way back to Ottawa last night, after taking my kids out trick or treating, I read with great interest the NDP platform from the last election.

In one provision, they were calling for consumer credit card interest rates to be capped at prime plus 5%, which I think, had that been implemented, would have exacerbated the consumer debt crisis. You also note in the October monetary policy report that there's been somewhat positive information emerging in terms of household credit and the debt rate slowing down a bit.

As you know, the government has taken numerous steps to help Canadians enter the housing market, and also to strengthen Canada's housing market by reducing maximum mortgages to 30-year amortization and significantly reducing the interest payments Canadians have to make on the interest on their mortgages. But the government has also done a lot to encourage broader improvements in financial literacy—and this is where I'm going on this—including a task force on financial literacy headed up by Don Stewart of Sun Life. Now the government is working to implement its recommendations.

In fact, even our esteemed chair of the finance committee has put forward a motion in the House on financial literacy. I want to ask you: can you speak to why improving financial literacy, particularly among our youth, is an important goal?

(1110) Mr. Mark Carney : We certainly welcome broader efforts to improve financial literacy. We play a modest role in that, or we try to play a role in that, through our outreach efforts, through our website, and through our museum. We're going to continue to enhance our explanations of how the economy works, how money works, and elements that I think would be consistent and broadly supportive of this effort. When explaining these things to youth or any age group of Canadians, part of the issue is that sometimes we all take the recent past as indicative of the future.

As you know, past performance is no guarantee of future performance, which is why we focus so much on the economy and achieving our inflation target, and we keep working at that. We don't take it for granted. In terms of this issue and the household debt issue, one of the great risks in the current environment is that Canadians take low interest rates—very low, extremely low, historically low interest rates—for granted. They construct their financial affairs with very long-term liability, such as a mortgage, on the expectation that interest rates will basically stay at these levels over the life of that mortgage.

What we have tried to counsel is the very basic point that, in taking on a longer-term debt, people should look at their ability to service it at a more normal rate of interest. We supply on our website all the rates of interest going back through the last decade, the nineties, the eighties, and back to Confederation, so the Canadians can make their own judgments about what normal is—but it's considerably higher than where rates are today. That's a very basic important fact.

The other basic fact for younger Canadians is the benefit of compounding, even at low rates of interest, and the value of starting some element of savings early on, particularly in a society where the vast majority of Canadians are saving for their own retirement. If you start early and build over time, even in periods like the present when there is extreme volatility in markets, the value of compounding will overcome that volatility over the lifetime of your building up a nest egg for a home, for retirement, or for your children's education. If I may, Mr.

Chair, I would say the final thing is that there are a variety of programs and tax advantage programs to enhance savings for Canadians. Just being aware of those programs and using them is incredibly important. The Chair : Thank you, Mr. Adler. Colleagues, we have time for one more round of four colleagues, so we're going to ask you to be very brief. We'll start with Mr. Julian, please. Mr. Peter Julian : Thank you, Mr. Chair. I'm a little surprised that Mr. Adler was reading the NDP platform last night, given that it was Halloween.

It would have been more appropriate to read the Conservative platform, because that's scary. Mr. Carney, since this is our last round I have a number of questions for you. Mr. Jean put a question to you about our overall level of financial sustainability, which I think you answered very effectively. We in the NDP believe fully in financial sustainability, of course. For the last 20 years the ministry of finance has said that NDP governments were the most fiscally and financially sustainable of all party governments.

I think you were making the point that in the current context there is some room for fiscal stimulus within a sustainable framework. That's what I understood, so perhaps you could come back to that point. Second, on page of your report, you mention the impact of fiscal austerity measures in Europe as one of four factors contributing to a mild recession in the euro area. Perhaps you can speak to that. Third, in your third technical box, you speak of the relationship between crude oil and gasoline prices. We know the impact of energy prices on the average family budget as well as on inflation.

There has been increasing concern about speculation in the energy industry. Are you concerned about the volatility of gas prices and how that could contribute to inflation? Do you favour measures that might rein in that speculation? Fourth, Canada's balance of payments deficit in terms of the current account is estimated by the IMF to be among the worst of industrialized countries for next year, at -3.8%. That's worse than Spain, Italy, and France. Are you concerned about that, and do you see that as perhaps a byproduct of what many on this side feel is a failed export strategy by the government?

(1115) The Chair : Governor Carney, you have three minutes to answer, but if you want to follow up with the committee you can do that as well. Mr. Mark Carney : This is a test of public sector productivity. I'll try to meet it. First, fiscal decisions are for the Minister of Finance, so we'll defer to him on those and not provide advice. We'll take those decisions as given and adjust monetary policy accordingly.

Second, we want to avoid, in the extreme, being in the situation of European governments, where the scale of fiscal austerity being required of a large number of countries is now materially affecting the growth outlook in those countries and, furthermore, is not yet having the effect on confidence. I'll make the general point that the measures that have already been enacted by the Spanish and Italian governments are in the order of magnitude consistent with long-term fiscal sustainability in those economies--and here I refer to enacted measures, not announced, muted, or debated ones.

Just as Canadians learned with difficulty in the 1990s, you don't get credit for announcing measures and passing the budget. You only get it when you actually implement them. Even then there's a lag. So the tough measures are taken. You're getting a slowing in those economies. You'll get further slowing because of these measures, but not the credit in terms of market confidence or market interest rates. That's an important point to recognize, and that's part of our dynamic there. On crude and gas prices, I'm glad you raised that technical box.

As you know, we're trying to draw out how the relationship between Canadian gas prices has changed from an historic one. One would usually have looked to WTI oil prices and a margin off those for Canadian gas prices. The fact is that WTI used to move quite tightly with Brent crude. Depending on where you live in Canada, are you getting refinery oil that's a blend of either Brent or WTI, or out in Alberta? It's a very different feedstock into the refineries. Because of supply constraints in the United States—which, in part, some pipelines might help alleviate—a bigger differential has grown between WTI and Brent.

So even though WTI has come down, as we've all seen, Canadian gas prices have not come down as much as they historically would have. Some of it is margin expansion, which goes to your question, but a large

part is this actual dynamic, which I hope is relatively well explained in the box. On the balance of payments and the current account, we obviously watch this. The current account deficit has increased. A large part of it—not all of it but a large part—has been due to an increase in investment in imported machinery and equipment. So that is a good current account deficit.

If you're going to have a current account deficit, you want to be importing investment machinery and equipment that will ultimately make your businesses more productive—and one expects to build exports over time to pay back that deficit over time. But it is something we watch, and we'll be happy to have further discussions on that in subsequent meetings. Thank you. The Chair : Thank you very much, Mr. Julian. I want to take the next round, Mr. Carney. I want to raise two issues with you.

First of all, obviously Canadians are well aware of the strength of our financial system and the strength of our financial institutions. Two of the main factors are our capital ratios and our leverage ratios in terms of the policies that we've adopted in Canada. You mentioned the Basel III accord, and that there are going to be both higher quality and higher levels of capital. There have been international concerns, American concerns, raised about both, which I think you've responded to very well.

In terms of some of the Canadian concerns that I'm hearing, the institutions here are not concerned about the level unless they're asked to do it on an asymmetrical basis. If other countries do not adopt the Basel III levels but Canadian institutions are forced to, how will that impact them? That's one concern. The second is with respect to the quality. Frankly, they say they're at or near the required levels now, but they do have a concern in terms of whether what they have now in capital is of the same type of quality or how that will be impacted. That's an issue.

A second issue is with respect to core inflation and the 2% target. Most people I talk to do not quibble with the 1% to 3% range or the 2% midpoint, but some do raise concerns with respect to what is actually included in core inflation. Gasoline, natural gas, fuel oil, and mortgage interests are just a few of the variables that are not included in core inflation. So these people ask the question. Obviously at the bank, you regularly debate what should be in core inflation and what should not.

Could you give us some background as to whether you're looking at that specifically now with respect to your core inflation target, or is this something we should look at changing?

(1120) Mr. Mark Carney : Thank you, Chair. I'm going to answer the second part first and then ask Mr. Macklem to answer the question on the bank capital. To be absolutely clear—and I'm glad you raised the question—the bank does not target core inflation. The bank's target is for total CPI inflation, which includes gasoline and all food prices. I hope that's absolutely clear. We have a target of 2% total CPI inflation because that's the representative basket of what Canadians consume. That's what Canadian households have to go out and spend.

Of course it would be folly to suggest that Canadians don't put gas in their cars, or eat, or any of these things. We have to achieve—and we have achieved over the target's lifetime, including over the course of the last five years—2% total CPI inflation through tough and easy times. What we do use with core inflation, or the difference between core and total CPI, is that we take out the eight most volatile items from total CPI.

What core inflation is useful for—it's reported by Stats Canada, and I referenced this in my opening remarks—along with a number of other measures, is as an operational guide for where total CPI inflation is going to be. Take the example of gas prices. They spike up because of conflicts in the Middle East, supply constraints in the United States, and other factors. They spike up. They're at a high level. We're aware they're at an elevated level. But unless they continue to increase, it's not additional inflation. We have to take into account what's happened to gas prices in terms of Canadian incomes and activity.

The better guide of where inflation's going to be one year out, or one and a half years out, tends to be measures like core inflation and other measures, such as mean standard deviation and weighted means, all of which we report. Just to be clear, we do not target that and we would not recommend that. The Chair : I appreciate that. That is a question we get often. Mr. Mark Carney : I'm glad you raised it because we need to be absolutely clear about it. Mr. Macklem will answer the Basel question, please. Mr. Tiff Macklem : The first

part is also a very important question. Clearly, the first step was getting the new capital, the new liquidity, rules agreed to, including a limit on leverage. That's been done. Now emphasis is increasingly focused on implementation. Obviously, rules are only as good as their sound implementation. As you stressed, what's important is both the full implementation and the consistent implementation across jurisdictions. Let's face it, while we certainly think the rules before the crisis were inadequate, one of the problems was that even the rules that were in place were not being followed in all jurisdictions.

We have to get to a world where there is consistent implementation across jurisdictions. What are we doing about it? Through the Financial Stability Board, which is the coordinating mechanism, both the standards setters.... So in the case of capital and liquidity and leverage, it's the Basel committee. The Basel committee, together with the FSB, has recently put out a couple of documents outlining how this will be done.

The Basel committee has put out a document that outlines how they will verify that countries are living up to their commitments, looking first at whether the rules in each country--in some countries it's legislation, in others it's through regulation--are fully consistent with the new Basel III standard. The second

part is whether those rules are being implemented in a consistent fashion across jurisdictions. The key issue there is to make sure the risk weighting is being done on a consistent basis across jurisdictions. The FSB--

(1125) The Chair : Unfortunately, my time is up, because I cut everyone else off. But if you want, you can briefly wrap up. Mr. Tiff Macklem : I'll just say a few more words. The Financial Stability Board, as the coordinating mechanism, has put out a document describing how the FSB is going to work together with the standards setters to ensure rigorous implementation. The Chair : Thank you very much for that. We'll go to Mr. Goodale, please. Hon. Ralph Goodale : Thank you, Mr. Chairman. I have two brief points, I hope.

With respect to the European plan to deal with vulnerable countries like Greece and others, you mentioned earlier that the modalities, the details, are yet to come, and it will be probably after the G-20 meetings, not before. I wonder if you see any risk of slippage there, delays that would allow the problem to just go on into never-never land. The second question is on a totally different topic. You have spoken frequently and very effectively about the need for trade diversification--and that's been discussed around the table today--especially into emerging markets, especially Asia.

You've also on occasion spoken about the need for sustainable resource development, because perceived unsustainability is not only an environmental issue, it is also an economic and market access issue. On that last point, is there anything directly within the purview of the bank that comes to bear on that issue, or is that purely a matter for government policy to deal with? Are there ways the bank can influence the long-term sustainability of Canadian resource development, or is it something that is entirely dependent upon government policy? Mr. Mark Carney : Thank you for that.

On the first question with respect to Europe, what we have said, and it's still relevant, is that we expect the measures to contain the situation, but there are clear downside risks to that assumption. When we first said that we didn't have the actual plan, but we expected to have something similar to what was announced. But we need the details and then, obviously, we need implementation. There are always risks around both those aspects. I'll be slightly more specific.

With respect, for example, to the recapitalization of the European banking system, where the objective is to raise the capital ratio of that banking system, we would advocate that a component of that be met through new capital, so that it is not all met through a reduction in assets. I say that because it's a reduction in assets that's going to intensify the pressures on financial conditions, not only in Europe but elsewhere in the world, and it's going to displace new credit creation in Europe and elsewhere as assets are sold.

If there is a better opportunity for a financial institution to buy an asset out of a European bank rather than make a new loan, that's going to have an impact, for example in the United States, if it's a U.S. dollar asset. So we would put emphasis on at least a component being met through new capital. There are ways to do that relatively efficiently, including with contingent capital that would reduce the dilution of existing shareholders, given current trading levels. So, yes, we're monitoring this closely and we're in close discussion with our European colleagues.

There will be meetings later this week, through the week and early next week, as part of the normal course, in Basel and other places, but this will clearly be one of the issues there. As to your question about sustainable resource use, it is a very important one.

I would say that from the bank's perspective, these are issues that ultimately go to the medium- and longer-term potential growth of the economy, on which we have to take a very cold-eyed, objective view and adjust our perspective of where that potential growth can go, because that is ultimately one of the key determinants of how fast we can run the economy without generating inflationary pressures. We have reduced our outlook for potential growth in the last couple of years. We have re-confirmed it in this projection. These issues will have an effect. It was referenced earlier.

Both in Fort McMurray and Saskatchewan, you see some of the pressures that do come on when paces of development becomes too large.There are broader issues around this, though, which have to do with national balance sheets, and other issues that we don't have time to get into.

(1130) The Chair : Okay. Thank you very much, Mr. Goodale. A final round by you, Ms. Glover, please. Mrs. Shelly Glover : Thank you Mr. Chair. I don't envy you your job having to cut these fine people off, but you may have to cut me off as well because I have lots to say. From listening to the questions put forward by some of my colleagues across the way with regard to page 12, I want to make it very clear that on page you cite a variety of reasons that may lead to a predicted recession in the euro area at the end of 2011.

For whatever reason, some of my colleagues across the way want to selectively hear only a small portion of what is listed there, namely what you've said about austerity measures. Then they also offer an alternative perception and

interpretation of what it means in terms of stimulus. I'd like you to confirm, Mr. Governor, that we are not Europe, that we do not have the same pressures or the same situation, and neither do we have the same economic view as the rest of the world. We are seen as leaders economically in the world, of course. I'd like you to be very clear about what may cause the brief recession you are predicting for Europe, and then talk about stimulus in Canada, which is a whole other bowl of wax. TD Economics had said very clearly that stimulus spending right now is not a good idea.

They have said, and I say the same thing, that timing is everything. We need to be very cautious right now in Canada. What would the consequences be of prolonged deficit spending here in Canada? Again, it's a very different situation here from that in Europe. So please clarify the first issue and then explain what the consequences would be of the second. Mr. Mark Carney : To explain the difficult situation in Europe, one has to go back to the functioning of the European Monetary Union.

In effect, a number of countries in the so-called periphery, although they are some of the affected countries--particularly Portugal, Greece, and Spain specifically--ran very large current account deficits within the monetary union. Part of the reason they ran those deficits is that the relative rise in unit labour costs in those countries was quite high, of the order of magnitude of 20% to 30% higher than at the Franco-German core of Europe. So they lost a lot of competitiveness over the course of the first 10 years of monetary union, and the challenge that these economies face is to regain that competitiveness.

This is not a good place to be in, but one of the advantages of a flexible exchange rate is that the exchange rate does some of the work for you in regaining that competitiveness. The other alternatives are large structural reforms to improve or build productivity and product in labour markets, and other aspects. They're the right things to do, but those take time to pay off—over the course of several years at least. And then second is to reduce wages.

I don't mean stagnant wages, but outright reductions in wages so that unit labour costs come down, which, of course, in and of itself reduces demand and has a self-reinforcing aspect on any slowdown. That means a direct hit to confidence, and lower spending. And then, because of lower spending, higher unemployment, etc., will result. That is the situation these economies find themselves in. The lower growth further worsens the fiscal positions of the countries, which forces additional austerity.

Because they face budget constraints, the markets are only willing to lend them certain amounts of money, and that is amplifying the downturn. So you have more severe recessions in an increasing proportion of the eurozone, which in our opinion is now going to result in an overall recession in Europe. Mrs. Shelly Glover : So anyone who leaves this room stating that a recession in Europe is likely caused by governments not spending on stimulus is grossly misinformed and not understanding this situation. Am I correct?

(1135) Mr. Mark Carney : I would say that there are deeper fundamental causes of the situation in Europe that have built up over a number of years that can only be resolved over a number of years. That is why the measures that the European authorities are putting in place must have that time horizon, so they can facilitate those adjustments in those economies, while at the same time the Europeans reconstruct or “re-found”, to use our terminology, the monetary union and how it works, so that they don't fall back into this situation a decade or two decades hence. The Chair : Thank you very much, Ms. Glover.

Thank you very much, Mr. Carney and Mr. Macklem for being here. As you can tell, the members of this committee very much appreciate this discussion. Thank you so much, and we look forward to continuing our conversations. Colleagues, I will suspend for a couple of minutes, and we'll bring our next guests forward. (1135)

(1140) The Chair : I call this meeting to order. I apologize for the lateness. We had some technical difficulty this morning in getting the microphones working, which is why our previous session went over time. I want to thank all of our witnesses for coming in to participate in our pre-budget consultations for 2011. We have seven organizations presenting to us during this panel.

We have first of all the Assembly of First Nations, the Canadian Public Works Association, the Canadian Restaurant and Foodservices Association, the First Nations Tax Commission, the Inuit Tapiriit Kanatami, the Professional Institute of the Public Service of Canada, and YWCA Canada. Thank you all for being with us. You will have up to five minutes for opening statements. As we have a very full panel, I will ask you to keep to that five minutes, and then we'll have members' questions after that. We'll start with the Assembly of First Nations. Mr.

Richard Jock (Chief Executive Officer, Assembly of First Nations) : Thank you, Mr. Chair. Our presentation is called “Structural Transformation and Critical Investments in First Nations on the Path to Shared Prosperity”. First nations communities and individuals are poised to make ever-increasing contributions to the overall economic prosperity of Canada and to their own economies. Fundamental structural change is part of the uncovering of the full potential of these individuals and communities. Investments in first nations continue to make sense, especially in a climate of fiscal restraint and reductions.

Accordingly, AFN recommends that the Government of Canada transform the fiscal relationship through examining existing funding mechanisms and to move forward to change those, based on a set of shared principles: that there be critical investments made in education, infrastructure, and skills development in order to increase productivity and participation in the future economic opportunities; and that there be investment made in safe and healthy communities through supporting overall infrastructure, housing, and health care. I have some comments on transforming the fiscal relationship.

The current mechanisms for funding are inadequate, unsustainable, and too unpredictable to allow for any long-term planning, and also to encourage any long-term investment by external banks and organizations. First nations are the only governments in Canada whose budgets for core and essential services are discretionary and subject to unilateral or arbitrary change. In fact, since an arbitrary 2% cap has been applied to funding for first nations' core services.

Therefore, stable and predictable fiscal transfers, with built-in escalators related to population and inflation, should be used for first nations governments, as they are for other governments. For example, provinces and territories receive a guaranteed annual growth of 6% per year for health services, but that's not the case for first nations. With regard to investing in first nations education—just by way of background—in Budget there was a commitment to achieving comparable education outcomes for first nations students. In our view, achieving comparable outcomes requires, at minimum, comparable investments.

A funding framework is needed based on real costs, indexation, and appropriate treatment for northern and remote communities, with such a framework being used for a permanent allocation of resources based on standards and real costs. The estimated outcomes of this, as related by the Centre for the Study of Living Standards in 2010, are such that achieving a comparable education outcome could save the government $1.9 billion in a single year by 2026. In transforming the approach, any action taken should be founded on the set of principles that I mentioned earlier.

Those principles would be equity, fairness, security, stability, predictability, and accountability. I want to emphasize appropriate authority, relative autonomy, flexibility, and also an opportunity to have access to external capital. In terms of opportunities for change, within the current context of the strategic operational review, there are some important considerations that we feel should be borne in mind, especially if we're looking at aligning programming and services across government. We feel that basic services and the elements and costs affecting health and safety should take priority.

We also feel that another principle to be included is that community-based services be set as a priority and be guaranteed a sustainable rate of growth in funding. Redeployment of resources should be done in areas of greatest need, and there should be a rebuilding plan to look at refocusing resources and to enable investment in areas of greatest need. In our view, transforming the approach and doing the critical investments I talked about will achieve both short- and long-term savings, and it will also result in changing the nature of the relationship. Thank you. Those are my opening comments.

(1145) The Chair : Okay. Thank you very much, Mr. Jock, for your opening comments. We'll now hear from Mr. Durnie, please. Mr. Darwin Durnie (President, Canadian Public Works Association) : Thank you, Mr. Chairman. Good morning. My name is Darwin Durnie, and I'm the president of the Canadian Public Works Association. I'm delighted to be here representing our 2,000 members. I'm Alberta-based, and I represent our chapters from sea to sea to sea. I'm joined in the audience today by Mr.

Peter King, the executive director of the CPWA, and also the executive director of our sister organization, the American Public Works Association. By way of brief introduction, the CPWA represents the men and women in every community across Canada who plan, build, repair, and maintain our communities. From sustainability planning through to waste collection, snow removal to disaster response, our practitioners deliver services to the communities of our nation 24/7, thus providing liveable communities that are the envy of the world. We appreciate the challenge ahead for the members of this committee.

Economic realities and global pressures will require a delicate balance between continuing the good track record that has been achieved with infrastructure renewal and investment while ensuring that Canada's economy continues to recover and lead on the world stage. Our submission focuses on two areas that we believe present great opportunities to protect our existing infrastructure and develop a comprehensive plan for the years ahead. The Government of Canada committed last year to undertaking a comprehensive review of the current approach to financing first nations infrastructure.

We support that review and recommend that CPWA work in partnership with the first nations communities and the federal government to provide training, certification, and membership programs to first nations public works employees through a pilot project. This will leverage the vast resources we have developed and are in use throughout North America and that have been applied to linear infrastructure, such as roads and bridges, and vertical infrastructure, such as schools and recreation centres. CPWA members have lifetimes of knowledge that can be shared through mentorship.

There are new opportunities for employment now, as current public works employees near the end of their careers. CPWA knows that now is the time to put the skills and knowledge transfer opportunities in place to ensure that young people are able to take advantage of these opportunities. As well, the benefits of well-trained first nations members maintaining their own community infrastructure are both personal and economic. The jobs and economic boost to the community are clear, as is extending the life cycle of existing assets.

CPWA members have already collaborated with American Public Works members to develop an accreditation and certification program that is portable throughout Canada and the U.S. In working together with the first nations, we can ensure that these programs are adapted to the unique challenges of first nations while providing training and credentials that will allow employment opportunities on and off the reserve. Our second recommendation is simply to continue the best practices that were developed during the rollout of Canada's economic action plan.

We encourage the Government of Canada to allocate funds to allow for continued consultations between government and the infrastructure community, with the goal of developing a framework of basic principles for the next generation of infrastructure programming. This should include, as a goal, the evaluation of the current state of key infrastructure assets.

This could also include the integration of the tools that we have developed for use in Canada, and also those we have developed in partnership with the American Public Works Association, through the Institute for Sustainable Infrastructure's model that evaluates linear infrastructure. We witnessed the benefits achieved when all stakeholders came together during the early stages of the action plan. We're very pleased to be able to present today, and we look forward to any questions. Thank you, Mr. Chair.

(1150) The Chair : Thank you very much for your presentation. We'll now hear from Mr. Whyte, please. Mr. Garth Whyte (President and Chief Executive Officer, Canadian Restaurant and Foodservices Association) : Thank you, Mr. Chair. The Canadian Restaurant and Foodservices Association represents the nation's $61-billion restaurant industry, one of the largest industries in the country.

We're pleased to have the opportunity to put forth some recommendations that will advance the committee’s goals of high levels of job growth and business investment, with a view to ensuring a shared prosperity and a high standard of living for all. We have many recommendations. For example, we favour eliminating the $40 million in credit card fees on sales taxes, but I'm just going to talk about two recommendations.

First, our overarching recommendation is to establish a private and public sector task force to study the central role of restaurants in Canada and to make recommendations to promote and grow this industry. This recommendation would have limited cost implications, but would create an opportunity to break down the agriculture and tourism silos in Canada and unleash the potential of one of Canada’s most important industries. Our second recommendation concerns reducing the burden of profit-insensitive, job-killing payroll taxes, which has always been a priority for the labour intensive restaurant businesses.

Our proposal is for the introduction of a $2,000-a-year basic exemption, YBE, modelled after the YBE in the Canada Pension Plan, as the most efficient and effective way to deliver payroll tax relief to the groups most affected—the entry level workers and labour intensive businesses. It's estimated that a $2,000 YBE would reduce EI revenue by approximately $1.4 billion per year. With respect to the restaurant industry task force, during the recent federal election, food and agriculture policy received a great deal of attention from all political parties.

Although the economic and employment contributions of restaurants exceed those of agriculture and all supplier groups, the restaurant industry is treated as secondary in food policy discussions. Similarly, over 50% of the jobs in the tourism industry, by far the largest component of tourism jobs, are restaurant jobs. Yet the restaurant industry is an afterthought in Canada’s tourism strategy. Canada’s restaurant and food service industry is one of the largest industries in Canada. We employ more than a million Canadians, making our industry one of Canada's largest private sector employers.

The industry’s workforce represents 6.4% of the country’s employment, more people than agriculture, forestry, automotive manufacturing, mining, and oil and gas extraction combined. An additional 250,000 Canadians are indirectly employed by the industry as suppliers, distributors, and consultants. A Decima poll commissioned by Kraft Foodservice Canada showed that the industry is the number one source of first jobs for Canadians, and that 80% of Canadians recognize restaurants as a vital source of employment.

Every $1 million in restaurant sales creates nearly jobs, making our industry one of the top four job creators in Canada. The diverse nature of our industry means the benefits are felt in every community, not just in major centres. The industry is much more than a huge contributor to the Canadian economy and a major job creator. It is at the heart of what Canada is about—food, youth, multiculturalism, agriculture, health, and community. We're faced with some daunting challenges.

The high Canadian dollar relative to the U.S. dollar and weak economic conditions internationally have discouraged visitors from coming to Canada and have significantly reduced tourism. A full 74% of the respondents to our restaurant outlook survey indicated that rising food costs are having a negative impact on their business; two-thirds said that rising labour costs are having a negative impact; and one of four operators said that they are struggling to find qualified labour.

Given the competitive nature of the business and the price sensitivity of restaurant consumers, it's difficult for operators to pass on higher costs. In recent years, the federal government has focused resources on capital- and resource-based sectors, which are a fraction the size of the food service industry, together with the agriculture and tourism sectors. We're not asking for grants or handouts. We're just saying the government should recognize the significant social and economic contributions of the food service industry and its growth potential.

Since food service is a touchstone for so many government priorities, it's important that the government take a more holistic approach to this industry, beginning with the establishment of a task force to study it and make concrete recommendations to promote and grow Canada's restaurant and food service industry. Second, on payroll taxes, we want you to consider--

(1155) The Chair : You have five seconds, Garth. Mr. Garth Whyte : Okay. We want you to consider the $2,000-a-year basic exemption, YBE. It will help low-income earners. It will help employers. We see it as a win-win proposal that will really help job creation. Thank you. The Chair : Thank you for your presentation. We will now hear from Mr. Jules. Mr. Clarence T. Jules (Chief Commissioner and Chief Executive Officer, First Nations Tax Commission) : Mr. Chairman, members of the committee, for over 20 years I've been working with first nations to implement taxation, build infrastructure, and improve services.

There are about first nation tax authorities, and since they have generated at least $800 million in local revenues. The first nations tax authorities have used local initiatives and development of local capacity to bring jobs and business opportunities to their communities and regions. We are proud of what has been accomplished and were pleased to be able to demonstrate this to parliamentarians by hosting them in Kamloops last year. I must note here that the committee members were very interested in our work and, in particular, our proposed first nations property ownership act.

The First Nations Tax Commission and tax-collecting first nations have achieved a great deal. However, much more can be done. First nations are still tremendously disadvantaged. The investment market does not work as well on our lands as it does elsewhere. Our infrastructure is still inadequate. We need to change this. First nations are the fastest-growing component of the Canadian workforce, and also include Canada's most under-employed people.

If we can change that fact, we will create jobs, improve the fiscal balance, and go a long way towards improving the quality of life, even in the face of an aging society and global fiscal challenges. The key to changing this is to allow the market to work on first nations lands by using local capacities to create sustainable infrastructure systems. Today the First Nations Tax Commission is putting forward two initiatives that will help these goals. The first initiative is our first nations property ownership act.

We are asking the government to expedite this development and the passage of this act, and to commit itself to providing the resources necessary to implement it and ensure its success. Ten first nations have confirmed their interest in implementing this act.

The passage of this act would allow them to own their own lands, to put an end to the paternalism of the Indian Act, where a land is described as “a tract of land, the legal title to which is vested in Her Majesty, that has been set apart by Her Majesty for the use and benefit of a band....” This would be a significant step forward in dismantling the Indian Act, which is seen as a relic of colonialism. It would end the injustice my father described 43 years ago when he said, we don't even own our own lands. However, the first nations property ownership act is much more than a symbolic act.

The passage and implementation of this act would allow the market to operate more effectively for these first nations. It would allow us, as my father said in 1968, to move at the speed of business. The first nations property ownership act would allow these first nations to bypass the cumbersome bureaucratic processes regarding land use. First nations would assume responsibility and authority over their lands just like any other government. The end result would be lower costs of doing business, improved reporting requirements, and less bureaucracy.

The first nations property ownership act would also allow participating first nations to create the same property rights used in real estate, credit, and investment markets elsewhere in the country. These rights would be registered in our Torrens system, which is recognized as the best form of land title system in the world. As a result, people conducting business would be able to draw on the same bankers, lawyers, and real estate professionals for these types of transactions as they would elsewhere. Investors would be able to make commitments with the same confidence that they do anywhere else.

Businesses would be able to work at the same speed with first nations, using this act as they do in any other market. First nations people and their governments would be able to access credit on the same terms as others in Canada. Second, we're asking for a new approach for infrastructure tailored to meeting the needs of taxing first nation communities. And we'll work with you on implementing it. Thank you. The Chair : You can finish up, Mr. Jules, or we can come to it during question period.

(1200) Mr. Clarence T. Jules : We can come to it during questions. The Chair : Okay, thank you very much for your presentation. We'll hear from Ms. Simon, please. Ms. Mary Simon (President, Inuit Tapiriit Kanatami) : [ Witness speaks in Inuktitut ] Thank you, Mr. Chairman. Thank you for the opportunity to speak with you today. I have requested an appearance here today because I am convinced the government has an opportunity to address the real needs of Inuit, as well as offer a real return to Canadians in its upcoming budget.

First, let me say that all Canadians could benefit from gaining more insight into the cost-benefit dynamics between economic and social development among Inuit people. Federal budget planners and all Canadians would benefit from additional analysis on two vital questions. First, what kind of new investments need to be made to deliver a realistic chance of closing the gaps in material living standards between Inuit and other Canadians within one or two generations?

Second, knowing that the Canadian economy will be increasingly impacted by the contributions of young aboriginal peoples, what will be the predictable cost to Canadian society of not closing such gaps? My first suggestion is that the Minister of Finance direct his department to carry out an objective examination of the two questions I have posed and to report back to this committee with the results of that examination.

My second suggestion relates to the proposed changes to Canada's criminal justice system that could result in a very large increase in the number of persons serving time in correctional facilities, of which a hugely disproportionate number would be aboriginal. Inuit are abundantly aware of the suffering caused by crime. Compared to other Canadians, we see more crime in our communities; and compared with other jurisdictions, rates of violent crime are not in decline. But there is no evidence that steering federal expenditures into a massive expansion of the prison system will bring about safer communities.

The fact that huge sums of money will not be available to invest in the prevention of crime and the reform of criminals, mental health programs, substance abuse programs, special education needs programs, and youth counselling will result in more blighted and broken lives. A lot of these are related to intergenerational broken lives and grief.

I recommend that the government consider amending its draft legislation to redirect a substantial portion of those budgetary resources to the enhancement of crime prevention activities, with a particular focus on young people, education, training efforts, and health programs within existing correctional facilities. Finally, Inuit have an urgent need in three specific areas.

I urge the committee to consider funding the following: first, $10 million over five years as seed money for the implementation of the national strategy on Inuit education, contained in First Canadians, Canadians First ; second, $15 million over five years for expanded mental health programs in the four Inuit regions of Nunavut, Nunavik in northern Quebec, Nunatsiavut in northern Labrador, and the Inuvialuit settlement region of the Northwest Territories, which comprise our homeland called Inuit Nunangat; and third, $300 million for a concentrated two-year program of new housing construction in the four Inuit regions, over and above what has already been approved.

These ideas have also been described in the letter I sent to Minister Flaherty this spring. Thank you for your attention. The Chair : Thank you very much, Ms. Simon. We'll hear from Ms. Bittman now, please. Ms. Shannon Bittman (Vice-President, Professional Institute of the Public Service of Canada) : Thank you. My name is Shannon Bittman, and I'm a vice-president at the Professional Institute of the Public Service of Canada. Thank you for inviting me to appear before the committee this morning. The institute represents almost 60,000 professional employees of the federal public service.

These are the people who provide a wide range of vital functions to the Canadian public--scientific research, food inspection, tax audits, and more. Our economy appears to be once again on the brink of a recession. Canadians are faced with massive unemployment, low levels of corporate investment despite low interest rates and tax breaks, and general market insecurity. Our message today is that the solution does not lie in further tax breaks for corporate Canada or heedless cuts to the federal public service.

A swift and sustained recovery from the recent global financial crisis has been, and still is, heavily dependent on the retention of core public servants for the provision of critical government services. Public service job cuts are not the answer to increasing government revenues, and will only add risk to an already fragile economic recovery. Furthermore, labour cuts will only produce marginal, short-term gains and not the long-term, sustainable efficiencies that the government is looking for.

Use of such overly simplistic strategies as cutting through attrition, or making indiscriminate, across-the-board cuts of 5% or 10% as mandated by the deficit reduction action plan, will leave serious labour shortages in areas of much-needed expertise. In fact, departments such as Environment Canada are already having trouble fulfilling their mandate of ensuring the health and safety of Canadians. Just as troubling is the fact that Canada is falling behind other OECD countries in its ability to conduct scientific research.

These reductions will only serve to make Canada even less competitive with these countries in today's global and knowledge-based economy. It is the institute's position that instead of cutting public service jobs, the government has the opportunity to achieve the efficiencies and savings it is looking for by reducing its reliance on outsourced contracts. As we have outlined in our written brief, research has shown an average gap of 350% between an initial bid price and the final tab paid by the government for third party delivery.

This government has shown a growing dependency on outsourcing since 2005, with costs rising from $600 million in 2005-06 to over $1.2 billion in the 2009-10 fiscal year. The institute would also like to voice its concern regarding the PricewaterhouseCoopers report, which was commissioned by this government, detailing an implementation strategy for the new federal department Shared Services Canada. This report, which we have submitted as evidence to the committee, sets out a series of recommendations, including one to outsource 54% of the government's workforce to third parties in the private sector.

Ultimately, this government needs to refocus its attention away from arbitrary budget cuts and address ballooning outsourcing costs if they hope to achieve sustainable reductions in costs over the longer term. Our government needs to be careful not to repeat the mistakes of the nineties during the last round of unilateral public service cuts. A lack of proper succession planning then left major gaps in the senior ranks of many federal departments. These consequences are still being felt today.

The Public Service Commission's 2010-11 annual report also shows a troubling trend of shrinking numbers of young people within the public service. It is critical that the public service remains an attractive employment option. Recruitment and retention of employees aged or less will have a high impact on the quality of future service delivery to all Canadians. Canada's current troubled economic state causes us to ask questions about the government's desire to shrink the public administration and the services it provides.

There's been much discussion regarding the government's ability to remain flexible should we sink into another recession and stimulus is required. Such flexibility will thus require retention of those who actually deliver stimulus—public service employees.

(1205) The recent workforce adjustment announced at the Atlantic Canada Opportunities Agency-- The Chair : Please wrap up. Ms. Shannon Bittman : --seems to fly in the face of this supposed commitment to flexible fiscal policy. We ask that the government bolster its commitment to fiscal policy strategies in the next budget. Thank you. The Chair : Thank you, Ms. Bittman. We'll go to Ms. Decter, please. Mrs. Ann Decter (Director, Advocacy and Public Policy, YWCA Canada) : Thank you, and thank you for the opportunity to speak to the committee.

I'm here representing the YWCA Canada, as director of advocacy and public policy. For over 100 years, YWCA Canada has advocated for policies and programs that improve the lives of women and girls. As the country's oldest and largest women's multi-service agency, our 34-member association raised and spent over $190 million last year, providing services in communities in nine provinces and two territories. Our perspective is grounded in first-hand knowledge of the life experience of tens of thousands of women, girls, and families who use our programs and services every year, from Victoria to Iqaluit to Halifax.

With over 140 years of history, we are Canada's largest provider of shelter for women and children fleeing violence, and of employment services for women, and the second largest provider of child care. We welcomed the government's June throne speech commitment to address the problem of violence against women and girls.

Over the last decade, we have conducted extensive research on responses to violence against women and girls, culminating in our policy report, Life Beyond Shelter: Toward Coordinated Public Policies for Women's Safety and Violence Prevention , with recommendations for federal government action and documentation of promising practices across the country. We urge the government to review the recommendations of Life Beyond Shelter , with a view to reducing violence against women, and the billions it costs Canadians every year.

The strongest recommendation of this report is for policy coordination at all three levels of government. To implement the government's throne speech commitment, Budget should commit the federal government to leading a process, with input from the women's service sector, to coordinate pilot policies on violence against women at all three levels of government, to ensure women's safety. Since the 1970s, Canada has developed a mature system of emergency shelters for women fleeing violence, largely violence in the home perpetrated by intimate partners.

Initiated by women who set up safe houses in their communities, this community-based response in most of the country has evolved over three decades into a professional social service sector, accessible to women post-violence. However, research has identified crucial gaps in this system. To ensure that all Canadian women who need it have access to emergency shelter as protection from violence, the system needs further development for rural women, women in the northern territories, women with disabilities, and it needs improved cultural and language competency in service provision.

In addition, the housing crisis in all three northern territories profoundly impacts women with children who are trying to escape violence. Housing in the three northern territories has been seriously disadvantaged by the lack of federal social housing funding. Budget should initiate an annual grant fund administered by Status of Women Canada to address the identified gaps in provision of emergency shelter to women fleeing violence. YWCA Canada continues to encourage the federal government to take steps to ensure access to child care services for all families that seek it.

More than 30 years of uninterrupted increases in women's employment has given Canada a labour force that is virtually gender-balanced, the result of an incremental, but relentless upward trend in women's employment since 1976, which has doubled the number of women employed in Canada. The employment rate of women with children has followed a similar upward trend, from a 27.6% employment rate for women with infants and toddlers in to 64.4% in 2009.

(1210) The Chair : You have one minute left. Mrs. Ann Decter : Two-thirds of the mothers with their youngest child in preschool or kindergarten were in the workforce in 2009. Women's increased labour force participation has been supported by a multi-decade trend toward increased attainment of higher education. Women have risen from 32% of young graduates in to 60% in 2006. With provincial governments investing in full-day kindergarten, the federal government has the opportunity to engage provincial and territorial governments in discussion on developing early learning and child care.

Investment in child care for low-income families has been shown to yield a substantial financial rate of return for every dollar invested. Such investment would support the federal government's efforts to eliminate the deficit and return to a balanced budget through economic growth. Early learning and child care are fiscally smart investments. Thank you. The Chair : Thank you very much for your presentation. We'll begin members' questions [ Translation ] with Mr. Mai for five minutes. (1215) [ English ] Mr. Hoang Mai : Thank you very much, Mr. Chair.

Thank you to all the witnesses for being here and for your briefs. They are very interesting. We have so many questions, but there is so little time. Yesterday the representative of the National Aboriginal Caucus was here telling us about the fact that they wanted to get rid of their 2% cap, because they want the youth to study and learn to be lawyers and doctors so they can be role models. We had members opposite saying “Well, no, you should go into the trades directly”.

That let me understand their negotiating position, when we have a government that's more paternalistic and is not negotiating nation to nation and is not fulfilling the treaties. I just wanted to know, and maybe you can all respond, about the promises made to first nations in the budget. We talked about millions of dollars being promised. Was that money funded to the first nations? Mr. Richard Jock : Thank you. I'll give a brief answer, and others may have something to contribute. My understanding is that there was a commitment to achieve educational improvements but not the resources to implement them.

What we are calling for in this budget are the resources to accompany those interests. That's really an essential and important next phase. So no, those additional dollars have not been committed to first nations. Mr. Hoang Mai : But they were promised. They were in the budget. Mr. Richard Jock : I don't think there was a specific financial commitment contained in the budget. It was more on the principle of improving that educational attainment interest. Mr. Clarence T.

Jules : One of the problems with the responsibilities of your committee and government is that you need to change the philosophical approach to dealing with aboriginal people as a whole. In my opinion, it should be about creating economies. The problem with the moneys being expended right now is that the vast majority go into social welfare programs. When you maintain that kind of approach within government, it will all stay the same. You have to change the focus to begin to help us help ourselves, and that means creating economies.

I don't believe we can force on anybody the kinds of choices they make, even though I feel that we have enough lawyers. Some hon. members: Oh, oh! Ms. Mary Simon : Just to add to what Mr. Jock was saying, we too have been involved with the Minister of Aboriginal Affairs over the past two years in coming up with a national education strategy for Inuit, which some members have copies of. There is a commitment to work with us, but as of now, there hasn't been any funding allocated in the budget for this initiative. Mr. Hoang Mai : We've been really pushing for investment in infrastructure.

We've been telling this government that it's an investment. We know that there's a deficit. Obviously, we can look at some of the situations where you don't have running water or you have problems with water. You have problems with infrastructure. Can you tell us what type of infrastructure....? I mean, it's so basic. For the government not to invest in that, and not to understand it has to be done now.... Can you give us some examples? Ms. Mary Simon : Yes, I'll give an example related to health issues.

Right now there's a lot of news that the suicide rate among Inuit in the Arctic is seven times higher than in the rest of Canada. There's a reason for this. Not only are they dealing with trauma and addictions, but there are also no services in most of our communities. We're asking the government to start putting in infrastructure so that people who need support and counselling, and the doctors who will diagnose them, will have access to that.

These services are not available at this point, so we're seeking funding from the government so that we can provide services that other Canadians in southern Canada pretty much take for granted. We don't have any mental health services in the north, or very, very few.

(1220) Mr. Hoang Mai : Thank you very much. The Chair : Be very brief, Mr. Jock, and Mr. Jules. Mr. Richard Jock : Thank you. We have done a detailed pre-budget submission, and I would refer the committee to it. But I would say that there has been a clearly identified gap in the need for water. I believe it's $6.85 billion. It was done through a very detailed engineering report. An additional 85,000 homes are also required to clear the backlog.

I would say that, increasingly, items such as general infrastructure and emergency services should be seen as core supports to the community, and we're seeing increasingly that there is a need to be able to respond effectively. We have provided some detail on that and see that transforming the relationship over a long period is also— The Chair : I'm sorry, but we're way over time, and I want to give Mr. Jules a chance. Mr. Clarence T. Jules : Right now the present system is on a rationed basis, and that has to change.

We're proposing a focus on the fiscal administration and capacity that will allow first nations to be responsible for planning, financing, building, operating, maintaining and, ultimately, replacing infrastructure. The dependence here is just like the aid that is given to other countries: it fosters more aid. What we need to do is to build the capacity within first nations to sustain and build infrastructure on their own. The Chair : Thank you. Thank you, Mr. Mai. I'll just gently remind colleagues that if they ask a really good question, you should leave time to answer that really good question. I'll go to Ms.

McLeod, please, for five minutes. Mrs. Cathy McLeod : And, of course, all our questions are really good questions. The Chair: They're awesome. Mrs. Cathy McLeod: I would like to focus my questions to Mr. Jules, with a bit of a

preamble because there are many new members on this committee. Sometimes a picture is worth a thousand words. We had the opportunity last year as part of our travels to hear from a number of chiefs in the interior of British Columbia, to see what some of the aspirations were and what was happening in a couple of those communities. It was a really great opportunity. I'm going to ask Mr. Jules if he can talk first of all in a little more detail about this first nations property ownership act and the fact that it's voluntary. What is it actually going to look like?

What would it mean for the communities that decided...? First of all, if what you're proposing as legislation goes through as proposed, what would it actually look like in terms of the communities and their future? Mr. Clarence T. Jules : First of all, what we're proposing is specific legislation that would optional, so that communities could choose to opt into it. What it would do is to transfer the ownership. Right now, the federal government.... Try to imagine what it would be like if Canada tried to build an economy with no individual private property rights; it just couldn't be done.

What we're proposing is the transfer under the Indian Act of ownership from Her Majesty—I don't think Elizabeth would object—to first nations, so that we in turn would be able to have the underlying jurisdiction and title to those lands. Also, individuals would be able to have and enjoy, like every other Canadian, individual property rights so as to be able to build and own their own home. To give you an idea, I served as an adviser to the Auditor General. In the report, she said the backlog in was between 20,000 and 35,000 units, growing at 2,200 units annually.

If Indian Affairs had built 2,300 units annually from onward, reducing the backlog by units a year, at that rate it would take to 350 years to reduce the backlog. So again, you're throwing water on a bonfire. It just isn't enough to wish these problems away. What you have to do is to create the fundamentals of building an economy. The fundamental economy builder in this country is individual private property rights.

With those we could can enter into partnerships with our friends at Public Works to build the infrastructure, and we could work with our friends in the restaurant industry to build restaurants within our communities. In other words, we want to be able to empower the individual, but also to create government institutions so that we can be accountable and be part of the fiscal and governmental makeup of the federation of this land.

(1225) Mrs. Cathy McLeod : Thank you. There are two things. One I'd like to note is that the Tk'emlúps Indian Band has, I think, 70% of its own revenue now, which has really reduced its reliance. And significant infrastructure projects have gone through with federal government support, but also band support, to deal with some o