Finance Committee on April 26th, 2012

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

I don't have time for another question, but I do want to say that there are a number of measures that are moving forward in terms of dealing with those challenges, including the option of perhaps deferring, keeping that workforce going. So I think that to take one very difficult policy decision, but an important policy decision, and isolate it from all the other issues is perhaps not really looking at the whole demographic challenge that we're going to face and how we're going to deal with it.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. McLeod.

Mr. Caron, go ahead.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you.

Mr. Page, I would like to go back to the issue raised by Ms. Glover, regarding the employment-related projections from your report. I am trying to summarize what you seem to be saying in your report. Please let me know whether I have understood correctly and correct me if not.

There are two main austerity measures in the budget—budget cuts, as announced, and a freeze on operating budgets. As those are austerity measures, stimulus measures will promote economic growth directly and indirectly. Austerity measures—those two in particular—will lead to a drop in economic growth. That drop can be calculated using multipliers. You mentioned a multiplier provided to you by the Department of Finance. Some multipliers are more well-known than others. I know that, if a dollar is injected into the infrastructure, economic growth increases by $1.60. If corporate taxes are reduced by $1, only 35¢ is generated in economic growth in the short term. You use another line to evaluate the loss of economic growth using that multiplier. You even went as far as to convert those figures to jobs. Have I understood correctly?

[Kevin Page]

Yes, that's a good analysis. As I said, the annex of Budget 2012 contains another analysis that looks at the impact of stimulus measures using the same economic multiplier. We conduct the same kind of analyses, but in the context of fiscal consolidation.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

When the Minister of Finance and his departmental staff make economic growth projections—the potential creation or loss of jobs—they mainly rely on those multipliers.

[Kevin Page]

Yes.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Is there consensus among economists when it comes to the use of multipliers in economy, especially macroeconomics, and the multipliers provided by the Department of Finance?

[Kevin Page]

Yes. There is a debate regarding the number of multipliers. People are wondering whether there is a difference in terms of the number of multipliers between 2009-2010 and today, in the context of 2012, 2013 or 2014. We think it's important to point out that economic growth is lower than it could be. It is still below its potential.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

You talked about the estimated job loss. I am not talking about the known cut of 19,200 jobs in the public sector, but about repercussions on employment owing to the drop in economic growth stemming from the austerity budget. Currently, the estimated job loss is 43,000, based on multipliers for budget cuts, and about 56,000 owing to the operational budget freeze. Is that right?

[Kevin Page]

Yes.

[Chris Matier, Senior Director, Economic and Fiscal Analysis and Forecasting, Office of the Parliamentary Budget Officer, Library of Parliament]

I'll try to shed a bit more light on those job figures.

The estimate and summary table 1 that we have for 2014 show a loss of 43,000 jobs, and this applies specifically to the spending reductions in budget 2012. But again, that's net of these positive measures.

So yes, we have taken into account the government's stimulus measures, both on the EI side and on other program spending side. We don't distinguish between public and private sector job losses. We look at the overall economy, as Mr. Page said.

But if you want to take the government's number of 19,000, which is at the end of 2014, and subtract that from our number of 43,000, that would mean roughly 24,000 in the private sector and 19,000 in the public service—again, based on the government's estimate of that number.

The rest of those job losses stem from previous restraint exercises that are occurring.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

You are confirming that the calculations are unanimously recognized by all economists. Just as a stimulus measure will lead to economic growth and job creation, an austerity budget will lead to a drop in economic growth and job loss. Your calculations are based on that.

[Chris Matier]

Yes. I would say that even recently the issue about fiscal drag has been very non-contentious. The TD's chief economist yesterday said:

I completely agree with the assessment that there is going to be a lot of fiscal (government) drag, the real question is how strong is the private sector going to be.

I think we all agree that the impact is negative. It's unambiguously negative. The question is how the private sector will respond to that.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

[The Chair, Conservative, James Rajotte]

Merci.

We'll go to Mr. Van Kesteren, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Mr. Page and everyone else from the office, I want to thank you for coming here again.

I want to tell you I spent some time last night and early this morning reading this. I think I was working on this until one o'clock this afternoon. I want to talk to you a little about your forecasting and the accuracy of your forecasting.

I don't want to be critical--you're trying to do your job--but when I read this I find there's an air of pessimism. It's that I want to talk to you about. When we look at the IMF, for instance, and the Bank of Canada, there are 14 leading private sector economists who somewhat disagree with your economic outlook on what's presented in 2012. Then when I look at the long-range forecast, that trend continues.

In 2012 you were predicting 1.9% compared to the 2.1% by the IMF and the private sector economists and 2.4% by the Bank of Canada. For 2013 the difference is even more stark, with your office predicting the real GDP growth of only 1.6% and the IMF projecting 2.2% and those same private sector economists and the bank again coming in at 2.4%.

If your numbers are correct, can you explain to this committee how the Bank of Canada and the International Monetary Fund and Canada's leading private sector economists have erred in their predictions? Why are these leading respected organizations overly optimistic in their outlook?

[Kevin Page]

When we're talking about the future, I don't think anybody knows what the accuracy will be. We'll only know when we get there. I would love to know who's going to win the hockey game tonight, as an example, right now so I could put money on the game, but we don't know.

These are all predictions. I think what we do provide in our report is what we call fan charts, so we have 16 years of history with the private sector and we've been using these private sector forecasts for that period of time, in fact, 16 to 17 years. What is our track record in terms of projecting nominal GDP one to five years out? What is our track record of hitting a budgetary balance one to five years out?

You could see we provide these confidence intervals and they're quite wide. Again, you folks have to make the decisions about is this the right plan. When it comes down to our forecasts, and the difference between, say, the PBO forecast, which is independent--it's our view--in our legislation you've asked us to provide an independent view, and it's our independent view.... How do we compare it to an average?

I think what's presented in the Department of Finance document, again, is an average of private sector forecasts. There are some below and there are some obviously higher. There's an arithmetic average. So there's probably some in our context.

I think Minister Flaherty and the Department of Finance officials quite rightly recognized that the number looked optimistic to them, so they put in some prudence. That prudence they put in on the forecast analogy represents something like $20 billion on the size of the economy, roughly about $1.7 trillion. We think it's probably an extra $20 billion, effectively, to give you a magnitude of that sense in terms of prudence.

I don't know that they're far off, and we don't really know with respect to the IMF and the OECD, and to be quite frank even the Bank of Canada, what they're calculated in terms of a fiscal drag factor for the budget. Again, the government didn't highlight that estimate in budget 2012. In some private sector forecasts, we're just getting this information now as to what they think the fiscal drag will be. I think most economists would agree that when you take that money out of the economy there will be some drag, just as they were saying quite rightly in times of stimulus that we needed the stimulus if the economy's operating below potential and it would have an impact on the economy that was positive.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

We've got to admit that in the past you've had maybe a poor track record in some of your predictions. There was a private sector study published in the Globe and Mail, and you're probably aware of that. It said that the government was more accurate than your office nine times out of fifteen.

Can you enlighten this committee and explain those apparent contradictions? And lastly, could you provide this committee with a written comparison of your predictions since 2008, comparing the economic indicators and what actually happened?

[The Chair, Conservative, James Rajotte]

Just give a brief response, if you want to, Mr. Page. If you want to provide something in writing, you can as well.

[Kevin Page]

Yes, we'll definitely provide something in writing.

Again, just to highlight, the reason we produce these fan charts is to give you a sense as to how much uncertainty there is around these estimates.

Quickly, with respect to the study you referenced, I think what it showed is that there was virtually no difference between the Department of Finance numbers and PBO numbers in terms of materiality. These are very small. They wouldn't affect any kind of decision-making sort of context. I'll leave it at that.

Thank you, sir.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Thank you, Mr. Van Kesteren.

We now go to Ms. Blanchette-Lamothe. You have five minutes.

[Lysane Blanchette-Lamothe, NDP, Pierrefonds—Dollard, QC]

Thank you.

Mr. Page, I would like to talk about Old Age Security. We have seen that the budget contains measures that affect that program. Is it true that our commitments to a public pension system are not a considerable threat to our public finances?

[Kevin Page]

The Parliamentary Budget Officer cannot use those exact terms. As mentioned in the report, we conduct general sustainability analyses. We look into the sustainability of the whole revenue and expenditure fiscal structure. In such a context, we said that it is a good thing, not a bad thing, but that the structure is stable.

[Lysane Blanchette-Lamothe, NDP, Pierrefonds—Dollard, QC]

Thank you.

Currently, the government is saying that Old Age Security is obviously not sustainable. Just today, a member said in the House that it was just a matter of basic math. I assume that the complexity of the issue goes a bit beyond basic math.

We are talking about transparency and trying to hold a debate on the announced changes to the Old Age Security Program, but we have not been provided with any studies unequivocally proving the program's unsustainability. Have you seen any such studies?

[Kevin Page]

I have no information about that. The government has prepared a study that claims the program has fiscal viability issues.