Thank you, Chair, vice-chairs, and members of the House of Commons Standing Committee on Finance. It is an honour to be here with you today.
The lead-up to the 2015 federal budget and federal election should be an important time for analysis and debate. The test for our country should be, will we leave our children with a stronger economy and stronger institutions than we had for ourselves? I worry. Growth in after-tax incomes has been stagnating. Business in multifactor productivity growth, a key ingredient for higher standards of living, has effectively flatlined. The old-age dependency ratio in Canada is about to go through a historic rise over the next two decades. We have had no federal-provincial discussion on what this may mean for sustainable growth, public finances, federal-provincial relations, or health care. Confidence in our Westminster system of responsible government has been eroded by spending scandals. The House of Commons has largely given up its power of the purse role.
On a more positive note, I believe we are about to reach some interesting junctures in the relationships between budgetary balance, fiscal sustainability, and growth. The world economy is emerging from the grips of the 2008 financial crisis. There is fiscal room to manoeuvre. There is choice in priorities and policy directions. Choose wisely.
After some difficult years since 2007-08, where Canada added about $140 billion, or 20%, to its accumulated deficit, the projected annual budget balance is near a balance. Minister Flaherty, God rest his soul, must be smiling from above. Thanks in part to historically low interest rates and 11 years of balanced budgets, or better, starting in the 1990s, the carried cost of this debt is down to about 12ยข on every revenue dollar, about one third of what it was 20 years ago.
Canada once again is headed for a structural surplus with a strong prospect of modest medium-term surpluses. Canada's fiscal sustainability situation is likely better than many other countries'. According to the Parliamentary Budget Office, the federal fiscal structure is sustainable, meaning we have a fiscal structure that will stabilize debt relative to the size of our economy in the face of demographic change. Similarly, the Canada Pension Plan and the Quebec Pension Plan are sustainable as currently structured, meaning we have a pension structure that will stabilize the relationship between net assets and expenditures over time.
We do have a fiscal sustainability issue or negative fiscal gap at the provincial and territorial level of government. The size of the gap at the provincial level was exacerbated by the federal policy change to the escalator for the Canada health transfer.
You may wish to recommend in your pre-budget consultations report that the Government of Canada prepare annual sustainability reports like other OECD countries, and that this analysis be done to reflect all levels of government. Health care is a major pressure on fiscal sustainability in Canada. Do we want a one-taxpayer approach to fiscal management? Do we want a national approach to health care cost management? If we do, the committee may wish to recommend a national dialogue on health care policy and finance involving all stakeholders.
You may wish to consider options to reform federal transfers to provinces. Balanced budget legislation as highlighted in the Speech from the Throne could provide a strong fiscal signal that the government is managing within a fiscal target. The experience in developed economies, particularly in the European Union, highlights the additional demand for analysis to mitigate the negative impacts of counter-cyclical fiscal policy. This includes the calculation of output gaps and cyclically adjusted balances, the need for corrective enforcement-type mechanisms, and stronger roles for independent fiscal institutions like PBO on the assessment of achieving targets.
The committee may wish to undertake analysis of various experiences with fiscal rules, targets, and balanced budget legislation and make suggestions on the necessary analytical requirements so that any balanced budget legislation is based on best practices. The committee may wish to recommend that the federal government provide five-year spending plans by department and agency outlining areas of spending reduction and changes to service levels. Spending restraint plans that generate fiscal and service-level risk create spending pressures into the future.
Thank you very much.