Finance Committee on April 18th, 2023

[Yves Giroux]

I will do so with pleasure, Mr. Ste‑Marie.

The recommendation I made has to do with the government's timing for tabling the main estimates. Since I've been in office, I've spoken several times about the way the government funds itself. The bill is such that current expenditures authorized by Parliament must be tabled before March 1. It is indeed tabled before March 1, but it almost always precedes the budget announcement. Parliamentarians are therefore asked to vote on funding and government operations, but the government tables its budget after they have that piece of legislation in hand. It means that, in the supplementary estimates, the main estimates, you don't see the entirety of government expenditures, which must be corrected through the supplementary estimates. You're asked to vote on government expenditures for the year to come before you can even know the government's priorities.

One way of simplifying things would be to ensure that the budget is tabled in February, for example, on a predetermined date or within a predetermined window. It would allow you to have the budget in hand, and then get the bill that includes the government's expenditures, meaning the government's operating costs and budgetary initiatives. You would have a better idea of the government's operations and expenditures, meaning the funds it needs to function and to keep its promises. It would be more logical to have the budget first, and then the bill asking for the funds to keep the commitments made in the budget.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you.

Let's hope the government moves forward. We will try to remind the government of it as often as possible. The parliamentary secretary is here with us, so I hope he's taking it all under advisement.

In the budget analysis, one of the problems I see has to do with the issue of transparency. In fact, it shows in your analysis as well. To see from the angle that interests me, I'll make a comparison. At the time when Mr. Paul Martin was the Minister of Finance, my predecessor and Bloc Québécois critic on the subject found the government's trick for budgets: It systematically overestimated its expenditures, and therefore achieved a balance or ran a slight deficit. At the end of the fiscal year, it could always claim that, in the end, the situation was better than what was expected.

I'd like to know your opinion of government forecasting when it comes to expenditure growth.

At the same time, the latest data from public accounts shows that the government left $41 billion on the table in lapsed appropriations. They had essentially been voted on, but a part of them weren't voted. The most recent fiscal year for which numbers are available is 2021‑22. When I asked Department of Finance officials to tell us where they were in the budget and how to take them into account, they told me that they were unable to answer those questions and that they weren't systematically included.

I'd like to hear your comments on all that.

[Yves Giroux]

Thank you.

Your question includes several points. I'll start with the issue of lapsed appropriations. Because of the government's structure and the constraints imposed on departments, constraints which prevent them from spending more than what Parliament allocated to them, managers throughout the whole of government exercise caution. They will ask for more funding than necessary to avoid unpleasant surprises, or to avoid reaching the limit of what they can spend to deal with the unexpected. They therefore want to avoid going over their budget and overstepping the law. That means lapsed appropriations occur every year, and they're included in the government's budgetary framework.

When the government and Department of Finance officials establish their budgetary estimates, they always include the lapsed appropriations factor to reflect the fact that it happens from year to year. Obviously, when funds are added on a one-time basis—as we saw during the pandemic, for example—lapsed appropriations grow, because it's more difficult for the government to accurately predict how much it will spend.

The other question has to do with budgetary estimates and the fact that there used to be reserves, cautionary factors, which led to overestimating expenditures to make sure that the results were better than the forecast. That, among other things, is what led to creating the Office of the Parliamentary Budget Officer. When the government underestimated its surpluses, many parliamentarians were frustrated, because it prevented them from having truly informed debates and getting an accurate idea of public expenditures. It was a concern then, but it is less so now, thanks to the establishment of an office like mine.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Ste‑Marie.

Now we're going to the NDP.

MP Blaikie, you'll be our final questioner.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you very much.

I think Canadians who get the lion's share of their knowledge about federal government policy from question period might be thinking the carbon tax is a large source of net revenue for the government.

What is the net revenue to the federal government from the carbon tax?

[Yves Giroux]

Well, the carbon tax has been designed so that the vast majority of proceeds are returned to individuals and households. The net revenue for the government should be negligible, especially when considering the administration costs. The net proceeds from the carbon tax to the government are not exactly zero, but they are close to zero.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Okay, it's not a real revenue source. It wouldn't appear in a budget table or anything like that.

[Yves Giroux]

Well, for government operations of over $400 billion, it is negligible, taking into account the proceeds returned to individuals, as we have said in many reports.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

So the money that's collected gets returned to Canadian individuals. Does any of it ever get returned to Canadian businesses?

[Yves Giroux]

To my knowledge, it doesn't. There might be some very specific aspects, but the bulk of the proceeds get returned to individuals, to households.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

We've heard a lot of controversy around the question of whether Canadian households receive more back from the tax they pay than they pay in tax. What I'm hearing is that the entire amount individuals pay that's designated as a carbon tax and the entire amount businesses pay that's designated as a carbon tax is returned to Canadian individuals.

Is there a household income level under which we could say with confidence that people are receiving more than they're paying or are at a break-even point?

[Yves Giroux]

That's a question for which the answer varies by province, because it depends on consumption patterns and on how the electricity that households consume is generated. Is it generated from fossil fuels or not? Generally speaking, though, if we look only at the carbon tax that households pay and the rebate they get, the majority of them—I'd say about 80%—get more in rebates than what they paid.

The top quintile, or the top 20% of households in terms of income, generally pay more than what they get in rebates if we look only at the carbon tax they pay versus what they receive. It varies, of course, depending on individual consumption patterns. If you drive a big RV and you heat your home with oil or natural gas, you will obviously pay more than you receive in carbon taxes.

The controversy has arisen because of the inclusion of the economic impacts of the carbon tax. It's true that any tax has implications and generates some friction in the economy. The carbon tax is no different. Introducing a carbon tax has impacts on specific sectors. The more fossil fuel-intensive these sectors are, the more impacts are likely to be felt on these sectors. When including the economic impacts, we find that most households will see a small loss, although the magnitude varies, when taking into account the loss of economic output, investment income and employment income and the difference between what they paid and the rebate they receive.

It's taking into account all the impacts of the carbon tax in the economy.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Is that a forecasting as well?

[Yves Giroux]

Yes.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Okay. So does that forecasting include likely emission reductions from investments that government and people in the private sector are making in order to reduce their emissions already, or is that not part of the assumption base that generates those forecasts?

[Yves Giroux]

That includes the behavioural change that will be induced by the carbon tax and its increase, but it does not include the so-called benefits of carbon emissions reductions. It's very difficult to quantify, in dollar terms, the benefits of a reduction in greenhouse gas emissions. If there was a way to quantify the benefits of reducing carbon emissions between now and 2030, we'd be happy to consider and include them, but the dollar benefits of transitioning to a greener economy between now and 2030 are very, very difficult to assess.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

In the economic analysis that says Canadians are breaking even or suffering a small loss, a lot of assumptions have to be made about behavioural change. There hasn't been an attempt, because there's too much uncertainty and there isn't an adequate model to measure the financial benefit of emissions reductions. However, on what we can measure very clearly, which is money paid under the auspices of the carbon tax and the money that's refunded to individuals, roughly 80% of Canadians are breaking even or receiving more back than they paid in the carbon tax. Of the 20% who are likely to be paying more in tax than they're receiving back, they're likely to be in the top quintile of Canadian earners. Is that a fair statement?

[Yves Giroux]

That's a fair statement. That's a fair depiction of the results of our multiple reports on that issue over the last few years.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you for that. I appreciate the clarity, because I think it's become quite muddled in parliamentary debate recently.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Blaikie.

I want to thank the Office of the PBO and of course the PBO for being with us.

Monsieur Giroux, thank you for your testimony on this study. Thank you very much. We really appreciate your time.

Members, we will now suspend while we get ready for our second panel.

[The Chair, Liberal, Peter Fonseca]

Members, we're back for our second panel.

From the Bank of Canada, we have the governor, Tiff Macklem, and the senior deputy governor, Carolyn Rogers.

The floor is now yours for some opening remarks. Then we will open it up to members' questions.

[Tiff Macklem, Governor, Bank of Canada]

Thank you, Chair, and good morning, everyone. We're very pleased to be here, the senior deputy governor and I, to discuss our recent policy announcement last week and our monetary policy report.

Last week we maintained the policy rate at 4.5%, and we continue to assess whether monetary policy is sufficiently restrictive to return inflation to the 2% inflation target. Since the last time we were here, we've seen a steady improvement in inflation and modest economic growth. Inflation is coming down quickly. In the data this morning, inflation for March came in at 4.3%. We forecast inflation will be around 3% this summer. We are encouraged by that, but we're also seized with the importance of staying the course and restoring price stability for Canadians.

Several things have to happen to get inflation all the way back to the 2% target. Inflation expectations need to come down further. Service price inflation and wage growth need to moderate. Corporate pricing behaviour has to normalize.

We're focused on these indicators and the evolution of core inflation to ensure that CPI inflation continues to progress towards our target. If monetary policy is not restrictive enough to get us all the way back to the 2% target, we are prepared to raise interest rates further.

Before I take your questions, let me give you some economic and financial context for our decision.

The Canadian economy remains in excess demand. Gross domestic product, GDP, growth in the first quarter of the year appears stronger than we projected in January, and the labour market is still tight. The unemployment rate, at 5%, remains near its record low, and wages continue to grow in the 4% to 5% range. Employment growth has been surprisingly strong, reflecting continued demand and increases in labour supply.

Past policy rate increases are working their way through the economy and restraining demand. Households are slowing their spending, particularly on big-ticket items. As mortgages are renewed at higher rates, more households will feel the restraining effects of monetary policy. Taking these forces into consideration, we expect Canadian GDP growth to be weak for the rest of the year before beginning to pick up gradually through 2024 and 2025.

What does all of this mean for inflation? We've come a long way from the 8% inflation that we saw last summer. As I mentioned, annual CPI inflation was down to 4.3% in March, led by falling goods price inflation, and we see further declines ahead. That's good news.

However, many Canadians are still struggling to manage the rising cost of living, and the prices for many things people need to buy are still rising too quickly. Food price inflation is just under 10%. We expect food price inflation to come down in the months ahead, but service price inflation will take longer. Continued, strong demand and a tight labour market are putting upward pressure on many services' prices, and those are expected to decline only gradually. We expect it will take until the end of 2024 to get inflation all the way back to our 2% target.

When the governing council met last week, we discussed whether we've raised rates enough. We considered the likelihood that the policy rate may need to remain restrictive for longer to return inflation to the 2% target.

Governing Council also discussed the risks around our projection. The biggest upside risk is that services price inflation could be stickier than projected. The key downside risk is a global recession. If global banking stress re-emerges, we could be facing a more severe global slowdown and much lower commodity prices.

Overall, we view the risks around our inflation forecast to be roughly balanced, but with inflation still well above our target, we continue to be more concerned about the upside risks.

Let me conclude. Our job at the Bank of Canada is to get inflation all the way back to the 2% target. We are encouraged by the progress so far. When we see inflation around 3% this summer, that's going to be further welcome relief for Canadians.

Let me assure Canadians that we know our job is not done until we restore price stability. Price stability is important, because it restores the competitive forces in the economy and allows Canadians to plan and invest with the confidence that their money will hold its value. That's the destination. We're on our way and we will stay the course.

With that summary, the senior deputy governor and I would be very pleased to take your questions. Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Governor Macklem and Senior Deputy Governor Rogers.

We're off to our questions. In our first round, we have the Conservatives with MP Hallan for six minutes, please.

[Jasraj Singh Hallan, Conservative, Calgary Forest Lawn, AB]

Thank you, Chair.

Thank you to Governor Macklem and Senior Deputy Governor Rogers for being here today at committee once again.

The Parliamentary Budget Officer projects that the new growth spending for budget 2023 will be $6.7 billion higher than projected in 2023, at $69.7 billion, and there's no doubt that there will be more government spending given the track record of this Liberal government. Does this increased level in spending work against your efforts to address inflation?