Thank you, Mr. Chair.
If I may, I will introduce our panel. Mr. Sahir Khan is our assistant parliamentary budget officer for expenditure and revenue analysis. Mostafa Askari is our assistant parliamentary budget officer for economic and fiscal analysis, and Mr. Chris Matier is our senior director for economic and fiscal analysis.
Members, if I may, today I'd like to spend some time again talking about the quarterly report but also focus my remarks on the economy and give you an update on the economic situation as well, relative to the budget.
Good afternoon, Mr. Chair, vice-chairs, and members of the Standing Committee on Finance. Thank you for the invitation to speak to you today regarding the government's budget 2009 progress reports to Parliament.
As you may recall, in late February my office released a discussion paper that suggested information to be included in these reports. In that note, we stated that, in the PBO's view, the central goal of these reports should be to provide Parliament with accurate, timely and easily understood information on three key issues: first, the implementation and progress of budget measures; second, recent economic and fiscal developments and prospects; and, third, assessing budget results relative to its guiding principles, that is of being timely, targeted and temporary.
On March 10, 2009, the government presented its first progress report. My remarks today update our previous work by highlighting what my office views as some successes from this report, some areas for potentially improved reporting to Parliament in future reports, and a brief update on the economic and fiscal context.
The key messages I want to convey to you today are the following.
The government's first report represents an important first step towards improving interim reporting to Parliament and will ultimately strengthen Parliament's budgetary oversight role. As a result, Parliament may wish to consider making permanent some type of progress reporting requirement to ensure this increased transparency for future budgets.
Second, the government's second report, in June, should address key information gaps that are highlighted in our updated monitoring and oversight framework. This includes identifying the uses of the $3 billion Treasury Board vote 35, including output and outcome indicators for all budget measures as well as key implementation risks, and finally updating the government's view on changes to the economic and fiscal outlook.
This leads me to my third key message. Recent economic data and the PBO's updated survey of private sector forecasters suggest a further significant deterioration in the outlook for the Canadian economy relative to budget 2009 fiscal planning assumptions.
As noted in our previous report, Parliament’s ability to provide effective oversight of the government’s economic action plan rests on timely, accurate and relevant information and analysis. To this end, my staff drafted an oversight and monitoring framework for the government’s budgetary measures, based on practices identified from other jurisdictions, such as, the Government of New Zealand’s regular, in-year public updates on key risks.
We are aware of the need to minimize any additional reporting burden on departments, so we suggested that the government use indicators primarily drawn from its own internal processes and external publications. This includes key indicators such as the objective risk assessment performed by the government as part of every Treasury Board submission, which is outlined on the Treasury Board Secretariat’s website.
The initial monitoring and oversight template has now been updated with the additional data released by the government in its first quarterly report. A separate briefing note has been posted to our website that provides a more detailed assessment of results to date. I want to emphasize to you today the benefits of this type of in-year reporting and commend the government in its efforts to build a new leading practice in public reporting.
We anticipate that the government will have more time over the next quarter to compile the additional indicators for June’s progress report. Depending on which information gaps remain after the second report, my staff may begin a more detailed assessment of potential higher risk initiatives, based on comparables derived from other jurisdictions and international best practices.
Given the continuously evolving economic situation, it is important that Parliament have access to up-to-date information on the economic and fiscal outlooks. The government’s first progress report provided little information on how the Canadian economic outlook has changed since the budget was presented in January or on what these economic changes might mean for the fiscal balance. Therefore, my office has done the following three things. First, for the first time, we are reporting the PBO’s near-term outlook for key economic output and labour market variables. Second, we have also updated our PBO survey of forecasters. And finally, we have used the Department of Finance fiscal sensitivities to give a rough sense of the current risk to budget 2009’s fiscal projections.
The government’s progress report states that recent economic developments are broadly in line with budget projections. In the PBO’s view, however, since budget 2009 was tabled high-frequency indicators for both the Canadian and global economies have revealed further weakness.
The IMF now expects the global economy to contract this year, representing the first decline in the post-war period. Members, if you're looking at the slide presentation, slide 4 basically shows the outlook for the International Monetary Fund.
This global weakness has had two main impacts on Canada. First, it has reduced demand for Canada’s exports. Second, it has sharply reduced commodity prices, and in turn the purchasing power of Canadian households and businesses.
Recent Canadian data show a decline in real output that accelerated in December, with the Canadian economy recording a 3.4% drop on an annualized basis in the fourth quarter of 2008 due largely to weak household consumption, business investment, and exports. It also revealed a continued slowdown in housing. And more than 200,000 jobs were lost in January and February 2009.
On slide 7, members, in the presentation, we have additional information on recent indicators.
The PBO currently expects real, inflation-adjusted gross domestic product to drop by about 8.5% in the first quarter of 2009 and by 3.5% in the second quarter. Again, we have some slides. Slide 8 actually provides the figures for our real GDP and the nominal GDP.
Because of the weakness in overall prices, the situation for nominal GDP is actually worse, with declines of roughly 15% and 4% respectively in the first and second quarters. Associated with this drop in output, the PBO expects that roughly 380,000 jobs will be lost over the first half of this year.
Turning to the economic outlook for 2009 and 2010, regrettably, I am once again reporting that private sector economic forecasts have been revised downward. These results, which now fully incorporate the forecasters’ expected impacts of the government's economic action plan, suggest that the current Canadian recession will be sharper than assumed in budget 2009, with real output expected to fall further below its trend potential than in either the 1980s or the 1990s recessions. Slide 13 provides a historical perspective.
Nominal GDP, the broadest measure of the government’s tax base, is expected to fall by about 4.5% this year, with roughly equivalent contributions expected from falling prices and from falling volumes. For the next two years, nominal GDP is now expected to be significantly lower than forecast in budget 2009, this despite the government's prudent decision to lower its growth assumption below its January survey average. Again, I refer you to slide 14.
With a weaker economy comes a weaker labour market. The PBO survey suggests a drop in employment of 2% in 2009, or roughly 350,000 jobs on an annual basis, with only a slight turnaround of 0.3% in 2010. Similarly, the unemployment rate is expected to rise further in the next two years. The survey average is for a peak of just over 9% in 2010, which is below that experienced during the past recession.
We have not had time to fully model the implied fiscal impacts of our new economic survey. Instead, we have applied the Department of Finance’s fiscal sensitivities to the new outlook.
This analysis suggests additional downside risks to the government's budget balance forecasts in the budget of 2009, mainly because of lower tax revenues. The implied budget deficits are $38 billion for 2009-10 and $35 billion for 2010-11, compared with the budget projections of $34 billion in 2009-10 and $30 billion for 2010-11.
You may recall that the stimulus goals in the 2009 budget are to increase GDP by 1.9% and to create and maintain 190,000 jobs by the end of 2010. With that in mind, please let me now discuss three outstanding issues.
The first issue is whether the current stimulus will be effective. Thus far, the government and Parliament have moved in a timely fashion to approve budget measures. The government's first progress report states that approvals for 90% of the measures are expected to be in place for April 1, 2009. It will take additional time to get money out the door and fully implement these programs, many of which require cooperation from key partners, including other levels of government. Therefore, at this point, it is simply not possible to disentangle the incremental stimulus effects of the government’s economic action plan. Indeed, no reasonable assessment can be made until these measures have been implemented and more time has passed.
The second issue is the potential need for additional stimulus in light of the fact that the average downward forecast revision in our survey during the past two months exceeds the estimated positive impacts of the government’s stimulus package. This certainly suggests that even if the current stimulus measures have their full impact, Canada faces a larger economic challenge than was envisioned when the budget was prepared, but let me be clear: this statement on its own does not necessarily imply that more stimulus is required. As a small, open economy, Canada’s recovery depends not only on the actions that policy-makers are taking to provide accommodative fiscal and monetary policies, but also, and crucially, on global economic and fiscal developments. I refer you to slides 21 and 22, which provide a historical perspective on the projected downturn relative to previous recessions in the 1990s and 1980s.
The final issue is whether the current stimulus measures are sustainable over the long term. In this regard the government’s stated goal in the 2009 budget is to enact mainly temporary measures that will avoid long-term structural deficits. In our own previous work, the PBO has provided its rough estimates of the government’s structural budget balance, which is what the government’s budget balance would be if the economy were functioning at its potential. The government’s own estimate of its structural budget balance is needed to meaningfully assess progress towards this goal.
Let me conclude by saying that these progress reports represent a historic opportunity to strengthen budget transparency regarding the implementation, oversight, and effectiveness of government budgets. Therefore, my office encourages Parliament to consider making permanent some type of progress reporting requirement to ensure this increased level of transparency remains in future budgets.
As always, we hope that parliamentarians find this work relevant and timely, and we look forward to any suggestions you may have to help us serve you better.
Thank you once again for the opportunity to speak to you today. I would be pleased to take your questions.
