Finance Committee on March 26th, 2009

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go now to Mr. Kramp, please.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you, Chair.

Welcome, gentlemen, to your imperfect world.

[Voices]

Oh, oh!

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

In the world of science, of course, things can be exact, but in the forecasting business it certainly is abstract, because you're dealing with that little thing called humanity, and I've never met anything quite as unpredictable as that yet.

As a matter of fact, we seem to have this changing world and these uncharted waters, and I think everybody recognizes that. Of course, we had the PBO here yesterday, who essentially, in the course of a few weeks, has junked even his original forecast. So certainly--and I will quote one of Mr. Drummond's statements--this has been a humbling experience.

Knowing that, my concern, of course, is how we as a government react to this. Do we react every time there is a movement? Do we revise an entire economic plan on a daily basis? How do you react in an intelligent, capable fashion when a lot of the factors, quite frankly, are beyond our control, whether it's the Obama administration or others?

Knowing the fact that we have a deficit that could be $60 billion or $70 billion, or $80 billion by some estimates, over a period of time.... Obviously, everybody would prefer the lower proportion of that, but is it a fair statement to say that at least we have the financial capacity--you've mentioned the debt-to-GDP ratio--to move forward with a plan? Knowing that we have the financial capacity to deal with that and that we can at least move on a path that has a solid sense of direction, we can rationalize.

Would that be a fair comment, Mr. Hodgson?

[Glen Hodgson]

That's an interesting question.

First of all, I think we should be thankful as a country that we did the right thing, resolving our deficit problems back in the mid-1990s. What's really striking to me is the fact that not just the federal government but virtually everybody across the country got their act together. We got debt ratios under control, we paid down debt, and that's part of the reason Canada is in a special place, I would argue. We're actually able to provide more stimulus relative to our economy than almost everybody, except maybe the U.S. In Britain you're getting push-back now from the Bank of England, encouraging the government not to stimulate a second round, because they're worried about this talk of debt and the huge borrowing requirements that the British government has going to the market right now.

How do you respond to the current circumstances? Well, I think you start with a plan, and I see a plan. You have a plan that's going to roll forward. Clearly it will have to be adjusted and adapted as we go along. I don't think you react to every incident. Understand that growth could be much darker this year, and revenues will be impacted, and the deficit will be deeper. But the good news story, for me, is that as a country we can afford it.

I would be more challenging probably two years from now, when we come back and see growth restored, and then ask questions about whether the path to get back to balance is aggressive enough. But I'm going to save that for 18 months.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you.

We can be optimists, we can be pessimists, we can be realists. The one thing that does disturb me—and this is certainly not a slam against our media friends—is that in some cases there appears to be a race to be the bad news bearers. Quite honestly, when you take a look at some of the information per se that is out there, we all know that media coverage certainly does influence consumer confidence. Excessively negative coverage, quite simply, is going to drive down that confidence. It becomes a self-fulfilling prophecy to some particular extent. I mentioned this the other day.

We all recognize that the numbers are bad. I think there isn't a Canadian or a parliamentarian or an economist who doesn't recognize the straits we're in. But do you feel at some particular point that we're simply ramping up this downside risk without taking into account the positive possibilities and realities that we do have?

I'll leave that open to whoever would like to comment.

[Don Drummond]

I don't buy the line of argument that the media is distorting it. The news is terrible, and there's no way around it. In fact, for every example you could put to me where you think the media has exaggerated the downside, I could point to a counter-example.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Okay.

[Don Drummond]

We have had, in the last week, four increases in key variables in the U.S. housing market. I pick the U.S. housing market as an example because that's one of the criteria we need in Canada. We need the U.S. housing market to get back. We've had an increase in housing starts, resale, new homes, and the prices, and the media has jumped all over this, and it's phenomenal. Housing starts in the United States went up 22% from January to February. It blared on all the front pages how positive this was. They are at one-third the level they were a year ago. They're abysmally low. The only reason they went up is because they couldn't go any lower than they were in January. I could have spun that story in a totally different fashion. Look how low it is! Aren't we depressed at how low they were?

They've talked about Geithner's plan and they talked about the toxic assets. That's the second key condition. We have to get these toxic assets separated from the U.S. banks' books so they can lend it. There is a very good chance that plan won't work, yet it was given very charitable treatment by the media. The markets reacted up 6% to 8% around the world on that basis. I could have come and written a story on that thing: look, we're not even going to know until May; we know there's enough incentive for people to buy; we don't have any idea whether there's enough incentive on the bankers' side; this could fall flat. You didn't find a lot of people taking that stance. So I find it on both sides.

I myself am getting messages frequently pretending I'm single-handedly pulling down the economy because I have a negative forecast. The day I got that, it was released that the capacity utilization rate in Canada for the fourth quarter was the lowest number in the history of this country. What are you going to say?

It comes back a little bit to the aspect of that commercial paper. Do you see it the way it is in reality, or do you just sugar-coat it and end up with problems? If I'm in Ted's world and the capacity utilization number is really low, I want to know that and I want to do something about the management of my business so I don't get caught with unintended inventories. If you just put the blinders on, then you're not going to get anywhere.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Kramp.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

We'll go to Mr. McCallum again, please.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, Mr. Chair.

At the risk of belabouring the point, I'd like to ask Don to comment.

Can you clarify what is your understanding for the next two years? What is the government's estimate of the deficit? What is your estimate of the deficit?

[Don Drummond]

The government's estimate is simple. They haven't publicly changed it since January 27.

[John McCallum, Liberal, Markham—Unionville, ON]

I mean, what is the number?

[Don Drummond]

We all know that. Was $37 billion the hit? I can't remember precisely the number. We have as our cumulative total just slightly under $40 billion for the fiscal year 2009, and $41 billion, slightly over. The only difference between the two is that I substituted our current economic assumptions for the economic assumptions that were underlined in the budget. That's not a full-fledged different view on the budget, and I haven't assumed any different revenue or expenditure or relationships or different programs. It's simply on the basis of economic assumption.

[John McCallum, Liberal, Markham—Unionville, ON]

So if you look at the dollar value of the government's assumption over two years and ignore—

[Don Drummond]

Well, ours is $18 billion higher than theirs.

[John McCallum, Liberal, Markham—Unionville, ON]

Right.

[Don Drummond]

This is roughly a difference of $9 billion in each of those years. Basically, that's taking the level of nominal GDP difference and multiplying it by the 15% average tax rate. Revenues divided by GDP is roughly 15%. So on average government taxed 15% of nominal income. I looked at the sensitivity of employment insurance, and my higher unemployment rate adds about $1 billion. So that's our number.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

It's great to get clarity, Ted. We like clarity, like the Clarity Act.

[Voices]

Oh, oh!

[John McCallum, Liberal, Markham—Unionville, ON]

Mr. Hodgson, after that little disruption, again for the sake of clarity, for 2009, can you tell us approximately what your assumption is on real GDP?

[An hon. member]

Revised.

[John McCallum, Liberal, Markham—Unionville, ON]

In your revised forecast.