Finance Committee on Feb. 5th, 2009

[The Chair, Conservative, James Rajotte]

I call this second meeting of the Standing Committee on Finance, in the second session of the 40th Parliament, to order.

From 9 a.m. to 10 a.m. today, we have before us Kevin Page, the Parliamentary Budget Officer, and pursuant to Standing Order 108(2), the study of the 2009 federal budget and recent economic and fiscal forecasts.

Mr. Page, you have with you three gentlemen who work with you. Perhaps I'll ask you to introduce them in your opening statement.

We have about ten minutes for your opening statement. I understand you may need a couple more minutes than that. Since you're the only witness here today, we could certainly allow that.

Please begin your opening statement, and then we'll go immediately to questions from members.

We very much welcome you to the committee. We look forward to your statement and your remarks here today.

Thank you.

[Kevin Page, Parliamentary Budget Officer, Library of Parliament]

Thank you, Chair.

I will start with some brief introductions.

This is Mostafa Askari, assistant parliamentary budget officer. His focus is on economic and fiscal outlook related issues. He was the chief architect of the paper we're going to discuss today.

Sahir Khan is the assistant parliamentary budget officer, and he is responsible for expenditure and revenue analysis. Detailed issues related to costing and scrutiny of estimates are under Mr. Sahir's wing.

And we have Chris Matier, who is one of our senior directors. He is also responsible for economic and fiscal analysis and forecasting. He's a principal author of the paper we're going to discuss today.

Good morning, Mr. Chair, vice-chairs and members of the Standing Committee on Finance. Thank your for giving me an opportunity to speak to you today on Budget 2009.

I would like to focus my remarks on the economic and fiscal planning framework underlying the 2009 budget. Given the high levels of global and domestic uncertainty, I believe that it would be useful for parliamentarians to have a good understanding of the economic and fiscal assumptions and related planning risks as they assess the merits of individual budget proposals.

In this context, I am releasing today a briefing note prepared by my office for your deliberations that examines key issues and potential avenues of inquiry for parliamentarians on the outlook. I would also like to take the opportunity today to highlight some work under way and proposals by the Office of the Parliamentary Budget Officer for future analysis and discussions.

By way of background, I would like to note that the legislative mandate of the parliamentary budget officer is to provide independent analysis on economic trends, the nation's finances, and the estimates of the Government of Canada. The legislation highlights three named committees for the parliamentary budget officer, which will shape its relationship with parliamentarians: this committee, the Standing Committee on Finance of the House of Commons; the Standing Committee on National Finance of the Senate; and the Standing Committee on Public Accounts of the House of Commons.

It is the mission of the Parliamentary Budget Officer to support Parliament and parliamentarians in exercising their oversight role over the government's stewardship of public funds and in ensuring budget transparency. Like other legislative budget offices around the world, the PBO is open and transparent to ensure that, to the best of our ability, the analysis is timely, authoritative, objective, and non-partisan.

Since my appointment on March 25, 2008 as the Parliamentary Budget Officer, I have been building capacity within my office to carry out this mandate. In the spring of 2008, I committed to parliamentarians that the parliamentary budget office would provide timely economic and fiscal analysis, meaning pre- and post-economic updates and budgets, so that parliamentarians would be supported in their important deliberations on economic and fiscal issues.

There are two overarching messages that will summarize my remarks today and highlight important challenges facing parliamentarians on the deliberations regarding the 2009 budget.

First, there is significant uncertainty and downside economic and fiscal risk to the planning outlook, as is the case in other developed economies around the world. We are facing the first recession in Canada in nearly two decades. Given the global and financial environment and the downward revisions to the outlook over the past six months, it is important that parliamentarians receive timely and updated information on the current economic developments and the planning outlook.

Second, Budget 2009 contains relatively large and diversified measures to support demand in the Canadian economy. Given the downside risk to the economy, the general political support for stimulus budgetary measures, the nature of proposed measures, and a recent history of increasing lapsed appropriations, it is important that parliamentarians receive timely information and oversight on implementation of Budget 2009.

Since Budget 2009 was tabled on January 27, my office has undertaken an analysis of the government's economic and fiscal assumptions. The analysis is outlined in some detail in our briefing note. I would like to highlight some observations on the 2009 budget and economic and fiscal outlook. There are five principal questions.

First, do the economic assumptions presented to Parliament represent a reasonable basis for fiscal projections, and are the economic risks adequately characterized?

In general, the Budget 2009 economic assumptions based on the average private sector outlook appear reasonable. However, the adjustment for risk made in the budget may be insufficient for budget planning over the medium term, particularly if the recession turns out to be deeper and/or more prolonged than is currently expected by private sector forecasters.

Budget 2009 characterizes this projected downturn as “milder than the last two Canadian recessions”, based on quarterly year-over-year real GDP growth rates. This does not, however, take into account the economy's performance relative to its potential capacity. In terms of the cumulative amount of unrealized output, PBO analysis suggests that this projected economic downturn may already be more severe than either of the last two recessions.

Members, I ask you to look at figure 1 of the PBO briefing note for a graphic display of this point.

Furthermore, one of the important assumptions underlying the 2009 budget economic outlook relates to corporate tax revenues. PBO analysis of experience of past recessions would suggest that corporate profits relative to nominal GDP would initially decline to a greater extent and then remain significantly below pre-recession levels for some time.

Members, I would ask you to look at figure 2 of the PBO briefing now.

The apparently more optimistic Budget 2009 assumption creates some downside fiscal risk to the planning outlook. Furthermore, the government's downward risk adjustment to nominal GDP largely affects only the near term, leaving the level of nominal GDP essentially unchanged in the outer years of the projection period. That is, the government has not made a complementary risk adjustment to the final years of the projection period, which may increase the risk to attaining projected medium-term budget balances.

The second question is the following: do the fiscal projections provided to Parliament represent a reasonable basis for planning and are the fiscal risks adequately characterized?

Due in part to the economic risk and the treatment of that risk in Budget 2009, it is our judgment that there is a downside risk surrounding the government's projected budget balances over the outer years of the projection period, and, accordingly, a risk that the government's budgetary balance will not return to a surplus position by 2013-2014.

In addition to the economic risks, the return to a small surplus position, on a status quo basis, is possible but dependent on a rapid recovery in tax revenues as well as the effective implementation of planned contractionary measures—over and above the “sunsetting” of temporary measures announced in Budget 2009.

The fiscal track assumes the government will raise employment- insurance (EI) premium rates while the economy remains well below estimates of its potential capacity.

The government's status quo fiscal track also continues to include just under 8 billion in yet-to-be-determined fiscal savings and gains from the sale of assets.

The third question asks what the government's structural budget balance is, given the measures introduced in Budget 2009. One way to look at the underlying financial health of the nation's finances is to measure the structural budget balance, which would show what the budget balance would have been had the economy been operating at its potential level. My office released a report on the structural balance in Canada last December to provide a basis for this type of analysis.

Largely as a result of the permanent personal income tax measures introduced in Budget 2009, the structural surplus has been reduced over the period of 2009-10 to 2012-13 from an average of $5 billion annually to just under $1 billion on average. The structural surplus is then projected to rise to $5 billion in 2013-14 as the corporate income tax rate reductions are completed in 2012-13 and the annual growth and planned program spending is held below 4%.

In this regard, I wish to recommend that the Department of Finance publish the detailed Budget 2009 assumptions and projections related to the income components of GDP, effective tax rates, estimates of potential output, and estimates of structural and cyclical budget balances to help parliamentarians and Canadians better understand the underlying position of the government over the upcoming years.

The fourth question asks if the size of the fiscal stimulus is appropriately measured. PBO views the $39.9 billion measure of the federal stimulus in Budget 2009 as a maximum or gross estimate. Adjusting for restraint measures proposed in the 2008 economic and fiscal statement, and the contribution to stimulus associated with maintaining current EI premium rates in 2010, PBO estimates that the total net stimulus could be about 20% smaller--at $31.8 billion--than is reported in Budget 2009 for the 2009-10 and 2010-11 periods. Further, a significant part--$10 billion, or 25% of the federal stimulus package--is conditional on contributions from other levels of government.

My fifth question asks whether Parliament has a clear articulation of the economic objectives of the Budget 2009 economic action plan, and whether the government has articulated a fiscal plan with fiscal targets for budget balances and federal debt. Budget 2009 estimates that its new measures will increase real GDP by 1.4% by the end of 2010, which translates into 140,000 jobs. When funds leveraged from other orders of government are included, the impact on real GDP is estimated to be 1.9% by the end of 2010, translating into almost 190,000 jobs created or maintained.

PBO supports the transparent approach to articulating the economic objective in a measurable fashion. In this regard, it is important for parliamentarians to debate the merits of a stimulus package, which the government has valued at close to $40 billion cumulatively over the next two years, against this economic objective.

Budget 2009 provides a transparent five-year projection for budget balances and federal debt. However, it does not provide a re-articulation of the government's fiscal anchors for its fiscal plan, which was previously highlighted by balanced budgets and a target for a 25% debt-to-GDP ratio. Parliamentarians may wish to encourage the government to renew and restate its fiscal objectives.

I wish to thank members of the committee for providing me the opportunity to raise some issues for your deliberations on Budget 2009 regarding the economic and fiscal planning assumptions. Consistent with the mandate of the Parliamentary Budget Officer, I wish to make a few brief comments and proposals about some future work my office can undertake to support your efforts.

The impact of the stimulus package in influencing the government's economic recovery is predicated on the government's ability to successfully implement the new budget measures. As a result, operational implementation of the proposed budget measures will need to be closely monitored. In this regard, PBO has begun working on an assessment of the targeted, timely, and temporary nature of each proposed budget measure. This report will be published in the coming weeks.

In addition to this initial assessment, in keeping with the mandate of budget oversight, the PBO is prepared to help develop a robust accountability framework based on OECD best practices, to enable parliamentarians to exercise effective oversight on budget implementation. This framework can be done with collaboration from the public service and reviewed and endorsed by parliamentary committees like this one.

Consistent with the need to support oversight and implementation of Budget 2009, PBO will consider the preparation of independent analysis of regional and stakeholder impacts. As well, PBO is prepared to look at specific proposals in Budget 2009 from a financial analysis perspective. For example, we've been asked by a member of Parliament to look at the proposed short-term repayable loans proposal for General Motors and Chrysler. The PBO preliminary report on this proposal will be made available to parliamentarians next week.

Thank you for your interest, I would be pleased to take your questions.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Page, for your presentation here this morning.

We'll start with questions. Mr. McCallum, you have seven minutes.

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

Thank you, Mr. Chair, and thank you, Mr. Page.

I want to just begin with a statement that our party fully supports your work and your budget and your office. We think you've supported parliamentarians very well, and we look forward to today's initiative, but also to the future ones you mentioned.

I was quite intrigued by your mention of the future work on accountability framework and the kind of reporting you might do. Perhaps I can ask you, with a specific example that is important to all of us, whether the infrastructure money is likely to get out the door and be spent and used by shovels as quickly as assumed in the budget. I think it's extremely important for us to be able to monitor that in a timely, accurate way.

I would think that one might consider stages like applications that might come into the government, decision lines of the government, money out the door—but is money out the door just to another government, or is money out the door to the actual project? The framework you're talking about, would it be able to help us in those dimensions to truly see if the infrastructure dollars are getting to the projects and when?

[Kevin Page]

Thank you very much. And thank you, sir, for the support for the work of the office.

As you noted, we think we can provide an accountability framework based on OECD best practices, with full transparency, on budget implementations. There are some best practices that have been articulated by the OECD and the IMF. Based on those best practices and looking at the 2009 budget, which is an expansive budget with over 100 measures, we could actually kind of deconstruct that budget and use those best practices and prepare an accountability framework for all measures, including infrastructure.

Regarding infrastructure, sir, as you've noted—and I think you've noted it as well in question period, as other members have—there have been significantly increasing lapsed appropriations in recent years. This would certainly be one key area we're going to have to monitor and perhaps pay more attention to than others, if you look at the successful implementation. It's also a measure in Budget 2009 where the indicator has one of the biggest stimulus impacts for the Canadian economy. So it's essential, if we want to get the stimulus that we need to get in the economy, that this infrastructure be implemented in a timely way in 2009 and 2010, when the economy is likely to be at its weakest.

Sir, I think we could design an acountability framework based on stages that could roll out consistent with a quarterly kind of reporting system that would show that flow. It would be different from something we've seen before, so I think it would be important to have lots of deliberations with the public service, with members of committees. They'd be comfortable with that kind of framework. We haven't seen that kind of transparency.

The Auditor General has raised a number of points in recent years about putting money into end-of-year funds, trust funds, and we've not had the kind of accountability some parliamentarians would like. I think in some senses, given the nature of the severity of the economic problems we have, we probably need to look at new ways of doing this. I think a report that kind of looks at this money and how it's flowing, breaks it down at decision levels, down to the project, is actually essential in this kind of time, and we would look forward to preparing that type of report.

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

Thank you very much. I look forward to that.

If I can change the subject now, today we have a juxtaposition of two things. On the one hand, yesterday TD Bank projected a worse economic situation, with 325,000 jobs lost in 2009, on top of, I believe, 84,000 jobs lost in the last two months of 2008. That's 400,000 jobs over 14 months.

The government had talked about creating 180,000 jobs, but if you net out the expenditure reductions, and if you exclude the provincial actions, which may not happen and which are not federal anyway, what is the job number you would give us as being created by the budget, first of all in 2009, and second, over the two-year period, not counting provincial actions and netting out expenditure cuts?

[Kevin Page]

You're quite right that the labour market has probably shocked a lot of people, particularly in the fourth quarter of 2008, in that the numbers turned much weaker. We've seen pretty much full employment level loss since the spring of 2008, and then we saw fairly significant declines in full-time employment in the months of October and November, and significant losses, as you suggested, in all-time, full- and part-time, of about 100,000 in October and November.

Private sector projections in general, on which the Department of Finance has based its forecast, have the unemployment rate rising from current levels of about 6.6% to about 7.5%, which would be somewhat less than the kind of job loss reported by the Toronto Dominion Bank—the numbers that were recently released. What underscores that is almost with each week, as we saw the economy becoming weaker, I think most economists were surprised by the release of the November GDP numbers—a 0.7% decline in real GDP of significant output loss in November. The economy gets continually weaker and weaker right now, which underscores the need for monthly monitoring.

On the numbers in the report, in the budget the government estimates a 140,000 net job creation based on federal stimulus and a 190,000 job creation based on total stimulus. Those numbers do look weak relative to the amount of stimulus we're trying to put into the economy. They may merit some further look to see whether they've actually underestimated the job loss that may actually come from that infrastructure type of investment. We don't have an independent assessment right now as to what the net job creation would be, but again, in the context of what you said earlier, sir, there is now a need to monitor the job loss on a month-to-month basis.

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

Very briefly, the 140,000 is the government figure over a two-year period? Do we know how many jobs the government thinks this budget will create or save over 2009?

[Kevin Page]

My understanding of the government's measures, sir, is that at the end of the two-year period, at the end of 2010, the fiscal stimulus measures that would be put in, roughly $40 billion, would add to the level of GDP of 1.4% and it would add in ongoing terms 140,000 net term jobs.

The government's projections do show an increase in the unemployment rate as a result of the weak economy in 2009-2010.

[The Chair, Conservative, James Rajotte]

Thank you.

Very briefly, sir.

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

I would say that a rough calculation, given our estimates of the net stimulus once you take into account the spending reductions, would probably be about three-quarters of that number, roughly. So our net estimate of the federal fiscal stimulus is around $32 billion. The total number of jobs--I can't give it to you year by year, but I would guess probably about 75% of the federal estimate of 160,000 that you've cited, so maybe 120,000.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. McCallum.

Monsieur Laforest.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Thank you, Mr. Chair.

Good morning Mr. Page, and members of your team. As a first comment, I wish to tell you that my party, the Bloc Québécois, considers your role and work to be extremely important. This allows you to have access to data and information that are extremely important for sound management and democracy.

You are Canada's parliamentary budget officer. We are in a recession, the country is experiencing a significant situation. I am sure you read the newspapers, and that you are certainly aware that south of the border, in the United States, a severe recession is underway and that measures of a greater order of magnitude have been announced by the new President of the United States. According to analyses done to date, Minister Flaherty's budget contains measures that represent perhaps one fifth of those adopted by the United States.

In your opinion, to what extent could Canada move out of this recession notwithstanding what is going on in the United States? Will Canada survive even if the U.S. stimulus package fails?

[Kevin Page]

In my opinion, it is very difficult for Canada to perform differently than the United States. The United States has entered into a period of significant economic weakness which has a big impact on the Canadian economy. However, Canada's fundamentals are certainly stronger than those of the U.S.

Those fundamentals will help us, going into this recession, so we can support Canadians in a much better way than the Americans are perhaps best positioned to support them. But when one looks at the performance of the Canadian versus the American economy over the long run of a 30-year or 40-year period, we've basically followed similar cyclical patterns. We've had periods of time when our economy is a little weaker or a little stronger, but virtually the same cycles.

If there are measures that need to be considered or implemented in a timely context because the American economy looks weaker, or it appears to be performing weaker, measures that we need to implement, then again it underscores the need for almost monthly or quarterly reporting.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

There are certainly many parallels that can be drawn between our measures and those announced in the United States. Many of those measures involve specifically developing new technologies, such as new sources of renewable energy. In Canada, we do not have such measures. Are we missing an opportunity if we do head in the same direction as the Americans?

[Kevin Page]

It is possible to analyze the economic stimulus plan proposed by the government in Budget 2009 and compare it to the American package. The American proposals are much broader in scope than those of our government, but the American economy is much weaker.

The American economy is much weaker. The stimulus package that President Obama is proposing right now is in the neighbourhood of 5% of GDP. The stimulus package that we are talking about in Budget 2009 is in the order of 2% to 2.5% for Canada.

If we were asked to do a comparison of the different types of proposals, we could assess it. We could assess the base under certain multipliers if there were that support to do that. In the report we prepared prior to the budget, we did a comparison of the size of packages but not the comparison of individual proposals.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

In November, you stated that in terms of the economy and fiscal tracking in view of a recovery plan, three conditions were important: measures must be temporary, timely, and targeted.

Are these conditions being met by the government's action plan, as presented in Budget 2009?

[Kevin Page]

We undertook a study that looks at the different proposals contained in the budget, with respect to motions of...

timely, temporary, and targeted. We will release that report within the next few weeks. We will examine all the key spending measures.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Perfect.

[The Chair, Conservative, James Rajotte]

You have one minute remaining.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Thank you, I am done.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Laforest.

We'll go to Mr. Menzies, please.

[Ted Menzies, Conservative, Macleod, AB]

Thank you, Mr. Chair.

We welcome for the first time our new Parliamentary Budget Officer to this committee.

I will repeat Mr. McCallum's comment that we completely support the role you're playing, recognizing, of course, that this role has been missing for a long time. This government committed to putting this office in place. I think it will prove to be of benefit to all parties in this House to provide more information. The reason we're here is to represent our constituents, and if we as members of Parliament don't have all the numbers at our disposal, then we're not doing the job that we could. So we do appreciate your comments and the role you're playing.

We recognize, certainly, what an unprecedented situation we're in. My first question would be in reference to where you get your numbers from. In looking through your biography, I recognize it's an incredible biography, the history that you have working in a number of government departments, so you have an incredible understanding of the workings of government.

At the Department of Finance we depend on a number of private sector forecasters to give us numbers and projections. The issues around the fall economic statement, of course, were dependent on those private sector forecasters, and we took sort of the middle of the road and factored in the stimulus that we presented in there. We have a number of private sector forecasts, and I'm just wondering if those are the basis of a number of your projections or all of your projections and how solid those are. We have to wonder, because those numbers were falling by the day last fall. They came out after the economic statement and asked where we got those numbers. Well, as a matter of fact, they're on your website. All of the private forecasters--I'm not saying you, I'm saying the private sector forecasters--gave us those numbers, and we took the difference between the high and the low and averaged it with the stimulus involved.

Can you share with us where you get some of these numbers?

[Kevin Page]

Certainly.

Thank you again for your support. At the Office of the Parliamentary Budget Officer we certainly see our role as supporting all parliamentarians, all of Parliament, all parties. When we do our work in the context of independence, we see us supporting Canadians in that context as well, as you've said.

In terms of where we get our numbers, sir, it partly depends on the nature of the work we're doing, but in the context of what we're talking about today--economic and fiscal analysis and projections--we use techniques very similar to those that are used by the Department of Finance. In fact, a large number of our team members who are responsible for the forecasts we're preparing and putting forth for you have worked at the Department of Finance for many years, including Mostafa Askari, Chris, and me. In fact, Mostafa and Chris were the senior chief economists for forecasting at the finance department for a number of years.

Very briefly, finance actually prepares its forecasts based on average private sector forecasts, with the transparency in those, and the five-year projections. They reconcile their projections in the budget, with changes from forecast to forecast. That kind of transparency is actually an international best practice. We like best practices. We've actually copied to a large degree their best practice.

We do our own surveys, sir. The finance department surveys 18 private sector forecasts on the economy and the outlook for the next five years. We don't have access to their 18. We actually survey 11. So we have a sample somewhat smaller, in the nature of a dozen. Based on those projections, we actually use an econometric model very much like the one the Department of Finance uses, which we've all used in the past. We've actually used one from a firm in Toronto. We kind of tune the model, so to speak, so it can help us with the fiscal forecast. We've built in what we need to have to prepare fiscal forecasts for you for analysis.

We'll also provide you with different scenarios, very much like the finance department would. Having worked at the Department of Finance, we can tell you that they need to give you the best-case average scenario. We will also give you a sense of the low and the high. We certainly did that going into November, because we saw the broad range. We did that as well just prior to the budget. So if you take the low projection, we'll give you a sense of what that means fiscally. We're not saying that it's necessarily going to be the scenario; we just want to attune you to this uncertainty. And just to underscore your point, there is significant uncertainty.

Forecasting is a very humbling profession to be involved in. We don't do it because we want to do it. We do it because we need a framework. We don't do it in the sense that we want to measure ourselves vis-à-vis some other private sector forecasters and say our forecasts are better. We want to give you a framework you can do budget planning on. In this environment, when we don't know how deep the recession is going to be, we want to give you a sense of risk, a sense of how big that could be in order to kind of facilitate your debate. That's what we're really effectively trying to do, sir.

[Ted Menzies, Conservative, Macleod, AB]

I'd like to make sure we have it on the record that an economist actually used “humble” in one of this answers.

Do I have time to...?