Very well.
Good morning, Mr. Chair, vice-chairs, and members of the committee. Thank you for inviting me and my colleagues to speak to you today regarding Canada's economic and fiscal situation and our monitoring of the government's third-quarter report on the implementation of the 2009 budget.
I have three key messages.
The first is that the Canadian economy appears to be emerging from a difficult recession. The average private sector outlook is stabilizing, although uncertainty remains high as the fallout from the global financial crisis persists. Based on the latest information, the PBO is indicating that the emerging recovery is fragile and the short-term economic risks continue to be on the downside.
The second point is that the world recession has thrown Canada further off its fiscal track. While Canadian fiscal numbers are significantly better than those of many other countries, even under the most optimistic private sector forecasts the federal fiscal situation is unlikely to return to balance over the medium term. A fiscal plan with targets and/or rules could help guide an exit strategy once the economic recovery has been put on a sustainable path.
The third point is that with the high levels of uncertainty and the loss of fiscal room, the policy challenges and trade-offs associated with both cyclical and structural issues become more difficult. This environment puts a premium on the need for transparent quarterly reporting on economic monitoring and budget implementation.
In this regard, the government may wish to consider the merits of including information on activities, outlays, and/or expenses to date, in addition to commitments, in the next quarterly budget implementation report. The government may also wish to consider providing analysis to parliamentarians on the effectiveness of stimulus spending to date on supporting Canadian output and jobs.
Let me now turn to the economic and fiscal situation and outlook. In July, at the request of the House finance committee, I released a comprehensive assessment of the economic and fiscal situation and outlook. At the time, I reported that private sector forecasters, on average, expected to see a technical recovery in the second half of this year, followed by modest economic growth in 2010 and more robust growth over the medium term.
I also reported that, on the basis of this economic projection, the government would experience a cumulative budget deficit of about $156 billion over the current and the next four fiscal years. In September and early October, my office, the PBO, updated its July projections, and I would like to highlight the key conclusions of our update.
The preponderance of indicators suggests that the Canadian economy has begun to stabilize in the third quarter following three quarters of negative growth. These indicators include consumer and business confidence, employment, hours worked, housing activity, and retail sales. While the Canadian economy has weathered the global recession better than most economies, Canadians have been hit hard by the recent downturn.
PBO estimates of the output gap, the level of real output compared to its potential, indicate that the depth of the weakness in the Canadian economy is more severe than it was during the recession in the 1990s and is similar to the recession experience in the early 1980s.
The unemployment rate stands at 8.4% in September, compared to 6.2% a year earlier. Including involuntary part-timers and discouraged workers, the unemployment rate would be about three percentage points higher. The average duration of unemployment is increasing at a significant rate. Canada has lost 395,000 full-time jobs since October 2008.
Although a general consensus has emerged that a recovery in the global economy is under way, considerable uncertainty continues to surround the outlook.
While the Canadian private sector forecasts indicate a modest recovery in the second half of the year, international forecasters like the IMF and the OECD are less sanguine about the pace of economic recovery and continue to emphasize the downside risk to the economic outlook. Despite this uncertainty, the September 2009 PBO survey of private sector forecasters suggests little change in the Canadian economic outlook since July.
According to the PBO survey, based on the average private-sector outlook, real GDP is projected to fall 2.3% in 2009 and rise 2.3% in 2010. Nominal GDP, the broadest measure of the government's tax base, is projected to fall 4.6% in 2009 and rise 4% in 2010. The unemployment rate is projected to average 8.4% in 2009 and then rise to 8.9% in 2010.
The updated survey implies that the Canadian economy will not return to its potential until the end of 2013. This translates into a cumulative loss of over $200 billion or about $17,000 per Canadian household in unrealized output.
According to the PBO view, there are downside risks to both the short-term growth and labour market forecasts in the September private sector survey. These risks include the potential for a weaker U.S. recovery as well as the potential for negative impacts stemming from the recent strength of the Canadian dollar.
The PBO projects a cumulative budgetary deficit of $167.4 billion over the next five years. The budget deficit is projected to rise from $5.8 billion in 2008-09 to a peak of $54.2 billion this year, falling to $19 billion in 2013-14. Consequently, the federal debt is projected to rise to $631.2 billion in 2013-14, which corresponds to 33.8% of GDP.
The PBO has improved some of the tools that it uses in doing fiscal projections, including the construction of our own measure of potential output and the government's structural balance. Based on the new estimates of potential output, PBO calculations continue to suggest that the budget is not structurally balanced over the medium term.
The PBO estimates that the structural balance would deteriorate from an essentially balanced position in 2007-08 to an $18.9 billion structural deficit in 2013-14. That said, the structural deficits projected over the medium term are significantly smaller than those of the early 1980s and early 1990s. They are also small relative to the size of the economy.
However, a more thorough assessment of the sustainability of the current fiscal structure requires a longer-term perspective, in particular taking into account the fiscal challenges posed by population aging. The PBO has undertaken such analysis and will release a comprehensive assessment of the sustainability of the government's finances in the coming months.
As noted, the PBO continues to judge that there are significant risks to the economic outlook, and there's of course a wide range of possible outcomes. To help illustrate this point, we have simulated the fiscal implications of a range of private sector economic forecasts in our September survey.
In 2013-14, the projected budgetary balance ranges from a deficit of $7 billion to a deficit of about $34 billion. This suggests that even under the most optimistic private sector forecast the budgetary deficit is unlikely to be eliminated without policy actions.
Further, considerable uncertainty remains with regard to future effective tax rates and revenue basis. In effect, there is a risk that effective personal income tax rates will recover at a slower pace than the PBO assumption.
In addition, corporate income tax revenues are subject to a high degree of uncertainty as a result of corporations' ability to carry losses backward or forward. An upside risk to the fiscal outlook in the near term arises from the possibility of large amounts of lapsed infrastructure funds. For example, one in every three planned infrastructure dollars went unspent in the past two fiscal years for which data is available.
Based on these considerations, we continue to judge that the balance of risks to the fiscal outlook over the medium term is tilted to the downside.
The high levels of uncertainty and risk also underscore the importance of a fiscal plan with clear targets for budget balances and debt. In the same vein, quarterly reports that highlight activities, outlays or expenses related to budget implementation, in addition to commitments, will help us understand the nature and impact of budget stimulus measures on economic recovery.
In closing, I thank you for the opportunity to speak to you today. I will be happy to answer your questions.
