Mr. Pacetti, go ahead for five minutes.
Evidence of meeting #31 for Finance in the 40th Parliament, 3rd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was debt.
A recording is available from Parliament.
Evidence of meeting #31 for Finance in the 40th Parliament, 3rd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was debt.
A recording is available from Parliament.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
I want to thank the witnesses for being here.
This may be a bit of a follow-up to what Mr. Wallace was saying. Everybody has been talking about household debt, but let's talk about government debt. I want to tie it into the domestic growth. We saw in the past two years that if the Government of Canada is off by even 1% it costs the fisc between $15 billion and $20 billion. Nobody is talking about the fact that we don't even know what our number is going to be. It keeps changing. The department prediction for 2010 was originally 2.3% and now it's 2.6%. The economists are coming in around 3%. Just that variance of 0.5% is going to cost the general fisc about $10 billion. Can I get your comments on that?
How are we going to get out of this mess?
I think, Glen, you addressed it initially and said we should have a three- to five-year plan. But looking at the numbers, I don't think we're going to get out of this any time soon.
Senior Vice-President and Chief Economist, Conference Board of Canada
There are obviously multiple forces at play when it comes to federal revenues, and the business cycle itself is a driver. Another thing we look at very carefully is the multiplier, such as, for example, how much revenue you're getting from every dollar of GDP.
One of the things we saw before the recession was that higher-income earners were paying more tax, and therefore we had more revenue than most of us were forecasting. Do you remember all through 2002 to 2007 we were always surprised on the upside? That was frankly a structural force, which we were seeing throughout the whole world. Under globalization, more income goes to higher earners.
We just saw the first four months of the federal numbers for this year, and they're pretty good. We actually have pretty good revenue, notwithstanding the risks and forces my colleagues are talking about. I don't quite know where it will come out, but I do know that I expect revenues from higher-income earners to actually be pretty good, in fact, on a going-forward basis. I can't give you the number, because we've just gone through a two-year period of great churn.
If it were only the business cycle, you're right: slower growth will mean slower revenue and much more of a challenge getting back to a balanced budget.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Mr. Tal, I saw that you were nodding your head.
Deputy Chief Economist, CIBC World Markets
Yes. If you look at the first half of the year, we have $8 billion of extra money just because of the fact that the economy was surprising us on the upside. But you know what? Easy come, easy go. This money will not be available in the next six months, because the economy will surprise us on the downside. It's already happening.
You basically see that it's not so easy to maintain this kind of revenue stream, especially if we are right that this economy is going to slow down over the next 12 months. So yes, it is going to be a major challenge to collect this money, given that there will be a slowing economy.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
How do we balance the budget over a reasonable time period, say the next three to five years?
Deputy Chief Economist, CIBC World Markets
It's not going to be easy. I think it's doable, but it's not going to be easy.
First of all, I think the worst will be the next eight to twelve months. Beyond that, we are going to recover. We are going to basically see a situation in which the economy will gather momentum. At the same time, it will not be rising by 6% or 7% on a nominal basis, and therefore we have to be prudent. The only way to balance the budget is to make realistic assumptions and to budget according to them.
Liberal
Deputy Chief Economist, CIBC World Markets
Well, I think that the realistic assumption....
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
I have BMO here at 3%, CIBC at 3%, Desjardins at 3.1%, and RBC at 3.3%. TD was at 2.5% and revised it to 3%.
Deputy Chief Economist, CIBC World Markets
Yes, I think that for the next 12 months a realistic number is around 2% to 2.5%, with nominal GDP at about 3.5% to 4%. Anything beyond that will be too risky. Beyond that, a nominal GDP of roughly 5% is reasonable.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
That could potentially mean that the government numbers are off by $10 billion.
Deputy Chief Economist, CIBC World Markets
For the next 12 months, yes, they are.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Thank you.
I have a quick question for you, Mr. Tal. In your presentation, you spoke about the percentage of our debt based on something--I missed part of it. You said that it is a little bit more dangerous because of certain conditions here in Canada compared to elsewhere. Did I understand that right?
Deputy Chief Economist, CIBC World Markets
Yes, I was talking about the sensitivity of consumers to higher interest rates, if that's what you're referring to. The debt-to-income ratio is 146%, which is a record high.
Liberal
Deputy Chief Economist, CIBC World Markets
Yes, I mean here in Canada. Within six months, we will be basically more or less where the U.S. is now.
This is not the main story, because of course debt is the stock of debt and income is the flow of income, so you cannot compare them. But the number has been rising very quickly, reflecting the very effective monetary policy.
I think it's very important to understand what we are talking about when we talk about this personal debt situation. Are we talking about a wave of defaults tomorrow? Are we talking about a subprime-type situation, or are we talking about a situation in which so many people are stretched that they will simply reduce their consumption in the future? I think this is the situation.
When interest rates go up, and they will go up eventually, you will see people spending more on debt and less on other things. This doesn't mean that everybody will default. We'll not see a situation in which default rates will rise to the sky, but you will see consumer spending slowing, and that's why I believe, if you will, that the speed limit of the economy will be reduced.
Liberal
Chief Strategist and Chief Economist, Laurentian Bank of Canada
As far as balancing the budget goes, I think the federal government's five-year plan is entirely achievable. I would not insist on reducing....
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
But if interest rates went up, would there be a risk?
Chief Strategist and Chief Economist, Laurentian Bank of Canada
We are vulnerable, of course, because interest rates are abnormally low. Eventually, rates will return to normal. It will probably not be in 2011, but in 2012 or 2013. Then there will be a shock. That is why Mr. Carney has been saying repeatedly that we need to prepare for the day when interest rates return to normal.