Finance Committee on Nov. 3rd, 2010

[The Chair, Conservative, James Rajotte]

I call the 44th meeting of the Standing Committee on Finance to order.

Thank you all for being here.

Pursuant to Standing Order 108(2), the orders of the day are a study of the government's economic update and fiscal projections.

We have four organizations represented here this afternoon. From the Library of Parliament, we have Mr. Kevin Page, the Parliamentary Budget Officer; Mr. Mostafa Askari, assistant parliamentary budget officer; Mr. Sahir Khan, assistant parliamentary budget officer; and Mr. Chris Matier, senior advisor, economic and fiscal analysis.

The second organization we have is the C.D. Howe Institute, and Mr. Finn Poschmann. From TD Bank Financial Group, we have Mr. Derek Burleton. From our fourth organization, Scotiabank Group, we have Ms. Mary Webb, senior economist and manager.

Thank you all for being with us here this afternoon. You each have up to 10 minutes for an opening statement.

We will start with Mr. Page, please.

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

Thank you.

Good afternoon, Mr. Chair, vice-chairs, and members of the committee.

Thank you for inviting me and my colleagues to speak to you about Canada's economic and fiscal outlook.

These are challenging times for budget makers across the world. The level of economic uncertainty remains high. The pace of economic recovery has slowed for many G-8 countries at a time when economies are still operating well below their potential. The slowdown in growth is also taking place at the same time as governments are considering the end of fiscal stimulus programs and the implementation of austerity measures to reduce budgetary deficits.

There are significant policy trade-offs and risks. Policy makers need to steer a policy course between short-term support for a fragile economic recovery, on the one hand, and the avoidance of a buildup of public debt that will burden future generations on the other. There are also structural problems--low productivity growth, aging demographics, and fiscal imbalances--that will require structural solutions.

In this context, policy and budget makers in Canada need to place a premium on fiscal transparency and analysis to support policy debate leading up to the 2011 Budget.

Today, my office released a paper updating our five-year fiscal projections. We have updated our analysis of the cyclical and structural components of the projected federal budgetary deficits. We have provided a new quantitative assessment of the uncertainty and risks around these projections.

A few weeks ago, we made available analysis that looked at international and Canadian experiences with fiscal rules (i.e., legislative and/or strong political commitments to budgetary constraint).

We made the case that parliamentarians may wish to commence debate on the next generation of fiscal rules in Canada. It highlighted the need for this discussion to include a long-term perspective on Canada's fiscal challenges; to look at all levels of government in a fiscal federalism context; to account for risk and uncertainty; and to separate the cyclical from structural aspects to Canada's budgetary balance outlook.

In the weeks ahead, PBO will release analysis on the impact of fiscal stimulus in Canada with a focus on the Infrastructure Stimulus Fund. The goals of this work are: to estimate the short-run economic impacts; to track budget implementation; and to draw some preliminary lessons to aid future policy deliberations.

Next spring, PBO will release an updated fiscal sustainability report. The report will examine the fiscal actions required to maintain a steady debt to GDP ratio in Canada, not just from a federal perspective, but from a total government perspective.

I wish to highlight some messages and observations from the report we released today regarding our economic and fiscal situation and outlook.

Canadian economic activity still remains well below its level of full capacity--potential GDP. Given the average private sector forecast and PBO's estimate of potential GDP, the output gap is projected to narrow gradually over the medium term, and the economy will reach its potential by the end of 2016.

While real GDP has almost recouped all the losses from the first quarter of 2008 to the second quarter of 2009, Canadian economic activity still remains well below PBO's estimate of potential GDP of about 2.9 percentage points. Labour market indicators also suggest that there is a significant amount of excess capacity.

While the level of employment has returned to its pre-recession peak, it is important to recognize that total hours worked remain below their pre-recession level and 1.8% below their trend. This low level partly reflects the fact that recent employment gains have been disproportionately in part-time work. The unemployment rate remained at 8% in the third quarter of 2010, well above estimates of the natural rate of unemployment.

The Department of Finance's September survey of private sector forecasters indicates that the outlook for nominal GDP over the medium term—the broadest measure of the government's tax base—is little changed from the forecast on which Budget 2010 was based. However, private sector forecasters have revised down significantly their outlook for interest rates, with both short- and long-term rates approximately 80 basis points lower each year on average over the 2011 to 2014 period.

The near-term outlook for the unemployment rate has been revised down somewhat, although private sector forecasters now expect a slightly higher rate of unemployment in the medium term.

PBO projects a budgetary deficit of $40 billion--2.5% of GDP--in 2010-11, declining to $11 billion--0.5% of GDP--in 2015-16. This results in a projected cumulative increase in federal debt of $200.5 billion to $658.1 billion by 2015-16, or about 32.4% of GDP, when combined with budgetary deficits realized in 2008-09 and 2009-10.

The projected reduction in the budgetary deficit over the medium term largely reflects a cyclical improvement in the economy. PBO estimates that the government's structural deficit will decline only gradually to $10.2 billion in 2015-16, or 0.5% of potential income.

Notwithstanding the extent to which Canada's fiscal plan has been thrown off course since the recent global recession, Canadian fiscal balances and debt levels are in a relatively better position than those of many of our competitors. The magnitudes of Canada's structural deficits over the medium term are significantly smaller than the structural deficits observed in the 1980s and 1990s. From this relative perspective, it is fair to say that Canada's fiscal challenges appear less severe and more manageable.

The fact that Canada has relatively better balances does not mean, however, we have a fiscal structure that is sustainable. Assessing fiscal sustainability requires looking beyond projections of budget deficits and debt over a medium-term horizon to take into account the economic and fiscal implications of the population aging.

In our 2010 fiscal sustainability report, PBO calculated a federal fiscal gap of 1% to 2% of GDP, depending on differing assumptions. This suggests that sizable and sustained fiscal actions are required to maintain a steady debt-to-GDP ratio over the longer term.

Parliamentarians need to be aware that the cost of fiscal action increases substantially the longer actions are delayed.

The PBO fiscal projections, as well as those in the government's update, are based on the results of Finance Canada's survey of economic forecasts produced by private sector organizations. Both PBO and Finance Canada translate the average private sector economic forecast into a fiscal projection based on their own assumptions.

PBO projects budgetary deficits that are moderately larger on average than those presented in PBO's March report and the government's update, owing primarily to higher operating expenditures.

Given the lack of detail regarding the government's expenses subject to the operating freeze, PBO has assumed that these expenses will grow in line with population growth and inflation--equal to 3.2% on average--over the 2010-11 to 2015-16 period. This assumption is significantly lower than both nominal GDP growth over the same period—about 4.9%—and the 6.4% average growth observed in the five years preceding the government's economic action plan.

In PBO's judgment, the balance of risk to the current economic outlook is heavily weighted to the downside. These downside risks include both external and domestic risks, each of which could have a substantial negative impact on economic growth in the near and medium term.

External risks relate to the U.S. outlook; the recent appreciation of the Canadian dollar and ongoing global currency tensions; and sovereign debt concerns.

Over recent quarters real GDP growth in the U.S. has slowed, employment growth has remained weak and the unemployment rate has remained well above 9%. In PBO's view the balance of risks to the U.S. outlook are clearly to the downside, which could have an important impact on the Canadian economy.

Currency tensions among countries have escalated in recent months, prompting discussions of competitive devaluations and tariff barriers. This could pose a downside risk to the global economic outlook. A second currency risk relates to the strong rebound in the Canadian dollar, which, since the first quarter of 2009, has outpaced a movement in commodity prices, thereby restraining growth.

While sovereign debt concerns have receded somewhat in recent months, as noted in the Bank of Canada's October 2010 monetary policy report, credit spreads remain elevated for some European countries, and a negative shock would risk triggering renewed strains in global financial markets, resulting in higher-risk premiums that would put upward pressure on global interest rates.

Domestic risks relate primarily to the high level of household debt in Canada. Household debt has continued its upward trend, reaching 147% of personal disposable income in 2009, putting households in a vulnerable position. The high level of debt of Canadian households will likely constrain growth and consumption and housing investment over the projection horizon.

The PBO report released today provides new analysis for Canada on the quantification of uncertainty and risk around economic and fiscal projections. The purpose is to enrich the analysis of the planning environment facing parliamentarians to elevate the debate away from relatively small differences in the medium-term balanced budget projections to a richer assessment of the uncertainty that incorporates the historical track record of private sector economic forecasts and PBO judgment for risk. While the government's fall update introduces a risk adjustment in its projection, in our view it is small and does not adequately reflect the magnitude of the downside risks to the economic outlook.

On a status quo basis, according to PBO estimates, the likelihood that the budget will be in a balanced or surplus position over the period 2010-11 to 2013-14 is effectively nil. There is an 85% chance of probability the budget will be in deficit in 2015-16, and there's an 88% chance that the budgetary balance of 2015-16 is lower than the $2.6 billion surplus projected in the government's economic and fiscal update. In this environment, parliamentarians may wish to debate the appropriate fiscal adjustments for uncertainty and risk, in addition to the appropriate medium-term and long-term fiscal objectives with respect to budget balances and fiscal sustainability.

In closing, PBO recommends the government consider making available their analysis on cyclically adjusted budget balances, on longer-term fiscal sustainability, and a detailed assessment of uncertainty and risk so that parliamentarians and Canadians will have access to the same level of analysis that's provided in many other countries. PBO also recommends that the government provide additional transparency related to the status of the fiscal framework for money set aside for new and proposed programs and the departmental strategies to freeze operational expenditures.

Thank you for the opportunity to speak to you today. We'd be happy to take questions after others speak.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Page.

We'll now hear from Mr. Poschmann, please.

[Finn Poschmann, Vice-President, Research, C.D. Howe Institute]

Thank you, Mr. Chairman and members of the committee.

Good afternoon. It's great to be back with this committee. It's a very, very friendly place to be—sometimes, anyway.

I'd like everyone to recall, as always, that while I am vice-president for research at the C.D. Howe Institute, I'm speaking on my on behalf and not that of my members and board of directors, who may not agree very much with the things I say.

To move on, I'd like to emphasize a few of the points raised by Mr. Page, including some points of agreement and some points of emphasis, and then to extend them a little bit in a policy direction.

First, you will have heard from economists for a very long time, and will continue to hear, a story about uncertainty. Economic output forecasts are always uncertain. They're especially uncertain in current times. This is an issue for budget-makers right now, because despite that degree of uncertainty, the fiscal prudence contained in the budget and the economic outlook averages only about $1 billion annually over the six-year horizon. That's about half a percentage point of revenue, or not very much. It's lower than the historical contingency reserve and lower than the economic prudence amounts of about $4 billion annually. That was about 2% of budget revenues looking back to previous years.

The point about this is that arguably it's not enough in a volatile economic environment, where fiscal projections are going to be prone to errors—and potentially big errors. That's one of the reasons it's plausible, as Mr. Page said, to look to the out-years of the planning horizon and to suspect that positive or balanced budgets may not be the most likely outcome.

So there are reasons to have some doubt, just based on volatility, about the economic forecast and the uncertainty about the forecast.

There are a few risks, some of which Mr. Page pointed out, but I'll add some others. One is that the outlook assumes a pretty low long-term financing rate for the federal government. The $2 billion to $3 billion in savings in annual debt services owing to low interest rates could come true. No one is expecting interest rates to go up very quickly right now—absolutely not—but there certainly is a risk. In bond markets, we'll be looking at higher interest rates down the road, and potentially not very far down the road.

What else are we assuming collectively among the private forecasters or from a federal perspective? We're assuming that unemployment comes down fairly quickly and that the labour market performs strongly. Again, that may well happen, but it's hardly baked in.

The other assumption in the outlook that takes us to roughly zero balance by 2014-2016 is that there will be no major new spending initiatives over the next five budgets. Again, that could be true, but it's a bit of a crash diet. It's going to take a lot of discipline to stay on it. It's great if the federal government is able to do so from a planning perspective and a fiscal perspective, but it will take a lot of willpower. That's what budget-making does, just like any diet does. So that's important, too.

Another observation is that notwithstanding these risks, the outlook for the federal government is relatively strong or positive compared with the provincial governments, where we have some major cost drivers. Mr. Page referred to the demographic pressures on health expenditures, in particular from an aging society—a story that we're very familiar with. Most of these costs are going to be centred on the provinces, where a lot of the socially driven or demographically driven spending occurs.

So those are some significant risks in the overall government budget-making process, which are going to put pressure on the federal government, obviously, particularly because of health care and looking to 2014 and beyond for it, when the current agreement for health transfers needs to be renewed. We have a more or less steady as you go, fairly quick growth rate built into health spending in the outlook right now. That's going to be an issue that will have to be dealt with by 2014. It's going to mean that the questions about fiscal imbalance will be back on the table not very long from now. Those are some familiar issues.

In particular, from a tax-raising or revenue-raising point of view, there's a question about who's going to raise the revenue to finance these growing expenditures on health. Will it be the federal government or will it be the provincial governments? For the most part, the federal government and the provincial governments occupy the same tax basis. That means that when you're talking about corporation income taxes, personal income taxes, sales or consumption taxes, the federal and provincial governments share all of those things.

So there will have to be, or perhaps there ought to be, some trade-offs as far as tax room goes in the next few years, in order that the revenue-raising ability will reside or be held by the level of government that has to conduct the spending that's funded by those taxes.

After alerting or pointing out to this committee some of these risks and emerging issues, I did want to make a few closing recommendations.

One, notwithstanding some of the spending risks, we, or I, don't see that much of a risk on the revenue side necessarily for the federal government. We don't see a reason to shy away from the government's planned path on corporation income tax relief. If you think about economic growth in the long run and the way corporation income taxes work, in the long run, tax relief from where we are, at 18% federally, is likely to have a positive net impact on government balances. In other words, a one percentage point drop in the current 18% federal corporation income tax rate in 2010, in the long run, is going to have a positive impact on federal revenues—not in the short term necessarily, but certainly in the long run. That's just the way corporate taxes work, because of the incentives for investment and growth and the way that corporations tend to respond to investment incentives.

The same corporation income tax reduction is potentially good for the provinces because of the growth in the tax base. Economic growth also drives provincial income growth. So there are positive externalities there as well; the provinces do well when the federal government drops its corporation income tax rate. But this is part of a plan that's essentially baked into the outlook right now, and I think it would make sense to stick with that plan.

I'd like to look back to the balance between the federal government and the provinces and to what some of us were saying a years ago about the balance between the taxing authority, corporation income tax room for the federal government, and also personal income tax room and sales tax room.

If you look back to 2005, I co-wrote, with Mr. Stephen Tapp, a paper that recommended that the federal government drop its personal income tax rate, drop the GST rate by two percentage points, and leave room for the provincial governments to raise their consumption taxes in order to fund the health spending that was necessarily part of their programs. We're part of the way there. We have seen the federal government drop 2% off its GST rate. It's important, though, that any tax room the provinces take up be smart tax room—in other words, not economically damaging tax room.That's why the conversion in Ontario and B.C., as well as Quebec and three of the eastern provinces, going back to 1997, to a harmonized sales tax system is good. There you have a smart tax system on which the provinces can put more weight. So we've created room for the provinces to do more of their funding through the HST and to fund more of their own health expenditures, and there is less pressure on the federal government to finance provincial spending through federal taxation.

So we need to start talking more about the balance between taxation and transfers from the federal government to the provinces and how the provinces set their own tax rates and finance their own spending needs.

With that, Mr. Chairman and committee, thank you.

I cede the floor.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Poschmann.

We'll now hear from Mr. Burleton, please.

[Derek Burleton, Deputy Chief Economist, TD Bank Financial Group]

Thank you very much, Mr. Chairman. It's a pleasure to be here.

We heard from the Office of the Parliamentary Budget Officer today, who gave us their take on the fiscal outlook for the next five years. We did send around—and hopefully you did get a copy—our fiscal table, our view, and I'll touch on that in just a second. If you don't have it, I'll qualitatively describe it.

But I do want to jump a little bit further into this issue of a wider-than-usual dispersion in private sector forecasts. I think it's very important, and it obviously reflects an extremely unusual period that we're in. I would argue that this is going to remain the case over the foreseeable future. There are two reasons why. Obviously, we're coming off a very difficult financial crisis. We're hearing central bankers around the world using the expression “greater than usual uncertainty”, but it's also this notion, in my view—and this is shared by many—that the so-called period of great moderation is behind us.

We went through a period in the nineties and through much of the 2000s where the view was that if you kept inflation low and stable, economic cycles would be less extreme than they were in the eighties and before. Some argued that there was also a little bit of luck. In the end, I think recent developments do show us that luck was at play. Part of the problem with some of these developments is that they did encourage more risk taking. The period of great moderation is behind us, so I think we can expect bigger economic cycles than we've seen in the last 15 years or so, and also in financial markets.

Just to look at the forecasts—I looked at Consensus Economics' numbers—in the range of forecasts we are looking at between 1% and something over 3% in U.S. growth next year. The Canadian dollar will be ranging between 87¢ and $1.15 through next year. For Canadian economic growth, there's a little bit less of a difference, less than 2% and more than 3%, less than the U.S. The fact of the matter is we are confronting as forecasters very difficult issues, both from a cyclical perspective and from a structural perspective.

In terms of the cycle, we talk about the external risks. In the U.S., of course, as I mentioned, all this quantitative easing...will it be effective? It's very difficult to ascertain at the moment. But I also am concerned about some of the domestic issues, some of the imbalances that we've seen develop--household indebtedness. As forecasters we're trying to assess how these imbalances will play out when interest rates are extremely low, and we expect that will remain the case in the near term. These imbalances could get worse. In my view, there's an upside risk in the near-term forecast. In the longer term, though, it could be a big downside risk. I'm just giving you a sense that these are very significant issues.

From a longer-term perspective, we're seeing economists split in two camps. You get some who think we're very much dealing with the status quo of a 3% trend growth rate, or slightly less, and others, in the camp that I'm in, who think growth is likely to be closer to 2% on a longer-term basis.

Dealing with the demographics, productivity is something that obviously is a huge driver of those medium- to long-term views. But when you think about it, most of us are a little reticent to start building in an acceleration of productivity growth. We just haven't seen it. Yet, if we were to give a list of things governments had to do 15 years ago to improve productivity, a lot of those things have been done—mostly recently, the HST, in both Ontario and B.C.—and yet we haven't seen that acceleration. Maybe it's not long enough. Maybe it's a lag.

So even though in my forecasts I don't build it in, what I'm trying to indicate here is that there are some upside risks as well to the longer-term view.

I'm assuming you did receive that forecast. If you haven't, our view is somewhere in between the Parliamentary Budget Officer's and the fiscal update. We are more negative on the longer-term projections for the economy, building in some of these downside risks on demographics. In the short term—and as Kevin Page just mentioned—in terms of some of these issues with consumer spending, I think consumers will be hard pressed to grow their spending at anything more than a very modest clip on a three-to-five-year basis, so I've built that in. I've taken our economic projections. I've left the program spending track unchanged from the budget update. I just assume that the governments are able to meet that.

Interest rate projections are built off our interest rate forecasts. We don't have a very big increase in interest rates, but very much a gradual increase to something close to what we feel is more normal. Obviously there are risks around that projection three to five years out. We have a deficit in 2015-16 of about $5 billion, which is about an $8 billion weaker projection than in the budget update, again reflecting our weaker forecasts.

Certainly this is not a big share of GDP--0.2%. I would argue, five years out, that it's actually not that dramatically different from the private sector. Again, there's uncertainty of how you take these projections and build your revenues off them. We've assumed a very similar track as that in the budget update in terms of GDP to revenues. That's our view of where we're headed.

To bring it to a close, one thing we need to come to grips with in future budget plans is dealing with this wider than usual dispersion. When I look around the country, I look at what other governments do. I like the B.C. model. They have a group of forecasters who meet annually. In the budget they provide about a three- or four-page text box that describes the range of private sector projections. It gives a fair amount of detail in there: who's high, who's low, and all the groups. Even in their observations they talk about how these projections unfold and the difference there. They ask us what probability we would assign to each outcome. So if my base case is this, what probability do I assign to it. They take that into account in their budget plans. I must say I would put a lower probability on this than I would have, say, three years ago. I would put maybe 50% on this outcome, this base case, whereas maybe a few years ago I would have put 60% to 70%. Again, I think looking at the broader range, as well as what my fellow speakers have commented on, more analysis on the budget would be helpful, looking at what these forecasts mean in terms of potential budget impacts.

I will stop there.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Ms. Webb, please.

[Mary Webb, Senior Economist and Manager, Scotiabank Group]

Thank you, Mr. Chair, for the invitation to speak today.

I'd like to echo the theme of uncertainty, and also the volatility that we think will continue in both foreign exchange rates and financial markets. We had such a strong initial rebound for Canada that this slowdown is only beginning to be appreciated. In fact, what we're looking for, after 3% real growth this year, is somewhere around 2.25% next year, with the U.S. being about a 0.25% below Canada's growth. It means that in terms of nominal GDP growth we may in fact be hard-pressed to reach 4% to 4.5%, and far less likely to reach 5%.

Canada, as a small economy, has a number of strengths, and I would point to our resource wealth and the strength of our corporate sector balance sheets, which is substantially stronger than in prior repair periods. But we also have significant adjustments, particularly in central Canada, and of course in Ontario, where we have seen industries, such as forest products and the motor vehicles sector, permanently downsized. So there is restructuring going on that we have to do in a world that's now dominated by growth that's fuelled by the emerging economies.

In terms of the U.S., I completely endorse the views of my colleagues. This is an economy that is under substantial duress. We are quite uncertain about the outcome of the second quantitative easing, not only in terms of the boost that it may or may not provide to real growth and job creation, but also in terms of the U.S. dollar and, eventually, the mid-term path for inflation. Our concern there as well is that the longer you delay a comprehensive fiscal repair plan, the steeper the fiscal correction will eventually be.

I think the shadow of protectionism, be it competitive currency devaluation or other means, will be hanging over us for a number of years going forward. At the same time, there is a race right now to sign advantageous bilateral trade deals so that our whole global trade framework is in the process of shifting.

Finally, Canada really benefited not only from our own domestic stimulus, but from the synchronized monetary and fiscal stimulus around the world. We're now facing a period of several years in which you have nations with different recovery paths in terms of pace and type, and you also have a simultaneous withdrawal of the fiscal stimulus and fiscal repair. We haven't had the type of fiscal repair among the developed nations on that scale simultaneously, so there is considerable uncertainty about how those interact with each other and play out.

On the domestic front, we quite strongly believe--because of our belief that the U.S. dollar will continue to soften--that the Canadian dollar will move sustainably to parity by the second half of 2011, and probably trade through parity as we look to 2012 and 2013. Our industry has learned to cope with a 95¢ U.S. dollar, but they haven't learned to cope with a dollar that might be at $1.05.

The volume of our exports in the second quarter of 2010 was about 86% of the prior peak in the second quarter of 2007. Our imports, by the way, were 99% at that peak.

We also have a concern about Canadian households having to slow their credit growth and their spending. When you look at one metric, the debt-to-income, it's at record levels. It's actually now approaching the level in the U.S., which has come down. And Canadians, because of a series of unexpected circumstances as we came out of the recession, had every incentive to borrow. If we're right, that means we face a cooler housing market and also a much more cautious Canadian consumer as provinces and the federal government try to repair their balance sheets.

There is a comparison that comes to mind, that the Parliamentary Budget Officer made: if you look at the latter half of the 1990s, from 1997 to 2000, that was a period of robust economic expansion that actually facilitated the fiscal repair progress by provinces and the federal government. The real growth was 4.4%, nominal GDP growth was 6.5%, you had a dollar that was still very weak, and you had interest rates that had declined through the 1990s. It was simply a very fortuitous period to finish that repair process. I don't think the next few years are going to be nearly as kind.

So we welcomed the fact that in the fall update the government had built in at least some uncertainty and the fact that their nominal GDP growth could well be less than the private sector average.

I think a scenario worth looking at is our concern that you could have several years where that happens. But instead of averaging some 2.7% real growth from 2011 through 2015, the average might be significantly below 2.5%, say 2.25%. In fact the GDP deflator is less than 2%.

That's why we're coming out with a nominal GDP that, like the TD, is some $50 billion less by the final year of the update.

Thinking about that, and therefore thinking about the path the federal government has laid out, we've always viewed fiscal 15 as being a balance, looking toward the fact that you couldn't have drastic fiscal repair because of the fragility of Canada's recovery, but also the U.S. recovery and the global recovery and the fact that one needs to move to take advantage of the window of low interest rates.

So it looks to me as though you have a process year by year of adjusting the fiscal reduction plan. Thus there is an extended period of quite significant program spending restraint that does contrast very much with the five years up to fiscal 2008 and would have a fraction of what we had. So as we potentially adjust on the program spending restraint annually, what comes to mind are the principles the U.K. brought forward. Now the U.K. is undertaking a far, far more severe austerity program, but they kept returning to the principles of equity and reform, ensuring that a strong base was laid for longer-term growth.

With respect to the last principle, we would endorse that you stay the track on the corporate tax reduction cuts that are planned. Both the provinces and the federal government will benefit from that in the longer term in terms of their revenues, as has been pointed out, and that type of measure--we are a small, open economy--will open us more to trade and foreign investment, which are extremely important.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll start questions from members. Mr. Brison, for a seven-minute round.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you very much to each of you for your presentations today.

Mr. Page, in your report you confirm that Canada now has a structural deficit. How will reducing the corporate tax rate by a further three points affect our deficit targets and our return to balanced books?

[Kevin Page]

In our projections we've built in the reductions in corporate taxes for the next few years, so it's part of our projections for both the structural deficit and our overall budget balance.

[Scott Brison, Liberal, Kings—Hants, NS]

If we were not to pursue those corporate tax cuts, would we return to a balanced budget faster?

[Kevin Page]

I think the rough estimation is out there, and the rules of thumb as well from the Department of Finance, that for every point reduction in the corporate statutory rate, you're talking about something in the neighbourhood of $1.5 billion to $2 billion, depending on the level of corporate income.

So yes, if you are talking about three points, you could be talking upwards of $5 billion to $6 billion.

In Canada we're talking about the economy getting back to its potential in 2016 and a structural deficit of about $11 billion. It wouldn't quite close the gap, but it would help.

[Scott Brison, Liberal, Kings—Hants, NS]

In your report you say “the Government's current fiscal structure is not sustainable over the long term”.

Mr. Poschmann referred to the demographic shift, aging population, productivity issues, higher health care costs as we enter negotiations on the health transfers.

Is there a risk these further corporate tax cuts will not be sustainable? Is there a risk they will be need to be reversed in order to pay or eliminate the deficit within the next five years?

[Kevin Page]

We think the current fiscal structure for Canada is not sustainable when you look to the long term. So we will have to change the current fiscal structure to make it sustainable.

In work we did earlier in the year, sir, for our fiscal sustainability report, when we projected forward and looked at those issues of trend productivity, growth rate, and what's happening to labour input, depending on what your assumptions are for the transfers, which Mr. Poschmann has raised, you're looking at a fiscal gap for Canada of between one and two percentage points of GDP.

What I mean, sir, is that to maintain a stable debt-to-GDP ratio of roughly 33% and to build in, forward looking, for the next 75 years, the aging and the demographics, you'd have to take fiscal action in the neighbourhood of one to two percentage points of GDP.

When you're talking about 2015-16, you're talking about a $2 trillion economy. Every point of GDP is roughly $20 billion, and that has to be sustained, sir, to eliminate that fiscal gap. That's a calculation other countries regularly do, and in fact are legislated to do.

[Scott Brison, Liberal, Kings—Hants, NS]

In your report you also say that the PBO requested details regarding how the government intends to achieve its planned operating budget freeze over the projection period. However, the government has indicated that this information is a cabinet confidence and will not be released to the public.

You're an officer of Parliament. We're parliamentarians, and ultimately, Parliament holds the purse strings of government. That's been the role of Parliament in terms of accountability. Can you explain to this committee why you believe the government is not providing you with the specific information you requested, and as such is not providing Parliament with the information you requested?

[Kevin Page]

What we requested were basically five-year plan reference levels for departments, with the appropriate breakdowns--operational, capital, transfers, and so on--so that we could actually improve our expenditure forecasting process.

Also, we wanted that information so that we could kind of undertake an analysis for parliamentarians on whether there is fiscal risk or service-level risk from a sustained operational freeze.

We've asked for the five-year reference levels on a couple of occasions. The operations and estimates committee has also put forward a motion asking for that information so that we can undertake that analysis.

[Scott Brison, Liberal, Kings—Hants, NS]

Earlier last month, this committee passed four motions requesting that Finance Canada provide us with projected costs for the F-35 fighter jets, the corporate tax cuts, and the Conservatives' crime legislation. Do you believe the department's response to these motions was adequate for us to fully evaluate them?

[Kevin Page]

Well, we've been asked to provide financial analysis around the F-35. We're undertaking that analysis. We hope to have a report to parliamentarians before Christmas. In response, I would say that I still think there are a number of questions about the costs, and there is some uncertainty with respect to the F-35.

On the other issues mentioned, such as the report on the G-8 and G-20, we did some work for parliamentarians in advance.

It's true that we have not seen even in the 2010 budget or in the fiscal update what adjustments were actually made in the fiscal framework for those expenditures. I think there's uncertainty. But I think at this point the work is now really over to the Auditor General to kind of look at the receipts. I'm not sure how much more value-added we could provide on that.

On corporate tax rates, we could do some work to look at what the rough costs were. We don't have a great corporate tax model. We could work with Statistics Canada. We've done these sorts of estimates before. We could do crude estimates. I think Finance already put out roughly what those estimates would be, I think in the 2000 statement, when they made the reductions in corporate income tax. So there's some information out there.

What was the fourth one?

[The Chair, Conservative, James Rajotte]

You have 30 seconds.

[Kevin Page]

Oh, yes, it was on the crime bills. I'm sorry, sir.

We're still waiting for information on the crime bills. We had no luck when we did our costing of the Truth in Sentencing Act, in terms of getting information.

[Scott Brison, Liberal, Kings—Hants, NS]

You had no luck. Do you mean they didn't give you...?

[Kevin Page]

We had no information, sir.

[Scott Brison, Liberal, Kings—Hants, NS]

But you requested information.

[Kevin Page]

We did request information. We requested, actually, context so that we could understand how they were doing their costing. We were not able to have--