Evidence of meeting #58 for Finance in the 40th Parliament, 3rd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was projections.
A recording is available from Parliament.
9:20 a.m.
Conservative
The Chair Conservative James Rajotte
Thank you.
Thank you, Ms. Glover.
Mr. Mulcair, the floor is yours.
9:20 a.m.
NDP
Thomas Mulcair NDP Outremont, QC
Contrary to all expectations, I have to share some of my time with Mr. Page so that he can answer Ms. Glover. She said that Mr. Page did something, but he did not have time to answer yet.
Mr. Page, you can answer Ms. Glover.
9:20 a.m.
NDP
Thomas Mulcair NDP Outremont, QC
You can go ahead in English. My colleague just affirmed that you've been releasing documents to specific journalists.
9:20 a.m.
Parliamentary Budget Officer, Library of Parliament
Yes. When we get requests from parliamentarians or committees to do work, we bring that work back to parliamentarians; we bring it to committees. For example, today we are releasing our updated fiscal projections. We're here today in front of you. We make it available to all parliamentarians at the same time. It's now posted on our website. It's made available to all Canadians at the same time. That way—
9:20 a.m.
NDP
Thomas Mulcair NDP Outremont, QC
Thank you, Mr. Page.
That's on my time, and as a police officer who is on a leave of absence, of course, Ms. Glover should know that the presumption of innocence still applies, even to senior officers of Parliament. She shouldn't make affirmations with regard to what people have done.
9:20 a.m.
Voices
Oh, oh!
9:20 a.m.
NDP
Thomas Mulcair NDP Outremont, QC
I'm going to be talking to you about two different things today. The first one is with regard to the potential for inflation, and the second is with regard to the notion of sustainability.
On the potential for increased inflation, I'd like to know what your long-term forecasts are, because it seems to me that with the amount of money that's being printed, notably south of the border, as that money increases in velocity, it could be coming back into the economy a lot faster, and we sense there might be an upward trend in inflation. I want to know if you've done any measurements in that regard.
9:20 a.m.
Parliamentary Budget Officer, Library of Parliament
We've not done any specific studies, though I think in terms of what underlies our fiscal and economic projections, I could say a few things. Private sector economists, the average private sector forecasts, the numbers that are in front of you today, suggest very moderate inflation, something in the neighbourhood of, at the consumer price level, 2% average growth per year.
Underneath that, I should say that when we estimate where the economy is vis-à-vis potential, we see a large output gap right now. There's a lot of slack in the economy. Notwithstanding the fact that we've had good progress in reducing our unemployment rate, there's still slack in the labour market. There's a lot of slack in capacity utilization in manufacturing sectors. That output gap I think will keep downward pressure on wages. We're not seeing any significant increases in wages.
Having said that, I think when you look beyond the short term to the medium term, and you look at some of these issues we're seeing now in terms of food price inflation, potentially some oil price inflation—we'll see where things go in the Middle East—it does create a concern that you'll see inflation, particularly in some of the emerging economies. Depending on where things happen over the short term for more developed economies, we could find ourselves.... It's certainly a risk to the fiscal framework: higher inflation, resulting in potentially higher interest rates, a higher cost of debt.
9:20 a.m.
NDP
Thomas Mulcair NDP Outremont, QC
The second point I want to start developing is the notion of sustainability. I suspect we'll have a second round, and we might be able to get into it a little more. I actually find the choice of term quite interesting because usually it's used in the context of sustainable development, but here you're using it with regard to the viability of the fiscal framework as it's being put forward.
When you talk about sustainable development, you're looking at three things: you're looking at the economy; you're looking at social aspects; and of course you're looking at the environment. A blind, across-the-board tax cut—the one Ms. Glover refers to and the one she's trying to get you to talk about, whether or not in the long term they're a good idea--by definition, doesn't help a company that didn't make a profit, because it didn't pay any taxes. So if you have a manufacturing concern in Quebec or if you have a forestry operation in Ontario or B.C. that didn't make a profit, you didn't get anything from those across-the-board tax cuts. The money, the billions in question, goes to the ones that had the highest profits, the Encanas of this world in the oil patch and the Royal Bank and the other chartered banks that are making record profits.
With regard to the fiscal sustainability of what's being proposed, you've come to a simple, clear understanding. You say we've got an aging population, a demographic challenge, low productivity, an economic challenge, and we're going to have to increase tax revenue or reduce spending, otherwise it's not going to work, in the simplest possible terms. Isn't part of the solution to start using that fiscal space that we assume is there—because we're having tax reductions—and start targeting those areas of the economy that are the most productive, that are the most forward-looking, that are the most likely to create employment, and that are the most innovative? Isn't that what we should be doing, instead of giving more tax breaks to the oil patch and to the banks?
9:20 a.m.
Parliamentary Budget Officer, Library of Parliament
Again, we're legislative budget officers. When we talk about fiscal sustainability, we talk about a calculation that looks at aging demographics and productivity and asks what fiscal actions will be required to maintain a stable debt-to-GDP ratio. We're talking about stabilizing the debt-to-GDP ratio, and in our calculation it is something around 34% at the federal level of GDP.
I think in the context where you're talking about across-the-board actions, whether it be corporate profits or personal income taxes, or whether you're talking about spending reductions to close a fiscal gap—we say we have a fiscal gap in this country—you need sustained actions. They need to be permanent. Again, temporary freezes won't do it. I should probably also say that everything is assumed in terms of legislated.... If there are legislated corporate income tax reductions, we build them into our forecasts.
But in terms of your question about productivity and the debate about productivity, again, it's highlighted in my remarks today. I think over the past ten years we've averaged 0.8% average growth in terms of labour productivity per hour, and it's well below what we've seen historically.
9:25 a.m.
NDP
Thomas Mulcair NDP Outremont, QC
You've highlighted in past reports the fact....
I will continue in French.
You have already pointed out in your reports that we are in a situation like this because of the choices made by the Conservative government. You have often said that it wasn’t just because of extreme circumstances, but it was also because of the government’s deliberate choices. Ever since this government came into power, so for five years now, there has been a constant gap between the increase in the federal government’s expenditures and the inflation rate.
Could you expand on the choices that have led to the structural deficit that you have described so clearly today?
9:25 a.m.
Parliamentary Budget Officer, Library of Parliament
Certainly. This government actually chose to adopt a policy that would eliminate the fiscal gap. Is it better to raise taxes or reduce spending? The fiscal framework indicates that the increase in program-related expenditures is 1.5% per year for the next five years. There is not a lot of margin for error in a situation like that. In any case, I think that your question was intended to be very political.
9:25 a.m.
NDP
Thomas Mulcair NDP Outremont, QC
No, I wanted an objective answer. I wanted to know what the increase in expenditures was compared to inflation. You can perhaps give me the answer in the next round. Your aides could have the figures ready for you. I know there's a difference between our roles. I always try to respect yours without drawing you into the political arena.
9:25 a.m.
Conservative
9:25 a.m.
Parliamentary Budget Officer, Library of Parliament
If the question is with respect to looking at operational spending in the government, I think the government is assuming it can maintain an operational freeze for 2010-11 and 2011-12 and 2012-13 on an amount of money that's approximately $55 billion worth of operational spending. We have no objections to the government trying to freeze operational spending, but we would like parliamentarians to have a plan, a top-down plan, as to how it might be able to achieve that freeze, and also a bottom-up plan from the departments on how that freeze will be allocated across departments.
In the absence of a plan, we have a higher assumption of inflation plus population for that particular period of time. That does contribute to our higher deficit projection at the federal level, for PBO versus Finance Canada.
9:25 a.m.
Conservative
The Chair Conservative James Rajotte
Okay. Thank you.
We'll go to Mr. Szabo for a five-minute round.
9:25 a.m.
Liberal
Paul Szabo Liberal Mississauga South, ON
Thank you.
Mr. Page, if a country doesn't have a stable fiscal framework, that's described as having a structural deficit. Is that right?
9:25 a.m.
Parliamentary Budget Officer, Library of Parliament
There is a small difference. In the language we've used here today, sir, structural deficit or structural balance...that's terminology that economists will use.
What will be the fiscal balance in our case at the federal level when the economy returns to its potential? We're saying our economy is operating about three percentage points below its potential right now, certainly in the second half of 2010. We're saying it will get back to potential by the end of 2015.
When we look at the structure, we're saying there's a deficit now, and that deficit will continue to exist even when you get back to potential.
When you look at fiscal sustainability, you're really talking, in our case, of what it would take, what actions are required, to maintain a stable debt-to-GDP ratio. That's somewhat different.
While our debt-to-GDP ratio is going up, it will come down for a period of time as we move through the medium term. We're saying that it will rise dramatically as we go to the long term because of aging demographics.
9:25 a.m.
Liberal
Paul Szabo Liberal Mississauga South, ON
Okay. Now moving through the period to 2015, what is your opinion as to the potential for corporate tax cuts to have a negative economic impact at a time when you have a structural deficit?
9:30 a.m.
Parliamentary Budget Officer, Library of Parliament
We're not assuming that it has per se.
We built in these projections because these corporate income tax reductions are legislated. We've legislated the reduction from 18% to 15% over the next two years. We've actually built those projections into the forecast, like other private sector forecasts have.
We're not assuming there's anything negative per se, that a risk is being created. We've incorporated that assumption into our economic and fiscal projections.
9:30 a.m.
Liberal
Paul Szabo Liberal Mississauga South, ON
Okay. In your January 2011 report on the operational budget freeze, the thing that really stood out was the fact that Corrections Service Canada did not respond. Their projected increases in personnel in fact offset all the reductions of all the other departments.
To the extent that Corrections Canada has not been able to respond fully to your information request, which you are entitled under the Parliament of Canada Act to receive, how could a cabinet possibly cost justice bills that are going to impact Corrections Canada operations?
9:30 a.m.
Parliamentary Budget Officer, Library of Parliament
Well, sir, I think there are two issues at play there.
One, when we did the study looking at the operational freeze, which we released a few weeks ago, we went to ten departments. We selected ten large departments, including Correctional Service Canada, HRSDC, the Department of Fisheries and Oceans, etc. We looked at their RPPs, reports on plans and priorities. We got measurements of what's happening in terms of employment in those departments and their estimates over the next four years. So in the case that you alluded to, Correctional Service Canada, yes, it's true, they've been quite open, quite transparent, and they're talking about hiring 4,000 more employees over the next three years.
Then we asked the deputy ministers' accountability offices to see their human resources plans. We wanted to see what plans were in place to achieve operational strengths specifically. In that particular case, we asked ten departments and we got back eight. The two departments, including Correctional Service Canada, did provide their human resources plans to us subsequently. But we thought we had enough coverage, from a material perspective, to make the points that we made in that note.
9:30 a.m.
Liberal
Paul Szabo Liberal Mississauga South, ON
My final question would then be, in your experience, how does a cabinet decide on legislation without having a baseline cost of the impact of introducing that legislation, which is part of the questioning that's been put to the House, about not getting the information from the government?
It would appear that this is very soft information if Correctional Service Canada can't answer the questions today in some detail with regard to the impact of creating new prisons.
How does a cabinet do it? How do you do it? How do you incorporate it into your projections?
9:30 a.m.
Conservative