Finance Committee on Feb. 15th, 2011

[The Chair, Conservative, James Rajotte]

Okay. Thank you, Mr. Brison.

We'll go to Mr. Del Mastro now for a five-minute round.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chairman. Thank you, Mr. Page.

Mr. Page, there seems to be a little bit of an apparent discrepancy in your remarks, and I just wondered if you could clarify this for me. You indicated that the federal debt is projected to rise from 34% of GDP to 31.9% of GDP. In other words, what you're saying is that it's rising in nominal terms, but it's actually decreasing in terms of serviceability. Ultimately, when the IMF and other bodies look at debt serviceability, what they look at is debt to GDP. So in actuality--we'll set the nominal aside--in real terms, serviceability is actually improving over the budget cycle. That's what you're indicating, correct?

[Kevin Page]

Well, the debt-to-GDP ratio, over the short to medium term, will fall, we're assuming, in terms of the average private sector forecast. You're correct, sir; nominal will go up. We often talk about debt interest charges relative to budgetary revenue. It's a slightly different concept.

[Dean Del Mastro, Conservative, Peterborough, ON]

Here's where the discrepancy comes in. I agree with you that debt serviceability improves. So against the measure by which all international governments will actually measure themselves, Canada is improving. Most of our trading partners are not, especially our major trading partner.

If we look at what you said later, this means that sustained fiscal actions are required to avoid excessive debt-to-GDP accumulation. That's not what you mean, is it?

[Kevin Page]

Again, we're talking about moving from the short and medium term to the long term. When we look to the long term, we look at aging demographics. Projecting forward, we're going to see a big change in the old age dependency ratios, as I said, over the next 10 to 20 years, in particular. So we're saying that the debt-to-GDP ratio, once you move through the medium term into the long term, will actually start to increase. Our operating budget balance would actually go into deficit. Right now, it's expected to go into surplus soon. That's the part that's not sustainable, so we need to take actions to deal with the long term, the same way we took actions with respect to CPP.

[Dean Del Mastro, Conservative, Peterborough, ON]

Sure. Okay. I think you're into a period of projecting well beyond the current budget cycle, which, frankly, I don't think is well understood in the room.

When you indicate on one side that the debt-to-GDP ratio, which is the international measure that measures the health of a government, is actually going down, but then later indicate that we have an accumulation of debt to GDP, I think that confuses the issue. In this case, it actually confuses it.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

It confuses you.

[Dean Del Mastro, Conservative, Peterborough, ON]

No, it didn't confuse me at all, Massimo. I just thought I'd point it out for you.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you. I appreciate that.

[Dean Del Mastro, Conservative, Peterborough, ON]

I'm also interested to note that your corporate income tax revenues increase between the period from 2010-11 to 2015-16. In fact, what's really encouraging is the amount of increase in personal income tax the government is slated to collect. I would think this is in two parts. One is because of the growth in the economy. The second is because of the medium-term stimulative effect of the corporate income tax reductions.

One of the things the opposition never talks about, and I think it's important to recognize, is that if you compare the corporate tax rates in 2000, when the dollar was around 63¢ U.S., where it bottomed out, and then you move that forward.... The international currency of business is the U.S. dollar, so when we talk about a dollar at parity, and we actually talk about the effective corporate income tax rate in Canada, although we've moved it down, it's only down slightly from where it was.

I think there are two important things to recognize. One, we have to compete globally, and two, within your own projections, you indicate that these medium-term stimulative effects are dramatically growing the economy and are dramatically growing personal income tax. Is that a fair assessment?

[Kevin Page]

Sir, again, I think it highlights why it's important for you to see not only our assumptions in terms of income shares going forward over the projection period but the Department of Finance's as well. It is so that you can understand what's happened to those underlying tax bases.

Just to underscore your point, sir, which is well made, what's happening, basically, over the short and medium term is that as the output gap closes in our economies, we get back the potential in the medium term. The IMF says 2014. The PBO says 2015. Those tax bases, as a percentage of the economy, will go back to their trend, and I think that's what we're seeing. We're seeing the output gap close now.

[Dean Del Mastro, Conservative, Peterborough, ON]

I'd just point out that within your own projections there are, frankly, a lot of balls in the air. You have to make a lot of assumptions when you're projecting out five years in the economy.

It seems to me that with the fiscal gap you've indicated, which is now down to only 3% of total expenditures, from about 20% at the peak, you wouldn't need to be off by very much on your GDP projections for the government to be in balance, would you?

[Kevin Page]

Again, sir, we're talking about budgetary balances in Canada at the structural level that are relatively small. We've provided a graph for you right now. So for the next five years we're talking about, relative to the size of the economy, even less than 1%. That's a relatively small structural deficit. We had structural deficits in the 4% to 8% range in the seventies and eighties. We ran structural surpluses of about 1% for about 10 years. Now we have a small structural deficit.

Why we highlighted, and I apologize, sir, if I sound Darth Vaderish all the time, is that you worry about running structural deficits as you move to the long term when you're dealing with an aging demographic issue, which is very real. These aging dependency ratios are going to create a lot of problems for finance ministers and prime ministers for the next 10 or 20 years, so that's why we highlight it.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Del Mastro.

We'll finish with Mr. Mulcair, please.

[Thomas Mulcair, NDP, Outremont, QC]

I would like to go back to the discussion we were having on your projections and the sustainable and renewable nature of the system we find ourselves in.

You already mentioned in the past the choices that were made and you said how they had more influence on the current state of the government's accounting records than any external factors. Let's go back to the issue of corporate tax cuts. That's part of our analysis of the situation. You must know about the Dutch disease or the Dutch syndrome, a term coined in the wake of what happened in the Netherlands during the 1960s, when major gas deposits were discovered off the coasts of the Netherlands. At the time, that had a significant impact on the value of the guilder, and the manufacturing sector was destroyed.

According to Statistics Canada, between 2004 and 2008, before the economic crisis, Canada had already lost 322,000 manufacturing jobs. This is still going on today. Are unfocused tax cuts, which by definition continue to benefit the companies that make the most money, meaning banks and oil companies, an accelerating factor? Is the shortfall you're talking about, the deficit—you are talking about a structural deficit—fed by this major trend?

[Kevin Page]

Absolutely. We said that a substantial tax cut has had some effects. Four years ago, it was around $40 billion per year. At the moment, it is roughly $30 billion per year. There are two reasons for that.

When we look at this period of time, we are talking about a generally much more reliable economy in a macroeconomic context. In addition, as you said, there are more structural issues in connection with some specific sectors of the economy. We noticed a significant reduction in the capacity of our manufacturing sector.

[Thomas Mulcair, NDP, Outremont, QC]

You have mentioned our choice in particular. Others might blame us for it. But I don't. You have pointed out that this is a major expense. In 2014, it will have to be renegotiated with the provinces. The NDP is the founder of Canada's free and public universal health care system. We are always going to strive to maintain it.

On your end, you have drawn a circle around the amounts that have to be transferred to maintain the increases in the health system. We have made this choice by emptying our budget envelope and this is currently affecting our ability to pay. So it is a matter of choice and priorities. It is not just about health being unaffordable, but health being unaffordable as part of a structure like this, with tax cuts.

[Kevin Page]

You are right, the structure has changed over the past few years. It is different now. We now have a structural deficit. Four years ago, it was generally balanced.

[Thomas Mulcair, NDP, Outremont, QC]

You often use the term “sustainability”. The notion of sustainable development relates to basic cost internalization principles, such as the polluter-pays principle, the user-pays principle and the life cycle of a product. Seeing as how you have to consider these principles as a whole, why do you think that cleanup costs are not included in the price of bitumen extracted from tar sands and exported in bulk to the United States without being processed in Canada? In addition, this is clearly a missed opportunity to create jobs in the country.

We are accumulating a historic financial debt, a global environmental and social debt, and saddling future generations with it. Hundreds of thousands of people will retire without a pension. Would cost internalization reduce the rising pressure on the value of the Canadian dollar and make it easier to continue exporting our manufacturing sector products? Could this be part of the solution to the problem?

[Kevin Page]

Economists are concerned about the whole general cost issue. If certain elements are not included in this price, there is a problem, just as in the case of environmental issues. I think you're talking about a sustainability concept that surpasses our financial sustainability. You're talking about accountability for multiple generations. Analyses are being conducted on this matter, and our office might study such issues in the future. As things currently stand, it would be a stretch for us.

[Thomas Mulcair, NDP, Outremont, QC]

I invite you to conduct this study and look into this accountability because it's important. We are now talking about our obligations as elected officials and about figures, but this is also an intergenerational obligation.

Thank you so much for your being here. As usual, your input helps us in our work. Thank you very much.

[Kevin Page]

Thank you very much.

[The Chair, Conservative, James Rajotte]

Merci, Monsieur Mulcair.

Mr. Page, I do want to thank you and all of your colleagues for being with us here today.

As the chair, I want to highlight one issue that perhaps you would want to follow up with me and the committee, and that is your statement on productivity growth, which is very interesting. It's very worrisome about trending down 1.2% since 1976 and 0.8% since 2000. I would certainly appreciate some analysis as to why that is, what we should do to reverse that trend, and also an analysis of the measures that have been taken—particularly since 2000—that in my view should be reversing this trend, what has been the impact of those measures in place. I would certainly appreciate information resulting from anything you have done thus far or that you do in the future. I would certainly appreciate that, and I would share that with all committee members.

Again, thank you for being with us here today.

Colleagues, we will suspend for about two minutes.

[The Chair, Conservative, James Rajotte]

Colleagues, I will ask you to find your seats, please. We will begin our second panel right away.

We have two organizations. First of all, from the Conference Board of Canada, we have Mr. Glen Hodgson, who is the senior vice-president and chief economist.

We have two individuals from the Canadian Worker Co-operative Federation, Monsieur Alain Bridault, président, and Ms. Hazel Corcoran, executive director.

We have, as an individual, Mr. Ian Lee, the director of the MBA program, Sprott School of Business, Carleton University.

If I can ask each of you to give your opening presentations, we'll start with Mr. Hodgson for between seven and ten minutes, please.

[Glen Hodgson, Senior Vice-President and Chief Economist, Conference Board of Canada]

I thought you might do that, Mr. Chairman.

Good morning, everybody. Bonjour, tout le monde.

I am part of the circle of economists who get to meet with finance ministers across the country pre-budget. I thought I would start with a few comments, basically the same thing I said to Mr. Flaherty last week, because we are allowed to talk about what we said. So here we go.

I started by talking about the economic outlook, and you have the private sector consensus forecast in front of you. We're actually below the consensus, which is a bit unusual. We've been leading the pack to a great degree for the last two years in terms of our growth forecast. We're now forecasting growth of just under 2.5%, let's say 2.2% to 2.3%, so just below the consensus.

We see this as a year of deleveraging across our economy. In our forecast we expect governments to withdraw the stimulus they injected in the last two years. We expect households to rebalance their balance sheet. We've seen things like the shortening of mortgage terms. We know personal debt levels are very high, and we've had warnings from Mr. Flaherty and from the Governor of the Bank of Canada, Mr. Carney, that households really have to start managing down, and therefore we expect a positive savings rate of about 5% for households this year. That'll take a bit of steam out of the recovery.

The dollar, of course, is having an impact on our trade balance with the United States. Other forecasters seem to think our exports will recover. We're certainly forecasting a recovery, but we expect the trade balance to be negative for this year, and that puts a negative sign into our forecast.

So growth of 2.25% is not great, but I would say it's much better founded than the growth you find in a lot of other places. The U.S. is still relying very heavily on fiscal and monetary stimulus. We're now at the happy point of being able to withdraw that and get back to a more solid foundation based on private recovery of consumption and investment. That's comment number one.

Comment number two is as follows. I've been in the public domain talking about the fiscal balance going forward and offering the view that we think the federal government can get back to balance as planned in 2015, and maybe even a little ahead of that. That view was very much founded on our belief that nominal income growth is going to be a bit stronger than has been forecast by the department and the consensus of forecasters. Last year we saw stronger nominal income growth than was forecast in the budget. On a going forward basis, even though we're putting the withdrawal of stimulus into our forecast plans, we think the government can get back to a balanced budget position by 2015.

That brings me to point number three, which is stay the course. The government put in place what we think is a very strong and appropriate framework in the last budget. We're now going to be looking for the details to ensure that the plans are put in place to slowly bring down the deficit over the next three years and then get back into a balanced budget in 2015. We're very mindful, for example, that the government managed to manage its forward obligations into the previous fiscal year. We see the government a little ahead of plan this year. I heard Mr. Page say a number of about $40 billion is the deficit for this fiscal year. That's more or less in line with our thinking as well. In fact, we'd be a little bit ahead of that, hoping for a number like $38 billion as the end number for the fiscal deficit.

We think the commitment to get back to a balanced budget in 2015 is very important. We've seen what happens when bond markets lose confidence in governments around the world. That's what has happened in many countries over the last year. So we think that re-anchoring fiscal policy by a commitment to get back to a balanced budget is very important.

I'll stop right there.