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.
Conservative
The Chair Conservative James Rajotte
I call this meeting to order. Pursuant to Standing Order 108(2), we are studying our government's economic update and fiscal projections.
We have two panels today of an hour and a half each. At our first panel we're honoured to have the Parliamentary Budget Officer, Mr. Kevin Page.
Mr. Page, I understand you have an opening statement for the committee, and I would ask you to introduce your colleagues at the table. You can begin any time.
Welcome, and thank you for being here.
Kevin Page Parliamentary Budget Officer, Library of Parliament
Thank you, Chair.
With me is Dr. Mostafa Askari. He heads up our economic and fiscal analysis group. As well there is Chris Matier, a senior economist in that group. Jeff Danforth is another senior economist who helps us with economic and fiscal projections, and finally there is Sahir Khan, who is our assistant parliamentary budget officer for revenue and expenditure analysis.
Good morning, 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.
Good morning, 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.
I will make some brief remarks about the Parliamentary Budget Office's updated fiscal projections and highlight issues for consideration in the context of the upcoming 2011 budget. A handout with charts and tables is provided to accompany my remarks.
The PBO's updated fiscal projections are based on the economic outlook from Finance Canada's December 2010 survey of private sector forecasters. On a status quo basis, the fiscal outlook is essentially unchanged from the projections provided to this committee last fall. The federal deficit is projected to fall from $56 billion, or 3.6% of GDP, in 2009-10, to $39.8 billion, or 2.5% of GDP, in 2010-11, to roughly $10 billion, or 0.5% of GDP, in 2015-16.
The federal debt is projected to rise from $519 billion, or 34% of GDP, in 2009-10, to $652 billion, or 31.9% of GDP, in 2015-16.
Before continuing, I would like to clarify some issues regarding the forecasting processes used by Finance Canada and PBO. First, both organizations construct their fiscal projections using the average of the private sector economic forecasts compiled by Finance Canada. From this stage of the process onward, both PBO and Finance Canada use their own assumptions to translate the private sector economic forecasts into fiscal projections. I want to be clear—the private sector economists with whom the Minister of Finance consults do not prepare the fiscal projections presented in the government's budgets or updates. Both organizations produce their own budgetary projections and should be willing to provide, and defend, the assumptions used.
Based on Finance Canada's recent survey, forecasters expect the Canadian economy to grow faster than PBO's estimate of its potential growth, allowing the output gap to close by the end of 2016. The unemployment rate is projected to decline to 6.6% by 2015, inflation is projected to remain stable, and short- and long-term interest rates are projected to rise only gradually over the medium term but remain low by historical standards. PBO views this medium-term economic outlook as relatively favourable given the elevated level of economic uncertainty.
PBO has identified four key downside risks to the private sector economic outlook. First, global growth, particularly in the U.S., could be slower than anticipated. Second, the recent appreciation of the Canadian dollar could restrain the recovery in exports. Third, sovereign debt concerns could restrain the recovery in Europe and put upward pressure on global interest rates and finally, domestically, the high level of household debt represents a further risk to domestic demand.
Thus, on a status-quo basis, and given the risks and uncertainty surrounding the private sector economic outlook, PBO estimates that the likelihood that the budget will be in a balance or surplus position over the period 2010-11 to 2013-14 is effectively nil; and, there is only a 16% chance that the budget will be in surplus in 2015-16. These estimates reflect the historical forecasting performance of private sector economists and Finance Canada's fiscal sensitivities.
The PBO projects that the reduction in the budgetary deficit over the medium term largely reflects a cyclical improvement, with the economy reaching its potential by the end of 2016. That being said, a budgetary deficit remains. This means that a structural deficit exists, which the PBO estimates to be about $10 billion, 0.5% of GDP, in 2015-16. As a consequence, policy actions would be required to achieve a balanced budget.
While the PBO's estimate of the government's structural deficit is small on a historical basis, and likely significantly lower than other central governments, any structural deficit is a potential concern, given the demographic transition that is under way.
I would now like to highlight two key issues for your consideration in the context of the upcoming 2011 budget deliberations.
The first one is that Canada's major fiscal challenge is long term, not short term.
Canada's serious fiscal challenge is underscored by aging demographics and weak productivity growth. Our population is getting older. In 1971 there were 7.8 people at working age for every person over 65, which fell to 5.1 in 2008. And it is projected to be 3.8 in 2019 and 2.5 in 2033. Growth in labour supply will fall dramatically due to slower population growth and the retirement of the baby boom generation.
Productivity growth is trending down: 2.6% average growth from 1962 to 1976, 1.2% since 1976, and about 0.8% since 2000.
The bottom line is that Canada does not have a fiscally sustainable structure. There is a fiscal gap. This means that sustained fiscal actions are required to avoid excessive debt-to-GDP accumulation. Based on the PBO's 2010 report, assuming that the Canada health transfer grows in line with projected provincial-territorial health spending beyond 2013-14, which is projected to be approximately 4.2% per year on average, the fiscal gap is about 1% of GDP, or $20 billion in 2016.
Alternatively, if the Canada health transfer continues to grow at 6% per year, as currently assumed by Finance Canada, the fiscal gap increases to 1.9% of GDP, or about $40 billion, in 2016. Moreover, a significant delay in taking fiscal action substantially increases the required amount of corrective measures.
Budget 2011 should include a fiscal sustainability analysis.
In 2007 the government committed to producing long-term sustainability analysis. It should deliver on this promise. Furthermore, in its 2010 article IV staff report, the IMF called on the government to increase transparency and communication surrounding the fiscal challenges related to the impact of population aging. Parliamentarians may wish to consider reforming the budget process to ensure a more forward-looking assessment and management of the nation’s finances. In my opinion, the current process and political climate gives too little weight to the fiscal impacts of current policies on future generations.
The PBO is committed to expanding its work on fiscal sustainability this spring to include all levels of government.
The second point is that Parliament needs more fiscal transparency and analysis, not less.
There is genuine concern that Parliament is losing control of its fiduciary responsibilities of approving financial authorities of public moneys as afforded in the Constitution. In the recent past, Parliament was asked to approve changes to crime legislation without financial information or knowledge of moneys set aside in the fiscal framework. Parliament was asked to approve authorities related to operational restraint without access to a government plan.
The PBO believes that the government should provide the strategy to achieve estimated operating savings in the 2011 budget and that the departments and agencies should outline their plans to achieve their respective three-year savings contributions in their 2011-12 reports on plans and priorities. It is our view that this would be similar to the approach the government took in its economic action plan, where the two-year stimulus strategy was outlined in the 2009 budget, including additional planned resources for government programs before Parliament was asked to provide financial authorities. The degree of transparency demanded by parliamentarians for stimulus spending should parallel those required for spending restraint measures.
The PBO also wishes to note that this government provided Parliament details on spending restraint by department and agency in 2006, prior to parliamentary approval of financial authorities, as did the previous government in 2005 on its expenditure review exercise. This raises the question of why the application of cabinet confidence with respect to restraint measures appears to have changed in such a short period of time. Further, the application of cabinet confidence has been used to withhold information regarding the assumptions used to translate the private sector economic forecasts into Finance Canada's fiscal projections.
New policy measures, such as the Afghan mission extension, and existing measures--for example, corporate income tax reductions--must be obtained and debated in an open and transparent manner with the information required for parliamentarians to assess their financial costs and risks.
Budget 2011 should provide a frank picture of the short and medium-term planning environment and budgetary constraints. Parliamentarians could benefit from having access to the government's estimates of the output gap, structural budget balances, and the quantification of risk and uncertainty.
Thank you for this opportunity to serve this committee. We would be honoured to address your questions.
Conservative
The Chair Conservative James Rajotte
Thank you very much, Mr. Page, for your opening statement.
We'll begin members' questions with Mr. Brison for seven minutes.
Liberal
Scott Brison Liberal Kings—Hants, NS
Thank you, Mr. Page, and thank you to your team for meeting with us this morning.
I have some very specific questions about information that this committee is seeking from the government in order for Parliament to make decisions in terms of our support, or not, for government legislation. We've requested information on corporate profits from the government--projections of total corporate profits before taxes and projections of effective corporate tax rates.
I have some specific questions. How is this information used and shared within the federal government?
Parliamentary Budget Officer, Library of Parliament
For projection purposes, I would think most of the information for projections going forward on corporate profits would be kept within the Department of Finance, perhaps used to brief the finance minister and the Prime Minister in the context of these projections and a potential scenario analysis. I think in conversations with private sector forecasters as well, this information would be exchanged to better understand what the average private sector forecast is and how it changes from forecast to forecast.
Liberal
Scott Brison Liberal Kings—Hants, NS
Would you agree that it's used by departments in ways that are not directly related to cabinet affairs?
Liberal
Scott Brison Liberal Kings—Hants, NS
Given your experience in the federal public service, can you tell us if this type of information is routinely protected as cabinet confidence?
Parliamentary Budget Officer, Library of Parliament
In my 25 years or so in the public service, including many years at Finance, the Privy Council, and Treasury Board, this type of information was regularly exchanged among officials, and exchanged with private sector forecasts. In fact, our projections, our assumptions in the back of our table and chart package, do include information on wages and salaries, corporate profits, and other income components of the national income.
Liberal
Scott Brison Liberal Kings—Hants, NS
Can you think of any instance in your 25 years of public service where projections of corporate profits were treated as cabinet confidence? Can you think of one instance?
Parliamentary Budget Officer, Library of Parliament
I'm not aware of short-term, medium-term, longer-term kinds of projection assumptions being treated as cabinet confidence. Certainly there could be cases of individual tax agreements with specific terms--how that may impact profits of a particular company--but certainly not in terms of general assumptions for planning purposes.
Liberal
Scott Brison Liberal Kings—Hants, NS
We have requested also from the government the costs of 18 different justice bills, including incremental cost estimates broken down by capital operations, maintenance, and other categories; baseline departmental funding requirements broken down by capital, operations, maintenance, and other categories; and also total department annual reference levels and detailed cost accounting analysis and projections.
How is this information used and shared within the federal government?
Parliamentary Budget Officer, Library of Parliament
In the case of crime legislation changes, when this information is being discussed in a lead-up to a proposal--again on the executive side of government--the department would be asked to prepare financial projections along with the changes in legislation. There would be a policy proposal first put to a policy cabinet committee. This would include some financial information. If the policy was approved, then it would go to Treasury Board. Treasury Board would provide a front-end due diligence on the financial models, methodologies, and costings. Eventually it would become part of a budget, and then eventually Parliament would approve the appropriate financial authorities for the legislation.
Liberal
Scott Brison Liberal Kings—Hants, NS
So once there's legislation presented to Parliament by the government...would you agree that this information is used in ways that are not directly related to cabinet affairs?
Parliamentary Budget Officer, Library of Parliament
Sir, I'm sorry. I'm not sure I understand--
Liberal
Scott Brison Liberal Kings—Hants, NS
Once there is legislation that goes to Parliament, would you agree that the information is then used in ways that are not directly related to cabinet affairs?
Parliamentary Budget Officer, Library of Parliament
Well, I think if we're talking about information analysis of the nature of methodologies and assumptions, again, I don't see why parliamentarians should not get access to that kind of information before they're asked to approve financial authorities.
I mean, if we're talking about communications or some other aspect.... I'm not sure exactly where you're going with the line of questioning.
Liberal
Scott Brison Liberal Kings—Hants, NS
In your opinion, the cost of government legislation is not routinely protected as a cabinet confidence.
Parliamentary Budget Officer, Library of Parliament
No, sir. I mean, if Parliament wants access to information--what the methodologies are and what the assumptions are behind any legislation, whether it's crime or something else--they should receive access before they approve financial authorities.
Liberal
Scott Brison Liberal Kings—Hants, NS
Based on your 25 years of experience in the public service, would the information for these justice bills exist within the federal government currently? And if it doesn't exist, what would be the implication of it not existing?
Parliamentary Budget Officer, Library of Parliament
Well, sir, I think we assume that it does exist. Treasury Board policy is that legislation and policy would not be able to go forward without some kind of costing. Just to get the appropriate approvals from Treasury Board, which is also a cabinet committee, it would require due diligence on the numbers. So we assume that this information does exist.
Liberal
Scott Brison Liberal Kings—Hants, NS
So it would be implausible that the government would not have this information.
Parliamentary Budget Officer, Library of Parliament
That would not be financially responsible.
Liberal
Scott Brison Liberal Kings—Hants, NS
You raised the question of the aging demographic and rising health care costs being a factor as to why we don't have a lot of chance of getting out of structural deficit in the foreseeable future. We're now entering into the health care negotiations leading into a 2014 agreement, or a deadline for an agreement.
Last time, there was a federal cheque for $41 billion. With the current deficit, it's highly unlikely that it would happen again. I'd appreciate your reflection on the level of provincial debts juxtaposed with this negotiation and how much of a complicating factor it is going to be to reach a surplus once again.
The second question is, has the government provided a credible plan to get Canada back to balanced budgets?