Finance Committee on April 26th, 2012

[Peggy Nash, NDP, Parkdale—High Park, ON]

But your numbers, for which you were highly and visibly criticized by the government, in fact turned out to be closer to the accurate numbers than what we were being told in Parliament.

[Kevin Page]

Well, I wish we could say that we actually could talk about real accuracy in the sense that we actually knew what the final prices would be and we could be looking backwards in time. But still at this point, when we're talking about F-35s, and when we're talking about the economy, we're still projecting for it.

So for us it's really giving, as you said, as much transparency as we can give you and also giving you analysis around that transparency.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Now, your job is to act on behalf of Canadians in terms of providing that transparency, which I think is a really critical job, because we're entrusted with overseeing the tax dollars that Canadians send to us in Ottawa. I sense today on the part of the opposition members here on the committee some defensiveness, shall we say, and perhaps some aggressiveness towards you and pushing you in terms of your analysis.

So let me just ask you now.... The Auditor General is appointed by Parliament. I think I'm correct on that. But if I understand correctly, you are appointed at—I quote—“the pleasure of the Prime Minister of Canada”. Is that right? Your position is not a position that is appointed by the Parliament of Canada.

[Kevin Page]

That's correct. It's a Governor in Council appointment, but effectively appointed by the government. Actually, I did work for the Prime Minister. I did work for this government as a public servant in the Privy Council Office, and I'm proud to say that.

[Peggy Nash, NDP, Parkdale—High Park, ON]

In terms of your role of sometimes providing information that might be critical of the government, it must make it awfully difficult for you to not have the full independence every other officer of Parliament has, because they are appointed by the Parliament of Canada, as opposed to serving at the pleasure of the Prime Minister.

[Kevin Page]

In my own experience, when I was being appointed in March 2008 and came to this very room in front of different committees, when committee members found out that I had worked for this Prime Minister—and these were different committees—they were concerned that I wouldn't be non-partisan. I don't think people are as worried about that particular issue right now.

In terms of the future, which is where I think your question is going, Mrs. Nash, I have a little less than a year left doing this job, and there are three people at the front of this table who I think would be excellent candidates. It would be much better if they were appointed by a broader process, if they were only dismissed by cause, this office would have a chance to continue and grow and serve all parliamentarians.

[Peggy Nash, NDP, Parkdale—High Park, ON]

For the best process of transparency, would it be better if the Parliamentary Budget Officer's position and those who work with the Parliamentary Budget Officer had the confidence of Parliament and were responsible to Parliament, and therefore the people of Canada, rather than to the Prime Minister's Office?

[The Chair, Conservative, James Rajotte]

Just give a brief response, please.

[Kevin Page]

I think a change in the appointment procedure would get the support of all of Parliament. To be dismissed by cause would be a big improvement to the legislation.

Thank you.

[The Chair, Conservative, James Rajotte]

Okay, thank you, Ms. Nash.

I'm going to take the next round, as the chair.

Mr. Page, I wanted to ask you a follow-up on the OAS issue. When the changes were made, you said that “...there's no reason to change from a fiscal sustainability perspective. There may be other reasons to change retirement ages that have to do with broader policy discussions, but that goes beyond fiscal sustainability”.

But in the “Fiscal Sustainability Report 2011” you did, the report stated:

The major demographic transition that is underway in Canada will strain governments’ finances over the next several decades. During this time, population ageing will move an increasing share of the population out of their prime working-age years and into their retirement years. This will put downward pressure on revenues, as growth in economic activity, and therefore the tax base, slows. At the same time, ageing will put upward pressure on programs whose benefits are entirely or disproportionately realized by Canadians in older age groups, such as elderly benefits and health care.

I'm at a bit of a loss, frankly, as to some of the statements made in the report, which I consider an excellent report and very solid, and some of the reactions to the government's policies.

Can someone indicate to me what the difference is, and why this statement, which is fairly clear, was made in this report and then we had your reaction to the OAS changes?

[Kevin Page]

Sir, I think what I'll do is start, and then I think Chris wants to jump in.

I would start by saying, again, that our first sustainability report was in 2010. The second one was done in 2011. We've seen sustainability reports. We used methodologies we borrowed from other countries. We do a similar type of calculation. We're trying to find out what fiscal actions it would take to stabilize the debt-to-GDP ratio, in terms of the 2011 report, both at the federal level and the provincial and territorial level. We provided this analysis.

We also provided analysis to give you a sense of how big these gaps are relative to, say, actions taken in the 1990s. Again, what we said, in terms of the fiscal gaps, was that there were modest gaps at both the provincial and federal levels. With respect to the change in the Canada health transfer subsequently, we said that essentially this burden was transferred down to the provinces. We haven't eliminated that gap, but we've transferred it to the provinces.

[The Chair, Conservative, James Rajotte]

Mr. Page, with all due respect, there's a fundamental difference between saying there's no reason to change the OAS program from a fiscal sustainability perspective and saying that the major demographic transition that is under way in Canada will strain governments’ finances over the next several decades. These two statements are contradictory, in my view.

Mr. Matier, would you or Mr. Page want to address that?

[Kevin Page]

Maybe, sir, I'll just start.

It's true. You've seen graphics. There are similar types of graphics in budget 2012 on what will happen to the old age dependency ratio. We're all finance economists. We can calculate what that would mean to potential output and budgetary revenues. Canada still faces this challenge. Again, we are talking about a fiscal plan today, and we're basically saying that PBO numbers, the Government of Canada numbers, are effectively the same over the medium term. We're talking about Canada getting to a structural surplus in the medium term, and then we project forward from that.

[The Chair, Conservative, James Rajotte]

But I'm not getting an answer.

The issue is, if one read the report one would be led to the conclusion—at least I concluded—that we had to make some changes in the long term to programs like old age security, based on what the report told us back in 2011. As I said, it's a very good report. Then the changes were made and then there was criticism of the changes that were made when in fact the analysis that was done in the PBO report would lead one to conclude that these are the kinds of changes that are required.

[Kevin Page]

Again, sir, there was a big change made in December 2011, when the government changed the Canada health transfer. It was an important change, and it actually solved a lot of the federal government's fiscal problems. But it did transfer this problem effectively to the provincial and territorial level.

[The Chair, Conservative, James Rajotte]

Okay, but on that point, page 4 of this report says “under a scenario in which health spending grows in line with only nominal GDP and ageing impacts...the federal and provincial-territorial fiscal gap would be reduced to 1.2 per cent of GDP”. You also go on to say that “significant delays in implementing the required actions substantially increase the amount of corrective measures”.

I guess my frustration here is that I took you very seriously when you produced this report. I think it's an excellent report. Frankly, I'll say as a member of Parliament that I went to the Minister of Finance and others and I said we need to take these issues seriously; the Parliamentary Budget Office has done an excellent report on this, and we need to look at long-term transfers for health care, and we need to look at programs like old age security in terms of long-term sustainability. My view is that in fact the government took your advice.

If I were you, I would have said, “I'd like to thank the government for taking our advice, because we were the ones who highlighted the problems that they are in fact addressing with these two measures.” That's where my frustration is.

[Kevin Page]

Sir, I apologize for your frustration. When we released the report in January on the Canada health transfer, we effectively updated our analysis. I assume that all members of Parliament would like us to keep our analyses current. We released the report and we said effectively that the federal government is now fiscally sustainable. So we updated our analysis. I would have thought at that point the government would have said, “Yes, we should take credit for that. We are now fiscally sustainable.” Then, in the context of an additional decision, really in the communication of a decision, they said that now we're going to take action on the old age security program.

[The Chair, Conservative, James Rajotte]

Unfortunately, Mr. Page, my time is up, but in this report you did address both health care and the demographic issues in terms of pensions. I encourage people to actually read the report. I think it's an excellent analysis.

At this point we'll turn the time over to Mr. McKay for five minutes, please.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I would have liked to carry that on, Chair, but I have another issue.

It's nice to be back. I see some things never change.

I want to turn to your second report, which has to do with the fiduciary duty of parliamentarians to the Canadian people to manage the public purse. As you know, I wrote you a letter a couple of weeks ago and asked you to update your F-35 report, and you in turn released a letter yesterday that asks DND to update their analysis. You specifically guided them to chapter 5 of their own guidelines. In there, you suggested, I believe—and I'm recollecting from the letter—that the cost per plane is somewhere in the order of $137 million or thereabouts.

The government has maintained throughout this that the envelope is $9 billion. That's locked in stone: there is no money other than $9 billion, end of story. Their analysis is based on a $75-million or $80-million plane. Yet very few countries seem to be staying with that number. The argument that DND puts to us as parliamentarians is that they're going to buy in the sweet spot of the analysis. This becomes a function of numerators and denominators. I was wondering whether you could take a little bit of time and explain to us as parliamentarians--and, by extension, Canadians--why that purchase in the so-called sweet spot is, as I would call it, fantasy. You might use another word, but in my judgment it's fantasy.

[Sahir Khan, Assistant Parliamentary Budget Officer, Expenditure and Revenue Analysis, Office of the Parliamentary Budget Officer, Library of Parliament]

Thank you for the question, Mr. McKay.

Right now the program is in what is referred to as low-rate initial production. So you have net R and D costs, you have relatively high costs associated with small batches of early production associated with the risks and challenges at that stage. Over time, typically what happens in fighter jet and other types of procurement is those costs decline, and one would hope that you would see those types of reductions over time.

In the context of this current airplane, the LRIP costs remain relatively high if you look at the shape of the production learner curve. So there are some concerns expressed by a number of countries that they would like to all defer purchases, including the United States government. It has also announced that it would like to defer production. The challenge ends up being in the long runs that not everybody can buy the last airplane in the production run, or fastest production sweet spot. So there are trade-offs among the partners that potentially could be required in order to balance between early costs and later costs.

When we did our analysis over a year ago, we did an estimate for the overall production run, which we estimated about $129 million per copy. Then we estimated a premium, given the time that the Canadian government had estimated acquiring the airplanes, which was among the earlier aircraft. So we estimate about a 15% increase.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So that gives you what, $148 million?

[Sahir Khan]

That's $148 million, sir. So as countries decide to postpone delivery, it does two things: it potentially reduces the cost, but then all the other aircraft subsequent to that point actually then have to absorb the cost increase, because essentially we're looking at what has been described to us as kind of like a total cost program divided by the number of aircraft. As those aircraft, the denominator, start to reduce, the average cost per aircraft starts to go up for everybody. So as countries start to reduce their orders, that cost then gets absorbed by all the remaining partners. There are papers written on this phenomenon that can occur. It's affected a number of programs, which have resulted in very high unit costs because ultimately the production runs were contracted.

[John McKay, Liberal, Scarborough—Guildwood, ON]

I understand the concept that pretty well everybody wants to buy this airplane last. That makes perfectly good sense to me, because that's where the sweet spot is. But what you're saying is that because of the reduced number of orders and the increased difficulties with this airplane, effectively we, along with all the other countries, will be shoved up the purchase scale to a higher per-unit cost.

[Sahir Khan]

Effectively, if you look at where Canada was originally looking to purchase, that point would have been in a fairly high level of this current learning curve associated with the production in the low-rate initial production, which would have been a relatively high cost compared to the last units.

Right now the U.S. Department of Defense has a figure published via the Government Accountability Office at $137 million average for all variants. So there will be a lower amount for the F-35A. But the price you ultimately pay--again based on this estimate--depends on when you are able to acquire the aircraft.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. McKay.

We'll go to Ms. Glover, please.