Finance Committee on Oct. 30th, 2012

[Randy Hoback, Conservative, Prince Albert, SK]

Yes.

[Kevin Page]

I'm sorry, sir.

On the QE3, I think one of the things that we've changed in our projections is lower longer term interest rates. We've actually revised down our longer term interest rates, both for the United States and for Canada, in our projections. I think we've seen that across the board. I think it has had an effect of lowering the rates, getting the rates down.

Is it having a significant impact? I think a number of commentators have said that rates are already quite low, and the ability of the monetary policy to provide continuous stimulus with the rates as low as they are is probably minimal. In the current environment, I think monetary policy people are pretty much doing all they can do, so there would be a positive impact certainly, but for longer term impacts, it's hard to say.

[Randy Hoback, Conservative, Prince Albert, SK]

Okay.

Under “Improving Budget Transparency and Accountability”, you talk about the “fiscal sustainability analyses of the provincial-territorial government sector that it has prepared in the past, which the Auditor General noted in his recent report”. Are there any specific problems that you are concerned about as far as their debt levels are concerned and how they're handling their spending?

[Kevin Page]

Well, sir, in our mandate and in the act of Parliament, it talks about preparing analyses on economic trends in the nation's finances, so when we do fiscal sustainability work—I think where we find that as well, from the AG's report, is what Finance is doing as well—with our limited capacity, we've consolidated the provincial-territorial-local sector, so we look at it as a complete sector. We don't yet have the actual capacity to separate out province by province.

I think that capacity does exist at the Department of Finance, which is where that type of question would be much better placed. The longer term stability, their projections, we weren't able to do that, sir.

[Randy Hoback, Conservative, Prince Albert, SK]

You haven't done any background information on that at all.

[Kevin Page]

Well, what we've done, and what we've actually published in the last two fiscal sustainability reports, is to look at the consolidated sector. I think what we've said on that sector is that the provincial-territorial-local sector faces a fiscal gap of something in the neighbourhood of two percentage points of GDP. Again, that's action that we need to require just to stabilize the debt-to-GDP ratio over a 75-year period. That's our estimation. We suspect that Finance might actually have a similar number, but they have not made that analysis available.

[The Chair, Conservative, James Rajotte]

You have 30 seconds.

Thank you, Mr. Hoback.

Mr. Brison, please.

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

Thank you, Mr. Page, and thanks to you and your team for being here and for the work you do on behalf of Parliament and on behalf of Canadians.

In your report, you expect that the Bank of Canada will keep interest rates where they are until 2015, yet Governor Carney constantly warns us of personal debt levels in Canada and keeps the door open to changes. How would a modest increase in rates prior to 2015...what sort of quantum would be the effect on your projections?

[Chris Matier, Senior Director, Economic and Fiscal Analysis and Forecasting, Office of the Parliamentary Budget Officer, Library of Parliament]

Our assumption on the Bank of Canada's interest rate is largely based with the view that the Federal Reserve is keeping their rate stable, very low, for an extended period of time. If we were to have increases beyond that, modest increases in interest rates, which we do have in our projection, you obviously would expect to see some drag from growth, but again, to keep inflation at its target, that would be required.

The effects of those policies, however, would probably fall largely outside the five-year window we're looking at, so probably towards the end of 2016 or early in 2017.

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

In a recent report from the Macdonald-Laurier Institute, “Provincial Solvency and Federal Obligations”, here is what was said: “In the medium to long-term, public finances in several provinces are unsustainable, raising the spectre of debt crises, damaged credit ratings, and federal bailouts if corrective steps are not taken”.

You just referred to the long-term fiscal gap, on the provincial side, of 2% in your report. Yes, that's $36 billion per year in 2012, at a time when the federal government has a long-term fiscal surplus of 1.4%. That gap, not just between the federal situation and the provincial situations, but the gap between provinces, is troubling and is tied to demographic issues and to the higher health care costs in an aging population in some provinces, less so in other provinces with a younger population, as an example.

Should we be looking at public policy changes in how we approach equalization, as an example, and considering other demographic realities, for instance, as opposed to purely per capita?

[Kevin Page]

Sir, I certainly agree with the premise that it is a different fiscal situation facing the federal government as a result of some tough actions with respect to the Canada health transfer, the freezing of direct program spending for five years, effectively, and the change to age eligibility for OAS.

The provinces have a gap of 2%. To provide some perspective on that, it's a significant gap, and it will grow as we move through this aging demographic transition over the next 20 years.

There is a cost to delaying action at the provincial level. I mean, it is our sense that the provinces are facing, like the Canadian economy in general, the economy operating slightly below potential. They may want to wait a number of years to take that action. But we think two percentage points of GDP is perhaps manageable. It's something they can deal with. The PBO is not forecasting unmanageable debt loads.

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

Respectfully, that's a macro number. In some provinces, it's far worse. It's that disparity that is troubling, in terms of potential. Some are saying that there's a potential for default, even. It's that disparity that is troubling.

[Kevin Page]

There would be disparity. Two per cent is an average. If you think of the adjustment we did to the operating surplus at the provincial level in the late 1990s, it was more than two percentage points. It wasn't sustained. This has to be sustained.

It is a significant challenge. I think it has implications for programs such as equalization and perhaps the CHT, as well. That could be a focus of policy discussion going forward.

Sorry, Chair, if I went on too long.

[The Chair, Conservative, James Rajotte]

No.

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

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Brison.

We'll go to Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Mr. Chair.

Welcome, Mr. Page, and others.

I have a question on employment. Some have said recently that Canada has not fully recovered the levels of employment as compared to other countries. I hope that what you say here in your report, “Assessment of Canada's Labour Market Performance”, will put to bed any concerns on that front.

First, on page two of the report, you say:

After declining 2.5 per cent in the recent recession, employment in Canada is currently 2.3 per cent above its pre-recession peak from October 2008. The level of employment is now 4.9 per cent above its recessionary trough from July 2009, an increase of over 820,000 net new jobs.

Second, on pages 19 and 20, you say:

Our analysis also suggests that the recession of 2008-09 was comparatively milder relative to other downturns in Canada during the 1980s and 1990s.... Looking internationally, Canada's labour market is currently significantly outperforming some countries with struggling economies, (e.g.the U.S.,and Euro area) and Canada also scores above average among G7 and OECD countries.

Could you elaborate on Canada's employment performance and how we compare to other OECD countries?

[Kevin Page]

Mr. Chair, the report released yesterday by the PBO is actually a very favourable report on Canada's labour market. Just to reiterate some of the points you've made, I think it shows that certainly in level terms, we are much better than where we were prior to the recession.

We make three large points in the report. We look, again, on a cyclical basis. First, Canada, we still see, I think, from the Bank of Canada, the IMF, the OECD, and others, is still operating a bit below potential. We're still recovering to get back to Canada's potential after the recession of 2009. We provide estimates on how we are relative to where we think those longer term trends are. But clearly, just as you highlighted, sir, relative to pre-recession peaks and levels in past cycles, such as the recessions we experienced in the 1980s and the early 1990s, this recession is much milder. We went in with better numbers. We're coming out with better numbers. I think it's highlighted in many ways. When we look at comparisons with other countries, Canada has done very well.

When you started your point, you talked about, I think, employment being lower. Some people were making comments to this point. It is also true that employment rates, participation rates—the level of employment relative to the population—are lower at the present time relative to where we were on a pre-recession basis. Again, that reflects the fact that we're still recovering. We're getting back to potential. I think the Governor of the Bank of Canada might have said something very similar.

[Mark Adler, Conservative, York Centre, ON]

With respect to the Canadian economy as a whole, the PBO's latest outlook report talks about external factors and the effect they could have on Canada's economy. Would you agree that it's mostly external factors that can have a negative impact on our economy and not domestic influences?

[Kevin Page]

I think there are foreign and some domestic risks as well. I think balancing the external risks, as raised by a member here today, is much more significant than the incredible uncertainty surrounding the fiscal situation in the United States. I think the euro crisis is another significant risk. I think that raises huge upside and downside risks that are hard to determine, but again it could be both on the upside and the downside. It makes forecasting in this environment quite difficult.

[Mark Adler, Conservative, York Centre, ON]

Would you agree that the external factors are far more significant than anything domestic?

[Kevin Page]

I would agree, sir.

[Mark Adler, Conservative, York Centre, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Adler.

Monsieur Mai, s'il vous plaît.

You have the floor.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Thank you, Mr. Chair. Thank you for being with us today, gentlemen.

Mr. Page, I would like to thank you for the work you are doing to ensure greater transparency.

When you came to meet with us last year, you said you did not envy us because we had to make decisions when we did not understand the full extent of the fiscal measures. That was not because of a lack of will, but because we did not have all the information. Unfortunately, we also saw, in the newspapers, a lot of discussion and the possibility of the government being sued to get information.

How do you assess the exchange of information and accountability on the part of the government?