Thank you, Chair.
Good afternoon Mr. Chair, vice-chairs, and members of the committee.
Good afternoon Mr. Chair, vice-chairs, and members of the committee. Thank you for inviting me and my colleagues to speak to you today about Canada's economic and fiscal outlook.
Yesterday, as you know, PBO released two reports. The first examined the short- and medium-term outlook, and the second analyzed the performance of the Canadian labour market. In addition, just over a month ago, the PBO released its 2012 Fiscal Sustainability Report, which examines Canada's fiscal structure from a longer-term perspective.
My remarks will focus on three topics that go to the core of the PBO's mandate: the nation's economic and fiscal outlook over the medium term, the government's fiscal sustainability in the long term, and Canada's labour market performance.
The global economic outlook has deteriorated since the PBO's April 2012 economic and fiscal outlook. The recent International Monetary Fund's world economic outlook indicates that uncertainty surrounding policy-makers' ability to control the euro crisis and to avoid the fiscal cliff, i.e., automatic tax increases and spending reductions, in the U.S. are weighing on growth in advanced as well as in emerging market and developing economies.
The expected weakness in the global economy and commodity prices combined with government spending reductions and restraint are expected to weaken economic growth and job creation going forward. As a result, the PBO projects Canada's real GDP to grow 1.9% this year, 1.5% next year, and 2.0% in 2014. The weakness in near-term growth pushes the economy further below its potential, resulting in an increase in the unemployment rate in the short term.
Since the release of the PBO's April 2012 economic and fiscal outlook, private sector forecasters have revised down their outlook for real GDP growth in 2012-13, bringing it more into line with PBO's April economic and fiscal outlook. Compared to the average of private sector forecasts published in September, PBO is projecting slower real GDP growth and lower GDP inflation in 2013-14. As a result, the PBO's outlook for nominal GDP, the broadest measure of the government's tax base, is lower by $22 billion annually, on average, than the projection based on average private sector forecasts.
The PBO judges that the balance of risks to the private sector outlook for nominal GDP is tilted to the downside, reflecting larger impacts from government spending reductions and a more sluggish U.S. recovery, as well as differences in views on commodity prices and their impacts on real GDP growth and GDP inflation.
On the basis of this economic projection, the PBO's fiscal projection shows significant improvement in the government's budgetary balance from a deficit of $18.1 billion—that's 1% of GDP—in 2012-13 to a surplus of $13.8 billion—0.6% of GDP—in 2017-18. The improvement is partly due to a cyclical rebound in revenues, but can be mainly attributed to policy actions to restrain operating expenses.
Based on the outlook presented in budget 2012, the government's direct program expenses are assumed to remain essentially frozen for six years, growing at 0.2% annually, on average, which is well below the average of 6.3% observed over the last 10 years.
Given the PBO's assessment of the balance of risks to the private sector economic outlook, the PBO estimates that the likelihood of realizing budgetary balance or better is approximately 60% in 2015-16, 70% in 2016-17, and 75% in 2017-18.
Although the PBO projects the government's structural balance to improve from a deficit to a surplus position over the medium term, assessing whether a government's fiscal structure is sustainable requires looking over a longer horizon to take into account the economic and fiscal implications of Canada's aging population.
In its 2012 fiscal sustainability report, the PBO concluded that the government's fiscal structure was sustainable over the long term given recent policy changes, which include the reduction in growth to the Canada health transfer, CHT, beyond 2016-17, reductions in direct program expenses, and the increase in the age of eligibility for the old age security, OAS, program.
The PBO estimated that the government would have sufficient fiscal room, amounting to 1.4% of GDP, to reduce taxes, increase spending on programs, or some combination of both, while still maintaining fiscal sustainability.
The PBO is pleased to note that last week Finance Canada published a report on Canada's aging population and long-term fiscal sustainability. Finance Canada's report confirms the PBO's analyses of the federal fiscal structure presented in its September 2011 fiscal sustainability report, as well as its January 2012 assessment of the CHT renewal, as well as its September 2012 fiscal sustainability report.
That is, prior to the government's December 2011 change to the CHT, the Canada health transfer, the federal fiscal structure was not sustainable, as federal debt relative to GDP was projected to rise unchecked over the long term. The PBO noted in its January 2012 assessment that as a result of the reduction in the growth rate of the CHT, the federal fiscal structure was rendered sustainable. Furthermore, the PBO's January 2012 assessment did not incorporate the government's program spending reductions and restraint, or the increase in the age of eligibility for the OAS, the old age security program.
In its labour market report, the PBO provides a richer perspective on the performance of Canada's labour market by analyzing a broad set of labour market indicators, comparing current levels to PBO estimates of their underlying trends, exploiting longer time periods, which include previous recessions, and comparing Canada's recent performance to a large group of advanced economies.
Most of the key labour market indicators in Canada have improved significantly from their recessionary lows, but they remain below the PBO's estimate of their underlying trend values. PBO analysis also suggests that the labour market in the current cycle has generally fared better relative to past economic cycles in the 1980s and 1990s. Looking abroad, Canada's labour market is currently out-performing the U.S. and some European countries and scores above average among the G7 and OECD countries.
The PBO is pleased to note that Finance Canada is now publishing its estimates of the government's structural, or cyclically adjusted, budget balance on a public accounts basis in its annual fiscal reference tables. Consistent with the PBO's estimates, Finance Canada's estimates now indicate a relatively small but growing structural deficit over the period 2008-09 to 2011-12.
Further, to improve budget transparency and accountability, the PBO continues to strongly encourage the Government of Canada to publish: historical estimates and medium-term projections—i.e., five years ahead—of the economy's potential GDP, accompanied by the methodology and assumptions relied upon to arrive at such estimates; medium-term projections of the government's structural, or cyclically adjusted, budget balance, accompanied by the methodology and assumptions relied upon to arrive at such projections; and 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.
Thank you again for inviting us here. We would be happy to take your questions.
Thank you, Mr. Chair.