Finance Committee on Oct. 29th, 2013

[Murray Rankin, NDP, Victoria, BC]

Thank you, Chair.

Welcome, Mr. Fréchette and your team.

I want to go back to the rather sobering comments you make about fiscal sustainability. I was delighted to hear you confirm that the Canada and Quebec pension plans are sustainable, but in contrast the consolidated provincial, territorial, local, and aboriginal governments sector is not sustainable, you say, with a fiscal gap of 1.9% of GDP. I'd like you to spend a little more time explaining what it simply means to say “a fiscal gap of 1.9% of GDP”.

[Jean-Denis Fréchette]

I'll ask Mostafa to walk you through that.

[Mostafa Askari]

This is a standard way of measuring fiscal sustainability. The OECD and the IMF and all the other countries do exactly the same thing.

The measure we use is to take the debt-to-GDP ratio of a jurisdiction, whether it's the provincial or the federal government, for the time being—let's say in 2012.

Sustainability means that, over a long period of time—in this case 75 years—the current policies will allow the government to go back to that debt-to-GDP ratio, the present debt-to-GDP ratio.

For example, in the case of provincial, local governments, we see that if the current policies continue, with the demographic changes, the debt-to-GDP ratio of that sector will significantly increase.

The fiscal gap is what they need to do to bring that debt-to-GDP ratio back to the current level after 75 years; it is 1.9% of GDP. If they reduce their spending or increase their revenues or a combination of the two equal to 1.9% of GDP of today, and maintain that at 1.9% of GDP over the 75-year period, their debt-to-GDP ratio will not increase, it will come back to the current level, which is about 31.5%.

[Murray Rankin, NDP, Victoria, BC]

Thank you.

In the case of the provinces, we talked about the Canada health transfer and the cuts made to it. We know that was a significant part of the budgets of all the provinces. Indeed, in Victoria, where I live, many officials have told me that, essentially, these cuts are a shell game to make the nation's finances look sustainable, but in fact, the provinces are helpless to do anything about it, thanks to the exacerbated cut to the Canada health transfer.

[Mostafa Askari]

Of course, the cuts are relative to what it would have been. I mean, those things are still growing at the GDP rate, but they're cut to what they would have been.

[Murray Rankin, NDP, Victoria, BC]

Mr. Fréchette himself pointed out the aging population and the impact of demographics on this financially. It makes it really hard to believe that we really have a sustainable situation. If one takes into account provinces, territories, municipalities, aboriginal governments, what you call the PTLA, it's not, would you say, sustainable as a consequence if all of that debt is included with the national numbers?

[Mostafa Askari]

That's correct.

[Murray Rankin, NDP, Victoria, BC]

I want to change the subject in the small amount of time left to me. Part of your analysis is public sector wages. Can you confirm that the real wages of civil servants have, in fact, fallen since 2006? Is that accurate?

[Mostafa Askari]

We did a study to try to decompose the total wage bill of federal institutions. It was, in total, about 95% of the total institutions, based on the data we had. On that basis, we found that the main driver of growth in the total wage bill was the increase in the number of employees.

Then there was the rate of inflation, which we assumed as 2%, and a small increase in real wages and a wage increase due to a reclassification of employees within their ranks.

Most of that wage increase was due to the increase in the number of employees and the rate of inflation. A small amount was due to a real wage gain, including a wage gain through reclassification of employees through their different ranks.

[The Chair, Conservative, James Rajotte]

You have 20 seconds.

[Murray Rankin, NDP, Victoria, BC]

I want to ask a quick question. I noticed that the version of the adult fitness tax credit that you've costed in your study is not that proposed by the Conservative Party. It doesn't include all adults.

Would you discuss the likely cost of an expansive adult fitness tax credit?

[Jean-Denis Fréchette]

The request was made by a member and was specifically for adults 55 years and older. We didn't have a request to do it for the entire—we did not look at the entire cohort of the population.

[Murray Rankin, NDP, Victoria, BC]

Perhaps we can make a subsequent request for that.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Rankin.

We'll go to Mr. Saxton, please.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Mr. Chair.

I'm going to be sharing my time with Mr. Adler. I will ask the first question and then I'll pass it on to Mr. Adler.

A large part of your update notes that economic conditions in Canada are, to an extent, dependent on what happens in other countries, particularly other advanced economies. Would you elaborate on how what's happening in other countries is different from what's happening in Canada and how that will impact Canada?

[Mostafa Askari]

Our major trade partner is still the U.S., and what's happened in the U.S. definitely has had a huge impact on the Canadian economy. We provided a projection for the U.S. economy. It is still below par. They have a huge excess capacity and output gap. For now, over a five-year period, we have considered this, taking into account the U.S. growth profile, and we have provided our own projection, which we have in the update.

[Andrew Saxton, Conservative, North Vancouver, BC]

Have you looked at other countries besides the U.S.?

[Mostafa Askari]

Our model uses the U.S. as the main external economy affecting the Canadian economy. In general, when we are doing the forecast, we take into account the overall global picture. We normally look at the IMF World Economic Outlook to see what kind of a projection they have for the rest of the world. That certainly would come into our projection. It would affect our judgment of how the two are related.

[Andrew Saxton, Conservative, North Vancouver, BC]

But it's not looking specifically at other countries like China, which is now a huge trading partner.

[Mostafa Askari]

No.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

[The Chair, Conservative, James Rajotte]

Mr. Adler.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

Thank you all for being here. Congratulations, Mr. Fréchette on your appointment as the PBO.

In determination of the fiscal gap, does the PBO use the same calculation as the Department of Finance to determine the fiscal gap?

[Mostafa Askari]

Do you mean in our fiscal sustainability...?

[Mark Adler, Conservative, York Centre, ON]

I'm referring to the sustainability framework, yes.