Finance Committee on Oct. 29th, 2013

[Stephen S. Poloz]

It's pretty far away from monetary policy and inflation. But in respect of consumer well-being and confidence, what we've seen through this cycle is an increase in savings rates. It's clear that consumers' households have responded to that uncertain environment in a way you might expect. As to the form this will ultimately take, it will likely involve self-saving in private plans, public-sector plans, and revisions to private plans that companies offer. It does seem as though we are looking to the future and becoming better prepared.

[The Chair, Conservative, James Rajotte]

Please be quick.

[Murray Rankin, NDP, Victoria, BC]

I noticed that the past Bank of Canada Business Outlook Survey suggested that at the national level Canada may not suffer from a skills shortage or labour shortage problem. We've seen some debate in the financial press about that as well. Would you agree? Is there not a problem in your view?

[Stephen S. Poloz]

Anecdotally, we know there are pockets of problems; it is very hard for us to put our finger on how general it is. Companies are describing themselves as more or less at the limit of their ability to stretch capacity in response to growing demand in the U.S. That could have two sources. It could be that they've used their entire capital stock and they're running as fast as they can. But they also mention that they can't quite get enough people like this or enough people like that.

So I think the skills mismatch issue is a real one. I just can't put my finger on just how large it really is. People mention it to me quite often.

[Tiff Macklem]

If you look in our appendix, we describe in some detail the sources of potential upward growth. In the last decade, labour force growth was increased at about one percentage point. With the baby boomers retiring, that is going down. By 2015, we have it at half that, half a percentage point. So drawing workers into the labour force and addressing skills mismatches—these issues are going to become more important in maintaining growth.

[The Chair, Conservative, James Rajotte]

Thank you.

I want to thank our two guests for being with us here today.

We look forward very much to your sessions twice a year at this committee. If there's anything further you wish the committee to consider, please always feel free to pass it along. Again, to the Governor of the Bank of Canada and the senior deputy governor, thank you so much for being here with us.

Colleagues, we will suspend for one or two minutes and then we'll bring forward the Parliamentary Budget Officer.

Thank you.

[The Chair, Conservative, James Rajotte]

Colleagues, I will call this meeting back to order. I know that it's a long meeting today, but I hope you're going to get used to it, because this is what the rest of the fall will be like.

We're very pleased to have with us here today, pursuant to Standing Order 108(2) in terms of the study of the economic and fiscal outlook, the new Parliamentary Budget Officer.

Mr. Fréchette, welcome to the committee.

It is your first time before the committee. We welcome you.

I know that we're seeing some members who we've seen before, so if I could have you present your colleagues at the table and then give an opening presentation, we'll have questions from members after that.

[Jean-Denis Fréchette, Parliamentary Budget Officer, Library of Parliament]

Thank you, Mr. Chair.

You can call me J.D., like it has been for most of my years on Parliament Hill. Thank you very much.

Mr. Chair, vice-chairs, members of the committee, thank you for your invitation and for maintaining the tradition of inviting the Parliamentary Budget Officer to appear before you at least twice a year. Speaking of tradition, as you know, I sat to the right of many committee chairs for a number of years and enjoyed a unique view of the proceedings. My view may have changed, but my goal of serving parliamentarians remains the same.

My colleagues and I are pleased to be here to present the Parliamentary Budget Officer's Economic and Fiscal Outlook Update, which we released yesterday. While here, I would also like to briefly discuss the results of the PBO's report, which examines Canada's fiscal structure from a longer-term perspective.

I am joined by Mostafa Askari, Assistant Parliamentary Budget Officer, and Peter Weltman, Acting Director General. I would also like to highlight the great work done by Helen Lao, Randall Bartlett and Scott Cameron, who helped draft the report.

The first part of my presentation will be in French, and then I will continue in English.

The global economic outlook has deteriorated somewhat since the April 2013 Economic and Fiscal Outlook. According to the most recent International Monetary Fund World Economic Outlook, weaker global growth prospects are driven to a large extent by appreciably weaker domestic demand and slower growth in several key emerging market economies. Modestly stronger growth than anticipated in some advanced economies is insufficient to mitigate those factors.

In the United States, despite improving fundamentals, the PBO has marked down its U.S. economic outlook in the near term. This reflects continued fiscal drag, as well as historical revisions to the U.S. System of National Accounts. Further, the commodity price outlook has been revised down over the projection, reflecting downward revisions to crude oil future prices, resulting, in part, from the continued strength of U.S. production.

These developments have led PBO to revise down the outlook for the Canadian economy relative to its April 2013 EFO. Currently PBO projects Canadian real GDP to grow by 1.6% this year, 2% next year, and 2.6% in 2015.

As the economy reaches its potential level of economic activity, PBO projects real GDP annual growth to average 2% per year over the period 2016-2018. PBO's current outlook for the Canadian economy reflects the effects of the government's economic action plan 2013, which resulted in projected savings of $10.8 billion as well as the freezing of the EI premium rate that was announced in September 2013.

Continued downward revisions to the private sector average forecast of real GDP growth have brought it broadly in line with the PBO projection through 2016. However the PBO's outlook for nominal GDP—the broadest measure of the government's tax base—is, on average, $25 billion lower than the projection based on average private sector forecasts, in part due to the downward revision to the GDP inflation projection.

PBO judges that the balance of risk to the private sector outlook for nominal GDP is tilted to the downside, likely reflecting larger impacts from government spending reductions as well as differences in views on commodity prices and their impacts on real GDP growth and GDP inflation.

On the basis of the revised economic outlook, PBO projects that a budgetary balance will improve from a deficit of $18.9 billion in 2012-13 to a surplus of $5.1 billion in 2018-19 due to cyclical recovery of tax revenues and restrained operating expenses of the government.

The improvement in the budgetary balance is less pronounced in the PBO's April projection due mainly to the lower level of nominal GDP. Assuming that the government does not increase its spending above planned levels, PBO estimates that, given the economic uncertainty, the likelihood of realizing a budgetary balance or better is approximately 50% in 2015-16, 55% in 2016-17, and 60% in 2018-19.

The weaker improvement in the budgetary balance relative to PBO's April projection is reflected in PBO's projection of the government's structural budget balance. PBO estimates that the structural balance will improve from a deficit of $6 billion in 2013-14 to a surplus of $4.2 billion in 2015-16 and will remain in surplus on average thereafter.

Finally, assessing whether a government fiscal structure is sustainable requires looking over a longer horizon to take into account the economic and fiscal implications of population aging in the context of the existing policy environment.

The PBO provided such an assessment for the federal government and provincial-territorial-local-aboriginal governments, as well as the Canada and Quebec pension plans, in Fiscal Sustainability Report 2013. The PBO's analysis shows that the federal government's fiscal structure is sustainable with fiscal room of 1.3% of GDP, while the Canada and Quebec pension plans are also sustainable. In contrast, the consolidated provincial-territorial-local-aboriginal government sector is not sustainable, with a fiscal gap of 1.9% of GDP.

Thank you, Mr. Chair. My colleagues and I will be happy to respond to questions you may have regarding our reports or any other relevant matters.

[The Chair, Conservative, James Rajotte]

Thank you very much for your opening presentation.

We'll begin members' questions, again with Ms. Nash for five minutes, please.

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

Mr. Fréchette, I would like to welcome you and your team.

Let me begin with a question about your recent economic and fiscal outlook. It indicates that the government's economic action plan of 2013 will cause the loss of about $2 billion in GDP annually and 13,000 jobs.

What will the effect of their EAP be in 2015 when it's combined with other recent budgets and budget implementation acts?

[Jean-Denis Fréchette]

The numbers you mentioned are aggregate numbers, which means that essentially, in total, the result will be what you mentioned. In 2015 the budget will be balanced. After 2015-16, the economy will return to a potential level, which means that we will be in better shape.

I'm going to ask Mostafa to go through all the details of the situation.

[Mostafa Askari, Director General, Economic and Fiscal Analysis, Library of Parliament]

The total impact from the 2012 budget and the measures that were taken following were reported in our April projection. At that time we showed that the total job loss would be 67,000 by year 2017, and the impact on the GDP would be about 0.6% by the end of the projection period.

Now, the only additional measure that we have incorporated in our current projection is the freezing of the EI premium, which would have a very small positive impact in the first couple of years, and then a small negative impact, which mostly offsets the positive impact, in 2016. Overall the impacts that we are showing from the measures from the 2012 budget onward are what we reported in the April projection.

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

Thank you for that.

So generally, because of the government's actions, there will be about 67,000 fewer jobs and GDP will be down about 0.6%.

Now, I also noticed that the government's move to fiscal sustainability comes at the cost of cuts to services and the downloading of the fiscal burden to provinces, but that's where we can get the numbers to actually find out what's happening. I'm very excited to hear that the PBO will be investigating this $7 billion discrepancy in the deficit.

Are there any constraints on the PBO in terms of getting the information you need to analyze that $7 billion deficit?

[Jean-Denis Fréchette]

I was really happy yesterday. I detected in a comment of Minister Flaherty's some openness to providing details on the $7 billion discrepancy. Everybody was taken by surprise. I was really happy about his openness and his mentioning that he will give some details about that and more information to the PBO. It is true that it's difficult for the PBO to do some kinds of projections if we don't have access to these data.

I'll let Mostafa explain a little bit, because we got a phone call from Minister Flaherty's officials. But for my part, as I said, because I'm working at building bridges with departments and with my parliamentary partners to get access to that information to better provide information to parliamentarians, that was really good news for me.

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

I understand some things have been under cabinet confidence, but the application has been very inconsistent.

Can you add to that?

[The Chair, Conservative, James Rajotte]

Very briefly.

[Mostafa Askari]

Sure.

We had a conversation with finance officials yesterday about the composition of that difference. What we were told is that about $4 billion of that difference is essentially from the fact that departments spent a lot less than what the government expected or projected at the time of the budget in March. We have not really figured out exactly what the source of that is; we are still looking at it. But it looks as though a lot of it is due to accrual adjustment that is done at the end of the fiscal year by the departments for their various expenses. That would explain some of that big difference. The rest of that $7 billion is mostly corporate tax revenues that came out larger.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Mr. Jean, please.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you, Mr. Chair.

And thank you very much for attending today. Congratulations.

I'm interested, in regard to balancing the budget, since of course, as you know, we've undertaken to do that during our mandate.

We had the governor here previously. I didn't get a chance to ask him a question during committee, but I did immediately after. I asked him what the impact on productivity in Canada would be if pipeline capacity were able to meet the current demand. In other words, if we didn't have to discount our oil by $30 million to $50 million a day, what would be the impact on our economy?

In particular, based on your analysis, what would be the impact on the economy if we added that?

That's somewhere in the neighbourhood of $18 billion per year that is simply not going into the Canadian economy because of pipeline constraints. I know you're well familiar with the file, and I'd like you to comment on it—if that weren't the case, if we did not have to discount our oil to the United States.

[Mostafa Askari]

In general, certainly what you're saying is true. If we didn't have to discount our oil, there would be an improvement in our terms of trade because what happens is that we import oil at the Brent price level, or the West Texas Intermediate, and we export at the western Alberta price, which is much lower. So certainly if that price goes up, that discount is reduced and it will positively impact our terms of trade, which will have a positive impact on the level of activity and certainly on the revenues of the government as well.

We haven't done that type of calculation to see what kind of impact the pipeline is going to have on that discount level, but certainly it will have an impact, no doubt.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

What kind of impact? I mean, $18 billion seems like a substantive amount of money in the Canadian economy. You add that into the economy and everything that associates along with that—which to my understanding in real terms in fact triples the amount—what would that do to your forecast in relation to the Canadian economy? What do you expect to happen by 2015?

[Mostafa Askari]

That is not something that we've done. We have taken into account the future impact of the pipeline. As I said, it will have some positive impact, but exactly how much I cannot tell at this time.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

How difficult would it be to make those calculations?

[Mostafa Askari]

I will have to take a look at it and see what kind of information we have and how we can incorporate that.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Would you be able to provide that to the committee?