Thank you, Chair, Vice-Chairs, and members of the House of Commons Standing Committee on Finance. It is an honour to be with you today.
I would like to make some brief remarks with respect to long-term fiscal sustainability, balanced budget legislation, and productivity trends.
On fiscal sustainability, Canada's fiscal sustainability situation is likely better than many other countries. As Warren Buffett says, “Doing good does not excuse us from doing better.” According to the Parliamentary Budget Office, the federal fiscal structure is sustainable, meaning we have a fiscal structure that will stabilize debt relative to the size of our economy in the face of demographic change. Similarly, the Canada Pension Plan and the Quebec Pension Plan are sustainable, meaning we have a pension structure in place that will stabilize the relationship between net assets and expenditures over time.
We do have a fiscal sustainability issue, a positive fiscal gap, at the provincial and territorial levels of government. The size of the gap at the provincial level was exacerbated by the federal policy change to the escalator for the Canada health transfer.
You may wish to recommend in your pre-budget consultations report that the Government of Canada prepare annual sustainability reports, like other OECD countries, and that the analysis be done to reflect all levels of government.
Health care is a major pressure on fiscal sustainability in Canada. Do we want a one-taxpayer approach to fiscal management? Do we want a national approach to health care cost management? If we do, the committee may wish to recommend a national dialogue on health care policy and finance involving all stakeholders. You may wish to consider options to reform federal transfers to provinces.
On balanced budget legislation, the federal government is largely on track to balance its budget in 2015. The current growth is sluggish due to a number of factors, including fiscal austerity, as Mr. Macdonald mentioned.
The committee may wish to recommend that the federal government provide five-year spending plans by department and agency outlining areas of spending reduction and changes to service levels. Spending restraint plans that generate fiscal and service-level risk create spending pressures into the future.
Balanced budget legislation, as highlighted in the Speech from the Throne, could provide a strong fiscal signal that the government is managing within a fiscal target.
The experience in developed countries, as Professor Godbout has noted, particularly in the European Union, highlights the additional demand for analysis to mitigate the negative impacts of counter-cyclical fiscal policy. This includes the calculation of output gaps, cyclically adjusted budget balances, the need for corrective enforcement type mechanisms, and stronger roles for independent fiscal institutions like PBO on assessment of achieving targets.
The committee may wish to undertake analysis of varying experiences with fiscal rules, targets, and balanced budget legislation and make suggestions on the necessary analytical requirements so that any balanced budget legislation is based on best practices, as highlighted by Professor Godbout.
On economic growth and productivity, Canada's productivity growth since 2000 has lagged that of the U.S. and is below OECD averages. Aging demographics will reduce our labour input, and the continuation of modest productivity growth suggests that Canada's potential long-term growth rate will decline significantly over the next few decades, from about the 2.5% range to the 1.5% range.
The causes for Canada's weak productivity growth and impacts of a declining potential growth rate warrants significant analysis and debate. This committee may wish to consider undertaking or commissioning a research project involving experts and stakeholders from different domains and reporting back after an appropriate period of time to strengthen debate and decision-making for the 2015 budget. On productivity, this research planning could examine all the principal drivers of productivity growth where analysis has suggested we have fallen behind or could do much better. Innovation, investment, human capital, and micro-economics frame our policies.
Thank you.