Finance Committee on Nov. 3rd, 2014

[Jean-Denis Fréchette]

I'll ask Helen to answer.

[Helen Lao, Economic Analyst, Economic and Fiscal Analysis, Library of Parliament]

Growth for 2014 was higher than expected. We revised up growth for 2014, partly because Q2 of 2014 came in stronger than expected. In our forecast, we also expect U.S. economic conditions to continue to improve as we have seen in their labour data, as well as their quarterly GDP for the first estimate of Q3. That's why we've revised up the growth for 2014. It was partly reflective of the stronger Q2 that we've seen.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

What would you see as some of the major risks if you projected that up? The Atlantic Provinces Economic Council just said they're projecting the Atlantic provinces' growth being a little better—not modest, not great, but a little better—mostly due to the U.S. conditions. Can the U.S. continue to sustain that? Is that one of the key risks you would see? Is there any risk of a fiscal impasse in 2015 hurting that as well?

[Helen Lao]

It could definitely be a positive risk, but on the downside, it could be weaker commodity prices. Also, weaker employment growth could also cause a downward revision in our economic forecast.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Have you made a projection on the value of the Canadian dollar and the impact on that? It would probably be helpful for us.

[Helen Lao]

We revised down our forecast of a Canadian and U.S. exchange rate.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Is that long term?

[Helen Lao]

In the medium-term projection we've reflected that, and that was also based on the weaker commodity prices we've seen.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you.

Mr. Askari, I think you made a comment about table 3. The last statement you made on that was in the medium term. After you get past 2019-20, does it look better after that medium term, even with the tax cuts and the additional universal child care benefit payment that was announced last week?

[Mostafa Askari]

Well, typically because we have a progressive tax system, taxes tend to increase more than the growth in GDP over time because of that bracket creep over time. People move up to a higher bracket and pay higher taxes, so there is a small increase over time, an improvement in the balance over time.

Again, I'll take you back to what I said about the long term. If we have a longer-term perspective, you will have that room I mentioned because the way that the federal government expenditures and taxes are structured now, something around 45% of government spending is in transfers. Most of them are indexed to GDP, so it's very hard for them to get out of hand. Then the direct program spending, which is another major part of this spending, is almost frozen. It increases very gradually, so over time you will see an improvement in the budget balance, yes.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you very much.

You mentioned you were going to be doing a CETA analysis, which is complex. I'd like to understand what trade deals have factored into your projections going forward, even into the next number of years. Have you been able to use previous trade deals that we have in order to get a projection of the impact of Korea and the impact of CETA, of what they might mean in the growth rates that you've projected?

[Mostafa Askari]

We have not explicitly taken into account any of these trade deals. CETA is new. It hasn't really been implemented, so there's really no point in doing that. As I said, we have to do a study to have a better idea of its effect.

The other trade deals that have already been done, relative to the overall picture, are very small, so they don't really require an explicit account in the way we do our projection.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Okay.

I'm fascinated by the demographic information that was in your report—2033 seems to be an interesting year, when a lot of things seem to settle, I guess, and stabilize, at that point in time. We're going to be at 2.6 people of working age for every person 65 years and over. When we're talking about immigration rates, it makes me wonder. The world is going to be very competitive for immigration. Do you see that we're going to be able to win in the competition for skilled immigrants? What's your projection on that? Population growth is only at 1.67 of internally generated children, right?

[The Chair, Conservative, James Rajotte]

You have one minute.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Can you answer that all in one minute?

[Scott Cameron, Economic Advisor, Analyst, Economic and Fiscal Analysis, Library of Parliament]

Is there a competition for skilled immigration? We haven't looked at that very closely. We have some longer-term StatsCan assumptions that our forecast is based on. It would be an interesting topic.

[Mostafa Askari]

If I could just add one point, I think you're right: there will be competition for skilled immigrants. That's one reason we have actually done some simulations in the past, in terms of whether raising immigration levels would actually help deal with the issue of long-term fiscal gap. Normally it's very hard to see that in the numbers.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

I'll just make a quick comment—I have 15 seconds.

[The Chair, Conservative, James Rajotte]

Yes, make it a very quick comment.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

It seems to me, based on the productivity growth, that just from a government policy standpoint it's going to be very important for investments in capital, because that's going to be one key thing for productivity growth. From a policy perspective, I'm encouraging businesses to invest in capital.

Thank you very much.

Thank you, Chair.

[The Chair, Conservative, James Rajotte]

I think it's a hint from Mr. Allen that, if you wanted to pursue that area of study, it would be worthwhile.

Thank you.

Ms. Péclet, you have seven minutes. Please go ahead.

[Ève Péclet, NDP, La Pointe-de-l'Île, QC]

Thank you very much, Chair.

Thank you very much to our witnesses.

The government intends to deliver six to eight ships, including infrastructure, by 2024, at a cost of $2.8 billion. But the Parliamentary Budget Officer's main finding is that the current budget is not sufficient to acquire six to eight ships. Currently, should there be no delays, the budget would allow for just four ships to be built. A one-year delay would bump up the cost of building four ships by an estimated $206 million more than currently budgeted. A two-year delay would bump up the cost by an estimated $310 million.

Even with no delays, to achieve four ships with 80% confidence is $201 million over the budget. The confidence level calculates the range of potential cost estimates and then orders from the lowest to the highest; the mid-point of these estimates is called the 50% confidence level. This is a minimum acceptable standard when selecting a budget. Fifty per cent of the anticipated outcomes yield cost estimates less than the budget and only 50% yield estimates greater than the budget. So only four ships can be delivered with the $2.8 billion budget at the minimum acceptable confidence level. If the government wanted to deliver the stated minimum of six ships and the maximum of eight ships, the budget would need to be augmented by $470 million to achieve a 50% confidence level. Any delay over a year would mean that the budget would likely only be sufficient to build three ships. Schedule slips, therefore, may have a significant impact on the government's purchasing power and on other projects down the pipeline such as the Canadian surface combatant.

As this program stagnates, it is understood that we lose ships in numbers. Does this lag affect the capabilities of those ships as well and, if so, how?

[Jean-Denis Fréchette]

Thank you for your question.

Yes, your figures are correct. The report states that a 50% confidence level equates to four ships. Raising that level to 80% would raise not only the likelihood of it being done, of course, but also the cost. The real answer to all of this is that there is a domino effect. The longer the delay, the greater the chance it will affect the building of other ships, the Canadian surface combatants.

In the event there are no delays or a delay occurs during the timeframe, the ships targeted for 2021, the next set of ships, will be in jeopardy or possibly delayed. Skills and expertise could be lost in the meantime.

The figures you cited are accurate. So achieving four ships with a 50% confidence level is more likely if everything stays on schedule. An 80% confidence level would basically require increasing the budget and, obviously, avoiding any delays.

[Ève Péclet, NDP, La Pointe-de-l'Île, QC]

In your report, you talked about the improvement in the structural budget and the fact that the budget would move into a surplus position. However, a number of economists are of the view that it is a false surplus—and I think you talked about this in your presentation—resulting from the federal government's failure to spend all budgeted amounts appropriated by Parliament.

And that could make fiscal management more challenging in the years ahead, especially in light of a potential change in government in 2015. In fact, the budget reality and the public accounts reality are completely different.

What are your thoughts on the false surplus projected by the government?

[Jean-Denis Fréchette]

I am going to ask Scott to answer that.