Finance Committee on Oct. 31st, 2017

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

Thank you to the work that all of you do for Canadians and for parliamentarians especially.

With regard to the report, I'd like to follow up a little with Mr. Grewal because obviously a shortage of skilled people can have a bit of a drag on projects and business moving forward. However, as important as it is to have people, whether it be intellectual property or whatnot, you also need to have capital. We've seen in the past few years a precipitous drop in investment in Canada.

Could you start us off with where we are right now as far as business investment? I'd like to find out if this is simply business investment that is replacing old equipment or maintaining current capacity rather than expanding capacity.

[Chris Matier]

In our current report, our view would be that right now capacity is relatively high, historically speaking, for the goods-producing sector. I believe it's around 85% of their estimated capacity. Going ahead we think that a lot of the investment that firms are going to be undertaking isn't just to replace old. It's adding to the capital stock. In our outlook, that provides a key driver to expanding the capacity for the economy and increasing potential output.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

You're speaking in aggregates so it's spread over the whole country, but we obviously know that certain regions are probably experiencing some ups and some are facing downs. Could you clarify where you see some of this productive capacity going?

[Chris Matier]

I can't speak to the outlook on a regional basis. We prepare our projections at the national level, but we see it broadly across the components of business investment. We see the increase in investment levels in machinery and equipment. We also see it in the non-residential sector, mining and engineering structures, as well as investment in intellectual property and products. It's very broad-based across those sectors, and the extent to which those sectors would be located across the country, we would think it would probably be fairly broad-based.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

In your report, though, you say one of the downside risk factors is business investment. Could you clarify that because it sounds to me that you're painting a slightly different picture than the risk projection.

[Jean-Denis Fréchette]

Before Chris answers your question.... You asked a specific question. For those of you who are interested, what's going on in Montreal in artificial intelligence is quite impressive because you have both immigration and capital investment in something totally new, if you were looking for an example. Montreal is now considered one of the world centres for artificial intelligence. Why? Stability and whatever the reasons are, but this is an example of something totally new. These kinds of investments were not known in Canada before.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Yes. Again, I think it's too early to be saying what that's going to do. As you said earlier, whether or not these innovations actually have.... Tyler Cowen in his book The Great Stagnation points out that many improvements in IT, such as Twitter and Facebook and whatnot, actually may be negative draws on productivity. I appreciate that.

Mr. Matier, were you going to continue?

[Chris Matier]

Sure. We flag it as a downside risk, and that's because our baseline for business investment is a very robust increase in its growth rate and its contribution to the Canadian economy. Over 2018 and 2019 we have business investment contributing almost a full percentage point to GDP growth. It's very high, especially relative to the past few years.

Underlying that we see an economy that is operating above its potential, so firms really need to expand their capacity to produce. At the same time, we've seen high levels of business confidence and business sentiment, and relatively low, at least historically low, interest rates still. Everything seems to be in place for this takeoff, and our baseline is that it is going to advance that way.

Again, we've been disappointed in the past, and that's why we flag this as a downside risk to that baseline.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Just about six or nine months ago, though, there were a number of reports about business investments being at an all time low since 1981. Is it because there was a hard contraction and now we're starting to see some growth?

Because when you actually contract an economy and then start to see some green shoots, people have a much larger view of it. Is this regaining ground or is this actually increased capacity?

[Chris Matier]

No. In our view it would be adding to capacity. Some of it would be making up for that lost sort of...that rebound, but also a large part of it would be adding to the capital stock of the economy going ahead.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

As the budget officer said, there are some new shoots as well, the new AI technology and whatnot.

[Chris Matier]

I would just add that we have been pleasantly surprised on the upside on business investment in the last few quarters. Again, it could be green shoots in too early, and that's why we flagged it as a downside risk.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you.

This is a question I did ask the Governor of the Bank of Canada was. If you see what's happening in the United States, the stock market going up, and you see a lot of investment pouring in, higher bond yields, all those things, how do we look at the investment that the Americans are drawing in vis-à-vis Canada?

Does Canada, in your opinion, still look like a good place to invest? I know we benefit from being a small open economy just north of the Americans, but they're also competitors. Do you have any views?

[Mostafa Askari]

Whether we are going to pull as much investment as the Americans is very hard to say. That depends on many different factors.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Would we be seen as being a good place?

[Mostafa Askari]

We certainly, as Chris mentioned, have been pleasantly surprised by the rise in investment in Canada in the past few quarters. Hopefully that will continue, but again these kinds of things depend on many different factors. Global factors are most definitely one of them, but typically also if the U.S. actually grows faster and the economy in the U.S. becomes more prosperous, it always has some positive benefits for Canada, both on the investment side and other parts of the economy.

That's as much as I can say about this without actually working the numbers, which we haven't really done.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you.

[The Chair, Liberal, Wayne Easter]

Are you okay with that?

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Yes. That's good.

[The Chair, Liberal, Wayne Easter]

Ms. O'Connell.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you, Mr. Chair.

Thank you all for being here.

I want to talk about your fiscal sustainability report that was released in October as well. In it you talk about a number of things, but one of the key points is that you talk about the federal government and that the current federal fiscal policy is sustainable over the long term. As well, it says that the PBO estimates that the federal government could implement permanent tax reductions or spending increases amounting to 1.2% of the GDP while still maintaining fiscal sustainability.

What are some of the factors that have led you to come to that conclusion in terms of the long-term sustainability?

[Mostafa Askari]

We do this exercise every year just to show what happens in the long run if the current fiscal structure is maintained over a very long period of time, 75 years. We impose on that the demographic projections that essentially show the aging of population in Canada, both for the country as a whole and also for different provinces. That exercise essentially looks at this fiscal structure and then moves that forward for 75 years and sees what happens to debt, and debt as a share of GDP. That's how we calculate this number of 1.2%.

Over time the current fiscal structure in Canada at the federal level is such that you are going to have this fiscal room of 1.2%, which means that the debt-to-GDP ratio, based on the current projection that we have done over a long period of time, continues to decline. In order to maintain that at the current level, then you can still spend more money, as we mentioned, $24.5 billion, or 1.2% of GDP, or reduce taxes by that amount. What that does is it maintains the current debt-to-GDP ratio at that level for 75 years.

If you don't do that and you leave the current structure unchanged, then the debt-to-GDP ratio will continue to decline. As we show in our report, the debt, eventually, will be eliminated.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you.

In this report, you go on to look at the fiscal health of the provinces and territories as well. In a lot of those instances, the fiscal sustainability is not so good. My question is in and around what happens if, for example, in a certain province or territory where a lot of it is aging demographics, especially in Atlantic provinces, that fiscal sustainability is not there. That means either the federal government steps in, or there are risks even if the federal government isn't directly impacted through injections of money, essentially. Then the tax base that is contributing to the overall federal situation would be impacted.

Have you built into your macromodels those types of risks we're seeing provincially on fiscal policies?

[Mostafa Askari]

What this study does is that it provides a scenario. If you maintain the current fiscal structure for those provinces that are not sustainable, then you are going to see an increase in the debt ratio over time—in some cases significantly. Again, this is a scenario. It's not necessarily going to happen. If you get to that point where the governments see that it is going to happen, they will have to do something about it. There could be something internal that a province would do in terms of their spending or taxes or revenues, or some of it could come from help from the federal government. There are different sources, as I said. Those provinces can raise their revenues' potential or they can reduce their spending, or a combination of those two, or they can convince the federal government to provide more transfers to them to help them out. These are all different possibilities for them.

The idea is not that we are going to actually see those crises or those debt levels or that debt ratio level. What the study shows is that there is a challenge for those provinces, and they have to think about solutions for those now or over the next few years to prevent that from happening over time.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you.

This might seem like a somewhat silly question, but I find it interesting that we're looking at our debt-to-GDP ratio. That's the measure we always use. Canada's in a very good position, especially compared with other countries. When you talk to the average Canadian or regular person in terms of that scenario, it's really hard to explain what that means and why Canada is seen as being in a very good position on that measurable.

My somewhat silly question is this. How would you explain, or how do you really talk about the debt-to-GDP ratio and what that means, to the average Canadian, in the sense of how most Canadians look at debt as something you want to pay off? That is your goal, to pay it off. As governments go, that's ultimately the goal as well, except that being in this low debt-to-GDP ratio is really a good scenario.

Is there a simplified way of how we explain this to Canadians in terms of Canada's current position, and why it is seen to be in such a good ratio, and why this ratio is seen as a positive element?

I ask that question. I say it might be silly in the sense that we talk about it very clearly here, but I find that when I go back to the riding and you say that statistic, well, what does that really mean?