Finance Committee on Oct. 31st, 2017

[Stephen S. Poloz]

This is a question that depends on the divergence in the inflation paths in the two countries. In the example that I gave there was a swing of some 75 basis points between Canada and the United States during 2015. There have been other episodes similar to that.

The truthful answer is that it only depends. I couldn't speculate on what is the maximum divergence we could sustain, but it would just depend on the underlying shocks.

I remember studying the early 1970s when Canada first went back to a flexible exchange rate. There was a massive divergence between the Canadian and U.S. economies at that time, and the exchange rate, as soon as it was unleashed, rose by some 10¢ in a very short space of time because of that divergence.

Really, I think the most important thing that helps us equate when there is a divergence is the exchange rate. Interest rates are less the engine of correcting that. They're more of a facilitator, if I can put it this way.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Sorbara, you have the last segment.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Chair.

Governor, you had commented, or the deputy governor commented on the labour force productivity in the last year or so, showing some pickup in trajectory. I was just wondering what you think is behind that pickup. How important is it to raise the standard of living for all Canadians to get that labour force number going in that way?

[Stephen S. Poloz]

Productivity in Canada is growing sufficiently strongly now, in aggregate somewhere around 3%, and in the goods sector, more than 4%, which is quite unusual. That suggests to me that it's for the most part a cyclical thing that will slow down to something more normal in the near term, but that remains to be seen.

What I think it reflects is the transition of the economy in the wake of the collapse in oil prices, the shrinkage of the oil sector, and then the expansion in other sectors coming in high-productivity areas. That's something that will continue, provided that those two growth tracks remain in place.

It's crucial that we get that behaviour because that is the basis for expanding incomes. Right now, Canada's unit labour costs are actually falling relative to the United States, but falling in absolute terms because productivity is outpacing wages. What we would expect to see in the near term is that things will pick up. As the excess labour is being picked up out of the labour market, wage growth is going to pick up because companies can afford it.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

That will end this session with the governor and the senior deputy governor. Thank you very much for your responses to questions.

Committee members, we will suspend for about a minute and then deal with the committee business before we start with the PBO.

Thank you, again, Governor. The meeting is suspended.

[The Chair, Liberal, Wayne Easter]

We shall reconvene. Before we start with the parliamentary budget officer, we have some committee business to deal with. Members have a report from the subcommittee on committee business going forward. I'll just go through it and then we'll see if there are questions.

Point one we talked about this morning. We had a little difficulty figuring out how to deal with embargoed copies. We agreed that an embargoed copy of a report from the parliamentary budget officer, 24 hours before it is made public, be distributed to members of the committee, and the report remains confidential until it is made public by the PBO.

Point two, the pre-budget consultations are explained in the report. People may not be aware of a couple of things. We agreed that the draft report contains an executive summary describing the main themes of the report, and that the committee include a statement in the report from the trip to Washington, D.C., and New York; that the parties submit their proposed recommendations to the clerk in both official languages, no later than 5:00 on Thursday, November 30; the committee meet on Monday, December 4, and Tuesday, December 5, from 3:30 to 5:00 to consider the draft report; and the committee meet on Wednesday, December 6, from 3:30 to 5:00, if necessary, for further consideration of the report. That is all on the calendar and it's marked in yellow.

Point three, we agreed that the clerk proceed with planning the committee trip to Washington and New York, according to the draft itinerary, as discussed by the subcommittee.

Then point four, turning to Bill C-63, the budget implementation act, I think it would be better to explain this by the calendar rather than going through the recommendations. It's there before you. On November 2, the committee would meet with departmental officials, and that 5:00 p.m. would be the deadline to submit to the clerk the witness lists for Bill C-63.

On Tuesday, November 7, the committee would meet and hear from 12 witnesses or thereabouts. On Wednesday, November 8, and this relates, Pierre, to the motion that you tabled, we would meet with the minister from 3:15 to 4:15 on supplementary estimates; we would have the minister before us from 4:15 to 5:15 on the bill itself, Bill C-63; and if necessary, from 5:15 to 5:45 we would deal with the remaining representatives from the departments.

On Thursday, November 9, we would again hear from witnesses from 3:30 to 6:30, related to Bill C-63. That would be in the range of two panels, six witnesses each. November 16 at 12 p.m. would be the deadline to submit amendments for Bill C-63. Then on Tuesday, November 21, we would go through clause-by-clause consideration of Bill C-63, and be in a position to report it back to the House. That deals with the Budget Implementation Act.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Mr. Chair, I just want to confirm that it would be all day or as long as is necessary.

[The Chair, Liberal, Wayne Easter]

We have to finish by what it says in the motion here, nine o'clock that night. I'll read this into the record so we're clear:

if the Committee has not completed the clause-by-clause consideration of the Bill by 9:00 p.m. on Tuesday November 21, 2017, all remaining amendments submitted to the Committee shall be deemed moved, the Chair shall put the question, forthwith and successively, without further debate on all remaining clauses and proposed amendments, as well as each and every question necessary to dispose of clause-by-clause consideration of the Bill, as well as all questions necessary to report the Bill to the House and to order the Chair to report the Bill to the House as soon as possible;

That would be the end on the bill.

I mentioned point five. That would be dealing with the supplementary estimates (B). The Minister of Finance, as I mentioned, would be before the committee on supplementary estimates on Wednesday. As well, the Minister of National Revenue and department officials would appear before the committee on Thursday, November 23, on the estimates for that department.

That's the report.

(Motion agreed to)

Thank you, PBO officials, for your indulgence while we dealt with that matter.

Pursuant to Standing Order 108(2), we have a study of the economic and fiscal outlook. We have before us, for this panel, the Office of the Parliamentary Budget Officer, Jean-Denis Fréchette, PBO.

I'll let you introduce your people. The floor is yours. I know you have an opening statement. Welcome.

[Jean-Denis Fréchette, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer]

Thank you, Mr. Chair.

Good afternoon, Mr. Chair, Vice Chairs, and members of the committee.

I am joined by my colleagues Mostafa Askari, Deputy Parliamentary Budget Officer, Chris Matier, Senior Director, Economic and Fiscal Analysis, and Trevor Shaw, Economic Analyst, also with the Economic and Fiscal Analysis team. We are grateful for your invitation to appear to discuss our economic and fiscal outlook for October 2017. As you know, these are part of the PBO's legislated mandate, in order to promote greater budget transparency and accountability.

As members of the committee may know, this report was prepared in response to the motion adopted by this committee on February 4, 2016. However, since then, the PBO legislation under the Parliament of Canada Act was amended. It is therefore in accordance with that legislation that yesterday we provided a copy of the report to the chair and the clerk. We made the report available to the public one business day after, that is, this morning.

Going back to the report, regarding the economic outlook, the Canadian economy advanced at a robust pace in the first half of 2017. However, beginning in the second half, we project that growth and consumer spending will moderate and residential investment will continue to decline as borrowing rates rise and disposable income gains diminish.

We project real GDP growth to slow from 3.1% in 2017 to 1.9% in 2018, and then average 1.7% annually over 2019 to 2022. Nominal GDP, which is the broadest single measure of the tax base, is projected to grow at 4.1% annually, on average, over 2017 to 2022. Compared with our April outlook, the projected level of nominal GDP is broadly unchanged.

We assume that the Bank of Canada will maintain its policy interest rate at 1% until January 2018. As core inflation continues to firm through 2018, we project that the Bank of Canada will gradually increase its policy rate by 25 basis points each quarter until it reaches its neutral level of 3% by the end of 2019.

Our economic outlook reflects the view that possible upside and downside outcomes are, broadly speaking, equally likely. In terms of downside risks, we maintain that the most important risk is weaker business investment. In terms of upside risks, we maintain that the most important risk is stronger household spending.

On the fiscal outlook, the budgetary deficit in 2016-17 was $17.8 billion. This is $2.8 billion lower than we projected in April, reflecting lower than expected direct program expenses, due in part to an estimated $2 billion in unspent infrastructure funding.

For the current fiscal year, 2017-18, we expect that the budgetary balance will show a deficit of $20.2 billion, which is 0.9% of GDP. We project that budgetary deficits will decline gradually, falling to $9.9 billion, which is 0.4% of GDP, in 2022-23. Lower direct program spending accounts for most of the reduction in the deficit over the projection horizon.

Compared with our April outlook, we are projecting budgetary deficits that are $2.2 billion lower, on average, from 2017-18 to 2021-22.

In budget 2016, the government committed to reducing the federal debt-to-GDP ratio to a lower level over a five-year period ending in 2020-21. This translates into a fiscal target of 31% or lower for the federal debt-to-GDP ratio in 2020-21. Under current tax and spending plans, we project that the federal debt-to-GDP ratio will be 29% in 2020-21, which is two percentage points of GDP lower than the government’s target.

Given the possible scenarios surrounding our economic outlook, and on a status quo basis, it is unlikely that the budget will be balanced, or in a surplus position, over the medium term. However, it is likely that the federal debt-to-GDP ratio will fall below its target level of 31% over 2017-18 to 2022-23. We estimate that there is, approximately, a 70% chance that the federal debt-to-GDP ratio will be below its target.

Lastly, in our report published today, we also provided some tables comparing our economic and fiscal projections to the government's projections presented in the fall economic statement. Consistent with the PBO's legislated mandate, we plan to publish an analysis of the fall economic statement in the coming weeks.

Once again, my colleagues and I would be pleased to answer any questions you may have about our economic and fiscal outlook or any other analysis.

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Fréchette.

I think we have time for the first round at seven minutes. We'll recalculate after that.

Mr. Sorbara.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Chair, and welcome everybody.

In your opening remarks, sir, you make the comment of possible upside and downside risks, and you mentioned the downside risks on business and weaker business investment. In the monetary policy report at the Bank of Canada—and we just had the governor and deputy governor here—the Bank of Canada has business investment firming and stabilizing, and contributing positively to Canadian GDP, less so on the residential investment side.

Could you comment on that business investment comment you have there? If you had to pick, what would be your top three downside risks and top three upside risks for the Canadian economy?

[Jean-Denis Fréchette]

Thank you for the question.

[Chris Matier, Senior Director, Economic and Fiscal Analysis, Office of the Parliamentary Budget Officer]

Thanks for the question.

On business investment, our outlook over the first three years is a bit stronger than the Bank of Canada's. We have a bigger rebound in business investment growth. At the same time, we also have a more, let's say, negative outlook on the residential sector, so we have a bigger decline in residential investment over that period. Part of that, as the governor mentioned—I caught the last couple of comments—is that investment helps to increase the productive capacity of the economy and boost potential growth, so that's being reflected in our outlook.

The risks that we identified are definitely what we see as the most important upside and downside risks. I'm not sure I can give you a top three and bottom three, but the others that are definitely under consideration relate to U.S. trade policies. Again, this is something that several other forecasters have pointed out, based on the uncertainty around NAFTA, of course. Then on the opposite side of that, coming from the U.S., is U.S. fiscal policy and talks about tax reform and tax reduction, so we see that as a possible upside. The way that we treated that in our forecast is that we just assume that they would be offsetting. That's definitely a judgment call and we're open to that.

There are some others, both global and domestic. On the domestic front, we could see a sharper correction in the residential sector than we currently have. We think that it's considerable, but given some of the recent changes on the mortgage underwriting guidelines and maybe a larger impact of the expected increase in interest rates, that could have a more negative impact on the housing side.

Our export outlook is also, I don't want to say, very optimistic, but we do see bigger pickup in terms of growth in export volumes, at least relative to the Bank of Canada's outlook. Maybe on the downside, if we do see another persistence in competitiveness issues for Canadian exporters, we might not see that rebound.

Those are probably the top two and bottom two.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you for that commentary.

Regarding Canada's fiscal position or capacity, when we talk about the deficit, what percentage of GDP is that at currently?

[Chris Matier]

In the current fiscal year...?

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Yes.

[Chris Matier]

It's 0.9% of GDP.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

It's 0.9%.

[Chris Matier]

It's less than 1%, yes.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

As a percentage of GDP on an annual basis, the trajectory is continuing to decline. That's is how I would take that.

[Chris Matier]

We're projecting it to decline to 0.4% of GDP by 2022-23.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

What is the U.S.'s position? What does the U.S. use as a deficit as a percentage of their GDP?

[Chris Matier]

Off the top of my head, I believe it's roughly around 3% or 3.5% of GDP currently.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Okay. Thank you.

When we look at fiscal anchors, it's great to see that we have the debt-to-GDP number declining in this current projection and potentially hitting below 30%. Is that correct?