Evidence of meeting #120 for Finance in the 42nd Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was economy.
A video is available from Parliament.
Senior Director, Economic and Fiscal Analysis, Office of the Parliamentary Budget Officer
Yes. We have the debt-to-GDP projected to decline to 29%.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
I say that because, as the debt-to-GDP is declining and as the deficit as a percentage of the GDP is declining, we're obviously undertaking strategic investments in our economy, including the Canada child benefit, which in the last testimony provided a 0.5% increase to GDP. Have you any estimates on what the impact was of the Canada child benefit in your modelling on the Canadian economy?
Senior Director, Economic and Fiscal Analysis, Office of the Parliamentary Budget Officer
Unfortunately, in this outlook we don't have an estimate of the impact, but we have incorporated it into our outlook for consumer and household spending, so it's in there but we haven't isolated it. I believe the last time we provided an estimate of this was back in our April 2016 economic and fiscal outlook. I forget off the top of my head what that impact was.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Thank you for that analysis, and I take it that, once the legislation comes out with the indexation of the CCB and the working income tax benefit, the PBO will be providing a more thoughtful analysis on that front.
I'm finished, sir.
Conservative
Pierre Poilievre Conservative Carleton, ON
Thank you for being here.
Between now and 2022, a five-year period, public debt charges, that is, interest on the national debt, are expected to grow from $24 billion per year to $38.5 billion, which is an increase of $14.5 billion or 58%.
Can you confirm that this annual expenditure of $38.5 billion for debt interest is money that the government cannot allocate to fund health care or other valuable services that Canadians use?
Mostafa Askari Deputy Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
Yes, of course, you're correct. That's the expense of the government and they have to manage that within the envelope they have in terms of revenues and the amount that they borrow.
Conservative
Pierre Poilievre Conservative Carleton, ON
This $14 billion is the increase in debt interest that the government will have to shoulder, that taxpayers will have to cover. Is that a significant amount of money in the context of the overall Government of Canada budget?
Deputy Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
In terms of the overall size of the economy and where we are going, no, it is not a big amount. The reason for that is twofold, actually. One is that interest rates are rising in our projection. That's obviously one impact on the public debt charges. The other one is that the government continues to have a deficit over that period. That accumulates over time with the higher debt level, so that will increase the public debt charges.
Conservative
Pierre Poilievre Conservative Carleton, ON
You mentioned that interest rates are rising. How much would interest rates need to rise before heavily indebted Canadian households begin to feel financial distress?
Deputy Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
We did a study earlier this year in which we looked at Canadians' household debt and their debt service ratio and we showed that over the next five years the service ratio will increase. That is obviously a pressure on households in terms of their finances, because as the debt service ratio goes up, it means they cannot spend the money on other things that they normally spend it on.
There is certainly an increase and more pressure on households. Whether that's a crisis or not, that's a different issue. I can't really say whether that would lead to a crisis for households, but certainly, it would increase the pressure on households.
Conservative
Pierre Poilievre Conservative Carleton, ON
How much could these households absorb in the way of interest rate increases?
Deputy Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
How much would they be able to absorb? That's hard to tell.
Chris, do you have any views on this?
Senior Director, Economic and Fiscal Analysis, Office of the Parliamentary Budget Officer
No. We don't have an estimate of what the maximum threshold is, but what we provided in that report was basically a comparison over the last, I think, 25 years. We projected that if, as expected, the Bank of Canada's interest rate rises back up to about 3%, which is the mid-point of its estimates for the neutral rate of interest from current levels, we would expect to see household debt servicing rise from about 14.2% of disposable income to 16.3%. Relative to the long-term historical average, that's roughly 3.5 percentage points above its long-term historical average.
Conservative
Pierre Poilievre Conservative Carleton, ON
Have we ever seen household debt service ratios that high in the past?
Senior Director, Economic and Fiscal Analysis, Office of the Parliamentary Budget Officer
No. Historically speaking, I think the highest was around 15% of disposable income, and that was during the global financial crisis when incomes really collapsed.
Conservative
Senior Director, Economic and Fiscal Analysis, Office of the Parliamentary Budget Officer
Roughly.
Conservative
Pierre Poilievre Conservative Carleton, ON
By 2022, in five years, interest rates are estimated by your office to be at 3%, and that will lead to the highest levels of household debt service costs on record.
Senior Director, Economic and Fiscal Analysis, Office of the Parliamentary Budget Officer
According to our projection, yes.
Conservative
Pierre Poilievre Conservative Carleton, ON
At that very moment, those same households will be bearing the burden of the $14 billion in additional interest costs that their government will pay for its growing national debt.
Senior Director, Economic and Fiscal Analysis, Office of the Parliamentary Budget Officer
They will not be paying the debt charges themselves. That will be the government issuing debt on financial markets.
Conservative
Pierre Poilievre Conservative Carleton, ON
Right, but government doesn't have any money. Somebody is going to have to pay for it and that means taxpayers. They can issue new bonds, but ultimately somebody has to pay interest on those bonds.
Senior Director, Economic and Fiscal Analysis, Office of the Parliamentary Budget Officer
Yes. They will be rolling over their debt as it becomes due, unless they stop issuing new debt.
Conservative
Pierre Poilievre Conservative Carleton, ON
Right, but whether they issue new bonds or treasuries, can somebody tell me where the money comes from to pay interest on government debt?
