Finance Committee on April 23rd, 2018

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

May I ask about your projection on housing for 2019? I think there may be some difference with other projections out there. You are using a -0.3 percentage point impact on real GDP growth. Given the demographic trends and immigration, B-20 and other measures that have been instituted, do you think that's a slightly bearish housing forecast compared to others out there?

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

I'll start, and my colleague Tim will probably follow up.

You're correct. Our outlook is a bit more negative than, let's say for instance, the Bank of Canada's outlook, where I think they probably have it making a zero contribution to GDP over that period. Our view really is that the impact of rising interest rates and the slowdown in disposable income in the economy will hit the housing sector a bit more directly and significantly than others. We're not calling for a housing market crash or anything like that by any means, but the level of residential investment in the Canadian economy is at historic highs. This is more of a natural adjustment to a more sustainable level.

My colleague Tim can follow up.

[Tim Scholz]

Maybe the only thing I'd add is that we're projecting that real house price gains will average 1.5% over 2018-22. While this is positive, it's well below the average of 5% that we've seen from 2010-17.

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

My personal feeling and my conjecture would be that it would be somewhere between the -0.3 and the zero from the Bank of Canada. There are pockets of housing where there's obviously been some pull forward from the changes that were made last year versus this year, but the spring housing market in overall home ownership levels will remain pretty strong.

You guys have done some work, and I'm very glad to see it, on the effect of fiscal developments in the U.S. on Canadian real GDP. Can you talk about the pull-through effects, please?

[Tim Scholz]

There are two major fiscal developments. There is the Tax Cuts and Jobs Act that was passed into law on December 22 last year, then there was also the Bipartisan Budget Act that came into force on February 9.

For the former, with respect to the tax cuts, we've taken an estimate by the staff of the Joint Committee on Taxation and basically taken their estimated economic impact on U.S. GDP of about 0.7% over the course of our projection. Then, with respect to the Bipartisan Budget Act, we've looked at what the Congressional Budget Office has predicted in terms of additional government spending over the medium term by the U.S. We've used their fiscal multipliers, essentially meaning how much they estimate that government spending will translate into economic activity.

We've come up with two impacts on the level of U.S. real GDP. Once we had those impacts, we brought those into our Canadian macroeconometric model. We estimate that this would lift Canada's real GDP by 0.1% in 2018, which will rise by 0.25% by the end of our projection period, primarily through higher exports.

[The Vice-Chair, Conservative, Pierre Poilievre]

Thank you, Mr. Sorbara.

Concerning the $10-billion cost to the Canadian GDP that you associate with carbon pricing, is that net of the lump sum payment you're anticipating will be made to recycle the dollars?

[Mostafa Askari]

No. That's the gross impact, as far as I know.

[The Vice-Chair, Conservative, Pierre Poilievre]

You say here, “we assume that federal revenues returned to provinces and territories will be transferred to households as lump [sums]”. Is that transfer then calculated into the final economic impact?

[Mostafa Askari]

That's right.

[The Vice-Chair, Conservative, Pierre Poilievre]

It is. Okay. That's great.

Thank you, Mr. Kmiec.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

I was going to continue on the carbon tax and then talk about table 9 on page 21 again, which Mr. Shaw mentioned.

You're showing a $22-billion deficit, whereas in the previous campaign, the Liberals talked about a $6-billion deficit at this point. You have an estimation of half a GDP point loss because of the carbon tax on the economy, and in the projections you have on table 1, it shows exports are halved, post-2019. It goes from 1.5% to 0.7%, and then it's 0.7% again in 2021-22.

What other government policy measure in the past, since as many years ago as you can remember, has cost the economy, basically, half a point of GDP growth? Is there anything like it?

[Mostafa Askari]

I'm sure there are many things that could cause that, such as a financial crisis or anything else, any kind of—

[Tom Kmiec, Conservative, Calgary Shepard, AB]

But this is within the government's control.

[Mostafa Askari]

Within government control, I can't come up with something right now on that, whether there was something that big or not—

[Tom Kmiec, Conservative, Calgary Shepard, AB]

It's kind of a unique, self-imposed penalty.

[Mostafa Askari]

I wouldn't call it that until I look at the last 10 years and see what other things have happened that could cause that kind of impact.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

The provincial governments are responsible for the administration, because they're going to be punished on January 1, 2019, if they don't have some type of carbon tax. If a government chooses not to do lump sums, and it does something else, what would the impact be?

[Mostafa Askari]

Well, then, we would have to take that into account and do another study, because this is the one we did. This is the lump sum. This is the simplest way of doing it, because we don't really have full information about exactly how different provinces are going to do this, and based on the information we have on the provinces—Ontario, British Columbia, and Quebec—we thought this was the closest to where the provinces are going, given the way they are handling this.

That's why we chose this, but if we were to do a full study, we would have to have the full information about what all the provinces are going to do and then take that into account.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Could you tell me then, on page 11, table 1, “Outlook for Canadian real GDP growth”, why exports go down literally by half? You're talking about an 0.8% loss to real GDP growth. Is it related to the carbon tax making our exports less competitive, or is that simply a projected loss of some sort? It literally cuts it in half.

[Chris Matier]

Yes, that's reflecting a few factors.

First of all, it's really the slowdown in foreign activity, so the U.S. demand for our exports. If you refer back to the slide, figure 4, you'll see that the U.S. economy is slowing down to about 1.8% in the medium term, so the growth in our exports would be roughly in line with the U.S. economy at that time. It's really the strong U.S. growth that's lifting it up, and then the moderation in U.S. growth that is bringing it down.

At the same time, we're seeing that some of that initial pickup in exports is coming from the dollar remaining around 77 or 76 cents, so there's still some benefit from the lower dollar.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

The way our interest rates go up in your model, I think you have 25 basis points each quarter up to the nominal neutral level of 3% by the first quarter of 2020, but we just had the Bank of Canada's governor come in and say that it's his expectation they will keep interest rates pretty much where they are. He obviously can't tell us what the future is like, but then that leads me to table 9 on page 21, which was mentioned before.

Specifically, that line, “Personnel—future, and other benefits”, is heavily influenced by interest rates—correct me if I'm wrong. When interest rates go up, the government earns more money on the side, so these costs would then go down. Is that correct?

[Trevor Shaw]

Specifically speaking to table 9, yes, the future and other benefits line on personnel is highly sensitive to interest rates, so as interest rates start to increase, you're going to see the expense line on future and other benefits start to decline over time. As I mentioned in a previous response, this happens with some delay, but certainly for those two, as interest rates increase, that expense should start to decline.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

If interest rates don't go up by as much as you're predicting, then you're talking about a gap between 2018-19 and 2022-23. That's an almost $9-billion gap that forms, just based on interest rates.

[Trevor Shaw]

Certainly that aspect of our fiscal forecast is sensitive to interest rates, as are others, namely our public debt charge forecast. For a good depiction of precisely how interest rates affect our fiscal forecast overall, I'll point you to appendix H on page 35 of our report, which shows that direct program expenses, which are concentrated on those future and other benefits, with a permanent 100-basis point increase, would come down by roughly $4 billion per year. On the other side of the ledger, public debt charges would start to increase with a 100-basis point increase, up to about $7 billion higher than our baseline projection by year five. So you have these two opposing forces; and on net, higher interest rates would result in a higher budgetary deficit.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

How much time do I have, Mr. Chair?