Finance Committee on April 23rd, 2018

[Carolyn A. Wilkins]

Sure.

It's really important that people who purchase these kinds of assets know what they're purchasing and know what an asset is. When you think of a currency, a currency is something that you can store value in; you can use it at a store to buy goods and services; and you can be reasonably sure of what the value is going to be from one day to the next, as you can with the Canadian dollar. That's why we target inflation, so that households don't need to worry about that kind of fluctuation in the value of the holdings they have.

If it's an asset, you may hold it for a variety of other reasons, as you hold other investments. You may hold it because you think you have a stake in a company. I'm thinking about an initial coin offering, on which I may earn a high return over time. I might hold something like Bitcoin, and I may hold a return on that over time as well. When you're a purchaser of that and you're a household, you need to know what kind of risk is associated with that and you need to know also that you have the same guardrails that are in place for investor protection and consumer protection with respect to other assets.

What I have been saying, as have the governor and the G20 countries, in fact, is that it's really the right time to start to put in place a regulatory structure that provides those guardrails, whether it's guardrails against anti-money laundering or terrorist financing, or just guardrails to make sure that investors know what they're getting into.

In order to do that, the best approach is for regulators and concerned parties in Canada to get together and think about how we're going to define these things, how we're going to treat them in our current regulatory environment, and also to do that internationally, because these are cross-border assets. They're being traded all over the world, so if we're not consistent across the world, then we're likely to be faced with regulatory arbitrage.

[The Vice-Chair, NDP, Peter Julian]

Thank you very much, Mr. Albas and Ms. Wilkins.

Governor and Deputy Governor, thank you for appearing before us today. We've had a very interesting discussion. We hope to have you back before the committee again soon.

We are going to take a five-minute break to bring in our next panel of witnesses.

We'll resume in five minutes.

Thank you.

[The Vice-Chair, Conservative, Pierre Poilievre]

We will proceed with our next panel of witnesses.

Mr. Fréchette, the Parliamentary Budget Officer, cannot be with us today, I understand for reasons of illness, but we do have with us the deputy Parliamentary Budget Officer, Mostafa Askari. With him on the panel is Chris Matier, senior director of economic and fiscal analysis; Trevor Shaw, economic adviser and analyst; Tim Scholz, economic adviser and analyst; and Carleigh Malanik, financial analyst.

Without further ado, please begin.

[Mostafa Askari, Deputy Parliamentary Budget Officer, Office of the Parliamentary Budget Officer]

Thank you, Mr. Chair.

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

Thank you for inviting us to appear before the committee to discuss our April 2018 economic and fiscal outlook. The parliamentary budget officer, or PBO, supports Parliament by providing economic and fiscal analysis to parliamentarians. Pursuant to section 79.01 of the Parliament of Canada Act, the parliamentary budget officer provides analysis “for the purposes of raising the quality of parliamentary debate and promoting greater budget transparency and accountability.” In addition, consistent with the legislated mandate of the parliamentary budget officer, our office provides economic and fiscal outlooks.

Since October there have been external and domestic policy developments that will impact the Canadian economy over the medium term. These include changes to fiscal policy in the United States, implementation of Canada's carbon pricing levy, as well as an expected fallout from ongoing NAFTA negotiations. We have incorporated into our April outlook assumptions with regard to the impact of these developments.

We project real GDP growth in Canada to average 1.7% annually over 2018 to 2022. Over the medium term, we expect the Canadian economy to rely less on consumer spending and the housing sector as business investment and exports make a greater contribution to economic growth.

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

Compared with our October outlook, the projected level of nominal GDP, the broadest single measure of the tax base, is on balance unchanged, with upward revisions to GDP price levels offsetting downward revisions to real GDP.

On the fiscal side, revisions to our outlook for the Canadian economy have modest impacts on our medium-term projection of the budgetary balance. Incorporating our new projection of direct program expenses along with new year-to-date financial results contributes to reducing projected budgetary deficits on a status quo basis—that is, prior to policy actions since October 2017.

We estimate that policy actions taken since the government's 2017 fall economic statement amount to $22 billion over 2017-18 to 2022-23. These new measures more than exhaust the projected increase in fiscal room, resulting in a somewhat larger budgetary deficit compared with our October outlook.

That said, we project that budgetary deficits will decline gradually, falling to $10.6 billion in 2022-23. This projected reduction is essentially due to restrained growth in the government's operating expenses, resulting from declines in future benefits for federal employees and slight decreases in the number of federal personnel through 2019-20.

In light of the various assumptions included in our economic outlook and in the absence of other strategic measures, it is unlikely that the budget will be balanced or in surplus in the medium term. However, we estimate that, in 2020-21, there is approximately a 75% chance that the federal debt-to-GDP ratio will be below the government's anchor of 30.9%.

I would also like to draw your attention to another report we published today that provides the PBO's independent costing of 10 large revenue and spending measures announced since October 2017.

These measures are fully reflected in our April fiscal outlook. All together, PBO’s costing of these new measures is $1.4 billion higher than the government’s estimates provided in budget 2018.

My colleagues and I would be pleased to answer any questions you have on our economic and fiscal outlook or any of the parliamentary budget officer's other analyses.

[The Vice-Chair, Conservative, Pierre Poilievre]

Mr. McLeod.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you, Mr. Chair.

Thank you to the presenters today.

I'm very happy to see the presentation here today. In your economic and fiscal outlook you analyzed the impact of the carbon pricing levy. This is a very important issue for me and the people I represent in the Northwest Territories. Climate change has been impacting us more than any other jurisdiction in Canada. We really never had the opportunity to invest in alternative energy or infrastructure that would allow us to reduce our greenhouse gas emissions. We're hoping that this program is going to do this for us. A lot of the communities I represent still have noisy generators, sometimes right in the middle of the community, running 24 hours a day every month of the year. Most of our communities are built on permafrost, which is now melting. I just came from a meeting in our coastline communities. Some of the communities are forced to now start moving houses. We have graveyards that are falling into the ocean, and many serious issues.

This is an important issue for me, but it's also an important issue for the committee because we're starting to study the measures in the budget implementation act this week. It was really interesting that you said in your analysis that it would be more beneficial for the Canadian economy and for the provinces and territories to use revenues from the levy to cut corporate or personal income taxes than to return the revenues as lump sum payments to households. Could you explain how you arrived at that and why it would be better to do in that fashion?

[Mostafa Askari]

We have looked at the study that was done by the Ecofiscal Commission. In order to estimate the impact of this, we used some of its calculations. What we are assuming in our calculation is that this tax will be essentially going back as a lump sum to households in any form. That is not the most effective way of using the tax in that form. There are other ways, such as corporate tax reduction or income tax reduction, that would deal with that. On that basis, we have estimated our impact, which starts at 0.1% in the first year and goes up to about 0.5% by the last year. That's the negative impact on the economy.

That's how we have come up with this estimate. There are many ways of looking at this. If the provinces decide instead to reduce corporate taxes in response to this, then the benefits of that for the economy would be large, or the negative impact would be lower than if you just did that kind of lump sum payment. That's the way we have come up with it.

[Michael McLeod, Liberal, Northwest Territories, NT]

One of the other concerns that we had in the north was the impact on our fiscal arrangements, our formal financing arrangements. Some of our agreements have a clawback, wherein there is a requirement to reduce your revenues from the federal government if there is another source of revenue. We've really been monitoring that and trying to make sure it doesn't impact us. It looks as if we're going to have that resolved, and I think the Northwest Territories is ready to move forward with its program.

I wanted to talk about the federal debt-to-GDP ratio. You said there's a high likelihood that it will be below 30.9% in 2020–21, which was a target set in 2016. Can you talk about the importance of using this measurement as a fiscal anchor and the significance of meeting that goal?

[Mostafa Askari]

There are certainly different fiscal anchors one can use. There is the adjusted deficit, the deficit as a percentage of GDP, debt as a percentage of GDP—these are all different measures that people use. In our case, we are looking at this because the government is using this measure to report on it.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you.

I'm good.

[The Vice-Chair, Conservative, Pierre Poilievre]

We will move on to Mr. Albas.

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

Thank you, Mr. Chair.

[The Vice-Chair, Conservative, Pierre Poilievre]

I thought I saw your hand go up.

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

Thank you, Mr. Chair.

I want to thank all of the public servants who are here today to help us better understand the reports.

I would like to start where Mr. McLeod left off. Some on this committee may remember that we actually had all three premiers of the territories, either in person or through teleconference, comment on the carbon tax. I specifically remember the testimony of the Premier of Nunavut, who stated that 80% of the costs of diesel are subsidized by the government. I asked him how a carbon tax would work under that kind of system, because most of the money was being recycled from the government's own revenue. He said he imagined that it didn't work.

I want to state categorically for the record that I believe that the Northwest Territories as well as Nunavut...I guess Yukon already has instituted its own carbon tax. But the territories that are not in favour, those premiers, I believe we should be exempting. I think we should be working with members of Parliament to remove diesel through other means.

Anyway, I'll come right to the same question. The report on page 8 says specifically that “we assume that federal revenues returned to provinces and territories will be transferred to households as lump-sum payments.”

Were you unable to get any kind of indication from the government as to whether or not it will be a tax-and-dividend-like system? You mentioned earlier that the preference would be through a decrease in income taxes, whether corporate or personal. Could you go over that, please?

[Mostafa Askari]

This is an assumption we made to be able to do this calculation, but different provinces have different systems now. There is a carbon tax in some areas and there are different ways of dealing with that. We didn't really want to do separate calculations for each province. We assumed that on average the carbon tax would be $10 to $50, and that it would be applied all over the country in the same way. We did this just to come up with some estimate of overall impact.

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

I had thought this was a system that the federal government would be imposing upon provinces or territories that have not yet done it. I thought the government might at least have indicated if it would be returning the money directly to households, or if it would be through a reduction in taxes for those areas by giving it to the provinces or territories that were responsible. So I appreciate that.

I'd like to go to employment. I raised this with the Governor of the Bank of Canada. Page 6 of your report says that “Roughly 40 per cent of jobs gained during this period came from private sector employers.”

Obviously, public servants play an important role in facilitating important services that can facilitate a stronger economy, but 60% seems to be a rather high ratio. Is there any concern about job creation only being from the not-private-sector side? Again, the government can only tax. You cannot have a government that is larger than its economy. It relies on a strong private sector to be able to pay for those things. Are there any concerns from anyone here in regard to 60% of it being non-private?

[Tim Scholz, Economic Advisor, Analyst, Office of the Parliamentary Budget Officer]

I think that over a long time horizon this would be something we'd monitor and maybe become concerned about if the private sector job growth were not strong. One thing I'd caution about regarding six months of monthly labour survey data is that it is quite volatile and subject to revisions. Is this something we'd be worried about from a macroeconomic perspective over six months? Probably not, but it's something we would definitely monitor.

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

Further to that, it points out that the unemployment rate has continued to trend lower from 6.2% in October to 5.8% in March. The next statement, however, says that this decrease largely reflects a decline in labour force participation. Therefore, fewer people looking for work lowers the unemployment rate. Is that what you're saying here?

[Tim Scholz]

Yes.

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

They could be not looking for work, because they have decided to retire instead, or they have given up looking for work and gone onto social assistance.

Can you give any indication as to why that is the case?

[Tim Scholz]

We haven't done a deep dive into why that is the case or why there has been—

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

I'll take a shallow dive.

[Tim Scholz]

We're in the process of working on a labour market assessment report that is possibly slated for this summer, and that's something where we actually go into a deeper dive on things like private versus public sector job creation, or the composition of the flows to and from the unemployment rate. I wouldn't be able to comment further. It's possible that we could go back to the office and take a look.

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

I do hope there's some follow-up on that, and that this is looked at specifically, because many people would be surprised to know that we see this number dropping because of the decrease in labour participation, rather than because of other factors that some government members have spoken about.

On page 7 it states that “We also expect that the Federal Reserve will increase its policy rate at a faster pace over 2018 to 2019 than we projected in October.” I believe it was last year that I tried to talk to the Minister of Finance regard rising interest rates of bonds.

Right now a lot of people are looking to invest in the United States versus other places. Obviously, Canada has a very strong process for foreign bondholders, for example, or even for domestic investing in the notes of the Government of Canada.

Will this mean that we will have to pay higher interest rates down the road to attract those bonds?

[Tim Scholz]

In terms of our economic model, when U.S. interest rates increase, and particularly those at the long end, like the 10-year rate—and of course those are influenced by expectations about what the Federal Reserve will do—they have a direct influence on household rates and business borrowing rates.

What you're talking about is higher rates on Government of Canada securities. That is also how our public debt charges are modelled, and the government would pay a higher interest rate. However, we haven't done any work necessarily on global capital markets, and whether we would expect to be—