Finance Committee on April 23rd, 2018

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you very much, Mr. Chair.

I want to come back to the tax gap examination that you're going to do, and force the CRA to provide information on, because the massive amount of money that goes overseas rather than serving a common purpose for Canadians to make those kinds of investments has real implications. I'm interested in two aspects of the study that you'll undertake on the tax gap. The first is whether or not you're going to come up with a figure on the real effective tax rate for large Canadian corporations. The Canadian Centre for Policy Alternatives has estimated that the effective tax rate for large, very profitable Canadian corporations is less than 10%—in fact, 9.8%. Will it be part of your study to determine to what extent these overseas tax havens and massive tax shelters are allowing some of the most profitable companies in Canada to get away without paying their fair share, which contributes to a profoundly unequal tax system?

The second aspect is the implications for the deficit. If we have this significant tax gap, is our deficit—and the additional spending or investments that we could make in people—due in fact to what has been a growing tax gap over the last few decades that neither the former government nor the current government has been willing to take on?

Those are my two questions around the tax gap study that you're doing.

[Mostafa Askari]

You have very good questions. Unfortunately, until we actually do a further study on this and see exactly what we can find in the data from the CRA, it will be very hard to answer your questions and say exactly what the conclusion will be. We know that there is a tax gap, no doubt. Knowing how big it is will have to wait until we have a better analysis of the data that we have.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Okay. I'll be awaiting that study, and I think a lot of Canadians will be awaiting with a lot of interest too. It's long overdue. Thank you, again, for your fight against the new Liberal government so that you could actually get that information.

The other issue is around the impact of climate change. We have the economic and the fiscal impacts around pricing carbon. What has not been done in any fulsome way is an evaluation of the economic and fiscal costs of the increasingly dramatic and catastrophic climate change events that we're seeing in this country. The Insurance Bureau of Canada has now estimated that insurance costs related to catastrophic climate change events are more than $1 billion. I've heard estimates of up to $4 billion a year, and growing, of the costs related to climate change. For those who feel that the current structure of our economy doesn't come with a cost, there's that $4 billion estimated cost, or some $10 million a day in economic costs of our not dealing with climate change. Is that something the PBO is now looking at? Are you looking to see, given the increasing number of catastrophic climate change events, what the cost to the Canadian economy is of not dealing in any real way with climate change?

[Mostafa Askari]

This is not something that we have done recently, or looked at. Obviously, the impact on the Canadian economy is an interesting topic. It's something that we can consider in the future and take a look at, and see if we have the capacity or instruments to actually do that kind of analysis internally.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

This begs my last question. Do you have the resources you need? You do very valuable work. Do you have all of the resources you need to do that work on behalf of Canadians?

[Mostafa Askari]

With the changes that were made to our office in terms of our independence, we were provided with a larger budget and are in the process of hiring new people and expanding the office. Hopefully, we'll be ready to answer many of these questions over the next 12 months.

We are getting ready for the next election. We have to do the platform costing for the parties. That will take up a lot of time, but we are getting ready for that.

[The Vice-Chair, Conservative, Pierre Poilievre]

Peter, we are out of time for your intervention. We do have 10 more minutes. I propose that we allow two-to-three-minute interventions to get the maximum number of opportunities.

Does that sound fair? Perhaps we'll go one to each party.

Mr. Fergus, for three minutes.

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

Thank you very much.

Once again, I'm very grateful to the PBO for coming forward. I do appreciate the modelling exercises that you do. Over the years, you've proven to be quite accurate.

From what I understand how the Office of the PBO works, and the information you gather to make these assessments, do you rely on the same set of data that the Department of Finance would have? Let's take a look at schedule B, in terms of the economic outlook. Your modelling is different, which seems to produce different results.

For my benefit and that of Canadians, could you explain why the modelling ends up being slightly different? What variables are you placing greater weight on, or for what reasons do you feel that the great folks we have over at the Department of Finance have different results than your shop does?

[Mostafa Askari]

We have a highly dedicated staff. They have a significant amount of experience in doing this kind of work, some of it for the government, in the past for the Department of Finance, the Bank of Canada, and other organizations. That's part of it, obviously, but we have the expertise.

The other part is that we have no prejudgements on what should come out of our results. We go into these studies trying to do what we think is the right way of doing it mechanically. There are no preconceived results that we want to achieve, in terms of the impact on the deficit or any other kinds of issues.

Maybe that's one of the reasons you see our work as being more accurate than other organizations', but that's all I can say. I don't really know exactly; I can't compare them.

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

I wouldn't imagine there would be a preconceived notion, for example, on the exchange rate, and taking a look at the four-year approach. Mind you, you have more recent figures to base it on, but, nonetheless, the almost 5¢ gap is significant. I'd imagine that would also influence the figures for how many exports the Canadian economy would be able to produce, or to what degree it would be able to produce exports.

Why is there such a huge difference on that? I don't know if Mr. Matier wants to get in on this.

[Chris Matier]

Sure, I'll follow up with a little more technical detail that can address your second question.

Our projection is model-based, so we have an estimated macro-model, in conjunction with assumptions and outlooks for the U.S. economy and commodity prices. These are key inputs. This contrasts with the Department of Finance's approach, which uses a survey of 15 or so private sector forecasters to prepare its outlook. One of the key weaknesses of this approach is that it doesn't necessarily ensure consistency in the forecast. You can have divergent views on, let's say, the exchange rate and commodity prices that you wouldn't have to reconcile in a single model, which we have to do. Some forecasters may not provide an outlook for certain variables. The survey itself doesn't ensure internal consistency as a macroeconomic model would.

The last point I would make is that we did look at forecast performance and quality in a report last year, and we found that in terms of accuracy, at least for the headline macroeconomic variables such as nominal GDP, we were in line with the survey-based outlooks from the Department of Finance. But one of the key differences was that our forecasts were less biased, so that when we did make an error, it wasn't typically over- or under-predicting the economy. That's another key difference.

How do you explain that? Why are we less biased than a survey-based result? As Mostafa said, maybe it's because we're not working for a chartered bank with incentives to talk about a bullish outlook, for instance. We don't have that kind of sentiment in the background.

[The Vice-Chair, Conservative, Pierre Poilievre]

Unfortunately, we are over time.

We'll now turn it over to Mr. Albas, and then back to Mr. Julian.

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

Picking up from where MP Fergus left off, I certainly do appreciate that. It's helpful to have competing models side by side, and then find out from Stats Canada, after the relevant data has been accumulated and we can look at it, who's closer. Certainly, I think it's good to have a variety of models, because we shouldn't just be thinking one particular way.

In regard to that, there's been a lot of discussion in the last few years about balanced budgets. Obviously, the Conservatives favour them; other parties have various views. In the report you estimate that the probability of the budget being in a balance or a surplus position in 2017, 2018, or 2019-20 is effectively nil. I appreciate that you've modelled that.

You've also talked on page 25 about the net debt-to-GDP ratio and where that might go in several years. These are the two most common references when we talk about the fiscal framework, and I understand why, because you have to start with something, and it's easy to count numbers.

What other metrics should parliamentarians be looking at? For example, that net debt-to-GDP ratio may tell one story, but again, as we know, we have a long-term demographic issue that may skew the effects in certain areas, where certain provinces are far more exposed than others. Where should we be looking to, as Wayne Gretzky used to say about the direction of a puck?

[Mostafa Askari]

I'll start, and maybe Chris can add something.

You're aware that we do a long-term projection that we call a sustainability report. There, we look at the federal situation, and we show that on that basis, the federal government's fiscal position is actually in a very good position over a long period of time, whereas most of the provinces have some issues. That's the difference between the two levels of government.

Chris, do you want to add something?

[Chris Matier]

[Inaudible--Editor].

[The Vice-Chair, Conservative, Pierre Poilievre]

Mr. Julian.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you very much, Mr. Chair.

I have two quick questions to finish off.

First, I was in Alberta last summer, going to town halls and meeting with energy workers. Their question was always about why the federal government isn't providing any supports for clean energy. They see their skills as eminently transferrable, and they're absolutely right. I notice from the economic and fiscal update how miniscule the support is for clean energy by this federal government.

This is my first question—and I'll ask both. To what extent are you studying the economic impacts of substantial investments in clean energy and how that could lead to job creation in this country? If you're not looking at it, what would parliamentarians be required to do to enable you to do that? Would it take a motion through a committee, for example, finance?

My last question is on the government providing information that is relevant to your work. With the CRA you had to battle five years under the former Conservative government and the current Liberal government, and had to threaten to take them to court before the CRA and the government finally said they would provide the information on this massive tax gap and wealthy tax cheats. Is there any other information the PBO is looking for right now that the government is withholding?

Those are my two questions.

Thank you for your very valuable work on behalf of Canadians.

[Mostafa Askari]

Thank you.

On the first one, we haven't really done anything on what you mentioned in terms of clean energy. If there is some kind of motion or request from Parliament, then we would certainly look at that and see whether it is feasible for us to do it, given our resources and the expertise we have in the office.

On the issue of the tax gap and the CRA, I assume that's something we can look at, but I can't really tell you exactly what the impact is right now.

[The Vice-Chair, Conservative, Pierre Poilievre]

I think that's the time, and I have a closing question.

The reference to net debt to GDP refers only to the federal government's debt. Typically, this government has used as its anchor the federal debt-to-GDP ratio. As you point out, provinces have their own debts, and as we all know, households are extremely indebted. If the economy is a workhorse that is pulling a wagon up a hill, and that wagon has debt to pull, it's not just the federal government's debt that's in that wagon. That one horse has to carry federal and provincial debt, plus corporate debt, plus personal debt, because we only have one Canadian economy, one GDP of roughly $2 trillion.

When we're judging the ability of governments to borrow more, do you think we should consider the total debt load of the nation, rather than that of just one level of government?

[Mostafa Askari]

To be honest with you, I haven't really thought about this question, so I don't know exactly how to respond. Maybe my colleagues have an idea.

Chris.

[Chris Matier]

Again, I think the question is focused on whether you're looking at it from a fiscal sustainability perspective, or you're looking at it in terms of economic capacity and private sector job growth. I think the question really has to be focused along those lines.

In terms of overall sustainability in the government sector, part of those high debt loads in the public sector could be captured indirectly through the risk premium that a government would have to pay in financial markets. Financial markets are aware of the government's ability to raise revenue from heavily indebted households. They will charge an additional premium, because they know that the probability of a credit risk is higher. That will be picked up through there.

Really, the signal should be coming from financial markets, and right now, at least for Canada, the Government of Canada can issue 10- or 30-year bonds at about 2.5% to 2.75%. Right now, at least from a financial-market perspective, those concerns aren't there. In contrast, the U.S. government over a similar period is facing interest rates that are probably about 50 to 60 basis points higher. There might be some concerns about both fiscal sustainability and U.S. debt levels, and maybe not so much on the household side. But those financial markets should be able to—should, I say—price that credit risk appropriately.

[The Vice-Chair, Conservative, Pierre Poilievre]

Thank you very much, and thank you for your testimony. This has been very helpful to us as parliamentarians.

[Mostafa Askari]

Thank you.

[The Vice-Chair, Conservative, Pierre Poilievre]

The meeting is adjourned.