Finance Committee on April 23rd, 2018

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

Again, the expectation would be that if interest rates are going up in the United States, that's going to track higher prices, and that may draw money away.

Do I have much more time?

[The Vice-Chair, Conservative, Pierre Poilievre]

I'm afraid not, you have exhausted your time.

On the same question, I do note that in the report the interest expense of the Government of Canada by 2022 rises to $39.1 billion from last year's $24 billion. This is a $15 billion increase, which is roughly a two-thirds increase, in the cost of interest to the Government of Canada. It's also significantly higher than the government anticipated in its recent budget.

For 2022, interest expenses were supposed to be $32 billion, so the gap between the two is $7 billion, or over 20%, and you're only about a month apart in making your projections.

Why is there such a difference between the government's projection and your projection?

[Mostafa Askari]

Two things affect that, and one is the level of interest rate. In our projection we have a higher short-term and long-term interest rate relative to what the government is assuming. Also, there is the amount of deficit that will add to debt. If you look at ours, in the short-term we have a larger deficit in the first two or three years than what the government has, and then gradually over time we actually reduce the difference between us and the government. These two factors together will essentially lead to higher debt charges.

[The Vice-Chair, Conservative, Pierre Poilievre]

To what do you attribute the very large disagreement between your projection and the government's on the deficit for this fiscal year? You project that it will be $22 billion, and Finance Canada projects it will be $18 billion. What gives?

[Mostafa Askari]

The big difference, in the first couple of years especially, is essentially on government operations. That is really something that we have arrived at by doing our own calculations, and we have a significant difference from what the government has on that.

Trevor, do you want to add to that?

[Trevor Shaw, Economic Advisor, Analyst, Office of the Parliamentary Budget Officer]

I'd like to point out that the biggest difference between our point of view for the budget balance in 2018-19—so the current fiscal year—and the figures published in budget 2018 is that line in operating and capital expenses. This report marks the first time that our office has actually published its own independent projection for the operating and capital expense components of direct program spending.

You'll see that, earlier in the report, on page 21 of the English version, we provide a breakdown of exactly how we construct our estimate of the operating and capital components of DPE. You'll see that in 2018-19, there's considerable growth in expenses attributed to future and other benefits. These benefits include future benefits for veterans, payments for pensions, etc. They're highly sensitive to interest rates. Interest rates over the past eight or 10 years have been declining, and the relationship between future benefits and the interest rates is inverse. As interest rates fall, the expenses attributed to future and other benefits start to rise. That peaks in 2018-19, so this is—certainly as part of our direct program expense forecast—a source of cost growth.

I can't comment on whether that's consistent with estimates in budget 2018 because, unfortunately, the government does not provide a decomposition, as we do here in table 9, of its direct program expense forecast. It summarizes transfer payments and then operating and capital expenses just in two summary lines. Hopefully with table 9 we're able to depict exactly how we're putting our direct program expense forecasts together. Unfortunately, I can't compare that to the estimates of the government because that information is not public.

[The Vice-Chair, Conservative, Pierre Poilievre]

You said that as interest rates go up, the future and other benefits go down. However, you anticipate both interest rates going up and future and other benefits going up.

[Trevor Shaw]

That's a very good point. I should add that this occurs with some delay. Because of the way accounting losses or revisions occur, accounting adjustments for the prior fiscal year will be recognized this year, but they'll start to accrue as expenses in future years. They're amortized over many years. It actually takes the accumulation of many years of re-evaluation of future benefits to actually start to accrue changes on the expense line. This is a phenomenon that happens with some delay.

While interest rates are already starting to increase, the decline in the future and other benefits expense will also decline throughout time with some delay, relative to our projected increase in interest rates.

[The Vice-Chair, Conservative, Pierre Poilievre]

All right.

Mr. Julian.

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

Thank you, Mr. Chair.

Thank you very much for being here. It's a very interesting and detailed report. You do a lot of work without a lot of resources. Hats off to you for all of the work that you do.

You're also heroes, I think, in the Canadian mind in that you pushed the government. It took five years to finally get from the CRA an acknowledgement that tax gap information should be shared with the Parliamentary Budget Officer. That is fight that you had to have with the former Conservative government and now with the current Liberal government. It's a fight that you never should have to go through on behalf of Canadians, but thank you for pushing the government to do the right thing and to provide that information.

My first question is really around that. The tax gap has remarkable impacts in terms of the deficits, in terms of what programs and investments we can make as a country. It's been estimated at anywhere from $10 billion to $40 billion a year. It's money that goes to overseas tax havens. It's money that wealthy and the well-connected are able to simply not pay when everyone else, tradespeople and small business people, all pay their taxes. A lot of very wealthy people don't have to. That tax gap has enormous implications.

What I'd like to know is how the PBO intends to use that information. Are you getting it now from the CRA? Have you gotten it yet? Do you have a plan laid out in terms of publishing that very important information about Canada's tax gap, about the difference between what government should have in common to invest and to support programs and job creation, and what the federal government is actually getting to make those investments because of these offshore tax havens and massive tax loopholes?

[Mostafa Askari]

You can imagine that we have received a huge amount of information from the CRA. It takes time to study that and figure out exactly how we are going to use it. I think we have received all the information that we asked for, but it will take time for our staff, my colleagues, to go through all of it and figure out exactly how that would impact the overall assessment of the tax gap.

We are working on it. I can't really give you a time frame right now for exactly when we are going to have a report on this. My colleagues are working hard on it, and hopefully we will have something after this summer, a report that will essentially estimate the tax gap based on all of that information we have received.

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

Thank you very much. We look forward to having you back before committee when you do publish that tax gap information. It's something that governments should have been providing for decades and have refused to. I again thank you, because even though you had to push the government and threaten to take them to court, you stuck to your guns. On behalf of all Canadians, thank you for that valuable work. Canadians need to know what the wealthy and the well-connected take offshore rather than investing in all of those programs that we need.

One of those programs, of course, is pharmacare. This is something that's been promised for decades. The PBO did an excellent report last fall around the federal cost of a national pharmacare program. You did very detailed work about what the overall savings are to Canadians, and I'd like you to speak to that: what we as a society spend currently for medication when one in five Canadians can't afford the medication they need, what the overall costs are, and what could be saved if we had a national pharmacare program.

Just to add a last note on this, we know that we're losing anywhere from $2 billion to $5 billion a year for the costs to our emergency rooms and our hospitals by not having a pharmacare program. In other words, somebody who can't afford their medication ends up in the hospital or in the emergency room, and it costs Canadians a lot more not to have pharmacare than it would to have pharmacare in place. I'm interested in why that wasn't calculated in terms of the PBO report on the federal cost of a national pharmacare program.

[Mostafa Askari]

My colleague Carleigh was the main author of that report we did, so I'll let her speak to that.

[Carleigh Malanik, Financial Analyst, Office of the Parliamentary Budget Officer]

In the report, we basically saw that we could have overall savings of $4.2 billion, but again, this whole estimation was based on a very specific formulary provided to us by the House of Commons Standing Committee on Health, and that was only looking at the drugs on Quebec's public formulary. You can imagine that even if we're using a different set of drugs, the costs or the savings that we could find would change. It also excludes any drugs that were administered in hospitals.

Also, of course, it does assume that by having a single payer for these drugs in Canada we would be able to achieve a lower price from drug manufacturers. Because the request from the standing committee was part of their study, they did provide to us a very specific scenario. It is not yet a policy, so we didn't really include that in our outlook here.

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

The cost for us as a society is over $4 billion a year by not having pharmacare in place. That would not include the additional charges, the estimated billions of dollars that we spend in hospital stays and visits to emergency rooms for those one in five Canadians who cannot afford medication and, as a result, end up having to be treated in the hospital or in the emergency room. Is that correct?

[Carleigh Malanik]

That is correct, with one caveat, and that is the cost to Canadians using this specific pharmacare plan, so again, the drugs that are on Quebec's public formulary and assuming that we could as a nation achieve these savings on those medications.

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

On the savings to small businesses, for example, Canadians would be able to afford their medication and, of course, would have cost savings. In reading through the report, I didn't see a specific estimate of the savings to small businesses. Is that because it's difficult to estimate? Or do you have some sense of it? Small businesses that care about their employees finance health care plans that include medication. Some of the figures I've seen from other sources indicate that small businesses would save billions of dollars if we had a national pharmacare plan, which actually means that this would be a very smart, competitive advantage to Canadians.

I have a final point I'd like to make. In terms of our medicare, I've seen estimates that for a Canadian company the average competitive advantage of our universal medicare system is about $3,000 an employee, as compared to their United States competitors. In other words, with medicare, a Canadian company saves $3,000 that a U.S. company would have to pay in employee health care plans to make sure they're balancing it off. Is that something you examined as well, that overall competitive advantage for Canadian businesses to have a national pharmacare program?

[Carleigh Malanik]

I will answer your second question first. It isn't something we included in the report. To answer your first question about whether or not we looked at small businesses, no, we didn't. It's partly that it would be difficult with the specific data we requested. We didn't really track beyond whether it was paid out of pocket, covered by a private plan, or covered by a public plan.

It's more to the point that we wouldn't be able to track exactly how much those businesses are paying as a share, because sometimes the employees pay half or split it with the employers.

The other big point I would like to make is that we don't exactly know how this pharmacare plan would be rolled out or implemented, exactly how it would to play out. We just had the parameters provided to us by the Standing Committee on Health.

[The Vice-Chair, Conservative, Pierre Poilievre]

Mr. Sorbara.

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

Thank you, Mr. Chair, and welcome gentlemen from the PBO.

In the projections that are used you noted the sensitivity to interest rate increases in terms of discount rates. For the last 10 years, the other side racked up a lot of debt—I think it was over $150 billion—but actually benefited because rates fell or declined quite a bit. If you look at past budgets, they always overshot what they said their interest expense number would be, because a lot of the debt that was rolling over was rolling over at much cheaper rates due to a very weak economy that the Conservatives presided over for a number of years.

Our situation is a little different. Rates are going up because the economy is doing a lot better. You guys have looked at some of those numbers. When debt, whether new or old debt, matures, and the government goes out to market, it's refinanced at a higher rate, unfortunately, but due to a very good thing because the economy is doing well, and rates are going higher.

I'm glad you also made the observation that with higher rates, the present value of future liabilities declines, so your direct program expenditures fall, which is a benefit for us. I'm very glad that the PBO has highlighted that. It's something I'm proud of because our government has worked with the unions representing those hard-working government workers who work day in and day out to serve all of our residents, whereas the prior government did not and just forced collective bargaining agreements on them.

That was my statement. My my question is on the pricing of carbon. It is a fact that each province will be allowed to do what it sees fit with funds that are collected from pricing pollution. Going to your comment in the report, if the funds, for example, are in B.C. where one of my honourable colleagues is from, those funds can be used for taxation purposes, i.e., to reduce personal and corporate tax rates. If that is done, it will largely offset any sort of impact.

Is that a fair assessment from one of the pages in the report?

[Mostafa Askari]

As I said, we are assuming that the lump sum is going to go back. In our view, in looking at different options of reducing corporate taxes or reducing income taxes, the least efficient is the one you mentioned, namely, its going back as a lump sum to households. From an economic perspective, that would be the least efficient way of doing it. That's why we showed this negative impact that's going from 0.1% to 0.5% by the end of the projection. If we use any other method that is more efficient from our point of view, through corporate taxes or income tax, the negative impact would be lower than that.

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

Over the projection period you provided, there are differing fiscal anchors, but the fiscal anchor I like to look at is the federal debt-to-GDP ratio. You actually have a declining federal debt-to-GDP ratio over the fiscal period. Correct?

[Mostafa Askari]

That's correct.

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

I know the sensitivities to various macroeconomic models are immense. What would you folks at the PBO say is the greatest sensitivity with regard to the estimates? I really like your research. I have all of the reports from this morning, and I look forward to reading them a little more in depth when I have an opportunity.

In terms of sensitivities, I look for Canadian real GDP growth. Where do you see the largest sensitivity with relation to our economy?

[Trevor Shaw]

Just to provide a little bit of context around our baseline estimates, we provide three sensitivity scenarios. One is a shock to real GDP, another to GDP inflation, and lastly, to interest rates. You'll see in appendix F on page 33 that the shock to real GDP has the most detrimental impact on the budget balance. A negative shock to real GDP would have roughly an $3.8-billion impact on the budget balance in the final year, whereas, conversely, a 1% increase in real GDP would have, roughly, a mirror effect, or about a $3.8 billion improvement in the budget balance by year five.