Finance Committee on April 19th, 2016

[The Vice-Chair, Conservative, Ron Liepert]

Thank you.

Lisa Raitt.

[Lisa Raitt, Conservative, Milton, ON]

Welcome. Thank you very much for being here.

I'm sorry, I'm going to do this, but I'm noting I'm the only woman at the table. I'm hoping that with the next round of people coming to the table, you're going to have a woman with you. I'm seeing nodding, okay, I'm going to take it. Next time you come to committee, you know what you have to do. You have to find them and bring them in.

[Jean-Denis Fréchette]

You'll see them in the next part of the meeting today.

[Lisa Raitt, Conservative, Milton, ON]

Thank you.

I'm going to ask you about your economic and fiscal outlook that was published this morning, specifically your appendix F. I wanted to get some clarification and clarity on your fiscal and outlook comparisons.

What we see in front of us is the PBO on budget 2016 fiscal outlook comparison, taking your...in the budget and putting them together, you end up with a delta. I'm going to ask about three areas: personal income tax, children's benefits, and then I'm going to talk about public debt charges.

I'm wondering if you can give me some perspective about why you diverged from the budget in terms of how much personal income taxes the government will be collecting over the next couple of years. I do note, it's a significant increase in personal income tax collection, from $135 million to $177 million. It's a significant increase in income taxes, but yours is even higher. I'm wondering if you can comment on that, please.

[Jean-Denis Fréchette]

I will ask Scott Cameron to answer your question. He has 40 seconds. Somebody else will provide more information after that.

[Scott Cameron, Economic Advisor, Analyst, Economic and Fiscal Analysis, Office of the Parliamentary Budget Officer, Library of Parliament]

That should largely reflect just the different nominal GDP bases and, within nominal GDP, the different shares accruing to households versus firms. The difference between us, the delta between us and Finance, would probably be attributable to its risk adjustment, which is spread proportionally over tax revenues.

Across those tax categories, you have to lose $6 billion from somewhere. We're not sure exactly where, but they have mentioned in the past that it's proportionally across, so about a $1-billion difference over the five years is what you'd expect from the forecast adjustment that Finance does.

Ours is an unadjusted economic forecast underlying the fiscal.

[Lisa Raitt, Conservative, Milton, ON]

Thank you.

In terms of the children's benefits, again we see a divergence, whereby you have children's benefits increasing, if I take a look at it, as you go through to 2020-21, but yours is actually lower than what is anticipated in the budget.

[Scott Cameron]

Because this is quite a new program, we don't have any historical data to work with yet, and we have a very limited subset of tax forms and CRA data to work with, compared with the Department of Finance. I would attribute most of those differences, then, just to our not really knowing what we're working with yet in terms of actual households, income distributions, and how the take-up will be amongst the different income brackets.

I think we're within a very small range, basically, in the difference between us and Finance. I don't know the exact percentage, but it's fairly close, I would say. Given that it's a $22-billion program, I think being within $300 million or $400 million.... I would say we're roughly the same as Finance.

[Lisa Raitt, Conservative, Milton, ON]

For the public debt charges, what is the interest rate assumption that you applied?

[Scott Cameron]

In appendix A, on page 18, we have the outlook for the three-month treasury rate and the 10-year government bond rate. We have an equation that maps the duration of the bonds onto the effective rate that we apply to the government debt. We look, then, at borrowing in the market and how the effective balance between those short- and long-term bonds maps into the rate that the government ends up paying on their debt.

[Lisa Raitt, Conservative, Milton, ON]

The Library of Parliament kindly provided some preparation materials for today that indicate that a sustained one point percentage increase in interest rates increases public debt. I'm wondering, since we had the governor in this morning and he talked about our returning to economic capacity in 2017, which one would assume could include an increase in the Bank of Canada interest rate, whether that was taken into account in this.

[Scott Cameron]

Chris will be able to tell you the exact kind of path of policy rate that we assume, but certainly we have the effective interest rate on government debt increasing over the outlook period.

[Chris Matier]

Our assumption is that the Bank of Canada doesn't start increasing interest rates until the end of 2017. I think this would be consistent with the accommodation of fiscal policy. The Bank of Canada has used the Department of Finance's estimates of the economic impacts on the economy. Those estimates are based on the assumption that interest rates don't change. Perhaps implicitly that is also the assumption underlying the monetary policy report, but we don't know that for certain.

[Lisa Raitt, Conservative, Milton, ON]

You've done a costing of how much changing the policy on old age security is going to be costing in the future. Can you give us an insight into what that is?

[Scott Cameron]

In terms of its overall sustainability picture, which is the way we like to evaluate the overall impact of these policy changes, the government debt path was sustainable before the change and continues to be sustainable after. The cost in the first full year of the program, 2028-29, I think we had at $11.2 billion, but as a share of GDP that's only about 0.35%.

That is the most costly it ever gets to be, because after that we start to see the demographics and the parameters of the program move in such a way that the costs decline very quickly, from about 0.35% to 0.2%, down to even as low as 0.18%, I think. I don't have it in front of me, but you see a kind of downward path.

That partly leads to the graph we have toward the end of the report, in which you see the debt declining over time. The way the demographics and program costs move is such that you start to get quite a quick fiscal consolidation, once we get over those humps in the demographics.

[Lisa Raitt, Conservative, Milton, ON]

In terms of direct program spending—

[The Vice-Chair, Conservative, Ron Liepert]

Time's up. Thank you.

Monsieur Caron.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you, Mr. Chair.

I would like to thank all the witnesses for meeting with us here and for the work they have done, which is extremely useful.

I would like to start with a few remarks, particularly to respond to Mr. MacKinnon's comments.

I would call the current approach to budgeting policy “Paul Martin 2.0”. This is where we can agree. In fact, this increasingly reminds me of the budgets tabled by that former finance minister.

We are not talking about prudence here, but rather about forecasts that are miles apart from what can be projected. Paul Martin calculated deficit forecasts by overinflating tax expenditures. I am talking about all the tax credits and revenues that the government hands out through tax measures.

In this case, things are being done differently, namely by inflating or lowering the estimates. As you yourself noted, we are talking about a difference of $40 billion per year for the projected level of nominal GDP. We even go up to nearly $50 billion per year in 2016-17. We are then back in the same situation. We are no longer talking about prudence now. This is my personal opinion, but I think we are witnessing a deliberate strategy intended to change people's expectations. An overly large deficit that calls for prudence is announced, but ultimately the result at the end of the year is somewhat better than what was originally announced. People are consequently relieved. In addition, this makes the government look good and eases its conscience.

Not being prudent enough is problematic, but being overly prudent becomes a deliberate political strategy. Since I know what your role is, I will not ask you to comment on these issues. However, since you are still in contact with the Department of Finance, I would like to know where this extremely conservative estimate of nominal GDP comes from.

Moreover, the contingency fund totalled $3 billion in the past. This amount was reduced to $1 billion under the Conservatives. However it has now inflated to $6 billion. Based on your conversations and the information you receive for your analysis, could you tell me where these figures come from?

I had the opportunity to ask the Minister of Finance, Mr. Morneau, some questions, but I never received an answer. It looks like these figures just fell from the sky.

[Jean-Denis Fréchette]

Thank you for the question.

In our case, we are not saying that it is deliberate, but rather that it is excessive. I understand your point. As I said before, that created certain expectations. It is quite clear that inordinately underplaying GDP growth for the next five years will create lower expectations. Then, with the results that can be achieved, expectations can be raised.

In terms of the information we have, we published some interesting data two weeks ago, shortly after the budget was released. We showed the private sector projections for the nominal GDP over a period of five years. There was whole lot of confusion on the subject. They spoke of both overestimation and underestimation. As for us, we were saying that the first and second years of their projections had been continually underestimated over the years, that is, for 40% of the time. This is really something to consider.

I would now ask Mr. Moskari to take it from here.

[Mostafa Askari]

Thank you.

We do not really know why the Department of Finance decided on an adjustment of $40 billion. That said, governments have used private sector forecasts for 20 years to give fiscal forecasting an element of independence.

However, when the adjustment is very large, this element of independence disappears completely. Moreover, when we change a significant variable, such as the nominal GDP, the other variables from private sector forecasts become inconsistent with the level of GDP. In short, such forecasts are problematic.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you.

I will probably come back to this, if I get the opportunity to participate in another round of questions.

I would like to talk about transparency. Where do the figures and parameters used by the Department of Finance come from? We do not know. This may raise questions about transparency and accountability.

You raised another issue about transparency or the lack thereof. In fact, you raised two issues. One of them was partially addressed. I wonder if you are satisfied with the answer you got from the finance department, following your complaint about not having all the numbers.

The other issue is the impact of the fact that the government shortened the time horizon for its cost estimates to two years from five years and the repercussions this will have not only on budgeting, but also on your work as Parliamentary Budget Officer.

[Jean-Denis Fréchette]

Thank you for your question on transparency. That is a good question. I would like to take 30 seconds to explain what we went through regarding transparency during that time.

When we saw that the budget contained only a two-year plan and not a five-year plan, as is normally the case, we were surprised. We had no idea this would happen.

The second surprise was actually pleasant, because we asked for the figures and we received them for a five-year period. Transparency certainly became more real than it was before.

The third surprise was to be told, when we received these figures a few days later, that we could not use them. We went through something of a cycle, namely pleasant surprises, less pleasant ones, and finally, following an official request, obtaining the data.

There may have been some lack of transparency at the outset. After that, the government realized that it was not being transparent. The fact that we obtained the figures we asked for satisfied us because that enables us to inform Parliament on the state of the five-year plan.

That said, pretty much everyone should perhaps learn something about transparency, whether we are talking about the government or anyone doing financial planning. Over the coming months we will see in the updates and in other documents whether that element of surprise will be eliminated and whether the PBO will always be happy to have those figures.

Mr. Matier can answer your previous question right away, if you like.

[Chris Matier]

I have spoken to Department of Finance officials, and I don't have direct knowledge of where the $3 billion came from. My guess is that it is essentially a holdover from the $3-billion contingency reserve that was used by previous governments, and it was just easily mapped into roughly $20 billion or $3 billion on federal revenues into the current forecast adjustment.

On your point about prudent forecasts in the budget, our reading is that the use of the forecast adjustment isn't really for prudence. At least, I couldn't find an explicit mention of that in the budget. Rather, it is about taking account of the downside risks. If you look back at the 2015 fall update and the February Canadian economic outlook, that is the way the language is presented, which is what you want to do as a forecaster. It is in that sense that we thought this forecast adjustment, specifically in the first year and the second year of the horizon, was excessive, and that this, at least on the surface, wasn't really about prudence. It was to balance the risks. You would really have to have a very negative scenario with a high probability of its being realized to justify a downward adjustment of $40 billion like that.

[The Vice-Chair, Conservative, Ron Liepert]

Thank you.

We'll go to Mr. Sobara, for seven minutes.

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

Thank you, Mr. Chair.

I wish to quickly speak about something Mr. Caron mentioned, about this being potentially Paul Martin 2.0. I think if we are entering a period of Paul Martin 2.0 here in Canada, and for the next several years we see strong economic growth and a number of good things, the strengthening of CPP and working with the provinces on a number of matters, I think that's a great thing for Canada and for my riding of Vaughan—Woodbridge. So I will applaud that. Thank you, Mr. Caron.

On the issue of prudence, in a former lifetime I was a bond analyst, and one of our jobs was to look at tail risk and to look at what may happen on the downside. I think if you look at last year and the last 18 to 24 months, and you've seen where commodity prices have gone, and you continue to see a transition with the Chinese economy going from an industrial-like economy to a consumer-driven economy, and some of the challenges that we've seen in volatility in emerging markets, the 2016 budget contained an amount of prudence, the $40-billion adjustment to nominal GDP. From my point of view, it is actually being very prudent to taxpayers. It's being prudent in terms of the economy and in terms of making sure that we look at it from the big-picture approach, but it's also taking into account the issues at hand in terms of the volatility. I do want to put that on the record, and I'd be happy to hear your comments.

I also wanted to ask Mr. Cameron, again, regarding the issue in terms of the adjustment in old age security and GIS from age 67 to 65. Can you just reiterate what that actually meant on a “per cent of GDP” basis going out on that, because I think it's important for us to note?