Finance Committee on April 19th, 2016

[Ziad Aboultaif, Conservative, Edmonton Manning, AB]

We've seen the falling of commodity prices, which basically stunted resource investments in Canada at large, and specifically in Alberta and other places. That led to a lower Canadian dollar. Do you expect, with this scenario, with the status quo, that you'd expect that there would be other investments coming in because of the lower dollar, which we don't see? That's a puzzling scenario I don't think we have even anticipated.

What measures can we take from generic knowledge that in this case you have to lower business taxes in order to attract investment, which is what the government had proposed is not going to happen from the budget, or unless a miracle happens somewhere around the world that is going to enhance the Canadian economy? Would you encourage lowering business taxation across Canada?

[Stephen S. Poloz]

I won't comment on a specific fiscal initiative such as that. I would just say that what we're expecting in our outlook as outlined in the MPR is that investment in the non-energy, non-resource, part of the economy is primed and ready to pick up strongly. Our surveys tell us that people are almost at capacity, and that they need to upgrade their equipment. The order book is strong from the growing export sales. Therefore, all the ingredients are present for the second half of this year to start stronger investment in the non-resource economy.

I've no doubt that this will be participated in by foreign investors as well, especially because, as you mention, with the dollar lower it makes that sort of investment a stronger value proposition for a foreign investor than it would have been while the dollar was stronger. For us, what matters is that the investment happens, new equipment happens, productivity rises, and our capacity increases, and more jobs are created. That's the magic combination that we're forecasting to be picking up speed now. That's what we'll be watching very closely, and foreign investment will be part of that picture.

[The Chair, Liberal, Wayne Easter]

Thank you, both. We're quite over time there.

Mr. Caron and Mr. Sorbara, we'll split the remaining time, if we could, between the two of you.

Go ahead, Mr. Caron.

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

Thank you.

I do have one quick question, but the answer might be a bit longer. When we talk about the inflation, target inflation, negotiations, right now, you said it would take a very high bar to actually change it from the 2%. But you alluded to the fact that right now the definition of that CPI is actually under consideration. Right now the CPI that's being used by the bank excludes the most volatile elements, which has its advantages and its drawbacks as well. One big drawback that I can see is that in that evaluation you're basically evaluating the cost of living that is not actually experienced by the average Canadian.

My question is, besides the status quo, which is a possibility, what are you exploring in terms of possibilities? What are the options that you're currently looking at? Also, can you comment quickly on the benefits and drawbacks of what you're looking at?

[Stephen S. Poloz]

Let me just start by saying that the CPI is still the central measure of inflation. As you say, it's the one that captures what everybody buys. When we're talking about different alternatives, what we're talking about is the operational guide, which tries to see through some of the noise.

Carolyn, do you want to talk about the candidates?

[Carolyn Wilkins]

Sure. There are a number of different candidates. We originally chose CPIX because it was a way to measure a core that we focus on most, that excludes volatile items. What we've seen over the last couple of years is that the usefulness of this measure as an operational guide—we can see through the volatility and the total CPI index and set monetary policy to see through that so we don't change interest rates for something that will be over by the time it has an affect. That's what we're doing.

The usefulness of that has declined for a number of reasons, which we've talked about in research that's been published. So we're looking at other measures. Some of them are highly statistical measures that use more complex econometric techniques. We're also looking at measures that crop.... Instead of excluding the same items every time, they crop the items that increase the most and those that increase the least in any particular period, in doing statistical tests to see which ones perform the most, the best, and will serve us well. That research is ongoing but a lot of it's on our website, if you want to have a look.

[The Chair, Liberal, Wayne Easter]

Thank you.

The last question goes to Mr. Sorbara.

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

Governor, you commented on the three tools, if I could call them that: monetary policy, fiscal policy, and structural change. On the fiscal policy side, your estimates from the April monetary policy report, incorporating the budget and fiscal measures in the budget, was for about 0.5% boost to growth in 2016, which is line with the finance department, and 0.6% boost for 2017, which is under by 0.4% from the finance department's estimate of 1.0%. So there's a slight change there.

I want to touch on one thing that you had mentioned a few months ago about infrastructure investment being an enabler for long-term economic growth, and you had commented on that to the parliamentary secretary as well; how important investment in infrastructure is to enabling long-term economic growth and improving our productivity.

In that vein, in terms of the productivity front, and with reference to your comment on structural changes, what measures or areas could you see improving the Canadian economy to deal with the structural changes that you may have mentioned? I know you mentioned free trade. Could you comment on the efficacy of our tax system, not on specifics?

[Stephen S. Poloz]

Okay. I'll be brief, Chair. That could keep us busy for quite a while.

To begin with a factual. First, the estimates that you referred to are the effect of the budget on the outlook, on growth rates, whereas the effect that was described in the budget and in the footnote—I think footnote 8 or somewhere around there in the MPR—is that the effect on the level of GDP is 0.5% the first year and 1.0% the second year. In growth rate terms it's roughly 0.5% and then another 0.5%. So that reconciles the numbers you discussed. They are all the same. It's level versus growth rates.

Second, I had talked previously about infrastructure as an enabler of growth. To me infrastructure can be a fluid concept. I guess it's any kind of investment that can be linked to future potential economic growth. So there's a wide range of examples from the most obvious, things like transportation—bridges or high-speed trains or rail or airport investments—or day care facilities, which enable parents to re-engage in the workforce, which gives us more potential. All those kinds of things are investments that can add to our potential growth and therefore good things.

In terms of the third leg of the stool, which is structural reforms, it's things that promote labour market mobility among provinces that relates to interprovincial trade. The labour mobility is not perfect, nor has it necessarily helped. There are policies that could make it move faster when we're trying to adjust to things.

Of course, more generally, as we discussed earlier, interprovincial free trade would help our economy adjust and perform much more efficiently.

Those are just some ideas, Chair. There are lots.

[The Chair, Liberal, Wayne Easter]

Thank you very much. We'll have to end there. On behalf of the committee, Governor, Deputy Governor, thank you for your presentation and your answers to questions. Beyond that, thank you, as well, for what you do for the stability of the Canadian economy, in terms of monetary policy. Thank you once again.

We'll suspend for about three or four minutes while the parliamentary budget officer comes forward.

[The Chair, Liberal, Wayne Easter]

Order. During this session, we'll basically be doing two studies or two orders of reference with the parliamentary budget officer. We'll break it into two sessions. First, we'll deal with Standing Order 108(2), the study on economic and fiscal outlook. In the second half of the session with the parliamentary budget officer, we will shift to Bill C-2, an act to amend the Income Tax Act, and comments from the parliamentary budget officer and staff in that area.

I understand, Mr. Fréchette, you have one opening statement that will cover the two. To introduce who is at the table: parliamentary budget officer, Jean-Denis Fréchette; Mr. Askari, assistant parliamentary budget officer; Mr. Matier, senior director, economic and fiscal analysis and forecasting; Mr. Cameron, economic adviser and analyst, economic and fiscal analysis; and Mr. Jacques, director, economic and fiscal analysis.

Mr. Fréchette, the floor is yours. It's been a long time since we used to work at the agriculture committee together.

[Jean-Denis Fréchette, Parliamentary Budget Officer, Library of Parliament]

Thank you, Mr. Chair. It's the first time you called me Mr. Fréchette so I'm really happy with that.

Mr. Chair, vice-chairs, and members of the committee, thank you again for the invitation to appear and discuss our April 2016 Economic and Fiscal Outlook, which was released today.

As you have already mentioned, today I am joined by a number of members of my team, who will be pleased to respond to your questions.

Since our November 2015 report, the outlook for the global economy has deteriorated further and commodity prices over the medium term have been revised lower. Despite this weaker external outlook, we anticipate that the combination of fiscal measures in budget 2016 and the accommodative monetary policy will help bolster the Canadian economy.

We project that growth in real GDP will rebound to 1.8% in 2016 and then rise to 2.5% in 2017. Growth in the economy is then expected to moderate over 2018 to 2020, reflecting the tapering of fiscal measures and the normalization of the monetary policy.

The level of nominal GDP, which is the broadest single measure of the tax base, is projected to be almost $20 billion lower each year on average between 2016 and 2020 compared to our November report. However, relative to the government's planning assumptions for nominal GDP in budget 2016, our projection is on average $40 billion higher per year over 2016 to 2020. The difference is most pronounced in 2016 and 2017, reaching close to $50 billion in those years.

Our November 2015 fiscal outlook provided an independent status quo planning assumption for the start of this 42nd Parliament. We have updated our fiscal outlook to include measures announced in budget 2016 as well as measures announced prior to the budget.

We estimate that there was a small surplus in 2015-16 and we are forecasting a budgetary deficit of $20.5 billion in 2016-17, which is primarily attributable to the introduction of new measures since the government's fall update.

The deficit is then projected to rise to $24.2 billion in 2017-18 as the result of moving to the seven-year break even mechanism for EI premium rates, as well as increases in direct program expenses.

Over the remainder of the planning horizon, we project the deficit to decline to $12.4 billion based on the government's forecast that direct program expenses, in particular the operating costs of departments, will remain flat over the period from 2017-18 to 2019-20.

Compared to budget 2016, our outlook for budgetary deficits over 2016-17 to 2020-21 is $4.5 billion lower on average. The average difference is roughly in line with the $6-billion fiscal impact of the government's adjustment to the private sector forecast of nominal GDP.

Budget 2016 highlights the government's commitment to returning to balanced budgets and to reducing the federal debt-to-GDP ratio to a lower level by 2020-21. To provide a broader perspective on the sustainability of the government's finances, we have extended our projections beyond 2020-21 to show the long-term trajectory of federal debt relative to GDP. Our projections show the federal debt-to-GDP ratio declining continuously over the next several decades under current policy. This indicates that the federal fiscal structure underlying budget 2016 is sustainable over the long term.

We would be pleased to answer your questions concerning our economic and fiscal outlook, or any relevant matter such as Bill C-2 or, again, our current or future mandate.

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Thank you.

If we could, committee, because I think you have different people to come to the fore for Bill C-2, could we keep this round of about 40 minutes or 35 minutes to the economic and fiscal update?

Mr. MacKinnon, for seven minutes.

[Steven MacKinnon, Liberal, Gatineau, QC]

Mr. Fréchette, I want to thank you and your staff for being here today, and especially for your hard work and continued support of the members of Parliament. You are doing excellent work. Parliamentarians and all Canadians very much appreciate your efforts. Your contributions to our analyses have become invaluable.

I'm going begin with the burning question.

There is an inconsistency between your analysis and that of the Bank of Canada, which is more in line with the projections from the Department of Finance when it comes to fiscal multipliers and the impact that the various government measures will have on Canada's economy as a whole. I wonder if you could comment on that, and please, don't hold back.

[Mostafa Askari, Assistant Parliamentary Budget Officer, Office of the Parliamentary Budget Officer, Library of Parliament]

Thank you for the question.

Indeed, there are always some discrepancies in the multipliers in the various models. Our multipliers are a little lower than those of the Department of Finance. Representatives from the Bank of Canada said they used the same multipliers as the Department of Finance. Accordingly, there is difference in terms of the level of multipliers and the impact on the economy.

[Steven MacKinnon, Liberal, Gatineau, QC]

What I was really asking for was an explanation for the discrepancy between your assessment of the multipliers and that of the Department of Finance. How do you explain this discrepancy regarding the impact of the budget measures?

[Mostafa Askari]

We use different economic models. Every forecaster uses different economic models, and the assumptions are different. There is usually a difference between the various multipliers, depending on the model used. I don't really have a more specific explanation than that. It is because of different models.

[Steven MacKinnon, Liberal, Gatineau, QC]

There are variables in any model. In your analysis, are there any variables that would underestimate the impact of the budget measures, or conversely, are there variables in other models that might overestimate it? I am try to identify where the discrepancy lies.

[Jean-Denis Fréchette]

Before I hand the floor over to Mr. Matier, who will provide more details on this, I would like to say that the use of models and multipliers is more a question of judgment than details. The same thing goes for our forecasts, which are different than the Department of Finance's forecasts. That being said, that department has a lot more people working for it, and their model is much more sophisticated than ours.

Mr. Matier will be able to provide all the details in that regard.

[The Chair, Liberal, Wayne Easter]

Mr. Matier.

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

We don't have the detailed results from the Department of Finance, but we suspect that there are differences in terms of the leakages in the economy. That is to say when there is an increase in aggregate demand that can be met in several ways through increased imports into the economy, a drawdown in inventory stocks, or increased production. As well, if you're looking at it from the household perspective, increases in disposable income through, let's say, lower taxes, that increase could either flow through into increased household savings, or increased household consumption. So the models will differ in terms of their sensitivities to these leakages.

As well, I think it would be helpful to see the Bank of Canada's more detailed analysis to which the governor referred today. While they do say that they believe the estimates to be reasonable, I think our estimates in terms of the impacts on real GDP in terms of the multipliers are fairly close to the department's in the first year. Anyway, they're identical, and in year two we're talking about an impact of 0.8% versus 1%. There are some differences on employment, and again the sensitivity to how the labour market responds to changes in aggregate demand and output will also be affected. I think in terms of this debate as an economist it's fascinating. I think it would be a very helpful contribution to see the Bank of Canada's detailed results, as well as their literature review on this.

Thank you.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you very much.

One area where there seems to be no difference of opinion is the fact that investments at various levels, particularly in infrastructure, will help boost growth in Canada. Investments will translate into better performance for the Canadian economy than if we don't invest. Would you agree?

[Jean-Denis Fréchette]

I agree. We also talk about this on page 2 of our report, where it states that this increase is mostly attributable to $13.2 billion of new measures.

You were talking about forecasts, but I think we are a little more optimistic than the Department of Finance. That may not be the case for employment, but that is definitely the case when it comes to economic growth.

[Steven MacKinnon, Liberal, Gatineau, QC]

We appreciate hearing you say it directly, Mr. Fréchette.

I do not have much time left, but I would like to go back to what I would call the prudence issue.

The previous government did not show such prudence when it presented its budgets, unlike Mr. Martin, for example, who did so during the 1990s and 2000s.

Our Minister of Finance wants to go back to exercising prudence. You are clearly saying that he might have been a bit too prudent with regard to growth. He is underestimating the country's economic opportunities. I would argue that being prudent when making budget projections is an excellent tool for any fiscal manager, such as our finance minister.

Could you comment on the return to prudent budget projections as compared to the practices of the previous government? How do you feel about this issue?

[Jean-Denis Fréchette]

I will not make any comments about the previous government.

I will talk about the report. We found that being prudent is a good thing. However, excessive prudence is undesirable because it creates expectations or a certain long-term outlook, which could be just as harmful as not being prudent at all.

That is essentially our message. We must be prudent, but excessive prudence is not desirable, and that is what we said. Our calculations are made with a reasonable level of prudence. I am talking about our results on growth and the deficit. Our calculations differ by about $6 billion over the next few years, compared to the department's numbers. That is primarily due to this excessive prudence.