Finance Committee on Oct. 30th, 2018

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

Thank you, Mr. Chair.

The Bank of Canada has raised rates five times in the last year and a half or so, and you're about 75 basis points from hitting the lower bound of your neutral policy rate. Obviously the rise in rates connected with the bond market and so forth impacts interest-sensitive sectors within the economy. My estimate is that inflationary expectations are quite well contained now.

As my colleague mentioned, you have removed the word “gradual”. Some economists have said it means nothing. Others have said it means something. I think it means, Governor, that you don't like to give forward guidance in terms of data points, data plots or anything like that, like the Fed does.

Can you comment on the interconnectedness, and how we can avoid going too fast in raising rates and doing damage to interest-sensitive sectors, while still keeping inflationary expectations well contained?

[Stephen S. Poloz]

Our situation, as I mentioned a moment ago, is that the economy is approximately at its capacity. It is also growing at its capacity rate. Inflation is on target, and unemployment is at a 40-year low. We have all the readings we're looking for, except that interest rates are still extraordinarily low by historical standards and certainly relative to our notion of neutral.

But you're right that getting from here to neutral—as we've said many times today—is a process in which we need to evaluate continuously how the effects are playing out. It's certainly not going to be a rapid process. It's a process, though, and we wanted to make sure we weren't locked into a perception that we would move every second meeting. That's what the market said that “gradual” meant.

We thought that it might mean that, but it could easily not mean that, so we needed to clarify. We defined the pace more carefully, so that people would understand what we would be looking at. The most important thing is how households are responding. That's the most interest sensitive part of the economy, given the level of debt. We will be analyzing that in every which way, and in much detail. At each time, we will be offering more and more insight into how people are responding.

Of course, if we move too quickly, the economy will slow below its potential growth rate and that will put downward pressure on the future outlook for inflation. That's not what we want. That would mean “slow down”. That's what that would tell us. But if the economy continues to perk along at this stage and is adding to excess demand, then we would become concerned about inflation pressures down the road. We're at that point where we need to balance the risk of going too quickly against the risk of going too slowly, and there are a number of unknowns in that grey zone in the middle. We will be monitoring each of those carefully and forming our judgments at each meeting.

[The Chair, Liberal, Wayne Easter]

With that, thank you for your presentation and answering our questions, Governor and Deputy Governor.

We will suspend for about five minutes to bring up the witnesses from the Office of the Parliamentary Budget Officer.

[The Chair, Liberal, Wayne Easter]

We can reconvene.

We have, from the Office of the Parliamentary Budget Officer, the Parliamentary Budget Officer, Yves Giroux. This is his first time before this particular committee. Welcome, Yves.

With you, we have the senior director, economic and fiscal analysis, Mr. Matier, and Mr. Shaw, director, fiscal analysis.

Just to explain, bells will ring at a not too distant time and members will have to leave to vote. There will be a 30-minute bell. Hopefully, if we get permission from all parties, we will stay here until about eight minutes before the vote. Then we will come back following the vote and finish our questioning for a period of time.

I know that at seven o'clock tonight, there are also briefings on the budget implementation act, and there's a vote on the NATO Parliamentary Association that people will want to vote on, at 6:30, so we can rotate in and out of that. It's a little complicated tonight.

Welcome, Mr. Giroux. The floor is yours.

[Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer]

Thank you.

Good afternoon, Mr. Chair, vice-chairs and members of the committee.

I would like to thank you for the invitation to appear before you today to discuss our October 2018 economic and fiscal outlook, which we published last week, exactly a week ago.

Consistent with the PBO's legislated mandate, my office produces an independent economic and fiscal outlook and today, as you mentioned, I am joined by Chris Matier and Trevor Shaw. The three of us will be happy to respond to your questions.

I would first like to start with the economic outlooks.

Canadian economic performance remains solid. Fuelled by strong export growth, the Canadian economy continued to operate above our estimates of its potential output in the first quarter of the year.

We expect growth to slow as the economy comes to rely less on consumer spending and housing, and more on business investment and exports. We project real GDP growth to decrease from 2.1% in 2018 to 1.8% in 2019 and then to 1.5% annually through 2023.

We continue to monitor macroeconomic developments and risks to our outlook. In our October report, we highlight recent tariff changes, Canada's investment climate and household financial vulnerability.

We judge that the risks surrounding our economic outlook are broadly balanced. In terms of downside risks, we continue to believe that the most important risk is weaker export performance. On the upside, the most important risk is stronger household spending.

Regarding the fiscal outlook, our fiscal outlook takes into account recent policy changes in Canada and abroad. The report highlights the revenue implications of recent Canadian tariffs and U.S. corporate tax changes. Furthermore, based on some preliminary assumptions, our fiscal outlook reflects the recent change in the government's discount rate methodology used to measure its long-term liabilities.

For the current fiscal year, 2018-19, we project that the federal budgetary deficit will be $19.4 billion, which amounts to 0.9% of the Canadian economy. Over the medium term we project the budgetary balance to reach a deficit of $9.4 billion, or 0.4% of GDP, as revenues outpace growth in the economy and the government's operating expenses remain restrained. In addition, we project that federal debt will decline to 30.3% of GDP in 2021, which is 1.5 percentage points below the government's official debt anchor.

Given the possible scenarios surrounding our economic outlook, and without further policy actions, it is unlikely that the budget will be balanced or in a surplus position over the medium term. However, we estimate that it is likely the government will meet its debt anchor commitment of bringing the debt-to-GDP ratio below 31.8%.

My colleagues and I would be pleased to respond to any questions you may have, and I am sure you have a few regarding our economic and fiscal outlook or other PBO analyses.

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Giroux.

We'll go to five-minute rounds, given that we're going to be tight on time.

Mr. Fragiskatos.

[Peter Fragiskatos]

Thank you, Mr. Chair.

Thank you, Mr. Giroux, for being here.

I was very interested in the report that you recently released. You say that U.S. tax cuts will not have a material impact on Canada's investment climate. I wonder if you could expand on that point.

Tell us how you arrived at that conclusion, specifically, because it differs from accounts that we have heard at this committee in our pre-budget consultations, both here in Ottawa.... I certainly did the eastern Canada trip and I know my colleagues did western Canada. I can't speak for western Canada, but I know this was a common theme, the concern about the U.S. tax cuts that Mr. Trump introduced a number of months ago, and what that means for investment in Canada.

[Yves Giroux]

The first point I'd make is that the U.S. has reduced its tax rates, but they are bringing them into line with Canada's. Over the last several years the U.S. tax rates for corporate income tax were significantly above Canadian tax rates.

Also, the U.S. tax cuts are temporary in nature. They will be phased out over a five-year period, and that, to an economist, doesn't have the same impact as permanent tax cuts. Businesses know that there are incentives to shift income and some investments in the U.S. when the tax rates are being lowered. When it's temporary, however, it doesn't have the same powerful incentive.

I'd also add that marginal effective tax rates are one element in businesses' decisions to make investments, one of many factors. One can think of the availability of labour, the quality of the labour force, their prospects for profits, obviously, also the macroeconomic environment, as well as trade certainty or uncertainty. These are a few of the many factors, including tax rates, in firms' decisions.

Given all this, we looked at the evidence. Was there evidence suggesting that there was a reduction in investment in the Canadian economy? We looked at foreign direct investment in the first half of this year and found that foreign direct investment in Canada has remained roughly at the same level as the average of the last couple of years. Furthermore, business sentiment is still positive in Canada despite the small difference in tax rates.

One also has to put the tax cuts in their broader macroeconomic perspective. Canada has a deficit of less than 1% of GDP, while the U.S. has a deficit of more than 3.5% of GDP. The debt-to-GDP ratio in the U.S. is rising and is slated to hit 100% over the next five years, while the Canadian debt-to-GDP ratio is going down. All that points to further increases in tax rates in the U.S. or a reduction in expenditures, because eventually something has to give.

Finally, if you'll allow me to go back to the testimony that this committee has heard, my bet would be that you heard testimony from business owners or business councils or the Canadian Council of Chief Executives. Business owners are representatives of business owners, and I would say they probably have a vested interest in arguing for lower tax rates.

[Peter Fragiskatos]

I appreciate your objectivity, then, Mr. Giroux.

I see that I have about a minute left, so I will put to you the following question. The TD Bank a number of months ago issued an opinion saying that if we were to follow the U.S. in significantly cutting our corporate tax rate, doing so would jeopardize debt levels in the future and that they expect the U.S. will run into debt problems as a result of the measure introduced by the administration.

Would you expect the same sort of danger to result here in Canada, if we significantly cut corporate taxes? Could doing so impact our debt levels in a very drastic way?

[Yves Giroux]

To answer that question, I would probably go back to the fiscal sustainability report that I published last month, in which we looked at the federal finances over the next 75 years. I will spare you all the details, but the conclusion of the report is that if we maintain current policies over the next 75 years—and this is a projection, so it's purely an exercise—we show that there is fiscal flexibility of about $29 billion at the federal level. If the government, then, were to reduce tax rates for businesses, there would still be sustainability over the long term in the absence of any other policy action or any economic shock over the next 75 years.

That being said, we know that things will not remain static over 75 years. This is just for illustrative purposes, to indicate which governments or jurisdictions have fiscal problems and which don't have fiscal pressures.

[The Chair, Liberal, Wayne Easter]

Mr. Richards.

[Blake Richards]

Thanks, Mr. Chair.

I appreciate your being here.

I want to ask you a little bit about an issue relating to the so-called dividends that the Canada Mortgage and Housing Corporation is paying out to government revenues—almost $6 billion over the last couple of years. What that essentially is telling us is that we're seeing homeowners paying far bigger premiums than necessary and are seeing $6 billion flowing to government. It's almost like a taxation, I suppose, in a way.

What I wanted to ask you about, though, taking a look at that almost $6 billion—$5.7 billion, anyway—is what that money would look like in the hands of taxpayers. What would it look like circulating in the economy rather than in the hands of the government?

I'm just curious as to your thoughts and your opinion on that.

[Yves Giroux]

Certainly, reducing the revenues of a Crown corporation such as CMHC and making sure that this reduced revenue is returned back into the hands of those who pay premiums would be akin to a tax cut.

What would the impact of that be? Returning, let's say, $5 billion to households, businesses or a combination of both would provide stimulus to the economy. I haven't quantified that, obviously, but that's something we can probably relatively easily calculate and determine.

[Blake Richards]

You're obviously saying it would provide some stimulus to the economy. It likely would also increase tax revenue, I suppose, as a result. Would it not?

[Yves Giroux]

Yes, probably.

[Blake Richards]

All right.

Let me ask about some of the differences we're seeing in the tax rates for businesses and corporations here in Canada as compared to the United States. Your report said that we receive about $500 million less in tax revenue on average as a result of some companies shifting their investments out of Canada and into the United States. Do you see that continuing to grow? What kind of impact do you think that is going to have on the economy?

[Yves Giroux]

We believe that there will be some profit shifting, and the amount that you mentioned is in our report. That amounts to about 1% of corporate income tax revenues, overall, in one year, as a result of some profit shifting, as you indicated. That's based on the current policy regime in the United States. If this policy regime in the States were to be made permanent, which we have not assumed, it would probably increase the profit shifting out of Canada and into the U.S. if businesses believed that this was to be permanent.

It's hard to quantify it exactly, but it certainly would increase the shifting away from Canada and into the U.S.

[Blake Richards]

When you talk about this kind of situation, obviously, larger corporations generally tend to have a bit more of an ability to take advantage of those kinds of opportunities, to shift the profits or whatever, to move their operations across borders and things like that. Small businesses are obviously not in a position to be able to do that, at least not often. It's certainly not as easy for them to be able to do that.

When you get that kind of a gap in tax rates and things like that, would you say that those kinds of policy differences would be something that would have a disproportionate impact on small businesses?

[Yves Giroux]

It's quite clear that mom-and-pop shops will have absolutely no capacity to shift their taxable income from one country to the other. The type of profit shifting that we are anticipating as a result of the U.S. tax cuts will be done in vast majority by multinationals that have operations in both countries. Even small and medium-sized businesses that have operations solely in Canada will have no opportunity to shift taxable income to the U.S.

To your question, do I expect this profit shifting to disproportionately benefit multinationals or that, on the opposite side, small businesses will not be benefiting from that? Yes, it is clearly the case, I believe.

[The Chair, Liberal, Wayne Easter]

Thank you. We're out of time.

Mr. Julian.

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

Thank you very much.

Mr. Giroux, you and you office and your predecessor are heroes, I think, to many Canadians, particularly because of the fight the PBO has waged to get the information from the Canada Revenue Agency. It allows us to get a good estimate of the tax gap in Canada—the money that's lost to overseas tax havens, the money that's lost to tax loopholes. The PBO waged a five-year fight to finally get that money. The previous government wouldn't permit it. The current government wouldn't permit it. Thankfully, the PBO finally said, “We'll take you to court unless you give that information.”

At the time, your predecessor, Mr. Fréchette said the time that it would take to actually produce a tax gap report depends on the quality of the information we receive. This report would be vital, I think, for the next federal election, when Canadians get a chance to look at the fiscal platforms of each of the parties. He said that if the Canada Revenue Agency gives us a paper version of files in boxes, it's going to take a lot longer than if there's a transfer of legitimate electronic information.

I think Canadians would be interested in knowing what quality of information you have received from the Canada Revenue Agency, and what you think in terms of a timeline to produce this important report. I think a lot of Canadians are waiting for it and want to know how much the federal government loses to wealthy tax dodgers and tax havens overseas.

[Yves Giroux]

That's an interesting question, given the fight that my predecessor entered into with CRA.

On the quality of data, my office received a first batch in February, and contrary to what people were fearing, we didn't receive boxes and boxes of paper documents. We received USB keys that were secure and protected despite not containing confidential taxpayer data. It was very secure and there was quite a bit of information.

We looked at what we received and determined that we need some more refined information and data from CRA. We have made the request and we have received, so far, very good co-operation from CRA on getting the information that we think will be useful in determining the tax gap.

There are discussions under way still with CRA, because I don't know that it has all the information that Canadians would expect it to have on international tax evasion, and on those who are more likely to get into these arrangements. That's why we are in ongoing discussions with CRA to determine what it is that it has, and what it is that we can get from CRA. It's not by lack of co-operation from officials. It's more out of determining what it is that CRA does indeed have. That's for quality.

Regarding timelines, we expect to be in a position to have an estimate of the tax gap in the spring of 2019, because on purpose it spans a three-month time horizon. If I were a betting man, I would probably go for the latter part of spring as opposed to the earlier part of spring. That is because trying to put a number on the international tax gap is eminently difficult.

It's trying to nail Jell-O to a wall, as somebody explained to me. It's trying to get information on the one hand on the taxes that Canada collects with respect to international income and international activities, but what is difficult is trying to get information on the taxable income. What part is declared and what part is not declared. The part that is not declared, under the radar, is very difficult to identify and estimate. This is not only in Canada, but other countries have faced the same challenges.

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

Do you have everything you need, subject to those negotiations and discussions, to move forward?

[Yves Giroux]

Assuming we get what we can get from CRA, and what we expect to get from CRA, it looks like we will get all that is feasible for CRA to give us, but I'll get back to you on that once we have finalized the discussions with CRA.

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

Here is my last question; it is about family debt.

We talked to Bank of Canada officials about this. Family debt really is at an incredible level. It is difficult to see how families will be able to ease that burden.

Are you concerned by the burden of debt that ordinary families have been carrying for a number of years?