Finance Committee on April 30th, 2019

[Yves Giroux]

No, we don't take that into account when we look specifically at the infrastructure programs. We take that into account when we do our macroeconomic projections, but when we look specifically at infrastructure programs we don't take that into account, because that would require second- and third-order impacts, and it would require dynamically estimating the impacts of these programs, which would be significantly more complex.

[The Chair, Liberal, Wayne Easter]

We will turn to Ms. Rudd and then back to Mr. Dusseault.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

Thank you.

Can you provide some clarification? I think we've been skirting around this in a number of ways. Mr. McLeod talked about the infrastructure in the north and you talked about the lack of incremental progress. As I'm understanding from your report, the programs by which the federal government puts infrastructure money out are supported by provincial and municipal governments as partners, usually with a third, a third and a third, but there are variations on that theme.

Further, my understanding is that in provinces—as an example, Ontario, where the provincial government has not released their infrastructure programs—the federal money is not being leveraged to the degree it could be and indeed should be in order to realize those incremental increases in infrastructure growth. Is that fair?

[Yves Giroux]

What I'd say is that we have not been made aware of any instances where provinces, territories or municipalities did not cough up their share of the program funding that they were supposed to provide under the agreements. What we have seen at the aggregate impact is that some provinces and territories have displaced a portion of the funding in order for them to meet the matching requirements. They have limited financial capacity and they were not either able or willing to fully provide a totally incremental funding for the infrastructure program.

We have not looked at specific programs, but in looking at the aggregate numbers, our suspicion is that some provinces and territories did slow down some other projects that were not subjected to the cost sharing with the federal government.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

I'll go back to the example of Ontario. There are four streams of infrastructure. There is an agreement between Ontario and the federal government. It's been in place for almost two years now.

Recently, the roads and bridges stream was opened for a four- or five-week application process, but there has been no opening of the streams for water, waste water, rural broadband and cell, or housing. What we're finding are challenges within municipalities that are ready to contribute and be partners, but because the provincial government has not stepped up to the plate and honoured the agreement, things are being slowed down.

I guess my question to you is this: Do you have any sense of what that would do—Ontario is a very large province—to the results you're talking about, if in fact that were to be realized as per the agreement?

[Yves Giroux]

That would obviously slow down the pace of implementation for that stream of the program. These are questions that Infrastructure Canada officials would be in a very good position to answer, and they would be able to provide you with specific examples, I'm sure.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

Thank you.

Peter?

[Peter Fragiskatos, Liberal, London North Centre, ON]

Is there time for a question?

[The Chair, Liberal, Wayne Easter]

We will be coming back a little while later anyway, but go ahead.

[Peter Fragiskatos, Liberal, London North Centre, ON]

I just have a question. We hear from the Conservative opposition and from Conservative provincial governments—not exclusively but many—and provincial leaders who carry the Conservative banner and have joined with their federal colleagues to say that there is economic ruin that will result from putting a price on pollution, and carbon pollution in particular.

Is there evidence from other jurisdictions that putting a price on pollution results in economic devastation? You're an economist and an expert and very neutral.

[Voices]

Oh, oh!

[Yves Giroux]

These are very harsh words, so I will not venture into these types of adjectives. We looked at the impact of putting a price on carbon in Canada, the economic impact, and what we found was a 0.1% impact on GDP, a negative impact on GDP, per year. It's a level difference, a 0.1% difference.

If Chris is not kicking me, it's probably because I have the.... Okay, no, he wants to kick me. We found a small negative impact on the level of GDP, which is probably not 0.1%, contrary to what I'm saying.

[Chris Matier]

Just to clarify, it is an impact of 0.1%, but it's a percentage point on real GDP growth per year. Over a five-year period, at the end, the level of real GDP would be 0.5% lower. That's considering a scenario with the federal plan in place, let's say, versus a scenario without any carbon pricing in the economy.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Canadians get rebates to offset increased costs.

[Yves Giroux]

In the provinces where the federal backstop is in place.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

We'll go to Mr. Dusseault, and then, if anybody over here has a question, we'll probably conclude with that.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you, Mr. Chair.

I'd like to come back to a question I wanted to ask you earlier about program expenses. I had a reference in mind, but I didn't have the document in front of me. It's on page 37 of your report. Program expenses are decreasing. The figures in the table are expressed as a share of GDP, not in absolute numbers, of course. Total program expenses are going from 14.6% in 2018-19 to 14% in 2023-24.

Would you say that's normal or worrisome?

[Yves Giroux]

I wouldn't call it worrisome, but I wouldn't call it normal either.

As I mentioned in my opening statement, our projections assume that no new measures or major policy changes are introduced. For our projections, we assume a status quo in policy actions. We look at the effects of economic changes over the long term that are a bit more predictable, such as demographic changes. Our projections take into account energy prices, the global economic and macroeconomic environment, current policy and announced policy actions whose implementation is almost certain. All of those considerations result in the figures you have before you.

That said, it's rare for a government not to make changes to government programs. Is it plausible to think that nothing will change and that government programs will carry on at the same rate? I don't think that's what's going to happen, because successive governments make changes to programs. However, government spending as a share of GDP can be expected to remain stable over time. That would not be unusual.

Regardless, a government may wish to play a stronger role and be more involved in the economy or, conversely, play a smaller role in the economy. That can happen in a variety of ways, either through direct spending or through higher or lower transfer payments to individuals.

Looking at program expenses in isolation likely paints a slightly distorted picture of real total government spending.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you.

My last question is about the scenario of a 100-basis point interest rate increase. According to the numbers on page 43, such an increase would have little fiscal impact overall, except with respect to public debt charges, which would increase rather significantly. In 2019-20, the increase would be $3 billion, and in 2023-24, the increase would be $7.6 billion.

That leads me to ask you about the Bank of Canada's policy rate. The governor appeared before the committee earlier today. You're projecting that the rate will increase by one percentage point by next year.

[Yves Giroux]

Yes.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

That's pretty substantial. That may cause many to be concerned about interest rates, especially when it comes to mortgages. Household indebtedness is high, with more and more Canadians nearing insolvency. That can have a huge impact.

How can we determine the risks of such a substantial increase, not just in terms of public debt charges—which are considerable— but also in terms of the Canadian economy overall?

[Yves Giroux]

Historically speaking, our projected increase in the Bank of Canada rate isn't all that high. Canada has experienced rates between 18% and 20% in the past. If the Bank of Canada's policy rate went from 1.75% to 2.75%, it would be significant in absolute terms, but not that high in relative terms.

We believe such an increase would lead to a neutral rate. The monetary policy would have neither the effect of stimulating the economy, nor the effect of curtailing it. For that reason, we project the rate will rise until it reaches 2.75%, a rate that, in our view, is consistent with a neutral monetary policy. In other words, it neither stimulates the economy nor curbs growth.

The impact on households would not be negligible, to be sure. It would be significant, but not overly negative.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you.

[The Chair, Liberal, Wayne Easter]

Okay, if there are no further questions, I just have one to close off.

In the executive summary of your report on the expenditure plan and main estimates, you mention that elderly benefits are the largest major transfer to persons. You also mention that the increases in the gas tax fund and the Canada health transfer account for the two most significant increases in major transfers to other levels of government.

Do you have the bottom line there? You outline the $2.2 billion increase in the gas tax fund, which is doubling it, and the $1.8 billion increase in the Canada health transfer. What is the total amount of expenditures in those two categories?

One of the problems, even in the budget documents, is that we often talk about the increased percentage or the increased amount, but you have to search here and there to find the bottom-line figure. I find that a problem.

I'm looking for the bottom-line figure. I guess if the gas tax fund is now doubling 100%, it would be $4.4 billion.

What is it for the Canada health transfer? That's a question we get a lot.