Finance Committee on April 30th, 2019

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

Thank you very much. It's a very interesting time, I guess, that we're living in.

One thing you mentioned earlier in your presentation was the impacts that provincial-municipal environments have on the housing market. I was just having a conversation with my colleagues before I came down. I asked if there was anything they'd like me to ask you. They said to ask about the Lower Mainland—Vancouver particularly, of course—and Toronto, and you mentioned these in your remarks, and about the rest of the country, particularly Vancouver and Toronto, where there are challenges in responding to the measures that have been put in place.

Do you believe those measures you mentioned, from a provincial-municipal perspective, are impacting some of these challenges in these two markets?

[Carolyn A. Wilkins]

The short answer is yes.

Those measures, if you're talking about the stress test and the tighter mortgage underwriting rules, certainly had a country-wide effect. That's because they were aimed at making the debt levels that were being taken on more sustainable for the people who were taking them on, and then, by virtue of that, ensuring a more stable Canadian economy.

The extra measures that were taken in Toronto and the greater Vancouver area, with respect to taxes, for example—the foreign buyer tax—added to the drag on the housing market. In fact, Toronto and Vancouver were different to begin with, just because of price expectations being so speculative. You can see in some of the data that we have on price expectations just how high they were getting. Those price expectations were reduced after the taxes, after B-20. Then, of course, our interest rate increases had an implication for these too. That's what's underlying the dynamic in the housing markets in those two jurisdictions.

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

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you all.

We'll turn to Mr. Kmiec.

Mr. McLeod, you'll round it out with the final questions.

Mr. Kmiec.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

When the monetary policy report talks about the economy hitting a soft patch, what assumptions are you making about the TMX pipeline construction project actually going ahead? What would be the impact on the GDP forecasts if there continue to be delays and more construction seasons are lost because of dithering?

On the upside, if it does go ahead and is completed on time, what type of projections...or how have you accounted for that project?

[Stephen S. Poloz]

At this stage, I think that we just have a question mark around the timing of that, so if it were to.... Let's suppose that it was approved in the near term. There would be some additional investment spending this year, but the real impact on the economy would be after it's completed. There are, of course, the costs, the spending associated with its construction.

I know that Line 3, the other pipeline, is supposed to come in next year or later this year. Anyway, that's built in, and of course gradual growth in the capacity to ship oil by rail is also built into the forecast. The oil revenues and the oil exports that we have are modelled based on those assumptions.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

In your monetary report, you say that Line 3 is actually “delayed until the end of 2020”, but you say that rail is the anticipated marginal mode.

[Stephen S. Poloz]

That's right. It's 2020 for Line 3, but you have a marginal increase in rail capacity as new cars become available.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Let's move on to the FTHBI, the first-time homebuyer incentive—the shared equity mortgages. Do you think that it will offset the effects of B-20 stress tests on the market, or do you think that they'll exceed it?

Those are all on the demand side. They're attempts to change the demand of people actually going to get mortgages. Do you think it will offset the impact of B-20 stress tests on the market, or will it exceed it in the future? Your growth projections are that the housing market recovers in 2020-21.

[Stephen S. Poloz]

The reason why the housing market recovers in that is that, as I described in my opening statement, when, in effect, B-20 is reducing the potential demand for housing on the margin, people are reacting in different ways: buying smaller houses or waiting a little longer to do it. However, once they've adjusted to those new rules, then the fundamental growth from population growth and labour force growth continues. That recovery is in the trend line.

The answer to the question that you're asking about the relative size of the B-20 effect macro versus this new first-time homebuyer incentive is very hard for us to know at this stage until we know the parameters of that program, as Ms. Wilkins answered a while ago. I think that the sketch around it was that it would be something like 100,000 households, that sort of thing. That's pretty significant, so we'll be figuring that in.

At the same time, B-20 is affecting everybody, so it's about how they adjust to that behaviour. That's something that we're monitoring closely as we go through.

It's very hard to compare them. It's an apple-and-orange kind of analysis, I'm afraid. I wouldn't want to commit to a balance on those two.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Would it be fair to say, then, that the impact of the FTHBI is not included in your 2020-21 projections?

[Stephen S. Poloz]

That's correct. We don't know the parameters of it yet.

One of the things that is implied there is that it's designed to favour more housing building, so it's a fairly significant piece of analysis to work out just how big that might be. We have not included those things yet.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you all.

Mr. McLeod.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you, Mr. Chair.

Thank you to the presenters for a very interesting presentation and discussion today.

As an MP, I certainly encourage people from all walks of life to come to the north to visit us and to talk to the people who reside there. I think that over the last couple of years we've seen a good response. We've seen many MPs from all parties, and ministers, come to the north.

I saw that earlier this month you were able to address an audience during the Nunavut Mining Symposium in Iqaluit.

[Stephen S. Poloz]

Yes.

[Michael McLeod, Liberal, Northwest Territories, NT]

Last spring, you were in my riding and delivered a speech, which I was also very glad to see.

I want you to talk a little bit about the benefits, both for your work and for the local residents, of having you, the Governor of the Bank of Canada, come to the north to speak to and address the smaller and northern communities.

[Stephen S. Poloz]

Thank you.

When I became Governor, I committed to visiting all provinces and territories in Canada. I can now say that I've done so. It has been a great experience to talk to real people making real business decisions on a daily basis, in totally different settings.

I think the value to me is that it puts colour around numbers. Economics is mostly a bunch of numbers. Being able to stress-test forecasts or judgments with real conversations is very valuable, and has always been valuable to us. We put much higher weight these days on both our BOS and the interactive round tables we have when we're in a region. Both Carolyn and I do that whenever we're out there. We'll organize a dinner or a lunch or something with, say, 12 or 15 business people. Those things have been very valuable to us.

There are two sides of it. We get to explain some things to people that maybe they don't see every day, and we have those heart-to-hearts about how we think the economy is working. They let us know, “No, it isn't. This is what I see.” That's the kind of two-way conversation we have.

[Michael McLeod, Liberal, Northwest Territories, NT]

Your speech in Nunavut and the bank's latest monetary policy report mentioned advances in automation and artificial intelligence. Can you expand on your views regarding how these advancements are affecting Canada's economy, and the potential risks and rewards, as you see them?

[Stephen S. Poloz]

Often these things are discussed in a frame of risk. You think of automation or AI displacing jobs that are susceptible to that, jobs that are repetitive. It goes from manufacturing-type jobs to service-type jobs, such as in the financial sector. I was on the phone with an AI yesterday, trying to get something sorting out, and it was all sorted out. That's phase one that we hear about. The other side of it is the jobs being created by those people who are creating those things and jobs maintaining those things. If you put an automated machine in a factory, somebody makes sure it's working properly and so on.

The third thing that I think is helpful to bear in mind is that each of those major innovations in society generates incomes that we didn't have before. They kind of come out of thin air. Those incomes are spent everywhere in the economy. We create jobs in all the other nooks and crannies of the economy too. That is often forgotten when people discuss these things.

In what we call a general equilibrium, history has shown that we always benefit from technological progress. It's never a negative. We always create more jobs than get displaced. Of course, it doesn't mean that there aren't hard adjustments for people. We always need to be cognizant of that and make sure we have the right kinds of programs to help them transition.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you.

[The Chair, Liberal, Wayne Easter]

We will have to end it there, and move from one set of numbers to a second set of numbers with the PBO.

Thank you very much, Governor and Deputy Governor.

We will suspend for a couple of minutes for the Parliamentary Budget Officer and crew to come ahead.

[The Chair, Liberal, Wayne Easter]

We shall reconvene, pursuant to Standing Order 108(2), the study of the economic and fiscal outlook with the Office of the Parliamentary Budget Officer. Welcome to Mr. Giroux, PBO; Mr. Matier, senior director, economic and fiscal analysis; and Mr. Jacques, senior director, costing and budgetary analysis.

If one of you has an opening statement, we'll go from there.

Thank you for coming, and sorry for the bit of a wait.

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

Thank you very much, Mr. Chair and ladies and gentlemen members of the committee.

Thank you for your invitation to appear before you to discuss our financial and economic perspectives from April 2019, which were published earlier today.

As you know, the Parliamentary Budget Officer provides parliamentarians with independent, non-partisan economic and financial analysis. As the Parliament of Canada Act indicates, we provide these analyses in order to raise the quality of parliamentary debate and promote greater transparency and accountability. Pursuant to the mandate of the Parliamentary Budget Officer, my office produces independent economic and financial cost estimates.

As you mentioned, Mr. Chair, I am accompanied today by Jason Jacques and Chris Matier, who will help me to answer your questions. They have a lot of knowledge and experience in the affairs of my office.

The Canadian economy is working its way through a temporary slowdown. Economic growth slowed sharply in the fourth quarter of last year following the decline in Canadian oil prices. We estimate that the real GDP growth remains subdued in the first quarter of this year but expect it to pick up over the remainder of the year as temporary factors dissipate.

Looking further ahead, we continue to expect the economy to rely less on consumer spending and housing and more on business investment and exports. We project real GDP growth to increase from 1.6% in 2019, the current year, to 1.9% in 2020, and then to average 1.6% annually through 2023. We judge that the risks surrounding our economic outlook are broadly balanced.

In terms of downside risks, we believe the most important risk is weaker export performance due to rising protectionism in global trade policies. On the upside, the most important risk is stronger consumer spending, fuelled by increased household indebtedness.

With respect to the fiscal outlook, since our October 2018 outlook we estimate that policy actions taken by the government will cost almost $10 billion per year, on average, over 2018-19 to 2023-24. Nonetheless, our updated outlook for the government's bottom line is, on balance, little changed compared to our October report. This reflects offsetting revisions to underlying revenues and expenses. In other words, we underestimated the amount of fiscal room in our economic outlook, mostly due to stronger than expected income tax revenues.

For fiscal year 2018-19, we expect the budgetary deficit will be $15.7 billion, which amounts to 0.7% of the Canadian economy. We project the deficit to rise to $22.3 billion in 2020-21, due in part to forgone revenues from introducing accelerated capital expensing. The budget deficit is then projected to decline to $11.9 billion, or 0.4% of GDP, in 2023-24. It's important to note this assumes no new policy actions are introduced.

We also project that the federal debt will consequently decline to 30.5% of GDP in 2020-21, which is almost 1.5 percentage points below the government's official debt anchor. We also project the federal debt-to-GDP ratio to fall to 28.9% of GDP in 2023-24.

Given the possible scenarios surrounding our economic outlook, and again without further policy actions, it's very unlikely that the budget will be balanced or in a surplus position over the medium term.

In our report today we also highlight some key issues arising from budget 2019 related to budget-estimates alignment, operating expenses and unannounced measures, among others. We would be happy to explain these issues if you wish us to and we can expand on that as well.

I would also like to direct your attention to another report we published this morning in which we independently established the cost of 11 Budget 2019 measures in order to prepare our estimate of the cost of electoral commitments, pursuant to my office's mandate.

The next general election will be the first in Canada where political parties will be able to ask us to prepare estimates that will be independent from the costs of their proposals. We acquired the necessary resources to manage the requests in an equitable and secure way while preserving the confidentiality of our clients. We are ready to seize this historic opportunity and provide the best possible cost estimates. We encourage all political parties to use our services in order to improve the quality of the information provided to Canadians.

My colleagues and I would be happy to answer your questions on our economic and financial projections, or on any other analysis from the Parliamentary Budget Officer.

Thank you very much.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Giroux.

We'll start with seven-minute rounds.

Mr. Fragiskatos is first up.