Evidence of meeting #204 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was economy.
A video is available from Parliament.
12:40 p.m.
Liberal
Peter Fragiskatos Liberal London North Centre, ON
Thank you, Mr. Chair, and thank you for being here today.
Mr. Giroux, you mentioned investment in exports in your opening statement as a source of real potential economic growth for Canada. Could you expand on that?
12:40 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
Yes. After the decline in business investments throughout 2017 to 2019, we expect that business investments will rebound, in good part because of the increase in oil prices in Canada and also abroad, but also because of the tax changes introduced in the fall economic statement. Both of these will be important contributing factors to increasing business investments. The exports should benefit from sustained growth—albeit at somewhat lower levels—in the U.S. going forward, as well as growth in Europe. Our main trading partners will continue to experience economic growth, which should help further expand our exports.
12:40 p.m.
Liberal
Peter Fragiskatos Liberal London North Centre, ON
Where are we with attracting foreign direct investment?
12:40 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
It's an issue we have not directly looked at as part of our economic and fiscal outlook, but Chris and Jason may want to expand a bit on it.
12:45 p.m.
Chris Matier Senior Director, Economic and Fiscal Analysis, Office of the Parliamentary Budget Officer
As Yves mentioned, we don't provide a forecast of it, but we have been tracking the quarterly data published by Statistics Canada, and we saw throughout 2018 a probably average performance, I would say. Initially there were some concerns, earlier on, about the tax changes made in the U.S. and about some investment probably being shifted out, but based on the data at least to date, I don't think we've really seen that materialize. Roughly, the investment levels are consistent with the average investment over the past four years.
12:45 p.m.
Liberal
Peter Fragiskatos Liberal London North Centre, ON
Thank you very much.
Mr. Giroux, in your statement you mentioned household indebtedness as a real source of potential risk in the Canadian economy. Could you speak more to that, but specifically from this perspective? We hear a lot, certainly from the opposition, and there are some economists out there as well who counsel that the stress test provides the wrong path for Canada and is not prudent economic policy. Could you put on the record your view of household indebtedness, with the stress test in mind?
We heard this morning from the Governor of the Bank of Canada, who, as you know, in previous remarks has spoken about the need for a mortgage stress test in order to offset the risk to the Canadian economy of creating a housing bubble.
12:45 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
With respect to household indebtedness, it's clear that one of the main factors is the relatively low level of interest rates, which of course encourages people to take on more debt. Another big factor contributing to high levels of debt is the relatively high price of housing. When household formation happens, people want to live somewhere, obviously, and they have a choice either to rent or to own. Owning means buying a house and incurring some mortgage debt, and when the prices are high and interest rates are low, that leads to high indebtedness.
It's not an issue, in and of itself, but it is a concern for us as economists when we see that households have high levels of debt. It's obvious that it's not sustainable in the optics of rising interest rates. It's bound to lead to some imbalances in the economy.
With respect to whether it is the right action to limit the growth in credit and have tighter mortgage rules, that's a very delicate question. It's obvious that something needs to be done. However, with the high prices of housing, it means that some people will be denied access to housing.
Something needs to be done, obviously, to rein in the high levels of debt, but it has the unfortunate collateral effect of preventing some people from accessing property, especially in the high-priced markets of Vancouver, Toronto and now, more and more, in Montreal.
12:45 p.m.
Liberal
Peter Fragiskatos Liberal London North Centre, ON
You're right. It is delicate because it's something that has come under debate, but as you say, something needs to be done.
Mr. Poloz is obviously gone, but I'll just read into the record comments he made a few months ago relating to household risk:
The biggest risk we face in the financial system is that household debt is not able to cope with a more normal level of interest rates.
...If people can afford [a mortgage] today but can't afford it 100 basis points from now, then we're not doing them any favours.
I know you didn't want to get into the stress test side of things, but you did say that something needs to be done. The economists that I read and the economists that most Canadians look to, to provide an analysis of where we are, have worried in the past about the potential for a housing bubble and where household debt is. I think something such as a mortgage stress test is a prudent move.
On the debt-to-GDP ratio that you talked about, where is Canada compared to other industrialized countries in that regard?
12:45 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
When you look only at the federal debt-to-GDP ratio, it's quite low compared to international partners. However, if you want to compare things that are comparable, for example, the U.K. is a unitary state, so if you look only at the federal level, we obviously look advantaged.
A better gauge of debt levels to GDP take into consideration the federal, provincial and territorial debt levels. By that measure, I haven't looked at the numbers recently, but I think we're slightly below or close to the OECD average. I think we're slightly below, so we're faring very well.
Where we have a better advantage is when you take pension obligations into consideration. As you know, Canada has a three-pillar retirement income system. There is the public system with OAS, private savings and the public pensions of CPP and QPP. Canada is in the unusual situation of having prefunded a good proportion of its future obligations when it comes to the QPP and CPP. If we compare that with the pension obligations of most other major countries, we are in a better financial position when you take all of these into consideration for the debt-to-GDP ratio.
12:50 p.m.
Liberal
The Chair Liberal Wayne Easter
Thank you. I'll end the round there.
Mr. Richards, the floor is yours.
12:50 p.m.
Conservative
Blake Richards Conservative Banff—Airdrie, AB
Thank you very much.
I have a number of topics that I want to try to ask you about. Hopefully we can get to them all.
The first one relates to your February 21 report, which said, “PBO found that the Pension Act regime”, which was in place from 2006 to April 1 of this year, “is the most generous for the veterans”. It also stated:
From the perspective of the veteran, virtually all clients would be better off if they were to receive the benefits of the Pension Act.
Put a different way, that means veterans will now be worse off almost across the board under the new regime. Could you expand a little on your findings there and tell us exactly how much worse off you think veterans will be under that new regime?
12:50 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
We looked at the three main regimes—the one in place until April 1, 2006, the regime between 2006 and the end of March of this year, and the regime in place since April 1, 2019.
You'll have to forgive me, as I've forgotten the names of each of the regimes. As I've said on a few occasions, these are very complex regimes. I have a background in tax and I find these regimes, to be honest, more complicated than the Income Tax Act. That's one of my failings. I don't understand veterans' programs very well.
We found that the pre-2006 regime was the most generous for the vast majority, if not the totality, of veterans. The regime in place since April 1 is slightly more generous than what was in place between 2006 and 2019, but it also leaves out some veterans. It does not provide the same level of benefits to some of the veterans; I think it's 5% of the veterans and these tend to be the most highly disabled.
These are the main conclusions of the report, if I'm not mistaken. Jason is nodding, which means I haven't made any mistakes in characterizing the report.
12:50 p.m.
Conservative
Blake Richards Conservative Banff—Airdrie, AB
Let's touch on the April 30 report, not today's report. You indicated this quote in your opening remarks, “For 2018-19, we expect the budgetary balance will show a deficit of $15.7 billion”. You go on to say, “We project the budgetary deficit to increase to $22.3 billion in 2020-21”. Further on, you say, “We estimate that the probability the budget will be in balance or in a surplus position in 2019-20 and 2020-21 is effectively nil.”
Just to be clear, in the year and the years following.... The year that Justin Trudeau said he would balance the budget, he's actually going to be increasing the deficit. Is that correct?
12:55 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
That's the conclusion we arrived at. We have seen no possibility of balancing the budget in 2019-20. In fact, we see the deficit increasing to $22.3 billion by 2020-21, which is a combination of policy actions that are significant and more than offset positive economic and fiscal developments. We see a significant increase in our forecast for the deficit. However, this deficit is expected to decrease over the planning horizon, to $11.9 billion by 2023-24.
We've also made a long-range forecast, or projection. We expect the deficit to return to balance, in the absence of any further policy actions, in 2028-29.
12:55 p.m.
Conservative
Blake Richards Conservative Banff—Airdrie, AB
That's about 10 years after it was promised to be.
Let's move from deficit to debt. What are your numbers for where the current federal debt stands?
12:55 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
We have as a proportion of GDP, which is a useful measure because it puts it into perspective—
12:55 p.m.
Conservative
Blake Richards Conservative Banff—Airdrie, AB
Sure, but what I'm actually interested in is the number.
12:55 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
For the absolute level of debt, we forecast federal debt at $687 billion—
12:55 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
—in the previous fiscal year. That's 2018-19, and rising to $766 billion by 2023-24.
12:55 p.m.
Conservative
12:55 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
In 2018-19, we believe they were at $23.4 billion. That's our estimation.
12:55 p.m.
Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
The final numbers are not in yet, but they would be rising to almost $34 billion by the end of the forecast period, which is 2023-24.
12:55 p.m.
Conservative
Blake Richards Conservative Banff—Airdrie, AB
What percentage of government spending is actually going towards servicing the debt?