Finance Committee on June 9th, 2016

Jean-Denis Fréchette Parliamentary Budget Officer, Library of Parliament

Thank you, Mr. Chair, and vice-chairs.

I would like to introduce my colleagues. With me today are Dr. Mostafa Askari, assistant parliamentary budget officer; Chris Matier, senior director, economic and fiscal analysis and forecasting; Tim Scholz, economic analyst; Elizabeth Cahill, financial adviser-analyst; and Jason Jacques, director of fiscal analysis.

Thank you, committee members, for this invitation to appear and for the opportunity to discuss our recent reports. Since our last appearance before your committee on April 19, we released eight reports, including two analyses last week on the cost estimate of private members' business, Bill C-239 and Bill C-241. These two studies were done in the context of your committee's routine motion requiring the PBO to conduct a detailed and comprehensive costing analysis of selected private members' business appearing on the order of precedence.

Since yesterday, Bill C-239 is, of course, no longer on your agenda.

Since the committee’s notice of meeting also refers to our recent reports and since those cover a wide range of topics, I will stop there, Mr. Chair.

Liberal

The Chair Liberal Wayne Easter

Okay, thank you. We will turn to questions.

I believe in my discussions with Mr. Fréchette, the group before us is willing to answer and discuss any of the eight reports that you mentioned. However, I think it's a moot point on Bill C-239, which was defeated last night in the House.

The first round of questions goes to Mr. Sorbara.

Liberal

Francesco Sorbara Liberal Vaughan—Woodbridge, ON

Thank you, Mr. Chair, and welcome, everyone.

I'd like to get an opinion. The PBO undertakes a certain set of analyses in a certain framework, and projects outward in terms of growth profiles. Our budget put in place a certain degree of prudence in terms of assumptions and in terms of the growth profile. We've seen in the first quarter somewhat of a tempering on the growth profile, and obviously, an exogenous shock to the economy with the fires in Alberta.

During that time, we came into some criticism in terms of being conservative in our forecast, but it seems to sort of play out that by being prudent in our growth forecast, we've actually done the right thing in how the economy has played out in the first quarter. We've had this exogenous shock and we will have a second half rebound.

I'd like to get your comments on that, because in some of the reports, I did see some commentary on that.

Parliamentary Budget Officer, Library of Parliament

Jean-Denis Fréchette

Thank you for the question.

Mr. Askari will answer that question.

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

You're absolutely right. The second quarter is probably going to be much weaker because of the fire, but that's mainly a timing issue. Once the rebuilding starts in Fort McMurray, actually, there's going to be a boost. It's not clear whether there's going to be a negative impact overall on the economy.

On the other hand, oil prices are actually much stronger than what was anticipated a few months ago, so that might increase potential for revenues in the short run.

Liberal

Francesco Sorbara Liberal Vaughan—Woodbridge, ON

Okay.

My second question deals with the Canada child benefit, and the way we've structured it versus the prior family tax cut that was in place under our predecessor. My understanding is that under that system, if you were a single parent family, you wouldn't actually benefit from the tax cut, because you would have no one to split your income with, whereas, with our new Canada child benefit, whether you're a single-income family or a double-income family, theoretically you'll benefit from both. Is that accurate?

Assistant Parliamentary Budget Officer, Office of the Parliamentary Budget Officer, Library of Parliament

Mostafa Askari

Well, we haven't really looked at every family structure.

One thing we did in response to a request recently was to take eight selected families, which the member had selected, and provide the impact of the budget measures on those families. Those families are not necessary representative of the population, but those are the families that were selected by the member.

Based on that, families with younger children and lower income will benefit in general from budget measures, and families with higher income and older children may not. But each family has its own characteristic, and it's very hard to tell who will benefit. There is really no average family, in that sense.

Liberal

Francesco Sorbara Liberal Vaughan—Woodbridge, ON

We know that nine out of ten Canadian families will be better off under the Canada child benefit plan, which will come into effect in July and is tax-free. It's monthly, simple, easily understandable, and I think we need to applaud our government for that. It will lift 300,000 children out of poverty.

Moving on to small business, under our purview, many of us in our committee want to undertake some sort of taxation review, whether it's reviewing tax expenditures or reviewing the tax code. There is a preferred rate for small business. Does it serve, from any of your research, as a disincentive for those small businesses to grow?

Liberal

The Chair Liberal Wayne Easter

Mr. Scholz.

Tim Scholz Economic Analyst, Library of Parliament

We didn't look specifically into this issue when we did our report, but what I can do is provide a brief summary of the literature that we reviewed.

Our assessment of the literature shows that the preferential taxation for small businesses was introduced on the basis that smaller firms face unique constraints in accessing financing to grow, as well as the cost of compliance with tax and regulatory measures. It's harder to spread those fixed costs across a smaller business.

The evidence has come out recently, so I'll just name a few examples. Mintz and Chen in 2011 noted that the current design of the small business preferential rate, and in particular the gradual phase-out as a company grows, effectively raises the marginal effect of tax rates on investment and growth for these businesses in transition, which could act as a deterrent to growth.

Another study, by Dachis and Lester in 2015 for the C.D. Howe Institute, found evidence that some businesses were essentially clustering around these thresholds, and it wasn't possible to tell whether this was because of reduced investment or not growing or tax planning, but their assessment was that this could be creating a distortion.

Liberal

Francesco Sorbara Liberal Vaughan—Woodbridge, ON

I'll make the analogy on that front. It was almost like an income trap, or what some in the economics literature would refer to on the personal level as a welfare trap, whereby you have a low-income person who is receiving some set of benefits, and as they start working and earn some income, they face higher and higher marginal income tax rates as they go up, but they're actually still relatively low income.

I make that analogy for small businesses, because we want them to scale up. We want them to grow. We don't want to have disincentives on that side. Looking at measures to make sure they grow is important for our government.

I have one final question. In terms of our infrastructure plan and in terms of the estimates you've provided, I see that there is a large and notable positive impact on the economy as we move forward with our infrastructure plan and measures that we've introduced in our budget. I am wondering if you could comment on that as well, please.

Liberal

The Chair Liberal Wayne Easter

Mr. Askari.

Assistant Parliamentary Budget Officer, Office of the Parliamentary Budget Officer, Library of Parliament

Mostafa Askari

We haven't really done any analysis of the impact of infrastructure spending specifically on the economy. Certainly infrastructure spending, like any other spending, has a multiplier impact, and typically infrastructure spending multiplies a bit more than some other measures, but we haven't really done our own analysis of the impact on the Canadian economy specifically for infrastructure.

Parliamentary Budget Officer, Library of Parliament

Jean-Denis Fréchette

Mr. Chair, we were in the other place in front of the committee last night. We discussed that issue. We mentioned to the Senate committee that we will probably in the fall.... We're already working on a work plan about the infrastructure project. We would like to monitor a little bit more the expenditures that will be invested in infrastructure in the upcoming months. It's something we will be pursuing in the next few months.

Liberal

Francesco Sorbara Liberal Vaughan—Woodbridge, ON

Do I have 10 seconds?

Liberal

The Chair Liberal Wayne Easter

You have 10 seconds.

Liberal

Francesco Sorbara Liberal Vaughan—Woodbridge, ON

Table 1 in the briefing document dated April 11, 2016, shows the positive impact from our budget measures that were introduced, and which the PBO has modelled.

A voice

Yes.

Liberal

Francesco Sorbara Liberal Vaughan—Woodbridge, ON

Thank you.

Liberal

The Chair Liberal Wayne Easter

Thank you.

Before I turn to Ms. Raitt, I do apologize to everybody for the number of moves for this committee meeting today. I think it's been moved three or four times, but the last reason for a move was the sinkhole down the street. I know it's been confusing.

Ms. Raitt.

Conservative

Lisa Raitt Conservative Milton, ON

Thank you very much, Mr. Chair.

One of the topics I want to discuss is actually not one of eight reports you have. It's a report that Mr. Matier was actually an author of, and that has to do with household indebtedness. The reason I want to discuss it is that this morning, the Bank of Canada actually talked about their concerns as well.

Would it be okay if I ask a few questions around that report, specifically?

Thank you.

In the report, there are a number of highlighted issues with respect to how high household indebtedness.... I want to understand what your motivation was in conducting the research that you did. Also, what are your concerns for Canadian households when it comes to this level of risk they find themselves?

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

Our motivation really was that the issue of household indebtedness had been flagged by both the Government of Canada as well as the Bank of Canada. We wanted to contribute to the analysis in highlighting one of Statistics Canada's recent data indicators on this, and that is the household debt service ratio, which we believe provides probably a better indicator of the vulnerability that households face by carrying such a high debt load.

Our analysis suggested that in the current environment, with low interest rates, while this ratio was high, it was not outside of historical experience. But looking ahead, if we believe that interest rates are going to increase even gradually, maybe 200 to 300 basis points, this would stretch households further in terms of their debt servicing capacity.

One of the limitations of the analysis was that it was done at a very aggregate level. As I'm sure you're aware, in the work at the Bank of Canada, they're able to look and focus more on the distribution side of this, so the aggregate numbers mask a large variation across a wide range of households.

Conservative

Lisa Raitt Conservative Milton, ON

Did you have an opportunity to see what the Bank of Canada came out with this morning? I'm not going to ask you questions on their report, of course, but just before I start talking about it, I don't know if you had a chance to look at it before you came in.