Yes, sir.
Thanks so much to the committee for the invitation today.
I'd like to focus my remarks today on some important macroeconomic phenomena instead of specific policy questions.
I think that we're living through a transformative moment in Canada. We're witnessing the end of monetary policy and the rise of fiscal policy.
Historically, to manage recessions, the Bank of Canada would lower interest rates, thus encouraging households to take out a loan or a mortgage to build, buy, or renovate their house, also encouraging businesses to take out a loan to improve their operations. For instance, during the great recession the Bank dropped interest rates and households ran a $176-billion deficit in 2009 alone. By comparison, the federal government ran only a $55-billion deficit, and the provinces, a $26-billion deficit.
While federal government cutbacks have since led to balanced books, households continued running annual deficits of $60 billion to $80 billion a year between 2009 and today. In fact, households were the heroes of post-crash growth in Canada. The cost, of course, was historically high household debt, but the payoff was much higher GDP growth.
As the federal government cut back, the provinces also continued their deficits. Their major programs, such as health care and education, can't be cut back in the same way. This actually led to a historic crossing in 2015, with provinces now holding more debt than the federal government for the first time in Canadian history. At the end of 2009 and the financial crisis, the Bank of Canada's overnight rate approached zero, effectively ending their ability to spur growth by encouraging more debt. Going forward, Canada is therefore limited in where we can see growth come from.
Slow growth didn't start in 2015. We have been experiencing slow growth since 2010. All estimates are that this will continue, likely mixed with technical recessions, for the foreseeable future. We continue to import more than we export, a trend started following the 2009 crisis, thereby reducing our GDP growth every year. The corporate sector actually has strong balance sheets and continues to hoard record amounts of cash, which now exceeds the value of our national debt. But corporate contributions to GDP, through new capital spending in particular, have been devastated by the oil price rout.
This leaves the federal government as a key engine for future growth. Without more involvement, specifically deficit-financed involvement, slow growth and technical recessions are the prediction for the future of Canada for the coming years.
But there is significant room to grow. The federal government is presently at its lowest share of total expenditures to GDP of any time since 1939 prior to the Second World War. Put another way, the federal government spends less as a share of the economy than it did prior to the implementation of the Canada pension plan and modern old age security, prior to employment insurance, and prior to universal health care. The federal debt-to-GDP ratio, Canada's relative debt ratio, is at its lowest point since 1980. We have the lowest federal debt-to-GDP ratio by a long shot in the G8, and it has been falling.
While Canada is lowering its debt-to-GDP ratio, bond markets are desperate for more debt, not less debt. They can't get enough Canadian debt. They are, in fact, so desperate that they are willing to lose money on our bonds after inflation, with our five-to-ten-year bond yield now under 1%. They are desperate for the federal government to run larger deficits to create more low-risk Canadian government debt.
To provide some scale, if we were to take, let's say, a $25-billion deficit—I think that is at the high end of expectations this year—one might say that this may seem large. It certainly is large for an individual or a company, but we need to consider this in relative comparison to the Canadian economy, which is worth $2 trillion today, and in comparison it's actually quite a small amount. In fact, a $25-billion deficit would be smaller than any deficit on a relative basis run between 1970 and 1995. In fact, we could run a deficit of $25 billion forever and the debt-to-GDP ratio would remain constant as the economy grows. In fact, the larger the federal deficit, the larger our corporate profits and the larger the household surplus, that is to say, households paying down their debts.
It's not just deficit size that's important; it's also what it finances. Deficit financing tax cuts for rich Canadians, for instance, would be much less effective at job creation and GDP growth. Deficit financing of social programs and infrastructure, on the other hand, would be much more effective for GDP, jobs, and growth.
There may be delays, clearly, in infrastructure spending and social program set-up, but slow growth isn't going anywhere. We have plenty of time to implement those programs and reap the benefits in terms of increased GDP.
For more details, I hope you'll read our alternative federal budget, which will come out in early March.
Let me thank you and I'll wrap up there. I look forward to your questions.