Finance Committee on Oct. 24th, 2016

[Carolyn Wilkins]

In our forecasts, there is a table. You can see that Canadian consumers will continue to contribute to growth until the end of this year and over the next two years.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. MacKinnon.

I note the bank's mandate is to conduct monetary policy to promote the economic and financial well-being of Canadians. You have a lot of experience coming before this committee, Governor, as MPs try to get you to look into your crystal ball from various political persuasions.

As a committee that sits around this table, Governor, I think you and your team, and you, Deputy Governor, are to be congratulated on the work you do. We certainly thank you for coming forward today and answering the questions put to you.

[Stephen S. Poloz]

Thank you very much, Chair.

[Carolyn Wilkins]

Thank you very much.

[The Chair, Liberal, Wayne Easter]

We will suspend for a few minutes and then hear from the parliamentary budget officer.

[The Chair, Liberal, Wayne Easter]

We'll reconvene. Pursuant to Standing Order 108(2), we're doing a study of the economic and fiscal outlook.

With us this afternoon, we have the parliamentary budget officer and his team.

Mr. Fréchette, I'll let you introduce your team and we'll go from there.

[Jean-Denis Fréchette, Parliamentary Budget Officer, Library of Parliament]

Good afternoon, Mr. Chair, vice-chairs, and members of the committee.

Thank you again for the invitation to appear and discuss the October 2016 economic and fiscal outlook. Today I am joined by Mostafa Askari, assistant parliamentary budget officer, as well as Jason Jacques, Chris Matier, Tim Scholz, and Trevor Shaw. They will be pleased to answer any questions you have regarding our outlook or other PBO analysis.

Before reviewing the key points of our report, I would like first to note that our updated outlook reflects the June agreement in principle and the Canada pension plan enhancement. However, our updated outlook does not incorporate the government's recently announced measures related to the housing market, the carbon pollution pricing, or the indexation of the Canada child benefit amount.

Regarding the economic outlook, on balance, the PBO's outlook for the Canadian economy is unchanged from our April report. Weaker real GDP growth in the near term is offset by stronger growth over the medium term due to increased provincial government spending, as well as additional monetary stimulus and lower long-term interest rates. Over the period 2016 to 2021, we project real GDP growth to average 1.8% annually, the same as in our April report.

Average annual growth in nominal GDP, which is the broadest single measure of the government's tax base, is only marginally lower than we projected in April, at 3.7% versus 3.8% in April. This revision reflects weaker GDP inflation in 2016. Adjusted for historical revision, the level of nominal GDP is on average $15 billion lower per year over the period 2016 to 2021 compared to our April report.

Despite this downward revision, PBO's projected level of nominal GDP is, on average, $26 billion higher per year over the period 2016 to 2020 compared to the budget 2016 planning assumption. That includes the government's downward adjustment to the average private sector forecast of nominal GDP.

Our fiscal outlook is largely unchanged from April. We continue to project that the deficit will decline over the medium term, falling from $22.4 billion in 2016-17 to $9.4 billion by 2021-22. Compared to our April report, we are now projecting slightly larger deficits in 2016-17 and 2017-18, but smaller deficits thereafter.

PBO's outlook for the budgetary deficit over 2016-17 to 2020-21 is $4.8 billion lower, on average, than budget 2016. This difference is roughly in line with the government's forecast adjustment, which removed the equivalent of $6 billion in revenues in each year of its planning horizon.

In budget 2016, the government committed to reducing the federal debt-to-GDP ratio to a lower level over a five-year period ending in 2020-21. This translates into a fiscal anchor of 31% or lower for the federal debt-to-GDP ratio in 2020-21.

Under current tax and spending plans, we project that a federal debt-to-GDP ratio will decline to 29.7% in 2020-21. Consequently, based on the PBO's outlook, the government is on track to reach its debt-to-GDP target two years ahead of schedule. As such, the government has flexibility within its current fiscal plan to meet the medium-term debt-to-GDP target.

On that note, Mr. Chair, my colleagues and I would be happy to respond to any questions you may have regarding our economic and fiscal outlook or any other matter related to our mandate.

Thank you very much, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Jean-Denis.

Mr. Grewal, the first round will be about seven minutes.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you to the witnesses from the PBO for coming to testify today.

You mentioned that your new forecast didn't include the changes that we made to the housing market. Could you add some colour? In your opinion, how will the changes we've made impact the economy?

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

We have taken that into account, not in an explicit way—it's full of underlying of forecasts—because we already assumed in our projection that the investment in residential construction would actually slow down over time.

Now the measures that the government has introduced, certainly in principle, should reduce demand for housing and have some negative impact on the speed of investment in the housing sector.

[Raj Grewal, Liberal, Brampton East, ON]

Locally, and this is obviously a very small-scale example, demand hasn't slowed down. But if you look at housing across the country and in the markets, predominantly Vancouver and the GTA, they're driven mostly by demand and the shortage of supply. We've addressed it. The government has had an opportunity to restrict the mortgage rules and introduce a stress test.

In your opinion, in the long run, will the government's changes to the mortgage rules slow down the housing market, or will this thing kind of settle down?

[Mostafa Askari]

The objective is to slow down—

[Raj Grewal, Liberal, Brampton East, ON]

Absolutely.

[Mostafa Askari]

Whether that is going to happen in reality remains to be seen. But based on the rules and the principles, there has to be a negative impact on the rate of growth of residential investment.

[Raj Grewal, Liberal, Brampton East, ON]

We just heard from the Governor of the Bank of Canada, and he was also quoted in the paper today saying that Canada has room to run deficits. When I asked him a question about the extent of that room, he said it is significant room, that the Government of Canada is well positioned to run these deficits.

In your latest forecast, you've also said that the deficit will be $4.6 billion lower than the government is stating it will be. What is that driven by?

[Mostafa Askari]

The difference between our projection and the government's is really due to the assumption that the government has made about the level of nominal GDP. In its projection, it made an adjustment of $40 billion to nominal GDP as a prudence factor, and we do not take into account any sort of prudence in our projection. Our projection, based on our view, is the balanced risks—or the risks on the upside and the downside are balanced—so we do not make any room for any kind of prudence in our projection.

That's really the difference between the two projections on the deficit.

[Raj Grewal, Liberal, Brampton East, ON]

We also asked the Governor of the Bank of Canada the impact of interest rates, but we won't get into that discussion here.

The Canadian economy has always been very dependent, in my humble opinion, on what's going on to the south of us and world economic factors.

I asked the Governor of the Bank of Canada about the fact that we have a lower dollar compared with the U.S., and he said that, yes, that has also increased export growth but we're still seeing sluggish exports.

Have you any other commentary on why that's happening? Why aren't Americans coming to Canada to manufacture their goods? Why aren't we having an increase in manufacturing? It's cheaper to make the products here and then ship them south of the border.

[Mostafa Askari]

Unfortunately, I don't think there is a good answer for that, yet. I think this is being studied. I know the Bank of Canada is studying this issue and it is trying to figure out why exports have been weaker than it expected. We are seeing the same thing. We haven't really figured out exactly why that is the case.

Chris, do you want add something?

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

I'll quickly add that, while the Canadian dollar has depreciated, the exchange rates of a lot of countries that Canada competes with in the U.S. market have also fallen and, in some cases, more. Therefore, that competitive edge that you would think Canada's lower dollar would be providing isn't as effective this time.

[Raj Grewal, Liberal, Brampton East, ON]

That makes a lot of sense, especially when competing with Mexico and its labour advantage.

[Chris Matier]

Exactly.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you very much.

[The Chair, Liberal, Wayne Easter]

Thank you, Raj.

Mr. Albas.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

I want to thank the parliamentary budget officer and his staff for being here today. It's wonderful to see you. Thank you for what you do for our country.

Let's start off on the job numbers. In April you said that budget 2016 had overestimated the number of jobs. The government had put forward a projection of 100,000 jobs, and your own projections showed 60,000. Has that changed at all given what we've seen since April?

[Mostafa Askari]

As far as our estimates of the impact of the stimulus go, no, we haven't really done the impact of the stimulus. It's still too early to see exactly how that's going to affect it.