Finance Committee on May 1st, 2017

[The Chair, Liberal, Wayne Easter]

We'll call the meeting to order. Pursuant to Standing Order 108(2), today we are studying the economic and fiscal outlook.

We're privileged to have representatives from the parliamentary budget office and the parliamentary budget officer himself, Mr. J-D Fréchette.

J-D, I'll ask you to introduce the group who are with you. You have quite a group of people to be able to answer any questions, I assume. I understand that you have opening remarks.

This meeting has been called to look at the economic and fiscal outlook. Before we start, I'll ask committee members to hold off on any questions for the parliamentary budget officer on the legislation proposed in the budget. We'll get into that issue in full detail another time. I expect that the parliamentary budget officer and his people will be here for that then, so if we could stick to the economic and fiscal outlook today per the agenda, I think that would be beneficial. I believe that's where the people from the PBO are at as well.

Mr. Fréchette, the floor is yours. Could you introduce your people as well, please?

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

Thank you, Mr. Chair.

Ladies and gentlemen of the committee, thank you for the invitation to appear and discuss our April 2017 economic and fiscal outlook. Today I am joined by Mostafa Askari, the 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.

With regard to the economic outlook, on balance our outlook for real GDP growth in Canada is essentially unchanged from October. Although the Canadian economy outperformed our forecast in the second half of 2016 and the first quarter of the year, we expect growth in consumer spending to moderate and residential investment to decline in the second half of 2017 and through 2018. We project real GDP to grow on average at 2% annually from 2017 to 2021.

Our projection for the growth in nominal GDP, which is the broadest single measure of the tax base, is on average 4.1% annually over 2017 to 2021, the same as in our October outlook. Adjusted for historical revisions, the level of nominal GDP is on average $10 billion higher per year over the period of 2017 to 2021. This is due to stronger than anticipated nominal GDP growth in the second half of 2016. We have also revised upward our outlook for long-term interest rates, reflecting higher than anticipated long-term rates in the United States.

With regard to the fiscal outlook, based on financial data through the first 10 months of 2016-17, we expect the budgetary deficit to be $20.7 billion, or 1% of GDP, in 2016-17. This is $1.6 billion lower than we projected in October. For fiscal years 2017-18 to 2021-22, we are projecting budgetary deficits that are $2.2 billion larger on average compared to our October outlook. This is primarily due to higher spending resulting from new policy decisions and higher long-term interest rates.

In budget 2016, the government committed to reducing the federal debt-to-GDP ratio to a lower lever over a five-year period ending in 2020-21. This translates into a fiscal target of 31% or lower for the federal debt-to-GDP ratio in 2020-21. Under current tax and spending plans, we project that the federal debt-to-GDP ratio will be 29.6% in 2020-21, which is 1.4 percentage GDP points lower than the government's target.

Given the possible scenarios surrounding our economic outlook, and on a status quo basis, it is unlikely that the budget will be balanced, or in a surplus position, over the medium term. However, it is likely that the federal debt-to-GDP ratio will fall below its current level of 31% over the period from 2017-18 to 2021-22. We estimate that there is, approximately, a 67% chance that the federal debt-to-GDP ratio will be below its targeted level in 2020-21.

With regard to budget 2017, our report also identifies some key issues for parliamentarians.

On the economic fiscal outlook, the PBO projects budgetary deficits that are $5.9 billion lower, on average, than budget 2017 does for 2016-17 to 2021-22. This reflects the government’s $3 billion annual risk adjustment and PBO’s stronger economic outlook. The PBO believes that the government’s outlook for the budgetary balance is overly prudent over the period 2017-21. This results from the use of an outdated economic outlook that goes back to December and from incorporating a risk adjustment.

On federal infrastructure spending, the data indicate that federal spending on infrastructure has lagged the timing set out in budget 2016. We expect that roughly half of the $4 billion in infrastructure funding in 2016-17 will be spent as planned in budget 2016. The PBO expects that spending will pick up in 2017-18 to above the level projected in budget 2016, resulting in overall infrastructure spending of $10.1 billion over two years, which is close to 90% of the originally projected levels.

As to operating expenses, budget 2017 provides for 1% in annual growth over the medium term. Yet collective agreements promise annual wage growth exceeding this amount. Parliamentarians may therefore wish to seek further detail on the government's strategy to manage operating expenses.

My colleagues and I would be happy to answer any questions you may have regarding the economic and fiscal outlook.

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Thank you, J-D.

Turning to the seven-minute rounds, we have Mr. Fergus.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you, Mr. Chair.

Thank you very much, Mr. Fréchette. We are pleased to have you with us. I have long admired your work and the work of your predecessor. I find your work to be very well structured.

My question pertains to your methodology in making forecasts about economic performance and government operations.

Can you explain your methodology to us? As I understand it, you use the same figures provided by the Department of Finance. Is that correct?

[Jean-Denis Fréchette]

I will quickly clarify something and then ask Mr. Matier to provide a more detailed explanation.

We have our own model. The Department of Finance, for its part, relies on private sector projections. In my remarks, I noted that there was a delay with respect to the 2017 budget because the department once again used the December 2016 projections. That gives you an idea of the distinctions that the Office of the PBO is able to make in its projections. We do regular updates, using our own model.

Christopher, do you want to add to this?

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

Thank you, Jean-Denis.

As Jean-Denis said, we use our own macroeconometric model to put together our economic outlook. It's a model that shares some similarities with macro models at the Bank of Canada and at the Department of Finance. However, our outlook is entirely an independent outlook. These are our views and they differ most of the time from private sector outlooks and from other organizations. We produce an internally consistent medium-term economic outlook, and that contrasts with a simple survey of private sector forecasters where it's difficult to control for consistency and the exit and entry of forecasters from the survey.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

In this regard, Mr. Fréchette and Mr. Matier, how accurate have your economic growth and budget forecasts been in recent years?

[Jean-Denis Fréchette]

Chris.

[Chris Matier]

We haven't compiled a detailed review of our forecasting accuracy or the forecasting bias over the almost 10 years that we've been doing this. It's still a very small sample to look at. We do compare our projections to, and did so in this report, the average accuracy of private sector forecasters over the past 20 years. We've tried to situate our outlook within that range of accuracy.

A more recent example may be more helpful. Last year, after budget 2016, in our economic and fiscal outlook we identified that the government's outlook, based on the private sector's outlook at that time, and the risk adjustment it made to it were excessively pessimistic. Although it's only one data point, if we look back now at that forecasting record for 2016 and at the level of the Canadian economy, we see that it's much closer now to what we were saying it would be relative to the risk adjustment made to the private sector outlook. That's just one example. I'll admit that is a very cherry-picked example. I think as time goes by and we have more observations, we'll conduct a more thorough review of our forecast accuracy and make comparisons.

[The Chair, Liberal, Wayne Easter]

One thing you can be assured of is that as members of Parliament, we never pick cherry-pick examples. You can be assured of that.

[Voices]

Oh, oh!

[The Chair, Liberal, Wayne Easter]

Mr. Fergus.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

We're straightforward all the time. Thanks, Wayne.

Again, the question would be, are we still in that situation? The provisions, as I read through your report, seem to be slightly more optimistic than those provided by the Department of Finance. Could you explain what is different about your methodology in greater detail, as to why you would have a more optimistic view of economic growth performance and a lower debt-to-GDP ratio than provided by the Department of Finance?

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

As J-D mentioned in his opening remarks, there is one difference between ours and the Department of Finance's. Although their budget was introduced in late March, the government decided to use a private sector survey that was done in December. The survey was almost three months old. That was the basis of the budget. Since December there have been positive developments as far as economic activity is concerned, and we use the most recent data. That's really the starting point of the difference between our projection and the Department of Finance's projection. Over the five-year period, in fact, our average growth projection is very similar to the budget's, but it's the first year that really makes a huge difference in terms of the starting level.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

It seems that between 2018 and 2021 those numbers are quite similar. Yet, as you say, the first two years are different. If you had run the Department of Finance numbers again using a more recent set of figures, taking into account the greater than expected economic growth at the beginning of the year, would you be coming to similar numbers over the short term?

[Mostafa Askari]

Sorry, you said the Department of Finance's numbers?

[Greg Fergus, Liberal, Hull—Aylmer, QC]

[Inaudible—Editor]

[Mostafa Askari]

No, obviously. They use a different survey with different numbers. The projected growth in that survey was much weaker for the first year specifically. As a result, that starting point is very important, especially for the fiscal forecast. It raises the level of GDP, which will have an impact on the fiscal revenues throughout the forecast, which might lead to a lower debt-to-GDP ratio than the Department of Finance is projecting, as you mentioned.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Fergus.

I believe Mr. Fréchette wanted to add one further comment.

[Jean-Denis Fréchette]

I will be brief.

That is a very good question. It pertains not so much to the accuracy of the data from one source or the other as to how we can compare those data. This is a very important part of our mandate. It has been part of the discussion over the years about the role of the PBO, which is to provide Parliament with different data from what the department provides. I am not saying that their data is not good, but rather that parliamentarians must be given the tools to compare the data from the department or other sources with data specifically prepared for Parliament.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Deltell, for seven minutes.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

Thank you, Mr. Chair.

Welcome to the House of Commons, Mr. Fréchette and welcome to your senior advisors.

We are very pleased to have you here. The institution of the PBO plays a fundamental role for us. It is a precious gem that we must protect and enhance even further.

We are very proud to say that it is our political party that was so bold as to create this institution, something that bears mentioning. I say “bold” because the role of the PBO is to analyze the actions of the government in power.

In a previous life and in another legislative assembly, the National Assembly, my colleagues from the second opposition party and I suggested that the position of parliamentary budget officer be created, based on the experience of the House of Commons. My departmental colleagues said at the time that they did not want anyone looking at their work. That is exactly what your role is, and you do it very well. We want to preserve this institution.

There is something that is really bothering us. Two weeks ago, the Minister of Finance introduced the omnibus bill, Bill C-44, which includes division 7 of part 4. I would point out in passing that the government had promised not to introduce omnibus bills.

[The Chair, Liberal, Wayne Easter]

We're going to stick to the economic and fiscal update. I think we need to. We'll have other opportunities to deal with Bill C-44. In fairness to the PBO and their people, that is the issue we invited them here to speak to today. They will be invited again at a later date, when you can make all of those points in probably greater detail.

[Gérard Deltell, Conservative, Louis-Saint-Laurent, QC]

I'm sorry, Mr. Chair, but I totally disagree with your point of view. First of all, we're talking here about the independence of the PBO. That's exactly what we're talking about. If you want to control what questions we can ask, I will lose my independence.

I'm sorry, but as a member of Parliament I decide what I have to ask. Let the people decide at the end of the day if I'm doing my job well, as you did so well for so many years as a member of—

[The Chair, Liberal, Wayne Easter]

I'm trying to keep us on track with what the PBO at this stage was invited here to do. I said in the beginning that they were invited to speak on the economic and fiscal update. You also said in your introduction how important a role they play, and I agree with that, but I do think we have to stick to the topic they were invited here to address. They will be invited again to deal with Bill C-44 and the line of questioning you're trying to go down.

For us to do our job as a finance committee, that's the ruling I need to make. I'm going to stick to questions on the economic and fiscal update at this point in time.