Evidence of meeting #83 for Finance in the 42nd Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was outlook.
A recording is available from Parliament.
Liberal
Raj Grewal Liberal Brampton East, ON
Thank you, Mr. Chair.
Thank you to all of our witnesses for attending today.
A lot of the conversation focused on housing. I want to get your comments on the recent changes that the Province of Ontario has made, and the impact these might have on your outlooks.
Economic Advisor, Analyst, Office of the Parliamentary Budget Officer, Library of Parliament
We didn't explicitly take into account those changes.
Liberal
Economic Advisor, Analyst, Office of the Parliamentary Budget Officer, Library of Parliament
It would have been a pretty tight timeline.
Liberal
Economic Advisor, Analyst, Office of the Parliamentary Budget Officer, Library of Parliament
I think our outlook on housing has been fairly consistent for the last couple of years, in that we expect a correction in residential investment, and we expect it to fall more towards levels that are in line with historical norms.
On the other hand, it's very difficult to imagine the exact timing or catalyst for this correction, although we expect it to take place over the medium term. For macroprudential measures, such as those introduced in Ontario, one way of interpreting them would be that if they had an impact on the housing market, it might bring residential investment towards its historical share more quickly than we have forecast. It's very difficult, using our model without the microdata on housing, to determine the precise impact of those measures.
Liberal
Raj Grewal Liberal Brampton East, ON
On your overall growth numbers, I guess Ontario's intention is to cool down the market, and you guys are already forecasting a correction in the housing market. The question is just where that number ends up in terms of your overall growth numbers.
Let's say something substantial happens. Could it really have an impact? From last year to this year, there was a 30% growth in Toronto real estate prices. Let's say on the flip side of the argument that it's a 30% decline. How would that affect the GDP number?
Economic Advisor, Analyst, Office of the Parliamentary Budget Officer, Library of Parliament
I think there are probably two key channels we would focus on.
One is household consumption and the effects on wealth. In our model, households consume out of their labour income as well as their non-labour income, and increases in housing prices can feed through to wealth, which can support consumption. So a decline in housing prices could result in a decline in household consumption.
The other effect would potential be on residential investment as well. A sharp decline in housing prices could result in less investment.
Between the two, it's about two-thirds of the economy, so 30% would be fairly sizeable. It's hard to speculate.
Liberal
Raj Grewal Liberal Brampton East, ON
I totally agree that it's hard to speculate, but it seems like such an important metric in your overall forecast. That's why I thought there would almost be a separate chapter on housing and what impact that would have.
Senior Director, Economic and Fiscal Analysis and Forecasting, Office of the Parliamentary Budget Officer, Library of Parliament
We didn't provide that in this document, but I believe in December of last year we provided another document that gave more detail exactly on our views on the residential housing market. We highlighted at the time that we do have a very significant adjustment going on—an even bigger decline than the Bank of Canada is calling for. We also have a deceleration in housing prices adjusted for inflation, so we're not seeing, again, these 10% year-over-year gains anymore. They are basically levelling off at zero. Again, these are in terms of inflation-adjusted gains.
Liberal
Raj Grewal Liberal Brampton East, ON
Would it not be prudent to update that document given recent changes in activity?
Senior Director, Economic and Fiscal Analysis and Forecasting, Office of the Parliamentary Budget Officer, Library of Parliament
It has been updated. Our outlook has been updated, and it underlies what's shown in here. We didn't provide additional detail. I think that would be—
Senior Director, Economic and Fiscal Analysis and Forecasting, Office of the Parliamentary Budget Officer, Library of Parliament
Yes. I would just say that we already have what I would consider probably as a very, I don't want to say, pessimistic or negative view, but one in which we see a very substantial decline in activity in that sector—probably much more than private sector forecasters or the Bank of Canada is looking at.
Liberal
Raj Grewal Liberal Brampton East, ON
Okay. That's actually very interesting. You have already anticipated a very pessimistic view compared to, let's say, the big banks and the lenders out there.
Senior Director, Economic and Fiscal Analysis and Forecasting, Office of the Parliamentary Budget Officer, Library of Parliament
Yes. Again, at this time what we're looking at in terms of the share of the economy, as Tim was mentioning, is that the housing sector is at its historic peak, its highest level. We think there will be declines in activity and that the sector will move to something that's more, let's say, in line with those kinds of fundamentals than what we've seen prior to the run-up.
We do have interest rates rising over the medium term, but let's say if there were a larger than expected decline either on the price side or activity side, you wouldn't expect to see the Bank of Canada raising interest rates over that period. There would be monetary policy response, and probably a fiscal policy response as well.
Liberal
The Chair Liberal Wayne Easter
I just have a couple of questions, and if anybody has a supplementary question, we do have a little time.
In your paper on page 28, does that projection of the cost of personnel include the increased salary settlements based on the collective bargaining agreements that have been reached, and is that figure higher than what the government tabled in its budget?
Director, Economic and Fiscal Analysis, Office of the Parliamentary Budget Officer, Library of Parliament
The figure does incorporate the collective agreements that have been signed. As the starting point for our forecast for direct program expenses, and particularly for operating expenses, we start with the baseline produced within the government's budget, which incorporates the collective agreements and compensation.
We then make several minor adjustments to it—I would characterize them as minor, at least—on the basis of our own views with respect to interest rates as well as current analysis of some of the transfer payments that are made to third parties, for example for infrastructure spending.
Liberal
The Chair Liberal Wayne Easter
That was a question I had too. He answered that.
The other one was on page 18 on EI, employment insurance and how it's going to balance itself out over time. The EI premium rate is currently $1.63 and I know it was reduced under both the previous government and the government before that over the years. Do you know what the high on the premium rate was? As we look at some of the things happening, especially in the lumber industry, this may become an issue.
Premiums are now at $1.63 and are predicted to be $1.65 in 2018. What was its high some time ago? Does anybody know?
I could have looked it up myself.
Assistant Parliamentary Budget Officer, Office of the Parliamentary Budget Officer, Library of Parliament
I'm sorry, I'm not sure, but I remember it was something around $1.90 at one point, but I may not be 100% correct there.
Liberal
The Chair Liberal Wayne Easter
Okay. I was just wondering, because it's supposed to balance itself out over a seven-year period. I think that is good information that you have in the report.
Does anybody else have one quick question they want to raise?
Pierre.
NDP
Pierre-Luc Dusseault NDP Sherbrooke, QC
Thank you, Mr. Chair.
I have a quick question regarding the new practice seen in recent budgets, which consists of forecasting spending until 2028, in some cases. Do you have an opinion on it? Does it help you establish your economic and fiscal outlooks? What do you think of this new practice, which consists of spreading out spending over 10 years or two election cycles?
Parliamentary Budget Officer, Library of Parliament
As we said earlier, our forecasts cover two parliamentary cycles, which provides a little more information. Recently, the federal government did something more significant. It looked at its financial viability over the long term, and not only at its spending and so on. It presented an overview of the fixed spending over a very long period.
I don't really have an opinion on the other part of your question.
Do you want to add something to that?
Assistant Parliamentary Budget Officer, Office of the Parliamentary Budget Officer, Library of Parliament
Only the infrastructure spending has been forecasted until 2028. The government has a long-term plan for infrastructure. As a result, this information had to be provided.
NDP
Pierre-Luc Dusseault NDP Sherbrooke, QC
Budget 2017 also contains a housing item, for which spending is forecasted until 2028.