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
The Chair Liberal Wayne Easter
If you want to answer that question, Mr. Fréchette, you can. If you don't want to answer now and leave it to a later date, we'll go on to Mr. Dusseault.
Parliamentary Budget Officer, Library of Parliament
Thank you, Mr. Chair. I never refuse to answer parliamentarians' questions.
Next Wednesday, in six days, I will publish a discussion paper with information for parliamentarians and their staff, specifically about the reform proposed in Bill C-44. This paper pertains not so much to the potential impact of this bill on the operations of the PBO, but rather to the potential impact on parliamentarians. I invite you all to pay close attention to that.
I will now answer your question about the independence of our office.
In the interview reported in the article you mentioned, I also said I am pleased that the independence of the PBO is recognized. We are certainly removed from the Library of Parliament. We will have our own budget, which is an aspect of independence. As to being completely independent, that is another matter. Thanks to the debate that we and other parties have raised, however, I believe this bill will be improved.
Liberal
The Chair Liberal Wayne Easter
Thank you for that response, Mr. Fréchette. We look forward to that document coming out on Wednesday.
Mr. Dusseault, you have seven minutes.
NDP
Pierre-Luc Dusseault NDP Sherbrooke, QC
Thank you, Mr. Chair.
Mr. Fréchette, thank you for your testimony today. Like my colleagues, I am looking forward to seeing the document that will be published soon.
When I read your economic outlook, I was especially interested in infrastructure spending. You note that not even half of the money earmarked for infrastructure has been spent, although spending will pick up significantly over the coming year.
The government keeps saying that investments in infrastructure will lead to growth and keep the economy going. Has the fact that not even half of the funding has been spent had an impact on Canada's economic growth?
Parliamentary Budget Officer, Library of Parliament
Thank you for your question.
For the first period, 2016-17, that is, it is true that the government has not spent half the funding set aside for infrastructure. It has carried the remaining amount forward.
That said, this kind of delay is not unusual in view of the infrastructure investments that are earmarked for the provinces and municipalities. You come from a riding that includes the large municipality of Sherbrooke, and you know very well that it can be difficult at times. This somewhat delayed economic growth in the past year. Since these investments have been delayed, the growth can be expected in the next two years. Growth in GDP and delaying this infrastructure spending does of course have an impact on government expenditures and on the deficit itself. That is why the deficit is a bit higher than expected, although just slightly so in relation to what we projected in October.
NDP
Pierre-Luc Dusseault NDP Sherbrooke, QC
I will talk about something that is not addressed in the report, namely, inclusive growth. This is an expression we use often. We want growth to benefit everyone and to reduce economic inequality in our country.
In your next reports, would it be possible for you to assess inclusive growth, that is, whether growth is benefiting everyone, not just a few people, at the end of the year? Can you include that in your economic outlooks?
Parliamentary Budget Officer, Library of Parliament
Thank you for the question.
That is not part of our forecasts. We have noticed, however, with regard to infrastructure spending—and this is getting away from social inclusion—that the goal in the first two years was to generate economic growth. My colleague Jason Jacques might wish to add something in this regard. In the medium term, by 2020, the objective is to boost productivity and efficiency. For the time being, there is no indication that infrastructure spending will generate that kind of productivity in the medium term.
That does not answer your question entirely, but increasing productivity and efficiency can have an indirect impact on social inclusion. We do not include it in our calculations, however.
NDP
Pierre-Luc Dusseault NDP Sherbrooke, QC
My next question is on another topic.
Your outlooks indicate that the exchange rate and the price of oil are very stable. In recent years, however, these figures have fluctuated a great deal. Since the exchange rate and the price of oil are interrelated, when the price of oil fluctuates, so too does the rate of exchange.
I am wondering why therefore, in the current context, you have forecast nearly perfect stability in the exchange rate and price of oil.
Parliamentary Budget Officer, Library of Parliament
Thank you for your question.
I will ask Mr. Scholz to answer.
Tim Scholz Economic Advisor, Analyst, Office of the Parliamentary Budget Officer, Library of Parliament
The two are related. In our macroeconometric model, the oil prices have an important effect on determining the exchange rate. The way we project oil prices is through futures prices. Right now the futures indicate that oil prices are going to be relatively flat across the projection horizon, which also contributes to the fact that our exchange rate forecast for the Canadian dollar is relatively flat at around 76¢ U.S.
The other force, I think, that's acting a bit in the short term is the interest rate differential between Canada and the U.S., which is supposed to be slightly higher on the U.S. side compared to October. That has minor impacts, but really when you see a flat exchange rate, it's due to the flat commodity price outlook.
NDP
Pierre-Luc Dusseault NDP Sherbrooke, QC
I was a bit surprised by some other figures. They are related to the exchange rate and price of oil. I believe these figures are from the Bank of Canada's April 2017 Monetary Policy Report. Consumption is expected to drop by 0.1%, in almost every year until 2019. A significant drop is also expected in net exports from 2016 to 2019.
How can you explain this expected drop in consumption and exports when the exchange rate is favourable for our companies in relation to the American market?
Senior Director, Economic and Fiscal Analysis and Forecasting, Office of the Parliamentary Budget Officer, Library of Parliament
Relative to the Bank of Canada outlook, we basically see a larger adjustment in terms of the slowdown in household spending. We also see a steeper decline in residential construction activity. We have about a 10% decline in that activity from its peak level. What offsets that and brings our overall outlooks into line is, as you identified, on the export side. We actually have a stronger export performance and stronger business investment too, but we basically just have a difference in view of the rebalancing in the economy.
NDP
Pierre-Luc Dusseault NDP Sherbrooke, QC
I would like to briefly discuss the fact that, in 2017, the departmental plans do not always match the budget statement.
To what extent will your economic outlooks change if the departmental plans and the main estimates are completed after budget 2017 and if they match? Will that improve your economic outlook?
Parliamentary Budget Officer, Library of Parliament
That's an excellent question. It's the topic of an internal debate, in particular with my colleague here. We're talking about an alignment of the departmental plans, the departmental main estimates and the federal budget. This alignment will certainly improve the type of reports we can provide to the parliamentarians.
I think this issue is still part of the procedural reform in the House of Commons. That said, the alignment of the different budget documents isn't the only issue. The various departments must also be able to do the right things at the right time. That's one of the comments being made regarding this reform.
It's a matter of delaying the main estimates by two or three months. However, based on the analyses carried out in past years, we realized that 65% of the measures had been included in the supplementary estimates (A) in May. This means that 35% of the measures hadn't been aligned. If all the main estimates are delayed until May, but this discrepancy remains, the issue will stay more or less the same.
That said, the alignment could result in some improvements. However, it would take a full cycle to see them.
Liberal
The Chair Liberal Wayne Easter
Thank you both.
Ms. O'Connell, for the last of the seven-minute rounds, the floor is yours.
Liberal
Jennifer O'Connell Liberal Pickering—Uxbridge, ON
Thank you, Mr. Chair.
Thank you all for being here.
I want to start with a question concerning the estimated federal debt as a percentage of GDP. It sounds like the finance department sees a decline in the deficit from 2021-22 to 2055-56. Help me if I'm misunderstanding this, but there seems to be a difference of opinion or in the modelling results between 2021-22 to 2035-36 based on these charts. I'm just curious because it sounds like the Department of Finance thinks that ratio will increase in that period but the PBO report seems to indicate that it will continue to decline from 2021 to 2056. Am I understanding this graph properly? It just seems to stand out to me that there's a difference in those years or a difference in the modelling. I'm going from the Library of Parliament's briefing note, but it's a figure and it pulls out these years.
I'm just looking for clarification as to what's so different in 2036.
Assistant Parliamentary Budget Officer, Office of the Parliamentary Budget Officer, Library of Parliament
These are two separate reports completely. Every year we do what we call a fiscal sustainability report, which essentially is a kind of scenario in which we put together what happens in the very long run in terms of government spending, revenue, and then, based on projected demographic changes, we estimate the debt and the debt-to-GDP ratio over the very long term.
The Department of Finance also does a similar thing now, as they provided recently, but it's a completely different thing from what we are presenting right now. What we are presenting right now is a medium term economic and fiscal projection. This is what we are projecting is going to happen, whereas the fiscal sustainability report is more a scenario based on demographic changes and whether the government's fiscal situation will be sustainable over the very long term. Those are based on certain assumptions.
We would be happy to talk about the different aspects of that report, but these are two completely different things.
Liberal
Jennifer O'Connell Liberal Pickering—Uxbridge, ON
Okay. Thank you. That explanation helps with the graph.
You somewhat answered the next question I have, which Mr. Dusseault also raised. Some of the justifications for the estimated contributions to growth are things like consumption and housing, but this committee has recently studied and been concerned about increased household debt, for example, which includes housing and other consumption. If I heard your answer to that question correctly, your assumptions about continued growth are not based on consumption and continuing increases in housing, which is something we are somewhat concerned about, but, in fact, that you expect exports to fill the gap.
Am I understanding that correctly? If you could elaborate, that would be helpful.
Economic Advisor, Analyst, Office of the Parliamentary Budget Officer, Library of Parliament
Yes, that sounds about right. By the second half of 2017, we expect consumer spending to moderate and residential investment to contract as well into 2018, but this will be offset somewhat by a sharp pickup in business investment as well as a pickup in net exports.
Liberal
Jennifer O'Connell Liberal Pickering—Uxbridge, ON
Okay. Thank you.
Again, to follow up on what my colleague asked, I'm wondering if the PBO has considered breaking down some of this analysis either regionally or demographically because, certainly, when we look at housing, we know there are certain regions where a drop or decline might have greater impact.
Are you able to break it down, or is your mandate and your modelling specifically to look at the big picture? Are you able to provide some of the kinds of regional and demographic breakdowns that would maybe help us in terms of policy considerations?
Assistant Parliamentary Budget Officer, Office of the Parliamentary Budget Officer, Library of Parliament
This report that we do twice a year is at a very high level, macro level, so we normally do not get into regional issues or sectors, or those kinds of breakdowns.
We have done in the past, for example, a labour market analysis that looked at trends in different regions or different sectors. We have done a study recently on household debt. Those things happen, but they are not part of this process; it's different. We'll also do it sometimes in response to a request by a member of Parliament. Or if there's an issue that we think is important for parliamentarians to be aware of, we will do a study and provide it to them.