Evidence of meeting #85 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was budget.

A video is available from Parliament.

On the agenda

MPs speaking

Also speaking

Trevor McGowan  Senior Legislative Chief, Legislative Review, Tax Legislation Division, Tax Policy Branch, Department of Finance
Pierre Mercille  Senior Legislative Chief, Sales Tax Division, Tax Policy Branch, Department of Finance
Gervais Coulombe  Acting Chief, Excise Policy, Sales Tax Division, Department of Finance
James Greene  Director, Business Income Tax Division, Tax Policy Branch, Department of Finance
Pierre LeBlanc  Director, Personal Income Tax Division, Tax Policy Branch, Department of Finance
Patrick Halley  Director, International Trade Policy Division, International Trade and Finance Branch, Department of Finance
Laura Bourns  Senior Economist, International Trade Policy Division, International Trade and Finance Branch, Department of Finance
Nicolas Moreau  Director, Funds Management Division, Financial Sector Policy Branch, Department of Finance
James Wu  Chief, Financial Institutions Analysis, Department of Finance

6 p.m.

NDP

Pierre-Luc Dusseault NDP Sherbrooke, QC

Very good. Thank you.

6 p.m.

Liberal

The Chair Liberal Wayne Easter

Thank you.

Mr. Sorbara, do you have have a question?

6 p.m.

Liberal

Francesco Sorbara Liberal Vaughan—Woodbridge, ON

Thank you, Mr. Chair.

In your opening statement, you used some words that caught my attention, “modifying their trade patterns”. From speaking to some of the folks in the steel industry, you may see some countries exporting steel through third countries, with that steel production or goods production—we don't have to use steel specifically—then ending up in one of our ports. Would the remedies or legislation here deal with that sort of situation?

6 p.m.

Senior Economist, International Trade Policy Division, International Trade and Finance Branch, Department of Finance

Laura Bourns

Absolutely. That would be one of the key situations that the anti-circumvention legislation is intended to address.

There are two key types of circumvention. The first would be a modification to a product that falls outside the existing scope of a trade remedy measure. This could be a modification that doesn't change the essential characteristics of the product or how it's ultimately used, but it does change it enough that it falls outside the scope of the measure. For example, we've had situations where the chemical composition of a steel product was changed by the addition of boron or of different chemical compounds, and we've also seen situations, for example, where a 4-inch steel pipe is made to be a 4.1-inch pipe such that it falls outside the scope of the measure. These would constitute changes to a product to make that product fall outside the scope of the measure.

The second type would be a change in origin. As I've previously alluded to, if an input good or an unfinished good is shipped to a third country and finished there, that may change the origin of the good such that it's no longer considered to originate in the subject country but deemed to be coming from a third country. Ultimately, the substantial proportion of the manufacturing of that good would still take place in the subject country. In these instances as well, based on certain criteria, if we find that the substantial proportion of the production is taking place in the subject country, we'd still be able to consider that a subject to the measure.

6 p.m.

Liberal

The Chair Liberal Wayne Easter

Are there any other questions in this round? Basically, I think what you're saying is that these changes will give us a better opportunity to challenge those companies or countries that are violating our trade laws. That's basically the bottom line.

6 p.m.

Senior Economist, International Trade Policy Division, International Trade and Finance Branch, Department of Finance

Laura Bourns

Circumvention practices aren't necessarily a violation of trade law, in the sense that making modifications to a product or to your trade patterns isn't necessarily a violation of any law, but if it can be shown that these practices are being undertaken solely for the purposes of avoiding duties, then we'll be able to extend the duties to those goods. So, essentially, yes.

6:05 p.m.

Liberal

The Chair Liberal Wayne Easter

Thank you very much for that clarification.

If there are no further questions from members, then thank you both for appearing before our committee and answering questions.

We will call up those appearing on division 2: Mr. Moreau, Mr. Wu, and Ms. David.

While the witnesses are getting settled, I just have a note for the committee. The Minister of Finance has a very busy week next week, and we're trying to see if we can fit him in. He has agreed to appear before committee from 12 to 1 on May 15. The minister is going to take the time to do that next week, rather than on the 29th, so those who are working with the minister can tell him that we appreciate that very much.

Dealing with part 4, division 2, on public debt, we have Mr. Moreau, who's the director, funds management division, financial sector policy branch; Ms. David, who is the adviser/economist, funds management division, financial sector policy branch; and for Mr. Wu, I don't have his information here. I have your name, but not your position, so you can give that to us when you're speaking.

Please go ahead in explaining part 4, division 2.

6:05 p.m.

Nicolas Moreau Director, Funds Management Division, Financial Sector Policy Branch, Department of Finance

Thank you, Mr. Chair.

We're here to present and answer your questions on division 2 of part 4, clause 103 of the budget implementation act, which introduces the proposed borrowing authority act. This act authorizes the Minister of Finance to borrow on behalf of the crown and provides for a maximum amount of borrowing.

In budget 2016, the government restored parliamentary approval of government borrowing, which was last in effect prior to 2007. In budget 2017, the government proposed to implement this framework by introducing legislation seeking parliamentary approval of government borrowing.

Under the proposed borrowing act, Parliament is being asked to approve a borrowing limit. A requirement is also proposed for the government to return to Parliament at least every three years to report on the government's aggregate borrowing relative to the limit and potentially to propose a new limit, if needed.

Relative to the current framework, whereby the Governor in Council approves the flow of government debt only for the current fiscal year, the proposed borrowing authority act adds transparency to Parliament by focusing on the stock of debt—the overall level of debt of the government. The new borrowing authority act also amends the accountability to Parliament by introducing the requirement that the reporting be on government debt as well as the crown corporation debt. Basically, we're not only including the federal debt, but also looking at the crown corporation borrowing.

As presented in clause 103, in proposed section 4 of that borrowing act you can see that the limit currently being asked for this year is one trillion, one hundred and sixty-eight billion dollars. Let me explain to you how we got to this number.

Basically, the first number that we take into consideration is the stock of government debt. As of the end of the last fiscal year, the fiscal year 2016, the stock of the federal debt was $691 billion. To this number, we add the agent crown corporation market debt. This number is $276 billion. To this stock of debt, we add the financial requirements set out in budget 2017 for the next three fiscal years. This number is $103 billion. On top of this, we add the expected crown borrowing over the next three years. This number represents $43 billion.

To this number, we add a contingency margin equal to 5%. The 5% is taken from the highest level of the combined government and crown corporation debt over the next three years. The amount we're adding is $56 billion for the next three years.

Overall, this explains the one trillion, one hundred and sixty-eight billion dollars of borrowing approval that we have included under proposed section 4 in clause 103. It should be noted that in terms of increasing borrowing requirements, we're talking here about an increase of $146 billion over the next three years.

This concludes my summary remarks.

6:10 p.m.

Liberal

The Chair Liberal Wayne Easter

Thank you.

We will start with Mr. Deltell, then go to Mr. Sorbara, then Mr. Dusseault, and then Mr. Liepert.

6:10 p.m.

Conservative

Gérard Deltell Conservative Louis-Saint-Laurent, QC

Thank you, Mr. Chair.

Ladies and gentlemen, welcome to your House of Commons.

Mr. Moreau, it isn't a problem if we converse in French, is it?

6:10 p.m.

Director, Funds Management Division, Financial Sector Policy Branch, Department of Finance

Nicolas Moreau

No, it's no problem.

6:10 p.m.

Conservative

Gérard Deltell Conservative Louis-Saint-Laurent, QC

That's what I thought. Very good. We'll have to be very careful when we refer to you, since the difference between your last name and the minister's is only one letter. We'll have to be mindful of that.

Mr. Moreau, I'd like to start by touching on two issues.

In relation to the debt, you listed a slew of figures that may come as a surprise to some, but not to us. The debt is beyond the billions, if you take into account all the elements.

What kind of strain does an amount like that put on public finances? Keep in mind that, for years, we have repeatedly been hearing that things are going well and that interest rates are low, with the caveat that those rates could eventually rise. What is the risk and danger of having over a trillion dollars in debt? As an aside, I would just point out that the French term for “trillion” is not the same as in English. The right term in French is actually billion. The English term “billion”and the French term billion are often used incorrectly. Be that as it may, for the purposes of our conversation, let's use the word trillion in French.

The debt currently exceeds $1 trillion. According to a Department of Finance study that was sent to the minister on October 10 but not made public until a few hours before Christmas, if the situation remains unchanged, by 2050, Canada's debt will sit at $1.5 trillion, and that doesn't include crown corporation debt.

I'd like you to discuss the risks that such a debt poses to public finances.

6:10 p.m.

Director, Funds Management Division, Financial Sector Policy Branch, Department of Finance

Nicolas Moreau

The thing that has to be taken into account is the government's capacity to make payments. We are talking about just over a trillion dollars of debt—billion in French, if we use the correct term. As a share of GDP, that's 50%. From that standpoint, when you compare Canada with other G7 countries, we fare quite well: we have the lowest level of public debt in the G7. Canada also has a higher credit rating, being the only G7 country with positive interest rates and a AAA credit rating. That's a key consideration to keep in mind.

That said, of course, maintaining our ability to repay the national debt is important. However, the debt has to be considered in context, with regard to the big picture.

6:10 p.m.

Conservative

Gérard Deltell Conservative Louis-Saint-Laurent, QC

Clearly, the excellent standing you are referring to is the fruit of the previous government's labour. Allow me, if you will, to speak on the former government party's behalf, and this has nothing at all to do with you. Thanks to the previous government, led by our party, Canada was the first country to emerge from the financial crisis, and has the best debt-to-GDP ratio and credit rating in the world. Fortunately, we were there to lead the country as the entire planet grappled with the worst financial crisis since the 1920s.

That said, you mentioned something else that came as a bit of a surprise to us, but I want to make sure I understood you correctly. You said that the government would have to return to Parliament every three years to provide an update on the situation. Did I hear that correctly? You are nodding your head. Why is it every three years? Why not every year?

6:10 p.m.

Director, Funds Management Division, Financial Sector Policy Branch, Department of Finance

Nicolas Moreau

I admit that the decision to do it every three years is somewhat an arbitrary one. However, it would be extremely onerous to have to return to Parliament every year to set a new borrowing limit. It's about the same as the current system; all we are doing is examining the debt flow.

It should be pointed out that the budget contains five-year forecasts. The outlook is for the medium term, up to five years ahead. We decided to provide an update every three years, making it possible to better balance tax planning and debt management. The approach offers more flexibility from a management standpoint.

It could prove difficult if the government had to return to Parliament every 12 months to adjust the limit. That's a very tight time frame, especially during an election campaign.

6:15 p.m.

Conservative

Gérard Deltell Conservative Louis-Saint-Laurent, QC

Your explanation makes sense, but the issue merits further analysis. The debt is, after all, a very high tax burden on public finances. I believe it is now the Canadian government's third largest spending item; we aren't talking about peanuts, here. We could certainly take a closer look at the merits of requiring the government to report to Parliament every year, as opposed to every three years.

You said all budgets reflected five-year forecasts. I have been in Parliament barely a year and a half, so this is only the second budget I have scrutinized. However, at another time, in another legislature, with the benefit of analysis, we realized that no five-year forecasts ever held true the following year. The next year's estimates were never in line with the forecasted figures.

Is that the case for the federal government as well? If so, what is the point of preparing five-year forecasts if they aren't valid the following year?

6:15 p.m.

Director, Funds Management Division, Financial Sector Policy Branch, Department of Finance

Nicolas Moreau

First of all, I'd like to clarify something about the three-year time frame I was talking about.

The government of the day can decide to adjust the borrowing limit every year, if it wishes. Under the proposed measure, the government would have to return to Parliament at least once every three years to have the limit adjusted, but the government has the discretion to do it every year, if it wants to.

The budget also sets out the strategy for managing the debt. By including those numbers in the budget, the government is accountable to Parliament and the public. Every year, a debt management report is also published; it lays out all the costs associated with servicing the debt.

Turning back to the matter of the economic forecasts, I would say it's far from an exact science and particularly challenging right now, mainly because of market uncertainties. We can't control what happens in the world. We have seen numerous shocks in recent years, and that has complicated the business of economic forecasting.

To arrive at our forecasts, we consult about 15 private-sector economists and take the average. We also ask them to list the risks associated with their projections, from both an upward and downward standpoint. That is why our forecasts include a contingency reserve.

It's not an exact science, and Canada isn't the only one adjusting its budget forecasts, either. All industrialized nations do the same. The IMF and OECD revise their forecasts quarterly.

It bears repeating: it's not an exact science. We do our best, but the market uncertainties make our job a lot more complicated.

6:15 p.m.

Conservative

Gérard Deltell Conservative Louis-Saint-Laurent, QC

I'm not an accountant, but that's what accountants say. Economists are always very good at explaining what happened and assuming responsibility for their predictions. That isn't exactly true, but I won't get into that.

Thank you, Mr. Chair.

6:15 p.m.

Liberal

The Chair Liberal Wayne Easter

Thank you, Mr. Deltell.

Mr. Sorbara is next, please.

6:15 p.m.

Liberal

Francesco Sorbara Liberal Vaughan—Woodbridge, ON

The number on the borrowing limit includes all the loan guarantees that are in place. Is that correct?

6:15 p.m.

Director, Funds Management Division, Financial Sector Policy Branch, Department of Finance

Nicolas Moreau

I beg your pardon?

6:15 p.m.

Liberal

Francesco Sorbara Liberal Vaughan—Woodbridge, ON

Does it include any loan guarantees that are in place for debt issuances?

6:15 p.m.

Director, Funds Management Division, Financial Sector Policy Branch, Department of Finance

Nicolas Moreau

It doesn't, no. No loan guarantees are included in this number.

6:15 p.m.

Liberal

Francesco Sorbara Liberal Vaughan—Woodbridge, ON

Okay.

Second of all, you mentioned credit ratings for the G-7. Please correct me if I'm wrong, but I understand that Germany also has a AAA credit rating like Canada's. It depends on which agency you look at for the United States: they also still maintain a AAA credit rating with Moody's and Fitch, I believe, but not with S&P if I'm correct.

6:15 p.m.

Director, Funds Management Division, Financial Sector Policy Branch, Department of Finance

Nicolas Moreau

You're totally correct. My statement was that Canada is the only country with a AAA rating from all the rating agencies—