Finance Committee on May 12th, 2020

[Yves Giroux]

When you add to the mix private debt or debt held by households and companies, it paints a very different picture. We and the Bank of Canada governor, the policy wonks and think tanks have mentioned repeatedly that the high levels of household debt presents a significant risk to the Canadian economy.

That high level of debt, however worrying it is, doesn't cost that much to service, which is probably the cause of that high level of debt in good part. It doesn't cost that much to incur a huge mortgage, because interest rates on mortgages are 3% to 4%. That incentivizes people to take on more debt, and they are doing that. Therefore, of course, when you take into consideration the debt that private individuals and corporations have and add that to the level of debt of the government, it is a very important amount. However, I'm not sure what the government can do to prevent households from having that debt. It paints a worrying picture when you add them all together. It is true.

[Pierre Poilievre, Conservative, Carleton, ON]

You have to add it all together, because the government doesn't own the entire economy. It cannot lay claim to all of the output to service its debt. That one economy has to service the debt of households, businesses and all levels of government. You're telling me the only saving grace we have right now is low interest rates. You've predicted that rates will remain low because the economy will be weak, but we have historical evidence that rates can be high in a weak economy. In the early 1980s, we had an extremely weak economy, and we had extremely high interest rates at the same time to combat out-of-control inflation. Why would we risk that repeat?

Why would we risk the possibility that we would have unsustainable levels of debt going into future increases in interest rates, all on the flowery assumption that rates will never go up again?

[Yves Giroux]

I don't think anybody is taking for granted that rates will never go up. The scenario we released goes only to the end of the current calendar year, and we don't anticipate a return to high interest rates. Those who have dared to put out projections or scenarios beyond the current calendar year are not envisioning a return to the high interest rates of the 1980s.

Could interest rates go up in the next several years? Yes, they could well go up, and we need to be cognizant of that.

[Pierre Poilievre, Conservative, Carleton, ON]

Chair, could I just make a closing 10-second comment on that?

[The Chair, Liberal, Wayne Easter]

You can. We will have time for another question from you later on anyway. Do you want to go now, or have it later?

[Pierre Poilievre, Conservative, Carleton, ON]

I'll make it very quick. I'll point out that if, for example, the overnight lending rate were to go up to 2%, that would be an 800% increase over the 0.25% we have now. It would be only a two-point increase, but it would go up eight times. The sensitivity of our economy to higher interest rates is so much bigger now, and therefore, the risk is so much bigger as well.

[The Chair, Liberal, Wayne Easter]

Is there any comment you want to make on that, Mr. Giroux?

[Yves Giroux]

Only that I agree that our economy, the entire economy, is very sensitive to interest rates. As Mr. Poilievre mentioned, should interest rates start going up, the government would have to incur significantly higher debt-servicing costs, but households and companies would have to face much higher debt-servicing costs as well.

[The Chair, Liberal, Wayne Easter]

As probably the only one on here who had to pay 22.5% in the 1980s, I remember it very well and very painfully.

We'll turn to Mr. Fragiskatos, and then we'll go on to Mr. Cumming.

Elizabeth May, somebody informed me that you had your hand up earlier. We will give you a round a little later on.

Mr. Fragiskatos.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you, Chair.

Thank you, Mr. Giroux, for your testimony today and for all the work you're doing.

I want to follow up on some of the questions that Mr. Poilievre posed. You've been asked today about Canada's debt-to-GDP ratio relative to other countries, and you said that we have a very good debt-to-GDP ratio when we compare ourselves with other G7 countries. That would include, also, federations that have within them municipalities that have states and/or provinces with debt levels as well.

When you make that comparison, you're not excluding federations, are you? You're also looking at countries that have a federal structure of government?

[Yves Giroux]

Yes, but when I make comparisons, I try to go with the same level for comparable numbers. For example, if we consider only federal debt levels in Canada, we consider only federal debt levels in other federations.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Yes, but when you look at other countries, you're not excluding federations. You're comparing Canada to other federations and other unitary states as well. You're not exclusive in that regard.

[Yves Giroux]

Yes.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Perfect.

I want to ask you something that builds on a question that Mr. Fraser posed to you at the end of his line of questioning.

Suppose, for a moment, that Canada had followed a minimal approach and had not introduced the Canada emergency response benefit, the wage subsidy program, the rent support program that we've seen for businesses or the Canada emergency business account that have of course been introduced. What would be the economic impact of that? I know you haven't modelled that and your officials haven't worked on that. However, you did say that it's an interesting sort of thought experiment. You study the economy. This is your expertise. What would you say, if posed a question in those terms?

If Canada had not introduced these programs, what would the net effect be on the economy, taking into account the most obvious thing, which is that the economy is ultimately about people? If people are suffering, certainly our economy would suffer in ways that we've never seen before, I would assume. I'm not going to put words in your mouth, but could you build upon that?

[Yves Giroux]

Sure.

In the absence of any government support—wage subsidies, income support measures, loans to businesses—we would have seen widespread bankruptcies, both at the individual level and the corporate level.

There would be even more restaurants that would say they're not coming back. We would already have seen a lot of bankruptcies. Not that many people have enough savings to sustain themselves for months at a time without an income, so there would be lots of defaults on mortgages, lots of repossessions of houses, and of cars, due to car loans not being paid. There would be businesses going under, as I mentioned, and credit card debts that would go unserviced. The cost of doing nothing would certainly be high. Instead of being borne by the government, it would have to be borne by businesses, banks, financial institutions or whoever is lending that money. They would absorb very high debt levels, and that would also mean very high levels of emotional distress and very high stress levels.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Can we infer from that, Mr. Giroux, that the cost of doing nothing could also have led to not just a recession but perhaps even a depression? Is it possible to think in those terms?

[Yves Giroux]

I think that it's possible to think in those terms, but I think the cost of doing nothing would just mean that the government would have ended up being forced to do something anyway, but probably something even more expensive or even more radical than what the government felt that it had to do.

For example, in the absence of any income support measures or loans, as I mentioned, there would be widespread economic distress, bankruptcies and so on. You can easily imagine financial institutions in this country going under one after the other in such a catastrophic scenario. The government would have had to bail out banks, which probably would not be much cheaper, certainly not cheaper than what we are currently doing as a country to support individuals and businesses.

As for the cost of doing nothing, I don't think you can really envisage that because the government would have been forced to do something anyway. Instead of doing it in March, it would have had to do it in late April or May, probably at a much higher price than the total. That we will never know for sure because we don't want to run such a bad social experiment.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you.

Andrew Scheer and the Conservatives have suggested that there is an apparent need, at least from their perspective, to reduce the Canada emergency response benefit for those accessing it. Do you have any thoughts on what that would mean for the average Canadian consumer who is on the CERB at the present time out of necessity and what that could imply for the Canadian economy?

[Yves Giroux]

In such a hypothetical scenario, one would have to look at the new level of the CERB. I think the question was related to the disincentives to work. Of course, the moment that you provide a benefit to individuals without an associated requirement to provide work effort, there is an disincentive to work, but that's a totally different question. With regard to your point, we'd have to look at the specifics to be able to assess the impact on Canadian consumers, individuals and the economy.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

Next is Mr. Cumming and then Mr. McLeod.

James, you have six minutes.

[James Cumming, Conservative, Edmonton Centre, AB]

It's great to see you at committee again. It's always a joy to hear your testimony at this committee.

I want to first talk a little bit about the $252 billion—it's funny how that just rolls off your tongue—as a deficit. What level of confidence do you have that that number is actually accurate, given that we continue to see additional spending extensions? It looks like there's going to be an extension to the wage subsidy program. More importantly, what revenue is going to be generated by the economy? That's a bit of an unknown. How quickly do you see provinces reopening and actually starting to produce revenue again in that scenario for the $252 billion?

[Yves Giroux]

In that scenario, we see physical distancing measures being gradually eased over the spring, and being lifted not before the end of the calendar year. Some measures would remain in place throughout the year—so provinces and the federal government would continue to have revenues—but the revenues would certainly not go back to the pre-pandemic level during the current fiscal year. We would probably have to wait past the end of the fiscal year for the government revenues to return to the same pre-pandemic level. It will be several months, if not a few years, until we see the same level of government revenues that we had in February, for example.

With respect to the confidence level that I have in the $252-billion deficit figure, I'd say that it depends on a number of things. It depends on physical distancing measures being lifted gradually throughout the remainder of 2020. It assumes that oil prices will remain low for the rest of the year. However, we also stopped taking into consideration measures as of April 24 because we had to go to print at some point.

In my view, the $252-billion figure is probably on the optimistic side. If I had to bet on that number, I'd say that it's more likely to be worse than that than it is to be better than that. I think that $252 billion is probably on the very optimistic side as things stand now, but as I said before, we could be pleasantly surprised. A genius could come up with a vaccine tomorrow, and we could go back to living a normal life by September, but that doesn't look likely for now. In all likelihood, the deficit will be higher than $252 billion.

[James Cumming, Conservative, Edmonton Centre, AB]

Because you did some analysis prior to COVID on the debt that's been taken on, as my honourable colleague has suggested—provincial debt, municipal debt, all of those—I think it's a safe assumption, then, that the level of this could be quite a bit higher.

That leads to our having two options here when we get into this scenario. One is having tax capacity, which Canada, from a competitive standpoint, was getting pretty close to.... If I remember in some of your reports, there was concern about our competitiveness. The other option was generating revenue.

How important would it be, as we look forward to any initiatives by government, whether it be on infrastructure funding or tax planning, to encourage investment in revenue-producing assets versus those assets that actually incur additional cost, as we try to work our way out of the COVID pandemic?

[Yves Giroux]

A crisis like the one we are living in, as sad as it is, presents opportunities. As you mentioned, there will certainly be a need and a desire for stimulus measures to be implemented. When that time comes, the government should seriously consider productivity-enhancing stimulus measures as opposed to pure spending, which doesn't lead to greater well-being and greater wealth-generating capacity, for example.

It will be important to have a plan in place, when the time is appropriate, for stimulus measures that generate additional growth and wealth for the country, as opposed to spending for the sake of spending.

That being said, it would be beneficial if the government were to lay out its recovery plan once the end of the pandemic is in sight, or at the very least a fiscal update as soon as possible, so that Canadians have a much better sense of the depth of the deficit and the economic situation.