Finance Committee on May 12th, 2020

[The Chair, Liberal, Wayne Easter]

Welcome to meeting number 27 of the House of Commons Standing Committee on Finance. Pursuant to the order of reference of Tuesday, March 24, the committee is meeting on the government's response to the COVID-19 pandemic.

Today's meeting is taking place by video conference and the proceedings will be made available on the House of Commons website.

I'll not go through the technicalities. We've been through them a number of times. However, I would emphasize that the use of a headset with a boom microphone is highly recommended. It makes it an awful lot easier for those who are translating, and I'd ask people to speak as slowly and as clearly as they can.

Before I turn to our witness, the Parliamentary Budget Officer, I want to give MP Morantz a minute for an opening remark on the anniversary he casually mentioned just before I called the meeting to order.

Marty, the floor is yours.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Mr. Chair, thank you very much for giving me a moment.

Today, my home province of Manitoba celebrates its 150th anniversary. It was on May 12, 1870, that we officially became a province, the fifth to join Confederation. The resilience of our prairie spirit, of over 1.3 million Manitobans, has never been more on display than it is now as Manitobans from all walks of life come together as we fight against COVID-19.

Throughout these 150 years, Manitobans have persevered through tough times and celebrated the good times. Today and all days, I am truly proud to be a Manitoban.

Happy 150th anniversary, Manitoba.

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Thank you, Marty.

Happy 150th from all of us as well.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you very much.

[The Chair, Liberal, Wayne Easter]

We will turn to our witnesses today from the Office of the Parliamentary Budget Officer: Yves Giroux, the Parliamentary Budget Officer; and Ms. Yan, the director of budgetary analysis.

Parliamentary Budget Officer, you're on. I assume that you have an opening statement, and we'll go from there.

[Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer]

Yes I do, Mr. Chair.

Good afternoon, Mr. Chair, vice-chairs and members of the committee. Thank you for the invitation to appear before you today in our first virtual appearance before this committee.

We are pleased to be here today to discuss our recent COVID-19 economic and fiscal analysis.

With me today I have Dr. Xiaoyi Yan, who is the director of budgetary analysis in my office.

Our work to date has included the publication of three scenario analysis reports on the impact of the COVID-19 pandemic and oil price shocks. Our scenario analysis reports are designed to help parliamentarians gauge the potential implications of the COVID-19 pandemic and oil price shocks on the Canadian economy and the government's finances. The analysis provides a plausible illustrative scenario. It is not a forecast. This scenario analysis is updated regularly as more data and information become available.

Our latest scenario analysis update report, which was published on April 30, incorporates new federal measures announced up to and including April 24. Our updated economic scenario assumes real GDP in Canada to decline by 12% in 2020, which would be the worst on record since the series started in 1961.

Under this scenario, the budget deficit would increase to $252 billion in 2020-21, which would make it, relative to the size of the Canadian economy, 12.7% of GDP. The federal debt-to-GDP ratio would rise to 48.4% of GDP in 2020-21. These latest fiscal results include the $146 billion in federal budgetary measures that have been announced as of April 24, based on Finance Canada and PBO cost estimates. These numbers do not take into consideration measures announced after April 24. Their inclusion would increase the federal deficit by a few billion dollars.

My office has also produced independent cost estimates of a number of the components of the government's COVID-19 economic response plan, including the Canada emergency response benefit, the Canada emergency wage subsidy and the Canada emergency business account among others. Based on our analysis, the estimated cost of the Canada emergency response benefit is $35 billion, while the Canada emergency wage subsidy is expected to cost $75 billion and the Canada emergency business account just over $9 billion.

To date, budgetary measures announced by the government are intended to be temporary. Once the budgetary measures expire and the economy recovers, the federal debt-to-GDP ratio should stabilize. However, if some of the measures are extended or made permanent, the federal debt ratio could keep rising.

Xiaoyi and I would be pleased to respond to any questions you may have regarding our COVID-19 analysis or other PBO work.

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Giroux, and thank you for the important work you do.

I will go through the list and then come back to the first questioner.

First up in the six-minute round will be Mr. Morantz, then Mr. Fraser, Mr. Ste-Marie and Mr. Julian, and then we'll move on to Mr. Poilievre in the next round.

Marty, you're on.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you again, Mr. Chair.

Mr. Giroux, you mentioned in your opening remarks and reported earlier the $252-billion forecast deficit, which is an historic number. My recollection across my lifetime is that it has never been higher than around $40 billion before.

Do you have an analysis of what portion of that deficit would be attributable to the expenditures and the retraction in the economy directly related to COVID, and what portion would have been incurred in the ordinary course? In other words, if this COVID crisis had not happened, what would your deficit forecast have been for 2020-21?

[Yves Giroux]

We estimate that the economic downturn itself is responsible for about $70 billion in revenue decline.

Of the $252 billion, about $70 billion is due to reduced revenues, $146 billion is due to increased expenditures directly related to COVID-19, and we had already expected a deficit, the amount of which I'll go through my numbers and find for you here.

Before COVID-19, we expected the deficit to be $23 billion in 2020-21. We will very likely be going from $23 billion to well over $250 billion.

The various components are, as I mentioned, $23 billion of deficit, $146 billion in budgetary measures and about $70 billion in reduced revenue.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you.

I know that yesterday there were some news reports. It appears that some public servants have been asked to essentially ignore evidence of fraud in some of these programs. At this point in time, that seems to be what has been alleged, at least, by the media.

Given the staggering number that you just talked about, essentially a tenfold increase in the deficit, do these reports concern you from your perspective as the PBO?

[Yves Giroux]

It's certainly concerning to me, not only as the PBO but as a taxpayer, when I hear there is a possibility that fraud or abuse of government benefits would not be countered or would not be closely monitored.

That said, in our cost estimates we don't factor in fraud or the abuse of systems. We make various assumptions as to the number of individuals who would be eligible for these benefits, but we don't top up our estimates to take into consideration abuse or fraud.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Then, in simple terms, the deficit could be higher if these allegations are, in fact, correct.

[Yves Giroux]

Sadly, yes. If there is widespread fraud or abuse of these benefits, the expenditures will be commensurately higher.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Okay. Thanks for that.

On the operating budget side, in 2019 the debt-servicing costs in the operating budget were about $23.3 billion. Assuming that your numbers are accurate and there is no real increase for fraud, and we go with a number of $252 billion, what do you expect the actual increase in the cost of debt servicing will be, drawn against the operating budget?

[Yves Giroux]

Assuming that we indeed have a deficit of about $250 billion, we anticipate that debt charges will not go up, which is surprising and counterintuitive. It's due to the fact that interest rates are so much lower than what we'd anticipated them to be just two or three months ago. With interest rates being so low, it doesn't cost that much to finance that growing debt.

For example, the government can issue 10-year bonds and pay less than 1% in interest rates, which are levels that we have rarely seen in our lifetime. We don't anticipate these interest rates to rise significantly over the coming months, due to the poor economic conditions.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Mr. Chair, perhaps I have time for one more question.

On the deficits, we had heard reports in the past that the federal government might not have the budget back in balance until around 2040. Based on what has happened, and again, this is a whole new world, what is your sense of when the federal government might actually be in a position to bring the budget back into balance? How many years?

[Yves Giroux]

Your guess is probably as good as mine when it comes to that. With a deficit of that magnitude, it will very likely require significant efforts for the budget to return to balance. It would require letting the temporary programs expire, but also probably having a strict control on expenditures or other kinds of policy actions, such as tax increases, unless we're blessed and witness unprecedented growth coming out of the pandemic.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you.

Mr. Chair, do I have time?

[The Chair, Liberal, Wayne Easter]

No, you're a little over, but that's fine, Marty.

Thank you, both.

We'll turn to Mr. Fraser and then to Mr. Ste-Marie.

Sean.

[Sean Fraser, Liberal, Central Nova, NS]

Thank you very much for joining us today and for your thoughtful analysis, as always.

I want to pick up on a line of answers to one of Mr. Morantz's questions about the carrying costs of this debt. You've indicated, essentially, that the cost of carrying this is not likely to increase. Is it because the rate of interest being paid on any monies borrowed is lower than it was previously, or is it just that it was so low to begin with that, more or less, the cost of borrowing is so close to zero that it doesn't impact the overall number?

[Yves Giroux]

It's a mix of both. Historically, interest rates have been higher than what we have seen in the last several years, so even before the pandemic started, the government could borrow at very low interest rates. The pandemic has pushed these rates to even lower levels, which very few people thought would be possible, but it did happen. Therefore, the government can now finance its debt.

There are the new borrowings, as well as the debt that is maturing and has to be refinanced at very low rates—which are below 1% for a 10-year bond and barely around or above 1% for a 30-year maturity—so it's a combination of already low interest rates before the pandemic and even lower rates since the onset of the pandemic.

[Sean Fraser, Liberal, Central Nova, NS]

The reason I ask is that one of the last times you joined us—we were in the flesh at committee—was following your late-February report on the sustainability of federal and provincial finances.

I believe one of the lines of questioning that I got into at the time involved the cost of borrowing on 30-year bonds. I think I referred to it as 0.709% or something in that order. One of the things that you indicated to us during your testimony was that there was essentially about 38 billion dollars' worth of—I hesitate to call it wiggle room—spending or reduced taxes before the fiscal picture would become unsustainable.

Is it your view that, because there was such a wide gap between the existing expenditure plans and that cap on sustainability, once the economy stabilizes, despite this additional $252 billion of public debt, we will be able to continue to operate sustainably?

[Yves Giroux]

It is quite possible that, once the pandemic is over and we return to what will be the new normal, the finances of the nation will still be sustainable. That being said, it's very difficult to say that with a high level of certainty at this point, because we don't know yet what the new normal will look like. We don't know when the new normal will be, and the most important thing is that we don't know what level of government expenditures will be necessary once we cross that awful divide, that awful gap that is COVID-19.

Depending on what the world looks like when we have finally crossed that bridge and have returned to the new normal, it may well be that government finances are sustainable if we are able to return to a deficit level that is much lower. However, it's very hard to predict with some level of certainty.

[Sean Fraser, Liberal, Central Nova, NS]

Do I have time for a final question, Mr. Chair? Excellent. Thank you.

One of the points that the former governor of the Bank of Canada made.... Actually, it was Kevin Milligan, an economist who joined our panel. One of the points that he made during his testimony was that it's not government expenditures that have created this debt, but in fact, the virus itself. We had a choice to make as to whether we would let private individuals, businesses and municipal, provincial and federal governments bear the costs of the response. I thought that was an interesting way of putting it because a choice to not respond, obviously, would have come at an enormous cost as well, and largely would have downloaded that cost onto private individuals, other levels of government and businesses.

I'm curious to know if you have the ability to analyze what the cost of a more limited intervention would have been across our economic system in Canada.

[Yves Giroux]

That's a very interesting question. We have not modelled the cost of not intervening or not supporting businesses and individuals to the same level, but it's something that would certainly be of great intellectual benefit to me and many economists and policy-makers in the country.

I'm not sure, however, how precise such an exercise would be. Because of the unprecedented nature of the current shock, it would be very difficult to determine what would be the impact of a lower level of intervention or different types of intervention, given that we're navigating in very uncharted territory.