You're absolutely right. I do remember that time.
Thank you very much, Mr. Chair.
Let me begin with four points.
One, according to the IMF April report, Canadian consolidated public deficits—that's for all levels of government—as a share of GDP will be the second-highest amongst all advanced economies, at 11.8%. This estimate on the size of the deficit is underestimated, since it does not take into account further spending commitments announced after April 6, 2020. As it is based on national accounts methodology, it ignores certain liabilities, particularly public employee pension plan deficits.
Two, using public accounting, the federal deficit is predicted by the parliamentary budget office to be $250 billion in 2020-21, which is 11% of forecasted 2020 GDP. The provincial deficits are not known, but RBC forecasted that they will be close to $65 billion. This would mean that the consolidated public deficit on a public accounts basis—which, by the way, includes deficits of public employee pension plans—will be close to 15%, the highest in this past century.
Three, the IMF predicts Canada's public net debt as a share of GDP to rise from 25.9% to 40.7% in 2020, the highest since 2001. Canada also has the third-shortest term to maturity for public debt, at 5.4 years, amongst advanced countries. Estonia and Sweden have shorter-term structures for their public debt. This means that we roll over our public debt more often than other countries. With 23% of this debt held by non-residents, we are sensitive to international investor perceptions of Canada's fiscal responsibility.
Four, we also know that our public liabilities are more than what is currently reported as net debt. It does not include unfunded health care, long-term care and OAS liabilities, net of taxes paid on RSP and pension plan withdrawals. CPP net assets are subtracted from net debt, but future CPP obligations are ignored. Public non-financial assets, especially important at the provincial-local level, are not easily liquidated if debt rollovers must be covered. Our consolidated government net debt obligation is almost triple the official number.
We also know that much of what lies ahead is uncertain. Return of lockdowns in the fall of 2020 or spring 2021 will make recovery much more difficult. There will also be significant demands for stimulus, given that many households and businesses will be running out of cash this fall with deferrals coming due. While the 2021 fiscal deficit should not be nearly as large as 2020 because of all the temporary measures, it is more than likely that the federal and provincial deficits will be elevated for several years beyond 2020-21 fiscal year.
Now, federal as well as provincial governments will need to lay out a budget for 2020-21. At that time, the Minister of Finance will likely indicate a fiscal target, in part to bring back more financial control to the budget, as demands will be enormous for spending hikes or tax cuts. In the past, the approach has been to ensure that debt as a share of GDP should not rise. This fiscal anchor makes less sense today, with $1 trillion more in official federal net debt plus other future obligations in our aging society.
When markets become nervous over a country's fiscal path, governments often resort to fiscal rules such as expenditure limits, tax ceilings, targets for balanced budgets and debt limitations. As the IMF reports, all advanced countries use different fiscal rules depending on their circumstances. In fact, in the past 30 years, the IMF reports that half of countries have used fiscal rules of various sorts to try to deal with deficits, including Canada back before 2005.
Alongside Iceland, only Canada at the national level has no fiscal rule today. This is, I mean, pre-COVID days.
Right now I'm not sure anyone has any fiscal rules. Many fiscal rules are statutory, embedded in legislation or the Constitution. They typically allow for adjustments for cyclical effects and may exempt debt-financed public infrastructure. Some countries, such as Australia, the United Kingdom and France, use multiple rules, such as a limitation on expenditure growth, a debt-to-GDP limit and a deficit-to-GDP limitation.
The criticism of fiscal rules is that they reduce budget flexibility and discriminate against public infrastructure spending. However, studies have shown that fiscal rules improve fiscal credibility, which keeps interest rates lower and ensures investor confidence in a country's debt. A recent study by German economists found that statutory fiscal rules also result in higher economic growth rates—18% in higher GDP in the long run. Fiscal rules only based on political commitments do not have a growth impact.
When the next budget is set, the Minister of Finance will need to address how big deficits should be in the future. How much debt can be tolerated? How much spending can grow? What tax reductions are affordable? What tax increases will be needed? The minister will need some type of fiscal rule and will need to decide whether it should be supported by legislation to indicate adherence to the plan.
I would suggest to this committee, even though it is early on—we're not talking about this year's fiscal rules—that in the coming months it should study the approaches used by countries for budget planning. It is critical, since future generations, which have no influence over our decisions today, could be left with a financial mess in the future if our generation does not act fiscally prudently.
Thank you.