Finance Committee on April 27th, 2021

[The Chair, Liberal, Wayne Easter]

Ms. Dzerowicz.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair.

Thank you, Mr. Giroux, for the important role that you play in our nation.

We've been talking about budget 2021, and we know it's a huge-spend budget. It's the first budget that we've put out in two years. Today, Canada has been reaffirmed by S and P Global with an AAA credit rating. How is this reaffirmation a signal that Canada is on the right path to recovery?

[Yves Giroux]

It's the assessment of one very important credit rating agency and it has signalled that at least some actors in the financial markets have confidence in the solidity and creditworthiness of Government of Canada bonds. In that sense, it's good news for governments in Canada, not just the federal government but also provincial and local governments, because a downgrade would have had potential repercussions throughout federal, provincial and municipal finances.

In that sense, it's good news. It means that interest rates, or the cost of borrowing for these levels of government, will not unduly go up. It will go up if interest rates rise, but there won't be a premium to be paid because of a potential downgrade.

[The Chair, Liberal, Wayne Easter]

We will have to move on. I'm sorry, Julie.

We'll go to Mr. Ste-Marie for one question and Mr. Julian for one question.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

How concerned should we be about rising house prices and household debt in relation to economic stability?

[Yves Giroux]

This is an important risk factor in our economic scenarios and forecasts. The rise in real estate prices means that those who want to access property must take on more debt. They therefore become more exposed to a potential increase in interest rates.

This is part of a trend where Canadians are carrying a fair amount of debt. Businesses and governments also have debt. This further exposes the real economy to interest rate increases. As real estate prices rise, there is a risk of a real estate bubble being created, which can eventually burst.

We saw what happened in the United States in 2008 when a housing bubble burst. I don't think we're there yet. However, the difficulties of access to property have, in themselves, a rather negative and important effect that encourages a rise in property prices.

[The Chair, Liberal, Wayne Easter]

Thank you, both.

We have Mr. Julian, followed by Mr. Falk.

We'll have about four minutes for you, Mr. Falk.

Go ahead, Mr. Julian.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you very much, Mr. Chair.

Mr. Giroux, you spoke earlier about measures that could be taken against the web giants. You mentioned a tax that could generate $2 billion to $3 billion. However, these measures don't take into account the excessive profits that these giants may have made during the pandemic.

What tools do you need to properly calculate excessive profits of a sector that doesn't typically provide accurate sales and revenue figures?

[Yves Giroux]

To make such a calculation, we obviously need sales and profit data from comparable firms. We also need historical data to see what reasonable profits look like, as long as “reasonable” is defined.

When a limited number of players largely dominate a sector, as is the case in the technology and social network industries, it's difficult to find comparable companies to turn to in order to determine what a reasonable profit is.

In the absence of such data, we can look at the rate of return on investment that investors typically expect, but it's difficult to use only this type of information since it doesn't take into account the risk associated with very specific sectors.

So we need historical data on sales, costs and profits. This is the best way to determine what a normal profit is and what constitutes upward deviations that can be defined as excessive profits.

[The Chair, Liberal, Wayne Easter]

Thank you, both.

We'll turn to Mr. Falk for four minutes, Mr. Fraser for the last four, and then we'll close it off.

Go ahead, Ted.

[Ted Falk, Conservative, Provencher, MB]

Thank you, Mr. Chairman.

Thank you to Mr. Giroux and your associates there.

We've seen significant increases in the cost of everything this last year. Food has gone up, and real estate has gone up 20% to 100% depending on what area of the country you live in. Crude oil has seen a 300% increase this year. Wood products like OSB have seen a 500% increase.

We know that we're right around the corner from seeing significant inflation and, with that, there are going to be higher interest rates. How rate sensitive—and you partially addressed it with the $17-billion answer—is our federal debt?

[Yves Giroux]

That's a very good question, and that's a question that gets asked of me and my colleagues quite regularly. We have determined that one point of percentage is 100 basis points. If, for example, an interest rate goes from 1% to 2%, we call that a 100-basis-point increase.

With public debt charges following such a shock of one percentage point, federal debt charges go up by $4.5 billion in the first year, and they rise to $12.8 billion additional by year five if that one-time shock is sustained throughout the period. As the government refinances itself, it's financing costs go up by $12.8 billion by year five for a one-time shock of one percentage point.

[Ted Falk, Conservative, Provencher, MB]

Is all of our federal debt rate sensitive? Is it all in a term and only sensitive to renewal dates, or is it also in a variable market-sensitive plan?

[Yves Giroux]

I think they're specific debt instruments that have a floating rate, but I'm not aware that there are such instruments. There are real return bonds, but they tend to form a very small portion of the overall market debt.

Market debt is sensitive to interest rates as it gets renewed, but with treasury bonds that are 30 days, 90 days and 180 days, plus bonds that have one, two, five and 30 years, there's an ongoing turnover or churn of market debt. The moment interest rates rise, there is debt that needs to be refinanced.

[Ted Falk, Conservative, Provencher, MB]

The Liberal government—and you stated this in your presentation—has a fiscal anchor, and that fiscal anchor is reducing federal debt. To me that's not a fiscal anchor; it's a wish list. They haven't attached any hard stops to that. They haven't said that a 51.2% debt-to-GDP is a hard stop and they will not exceed that. They've used it as a goal there. I would liken it more to the guardrail terminology that they've been using.

The debt-to-GDP is only one of the markers. In all my years as a banker and as a businessman, if I fixated on only one ratio, I wouldn't do a service to the application or to the business. There are multiple ratios that you have to look at, and I think the government needs to establish a variety of anchors.

Are there other anchors that you as the PBO consider should be looked at and considered by this government?

[Yves Giroux]

That's a very good question.

Because there's only one taxpayer that supports all levels of government debt, I think it would be useful for parliamentarians and Canadians to look at government debt as an integrated debt. There's the federal debt that we focus on today, and that's normal—we're federal parliamentarians or servants to parliamentarians—but there's also provincial debt. I think it would be advisable for the government and governments in this country to look at the overall government debt burden, because provincial debt is also of concern, especially in several jurisdictions that are on a path to an ever-increasing debt-to-GDP ratio.

[Ted Falk, Conservative, Provencher, MB]

That's right.

We've been talking mostly about one side of the ledger, which is the debt side and the expenditure side, but how about the revenue side? Are you confident that our revenues are going to remain consistent, or is there a potential that we're going to see a hiccup on the revenue side?

[Yves Giroux]

I'm relatively confident in the robustness of the revenue numbers because the tax base of the government tends to be fairly reliable. It's mostly personal and corporate income taxes, as well as the GST, and these are usually well-established tax bases in Canada. I don't have any major concerns with respect to the revenue projections. They are very closely tied to GDP, so it's not an area of concern that revenues could dip.

[Ted Falk, Conservative, Provencher, MB]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thanks to both of you.

You have about four minutes, Mr. Fraser. Then we will deal with the report from the subcommittee. We'll have 10 minutes following the last question.

Go ahead, Mr. Fraser.

[Sean Fraser, Liberal, Central Nova, NS]

Thank you, Chair.

Thank you to the Parliamentary Budget Officer for being with us today.

I want to pick up from where my colleague Ms. Dzerowicz left off with the recent reports of certain credit rating agencies.

We've seen S and P reaffirm the AAA rating roughly about a month ago. DBRS Morningstar made the same decision. You've seen commentary from some of the credit rating agencies about the fundamental underpinnings of the economy being strong, in part due to the substantial and timely release of economic supports for households and businesses at the outset of the pandemic.

If you can follow the bouncing ball with me, the IMF tabled a report—I hope you can stay with these various reports—also a little more than a month ago, indicating that, had those same measures the credit rating agencies spoke of not been advanced, the deficit would have been roughly the same as it is today, as a result of lost economic activity. With businesses shutting down and people not working, it makes sense to me.

I'm curious to know if you would agree with the IMF's conclusion, not only in that the scale of the deficit would have been the same without those measures in place, but also with their supplementary conclusion that the economic scarring that would have fallen upon the Canadian economy would have left us far worse off in terms of our ability to rebound from this pandemic once the economic recession comes to an end.

[Yves Giroux]

It's an interesting question. I don't know if I can say that I agree with the IMF that without any of these support measures the deficit would have been roughly similar to what it was in 2020-21. I haven't done the math. I haven't looked at that, because, as I said before, to me, it would have been very sadistic to inflict that type of pain on Canadians.

Maybe they're right. Personally, I doubt the deficit would have been the same or roughly the same in 2020-21, but there would have been, clearly, a scarring effect, so maybe over a five- or 10-year period deficits would be roughly similar. I don't know for sure. I wouldn't say, yes, the IMF is totally right and I agree with them 100%, but what is clear is that there would have been unprecedented scarring of the Canadian economy and the labour markets and, as I said before, the social impacts would have been catastrophic, even worse than what we have seen due to the loss of life during the pandemic.

[Sean Fraser, Liberal, Central Nova, NS]

Look, it really was your testimony during your last appearance that provoked this question. Is it possible for you to conduct an analysis to get an answer to that question as to whether or to what extent you would agree with the IMF's assessment?

[Yves Giroux]

I will certainly take that under advisement. We have a lot on our plate and, as one of your colleagues mentioned, we have limited resources, so we'll see what we can do.

[Sean Fraser, Liberal, Central Nova, NS]

Mr. Chair, do I have any time left?