Finance Committee on June 3rd, 2024

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order.

Welcome to meeting number 146 of the House of Commons Standing Committee on Finance.

Pursuant to the House of Commons order of reference adopted on Wednesday, May 22, 2024, and Standing Order 108(2), the committee is meeting to discuss Bill C-69, an act to implement certain provisions of the budget tabled in Parliament on April 16, 2024.

Before we begin, I would like to ask all members and other in-person participants to consult the cards on the table for guidelines to prevent audio feedback incidents. Please take note of the following preventative measures in place to protect the health and safety of all participants, including the interpreters. Only use the approved black earpiece. The former grey earpieces must no longer be used. Keep your earpiece away from all microphones at all times. When you're not using your earpiece, place it face down on the sticker that is on the table for this purpose.

Thank you all for your co-operation.

Today's meeting is taking place in a hybrid format, pursuant to Standing Order 15.1.

In accordance with the committee's routine motion concerning connection tests for witnesses, I'm informing the committee that all witnesses have completed the required connection tests in advance of the meeting.

I'd like to make a few comments for the benefit of the members and witnesses.

Please wait until I recognize you by name before speaking. For members in the room, please raise your hand if you wish to speak. For members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as best we can, and we appreciate your understanding in this regard. I remind you that all comments should be addressed through the chair.

I'd like to welcome the witnesses with us here today.

From the Centre for Future Work, by video conference, we have Jim Stanford, economist and director.

From the Coalition for Healthy School Food, we have Ms. Carolyn Webb, knowledge mobilization coordinator.

From Nature Canada, Mr. Steve Hazell, consultant, is joining us.

From the Office of the Parliamentary Budget Officer, we have the Parliamentary Budget Officer, Monsieur Yves Giroux. Joining him is Chris Matier, director general of economic and fiscal analysis, and Mark Mahabir, director general of costing and budgetary analysis. Welcome to you all.

With that, we're going to have time now for opening statements.

We'll start with Mr. Jim Stanford from the Centre for Future Work, for up to five minutes.

[Dr. Jim Stanford, Economist and Director, Centre for Future Work]

Thank you very much, Mr. Chair and committee members, for the opportunity to participate in your hearings on this legislation.

In my view, the 2024 federal budget provides a range of necessary and appropriate fiscal measures to assist Canadians in dealing with current cost of living challenges, to achieve a more equitable distribution of income and to support Canada's macroeconomy through the current challenges of inflation, interest rates and global uncertainty.

The biggest focus of this budget, of course, was addressing the housing crisis in Canada with a wide range of policies, including building new houses on federally owned land, fiscal support for new projects and even converting underused federal office buildings into apartments. These measures are critical to addressing the barriers to secure housing for many Canadians. They will also help to reduce inflation. Rising prices in the shelter component of Statistics Canada's CPI bundle have been the biggest single contributor to recent inflation. Making housing more affordable is a potent long-run anti-inflation measure.

The budget also contained a suite of measures aimed at addressing other aspects of the cost of living challenges facing Canadians, including funding for free school lunches, an excellent idea; the new pharmacare and dental care programs, negotiated with the NDP; and the first tranche of a new Canada disability benefit. These measures are important and valuable.

I will note that one vital social policy priority that was not addressed in this budget is the need for thoroughgoing and lasting reforms to our employment insurance system. The COVID pandemic exposed the gaping holes in Canada's EI system and necessitated the emergency benefits, like CERB, that were implemented during the lockdowns. It is now still vital to go back and truly fix EI so that it can be a proper pillar of income support by addressing failures in the current system of hours, qualification and benefit levels so that EI can serve its proper role as a support to family financial stability when someone is laid off and also as a macroeconomic stabilizer.

Much attention is always directed in these discussions to the budget deficit. The forecast deficit in this budget has hardly changed from last year's trajectory, with $40 billion forecast for the fiscal year that has just ended, 2023-24, and gradually declining after that. The deficit targets contained in previous budgets were maintained despite the budget's modest new spending on cost of living initiatives, defence and other budget items thanks to improved revenue streams.

Canada's deficit remains small relative to deficits of other countries, and particularly compared to the U.S., where deficits are large but the economy is performing much better than Canada's. That's something for us to think about. Both the deficit and debt in Canada are falling relative to GDP.

Indeed, the experience of the last three years has confirmed that the recent rise and now fall of inflation in Canada, like other industrial countries, was not caused by fiscal policy or deficits. There's no correlation internationally between the size of a country's deficit and its rate of inflation. Again, I point out that the U.S. federal deficit is six to eight times larger as a share of GDP than Canada's, and yet its inflation trajectory has been very similar to Canada's.

As Canadian households grapple with the effects of high interest rates and the overall economy continues to grow—very slowly, but growing—modestly stimulative and targeted fiscal measures, rather than fiscal austerity, can help sustain macroeconomic growth. Now, there's a common claim that a budget deficit runs counter to the goals of monetary tightening in trying to reduce inflation, and hence is contradictory, but that view is only valid if it is accepted that inflation is solely the result of a condition of excess aggregate demand.

That assumption was never valid in the wake of the COVID pandemic. The inflation we experienced resulted from supply chain disruptions, temporary shifts in consumer behaviour during and after the lockdowns, a global energy price shock, and, it must be noted, a large dose of excess profit-taking by corporations in Canada. They took advantage of the disruptions and uncertainty of the pandemic and its aftermath to boost prices well above costs of production and saw their profits rise in 2022, the peak of our inflation, to their largest share of GDP in history. None of those suggest a condition of excess demand, and none of those are resolved by a government running a surplus or cutting public spending.

Given a more nuanced and realistic understanding of recent inflation, using fiscal policy to support Canadians through these challenging adjustments is both important and macroeconomically sensible.

I'll leave it at that, sir.

Thank you again for your invitation to participate today.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Stanford, and I'm sure there will be many questions.

Now we'll hear from the Coalition for Healthy School Food and Ms. Carolyn Webb, please.

[Carolyn Webb, Knowledge Mobilization Coordinator, Coalition for Healthy School Food]

Thank you. Good morning.

On behalf of the Coalition for Healthy School Food, I want to thank you, Mr. Chair and the committee, for inviting me to speak on the Budget Implementation Act.

The Coalition for Healthy School Food is made up of more than 300 non-profit member organizations and over 140 endorsing organizations from all provinces and territories. We've been advocating federal funding for a cost-shared national school food program for years, and we were pleased with its inclusion in the April 16 budget.

This is a historic moment for Canada. Thanks to this investment, we will be joining all the other G7 countries and most industrialized countries in the world by establishing a national school food program. This investment is the result of an excellent social and economic policy that will ensure that children and youth at schools across the country are well fed, ready to learn and have an equal opportunity to succeed. It will also help families by lowering grocery bills and will support women and parents, food suppliers, food systems, employment, economic growth and communities.

As stated by a recent World Food Programme report, all the evidence shows that school meal programs, along with other social protection initiatives, are one of the smartest long-term investments that any government can make. Since 2023, we've seen more and more provinces and territories invest in school food, including $214 million over three years in British Columbia, $30 million annually committed by Manitoba and $18.8 million in Nova Scotia. As of the 2024-25 school year, the combined investment from provinces, territories and municipalities is projected to be over $285 million annually.

Despite growing investments from other levels of government, programs need federal support now more than ever. In Ontario, for example, the affordability crisis and other factors have made it so that programs are really struggling to feed the children and youth who access them. Over the past three years, student nutrition program providers report that food expenses have increased by 40% to 80%, while student participation rates have risen by 25% to 40%. This has impacted the quality and quantity of the food served in programs: Some regions can no longer serve a full meal and offer a simple snack like a granola bar instead, while others have reduced the number of days that they serve kids or have had to shut programs down months before the end of the school year because they've run out of money.

Federal funding will provide enormous support to existing programs in this country. This funding is necessary and should be disbursed as soon as possible. Although all the federal, provincial, territorial and municipal investments combined aren't enough to reach all children and youth in Canada, federal funding will help existing programs ensure that students are well fed, that schools stay off waiting lists and that far more students are included in school food programs. These programs will be able to stabilize, expand and adopt best practices, in particular by involving students in planning, growing, preparing, serving and learning about foods and by providing good jobs. They can also purchase more local foods, which, as we all know, generates significant benefits for food suppliers and communities.

The coalition has been advocating that federal funding be be transferred to provinces and territories because each province and territory has an existing system in place to flow funding to school food providers, along with a mechanism for public accountability. All provinces and territories also have food and nutrition policies that strive to ensure that the food served is as healthy as possible. We know that many provinces and territories have reached out to Minister Sudds to express their support and their interest in federal partnership, because school food programs need a significant amount of investment to serve quality programs, to support the health and well-being of children and youth and to succeed.

The coalition has also been advocating that the federal government enter into discussions with indigenous leaders to negotiate agreements for the creation and enhancement of permanent, independent, distinctions-based first nations, Métis, and Inuit school meal programs, and we ask that this work happen without delay.

We recommend that your committee ensure implementation of the budget, which states:

In Budget 2024, the government proposes to provide a statutory appropriation authority in the Budget Implementation Act that would enable the Minister of Families, Children and Social Development to sign bilateral agreements and transfer funding to provinces and territories to support National School Food programming for the 2024–2025 school year.

For the health and well-being of children, youth and families across Canada, we urge you to support the budget implementation act so that this process of signing bilateral agreements can begin as soon as possible.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Webb.

Now we'll hear from Nature Canada and Mr. Hazell, please.

[Stephen Hazell, Consultant, Nature Canada]

Good morning, Mr. Chair and committee members.

My name is Stephen Hazell and I am pleased to represent Nature Canada.

Thanks so much for the opportunity to appear before the committee as it considers Bill C-69, and specifically the amendments to the Impact Assessment Act.

Nature Canada is one of the oldest nature conservation charities in Canada, representing a network of over 130,000 members and supporters.

Nature Canada's key message today is that the proposed government amendments to Bill C-69 would severely undercut federal authority to assess impacts of proposed projects that cause serious transboundary environmental effects, such as acid gas, greenhouse gas emissions and reduced water flows in transboundary rivers.

Recall that the Supreme Court of Canada's October 2023 opinion confirmed the federal authority to carry out impact assessments of development projects as long as those projects have the potential to impact federal jurisdiction. The court opined that several IAA provisions strayed out of the federal constitutional lane. The government's proposed amendments fully address these issues, in Nature Canada's view.

Unfortunately, the government's amendments overreact to the court's opinion. The result is that proposed developments generating millions of tonnes of toxic air pollutants and GHGs or causing major reductions in transboundary water flows would not be subject to even the possibility of federal assessment.

Here are two examples of what I'm talking about, based on my own personal experience from over 40 years as an environmental lawyer working in Ottawa.

First, Colacem, a multinational corporation, is proposing a cement plant on the shores of the Ottawa River in Ontario, a few kilometres east of the province of Quebec, 70 kilometres upwind of Montreal and 50 kilometres upwind of Kanesatake First Nation. The Colacem plant would produce one megatonne of GHGs every year, as well as acid gas pollution in excess of Canadian standards.

The Kanesatake First Nation opposes the plant and says it was not consulted. No one consulted Quebec either. Ontario conducted no impact assessment, and Quebec was unable to undertake one, given that it wasn't on Quebec territory.

In 2018, Nature Canada petitioned the federal environment minister to convene a federal assessment of the proposed cement plant. That petition and a subsequent one were rejected.

The point is that the government's proposed Impact Assessment Act amendments would prevent a federal environment minister from even entertaining a request to designate any similar project generating significant transboundary air pollution, leaving downwind provinces—not to mention the United States—at the mercy of upwind provinces.

Nature Canada proposes that the IAA allow projects such as the Colacem cement plant to be designated for assessment so long as the transboundary air pollution is significant. Nature Canada is confident that the test for national concern under “peace, order and good government” as set out out by the Supreme Court in the previous Greenhouse Gas Pollution Pricing Act reference, can thus be met—perhaps with a backstop provision.

My second example is from 1986. Saskatchewan proposed the Rafferty and Alameda dams on the Souris River, which flows south into North Dakota before looping north to join the Assiniboine River, which flows through the middle of Mr. Morantz's riding.

Changes to the quantity and timing of transboundary water flows of the Souris were the key environmental issues at the time, not damage to fish habitat. Initially, the federal government refused to convene an environmental assessment for Rafferty and Alameda, but did so after the Canadian Wildlife Federation—where I served as legal counsel—applied successfully to the Federal Court for an order mandating an assessment.

My second point is that the government's amendments would preclude the federal government from assessing the impacts of such dams or other types of projects, like irrigation schemes, on transboundary waters.

Nature Canada says all adverse changes to international and interprovincial waters—not just pollution-related changes—should be included as effects within federal jurisdiction. The full text of these amendments is contained in amendments that have been tabled with the committee by several parties, as well as by other groups, such as Ecojustice.

Nature Canada recognizes that provinces may challenge the amended IAA in court. However, given that climate chaos and destruction of nature are the issues of this century, the federal government must face such challenges and advance impact assessment legislation that aggressively supports climate stability and nature conservation within federal jurisdiction.

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Hazell.

Now we'll hear from the Parliamentary Budget Officer, Mr. Yves Giroux. After that we'll get to members' questions for our witnesses.

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

Mr. Chair, members of the committee, thank you for inviting me to appear before you today.

First, I'd like to say a few words about the office's work on carbon pricing.

In April of this year, in the course of reviewing and updating our computable general equilibrium or CGE model, PBO staff discovered that the original CGE simulations underlying our March 2022 distributional analysis of carbon pricing inadvertently included the economic impact of both the federal equivalent fuel charge and the output-based pricing system. CGE estimates from these simulations were published in our March 2022 report, table 3-1, and were also used in the update to that report that we published in March 2023.

Weeks ago, on April 17, we published a notification flagging this modelling issue. It appeared on the home page of our website. The notification also indicated that we plan to provide an updated analysis of carbon pricing by the fall of this year.

I am truly sorry for this modelling error and for not providing more prominent notification to parliamentarians.

PBO staff are working diligently to prepare this update to incorporate recent policy changes, new projections and new CGE modelling. This analysis is challenging and complex, involving multiple models, programs and databases. We will publish updated analysis when we have full confidence in our results.

Further, going forward, I will ensure that parliamentarians are provided with more prominent notification should similar issues arise.

I would now like to discuss the reason for our appearance today, which is Bill C-69, An Act to implement certain provisions of the budget tabled in Parliament on April 16, 2024.

I am joined today by Chris Matier and Mark Mahabir, directors general in my office.

On April 30, my office published an analysis including highlights of Budget 2024. In that budget, the government announced $61.2 billion in new spending that was partially offset by $21.9 billion in revenue-raising measures. Thus, on a net basis, the new measures reduce the budgetary balance by $39.3 billion over 2023–2024 to 2028–2029.

My office has also published cost estimates for measures included in budget 2024, including the refusal of tax deductions for short-term rental, employee ownership trusts, Canadian journalism labour tax credit enhancement and accelerated capital cost allowance for eligible new purpose-built rental housing. We also published a blog post on increasing the borrowing limit.

In the coming weeks, my office will publish further analyses on measures announced in the 2024 budget, including the capital gains inclusion rate increase, the Canada disability benefit, an investment tax credit for clean energy, tax reduction for entrepreneurs and an update on the alternative minimum tax measures.

We are also preparing to publish analyses on reaching NATO's 2% target on defence spending, as well as the procurement of polar icebreakers. These analyses aim to provide parliamentarians with important information on key issues to inform your discussions about the country's economic and financial situation.

We would be pleased to respond to any questions you may have regarding our budget 2024 analysis. Merci.

[The Chair, Liberal, Peter Fonseca]

Mr. Giroux, thank you.

Now we will move right to members' questions. For the first round, each party will have up to six minutes. We're starting with MP Calkins for the first six minutes—

I'm told it was changed. We'll go to MP Lawrence, please.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

I apologize, Mr. Chair.

We had great submissions from all of our panellists today. I will focus my questions on you, Mr. Giroux, perhaps not unsurprisingly. I'm going to be spending most of my time talking about debt-to-GDP ratio, if that's helpful for you as well.

I will start out with a quote from the Minister of Finance from 2022.

She said:

We are absolutely determined that our debt-to-GDP ratio must continue to decline and our deficits must continue to be reduced.... This is our fiscal anchor. This is a line we will not cross. It will ensure that our finances remain sustainable.

Then, of course, we reviewed the budgets going forward, and we saw that in 2023, the debt-to-GDP ratio increased.

Your most recent report says, on page 16:

Based on the outlook presented in the [budget], the federal debt-to-GDP ratio is projected to increase, remaining above its 2022-23 level of 41.7 per cent for [the next two years].

Then you go on to say that by 2028-29, it is projected to perhaps decrease.

I have concerns that this number will actually go higher, as opposed to lower, and we'll discuss that further. However, could I get you to briefly comment on and confirm your report that in the next two years, the debt-to-GDP ratio will continue to increase?

[Yves Giroux]

Well, the government made a commitment a few years ago to have a declining debt-to-GDP ratio over time. However, what we have seen is that the ratio increased for a year, then slightly declined. It is still not reaching the starting point, even after the pandemic.

What we see is an increase and then a very gentle decline over the next couple of years, based on the government's own estimates. What this says is that the government seems to be comfortable with a debt-to-GDP ratio that is hovering around 40%, which is still significantly above the prepandemic level of 31.7%.

I'll leave you more time for questions.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Perfect. Thank you very much, Mr. Giroux. I appreciate it.

With respect to debt-to-GDP ratio, the government has three different levers they can pull, to a certain extent, to affect that ratio. One would be the amount of spending; another would be the amount of revenue they collect; and the third would be GDP growth. I have issues with the assumptions the government has made in all three of these areas.

Number one is that you said in your report, I believe, that there's a 70% chance they will hit their debt-to-GDP target. However, that's without any additional spending. In the nine years this government has been in power, we have yet to see a budget or any type of financial document—including a fall economic statement—that doesn't have new spending.

If in fact the government is consistent in its rate of increase in spending, as opposed to its call for no new measures, as projected, will they hit their debt-to-GDP ratio? What could the potential ceiling of that be?

[Yves Giroux]

We estimate, based on the budget document tabled on April 16, that there's a 72% chance that the federal debt-to-GDP ratio in 2029 will be below its 2022-23 level of 41.7%. However, as you pointed out, that's assuming there are no new measures beyond those that were announced in the most recent budget—or at least that, if there are new measures, they are offset by expenditure reductions elsewhere, or by tax increases.

Should there be additional expenditures not paid for by additional tax increases or reductions elsewhere, it reduces the likelihood that the debt-to-GDP ratio will end up lower than it was in 2023.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you.

The next area I'm going to talk about is revenue.

They've been guilty in the past—and continue to be—of overestimating revenue, such as the underused housing tax, where they dramatically overestimated what the amount of income would be. In this most recent budget, they projected an additional $7 billion from capital gains legislation that has yet to even materialize. A large portion of it, according to government officials, is being generated by a fire sale that is to occur before June 25. We still don't have that legislation, and we don't know whether that fire sale will occur.

Do you believe there is at least a chance that this government has overstated the amount of revenue that will come from the proposed capital gains increase?

[Yves Giroux]

The capital gains applies to relatively few taxpayers, and the revenue from a capital gains inclusion rate increase is highly dependent on the behaviour of those corporations and individuals that can generate those capital gains.

What we've seen with the announcement in advance is that there is likely to be room for some transactions being advanced in time. “Fire sale” is one term that people use. I wouldn't go there, but it's quite possible that in the first year of the measure, revenues will indeed be as the government expects, or even higher as people take advantage of the lower inclusion rate while it lasts, but in the subsequent years, it's quite possible that these revenues will be lower as people generate lower capital gains.

Therefore, it's difficult to assess the exact impact. We're in the process of estimating the revenue potential of that measure, but it makes it a bit more difficult not having the—

[The Chair, Liberal, Peter Fonseca]

We're out of time. Thank you.

Now we'll go to PS Turnbull for the next six minutes, please.

[Ryan Turnbull, Liberal, Whitby, ON]

Thanks, Chair.

Thanks to all the witnesses for being here today. I really appreciate your valuable testimony.

Mr. Giroux, I'll start with you.

Thanks for your opening remarks and your acknowledgement of the error that was made in the recent report, and I guess the previous one, in estimating the economic impacts of the fuel charge. It is well noted.

As you know, I wrote you a letter recently about that, asking for a corrective report to be issued. I understand that mistakes can be made, so I'm not being unfair to you in any way, and I understand that your office provides a really important role to Parliament in elevating our debate. I do think that a corrective report is needed on that, as you know.

I wanted to ask you, based on the fact that the analysis you provided to members of Parliament has some errors in it, which you've acknowledged, what would you say to individuals or groups who may be using that faulty analysis to base their own math or their own conclusions on about carbon pricing as a whole?

[Yves Giroux]

Thank you, Mr. Turnbull.

The error you're referring to is that we have included inadvertently, as I said in my opening remarks, not only the economic impact of the carbon tax but also that of the industrial emitters—the output-based pricing regime.

The results published in our reports are including the government's entire climate plan, so in that sense it's not an error. It provides an economic impact of the entire government plan, which includes the industrial emitters and the carbon tax. As people are using this report, they have to keep that in mind: that it's providing a complete picture of the economic impact of the carbon pricing regime that is in place in Canada.

[Ryan Turnbull, Liberal, Whitby, ON]

Are you now saying that it's not an error?

On your website it clearly points out—and you've said today—that it is an error. The title of the report talks about the “Distributional Analysis of the Federal Fuel Charge”. My understanding is that it was supposed to isolate the economic impacts of the fuel charge and not the output-based pricing system. I would say to you, just to be clear, are you now saying that it's not an error? I think you've said that it clearly was an error.

[Yves Giroux]

Exactly. I said that clearly.

[Ryan Turnbull, Liberal, Whitby, ON]

Okay.

[Yves Giroux]

I just want to clarify that the results are valid to the condition, understanding that they include not only the carbon tax but also the output-based pricing systems.

[Ryan Turnbull, Liberal, Whitby, ON]

Let's be clear here, though. When you include the output-based pricing system in your analysis, you're naturally going to overestimate the impact of the fuel charge if that's mixed in there, right?

I mean, I've done economic impact analysis myself, and that seems pretty common sense to me. Can you maybe speak to that?

[Yves Giroux]

Yes. I think that is our expectation too, but we don't know the precise impact.

[Ryan Turnbull, Liberal, Whitby, ON]

Right, and you've said recently in the media that you don't think it's going to have a significant impact, which I have a problem with too, because I think you're assuming something. Not having done that, in rerunning that model with the new numbers, how could you prejudice the findings of a future report that you haven't run the analysis on?