Finance Committee on March 24th, 2022

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you, Chair.

Chair, I want to go back to Mr. Punwasi.

Mr. Punwasi, just moments ago you tweeted out:

[Canada]'s finance committee: Can government spending impact the central bank's ability to carry out its mandate, Mr. Punwasi? Me: The BoC admits this in a paper... *everything goes silent*

Mr. Punwasi, first, as others on this committee have noted, the report you have cited is a work in progress, research independent of the bank's governing council. I'm just wondering if you're aware of that and whether you would you like to clarify some of your comments.

[Stephen Punwasi]

Sure.

The Bank of Canada staff report indicates that government spending is related to that. Basic economics also tends to agree with that.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you, Mr. Punwasi.

Mr. Macdonald, I want to go to you. I was reading your final report and I'm very interested in the initial provincial budget estimates. You quoted that they were way off the mark. Maybe you didn't say “way” off the mark, but you said they were off the mark.

I just want to ask you about why they were off the mark and what this might do to inflation in each of the individual provinces where this happened.

[David Macdonald]

I think you're referring to a report I did that looked at changes in provincial deficits in the first two years of the pandemic.

Certainly, for this last year—the 2021-22 fiscal year that's wrapping up in a couple of days—the projected provincial deficits, initially, were $70 billion. In this report's final estimate, they were about $20 billion, which is a huge change in how big the provincial deficits were. Six out of 10 provinces are likely to be in a surplus position this year or next year, largely due to an unforeseen recovery in economic growth in the fall, as well as unanticipated additional transfers from the federal government—although it was economic growth that largely drove this.

This additional revenue received by the provinces, in the neighbourhood of $60 billion over what they initially budgeted for in the 2021-22 fiscal year, is due to economic growth, but it's also due to higher inflation. Higher inflation benefits provincial as well as federal revenues insofar as those revenues stay relatively constant as a percentage of GDP. If nominal GDP goes up, whether due to inflation or real growth, you see more revenues as a result. So it was certainly partially due to increased inflation over the course of the fall.

[Heath MacDonald, Liberal, Malpeque, PE]

So with these surpluses and less debt, Mr. Macdonald, where would you suggest the provincial governments spend their money going forward?

[David Macdonald]

Often, the government's argument, for the provinces, is that the cupboard is bare, so there's nothing for long-term care and so on. That is not the case any longer. The cupboard is stuffed with cash. A lot of it is federal cash, incidentally.

I think this puts the provinces in a good position to spend on their priorities. Hopefully, those are the priorities the pandemic attempted to teach us: that we have woefully inadequate long-term care, that our health care systems simply are not resilient enough, and that we've left some big issues, like climate change, on the back burner for two years. We've certainly seen a push towards tax cuts instead of those priorities. I hope that's not what's going to continue in how those surpluses will be spent.

But it's not for lack of money, at this point, that we're making particular policy choices. The money is there for most of the provinces. Now it's a question of what the priorities are.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you.

[The Chair, Liberal, Peter Fonseca]

On behalf of our committee, the members, the clerk and the analysts—those who will be putting together this inflation report for Parliament—I thank the witnesses. I also thank the staff and the interpreters for coming before our committee.

For those who are new to committees here on the Hill, you've done a superb job. Thank you very much for all of your answers. I hope you have a great day.

Members, we'll adjourn the meeting at this time. I ask members to leave the finance Zoom public meeting. For those on the subcommittee, please reconnect to the subcommittee in camera Zoom links provided by the clerk in a separate email.