Finance Committee on May 26th, 2022

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Chair.

Mr. Giroux—and I see you have one of your staff with you today—thank you very much for appearing at our committee. It's wonderful to have you here. I think back to the time before we had the Parliamentary Budget Officer. I think the work that you and your office do certainly makes our job as parliamentarians easier. It also increases our confidence level in some of the financial discussions we have at this table. Thank you very much.

You mentioned that you did some work on the luxury tax. I'd like to spend a bit of time there, but before I do, Mr. Chair, I'd like to provide notice to this committee of a motion. I do not wish to debate this motion, but I did want to table it here publicly. I have sent it to the clerk.

Following on the good work of the Parliamentary Budget Officer, the motion is that this committee, in respect of the luxury tax, will ask the Department of Finance to table a report to this committee on or before September 19, which would include an economic impact study of the select luxury tax items, including a breakdown on the expected employment and expected tax revenue, on or before October 24; that the Department of Finance provide a detailed written progress report on the efforts by the department to address some of the issues that we've heard; and that by November 21, 2022, the department reappear before this committee so that we can discuss its findings.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Chambers. I'll ask if the clerk has received the motion and distributed it to members.

Yes. We have thumbs-up. Thank you.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much. We'll discuss that at a later date with my peers.

Mr. Giroux, thank you for providing some economic basis. We have not seen an economic impact assessment done by the government of this luxury tax, so I was very interested in what you shared with us.

At a high level, I saw some significant loss in sales, about $2.9 billion. The lion's share of that was affecting the vessels, the boating industries—about 75%, or $2.1 billion. There are assumptions that go into that, but I want to talk at a high level about what we could expect to see, even just the direction of economic activity.

[Yves Giroux]

As you pointed out, we did estimate the impact on sales from the introduction of a luxury sales tax on automobiles, vessels and aircraft, and we found that the bigger impact would be on vessels.

With the reduction in sales of vessels, we can expect a potential reduction in the manufacturing of these vessels, and aircraft to a lesser extent, and automobiles. However, we haven't done an economic study, because that would be a significant undertaking for a small office like ours, so it's not clear whether there would be a full substitution in exports for that loss of sales, or whether it would be mostly imports or domestically produced goods that would be suffering. It would probably be a mix, but we have not done that study.

However, it is clear that with a reduction in sales, there would inevitably be a reduction in the sales tax that would otherwise be collected. One can think about the GST, but there is also the provincial sales tax and the HST.

In a nutshell, at a high level, that's what we can expect: a reduction in sales of almost $2.9 billion over a five-year horizon, and a commensurate reduction in sales tax collected.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

I would obviously support your office's getting additional resources so that you can take on additional studies like that .

My high-level math shows that if you just looked at sales taxes—federal and provincial sales taxes together—it's about $375 million, holding everything else equal on $2.9 billion of sales. Just at the highest level, if you net that out against what the government says it will take in in revenue, it is going to have a substantial net negative impact on the government's coffers.

Is that a fair assessment?

[Yves Giroux]

That's indeed a fair assessment. Because of the reduction in sales, there will undoubtedly be a reduction in sales tax collected, the extent of which is difficult to estimate, because it's a niche market. Obviously, not every one of us buys a vessel or an aircraft. I certainly don't, and I'm not in the market for an expensive car, but it's certain that there would be a reduction in sales tax receipts.

The extent to which this will happen is an estimate, and because it's a niche market, it's not straightforward to estimate what we call an “elasticity”, the extent to which sales will respond to an increase in prices from the luxury sales tax.

That said, we have looked at international experience and we have used a peer-reviewed elasticity that we think is very defensible.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much.

Mr. Chair, I hear that doing some homework is better than doing none, and I think this shows the government should be doing it.

Just quickly, this is the second time you have come to the committee. You mentioned the timing of the budget and having MPs able to review things. Do you want to expand very briefly on what you would like to see in terms of the timing of reports and the tabling of budgets?

[Yves Giroux]

That's a good point.

Ideally, there would be a budget that would happen earlier in the cycle—for example, in February—so that budget items would be reflected in the main estimates. As that is the vehicle through which the government finances its operations, you then as parliamentarians, when you review the main estimates, would be able to make the connection back to budget items, as opposed to having main estimates that are not complete and that do not paint a complete picture of the government's finances and so do not include the budget estimates.

You'd have a much easier job, I would say, of approving or scrutinizing government expenditures, or the government's requests for money that would include budget items, which is currently not the case with the budget tabled way after when the main estimates have to be prepared and tabled.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you very much, Mr. Giroux. You're welcome to come back anytime.

Thank you, Mr. Chair.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Chambers.

As far as the motion is concerned, the clerk did receive it, although we do need it in both official languages for distribution. Thank you.

We'll now hear from the Liberals for six minutes. Go ahead, MP Chatel, please.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much, Mr. Chair.

Mr. Giroux, thank you very much for being with us again. It's always a pleasure to see you.

In "A stochastic debt sustainability analysis of Budget 2022", you said that, "most future debt paths would result in a lower gross debt-to-GDP ratio after five years". You also wrote that "it is likely that the Government will meet its objective of maintaining a declining federal debt-to-GDP ratio over the medium term."

Can you give us more details about the process used in this analysis to reach these conclusions?

[Yves Giroux]

Of course. It's not an easy question to answer, because the analysis is rather technical. For the econometricians who may be listening, I would say that the analysis is based on a series of analyses and simulations using the Monte Carlo method, which has nothing to do, unfortunately, with the eponymous tax haven. We made use of parameters from the past 30 years, meaning from 1990‑1991 up to the period immediately prior to the pandemic. We consider the various economic variables, like GDP, inflation and the interest rate, and observe how these variables behave themselves over this lengthy period. We then put all of that into a model whose starting point is right now.

What do we get as the future trajectory of the debt if the economic and macroeconomic parameters vary from what we have seen over the past two decades? We get a distribution of the possible scenarios, and that's what we base our estimates of probabilities on. They're not really probabilities, but rather a range of possibilities within which the government might or might not meet its objectives.

In short, we look at what happened in recent decades, we introduce the data into a model based on current parameters, and by looking at the past, we can see what the future might hold for us. This does not of course take extraordinary events like a pandemic or a war into consideration, but it gives us a very good idea of the future debt trajectory.

[Sophie Chatel, Liberal, Pontiac, QC]

Have you factored the war and what we know about it at the moment into your models?

[Yves Giroux]

We took it into account insofar as our point of departure reflected it. If the point of departure is a period during which inflation is somewhat higher, which is currently the case, then we take that into account. However, we do not explicitly factor it in the impact of war, like the war in Ukraine, to which you are alluding, I would imagine. In other words, we do not allow for the fact that it might continue and have even more significant impacts on the world economy and Canada's economy.

[Sophie Chatel, Liberal, Pontiac, QC]

So you took what we knew at the time into account to determine the debt trajectory.

[Yves Giroux]

Yes, implicitly, we took it into consideration. Our model enters the parameters as they were at the end of the fiscal year.

[Sophie Chatel, Liberal, Pontiac, QC]

In my view, one of the key points with respect to Canada's economic prosperity is really the debt-to-GDP ratio. Canada's ratio needs to be one of the most competitive within the G7, the G20 and even the OECD.

So am I to understand that in this scenario, the trajectory is nevertheless healthy and positive?

[Yves Giroux]

Based on our simulations, the probability is approximately two out of three that the gross debt-to-GDP ratio in 2026‑2027 will be lower than in 2021‑2022. It's therefore likely that the gross debt-to-GDP ratio will be lower in five years than it was in March. Of course, it all depends on numerous factors. The future will tell.

In the current state of things, we believe that the probabilities are fairly good, even though we don't know for sure. Two out of three is nevertheless a fairly good scenario.

[Sophie Chatel, Liberal, Pontiac, QC]

So we can say that the net debt position is still better if we take away the impact of pension funding in Canada, compared to Europe, where there is no pension funding or future debts for pensioners. In short, the news is still better than expected for net debt. That's my understanding of it.

[Yves Giroux]

Yes, the net debt should be lower than expected.

On the other hand, what we did in this report is consistent with what the International Monetary Fund is doing. Because financial assets can play nasty tricks on us, particularly with respect to international comparisons, we used gross debt in order to be consistent with the International Monetary Fund's methodology. However, the results should, overall, be in alignment, regardless of whether we're looking at gross debt or net debt. The levels would of course be different, but the trajectory should remain approximately the same. If the likelihood of lower gross debt in five years is two out of three, then the probabilities should be pretty much the same for net debt.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Chatel.

We now go to the Bloc and MP Ste-Marie for six minutes, please.

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

Thank you, Mr. Chair.

Good morning, Mr. Giroux and Ms. Yan. Once again, I'd like to join my colleagues in thanking you for the work you do. It's very helpful and widely used. It's very important for us to have access to an objective point of view on everything pertaining to the budget so that we can do our work effectively.

My questions will begin by addressing your note on the estimation of the sales tax for luxury goods, and the update to this note that was published this morning.

I'll begin with a comment, a reminder to the effect that when we talk about public debt in Canada, it's important to also look at provincial debt. Just about every year, you provide an update in the fiscal sustainability report. In the end, it's the provinces that bear the financial burden.

The committee asked the Department of Finance whether it had, before introducing the sales tax on luxury goods, conducted a study on the impact on the targeted industries in order to identify potential impacts, such as how many jobs and how much revenue would be lost. This was not done, and I believe that it was a serious omission.

I'd like to ask you some questions in order to clearly understand what the boundaries of your study were.

You began by estimating the costs and revenue for the state, for the federal government, but not their impact on the industries affected. Is that correct?

[Yves Giroux]

Yes, that's right Mr. Ste‑Marie. We estimated the costs and revenue generated by the tax with due regard to the fact that there would be decreased sales if prices were to increase. There are of course people who will not buy these goods, or purchase them abroad, in the case of boats. We only took into account the federal revenue generated by the introduction of a tax on those automobiles, vessels and aircraft considered luxury goods.

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

Okay, thank you.

I'd also like to thank you very much for the transparency demonstrated in your note. You talk about all the sources of uncertainty about what might happen after the taxes are introduced.

Did you use the same elasticity models for each of the sectors: automobiles, vessels and aircraft?