Finance Committee on Nov. 28th, 2022

[The Chair, Liberal, Peter Fonseca]

Thank you, Minister.

Thank you, MP Morantz.

Now, for our final questioner to conclude this round and this first hour with the minister, we have MP MacDonald for five minutes.

[Heath MacDonald, Liberal, Malpeque, PE]

Thank you, Chair. I'm certainly glad to have the minister here with us today.

Sitting here, listening to the questions and being a relatively new MP, I'm glad you mentioned COVID-19, because I think you've steered the ship through likely the most turbulent time, possibly, in the history of our country. I think you and your team need to be well respected for that. We're not out of the woods yet. We understand that, but with everything that is going on around the world and our placement among different levels of economic value, it's been extremely good. Again, we need to continue.

Similar to many G7 partners, we're experiencing elevated levels of inflation due to a unique combination of global factors, obviously, with the invasion of Ukraine, or supply chains and pent-up demand. While Canada has fared better in comparison to many countries regarding inflation, we must be cautious that our measures to support Canadians don't inadvertently make the inflation issue worse.

We've talked about targeted investments. The measure to cancel interest on student loans will deliver financial relief to students, while avoiding a large infusion of stimulus into the economy in a way that broad-based cheques would produce, which we've seen in some provinces. Was a decision to take this measure of cancelling debt on student loans and apprenticeship loans chosen in part due to its ability to provide relief to those who need it without running the risk of inflationary challenges?

[Chrystia Freeland, Liberal, University—Rosedale, ON]

It absolutely was, Mr. MacDonald. I want to start with where you began your question, which is talking about COVID-19, the COVID-19 recession, and the extraordinary measurements that our government, and, in fact, all Canadians, put in place.

It's really important to underscore that our measures have been economically successful. The jobs recovery is particularly strong in Canada, and every person who has a job today...that's so important for a family.

There is another thing we did. We saved lots of lives. Had Canada had the mortality levels of the United States, 70,000 additional Canadians would have died. That's the whole population of Fredericton. This is the finance committee. We're talking about dollars and cents, and that is important, but those 70,000 people include neighbours, parents and grandparents. I think back to the really darkest days of the pandemic. We weren't perfect. Canada wasn't perfect, but we did a pretty good job. Our measures helped to save lives, and I think it's important for all of us to remember that.

Quickly, on the student loans—really important—data from the Department of Finance shows that among the people who are facing the biggest challenges right now with elevated inflation are students—our young people—so, permanently eliminating student loans provides relief to young Canadians today. I'm the MP for University—Rosedale, and there are lots of students in my riding. People have said to me directly that knowing this is permanent is a real relief. I think we owe that to young Canadians. I'm glad we're able to do it.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP MacDonald.

We want to thank the minister. We want to thank your officials for appearing before us. Thank you for your testimony. Thank you for the many questions that you answered on this study.

Members, this concludes this portion of the meeting, this panel.

We are going to suspend so that we can switch over to our next witnesses.

[The Chair, Liberal, Peter Fonseca]

I call this meeting back to order.

With us now for our second hour, we have our special witnesses here today. From the Office of the Parliamentary Budget Officer, we have Yves Giroux, Parliamentary Budget Officer, as well as the director of fiscal analysis, Kristina Grinshpoon.

We will go to your opening remarks, please, before we get to the members' questions.

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

Good afternoon, Mr. Chair and members of the committee. Thank you for the invitation to appear before you today.

We are pleased to be here to discuss our analysis of Bill C-32, the fall economic statement implementation act, which we published in our report entitled “Fall Economic Statement—Issues for Parliamentarians” on November 15, 2022.

Additionally, this morning my office published three separate legislative costing notes: our analysis of the residential property flipping rule, the doubling of the first-time homebuyers' tax credit, and eliminating the interest on federal student and apprentice loans.

With me today, I have Kristina Grinshpoon, who is director of fiscal analysis.

In accordance with the PBO's legislative mandate to provide impartial, independent analysis to help parliamentarians fulfill their constitutional role, which consists of holding government accountable, our report on the fall economic statement highlights key issues to assist parliamentarians in their budgetary deliberations.

In terms of funding and new budgetary measures, revisions to the private sector economic outlook and fiscal developments in the fall economic statement provide a total of $81.2 billion in new fiscal room, which finances $52.2 billion in net new measures over 2022-23 to 2027-28.

Of note is the government's $4 billion enhancement to the Canada workers benefit, which will automatically provide advance payment to individuals who qualified for the benefit in the previous year. The substantial cost of this measure is largely due to the government's policy decision not to recoup these advance payment when recipients' incomes rise and they become ineligible for benefits or eligible for lower benefits. Not requiring repayment of federal benefits for ineligible individuals is a pronounced departure from the existing federal tax and transfer system. This expensive policy change was not mentioned in the fall statement.

Further, the government identified $14.2 billion in new measures without providing specific details on this spending, which represents 27% of all new measures, totalling $52.2 billion, in the fall economic statement 2022. This lack of transparency presents challenges for parliamentarians and the public in scrutinizing the government’s spending plans.

The timeliness of financial reporting also continues to present challenges. This year the Public Accounts were tabled on October 27—seven months after the close of the fiscal year. Canada continues to fall short of the standard for advanced practice in the International Monetary Fund's financial reporting guidelines, which recommends that governments publish their annual financial statements within six months. Parliamentarians may wish to request that the government publish the Public Accounts of Canada and the Departmental Results Reports, which have not yet been published, within six months of the close of the fiscal year. Legislative amendments to that effect could be considered.

Finally, the government highlighted that it exceeded its first spending review target of $3.0 billion by achieving savings of $3.8 billion from lower-than-anticipated spending on certain COVID‑19 support measures in the previous fiscal year, 2021‑22. However, the source of this saving is inconsistent with the intention and timing that was announced in Budget 2022. The FES provided no explanation for this discrepancy. This puts into question the credibility of the yet-to-be-launched strategic policy review supposed to generate savings of $6 billion by 2026‑27 and $3 billion in annual savings.

Ms. Grinshpoon and I will be pleased to respond to any questions you may have regarding our analysis of the fall economic statement or other PBO work.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Giroux and Ms. Grinshpoon.

We are going to our first round of questions by members.

We have the Conservatives, MP Chambers, for six minutes, please.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you, Mr. Chair.

Thank you very much to our witnesses. It's a pleasure to have you back at committee.

I wanted to pick up on a couple of larger themes that we've heard your office talk about in some of its analysis recently: the fact that inflation is significantly driving government revenues—and you mentioned the capacity that was created—and then some spending associated with that.

Could you highlight, for this year, how much of the new revenues you estimate are driven by inflation?

[Yves Giroux]

We performed that analysis when we saw that the revenues were coming in at a much higher level than we anticipated. We estimate that about half of the increase in revenues is due to higher than expected inflation. The other half is what we call a higher tax yield. It's stronger income, economic growth and better remittances.

Half is due to inflation.

[Adam Chambers, Conservative, Simcoe North, ON]

Half of the unexpected increases are due to inflation, which is basically a way of suggesting that Canadians are paying more. They are paying more HST.... Some people refer to inflation as a silent tax, if you will. What is the government doing with the windfall?

[Yves Giroux]

We found that the government is spending a significant portion of it.

In my opening remarks, I alluded to the fact that fiscal room of about $81 billion has been generated. The government has spent about $52.2 billion of this on a net basis. When I say on a net basis, I means that's taking into consideration the additional revenues generated by the new tax measures that the government has introduced.

That still leaves $52 billion of that $81 billion in fiscal room that's eaten by government measures. On a gross basis, I don't have the numbers off the top of my head, but that's once we've netted out the increased revenues that the government has introduced.

[Adam Chambers, Conservative, Simcoe North, ON]

On that point, I think it's worth highlighting for the committee, when we use the term “net basis”, in times of inflation it's actually the gross amount of government spending that people should be focused on. The net measurement is good for when we're thinking about the deficit or debt levels. If we're worried about government spending driving inflation, ought we not look at the total gross spending increases the government is making?

Is that a fair assessment?

[Yves Giroux]

That's a fair assessment.

[Adam Chambers, Conservative, Simcoe North, ON]

On that measure, the government is spending about 30% more this year than it did pre-COVID. Forget the unexpected COVID expenditures. You've mentioned $52 billion net. The number's much higher. The government is classifying this spending plan as fiscal restraint. In this spending, there is no additional spending for pharmacare or for new health transfers to provinces.

First, would you characterize a 30% increase in spending as restrained spending growth? Second, have you done any analysis on additional spending pressures and what that might do to the spending on a go-forward basis?

[Yves Giroux]

There are a couple of points to your question.

First of all, would I qualify this as restrained spending growth? The answer is, unsurprisingly, no. When the government has $81 billion in fiscal room and spends $52 billion of that, even after taking into account new tax measures, it's not called keeping one's powder dry. That's one way of saying it. I've said that before, so it's nothing new.

We have not looked at what all the other pressures would mean on the fiscal bottom line for the government because there are many ways a government could decide to address these pressures. For example, there's a commitment for NATO countries to spend at least 2% of their GDP on national defence. We published an analysis several months ago indicating what this would mean in terms of dollars, but it doesn't mean the government has to do it or that the government will move there quickly. It could choose to move at a different pace.

There's also pressure on the part of premiers to get additional funding for health care. Again, it's a pressure. The government has many ways to address this. It could choose to ignore these pressures. It could choose to provide all the funding that premiers want or anywhere in between.

All that is to say we have not done an analysis of what these would mean.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

A quick yes or no, have you ever seen a government restrain its spending growth to 1% to 2%? The government now says it will restrain its spending growth to that amount in future years.

[Yves Giroux]

Over several years, no.

[Adam Chambers, Conservative, Simcoe North, ON]

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Chambers.

We'll now go to the Liberals with MP Chatel, for six minutes, please.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much, Mr. Chair.

Thank you for being with us, Mr. Giroux.

Global inflation has clearly meant hard times for many Canadians. Some people in the communities I represent live from paycheck to paycheck. Life is increasingly hard for them.

However, there's a glimmer of hope on the horizon. When we read your economic outlook, we see more hope in your statement than in ours. You're projecting as much as a 1.9% drop in inflation for 2023. So that's a radical and significant decline and suggests a return to a stable inflation rate.

Would you please tell us about that, Mr. Giroux?

[Yves Giroux]

Of course I can tell you about that.

We released our economic and fiscal outlooks at the end of October. In our economic outlook, we assume that the Bank of Canada and central banks around the world won't tighten monetary policy more than necessary.

In October, we estimated that the prime rate that the Bank of Canada needed to control inflation should be about 4%. That's still our opinion. A rate of 4% would be enough to lower inflation to 2.3% in 2024 and then to 2% in 2025 and subsequent years.

In a scenario where central banks, including the Bank of Canada, further restrain monetary policy, in other words, if they raise interest rates more than necessary, the inflation rate would fall slightly more sharply, but that would result in significant costs.

In our base case scenario, in which the Bank of Canada and other central banks take necessary action without going too far, inflation would decline further in subsequent years. Economic growth would pause slightly in 2023, then gradually resume in 2024 in ensuing years.

[Sophie Chatel, Liberal, Pontiac, QC]

We're in pretty good shape compared to what we see elsewhere. The situation isn't pretty in other countries, including the G7 countries, among others, which have even more inflation and no hopeful scenarios.

We talked at length about fiscal responsibility. In these hard times, we should implement measures that target those who most need them so that no one in Canada falls into poverty. That's what the government is trying to do by outlining measures that really target lower-income households.

You've shown in your analysis that the assistance provided to the least well off in our society, those most in need, low-income families and workers, will only require a minor commitment. We will assist them during this difficult period, and the pressure on inflation will be very minor.

Please tell us about those targeted measures and their impact.

[Yves Giroux]

In response to numerous requests, we've taken into consideration the inflationary impact of the measures that the government announced in September, particularly the temporary increase in the GST credit, the Canada dental benefit and the top‑up to the Canada housing benefit. We came to the conclusion that their impact on inflation would be marginal, in the order of a few hundredths of a percentage point.

This is understandable because these measures involve temporary amounts in certain cases that are relatively minor compared to the size of the economy.

[Sophie Chatel, Liberal, Pontiac, QC]

When you say “very targeted measures”, you're referring to the impact of doubling the GST credit, the top‑up to the Canada housing benefit for those most in need and the Canada dental benefit.

So you think that will help households, while reducing the negative impact it could have on inflation. Is that correct?

[Yves Giroux]

These programs are designed to assist households with incomes below a certain threshold. To be eligible for the Canada dental benefit, families must earn less than $90,000 a year. I don't know the GST credit figures offhand, but the amount is smaller.

The objective is to assist low‑ to medium-income households. So that's why the cost is relatively limited.