Evidence of meeting #15 for Finance in the 45th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was bia.
A recording is available from Parliament.
Interim Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
According to the Government of Canada, that is the case.
Conservative
Éric Lefebvre Conservative Richmond—Arthabaska, QC
I see.
Do you believe that these expenses should be classified as investment tax credit expenses?
Interim Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
It’s the same thing, according to the Government of Canada’s definition.
Conservative
Éric Lefebvre Conservative Richmond—Arthabaska, QC
Very well.
The credit rating agency Fitch Ratings pointed out that the Liberals’ budget highlighted the erosion of the federal government’s finances.
Do you agree with this agency?
Interim Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
I don’t work for a rating agency, but I would say that it’s important to be transparent, i.e., to share all possible data with rating agencies, but also with other investors.
Conservative
Éric Lefebvre Conservative Richmond—Arthabaska, QC
Are you concerned that rating agencies are starting to talk about downgrading Canada’s credit rating?
Interim Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
I think that improving the quality of transparency is the basis for our recommendations.
It is up to the Government of Canada to make decisions about the types of budget angles to adopt and how to measure them. At the same time, other stakeholders must make decisions about investments. In our view, that is the advantage of improving the quality of transparency and explaining why a decision was made by the Government of Canada, i.e., changing fiscal angles within an incredibly short period of time.
In addition, it is important to increase credibility, how capital investments are defined and measured. As I explained earlier, we have already had two other examples here in Canada regarding the definitions of “capital”. This is completely new, and it is defined here, only in Ottawa.
Conservative
Éric Lefebvre Conservative Richmond—Arthabaska, QC
Thank you.
Since the beginning of your interventions, you have often spoken about transparency and credibility. You also said that the Prime Minister had confirmed that he would maintain the fiscal anchor that is the debt-to-GDP ratio. Six weeks later, the Liberal government abandoned that anchor.
Can you explain why it is so important for Canada to maintain the debt-to-GDP ratio as an anchor?
Interim Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
Thank you for your question.
This important fiscal angle was put in place over 30 years ago now. This is an incredibly important indicator for every other country in the world, but also the rating agencies.
I don't think it's up to us to judge the budget angles that the Government of Canada chooses. In a context where we advocate transparency, the quality of it diminishes when a change in this regard is passed very quickly, without in-depth discussions on Parliament Hill. It could create the perception that numbers have a political aspect. In addition, I think everyone wants to avoid that.
Liberal
The Chair Liberal Karina Gould
Thank you, Mr. Jacques. That's all the time we have.
Thank you, Mr. Lefebvre.
I now give the floor to Mr. Sawatsky for five minutes.
Liberal
Jake Sawatzky Liberal New Westminster—Burnaby—Maillardville, BC
Thank you, Chair.
Thank you to the witnesses for coming here today.
The IMF recently praised Canada's decisive action to modernize its budget framework, including splitting the capital and operating spending, which we've been talking about. It said:
Both Germany and Canada recognize that in this very testing time, they need to use their fiscal space....one of these actions is indeed to reform—modernise the budget framework by (...) separating operating expenses in the budget from investment—that ability to then focus strategically on investment[s] that are pro-growth, and that can lift up productivity.
Does your analysis reflect the benefits of that reform? You touched on some of the specifics, but in a broad sense, do you see this as something that could be beneficial?
Interim Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
Yes.
Liberal
Jake Sawatzky Liberal New Westminster—Burnaby—Maillardville, BC
Great. Maybe you could dive a bit more into the specifics. I know you mentioned that there were perhaps a few things you might have wanted to see be different. Maybe you could elaborate.
Interim Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
Again, in terms of this split between operating and capital, that's something the government has done internally, which is certainly their right to do. I think it's certainly good that the government, because they've changed their internal decision-making processes around operating capital.... If that's how you're managing internally, I think it's very transparent to share that information with the public to explain how you're making decisions and what one wants to accomplish.
In terms of the observations we make around a broad capital definition term, it's broad in comparison with other jurisdictions. There are things included in the definition that typically one would not include in other jurisdictions. That's something that parliamentarians should be aware of. Certainly, the government is aware of it. The further you stretch the relationship between the spending and what is considered an investment, the harder it is to actually identify or determine whether it's actually a capital investment or not.
It's not to say that tax expenditures would not somehow indirectly benefit capital investment. It's simply to say that it becomes harder to actually draw a clear linkage between the two.
Liberal
Jake Sawatzky Liberal New Westminster—Burnaby—Maillardville, BC
Thank you.
When we're talking about investments and capital expenditures, what are some things that you would see as being clearly capital investments into the country?
Interim Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
I think we'd start with the definition from the system of national accounts, so starting with the definition from Statistics Canada. They have a definition with respect to what capital is. I believe on a monthly basis they're publishing something called capital investments and capital formation in the economy. That would certainly be a starting point.
If you wanted to extend it a little bit further, being an accountant, I would extend it further to include and incorporate the Public Sector Accounting Board standards. There are some things included in the Public Sector Accounting Board standards that might not necessarily show up within the system of national accounts, but it's a larger concentric circle, so you might include some of those things as well.
To the best of my knowledge, to use an example, an operating subsidy from the federal government to a private sector firm to produce something on an ongoing basis, within the first two categories, from Statistics Canada and the Public Sector Accounting Board standard, would not be considered a capital investment and wouldn't show up in your balance sheet. It's not to say that the government can't define it as such. It is to say, and this is the observation we make, that if you're coming up with a new definition, if one wants to use a new definition of what capital is, it's important to be transparent around it so that all parliamentarians understand.
As well, when it's clearly intrinsically linked to the new operating budgetary anchor of the government, it probably will increase the transparency and credibility if the definition you're using is not one that you come up with on your own and you don't have full control over and it's not subject to change as you see fit.
Liberal
Jake Sawatzky Liberal New Westminster—Burnaby—Maillardville, BC
Thank you. That makes sense.
Budget 2025 makes some productivity-focused investments, such as housing, defence, major projects and the build communities strong fund, which is $51 billion over 10 years and then an ongoing $3 billion per year thereafter.
When your office assesses long-term fiscal sustainability, how do you incorporate these expected long-term returns from these investments into housing, infrastructure, defence—
Liberal
The Chair Liberal Karina Gould
Sorry, Mr. Sawatzky, but we're going to have to end it there.
That concludes the time for this round.
We will go over to Mr. Kelly for five minutes, please.
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
Thank you.
I'd like to continue on the topic of credibility. You mentioned in your opening statement that it was only six weeks ago that the Prime Minister was insisting that his government's fiscal anchor was a declining debt-to-GDP ratio, and now it is a declining deficit-to-GDP ratio wherein they then change the definition of an operating deficit and claim that is a new fiscal anchor.
Can you talk about how changing the goalposts, cutting loose fiscal anchors and these kinds of inconsistencies affect Canada's fiscal credibility?
Interim Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
Again, it comes back to an issue of the government having full discretion to establish whatever fiscal management practices it wants to, including identifying or potentially changing the fiscal anchors as it sees fit.
From our perspective, and looking at good practices among advanced economies, if you're going to do so, you should do it in a transparent way that brings everyone along with you. If there are fundamental changes that the government has planned with respect to fiscal management, a good practice would be to explain the changes being proposed and ask if anyone has any feedback and if everyone understands what they are and what the consequences might be and then, after receiving feedback, potentially putting those into place and incorporating the feedback as you see fit. That's something, again, that we flag for parliamentarians.
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
When an existing fiscal anchor like a declining debt-to-GDP ratio is so quickly abandoned, how much credibility does the new fiscal anchor have?
Interim Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
I don't know that I'm in a good position to judge that using numbers.
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
Okay, now with numbers, you did note in your report that there is, in your estimation, only a 7.5% chance that the government will maintain the anchor that it has now assigned itself.
Talk about how you arrived at that conclusion and how that impacts the credibility of the government.
Interim Parliamentary Budget Officer, Office of the Parliamentary Budget Officer
In terms of measuring the probability of the government respecting its anchor of a declining deficit-to-GDP ratio, that's actually based upon an IMF framework looking at the historical shocks that have faced the Canadian economy going back over the past 30 years. When we face those shocks, how severe are they, and in that context, is the government going to still be able to respect those anchors?
Again, it's not to say that they can't, and, going back to the question around fiscal sustainability, it's not to say that the government is not fiscally sustainable, but it is to say that there's a lot less room than there used to be. The next time there's an economic shock—and there will be, and economic shocks can mean recessions, pandemics and the terrorist attacks of 2001—there will be far less fiscal space than we had previously.
Conservative
Pat Kelly Conservative Calgary Crowfoot, AB
All right, so they're setting themselves up to have less room to deal with events, which we know will happen in the years ahead.