Public Accounts Committee on March 5th, 2013

[The Chair, NDP, David Christopherson]

I call this 80th meeting of the Standing Committee on Public Accounts to order. I welcome our guests.

Prior to turning to our guests, I would just mention to colleagues, again, as we did at the last meeting when we had a hearing, that there are a number of business items in our work plan that we need to address. Assuming there will be time at the end of this hearing, I will then move us into a business meeting to conduct that part of it. However, that will be at the end.

We will now move forward. Today we are studying chapter 7, Long-Term Fiscal Sustainability—Finance Canada, of the Fall 2012 Report of the Auditor General of Canada.

We have with us representatives from the Auditor General's office and the Department of Finance. I will ask Ms. Cheng and Monsieur Robidoux to introduce their delegations and to make their presentations with any opening remarks.

Ms. Cheng, you have the floor.

[Nancy Cheng, Assistant Auditor General, Office of the Auditor General of Canada]

Mr. Chair, thank you for the opportunity to meet with your committee today to discuss chapter 7 of our fall 2012 report, on long-term fiscal sustainability. Joining me at the table is Richard Domingue, the principal responsible for this audit.

Long-term fiscal sustainability refers to whether the government can finance its activities and debt obligations in the future without imposing an unfair burden on future generations. Factors like changing demographics can put pressure on Canada's fiscal position in the long term.

After the financial turmoil in 2008 and its negative impact on the government's fiscal outlook, long-term fiscal sustainability became even more important. In this context, analyses that provide a long-term budgetary perspective would help parliamentarians and Canadians better understand the fiscal challenges we face.

Our audit objective was to determine whether the Department of Finance Canada took into account the long-term fiscal impact when proposing budget measures and policies, and whether it reported this type of information publicly.

We first selected six recent budget measures to determine if the Department of Finance Canada analyzed the long-term fiscal impact of these measures and considered the results when recommending them. To protect the government's fiscal position in the long run, it is important that policy makers understand the future budgetary impact of decisions made today.

Based on our audit, we concluded that the Department of Finance Canada had the capacity and tools to carry out long-term fiscal analyses. We found that such analyses were carried out when the department considered it to be relevant. For changes to the Canada Health Transfer and Old Age Security, the department analysed the long-term fiscal impact of the proposed changes on the federal government, and on the provinces and territories. We noted that the results of those analyses were used to make recommendations.

We then looked at whether the department reports projections on Canada's long-term fiscal position. Although the department analyzed the impact of individual budget measures, it is also important to make available, before concluding the budget process, an overall assessment of their combined impact on the government's long-term fiscal position.

We found that Finance Canada does prepare an analysis of the overall long-term fiscal position of the government. However, it is not prepared or provided to the minister before the budget process is concluded.

For example, we found that an analysis of the long-term overall impact of the March 2012 budget was given to the minister in August 2012, five months after the budget was tabled.

At the conclusion of the 2012 budget measures, senior management and the Minister of Finance had not been informed of the measures' combined impact on the government's long-term fiscal position.

We recommended that the minister be informed of the overall impact of budget measures before final choices were made and approved. Finance Canada agreed with the recommendation. Starting in 2013, it plans to provide the minister with this information before decisions are finalized.

In its 2007 budget, the Government of Canada committed to publishing a comprehensive report on fiscal sustainability and intergenerational equity. We found that the government had not followed through on this commitment. In the absence of publicly available information—and to illustrate the overall impact of the 2012 budget on the government's fiscal sustainability—we prepared 40-year projections by replicating the economic and fiscal conditions at the time when those decisions were made. As we illustrate in exhibit 7.5 of our report, our projections showed that the 2012 budget will have a significant positive impact on the sustainability of public finances for the federal government.

Within hours of our report being submitted, the department published the government's first long-term fiscal report. In response to our recommendation, the Department of Finance committed to publishing long-term fiscal analyses for the federal government annually. It is commendable that the government implemented this recommendation so quickly. As a result, Canada joins a good number of OECD countries that have published long-term fiscal sustainability analyses.

In addition to reporting at the federal level, we also recommended that from time to time the department report an analysis for all levels of government combined, including the federal, provincial, and territorial governments. We note Finance Canada has the capacity and the information to prepare a combined report. A comprehensive report would provide a complete long-term fiscal outlook for Canada.

We note the International Monetary Fund recently urged Canada to publish a fiscal sustainability report covering all levels of government. We encourage the government to take steps to analyze the fiscal position for all of Canada and to report it periodically.

Mr. Chair, this concludes my opening remarks. We would be pleased to answer questions from members of your committee.

[The Chair, NDP, David Christopherson]

That's very good. Thank you, Madam Cheng.

Monsieur Robidoux, you now have the floor. Would you introduce your colleague and make any introductory remarks you may have.

[Benoît Robidoux, Assistant Deputy Minister, Economic and Fiscal Policy Branch, Department of Finance]

Mr. Chair, members of the committee, thank you.

I want to begin by thanking you for the invitation to appear before this committee to discuss the results of the Auditor General's performance audit on long-term fiscal sustainability presented in his fall 2012 report.

With me today also from the Department of Finance is Mr. Doug Nevison, general director, economic and fiscal policy branch.

We are pleased with the results of the performance audit of the Auditor General, which confirmed that the Department of Finance routinely conducts sound, long-term fiscal sustainability analyses, and that the results of these analyses are used to inform policy decisions.

I would like to take this opportunity to thank the Office of the Auditor General, Nancy and Richard, for their continued professional working relationships we have enjoyed both through this audit and previous ones.

We have accepted their recommendations and have acted in response.

Mr. Chair, we have tabled our action plan outlining the key steps the department has undertaken in the wake of the Auditor General's recommendations to expand our long-term fiscal analysis and better communicate its results to the public. I understand you received that action plan late, and I apologize. I think there was some issue with the translation at Finance.

Finally, we would be pleased to take the committee's questions.

Merci.

[The Chair, NDP, David Christopherson]

Thank you.

I appreciate your mentioning the action plan. It was a good move. You got out in front of me.

To let you and your counterparts in other departments and ministries know, I say to colleagues we need to refine the motion a little. It's not as clear and crisp as it should be, and there are omissions. There are supposed to be action plans for all the chapters, even the ones we don't pick, and we haven't been as good at following up on that. It's another area where we'll tighten up. We'll do that at a business meeting.

For now we will continue, and unless there are any interventions to the contrary, it's my intent to begin the rotation.

Seeing no interventions, I will start with Mr. Saxton.

Mr. Saxton, you have the floor.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Chair, and thanks to our witnesses for being here today.

My first question is for the assistant auditor general. According to your analysis as well as that of the Department of Finance, the Government of Canada is on sound, sustainable, long-term financial footing.

Would you agree with that statement?

[Nancy Cheng]

Mr. Chair, we did our own projection. Our projection results are quite similar to those of the Department of Finance. You can see that in exhibit 7.5 on page 21.

The chart is not a prediction in the sense that it carries preciseness, but it's the trend line that counts. According to the trend line, after the March 2012 budget, as you see here, the black line shows, moving forward, that the path is rather sustainable.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you very much.

My next questions are for the Department of Finance.

One of the recommendations of the Auditor General is that the federal government should provide long-term fiscal analyses for both the federal and the provincial governments.

I understand that your department does not feel comfortable doing the analyses for the provincial governments because you simply don't have the specific information available.

Can you speak to some of the more practical and technical challenges in the federal government for examining and releasing detailed information on the provincial governments?

[Benoît Robidoux]

First, from the point of view of the government, the Government of Canada is not accountable for the provinces, so releasing projections for provinces would be somewhat problematic. They don't own their fiscal situation, and it would be somewhat difficult.

Entirely at the Department of Finance, as Nancy was mentioning, we could do analyses based on some assumptions, but we strongly believe that a government should publish their own analyses, defend and support them, and defend the assumptions they've used in these reports. It's not for some other government to decide what the right assumptions are to be used for some other government.

This is the main reason that it's fairly difficult, from a communications point of view, for one level of government to publish results for other levels of government. This is the main issue.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

In the opening statements of the assistant auditor general, she mentioned that the federal government had not released its sustainability report until quite recently, even though it had committed to doing so quite some time ago. I think it was in 2007.

Can you explain why it wasn't released sooner? Was it possibly because of the recession and other things that came up in the meantime, or what was the reason?

[Benoît Robidoux]

Sorry, is this question for me?

[Andrew Saxton, Conservative, North Vancouver, BC]

Yes, it's for Finance.

[Benoît Robidoux]

As explained in the report, we prepare analyses on a regular basis at the department. We knew that the government wanted to publish reports, so we did prepare some reports.

Now, as to when these kinds of reports get published, I would say that, effectively, when the global financial crisis happened, our focus changed dramatically and quickly toward the economic action plan and the different phases of it.

For some time, then, this was clearly not a priority at the department, and it was probably not a priority for the government, although I can't speak for the government.

This is one of the reasons that it was kind of postponed. As far as the decision to publish, and when, I think that's more a question for the government.

[Andrew Saxton, Conservative, North Vancouver, BC]

As I mentioned earlier, the Auditor General's report, as well as the findings of the finance department, show that the Government of Canada's finances were on solid and sustainable long-term footing.

Since 2006 the government has undertaken numerous steps to address long-term challenges and ensure the sustainability of public finances and social programs for future generations.

Can you highlight some of the steps that the government took?

[Benoît Robidoux]

As we explained in the report, one of the first steps you have to take on the economic side towards sustainable public finances is to ensure that you maximize your potential growth, which means, in turn, ensuring that people participate in the labour market as much as possible and that your productivity is as high as possible.

In 2006 the government published “Advantage Canada”, which is a long-term plan to support long-term growth. The government has taken a number of steps, which are outlined in the report, to support both the labour market participation and productivity through the years. The list is long, and it's fairly difficult to go through it all, but there are major elements such as the building Canada fund, at $33 billion, for infrastructure to support productivity across Canada. There's also the reduction in corporate and personal income taxes. There were a number of measures, big and small, to support that.

The second item that is important is to look at the public finances. The first thing you need to ensure is that you have a balanced budget or a surplus as often as possible. The government, between 2006 and the global crisis, paid down debt every year, which is the first thing you should do if you want to have a sustainable fiscal situation.

After the crisis, I would say that the two major decisions for fiscal sustainability had to do with a more sustainable path for the CHT and OAS. Those two actions were explained in the report of the Auditor General and in our report as a significant step to ensure long-term fiscal sustainability.

[The Chair, NDP, David Christopherson]

Thank you. The time has expired.

We'll move along to Mr. Giguère.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Thank you, Mr. Chair.

I want to thank the witnesses for joining us.

I would like to discuss income splitting. According to paragraph 7.24 of the Auditor General's report, the department officials estimate that the $925-million amount will decline over the next 10 years.

Do you think an estimation based on non-validated and undocumented assumptions should be trusted by Canadians?

My question is for the representatives of the Office of the Auditor General.

[Nancy Cheng]

Mr. Chair, I just want to make sure that I got the question properly. The member is referring to paragraph 7.24, the $925 million. He quoted a number of $900 million. What rings a bell right away is the paragraph referring to income splitting for pensions.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Yes.

[Nancy Cheng]

This is an estimate prepared by the Department of Finance, and the department would be in a better position to answer this. It is not so much about the amount of savings that one can afford or not, but rather to make a comparison between the growth of the economy and productivity to see if the two are in balance. The whole concern about long-term fiscal sustainability is that if you spend more than the growth in your economy, then your debt ratio will continue to increase—

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

No, madam, I am talking about paragraph 7.24, which covers pension income splitting. It mentions a cost of $925 million for 2011. Public servants have not conducted any analyses, as they estimated that, within 10 years, income splitting will no longer cost anything, since the gap in revenue between women and men will cease to exist.

[Nancy Cheng]

Mr. Chair, I thank the member for that clarification.

Essentially, for this particular measure, the Department of Finance did not do an analysis, because of the reasoning that there are the two-income families. It really is the sentence above that talks about the reduction of the income gap between the spouses. So in their opinion, in the longer term, the ratio of the revenue lost and the growth of the economy won't change significantly.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Madam, my question is very simple. You yourself are saying that paragraph 7.24 mentions an undocumented estimate that has not been validated. You yourself seem to be skeptical about the validity of that comment in paragraph 7.24.

How can we rely on a comment that has not been analysed and goes against your general recommendation to systematically conduct studies? That's all I am asking you.

[Nancy Cheng]

Mr. Chair, I'll attempt to answer the question once again. The $925 million is an estimate into the long term, so it wasn't something that we would be auditing. It was an estimate only to that level of precision, and that's why we didn't try to audit that particular number. So the number $925 million is not precise—you're absolutely right—but it gives an order of magnitude as to how much this revenue measure might cost into the future. That's what the idea was. It was to give an order of magnitude but not to try to measure precisely the amount of that tax expenditure.

I hope that's a better answer.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

My question is for the Department of Finance, still regarding income splitting.

While going over your information, you said there was no need to conduct an analysis to identify the long-term impacts. You have not documented that data, but the information provided by your department indicates that the pension income gap between men and women is a current, past and future reality.

The Parliamentary Budget Officer has conducted a simple analysis referred to as the valuation of the L variable, which indicated that the gap will not decrease or disappear, but rather increase.

Your own information indicates that this gap will continue to exist, yet you are telling us that it will disappear within 10 years. How do you explain that contradiction?