Public Accounts Committee on Nov. 20th, 2013

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

Thank you Mr. Chair.

This question will be to Finance again. It's going to speak to our debt. I think Canadians want to have a real confidence level—I know I want to—in terms of how we're managing our debt. The sources of debt are significant.

I see that foreign holdings of government unmatured debt are estimated at $175.9 billion. I'm hoping you can give me an idea of who's holding our debt and what we have in place in terms of a risk mitigation strategy for our debt.

[Benoît Robidoux]

We could only break it down between foreigners who owe Canadian debt and our own debt. So it's between Canadian citizens and foreigners. We don't have another breakdown on that.

Foreign holding of Government of Canada venture debt has been increasing. We have more issues since the recession, something in the range of 15% to 25% of the debt.

I would say 25% of our debt is owed by foreigners, and 75% of our debt is owed by Canadians. The share of foreigners has been increasing this year, following a reduction before that. The reduction was because we were not emitting a lot of new debt. We had surpluses in many of these years. With the crisis, we had suddenly an increase in emissions. Canada's fiscal situation across the world was good before the recession, and it's even better now. Foreigners are quite interested in buying Canadian debt, and we have seen that they are doing so. This is what we have observed.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

I'll go a little further; I was hoping you'd actually jump into this.

The Department of Finance has a debt management strategy. I think that's where I was trying to go with this question. I was looking to understand what was involved in developing a debt management strategy. What does it consist of? Will that strategy give Canadians confidence that the government is managing its debt in a way that reduces risk to Canadian taxpayers?

[Benoît Robidoux]

I will let my colleague Douglas Nevison answer that question.

[Douglas Nevison, General Director, Economic and Fiscal Policy Branch, Department of Finance]

Thank you very much, Mr. Chair.

You're absolutely right that the government has a debt management strategy. It is published as an annex to the budget every year and presented before Parliament. The objective of the debt management strategy is to raise stable, low-cost funding while ensuring a well-functioning Government of Canada securities market. So there isn't a strategy to pursue or target-specific types of issuance. It's to get the lowest cost possible and appropriate debt structure.

Since Canada is one of the global economy's few Triple-A credits with a good fiscal situation, there is a lot of demand for Canadian securities, particularly amongst central banks and sovereign wealth funds that are reallocating their portfolios towards a fairly secure asset.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

Just to elaborate a little bit more on developing this strategy, is this done internally, or do you seek expert advice?

[Douglas Nevison]

It is determined internally. It's also determined in consultation with the Bank of Canada, which is the fiscal agent. It is based on consultation with market participants, investors. There's a significant investor relations program to make sure that we are tapping investor demand appropriately, getting the right structure of debt to pursue the objectives of the strategy.

[Bryan Hayes, Conservative, Sault Ste. Marie, ON]

One more small question again on debt. This is something I don't quite understand, and I'll read it to you. It states:

The average effective interest rate on the Government's interest-bearing debt in 2012-2013 was 3.4 percent, down from 3.8 percent in 2011-2012. The average effective interest on unmatured debt in 2012-2013 was 2.7 percent—

Here's the next one that I don't understand:

—while the average effective interest rate on pension and other liabilities was 5.4 percent.

I'm trying to understand the very significant difference between interest-bearing debt and the interest rate on pension and other liabilities. That's on the top of page 1.12.

[Benoît Robidoux]

The effective interest rates you mentioned before, 3.4%, those are market rates that reflect that structure. If we have more long-term debt and less short-term debt, this average rate will be higher. If we have more short-term debt, it will be lower.

This reflects two things: a structure for debt over time, and also the fact that both long- and short-term interest rates have been falling in recent years, so a fall in the effective rate reflects when we admit new debt, we admit at lower rates than all the debt we roll over from the past. Rates have been going down so the effective rate is falling.

On the pension, which is your real question, it's a long-term rate, a ten-year rate, a ten-year-plus in fact, that we use to book our pension liabilities. It's not a rate we pay to anybody. It's a rate we use to factor in our liabilities in public accounts. That rate allows us to calculate the current value of our liabilities, and also to account for those liabilities over time, both now in the current year and also in the future. We use that rate to do that. It's a benchmark rate. It's not something we're paying to anybody. It's a way to ensure our liabilities are recorded in public accounts in an accurate way.

Since pensions are long-term liabilities, we use long-term rates to account for that. It's more a shadow rate, “what if”, than a real rate.

[The Chair, NDP, David Christopherson]

Thanks very much.

Mr. Allen, you have the floor, sir.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Mr. Chair.

To Finance, recently there has been talk about lapsed spending in departments to the tune of almost $11 billion, $10.9 billion. I guess there are two parts to the question. Is this higher than you expected, and if so, is there a cause for it, or is there any reason you can point to, or are you not sure?

[Benoît Robidoux]

Yes, the difference in spending was lower than expected in 2012-13. At the same time departments had been lapsing a bit more than $10 billion compared to their appropriations.

It's fairly difficult to explain from a forecasting point of view because the lapse we talk about in our forecasts between us at Finance is the actual lapse. The lapse that has been in the media up to now is a cash lapse. Departments access cash in a year that they could appropriate to spend, and if they don't spend that, they lapse the money, and this is a cash lapse.

That cash lapse is relevant, but it's not the same lapse that we use in our predictions because we need to do a number of accrual adjustments for liabilities, assets, and all that.

[Malcolm Allen, NDP, Welland, ON]

We're back to the accrual cash thing again, Ms. Cheng, it seems, the debate about accrual versus cash, but I hear what you're saying, Mr. Robidoux.

[Benoît Robidoux]

I wanted to outline that the two are not the same, but effectively what happened in 2012-13 is we assumed a lapse on an accrual basis in the projection.

[Malcolm Allen, NDP, Welland, ON]

I think you can understand from a parliamentarian's perspective, we are asked to vote on expenditures. Clearly we're asked to vote on a certain amount of money. Then when we find out later on that the amount we're asked to give was exceeded; $10 billion, almost $11 billion, isn't a rounding error. Yes, there are some pieces later on—how lapsed cash and accrual goes back—quite frankly it's like sleight of hand sometimes for those who don't quite understand accounting. I get that.

But clearly this is higher than normal. I guess the question is....I saw Mr. Ralston give me an indication. Maybe he wants in on the answer. This is not a normal piece. It's higher. So the question is, is there something specific to this, is it a one-off, and is there a methodology to try to put in place that says they'll be a little tighter the next time so they don't get into this shifting of or lapsing of the departmental expenditures?

Mr. Ralston.

[Jim Ralston]

I have a couple of general observations to start with. First of all, when you appropriate funds, that represents an upper ceiling. So there's never really an expectation that it will be completely used. Departments are certainly not obligated to spend their entire appropriations, and for certain appropriations, there are a number that are essentially there to cover contingencies. So if the occasion does not arise to access those contingent funds, they will lapse. There's always a certain level of lapse that is to be expected.

In the 2012-13 year, the situation arose where the main estimates had been tabled, and then there were some reductions announced in the 2012 budget after the estimates had been tabled. What Treasury Board did was to so-call freeze certain of those simply to reflect the update, if you will. That's not the only reason you would freeze allotments, but it was one reason that happened to be present in the year in question. There could be other reasons that frozen allotments are used. In this case that sort of category covered about 40% of the lapse.

Also, departments have the ability to carry forward a part of their appropriations. I certainly remember that I did this when I was a chief financial officer. We plan to carry forward some of the current year's funds into the next year because we have a greater need, say, in a subsequent year than the current year. That carry-forward activity represented about 16%.

[Malcolm Allen, NDP, Welland, ON]

So it's actually a greater amount than normal. That's the dilemma.

[The Chair, NDP, David Christopherson]

Mr. Allen, please.

[Malcolm Allen, NDP, Welland, ON]

Sorry, sir.

[The Chair, NDP, David Christopherson]

Thank you.

[Malcolm Allen, NDP, Welland, ON]

I couldn't hear him. A bad ear.

[The Chair, NDP, David Christopherson]

You couldn't hear me? I don't hear that very often.

[Malcolm Allen, NDP, Welland, ON]

I'm from Welland. You're only from Hamilton.

[Voices]

Oh, oh!

[The Chair, NDP, David Christopherson]

All right.

Moving along, Mr. Albas, you have the floor, sir.