:
We'll call the meeting to order.
Welcome to meeting number 28 of the House of Commons Standing Committee on Finance. Pursuant to the order of reference of March 8, 2021, the committee is meeting to study Bill , an act to implement certain provisions of the economic statement tabled in Parliament on November 30, 2020, and other measures.
Today's meeting is taking place in the hybrid format pursuant to the House order of January 25, 2021. Therefore, members are attending in person in the room and remotely using the Zoom application. The proceedings will be made available via the House of Commons website. Just so you're aware, the webcast will always show the person speaking rather than the entirety of the committee.
Welcome to our witnesses under this new format. We have three witnesses in the first hour-long panel, and we'll start with Mr. Macdonald with the Canadian Centre for Policy Alternatives.
Mr. Macdonald, could you hold your remarks pretty close to five minutes? We're tight on time.
Go ahead. The floor is yours.
:
Excellent. Thank you, Mr. Easter.
I hope everyone can hear me.
Thanks so much to the committee for the invitation today.
Certainly, the economic response to COVID-19 from the government has been unprecedented in Canadian history. We'd need to look back at the World Wars to see government expenditures on this scale, although we'd also have to look back to the 1930s, almost a century ago, to see unemployment at this scale, particularly in the early months.
My recent report, “Picking up the tab”, was a comprehensive dataset of all 850 direct federal and provincial COVID-19 measures through the end of December 2020, including the fall fiscal update. The overall conclusion of this compilation is that, when it comes to measures to combat COVID-19, this has been almost entirely paid for by the federal government, with 92% of every dollar spent on measures to combat the coronavirus—everything from the purchase of PPE, to business and individual supports—having come from the federal government. Even in areas of provincial jurisdiction, like health care, 88% of the cost was borne by the federal government.
The largest expenditure, including both federal and provincial programs, has been in support of businesses, amounting to $4,100 a person. Supporting individuals comes in a close second at $3,900 per capita, and health care support is a distant third at $1,200 a person.
In each of the categories examined, except one, federal support was larger than provincial support. The one area where the provinces are spending more is on physical infrastructure to stimulate growth. This is being driven particularly by the western provinces. The federal government's major infrastructure program at this point is the resilience stream of the Canada infrastructure program, although this only reallocates existing funds and doesn't spend new funds.
It's worth pointing out that as the federal government embarks on new rounds of upcoming spending in the spring budget, in the last round of spending many of the provinces didn't properly match federal spending in support of municipal deficits, and many provinces didn't fully access the federal money available to them. In the next phase of the recovery, the federal government should keep a close eye on matching dollars and fund utilization to ensure the maximum impact for its expenditures.
This brings me to the next stage of federal COVID-19 spending, which has been promised at $70 billion to $100 billion in the upcoming spring budget. As I mentioned, infrastructure spending is already budgeted in several western provincial budgets. This is certainly an area where the federal government can back provincial efforts, like it did in the safe restart agreement. New infrastructure spending that reduces the country's carbon footprint can be an important opportunity to build back better, and further encourage central and Atlantic provinces to devote more of their COVID-19 dollars to infrastructure.
I'd also like to take a moment to call members' attention to our annual child care fee survey, published just this morning. It provides a detailed look at child care fees and COVID-19 impact in 37 Canadian cities. This year's survey shows a very concerning decline in enrolment in child care due to COVID-19, at the same time as fees remain high across many cities in the country. The decline in enrolment is worse in cities with high fees, and worse in cities with high unemployment. Without immediate consideration, site closure and/or the loss of staff may make a rapid recovery in the summer and fall impossible as parents can't find spaces for their kids as they hopefully go back to work.
One of the other ongoing lessons of the child care fee survey, which may be instructive for future federal efforts, is that the lowest child care fees are always found in cities where providers receive provincial operational grants, and then charge a low set fee. Just last year, Newfoundland became the fourth province to join Quebec, Manitoba and Prince Edward Island in this approach, and it looks like the Yukon will soon follow suit.
More broadly, I am encouraged that the federal government is committed to rebuilding the economy, rather than being overly preoccupied by federal deficits. Large federal deficits were necessary to avoid much worse deficits in other sectors. Had the federal government not covered expenses, as it had, those deficits would have occurred elsewhere in the economy, particularly in the provinces, as they covered health care costs; for individuals, as they lost jobs and weren't covered by EI; or for businesses, as public health measures wiped out incomes while expenses remained.
A deficit is neither good nor bad on its own. It is merely one side of an accounting relationship, with an equally sized surplus created in another sector. Every dollar comes from somewhere and goes to somewhere. To evaluate the utility of a deficit in a particular sector—say, the federal government sector—we have to track where the surplus was created, the other side of that accounting relationship.
For the past four quarters, the federal deficit of $220 billion has created a surplus of an equal amount, three-quarters of which has ended up in the household sector and one-quarter of which has ended up in the business sector. Thankfully little of the surplus has escaped Canada in the form of financial flows to non-residents.
The federal government isn’t constrained by deficits or debt-to-GDP ratios. It is constrained by the country’s productive capacity. As long as we have people who can’t find jobs, as well as empty stores and restaurants, we aren’t at our productive capacity.
Inflation is the constraint the federal government faces. We have to remember that going into this crisis we managed historically low unemployment and rock-bottom interest rates, and we still weren’t seeing sustained inflation. When we have 800,000 low-wage workers still out of a job compared with the numbers in February last year, we are nowhere near full capacity and inflation will remain subdued for a long time to come.
Thank you. I look forward to your questions.
[Translation]
Thank you for inviting me to join you today.
[English]
As I sat down to prepare my remarks, I was struck by the unique challenge that faces the hotel sector, and indeed this committee and the federal government. We face a balancing act. On the positive side, we have hope and a potential recovery on the horizon with vaccinations under way, which could lead to a possible domestic tourism recovery for some segments, such as resorts, this summer.
On the negative, and frankly, more realistic side, if we don't get all Canadians vaccinated by summer and we have a third wave of the virus, if people are encouraged to stay home, domestic and international borders stay closed and mass-gathering bans remain in place, we could enter COVID year two having lost the most important season for our industry once again.
Let me first address the positive summer scenario and what government action would be required. If we get most Canadians vaccinated by June, the government must pivot quickly—all levels of government—to allow for a safe reopening and invest in stimulating our recovery to maximize the summer tourism season.
This should include implementing best practices from other countries that have successfully reopened before us, breaking down provincial barriers to travel, stimulating domestic demand and confidence by providing tax incentives or rebates to people to spend their dollars in Canada, investing in domestic marketing campaigns and aligning with the U.S. Biden administration on an expedited Canada-U.S. border reopening.
In the second scenario, the worst case, in which restrictions are still necessary and remain in place for the summer, the government will need to provide financial support for the tourism and hospitality sectors until the recovery is possible.
I, unfortunately, believe that the worst case is the likely case. While most other sectors bounce back the day after lockdowns are lifted, we do not. Nobody books a trip the next day. Travel takes lead time. Event planning takes lead time, and those events are what drive the movement of people and the core of our business—festivals, fairs, concerts, theatre shows, weddings, major sporting events and conventions. None of these are planned for this summer or fall and are probably not likely until the spring.
We are asking for what Mark Carney called for in his new book: “Support for companies should be targeted at regenerating the most affected industries, rather than provided as expensive blanket support for all”. It is time for the government to tailor CEWS and CERS towards those who need them most.
In this worst-case scenario, we are looking for two things in the federal budget: big subsidy extension until the end of 2021 for the hardest-hit sectors, and an extension and expansion of the CERS program to help cover fixed costs until the end of 2021 while we are not in a position to make revenue.
Today this program is woefully inadequate. It cuts out the M from SMEs with the monthly cap. It does not cover enough eligible expenses, and it fails to account for the rising business costs like insurance, which has skyrocketed in our sector since COVID.
Our members' survey from March showed that 70% of Canadian hotels will go out of business without an extension of CERS and CEWS to the end of the year. This is a massive-scale loss and it is upon us. Simply put, if the government doesn't extend these programs past June and tailor them to the sectors that need them most, we will lose the majority of the hotel industry.
The government deserves credit for rolling out these programs quickly and for providing tailored debt solutions to the hardest hit. These programs are the reason we still have an industry standing today, but now is not the time to pull away from the sectors that will lag behind through no fault of their own.
The anchor businesses in the travel industry, including hotels, need to be preserved. Hotels support essential travel. They are the cornerstone of tourism regions. They allow Canada to compete for global events. They host our country's hockey tournaments and weddings, but they will not be there if the government does not plan adequately for both scenarios.
We need a clear signal in the budget that the government acknowledges our unique challenges and will stand behind us until recovery is possible.
Thank you.
:
Thank you, and thanks for having me back.
Because I've addressed this committee before, I'm going to follow up on previous discussions I've had with you. I'm going to focus pretty much exclusively on inflation and interest rates. As Mr. Macdonald said, it's low inflation and low interest rates that make all of this work, so it's worth understanding that a little better.
Now I'll turn to my prepared statement for the translators.
Rising commodity prices early in 2021 are fuelling speculation that inflationary pressures could surface faster than central banks anticipate. Central banks took extreme measures to bolster the economy after the pandemic began, lowering interest rates to historic lows and expanding their balance sheets substantially. This led some to accuse central banks of “printing money”, which risks rekindling inflation.
The money supply has long been at the centre of macroeconomics. This reflects a centuries-long reliance on the quantity theory of money to guide the economy. The quantity theory is based on the identity that the money supply and its velocity determine GDP. Assuming velocity is stable over time and output grows steadily, changes in the money supply would be reflected in prices. Milton Friedman’s famous statement that “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output” summarizes what many believe is the origin of inflation.
Applying quantity theory is not simple or straightforward. There is no universal definition of money. Velocity is the the rate at which money is spent, reflecting the number of times money is turned over while making the transactions that generate nominal GDP. A key tenet of the quantity theory is that velocity is stable, or at least predictable.
However, with interest rates approaching zero in both 2009 and 2020, central banks resorted to quantitative easing to boost the economy. QE involves central banks buying bonds, mortgages and other assets to inject money into the financial system. By adopting QE, once again central banks have become “quantity theorists”.
Canada had a brief experiment with QE in 2008-09; however, the money supply and private sector credit did not accelerate. Even the Fed’s greater use of QE did not spark faster money supply growth. We can say that in 2008-09 these experiments with QE did not disprove the quantity theory of money because the broad money supply did not expand rapidly.
QE failed to deliver its promise to boost output and raise inflation after the financial crisis partly because it could not control whether banks increased lending or whether money was spent on GDP and not on existing assets like housing and the stock market. Since QE did not trigger faster GDP growth, neither did it fuel inflation. A regional Fed president bemoaned in 2012 that “the historical relationships between the amount of reserves, the money supply, and the economy are unlikely to hold in the future”. I'm going to return to that quote in a minute.
In 2020, central banks rapidly resorted to even more QE, in Canada’s case mostly by buying federal debt to keep interest rates low while governments provided emergency pandemic relief. Unlike in 2008, however, the broad money supply soared from a 7% to a 30% growth. However, private sector credit demand has not accelerated.
Both prices and inflationary expectations are rising early in 2021, with the latter rising to 2.2% in the U.S. Economists have warned that the U.S. risks overheating because the Biden’s administration’s $1.9-trillion stimulus is arriving just as the economy reopens with the rapid distribution of their vaccines. Fed chair Jerome Powell cites a “flat Phillips curve” as one reason inflation will not take off. The Phillips curve is the trade-off between inflation and capacity utilization, and a flat one shows resource utilization does not affect inflation.
I'm going to skip a paragraph here.
Easy monetary policy was adopted to directly stimulate the economy and facilitate government borrowing needed to help people during the pandemic. Monetary policy is a tool to stabilize the economy in the short term and control inflation, not to bail out governments from the long-term consequences of their fiscal choices.
If the economy recovers better than expected and inflationary pressures or expectations begin to rise—and nobody knows how pent-up demand will respond to the reopening after an unprecedented pandemic—then central banks will have to choose whether to continue to keep interest rates low to enable ongoing fiscal stimulus or start to tighten. In such a circumstance, I have no doubt that they will focus on inflation. In that case, governments that are slow to withdraw fiscal stimulus will face an unwillingness from central banks to continue to make borrowing easy and cheap.
Central banks will not abandon decades of building confidence in their inflation targets. It would take years and probably decades to restore that confidence. The risk of higher interest rates is much greater than that of inflation. The cost of higher interest rates will quickly be felt by governments with large debt loads.
For example, in Canada the PBO estimates that a 1% rise in interest rates would increase federal costs by $4.5 billion in the first year and $12.8 billion by the fifth year.
Both the Fed and the Bank of Canada will tolerate whatever inflation occurs in 2021 as both transitory and salutary. Inflation will accelerate to at least 3% and probably more because of base period effects. Gasoline prices were unusually low last spring, so automatically that's going to raise inflation this year. As well, firms need to rebuild profit margins and balance sheets, especially in industries such as restaurants, travel, recreation and personal services, as Susie mentioned.
Customers are flush with government transfers and are therefore able to afford higher prices, but if inflation becomes embedded into behaviour and especially expectations in 2022 and 2023, central banks will then take decisive action.
Thank you.
:
Thanks so much for the question.
Certainly, when it comes to debt and deficits, the federal government does not exist alone. It exists within the Canadian economy, across from other large sectors in the economy, and deficits and debt are fungible. In essence, they can move between sectors. In this case, the federal government took on a massive deficit in this year and what that did was create smaller deficits and in fact some surpluses in other sectors of the economy. For every deficit there's a surplus of equal value in another sector of the economy.
The federal government could have decided to spend none of this money. It could have decided to have no CERB, no support for business, no support for provinces and no support for health care and individuals. What would have occurred in that case is that those deficits would not have occurred on the federal books. They would have occurred on provincial government books as they covered health care costs. They would have occurred on household books that incurred deficits because they lost work but still had expenses, or on business books.
Despite the federal and provincial governments' efforts, we've nonetheless seen increases not only in federal debt but also in household and corporate debt at the same time. In fact, the household and corporate sectors are far more leveraged than the federal government is. If we were to see interest rate increases, they would certainly hit the federal government, but they'd hit the household and business sectors much harder. Not only do they pay higher interest rates, but they have a lot more debt.
I think it's worth understanding the federal government and its deficits not on their own, but by how it and those deficits relate to other sectors in the economy.
:
I certainly think that there will be a time to come in the next couple of years to start to examine new revenue measures. Broadly, when we start to look at new revenue measures, I think one of the things to understand is that this pandemic has not been bad for everyone.
Financially, there are certain firms in certain sectors that just happened to be on the right side of the pandemic and have made record profits as a result. As a result of firms making record profits, CEOs attached to those firms will make record profits. Even CEOs working for companies that did not make record profits will still likely see massive bonuses at the end of the year as the rules are changed, such that if the economy does really well, CEOs get massive bonuses, and if the economy does badly, they change the rules so that CEOs get massive bonuses in any event.
Then we come to the issue of wealth taxation. Again, for the highest decile of Canadians, this recession was over in July. Jobs had completely recovered for people in the top quarter of earnings. Also, for the top 1%, asset values had increased, based on stock market valuations as well as real estate valuations. This has not been bad for everyone.
I think that as a general principle we should certainly be considering things like a wealth tax, and Canada is the only country in the G7 that doesn't have an inheritance tax. Every other major country does have an inheritance tax. A wealth tax would have to be built on lessons learned through inheritance taxes elsewhere. It's easy to make wealth taxes that are terrible in terms of their implementation, but that isn't to say that we shouldn't try to learn from lessons from other countries to build more effective wealth taxes.
I think other things that we might want to start considering are things like a surplus profits tax, again, for the corporate sector or sections of the corporate sector that have done very well from the pandemic, as well as, potentially, new top marginal tax rates for individuals, again for people like CEOs who will see record bonuses out of this.
I think it is worth questioning who should, in part, contribute to the pandemic. The people who've done the best, at the very high end of the income spectrum, I think should be asked to contribute some of what they've gained, so that other people, particularly low-income Canadians, are more likely to get support and more likely to get a job.
:
In the short run those are exactly the three choices that governments face. They can raise taxes, they can cut programs or they can run deficits, or some mix of the three.
The decline in federal government revenues at $60 billion is so substantial that there would really be no way for you to cut government programs to anywhere near balance the budget. To do so would be devastating. You'd have to totally eliminate EI, totally eliminate, say, the Department of National Defence, and totally eliminate the Canada child benefit program. That would have been sufficient to balance the books in 2020.
Clearly, deficit financing is the right decision at this point. The federal government interest rate on 5- to 10-year bonds is at, or near, historic lows. We haven't paid this little in interest rates on bonds going back to the 1950s. Under 2% is extremely low in terms of what we're paying to finance this debt. It's very different, actually, than the situation we faced in the 1990s, when interest rates were much higher.
Certainly there's a risk that interest rates could rise and could increase costs to the federal government, but interest rates don't just affect the federal government. Interest rate rises affect the household and corporate sectors in addition to the provincial sector, all of which pay higher interest rates and all of which are much more highly leveraged.
The federal government is sitting at 50% of GDP right now in terms of mixed debt. The corporate sector is 130% of GDP and the household sector is at 110% of GDP. Those sectors would be hit much harder. We'd be driven rapidly back into a recession if we were to see a big increase in interest rates, before the federal government suffered in any real degree.
[Translation]
Good morning, Mr. Chair and members of the committee.
Thank you for the invitation to appear before you today. We are pleased to be here today to discuss our recent economic and fiscal analysis related to your study of Bill .
As you mentioned, Mr. Chair, I am accompanied today by Xiaoyi Yan, Director, Budgetary Analysis.
Consistent with my mandate to provide independent, non-partisan analysis to Parliament, my office has worked diligently since the beginning of the pandemic last March to provide parliamentarians with reliable estimates of the impacts of the unprecedented COVID-19 response spending on the government’s finances and the Canadian economy.
We have also published independent cost estimates of a number of components of the government’s COVID-19 Economic Response Plan.
[English]
On December 10, we released our assessment of the Government of Canada's fall economic statement. Our report identifies several key issues to assist parliamentarians in their budgetary deliberations, as well as updated fiscal and economic projections.
In terms of transparency, the government's fall economic statement does include elements that are essential for credible fiscal planning and scrutiny, such as a detailed five-year fiscal outlook.
However, the statement falls short on transparency in several areas, such as the absence of a fiscal anchor, the lack of clear thresholds for fiscal guardrails and the lack of detail related to the employment insurance operating account.
In addition to our report, my office has also released independent cost estimates of selected measures contained in the fall economic statement, including the elimination of interest on Canada student loans, the Canada emergency wage subsidy and Canada emergency rent subsidy programs.
We would be pleased to respond to any questions you may have regarding our analysis of the government's fall economic statement 2020 or other PBO work.
Thank you, Mr. Chair.
:
Thank you, Mr. Ste-Marie.
Yes, the debt limit is one thing. It allows the government to incur debts up to a maximum amount. The amount proposed is $1,800 billion. That does not mean that the government can keep spending until that amount is reached. It's not a credit limit, as on a credit card, for example. Another process has to be followed in order to do that. So this is a constraint that combines with others that already exist in the process of approving appropriations.
In order to fund its annual operations or programs, the government has two methods it can use. One method applies to existing programs that are established in legislation, like old age security. In that program, the expenditures depend entirely on the number of recipients. The amount of the expenditures for old age security is therefore not limited by a budget envelope.
The government can also spend using budget appropriations, which must be approved each year by an act voted on in Parliament. That is the case for the operating expenses of the departments and of Parliament, as well as for grants and contributions. So that is a constraint also.
In addition, the government cannot borrow more than the current limit, which is $1,168 billion. The government is proposing to increase that to $1,800 billion. Those two constraints combine to limit expenditures or at least control them.
We actually do have regular meetings and discussions between parliamentary budget officers or the equivalent positions in the industrialized countries, and even in countries that are a little less so.
To my knowledge, no country, at least in the G-7, has not yet brought down a budget. Most countries are facing the same pandemic and the same level of uncertainty but, to my knowledge, most, if not all, of the G-7 countries have tabled at least one budget since the pandemic began.
The lack of a budget therefore sets Canada apart. It deprives Canadians of a good look at what will happen in the coming weeks, months and years, once we have come out of the pandemic. The government has not yet indicated what its plans will be for the economic recovery or for the time after the pandemic. That would probably be included in a budget.
Everyone understands that there is a lot of uncertainty. All the provinces have to deal with that uncertainty, of course, but all provinces and territories, I believe, have been able to table a budget, despite the high degree of uncertainty.
It is therefore a little surprising that the federal government has not yet done so. I don't believe that it is because it can't do so, because the officials in the Department of Finance are top-notch when it comes to crafting budgets. They are certainly capable of doing so.
Thank you, Mr. Giroux, for your testimony this morning and for your service.
I think it's important to remind all Canadians who may be watching today of what Bill is and what we're studying here at committee. The only spending Parliament is being asked to approve through Bill C-14 is to introduce a temporary and immediate support for low- and middle-income families who are entitled to the CCB, the Canada child benefit, totalling up to $1,200 in 2021 for each child under the age of six; to provide the regional development agencies an additional $206.7 million; to replicate the CEBA loan limits for gap-filling programs and the RRRF gap-filling capacity; to ease the financial burden of student debt for up to 1.4 million Canadians by eliminating the interest on repayment of the federal portion of the Canada student loans and Canada apprentice loans for one year, 2021-22; to provide funding of up to $505.7 million as part of the new safe long-term care fund to support long-term care facilities, including funding to prevent the spread of COVID-19 infection, outbreaks and deaths in supported care facilities; to provide additional funding of up to $133 million to support access to things like virtual care, mental health tools and substance use programming; and to provide up to $262.6 million for a suite of COVID-19 initiatives, including testing, medical research, countermeasures, vaccine funding and developments, border and travel measures and isolation sites. I think it's important to put that on record and to remind everyone of what Parliament is being asked to approve.
Having said that, I hear my colleagues on the opposition harping on the fact that there's the lack of a budget.
You're right that this is an unprecedented event. It has never happened before in our Canadian history. We've never had to deal with such a pandemic, and I think it merits keeping that in mind.
Having said that, Mr. Giroux, I'm interested to know what were or are your thoughts on the biweekly updates provided to the committee by the Department of Finance earlier last year.
:
Thank you, Mr. Ste-Marie.
The Fall Economic Statement 2020 mentioned the employment insurance operating account, but it did not give a very clear picture of the way it has evolved in the current economic situation, given that benefits have been expanded and extended. Clearly, we are expecting the employment insurance operating account to incur huge deficits, which is to be expected in the current economic situation.
The government also committed to freeze the employment insurance premium rates at $1.58 per $100 of insurable earnings, at least until the end of 2022. However, the government makes no mention, either in the update or in general, of what will happen afterwards. It does not actually say how the very significant deficit of $52 billion in the employment insurance operating account will be eliminated over the five-year period.
Current legislation limits the annual increases in the premium rates. However, even if the premiums were increased to the maximum allowed by the legislation, the deficit in the employment insurance operating account would probably be about $52 billion. There is a lack of clarity over what will happen with this very significant deficit. We hope that the budget will provide more details about it, because it's clearly a colossal deficit for the employment insurance operating account.
If we maintain the status quo, that is, if we apply the legislation as it presently stands, the employment insurance premium rate will increase by $0.30, going to $1.80 per $100 of insurable earnings in the next three or four years.
:
Thanks, Mr. Chair and Mr. Giroux.
In the same vein as talking about the alternatives, the borrowing authority and looking to potentially increase income revenues to the federal government, it's important to cite, as per your previous studies, that there is a lot of money that already should be paid in taxation that goes to overseas tax havens. I cite your landmark study of June 2019, where the estimate was over $25 billion in federal tax revenues that go to overseas tax havens.
You provided a legislative costing note on strengthening tax compliance on February 18. I would like to ask you two questions. You've indicated some difficulties in terms of the investments by the federal government actually leading to the kinds of revenues that Canadians would expect. We also have testimony before this committee from Ted Gallivan of the Canada Revenue Agency, back on June 16, reacting to the failure of the federal government to prosecute, basically, anybody who's been involved in overseas tax havens. He said at that time, to this finance committee, that we'd come as far as we could with the tools we had.
My question is twofold. First, where do you see the federal government as lacking, in terms of initiatives to strengthen that tax compliance?
Second, do you have any recommendations for the federal government that would curb the massive leak of federal tax revenues to overseas tax havens among the wealthy and very profitable corporations?
I asked that because obviously the debt-to-GDP ratio is an important measure of debts levels and a good way to assess the fiscal health of a country's economy.
I did read your recent report, and although we are focused on Bill here, your recent report is, in my view, very relevant because it helps to provide a context for MPs, particularly on this committee, to understand the overall economic picture. Your recent report, of course, focused on a number of things, but mainly the federal government's expenditure plan and the main estimates for 2021 into 2022.
Correct me if I'm wrong, but there was a breakdown there. As far as the expenditures are concerned, transfer payments to provincial governments, municipal governments and individuals, as far as support goes, amounted to 64%. Operating and capital expenditures amounted to 30%. The public debt charges were 6%. Is that correct?
I apologize for the technological hiccup. I do have a very high-speed connection, I assure you. I have Bell Fibe.
I want to thank the finance committee for inviting me to appear.
My disclosure is that, first, I do not belong to or donate to any political party, nor allow lawn signs on my lawn at all. Second, I do not consult to any company. I am paid by Carleton; that's who pays me.
Approximately 50 years ago, a very distinguished liberal professor of economics, Professor Arthur Okun, adviser to President John F. Kennedy, wrote a small monograph that became very influential. I studied it during my Ph.D. studies 30 years later. It was called Equality and Efficiency: The Big Tradeoff.
Professor Okun argued that almost every last public policy decision involves a trade-off between these two fundamental values, which could be understood, he said, as—to use synonyms—rights versus markets or equality versus efficiency. While most understand the idea of equality or equity today, or what some call “social justice”, the idea of efficiency or markets seems to be less and less well understood with the passage of time. “Efficiency” was the catchword that Professor Okun used to signify markets, economic growth, productivity, standard of living, jobs, or what Adam Smith characterized 300 years ago even more succinctly as simply “the wealth of nations”.
Restated using Professor Okun's phrases—and to be fair, I may be contradicting Professor Okun a little bit—equality requires efficiency; equality requires markets; equality requires growth, just as efficiency requires equality or equity if markets are to succeed. To state it even more bluntly, rights need markets if rights are to be achieved, while markets need rights to succeed.
Some may disagree. You can see the fact that I have travelled and taught, for 30 years, over 100 times, in developing countries, and I have noticed that remarkable correlation. The countries with the greatest degree of rights are the wealthiest and most successful countries, the OECD high-income countries of the world.
Unfortunately, it's increasingly fashionable among populists to claim that rights and markets, or equity and efficiency, are opposed to each other, antithetical. I am directly challenging the simplistic slogan “people over markets”. You hear it regularly.
Professor Okun understood that equality or rights are not free. Indeed, from Professor Okun's time in the 1960s to our time today, we have developed a much deeper appreciation of how costly policies and programs are to try to develop and achieve inclusion, equity and social justice. This is why we are at a critical point in Canada. The costs of equity have become so very large, and the deficits even larger, that we must seriously discuss, once again, efficiency or growth if we do not want to unwittingly undermine or sabotage policies to continue to offer programs to support equity or social justice.
If that is seen as a little bit extreme by some people, I just want to remind you of the 1995 largest downsizing in Canadian history. I wrote what was, I think, the definitive article on that in How Ottawa Spends.
I turn now to these issues in Canada, and to my criticisms, in order to make my philosophical comments to this point much more concrete.
One, no budget or plan has been presented to Parliament to provide the analytical and policy justification for increasing the debt ceiling. I would merely note that many years ago, in the seventies and eighties, in my previous incarnation in a decade-long career as a mortgage and commercial lender, I lent millions and millions of dollars. If a business owner met me to discuss their borrowing needs and they didn't have a business plan, I told the owner to go away, create the plan, and then return to talk to me about the plan, which was, is, and always will be the foundation or basis for credit authorization.
Two, there is simply no justification for delaying the presentation of the budget. The Government of Canada has an excellent digital financial infrastructure for financial reporting and accounting. Indeed, if I may say so, some of my finest graduates from our program over the past 30 years—I've been teaching for 32 years—have entered into the Government of Canada as financial analysts and accountants, and have become very successful at modernizing the now excellent financial and accounting systems. As someone who has lived in Ottawa for over 60 years, and with friends and relatives inside the public service of Canada who are familiar with the financial reporting systems, it is simply inaccurate to suggest that the empirical data of daily, weekly and monthly expenditures in the Government of Canada is unavailable to produce a budget.
Three, there is an urgent need for a fiscal anchor, per the IMF, the OECD, David Dodge, Don Drummond et al. There are many others. Contrary to those opposed, a fiscal anchor is not a lockbox that prevents government decisions. It is a tool of evaluation and accountability for all stakeholders. I understand that no one wants a bad report card. I can tell you that I hate student evaluations if they say bad things about me. I love them when they say nice things about me. But the genius of liberal democracy lies in the myriad of checks and balances that go far beyond mere elections. A fiscal anchor is a critical check and balance of fiscal policy.
Four, concerning the post-pandemic recovery, I urge the committee to debate and discuss whether the stimulus that has already been provided over the past 12 months via income support programs—I strongly supported them, as I think every Canadian did—and that drove the savings rate from roughly 2% to just under 30% is stimulus. I'm referring to the $200 billion. It can be argued that the Government of Canada, perhaps unwittingly and perhaps wittingly, engaged in post-pandemic stimulus with the plethora of income support programs.
Restated, there is approximately $200 billion—per the TD Bank and their economic analysis of only this week—in bank accounts in Canada, waiting for mass vaccination and confidence to return to individuals and businesses before they start spending. What I'm suggesting is that I don't think we need to stimulate the stimulus. However, although I don't think further stimulus is needed, I recognize that a good number of people out there do think that.
If we do proceed with stimulus, I urge the committee to recommend to the that we shift from consumption and income spending to investment. If stimulus is decided upon, it should refocus from general consumption and income support to infrastructure, and I mean real infrastructure, not mislabelled consumption spending on day care centres or hockey arenas, but investments that enhance the productivity of the economy: ports, roads, rail, airports, pipelines and digital infrastructure.
The economy has not underperformed due to lack of resources. Large numbers of Canadians, and I am one of them...I have been sitting in this house since last March, and 99.999% of my life has been in this house, because I am waiting for a vaccine, along with millions—
:
Thank you very much for the invitation to appear with you today. It's an honour to be with the committee. My only regret is that, even as we speak, , leader of the federal New Democratic Party, is going to be addressing a C.D. Howe Institute webinar. I had hoped to host Mr. Singh for that event, but when the invitation came, I thought it was best to respond positively to an invitation to appear in front of parliamentarians, so here I am. I hope my contributions will help you in the important work you're doing.
I look forward to your questions. My opening remarks key off Bill 's provisions related to borrowing.
The federal government's current reliance on borrowing, rather than taxation, to fund its programs is unprecedented. That means that the apparent cost of federal programs to taxpayers is unprecedentedly low. This situation will not last. I urge members of this committee to evaluate all fiscal proposals, including those in Bill , in light of the sharp increase in the tax costs of federal programs that is inevitable over the next four to five years.
As you know and have discussed already, Bill would amend the Borrowing Authority Act to increase the debt limit from about $1.17 trillion to $1.83 trillion. Those numbers are astonishing, as is the fact that this is projected to cover borrowings only until March 31, 2024, so about three years from now.
Those of us who remember the federal government's fiscal problems of the 1980s and 1990s get little comfort from assertions that borrowing on this scale is not a problem. Some of you will remember that successive governments, Conservative and Liberal, had to deal with tough trade-offs among programs and taxes during a period when interest payments meant that the federal government was asking Canadians to pay more than a dollar in taxes for every program dollar. We don't want that. We make better decisions when we are paying a dollar in taxes for every program dollar.
It came up earlier, and let me just say, since I'm talking about the quality of decisions, that I have not had an opportunity to comment in this forum on the failure to produce a budget in the 2020-21 fiscal year. That was a failure of accountability that was also unprecedented. Parliament needs and Canadians need proper conversations about fiscal choices. Those fiscal choices have to hold up over time, when the normal healthy process of evaluating each program and each tax, dollar for dollar, resumes.
I'm using this concept of the tax cost of a program dollar because the hundreds of billions or trillions of dollars that we're now talking about in programs and debt are a bit hard to grasp. I think it helps if we boil it down to ask how much tax each year Canadians are paying to the federal government for each dollar of program spending they get.
To give a simple example, if the budget is balanced, the number is going to be a dollar. It will be a bit more than a dollar if there are a few cents that are covering interest payments. If the government is targeting the ratio of debt to GDP—and I know many of you have talked about this and many economists have advocated it—then the number is going to be one dollar plus interest and then as much borrowing, as much of a deficit, as GDP growth allows subtracted from that. If interest rates are higher than growth rates, as was the case in the late 1990s, the number will be larger than one. If interest rates are lower than growth rates, it will be less than one, but over time it always gravitates towards one.
In the fiscal year about to end, the numbers in the fall economic statement show that the tax cost of a program dollar was 46¢. The federal government borrowed more than half of every program dollar it spent. To repeat, that is unprecedented. Even in the late 1970s, when the seeds of the fiscal problems of the 1980s and 1990s were planted, that number never got below 80¢. It won't last.
Even the projections in the fall economic statement, which has very low interest rates and continued heavy reliance on borrowing to finance programs, prefigure the tax cost of a program dollar doubling to 92¢ in 2025-26. If you project further out, it keeps rising. If you allow for the higher interest rates we're already seeing, it will surpass a dollar.
The message in my opening remarks is that the apparent cost of federal programs to Canadians is currently very low. It's less than 50¢ on the dollar. It is going to rise. In round numbers, it's going to rise back to a dollar. Our choices have to make sense when the cost of programs is not half-price. Easy credit undermines good decision-making. We prevent people from using credit cards to buy lottery tickets for a reason.
The federal government overextended itself in the 1970s. It expanded many of the programs, including income supports to people, and transfers to provinces got cut when the tax cost of a program dollar rose in the 1980s and 1990s. If we build big ongoing programs on the premise that Canadians can have them at 50¢ on the dollar, we build them on a foundation that will shortly melt away.
The only programs the federal government should promise are ones we can sustain: those for which the government is willing to charge and those for which Canadians are willing to pay full price.
Thank you for allowing me this opportunity to appear. I hope you found my opening remarks helpful. I look forward to your questions and comments.
:
There is a lot to be said about the intergenerational impacts of what has happened. COVID has been very hard on young people. It has interrupted their schooling. Those who are graduating into the labour market currently are facing a rough time. There are many other things to be concerned about in addition to the question of when we are going to pay down the cost of this pandemic.
I know that there are arguments for spreading it out over a very long period of time. My own inclination would be to try to get the people who benefited directly, including from the transfer payments, to shoulder some of that cost in the near term, partly because other things are going to happen in the future. We have now begun to think perhaps these extraordinary events come along a little more frequently than we used to think they did.
It is very common for people to talk about the very good fiscal position Canada was in going into this crisis. That naturally followed from the prudent fiscal policy in the past. I think it would make sense for current governments to think similarly about what kind of legacy they're going to leave, because there will be additional problems in the future and you'd like future governments to also be able to say “we were in good fiscal shape when we went into that”.
On the particular point I was making about how much you pay per dollar of program spending, I think what I might do in response to the question is observe that the numbers I'm talking about will be different depending on the level of interest rates and the level of growth rates. You can run a deficit consistent with a steady debt-to-GDP ratio if you are persuaded that it's a good guidepost. I'm not a big fan myself, but it makes sense. It's sustainable.
No matter what variation on that you choose, at some point the tax cost of a program dollar is going to be gravitating back towards one dollar. As I said, if you take apart the numbers in the fall economic statement, you'll see that, even though it's relying on low interest rates and heavy borrowing, and if you look at the Parliamentary Budget Office projections, again you'll see the same thing. It's just going to happen, so my plea—
:
Point taken, but by invoking him, I think you raise someone who's quite relevant and whose thoughts and ideas are quite relevant, specifically with regard to some of the matters that we're discussing at the committee today.
I know you have issues with government spending, and that's fair to raise, but in the context of COVID-19, I wonder what else government could have done.
For example, have you had a chance to read the recent report of the International Monetary Fund, the IMF, that focused specifically on Canada? It was released this month, so it's very recent. If you haven't had a chance to look at it, that's quite understandable.
It did say that if emergency programs such as the wage subsidy and the Canada emergency business account—which is, of course, the loan that now goes up to $60,000 for small businesses—the rent subsidy support, and many other examples that have been introduced, which admittedly are expensive, but have helped to sustain the country.... That's not just political spin here; that is the reflection of the IMF as well. It found, in this report, that unemployment would have risen by 3.2% beyond what we saw last April, which was 13% unemployment in Canada. It could have been even worse. As far as economic output goes, we would have seen, according to the IMF, a decline of 8% beyond what we saw in terms of the GDP decline.
What do you make of this? Absent the introduction of emergency programs, we would have had an enormously difficult time in Canada. We just heard from the Parliamentary Budget Officer, for example, who made clear to this committee that if emergency programs had not been introduced, Canada would have seen a situation of—he didn't use the term, but I think he might as well have—a depression.
What do you make of these things?
Infrastructure has been studied, as you can guess, literally going back to Adam Smith.
I would bring up something in response to your question. I testified before this committee back in 2008-09, and I looked up the data on infrastructure spending. I think the data I'm quoting to you today is still current—I could be wrong, so please double-check me. Infrastructure in 2010, 2011 and 2012, based on all the studies that were done, had a higher multiplier than any other form of government intervention. This was confirmed by U.S. studies and Canadian studies. The number was 1.6 at the time. I remember it, and in fact Minister Flaherty had it in the appendix of one of his budgets, 2011-12.
In other words, every $1 billion you spend on infrastructure generates $1.6 billion of economic activity, whereas giving cheques to people can be used to pay down debt, or they can put it in a bank account. They might not spend it, whereas with infrastructure you know it will be spent because the contractor who is building the bridge or the road or the pipeline will not be paid until they build the bridge or the road or the pipeline, so you know it's going to be invested in the economy.
Second, to your point, infrastructure has been studied, and the reason it's so important for economic productivity and growth is that anything that contracts...or increases the efficiency of the movement of goods or services across the country, whether digitally or physically, enhances the growth and the productivity of the economy.
I think that's why the multiplier is larger and has a net-positive impact on the economy—whether it's railroads, airports, airlines or digital infrastructure broadband.
:
Thank you very much, Mr. Chair.
Thank you so much, Mr. Ste-Marie. This is extremely kind of you. I really do have to leave the meeting soon.
Mr. Chair, I would also like to advise you that I am going to give Ms. May the last minute of my time.
[English]
Thanks to our witnesses for being here. We certainly hope that you and your families are staying safe and healthy during this pandemic.
Thank you, Mr. Robson, for the shout-out to , who is speaking today at the C.D. Howe Institute. I'm missing it too, so unfortunately we're both missing what I certainly hope will be our next prime minister speaking at the C.D. Howe Institute.
I wanted to come back to the issue that you raised, Mr. Robson, about the fact that there has been no budget. We just had the Parliamentary Budget Officer on, and he talked about the fact that there simply isn't another industrialized economy that has waited more than two years for a national budget, so I'd like to come back to that.
How big a failure is that, when we're the only industrialized country that hasn't produced a budget in over two years?
:
I do think it is deeply regrettable.
We've already talked about the international comparison. Let me point out that here, within Canada, the provinces and territories have produced budgets, and municipalities have produced budgets. They all faced important uncertainties about what was going to happen. In some cases, those uncertainties would have been exacerbated by the fact that the federal government didn't produce a budget. The federal government's activities matter a great deal to the provinces, the territories and the municipalities.
One thing that I think is important to note is that budgets have traditionally been extraordinarily complete in the numbers they lay out and in their expression of the fiscal plan. I do not think the fall economic statement was an adequate substitute for a budget.
I will point out just one thing that really troubled me about the fall economic statement, and that was that we had between 70 and 100 billion dollars' worth of additional stimulus spending pencilled in, with different kinds of potential profiles over the three years, and yet even though this contemplated additional borrowing, there was no adjustment for the interest costs that would be involved in that additional borrowing. That looked to me a little bit as though it was pencilled in without the fiscal planning that you would normally expect around something as significant as that.
I do look forward to a budget. I think it's highly regrettable that we missed one, and I think it's high time that we got one that was appropriately complete when it comes to helping Canadians and parliamentarians understand the fiscal plan.
:
I wrote a piece in The Globe and Mail on this just this week, so perhaps I'll jump in.
The answer to your question is very much dependent on what kind of time frame we're talking about. I think the central banks have had a tough time even hitting their inflation targets over the past decade. I'll call them tactical errors: misreading the strength of the economy and perhaps being too quick to raise their short-term interest rates because they thought the economy was doing better than it was. We saw generally around the world this failure to hit inflation targets.
As I look at the longer term, and particularly when I look at what's happening in the United States, I feel a little differently. Central banks are buying huge amounts of these government debts that are being issued. Here in Canada, as you know, the Bank of Canada has a commitment to keep buying at least $4 billion per week. The Fed, similarly, is absorbing large amounts of U.S. government debt.
What happens when the central bank gets to the point where they see inflation back on target, back where they want it, and they stop absorbing that debt? We've been there in the past. When the federal government had its fiscal problems in the 1990s, I remember that a lot of people said that the Bank of Canada should be buying more debt and getting those interest rates down to make the fiscal challenge easier to meet.
We didn't go that way, ultimately, but that was because the memory of inflation—when you did have too much debt being monetized by the central bank—was so fresh. People hate inflation when they actually experience it. I do worry as we look out over the longer term that we might be on that road. It would very much reassure me, particularly in the United States—not just in Canada—if I saw the federal government there willing to match its revenues and its expenditures more closely and stop relying on the central bank to buy so much of its debt.
Good afternoon, gentlemen.
My questions will be going to Mr. Robson and Mr. Lee.
I would like your advice on the following. A few weeks ago, the former Senior Director and Regional Representative at the Bank of Canada, Mr. Miville Tremblay, wrote an opinion piece in La Presse.
In that piece, he seemed to align himself with the thesis put forward by Ben Bernanke, the former Chair of the Federal Reserve in the United States, who described a global problem of too much money saved and too little invested, saying that the imbalance can particularly be seen with the low interest rates.
Do you agree with that analysis? Do you believe that the imbalance could resolve itself more quickly than we think and that interest rates and, potentially, inflation could go up?
I agree with Bill completely.
I just want to mention a couple of names. Charles Goodhart, the 81-year-old retired LSE professor of monetary policy, has written several books and was 30 years before that at the Bank of England. He is making the same argument in his latest book that Bill was. The boomers, in our peak years, were generating huge amounts of savings, and now we're going into our senior years when we're going to start—the evidence shows—to dissave. That's an ugly term for saying that you start to spend your savings because long-term care homes are expensive, you go on trips and cruise ships, and so forth.
The second point he made was that the emergence of China and the collapse of the Soviet Union in the early nineties brought hundreds of millions of consumers and workers into the world, which drove down wages, and that contributed to the very low interest rates as well. That's going to reverse, going forward.
He is on the record—I saw an interview of him recently, this year—suggesting that rates could go to 5% over the next five years. That's not huge compared to when I was at the bank, when they hit 20%, but we're used to one-quarter of one point. To go to 5% is going to be just apocalyptic for many of us.
I am agreeing with Bill, and I think rates are going to go up, for those reasons.
:
Thank you, Mr. Lee, for pointing out that no bank will lend money to a private business without a plan.
I made many a bank presentation in my time and, as you pointed out, was always required to present a clearly articulated plan on how the farm was going to spend those borrowed dollars. Without a budget and a plan, no regular Canadian is able to borrow a dime.
This government just seems so out of touch that it doesn't think those rules apply to it, and honestly, I have a tremendously hard time voting for Bill as is. Although Canadians continue to need support for what appears to be longer than any other G7 country due to the government's poor vaccine procurement, to green-light $100 billion in consumption spending, as well as to increase the debt ceiling, without a plan or a fiscal anchor in sight is just painful.
Without assurances that funding will focus on growth and innovation, as well as a corresponding budget to detail the fiscal plan, I am wondering if you think we, as parliamentarians, should vote in favour of this bill. I honestly feel I'm between a rock and a hard place because of the way the bill is crafted.
:
Thank you so much, Mr. Chair.
My question will be directed to Mr. Robson, but first I want to make sure that something else is on the record around the budget. I don't want Canadians who might be listening to think that there's been a deliberate attempt by our government to not be transparent or accountable. Last year we actually announced a budget date. That was Monday, March 30. We didn't follow through with it, because there was a massive pandemic, and that had to be sidelined.
I also want to remind everyone that we did have reports every two weeks, once we started up with the finance committee, to make sure we were transparent and accountable with our spending. It took part right up until the end of August, when we prorogued. When we came back into session, then we were accountable through our Parliament. There also is an intention to be presenting a budget. I don't want people to think that's not coming—it is—or that we haven't been accountable and transparent.
Mr. Robson, in your opinion, how should the federal government have spent or financed emergency and economic restart programs? We have heard time and time again from many economists that if we hadn't spent what we did, our economy would have been much worse. We also have really good data to show that we're actually doing fairly well, considering. When we look at our labour participation rates, we are doing better than Germany, the U.S. and Japan. When we look at the fourth quarter of Canada's GDP growth, we grew more than the U.K., the U.S., Germany, France and Italy.
If you are worried about our debt levels, how would you have done things differently?