PACC Committee Meeting

STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, June 9, 1998

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[English]

The Chairman (Mr. John Williams (St. Albert, Ref.)): Good afternoon, ladies and gentlemen. I'd like to call this meeting to order.

Pursuant to Standing Order 108(3)(e), this is a consideration of chapter 6, “Population Aging and Information for Parliament: Understanding the Choices”, of the April 1998 Report of the Auditor General of Canada.

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As witnesses today, we have the Auditor General of Canada, Mr. Denis Desautels; the assistant auditor general, Mr. Ron Thompson; and a director of audit operations branch, Mr. Basil Zafiriou. From the Department of Finance, we have the deputy minister, Mr. Scott Clark; the director of fiscal policy, economic and fiscal policy branch, Mr. Peter DeVries; and the associate deputy minister, Mr. Don Drummond.

We'll start with the opening statement by the Auditor General, Mr. Desautels.

Mr. L. Denis Desautels (Auditor General of Canada): Thank you very much, Mr. Chairman, for providing my colleagues and me with the opportunity to discuss with you our chapter on population aging and information for Parliament.

As you may know, this chapter is a continuation of the series of reports we've issued on the need for better information for Parliament about the state of government financial health. In my role as Parliament's auditor, one of the responsibilities I have is to comment on the meaningfulness of government financial reporting. In this regard it's important that government provide Canadians with information they need to make the financial choices that affect them, not only today but also for generations down the road. This is why we have reported a number of times on this theme of better financial information, particularly as it affects the government's overall financial condition.

In this particular chapter we specifically focus on the importance of taking demographics and the long term into account in annual budget decisions. In saying this, it's important to recognize the distinction between taking this information into account and being accountable for the information.

This chapter has two objectives: first, to demonstrate that it is possible to conduct long-term projections of government's overall financial condition and to illustrate the importance that demographics can play; and second, to draw attention to the inadequacy of financial information currently being provided to Parliament about the likely impact of this demographic trend.

[Translation]

Starting with the first point, we showed that as baby boomers get older, there is the strong possibility that economic growth and related revenue growth will fall off, while expenditure growth will likely quicken.

This potential decline in economic growth is based on the expectation that labour force growth will slow down markedly as baby boomers begin reaching retirement age in 10 years or so and start leaving the labour force in large numbers.

This adverse effect on the economy and government revenues could be offset by increases in labour productivity. With such productivity having remained relatively constant, near one percent for the last 20 years, a dramatic increase would be needed to offset the projected decline in labour force growth. While this would be very opportune, it is also something that we should not count on.

On the spending side, as baby boomers approach retirement and people are generally living longer, governments can expect larger pension costs and rising medical costs.

Again, while this is not inevitable, for it not to occur would require major changes in the way medical services are consumed and pensions are funded, particularly OAS and GIS.

This may sound and look like a lot of economic projections being made by the Auditor General, and I would agree. My reason for doing this is not to predict the future but to illustrate the need for information to help Canadians understand the potential impacts of demographic trends on long-term financial condition, and to show their relationship to current budgetary decision making.

[English]

Mr. Chairman, let me assure you that what we are calling for is not something out of line with other advanced nations. In its latest budget, the British government announced a new code for fiscal stability. That code calls for fiscal projections for a period of not less than 10 years to shed light on the intergenerational impact of the government's financial strategy.

In addition to the U.K., Australia, New Zealand, and the U.S. are currently providing long-term projections with their annual budgets to demonstrate the relationship between budget decisions and the long term. Yet Canada continues to provide two-year rolling targets, with no information in the budget or the fall outlook about the impacts of demographics on government finances.

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As I conclude, let me clarify two points. First, I'm well aware that long-term projections are fraught with uncertainty, but as the OECD has pointed out, the greatest value of making projections of this nature is not the numbers themselves but that it forces people to think about the future. Secondly, I'm not proposing that the Minister of Finance provide 10- to 30-year forecasts for which he would be held accountable. Such a proposal would be impractical. Our concern is with transparency, not accountability.

In this regard, for the government financial reporting to be meaningful, telling people about the potential impacts demographics can have is fundamental. This does not necessarily mean reporting such information with the annual budget. A more appropriate time could be the fall, when the government comes to Parliament for input into the next budget.

I thank you, Mr. Chairman. My colleague and I would be pleased to answer the committee's questions.

The Chairman: Thank you, Mr. Desautels.

Now we'll turn to Mr. Clark for the opening remarks by the Deputy Minister of Finance.

Mr. Clark.

Mr. Scott Clark (Deputy Minister of Finance): Thank you, Mr. Chairman. Let me say it is indeed a pleasure to appear before your committee to discuss the recommendations made in chapter 6 of the Auditor General's April 1998 report concerning the role of demographics in assessing the government's financial condition.

Let me state at the outset that we are in full agreement with the general conclusion of the chapter relating to the need for information to Parliament and to Canadians regarding fiscal policy. A sound understanding is required of the issues involved and the possible ramifications of alternative policy choices. Good information is the foundation of good policy.

Here I take considerable pride in the policy research done by the Department of Finance and the actions we have taken to bring many of the issues raised by the Auditor General into the public domain. For example, last September the Department of Finance sponsored a conference, organized by the John Deutsch Institute of Queen's University and the Institute for Policy Analysis at the University of Toronto, entitled “Fiscal Targets and Economic Growth”.

At our request, some of the papers explicitly addressed some of the demographic issues raised by the Auditor General. These papers, presented by private sector academic researchers, included, for example: “Demographic Trends, Labour Force Participation and Long-term Growth”; “Long-term Economic Projections”; and finally, “Debt/GDP Dynamics and Optimal Policies”. The principal author of the Auditor General's report was in fact a participant at this conference.

For your information, I have attached to my remarks a full listing of the papers discussed at the conference, and these papers are expected to be published in the near future.

Similarly, in 1992 the Department of Finance, in conjunction with the provincial finance departments, released a detailed study entitled “The Cost of Government and Expenditure Management”. This paper focused on major long-term cost pressures, especially in the areas of health education and social services, facing governments. The methodology employed in that study was used by the Auditor General in his report.

The department has recently taken part in an international working group examining the consequences of an aging population throughout the industrialized world. This study was in response to an initiative flowing out of the 1997 Denver Economic Summit, where finance ministers from the Group of 10 countries, including Canada, were requested to carry out an assessment of the macroeconomic financial implications of aging populations. The study was released this spring.

As part of this G-10 working group, the Department of Finance has played a key role. A number of important research projects were undertaken as input into the study, and working papers will be made public shortly.

Also, recently two officials in my department have been invited to participate in a multi-country research project, undertaken by the Brookings Institution in Washington, on the economic effects of an aging population.

Finally, as the Auditor General's report notes, the department provided detailed information on the long-term structural problems associated with the Canada Pension Plan, which formed the background for the recent reforms agreed upon by the federal and provincial governments.

For your information, I have tabled a listing of all the papers the department has published on issues relating to economic and fiscal incidence of demographic changes. The department is also doing analysis and research on a wide range of other issues, the results of which are reported in departmental and other publications. And every year, my officials make presentations on their work at various professional meetings.

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All of this is to say we are very active in ensuring that good analysis is available to the public and Parliament on which to base informed discussion and policy decisions. However, where we disagree with the Auditor General is the process and in what form this information should be made available.

The Auditor General is suggesting that long-term economic and fiscal projections be a part of the annual budget process or be published during pre-budget consultations by the government. From my experience, the inclusion of longer-term projections in the budget process undermines the importance and urgency of addressing immediate problems—problems and issues that must be addressed even in good times in order to ensure that the longer-term objectives can in fact be met. Just ask previous ministers of finance who tabled five-year economic and fiscal plans that were not achieved. Failure to meet targets meant lost credibility, and the consequence for this was a higher risk premium and higher interest rates.

You may recall that in his October 1995 report the Auditor General urged the government to set a long-term debt strategy anchor. The government has in fact a long-term debt strategy anchor and that is the commitment to a steady and permanent reduction in the debt burden. The government has rejected the selection of a specific long-term target of debt to gross domestic product, and for good reason. Long-term debt targets are simply too uncertain to have any real meaning. Debt reduction targets, especially debt as a percentage of the economy, are simply impossible to control directly.

Not only does one have to control the numerator, the stock of debt, but also the denominator, the size of the economy, and this is simply not possible. Projecting out over a two-year time period is difficult enough; projecting them over five, ten or twenty years becomes a truly hypothetical exercise.

In fact, I would suggest that even two-year debt targets are problematic. Let me give you an example.

In the 1995 budget, the deficit target for 1995-96 was $32.7 billion and the resulting ratio of debt to gross domestic product was 73.5%. In the 1996 budget, the deficit target was unchanged, but because of the downward revisions to the level of nominal income the debt-to-GDP ratio was now 74.2%. Based on the final outcome for 1995-96 of $28.6 billion for the deficit, the debt-to-GDP ratio is now estimated at 71.9%. Most of this revision downward to the ratio was not due to the lower deficit outcome but to subsequent upward revisions to gross domestic product by Statistics Canada.

The government's approach has been based on setting two-year fiscal targets embedded in a medium-term fiscal framework. The first medium-term anchor was the elimination of the deficit. Implicit in this objective was the need to halt the rise in the debt-to-GDP ratio and to put it on a permanent downward track.

Most importantly, however, the government ensured first and foremost that the short-term targets were met. This has resulted in fiscal discipline unprecedented in the post-war period. In doing so, the federal government has been able to eliminate the deficit much faster than anyone had expected. By focusing its actual budget plans on the short term, the government has been able to achieve a significant longer-term objective: that is, arresting the growth in the debt-to-GDP ratio after nearly 25 years of uninterrupted increase. With the actions taken over the past four years and the debt repayment plan put in place in the 1998 budget, this ratio has now been firmly set on a downward track.

I cannot overemphasize the importance of this achievement. This will give the federal government the flexibility to address the longer-term structural problems, some of which have been identified in the Auditor General's report.

Although the government's budget plans have been of a two-year focus, this has not meant that the longer-term financial problems are being ignored. For example, the federal government and the provinces have restructured the Canada Pension Plan precisely to address the longer-term demographic pressures on that plan and it will continue to address these longer-term structural issues that need to be looked at.

The government does not believe that it should change its approach to budget planning at this time. It has proven to be extremely successful in not only achieving the government's short-term objectives but laying the foundation to address the longer-term structural problems.

There can be no denying that we have entered a new era, one with which few of us have had much experience. The last time the federal budget was in surplus was in 1969-70. This suggests that we continue to be prudent and focus on the achievement of short-term fiscal targets.

The time may soon come when longer-term fiscal projections again become part of the broader discussion of fiscal policy issues rather than the budget process per se. Projections would be presented for illustrative purposes and be accepted by all as such. However, I believe it is still to early to take that step. As the Auditor General has noted, some countries do prepare long-term fiscal projections, but they are in a much better position fiscally than Canada is at this time. I believe the time will come for Canada once we have started to make some really significant progress in reducing the debt-to-GDP ratio.

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In conclusion, as I stated in the beginning, we concur generally with the Auditor General's recommendations in his report. We, however, disagree on the process.

Thank you, Mr. Chairman, and we are prepared to answer questions your committee may have.

The Chairman: Thank you, Mr. Clark. Now we'll turn to the questions. Mr. Kenney, I will start with you for eight minutes.

Mr. Jason Kenney (Calgary Southeast, Ref.): Thank you, Mr. Chairman, and thank you Messrs. Desautels and Clark.

My initial question is directed toward Mr. Clark. In your statement, sir, you speak about the debt repayment plan put in place in the 1998 budget. When I look at the 1998 budget I see the short-term projections for the net debt at $583.2 billion this year, $583.2 billion the year after that, and $583.2 billion the year following. How does this constitute a debt repayment plan when in fact in the budget projections itself no reduction of debt is projected?

Mr. Scott Clark: The debt repayment plan had two parts. First of all, it was set in terms of the debt burden, let's be clear about that. And that has two parts, the first part of which is to sustain economic growth. The second was to reduce the level of debt. And we stated in the budget that if the contingency reserve, which is included in the budget for unforeseen events, at $3 billion a year is not needed, it would go to paying down the debt. The debt number you're looking at does not allow for the possibility that this will occur. But if it turned out, in the event, that we don't need the contingency reserve of $3 billion, then that debt number would be reduced by $3 billion every year.

Mr. Jason Kenney: How could we credibly believe as parliamentarians that the government will follow through on the commitment to apply the contingency reserve to the stock of debt when in fact it's already chosen to disperse part of the current contingency reserve on the millennium fund contrary to your recommendations to the Auditor General?

Mr. Scott Clark: We didn't disperse the contingency reserve in 1997-98 on the scholarship fund. The original target for the deficit for 1997-98 was I think $17 billion. So we never dispersed the contingency reserve; we basically ended up targeting now for a budget balance in 1997-98 that is far below what the original target was and we didn't need the contingency reserve to get to the budget balance.

Mr. Jason Kenney: Sir, having mentioned the Auditor General, perhaps I should let him comment on this as well.

The Chairman: Mr. Desautels, do you want to comment on that?

Mr. Denis Desautels: Sure, if I can offer any comment on this specifically. I think the figures are all there. The deficit for 1997-98 will be whatever it ends up being. But the two transactions of the millennium scholarship fund and the contingency reserve are in my mind as well quite distinct issues. I don't see one being used for the other necessarily. I have a problem with the millennium fund, as you know—

The Chairman: We know that.

Mr. Denis Desautels: —but for different reasons.

Mr. Jason Kenney: Mr. Clark, in your statement you say—essentially I paraphrase—that because Canada's in such bad fiscal shape relative to other developed economies we should stick to two-year targets as opposed to going to longer-term projections as recommended in part by the Auditor General. I don't follow the logic here. It would seem to me that if we have some serious structural continuing fiscal problems, namely the unfunded liabilities of our pension systems as well as the stock of debt, this would be an argument for creating greater transparency in public accounting into the future by providing the kind of projections that have been suggested. Why is it that because we're in bad shape, that's an argument not to provide the public with more information? I don't follow.

Mr. Scott Clark: Certainly I'd be the last to say we're in bad shape. In fact, I'd say that given where we came from, we're in pretty good shape. If you look at countries like Australia, New Zealand and the United Kingdom, which have now introduced longer-term fiscal projections, they also only did so when they had achieved their short-term fiscal objectives. These countries have not always had long-term fiscal projections.

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I said in my statement that I think maybe at some time in the future, after we've had more success in meeting our short-term fiscal targets, we can then have a situation where a longer-term financial analysis could be used just for what it is and not.... I think the Auditor General made the point that the government shouldn't be accountable. It has been my experience, having done medium-term fiscal projections for governments, that they are held accountable. They're held accountable when you put a projection out. It does become an official target when you say it, even though it's not an official target.

I don't think we've now reached the stage where we're at that point. Maybe Australia, New Zealand, and the United Kingdom are there. Maybe in their environment, they've reached that point, but I don't think we've reached that point yet.

Mr. Jason Kenney: You do say in your statement that these other countries are much better positioned fiscally than Canada is at this time.

Mr. Scott Clark: What I'm saying is that they reached their success before we did.

Mr. Jason Kenney: I understand that there is a growing consensus in the United States that any future fiscal surpluses should be directed to the reduction of the unfunded liability in the social security fund, which of course is analogous to our Canada Pension Plan unfunded liability. In other words, there seems to be an emerging long-term thinking about how to use the current fiscal surpluses for the long-term fiscal structural problems they still face. I don't see that kind of imaginative thinking coming from the kind of presentations from Finance that we received. Why do we see a different consensus developing there?

Mr. Scott Clark: Whether it happens in the United States I don't know, but the President has said that their intention is that if they're able to maintain surpluses, he wants to commit them to their social security system. It's not the Canada Pension Plan of the United States, it's a pay-as-you-go system.

What we have done is two things. One is that we have dealt with the problems of the Canada Pension Plan. Second, by eliminating the deficit and putting the debt burden on a downward track, which is what the President of the United States is saying, we're saying that we then are generating a dividend. Some of that dividend will go to paying down the debt and some will be used for other investments or reductions in tax burdens.

All the United States is saying is that for the time being, they'll eliminate the deficit. If they have a surplus, they won't use it for spending or tax reductions. They'll devote it all to the social security system, which is not an unfunded system but a pay-as-you-go one.

Mr. Jason Kenney: Well, I find it difficult to understand how you talk about future tax relief in Canada when you've just proposed, in the CPP, to raise premiums by 73%. It seems to me that the American approach of not raising that and instead opting to put surpluses toward their unfunded liability is a more prudent approach.

I think I'm out of time, Mr. Chair.

The Chairman: We'll finish up the question and get a short answer. We'll wrap it up at that point. Did you have a quick question?

Mr. Jason Kenney: No, just a comment.

The Chairman: Okay, Mr. Dumas, you're going to pass on this round.

Mrs. Barnes, you have eight minutes.

Mrs. Sue Barnes (London West, Lib.): Thank you. I welcome our guests today.

I've only been in Parliament for two terms, but I remember that there was a government before ours that didn't have short-term targets. It always had projections that I think were a little longer term. At that time, I remember reading about the Auditor General reviewing and criticizing those projections.

Do you want to go back and just give us a little history of what was the history of projections and the Auditor General's report regarding not meeting targets and the numbers being a little different than advertised?

Mr. Denis Desautels: I think we have, at least since I've been Auditor General, commented from time to time on the general quality of the financial information put out by government. We have expressed concern at different points in the past about the failure of governments to meet some of their targets. I think the record on that speaks for itself.

Mrs. Sue Barnes: Well, let's just state it: nobody met their targets before this government.

Mr. Denis Desautels: It depends how far back you want to go, but in the immediately preceding government, they had a lot of difficulty meeting their targets. I recognize that completely.

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Mrs. Sue Barnes: You said there should be transparency and not accountability.

Mr. Denis Desautels: Yes.

Mrs. Sue Barnes: I would have a problem with that, and I think my voters would have a problem with that. In giving somebody a view and then not living up and being accountable for that view, there's a dichotomy of responsibility there that I don't think would be generally acceptable, and you're stating that.

Mr. Denis Desautels: Mr. Chairman, I can elaborate on that. I think obviously—and I think Mr. Clark had just mentioned that—one of the reasons the government hesitates to put out longer-term projections is in part to keep its focus on a shorter term, but also because it runs a risk of being held accountable for meeting those longer-term projections, because some people might consider them targets.

That's not what we're saying. We're suggesting that the shorter-term targets should remain shorter-term and well-defined targets. We believe parliamentarians, and Canadians generally, will be better informed if these shorter-term targets could be framed within a longer term context, if you wish.

So we're talking about setting a longer-term context, not predicting what's going to happen but basically putting out certain scenarios so that people can understand better that if you have no policy change or let it go in a certain direction, these are the pressures you will face some time down the road.

So I think we have to find a way of disconnecting the publication of such information from the accountability of the finance minister. As long as it's totally connected, of course finance ministers will hesitate to do that, and I can understand that. But I think we can find a way to disconnect those things. I don't think it has to be part of, as we said, the Minister of Finance's actual budget; it could be a separate docket.

Mrs. Sue Barnes: We'll just go back to that.

Mr. Denis Desautels: I don't even think it has to be done every year. It could be done every few years.

Mrs. Sue Barnes: You made the statement about the fall and getting into the budget. I believe the finance committee is starting already in June to do some hearings on what's going to start. Have they already had that meeting? I know it's right now.

The Clerk of the Committee: No. I'm not sure of the exact dates, but for one week this month, they will begin hearings.

Mrs. Sue Barnes: We're already doing input into next year's budget.

Let's talk about the finance department a little bit. Right now, you have obviously put some expenditure and resources into these conferences where you are getting this information. Do you feel you're getting a sufficient quality and quantity of information for you to do your targets at present?

Mr. Don Drummond (Associate Deputy Minister, Department of Finance): I think we got a lot out of those conferences. I think the community got a lot out of them as well. It was the first time we really brought all the players and these economic and fiscal projections together to have a discussion of the appropriateness of some of the underlying assumptions.

I think perhaps the most interesting thing that has happened since we had that conference is that previously there was really only one firm in Canada that did any fiscal projections, and that was Wood Gundy. In a sense, that wasn't very good for the Canadian public or for Parliament, necessarily, because it was only the Department of Finance putting out these economic and fiscal numbers. We were really your only source of information.

There are now about nine firms that are putting out, in a sense, alternative views to ours. Maybe that's competition with our view. I think that's great, if you have an alternative point of view, and you are seeing a larger number of firms putting out these longer-term scenarios. The Royal Bank, for example, today had a press release on their fiscal projections going out to the year 2006.

In part, I think that relates back to our having those types of conference and bringing people in and making available the sort of information they need to do those projections, such as what we did on the seniors benefit and the Canada Pension Plan and providing that long-run information.

Mrs. Sue Barnes: Because I am short of time, I want to get something else in.

I fully agree with the concept of transparency and people getting better information. If anything, I think the process of having an open pre-budget consultation process, which was never in place before, should have had some tremendous impact inside your department, because Canadians then engaged and they brought their concerns to the table, which include all of those things like the maturation of their industries, the demographics in there, and other things. Can you comment on that?

Mr. Scott Clark: I couldn't agree more. The whole process since 1993 has been a lot more open than it ever has been, and we have benefited from the people going before the committee and the research that gets done as background for that. That wasn't the case prior to 1993.

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Mrs. Sue Barnes: So basically, the short-term goals, the openness.... You've managed to do something that no other government has for a long time—not you as a government, the department. This government has been able to do something that wasn't accomplished with all of the other things that were done heretofore.

Mr. Jason Kenney: Give him some credit.

Mrs. Sue Barnes: He still has more ways to go.... I want to talk about gender analysis, because when you're going to put resources out for what the Auditor General wants.... There's something on the books right now that talks about gender analysis of legislation—

Mr. Scott Clark: Yes.

Mrs. Sue Barnes: —and I would hope that the department's putting extra resources—

Mr. Scott Clark: Yes.

Mrs. Sue Barnes: —into that area too. Okay. Seeing as that's not today's topic, I'll pass, and just give that—

Mr. Scott Clark: I thought you were going to ask.

Mrs. Sue Barnes: You did?

That should be all.

The Chairman: Okay. Thank you, Ms. Barnes.

Mr. Mayfield, we're now moving on to the four-minute round.

Mr. Philip Mayfield (Cariboo—Chilcotin, Ref.): Thank you very much, Mr. Chairman.

It is a pleasure to come together with you this afternoon, and I've enjoyed reading the...well, “enjoyed”.... Let me say that I've “appreciated” reading the Auditor General's report. It certainly does raise some alarming issues, some serious issues, not only for you but for Canadians and for the government, which is responsible for setting policy.

When I look at some of the things that the Auditor General points to, like the demographic problems with the baby boom, like the falling of the revenues that the government may anticipate with the rising demands of seniors who are no longer in the workforce.... The Auditor General does point to some things that might help, though. For example, he points to Canadians' ability to save. And he points to rising productivity of perhaps fewer workers.

What plans does the government or the department have to facilitate savings for Canadians and to facilitate the productivity of workers? What policies and what plans do you have, and how might those be communicated to the Canadian public?

Mr. Scott Clark: First of all, I couldn't agree more. Chapter 6 of the report is, I think, an excellent piece of analysis. You said you enjoyed reading it and then you said, “Well...”.

Some hon. members: Oh, oh!

Mr. Philip Mayfield: It was because it was so alarmist in some senses, but let's just say I—

The Chairman: Because of his age, that was the problem—

Some hon. members: Oh, oh!

Mr. Scott Clark: I think we're all sort of looking at that side of the calendar.

I think it was an excellent piece of analysis and I think it clearly raises issues that governments should certainly become aware of if they're not aware of them already. Part of my intervention was to indicate that we have of course become aware of these issues in the past and that a lot of work needs to be done.

In terms of increasing savings, I think the first issue is dealing with the deficit. In terms of overall national savings, you can't be running a deficit of 6% of GDP. I think the first step to dealing with the longer-term issue is to basically get rid of the deficit. The second step is to maintain a balanced budget and make sure that your debt burden is falling. There's no doubt about it.

I don't think anyone is disagreeing on the need to reduce the country's debt burden or the need for the federal government to reduce its debt burden and the share of revenues going to pay interest costs. And of course if you can do that, you certainly have a greater amount of resources available to deal with some of the problems, I think, that are identified in the Auditor General's report.

So I think a first step towards increasing savings in the economy is to reduce and eliminate government deficits, and I think we've achieved that.

In the sense of individuals' savings, I think ultimately the real need in regard to individuals is for us to sustain economic growth and increase levels of income. To save, you have to have adequate levels of income, and I think we're now in a situation where growth has been quite strong, almost 4% for the last seven or eight quarters, and I think that will be essential.

When it comes to productivity growth, that's been an issue now—

Mr. Philip Mayfield: To interrupt, do your projections show that growth continuing beyond, say, 2000 or 2001?

Mr. Scott Clark: Basically, we see continued strong growth for the next two years, and strongest in the G-7.

Can I predict growth for the next ten years? I don't think so.

A voice: No?

Some hon. members: Oh, oh!

The Chairman: Please!

Mr. Scott Clark: I think we have a capacity to sustain growth and its potential that we haven't had in a long time.

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The Chairman: Thank you, Mr. Mayfield.

Now we'll turn to Mr. Myers for four minutes.

Mr. Lynn Myers (Waterloo—Wellington, Lib.): Thank you, Mr. Chairman.

Mr. Clark, you said in your opening comments that the previous finance minister made long-term projections and that one of the risks in doing that is a higher premium and higher interest rates. Could you maybe elaborate on that point? Is that a danger you see if we in fact go down this path?

Mr. Scott Clark: My sense on looking back into that period is that not just the Canadian government but a number of governments and provincial governments certainly lost some credibility because of their failure to deal with financial problems.

And when I look back to that period—and we were there as officials—and the failure to miss targets, to set longer-term projections which you could never achieve and which would then be adjusted in the next budget, I think that raised serious concerns in the financial markets about the commitment of the government to really dealing with the problem.

What we find with having done two-year targets and achieving them and showing commitment is that it then gets you the credibility. There's an old saying that credibility is hard to earn and easy to lose, and I think we are still in a situation where if we missed a target—dare I say it?—I think markets would be quite upset. And that's why, I think, we still have a way to go. We've eliminated the deficit, but let's put it this way: when the numbers are finally in for 1997-98, we will have had a balanced budget, but that's for the first time in what, twenty-odd years? We still have a ways to go to really solidify and maintain that credibility.

That's part of the reason I feel we shouldn't start moving yet to the old ways that didn't work in the past, that we should stick to the short term and make sure we hit our targets.

Mr. Lynn Myers: Mr. Desautels, could you comment on that? It certainly strikes a chord with me when I hear someone like Mr. Clark say that about higher interest rates rattling the markets and those kinds of things. Can you comment on that particular argument?

Mr. Denis Desautels: Mr. Chairman, I think credibility is extremely important in order to ensure that you have the confidence of the financial markets and that you are in fact able to maintain interest rates and the ability to borrow at the optimum level. I've never disagreed with that, and I think we have to maintain the credibility that's been acquired in the last few years. We should make sure we don't lose that.

I believe, however, that.... And again, I'm not the only one saying this. Even the OECD is recommending that you should be able to achieve your short-term targets and objectives while still being able to discuss, in a meaningful manner, some of the challenges that you might be facing further down the road.

Certainly I don't think we should necessarily go back to a time when it didn't matter if we didn't meet the target for year one or year two because we might make it up in year three, year four or year five—but we never did make it up in years three, four and five. I don't think we should ever go back to that.

I think we should meet this year's target and next year's target, but we should also be able to provide some context to the short-term objective so that you can start making policy decisions now that will affect taxpayers and Canadians ten or fifteen years down the road. And you can only make those policy decisions if you've been given the kind of information you need to understand the actual context and this situation. I think it can be done and I think you can divorce the two things, the short-term targets and the longer-term context.

Mr. Lynn Myers: Thank you.

Just very quickly, Mr. Clark, you said the time may come where we have to revert to those kinds of projections, albeit for illustrative purposes and such. Under what conditions and when would that take place? What kinds of things would you look at?

Mr. Scott Clark: I don't think I can be specific about the timing. I can set out the kinds of conditions I'd want to see. First of all, I'd want to see a continued track record of achieving our short-term targets. We do have a short-term target: a balanced budget. And we do have a medium-term and a long-term context: a steady decline in the debt burden.

The key is to still put a few years of successfully balancing the budget behind us. We've only had two back-to-back balanced budgets. It was what, over 50 years ago? That was the last time we had two consecutive years of balanced budgets.

• 1615

When I talk to people in the markets in New York or Toronto or anywhere else, they do not at all recommend going back to putting out long-term projections, which they know and everyone else knows you're not going to meet. They're emphatically supportive behind short-term targets.

The Chairman: Thank you.

Mr. Dumas, you have four minutes, please.

[Translation]

Mr. Maurice Dumas (Argenteuil—Papineau, BQ): Mr. Desautels has spoken earlier about long-term budgeting taking place in various countries. What do you mean by "long-term"? How many years is "long-term"? In these long-term budgets, do they take into account periods of recession, poor economic times? Right now, we are going through good times.

Mr. Denis Desautels: In those countries we mentioned as an example, like UK, Australia, New Zealand and the USA, long-term projections can cover one or more decades. In the United-States in particular, the projections are for a period of several decades that must surely represent many business cycles. These countries believe that this type of information is worth being released and discussed, despite the fact it may be unreliable.

Mr. Maurice Dumas: Even if a recession could happen, as it did not so long ago, maybe some 15 years ago?

Mr. Denis Desautels: As I say, the minute you make projections for more than 10 years away, as the Americans do—their projections cover more than 30 years, that is three decades—you are certain to go through several economic cycles with periods of growth and periods of recession. Projections are averages that can tell us where we can end up in 10, 15 or 20 years from now.

Mr. Maurice Dumas: Thank you.

[English]

The Chairman: Thank you, Mr. Dumas.

Mr. Mahoney, you have four minutes, please.

Mr. Steve Mahoney (Mississauga West, Lib.): Thank you, Mr. Chairman.

You don't necessarily put out long-term projections, and I understand that, but you must do analyses of the impact, sort of “what if' scenarios. I think of things like the Asian flu, and what impact the Euro dollar is going to have on the world economy. It seems to me our budget problems are very much tied to the world. Do you do an analysis or strategies to plan contingency plans, or that kind of thing, for this?

Mr. Scott Clark: It's the old saying, “Plan for the unexpected”, right? In fact, I think one of the important things we did, beginning in 1993, was to realize that things like the Asia crisis or other events can happen and will throw your budget plan off, and that's not a situation you want to get yourself into. So what we did, beginning in 1993-94, was introduce a contingency reserve of $3 billion a year, for one, which was to deal with events that you couldn't predict, and the second was to base our budget plan on less optimistic views of the economy or events than the private sector forecasters were assuming.

What we do every year when we're planning is take a survey of about 20 forecasters. We look at what they're saying about nominal income growth and about interest rates, we take the average, and then we increase the interest rates and reduce growth so that we build into our budget plan a buffer to deal with these unforeseen events. So that's an important part of our budget plan.

At the same time—and it's what I said about intervention—we do a lot of analysis and research on the impact different events might have on the economy, and of course, therefore, what impact they might have on the budget plan. But I think one of the most important things we did for budget planning was to build prudence into the budget plan and to ensure, therefore, that we're going hit our targets.

Mr. Steve Mahoney: I find your statement here a little bit contradictory. Maybe you can help me with it, Mr. Scott.

I'm referring to the two-year focus. On page 4 of your comments you talk about the federal government and the provinces restructuring the CPP “precisely to address the longer-term demographic pressures on the Plan”.

• 1620

We have this mass of baby boomers—Mr. Kenney hasn't gotten there yet, but the rest of us are mostly in that category, some past it—moving through and having tremendous impact on everything from when we the boomers first started buying automobiles, first started buying homes. We saw the enormous impact this group had on markets.

Now—with some depression—I see the AG using terms like “slowing to a crawl” and things like that. It's uncomfortable language, but I understand where you're coming from.

The Chairman: It's called “returning to basics”.

Mr. Steve Mahoney: Yes, that's right.

If we're giving only two-year projections, surely we must analyse and understand the impact of the demographics, which is what we're talking about here today. As it will slow in consumerism, it will perhaps increase in investments in RRSPs and more savings, with people hoarding their money. All of that must have an enormous impact on you in your department and the government's ability to project.

Mr. Scott Clark: I think everyone here has to agree—and this is what I said in my statement—with the absolute need and importance of doing the analysis and doing the research on those kinds of issues. I listed in some depth—and I probably bored all of you—all the research we've done and the conferences we've held and so forth.

I don't think the Auditor General and I disagree at all on the need for looking at those issues, and we do look at those issues. We have to take them into account when we begin to put together our view of what the economy is going to be doing.

So I don't think there's any disagreement at all on the need for doing good research, and certainly good research on demographics and the implications of the demographics. No doubt about it.

The Chairman: Thank you, Mr. Mahoney.

Mr. Harb.

Mr. Mac Harb (Ottawa Centre, Lib.): Thank you very much for your presentation. I'd like to make a comment and then get your reaction to it.

Nowadays in this global economy there are so many hundreds of different factors taking place. In some cases, one mutual fund operator who decides to pull out of an economy and almost destroy the economy can move his investment to another country and do the same thing. They can wreck two or three countries, in a sense, and affect interest rates, to a large extent, in those countries and create a recession, whether artificial or not.

With things like this, with fluctuation of monetary values and interest rates and changes taking place with our partners around the world, that must make your job extremely difficult, really, to say, well, this is my target over the next five years.

Mr. Scott Clark: You might want to go back to the eighties and ask the previous finance ministers why they missed their targets. Basically it's usually because interest rates and growth turned out to be completely different from what they were assuming.

To goes back to the answer of the previous member, it's because those events are there. You don't know when they're going to happen, but they're probably going to happen. Nothing is certain over a two-year period. I mean, five or ten years is so hypothetical. It's interesting, and it's good discussion, but from a pure budget-planning point of view, getting just the next two years within a reasonable confidence level is not an easy task.

That's why we wanted to introduce prudence into budget planning, where we take assumptions that we know are basically “pessimistic”, if I can use that term, with respect to the general view of the forecasting community.

We cannot afford to be wrong. Wood Gundy can afford to be wrong. The chief economist for Wood Gundy goes out and changes his tune the next day, or gets a smaller bonus, but I don't think we in government can afford to be wrong.

Mr. Mac Harb: That's first. Second, it strikes me that there are I don't know how many different standards when it comes to actual accounting in terms of what the government owes and what it owns—in a sense, assets and liabilities.

If I were to look at some of the countries in the OECD and use their methods of accounting, Canada, I presume, would be in much better shape than it is now when it comes to its balance sheet. Is that correct?

Mr. Scott Clark: Yes.

• 1625

Mr. Mac Harb: If it's yes, is there any movement within the Department of Finance, within the government, to take a leadership role so that we can aggressively forge ahead with the setting of proper international standards when it comes to OECD countries, at least, so that when we're talking about apples we know we're talking about apples, or when we're talking about oranges we know we're talking about oranges?

If we set up those standards of accounting everybody would be talking about the same thing. Is that something you guys are working on?

As well, what's the reaction of the Auditor General to that?

Mr. Scott Clark: In terms of international comparisons with the OECD, they will tend to use what is referred to as “national accounts” data. That's fine. That's not too different, in a financial sense, from what we call “financial requirements”. We have a public accounts measure of the deficit. We also have what we call financial requirements, which is very close to the what the U.S. calls its “budget balance”.

You'll notice in our budgets we're always saying, well, our balance is such-and-such on a public accounts basis. If we were to measure it on a basis such as that in the U.S., then we would already have had a balanced budget, because we're already running a surplus in terms of our financial requirements.

I think you'll find that we're not going to be moving in their direction. Instead, they're going to be moving in ours. I think there's probably a movement more in the U.S. to move to a more full public accounts basis.

The Chairman: Mr. Desautels, do you have a comment on the question?

Mr. Denis Desautels: Yes, Mr. Chairman. I thought I'd be rather quick, and pick up on Mr. Clark's last point.

There is a lot of effort made around the world to standardize accounting and reporting. I can think of the International Federation of Accountants, INTOSAI, and other organizations, including the OECD. But the movement generally is toward a more full disclosure, something much closer to what we're doing here. Even the United States published for the first time, as of the last fiscal year, a full set of financial statements trying to reflect all of their liabilities.

So we're reflecting all of our obligations and liabilities, and I think more and more countries now are following that lead.

Mr. Mac Harb: Thank you.

The Chairman: I notice a reluctance on your part, Mr. Clark, to bring out these reports. You're saying you don't want to get into targets that will confuse the issue, but I think the Auditor General is saying it's time we got the discussion going in the country.

Is it possible for you to consider avenues other than, say, the pre-budget consultation rounds—the planning and priority documents, the old estimates documents, the performance reports of the departments—to start discussions on it without setting out targets?

Mr. Scott Clark: I think it's something we could look at. I think the Auditor General has raised the issue in terms of whether we can lay it out pre-budget, or at any other time, for that matter. It's the ability to disconnect, giving information for good discussion and good public debate versus the issue of accountability.

A good example is when my minister went before the main estimates committee to discuss the main estimates of our department. I guess he alluded to the fact that the debt-to-GDP ratio in the U.S. was about 40%, and gee, wouldn't it be nice if we were close to that.

The next day the Financial Post said, “Finance Minister about to set new debt target”. There was the inability to disconnect simply a general statement about a debate versus all of sudden that he was saying a target.

So I think the Auditor General has really hit it on the head. When do we reach that point? How do we allow good debate, maybe through the mechanisms you've suggested, but avoid having to establish new accountabilities?

The Chairman: When we take a look at the issues, I see three fundamental issues.

One, there is the pension issue. How do we afford the pensions of this large number of people who are going to retire?

Two, how do we afford the health care of these people—and it's not “them”, it's “us”—as we reach the end of our lives? I understand there's a statistic that says people consume about 50% of their health care in the last two years of their life.

The third issue is the declining productivity, which the Auditor General referred to, as the working population declines. It may not be offset by rising productivity and with investment.

• 1630

So we have pensions becoming more expensive, health care becoming more expensive, and perhaps reduced productivity, but we don't save for health care. We don't set the money aside today to pay for health care five years from now; it's strictly very much a pay-as-you-go and we know that pay is going to be a phenomenal cost. That is not a target, but that's a discussion to say, how are we going to be able to finance the health care in the year 2030? How do we go about getting that discussion going?

Mr. Scott Clark: Let me just say that I wouldn't disagree at all with the three issues you have just listed. As my colleague said, there are numerous organizations, including the OECD, that provide those kinds of projections. I'm not arguing against doing projections, and I'm certainly not arguing against doing good research and good analysis. I happen to agree with you that the issue of retirement and the issue of health—or the issue of aging, to use that terminology—is critical, especially in terms of the increasing dependency ratio or the slowing down of the labour force. And on the issue of productivity growth—which we are trying to address, although it takes a long time—I don't disagree at all. Probably I would suggest that there needs to be more public debate about intergenerational issues.

The Chairman: This comes back to my point that you seem to be reluctant to enter into the debate because you're afraid of being perceived as setting targets and then being caught in a box. Why don't you be bold and step out?

Mr. Scott Clark: I think the difficulty is exactly what the Auditor General said: what is the mechanism by which I can disconnect to provide information from accountability?

The Chairman: Yes, but accountability, as I said.... I'll use health care as one example; that's strictly a pay-as-you-go. There's no debate about saving money today to pay for health care tomorrow, and we know about the rise in costs. Have we any concept of what the costs are going to be as a percentage of GDP of health care, using projections of rising costs and so on? That is not target-setting but it is awareness-building, in my opinion.

Mr. Scott Clark: I agree, and of course that's why we in the Department of Finance worked with the provinces to produce the paper that formed the basis of a lot of the analysis in the Auditor General's report. It was the 1992 study.

The Chairman: That is going to cause some debate amongst the provinces. They're going to say, if this is going to cost this horrendous amount of money, who is going to pay for it? Then we start another debate, but a debate that's well worth while before we end up in a crisis. Can't you agree with that?

Mr. Scott Clark: I think you definitely need research, you definitely need debate and you definitely need both before you end up in a crisis. Do I believe that our putting out a target for a debt reduction is irrelevant—

The Chairman: No, I said no targets. I didn't say anything about targets. I said let's get the analysis of how serious the situation is going to be on the table. For example, we have just gone through it on Canada Pension Plan. We've had the minister take a lot of heat in the House regarding his 73% increase in CPP premiums because of a problem that he perceives coming down the road in 15 or 25 or 30 years.

Mr. Scott Clark: I agree. I have no problem in providing analysis, doing analysis, doing the research and discussing the research.

The Chairman: So my question is, if you've no problem, how are you going to get this information to us, rather than hiding behind an attitude of,“I don't want to set targets; therefore I'm not going to do it”?

Mr. Scott Clark: I'm here. You can always ask officials to come and discuss issues. I'm not trying to say I wouldn't come here and discuss—

The Chairman: We want the academic papers and reports.

Mr. Scott Clark: You want them?

The Chairman: I think that if we're going to have an intelligent debate in the country, it's not just around this table on an ad hoc basis, surely it's the academic reports and the intelligent analysis—

Mr. Scott Clark: Absolutely, and that's why I attached the entire list of all the academic reports we have put out in that conference.

The Chairman: Okay. Mr. Grose.

Mr. Ivan Grose (Oshawa, Lib.): Thank you, Mr. Chairman.

I'm very happy about the subject. Every now and again we have a subject that I know something about. I research this one on a day-to-day basis, the population aging bit. I don't want long-term projections either. I remember being in business when I wanted to borrow $75 from the bank manager and he asked me for a five-year business projection; anything after three weeks was pure blue sky, but he liked my projection and loaned me the $75.

One of the things it says here is understanding the choices. We have this scenario for 2010, of the baby boomers who are going to come along and all start wanting Canada Pension Plan and OAS and so on, but by that time they'll have exhausted all the resources in it.

What I want to know is the choice. Tell us. You can tell us exactly how long these people are going to live, exactly what their expectations are going to be. Any actuary can tell you that. Tell us what will happen if we do nothing; if we do X what will happen, and if we do Y what will happen. Forget the political implications of our doubling and tripling—whatever we have to do—the CPP premiums, but give us the choices, please, of what it will involve if we don't do anything at all, or if we do this or we do that.

• 1635

We've been researching and looking at this for quite some time, and the thing looks scary, but that's all it looks. What really could we, or should we, do? Or is it impossible? Should we just keep discussing and researching it?

Mr. Scott Clark: I think when you look at the analysis and the discussion on the CPP, there were a lot of choices set out there in terms of what would have happened if we had not agreed with the provinces on reforms to the CPP. It was very clear what the actuary was saying. It was very clear that action had to be taken. There's no doubt about it.

Numerous reports and academic studies have been done both in Canada and all other countries in the OECD. There's considerable analysis done on the impacts of aging, whether it's on the pension reform or certainly on health costs. I would say the implications of aging on the health cost in this economy and the share of output in the economy going to health care will far exceed the implications for aging in terms of retirement income.

So there is analysis done, and that analysis should be part of any public debate. I think, though, it's important to recognize that in dealing with future problems, in this case aging, the absolute sine qua non to deal with them is to reduce the country's debt burden. For about 68% for the federal government, it needs to fall. There's no doubt about it.

So there's a question of what if you do nothing. You have to reduce the debt burden if you're going to adequately have choices in terms of dealing with the kinds of things that are happening as a result of the demographics. There's no doubt about it.

Mr. Ivan Grose: That's fascinating, because I sat on the finance committee this morning and we listened to two groups, both of whom told us to forget about the debt burden, do this, do that. Incidentally, neither one of them wanted to do what the other one wanted. But we have all these terrible choices, which is what worries me.

I have one simple question in terms of private pension plans, on which people really do depend. They've lost faith in the government pension plan and they think that private plans will look after them. Is this the case in 2010 and beyond or will the government have to step in—if they are able to step in, because, let's face it, the government is the last resort? Private pension plans: are they in a position to look after this?

Mr. Don Drummond: We basically have two different types of private pension plans. We have a defined benefit plan, which you would have with an employer. In general, if you're an employee and your employer offers this plan, on average that will provide adequate coverage for your pension. Unfortunately, not everybody in the economy has one of those things, and the percentage of workers who are covered by those plans has very unfortunately been going down with the move to self-employment, etc.

So for a large number of Canadians, and an increasing number of Canadians, they are having to rely on something like their RRSP. We know there's a lot of money in RRSPs. Generally, people above middle income are adequately covered from it, but we know that, on average, people say in the $30,000 to $60,000 family income range typically do not have enough money set aside in their RRSP.

I think they're aware that they probably need more, and I think the incentives are there, but perhaps there's not always enough money, savings, set aside to put this aside. There is a difficulty on that side, and there is the difficulty of the adequacy of the private pension. It's getting worrying as we move away from employer-sponsored plans.

Mr. Ivan Grose: Thank you very much.

The Chairman: Mr. Mayfield.

Mr. Philip Mayfield: Thank you very much. I appreciate some of the questions that have been asked here, and I want to ask a similar question from a slightly different point of view. As I think about attitudes of people where we have encouraged them to depend upon the so-called nanny state.... People have traditionally gone to the doctor, and the doctor has looked at them and said, “I'm the doctor and you're the patient, and this is what you'll do”, and people have done that.

More recently, though, people are saying they want to take more responsibility for themselves, and I think this could be said about their looking after themselves in their later years for their retirement too.

• 1640

I'm pushing for the kind of transparency whereby people would be able to say “This is where I stand with the health care system. This is where I stand with the public pension system. These are the things I will have to do to care for myself if I want the kind of health care I need. This is what I will have to do to provide for me the level of retirement income I wish to have”. What really hurts people is that they think they've done this and then the big surprise comes along. They don't feel responsible for it, but they do feel hurt by it.

I think, as do some of my colleagues, we should be working more and more toward establishing a kind of partnership with Canadians rather than a doctor-patient or governed-governing relationship. How can this partnership be fostered so people know what they can expect from the government on the nanny state, the pension plan and the health plan, and make their own plans to meet their needs in cooperation with that? Is there any thought of taking the Canadian people in your confidence sufficiently so they could plan for their future this way?

Mr. Scott Clark: Sure.

Mr. Don Drummond: I would like to address the issue of the role of longer-term projections in offering transparency, and point out that in a couple of examples where this has been done they might have offered more confusion than transparency.

A good test case is the Canada Pension Plan, because there have always been longer-run projections in the Canada Pension Plan, hence there could be a feeling that it's offering transparency and you should know where you stand versus the Canada Pension Plan. Despite that long history of those long-run projections, we had to propose very large increases in the premium rates, as Mr. Kenney pointed out, in the round that was just passed recently. The long-run projections didn't necessarily provide that transparency and certainly didn't provide the certainty to somebody that they knew where they stood, because large adjustments had to be made in that program.

United States has had more experience with these long-run projections for a longer time than perhaps other countries. The General Accounting Office in the United States has offered projections out to 2040 three times in this past decade. In 1992 they said in 2016 there would be a deficit of 10% of GDP; in 1995 they said there would still be a deficit of 10% of GDP in the year 2016; and this year they said there would be no deficits at all until 2015, and the 10% deficit of GDP ratio wouldn't occur till 2040. That was transparent, I suppose. Certainly it didn't provide any certainly. I suspect it provided a lot of confusion.

It seems like a tremendous difference. How can you go from a 10% deficit one time in 2016 to 0%? In fact when you look at it there's a very small difference in their assumptions. A little bit of difference on a productivity growth rate every year compounded out for 20 to 30 years just makes an enormous difference. I'm in support of doing that type of analysis, but I think we have to have our eyes open that there is no certainty offered, even once you've done that, because very tiny changes in your assumptions totally change the results.

In a similar exercise, a paper in Canada was done on whether our fiscal situation is stable or not. It calculated whether future generations will have to pay higher taxes than we will. The first time around it suggested the future tax burden would have to rise by 73%. Two years later the same authors came to the conclusion that the future tax burden wouldn't have to rise at all. There was a totally different result just in a two-year period, speaking about two or three generations into the future. Again, it would be nice to provide that certainty but I don't think we have the tools to do it.

Mr. Philip Mayfield: But don't you think you're essentially telling Canadians there's no certainty in the future, they'd better look after themselves and anything extra we come along with will be gravy? It seems as though Canadians are concerned now that the savings they put away for themselves may be captured by the government to make up for its own shortfall in past years. It seems to me there is a danger in not adopting a more cooperative approach with Canadians. Canadians are a resourceful people. They will look after themselves one way or the other, and it would be nice if it could be done in a cooperative basis rather than a competitive basis with the governing people.

The Chairman: Was that a statement or a question, Mr. Mayfield?

Mr. Philip Mayfield: You can respond to it if you like, but that's a statement.

Mr. Scott Clark: It sounds like a statement to me.

• 1645

The Chairman: Well, I guess there's no response to that statement.

Mr. Kenney.

Mr. Jason Kenney: Thank you, Mr. Chairman.

Mr. Philip Mayfield: I should have asked the Auditor General if he would like to respond to it.

The Chairman: Does the Auditor General wish to respond?

Mr. Denis Desautels: Not yet.

The Chairman: Mr. Kenney.

Mr. Jason Kenney: I was remiss in my opening round in not saying at the outset that I want to commend the Auditor General and his office for the excellent work they've done. I think that he and his office have demonstrated important leadership in bringing to the attention of this Parliament what I think is perhaps the biggest public policy challenge of the next several decades. I think this is excellent work and an excellent start.

I just have some observations about the discussion. Then I'll have a question for the Auditor General.

It occurs to me that the problem we have is not a lack of information. Mr. Clark and his department have indicated their eager willingness to supply information and conduct and fund original research into the problem of intergenerational equity and the liabilities that we face into the future.

I appreciate the conference that Finance sponsored at Queen's earlier this year. I read a couple of the papers from it. I appreciate the bibliography we've been presented with. I'm certainly familiar with an enormous amount of research that's been done on this subject by independent think-tanks such as the IRPP and the C.D. Howe Institute. Mr. Drummond just mentioned a couple of their studies. The Fraser Institute has financed research of this kind.

So I think there's no shortage of research on this subject, but it occurs to me that there is a shortage of political will and political leadership on the issue. This I do not make as a partisan comment.

Mr. Mac Harb: No, far from it.

Mr. Ivan Grose: Not at all.

Voices: Oh, oh!

The Chairman: Make the comment, Mr. Kenney.

Mr. Mac Harb: He's out of time already. It has been 3 minutes and 59 seconds.

The Chairman: No, he's not out of time. Go ahead, Mr. Kenney, you have the floor.

Mr. Jason Kenney: What I'm saying is that there's a problem in modern democratic societies in that there's not a political incentive to adapt policy to the long term. Winston Churchill said that the definition of a politician is somebody who thinks of the next election, while a statesman is somebody who thinks of the next generation. It's difficult to tell people the difficult truth as politicians.

This is what I think we need. Let me just draw one point from the Auditor General's report. He said that the finance department made a good start with this kind of information on the debate on the CPP. My concern is that this debate and information was principally shared among policy-makers. Basically, it was inside-baseball politics. Unless you're a policy wonk who sits at home and watches CPAC hearings on television, you didn't know much about it.

As the president of an interest group, I attended the hearings that were conducted by the government across the country on CPP reform, and I recall being the only person at most of those hearings who was under the age of 50. In other words, an entire generational cohort that's deeply affected by this was not engaged in that debate.

So I close by asking you this, sir: don't you think there's a need for us to step out of...? This isn't an issue that should be attached to the budget, as Mr. Clark suggests. We ought not to be putting 30-year health care cost projections into an annual federal fiscal budget. That's completely ridiculous.

Let's look at the American example. They have an American President with congressional leadership that has appointed an entitlement commission made up of all parties with equal representation from current seniors, the boomer generation, and the post-boomer generation. So there's generational equity in an independent commission that can speak frankly about these issues independent of the political problems that we all face.

Would the Auditor General not think that an entitlement commission of that nature would be useful in Canada? It could look squarely at these issues and speak to Canadians in a more frank manner than politicians can.

Mr. Denis Desautels: I think a number of avenues are possible for using the kind of information we're suggesting. I think that producing the information is not that hard. I think Finance does have a lot of good information available. I think what's more important is what you do with that information once it's available.

The focus of our chapter is to make the kind of information that Finance does have available to members of Parliament and to Canadians at large in what I would call a more comprehensive and regular fashion. So it would be coming forward on a regular basis, it would not be ad hoc, and you would see the full picture whenever it came forward. Basically that's the message we're carrying: make that kind of context information available to parliamentarians at large.

• 1650

As to how parliamentarians use it afterwards, I didn't go quite that far, but there could be a number of possibilities there as well. I honestly believe this can be done in a way that does not take away the focus on meeting short-term targets.

We have to work harder on the second part, but I would say we have to find a way of doing this so it does not engage automatically the Minister of Finance's accountability for that kind of information. In fact, it should be seen as helpful information that may not materialize at all but is just useful to know so we can see beyond the next curve down the road, much further down.

Mr. Jason Kenney: Perhaps Mr. Clark could comment on that.

The Chairman: We've run out of time, Mr. Kenney. We'll come back to you.

Mr. Steve Mahoney: I thought we were here until 4 in the morning.

The Chairman: You're going to be here until 4 in the morning?

Mr. Steve Mahoney: Is the committee not sitting until 4 in the morning, Mr. Chairman? We sit when the House sits; I think we should be here.

Some hon. members: Oh, oh!

Mr. Jason Kenney: Sure, I'm game.

The Chairman: We'll have to have a motion on that later on, Mr. Mahoney.

Mr. Dumas.

[Translation]

Mr. Maurice Dumas: Mr. Chairman, I came to this meeting because I'm in charge of the seniors issue for my party. Having read the Auditor General's report, I must say I'm afraid the future of tomorrow's pensioners will not be a bed of roses. Can you confirm whether we must expect a claw-back on higher incomes for future retirees as well as a decrease in benefits for the people who have already retired?

[English]

Mr. Scott Clark: No, I wouldn't think you would be expecting an increase in taxes whatsoever, certainly not in the next number of years. Obviously eliminating the deficit and reducing the debt burden have given the government a lot more freedom and capacity to deal with the kinds of issues we've been talking about here, certainly the issue of aging. It's also allowed the government and the people of Canada to consider whether or not there should be tax reductions, not tax increases. So I wouldn't think tax increases for either current seniors or future seniors is an issue in the environment we're in now.

The Chairman: Monsieur Dumas.

[Translation]

Mr. Maurice Dumas: Thank you.

[English]

The Chairman: Okay.

I have a couple of questions, going back to my thesis before, Mr. Clark, on the fact that health care costs we expect will rise dramatically as the baby boomers come to the end of their projected lives. At that time, as the Auditor General has pointed out, we may, unless we can engineer something new, be into a reducing GDP rather than a rising GDP. What policy options would be open to us? I can think of perhaps an inflationary run by the Bank of Canada to maybe make the money supply more available, but are there any other options available to us where we have rising social expenditures and perhaps a reducing economy?

Mr. Scott Clark: I don't think the Auditor General—and he can speak for himself—is suggesting that GDP would fall. What we're talking about here is the potential in the future, because of a slowing in the growth of the labour force. Just assuming the productivity growth were to continue at its current rate, you would have a natural slowing in the potential growth of the economy. So I still would say GDP will be increasing; it's just that the potential growth of the economy is going to be less than it is now, and certainly less than it was back in the 1970s and 1980s. I think that's what the Auditor General is saying.

It's interesting. The slowing in the labour force growth has a natural impact on revenue growth. Offsetting that, though, I would suggest, is that with people out there saving in RRSPs and so forth and in private pensions, all that income we boomers are going to be bringing out is taxable. In fact, given the demographics, those going in would be less of a tax reduction, and since we're going to account for such a much larger share of the population, then we're going to be taxing all the income coming out of our RRSPs. So it's unclear just what the net revenue impact of those two flows would be.

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In terms of the impact on health, I agree completely. I think health is the number one issue for Canadians, absolutely, and I think the issue is whether all levels of government are going to be able to work together—I think someone said, to work cooperatively—to deal with the health care system and reduce the anxiety that Canadians have. I think that's the issue that all governments have to deal with.

The Chairman: Mr. Desautels, was I right in saying, in reading your report, that you were perhaps saying that unless productivity can outmatch the drop in the labour force, the GDP could fall?

Mr. Denis Desautels: I'll ask Mr. Zafiriou to answer that, Mr. Chairman.

Mr. Basil Zafiriou (Director, Audit Operations Branch, Office of the Auditor General of Canada): Mr. Chairman, as Mr. Clark said, it is the growth rate that will decline, not the absolute value of the GDP. The growth rate will slow down, because you'll still be getting some labour force growth, and you add the productivity improvements that are assumed on that, and so you still get some positive growth but that growth will be a lot less.

The Chairman: But if the productivity growth does not exceed the reduction in the labour force, will the GDP not drop?

Mr. Basil Zafiriou: The GDP growth rate will drop, but not the GDP itself. You have labour force growth, plus productivity growth—

The Chairman: No, I said we have a labour force decline.

Mr. Basil Zafiriou: Again, the labour force will not decline; the labour force growth will decline.

The Chairman: Okay.

Mr. Basil Zafiriou: So even if you have the labour force staying constant and your productivity grows by 1%, then you have a GDP growth of 1%.

The Chairman: So you're actually saying there will not be a drop in the labour force but a drop in the growth of the labour force.

Mr. Basil Zafiriou: Right.

The Chairman: Okay, I take that back, because I had a misapprehension there.

Mr. Kenney, did you have any more questions?

Mr. Jason Kenney: No.

The Chairman: It seems to me that the will of the committee is to bring the meeting to a close. There seem to be few if any questions.

Mr. Mac Harb: Would you thank them on our behalf, Mr. Chairman.

The Chairman: I would like to ask the Auditor General for his closing comments, and then we'll wrap the meeting up.

Mr. Denis Desautels: I'll be equally brief, Mr. Chairman. First of all, I sense in the statements made today by Finance a certain openness to some of the suggestions we've made. Certainly, I think Finance has kept the door open to putting out sometime down the road that kind of information on the longer-term prospects or the longer-term context.

I must say, in the last few years where we've made suggestions to improve the quality of the information on the financial condition of government, we've had generally a positive response, and I would hope on this particular subject, too, in due course we'll be able to find a way of doing that.

The essential message, again, is that we're hoping to see more comprehensive and regular communication of that kind of information to parliamentarians so that when they make short-term decisions or decisions today, they can put them in the context of a picture that extends much further down the road.

As one last quick comment, I suppose all of this, as we said, is fraught with uncertainty and there's the risk of being wrong in making longer-term projections, but I honestly don't believe that's enough of a reason to not attempt to actually predict or at least anticipate some of the things that are coming down the road that could affect the financial condition of government.

So I hope that will not discourage people from attempting to do that, and I am encouraged by the openness shown today by Finance on the possibility that this could happen down the road.

The Chairman: Thank you, Mr. Desautels.

On Thursday we're dealing with the draft report of chapters 35 and 36, which, I understand from the clerk, was distributed to all offices this morning.

The meeting stands adjourned.