Thank you, Mr. Chair and members of the committee, for having me today as part of this distinguished panel.
I live in Vancouver, so greetings from British Columbia, where last week the provincial budget brought in the country's first carbon tax, something that I'm sure you'll be studying as time goes on.
The CCPA does not do independent macroeconomic forecasting. What we do is provide fiscal forecasts as part of our alternative federal budget process. On this front, our track record is quite good. We were the first in Canada to raise the alarm about understated revenues in federal budgets leading to lower than projected deficits and then, after 1998, larger than anticipated surpluses.
The macroeconomic framework for this year's alternative federal budget is one where economic growth projections have been lowered compared with last October, when the economic and fiscal update was tabled. Whereas the 2007 federal budget lowballed revenues, the re-estimated framework in the economic and fiscal update is much more accurate and provided the fiscal room for the government to make its multi-year tax cuts.
I won't dwell on the prospects for lower economic growth. Developments in the United States suggest that the U.S. has already entered a recession, and the nature of that downturn suggests it could be longer and deeper than recessions in the recent past.
What's at issue is to what extent the downturn for our biggest trading partner--with exports equal to a quarter of our gross domestic product--will affect Canada overall, and what sectors and regions will bear the worst of it.
My forecasts take the economic and fiscal update as a baseline and then make adjustments for changes in the rate of economic growth. The revised base case is on page 15 of the alternative federal budget, which was released today. I've brought copies for all of you. I won't review the remainder of that document, but I will leave it to you to steal our best ideas and recommend that they get put into practice.
Slower economic growth means much less fiscal room heading into budget 2008 than in budgets past. We still anticipate a surplus of $11 billion in 2007-08, as most of the tax cuts kick in during 2008-09 and years after, but based on the updated economic forecast from the Bank of Canada's January 22 monetary policy update, the available surplus drops to about $1 billion in 2008-09.
Now, I should caution that this is not accounting for the government's promise to reduce the federal debt by at least $3 billion. In order to meet that particular promise, and under this new revised framework, the government would actually have to cut spending by $4 billion next year or it would have to revisit some of its tax cuts.
Personally, I would reject the notion that paying down federal debt is a top priority for the country right now. This includes the government's promise to make a $10 billion payment on the federal debt out of the current year's surplus.
In the out years, the surplus in the base case rises to $3 billion in 2009-10 and to $6 billion in 2010-11.
I'd like to underline the fact that if there were to be a major slowdown in Canada, because there is so little fiscal room the budget would naturally move into a deficit position. This is entirely the consequence of multi-year tax cuts from the economic and fiscal update and previous budgets.
The EFU tax cuts build on tax cuts announced in the 2006 and 2007 budgets. Fully phased in, the total revenue loss from the EFU is $14.7 billion per year by 2012-13. But if those previously announced tax cuts are taken into consideration, the total revenue loss from tax cuts by 2012-13 is an alarming $40.2 billion per year. This is a number I got right out of the economic and fiscal update itself.
We therefore need to ask what the federal government would do in the event that there was a slowdown or recession that pushes the budget into deficit. The government has promised to balance the budget, so assuming that they are unwilling to revisit their tax cuts, the only choice would be to cut spending.
In a technical paper for the alternative federal budget released in January—I believe copies were distributed to committee members--I modelled four scenarios of economic downturn and recession, again relative to the EFU baseline, each increasingly more pessimistic than the previous.
Growth estimates for the non-recession years of 2007 and 2010 are essentially the same as the EFU baseline in all scenarios. Essentially what we are modelling is a slowdown or recession in 2008, with a recovery year in 2009.
One note of caution in comparing the alternative federal budget to the technical paper is that today's AFB uses a revised GDP figure for 2007, so the forecast surplus in 2007-08 falls from $11.5 billion in the technical paper to $11 billion in the alternative federal budget.
In the technical paper, scenarios one and two are slowdown scenarios but not actual recessions. They show that it wouldn't take much before the budget reverted to deficit. These scenarios can be seen graphically on page 4 of the technical paper and in more detail in the appendix.
Scenarios three and four model actual recessions rather than slowdowns. In my worst case scenario, the deficit hits $6.2 billion in 2008-09, rising to $12.7 billion in 2009-10 before falling back to just over $10 billion in 2010-11. In terms of tipping the fiscal balance, a nominal GDP growth rate under 2.65% will lead to a deficit for the 2008-09 fiscal year.
The policy question, of course, is what should be done in response to a recession. The prospect of a downturn puts the recent tax cuts into sharp relief. Should the government hold the line on its tax cuts as its primary policy response? And to what extent would things such as the tax back guarantee, which I would argue is a gimmick that converts savings on debt interest payments arising from surpluses into tax cuts.... What would happen to that should surpluses turn into deficits? Does it in fact become a tax increase guarantee?
In response to a downturn, I believe the government should be prepared to run a deficit. Personal and corporate income tax revenues and GST revenues will minimally slow and possibly decline. Automatic stabilizers such as the employment insurance program have been greatly weakened since the mid-1990s, but in the face of a downturn they will push the budget towards deficit.
Surpluses on the EI account have already shrunk a great deal because of rate cuts, from an excess of $4 billion of premiums over benefits paid in 2001-02 to an estimated $2 billion in 2007-08. If unemployment were to rise, the EI account would turn to deficit rather quickly.
The conventional wisdom in Ottawa is a deep antipathy towards deficits under any circumstances. But I would argue that having saved for a rainy day, the federal government should be prepared to use the umbrella of deficit spending if need be. Canada's debt-to-GDP ratio fell from 68% in 1996-97 to 32% in 2006-07. The government has substantial room to run a deficit if it so chooses. Compared with those of other G7 countries, Canada's net liabilities are the lowest by a fair margin, with other countries running deficits in recent years, in contrast with Canada's surpluses.
In the United States, the Bush-Bernanke stimulus package, which has been criticized as not being stimulative enough, comes in a context of a previous year's deficit above 2% of GDP. In Canada, an equivalent deficit would be above $30 billion. That's not what I'm recommending; it's just to put it in perspective for Canadian audiences.
I believe there is much work to be done on climate change, poverty, transportation, and so forth, which make a compelling case for public spending as the vehicle for action. Federal expenditures have recovered somewhat, to about 13% of GDP from a low of 12% in 2000--01, but even this amount is three to five percentage points of GDP lower than levels that prevailed up to the early 1990s.
To put this in dollar terms, four percentage points of GDP amounts to about $60 billion, a fairly considerable sum.
There are detractors, of course, who would prefer to rely solely on monetary policy and who view fiscal policy as ineffective and ill-timed. I disagree. While we need to lower interest rates, this is increasingly an ineffective policy, because there is little ripple effect from the changes in overnight rates from the Bank of Canada to the rest of the interest rate structure. We are seeing, if anything, higher rates from banks for commercial and household lending due to the credit crunch, while the flight to quality in financial markets is driving down interest rates on medium-term government bonds.
We need to put fiscal policy options on the table. The critique that fiscal policy comes too late has some merit, to the extent that recessions are short-lived and fiscal measures involve a lot of long-term planning—for example, building a new bridge or a highway.
But other fiscal measures can be brought to bear. The key is to get money quickly into the hands of people who will spend it. I already mentioned EI. The government should consider measures that would enhance eligibility for EI, so that more unemployed workers would benefit, as currently only about one-third of the unemployed are eligible for EI.
Another measure would be to enhance the GST credit, which would quickly put more money in the hands of low-income Canadians. Other targeted measures could be considered for specific regions and industries that are hard hit.
As for infrastructure, we should be prepared with some big ticket items that we need anyway. The labour market is currently strong, but the fallout for construction could be large over the next year or two.
The fact that the U.S. recession is being driven by a dramatic fall in asset prices--in the past such an event would be called a depression, not a recession--suggests that this will not be your garden variety post-war recession with a quick drop and return to business as usual. This could take a couple of years to play out, and any resulting slack in the employment market could be absorbed by needed capital investments in things like social housing, public transit, and early learning.
That's my presentation. I'd be happy to entertain any questions after the next presentation.
Actually, Mr. Chairman, can I make four brief comments to open, because we've had a chance to hear from Mr. Lee, and I thought I'd say a couple of things about our perspective on the world.
Message number one is on the U.S. outlook. We actually have not called for a U.S. recession in our forecast. If you look at the consensus forecast on Wall Street, it's about 50-50, and we're with the 50% who believe that the U.S. is going through a very tough period. If it feels bad right now, it's because it is. This is probably the worst quarter, but we don't think a recession is the most likely outcome. Our forecast for U.S. growth this year is about 2.1%, which is smack at the centre of the consensus forecast on Wall Street.
That said, I think we've probably given insufficient weight to another phenomenon, which is called “stagflation”. There I'd actually agree with what Mr. Lee said at the end of his comments, that the U.S. consumer is hugely overburdened with the combination of falling house prices, a weak equity market, very high global oil prices--and the U.S. imports about two-thirds of its oil--and heavy indebtedness. Debt is fine as long as the other side of your balance sheet is going up in value, but what's happened is that the average American is indebted up to about 130% of their income, yet their house price is now falling. That looks like a recipe, to me, for really weak recovery and weak growth for a number of years to come. There I would agree with Mr. Lee. Two years might actually be a short period. It could be three to five years of crawling along, underperformance by the U.S. consumer, which is 70% of U.S. GDP. So that's an important number.
The inflation side, unfortunately, comes from the fact that appreciating currency and high commodity prices, whether it's wheat or oil, is really feeding the underlying inflationary forces in the United States' economy. The last three months have seen inflation of almost 7% in the United States. If you look at the inflationary forces around the world, China, India, and a lot of other countries right now are unfortunately seeing a lot of stimulus in terms of prices.
So I think it's probably a fairly even bet as to whether the U.S. is facing a recession or what I would see as a much more serious problem, which is stagflation, going forward. That could last a long time. It can last into multiple years.
That's important for the Canadian outlook, and that's my second point, because it means that anybody who is selling to the U.S. consumer, any business that's really relying on exports to the U.S., is going to be in a tight position for a number of years to come. We've seen Canadian exports to the U.S. more or less flat in real terms for the last eight years. If you measure the annual growth rate, it's about 1% or less. We used to rely very heavily on sales to the U.S. as a source of stimulus. We can no longer do that. That raises some really interesting questions for our trade and economic policies going forward.
We were actually the most optimistic of all the private sector forecasters right now on our Canadian outlook. We think the Canadian economy can grow at 2.5% this year, but it will be very uneven sectorally and geographically. So the west is best--we think 3% growth or beyond is quite attainable for all four western provinces. Central Canada is very challenged because of the heavy reliance upon sales to U.S. consumers. The industrial heartland is very much challenged. I'm sure you've heard from many manufacturers that have talked about the challenges they're facing. Then Atlantic Canada is bringing up the rear a bit. We do think that growth of around 2.5% is attainable, but again, this is probably the worst quarter.
It feels like we're in a real slowdown right now because we are going through a period of slower growth, but I would point to the fact that we did have growth in the fourth quarter of last year, and the job creation numbers for January were remarkably strong. As we look at all the evidence, we again don't see quite as pessimistic a story as do some other forecasters out there.
One other thing I'll mention on our Canadian outlook, and that's the outlook for inflation. We see the inflation numbers coming way off. It's actually the complete reverse of what we're seeing in the United States. We're the beneficiary of high commodity prices as a domestic economy and we have an appreciating currency, so our forecast for Canadian inflation for this year is around 1.5%. That leaves a lot of latitude for the Bank of Canada to gently cut rates through the course of the year. It also, however, means that nominal income growth--and that's what governments tax--is going to be a little slower than what we or the Department of Finance foresaw last fall. That may well create a challenge for the federal government in terms of going into the budget, because it means revenues will be a little bit weaker than we'd all foreseen.
Very quickly, on a third point, I just want to do a quick contrast between revenue implications on our side and what the government is saying. We haven't formally run our model that we do in terms of one of the four forecasters of record on the fiscal deficit or surplus, but my colleague Matthew Stewart has done a little back-of-the-envelope work, and our best guess for this fiscal year is a surplus of around $11.6 billion or $11.5 billion, which is pretty much the same number as Finance put out in their fiscal outlook back in October. For next year, we have pulled our forecast surplus way down to about $3.4 billion. Finance is forecasting $4.3 billion. So it's in the same ballpark, but you can see that the latitude in the budget for innovative things is getting squeezed. We have come up with more or less the same number for fiscal year 2009-10. We're now forecasting a surplus of around $3.4 billion; Finance had a number of $4.3 billion. Again, a billion dollars on a budget of $230 billion is really just noise.
So our view is very close to or aligning with that of Finance.
The last thing I'll mention, Chairman, is that we're in the midst of doing a series of papers on tax reform. It's an area where the Conference Board has not done a lot of work in the past, but I thought, as chief economist, it was important we get on the record in areas where we need to rethink the tax system on a national basis.
Members might be interested in seeing the work we've done. The first one was on cities and thinking about how to create fiscal capacity for our cities. That came out in mid-January. The second one is actually on green taxes and the use of market instruments to put a price on carbon. We published that about a month ago, and have had a fair amount of media attention.
The things we plan to put out over the course of the year will be around sales tax harmonization, where we will strongly encourage the provinces to harmonize with the GST system—which would be a real boost to productivity, particularly for small business. We're going to look at business tax reform and things like getting rid of capital taxes faster, and we will be thinking of other things we can do to improve business competitiveness. Then we'll look at individual tax reform, based upon the demographics we're facing, because we are now at a point where we argue constantly that we're facing a labour market crunch going forward and we have to think about aligning our tax system with the demographic realities in our labour market.
Thank you, Chairman.
I don't want to give away everything in my written brief. I'm having a highly reputable outside reader go through it right now. But our thinking is fairly simple, that simpler is better when it comes to the design of a tax system, and right now we do have a patchwork quilt of sales tax regimes across the country, both in terms of rates and in terms of coverage.
We've seen three of the four Atlantic provinces—it's three out of four, but not P.E.I.—sign up for the harmonized sales tax and come up with one tax collector, one auditor. Clearly that's going to save money for businesses of every size at every stage along the way, and for the taxpayer, because we really have made a very simple administrative system. Quebec has done the same thing. The collections are different, but basically it's a harmonized system.
But if you look at other large provinces, the two most prominent are B.C. and Ontario of course. There is an element of misalignment. Their coverage is different. Maybe the most punitive thing is that businesses who buy business inputs don't get the benefit of a cascading value-added tax system, so they have to pay the sales tax on goods that are covered by the provincial sales tax.
I've had the privilege of giving advice to many ministers of finance, so we've met with Minister Duncan in Ontario and talked about this. I think he's a bit intrigued. I think as a philosophical matter he understands there are benefits, but he's also worried about the revenue impact for his own budget, because if you were to harmonize, he would probably be looking for some sort of bridge. As you know, Mr. Menzies, there is a bigger debate about Ontario's place in the federation when it comes to transfers and having a level playing field. I would suspect that as that dialogue goes forward we're going to have to put a lot of those issues into the pot.
But clearly, I would argue that almost every Ontario business would benefit from having a single sales tax regime that is built on value-added taxation, where they don't have to pay taxes on business inputs that they then often can't even pass on to their customers.
Then there's another level of benefit, of course, in terms of administration and efficiency. That's the argument I make with Mr. Duncan directly, and therefore I'm quite happy to make it to you today.
Along the same lines, we have put forward--we didn't originate the idea, we just developed the policy--the whole notion of further investment into retrofitting our existing buildings, in particular residences, because commercial-industrial can be on a different track in terms of how you look at it economically. But certainly refurbishing homes does a number of things, and there are three obvious ones.
First of all, it helps our country meet our international obligations, whether it's Kyoto or something going forward, so that as a country we're lowering our emissions.
Secondly, it creates jobs, possibly hundreds of thousands of jobs, because people have to physically go in there and do the work. And this is locally created work.
Lastly, it lowers people's energy costs. So it's actually a savings for Canadians, because over the years they'll be putting out less money for energy costs.
My question, again, is--and I'll leave it very open for you--am I blowing it up too much to suggest that this implies, like the infrastructure, that there's a cost to our nation on the macro level if we don't do this, as well as conversely, that it's a positive that provides good stimulation and helps us hit a number of national objectives?
I'd like your thoughts, please.
Good afternoon, Mr. Chairman. I would like to thank you and the Standing Committee on Finance for inviting the Financial Consumer Agency of Canada to appear before you.
I am proud to say that I have recently been appointed commissioner of the Financial Consumer Agency of Canada, as of mid-December. I will do my best to respond to your questions.
To begin the discussion today, I would like to first highlight the mandate of the agency and then present to you some key activities that the agency is undertaking and that may be of interest to you.
The agency's mandate is to supervise and monitor the conduct of federally regulated financial institutions that take deposits and make retail loans. It is also charged with the mandate of consumer education in the financial sector.
Our work complements the regulatory framework that includes the Office of the Superintendent of Financial Institutions, which supervises the safety and soundness of our institutions; the Canada Deposit Insurance Corporation, which protects consumers through its insurance of retail deposits; and the Department of Finance, which is charged with the financial sector policy framework.
At its most fundamental level, the agency's role is to ensure and promote compliance with the disclosure provisions found in the various financial institutions' statutes. Our mandate does not give us a role in matters of redress. Parliament, in establishing the financial consumer protection framework, clearly separated individual consumer redress from enforcement of the law. The ombuds services were a response to Parliament's desire that all financial institutions belong to a third party dispute resolution body, to provide redress for individual consumers based on fairness.
As the market conduct regulator, our ultimate objective is to encourage a fair and competitive marketplace by ensuring that consumers have the information to make informed decisions.
Pursuant to our mandate on consumer education, the FCAC educates consumers on their rights and responsibilities when they are dealing with financial institutions. We provide Canadians with accurate and objective information on products and financial services, on a timely basis, in order to help them better understand and select products that will help them better manage their personal finances.
Our publications and online tools give consumers information on various products and financial services such as credit cards, mortgages, bank accounts, credit records, and payday loans.
By filling in the information gaps that exist in the marketplace, the agency provides Canadians with the tools they need to help them navigate a complex financial marketplace.
Demand for our services is growing. Every year more and more Canadians come to us to obtain information or to register a complaint about a financial institution. Since 2001 the agency has received more than 140,000 phone calls, e-mails, and letters from Canadians. Last year, in the 2006-07 financial year, we distributed 750,000 publications to consumers across the country.
Our website has become one of Canada's best sources of objective, up-to-date information on financial products and services. In the previous financial year, our website received in excess of 1.4 million distinct visits.
Through our outreach program, the agency is working with a growing number of partners in order to increase our reach and awareness of the agency among consumers. In 2006-07 our partnerships with the Canada Revenue Agency and Human Resources and Social Development Canada helped us reach over 8 million consumers directly, through inserts in GST rebate, child tax benefit, old age security, and Canada Pension Plan cheques.
Last year Parliament voted the agency $3 million over two years as an initial investment in improving financial literacy among Canadians, and in particular youth. We are forming alliances across the country in an effort to leverage these funds as much as possible in terms of spurring interest in investment and improving the financial capability of Canadians.
Canadians are expected to take charge of their financial affairs in a rapidly changing financial marketplace to invest for their futures and their families' futures and to accumulate enough savings to support their retirement.
To this end, Canadians need tools, information, advice and training to manage their personal finances with confidence.
With our funding, we are working with the British Columbia Securities Commission on a joint project to develop a web-based curriculum for high school students. We are piloting a project with George Brown College and the Ontario Investor Education Fund in presenting convenient mini-courses for college students. We are working with other government departments and Statistics Canada to carry out a national baseline survey to determine the financial strengths and capabilities of Canadians that will provide substantial data for focusing more efforts in this field.
We are also working in collaboration with a non-profit organization called the Social and Enterprise Development Innovation (SEDI) as well as the Autorité des marchés financiers du Québec in view of holding a second conference on financial ability. This conference will bring together experts and stakeholders to share knowledge, and develop the necessary networks to advance this program.
Lastly, the Internet will serve as the main platform to set up a resource centre that all of our partners and all Canadians will be able to use and share.
In closing, I would like to thank you for this opportunity to appear before the committee. I look forward to answering any questions you have.
I will be very pleased to answer your questions.