If I may, I will introduce our panel. Mr. Sahir Khan is our assistant parliamentary budget officer for expenditure and revenue analysis. Mostafa Askari is our assistant parliamentary budget officer for economic and fiscal analysis, and Mr. Chris Matier is our senior director for economic and fiscal analysis.
Members, if I may, today I'd like to spend some time again talking about the quarterly report but also focus my remarks on the economy and give you an update on the economic situation as well, relative to the budget.
Good afternoon, Mr. Chair, vice-chairs, and members of the Standing Committee on Finance. Thank you for the invitation to speak to you today regarding the government's budget 2009 progress reports to Parliament.
As you may recall, in late February my office released a discussion paper that suggested information to be included in these reports. In that note, we stated that, in the PBO's view, the central goal of these reports should be to provide Parliament with accurate, timely and easily understood information on three key issues: first, the implementation and progress of budget measures; second, recent economic and fiscal developments and prospects; and, third, assessing budget results relative to its guiding principles, that is of being timely, targeted and temporary.
On March 10, 2009, the government presented its first progress report. My remarks today update our previous work by highlighting what my office views as some successes from this report, some areas for potentially improved reporting to Parliament in future reports, and a brief update on the economic and fiscal context.
The key messages I want to convey to you today are the following.
The government's first report represents an important first step towards improving interim reporting to Parliament and will ultimately strengthen Parliament's budgetary oversight role. As a result, Parliament may wish to consider making permanent some type of progress reporting requirement to ensure this increased transparency for future budgets.
Second, the government's second report, in June, should address key information gaps that are highlighted in our updated monitoring and oversight framework. This includes identifying the uses of the $3 billion Treasury Board vote 35, including output and outcome indicators for all budget measures as well as key implementation risks, and finally updating the government's view on changes to the economic and fiscal outlook.
This leads me to my third key message. Recent economic data and the PBO's updated survey of private sector forecasters suggest a further significant deterioration in the outlook for the Canadian economy relative to budget 2009 fiscal planning assumptions.
As noted in our previous report, Parliament’s ability to provide effective oversight of the government’s economic action plan rests on timely, accurate and relevant information and analysis. To this end, my staff drafted an oversight and monitoring framework for the government’s budgetary measures, based on practices identified from other jurisdictions, such as, the Government of New Zealand’s regular, in-year public updates on key risks.
We are aware of the need to minimize any additional reporting burden on departments, so we suggested that the government use indicators primarily drawn from its own internal processes and external publications. This includes key indicators such as the objective risk assessment performed by the government as part of every Treasury Board submission, which is outlined on the Treasury Board Secretariat’s website.
The initial monitoring and oversight template has now been updated with the additional data released by the government in its first quarterly report. A separate briefing note has been posted to our website that provides a more detailed assessment of results to date. I want to emphasize to you today the benefits of this type of in-year reporting and commend the government in its efforts to build a new leading practice in public reporting.
We anticipate that the government will have more time over the next quarter to compile the additional indicators for June’s progress report. Depending on which information gaps remain after the second report, my staff may begin a more detailed assessment of potential higher risk initiatives, based on comparables derived from other jurisdictions and international best practices.
Given the continuously evolving economic situation, it is important that Parliament have access to up-to-date information on the economic and fiscal outlooks. The government’s first progress report provided little information on how the Canadian economic outlook has changed since the budget was presented in January or on what these economic changes might mean for the fiscal balance. Therefore, my office has done the following three things. First, for the first time, we are reporting the PBO’s near-term outlook for key economic output and labour market variables. Second, we have also updated our PBO survey of forecasters. And finally, we have used the Department of Finance fiscal sensitivities to give a rough sense of the current risk to budget 2009’s fiscal projections.
The government’s progress report states that recent economic developments are broadly in line with budget projections. In the PBO’s view, however, since budget 2009 was tabled high-frequency indicators for both the Canadian and global economies have revealed further weakness.
The IMF now expects the global economy to contract this year, representing the first decline in the post-war period. Members, if you're looking at the slide presentation, slide 4 basically shows the outlook for the International Monetary Fund.
This global weakness has had two main impacts on Canada. First, it has reduced demand for Canada’s exports. Second, it has sharply reduced commodity prices, and in turn the purchasing power of Canadian households and businesses.
Recent Canadian data show a decline in real output that accelerated in December, with the Canadian economy recording a 3.4% drop on an annualized basis in the fourth quarter of 2008 due largely to weak household consumption, business investment, and exports. It also revealed a continued slowdown in housing. And more than 200,000 jobs were lost in January and February 2009.
On slide 7, members, in the presentation, we have additional information on recent indicators.
The PBO currently expects real, inflation-adjusted gross domestic product to drop by about 8.5% in the first quarter of 2009 and by 3.5% in the second quarter. Again, we have some slides. Slide 8 actually provides the figures for our real GDP and the nominal GDP.
Because of the weakness in overall prices, the situation for nominal GDP is actually worse, with declines of roughly 15% and 4% respectively in the first and second quarters. Associated with this drop in output, the PBO expects that roughly 380,000 jobs will be lost over the first half of this year.
Turning to the economic outlook for 2009 and 2010, regrettably, I am once again reporting that private sector economic forecasts have been revised downward. These results, which now fully incorporate the forecasters’ expected impacts of the government's economic action plan, suggest that the current Canadian recession will be sharper than assumed in budget 2009, with real output expected to fall further below its trend potential than in either the 1980s or the 1990s recessions. Slide 13 provides a historical perspective.
Nominal GDP, the broadest measure of the government’s tax base, is expected to fall by about 4.5% this year, with roughly equivalent contributions expected from falling prices and from falling volumes. For the next two years, nominal GDP is now expected to be significantly lower than forecast in budget 2009, this despite the government's prudent decision to lower its growth assumption below its January survey average. Again, I refer you to slide 14.
With a weaker economy comes a weaker labour market. The PBO survey suggests a drop in employment of 2% in 2009, or roughly 350,000 jobs on an annual basis, with only a slight turnaround of 0.3% in 2010. Similarly, the unemployment rate is expected to rise further in the next two years. The survey average is for a peak of just over 9% in 2010, which is below that experienced during the past recession.
We have not had time to fully model the implied fiscal impacts of our new economic survey. Instead, we have applied the Department of Finance’s fiscal sensitivities to the new outlook.
This analysis suggests additional downside risks to the government's budget balance forecasts in the budget of 2009, mainly because of lower tax revenues. The implied budget deficits are $38 billion for 2009-10 and $35 billion for 2010-11, compared with the budget projections of $34 billion in 2009-10 and $30 billion for 2010-11.
You may recall that the stimulus goals in the 2009 budget are to increase GDP by 1.9% and to create and maintain 190,000 jobs by the end of 2010. With that in mind, please let me now discuss three outstanding issues.
The first issue is whether the current stimulus will be effective. Thus far, the government and Parliament have moved in a timely fashion to approve budget measures. The government's first progress report states that approvals for 90% of the measures are expected to be in place for April 1, 2009. It will take additional time to get money out the door and fully implement these programs, many of which require cooperation from key partners, including other levels of government. Therefore, at this point, it is simply not possible to disentangle the incremental stimulus effects of the government’s economic action plan. Indeed, no reasonable assessment can be made until these measures have been implemented and more time has passed.
The second issue is the potential need for additional stimulus in light of the fact that the average downward forecast revision in our survey during the past two months exceeds the estimated positive impacts of the government’s stimulus package. This certainly suggests that even if the current stimulus measures have their full impact, Canada faces a larger economic challenge than was envisioned when the budget was prepared, but let me be clear: this statement on its own does not necessarily imply that more stimulus is required. As a small, open economy, Canada’s recovery depends not only on the actions that policy-makers are taking to provide accommodative fiscal and monetary policies, but also, and crucially, on global economic and fiscal developments. I refer you to slides 21 and 22, which provide a historical perspective on the projected downturn relative to previous recessions in the 1990s and 1980s.
The final issue is whether the current stimulus measures are sustainable over the long term. In this regard the government’s stated goal in the 2009 budget is to enact mainly temporary measures that will avoid long-term structural deficits. In our own previous work, the PBO has provided its rough estimates of the government’s structural budget balance, which is what the government’s budget balance would be if the economy were functioning at its potential. The government’s own estimate of its structural budget balance is needed to meaningfully assess progress towards this goal.
Let me conclude by saying that these progress reports represent a historic opportunity to strengthen budget transparency regarding the implementation, oversight, and effectiveness of government budgets. Therefore, my office encourages Parliament to consider making permanent some type of progress reporting requirement to ensure this increased level of transparency remains in future budgets.
As always, we hope that parliamentarians find this work relevant and timely, and we look forward to any suggestions you may have to help us serve you better.
Thank you once again for the opportunity to speak to you today. I would be pleased to take your questions.
Thank you, Mr. Page and your colleagues, for appearing here today.
If Mr. McCallum can talk about his party, I might remind him that it was actually the Conservative Party that established this position in budget 2006 because we saw a need for it, and we maintain that, despite what you might hear from the suggestions otherwise. This is very important; it's critical, and even more so in these economic times we're facing. And the more information members of Parliament can get, the better job they will be able to do in representing their constituents. So we applaud your work.
There was some discussion here--and you referred to it as well in answering Mr. McCallum's question--about actually tracking how the money is going out. We have a website that will explain where and how the money flows, so it will be.... We have a website on what's going on and how our goals are being achieved in Afghanistan. I pushed hard for that. The minister thought it was a great idea, and we now have a website to follow that and follow where the money is going. So we are being accountable, and we think that's very important.
Just after your last appearance we were wondering about making sure that you got the information you requested. I put in a request to the finance department just to make sure. I had suggested that I thought you had received all the information you had requested, and at that time they said there were no further outstanding requests. I understand there is one now that hasn't been fulfilled, but there is still the question mark about cabinet confidentiality. So just for your information, whatever isn't under cabinet confidentiality will be coming.
In your March 11 report you made some comments using GDI numbers rather than GDP numbers. Could I get you to explain why you used those numbers in comparing Canada and the U.S.? You said that in the fourth quarter real GDP, the level a year ago provides a better reflection of recent trend growth, and you suggested similar performances in the two economies. As a little bit of editorializing, if I can make a comment, you said that the GDI numbers were plunging--I'm not sure if an economist needs to use that harsh language, but that's your decision--15.3%, ten times more than in the U.S.
That is a pretty strong suggestion, given the fact that our GDP numbers don't reflect that. May I ask why you used GDI numbers in that report, and in this one you seem to go back to the GDP numbers? Can you explain the difference as it's reflected in the strength of our economy? We're projecting to come out of this 30% debt-to-GDP ratio, and the Americans, arguably, aren't far short of 100%. That's a huge difference. Yet your GDI numbers are showing something different. Can you explain that to me?
Sure. I'll address your earlier points about the websites and the information request and then I'll talk about the economic question.
First, I think the government should be applauded for the kind of transparency that we saw in the first trimester report, and particularly on the aspect of the report that went through and showed how the authorities are being updated so the money could flow. I don't think the government was really in a position to go beyond that because authorities were just being put in place, but there's some complimentary language in our reports today about that level of transparency and that level of detail.
For us, from the point of view of setting the standard, if we can maintain that standard as we move forward and we're showing the money flowing on a program-by-program level basis at that level of detail--the point Mr. McCallum raised--I think that would actually go a long way to satisfying everybody. Probably it would really be a best practice internationally in the world today. So what we've highlighted today are some potential information gaps. I think they're normal. They're information gaps not in the sense that we expect them to be in a first report but in terms of the second report. We didn't really see the indicators that you'll be using to assess either the flow of the money or the impact assessment of those programs once in place, what they're intended to achieve, but I'm sure that hopefully they will be in the next report. So we're just putting a marker down.
In terms of information requested of the Department of Finance, sir, thank you again for your support. We still have not received.... We have made repeated requests. When we provide these economic provisions and do our analysis, we make them available to you. And most of us here and certainly on this side of the table all spent many years at the Department of Finance. In fact, with me I have two of the senior directors of forecasting at the Department of Finance, Mostafa Askari and Chris Matier. But we still have not got back the information we requested. We're familiar with what is cabinet confidence and what is not cabinet confidence. The information we want has actually been published in the past and was actually made available to private sector forecasters so they can do their work. We just want that same ability to have that same information. I made that point to Mr. Rob Wright yesterday, the Deputy Minister of Finance.
Sir, I want to respond to the economic point that you raised, why did we look at GDI and GDP, and are we moving away from it today in today's report. But first, I think more importantly, there's the issue of why look at different measures. I think what we tried to do in the March 11 report is provide a broader perspective on what was happening in the fourth quarter from different perspectives. So we provided the numbers on GDP. We showed the 3.5% decline roughly on a quarter-to-quarter basis. We showed the decline in nominal GDP, which is an over-double-digit decline on a quarter-to-quarter basis in the fourth quarter. We showed the decline in gross domestic income, which really is a measure of income that takes an account of commodity price changes really through the terms of trade, which is a measure StatsCan releases, and it's released by the statistical agencies in the United States. So we gave you three indicators and we provided them all. We wanted to give a more comprehensive view. We compared that both when you look at the quarter and when you annualize and when you look at the trends over the past year. So it's very backward-looking. There is no forecast involved in that kind of perspective.
Early in 2008, when the Canadian economy's output numbers were sagging a little bit, a lot of economists were looking at gross domestic income because they were saying that because of the high dollar and commodity prices staying high.... We were flagging that, saying this is a positive thing: it was supporting tax bases; it was supporting purchasing power. But what happened, and I think most Canadians have witnessed it, was the plunge in commodity prices, the plunge in oil prices and other commodities as well. That is reflected very much and is really picked up in that gross domestic income figure. But we wanted people to see what that looks like both from a quarter-to-quarter perspective and when you looked over the past year from a year-over-year perspective. So we made those numbers available to provide a broader perspective.
So in regard to purchasing power, because Canadians benefit so much by commodity prices, we wanted to give that broader perspective. We provide in our information, our presentation today, both--
Mr. Chairman, first, as always, it's a pleasure for me to welcome Mr. Page. It is a commonplace to say “your humble servant”, but not only is Mr. Page an extraordinary servant of this House, he also always presents matters in a disarmingly simple manner, and that is of enormous help to us in navigating this maze of economic difficulties.
I want to say how happy I was a little earlier to hear my colleague Mr. McCallum clarify—I'm going to be charitable—the successive remarks of his colleagues and say that they were not always very clear with respect to the Liberal Party's intentions concerning Mr. Page's office. So I'm delighted to know their new intentions. I find it a little more difficult to decode the government's message because Mr. McCallum said that he was not sure that the three opposition parties together could impose the necessary $2.7 million so the office can continue to operate. But I am certain of one thing: the four parties together can. So it remains to be determined whether our feeling that what was supposed to be the parliamentary librarian's spontaneous reaction, to try to strangle the Office of the Parliamentary Budget Officer, was in fact something that was done with a smile and the active or passive participation of the government party. Whatever the case may be, that doesn't prevent them from supporting us in our request.
Mr. Chairman, I'm going to explain to you why the situation is so difficult for everyone. Technically, there is undoubtedly no mistake, but today our agenda states that our first witness is the Library of Parliament. Formally, that is correct, in accordance with the structures of the Parliament of Canada: the first witness is the Library of Parliament, and it states the names of the persons here present today.
Next to you are two extraordinary associates, who are always there for you and for whom I have nothing but praise. But they are also employees of the Library of Parliament. So let's consider the absurdity of the situation. I have in my hand information prepared for the House of Commons Standing Committee on Finance by the Parliamentary Information and Research Service. What do we find in it? We find a series of suggested questions; these are the terms they use. So the Library of Parliament, through its employees, all equally competent, suggest to parliamentary committee members questions to ask their colleagues. I emphasize that they are colleagues, that they have the same employer. Clearly something is not right here.
I refer to the remarks by Mr. Wallace and Mr. Menzies, who recalled, a little earlier and very rightly so, that it is the Conservatives who have not only the responsibility, but also the merit of having created the position of parliamentary budget officer. Today we heard in the House of Commons that, when the Prime Minister was leader of the opposition, he said that obeying the will of Parliament was a moral issue. He was reminded of that because, two weeks ago, Parliament adopted a number of requests concerning employment insurance with respect to which the Prime Minister—that same individual who was leader of the opposition at the time—refuses to obey the will of Parliament. So the question is whether it is a matter of successive or actual morality. In the coming weeks, time will tell. I want to recall that the Library's Standing Joint Committee will be meeting tomorrow. That's a happy coincidence. We'll be there. I hope the official opposition will act on the good intentions announced a little earlier by our friend Mr. McCallum.
I wanted to ask Mr. Page a technical question. I wanted to know whether the new figures on the deficit, the forecasts that have just been received, and that are indeed quite alarming, include increased employment insurance costs. That isn't clear in my mind, but my impression is that they are not.