Good morning, Mr. Chair, vice-chairs, and members of the committee. Thank you for inviting me and my colleagues to speak to you today regarding Canada's economic and fiscal situation and our monitoring of the government's third-quarter report on the implementation of the 2009 budget.
I have three key messages.
The first is that the Canadian economy appears to be emerging from a difficult recession. The average private sector outlook is stabilizing, although uncertainty remains high as the fallout from the global financial crisis persists. Based on the latest information, the PBO is indicating that the emerging recovery is fragile and the short-term economic risks continue to be on the downside.
The second point is that the world recession has thrown Canada further off its fiscal track. While Canadian fiscal numbers are significantly better than those of many other countries, even under the most optimistic private sector forecasts the federal fiscal situation is unlikely to return to balance over the medium term. A fiscal plan with targets and/or rules could help guide an exit strategy once the economic recovery has been put on a sustainable path.
The third point is that with the high levels of uncertainty and the loss of fiscal room, the policy challenges and trade-offs associated with both cyclical and structural issues become more difficult. This environment puts a premium on the need for transparent quarterly reporting on economic monitoring and budget implementation.
In this regard, the government may wish to consider the merits of including information on activities, outlays, and/or expenses to date, in addition to commitments, in the next quarterly budget implementation report. The government may also wish to consider providing analysis to parliamentarians on the effectiveness of stimulus spending to date on supporting Canadian output and jobs.
Let me now turn to the economic and fiscal situation and outlook. In July, at the request of the House finance committee, I released a comprehensive assessment of the economic and fiscal situation and outlook. At the time, I reported that private sector forecasters, on average, expected to see a technical recovery in the second half of this year, followed by modest economic growth in 2010 and more robust growth over the medium term.
I also reported that, on the basis of this economic projection, the government would experience a cumulative budget deficit of about $156 billion over the current and the next four fiscal years. In September and early October, my office, the PBO, updated its July projections, and I would like to highlight the key conclusions of our update.
The preponderance of indicators suggests that the Canadian economy has begun to stabilize in the third quarter following three quarters of negative growth. These indicators include consumer and business confidence, employment, hours worked, housing activity, and retail sales. While the Canadian economy has weathered the global recession better than most economies, Canadians have been hit hard by the recent downturn.
PBO estimates of the output gap, the level of real output compared to its potential, indicate that the depth of the weakness in the Canadian economy is more severe than it was during the recession in the 1990s and is similar to the recession experience in the early 1980s.
The unemployment rate stands at 8.4% in September, compared to 6.2% a year earlier. Including involuntary part-timers and discouraged workers, the unemployment rate would be about three percentage points higher. The average duration of unemployment is increasing at a significant rate. Canada has lost 395,000 full-time jobs since October 2008.
Although a general consensus has emerged that a recovery in the global economy is under way, considerable uncertainty continues to surround the outlook.
While the Canadian private sector forecasts indicate a modest recovery in the second half of the year, international forecasters like the IMF and the OECD are less sanguine about the pace of economic recovery and continue to emphasize the downside risk to the economic outlook. Despite this uncertainty, the September 2009 PBO survey of private sector forecasters suggests little change in the Canadian economic outlook since July.
According to the PBO survey, based on the average private-sector outlook, real GDP is projected to fall 2.3% in 2009 and rise 2.3% in 2010. Nominal GDP, the broadest measure of the government's tax base, is projected to fall 4.6% in 2009 and rise 4% in 2010. The unemployment rate is projected to average 8.4% in 2009 and then rise to 8.9% in 2010.
The updated survey implies that the Canadian economy will not return to its potential until the end of 2013. This translates into a cumulative loss of over $200 billion or about $17,000 per Canadian household in unrealized output.
According to the PBO view, there are downside risks to both the short-term growth and labour market forecasts in the September private sector survey. These risks include the potential for a weaker U.S. recovery as well as the potential for negative impacts stemming from the recent strength of the Canadian dollar.
The PBO projects a cumulative budgetary deficit of $167.4 billion over the next five years. The budget deficit is projected to rise from $5.8 billion in 2008-09 to a peak of $54.2 billion this year, falling to $19 billion in 2013-14. Consequently, the federal debt is projected to rise to $631.2 billion in 2013-14, which corresponds to 33.8% of GDP.
The PBO has improved some of the tools that it uses in doing fiscal projections, including the construction of our own measure of potential output and the government's structural balance. Based on the new estimates of potential output, PBO calculations continue to suggest that the budget is not structurally balanced over the medium term.
The PBO estimates that the structural balance would deteriorate from an essentially balanced position in 2007-08 to an $18.9 billion structural deficit in 2013-14. That said, the structural deficits projected over the medium term are significantly smaller than those of the early 1980s and early 1990s. They are also small relative to the size of the economy.
However, a more thorough assessment of the sustainability of the current fiscal structure requires a longer-term perspective, in particular taking into account the fiscal challenges posed by population aging. The PBO has undertaken such analysis and will release a comprehensive assessment of the sustainability of the government's finances in the coming months.
As noted, the PBO continues to judge that there are significant risks to the economic outlook, and there's of course a wide range of possible outcomes. To help illustrate this point, we have simulated the fiscal implications of a range of private sector economic forecasts in our September survey.
In 2013-14, the projected budgetary balance ranges from a deficit of $7 billion to a deficit of about $34 billion. This suggests that even under the most optimistic private sector forecast the budgetary deficit is unlikely to be eliminated without policy actions.
Further, considerable uncertainty remains with regard to future effective tax rates and revenue basis. In effect, there is a risk that effective personal income tax rates will recover at a slower pace than the PBO assumption.
In addition, corporate income tax revenues are subject to a high degree of uncertainty as a result of corporations' ability to carry losses backward or forward. An upside risk to the fiscal outlook in the near term arises from the possibility of large amounts of lapsed infrastructure funds. For example, one in every three planned infrastructure dollars went unspent in the past two fiscal years for which data is available.
Based on these considerations, we continue to judge that the balance of risks to the fiscal outlook over the medium term is tilted to the downside.
The high levels of uncertainty and risk also underscore the importance of a fiscal plan with clear targets for budget balances and debt. In the same vein, quarterly reports that highlight activities, outlays or expenses related to budget implementation, in addition to commitments, will help us understand the nature and impact of budget stimulus measures on economic recovery.
In closing, I thank you for the opportunity to speak to you today. I will be happy to answer your questions.
Thank you, Kevin.
I feel that I can perhaps call you by your first name. We see you often enough that we're almost on a first-name basis now.
Thanks to your colleagues who've joined you here this morning.
I might suggest that you need to have a chat with whoever does your scheduling. I understand that from here you run right to a Senate committee hearing. You should space those out a little bit to give yourself a breather in between.
You absolutely do good work and we do appreciate it at this committee. We look at some of the critiques of what we're doing, and I think everyone understands that we're caught up in a global recession, and we're doing the best we can. I see your comments that we appear to be emerging from a difficult recession and the average private sector outlook is stabilizing, although uncertainty remains, and I guess that's the key: uncertainty.
When I talk to my constituents, they're not so hung up on the numbers as they are about the outcome. They ask if we're going to see an end to this recession and they ask if this government has a plan. I think what we see reflected in all of these reports and in your analysis of the report is that there is a fragile movement toward recovery.
Mark Carney, Governor of the Bank of Canada, in answer to a question the other day, said that:
||...definitions of recession and recovery based simply on GDP are a little unrepresentative. There are broader factors like industrial production, unemployment, etc.
|| I think in the fullness of this experience of the recession and the recoveries, and the amount of time it takes for economies to return to their previous path of potential growth, it is likely that Canada will return to its path of potential more quickly than the other crisis-affected economies, including the two European countries you mentioned. But that's something one sees over the fullness of time, and that's what ultimately will matter.
The key is “and that's what will ultimately matter”.
Do you agree with the governor's comments, Mr. Page?
Well, I prefer to provide our own independent view. You can see whether it lines up with the governor's comments.
But on your opening point, Mr. Menzies, in terms of the numbers, the outcome, and what it will feel like for many Canadians in different parts of the country, I would say, as I highlighted today in my speaking points, that when the economy is operating well below its potential.... We estimate that in the third quarter of 2009 we're about five percentage points below where we'd be if the economy was fully employed and if we had a sense that capital were fully employed. It's well below its trend rate.
When you compare that with where we were in the 1980s when we had a severe recession, which is when I started my public service career, there's a lot of pain out there in terms of loss of output. As you've noted, when you look at industrial production numbers, they're down, in double-digit ranges in real terms. If you look at unemployment in the goods sector or industry, it's down 8% relative to an average of 2%.
So if you are in those towns that are affected.... For instance, sir, I grew up in Thunder Bay, and I see some of my old friends who have lost their jobs in the forestry industry and are concerned about whether or not those are coming back. So how it feels depends sometimes on where you're at.
In terms of the fragility of the outlook and when we might get back to our potential, our own numbers suggest—and I think they're quite consistent with what the OECD and the IMF suggest—that it will be something more like the end of 2013 when the economy will be back at its trend level, which is a bit longer than what you alluded to regarding what Mr. Carney said to you just a few days earlier, sir.
When you look at the IMF's analysis of what happens to economies after financial crises and the debt bubbles we have and all the de-leveraging that takes on, you tend to see more of a U-shaped type of recovery. That's consistent as well with analysis done by professors at Harvard and at the University of Maryland as well, who have examined this over many different countries' experiences.
If you look at our output gap and the projections that are in our report today, the private sector is basically saying it will be more like a V-shaped recovery. Even with the economic recovery in 2013, in our report it actually looks more V-shaped than U-shaped. If you look at the output gap experience in the 1990s, it looks like a much more U-shaped experience.
It's in that context, sir, that we say the risks are more on the downside, that this could last a little bit longer, and that we could see growth much closer to trend growth rates in 2010, which is where some of the private sector forecasts are, at around two and a half per cent as opposed to well above trend, which I think is where the Bank of Canada is for 2010.
We'll have to wait and see, but that's certainly where the uncertainty and risk lie.
Thank you very much, Mr. Chair.
It is now my turn to say that I am delighted to welcome Mr. Page and his team to our committee meeting.
I do not want to spend too much time reiterating comments made by my Bloc and Liberal colleagues, but I must say that last spring, when the time came to determine our priorities, we felt that a boost was your priority. You could not discharge your duties pursuant to the mandate assigned to you by Parliament, in other words, to work in the public interest, if you did not have the resources you need.
So if an army travels on its stomach, your office travels on its wallet. If you couldn't have your employees there, you couldn't do your job, and the rest of it we could fight about afterwards.
I am outraged, truly, that the Parliamentary Librarian continues, despite the unanimous will of Parliament, to try to stifle your office. It is scandalous, contempt of Parliament, and we intend to tell him so on the first possible occasion.
I would like to start by referring to the famous Accountability Act, whose title is ill-chosen. It should have been referred to, in French, as the Loi sur l'imputabilité. Apparently, from now on, it is the deputy ministers who are accountable. There is some discussion as to whether or not infrastructure spending is being done by the book.
Last week, I was able to show that you had been handed a huge stack of unprocessed documents, without a synopsis or summary, nor the electronic means to access the documents. In concrete terms it is quite obvious, if we turn to this Accountability Act. The electronic version must exist, because the deputy minister has a legal obligation to create such systems. Am I wrong?
Thank you, Mr. Laforest.
You refer to future estimates. You refer to government revenue estimates and to the aging population, which could have a major impact on future government revenues.
You said that 395,000 jobs have been lost over the last two years. These were very well-paying jobs in the manufacturing sector. At this point, the majority of jobs created in Canada pay far less than those of the manufacturing sector, and they are often part-time positions. So, the tax rate and government revenues would certainly be less than they would be had the 395,000 well-paid jobs in the manufacturing sector been kept. Indeed, those people would be paying higher taxes.
Today, we are seeing—and economists are telling us so—that the jobs that are being created do not pay as well. It seems as though we would have to live with an increase in these types of jobs and a continued drop in well-paying manufacturing sector jobs.
Are you able to tell us whether government revenues over the next few years, based on personal income tax rates, will increase or whether, on the contrary, they will continue to drop? In my opinion, the more well-paid jobs lost, the less taxes collected, that is obvious. If you replace 395,000 jobs or one million well-paid jobs by one million jobs at a lower tax rate, it makes a huge difference to revenue.
I thank you for your question. Clearly, the recession has a major effect on the manufacturing sector in terms of production as well as job numbers.
There has been a lot of research done, not only in Canada but in other countries, on when you have these difficult recessions. I think it's fair to say that at least on a world basis this is the most difficult recession we've had since the Great Depression. It has had a hard impact on Canadians, unfortunately, and particularly in this recession on our manufacturing sector, where you see jobs down by almost 10%.
That has an impact when you have capacity utilization rates in the industrial sector that are less than 70%. You're not working anywhere near capacity for a period of time. That's one of the reasons why our output gap is so deep. It will take a number of years--until 2013--for it to come back. Because it will take time.
In terms of bringing back those jobs and the quality of jobs, that will be a struggle. Even in most projections of the economists, you will not see the unemployment rate come down to a structural level of 6% to 6.5% beyond the medium term. That is not necessarily very abnormal for recessionary experiences.
We are looking at premium rate increases under the employment insurance program. In our assumptions, as noted in our study, we assume that after the first two years there will be increases of 15¢ for each year, so we're really talking about a 60¢ increase out to 2014. That will amount to roughly $700 per job, which is significant. That is simply the way the legislation has been written right now, but it is something to be mindful of as well.
Sir, just to follow up on our tracking of the U.S. situation, Mostafa is absolutely right. Our private sector surveys implicitly have an outlook built in for the U.S., but in addition to that, there's a lot of information available in terms of projections going forward and risks. They have a 50 blue chip sector forecast, and it's very easy to monitor the range of forecasting and some of the uncertainty around that.
As for the stimulus package in the U.S. and their deficit situation, again, they're talking about a problem that is much more severe than ours. We're talking about a deficit in Canada today, sir, at the federal level, of about 3.6 percentage points of GDP. Again, this is smaller than we experienced in Canada in the early nineties and early eighties. We're talking about something three times larger in the United States. As a result, debt there will build up at a much faster rate. There is also a significant structural problem in the U.S.
They have a stimulus package of about $800 billion in the United States, which has an economy of roughly $15 trillion. There again, through their monitoring as well, we do track that. We looked at benchmarks for reporting. We could see how much money is going out the door there. Their last quarterly report stated that roughly $150 billion of that close to $800 billion has gone out the door so far. So a lot of that stimulus still hasn't really had an impact.
GDP in the United States grew at 3.5% in the third quarter, at an annual rate. This is probably higher than what a lot of private sector forecasts are assuming for Canada in our third quarter. We're probably looking at something that is more in the 1% range, even with those low basic price data that we've recently received.
The U.S. actually shrank at a slower pace that we did in the second quarter, so we're looking at all kinds of stimulus measures with whatever data is available in order to look at relative performance in the second and third quarters, and potentially the fourth quarter as well.
Thank you, Mr. McCallum.
I'm going to take the next round as the chair.
First of all, Mr. Page, I want to thank you for all your work for this committee, and especially, as we're doing our pre-budget consultations, your work on the fiscal situation as we move forward. It's a very sobering outlook in terms of projected deficits, but it is, I think, a very good background for us as committee members as we deliberate over the recommendations we have been given.
As you might suspect, we've been given very few recommendations on how to reduce spending, but quite a few in terms of increasing spending, so it will make our decisions much more difficult.
I do, though, want to address your point on the output gap. You make a statement that “the level of real output compared to its potential indicates that the depth of the weakness in the Canadian economy is more severe than [in] the recession of the 1990s and similar to the recession experienced in the early 1980s”.
Could you expand on that? My recollection in terms of the unemployment rate and interest rates is that the perception is that the recession experience of the 1980s was much harder on the Canadian economy and on Canadian individuals and families. So could you expand in terms of comparing those two recessionary periods? Also, if you wanted to give more background on the output gap, I'd appreciate that.
Sir, we think it's our role to provide the economic and fiscal context. How big is that output? How weak is output in Canada? What is the unemployment rate gap relative to some measure of full employment?
We're quite comfortable in terms of analyzing stimulus spending in terms of the stimulus we've seen go out the door at the Canadian level, at the 2% level, and IMF practices.... We looked at various principles--timing, temporary, and the targeted nature--and we think that for most part the package we produced for stimulus in Canada is consistent with those three principles.
In the context of an output gap, what is significant is 5% in the third quarter and, again, not closing until 2013. Would there be measures you want to be mindful of? In the context of the unemployment rate, right now it is at 8.4%, and the gap is closing very slowly. Even in 2013-14, it still will be upwards of 6.5% to 7%. Are there measures? What do they look like?
These issues have already been raised here today, such as what the potential impact could be. Increasing EI premium rates is an example. The total cost to employers and employees would be upwards of $700.
In the context of trying to stimulate, to grow the economy faster, and to close the gap faster, what are the appropriate policies? We're more in a position.... If you put questions to us and ask us if we can analyze them in the context of this output gap, we'd be more comfortable doing that than recommending specific measures.
As you know, in life—and politics are part of life—it is always a little risky to impute motives, especially when those motives may be disgraceful. We have always felt that your office greatly disturbed the Conservative government, which tends to control everything up to the very words uttered by ministers. We saw the long arm of the Prime Minister's Office as a source of the difficulties you experienced last spring.
When I saw John Baird's obvious contempt in handing you a metre-high pile of documents, saying that you had asked for the information and that you should manage, I understood that our worst fear was beginning to come true. So, on behalf of the NDP, I am asking you to stand firm. We will do everything in our power so that the will of Parliament, expressed both ways, be upheld. First of all, there is the Accountability Act, which indeed created the position you hold to ensure that all Canadians could have access to valuable information on the budget. A testament to that is the fact that your estimates have proven to be more accurate than those of the finance minister, who, as usual, tries to feed us a line.
Then, there is the other side to the will of Parliament, unanimously expressed by the Standing Joint Committee of the Senate and of the House of Commons, which determined that you were to have the right to oversee the budget. As an elective representative, I find it intolerable that someone who is unelected, like the Parliamentary Librarian, and who is obviously in cahoots with those who are responsible for everything that has been going on for the past six months, should thwart the legally expressed will of elected representatives. To my mind, this situation cannot last.
You have our full support, and I speak not only to those who are here with you to testify today, but I know there are several other individuals in your office who do painstaking work and who are constantly finding obstacles in their way. I want to commend you on your patience and on everything you have done to help us.