By way of introductions, I have Mr. Sahir Khan. He's our assistant parliamentary budget officer for revenue and expenditure analysis. Dr. Mostafa Askari is our assistant parliamentary budget officer for economic and fiscal analysis. Chris Matier is our senior economist, and he's responsible for a lot of the work we're presenting today.
Good afternoon Mr. Chair, vice-chairs and members of the committee.
Thank you for inviting me and my colleagues to speak with you today.
Yesterday, in preparation for this meeting, PBO released two reports to parliamentarians and Canadians. In my introductory remarks I would like to highlight three key messages and possible issues for discussion.
First, PBO's updated projections show a significant improvement in the government's budgetary balance over the medium term, which is primarily attributable to policy actions to restrain operating expenses. These fiscal projections, which are based on our own independent economic assumptions, are broadly similar to the government's fiscal outlook presented in budget 2012.
Second, PBO's Economic and Fiscal Outlook highlights a key policy trade-off that we feel has been largely absent from fiscal policy discussions—namely that, while the benefit of spending restraint is increased fiscal room in the future, the expected cost is a weaker Canadian economy and a slower recovery.
My final message is that improvements are needed in the government's budget reporting to Parliament. Just as increased budget scrutiny was warranted during the fiscal stimulus phase of the economic action plan, so too is scrutiny required during the spending restraint phase, in order for Parliament to carry out its fiduciary responsibility to scrutinize the estimates and approve appropriations.
In my view, PBO's two reports provide some guidance on what this improved budget reporting to Parliament might entail. Specifically, our economic and fiscal outlook provides projections of Canada's potential GDP, the government's structural budget balance, and it illustrates the uncertainty around the outlook. In addition, we provide economic impact estimates of budget 2012 measures, and include quantitative estimates of the impacts of policy changes with far-reaching impacts, such as changes to the age of eligibility for elderly benefits. Comparable analysis was not provided in budget 2012.
Our second report, Budget and Expenditure Reporting to Parliament, highlights the management challenges associated with the strategic and operating review. This report advances a reporting framework for your consideration that would be unlikely to increase the administrative burden on departments, as collecting this information is already required as part of Treasury Board policies.
Recent economic indicators suggest that the global economic recovery is gaining some traction following setbacks in 2011. While recent growth in Canada has been stronger than anticipated in our November report, its pace remains modest.
Going forward, PBO expects that Canadian fiscal policy at the federal and provincial levels will act as a drag on the economy, pushing it further away from its potential level and delaying the recovery. Based on Finance Canada's estimates of expenditure and tax multipliers published in previous budgets, PBO estimates that real GDP will be roughly 1% lower and that employment will be reduced by just over 100,000 jobs in 2014 as a result of tighter fiscal policy.
PBO projects that real GDP growth will slow to 1.9% in 2012 and 1.6% in 2013, resulting in an increase in the unemployment rate to 7.9% in 2013. As the recovery eventually takes hold, real GDP growth is projected to rebound, averaging 2.8% over 2014 to 2016, while the unemployment rate is projected to decline gradually to 7.0% by 2016.
Relative to the average private sector forecasts, PBO projects slower economic growth and lower GDP inflation from 2012 to 2014. PBO judges that the balance of risks is tilted to the downside for the private sector forecasts for nominal GDP, which is the broadest measure of the government's tax base.
In addition to the downside risks identified in his report last November—namely, a more sluggish U.S. recovery, larger impacts of commodity price weakness and high levels of household indebtedness—PBO believes that fiscal policy will exert a larger drag on real GDP growth than private sector forecasters have projected.
PBO's current fiscal projection incorporates the planned departmental spending reductions contained in budget 2012, as well as the government's forecast of operating expenses subject to freeze that was initially announced in budget 2010. These changes represent significant reductions to PBO's projection of federal direct program expenses, amounting to approximately $60 billion over 2011-12 to 2016-17.
PBO projects a significant improvement in the government's budgetary balance over the medium term. PBO's fiscal balance projections are in line with the government's forecasts. PBO projects a budgetary deficit of $24.2 billion or 1.4% of GDP in 2011-12, which steadily improves over the projection horizon, resulting in a budgetary surplus of $10.8 billion or 0.5% of GDP in 2016-17.
PBO estimates that the likelihood of realizing budgetary balance or better is roughly 35% in 2014-15, 55% in 2015-16, and 70% in 2016-17, respectively.
The projected improvement in the budgetary balance over the medium term is largely the result of policy actions to restrain spending on programs. As a result, PBO projects that the government's structural deficit will be eliminated by 2013-14, ultimately giving rise to a structural surplus of $14.3 billion in 2016-17.
With respect to fiscal sustainability, while medium-term projections are an essential element of fiscal planning, it is also necessary to take a longer-term perspective to assess whether a government's fiscal structure is sustainable, given economic and demographic trends. Fiscal sustainability requires that government debt cannot ultimately grow faster than the economy.
In January 2012 PBO estimated that the federal fiscal structure was sustainable over the long term, owing to the government's decision to reduce growth in the Canada health transfer after 2016-17. Furthermore, our analysis at that time assumed old age security eligibility at age 65 and did not incorporate the government's forecast of its operating expenses.
The proposed increase in the age of eligibility for benefits for the elderly would, according to budget 2012, ensure that the program is on a sustainable path. However, no analysis of the sustainability of the program was provided, nor were the fiscal impacts of this policy change presented. In our report, PBO projects that the proposed change would reduce spending on benefits for the elderly by roughly 12%—$12 billion—in 2029-30. Benefits for the elderly would rise from 2.2% of GDP today to a peak of 2.7% of GDP in 2033-34, which is 0.3 percentage points of GDP lower than it would be without this policy change.
With respect to fiscal transparency, debate, and scrutiny, this is the last issue I will discuss, which is the need for the government to improve its budget reporting to Parliament.
Parliamentarians need more transparency—not necessarily more disclosure, but more transparency—from the government. This issue is particularly important in the current context, given the sums of money involved.
Taken together, the savings measures enacted since budget 2010 represent almost $60 billion over the next five years, according to the government's estimates. These actions are larger than the federal fiscal stimulus implemented in budgets 2009 and 2010. At that time, stimulus measures were accompanied by commendable levels of transparency and analysis, which included quarterly reporting on implementation and the economic impact of the budget measures. This level of transparency and analysis is absent in budget 2012. If we can deliver transparency to parliamentarians and Canadians on fiscal stimulus, we can do the same on fiscal consolidation.
Parliamentarians also need more analysis from the government. The current context features both short-run and long-run challenges. In the near term, fiscal consolidation is being undertaken in the context of an economy operating below its potential. Over the long-term, significant policy decisions are being undertaken on the Canada health transfer and the old age security program, without sufficient analysis to support these policy actions. Without such analysis, there is a potential for a misleading view that parliamentarians face no policy trade-offs.
Parliamentary debate on fiscal policy could be enhanced if the government provided its estimates and analysis of the following: the performance of the Canadian economy relative to its potential; the government's structural balance over the medium term; the economic impacts of spending restraint; and fiscal sustainability.
Finally, parliamentarians need more detailed spending plans from the government. Scrutiny on government spending would be enhanced if parliamentarians had details, at the level of departments and agencies, for baseline spending levels, public service job numbers, and service-level information on program activities that will be restrained or eliminated.
Parliamentarians need to assess fiscal and service-level risk before they vote on appropriations for budget 2012 measures. Recent government announcements suggest that this reporting may be delayed until 2013. In my opinion, this should not be acceptable.
To sum up, PBO expects the government's fiscal position to improve over the medium term, due primarily to spending restraint. This fiscal improvement needs to be weighed against the cost of a weaker Canadian economy that is currently operating below its productive capacity. Finally, informed parliamentary debate on important fiscal policy issues requires more information than the government is currently providing.
Thank you again for inviting us here today. We would be happy to take your questions.
I would like to welcome the guests.
I just have a brief comment about the job issue, and then I actually want to focus in on some comments around demographics.
I think it's absolutely critical that we remember that between 1998 and 2011 our federal public service grew by one-third, so we've gone from just under 300,000 to just under 400,000. Certainly that's much faster than GDP growth, and that's much faster than the population growth.
I think if one asks the average Canadian.... Yes, there are absolutely critical services that the government provides, but also, I was with the red tape reduction commission, and they were saying there is an awful lot of unnecessary red tape bureaucracy. So first of all I think we need to keep the job issue in perspective. It's always very difficult for anyone affected by job cuts, but I think we have to look at the federal public service and what are the key roles and responsibilities and really look again at that job picture over the bigger picture. I just want to make those comments, because 300,000 to 400,000 between 1998 and 2011 is very significant, and what additional services are Canadians actually getting?
The demographic challenges.... I struggle with this one. I was involved in health care for many years prior to being elected a member of Parliament. I can remember for years and years we sat around and navel-gazed about the impact of the demographic challenge on our health care and our health care facilities. I was in many meetings, over time. I think we pontificated a lot about what it was going to mean.
Before the committee last year you spoke at length about the demographic and long-term fiscal challenges facing Canada. I'll just quote what you told us in 2011:
||...Canada's major fiscal challenge is long term, not short term.
||Canada's serious fiscal challenge is underscored by aging demographics and weak productivity growth. Our population is getting older. In 1971 there were 7.8 people at working age for every person over 65, which fell to 5.1 in 2008. And it is projected to be 3.8 in 2019 and 2.5 in 2033. Growth in labour supply will fall dramatically due to slower population growth and the retirement of the baby boom generation.
Those were your comments.
And now I look at what you're saying today. Specifically, you indicated that OAS changes are not necessary. You said to the media, when you were talking about the need to make OAS more sustainable,
||...there’s no reason to change from a fiscal sustainability perspective....There may be other reasons to change retirement ages that have to do with broader policy discussions, but that goes beyond fiscal sustainability.
Everyone talks about the challenges. Obviously the government does not want to do things they don't have to do in this area. As soon as someone takes a measure it's really, “Oh my goodness, someone is dealing with this issue”. So as an economist, are you honestly saying that you know the labour supply will fall dramatically due to the slower population...? Will there be no cost pressures whatsoever for this program?
When we're talking about the future, I don't think anybody knows what the accuracy will be. We'll only know when we get there. I would love to know who's going to win the hockey game tonight, as an example, right now so I could put money on the game, but we don't know.
These are all predictions. I think what we do provide in our report is what we call fan charts, so we have 16 years of history with the private sector and we've been using these private sector forecasts for that period of time, in fact, 16 to 17 years. What is our track record in terms of projecting nominal GDP one to five years out? What is our track record of hitting a budgetary balance one to five years out?
You could see we provide these confidence intervals and they're quite wide. Again, you folks have to make the decisions about is this the right plan. When it comes down to our forecasts, and the difference between, say, the PBO forecast, which is independent--it's our view--in our legislation you've asked us to provide an independent view, and it's our independent view.... How do we compare it to an average?
I think what's presented in the Department of Finance document, again, is an average of private sector forecasts. There are some below and there are some obviously higher. There's an arithmetic average. So there's probably some in our context.
I think Minister Flaherty and the Department of Finance officials quite rightly recognized that the number looked optimistic to them, so they put in some prudence. That prudence they put in on the forecast analogy represents something like $20 billion on the size of the economy, roughly about $1.7 trillion. We think it's probably an extra $20 billion, effectively, to give you a magnitude of that sense in terms of prudence.
I don't know that they're far off, and we don't really know with respect to the IMF and the OECD, and to be quite frank even the Bank of Canada, what they're calculated in terms of a fiscal drag factor for the budget. Again, the government didn't highlight that estimate in budget 2012. In some private sector forecasts, we're just getting this information now as to what they think the fiscal drag will be. I think most economists would agree that when you take that money out of the economy there will be some drag, just as they were saying quite rightly in times of stimulus that we needed the stimulus if the economy's operating below potential and it would have an impact on the economy that was positive.
Thank you very much, Mr. Chair.
Thank you for your presentation. I'm a visitor to the finance committee, so I haven't had the opportunity to hear any of your previous presentations, but thank you very much.
I know you're all economists. I think it was President Roosevelt who said he'd like to find a one-armed economist, because economists always say, well, on one hand, and on the other hand. So there's always a great dispute. Economics can be a science and it can be a social study. I guess it's because we have normative, then we have positive.... People come at these things from different perspectives, do they not?
I listened to the presentation and heard what you've had to say today, and yet we have economists from all across this country.... Patricia Croft is saying, regarding budget 2012, “...I think Canada is in a fabulous position.”
Avery Shenfeld, from CIBC, said that budget 2012:
||...makes sense in a world economy that is still not what we would like it to be. [...] Relative to what anybody else is doing, we still come out with flying colours.
Craig Alexander, from TD Economics, talks about budget 2012 being
||...a prudent budget...the government provided support to the economy when it needed it. They boosted spending. They increased stimulus and now that we're on the other side of the valley, it's time to rebalance.
Doug Porter.... And it goes on. There's a whole list of economists here who have quite a different take on some of the things you've presented today.
One of the things I would like to point out, just being a visitor to this committee, is that the government has created 700,000 net new jobs since the beginning of the recession. So we are coming out on the other side. Every one of those jobs in the private sector is a new taxpayer who is contributing to the economy. I always look at government jobs as ones that are being paid on recycled dollars, so when we have real jobs taking place in the real economy, and the private sector is starting to provide that opportunity, we are on a positive trajectory.
I'm not an economist, but at least I look at that and say I think there are some very positive things happening here.
Where I really want to focus my question, though, if I may, is on issues where you're talking about cuts in spending and cuts in transfers. You said that's going to have a really negative impact on health care across Canada. I wonder if you could provide to the committee some of the costs the provinces are projecting as increases in their spending.
I come from the province of Ontario; I represent an Ontario riding. I know that Mr. McGuinty, in his most recent budget, said that increases for the province of Ontario are going to be kept to an average of 2.1% growth annually. Yet we've been transferring 6% year over year into the province of Ontario for health transfers. I don't get how this jibes. I just don't get how this matches with what you're saying, that health care is going to be impacted so negatively.
I wonder if you could speak to that and if you could provide to the committee those numbers as far as increases from the provinces are concerned. Are they looking at spending more than that 6%?
I want to pick up on a couple of things that were said. First of all, I'm simply a soccer mom. I'm a parliamentarian, but I'm a soccer mom, so when I do my budget at home I take into consideration the revenues I have, the expenses I have, any investments I may have, and to get to the bottom line I have to include everything.
The frustration I have, Mr. Page, is that whenever I ask questions that are sensitive to you, because you really haven't included the good stuff, you try to stay away from it and you don't answer the question. So when Ms. Nash says we expect transparency, absolutely, that's why we created your position. We expect transparency. We expect honesty and fairness. Mr. Matier actually did say that you did take into consideration that chapter on innovation, on research, that kind of stuff, so I'd like him to point out what page that's on. He said EI as well. I see where EI is. So all I'm asking, and I hope it doesn't take you four minutes again, is to point out the page.
While you're looking for that, sir, I'd like to also ask you to clarify a couple of other things, because I only have five minutes and really four of those minutes were wasted dancing around the question last time.
The province-to-province health care spending, I thought that was an excellent question by Ms. Brown, and the ten-year projections I thought was an interesting comment. I would love to see that. If you could provide that to us, the ten-year projections of what the health care spending was, province to province, territory to territory, that would be very helpful.
I also want to comment that although I remarked about the one chapter on entrepreneurship and that kind of thing that seems to be absent, and Mr. Matier is going to get me the page in your report where it's addressed, I really don't see any investment information either, and how that assists in keeping Canadians in a situation where we're at an advantage. So things like, for example, the hiring credit for small business, the community infrastructure improvement fund in the budget, the Canadian Coast Guard--they have $5.2 billion that will generate jobs as well--all of those things help to generate jobs.
Again, going back to your contention that there are going to be 100,000 jobs lost, they're hypothetical. I know that now, after listening to you--that is what I asked you in the very first moment, and which you danced around for four minutes--but I do want to know, where are those projections for all these created jobs? It seems awfully odd that you would leave those out. So I'm giving you a chance here to explain where they are, and if you did leave them out who asked you to do that, because that's not transparent. That is not fair. That is not what a soccer mom would do in calculating a budget or making comments about a budget.
Frankly, there have been other economists who have said, Mr. Page, that you're very pessimistic when you do these things and there are things that are missing. So if you criticize the government on what's missing, it's because we've asked you to do a job, and we appreciate that. But you can't come here and do exactly the same thing and then try to dance around the question. So I'm giving you an opportunity to explain.
Thank you for the question.
When we produced this report for parliamentarians a year ago, public estimates were not easily readily available for the F-35A variant, nor were long-term sustainment costs, so at that time we felt this would be.... Well, we were asked to produce this estimate under the Parliament of Canada Act.
Subsequently, reports have been published by the U.S. Improving Government Accountability Act, which is the audit and investigative arm of Congress, as well as by the U.S. Department of Defense CAPE unit--capability assessment and program evaluation--which has produced two estimates on the sustainment costs, and the Government Accountability Office has now produced average unit procurement costs.
Given that these are in the public domain, and they're done by respected institutions, our sense is that parliamentarians could be well served to have them as reference points for estimates that are now produced by the Department of National Defence alongside their own guidelines, which provide definitions for such things as life-cycle costs and operating and support.
We think it could be very useful for parliamentarians to have these reference points, because they are in the public domain. They are being updated on a periodic basis, and they remain estimates, but they're well explained as such.
We can provide the reports from the GAO and that could help you in your review.