Good morning, Mr. Chairman, and thank you.
Good morning, committee members. Senior Deputy Governor Wilkins and I are happy to be back to discuss the bank's monetary policy report, which we published last week.
I extend particular greetings to the new members of the committee, which I think is almost everyone. I look forward to being with you twice a year to talk about the Canadian economy and our monetary policy.
Carolyn and I were last in this committee about 12 months ago. It has certainly been a tumultuous year for the Canadian and global economies. Let me start with a quick review.
As you know, the Canadian economy has been dealing with a massive shock to our terms of trade, which was brought about by a sharp drop in the price of oil and other commodities that began in late 2014.
Given that Canada is such an important producer of resources, particularly oil, this shock was a major setback. It set in motion a difficult adjustment process that has been very disruptive for many Canadians. Investment and output in resource industries have fallen precipitously, the decline in national income has curbed household spending, and the resource sector has seen significant job losses. These negatives have clearly outweighed the benefits of lower energy costs for households and businesses.
From a monetary policy perspective, the shock posed a two-sided threat to our economy last year. First, it was a clear downside risk to our ability to reach our inflation target. Second, by cutting into national income, it worsened the vulnerability posed by household imbalances, as seen in our elevated debt-to-income ratio. To address both threats and to help facilitate the necessary economic adjustments, we lowered our policy interest rate twice last year, bringing it to 0.5%.
While we recognized the possibility that this reduction could at the margin exacerbate the vulnerability posed by household imbalances, the more important effect of lowering the policy rate last year was to cushion the drop in income and employment caused by lower resource prices.
Another natural consequence of the shock to our terms of trade has been a decline in the Canadian dollar exchange rate. It's important to note that this is not unique to Canada. Indeed, many resource-reliant countries have seen similar depreciations in their currencies.
Both our policy moves and the lower currency have been helping to facilitate the economic adjustments that have been playing out over two tracks. While weakness has been concentrated in the resource sector, the non-resource economy continues to grow at a moderate place. Within that, non-resource exports are clearly gathering momentum.
By the time we reached the new year, there was a clear sense of anxiety among many financial market participants. The outlook for global growth was being downgraded again, and commodity prices were plumbing new lows. At the bank, we had new intelligence that Canadian energy companies would be cutting investment even more than previously thought. In this context, we said that we entered deliberations for our January interest rate decisions with a bias to easing policy further, but we decided to wait to see details of the government's fiscal plan.
Since January, we've seen a number of negative developments.
First, projected global economic growth has once again been taken down a notch for 2016 and 2017. This includes the U.S. economy, where the new profiles for investment and housing mean a mix of demand that is less favourable for Canadian exports.
Second, investment intentions in Canada's energy sector have been downgraded even further. True, oil prices have recovered significantly from their extreme lows, but Canadian companies have told us that even if prices remain around current levels, there will be significant further cuts beyond what we foresaw in January. By convention, we incorporate the average oil price from the few weeks before we make our forecast, letting us see through variability in markets. Because of all this, our oil price assumptions are only $2 to $3 per barrel higher today than they were in our January forecast.
Third, the Canadian dollar has also increased from its lows. Our assumption in our current projection is 76¢ U.S., which is 4¢ higher than we assumed in January. While there are many factors at play, including oil prices, most of this increase appears to be due to shifts in expectations about monetary policy in both the U.S. and Canada. The higher assumed level of the dollar in our projection contributes to a lower profile for non-resource exports, as does lower demand from the U.S. and elsewhere.
As the bank's governing council began its deliberations for this month's industry announcement, we saw that these three developments would have meant a lower projected growth profile for the Canadian economy than we had in January. Now, this may sound counterintuitive given the range of monthly economic indicators that started the year strongly; however, some of the strength represents a catch-up after a temporary weakness in some areas during the fourth quarter, and some of it reflects temporary factors that will unwind in the second quarter.
The other new factor we had to take into account was the federal budget. For the purposes of our MPR and interest rate announcement, we took a close look at the finance department's projections of the multiplier effect of the fiscal shock. Our analysis is that the department's projections are reasonable, and that they are within the range of estimates you would find in the economic literature, as well as in our own staff research. There is, of course, greater uncertainty as to how the budget measures will affect growth in the longer term, particularly since they will need to work their way through the household sector. In our report, we outlined the risk that households may be more inclined to save than historical experience would suggest.
Taking all of these changes on board, our projected growth profile is generally higher than it was in January. We are now projecting real GDP growth of 1.7% this year, 2.3% next year, and 2% in 2018.
Our forecast suggests that the economy will likely use up its excess capacity somewhat earlier than we predicted in January, specifically, sometime in the second half of 2017. However, there is more than the usual degree of uncertainty around that timing. It is always tricky to estimate an economy's potential output, and the difficulty is compounded when the economy is going through a major structural adjustment, as Canada is right now. We know that the collapse in investment in the commodity sector will mean a slowdown in the economy's potential growth rate. In the near term, we've lowered our estimate of potential output growth from 1.8% to 1.5%.
In terms of the bank's primary mandate, total CPI inflation is currently below our 2% target. The upward pressure on imported prices coming from the currency depreciation is being more than offset by the impact of lower consumer energy prices and the downward pressure coming from excess capacity in the economy. As these factors diminish, total inflation is projected to converge with core inflation and be sustainably on target sometime in the second half of next year.
To sum up where we are, while recent economic data have been encouraging on balance, they've also been quite variable. The global economy retains the capacity to disappoint further. The complex adjustment to lower terms of trade will restrain Canada's growth over much of our forecast horizon, and households' reactions to the government's fiscal measures will bear close monitoring. We've not yet seen concrete evidence of higher investment and strong firm creation. These are some of the ingredients needed for a return to natural, self-sustaining growth with inflation sustainably on target.
With that, Mr. Chairman, Carolyn and I would be happy to answer your questions.
Governor and Senior Deputy Governor, it's very nice to meet you both, and thank you for being here today.
I'm going to focus on one aspect of your analysis, and it has to do with determining whether or not the measures the government has introduced in the budget are going to add to growth in the country. In your report you indicate correctly that it's about $11 billion in infrastructure investments, and about $12 billion in households, and you think that the effects will be felt in 2016. That forms a basis for your analysis that in a sense it's going to help and overwhelm the negative factors we're seeing in the economy, but you also have two really important caveats in there, and one has to do with households and whether or not they're going to be spending.
You also point out in the very next section that household debt has gone up in this country because more mortgages are being taken on in Ontario and B.C. Of course we're seeing the negative effect on housing markets in the oil-producing provinces. With all of those taken into consideration I want you to expand a little on your comfort level saying that putting money into the hands of families in this country is necessarily going to be spent in the economy and moved along when we're looking at such high levels of debt. There's a propensity for people to save or pay down that debt because they are concerned about whether jobs are being created. I would overlay that with one anecdote. It's very difficult to see cousins and brothers and sisters and friends across the country losing their job and seeing a lot of discussion about the oil sector. You refer to it as a structured change in our economy. They're seeing that and they're very concerned about what that means to them.
So tell me a little about how the council ended up deciding that people will spend this money instead of saving it. I would say one last thing; the tax cut we have before us that the government has introduced amounts to 90¢ a day for an individual, and I fail to see how that's going to spur great economic growth that's going to counter what we're seeing in terms of the losses in our country.
With that I'll turn it over to you.
Let me just clear up something on the facts, then I'll turn it over to Carolyn.
A year ago, we were reporting a new piece of research that we had published that made an attempt to analyze housing markets globally, not just Canada's, but global housing markets, in cases where there had been periods of overvaluation and then adjustments. It's an attempt to understand the fundamentals.
That came in the context of a number of other studies that others reported where there was a wide range of estimates as to whether the Canadian market was overvalued and whether you could even say something like that about the Canadian market since it varies so much from region to region.
Our conclusion was that those kinds of figures are very risky to appeal to, given the variety of experiences we have across the country, and that there are a number of significant differences from market to market that aren't actually incorporated in models like that.
With all of that as background, perhaps I'll turn it over to Carolyn for an update on how the housing market has evolved and what our current standing is on it.
We continue to look at the housing market very closely because of the potential financial stability implications. What we've seen over the last year is what you would expect, given the transformation of the economy going from more energy based to non-commodity based. You noted, quite rightly, that in places that are dependent more on energy, not only Alberta but other provinces, you see their housing market conditions slowing quite considerably. It's what you would expect as people become unemployed, perhaps move to other provinces to find new employment, or just go home to where they originally worked before they moved to Alberta. There is a lot of that going on and you see the slowing there.
If you look at elsewhere in the country, there are two other things going on. You have major cities like Vancouver and the greater Toronto area, where the markets are actually going very strongly, and we're watching that closely. The context there is that how strong that is is just a function of the supply and demand dynamics that have been going on for years. Adding to that is the interprovincial migration of people and the fact that their employment is up and their economies are doing relatively better than the energy-dependent places.
When you look at that and try to make an assessment of the market you really need to take into account those supply and demand dynamics. The supply constraints are well known in Vancouver and Toronto. It is because of geography, because of the permits, and because of the interest people have in working and living there.
Clearly, from a monetary policy point of view it is something we look at and we take into account. At the same time, given the localized nature of the things that we're really focusing on right now, monetary policy as a tool really is just too blunt for that. Maybe there are other tools.
As you know well, the government has taken some actions recently that just came into force, so we'll be watching it closely.
Welcome Governor and Ms. Wilkins.
In the previous Parliament we had lots of interesting exchanges on the need to include or not to include certain tools in the bank's tool box. At one point we were talking about quantitative easing.
Last year you commented on the possibility of, or your openness to, considering negative interest rates. Some countries are currently experimenting with this, including Sweden, Japan, and Denmark, as well as the eurozone. There seems to be a growing consensus. I would ask you to comment on your evaluation of the experiments so far.
The consensus I'm seeing is that, in the short term, it might actually provide the help that's needed and is sought, but mid-term, we're losing that efficiency. There is an adaptation to that reality that actually brings about a loss of efficiency in stimulating the economies and interest rate, while trying to get the investments needed.
Could you comment on what you're seeing so far?
In terms of the tool box that you referred to, our tool box was laid out back in the midst of the crisis in 2008. Last fall we undertook a project to update it in light of experience since that time. Most of the experience that we referred to, happily, was not in Canada, but was in other countries where the problems have been more serious.
In the institutional context we have, we now believe that our markets would continue to function more or less normally at interest rates as low as -0.5%, whereas we used to think of 0%—or 0.25%, actually, to be specific—as the actual physical lower bound. That means we have on the order of 75 basis points more room to manoeuvre, as you suggest, for relatively short-term issues. It's true that the distortions that may emerge grow with the length of time that is there, and possibly the effectiveness of this policy would diminish for a longer time period.
It's in that context that we think of quantitative easing. We've had some very interesting uses of quantitative easing that have had a significant impact on performance in various economies.
We don't say concretely which of those tools we would appeal to if the situation arose. We just start with saying that fortunately our outlook is that none of that is necessary. Our outlook is quite a positive one. But if there were a significant negative shock to the economy, we know we have a tool kit available to help buffer the effects of those things, and what order we might use those things in, or in which combination would depend on the circumstances and what seemed best at the time.
That's a live issue for us at this time. I won't go into the conclusions of that work, but some of the working papers have already been published.
There are three issues that we've set out that need to be addressed this time before we renew that agreement.
First, what's the right measure for inflation? Should we change from the CPI that we've used traditionally?
Second, what is the level, which is the question you've just raised; 2%, or some other number?
Third, how do we integrate financial stability issues into that policy framework?
The one about the level is perhaps the most prominent issue, and it's because of the experience of the last few years when central banks, including ourselves, got to the lower bound. If interest rates had been one percentage point higher when it all started, you would have more room to manoeuvre. That's an important consideration. That experience has of course been historically quite rare, but now it has happened so everyone has to think about it.
The other side of that discussion is now that we understand that negative interest rates are possible, that also gives us more room to manoeuvre than we thought we had before. So it's those two sides of the coin that need to be assessed. What are the relative costs and benefits about that extra flexibility? What would it buy us? That's the question, especially when we have unconventional tools in the tool box that can be used if need be.
So it's a live question still. We're just at the stage where we'll begin concrete discussions with the Department of Finance in the next month or two.
We think of the Canadian dollar as a general equilibrium variable. I know that sounds like a technical thing, but what I mean is that virtually everything that is going on in the world economy or in our economy has some feedback effect on the currency. That is why it is never simplified in the way you describe.
Oil prices, say, go down, and that causes the Canadian dollar to go down. The Canadian dollar didn't go down by itself, so there are two things happening at the same time. We know that lower oil prices are unambiguously a negative for the Canadian economy. The decline in the Canadian dollar helps to cushion that blow, but in the end we still have a negative for the Canadian economy.
Usually, when people ask questions like that, they think, “Well, if the exchange rate moves all by itself, is that good or bad?”
It is always a double-edged sword because for somebody it's good, and for somebody else it's bad. It is best not to think of it that way. It is more about its usefulness as a thing to keep things moving where they belong and, as you say, markets decide that best.
When the dollar is on the weak side, it is promoting exports of companies for which that matters. There are some that have a lot of imported inputs, so it matters less. For those who are thinking of investing in capital equipment, maybe an imported machine, it would cost more. The lower dollar causes them to slow down that decision, which would be good for economic growth if they did it, while at the same time speeding up demand for their products, which is obviously good. For every company, it is different.
Then, of course, there are the households, because the price for your imports, whether it is a vacation outside of Canada or simply fruits and vegetables, varies according to the exchange rate.
This is an extremely complex question, and I hope you will forgive me for not giving you a simple bottom line.
Thank you very much, Governor, for coming here today.
I have two central questions, and I'd like to put them in context a little bit.
As we all know, the Bank of Canada's mandate and that of other central banks is to keep inflation low, and while the bank has been trying to intervene in the Canadian economy and stimulate borrowing and investments with low interest rates, it's also the case that the bank may intervene in the economy when it appears that the economy is too hot; that is, when employment drops to “low the end” or when there's a threat that wages might rise and therefore drive up inflation.
Now, some Canadians might be surprised by this because they generally think that if the Bank of Canada and the government were going to intervene in the market, it would be to create more jobs with better wages, and not deliberately to act to increase unemployment and prevent wage increases.
An economist, Arthur Okun, who was a member of the President's Council of Economic Advisers, wrote in 1976, “The crusade against inflation demands the sacrifice of output and employment.”
Joseph Stiglitz, the Nobel Prize-winning economist, has written:
||A focus on inflation puts the bondholders’ interests at center stage. Imagine how different monetary policy might have been if the focus had been on keeping unemployment below 5 percent, rather than on keeping the inflation rate below 2 percent.
Now, the Cambridge economist, Ha-Joon Chang, has written:
|| Lower inflation may mean that what the workers have already earned is better protected, but the policies that are needed to generate this outcome may reduce what they can earn in the future. Why is this? The tight monetary and fiscal policies that are needed to lower inflation, especially to a very low level, are also likely to reduce the level of economic activity, which, in turn, will lower the demand for labour and thus increase unemployment and reduce wages. So a tough control on inflation is a two-edged sword for workers—it protects their existing incomes better, but it reduces their future incomes. It is only the pensioners and others (including, significantly, the financial industry) whose incomes derive from financial assets with fixed returns for whom lower inflation is a pure blessing. Since they are outside the labour market, tough macroeconomic policies that lower inflation cannot adversely affect their future employment opportunities and wages, while incomes they already have are better protected.
It would appear to me that the Bank of Canada's core mandate since the 1970s has been to put a thumb on the scales in favour of investors, especially established investors, at the expense of everyone in the labour market. The switch to this policy was a turning point in countries like Canada, the U.K., and the U.S., when wages for the most part started to stagnate and the income of CEOs and investors started to increase. It could be argued that this change marked the end of the era of inclusive growth after the end of the Second World War, when as the economy grew it grew for everyone, and the beginning of a new era in which the benefits of economic growth were concentrated in the hands of a few. Inflation has not been a problem in the economy for decades, and in the 1970s it was driven by deliberate manipulation of oil markets by OPEC.
My question is: is it a consequence of the Bank of Canada's anti-inflationary policy and low-inflation target that you will intervene in the economy to sacrifice workers and wages in order to protect investors, as per your mandate?
The choice of inflation targets as a regime for monetary policy in Canada is now over 25 years old. It grew out of a horrific experience with high inflation. It is unambiguously accepted in the economic literature that lower inflation over the last 20 years has led to better economic performance for all participants in the economy—all—whether they're working, whether they're retired, whether they hope to retire, everybody. That is unambiguous.
Many of the very fine points that you have made are what I would call disequilibrium points; that is, they are partial equilibrium: it's true that if this happens, then this happens. It must, however, be considered in the context of the entire economy and whether the economy has achieved an equilibrium that will stay.
Our belief, very strongly held, is that the economy does not stop moving until inflation is stable and the rest of the economy has adjusted to that level. That defines what we call the “divine coincidence”, in which we have maximized employment—
Thank you very much. I do have one question.
You said earlier that part of the economy, the energy economy, is diminishing. You also said, in the Bank of Canada's “Monetary Policy Report” published on April 13, that investment in the energy sector is expected to decline by 60% from 2014 levels. I come out of the commodity industry as a former producer, and we see ups and downs, booms and busts. We see that in the energy sector as well, although there's a lot of global pressure in energy.
I'm just wondering about something. This may be a controversial question, and it may be something that you don't want to, or can't answer.
Have you looked at what the investment situation would be if an Energy east pipeline were in place, or other pipelines? Yes, there would be the investment from putting in place the pipeline itself, but would that have any impact on the oil economy in terms of easier access to market, or in the case of Energy east, putting oil into the refinery in eastern Canada? Can you tell me if you look at those scenarios, or do you know anyone who does?
I won't comment on specifics for other countries, but the general thrust is that there are three fields of policy that should be working together in this situation.
Monetary policy is clearly very stimulative globally, and is close to its maximum ability.
Fiscal policy is less widely engaged, except in certain places that I mentioned before.
The third, and probably most important policy at this stage, is structural change to the economy to overcome the barriers to growth that we talked about earlier. The contention of the IMF, and of those around the table, is that those three can work together.
That is, a structural policy on its own may just have some positive effects long term, and possibly negative effects in the short term. Using fiscal policy with it to cushion the blow and add some extra impetus to the economy helps offset the negative effects while ensuring the long-term effects are good. Monetary policy is there to keep the system well prepared, and to nurture the process.
Using just one of them is not the recipe. The important thing is to have all three operating. That's the nature of our discussions.
Okay. I'll be brief, Chair. That could keep us busy for quite a while.
To begin with a factual. First, the estimates that you referred to are the effect of the budget on the outlook, on growth rates, whereas the effect that was described in the budget and in the footnote—I think footnote 8 or somewhere around there in the MPR—is that the effect on the level of GDP is 0.5% the first year and 1.0% the second year. In growth rate terms it's roughly 0.5% and then another 0.5%. So that reconciles the numbers you discussed. They are all the same. It's level versus growth rates.
Second, I had talked previously about infrastructure as an enabler of growth. To me infrastructure can be a fluid concept. I guess it's any kind of investment that can be linked to future potential economic growth. So there's a wide range of examples from the most obvious, things like transportation—bridges or high-speed trains or rail or airport investments—or day care facilities, which enable parents to re-engage in the workforce, which gives us more potential. All those kinds of things are investments that can add to our potential growth and therefore good things.
In terms of the third leg of the stool, which is structural reforms, it's things that promote labour market mobility among provinces that relates to interprovincial trade. The labour mobility is not perfect, nor has it necessarily helped. There are policies that could make it move faster when we're trying to adjust to things.
Of course, more generally, as we discussed earlier, interprovincial free trade would help our economy adjust and perform much more efficiently.
Those are just some ideas, Chair. There are lots.
Thank you, Mr. Chair. It's the first time you called me Mr. Fréchette so I'm really happy with that.
Mr. Chair, vice-chairs, and members of the committee, thank you again for the invitation to appear and discuss our April 2016 Economic and Fiscal Outlook, which was released today.
As you have already mentioned, today I am joined by a number of members of my team, who will be pleased to respond to your questions.
Since our November 2015 report, the outlook for the global economy has deteriorated further and commodity prices over the medium term have been revised lower. Despite this weaker external outlook, we anticipate that the combination of fiscal measures in budget 2016 and the accommodative monetary policy will help bolster the Canadian economy.
We project that growth in real GDP will rebound to 1.8% in 2016 and then rise to 2.5% in 2017. Growth in the economy is then expected to moderate over 2018 to 2020, reflecting the tapering of fiscal measures and the normalization of the monetary policy.
The level of nominal GDP, which is the broadest single measure of the tax base, is projected to be almost $20 billion lower each year on average between 2016 and 2020 compared to our November report. However, relative to the government's planning assumptions for nominal GDP in budget 2016, our projection is on average $40 billion higher per year over 2016 to 2020. The difference is most pronounced in 2016 and 2017, reaching close to $50 billion in those years.
Our November 2015 fiscal outlook provided an independent status quo planning assumption for the start of this 42nd Parliament. We have updated our fiscal outlook to include measures announced in budget 2016 as well as measures announced prior to the budget.
We estimate that there was a small surplus in 2015-16 and we are forecasting a budgetary deficit of $20.5 billion in 2016-17, which is primarily attributable to the introduction of new measures since the government's fall update.
The deficit is then projected to rise to $24.2 billion in 2017-18 as the result of moving to the seven-year break even mechanism for EI premium rates, as well as increases in direct program expenses.
Over the remainder of the planning horizon, we project the deficit to decline to $12.4 billion based on the government's forecast that direct program expenses, in particular the operating costs of departments, will remain flat over the period from 2017-18 to 2019-20.
Compared to budget 2016, our outlook for budgetary deficits over 2016-17 to 2020-21 is $4.5 billion lower on average. The average difference is roughly in line with the $6-billion fiscal impact of the government's adjustment to the private sector forecast of nominal GDP.
Budget 2016 highlights the government's commitment to returning to balanced budgets and to reducing the federal debt-to-GDP ratio to a lower level by 2020-21. To provide a broader perspective on the sustainability of the government's finances, we have extended our projections beyond 2020-21 to show the long-term trajectory of federal debt relative to GDP. Our projections show the federal debt-to-GDP ratio declining continuously over the next several decades under current policy. This indicates that the federal fiscal structure underlying budget 2016 is sustainable over the long term.
We would be pleased to answer your questions concerning our economic and fiscal outlook, or any relevant matter such as Bill or, again, our current or future mandate.
Thank you, Mr. Chair.
I would like to thank all the witnesses for meeting with us here and for the work they have done, which is extremely useful.
I would like to start with a few remarks, particularly to respond to Mr. MacKinnon's comments.
I would call the current approach to budgeting policy “Paul Martin 2.0”. This is where we can agree. In fact, this increasingly reminds me of the budgets tabled by that former finance minister.
We are not talking about prudence here, but rather about forecasts that are miles apart from what can be projected. Paul Martin calculated deficit forecasts by overinflating tax expenditures. I am talking about all the tax credits and revenues that the government hands out through tax measures.
In this case, things are being done differently, namely by inflating or lowering the estimates. As you yourself noted, we are talking about a difference of $40 billion per year for the projected level of nominal GDP. We even go up to nearly $50 billion per year in 2016-17. We are then back in the same situation. We are no longer talking about prudence now. This is my personal opinion, but I think we are witnessing a deliberate strategy intended to change people's expectations. An overly large deficit that calls for prudence is announced, but ultimately the result at the end of the year is somewhat better than what was originally announced. People are consequently relieved. In addition, this makes the government look good and eases its conscience.
Not being prudent enough is problematic, but being overly prudent becomes a deliberate political strategy. Since I know what your role is, I will not ask you to comment on these issues. However, since you are still in contact with the Department of Finance, I would like to know where this extremely conservative estimate of nominal GDP comes from.
Moreover, the contingency fund totalled $3 billion in the past. This amount was reduced to $1 billion under the Conservatives. However it has now inflated to $6 billion. Based on your conversations and the information you receive for your analysis, could you tell me where these figures come from?
I had the opportunity to ask the , Mr. Morneau, some questions, but I never received an answer. It looks like these figures just fell from the sky.
Thank you for your question on transparency. That is a good question. I would like to take 30 seconds to explain what we went through regarding transparency during that time.
When we saw that the budget contained only a two-year plan and not a five-year plan, as is normally the case, we were surprised. We had no idea this would happen.
The second surprise was actually pleasant, because we asked for the figures and we received them for a five-year period. Transparency certainly became more real than it was before.
The third surprise was to be told, when we received these figures a few days later, that we could not use them. We went through something of a cycle, namely pleasant surprises, less pleasant ones, and finally, following an official request, obtaining the data.
There may have been some lack of transparency at the outset. After that, the government realized that it was not being transparent. The fact that we obtained the figures we asked for satisfied us because that enables us to inform Parliament on the state of the five-year plan.
That said, pretty much everyone should perhaps learn something about transparency, whether we are talking about the government or anyone doing financial planning. Over the coming months we will see in the updates and in other documents whether that element of surprise will be eliminated and whether the PBO will always be happy to have those figures.
Mr. Matier can answer your previous question right away, if you like.
I wish to quickly speak about something Mr. Caron mentioned, about this being potentially Paul Martin 2.0. I think if we are entering a period of Paul Martin 2.0 here in Canada, and for the next several years we see strong economic growth and a number of good things, the strengthening of CPP and working with the provinces on a number of matters, I think that's a great thing for Canada and for my riding of Vaughan—Woodbridge. So I will applaud that. Thank you, Mr. Caron.
On the issue of prudence, in a former lifetime I was a bond analyst, and one of our jobs was to look at tail risk and to look at what may happen on the downside. I think if you look at last year and the last 18 to 24 months, and you've seen where commodity prices have gone, and you continue to see a transition with the Chinese economy going from an industrial-like economy to a consumer-driven economy, and some of the challenges that we've seen in volatility in emerging markets, the 2016 budget contained an amount of prudence, the $40-billion adjustment to nominal GDP. From my point of view, it is actually being very prudent to taxpayers. It's being prudent in terms of the economy and in terms of making sure that we look at it from the big-picture approach, but it's also taking into account the issues at hand in terms of the volatility. I do want to put that on the record, and I'd be happy to hear your comments.
I also wanted to ask Mr. Cameron, again, regarding the issue in terms of the adjustment in old age security and GIS from age 67 to 65. Can you just reiterate what that actually meant on a “per cent of GDP” basis going out on that, because I think it's important for us to note?
I thank Mr. Fréchette and all his colleagues for being here with us.
You know that we have a great deal of respect for your work and we are happy to see you here today. I can assure you that the work you do, namely to inform Canadians and parliamentarians, is important to us. I can assure you, Mr. Fréchette, of our full co-operation, now and in the future, for everything you do.
I would like to get back to the issue of prudence, which is very important. Before meeting with you, we met with the Governor of the Bank of Canada, who told us about the volatility of the global economy. The Canadian economy is about 2% of the global economy. We examined the significant risks in the global economy. We talked about China and the United States. We could also talk about Brazil. The International Monetary Fund recently downgraded its projection for Canada's economic growth.
How have you integrated the macroeconomic risks in the global economy in your projections? It is important to look at what is happening in the world. All economic players agree that there is a lot of volatility. Ms. Lagarde spoke of a low-growth era. Therefore we think it appropriate to be prudent.
Please tell us about the macroeconomic measures you have considered or the risks associated with the global economic volatility that you took into account in your projections.
In our projection we incorporate the external outlook essentially through the U.S. economy and through commodity prices, as well as the economy of the rest of the world, which we look at, and it is informed by the International Monetary Fund.
In our recent projection, we made significant downward revisions to the outlook for U.S. real GDP growth from 2.6% to 2.1%, and from 2.6% to 2.3%. As well, we reduced significantly the outlook for commodity prices, reflecting the weaker global environment.
These are the main channels that are the global macroeconomics that are affecting the Canadian economy.
At the same time, we have a fiscal policy that provides an increase to aggregate demand in the economy and a monetary policy that maintains its interest rate at current levels to accommodate this. This provides an offsetting stimulus to the economy.
On the question of prudence, our projections are what we call balanced risk, in that we think the upside and the downside possibilities are roughly balanced. As a forecaster, this is what you want to do if you are concerned about forecast accuracy. If you want to minimize the size of your errors, you want to take into account the balance of risks.
A prudent forecast is different in that it wants to ensure, with a high degree of probability, meeting or exceeding a target.
They may sound like the same thing, and it may sound prudent in both cases, but we think of them as distinct approaches to forecasting.
In the current budget, our reading of it, based on the fall update and the February backgrounder, is that the forecast adjustment had been used to balance the risks the government sought to the private sector outlook, and not so much as prudent budgeting. If the government's decision is to make this adjustment to increase the degree of prudence, or ensure with a high degree of probability achieving its target, then it can be transparent and say, “We are making a prudent decision”. In my reading, and doing a word search in the budget document, the word prudent does come up, but not in that context.
I am particularly interested in Bill .
I would like to thank you once again, Mr. Fréchette, for your thoughtful work to answer to my question. Indeed, you compared the provisions of Bill C-2 on the reduction to the second income tax bracket, which ultimately affects all income above $45,000, the one for income between $45,000 and $90,000, with the measure we proposed, specifically, a 1% cut for the first tax bracket, which would affect 83% of Canadians.
This is being touted as a tax cut for the middle class, but people with incomes under $45,000 do not see a penny in tax relief. Ultimately, I would like you to confirm, based on the figures from the studies you have done, that someone who earns $210,000 would receive more in tax cuts than someone else earning $62,000 per year.