Good morning, everyone.
Once again, Senior Deputy Governor Wilkins and I are pleased to be with you to talk about the bank's monetary policy report, which we published last week.
Six months ago, when we last appeared before this committee, we talked about some very positive developments. The Canadian economy had solid momentum and had essentially completed its journey home—that is to say, it was operating very close to its capacity, and inflation was running near our target. At the same time, we were monitoring the risks posed by protectionist trade measures and elevated levels of household debt.
Unfortunately, since then, there have been a couple of negative developments. These have caused a detour for the economy and are delaying its return home. Our forecast is based on the belief that the impact of these developments will be temporary, and that once the associated adjustments take place, stronger economic growth will resume. So, in the monetary policy report, we marked down our forecast for economic growth this year to 1.2%, and we project growth of near 2% for both 2020 and 2021.
Let me offer a few details. First, the global economy slowed toward the end of last year. To be clear, some slowing was expected as the stimulative impact of U.S. fiscal measures fades, but the slowdown was deeper than most forecasters projected and has persisted into 2019.
A major factor behind this global slowdown has been the U.S.-led trade war. This is delaying business investment decisions in many countries around the world. Uncertainty about future trade policies has risen. Here in Canada, doubts about the ratification of CUSMA have increased, and these remain a downside risk to our outlook for investment.
lt is certain that an escalation of trade conflicts would be a blow to the global economy; however, the global economy could receive a significant lift if there were progress in resolving these conflicts.
I should emphasize that businesses and economies will ultimately adjust to the heightened level of uncertainty around trade by adjusting their investment plans lower. Once those adjustments are complete, however, economic growth can pick up again.
The other major development since October was another sharp decline in oil prices late in 2018, which put Canada's oil sector under considerable stress. More recently, oil prices have firmed, including the prices our western producers receive, but transportation constraints on future growth remain a significant source of drag and uncertainty. This has led to another downward revision to investment intentions in the sector.
Some of this downgrade is likely more structural than cyclical in nature, as it represents the continued adjustment of the sector to global oil prices of $50 to $60 per barrel, rather than the much higher prices of five years ago. This adjustment process is also being reflected in wages and other costs and in developments in the housing market in Alberta.
lt's important to note that as investments in the oil patch are pared back, Canada's growth slows, but when those investment levels stop falling, Canada's growth will pick up again, even if oil sector investment does not, because other areas of growth will come to dominate the data. We saw exactly the same dynamic following the oil price shock of 2014-15.
ln addition to concerns about global trade and oil prices, we've continued to watch how the Canadian housing market is adjusting to a combination of factors: provincial and municipal housing policy measures, the revised guidelines for mortgage lending and past increases in interest rates. The adjustment of the housing market is particularly important given the context of elevated levels of household debt.
Our analysis has been complicated by activity in some previously frothy markets—the greater Toronto and Vancouver areas, in particular. Research by bank staff shows that the sharp rise in housing resales above fundamental levels in Ontario and British Columbia and then the subsequent fall correlate strongly with house price expectations. This suggests that provincial and municipal housing policy measures have had a much stronger impact on housing activity than changes to mortgage lending guidelines and past increases in interest rates.
Supporting this analysis is the fact that many other markets across the country are seeing solid activity even though they have the same mortgage lending guidelines and interest rates. This is what would be expected in an economy that is growing, with a rising population and strong labour market.
The implication is that as the situation in Toronto and Vancouver stabilizes, the Canadian housing sector should return to growth overall later this year.
Finally, I would note that the federal government and several provinces have made fiscal announcements during budget season. Our analysis suggests that the combined impact of adjusted spending plans announced to date would lead to a downward revision for our growth outlook of about 0.2 percentage points in 2020.
In sum, the Canadian economy is currently facing some headwinds, but there's good reason to believe the economy will accelerate in the second half of this year. In this context, the bank's governing council judges that an accommodative policy interest rate continues to be warranted.
We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive. In particular, we are monitoring developments in household spending, oil markets and global trade policy to gauge the extent to which the factors weighing on growth and inflation outlook are dissipating
In case you have not heard, I should mention that since we last met, we launched the new $10 banknote featuring Viola Desmond and the Canadian Museum for Human Rights in Winnipeg. It has been named the best new banknote in the world for 2018.
With that, Senior Deputy Governor Wilkins and I will be happy to take your questions.
Welcome, Senior Deputy Governor and Governor.
In the last three months we've had a series of data reports come out. We had the business outlook survey, the monetary policy report, this morning the February GDP, and in the last couple of weeks, the international trade report. One measure that we brought in, in the fall economic statement, and it's in the budget implementation act, is the accelerated capital cost allowance, which has been referred to in both the business outlook survey and the monetary policy report, and it seems to me that firms are responding to that measure.
Would you care to comment with regard to the immediate expensing and what that should do to firms' investment intentions?
Thank you for being here with us once again today.
My first question is on a topic I raise with you regularly when you come before us, and that is household debt.
I wonder if you could provide us with a status report on household debt in Canada. The situation does not seem to be improving. Some studies show that there can be good debt. A mortgage, obviously, is a good debt. However, a recent study by the MNP firm has shown that 50% of Canadians are $200 away from insolvency, that is to say a few dollars away from bankruptcy at the end of every month.
I wondered if those numbers are of concern to you, with respect to the Canadian economy. What are your thoughts?
The household debt level of Canadians represents a high level of risk to Canada's financial system. We have been saying so for a long time. We noted that for a year now, the ratio of debt to disposable income has stabilized. That is good news. We also note that the quality of mortgage loans has improved, and that is very good.
You have to be careful when it comes to surveys of the population. Some people certainly do find that their finances are tight, even very tight. When we do our analysis, we look at the economy and the population as a whole. We know that 30% of Canadians have no debt. As for those who do, they have seen the cost of servicing their debt increase. The ratio is higher than before, but it seems manageable, on average.
Among the factors we can study are whether or not people are behind on payments, and the rate of personal bankruptcies. In Canada that has not increased, or worsened. The levels are not very high at all. However, some data show that it is more difficult in Alberta and Saskatchewan. That is totally understandable, given the adjustments people in those regions have had to make.
As you said, this issue comes up constantly. Since last year, we have seen some encouraging developments.
First, obviously the new mortgage rules have changed things in a positive manner.
Secondly, household debt was on the upswing for a long time because of the increase in the cost of homes, particularly in Vancouver and Toronto. That is the factor that contributed the most to growing debt. However, that increase has declined considerably recently.
Third, the growth rate of debt is generally lower than the rate of nominal income.
I hope that this has already peaked and that we are entering a period of adjustment for households. This period may extend over several years, perhaps even 10 to 20 years. It is a gradual process, of course. That said, the situation is much more favourable than two years ago, that is certain.
It is up to you to make the difficult political decisions.
In fact, it is a bit soon to evaluate the economic effects because all of the parameters have not yet been clearly established for the moment. This is what we underscored in our monetary policy report. We will know more next fall.
Certain factors will be taken into account. We already know that certain program parameters will indicate to what extent the effect will be widespread.
For instance, limits have been placed on the ratio between mortgage debt and income. There are also limits on the loan amount one can obtain. In addition, if you are not buying a new house, the applicable figure is 5%, while for a new house, it is 10%. All of these parameters indicate that access to mortgages will probably be broadened, which corresponds to the objective of the program. Next fall, when we have all of the parameters, we will be able to determine more precisely to what extent the objective has been attained.
It's certainly possible that it may affect investments in high carbon emission sectors. That is a potential consequence, and I would even say it is probable. When people have to pay a tax, this may encourage them to reduce their carbon emissions. It may also lead to lower investments in high carbon emission sectors.
The question is what will be done with the money that is collected, because this will encourage investments in other sectors. It's very difficult to analyze ahead of time.
As for me, I'd say that it will probably be a slight or neutral effect, but we will have to wait and see.
It is comparable to other factors that could affect the economy's potential; we can't really foresee them. We have to assess both sides of the coin and the situation eventually becomes clear.
In the final analysis, this will probably not have an effect on the economy, first because funds are being provided to absorb the costs to the economy.
Yes, it's normal for government leaders to make rosy predictions, and when they don't come true, to blame them on exterior factors in faraway lands.
I'm looking at your comments from the monetary policy update, Mr. Governor, and you attributed some of the downgrade to a structural matter, which was global oil prices. You compared oil prices to where they were five years ago. Of course, when you compare anything to a peak, you're going to be down, but it turns out oil prices are not low right now. Oil prices are actually quite high by historical standards. If you convert them into Canadian dollars, they're almost average for the last roughly 35 to 40 years. From 1980 on, we had an incredible expansion of Canada's oil sector at those average, inflation-adjusted prices.
What you didn't say in this remark—which astonished me and I'm sure many others—is that it has nothing to do with global oil prices, which are high. It has to do with reaching the market. I know it would have been politically inconvenient for the government if you had pointed out that market access, and not global oil prices, is the problem. Given that your job is not to help the government but to assess the facts, why did you attribute it to global oil prices rather than market access, which everyone agrees is the real problem?
Thank you once again for joining us.
I want to ask you to expand a bit. Foreign direct investment rose to $51.3 billion last year, which was a three-year high, the highest annual total since 2015. The inflows of about $16.5 billion in the final three months were the second-highest quarter that has happened since 2015.
The bulk of foreign direct investment last year was in non-energy sectors. As you talked about earlier in terms of the levelling off or stabilization of investment in particularly the oil sector, it appears that there is significant interest in investment outside that sector. Stats Canada stated that Canadian businesses are planning to increase by 2.5% their capital investments in 2019.
Can you talk maybe a little bit about what that means for growing areas of the economy, such as alternative sources of energy and the green economy, as we talk about electric vehicles and as we talk about the opportunities we have in the carbon-reduced economy that Canada is very engaged in?
The data you give us are correct. Despite a lot of concern about Canada's competitiveness and its ability to attract investment, in 2018 there was about a 5% increase in inbound FDI, which is quite healthy. It's true that this increase was not in the energy sector, but of course, I could say the same thing about domestic investment. Domestic investment was being pared here in Canada in that sector.
The investment we are seeing is in what we would call more growth sectors. That's not to say that the energy sector won't attract investment, because it will and it still is, but it's lower than it was before. Its growth is perhaps constrained by transportation constraints, but slack makes more of an organic growth picture for the oil sector, until there is a pipeline, let's say, in which case we might then see a jump in activity.
In other sectors, I would say that the biggest investment area is intellectual property or softer forms of capital. If we look across, the strongest export sector now, in growth terms, is IT services. The strongest labour market and the strongest employment gains are in IT services. That's just for starters. The IT economy appears to be growing around 7% or 8% per year, attracting a lot of investment. Indeed, much of the investment is not even captured. If you just buy services on the cloud, you don't have to invest.
There are, then, some big transformations happening that make it hard to read, but we think that for investment overall, according to our survey of 100 firms in the BOS, everybody's ready to invest. We're hopeful, then, that the first quarter, when we get those data, shows it.
The short answer is yes.
Those measures, if you're talking about the stress test and the tighter mortgage underwriting rules, certainly had a country-wide effect. That's because they were aimed at making the debt levels that were being taken on more sustainable for the people who were taking them on, and then, by virtue of that, ensuring a more stable Canadian economy.
The extra measures that were taken in Toronto and the greater Vancouver area, with respect to taxes, for example—the foreign buyer tax—added to the drag on the housing market. In fact, Toronto and Vancouver were different to begin with, just because of price expectations being so speculative. You can see in some of the data that we have on price expectations just how high they were getting. Those price expectations were reduced after the taxes, after B-20. Then, of course, our interest rate increases had an implication for these too. That's what's underlying the dynamic in the housing markets in those two jurisdictions.
The reason why the housing market recovers in that is that, as I described in my opening statement, when, in effect, B-20 is reducing the potential demand for housing on the margin, people are reacting in different ways: buying smaller houses or waiting a little longer to do it. However, once they've adjusted to those new rules, then the fundamental growth from population growth and labour force growth continues. That recovery is in the trend line.
The answer to the question that you're asking about the relative size of the B-20 effect macro versus this new first-time homebuyer incentive is very hard for us to know at this stage until we know the parameters of that program, as Ms. Wilkins answered a while ago. I think that the sketch around it was that it would be something like 100,000 households, that sort of thing. That's pretty significant, so we'll be figuring that in.
At the same time, B-20 is affecting everybody, so it's about how they adjust to that behaviour. That's something that we're monitoring closely as we go through.
It's very hard to compare them. It's an apple-and-orange kind of analysis, I'm afraid. I wouldn't want to commit to a balance on those two.
When I became Governor, I committed to visiting all provinces and territories in Canada. I can now say that I've done so. It has been a great experience to talk to real people making real business decisions on a daily basis, in totally different settings.
I think the value to me is that it puts colour around numbers. Economics is mostly a bunch of numbers. Being able to stress-test forecasts or judgments with real conversations is very valuable, and has always been valuable to us. We put much higher weight these days on both our BOS and the interactive round tables we have when we're in a region. Both Carolyn and I do that whenever we're out there. We'll organize a dinner or a lunch or something with, say, 12 or 15 business people. Those things have been very valuable to us.
There are two sides of it. We get to explain some things to people that maybe they don't see every day, and we have those heart-to-hearts about how we think the economy is working. They let us know, “No, it isn't. This is what I see.” That's the kind of two-way conversation we have.
Thank you very much, Mr. Chair and ladies and gentlemen members of the committee.
Thank you for your invitation to appear before you to discuss our financial and economic perspectives from April 2019, which were published earlier today.
As you know, the Parliamentary Budget Officer provides parliamentarians with independent, non-partisan economic and financial analysis. As the Parliament of Canada Act indicates, we provide these analyses in order to raise the quality of parliamentary debate and promote greater transparency and accountability. Pursuant to the mandate of the Parliamentary Budget Officer, my office produces independent economic and financial cost estimates.
As you mentioned, Mr. Chair, I am accompanied today by Jason Jacques and Chris Matier, who will help me to answer your questions. They have a lot of knowledge and experience in the affairs of my office.
The Canadian economy is working its way through a temporary slowdown. Economic growth slowed sharply in the fourth quarter of last year following the decline in Canadian oil prices. We estimate that the real GDP growth remains subdued in the first quarter of this year but expect it to pick up over the remainder of the year as temporary factors dissipate.
Looking further ahead, we continue to expect the economy to rely less on consumer spending and housing and more on business investment and exports. We project real GDP growth to increase from 1.6% in 2019, the current year, to 1.9% in 2020, and then to average 1.6% annually through 2023. We judge that the risks surrounding our economic outlook are broadly balanced.
In terms of downside risks, we believe the most important risk is weaker export performance due to rising protectionism in global trade policies. On the upside, the most important risk is stronger consumer spending, fuelled by increased household indebtedness.
With respect to the fiscal outlook, since our October 2018 outlook we estimate that policy actions taken by the government will cost almost $10 billion per year, on average, over 2018-19 to 2023-24. Nonetheless, our updated outlook for the government's bottom line is, on balance, little changed compared to our October report. This reflects offsetting revisions to underlying revenues and expenses. In other words, we underestimated the amount of fiscal room in our economic outlook, mostly due to stronger than expected income tax revenues.
For fiscal year 2018-19, we expect the budgetary deficit will be $15.7 billion, which amounts to 0.7% of the Canadian economy. We project the deficit to rise to $22.3 billion in 2020-21, due in part to forgone revenues from introducing accelerated capital expensing. The budget deficit is then projected to decline to $11.9 billion, or 0.4% of GDP, in 2023-24. It's important to note this assumes no new policy actions are introduced.
We also project that the federal debt will consequently decline to 30.5% of GDP in 2020-21, which is almost 1.5 percentage points below the government's official debt anchor. We also project the federal debt-to-GDP ratio to fall to 28.9% of GDP in 2023-24.
Given the possible scenarios surrounding our economic outlook, and again without further policy actions, it's very unlikely that the budget will be balanced or in a surplus position over the medium term.
In our report today we also highlight some key issues arising from budget 2019 related to budget-estimates alignment, operating expenses and unannounced measures, among others. We would be happy to explain these issues if you wish us to and we can expand on that as well.
I would also like to direct your attention to another report we published this morning in which we independently established the cost of 11 Budget 2019 measures in order to prepare our estimate of the cost of electoral commitments, pursuant to my office's mandate.
The next general election will be the first in Canada where political parties will be able to ask us to prepare estimates that will be independent from the costs of their proposals. We acquired the necessary resources to manage the requests in an equitable and secure way while preserving the confidentiality of our clients. We are ready to seize this historic opportunity and provide the best possible cost estimates. We encourage all political parties to use our services in order to improve the quality of the information provided to Canadians.
My colleagues and I would be happy to answer your questions on our economic and financial projections, or on any other analysis from the Parliamentary Budget Officer.
Thank you very much.
With respect to household indebtedness, it's clear that one of the main factors is the relatively low level of interest rates, which of course encourages people to take on more debt. Another big factor contributing to high levels of debt is the relatively high price of housing. When household formation happens, people want to live somewhere, obviously, and they have a choice either to rent or to own. Owning means buying a house and incurring some mortgage debt, and when the prices are high and interest rates are low, that leads to high indebtedness.
It's not an issue, in and of itself, but it is a concern for us as economists when we see that households have high levels of debt. It's obvious that it's not sustainable in the optics of rising interest rates. It's bound to lead to some imbalances in the economy.
With respect to whether it is the right action to limit the growth in credit and have tighter mortgage rules, that's a very delicate question. It's obvious that something needs to be done. However, with the high prices of housing, it means that some people will be denied access to housing.
Something needs to be done, obviously, to rein in the high levels of debt, but it has the unfortunate collateral effect of preventing some people from accessing property, especially in the high-priced markets of Vancouver, Toronto and now, more and more, in Montreal.
We looked at the three main regimes—the one in place until April 1, 2006, the regime between 2006 and the end of March of this year, and the regime in place since April 1, 2019.
You'll have to forgive me, as I've forgotten the names of each of the regimes. As I've said on a few occasions, these are very complex regimes. I have a background in tax and I find these regimes, to be honest, more complicated than the Income Tax Act. That's one of my failings. I don't understand veterans' programs very well.
We found that the pre-2006 regime was the most generous for the vast majority, if not the totality, of veterans. The regime in place since April 1 is slightly more generous than what was in place between 2006 and 2019, but it also leaves out some veterans. It does not provide the same level of benefits to some of the veterans; I think it's 5% of the veterans and these tend to be the most highly disabled.
These are the main conclusions of the report, if I'm not mistaken. Jason is nodding, which means I haven't made any mistakes in characterizing the report.
You have raised two points.
The first is the fact that the federal budget and the estimates will be better aligned, that is to say the parliamentary appropriations which you, as parliamentarians, must make decisions about. I think this is an improvement to transparency. According to the old presentation, budget measures were subject to a vote; parliamentarians had to approve them. This year, we have a new way of doing things. From now on, the Treasury Board Secretariat and the government present certain budget measures by department. It is now possible to match budget measures and parliamentary votes on which you must make decisions. I think this is an improvement.
However, this does not fully meet some of the criticism addressed to the government, according to which parliamentarians must speak out on budget items before Treasury Board has carried out its meticulous review of them. It is possible that changes will be made after parliamentarians vote on the appropriations. That criticism remains valid, but in my opinion, there are not many ways to remedy this unless we change the very structure of parliamentary appropriations.
In your question you also raise the matter of measures that have not been announced. There has also been an improvement in that regard, as compared to the transparency of previous budgets. However, there are a lot of unannounced measures. In fact, we do not know the exact number but the amounts are rather large. That said, it is a bit surprising that there is a negative amount in the 2019 budget.
There is a negative of $3.8 billion over a five- or six-year horizon. This suggests two possibilities, or a combination of both; a decrease in expenditures that have already been provisioned, or increases in taxes and tariffs. Without having details, we can't know whether these are expenditure reductions or funds that are no longer needed, so that budget space has been freed up. There is a lot of uncertainty about that.
The upside is that in the past, that uncertainty would not even have been mentioned. Today, we mention the existence of a large amount that corresponds to unannounced measures or expenses. We mention their impact, but the measures themselves are not specified.
Thank you to the witnesses for presenting here today.
I wanted to touch on a report that was put together by your office in the middle of April on the infrastructure investments in the territories. The report was critical of infrastructure spending in the north. I found it odd that in spite of many announcements on roads, highways, airports and housing, the report came out in the fashion that it did. It raised a lot of questions.
Can you verify that your report was looking solely at the investing in Canada plan and not at the broader scope of infrastructure?
I raise this because without including measures such as the trade and transportation corridors initiative, the investments in housing, the investments in broadband, disaster mitigation and everything else, it really doesn't paint the bigger picture when it comes to infrastructure investments.
That's not what we find. In fact what we find is that in aggregate there could be $4 billion of non-announced measures, but it translates into a net minus $3.8 billion. It's thus either a net reduction in expenditures, increases in taxes or a combination of both.
In your scenario, in the example you mentioned, $4 billion of non-announced expenditures would probably mean $7.8 billion of other, offsetting reductions or tax increases, for a net of minus $3.8 billion. That, then, is what we find: the government mentioned in its budget non-announced measures for a net of minus $3.8 billion.
We asked Finance officials and were not provided with concrete explanations—budget secrecy or decisions still to be made. Whatever the reasons, valid or not, we don't know. We interpret this as expenditure reductions or tax increases or a combination of both for the forecast period, totalling a net $3.8 billion.
Thank you, Mr. Chair, and thank you for coming to present to us today.
There are a couple of questions coming out of your remarks and something I would like to clarify, if you could give me one second here. We were talking about the money for veterans.
I found your summary table in your report. Thank you very much. I'm a numbers person; I appreciate the clarity of numbers.
Just for the record, based on the former program under the last government, the present clients would receive $22 billion. Under the pension-for-life scenario that has come in under 2019, those same present clients will receive $25 billion, an increase of $3 billion. New entrants would receive the same, as they did in the plan preceding this plan.
There is a net increase of $3 billion, just for the record. I know you were struggling there about the 5% and what have you, so I thought this would be helpful.
The other thing in your fiscal outlook and in your remarks today is that you said you project that federal debt will “decline to 30.5% of GDP in 2020-21, which is almost 1.5 percentage points below the government's official debt anchor. We also project the federal debt-to-GDP ratio to fall to 28.9% of GDP in 2023-24.”
Could you explain to people who might be watching or interested in hearing this what a “debt anchor” is?
I wouldn't call it worrisome, but I wouldn't call it normal either.
As I mentioned in my opening statement, our projections assume that no new measures or major policy changes are introduced. For our projections, we assume a status quo in policy actions. We look at the effects of economic changes over the long term that are a bit more predictable, such as demographic changes. Our projections take into account energy prices, the global economic and macroeconomic environment, current policy and announced policy actions whose implementation is almost certain. All of those considerations result in the figures you have before you.
That said, it's rare for a government not to make changes to government programs. Is it plausible to think that nothing will change and that government programs will carry on at the same rate? I don't think that's what's going to happen, because successive governments make changes to programs. However, government spending as a share of GDP can be expected to remain stable over time. That would not be unusual.
Regardless, a government may wish to play a stronger role and be more involved in the economy or, conversely, play a smaller role in the economy. That can happen in a variety of ways, either through direct spending or through higher or lower transfer payments to individuals.
Looking at program expenses in isolation likely paints a slightly distorted picture of real total government spending.
Okay, if there are no further questions, I just have one to close off.
In the executive summary of your report on the expenditure plan and main estimates, you mention that elderly benefits are the largest major transfer to persons. You also mention that the increases in the gas tax fund and the Canada health transfer account for the two most significant increases in major transfers to other levels of government.
Do you have the bottom line there? You outline the $2.2 billion increase in the gas tax fund, which is doubling it, and the $1.8 billion increase in the Canada health transfer. What is the total amount of expenditures in those two categories?
One of the problems, even in the budget documents, is that we often talk about the increased percentage or the increased amount, but you have to search here and there to find the bottom-line figure. I find that a problem.
I'm looking for the bottom-line figure. I guess if the gas tax fund is now doubling 100%, it would be $4.4 billion.
What is it for the Canada health transfer? That's a question we get a lot.