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View Ted Falk Profile
CPC (MB)
View Ted Falk Profile
2021-05-18 17:14
Thank you, Mr. Chair.
Thank you to all of the witnesses. I enjoyed hearing your various comments and testimonies.
I'd like to ask Mr. Moody a few questions. You indicated in your opening comments about the size of the budget—724 pages—with this bill being 366 in all, how extremely extensive it is and that to give it an adequate study it would take a lot more time than what we're doing.
You also talked about inflation, and I've had the same experience you've had. I know that when I go to the grocery store groceries cost more. They're telling me a sheet of OSB for building houses was $8 a year ago. Today there's a limit on it at $80 a sheet. A homebuilder, on the weekend, told me it costs an average of $40,000 more this year to build a home than it did a year ago. RVs and autos are more expensive. Housing and even the cost of everyday goods and services have seen, for the most part, a significant increase. We know that inflation is happening, and we know when inflation happens interest rates are going to increase.
Have you done any calculations as to what size of a rate shock Canada can afford on its debt?
Kim G. C. Moody
View Kim G. C. Moody Profile
Kim G. C. Moody
2021-05-18 17:16
Thank you, Mr. Falk.
The short answer is no. I personally have not. I spend all of my time in tax stuff and tax policy more than in inflation and economics. I leave that to my economist friends. I think common sense dictates that it's not going to take much of a rate increase in order to have a huge economic shock.
David Macdonald
View David Macdonald Profile
David Macdonald
2021-05-18 12:46
I have indeed. Thanks so much for the invitation to come back to speak to you today about Bill C-30 and Budget 2021.
The last time I was at the committee, I presented you with the results of our 2020 child care fee survey in the context of the fall economic update. I was pleased to see those child care figures appear in Budget 2021 as the starting point for the government's ambitious national child care plan.
Parents have two main complaints about child care in Canada. First is that fees are high, and second is that wait lists are long. Targeting a reduction in fees, particularly with quick and substantial reductions by 2022, will have a noticeable impact and make a big difference for parents with young children. However, the expansion of spaces at the same time will be an important corollary to fee reductions to ensure that we don't trade lower fees for longer wait lists. I look forward to specific targets on space increases, as well as reductions in fees.
When it comes to building a recovery from COVID-19, affordable and accessible child care is in a unique position. It certainly supports women as they return to the labour force after they have been harder hit than men during the pandemic due to job loss, but it also provides improved productivity due to higher female labour force participation, thereby driving long-term real GDP growth. Moreover, it pays higher tax dividends than other programs do.
The reduction in child care fees so far has been largely driven through provincial expenditures—certainly in Quebec, but also in Manitoba, Prince Edward Island and Newfoundland, which all have set fee programs, although at a higher rate than Quebec.
The higher income tax that results from higher female labour force participation goes disproportionately to the federal government, despite the provinces being the ones that support it. This makes the federal government an ideal partner on this file, as it is also the main beneficiary of that increased tax revenue.
Budget 2021 is relatively limited in its focus on new revenue generation. I'm not overly concerned about deficits, but now is the time to start to consider new measures so that they can be properly implemented in the future. In the short term, I would encourage the committee to consider a CEWS clawback for profitable companies. In the initial months of the rollout of the wage subsidy, the barriers to entry fell quickly. The upside was easy access for businesses that needed it to continue to operate. The downside was that businesses might squeak by on the rules, but that the subsidy, in the end, would boost profits.
While the CRA has aggressively pursued CERB recipients, there is no corresponding effort on the business side. Recent media reporting has highlighted publicly traded companies successfully receiving the CEWS all the while declaring substantial profits. I would encourage the committee to consider a CEWS payback regime, whereby companies that received it but also declared profits pay it back.
Given that more support has gone to business than to jobless Canadians during the pandemic, it only makes sense that profitable companies that don't need the wage subsidy send it back to support other recovery efforts.
In the longer term, I would encourage the committee to consider other revenue options. The federal government could build on its closure of the stock option deduction scheduled for July through an examination, for instance, of the capital gains inclusion rate. Given its immense cost, this could provide additional funds for the recovery, as could a more thorough review of tax expenditures given that many of those tax loopholes go to a very small slice of the upper end of the income spectrum.
The proposed digital services tax at 3% of revenue provides a model for how profit-shifting by international corporations can be tackled. The 3% of revenue is a sort of minimum corporate tax for foreign companies, although it could certainly be expanded far beyond digital services, which is its starting point.
It is clear from American disclosure that many multinational companies regularly employ profit-shifting strategies to declare profits in tax havens instead of in the countries where those profits were generated. Examining a minimum corporate tax, possibly based on the 3% revenue rule, would go a long way to avoiding corporate freeloading on Canadian infrastructure done by foreign multinationals, all while levelling the playing field for Canadian companies that do pay those corporate income taxes.
Finally, like the government, I have limited concern about federal deficits and new federal debt. Interest paid on the federal debt has fallen to historic lows when adjusted for GDP. This is true even when one includes the record pandemic deficits and new spending over the next five years. Incredibly, we would have to look to before the First World War to see the federal government paying less to service its debts, adjusted for GDP, compared with today. Those low rates make this an ideal time for the federal government to invest in short-term pandemic economic recovery but also in long-term issues, like much-needed changes to avoid the impact of the climate emergency.
For members concerned about interest rate increases, it's important to remember that those increases would hit all sectors, not just the federal government. Including the pandemic spending, the federal government's debt-to-GDP ratio now sits at roughly 50%. Household debt-to-GDP stands at more than twice that, at 112%. The corporate equivalent is at 130% of GDP.
The debt of these portions of the private sector, household and corporate, have jumped 10 points during the pandemic, so even small changes in the interest rate brought about by, say, the Bank of Canada's increasing the overnight rate would have big impacts on the private sector. The impacts would not only be because they are more leveraged but also because they pay a higher interest rate to start with. In that sense, heavy indebtedness of the private sector will protect the federal government from interest rate increases.
I thank you for your time and look forward to your questions.
Stephen S. Poloz
View Stephen S. Poloz Profile
Stephen S. Poloz
2021-05-18 12:58
Thank you very much, Chair.
Good afternoon to you and to the committee. Thanks for asking me to participate in this study of Bill C-30.
I would offer three points by way of introduction. The first point concerns the context in which we find ourselves. The impact of COVID-19 on people and our economy has been massive. There will be some permanent damage. However, the damage has been mostly limited to sectors that have been shut down. In a typical recession, bad news in one sector usually infects the other sectors through lower confidence. This has not happened this time. I think this is the main reason that the economy has significantly outperformed most forecasts during the past year.
This economic strength has generated a debate around the appropriateness of fiscal stimulus. It has given the government far more fiscal room to manoeuvre than previously expected. However, any major economic trauma will scar the economy. These scars will run deeper the longer it takes for the economy to heal. Scarring manifests itself as a level of national income that would be lower than it otherwise could be—literally forever—and so I therefore subscribe to the view that it makes sense to push the economy harder during the early stages of recovery, because this will encourage business investment and create new economic growth.
My second point concerns fiscal sustainability. A credible fiscal plan in which the level of government debt relative to national income stops rising and debt service costs are manageable meets the minimum—or, we should say, perhaps technical—standard of sustainability. I draw your attention to the table on page 328 of the budget, which shows that these criteria are met. By the way, comparing this table with a similar one from the 2019 budget two years ago demonstrates that this budget does not represent a sharp turn toward big government, as many have said. The planned budgetary expenditure trend line returns to about 15% of national income, just as it was pre-COVID. The budgetary revenue trend line does exactly the same.
There is a legitimate concern that this minimum standard of fiscal sustainability would leave the economy vulnerable to future shocks. Well, that issue is for broader political debate, a debate that I think should acknowledge the challenging fiscal situation in our provinces. When we combine federal and provincial debt together, as we should when considering Canada's future resilience, our fiscal picture is not very different from that of other major economies.
My third point is that there are many ways to build future resilience without government austerity or higher taxes. If we put our minds to it, we can grow out from under our COVID debt burden, just like we grew out from under our World War II debt when I was young. There are many ways in which we could boost our long-term economic growth rate and grow our way out of our indebtedness.
First of all, immigration is Canada's most important economic growth engine, just as it was in the 1950s and 1960s. Anything we can do to make that process more efficient will be a good investment in future growth.
Second, a national child care program, as announced, can also help boost labour force growth. I do hope it can be deployed without delay. This is the sort of program that can literally pay for itself. If we can boost the level of national income by a mere 2% in this way, which amounts to $40 billion to $50 billion more national income every year, then $6 billion to $8 billion will automatically land in government coffers, also every year.
Third, as I've argued before in this committee, one of our biggest untapped sources of future economic growth is to harmonize provincial regulations across the country to reduce interprovincial business frictions. This initiative has about twice as much economic growth potential as the child care proposal, and in fact would cost nothing to implement. It seems to me that finding innovative ways to boost economic growth and avoid raising taxes should be at the top of our list, at this most precarious time, at both the federal and provincial levels.
Thank you, Chair.
View Pierre Paul-Hus Profile
CPC (QC)
Thank you, Mr. Chair.
Good afternoon, Mr. Minister.
My regards also to the officials with you today.
Mr. Duclos, you are the President of the Treasury Board, as well as an economist. In the document that I am about to show you, you will see figure 1, dealing with the composition of expenditures in the Main Estimates 2021-2022. You will see a green circle, indicating the cost of servicing the debt.
This year's budget shows $21 billion for servicing the debt.
Does that concern you?
View Jean-Yves Duclos Profile
Lib. (QC)
Thank you, Mr. Paul-Hus, and all my colleagues on the committee.
I am indeed an economist by training and I am also President of the Treasury Board. As such, my responsibility is to ensure that the Government of Canada's funds and efforts are directed to where the pandemic makes it important.
As an economist, I also understand, as do many others, that, if we had not invested quickly and massively to support Canadians and their companies, the result would have been terrible. We would have found ourselves not only in an extraordinary economic crisis, but also in a social crisis…
View Pierre Paul-Hus Profile
CPC (QC)
Mr. Duclos, you know that I do not have a lot of time.
I want to know whether it concerns you. I especially want to know whether you have assessed the impact that a 1% increase in the interest rate could have on Canada's finances.
View Jean-Yves Duclos Profile
Lib. (QC)
We know two things about that.
First, the interest to GDP ratio in Canada is the lowest it has been for almost a century.
Second, our financial and budgetary conditions are among the most enviable in the developed countries. It is important…
View Pierre Paul-Hus Profile
CPC (QC)
So your answer is that you are not concerned about the medium-term impact of a possible rise in interest rates for Canada and its taxpayers.
As the parliamentary budget officer has indicated, an increase of only 1% would have impacts on society as a whole and on all taxpayers.
Does that concern you?
View Jean-Yves Duclos Profile
Lib. (QC)
The concern we absolutely must have at the moment is to get out of this crisis as strongly as we can. That is exactly what will allow us to avoid accumulating deficits, which would become greater and last longer. Those deficits would lead us into a fiscal and economic slump that we absolutely want to avoid.
View Ed Fast Profile
CPC (BC)
View Ed Fast Profile
2021-05-11 16:13
Thank you, Mr. Chair.
Thank you, Minister, for appearing before committee again.
I again want to congratulate you for being the first female finance minister to deliver a federal budget and, hopefully, it's the first of many to be delivered by women in the future.
I do note, however, that this is also the largest spending budget ever and creates the largest debt and deficits in our country's history. My fear is that future generations will look back on this budget as the one that created a financial burden that undermined their prospects of living the Canadian dream. I certainly hope that is not the case and that, in fact, Canadians still have the prospect of a bright future ahead of them.
With that in mind, I want to refer you to not only the fall economic statement, but also the budget that this BIA implements.
I note that in the fall economic statement you projected GDP growth at 4.8%, but the budget says that it's going to be better than that; it's going to be 5.8%. You projected in the fall that revenues would be around $335 billion. Now, in the budget, you're predicting that it's going to be better than that, and we're going to have $20 billion more. With more cash coming in by way of revenues and more economic growth predicted in this budget, you're still projecting a deficit that is higher than what you projected in the fall economic statement.
The same is true in 2022-23, which is the next fiscal year. Again, the projected revenues are going to be up by about $20 billion, so you have more revenue coming in, more money in the bank account, and your growth is projected to be close to 1% higher than the fall economic statement had suggested, yet you're predicting a deficit that is $9 billion higher than the fall economic statement.
My concern is this. We have better growth; we have higher government revenues in this year and the next, yet, for some reason, you're not only spending all of the unexpected additional revenue, you're also increasing the amount you're going to borrow each year. We're going backwards, big time.
For every extra dollar that comes in in revenue, you seem to think that you can spend that dollar and then borrow even more than you had initially projected, so how is that a sustainable fiscal and debt management plan?
View Chrystia Freeland Profile
Lib. (ON)
First, Mr. Fast, thank you for your kind comments. You made a similar comment that I really appreciated when I delivered the budget. I will take this opportunity to recognize a woman who I think deserves the respect of all of us, and that is Kim Campbell, Canada's first woman prime minister. She was, of course, a Conservative, so I will take this opportunity in turn to congratulate you and your party for having broken that glass ceiling, and to congratulate Ms. Campbell.
You have addressed some questions broadly around fiscal sustainability in the budget and around debt and deficits, and around the FES projections and the budget projections. Let me make a few comments.
The first comment I would make is that when it comes to the growth projections, a long-standing practice, in fact one that dates back to 1994, is that the budget is based on the average of forecasts of private sector economists. I think this is a great example of institutional strength of Canadian institutions and I make that point to the committee to be clear about why the projections have changed. The projections of private sector economists have changed and that has been what we have used as the basis of our fiscal track. Now, I know that members of this committee are well aware of this, but I just want to be clear with all Canadians.
To the second point around the sustainability of our spending, I assure members of the committee that I am very confident that the spending in our budget is reasonable and sustainable. There are a couple of key markers that I would point people to. The first is that we show a declining debt-to-GDP ratio, falling to 49.2% in 2025-26, and likewise, a declining deficit, falling to 1.1% in that outer year. I would also point out that it is not merely my judgment that the debt and deficit track is reasonable and sustainable, it's also the judgment of some important outside validators. I would start by citing S&P. On April 26, they reaffirmed Canada's AAA credit rating, the highest there is, and said that the outlook was stable. That was after reviewing our budget.
I would also point to comments published today of former governor Stephen Poloz, who was, of course, appointed by Prime Minister Harper. He actually spoke about how in his view the assumptions in the budget were actually quite small-c conservative and that he did believe there was a sustainable path.
Paul Kershaw
View Paul Kershaw Profile
Paul Kershaw
2021-05-04 16:05
Thank you very much.
As a reminder, I'm a policy professor at the UBC School of Population Health and founder of Gen Squeeze.
Gen Squeeze is a force for intergenerational fairness to improve Canadian well-being. It is powered by the voices of Canadians in our 20s, 30s and 40s, the kids we represent and the family members who love us, all backed by cutting-edge research.
When you requested my participation a couple of weeks ago, I focused in particular on the need for policy-makers to reduce an intergenerational tension in our housing system.
Our current policies incentivize many everyday households to want two incompatible things from housing. On the one hand, we often want housing to provide an affordable place to call home. On the other hand, we want housing to provide a good return on investment. The problem is that those two things are incompatible, because when something provides a good return on investment, by definition its value grows faster than local incomes. When something grows faster than local incomes, it becomes less affordable.
For the last several decades, a cohort of Canadians who tend to be older and reside more in urban areas have reaped substantial gains in wealth as a result of rising home prices, all while sleeping, watching TV, cooking, raising kids and making our homes. I share with you my own story about how my own wealth windfalls are implicated in that.
Unfortunately, one of the outcomes from housing wealth windfalls for people like me and others is that those who follow in our footsteps, our kids and grandchildren, have a much more challenging time to find a place to call home that is affordable, even in places where they grew up.
I pointed out last time that our national housing strategy so far fails to address this intergenerational tension, because it never once mentions the word “wealth”. That omission reflects a hesitancy on the part of our world of politics to address intergenerational tensions. By being silent, our world of politics is collectively standing by as many Canadians are over-consuming wealth windfalls that erode the sustainability of the housing system to deliver affordability for generations to come.
It's quite similar to our climate change problem. While the last couple of years clearly signal some important federal progress, Canadian policy remains quite slow to address the reality that Canadians today are over-consuming the atmosphere's scarce capacity to absorb carbon. We don't yet price pollution at a high enough value for the harm that it's causing, so what do we do? We leave younger Canadians and future generations to pick up the tab for our present over-consumption of this scarce capacity, and that over-consumption undermines the sustainability of the very climate on which younger Canadians are depending for their health and economic well-being, and we know that's a big price to impose.
It's not just environmental debt; there's also government debt, which we know is ballooning as a result of the emergency response to COVID. That response is appropriate in this emergency moment, but the sustainability of government finances was already being disturbed prior to the pandemic, in no small part because the federal government was not prioritizing balancing budgets even when we were not in a recession.
One of the concerns I want to draw attention to today with the moments that I have remaining in my opening remarks is that the world of politics has shied away from helping Canadians to recognize another intergenerational tension, in this case in regard to our old-age security system, which is a very important system to protect, but it's at the heart of an intergenerational tension in our budgets. Our budget messaging coming out of Ottawa each year is risking burying those details in its fine print, which is not a partisan problem; it's a long-term problem.
The most recent budget is really instructive. Everyone in this room could be forgiven for thinking that child care was the biggest social spending increase in federal budget 2021. You should know that Gen Squeeze is proud of what happened in that budget. We worked hard to popularize the concept of $10-a-day child care when we first gave this label to a pan-Canadian child care recommendation in our lab over a decade ago, and along with tremendous mobilization by the Coalition of Child Care Advocates and early educators in B.C. , a 10aday.ca movement was born, and it's clearly had an important influence on national thinking.
I want to congratulate the federal government for really investing now in a meaningful way in child care, but it should be known that child care is nowhere near the largest social spending investment in the 2021 budget. Increases to OAS absorbed far more taxpayer dollars, and I beg of everyone in this room to go pay a lot of attention to table A1.6 of the budget, which shows that the Government of Canada plans to increase spending on OAS by $22 billion as of 2025, compared to a year ago.
That $22-billion increase is three times more than the roughly $8 billion that Ottawa plans to add to child care in 2025. It's more than the nearly $18 billion that budget 2021 plans to spend over several years for its green recovery to create jobs, build a clean economy and protect us against climate change. Also, it's about 10 times greater than the $2.5 billion that budget 2021 adds for affordable housing over the next several years. When Canadians and our politicians reflect on why our national government still plans a $31-billion deficit in 2025, well after we hope the pandemic-induced recession is over, it's going to be important to acknowledge that growth in OAS spending is a primary factor.
To be clear, OAS spending itself is not a problem on its own. Old age security is important because it helps seniors enjoy financially secure and healthy retirements. Almost every younger Canadian will have a parent or a grandparent who uses OAS. My mom and dad do, and so do my in-laws. However, it is a problem that governments resist being honest with Canadians about the need to consider new ways to raise revenue to cover its growing cost.
This means that today's retirees can rightly claim that they paid taxes towards OAS throughout their working lives, but the problem is that our governments weren't sufficiently honest with them about how much they needed to contribute in the past in order to ensure that their generation didn't take from the current system more than they put in. That outcome is unpaid bills that they leave for their kids and grandchildren.
Let me close. Intergenerational tensions are at the heart of a lack of political commitment to sustainability in our housing system, sustainability in our climate system and sustainability in our government budget system. Now is the time for us to come together to build for our world of politics the political cover to be courageous, to act on the evidence, to reduce these tensions, so that Canada truly works for all generations.
Thank you.
Yves Giroux
View Yves Giroux Profile
Yves Giroux
2021-04-27 17:11
Thank you, Mr. Chair.
Good afternoon, Mr. Chair and members of the committee.
Thank you for the invitation to appear before you today to discuss Canada's economic and fiscal outlook. I am also pleased to highlight some key issues arising from budget 2021, tabled on April 19.
I am joined today by Chris Matier and Trevor Shaw, who will help respond to your questions.
We released our pre-budget outlook on March 31. Our outlook showed a significant improvement in the economy owing to the earlier-than-expected arrival and administration of effective vaccines, higher commodity prices and a stronger U.S. recovery.
While the more recent surge in new COVID-19 infections presents a near-term risk, the resilience and adaptability that the Canadian economy exhibited during the second wave—combined with increased vaccination—should limit the economic impact of the third wave. Nevertheless, we will continue to closely monitor developments.
Our outlook, of course, did not include the new measures that were announced in last week's budget. Nor did it include the up to $100 billion in stimulus spending earmarked in the government's fall economic statement.
Our outlook showed the level of nominal GDP and budgetary revenue returning to their pre-pandemic paths over the medium term. On a status quo basis, we projected the budget deficit to hit 16.5% of GDP, or $363 billion, in 2020-21 and then decline to 0.7% of GDP over the medium term. The federal debt-to-GDP ratio was projected to peak at 49.8% of GDP before gradually declining over the medium term to 45.8% of GDP.
As noted in our report, uncertainty surrounding the outlook remains high. That said, setting aside the government's earmarked stimulus and budget 2021 measures, we judged that risks to our economic and fiscal projections were roughly balanced.
I will now turn to budget 2021.
Key issues in budget 2021, from our perspective, are, first, the fiscal guardrails. In our December report we judged that the $70 billion to $100 billion earmarked in stimulus spending could be miscalibrated if the focus was solely on returning selected labour market indicators to pre-pandemic benchmarks.
Given the improved labour market outlook, our pre-budget report reiterated this assessment. Based on our projection of the guardrail indicators, the government identified in its fall statement, almost all of the ground lost in the labour market due to the pandemic will be made up by the end of 2021-22. To be clear, we're not referring to temporary COVID-19 measures, but rather, as the fall statement indicated, to targeted stimulus to jump-start the economy. Moreover, measurers could be fully justified based on policy objectives other than providing economic stimulus.
In budget 2021 the revision to the private sector economic outlook and fiscal developments provides $109 billion in terms of new fiscal room over six years; that is, before any new measures were introduced, the budget deficit would be over $100 billion lower on a cumulative basis than forecasted in the fall statement.
This new fiscal room is used to finance over three-quarters of the $143 billion in measures detailed in budget 2021. While the budget refers to all these measures as “investments”, $37 billion is tied to COVID-19 spending. Up to $69 billion over the next three fiscal years could be construed as stimulus spending.
Budget 2021 also estimates the economic impact of $126 billion in recovery plan measures over the next three fiscal years. These estimates, however, likely overstate the impact of stimulus spending on the economic outlook presented in budget 2021.
The impact of $25 billion in measures from the fall statement should already be reflected in the March 2021 private sector survey. The recovery plan also includes $32 billion in additional COVID-19 supports, which are not, per se, stimulus measures. Moreover, some of the remaining measures were anticipated by economists and would also be included in their forecasts as the government had clearly signalled its intention to spend $70 billion to $100 billion in the fall statement.
We will be providing our own estimate of the economic impacts of the $69 billion in budget 2021 stimulus spending in a future report.
Finally, concerning the fiscal anchor, budget 2021 sets out a fiscal anchor, which is reducing federal debt as a share of the economy over the medium term and unwinding COVID-19-related deficits.
Over the medium-term horizon, the government projects the federal debt ratio to decline marginally to 49.2% of GDP from a peak of 51.2%, and remain well above its pre-pandemic level of 32.1% of GDP. Long-term projections presented in the budget also show the federal debt ratio remaining above its pre-pandemic level through 2055.
This suggests that the government has decided to effectively stabilize the federal debt ratio at a higher level, potentially exhausting its fiscal room over the medium and long term. This means that any substantial new permanent spending would either lead to an increasing debt-to-GDP ratio, or have to be financed through higher revenues or spending reductions in other areas.
With that, we'll be pleased to respond to your questions.
View Ed Fast Profile
CPC (BC)
View Ed Fast Profile
2021-04-27 17:18
Thank you very much, Mr. Giroux. It's good to see you at committee.
There are some who have suggested that we shouldn't get our knickers in a knot about the size of the debt because debt servicing costs are so low. However, there are some fears that the Bank of Canada rate may rise earlier than expected, perhaps some time in 2022.
Can you speak to the risk of rising interest rates, and has your office modelled what each 1% increase in rates would mean for the debt that the federal government has incurred over the last six years?
Yves Giroux
View Yves Giroux Profile
Yves Giroux
2021-04-27 17:19
Yes, I have heard that very often, that it's not a concern to be had about the increasing level of debt because the current debt servicing costs are very low, which is true. However, that's taking the point of view that because the cost to service that debt is low now, the debt that will have to be supported by the government over the next decades does not matter as much as it used to, which is taking the point of view, I assume, that interest rates will never rise.
We have done calculations and what we call “sensitivity analysis” and the cost of a 100 basis points shock to interest rates—so a one percentage point increase in interest rates—has an impact in the first year on public debt charges of increasing them by $4.5 billion. That rises as the debt needs to be refinanced. By year five, the additional debt servicing cost amounts to $12.8 billion per year. That's when interest rates rise by one percentage point.
View Tamara Jansen Profile
CPC (BC)
Okay. The Department of Finance's own numbers say we could be back within spitting distance of more historical deficit numbers as early as the next fiscal year with no austerity measures necessary.
What risk does Canada face with taking on this enormous debt, considering the fact that interest rates are on the move and all signs point to rising inflation?
Yves Giroux
View Yves Giroux Profile
Yves Giroux
2021-04-27 17:50
What the government and the Department of Finance published in the budget is a worst-case scenario. What I would have liked to have seen in the budget was a status quo scenario—that is, what the fiscal track would look like, the budget or the debt would look like, without the budget interventions or the budget investments.
To respond directly to your question, the risks of higher deficits and higher debt with interest rates rising, especially if there were to be new permanent spending in future budgets or in future government decisions, is that the debt-to-GDP ratio, rather than stabilize or even decline a bit, could start to rise. Then it would become a bit more.... Every time you have a debt-to-deficit ratio that is increasing, the longer you wait to stabilize it, the more difficult it is to course-correct. That is the risk.
View Ted Falk Profile
CPC (MB)
View Ted Falk Profile
2021-04-27 18:01
Thank you, Mr. Chairman.
Thank you to Mr. Giroux and your associates there.
We've seen significant increases in the cost of everything this last year. Food has gone up, and real estate has gone up 20% to 100% depending on what area of the country you live in. Crude oil has seen a 300% increase this year. Wood products like OSB have seen a 500% increase.
We know that we're right around the corner from seeing significant inflation and, with that, there are going to be higher interest rates. How rate sensitive—and you partially addressed it with the $17-billion answer—is our federal debt?
Yves Giroux
View Yves Giroux Profile
Yves Giroux
2021-04-27 18:01
That's a very good question, and that's a question that gets asked of me and my colleagues quite regularly. We have determined that one point of percentage is 100 basis points. If, for example, an interest rate goes from 1% to 2%, we call that a 100-basis-point increase.
With public debt charges following such a shock of one percentage point, federal debt charges go up by $4.5 billion in the first year, and they rise to $12.8 billion additional by year five if that one-time shock is sustained throughout the period. As the government refinances itself, it's financing costs go up by $12.8 billion by year five for a one-time shock of one percentage point.
View Ted Falk Profile
CPC (MB)
View Ted Falk Profile
2021-04-27 18:02
Is all of our federal debt rate sensitive? Is it all in a term and only sensitive to renewal dates, or is it also in a variable market-sensitive plan?
Yves Giroux
View Yves Giroux Profile
Yves Giroux
2021-04-27 18:02
I think they're specific debt instruments that have a floating rate, but I'm not aware that there are such instruments. There are real return bonds, but they tend to form a very small portion of the overall market debt.
Market debt is sensitive to interest rates as it gets renewed, but with treasury bonds that are 30 days, 90 days and 180 days, plus bonds that have one, two, five and 30 years, there's an ongoing turnover or churn of market debt. The moment interest rates rise, there is debt that needs to be refinanced.
View Ted Falk Profile
CPC (MB)
View Ted Falk Profile
2021-04-27 18:03
The Liberal government—and you stated this in your presentation—has a fiscal anchor, and that fiscal anchor is reducing federal debt. To me that's not a fiscal anchor; it's a wish list. They haven't attached any hard stops to that. They haven't said that a 51.2% debt-to-GDP is a hard stop and they will not exceed that. They've used it as a goal there. I would liken it more to the guardrail terminology that they've been using.
The debt-to-GDP is only one of the markers. In all my years as a banker and as a businessman, if I fixated on only one ratio, I wouldn't do a service to the application or to the business. There are multiple ratios that you have to look at, and I think the government needs to establish a variety of anchors.
Are there other anchors that you as the PBO consider should be looked at and considered by this government?
Yves Giroux
View Yves Giroux Profile
Yves Giroux
2021-04-27 18:04
That's a very good question.
Because there's only one taxpayer that supports all levels of government debt, I think it would be useful for parliamentarians and Canadians to look at government debt as an integrated debt. There's the federal debt that we focus on today, and that's normal—we're federal parliamentarians or servants to parliamentarians—but there's also provincial debt. I think it would be advisable for the government and governments in this country to look at the overall government debt burden, because provincial debt is also of concern, especially in several jurisdictions that are on a path to an ever-increasing debt-to-GDP ratio.
View Sean Fraser Profile
Lib. (NS)
View Sean Fraser Profile
2021-04-27 18:09
I'll make it quick, then.
One piece of testimony you gave today, Monsieur Giroux, was about Canada's deficit or debt position in comparison with that of its international counterparts. It struck me that we may be a little better than middle of the pack right now.
Is that a fair assessment, insofar as it impacts our overall debt and our debt-to-GDP ratio?
Yves Giroux
View Yves Giroux Profile
Yves Giroux
2021-04-27 18:10
Yes, I would say that 11 out of 29 is slightly better than middle of the pack. That's a fair assessment.
View Sean Fraser Profile
Lib. (NS)
Yves Giroux
View Yves Giroux Profile
Yves Giroux
2021-04-27 18:10
Yes, it's overall net debt, but the IMF also includes assets of public pension plans such as CPP and QPP. These offset some of the other levels of debt. Most other countries don't have assets to pay for future benefits. In that sense, Canada is in a privileged position.
Philip Hemmings
View Philip Hemmings Profile
Philip Hemmings
2021-04-15 17:22
Good afternoon. Thank you for this opportunity to appear before the Standing Committee on Finance.
This presentation draws largely on the OECD economic survey of Canada that was published on March 11. Our report is generally positive about the suite of economic policy measures that was introduced in 2020 and the subsequent evolution of those measures. The initial policy response was viewed as being appropriately rapid. The steps taken were also seen as having performed a reasonably good job in ensuring income support to those households and businesses most severely affected.
Canada was ranked as having one of the largest packages of fiscal support in an international comparison the OECD made in autumn of last year. Canada's package at that time, when we added it up, was worth around 13 percentage points of GDP. Other countries with large fiscal packages in this comparison were Italy, Germany, Australia and Japan. We'd also underscore that prudent fiscal policy in Canada over past years has helped provide scope for this sizable fiscal support.
Canada's menu of support has become more targeted, which is welcome. Notably, there has been the transition from the Canada emergency response benefit to the more focused benefits, including the Canada recovery benefit, the CRB. To be sure, there will be scope for technical improvements to some of these schemes that are still operating. For instance, our report flags that the 50% clawback rate of the CRB could perhaps be dissuasive to individuals in returning to employment.
Our report emphasizes that for the time being, a focus on keeping these supplementary channels of support open is appropriate to help economic recovery. Financial assistance for households should ensure gaps and support are covered. For businesses, continued focus is needed on nurturing their recovery.
It is worth emphasizing, I think, that, even with the retention of supplementary support, the very large deficit generated in 2020 will partially unwind. The shift back from blanket support suggests smaller outlays. Also the recovery process itself, unless reversed by another shock, will bring deficit reduction through revenue increases and diminished spending demands.
The crisis has raised a question as to whether the safety net provisions available in normal times are adequate. The recent commitment to introduce automatic tax filing for simple returns, partly so that more low-income households receive the tax credits as well, is welcome. In addition, permanent change to income support may be required to make social safety nets more reliable, timely and effective. This is challenging to implement. Our report suggests that one route would be for provinces and territories to upgrade their safety net welfare provisions, possibly with financial assistance from the federal government.
In principle, a guaranteed income scheme offers another solution; however, our report concludes that such a scheme is likely to be overly expensive and may reduce incentives to work. While support programs should remain on offer while the economy is fragile, a clear and transparent road map for preventing a spiralling public debt burden is needed. Canada's past record in federal deficit and debt suggests that, to date, broadly defined fiscal rules have worked adequately; however, a more precise rule may provide a useful anchor for reining in the debt burden. Our survey and previous ones have specifically suggested the introduction of a numerical debt-to-GDP target.
Finally, I think it's worth underscoring—and this is something emphasized in our report—that a successful post-COVID economy also requires structural reforms that do not necessarily involve direct fiscal costs. To help the business sector, our report urges faster progress in particular on the removal of non-tariff barriers between provinces. It also supports continued attention to the competitiveness and quality of telecommunication services. In addition, it identifies scope for improving business insolvency processes. For households, the report advocates the creation of more affordable housing through measures that encourage the building of more homes, for instance, through lighter planning regulation.
This brings my introductory comments to an end.
Thank you.
View Tamara Jansen Profile
CPC (BC)
Thank you.
Mr. Hemmings, in the OECD report you underscore the need for a transparent plan to ensure that the debt burden does not spiral out of control. Currently, Canada has one of the largest debt burdens among the developed nations, according to an article in Bloomberg. As a matter of fact, we would be top of the heap if not for Japan.
Would you agree, then, that fiscal anchors should be a keystone principle for stabilizing our debt, going forward?
Philip Hemmings
View Philip Hemmings Profile
Philip Hemmings
2021-04-15 18:22
Yes. At some point, once recovery is really solidly under way, then all of the attention should go back to prioritizing some reduction in public debt.
The extent to which active measures may be needed to bring that down will depend on the speed of recovery. If you have a sufficiently strong economic recovery and tax revenues come back rapidly, it might be that your deficits reach levels at which you're going to get reductions in the debt burden without having to make stringent cuts to public spending and so on.
This is all really going to become more transparent in the next year or so, I'd say.
View Pat Kelly Profile
CPC (AB)
Thank you.
I'll keep Mr. Cross going and ask him a question.
Given your testimony just now, what do you make of Bill C-14's unprecedented expansion and raising of Canada's debt ceiling? There's no budget, so we don't know why the debt ceiling would need to be raised. The debt ceiling is part of a second act, and we don't even know why it would necessarily be connected to this bill, which implements the fall economic statement.
Mr. Cross, what do you make of adding hundreds of billions of dollars to Canada's debt ceiling?
Philip Cross
View Philip Cross Profile
Philip Cross
2021-03-18 10:21
As mentioned, a lot depends on the course of inflation and especially interest rates. At near-zero interest rates, almost any amount of debt is affordable and sustainable. The minute interest rates start rising very quickly, this country could find itself in a difficult position.
This was exactly the conundrum the economy faced in the 1994-95 debt crisis. At that point, interest payments especially became unsustainable. The Bank of Canada made it clear that it was not going to bail out the federal government. As the federal government made difficult fiscal choices, the Bank of Canada then maintained lower interest rates to ease that path to restore fiscal equilibrium. A lot depends on the course of interest rates, and a lot of people seem to be counting on interest rates staying low.
A lot of what I said today was based on Chairman Powell's comments for the Federal Reserve board yesterday. He clearly indicated that the central banks will put up with almost any amount of inflation this year. However, going forward, once people start to expect inflation, all bets are off and interest rates could rise quite quickly.
We've already seen interest rates rise this year. The 10-year bond rate in the U.S. has jumped up from less than 1% at the start of the year to 1.7% already. I sit here and watch every day and there's an increase of almost 0.1% a day. This is the story in financial markets these days: How long and how sustainable will the upward movement in interest rates be? That's going to determine everything.
View Julie Dzerowicz Profile
Lib. (ON)
The other thing you're alluding to and you're reminding me about also, Mr. Macdonald, is the fact that if the federal government didn't take on the debt, we have heard from others that there would be worse repercussions for the economy and, as you just mentioned, there would be far higher debt levels whether on corporations or on the provinces.
We have often heard our Minister of Finance say that the government is taking on the debt so that Canadians don't need to. Do you think that's a fair statement?
David Macdonald
View David Macdonald Profile
David Macdonald
2021-03-18 10:29
I think it is a fair statement. The debt could have occurred someplace else. Certainly even in the corporate sector, despite the businesses being the primary beneficiaries of the federal government's COVID-19 efforts, the debt-to-GDP ratio for the corporate sector has risen 15 percentage points in two quarters. It's going to be very difficult for the corporate sector, which already had very high debt, to dig itself out of this, and it would have been much worse had they not received things like the wage subsidy or support for rent.
Despite the help for households, household debt has continued to go up, and despite help for the provinces, provincial debt has gone up over the last three quarters.
Debt has to be understood across the entire economy. It should be looked at not in isolation, at only the federal level or the household level, but also with regard to how it moves and can move between sectors.
View Tamara Jansen Profile
CPC (BC)
Thank you.
Mr. Cross, the finance minister has told Canadians ad infinitum that we can easily afford the debt we have because interest rates are so low and are guaranteed to stay low.
Would you say that her confidence is based on fact or fantasy?
Philip Cross
View Philip Cross Profile
Philip Cross
2021-03-18 10:47
When it comes to interest rates, there are no guarantees. I said I think central banks have made it clear they will not be raising interest rates under any circumstance this year, but as you get into next year and the following year, that's where already we're seeing inflationary expectations and upward pressure on longer-term interest rates building in the U.S. We're going to have to match that; otherwise all the money will just leave this country and go to the U.S.
Counting on interest rates staying lower forever is, I think, already.... That's been the story of financial markets so far this year—that interest rates may rise faster than central banks had thought or promised.
View James Cumming Profile
CPC (AB)
Thank you, Chair.
I'll direct my questions predominantly to Mr. Cross.
It's good to see you at committee again, Mr. Cross.
You talked quite a bit about quantitative easing and the Bank of Canada's massive bond buy. Should we be concerned that the majority of Canada's debt is really at a floating rate right now? What's the impact of that? Even if we were to fix it today, would we see an uptick in debt-servicing costs?
Philip Cross
View Philip Cross Profile
Philip Cross
2021-03-18 10:49
It's not all floating. As I mentioned, the PBO study found that an increase in interest rates in one year would have an impact of $4.5 billion, but over five years, it would be $12.8 billion, and that's because it takes time for that longer-term debt to roll over. It wouldn't be immediate, but even $4.5 billion is significant. Once rates start rising, they're not going to stop at the 1% scenario that was in the PBO's report. Once rates start rising, there's a potential there for them to rise quite significantly.
View Tamara Jansen Profile
CPC (BC)
Thank you.
Mr. Wudrick, the Business Council of Canada said, “The pandemic ignited an explosion in public spending and debt.” The federal debt-to-GDP ratio before COVID was 30%. Now it's 50%. Since we were told by the finance minister that the stimulus package was “preloaded”, which I'm assuming is meant to explain why they spent the most out of all the G7 partners, and now, looking at what appears to be a plan in Bill C-14 to get permission to spend another somewhere in the range of $700 billion, with a $100-billion slush fund and a $600-billion debt ceiling increase, should Canadians be worried that the Liberal government is out of control?
Aaron Wudrick
View Aaron Wudrick Profile
Aaron Wudrick
2021-03-17 17:23
I think Canadians definitely should demand and expect to have a budget. When a government wants to spend money, it's very simple: You come forward, explain what your plan is, and make your case for it. They're not doing that. They are using the pandemic as an excuse to not present a budget.
I was forgiving of that last year. I think most people were. But if you look around the world, all of our G7 peers have managed to present budgets. Every province in Canada except Nova Scotia has been able to. In fact, Ontario will present three budgets. Since their 2019 budget, which was after the federal budget, they'll have presented three budgets before the federal government has presented one.
Just in terms of accountability and transparency, I think it is irresponsible. They're out of excuses. They need to present a budget as soon as possible.
View Ed Fast Profile
CPC (BC)
View Ed Fast Profile
2021-03-11 15:49
Let me turn to part 7 of Bill C-14. That part effectively increases Canada's debt ceiling from $1.17 trillion to $1.83 trillion.
Am I correct, Minister? Just answer with a yes or no.
View Ed Fast Profile
CPC (BC)
View Ed Fast Profile
2021-03-11 15:50
No, I just asked whether you are increasing the debt ceiling from $1.17 trillion to $1.83 trillion. It's yes or no.
View Chrystia Freeland Profile
Lib. (ON)
Let me just say a quick point on the jobs numbers, because I think those are something that all of us are deeply concerned about. I sure am. Let me say that today 636,000 Canadians who had a job before COVID struck don't have a job.
I think the most urgent priority of our government and this entire House needs to be to provide the economic support to get them back to work.
View Ed Fast Profile
CPC (BC)
View Ed Fast Profile
2021-03-11 15:50
Mr. Chair, she didn't answer the question.
Yes or no, is the debt ceiling going up by $663 billion?
View Chrystia Freeland Profile
Lib. (ON)
I'm delighted to answer that question, Mr. Fast. Yes, the limit that we are seeking with Bill C-14 is $1.831 trillion.
View Ed Fast Profile
CPC (BC)
View Ed Fast Profile
2021-03-11 15:51
That figure is very exact, so you must know what it's going to be spent on, what you're going to use it for. Can you tell us exactly how that additional $663 billion will be deployed?
View Chrystia Freeland Profile
Lib. (ON)
As you know very well, Mr. Fast, having served in cabinet, a borrowing authority increase is not the same as spending authority. What it does is set a ceiling for how much the government can spend.
In terms of the composition of that number and how we got there, I would like to turn the attention of all committee members to page 141 and chart A2.3 in the fall economic statement. I can hold it up to show you guys the page. That has a very specific breakdown of how we got to that number.
View Ed Fast Profile
CPC (BC)
View Ed Fast Profile
2021-03-11 15:52
Mr. Chair, Ms. Freeland didn't actually answer the question. I want her to explain to Canadians the $664 billion of additional borrowing that she is asking Parliament for. Where will it be allocated, and how will it be spent?
Don't point to a chart. Tell Canadians who are watching this why you should receive effectively a blank cheque for $663 billion?
View Chrystia Freeland Profile
Lib. (ON)
Mr. Fast, I know that Canadians are really smart and really sophisticated and I urge everyone who's listening to this to look at page 141, chart A2.3, where how that borrowing authority amount is composed is laid out very specifically.
I want to address something very precise here. The increase in the borrowing authority is in no way a blank cheque. Every single expenditure by the government needs to be authorized by Parliament. The borrowing authority sets a transparent and accountable maximum limit as to how much the government can borrow.
View Ed Fast Profile
CPC (BC)
View Ed Fast Profile
2021-03-11 15:53
We know, Ms. Freeland, that in 2017 your government set a debt ceiling, which still left about $200 billion of room to spend. You spent all of that, and then the pandemic hit. You spent beyond that because of the support that you quite rightly provided to Canadians, and by the way, those items you articulated, we strongly support that support for Canadians.
What we don't support is increasing the debt ceiling by $663 billion without knowing exactly what that borrowing will be used for. You're saying you want a line of credit, a $663 billion additional line of credit, but you're not going to tell us exactly where you're going to spend it.
I'm going to give you a chance again to explain to Canadians where you are going to be spending that money. How will you spend it, when will you spend it and are you going to spend all of it?
View Chrystia Freeland Profile
Lib. (ON)
Let me just say to Mr. Fast that I have far too much respect for him, and I really do have a lot of respect for him, to think that he really believes the borrowing authority is in any way equivalent to a blank cheque or a line of credit.
What the borrowing authority limit does is it sets a limit on the maximum amount a government may borrow. There is a quite separate process, which this committee is intimately involved with, for debating and authorizing the specific spending that the government undertakes, and I look forward to having that discussion with all of you.
Again, for interested Canadians and committee members, look at chart A2.3 for the composition of how we got to that $1.8 trillion number for the borrowing authority limit.
View Ed Fast Profile
CPC (BC)
View Ed Fast Profile
2021-03-11 16:38
Thank you.
Minister, earlier in this meeting you referred to chart A2.3. You suggested that it explained everything. It explained spending, it explained borrowing and it explained how much money was going to be allocated to a certain area.
In fact, Canadians can't see this chart. You and I can see the chart, and if you look at it, I think you'll agree with me that all this chart does is explain that the government is going to borrow another $663 billion.
Would you agree with that assessment?
View Chrystia Freeland Profile
Lib. (ON)
No, Mr. Fast, I'm afraid I would not.
Let me just say a couple of things. Canadians can see this chart because it was published in the fall economic statement. It's available to anyone who would like to go online and look at the fall economic statement. For wonkish people who are watching our deliberations, let me point you to page 141 and chart A2.3.
What this chart shows is how we got to the number of $1.831 trillion for the borrowing authority we are seeking. It shows the composition of it, and I think that was important to show and people should refer to it. I can go through the chart, if people would like.
View Ed Fast Profile
CPC (BC)
View Ed Fast Profile
2021-03-11 16:40
Minister, you have confirmed what I just said. This is all about how much the government is going to borrow. It says nothing about where it's going to spend that money, and that's why we need a budget.
For two years you've neglected to deliver a budget and an economic plan for the country that would outline what you expect in terms of tax revenues, what you expect in terms of debt servicing costs, what you expect in terms of spending, what programs you're going to spend on, what fiscal anchors you're going to put in place to make sure that this doesn't get out of control, economic growth projections.... None of that is in this fall statement, yet you're asking us to increase the borrowing limit by $663 billion without any idea of where you're actually going to spend that money.
View Chrystia Freeland Profile
Lib. (ON)
Mr. Fast, there's a lot in there. Let me parse it and respond to the various points you've raised in the time allotted.
To your first point, that the borrowing authority is quite different from a budget, you are 100% right, Mr. Fast. That's a really important distinction. In seeking an increase of the borrowing authority, we are being extremely transparent. We are saying that this is the upper limit up to which the government may borrow.
We are not saying that the government will undertake those borrowings, nor are we saying anything about government spending. That's entirely separate. That happens through the fall economic statement. It happens through Bill C-14, which we're debating today, and it will happen through the budget. That's entirely right.
View Ed Fast Profile
CPC (BC)
View Ed Fast Profile
2021-03-11 16:42
Minister, your government blew through its previous debt ceiling within a couple of years—way beyond it. In fact, you exempted certain spending for COVID relief and that was appropriate, but you blew through it. Now you're suggesting to Canadians, “Yes, but if you give me $663 billion, don't worry. I won't blow through that line of credit.” Why should Canadians trust you with that?
View Chrystia Freeland Profile
Lib. (ON)
Mr. Fast, you've answered your own question with your previous question. It's very important to make a clear distinction, as you did in your first question, between the borrowing authority and actual spending authorities. We are very clear on that distinction. Canadians should be clear on it too.
The only other thing I would say is that, when it comes to spending authorities, our government has been clear that we believe, during COVID, it is important to do whatever it takes to support Canadians and Canadian businesses. We're open and transparent about that. I hope that all members of this committee will agree with that. Canadians need us to be there for them. That's why they made Bill C-14.
View Ed Fast Profile
CPC (BC)
View Ed Fast Profile
2021-03-11 16:43
I'll just make a comment.
We fully support the support measures that are contained in C-14. What we do not support is part 7, which dramatically increases Canada's debt ceiling without any oversight or accountability.
You're simply saying, “Give me a blank cheque and then trust me.” We just cannot do that, Minister. In fact, Minister, we are very disappointed that you wouldn't sever part 7 from C-14. That would allow us to support Bill C-14 and all the good measures that you've contained in there.
View Chrystia Freeland Profile
Lib. (ON)
I have a very quick response, Mr. Chair, which is simply to say, with really great respect for Mr. Fast, that the characterization of the borrowing authority limit as a blank cheque is simply false. This is a transparent and open authorization of a level up to which the government may borrow. Spending authorizations are separate.
View Pierre Paul-Hus Profile
CPC (QC)
When the government talks about economic forecasts and expenditures, it often brings up the argument that interest rates are very low, almost at zero. I find that short-term way of looking at things very troubling because we know that interest rates can go up very quickly. So if we extend the forecast out to five or 10 years, we could be in a bind.
The last time we met, I believe we estimated that, considering COVID-19 only, interest repayments on the deficit for that year would come to about $15 billion per year at current rates. If the rates increased to 2% or 3%, those costs will explode.
Should we take a much more prudent approach in the future? Is it not unwise to continue spending money on the assumption that interest rates are low?
Yves Giroux
View Yves Giroux Profile
Yves Giroux
2021-01-27 18:15
A rise in interest rates is one of the risks we established in our economic and budgetary forecasts. We do not see interest rates rising in the short or medium term. That should not happen before the end of 2023 or 2024. Basically, any rise in interest rates will be modest.
We are never free from turbulence. We saw that in February and March 2020. Unpleasant shocks and surprises can occur. We are not sheltered from a financial shock that could happen elsewhere on the planet and that would cause interest rates to rise. If that did happen, funding the debt would cost much more. But that is not on anyone's radar.
Certainly, a deficit like the one we are forecasting for the current year cannot be repeated for a number of consecutive years without putting the federal government's financial viability into peril or without medium- and long-term financial consequences.
View Majid Jowhari Profile
Lib. (ON)
You mentioned that you perceive that our interest rate is going to stay low some time in 2024 and it's not going to change. When we look at the debt, even at the debt we've accumulated or the investment we have made to make sure our economy holds in the $200-billion to $400-billion range, still at that type of interest rate the servicing of that debt seems to be very low.
Yves Giroux
View Yves Giroux Profile
Yves Giroux
2021-01-27 18:38
You make a good point, so that could be a fiscal anchor in itself. We will ensure that our debt does not exceed a level at which we have to pay more than x per cent of our tax revenues towards interest.
That's why I am saying that if a fiscal anchor is necessary, or is useful at least, the choice of a fiscal anchor is up to the government. Multiple fiscal anchors can be chosen.
To get back to a point you made, if the government spends and incurs additional debt to make the economy more productive, eventually that will reduce the debt-to-GDP ratio, other things being equal, because that will lead to more economic growth, which will reduce the relative size of the debt.
Livio Di Matteo
View Livio Di Matteo Profile
Livio Di Matteo
2020-12-11 13:03
Thank you, Mr. Chair.
Good afternoon. Thank you for the invitation to speak at these pre-budget consultations in advance of the 2021 budget. I commend the committee for reaching out to the academic community of economists for public input on this important process.
It's been said many times that the COVID-19 pandemic is an unprecedented event in recent history, and this context frames my input into this process.
The fall 2020 economic statement documented the unprecedented effects of and response to the COVID-19 pandemic. For fiscal year 2020-21, real per capita revenues have declined by 20% from the previous year, while spending is up by 70%. In real terms, this is the highest per capita amount ever spent in Canadian fiscal history—nearly $16,000. As a share of GDP, the projected deficits will be the second-largest in Canadian fiscal history, exceeded only by those during World War II.
The fall statement reveals that spending will eventually decline and the deficit approach 1% of GDP by 2025-26, but also a federal net debt that will rise to $1.5 trillion and a net debt-to-GDP ratio remaining in excess of 50%. Despite current low interest rates making current debt management look manageable, it remains the case that any sudden future shocks to the economy or to interest rates could be more difficult to manage as debt burdens rise.
The size of the initial fiscal response to the onset of the pandemic in the February-to-April period of 2020 was appropriate. However, the continuing, unprecedented fiscal response generated results that have not paralleled the fiscal support provided. The fiscal assertiveness of the federal response to the pandemic was not matched by assertiveness in targeting the response as might have been afforded under federal spending power or the power of quarantine that exists under the Constitution. Moreover, much of the spending went toward individual income transfers in excess of the pandemic-generated income losses. After all of this unprecedented response, we are now in the midst of a more severe second wave that threatens the economic recovery that began over the summer.
The federal 2021 budget must learn from the past and better target any additional projected fiscal response with a view to long-term economic recovery and growth. The additional spending must be directed towards productivity-boosting investment. Even prior to the pandemic, the business investment-to-GDP ratio had been faltering. While the short-term income support provided at the peak of the pandemic was important, if we are to continue to spend at these record levels, there must be more to show for it.
Government spending priorities should be directed towards initiatives for boosting our long-term productivity via investment in physical and human infrastructure. Public infrastructure in roads and transport; bridges; communications; schools; health care; water, sewer and environmental systems all require investment. Education has taken a major blow during the pandemic, and we need to ensure that students at the elementary, secondary and post-secondary levels do not fall behind in educational achievement and opportunities and reduce future labour productivity growth.
Then there is the matter of our national defence and security in a more multipolar and unstable world that requires equipment and resources and vision.
There is also a need for private sector investment in sectors producing goods and services that we can export so that we can continue to earn our way in the world. If our export markets falter and our incomes drop, there will be no international emergency response benefit payments offered to us. The federal government, therefore, should work with the private sector in assessing its investment needs.
Historically, excessively large amounts of government spending are not well correlated with long-term economic growth. It's not that government cannot help the economy, but that effective government requires knowing when to spend and when not to spend and, more importantly, what to spend the money on.
If we are to embark on a program of infrastructure spending, we must ensure that projects with the best return are selected. Assorted public projects should be assessed by an arm's length panel of key leaders with expertise in business, accounting, engineering and economics who can make recommendations in areas of national interest. It would be extremely unfortunate if federal infrastructure money flowed to community or sports centres rather than, say, roads and sewers, simply because shovel-ready plans exist for the former and not the latter.
Thank you very much for the opportunity to speak to you all, and I look forward to the discussion.
View Pierre Poilievre Profile
CPC (ON)
Exactly. The minister has no control over when they rise and can't guarantee they'll be low for long. That's why she's claimed that she's locking in our debt for the long run. It's kind of like a homeowner who takes on a long-term mortgage rather than a variable rate.
She can tell us then, what share of the new debt that the government has added since March is locked in for more than four years.
View Chrystia Freeland Profile
Lib. (ON)
We were clear in the fall economic statement and in our printed documents that 10-year and longer bonds make up 50% of the issuance in 2019-20. They're planned to make up 29% of the issuance in 2020-21.
View Pierre Poilievre Profile
CPC (ON)
That clearly contradicts the data on page 139 of the fall economic update, which shows that the combination of short-term treasury bills and short-term bonds of four years or less equals 75% of all of the debt that the government has issued since March, and that issues of 10 years and up represent a combined 25%. In other words, three-quarters of the new debt is short term and susceptible to sudden increases in interest rates.
Why are you contradicting the data that's in your own report?
View Chrystia Freeland Profile
Lib. (ON)
Mr. Chair, I am in no way contradicting the data. In fact, the numbers I am citing come from table A2.2 from the fall economic statement. As I said, what that table shows is the reality, which is that 10-year and longer bonds make up 15% of the 2019-20 issuance. Our intention, our target, is that they should make up 29% of the 2020-21 issuance.
View Pierre Poilievre Profile
CPC (ON)
I will go back to the original question. What share will be for less than four years?
View Chrystia Freeland Profile
Lib. (ON)
Mr. Chair, we were clear in the fall economic statement on our plan to push out along the curve, and that is a prudent plan. It's something that we have signalled clearly to markets, and that was an important objective of the fall economic statement.
View Pierre Poilievre Profile
CPC (ON)
What share are for four years or less?
View Chrystia Freeland Profile
Lib. (ON)
I have been clear, Mr. Chair, about our government's intentions of moving to longer maturities.
View Pierre Poilievre Profile
CPC (ON)
Yet the data in your own report shows that almost all of it is on short maturities, and it's susceptible to interest rate hikes, which you admit could come at any time.
Even the CBC is reporting that of the $240 billion of COVID spending, your government is refusing to release the recipient company names of that funding. Will you commit to publish all of the amounts and recipient companies of COVID-related spending before we vote on authorizing another $700 billion worth of debt that you're now asking for, yes or no?
View Chrystia Freeland Profile
Lib. (ON)
Let me first just take issue, Mr. Chair, with the little slur there implicit in the “even the CBC” reports.
As a former journalist, let me just say that the CBC is a fantastic news organization. I think it contributes hugely to the national fabric and the public discourse in Canada, so I couldn't let that pass.
When it comes to the information members of Parliament feel is necessary for them to be comfortable supporting our government's measures, it's going to be up to each member to make—
View Pat Kelly Profile
CPC (AB)
It's mostly short term. We heard that in the opening statement in the opening round. We heard that most of it is short term.
Soren Halverson
View Soren Halverson Profile
Soren Halverson
2020-12-08 17:12
At a very high level, just to do an abstraction of that, you've got about $1 trillion in debt, and so you're looking, on a steady-state basis, at 1% of $1 trillion.
View Pat Kelly Profile
CPC (AB)
Okay. Thank you.
The concern is that we've just heard in the opening panel that the government has no ability to gauge when interest rates are going to rise. The minister admitted to not possessing a crystal ball, and I don't think anybody expects she does.
What has your department built into its expectations around interest rates? Are you expecting that 1% addition to our debt service cost, or is it 2%, 3%? At some point rates are going to go up, and we need to know what that's going to do to the Canadian economy and Canadian public finances.
Soren Halverson
View Soren Halverson Profile
Soren Halverson
2020-12-08 17:13
If the question is focused on federal debt management, the answer is that the approach the department takes in terms of providing advice on debt management strategy is looking at a range of scenarios. It's an approach that is robust under a range of different interest rate conditions, and it's also mindful of smooth market functioning.
In the context of the crisis, the front end of debt, the short-term debt, was where the shock absorber was located. It's the easiest part of the market to place debt in, and then over time, there's a plan that has been communicated in the fall economic statement that involves terming out that debt. You're seeing a substantial increase in issuance in the 10 and 30-year range, in accordance with that approach.
View Pat Kelly Profile
CPC (AB)
How long will it take to shift the majority of that into longer terms?
Soren Halverson
View Soren Halverson Profile
Soren Halverson
2020-12-08 17:14
You are looking at a multiple between 450% to 600% increase, if you're looking at the 10- or 30-year issues right now, year on year from where they were last year. Those are big increments of debt going into specific sectors. If you were to maintain that, if you kept doing that for four years in a row, you would see a very large percentage of your overall debt burden reflected in that long end. You're sort of moving to that trajectory, but it's not a switch you can flip overnight.
View Sean Fraser Profile
Lib. (NS)
View Sean Fraser Profile
2020-12-08 17:19
Thank you very much, Mr. Chair.
I think Mr. Halverson will be best positioned to answer my question. I want to dig in a little on the cost of borrowing, given the nature of the conversation we've had to date.
The policy rate of the Bank of Canada, which is at the effective lower bound, is currently at 0.25%. The Conservatives keep raising fear about a potential 1% increase, which would represent a 500% increase if it were to shoot to 1.25% overnight. In any event, the Bank of Canada, during the testimony before this committee, has explained that there is no plan to do that for potentially the next few years, and in any event, the conditions that would justify such a radical increase would essentially tell a story that the economy is doing very well.
Mr. Halverson, to come back to this question, you explained previously that even if there were a short-term hike in the interest rate, the existing debt would need to term out first. I assume you mean that the term for each debt that's owed would have to pass before that would become due.
In your view, does this window of time, given the remaining term on debt that we hold, create an opportunity for us to effectively refinance our debt at a much lower interest rate, given what's happened in the world, so we can save significantly on borrowings that may be required to finance spending in response to the pandemic?
Nicholas Leswick
View Nicholas Leswick Profile
Nicholas Leswick
2020-12-08 17:20
Thank you, Mr. Chair.
I wanted to point out that the fall economic statement prints a forward-looking expectation for the yield curve. It prints an interest rate path through to 2025. You can most clearly see that, if members want to jot notes, on page 121. The department surveys 14 private sector economists as a group and takes the straight average of their macroeconomic variables, which include a path for both short- and long-term interest rates. In that context, as the economy strengthens, there is an expectation that there will be a backup in rates across the yield curve, across three-month rates all the way through to 10-year rates—
Nicholas Leswick
View Nicholas Leswick Profile
Nicholas Leswick
2020-12-08 17:21
I will cut to the chase. A path for interest rates is published in the fall economic statement. That path and the cost are imposed on the term structure of the debt and the debt management strategy and brought into the fiscal framework that's presented in the document. It is explicitly outlined that there is an expectation of a backup in rates, and those costs are brought into the fiscal framework as published in the document.
View Sean Fraser Profile
Lib. (NS)
View Sean Fraser Profile
2020-12-08 17:22
That's very helpful. That was going to be question number two.
I'll skip to question number three. A lot of fear has been raised on this committee around the potential that we're going to fall into a position similar to the one that the federal government saw in the 1990s before significant measures were taken to erode the debt.
Obviously this is not the 1990s; the interest rates are not the same. Can you give a sense—perhaps Mr. Leswick or Mr. Halverson would be positioned to answer this—as to what percentage of the total expenditures of the federal government is expected to be used to service debt, as compared to the 1990s?
Soren Halverson
View Soren Halverson Profile
Soren Halverson
2020-12-08 17:23
I'm not sure it's as good as yours. Essentially what I can point to is that the maximum point in the data that I've seen in terms of federal debt charges would have been in the early nineties, and at that time you were looking at a multiple of six times what we have today. It was a number just over 6% of gross domestic product, whereas today the overall federal debt charges represent 1% of gross domestic product. There's a pretty significant interval between those two.
View Sean Fraser Profile
Lib. (NS)
View Sean Fraser Profile
2020-12-08 17:23
Mr. Halverson, that includes spending that was part of the government's COVID-19 response to date.
Soren Halverson
View Soren Halverson Profile
Soren Halverson
2020-12-08 17:24
Those are the debt charges that we are paying today on the debt that is currently being issued, which would include the debt that was issued to support the government's COVID-related activities.
View Pierre Poilievre Profile
CPC (ON)
I'd like to get the officials to tell us how much debt the government will add this year and how much the Bank of Canada's holding of government debt will increase in this fiscal year.
While they are searching for those numbers, I'll just answer the minister's question to me as to whether Conservatives believe in the independence of the Bank of Canada: Of course we do.
She cites Jim Flaherty. Not only did he believe in the independence of the Bank of Canada, but he also never funded his deficits by having the Bank of Canada print money to lend it to the government.
In fact, throughout the entire great global recession, we never relied on the bank to print cash to fund our operations. That is something that this minister and this government are doing. They are dependent on the bank, and therefore cannot be independent from it.
To go back to my question, how much will the debt grow this year, and how much of that debt is being newly held by the Bank of Canada?
Soren Halverson
View Soren Halverson Profile
Soren Halverson
2020-12-08 17:48
What I have in front of me.... I don't have the growth in debt. I have the gross issuance. Is that of value to you informationally?
View Pierre Poilievre Profile
CPC (ON)
The growth in the debt of the Government of Canada is what I'm looking for.
Mr. Soren Halverson: Okay.
Hon. Pierre Poilievre: The published deficit is $380 billion. Would it be fair to say that it's $380 billion?
Nicholas Leswick
View Nicholas Leswick Profile
Nicholas Leswick
2020-12-08 17:48
I'm sorry, Mr. Chair. I think what we're searching for....
Thank you to the member for the question. I think what we're trying to zero in on is what you would like to use, Mr. Member, as the definition of debt—
View Pierre Poilievre Profile
CPC (ON)
It's the growth of the federal debt.
Nicholas Leswick
View Nicholas Leswick Profile
Nicholas Leswick
2020-12-08 17:48
On an accumulated deficit basis, it's exactly as you said. It's the value of the deficit, which is $387 billion—
View Kelly McCauley Profile
CPC (AB)
Thanks.
Just for the record, I'll correct Mr. Kusmierczyk's stats. Between 2006 and the Liberals' taking of power, the public service stayed at about the same amount, whereas the previous Liberal government actually cut 14% of the public service.
Mr. Giroux, I want to ask you a question. The finance minister commented in her update that we're locking in low rates by issuing more debt in longer-term instruments. I'm looking at the Bank of Canada website and I see a massive amount of short-term treasury bills being issued, but very little long-term debt.
I'm wondering whether you could comment on that. Are we actually issuing a lot more long-term debt, locking in these low rates?
Yves Giroux
View Yves Giroux Profile
Yves Giroux
2020-12-02 17:39
We are issuing more long-term debt, but not that much more. We can argue about the reasons—whether the government has done the maximum or could do even more—but the issue with long-term maturities is that there's only limited demand for that.
If the government tries to issue all of its debt as 30-year bond maturities, it will probably have to pay significantly higher interest rates, because there's limited demand for these very long maturities. That may explain why the government has not issued only 30-year bonds but has instead gone, for still a majority of its financing, through shorter-term bonds.
View Kelly McCauley Profile
CPC (AB)
What is our total projected debt when you add the debt owed by our Crown corporations? That's generally not added to the $1.1 trillion being bandied about. Then, if you add pension liabilities and everything else....
Yves Giroux
View Yves Giroux Profile
Yves Giroux
2020-12-02 17:42
The government has updated its debt-management strategy as part of the fall economic statement. They're looking for amendments to the Borrowing Authority Act, pushing the limit, proposing a maximum borrowing amount of $1.8 trillion, if I'm not mistaken: $1,831 billion.
View Tamara Jansen Profile
CPC (BC)
Thank you.
Mr. Macklem, you briefed us by saying “the Governing Council agreed that extraordinary monetary policy support will continue to be needed.” I'm wondering if I understand you correctly. Are you saying that you need to keep buying government debt, basically printing money, for Canada to remain solvent?
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