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Philip Jennings
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Philip Jennings
2015-03-30 15:42
With that, thank you, Mr. Chair and committee members, for allowing me to provide you with a brief overview of Industry Canada's response to the Auditor General's 2014 fall report on the restructuring assistance provided to General Motors and Chrysler during the economic crisis of 2009 as well as the automotive innovation fund.
As you are aware, Canada has a strong automotive sector, which generates $17 billion annually of value-added, or 10% of Canada's manufacturing GDP. With some 730 automotive suppliers supporting our 11 assembly lines and three engine plants, the industry employs some 117,000 Canadians directly, and another 377,000 Canadians indirectly. In fact, in 2014, Ontario was the largest automotive manufacturing jurisdiction in North America—larger even than Michigan.
The auto sector is also export orientated. There are 90% of Canadian-made vehicles sold abroad, the vast majority of these in the United States. The proximity to the U.S., one of the most profitable auto markets, is one of our competitive strengths. Our auto sector is truly part of an integrated North American market.
Industry Canada is always interested in views and ideas that will help us support and grow Canada's automotive sector. While we hope we will never face a situation like the crisis of 2009 again, we are also interested in learning from such circumstances and in continuously improving how we prepare and respond. In this light, we welcomed the Auditor General's four recommendations. In fact, Industry Canada has already acted upon two of them and plans to act on the other two recommendations in a timely fashion. I will discuss this later in my remarks.
As you know, Mr. Chair, late 2008 and early 2009 was a period of extreme uncertainty and volatility. Credit was tightening, consumers were scaling down and postponing their spending, and economies around the globe appeared to be heading into recession, if they weren't already. The auto sector was experiencing first-hand the impacts of consumers postponing major expenditures. Annual vehicle sales plummeted in the U.S. in 2009, from about 17 million vehicles per year to a little over 10 million.
With shrinking sales, the financial situation of all companies was becoming desperate, but for GM and Chrysler it was particularly bad, as it did not have access to capital like the others. In November 2008, GM announced it would run out of cash around mid-2009 without a combination of government funding, a merger, or sales of assets. No credit institution was in a position to help either GM or Chrysler.
While Canadian sales did not dip as much, Canadian assemblers were not sheltered by the events in the U.S., given that close to 90% of Canadian-made cars are exported to that country. Canadian subsidiaries were directly impacted by their parent companies' difficulties. There was a real risk that GM and Chrysler might shutter their Canadian operations in an attempt to restructure.
GM and Chrysler were at the time, and continue to be, the two largest carmakers in Canada, accounting for more than 55% of total production. Many of Canada's suppliers depended on contracts with GM and Chrysler. Without this work, many would not have survived, leading to a hollowing out of the suppliers and creating problems for the other original automotive equipment manufacturers.
That would have triggered a collapse of the entire Canadian automotive supply chain. The strong links and interdependencies between our supply chain and our assemblers were the key motivation for government action and support of GM and Chrysler. GM and Chrysler in Canada had to be protected from being collateral damage of the events in the U.S., not only for their sake but for the entire suppliers sector and ultimately the entire automotive industry in Canada.
Mr. Chair, as the Auditor General concluded, the Government of Canada did what it set out to do: prevent the disorderly collapse of the auto sector and ensure a viable automotive sector in Canada.
The clock was ticking. There was a very short timeframe to find a viable remedy for both GM and Chrysler. Both were in dire financial straits, and Chrysler needed to find a buyer. From the point that the crisis started and GM submitted high-level restructuring plans to the U.S. Congress in late 2008, governments had less than a month to decide whether to provide an initial set of loans. Again, once the company submitted more detailed plans, there was only about six weeks to assess their long-term viability.
As these events demonstrate, the restructuring of GM and Chrysler took place under intensely challenging circumstances. It required unprecedented collective action by the federal, Ontario, and U.S. governments.
While Charles and I at Industry Canada were not there at the time of the restructuring, the federal government did quickly organize an automotive response team. It was headed by Mr. Richard Dicerni and Mr. Paul Boothe, the deputy minister and associate deputy minister at Industry Canada at the time, and Mr. Ron Parker and Mr. David Moloney, who are my predecessors and who led a team of dedicated public servants who worked tirelessly and in unique ways to manage the government's response to the crisis. It supported a steering committee made up of deputy ministers from Industry Canada and Finance, as well as representatives from Export Development Canada, the Privy Council Office, and the Ontario Ministry of Finance and Ministry of Economic Development and Tourism, who all played important roles.
The team also reached out to stakeholders and experts to ensure it quickly had access to the necessary knowledge and expertise, whether on financial corporate restructuring from KPMG and Ernst and Young or on U.S. and Canadian insolvency law from Cassels Brock or on the automotive market from CSM Worldwide and Casesa Shapiro Group.
There were external discussions with those in the industry, including assemblers and suppliers, to gather essential information needed to assess and understand the risk. The government then made a responsible decision and took decisive action. Afterwards, my department monitored the two companies to ensure they fulfilled their end of the bargain and to ensure that the restructuring would deliver the desired results.
Mr. Chair, I am impressed by the work accomplished by my predecessors for the Canadian industry and its workers. Their work was the basis of the government actions and it paid off. It also proved to be pivotal in securing the immediate future of Canada's automotive industry and the economy at large. In early 2009, GM and Chrysler assembly plants directly employed an estimated 14,000 workers. Today both companies continue to be Canada's largest automotive manufacturers, employing about 19,000 Canadians, and the economic benefits extend far beyond the two companies. At the time of the crisis, the Department of Finance estimated that a total of 52,000 jobs were directly or indirectly tied to production at GM and Chrysler. Another study, by Leslie Shiell and Robin Somerville at the IRPP, estimated that in 2010 a total of 100,000 jobs, including jobs in the supplier sector, could have been lost without the restructuring. The study further suggested that in 2009 alone the economy could have suffered losses of $23 billion had GM and Chrysler not successfully restructured. The government's decisive actions ensured that there was business for hundreds of suppliers. The effects even spilled over into industries across the Canadian economy.
Today, all Canadian automakers, including GM and Chrysler, are investing in their operations. In the last two years in particular, each of Canada's five automotive assemblers has reinvested in Canada, and auto parts manufacturers have also invested in their operations. Another sign that the sector is doing well is that Canada's production increased to almost 2.4 million vehicles in 2014. The auto sector will continue to contribute significantly to the Canadian economy for many years to come.
All this work was and continues to be recognized, not only by the industry but also by third party analysis such as the IRPP study I mentioned, which concluded that the restructuring assistance was successful. Furthermore, Industry Canada received recognition for its accomplishments, including in the form of the Institute of Public Administration of Canada's 2010 innovative management award. I believe it is a remarkable success story that we were able to partner quickly and effectively with our counterparts at home and abroad, within and outside of government, to provide sound advice and ultimately save thousands of jobs and hundreds of businesses, and to secure a future for Canada's auto sector.
With respect to the automotive innovation fund, I am pleased that the report reflects a program that continues to be well managed. In many respects, it's still early days for the program. It was established in 2008 and seven projects have been supported. The initial projects are just now being completed, yet we know from the initial evaluation we did in 2012 that the program is meeting its short-term objectives. It has leveraged about $2.8 billion in investments since its inception, and as the Auditor General has recommended, we will continue to report against its longer-term objectives as projects are completed.
Mr. Chair, I want to conclude my remarks by noting that we have learned a great deal from these experiences, and the Auditor General's recommendations have helped embed these. The recommendations have highlighted that clear and comprehensive reporting on support provided and the management of that support contributes to the public understanding of the restructuring success. In order to increase the ease of access to the information, last December we published a single summary report on the restructuring support and recoveries. We've also committed to undertaking a review of the management of the restructuring assistance with a focus on identifying lessons learned. This work will be completed this year.
The Auditor General also recommended reviewing how we evaluate proposals for support from the automotive innovation fund, and monitoring the performance of the program.
We have updated the program's risk assessment framework and made explicit the manner in which risk profiles of applicants are assessed. We will also evaluate the program again in 2017-18 to determine to what extent it achieves its long-term objectives.
It is fair to say, just like all Canadians, we hope we never face such a challenge again, requiring us to use the lessons learned from the 2009 crisis.
Thank you, Mr. Chair and committee members. We will be pleased to respond to your questions.
Brian Pagan
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Brian Pagan
2012-12-03 16:11
I'm not sure if there's a particular OECD recommendation that you had in mind in terms of best practice, but the Government of Canada is an active member of the OECD and is always looking at recommendations and best practices to improve transparency and the flow of information.
A number of years ago, we moved from a cash budget to an accrual budget, which is considered to be best practice. In the spring of 2009, we introduced a new estimate to the cycle—a spring supplementary estimate—that was intended to better align Parliament's voting on cash appropriations to budget measures that were introduced in a February or March budget. There were also a number of central votes that were created, which were intended to introduce more transparency, for instance, in terms of how departments were using their operating budgets. That was not only to make that clearer in the estimates, but also, because of a spring supplementary estimate, to get that into hands of departments earlier in the fiscal year so they could actually use the authorities available to them.
Kevin Page
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Kevin Page
2011-11-02 15:32
Thank you, Chair.
By way of introduction, with me is Chris Matier, our senior economist, who provides us with our economic and fiscal analysis; Dr. Mostafa Askari, our assistant Parliamentary Budget Officer for economic and fiscal analysis; and Sahir Khan, our assistant Parliamentary Budget Officer for revenue and expenditure analysis.
Thank you.
Good afternoon, Mr. Chair, vice-chairs, and members of the committee.
Thank you for inviting me and my colleagues to speak to you about Canada's economic and fiscal outlook in the context of your consultation leading up to the 2012 budget.
Yesterday, as you know, PBO released a report examining the short- and medium-term outlook. On September 29, 2011, PBO released its 2011 Fiscal Sustainability Report, which examines Canada's fiscal structure from a longer-term perspective. The Parliament of Canada Act instructs the Parliamentary Budget Officer to provide independent analysis to the Senate and the House of Commons about the state of the nation's finances and trends in the national economy.
The PBO's objective is to provide you with analysis of the planning environment to support your debate about policy priorities and directions, and as members of the House of Commons, your power of the purse role in holding the government to account with respect to the prudent management of public finances.
In an effort to provide you with a rich planning environment, PBO provides you with an independent view on the economic and fiscal outlook in a fully transparent manner. In addition we provide you with analysis to support your work.
We provide you with analysis of how the economy is projected to perform relative to potential output—the size of the so-called output gap.
We provide you with analysis on the nature of our fiscal balances—what proportion of our federal deficit is cyclical and will go away when our economy returns to its potential level, and what proportion is structural.
We provide analysis on uncertainty—what does the history of private sector economic projections relative to outcomes mean for confidence intervals around projections for nominal GDP and budgetary balances.
Finally, we do not lose sight of the long term. We provide you with estimates of the fiscal gap to inform you on the sustainability of current fiscal structures and the size of actions required to stabilize debt relative to the size of the economy in light of aging demographics and other underlying long-term cost pressures.
In the budget plan tabled in June 2011, the government committed to balancing the budget by 2014-2015 through reductions in expenses that will be determined and implemented in Budget 2012. This budget must also set up the framework for negotiations with the provinces and territories to be held in 2014 on federal transfers, which represent 30% of federal program spending.
I wish to highlight three challenges in the context of your deliberations on priorities and policy directions leading up to the 2012 budget.
One, relative to the 2011 budget planning framework, the outlook is weaker. Two, the fiscal outlook over the medium term is highly uncertain. Three, the challenges of long-term fiscal sustainability stemming from aging demographics and other cost pressures are real and need to be recognized and addressed.
The outlook for the Canadian economy has weakened in the eyes of virtually all forecasters, reflecting a less optimistic external environment. The negative impacts of de-leveraging, fiscal austerity, and declining confidence underscored by financial market turbulence are largely behind the softening of growth projections.
PBO projects Canadian real GDP to grow by 2.2% and 1.5% in 2011 and 2012 respectively. The weakness in near-term growth pushes the economy further below its productive capacity--a widening of the output gap--resulting in an increase in the unemployment rate. As a result, PBO expects the Bank of Canada to maintain the overnight rate target at 1% through the third quarter of 2013 before gradually raising rates over the remainder of the projection period.
Underlying the outlook is the assumption that the European sovereign debt crisis will be contained and the U.S. fiscal restructuring will take place in an orderly fashion. PBO is projecting a weaker short-term outlook than the average private sector outlook. PBO judges that the balance of risks to the private sector outlook for nominal GDP is tilted to the downside, reflecting a more sluggish near-term U.S. recovery, with real GDP growth of 1.6% versus 2% in 2012 for the average private sector forecast; a larger impact from the recent decline in commodity prices--we have GDP inflation in our forecast of 1.1% versus 2% in 2012 in the average private sector forecast; and the high level of Canadian household indebtedness that will likely restrain growth by a larger amount in the near term than appears to be factored into the average private sector forecast.
The PBO outlook for the budgetary balance on a status quo basis has the deficit declining from $37.3 billion in 2011-12, which is roughly 2.2% of GDP, to $30.5 billion in 2012-13, or 1.7% of GDP, and eventually to $7.3 billion in 2016-17, or 0.3% of GDP. These magnitudes remain significantly better than the projected outlooks of other G-7 countries and are consistent with targets set out by the G-20 in Toronto in 2010 for deficit reduction. The progress reflects reduction in both cyclical and structural balances over the medium term. The significant reduction in the structural deficit partly reflects the planned restraint in direct program spending.
Over the 2011-12 to 2016-17 period, PBO is assuming that direct program expenditure will grow modestly at 1.6% annually on average, which is significantly slower than observed over the five years preceding the downturn of 6.1%. Over the long term, PBO is projecting the structural deficit to rise on a status quo basis due to the impact of aging demographics and other underlying cost pressures.
PBO's 2011 fiscal sustainability report concluded that Canada does not have a fiscal structure at the federal and/or provincial-territorial government levels that will stabilize the debt-to-GDP ratio over the long term. We are undergoing a major demographic transition that will slow economic and government revenue growth and put upward pressure on spending. PBO estimates that restoring sustainability would require permanent policy actions to improve the operating balance amounting to 2.7% of GDP. That is 1.5% at the provincial-territorial level and 1.2% at the federal level.
While the amount of policy action is significantly less than the restraint measures implemented in the 1990s, it will need to be sustained over the longer term. These actions do not need to be taken immediately while the economy is operating below its full capacity; however, long delays in taking action would increase the amount of corrective measures significantly.
The challenges of the planning environment raise important considerations for parliamentarians regarding Canada's fiscal policy directions, targets, credibility, and sustainability.
Parliamentarians may wish to debate the policy merits of a staying the course fiscal policy reflecting the weaker outlook. Projected output losses in Canada relative to potential associated with the ongoing world financial crisis are more severe relative to the economic downturns in the mid-1990s and early 1980s. The output gap is now projected to close in 2017.
Given economic uncertainty based on accuracy of the average private sector forecast over the past 16 years, PBO analysis on balanced budget outcomes indicates the probability of fiscal balance under status quo policies is approximately 10% in 2014-15 and 25% in 2015-16.
In the context of a relatively large and persistent output gap over the medium term, uncertainty about the fiscal outlook over the medium term, and emerging fiscal pressures over the longer term, parliamentarians may wish to debate the pros and cons of further stimulus or restraint measures as well as the achievability, relative merits, and priority trade-offs associated with a fiscal target of budgetary balance in 2014-15.
While many other countries are experiencing market pressure to strengthen their medium-term fiscal plans, parliamentarians may wish to use Canada's better fiscal standing to reinforce the credibility of its medium- and longer-term fiscal plan.
A former Deputy Minister of Finance, Scott Clark, has recently written a paper highlighting four criteria for credible fiscal policy. Credible fiscal policy, he says, must be realistic, responsible, prudent, and transparent. According to Mr. Clark, credible fiscal policy should be based on a balanced view of challenges, prospects, and risks, and not be based on a rosy or unrealistic view. For example, a recent international paper by economist Jeffrey Frankel, published by the National Bureau of Economic Research, has highlighted the tendency across countries to use overly optimistic forecasts. This has facilitated complacency and contributed to tax cuts and increases in government spending.
From this perspective, the projections underlying Budget 2011 are no longer realistic. Parliamentarians may wish to consider whether the recently updated average private sector forecast represents a realistic view or they may recommend that the Department of Finance provide an independent economic outlook.
Responsible fiscal policy means the government will establish a medium- and long-term fiscal plan that is sustainable, whereby debt will not grow faster than the economy. Parliamentarians may wish to request that the government provide longer-term fiscal sustainability analysis, as promised in 2007.
Prudent fiscal policy means the government may wish to provision against forecast error and missed fiscal targets due to unforeseen events. Given high levels of uncertainty, parliamentarians may wish to debate the merits of contingency reserves and prudence allowances around the establishment of medium- and long-term fiscal targets.
Finally, transparent fiscal policy means full disclosure of analysis, information, and risks. Parliamentarians may wish to ensure full disclosure of the measures covered by the strategic and operating review to be implemented in Budget 2012, as well as in the annual reports on plans and priorities, with the same level of detail afforded in the 2009 fiscal stimulus plan.
Similarly, parliamentarians may wish to request that the government provide full disclosure of departmental plans associated with Budget 2010 operational restraint measures and the adjustments to the fiscal planning framework associated with the government's crime agenda.
Thank you for the opportunity to speak to you today.
We look forward to your questions.
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