Proceedings of the Standing Senate Committee on
National Finance
Issue 15 - Evidence - October 28, 2009
OTTAWA, Wednesday, October 28, 2009
The Standing Senate Committee on National Finance met this day at 6:33 p.m. to examine the Estimates laid before Parliament for the fiscal year ending March 31, 2010 (topics: Canadian Secured Credit Facility/borrowing authority; and economic update).
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: Honourable senators, over the course of our hearings a number of issues have come up and members have expressed an interest in hearing more. This evening we will be dealing with some of those issues.
One issue that has attracted interest is the Canadian Secured Credit Facility. To speak to that, we are pleased to welcome, from the Business Development Bank of Canada, Paul Buron, Executive Vice-President and Chief Financial Officer; and Paula Cruikshank, Vice-President, Securitization.
Thank you for being here. We have had some discussion on the Canadian Secured Credit Facility, but we need to have more to understand it better.
From the Department of Finance Canada we welcome Wayne Foster, Director, Financial Markets Division, Financial Sector Policy Branch. Mr. Foster will assist the Business Development Bank of Canada where necessary but will also be speaking to us on another issue on which we have had interest expressed, and that is the use of the government's borrowing authority.
Honourable senators will recall that one of the pieces of budget-implementation legislation a few years ago had a section that dealt with borrowing authority. Since then we have not heard much about the borrowing authority. It used to be that Parliament had to speak on and provide authority for borrowing, but we gave a blanket to the government to borrow without having to come back to Parliament. We will hear about how that facility is working and how it is reported.
[Translation]
Mr. Foster is accompanied by Marie-Josée Lambert, Chief, Debt Management Policy, Financial Markets Division, Department of Finance Canada.
[English]
We have only one hour for this section, honourable senators. Hopefully we will have the usual brevity in questions and answers so we can cover as much ground in this one hour as possible.
Paul Buron, Executive Vice-President and Chief Financial Officer, Business Development Bank of Canada: We are pleased to be here tonight to discuss with you how the Canadian Secured Credit Facility, CSCF, has met its objectives.
Referring to slide three of the presentation you have on hand, I will say a few words about the business conditions that prevailed when the CSCF was created and how it was created. Then my colleague, Ms. Cruikshank, will talk about the first allocation and recent developments.
[Translation]
If you recall, at the end of 2008, I am referring to page 5 of the presentation, the credit crisis intensified and Canada was heading quickly into a recession. Auto sales were severely impacted by these two phenomena, as we can see on the graph you have in front of you. Auto sales to users were financed by loans and leases and in recent years makers were using securitization to finance sales.
[English]
The asset-backed, or ABS, market was and still is key for the auto sector. In fact, in July 2007, auto and equipment assets represented 27 per cent of the ABS market in Canada. With the credit crunch and the shutdown of the asset- backed commercial paper market, financing auto and equipment sales was becoming more and more difficult for manufacturers.
In fact, between July 2007 and January 2009, the public ABS outstanding financing auto and equipment assets decreased by $16 billion, or close to 40 per cent. This reduction was due to less activity in the market and lack of credit availability.
To help consumers and businesses through these difficult economic times, CSCF was announced in the January 2009 budget with two main objectives: to stimulate economic activity in Canada by supporting sales of vehicles and equipment through the purchase of term ABS and to promote renewed investor participation and confidence in the Canadian term ABS market.
Shortly after the announcement, the Business Development Bank of Canada, BDC, with the Department of Finance and Industry Canada, launched a consultation process in order to define the terms and conditions of the facility. All the principle stakeholders were met and listened to.
[Translation]
The terms and conditions had to allow for balancing the economic stimulus aspect and the risk to taxpayers aspect. That is why certain conditions, such as uniformity in contract terms, prospectus-type documentation, verification of asset eligibility and the presence of a qualified director were introduced.
Once the conditions were decided, a price at which BDC was going to buy the eligible asset-backed securities, through an open process, had to be decided. The price the market wanted was 3.5 per cent above the Canadian bond rate. Participation was therefore very important and over $10 billion was allocated to over 20 originators. To facilitate the use of CSCF, certain conditions were relaxed for the first $350 million issued by the originator.
[English]
From that point, participating originators had a free option to access a committed source of financing with well- defined terms and conditions — that was CSCF — or to try to get financing from the market on better terms and conditions. Above all, for participating originators, credit availability was no longer an issue.
I will now ask Ms. Cruikshank to cover the CSCF until today.
[Translation]
Paula Cruikshank, Vice-President, Securitization, Business Development Bank of Canada: The history of the CSCF demonstrates very rapid improvement in global and Canadian financial markets, and even in securitization markets.
When the price was set for the first allocation, the asset-backed securities did not sell. Information from brokers about the ABSs in the automotive equipment field was between 600 basis points and 1,000 basis points above Canada Savings Bonds, and it was very possible that the firm would not even exchange them. As well, there had been no public transactions in this sector for about a year and a half.
[English]
If you take a look at page 13 in the presentation, you can see that within six weeks of establishing a price at which BDC would purchase these securities and once we had issued commitments of $10.2 billion, the financial markets landscape and the Canadian ABS market changed significantly.
I will tell you about the changes that occurred in the market, how they affected the CSCF and how we have responded to them and where we are now with the program.
Due to this remarkable financial markets recovery, which in Canada started in the spring, many companies that received CSCF commitments started to have funding alternatives. Conditions were changing rapidly. Rather than use the BDC commitment, companies started to do what they should do and look for even better deals. There was a time period where the program participants could hold their commitment for free, and so they did.
The particular factors that led participants to use their commitments as backstops were as follows: market pricing was contracting rapidly; companies did not want to undertake standardization of documentation required by the program if they could avoid it; and turmoil in the auto industry, characterized by the bankruptcies of GM and Chrysler, made it difficult for these companies to issue any securities as their futures were uncertain.
[Translation]
Last, on page 14, there is an illustration of how conditions were improving. On that page, the example I used was that spreads are down for Canadian corporate bonds. Investors were satisfied with increasingly low performance, because they had growing confidence that the earth was not going to stop spinning on its axis.
[English]
On page 15, we see that motor vehicle sales had started to improve. The rapid emergence of GM and Chrysler from bankruptcy helped to maintain optimism.
On page 16, the benchmark established by the CSCF pricing convinced investors that spread widening had come to an end, and a public EBS transaction funded by institutional investors was in fact completed by Ford Motor Company.
On slide 17, at the end of July, the free option period for commitment holders came to an end. With the understanding that a second price discovery process would be undertaken in August, almost all of the participants handed back their commitments.
I will now turn to the most recent developments of the program, on page 19.
At the conclusion of the second price discovery, it was evident from participants that financial conditions had indeed improved. We listened to this feedback and other comments that we had heard since the program was established and we made some changes. The facility would no longer depend on a bidding and allocation process; it would be available for all eligible participants at the same price at any point until March 2010. The facility would be available at a lower price — 150 basis points instead of 350 basis points — and greater flexibility for the structure of the bonds that the BDC would purchase was incorporated.
In conclusion, on page 21, the parameters were announced to the market on September 17 to some very positive feedback. We now have a number of signed commitment letters and we are working on transactions.
Finally, I wanted to include a chart summarizing the various milestones for the development and deployment of the CSCF, on page 22, as the timing of the announcement and the changes in the financial markets have been simultaneous.
[Translation]
Now that you know a little more about CSCF programs, Mr. Buron, our colleague from the Department of Finance, Wayne Foster, and I are prepared to answer your questions.
[English]
The Chair: Mr. Foster, do you have anything to add that might help to clarify what we just heard?
Wayne Foster, Director, Financial Markets Division, Financial Sector Policy Branch, Department of Finance Canada: I do have a few remarks on the borrowing authority issue if you would want me to go forward.
The Chair: Why not do that now and then we will do questions after that.
Mr. Foster: I do not have a pretty coloured deck, I am afraid — my BDC colleagues showed me up — but I would like to thank the chair and the members of the committee for giving me the opportunity to come in today on behalf of the Department of Finance to talk about the standing borrowing authority of the government.
Authority to borrow in financial markets is provided for by Part IV of the Financial Administration Act, which authorizes the Minister of Finance to issue securities and undertake related activities, including entering into financial contracts and derivative transactions.
Since 2007, following amendments to the Financial Administration Act enacted through the budget of that year, the Minister of Finance obtains authority to borrow from the Governor-in-Council through an order-in-council. Under the previous regime, when borrowing levels were expected to increase, a legislative approval was required for additional borrowings.
A key motivation for the changes in Budget 2007 was to increase the government's flexibility to meet future borrowing needs and, at the same time, provide greater transparency and accountability regarding the government's borrowing activities. At the time, this flexibility was needed to accommodate the consolidation of the borrowings of three Crown corporations, including the Business Development Bank of Canada but also the Canada Mortgage and Housing Corporation, CMHC, and Farm Credit Canada, with the government's own debt program. More generally, however, this added flexibility facilitates an efficient, responsive and prudent financial management.
The amendments of 2007 provided for greater transparency and accountability about the government's borrowing activities by establishing enhanced disclosure requirements about anticipated borrowing and planned use of funds through the Debt Management Strategy, an annual publication that normally accompanies the budget as an annex.
In addition, information on actual borrowing and uses of funds compared to that forecast is provided in the Debt Management Report, which comes out after the end of the fiscal year. We expect it will be this fall, hopefully before Christmas.
More detailed information on outcomes is also included in the Public Accounts, which is reviewed by the Auditor General of Canada.
The additional flexibility of Budget 2007 was demonstrated in the fall of 2008 when, in response to the turmoil in the financial markets, the government was able to act quickly in the midst of the financial crisis, even though Parliament was not sitting. You may recall there was an election during that period.
In November 2008, the Governor-in-Council expeditiously approved an increase of $90 billion to the original 2008- 09 aggregate borrowing limit of $206 billion. This intra-year increase in the borrowing ceiling enabled the provision of immediate measures to mitigate the impact of the global financial disruption. These measures took the form of a commitment by the government to buy up to $75 billion in insured mortgages through the Insured Mortgage Purchase Program, IMPP, managed by CMHC, as well as to finance special liquidity measures undertaken by the Bank of Canada totalling up to $30 billion — the use of $30 billion of borrowing authority for that purpose.
These timely measures to support financial stability and access to financing have helped to alleviate market uncertainty and facilitate a reduction in consumer lending rates. In fact, a number of lenders have pointed to the Insured Mortgage Purchase Program in particular as contributing to a significant decline in mortgage rates since the fall of October 2008.
The total amount borrowed against the $296 billion authority, the ceiling in 2008-09, was $279 billion, so slightly under. During the year, gross market debt increased by $123 billion, largely through the issuance of treasury bills and government bonds. However, the federal debt or accumulated deficit increased by only $6 billion, as the increase in market debt was largely offset by an associated increase in financial assets, which includes the mortgage pools bought through the Insured Mortgage Purchase Program as well as increased loans to Crown corporations, such as the Export Development Corporation, and higher cash balances held at the Bank of Canada to support their ongoing liquidity operations.
In 2008-09, while gross debt issuance increased substantially, public debt charges actually declined by $2.3 billion as the increase in the stock of market debt, which was over $100 billion as I mentioned, was more than offset by a sharp decline in interest rates, particularly short rates.
For 2009-10, the aggregate borrowing limit approved by the Governor-in-Council to meet Budget 2009 financial requirements is $370 billion. That is up $74 billion from last year. As at September 30, 2009, actual aggregate borrowings measured consistent with this ceiling and totalled about $258 billion. We expect to be able to manage well within the approved standing authority of $370 billion for the remainder of this fiscal year. We do not expect to have to increase it again.
In closing, I would like to thank the chairman and committee members for providing me with this opportunity to brief you on the Government of Canada's standing borrowing authority and borrowing activities over the past year.
The Chair: Thank you, Mr. Foster. I appreciate your giving us this background. Just so your presentation is clear, is it Governor-in-Council that can determine each year now what the aggregate borrowing will be?
Mr. Foster: Yes. The Governor-in-Council, as you know, is a committee of cabinet, essentially. It is through an order-in-council that a new limit is set. In the budget, we have an annex — the Debt Management Strategy — that indicates how much the government plans to borrow and a limit that it will ask the Governor-in-Council to approve.
The Chair: That will come out at the same time as the budget?
Mr. Foster: That did. In every year there is a debt management strategy that sets out what we expect the limit to be, and then there is a mechanism, since it is a Governor-in-Council decision, to increase it during the year. As I mentioned, in the fall of 2008 we had to do that.
The Chair: Yes, you did. I see that they can do that; they have the authority to do that through another order in council?
Mr. Foster: Yes, they do, which becomes public through the Canada Gazette.
The Chair: If we were following that more closely, reading the Canada Gazette on a regular basis, we would have read where that had taken place.
Mr. Foster: I thought everyone read the Canada Gazette on a regular basis, but yes, you are right.
The Chair: No, we like to bring you in so that you can tell us.
Senator Callbeck: Welcome this evening. Thank you for coming.
In June 2009, the Business Development Corporation was here and mentioned — it could have been you, Mr. Buron; I am not sure who the witness was — setting up a credit assessment group that would confirm the AAA ratings of the two agencies that have to rate the securities. Has that group been set up?
Mr. Buron: We have gathered a group of knowledgeable people in the market. Paula Cruikshank is heading that group. They do not have the ability to redo what the rating agencies are doing in rating these securities; rather they run their own models to get to a risk assessment on their own based on all the information publicly available from a transaction.
Senator Callbeck: Has there been any disagreement between your group and the two agencies?
Ms. Cruikshank: At this point we have not had any disagreements. We are in the beginning stages of looking at the transactions. I do not anticipate any disagreements, but we are running a thorough process to ensure we agree with those assessments.
Senator Callbeck: Now that you are set up, will you look at them before the government does any more purchasing?
Ms. Cruikshank: Yes. We have set up a process to ensure we communicate the details of the transaction to senior management and also to our board through the risk management committee.
Senator Callbeck: But so far you have agreed with the AAA ratings as set by these two agencies?
Ms. Cruikshank: That is correct.
Senator Callbeck: Has any assessment or analysis been done to determine whether it is still necessary to have this facility?
Mr. Buron: As we stated in our presentation, this market has evolved a lot in the last six to eight months. We are in consultation with the different market participants on a regular basis. We have just signed commitments with different originators, which tells us that there is still a need out there for this facility.
Senator Callbeck: But no analysis has been done?
Mr. Buron: The analysis is done by keeping in touch and keeping the lines of communication open with the different stakeholders in the market. We have those communications and contacts, and we assess the market on a regular basis. Obviously, we are not managing those companies dealing within this financial market. They define their own needs, and we believe the need is still there.
Senator Callbeck: We are all aware of the scandals in the United States and what happened with taxpayers' money flowing through and, in some cases, going to finance high executive bonuses. Has any analysis been done to ensure that has not happened in Canada?
Ms. Cruikshank: The securities we purchase are highly structured. Basically, they are asset-backed, so I think there would be no possibility of those particular securities being linked with what you are suggesting. Essentially, the securities we are purchasing have many checks and balances on those particular assets. They come from traditional assets, and we verify the cash flows. There is a lot of work around that. I think it would be difficult for these securities to lead to the types of abuses you are talking about.
Senator Callbeck: Difficult, but there is a possibility, is there, that this could flow through to bank executives in the way of bonuses?
Mr. Buron: As a complement of information here, we are not buying securities from the banks. We are buying securities from auto and equipment originators. The banks are not directly involved in the transactions we are doing in that regard.
Senator Ringuette: Who are the originators you are talking about? I believe that in your presentation you said there were 20 originators. If they are not Canadian banks, who are they?
Mr. Buron: This was mentioned regularly on the CSCF. GMAC is an originator. It is captive financing that comes out of GM. Chrysler Financial is another. Those big originators exist in the market. They are global players and were the ones that needed funding to continue to originate auto and equipment sales in the market.
Senator Ringuette: Is that part of the $12 billion to help the auto industry? Is it part of the shares we bought?
Mr. Buron: No, it is not.
Senator Ringuette: Let us make this clear. This is above and beyond the purchase of GM and Chrysler shares from the Government of Canada.
Mr. Foster: That is correct.
Mr. Buron: That is correct.
Mr. Foster: This is not shares. This is actually purchasing loans or leases extended by Ford Credit, for example, to clients packaged together. This is not buying equity. It is on a commercial basis with AAA credit ratings. It is completely separate, and it also covers a broader array of assets than only auto, so it is not just GM and Chrysler. It covers equipment manufacturers and others.
Senator Ringuette: Are the 20 originators all located in Canada?
Mr. Buron: Yes, they have to be.
Senator Ringuette: We are talking about equipment built in Canada and sold in Canada or exported; or are there no exports?
Ms. Cruickshank: There are no exports. All of the securities would have to be denominated in Canadian dollars, and all the loans and leases provided either to Canadian consumers or Canadian businesses.
Senator Ringuette: An auto lease would be, on average, two years; and a loan, 60 months. What is your scale of income to repay the $12 billion?
Ms. Cruickshank: The bonds or securities we are buying, the investments we are making, usually have a term of between three and five years, and they have an automatic repayment mechanism built into them. Essentially, we will purchase a pool of assets, and as those loans and leases are repaid, so are we.
Senator Ringuette: You must have made a schedule of loan repayment that will go to your institution.
Ms. Cruickshank: It would be part of the security.
Senator Ringuette: Whether or not it is part of the security, you must have a payback schedule, with interest, for the three and five years that correspond to what you have purchased.
Ms. Cruickshank: Correct.
Senator Ringuette: Could we have a copy of that?
Ms. Cruickshank: At this point, no securities have been purchased. We are currently in the process of purchasing transactions. It takes a while to put them together. We have to approach rating agencies and prospectuses need to be filed. The announcement of the new pricing came out in September, so we are working on transactions at this time.
Senator Ringuette: On your last slide, on page 22, you say in May "commitment letters delivered" and "commitment letters received," and then you undertake a second process.
Ms. Cruickshank: We had to undertake a second process because the commitments were turned back; they were handed back. All the companies had other alternatives or felt the pricing was too expensive because of the improvement in the market.
Senator Ringuette: So why did you pursue the operation? If there was another alternative instead of government, why did you pursue the operation and issue the second process?
Ms. Cruickshank: To further answer Senator Callbeck's question as well, an assessment was made at the time of the second price discovery as to whether the market was fully functioning, whether it had recovered. We had seen only one public transaction, so we determined that conditions were not strong enough in that market at that time.
As Mr. Buron explained in answer to a question, the response was that we needed to continue to support it, and the companies that participated in our second price discovery process certainly agreed.
Senator Ringuette: At the rate of 1.5 per cent they are certain to pursue. That is almost interest-free money from the taxpayers of Canada while they had other options.
Ms. Cruickshank: It is 150 basis points over the government base rate.
Senator Ringuette: What is the government base rate?
Ms. Cruickshank: It would depend on the term of the security. Are you speaking of a five-year term?
Senator Ringuette: Tell me the rate for a five-year term.
Ms. Cruickshank: It would be 2.75 per cent.
Mr. Foster: That is plus 1.50 per cent, so 4.25 per cent.
Senator Ringuette: Earlier this evening I attended a meeting of the Senate Banking, Trade and Commerce Committee where the Governor of the Bank of Canada appeared. This is quite a coincidence. The governor confirmed that Canadian financial institutions currently have high liquidity. Therefore, why would we pursue this with taxpayers' money?
I have his report right here where he said, in Table 2 on page 20, that when your second process started in June, corporate bonds were at 4.83 per cent, and you were lending Canadian tax dollars at 2.25 per cent in a market that the Governor of the Bank of Canada said only an hour ago was highly liquid.
Ms. Cruickshank: You are right to look at the corporate bond page, but these corporate bonds would have various ratings between BBB, A and AA. The bonds that we are buying are AAA rated securities, and that helps to reduce the rate.
Senator Ringuette: There are many serious issues going on right now.
Mr. Buron: To clarify, we are not offering 2.75 percentage points in the market. It is plus the 150. It is more than 4 per cent that in fact the pricing of these securities are at with the actual bond market pricing in the market.
Senator Ringuette: I have a few questions for Mr. Foster. I will try to make them short.
On page 4, Mr. Foster, in your presentation, you indicate:
These timely measures to support financial stability and access to financing have helped to alleviate market uncertainty and facilitate a reduction in consumer lending rates.
That is quite a statement.
Then you say:
In fact, a number of lenders have pointed to the IMPP as contributing to a significant decline in mortgage interest rates since October 2008.
Who are those lenders?
Mr. Foster: A number of bank CEOs made the comment, after we announced this program, that the availability of term financing through this program at reasonable rates allowed them to lower their mortgage rates. I do not have the specific names, but it was CEOs of banks.
When I talk about consumer lending rates, I am talking about mortgage and consumer lending rates. You can look back at what they were in October of 2008 and where they are now.
Senator Ringuette: Yes, I have that in front of me because of the report of the Governor of the Bank of Canada. On October 23, 2008, he indicated that the overnight rate of the Bank of Canada was 2.25 per cent, which was accurate at that time. The prime rate, from your banks, was 4 per cent.
Then, the relationship between prime rate and mortgages is direct, and the overnight rate of the Bank of Canada and the bank's prime rate are also directly related.
Therefore, the Bank of Canada took their overnight rate from 2.25 per cent; it is now 0.25 per cent, a 2 per cent drop. The prime rate of our banks went from 4 per cent down to 2.25 per cent, which was a 1.75 per cent drop, and the five-year fixed mortgage rate went from 7.2 per cent to 5.8 per cent.
The bottom line is that the purchasing of all these mortgages had nothing to do with the decline of the bank's mortgage rate. It has everything to do with the national and international financing market. For instance, the Bank of Canada rate dropped by 2 per cent in that period; the prime rates of banks dropped by 1.75 per cent; and the mortgage rate dropped by 1.36 per cent.
I do not know what all these purchases of auto lease, of mortgages, have truly accomplished in the market, because all of it has been taken care of by two things: the liquidity was taken care of by the $30 billion from the Bank of Canada into the Canadian market; and then the overnight rate of the Bank of Canada, affecting the bank prime rate and the mortgages.
You are answering to government policy.
I have another question for you, Mr. Foster.
Our federal debt has grown by $5.8 billion in 2008-09. It is slated to grow by $55.9 billion in this fiscal year. If you take that all into consideration, in just two years all the debt that we had paid for the past eight years has been wiped out. The current per capita debt of the Government of Canada is $40,755. Is that correct, Mr. Foster?
Mr. Foster: I assume it is, if you have it in front of you.
Senator Ringuette: I do my homework.
This is a sad state, and I think that pursuing the purchasing adventure that you are in with Canadian taxpayers' dollars should be stopped.
[Translation]
Senator Carignan: My question is for the Business Development Bank. Has this program cost Canadians or benefited them? Either way, how much has it cost or earned? Because what I understand is that you have redeemed loans where you had a chance of making a loss or a profit.
Mr. Buron: Senator Carignan, for the moment, as Ms. Cruickshank explained, no transactions are taking place. Commitments have been issued on the market that allowed the originators to be certain they were able to finance themselves. They used those commitments to do business, to continue selling on the market. The result was therefore very positive in terms of the Canadian economy, without the BDC, through the facility, having yet to invest money.
A second series of commitments was made in September. Further commitments were signed at that point, and we are working on the transactions. Investments will very probably be made in the next few months. The BDC should simply be able to earn an adequate return from those investments. For the moment, the only costs that have been incurred by the BDC are administrative costs.
Senator Carignan: So I understand that this activity is an earnings activity and not a deficit operation activity. When you sell loans with a double AAA rating you have some security.
Mr. Buron: The program was constructed to help the market and protect taxpayers. So ordinarily, when you engage in these transactions, you expect to have some return, yes.
Senator Carignan: Do you have an idea of the return?
Mr. Buron: If we look at the rate we are going to charge, where commitments have been made, again, at 150 basis points above the government's cost of borrowing, in reality, the profit margin should therefore be somewhere around 150 basis points, and from that you have to deduct operating costs, obviously.
Senator Carignan: You are not really foreseeing any bad debts, given the quality of the securities?
Mr. Buron: Given that they are AAA, the certainty we have is at the AAA level; something can always happen, but it is still a very good risk for taxpayers.
Senator Carignan: You talked about originators, you talked about GMAC and Chrysler Finance. Among these originators, are there also industrial equipment suppliers, for example? And if so, what kind of industry?
Mr. Buron: Yes, there are equipment suppliers, particularly for heavy industry, ultimately. But these are major equipment suppliers.
Senator Carignan: So it may include forestry companies, it isn't just car manufacturers?
Mr. Buron: No, not just car manufacturers.
Senator Carignan: My other question is for Mr. Foster. The amount of the debt recorded to date, that has been disbursed, is that the debt actually incurred, at the point when you paid out, or at the point when the money was laid out, or is that just commitments that have been made to date, without any money having been disbursed?
[English]
Mr. Foster: The numbers I presented for the total amount of debt represent the amount of debt that we have actually issued and are projected to issue. The ceiling is prospective. We might not get to the ceiling.
Apart from that, yes, the numbers for last year, for example, were what were issued to either fund the deficit or finance spending programs or, as I mentioned, invest in mortgage pools.
[Translation]
Senator Carignan: It is total debt, it is not just an amount that has been committed?
Mr. Foster: Yes.
[English]
The Chair: Can I get this clear in my mind? The Business Development Bank of Canada wanted to put out a credit facility of $12 billion. You went through a bidding process and you did some commitment letters. As Senator Ringuette pointed out, that did not work out because your spread was too large. You went on. You are now into a second round, and you think you will have a couple of contracts come out of that because the market needs it.
Have you got any money out of that the $12-billion credit facility now?
Mr. Buron: For now there is no money out of this facility.
The Chair: That is what I understood. When and if you put some money out of that $12-billion credit facility, will that come out of BDC's borrowing authorities, or will that be part of what we just heard from Mr. Foster of the borrowing authority that the minister has?
Mr. Foster: It will actually be both. We will lend the Business Development Bank the amount of money, up to $12 billion, as part of this new program I mentioned where we consolidated three Crown corporations and we lend directly. On BDC's balance sheet it will be a liability, a borrowing from the Government of Canada, offset by an asset, up to $12 billion in asset-backed securities.
The Chair: Presumably they already have some money out there. Is that a cumulative figure on an annual basis, or is that only the money that comes up for renewal?
Mr. Foster: The $12 billion?
The Chair: No, the full amount that you indicated the Governor-in-Council authorized the minister to borrow in a particular year.
Mr. Foster: There is a formula. Essentially, you take the amount of short-term outstanding, which is our treasury bills, which are somewhere around $200 billion now. Then you add on to that gross bond issuance, retail debts, Canada Savings Bonds, any foreign issuance that we do. Therefore, $200 billion plus, say up to $170 billion more would be the $370 billion, through bonds and these other things.
It has a stock component in that the short-term debt is included right from day one. At the start of the year we will already have, say, $200 billion used of the $370 billion I mentioned. Then the rest is the gross bond issuance.
The Chair: That you need for that year?
Mr. Foster: Yes, that is right.
The Chair: There are some bonds out there that do not mature that year and you do not need to borrow for those?
Mr. Foster: That is right.
Senator Mitchell: I am interested in the issue of risk for the Government of Canada in these processes. You have explained it well, but it is complicated, so I will ask some questions that might not make much sense to you, but they will to me.
When was the last time the Government of Canada assisted the banks? We did give some assistance to the banks; is that right? We bought some bad assets to give them liquidity or good assets to give them liquidity?
Mr. Foster: The only example I can relay is with Senator Ringuette's favourite program, the Insured Mortgage Purchase Program, where we have gone out and bought assets off the balance sheets of banks.
Senator Mitchell: Was that $74 billion?
Mr. Foster: It is around $70-odd billion so far. It is up to $125 billion but the minister announced the program would go to the end of March. The pace at which we are going will not get us anywhere near $125 billion. It will be $90 billion maybe. I do not remember — way back maybe — any programs where the government bought assets from banks. It would only be in the context of perhaps a bank resolution where a bank or trust company failed and where the Canada Deposit Insurance Corporation might have bought assets out or facilitated a merger of an institution, but that is a long time ago.
Senator Mitchell: This $74 billion was the purchase of assets?
Mr. Foster: Purchase of mortgages, which were guaranteed, so it is like buying your own credit.
Senator Mitchell: Guaranteed by the Government of Canada through CMHC?
Mr. Foster: Yes.
Senator Mitchell: That is great. Since that time we have heard a great deal, and it is good and proper that they are in good shape. At the same time, you are developing this facility and looking to invest in credit instruments to support industry, auto industry and other industries. You already have support of the auto industry to some extent, but is this more of that or is this just finishing that off?
Mr. Foster: We had the Insured Mortgage Purchase Program and the Bank of Canada injecting liquidity directly into regulated financial institutions so they could continue lending. This program is really directed at those non- regulated, non-deposit-taking institutions that were extending credit to Canadians, to Canadian businesses, which were reliant on securitization, reliant on capital markets for their funding. That dried up; it froze. This program was designed to help that sector, which was an important sector.
Senator Mitchell: What would be an example of a company in that sector?
Mr. Foster: Ford Credit Canada. Finance leasing companies that are not regulated do not collect deposits but fund themselves through this mechanism.
Senator Mitchell: I think this is the contradiction that Senator Ringuette was looking at. We have helped the banks and they are strong, and yet they do not meet the demands of companies like Ford Credit. Maybe they never loan to them; I do not know. It seems to me that if the banks are strong it is an indication that credit markets are relatively strong. We have helped the banks. Why would the banks not meet that demand? Is it too risky? In which case, how can we say it is AAA and it is okay for us at a triple-A rate? Do you see the contradiction?
It seems like people are telling us the markets are way better, yet the markets are not meeting a big market demand; otherwise, you would not be out there developing this facility.
Mr. Foster: The banks have moved in to fill some of this space, but they have not gone nearly far enough to fill the gap that was there. This was a $100-billion market, the securitization market. It has come down dramatically. The banks compete with Ford Credit and these other captives, right, so they are not in the business of lending them money so they can compete against the retail base for car loans and so on.
Senator Mitchell: Ford Credit would normally have gotten the money from Ford?
Mr. Foster: Through capital markets, through issuing the ABS, which BDC would buy.
Senator Mitchell: Now too few institutional investors want to give them money because there is a sense of risk in this.
I do not doubt you, but I just want to get this straight. You are saying, on the other hand, that you are only buying AAA credit instruments. AAA is as good as it gets. If that is the case, then why would these other institutional investors not want to invest there? If that part of the market is telling you it is risky, then what part of the market do you depend on more than that to tell you that it is not?
Second, I recall also that a big problem with the subprime mortgages was that they were securitized mortgages in packages, and they were deemed to be AAA, but of course they were seeded with all kinds of stuff that was not so AAA. I am certain you have worked your way through this, but I would like to hear you tell me that.
Ms. Cruickshank: There are a couple of different questions.
Mr. Buron: The entire ABS market was tainted with subprime mortgages and ill-assessed credit risks. The market that we are aiming at based on auto loans and leases and equipment loans and leases was not so affected. We must understand the sentiment toward the product — ABS — has been tainted, but some products were not impacted. We received a report from one of the rating agencies following their issuances of auto loans and leases and ABS and the market. After the last 12 months, which have been difficult in the market, all issuants are behaving well within the parameters and earning decent returns for investors. These products are not in trouble as we speak, but the investors decided not to invest because they are tainted products.
We know that a lot of value has disappeared in the market. For example, the different pension funds and institutional investors have to rebalance their respective portfolios and find other products so they can recoup the money to their pensioners. There are some risks they will not take, and there are some products they will not buy. They are also looking for some transparency from these products, which they are not getting right now. The CSCF is necessary to create some liquidity to help the originators do transactions and to help put greater transparency in the market so that investors can return to the market and participate.
Senator Mitchell: Do you ever resell in turn?
Mr. Buron: If the market enables us to do so, yes, we resell.
Senator Di Nino: I would like to focus on the purpose of these government interventions in areas where they would not normally be. Is it government intervention?
Mr. Buron: Yes.
Senator Di Nino: If I understand correctly, when the economic crisis was recognized, the Government of Canada and governments all over the world, certainly in the Western World, decided that they needed to create some confidence in the markets by infusing liquidity, which they hoped would create stability in the markets. The facility that BDC was given to handle was one of a number of various interventions by the federal government. If the purpose was to create confidence and to start bringing back some stability in the markets, the mere fact that the funds were available helped to create that confidence, although no one took you up on it the first time around. Is that correct?
Mr. Foster: Definitely. That is the story we like to tell, although not one dollar has been invested.
Senator Di Nino: No one wrote that question for me, either.
If the federal government, on behalf of taxpayers, decided that the intervention was necessary to be able to stabilize markets to start turning the economy around, do you think, at least from the standpoint of the facility that we are talking about and BDC in general, it has achieved that?
Mr. Buron: That is an interesting question. Remember what our process was. We consulted with all stakeholders: originators, banks involved in this market before, investors and rating agencies. We met with everyone participating in the securitization market in Canada. The terms and conditions were set with the help of these consultations. We believe that it was set up in a way that responds nicely to what the market demanded.
All of the comments we heard from participants, even after the first allocation, were positive. The market was in such turmoil back then that these originators and participants in our economy were unable to get financing because there was no benchmark. They had no idea of the price for risk. Now we have set the price. It is 350 basis points over the cost of funds. The benchmark was set, and they were able to return to the market and try to beat that. Their goal is to do better than what is offered by the government. We were satisfied with that because that is how the system should work. Some of them were successful in obtaining financing not on the public market but on the private market. We know that some of the investments were coming not from Canada but from outside Canada, which might be another problem. They were able to find financing because the benchmark was set, which CSCF did for them. They were thankful for that.
With time passing and the second allocation coming, they knew we would change the terms and conditions because we would need to adapt to the actual market conditions. Therefore, we lowered the price and changed the conditions, and guess what? They are back and are participating again. Currently we are working on transactions, because we are closer to the market than we were three or four months ago. They are very satisfied with the terms and conditions that have been set for them this time around. We are confident that we will do some transactions based on this second allocation.
Senator Di Nino: The whole thing worked.
Mr. Buron: Yes, it worked.
The Chair: The real issue is whether you still need to be there. You said you should still be there. We understand from a recent announcement that General Motors Acceptance Corporation is having difficulty raising capital, so it will not be able to participate in the financing to the degree that perhaps it had hoped it could. Are you still there because of that problem?
Mr. Buron: This is part of the market. GMAC's problems are well known. This is not the first time it has asked for U.S. government aid. I believe it is the third time.
The Chair: They are back for more money.
Mr. Buron: This does not surprise me.
Having said that, we went to the market for the second allocation and heard from the participants that the support of the CSCF is still needed, at least to set the benchmark and to help the market behave in its normal way. We have changed the conditions. This time, to get a commitment from the BDC, they had to pay a standby fee. They now must pay for that option.
The Chair: You have to make money.
Mr. Buron: Absolutely.
Senator Di Nino: We have to pay their wages.
The CSCF has evolved to adapt to the new market conditions; and I believe we have succeeded.
Senator Callbeck: On October 9, you said, "signed commitment letters received." What amount of money is involved in those commitment letters?
Mr. Buron: With all due respect, senator, we want to keep that information confidential from the market, because we have an open facility that serves participants on a first-come, first-served basis. Such information would be useful for some originators to know, so we would like to keep it confidential.
Ms. Cruikshank: As the transactions are completed, they will be completely publicly disclosed. As they are purchased by the BDC, that would certainly be disclosed.
Senator Callbeck: I thought that meant a signed commitment, but it does not.
The Chair: Really, it is an offer.
Mr. Buron: It is an offer to purchase. It is a binding offer to purchase.
The Chair: Yes. You have a lexicon and a jargon that are somewhat foreign to us. We apologize for asking questions for which the answers are obvious to you but perhaps not to us.
We thank you very much for being here this evening and for giving us this update. We look forward to another update in due course.
Honourable senators, for the second half of this meeting, we are discussing the present state of the economy, which should flow nicely from the discussion we just had on two specific programs.
[Translation]
For this discussion, we welcome Benoit Robidoux, General Director, Economic and Fiscal Policy Branch of the Department of Finance.
[English]
I would ask again for your cooperation. We are a little late getting started, but we have Mr. Robidoux by himself, so I think we can move along smoothly.
[Translation]
Benoit Robidoux, General Director, Economic and Fiscal Policy Branch, Department of Finance Canada: Thank you, Mr. Chair. I am going to take a few minutes to give you a brief overview of the economic situation.
The world economy is emerging from the deepest and most widespread global recession of the last 60 years. This global downturn continues to have a significant impact on the Canadian economy. The global financial market crisis, together with the large decline in foreign demand, has reduced Canadian exports, reduced employment and weakened business and consumer confidence.
On the whole, Canada has fared much better than most other major advanced economies over the last year. This has occurred despite our strong trade ties with the United States, which has been severely affected by the recession.
In recent months, tentative signs of economic and financial stabilization have emerged. Financial market conditions have improved significantly, in large part due to the extraordinary policy measures introduced by governments and central banks. Following dramatic declines in global economic activity in late 2008 and early 2009, the pace of contraction in economic activity has eased considerably, with some countries posting positive growth in the second quarter of 2009. Private-sector forecasters continue to expect an economic recovery in Canada beginning in the second half of this year and gaining momentum in 2010 (Chart 1). These expectations are consistent with recent economic developments.
Canada's real GDP has stabilized over the last two months. It remained unchanged in July, following an increase in June after 10 consecutive monthly declines. Employment increased in both August and September. Consumer confidence, consumer spending, and housing activity have also improved in recent months.
While prospects for an economic recovery are encouraging, the economic outlook remains uncertain.
[English]
Thank you, Mr. Chair.
The Chair: Thank you for your brief introduction, Mr. Robidoux.
Senator Di Nino: There is no question that we are seeing some improvement in the economy. I think that is generally accepted, and you just gave us statistics that support that. However, I have a concern I would like to see if you could help me with.
I am concerned that the economic improvement we are seeing might not really be economic improvement or a change in the economic conditions of our country but might be primarily due to the huge stimulus going into the economy. When that ends, we may not see the results we think we will see.
I do not know whether I expressed myself properly, but could you tackle that question first?
Mr. Robidoux: I would agree, and most private sector forecasters and the Bank of Canada make the same comment, that effectively what we see is in part driven by huge monetary and fiscal stimulus that is helping to stabilize the economy and kick-start the economy on the right side, on the North side. This is the first time in a while that we have gone through such a deep recession. We have gone through a recession before, and this is the way we kick-start the economy again, through monetary and fiscal policy. Therefore, this is not something new.
The depth of the recession and the fact that it was so widespread globally is something we have not lived through for some time. The fact that the recession was so synchronized and that recovery needed to start everywhere and that you could not rely so much on your neighbour is cause for concern. However, everyone employed the right policy, and it should work, and in fact it is working now.
The next step is to exit from the strategy of stimulating the economy through monetary and fiscal policy and to get the private sector to take the baton and provide growth to the economy. There is uncertainty; there is risk both on the upside and on the downside, but based on previous recessions you should expect the private sector to get back into the game. For example, consumption in Canada looks pretty good. The household balance sheet situation is fairly good too. Consumer satisfaction is back and it could grow. The housing market is looking fairly good. Business investment should follow at some point, and it should work through the system.
Saying the recovery is not true is not a really fair depiction. The fact that it is driven early in the cycle by monetary fiscal policy is totally true. It is the real driver of the recovery. However, that does not mean the private sector will not take the lead in a few quarters. In fact, that is everyone's hope.
Senator Di Nino: You said this is everyone's hope. You pointed in your remarks to some signs; the housing market is one. We have seen the private sector pony up, if you wish. We have seen them step up to the plate in other areas as well. Do you have statistics to share with us?
Mr. Robidoux: As I said, the housing sector is doing fairly well and the consumer sector is doing fairly well. Canadians are back consuming, and retail trade is growing in nominal and in real terms. Consumers are there, and it is a big share of the economy. We may see some early signals of business investment again on machinery and equipment, things of that type. However, it will take longer for business investment in construction and in things like building and so on. That will take longer because that market is more affected.
Investment of business may well come back. For example, imports of machinery and equipment were very strong recently, so we may see businesses coming back and increasing their investments sooner than we expected. In Canada, the domestic demand is looking pretty good; there is no question about that. If we go outside the country it is good, but it is not as good as what we see in Canada in domestic demand. That consumption investment is weaker in the U.S. and less solid.
Senator Di Nino: I would agree with you that the U.S. has to give us some cause for concern, but I believe the stimulus package was a global package — and I agree with you here — that was embraced in particular by the G20, but by other countries as well. It has created that confidence of stability that you need to be able to start going back to normality. I wondered if you had some examples of that, but you answered that question.
I want to focus more on the U.S. No one wants to see what probably created the Depression of the 1930s. That was when everyone became insular and started to practise what we call protectionism. It seems to me protectionism reared its ugly head in the U.S. some months ago. However, from what I have been able to gather, there seems to be less concern there, and it affected the U.S. less. In particular, after the meeting with President Obama and Prime Minister Harper, there seems to be a backing down of the U.S. to some degree on the protectionism that they were promoting some months back. Am I seeing it correctly?
Mr. Robidoux: I do not know much more than you about this. What I read was exactly what you said: they were working on something to ensure that Canada would not be affected by this in the future by the "Buy American" clause. There has been some progress, but I do not know more than that.
Senator Di Nino: I will leave that for now.
The Chair: Mr. Robidoux, you mentioned that consumption has increased. Do you at all attribute that to what Parliament has done in extending Employment Insurance? We will be doing it again with Bill C-50. Are you concerned that once that extension runs out that consumption increase will not be sustained?
Mr. Robidoux: Obviously EI and other measures we put there have helped to support consumption. For example, in the housing market, the home renovation tax rebate has been helpful to support renovation, and this sector has been going fairly fast recently.
In terms of the rest I would say there is uncertainty, and we need to be careful how we exit from these measures. In principle, in 2010 we should see consumption, investment, business and residential picking up, stabilizing and being fairly solid. By then, I would not be concerned at all to remove these measures if the economy behaves as expected now by private sector forecasters, which is a fairly prudent forecast.
The Chair: Are you anticipating an increase in employment opportunities as part of that economic recovery?
Mr. Robidoux: The private sector was expecting a stabilization of the employment situation, no solid gain. Recent developments are more optimistic on the employment side. I do not think we are totally out of the woods. No one believes we are totally out of the woods. Obviously, some monthly numbers might fall, but overall the last two months were positive surprises on the employment side. Things seem to have stabilized faster than expected by private sector forecasters.
In 2010, instead of stabilization, we may well see an increase in employment and the unemployment rate falling faster than expected. This all depends on the trend of the demand we will see in 2010.
Senator Gerstein: Mr. Robidoux, Prime Minister Harper recently presented his third report on the government's Economic Action Plan. In just over 100 days there were something like 7,500 projects committed to and 4,000 that have been funded. I think 90 per cent of the program has been implemented.
From your perspective, how do you monitor or evaluate the projects that are taking place? Do you follow them or monitor them in any way? Do you evaluate them?
Mr. Robidoux: In order to write these reports we have to work closely with departments that are in charge of these programs. They report to us. Obviously, they follow their programs one by one and they track what is happening.
Senator Gerstein: Is it your view they are being reasonably successful?
Mr. Robidoux: Do you mean in terms of getting implemented?
Senator Gerstein: Yes.
Mr. Robidoux: I believe the package was very well-balanced, with enhancements to EI benefits and tax cuts helping the industries, including the auto sector. They were front-loaded and worked very well. A large part of the package supported the construction industry through social housing and infrastructure with the provinces and municipalities. This part has been building throughout the summer and will continue to build in the fall and next year. This second part of the package is the second leg of the package, and I think it is working fairly well right now.
The overall package was designed to provide immediate stimulus to the economy fairly early, and then it was to have these projects like infrastructure, which takes a bit more time to kick-start and put in place, take place in the second wave. We are seeing that now. Globally, at the department, we are fairly please by the pace of implementation.
Senator Ringuette: You say in your presentation it is a survey of private sector forecasters.
Mr. Robidoux: Yes.
Senator Ringuette: What kind of survey? What kind of sample size is this survey?
Mr. Robidoux: This includes all major private sector forecasters we have in Canada, so they are all based in Canada. They include all the major banks; others, like Merrill Lynch, a U.S. bank but with offices based in Canada, are part of that. We have academics and forecasting firms. It covers most major forecasters in the country who are willing to participate in the survey.
Senator Ringuette: I compare what you gave us to what I received two hours ago from the Governor of the Bank of Canada and your Chart 1 on real GDP growth outlook by the survey forecaster. I look at Chart 20 from the Governor of the Bank of Canada, which indicates real GDP is expected to rebound in the second half of 2009, and compare them.
In 2009, both charts show growth in the third quarter. However, there is quite a difference afterwards. There is a difference in regard to 2010. There is a slight increase in all your quarters in 2010, but the Governor of the Bank of Canada predicts that the real GDP growth in the third quarter, a year from now, will start declining and will continue declining in the year 2011.
Mr. Robidoux: The growth will fall. Because I do not have what you have from the Bank of Canada, I can only think I know what you have in mind.
Senator Ringuette: It is on page 23 of the Bank of Canada Monetary Policy Report. I am trying to assess who is right and who is wrong in forecasting. Who should we believe? Should we believe the governor of the Bank of Canada, or should we believe the private sector forecasters' survey?
Senator Mitchell: The one thing you can know for sure is that they are both wrong.
Mr. Robidoux: No forecast is right. A forecast is a forecast.
Senator Ringuette: I will put that aside and say no forecast is right.
Mr. Robidoux: I will explain the difference. The bank forecast you see there is the Bank of Canada forecast.
Senator Ringuette: So your forecasting growth is probably not right either?
Mr. Robidoux: As I said, a forecast is a forecast, and most of the time it turns out to be somewhat wrong. Sometimes it is nearer to the real outcome than others, but it is always a forecast.
The Chair: Is it likely to be conservative or liberal?
Senator Ringuette: You do not have to answer that.
Mr. Robidoux: If I compare with the private sector, for Q2 and Q3 of 2009 they have a slightly stronger forecast for growth than the private sector, and they are, more importantly, stronger in 2010. This decline you see on their chart is because they go higher in terms of growth in the first half of 2010 and then they go back down. The private sector is flatter at the lower growth level.
Senator Ringuette: Your forecasts are more negative.
Mr. Robidoux: Overall, the Bank of Canada's forecast is somewhat higher than the private forecast we have used in our fiscal planning.
Senator Ringuette: I agree. The Department of Finance used to use the private sector forecast.
Mr. Robidoux: We have used them since 1994.
Senator Ringuette: Another question was raised in regard to our exports, which will be down by 4.4 per cent this year. Will there be a removal of this "Buy American" clause? A major portion of our exports goes to the U.S.A. I thought all of that was resolved when we signed NAFTA.
Mr. Robidoux: I am not an expert on this, but NAFTA does not bind provinces in Canada or states in the United States. It binds only the federal Government of Canada and the federal government in the U.S. NAFTA did not cover the provinces.
Senator Ringuette: I do not know about that. It is more than that. It also covered private businesses.
Mr. Robidoux: For sure, but in terms of the government imposing some constraint on where to buy, what we call procurement policies, NAFTA did not apply to provinces or states, and that is still the case.
Senator Ringuette: You are looking at what is being discussed now. I am talking about the current NAFTA that has been signed between Canada, the U.S. and Mexico in regard to free trading.
The Chair: The witness said he is not an expert on this. I think you made your point.
Senator Ringuette: Maybe we should have a witness on this topic to see where we are going.
The Chair: Senator Ringuette raised the internal forecasting by the Department of Finance, but you normally publish the external corporate financing as opposed to your internal predictions. That is what I usually see from you, anyway.
Mr. Robidoux: Yes.
The Chair: You have lots of people, a high payroll of people doing the forecasting internally. How do we get at those forecasts?
Mr. Robidoux: We repeatedly do analysis of the private sector forecasts. Every time we use their average forecasts, we assess it before we use it for fiscal planning. Many of our people used in forecasting are for risk analysis in the private sector forecast.
The Chair: How do we get your forecast? We never see private sector forecasts as amended by the Department of Finance.
Mr. Robidoux: We do not publish our forecasts. We base all our work on private sector forecasts. As an example, in Budget 2009, our analysis led us to think that the private sector forecasts, the average, was too optimistic; and we basically adjusted that forecast, which was based on the analysis we were doing on the forecast.
The Chair: You do not do your own forecasting internally, separate from looking at the private sector forecasts and then determining whether you agree with it or not.
Mr. Robidoux: Most of the time we do it, but only as a tool to assess, as a starting point to assess the private sector forecast. We know the average of private sector forecasts is one of the best forecasts you can choose in the market to do planning, so we strongly believe it is a good base to start from when it comes time to do fiscal planning. While we always do our own analysis to assess the risk of that forecast, when we believe the risk is too high on one side or the other, we explain that we believe the risk is too high and we adjust the forecast.
Senator Di Nino: How many individual private forecasters do you have available to you? Approximately how many are there?
Mr. Robidoux: There are 15 to 20, and it varies from one survey to another. Sometimes they do not participate because they are not up to date and prefer not to give a forecast.
Senator Di Nino: You have 15 to 20 organizations that specialize in this, and you would use no fewer than 10?
Mr. Robidoux: That is correct. I cannot remember ever going below 10.
Senator Di Nino: You would have a good variety of opinions. Then you double-check. You in effect audit their work by doing your own analysis. As opposed to doing your own forecasting, you analyze their numbers to make sure they are not skewed.
Mr. Robidoux: That it is a good way to depict it, yes.
The Chair: Analysis as opposed to forecasting.
Senator Di Nino: That is probably wise. In 1994, we felt it was good if it got one group of people. Now they have 10 to 15. It is good as long as they go through the process of analysis to verify their numbers. As we said before, no forecast will ever be spot on. By using these experts, governments believe they are able to provide us a more accurate forecast than they could by having it done by their own people.
The Chair: It was helpful to have that discussion, because there were outstanding questions.
I have one other question. Do you share the concerns that some others in positions of authority have in relation to the strong Canadian dollar? There is some suggestion that the economic recovery will not be sustained over the long run if the Canadian dollar stays strong, whereas other economists say that a strong dollar helps with increased productivity, which is good for the long term and helps to acquire new machinery, which is usually what happens with a stronger dollar.
Will you comment on that?
Mr. Robidoux: I agree that a stronger dollar is good if it is supported by fundamentals, which, in the Canadian context, are often determined by commodity prices, which affect the price at which we export our products. A stronger dollar affects exports, so there is a negative impact. That leads to reallocation of resources within the country and also to cheaper prices for business machinery that to a large extent we import from other countries. That leads to businesses that are more productive, can pay higher wages and are more competitive on the world stage.
There are pluses and minuses to a stronger dollar. It is a way to adjust to shocks in the economy fairly rapidly.
The Chair: You agree with both of my statements.
Mr. Robidoux: Yes.
The Chair: Bringing this down to the Canadian economy, do you share the view that it is important for the Canadian dollar to stay up?
Mr. Robidoux: I do not think my view is pertinent to this issue. We follow the private sector. We look at what they think. They seem to think that looking only at the dollar is not the right way to look at the situation. We need to look at the dollar and other factors. For example, the dollar has been going down this week, as have commodity prices. We often see this link. It is normal.
Most private sector organizations see enough offsetting factors that they are not currently revising downward their growth forecasts for 2010.
The Chair: That is what I was getting to.
Mr. Robidoux: They are revising their view on the dollar a bit upwards, but not too much. They believed the increase we saw was temporary to some extent, and we saw some movement last week that fulfilled that expectation. They look at the whole picture and say the dollar may be a bit stronger, but the economy will not be weaker. That is the view out there. You need to look at all factors before deciding whether the dollar will have a direct impact on the economy.
When the value of the dollar increases rapidly and in a sustained fashion without any underlying causes, such as increased commodity prices, it is cause for concern and it poses risks to the outlook in general. However, it need not be offset by other factors.
Senator Mitchell: I was reminded of something as I was listening to Senator Ringuette and the debate on who was predicting what and how accurately. The other day a friend of mine from Alberta said there is nothing wrong with prognostication as long as you are not trying to predict anything. I thought that made eminent sense.
In your presentation, Mr. Robidoux, you say, in the third paragraph that in recent months, tentative signs of economic and financial stabilization have emerged and that financial market conditions have improved significantly.
There would appear to be plenty of indication of that, and yet the BDC and the Finance Department suggested earlier this evening that they have to intervene in capital markets because they are not working that well, and there seems to be an anomaly between what they perceive to be a good risk and a market that says, "We do not want to take it."
How does that relate to what you are saying, and what does that say about recovery?
Mr. Robidoux: Since the time of the budget and the Economic Action Plan, the overall situation on financial markets has greatly improved — faster, in fact, than expected by most. Does that mean we are back to normal in every respect? I think the answer is no. There are still some pockets in the financial markets that are not working very well, and it will take some time before all these pockets are working as smoothly as they were before the crisis emerged.
In general, consumer businesses have greatly improved. We determine this by looking at spreads between risk-free rates, like government rates, and the rates people pay on the market, be it consumer or businesses, and they have shrunk considerably since January.
There is no question that things have greatly improved. We see the impact of that on the decision of businesses and consumers to invest in housing and capital. In pockets of markets, it is true there are still some problems.
Senator Mitchell: Regarding the stimulus package, I am sure you mentioned there is a specific figure. I think they are predicting $235 billion for 2009-10, and $56 billion of that will be deficit, so they are only raising, give or take, $180 billion. How much of that $56 billion is stimulus? To put it another way, how much are we spending on stimulus specifically, on those 7,500 programs or projects?
Mr. Robidoux: This is a very good question. It is a bit difficult to answer because the deficit is based on an accrual basis while the stimulus is on a cash basis. We need to do the math, but roughly, probably half of the deficit should be viewed as a pure temporary stimulus.
Senator Mitchell: That would be $27 billion.
Mr. Robidoux: We have measures in the action plan for $38 billion in 2009-10, on a cash basis, and we have a deficit of $56.9 billion projected.
Senator Mitchell: Some of that will be spent next year?
Mr. Robidoux: The $56.9 billion is 2009-10, this year. The $38 billion is the action plan. One is on accrual basis; the other is cash basis. The big difference is that all capital spending does not record expenses the same way. Some adjustment needs to be done.
Senator Mitchell: Does that make it lower than it really is?
Mr. Robidoux: The $38 billion does not have an impact of $38 billion on the deficit, because it is cash and part of it is capital spending that will be expensed over the life of the asset we are investing in. The impact is a bit smaller.
Senator Mitchell: The deficit would be higher.
Mr. Robidoux: Yes, if we were to expense all the capital spending done at the federal level in one year, but this is not the accounting we use.
Senator Mitchell: It is higher than $56 billion. The cheques we are writing are actually higher than $56 billion this year.
Mr. Robidoux: The cash flows are higher. When you look at the fiscal monitor, for example, this is all transparent. The cash needed in one year is not equivalent to the deficit in one year.
Senator Mitchell: Of the $38 billion, what do you book this year as capital?
Mr. Robidoux: I do not have this information with me. I do believe the part of capital spending, purely federal, is relatively small in the package, so the difference should be fairly small. However, we never went through the whole calculation of isolating, on an accrual basis, what is the stimulus. We reported all of the stimulus on a cash basis, for the main reason that the impact on the economy is not based on the accrual accounting but on the cash flow you have in the economy. It is why we always reported right at the beginning the estimates on a cash basis. For years we have not reported on a cash basis.
Roughly speaking, I would say half of it is measures from the plan, in the $56.9 billion.
Senator Mitchell: There is a $38-billion stimulus package, so we have an extra $10 billion somewhere.
Mr. Robidoux: A significant part of the deficit this year is because the economy is weaker. As a result, revenues are weaker and spending tends to be higher. Without an action plan, we would have had higher EI benefits and higher other transfers, so you get that automatically.
Senator Mitchell: I thought the bulk of these projects were capital, though.
Mr. Robidoux: Again, there is a difference between projects that are capital but are provincial and municipal. When we provide funding to a municipality, we share costs with municipalities or provinces for the capital project. We expense that all in the first year.
Senator Mitchell: It is their capital.
Mr. Robidoux: We treat that as a transfer to another level of governance, and we expense it in one year. When it is our own capital spending, when the Government of Canada owns the capital, then it expenses it over the life of the asset.
Senator Mitchell: There is much debate about what form of projects and programs would constitute the best kind of stimulus. Can you give us some insight into the process by which it was determined that the stimulus would be focused largely on infrastructure programs and not on initiating, supporting and creating new industries of the future, such as green industry? It is a key policy choice, it would seem to me, but you cannot put signs on some of those things that might be good for the future.
Mr. Robidoux: When we developed the package at the department with the government, we looked at all the options that were available. Part of the package is on green infrastructure and clean energy. Practically, if you want to spend money rapidly to support the economy, there is just so much money you can put on green infrastructure, clean energy or environmental projects. We put some money into projects that were ready. There was not so much there. If you look at the U.S. package, for example, they put some money there, but it is over five or ten years. It is a small part of the package because it is difficult to do due diligence, find the appropriate projects and do it quickly.
When it comes to what was available quickly, enhancing EI benefits to help the most affected and reducing taxes are something you can do quickly that feed through the economy fairly quickly. When it came to infrastructure, we decided to concentrate on shovel-ready, smaller projects that could be done more rapidly and not large projects that are not fully developed, where, by the time you start the project, you are out of the time frame you want to put your stimulus in.
This is how we developed the package. We thought, as I said before, that it was a fairly well-balanced package. We are not the only one to think that. The International Monetary Fund, IMF, praised Canada for its well-balanced and large package. This is how we developed that package. We provided in the budget an annex, Annex 1, if I am correct, that explained how we calculated what we thought would be the impact of each element of the plan and how it would feed into the economy. You can see there how we pick our economic parameters for each category of spending. You will see that we were prudent in our assumptions, but they were all large economic files.
Senator Mitchell: Would it be possible for you to get to the clerk an indication of how much of the stimulus package has not been expensed this year and, ergo, is not included in the $56.9-billion deficit? I would like to know the difference between the $38 billion we are spending on stimulus and how much of that has actually been expensed. For example, if it is $27 billion, that means we are really at $66 billion. That would be startling, but entirely possible.
Mr. Robidoux: We could do that. I could not provide it tomorrow, but we could work on it and give it to you.
The Chair: That would be helpful. Provide it to the clerk and we will circulate it to members.
Mr. Robidoux: The number we are quoting for the deficit is wrong. It is $55.9 billion for this year.
Senator Mitchell: I will bet you it is bigger than that.
Mr. Robidoux: As I was saying, it was $55.9 billion.
The Chair: Is $55.9 billion the current projection for the deficit for this fiscal year?
Mr. Robidoux: Yes.
[Translation]
Senator Carignan: I am not sure I understood your explanation because the simultaneous interpretation was not working just now. Does the amount for the deficit include the infrastructure investment spending? There are different accounting rules that may apply.
In Quebec, for example, infrastructure spending that comes from borrowing is not counted in the deficit. In Ontario, I do not know whether it counts in the deficit. So it is difficult to compare the two. In Canada, is the infrastructure spending financed by borrowing also counted in the deficit or is it excluded from the calculation?
Mr. Robidoux: In the case of Ontario, as in Quebec or Canada, it is always counted in the deficit.
Senator Carignan: That is the capitalized portion.
Mr. Robidoux: The portion of the portion amortized over the first year. That is the case in Quebec and in Canada for our own infrastructure. For transfers to municipalities, the full amount is entered as a direct expense. Ontario counts its capital expenditures directly in the current year when it makes them. In the past, a number of governments took that approach. The accounting rules have changed and now most governments will amortize it over the lifespan of the equipment or the principal of the asset created.
Senator Carignan: So the money is paid directly to the municipalities to help them and directly in terms of the deficit?
Mr. Robidoux: Absolutely, that is in the case of the federal government.
Senator Carignan: As if it were groceries, even though it is infrastructure spending.
Mr. Robidoux: Yes, because it isn't our infrastructure. We don't get any assets in return.
Senator Carignan: But when it is in our infrastructure, for example in national defence, it is just the part of the payment out that is amortized?
Mr. Robidoux: It is amortization. It is the use of the principal in the current period that is counted.
Senator Carignan: On page 14 of Canada's Economic Action Plan, it refers to measures that have to be taken by the provinces and territories, nearly $9.7 billion in 2009-10. Are other agencies under provincial jurisdiction, like municipalities, universities and hospitals, included?
Mr. Robidoux: What document are you referring to, exactly?
Senator Carignan: The Economic Action Plan, the third report, page 14, table 1.1. Federal stimulus measures total $29 billion and the measures that have to be taken by the provinces and territories total $9.691 billion. Does that figure include the municipalities' share, for example universities or institutions that take part in the lever-effect recovery measures?
Mr. Robidoux: Yes, that includes all spending for cost-sharing programs, 50/50. It is the 50 per cent that comes from the provinces, municipalities or universities, as the case may be. There are some components of the plan where the lever effect comes from the private sector. I do not recall the measure exactly, but it is included in there. It is 99.9 per cent the provinces and municipalities.
[English]
Senator Di Nino: Following on Senator Mitchell's comments, if I read my material correctly, the entire stimulus package is being looked at with a green component to the degree appropriate, whether it is construction or building a bridge, et cetera. Am I correct that whenever appropriate or possible, the greening of the projects under the stimulus package is a component?
Mr. Robidoux: I am not sure I understand your question or that I could answer your question. There may be some environmental processes they have to go through. As I said before, some specific elements of the plan, such as the Green Infrastructure Fund and the Clean Energy Fund, aim to create green infrastructure and clean energy.
The Chair: We have Infrastructure Canada coming next week. They may be better able to answer that question.
Mr. Robidoux, why were what we believed initially to be loans to General Motors and Chrysler in Canada all written off as part of the deficit?
Senator Ringuette: We thought we bought shares.
The Chair: Yes, we thought we bought shares.
Mr. Robidoux: What was done prior to the preparation of the budget was a loan, and it is still a loan. The early help provided was a loan. It is a fairly small share of the whole package. What came after was equity. We decided to book equity with basically —
The Chair: Zero value?
Mr. Robidoux: We provisioned that equity assuming it will never come back. That is not because we believe it, but we wanted to be prudent in the way we were expensing these investments.
The Chair: This is conservative accounting again.
Senator Di Nino: That is good.
Mr. Robidoux: This is it what we decided to do.
Senator Di Nino: We still own the shares, though?
Mr. Robidoux: Yes.
Senator Di Nino: It is important to put on the record that the percentage of equity in the companies that we bought is still on the government books. However, the government is using prudent accounting as you call it. They have said, "We are placing these shares on the books at zero value."
Mr. Robidoux: We put an offset provision of 100 per cent.
The Chair: When we hold shares as a government, do we do an annual evaluation of those?
Mr. Robidoux: That is a question for Industry Canada officials. They are in charge of that project.
The Chair: They are in charge of that?
Senator Di Nino: The answer is yes.
Senator Mitchell: The figures in the estimates seem to be saying that in 2009-10, the government is spending $235 billion.
Mr. Robidoux: This is the total spending by department that you are talking about. This is overall spending of the government.
Senator Mitchell: This is overall spending. It is on page 1-7, under "Total Program Spending."
Mr. Robidoux: Is this is under "Public Accounts"?
Senator Di Nino: Do you want to borrow my book?
Mr. Robidoux: Is it the 2008-09 estimates?
Senator Mitchell: It is for 2009-10. The Main Estimates are $235 billion in expenditures; 2008-09 actual expenditures appear to be $220 billion. Expenditure has increased by $15 billion. However, we know from what you are telling us that stimulus, which is new and special spending, is accounted for this year as $27 billion.
Mr. Robidoux: No, it is $37 billion.
Senator Mitchell: Okay, $38 billion.
Mr. Robidoux: Sorry, $38 billion includes the provinces. I should strip out the provincial contribution, which is not on our books. It is $29 billion.
Senator Mitchell: Expenditure is increasing by $15 billion. We know that the one-time stimulus expenditure is $29 billion. Either the government has cut $14 billion from something, or this entire stimulus package is not new, different or one-time stimulus spending at all. You cannot have it both ways.
Mr. Robidoux: Only part of the stimulus is spending. For example, infrastructure is spending. It shows up there. Tax cuts are not spending. We froze EI premiums; this is not there either.
Changing program expenses is not the right way to find this $29 billion. You need to look at the budget balance. Maybe you can look at the change in the debt. That is one way you could see that. Basically what drives the change in debt is your deficit.
Senator Mitchell: How much is the change in the debt?
Mr. Robidoux: That is moving from $463 billion to $519 billion. I have rounded out the numbers. We have a plan of $29 billion in cash. However, the economy is weaker and the deficit is bigger. We have a deficit of $55.9 billion, of which we actually have $29 billion in stimulus and the $55 billion. This is a way to square all these numbers together. Plus here is a little trick: I talked about the adjustment to the infrastructure spending at the federal level that needs to be put in on that accrual basis.
The Chair: We should have you come here more often to explain these.
Senator Ringuette: Correct me if I am wrong, but you said that EI contributions were capped?
Mr. Robidoux: Frozen.
Senator Ringuette: Frozen for the fiscal year 2009-10.
Mr. Robidoux: For 2009-10 and 2010-11; for two years. The current fiscal year and the next fiscal year are at $1.73 per $100 of insurable earnings.
Senator Ringuette: That is very nice, but today I read a report on EI that was tabled yesterday with regard to those rates. It is true that the rates were frozen. However, the amount of income that one pays EI on was increased.
I made a small calculation this morning. I have a photographic memory, so I can put it down quickly. It was an increase of $135 in contributions to EI for every person who had an income of $42,000. You can multiply $135 a year by about 8 million. That is a lot of money going to the EI bank. It is one thing to say that the government has frozen the rates, but it is just marketing. On the other hand, it has increased the level of income that one must pay EI on.
Senator Mitchell: Interesting.
Senator Ringuette: Is it not?
Mr. Robidoux: The insurable earnings go up every year based on the average wage rate in the industrial sector. The actual insurable earnings went up in 2008-09 to this year from $41,100 to $42,300. If you insure more of your revenue and are unfortunate enough to become unemployed, you get more EI.
Senator Ringuette: No.
Mr. Robidoux: If your income is higher than that, you insure a bigger part of the wage that you earn.
Senator Ringuette: No.
Mr. Robidoux: You pay the same amount per tranche of 100 that you insure. This is standard. Every year it increases. Otherwise you would not increase the rate but cover a smaller and smaller real part of your income. You would freeze the income that you insure and the value of that income, because of inflation, would be worth less and less. At some point we would not insure the same value of real income people earn.
Senator Ringuette: No, the maximum benefits per week have not increased.
The Chair: I think we understand the point that you have made.
We have kept you here a bit longer than we told you we would and you agreed to, but that was because your presentation was so interesting and helpful to us.
[Translation]
Thank you very much for coming to testify before our committee, Mr. Robidoux.
Mr. Robidoux: It was my pleasure.
(The committee adjourned.)