Proceedings of the Standing Senate Committee on
National Finance
Issue 9 - Evidence - April 8, 2014
OTTAWA, Tuesday, April 8, 2014
The Standing Senate Committee on National Finance met this day at 9:33 a.m. to study:
(1) a draft report on the expenditures set out in the Main Estimates for the fiscal year ending March 31, 2015;
(2) a draft report for the study of the Supplementary Estimates (C) for the fiscal year ending March 31, 2014;
(3) a draft report on the expenditures set out in the Main Estimates for the fiscal year ending March 31, 2014.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: This morning, the committee will begin consideration of Bill S-204, An Act to amend the Financial Administration Act (borrowing of money).
[English]
We have three different sessions in our two hours this morning. For the first half hour, we welcome the sponsor of the bill, Senator Moore.
Senator Moore, we thank you for your initiative, and we'd ask you to tell us why the nation needs this piece of legislation.
The Honourable Wilfred P. Moore, sponsor of the bill: I want to thank all senators and members of the Standing Senate Committee on National Finance for giving me the time to come to speak to and to examine Bill S-204 today.
My remarks will be brief as we went through this last year, but I would like to provide the reasons I believe S-204 should be passed by both the House and Senate and restore balance and accountability to the financial procedures of our Parliament.
In Budget 2007, Parliament and, thus, Canadians lost their long-held authority over the public purse. This budget removed from Parliament the authority to borrow and moved it to the executive solely. No longer would Canadians have a say in how much money would be borrowed in their name. The cabinet, that is, the Prime Minister and his Minister of Finance, would now make that decision.
What has been provided to cabinet is an open line of credit, which Canadians will be on the hook for after this government is gone.
It is very interesting that this government, in its election platform in 2006, did not tell Canadians that it intended to remove the authority of Parliament over borrowing of money. Why? Because Canadians would not have accepted erasing such a proven and time-honoured role for Parliament, for them the people.
It is my contention that this was a terrible mistake, which leaves us with not only a weakened financial regime but also a weakened Parliament.
Marleau and Monpetit put it much more succinctly:
The whole law of finance, and consequently the whole British constitution, is grounded upon one fundamental principle, laid down at the very outset of English parliamentary history and secured by three hundred years of mingled conflict with the Crown and peaceful growth. All taxes and public burdens imposed upon the nation for purposes of state, whatsoever their nature, must be granted by the representatives of the citizens and taxpayers, i.e., by Parliament.
This is quite clear, and the government cannot have it both ways. There is either responsible and accountable government, as laid down by parliamentary principle, or there is not. In Canada, at the moment, there is not.
We know the reasons given for the change made by bureaucrats at the Department of Finance. They amount merely to expedience. It is definitely easier to borrow money on behalf of Canadians when you cut them out of the process, but it is anything but accountable.
The Department of Finance has told us that the changes made to borrowing authority have enhanced accountability.
We know that that is absolutely untrue. There is no greater form of accountability than the Parliament of Canada. A bill to borrow funds must come before Parliament and be debated by the elected representatives of Canadians. That is accountability.
The Department of Finance tells us that their Debt Management Strategy contains information that outlines, amongst other things, the anticipated borrowing requirements. This is presented to cabinet, however and not to the House of Commons. This not only does not enhance accountability but it also ignores the fact that, while cabinet should have a discussion, it's Parliament that should have the vote.
The Department of Finance tells us that their Debt Management Report provides accountability as it is published 30 days after the accounts are released. This is all done after the fact. Canadians are not informed of what they now owe until after the fact. I think this is completely unacceptable.
The Department of Finance tells us that this bill strikes a balance between parliamentary oversight and efficiency and flexibility. We know that Canada — and I said this in my last time before this committee — has survived two world wars, the recession of the 1930s and countless other emergencies. In fact, the only changes made prior to Budget 2007 were made to strengthen parliamentary oversight, not weaken it. That is as it was always meant to be.
In response to this bill in the Senate recently, we were told that this is considered by this government to be a "warmed over" bill that is not worthy of attention. I find it alarming that a bill that seeks to restore the powers of Parliament, which were surreptitiously removed, might be considered irrelevant. Indeed, we were told: "The legislation amended in 2006 gives significant powers. Why restrict them?"
Why should we restrict government powers indeed? I think Canadians should be alarmed over that particular assertion that we should allow the Department of Finance and cabinet to borrow as much as they want, and we should allow them this open line of credit.
We are not here to serve the Department of Finance. It is just the opposite. Finance is here to serve the Parliament of Canada, the people. This bill seeks to restore the equilibrium.
Chair, I understand that, post-Easter break, this committee will be considering clause-by-clause consideration and hearing from other witnesses. I look forward to that session. Thank you for your time and I look forward to answering the questions of senators.
The Chair: Thank you very much, Senator Moore. At one point, you made reference to your previous bill, and, in the previous bill that was before this committee, one of the concerns expressed by some honourable senators was that there were no coming-into-force provisions. Can you address that?
Senator Moore: That has been amended in this bill. The coming-into-force province will apply quickly after the passage. I think it's 30 days within the passage of the bill. I can read it:
This Act comes into force on the later of April 1 of the first fiscal year that begins after the day on which it receives royal assent . . .
That is 90 days after the day on which it receives Royal Assent.
The Chair: Which clause are you reading?
Senator Moore: That's clause 4, chair.
Senator Callbeck: Welcome, senator. Thank you for bringing forth this legislation.
As you say, the executive or the cabinet now have the total say in how much is borrowed, and no longer do Canadians have a say, so we've lost a major check on the system.
Do you know of any other Westminster systems or countries that have this, that Parliament doesn't have a say?
Senator Moore: No, I don't.
Senator Callbeck: It's really like giving cabinet a credit card without any limit.
Senator Moore: That's the way I've mentioned it here in my statement. What happens is that the Minister of Finance simply goes to his cabinet colleagues, explains what he wants and, with their approval, he can proceed. He's not going to the people, to the Parliament, to the House of Commons, and doing the same thing and seeking their approval, and that is fundamental to all Westminster-style democracies.
Senator Callbeck: I very much agree with you. We find out about the borrowing limits requested by the minister in the Debt Management Strategy. When is that presented, or when do we find out what's in that; do you know?
Senator Moore: The Debt Management Report comes through 30 days after the public accounts. It is the report which is the key thing because it tells you what he spent, but he didn't come in beforehand to get the approval.
Senator Callbeck: This change that was made in 2007 in the omnibus bill. Is there any reason to think that the day or two it may take to pass a bill like this, under the old system, would have made any difference in the crisis in 2008?
Senator Moore: I don't think so. We heard evidence the last time this bill was before this committee that, in the past, the House of Commons and the Senate have had ample time to deal with crisis issues, and it certainly could have done so in the 2008-09 Great Recession, as it's called.
Senator Callbeck: Okay. Thank you.
The Chair: There are two documents, as I understand it. Senator Callbeck was asking you about the strategy. My understanding is that is annexed to the budget, and so that's before the fiscal year starts.
Senator Moore: Correct.
The Chair: Then the document, Senator Moore, that you referred to as a report comes after public accounts, after the fact.
Senator Moore: Correct, chair.
The Chair: So there are two: one before and one after.
Senator Moore: Yes, there are.
The Chair: Did you want to make any comment in relation to the strategy aspect? I think I heard you say that it goes only to cabinet, but that's in the budget, and the House of Commons votes on the budget.
Senator Moore: Yes, but the minister doesn't come before the house and lay out in detail the money he wants and why he wants it, or ask for the permission of the house to borrow. He doesn't do that. He's coming in after the fact.
The Chair: So these two documents and this approach, strategy in the budget, and after public accounts, a report, is a replacement for the previous process of a bill that came before both chambers to be passed?
Senator Moore: Correct. We did that, chair and members, for 140 years and it worked. Nobody told the Canadian people that we're going to change this, and the import of that. Nobody did, and nobody has since. It should be restored.
The Chair: Can you talk about how we found out about this change?
Senator Moore: In the omnibus bill, the first Conservative government omnibus bill in 2007, I know that I — and I think many others in the Senate — were preoccupied with the changes to the Atlantic Accord and the change to the formula for the sharing of revenues between the federal government and the provinces.
So nobody in the House of Commons or the Senate saw that before the omnibus bill was passed; it was afterward. My seatmate, the Honourable Tommy Banks, was going through the bill. He noticed this one little clause and said, "What does that mean? Does that mean what I think it does?"
I think, chair, he might have asked you. He raised it with me, and I think he might have raised it with you. Then he spoke with the Honourable Lowell Murray, who was alarmed. I know that Senator Murray tried two or three times to get a bill before a committee and he was obstructed. He couldn't get that done. So I guess I'm kind of carrying the torch here. But that's what happened. That's how it was discovered.
I think we were alarmed because it is such an important fundamental principle, and that it would be slipped in in a stealthy manner. It wasn't part of anybody's campaign promise. It wasn't part of any printed platform. The Canadian public didn't know it. People in the House of Commons didn't know it. People in the Senate didn't know it. So it was a shock, and now we can't seem to get it restored, and it should be restored. Nobody has said why it shouldn't be restored. Nobody has justified why it has been taken out, outside of expediency, and that just doesn't hold water, because it's never been an issue. We have heard testimony to that effect from witnesses in the past, and you will probably hear it again today or whenever you hear witnesses.
To put this bill in again would restore the balance, the equilibrium, between the house, the people and the executive branch.
The Chair: You say "omnibus bill," which we sometimes refer to as a budget implementation omnibus bill.
Senator Moore: It's been called that too, chair.
Senator Eaton: Senator Moore, has the Financial Administration Act ever been defeated? In the years previous to 2007, when the government went before the people, was it ever defeated, or was it an act of housekeeping by saying, "I'm going to borrow X," and everybody said, "Yea"?
Senator Moore: I don't think it was defeated, but what happens, of course, is that you have to take the bill before the house — a monetary ask — and seek the approval of the house. So it gives the house an opportunity to review and consider. If the government of the day has the majority, they're probably going to get it through in any event.
Senator Eaton: But to your knowledge, it has never been defeated?
Senator Moore: Not that I'm aware of.
Senator Eaton: Just to follow up: I guess I'm not as financially sophisticated or experienced as the rest of you, but when the budget comes up before the house, are these things not taken into consideration? In other words, the borrowed money, the money we're spending, the money we don't have, the deficit, is that not part of Parliament's consideration?
Senator Moore: Yes.
Senator Buth: Thank you very much for being here today, Senator Moore.
I'm just curious whether you've reviewed the Debt Management Strategy or the Debt Management Report, if you've taken a look at them.
Senator Moore: I did last year when we were doing this. I didn't this year.
Senator Buth: My question goes along with what Senator Eaton and Senator Day were saying, and that is that the Debt Management Strategy — and I just took a look at it — lays out the borrowing in comparison to last year. It indicates how the borrowing is to happen, essentially how they're going to do it. Then, it is included as an annex in the budget, which we get. Then, the budget implementation act is brought forward, and we approve that. So that's approved by Parliament. It goes through the House. It goes through the Senate.
If there are any concerns, they could be debated in the House or in the Senate, so I'm not too sure what your primary concern is. There is still a mechanism there for Parliament to review the Debt Management Strategy.
Senator Moore: I don't know why the authority in Parliament, as it was for 140 years, was taken out. I don't know why. The other system, I would suggest, is better, more accountable. The public understood when this issue was coming before it, before the House, the members had an opportunity to hold the government to task to explain it, not to read a report that has come in as what we propose to do but actually what was asked and what the terms of it were.
Senator Buth: So this change to the Financial Administration Act was, as we mentioned, included in a budget bill.
Senator Moore: In 2007.
Senator Buth: That budget bill was debated in Parliament and the Senate, but you missed it. Or was it Senator Banks?
Senator Moore: Senator Banks was the first to discover it. No one in the House of Commons or in the Senate saw it, which is a tragedy.
Senator Buth: Nobody in the opposition saw it and mentioned it.
Senator Moore: Nobody in the House of Commons saw it, either side. Well, I expect the government knew.
Senator Buth: I don't think you can talk about whether our side saw it or not.
Senator Moore: That's true. It wasn't raised — let me put it that way — by anybody in the House of Commons.
Senator Buth: Right. It wasn't raised, but it was in the bill.
Senator Moore: It was in the bill, senator. Correct.
Senator Buth: And the bill was voted on.
Senator Moore: Yes, it was.
Senator Buth: And the bill passed.
Senator Moore: Yes, it did.
Senator Buth: So that change was made. Thank you very much.
The Chair: Just to clarify the record, the Debt Management Strategy is annexed to the budget, but we do not, in the Senate, vote on the budget. It is not part of our budget implementation. Only certain things are taken out of the budget that we deal with in the budget implementation, and then a lot of other things aren't, of course.
Senator Moore: In committee, yes.
The Chair: I don't think any of us have ever seen the strategy attached to a budget implementation bill in the Senate.
Senator Buth: But the budget is debated in the house and voted on in the house.
The Chair: In the house and not in the Senate.
Senator Buth: Right.
The Chair: Just to clarify the record.
Senator Moore: Because the public probably doesn't know that, Chair.
The Chair: It's hard for us to speculate on what the public may know.
Senator Moore: In terms of the fact that the Senate doesn't get to look at it.
The Chair: Yes.
[Translation]
Senator Hervieux-Payette: I would like to provide clarification regarding provisions that were added to budget bills that were not taken into account by the House of Commons and that had to be amended by a Conservative minority government.
I am talking about the tax credit for film productions and how we discovered that the minister had been given the discretionary power to withdraw the tax credit after work on a film had already been completed. It is in the Senate that we discovered that this tax credit could be withdrawn on moral grounds.
Clearly, all this was seen as a way for the government to control content. All Canadian cities involved in film production opposed this clause that nobody noticed. It was debated here in the Senate.
With regard to the concept of omnibus bills, I used to be an MP in the House of Commons, and I would like to remind you that, at that time, omnibus bills were usually used to correct provisions that were difficult to enforce. Omnibus bills were generally used to clean up a number of bills, but they did not necessarily prevent people from discussing certain issues.
We are given a limited amount of time to examine omnibus bills. If we were given six months to examine them, things might be different. I have noticed that the Senate devotes more time to examining omnibus bill than the House of Commons does.
At the time, the issue of the tax credit for film production gave rise to a major national debate, and the government changed its mind because it was a minority government. When the opportunity arises, we can use our good judgment. The bill was amended in the Senate and sent back to the House of Commons.
That is why I fully support my colleague's proposal in this case. The government is simply giving itself a blank cheque, and I do not think that should ever happen. I am explaining where this came from and how this issue came up.
Does this not call into question the whole issue of omnibus bills? When it comes right down to it, if we knew what a bill was all about, then provisions would not be added to our budget bills in a way that is not exactly kosher.
[English]
Senator Moore: I recall the lengthy debate of the matter that you raised, and I believed that, at that time, the minister set himself up as the sole moral officer in the country to decide whether or not a film was appropriate. It was the Senate that discovered this in our study of the bill and had it turned back.
Nobody spoke about it. Nobody campaigned on that. Nobody told Canadians that, and, because we found it, of course, it certainly raised the opposition of the entertainment people and film production people in the country and abroad. Probably, the Canadian people who were deeply involved in that industry were shocked by it.
I guess the question is the appropriateness of these omnibus bills. When you get a bill that's 400 or 500 pages long, it's not humanly possible for any one of us to take that bill and to go through it and do all of the cross-referencing to the other statutes. You'd have to have a full research staff to do all of that in a timely way because this stuff happens quickly. If the government brings in time allocation and enforces it, it makes it even more difficult. I think that process should be stopped or limited.
Senator Seth: Thank you, Senator Moore. I understand what you're saying about this bill.
Is it possible that, because of the approval process for borrowing limits, this will reduce the capacity to borrow? Will it affect that?
Senator Moore: I don't think so. The ultimate power, as I've said, is in the people, and, if Parliament decides, in its wisdom, that the ask of the public purse should be adjusted, that is the appropriate authority to make that decision, not bureaucrats, not the department. They're there to serve the people, not the other way around.
Senator Seth: According to officials from the Bank of Canada, during the global financial crisis of 2008, the current financial framework allowed Canadian authorities to react sufficiently and quickly to the major shock that shook the Canadian financial system. How would Bill S-204 affect the reaction of the federal government in terms of efficiency and timeliness in the event of financial crisis?
Senator Moore: Thank you for the question. That issue was raised, senator, last time this bill was here. I expect you'll hear evidence about that from other witnesses. Under the previous legislation, the departments, the government, had ample time to respond to that. That was made clear. The country was in good shape in terms of finances, but there was plenty of time for the process to unfold and for the government of the day to receive the necessary approvals to borrow funds or to make adjustments to the finances of the country to deal with that situation.
Senator Chaput: Thank you, Senator Moore, for bringing this bill again to the committee. This kind of bill reminds me of the reason why senators are here. When we talk about the Senate and sober second thought, that's what happens when we take the time to do that.
I've heard many times at Senate committees the expression "tool box." I remember on one of the other committees we used to say, "This is another tool in the tool box so that we can do a better job." If I take that example and talk about the tool box of accountability, would you say that this bill would be another tool in the tool box of accountability?
Senator Moore: It certainly would. I don't know how this tool got removed from the tool box without somebody giving notice to the public that this is proposed. It's a fundamental principle, as I said, of Westminster democracies, and it worked for Canada for 140 years. Nobody stood up and said this doesn't work anymore; we've got to get rid of this. I never heard anybody say that. I never heard a minister of finance or a prime minister or any official in government say that. I don't know how this one got away.
Senator Buth: Senator Moore, I wanted to review the process we went through in terms of the changes to the Financial Administration Act and what you're doing now. The changes to the Financial Administration Act were brought forward in a Budget Implementation Act that was reviewed by Parliament and voted on, reviewed by the Senate and voted on. It was missed by the opposition, according to you. Now you're bringing forward a change, essentially, to the Financial Administration Act, which is perfectly within the rules and the process, and it's what we do; we look at issues. Anybody can bring forward a bill in the Senate, and that's what you've done.
Can you essentially tell me how many times this bill has come before the Senate and what has happened in terms of the bill?
Senator Moore: It's my second time. It would have been fully dealt with last time, except the government prorogued Parliament, so I had to start all over again. Those are the rules within the Senate. I had to start from the beginning. I think Senator Murray had a similar bill before the Senate on two or three occasions, but he could not get it beyond second reading and into a committee. He was blocked from doing that.
Senator Buth: So one time it was prorogued, you're saying?
Senator Moore: Last year, yes, senator.
Senator Buth: I was on the committee when the bill came forward last year, and we actually reported it back to the chamber that would not move it forward.
Senator Moore: Yes.
Senator Buth: So it wasn't lost in prorogation; it was reported back, essentially, to not move forward.
Senator Moore: It was reported back, but no final decision was made on it.
Senator Buth: Okay.
Senator Moore: We didn't hold the actual final vote, as I recall.
Senator Buth: In the chamber?
Senator Moore: In the chamber, yes.
Senator Buth: Thank you for clarifying that.
The Chair: Thank you, Senator Moore, on behalf of our committee, for your initiative. You're welcome to stay on as we proceed with the next round of witnesses.
Senator Moore: Thank you, senators, for hearing me again.
The Chair: Colleagues, we'll invite our next witnesses.
[Translation]
Honourable senators, I am now pleased to welcome to the Standing Senate Committee on National Finance two witnesses from the Department of Finance: Dan Calof, Acting Director, Financial Markets Division, and Marie-Josée Lambert, Chief, Domestic Debt Management Policy, Financial Sector Policy Division. They will be giving a joint presentation.
[English]
From the Bank of Canada, we welcome Grahame Johnson, Chief, Funds Management and Banking.
Do either of you have any introductory remarks? You've heard Senator Moore's comments. If you would like, as part of your introductory remarks, to make some comment in relation thereto, or otherwise, you have the floor.
Dan Calof, Acting Director, Financial Markets Division, Department of Finance Canada: I have some introductory remarks which I believe have been circulated to the senators and I believe my good friend Mr. Johnson.
Grahame Johnson, Chief, Funds Management and Banking, Bank of Canada: I likewise have some short introductory remarks.
Mr. Calof: I'd like to apologize. I'm a last-minute replacement. Toni Gravelle was supposed to be appearing in my place.
The Chair: It is short notice that we gave you. You don't need to apologize. We should be apologizing to you. Thank you for making yourselves available.
Mr. Calof: It's a pleasure to appear before this committee on an important issue like borrowing authority.
Good morning. My name is Dan Calof, and I'm the Acting Director of the Financial Markets Division of Financial Sector Policy Branch of the Department of Finance. My colleague Marie-Josée Lambert, Chief of the Debt Management Policy Section, joins me here today. I'm also here with Grahame Johnson from the Bank of Canada.
It is our pleasure to be able to appear today before the Standing Senate Committee on National Finance, on behalf of the Department of Finance, to assist you in your study of Bill S-204, which proposes to amend certain provisions of the Financial Administration Act, the FAA, concerning the borrowing of money by the Government of Canada.
Part IV of the Financial Administration Act sets out the authorities under which the Minister of Finance can borrow on behalf of Her Majesty in right of Canada. In particular, section 44(2) specifies that the aggregate principal amount of money borrowed by the minister in any fiscal year may not exceed the amount that is specified by order of the Governor-in-Council for that fiscal year.
The maximum amount requested by the minister from the Governor-in-Council is based on the projected financial needs of the government, which includes both budgetary and non-budgetary requirements, plus a margin of prudence, as set out in the Debt Management Strategy that is published as part of the annual budget. For the current fiscal year, this amount is $270 billion, which is $30 billion lower than for last year. This is put out, as you noted earlier in Senator Moore's testimony, as an annex with a budget.
I would emphasize that the borrowing authority approved by the Governor-in-Council is an upper limit on the amount of debt to be issued by the government for that fiscal year. It is not an approval of the level of spending for the government. Rather, the level of spending for the government is set through appropriation acts and various statutory appropriations, all of which are subject to parliamentary approval.
The current framework in which the Governor-in-Council approves the borrowing limit for the government has been in place since October 2007. Prior to this, there was a statutory limit on borrowing that only Parliament could change. Under this regime, the government had standing authority to refinance maturing market debt, plus $4 billion of non-lapsing borrowing authority pursuant to the Borrowing Authority Act of 1996-97.
As presented in the March 19, 2007, budget, a key motivation for changing the borrowing authority framework was to streamline and modernize the process and increase flexibility to meet future borrowing needs, particularly with respect to the consolidation of the Crown corporation borrowings. In the March 2007 budget, the government announced that, beginning in 2008, it would meet all of the borrowing needs of the Business Development Bank of Canada, the Canada Mortgage and Housing Corporation, and Farm Credit Canada, another Crown corporation, through direct lending to these Crown corporations, resulting in an increase in the government's financial requirements.
A key benefit of this additional flexibility that was provided by the 2007 changes was demonstrated in November 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 and seek a higher borrowing limit. 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 increase enabled the government to commit up to $75 billion in loans to the Canada Mortgage and Housing Corporation to fund the Insured Mortgage Purchase Program, the IMPP, and help the injection of over $40 billion in short-term liquidity to financial institutions through the Bank of Canada.
Along with the removal of the statutory borrowing limit, the 2007 amendments established enhanced disclosure requirements on anticipated borrowing and planned uses of funds. Through the Debt Management Strategy, we enhanced the disclosure requirements on actual borrowing and uses of funds compared to those forecast through the Debt Management Report, and we implemented more detailed information on the outcomes in the public accounts.
The 2007 amendments also provided for more timely disclosure of the borrowing activities that have happened in the past fiscal year. The period within which the Minister of Finance must table management reports in both Houses of Parliament was shortened from 45 to 30 sitting days following the tabling of the public accounts.
In response to Senator Callbeck's question from earlier, most modern democracies do not have explicit borrowing limits, including Britain, France, Germany, Australia and New Zealand. As such, the 2007 amendments to modernize the Government of Canada's borrowing authority provisions are in line with the borrowing authority frameworks used in other countries. The only remaining developed countries with explicit borrowing limits that we could find are the U.S., Japan and Denmark.
You should be aware that, in the U.S., their general accounting office, which is basically the equivalent of our Auditor General's office, noted, in its February 2011, July 2012 and December 2013 reports, that Congress should consider ways to better link the decisions about the debt limit with decisions about spending and revenue to avoid the potential disruptions to the treasury market and to help inform the fiscal policy debate in a timely way.
In summary, the 2007 amendments to the FAA have made our borrowing authority framework consistent with best practices around the world. Compared to the previous framework, the current borrowing authority regime has provided for more efficient, responsive and prudent financial management, and greater transparency and accountability with respect to the Government of Canada's borrowing authorities.
In closing, I thank the chair and committee members for providing me with this opportunity to brief you on this important topic. After Mr. Johnson's remarks, we will be very pleased to answer all of your questions.
Mr. Johnson: Thank you, Mr. Chair and committee members. My name is Grahame Johnson. I am the Chief of Funds Management and Banking Department at the Bank of Canada, and I'm very pleased to be here today to present the Bank of Canada's views on Bill S-204, An Act to amend the Financial Administration Act (borrowing of money).
At the outset, I'd like to offer some brief context with regard to the Bank of Canada's role in government debt issuance.
As the fiscal agent for the government, the Bank of Canada issues debt on behalf of the Government of Canada and does so in a manner consistent with the legislative requirements laid out in the Financial Administration Act. While the Bank of Canada and the Department of Finance collaborate to offer debt management advice to the Government of Canada, debt policy decisions are ultimately the responsibility of the Minister of Finance. The changes made to Canada's borrowing authority framework in 2007 were focused on creating a more efficient and flexible process for approving Canada's annual borrowing plan.
The changes also provided for transparency and accountability by establishing enhanced disclosure requirements on both the anticipated borrowing and actual borrowings undertaken in a fiscal year.
[Translation]
During the dramatic events of the global financial crisis, particularly in the autumn of 2008, the borrowing authority framework currently outlined in the Financial Administration Act served Canadians well. In particular, it helped Canadian authorities respond effectively — and quickly — to severe shocks to the Canadian financial system.
As many of you will recall, the world was faced with an exceptional situation when Lehman Brothers declared bankruptcy on September 15, 2008. What was striking about this bankruptcy was the unprecedented spike in the cost of interbank borrowing, which then spread to other markets. Financial institutions around the world became unwilling to lend to each other. Key intermediaries began to hoard liquid assets, and some even halted their market-making activities. At several points, interbank lending and other short-term funding markets, including those for banks, seized up almost completely. Clearly, we were facing a shock to the global financial system of systemic importance.
In response, central banks and governments around the world took unprecedented action to stabilize the financial system.
[English]
In Canada, our actions during the crisis were supported by the current borrowing authority framework. Specifically, the framework allowed Canadian authorities to respond quickly, with an approval of an increase of $90 billion to the intra-year borrowing limit, as Mr. Calof pointed out.
This increase aided the Bank of Canada by facilitating the rapid deployment of a number of measures, which provided over $40 billion worth of short-term liquidity to the Canadian financial system.
These measures and this additional liquidity were essential to ensuring the ongoing functioning of the Canadian financial system.
In summary, as a result of the framework, when the global headwinds of the crisis were threatening financial stability, authorities were able to provide a fast infusion of needed liquidity into financial markets, which, in turn, helped to maintain the availability of longer-term credit in Canada.
The current framework has been tested and has proven its ability to allow for quick and flexible responses in times of crisis.
Although we hope not to face another crisis of similar magnitude, and efforts to make the global financial system more resilient are advancing well, we must remain prepared to respond effectively if and when called upon.
Thank you very much. I would join Mr. Calof in taking any questions.
The Chair: Mr. Johnson, thank you very much. Before I go to my list, I just want to clarify a point, Mr. Calof, that I believe you touched on. This is the Debt Management Strategy that was attached to the budget that was made available to all parliamentarians when the budget came out. I'm looking at page 296, and I can read it to you. It talks about borrowing authority, planned borrowing activities and borrowing authority for 2014-15, the aggregate — all of it — borrowing limit requested from the Governor-in-Council to meet Economic Action Plan 2014 — presumably that's old activity — financial requirements and to provide a margin for prudence of $270 billion. Then I flip over the page and the sources of borrowing, the aggregate principal amount of money required to be borrowed, is $232 billion. So the difference between $232 billion and $270 billion, can that be accounted for as a margin of prudence?
Mr. Calof: That is correct.
The Chair: Thank you very much. I wanted to clarify that before we went into question and answer. I'm going to begin with the former deputy chair of the committee, Senator Gerstein, from Toronto.
Senator Gerstein: Thank you, witnesses, for appearing before us today.
The sponsor for the bill, for whom I have the greatest respect, notwithstanding that I do not agree with his premise at this point — but I must say; I've been married to my wife for over 50 years and I don't always agree with her, so I wouldn't want him to feel bad. Having said that, his premise is that, one, the government has an open line of credit; the cabinet has an unlimited credit card; the change in 2007 is based on the premise of a change that resulted in "weakened financial control, accountability and oversight."
As I listened to your presentations from both the Bank of Canada and the Department of Finance, would I be hearing you correctly in that both of you do not agree with the fundamental premise of this bill?
Mr. Calof: I, as well, have the greatest of respect for Senator Moore and his persistence in trying to put forward this bill. I've looked a fair amount at borrowing authorities around the world and different types of accountability. I believe last time, when I wasn't here, there was a speaker, an academic, Professor Turnbull, who spoke about accountability versus efficiency or transparency; there was a balance. She would probably be more the expert than I about the overall accountability and responsibility.
From my perspective, I see Parliament having overall say for the spending of the government, and Parliament having overall say for the taxation of the government, and what's the residual is the borrowing. There is borrowing for financial reasons, budgetary reasons and non-budgetary reasons, so it's more or less a mechanical type of calculation to figure out exactly how much is necessary to borrow to keep the government running after all the other decisions on spending and taxation have been made.
These are laid out in depth in the Debt Management Strategy, for Parliament, or for anyone. We welcome any specific questions about the Debt Management Strategy that we laid before you. We're gratified that some people read it. Marie-Josée Lambert worked very hard in developing it for Canadians and for parliamentarians. It's all laid out.
In terms of the credit card, we borrow from financial markets; and so financial markets, in essence, give us a limit on that credit card. If we want to borrow more, and we don't have great spending plans, it's going to cost a lot more for us to borrow from financial markets. This is going to feed into the debt and deficit position.
Personally, I would not characterize it as a blank cheque and unlimited borrowing authority. I characterize it as the government makes certain decisions and we, as professional debt managers, the three of us, implement the borrowing program.
Mr. Johnson: I would certainly agree with Mr. Calof. I'll just speak on few points. The first is that as fiscal agent and debt manager, the Bank of Canada works in partnership with the Department of Finance. We take, as a given starting point for the debt strategy, the budget, appropriations and spending that have been duly put forward, debated and passed in the budget. That is the starting point. There are obviously other items that may or may not arise — maturing debt, Crown borrowing funding, as Mr. Calof indicated — that go into the borrowing requirement. As fiscal agent, we find that the current framework gives us an appropriate degree of flexibility to fund this spending that has been approved as part of the budget and passed by Parliament.
The other point I would add is that, as the Bank of Canada, at any time, but certainly in times of financial crisis, in terms of supporting the financial system, we operate in partnership with the Government of Canada. If you go back to 2008 — and, although we would hope not, but any future crises — it's important that we act in this partnership, that we be responsive, flexible and timely, and certainly in the Bank of Canada's response, to inject liquidity into the financial system. The ability to do so, in partnership with Finance and supported by the incremental borrowing that was added in a very speedy and timely manner, we found to be extremely efficient and necessary for a timely response.
[Translation]
Senator Hervieux-Payette: My question is for both witnesses. Are you aware that the Canadian public and parliamentarians were completely left out of the major decision to authorize an additional $75 billion to bail out chartered banks, the automobile industry and others? Were we given any specific information? Did you provide us with any information to let us know exactly what the $75 billion was going to be used for?
[English]
Mr. Calof: I thank you for your question, senator. I'm sorry; I can't speak to General Motors and their loans. I wasn't involved with that file. But I can try to get you some further information.
I know, from the injections of money for the Insured Mortgage Purchase Program, it was involved in essentially taking risk that was already a contingent liability of the government and owned by banks, and extending money. In essence, it was a collateralized loan. The government made money on that. The government had no incremental risk, because we already owned the risk and that was already authorized. The government made a loan to CMHC and received that money in return and made the spread off of that.
Senator Hervieux-Payette: I'm asking you: How do you think we would be informed, and how long did it take for us to know about this $75 billion? Actually, I'm not asking you if it was good or not good, or if it would have been done or not done. I'm asking you: With the new process, how would the Canadian public and we have been informed about what this $75 billion was going to be used for?
Mr. Calof: I think immediately a press release was released when the program was announced.
Senator Hervieux-Payette: It took a long time to get to us, I can tell you. I am the one who informed a lot of very, I would say, knowledgeable people in the financial community. They were not aware of that. They learned about it. After passing a bill called "accountability" — that's why I support Senator Moore's bill — you have to put on the table the information before and after. We got it after. It took a long time to sink in for the Canadian public.
Are you aware that we have legislation that provides for the government to get the workers who are on strike back in the workplace within less than 48 hours? In more than 48 hours, if we were going back, would any crisis happen? Do you think you need less than 48 hours to proceed with what you have done with the new bill? Would it be enough to put that on the table and ask the parliamentarians to go back and discuss the need for that supplementary amount of money?
Mr. Calof: First of all, in response to your previous point, the IMPP was announced on October 10, but the actual transactions happened sometime later. So Canadians were informed beforehand when there were plans. We didn't, at that point, get the borrowing approval until November 6, which was the first increase and which happened to be after Parliament was prorogued. It would've been difficult. It's very tough to go back and look and see how quickly a Parliament can be recalled and go through three readings in the House and three readings in the Senate.
Senator Hervieux-Payette: No, we have some precedent. We have had strikes in this country that were settled within 48 hours. Don't tell me it's difficult.
Mr. Calof: As I say, I cannot comment on how quick it is. All I can tell you is that, from my perspective as a debt manager, this allows us to quickly and easily raise the borrowing limit, which, in a crisis that happens over a weekend, is often necessary.
Senator Hervieux-Payette: My question was: Would you be able to spare 48 hours to discuss the matter before parliamentarians before this is done?
Mr. Johnson: If I may speak for the Bank of Canada and the exceptional liquidity operations that we provided to the market at that time, going back to the counterfactual is, obviously, extremely difficult. We cannot say what could or could not have been done. At the time, November 2008, Parliament was not sitting. Time was of the essence. As Mr. Calof said, on a number of occasions, some of these exceptional liquidity provision facilities were essentially devised over a weekend and implemented first thing Monday morning. With Parliament not sitting, I don't know whether 48 hours would have been sufficient. I don't know whether 48 hours would have been possible, and I certainly don't know whether 48 hours would or would not have made a material difference.
What I do know is that, under the current framework, we had the authority to get the money at the Bank of Canada. The government had the flexibility to get the borrowing it needed to provide a government deposit on the Bank of Canada's balance sheet, which provided us the funding to go and inject up to $40 billion worth of liquidity into the financial system. In terms of communicating this to the public, the Bank of Canada's financial statements are made public monthly. The government deposit was put on there. The offsetting assets, which were secured loans in the form of a repo transaction, were likewise on the balance sheet with all of the associated collateral listed. The operations were disclosed in advance and the results were made public.
Again, it's very difficult to speculate on the counterfactual and it clearly would be speculation. What I can say is that the current framework allowed us to respond efficiently and flexibly enough that it did have a material benefit to the system.
Senator Hervieux-Payette: I have a last question. Do you remember, Mr. Calof, that, in September, the minister said that everything was fine, that we had no financial problem in Canada and that we could not expect anything wrong to happen. Everything was fine. As you say in English, "fine and dandy." A month later, we were supposed to be on the brink of a catastrophe.
Which version does Finance support, that everything was fine or the other one? What happened in the United States we could foresee even a year before. All of that process, if you read some books written by Americans, took a long time to develop. That Lehman Brothers would go down the drain took weeks. You had plenty of time.
We had a report that everything was fine, and then a report that you needed money badly. I agree that it's efficient. It's not a question of efficiency. What Senator Moore and our colleagues disagree with is the fact that the Canadian public is not informed and that parliamentarians are not informed and consenting to use this money.
The Chair: Would you like to comment on that? That may be something that you're not in a position to comment on.
Mr. Calof: You're correct, it's not.
Senator L. Smith: Mr. Calof, about your notes that you read out to us, I will ask two questions.
On page 5, you wrote "Most modern democracies do not have explicit borrowing limits, including Britain, France, Germany, Australia and New Zealand." Could you give us, if possible, examples of where they were and what they did to change their situation? Was this a recent phenomenon? Was this done in the last 10 years? Was it done a long time ago? Why did they do it? Do you have any knowledge of that, even if it's one example of these countries to show that there is a fundamental change in how financial management works from, say, 1867 to 2014? If you could help us with that, that would be great.
Marie-Josée Lambert, Chief, Domestic Debt Management Policy, Financial Sector Policy Division, Department of Finance Canada: I can start with the U.S., with their debt ceiling. I have close ties with the accountability office in the U.S., which is their comptroller general, and they often contact us whenever they're about to prepare the reports on the debt ceiling because they wish they had a system like Canada's in many ways.
If you take a moment and look at the U.S. GAO reports and cross-reference Canada against the U.S. debt ceiling, you will find all kinds of references pointing back to us as a best practice.
Denmark has a debt ceiling, but it's symbolic. It's so high that they'll never run up against it. It's designed that way because they don't want to go through the legislative process to get rid of it. I think it's a similar situation in Japan. Those are the only three with debt ceilings.
Australia had an experiment with a debt ceiling. They implemented one in 2007, and they set it at $75 billion. In 2009, it was increased to $200 billion, $250 billion in 2011 and $300 billion in May 2011. In November 2013, they tried to increase it to $500 billion. This past December, 2013, it was repealed.
The developed countries around the world mostly look at fiscal rules now. They look at debt-to-GDP levels. They look at decisions tied to their budgets, and then the borrowing that is done is tied to decisions that are contained in the budget.
Senator L. Smith: My second question was partially answered by you because I was going to say that, now that we've looked at some of these countries, we could go to the paragraph that states that it was noted, ". . . in its February 2011, July 2012 and December 2013 reports, that Congress should consider better ways to link the decisions about the debt limit with decisions about spending and revenue. . . ." As an observer, it is always fascinating to see one side blocking the other in terms of how they were going to manage through this crisis. I wondered what other comments you could have on that that would help us to reflect in terms of Canada's situation.
Mr. Calof: I don't really want to speak poorly of my neighbours to the south or anything.
Senator L. Smith: I'm not saying we should speak poorly about them, but what are the learning points from their situation?
Mr. Calof: I see it as difficult that, in cases where they can't negotiate an increase in the fiscal limit, they, in turn, have to go and renegotiate decisions that have already been made in the budgetary context, that have been duly made through their Congress.
From our point of view, it was rather difficult when they were going through that. We had to develop all sorts of contingency plans because, yes, it did affect their borrowing costs. It did affect the credit rating in the United States. We do own U.S.-dollar assets, but it also had a broader spillover effect in confidence in financial markets. So we were developing contingency plans in case they defaulted or in case they didn't default. I can tell you that as a debt manager, I wouldn't want to go through some of the machinations that were gone through in the U.S. to keep the government running and taking money from one account versus another account and the sleight of hand. I would much rather lay things out in advance through the Debt Management Strategy, report on it afterwards, and be clear and transparent in terms of how we borrow our funds.
Senator L. Smith: Just from the panel, one of the things people could say is that things have settled. But I guess a question to you folks is: With the way the world is operating — politically, economically and environmentally — do you think the world is settled? How do we manage going forward in terms of volatility?
Mr. Johnson: In terms of the Bank of Canada and any of the actions that we could or may take for financial stability supporting efficiency of financial markets, I would agree, senator; happily, the world seems to have settled a little bit right now, certainly with reference to the 2008-09 period. Nonetheless, I think we need to take a few key lessons out of that.
The first is that there is a number of what we would refer to as core financial markets that quite simply need to function constantly, period. These would include markets like the repo market, short-term secured funding for banks, the foreign exchange market and the government securities market. These are in some senses plumbing of the financial system. They are core and they need to constantly function.
Needing to constantly function, to me, means that there needs to be a backstop there, an entity that can provide support in a sort of last resort. The Bank of Canada needs to have the tools and abilities at our disposal to be able to play that role, if necessary.
As I said, we play that role in partnership with the government and with the Department of Finance. Often, this support has an impact on the Bank of Canada's balance sheet, and managing our balance sheet is facilitated by government borrowing and deposits with the Bank of Canada and facilitated by the partnership we have with the Bank of Canada.
To take a lesson from the crisis, we have learned that several markets need to be our core and need to be constantly available; that there need to be some tools to ensure that they are; and that the current financing framework helps make that possible.
Senator Callbeck: I thank the three of you for coming this morning.
Mr. Calof, from your presentation, there are a couple things I want to ask about. First of all, at the bottom of page 4, you talk about the amendments that establish enhanced disclosure requirements on the management strategy. Then you also say that was the case with the Debt Management Report and that there is more information in the public accounts. Could you comment on that? What extra information is there now than before 2007?
Ms. Lambert: I can answer that question. I don't know if you have a copy of the Debt Management Strategy. In that document, there is a new table that didn't exist before the amendments, which is a sources and uses table. That table outlines all the sources of the borrowing that will be undertaken — so whether the funds will be raised through the issuance of treasury bills or bonds, retail debt instruments, global bonds — and then what the source of that funding will be applied towards, whether it's the financial requirements, non-budgetary items, and so on, plus a margin for prudence.
In the Debt Management Report, which is tabled after the public accounts, that same table appears again, but it compares where we plan to be against where we actually ended up; and then it provides an explanation if there is a material variance. So it's very transparent. That information did not exist before.
The Chair: That table that you were talking about, could you tell us what page that appears on?
Ms. Lambert: Yes. It's table A1.1.
The Chair: But at page 294 of the budget. Thank you.
Senator Callbeck: What is the Debt Management Strategy, then? Would that information not have been available under the old system when the legislation was presented to Parliament, where they could discuss it and the amount of money that was being borrowed?
Ms. Lambert: Under the old system, because we had been in a position of declining debt, financial surpluses year after year, we hadn't presented a borrowing authority bill since 1996-97. For a number of years, we didn't need to issue new debt, so in fact there was no act.
The Debt Management Strategy, I guess there was less desire to know. It was such a small program back then. There was not a lot of interest, and there just wasn't that kind of information in those reports at that time.
Senator Callbeck: The other area I wanted to ask about — Mr. Calof, you mentioned it; and Mr. Johnson, you did, too — is this new system where you have greater transparency and accountability.
To me, it's the opposite, because now the executive or cabinet have the total say about the borrowing. That's been taken away from Parliament. How can you say it's more transparent and accountable? Now we know, after the fact. There's no discussion before.
Mr. Calof: We do lay it out through the table and through the information that Ms. Lambert was mentioning, before the fact, as part of the budget.
Senator Callbeck: As far as the borrowing is concerned, it's the executive that decides that. There isn't any bill presented to Parliament now, as there used to be before 2007.
Mr. Calof: Correct, but there's a full explanation that is laid out with the budget, that is presented and debated as part of the debate on the budget beforehand. So we're adding more transparency than had been before, and then we're reporting on it afterwards with the public accounts and the Debt Management Report.
Senator Callbeck: But you report it afterwards, under the old system.
Ms. Lambert: If I may add to what Mr. Calof said. We don't request borrowing authority from the Governor-in-Council until the budget bill has passed. The Debt Management Strategy annex, that is part of the budget once that is approved in Parliament, because there is a whole section on the borrowing authority in the DMS that says for 2014, the aggregate borrowing limit requested from the Governor-in-Council to meet Economic Action Plan 2014 and provide a margin for prudence is $270 billion.
The amount we intend to request is this. If this bill passes, we will then proceed to obtain the borrowing authority. That's the sequence that we have followed since the new amendments have been in place.
Senator Callbeck: All right. So you don't ask until the budget has been approved. Thank you.
The Chair: Is that the upper limit that appears? Once this is approved by the House of Commons, you can't spend more than that?
Ms. Lambert: That is correct. That's the limit. It includes a margin for prudence.
The Chair: Yes. We talked about that earlier. But if you use up all your prudence, you have to come back to Parliament.
Ms. Lambert: We have to go back to the Governor-in-Council. There is a way for us to obtain an intra-year increase in our borrowing authority.
The Chair: Without going to Parliament.
Ms. Lambert: But it expires at the end of each fiscal year. We have to start over the same exercise every year, whereas previously, before the new amendments, there had been a decade where we had not presented a borrowing authority act in Parliament.
[Translation]
Senator Bellemare: Thank you for being here. I have been listening to you since I arrived. Is it not true that the Debt Management Strategy is also a tool for the conduct of monetary policy? We can play with the structure of interest rates, among other things.
[English]
Mr. Johnson: I would say no. The Debt Management Strategy, these are very distinct responsibilities within the Bank of Canada. Monetary policy is implemented through the control of the overnight rate. We set a target for the overnight rate. We conduct operations in the market to make sure that the actual rate stays close to target.
It is true that changes in the overnight rate do feed into other longer-term interest rates that then feed into the overall economy, but that is largely independent of the Debt Management Strategy. That is a very separate function.
There is a link in the provision of financial stability operations, and this is what I referred to, the liquidity injection operations the bank performed.
During the crisis, often operations that do support financial stability will have balance-sheet implications for the Bank of Canada. That means they will add an asset or liability to our balance sheet. We need to manage that, to offset that, to make sure the assets equal the liabilities.
One of the key tools that the Bank of Canada uses is the amount of government deposits that are held with us. The amount of government deposits can be influenced by borrowing and then depositing the money with the bank, but again, this is a tool that has been used for the financial stability, the liquidity injections, the implementation of monetary policies independent of the Debt Management Strategy.
[Translation]
Senator Bellemare: If I understand you correctly, you manage the monetary policy, which means that this bill will not affect the conduct of the monetary policy?
[English]
Mr. Johnson: No, it would not really have an impact.
The Chair: Senator Moore, we're out of time, but I will give you the final word if you have any point you want to clarify or will help you or hinder you with respect to your bill.
Senator Moore: Thank you, chair.
First, why could the deleted provision not have been left in place side by side with the new process? I've heard "expedience." "I've heard "fast." Are you saying that under the previous provision, Canada could not have responded in a timely way to the recession that began in 2008?
Finally, with regard to the U.S. situation, I am an observer, and I note that for three successive years there was a recommendation in the report, but Congress has not seen fit to do that. Let me suggest to you that that is probably because the Founding Fathers of that democracy insisted and still insist upon the executive coming to the people to get the authority to borrow money.
The Chair: Now, the final point is really a point of debate. Are you able to talk about any of the other points very quickly?
Mr. Calof: Very quickly, I can't go back and say what could and couldn't have happened in 2008-09 if we would have been under a different regime. I do know that having this regime did allow us to respond quickly. Whether we would have gone into a greater recession by delaying, whether there would have been uncertainty, I don't have a crystal ball from that time, but I do know that the system functioned well for us at that point.
As far as the second question, I'm not going to comment on U.S. departments.
Senator Moore: My second question was with regard to you saying that Canada could not have responded. Let's face it, if there's a Standing Order in the house, the house can be recalled in 24 hours. There is no obstruction. I'm suggesting to you that there is nothing there to stop Canada from responding in a timely way.
Ms. Lambert: I have a small fact on the U.S. debt ceiling. It has only existed since 1917. It wasn't part of the conception of the Founding Fathers.
The Chair: 1917. Thank you for that. You're got some good facts there. We need you standing by.
Thank you very much, Finance and Bank of Canada. We very much appreciate you coming and explaining this to us.
We deal with estimates quite extensively, and we are aware that $42 billion is coming back to the government from CMHC as a result of some of the insured mortgages coming to maturity. We should be able to look in the strategy or the report and see that reflected in some way in here, and we'll do that. We've got both the report and the strategy to review.
This is our final portion of today's session. I'm very pleased to welcome back two witnesses we had previously who were very helpful. One is Lori Turnbull, Assistant Professor, Dalhousie University in Halifax, Nova Scotia; and Peter Devries, Consultant on Fiscal Affairs.
I would ask each of you to provide us with your brief opening comments. You've had a chance to hear the earlier testimony from Finance and the Bank of Canada, which may help you know what this committee has been informed of thus far.
I will start with Ms. Turnbull, and then I will go to Mr. Devries.
Ms. Turnbull, you have the floor.
Lori Turnbull, Associate Professor, Dalhousie University, as an individual: Thank you very much for having me again. I'll try to keep my opening comments brief so that we can get to questions as soon as possible.
The first thing I wanted to say is I see this issue as part of a larger context of the relationship between the executive branch and the legislative branch in Parliament, so if we're talking about Parliament's ability to provide scrutiny over borrowing or, really, to provide scrutiny over anything, this is a very important part of Parliament's function. If we're talking about placing any kind of restraint on that scrutiny function, I think we have to see it in the larger context of the balance of power between the executive branch and the legislative branch. It seems to me to be pretty clear that although in a responsible government system that balance of power is supposed to rest with the legislative branch, in our system it doesn't. Increasingly, we're seeing the scale tip so that the balance of power rests with the executive branch.
There are a number of things that provide obstacles and make it difficult for Parliament to perform its scrutiny function, and I think we want to be careful about going down a slippery slope. I'm not going to name everything or we'll be here all day, but if we considered party discipline and a leader's capacity to control what's going on in the caucus, that can make it difficult for Parliament to perform its scrutiny function. Closure on debate on bills — all of these things — can make it difficult and can tip the scale the wrong way or tip the scale too much in the direction of executive power. We want to be mindful and careful about that.
I wanted to mention this omnibus approach. That seems to be one of the things that Senator Moore raised in his comments. The omnibus bill approach is not something that we generally associate with a theory of parliamentary government; it's something that we usually associate with Congress. That is, the idea of one big bill trying to accomplish a number of things. In parliamentary systems, we think about a bill having a theme, and everything, and the bill is under that theme. The omnibus approach is not specific to any particular party or government. Anyone can use it, if they want to do so, to push through. It has the upshot of efficiency; that is, you get a number of things done at once, but it's harder if you use that approach. The accountability function of Parliament is more difficult to accomplish than the scrutiny function because you have to comb through legislation to make sure you've got everything. I'm not sure if it is reasonable to think that that's the best way to achieve parliamentary accountability.
I'm going to make those two large, big-scale points about the relationship between executive and legislative branch, the omnibus bill and what that does to parliamentary accountability and to parliamentary functioning and end on this question — and I hope we come back to this in the question and answer session — what do we expect parliamentary debate to accomplish? What do we expect parliamentary accountability to look like?
If you think about it in the context of a majority government, in different governments and governments of different partisan stripes, we've seen debate being brought to a close a number of times; sometimes more quickly than parliamentarians would like. That seems to arrest the process of discussing the bill and going through its contents and discussing possible amendments. This is where the accountability function of Parliament comes in. If we use the omnibus bills approach, what happens to parliamentary accountability then and are we meeting our objectives? I'll stop there.
The Chair: Thank you very much, Professor Turnbull.
Peter Devries, Consultant on Fiscal Affairs, as an individual: Thank you, Mr. Chair. It is a pleasure to be back here again to discuss this bill. When I was here last June, I indicated my reasons for wanting to keep a borrowing authority bill. A borrowing authority bill provided Parliament with increased financial oversight and scrutiny as it was considered a money bill. The vote on the Borrowing Authority Act was a vote of confidence. The Borrowing Authority Act, the budget, the related budget bills and the estimates were all considered important instruments for parliamentary accountability and transparency. With Bill C-29, the Budget Implementation Act of 2007, one of these key instruments was gone.
The Borrowing Authority Act required an economic and fiscal context. This meant that the budget would have to be tabled on or before the borrowing authority bill. For effective borrowing management practices, it is preferable to have a borrowing authority act in place for the upcoming fiscal year before the end of the current fiscal year. This meant that the budget had to be tabled sometime in February or March in order to provide flexibility for the borrowing authority act to be passed.
In 1985, this committee delayed the passage of the Borrowing Authority Act for fiscal year 1985-86, arguing that since the government had yet to table its budget for that year there was no economic and fiscal context for the bill. With Bill C-29, there is no longer a requirement to table the budget before the end of fiscal year. Budgets are now being tabled later, leaving less time for Parliament to debate the budget and the budget bills. It also means there is no direct link between the spending estimates in the budget and those in the Main Estimates. Of course, the Main Estimates have to be tabled before March 1.
In Budget 2007, the government argued that the changes were primarily made for greater transparency and accountability; it did neither. It also argued that the changes were necessary to meet the borrowing requirements of certain Crown corporations; this, it did. However, it also removed an obstacle to the government in the event of new borrowing requirements and an instrument by which Parliament could hold the government accountable.
The vagueness of the proposal in Budget 2007 was also a concern. The wording outlining the changes to the Financial Administration Act highlighted this. At the time of Budget 2007, this proposal went largely unnoticed. By the time it was noticed, it was too late to do anything about it. One now has to wait for the budget omnibus bill, and Ms. Turnbull touched on that, to understand what the budget proposals are all about. This undermines the credibility of the budget.
It is argued that the elimination of the requirement for a borrowing authority bill provides the government with flexibility to meet current or urgent financial requirements. They point to the 2008-09 financial recession and the requirement for billions of new funding under the government's 2009 economic action plan. However, the situation in 2008-09 was no more critical, in my view, than it was in 1994 or the early 1990s. It was even worse in the early 1990s, I would argue. Yet, the government at that time was able to secure parliamentary approval in time to meet its borrowing requirements. As I mentioned earlier, only once was the Borrowing Authority Act delayed.
It is also argued that the Financial Administration Act requirement to publish the Debt Management Strategy and the Debt Management Report provides parliamentarians and Canadians with all the information they need to assess the government's borrowing requirements. However, these reports are not new. They have been published since the late 1990s. I believe that they are background material for the borrowing authority bill, not a substitute for the bill.
The government's market debt reached an all-time high of $667 billion in 2012-13. For 2014-15, it was provided with an aggregate borrowing limit request from the Governor-in-Council of $270 billion. Yet, there is no longer any scrutiny by Parliament of these amounts. With the elimination of the Borrowing Authority Act, the government again has removed an important mechanism of parliamentary control and oversight.
In my experience, the Borrowing Authority Act was the most important accountability document in the overall budget approval process. That is now lost and I believe significantly undermines Parliament's ability to hold the government to account. I will take any questions now.
The Chair: Thank you very much. That was very succinct and we understand your point of view.
Senator Eaton: Thank you both very much. Historically, professor, the Financial Administration Act was probably brought in at a time before the Internet. Now, however, with the Internet and with financial transactions working at the speed of light and market fluctuations happening so quickly, do you not think streamlining the Financial Administration Act was a good thing? That is, as we do have the Internet now and the markets do fluctuate, over the course of a day, three, four, six times?
Ms. Turnbull: I understand that there is an imperative to be able to act quickly and the parliamentary schedule is probably not conducive to the market acting the way it does. But, at the same time, there has to be a balance. We want to be able to act responsibly economically; we do not want decision-makers to be paralyzed by process, but the process is there for a reason. It's about the balance. I think we talked about this the last time. It's about democracy and practicality and being able to maintain a healthy balance between those two things. If the scrutiny function is eroded too much, then you don't have the balance.
Senator Eaton: I think I'll drop my comments there because I don't want to get into a discussion of democracy and what's good for democracy.
The Chair: I'm glad you didn't do that — not that it would not be interesting.
[Translation]
Senator Bellemare: As Senator Eaton suggested, we could get into a philosophical and political debate on the role of parliamentarians or the executive. However, instead, the question that I am going to ask you is about the issue that concerns us. It is a technical matter related to debt management.
On one hand, the public documents are quite transparent. On the other, we know that, for the average person and for a number of parliamentarians, the concept of debt management is quite technical and it is becoming increasingly so as a result of globalization.
We also know that some countries, including sovereign countries in Europe, in the Eurozone, do not really have their debt management under control and have had a great deal of difficulty dealing with the international crisis.
Rather than passing a bill like this one that exacerbates the amount of debt and could be the subject of debate among parliamentarians, would it not be more democratic to pass a bill that focuses on limiting budget deficits? This could take the form of a balanced budget act, rather than legislation that focuses only on the amount of debt. There is a link between the two. Debt increases when there are budget deficits.
What if we had a law that tried to control budget deficits in view of the global economic situation? Would that not be a strategic tool that would allow us to stop simply managing debt as we continue to spend and instead allow us to limit deficits and debt growth?
I would like to hear your thoughts on this alternative to a bill that would take us further into debt, an alternative that would seek to balance the budget and manage deficits.
[English]
Mr. Devries: In order to be able to get the underlying information with regard to the total amount of borrowings that the government is going to undertake in the upcoming fiscal year, you need to have all the information that's available in order to be able to assess both the level of that debt, as well as the structure of that debt.
In order to do that, you have to have a budget. You have to put it in a broader economic and fiscal context: Why do we have a deficit? What causes that deficit? Why do we have to then go out in the marketplace and borrow that incremental amount of money? At the same time, we are borrowing extensively now for three of the four financial Crown corporations, involving tens of billions of dollars for their management. Then we've also introduced the prudential liquidity plan in order to increase the amount of cash we have available in any one month in order to handle emergencies.
In one part, the government really has a lot of flexibility in its current plan with what it's doing with respect to this building up of cash reserves so they can manage at least two months of any unexpected requirements.
I sort of see the budget and the borrowing authority bill as one more than as two. The budget plan, however, is voted on by Parliament after four days of debate. It is a vote not on the individual measures in the budget or even a vote on the borrowing in the budget, but on the overall context of the government's economic and fiscal plan. So it's a vote related to very broad parameters of the budget, not specific parameters of the budget, whereas the borrowing authority bill then comes in and digs into that in much more detail to say, "This is why we have to do what we have to do in the upcoming fiscal year."
I don't know if that helps at all.
[Translation]
Senator Bellemare: I am under the impression that the committee goes into great detail when examining the Main Estimates and the budget implementation bill. These are two means of ensuring fairly close oversight of government expenditures.
I was hoping to hear your thoughts on a balanced budget act. From what I understand, you believe that the bill will result in even greater oversight of expenditures.
[English]
Mr. Devries: Not necessarily the oversight of expenditures, because new expenditures proposed by the government in a budget normally fall in the budget implementation bill. So when you study the budget implementation bill here, you're not looking at the overall budget but you're looking at the individual items that were announced in the budget and contained in the budget bill.
When you examine the estimates, again, you are looking at the estimates department by department, but only for a selected component of spending for each department, the voted part, not statutory part. So those two instruments are very important, but they relate more to single line items. The budget itself gives you the overall broad context in which those items were introduced. It provides you background as to why there's a deficit and why there's not a deficit, and then the borrowing authority bill provides details on, if you do have a deficit, how you're going to manage and finance that deficit, along with all the other things you have to do for debt management purposes. You have to roll over the debt or the debt that becomes mature, plus you're adding to it because of borrowing requirements for Crown corporations or for the deficit per se. That's why I see the budget borrowing authority act as still a very important singular document because nowhere else do you debate the implications of that borrowing strategy.
[Translation]
Senator Bellemare: We will also hear from the Parliamentary Budget Officer, who is going to present a macroeconomic analysis of the budget. I think a balanced budget act could open debate on the broad structure, the broad macroeconomic parameters of the budget. That is my opinion.
Do you have any comments on that?
[English]
Mr. Devries: I might have misinterpreted your first question when you were talking about the balanced budget act, which we have yet to see, so we don't know what it looks like yet, but the government did indicate in the Speech from the Throne that it was going to come forward with a balanced budget act. It would only take effect once the budget is balanced, and then over a period of time, it would have to ensure that the budget was balanced on a year-to-year basis. I guess there's going to be some caveat, some out clauses with respect to adverse economic activities, but in the end, it would basically tie the hands of the government to keep to a balanced budget from year to year.
There are many countries that have balanced budget acts, or have limits on the amount of money that they can spend, or the amount of money that they can raise. The jury is out as to the success of these countries that have balanced budget legislation. Studies that have been done in the past indicate that those who don't need it have it because they do have very strong fiscal discipline, and in Canada, since the mid-1990s, I would say we have had very strong fiscal discipline in order to ensure that the deficit does not get out of hand.
So in countries that have strong fiscal discipline, you do not need a balanced budget act because the discipline is there and the commitment of the government is there. With those countries that do need balanced budget legislation, experience has shown that once they run into difficulty, they find some way to circumvent.
Even when you look at the European economic union, where they have legislative rules on how high the deficit can be in any one year and how high the debt can be in any one year in ratio to the GDP, every time countries come up to those ceilings, some leeway is given to them so that it doesn't come into effect. Countries like Germany and France have abused the system quite a few times since it has come into effect.
I'm not in favour of balanced budget legislation. I think it's up to the government to show discipline in order to set forward a fiscal strategy that meets the concerns of Canadians.
I'd be very interested to see what this balanced budget legislation looks like and what caveats are in there. I would suspect at the end of the day, the government would have sufficient flexibility that if they did come up against a wall, there would be some way that they could find their way out of it, or delay the implementation of rules until the situation is a bit more conducive to them.
But I'm not in favour of balanced budget legislation. Where you have seen strong fiscal discipline, it's because the governments have actually done it on their own; they didn't need an act to force them to do it.
The Chair: Any comment, Professor Turnbull?
Ms. Turnbull: I think I'm right in saying that some provinces have had balanced budget legislation, as well. So while there is an international context, you can look in our own context as well.
It definitely performs a political function. As Peter was saying, it doesn't necessarily change the financial situation of a country if the ones that have it don't need it, but it can perform the political function of identifying a government with the responsibility to maintain a certain amount of borrowing, spending and revenue building.
It can happen that if a government has a balanced budget bill and then comes up against it and finds that it's too much of a constraint, the government may take measures to circumvent it and deal with it. But there might be increased political pressure on the government not to do that if they've made a promise in the form of a balanced budget bill that they're going to be fiscally responsible in this way.
I'm not excited about balanced budget bills, either, but I would think there is still a political function that can be performed there if people are attentive and hold the government to account on it.
Senator Gerstein: Ms. Turnbull, in your opening comments, you talked about the executive and legislative areas of the government. You made the comment that the balance of power was shifting to the executive. You related it to a scale. Do you view that in the Westminster system the scale continues to always tip the same way, or has history shown that it may tip this way and it may go back the other way over time?
I ask this because — and the chair will remember well — we dealt with a bill called Bill C-9, an omnibus bill. At the time we dealt with the omnibus bill, which I believe was in 2010, I referred back to another omnibus bill. That omnibus bill, which I believe was entitled "Price of Bread, et cetera," included bankruptcy rules, the legal status of Papist wills, Protestant leases and poor law settlements. The year was 1763, the third year of King George III's reign. If you carried that to its logical conclusion, you might have had somebody in opposition when the government presented that bill saying, "This is the beginning of the slippery slope. Before we turn around, there will only be one bill brought before Parliament and it will include everything." But that did not happen.
Is this just a question, perhaps from an academic point of view, that this has a tendency to balance itself out over history?
Ms. Turnbull: I would agree with you. There is no golden age of parliamentary government, if you ask me. There is no time that we can look back and say, "That was excellent; we did everything marvelously then and we've simply decayed since then. Certain things have decayed; certain things have gotten better.
I believe in an ebb and flow. The question is: How do we maintain the ebb and flow? Sometimes we will see certain events transpire that governments don't have any control over that will lead to a concentration of power. Even developments in media and communications affect it. Now that we have — I would say — constant government scrutiny in the form of social media, there are always people watching and there are always people keeping track of all the things that one MP said that was not the same as what a senator said that wasn't the same as what the Prime Minister said. And they make a big thing about it.
It seems to me that certain types of scrutiny are becoming more developed; they're not necessarily becoming more sophisticated. But we have agents of Parliament now, as was mentioned previously, who are charged with assisting Parliament and holding government to account. You could make the argument that some forms of scrutiny have become more intense, more sophisticated and better funded. You can make those arguments. Then you can also look to see how the executive branch has responded to those developments to make sure that they have fortified themselves against this.
Yes, there is an ebb and flow. We need the ebb and the flow, I think. If it's too much in one direction, everything falls apart.
The Chair: I do recall that speech you gave, Senator Gerstein.
I will pose a couple of questions that may help honourable senators. Those questions flow from what has been given in testimony here.
Mr. Devries, you indicated that the strategy and the report — strategy at the front end and the report six or eight months after the fiscal year — are not something new. Was the strategy attached to the budget bill prior to the change in the regime that we're discussing here today?
Mr. Devries: No, both of them were separate documents at that time, but one came out, if not with the budget, then shortly after the budget, and the other one came out once the fiscal year was over.
The Chair: We heard from Ms. Lambert from Finance that there is a change in the strategy. That was page 299, where she referred us to the "planned sources and use of borrowing," which is new, and she said, "That's new in the strategy, and it's also new in the report, and can you compare the two to see how government had done over the year."
Does that give you've a bit more comfort?
Mr. Devries: That is true; that's a new table in the reports now that was not there before. But I remember coming before this committee as well as the House of Commons Finance Committee with representatives from our debt management group, and information of that type was made available to the committee discussing the borrowing authority bill. So although it's new, it's not information that was never available before.
The Chair: That's helpful.
Professor Turnbull, you talked about ceilings and we get into a discussion about debt ceilings. The discussion we had earlier on talked about this: In the strategy, the amounts that are shown here — $270 billion that the government is proposing to borrow — is a ceiling, in effect. It has a built-in 15 per cent contingency, but if that contingency were used up — and I asked Ms. Lambert earlier. She said there is a process whereby the executive Governor-in-Council can authorize more funds to be spent without having to go to Parliament.
Ms. Turnbull: Right.
The Chair: Are you familiar with that process, and can you tell us about that? That seems to be quite critical in avoiding the debt ceiling issue. Otherwise, there would be a debt ceiling, because they can't go above what's in this document without getting some approval from somewhere.
Ms. Turnbull: At this point, the cabinet is able to borrow money without going to Parliament.
The Chair: That's correct. Are there any limits on that? Is there anything you can help us out with? They tell us $270 billion is what they need to borrow, and they tell us where it's going, but if something happens during the year and they need more, they can just borrow more; is that correct?
Ms. Turnbull: As far as I know, that is correct. I don't know of any restriction on the amount.
Mr. Devries: That is correct. It concerns me that it goes out as a Governor-in-Council request with no fanfare and no background information as to why the government needs it.
In the past, if an interim or another borrowing authority bill was required during the course of the year, the government would have had to come forward to Parliament with a new budget or an economic and fiscal statement in order to provide the context for why the government needed additional funds during the year.
The Chair: We ran out of time, unfortunately, and I didn't get a chance to follow-up with Ms. Lambert who made the statement that there is a method of going to the cabinet just to get authority to borrow more. Maybe the committee could follow up on that. Perhaps the Library of Parliament analysts could do that so we could understand what the process is. There must be some parameters and limits on this. I'll be interested to find that out.
Senator Moore, I give you the final word to clean up matters.
Senator Moore: Thank you, witnesses, for being here.
You can decide who wants to respond to this. Is there any reason why the provision that my bill is attempting to restore could not have been left in place side by side with the new process?
Mr. Devries: By "the new process," you're talking about the Debt Management Strategy report?
Senator Moore: Yes.
Mr. Devries: No. There is no reason why it could not, in my view.
Senator Moore: We heard words with regard to the expediency, efficiency, quickness and fast response in connection with 2008's beginning of the great recession. I don't think I got an answer from the officials who were here. Could Canada have responded in an efficient and timely manner had the previous provision of this act been in place? Was there any obstruction or time detriment that prevented Canada from responding to its fiscal needs at the time of that recession when was recognized?
Mr. Devries: As I mentioned in my opening remarks, I don't think the situation in 2008-09 was any more severe than it was in the 1990s, and especially in 1994. At that time the budget was severely criticized for not being effective enough in controlling the deficit and debt. The markets were against us at that point in time as well because of a high level of debt. We had a debt level at that time which was nearly two-thirds of GDP. Going into the last recession, it was only a third of the GDP.
At that time in the 1990s, and going back to the 1980s, when the deficit was rising very rapidly, we did not have any difficulty in getting the borrowing authority bill passed in time to undertake effective Debt Management Strategy. There was one incident just before the referendum whereby things got a little tight, but, apart from that, I can't think of another time. I think that period was more severe from an economic and fiscal point of view and from a market point of view than what we faced as a nation in 2008-09.
Ms. Turnbull: My inclination when you first posed the question was to say there was nothing preventing a reasonably timed action. I would agree with what Peter has said.
The Chair: I think there's a follow-up.
Senator Mockler: I'd like you to read what Mr. Calof and previous witnesses said and I'd like to know what you think of it. He said that:
In 2000, amendments to the FAA have made our borrowing authority framework consistent with best practices around the world compared to the previous framework. The current borrowing authority regime has provided for more efficient, responsive and prudent financial management of greater transparency and accountability with respect to the Government of Canada's borrowing activities.
I agree. It depends which economist you talk to, but 2008 was the biggest meltdown that any economy had seen, regardless what some economists, specialists or consultants think of the previous activities that we had with our modern economies. This is what the authorities have said. Do you have any comments on that?
Ms. Turnbull: I heard the testimony as well that the way things are now makes us consistent with the way things are done in other countries and that this isn't something we should be alarmed about. To be honest, the part that alarms me the most is the omnibus approach. That is, the fact that this happened and there wasn't a parliamentary debate about it. Sometimes a government's going to make a decision to do something and that's going to be the way it is and parliamentary debate, especially in a majority context, is not going to change it, but it's still useful, particularly from Canadians' perspectives, to understand why things are the way they are; why there was a change. Change is usually for the better, but it's still productive to bring those things before Parliament and air them out to ensure that people understand that there has been a change to the way money is managed in Canada, and there is a reason for that change. There could be five reasons for that change. There could be 10 things wrong with it, but let's talk about it. That's my issue.
Senator Mockler: Your concern, professor, is the omnibus approach.
Mr. Devries: I share that same concern with the omnibus approach. We've seen a massive extension of that principle over the last few years.
I am of the view that something should be explicit in the budget before it can go into a budget omnibus bill. When you review the budget omnibus bill, I encourage you to question the officials from the Department of Finance, or elsewhere, to show you where that reference in the budget omnibus bill is in the budget itself. How can you make the link between the two? If you can't make that link between the two, then I would appeal that to the Speaker of the House to see if that should be in there. That's a concern I have.
Granted, for the Department of Finance this new approach is more efficient. They no longer have to appear before this committee to justify what they have done. It's more transparent in the sense that there is some more information that's now being provided in the Debt Management Strategy and the Debt Management Report, but, as I indicated earlier, that information was made available to committees examining the borrowing authority bill in the past.
As far as getting money faster, I don't think that is an issue with respect to this. I think timeliness is still the same today as it was before the changes were made.
I'm really concerned about the lack of scrutiny now by parliamentarians in the overall budget and in the budget authority bill. Not having a budget authority bill then removes an element of scrutiny and transparency for parliamentarians and Canadians.
The Chair: On behalf of the Standing Senate Committee on National Finance, I would like to thank you, Ms. Turnbull and Mr. Devries.
Colleagues, with your indulgence, tomorrow we would like to go ahead with clause-by-clause consideration of Bill C-462, the Disability Tax Credit.
We have three departments set up on the Main Estimates. We have DFATD and National Defence. It will be a busy evening for us.
Steering will be meeting to consider whether we need further evidence with respect to this particular bill that we've been dealing with today. If any of you speak to anyone in steering, and if you feel there is an aspect of this bill that we haven't looked into, let us know. Otherwise, we'll set a time for clause by clause on that bill.
(The committee adjourned.)