THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, December 1, 2022
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 11:29 a.m. [ET] to study matters relating to banking, trade and commerce generally.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Hello to everyone here in the room and joining us online as well. This is a meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin and I’m the chair of the committee. I would like to introduce the members who are with us today: the deputy chair, Senator Deacon from Nova Scotia; Senator Gignac, Senator Loffreda, Senator Marshall, Senator Smith and Senator Marwah.
We’re here to continue our discussion of the state of the Canadian economy, looking particularly at inflation, but at other issues as well. Today, we have the pleasure of welcoming Kevin Page, President and CEO of the Institute of Fiscal Studies and Democracy. Many of you will know him well from his former role as the Parliamentary Budget Officer and all the good work that he did at that time.
Welcome, Mr. Page. Thank you for joining us today. We’ll begin with your opening remarks.
Kevin Page, President and CEO, Institute of Fiscal Studies and Democracy: Chair, deputy chair and members of the Committee on Banking, Commerce and the Economy, thank you for your study of the Canadian economy and inflation, and thank you for the opportunity to be a witness.
The global economy is bracing for a slowdown. There is a confluence of factors, many of which are the usual suspects: high inflation, including high food and energy prices; tighter financial conditions; China’s struggle with COVID and Russia’s war on Ukraine.
The stage is set for the third global economic shock in less than 15 years: the 2008 global financial crisis, the 2020 global pandemic and possibly the 2023 global recession, or a slowdown to fight high inflation.
Canada must prepare, help vulnerable people, protect economic capacity, restore macroeconomic stability and launch a post-COVID policy agenda to promote competitiveness, sustainability, inclusion and resilience.
For Canada, the economic storm clouds are on the horizon. We can see signals in business surveys. We can see the flattening of house prices. We can see signals in global commodity and equity markets. The storm is not yet overhead.
The Canadian economy is relatively strong but wounded from the COVID experience. Real economic growth continued through the third quarter, but growth over the past two and a half years, since the start of COVID in February 2020, only matches the growth Canada experienced in one year prior to COVID.
The Canadian labour market has rebounded well. The unemployment rate has returned to pre-COVID levels. The employment and participation rates have not fully recovered, which may reflect in part the rise in job vacancy numbers.
Household and business balance sheets, at an aggregate level, are in relatively better shape than the pre-COVID period because of large federal transfers during the pandemic. Debt stress indicators have not yet raised yellow flags. If we do have a growth slowdown or a shallow and short recession, the relative strength of these balance sheets will promote resilience.
Recent inflation numbers in Canada and from the OECD — Organisation for EconomicCo-operation and Development — are adding confidence to the view that consumer price inflation may have peaked, barring unexpected global shocks. The increase in the core inflation numbers — the CPI, or Consumer Price Index, excluding food and energy, as an example — over the past year continues to cause concern by policy-makers that the inflation problem needs to be addressed in a timely manner before inflation expectations and pressures become further embedded.
Canada’s monetary and fiscal policy are largely on track toward policy normalization. Policy interest rates and bank balance sheets are adjusting to address high inflation. Federal budgetary deficits have fallen dramatically since 2020, reflecting the rebound in the economy and the unwinding of COVID supports. The government should be encouraged to maintain its current fiscal trajectory.
Thank you. It would be a pleasure to respond to your questions.
The Chair: Thank you for those remarks. I have a couple quick points. Do you share the view of the Governor of the Bank of Canada that they probably should have moved more quickly on interest rates? And do you agree with the comments from your successor that there is still not really much indication that the government is in a restraint mood and that spending will slow?
Mr. Page: I do share the view of the Governor of the Bank of Canada, Mr. Macklem, that, in retrospect, it would have been better for the Canadian economy if we had started the adjustment to the normalization of policy interest rates and the quantitative tightening in the fall of 2021. But that is with hindsight. At that time — and I’m sure we’ll get into this discussion — there was a debate about whether the inflation that we were experiencing — namely, the big month-to-month increases in the summer and the fall of 2021 in the CPI — was transient or permanent. I think it’s now clear that it’s more of the permanent nature.
With respect to the second part of your question regarding fiscal policy — again, I hope we do get into this conversation — and if we have the right fiscal stance to deal with where the economy is at right now — an economy that is still, I think, operating below trend and where there’s a broad sense with respect to the planning framework that we’re headed for a slowdown — I think the size of the federal budgetary deficit in Canada — something in the neighbourhood this year in the $35-billion range, or about 1.5% of GDP — is a modest deficit. I think it’s fitting in the context of an economy operating below trend, so it’s not a major concern.
Going forward, I think we must be careful. We should not be launching major structural programs or new long-term programs through deficit finance. As we go forward at this point, it’s important that fiscal policy continues its track toward smaller deficits as the economy closes its output gap.
The Chair: That’s very helpful. Thank you for setting the stage.
Senator C. Deacon: Thank you very much, Mr. Page, for being with us here today.
I want to dig a little deeper into that. Finance Minister Freeland stated this fall that:
We really believe it’s important to have a fiscally responsible approach right now. We really understand the value of not pouring fuel on the flames of inflation and not making the Bank of Canada’s very tough job even harder.
As you look at the measures that are in place right now, and as you look forward in terms of the plans of the Government of Canada, do you think the multi-year plan that we’re all seeing right now lives up to that strong statement on the part of the finance minister?
Mr. Page: On balance, senator, I do. I support the position of Minister Freeland. If we look at the fiscal track that we have now, based on the planning outlook, we effectively almost got two planning outlooks from the Fall Economic Statement. There’s an average private sector forecast from September, and then there’s the finance downside scenario. Under both of those tracks I see a decline in the deficit as a percentage of GDP. I see a debt-to-GDP ratio consistent with that planning framework that continues to decline over the next five years over the medium term and gets to levels that are not dissimilar to what we’ve seen five or six years ago in terms of the size of that debt-to-GDP ratio, the accumulated deficit as a percentage of GDP.
As we move beyond COVID and beyond the shock that we’re experiencing now with respect to Russia and Ukraine; as we talk about the agenda to promote competitiveness and to promote energy transition; to prepare the private sector and to facilitate that adjustment to a net-zero economy and to strengthen social safety nets to deal with resilience issues such as the storms that we’re seeing, it probably augurs that we could see more public spending. If we do need more public spending to help the economy adjust over the medium term, it will have to be matched with revenue increases.
If we learned something from the 2008 and 2020 crises, it is that having a strong fiscal position is very useful to be able to support Canada, to support Canadian households and Canadian businesses in times when the bottom falls out of the economy as it did during those two crises.
But I think the current track would do that. It gives us that flexibility to address further downturns, including, potentially, one we might experience in 2023.
Senator C. Deacon: Thank you very much.
Senator Smith: Thank you for being with us, sir.
The Parliamentary Budget Officer, in his assessment of the supplementary estimates for 2022-23, noted that personal spending accounted for about 9%, or $2.3 billion. Additionally, his report notes that federal spending on salaries and benefits is forecasted to be $55 billion this year, or about $130,000 per full-time employee.
You’ve noted this massive hiring spree by the federal government is growing much faster than the private sector and faster than the rate of growth in the real economy. I’d like to get your thoughts on the potential impact of increasing the size of government, both for the labour market and the broader economy.
Mr. Page: Thank you, senator.
I’m glad that various media outlets and the Senate have highlighted this issue. There’s been a long-standing lack of transparency in government human resources hiring plans. It’s not easy for parliamentarians or Canadians to easily get information on the personal spend and the human resources plan of the Government of Canada. There’s some basic data you can get from Treasury Board of Canada Secretariat. There’s a report the clerk tables every year on the state of the public service that provides some data on the size of the public service, but it’s not embedded into a long-term government spending plan.
When a lot of fiscal observers look at what has gone on in the growth of full-time employees, particularly under this government since 2015 — and yes, some of the growth is understandable during the COVID period — it’s hard to understand how they reconcile that growth with the spending plan going forward over the next five years.
If we look at the Fall Economic Statement, you will see we do get back to balance, effectively, over five years, and if you look at revenue and spending as a percentage of GDP, you’ll see that revenue has been held fairly constant relative to GDP over the medium term — a little over 16 percentage points.
Spending, particularly if you look at the big transfers to provinces and to people, they hold their own with respect to GDP, but the real decline that brings back the balance is on direct personal spending. A large component of that is the personal spending that you’ve highlighted, senator.
It would be very useful if the government were to be encouraged — and it should be from the President of the Treasury Board — to provide a five-year human resources plan, or perhaps an even longer one, that has the personal standard object that you referred to, it has the full-time employees, employees broken out by department and a five-year plan going forward. That way, we know that we will have the public service that we need to have to address various policies that we’ll likely talk about and that we could reconcile the growth over the past five years with the shrinking of spending relative to GDP over the next five years. To me, that’s kind of hard to reconcile.
This significant ongoing growth, which I think started in 2016, has been steady. It obviously grew over COVID, but now we see the shrinkage of direct program spending over the next five years to get back to balance.
We need to see the plan. Direct program and personal spending bills of $55 billion or $60 billion a year is going above nominal GDP — or above real GDP, anyway — is a concern. It is a significant spending pressure that will make it difficult for the government to achieve the kind of restraint they have in the forward planning framework.
The Chair: We’re still waiting for the health care plan, too, which might be another big chunk of change.
[Translation]
Senator Bellemare: Thank you for joining us, Mr. Page. I have several questions, and I’ll start with one that occurred to me yesterday while I was at the Senate Standing Committee on National Finance. We were studying Supplementary Estimates (B).
I was surprised by the significant increase in government operating expenditures. There is significant spending on human resources; we are talking billions. Of the $20 billion spent, at least 20% was on operations. Has hybrid work — which is here to stay, I agree — reached the point where we need more manpower to meet our needs? You just touched on our human resource planning. Should that be part of the approach?
[English]
Mr. Page: Thank you, senator, for the question. I think it’s a nice follow-up to the previous question from Senator Smith.
I’ve been outside the public service for the better part of a decade. There’s a sense that we need a strong public service to deal with these sorts of shocks. If we go back to 2020, I think the public service did an incredible job dealing with the crisis in the context of an environment where we had no vaccine in which we told people to practise social distancing. We wanted to protect households and businesses. Almost week by week, we saw the launching of new programs and the fixing of programs. Hundreds of billions of dollars were spent, actually, to deal with that kind of very sharp recession.
In times of crisis, we depend upon the public service, and we need that capacity. But it’s not clear without this longer-term human resources plan — this growth that we’re seeing in operational spending and in the personal spending, how does it relate to the post-COVID challenges? Regarding the hirings that have gone on, to me, when I look at the data, senator, it’s not clear to me; I don’t see the strategy. It seems like there’s growth everywhere across all the different departments. So it’s broadly based.
We need that report. We need to hold the government to account and also know that we have the public service that we need to generate the kind of agenda that is going to facilitate energy transition, that is going to promote competitiveness and that would actually help work with the provinces and First Nations people, as well as the municipalities and territories, so that we deal with these questions of resilience.
We don’t have the plan on operational spending. To a lot of people who do these forecasts, it’s a bit of a black box.
[Translation]
Senator Bellemare: One quick question, Mr. Page. You mentioned a recovery, but that is not a certainty. In your view, does the fact that there are so many job vacancies provide Canada with a softer landing and make it possible to absorb the rise in interest rates a little more easily, perhaps by having people who were looking for work fill available positions?
[English]
Mr. Page: Senator, we’re definitely still dealing with the symptoms of the COVID crisis. It seems to me that we’re still transitioning to some type of new steady state for the public service.
The government, in its policy platform in 2021, talked about reviews, and in Budget 2021 it talked about policy and operational reviews. It got a paragraph or two in the Fall Economic Statement, but we haven’t really seen the review. So it is quite possible that we’ve seen this sort of surge in operational spending for the government, and that we will see a different type of restraint going forward.
So, yes, we need the plan.
The Chair: I’m glad you keep saying that, because I think that’s a very important point.
Senator Loffreda: Thank you, Mr. Page, for being here.
You said in your remarks that households and balance sheets are in better shape because of the government support obtained, and the debt stress indicators have not yet raised yellow flags.
During our National Finance Committee meeting on Tuesday, November 29, 2022, we had with us the President and CEO of the Canadian Federation of Independent Business, Mr. Dan Kelly. I will quote him, and I’d like to have your opinion or your thoughts on what he said. You did discuss fiscal stance going forward, so can you describe some fiscal stance to mitigate that, if possible?
Two thirds of Canadian small firms are still facing additional COVID debt that they didn’t have before the pandemic and which they took on in order to get through the pandemic. On average, that is now $110,000 in additional debt facing business owners. Some of that is in the form of a government-backed Canada Emergency Business Account loan —
— and this is important —
— and 17% of small businesses, almost one in five, are at risk of permanent closure due to the damage they have taken on over the course of the past couple of years.
I’d like your insight and your comments on that. I agree many do have strong balance sheets. I’ve heard that from many and I’ve heard that from business owners who said, “We got the support and deposited it in the bank. We didn’t touch it. It’s still there. Going forward, we’re going to invest that money.” But small businesses employ most Canadians. So what is the solution to that? Is that number a high number? Are you concerned? Is there a fiscal stance that could be taken to save some of those businesses?
Mr. Page: Thank you senator. Maybe I could spend a short period of time talking about the kind of data that I’ve looked at to come to these sorts of judgments with respect to household and business balance sheets, but focusing on business balance sheets, and then I’ll address Mr. Kelly’s point.
If we were to look at Statistics Canada data on the corporate sector and the business sector, you can track what was happening to incomes. We can track the operating surpluses. We can look at the transfers that have gone into the government. We have various measures of net savings or disposable income for the corporate sector, just like we have for the household sector.
By that account, the data shows that, first of all, operating surpluses have grown quite dramatically in the past couple of years, particularly in the past year and a half, overall, from a macroeconomic perspective. When we look at other data with respect to bankruptcy filings and potential bankruptcies, those numbers continued to trend down right through the COVID period. We haven’t really seen any uptick whatsoever in terms of that type of pressure — that kind of credit stress that exists even in the corporate sector.
It’s fair to say that there are developments taking place now, including the big increase in interest rates and the changing of financial conditions. We look at the senior official surveys and business outlook surveys from the Bank of Canada. We’ll continue to look at those, month to month, as the bank is doing. We don’t see the financial tightening yet in those surveys.
That is a little bit of a different perspective than we’re getting from Mr. Kelly. Obviously, he’s very close to small businesses and the kind of stress that they’re experiencing. It wouldn’t surprise me, if we’re headed for a slowdown, that obviously would hurt the business sector. We can see some flattening in consumption spending in the national accounts. That will hurt small businesses significantly because, with these higher interest rates, people will not want to use credit to go out and spend.
I think Mr. Kelly is right to say we have to be careful. There are darker clouds there. The slowdown is effectively being planned by the central banks, including our central bank, to take some demand pressure out of the economy. That will hurt small businesses, for sure. That’s where it will hurt, including all the people who work for them.
You can’t raise interest rates — we raised them 3.5% this year, very dramatically; it’s really a monetary policy shock, and perhaps there will be another increase next year — and say that it’s not going to have an impact. It will. We’ve changed financial conditions dramatically; it’s been very fast. What we’re probably hearing Mr. Kelly say is that, with the growth slowdown and the change in financial conditions, his community of small businesses will get hurt. That’s the price we have to pay.
That’s a post-COVID-type response, but unemployment rates will go up. There will be some real stress for small businesses; we’ll probably lose some. As we think about how we’re going to deal with 2023 if this global recession becomes a reality and if we have a small recession in Canada, we will have to be mindful of our lending practices for that community going forward. We’ve been tightening over the past year.
The Chair: We’ll come back to that issue in a moment.
[Translation]
Senator Gignac: Welcome, Mr. Page. You deserve our recognition and thanks for building a team in the Parliamentary Budget Office, as the first Parliamentary Budget Officer. We parliamentarians are now benefiting through your successor.
I would like to ask two questions straightaway, Madam Chair. With the benefit of hindsight, how do you assess the government’s management of the COVID-19 pandemic from a budgetary perspective?
And then, as we emerge from the pandemic, do you think the government’s current fiscal policy is stimulating inflation? If so, how strong is its effect?
[English]
Mr. Page: Thank you, senator. It will probably take years to look back with real confidence in terms of casting a judgment on how the government responded fiscally to the COVID crisis.
My intuition is that it will be a favourable judgment. People will look back and say that, in the context of this virus when we had no vaccine, in the context of social conditioning and in the context of an incredibly steep decline in output in the second quarter of 2020, the government responded in a very timely way and with significant fiscal largesse. It was an enormous outlay of taxpayer resources to save households and to save businesses, while we basically shut down the economy, turned the lights off, told people to stay at home and to social distance when we didn’t yet have the vaccine.
There’s an arithmetic to looking at the steepness of the decline in GDP, in output and in income and then the size of the fiscal supports. In retrospect, similar to the chair’s question earlier about monetary policy, we’ll probably come to a conclusion, as we look back, that we overdid it — that the bazooka was too big. Relative to the decline in output, we provided an excess of fiscal resources. If you look at household and corporate balance sheets and the transfers that went into it, we’ve never seen anything like that in terms of the size but also the timing of it.
Typically, in past recessions, say 2008, the early 2000s, early 1990s or early 1980s, when governments relied primarily on automatic stabilizers — employment insurance — EI — or tax adjustments — the money went into the economy, but it was kind of late. Even the fiscal stimulus that former Prime Minister Harper and former Finance Minister Flaherty put out in 2008 came a little bit late relative to the decline in output, whereas here, on the timing, people will look back and say, “How did they do that?” The injection into the economy was massive and so timely. It protected households and businesses. The deficit went from $30 billion in 2019-20 to $330 billion, from roughly 1.5% to almost 15% of GDP. It was enormous.
We’ll probably look back and say that growth and strengthening in household and corporate balance sheets increased demand pressure in the context of an economy. Once we started to get vaccinations in the fall of 2020, the economy came back really quickly. It shocked everybody, I think, for the most part. There was a lot of demand and restricted supply because of these COVID constraints.
There probably is a case that, at that period of time, because we front-end loaded and so loaded those corporate and household supports in a timely fashion — plus there was additional work by the Governor of the Bank of Canada in terms of liquidity supports — we boosted demand a little too much relative to restricted supply, and so this inflation was going to be inevitable.
If it were possible to go back and talk to people who I’m sure were sitting in these important rooms, here and at the Bank of Canada building on Wellington Street, when people were briefing the Prime Minister and the Governor of the Bank of Canada talking about risk, they were probably saying, “In this environment, when we’re shutting down the economy, it’s probably better to put too much in the system, rather than too little in the system.” They put too much in the system and so the economy came back — some people use this expression — a little bit too hot relative to the restricted supply.
Now we’re dealing with an inflation rate of 7% and a core inflation rate at a little over 5%, which is higher than the 1% to 3% government target.
If we were to go back, we were talking about a deficit in 2022-23 of $35 billion, or about 1.5% of GDP. If you and I were having this conversation, senator, in the summer of 2020, at that time we thought we were headed for a deficit $350 billion. If I had said to you, senator, that some people out there think we can get the deficit back in the range of $30 billion to $40 billion in two years, you would have said, “That’s not going to happen.” You would say that pulling away the fiscal support for the economy would be too fast, that we would probably have to slow it down more and that we should anticipate deficits close $100 billion in 2022-23.
It’s a bit astounding how dramatically the deficit fell. That’s because the economy came back really strong, and the government did effectively unwind the COVID supports, for the most part.
Economists, like yourself and others, cyclically adjust budget balances. Right now, even though people talk about the economy being really strong, I still think we’re operating below our potential. In an economy that’s operating below potential, from a fiscal policy and cyclically adjusted balance, it’s actually fairly normal to run small deficits. This deficit that we’re running right now in the $30 billion to $35 billion range, that’s a pretty small deficit in the context of COVID.
I don’t see this particular fiscal stance in 2022 as being inflationary. It’s very much on track with trying to get the government’s policy rate into the 4% to 4.5% range to deal with inflation that’s running in the 7% range. The downward trajectory is falling very dramatically. Again, we went from $330 billion in 2020-21 to $90 billion, and now we’re talking about $35 billion.
The question going forward is: What is the appropriate path? I think we’re on a pretty good path right now. Can the government maintain this path? That’s another question. What kinds of restraints do we need to ensure that the government stays on this path? How do we constrain the government spending in this environment going forward?
In the Fall Economic Statement, there was a modest amount of measures. I didn’t see it as inflationary. We have to spend an additional, say, $30 billion over six years in an economy that’s $2.7 trillion; most of that is going to vulnerable people, doubling of the GST credit and helping students with interest debt. I don’t see that as inflationary. In the other part, there are small measures to deal with investment tax credits that encourage businesses to buy into clean tech. There are some additional monies to help workers train up for energy transition. We have to do that anyway. Even if we have inflation, we still have to retool the Canadian economy so we reduce our emissions. Thank you for that great question.
The Chair: Thank you for the great answer.
Senator Marshall: Thank you, Mr. Page, for being here. This is a continuation of some of your previous comments, but some of us are tracking the government’s spending. We’re tracking the additional taxes. We’re tracking the debt. It’s all going up. Whenever we raise this with the Minister of Finance, her response is always the same: She says Canada has the lowest deficit of the G7 countries, and Canada has the lowest debt-to-GDP ratio of the G7 countries. So we’re the best of the lot, but it really depends on how well the other six are doing.
We know there is a financial shock coming. Do you think that we should place a lot of confidence in those two ratios, those two financial indicators? When you look at the spending by the government, we don’t know how severe the financial shock will be. We’re hoping for what we call a soft landing, but we don’t know if it will be a soft landing. When we look at the fall fiscal update — I do agree with assisting people who need assistance — some of the programs being implemented by the government or proposed in the fall fiscal update are odd, I would say, or different, such as the change in policy in the Canada Workers Benefit, which will cost billions of dollars.
Do you think we should place a lot of faith in our relative position to the other G7 countries, or do you think we should be looking more to preserve our own fiscal firepower in case we do get a big financial shock?
Mr. Page: Thank you, senator. We need to look at the full range of indicators to get a sense of whether Canada is fiscally strong and has the resilience to deal with the next financial crisis or the next economic shock or the next public health shock.
The bond markets look at some of the same indicators which Minister Freeland has highlighted. From a planning perspective, they’ll look at the assumptions. Are they realistic? What is the projected deficit relative to GDP? What is the projected debt relative to GDP? They are looking at those two indicators as well. They will ask questions about the longer-term fiscal sustainability of the country. Like in the work that actuaries do, the markets and the bond-rating agencies know that we have an aging demographic. They’ll look at the analysis done by the Department of Finance or the Parliamentary Budget Officer — PBO — or the IMF — the International Monetary Fund — to see whether Canada has relatively stable debt-to-GDP ratios over the long term, decades out, because of this aging demographic.
The short answer is that, at the federal level, yes, we do, but as the chair will probably allude to, there are other issues. There are some big spending pressures there on health care, on defence and on climate adjustment, which are not yet built into the planning framework.
They definitely will look at the carrying cost of the debt. They’ll look at measures of public debt interest charges relative to budgetary revenues. They will also compare Canada’s indicators to other OECD countries. Our numbers are at historic lows right now, even though we’ve been adding on a significant amount of debt since the 2008 financial crisis, partly because the effective interest rate on that debt has continued to decline. Now it’s bottomed out and will begin to go up, but the carrying cost, at least in the medium term, is still incredibly low.
We’re probably spending something in the neighbourhood of 10 cents of every revenue dollar on public debt interest, whereas when I was at the Department of Finance as assistant chief of expenditure analysis and forecasting, something in the neighbourhood of 36 or 38 cents out of every revenue dollar was going to public debt interest charges.
I remember that when my bosses would go up to brief the deputy or the minister at the time, it was not fun because they had no fiscal room to manœuvre. Maintaining a low carrying cost of debt is an important indicator.
Having a declining debt-to-GDP ratio, even over the medium term, is a strong signal, but can we commit to that? For the most part, if you look at this government’s mandate and if you look at the debt-to-GDP ratio that they inherited in 2015-16 and where we were prior to COVID in 2019-20, they actually were reducing the debt-to-GDP ratio. It went up by 16 or 17 percentage points because of COVID. Now, it’s coming down fairly dramatically in the medium-term environment because the economy is growing and we are unwinding the COVID supports.
So it’s good to keep pressure on government. It’s good to look at a full range of indicators.
Senator Marshall: I know everybody is hoping for a soft landing, but what if we do have another financial shock like we just had with COVID? It just seems to me that the government is — some of the firepower that they would have had if they hadn’t spent on some of the programs, they would be better positioned for what’s going to come ahead. That would be my concern. What of the financial shock? People think there is something soft coming. Maybe it won’t be soft. Maybe we’ll get a big surprise and it won’t be a good one. I don’t know if you want to comment on that. That is my concern.
Mr. Page: I think there are almost two parts to your great question, senator. One is: How should we look at the outlook in the short term in the next couple of years? What are the various scenarios we should look at? How do we maintain optionality, resilience and agility in this environment with our fiscal balance sheets over the next year?
I think we don’t have a lot of confidence in the planning outlook over the short term. People have been talking for months that this recession is coming and it’s a self-inflicted recession in many ways; central banks are doing it to themselves not just in Canada but around the world. They’re all talking about raising interest rates, partly because of this imbalance between policy rates, interest rates and inflation, but also just to take demand pressure out of the economy. So this is self-inflicted.
Is it possible we get this wrong? It’s very possible. I grew up in Thunder Bay so I have to use hockey analogies. Walter Gretzky, when he was teaching Wayne, he said, “Wayne, you have to go where the puck is going to be.” If you’re playing hockey with somebody who is a very fast skater, you have to make sure the puck goes out ahead of that person so it ends up on his stick nice and flat.
It’s pretty hard in this environment if you’re a central banker to see where this economy is going to be six months or a year from now, knowing you’ve been raising interest rates dramatically and just because of the nature of these interest rates — how it affects people’s credit, how it affects the mortgage and housing market, how it affects business credit. It takes time to work through the system, even though it’s been a dramatic increase in interest rates. It’s hard right now to know. It’s easy to get it wrong. All central banks have been doing this, and the potential to get it wrong is pretty significant.
There is real risk and a significant probability of something that is worse than short and shallow in terms of recession and worse than even the downside scenario that Minister Freeland put in her Fall Economic Statement.
The second part of your question is: What is the fiscal stance and the programs we need to put in place so we’re ready to take that shot? Should we maybe spend even less of the money we did in that time? Should we start thinking about lessons we’ve learned from 2020 in terms of getting money into people’s hands quickly? Do we need to make adjustments to some of our stabilizing programs, like EI, worker benefits and other programs to prepare people for that kind of shock? My guess is there’s probably thinking like that going on in central agencies now, but we’re not seeing it. I think it’s fair criticism. I think Minister Freeland should be credited for talking about this downside scenario. We didn’t really see the policy response for the downside scenario in the Fall Economic Statement. We got the planning outlook, but we got basically the policy response for a baseline scenario which is just a gross slowdown; she wanted to tell us that you’ve got to prepare the economy, but we didn’t get the policy response to prepare the economy for the downside scenario.
Senator Marwah: Thank you, Mr. Page, for being here. There’s been a lot of discussion on the monetary side and interest rates that went up too fast or too slow, or how they should have gone up earlier. I appreciate that on the spending side. And on the fiscal side, there is a lot of discussion on the size of the stimulus. The stimulus was too high, too low or should have been withdrawn. But there is very little discussion on the tax side. I’d like to hear your thoughts. Should the government be thinking and doing other things besides the odd pre-care, which is tax on stock buybacks and a tax on banks? Are there other policy measures that should be considered that would help alleviate that given the environment we’re going into?
Mr. Page: Thank you, senator. You’re right. Since the COVID environment, with respect to tax policy discussions, there’s been an ongoing international conversation around a global minimum tax, which extends longer term through the post-COVID economy. Prior to COVID, the government made the growth of the middle class a big part its agenda, so there were some changes to the tax code with respect to rates and brackets in the 2016 period.
I think, honestly, just outside the room I’m checking news and there are conferences going on next week that look fascinating about cities and I’m reading some of these back stories. Cities like Toronto and other cities across the country, they’re coming out of COVID and dealing with the climate change agenda. They don’t have the tax resources to deal with it. Property tax is not going to help them. So there is this an ongoing sense that we need to change the tax system to deal with the fact that we’re just a much more urban kind of economy and we need to spend significant resources on infrastructure to rewire our energy grids, but we don’t have the tax system that’s going to facilitate that.
I think there’s another question that is part ideology but it’s also partly facilitating the energy transition. We don’t have the tax revenue to increase, fundamentally, the spend on health. When we hear premiers talking about, in this country, that the federal share is in the low 20% range of the total public spend, I think a lot of Canadians would say that doesn’t really make sense. We have a Canada Health Act but the feds are only kicking in 20%. There needs to be a rebalancing and that would be a major tax issue.
We’re living in a world now where we turn on the news and we’re getting a significant dose of the Russia-Ukraine war and there’s just ominous signals with respect to China and Taiwan, and North Korea.
Do we have the military to spend? We checked talks in the United States about increasing military spending there by a full percentage point of GDP. That’s many multiples of what Canada spends relative to the size of our economy and we’re far short of our NATO commitments.
In terms of just closing those two gaps — and we can go on — I think to facilitate a transition to a new energy system, the public sector is going to have to play a key role for a period of time. That’s going to require more resources.
We’re not the biggest spenders when it comes to official development assistance in the world. We’re nowhere near what the Scandinavians do. There is another spending pressure.
Given those fundamental structural spending pressures, we’re going to need more revenue than we are getting right now, which is in the neighbourhood of 16 percentage points of GDP. It’s probably going to have to come from the federal government and there’s some rewiring that’s going to need to go on.
I think COVID has shut down a lot of that conversation on tax policy. We’re just so focused on dealing with this public health crisis and the economic impact, but all these big pressures are part of the post-COVID economic agenda.
Senator Marwah: So that’s exactly the point that worries me: There is no discussion on the revenue side. We’re going to have to deal with that because the demands are endless, yet there is no discussion on how we increase revenue or what we do on tax policy or tax reform — whether we tweak the GST or whether we [Technical difficulties] Should we undertake some sort of overall tax reform that looks at how we better collect our revenue and how we increase it over time?
Mr. Page: Yes, I think we do. I honestly think it is, from my own experience, the kind of study that can only come from the Senate. I can understand why politicians don’t want to talk about raising taxes in the recent environment where we’re dealing with a public health crisis; it’s not going to get you re-elected. But a body like this, with the experience that exists in our Senate that looks long term in structure, puts the conversation up front. I think it could happen here, and I think there’s the dimension about revenue need. Then there’s the dimension, which I think you’re getting at, senator, of how we structure the tax system federally, provincially and with the municipalities so that it has all the benefits of neutrality but still promoting the kinds of movements that we need to deal with a low-carbon economy.
The Chair: I think you’ve raised some very interesting points there; while the spending was needed at the front end of COVID and it was timely, it was excessive and it couldn’t go to the right places. The small businesses that are now struggling were shut down so nobody could go and spend their money there, and now it’s out floating about and pushing inflation up.
We’re still seeing a lot of spending on the part of government, but it seems piecemeal. It’s $40 million here and it’s $50 million there and it’s on social spending or project spending, but, again, there’s no kind of big target, as you say. We do not have the revenue to meet the bills that we are going to have to pay, whether it’s military or the health care system or all of the things that you’ve outlined.
What are you proposing? Obviously, a budget will come, but you keep saying there is no strategy and no plan. What would you like to see pretty quickly that would give peace of mind to some of the issues that Senator Marwah has just put on the table?
Mr. Page: Thank you, chair. I think it is the strategy and the plan for our post-COVID economy. This talk has been going on since probably the fall of 2020 about the post-COVID economy in all sorts of studies by the IMF — the International Monetary Fund — the OECD, the World Bank and think tanks about the various key pieces that need to be included in it. It seems like, because of the COVID crisis and the Russian war in Ukraine, the government has been reticent to put it out. We really didn’t have a big policy debate in the 2021 election. The platforms weren’t really addressed to deal with those sorts of big issues.
We can make the argument that some parties were willing to talk about some of these big potential items that could be needed, but they weren’t the governing party and they weren’t the official opposition and so they didn’t have the gravitas.
Having been a public servant through the 1980s, 1990s and 2000s, we’ve used the Senate and we’ve used royal commissions to study these fundamental structural changes. We brought in experts from across societies to have this kind of conversation. I think about all these big issues: What will it take for Canada to improve its competitiveness over the medium to long term in a world that is being decarbonized? What will it take for Canada to hit its 2030 and 2050 targets? Do we have the safety net system in this world to deal with the big shocks that we seem to be getting now more often than not?
What is our framework to deal with resilience, both with respect to climate change and public health shocks and public security shocks? Are we spending appropriately? Where are the frameworks they have in place? How does the public sector work with the private sector? There is a big strategy that needs to go along with the change of policies and —
The Chair: Yes, we do need that — I couldn’t agree more — but we’re also facing some of this other stuff in short order. You’ve talked about a monetary policy shock and we can’t have 3.5 points in this condensed a time without it having a huge whack and impact, which we are starting to see. So can we do two things at once?
Mr. Page: I don’t think there is much of an economic policy choice with respect to doing what is necessary to get macroeconomic stability. Having rising inflation rates like we did early this year — rates climbing to over 8% — I think that had to be stopped. There’s going to be a price to pay for that, and I think it’s the slowdown that is likely inevitable in 2023.
But it doesn’t mean we should stop. The fact that you’re meeting and talking about the economy and inflation, and most of the questions are longer term, that’s exactly what we need to be doing. We need to do the thinking now and create the context for these fundamental changes.
I definitely think we could respond with public policy to deal with this macroeconomic instability, but we definitely need the policy thinking, the debates and building up consensus around these plans to promote a stronger economy, sustainability, inclusion and resilience so that we can start implementing the programs. And I think creating the conditions to say, “Yes, we have to pay more taxes, that maybe we need another point or two points of GST in this environment for a period of time,” is what it will take to be sustainable.
I think we really need the Senate. That’s why I was glad to show up.
The Chair: I can’t wait for the election campaign where everybody is discussing raising the GST by two points. That ought to be interesting.
Senator C. Deacon: Thank you, Mr. Page. This has been a riveting conversation.
I want to speak to regulation, if I could, for a second, because we’re working our way through a number of issues. One of the big challenges we have in this country is a command-and-control regulation culture. We lead the OECD in this regard, and that really slows down the opportunity to innovate because when you define the process that must be followed, the innovation comes in disrupting the process. All of our regulatory modernization efforts are moving very, very slowly. To what extent can digitization play a role? Again, we’re last in the OECD in e-government and moving toward digital government. So there is the opportunity to go from worst to first in a few areas.
I want to hear your thoughts about the role of not paving over the same old cow path but changing a regulation and digitizing to make it more efficient for government and business in dealing with the HR challenge that we have in government. We’ve got too many analog processes. What have you been looking at in that regard?
Mr. Page: I haven’t been doing enough looking in that regard, but I would say that in this conversation we had today, we talked about revenues, spending and monetary policy. Now we mention regulation; I think regulation is a fundamental policy instrument. As we go forward and we think of what the post-COVID economy looks like and we think about the role that the public sector has to play to facilitate transition, the key role the public sector plays is defining the marketplace. So in this new digital, low-carbon world, we need a fundamental rethink in terms of how we want to structure those markets so that they’re working for people.
I think if the Senate is leading this and we’re looking at revenues, spending, monetary policy and mandates going forward, all I can say at this point is we need to look at regulation and the full breadth of it as a fundamental policy instrument to structure these markets in a post-COVID world where we need less carbon.
Senator Loffreda: Mr. Page, thank you once again for being here. You did mention the labour market was in good shape. I have a Fraser Research Bulletin from August 2022 I’d like to quote, and I’d like your insights on it:
An adjustment for population growth shows that the share of adults above the age of 15 employed in the private sector has fallen from 49.3 percent to 48.2 percent during this period.
It is clear that the government sector is disproportionately driving Canada’s labour market recovery. Private sector total employment is now only slightly above pre-pandemic levels and once an adjustment is made for population growth, private sector employment is in fact lower than it was in February 2020.
That is fairly recent, from August, and we’ve all seen reports without getting into the reports. Senator Bellemare also mentioned the budgets. We were looking at $20 billion yesterday in Supplementary Estimates (B). The government expenses and costs are increasing, including the labour side.
What are your thoughts or recommendations going forward?
Mr. Page: With respect to the labour market, we can say from a macroeconomic perspective that some of the headline numbers, particularly the unemployment rate numbers and even the number of unemployed — I don’t like to use the words “good shape” — given what we’ve gone through in terms of the COVID experience, the fact that we can have an unemployment rate in Canada around 5% and the number of unemployed is less than it was prior to COVID in January and February of 2020, that is a good thing.
I agree with the premise of your question. There’s a risk — and Senator Marshall talked a bit about this — that we’re overplaying the tightness of the labour market. That is an expression that economists and central bankers use when they say, “We need to raise interest rates even more because this market is too tight.”
I probably share a bit more the sentiment from the Fraser Institute study, where it was just that we’re still fairly wounded from the COVID experience. Our participation rates have not recovered. Labour force participation rates have not recovered to pre-COVID levels. Our employment rate numbers have not fully recovered. This labour market is not tighter than it was going into COVID. To say now that we need to keep raising interest rates more and more because the labour market is so tight — it is not that tight. I don’t find it that tight. Wages have moved up, but people are trying to maintain real wages and not lose so much ground relative to this high inflation.
It is the same when people talk about the economy in terms of output growth. Again, when I look at the numbers, my sense is that we’re operating well below trend. We’ve only grown 2.7 percentage points in two and a half years, cumulatively, since the fall of 2020. If you looked at the year-over-year growth rate, basic prices and production data, we grew 2.7% on a year-over-year basis in the fall of 2013, so in one year, we grew as much as we did in two and a half years. We haven’t recovered all that we’ve lost from a trend perspective, so I think we have to be careful that we don’t overdo the increases in the policy rate on the assumption there are enormous demand pressures. There are fairly significant supply constraints in the context of the global economy and to some degree in the Canadian economy, but raising interest rates will not help you on the supply side. It can’t change fundamentally the supply. You’re just going to play on the demand side of the economy. I do worry in the short term that we could overdo it.
My first job in the public service was as an inflation analyst in the Department of Finance in 1981. Inflation was 13%. It was a very busy job. People worried about going back to the late 70s or early 80s in terms of embedding in this high-inflation environment and high-unemployment environment. My intuition is that if we slow the economy down, no one will be talking about inflation one year from today. It will not be on your agenda. Part of it will be because of the big increases in the balance sheets in households and businesses. It is quickly working itself off because of higher inflation. A slowdown in the economy while we have depressed energy prices in particular — you can see already in these global commodity markets that these numbers are moving down — won’t be our big issue in the fall of 2023. I think these numbers will start to come down.
The Chair: We’re going to have a quick final question from Senator Gignac, and then that will be the end.
[Translation]
Senator Gignac: My question is for the former parliamentary budget officer.
This year the Minister of Finance announced nearly $20 billion in new measures, but outside the budget and before the economic update. These are called off-cycle budget measures.
You worked with the late Minister Flaherty and other governments. Twenty billion dollars is a substantial sum, after all; that represents 40% of the new measures that were announced outside of a budget and economic update.
Have you seen this in the past or is this a new trend?
How can we, as parliamentarians, respond to this?
[English]
Mr. Page: Thank you, senator. Having worked at these central agencies and having worked on budgets for a period of time, I’ve seen different thinking about how to use budgets and updates in terms of policy announcements and spending announcements.
I think there are different schools of thought. There’s a school of thought that says we should use the budget to make most of your spending announcements and limit your off-cycle kinds of announcements. But then there are other people thinking that it’s actually okay to have off-cycle announcements and use mid-year updates as mini budgets. We don’t have to make the budget the one supreme event in the financial cycle. We can have these off-cycle announcements.
In an environment where there’s so much uncertainty and governments are seen to play a stabilizing role, there’s a certain logic to using updates to expect measures. From my personal perspective, I don’t think the measures in the last Fall Economic Statement, from both a total balance sheet perspective and a total economic perspective, were that large. You can spread out over six years of time frame. There was a little over $30 billion in new measures, or almost $8.5 or $10 billion depending on how you look at the numbers. There weren’t even announcements. We were told to stay tuned because there’s going to be more off-cycle announcements. Almost a third of the $30 billion was “stay tuned” stuff, of which we’ve seen one or two measures recently. The other part was to help vulnerable people, which is about a third. There were big measures on the GST credit; some help for households, for the housing sector and for students and then there were some measures with respect to the post-COVID economy.
In the context of a government that spends over $400 billion a year and in the context of a planning framework where the economy is $2.7 trillion and going up to over $3 trillion over the next five years, that’s a rounding error. You could almost criticize it and say, “We got the scale wrong.” At some point the Senate has to analyze what the scale is to create competitiveness in the Canadian economy going forward. What’s the role of the private and the public sector? What’s the scale to have a basic income type of program? What’s the scale of spending that needs to go on so we have private and public frameworks that actually support resilience to deal with climate change and public health shocks, et cetera? It looks like a lot of little measures that the chair talked about. Again, in doing this long-term structural study on the post-COVID economy, one of the issues is scale and one of the policy instruments is regulation.
The Chair: Thank you so much for this. You’ve given us a lot of work to do. We’re appreciative of that, but you’ve given us a great roadmap. Thank you so much for your time today, Kevin Page, President and CEO of the Institute of Fiscal Studies and Democracy, and, of course, Canada’s first Parliamentary Budget Officer; you really laid out the plan for what that role is. We so appreciate your comments today.
I’m going to ask everyone to stay in place for one minute before we have our steering meeting, but I’m going to bring this meeting to a formal end.
(The committee adjourned.)