THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
EVIDENCE
OTTAWA, Wednesday, May 22, 2024
The Standing Senate Committee on National Finance met with videoconference this day at 6:45 p.m. [ET] to examine all of the subject matter of Bill C-69, An Act to implement certain provisions of the budget tabled in Parliament on April 16, 2024.
Senator Claude Carignan(Chair) in the chair.
The Chair: Before we begin, I would like to ask all senators and other in-person participants to consult the cards on the table for guidelines to prevent audio feedback incidents. Please take note of the following preventative measures in place to protect the health and safety of all participants, including the interpreters.
If possible, ensure that you are seated in a manner that increases the distance between microphones. Only use a black approved earpiece. The former grey earpieces must no longer be used. Keep your earpiece away from all microphones at all times. When you are not using your earpiece, place it face down, on the sticker placed on the table for this purpose.
Thank you all for your cooperation.
I wish to welcome all of the senators as well as the viewers across the country who are watching us on sencanada.ca. My name is Claude Carignan, senator from Quebec, and chair of the Standing Senate Committee on National Finance.
Now, I would like to ask my colleagues to introduce themselves starting on my left, please.
Senator Forest: Good evening. Éric Forest, Gulf senatorial division, Quebec.
Senator Gignac: Good evening. Clément Gignac from Quebec.
Senator Dalphond: Good evening. Pierre Dalphond, senatorial division of De Lorimier — one of the great patriots we celebrated on Monday — in Quebec.
Senator Loffreda: Good evening and welcome, Mr. Giroux. Zac, it is a pleasure to see you again. I am Tony Loffreda from Montreal, Quebec.
Senator Pate: Kim Pate. I live here in the unceded, unsurrendered territory of the Algonquin Anishinaabe.
Senator Kingston: Welcome. Joan Kingston, New Brunswick.
Senator MacAdam: Jane MacAdam, Prince Edward Island.
Senator Ross: Krista Ross, New Brunswick.
Senator Smith: Larry Smith, Quebec.
[Translation]
The Chair: Honourable senators, today, we will begin our study on the subject matter of all of Bill C-69, An Act to implement certain provisions of the budget tabled in Parliament on April 16, 2024, which was referred to this committee on May 9, 2024, by the Senate of Canada.
We are pleased to welcome Yves Giroux, the Parliamentary Budget Officer. He appears often and we learn a great deal from him. Mr. Giroux is accompanied by Zac Vrhovsek, analyst.
Welcome and thank you for accepting our invitation. You will have five to seven minutes for your opening remarks, after which we will move to questions from senators.
Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer: Honourable senators, thank you for the invitation to appear before you today. We are pleased to be here to talk about Bill C-69, An Act to implement certain provisions of the budget tabled in Parliament on April 16, 2024.
I am accompanied by Zac Vrhovsek, economic analyst. This is his first appearance before a parliamentary committee. I have no doubt that you will be friendly and welcoming towards him.
My mandate as Parliamentary Budget Officer, as defined by the Parliament of Canada Act, is to provide parliamentarians with independent and non-partisan analysis to assist them in fulfilling their constitutional role of holding the government to account.
To that end, on April 30, 2024, my office published an analysis highlighting key issues in Budget 2024. In the budget, the government announced $61.2 billion in new spending that was partially offset by $21.9 billion in revenue-raising measures. On a net basis, the new measures reduce the budgetary balance by $39.3 billion from 2023-24 to 2028-29.
[English]
My office has also published cost estimates for measures included in Budget 2024, including the refusal of tax deductions for short-term rentals, employee ownership trusts, Canadian journalism labour tax credit enhancement and accelerated capital costs allowance for eligible new purpose-built rental housing, which was released this morning.
In the coming weeks, my office will publish further analysis on measures announced in the 2024 budget, including the capital gains inclusion rate increase, the Canada Disability Benefit, investment tax credits for clean energy, tax reduction for entrepreneurs and an update on the alternative minimum tax measures. These analyses aim to provide parliamentarians with important information on key issues to inform your discussions about the country’s economic and fiscal situation.
Zac and I will be pleased to respond to any questions you may have regarding our Budget 2024 analysis or other work carried out by my office. Thank you.
[Translation]
Senator Forest: Thank you for coming to kick off our study on Bill C-69.
In Bill C-69, as indicated in Part 1(f) of the preamble, the government is enhancing support for newsrooms through two measures: first, by increasing the cap on labour expenditures per eligible newsroom employee from $55,000 to $85,000 and, second, by temporarily increasing, for four years, the Canadian journalism labour tax credit rate from 25% to 35%.
I’m hearing a lot about how unfair this assistance is, since digital media are excluded. However, in the regions, radio and television stations produce news, write content and play an important role in the democratic health of our communities. Do you understand the government’s strategy in limiting this assistance to print media? Do you have an idea of what it might cost to extend this measure to digital media?
Mr. Giroux: That’s a relevant question; however, this was a decision made by the government, which decided to favour a specific sector. So, the government made an informed decision to favour print media journalists, rather than television journalists, for example.
I don’t have an exact idea of the potential cost of extending this measure to television, for example, but I don’t believe that it would double or significantly increase the cost of the measure; since the eligible journalists and salaries are quite well defined — and the tax credit is also quite narrowly defined. That suggests, then, that the cost would be less than twice that of the current measure.
Senator Forest: The underused housing tax is an important measure, in light of the current situation. Division 3 of Part 3 amends the Underused Housing Tax Regulations. In April, you produced a report estimating the revenues generated by this housing tax. You estimated the revenues generated by this tax to be $693 million over a five-year period. Did your estimate take into consideration the measures announced in Bill C-69?
Mr. Giroux: I don’t believe so, because at the time of publication, the budget had not yet been tabled; therefore, we wouldn’t have been able to include provisions set out in the budget implementation bill.
Senator Forest: Do you think that this could substantially change your estimates?
Mr. Giroux: It’s difficult to say, because we didn’t look at that issue in detail. The measures set out in Bill C-69 would have to be examined more carefully. That’s something we would consider if the committee wanted us to look at the possible relationship between the measures set out in Bill C-69 and the cost estimates we previously tabled.
Senator Forest: In your opinion, given that the ultimate goal is to put rental housing that was frozen or taken off the market back on the market, do you believe that this measure can be effective at this time?
Mr. Giroux: Certainly, once the tax burden is eased for building or converting housing, it will make it easier to get that housing on the market. Will it be a decisive factor? It’s likely that it won’t be the most important factor, because the most important factor will be the construction of new housing units.
So, if a tax like the the GST on rental housing construction is eliminated, or if a tax is imposed on underused housing, that will help bring units back onto the rental market; however, construction is obviously the most important factor. As we know, there are other factors in the construction industry that reduce availability, such as labour shortages in some sectors. This measure will help, but it probably won’t reverse the trend on its own.
Senator Forest: If I understood your opening remarks correctly, in the budget, spending has increased by $71.8 billion compared to a $21.8 billion increase in revenues. So, if I do a quick calculation, the deficit is actually $50 billion higher. Will the new measures that have yet to be announced — some are tied to revenues or spending that will be announced in the coming weeks — further increase the gap between our revenues and our expenditures?
Mr. Giroux: You’re probably referring to the capital gains inclusion rate, the details of which are still unknown; the estimates include this revenue-generating measure. Unless the legislative provisions change significantly, the essence of the measure that was announced in the budget should not have a significant impact on estimates.
There could be some surprises on the expenditure side. For example, the government may not, for all kinds of reasons, be able to deposit or spend at the rate forecast in the budget; in that case, it would reduce the deficit somewhat.
Senator Forest: Thank you very much.
The Chair: I am now going to give the floor to the sponsor of the bill, Senator Loffreda.
[English]
Senator Loffreda: Thank you, Mr. Giroux and Mr. Vrhovsek, for being here with us.
Mr. Giroux, I will quote your report. I am looking at the fiscal anchor with respect to the budget. Global debt levels are high everywhere, not just in Canada, compared to pre-pandemic levels. There is concern, not just for government debt but also for Canadian household debt. Debt, as we would say in my previous life as a banker, eats three times a day: breakfast, lunch and a big supper.
Quoting from your report:
In Budget 2024, the Government claimed to “maintain its commitment to its fiscal objectives and achieve its fiscal anchor to reduce the federal debt-to-GDP ratio over the medium-term”. Based on the outlook presented in Budget 2024, the federal debt-to-GDP ratio is projected to increase, remaining above its 2022-23 level of 41.7 per cent for two years, before gradually declining over the medium term to reach 39.0 per cent in 2028-29.
On a status quo basis—that is, without additional measures and given possible economic outcomes surrounding the private sector outlook—we estimate that there is a 72 per cent chance that the federal debt-to-GDP ratio in 2028-29 would be below its 2022-23 level of 41.7 per cent.
I am curious about the 72 per cent chance. How did you arrive at that number? Why not 99%, or why not 55%? How certain are you that those levels will be achieved? It would be reassuring to Canadians if in a few years we could be below the 2022-23 level. How much assurance can you give Canadians, including myself, that this will be the case?
Mr. Giroux: The important couple of words in the quotation from the report are “on a status quo basis,” so without additional measures. If we take the fiscal track laid out in the budget as the government’s intentions, we can arrive at the probability of hitting the federal debt to GDP in 2028-29 lower than 41.7% by doing what econometricians call Monte Carlo simulations. That is running the data into a model that explains or simulates what could happen to the economy based on multiple scenarios that have happened over time — for example, an upside surprise on economic growth, inflation, interest rates, or the reverse, or a combination of trade, unemployment shocks, what we have seen over the last several years.
What if these multiple scenarios were to happen again, excluding events such as a pandemic, for obvious reasons? When we do these simulations hundreds of times, thousands of times, with various scenarios, we arrive at that situation. In 72% of these multiple scenarios with various situations that could occur, the federal debt-to-GDP ratio in 2028-29 is lower than 41.7%.
Senator Loffreda: So this is a scientific method that has been proven, and we can say that it is likely to happen with a level of predictability of 72%?
Mr. Giroux: It is based on mathematical models. Some will say that economists cannot do anything scientific, but that is based on proven models that have been used in the past, using past behaviour of economic factors and the economy in a global context and in a Canadian context.
Senator Loffreda: I was looking for a chart, and we have seen them, but can you please share our debt level comparison to the G7, G20, Organisation for Economic Co-operation and Development, or OECD, countries? There is a lot of concern. Everybody talks about debt levels and inflation, which we now see is under control, hopefully. I think kudos to the Bank of Canada for bringing it under control. How sustainable is this debt level? How do we compare to our counterparts globally? If we have time or a second round, what is your overall impression of the Budget Implementation Act?
Mr. Giroux: With respect to the sustainability of the federal debt, we assess that on an annual basis, usually in the summer. The last time we assessed the sustainability of the federal debt was July 2023. We’ll do that exercise again this summer. It is in progress. The last time we looked at that was before Budget 2024, obviously, and we deemed the federal debt under status quo policy assumptions to be sustainable over the next 75 years.
Senator Loffreda: 75?
Mr. Giroux: Yes, over a 75-year period.
Senator Loffreda: I hope I am here to I see it.
Mr. Giroux: I hope to be here. Maybe my wife is not hoping that. I’ll stop there in case she is watching.
Over the next 75 years, if we were to put everything on autopilot, what would happen with the federal finances, knowing that everybody gets older by a year, demographic assumptions, productivity and interest rates and so on? We arrive at the conclusion that federal finances, as of July 2023, were sustainable over the long term. It’s the same with most provinces and jurisdictions.
What was the other part of the question? Oh, yes, comparisons.
Senator Loffreda: Do I still have time?
[Translation]
The Chair: You are the sponsor, so yes.
[English]
Senator Loffreda: How do we compare to other countries with respect to debt levels? Have we been totally off-base? Everybody has spent during the pandemic, not only Canada. We hear it all over the world. Even last night, I was putting on the news and I said, there should be a good news station. There isn’t any. But how do we compare to other countries?
Mr. Giroux: The best news station is the Senate National Finance Committee proceedings.
Senator Loffreda: It is. That’s why I have been given more time tonight.
Mr. Giroux: We compare rather favourably on a debt-to-GDP ratio with G7 countries. We are probably the least or second least indebted country compared to our GDP. When it comes to other comparator groups such as the G20, we’re again in the best quartile, so the low 25 when it comes to the level of debt related relative to the economy. We are in a good position, and that is in large part due to the public pension funds — CPP and QPP — that are partially pre-funded, which most other countries don’t have. They have the obligations without having the same assets that we do.
Senator Loffreda: So we are in a fine position compared to them? We’re in the front of the class?
Mr. Giroux: Certainly in the couple of front rows.
Senator Loffreda: Couple of front rows.
Mr. Giroux: Few front rows.
Senator Loffreda: Thank you very much.
[Translation]
Senator Gignac: Welcome, witnesses. Although the Senate is independent, I’m going to counterbalance my colleague and address what might be a slightly less glowing aspect of our public finances. In the 2022 budget and budget projections, the government said that public spending as a percentage of GDP would decrease from 15.8% to 15%. Two years later, when we look at government spending as a percentage of GDP, we’re not at 15%, but rather at 16%. Just 1% of GDP is equivalent to a forecasting error of an additional $30 billion. What concerns me more is that this is not due to transfers to the provinces or to individuals, but to operating expenses. At the time, the 2022 budget said that would drop from 7.5% to 6.6% of GDP. But the percentage hasn’t fallen at all; it’s stayed at 7.5%, which is clearly due to a forecasting error.
Can you reassure me that the government is properly controlling and managing its expenditures? As in the private sector, we control our spending but not necessarily our revenues, unless we increase taxes.
Mr. Giroux: I’d like to reassure you on that point. Over consecutive budget years, the government has tabled budgetary estimates. For example, in the 2022 budget and the 2022 economic update, we see that the trajectory is increasing. In each budget for a given year, spending is always slightly higher than estimated.
This can also be seen in the estimates for departmental personnel expenditures. They always plan for a maximum number of employees, followed by a reduction the following year. But it never happens. Reducing the size of the public service, as set out in departmental plans, is always postponed until the following year, no matter what year it is. It’s a bit like someone who wants to go on a diet, but always puts it off until next year or next month, but the next month hasn’t arrived yet.
You suggested it’s a forecasting error. I think it’s more of a deliberate scenario to have the public service be a certain size, and it’s probably the result of various political choices to deliver new programs or extend existing ones, rather than a simple mistake.
Senator Gignac: In the study you published on the 2024 budget and issues for parliamentarians, Table 5 on spending reviews is interesting — and I’m going to ask the chair for some latitude, as the preamble to my question is likely to be long.
The Chair: It’s not a criticism but...
Senator Gignac: In Senator Marshall’s absence, I feel it’s my duty to be more critical this evening.
In fact, if we look at your Table 5, in the 2022 budget, you talk about “reduced planned spending”, because $3 billion in savings were targeted. A little further down, you talk about a “strategic policy review”, which we haven’t seen yet, with $9 billion in targeted savings. In short, I’m up to about $25 billion. There’s a column next to it; can you tally up what’s been announced and what’s been achieved so far?
Mr. Giroux: Several spending cuts or reallocations have been announced over the years. The only exercise with concrete results was the 2022 budget, which aimed to reduce planned spending in the context of a stronger recovery. The government had committed to reducing certain expenditures from 2023-24 to 2026-27, but instead of doing that, it went back a year. Spending was lower in 2021-22, so they used those lower expenditures to claim they had successfully reduced expenditures that were planned for the future. As for the rest, there have been a lot of announcements, but not a lot of concrete results.
The government seems more inclined to reallocate spending from certain sectors to others — for example, a reduction in travel costs or the use of consultants to partially fund other spending — but we haven’t seen any spending cuts. There are no real macro-economic aggregate reductions.
Senator Gignac: Thank you for your work; your explanations are extremely helpful.
No doubt the government was right to do what it did during the pandemic. I encouraged their efforts which prevented a major recession, but over the past two years, my concerns have grown.
Could you enlighten the committee and provide an international comparison of government operating expenditures? My colleague Senator Loffreda is right: we’re pretty much at the top of the class when it comes to debt. It’s the pace of operating expenditures that worries me. Could we make a comparison — relative to the size of our economy and particularly the evolution of the federal government’s operating expenditures — with other jurisdictions since the pandemic? You’ll see what you can come up with to reassure us that spending is still under control.
Mr. Giroux: We could do that if the committee decided to make a formal request through a motion. However, I should mention that the results of an international comparison could lead to conclusions that aren’t as worthwhile or useful as they might seem. Different countries obviously have different public service preferences and different organizational structures. Since Canada is a federation, it’s hard to compare the country’s operating expenditures to those of unitary states such as France or the U.K.
Senator Gignac: Perhaps we could look at the situation provincially and consolidate the information, which might not be as clear. Thank you.
[English]
Senator Smith: Thank you for being with us, Mr. Giroux.
We have talked a lot about spending reviews, cost savings, reductions in the use of professional services and the government’s pledge to reduce the cost and size of the ever-expanding public service. You noted in your report that the planned reduction in FTEs is about 5,000 over the next few years. That is a shift away from recent practices, but the budget includes many new programs that would likely require future departments to take on more staff. Does that concern you? It seems like it is a bit of a ping-pong game where we cut one day and add back the next day because of the new programs we bring in. How do you evaluate what the government is promising in terms of reducing the public service but then announcing new programs?
Mr. Giroux: It’s not something that concerns me per se. It’s a choice to expand the size of the public service or spend more, and that’s totally within the government’s prerogative. That is not my area of concern. My area of concern is when the government says they will reduce the size of the public service by 5,000 over four years by attrition and, at the same time, we see that there are a lot of initiatives in the budget that will require more public servants. I find it very difficult to reconcile those two.
An expansion in the number of FTEs that will be required to deliver upon all those new services will not be possible to do while reducing the size of the public service, unless there is a massive reallocation within the public service away from certain areas toward those new sectors. For example, expanding the capacity of CRA call centres to handle the increasing volume of calls requires persons to pick up the phone. Unless you significantly reduce in some areas to reallocate to the new areas of spending, you can’t achieve that at the same time as reducing the overall number by 5,000.
That 5,000 is a very small number. You don’t need four years to reduce the size of the public service by 5,000.
Senator Smith: Part of why I asked you the question is because there seems to be some inconsistency in the actual execution by the government.
Canada has a long-standing productivity program, which is well documented. Budget 2024 includes billions of dollars in spending aimed at boosting productivity. This includes investment credits in the EV sector, investments in biofuels and billions of dollars for artificial intelligence research. Based upon your review of the budget, are you convinced that the government’s announcements will actually help in achieving growth in productivity?
Mr. Giroux: The announcements regarding artificial intelligence and increasing, for example, the amounts of bursaries, scholarships and money going to PhD students and so on are a good additional step toward increasing the productivity and competitiveness of the Canadian economy, but it is an issue that is much bigger than these select areas. It’s an issue of business investment, which is lower in Canada than it is in many other countries, despite government efforts, despite tax preferences such as the Scientific Research and Experimental Development, SRED; despite the tax credit, which is quite generous by international standards, and all these other tax supports. Despite all of that, business investment is not at the level peer countries see their own business investments. It’s a good first or additional step, but we need something else — and I don’t know what it is — to spur business investment in productivity.
Senator Smith: That leads into the next question I had for you. What’s not included in the BIA is the increase in capital gains inclusion rate, which is coming, according to the government. Many have suggested this tax change is counteractive or counterproductive to the government’s attempt at boosting productivity. What are your comments and thoughts in terms of the proposed expansion of the capital gains inclusion rate? What does that do in terms of affecting investment and hurting productivity?
Mr. Giroux: In absolute, if you increase the inclusion rate of capital gains into one’s income, you would normally think it would be somewhat detrimental to investment. However, there are other measures that accompany the increase in the inclusion rate. For example, there is the increase in the lifetime capital gains exemption for small business owners from below $1 million to $1,250,000. There is the new lifetime capital gains for Canadian entrepreneurs of $2 million, which will be phased out over time. There is the $250,000 inclusion rate at 50%. There are many moving targets within that announcement that make it difficult to assess with certainty what the overall impact will be for the business investment climate in the country.
For big corporations, it will have a negative impact, but for smaller investors, it’s not clear yet what the net impact will be of the combination of increasing the inclusion rate but also including the lifetime capital gains exemption.
Senator Smith: Should we be looking to help a combination of small investors and big investors? What’s going to build our economy long term? Will it be small organizations growing larger or medium-sized organizations growing larger? It looks great to help the small business person, which we all want to do, but we need to have economy of scale so we can compete internationally.
Mr. Giroux: You need both, ideally. You need an environment which fosters the start-up of new businesses but also gives them the space and the tools and the incentives to grow so that they don’t remain small or they don’t remain small with the hope of getting bought out or bought by bigger fish. We need an environment which is conducive to starting businesses and having them grow to levels that make them eventually multinationals.
Senator Smith: Thank you.
Senator Ross: One of the things that caught my eye in your report was this sentence:
In 2023-24, there are $1.8 billion in new measures that have not been announced yet for a fiscal year that is over.
So that’s $2 billion we can’t account for, and it really seems to fly in the face of financial transparency. I know that you said we can ask government about this or we can ask for details on this, but what do you make of this, and what does your office think of this? How do you view this?
Mr. Giroux: It’s hard to reconcile that with transparency and openness. It can be explained to a certain extent if they are amounts that have been provisioned for legal claims or a settlement that was well advanced and to book them in the year that ended March 31, which is an accounting issue. I’m sure the Auditor General can better explain that than me, but it still seems like a large number for something that has happened in the past. There are circumstances where it can be justified, but I’ll be very curious to see what the public accounts reveal of that $1.8 billion when they’re tabled, presumably in the fall.
Senator Ross: Way after the fact.
Mr. Giroux: Yes.
Senator Ross: We’ve already had a couple of comments or questions about table 5, and we’ve talked previously about the section on reduced spending on consulting, professional services and travel. We’ve also had various departments come in, and we’ve talked to them about that as well and asked specific questions. I wonder, with only $500 million of that $7.1 billion targeted savings being achieved, what is your outlook on this and what are your comments on this level of progress? What do you see happening?
Mr. Giroux: That was not an overly constraining amount to reduce in terms of spending. When you see that the federal government is $500 billion in overall spending, well over $100 billion in operating expenditures, reducing it by half a billion in one year and having it grow modestly over time is not very constrained or ambitious. It’s something that’s fairly easily achievable, in my opinion. It’s a good first step toward reducing areas of spending that the government wanted to reduce, but it’s not something that is very ambitious. It’s not austerity, and it’s certainly not cutbacks.
Senator Ross: Something that the government is trying to more signal to Canadians that they’re doing something as opposed to a real austerity measure, as you say? These are visible types of things.
Mr. Giroux: Looking at the numbers and putting them in context with the overall level of spending for these areas answers that question. The way you characterize it is probably something I would agree with.
Senator Pate: Thank you very much for being here.
As you mentioned, you released a report this morning that was entitled Federal Spending to Address Homelessness. Your office noted in that report that the best available evidence was that homelessness has increased despite the federal government’s Reaching Home program, and as a result, the program is not on track to meet its targets with respect to reducing homelessness. In fact, you go further and say that the number of chronically homeless people has increased by 38% relative to 2018, and the number of individuals living in unsheltered locations has also increased by 88%. The report noted that achieving a 50% reduction in chronic homelessness would require an additional $3.5 billion per year, approximately a sevenfold increase in funding over the National Housing Strategy average right now.
In my office, I have a great group of fabulous interns, and we were looking for but could not find any particular measures directly addressing homelessness in Bill C-69. Are there measures in this legislation that we missed or that you see that would meaningfully address homelessness, and how do you reconcile your recommendation for an additional $3.5 billion per year spent on reducing homelessness with the federal government’s proposal to increase spending on Reaching Home by only an additional $1.3 billion over four years as was noted in Budget 2024?
Mr. Giroux: Senator, I don’t think you missed anything in Bill C-69. I haven’t seen any specific measures aimed at addressing homelessness. I just asked Zac if he recalls seeing that, so that makes three of us. Maybe it’s there, because Bill C-69 is 686 pages long, so apologies for that.
Just as a point of clarification, when we say achieving a 50% reduction in chronic homelessness would require $3.5 billion, it’s not a recommendation. It’s just a fact, and that’s based on homelessness counts and numbers from the Government of Canada. It’s their numbers and the enumeration of homelessness and homeless people or people close to homelessness. That’s a long answer to your precise question.
Senator Pate: In terms of what has been allocated, do you have estimates of what you think chronic homelessness may end up escalating to as a result?
Mr. Giroux: No, we don’t. We have numbers. Infrastructure Canada did survey the number of homeless people, chronic homelessness in 2018, and again in the period 2020 to 2022, but I don’t think we have forecasts that they published.
Senator Pate: The government has framed the ban on tax deductions for non-compliant short-term rentals as one that could help make additional housing stock available. Your team estimated that the measure would increase income tax revenues by only $170 million over five years but didn’t address the issue of whether this would help to put houses and apartments back on the market. Are there any findings you can share in this regard that might be useful for us to consider?
Mr. Giroux: In estimating this measure, we had to rely on microdata that is publicly available, and we also looked at similar measures that were implemented in other jurisdictions. You’re right that we didn’t look at the number of units that could potentially be put back on the market. I’ll have to go back and see if in the data we used there is inherently any evidence of a number of units that will be put back on the market or were in jurisdictions that implemented a similar measure.
Senator Pate: While you’re doing that, do you mind also looking at whether certain demographics, such as low-income homeowners or those in high-tourism areas, would be particularly impacted and how the measure might affect low-income homeowners who use short-term rentals to supplement their income?
Mr. Giroux: If that’s part of the data we have, we’ll be happy to provide that.
[Translation]
Senator Dalphond: It is always a pleasure to have you with us, Mr. Giroux. I have a few questions.
In your budget assessment, did you take into account the anticipated recovery of pandemic-related emergency benefits? Witnesses who testified before the committee told us that there were 800,000 files targeted for review, that 500,000 files had been reviewed and that there was $5 billion in potential overpayment claims. If there are still 300,000 files left, I wondered whether that meant that approximately $8 billion could possibly be recovered. That is equivalent to the interest on the debt for a year. The witnesses told us that they couldn’t give us an exact figure, because amendments and price reductions would be negotiated, and people’s debts could be forgiven if they paid a certain amount. We never understood what that meant. There is a potential $8 billion, but what does that mean in theory? Do you take that into account in your revenue estimate?
Mr. Giroux: To the extent that the government sends us their own estimates for the recovery of emergency benefits that were paid out, yes, we take it into account. However, when the government cannot estimate the amount, we do not take it into account. It really depends on the government’s ability to recover the money it is owed. Some of these people or businesses may have gone bankrupt, so it’s hard for us to estimate how much could be recovered if the government doesn’t provide us with the figures.
Senator Dalphond: Has the Canada Revenue Agency not provided you with details on the recovery estimates?
Mr. Giroux: Not to my knowledge, but if it has, I will be happy to correct that.
The Chair: If I may, in the last few hours, we received an answer to your question. I had also asked about businesses, the number of bankruptcies and all that. We received all the exact figures. It’s probably in your inbox.
Senator Dalphond: We might send you a copy, Mr. Giroux, because there might be developments on that front.
Another transparency measure you suggested at the end of your document is setting a fixed date for the budget. We now have fixed dates for elections. It might be significant, but it could be circumvented. Are there any British-style parliamentary models — in the U.K., New Zealand or Australia — where they have fixed-date budgets?
Mr. Giroux: There are administrations — their names and jurisdictions have slipped my mind, but I can certainly get back to you — where the government is compelled to table budgets, perhaps not on a fixed date, but within a fairly limited window. That makes it easier to table the main supply and the Main Estimates. There are other administrations where the budget needs to be tabled at the same time as the budget appropriations, which means that there is a statutory limit for when the budget can be tabled. I think Australia uses a similar model, where the budget and the budget appropriations are tabled at the same time, but I will need to confirm that.
Senator Dalphond: That’s interesting, but it also means the end of the fiscal year is always at the end of March. Therefore, the budget would always have to be before the end of March, even in a difficult period when the government wanted to wait another month or two to see how the economy developed. I imagine there are provisions in these systems that allow for supplementary or further estimates at any time.
Mr. Giroux: Yes, the government can always table an economic and budget statement. The government always does that in the fall anyway, but even if it doesn’t, it can always announce new initiatives outside the budget. The government has a lot of leeway for announcing its fiscal framework, or new revenue or expenditure measures.
Senator Dalphond: In terms of non-announced measures, do you do a follow-up a few years later to see what was not announced or what was kept confidential? For example, last year, the matter of Indigenous claims before the Human Rights Tribunal was settled. There was a lot of discussion, and, at one point, there was a settlement that was not accepted. There were more discussions afterward, and a settlement was reached.
Were you able to determine afterward whether the amount paid was estimated to be in that range? Did the government put forward an amount that was much higher or lower, or no amount at all? I asked the officials that, and they told us that they couldn’t provide the figures for their estimates, or the people they were negotiating with would know their upper limit. However, most companies with claims have an item called “litigation” where they put an approximate amount. Companies can do that, but the government does not seem able to.
Mr. Giroux: The government does that, but it does within a very large funding amount. The non-announced measures are part of that large amount. We are able to reconcile some of the non-announced measures with announcements that are eventually made. That said, there is always an unknown component, since there is that liability or reserve for pending lawsuits or amounts that the government expects to have to pay. We can do a reconciliation when items end up being reported, but the reconciliation is never perfect, given the wish — or need, I should say — to keep the amounts confidential in some cases. This is something that is always changing, so it’s very hard to put a finger on it. The government is subject to thousands of claims every year. It is a virtually impossible task for a small office like ours.
Senator Dalphond: Thank you.
[English]
Senator MacAdam: Building on this transparency theme, there are several references in your Budget 2024 report regarding transparency of government spending plans and progress, including there being no central tracking document publicly available and difficulty tracking previously announced spending that has been reallocated. Your recommendation was that Parliament consider adopting a new legislative or administrative framework to improve transparency for parliamentarians and the public, including the possibility of the fixed budget date earlier in the year, which was talked about. I’m wondering if you can elaborate on that. In your opinion, what would be a good solution to improve transparency? Would the tracking be difficult to implement, and why is there such a lack of transparency?
Mr. Giroux: On the tracking of government expenditures and the tracking of expenditure reduction or reallocation, it wouldn’t be very difficult because it’s something that I have done in my career when I was in the public service. It’s an Excel spreadsheet — sometimes a glorified Excel spreadsheet — which requires constant updating, but it is doable on an Excel spreadsheet. It’s not rocket science, and humble people like me did it. I’m sure smarter people that have succeeded me in the public service can do it more easily.
The possibility of doing it exists, but whether there is a desire to do that is probably where there is a lack of willingness. If you can track that we have reduced spending in this area to reallocate it there, then it reveals that some areas of spending are not a priority for the government of the day, and that can be painful for some people to hear. It can cause some communications issues, and it obviously requires some explanation. It can be uncomfortable to be fully open and transparent when announcing that you have reduced expenditures in some areas to reallocate to others.
Senator MacAdam: I know it is done, because in the audited consolidated financial statements, there is a comparison of expenditures with the budget, so the Office of the Auditor General of Canada definitely does this every year. They have access to a lot more information than parliamentarians and the public. I fully agree that it can be done. It’s just overly cumbersome for the average Canadian or the average parliamentarian.
Public Sector Accounting Standards focus on net debt, as in the statement of financial position of government in the government’s consolidated financial statements in the Public Accounts of Canada. When we talk about these fiscal anchors, we talk about debt to GDP. Does the government have a fiscal anchor of net debt to GDP, and if not, why not?
Mr. Giroux: I think they have a fiscal anchor of their net debt to GDP, and their fiscal anchor is a reduction over time of the debt-to-GDP ratio. They are not targeting the absolute level of debt but rather the debt compared to the size of the economy. Reducing the debt-to-GDP ratio can be accomplished by reducing the absolute level of debt or relying on an expanding and increasing economy. That is what should be happening now and in the years to come. With a growing economy, even if we have an increasing debt, if the debt increases at a slower pace than the economy, then the debt to GDP goes down.
The other fiscal anchor that the government has is a deficit relative to the size of the economy of 1% or less in 2026-27 and after that. Based on the budget, it is expected that the deficit will reach 0.9% of GDP, which is very close to the fiscal anchor of not exceeding 1%. It leaves only 0.1% of room for manoeuvring in public finances two years from now.
Senator MacAdam: But you are talking about net debt to GDP rather than total debt.
Mr. Giroux: Yes.
Senator MacAdam: After you take into account pension fund assets and other cash and cash equivalents, that would reduce the total debt?
Mr. Giroux: Yes.
Senator MacAdam: And factor it to the net debt.
Mr. Giroux: The government’s fiscal anchor is the government’s net debt not counting for the assets of the CPP or QPP. It is not net debt — not as per the IMF or the OECD. It is net debt on Government of Canada on a consolidated basis, but not including pension assets.
Senator MacAdam: Okay. Thank you.
Senator Kingston: Thank you both for being here and thank you for what you have put in our mailbox this afternoon — your federal spending to address homelessness. That’s what I will be asking you about.
You have said that chronic homelessness has increased by 38% relative to 2018 and the number of individuals living in unsheltered locations has also increased by 88%. In another place in your document, you say that there has been a 17% increase in people in shelters, but that leaves a deficit of about another 17% or 18% that are sleeping rough. Those are the ones that I am particularly interested in because I have been close to the ground, if you will, with people in that situation for the last few years.
My questions are around what Senator Pate had talked about in terms of the amount of money needed, but also how it is being spent. There are a few things I would like your opinion on.
There has been a change in where the Reaching Home funds have been located from Employment and Social Development Canada to Infrastructure Canada. As a person who was close to the ground, as I said, it seemed like at that point in time there was a bit of a shift in priorities, flexibility or whatever you would want to call it in how those funds were spent. I say that because Employment and Social Development Canada would tend to have maybe more of a lens on the support needed for the people I have just spoken about, those who are chronically homeless, sleeping rough and most likely have a lot of challenges around mental health and addiction.
You speak in your document quite a bit about going back to Chez Soi, which was the part of that particular initiative that was done in my province of New Brunswick, and how it worked. It did work well, and it demonstrated that, given the proper supports, people could be housed and maintain their housing when they hadn’t been before.
Given that Infrastructure Canada is now involved, and given — in my opinion, at least, and I am hoping to ask for yours — the need for some integration between the money spent on mental health and addictions — from another department, I realize — the Reaching Home funds seem to touch many different departments, including Indigenous Services. The government speaks about best practices being used for the integration of support services for housing, along with clinical services to help people address their challenges around mental health and addictions and the need for outreach, because lots of people who are sleeping rough aren’t going to come to you. How does this money — it is an increase, and that is great — get to where it needs to go to help the people that are on that tip of homelessness — the chronically homeless and challenged issue?
Mr. Giroux: That’s a very interesting question for many reasons. When we started this work, I was surprised to find that the federal government is contributing a minority share of all the funding that gets spent in this country to address homelessness — 7%, 15%. The share has increased, but it is still a fairly small share, which was a surprise to me, at least.
How it reaches those who need it, I think, is with partnerships with provinces, territories and community organizations that are delivering that service. I am not familiar enough with the intricacies and how the programs are delivered.
One thing you mentioned is the shift from ESDC to Infrastructure Canada, and that can have implications. As you move a program with eminently social goals from a social department that is used to dealing with social issues such as homelessness, disabilities and so on to a department that is focused on infrastructure and on economic impacts, that can have a negative impact on the delivery of the program if the culture of the new home department does not perfectly adapt to that new reality. I’m not saying it is the case here, but there is always a risk when you move a program from one institution to another that you lose that sensitivity that you would expect to follow.
Senator Kingston: When the health accords happen, the provinces and the federal government decide on criteria about how the money is to be spent or what the focuses are. Here it seems that, yes, the federal government gives some money, but not as much in most cases as the provincial government or the municipalities in the case of some places like Toronto. How do we move to that kind of a negotiation where there are people at the table, not just goodwill or topping up or that kind of thing? Has that been discussed? Is that part of the accountability in how the money is spent?
Mr. Giroux: That is not something that we have looked at. We looked at the number of homeless people or those at risk of being homeless being helped by this program and the number of chronically homeless people. We haven’t looked at the way forward. That is not something that we have asked the department for details about or the minister, but I am hoping that the minister would be in a good position to explain how they are negotiating with provinces and service providers to ensure the best outcomes possible. I don’t have that detail.
Senator Kingston: Thank you.
[Translation]
The Chair: I have two quick questions. In response to a question from Senator Loffreda, you mentioned that, for calculating the debt, pension fund obligations were not taken into account in Canada. For example, in the public service, it would be the Public Service Pension Plan. The part related to all future commitments is covered by the plan. Am I to understand that it’s the same for the Canada Pension Plan?
If we compare Canada with other countries that don’t have these obligations, that have not put them in an external pension fund, it makes it hard to compare the net debt-to-GDP ratio. Have I misunderstood?
Mr. Giroux: As chair of the committee, you can’t have misunderstood. I mustn’t have explained myself clearly. What I meant is that the obligations related to the Canada Pension Plan and the Quebec pension plan for which funds have been set aside are pensions provided to all citizens based on contributions, whereas many other countries still have a pay-as-you-go system.
As for obligations under the employee pension plans, including public servants and parliamentarians, the debt and the obligations are recognized in the public accounts. Therefore, there is a debt for service prior to the year 2000, and there are corresponding assets for service since 2000. That is taken into account in the federal debt.
The Chair: Thank you. I wanted to be sure I understood.
My second question for you concerns the fact that the bill extends the Prohibition on the Purchase of Residential Property by Non-Canadians Act until 2027. Have you re-examined this legislated compliance and its effect on the housing crisis? In other words, is it not a bad idea masquerading as a good one to ban non-residents from buying property? We have 500,000 new immigrants per year. If they cannot buy a home, they are forced to rent an apartment, but there are no apartments available, which creates a housing crisis. There is also less construction, because the builder and developer will not have these foreign buyers who would purchase five or six condos. Therefore, they don’t have the numbers to warrant undertaking a project to build 150 condos. The government is preventing 10 people from buying, but also preventing 140 condos from being built, so the measure has adverse effects. Have you studied the impact on housing costs and the current crisis?
Mr. Giroux: We examined the measure when it was first announced, but we have not assessed its impact or costs. After reading the measure and discussing it internally, we realized that there were a lot of exemptions and exceptions. Therefore, we concluded that the measure would be restrictive for some non-residents, but it was still possible for non-residents to buy property. As a result, we concluded that the measure would not really have teeth. However, there may be cases such as the one you mentioned, where there would be negative impacts on the housing market. To summarize, we did not consider the matter carefully.
The Chair: I will put my name down for the second round.
Senator Forest: I want to follow up on Senator Kingston’s comment, which was a very important one.
It would make no sense at all to transfer a social initiative to Infrastructure Canada. For every social problem we have, there are stakeholders we don’t talk about much, yet they shoulder the lion’s share of the burden and deal with it every day: municipalities. With issues like these, we don’t really see the connection because the provinces and territories take on this responsibility for the most part, but it’s visible at the municipal level. There’s no real connection, nothing currently set up. I really don’t understand why anyone would want to transfer a social measure to Infrastructure Canada.
Mr. Giroux: Not to be a devil’s advocate or try to explain, but I believe programs designed to tackle homelessness have a housing component. Because housing is now an Infrastructure Canada responsibility, the government probably thought it made sense because homelessness is closely tied to lack of housing, of course. There’s probably a connection, and they tried to transfer programs that support access to housing, whether those are programs for people who want to become homeowners or for people who are on the street. They tried to put those things together.
By doing so, they may have kind of lost touch with very different clientele groups. From a couple purchasing a first home to a person on the street with nowhere to call home. It’s entirely possible that that culture was transferred within the department.
I’ve often said that, even if the org charts aren’t the greatest, having the right people can produce very good results.
Senator Forest: In many cases, social housing construction initiatives are carried out by municipalities or non-profits, and the first point of contact is the municipality. Then the municipalities take it from there. We’ll see how that plays out, but the homelessness problem involves housing, of course, as well as lots of other elements and factors that have to be taken into account. It’s a bit simplistic to reduce the problem to one of housing alone.
What worries me is that, when we look at the public service, which we touched on earlier, it has grown by over 100,000 public servants under this government. Many programs have serious problems, programs such as ArriveCAN, passports, Immigration, Refugees and Citizenship Canada, and Phoenix. They use more and more consultants and have a hard time delivering programs. Does this seem to be getting better or worse?
I have a follow-up question. The Phoenix pay system is about to be mothballed. Once bitten, twice shy. Has the replacement pay system been tested? I didn’t see anything in the budget about set-up costs for the new program. I hope we’re not about to jump into something as disastrous as Phoenix or ArriveCAN.
Mr. Giroux: You commented about the size of the public service, and that is definitely a topic that interests us, because we look at that every time a budget is introduced, whenever the Main Estimates are introduced, when departmental plans are tabled. Earlier, I alluded to the clear tendency we’ve observed, which is that, every time we see departmental plans in aggregate, they all project a smaller workforce for the following year. Then, by the following year, the workforce has grown, but they keep projecting it will shrink the year after that. Will there be an end to that trend? Will there be an inflection point? We won’t know until we’re past it.
Senator Forest: Maybe it’ll be next year.
Mr. Giroux: That’s all I can say about that, because what we’re seeing in the budget actually suggests the public service is likely to grow.
As to your question about Phoenix, I know a lot of money was invested in pay systems, so the cost of the new system is probably included in the pay modernization measures that have already been announced. I don’t have any details, but, given our experience with Phoenix, I do think the new system will be better because the bar was set higher from the start. Things can only get better. I’ll stop there.
Senator Forest: Let’s hope Phoenix doesn’t rise from its ashes.
[English]
Senator Loffreda: Canada’s $1.4 trillion in debt will be refinanced at current high interest rates. I am sure you took a deep dive, because I’m referring to your government expenditure plan report dated March 7, 2024, where you outline the expenses: government operating and capital costs account, $119.7 billion, 26.6% of expenses; elderly benefits, which are growing at $81.1 billion; the Canada Health Transfer was $52.1 billion; and the interest on public debt at the time of your report is $46.5 billion, which is close to 10.4%. Maybe I would like to see if that 10.4% historically is where it is at with expenses.
More importantly, my question is this: Why weren’t long-term bonds issued when the interest rates were much lower? Close to one third of our debt at this point is going to be renewed: $414 billion out of $1.4 trillion. Why was so much debt via short-term bonds during the pandemic? The interest rate was 0.25%.
A lot of friends, if I can say now — and this is all I do, and I try to be a good senator — but a lot of friends would call me and say, “What do I do? Long-term fixed or short-term?” I would say, “Well, you are at 0%, almost. The downside is very low. The upside seems to be very high at this point. Book long-term.” Right? They are all calling me back and saying, “Thank you.”
Why didn’t the government do the same? It is 5% now. The appetite for long-term bonds when it is 0.25% on the market is very low, but is it normal to keep a third? At the end of the day, there are a lot of creative ways that that could have been worked around. Why wasn’t more thinking put into that? You are independent, you said, and I am independent, and we’re trying to save money for Canadians. I think this year the interest will be $54 billion — not I think, but it will be, which you are forecasting. By the end of the decade, it will be $64.3 billion. Why wasn’t it done earlier at very low interest rates?
Mr. Giroux: It is an interesting question, and it is one that senior officials that I worked for asked many years ago when the same question came up. At that time, I remember getting a very good briefing by Department of Finance Canada officials.
The issue when this arises is often an issue of market liquidity. I think the government issued quite a bit of long-term bonds over the last several years when interest rates were low, but there is only so much of these high-quality bonds that the market has an appetite to buy when interest rates are low because —
Senator Loffreda: We are AAA.
Mr. Giroux: Yes, but still, the market for 10-year or 30-year Government of Canada bonds at 0.5% or 0.75% is not unlimited. Buyers also know that locking in your rate for 30 years at 1% is a high-risk proposition. There are buyers, but there is not an infinite appetite for these bonds. I am not saying that what the government did is, to the penny, absolutely the right amount, but that’s one caveat that is important to keep in mind. There is limited appetite for long-term bonds of any issuer. At the time, in 2020-21 and 2021-22, the government was borrowing massively.
What I remember of the other part of that thorough explanation by Department of Finance officials is that over a long period of time, borrowing short-term is very often a strategy with advantages, because you will end up, on average, paying slightly lower interest rates. Yes, there will be bumps —
Senator Loffreda: There is a premium for borrowing long, obviously.
Mr. Giroux: Yes, that’s it.
When it was explained with numbers and historical data, it made a lot of sense to have an appropriate mix of long-term and short-term rather than going all in on long-term, when also considering the absorption capacity of the market.
Senator Loffreda: If I look at the average maturity, it is 6.9 years, in line with other AAA countries. That is what I read, right? That seems low, 6.9 years. I don’t always have to say it, but the experience I had, even with regular entrepreneurs, is that’s not very long-term, 6.9 years. I mean, equipment loans, at times, would extend beyond that. Why wouldn’t you do it for billions of dollars to increase that average? Why 6.9 years?
Is that historically what’s been done? Is that what other countries do also? The premium couldn’t have been so high, short-term to long-term, when the interest rate was so low. If we look now at the premium, what we’re paying now is high.
Mr. Giroux: Yes. Is the 6.9 years the optimal average maturity? I don’t know. At that point, it sounds like it is not, because interest rates have risen over the last few years, and they are comparatively high. Time will tell.
[Translation]
The Chair: That was a long question, but it’s fine.
Senator Gignac: Mr. Giroux, I really like your title, Budget 2024: Issues for Parliamentarians. Those watching us might like to know that the budget implementation bill I have here is over 600 pages long. We’re doing a pre-study of Bill C-59, which hasn’t been passed in the House of Commons yet, and it’s 550 pages long. So, in your experience with public finances, have you seen this kind of congestion before? We’re still trying to deal with last fall’s budget implementation bill. We studied it this spring, but it still hasn’t been passed in the other place. It has to be passed in the next few weeks. We know that senators have very little leeway when it comes to amending a budget bill. The Minister of Finance will be coming to talk to us about both bills, Bill C-59 and Bill C-69, in the coming weeks.
Has this ever happened before with everything happening at the same time? You’ve been observing public finances for some 15 or 20 years.
Mr. Giroux: I’m sorry to tell you this, senator, but you’re wrong. I’ve been observing this for more than 15 or 20 years. I’m sure it has happened before, but it definitely doesn’t happen often. We usually see one or two implementation bills for a given budget, and they’re consecutive, not concurrent. The fact that we have two implementation bills for two different budgets is unusual. I wouldn’t be surprised if it has happened in recent history, because various scenarios have occurred over the years, such as elections or Parliament being prorogued for various reasons.
Senator Gignac: I asked because, for one thing, there are parts of these bills that have no financial implications but that will affect the markets and financial institutions. The banking and commerce committee analyzed whole sections that will have an impact. The open banking system is in there. It’s a lot to cover in a short time. We still don’t have any details about the capital gains tax. That’s $19 billion over five years and $6 billion in the coming year. We don’t know when the details will be available, but we know it comes into force on June 25.
The capital gains inclusion rate doesn’t change often. It has happened only once since 1972, under the Mulroney government, when finance minister Michael Wilson announced it. At the time, he announced it six months ahead of time in a white paper. This time it wasn’t even two months in advance. What are your thoughts on that?
Mr. Giroux: As I’ve already said with regard to the two-month timeline, I was actually surprised it was so long. I’m not terribly familiar with the history of capital gains and the inclusion rate. I find it surprising that they would announce a higher inclusion rate two months ahead of time. From an equity, justice and revenue-boosting perspective, that enables people to arrange their affairs to avoid the higher inclusion rate. At that point, I wasn’t aware of the precedent where a change to the capital gains inclusion rate was announced six months in advance.
Senator Gignac: Every time a budget implementation bill is introduced, you publish a report or a study. Are you going to do that for this one, too? If we end up having to adopt this measure before June 25, you’ll be hard-pressed to enlighten us in time. What I noticed is that one third of the projected revenue for the next five years, $19.5 billion, will come in the first year of this budget. Folks are speculating about what people will do. They think some will liquidate their portfolio so they don’t have to pay more tax. However, in the housing market, good luck selling a six-unit building within 45 days. Are you planning to release a study once the bill is introduced?
Mr. Giroux: We asked the Canada Revenue Agency for the necessary information so that we could independently estimate the revenue generated by the increase in the capital gains inclusion rate.
This will depend on how quickly we obtain the required data and its accuracy and thoroughness. We plan to give you an analysis, or at least a cost estimate of this measure.
[English]
Senator Smith: Are you having fun, Mr. Giroux?
Mr. Giroux: I am.
Senator Smith: Okay, good.
In your report on accelerated capital cost allowance for new purpose-built rental housing, you estimate that 241,000 new rental units will be built over a period of five years, with a total cost of just under $1.9 billion. Can you talk a bit about your estimation? How will these rental units be distributed across the country? Of course, we’ve had a couple of other senators talk about rental housing and underprivileged people. In general, can you talk about how these rental units will be distributed across the country? Is this an effective policy of getting housing built? What are some of the risks to the program? Higher interest rates? I’m wondering what you think.
Mr. Giroux: Senator, I don’t want to be selfish, so I’ll let Zac share in the fun I’m having.
Zac Vrhovsek, Analyst, Office of the Parliamentary Budget Officer: Your first question is about how it was estimated at the regional level. It was broken down by province for the larger provinces. For the smaller provinces where there isn’t as much data available — for example, Manitoba and Saskatchewan were considered the Prairies, and also the Atlantic provinces were merged together. I can tell you that most of the expected construction is going to be in the larger provinces of British Columbia, Ontario and Quebec, which already have strong purpose-built rental markets. However, we are seeing a large uptick in purpose-built rental construction in all six major regions across Canada.
Senator Smith: There are some significant programs and needs in the North. Having visited there last year with one of the committees, it was very apparent that something needs to be done. Is that not included in the major markets? What do we do with some of the less-than-privileged markets?
Mr. Vrhovsek: Unfortunately, there isn’t enough data available for some of the smaller centres in order to come up with a reasonably certain estimate on how many will be constructed. Unfortunately, it does exclude the territories. The territories are a relatively small market, in general. As a result, it likely won’t have a big impact on the total number that will be constructed. Unfortunately, it doesn’t give us a good idea of how many will be constructed in the territories.
Senator Smith: If we go back to the big markets, how will you roll it out, and what is the timing for acquisition?
Mr. Vrhovsek: First of all, in order to be eligible, the construction has to begin on or after budget day and has to end before 2036. In order to come up with the estimate, I applied a construction schedule using data that has been modified from the U.S. on how long it takes to build purpose-built rental units. You see that the program scales up relatively slowly. It starts at only $2 million in the first fiscal year and accelerates rapidly. That is partially because there is an acceleration in the number of purpose-built rentals that will be constructed in Canada and also simply the fact that the first units that will be eligible are ones that had to start construction more recently or after budget day.
Senator Smith: I sort of see a red light when I hear 2036. Does that mean there’s an actual plan, or does that mean there’s a hopeful plan that may or may not get executed because of unknown factors? What are the risk factors for this to actually happen?
Mr. Vrhovsek: This is a market-based mechanism. It’s not the government deciding that they’re going to build a certain number of houses. It’s a measure that makes it less expensive for investors to invest in their purpose-built rentals. Market conditions could heavily impact the projected number of purpose-built rentals. If market conditions change, such as interest rates going down, it could be more profitable to build purpose-built rentals, and that could increase the number that are built. Alternatively, if rents come down at a national level, there might be less of an incentive to build purpose-built rentals.
Senator Smith: Would this be a real partnership that you would have to implement through the provinces, towns and cities across the country?
Mr. Vrhovsek: It would largely rely on municipalities allowing purpose-built rentals to be built. There is an interaction with things like the Housing Accelerator Fund, which is incentivizing municipalities to allow larger units to be built, especially around transit. However, it isn’t something that requires direct interaction with the provinces or municipalities, other than having them allow the investors or builders to build these purpose-built rentals.
Senator Smith: If you had to guess at the percentage of success potentially occurring, what would you think in terms of estimating the likelihood of successful completion?
Mr. Vrhovsek: It’s very likely to have some effect. Over the past five years, there’s been a rapid increase in the number of purpose-built rentals built, and there’s no reason to predict that it would change. A recent CMHC study showed that it’s quite profitable to invest in purpose-built rentals. It’s highly likely that investors will continue to do so as long as it remains profitable. We’re likely to see a continued uptick in purpose-built rental construction in Canada.
Senator Ross: First, I have to say, Mr. Vrhovsek, that you seem far less nervous your first time speaking with the PBO than I was the first time I asked questions of the PBO. Good for you.
I’m concerned about the new treatment of the capital gains, as proposed in the budget, rising to 67% capital gains over $250,000. I’m glad to hear that you’re working on that and that you’ll be doing a report. I think there’s a lot of contradiction in the messaging around that. The messaging I read is that it’s only going to impact the 0.13% wealthiest, while, at the same time, providing $1.7 billion in tax breaks for entrepreneurs.
Many entrepreneurs are corporations and trusts, and they will be impacted by this. It will cause some of the highest marginal tax rates in the world, according to many of the reports I’ve been reading. Small businesses are the engine of the economy, and they’re not generally considered to be the wealthiest people in the country. I had a list provided to me from a lawyer that said virtually every electrical contractor, plumbing contractor, independent insurance agent, real estate agent, doctor, farmer, engineer — and anyone else who faces potential liability in the operation of their business — has a holding company based on guidance they’ve received to separate themselves in the interest of liability protection.
I’m hearing from many entrepreneurs about the impact it’s going to have on them. I’m interested in your perspective on that impact and on the messaging that’s going out. What would you think of ideas like maybe having the amount be annual instead of lifetime? What would you think about having a valuation day? I read that something like that happened in 1971. They had a valuation day, and then it took effect after that, so capital gains up to a certain point were okay.
Mr. Giroux: That’s something that also happened in 1994 when the inclusion rate or the taxation of capital gains was changed.
It’s difficult to assess what the net overall impact will be without having our own numbers and having received the appropriate, relevant data from CRA. As I explained before, the capital gains inclusion rate is going up, so it will have a detrimental impact on big corporations that realize capital gains. At the same time, there is a lifetime capital gains exemption for small businesses that goes up. They have $1.25 million of their capital gains tax-free, rising from the current level of slightly lower than $1 million. There will be an additional $2 million of capital gains tax-free for entrepreneurs phased in over time, and the first $250,000 of capital gains for individuals will still be included in income at half of capital gains. There are many moving targets. It’s not clear what the impact will be overall. It’s clear that for big corporations or for those realizing big capital gains, they’ll be paying more, but for the vast majority, in terms of numbers, they will see little to no impact. But those who see an impact will see a big impact.
I can’t say more than that without having seen our own numbers as opposed to the 0.13% of taxpayers that will be affected and whether these 0.13% are the same year after year or if it is different groups that pop up because they have one-time capital gains and they get hit by that higher rate, but it’s once in a lifetime. All that to say it’s a bit too early for me to say more than that.
Senator Ross: A lot of small business owners are basically feeling that they’re going to lose a lot of their retirement savings through this, and they’re very concerned. Maybe the unknown is part of that as well. It just seems punitive for a lot of small business owners.
Mr. Giroux: There will probably be an increase in the taxes they have to pay overall, even if you factor in the lifetime capital gains exemption for small business owners —
Senator Ross: There is a big gap between that $250,000. That is a large space, and that would be where many of them will fall.
Mr. Giroux: I’m thinking about the lifetime capital of $1.25 million. Those who have profitable businesses and sell them will be faced with a higher capital gains inclusion rate than they are now even after taking into account the exemption.
Senator Ross: Just to add on to what Senator Gignac said about the shortness of time to make a transaction between now and June 25, it’s almost impossible. Thank you.
Senator Pate: When it comes to the underused housing tax, I’m curious as to what your perspective is on the minister’s claims that loosening restrictions and penalties is aimed at promoting compliance with the 1% tax and that the measures promoting compliance as of now are self-reporting and that submitting funds on the government and CRA websites is going to be effective. Is your view that this is the measure that would be most effective for promoting compliance with the underused housing tax, and are there more effective ways?
I’m curious if you’re comfortable speaking to what appears to be a contradictory function of the 2024 budget implementation as it seeks to both draw back on restrictions for those with significant resources who are dominating the housing market but claims to also create affordable housing for Canadians who cannot afford a home. It’s not clear to me that those provisions will result in that, but you’re much smarter than me, so perhaps you could elucidate.
Mr. Giroux: Don’t assume that, senator.
On loosening restrictions aimed at increasing compliance, it’s something that typically happens when the compliance measures are initially way too restrictive or too burdensome or when the cost of administering such a provision is too high, and I think this is the case for the underused housing tax. When I first saw the provisions and the compliance measures, I personally didn’t think they were too burdensome, but maybe their administration is more difficult than the agency had initially thought and that is why they are loosening them. I’ve not had to file under that provision, obviously, so I don’t know firsthand whether they were too restrictive. Based on what I read and based on our assessment, it didn’t seem to be an undue hardship to impose these restrictions for an underused housing tax. It’s surprising to me that they would be loosening these compliance measures. It’s not something that you do to increase compliance; it’s something that you do to make it easier to administer or easier to comply, but to increase compliance — I’m not sure if that’s the language I would have used.
On the other aspect of your question, it’s something that I’m unfortunately not able to comment on. I need to do a bit more digging.
Senator Pate: Okay. Thank you very much.
[Translation]
Senator Dalphond: I would like to follow up on the questions asked by several colleagues about the early announcements of changes to tax rules starting in June. Senator Gignac referred to Minister Wilson’s announcement of certain measures in 1987. The first part came into effect on January 1, 1988, and the second part in 1990.
Three or four years ago, a private member’s bill changed the capital gains exemption for intergenerational transfers. Within days of the legislation coming into force, the government announced that it would change the rules. There was considerable debate, particularly in the Senate. People thought that the rules were rather generous or open to abuse. The government immediately announced that it would do something, but it took two years. This happened recently, in last year’s budget.
You said that it was difficult to predict behaviour and that we were playing with a crystal ball. Can we look at the history of these two measures to determine where any behavioural effects occurred, or whether ultimately few people benefited from the intergenerational transfer and the impact remained negligible?
Mr. Giroux: Certainly, we could use some data to support or refute the argument that people change their behaviour when certain measures are announced. We haven’t considered this yet.
However, we considered other aspects of the tax system to gauge any behavioural effect, such as the fact that small businesses face a lower tax rate than large companies. This indicates that more companies fall just below the limit for paying the large company tax rate than a normal distribution would suggest. This is called a kink. We can see that the distribution is broken. This shows that people are clustered just below their expected threshold. This suggests a change in behaviour in response to the messages sent by the tax system. This example comes closest to our areas of concern. That said, we haven’t yet considered the historical changes of 1988 and 1990.
Senator Dalphond: Intergenerational changes target a specific category, such as people with insurance offices, brokers, lawyers and accountants in small offices. They could do flips that others couldn’t do. When they received this permission, did they take advantage of it, or did their behaviour remain the same? We have here the capital gain for private property, such as the six-unit building discussed earlier. These individuals have assets of a certain value, but this value is small in relation to the national wealth. This was also the case for fishers, farmers and small-level professionals.
The Chair: Thank you for the question.
[English]
Senator MacAdam: In your April 2024 budget report, you noted that from 2024-25 to 2028-29, your adjusted budgetary deficit is on average $4.5 billion higher due to lower personal and corporate income tax revenues. In your opinion, what are the main drivers behind these lower tax revenues, and what economic stimulus is required to put Canada on a stronger growth path?
Mr. Giroux: In good part, the lower revenues on our part were due to positive surprises when the real numbers came in at the end of the fiscal year. The government got more revenues than we had anticipated. It’s something that’s happened on a couple of occasions in the last several years on the corporate side. We say in the report that our own deficit is higher because we did not anticipate the strong corporate and personal income tax revenues. On the corporate side, it’s something that has been recurring since even before the pandemic at the federal and provincial level. For the personal income tax side, in good part, it’s due to higher-than-expected inflation that has inflated or increased revenues and has increased federal personal income tax revenues to a larger extent than we anticipated.
Senator MacAdam: Thank you.
Senator Kingston: I’m going to ask you about Pharmacare. When I look at the first phase, there seems to be a bevy of contraceptive medications, but when it comes to controlling diabetes, although it says that there will be other medications often used in combination by patients with type 2 diabetes, the only ones that are listed in the chart that I see are insulin and metformin. If you’ve got type 2 diabetes, for instance, you might be taking a couple of other medications just for your blood sugar, but beyond that, they want you to control your hypertension, cholesterol, et cetera. I know you probably did some of the costing on this. Were those medications taken into account as well in terms of this first phase?
Mr. Giroux: To the best of my knowledge, no. Included were contraceptives and medication aimed at diabetes exclusively, and none of the associated or closely related, or that are also co-prevalent diseases, such as high blood pressure, cholesterol or cardiac issues that are often associated with diabetes. It’s strictly diabetes medication. As we understand, that is the ambit of the initial phase. It is strictly limited to diabetes and contraceptives.
Senator Kingston: Do you have a crystal ball about what might come next?
Mr. Giroux: I don’t. If I had a crystal ball, I would be much richer than I am.
Senator Kingston: Thank you.
[Translation]
The Chair: My question concerns your budget and the budget of other officers of Parliament. We’re beginning to hear officers of Parliament complaining about their budgets, and sometimes even about budget cuts, as the size of the government increases. More programs and agencies make your job more demanding. First, do you have a sufficient budget for your work? Second, have you noticed that the budget for the offices of officers of Parliament, particularly the officers mandated to hold the government to account — such as the Commissioner of the Environment, the Information Commissioner or the Integrity Commissioner — isn’t increasing at the same pace as government spending?
Mr. Giroux: To answer the first part of your question about my office budget, it seems sufficient for now. I had a small increase of 2% this year and last year, which seems quite sufficient to fulfill my mandate. Obviously, if I had infinite resources, I would have many more reports to prepare. However, I believe that my current resources enable me to deliver the goods to properly fulfill my mandate. Unfortunately, I must turn down certain requests that sometimes fall outside my mandate, but not always. My budget seems sufficient for now.
My colleagues regularly express concern about the budget of other officers of Parliament. I know that some of them don’t seem to have a sufficient budget. Other officers, like me, appear to have enough money in their budget to meet their needs. This varies greatly from organization to organization. I can’t comment on or describe the situation of all the other officers of Parliament. My situation is relatively good. For my fellow officers of Parliament, the situation varies from good to considerably worse.
The Chair: Do you have a list of the officers whose situation is much worse and who may not be able to fulfill their mandate properly according to the goals that we want them to achieve?
Mr. Giroux: I think that the Information Commissioner, Ms. Maynard, made her situation quite clear when she said that her needs were far greater than the resources at her disposal.
In terms of the other officers of Parliament, I haven’t heard of any major concerns. However, I say this with some reservation. I obviously haven’t looked into each of their budgets individually. I’m basing my opinion on what I’ve seen in the media and on the discussions held a number of months ago.
The Chair: Your mandate ends next year. Presumably, an election will likely take place next year. Part of your mandate involves assessing election promises. This may coincide with the election campaign and the end of your mandate. Have you started thinking about this issue, or about your ability to fulfill your mandate, given that the end of your mandate will likely coincide with the start of an election campaign?
Mr. Giroux: Yes. I’m obviously quite concerned about this. Given the fixed election date, the election would be held in late October 2025. My office is mandated to assess the costs of election measures at the request of the parties 120 days in advance. This period begins 120 days or four months before the election. The period for assessing the cost of the parties’ election promises would start at the end of June. My mandate ends at the start of September 2025. My mandate will end about halfway through the election campaign. After my departure, if the government doesn’t renew my mandate, my successor must take over.
The Chair: Is there a potential issue surrounding the ability to deliver the service properly, given that the end of the mandate coincides with the start of the election campaign?
Mr. Giroux: If I’m not there, the team could still provide a good quality of service. The issue instead lies in leadership continuity, should the government decide to replace me with someone else at that time.
Senator Forest: Is your mandate renewable?
Mr. Giroux: Renewable up to a maximum of seven additional years.
The Chair: That’s an issue.
[English]
Senator Loffreda: My question is on the budget implementation act, which you know I’m sponsoring. I’m glad to sponsor it. We’ve asked specific measures often this evening, but it’s late at night and I’d like to end with a general question. All experts have an opinion on it, either favourable or unfavourable, and I always say judgment is more important than opinion. I’m sure you’ve taken a deep dive, and judgment is based on research, facts and knowledge. I would like to have your judgment on this particular budget. Which measure concerns you the most, if any? Which measures do you welcome the most, if any? Do you feel it will complement our economy well?
Mr. Giroux: That is probably an unfair question, but knowing you, I know there is no malice in that question, senator. I won’t qualify the budget overall. Many people have opinions.
There are measures that I think are good when we consider one of the challenges of the Canadian economy is the low level of productivity. I think the investments in artificial intelligence are a welcome measure in the budget from a product productivity standpoint. That is one measure. Other measures are aimed at enhancing research and productivity overall.
I’m a bit more worried about other measures, for example, the details when it comes to expenditure reductions or reallocations. There is something that made me scratch my head, namely, the allocation of $1 billion to Public Services and Procurement Canada to reduce the number of square metres of office space. Maybe it’s something I don’t understand, but you give $1 billion to an agency so that it can sell real estate. It’s something on which I probably have to dig deeper.
Senator Loffreda: Overall, you feel it will complement our economy well? You said you didn’t want to place an overall opinion on it, but all the experts seem to have one.
Mr. Giroux: It’s late at night, so I’ll end it there.
[Translation]
The Chair: On that note, I want to thank Mr. Giroux and Mr. Vrhovsek for their testimony. I’m not sure whether you committed to sending us additional notes. If so, please send them to the clerk by the end of the day on Wednesday, June 5, 2024.
I would like to remind the senators that our next meeting will take place on May 28, at 9 a.m., to continue our study of Bill C-69.
Thank you. I want to thank the support team, the interpreters and the whole team that makes our work easier.
See you next time.
(The committee adjourned.)