THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
EVIDENCE
OTTAWA, Wednesday, October 1, 2025.
The Standing Senate Committee on National Finance met with videoconference this day at 6:50 p.m. [ET] to study and report on matters relating to federal estimates generally and other financial matters; and in camera for consideration of a draft agenda (future business).
Senator Claude Carignan (Chair) in the chair.
[Translation]
The Chair: To support the smooth operation of committee proceedings, the following guidelines must be observed by all participants to help prevent audio feedback. I ask that you consult the cards on the committee tables to familiarize yourselves with the guidelines for preventing feedback incidents.
Keep earpieces away from all microphones at all times. Microphones must not be touched. Activation and deactivation will be managed by the console operator. Avoid handling your earpieces while the microphone is active. Earpieces should either remain on the ear or be placed on the designated sticker at each seat. Thank you all for your cooperation.
I wish to welcome all senators as well as the viewers across the country who are watching us on sencanada.ca. My name is Claude Carignan. I am from Quebec and I am the chair of the Senate Committee on National Finance.
Now, I would like to ask my colleagues to introduce themselves.
Senator Forest: Good evening. Éric Forest from the Gulf division.
Senator Gignac: Good evening. Clément Gignac from the Kennebec division in Quebec.
Senator Dalphond: Good evening. Pierre Dalphond from the De Lorimier division in Quebec.
Senator Oudar: Good evening. I am Manuelle Oudar. I am sitting in for Senator Jane MacAdam today.
[English]
Senator Loffreda: Welcome. I’m Senator Tony Loffreda from Montreal, Quebec.
Senator Cardozo: Andrew Cardozo from Ontario.
[Translation]
Senator Miville-Dechêne: Julie Miville-Dechêne from Quebec.
[English]
Senator Kingston: Joan Kingston from New Brunswick.
Senator Ross: Krista Ross from New Brunswick.
Senator Housakos: Leo Housakos from Quebec. I’m sitting in for Senator Marshall.
[Translation]
Senator Hébert: Martine Hébert from the Victoria division in Quebec.
The Chair: Honourable senators, today we are holding our first in a series of meetings on a general financial and economic update on the state of the country. For our first panel, we are very pleased to have with us, from the Office of the Parliamentary Budget Officer, Jason Jacques, Interim Parliamentary Budget Officer. We also have Kristina Grinshpoon, Director, Fiscal Analysis; Diarra Sourang, Director, Economic Analysis and Tim Scholz, Advisor-Analyst.
Welcome and thank you for accepting our invitation. We will now hear opening remarks from Mr. Jacques. Mr. Jacques, you have about five minutes to make your presentation.
Jason Jacques, Interim Parliamentary Budget Officer, Office of the Parliamentary Budget Officer: Honourable senators, thank you for the invitation to appear before you today. I am pleased to be here to support your study of the state of Canada’s economic and fiscal conditions and its possible impact on the upcoming budget.
Last Thursday, we published our latest economic and fiscal outlook. This report provides Parliament with a baseline projection of economic and fiscal outcomes under current policy settings, to support and inform your debates.
[English]
Our updated outlook presents the picture of an economy navigating significant global and domestic challenges. It incorporates new measures announced by the government since the 2024 Fall Economic Statement, with the notable exception of incremental measures to achieve NATO’s 5% of GDP defence pledge and the government’s Comprehensive Expenditure Review. We will incorporate these and other measures when the government provides sufficiently detailed information.
Honourable senators, in the spirit of providing the clearest and most direct information to this committee, I am proposing we try a slightly different approach today. With me at the table are the lead analyst and directors who were responsible for preparing this outlook: Diarra Sourang, Kristina Grinshpoon and Tim Scholz. They are the experts who built the models and performed the analysis that underpins the report that you have before you.
While I am, of course, prepared to answer any and all of your questions, I believe the committee’s work will benefit from the opportunity to hear from the team. With your permission, I have asked my colleagues to respond directly to your questions regarding the economy, tariffs and the fiscal outlook.
[Translation]
Our office remains steadfastly committed to its core mandate: providing independent, non-partisan analysis of the nation’s finances and the economy.
Thank you for your time. We are now happy to answer your questions.
The Chair: Thank you.
As usual, senators will have five minutes to engage with the witnesses. We will start with Senator Housakos, who is sitting in for Senator Marshall. Senator Housakos, you have the first five minutes.
Senator Housakos: I would like to welcome Mr. Jacques and all of the witnesses.
[English]
Last year’s budget, or Bill C-69, raised the government’s maximum borrowing amount from $1.8 trillion to $2.126 trillion. The government told us that this increase will raise the borrowing limit for the next three years.
This limit was supposed to authorize increased debt until 2026-27. However, your report last month indicates that the new ceiling will not be high enough to accommodate all the borrowing the government plans to do before 2026-27.
My question is a simple one: Does this mean that the government will have to return to Parliament earlier than anticipated to ask for authority to borrow even more money?
Kristina Grinshpoon, Director, Fiscal Analysis, Office of the Parliamentary Budget Officer: We’re waiting for Budget 2025 to address this. But from the act, the minister can borrow up to the amount that is set in the legislative act. The minister also needs authority from the Governor-in-Council on an annual basis to borrow this amount. The Governor-in-Council has the authority to authorize any amount required to be paid in that fiscal year, including for extraordinary circumstances. Any borrowing that is approved under that will need to come to Parliament for approval.
The short answer is yes, to a certain degree. They can either do it by coming to Parliament with the report they usually do on an every-three-year basis, or they can approve that amount through the Governor-in-Council and then report it back to Parliament.
Senator Housakos: My other question is this: Many of the PBO reports reference the debt service ratio, which is public debt-servicing charges relative to total revenues. There has been some discussion in the past about limiting debt-servicing costs to 10% of total revenues, as well as the possibility of Canada’s credit rating being downgraded. I see in your report that you are projecting the debt service ratio to rise from 10.3% in 2023-24 to 10.7% in 2024-25 and to 13.7% in 2030-31.
The question is this: Could you comment on your decision to continue reporting on the debt service ratio in your recent report and the importance of this ratio as well as the impact on this ratio if Canada’s credit rating gets downgraded?
Mr. Jacques: Thank you for the question. With respect to the motivation for continuing to report on it, I think your question speaks to the motivation. There is interest from parliamentarians and members of the Senate to follow this ratio.
With respect to its relevance, certainly from a technical perspective when looking at the amount of revenue coming in or when looking at the funds that are flowing into the government which are dedicated to servicing our debt on a regular basis and cannot be used for other types of government programs, it is something that certainly is of interest because obviously you want to have a sense of how much of your spending is focused on providing programs to the public and to Canadians versus how much is actually paid on debt servicing.
With respect to the ratings agencies, I do not work for a ratings agency. I could not speak to the importance of this metric for them. That said, obviously from a lending or financial perspective, you would want to have a sense of how much money a potential borrower is currently allocating to debt interest costs when you are assessing their ability to take on additional debt. It is certainly something that someone would want to keep in mind.
Senator Housakos: Would you agree with me about the following: Given the current level of borrowing by the government and given what is projected as the possible range of debt, as we see in the upcoming budget, when you compare it to the growth in the economy and what is projected in terms of revenue coming in, what are the weak points in the underbelly of what could happen over the next couple of fiscal years?
Mr. Jacques: Something that we mentioned in the report and also something that was in the press release contained in the overlay of the report is that the Canadian economy and the Canadian fiscal situation are very challenging. We are facing challenges that, for the most part, are coming from outside the country. These are global challenges when looking at our neighbour to the south who has torn up a long-standing trade agreement that has been a mainstay of the Canadian economy, along with a dramatically different geopolitical outlook which has resulted in a pressing need to increase defence spending and increase spending on Canada’s security.
What that means from a fiscal context and what we have depicted in our Economic and Fiscal Outlook is it is a very challenging fiscal situation. Our numbers do not include NATO’s 5% target, which is the most recent spending announcement from the government in June. We haven’t incorporated that.
There is still, potentially, additional spending that will come to pass on that front.
In response to trade, the government has also indicated that there are additional investments that will likely need to be made in the Canadian economy.
Those are additional fiscal pressures, but the bottom line is that it is a very challenging fiscal situation that the government will need to manage as it goes forward.
[Translation]
Senator Forest: Welcome, Mr. Jacques, and congratulations on the heavy responsibility you have taken on. The Parliamentary Budget Officer is one of the officers most highly regarded at the Standing Senate Committee on National Finance.
My first question has to do with concerns about the deficit. This summer, the C.D. Howe Institute was the first organization to sound the alarm, raising the question of a possible $92 billion deficit for 2025–2026. That is $50 billion more than the Trudeau government projected last December and $30 billion more than the fiscal framework presented to you by the current Prime Minister.
In recent weeks, you actually spoke about a $68.5 billion deficit — in other words, $23.5 billion less than the C.D. Howe Institute has projected. How do you explain this significant disparity regarding the projected deficit?
Mr. Jacques: I think there are two major factors in terms of the disparity between the C.D. Howe projections and our own five-year reviews. I think they decided to include the 5% NATO targets in the C.D. Howe projections, and in our case, as I said, we decided it was not specific enough yet on that point, not detailed enough and not clear enough. Obviously, with some types of infrastructure spending, it would be possible to invest in a [Technical difficulties] to protect the security of Canada in some respects. There might be some benefit in terms of infrastructure and that could be included in the 5% NATO target. We don’t know.
The other difference from C.D. Howe is that they also included all elements of the Liberal Party of Canada election platform.
We have a legislative mandate, which is to support the political parties in every election with a cost estimate for proposals. Now, there is a difference between the Liberal Party of Canada and the Government of Canada. That is why we focus only on proposals to implement policies that are stated clearly and in detail by the Government of Canada.
As you can imagine, the last election was six months ago, and that is a long time in the world we live in today. That explains most of the differences between the two sources. There are also proposals for cuts, and that is the third factor.
Senator Forest: Thank you. As you said earlier, with new leadership comes a different way of seeing things. What will you be watching for when the budget is tabled in November, to give us an idea of the budget situation in Canada?
Mr. Jacques: As you know, we have a mandate to promote greater financial transparency for parliamentarians. I think that one crucial aspect of that is to have a clear and precise explanation of the Government of Canada’s budget angles.
Before the election, there were budget [Technical difficulties], there were several announcements, one of which was the Liberal Party of Canada election platform. The Prime Minister has given the House of Commons an overview of budget targets, but it was not specific or detailed.
I think this would be the most important aspect for all members of the Senate, and it is also important to us.
The government also announced that there would be more details when the budget was tabled, in terms of an operating budget and an investment budget. That is another important aspect. The government said this would be a way to make decisions within each department. If that is how internal decisions are made for the Government of Canada, I think this is something else that is important for all parliamentarians, who need to be very knowledgeable about the decisions made by the Government of Canada regarding how funds are allocated. These two things are important, to our minds.
[English]
Senator Cardozo: Thank you all for being here and for sharing your thoughts with us.
We are looking at the big picture of what is happening and then how that affects the government and government spending. Could you list for us what you think are the strengths, the weaknesses and the unknowns in the economy and society that we can turn to? It could be everything from our workforce to geopolitical events. Where is our bedrock, and what are the unknown things out there? What are the things that you are most concerned about and that we should be watching as we go ahead?
Mr. Jacques: How much time do we have?
Senator Cardozo: We have reduced it to four minutes.
Mr. Jacques: I will endeavour to start and then hand it off to my colleagues to add as they see fit, in particular Ms. Sourang who has a better sense of the global and Canadian economies.
The first thing to keep in mind and something that has been highlighted by others is that all other countries around the world are facing similar challenges.
In regard to the challenges that Canada is facing and has to navigate now, coming from a changing geopolitical environment and a rapidly changing trade environment which has been the mainstay of the global and Western economies over the past 75 years, everyone is facing those challenges. In particular in Canada, relatively speaking, depending upon the metric you look at, the federal level — and, to a lesser extent, the provincial level — is in a slightly more fiscally advantageous position. Something that comes to mind for myself, which is the clearest example of that is with respect to our pension system. Our pension system through the Canada Pension Plan is fully funded, so the money is available. You can compare that to other jurisdictions in Europe, and most senators would be familiar with the context in the United States where they are staring down the proposition of potentially having to reduce their pension payouts within the next 5 to 10 years because it is not fully funded. Certainly, while our report is depicting a challenging fiscal situation, our fiscal situation is potentially less challenging than that faced by other countries.
The other thing that comes to mind is this, and I have highlighted this in the past: As the Prime Minister has indicated, Canada is looking at a considerable amount of economic change. The economy is people, so people change. Over the next five years, people will be losing their jobs, getting retrained, finding new jobs, having to move, putting their children in new schools, selling their homes and finding new places to live. But Canadians have done that in the past. When you look at the people who form the Canadian economy, we do have the advantage of having a well-educated workforce and people who have demonstrated in the past that they are willing, with incentives and support, to actually take on those challenges. Those are two relative strengths. I’ll leave it to Ms. Sourang to rain on everyone’s parade and identify some of the weaknesses.
Diarra Sourang, Director, Economic Analysis, Office of the Parliamentary Budget Officer: I agree with everything Mr. Jacques said. We’ve seen people as a strength because domestic demand has held up firmly, certainly at times when exports did not or when all the typical drivers of the Canadian economy were not working as they have in the past. That’s a strength.
In terms of weaknesses — beyond the trade uncertainty that is affecting businesses’ investment decisions and consumers’ purchases and also buying homes — there’s uncertainty everywhere.
Apart from that, we’ve seen something that has the characteristic of changing the landscape of the workforce and the labour market. That is immigration policy, which mostly affects people in the core age. We already have an aging population. If people in the core age are leaving the labour force, that does not bode well for the economy. We are monitoring the developments on the immigration front, and we’ll see what happens. I would say basically those are the uncertainties and the weaknesses at the same time.
Senator Ross: With great interest, I’ve been watching what you’ve been saying lately. You talked about us being at the precipice or looking out over the cliff. I think about last year’s sustainability report that said we could permanently increase spending by $46 billion per year and still be sustainable. What has changed that would make you feel that we’re at the precipice at this point?
Mr. Jacques: The November election in the United States very much changed everything. The post-November 4 unilateral decision by the United States to rip up a long-standing trade agreement and to engage in targeted sectoral tariffs has resulted in situations where Algoma Steel can’t sell high-quality products into the U.S. because of the prohibitive tariffs at this point. That would be the major factor which, from an economic perspective and a fiscal standpoint, has changed things.
Senator Ross: A couple of weeks ago, in your testimony at the House of Commons, you said this is a more difficult economic context than during the pandemic and 2008 and 2001. You’ve just talked about the relationship with the U.S., the tariffs, trade and that sort of thing. What else is fuelling your comment that things are worse now than during the pandemic?
Mr. Jacques: This is more challenging certainly for the federal government and, to a lesser extent, for provincial governments in comparison to previous recessions and economic shocks. You can go back to the previous challenges faced by the Chrétien government in the 1990s. In that situation, the focus was reducing spending and eliminating the deficit versus, say, in 2008 when it was evident that a significant economic shock required the government to step in and stimulate demand and potentially provide targeted support.
Now the government has to do both at the same time. The foot is on the gas, and the foot is on the brake. The hands are on the steering wheel, and hopefully they are navigating a very narrow road at 100 kilometres an hour. That challenge of doing both at the same time definitely stands out.
I can’t think of another time over the past 30 years when a government has said it needs to engage in — I think the Prime Minister used the word “austerity” — significant austerity and, at the same time, significant investment or expansion in certain areas, like defence spending.
It’s currently a very challenging work environment in the federal public service. It will become an even more challenging environment over the next 6 to 12 months.
Senator Ross: If you were looking at balancing, increasing and meeting NATO targets and looking at the government’s recommendation to restrict spending by 15%, would you think there’s any opportunity for a balance there? What else could make up that balance?
Mr. Jacques: Looking at the mandate of our office, I don’t think it’s our place to offer policy recommendations regarding what the government should be doing. Our role is primarily and simply to ensure that we do the analysis, we present the numbers and then we explain the numbers. Then it’s very much over to senators and other parliamentarians to make those very challenging decisions that are going to affect all Canadians.
Senator Ross: Thank you very much.
[Translation]
Senator Dalphond: I would like to welcome your team to the Senate. I had some questions about Table 1 in your September report, which gives a summary of the key economic indicators. I went over Appendix A, which also contains economic indicators, particularly for the United States, and I see, for example, that in 2024, compared to the 2.8 growth rate shown, we were at 1.6, so substantially lower than the rate of growth in the United States.
You project that in 2025 it will be 1.2; for the United States it is 1.7, so Canada is substantially lower. You project 1.3 in 2026, while for the United States it is 1.6, and then we get to 1.8 and 1.7, while in the United States it is 2, 1.9 and 1.8; it looks like we start to catch up to the Americans starting in 2027. I am wondering what the premise…. I understand that the American policy is to bring as many jobs and factories home as possible, for example, in order to pump up the industrial product.
As this relates to us, a lot of that is at our expense. How do we manage to catch up with them starting in 2027, as the projections say?
Ms. Sourang: We are looking at the potential of the Canadian economy, the volume of work, the volume of labour and the volume of capital. So we determine our growth rates based on those volumes and the projections we have regarding them. When it comes to the United States, we follow the news there, but we regard it more as an input in our projections, because we are primarily concerned with what is happening in Canada, even though we are aware of what is happening in the United States. Yes, they have imposed tariffs on virtually everyone, on all the rest of the world. That will have repercussions for their economy; six months ago, there was a lot more optimism about the rate of real GDP growth in the United States. Now, with the tensions and especially the uncertainty…. The uncertainty is not affecting just the companies in those countries that have been subjected to tariffs, it is also affecting American companies.
All of these factors together are what suggest to us that their growth rate will be what is shown in the table in the appendix.
Senator Dalphond: A number of Canadian companies are moving some part of their operations to the United States. So the result will not be that we see increased production here; instead, production will increase in the United States. Do you anticipate that this trend will stabilize? Your figures look optimistic starting in 2027.
Ms. Sourang: Yes; that coincides with a period when we expect trade tensions and uncertainty to subside, because we will see a lot more certainty when it comes to tariffs, for example. It also coincides with a period when wages will stabilize, with the goal of reducing input costs for companies and making it easier for them to direct their investments into sectors where investments are naturally more productive.
Senator Dalphond: I am a bit surprised to see that our productivity is much lower than the United States’ and that growth of our gross domestic product will be comparable to the United States’, when we have not solved our productivity problem.
Ms. Sourang: I understand. We talk a lot about productivity. I think there is a very long history of comparing productivity between the two countries. That is the result of decisions that were made a long time ago, be it regarding investment or, also, regarding the sectors where investments have been made. In recent years, population growth has not really helped us measure productivity, which is essentially a mathematical relationship. It is really the production generated in the economy in relation to the number of people or the hours they worked. Naturally, when there is significant population growth, the denominator is much higher, and that contributes to the result we see being lower.
Senator Miville-Dechêne: We have had this discussion in the committee. The Carney government makes a significant distinction between investments and spending. When you calculate the potential deficit, which you estimate to be $68.5 billion, are you taking that difference into account or are you considering these all to be spending?
Mr. Jacques: These are all spending. The government has already floated the idea of two budgets: an operating budget and an investment budget. However, this is not yet in clear, detailed form. Similarly, Quebec, for example, has an operating budget and a capital budget. It is clear and very detailed, and they have several years’ experience with it. That is not the case, however, at least not yet, given the current situation.
Senator Miville-Dechêne: Is that what is coming?
Mr. Jacques: Yes.
Senator Miville-Dechêne: Do you tend to think you will be counting these investments as spending as well, or are you going to distinguish between the two things to increase the deficit?
Mr. Jacques: All the numbers are included. With our economic modelling, we determine the federal government’s operating expenses and the volume of investments. We can identify it ourselves, but these are our definitions. It is not clear yet that the Government of Canada will be using the same definitions as we do when it comes to operating expenses and investments.
Senator Miville-Dechêne: If I understand correctly, you have estimated the deficit to be $68.5 billion. However, you did not count defence spending in that figure. Is the additional 5% for defence not included in that?
Mr. Jacques: That figure includes what was announced for National Defence and the Canadian military in the current budget. It does not include the increase from 2% to 5% announced by the Government of Canada. In our view, what will be included in that 3% is not clear yet.
Senator Miville-Dechêne: I am going to ask you to do a bit of political science fiction — but maybe don’t worry about it. At what point will the deficit be untenable? You said that our situation is a little less bad than other countries’, but it is still difficult. What is the upper bar that the deficit may not go above and the economy still be in good shape?
Mr. Jacques: There is no magic figure or number. However, there must not be a very large deficit relative to the size of the economy on a permanent basis. Every person in this room is responsible for managing their own budget. You are well aware that you cannot keep borrowing forever. You have to pay it back at some point.
It is always important to remember that these are projections, not the future. We are not clairvoyant. These projections indicate where we will be in five years. This raises risks for the sustainability of the Government of Canada’s financial management. I am confident that officials in the Department of Finance Canada are developing a good plan to rectify the situation.
Senator Miville-Dechêne: On the subject of immigration, I am a bit surprised to see that nobody saw this coming. We know there will be cuts to the number of temporary foreign workers. We are familiar with the figures. Have you managed to translate the cuts into numbers, to see the extent to which this might slow the economy down? I am thinking of Quebec in particular.
Ms. Sourang: Yes, we published a report at the end of last year that reported on the economic impacts of the change to immigration policy.
[English]
Senator Loffreda: Congratulations on your nomination and welcome to our National Finance Committee.
Currently, many federal expenditures on infrastructure, innovation and certain program supports are expensed in the year they are incurred rather than capitalized as long-term investments. Has your office analyzed what the fiscal and economic picture would look like if we applied an investment-style capitalization framework — and you briefly touched on it — distinguishing between consumption spending and productive capital spending? Would such an approach provide Parliament with a clear view of fiscal sustainability, intergenerational fairness and the true value of public assets?
And I’ll ask you a few questions, and maybe you can follow up. If there is a second round, you can touch on these and prepare for them: What lessons could Canada draw from our Organisation for Economic Co-operation and Development, or OECD, peers that use capital budgeting or accrual-based frameworks to better reflect long-term returns? There are some OECD peers doing that already. Nobody reinvents the wheel. It’s being used already.
How would such a change impact debt-to-GDP trajectories, especially as we balance short-term deficits with long-term asset creation, because we are in a phase of long-term asset creation at this point in time? Could this approach help avoid underinvestment in critical infrastructure like housing, for example, and other areas where we’re making long-term value more transparent rather than saying, “Hey, we’re spending so much here,” and creating a larger deficit and creating a larger debt to GDP? But rather we’re saying, “Hey, here is our investment. We’re investing in housing and infrastructure.” There’s a lot of infrastructure needed going forward, including wanting to make Canada an energy superpower.
Maybe you can answer in the time we have. And maybe in the second round, if Mr. Chair allows me, we can continue.
Mr. Jacques: Sure, and if we don’t touch on all the points, we can definitely respond —
Senator Loffreda: I’ll find you later.
Mr. Jacques: We’re not hard to find.
Thanks for the question. In short order — and I’ll touch on the infrastructure report that we did, I’d say, at the instigation of Senator Gignac. Thank you, Senator Gignac.
Several weeks ago, we published a report with respect to a broader look at federal investments in capital writ large. As you correctly point out, the federal government spends on its own capital that’s picked up on an accrual basis. You don’t fully expense it, and effectively with accrual, you take the expense and recognize it over a longer period of time because of the useful life of the asset.
The vast majority of federal spending — it’s a multiple of spending on federal assets — is actually going out the door to other levels of government through infrastructure spending and transfers, and those are immediately expensed. As you correctly point out, it means that from an accounting perspective and the way that the federal deficit is presented, the deficit necessarily ends up being higher than it otherwise would be because you need to recognize all of those expenses up front.
Senator Loffreda: In generally accepted accounting principles, going back to my CPA years, most corporations capitalize if there is a future benefit.
Mr. Jacques: You’re entirely correct. Being a CPA myself, the key question is the ownership or control aspect. Since the federal government doesn’t own or control the Lions Gate Bridge, if we provide a transfer payment to the Province of British Columbia that’s substantial enough for them to invest in a capital asset, that’s going to benefit the people of British Columbia and all Canadians.
The Port of Vancouver is a bad example because we control that one. In the case of the Lions Gate Bridge, we don’t control it, and, therefore, we can’t consolidate it on our balance sheet. At the same time, it’s a productive capital investment. It is being amortized by the Province of British Columbia, even though it shows up as an expense for us.
Arguably, again, the best counter-example is this: If you look at the situation in the U.K. where it’s a unitary state, it doesn’t happen.
Senator Loffreda: That’s right because they capitalize everything. You don’t own the asset, so you can’t capitalize it. You don’t control it, sorry.
Mr. Jacques: You don’t control it, but, arguably, it does result in a disincentive to making worthwhile capital infrastructure investments, because if you were to have a fiscal anchor to reduce the overall deficit, it would result in a situation where potentially one could be cutting productive capital investments that are going to grow the economy in order to reduce the deficit which, years down the road, would actually make it more challenging to reduce the deficit because you have a less productive economy.
[Translation]
Senator Gignac: I would like to welcome the new Parliamentary Budget Officer. Thank you for this brief acknowledgement that I wanted to know more about the federal government’s capital spending. It is understood that a distinction has long been made in Quebec between capital expenditures and budget plans.
I would like to follow up on the conversation you had with my colleague Senator Ross. In your recent outlook report, you said that you projected that budget deficits would be, on average, $26 billion higher for the next five years than before the election and the previous government. In your testimony in the other place, you used words like “worry” and “unsustainable”. I am trying to redo the math, because in the August fiscal sustainability report, one of the things your predecessor had said was that the current fiscal policy was sustainable over the long term and the federal government could even increase its spending or reduce its revenue by $46 billion a year without destabilizing the debt ratio.
I am trying to understand why, all of a sudden, the $26 billion more per year, on average, is a source of great concern, when — and this surprised us all — $46 billion more on a recurring basis was not a concern. Can you explain that?
Mr. Jacques: Thank you for the question. I had the pleasure of working on the report you referred to concerning the Government of Canada’s 2024 fiscal sustainability projections. I think the difference between the two comes down to 12 months and the election in the United States. When we did our calculations, it was during the summer and fall of 2024, before the election in the United States, the elimination of free trade with the United States, and the election of Mr. Trump — pardon me, President Trump. I think that is the biggest difference. As Diarra said, there has been an impact felt in every other country outside Canada when it comes to economic growth and this could have an influence on us. There is also a direct impact in Canada because of our direct ties with the United States and the supply chains. Ultimately, this is a factor…. Your comparison is useful, because it shows the major impact that a political change, a political shock or an economic shock could have on the Government of Canada’s fiscal framework.
Senator Gignac: We are not going to get into wars of numbers, and you are more familiar with the subject than I am, but when I compare the federal and provincial governments’ public debt levels with other countries’, Canada actually ranks quite well. Gross debt is the second lowest and net debt, including pension fund assets, is the lowest. I am trying to understand how the situation is a matter of concern in economic terms because of the United States, but when it comes to the path taken by the federal government, you still use the word “alarming”, so I just wanted to give you an opportunity to confirm whether that is the adjective that should have been used. I am trying to understand, because we are going to have a budget soon. Is there something to be alarmed about if we are presented with a deficit of $80 or $90 billion?
Mr. Jacques: We have the team and we decided to use a phrase; I think it was “it raises the risks”.
Senator Gignac: The concerns.
Mr. Jacques: Yes, “sustainability risks”. That does not mean it is unsustainable. There are risks. As I said earlier, the current situation in Canada, if we compare it to other countries…. We are in a better position, but that does preclude the difficulties that will arise and that exist in the management and restructuring of Canada’s economy.
Senator Gignac: Regarding fiscal anchors, the Prime Minister is no longer talking about the debt-to-GDP ratio or the deficit; he is just talking about balancing operating expenses. Can that be called a fiscal anchor or is that not really what it is?
Mr. Jacques: It is a fiscal anchor. The definition of a fiscal anchor is not simply identifying something as the thing we want to achieve and we are going to monitor.
Senator Oudar: Congratulations on your appointment. I would like to ask you about the document you published a month ago about federal personnel spending projections. I am asking you this because, actually, that spending accounts for the bulk of operating expenses. You put the numbers at over $70 billion for this, in fact. My question relates more specifically to…. You referred to the increases in your introduction. It went from 335,000 FTEs in 2006 to 441,000, and I think you even estimated that the number will rise to 445,000 in 2025–2026, based on departmental plans. Given what the Prime Minister has announced about reducing the size of government, what would you like to say to the committee? Are there any risks or uncertainties you would like to share with committee members?
Mr. Jacques: Concerning human resources management in the Government of Canada?
Senator Oudar: Concerning what was announced.
Mr. Jacques: The Government of Canada has announced that the public service will undergo a kind of restructuring. What they want to implement is not clear yet. We are waiting for details.
At present, we do not have enough details to assess what the Government of Canada has announced already.
As you said earlier, we are now basing our projections on the departmental spending plans that were published a few months ago, but they were prepared before the election. So there is still a high degree of uncertainty.
Senator Oudar: Do you think it is credible, given that 87% of personnel…. These are equivalents. In fact, I think that your document talks about indeterminate employees, so these are people who have permanent positions. Is this a viable or credible objective, in your opinion?
Mr. Jacques: I can quote my predecessor: It is unlikely that there can be a balanced operating budget unless there are cuts to the size of the public service. In addition, it is always a challenge when the government wants to make cuts to the public service. For every public servant there is a job, something that may benefit the public. It is no simple matter to make speedy cuts and at the same time make sure the quality of services to Canadians is maintained. If it were simple, it would have been done already.
Senator Oudar: You are not reassuring us that this objective can be achieved, knowing also that going about it by attrition…. I don’t know whether you have looked at the average ages or you do actuarial or other projections —
Mr. Jacques: We do not do that. Initially, the government announced that it would be done by attrition, after that there was talk of cuts and attrition. It is not clear yet. I want to avoid speculation.
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Senator Kingston: I’m going to shift gears a little bit. Welcome to all of you.
I would like to talk about tariffs. I do not know which panellist is the best person to put my questions to.
I am thinking about New Brunswick and the fact that New Brunswick is most exposed, particularly the City of Saint John. The Canadian Chamber of Commerce has indicated that in terms of refined petroleum products in particular, Saint John is more exposed than Calgary by a lot, which is interesting. The second area of tariffs that is most problematic for New Brunswick is crustaceans, or the seafood industry.
Because the effect of tariffs is uneven across the country — or at least that is my impression — I would like for you to comment on how you see the federal government going forward, ensuring that all Canadians are supported as much as possible in this situation until we find some resolution, whatever that may be, to the issue we see before us now.
Tim Scholz, Advisor-Analyst, Office of the Parliamentary Budget Officer: I can answer that.
As Mr. Jacques said, we can’t give policy advice or policy recommendations on how to deal with that. I think you have hit on a very challenging issue when analyzing tariffs, at least from our office’s perspective. A lot of our modelling is at the national level, which is the whole economy level, and it misses — occasionally, we capture some of the granularity by industry, like steel, aluminum and automotive, but not necessarily the regional impact. Although we look at the impact of tariffs on the economy at the national level, it is quite large and quite shocking when you look at, for example, the impact on goods exports in the second quarter. It can be even larger depending on different industries and regions.
That is definitely something we can look into more deeply on request, and we can track as well as monitor the potential economic impacts in different regions, particularly if the support programs are not reaching or if they are not having the intended impact.
Senator Kingston: Another thing I am interested in is the whole housing industry and how that is going.
My understanding is that the market in Toronto has changed significantly over the past year. That will have, I think, some kind of a domino effect on other places like New Brunswick, which actually saw a rise in the price of real estate during the time when it was also rising quickly in Toronto.
Do you have any thoughts on how the change in the housing market in Toronto, for instance — and apparently Vancouver is following as well — is going to impact your outlook on things like household formation, housing stock and the housing gap in 2035?
Mr. Jacques: We have a report coming out at nine o’clock tomorrow morning on housing affordability that looks at the national level and also breaks things down market by market. That report is currently with the Speakers. I think it would be a breach of parliamentary privilege if we were to comment on it now.
That said, I think Ms. Sourang is certainly prepared to speak to our outlook on the housing market within the economic outlook.
Ms. Sourang: Certainly. In general, housing markets are determined by regional forces. As we have seen in Toronto, it is mostly the multi-unit market, which is mostly condominiums. As I said earlier, uncertainty is affecting consumers as well, which also influences their decision to purchase or not. Given the way the market is structured, you have to reach a certain ratio of presales before you have your funding approved. At least from what we have seen, it has not been up to the level that it was in the past, and that is definitely affecting the market and also the prices as well. Prices have started to come down. In markets such as Toronto and even Vancouver, prices have been really elevated, at least when we compare it to fundamentals. If that is the case with New Brunswick, we might see something similar happen as well.
What is also important to keep in mind is the demand. That is driving a lot of the fluctuation, especially in housing. Even though the residential investment sector is not being a drag on the economy, what we see in the outlook is certainly a slowdown. And demand is affecting most of it. It is driving most of it.
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Senator Hébert: Ms. Sourang, you talked about the economic impact of immigration. You talked about a report you had done, but I understand that it had been produced before the massive government investments were announced. We do know that building infrastructure is going to require workers. We are also hearing from companies crying wolf now, saying they do not have enough workers. Even your unemployment projections are going down. You are aware that in a number of regions of Canada there is already full employment and an unemployment rate that is still very low, despite the impact the crisis has had.
Did your economic growth projections take into account the shock that will happen when hundreds of thousands of temporary foreign workers lose their work permits and these Canadian companies lose those workers, and the labour shortage there will be when it comes time to build the infrastructure we want to invest in?
Ms. Sourang: The short answer is that we do take changes in immigration and new targets into account. So there will be news that will technically be published in November, and our projections will be adjusted, if need be.
Senator Hébert: So you will be redoing your projections for November, is that right?
Ms. Sourang: If the targets are dramatically different from what we have now, yes. For the moment, we are taking the latest targets, the most recent ones, into account.
Senator Hébert: Thank you. My second question has to do with tariffs. As the Governor of the Bank of Canada said in a speech last week, the effects of the tariff crisis have been milder than predicted in a number of sectors. That being said, the government is expecting to make massive investments.
Do we know whether the return on those investments, for the Canadian economy, will be greater than the impact the tariff crisis has had on the economy? Are we getting ready to make massive investments in the Canadian economy? Will we get a high return on investment, or even proportionately higher, because of the impact of the tariff crisis? Will it be as high or lower vis-à-vis the impact?
Ms. Sourang: I think it would be a matter of timing. At the moment, there is a sharp downturn in investment. We expect there to be a recovery in about 2026. Things will have been on pause for a while. There will be really very low levels. And all at once, when the uncertainty has been removed, we will be able to look at it as kind of catching up. At first it will look like a huge influx of investment at once, for a year or over a few years, but really it is the fact that a year before, investment was really very low and those funds were available, but given the situation, they were not injected into the economy. There will be some catching up and eventually, we will be starting from a lower point, growth in investments will be higher in the short term, but in the medium term it will not necessarily drop; it will just rise less rapidly.
The Chair: We have gone a bit over the time allotted. We need to finish up because another witness is waiting for us.
Just before that, I have one last question. You talked about the debt-to-GDP ratio, where Canada is said to be in good shape. However, when we look at the debt-to-GDP ratio, the debt for all levels of government, things are not going well. Of all the OECD countries, according to IMF figures, Canada is the tenth most indebted country in the world. All of those governments, be they provincial or municipal, will have to mount a strong common-front response to the tariffs and challenges you have spoken about.
I am considerably more concerned, because all public institutions will have to deal with those challenges. It means less money.
When you talked about the edge of the cliff, were you talking about debt as a whole, about that ratio?
Mr. Jacques: I am the Interim Parliamentary Budget Officer for the federal government, for the Parliament of Canada. Obviously, all Canadians are facing a challenge when it comes to household debt, corporate debt and the debt of other governments, the provincial and municipal levels. We have been assigned the task of assessing the fiscal framework for the Government of Canada and identifying the flexibility and the room that the government has, to meet the challenges that exist now. We know, too, that this will be difficult.
The Chair: I have heard you talk about the “edge of the cliff”. What would the consequence of the cliff be? A devaluation?
Mr. Jacques: I hope we will not have to see the consequences. In all honesty, we prepare projections in order to identify what risk there will be in the long term, in five or six or seven years. We know now that there will be a risk. This gives us an opportunity to avert the risk and remedy the problem. That is why we prepare the figures.
The Chair: Thank you. We will certainly have a chance to see one another again in the weeks to come.
Honourable senators, we are pleased to have with us for our second panel today, by videoconference, Jimmy Jean, Vice-President, Chief Economist and Strategist with the Desjardins Group. Good evening, Mr. Jean.
You have five minutes for your introduction, and there will then be questions from senators.
Jimmy Jean, Vice-President and Chief Economist and Strategist, Desjardins Group: Good evening and thank you for inviting me to this meeting of the committee. The Canadian economy appears resilient at the moment, but there are a number of risks that threaten to erode that resilience. One of the main risks is international trade. The American tariffs on numerous countries were formalized over the summer and unless there is a dramatic reversal in the courts, they are here to stay.
CUSMA, which protects a portion of our exports, helps us, but there are at least three factors that require us to be cautious. First, uncertainty has already cost us a lot, even with a low tariff rate: over 60,000 manufacturing jobs have disappeared since January. Second, a new round of tariffs has been announced in the last few days and they are targeting new industries, sometimes by surprise.
Third, next year’s review of CUSMA may result in less favourable conditions for Canada than prevail at present. The second major risk factor we are monitoring is the labour market. The summer saw two consecutive months of losses totalling over 100,000 jobs. While previously we could take some comfort in the fact that the unemployment rate is going up mainly because of a large increase in the labour force as a result of increased immigration, the situation has changed and we are seeing the labour market become considerably weaker. Youth unemployment continues to be high. The fear of a structural shock associated with artificial intelligence remains real, but for now it seems that corporate hiring freezes are mainly what is blocking labour market openings for newcomers.
Of equal concern, 25- to 50-year-olds, who are central to household consumption, are currently seeing their employment rate drop and their unemployment rate rise to a level not seen since 2016 — an all-time high apart from during the pandemic. The trend is still recent and might reverse. We also are not seeing massive layoffs, which is reassuring. However, these trends still need to be monitored.
The third factor relates to demographics and immigration. Between 2021 and 2024, the population grew by over 3 million people, with 98% of that increase coming from immigration. Since then, Ottawa has sharply reduced both permanent and temporary admissions. In the short term, this relieves the pressure on housing and public services, but in the medium term, it threatens potential growth, labour availability outside urban areas, and fiscal sustainability. The average age of the population is already rising again, while the fertility rate is still falling and life expectancy continues to rise.
Fourth is housing. Although the population grew by over a million people per year in recent years, only one new home was built for every four new adults. Historically, the ratio was more like one to two. The pressure on affordability has been felt all across Canada, but the dynamics we see today were influenced by very different starting points. Surprisingly, Quebec has shown an increase, as has Alberta, which still has a fairly strong real estate market. Both these markets were relatively affordable and accessible before the outbreak of the pandemic.
On the other hand, Ontario and British Columbia are having problems, given that access to home ownership was already very tight and has gotten worse. The common solution remains the same: We have to build more accessible housing that is suited to a range of demographic needs. However, the anticipated decline in demographic growth lowers the prospects of rental income and undermines the viability of some residential projects, where costs remain rigid. To avoid a potential severe supply contraction, solutions will have to be chosen quickly, at whatever cost, in order to reduce costs and incentivize the sector to increase its productivity, which is lower than the average for other sectors.
The last point relates to fiscal policy. The federal government is about to introduce an ambitious budget: increased military spending, public investments, program cuts. Everything will depend on how credibly it is implemented. Bond investors are taking a close look at the direction spending cuts are taking and the capacity to deliver structuring projects. Experience in recent years has shown that major projects have been hard work and their economic impact often disappointing. While separating the current expense and investment budgets may be potentially useful from the standpoint of transparency, it could nonetheless add an additional element of uncertainty during the transition period. It will be important to maintain investor confidence over the next few years.
In short, despite there being a number of shocks, the indicators do not suggest that Canada is in a recession at this time, but it is navigating through significantly uncertain waters. The collective challenge is to restore predictability, both for households and businesses and for investors. Whether the issue is trade policy, budget direction or immigration planning, the economy needs less volatility and more clarity. Thank you. I will be happy to answer your questions.
The Chair: Thank you, Mr. Jean.
Senator Forest: Welcome, Mr. Jean. La Presse reported this morning that the Business Council of Canada is calling for credible fiscal anchors to be restored in the budget. It is calling for a deficit reduction plan and “the adoption of additional fiscal guardrails to guide policy over the medium term.” Minister Champagne said again last week that the government’s policy on this subject was perfectly clear. Do you think it is clear enough, particularly from the standpoint of wanting to have an operating budget and an investment budget? Regarding fiscal anchors, does that look to you like a sufficiently clear environment to guide us in the discussions that will take place after the budget is tabled?
Mr. Jean: What seems clear to me is that there are fewer and fewer fiscal anchors. The last anchor that remained after former minister of finance Chrystia Freeland’s fiscal update was the one concerning debt. The argument then was that debt had to stay on a stable or downward slope.
Our current estimates, given what has been announced, suggest that debt will actually be on a slightly upward slope. So at this point, taking that as a given, it means there would really no longer be any fiscal anchor, and so the concern is valid. I find it hard to see how that can be reconciled with the big ambitions stated regarding the increase in military spending. By adding 3.5% as the percentage of GDP, the National Defence budget will essentially be tripled by 2035.
These are investments in infrastructure, and there might be other needs, particular in relation to tax competitiveness. In fact, regarding the immediate depreciation it announced in July, the United States is putting Canada at a disadvantage, at least in the long term. So these are extremely important priorities and a lot have already been implemented when it comes to tax cuts. It will be very difficult to come back in the very short term with targets.
What will be most important to do is persuade people of the structuring nature of the investments and the spending, which has not always happened in the past, but that is where it will be decided. At this point, I do not believe, given the government’s big ambitions, that it will be in a position to confine itself to a very rigid budget framework. This is a risk. Obviously, we know that investors or credit rating agencies may take a dim view of it. I think that is the risk they are prepared to take.
Senator Cardozo: Thank you for your very clear and detailed presentation, Mr. Jean. I have often seen you on television and I am delighted to have you with us this evening. Welcome.
My question is this: What are the areas of concern that we, as the finance committee, should be monitoring in Canada or on the international stage?
Mr. Jean: I think right now it is the tariff issue, particularly with what are apparently going to be very tough negotiations. The Americans will be dictating the rules of engagement to their trading partners from now on. We have to look at the renewal of CUSMA as another opportunity for the American administration to apply new rules of engagement that could be unfavourable to Canada. We will have to work hard to limit damage in this area.
There have already been concessions on Canada’s side, but we have seen no reciprocal concessions from the other side. At least, indications are that this is how it is going to go. We will need to be very agile in order to limit the damage. That is the first factor. The second factor takes into account things that we have more control over. And last, the entire economic policy is based on performing a near-impossible mission — it being all very well to have ambition and give strong signals — because we are talking about tripling defence spending over the next ten years in order to meet NATO targets and also to carry out ambitious infrastructure projects like hydro transmission lines or maybe pipelines, ports, and so on.
Despite environmental and Indigenous concerns, and despite disagreement coming from provinces that might impede agreements, the aim is to achieve these objectives while at the same time conducting a spending review in order to generate a 15% program spending reduction by 2028-29. And the aim is to do that without affecting transfers and social programs and by reducing staff through attrition rather than layoffs. Checking all these boxes will be an extremely difficult job. It will call for prioritizing, and I think infrastructure projects will be prioritized.
Senator Cardozo: Thank you.
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Senator Ross: Thank you for being here with us this evening.
The government is currently looking at the Major Projects Office to launch projects that will really jump-start the economy, and I’m wondering if you could give me a sense of the impact that you think streamlining these big megaprojects will have overall. By speeding up the spending and speeding up the approvals, do you think that will offset some of the challenges in our economy? I’m also interested in your perspective on private investment in these projects. What will that look like?
Mr. Jean: There’s a signalling effect that is going to be very strong, I believe, because the government is sending the signal that Canada is open for business. The private sector didn’t always get that message coming from Ottawa in the last 10 years. Now the tone is changing, and the sense of urgency is certainly there. I think that’s going to help.
In terms of what we’ve seen so far by way of nation-building projects, most of them are projects that were already under way and already somewhat approved. They are going to accelerate that, but those were shovel-ready projects.
I think it’s the correct approach, but we have to see what is going to be the quantum, what is going to be the delta and what will be the additional projects that are going to be decided based on the new environment that we’re in.
We saw the Premier of Alberta just announce a pipeline project, but it looks like it’s going to be undertaken by the government, and they’re hoping for a private sector player to take over eventually. It shows that confidence is still very fragile.
On the question, specifically, about the role of the private sector, we know that the Canada Infrastructure Bank — which had a similar mandate to what we’re seeing right now — is well on track to miss its original $35-billion investment mandate, which was by 2026-27. It was only able to pull in about 20% in terms of private investments in whatever it invested in. That’s really low. It’s probably below what was intended at the beginning.
There are many reasons for that: too small projects for the type of projects the private sector is looking to invest in; some misaligned priorities between various layers of government or the private sector, sometimes offsetting provincial investment; and also the constraints which are, as we know, the labour, material or productivity.
There are a number of reasons that the contribution from the private sector hasn’t been as much as we would have hoped for, so there are many lessons from that failure for the government to learn from as it tries to really elevate the game when it comes to private sector participation.
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Senator Miville-Dechêne: What stuck with me, Mr. Jean, is the mission being almost impossible. I thought this was a rather harsh judgment about what is happening — and probably an accurate one. I want to come back to the major projects, because you said that in the past, major projects have been hard work. I understand that this government may suspend certain legislation, but it will have to hold tough discussions with a number of groups in society.
Do you think that these major projects themselves will be enough of a stimulus for the economy? Do you think we will be able to achieve a sensible pace? And will we be able to find the workers needed?
Mr. Jean: That is exactly why I am going to keep stressing the enormity of the challenge, because it truly is a big one. After the 2015 election, $188 billion was approved under the Investing in Canada Plan and less than $110 billion was spent. As I said earlier, the Canada Infrastructure Bank was regarded as a failure because the projects were not properly aligned with what private sector investors were prepared to finance, for example, because there were no agreements relating to the priorities of the provinces, the First Nations or other stakeholders.
In addition, it was seen as a failure because of the issues that exist in our construction sector. You referred to the labour shortage. That shortage has existed for the last ten years and the situation is going to get worse in the coming years. A report by BuildForce Canada says we will be facing a shortfall of 108,000 construction workers by 2034, even counting what we are expecting in terms of training, retirements, and so on.
Given that we need workers for both residential and non‑residential construction, the construction sector may be the major bottleneck for all our projects and ambitions. So far, I have not seen or heard a very clear strategy in what has been put forward for determining how we are going to leverage or how we are going to be able to solve the problem of the construction labour shortage.
At present, the United States is taking a very hostile approach to immigrants, particularly immigrants from Latin America, many of whom work in the construction sector there.
Why is there still no strategy to try to attract those workers here and quickly integrate them? These questions need to be asked without delay.
Senator Miville-Dechêne: I imagine it is because we do not want too many temporary foreign workers. So what we have are somewhat conflicting policies.
Mr. Jean: The problem is also one of composition. It is not so much a problem of volume as of composition. We have not focused on the immigrants the economy really needed — at least not enough. The construction sector should have been prioritized.
Senator Loffreda: Welcome to the Standing Senate Committee on National Finance, Mr. Jean. In June, following the tabling of the 2024 Budget, you made the following comments.
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But Canada’s public finances are still in good shape relative to peers, even when we include the provinces.
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That is an important point.
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And the substantial increases in spending are a natural consequence of strong demographic growth and inflation. When we adjust for this reality, as we did in our report on the 2024 provincial budget season, the spending increases don’t look unreasonable.
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Sixteen months later, do you think that is still the case? We are expecting a budget on November 4. Considering what you now know, do you think that is still the case? Will we be able to keep the promises made regarding military spending?
Mr. Jean: This comment was made after the last budget, which is more than a year old. Since the beginning of the year, we’ve heard a multitude of commitments. Very expensive promises have been made. In the update, there was already a deterioration, but now we are going even further. In fact, at the time, public spending was balanced with population growth. It’s normal that we should invest more when there is a marked increase in population, whether for infrastructure or transfers to the provinces, so that they can welcome newcomers and ensure that services to the public are available. There’s also a benefit when it comes to workers who contribute to the labour force and national income. So things balance out, perhaps not perfectly, but at least in part.
In those days, there wasn’t a great deal of concern about the cumbersome state of public finances. If I go back to the comment made earlier, there were still some fairly serious fiscal anchors. As proof, we haven’t seen credit rating agencies take any action or downgrade Canada’s rating.
Today, the situation is different because we have a very real existential threat that affects Canada. We have to react and turn the economy around. We have to invest in defence and have no choice. Canada isn’t the only country facing this situation; several NATO partners are as well. Those are pressing needs and emergencies that have suddenly appeared, somewhat like they did during the pandemic. We must address them, and we have the ability to do that.
That’s how I see it. It’s like being in a recession: You have to take action. The fact remains that we don’t have the same capacity as before the pandemic either. If we fail to ensure that these expenditures or investments are foundational, we’ll run into trouble later on. Ultimately, placing all this burden on future generations remains an injustice. If we don’t generate the growth and wealth necessary for these expenditures to pay for themselves, taxes will have to be increased, and future generations will have to bear the burden, which is never positive.
Senator Gignac: Welcome to my fellow economist. I’d like to point out, for committee members, that since Mr. Jean has been the head of economic studies at Desjardins, his team has consistently ranked among the top five in the country. I think it’s also worth noting that in 2022 it was ranked number one in the world among forecasters. I know that you’re in high demand, and we are lucky to have you with us this evening.
I have two questions, and if I may, I’d like your answers to be concise. Let’s continue the exchange we had earlier with Senator Loffreda. Basically, if all these investments increase the potential GDP, you won’t be too worried. You heard the Parliamentary Budget Officer say that the federal government’s fiscal situation is unsustainable. Listening to you, however, we notice that you don’t seem to use this adjective. Is the budget situation worrisome?
Mr. Jean: It isn’t enough to know how much we’re spending, we also need to know how we’re spending. Poorly targeted and non-structural expenditures lead to an unsustainable situation.
There’s also another angle. People say spending will increase while still talking about austerity. That’s quite unusual, because usually things go in one direction or the other. We must be careful, because excessive austerity is also dangerous; the example of Greece, Spain and Portugal shows this. It can also increase the debt-to-GDP ratio. The government’s current position will have to be clearer. We’ll have to know whether there will be more austerity or more key expenditures. The challenge will be to maximize the structural impact of every dollar invested, while minimizing the negative effects of budget cuts on the economy.
Senator Gignac: The federal government usually borrows in the short term, while the provinces borrow in the long term. All these investment expenditures will likely mean that many more long-term bonds will be issued. What will be the impact on the cost of financing if the federal government funds long-term bonds? Will this have a negative impact on the cost of borrowing by the provinces, given that the provinces always pay more than the federal government to borrow money on the financial markets?
Mr. Jean: Absolutely. We were nevertheless lucky, because two provinces saw their ratings drop in recent months, without seeing much of an impact on credit spreads. The situation remains fragile, with massive global debt and intense competition for capital.
The federal government is facing a curve that’s already quite steep. In my opinion, it would be better for Ottawa to focus on issuing bonds with maturities of five to ten years, which would be less costly and would also avoid crowding out the provinces.
Senator Oudar: Thank you, Mr. Jean, for being with us today. We are very fortunate.
I read several documents that you published at Desjardins. I’d like to hear what you have to say about the prospects for economic growth. In fact, I’m reading a document entitled Canada’s Economy Is Weak, but a Recession Isn’t a Foregone Conclusion. It sounds like a very interesting novel. I’m at the end of that published document. I’d like to hear what you have to say about that. I’ve listened to what’s been said since the start of the meeting about the outlook for economic growth. In particular, you’ve identified certain risks that wouldn’t allow us to achieve the objectives set. I’d like to hear from you more specifically on this point, and give you time to add to some of the answers you gave earlier.
Mr. Jean: We just had a contraction of 1.6% for the second quarter, which is slightly higher than expected. With the very preliminary data we have for the third quarter, we expect a slightly higher rate of 0.5%, which is very low but still positive. We can see from the data that the decline in exports during the second quarter was disproportionate. We also felt it, given the very low effective tariff rate. In the end, it was only 3% against Canada, which didn’t justify a 27% drop in real exports. As we’ve seen, exports are starting to recover somewhat, even though they haven’t yet returned to where they were. We see that things are starting to pick up somewhat, particularly in the automotive and oil sectors.
That should add to the gross domestic product and help us. Still, through the end of 2025, it will be a difficult year marked by adjustments. I talked about the loss of jobs in those sectors, which may continue. There will be a lot of fragility.
We believe that, in 2026, with what the federal government is deploying and will detail for us, we could have a significant contribution of 0.8 percentage points to gross domestic product growth, which is roughly equivalent to half of potential growth. That’s still quite significant, both because of the new spending on national defence and infrastructure, assuming there will be further announcements to reinforce it.
This isn’t a recession scenario, but the risks remain high, because we’re currently seeing an upsurge in announcements from the United States, with the attendant risks regarding CUSMA.
There’s a tax disadvantage for investment in machinery and equipment. The United States has just made permanent the ability to fully expand investments in machinery and technology, whereas in Canada, a similar provision exists but it’s much more targeted and reserved for certain manufacturing equipment and clean technologies. There’s a sunset in the way this is done in Canada, so it should expire.
That’s why I’m saying that this aspect will have to be taken into account to prevent companies from moving to the United States, not just American companies or multinationals, which may be encouraged to bring their production back to the United States, but even Canadian and Quebec companies. We’ve heard stories about that. Their biggest market is the United States, and they might be tempted to seek certainty by relocating to the United States.
We already have a productivity gap. The Americans invest two and a half times as much in equipment and software per worker as we do in Canada right now.
If we have a problem with offshoring, it will be an even greater brake not only on investment, but also on capital stock. This is contrary to what we’ve been trying to achieve for a long time in terms of productivity. It will be extremely important for the government not to miss this opportunity, and it shouldn’t focus too much on certain aspects of the public investment sector. We have to make sure we stay with the private sector. We’ve seen a 21% increase in public sector jobs since 2020, but only 13% in the private sector.
The public sector is taking up a lot of space economically; what we need is for our small private-sector businesses to get bigger and export internationally. That will allow us to emerge from this situation in a sustainable way.
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Senator Kingston: Welcome to our committee.
Currently, the Bank of Canada’s target for the overnight rate is a 2.5% interest rate, while the U.S. Federal Reserve target range for the federal funds rate is between 4.0% and 4.25%, and the difference is the largest since the year 2000.
What factors explain the widening gap between the policy interest rates of the two countries?
Mr. Jean: The Bank of Canada began its normalization cycle way earlier than the Federal Reserve. The reason for that was the higher debt sensitivity in Canada. We have seen that in the mortgage space, where you have had that renewal process every five years. Typically, a household will have to renew a mortgage, whereas you do not have that in the U.S. The restraining effect from tight monetary policy in Canada is felt much faster, and it is harsher, so that allowed the Bank of Canada to start a little bit earlier than the Federal Reserve did.
When you look at inflation — because, ultimately, these two central banks focus on inflation — the Federal Reserve has a dual mandate, but, still, inflation plays an important part. We saw inflation in Canada moderate quite significantly in terms of the headline.
Despite the persistence we saw, for example, in some categories like housing, we still saw the slowdown in other sectors being powerful enough to bring the headline inflation somewhere around the target.
We still have lingering issues with what we call the “core measures” that strip out a certain number of volatile categories. We think it is temporary. We think the core will ultimately converge as well to 2%.
That has been the story in Canada. That is why the Bank of Canada was comfortable resuming interest rate cuts. Not only was inflation at target, but also the risks from the counter-tariffs that existed back then — which were significantly reduced in September — and the risk of runaway inflation or other pressures from that have been reduced significantly.
Whereas, in the U.S., you have the opposite. Actually, we think that inflation will only peak in the middle of 2026 in the U.S. We don’t think what we are seeing in terms of the inflation numbers reflect in any shape or form the impact of those tariffs, and 40% of the companies are saying that they are absorbing — for now — the cost pressure from the tariffs, but that is not sustainable. We think it will ultimately filter down the pipeline and reach the end consumer.
The Fed is now in a position to ease because its labour market is struggling, but when those inflation numbers come out, that is when we are going to see the real tension within the Federal Open Market Committee, or FOMC. If there is a risk, it is that the Fed cuts less going forward relative to what the Bank of Canada has the latitude to do right now.
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Senator Hébert: Mr. Jean, it’s good to see you again; we had the opportunity to work with each other in my previous life.
You talked about risks associated with CUSMA; I share several of the observations you made today. Your reading is quite accurate in a number of respects. I’d like to hear what you have to say about the real potential for diversifying our markets and exports. The Governor of the Bank of Canada said last week that we’re 15 years behind; as we know, we’ve often talked about the need to diversify. I’d like to hear what you, as an economist, have to say about this. What’s the real potential for the diversification of our markets, and where is it, if it exists?
Mr. Jean: We’ve done some work on this; we published an article on September 4 concerning Europe.
Canada is rich because of the abundance of natural resources and has a lot to offer the rest of the world, from Europe, among others, to Asia. These are markets that are, in both cases, larger together than the U.S. market. We used to be told that transportation costs were a limiting factor, which is much less true today, because there are efficiencies, and supply chains and logistics chains have developed significantly.
In terms of critical minerals and clean technology, in order to continue to participate in the climate transition and the technological aspect related to the climate transition, Canada is an important and credible player in every respect.
Even in terms of conventional energy, transitional energy — we’ve talked a lot about that — Canada is very well regarded, as long as it has the infrastructure to be able to be that reliable player. That’s what’s missing, that’s what we’re trying to fix, and it’s going to take a long time. The potential is there.
After that, there’s the issue of manufacturing.
With developments in the area of national defence, there are applications for a number of our major players, our multinationals, for example in the aviation sector. There could be others in the cybersecurity sector, where we have recognized expertise, particularly on responsible artificial intelligence. The war today doesn’t involve tanks and hundreds of thousands of troops landing on a beach; it’s about drones and electronic warfare. Canada is very well positioned when it comes to the future of defence.
After that, there are obstacles. Among these, Canadian companies must also be aware of what exists, for example with CETA, which allows access to government procurement. However, we have seen that few companies are availing themselves of CETA provisions. There’s a need to build partnerships. It’s very difficult in Europe, where there are many non-tariff barriers. However, substantial efforts must be made over a period of years to fully capitalize on this. But we think that the potential is far from being met in terms of knowing how Canada can take advantage of it. So far, Europeans are the ones who’ve benefited from CETA. Canada has to do everything it can to recover its share of the pie.
Senator Dalphond: Thank you, Mr. Jean. Like my colleagues, I very much appreciate the quality of your presentation.
There’s a budget coming up and consultations are being held. One of my concerns is the movement of capital to the United States, the displacement and the offshoring of production. Quebec entrepreneurs from Montreal are telling me that they send part of their production to the United States to avoid tariff problems. It’s simpler. They say they had to undertake expansion projects, but they won’t do them anymore, they will do them in the United States. So there’s a flow of capital that will somewhat minimize the impact of government projects in Canada, which are intended to create jobs here and stimulate growth somewhat artificially, whereas some of our growth will go to the United States.
I understood from one of your comments that if we were to adjust some of our tax policies, for example with respect to the deduction of technology expenses, we could keep some of these companies in Canada that are considering moving elsewhere.
Can you clarify your thoughts on this, in the hope that someone from the Department of Finance is listening and might include easing measures in the budget to retain capital that’s already here with us?
Mr. Jean: Absolutely. A set of factors contributes to the decision to relocate or not. It can be expertise, access to labour, supply chains, market size. And yes, taxation plays a role.
Would taxation, on its own, have a role to play? Unless Canada becomes, not in an equivalent or competitive way, even more generous at that level, I see that as a marginal aspect. But when you put it all together….
As you said, if on top of that we’re more generous in investment spending and no longer have this uncertainty regarding trade, if there are other factors that can be favourable, notably the currency issue, these are factors that may encourage a company…. As I was saying earlier, if 85% of its sales are in the United States, that makes more sense. We can’t control all the factors, but if we can control some of them, if it can make a difference somewhere, it may be worthwhile. But this perspective isn’t the only one. It’s also about companies that are located here, even if they aren’t necessarily in the trade sector…. We are now seeing more investment and more momentum than we have seen, and the government is stepping up to the plate and encouraging this movement in a very strong and broad way.
We used to say that it only applied if you invested in “manufacturing 2.0” or in clean technology, but now we’re taking a broader approach and going all in. This sends a strong enough signal, as I was saying, that Canada is now there to do business and that we’ll help businesses. That’s not what entrepreneurs have been getting in the last 10 years.
This could result in a bold move that might speed things up. We have to think about that and put it forward. The stakes are too high and we can’t afford to lose even more capital, especially with the population growth we’ve seen. When we look at all of this on a per capita basis, these are really scary figures.
The Chair: I have a question for you, Mr. Jean. We know that Minister Champagne sometimes uses vocabulary that’s a little more elaborate. He often says, “Canada needs to reinvent its economy, as it did after the Second World War.”
“Reinventing our economy.” All we’re hearing right now is that we’ve fallen behind on what should have been done 15 years ago, and that we need to exploit natural resources and invest in infrastructure. In my opinion, we’re not reinventing the economy. We’re simply dealing with the traditional aspects and correcting a delay that we shouldn’t have had, because if we’d done things properly, we’d now be better able to face the threat. But to me, that doesn’t mean we’re reinventing the economy. We’re light years behind in technology, both in technology companies and in the application of technologies in our businesses. What does that mean to you, “Canada needs to reinvent its economy, as it did after the Second World War”?
You do a lot of reading. I see behind you books by Bill Morneau and Mark Carney. You may have a definition of what reinventing the economy means to Minister Champagne. What would that lead to in terms of a position on reinventing our economy?
Mr. Jean: It’s funny, but the book that talked most about reinventing the economy was Mark Carney’s. However, the book was more about reinventing it in the direction of transition, and bringing the economy into the service of climate transition.
The imperative remains present and important, but there are many emergencies competing on this in the short and medium term. Indeed, Canada has wealth that many countries envy, whether it’s in the natural resource sector — no need to mention fossil fuels — but also everything related to the mining sector, which has applications for infrastructure tied to artificial intelligence, particularly for national defence. Once again, tomorrow’s technologies and these critical minerals are at the heart of needs around the world. Right now, China has the upper hand on that and controls the supply chain from end to end. The opportunities are there.
We’re still talking about the workforce and the education provided by institutions. What’s peculiar is that the United States is known for its stable institutions, its high-performing research sector and the rule of law. At the moment, all of that is being eroded, whereas Canada is a pillar, which further strengthens our reputation.
I don’t think we have much to reinvent, but as you pointed out, we need to fix the mistakes we may have made that prevented us from occupying the world stage to our full potential. But the ingredients are there. There’s no need to overcomplicate things. I believe that it’s a question of execution.
The Chair: Should we be more aggressive with regard to skilled professionals? Obviously, the behaviour in the United States causes a lot of fear.
Should we be more aggressive in attracting skilled professionals? If we take, for example, the $100,000 H-1B visas, there are a lot of them, and that can encourage people to work here in Canada, even if they work for an American company, to avoid paying that $100,000 visa. I think many other things could be done.
Is Canada aggressive enough on the skilled professional issue?
Mr. Jean: In my opinion, we aren’t doing enough. After the 2016 election, the United States had the same president, and at that time, Prime Minister Trudeau welcomed with open arms people who were paying the price for that hostility, which led to some good things in the technology sector in Toronto.
We managed to develop a sector thanks to the talent we were able to acquire at that time, but we were in a completely different situation regarding our capacity to accommodate immigration. Today, it’s more complicated, we have to be much more selective and there’s less room.
That said, when we talk about recruiting top minds, we aren’t necessarily talking about Americans. Of course, the best brains on the planet work in the scientific and academic sectors in the United States. So, there’s potential to tap in that country.
However, even for our best and brightest, the brain drain has been talked about for a long time. We could do the opposite, repatriate the top Canadian and Quebec minds who are there, who don’t like what they see and who’d like to come back here.
So the opportunity is there, obviously, but we’re shooting ourselves in the foot on a number of levels. For example, let’s look at what’s happening with the sharp reduction in the number of international students who are a source of funding for many advanced research programs in universities. If we don’t have high-performance, credible and reputable programs, how are we going to attract the best minds to come and do research here?
Many unintended or unanticipated effects are holding us back. However, I agree with you that we fundamentally need to run a fairly aggressive campaign not only to attract foreign talent but also to set conditions that will enable their success here.
The Chair: Thank you very much. I think the meeting is over, because we’re a little over time. That was very interesting, Mr. Jean. I think that the senators and those listening to us greatly appreciated your presentation. We’ll certainly see you again, if you are generous enough to accept our invitations in the future. Thank you very much.
(The committee continued in camera.)