In its recent biannual appearance before the Committee, which occurred while pre-budget consultations were ongoing, the Bank of Canada spoke about a range of considerations in relation to the domestic economy. Moreover, a number of the Committee’s witnesses commented on federal fiscal issues, including revenue, expenditures, and budgetary balance and debt reduction.

ECONOMIC ENVIRONMENT

According to the Bank of Canada, economic growth has slowed in all major economic regions of the world, which has restrained growth in Canada; in particular, growth in the United States is slow, Europe is in a recession, the European crisis is expected to continue in the medium term, and growth in China and other emerging economies has slowed. The Bank also stated that the greatest risks to future economic growth in Canada are external, and made particular mention of the potential economic impacts for Canada of a failure to stabilize financial and credit markets in Europe, as well as of the possible scenarios concerning resolution of the United States’ “fiscal cliff,” which refers to such fiscal measures as tax reductions and extensions of unemployment insurance benefits that are set to expire in 2013, and scheduled spending reductions associated with sequestration.

In describing the domestic economic situation, the Bank of Canada stated that most of the economic growth observed in Canada in recent months — 1.8% and 1.9% in the first and second quarters of 2012 respectively — can be attributed to domestic factors. These factors include relatively low interest rates — which tend to increase household consumption and business investment — and high commodity prices — which tend to lead to greater economic growth due to the high proportion of the value of Canadian exports that is commodity-based. That said, according to the Bank, the household debt burden is expected to rise further before stabilizing by the end of 2014, a situation that poses a risk to Canada’s future economic growth. The Bank projected that the economy will grow by 2.2% in 2012, by 2.3% in 2013 and by 2.4% in 2014.

Table 1 – Actual and Projected Annual Real Growth in Gross Domestic Product, Canada, by Organization, 2011–2013 (%)

Organization	Actual	Projected
	2011	2012	2013
Bank of Canada	2.6	2.2 (2.1)	2.3 (2.3)
Department of Finance	2.6	2.1 (2.1)	2.2 (2.4)
Financial Institutions:
BMO	2.6	2.2	2.0
CIBC	2.6	2.1	2.0
RBC	2.6	2.3	2.4
TD Economics	2.6	1.8	2.0
Desjardins	2.6	2.2	2.2
International Monetary Fund	2.6	1.9 (2.1)	2.0 (2.2)

Notes:  The numbers in brackets are previous projections.

According to Statistics Canada’s 1 October 2012 release of historical revisions to the System of National Accounts, Canada’s real gross domestic product grew by 2.6% in 2011, an upward revision from 2.4%.

Sources:     Prepared using data from Bank of Canada, Monetary Policy Report, 24 October 2012, p. 26; Department of Finance, Survey of Private Sector Economic Forecasters, June 2012; International Monetary Fund, World Economic Outlook, October 2012, p. 2; BMO, Canadian Economic Outlook, 19 October 2012; CIBC, Economic Insights, 28 August 2012, p. 12; Royal Bank of Canada, Financial Markets Monthly, 5 October 2012, p. 6; TD Economics, Quarterly Economic Forecast, 18 September 2012, p. 5; and Desjardins, Economic and Financial Outlook, 22 October 2012, p. 2.

In assessing the benefits and drawbacks of reducing federal spending, the Bank of Canada noted that the government’s spending in 2008 and 2009 accounted for up to one third of the country’s GDP growth in 2009 and 2010. It also stated that the subsequent withdrawal of fiscal stimulus and the desire to balance the budget will have a negative effect on economic growth; according to the Bank’s projections, actual federal spending for 2013–2014 is expected to increase GDP growth by 0.3 percentage points, although this contribution is lower than the historical average of 0.6 percentage points. As well, the Bank indicated that, compared with other developed countries, Canada has the lowest debt-to-GDP ratio and, therefore, more policy options.

Regarding the level of employment in Canada, the Bank of Canada noted that the number of jobs fell by 430,000 during the recession that started in 2008; since then, employment has surpassed its pre-2008 level, having increased by an additional 380,000. Furthermore, according to the Bank, the “quality” of the additional positions is high; 77% of the positions are in industries where the wage is above average, 85% are in the private sector, and most are full-time. In comparing Canada to other countries, the Bank noted that Canada is in a much better position than is the United States, which has not yet recovered the number of jobs lost during the recession, and than other G7 countries, which have had slow job creation and have created jobs that are of relatively lower quality. That said, in indicating that employment improvements are still required, the Bank also highlighted that Canada’s unemployment rate is currently 7.3% to 7.4%, the country’s employment-to-population ratio is lower than prior to the recession, and the level of involuntary part-time employment, which reflects a situation where people are working part-time but would prefer full-time employment, exceeds its pre-recession level.

Figure 1 – Year-Over-Year Real Gross Domestic Product (GDP) and Employment Growth, Canada, First Quarter 2001–Third Quarter 2012 (%)

Note:    Gross domestic product (GDP) data used 2007 constant prices. The employment growth calculation is based on average quarterly data.

Source:       Prepared using seasonally-adjusted data from Statistics Canada, CANSIM, Tables 380-0064 and 282-0087 (accessed 19 November 2012) and from the Bank of Canada, Monetary Policy Report, October 2012.

FISCAL ENVIRONMENT

Revenue

In speaking to the Committee about the proportion of tax revenue from various sources, the Canadian Institute of Chartered Accountants said that, compared to other OECD countries, personal income taxes in Canada make a significantly higher contribution to government revenue than do consumption taxes, and that the government should increase the proportion of revenue from consumption taxes. Similarly, recognizing that economists view consumption taxes as the most efficient and progressive form of taxation, Financial Executives International Canada advocated an increase in the Goods and Services Tax (GST) rate, rather than increases in corporate taxes, personal taxes or social security contributions, in the event that additional revenue is required.

Figure 2 – Total Government Tax Revenue, as a Percentage of Gross Domestic Product, Canada and Organisation for Economic Co-operation and Development (OECD) Countries, 2010

Source:       Prepared using data from Organisation for Economic Co-operation and Development, Revenue Statistics StatExtracts, Tables 1100, 1200, 2000 and 5000 (accessed 16 November 2012).

In discussing the sources of revenue that should be the primary focus in the event that additional revenue is needed, the Certified General Accountant Association of Canada suggested that the government should close tax loopholes and prosecute more tax evaders, while the Réseau SOLIDARITÉ Itinérance du Québec said that taxes for high-income individuals should be increased.

Expenditures

In its appearance before the Committee, the Canadian Labour Congress suggested that the government — in partnership with provincial and municipal governments — should launch a major, multi-year public investment program; particular mention was made of municipal infrastructure, transit systems, affordable housing, child care, energy conservation and renewable energy projects. Similarly, the Canadian Union of Public Employees urged higher funding of these initiatives.

The Professional Institute of the Public Service of Canada and Financial Executives International Canada suggested that the government should seek efficiencies in its day-to-day operations. The Calgary Chamber of Commerce stated that growth in federal expenditures for the 2013–2104 fiscal year should be limited to between 2.6% and 3.0% of the average of the previous five years of expenditures.

Regarding reductions in federal expenditures, the Public Service Alliance of Canada asked that the government reverse the reductions that have occurred, while the Canadian Union of Public Employees stated that the government should refrain from making further reductions. The Professional Institute of the Public Service of Canada argued that federal public service employment reductions should be curtailed, especially in respect of jobs related to health and safety.

Budgetary Balance and Debt Reduction

In their appearance before the Committee, and with a focus on eliminating federal deficits, Financial Executives International Canada, the Canadian Federation of Independent Business, Desjardins Group, the Regroupement des jeunes chambres de commerce du Québec, the Canadian Institute of Chartered Accountants, the Canadian Chamber of Commerce and the Mining Association of Canada urged the government to continue to pursue a balanced budget in the short to medium term. As well, the Mining Association of Canada asked that the government continue to prioritize Canada's economic “fundamentals” by preserving and improving the country’s tax levels, and decreasing the national debt.

Transparency and Accountability

In speaking to the Committee about transparency in budgetary decisions, the Public Service Alliance of Canada indicated that the government should receive, and give consideration to, feedback from Canadians before budgetary decisions are made. The Canadian Association of Social Workers argued that the government should have direct responsibility for, and coordinate shared accountability with, the provinces through the Canada Social Transfer (CST); this responsibility and accountability could be similar to the Canada Health Act.