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The Estimates, 2017-18 (Main Estimates-Sixteenth Report of National Finance Committee)

 

Honourable senators, I rise to speak to the Main Estimates, which is the government's second money request for this fiscal year.

The government's first money request was for interim supply, which authorized funding for the first three months of the fiscal year, covering the months of April, May and June. Since June 30 is fast approaching, these Main Estimates must be approved on or before June 30 so that government will have funding for the remainder of the fiscal year.

According to the Main Estimates, the government plans to spend $258 billion this year. They are actually requesting parliamentary approval for $102 billion of the $258 billion, as the difference of $156 billion represents statutory expenses which have already received approval in accordance with other legislation. This would include items such as equalization payments and Old Age Security benefits.

Honourable senators, until 2006, Main Estimates were usually tabled after the budget and therefore included budget initiatives. However, after 2006 the Main Estimates were tabled before the budget and therefore did not include budget initiatives.

To correct this problem, the government has proposed changes to align the Main Estimates and the budget. These proposed changes have been discussed extensively with the House of Commons Standing Committee on Finance, as well as the Standing Senate Committee on National Finance. The current President of Treasury Board has also held several information sessions for all parliamentarians on this matter.

As a result, expenditures indicated in the Main Estimates are different from the expenditures indicated in the budget. In summary, the Main Estimates do not provide an overall picture of the government's planned spending for the year, as anticipated in their budget.

This year, again, we are faced with Main Estimates that show different expenditure numbers than those in the budget. While Budget 2017 indicates total expenditures of $330 billion for this year, the Main Estimates indicate a lesser amount of $258 billion, a significant difference of $72 billion.

The government's requests for funding for a fiscal year do not come forward in one request. Rather, there are five requests throughout the year entitled Main Estimates, interim supply, Supplementary Estimates (A), Supplementary Estimates (B) and Supplementary Estimates (C).

Because the government's requests for funding are staggered throughout the year, comparison between years at periodic intervals is not particularly useful.

For example, Employment and Social Development Canada, in their Supplementary Estimates (A) for this year, indicated to the committee that of the $585 million they are requesting, a full $455 million are for items referenced in last year's budget.

The Parliamentary Budget Officer, in his review of Main Estimates, encountered similar problems. For example, this year, the government earmarked $8 billion in new spending for infrastructure, yet the Parliamentary Budget Office could only identify about $5.5 billion in these Main Estimates.

The Parliamentary Budget Officer, in his report on Supplementary Estimates (A), attached a chart to his report outlining this year's budget initiatives and then indicating whether the funding is included in Supplementary Estimates (A), because they are not in the Main Estimates.

His analysis indicated that Supplementary Estimates (A) included only 19 of the 94 budget initiatives in the 2017 budget. $1 billion in funding in the 2017 Supplementary Estimates (A) was requested for these 19 budget initiatives. The remaining 75 budget items totalling $1.25 billion have yet to be requested.

This is how the current Parliamentary Budget Officer concludes his review:

The Government has proposed improving the alignment of the budget and the main estimates by delaying the main estimates until May 1 and revising internal processes. Given the limited number of Budget 2017 measures that are included in these supplementary estimates, — which were tabled after May 1 — this proposal may not result in meaningful improvement in the alignment of the budget and the main estimates.

Last week, Mr. Kevin Page, our former Parliamentary Budget Officer, testified before the Senate's National Finance Committee. He concluded that our estimates system is "broken" because we are reviewing Main Estimates for this fiscal year and they are aligned with last year's budget and not this year's budget.

Unfortunately, not all departments, when requesting funding, indicate whether the funding relates to budget initiatives in the previous year or the current year. As a result, it is necessary to cross-reference funding requests with the current year's budget as well as the previous years' budgets. And the budget, which announces new or additional spending, usually includes a general description, which cannot be cross-referenced to a particular department or program.

Needless to say, this is a serious problem as it is very difficult to track government spending plans and related budget initiatives to the Main Estimates and supplementary estimates.

Even the President of the Treasury Board, in his testimony before the National Finance Committee last Thursday, referred to this process as an "asinine, absurd, ridiculous process to have the Main Estimates being tabled before the budget." His conclusion was that this process made no sense.

Honourable senators, throughout the year, committee members have been following developments in the housing sector with interest. Of particular concern is the impact that negative events in the housing sector could have on the government's fiscal framework. Selling prices of homes in Vancouver and Toronto have increased significantly over the past year, and both cities have implemented new policies to cool the market.

The federal government also implemented last fall more stringent rules for potential homeowners seeking mortgages. For example, the government increased stress testing standards to ensure people could still afford their mortgages at higher interest rates than they are currently paying. In addition, lenders can no longer insure mortgages on homes with a purchase price over $1 million, nor can they insure mortgages on homes purchased for rental or as investments.

Although CMHC has said that total insured volumes fell 41 per cent in the first quarter of 2017, Finance officials, when testifying at the National Finance Committee, said it was too early to determine the impact of the new rules.

Concerns are also being expressed about increasing consumer debt, including mortgage credit, which has been growing faster than disposable income. Inherent in this is the risk associated with record low interest rates and individuals' ability to cope with an increase in interest rates, which many economists say is imminent. In addition, premiums for mortgage insurance were increased in March of this year after new rules were implemented requiring mortgage insurers to have more capital on hand as a hedge against potential losses.

CMHC, the Crown corporation, provides mortgage insurance and is, in fact, the provider of the majority of mortgage insurance. Canada Guaranty and Genworth also provide mortgage insurance. They are regulated by the Office of the Superintendent of Financial Institutions and were also required to increase their premiums.

Last month, the Finance Committee met with officials of Moody's Investors Service, the International Monetary Fund, the Office of the Superintendent of Financial Institutions, the Department of Finance and CMHC to discuss the housing market and whether it could impact the government's fiscal framework. Moody's downgraded the credit rating of Canada's six largest banks on May 10, citing concerns that expanding levels of private sector debt could weaken asset quality in the future.

Moody's further elaborated by stating that:

Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past.

An official of the International Monetary Fund testified on May 30 when they were in Ottawa for their annual consultation process. At that time, we were informed that, during consultations, the housing market had come up as an important issue for the Canadian economy, citing the problems at Home Capital, house prices in Toronto and Vancouver, the ratings' downgrade by Moody's, the high level of household debt and the exposure of the banks to the housing sector. We were informed, for example, that mortgage lending alone accounts for 45 percent of the banks' total loans. Of particular interest were comments regarding the government, that a significant portion of mortgages are backed by the full faith of the government.

CMHC also discussed the consultations currently being undertaken by the Department of Finance on lender risk-sharing for government-backed insured mortgages. CMHC officials also testified regarding the corporation's mandate and programs, as well as the government-backed mortgage insurance, which currently stand at $500 billion.

CMHC informed us of their stress-testing program, which is designed to understand the impacts of changes in the economy as well as other types of circumstances that could impact CMHC. Officials informed us that they try to tailor the stress scenarios to the actual reality of the market. For example, last year they looked at a U.S.-style housing correction, which is a 5 per cent increase in unemployment and 30 per cent decrease in house prices. This year they are looking at a more severe house price decline because house prices have continued to elevate.

CMHC officials informed us that, in addition to the programs provided by the corporation, they are a stabilizer when the economy is under stress. For example, in 2008 and 2009, when the private mortgage insurers were under stress and reduced their participation in the market, CMHC indicated that they had helped keep the housing market going and ensured stability in that sector.

In concluding their testimony, CMHC officials informed us of the following. This is a quote from their testimony because I wanted to convey to senators the assurances that we were given by CMHC:

Recent developments, including Home Capital and the downgrading of Canada's big six banks by Moody's Investors Service, has caused some to question the stability of Canada's housing finance system. Moody's is a respected credit rating agency and its opinion matters to market participants. Notably, Moody's has cited high levels of household debt and elevated house prices as key reasons for the downgrading. . ., This is consistent with CMHC's analysis of market conditions.

Having said that, CMHC is not concerned about the state of our financial exposure and we remain confident in Canada's housing finance system in general. Canada's banks have consistently been rated among the strongest in the world. Moreover, CMHC's latest stress testing results demonstrate that the corporation has sufficient capital to withstand severely disruptive economic conditions.

This is not the first time Canada's big six banks have been downgraded, but it does provide a note of caution that we need to remain vigilant against risks that could jeopardize the stability of Canada's financial system.

Last week, the Bank of Canada said that the high levels of household debt and red-hot housing markets pose the biggest threat to the stability of the country's financial system. Mortgages and home equity lines of credit make up about 90 per cent of Canada's household debt, and the Bank of Canada has previously said that it is concerned that mortgage credit is growing faster than disposable income.

Other than Vancouver and Toronto, price increases have been moderate, but the areas where housing has been growing the fastest make up about half the value of Canada's housing stock and about one third of the population. As a result, the housing situation in Vancouver and Toronto could have an impact across the country.

The Standing Senate Committee on National Finance held four meetings on the Main Estimates and we heard from 21 witnesses from eight organizations.

As I have already mentioned, a number of departments and agencies indicated that most of the initiatives outlined in the budget are not included in the Main Estimates, as the Main Estimates are prepared before the budget is released.

Officials from Health Canada indicated that increased funding has been provided for a number of programs, including an increase of $440 million for First Nations and Inuit health programs. Officials discussed health and social services provided to First Nations children living on reserves, the Indian Residential Schools Settlement Agreement, funding for mental wellness programs, as well as funding to assist First Nations communities with access to safe, reliable water and waste water services.

Canadian Heritage officials discussed a number of initiatives including the Canada 150 Fund established to celebrate the one hundred and fiftieth anniversary of Confederation to support numerous community and national activities. Officials also discussed a number of budget initiatives for which funding will be requested through Supplementary Estimates.

CMHC's funding of $2.7 billion in the Main Estimates reflects a budgetary increase of $700 million, of which $576 million is for social infrastructure. CMHC officials also discussed their budget allocation of $30 million for market research and analysis, including insights into housing markets that are overheated and information on escalating housing prices. They indicated they are expanding their surveys to provide more timely and more accurate information on the housing market.

This issue of the housing and consumer debt has been ongoing for the past year, and we've been very concerned about it. Even within the last day, there have been at least three articles on housing, interest rates and debt. There's one here from yesterday where Canada's Finance Minister, Bill Morneau, said he discussed with his provincial counterparts whether more actions are needed to ensure the stability of the country's housing market.

There was also an article where the Bank of Canada raised with sudden urgency a July rate hike in Canada. It looks like the interest rates increase is very imminent. Some people are really borderline with regard to managing their debt.

There's another one. The Parliamentary Budget Officer just released a report today where he's saying that Canadians will have to devote an unprecedented amount of their income to debt repayments as interest rates return to normal levels.

So the housing and interest situations are really concerning.

My last comment relates to the Department of National Defence officials who testified before the committee on March 8. They discussed a number of current issues, but I was particularly interested in the Canadian Army Reserve, because the Auditor General had conducted an audit last year of that area of the department. It's of some interest to me because Newfoundlanders and Labradorians are well represented in the Canadian Armed Forces.

The audit identified numerous serious problems and concluded, among other things, that the number of Army Reserve soldiers has been steadily declining and the reserve units did not have the number of soldiers it needed. It also indicated that funding was not designed to fully support training, units were not fully prepared for domestic missions, and units lacked clear guidance on preparing for major international missions and were not fully integrated with the regular army.

I was very disappointed when officials informed us that no additional funding has been provided to address the serious problems with the reserves.

The recently released Defence Policy Review references the Army Reserves, committing to an increase in soldiers, new operational roles and further integration into the total force.

Unfortunately, no new funding has been provided for the reserves.

That concludes my remarks on the Mains Estimates.