Finance Committee on Sept. 25th, 2006

[Andrew Jackson]

Well, I guess it came to what we said in our advice to this committee in the fiscal year before that surplus was run. Our focus would have been on social investments. I think there are many areas of expenditure, including training, infrastructure investment, where there's a direct sort of link between that investment and long-term growth and productivity. So my preference wouldn't have been to run a surplus of that size. That said, I wouldn't argue that there are no benefits from that. I mean, clearly, it does have some benefits moving forward in terms of the effect.

[Garth Turner, Conservative, Halton, ON]

But as an economist, do you feel that a $13-billion debt pay-down is a good move, a bad move, or no opinion? Given the size of our debt, the implications of the debt on the economy, debt-servicing costs as a proportion of program expenditures, do you feel that this is an appropriate move?

[Andrew Jackson]

I guess I find it hard to answer the question when we're talking about a period of time. I mean, clearly, that means we have come through a period in the past when the rate of taxation was excessive relative to the current spending—

[Garth Turner, Conservative, Halton, ON]

It's a pretty simple question, though. It's about debt reduction. Is that, in your opinion, a good expenditure of surplus funds?

[Andrew Jackson]

I think it's inferior to the alternative of increasing government expenditure.

[Garth Turner, Conservative, Halton, ON]

So we should have spent it instead?

[Andrew Jackson]

Yes.

[Garth Turner, Conservative, Halton, ON]

All right. Interesting.

Now, you talk about the—

[Andrew Jackson]

I was only surprised by the size of the number. I think—

[Garth Turner, Conservative, Halton, ON]

You answered your question. Next question. The impact—

[Andrew Jackson]

Well, just wait. With respect, I said I could only have answered the question of how a likely surplus should have been allocated in the advanced discussion. In my world, there would still have been this—

[Garth Turner, Conservative, Halton, ON]

In your world you'd spend it. I heard that.

[Andrew Jackson]

No, in my world there would still have been a surplus and it would have been paid down to the debt, because it would have been an unanticipated surplus.

[Garth Turner, Conservative, Halton, ON]

Thank you.

Next question. You talked about the problems we're having in manufacturing, companies shutting down. The only thing I see you attribute this to is the high dollar value. Surely, if we're uncompetitive in terms of manufacturing, losing manufacturing jobs, is there not a high labour component involved there? Is there not a high government overhead component involved there, and also a lack of productivity? How can you blame it all on the exchange rate? I mean, you're a smart guy; you're an economist.

[Andrew Jackson]

We're going to be putting out a paper shortly and you will find that it addresses a wide range of issues. I certainly wouldn't say the dollar is the only factor, but when you go from a 64¢ dollar to an 89¢ dollar, that's a pretty huge adjustment for companies to go through.

[Garth Turner, Conservative, Halton, ON]

Yes, but it's the only factor in your brief. It's the only one you referred to. Why did you refer to just one? As I said, you're a smart guy; you know all these other factors. Why did you ignore them?

[Andrew Jackson]

The limit on the length of a brief is what, ten pages? I was endeavouring to flag some important issues. I have several papers on productivity that we've produced, which I'd be happy to send to you. I absolutely agree that the exchange rate is by no means the only factor. I would argue, with respect to the productivity issue and sound use of funds, that investment in human capital is a big part of the piece, and public infrastructure—

[Garth Turner, Conservative, Halton, ON]

But I'm thinking, for example, of high labour costs. Are they not part of the component that makes our manufacturing sector uncompetitive? Is that not a factor?

[Andrew Jackson]

Our unit labour costs in manufacturing have been actually declining, if memory serves me, over the last year or two. Productivity growth has been quite rapid in Canadian manufacturing. An increase in labour cost is absolutely not a factor in the current situation.

[Garth Turner, Conservative, Halton, ON]

As a final question—

[The Chair, Conservative, Brian Pallister]

You have twenty seconds.

[Garth Turner, Conservative, Halton, ON]

—as an economist would you not agree that our low exchange rate over the past few years has just masked problems in productivity, and that now that we're getting into a more historic balance in our exchange rate those problems are coming home to roost? And should we not be addressing them structurally?

[Andrew Jackson]

I would argue as an economist that probably the exchange rate now is overvalued. I would agree it was previously undervalued. I think there was a tipping point reached when we hit the high seventies- and eighty-cent level, which by the way would equalize unit labour costs between Canada and the U.S.

The other major factor that's very much in play here that we have to get our heads around is the competition from China, the surge in Asian exports to the North American market. I'm not sure the exchange rate alone lies behind that.

[Garth Turner, Conservative, Halton, ON]

That's at the heart of high labour costs again. We're a high valued-added country.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Turner; your time has elapsed.