Finance Committee on Nov. 5th, 2013

[The Chair, Conservative, James Rajotte]

I call this meeting to order.

This is meeting number three of the Standing Committee on Finance, and as per the orders of the day, pursuant to Standing Order 83.1, we are starting our pre-budget consultations.

Colleagues, before us today, first of all, we have the Canadian Council of Chief Executives, Ms. Ailish Campbell, vice-president. From the Conference Board of Canada, we have Glen Hodgson, senior vice-president and chief economist. Welcome.

From Financial Executives International Canada, we have the chair of the policy forum, Mr. Peter Effer.

Am I pronouncing your name correctly?

[Peter Effer, Chair, Policy Forum, Financial Executives International Canada]

Yes, sir.

[The Chair, Conservative, James Rajotte]

Welcome.

By video conference, we have Monsieur Yan Hamel, the chairman of the board of directors of the Association québécoise de l'industrie touristique.

Bienvenue à ce comité.

[Yan Hamel, Chairman, Board of Directors, Association québécoise de l'industrie touristique]

Thank you.

[The Chair, Conservative, James Rajotte]

And we have with us, from Toronto, Mr. Ian Russell, president and CEO of the Investment Industry Association of Canada.

Welcome to all of you. Thank you for being with us today.

You will each have five minutes maximum for your opening statements. We will begin with Mr. Hodgson, then, and proceed in that order.

[Glen Hodgson, Senior Vice-President and Chief Economist, Conference Board of Canada]

Thank you, Mr. Chairman.

Good morning to members of the committee. It's not the first time we've been here, and I hope it won't be the last. In view of the time constraint, I'm going to make three comments to start.

First of all, on our growth outlook for 2014, the Conference Board is one of the forecasters of record, I would argue, in the country. Right now our forecast is for growth to pick up a bit in 2014, to 2.4% in real terms. The key element is what's happening on the inflation front. Steve Poloz's last commentary about the Bank of Canada moving to a more balanced position on interest rates was interesting and probably is a leading indicator that inflation will not rebound, as we were forecasting earlier this year, to 2%. Now, that matters because what governments tax is the nominal economy.

Real growth is good, but you have to add the real growth forecast together with inflation. If we add them together, we end up with a nominal growth of around 2.25% to 2.50% next year, and I think there's more downside risk than upside. Normally low inflation sounds good, unless you're a government that's trying to generate revenues. The combination of recovering growth and inflation being fairly weak suggests that nominal growth will probably be below 4.4% next year. We do a revision of our forecast every quarter, and we'll have the numbers some time before the budget process starts up. By the end of the year or early into 2014, we'll have a revised number on the growth.

The other point I wanted to make, though—point number two—is that we do a long-term forecast for Canada as well. We'll do a short-term outlook for over the next 18 months to five years, but we're one of the few organizations to do a long-term forecast. Our view of the next 20 years going forward is that we're now entering a period of much slower growth potential for Canada, at around 2% after 2015. We're still not fully back to potential, to a kind of long-term growth path for our economy, because of the depth of the financial crisis recession. We're getting close to it, but after 2015, our view is that Canada can only grow on a sustained basis at 2% without feeding inflation.

That's a very different world from the world we've lived through in the last 25 years, where growth of 3% to 3.5% in real terms was the norm. That means that governments are going to have to learn how to live with slower growth on a going forward basis. That's why you see provincial governments, for example, all working hard to get back to balanced budgets right now. They know there's going to be pressure. The challenge of generating enough revenue to pay for health care and education going forward is going to be more acute.

As you think about the kind of advice you're going to give as a committee to the government, you have to look over the hill and think about what growth is going to look like after 2015. A world of 2% growth is very different from what we've lived through in the past, and that means that if you want to transfer more money to provinces, for example, you have to live within the growth constraint. If you want to put more funding into infrastructure, again, you have to live with a world of slower economic growth.

The theme we were given as witnesses was to talk about economic growth. We could go on at great length, but for my last point I'm going to put three markers down.

I think there are three things that governments and budgets going forward must address, almost as a chronic condition. One is investing in human capital. The reason growth is slowing is because of slower labour force growth and aging populations. We won't have as many workers entering the workforce, and that means we'll have to find a way to constantly upskill the workforce we have. The investment in human capital will be a critical piece of our growth strategy.

The second thing is investment in infrastructure. In the last budget, the government committed to increasing its investments in infrastructure. We think that's a good start, but probably not adequate for the long term. We haven't seen updated numbers from people at the Federation of Canadian Municipalities for a while, but they used to talk about an infrastructure deficit of about $125 billion for the country. Governments at all three levels are addressing that now. We have a long way to go. Look at the state of our transportation infrastructure at the border and elsewhere. It's a huge challenge.

With one minute left, the last point I'd make is on tax reform. We're creating a new centre at the Conference Board to use our research to try to identify areas where tax reform could contribute to economic growth. I know this committee has talked about that in the past. I think the time has come to have a serious national conversation about revamping our tax system to try to boost the growth potential of our economy.

Chairman, I'm going to stop there, but I'm quite happy to take questions.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Hodgson.

We'll now go to Mr. Effer, please.

[Peter Effer]

Good morning.

I'm Peter Effer, chair of the policy forum of Financial Executives International Canada, and we are honoured to be here today.

FEI Canada is a voluntary professional membership association comprised of 1,700 of Canada's chief financial officers and other senior financial executives who work in all industries and sectors across the country. The recommendations that we are presenting to you today were prepared by some of these volunteer members and are generally representative of the views of all our members.

As senior financial executives, we control costs in our organizations as much as possible while growing our businesses. We lead our organizations to do more with less. It should come as no surprise that Canada's financial executives agree that fiscal restraint should remain a top priority for the federal government.

FEI Canada recommends that the federal government retain its objective of balancing the budget in the near term, while Canada's economy is relatively stable, and then use any budgetary surplus to grow the economy and pay down some debt. Fiscal prudence will enable Canada to maintain social programs at the current levels as the population ages, to withstand future international economic headwinds, and to support high levels of employment during the slower periods of the economic cycle.

We encourage the government to balance the budget without raising corporate or personal income taxes so that Canada remains globally competitive and accessible to domestic and global investment capital. If additional tax revenue is required to balance the budget, the GST rate should be increased, as value-added taxes are viewed by most economists as an efficient and progressive form of taxation.

In our submission, FEI Canada offers suggestions that will save costs. One method involves simplifying the federal Income Tax Act by removing certain complexities and administration embedded in this act. This would save administrative costs for both the government and taxpayers, particularly small and medium-sized enterprises, which are key drivers of the economy.

For instance, the government should immediately allow a company to elect to include capital losses in its eligible capital expenditure pool. In the near term, a company should be allowed to transfer non-capital losses and net capital losses at least to another related company operating within the same provincial tax jurisdiction, and, when feasible, to any related company within the same corporate group, rather than, for those who can afford to, undertaking costly corporate reorganizations to achieve the same result.

For GST purposes, companies should be allowed to elect to claim input tax credits in a related company, similar to the election currently available that allows another taxpayer to remit GST. The election would simplify both taxpayer reporting and government audits of the GST by reducing the number of relevant GST returns that would be filed and then audited, with no change in net tax collected by the government.

Lastly, introducing legislation that requires a mandatory settlement process at the field audit and/or objection level for both income tax and GST would reduce tax audit dispute costs for both government and taxpayers.

Economic growth, driven by job creation, is enhanced when innovation is fostered and allowed to flourish. Innovation creates new products and services for use and sale by Canadian companies, which leads to increased productivity and employment. FEI Canada suggests that the federal government allow companies in all industries engaged in innovation to issue flow-through shares to access capital through the monetization of development and related commercialization expenses. This would be similar to the program that exists in the resource and mining industries. Companies issuing innovation flow-through shares would renounce qualifying SR and ED expenses and tax credits to shareholders, who would claim these amounts on their tax returns. This program simply transfers tax deductions and tax credits from one taxpayer to another.

We believe expenditures incurred up to product commercialization should also be eligible for this flow-through to encourage the private sector to fund costs associated with converting ideas into marketable products. This program would be beneficial for start-up firms that are not yet earning taxable revenue in excess of innovation expenses—

[The Chair, Conservative, James Rajotte]

You have one minute.

[Peter Effer]

—and particularly beneficial for similar public innovative companies that are not entitled to refundable SR and ED tax credits. This recommendation should attract investable capital from idle cash in the private sector that could be deployed to increase innovation activity in Canada, which in turn should reduce reliance on government-funded programs and increase economic activity and employment.

In conclusion, we believe our recommendations will promote fiscal sustainability by reducing government and taxpayer costs and foster economic growth through innovation.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Next,

Mr. Hamel, you have five minutes to make your presentation.

[Yan Hamel]

Mr. Chair, madam, and members of the committee, good morning, and thank you for this opportunity to discuss economic growth, an important target for the tourism industry, one for which we know we can play a capital role.

The tourism industry is a major source of wealth. Here in Canada in 2012, tourism accounted for 2% of the GDP, outperforming agriculture, fishery and the forestry industries combined. Last year, tourism generated $82 billion in revenue. For the same period, export revenue generated by international visitors spending in Canada reached $17 billion.

The 180,000 Canadian tourism businesses support 1.7 million jobs nation-wide, both directly and indirectly. Tourism is produced and consumed here. The jobs it creates can't be offshored. Tourism is good business for governments: in Quebec, $1 of public funds invested in the industry generates $5 in tax and incidental tax revenues. The positive economic impact of the tourism industry is crystal clear.

And the timing couldn't be better to capitalize on this industry since globally, tourism is booming. International tourism receipts reached USD 1 trillion in 2012—a 4% increase compared to the previous year. This performance makes tourism the fourth export sector worldwide and the World Tourism Organization is forecasting a continued growth of 3% to 4% annually until 2030.

One can easily conclude that the development of a strong Canadian tourism industry is perfectly aligned with the government's priority of fostering economic growth, job creation and long-term prosperity. However, as the industry is growing around the world, Canada is simply missing the boat and the country's market shares are plummeting! Canada's massive travel deficit is nearly $18 billion, having increased by 736% in 10 years. These incredibly poor results are extremely worrying.

Our industry has identified marketing, access and product as the three essential components of success for a destination. Here in Canada, we benefit from enviable product and infrastructures. Canada even sits at the top of the list when it comes to destination reputation. While we should be capitalizing on this positive sentiment, the lack of promotion of our destination and our aviation cost structure severely hinder our efforts and diminish the country's attractiveness.

Between 2002 and 2012, Canada cut its marketing budget by 42%. In 2014, that budget will be a mere $58 million. Over the past decade, Canada has seen a dramatic decline of its international arrivals, slipping from 7th to 16th position. Among the world's 50 most popular destinations, only 5 have seen a decrease in international arrivals and Canada is part of that group.

A competitive aviation cost structure is key for a destination aiming to attract international visitors and to encourage its population to visit and vacation in the country. Canada just doesn't cut it on that front. Our airport infrastructures are extremely well-ranked globally, but the Canadian aviation cost structure drags the country all the way down to 124th place out of 140 in terms of cost competitiveness.

We come to you with two crucial recommendations that will allow Canada to regain its strategic position on foreign markets. Firstly, for quick impact, we recommend creating ''Reconquer USA'', an additional marketing campaign aimed at our biggest proximity market and led by the Canadian Tourism Commission. Targeting a specific segment of the American market in order to generate immediate returns, this marketing campaign will utilize twinned cities to increase direct visitation from key regions across the US. “Reconquer USA” is a three-year, $35 million a year federal investment, which will be fully matched by the industry for an annual investment of $70 million. The campaign will generate $205 million in federal tax revenues; six times the investment.

Our second recommendation: a full review of Canada's aviation cost structure. Our current cost structure downloads the cost of the system onto the individual traveller, impeding the tourism industry and the economy. Just like successful tourism destinations, it is crucial to consider investment in the aviation sector as an instrument of economic development. By welcoming more international visitors through tourism, Canada has the potential to increase its exports and its overall revenues. The country must implement policies that will increase its competitiveness on the global stage.

In short, international tourism is booming. Canada has a huge travel deficit but the potential is there to generate far greater economic benefits. We must invest more in promotion and develop more competitive air travel access. Tourism is an investment. It pays off!

Thank you for your time and attention.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Next, we will have Mr. Russell, please, for your five-minute presentation.

[Ian Russell, President and Chief Executive Officer, Investment Industry Association of Canada]

Good morning, ladies and gentlemen. My name is Ian Russell and I am the president of the Investment Industry Association of Canada in Toronto. I am happy to have this opportunity to submit our recommendations to the Standing Committee on Finance.

In my remarks this morning I want to briefly sketch the background in the small business capital markets and describe in particular the capital-raising process in Canada and our policy recommendations.

Clearly, the challenge for your committee, Mr. Chairman, is to look at ways to reignite the growth in the Canadian economy. We've just heard a fairly pessimistic view of the economic outlook. The one fortunate element that Canada has is a little more fiscal manoeuvrability than our trading partners to find selective tax measures and spending measures to promote growth.

I want to talk about the capital-raising engine of the Canadian economy, which is essentially the marketplace that small businesses tap to raise capital. It's very important for the committee to understand that this marketplace is very successful, is envied around the world, and is probably the key reason why the London Stock Exchange was interested in merging with the Toronto Stock Exchange four years ago. It's a marketplace that's sophisticated, diversified in terms of the participants, very leading-edge and innovative in terms of the financing structures that have been in place, and also very diversified in terms of the size of companies that have been able to come to the market, even companies that one would describe as emerging companies in the Canadian corporate sector.

At the moment that infrastructure is under siege from two factors in particular. The obvious one is very slow growth in the Canadian economy and in the capital markets, but in addition to that, there's been a rather depressed sentiment among investors, particularly for speculative investments. As a consequence of all that, Canadian companies have had a very difficult time raising capital. In fact, this year we estimate in total—these would be small business capital raisings in the public market and in the private placement market—something in the order of $2.5 billion to $3 billion. That compares to roughly $10 billion pre-crisis period. And it has fallen pretty dramatically over the past two years. Two years ago those companies raised about $6 billion. So it's very difficult for companies to come to the market.

The other point that is important for the committee to understand is that this public marketplace is the prime source of capital raising for small companies. We have a venture capital sector. In 2012 it raised about $1 billion for small Canadian businesses, mainly emerging businesses. Half of that came from U.S. venture funds. We also have a vibrant angel network, which is difficult to get estimates on, but it probably would be in the order of $2 billion to $3 billion a year. That runs under the radar screen. That's important for small businesses, but it does not in any way compare to the size of our public and private marketplaces.

From a policy perspective, we need to find ways to assist companies to bring those issues to market, and also to encourage investors to invest in speculative risk investment. We have argued for selective tax incentives to promote that capital-raising process, which are outlined in my submission.

The last point I want to raise is that the other factor that is putting pressure on that marketplace is a very heavy regulatory burden that the securities industry, the capital markets at large, have faced over the last five years.

This is not to argue that all of that is not well intentioned or in fact needed. But our view is that it's moved very quickly, and it's been very extensive, in our industry in particular, and I think that has, in a way, contributed to the likelihood of excess costs and unintended consequences.

The solution to that is for more effective regulation. In our view, one of the ways that can be achieved is through the proposed cooperative securities regulator that's on the table now, put forward by the federal government. We're supportive of that for two reasons. One is that it will significantly strengthen the accountability and oversight of the regulator, which will provide a discipline to improve the effectiveness and efficiency of securities regulation.

The other is that it will clearly streamline regulation and lower costs that way. This is certainly a vehicle supported by the federal government, but I would like to see the House of Commons finance committee take up its support formally. It is something that would provide a benefit to this marketplace I've talked about.

Those are my remarks, Mr. Chairman.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Russell.

We'll go to Ms. Campbell, for your five-minute presentation, please.

[Ailish Campbell, Vice-President, Policy, International and Fiscal Issues, Canadian Council of Chief Executives]

Thank you so much, Mr. Chairman, committee members, for the invitation to appear here today.

Before I begin my specific comments, let me briefly introduce the Canadian Council of Chief Executives.

The Canadian Council of Chief Executives is a non-profit and non-partisan organization made up of 150 of the leaders of the largest companies in Canada.

CCCE members collectively administer $4.5 trillion in assets, have annual revenues in excess of $850 billion, employ close to 1,500,000 Canadians, and are responsible for the vast majority of Canada's exports, investment, research, and training.

The framework for my remarks today is the objective of a Canada that, looking out over the next 20 years, becomes the smartest, most global country in the world. Furthermore, we believe that the benchmarks to measure our progress towards this goal should be against the best in the world. We suggest that the critical questions in front of this committee, and indeed in front of Canada, related to this objective are: where will prosperity come in the future; where will jobs come in the future; and given where Canada can grow its wealth and create jobs, what are the best investments today to prepare us for that future?

Let me present a few ideas. The first concerns trade. Let me congratulate the government on the conclusion of the Canada–EU Comprehensive Economic and Trade Agreement. Canada has achieved an ambitious outcome that will deliver results for every region of the Canadian economy. CETA reminds Canada of its trading roots. In short, Canada has what the world needs: high quality and reliable services and goods; a reliable and diverse food supply chain; resources; and a stable investment climate. It is time, I would submit, for Canada to turn its attention to Asia. Our approach there should be rooted in promoting Canadian products and services and investment in Canada, not protectionism.

Looking forward, the critical steps are: an ambitious conclusion to the Trans-Pacific Partnership Agreement; conclusion of bilateral negotiations ongoing for some time with South Korea; conclusions with India and Japan to bilateral trade agreements; and a clear path forward for deeper cooperation, trade, and investment with China. A clearly articulated policy towards foreign direct investment is another key policy piece.

As your committee prepares for Budget 2014, we submit that specific and special attention be paid to full resources for Canada's trade negotiating teams, an ambitious budget for the trade commissioner service, so important to diversifying Canada's exports for firms of all sizes, and support for Export Development Canada, including permanent and flexible domestic financing provisions.

We also call on provincial governments to join with the federal government in committing, through the Agreement on Internal Trade, to extend to each other every market access opening we have provided through international agreements. We cannot treat foreign firms better than we treat one another. Federal and provincial leadership on the Agreement on Internal Trade is required. We have to up our game and eliminate any remaining internal barriers. We must also ensure that the required domestic infrastructure is in place to export. Landing Canadian products in diverse markets, especially in Asia, will drive demand, price, and Canadian prosperity into the future.

Second is North America. While emerging markets in Asia will be critical to Canada's future, especially growing new exports, the North American partnership remains Canada's most important economic driver. It is time to strengthen and renew this important trilateral relationship.

In our view, please consider three critical actions to upgrade the NAFTA relationship. First, add a mechanism for trilateral cooperation to the dual bilateral regulatory cooperation process already under way. Second, facilitate the movement of business travellers between our countries, including looking at the concept of a trusted employer program that would function like a NEXUS card for business.

[The Chair, Conservative, James Rajotte]

You have one minute, please.

[Ailish Campbell]

Third, realize the potential of the continent's energy resources while also increasing energy security, in particular through energy infrastructure and expanding opportunities for Canadian renewable energy.

On the Canadian labour market, Canadian Council of Chief Executive members are among the largest employers in Canada. Specific skill shortages in certain sectors, regions, and occupations and future demographic challenges are among the top concerns of Canada's business leaders. These issues must be addressed to create opportunities for private sector investment and economic growth. The Canadian Council of Chief Executives has adopted as one of its priorities an initiative to look at the jobs and skills of the future, and I look forward to reporting back to this committee on that work.

In conclusion, Canada operates from a position of strength. We fully support the government's efforts to achieve a balanced budget by 2015, and we also call on provincial governments to articulate a road map to fiscal sustainability. Competitive tax rates on all forms of taxation are also essential. It is not enough to have tax rates that ensure Canada is the destination of choice for investments in North America; we must be the best in the world.

Thank you. I'm happy to answer any questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll begin members' questions with five-minute rounds.

Ms. Nash, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, Mr. Chair.

Good morning, everyone. Welcome to the finance committee.

Mr. Hodgson, I'd like to start with you and the great work the Conference Board does in analyzing our economy and in giving us report cards about how we compare with our own record and how we compare internationally. There are a couple I'd like to get more information about.

In the recent economic performance report card, you noted that Canada has moved up to sixth place, and that's positive, except it reflects as much the weakness of many other countries at this time. But you noted that Canada fares poorly when compared with some top-ranking economies on many economic indicators, with the exception of inflation and employment growth. My question to you is, what are other countries doing to have better economic outcomes? What can the federal government learn from those other countries that we could do better here in Canada?

[Glen Hodgson]

Thank you very much for the questions.

You've done your homework, obviously. You looked at our website and saw the report cards we do across six different domains. I assume the sixth place was the economy domain.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Yes.

[Glen Hodgson]

What are others doing? It's interesting. The Nordic countries in northern Europe tend to be the star performers on almost all indicators. From the research we do, and from what I've read from other sources, the key difference-maker for the Nordic countries is governance, the quality of governance across the board in the private sector; in the public sector, it's the quality of public services, the ability to actually form consensus around the right policies. So if there's any one factor, I think, that anybody points to, it's probably around governance. It's not necessarily economic policy. That's the product of a governance process where they're prepared to take hard decisions in some cases about changing the course of the country and ensuring that they have the right kinds of anchors in place.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Can you elaborate a bit more on how they arrive at that consensus? And who is the consensus with?

[Glen Hodgson]

Remember, the Nordic countries for the most part are more homogeneous than we are, so Canada really stands out as quite a different place, compared to Sweden, Denmark, Norway, Finland. It's probably easier to form a social consensus in a homogeneous society. There have been, for example, some riots and other events in parts of urban communities where there have been large immigrant populations. So they're not Utopian states, by any means, but they do have the ability, and it's something they've developed over probably the last 100 years, to build social consensus in the way that most other countries marvel at.