Finance Committee on Sept. 29th, 2014

[Gregory Thomas]

Yes.

[Voices]

Oh, oh!

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Well said; well said.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Brison.

We'll go to Mr. Keddy, please.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Thank you, Mr. Chairman. Welcome to our witnesses here today.

My first question is for Mr. Speer of the Fraser Institute. I'm very interested in your discussion about capital gains, which I'm going to come back to.

Awhile back, your Fraser Institute recommended developing incentives for companies to provide in-house training for young workers. This is something that I think most of us around the table have discussed and certainly support.

At the same time, you also called for the government to loosen the red tape surrounding the temporary foreign worker program. That's a bit of a conundrum to me because we've seen some abuse of that program. We know it's important in certain areas, but how are you going to give an incentive for companies to have in-house training and then open up the temporary foreign worker program at the same time?

[Sean Speer]

Mr. Chair, I'll address that question, but my colleague, Mr. Cross, may also want to do so because I think Mr. Keddy may be referring in part to some work that Mr. Cross has done for the institute.

The only thing I would say directly to that is that I know that various proposals have been put out by different parties in the past week or so with respect to EI premiums. One of the unfortunate things about this debate is that it hasn't looked at the EI structure, the design of the program on the benefit side. I think what Mr. Cross' paper on labour market shortages seeks to get at is the extent to which we don't have a properly functioning labour market because of distortions such as the EI program. I think it's difficult to discuss things like the temporary foreign worker program before looking at what government is currently doing to distort the labour market.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Okay, thank you.

Mr. Cross, go ahead.

[Philip Cross]

I have a couple of things to say here.

One is about your question about the incentives we should be giving companies for more training. That is one of the conundrums, because firms don't invest a lot in training of their employees. It's actually declined over time and is now negligible. They have every incentive to do it because of the shortages they're facing out west. So what more incentives we can offer, I'm not sure. But I think it's not all on firms to do. When you look at the labour market in Canada today, for example, you see that 16% of youths in Ontario are unemployed and employers are screaming to find employees out west. We have to do things differently to get people in the right places. It's not just up to firms to do; there's a role for government and individuals in all of this too.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Thank you.

I wasn't suggesting there was an easy answer to any of that, but I think we need to be extremely careful that the temporary foreign worker program not be a disincentive for training, because you can replace that labour somewhere else. This can become a greater problem.

I just want to explore your discussion on capital gains, because you're absolutely right that capital gains really isn't a break. It's simply a deferral of paying that tax and somewhere at the end of the road, someone at some point will need to pay that tax.

I think many of us look at capital gains. You pay taxes on your business or your firm or your woodlot all your life. You should be improving that. It should acquire some assets and some value along the way and when you sell that, you're going to pay tax on it anyway. But on top of that, you have a capital gain. So you're suggesting a change of 2.4%, I think was the number that you used of tax revenue, to Canada's tax system. But that is a lot of money. How do you replace that? If the government were to stop capital gains tomorrow, would there be enough reinvestment? Would there be enough of an incentive to make up for that gap of 2.4%?

[Sean Speer]

Thank you, Mr. Chair.

Mr. Thomas referred earlier to the wonky economic debate about the marginal efficiency of different types of taxes. The most costly according to most analysis, including analysis done by the Department of Finance, is capital taxes. A dollar of capital gains taxes has the biggest economic negative impact of all of the different forms of taxation. So it would be wrong to say that eliminating or reducing the capital gains tax is going to produce a full 100% feedback effect. I think that would be misleading. But I don't think there is any question, as Mr. Page said at the outset, that this is about choices. We're in a world of debating the fiscal dividend and it seems to me a capital gains tax reduction would be an effective way to move ahead.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

I'm not disagreeing with that statement but am trying to lock in some real numbers here, knowing that capital gains can absolutely be a disincentive to investing in your company. If you're going to have to sell that business, or sell that farm, or sell that woodlot, you will want to depreciate it in value, because you're going to pay less income tax and less capital gains that way. This has happened in the past, but at the same time, it would have to be an incremental change instead of a radical change.

[Sean Speer]

Thank you, Mr. Chair.

I think it's something the committee ought to look at. The last change to the capital gains tax rate took place in 2000—again in the context of a debate about how to use budgetary surpluses. So moving incrementally, or even as I mentioned in my remarks the idea of a rollover mechanism whereby you defer capital gains taxes as long as you reinvest it in the market over six months, I think is a common timeline.... All of these things ought to be looked at.

[The Chair, Conservative, James Rajotte]

There is about 30 seconds left. You wanted Mr. Thomas to respond to that.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

I think Mr. Thomas and Mr. Cross are both trying to comment.

[Gregory Thomas]

When a government employee retires after 30 years of service and has an annuity worth, say, $1 million to be paid to them for the rest of their lives as a retirement pension, the government doesn't come away and take 40% of the annuity in one year at the top bracket, right? But that's what it does with an entrepreneur who might sell their apartment building.

The thing to do is to create a reserve and have an income averaging opportunity with the capital gains. It's not rocket science. It would be a very practical way to cushion that capital gain.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Keddy.

Unfortunately, Mr. Cross, Mr. Keddy's time is up. We'll come back to that.

Monsieur Caron, s'il vous plait. Pour sept minutes.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much, Mr. Chair.

I thank the three witnesses for their presentations.

I'd like to clarify one thing with you, Mr. Cross.

You talked about the aging of the population and of the pressure this is going to put on public finances. I think that the issue of the aging population is important and that we should be taking it into account. You mentioned that this would create pressure that could affect the viability of retirement pensions, Old Age Security and the Guaranteed Income Supplement. Is that what you said?

I know that we have heard several opinions on this matter. The Government of Canada increased the age of eligibility for OAS, which has gone from 65 to 67 years of age. There have been studies done on this, among others by Bernard Dussault, the former chief actuary of the Canada Pension Plan, who demonstrated that the Canada Pension Plan was very viable and that minor amendments needed to be made to ensure its viability given the aging of the population. Were you aware of that analysis?

[Philip Cross]

Mr. Chair, with your permission, I'm going to answer that question in English.

I think the increase in the eligibility age for OAS is a good first step. I did a paper for the Fraser Institute on those who are unpensioned, and noted in it that the easiest way to address the pension crisis in this country is to get people to work longer. For every year you work longer, you are adding more revenue or savings for retirement and are reducing by one year the drawdown you are making on those assets. So delaying retirement by three years has a very significant impact on improving finances.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much, Mr. Cross.

Mr. page, I know that you also worked on the issue of the viability of our pension plans and Old Age Security.

What is your assessment of the viability of the Old Age Security plan, in light of the aging of the population?

[Kevin Page]

Mr. Chair, I think there are a couple of issues. One is the issue of fiscal sustainability. The other is the issue that I think Philip was dealing with, which speaks to the impact on the economy. I think with respect to fiscal sustainability, it was the work that we did when I was in the Parliamentary Budget Office on the federal government's fiscal structure after they changed the Canada health transfer.... When they changed the escalator, the Canada health transfer became fiscally sustainable. That means we have a structure in place, though maybe not the structure that we want, that will stabilize debt relative to the size of the economy when you overlay changing demographics.

I think when the Prime Minister and Minister of Finance said that the old age security program was not sustainable, we had a problem with that, because it is fiscally sustainable in the context of a program that is funded from general revenues.

There is the issue, which I think Mr. Cross raised, that as we look to the long term and see declining labour input growth because of aging demographics, do we want to raise the labour force participation rate? Do we want to raise their labour force participation rate? Having us work longer is one of those ways we could increase labour force participation and keep our growth rates up.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

Mr. Cross, I'd like to go back to a second point.

You talked about the difference between the financial soundness of the federal government and of the provinces. In fact we expect that the federal government is going to announce a budget surplus. The Conference Board of Canada recently did a study on the discrepancy between the financial and budgetary situations of the two orders of government.

However, one important element seems to go by the wayside, and that is the impact of the federal government's decisions on the provinces. During the 1990s, when the Liberal government cut transfers massively, this placed considerable pressure on the provinces and their capacity to fund programs was affected. I'm referring to programs involving post-secondary education, social assistance, and health. Other more recent decisions on the part of the federal government also had an impact on these matters, among others the reform of employment insurance, which has meant that people are no longer eligible for employment insurance, or no longer have access to it. Because of that fact they wind up on social assistance, which is a provincial program.

The cuts to health transfer increases, that went from 6% to 3%, will have a considerable impact on provincial finances; the Conference Board of Canada estimates that expenditure growth will be 5.2%. Currently, we hear that if the government goes ahead with the pension income splitting measure, this will mean cuts of $1.7 billion to $2 billion in provincial finances.

Consequently, could we also discuss the issue of the role the federal government has in this budgetary pressure that is being placed on the provinces?

[Philip Cross]

I'm not sure I understood the question well; you're asking whether provincial deficits are the responsibility of the federal government or of the provincial government, I believe. In my opinion, the provinces created the problem. And so solving it is their responsibility. The provinces that have the biggest deficits and the biggest problems are Ontario and Quebec. Their basic problem is not the reduction of transfers from the federal government, but their lack of economic growth. I think that these provinces have a primary responsibility in the poor results we saw recently.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

I only have 30 seconds left for my last question.

Mr. Page, you mentioned that we were heading toward a structural surplus. However, many economists are of the opinion that is a false surplus, as it derives from the fact that the federal government is not spending all of the amounts in the budget that is given to it by Parliament. This means that the next government that will be elected in 2015 will be in a somewhat compromised situation because the reality of the budget and that of public accounts differ completely.

Could you make a comment on that?

[Kevin Page]

Well, Mr. Chair, I think there will be issues and it is important that we see more transparency. Mr. Speer has raised this with the issue of potentially deconstructing budgets, looking at current versus capital budgets. On the operational side of government, I think there is a lot spending restraint going on. We are not seeing the details, but tend to get them through newspaper clippings—this morning on CF-18's, and other issues on veterans, which Mr. Oberg talked about. I think Parliament should have seen these five-year spending plans and scrutinized them. We don't know to what extent there is fiscal risk—of what spending pressures we are kicking down the road. So I think in that sense we need to be careful going forward while some of these spending pressures need to be dealt with. Are we being honest with Canadians with respect to service levels?

[The Chair, Conservative, James Rajotte]

Okay, thank you. Merci.

We'll go to Mr. Allen, please.