Finance Committee on Sept. 29th, 2014

[Mark Adler, Conservative, York Centre, ON]

How much time do I have?

[The Chair, Conservative, James Rajotte]

You've got about 40 seconds.

[Mark Adler, Conservative, York Centre, ON]

You have 40 seconds.

Governor Poloz in Drummondville recently gave a speech about holding the dollar constant. He said it would be a bad idea. Do you want to touch on that?

[The Chair, Conservative, James Rajotte]

We've got time for one response. Is there someone who wants to comment on that?

[Philip Cross]

I'll jump in. I certainly read the speech. He's absolutely right. The Bank of Canada cannot control the exchange rate. It simply can't, so there's no point in even trying.

[Mark Adler, Conservative, York Centre, ON]

[Inaudible--Editor]...other economies around the world do, and that causes....

[Philip Cross]

I was listening to a Federal Reserve Board president today talking about how the Europeans and New Zealand, and Japan for that matter, are all clearly trying to talk down their exchange rates. That's one of the problems. We're in a world now where basically everybody is trying to achieve prosperity through devaluation, except the U.S.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Adler.

I just had one question I want to put. I'll put it to Mr. Speer, and if others want to comment, let me know.

If you were advising the finance minister as we're entering a period of modest surpluses, what percent would you allocate towards debt reduction, what percent towards new spending, and what percent towards tax reduction?

[Sean Speer]

Thank you, Mr. Chair.

As you know, the government set out a debt-to-GDP target. That was something I think the Prime Minister announced at the G-20 a couple of years ago. My understanding is—

[The Chair, Conservative, James Rajotte]

But what would you recommend?

[Sean Speer]

I'm afraid I don't have a good answer on that. I think at the end of the day how the government uses the surpluses ultimately comes from a judgment about priorities. I've talked about capital gains taxes and personal income taxes today, but I'm sure there'll be other people around the table who have different views.

[The Chair, Conservative, James Rajotte]

Does anyone else want to quickly address that? What percent should be allocated towards each?

Mr. Page?

[Kevin Page]

I don't know if there's a mathematical rule on how to divvy it up. I think if you look at the trend lines, the debt-to-GDP ratio is now falling, the deficit is likely to be in balance, and the economy is growing. The debt-to-GDP ration is going to fall quite rapidly. I suspect we'll get to 25% on net debt basis quite quickly. So the people in the markets don't see a problem. Again, we're spending 12 cents of every revenue dollar on debt interest charges, whereas we were spending 36 cents of every revenue dollar in the late 1990s. I don't see debt as a problem. I think growth is a problem, and I think it comes down to this table. Where do you see the role of the state? Do you think the role of the state, the role of government, is to stimulate investment and enterprise growth? If so there might be some need for capital expenditure.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Oberg

[Gary Oberg]

Mr. Chair, I can't give you percentages. I don't have that skill, but what I guess it comes down is Canadian values and what we want to put towards looking after veterans who have been injured.

[The Chair, Conservative, James Rajotte]

Thank you.

I want to thank all of our witnesses for being here for this first panel of the pre-budget consultations.

Colleagues, we're just going to take a two-minute break here, and we'll come back with our second panel.

Thank you.

[The Chair, Conservative, James Rajotte]

I call this meeting back to order.

I want to welcome our second panel of guests to this meeting, as we continue our 2014 pre-budget consultations.

We have with us at this panel, from the Canadian Council of Chief Executives, Mr. Brian Kingston. Welcome.

We also have from the Canadian Union of Public Employees, the national president, Mr. Paul Moist. Welcome back.

From the Conference Board of Canada, we have the senior vice-president and chief economist, Mr. Glen Hodgson.

From the Frontier Centre for Public Policy, we have Mr. Peter Holle, president. Welcome to the committee.

From the Office of the Veterans Ombudsman, we have back before us, Monsieur Guy Parent.

I want to welcome you to this hearing of our committee.

You will each have five minutes for your opening statement, and then we'll go to members' questions immediately after that.

We'll start with Mr. Kingston.

[Brian Kingston, Senior Associate, Canadian Council of Chief Executives]

Mr. Chairman, committee members, thank you for the invitation to take part in your pre-budget consultations on the topic of balancing the federal budget to ensure fiscal sustainability and economic growth.

The Canadian Council of Chief Executives represents 150 chief executives and leading entrepreneurs in all sectors and regions of the economy. Our members lead companies that collectively administer $4.5 trillion in assets, employ more than 1.5 million Canadians, and are responsible for the majority of Canada's private sector exports, investments, and training.

Canada's economy has proven resilient since the recession and continues to expand at rates higher than in most other OECD countries. Reducing the federal debt while implementing pro-growth policies would ensure that Canada continues to grow and remains an attractive destination for business investment and job creation. The CCCE fully supports the government's commitment to balanced budgets and debt elimination. Achieving balance and reducing Canada's debt-to-GDP ratio has four significant benefits.

First, balanced budgets and low debt levels are good for Canada's long-term economic growth. Estimates across advanced economies show that debt levels above 90% of GDP are correlated with lower economic growth. Fortunately, Canada has not reached this point, but that is not a reason to be complacent. The combined federal-provincial net debt reached 62.1% of GDP in 2013 and 2014—an increase from 49% in 2008 and 2009. According to the Fraser Institute's 2014 report on government debt, the story is significantly worse if you look at total liabilities, including debt guarantees, contingent liabilities, and unfunded program obligations. Using this metric, all provinces, except Saskatchewan, have total liabilities as a percentage of GDP in excess of 150%. In short, Canada's long-term prosperity depends on achieving and maintaining a sustainable debt level, and the federal government must lead the way.

Second, balanced budgets allow the government to respond to long-term challenges such population aging. The old age dependency ratio, which measures the number of elderly people as a share of those of working age, will rise dramatically due to a decline in total fertility rate and increases in life expectancies observed over the last 80 years. According to the Parliamentary Budget Officer's fiscal sustainability report, this will lead to slower growth in the labour force and total hours worked. Combined with lower labour productivity growth, projected average real GDP growth will be 1.7% over the period from 2013 to 2087, down significantly from average growth of 2.6% over the past 30 years. Balanced budgets and a low debt-to-GDP ratio give the government the flexibility to face this demographic reality.

Third, balanced budgets and a low debt-to-GDP ratio give the government the ability to respond to future downturns. While Canada's economy has performed comparatively well, the recovery from the global financial crisis has been underwhelming and continues to fall short of expectations. The recovery has had repeated false starts and still faces considerable headwinds. Much of this can be attributed to poor global growth that has averaged 3% over the past 2 years. That's well below the average prior to the crisis, and it's unlikely that 2014 will be much better. Until global headwinds abate and U.S. economic recovery fully takes hold, Canada will be vulnerable to new economic shocks and must be prepared to respond. Balanced budgets and a low debt-to-GDP ratio help to insulate Canada against such shocks.

Fourth, balancing the budget allows the government to make targeted investments to improve economic competitiveness. According to the PBO, the federal government has the fiscal room to increase spending, decrease revenues, or some combination of both.

The following pro-growth policies would ensure that Canada remains an attractive destination for business investment and job creation. First, implement a single, comprehensive portal that brings together data on labour market conditions and job vacancies across the country. Second, introduce a direct R and D support program for major new private sector innovation projects. Third, make targeted investments in infrastructure to promote increased trade and economic growth. Fourth, conduct a comprehensive review of the tax system with the goal of simplifying the tax code, encouraging the growth of small and medium-sized companies and improving exporters' competitiveness.

In conclusion, the CCCE supports the government's efforts to return to balance. Once balance is achieved, we recommend targeted investments to improve Canada's economic competitiveness and long-term prosperity.

I'd be happy to answer any questions you may have. Thank you.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation. We'll now hear from Mr. Moist, please.

[Paul Moist, National President, Canadian Union of Public Employees]

Thank you, Mr. Chairman.

These remarks flow from our submission to the committee dated August of this year. Budget 2015 is going to be a critical budget for Canadians, including the almost 630,000 members that CUPE is privileged to represent. Our members pay collectively just over $3 billion in income taxes annually. When we discuss the issue internally, they agree quality public services are more important than tax cuts. They want fairer taxes, but few want tax cuts if it means public services will be reduced and their own individual cost will rise.

Trickle-down economic policies, tax cuts, and austerity measures are failing to strengthen growth. Growth from this recession is 30% slower than previous recoveries, which means about a $100 billion smaller economy by 2017, equal to $7,000 less per household. Those at the top have benefited the most, with increases for the top 0.01%, and CEOs far outpacing growth in workers' wages. The IMF, the OECD, the ILO, the World Bank, and even Standard and Poor's now agree that growing inequality is reducing growth and that we need to focus on generating quality jobs, raising wages, and reducing inequality to reignite economic growth. Unfortunately, we're not seeing this happen. Our unemployment rate has barely declined in the last three years. Over 80% of the growth last year in new jobs was in part-time jobs, and a fair chunk was in temporary and contract jobs.

Inequality continues to grow, with top occupations gaining bigger pay increases, while wages for many on the lower end of the scale are much lower, barely keeping up with inflation. A top priority for budget 2015 should be to create more and better quality jobs, and support wage and income growth. Private corporations are failing to do this, despite sitting on over $600 billion in surplus cash. The best way to achieve this is through increased public investment and expanded services.

Instead, we've seen the opposite. Some 20,000 full-time federal jobs have been lost, and apparently there are plans for 9,000 more. We're privileged to represent employees at Radio-Canada. Over 2,000 jobs have been eliminated, and another 1,000, one third of the workforce, are on the table. The government should help increase wages of working Canadians, instead of suppressing them, and should cease to interfere in free collective bargaining and bargaining that you control.

We also advocate for a reintroduction of the federal minimum wage, starting at $14 an hour, restoration of EI benefits with the fiscal dividend, and access and reform of the temporary foreign worker program beyond the needed changes that have been introduced by the minister to date. We should ensure decent retirement income security for all Canadians by improving the CPP and the GIS. We should cancel plans to force Canadians to work longer to qualify for OAS and GIS. We should think of the effect this will have on provinces and Canadians.

Polls show Canadians' top priority is to keep public health care systems strong. The federal government's unilateral changes, according to the Council of the Federation, reduce health care funding by $36 billion by 2024, or over $1,000 per person over the next decade.

We urge the government to negotiate a new 10-year health accord with a minimum annual escalator of 6% funding. We also want to see a national pharmacare plan that could help reduce overall costs by $10 billion annually, discussions on a national community residential and home care program, and expanded funding for community health care centres and clinics.

Budget 2015 should also pave the way for a high quality, public early childhood education and care program with the provinces. This would generate thousands of jobs, and would likely pay for itself in fiscal terms, as Quebec's program has done.

How can we pay for this while ensuring a balanced budget and fiscal sustainability? Tax cuts since 2000 have reduced federal revenues by at least $50 billion. Our August submission outlines a few simple steps that would increase tax fairness, and increase the federal government's revenues by over $33 billion annually.

To close, public investment and spending has a much stronger, stimulative impact on the economy than tax cuts. Combining these measures would provide a strong boost to employment and Canada's economic growth.

Thank you, Mr. Chairman.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation. We'll now hear from Mr. Hodgson, please.

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

Mr. Chairman, members of the committee, it's great to be back.

At the risk of sounding vain, I want to remind you that in 2010 we said that the government would be back in balance by 2015, so I think we got that call more or less right.

I want to focus on three things: our short-term outlook, our longer term economic outlook which is quite different, and then give you some free advice on what budgets should look like going ahead.

We actually just finished this afternoon our short-term outlook, and we're forecasting growth this year of 2.2% in Canada, a fairly weak job growth of only 1%, and unemployment getting stuck kind of in the 7% range. Next year will be a better year. We have attached ourselves to a recovering U.S. economy. Our view is that Canada will grow at 2.6% next year. You'll see kind of a good news story across the board.

The one area that really troubles me is the very weak growth in private investment. We're actually showing a negative sign this year in private investment. It's not because investment is not growing, but because the cost of investing is rising. We have a 5% nominal growth rate for private investment built into our forecast, but the cost of imported capital goods has gone up because the dollar has gone down.

People tend to cheer when the dollar goes down in value. I like to point out the fact that it's good for some people and not so good for other folks. It's actually raising the cost right now of private investment in the country, which is not such a good thing. I'm not sure there's much we can do about it. We're forecasting growth in private investment next year of around 5%, really driven by recovery in exports to the United States. The U.S. recovery is really critical to Canada's ongoing success, but I think there's lots of evidence that the U.S. is showing a really strong durable private sector recovery after six years of turmoil, so it's about time.

If I switch to our long-term forecast, it's really driven by the fundamentals—demographics, private investment, productivity growth—and there the story from the Conference Board is more sobering. We're forecasting that Canada will really only grow at about 2% in real terms after 2016. We're entering a period where the impact of demographics is really going to eat away at the capacity of our economy to grow. We're basically losing a whole percentage point in growth on a sustained basis. If you add inflation on top of that, because governments tax nominal income, nominal growth, we're looking at a world where nominal income is growing less than 4%. That means we're going to have to have a very disciplined budget process on a going forward basis, frankly from here to the horizon. That's probably not going to change for 20 years or longer. If it changes, it may go down rather than up.

What do we do about it? Well, I actually agree with Brian. We think that we should be thinking about budgets now than investing growth. Growth should become the core theme of budget making on a going forward basis. For us that means three things.

First of all, I would strongly encourage this committee to take on the role of being the champions of tax reform in Canada, not cutting taxes, rethinking the tax system to spur growth. That means simplifying, clarifying, taxing the right things. I can talk more about that if you want during the question and answer session.

Second, I think Canada has systematically underinvested in infrastructure for probably 25 or 30 years now, so it's time to catch up. We know that the provinces are doing it. We know that the federal government has already set aside funds going forward for infrastructure investment, but if you drive across this country, if you fly across this country, if you use the water system, you know that we have to put in a lot more money, probably hundreds of billions of dollars, to get our infrastructure back to the point where it can support the economy.

Third, we would support investment in people, meaning skills, education, building human capital to really have a modern economy going forward.

If I'm allowed, Mr. Chairman, I have one more thought. If I had to choose between debt reduction and cutting taxes, I would be much in favour of reducing debt further. I think the debt ratios are coming down, but to really have a sustained growth path for our economy, we have to get public debt under control federally and provincially. If I had a dollar left over at the end of the year, I would use it to pay down debt.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

Next is Mr. Holle, please.

[Peter Holle, President, Frontier Centre for Public Policy]

I thank the committee for inviting me to come all the way here from western Canada.

I want to talk about three things today very quickly, three of the 30,000-foot type of items.

Number one is fixing the mismatch between taxing power and the federal government's jurisdiction. We have a lot of services that are provincial in nature and are being delivered by the federal government. The federal government collects about 43% of all the taxes. As the largest consumer of the tax pie, it has become involved in all sort of areas of provincial responsibility, such as health, education, municipal transit, roads, and infrastructure.

I have included in my little file a paper on decentralizing services. What we would like to suggest is that we need to go back to the original intent of the Constitution and have the federal government transfer taxing powers to the provinces, particularly the GST and the federal gas tax. We would suggest that you could do this concurrently with a phase-out of some damaging transfer programs.

I'm going to talk a little bit about equalization reform. Equalization is a well-intended program, but it has increasingly undermined and damaged the recipient and source provinces. We have ended up with larger and more politicized public sector services in the recipient provinces. They are rewarded for having higher taxes. Those higher taxes of course discourage private sector economic growth.

There has been a lot of research done around the “flypaper effect”, which shows that the transfers that are provided to provinces end up enlarging the civil service in the recipient provinces. Again, I'm from Manitoba, where we have the largest proportion of our workforce in the public sector and we're also one of the largest recipients of equalization.

What we would suggest—and again, this is a longer-term answer to a fiscally sustainable balanced budget—is that we should be shifting over tax power in exchange for some reform, particularly for the GST. We did a calculation a few years ago: GST revenues were approximately equivalent to equalization a few years ago.

Number three, I would like to talk about core public sector reform in the federal civil service. We see ample opportunity and room to make the federal civil service smarter, smaller, and more effective. We can learn from other countries, from those that have embedded performance management measurement, more useful accounting systems, and more decentralized management to improve asset stewardship and bring an output-and-outcome focus to their service operations. I have included in my folder a paper discussing the New Zealand reforms, which are still very useful although they're getting a little old now, and they would apply nicely to Canada.

If I had to wrap it up, I would say that smaller federal government would be possible if the feds transferred taxing power to the provinces, got out of certain areas, and also did a substantial reform of equalization.

Lastly, I think there's a great opportunity to rethink how the federal civil service works. I am a great fan of the book Yes Minister, and I have to say that when I watched the environmental lakes program being shut down in Manitoba, and for not a lot of savings in my view, there were smarter ways to lower spending. Again, I think the opportunity for the committee is to look at changing the policy DNA within the federal civil service so that we have a focus on outputs and outcomes, push power down, and have the higher-performing civil service.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

I will now yield the floor to Mr. Parent.