Finance Committee on Oct. 28th, 2014

[The Chair, Conservative, James Rajotte]

In 1994 the Department of Finance produced a purple book and a grey book that I think are still two seminal, outstanding documents about the dangers of debt, about the need to address a debt situation, the need to lower interest rates, and the need to lower taxes, which I think formed a lot of the policy-making that's come out of the department—I think even until this day, frankly.

Those documents talked about a transition from a higher growth economy to a lower growth economy. Frankly, I think that's true today, but we're looking at growth rates that are even lower, so it is going to be a big challenge for countries like Canada, with modest growth rates here in our country, in North America, and across the globe. It is our big challenge. You combine that with our demographic challenges of an aging population and not enough people producing themselves domestically, for lack of a better phrase. That's going to be a challenge going forward.

Realistically, you present the challenges in terms of the global model. If say we doubled the infrastructure program we have, which is a 10-year, pretty ambitious plan on infrastructure, what could you expect in terms of a better growth rate for Canada, in your view?

[Scott Clark]

Well, two things. I think those documents that you referred to are excellent because I was instrumental in writing them.

[The Chair, Conservative, James Rajotte]

I assume you wrote them.

[Scott Clark]

Going to your question, it's an interesting thing about debt. The government has a target of 25% debt ratio, and I assume that when it gets there, it will be happy. Well, if you have a stable debt ratio, my high school math tells me that for a ratio to be stable, the numerator must grow at the same rate as the denominator. In other words, debt must grow in order for the ratio to stay the same, which means you have to run deficits, right? That's just mathematics.

There's an interesting study from the C.D. Howe Institute that said that when you reach 25%, the government should run a permanent deficit of 1% of GDP. In today's dollars that's close to $18 billion a year. That would still maintain a stable debt ratio, and you could use it to finance infrastructure.

[The Chair, Conservative, James Rajotte]

You're suggesting that the government actually run deficits of, say, close to $18 billion each and every year.

[Scott Clark]

Yes.

[The Chair, Conservative, James Rajotte]

That's your recommendation.

[Scott Clark]

Yes, and you borrow to finance it. At interest rates today, as I said earlier, it would be criminal not to. You could do that. If you read the International Monetary Fund's latest World Economic Outlook reports, which I'm sure the Department of Finance and the Minister of Finance did, they came out absolutely clear and said two things: investment in infrastructure will pay for itself, and you should neither raise taxes nor cut spending; you should borrow to finance it.

[The Chair, Conservative, James Rajotte]

But in those two books you wrote, you actually talk about a direct link between chronic deficits and taxation.

[Scott Clark]

Yes.

[The Chair, Conservative, James Rajotte]

Are you saying that's decoupled because of the lower interest rates?

[Scott Clark]

Of course if you go back to '94, interest rates were in the double digits. We had a fiscal crisis and we were borrowing on one credit card to pay another credit card. That's an entirely different world.

As has been said, we have a stable and sustainable fiscal structure right now.

[The Chair, Conservative, James Rajotte]

Federally....

[Scott Clark]

Federally, but not provincially.

[The Chair, Conservative, James Rajotte]

That's right.

[Scott Clark]

Absolutely. The federal government is the one level of government that has the capacity and the fiscal capacity to take the leadership, not the provinces.

[The Chair, Conservative, James Rajotte]

Answer my question, then. Suppose you did massively expand the infrastructure program. I think you have to admit we've had two large-scale infrastructure programs, seven years and ten years. We've done things like make the gas tax funding permanent for municipalities and provinces.

[Scott Clark]

Right.

[The Chair, Conservative, James Rajotte]

We had the knowledge infrastructure program, which was a huge investment in post-secondary institutions. So if you did that, given the global growth rates, how much could you actually change...?

[Scott Clark]

It would do two things. It would do exactly what the IMF said. We'd come at it from two directions. First of all, it would create demand in the economy, which we've been lacking for years. We simply do not have enough domestic demand in Canada, so on the demand side it would elevate that side of the equation. On the supply side, it would clearly create a more efficient economy. I mean, an economy which has modern infrastructure has to have higher productivity. So I think what it would do is contribute to an increase in the potential growth rate of an economy, which is predicted to run around 2%. We could raise that up over the next decade. You might say that it might only raise it from to 2% to 2.2% and that's not very much, but 0.2% year after year compounded is absolutely gigantic.

I think you're right, Mr. Chairman, it comes at two levels, but what it comes at now is that we can't depend on a global economy to grow the Canadian economy. We need a domestically created policy to generate growth in Canada right now.

[The Chair, Conservative, James Rajotte]

There are a lot of issues I want to follow up with you on, but I have to impose time limits on myself as well.

[Scott Clark]

I'm sure you do.

[The Chair, Conservative, James Rajotte]

Unfortunately, our meeting time is up and members will be wanting to go to a briefing on the budget bill next door.

I want to thank all of you for a very good discussion here this afternoon. Thank you all for your input.

Thank you.

The meeting is adjourned.