Finance Committee on Nov. 21st, 2013

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We now go to Mr. Pineault, who has five minutes.

[Éric Pineault, Professor, Institut de recherche et d'informations socio-économiques]

Thank you, Mr. Chair. Thank you, committee members.

I will continue in French.

I would like to quickly tell you about a study published in the spring by the Institut de recherche et d'informations socio-écononiques. The study was an attempt to understand the current economic recovery by comparing it to the country's past recoveries in the wake of the last three major recessions—in 1975, in 1980 and in 1990.

The idea was to take up a hypothesis established by the IMF about a year and a half ago, whereby there is a major difference in the way the recovery is unfolding today. I worked with that hypothesis in 2008. In 2009, I published an article in the journal Options politiques regarding the notion of an L-shaped recovery, rather than a V-shaped or a U-shaped recovery.

That idea of an L-shaped recovery refers to an interpretation that I will present to you—an interpretation involving stagnant structural forces in the economy. I think it's very important to keep that context in mind in order to understand how the budgetary policy will behave. I will only talk to you about the diagnosis, leaving it to others to deduce from that policies moving in one direction or another. I would like to point out that this interpretation is similar to the one Larry Summers just presented to the IMF last week, and to Paul Krugman's interpretation. It is starting to make its way through the mainstream circles. However, when I started working on this, people looked at me in disbelief.

One of the tables illustrates the performance of the Canadian economy. The figure of 100—which stands for 100%—shows where the economy was just before the recession began. You can see two curves in the chart. The first one represents the average of recoveries since 1975, and the second one represents the current situation.

You can see that the performance of our economy is weak, that the economy is having difficulty recovering from the crisis and that we are going through a “non-recovery” or an extremely weak recovery, without experiencing a double-dip. How can that be explained? We can come back to the explanation later, but one thing is clear—ours in an open economy that is highly dependent on the global market. The U.S. finds itself much deeper than us in that stagnant crisis, but we are still affected.

How has the state reacted to that crisis? When we consider all the public spending, at all levels of government in Canada, we can clearly note a major difference in the way the state is handling the crisis. This means that the level of spending is significantly lower. In addition, as of the third year, we see that the state's impact has been neutral—that is, the spending stopped progressing and has been stagnant. So this is a new way to react to a crisis—instead of stimulating the economy, the government decided to apply policies characterized by austerity that neutralize the state's impact.

Let's now look at federal transfers. The 1990s were marked by major reforms implemented by Paul Martin. You can see that the federal government's impact on the economy was very neutral. In fact, the major economic stabilizers we have had in the past—such as transfers to provinces and municipalities, employment insurance, and so on—have not had an impact and were not triggered by the recession. The remaining tools consist of discretionary spending, whereby a decision is made in the budget to increase spending on infrastructure or ongoing expenses.

You can see that in this curve. Year 0 is the year of the recession. The figure “minus one” is my starting point. You can see that there is only the countercyclical curve, which represents government investments. Yet that accounts for only 4% of the GDP. The leveraging effect is very weak because, unfortunately, our tool has very little control over the economy. Household consumption expenditures, as we know, make up most of the Canadian economy. They accounted for 56% of the GDP in 2012.

I want to draw your attention to the following: we can see that the export sector has really dragged the economy down, but we are not just talking about the export sector, as investments and companies also have a major impact. Household consumption expenditures appear to be stable.

The last issue I wanted to discuss with you is somewhat worrisome. The following three curves should be considered: consumer credit as a total volume, expenditures and household income. You can see that, until the crisis, the expenditures and household income were in line with one another....

[The Chair, Conservative, James Rajotte]

You have 30 seconds left.

[Éric Pineault]

... and that the credit is above. You see that, since the crisis, the income has been the floor, and the expenditures have been maintained thanks to an increase in consumer credit. That's not sustainable.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

Next we'll have Mr. Stanford, please.

[Jim Stanford, Economist, Unifor]

Mr. Chair, members of the committee, thank you very much for inviting Unifor to your hearings.

We agree with the supposition of the meeting that economic growth and job creation are the central goals and should be the central goals of a federal budget policy.

Unifor is Canada's largest trade union in the private sector of the economy. We represent over 300,000 members in over 20 different sectors. We were formed earlier this year through the merger of the former Canadian Auto Workers and the Communications, Energy and Paper Workers. I do want to recognize my colleague with me today, Dave Moffat, assistant to the president of Unifor and the top negotiator and official in charge of our energy, communications, and media sectors.

I must make one note regarding process. I know that in addition to these pre-budget hearings your committee is also investigating the current budget implementation bill, Bill C-4. Representatives from Unifor will appear before you next week to express our views on certain aspects of that legislation, but we do want to register as an organization our concerns regarding the process by which these budget omnibus bills, such as C-4, are being used to change far-flung pieces of legislation that have no direct relation to a budget bill. In our judgment, some of the issues tackled by your committee through the C-4 hearings should be considered more directly and fulsomely through a normal legislative process.

On the issue at hand about economic growth and job creation, we have a written submission that has been distributed. Let me briefly highlight four points from the written document, and I refer you to the document for more details.

First of all, in terms of the status of Canada's overall labour market, it is often claimed that our labour market has done very well, sometimes supported by discussion about absolute increase in employment or percentage growth in employment. That is not the best way to measure labour market performance either over time or across countries, for the simple reason that we also have to take into account growth in the working age population, which is the pool of workers who are available for those jobs. A better measure is the employment rate, which considers the level of employment relative to growth and labour in the working-age population, which is relatively rapid in Canada's case. We have one of the fastest rates of population growth in the developed world.

In that regard, I'll refer you to figure 1 at the end of our brief, which shows the evolution of the employment rate in Canada since the years before the recession to present. As the recession hit, the employment rate fell rapidly, by 2.5 percentage points of the working-age population. That was the most dramatic and rapid decline in the employment rate since the 1930s. With the initial stimulus effort, fiscal and monetary interventions and other measures, that recuperated in the first year and a half of the recovery by about half of a percentage point, or about one-fifth of the way back. What's very important to note, though, is that since late 2010, for three years now, there's been no increase in the employment rate at all, so from a jobs market perspective relative to our population growth, the recovery has completely stalled. This picture is in fact a perfect L. In regard to my colleague's presentation recently about an L-shaped recovery, this is a perfect L. The only reason the unemployment rate has declined gradually over the last three years is the decline in labour force participation, which is nothing to be proud of.

I'll also refer you to table 1 at the back of the brief, which compares Canada's performance in the employment rate to the other industrialized countries of the world. Again, if we adjust for the differential population growth rates in different countries, Canada does not rank at the top, or even near the top. We rank 20th out of 34 countries in terms of the change in the employment rate from 2008, when the recession hit, to 2012 most recently. This shows that the argument of our labour market problem being one of a mismatch between available workers and available jobs, or certainly a shortage of workers or even a shortage of skills workers, is quite misplaced. That is a misdiagnosis of the problem and could lead to incorrect policy responses, including some of the measures the federal government has taken clearly aimed at trying to push a labour supply, whether that's temporary migrants, or changes to the EI rules, or other measures. In fact, I would argue there are over 20 unemployed Canadians effectively for every available job vacancy.

The general thrust of fiscal policy should be to address the main problem in the job market, which is a lack of jobs. So it's job creation and an expansionary program, and we have five dimensions of that written in the brief. In general, I think the continued emphasis on fiscal austerity, which has been indicated by the finance minister, is quite misplaced. We will balance the budget a year early; we will underspend our budgets in several key areas; and then we will further decline program spending relative to GDP in the years even after a balanced budget.

That is a very hollow victory at a moment when over two million Canadians are effectively unemployed. I think the continuing decline in program spending as a share of GDP after the balanced budget has been attained will reduce our GDP growth by up to half a point of GDP a year. I think that continuing austerity is both unnecessary and counterproductive.

Thank you for having us.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll now hear from Mr. Weir.

[Erin Weir, Economist, Canadian National Office, United Steelworkers]

Thank you very much. I'm very happy to be here.

In addition to my work as an economist for the United Steelworkers union, I also serve as the volunteer chair of an organization called the Progressive Economics Forum, which has about 200 members across Canada. I'm very proud of the fact that four of those members are sitting in front of you on this panel. Angella, Eric, and Jim are also members of the PEF. Typically we hold sessions at the Canadian Economics Association meetings, and I'm very pleased that we're able to hold a session at the House of Commons finance committee.

A positive aspect of having these other eminent economists on the panel is that you already have a good overview of the labour market, fiscal policy, and the Canadian economy. What I want to do is focus a little more specifically on the question of whether corporate income tax cuts have helped create jobs by spurring investment.

In that vein, I would refer you to the document we provided you entitled, “Have Corporate Tax Cuts Increased Investment and Employment?”. It shows that the federal corporate tax rate, as we all know, has basically been cut in half since the year 2000. It's gone from just over 29% down to 15% today. It's quite a dramatic corporate income tax cut.

After-tax corporate profits as a share of gross domestic product have increased quite dramatically over that period of time. It started out at a little below 10% in 2000 and it's now up to about 14% of gross domestic product. That has been caused by an increase in pre-tax corporate profits, by a reduction in the federal corporate income tax rate, and by corporate tax cuts at the provincial level.

We've seen this huge drop in the corporate tax rate and a huge increase in after-tax profits. One would hope that would have led to a pretty impressive increase in business investment. That prompts the question of how we should measure investment. Often the way we measure business investment in the economy is to look at non-residential structures, machinery and equipment as a component of expenditure-based GDP.

I think that is a decent proxy for what we're trying to look at, but the problem is that it includes some investment in non-residential structures, machinery, and equipment by non-corporate entities, and it also excludes some residential investment by corporations.

I looked at Statistics Canada's financial flow accounts in order to zero in on the corporate sector. Business investment by the corporate sector as a share of gross domestic product has been pretty flat. Actually, in most years it's been lower than it was back in 2000 when these corporate tax cuts began.

It's not a particularly encouraging picture and it's even weaker when you compare it with after-tax profits as a share of the economy. In 2000 when this process started, corporate investment was actually bigger as a share of GDP than after-tax profits. That's exactly what you'd expect if you look at—

Yes?

[The Chair, Conservative, James Rajotte]

You have five minutes.

[Erin Weir]

Thank you very much.

—an economic textbook. Companies would borrow money to finance investment over and above their profits. That relationship has flipped around. More recently you can see that after-tax profits are quite a bit larger than investment. It's actually even worse than that, because of course, this business investment includes investment to cover depreciation, whereas the profits are net of depreciation, so there's actually even a bigger imbalance going on here.

The final point I want to make is that this overall corporate sector actually includes crown corporations, which is the next line on that table. While investment by crown corporations is very small as a share of GDP, it's actually increased by quite a large proportion. It's basically doubled since 2000. I think one of the untold stories of the great recession is how crown corporations were actually a stabilizing force to our economy.

When you take crown corporations out of it and you look at private corporations, the ones that are actually subject to the corporate tax rate and which might have benefited from these corporate tax cuts, what you see is an even clearer pattern of business investment actually having declined as a share of the economy as these corporate tax cuts were happening.

Thanks very much.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll begin members' questions with Ms. Nash, please, for five minutes.

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

Thank you, and welcome to all of the witnesses.

Mr. Stanford, I'd like to begin with you.

Your analysis indicates that the government's public relations about its economic performance don't actually match the reality of its economic performance. Would you agree with that statement?

[Jim Stanford]

I won't comment on any particular public relations exercise or particular advertisements, or whatever, but the hard economic data—and this is all from Statistics Canada for the Canadian story and from the OECD for the international comparisons—show that most of the damage that was done to our labour market by the downturn has not been repaired. Perhaps one fifth of it has by that measure of the employment rate but in main street Canada, if you like, it still feels like a recession, and this graph tells you why.

The official unemployment rate doesn't tell the whole story, and internationally on this score, our performance has been relatively poor. There are other countries I think that could legitimately claim that their labour markets have recovered fully from the recession, places like Germany and Korea, but Canada cannot make that claim.

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

I've heard it described as though the Bank of Canada has its foot on the gas in terms of low interest rates as a stimulus, but the government has its foot on the brake in terms of austerity measures.

Does that reflect what's happening, or is it much more complex than that?

[Jim Stanford]

There was initial fiscal stimulus in Canada from the federal and provincial levels of government and that was quite appropriate. In the initial period of that post-recession turnaround, we did start to make progress. We were creating jobs faster than the population was growing. During the two years roughly of that proactive stimulus, I think we genuinely were recovering.

Since late 2010, however, governments at the federal level and in many provinces have emphasized austerity rather than recovery, so the foot is definitely on the brake on the fiscal side. Is the monetary foot on the gas? To some extent it is, but remember the Bank of Canada increased their interest rates before other central banks did. It could be argued that in fact they did so prematurely.

Certainly the fiscal foot is firmly on the brake, and given our poor labour market recovery, our stagnant growth, and the lack of positive momentum from other sectors of the economy, exports, business investments, and soon I suspect the housing sector, that's where the importance of not having a fiscal foot on the brake becomes all the more apparent.

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

You say in your brief, “The bottom line is an all-time record current account deficit (currently $60 billion per year) that is far more damaging than the federal budget deficit which attracts so much more political attention.”

Can you elaborate on that for us?

[Jim Stanford]

My colleague, Mr. Pineault, highlighted the different sources of economic weakness, business investment. Mr. Weir did the same. Mr. Pineault also mentioned the very poor trade performance.

Our exports have been stagnant. In fact, they've fallen back to a level equivalent to where they were in the year 2000, and our imports have grown much more. We do have a current account deficit in Canada. It's about $60 billion a year. I would argue that's more significant than a budget deficit, primarily because it shows flagging competitiveness in world markets, and every dollar of that in one way or another translates into increased indebtedness to the rest of the world.

Our budget deficit, on the other hand, first of all is much smaller. Second, the federal debt as a share of GDP, which is the more appropriate measure of the level of indebtedness, is already falling and is at rather modest levels. I think we should pay more attention to some of those other sources of weakness and less attention to balancing the budget as fast as possible, which I wouldn't even view as an appropriate goal at this junction.

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

You said that we're dashing down at about 20th of the OECD member countries and that there were other more successful high-value exporting countries that you would point to that are doing a much better job.

Mr. Stanford, to you or any of the other witnesses, what are some of the other examples that have a better record that we could be looking to rather than the austerity measures we're enacting here in Canada?

[Jim Stanford]

For most of the countries on that table, 19 countries are higher than Canada. There are several countries where the change in the employment rate between 2008 and 2012 was positive, from Israel where it grew the most, down to Mexico which broke even.

I would say that one common factor many of those countries have had is a very successful export-building strategy, including the role of proactive industrial strategies to develop key industries for export. The Germans, of course, have been enormously successful, as has Korea. Israel, where the government has played a very hands-on proactive role in partnering with private investment in key high-tech and export-oriented industries, is another example.

I think something on the export side is going to be a key part of it.

[The Chair, Conservative, James Rajotte]

Thanks very much.

Thank you, Ms. Nash.

We'll go to Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

Thanks to all of you for being here this afternoon. It's nice to see many of you again.

I have a couple of questions for a number of members on the panel.

First of all, I want to begin with something that I heard and which I just have a little difficulty accepting.

Mr. Stanford, first of all, how many job vacancies are there in Canada currently?

[Jim Stanford]

There's a new Statistics Canada survey of job vacancies. This began in 2011. It's a very important survey. It's kind of surprising that we've never done this before.

[Mark Adler, Conservative, York Centre, ON]

Can I just ask you for roughly the number?

[Jim Stanford]

At present it's just over 200,000.

[Mark Adler, Conservative, York Centre, ON]

It's 200,000. You said there are 20 people for every job vacancy, so that's 20 times 200,000. What is that number?