Good afternoon to you, Mr. Chairman, and to all. I thank the committee for inviting me. It is always a delight to appear before this committee.
Clearly I am here to discuss this budget bill, and there's a lot in that bill, so I'm going to restrict my opening comments to TFSAs and Bank of Canada powers, parts 1 and 10 of the bill.
Let me begin by repeating that there is a lot in the bill, and this point deserves emphasis. Members of the committee are keenly aware of the importance of the parliamentary process and may know that I believe MPs should have an opportunity to scrutinize legislation with the diligence it deserves. I will not second-guess the government's wisdom in bring forward omnibus legislation like this bill, but I point out that doing so and packing multiple issues together in one bill does make it difficult for any of us to give each aspect the scrutiny it deserves.
That said, there is much to like in this bill, and I do. I've made no secret of my support for tax-free savings accounts, and I'm absolutely delighted to see the idea appear in legislation. When Jon Kesselman and I first wrote about the concept in the Canadian context back in 2001, our focus was on expanding the range of options available for Canadian savers. We were concerned that, on the one hand, people planning their retirements did not have enough tax-recognized contribution in total. After all, the contribution limits on RRSPs were much lower then, and at the time had not moved much over many years.
We had two reasons for prescribing something other than just bigger contribution limits. We made the general point that people are better off when they have more options for how they can save. Sometimes, in anyone's life, it can make more sense to save out of pre-tax earnings, as with RRSPs, and others might be better off saving out of after-tax earnings, as with TFSAs.
I should add that we labelled them “tax-prepaid” savings plans, because we wanted to emphasize that the tax had already been paid on the earnings underpinning those savings. That reminder explicit in the tax-prepaid label was really aimed at future governments, because we were concerned that the plans would become very popular and large over time and that future governments would see the accumulated savings as a target for taxing.
That brings us to the second aspect of why I think the option of saving in TFSAs is good for Canadians. That is because RRSPs are not right for everyone. Consider an older worker, someone who perhaps immigrated to Canada late in life who doesn't have much savings or a workplace pension. This worker will almost certainly rely on the guaranteed income supplement when he or she retires and may be eligible for federal or provincial supplementary benefits. But what happens if she saves in an RRSP? When she retires and begins to draw down her RRSP savings, the withdrawals count to taxable income, but she must also count those withdrawals in establishing her GIS eligibility and will lose entitlements at the rate of 50¢ or 75¢ on the dollar for each dollar of private income, including from her savings. If she loses entirely her GIS ability, she'll lose access to other benefits such as provincial top-ups or subsidies that are made available to the people who qualify for the GIS. So some workers are no better off saving in RRSPs than if they don't save at all. In fact, they may be worse off if they do.
Some folks argue that low-income families don't save. In fact, they do. A few years back, GIS recipients had retirement savings totalling $37 billion, averaging about $25,000 each, but even if we thought saving was rare, policy shouldn't punish people for doing it. That's where TFSAs come in. I see them as beneficial for Canadian savers of all sorts.
For us to take advantage of them, however, we do have to see the legislation adopted and supportive regulations developed and published, because 2009 is not very far off, and if financial institutions are to roll out the new savings accounts, they need staff and promotional materials, they need to deal with their legal issues, and perhaps most important of all, they have to update their information systems. So all that has to be ready.
That implies two things. The first is swift action from the government in passing legislation and regulation if we are to see TFSAs as swiftly in place as I would hope. The second is that as we run through the regulations in particular, but the legislation too, we should see that, wherever possible, TFSAs be given provisions identical to those applying to RRSPs. This is a good example of where policy can usefully be guided by practice.
At this point, I would like to shift gears entirely while returning to the general issue of legislative scrutiny. Part 10 of the bill proposes broader powers for the Bank of Canada. Indeed, the C.D. Howe Institute published a brief last year stating that an updated Bank of Canada Act was due because the types of securities the bank was permitted to buy and sell no longer reflected the modern financial marketplace. That's a problem, because if the governor had to invoke emergency powers to respond to ordinary needs for short-term liquidity in support of otherwise solvent financial institutions, the announcement of an emergency would risk further aggravating the problems it sought to solve.
Bill C-50 would broadly expand the governor's powers, subject to the requirement that the governor establish a clear policy and publish it seven days in advance in the Canada Gazette laying out how those powers could be implemented. That's good for accountability.
What concerns me, however, is whether the bank, with liberalized powers to buy and sell assets as well as lend, is sufficiently protected from pressure to prop up failing institutions, exposing Canadians at large to risks and costs that should stay parked with those institutions themselves.
The Bank of Canada is very well managed and recognized around the world for its independence and reliability, but it is dangerous to assume that this will always be the case, and risky to lower the institutional barriers that protect that independence. After all, when faced with political pressure to act in a particular way, it is useful for an agency head to be able to say that the institution's governing legislation does not permit what the political leadership says it wants.
Again, I think the bank will handle these powers well, but I find the recent U.S. experience of grave concern. There, after all, the Federal Reserve has come under intense pressure to support financial institutions, and to do so in some novel ways. For good or ill, the Fed has provided such support, so I see there some evident justification for my concern.
What to do about it? One modification would be to look for a longer lead time—longer than seven days—with respect to policy changes in what the bank may do in the course of its market activities, and to clarify that changes will take the form of regulations requiring order in council approval. Another would be for the legislation to be more prescriptive and less open-ended with respect to bank powers. Those are some options.
With that, I think my time is up, Mr. Chairman. I thank you very much for your time.
