Finance Committee on Nov. 23rd, 2006

[Mathieu Dufour]

Maybe I can provide the quick answers to that. This is very true, except that according to the Bank of Canada, we're already close to potential GDP. Domestic demand, personal consumption, if you will, is not low by any account; it's very high, it's sustained, so we don't see tax cuts at the personal level as helping much as far as economic expansion goes.

Regarding corporate tax cuts, we've had record productivity for years. This is probably likely to go down, but as we were saying, this has not brought in the investment you could have expected.

[Dean Del Mastro, Conservative, Peterborough, ON]

Okay. I only have four minutes.

Mr. Drummond, don't you think you could make the case that Canada is on the inverse side of the tax curve, that taxes are at a point where by reducing them we could see some kind of expansion in overall tax revenues, in economic growth?

[Don Drummond]

I wondered if that was where you were going to go with your previous questions, and I'm glad you asked that. No, I don't.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thanks. Okay.

[Don Drummond]

It's a simple mathematical proposition. The federal government taxes 15¢ of every dollar of economic activity, so you take the inverse of that. To get a dollar back, you have to create $6 of economic activity from every dollar of tax cut, and there's no way a tax cut can do that. You'll get a portion of it back, but you never get all of it back.

[Dean Del Mastro, Conservative, Peterborough, ON]

I'd agree with you, you'll get a portion of that back. That's exactly what I'm saying.

[Don Drummond]

If you cut it, yes, sure, and soon you'll notice—

[Dean Del Mastro, Conservative, Peterborough, ON]

The huge surpluses are a symptom of excess taxation. My point is that you simply cannot take off the cost of a tax cut and say this has eliminated this much revenue from the government, because some revenue is created.

[Don Drummond]

A protocol has been established in the budgets for a long time to include just the direct costs. Obviously that's not quite accurate. There is some amount of recapture for the economic effect, but on the flip side as you lower the surplus, you would have higher than otherwise public debt charges as well. That's why they tended to be rounded off. The recapture is probably 20% at best. It's certainly not close to fully recovering it.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you. That's fine. That was all my point was.

Mr. Orr, you've indicated inflation. You think it will be somewhere in the neighborhood of 1.8% for 2007. Do you think that might allow for a slight relaxation of interest rates overall in Canada, which would reduce some of the cost of carrying the debt?

[Dr. Dale Orr]

Our forecast for interest rates is that in terms of the bank's policy rate, the bank will keep on hold that 4.25%, where they are, for well into next year. There's a little bit of debate. Will their next move be up or down? I would say it's probably more likely to be down than up, but it's also probably at least six months away.

[Dean Del Mastro, Conservative, Peterborough, ON]

Consistency at the very least?

[Dr. Dale Orr]

Yes.

Can I just piggyback on what Don said?

[Dean Del Mastro, Conservative, Peterborough, ON]

Certainly.

[Dr. Dale Orr]

We've done a lot of work on the impact of various tax cuts. As for personal income tax, yes, the federal government might get about 20% of its money back over time, because of the expansion. For corporate income tax, yes, there have been a lot of studies; it really does stimulate investment. In fact, regarding the impact of the harmonization itself with the three eastern provinces, a recent study showed it was very effective in increasing business investment in those provinces.

Some people think, why doesn't the government cut taxes, because it can get its money back? Let's not go that far. We're talking about 20%.

[Dean Del Mastro, Conservative, Peterborough, ON]

No. I would agree with that.

[Dr. Dale Orr]

There are some unusual situations for corporate income tax where corporations may, if you're right on the margin with the U.S., start reporting more profit in Canada versus the U.S. There is really no shift in real economic activity. In that corner solution, they can virtually get their money back from a corporate income tax cut because of changes in accounting procedures, but generally they might get one-third of their money back. Cuts in corporate income tax, when we are head-to-head competing with the U.S., not only in Canada but in the U.S., and in most of those export markets that head to the U.S., it's very important to have a good tax-cutting agenda on the corporate side.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Orr.

We move to Mr. Pacetti now for four minutes.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chair.

My thanks to the presenters. It's been interesting, as always. I want to continue the line of thought Mr. Del Mastro was using, and I think Judy was as well.

I like numbers. It's nice to talk about 3% of the GDP, but let's talk about numbers. As an accountant, I like to see what the numbers are. If we look at what the projections were from the last independent forecasters, pretty well everybody was almost within $5 billion in terms of program expenditures. It's the revenue. Everybody was predicting around $210 billion, but the revenues came in at $222 billion. I know there were some accounting adjustments, but we're still predicting $227 billion this year, or maybe in the $230 billions. Isn't the growth going to come from the revenues?

Mr. Orr, if we look at what The Fiscal Monitor is saying, it's $5 billion. Shouldn't we double that and say we're still expecting $12 billion to $13 billion? That's easy mathematics. The revenues should be going up. Finance always seems to be undercutting. I think you guys underestimated revenues. Shouldn't we be looking at $13 billion to $14 billion?

Really, what happened in the last budget—I'll get to you as well, Ellen—was that the government decided to cut the GST, but they increased income taxes. It was almost an offset.

Mr. Orr, perhaps you can answer that, and I'll give Ms. Russell a chance as well.

[Dr. Dale Orr]

The last forecast on revenues that we did for the finance committee was for 2005-06. The revenues were pretty much bang-on in that forecast.

Of course, in between, we've had budget 2006. We had a lot of changes on the tax side in budget 2006, and a lot of them took effect July 1. So I caution you about looking at The Fiscal Monitor, because we only have a couple of months, through September, reported after those tax changes of July. We're seeing quite a different pace of year-over-year changes in the recent months from what we were seeing in the earlier part of the year.

I don't know what more I can say than that.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Ms. Russell.

[Ellen Russell]

I would just echo what Dale Orr just said in terms of why The Fiscal Monitor is not a reliable predictor of what we're going to have surplus-wise at the end of the year.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Do you want to answer that, Mr. Drummond?

[Don Drummond]

Well, if you look at the fiscal results today, there are two very striking features to them. One is that departments have been underspending their budgets, as they did in the last fiscal year. You have to assume that at some point they'll catch up, because they're underspending what they're allocated to spend.

The second feature is that personal income tax revenues are extraordinarily strong. They've been running at plus 11% year over year, and I suspect a good part of that is the capital gains. The stock market has been very strong, and housing prices have gone up. While we don't pay capital gains on principal residences? We do on investment properties and second—

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I'm sorry, but it wouldn't be capital gains, because you only report capital gains at the end of the year. So I think it's just—