Finance Committee on Nov. 23rd, 2006

[Don Drummond]

I might be able to answer that question. We have the advantage of using the private sector forecasts which have already been published, most of them in September. I believe that the average for the entire private sector is about 2.5% in GDP growth for 2007. The TD Bank forecasts are somewhat lower, at 2.25%, but that does not make too much of a difference.

[Pierre Paquette, Bloc, Joliette, QC]

And in terms of inflation?

[Don Drummond]

The average consumer inflation rate is about 2%. That is the forecast average. Everyone concedes that the price of oil is more or less stable but similar to the current level, which leaves us with the rate that is forecast by the Bank of Canada. The growth rate is slightly higher for 2008, about 2.75%, and maybe 3%. Ours is somewhat lower, but that does not make much of a difference.

[Pierre Paquette, Bloc, Joliette, QC]

Mr. Fortin.

[Mario Fortin]

Mr. Drummond will no doubt be happy. From the various forecasts that I have read, the ones published by TD are my favourite because they are slightly lower than the others. I explained why earlier. I believe that economic growth in the US might be even slower than what is currently forecast. The effects would be felt mostly in Ontario and Quebec, the two provinces that will no doubt be the hardest hit next year.

I also believe that Canada's economic growth will be about 2% with, of course, an advantage going to the western provinces.

As to inflation, as Mr. Drummond said, it should not be any higher than 2%. I am rather optimistic when it comes to the price of oil and slightly more pessimistic with respect to world economic growth. A slower growth in the US GDP will mean a slower increase in the demand for oil. In 2007, capacity should grow more quickly than demand. There should be a downward pressure on oil prices so that they would finish off the year near the $50 US mark. That price would still be high enough to maintain investment interest in the oil sands.

[Pierre Paquette, Bloc, Joliette, QC]

Would the other two witnesses care to respond?

Mr. Dufour.

[Mathieu Dufour, Research Associate, Canadian Centre for Policy Alternatives]

I would simply like to add that our figures are essentially the same. You can find them in our brief. They are based on a slower growth in the US economy for 2007. We expect it to recover relatively quickly and begin a growth trend towards the end of 2007, to get back on track in 2008.

There is no guarantee. There is a great deal of uncertainty in the US, so the figure may be somewhat high. It is the upper limit of what might be expected. This would mean a relatively short downturn in the United States, which could easily be prolonged and would, therefore, lead to a weaker medium-term growth than expected.

[Pierre Paquette, Bloc, Joliette, QC]

Mr. Orr.

[Dr. Dale Orr]

Just about two days ago, I got the forecast from the group called Consensus Economics. It's probably the highest-profile, most widely read group. They surveyed 17 different forecasters in early November and the results came out about two days ago. For 2006 they're forecasting 2.8% growth, and for 2007 it's 2.6%. That's absolutely right up to date in a wide consensus. The Department of Finance forecast for the economy will be based on their survey of Canadian forecasters for September, so it's a bit dated.

I should just say that we're talking about real growth here. Yes, it's the main driver of the fiscal tax base, but GDP inflation is also important, the pace of employment is also important, and interest rates are also important.

[Pierre Paquette, Bloc, Joliette, QC]

What do you think the inflation rate will be?

[Dr. Dale Orr]

Inflation? The forecast for this year is 2.1%, and for next year it's 1.8%. That's consumer price inflation.

[Pierre Paquette, Bloc, Joliette, QC]

The second item of great importance to us is fiscal imbalance. Of course, when it comes to the surplus, we are not expecting it to be as high as what as been experienced over the past 10 years, even though it will be appreciable, since the first six months saw it at $5.3 billion. We must not, however, forget the expenditure side of the equation.

We did a little study. From 1997-1998 to 2005-2006, federal government spending increased by $235 billion. The surplus was $67 billion, for a total of $302 billion. This flexibility was either used for expenditures or remained in the surplus.

Expenditures increased by 58% during the same eight-year period. Thirty-nine per cent went to transfers, 62% for department operating expenses and the increase for the population and inflation was 24% while the GDP increased by 33%.

Do you not think that the government expenditures might allow enough flexibility to settle the fiscal imbalance? Not by cutting funding to literacy and women's groups, as they did in September, but by reducing spending on the government operations themselves, which appear to be increasing at a faster rate than the economy, the population and the consumer price index.

I would like to hear your opinion on this.

[Don Drummond]

If I could start again, there is what we in the fiscal business call a natural wedge that is formed. That's because the interest on the public debt is tending to be flat to trending down. In fact, even if interest rates don't go down further, you will see flatter declining interest on the public debt because bonds were being issued at 10% ten years ago and they're being reissued at 4% as they come up for renewal. That gives you the fiscal dividend that you referred to, and it allows you to run your program spending up to some degree. But that has already been done to a considerable degree.

As you noted, program spending has been rising at a considerable trend in the May budget. While in future it is not to rise at quite the pace it had in previous years, it's still rising at a fair clip. We still have to go off the base of the surpluses that were projected at that time, and, as I said, I think they could be $1 billion to $2 billion higher than that. If a government wishes to keep to its commitment of paying down $3 billion of debt, that doesn't give an awful lot of room for additional initiatives, and there are a number being floated around in addition to the fiscal imbalance.

I should just say something in reference to your question about fiscal imbalance. You were asking about the growth on a national basis. There has never been a time in Canada that a national number has been less relevant for anybody in the country. There's no part of the country and no sector of the country growing remotely close to that average. For example—

[Pierre Paquette, Bloc, Joliette, QC]

Except the federal government—

[The Chair, Conservative, Brian Pallister]

Thank you very much, Sir.

We continue now with Madam Ablonczy, for seven minutes.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Thank you, Mr. Chairman.

We thank all of you for being here. Whether we're members of the government or the opposition, we appreciate reality checks on the finances of the nation. I think they're very helpful to all of us.

As you will know, we've been focusing, as a committee, on productivity and international competitiveness. I found very helpful an article that one of you did. Don Drummond did an article in the fall issue of the International Productivity Monitor, but he actually referred to work that all of you have done on productivity. He said that economists in Canada “believe weak productivity is compromising the Canadian standard of living and threatens many aspects of the quality of life that Canadians cherish.” So this is a very important issue. The article identifies quite a number of areas where Mr. Drummond feels there is a consensus among economists on measures that need to be taken to increase productivity to make sure that Canada's standard of living and quality of life is maintained and enhanced.

I would like to give each of you an opportunity to emphasize to the committee the two or three areas where you feel it is most important for the government to take action to ensure productivity, which of course really is Canadians' standard of living and quality of life. For which areas would you say, if you don't do anything else, do this to maintain Canada's productivity?

Maybe we can start with you, Mr. Orr, and just go around.

[Dr. Dale Orr]

I believe I already answered that question when I answered Mr. McCallum. The only thing I would want to add to that would be to emphasize what Ellen Russell said. We're very much on the same wavelength on this one, since sometimes we're not exactly on the same wavelength. It's all very nice to talk about what we should do for productivity, but I warn you to watch the fiscal forecast and to watch very carefully how much money is left in there for the tax cuts that I talked about and recommended and the program changes that I talked about and recommended.

In doing that, there's another thing that I highly recommend to you. You're talking about what the surplus is going to be. That's meaningless unless and until you know exactly what the government has included in their revenue forecast and in their program spending forecast. I'm saying that, whichever way they slice it, there'll be a lot of talk about productivity, but there won't be very much money left to do very much of that over the next couple of years.

[Mario Fortin]

Since I have been given the opportunity, I would like to make a suggestion. Productivity and innovation depend on brain power. Canada could invest more in post-secondary education particularly in the region which is familiar to me, namely Quebec, where funding is much lower than it is elsewhere. I know that is an area of shared jurisdiction, but it is also an area where innovation could be worthwhile and greater funding in post-secondary education would encourage researchers to remain here.

[The Chair, Conservative, Brian Pallister]

Madam Russell, you can continue.

[Ellen Russell]

On the tax cut versus program spending question, there has been a program of corporate tax cuts for many years now. It would be useful to examine whether that program has remedied the productivity issues that are being identified or whether it has remedied the competitiveness issues.

We have a report here quoting Jim Stanford, who did a paper outlining the fact that despite these corporate tax cuts, there weren't the advertised benefits in terms of competitiveness and productivity. Plus, by cutting the taxes, you deprive the federal government of the revenue it could use for doing things—infrastructure, education, or whatever you may consider to be a priority—in terms of spending money to invest in productivity.

[Don Drummond]

I have more than four reasons, but I won't go through all of them. I'll pick out four, as you requested.

I think our number one problem on the tax side is the high marginal effective tax rates. They kick in for people up to about $50,000 in income. I know we instinctively think of marginal tax rates as being bad for high-income people, but they're much higher when you take away the social benefits at low incomes, usually higher than 60%. So there's very little incentive to upgrade your education, take second shifts, and look for a better job and what not.

I would say that the employment insurance system would be number one. There's been no study that I'm aware of, or none with any credibility, that hasn't said that this is a disincentive. It subsidizes people to stay where the jobs aren't, and discourages them from going to where the jobs are.

My third one would be immigration. We're within a few years of having 100% of our population growth being determined by immigration, so the economic welfare of immigrants will largely determine the economic welfare of the nation. That's a very sad story, and it has been for the last 20 years. The problems go through the whole thing--the design of the system, the administration of the system, the integration of immigrants.

My final one is a remaining problem, not in the federal jurisdiction but largely in the provincial area. We talk about the high rates of taxation on capital, and largely they're provincial. We still have provincial internal barriers to trade. We have overlapping jurisdictions. One aspect that I particularly appreciated in the spring budget was Mr. Flaherty's use of some fairly harsh, bold language to say that if we want to get our productivity up, we need some improvements on the provincial side, not just federal.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Okay, I appreciate that.

Thank you very much to all of you.

[The Chair, Conservative, Brian Pallister]

Thank you.

Madam Wasylycia-Leis, seven minutes.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you, Mr. Chairperson.

Thanks to everyone for coming today. I trust that you will be giving serious consideration to an ongoing relationship with our committee, since we are interested in, and passed a motion to ensure that we have, some independent forecasting advice until such time as the mechanism in Bill C-2 kicks in. We hope this is the start of a regular appearance before the committee.

The main reason we need you here today is that the minister gives his economic update this afternoon, and we're in the middle of finalizing our report based on pre-budget consultations. We're trying to get a lay of the land that's as accurate as possible, starting with the surplus dollars available.

I'd like just a quick go-round on that again. Ellen has given us an indication not to expect more than $4.2 billion surplus for this year, and for next year a forecast of $5.3 billion. That is way lower than any of us expected. That's been a real eye-opener for me and I'm sure for others.

If I go back to the reports that you gave us all last October, I know that we're all in the neighbourhood. Global, for example, was thinking more in the line of $8 billion or $9 billion flexibility. I think that was the same for everybody across the board. So things have changed.

Since Ellen is the only one who has given us a specific number, does everyone here concur with that number, in a ballpark way? Are we looking at roughly $4 billion in surplus for this year?

Dale.

[Dr. Dale Orr]

It's really hard to answer that. As I say, it depends on exactly what fiscal actions you include and exclude. Obviously the surpluses have been eroded because of what was in budget 2006.

Previously we did a fairly thorough piece for the finance committee to answer exactly that question. It took quite a bit of time. I can't answer this right off the top of my head. You have to be so careful about what you're including and excluding before you come up with these kinds of numbers.