Finance Committee on Nov. 23rd, 2006

[The Chair, Conservative, Brian Pallister]

We'll move to questions now. We'll begin with Mr. McCallum.

Seven minutes, Mr. McCallum.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

Don Drummond hasn't said anything yet. I think it's the first time I've ever heard a witness not use his time to any extent. So perhaps I could begin with Mr. Drummond.

Can you tell me what your surplus projections are for the next three years or so?

[Don Drummond]

Yes, sure. Rather than giving you the numbers cold, maybe, as a benchmark, I'll use the May 2006 budget. I think that would be the appropriate context for the update later this afternoon.

Just to step back a bit, obviously you need an economic forecast. Actually, for a long time our economic forecast at the TD Bank hasn't changed very much. In fact, it's virtually identical to the forecast we had last spring. So on the surface—

[John McCallum, Liberal, Markham—Unionville, ON]

Actually, I don't want to interrupt, but I have very little time and quite a few questions. Can you just give me the numbers?

[Don Drummond]

Sure. Relative to the budget numbers, our forecast would be that the surplus will be up $1 billion to $2 billion in the current fiscal year, and about $1 billion in 2007-08. If indeed it goes further, it will trend back to the longer-term horizon after that.

In a nutshell, that is basically what has changed. The economic forecast hasn't changed, but the revenues, particularly the personal income tax revenues, continue to come in extraordinarily strong.

[John McCallum, Liberal, Markham—Unionville, ON]

Okay, thank you.

With respect to income splitting, Dale Orr spoke about the need to provide incentives to work. If you're concerned about labour shortages and incentives to work, I would have thought that moving to income splitting would take you in the wrong direction. Would you agree, in the sense that at the margin you'd encourage more people to stay at home?

[Don Drummond]

It's a different way.... Is the glass half full or half empty? The current system is a disincentive to do that. This removes some of the disincentive. I wouldn't really look at it as providing an incentive.

There are different aspects to it. Do you look at the family unit as being individuals, or do you look at it as a couple? You can look at it in different ways.

[John McCallum, Liberal, Markham—Unionville, ON]

Okay.

On the productivity agenda in general, we can think about tax measures that foster productivity. We can think about spending measures, whether for research or innovation or training and things of this nature. Maybe this is difficult to answer, but would you think the most effective program to foster productivity would be a mix of these, or would you have a strong focus on either the tax side or the spending side?

[Don Drummond]

I think it absolutely has to be a blend of the two. On the tax side, you have to get down the marginal effect of rates on tax, on capital, and also on individuals. They're extraordinarily high in Canada. But having low taxes isn't going to take you very far, unless you have that government infrastructure in education, and hard assets in the country.

[John McCallum, Liberal, Markham—Unionville, ON]

So what would you give top priority to in terms of spending or, as you used to call it in the Department of Finance, investments? Would it be in innovation or in research? Where would you get the most bang for the buck?

[Don Drummond]

Certainly it would be on the education and skills training. But you also have to recognize that the federal government has done a lot in those areas in the last years. I'm not really suggesting that at this point you need to do more. Since 1997, there has been quite a substantial reinvestment in post-secondary education. I'm not sure at the moment that this is the area calling out for additional funds. Certainly on the infrastructure side, it is. But again, I think we need to be imaginative. It doesn't need to be a direct hit on the fiscal target. We need to make much more use of private sector funds and public-private partnerships. We need more of it, but it doesn't have to be a federal government-financed initiative.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

This question relates perhaps more to your previous job as associate deputy minister. We're clearly short of money to do a lot of things, as various people have pointed out.

Concerning this idea of privatizing assets, let's say they sell AECL or whatever and get $5 billion or $2 billion or some sum of money at one time. What are the rules in terms of using that money? Remember, you cannot use that for permanent tax cuts if it's a one-time piece of money. How does it work, accounting-wise?

[Don Drummond]

Well, if you realize a gain on it, you obviously get some interest relief on $5 billion. At a 4% effective interest rate, you can get a small trickle of ongoing savings. But absolutely, you can't really pair it up with anything other than a one-time expenditure.

In my 23 years in government, I never encountered a one-time expenditure. And on the so-called sunsetting programs, I've never seen the sun set. So that doesn't work out very well.

[John McCallum, Liberal, Markham—Unionville, ON]

But would it be within the accounting rules or the Auditor General's rules to use one-time money for ongoing tax reductions?

[Don Drummond]

No. You'd then have to get the asset proceeds coming over a space of time, but even if you managed to do that physically on an accrual basis of accounting, that wouldn't fly. You have to record the transaction when it occurs.

[The Chair, Conservative, Brian Pallister]

You have a minute and a half.

[John McCallum, Liberal, Markham—Unionville, ON]

My apologies to the others, but it's because Don Drummond didn't tell us anything initially.

Dale Orr, do you agree with Don, or do you have other comments on the spending/tax mix or the degree of blending that you would think most useful for a productivity agenda? Within the spending side, which areas would you give particular emphasis to?

[Dr. Dale Orr]

Yes, thank you.

I pretty much am in agreement with Don. It does have to be a blend. On the tax side, the key thing is that marginal effective tax rate on investment. Trying to line up depreciation rates with useful life is really critical. The reductions in the corporate income tax would be right on target.

On the spending side, I did mention training, education, and infrastructure.

[John McCallum, Liberal, Markham—Unionville, ON]

What about a two-year writeoff for manufacturing investment and processing? That's one thing the manufacturing sector is asking for. If you and Don could, give us a thirty-second answer.

[Dr. Dale Orr]

I would be really leery about tax reductions for specific sectors. I'd have to think more before I would jump with enthusiasm on that one.

[Don Drummond]

Can I answer that?

[John McCallum, Liberal, Markham—Unionville, ON]

Yes.

[Don Drummond]

I have a very strong conviction on depreciation for tax purposes. I think it should just match up with the economic life. The tax depreciation should be exactly in match with the economic life of the asset. If the tax depreciation is accelerated, it's a subsidy and we should just recognize it as a subsidy.

In the tax provisions right now, there are actually a host of tax depreciation rates that are slower than the economic life. They just haven't been brought up to time as technology changes and the world changes. In fact, a lot of them are specific to the manufacturing sector, not so much on the machinery and equipment side as on the building side. They're way longer on the tax side than on the economic life side.

[The Chair, Conservative, Brian Pallister]

You have seven minutes, Mr. Paquette.

[Pierre Paquette, Bloc, Joliette, QC]

Thank you, Mr. Chairman.

As you know, there will be an economic statement this afternoon. We will be watching to see whether or not the minister of Finance will be giving us an accurate outline of the federal government's financial situation. In order to do that, we must have some idea of the growth expectations for 2007.

I would like to throw out this question to anyone who might wish to respond. What do you expect the real and nominal growth values to be for 2007? I realize that it is an order of magnitude. In real terms, will it be 1.5% or 3%? What will the inflation rate be? I would like to hear some indications from you.