Finance Committee on Nov. 23rd, 2006

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

You said earlier that you were roughly in favour, or that you were eye to eye with Ellen in terms of the overall forecasting. Are you urging us to be cautious in terms of looking at the numbers?

[Dr. Dale Orr]

Yes. I'm saying that if you only include what was included in budget 2006, look at what the surplus is in 2010. If it's not more than $10 billion, then he doesn't have much money left for anything incremental. Between now and 2010 he has to reserve money for a GST cut of over $5 billion; an increase in the basic personal amount from about $9,000 to $10,000, which is going to cost over $2 billion; and the fiscal balance question, which is a very ill-defined concept, but if he doesn't come up with $2 billion to $3 billion incremental money on that issue, there are going to be some disappointed premiers. We've mentioned defence spending, and I think the forestry sector is expecting him to give money.

None of those things you do because of productivity and economic growth. All of those things are motivated by something other than trying to make the economy stronger.

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

All right, Ellen, do you want to add anything in terms of your numbers?

[Ellen Russell]

I will only say we put out this forecast, but the finance minister does not take me into his confidence. I don't really know what goes on inside the finance ministry, and there may be reasons to think that any number of expenditures could be higher than I put them here. In some ways, you could be looking at less fiscal room than I portrayed.

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

Okay, but you're giving us a ballpark figure, so we have to take that into account when we assess both our pre-budget presentations and whatever Mr. Flaherty is going to talk about this afternoon. There is limited room. If you consider the fact that another drop in the GST is about $6 billion, even on that basis, just on that term, we don't have enough money, never mind income splitting, which is $5 billion or $6 billion, never mind taking into account all the other things Ellen and others mentioned. We have to be very careful about what we push for and what will actually produce productivity.

There is a real debate about whether or not another drop in corporate income tax will do that. That's an expensive proposition. The question for us is, does that produce competitiveness and productivity?

Don Drummond had some comments in the paper not too long ago questioning whether or not the business sector has done its job of translating tax breaks into real investment in this country that leads to more jobs, higher productivity, and so on.

My questions are as follows. For anyone who wants to answer, does a drop in the corporate income tax from 21% to 19% produce much in terms of productivity? Does the capital gains really do what you're talking about? Does the marginal effective tax on investments do it, or do we need to look at some other things? For example, could you say that the cancellation of the national day care program produces competitiveness? Would it not make sense to look at that in terms of increasing productivity? On some of the other stuff the government has done, does an increase in defence spending increase productivity? Does the 1% drop in GST produce competitiveness?

Ellen, maybe you could start, and then Don and then Dale. Could you give me a response?

[The Chair, Conservative, Brian Pallister]

There is a short 40 seconds to respond to that speech.

[Ellen Russell]

If you are applying productivity criteria, a lot of the stuff in the last budget wouldn't meet it. Often these measures are politically motivated.

Second, if you're going to bet the farm on corporate income tax cuts, that's the only thing you're going to be able to do, if you can even do that, because there is just not the fiscal room to do everything. So you're going to have to bet on corporate income tax cuts doing everything you want to do, because you won't have the money for infrastructure, education, the environment, aboriginal peoples. There won't be any money to spend for those other things.

[The Chair, Conservative, Brian Pallister]

Thank you very much.

We'll continue with Mr. McKay now, for five minutes.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you to these witnesses. Certainly it's much more pleasant listening to you on this side of the table than on the other side of the table.

I want to go with the projections of surplus for the next couple of years, even though it looks as if a lot of commitments made in the 2006 budget go forward four or five years, which probably to you folks means a lot more than it does to the average folks.

Ms. Russell's projection is that it's going to be in the range of $4 billion. Mr. Drummond's is $1.8 billion to $2.8 billion, and I assume Mr. Orr is somewhere in there, but certainly not disagreeing greatly with that. I want to go through what's left.

If he goes with personal income tax changes--in other words, he takes the November 2005 update, photocopies it, and puts pretty blue paper on it--what is that going to cost him, and where will that leave him? He's bumping up the first basic personal exemption and presumably bringing the marginal rate back down to where it was at 15%. What is that going to cost?

That is for Mr. Drummond, or any of the three.

[Don Drummond]

Let me clarify. I did give a range on the fiscal numbers, and that was the budget numbers plus $1 billion or $2 billion this year or next year, so that would put us into the $4.5 billion to $5.5 billion range, and that is assuming all the measures on the table right now are passed. If I understand your question, you're asking if we went beyond that and knocked another half a point off the first tax group. Is that your question?

[John McKay, Liberal, Scarborough—Guildwood, ON]

No, it's with regard to the specific tax changes that Mr. Orr was referring to. The two personal income tax changes will certainly lower the marginal rate and up the base personal exemption. What are those changes going to run?

[Don Drummond]

I'm sorry for the confusion, but we've already incorporated, in the numbers I've given, the increase in the basic—

[John McKay, Liberal, Scarborough—Guildwood, ON]

Okay, so you've left those numbers out. I understand.

[Don Drummond]

Yes. If you're asking whether we go further, just as a rule of thumb, one point off each one of the four tax brackets.... So taking the top one from 29% to 28% and the bottom one from 15.5% to 14.5% is $6 billion.

[John McKay, Liberal, Scarborough—Guildwood, ON]

That really doesn't leave you too much room.

In terms of the GST, it's basically the consensus that this is a $4 billion or $5 billion item?

[Don Drummond]

It's $6 billion if they don't adjust the GST low-income credits to offset it.

[John McKay, Liberal, Scarborough—Guildwood, ON]

All right.

Mr. Orr, you talked about probably monitoring income trusts to ensure that the playing field is level. I'm not quite sure I know what you mean by that. His commitment is pretty firm that income trusts are going to be taxed in four years.

[Dr. Dale Orr]

Yes, that's right, but has the October 31 change eliminated any artificial drifting from the corporate form into the income trust form for tax purposes? That's what he wants. Has that been enough?

[John McKay, Liberal, Scarborough—Guildwood, ON]

Oh, I see, that's what you mean. All right.

The Conservative platform is to eliminate capital gains tax. They seem to have abandoned this business of cycling the capital gain forever and ever. What would you propose to him in order to be able to accommodate that somewhat ill and rash promise?

[Don Drummond]

Just to clarify, you said that the Conservative platform is to eliminate capital gains. As I understand it, it's to eliminate the capital gains on the rollover on investments, not to eliminate all capital gains.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Yes, I know, but once you're dead you'll probably get taxed.

[Don Drummond]

But you can certainly understand a rationale for that. There's quite a penalty right now for trade in stocks. You want to hold off because you don't want to incur the tax. The original election campaign document put the cost at $100 million, and by my reckoning, that's off by at least a factor of ten. It depends as well on whether you allow it just for individuals. Everybody forgets that corporations have capital gains as well. In fact it's about the same amount of revenue as for individuals, so that ten factor could even be higher.

You could certainly do it. You might remember that in 1985 there was the ISIP program, which was an account that you were allowed to establish over a lifetime. It only taxed capital gains on the real portion. My suggestion is that if you wanted to go ahead with this, set it up as a lifetime account. The trading has to take place within an account. If you want to limit the costs and limit the regressivity of the measure, put on whatever lifetime cap you want--$100,000, $200,000, $500,000.

So it is doable. I just don't think one would want to allocate that much revenue to do it in an unrestricted fashion.

[John McKay, Liberal, Scarborough—Guildwood, ON]

At this point we're at $13 billion of costs and we have $4 billion worth to play with. Is that fair?

All right, thank you.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Mr. McKay.

I'll throw in a couple of questions now.

Opponents of the concept of income splitting are using the argument that it may have the perverse effect of reducing labour force participation by couples who are emboldened by the fact that they're able to keep more of their money, and who may decide to stay out of the workforce and raise their own children.

I'm curious about your perspective on this issue. Certainly in the pre-budget process we heard from numerous people expressing concerns around labour force demographics in the future. I'm just curious to know if you hold any credence to the argument that somehow our productivity as a country will be negatively impacted by income splitting.

[Don Drummond]

That's of course the classic argument--the glass half full or the glass half empty. If you want to make the argument as you put it, you have to step back and say that the existing system is arguing for an incentive for additional participation, and if this argues for an incentive for less participation, it's just offsetting the bias that's already there.

That's not an argument that I would put a lot of weight on.