Finance Committee on May 30th, 2006

[The Chair, Conservative, Brian Pallister]

Welcome, committee members. Welcome to our guests today.

Pursuant to the order of reference of Friday, May 19, 2006, Bill C-13, an act to implement certain provisions of the budget, tabled in Parliament on May 2, 2006, I'll call clause 1.

I'll invite our guest, the Minister of Finance, to make a few opening comments.

Take it away.

[Jim Flaherty, Conservative, Minister of Finance]

Thank you, Mr. Chair.

Before I begin, I want to thank the committee on behalf of my oldest son, who has just turned 15 years of age. He'll be thrilled to know that he is now the Minister of Finance for Canada--John Flaherty, right in front of me here. I hope I can take the sign with me when I leave. I'm sure he'd love to have it at home. He would be thrilled with that.

I have a few opening remarks, as you said. I'll try not to go on for too long, Mr. Chair.

Thank you, Mr. Chairman, for the opportunity to appear before this committee to discuss Bill C-13, which implements certain measures in Budget 2006.

This government's first budget delivers on the commitments we made to Canadians during the election campaign. This plan delivers real results for Canadians and will contribute to stronger families, safer communities, and a better Canada.

I would like to focus my remarks today on two areas at the core of the bill before the committee today. Indeed, they represent what the government stands for; I'm speaking about tax relief and child care.

First, on tax reductions, it became clear during pre-budget consultations, Mr. Chair, what Canadians were up against: government was taking too big a bite out of their paycheques.

Middle-class Canadians and their families told me that they were working harder and harder, but getting less and less in return.

I kept telling them to wait until the budget day. Now that day is over and we have kept our promise to Canadians. Budget 2006 proposals will leave significantly more money in the pockets of Canadians, and the budget delivers greater benefits, especially for middle-income families, than were anticipated under the tax measures proposed in 2005.

With these measures, the government is not only keeping its word to Canadians on cutting the GST, but it is also going much farther in delivering immediate, real, and continuing results for people across the country. In fact, the budget provides almost $20 billion in tax relief for individuals over the next two years. Mr. Chair, this is more than the last four federal budgets combined. The tax measures in this budget will remove some 655,000 people completely from the federal income tax rolls.

The tax reduction measures start with a key commitment of the new government, the reduction of the GST to 6% from 7%. As I said, this measure delivers on a commitment this government made to Canadians. This key measure of our tax reduction plan will put money in the pockets of Canadians every time they buy something for themselves, their families, or their homes. This is a real tax cut for all Canadians. Effective July 1--Canada Day--and assuming the bill passes, Canadians will see this tax cut in action every time they buy something. This tax cut will benefit all Canadians by $8.7 billion over two years--even those lower-income Canadians who don't pay income tax, who make up about a third of Canadians.

Let's look at some concrete examples. A person spending $30,000 on a new car will save $300 in GST. For young families buying a new $200,000 home, the GST savings are $1,280, after taking into account the GST rebate on new housing. These are substantial savings, Mr. Chair.

The date of July 1, 2006, has been the subject of some comment. I can tell you it was chosen to ease the administrative transition for Canadian businesses. It will provide all businesses--large, medium, and small--with sufficient advance notice to modify their cash registers, computers, and other systems. The date also coincides with GST filing periods--not only for monthly filers, but also for smaller businesses that file quarterly. Finally, as you know, there are three provinces that have a harmonized sales tax/consumption tax system, and the agreements with those provinces require the federal government to give at least two months' notice, which I did shortly before the budget.

It is also important to remind the committee members that the GST will be reduced by a further percentage point in a future budget, providing Canadians with more money in their pockets.

The GST cut is an important step in the right direction, but it's only one part of our tax relief plan. In every way the government takes money from Canadians, the government will take less of it. We made a promise to reduce the GST, and we have kept that promise. Budget 2006 goes beyond that promise by proposing additional tax relief for Canadians.

The bill proposes to increase the basic personal amount--the amount that an individual can earn without paying federal income tax--so that it grows each year and remains above currently legislated levels for 2005, 2006, and 2007. This includes preserving the $500 increase scheduled for 2005. The basic personal amount will continue to grow with indexation; in addition, there will be a permanent $100 increase in 2007.

In total, this budget will provide more than $26 billion in tax relief over the period from 2005-06 to 2007-08. Of this sum of approximately $26 billion, more than 90% will go to individuals and families in Canada. That's not the end of the story, either.

The Harper Government recognizes that lower taxes for businesses are essential if Canada is to remain competitive. They will encourage the investment necessary to create jobs and ultimately improve the living standards of Canadians.

The Canadian Chamber of Commerce was clear in its support of the government's action on this front. Following the introduction of this year's budget, the CEO of the Canadian Chamber of Commerce said this:

The government has heard our call and acknowledged the need to reduce the tax burden of Canadian taxpayers and businesses alike, in order to make Canada more competitive.

To make Canada's tax system more competitive for businesses, Bill C-13 proposes to set out a significant business tax relief plan that will reduce the general corporate income tax rate from 21% to 19% by January 1, 2010. It proposes to eliminate the corporate surtax for all corporations in 2008. And it proposes to eliminate the federal capital tax as of January 1, 2006, two years ahead of schedule.

To further encourage small business growth in Canada, Bill C-13 proposes to increase the amount of small business income eligible for the reduced federal tax rate to $400,000 from the current limit of $300,000 as of January 1, 2007. This bill also proposes to reduce the current 12% income tax rate applying to qualifying small business income to 11.5% in 2008 and 11% in 2009.

Tax measures in this bill go even beyond what I've already outlined. For example, this government recognizes the invaluable role played by charities in assisting Canadians and in contributing to our sense of community. It also recognizes important projects in the cultural, educational, and social sectors. So to encourage charitable living, this bill proposes to eliminate capital gains tax on certain donations to charities. It also increases support for the Canada Council for the Arts.

I must say, Mr. Chairman, I am just thrilled by hearing in the last almost a month now from across Canada about the substantial amount of charitable contributions that are proposed to be made assuming this bill passes. There are millions and millions of dollars in publicly traded securities that are going to be given to important institutions in Canada as a result of this budget, assuming Bill C-13 passes.

As Karen Kain, the chair of the Canada Council for the Arts, said:

This government has recognized the value and importance of the arts to the quality of the lives of Canadians and their communities;

At the risk of sounding something like a broken record, this government has done even more. Time doesn't permit me to outline every measure proposed in the budget, but I would just quickly mention the children's fitness tax credit and the pension income credit. These initiatives will help improve the quality of life for all Canadians, both young and old.

I mentioned at the outset the child care credit. This government has kept its promise to cut taxes for Canadians. It is a priority for this government. We also recognize that each family has its own challenges and that no two families are alike. And it's individuals, not the government, who are in the best position to make the right choices for themselves and their families.

That is why Budget 2006 announced the kind of investments that will make a real difference to parents, by providing more choice in childcare for families with young children.

As a result of the budget measures proposed in Bill C-13, total direct federal support to families will be approximately $11.7 billion for the 2006-07 benefit year, with the vast majority of benefits directed to low- and middle-income families in Canada.

At the heart of this support is the proposed new universal child care benefit, $100 per month for each child under age 6 effective July 1, 2006, assuming the bill passes. This proposed measure will help give parents the flexibility to choose the child care option that best suits their family's needs.

An important part of this initiative--and there was some anticipatory criticism pre-budget about this--is that the universal child care benefit will not have other federal benefits clawed back. In other words, benefits paid under the Canada child tax benefit and the goods and services tax credit will not be reduced on account of the new benefit. The benefit will also not be considered income for the purposes of federal income-tested programs delivered outside of the income tax system, such as the guaranteed income supplement, the Canada education savings grant, the Canada learning bond, and employment insurance.

The government also recognizes that the availability of quality child care is a challenge for many working parents. To support the creation of child care spaces, this bill proposes to set aside $250 million per year beginning in 2007-08. The government will consult with provinces and territories, employers, and community non-profit organizations to ensure that assistance is effective in creating additional child care spaces. It must also be responsive to the needs of parents and administered in an efficient and accountable manner.

So summing up, Mr. Chair, this government has kept its commitments to Canadians. With this bill we are reducing taxes; with this bill we are providing choice in child care; with this bill we are delivering results.

And we are doing all of this in a way that is fiscally responsible, that will pay down debt, contain government expenses and deliver the greatest value for taxpayer dollars.

I would now be pleased to answer any questions from the committee, Mr. Chair. Officials from the Department of Finance have also joined me to assist in answering questions.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Minister.

We'll lead off with Mr. McCallum. You have seven minutes, sir.

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

Thank you, Mr. Chair. I'll probably be sharing some of my time with my colleague, Mr. McKay.

My first question to the minister is whether he would agree, as stated very clearly on page 218 of the budget plan, that the lowest personal income tax rate that Canadians actually pay will rise on July 1, assuming the bill passes, from 15% to 15.5%.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

All taxpayers will, on average, pay less income tax in Canada as a result of Bill C-13. In fact, it is only because of Bill C-13, assuming it passes, that Canadians will not be called upon to pay the level of taxes set out in the 2005 budget.

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

But do you agree with the very simple point I just made, that effective July 1, the tax rate will go up from 15% to 15.5%? It's stated in this book. Is that not correct?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

That's correct; it's in the book. But I say to you, Mr. McCallum, all Canadians will pay less income tax on average as a result of Bill C-13.

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

Good. Thank you.

That's the first time we have had you acknowledge that basic truth. When we go from that basic truth to the consequences of that truth, we have a recent report by Dale Orr, a well-known economist--not traditionally very friendly to Liberals when we were in power--who makes a number of points that follow from that very point you have just acknowledged.

He makes the following three points: one, the personal income tax cuts are really only 5% of what was stated in the budget and the speech, as a simple consequence of your admission just now that the tax rate went up and not down; two, the total tax cuts were only half of what was advertised; and three, far from 655,000 people coming off the tax rolls as a consequence of your budget, 200,000 Canadians were in fact put back on the tax rolls.

Those three points follow from the admission you just made that the tax rate went up. I'd like to ask you to acknowledge those three corollaries of the point you just acknowledged.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

I didn't admit that the tax rate went up, Mr. McCallum. What I said was that there was a ways and means motion last fall that had 15.5%, and it didn't pass. Your government was defeated.

When I compare Budget 2005 with the 2006 budget, in every tax category--

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

But that's not the question.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

--Canadians will pay less income tax than they would have paid under the budget that was passed--I'm sorry, under the NDP budget that was ultimately passed, one of the budgets that you passed in 2005.

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

Well, the record will show what you said. What you did say was, yes, because it's in the book, the rate that Canadians actually pay.... Canadians don't actually care whether their rate is legislated or passed by ways and means; Canadians only care what they actually pay. As you just acknowledged--as the book says--that rate will go from 15% to 15.5% as of July 1. I'm pleased you acknowledged it. Those three other points follow from that acknowledgement.

Now I will ask my second and final question, which is on fiscal imbalance: how are you going to pay for this? Whether you do a 10-province standard, with or without resource revenues, the cost is in the billions of dollars per year. I think a billion dollars is just small change when it comes to giving additional funds to provinces, whether through equalization or transfers. You have budget surpluses in the next two years of $0.6 billion and $1.4 billion, and you have no more prudence. You seem to have spent all the money. You've promised to fix the fiscal imbalance, but the monetary cupboard is bare.

We don't have the figures for years three, four, and five, but all the tax measures you have announced are ongoing. The experts I have consulted think there won't be all that much additional funding going forward.

When you make a big election commitment to fix the fiscal imbalance, you actually take money back from provinces through cancelled child care agreements, and the cupboard is bare. How are you going to honour that commitment?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Not only are you wrong about the income tax issue--which you are, because all Canadians will pay less tax than they would have paid under the Liberal government--

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

That wasn't the point.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

--but you're also wrong about the spending issue. For every $3 we had, we used $2 for reducing taxes and $1 for spending.

You make the assumption, the traditional Liberal assumption, that the only way to resolve problems in Canada is to throw money at them. You also make the assumption, as Liberals always did when they budgeted here for 13 years, of creating these artificial numbers, at the end of the budget, of zero-zero and pretending it was balanced.

We didn't do that this year. We actually put in the correct numbers at the end of the budget, which you've just quoted, that actually there will be a $400 million surplus, and $1.4 billion next year, and so on. We didn't mislead the Canadian people, quite frankly, and then come up with huge surprise surpluses at the end of most fiscal years, which Liberal governments did year after year in Canada.

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

My question remains, where is the money for the provinces--

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Dealing with the fiscal balance issues and the equalization issues, there are three primary considerations here. One is the core responsibilities of the federal government and the provincial governments. The Liberal governments in Canada could not restrain themselves from using funds that quite rightly should be used for federal core responsibilities--like security, like our armed forces, like immigration--and meddling instead in provincial and territorial affairs in Canada. So we have to have that fundamental realignment, which our government is committed to doing.

Secondly, we already have a health care accord with the provinces and the territories--

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

Thanks to us.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

--with a fixed, built-in 6% escalator that goes into the base each year.

Thirdly, we have very substantial funding for infrastructure in Budget 2006, more than $16 billion over the next four years.

The remaining issue that is a challenge, no question about it, and that certain premiers have raised, is the issue of post-secondary education. That has to be dealt with.

As you see, the issues are becoming more narrow and more focused when we're dealing with transfers and equalization.

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

So it's only post-secondary education. I think many premiers would say it's also equalization, and I think it's billions for equalization. Are you saying there will be no more money for equalization?

I don't think you've answered my question. I've said that the monetary cupboard is bare. You have a surplus of $1.4 billion. That goes nowhere in terms of equalization, plus the post-secondary that you mentioned.

My time is up, I guess, but I don't think you've indicated to the satisfaction of any premiers who are counting on the government to meet its election commitment that there is money to fix the fiscal imbalance.

[The Chair, Conservative, Brian Pallister]

Mr. McCallum, you're out of time.

Mr. Loubier, you have seven minutes.

[Yvan Loubier, Bloc, Saint-Hyacinthe—Bagot, QC]

Thank you, Mr. Chairman.

I would like to welcome you, Minister. It is always a pleasure to see you.

It is, however, curious to hear my colleague from the Liberal Party, Mr. McCallum, speak so intensely about the fiscal imbalance when in fact the members of this party never believed in its existence at the outset. We find ourselves facing a fiscal imbalance now because, in Mr. Martin's 1995 budget, transfers for post-secondary education, health and social assistance were cut drastically. Mr. Martin never wanted to reform equalization either. So this is a mantle that you are assuming rather late in the game. This is unfortunate because you were in fact, given the tremendous surpluses that you accumulated every year, in a very good position to remedy the problem.

That being said, Minister, we supported your budget for one reason exclusively and that was that it contained a solid commitment and process to correct the fiscal imbalance. In French and in English, correcting means removing all of the problems related to the fiscal imbalance.

You mentioned, among other things, the problem of post-secondary education and the issue of health care, which has not been resolved yet. Even with the September 2004 agreement, if we are to achieve the federal contribution of only 25 per cent for health care, some $1.5 billion, and this on a recurring basis, every year, is still missing.

As far as post-secondary education is concerned, we need $4.9 billion per year to remedy the fiscal imbalance. If we use the rule of ten for equalization and if we correct the many parameters, including property tax, by taking into consideration all renewable and non-renewable resources, we still require a further correction in the amount of $4 billion. Basically, we need between 10 and $12 billion per year to remedy the fiscal imbalance.

As you know, the Bloc Québécois has often discussed this issue. We must take steps to ensure that this amount is transferred in a form of tax points or tax sectors to the provinces to ensure that they have some independence and financial predictability and also to ensure, as was the case in 1964, that these tax points appear in the provinces' financial statements so that they in turn can fulfill their constitutional obligations.

Over the past two weeks or so, you have concerned me, not you alone, but also your Prime Minister, Mr. Harper. He said, about two weeks ago, that this issue was nearly dealt with, that there was very little work to be done because, with the health agreements — those are your exact words —, a lot of the work had been done. You yourself said, yesterday, when talking about equalization, that you did not exclude at all the possibility of removing all non-renewable natural resources. By doing this, you will not correct the fiscal imbalance. Hence, in the case of Quebec, for example, instead of increasing equalization payments by $1.9 billion per year, you would be reducing equalization payments by $872 million.

How can you reconcile the fact that, in your budget and throughout your election campaign, you made a commitment to correct the fiscal imbalance with the fact that, over the past few days, you have been trying to soften this correction by proposing a very partial method of correcting the problem?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

A lot of ground was just covered, and I will try to be as focused and succinct as I can in my response.

The context of fiscal balance and fiscal imbalance is different now from what it was several years ago. One of the important facts is that of the 14 governments in Canada, most have balanced budgets and surpluses now. This is not true of two of the provinces, Prince Edward Island and Ontario. There are no longer extraordinary federal surprise surpluses, nor do we intend to have such surpluses. The existence of those surpluses led to a rather strong outcry about fiscal imbalance.

At the same time--and I can say this as a former minister of finance--in one of the provinces some five or six years ago, before the health accord...there was tremendous pressure on provincial governments to use whatever extra dollars they had or whatever dollars they could save in health care, because health care was growing at 6% or 7% or 8% per annum on average. Provincial governments were struggling to keep up with that degree of growth in health care, which was consuming something north of 40% of program budgets of the provinces and territories. In Ontario it was 45% to 46% of the operating budget.

So as I say, that intense pressure that was on the provinces with respect to health care spending is no longer there. It's not to say--and I agree with you, Mr. Loubier, I would not be presumptuous to say--there is no issue there, but I would say that the issue is much more modest than it was some five or six years ago.

[Yvan Loubier, Bloc, Saint-Hyacinthe—Bagot, QC]

Minister, even with the September 2004 health accord, the additional $ 385 million equalization payment and other small agreements that have been entered into over the past year-and-a-half, there is still, as far as the fiscal imbalance is concerned, a shortfall of between 10 or $12 billion per year. Consequently, it cannot be said that the pressure has disappeared.

If you are telling me that the fiscal imbalance can be corrected simply by keeping the provinces better informed about the status of public funding, I must tell you that I do not agree. During the election campaign, you made a commitment to correct the fiscal imbalance. You repeated these words in the budget. Moreover, this is why we supported the budget. Given that there were no measures to reform employment insurance or the program for older worker assistance, we would not have hesitated to vote against your bill were it not for this.

Now you appear to be minimizing the problem. Indeed, how much money do you estimate it will take to correct the pan-Canadian fiscal imbalance? I would like you to give us an idea of the magnitude.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Thank you.