Finance Committee on April 24th, 2007

[Mark Carney]

I appreciate the question, and I apologize for being slow in answering it.

The principal difference is there's a decrease in operating expenditures, as I mentioned in my opening remarks, and there is also a reduction of $183 million in grants and contributions, principally because of debt relief initiatives. Then there are increases as a result of a number of transfers. There's $72 million, territorial financing formula. A big one is the Canada health transfer, increasing by $1.2 billion, and there's $300 million more for the Canada social transfer. And public debt charges--also mentioned in my opening remarks--$302 million, have gone up.

All of those elements, with the exception of the multilateral debt relief, the $183 million, and obviously the operating expenses of the department, are statutory items. I would also make the point that all of these items are prior to the measures outlined in budget 2007. As you know, the budget and the mains are prepared concurrently. Those are the principal elements operating on the old system, and there is a subsequent reconciliation.

[Rick Dykstra, Conservative, St. Catharines, ON]

You mentioned the increase in public debt charges. Could you expand on that a little bit to describe what that means?

[Mark Carney]

Thank you for that question.

The government has for a number of years been moving its balance of public debt to a 60% fixed-rate debt, a longer-term debt at a set rate, and then a 40% floating-rate debt. The increase in the public debt charges is a result of the increase in the average interest rate on all the debt, but effectively on the floating-rate debt, and I'll get the precise figure for you in a second. The difference is the treasury bill rate for the last mains was 3.4%, i.e. the short-term debt rate, which is the relevant rate, and it's increased to 4.1%, the projected rate now. That explains the difference between the two.

[Rick Dykstra, Conservative, St. Catharines, ON]

How much larger would that figure be had we not made the two consecutive payments on our national debt?

[Mark Carney]

How much larger would it be if we had not made the $22 billion--

[Rick Dykstra, Conservative, St. Catharines, ON]

How much higher would it have been, yes. I'll leave that; it's a number. Instead of taking up too much time searching--

[Mark Carney]

It's $1.1 billion. At 5%, the government has paid down $22.4 billion worth of debt over the course of the last.... So it's $1.1 billion, 5% of that $22 billion, annually. And in the spirit of the gift that keeps on giving, the government is proposing to legislate a tax-back guarantee so that this saving will be returned to individual Canadian taxpayers.

[Rick Dykstra, Conservative, St. Catharines, ON]

So over a billion. Thank you.

And, Mark, I don't want to get you scrambling again, but the other question I had relates more to our attention to international affairs. By that I mean international assistance. We're spending a great deal of time and money, obviously, assisting countries to become stronger and more self-reliant. It's one of the things that a lot of attention was paid to and we did pre-budget consultations across the country and heard from a lot of organizations that believe we need to continue to make more investments. I wonder if you could comment on the year-over-year increases in international assistance.

[Mark Carney]

Yes. The government confirmed in budget 2006, and reaffirmed in budget 2007, the annual increase in international assistance of 8%, which is a significant figure, particularly since the government is committed to maintaining a rate of growth in overall government spending of less than the rate of growth of the economy. So if one uses a 5% figure for the overall rate of growth of the economy, international assistance growing more rapidly, you have to grow other things less rapidly.

The other point I would like to underscore is that in part in response to the consultations of this committee, and others, is the government outlines in budget 2007 a four-point program to enhance the effectiveness of that spending. So it's not just the volume, it's the quality and effectiveness.

[Rick Dykstra, Conservative, St. Catharines, ON]

I appreciate your responding to that, because it was actually my next question, so thank you. It's not necessarily how much you spend, but the fact is it's what are the deliverables and what are the outcomes that are important.

Very quickly, one of the things relating to international assistance that I found, and maybe you can answer this after, is that in the section on the Office of the Superintendent of Financial Institutions, page 35, it refers to “ongoing responsibilities” in terms of international assistance. One of the things is to “contribute to awareness and improvement of supervisory and regulatory practices for selected foreign regulators through the operation of an international assistance program”. I have no idea what that sentence means, and I was hoping to get a little bit of clarification. I don't necessarily need it now, but I'd love to get a response as to exactly what that--

[Mark Carney]

To give you an exact response, we will work with OSFI and provide a written response to the committee on that question.

It is important work. I will make two points on that. One is that increased regulatory cooperation internationally is absolutely crucial to effective functioning of the global financial system and combating any money laundering and counter-terrorist financing. This government has made a tremendous commitment on this part. We fully support the efforts of the superintendent in this regard. You see it also through our presidency of the financial action task force on money laundering.

[Rick Dykstra, Conservative, St. Catharines, ON]

We dealt with one of those bills right here at committee, so I appreciate hearing that.

Thank you, Mr. Chair.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Dykstra.

We continue now with Madam Wasylycia-Leis, who's glad she's not in a provincial election campaign today.

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

I'm just glad we're not in two campaigns at once--thank you, Mr. Chairperson--so far anyway.

Let me ask a question about a press conference that was just held here in the House of Commons about the smuggling of cigarettes and the loss of revenue. It's a concern I've raised before. I put in order paper questions to try to get a proper estimate, and I haven't had a satisfactory answer yet. I'm wondering if you can give any kind of number in terms of the amount of money that is lost annually because of smuggling.

[Mark Carney]

I do not have an estimate for that at hand. We can undertake to provide one.

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

Okay.

The Canadian Council for Tobacco Control has said that at least $200 million annually is lost. The concern is, this is money that could go towards cancer strategies, it could go towards a number of things. I'm wondering if you could indicate if you have any plans to deal with the fact that at least 10% of cigarettes smoked in Canada are untaxed.

[Mark Carney]

Yes, this is an important issue, and it is an issue we look at. Obviously, it's an enforcement issue, first and foremost. But also, it is a question of working with provinces, as well, in terms of designing the right combination of tax and compliance systems to ensure that the incentives are there. What has happened recently is that there's been a consistent increase in tobacco taxes, which has, in part, occurred in tandem with an increase--a potential increase--in smuggling. So it is an enforcement issue plus a tax and compliance issue. We do look at these issues, because we agree that they are important.

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

One related concern in this field is that I understand that at this point none of the normal grants and contributions dealing with anti-tobacco strategies are flowing to any of the groups involved. And there's growing concern about whether there has been a change of heart in terms of government commitment to programs in this area.

If you can't answer now, I would like to register that concern, and perhaps you could get back to us.

[Mark Carney]

We appreciate your registering the concern, and we'll discuss it in more detail.

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

Let me go to the broader issue of tax avoidance. I know there have been a number of concerns raised since the budget, especially in terms of foreign private equity. There have been calls internationally for this to be dealt with in respect of countries, including Canada. I'm just wondering if in fact this is on your agenda. What's the latest strategy regarding private equity? And are you dealing with this as part of any overall tax avoidance strategy?

[Mark Carney]

Thank you for the question.

The development of private equity globally has been marked over the course of the last couple of years. I just want to provide a bit of context. The short answer to your question is yes, we are looking at this. We are monitoring the developments, all major developments, in global financial markets. The development of private equity is a major development in global financial markets. For example, in the U.K., because of the amount of equity that was retired through private equity buyouts and share buybacks by companies, the market capitalization of the FTSE 100 did not increase over the last two years.

The activity of private equity in Canada is substantially less than the comparable activity of private equity globally. Further, Canadian companies have been more active. We have had net foreign purchases, if you will, on a private equity basis, over the course of the last several years. For example, last year Canadian firms bought something in the order of $13 billion--invested $13 billion--on a private equity basis, outside Canada, versus total investment in Canada of private equity, both of Canadian and foreign firms, in the order of about $8 billion.

So it is a global development. Two other figures I will give you support your point. There was $400 billion in private equity raised last year, globally, in U.S. dollars. The expectation is that a further $500 billion will be raised this year. So it's something that is a topic of conversation internationally. We participate in those discussions. We are looking at the situation.

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

Do you think Canada has the tools to deal with this type of tax avoidance? Do we have the ability to crack down on those who avoid paying their fair share of taxes using debt leveraging? Do you think there is something more we could be doing as a country? Do we have ways to protect revenue, whether in the trust or standard corporate area?

[Mark Carney]

Here are a couple of observations we'd make on private equity or leveraged transactions, whether they are actual transactions that take a company from being public to becoming private or are merely adding more debt to the capital structure of Canadian corporations. Number one, leverage in Canada is quite low at the moment. That's a global phenomenon, but the actual amount of debt that's in the corporate system is very low relative to 25-year averages. That's point number one.

Point number two is that we recognize that in these transactions there is third-party debt. There is a market discipline to the amount of debt that is put on a company. It's not a structured tax-avoidance scheme, if you will, that takes advantage of a loophole, if I can use that term, in the tax system. Rather, it is a judgment by market participants of how much debt a certain business can support, given its investment plans, which provides an important distinction from other types of activity.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Madam.

We'll continue with Mr. Thibault for five minutes.

[Robert Thibault, Liberal, West Nova, NS]

Thank you.

Thanks for appearing.

I have no doubt about the capacity of the Department of Finance to provide advice to do the research, but I have some serious questions about what kind of advice is being sought and accepted.

I think of the income trust fiasco and remember back to the previous government, when advanced rulings were stopped--not advanced taxation--and we saw the market react rather quickly. I assume that the department could have predicted that introducing a 31% tax on income trust distributions would cause a huge market reaction, and we saw it. We saw $25 billion lost in market capitalization overnight. So I presume that type of advice was available from the department, but was probably disregarded or not sought.

It brings me to the same sort of question on interest deductibility on foreign investments. Let's say you're working in a global environment where your competitors, in order to grow or maintain their advantage, are able to invest in foreign markets and acquire companies in other markets where they need those links and relationships. If those competitors are able to have tax deductions on their investments and our companies aren't, one of two things is going to happen. Either our companies are going to stagnate and lose their competitive advantage with other companies, or they're going to be forced to sell out to foreign interests, as we saw in the income trust sector.

Has the department made that calculation? Was the department asked to make those types of calculations on adverse effects? If so, was the Minister of Finance made aware of those facts?