Finance Committee on Feb. 25th, 2008

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you very much, Chair.

Thank you both for your presentations today.

I want to pick up on the issue of infrastructure. Notwithstanding the government's fervent belief that tax cuts are going to solve everything, I think both of you at least touched on the fact that investment in infrastructure would be a good return.

What I want to do is flip it once, just flip it around and look at it in a different way, because this is being televised, so that people understand why this matters, not just as an important issue locally but also the macroeconomics.

Regardless of who ponies up the money, whether it's municipal, provincial, or federal, just on the macro scene, if we as a country don't find the money to reinvest in our infrastructure and we continue down this road for years and years, and one day at a time, one week at time, one month at time, one more year at a time, we don't tackle that massive infrastructure problem that we all have in most of our communities, what's going to happen? What are the results for Canada macroeconomically if we don't come to grips with our infrastructure needs soon?

Either or both of you could respond, please.

[Glen Hodgson]

I think our research shows that the costs, first of all, back up on business.

I'll give you a very concrete example, a study we did on the border, trying to measure what happened with Canadian exporters when the U.S. border security went up and it created a barrier. It actually didn't slow exports down. We've done some pretty complex econometric analysis showing that it didn't slow exports. What it did, though, was raise the cost for our exporters in terms of complying with U.S. security legislation, and therefore it ate into their bottom line. They had to create warehouses on both sides of the line, they had to have compliance, all sorts of things that they're spending money on.

That's a pretty good analogy for what happens if infrastructure doesn't work. It means people have to start planning their business model quite differently, knowing that they're going to have bottlenecks, knowing that they can't get their truck down Highway 401, that they can't get across the bridge at Windsor, that we don't have an integrated national transportation network where they can take stuff off the ship from China and put it into their supply chain on a fairly easy basis.

Initially, the costs will go up for business. That will be the first step. The second step, of course, is that firms will have to rethink their business model and will have to think about what they can afford to do in Canada and what they might be required to do in other places just because they can't get goods to market as quickly as they should.

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you very much.

Marc.

[Marc Lee]

Going back a couple of years, I remember a study, I believe from Statistics Canada, that found that for every dollar of infrastructure spending, businesses benefited by 17¢ per year, which I would argue is quite a good rate of return for infrastructure spending.

I would just caution to distinguish between renewing the existing infrastructure and rebuilding infrastructure. If we are looking at infrastructure—for example, expansion of highways that reinforce sprawling suburban patterns of development—we are locking ourselves in for a generation. The type of infrastructure investments matter a great deal. In particular, public transportation is one, affordable housing is another, and child care and early learning facilities is another. Even in the oil and gas sector—and this is a longer-term proposition—developing infrastructure around carbon sequestration is something that could be incredibly important for the future.

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you.

Along the same lines, we have put forward--we didn't originate the idea, we just developed the policy--the whole notion of further investment into retrofitting our existing buildings, in particular residences, because commercial-industrial can be on a different track in terms of how you look at it economically. But certainly refurbishing homes does a number of things, and there are three obvious ones.

First of all, it helps our country meet our international obligations, whether it's Kyoto or something going forward, so that as a country we're lowering our emissions.

Secondly, it creates jobs, possibly hundreds of thousands of jobs, because people have to physically go in there and do the work. And this is locally created work.

Lastly, it lowers people's energy costs. So it's actually a savings for Canadians, because over the years they'll be putting out less money for energy costs.

My question, again, is--and I'll leave it very open for you--am I blowing it up too much to suggest that this implies, like the infrastructure, that there's a cost to our nation on the macro level if we don't do this, as well as conversely, that it's a positive that provides good stimulation and helps us hit a number of national objectives?

I'd like your thoughts, please.

[Glen Hodgson]

I'll take the second part of your comment first.

I'm not sure we know what the cost is or what the cost benefit is, because we're treating CO₂ like a free good, and as long as we treat it like a free good we actually don't know whether this is a net win or a net loss.

But on your first point, your idea of retrofitting is very analogous to the idea that I put in our brief on green taxes, which is an environmental investment tax credit. That would simply be the same cost as could be applied to the refit industry as well. Or you could do it directly through government programs that have been done in the past. I have a bias in favour of using the tax system, because we have the whole structure for tax administration there already. That's why we provide GST rebates through the tax system, because it actually encourages people to pay their taxes and take advantage of the tax machinery that's already in place.

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you.

Marc.

[Marc Lee]

What's interesting is that if you look at the modelling around different types of taxes and carbon pricing and how they lead into greenhouse gas emissions, you'll see a very good example is the recent report from the National Round Table on the Environment and the Economy. Almost all of the gain over time is due to turnover of capital stocks--at certain points in time businesses need to buy new equipment, consumers need to buy new cars, and things like retrofits happen.

Having a price on carbon that is rising over time gives a signal and it changes the decisions made at those junctures when the capital stock needs to turn over. So over the course of several decades, you then get to essentially the types of targets that the federal government itself has set out, largely on the basis of capital stock turnover. Anything we can do to accelerate that is welcome, from my point of view.

[The Chair, Conservative, Rob Merrifield]

Okay. The time is gone now. We're going to enter a second round. We're going to allow only three minutes, and we'll be able to get the second round completed.

We'll start with Mr. Wrzesnewskyj.

[Borys Wrzesnewskyj, Liberal, Etobicoke Centre, ON]

Thank you, Chair.

Mr. Hodgson, I'm appreciative of your candour when you stated that your projections are currently among the most optimistic, if not the most optimistic, although you've pulled your numbers down from what they were in the fall.

I understand also that you were one of four groups that provided numbers to the minister when he was coming up with his projections. Your numbers were better at that time than what you are currently projecting. Is that correct?

[Glen Hodgson]

Yes.

[Borys Wrzesnewskyj, Liberal, Etobicoke Centre, ON]

Okay, so your numbers were wrong then.

Now you're saying you're out here when everyone else is somewhere on the spectrum to the left of you, and also less optimistic. You've also stated you're optimistic that the U.S. is not going into a recession. There are obviously repercussions, but you did say it's 50-50, so it's a toss of a coin, heads or tails. You were wrong last fall, and based on incorrect projections, rosy projections at that time, the government made some very critical decisions, including accelerating the GST cut to January 1.

With hindsight, would you consider that to have been prudent and responsible?

[Glen Hodgson]

Perhaps I'll start by saying that the tone of your question implies that we make systematic errors when we do economic forecasting. That's not the case. If you go back to look at an article done in Policy Options magazine about two years ago on the accuracy of forecasters over a 20-year period, guess who was at the top of the list? So we don't make systematic errors.

We do have, arguably, the most sophisticated tools. When we do a Canadian forecast, we have a model with 1,200 equations in it, where we have modelled people's behaviour down to minute detail. We were really working off the numbers that came out of the national accounts; that's how we do our forecasts. We were stronger, which is probably the reason the government has four different forecasters and uses a consensus.

[Borys Wrzesnewskyj, Liberal, Etobicoke Centre, ON]

Since we only have three minutes, unlike the previous round of seven minutes, I'll interrupt you there.

You've referenced 20 years. Just by looking at you, I doubt you were there 20 years ago!

[Glen Hodgson]

No, but unfortunately I was at the Department of Finance 12 years ago.

[Borys Wrzesnewskyj, Liberal, Etobicoke Centre, ON]

And you also referenced some 1,200 different equations that you use.

[The Chair, Conservative, Rob Merrifield]

Make it a very quick question.

[Borys Wrzesnewskyj, Liberal, Etobicoke Centre, ON]

Okay, I'm just going to quickly move to something else.

You said that we, unlike the States, are most likely not going to be facing inflation. Last week we saw wheat or flour prices in Canada move to about $1,200 a tonne; previously they were around $500 per tonne. How long will it be before that works its way through and shows up in our inflation numbers?

[Glen Hodgson]

It's already showing up in people's baskets. When you go to the grocery store right now, a basic loaf of bread is $2.40 or $2.50, whereas was $1.60 last fall. Inflation is fundamentally a phenomenon driven by monetary policy, however, and it really depends upon whether the Bank of Canada is going to monetize that—which I'm afraid the Fed is doing right now in the United States, by the way. As a macroeconomist, I'm quite worried that the Fed is actually feeding long-term inflation in the United States by its huge cuts in interest rates.

You can have price changes without having inflation, as long as you don't create the liquidity within your economy for that to turn into inflationary forces. Our dollar went from 85¢ to parity with the U.S. dollar in six weeks, and that, of course, cut all of our import prices at the same time as wheat prices were going out. It's that balancing act that the central bank is dealing with every day.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Michael Chong, the floor is yours for three minutes.

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

Thank you, Mr. Chair.

I know that Marc Lee, in the documentation he gave us, was talking about a carbon tax, but I notice that the Conference Board also made reference to it. So I have two questions.

First, the folks at the Canadian Centre for Policy Alternatives argued for a $30 per tonne carbon tax and projected that it would produce about just over $5 billion in revenues, I think it was.

[Marc Lee]

Fully phased in, it will be about $7 billion, because the tax would start on July 1. So it's only three-quarters of a fiscal year.

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

Thank you for that clarification. So there'll be about $7 billion in revenues, fully phased in, from $30 a tonne.

Is there modelling producing those numbers for you as well? Maybe you could tell us a little bit more about what the Conference Board's position is on this.

[Glen Hodgson]

Well, we haven't done a formal modelling of the fiscal impact.

Our position is fairly simple. We are producing CO₂ right now, and the consensus of the Intergovernmental Panel on Climate Change is that it is having an impact on our physical environment; therefore, we think we have to start attaching a price to CO₂. That is the whole point of a green tax or carbon tax, which is to treat that as what's called an externality in economics, a bad thing that we're treating as free, and it's not free but actually having some sort of deleterious impact.

Secondly, however, if you put in place a green tax, as B.C. did just last week, you do it in a way that's revenue neutral. That would actually allow you to cut other taxes, which the B.C. government is doing, and effectively keep your revenues in balance going forward.

Those would be the fundamental elements of our brief.

[Michael Chong, Conservative, Wellington—Halton Hills, ON]

I believe it was actually the Government of Quebec that was the first provincial government in Canada to announce a carbon tax, and not—