Finance Committee on Nov. 20th, 2007

[Dr. Jim Stanford]

The fiscal incentive must be tied to an investment expenditure. It can't be a corporate tax cut that has no direct tie to expenditure. An investment tax credit, or some kind of investment partnering, or something such as Jayson suggested in terms of monetizing past losses, which directly assists investment finance, is what's needed.

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

Maybe Mr. Adams....

Or maybe my time is up.

[Don Drummond]

I'm just a little bit concerned with the context of the question. Some of the answers give a false sense of comfort, because the context was that the problems of the manufacturing and forestry industry are almost being uniquely related to the dollar. I would go further and say that the difficult period of transformation in these industries is going to continue, even if the dollar were to go down substantially.

To get a feel for that, just witness that the percentage losses in manufacturing employment have even been bigger in an economy like the United States than in Canada, and their dollar has been quite weak.

There's a whole set of other forces. Forestry prices are not going to recover until U.S. housing recovers. It's going to be under pressure. And unfortunately, the drive that's come very suddenly and very intensively on the manufacturing sector, which has unambiguously been exacerbated by the dollar, is going to continue, even if the dollar pressures ease somewhat.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Crête, you have seven minutes.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Mr. Chairman.

Thank you for having responded to our invitation. The committee unanimously recognized that it had to begin its pre-budget consultations on the Canadian dollar because it feels that the strong loonie has already deeply affected the economy and that it will also influence the budget. I believe all committee members felt this to be an important issue which should be made a priority.

Mr. Stanford, I was deeply touched by what you said. You said that if nothing is done, we risk losing 300,000 jobs within the next two to four years. I was also struck by what Mr. Myers said. I am probably also struck by the fact that management and labour alike are saying that this is a pressing matter. I understand that the measures contained in the economic statement, such as across the board tax reductions, do not address your problem.

Could you tell us in more detail what it would take in the short term to produce goods which people will buy, yet nevertheless remain competitive?

Perhaps Mr. Myers can answer first.

[Dr. Jayson Myers]

Maybe I could go first.

Don is absolutely right; there are longer-term challenges that we have to address in terms of productivity improvement, innovation, skills development, and so forth, that are exacerbated by this very rapid surge in the value of the dollar. It makes the issues I think much more urgent to address.

To my mind, the recommendations we put forward—to consider some form of investment tax credit that would help to monetize the accelerated depreciation, refundability of R and D tax credits, some form of employer training tax credit—are not only measures that I think would assist manufacturers at this time, but they put in place the measures that are going to enable them to adjust to these competitive factors over the long term. All of these recommendations, which were made last year, were made at an 84¢ dollar. I think they're even more important today at a dollar that could be $1.02 to $1.10, depending on where the market goes. It's more important than ever.

The longer-term issues outlined in the recommendations the coalition has made for skills development, for connecting research to industrial innovation, for dealing with issues around enforcement of trade rules—all of these—are extremely important as well.

But this rapid appreciation of the dollar really puts the emphasis on tax measures that go to the heart of building a competitive industrial economy that is able to compete in the global marketplace: investment, training, and innovation.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Mr. Myers, in your letter dated October 9, you refer to the unanimous report and its 22 recommendations. Indeed, would it not be urgent for the government to implement these recommendations? The last budget contained half of a recommended measure on accelerated depreciation, but there was nothing in the economic update. As time goes by, it will become increasingly difficult to fix the problem.

[Dr. Jayson Myers]

As I was saying, certainly all the issues are urgent. I think the need to respond to these recommendations is more urgent than ever. Going forward to the next budget, I think it's extremely important to take those recommendations and to ensure, at least on the tax part, that they're implemented.

The House of Commons industry committee had extensive consultation with manufacturers. They talked to manufacturers as the dollar was around 85¢ to 90¢ here. I think they heard from right across the industry how important these recommendations are. So to act urgently, especially on the tax recommendations, I think is very important.

The issue of the two-year writeoff that was introduced in the last federal budget was very important as well. With a 21-month window, this is not enough time to introduce new capital spending plans into a capital budget planning process. It takes time to customize the equipment, put the equipment in place, and even get regulatory approval for that. So extending that window to a five-year timeframe I think is extremely important. But, again, there are many companies that will not be able to take advantage of that, simply because they're in a loss position right now and there is no incentive. So to consider a measure to somehow monetize those savings would be an extremely important measure.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Mr. Stanford, could you please explain the impact that this will have on the rest of the economy? We are told that things are going well in the west but that things are not as rosy in the east and that other types of jobs are being created there. Are we not heading towards a situation where many people will see their buying power reduced significantly as their hourly rates will go from $15 or $20 to $8, $9 or $10?

[Dr. Jim Stanford]

So far we've been fortunate in that the job losses in manufacturing, this export-oriented sector, have been offset by job creation in what I would call the domestic side of our economy--construction, personal consumption spending, government spending. But every trading nation knows you have to, in the long run, pay your way in global markets in order to maintain your high levels of income.

I am very pessimistic that if manufacturing continues to shrink, the momentum on the domestic side, which has been very important in the last couple of years, will carry on. Eventually, we will start to see a spillover effect, where every job that's lost in manufacturing will bring another one or two or three or four jobs down with it in the domestic side of the economy in terms of upstream linkages through supply industries and also downstream linkages through consumer goods industries and consumer spending industries, which depend on manufacturing jobs.

So I do not expect that if the shrinkage in manufacturing continues we will experience the same broad strength in our aggregate performance that we've been fortunate enough to have so far.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Del Mastro, you have seven minutes.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

Mr. Drummond, I want to start with you on a couple of questions I have.

First of all, it seems to me that the value of the dollar--and this is of course what most senior economists are saying--is more a symptom of U.S. softness and a soft U.S. economy and overall problems in the United States. Of course, within that--and I believe you already touched on this in your question--the U.S. has certainly not been exempt from the problems we see in manufacturing here in Canada. Clearly they're not affected by the high Canadian dollar in a place like Michigan, where they have lost well over 200,000 manufacturing jobs, I believe, in the last 18 months.

So I want to ask very briefly, with respect to the dollar, would you agree that it's more a symptom of issues in the U.S., as well as the strong resource market, than it is an issue of strictly the monetary policy of the central bank?

[Don Drummond]

Yes, I think there are three fundamental factors, and you mentioned two of them. There's just the general malaise of the U.S. dollar connected to their trade and fiscal deficits. Secondly, there's the rise of commodities, and that's why we've risen more than the euro or the yen.

But third--and Jim Stanford referred to this at the beginning--as opposed to the 1980s, when we had a readjustment of world imbalances and the U.S. dollar depreciated and it had a happy ending because the U.S. trade deficit almost went away, we have huge blocks of countries that have quasi-fixed exchange rates to the U.S., mainly China and the OPEC trading nations.

So a disproportionate amount of the U.S. dollar adjustment is falling on a small number of currencies, and we're only about 20% trade weighted in the U.S., but we've absorbed well over a third of the overall adjustment. So I would add that as a third factor. Less of that adjustment would have been forced on to the Canadian economy if the Chinese and the OPEC currencies were appreciating as they should, in theory, against the U.S. dollar.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you. I appreciate that.

I attended a speech last week that was given by Derek Burney. I'm sure you know who Mr. Burney is. He made the comment--one that I happen to agree with--that Canada needs to focus, as the finance minister has said time and time again, on building productivity. This government put in place the accelerated capital cost depreciation for manufacturing, but very importantly, on October 30, we signalled to the world very aggressive tax measures to help our major companies compete, to put us on a very competitive footing, and to attract foreign investment.

My concern is that when we previously had very high tax rates and a very low dollar, we really didn't focus on productivity. It has led Canada to a position where we have to catch up on the productivity curve a bit.

Would you agree that the government's decisions to reduce taxes and encourage investment through accelerated capital cost depreciation allowances is moving in the right direction?

[Don Drummond]

I think the federal government has made tremendous strides on the corporate income tax side, to its credit. We're heading to a very competitive structure. A couple of years ago it got rid of the capital tax, which was really the silliest tax. We want to have capital, and we were fairly unique in directly taxing that. As we head towards a federal level of 15% tax, that will be one of the lowest in the world. We don't have a retail sales tax any longer at the federal level; we have a value-added tax, so that doesn't fall on business inputs. The federal side is fairly clean.

In fact, on the tax side, the problem is really at the provincial level. We still have a lot of provinces with capital tax. We have five of them with retail sales taxes that tax capital, and we have very high property taxes, which is also a form of capital taxation.

But when we get to that 15% rate, we will have one of the lower overall tax regimes on capital, certainly much lower than the United States, our main competitor.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you.

I was going to ask you about a harmonized sales tax, the fact that we tax investment at the provincial level. It's really a fairly significant detriment to attracting investment in the province of Ontario.

[Don Drummond]

We tend to think about retail sales taxes as consumer taxes, but anywhere from 30% to 40% of the revenue does come from business inputs, and a substantial chunk of that from machinery and equipment. If you're a provincial government...I find it hard in this environment to look at what's happening in our manufacturing sector and not move on one of the major impediments. Not only has it raised the cost of machinery and equipment, but the tax gets embedded in exports. Export margins are already being extraordinarily squeezed. I'd like to see those get harmonized with the GST.

[Dr. Jim Stanford]

Could I add something, Mr. Chair, on the subject of the corporate income tax cuts, which have been very deep?

[Dean Del Mastro, Conservative, Peterborough, ON]

I have a question for Mr. Myers. I promise to let you in, if I have a moment left.

Mr. Myers, on October 30 you put out a release that said the reduction in the federal corporate tax rate is an extremely important step in sustaining Canada's ability to retain and attract business investment. It keeps us in the game as countries around the globe are lowering their tax rates to do the same.

These are pretty positive announcements from the finance minister.

[Dr. Jayson Myers]

Yes, it was a very positive move. I agree, it does keep us in the game in terms of overall rate of return. To some extent the situation in the manufacturing sector right now is extraordinary. With the surge in the dollar, there aren't a lot of profits and a lot of companies that can take advantage of the tax rates.

[Dean Del Mastro, Conservative, Peterborough, ON]

We've noted your recommendations and we do appreciate them.

Mr. Stanford, if you had a comment, you're welcome to make it.

[Dr. Jim Stanford]

I would like to make a couple of points on the corporate income tax cut. There's no dependence between the corporate income tax cut and a new marginal investment decision. If you're a company that's not earning large profits now, then the corporate income tax cut does you no good.

To the extent that the run-up in our dollar is in fact the result of incredibly lucrative profits in the resource and mining sector and the consequent foreign inflow of capital to invest in those companies, and in many cases take them over, a corporate income tax cut can have a perverse effect if it leads to higher profitability in that sector and more inflow of capital to take them over. It does very little good for manufacturing, and it could actually backfire.

[Dean Del Mastro, Conservative, Peterborough, ON]

Obviously foreign investment is a major driver in the Canadian economy. It's a major incentive for foreign investors to invest in Canada and for companies to see that if they make an investment there will be a payoff as the government is going to take less of those profits.

I have nothing further to say.

[The Chair, Conservative, Rob Merrifield]

That's good, because your time is gone. Thank you very much.

We're into the second round. We'll limit it to five minutes on this round.

Mr. McKay, you have the first five minutes.

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

Thank you, Chair, and thank you, witnesses.

It's a bit of an unusual day when I have the CM and E and the CAW talking from the same hymn book—they may not be on the same song sheet but at least from the same hymn book—and the TD being a bit of an agnostic here.

I just note in passing that half of the tax base in the mini budget in November was taken up by a GST cut, which pretty well does nothing for any of you. From what I can see, all it does is, in effect, create more inflation and higher interest rates, which leads me to my first question, directed to Mr. Myers—that is, the cost of money and the credit crunch. I think what you said was it's difficult to raise money. How does that relate to the sub-prime crisis that's going on in the U.S.? How is that spilling over to you?

My second question has to do with the differential rise in the strength of the Canadian dollar versus the U.S. dollar. I wonder what Mr. Drummond thinks of Mr. Stanford's analysis on that.

My third question was the comment by Mr. Stanford on controlling the pace of resource development and foreign takeover reviews. I wonder, Mr. Myers, if you could comment on that as well.

So I appreciate that those are a number of questions, but I think we may have a useful dialogue if we get some conversation among the panellists.