Finance Committee on Nov. 22nd, 2007

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

Thank you, Mr. Chair.

Mr. Pellerin, I completely understand your position on the emergency plan. But could you explain your support of Mr. Charest's initiative a little more? We see the same thing here. People in parts of Canada are saying that action and involvement are needed, and the federal government is saying that the economy should just be left to roll along.

What would you want the initiative to achieve if the Prime Ministerwere to respond?

[Laurent Pellerin]

A federal government that, by definition, heads ten provinces and the territories cannot have a detailed appreciation of what is happening in each of those regions. It has its own vision. If it does not bring together the ten provincial partners and the territories to see the details in each region of Canada close up, it is just going to keep pocketing oil revenue—no argument from us about that—but it will not see the looming disasters in other areas that are very important for Canadian society, like agricultural and forestry production.

Now I think that it is extremely important to have this vision and to share it. We are not asking the Prime Minister to intervene with the Bank of Canada. Not at all. That is not the proper approach. The proper approach is to see what is happening in each sector and to minimize any negative impact for Canadians working there. We are not yet at the point of seeing all these areas shut down. But that is what will happen if nothing is done. The forestry sector in Quebec is all but shut down, and the same thing will happen to agriculture if there is no significant change of course, no leadership that will, at very least, bring together the provincial premiers and territorial representatives to look at applying solutions appropriately in each of the regions of the country.

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

Mr. Jarislowsky, we have heard Mr. Pellerin talk about supportive measures in order to handle this crisis. You have suggested that a structural solution is possible, in the form of a common North American currency.

Last May 5, at a Standing Committee on Finance meeting, I asked Mr. Dodge at what point the rise in the dollar would make it too costly to support two separate currencies. Could you expand on that? What sort of future do we face if we keep playing the yo-yo as we are now? Do you feel that a common currency is economically viable? Are the only obstacles emotional ones?

[Stephen Jarislowsky]

There are a number of countries whose currency is pegged to the American dollar. China has done it with the yuan. There are small adjustments to be made, but I think that we could do the same with the Canadian dollar. We could allow 5% each side of a logical value for the Canadian dollar, that I would put around 80¢. Our dollar could go up or down by 5% depending on the time. I would find that acceptable.

You can attribute China's success to the fact that its currency is tied to the American dollar. Many other countries have done the same thing, like Saudi Arabia.

In our case, although a third of our gross national product is tied to the Americans and 85% of our exports go there, all we are doing today is resigning ourselves to becoming [Editorial Note: inaudible] because of the Americans. Actually, the Americans are importing Canadian industries to the United States, and ours are going bankrupt. In English, we would say:

they are beggaring us.

This is something that they were already talking about during the Great Depression in the 1930s. I think that the solution is either to adopt American currency for the entire continent or allow a 5% margin on either side of a value for our currency that would reflect the country's gross product compared in real terms to theirs.

However, what is happening today is that enormous tax revenues and profits are being lost. We are even selling oil at $50 instead of $95 today, if we compare it with the price five years ago.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move on to Mr. Dykstra. You have seven minutes.

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

Thank you, Mr. Pellerin.

One of the recommendations you made with respect to the forest industry in terms of the issue you've outlined, in terms of where you think government should move a bit--and I trust from your comments that you're supportive of “Challenges Facing the Manufacturing Sector”, the report that was completed.... One of the pieces in there with direct relationship to the forest industry is the consideration of the positive impact the Canada-Korea free trade agreement would have. I'm wondering if you could comment on whether you support that aspect of it, if it obviously would, in the forest industry anyway, relative to the forest industry, have a benefit directly related to a deal between South Korea and Canada in terms of free trade.

[Laurent Pellerin]

All this theory...

All this theory about free trade, free enterprise, free everything.... The actual situation is bad. Certain people continue to think the market will resolve the problem by itself, and I don't think that's true. It's so bad that the finance minister has to call the distribution companies in this country and tell them to look at the dollar's value and sell the products they're selling in Canada now for lower prices because of the impact of the dollar's value. The market itself is not able to correct what is happening. The finance minister has to call the big owners of the big companies to remind them that the market is not doing the job.

So I'm not confident in all those free trade—so-called free trade—agreements or discussions, because in real life, some people are making money on the backs of others. That's the case for all Canadians. Mr. Jarislowsky had a very good image of that: the U.S. is beggaring our industries. Agriculture, forestry, and raw products are moving south. The ownership is moving south, and we are all losing control over the processing industry in Canada. We will be very low-wage workers in the next generation if nothing changes. So don't wait for a free market or free trade or free anything to solve that type of problem.

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

So while that is a supportive aspect of the report, you don't support that component of the report.

[Laurent Pellerin]

I don't think it will be an answer for Canadian industry at all.

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

Mr. Stewart-Patterson, you brought forward a number of recommendations, a number of which we have already implemented and a couple of which, you said, need to be extended. I find it interesting that a number of things we did within the report itself that have already been moved forward, such as investment in manufacturing and processing machinery and equipment that's eligible for the 50% straight-line writeoff and the temporary accelerated CCA rate, will provide about $1.3 billion of assistance to businesses over the periods 2007-08 and 2009-10. I suspect that the number will be incrementally higher as we extend them over a further period. That would be based, first, on companies finding out about them, and second, on their determining if making the investments they are talking about fits into a business plan.

It strikes me that we've taken a good first, second, and maybe third step after the report in terms of implementing probably the biggest portions of it.

We had a lot of discussion in the previous session about the scientific research aspect of it. I wondered if you could comment a little bit more on how we could do that in such a way that, obviously, it has an immediate impact. Also, what are your thoughts on how it would impact over the longer term? I suspect it won't be an impact that's going to happen over a period of four to six months; it's going to take a longer period of time to be implemented and to have a lasting impact.

[David Stewart-Patterson]

There is no question. For anything that is a driver of research, obviously, it will take time, first of all, to generate the discoveries, and second, to allow the discoveries to move into the marketplace in terms of new products and processes.

If I may just step back quickly to the accelerated writeoffs for manufacturing equipment, I think if the government chose to extend the temporary writeoff for a longer term, the impact would be more than incremental. I think the major criticism that has been made of that particular initiative is that when you're talking about making major investments, given the planning times, the environmental approval times, the regulatory and the investment cycles, it is very difficult to actually get investments in place within the two-year timeframe. I think, therefore, that if it's limited, and stays limited, to two years, the take-up may be smaller than predicted.

I think extending it would simply make it possible to use it.

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

I supposed you mean that by doing that the growth would be exponential.

[David Stewart-Patterson]

I'm worried that you won't get nearly as much take-up within the two-year window as you would like to see simply because the big investments, the most important investments, take more than two years to get done.

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

That's a fair point.

The other thing you commented on was the whole aspect of...you didn't necessarily say environment, but you talked about climate change. And there is, of course, a lot of discussion around how to move forward on climate change and the issues around the environment without having a significant or at least a direct impact on the ability for business and the economy to continue to grow in Canada. I wondered if you could comment a little bit more on that, give your thoughts on our approach—the government's approach, obviously, but Canada's approach to how to deal with the environment and climate change.

[David Stewart-Patterson]

This is a subject that our membership has given a great deal of attention to over the last six months in particular, and a couple of months ago we brought out a set of principles that essentially laid out what we thought was a path forward, a framework if you want, that would enable us to make effective progress as a country on the climate change challenge while also moving us forward as an economy, rather than adding to the problems of growth.

One of the key elements in that was understanding the importance, if we really want to make substantive decreases in emissions of greenhouse gases, of developing the new technologies and getting them in place at the consumer level as well as the business level. That's what's going to give us the big gains in terms of production.

But as for your first question, the research cycle can be lengthy, and I think what we have to make sure of is, first, that government policy recognizes the importance of technological improvement to the environmental challenge, and second, that economic policy, the business framework, encourages that research.

If I may, just on the scientific research tax credits, Mr. Chair, I think one of the short-term suggestions that's important is the potential to make that refundable to companies that are not profitable but would like to invest. We are working currently with Industry Canada doing a joint study to try to get a better handle on how that tax credit and other drivers of innovation might be improved.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Mulcair, the floor is yours.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chair.

My first question goes to Mr. Pellerin.

Mr. Pellerin, you mentioned potential losses of $1.5 to $4 billion. That suggests that the agricultural sector is going to collapse in the next year. Can I ask if you have specific numbers of farm bankruptcies in the last two years, and your prediction for the next year or the next two years?

[Laurent Pellerin]

Traditionally, the number of bankruptcies in agriculture is not high, but a lot of people just sell out. These days, the rate of change in farm ownership and the consolidation of property is increasing, especially for hog farms.

In western Canada, the hog industry works differently. Here, the growing phenomenon is the export of live piglets to the United States for feeding, slaughter and processing. We are not talking thousands, we are talking millions of piglets that are exported live to the United States to create added value, prosperity and economic activity on the other side of the border.

The same thing is happening with beef. Because of the impact caused by the value of the Canadian dollar, yes, but also because of regulations that are—and I hesitate to use the adjectives—abusive and nitpicking compared to American ones, we are losing our cattle and hog slaughtering industry in Canada.

[Thomas Mulcair, NDP, Outremont, QC]

It is interesting, because when you think of the added value we are losing, you also think of the Keystone pipeline when we were about to export 500,000 to 600,000 barrels a day, and 18,000 jobs to the United States. You think of the forestry, where there is very little secondary and tertiary processing, or of aluminum. You do not think so much about agriculture. We are about to make the same mistakes there.

My second question goes to Mr. Jarislowsky.

Mr. Jarislowsky, have you ever written anything, it does not matter what form it is in, that confirms the explanations you gave us earlier about Alcan and the negative effect that its sale to foreign interests had on our currency? Have you written anything about this, and, if so, can you share it with the members of this committee? Of course, we have your evidence, for which you have our sincere thanks, but I for one would like to have something written from you.

[Stephen Jarislowsky]

I can tell you what happened and how I got to those numbers. I was consulted by Paul Tellier, a director of both BCE and Alcan, before their takeovers. He had the figures from Alcan and BCE, and we estimated at that time that each would entail about $20 billion owned by Canadian holders. That is why I said Alcan alone was $20 billion.

In addition to that, there are these enormous sums coming in for the tar sands that are, as I said before, being brought in here absolutely inefficiently and are going to be overspent tremendously. The companies' costs are going to be such that their profitability will be negligible unless the price of oil stays very high. That has brought in an enormous amount of money.

There have been many other smaller companies in this country taken over by money coming in. We were involved in St. Lawrence Cement, in this connection, etc.

I am not a great believer in just selling all our companies in this country. Already, 80% of our stock market today is either cyclical or made up of materials and financial stocks—80%. That's not a market anybody can diversify in properly for investment.

I am not in favour of subsidies, but we have to come at some early stage to a long-term solution to the relationship of our currency with the United States, because we are tightly tied to that market and we cannot permit ourselves either to go back to 62¢ or to stay at the present level; we're going to destroy all kinds of things in this country.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you very much, Mr. Jarislowsky.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Monsieur McKay.

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

I, too, would like to direct my questions to Mr. Jarislowsky.

A number of us have been watching asset-backed commercial paper, and just from reading articles in the newspaper, this appears to be a bit of a sleeping giant.

The Quebec assembly has apparently asked the head of the Caisse de dépôt to give testimony before a committee at the assembly. You had a half-billion-dollar writeoff by the National Bank in this past quarter, which is a significant sum of money for that size of bank. You have some newspapers estimating that the Caisse is in for $13 billion to $17 billion worth of asset-backed commercial paper. You have a Montreal protocol in which the government has apparently been a participant, and it appears to be a rather high-level exercise trying to keep the panic from squeezing out.

What role, if any, do you see for the Bank of Canada in this concern? What role, if any, do you see for the Government of Canada with respect to this concern?

[Stephen Jarislowsky]

My basic feeling is that these are faulty products that have been developed. Our own firm was never invested in them. They were bought by people who wanted to have better performance, and they got eight or ten basis points more by going into these products. We didn't go into them because we didn't understand them. We felt that if you had a short-term piece of paper with Alcan, you would get paid at the end of the period when it was due. But how do you go after 100 people who have mortgages that don't come due for another 10 years? So it was a faulty piece of paper. We believe that everybody should basically have seen through this kind of thing.

I don't believe in government bailouts and I don't believe in subsidies, but I believe in playing fields that are predictable. There I come back to what I said before, that we have to arrive at a band in which our dollar relates to the American dollar, or adopt the American dollar, because we cannot live and have our industry destroyed every 20 years. We cannot ask people to invest here if the chance is they get wiped out in 15 or 10 years, or whatever it will be in the next cycle.

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

I don't disagree with your analysis that the priorities are somewhat obscure when a default occurs; that seems to be confirmed, particularly by U.S. judges. But having said that, and having said that going for eight or ten basis points appears to be attractive to some people, there does seem to be a significant number of apparently fairly smart people who have bought this paper.

If in fact this works its way through the market, how do you see these kinds of significant writeoffs affecting both the market and the Canadian dollar, if at all?