Finance Committee on Nov. 22nd, 2007

[The Chair, Conservative, Rob Merrifield]

It's splendid from our end as well. Thank you for being here. We will yield the floor to you at the appropriate time; we just want to make sure our microphones are working.

With that, we have the Canadian Council of Chief Executives,

the Union des producteurs agricoles,

David Tougas, and I just introduced Mr. Jarislowsky.

We'll start with the Canadian Council of Chief Executives, David Stewart-Patterson, executive vice-president. The floor is yours for five minutes, please.

[David Stewart-Patterson, Executive Vice-President, Canadian Council of Chief Executives]

I'll do my best, Mr. Chair. Thank you.

Thank you for the opportunity to appear and discuss the impact of the Canadian dollar and its appreciation on our economy. It's only a few years ago, it seems, that we were worried about the dollar being too low. That weakness reflected our precarious fiscal state, low commodity prices, and other factors. We complained about the way it sapped our productivity, added to inflationary pressures, and left us vulnerable to foreign takeovers. Thinking about that today brings to mind that old adage about being careful of what you wish for.

Strong currency does have many benefits. Consumers are enjoying lower prices on goods imported from the United States. If the dollar stays high, you're going to see prices continue to fall as inventory works its way through the system. Businesses can also benefit from a higher dollar. As import prices come down, it makes it easier and more affordable to invest in imported machinery and equipment, much of which comes from our neighbour to the south. The downward pressure on both business and consumer prices in turn makes it easier for the Bank of Canada to justify lower interest rates, and that of course is a benefit to both business and families.

But make no mistake, both the current level of the dollar and the incredibly rapid pace of its rise are causing real problems for our economy. In the resource sector, tight labour markets keep driving up Canadian dollar costs even as the shift in exchange rate takes away much of the global rise in commodity prices that are expressed in U.S. dollars. Manufacturers have already shed hundreds of thousands of jobs. The damage in that sector could very much get worse.

Exporters of services are affected just as badly because their biggest cost is people who are paid in Canadian dollars. This includes Canada's vital tourism sector, which is being hurt by the rise of the dollar and increasing security requirements, both current and projected, at the United States border.

Perhaps the biggest risk moving forward lies in the causes of the plunge in the American dollar, not just against ours but against all major currencies. The United States faces huge fiscal, trade, and current account deficits, a situation that we in Canada remember well. The real danger is that these economic negatives, which have been compounded in recent months by the crisis in financial and housing markets in the United States, could plunge that country into a recession. A major downturn in our largest export market clearly would compound the damage already being done by the dive in the U.S. dollar.

In the meantime, the worse aspect of the exchange rate situation is not the absolute level of our dollar against its American counterpart but the speed and volatility of currency movements. Over time, Canadian companies can offset a higher dollar, either by moving operations offshore, purchasing offshore, or by investing in new technologies that deliver higher quality at lower cost right here in Canada. That, I would suggest, is the preferred outcome.

That kind of investment, though, takes time. It takes time to develop, to buy, and to put in place. At its recent peak of close to $1.10, our dollar had risen a stunning 29% since the beginning of the year—74% over the past five years. Even aggressive business investment cannot cope with that speed of change.

It has to be recognized that Canada has done remarkably well so far in replacing the jobs being lost in manufacturing with other jobs. Certainly there have been studies suggesting that those jobs being created are in fact better than the ones being lost. But I would suggest that this kind of performance cannot continue indefinitely in the face of both a rising Canadian dollar and a weakening United States economy.

The most important steps that governments can and must take now are to focus on helping business accelerate investments that are necessary if we want to keep growing jobs in this country.

Successive federal governments have done a good job in steadily bringing down the statutory corporate income tax rate. But because of the lead times involved in major capital investments, I would suggest that the federal government should extend the faster write-offs for manufacturing equipment that were introduced in the last budget. It also should consider improvements to drivers of innovation, such as the scientific research and experimental development tax credit.

I think that raises the broader issue that while it's a good idea to support business investment through the tax system, we have to take account of what you do when companies are not making any profits to be taxed and how you make sure the incentives are effective.

In any case, assistance on the tax front must not be limited to the federal government; provincial governments have to do their share too. That is a task that is most urgent in Canada's manufacturing heartland of Ontario, which currently suffers under one of the highest effective tax rates on new investment in the industrialized world. Provinces are gradually reducing their capital taxes—that's a good thing—but the most critical next step is for Ontario, British Columbia, and other provinces that still levy sales taxes on business inputs to convert them to value-added taxes similar to, and preferably harmonized with, the federal goods and services tax. Provincial governments should also be moving more quickly in eliminating their capital taxes and should be doing their bit to lower the provincial corporate income tax rates.

Tax policy is not the only lever governments can and should pull if they want Canada's long run of economic growth to continue through the current crisis in our largest market; they need to tackle every policy that adds unnecessarily to the cost of doing business in this country.

The federal government needs to achieve the goal of the smart regulation initiative, cutting the cost of the administrative burden of regulation by 20%. Federal and provincial governments need to continue their work to reduce the remaining barriers to the movement of goods, people, and investment across provincial borders within this country—and also ensure that other important policy objectives, such as addressing climate change, are done in ways that add rather than subtract from our country's competitiveness.

One other point I want to make, Mr. Chair, is that Canada also has to ensure that both people and goods move smoothly in and out of our country. This requires significant investment in transportation and border infrastructure, but it also reinforces the importance of strengthening the efficiency of the North America economy as a whole and in particular making sure that the Canada-United States border stays open and efficient. An efficient Canada-U.S. border is critical to the competitiveness of Canadian companies. By the same token, the potential combination of an increasingly security-driven, sticky border and a high Canadian dollar forms a powerful incentive for businesses to put any new investment into the United States rather than our country.

Cutting taxes on business investment, streamlining regulation, and working towards a seamless border, I want to admit, are not new ideas or new prescriptions. They made sense even when the dollar was low. What I want to suggest to you today, Mr. Chair, is not only that they make even more sense now, but also that they have become pressing necessities, given that the dollar has climbed so far and so fast.

Thank you, Mr. Chair.

[The Chair, Conservative, Rob Merrifield]

Thank you very much. I appreciate that.

We'll now move on. There is a change from an economist to a president. It seems like a fair trade to me.

We have Laurent Pellerin, president. The floor is yours for five minutes.

[Laurent Pellerin, President, Union des producteurs agricoles]

First, I would like to thank the members of this committee for agreeing to hear our views on the situation and on the effects of the rise of the Canadian dollar against the American dollar specifically, but more generally against other world currencies.

Most of you know our organization, the Union des producteurs agricoles. The organization represents agricultural and forest producers in Quebec. In our agricultural division, we have 43,000 members on about 30,000 farms throughout Quebec, with farm-based sales of $6.2 billion.

In our forestry division, which we represent through the Fédération des Producteurs de Bois du Québec, we have 130,000 owners of private forest land who contribute 20% of the supply to Quebec plants. This means 30,000 jobs directly in those forests, a figure that does not include the multiplier effect in processing.

Right off the bat, we must emphasize that the rise in the Canadian dollar against the American dollar is having unprecedented consequences that are destroying our sector. The extent and the speed of the rise in value of our country's currency—almost 30% against the American dollar in only two years—are closely linked to the rise in the price of oil. I have provided a graph that shows these changes. The rising cost of energy and the difficulty in getting our products to market are causing our production costs to increase. This structural and very sudden change has resulted in agriculture and forestry in Quebec becoming significantly less competitive.

As monetary policy is in federal jurisdiction, it seems to us essential that the Government of Canada must show its leadership by bringing in measures to help our industry through this crisis.

At the meeting of Ministers of Agriculture last November 16 and 17 in Toronto, the industry demonstrated the harmful effects of the rise in exchange rates on agriculture, specifically on meat, and the topic was a significant part of the discussions held by the Ministers of Agriculture.

Here are some of the repercussions of the Canadian dollar's rise against the American dollar: it affects the income of producers; it depresses market prices; it means that we lose markets; it adds more imports to our markets; it drives our exports down—especially in forestry, which is being very badly hit all round. Canadian measures to ease this crisis in forestry and agriculture are having little effect.

You know, I am sure, that the prices of most of our agricultural commodities, grains, beef, pork and some market garden products, are set on the Chicago Exchange. Whatever happens on that Exchange affects the Canadian market once the exchange rate is taken into account.

In the Quebec pork industry alone, the loss of revenue, just for 2007, is almost $200 million. If I do the same calculation for Canada, the lost income climbs to the order of $600 million in Canadian pork production. The word "production" does not include slaughterhouses. Pork is our second biggest agricultural export, and sometimes, the biggest. The blow is extremely severe.

There is also an effect domestically. The substantial drop in the value of the American dollar makes their products very attractive in Canadian stores because they are now priced much lower than our own. This creates a substitution effect in our markets.

Furthermore, in export markets other than the United States, where we are compete with American products, the competition is intense, and we are losing export markets as a result.

According to one study at an American university, each time that the Canadian dollar increases by 1%, 0.2% of our exports to the United States disappear in the short term and 0.5% disappear in the medium term. So let us not downplay the medium term effect which is only just starting to appear. What we are seeing in the short term is only the beginning of the full impact that the exchange rate could have. That impact on the farm will be somewhere between $1.5 and $4 billion in the next few years.

In forestry, 68 mills in Quebec have shut down. Producers in the Gaspé, in the Lower St. Lawrence and in Abitibi-Témiscamingue have no way to get their products to market because of the impact that the value of the Canadian dollar has on our exports.

We are making four requests at this committee meeting: to establish an urgent action plan to cushion the harmful effects of the value of the Canadian dollar; to act on the suggestion made by Mr. Charest, the Premier of Quebec, to hold a first ministers' meeting as soon as possible; following on from the recent meeting of Ministers of Agriculture, to quickly implement measures to help the pork, beef and market garden sectors, because we are also losing our slaughtering capacity which is heading more and more to the United States; to establish an AgriFlex program, as proposed by the Canadian Federation of Agriculture, that would allow provinces to access federal funding for provincial programs.

Thank you for your attention.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move on to Jarislowsky Fraser Limited. The chairman and director, Mr. Jarislowsky, is here.

The floor is yours. You have five minutes, please.

[Stephen Jarislowsky]

I haven't really prepared for this because I didn't know what we were going to talk about, but it's a subject on which I'm reasonably versed, so I won't have any great problem.

About three years ago I got together with Mr. Dodge and indicated to him that the dollar had already risen quite a bit. In a country where one-third of the gross product is dependent on the United States and 85% of our exports go to the United States, we cannot go through periods every 20 years when commodities do well and our manufacturing industry goes broke. That's exactly what's happening and will happen to practically all of our manufacturing industries in Canada—or they will move out of this country—if we continue at the current level of exchange.

I indicated to him at the time that inflation was one item, but for a country tied as closely as we are to another country, the exchange rate makes an enormous amount of difference.

Even your members of the more socialist parties will recognize that if you raised wages in one year by 29%—as we did this year as the result of the dollar differential between us and the States—and 74% in a four-year period, the unions would have done something about it. I don't believe there are any industries that have any amount of labour capable of overcoming that kind of disincentive...except to go bankrupt.

Until recently I was a director of Canfor, which is the largest sawmill operation in Canada. I can tell you that at this point, even though I'm no longer on the board, we don't have a single mill in Canada that isn't losing cash at the current exchange rate, despite the fact that we invested hundreds of millions of dollars in new equipment when we had the money.

Very often we are told that this is a wonderful time to invest, but if you're going to go bankrupt anyhow and the dollar keeps shooting further up, I would say it would be throwing good money after bad. You might as well go bankrupt and try to save as much of your money by pulling it out of there before you go bankrupt, rather than putting additional capital into the company.

When you have as close a relationship as we have with the United States—and I'm thinking long term—it's going to be very difficult to attract people to invest in manufacturing here, because for 60 years, ever since World War II, we have been trying to build a manufacturing base in this country. The result of what we have seen in the last few years is that the manufacturing base is being totally destroyed.

I believe that if we stay at the present level, practically the entire forest products industry will be in bankruptcy, with an enormous loss of employment. I believe that about a million people out of the 30 million depend on the forests, and it's going to create absolute havoc in the mill towns, especially in areas like British Columbia, where you have to compete with wages in Alberta.

If you look across Canada, especially in the heartland, where we don't have oil production, we are really living in a country where the hair on the tail of the dog, namely the 70,000 people who live in Fort McMurray, are really the engine of this petrodollar.

When you look at Alberta at the present time, conventional drilling for oil is practically non-existent, and very large reserves aren't going to be found there any more. Because of the differential in the gas-to-oil price internationally, most of the gas drilling—and that's really what the province is all about, other than in Fort McMurray and the tar sands—there's hardly any activity there, and it's very much reduced this year compared to last year. So it's really the hair on the tail of the dog that's wagging this dollar.

The other thing that has had enormous influence in the last few months is the fact that we have allowed some of our largest corporations to be taken over by foreign interests. I believe the recent upsurge in the dollar to $1.10 was largely the result of people who received the Alcan money translating it back into Canadian dollars. Our firm estimated that some $20 billion was involved in that alone.

If BCE goes ahead, the foreign investors from the United States who work together with the teachers' union will also bring probably another $20 billion in.

The way we have organized it—and this is an Alberta problem—the development of the tar sands, whereby everybody is building at exactly the same time, reminds me of what happened during the uranium boom some 40 years ago in Ontario. All these companies are going to have enormously high costs, far higher than if there had been scheduled building whereby only so many tar sands would have been allowed to be built.

My personal feeling is that in a country like Canada we cannot permit ourselves to have a dollar that goes through these kinds of gyrations, and I think we have to really seriously start thinking of a model of a continental currency, just like Europe has a continental currency. We have to work towards that, not at a price where we are today, but at an average price.

Even then, we have to keep in mind another thing, and that is that in a country as cold and as distant as Canada, we have a problem of productivity. Our productivity increases will continue to be slower than in the U.S.

[The Chair, Conservative, Rob Merrifield]

Thank you very much. I appreciate that. Now we'll move on to the questioning part of our meeting, and we'll start with the Liberal Party.

Mr. Pacetti, you have seven minutes.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chairman.

Thank you to the witnesses for appearing.

Mr. Stewart, I don't want to spend too much time on this, but you talked a bit about the challenges or the tax rates at the federal level and then you spoke about the provincial level. Is there nothing that bothers you in terms of the municipalities, in terms of how their taxation works?

[David Stewart-Patterson]

Municipal taxation matters too. The fact is, when companies are assessing Canada's attractiveness as a place to invest, they're looking at the total tax burden. We actually have a research project under way right now, which we're hoping will give us a better picture of the tax situation at all three levels of government and how they add up. Where we've seen the most significant progress to date has been at the federal level, by actions taken both by the previous government and the current government. I want to acknowledge that. I think the most urgent single step that can be taken now would be the conversion of remaining provincial sales taxes to a GST or GST-equivalent.

But no, I would certainly agree that municipal taxation is important, and probably disproportionately important for small or medium-sized businesses.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

That's what I was thinking. Thank you.

Because our time is limited, if you would have shown up, say, even a month or two ago, the challenge would have been on the low productivity and where are businesses going. There have been some changes in the last few years in terms of tax policy, where the companies could invest and invest in their equipment. Now we're saying with the higher cost of the Canadian dollar and the lower cost of the U.S. dollar, companies should probably take this opportunity to invest in equipment. Is this something your companies are doing, or is this just another excuse to ask for more—I hate to use the word “subsidies”, but for more help and handouts?

[David Stewart-Patterson]

I think the pressure to invest has been there. We've had five years of the dollar going up, and each year it's been a problem. The higher it goes, the more pressure there is for companies to invest. At the same time, I think as both of the other witnesses pointed out, when it goes up extremely fast, you end up with a situation where the pressure to invest is extremely high but the ability to invest goes down because you're not making any money.

So I think it is a legitimate criticism to say that back when we had a 64¢ dollar, Canadian companies took it too easy. Too many companies took it easy. Those that did take it easy are paying a price for it today.

On the other hand, as Mr. Jarislowsky pointed out, companies like Canfor invested heavily. If you look at the relative productivity statistics, there are industries where Canada and Canadian industries have higher productivity than their American counterparts. So it's not a uniform picture on the productivity side. The fact is that when you look at the dollar, where it is today, when you look at how fast it's got there, you have to ask yourself, what's the most effective way to get through the crisis?

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

That leads to my next question.

With the speed of the dollar going up, how long can businesses absorb that? It's part of the market I think if we're going to let the market forces dictate how it goes. How long can you keep it up? We saw that it has gone down almost 10% just in the last two weeks. Is that okay? You said over five years the dollar has gone up relatively at a lesser rate. Is that okay? Are you looking at controlling the rate at a certain level?

[David Stewart-Patterson]

I think there is absolutely no point in trying to predict short-term currency movements. Statistically, it's about the closest thing to a random walk that exists. But when you've seen a steady appreciation over a five-year period, I think it recognizes the structural differences that have emerged between how well we have managed our economy and how badly I think the Americans have managed aspects of theirs.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

We have a limited amount of time, Mr. Pellerin.

Thank you again for coming.

I would like to ask you a quick question. Let us take pork as an example. You said that pork is less affected by changes in the exchange rate. But a lower market price for pork is not related to the price at which it is sold, because the price is controlled.

[Laurent Pellerin]

The price of pork is not controlled. It is a free market. The meat exchanges set the price as they do for beef, grains, and market garden products. So it is the free market and the increase of the Canadian dollar against the American dollar that impact the price directly.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

So if people cannot sell pork because the price is not high enough, will there be more hogs in Canada that can be sold more cheaply here?

[Laurent Pellerin]

Just because producers are selling their products at a lower price does not mean that consumers get the benefit. This week, pork at the farm gate was 35¢ per pound. We have not seen that for 25 years. But consumers pay the same prices in the store because of the concentration in the distribution sector.

The problem is even worse in meat production, pork or beef. Our animals are now shipped to the United States on the hoof. Piglets are now exported to the United States live; the value is added there, as they are raised, slaughtered and processed. The same thing happens with cattle. We sell live cattle to the United States and they are slaughtered there.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Does the opposite happen when the exchange rate drops?

[Laurent Pellerin]

When the exchange rate was 85¢ on the dollar, or even 60¢ on occasion, it is true that these industries developed and captured markets at home, in North America and around the world.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

You said that a change of 1% in the exchange rate represents a change of 0.2% in the market, did you not?

[Laurent Pellerin]

It represents a 0.2% loss of exports in the short term and a 0.5% loss in the long term. In agriculture, this means losses in the order of $4 billion in the medium term. So these are the areas of activity that are in danger of disappearing just like the forestry industry is already disappearing from the Canadian landscape.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

There was not a lot of time left in your presentation, but one of the solutions you proposed was a funding program.

Would that be paid back, or would it be just a support program?

[Laurent Pellerin]

Our requests are for emergency support for the industry. For a number of years, for decades, Quebec and Canadian agriculture and forestry have been the source of tax revenue, especially for the federal government, providing very lucrative funding for Canadian society.

Now that we are going through a more difficult time, and other sectors, like the oil industry are filling the government's coffers with unprecedented revenues, it is time for the pendulum to swing back towards the agricultural and forest industries that have sustained this country for years. We are going through a bad time now, so it is time for someone to give us a ride.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you.

[The Chair, Conservative, Rob Merrifield]

Thank you.

We'll go to Mr. Crête.