Finance Committee on Nov. 22nd, 2007

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

The government has had it for a long time and it has implemented only part of one.

Can I ask one last quick question?

[The Chair, Conservative, Rob Merrifield]

No, you can't. Actually, your time is gone, and we're going to go to Monsieur Crête.

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

Thank you, Mr. Chair.

Let us continue along the same lines. Let us talk about the unanimous report from the Standing Committee on Industry, Science and Technology dated last February 5. This is no commercial for the Liberals, it was signed by a Conservative member, Mr. James Rajotte. This was in February 2007; let me quickly read you an extract:

While the rest of the Canadian economy is generally very robust, many industries within the manufacturing sector are struggling to remain competitive against the backdrop of the Canadian dollar that has risen in value by more than 40% in comparison to its American counterpart [...]

[The Chair, Conservative, Rob Merrifield]

Back off the caffeine and you'll be all right.

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

That was in February 2007, so the additional rise in value that we saw this fall had not yet happened.

Let me read on:

The committee believes that the Government of Canada should make the preservation of a competitive Canadian manufacturing sector a national goal, and that, given the gravity of the challenges facing the sector, the recommendations presented in this report should be implemented in a timely fashion.

Mr. Lazar, do you feel that the federal government has done enough to implement the 22 recommendations? By my count, they have implemented half of one of them, the one about accelerated depreciation. The others have not been implemented.

Could you comment?

[Avrim Lazar]

Certainly.

I have to say that members did good work together. This is a real demonstration of our Chambers' ability to work in a non-partisan and intelligent way that has the welfare of the country as its foundation. So first, I congratulate all parties for that.

But second, it is not enough. Action must come more quickly. A step in the right direction has been taken, some taxes have been reduced, but, given the crisis in our manufacturing sector, more urgent action is needed.

We've got guys being thrown out of their jobs; their houses, which used to be worth $500,000, are now worth $50,000; they don't know where to go; and there's no time for scholarly reflection on the economics. We have an all-party report.

As a minimum, this report should be implemented quickly.

and the top priority is the refundability of the SR and ED. You know, we've got companies now that are going to go down whatever you say and do with the dollar. They're just not going to make it. We have others that will do just fine; even though they're hurting and complaining, they'll survive. But there are a whole bunch in the middle who, with a little action from Parliament on something like the SR and ED, could move to the winner's instead of the loser's category. It's a question of two or three years of trying to survive in this extremely difficult time of transition.

So no, it's not a magic bullet for all of them. Some of them you can't help. The economics won't work. And some of them are just so smart and good, they're going to survive. But why give up on whole towns when something as clearly competitive as tax credits for research and innovation would help them innovate their way through this crisis?

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

Mr. Sigouin, if the Conservative government sticks with its policy of reducing taxes across the board in 2008 and has no program that allows similar targetted actions, will tax cuts generate profits that will come back to your community?

Mr. Lazar, will your forest industry generate profits in 2008 as a result of these across the board tax cuts to the extent that your companies will be on their feet again?

[Roger Sigouin]

My feeling is that, if there are tax cuts, the local government ends up paying.

People do not understand the situation. When federal taxes go down, provincial taxes go down; when provincial taxes go down, municipal taxes go up. For me, that is logical, obvious and clear.

People have to understand that, if they want a healthy community, they have to face the fact that a tax cut means that the federal government has less money to help our forest industry and our community economically. We live on a two-lane Trans-Canada Highway. The highway is in its worst condition in Ontario, because it is four lanes everywhere else. The railway is in decline. It is in poor condition. There are resources in the north, but we have no access to them. Is anyone concerned about the people in the north? That is where the government should be looking if it wants to see the big picture.

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

In your list of forestry towns, you could have added the names of several in Quebec.

[Roger Sigouin]

Yes, I could have.

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

Mr. Lazar, I have a question for you about across-the-board tax cuts versus...

[Avrim Lazar]

Tax cuts are wonderful, but they are only half of the situation.

So I offer kisses, hugs, and thank yous for the overall reduction of the corporate tax rate; it's necessary. But it won't help with the transformation of the manufacturing sector because to benefit from it you've got to be profitable. We're in the middle of a transformation, and some companies won't make it from here to there.

So it's the right thing, but those economists who say just reduce overall tax rates and everything will be fine are just a little bit naive. Different sectors of the economy are at different points. Subsidies won't help the transformation, but the refundability of tax credits for innovation and research would help those in transformation get through the transformation.

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

My last question has to do with the latest rise in the value of the dollar over the last month. If the dollar remains around par, what will be the consequences for the tourist industry?

Yesterday, the Minister of Financesaid that the dollar had gone down by two cents,and that things were beginning to stabilize again. What will be the reality if the dollar stays around par and no other measures are taken?

[Christopher Jones]

I think we'll see the travel deficit aggravated significantly as more and more Canadians are incentivized to head south of the border. We'll eventually see dislocation and some trouble within the border towns. I think the bigger cities will probably be okay, but some of the smaller border towns, who are used to a regular custom of American visitors, will probably begin to feel some pain.

As in other sectors, many of our operators had built a business model premised on a 63¢ dollar. When that disappeared and it moved to par, people had to change, they had to do things differently. The better ones will survive and others will probably go by the by. But I think over the long run our concern is that there are structural problems in our sector that we need to address, particularly around marketing and the structural costs of aviation in this country. Those are the two big factors.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Now we'll move to the Conservatives.

Mr. Wallace, you have seven minutes.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

And thank you for coming this afternoon in the ugly weather. I have a number of questions, and I'll start with the Conference Board.

Mr. Darby, thank you for coming. You're listed here as deputy chief economist, and you spoke exclusively on tourism. We've had economists here over the last couple of days, including Mr. McCallum, who likes to call himself an economist—he worked for a bank at one time. He said that the government can't change the value of the dollar, that it's not the government's ability to do so. He said that here today.

You focused on tourism. We've done some other things to try to make sure our business climate is competitive in terms of lowering corporate taxes and so on. Did you have any comment on the fiscal update we just had that the finance minister brought, other than on the tourism issue?

[Paul Darby]

Well, I think certainly the notion of extending the capital cost allowance beyond its sunset, making it even potentially permanent, is very definitely important, and that was I think at least hinted at in the economic statement.

Regarding the reduction of corporate taxes, as Avrim points out, it is appropriate and does stimulate business investment. But you do need to be profitable to benefit from that, and I think that's a very important point to make. It does have an impact, clearly, that will help manufacturing. But for some of the sectors that are most severely affected by the rise in the Canadian dollar, you may have to think of something a little more targeted.

In general, obviously, the economic statement was quite stimulative. So it does, at least to some extent, offset negative implications of the rise in the dollar in terms of our GDP, and from that perspective it is useful. But again, there are some interesting regional issues and interesting inter-sectoral differences that I think will challenge any government in terms of appropriate policies to help mitigate what Mr. Lazar, for example, calls a period of transformation. I think it's important for the government to think very long and hard about how it might effectively and efficiently address those problems, because subsidies are not generally seen as a good long-term strategy. In addition, we have seen artificial support for industry—again, not a good long-term strategy.

But I think along the thoughts of Mr. Lazar and others here, strategies that would encourage investment, that would help to encourage innovation, get the costs down so that manufacturing firms could be competitive at the higher dollar, and help them over that transition period are really the right way to go.

[Mike Wallace, Conservative, Burlington, ON]

I'm just going to ask Mr. Fenn a very elementary question. I can certainly understand the publishing industry's issue with the high dollar. I'm not going to argue with that and the effect it may have. Can you tell me why your product puts the differential price on their sleeves well in advance of when they're actually...? I've been racking my brains to try to think of other products that print a Canadian and a U.S. price on their product well in advance of its hitting the shelves. Is there a law requiring that?

[Jordan Fenn]

No, there's absolutely no law requiring it. I guess it's a historical practice. Publishers have done this for many years. Books have suggested retail pricing. Unlike other items where you'll see one retailer sell a garment at one price and a different retailer sell it at a different price, books do have that price printed on them. You may see retailers sell it at lower than the suggested retail price, but it is the top dollar that you're going to charge for an item. Our books are printed months in advance of the release, and as I mentioned earlier, the developmental costs of a book are set 18 months before the book hits the shelves.

[Mike Wallace, Conservative, Burlington, ON]

My personal comment on that--I have been in the sales side of the equation in numerous industries--is that there is a manufacturer's suggested sales pricing and a retail sales suggested pricing. I find your industry strange in that it eliminates a lot of flexibility in terms of when things change.

But I'm going to move on to Mr. Lazar. That was an excellent presentation, by the way. You mentioned a 3% increase in annual demand. Can you explain to me where that demand is coming from?

[Avrim Lazar]

Most of the increase in demand is coming from the rapidly growing economies in Asia. There's increased demand in South America as well. India, China, Indonesia—all those places are driving most of the demands.

The lumber business is in a cyclical decline in North America, but it's in a structural increase everywhere. Newsprint is in a structural decline in North America. It won't come back. It might bounce back a little, but it's going down, people are going to the net. But overall, as there's this explosion of wealth globally, as you find peasants marching into the middle class all over Asia, they want to blow their nose, read their newspaper, wrap their presents, build a bookshelf. There's a global scarcity of natural resources. You can grow trees in Brazil, but they're having huge fights with guys who want to grow food there. So we're very well situated that way.

[Mike Wallace, Conservative, Burlington, ON]

I appreciate that on the demand side. You did, I think appropriately, say there's a mix of things, not just the increase in the value of the dollar that's driving business. What has the lack of demand in the United States in terms of the housing market done to the forestry business?

[Avrim Lazar]

The stuff that's making it really hard is the housing crisis, the export taxes or quotas on softwood, the pine beetle eating our wood. It has been a real piling on of crises. But all the things we could have done to survive all those were ripped away from us with a 40% cost increase because of the dollar. The dollar is by far the worst of all our problems.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Mulcair, you have seven minutes.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chair.

Mr. Chair, my first question is for Mr. Lazar.

I listened patiently to the questions you were asked by the Conservative members of our committee, but I never heard them reply to your requests for relief, specifically for a quicker reduction in capital costs.

So let me put my question to you, since I cannot ask my Conservative colleagues. What will their answer be when you ask them to understand that something different must be done, that we cannot just blindly reduce taxes, because a company that makes no profit pays no tax anyway? What will their answer be when you explain that to them and ask them for the tax relief that you just described to the committee? It does not look as if you will get any answer here.