Finance Committee on March 26th, 2009

[Ted Mallett]

The CFIB has had a lot of experience in GST. We were there for the implementation back in 1990. We did a lot of research in the European countries on what they did right and what they did wrong.

Certainly a lot went wrong with the implementation of the GST. Small businesses supported the notion of the value-added tax as much more efficient than the old manufacturing sales tax. One of the non-negotiables from our perspective was keeping the base as simple and as much the same as possible. Of course we don't know what the announcement is for later today, but it sounds as if they are talking about a separate base in Ontario compared to the rest of Canada. We feel that's probably a very bad move in that respect and probably a slippery slope for other provinces, because if they do harmonize it will create their own tax bases and then you're losing a lot of the benefits of harmonization by each province choosing what to tax and what not to tax. The costs of compliance for small firms in collecting the tax is one of the highest of all the tax systems. So that's a very large concern.

Of course we also have lots of members on the other side, currently in the non-tax categories of restaurant food and fuel delivery, all those sorts of elements that are quite concerned about the tax.

On balance, in theory it's one of these things we want to see, but we think some implementation problems may come up as a result of today's announcement.

[The Chair, Conservative, James Rajotte]

Mr. Hodgson, please, very briefly.

[Glen Hodgson]

We put out a brief in the spring calling for harmonization of sales taxes built largely on the good work that the C.D. Howe Institute has done, because we agreed with all that analysis. I think one of the big challenges to this point has been the revenue shock that Ontario's going to experience. Estimates are between $0.5 billion to $1 billion of lost revenue, particularly if you add on something like the GST credit for low income. Presumably there's going to be assistance from the federal government in the rollout. I know that has been a big part of the dialogue for the last two years, and frankly it was a debate about numbers and whether the number was enough.

I too am hopeful we're going to see an announcement today dealing with some of Ted's issues. I hope we'll see a transition period toward a normalization of the base, so we have a common base but also federal assistance to allow the transition to take place.

[The Chair, Conservative, James Rajotte]

Thank you.

Go ahead, Monsieur Mulcair.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chairman.

In my turn, I'm taking the liberty of saying a word to Mr. Poschmann. I did hear his excuses a little earlier, but he knows as well as I do that the document in question is only six pages long. If you look at the header, you see it reads: “C.D. Howe Institute, l'Institut C.D. Howe, celebrating, nous célébrons 50 years, ans”. That's the only bilingual thing in this entire six-page document. In addition, the text was written by a certain Alexandre Laurin. It would not have been very difficult for an institution of your size to have six pages translated, particularly since the clerk explained to you that, out of respect for the two official languages, it is prohibited in our committee to distribute this document, but you did so yourself. I think there is a real problem of respect for the two official languages at the C.D. Howe Institute, and I want to tell you that. It's not that I don't accept the apology you offered earlier, but I myself translated for many years—I was responsible for translating the laws in Manitoba—and I must tell you that it takes very little time to translate six pages. Out of respect for this committee, its members and the two official languages of this country, I believe very seriously that the C.D. Howe Institute could do better than that.

Mr. Hodgson, I wanted to go back to one of your remarks that was very interesting. You just made it incidentally, but I'm beginning to think some attention should be drawn to it. You said that you're not convinced that we're not making mistakes. If I may paraphrase, you said that a lot of solutions had been suggested.This is a bit complicated. An amount of $1,000 billion, which is called a “trillion” in English, and a “billion” in French. In the United States, they've reached $10 trillion in expenditures, to put it in terms that everyone will understand more easily. If I understood correctly, in your presentation, you expressed the fear that we might be doing things today that will cause us other problems later. It's like in stations: one train may conceal another. You try to cross the track and you get hit.

May I ask you to elaborate on your thinking on that subject?

[Glen Hodgson]

Mr. Mulcair, thank you very much for the question.

Frankly, we are in a grand experiment right now. None of us has ever seen this before. That's part of the reason Don and I have such huge challenges with the economic forecast right now. By the way, ours will be out in two weeks. It's going to be darker. Unfortunately, Mr. McCallum, the average is probably going down over the course of the next few weeks.

But it's a grand experiment. It's almost learning by doing. Perhaps I'll relate a little story. Early in my career I had a chance at the federal Department of Finance to work on the Latin American debt crisis. It took the world four years to understand that when countries can't afford to pay, you have to be prepared to reduce principal. It took us four years to reach that point.

[Thomas Mulcair, NDP, Outremont, QC]

If countries can't afford to pay, you have to be prepared to...?

[Glen Hodgson]

You have to be prepared to reduce principal, to actually mark down the face value of the loans, because if people can only afford to pay 80¢ on the dollar, there is no point in pursuing them for two decades trying to get 100¢ back. It just won't work. You can reduce interest rates, but their stock and debt is really the critical issue.

I see the same sort of learning by doing process happening right now on a global basis with respect to the financial crisis. Look at where Mr. Paulson came from in the course of one month. In September he went from complete belief that you should allow institutions to fail to stepping up and recapitalizing the banks. He had a total reversal of attitude in the space of one month.

The same sort of thing, the learning by doing, is happening over the course of this year. What I see the U.S. government doing, frankly, is almost experimenting. They try something; if it works, they go on. If it doesn't work, they try something else.

Clearly, there are going to be responses. Things we can't anticipate perfectly are going to happen. For example, if the asset-stripping program that Secretary Geithner has announced goes forward with $1 of private capital for every $5 of public capital, it's an extraordinary ratio. Almost all the risk is still being taken by the private sector, but the private capital is needed to set the price of the distressed assets in the markets.

Negative things are going to follow that. For example, suddenly banks will have to mark up all those assets. They may actually need more capital, so you may see some major money being sent to banks in the United States, requiring even further state capital injections, which may have consequences down the road. That's the kind of thing I was talking about.

I think we're on the right path. I think governments learn by doing, starting with the equity injections, which is something the academics tell us is almost always the bottom line in a financial crisis. Governments step up and recapitalize banks. That's been done. We're now looking at taking the bad assets off the banks' balance sheets in the United States, but we really don't know what the end state is. We think we know the direction the train is moving, but we could well be sideswiped by--

[Thomas Mulcair, NDP, Outremont, QC]

We know that Canada's banks don't have the same bad assets--toxic assets--as the American banks. Mr. Drummond made a good description of that. We have nothing close to it. Yet your description of asset-backed commercial paper.... Having practised commercial law for a long time, I'm always amused by the fact that you can draft reams of documents like this and charge your appropriate hourly rate and nobody's actually going to read the darn things. I have a feeling there was a little bit of that going on with ABCPs. As you said, it was bundled, but nobody was actually saying, “Well, what's this?”

I spoke with Stephen Jarislowsky about that and I asked him if he had invested in ABCPs. He wasn't being falsely modest, just being himself, and he said, “No, I didn't touch them. I didn't understand them.”

So how come all the smart people in the banks bought them?

[Don Drummond]

Because they wanted a 17-basis-point higher return. I assume they didn't do what I would have thought was appropriate risk management. But we know, through the work of Purdy Crawford and others, it took them more than a year to penetrate into that box to figure out what was in that box. So it wasn't that they could have got into the box if they'd put in another hour and paid that hourly rate. It took a big committee and a lot of lawyers a year to figure it out. And even then there were elements of what was backing those that were still not known.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Mulcair.

Mr. McKay, please.

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

It's remarkable, Chair, how regardless of what the economic conditions are, the bankers and the lawyers seem to end up with the money in their pockets.

I just want to keep track of this ever-escalating deficit. The government's on the wildly optimistic side of 74. The Parliamentary Budget Officer was at 73 yesterday. Mr. Drummond, I take it you're projecting about 82, and Mr. Hodgson is about to change his position to being possibly even worse than Mr. Drummond's. Is that a fair synopsis of where the government's projections are at this point, where the deficit is at this point?

[Glen Hodgson]

Well, why don't I speak to our forecast, what's happening right now?

I have 32 guys back at the shop who model everything in the country, and we do our forecasts on a quarterly cycle. What we're seeing happen right now in the economy is a very sharp impact on investment. We're now heading into a period where Canada could have a worse quarter than the United States by a lot. I won't put a number on it, but certainly a contraction of more than 5% in the first quarter is going to be in our forecast. That naturally will lead us to mark down our growth forecast for the whole year.

Like Don, I don't know whether we're in deflation or not. We see a little bit of inflation, so there could be nominal income growth in the economy. But certainly, having the economy contract by, let's say, about 2% over the course of this year--we'll finalize the number in the next 10 days--is going to have an impact on government revenues and will make the deficit a little bit deeper.

Now, of course, we can afford it. All the writing I did over the course of the last two months has been to explain to Canadians the fact that having a debt-to-GDP ratio at 30% means you can provide stimulus for, let's say, two years. That's quite affordable going forward. The challenge will be when we get back to growth. Are we going to get back to balanced budgets fast enough? That's the challenge this committee is going to grapple with two to three years down the road.

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

I want to go to another question with respect to this shift in credit. Yes, it's right to say that the banks are issuing more credit. It's also correct to say that the non-bank actors have left the shop; therefore, the banks have moved in and arguably creamed the good stuff and left the taxpayer--in the form of BDC, EDC, and the rest--with less than optimum credit. A lot of us are hearing, including from CFIB folks, that the banks and other financial institutions, such as Visa and MasterCard, are really starting to crank up the cost of credit. So you see credit actually constricting.

I want to get a response to that from both Mr. Drummond, representing the banks, and Mr. Mallett, representing the consumers of credit. Are we getting into a situation where credit is becoming more expensive for many of your folks?

Maybe we'll lead with Mr. Mallett and then go to Mr. Drummond.

[Ted Mallett]

I'll start with the latest comment. Our work on credit card issues has to do not with the cost of credit on credit cards, but with respect to transaction costs--what the business has to pay to accept cardholder payment for their goods and services. That's really the focus of our work on that area.

What we're tracking is the interest rate you're paying on your largest loan or line of credit, and we're noticing a slight uptick in the cost of credit. We think the average loan amount is around two and three-quarter points above prime. Thirteen per cent of our members are paying six points above prime or more.

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

Yes, I looked at your chart. It's quite shocking.

[Ted Mallett]

A lot of that is BDC, a lot of that is credit unions, and a lot of that is the specialty asset financing companies. Now, they are small players in the small-business market. BDC traditionally represents about 3% of our members' activities. Our latest survey shows about 6%. So there seems to be an increase in their work with our members, but it's still by no means a major portion.

As for the specialty asset finance companies, I believe--I don't have the numbers in front of me--that still fewer than 10% of our members use those. So roughly two-thirds of our members are using one of the traditional Canadian domestic banks, 3% are using a foreign bank, and about 15% are using a credit union.

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

Can we get a comment from Mr. Drummond?

[The Chair, Conservative, James Rajotte]

We're out of time. Mr. McKay wanted Mr. Drummond to speak briefly to this question.

[Don Drummond]

First, let me just say that I object to your characterization that EDC and BDC are being left with the questionable loans and the banks are creaming off the crop. In fact, if you look at the portfolio of BDC in particular, you will find that these are not the questionable loans; they're in the prime loan territory. In EDC it's not a question of our taking the good ones and their taking the poor ones. We've been a partnership in all these loans. So I really don't think this characterization is what's going on in the Canadian credit market.

I'll come back to the point you raised on the cost of credit. A Canadian bank that wants to raise five-year funding would face Government of Canada plus 300 basis points. Two years ago, you would have gotten a commercial real estate mortgage from a Canadian bank at probably the Government of Canada rate plus 175. How can you do that right now? Their cost is plus 300, so of course the cost of credit has gone up. Prime has gone down to 250. The banks' cost of funds has not gone down in parallel with prime, so of course the pricing has become an issue.

There's an access to credit issue, not from the banks but, as you say, from the non-banks. But absolutely, there's a pricing of credit issue, and that is because the costs faced, because of the difficulties in the corporate bond market, have not gone down commensurately.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Drummond.

Thank you, Mr. McKay.

Monsieur Carrier, s'il vous plaît.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Thank you, Mr. Chairman.

Good morning, gentlemen.

I listened carefully to your presentations. What emerges from them is that access to credit seems to be under control. Mr. Hodgson mentioned that BDC and EDC are doing a good job in that respect. You're responding to the demand for credit.

In a release last Monday, I believe, the Toronto-Dominion Bank predicts an even bigger deficit in 2011, $81 billion, which represents $18 billion more than that forecast by the present government. That shows that you are more pessimistic about the country's future economic performance.

You seem to be responding to demand, but you're not saying a lot about the immediate future. In the medium and long terms, will you still be able to meet that demand? Should additional measures be taken to stimulate the economy and to enable you to continue meeting the demand for credit? Currently, you can easily meet demand. If people are highly pessimistic, they won't even dare apply for credit. That's not necessarily indicative of a good economic situation.

Mr. Drummond, you said that you had many experts forecasting economic performance; so I'm speaking to you first. Is the present economic plan adequate? Will you still be able to meet demand for credit?

[Don Drummond]

My forecasts are spread over three periods. We'll have more difficulty in 2009, but there will be an economic recovery in 2010 and 2011. Then we'll have to wait a number of years to solve the problems that have been caused during the current period. The United States is forecasting a deficit of more than $2 trillion next year and more than $1 trillion for a number of years. Their debt burden relative to gross domestic product will exceed 40%. It may take a number of years to correct that situation. Cuts will have to be made to spending and so on. Banks, especially in the United States and Western Europe, will need to replenish the capital they have lost during this period.

There will be economic growth, but the rate will be depressed as a result of these factors. Instead of 3% from 2011 to 2015, for example, the growth rate may be 2% to 2.5%. I don't think the answer in Canada is to add more tax measures. I am very much concerned. I nevertheless anticipate a deficit of approximately $40 billion. There will be an economic recovery in Canada, the United States and the world, both as regards demand from the United States for Canada's products and in the price of natural resources in Canada.

This is one of the major differences between Glen and me concerning revenue and taxation. I think Canadian resource prices will remain quite low for the next two years because global growth rate is very low; there's no demand for those products.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Thank you.

I have one minute left. I'd like to speak to the Canadian Federation of Independent Business.

In the folders you submitted to us, we see that certain economic sectors are more pessimistic about the future. These are direct consumer businesses, such as the first furniture store and a truck dealership.

What tax measures could the government take to increase the confidence of these businesses that don't foresee a brilliant future?

[The Chair, Conservative, James Rajotte]

Please be brief, Mr. Mallett.