Evidence of meeting #31 for Finance in the 40th Parliament, 3rd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was debt.
A recording is available from Parliament.
Bloc
Daniel Paillé Bloc Hochelaga, QC
We hope you can too.
I would like some more details from you on another part of your document. On page 4, recommendations (1a) and (1b), you say that you would like to see a cooperative investment plan and a cooperative development fund. Those are both one-sentence proposals. Clearly, we would like to see two or three additional sentences that would give some more details about your cooperative investment plan and your cooperative development fund.
Director, Government Relations, Mouvement des caisses Desjardins
It is quite simple. It is all part of the overall program and of one coming up in 2012, which will be the United Nations International Year of Cooperatives. The entire cooperative movement, including the cooperative financial movement, will use the year to put it front and centre.
We want to ask government to prioritize certain programs, specifically the cooperative investment plan. I can send you documentation with more details.
Bloc
Daniel Paillé Bloc Hochelaga, QC
Yes, I can use one more minute.
This is for the people from CIBC. I do not have it with me, but, a few years ago—I think it was the late 1990s or the early 2000s—you published something to the effect that the governor of the Bank of Canada at the time had raised the policy interest rate a little too quickly. In order to follow what American rates were doing, he had to backpedal.
Along those lines, do you think that the governor of the Bank of Canada's latest increase could have been more cautious?
Deputy Chief Economist, CIBC World Markets
Yes, I think we probably could have skipped the September move, but that's not significant. That was only 25 basis points. I think the message from here on is that we cannot deviate from the Federal Reserve in the U.S. in a very significant way. I think in the past it was a mistake. I think if we continue to raise interest rates at this point independently of the U. S. Federal Reserve, that would be a mistake again. So our call to the Governor of the Bank of Canada is to basically stay in neutral at this point, and to wait until we see the situation getting a bit clearer before continuing to raise interest rates when the economy is giving us the green light. I don't believe the economy is currently giving us the green light to continue to raise interest rates.
Conservative
Conservative
Ted Menzies Conservative Macleod, AB
Thank you, Mr. Chair. Let me be the first to congratulate you on the resounding support this team is showing for your leadership, and we look forward to a very successful and well-run committee going forward. Congratulations, Chair.
Thank you to our witnesses for coming here today. I had the privilege of sitting with the finance minister when you appeared this morning, so I do have many questions, from not only this morning's comments but also this afternoon's.
Just very quickly, I want to read a quote. The opposition has been suggesting that we should stop our legislated and planned business tax reductions. Jack Mintz wrote an interesting piece, and I'll just quote it. I will read you the quote and then ask whether you agree.
...the reduction in corporate [taxes] will improve neutrality by imposing similar tax burdens on businesses and result in some revenue loss due to profit-shifting.
These economic gains are substantial....
Canadians by and large understand that the improved competitiveness of our corporate tax system has made Canada a much more attractive country for global investments. It helps bring down consumer prices since corporate taxes increase production costs. Greater capital investment induced by lower corporate taxes improves worker productivity and wages, as recent economic incidence studies have shown. Thus, corporate tax reductions help workers and consumers most.
It is important for Canada to complete its reforms if it wishes to maintain an image that is a country open for business.
Can I ask each one of you to comment on that?
Senior Vice-President and Chief Economist, Conference Board of Canada
Well, my light seems to have gone on, so I guess I get to start.
We presented a brief about two and a half years ago with regard to reforming the Canadian tax system. I covered a lot of different things, but one of them was business taxation. At the time, we talked about reducing the corporate tax burden and some other adjustments. For example, I think the step between the small business tax and the full corporate tax rate is too abrupt a step. I'd like to see a scaled step.
As a general principle, for a country that's facing what's going to be a strong currency for a long time to come, we have to find ways to allow our business community to become more competitive going forward and to keep attracting our fair share of overall global investment.
So we're on the record talking about reducing business taxation, of which the corporate income tax is one piece. There are some other things in the brief, but I won't go on about that now. However, I think that responds to your question.
We have to be very mindful that we're now competing in a world where our dollar is going to be more or less at par, frankly, from here to the horizon. We actually have the dollar breaking through par with the U.S. dollar sometime in 2011. One can resort to specific tax measures or deal with the overall rate of corporate taxation, but I do think that we're on the right path, in fact, to reducing the burden.
It will require us to tax other things, such as carbon—and we can talk about that if you wish—but our brief is there for all to read and we're certainly in favour of reducing the overall corporate tax burden.
Deputy Chief Economist, CIBC World Markets
I will say that it's not only the dollar that is going up; I think that corporate Canada and SMEs in Canada are facing a significant challenge over the next few years. Why? Because the U.S. manufacturing sector is witnessing a significant structural change. We have seen a situation in which the manufacturing sector in the U.S., despite the recessionary American economy, is actually booming.
All the improvement in the manufacturing sector in the U.S. is capital-intensive improvement. We are seeing basically a renaissance in the manufacturing sector in the U.S. It is able to penetrate the emerging markets in a very significant way. I think that corporate America has realized that the future is capital-intensive, and it is moving very fast on that.
Two or three years from now, when the fog clears, I see a much leaner but much more dynamic manufacturing sector that definitely will be able to compete in the U.S. The question is what we do here in Canada in order to basically maintain our market share. Because at this point, actually, we are losing the market share in the U.S. If it's true that emerging markets are the future, we have to find a way, first, to get involved in emerging markets, and second, to find opportunities in the global supply channels that the U.S. economy will be providing us.
At this point we are not there. So I totally agree that we need to help corporate Canada to face not only an expensive dollar, but also a changing manufacturing sector in the U.S. that will be much more competitive. Taxation is part of it, but we'll have to offset it.
Chief Strategist and Chief Economist, Laurentian Bank of Canada
Well, generally speaking, I do think that corporate income taxes should be kept at a minimum, and those that already have been announced and that business is already counting on I would certainly not backtrack. But also, as Glen pointed out, governments do need revenues, and if we do not raise it via corporate income taxes then there have to be some other ways.
Again, in general terms, if I were the Minister of Finance, which I'll never be, but if I were, I would keep corporate and personal income taxes at the lowest possible level. I would raise consumption taxes, value-added taxes, and the GST.
Now, we know what's going on in British Columbia. Canadians and consumption taxes are an explosive mix, so I understand the practical problems of that, but I think corporate income taxes should be kept at the lowest possible level to keep our competitiveness.
Vice-President , Economic Studies, Mouvement des caisses Desjardins
I agree with Carlos. I feel it is important to understand that those companies create jobs and we have to establish a structure that is as competitive as possible. But earlier, we were talking about a scenario with a lot of risk and uncertainty. I do not think there is a need to make many changes in the next few quarters or the next few years. Given the uncertainty, I do not think this is a good time for that.
Conservative
Ted Menzies Conservative Macleod, AB
That's why we elected you chair, you're so fair.
Mr. Leitao, we actually are seeing through more people working, more small and medium-sized enterprises starting businesses and maintaining businesses, that there is more revenue from all of these without raising personal or corporate taxes. That's the plan, and we're certainly hoping that will continue.
Thank you for your answers.
Conservative
NDP
Thomas Mulcair NDP Outremont, QC
Thank you, Mr. Chair.
I too would like to welcome the representatives from the banking and credit union sector, as well as from the Conference Board of Canada. It is always a pleasure to hear the points of view of such well-informed people.
Although we are not going to use it as the basis for major decisions, I would just like to start with a story that may explain why, where budgetary forecasts are concerned, my name is Thomas for a reason. When Catherine and I wanted to buy our first house at Cap-Rouge in the early 1980s, we went to see the Caisse populaire Notre-Dame-du-Chemin on the Avenue des Érables. The manager told us very nicely that mortgage rates were an unheard-of 13.5%. So there was no way we should take out a mortgage for more than one year because the rates were definitely going to change. He was right. When we renewed our mortgage a year later, the rate was 20.75%. One learns from one's mistakes.
I found the presentation from the Mouvement Desjardins to be very interesting and pertinent, but I would still like to ask you a question. I share your point of view entirely. What we are living through at the moment is not at all typical, and I am very concerned. I have seen the slow-down since the summer and, once more, several tens of thousands of jobs have been lost in the manufacturing sector. These are well-paid jobs, often full-time, with a pension at retirement. The words sustainable development are often used in the context of the environment, but we forget that it also includes the question of who is going to be leaving future generations with debts and obligations. We may be thinking about solutions that are too short-term.
You mentioned that inflation is very low. That caught my attention because, historically, when there is a huge debt, governments are tempted to pay it down by using inflation. What better than reimbursing the Chinese with a four to one ratio? It is like a sale at Dollarama. What makes you sure that inflation can stay low when we have printed 6,000 billion dollars since the start of the crisis? How can we repay that debt without inflation? I really want people to admire Canada, I really want us to pat ourselves on the back and tell ourselves that we are better than anybody else, but really, realistically, I do not see how you can be so confident that, in the medium term, massive inflation will not be considered the only way to pay everything back.
Vice-President , Economic Studies, Mouvement des caisses Desjardins
That is an important question. If we go back a few months, when governments were starting to make their expenditure plans, there was fear of an inflation bulge. There were a number of inflationary fears in 2009, but I go back to the fact that demand is extremely weak. In the short and medium terms, demand in industrialized countries is much too weak. That is because of the rebalancing in several sectors, so that, even with governments carrying enormous debt, it is still likely that inflation will be very low. The economic machine is not going fast enough.
That said, in five, seven or eight years, when we have gone through this period of rebalancing, there may be an inflation bulge then. At the moment, there is none. Few people, I feel, are anticipating inflation at the levels we saw in the 1970s, when the public debt created too many inflationary pressures. Perhaps there is a more technical way to answer. Economies are operating clearly below their potential. So there is a lot of slack in the economy. A lot of time will be needed in order for that slack to be taken up.
NDP
Thomas Mulcair NDP Outremont, QC
You mentioned the quality of the assets, which are apparently better in Canada. I am thinking about household debt, proportionate to assets, because this is one of the things that concerns me most. The OECD actually says that we are one of the worst countries in the world. Can you perhaps reassure me with the definition of assets that you provided earlier, because I do not see it?
Vice-President , Economic Studies, Mouvement des caisses Desjardins
I was making a comparison with the sub-prime mortgages we heard so much about in the United States and the United Kingdom. That is not really the case here; loans are made on a much more solid basis. In a sense, it is—
NDP
Thomas Mulcair NDP Outremont, QC
Okay.
Mr. Hodgson, is the level of household debt in Canada, as a proportion of their assets, a real source of concern for you?
Senior Vice-President and Chief Economist, Conference Board of Canada
Much less so than it is for Benjamin Tal. We can see the rising personal debt levels, and it's a concern. Obviously, that's why Minister Flaherty and Mark Carney have talked about this over the last year.
But we are in a period in which interest rates are low. People can afford to service them. That's part of the danger, of course: by keeping rates low, you're going to add to the personal debt burden.
At the government level, frankly, for the most part we did the right thing over the last 15 years and got our government debt levels under control, Quebec being maybe the one outlier. Even in Quebec, with the kind of budget the province had to put in place this spring, they had a plan to keep things under control.
So I compare Canada to what has happened throughout Europe, to Japan in particular, and to what's happening in the United States, where you see debt levels rising, being ratcheted up federally at the state levels and within cities. We are really a shining star by comparison if we get our act together, if we actually keep doing the right thing.
I am worried about Ontario, because Ontario has gone through a very tough period. It was so deeply integrated into the U.S. economy as the manufacturing heartland, and with the shock therapy the U.S. economy has gone through, Ontario has now gone through the same shock. We've seen the shock in the auto and other manufacturing sectors. Revenues fell off the edge of the table, added stimulus.... So Ontario is in a fairly deep hole fiscally, and I do worry about the capacity, even with the best of intentions, to get back to balance.
But overall I'm not as worried about Canada as I would be about a lot of other places around the world.
