Finance Committee on Feb. 15th, 2011

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Hodgson.

Mr. Bridault, will you be presenting on behalf of the...?

[Alain Bridault, President, Canadian Worker Co-operative Federation]

Good morning and thank you for having us.

I represent the Canadian Worker Cooperative Federation, and I want to remind you first that the UN proclaimed 2012 to be the International Year of Cooperatives. The UN accordingly recognizes the importance of cooperatives in economic development. I would also like to thank the federal government for supporting this UN initiative.

The Canada of today, especially rural Canada, owes much of its development to cooperatives. You may often hear about agricultural cooperatives, cooperative banks and credit unions, but we represent a third family of cooperatives, worker cooperatives.

First, I want to give you a brief explanation of what makes a worker cooperative, so that you can understand the difference between us and other cooperatives. Second, I would like to talk about the potential. Third—and this is especially important—I would like to talk about our focal point, the issue involving business transfer. About 200,000 companies will change hands over the next 10 years. The country will experience a shortage of business owners. In the regions, this could have disastrous results. However, the cooperative would be the ideal solution to this problem in the regions. This is a solution called for and encouraged by the European Commission in all the European countries.

I'll try to explain briefly what a worker cooperative is. Most people are not familiar with this concept. We, the cooperatives, share the same way of doing things. We are democratic businesses that operate somewhat like Parliament does: one person equals one vote.

However, the essential purpose might differ depending on the type of cooperative involved. For example, if a plant produces cedar shingles and is the property of private business owners who have invested in the company, the logic governing its management is that of maximizing profits in order to maximize dividends. That's the business logic at play. They strive to buy cedar—the raw material—as cheaply as possible, sell cedar shingles at the highest possible price and pay their employees as little as possible.

However, if this same company was the property of a forest cooperative—this could be the case in Quebec—the logic governing its management would be completely different. It would still be the same plant, with the same number of employees and the same equipment, but the logic behind its management would be to buy from wood suppliers at the highest possible price. So, they would always try to sell cedar shingles at the highest possible price and keep the payroll as low as possible.

If, on the other hand, this plant was located in Sweden or England, for instance, and was owned by a consumers' cooperative, the logic behind its management would be different yet again. The goal would be to ensure that consumers can buy cedar shingles as cheaply as possible. What all these cooperatives have in common is that workers are always losing out. In this case as well, the point is to pay the employees the lowest salaries possible and to purchase cedar wood as cheaply as possible.

This is where the worker cooperative concept comes in. Our cooperative is not a plant; we are professionals. However, if the plant were the property of workers, the logic governing its management would once again be different, as would its essential purpose. Its purpose would be to protect the workers' jobs, to provide them with the best working conditions, the best possible social benefits and the highest possible wages. To achieve this, the plant would try to buy the wood as cheaply as possible and sell cedar shingles at the highest possible price. The logic is somewhat different.

I'll now talk about the potential involved. I say and have often written that worker cooperatives can realize their full potential under modern and current economic conditions. Why is that? There are two major trends that are currently influencing the markets.

First, we, in the global north countries, have to work with salaries that are always higher than in the global south countries, the emerging countries. That's why we must always strive for high value-added products or products with high value-added intelligence. This absolutely requires very motivated workers who use all their intelligence in their work in order to succeed. This is a natural component of worker cooperatives, since they are owned by workers. They know that the profits belong to them. Consequently, it is in their best interest to remain constantly mobilized. A worker cooperative has the highest rate of potential productivity, which is especially favourable to the creation of what I call a smart business, which meets modern standards.

The second trend, which is currently not found in all regions but is in my region—I'm from Quebec City—is that we have been at full employment for years. Things are going very well, but the major issue is a manpower shortage. Tens of thousands of positions are not filled. We are experiencing genuine manpower shortages. The region is faced with the challenge of retaining and attracting workers. How does one keep and attract employees? Once again, the worker cooperative concept is very relevant, since it really enables employers to attract the most workers and retain them.

It works based on Maslow's hierarchy of needs. The basic personal needs, the psychological needs of self-fulfilment are satisfied within the worker cooperative. I could talk to you about this for a long time. I gave a 45-hour course on the topic. Regardless of that, I will stop here.

Before I yield the floor to my executive director, I will talk about the issue involving the transfer of 200,000 businesses. The Canadian Federation of Independent Business pointed out this risk almost 10 years ago. This unique phenomenon, which will manifest itself suddenly, will result in a bell-shaped curve. I am talking about business owners who will retire. It was assumed that the curve would peak around 2015, but I believe this will happen around 2017 or 2018.

There is currently a sufficient number of business successors, but within three or four years at the most, there will be a shortage. This will result in the closing of businesses. The situation will be much more serious in the regions because there will be few incentives there. The cooperative will be the only appropriate solution. The European community has understood this. The European Social Fund has been providing funding in places like France, Italy, Spain, Belgium and England for programs aimed at facilitating company takeovers and bail-outs by salaried employees.

This is basically what we suggest. The worker cooperative system could enable us to save jobs and businesses, and maintain the economic base in the regions.

I will now yield the floor to Hazel.

[Hazel Corcoran, Executive Director, Canadian Worker Co-operative Federation]

Thank you for inviting us to appear before you.

Just very quickly, there are about 350 worker co-ops across Canada, and about two-thirds of those are in Quebec. Our organization, the Canadian Worker Co-operative Federation, is a national association. It started about 20 years ago for worker co-ops, multi-stakeholder co-ops, and worker shareholder co-ops. Services include support for start-ups, a newsletter, research, and an RRSP program so that our members can invest in their own businesses. Currently the program has over $14 million invested in it.

The relatively small worker co-op sector in Canada stands in contrast to the sector in Europe, where hundreds of thousands of people work in worker co-ops. In the U.S., about 10 million people are in employee-owned companies under ESOPs, employee stock ownership plans. So Canada is far behind members of the EU and the U.S. in terms of the size of the sector and in terms of employee ownership as a business succession strategy.

I'm going to present a three-point plan in terms of how the federal government can help address this succession crisis that's coming, especially in rural communities and in particular through using employee ownership. Some of these points are also relevant to other parts of the cooperative sector.

The three elements are, one, a cooperative investment strategy; two, to make the federal cooperative development initiative permanent and to expand it; and three, to expand that program that I'll call the CDI--the co-op development initiative--into the new area of conversions to worker co-ops. We believe these programs would be an important legacy of the UN International Year of Cooperatives in 2012.

To go into more detail on the first one, the co-op investment strategy has two prongs. First is a Canada-wide co-op development fund that has previously been proposed by the umbrella organizations the Canadian Co-operative Association, or CCA and le Conseil canadien de la coopération et de la mutualité, CCCM. It's been supported by our organization as well as the Credit Union Central of Canada and others before Parliament.

The second point in the investment strategy is a federal co-op investment plan that is modelled on the Quebec Régime d’investissement coopératif, which is a tax credit program for investing in worker and producer co-ops or farmer co-ops and so on. Both of these components were unanimously endorsed by the finance committee in your 2010 pre-budget report, but they did not make it into the budget.

So in terms of a few details on that, co-funded with the co-op sector, the co-op development fund would provide financing to new and existing co-ops. It would require a one-time federal contribution of $70 million, after which it would be self-sustaining. It would be a repayable loan fund and not a source of grant funding.

Investments would only be made based on an analysis of a cooperative's business plan and its capacity to pay back loans. An example of such a fund is the arctic cooperative development fund, which received about $10 million in 1986 from the federal government and has grown through serving the largely aboriginal co-ops in the north to a $30 million fund now, and it continues to serve those communities. So it would be a very similar situation.

In 2008, the cooperatives secretariat of the federal government commissioned PricewaterhouseCoopers to examine this fund as proposed by the co-op sector and they viewed it very positively. We are convinced that this fund would be an effective source of support for employee-owned co-ops as well as other types.

The federal co-op investment plan, as I mentioned, is modelled on the Québec Régime d’investissement coopératif. It would be a partnership between citizens investing their own money and the federal government. In the plan in Quebec, from 1985 to 2006, almost $400 million in total was invested by members and employees in eligible cooperatives. The plan at the federal level is estimated to cost $17 million to $20 million per year.

[The Chair, Conservative, James Rajotte]

Ms. Corcoran, can I get you to summarize, please?

[Hazel Corcoran]

Sure, I will.

The federal co-op development initiative is a program that was renewed in 2009. It needs to be expanded from its current $4 million per year and made permanent. There's much more demand for the program than can be met.

In terms of the third point, which is the new CDI component for a program to convert enterprises into worker co-ops, this would be focused on rural communities, as Alain has spoken about, and the crisis that is coming there with business successions. We believe the employee ownership model is one that holds a lot of potential. In fact, there is lots of research I could quote, but I won't, around its success.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to Mr. Lee, please.

[Professor Ian Lee, Director, Master of Business Administration (MBA) Program, Sprott School of Business, Carleton University, As an Individual]

Thank you very much for inviting me again. I'm not allowed to present the slides, but they're reproduced.

I want to run through the disclosures first because I think they're important. I don't have any investments or consulting contracts of any kind anywhere in the world. I am a poor professor. No organization, corporation, NGO, or political party influences my views. I do an enormous amount of research, and I talk to myself a lot, but I am a tenured professor who is free to speak my mind without any influence from outside organizations.

I've also taught over 100 times in the third world. That's relevant because I'm going to be talking about protectionism today.

I was thinking last night and this morning about not providing a title to you for my presentation, but I've come up with one. I'm going to call it “Toto, we are not in Kansas anymore”. I'm referring, of course, to Dorothy and the Wizard of Oz and that we are in a brave new world, a rapidly globalizing world. There are major new competitors coming on stream—such as China, where I have been teaching every year since 1997—and we cannot pursue the policies of the past.

Although I agree with much of what the PBO said in the broad big picture, that the long-term threats are much more critical to Canada than the short term, I think we're very strong. I'm not going to get into the details because I don't have a database that the Conference Board or the Department of Finance or the PBO have. I do want to deal with some “big P” policy issues in my short time.

I do think we have the strongest economy in the OECD today; that's been endorsed internationally. I agree, again, with the PBO that the economies of the European Union and the U.S.A. are in great danger due to profligate and irresponsible indebtedness by some of those countries, especially in the States and in southern Europe. I also put the assumption on the table that economic growth is absolutely crucial to grow the jobs that pay the taxes to finance the social programs that we value.

What I really want to talk about today are what I believe are three threats or harms or risks to Canada and individual Canadians.

The first one is protectionism. I think we have to reframe this tired debate that has been discredited in the research literature. I refer you to the Institute for Research on Public Policy, January 2010, dispelling myths about foreign investment. It's an excellent summary of all the research, and it blows all those myths out of the water.

We have to reframe the debate from who owns the company to who is investing in Canada and creating jobs. In other words, a Canadian company that is not investing here, versus a foreign company that is, is in worse position, in my view--is not doing as much--than a foreign company that's investing here. In fact, the research is showing very clearly that foreign firms have higher levels of productivity and they pay higher levels of wages. That's an important point. We have to open up and not shut down our Canadian economy. Why? Because one-third of the boomers are aging.

This was supported unanimously at the November G-20 in South Korea. The OECD, the World Bank, the WTO, and the ILO opposed protectionism. I have these documents for the committee if they want them, and I can copy them off the laptop. This was “Trade and employment...Lessons for the future”. You have the bullets there, the quotes, saying that protectionism of any kind is terrible for the economy.

On number two, again, I just want to mention one thing. I realize I am from the research-based community, the world of scholarship, and I understand that some of the things I'm going to say today are going to upset some people. That's fine. I'm not a politician. I'm not elected; I'm tenured. You can't get rid of me and my president can't get rid of me. I can say what I want. And I'm going to support it with research—refereed, scholarship research—in the leading organizations, such as the OECD.

Let's turn to corporate taxation. I've followed the debate over the past two months, and I'm astonished at the debate. There has been no reference to the OECD, to their 10-year tax policy research branch studies. They have published dozens and dozens of studies that have concluded, irrevocably, without condition, that corporate taxes are the most harmful type of tax for economic growth. There is no ambiguity in the research—none, zip, nada. I know that's going to upset some people, but that's a fact.

Also on the incidence of taxation, who pays corporate taxes? There's this myth in Canada that the corporations pay taxes. Corporations do not pay taxes even when they pay taxes. I am a former banker. I used to lend millions of dollars in this city to small and mid-sized businesses. Tax is just another cost of doing business, like wages. It's like the plant and equipment. If you don't pay those bills, guess what? The bank or someone else shuts you down and puts you into insolvency.

A corporation is an intermediary and it passes on all its costs of being in business, including taxes, either through increased price of goods and services or through lower wages. There is excellent research coming out of the Federal Reserve Bank, the research branch in the U.S., showing it manifests in lower wages.

The third debate is on the reform to increase CPP. There are many people saying, “Oh, my goodness, Canadians are falling off the cliff into poverty. Our elders are just falling apart.” This is fatuous, empirical nonsense.

The OECD “Pensions at a Glance” has said on the record—and again I have this report here in my laptop to give to the committee—that we have one of the highest social safety nets in the world for elderly people, and less than 5% of our elders are in poverty, one of the lowest on the planet Earth. If we're going to do anything, we should be targeting that 5%, which is about 250,000 families, and not doing a universal increase that's going to drive up payroll taxes on employers.

In conclusion, the Canadian economy is extraordinarily strong. I believe it's one of the two strongest economies in the west, along with Germany. But there are great dangers ahead.

First, protectionism is a cancer that is metastasizing in our country. We've got to stop it now for those who care about this country and care about individual Canadians. As I said in an interview on CBC's Lang & O'Leary last Friday, protectionism produces poverty.

Second, we've got to at least reduce, if not eliminate, corporate taxes because they are taxes on workers.

And third, we shouldn't be increasing the CPP; we should be targeting that 5%.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Lee, for your presentation.

We'll begin questioning by members with Mr. Szabo, please.

[Paul Szabo, Liberal, Mississauga South, ON]

Thank you, Mr. Chairman.

Let's start with the Conference Board.

Mr. Hodgson, you heard the PBO this morning cover a lot of ground. Quite frankly, I think for a lot of people some of the stuff he was saying was in terms that his office would understand but a lot of the people listening in probably didn't.

Other than saying that his projections are basically unchanged, what else did he say that caught your attention?

[Glen Hodgson]

The most acute area of difference is our view on nominal income growth over the next five years, which is why Kevin said there was a structural deficit in 2015. We don't think there is. Frankly, there's lots of room for debate amongst the economists because we're talking about a 1% or 2% difference in the growth line going forward five years. So that's an area of difference.

But in areas of agreement, I heard a number of things that I deeply agree with.

First of all, we're as concerned as anybody about Canada's terrible productivity growth performance. The chart in his presentation showing productivity growth rates dropping on a decade basis is very striking. It's an area where we're doing a lot of research. I, personally, have done a lot of research there. We have to really change the argument now.

To a great degree, as a national economy, we've relied upon a cheap currency to be competitive in the world for way too long, and it's now caught up with us. That started, really, in about 2003-04, as oil prices were rising—and I think they're going to rise further—and the dollar rose along with it because our currency is a petro currency. We really have to come back to the productivity point.

The other point that I was really struck by was his point on demographics, which is going in the other direction. We're kind of caught in a vice right now. On one side is poor productivity performance and on the other side is aging demographics, which is going to mean much slower labour force growth going forward.

That really does suck the life out of our national economy, because population growth is a key driver of economic growth. If we could deal with the productivity issue, we can actually substitute for the slowing labour force growth. But if we do nothing, we're going to end up as a much poorer nation. So I was very struck by his medium-term view, with which I very much agree.

[Paul Szabo, Liberal, Mississauga South, ON]

We talk about structural deficit in terms of a sustainable financial framework. It's going down, or at least it's projected to go down, and we're going to reach a point of full potential. In terms of the timeline, though, do you have any level of confidence as to how we will be able to address that over the medium term?

[Glen Hodgson]

The Minister of Finance set out a framework in the last budget that took us back to a balanced budget in 2015. We think if we follow that framework path, we're going to get there. That's going to have to mean very tight control of spending. There should be some reconsideration of the whole nature of taxation in the country, but it doesn't automatically mean you have to increase taxes right now. I think a lot of the adjustment can happen on the spending side, knowing that there are going to be acute pressures for more spending down the road, particularly in health care. And of course the Martin accord runs until 2014.

We've assumed the status quo in our forecast going out beyond that, but that's one of the big policy debates that's going to happen in this country on a going forward basis. Fundamentally, we don't think there is a structural deficit. We think that Canada, at the federal level, can get back to a balanced budget by about 2015.

[Paul Szabo, Liberal, Mississauga South, ON]

That's assuming that everything stays under control.

[Glen Hodgson]

Yes, there are a lot of assumptions built into that.

[Paul Szabo, Liberal, Mississauga South, ON]

In the PBO's report on the operating budget freeze, there were some concerns raised about being able to deliver, particularly with regard to things like Corrections Canada and the cost of the justice bills, which will affect the prison populations, the attendant infrastructure, and indirect costs. We're talking tens of billions of dollars.

When the PBO and the Conference Board and others do these projections, they're not looking on a legislative-by-legislative basis. When you have 18 different justice bills that are going to affect the whole corrections/criminal justice sides, both federally and provincially, do you ever make any adjustments or factor in extraordinary shifts in public policy that will cost tens of billions of dollars?

[Glen Hodgson]

I think you captured my role accurately a bit earlier when you talked about our forecast being very much top down. I'm not analyzing across 150 federal programs totalling $225 billion annually. The advice I've given to Minister Flaherty from the time when I was at the Department of Finance is that good budget-making means you build in some prudence. You build in some operating reserves—$5 billion is the kind of number I like. You use prudent planning assumptions on a going forward basis. We could do that sort of bottom-up analysis, but I'd have to do it on a contractual basis.

[Paul Szabo, Liberal, Mississauga South, ON]

Paul Martin used to have at least a $3 billion contingency in there. If the government were to incorporate that now in its projections over five years, we'd have another $15 billion that they're going to have to cut, or raise taxes to cover, to have balanced budgets by 2015. So it's going to take a lot of discipline, forgetting about providing contingency or prudence or productivity reserves.

Is there anything else that the committee should be concerned about—threats, risks, or even opportunities—that hasn't come out yet?

[Glen Hodgson]

I'll repeat what I said to Mr. Flaherty last week. I talked a lot about the heavy levels of public indebtedness in a lot of countries in Europe and the fact that Japan just went through a credit downgrade. There are a lot of aging, mature industrial countries that are severely over-indebted. I think Professor Lee referred to that in his comments. That's going to be a chronic risk. Right now, it looks fairly calm, but at any point, bond markets could lose confidence in those governments. I think at some point Greece will not be able to service its debts on time, and there will have to be a restructuring, or even a formal default.

We're in a world full of risk. We can see what's happening in the Middle East—this will destabilize petroleum markets, currency markets. So we have to plan within that unstable context.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Szabo.

Monsieur Paillé, sept minutes s'il vous plaît.

[Daniel Paillé, Bloc, Hochelaga, QC]

Mr. Chair, I am wondering about the topic of our meeting. We were supposed to talk about the government's economic update and fiscal projections. However, I see that Mr. Lee and people from the Canadian Worker Cooperative Federation have instead provided us with budget advice. I must say that the credibility is not the same in the two cases.

I will now speak to the Conference Board of Canada.

You say that we should withdraw stimulus measures and that we will get back to a balanced budget position in 2015. We are talking about a deficit of $32 billion or $40 billion. We agree in saying that this is a statistical error. Regardless of that, you are not considering any other approaches. You are suggesting we remain very conservative and withdraw stimulus measures, but you seem not to want to talk about taxation measures. For instance, more taxes could be imposed on higher earnings. We could also take a look at exceptionally large bonuses, taxation of businesses, tax havens, and so forth.

Why do you suggest that, over the next few years, we should stay the course and not make any changes at all to Canada's taxation measures? It seems that some measures cannot be touched.

[Glen Hodgson]

The core purpose of the Conference Board is to be essentially the country's economic forecaster offering an alternative view. We have built tools that are very similar to what Quebec finance has, what Ontario finance has, and what the federal government—both the Bank of Canada and the Department of Finance—has, to provide a view to everybody on a fee-for-service basis. So we basically do a baseline forecast that's then available for everybody to subscribe to—governments, the private sector, universities, labour unions.

We can build scenarios quite happily into our forecast if we're engaged to do that, but we have to make an assumption to provide that baseline forecast. You'll often use the status quo assumption, although with a little bit of forward thinking, for example, in the case of Ontario. We know that Ontario is facing a very deep fiscal deficit. In fact, if there's a structural deficit in the country, it's in Ontario. We would factor that into our thinking in terms of their ability to pay ongoing increases to public sector employees in Ontario. In the federal government we have taken, basically, the status quo model, on a going forward basis, and then we'll make adjustments to the forecast, which we do every quarter, frankly. So as the facts change, we run the model again and come up with a different view.

We do many, many studies. We probably do 70 pieces of paid research a year, examining questions like the job impact of the federal stimulus package or the impact to different forms of public sector compensation on the economy.

So I could certainly do that work if there's an appetite to do it.

[Daniel Paillé, Bloc, Hochelaga, QC]

So you are saying that any unused taxation measures that could be used more, or some expenditure adjustments, could do the job. The fact that our government's expenditure policy and tax policy are rather conservative does not mean that they are sacred cows.

Mr. Lee, another thing I want to point out before I move on to the Canadian Worker Cooperative Federation is that being at liberty to say what is on your mind does not mean that it is the truth. The MP representing Beauce thinks he is infallible. It would do you good to go to Hochelaga to see what real life is like beyond the findings stored in your laptop. Since I am a nice guy, I will stop there.

I will try to link this to today's topic, which is the government's fiscal projections. Regarding worker cooperatives, you seem to be saying that there is a very short-term problem related to the transfer of companies—two or three years is like tomorrow morning for companies. You say that the issue is new and that the only solution would be to transfer companies to work cooperatives. I may be in agreement with you on this issue.

Why caution people now, when the problem will only arise in two or three years? Do you have any data about this, data based on real life and not on the opinion of academics?

[Alain Bridault]

Yes. Academics also take real life into consideration. A major economic disaster could occur, especially in the regions that are already doing poorly, such as Gaspésie and the remote regions.

The MDEIE, the ministère du Développement économique, de l'Innovation et de l'Exportation du Québec, published a research paper three weeks ago. The paper focuses on the shortage of successors. This is the issue at hand. The problem will be less noticeable in urban areas, since people will move to larger cities. There won't be any problems in Quebec City and in Montreal, but the situation could become disastrous in the regions. This issue should be addressed before the situation becomes critical and not once companies are closing. Everyone is saying that, to save companies with no successors, those in charge should prepare three or four years in advance.

[Daniel Paillé, Bloc, Hochelaga, QC]

You say that, if there are no successors, companies will close. This truly affects economic conditions, since the regional economy is at stake. However, I feel that, if a company is doing well, if it is earning profits or paying dividends to its owners, there will always be someone to take over.

[Alain Bridault]

This is the very issue I'm talking about. This is what is shown in the research conducted by the MDEIE, which is especially interested in Quebec. However, the situation is probably the same in all Canadian provinces. Research shows that there will be a shortage of successors. Even though companies will be available, there will be nobody to take them over. The only alternative—the European Commission is working on this—will be to have employees take over their own companies. However, this process requires a lot of guidance and preparation.

Right now, and for another two or three years, there is no problem, since there are enough successors. However, as we approach the peak of the curve...

You can already see this in some regions. I am involved in local development centres in Quebec. I was vice-president of the Quebec City LDC for a very long time. For example, over 50% of cases at the LDC of the regional county municipality of L'Islet are company takeovers. For the time being, there is no problem. However, panic is starting to set in because, in three or four years, there will be no one left aside from the workers.

We must implement an international mechanism, which will keep the economic costs of closures from skyrocketing. Basically, what the estimates are saying is that, if you are not careful, you will end up with a problem.