Finance Committee on Sept. 27th, 2011

[Douglas Porter]

As I indicated in my earlier comments, I think it's early to change tack. Having said that, we could have a rather dramatic change in the economy in the months ahead. I do believe the U.S. economy is in danger of a renewed downturn. The one thing I would say is that in a lot of the most recent data we've seen, the most pronounced weakness is in things like sentiment and confidence in the financial markets. In terms of what people are actually doing and buying and producing in the U.S., it has not meaningfully cracked yet. So the U.S. economy still looks like it's growing slowly, no question about it, but it doesn't look like it has actually tipped into an outright downturn yet when you look at the absolute spending and production numbers. And it's similar story here in Canada.

So I still do believe it's too early to change tack. As for my comment about aggressive spending cuts, I don't believe we're seriously considering aggressive spending cuts in Canada. That comment was really aimed more at the U.S. economy, where some are advocating that the answer to their woes is a major contraction in the fiscal situation. I just don't believe that's the right answer in the U.S. at this point.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

My question is for Mr. Schetagne.

We hear that the current government wants to cut taxes for large corporations using the excuse that this creates jobs. You talked about this.

Could you tell us how will the tax cuts affect major corporations when it comes to creating jobs? Is this really the way to go?

[Sylvain Schetagne]

The answer to your question is no. This is not the way to go because those tax cuts are essentially for the benefit of companies that make profits. The less taxes these companies pay, the more profits they make. Are the profits then reinvested to create jobs? We are now seeing that these businesses are not really doing that.

We say that we have to make a choice. Do we give $1 billion to corporations in tax cuts in order to create roughly 3,000 jobs, based on our calculations? Or do we take this billion and use it to create 16,000 or 17,000 jobs, be they in infrastructure or employment insurance reform? It is clear to us that this billion would be better invested in targeted policies tailored to the current job situation.

I will quickly mention something else. We are wondering whether it is time to implement a new plan in the event of a recession. We believe that there will be a recession and that there are mechanisms that should kick in automatically when a recession starts. A well-known mechanism is employment insurance. Today, we could and we should look at the EI program and take steps to reform it so that it does its job when the recession strikes.

Right now, only 39.6% of the unemployed are entitled to employment insurance. That's a problem.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Mai.

We'll go to Mr. Van Kesteren, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Chair.

Thank you, panel, for coming.

What do you think, Mr. Hodgson? Do you think we should impede companies from making a profit?

[Glen Hodgson]

Oh, absolutely not.

[Voices]

Oh, oh!

[Glen Hodgson]

I mean, we're on the record as saying that we thought the business tax adjustments undertaken over the last three years were really important to help companies adapt to the fact that we are now trading with a very strong.... We've become the Switzerland of North America when it comes to the exchange rate.

Our view is that the Canadian dollar is going to stay a strong currency for a long time to come, driven by the commodity prices that Mr. Brison talked about. We think the sales tax harmonization, elimination of capital taxes, and reductions in corporate income tax were a critical piece in helping Canadian companies adjust.

Now, revenues have to be made up someplace. We're also on record as saying that Canada should have a national carbon tax to support what provinces are already doing with carbon taxation.

But thinking about tax reform, I'm a big advocate. I'd love to come back and talk with you further about this.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

But you would agree.... I was always under the impression that we generate most of our revenue from the government from profitable companies, so it's kind of important that our companies remain profitable, and it's a good thing that they're profitable.

[Glen Hodgson]

Yes. I think Canadian companies really need an overall environment to be as competitive as possible right now. The dollar adjustment was probably the biggest shock they've experienced over the last five years, having to adapt to a strong dollar. For many companies, they really have had to fundamentally rethink their business operations if they're going to stay in business in Canada.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I want to just switch over to trade for a second. We're a trading nation. This is the first time we've ever dealt with something as a global situation, where we're all in this together.

So how important is trade? We've instituted a number of trade deals with a number of countries. Are we on the right track? Do we want to keep moving in that direction? Do we need to make more of these?

[Glen Hodgson]

In one word, yes: I think more free trade is good. It gives us access to other markets. It increases competition at home, which is also good for our economy. It forces companies to sharpen their pencils on an ongoing basis. It really is allowing Canadian companies to take advantage of what are called global supply chains or global value chains as they change their business model.

Again, we are on the record as strongly supporting bilateral, regional, or multilateral free trade however you can accomplish it. I think Canada benefits from access to more markets around the world.

One of the good things that happened after the financial crisis was that we saw very few trade barriers put in place, because under globalization, firms and national economies are more and more integrated. People understand that by doing a Buy American clause, for example, you just shoot yourself in the foot. You actually hurt your own economy by putting a barrier in the way.

I could only encourage the government to pursue more free trade, in Asia and.... I mentioned the trans-Pacific partnership. That will require us to address some barriers at home that are actually preventing us from having full access to free trade.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Well, I don't want to keep picking on you--

[Glen Hodgson]

Oh, I don't mind.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

--but you did say that we need to be flexible. Being flexible, though, would you think that it would be prudent for us to spend more money, aside from being flexible, for instance, on needed infrastructure projects? Is it a good policy of the government to get further into debt, to just spend more money and spend our way out of this thing?

[Glen Hodgson]

I think it's very important to have an anchor, a medium-term anchor, in terms of rebalancing the books, not just getting the debt-to-GDP ratio under control. You know, you can actually run a deficit and have a falling debt-to-GDP ratio. I don't think that's good enough; I think it's hard to explain to people, for example.

Having an anchor point is really important, whether it's 2014, 2015, or a year or two later. By virtue of the fact that global growth has slowed down, that has hit us in terms of nominal income growth, and that's where I would suggest maybe rethinking the track to get there.

I don't think the economy needs more fiscal stimulus right now, but I wouldn't close my mind to it either, in the event that circumstances turn out much worse in Europe and the U.S. than we're foreseeing right now.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Would you agree, Mr. Leitao?

[Carlos Leitao]

Generally speaking, yes, but I would add that there are ways of building bridges without necessarily adding to the national debt. You can also think in terms of how you finance the building of that bridge. There are all kinds of partnerships that can be put in place.

God forbid that you have to put in place a toll booth--oh, my God--but those things should also be considered.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Van Kesteren.

We'll go to Mr. Marston, please.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you, Mr. Chair.

Welcome. Sorry again for the delay in getting here. We had a vote to take care of.

Mr. Hodgson, you were talking about the tradespeople movement throughout the country. Are you familiar with the “red seal”? The red seal is where you keep a certain standard level of training for all of the trades. The last thing we need is some kind of dumbing down of the quality tradespeople that we have. But that's more of a comment than a question.

My real question for you is this. The Conference Board recently published a report detailing rising inequality in Canada. It was a very good report. I'd like you to comment on the way in which this inequality is not only bad in social justice terms but also bad for the economy. It affects consumption and affects demand. If you could expand on that, I'd appreciate it.

[Glen Hodgson]

Well, it sounds somewhat like a rhetorical question, but thank you for acknowledging that work.

We do a report card on Canada's performance called “How Canada Performs”. It's entirely on our website. We did look at inequality in the major OECD countries over the last 20 years.

As part of globalization, sadly, inequality is growing in most countries around the world. In Canada the rate of growth of inequality as we measured it was actually greater than in the United States, which is a bit of a surprising result. We didn't do detailed analysis on the economic impacts of that, but I think we're starting to highlight them. They are things like how, if people with lower incomes aren't keeping pace with income growth across the economy, that takes away from potential demand in your economy. Often they're buying locally made goods. They're not importing BMWs, although there's nothing wrong with BMWs.

We were asking whether we're doing enough as a country to ensure that all Canadians are benefiting from economic growth. Whether we're talking about the lack of job security or about people retiring with insufficient incomes, ongoing poverty is kind of a festering sore within an economy, and I think it does drag down your ongoing growth potential.

It's something we're going to come back to in further research, because we didn't really go deeply into the causes, but I'd like to do that in our future research.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

I think it's important that you're keeping an eye on it. I appreciate that.

Mr. Porter, right now we are hearing that there's $500 billion of business money just sitting there. It's not being invested, and we have a situation in which the private sector has withdrawn.

From our standpoint, having public investment is critically important. I understand you were quoted just yesterday in The Globe and Mail and you said that suggestions by Mr. Harper for global austerity are the wrong medicine at this time. Would you like to expand on that a bit? Because to my mind I would tend to agree with you that it's time for this government to invest. It's not time for the government to withdraw if the business community has already withdrawn.

[Douglas Porter]

My comments were aimed more at the global economy generally and specifically at the U.S. as per my earlier comments. My concern now is that the U.S. not focus too much on controlling their budget deficit, given the fact that their economy is gasping for air and they've had very little employment growth in the past year or so.

In terms of the buildup of cash levels at the corporations, I guess the one thing I would say is that's a bit of an unfortunate although understandable by-product of the financial crisis that we went through in 2008-2009, when cash was absolutely king and for all intents and purposes the financial markets had a virtual heart attack in the fall of 2008. In order to guard against that kind of extreme hunt for cash, we've seen, not just in Canada--this has really happened around the world--that corporations believe they have to build up these higher defence walls, and they believe they have to essentially keep more ready cash on hand. As I said, that's one of the unfortunate by-products of the financial crisis.

In terms of business investment, I would point out that it has been one of the stronger areas of the economy in the last year. We actually have seen quite a pick-up in capital spending in the last year.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Okay.

Mr. Schetagne, I understand that the CLC is promoting a policy of investment in seniors. We've done the same thing in the House for over two years, talking about raising the guaranteed income supplement. We have seniors living in poverty in this country, and we've had a modest increase of $50 a month. We're saying that increase should be closer to $200 a month. I'd like your comments on that, please.