Finance Committee on Aug. 19th, 2011

[The Chair, Conservative, James Rajotte]

I call this meeting to order. It's my pleasure to welcome you all here today to the seventh meeting of the Standing Committee on Finance.

Pursuant to Standing Order 108(2), we are studying the current debt crisis and economic turmoil in the United States and Europe, and its potential impact on Canada.

Colleagues, we have two panels here this morning. On the first panel, we're very pleased to welcome the Minister of Finance, the Honourable Jim Flaherty, as well as two officials from the Department of Finance: Monsieur Benoît Robidoux, assistant deputy minister, economic and fiscal policy branch, and Mr. Doug Nevison, director of the fiscal policy division of the economic and fiscal policy branch. I understand that if need be, there are two other officials from the department available to members.

We have a short time period, an hour, with the minister and officials, so I am going to ask the minister to begin his opening statement, and then we'll proceed to questions from members.

Minister, welcome to the committee. Thank you so much for being with us. We look forward to your comments.

[Jim Flaherty, Conservative, Minister of Finance]

Thank you, Mr. Chair.

Good morning, hon. members.

Thank you for the opportunity to appear before the finance committee today on the current economic situation here and abroad.

Before I continue, I would like to wish a happy birthday to the chair. I cannot imagine a more joyous thing to do on your birthday—

[Some hon. members]

Oh, oh!

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

—than to chair the finance committee in August in Ottawa.

[The Chair, Conservative, James Rajotte]

I can't think of a more fun way to spend my birthday.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Of course, the chair has established himself as one of the most well-regarded members of Parliament, partly through his exceptional leadership of the finance committee, and before that of the industry committee of the House of Commons.

Let me thank the chair and all of you for the pre-budget consultations that you're going to commence in the next few weeks. Along with my consultations as Minister of Finance, the finance committee's pre-budget consultations help to ensure that Canadians have the chance to make their voices heard. Recommendations flowing from this committee's hearings always inform and influence the ultimate budget document.

I am especially heartened to hear the committee explicitly chose to emphasize the importance of the return to balance as a theme of this year's hearings—and is encouraging ideas on potential cost savings.

I would also strongly suggest that the committee urge Canadian businesses this fall to grow and invest in Canada. As I've said before, to ensure that our economy grows and creates jobs to support a sustainable and long-term economic recovery in Canada, we need strong private sector investment in productivity-improving machinery, equipment, hiring, and more.

Today I will talk about three key issues: first of all, the current volatile global environment; second, Canada's economic and fiscal strengths; and finally, the future.

As we have emphasized repeatedly for the past few years, we are in a period where the global economic recovery—especially in the U.S. and Europe—is fragile and growth will be modest.

At the outset, it is important to have context, and the context is that the global economy is in fact largely growing, albeit slowly.

The situation has been compounded recently by questions surrounding the political determination in certain countries to address the structural problems underpinning weak growth and unsustainable fiscal situations. That underscores one major difference between now and the fall of 2008. At that time, we saw an international credit crisis largely triggered by a loss of confidence in international financial institutions; the current situation is largely a problem of confidence in efforts of governments to move forward with credible medium-term solutions to reduce their deficits.

Earlier this week I co-wrote, along with fellow finance ministers from the United Kingdom, Australia, South Africa, and Singapore, a joint op-ed that appeared in the Financial Times, The Globe and Mail, and other publications around the world. That op-ed called for a new global response to support a sustainable recovery based on credible fiscal consolidation in countries with large deficits, matched by a rebalancing of global demand in order to support growth. As my colleagues and I noted, we must address these global challenges decisively and commit now to fundamental medium-term reforms. I repeat that call here today.

Clearly, resolving the problem will require difficult and bold action—primarily in the United States and Europe—to instill confidence in a prolonged recovery.

Mr. Chair, last week and again yesterday we saw extreme swings in global markets reacting to ongoing events, fiscal challenges, and concerns about the pace of the global economic recovery. Canada is a trading nation with exports representing about one-third of our economic output, and the U.S. is our largest trading partner. As such, global economic turmoil in the U.S. and Europe will inevitably impact our existing trading relationships and our economy.

That's why Canada has been a strong voice globally in calling for action to address current concerns, especially credible fiscal plans that set the path to budgetary balance and sustainable public finances.

Indeed, that is what our government is doing—providing a good example of a government that has its economic and fiscal house in hand for others to follow.

Colleagues, in Canada our economic and fiscal fundamentals are sound and sustainable. We have experienced seven consecutive quarters of economic growth, almost 600,000 more Canadians are working today than when the recession ended in July 2009, and both the IMF and the OECD forecast that our economy will be among the strongest in the G-7 this year and next. Recently, Moody's renewed Canada's AAA credit rating, based on Canada's “economic resiliency, very high government financial strength, and a low susceptibility to event risk”.

Canada has by far the lowest net debt burden among G-7 countries, and we're on track to balance the budget. As the IMF declared recently, Canada has “a sound and credible plan to return to budget surpluses”.

But Canada cannot and is not resting on our laurels—we are cognizant and prepared for the challenges ahead.

Recent indicators suggest that global economic growth was uneven in the first half of 2011 both here and abroad.

Indeed, while Canada experienced greater than expected growth in the first quarter of this year, that is expected to be balanced out by a softer than anticipated second quarter, as witnessed in other G-7 countries.

Colleagues, the government adopted prudent planning assumptions in Budget 2011 by adjusting down the level of nominal GDP growth projected by private sector economists by $10 billion. As a result, fiscal results to date have been broadly consistent with the conservative 2011-2012 projections set out in Budget 2011.

I should note that we continue to monitor developments closely and will, as usual, provide an update to Canadians on the economic and fiscal outlook later this year as part of the fall economic update. Our government is squarely focused on the economy and jobs.

We are focused on creating the right conditions for businesses and individuals to succeed for long-term, sustainable economic and job growth by staying the course with the next phase of Canada's Economic Action Plan.

The next phase of Canada's economic action plan contains several measures designed to contribute to a positive growth environment for our economy and Canadians, such as providing a temporary hiring credit for small business to encourage additional hiring by this vital sector, supporting the manufacturing sector by extending the accelerated capital cost allowance rate for investment in manufacturing or processing machinery and equipment for two years, new resources to support leading-edge research and development, and much more.

The plan ensures sound public finances designed to achieve substantial savings for taxpayers through greater efficiency and effectiveness in government. Once it is fully implemented three years from now, the deficit reduction plan will achieve four billion dollars in annual savings and allow the government to return to budget balance by 2014-15, one year earlier than previously planned.

This is a responsible and prudent approach, consistent with the careful management that has been the hallmark of our government's approach to public finances and taxpayers' money.

We are also staying the course with our plan to make Canada a low-tax jurisdiction for both families and businesses. Our low-tax plan is working and the world is increasingly noticing. Indeed, only this past Sunday, on the American news program Meet the Press, the Governor of Iowa, Terry Branstad, lamented the impact of Canada's competitive business environment. He said, “The Canadian government has reduced their corporate income tax. I've had companies that I've called on to come to Iowa say, 'We like Iowa, but if they don't change the federal corporate income tax, we're probably going to go to Canada.' Now, that's a tragedy when now Canada is beating us”.

May I say, with all due respect to the Governor of Iowa, it's not a tragedy up here.

The next phase of Canada's economic action plan will preserve this country's advantage in the global economy; strengthen the financial security of Canadian workers, seniors, and families; and provide the stability necessary to secure our recovery in an uncertain world.

Before I conclude and invite questions from the committee, let me again reassure Canadians that our government remains squarely focused on the economy. We are continually working to implement the next phase of Canada's economic action plan to support the economic recovery and jobs.

We are closely and constantly monitoring global developments and I remain in frequent and regular contact with my global counterparts. While we should not understate the risks, Canadians can be confident that our country is well positioned to face global economic challenges, as we have done successfully in the recent past.

With that, I invite the committee's questions.

Thank you, Chair.

[The Chair, Conservative, James Rajotte]

Thank you very much, Minister Flaherty, for your remarks.

We'll begin questions with Ms. Nash, for five minutes, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you very much, Mr. Chair, and happy birthday as well.

Thank you for joining us in the middle of summer, Mr. Minister. We really appreciate the opportunity to ask you questions about the government's plan to ensure the financial security of Canadians.

We wanted to invite you here--and others, by the way--because of the global situation. As you mentioned, we have seen the wild stock swings, the sovereign debt crises in Europe, and concerns about another potential recession.

In spite of your reassurances, though, our economy has been underperforming. We have inadequate demand to generate economic activity and investment that would put money in the pockets of Canadians and their families so that they can spend and further boost the Canadian economy.

We have, as you know, 1.7 million Canadians who are out of work or have stopped looking or are underemployed, and their lost wages alone cost our economy about $80 billion. Companies are sitting on about $500 billion of cash that they've been using to pay down debt and pay dividends. It's almost enough to pay down our entire debt in Canada, yet this government's looking at giving them a further corporate tax cut. Consumers are tapped out with very high personal debt levels, and our export deficit is growing.

Clearly, there are concerns about the U.S., where 70% of our exports go, so we can't be complacent as a country. We can't be rigid or inflexible. Your government has chosen to attack the fiscal deficit by cutting spending, thus taking more money out of the economy and increasing unemployment.

My question is, why not attack the jobs deficit? Why not create jobs that will keep the economy moving and also reduce the fiscal deficit through growth? With interest rates at near-record lows, is it not irresponsible for the government to be less proactive? Why not make strategic public investments to serve the people of Canada, create jobs, improve retirement security, boost growth, and through that ultimately lower Canada's debt?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

I thank the member for the question.

The member is advocating more spending now in the current environment. That actually is the problem in Europe: too much spending and accumulated deficits. It's exactly what we should not do if we want to maintain the fundamental fiscal health that we have in Canada. Needless to say, it's the fundamental problem in the United States. Spending has gone out of control, and accumulated deficits have resulted in an unwieldy public debt. That, in my view, is precisely the wrong direction to go.

It was the right direction to go in the economic action plan back in 2009 when the world economy was in a recession and we had to do some major infrastructure spending in Canada. The NDP, the member's party, voted against those initiatives back in 2009. It was wrong then, and I dare say it's wrong now, when they advocate more spending at a time when we need to keep our economic house in order in Canada.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Mr. Minister, going into the last economic downturn, the government was sleepwalking into a recession. It insisted that all was fine and that we were going to have balanced budgets. We ended up with the largest deficit in our history, a deficit of $54 billion. What we need is, in fact, a counter-cyclical measure and approach right now that takes advantage of low interest rates and helps make our economy more competitive.

Why wouldn't we take advantage of low interest rates, put Canadians to work, upgrade our infrastructure in urban transit, get clean water into all first nations communities, or create a national broadband structure? Why wouldn't we do that now to put Canadians to work and counter the softening economy that we're facing around the world?

[The Chair, Conservative, James Rajotte]

Minister, please give just a brief response.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

It's important to strike the right balance. We have those on the left in Canada and elsewhere in the world who would advocate more spending at a time when, really, fiscal consolidation and fiscal restraint are what is required, as well as governments with the courage to carry forward with medium-term plans to have balanced budgets.

There are also those on the right who would say that we should cut government spending dramatically and in a draconian way, and we're not going to do that, as we set out in the budget plan. We're trying to strike that right balance--and I think we have, quite frankly--so that we have modest economic growth but at the same time move back to balanced budgets in the medium term, which in our case is 2014.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. Nash.

We'll go to Ms. Glover, please.

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you, Mr. Chair.

Once again, I would first like to welcome our minister and the witnesses who came here during the summer.

I want to continue with what we were speaking about, if you don't mind, Minister.

The NDP has been critical in recent weeks of our government's plan to undertake a review of spending, a review of how taxpayers' dollars are actually spent. Disappointingly, some in the NDP have dismissed such a review as “an ideological approach”.

As we know, our next phase of Canada's economic action plan lays out a plan to examine roughly $80 billion of direct program spending. The objective is to ensure that we are spending taxpayers' money as effectively and efficiently as possible and that we are reducing spending. I understand this involves ensuring that we are getting maximum value out of current operating expenditures, improving productivity in government, and examining the relevance and effectiveness of programs.

I think small businesses and moms and dads who also have to balance their budgets think it's prudent that we have this kind of review. They think it's reasonable and want to be assured that we are effective in using their money. That's why, unlike the NDP, I think we ought to proceed and I think that's why Canadians agree with us. The government is doing what is necessary, and I urge the government to continue in that vein.

That said, can you speak further about our government's plan to review spending? Could you also comment on how we expect to satisfy the priorities that Canadians are indicating?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Thank you for the question.

Fiscal discipline is important. There's been a lack of fiscal discipline in a number of countries in the world and a lack of political will to correct it. That is the fundamental issue we are facing in Europe today, the political will to fix fiscal situations.

In Canada we're not faced with that. We created the economic action plan at a time of recession to protect jobs, families, and the Canadian economy. Part of the economic action plan was always to move back to balanced budgets, so we're staying the course and maintaining the balance that will take us to that good place of having a balanced budget in 2014-15.

We have a great advantage in Canada right now. That's why I encourage my colleagues on this committee, when they're out there in the next few months during the pre-budget consultations, to encourage business to invest. The balance sheets of corporate Canada are strong. In part they're strong because of our corporate tax reductions over the course of the past five years and continuing to January 1 of next year, when the federal corporate rate will drop to 15%. As you know, we've done this with the cooperation of most of the provinces, which have reduced their corporate tax rates gradually to 10% so that we will have a Canadian brand rate of 25%.

This is a great opportunity for Canada. We have the strongest financial system in the world, we have strong fiscal fundamentals in the Government of Canada, and we have strong business balance sheets. This is a chance to seize the Canadian advantage.

[Shelly Glover, Conservative, Saint Boniface, MB]

Thank you.

I want to thank you also on behalf of the business leaders we met yesterday during our EI consultations. They reiterated how the economic action plan and the corporate tax reductions have actually helped them to progress and to create jobs, so I pass that along.

I agree with you, Minister, that Canada is in a much better situation than the folks who are unfortunately having to deal with some problems in Europe and the United States. Could you reiterate some of the comments made by the IMF and the OECD with regard to Canada in relation to other countries?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

It's important, obviously, to have balance in what we do. We are seeing quite modest growth—almost flat growth—in the European Union and the euro area, quite modest growth in the United States, and modest growth in Canada, but when we compare ourselves with other major industrialized countries in the world, as the IMF and the OECD do, Canada is not only leading the pack this year but will also do so next year.

Again, being realistic, there are risks in the world, and the growth we're seeing is modest. The unemployment rate in Canada, at about 7% right now, is much lower than the rate in the United States, for example, but it's still too high. That's why we've been moderate in what we've been doing. We're being flexible and pragmatic, continuing the infrastructure program until October, and proceeding with the program to help hiring by small business in Canada. We believe we're striking the right balance.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Glover.

We'll go to Mr. Brison, please, for five minutes.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you, Mr. Chair.

Welcome, Minister.

Minister, in your opening statement, you said that growth will be modest in Europe and the United States. That's your assumption, your expectation, yet we see a growing number of economists, both in Canada and internationally, who are predicting a full-scale recession in the U.S. and Europe. In fact, yesterday Morgan Stanley described the U.S. and Europe as being, in both cases, “dangerously close to a recession”.

If you're wrong and they're right, do you have a plan for Canada in the event of a U.S. and European recession, and if so, what is that plan?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

There are certainly risks, and some of the economists have been pointing out the risks. The view today of the economists is for, as I just said, very modest growth in the United States, and virtually flat growth--if there is such a term--or flatness in Europe.

If we were to see the global situation deteriorate in a dramatic way, we would obviously do what is needed to protect our jobs and our economy and families in Canada. We would act in a pragmatic way, as we have done successfully previously and recently.

[Scott Brison, Liberal, Kings—Hants, NS]

Minister, there is a disconnect between what is emerging as a growing consensus over a fear of a full recession in the U.S. and Europe and what you're saying here today. Earlier this week, on Monday, Conservative members of this committee refused to invite independent economists to appear before this committee. In fact, your parliamentary secretary said that they were afraid it might worry Canadians if independent economists were to appear before this committee.

Is that why your government refused to allow those independent economists to appear before this committee? Is it because of the delta between what they're predicting for the U.S. and Europe and what you're predicting here this morning?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

I leave it to the committee to do whatever the committee chooses to do, but I--

[Scott Brison, Liberal, Kings—Hants, NS]

We note that your parliamentary secretary is quite independent from your department, Minister.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

I can tell you for myself, as Minister of Finance, that last week I had my annual policy retreat, which included business people and economists, academics, and others from across the country. As you know, I meet regularly with Canadian economists. They're quite satisfied that they have access to the government and provide advice. I have an economic advisory council that I meet with regularly during the course of the year. We get lots of advice and we're open to listening. Quite frankly, some of the best advice I've received in the past more than five years has been from private sector economists, and I welcome their advice.

[Scott Brison, Liberal, Kings—Hants, NS]

Minister, this is like déjà vu. I remember that in the fall of 2008, when you first denied a downturn and diminished the expectation of what the impact would be on Canada, you refused to take action or to present a plan until you were forced to by opposition parties at that time.

Minister, a lot of Canadians watching you now are frightened because they fear you're going to make the same mistake you made in the fall of 2008. You have had an opportunity, and you still have an opportunity at this committee this morning, to present a plan in the event of a U.S. or European recession. None of us hope that is the eventuality, but we do hope that you have a plan.

Minister, again I ask: do you have a plan for Canada in the event of a U.S. and European recession? Do you have a plan, and will you share it with this committee and with Canadians?