Finance Committee on Nov. 5th, 2013

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

Thank you, Mr. Chair.

Hello to all the panellists. Thank you for being here today.

Mr. Page, welcome back. It's very nice to see you again. I'd like to start with you. You had very interesting comments.

One of the things you mentioned was austerity and the impact of austerity measures on economic growth and on our sustainability. Can you describe for us the impact of the government's austerity measures? The government, of course, wants to make sure its finances are in order, but is there a downside, or can you describe the downside to austerity measures?

[Kevin Page]

Thank you.

Mr. Chair, I think the way economists tend to look at austerity is very similar to the mirror image of the way we looked at stimulus. In the case of stimulus, when the government implemented a very large stimulus package in 2009 they used economic analysis, effectively what we called multipliers, to estimate what would be—if we had a stimulus package—the additional increase in output and in jobs. They calculated with a stimulus package in the neighbourhood of $50 billion that we could achieve an additional two percentage points to GDP and an additional couple of hundred thousand jobs.

In 2012, the government moved to freeze direct program spending effectively for five years. Direct program spending is in the neighbourhood of $115 billion to $120 billion. So we're effectively reducing spending by almost $15 billion over that period of time from what the trend growth rate was. Again, we're talking about loss overall since 2012 of probably something in the neighbourhood of one percentage point in terms of output and 100,000 jobs. This is taking place at a time when our economy is operating below potential. We have unemployment rates in the 7% range. We have capacity utilization rates in the 80% range. These are different rates from what existed prior to the recession. There are costs to austerity just as there were positive benefits to stimulus.

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

Austerity, as you've described it, is a drag on our economic growth.

Mr. Macdonald, you talked about the slow growth and the lack of growth as one of our major problems. We have trade deficits. You talked about the collapse of the manufacturing sector, stagnating wages. Yet so much of our recovery seems to depend on consumer spending, which is translated increasingly into high personal debt. How sustainable is this in the long run, or even in the short run?

[David Macdonald]

Looking at the debt levels of households, we have seen some levelling off in terms of increasing household debt, although that has been picking up again in the last year.

With regard to debt sustainability, clearly the sector that is most over-leveraged in the Canadian economy is household. This isn't news to this committee, and it's not news to the folks at the Bank of Canada or to economists in general, who have been highlighting the issue of high household debt.

In the short term, it may well be sustainable, given historically low interest rates and, importantly, historically low mortgage rates, that the vast majority of the debt in fact is mortgage debt and is not debt from buying household items like computers, TVs, and so on. In the short term, it may well be sustainable, given that the mortgage payments are quite low. The real problem it presents is that it has leveraged up the household sector, and changes in the mortgage rate going forward will have a much bigger impact on the household sector than it would have if the household sector had seen lower rates of indebtedness.

So that's the real concern. When and if economic growth begins again and we do see mortgage rates start to climb up again from historic lows, the real danger is that an over-leveraged household sector cuts back on its spending—it has been the primary driver of economic growth—and we see a real drag on growth once we start to see some pickup.

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

I'd like to follow up on that. You talked about how we're right now in a period of very slow growth, and the government's austerity measures are designed to get us to a balanced budget situation quite quickly.

Now, one of the things the government has said it wants to do if we get to a balanced budget situation is to introduce income splitting. Is that a good idea for Canada?

[David Macdonald]

Income splitting would act against the government's goals of reducing its debt more rapidly, if that is the government's goal. Income splitting is relatively expensive. It's in the neighbourhood of $2.5 billion to $3 billion a year at the federal level. It's about half that at the provincial level, from studies that have been done previously.

So it would be quite expensive, which would mean that if the government wants to maintain its path toward a balanced budget in a certain year, let's say 2015-16, then it would have to cut those expenditures someplace else out of the budget to make room for this tax expenditure of income splitting.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you very much, Ms. Nash.

We'll go to Mr. Saxton, please.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Chair.

Thanks to our witnesses for being here today.

My questions will be directed to the accounting representatives here today—Richard Monk, adviser to the Chartered Professional Accountants of Canada, and Carole Presseault, vice-president of the Certified General Accountants Association of Canada.

First of all, I look forward to the amalgamation of accountants in Canada. It's very confusing to remember who is chartered and who is certified. I'm sure this will be taken care of once you finally amalgamate.

I want to address both of you, because your submissions were quite similar in some respects. First of all, you both gave suggestions on how to reduce red tape. Of course, this is something that our government has been focusing on. We have the red tape reduction plan, which was the result of the red tape reduction committee's cross-country meetings and round tables to come up with ideas to reduce red tape, specifically for small and medium-sized businesses.

Mr. Monk, you have a suggestion that you call “eXtensible business reporting language”.

Madam Presseault, you have a suggestion that you call “standardized business reporting”.

Perhaps you could both elaborate briefly on your recommendations in this regard.

[Richard Monk]

I'll start off.

The concept is standardized business reporting. XBRL is a platform that allows that standard to go forward. XBRL essentially is a subset of the SBR that we're suggesting.

Really what it does—and this has come before the committee before—is it reduces complexities in filing for businesses and it lowers the cost of transferring data between departments within the federal government.

[Andrew Saxton, Conservative, North Vancouver, BC]

Madam Presseault, have you any further follow-up on that, on your recommendation?

[Carole Presseault]

Certainly we're supportive of that recommendation. As Mr. Monk pointed out, in terms of standard business reporting the platform is XBRL.

Essentially, as I understand it, it's really allowing businesses to communicate with government in one financial reporting language so that information can easily be transferred and shared across. That's where it simplifies business reporting and reduces the compliance costs.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you very much.

I think both of you mentioned the patent box and how this could help improve innovation. Could you elaborate more on how the government could implement such a measure?

[Richard Monk]

Sure.

The patent box is essentially a way of commercializing our innovation by providing for a low rate of tax on revenues, profits generated from that commercialization within Canada. The U.K. launched its patent box in early 2012, and it's now in process. The name comes from a little box that you tick on the filing form that says you qualify for a patent box; that's where the name “patent box” comes from.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

You both also touched on the need for tax simplification.

Would you like to elaborate on that?

[Carole Presseault]

I will.

Thank you very much for your question.

I think this committee has heard me, a few times, talk about taxification. And welcome, Mr. Saxton, to this committee. I have a new audience for this topic that is near and dear to the hearts of accountants.

Despite it being counterintuitive, accountants do want a simpler tax system. Essentially what is suggested is that we re-examine the tax system to make it more fair and efficient, to ensure the taxpayer pays the right share and that the right taxpayer pays the right share. There are a couple of building blocks toward that, and the first building block is the red tape reduction system and some of the administrative aspects that are already under way through the Canada Revenue Agency. These are very welcome by our members.

The second aspect is to look at it from a legislative perspective. Again, the passage of the Technical Tax Amendments Act last year was a very welcome addition to addressing the growing backlog. It's a complex tax system that doesn't bring forward amendments on a timely basis. We have to look at how we can correct that process. What are the mechanisms we should have in place to have a regular technical tax bill come forward?

The last aspect is who undertakes this review and how you go about it. This is why we challenged that perhaps it is the committee's task to start looking at how to undergo tax reform.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Saxton.

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

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

Thank you, Mr. Chair.

Mr. Macdonald, you referenced the federal debt as a percentage of GDP. We're often being compared with unitary states, as opposed to our country, which has significant provincial debt loads as well. When you calculate some of the provincial debt loads and their portion of the federal debt, some provinces are carrying debt-to-GDP levels that are close to where Greece and Portugal and Italy and Spain were prior to the downturn. If we consider those obligations, I'd just caution that in terms of the fiscal situation in Canada, it may appear a little rosier than it actually is.

You're quite right to identify the household debt risk in Canada. It's at record highs today. Have you considered the degree to which that is being driven...? Two recent bank economist reports are telling us it's being driven by the direct subsidization by parents and grandparents of Canadian youth who are having difficulty finding work. Has your organization looked at that challenge faced by young Canadians, the fact that there are 224,000 fewer jobs for young Canadians today than before the downturn?

[David Macdonald]

Certainly youth unemployment is approximately double the regular rate. We have quite a concentration of unemployed youth, and I think that is one of the long-term sustainability problems. I'd argue that household debt is probably much more related to interest rates and stagnant incomes than it is to supporting youth who can't find a job. That would certainly be a part of it, but I think the major components are the interest rate and stagnant incomes.

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

I'm very interested in the increased calls for tax simplification and tax reform. We haven't really considered an overhaul of the tax system since the Carter commission in 1971. Has the tax system become more complicated in the last few years with the boutique tax credits that we've added? Have we not gone in the opposite direction of tax simplification in the last several years?

[Carole Presseault]

Certainly tax expenditures contribute to the complexity, and there's more information coming out on exactly who benefits from these tax expenditures. An interesting study was published last week or the week before about that. In the study they showed that the actual net benefit is quite low because the additional costs of complying with or actually applying for that benefit reduce the availability.

That's part of the whole picture. It's not the sole aspect of it. Tax expenditures are a small part, but certainly when you look at the personal income tax system, that's what—

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

These targeted tax expenditures add up, some would argue, to billions of dollars. Potentially, with that kind of fiscal impact, we could actually have significant tax reform and simplification if we were willing to do that.

Mr. Page, you mentioned that some types of cutting occurring today could have, I believe you said, increased “spending pressures into the future”.

Are you suggesting that some of the cuts today may actually be kicking the can down the road and may actually obligate future governments to spend more money, potentially putting us into future deficits?

[Kevin Page]

I certainly think there is a risk that without a lot of transparency on where those cuts are taking place, we could be kicking the can down the road in terms of future spending pressures. I think the government, the public service, should be providing those five-year spending plans by department. Where are those cuts taking place? Is it in operating? Is it in capital? Which program activities are affected? How are they managing those service levels?

We've had our own experiences in Canada, which I lived through in the 1990s, in which we went through massive fiscal restraint. There was very depressed capital spending going on. We built up capital spending pressures and we had to put money back in the system.

I think with greater transparency we could manage the overall fiscal and service-level risk much better.

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

Thanks.

Mr. Page, you mentioned balanced budget legislation. The legislation, according to the throne speech, will apply only during normal economic times. Minister Flaherty has told the House that normal economic times are when budgets are balanced, which would mean that the balanced budget legislation will apply only when budgets are already balanced.

What do you think broadly of balanced budget legislation and its applicability in other jurisdictions and its general success rate as a measure?

[The Vice-Chair, NDP, Peggy Nash]

Be very quick, Mr. Page.

You're out of time on this round.

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

Oh, sorry.