Finance Committee on Sept. 29th, 2014

[The Chair, Conservative, James Rajotte]

I call this meeting to order.

This is meeting number 43 of the Standing Committee on Finance. I want to welcome all of our guests here today at the start of our 2014 pre-budget consultations.

Colleagues, I want to welcome you back to this first meeting of the finance committee in the fall.

We are starting our pre-budget consultations. At our first meeting, we have two panels of an hour and a half each. In the first panel, we have the Canadian Taxpayers Federation, with the director, Mr. Gregory Thomas. We also have from the Fraser Institute a person who has written a budget in the past, Mr. Sean Speer.

From the Macdonald-Laurier Institute, we have a senior fellow, Mr. Philip Cross. From the National Association of Federal Retirees, we have the president, Gary Oberg. Also, from the University of Ottawa we have someone who's familiar to our committee, Mr. Kevin Page.

Welcome to all of you. Thank you so much for being with us.

You each have five minutes for your opening statement. Then we'll have questions from members.

We'll start with Mr. Thomas, please.

[Gregory Thomas, Federal Director, Canadian Taxpayers Federation]

Thank you, Mr. Chair, and committee members.

On behalf of the Canadian Taxpayers Federation, Canada's largest, oldest, and noisiest taxpayer advocacy group, I thank you for the invitation to appear today.

We recently surveyed our supporters and had nearly 6,000 responses to the survey, which was asking what the priorities should be for the Government of Canada in the years ahead. Interestingly, 53% of this sample of nearly 6,000 Canadians said that paying down Canada's debt was their top priority for what to do with the surplus, while 44% favoured tax cuts and 2% wanted to see more federal spending.

So we strongly urge the committee to urge the government to include a debt repayment schedule in the 2015 budget. Nobody's expecting the debt to be repaid overnight, but over the course of 11 surplus budgets leading up to the financial meltdown in 2008, over $100 billion of federal debt was repaid by governments of all stripes, the lion's share of that by a Liberal administration. We hope the Liberal caucus and the official opposition will take note of the desire amongst Canadians for lower debt.

Our supporters also indicated a preference for fewer tax brackets, lower rates, and fewer boutique tax credits. When it came down to a straight-on request for input as to how best to deliver tax relief to families, the most popular option was increasing the child care deduction and allowing stay-at-home parents to benefit from the child care deduction. We believe that if special relief is going to be afforded to Canadian families, then a child care deduction of $10,000 per child that is available to stay-at-home parents, whereby a parent in the workforce could pay a stay-at-home parent, is an affordable, flexible, and effective way of getting that tax relief to Canadian families.

We continue to call for the government to reduce employment insurance premiums and to ultimately implement an employment insurance savings account, whereby Canadians who never use the employment insurance fund and who work all their lives could roll their own employment insurance premiums into their retirement savings at retirement. This year, a working couple earning the average industrial wage—two spouses earning approximately $50,000—is going to see $4,300 docked from those paycheques on behalf of the employer and the employee and sent to Ottawa. We think that's far too much money benefiting far too few Canadians. We strongly urge the committee to urge the government to begin comprehensive reform of employment insurance.

We have a whole bunch more in our brief, but if I keep talking my friends won't have a chance, so I'll once again thank you for the invitation.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Thomas.

We'll go to Mr. Speer, please.

[Sean Speer, Associate Director, Government Budgets and Fiscal Policy, Fraser Institute]

Thanks, Mr. Chair.

Thanks to all of you for the opportunity to appear as part of your annual pre-budget consultations.

I want to begin by recognizing how important the committee's pre-budget work is. I've been involved in four federal budgets in the past, and I know the extent to which the government relies on these hearings and ultimately on your advice in the development of the budget.

This year's work is particularly important as the government moves to a balanced budget and the country debates how best to use future budgetary surpluses. I think to this point the committee's pre-budget theme of balanced budgets and economic growth is apt.

This brings me to my two main comments today: the need to eliminate the deficit and maintain ongoing spending discipline and, secondly, what I think is a high-impact and low-cost step the government can take to encourage short- and long-term economic growth.

First, with respect to the deficit, we appear to be entering a transition from a series of budgetary deficits to fiscal surpluses. This protracted period of deficits will have added nearly $175 billion to the federal debt by 2015-16. The government's top priority, therefore, ought to be eliminating the deficit. This means ignoring calls from some quarters to push back the timeline for a balanced budget in the name of ongoing fiscal stimulus. The fact is, we've seen the results of such prescriptions before, and this ultimately leads to a never-ending cycle of persistent deficits, growing debt, and rising interest costs.

It's also important, though, that the government doesn't use the return to a balanced budget as a licence to ramp up spending. The current government has exhibited better discipline in recent years, and it would be a mistake to reverse course and return to the type of spending growth we witnessed before and during the global economic recession.

Put simply, the first priority of this budget ought to be to put the government on a strong fiscal path now and for the future. This of course is because controlled spending and balanced budgets aren't an end in themselves. They're a means to a end, and that is freeing up fiscal resources for the government to take steps that will improve the country's competitiveness and really set the foundation for long-term prosperity.

I think there's a real opportunity to focus the debate and the discussion through these hearings on how best to use the fiscal dividend, which was a major debate, as you all know, when we last eliminated deficit and returned to balance. There are many important policy ideas that ought to be discussed as part of a pro-growth agenda, but let me focus briefly on just one here today, and that is the tax treatment of capital gains.

A wealth of research shows that capital gains taxes reduce the supply and increase the cost of capital available to new and expanding firms and in turn diminish levels of entrepreneurship, economic growth, and, ultimately, job creation. The primary reason that capital gains taxes can have these negative effects is something that economists call “the lock-in effect”. Because capital gains are only taxed upon realization, high taxes can create an incentive for investors and asset holders to retain their current investments even if more profitable and productive opportunities are available.

The magnitude of the lock-in effect depends on a number of factors, but a series of empirical studies has found a negative relationship between capital gains taxes, assets sales, share prices, and other proxies for investment activity. This important for Canada because, as I'm sure you'll hear throughout these hearings, there remain ongoing concerns with respect to the capital supply and the creation of new firms in Canada.

A series of governments have taken steps to encourage and increase the supply of capital through direct subsidies and tax expenditures, yet the tax treatment of capital gains has gone largely ignored. At a time when governments are searching for policy options to improve the access to capital for new firms, it would be wise to reform the tax treatment of capital gains. Eliminating capital gains taxes altogether or reforming the application of capital gains taxes through a rollover mechanism could help to increase Canada's supply of early-stage financing.

It's worth noting that such a policy would have a relatively limited fiscal impact. According to the most recent estimates from the Department of Finance, the government collects approximately $2.8 billion in capital gains taxes, which represents 2.4% of income tax revenue and 1.8% of total government revenues.

So in sum, capital gains taxes carry significant economic costs and generate a small amount of government revenue. Capital gains tax reform would be a high-impact, low-cost measure that would have a considerable impact on the Canadian economy. I would encourage the committee to explore this issue further.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Speer.

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

[Philip Cross, Senior Fellow, Macdonald-Laurier Institute]

Thank you, Mr. Chair.

I'd like to summarize. The MLI has done a couple of research reports in the area of federal deficits. One result that I think most members would be familiar with is the impact of aging on future deficits. Another impact I'll be discussing is the implications of provincial deficits, an impact that is rarely discussed. I'll start with the aging.

The rapid aging of the population is going to put pressure on federal finances through at least four mechanisms. One is that there will be fewer workers paying income tax. Second, there will be increased demands on the unfunded portion of our pension plans, notably the OAS and GIS. Third, there will be increased demand from the growing number of federal employees for the unfunded portion of federal government employees' pensions. Finally, there will be increased demands to fund the health care system.

One estimate we've published is that from now to 2030 the aging of the population by itself will add 52.5% of GDP to federal government debt outstanding. That's more than all federal government debt today.

The other thing I'd like to discuss is that while you look at federal finances—and they've come down from a peak deficit of over $40 billion at the worst of the recession to a negligible deficit over the last four quarters—what's rarely discussed is how there has been almost no improvement in provincial deficits over that time. In fact, provincial government debt today is higher than it was at the worst of the recession, totalling something on the order of over $40 billion at the moment.

The largest deficits are being run by Ontario and Quebec, the provinces that also have the highest provincial debts. Quebec's debt outstanding is 48.1% of GDP. Ontario is next at 37.4%. Ontario's is growing much more rapidly.

On the other hand, with regard to Quebec's deficit, they've had more ability to bring down their deficit, but it's worrisome that they haven't been able to eliminate it completely. In 2013, then finance minister Marceau gave an “engagement ferme”, in his words, that the deficit would be eliminated. Instead, the deficit came in at $1.7 billion and, by the Quebec government's own estimates these days, it is heading up to $3 billion.

Why am I talking about provincial deficits? In the fall of 2012, we published a study showing that financial markets regard the federal government as giving an implicit guarantee to bail out the provinces that get into debt. This happened regularly during the Depression, but we don't have to go back that far.

One of the interesting chapters in Chantal Hébert's recent book, The Morning After, was about then Saskatchewan premier Roy Romanow saying that when he took over the province they were “flat broke” and adding, “I don't think I'm overstating it.” He then recounted how he got a call from Brian Mulroney, then the prime minister:

...he phoned me about the gravity of the Saskatchewan and Newfoundland situations. The essence of the conversation was that we had to take dramatic action and if we did not, the federal government would have to act and the Bank of Canada governor would have to intervene.

That I think very explicitly says that the federal government is perceived correctly by financial markets as backstopping provincial debts. So to the degree that provincial government deficits continue to be a problem, this is something that can't be ignored when assessing the future outlook for federal finances.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Cross.

We'll go to Mr. Oberg, please.

[Gary Oberg, President, National Association of Federal Retirees]

Thank you, Mr. Chair.

First of all, I have to tell you that I had a ten-minute presentation here that just had to be cut to five. I hope I can make it.

On behalf of the National Association of Federal Retirees, I am pleased to address this committee on the issues that affect all our veterans, including Canadian Armed Forces, RCMP members, and their families. As the president of the association, and having served my country as a member of the RCMP for over 27 years, I understand the issues affecting our veterans and their families. I have heard from many of them over the years.

The National Association of Federal Retirees is the largest national advocacy organization representing federal retirees and their partners and survivors from the Canadian Armed Forces, the RCMP, and the public service of Canada, and retired federally appointed judges. With over 185,000 members, including over 60,000 veterans and their families, this association has a 50-year history of providing independent advocacy on issues affecting the financial security, health, and well-being of our members, including veterans and their families. Our veterans' membership makes this organization one of the largest organizations representing veterans today.

Our presentation today focuses on ensuring that our veterans, including Canadian Armed Forces and RCMP members and their families, have access to the programs and services that will ensure a supportive and successful transition to civilian life, with reassurances of lifelong quality of life, including financial stability, a rewarding career, good health and well-being, and a strong family. This is the federal government's obligation.

Resolving the financial deficiencies of the new Veterans Charter is one of the most pressing issues facing our veterans and their families. Since 2006, veterans groups, the Veterans Ombudsman, the new Veterans Charter advisory group, and two reports from the House of Commons committee on veterans affairs have all stated that there are significant deficiencies within the new Veterans Charter. More recently, in June of this year this government released three reports on the care of our injured veterans. This is a compelling message that immediate improvements are required to the benefits, services, and programs that support veterans who have been injured in their service to Canada. Extensive and comprehensive consultation and analysis have taken place, and immediate action is essential. It is now time to resolve the key financial deficiencies of the new Veterans Charter.

We believe this government must maximize the number and types of jobs for Canadians, and this includes our military and RCMP veterans, by providing a tax incentive for employers who hire a veteran. The Veterans Affairs Canada 2010 life after service study confirmed that 25% of veterans experience difficulty in transitioning to civilian life. To lessen this risk, it is important that all veterans have the opportunity to transition to meaningful employment following their service to their country.

While there are programs available to assist our injured military and RCMP veterans' transition to civilian employment following their service, the programs remain limited and focused in such specific areas as Helmets to Hardhats. Our military and RCMP members have training, skills, expertise, and leadership that are second to none. We need to recognize this and ensure that diversity in employment opportunities that tap into their extraordinary experience and talent is available to our veterans. Therefore, to encourage private employers to engage this resource across the country, employers who hire veterans should receive a tax credit from the federal government. This will build and strengthen our communities.

Lastly, we believe a sustainable national research program focused on the needs of Canadian Armed Forces and RCMP veterans and their families is essential. The long-term impact of independent research on military and veterans health is significant, as it informs and shapes government policy and programs to ensure that veterans and their families experience successful transition and lifelong quality of life.

Our veterans are impacted by unique risks, exposures, and experiences of service. These Canadians require unique standards of health protection, prevention, and care. The Canadian Institute for Military and Veteran Health Research has established itself as an unprecedented and independent leader in veterans health research in Canada. This institute engages existing academic research resources, facilitates new research, increases research capacity, fosters knowledge translation, and has become the hub of 33 universities that have agreed to join forces in addressing these unique health research requirements. In just four years, the Canadian Institute for Military and Veteran Health Research has become the hub for military and veteran health research in Canada. We support their request that the government commit $5 million over five years.

In conclusion, on behalf of the 185,000-plus members of the National Association of Federal Retirees, I would like to thank you for the opportunity to address this committee today.

I have provided you with the priorities that are supported by veterans groups, the Veterans Ombudsman, the new Veterans Charter advisory group, and two reports from the House of Commons committee on veterans affairs. It is time for substantive change to support our veterans and their families who have been injured in service to their country. I urge you to take that needed change now.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation, Mr. Oberg.

We will go to Mr. Page now, please.

[Kevin Page, Jean-Luc Pepin Research Chair, University of Ottawa]

Thank you, Chair, vice-chairs, and members of the House of Commons Standing Committee on Finance. It is an honour to be here with you today.

The lead-up to the 2015 federal budget and federal election should be an important time for analysis and debate. The test for our country should be, will we leave our children with a stronger economy and stronger institutions than we had for ourselves? I worry. Growth in after-tax incomes has been stagnating. Business in multifactor productivity growth, a key ingredient for higher standards of living, has effectively flatlined. The old-age dependency ratio in Canada is about to go through a historic rise over the next two decades. We have had no federal-provincial discussion on what this may mean for sustainable growth, public finances, federal-provincial relations, or health care. Confidence in our Westminster system of responsible government has been eroded by spending scandals. The House of Commons has largely given up its power of the purse role.

On a more positive note, I believe we are about to reach some interesting junctures in the relationships between budgetary balance, fiscal sustainability, and growth. The world economy is emerging from the grips of the 2008 financial crisis. There is fiscal room to manoeuvre. There is choice in priorities and policy directions. Choose wisely.

After some difficult years since 2007-08, where Canada added about $140 billion, or 20%, to its accumulated deficit, the projected annual budget balance is near a balance. Minister Flaherty, God rest his soul, must be smiling from above. Thanks in part to historically low interest rates and 11 years of balanced budgets, or better, starting in the 1990s, the carried cost of this debt is down to about 12¢ on every revenue dollar, about one third of what it was 20 years ago.

Canada once again is headed for a structural surplus with a strong prospect of modest medium-term surpluses. Canada's fiscal sustainability situation is likely better than many other countries'. According to the Parliamentary Budget Office, the federal fiscal structure is sustainable, meaning we have a fiscal structure that will stabilize debt relative to the size of our economy in the face of demographic change. Similarly, the Canada Pension Plan and the Quebec Pension Plan are sustainable as currently structured, meaning we have a pension structure that will stabilize the relationship between net assets and expenditures over time.

We do have a fiscal sustainability issue or negative fiscal gap at the provincial and territorial level of government. The size of the gap at the provincial level was exacerbated by the federal policy change to the escalator for the Canada health transfer.

You may wish to recommend in your pre-budget consultations report that the Government of Canada prepare annual sustainability reports like other OECD countries, and that this analysis be done to reflect all levels of government. Health care is a major pressure on fiscal sustainability in Canada. Do we want a one-taxpayer approach to fiscal management? Do we want a national approach to health care cost management? If we do, the committee may wish to recommend a national dialogue on health care policy and finance involving all stakeholders.

You may wish to consider options to reform federal transfers to provinces. Balanced budget legislation as highlighted in the Speech from the Throne could provide a strong fiscal signal that the government is managing within a fiscal target. The experience in developed economies, particularly in the European Union, highlights the additional demand for analysis to mitigate the negative impacts of counter-cyclical fiscal policy. This includes the calculation of output gaps and cyclically adjusted balances, the need for corrective enforcement-type mechanisms, and stronger roles for independent fiscal institutions like PBO on the assessment of achieving targets.

The committee may wish to undertake analysis of various experiences with fiscal rules, targets, and balanced budget legislation and make suggestions on the necessary analytical requirements so that any balanced budget legislation is based on best practices. The committee may wish to recommend that the federal government provide five-year spending plans by department and agency outlining areas of spending reduction and changes to service levels. Spending restraint plans that generate fiscal and service-level risk create spending pressures into the future.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Page.

Colleagues, I think we'll have time for seven-minute rounds. That was what we were following in the spring. I'll start with the seven-minute rounds. If we run short on time, I may have to shorten some of the latter rounds.

We will begin with Mr. Cullen.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you.

I just want to pick up on a comment that you made, Mr. Speer. I know that Mr. Page and maybe some others at the table have had some experience on the other side of this conversation from government. As we go through our hearings, does government listen? It's a fair question to ask, or have most of the big decisions with the budget already been made?

Your experience was that these rounds of consultations are important, that the ideas that you and other witnesses bring forward and the committee recommends are important to the drafters of the next budget.

[Sean Speer]

Yes. I can say that in my experience, Mr. Cullen, the committee's report and ultimate recommendations are a major input into the budget process. The Department of Finance is responsible, as a conduit to stakeholders, to compile a list of submissions from stakeholders, ranging across industries and sectors, and one of those inputs is the committee's report and recommendations.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

That leads me to a curious moment, because all five of you—and I thank you for your testimony—had an opportunity today to put in your topline ideas for what would help veterans and retirees and help the general economy, but none of you mentioned income splitting as your important idea.

Mr. Thomas, why did you not? Isn't your organization loudly in favour of all tax cuts at any time?

[Gregory Thomas]

We've just surveyed our supporters. We had nearly 6,000 responses. Our supporters strongly favour fewer brackets, lower rates, and the elimination of boutique tax credits. For example, we view a comprehensive tax reform along the lines of the American tax reform of 1986 as more equitable for everyone, and—

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Can I stop you—

[Gregory Thomas]

—it's interesting that when you look at the cost to provincial treasuries of income splitting, the effect is substantial in Atlantic Canada, Ontario, and Quebec, where there's a highly progressive income taxation system, and negligible in Alberta, where there is a flat tax. When we asked our supporters about income splitting, though, an enhanced deduction for child care won out.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

As a choice?

[Gregory Thomas]

As a choice amongst the supporters of the Canadian Taxpayers Federation, and when you look at the demographics and what have you, it's quite startling.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

In terms of the fairness or the equity you've mentioned, it's not just the number of families or what kinds of families may be impacted by such a tax policy, but also the geography and the implications region by region of such a policy, particularly on provincial budgets.

[Gregory Thomas]

That's right.

One of our younger employees has two children of pre-school age, including a newborn. He and his wife spend $8,400 on child care. The current ceiling per child is $7,000 and hasn't been bumped up since 1998.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you for that. It's helpful.

Mr. Page, part of the starting point that we don't necessarily address here is perceptions on the health of the economy, in that when the onset of the great recession came, there were different perspectives as to whether we were headed into a recessionary time or a not recessionary time. In the first budget that was brought out, that was then essentially rescinded. It was an austerity budget and then it became a budget for investment.

At the top of your presentation, you listed a number of indicators you're looking at with regard to the Canadian economy that leave you with some doubt or some serious questions about the strength and health of the Canadian economy. The reason I'm asking about this is that we don't take this first starting point very often: how strong is the Canadian economy today and how is it trending? That would then lead one to conclude, if you're listening to the evidence, as Mr. Speer says, not just from you but from the econometrics themselves....

You've mentioned a number of things. It left me with the impression that you're not feeling overly enthusiastic or confident that the Canadian economy is in a good and improving situation. Am I characterizing your testimony correctly?

[Kevin Page]

Mr. Chair, my view on the Canadian economy is that it is growing. I think that if you look at the latest numbers, at industrial production numbers, you see that we're up by about 2.6% on a year-to-year basis. We're growing. We have an unemployment rate of 7%. That's down from 8.5% at the depths of the recession.

That's probably a full percentage point higher, which most economists would say is Canada's longer-trend unemployment rate, so there is weakness. I think the Bank of Canada and other people who estimate these outputs say that the economy is still operating well below potential, maybe by a per cent to two percentage points, each percentage point being about $20 billion. That's a relatively weak economy, so I think economic growth should be a priority going forward.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

If we take as a starting point—and I know economists and two hands and all the rest—this idea of the Canadian economy being well below potential, and in speaking about the choices for our federal government going into a budget cycle, where there is now room either to invest or, as Mr. Thomas and others have argued, there are choices of true investment versus politics—which is always a difficult thing in balancing this—there is the question of where the best investments are.

Mr. Oberg, I want to turn to you for a moment. Do you consider the services and programs offered to our veterans as investments? Or are they sort of—and here I don't want to use an improper term—secondary considerations for a government dealing with other matters, other economic matters, like job creation and job growth? For your members, the folks you represent, with regard to the types of expenditures that you're asking for, now that we appear to be moving into surplus, are they investments in the Canadian economy and in Canada in general?

[The Chair, Conservative, James Rajotte]

You have one minute.