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.