It is my great pleasure to be here, and it is an honour to be here with all of you. Thank you so much for keeping on. I'm so proud of Parliament right now.
I thank you for the invitation to discuss how we can improve Canada's taxation and regulatory regimes. I would like to present for your consideration three proposals to improve the short game, the long game, and the strong game for Canada's public revenues and the rules that govern them.
With respect to the short game, economic growth is slowing around the world and in Canada. Both the IMF and the Bank of Canada have downgraded growth expectations very recently, and we expect the fiscal outlook will reflect that.
Since July, when these growth rates were downgraded, oil prices have plunged by 25%, and they continue to fall this week on the markets. The exchange rate of the Canadian dollar has fallen by about 6%, which means we are getting less for the oil we are exporting and all of our imports are increasing in price. Add in a U.S. economy that is growing in its energy independence, the fear of a triple-dip recession and deflation in Europe, a looming credit crisis in China, and there is absolutely no shortage of reasons to worry about how difficult it's becoming to attain and maintain budget balance in the coming months.
While there is a risk adjustment factor of $3 billion built into the federal budget of 2014, plunging oil and gas prices could wipe out up to $4 billion from federal revenues alone. In addition, your pledges to military action to fight ISIS abroad and enhance security measures to fight terrorism here at home will cost us more.
Despite these growing fiscal pressures, we know the Government of Canada is committed to more tax cuts. The EI reductions and the doubling of the child fitness tax credit and making it refundable will take about $255 million out of the public purse next year. Two remaining large commitments from the spring 2011 election campaign will take billions more. Of course there's been much debate over the income splitting proposal, which would cost $3 billion in its original form. Less attention has been paid to the proposals to double contributions to the tax-free savings account, which one study in the Canadian Tax Journal estimated would result in a loss of 6% of federal revenues on maturity.
Each of these tax cuts simply reward existing behaviour rather than incentivizing new behaviour. Tax credits for children's fitness, even when refundable, recover a small factor, a fraction of the costs, leaving enrolment for most physical activity programs unchanged for most young families. Employment insurance premium reductions flow to small businesses whether they create or eliminate jobs. The tax-free savings account and income splitting proposals encourage saving rather than spending, not working rather than working.
Since tax measures that reduce rather than enhance economic growth work in a direction opposite and contrary to your short-term policy objectives, my first recommendation is that the Government of Canada not proceed with tax cuts at this time.
The long game means we need to broaden the tax base. Population aging will cause labour shortages, reduce revenues, and increase expenditures over the next 20 years. At the same time it is expected that at least $1 trillion of wealth will be transferred between generations of Canadians. The dependency ratio, which is the ratio of those who are too young or too old to work, will rise over the next 20 years. But even so, it will not match the dependency ratio of 1961, the biggest difference being that there will be more older dependants than younger than in 1961.
In 1961 the federal government accounted for 16% of the economy. This was an era that preceded programs like medicare, the Canada assistance plan, and post-secondary education expansions.