Finance Committee on Nov. 3rd, 2014

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thanks.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

Thank you, all, for being here today.

I do want to pursue a number of different angles.

Some say that nominal GDP is the best indicator of the broadest measure of the government's tax base. You have indicated that your assessment of nominal GDP exceeds the forecast of private sector economists in the next couple of years, but then beyond 2016 it is below. Could you explain that and the reasons why?

[Mostafa Askari]

Yes, we have our own projection, obviously, which is different from the private sector's, so our growth profile for the real GDP is somewhat different from the private sector forecast. Also, there are two elements to that, which are the real GDP and the prices. The combination of the two will give you the nominal GDP.

When you look at the five-year projection, the nominal GDP on average is actually very close to what the private sector has, but it has a different profile. It's a little bit higher first and then a little bit lower later. It's just a matter of having a different forward projection, that's all.

[Mark Adler, Conservative, York Centre, ON]

Your methodology is different, or do you use different tools?

[Mostafa Askari]

It's a methodology judgment. Projection is done through models and also through the judgment of those who are using those models. Obviously every forecaster has their own view of how things will develop and our view might be a little bit different from what the private sector has in terms of the profile for that.

[Mark Adler, Conservative, York Centre, ON]

Okay, I was just trying to get an idea of number one, why it's different, and number two, what different tools you're using from those the private sector economists are using.

[Mostafa Askari]

Nothing really. You use models that are pretty standard in general. Some private sector forecasters don't even use a model, they use their judgment essentially, and it's different. Each organization uses a different approach to these things. But everybody is using the framework of the economy to do that so it's not that much different.

[Mark Adler, Conservative, York Centre, ON]

Okay, I've got that.

We heard recently that the Bank of Canada has abandoned forward guidance as a policy tool, and a number of other central banks around the world are doing the same and tend to want to reserve it more for times of monetary stress.

Could you comment on whether you think that's a good policy move or not. I'm just curious about your thoughts on that.

[Mostafa Askari]

Information is always valuable for people like us who are in the business of projection, and obviously forward guidance by the Bank of Canada would be helpful in that sense. If they do not do that then we don't really know exactly what their views are on how interest rates are going to move in the future. Obviously we would like to see forward guidance and even more detailed forward guidance in terms of the projection by the Bank of Canada of interest rates. The bank never provides any projection of interest rates and it would certainly be helpful to us if we had that.

[Mark Adler, Conservative, York Centre, ON]

You indicated earlier that with the fall in energy prices there's also a commensurate fall in government revenues, naturally. However, that's offset by the fact that people will have more money in their pocket as a result of spending less on energy, therefore, they'll be spending that money on other goods and services, thereby raising government revenues on that side of the ledger.

Does the same not occur when the government relieves a tax burden on citizens too: if they have more money they're going to spend more? Would the same principle apply?

[Mostafa Askari]

Yes, they will spend more, obviously. But, typically, if you estimate the impact of a tax rate decline, it would never pay for itself under normal circumstances. The amount of the increase in revenues as a result of the stimulus impact of tax is never going to be sufficient to pay for itself. The overall tax in Canada is 15% of GDP. If you reduce taxes by one dollar, that tax decline has to essentially stimulate six dollars of GDP to pay for itself. That kind of a multiplier of one dollar of tax decline creating six dollars of GDP is an extremely large multiplier. I'm not aware of any standard macro model that people use for this kind of assessment that can provide that kind of a multiplier.

[Mark Adler, Conservative, York Centre, ON]

Corporate tax revenues in Canada have increased. Is that not true?

[Mostafa Askari]

That's correct.

[Mark Adler, Conservative, York Centre, ON]

That's a direct result of lowering the federal corporate tax rate to 15%, is that correct?

[Mostafa Askari]

Not necessarily; corporate taxes typically increase because of the increase in activities, but we can't really attribute all the increase in business activities to the reduction in corporate tax rates. As I said, all we have to compare it to is what would have been the case had there not been the reduction in corporate taxes. It is very likely that without the reduction in corporate tax rates, we would still see an upward increase in corporate revenues. It's just a matter of that magnitude, whether it's higher or lower.

[Mark Adler, Conservative, York Centre, ON]

Would you not agree, though, that a lower corporate tax rate is an attractive investment tool to get foreign investment, to get companies from outside Canada to invest in Canada? If they have the option of investing in a higher tax jurisdiction or a lower tax jurisdiction, naturally they're going to choose a lower tax jurisdiction. Say, between Canada and the United States, the quality of life is similar, however here they're going to pay less in corporate tax, at the federal level at any rate, plus they don't have to pay health care costs in addition, that they have in the States, and that sort of thing. Would that not be an attractive policy tool?

[Mostafa Askari]

It is certainly a factor, but it's definitely not the only factor that enters into the decision of a business to locate its business. Many different factors would affect that, but certainly taxes would be an important factor, absolutely.

[Mark Adler, Conservative, York Centre, ON]

Burger King recently buying out Tim Hortons, and this whole issue of tax inversion and all of that, how do you see that playing out over the next...? Congress has taken a number of steps to reduce the attractiveness of tax inversion, but how is that going to benefit? Is that not a good sign for the Canadian economy that we've got companies like this that could buy—

[The Chair, Conservative, James Rajotte]

Make a brief response, please.

[Mostafa Askari]

I wouldn't be able to comment on that. It's not something that we have studied now, sorry.

[Mark Adler, Conservative, York Centre, ON]

Okay.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Thank you, Mr. Adler.

I'm going to take the next few minutes here, as the chair.

The issue of access to information was raised, responsiveness of various departments. You mentioned that some departments are better than others. Which are the best departments and which are the worst ones?

[Voices]

Oh, oh!

[Jean-Denis Fréchette]

As I mentioned, we have a problem with DND for various reasons, in not having access to information; I think we mentioned that several times. One of the problems is that last year, in response to one of our requests, they made a comment that was outside the scope, based on their own assumptions. So that is problematic.

We have a good relationship with Agriculture Canada and Finance.

It also depends on the requests. It's difficult to make a list of what is the best, what is the worst. It depends on our kinds of requests.