Finance Committee on April 28th, 2015

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

Good morning. Thank you for joining us today.

To govern is to make choices. I won't tell you how to do your job; instead, I'm going to come back to the TFSA.

Earlier, you brought up a new point, at least one I hadn't thought of. Ever since the TFSA program was introduced, we haven't really seen a meaningful increase in the amount of money Canadians are saving. In fact, the focus has shifted to non-taxable savings. The program will apparently cost us billions upon billions of dollars, when all is said and done. The fact of the matter is that it isn't making Canadians save more money, but it is costing us in tax revenue.

Is that a correct assessment of the situation? Could you give us more details on that?

[Jean-Denis Fréchette]

Your assessment is right. When we discussed it with another member of the committee, we pointed out that it was a new program. It's only been around for a few years. Indeed, we are seeing a savings shift. In the long term, we'll have to see—and that's what we measured—who will be able to benefit from the current $10,000 contribution limit. No doubt, it will be wealthier individuals, those with higher incomes.

That said, it's important to take into account people's behaviour. Earlier, we were discussing people's previous economic habits. We'll have to wait and see what happens with a program like this over time. Will people use it on an as-needed basis, for example, a student who starts a TFSA in order to save money for a house? If so, people would be able to regularly withdraw that amount. We'll have to wait and see whether the savings are lasting or not. Those are exactly the kinds of factors that will need to be analyzed in the longer term.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

So this is a measure that, in your view, favours the rich.

Now I'd like to move on to another measure, income splitting.

I've done a bit of math. A couple in which one person earns $100,000 a year and the other earns $20,000 would see their tax bill drop by $1,800. But a family with a total income of $50,000 a year wouldn't benefit at all. In fact, according to a study, 86% of people wouldn't benefit.

I see that the income splitting measure will cost just about as much as a measure that would have brought seniors out of poverty.

Do you have any figures related to seniors and how much it would take to raise their income above the poverty line?

[Jean-Denis Fréchette]

We don't have specific data on that. But in terms of the family tax cut, more commonly known as income splitting, the difference in the couple's incomes would have to be significant in order for them to benefit.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

I also paid close attention to your comments on EI reform. I found them very interesting. One of my constituents has cancer. Under the EI program, the most she could get, in other words, 55% of her income, was $440 a month. After 15 weeks of EI, she had to turn to last resort assistance.

You said that, given the surplus in the EI fund, the government could have increased the EI wage replacement rate from 55% to 68%, or raised the number of weeks available for that individual with cancer. That would've allowed her to access EI benefits a lot longer.

The government is balancing the budget on the backs of those that very money is intended for, people without jobs. And the price of that balanced budget is people's misery, people who are either sick or jobless.

Could the government have done more?

[Jean-Denis Fréchette]

I can't really answer that because it's a political question. All I can say is that the EI fund currently has a surplus that is being used. It's the government's prerogative. It's up to the government to decide how it wants to use that money.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

My assessment is that, in the case of unemployment, the government chose to put that money towards income splitting and a TFSA cap increase, measures that benefit the rich, instead of using the money to help those who really need it.

I have one last question for you. Can you tell us about the next study you will be undertaking?

[Jean-Denis Fréchette]

A number of studies are in progress. As I said, we are currently doing a follow-up review on Canada's mission in Iraq, which was expanded. We are also working on a few studies on international trade. And as for the others, I'm going to keep those under my hat for now.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Dionne Labelle.

We'll go to Mr. Van Kesteren, please.

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

Thank you, Chair.

Thank you for being here, and thank you for the work you do. I know it's a difficult job to on the one hand—I'm starting to sound like an economist here—keep the government in check, and on the other hand to give a fair and informed analysis of where the economy is going. I appreciate your challenge there as well.

The issue that I take, however...and it's not a criticism, it's something that I find somewhat perplexing. When you create your analysis—Mr. Cameron, maybe you can delve into this in a minute as well—you seem to do what Harry Truman wished his economists would do, which was not give them the one hand and the other hand: you give them one hand.

I would suggest that the biggest part of the analysis comes from how you see the futures in oil. You have to admit that there are a number of issues and outside forces, geopolitical and just a range of different things, that would completely alter what your analysis would be.

As a matter of fact, we had a great chart from our governor this morning, and we saw the rapid rise of oil prices. I don't know if anybody...well, maybe there were. A lot of people were thinking “peak oil” back then. That's not a term we hear too much about anymore. I'm in that camp that feels there will be a change in oil prices. If all things were equal, absolutely, we would probably see this gradual rise.

I'm asking the question in all sincerity. Wouldn't it be prudent to maybe in this case be one of those economists who says on the one hand, the government's projections are such and we feel this, but on the other hand, they might be pleasantly surprised because we may see something that changes that whole scenario?

[Mostafa Askari]

You are absolutely right; surprises can always happen. Some of us who have been in the forecasting business for a long time learn very early on that you never try to forecast oil prices. It's extremely difficult, for some of the reasons that you mentioned. There are geopolitical impacts and other impacts that make it extremely hard to project. In fact, when we were doing our forecast one option was to keep, as the Bank of Canada does, the current oil prices fixed throughout our projection period, which would be a very simple assumption, and not try to project them.

But then we decided that financial markets have a view of where the oil prices are going, so we said that maybe the simplest and the safest way would be to take what the futures markets have for their oil prices. Certainly, there are bands around that. It could be much higher; it could be much lower. Both sides of that will go. There are upside risks and downside risks to that. If it turns out to be higher than what we are assuming, certainly it will have an impact on the nominal GDP and will have an impact on the bottom line for the government. But if it is lower, it will be the other way around.

So we are taking a very simple approach to the projection of oil prices—essentially what the financial markets have.

[Chris Matier]

I would quickly add that when you look at our projection, it sits almost coincidentally in the middle between the Bank of Canada's assumption of $50 for WTI and the private sector forecast of $78. We're at $66. We're almost in the middle. For us, we would think that's relatively balanced, but of course there are upside and downside risks.

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

I think that, and I'm glad you point that out too. There certainly is...and I would argue that, all things being equal, if one were to look at history especially in the last 10 years, we can almost expect a surprise. Let's just say that: we can almost expect a surprise.

There's another thing I want to challenge you on. I don't think you've done that, but it seems to imply that, oh, this saving stuff, nothing is going to change the way people are going to think and it's not going to have a great impact. But isn't that an attitude we should be projecting to or encouraging the populace on? If I look at societies like Japan, prior to what's happened in the last maybe seven years, they were a strong saving nation, and as a result they reaped huge benefits.

So wouldn't you agree that the policy the government has enacted with the savings account would lend to that and subsequently would create a stronger economy and environment for a Canadian populace?

[Mostafa Askari]

If it leads to higher savings. Higher savings typically in principle are good for the economy in terms of the long-term productive capacity of the economy. But as I mentioned earlier, we had to go with some of the studies that have been done and the literature. Our conclusion from reading and reviewing those studies was that there isn't really strong evidence to suggest that.

So we made an assumption at that point, based on the literature, that we are not going to assume that the savings rates will increase. We're going to do our study based on the current savings rates. But if the savings rates happen to increase over time, certainly that will be a benefit to the economy.

[The Chair, Conservative, James Rajotte]

You have 30 seconds, Mr. Van Kesteren. Be very brief.

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

I want to wrap up by saying that there is, and you agree that there is, definitely a.... The result of this could be good, positive things, because saving is a good, positive thing. You'd agree with that analysis.

[Mostafa Askari]

Savings in general will help increase the productive capacity of the economy, yes.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

Thank you all for being here today.

Earlier you were discussing future studies. How do you determine what to study? Would you take, for example, recommendations from MPs, suggestions from MPs, on what to study?

[Jean-Denis Fréchette]

The legislative mandate is very clear. We can provide our own analysis based on your fiscal policies. What we did, for example, is something that we do as part of the regular publications we have. Any standing committee, including this one, and any parliamentarian can ask for specific studies, and we have many.

How do we choose? It's a team of 15 people, and although we did almost 40 reports in the last 12 months, we have to select some of the projects. Sometimes we have to turn down some projects because in terms of materiality or fiscal impact it's not high enough—$50 million, for example. But for anything that will be quite substantial, anything that will bring a good debate for parliamentarians, we will do these kinds of studies.

So yes, and that's why I asked the member if she wanted to have a specific study.

[Mark Adler, Conservative, York Centre, ON]

I see. Thank you for clarifying that. I was curious.

There was a lot of discussion about TFSAs and income splitting. Now, on the money that people earn, it's.... They earn that money. There's an underlying implication, particularly coming from the other side, that there is this cost to the government of money that's forsaken by way of lost tax revenue.

Is this not money that belongs to the people who earn it, and it's really a misnomer to say this is costing the government money that's not really theirs in the first place?

[Mostafa Askari]

According to the current tax law, if you invest money in a savings account, in equities, or in bonds, the interest and the dividends you get from them are taxable. If you provide another instrument such as the TFSA, which will allow you to transfer the money you had in a regular savings account or equities into it, the revenue you get from that investment is exempt from taxes. So there's a change in the way you're allocating your savings. You can take advantage of that, the new instrument, to reduce the amount of your taxes. But according to the current tax law, any investment income, dividends, or capital gains are taxable. It's true you are making that investment from the income you earned, but the current tax law is that if you invest it and you earn income, you are going to pay more taxes on that.

[Mark Adler, Conservative, York Centre, ON]

Right. But the government doesn't own the money you make. If the government provides a tax break for you, then you get to keep more of your hard-earned money. It's not something the government owns and is lending to you, right?

[Mostafa Askari]

No, it's absolutely not. But the counterfactual argument is that if it weren't for the TFSA, those savings would have been in instruments that were taxable, and those taxes would have gone to the government. Because the TFSA protects those investments from taxes, that forgone revenue is the cost of the program.

[Mark Adler, Conservative, York Centre, ON]

Perhaps TFSAs are a bad example for this. What about the family tax cut, the income splitting? When you shift income, you're just keeping more of your money, right?