Evidence of meeting #102 for Finance in the 42nd Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was finance.
A video is available from Parliament.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
I'd like to make another amendment, Mr. Chair.
Mr. Kmiec has rightfully raised the question of whether the minister should be providing his own consultation. I would hate to put your minister in that kind of position, so perhaps we should exclude his testimony to himself just out of practicality and fairness.
Many people, I think, would be extremely aggravated to find out that we would be sending testimony presented by the finance minister to himself. I'm sure they would take issue with some of the statements, but it also does not run a clean consultation process. I know members of Parliament want to do right by the Canadian people.
Liberal
The Chair Liberal Wayne Easter
Is there any problem with that? Do we need an amendment, or can we do this by agreement? Are we okay with sending the witnesses' testimony to the Department of Finance consultations and not including the minister's testimony?
Liberal
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Mr. Chair, Mr. Fergus had an interesting idea, which was to allow for written submissions from people who don't have the time, due to running a business, to provide their input to the committee.
Who will be receiving that? Is there an email address? Should it be directed to the clerk or to you, Mr. Chair?
Liberal
The Chair Liberal Wayne Easter
It would be the clerk, but I think we're probably all getting some copies of submissions that are going into the Department of Finance on the views that already out there. Is that adequate or not?
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
I would say that if this is anything more than just a PR move by the government side, they should be quite open and we should be open.
Liberal
The Chair Liberal Wayne Easter
We can put that button on the website, if that's your wish to do so. Okay.
Then the button will go up on the website to do that, and that will be transferred to the consultations as well.
On the question on the original motion....
Dan.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
I just want to thank people for being reasonable and somewhat fair on some of these extra provisions.
Liberal
The Chair Liberal Wayne Easter
All right. What a great way to start.
Did somebody say they wanted a recorded vote on this?
Liberal
The Chair Liberal Wayne Easter
Okay. We'll have a recorded vote.
(Motion agreed to: yeas 6; nays 3 [See Minutes of Proceedings])
We now have the Department of Finance. We said that we would adjourn at 5:30. I've already told some people that we would, so we will go 40 minutes with the first panel and 40 minutes with the second, if that is okay. All right.
Mr. Leswick from the Department of Finance, please go ahead.
Nicholas Leswick Assistant Deputy Minister, Economic and Fiscal Policy Branch, Department of Finance
Good afternoon, Mr. Chairman, honourable members.
My name is Nick Leswick, I am the assistant deputy minister of the economic and fiscal policy branch at the Department of Finance with overall responsibility for economic and fiscal forecasting and the production of the federal budget.
As requested by the committee, in my opening remarks this afternoon, I will briefly speak about recent economic developments in Canada as a background to your overall theme of productivity and competitiveness that you'll be exploring through the course of your pre-budget consultations.
From the beginning of 2015 until mid-2016, Canadian economic developments were dominated by the large, rapid, and sustained drop in global crude oil prices. Those prices, measured in West Texas Intermediate U.S. dollars per barrel, fell from over $100 in late 2014 to lows of under $30 in early 2016.
The impact of this drop on Canada's economy was significant. The dollar value of Canadian oil exports fell by nearly $70 billion. This was a significant hit to national income, equivalent to about 3.5% of national GDP.
As a result, investment in the oil sector plummeted, falling by an estimated 60% or more than $50 billion. Along with it, employment in oil-producing provinces, particularly Alberta, but also Saskatchewan and Newfoundland and Labrador, fell by a combined 150,000 jobs. While these three provinces bore the brunt of the shock, its impacts were felt across the country. Real GDP in Canada contracted during the first and second quarters of 2015, and for that year as a whole, expanded by less than 1%.
Since mid-2016 however, economic developments have turned around markedly. Real GDP has expanded by an average rate of 3.7% per quarter for the last four quarters. Alongside this much stronger output growth has come very strong employment growth. It is estimated that employment has risen by over 350,000 jobs since mid-2016, and the unemployment rate has fallen from about 7% to just above 6% over the same period.
What caused this turnaround? Several factors have been at play.
First and probably most importantly, has been the stabilization and rebound in economic activity in energy-producing provinces, particularly Alberta.
This has been facilitated by the bottoming out, rise, and evident stabilization of oil prices at somewhere between $45 and $53 U.S. per barrel since the beginning of February last year.
The pick-up also reflects the fact that cuts to investment have largely run their course; during the first quarter of this year, oil sector investment was up on a year-over-year basis for the first time since the end of 2014. It was up again compared to the same period last year in the second quarter of 2017.
A stabilization in investment has also meant a stabilization in the job cuts associated with that investment. The fall in employment in Alberta, for example, halted in mid-2016, and job levels in the province have shown slow but steady gains since then.
The Canadian dollar has also depreciated relative to its U.S. counterpart over this period. The dollar averaged about 90 cents in U.S. dollar terms in late 2014 before falling to just over 70 cents in early 2016. This depreciation has provided important support to our export sector.
Altogether, these developments are what has been described as the slow and complex adjustment to lower oil prices. This simply means the reallocation of labour and capital to other areas of the economy, facilitated by monetary policy, fiscal policy, and a flexible exchange rate. For the large part, and at the macro level, these adjustments appear to be over. However, on a more individual level, there are certainly families, communities, and firms that continue to feel the impacts of the oil price decline.
Beyond the stabilization in the energy sector, a number of other factors have helped to affect the sharp turnaround in Canada's economic performance.
We have seen very robust housing market activity over the last year in Vancouver, Toronto, and surrounding regions. This has helped to support regional and national GDP growth.
Also, there has been a stabilization and pick-up in the global economy. The U.S. economy is meeting expectations. Conditions in the Eurozone have also firmed, as has growth in China. This more positive global environment has undoubtedly helped to support our exports, but equally importantly, business confidence and prospects about future sales.
The expectation of future sales growth, both domestic and abroad, is encouraging firms to invest in productive capacity to meet this increased demand. This can be seen in survey data on business expectations, as well as actual data on investment spending. While not strong yet, investment in Canada has shown signs over the last two quarters of responding positively to these domestic and international developments.
Monetary policy in Canada has also been providing, to use the specific words of the Bank of Canada, considerable stimulus. As well, in conjunction with monetary policy, a number of fiscal measures have been introduced by the federal government over the last two years, which have helped to support income growth and general economic growth. These include middle-class tax cuts, incremental infrastructure spending, and the enhanced Canada child benefit.
Combined, all of these factors are resulting in stronger and more broad-based economic growth across the country. For example, the unemployment rate in the province of Quebec is at its lowest level since 1976. Ontario has posted its longest back-to-back stretch of 2% or above real GDP growth since the mid-1980s, and in British Columbia the economy has created almost 150,000 new jobs since the beginning of last year.
This is all very positive and good news. Stronger, broader-based growth means that more solid economic momentum will likely continue over the coming quarters. Higher growth has generated higher employment and income gains, which have led to higher demand and thus higher output growth and so on, in a so-called virtuous circle.
However, the very strong rates of growth that we have seen over the last four quarters are highly unlikely to continue. There are a number of structural reasons for this. The bounceback in the energy-producing regions is just that, a bounceback. Growth rates will eventually plateau and ease. As well, we have seen a notable cooling in the Toronto and Golden Horseshoe housing markets recently. This will also take some strength out of recent GDP growth rates. The Canadian economy still also faces uncertainty relating to policy developments and direction in the United States.
Over the medium term, we also face a number of well-known structural challenges. These include demographic pressures brought on by population aging and, more specific to today's session, a relatively weak productivity performance in Canada.
On that, I hope both my colleagues from Finance Canada and my colleagues from ISED and ESDC will be able to respond to your questions. Thank you for the opportunity to make the opening remarks.
Liberal
Lisa Setlakwe Acting Assistant Deputy Minister, Strategy and Innovation Policy Sector, Department of Industry
Krista Campbell and I would like to thank you for having us here to discuss Canadian productivity and competitiveness, something that we live and breathe every day at ISED.
We know that Canada is operating in a slow-growth economic environment. While the economy has grown strongly in recent quarters, as indicated by my colleague at Finance, significant expansion remains uncertain. Even though Canada's economy is performing better than expected, the Bank of Canada still projects modest growth of 2% for 2018 and 1.6% in 2019. This speaks to the ongoing need to look beyond the more traditional policy prescriptions of the past. Monetary policy, sound macro fundamentals, and competitive tax rates are critical, but no longer sufficient.
The current structure of our support for business innovation requires modernization to generate greater impact and allow for the flexibility needed to succeed in these uncertain times. If we want to see transformative results, we need to move beyond funding. We need to rethink and modernize our policy tool kit with one that places an emphasis on both innovation and inclusiveness. I truly believe that is what we are doing: we are looking at new approaches to improve our efficiency and effectiveness and provide the tools that business needs to succeed.
Budget 2017 put a focus on innovation. What I want to focus on today is how we see building growth through innovation. It is key to Canadian competitiveness, better jobs, and greater prosperity for all Canadians.
We have a significant long-term growth problem caused by slowing productivity performance and an aging population. The main driver for building growth is innovation. It builds opportunities and increases Canada's growth potential. In a higher-cost, higher-wage economy, innovation is crucial for inclusive growth, so let me highlight several core areas in our approach to innovation as set out in budget 2017, beginning with attracting global talent.
To grow Canadian businesses, create more Canadian jobs, and compete among the best in the world, we must also attract the best minds. The government's global skills strategy does just that. It will make it easier for Canadian businesses to attract the talent they need to succeed. It provides an ambitious two-week standard for processing visas and work permits for low-risk, high-skilled talent for companies doing business in Canada. This will ensure that high-growth Canadian companies that need to access global talent can do so to facilitate and accelerate investments that create jobs and growth.
We also need to develop talent at home. We need to equip Canadians with the skills and tools they need to succeed in a changing economy. It is important that Canadians have the right mix of tools and experiences to not only participate in the economy but to lead it.
For example, ISED launched the CanCode initiative, which will ensure that Canadian youth have the digital and coding skills necessary to succeed in this digital economy.
We are also looking to enable an organization by the name of Mitacs to create 10,000 work-integrated learning placements for Canadian post-secondary students and graduates to ensure they have the skills needed to thrive when they enter the workforce. It will grow the number of Canadians equipped with STEM though initiatives such as PromoScience. It provides new funding to attract and retain top researchers through a pan-Canadian artificial intelligence strategy to promote deep learning in new and groundbreaking areas in Canada. Combined, this skills plan will encourage continuous learning, increase experiential learning opportunities, and encourage business investment in the upscaling of their employees.
All of you will have heard of the superclusters initiative. Evidence around the world points to the disproportionate impact—a positive impact—of innovation superclusters. We don't need to look further than Silicon Valley to see the huge effect they can have on growth. They create jobs, encourage knowledge sharing, drive business specialization, and help to attract anchor companies from around the world. Canada has no innovation supercluster in the top global innovation ecosystem, but budget 2017 laid out a plan to change this.
ISED is providing up to $950 million, launched in May, to support up to five business-led innovation superclusters that have the greatest potential to accelerate economic growth. We are focused on superclusters that will enhance Canada's global competitiveness, by looking at highly innovative industries. It is to help companies succeed in the global marketplace with new products, processes, and opportunities to grow, and to connect Canadian companies with globally integrated supply chains.
On government as a first buyer, what is also evident from other models, like that of the U.S., is that the government as a first customer is crucial for innovation start-ups and the development of innovative products. The plan is to launch a new procurement program, innovative solutions Canada, to encourage innovation and to support early-stage research and development and late-stage prototypes from Canadian innovators and entrepreneurs. Government-tested and validated Canadian technologies will help Canadian businesses to scale and find new customers around the world.
Next is capital. The future of the Canadian economy will be significantly impacted by the capacity of Canadian firms to grow domestically and compete internationally. High-growth firms account for a disproportionate number of new jobs and tend to invest more in technology development and generate knowledge spillovers that other firms can harvest. To support the growth of innovative companies, the budget announced a venture capital catalyst initiative to continue to increase the availability of VC in technology.
The innovation and skills plan also included nearly $1.4 billion in new financing through BDC and EDC to boost the growth of Canada's clean technology sector. This will not only foster the growth of Canadian technologies and companies, but also help us meet our climate change goals.
Scale requires global markets, access to global supply chains, and integration into global investment networks. Through our approach and associated measures, the government is enhancing global markets through trade agreements: rolling out CETA, which occurs this week, and looking at trade agreements with other partners, such as Asia.
Earlier this year, the government announced the Canadian Free Trade Agreement, which will increase opportunities for all Canadian businesses to innovate and expand at home.
A big part of the innovation and skills plan is innovation within government. We are too large a part of the economy not to have an innovation focus. We recognize this, and through this budget we are doing our part through the creation of innovation Canada. This new platform within ISED will coordinate and simplify the support available to Canada's innovators, making it easier and faster for them to find and access government programs and services.
As part of this, in collaboration with the Treasury Board Secretariat, we have also initiated a whole-of-government review of business innovation programs, reviewing dozens of innovation programs across government to see how they can be consolidated and simplified. This will reduce the amount of legwork required and give entrepreneurs more timely access to innovation services. A key first step was the creation of the strategic innovation fund, a new, streamlined approach to support existing sectors like auto and aerospace, but at the same time expanding support to dynamic and emerging sectors like clean technology and agrifood.
We are also in the process of developing economic strategy tables in six key areas for Canada. These tables will examine sector challenges and bottlenecks to innovation, and lay out strategies to overcome them. While it will take time to implement, our ultimate goal is to modernize what we offer and how we deliver business innovation programming to Canadians.
We also know that we need to enhance IP education, improve clarity in IP laws, and improve incentives for firms to protect their IP. We are working on a national strategy that will provide firms with the certainty and freedom they need to operate in international markets.
In conclusion, Canada has real innovation strengths, yet we continue to lag behind key competitors. Canada needs to continue to modernize its policy tool kit to better support and encourage innovation and inclusive growth.
We need to put in place a new framework for doing business, recognizing the importance of talented people's access to risk capital, innovation ecosystems, the need for government as a first customer, and increase access to global markets. We need to put in place the right measures today that will ensure Canada remains a player on the world stage, able to compete and keep pace with global leaders.
Budget 2018 presents an opportunity to continue to build off the gains made from the innovation and skills plan, and leverage partnerships through a whole-of-government approach to further implement the government's agenda of innovation-led economic growth.
My colleagues and I look forward to taking any questions you may have to further discussion on Canadian competitiveness and productivity.
Thank you.
Liberal
The Chair Liberal Wayne Easter
Thank you very much, Lisa.
We'll now go to questions. We'll take six questions for four minutes each.
Mr. Fergus, you're first.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
Mr. Leswick, Ms. Setlakwe, I'd like to thank you and your colleagues for your presentations.
Each government has a number of tools available to revive the economy, but it is very rare that the time is right. There is almost always a lag between the time a new program is implemented or a measure is adopted, and the time it takes effect.
Mr. Leswick, you mentioned that our situation was very enviable, because there was a stabilization of prices and economic activity in our provinces, which are in the middle of the energy sector.
There is also evidence presented by Innovation, Science and Economic Development Canada. Employment and Social Development Canada will soon take a position on these elements.
Given that the economic momentum is strong, employment is on the rise, and growth is widespread and strengthened, are you hopeful that the programs and measures we are adopting for the future will support this good economic performance? The growth rate may not be 4.5% per year, but at least it will be higher than in the past 10 years, when economic growth was anemic.
Liberal
The Chair Liberal Wayne Easter
I don't know who is going to answer first but I do not want this question in terms of the economy to get into whether what the other guy did was good or bad, or vice versa. We're sticking to the basis of the economy, where it's at, and we're not getting into policy.
Do you all understand that?
Mr. Leswick and then Ms. Setlakwe.
Assistant Deputy Minister, Economic and Fiscal Policy Branch, Department of Finance
I think it's clear that there is this policy tool kit in terms of the monetary and policy responses to weakness in the economy.
The Bank of Canada has responded, to quote them, with what they would characterize as considerable stimulus with respect to their policy rate and how that flows through to ultimate residential and commercial lending rates.
Likewise, from a fiscal policy perspective, if we rewind the clock, in early 2016 we were facing what seemed like pretty extreme economic weakness both domestically—growth was lagging—and internationally. We saw some signs, whether it be south of the border in the United States—where people were speculating about the United States teetering into recession—and beyond the borders of the United States, such as in China where they were going through this extreme financial market volatility. So fiscal measures in that context were helpful.
You talked about the fiscal policy tool kit. There was the Canada child benefit, which effectively contributed about $4 million or $5 million into the Canadian economy, so more of a kind of raw injection, like a raw income support. There was also a suite of infrastructure measures, some shovel-ready infrastructure measures, where there were some plans in hiring that were able to be deployed fairly quickly. Getting to the core of your question, there were some longer-term infrastructure measures that were designed to enhance the longer-term productive capacity of the Canadian economy.
However, infrastructure isn't going to do all the heavy lifting here. We're still facing these demographic challenges. We're facing these productivity challenges. There are a lot of indications that tell us we're already.... In comparative terms, our capital-labour ratio, like our capital stock, is pretty good. Maybe we're over-invested in kind of engineering structures in the energy sector, and less invested in Canada's productivity enhancing machinery and equipment, but yes, it's not just infrastructure. It's going to be a combo platter of a lot of other things—including skills development, which I think we'll hear about from ESDC in the later half of the testimony—doubling down on some of our sector strategies and innovation strategies, to really boost the long-term growth potential of the Canadian economy.
Acting Assistant Deputy Minister, Strategy and Innovation Policy Sector, Department of Industry
I think I'd add a couple of points building off that. One is that when our minister undertook a number of consultations to support the work we've done on innovation, we clearly heard from companies that skills and talent were one of their major concerns, and it continues to be so. Are we making the right investments for the long term? I think, yes, especially in that regard. There are a number of other areas that I outlined in my opening remarks as well.
The other thing I would say is that the work that we're doing now is really engaging all Canadians, all stakeholders, because we can't do this alone. We really need to mobilize the business community, citizens, the not-for-profit sector. Everybody needs to be contributing to the agenda. I think this is another area in which we've done quite a bit of work. Those are the kinds of partnerships and relationships that sustain the momentum that we are seeing now and that we think are really important in continuing the progress we're making. I also mentioned that we're undertaking a horizontal review, which will likely reveal some changes that would make things even better in terms of the business innovation programming ecosystem.
Then last, but certainly not least, we've put a really big focus on tracking results. This is really intended to guide any future changes that need to be made and gives a degree of ambition not only for the work that we do and the policies that we put in place, but also for the stakeholders with whom we are partnering on all of these.
Conservative
Pierre Poilievre Conservative Carleton, ON
Thank you very much, Mr. Chair.
Are the Finance Canada officials able to answer questions about the proposed tax changes Minister Morneau announced in July?
Assistant Deputy Minister, Economic and Fiscal Policy Branch, Department of Finance
Very respectfully, Mr. Chair, no, we're not the right people to talk to about that.
