Finance Committee on Feb. 12th, 2018

[Dominic Barton]

Yes, to your point, we and others have done some surveys. I think one of the things you referred to was from a broader business point of view, three big issues, but two in particular. One is regulation. I think 61% of the respondents said that they thought there's a major issue in Canada on that front. Then on the tax rates, as was mentioned before, when we dug into them, we thought that more could be done in regard to the newer innovations, so that we have a modernized tax system as opposed to one built on the industrial side of it.

Again, we're fortunate. When we looked at our endowment, if you will, in Canada—and I use that in the broadest sense of the term, meaning the talent, the natural resources, and so forth—we have all of what we need as we look ahead. What we're saying is, let's try to make it as easy as possible for people to be able to build, obviously in a safe manner. We think there are a lot of things that get in the way of doing that.

Again, on the tax side, you said that the last time we did this was over 30 years ago. The system has changed. We were arguing for a more targeted approach, thinking about the future and innovation, because there are things that are in place that won't be needed, and there are things that aren't there that should be there, if you know what I mean, when we think about some of the new capabilities that are required.

The overarching thing, if I might say, is also just speed. If you notice the time it takes to get a construction project done in Canada versus other places, it's significantly longer. The time frames just take longer, and that costs businesses and entrepreneurs.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

I completely agree. I think the other unique factor that we're dealing with, especially in Ontario, is that entrepreneurs or enterprises deal with four levels of government. They deal with the federal level, the provincial level, the city level, and then they'll deal with the regional level. On the regulatory front, the burden of administrative costs of doing that here versus investing in Sterling Heights, Michigan, or in Mexico, in terms of construction periods, for example, and the time to get a permit, is much greater in Canada. It takes much, much, longer in Canada than in those other jurisdictions.

I'd also like to congratulate you for your focus on skills development and increasing the labour force participation rate. Could you comment on the skills development side? That's something the government provides provincial governments with a lot of money for. There are a lot of agreements in place. How do you think we can do better on that side?

[Dominic Barton]

On the skills side, there are some pages on that, and I won't bore you with them, but we tried to estimate for each job type what percentage of those jobs would be automated. Point number one is that no one is immune. I'm sure we won't have robots—and you can shut the computer off when I say this—as members of Parliament at any time, but I think all of us are going to have parts of our jobs automated, including mine. I think some people in my own firm have said they'd probably be better with a robot than me, but at least 30% of what I do now could be automated.

We went through the different job types, including transportation, manufacturing, construction, and finance. Everyone's going to have a chunk of their work automated. Everyone's job is going to change to some extent. The biggest concern we have is that people are going to have to start re-skilling at a more aggressive rate when they're older. It's going to be more difficult for people when they're 40 or 45 years old, because you can't leave your job to go to school. You have a mortgage, and you have kids, and so forth, so how are we going to put in a program that enables people to do part-time re-skilling as they go through it? How do we ensure that people know what it is that they're building skills for with a world that's changing?

Of the components we were talking about here, one is that all of us will have to have a mindset of re-skilling over time. We think being able to get information.... This was the future skills lab idea in the second wave of our recommendations to try to synthesize the future skills that will be needed in the economy. That doesn't really exist. We need to make sure that people can see that, and it's a combination of employers, SMEs, and others putting that in. We need to make sure that we have the educational institutions to be able to provide more flexible, part-time learning for people to go through.

We think it's a pretty broad shift. To us, it's like pension reform was at the turn of the last century. We need the equivalent of that. It's a very big issue, and we're worried that no country in the world is thinking about this as aggressively as we need to. I'm hoping that in Canada we can show the way on how to do this.

[The Chair, Liberal, Wayne Easter]

Thank you.

We will go to five-minute rounds.

Mr. Kmiec.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

I'm going to focus on the initial questions that my colleague Mr. Albas had about the Expert Panel on Regulatory Agility and Innovation, which you talk about here.

I would ask that you flesh it out some more and maybe draw a parallel with a piece of legislation before the House of Commons right now, Bill C-69, that would basically replace some of the regulators that exist now. It will add the following areas of study for companies to submit, including, I guess, some type of documentation on health, economy, social issues, gender, and indigenous rights. They are shortening the target dates for having an approval from 450 days to 300 days, but they seem to be layering on more complexity for the company to be able to get to the point of saying yea or nay.

How does that fit with the Expert Panel on Regulatory Agility and Innovation? How do you see these two? On one hand, you have this piece of legislation that is proposing to increase the scope of study of the subject matter that companies need to look at. It's pretty broad in its scope, so I can already see individuals who work in those companies trying to figure out how to comply with the new rules, how to demonstrate compliance with the regulator. On the other hand, they are also shortening the timelines, which would be a good thing, because you will find out faster whether you comply with the requirements.

In this year, you talk about unleashing creativity of Canadian innovators and entrepreneurs and better coordination between agencies and jurisdictions. Can you talk more about that? On one hand, you have the government doing one thing, and you're recommending something that doesn't seem to align itself too well.

[Dominic Barton]

I'm not familiar with the details of Bill C-69, so I apologize for that. We will make sure that we look at that. It sounds as though there are some elements that would be in line with what the panel recommends, in regard to the point you made about speed.

What we're saying is probably more at an execution level within the current rules. What we were hoping to have put in place is this expert panel. We said we wanted to have representatives from the private sector and academia, not just from the government side, that would actually look at this, working with the Treasury Board Secretariat, literally to go through what we were saying on a sector-by-sector basis. We identified six tables that we think are important. We would start with those to say, “Let's just go through those on an execution basis and see what we already have; what are some of the regulations that are in place?”

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Mr. Barton, I need to interrupt you, because I don't have a lot of time. I know you could fill all of it because you have so much knowledge.

The Liberal government did cut the regulatory advisory committee that was part of the red tape reduction action plan. You're proposing to reintroduce that concept.

I served on the Standing Joint Committee for the Scrutiny of Regulations that looks at all regulations that come through the government, and there is a lot of it. I learned about things the government regulates that I never wanted to know about and I never care to know about again, because some of it is really complex and highly detailed. I learned a lot on that committee, too.

With the complexity of it all, how do you square one and two, have more innovators, more entrepreneurs, but at the same time the government is layering on new broad rules to comply with, very complex things? I don't really know how some companies can comply with a broad category such as health, the complexity, when the breadth of the regulation is so broad. How will entrepreneurs react? How will innovators comply with these types of rules?

[Dominic Barton]

We're very much for having less complex and fewer regulations. That's a pretty bald statement. We think there is a lot that can be done even in the near term by having a panel put together externally that would advise the Treasury Board Secretariat, to go through each of these areas to exactly surface it up and ask, why was this regulation put in place, how does it compare competitively with other countries, and so forth? To have business people, as well as other innovators, saying “I can't do this”, there needs to be a voice back that way.

We were quite encouraged by the Treasury Board Secretariat's response to it, but as you said, obviously things need to be coordinated. We think we just have to get at it, because it's a barrier.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Mr. Chair, may I...?

[The Chair, Liberal, Wayne Easter]

Make it very short.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

On IP, because you mention that in the report a bit as part of creating a business model, I guess, with more IP, more intellectual property, and the development of ideas into something that's marketable. However, a lot of companies, once they become multinationals, international companies, use royalties on intellectual property to move cash around.

How do you avoid that? Do you have a proposal for or an idea on how to avoid situations whereby companies use their IP and royalties paid on the IP to avoid paying the level of taxation in one jurisdiction because they're paying an amount in another one?

[Dominic Barton]

Yes, on this one, this is where we think that targeted review of the tax system needs to be put in place. I think a previous member of your standing committee raised that point about people being able to take advantage of going offshore.

We think there has to be a level playing field. We would actually argue that withholding taxes, for example, actually make it more difficult for SMEs in Canada to innovate. It costs more. We actually think we're the other way: we're not competitive on that side in Canada compared to other countries in how we think about withholding taxes, for example. To your point, we think we have to look at it globally and recognize that people will look for the means of being able to pay less tax. Let's first of all make sure that our jurisdiction makes it easier for people to do that. Right now, we think it's a little more difficult.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Fergus, you have five minutes.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you, Mr. Chair.

Thank you, Mr. Barton, for your contributions to these reports, as well as your contributions to the public policy development in Canada, frankly. I have to say that you are offering what I think is the best in the Canadian tradition of giving back to one's country. I had the pleasure of meeting you when you did some similar work for the Association of the Universities and Colleges of Canada, so it's great to see you back. I really did appreciate reading your reports.

As much as I would like to talk to you about the re-skilling aspects of it, because I think there's more to be said on that.... Hopefully I'll have a chance to get to that in the second round, but for this part of it, I'd like to focus on talking about your ideas on growing Canada's exports and getting our businesses to export more. Given the current trade policies being enunciated by President Trump and given the opportunities we have, perhaps, with the Trans-Pacific Partnership, what opportunities do you see ahead, in a sort of large point of view, for Canadian companies to expand their export opportunities?

[Dominic Barton]

Thank you. I really think that's a huge opportunity for Canadian businesses. Our Canadian SMEs, for example, I think account for less than 30% of our exports. If you look at places such as Italy and Germany, that's well over 50% and up to 70%, so there's opportunity.

Very much to what you said, I think, one thing is that we need to broaden our trade relationships beyond the United States and Mexico. That's obviously critical, and I really hope that NAFTA.... I think we're all hopeful that we get it and make sure that NAFTA is there.

One of the things we recommended in our first wave of recommendations was that we have to establish much deeper relationships, particularly in Asia with China, India, and Japan. Free trade agreements would be great, and we're very excited by the CPTPP signing, but we actually think it's beyond having a trade arrangement. It's about having much deeper business relationships, and I think that's in many different areas for Canadian companies. Again, forgive me for always talking on the agrifood side, but that's an area we've talked about before where we're punching way under our weight and there are huge opportunities.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

I like where you're going. Here's what I'm also trying to figure out. Is that also related to your call for greater immigration levels so that these new Canadians can serve as bridges back in creating those deeper trade relationships?

[Dominic Barton]

Yes. As you said, it's a deeper set. It's abut trade. We have many capabilities, as I said, such as in our natural resources and agrifood, but we also have our services—health services and financial services—and the way our retirement program works. A lot of countries would love to have that type of a system. There's the way our pension system works. There's a whole range of things, including education, to your point. I'm here in Australia. Their third-largest export is education. It's the number three export—international students of all types coming here. Many of them stay, which helps create...and they're entrepreneurs. They build businesses and so forth. We think it's that deeper set of relationships with this part of the world. We have city-to-city relationships. Chongqing has 35 million people. It's the size of Canada. It's just one city in China, and many SMEs could be part of that. It's not just large companies.

If we look at the comparative numbers, over the last two decades, Canada has lost a lot of market share in Asia, and we think we have to goose that back up again significantly. It's not a replacement of NAFTA. It's in addition to it, but there's a lot we can do even in the near term with technology, whether that be with Taobao or whatever trading systems are now in place. It allows small businesses to also attach themselves into other countries' systems. We're very keen on that. It creates good jobs. It will encourage people to invest more. There are a lot of virtuous cycles if we can just shift more east.

[The Chair, Liberal, Wayne Easter]

You have time for a small one.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Then how do we change the culture of our SMEs to encourage some of them to make serious and deep forays into markets outside of the normal ones that we go to, or deeper ones in Asia, India, or in Japan? How do we help them take that on and lower their risk so that they can afford to spend that time developing those long relationships?

[Dominic Barton]

There are some examples in other countries. Malaysia and New Zealand have focused on SMEs. It's not all SMEs. They've kind of put criteria in place for those that would have more of a chance, but they've increased significantly the exports of those companies. That's one of the recommendations we're suggesting on the SME side, that we scale those up.

There's the QG100, which is a bunch of SMEs in Quebec. I think Tom Jenkins and a number of others are setting up an Ontario 100. I think the plan is for that to go across the country, to British Columbia and all the provinces, and to use those as forums where people can actually learn about what's going on. It's efficient for them to see what the opportunities are and to then target the support programs to those with the most likelihood. There are some good examples with Malaysia and New Zealand where they've pushed it.

I think there's a lot of opportunity to be able to do that. I also think we need to have much more flow of people back and forth with Asia. Canadian students don't travel very much compared to those from other countries. If they do, they travel mainly to Europe. I think if we can encourage more people to link up with these parts of the world to build relationships, they will become more familiar. Canadian companies are very competitive.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Poilievre.

[Pierre Poilievre, Conservative, Carleton, ON]

Thank you for your work.

I want to follow up on Mr. Julian's questions about opportunity for workers with disabilities.

You've spoken about the need for us to watch carefully our personal income tax rates, but often I find that policy experts and people who study taxation forget about the extremely high marginal effective tax rates affecting low-income people in general and people with disabilities in particular.

When a disabled worker who is on some sort of assistance gets a job, they not only start paying payroll and income taxes but they immediately lose income support, housing support, drug benefits, etc., the combined consequence of which is a tax rate that can well exceed 100%. People can be significantly worse off when they work, get a raise, or add more hours.

Has your council considered this problem?

[Dominic Barton]

It's an excellent point, but we haven't gone to the level of detail you're suggesting. It sounds to me like a very good idea on the face of it. We did think about this with unemployment, and we thought about it with some other groups that don't participate in the economy as much. What are the incentives? We also thought about this a little bit with retirement. What incentives not in place do we have for people to work longer? I would say on the face of it that we have to get more people participating in the workforce. It's critical for our productivity, and if you end up paying more tax because you're working, that's certainly counterproductive. It's a good question, however. I'm making notes on this and other comments, things we should look at.

[Pierre Poilievre, Conservative, Carleton, ON]

There are some really heartbreaking stories. One of them is Linda Chamberlain, a single mother who struggled with schizophrenia for many years. Finally, she got a job, a job she loved. Within two months, though, she realized she would not be able to survive if she kept the job, because she was going to be roughly $250 poorer having a job than she would be without one. So she quit. It's heartbreaking because she loved the job. Her co-workers loved her, and they held a nice party for her to say goodbye. She's stayed on social assistance and in public housing ever since. This is someone who could have had a life of independence. She might have slowly increased her wages to a level where she required no assistance at all, but the system defeated her. All parties, and all levels of government, are responsible for it. We pulled some of the steps out of the ladder, and so you can't climb if there are three or four steps in the ladder missing. I hope your group can look at this. I proposed a private member's bill that would oblige all governments to ensure that for every $1,000 a worker with disability earns, they never lose more than a $1,000 in taxes and clawbacks. This is something for you to consider.

My second question is with regard to the massive debt levels that are sloshing around the system after a decade and a half of low interest rates, and seven or eight years of extraordinarily low rates. In Canada we have high levels of both consumer debt and government debt. South of the border, in part because of some irresponsible senate budget decisions just last week, the debt deficit will probably reach a trillion dollars by next year. This kind of insane government spending is going to leave future taxpayers in a crisis position, not just south of the border but around the world. I wonder if you have views on how Canada is positioned for the day, which is inevitable, when rates rise and both governments and households find themselves unable to service their debts.

[Dominic Barton]

You raise a very good point, and I think you probably have the numbers. If you look at overall debt in the global economy from 2008 to 2017, you can see that it's gone up significantly. I worry about two things. One is how smooth the process is to get to more normal rates, and what that process does. There are many others more expert than I am, but I think the ability to tighten smoothly is not an easy thing to do. So I also worry about shocks to the system. Most financial crises occur because of a shock that hits the system. Overall, I think it's an imperative that rates are going to have to go up to deal with this liquidity that's awash in the system.

I think there are probably asset bubbles. They could be in housing markets, or in some commodity products. It's important to be very careful about where the spikes are. From a fiscal point of view, I'm more bullish on Canada as long as we can continue the underlying growth, which I think we can. The areas I worry more about are real estate and consumer debt and what happens on that side if rates really move quickly. I think you might have an even more troubling situation in the United States and in some other parts of the world. I think we have to be very careful.

With that tax bill in the U.S., there's a very good short-term hit as a result of the investment going on. We should look at some of those elements. But in the longer term, when you look at the debt levels, I think there's reason for a lot of concern.