Finance Committee on Feb. 12th, 2018

[The Chair, Liberal, Wayne Easter]

I will call the meeting to order. Pursuant to Standing Order 108(2), the committee is commencing its study of the third report of the Advisory Council on Economic Growth.

With us we have Dominic Barton, the chair of the Advisory Council on Economic Growth.

Welcome, Mr. Barton. Thank you for making the time. We had a bit of difficulty trying to catch up with you in Tokyo last week, and now we hear that you're in Australia. You're a hard man to keep track of.

Anyway, Mr. Barton, just to say at the beginning, we do appreciate the work that the advisory council has done and your ability to bring a global perspective and a very impressive depth of knowledge from the people who are on that committee. I think everyone has a copy of the report and went through it.

I'm not sure whether you have an opening statement, but I'll turn it over to you. We'll hear what you have to say and then go to questions. I understand that we have about an hour and a half.

[Dominic Barton, Chair, Advisory Council on Economic Growth]

Great. Thank you, Mr. Chairman.

Thank you for being so flexible. My apologies for this being by video conference and for being in different parts of the world. You're very gracious to put up with this.

In my opening statement, I would just say a couple of things. One, as you mentioned, in December we submitted the third report to the Minister of Finance. As we discussed before, our focus is trying to increase inclusive growth in Canada looking over the next 10 to 15 years.

We tried to focus on fewer than a dozen recommendations—there are about 13 right now—and to release them in waves. We talked before about the previous two waves. I believe Michael Sabia and Ilse Treurnicht might have been involved in talking about the second wave. I won't go through those. Obviously, if there's anything you'd like to discuss about those, we'd be very happy to talk about them.

The primary thing I want to say here is that in this third report that we're putting forward, there are really two sets of recommendations. One is around business investment. The second is around skills and how we help re-skill Canadians for the future with all the technological changes going on.

On the business investment side, there's been a huge amount of work done on it in Canada by people more thoughtful than we are—the C.D. Howe Institute, the Conference Board—and there are many terrific reports to be looked at, all with good things to say. We really focused on three things in that business investment bucket. One, as we look at ourselves comparatively, in Canada we are investing less on the business investment front than are our peers, particularly if we compare ourselves with the United States—and we have been for quite a number of years. There's been a very recent uptick, which is good news, but we don't think we should draw any strong lines from it.

Another of the three specific areas we focused on was regulation. We think there's a need for much more regulatory agility, especially as we look ahead at the innovation that's required. There's a huge amount of regulation in place. We've been working with the Treasury Board on that side. We want to make sure our regulatory system is more agile and ready for the new areas, in particular in innovation, whether it be in health care, fintech, agrifood, and others. We also want to see better coordination among the different agencies and jurisdictions, and want to have more efficient and predictable regulation. When we look in the areas of energy and so forth, there are some very long delays. The unpredictability is a big factor.

The second part on this business investment side is tax, but in a very targeted way. We think the tax system needs to be modernized in the sense that it's very much focused on looking at plant equipment and property. That is an important part of business investment, but as we look ahead, innovation IP will be even more critical. We think there needs to be more balance focused on that so that we can ensure that we do get the investment on the IP side. In Canada, just as an example, we invest about 2.1% of our GDP in IP compared with the U.S. at 3.7%, or France at 5.2%. As well in this targeted review, the tax system has not been looked at in a comprehensive way for about 30 years, and we are keen to ensure that we are competitive and that we also apply a customer experience lens to the tax administration so that when there are disputes or reviews, it's done in an even more efficient manner.

The third area with regard to business investment is with SMEs. Our SMEs are a really important part of the Canadian economy. Sometimes we focus too much on the big businesses. We think there's a significant opportunity to help SMEs in broadening their exports to other parts of the world. We punch below our weight, even though we have some terrific SMEs. There have been some very good programs in place, but we think they need to be scaled up, whether it be with the Business Development Bank or other agencies. We need to look for ways to help SMEs adopt more innovation.

Those are the three buckets: the regulation, tax, and SMEs. Then on skills....

No, I've been talking too long, and please shut me up at any time.

[The Chair, Liberal, Wayne Easter]

That's okay, go ahead.

[Dominic Barton]

Okay. As we get to the skill side, this is an area that we felt very strongly about in the growth council. We're worried about the technology change that's happening at a pace and a scale we haven't seen before. We think that in the order of 10% to 12% of Canadian jobs will be displaced by technology by 2030. I think that's conservative, that it's an underestimate. We had a lot of debate on that in the council. The challenge, though, is that when 10% to 12% of people have their jobs changed, they will probably be at an average age of somewhere between 40 and 55. We're not talking about new entrants coming into the workforce.

This whole idea of re-skilling at scale we think is a very important problem globally. We haven't seen any country deal with this. We tried to learn. There are some very good small examples of what countries are trying to do about it, but we think we need something more comprehensive.

The two specific recommendations here are that we establish what we call a “Canada lifelong learning fund” to help Canadians to be able to invest in re-skilling throughout their lives, so that we don't have this idea that once you're 24 or 25, you're done, and that hopefully you can find jobs as you move on from there. There's going to need to be continual re-skilling, which we all have to do, and some sort of a fund to help Canadians do it.

We think employees and the government need to play a part in this. We weren't very specific about who exactly does what. I think it's probably because it's beyond our remit, but we tried to size it. We think it's potentially about another $15 billion a year. Again, we're not saying that government pays for that. We're saying that there has to be some joint arrangement among the three parties to be able to do this.

The second specific recommendation here was to shift our employment centres—we have about 1,000 of them across the country—so they are not just places where you go to find a job, but also where you go if you want to think about the skills you need as you go forward. We base this on some learning the German system is going through now. They've had some very successful pilots in reconfiguring their employment centres to ongoing skill development centres for people to be able to look at. Those were the two recommendations there. The concern we have is the scale of re-skilling we need. There's a lot of data in the material to show estimates by job type and so forth, but we felt the need for something significant on that side.

I'll stop there. Sorry for talking for so long.

[The Chair, Liberal, Wayne Easter]

That's not a problem. That's a great overview of the third report.

We'll turn to seven-minute rounds and Ms. O'Connell.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you, Mr. Chair.

Thank you, Mr. Barton, for being available to answer some questions for us.

With regard to Canadian businesses not dealing with new technology, I think the report says that Canadian businesses are particularly slow to adjust. You use the example of John Deere in the report, noting how they were leaders in tractors, and now they're becoming leaders in technology. It's probably an example that most people don't realize or associate with agriculture, and this committee has heard quite a bit about the opportunities in agriculture and technology specifically.

What is it about Canadian companies, and why aren't they embracing or tackling this change faster compared to maybe some other countries? Is it a lack of incentive, or is it a lack of know-how or ability? Where should we focus to get the Canadian companies to speed up to face the changes?

[Dominic Barton]

I do think, as you said, that even agrifood, which a lot of people don't think is a high-tech area, is very much on the leading edge.

I don't want to make a blanket statement that all Canadian companies don't do this. There are some that do it extraordinarily well. It's just that we don't seem to do it at scale. When you look at the percentage that we're investing on that side, we do lag over time. I won't bore you through some of the charts there, but just on an overall basis, we invest less.

It's particularly true with SMEs, and it's for two reasons. One is that they're not very export-oriented. A lot of our SMEs are domestically oriented. We do find that when we help them become more export-oriented, they actually do invest more, and we've seen some success in some of the programs. However, literally fewer than 2,000 are doing that. I think it's about seeing that you have a much broader market to operate in, and then the Canadian market enables, we think, one to invest more if they see the scale of the opportunity and the market in which they can operate.

The other, which again is mainly on the SME side, is that because of the cost involved in being able to make those investments, if you're not able to have scale—it's again related to exports—there's not a very good incentive to do that. What we're most worried about is the new areas. If you think about health care, which we think is a huge opportunity, regulatory-wise it's a very challenging place to do it. They don't have the legal capabilities or the money to work their way through that.

We think regulation is one area that acts as a barrier that makes it more difficult for people to actually move it forward. If you have to spend your time figuring out whether you're allowed to do it, you just stop.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Do you think there's possibly a perceptual issue as well? For example, in my municipality we have a huge opportunity for agriculture, but local governments just want traditional investments, because they think that's the way forward for jobs. Is there a possibility that the trends and investments needed are really not trickling down to all areas that would encourage and help promote some of these investments? If you want to do something new in a municipality and the municipality wants to start getting rid of agriculture because they don't think there are any jobs in it, do you see that as an impediment, or is this just...? That's what I'm experiencing in my backyard. Do you see maybe for some of these traditional jobs that it's really a perceptual issue, that there are huge opportunities for innovation in Canada and that we're not being creative enough or vocal enough about the opportunities to encourage all levels and players to get involved and see the potential?

[Dominic Barton]

I definitely think there's a perception like that, and maybe there's some lack of spotlight on some of the opportunities.

This relates a bit to the second wave of recommendations on innovation. There were two elements there that we hope will also improve business investment. One is, as you were saying, putting a spotlight on six to eight sectors, including agrifood, because a lot of people don't realize that we have this huge potential. We just want to put a spotlight on it, and I think six of those tables are now under way, including one on agrifood. The second relates to these superclusters, which we're quite excited about. They're bringing universities, SMEs, venture capitalists, and businesses together at scale. I think when we do that.... For example, on aquaculture—although I know that's not in your municipality, but I'll just use that one example—we are punching way below our weight in Canada just given what we have with our resources. We have some amazing universities and amazing research under way, and we have capital, but it's not all put together.

I think, as you said, that by having greater ambition about what we should do and saying this is something that's good—and it's not about providing any subsidies or doing anything like that, but just putting a spotlight on it—a lot can be unleashed. Not to go on about agrifood, because the chair knows I'm totally biased towards that, but it's interesting that in the previous Governor General's book on innovation, which he did with Tom Jenkins, he argued that more than half of the innovations they talk about come from agrifood. We've been very good at it. The challenge is that we haven't scaled or commercialized those innovations. We come up with good ideas in Canada—we actually punch above our weight on that front—but we don't commercialize them. I do think awareness of this is critical.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Albas.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

Thank you, Mr. Barton, for being here today. We certainly appreciate your insights.

Earlier in your presentation, you talked about the need for regulatory agility. There are many people who are watching at home, and some people might feel, first, that it's a buzz word, or second, that it's just another way of saying deregulation.

Could you please put a little meat on the bone and explain what you mean by regulatory agility?

[Dominic Barton]

I also did a bit of background reading. I saw that you got nominated, I think, for the Golden Scissors award, which I liked, on regulatory reform.

I think what we would say on this is that it is more about, frankly, that there are too many regulations, and regulations that pile up over time. There don't seem to be sunset clauses on regulations. I hope I'm not sounding like an extremist here, but they have become like barnacles that just continue to grow. There are no sunset clauses, and they move on forward. There are literally thousands of them that are there.

Again, what worried us in particular are some of these new areas of growth for the country. If we take life sciences, fintech, agrifood, it's very difficult for entrepreneurs to be able to work their way through that. We found examples in other countries. In regenerative medicine in Japan, for example, they have had a separate approach for people who are developing products in those areas, an approach that can bypass the current system to enable people to go through it. It's not meant to be less safe, but the process is so onerous that they know nothing will come out of it.

We've seen some. There's a colorectal scan, I know, that was developed in British Columbia and Alberta. It was developed in 2013, I believe. It was still not allowed in Ontario in 2017, even though it has been given permission in a province. I know that's part of our federal structure, but that's not helpful for people who are trying to develop new businesses at scale with those kinds of regulatory issues.

Fintech is another one. If you think about our banking system, we should be a leader in that area. It's more challenging to be able to do that in Canada than it would be, for example, in Singapore or in the United Kingdom where they call have what they call “regulatory sandboxes” to allow people to try new things.

It's the buildup of regulations over time and not a process to clean house or review. We think it should be done sector by sector. Plus, as we look ahead at some of the new areas where we could be leading the world—I do say that health care is one—we have really quite restrictive processes in place for people to be able to do things.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

I totally agree with your assessment. Being regulatorily agile means taking a look at whether or not the current regulation and regulators serve the public interest. In many of these cases, they don't always.

I talked to a cheese producer in British Columbia who is regulated under the CFIA. He wanted to create a cheese that is well-established in Europe. Unfortunately, because the CFIA didn't have a program for authenticating it, it took him two years before the CFIA gave him permission, even though the Ontario government has a process for provincially regulated cheese producers to follow. So, there's a lot that can be done.

You also raised the topic of looking forward as well. If we think about autonomous vehicles, in 15 to 20 years, if there is widespread adoption, we may see provinces take out their motor vehicle acts because it will be done autonomously and not by law, so I certainly agree with the assessment.

When we talk about taxation.... I'm sure that you have done some travelling. When this committee was in Washington, DC, and in New York in December, the United States was abuzz about tax reform. You have said in the report that we have to stay competitive, which I appreciate, but you also said that we have to retain talent. There are two ways that you can retain talent: you either grow it or attract it. We've seen the taxes on high-income earners go up in Canada. We've also seen provinces talk about programs du jour, like teaching all kids to code, which Michael Bloomberg says is a massive waste of time.

Are you worried that there could be spillover effects from our tax regime having rates that are too high and our putting a lot of money into public education that either, one, is ineffective, or second, if it is effective, we still see a lot of the top talent that we're cultivating here in Canada going to other jurisdictions?

[Dominic Barton]

We think it's important that we be competitive, and that's within a bound. I don't think it has to be exact, but we have to be in the range. The U.S. tax reform has put some pressure in that regard, though again, I'm looking a comparison done by EY and KPMG of tax rates and that we're pretty competitive in that regard. In the U.S. they've moved significantly, but we're still quite competitive on that side.

On the personal income side, I think that is one we have to watch carefully so that we're not out of bounds on that. One place that I would watch is what happens in the U.S., given the differences between the states. If you look at what's happened in New York and California, it will be interesting to see what happens to talent within the United States. It will move people.

I wouldn't make it a red alert right now on this side, other than to keep our eye on where that is. I think we have an opportunity with immigration. We've been pushing to make it easier for high talent to come into Canada, and I hope we can continue to push for the skills we need and make it easier for that talent to come into Canada. We have to keep our warning lights on to watch it.

The other area is regulation. What I have taken from the U.S. change recently gets back to your first question on regulation. I think we have underestimated the impact of Donald Trump. I'm not a big fan; I'll just be open with you about Donald Trump. However, what he's done from a deregulation point of view, we cannot underestimate what that's done for business growth in the United States. I think other countries are looking at that and saying there may be something there and are wondering if that's the aspect to focus on.

To your point on education, I do think education is critical for us to be able to be competitive over time. One thing we mentioned in our report here, though we weren't specific about it, is that we did make a comment that to assume that our K-to-12 and university systems are exactly fit for purpose as we look ahead is a bit of a stretch. I'm a big fan of our education system, but why does it take 16 years to make a doctor? Some people are challenging some fundamental assumptions about how we train people and do things in this new world. We didn't have specifics on it other than to say that we may want to start thinking about how we're going to be educating ourselves for this future world. To assume that the old industrial approach is still going to work, I think, is probably not the case.

I don't know if I'm being specific enough for you.

[The Chair, Liberal, Wayne Easter]

No, that's okay. Thank you.

Mr. Julian, for seven minutes.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you very much, Mr. Chair, and hello to all of my colleagues.

Mr. Barton, it's good to have you here. This is my first meeting at the finance committee, so I'm happy to have you come for these important discussions.

Some of the points you've laid out have been extraordinarily interesting, particularly when you talk about lifelong learning and the skill-development centres that we've seen in the German model that have been very helpful in integrating people into the workforce. But to do all that, of course, the federal government needs resources.

My starting question is around the whole issue of the tax system—which the advisory committee has raised in the past—about shutting down loopholes through which certain companies avoid paying their fair share of tax and looking at having a level playing field in terms of digital services. In my area of the country, small businesses that are paying their fair share of tax and are applying the GST are competing against companies offshore that aren't paying anything, which is a major problem. It hurts the competitiveness, particularly of small Canadian businesses. At the same time, it allows money to flow out of the country, money that isn't being invested in things such as skill development, lifelong learning, and those important things you mentioned.

Are you concerned about the increasing amount of money that's going offshore because we lack a tax regime for digital services, and what is the impact on the Canadian economy in the long term if the government doesn't take the bull by the horns and put in place a tax framework for that?

[Dominic Barton]

Thank you. We do worry about innovation going offshore, if you will, into non-taxed regimes, though I think there's now more pressure around the world to try to be able to deal with that. We're seeing that in Europe in a very big way.

We think there's a lot that could be done. For example, if I just take one of the sectors—health care—this is an area where we think there are a lot of innovators, a lot of people with terrific ideas who would like to be able to build businesses. We would argue that the regulatory barriers are bigger than the tax barriers, if you will, to be able to build things.

We're blessed in Canada with our health care system, which allows us to collect an incredible amount of information on people. There are only two other jurisdictions in the world that would even have the possibility to do what we do, which are Australia and the U.K. There are very restrictive regulations on how you can use that information, some for good reasons, I think some not for good reasons.

One of the things we're keen on is if we can make it easier for people to.... People will do more innovation in Canada from a regulatory point of view if it's easier, not so much from a tax point of view, if you will. For sure, tax is a factor to think about, but we think the regulatory challenges are bigger issues.

To your point specifically on tax, we don't think people should be able to go offshore and get different tax rates. There has to be some comprehensive view. In the digital world, it's a lot easier to be able to do that, so I think we have to make sure we're competitive in that. It's not that there isn't such a huge gap between us and other places. I guess I'm saying that to help get even more activity going, I think the regulatory lever may be an even bigger one.

There are some things on IP, as we mentioned in the report, that don't get the same benefit as plant and equipment. They have longer depreciation rates, and I don't think that's a fair process, given what people will be investing in over time. So there may be some differences on that.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thank you. I'm sorry to interrupt. It's just that I've got a whole long list of questions, so I'll go to the next one, which is on skills development.

You've talked about groups that are under-represented in the workforce: indigenous peoples, lower-income Canadians, women with children, Canadians over the age of 55. One area that is profoundly overlooked by policy-makers that does make a difference in terms of the overall development of the workforce is skill development among people with disabilities.

I worked in that area before I was elected to Parliament, so I know how often just a small bridge—a ramp that is put into place in a workplace, the provision for a sign language interpreter for the training of the new employee, for example, or even magnified screens for visually impaired Canadians—can make a difference. You've got a really excited, often highly skilled group of Canadians with disabilities who just don't have access to the workforce.

Is that something you're contemplating bringing out in a further report, or is that something that has been discussed at the advisory committee level so that you, at some point, will be making recommendations? The skills development component is very important, and that's 15% of Canadians who are left out.

[Dominic Barton]

That's a great question.

We did talk about it. To be honest, I think we could put more of a spotlight on it because, as you mentioned, with all those categories, given our rapidly aging demographics, if we don't get as many Canadians participating in the workforce as possible, we're going to have very low productivity over the next 20 to 30 years. With some of the things you talked about, which are making it easier for disabled people to be able to work, whether it be the ramps or the magnified screens or whatever, we actually also think that this digital world is actually going to make it even easier for people with disabilities to play a role in the workforce, so it's an opportunity that we should go after even harder.

We think we're also going to need to have the digital infrastructure in place for people in remote areas. We did talk about people with disabilities in remote communities. How do they participate in this economy? We know they can. One example we looked at was—I'm sorry for going on here—Globant, an Argentinian software company. What's interesting about it is that, first of all, you wouldn't expect a high-tech software company that's supporting Google and others to be based out of Argentina, but it does very well. Only only 50% of its workforce is in the main city; 50% is actually in the sub-regions of Argentina, but using technology allows people to be able to participate, and a chunk of the workers are also disabled.

I think there's more we can do, and the higher we get participation rates across the board, it's in all of our interests to do it. It's not even just a moral or social issue; it's an economic issue.

[The Chair, Liberal, Wayne Easter]

You have time for a short one, Peter.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Well, the short question is around child care.

You did flag in your second report the importance of having child care. It would allow women to go into the workforce. That's obviously a major challenge across the country. Is that something you continue to stress, that the government should be putting in place a national child care program along the lines of the Quebec model?

[Dominic Barton]

We definitely feel strongly about that because our female participation rate had gone up and has flattened over the last while. Again, we think they are a source of talent that we need to have participate much more in the economy. The child care part is a very important part of that to ensure that women can work.

On the women's side as well, we found that on the investment or VC side of things, far fewer women are involved in that, even though the women who are involved are actually quite a lot more successful than the men. We're looking at what biases are there, implicit or explicit, for women on the entrepreneurship and investor side of things. We are thinking about the growth fund that's there and want to make sure that we're looking broadly, and recognizing that we're way underplaying on the women's side also for entrepreneurs and for innovators.

[The Chair, Liberal, Wayne Easter]

Okay, thank you, both.

Mr. Sobara.

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

Thank you, Mr. Chair.

Thank you, Mr. Barton, and thank you to you and the other individuals who have participated and developed the three sets of reports.

In reviewing the third set of reports, obviously you had the October 2016 first report, with a number of recommendations, and the second report. It's great to see we've completed the CETA with Europe. We've recently announced the CPTPP agreement with our Asian partners largely, but also Mexico, I believe. We've moved forward on the Canada Infrastructure Bank; the global hub for attracting FDI; and are moving forward soon, I would assume, on a superclusters agenda, identifying the sectors that were identified in the reports. There's much to do, as you've identified in these reports that I've read.

There was one thing that caught my attention in one of your reports, which really speaks to attracting business investment. It's something that was even identified last month in the Bank of Canada's monetary policy report. In your report, “Investing in a Resilient Canadian Economy”, you say that we're not seeing as much greenfield investment as we should. I shall read it verbatim:

While it is difficult for the government to directly lower input costs for Canadian businesses, it can—and must—tailor the regulatory and tax systems to a more dynamic era of technological disruption and global competition.

It's on page 9 of that report. I pulled that statement or sentence out of all the reports, because we really haven't had a review of our tax system prior to the use of mobile phones and the Internet. You've pointed that out in the third series of your reports.

I was wondering if you could please elaborate on that. How important is it to get that right and get productivity going in our economy—which has sort of picked up—so that investment conditions are conducive from a tax and regulatory point of view?