Thank you, Mr. Chair.
Canadians are rightly concerned with the decline in the competitive position of Canadian business. Canadian spirits manufacturers are to a great extent the proverbial canary in the coal mine of the effects of policy-makers taking their eye off the ball and allowing a competitive challenge to deteriorate to a crisis. Canada has long imposed higher excise duties on spirits than those imposed by our American competitors, but a significant historical competitive disadvantage has in recent years devolved into an existential threat.
Canada has a dozen commercial-sized distilleries and some 170 small local producers. From the largest and the oldest to the newest and the smallest, we all agree that the core problem with Canada's excise duty structure is the automatic annual escalator clause introduced in the March 2017 budget. The automatic escalator clause made a bad tax even worse.
Alcohol excise duties are among Canada's oldest taxes and fail the most basic principles of sound, modern tax policy, things like transparency, equity, effectiveness, neutrality and being broadly based. The decision to automatically increase excise duties annually irrespective of the economic realities of the day, all without any input or oversight by members of Parliament or this committee, magnifies these structural deficiencies in the excise duty framework.
Some have postulated that the annual increases are only pennies a bottle and are largely insignificant. As finance department officials admitted themselves, however, these changes were adopted with no analysis or consultation. I want to say that again—no analysis or consultation.
With the increase coming into effect on April 1, 2019, the federal treasury will have stripped nearly $50 million off the top from the resources available to Canadian spirits companies to deploy in the market over the coming 12 months, and $50 million is a lot of pennies. That's $50 million not available to develop and introduce a new Canadian whisky brand, $50 million not available to take advantage of the new free trade agreement between Canada and Ukraine, $50 million not available to get ready to enter Vietnam once the CPTPP comes into effect, $50 million not available to buy new barrels to lay down whisky distillate, $50 million not available to upgrade equipment in our facilities and $50 million not available to promote and compete in the marketplace.
I mentioned earlier that a huge weakness in the automatic escalator clause is that it does not consider the current economic environment. What is that environment? Well, in March 2017, inflation in Canada was running at 1.5%. In July 2018, it hit 3%. So, the escalator clause will be double that anticipated at the time of its introduction.
At the same time, as Canada decided to automatically increase excise duties on alcohol, the United States adopted a historic decrease in its own excise duties. Now we have a situation where Canadian spirits manufacturers have some $50 million less to invest in the market in 2019, while American bourbon and spirits companies have $285 million in tax relief to deploy. That's simply a scenario for disaster for investment in Canadian spirits manufacturing or in the Canadian whisky franchise.
From excise duty officials' point of view, all of this is largely irrelevant. Their sole perspective is the revenue stream for treasury derived from the application of excise duties, and these federal revenues are the same whether the product is Canadian, made by Canadians from Canadian-grown barley, corn, rye or wheat, or whether the product was made halfway around the world.
Canadians will always drink spirits, and excise will always get its pound of flesh. The question before us is whether or not we will be the last generation of Canadians to enjoy the economic benefits accruing from a vibrant, globally competitive domestic spirits manufacturing industry. No country in the world so disadvantages its signature beverage alcohol export in its own market. Scotland doesn't do it with scotch. We just talked about the tax relief provided to American bourbon, and certainly Mexico takes great pride in supporting tequila's growth around the world.
Here in Canada, Canadian whisky and Canadian rye whisky are hammered with exorbitant fiscal burdens, often restricted in places they can sell and now subject to further annual increases in excise duties. It's simply not sustainable.
I close and call on your support for three recommendations to help sustain more than a century-old primary manufacturing industry filled with tradition and craftsmanship.
The first is that the government eliminate the automatic escalator annual increase on federal excise duties on beer, wine and spirits.
The second is that the government reduce federal excise duties on Canadian spirits to mirror those imposed on American spirits by the United States government.
The third is that the government ensure that Canadian out-of-province alcohol manufacturers are provided the best policy treatment available to licensed in-province producers—the interprovincial barriers, which my colleague alluded to.
Thank you for your time and consideration.