Finance Committee on Feb. 23rd, 2016

[Bill Morneau, Liberal, Toronto Centre, ON]

Thank you again.

I want to restate that we are committed to balancing the budget. I want to move on to say that our first priority is to make investments in Canadians and in Canada. We recognize that in a time of economic challenge, in a time when the economic growth is lower than we want it to be, the first and right priority for Canadians and for Canada is to invest in our economy.

We've been very specific about that objective. We've started with what we believe is investing in our middle class. We've reduced taxes for the middle class, which immediately goes to people stimulating our economy. We will be moving forward, as we've said, in our budget with the introduction of the Canada child benefit, which will simultaneously help the most vulnerable and put money into our economy.

Infrastructure investments are also of significant importance. We will be moving forward with investments that we know will help the short-, medium-, and long-term growth trajectory of this country. They will be strategic investments. They will be smartly focused on things that will help our economy over the long term.

Finally, and not least, we will be focused on how we can make our economy more productive through investments in innovation. That's something, as I announced yesterday, that would be aided through an advisory council on economic growth. It's something we are moving forward on, because we know it's the right thing to do for our children and our grandchildren to make sure we come up with a more innovative economy over the long term.

[The Chair, Liberal, Wayne Easter]

Thank you, Minister.

Mr. Caron, you have seven minutes.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you, Mr. Chair. Thank you, Minister, and welcome to the committee.

Regarding the figures that were published yesterday, I would like to focus on two specific issues. My first question is about the reserve fund.

In the 1990s, the normal reserve fund was set at $3 billion. It stayed at that level over all that time until the last budget, when it was decreased to $1 billion. Now this fund is being increased to $6 billion. There is an $18-billion deficit projected for next year, and without the reserve fund, it will be $12 billion. In the following year, it will be $15.5 billion, and without the reserve fund, it would be $9.5 billion.

What led to the establishment of a $6-billion reserve fund? It went down to $1 billion, whereas the usual amount was $3 billion. Why was it not set at $2 billion or $4 billion? Why was it set at $6 billion?

[Bill Morneau, Liberal, Toronto Centre, ON]

Thank you very much. I'm pleased to respond.

We made significant commitments to Canadians to invest in order to grow our economy. We also told Canadians we would be prudent along the way. We recognize that in a volatile economy we need to ensure that Canadians understand that we are taking the appropriate measures to ensure that we have the fiscal capability to do what we've promised.

When we looked at the proposals from the private sector economists both in November and more recently in February, we recognized there was a high degree of volatility. We also saw that in each of the last five years, as I mentioned earlier, there was an overestimation of the rate of growth. Having looked at the volatility, especially around the price of oil, we believe it prudent to put in a risk adjustment that would allow us to start from what we think is the right place to make the investments Canadians expect us to make.

It is appropriate for us to be transparent in that. We've been absolutely transparent in that, and we are moving forward with the investments we need in order to build off what we think is the right approach.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you.

The question I want to ask most is the following. Is there a formula to determine this, or is it a rather arbitrary political decision?

My second question is related to that. In the same report, regarding economic growth forecasts, one finds the private sector evaluations. We see that there is a decrease of $40 billion. In the November economic update, you said that you would be cautious and you decreased your private sector forecast by $20 billion. Now, we are told there is a $40-billion decrease.

How did you determine this $40-billion amount? Did you use some specific formula or did you select an amount rather arbitrarily?

[Bill Morneau, Liberal, Toronto Centre, ON]

Thank you.

Because we want Canadians to understand our current situation, we took a close look at the volatility going on in the marketplace. We also took a close look at private sector forecasts. We chose to take a risk adjustment. We chose to use the bottom four of the financial sector forecasts as our downward case adjustment. We believe that's the prudent thing to do, and doing that provides us with the starting point from which to make the investments that Canadians expect us to make in order to move us on to a higher growth path for our economy.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

During the 1990s, a former finance minister had the reputation of forecasting budgets that were almost balanced, and some considerable surpluses. These surpluses were not necessarily reinvested in programs. They were used to reimburse the debt.

One can't really help but think that some of it is actually used to modify public opinion so that will decrease expectations in comparison with the expectations that were raised during, for example, the electoral campaign.

Is there not a risk at this time, a somewhat similar risk of lowering people's expectations regarding reinvestment and change, as you mentioned? In the final analysis, you are going to try to take advantage of the situation to postpone commitments or investments Canadians voted for last October.

[Bill Morneau, Liberal, Toronto Centre, ON]

I am going to be very clear in this regard.

We made commitments during our electoral campaign because we knew that over the past ten years the growth rate of the economy had been lower. And so we made an appropriate commitment to invest everywhere in the country.

That is what we promised Canadians, and that is what we are going to do. We are going to make investments. We don't want Canadians to think that investments are not necessary. It is doubly important to invest throughout the country. Our commitments are very important for Canadians, and we are going to continue with this program to improve the Canadian economic situation.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

A little earlier, Ms. Raitt listed the commitments which were made and which may be in your first budget. There may indeed be a risk that some commitments or investments will be deferred, particularly as regards infrastructure. When I talk about lowering public expectations, I mean that several of these measures may be postponed to other years because of lower and more negative budgetary projections than had been anticipated.

Do you understand my concern that you will actually have the incentive here or the possibility to tell the population to wait because we are not yet in the situation to actually move towards those investments and those commitments the first year and to delay them and to report them?

This is a tactic that was used in previous years by other Liberal governments. So I am sure you will understand my current concern.

[Bill Morneau, Liberal, Toronto Centre, ON]

Thank you for your question. I understand your concern.

We campaigned, as I mentioned, on a commitment to focus on how we can grow the economy. We campaigned on how we can help those in the middle class and those struggling to get into the middle class. We campaigned on how we can improve the lot of those Canadians who are most vulnerable.

We intend to move forward on those campaign commitments. We want to do so in a way that gives Canadians an understanding of our situation.

The report yesterday was to be open and transparent with Canadians. It's to tell them that this is where we're starting and that we're going to make investments against that.

What I'm repeating here today is that in a situation where the economy is not growing as well as we'd like it to be, which is the situation we found ourselves in, I will remind you, during our campaign, we believe that fiscal investments are the right way to go. We couldn't have been more clear. We intend to move forward with investments to make a real and sustained difference in Canadians' lives.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Ms. O'Connell, you have seven minutes.

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

Thank you very much.

I am going to share my time with Mr. Grewal.

Mr. Minister, a downturn in the economy means a lowering of revenues for all levels of government, not just the federal level. In my riding of Pickering—Uxbridge, we have a huge infrastructure backlog, as do many Canadian cities. I was speaking to Mr. Grewal about Brampton as well.

Municipalities can't not provide safe drinking water. We can't not fix bridges or roads. In the downturned economy, we still have to make these investments in our municipalities. It's becoming more and more unaffordable for Canadians to live, with higher property taxes but without an increase in income.

Given the downturn in the economy, I want to make sure the focus is still on investing in our communities, investing in infrastructure. We heard during the pre-budget consultations from the FCM, Ontario's Big City Mayors, and many job creators about investment in infrastructure. Can you commit that we are still going to invest in municipalities to ensure that we are not just putting the cost of infrastructure on the backs of taxpayers down the line?

[Bill Morneau, Liberal, Toronto Centre, ON]

Thank you very much.

I will take a brief second just to qualify what I said to Monsieur Caron. I want to give you an exact understanding of the risk adjustment that we took. The $40 billion is equal to the average downward adjustment in the past three surveys of private sector economists.

Monsieur Caron, I think you were looking for our formula-based approach and how we got to that number, and I just want to be absolutely clear in case I wasn't.

With respect to your question, having had the opportunity myself as well to travel across the country and to talk to Canadians and talk to people from smaller cities and people from larger cities, of course I heard many of the same concerns that you did, that the challenges they face are enormous. That was consistent across the country.

We made commitments that we intend on investing in infrastructure. That infrastructure includes the things that will improve the productivity of the country over the long term, things like transit systems. It includes things that will improve the immediate lives of people, particularly the most vulnerable, such as social housing, affordable housing, and housing for seniors. It also includes investments that we would call green investments such as dealing with the impacts of climate change and waste-water systems.

Some of those investments will clearly be investments we will have to collaborate with municipalities on; social housing and waste-water systems are good examples. Some of them may overlap between provinces and municipalities, so we recognize the importance of collaborating with both those levels of government.

We do want to make sure as we make our investments that we satisfy a couple of goals. We want to make sure that we get incrementally new funding into the economy. We want to make sure that we don't just dislodge funding from other levels of government. We want to make sure that what we do is incremental.

Of course we want to have the maximum possible impact on our economy. By that I mean we do want to seek to get other sources of funding that will also be part of our investments, because we want to have the greatest possible impact on the economy and the greatest possible impact on Canadians' lives.

Those will be the sorts of initiatives that we will be moving forward on, and I'm confident that Canadians will feel a real impact in their lives over the course of the upcoming years because of these investments.

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

Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Grewal.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you, Mr. Chair.

Thank you, Minister, for coming today.

The United States has been the best performing industrialized economy over the past few years. As you know, the Obama administration made a conscious effort to invest in the economy to spur growth at the height of their economic recession. Subsequently, the U.S. budget deficit has plummeted in recent years.

What lessons does the U.S. experience hold for Canada, given the 10 years of low job growth and $150 billion added to our national debt?

[Bill Morneau, Liberal, Toronto Centre, ON]

I think the way I would take that question is with what we are hearing from people around the world. I had the good fortune of going to the G20 meeting with the Prime Minister in early December, I believe it was, and I'm looking forward to going to the G20 meeting this week in Shanghai.

What we're hearing from people around the world and what we're hearing from the OECD is that fiscal measures are critically important as we deal with what we see as a low-growth world. We're seeing significant challenges in major industrialized countries from demographic challenges. We've seen that monetary policy has had an impact, but at a certain stage it's not able to have the same impact that it's had in previous times.

We believe that the idea of putting fiscal impacts into place in the economy can be very important for the economy and at the same time improve people's lives. We're quite clear that in dealing with a lower growth environment, in dealing with demographic challenges, in dealing with a volatile world economy and changes in prices in oil, our idea of moving forward on investments and moving forward to make our economy more productive and innovative is just the right way to go.

To the extent that we see lessons from other countries, we will certainly be very conscious of them. That's one of the reasons that it's very helpful to meet with finance ministers from other countries and central bank governors to get their experience and use that in our Canadian context.

[The Chair, Liberal, Wayne Easter]

There is time for a quick question and a quick response.

[Raj Grewal, Liberal, Brampton East, ON]

Alternatively, both the parties opposite, the NDP and the Conservative Party, pledged during the campaign to balance the budget. In your assessment, given the current state of the economy and the fall economic update, what would be the impact on the economy if we went down that path and had a balanced budget at all costs?

[Bill Morneau, Liberal, Toronto Centre, ON]

We've made a clear commitment to Canadians that we want to invest in the economy. We believe that the decision made on October 19 was a stark decision between two alternatives. The first alternative was to focus on how we could grow the economy, make a real difference in Canadians' lives along the way, and improve our long-term rate of growth. The second alternative was to have a balanced budget at all costs immediately. We believe Canadians made the right choice.

The specific answer to your question is we believe that if we were immediately to look to balance the budget, we would be doing it at all costs. This would force us to either significantly raise taxes or to significantly cut spending. Neither of those is an alternative that we think makes sense. In the case of Alberta or Newfoundland and Labrador, as examples, the idea of raising taxes in either of those two places or in fact significantly cutting spending in them would not make any sense in the face of what families are feeling right now in those places.

We don't believe the outcome would be any less than likely recession for our country if we were to take that approach at this time, which was the proposed approach of the parties that were running against us.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Starting the second round, we are down to five minutes.

Mr. McColeman.

[Phil McColeman, Conservative, Brantford—Brant, ON]

Thank you for being here, Minister.

On my colleague's comments about the Obama administration and where they stand fiscally, I want to put the anchor that this government has moved to, or is pivoted to, because with all due respect, Minister, you've missed every anchor that the Prime Minister sent you in his mandate letter, in terms of what the economy was going to be anchored in, and primarily bringing it back to balance in this term.

Let's just put it in context. The current debt-to-GDP ratio in the United States is 102.98%. Prior to the Obama administration, it was 61.38%. Actually, that's the average, leading in. If you'd like to use that as a comparison, please do, because this is the direction in which your government seems to want to take us whilst they anchor themselves in the statistics of the GDP ratio.

That's enough for the comments. Now, the question has to do with small business. It is really two questions, if you might answer them for us.

There has been a signal that you're going to move to do what the Prime Minister has asked, which is to eliminate the professionals from the Canadian-controlled private corporations provision and not allow them to incorporate. Let me give you an example, a veterinarian who has three employees in his employ. He has been in business for four years, and now he's going to be faced with an additional tax hit of probably between $40,000 and $60,000 a year. Many of the people I've talked to in this category, which includes engineers, surveyors, accountants, chiropractors, doctors, and dentists, say that this will be a significant move to hit them primarily through their not being allowed to incorporate.

That small firm would have to lay off one person, or eliminate one job, as a result of this. It's in direct contradiction to what you've been saying today, which is that you're there for the middle class, that you're there for that entry-level job, for the administrator in that operation who loses his or her job as a result of this.

Can you confirm, yes or no, whether you're going to proceed with this kind of taxation?

[Bill Morneau, Liberal, Toronto Centre, ON]

Can you repeat the specific “yes or no“—the sentence before the “yes or no” as opposed to the longer one? I'd be happy to answer.

[Phil McColeman, Conservative, Brantford—Brant, ON]

Simply stated, is your government, as you've signalled, going to move towards eliminating the current status that professionals in these types of occupations—veterinarians, chiropractors, etc.—have under the Canadian-controlled private corporations taxation provisions?

[Bill Morneau, Liberal, Toronto Centre, ON]

I can confirm, no.