Finance Committee on May 18th, 2021

[The Chair, Liberal, Wayne Easter]

On behalf of the committee, I want to thank all of our witnesses for taking the time to make their presentations and answer our questions. We certainly had, on quite a number of topics, fairly wide-ranging discussions, and we appreciate that.

To committee members, we will suspend for two minutes and go to the next panel.

The meeting is suspended.

[The Chair, Liberal, Wayne Easter]

We will reconvene the committee.

Welcome to meeting number 45 of the House of Commons Standing Committee on Finance. We are continuing our prestudy on the subject matter of Bill C-30, an act to implement certain provisions of the budget tabled in Parliament on April 19.

With that, we'll go to presentations by the witnesses. We'll start with Mr. Macdonald from the Canadian Centre for Policy Alternatives.

Welcome, David. You've been here before.

[David Macdonald, Senior Economist, Canadian Centre for Policy Alternatives]

I have indeed. Thanks so much for the invitation to come back to speak to you today about Bill C-30 and Budget 2021.

The last time I was at the committee, I presented you with the results of our 2020 child care fee survey in the context of the fall economic update. I was pleased to see those child care figures appear in Budget 2021 as the starting point for the government's ambitious national child care plan.

Parents have two main complaints about child care in Canada. First is that fees are high, and second is that wait lists are long. Targeting a reduction in fees, particularly with quick and substantial reductions by 2022, will have a noticeable impact and make a big difference for parents with young children. However, the expansion of spaces at the same time will be an important corollary to fee reductions to ensure that we don't trade lower fees for longer wait lists. I look forward to specific targets on space increases, as well as reductions in fees.

When it comes to building a recovery from COVID-19, affordable and accessible child care is in a unique position. It certainly supports women as they return to the labour force after they have been harder hit than men during the pandemic due to job loss, but it also provides improved productivity due to higher female labour force participation, thereby driving long-term real GDP growth. Moreover, it pays higher tax dividends than other programs do.

The reduction in child care fees so far has been largely driven through provincial expenditures—certainly in Quebec, but also in Manitoba, Prince Edward Island and Newfoundland, which all have set fee programs, although at a higher rate than Quebec.

The higher income tax that results from higher female labour force participation goes disproportionately to the federal government, despite the provinces being the ones that support it. This makes the federal government an ideal partner on this file, as it is also the main beneficiary of that increased tax revenue.

Budget 2021 is relatively limited in its focus on new revenue generation. I'm not overly concerned about deficits, but now is the time to start to consider new measures so that they can be properly implemented in the future. In the short term, I would encourage the committee to consider a CEWS clawback for profitable companies. In the initial months of the rollout of the wage subsidy, the barriers to entry fell quickly. The upside was easy access for businesses that needed it to continue to operate. The downside was that businesses might squeak by on the rules, but that the subsidy, in the end, would boost profits.

While the CRA has aggressively pursued CERB recipients, there is no corresponding effort on the business side. Recent media reporting has highlighted publicly traded companies successfully receiving the CEWS all the while declaring substantial profits. I would encourage the committee to consider a CEWS payback regime, whereby companies that received it but also declared profits pay it back.

Given that more support has gone to business than to jobless Canadians during the pandemic, it only makes sense that profitable companies that don't need the wage subsidy send it back to support other recovery efforts.

In the longer term, I would encourage the committee to consider other revenue options. The federal government could build on its closure of the stock option deduction scheduled for July through an examination, for instance, of the capital gains inclusion rate. Given its immense cost, this could provide additional funds for the recovery, as could a more thorough review of tax expenditures given that many of those tax loopholes go to a very small slice of the upper end of the income spectrum.

The proposed digital services tax at 3% of revenue provides a model for how profit-shifting by international corporations can be tackled. The 3% of revenue is a sort of minimum corporate tax for foreign companies, although it could certainly be expanded far beyond digital services, which is its starting point.

It is clear from American disclosure that many multinational companies regularly employ profit-shifting strategies to declare profits in tax havens instead of in the countries where those profits were generated. Examining a minimum corporate tax, possibly based on the 3% revenue rule, would go a long way to avoiding corporate freeloading on Canadian infrastructure done by foreign multinationals, all while levelling the playing field for Canadian companies that do pay those corporate income taxes.

Finally, like the government, I have limited concern about federal deficits and new federal debt. Interest paid on the federal debt has fallen to historic lows when adjusted for GDP. This is true even when one includes the record pandemic deficits and new spending over the next five years. Incredibly, we would have to look to before the First World War to see the federal government paying less to service its debts, adjusted for GDP, compared with today. Those low rates make this an ideal time for the federal government to invest in short-term pandemic economic recovery but also in long-term issues, like much-needed changes to avoid the impact of the climate emergency.

For members concerned about interest rate increases, it's important to remember that those increases would hit all sectors, not just the federal government. Including the pandemic spending, the federal government's debt-to-GDP ratio now sits at roughly 50%. Household debt-to-GDP stands at more than twice that, at 112%. The corporate equivalent is at 130% of GDP.

The debt of these portions of the private sector, household and corporate, have jumped 10 points during the pandemic, so even small changes in the interest rate brought about by, say, the Bank of Canada's increasing the overnight rate would have big impacts on the private sector. The impacts would not only be because they are more leveraged but also because they pay a higher interest rate to start with. In that sense, heavy indebtedness of the private sector will protect the federal government from interest rate increases.

I thank you for your time and look forward to your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Macdonald.

We'll turn to the Gros Morne Cooperating Association, Ms. Colleen Kennedy, executive director.

[Colleen Kennedy, Executive Director, Gros Morne Cooperating Association]

Thank you, Mr. Chair.

Committee members and fellow panellists, I did have a PowerPoint presentation, but I'll go by the seat of my pants.

I work for a small not-for-profit that was set up in 1993 by Parks Canada, and which later expanded its mandate to include communities. I'm in a very fortunate region, because we have a lot of tourism and some fisheries. Pre-pandemic, we had about 250,000 visits in the region, and generated a total revenue of $312.5 million. The average spending by a visitor was approximately $1,250 a day, and we employ about 1,200-plus in that industry.

Our region is made up of seven enclave communities. We refer to Gros Morne National Park as our “other fish plant”. The communities have a population of around 3,000. They are engaged in visitor experiences, because that's how we build capacity, by using what's around us.

Current needs in the tourism marketplace have shifted quickly, because of the pandemic, and we've become ever reliant on technology and connectivity.

I'd like to thank the federal government for its investment over the last year or so in connecting some of these small communities to allow us to compete. With these investments in technology, our businesses need this now for sure. We projected expansion into these markets in five to eight years, but because of the pandemic, we've had to fast forward and catch up quickly, so technology's been a big part of our growth and reach-out since the pandemic.

The rapid response by the federal government was very much appreciated from an employee, employer and community point of view. The current structure of the wage subsidy will not work for industry, nor our region, to survive. If we don't have the option to explore and adapt to the new norm we won't have a chance to grow.

The Canada emergency wage subsidy must continue until the fall of 2022 to make the rebuild of this sector feasible. The investment feeds directly into jobs, the economy, and allows our industry to continue its pivot to become one of the world's best destinations for sustainable tourism. We see this as a way of growing our community.

We've lost our accessibility. Our market is very much a domestic market, with 70% of our visitors coming from Canada, mainly Ontario and Quebec. Our international market is about 30%, and that's very much dependent on the U.S. and U.K. The accommodations, experiences and restaurants just before the pandemic were getting their feet under themselves, and could have responded to the capacity at the peak of the season.

Roughly 70% of our operators are older. With the final life cycles of their businesses, they are looking to sell in the next few years. Succession planning for them is a big challenge because of the lack of financial options for younger entrepreneurs who would like to enter the industry. They are challenged by that. For those businesses that were sold in 2020 and bought, they're facing new challenges of no previous employees and no previous revenue. That puts up a barrier for their accessing some of the programs the federal government is offering to assist them in their recovery.

I can't stress enough how important access is to us in the province of Newfoundland and Labrador. Since the pandemic, we've lost 19 flights in Atlantic Canada, and are really challenged while we rebuild some of that. Our operators were 50% open last year. Some of them, about 50%, were probably at 15% of revenue; the others, less than 8%. We dropped about 95% of our visitation and revenue last season, and we don't anticipate much growth in 2021.

With the complications of the vaccination rollout and its being delayed, we can't see.... Even the Canadian Tourism Commission alluded to the fact we'll probably be into September before we see movement in the Canadian market. There are many challenges for small business in our region, but we have a lot of thank yous for the federal government for its assistance in getting us this far.

We really see that the opportunity is in the wage subsidies and in bringing employees back on, showing them how to do it right, and responding to the new expectations of visitors to feel safe. We see that as a better option than extending unemployment and sort of stay-at-home pay.

Thank you so much for your time. I'm sorry that the PowerPoint didn't work, but hopefully I set the stage for where we're at in Gros Morne small business.

[The Chair, Liberal, Wayne Easter]

You explained it well, Ms. Kennedy. Thank you for that.

Before I go to our last witness, the first round of questions will be Mr. Fast, Mr. Fragiskatos, Mr. Ste-Marie and Mr. Julian.

The next witness, Mr. Poloz, who is a special adviser with Osler, Hoskin and Harcourt LLP, is not new to this committee. He is a former governor of the Bank of Canada, who is in a new position.

Stephen, the floor is yours.

[Stephen S. Poloz, Special Adviser, Osler, Hoskin and Harcourt LLP]

Thank you very much, Chair.

Good afternoon to you and to the committee. Thanks for asking me to participate in this study of Bill C-30.

I would offer three points by way of introduction. The first point concerns the context in which we find ourselves. The impact of COVID-19 on people and our economy has been massive. There will be some permanent damage. However, the damage has been mostly limited to sectors that have been shut down. In a typical recession, bad news in one sector usually infects the other sectors through lower confidence. This has not happened this time. I think this is the main reason that the economy has significantly outperformed most forecasts during the past year.

This economic strength has generated a debate around the appropriateness of fiscal stimulus. It has given the government far more fiscal room to manoeuvre than previously expected. However, any major economic trauma will scar the economy. These scars will run deeper the longer it takes for the economy to heal. Scarring manifests itself as a level of national income that would be lower than it otherwise could be—literally forever—and so I therefore subscribe to the view that it makes sense to push the economy harder during the early stages of recovery, because this will encourage business investment and create new economic growth.

My second point concerns fiscal sustainability. A credible fiscal plan in which the level of government debt relative to national income stops rising and debt service costs are manageable meets the minimum—or, we should say, perhaps technical—standard of sustainability. I draw your attention to the table on page 328 of the budget, which shows that these criteria are met. By the way, comparing this table with a similar one from the 2019 budget two years ago demonstrates that this budget does not represent a sharp turn toward big government, as many have said. The planned budgetary expenditure trend line returns to about 15% of national income, just as it was pre-COVID. The budgetary revenue trend line does exactly the same.

There is a legitimate concern that this minimum standard of fiscal sustainability would leave the economy vulnerable to future shocks. Well, that issue is for broader political debate, a debate that I think should acknowledge the challenging fiscal situation in our provinces. When we combine federal and provincial debt together, as we should when considering Canada's future resilience, our fiscal picture is not very different from that of other major economies.

My third point is that there are many ways to build future resilience without government austerity or higher taxes. If we put our minds to it, we can grow out from under our COVID debt burden, just like we grew out from under our World War II debt when I was young. There are many ways in which we could boost our long-term economic growth rate and grow our way out of our indebtedness.

First of all, immigration is Canada's most important economic growth engine, just as it was in the 1950s and 1960s. Anything we can do to make that process more efficient will be a good investment in future growth.

Second, a national child care program, as announced, can also help boost labour force growth. I do hope it can be deployed without delay. This is the sort of program that can literally pay for itself. If we can boost the level of national income by a mere 2% in this way, which amounts to $40 billion to $50 billion more national income every year, then $6 billion to $8 billion will automatically land in government coffers, also every year.

Third, as I've argued before in this committee, one of our biggest untapped sources of future economic growth is to harmonize provincial regulations across the country to reduce interprovincial business frictions. This initiative has about twice as much economic growth potential as the child care proposal, and in fact would cost nothing to implement. It seems to me that finding innovative ways to boost economic growth and avoid raising taxes should be at the top of our list, at this most precarious time, at both the federal and provincial levels.

Thank you, Chair.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Poloz.

Thank you to all our witnesses.

In the first round of six minutes, we have Mr. Fast, followed by Mr. Fragiskatos.

Ed.

[James Cumming, Conservative, Edmonton Centre, AB]

Chair, I will be substituting for Mr. Fast in this first round, if that's all right.

[The Chair, Liberal, Wayne Easter]

Okay, you're on first again, Mr. Cumming.

Go ahead.

[James Cumming, Conservative, Edmonton Centre, AB]

I know how much you've missed me.

Mr. Poloz, I'll direct my questions to you. It's good to see you at committee again. Thank you for your presentation.

Quantitative easing and the amount of stimulus that we've seen into the economy.... I know when you had appeared previously, you had forecasted that inflation was in check and that it didn't appear to be an issue, but we're seeing some trends now that are quite concerning about inflation. In particular, industry has suggested that because of supply chain and shipping issues—we're seeing that very much in several sectors—we're starting to see that spike up.

Is this not a concern on two fronts? The first is affordability in a variety of different sectors and competitiveness. The second is the potential now for interest rates to start to rise to offset that inflation.

[Stephen S. Poloz]

Of course, inflation risk is something we can never take lightly. However, I would just add a couple of things to your premise. One is that most of the anecdotal evidence we have around higher prices is coming from commodity markets. Commodity prices, in fact, have been quite depressed for the last while. In fact, if we look at the CRB index of global commodity prices, they're just now returning to the levels they were at back in 2014.

If you look at the Bank of Canada website, you'll see the commodity price index. There, too, with all the basket of commodities relevant to Canada, prices have been low and now are returning. This is not inflation. This is normalization of prices.

I know there are some exceptions and some prices have gone up a lot, such as lumber. It's a good example. There are also still the laws of demand and supply. They still work. Last year, there were plenty of cutbacks in production because the consensus among a lot of economists was that the economy would be very slow for a very long time. As I mentioned in my introductory remarks, the economy has bounced back far exceeding all of those expectations because economists had modelled it in the traditional way that recessions normally work. This one isn't like that at all.

I think some sectors are still catching up to the recovery in demand. Inflation almost never comes from commodity prices because with commodities you can find more product. You can expand capacity in time, so usually when prices go up enough, somebody brings more capacity online and that causes that price to settle back down again.

I agree with what I've heard from various central banks, including our own, that the inflation we're observing right now is very likely to be transitory.

[James Cumming, Conservative, Edmonton Centre, AB]

Would you agree, though, that it's not just those commodities? We're seeing a significant spike in real estate and certainly an inflationary run on the value of real estate in the country.

[Stephen S. Poloz]

The price of houses is a special item. As you know well, it's not just something we buy. It's an asset. It gives you a stream of housing services literally forever. As a consequence, when interest rates are low, the price of all assets tends to rise, including the price of houses.

Also, the laws of supply and demand have not been ruled out. We still have excess demand for new housing relative to the supply that's being created. I note that the latest numbers show that housing starts are picking up strongly. That's just like commodities. Supply can come on the market and meet that.

I'm not going to pretend that the price of houses has not gone up, but that isn't, strictly speaking and in and of itself, inflation as we describe it. It would need to be something that is sustained for a long period of time for it to be part of inflation. Of course, it is captured in various ways in StatCan's consumer price index.

[James Cumming, Conservative, Edmonton Centre, AB]

Mr. Poloz, you suggested in one of your points that economic growth is an opportunity to dig ourselves out of this hole, and I actually completely agree with that.

There are two things. One is that we've seen a decline in the competitiveness of Canadian companies due to the tax structure, and probably in addition some these commodity prices. However, should the focus not be—if there's going to be any kind of stimulus spending—on assets that will help produce revenue, improve competitiveness or improve innovation? Certainly, we have to be, according to your remarks, I think, export-focused rather than selling to ourselves. We have to be looking at the broader markets. Would you agree that any kind of stimulus should be focused towards assets that will improve competitiveness?

[Stephen S. Poloz]

Well, competitiveness is a complicated thing to measure. Anything that contributes to the cost of a company is affecting its competitiveness. Often, economists point to the exchange rate as a key part of that, but of course, all forms of taxation, the cost of obtaining permits, lags in obtaining permits, and the cost of electricity—which, as you may know, is much higher, for example, in Ontario than it is in Michigan right next door—are all the things that go into effecting competitiveness.

Now, how can policy-makers contribute? Competitiveness is usually driven by productivity, so anything that encourages new investment, new investment in digitalization, or opportunities for automation.... Yes, the tax structure matters. Infrastructure matters a great deal to Canada's competitiveness. There are things going on on a wide range of fronts that should help us improve our competitiveness. Possibly the most urgent would be around the ability to digitalize, so there's broadband Internet, as well as the skill sets to go with that.

I'm sorry that I'm giving you a vague answer, but that's because the question is such a wide-ranging one. I certainly agree that the government should be using its tools in every way it can to facilitate companies' abilities to improve their competitiveness. That's not necessarily the same as using stimulus dollars to buy things or make certain things happen, but infrastructure, if I use the term broadly enough, is for sure a facilitator of competitiveness.

[The Chair, Liberal, Wayne Easter]

Okay, we went substantially over there, but I think we needed a full-scale answer.

We'll turn to Mr. Fragiskatos, followed by Mr. Ste-Marie.

Peter.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you, Mr. Chair.

Mr. Poloz, I'll continue with you, as a matter of fact.

I want to ask you about your specific impressions of Budget 2021. You were quoted in the media recently as saying:

The minimum ingredients that one needs to have in a sustainable plan are present, and that was done without a meaningful increase in taxes of any kind.

Could you expand on that?

[Stephen S. Poloz]

As I said in my opening remarks, if we just look at page 328 of the budget, you can see clearly there that the forecasted debt-to-national-income ratio stops rising next year and is projected to decline very gradually from there.

As I said in my opening remarks, that meets what I call the minimum or a technical definition of sustainability, which is that debt is not continuing to rise—debt is actually slowing—relative to your ability to service it. Debt service, public debt charges, remain not much above 1% of the national income, which for reference is around one-fifth of what they were in the mid-1990s, for example, when we hit a bit of a fiscal wall.

That's a positive way to put it. If you believe that it leaves us unequipped to deal with the next big shock that comes to the economy, that's a judgment. I won't make that judgment today, but if you believe that, then you would probably argue for a faster decline in indebtedness over time. That's something for the political process to work out, but it's not necessary to meet what I call the minimum requirements of sustainability.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you very much for that. There are a lot of interesting things in there—of course, in your testimony as well—but I have limited time.

I'd like to explore some things that you said specifically about the budget, particularly in response to criticisms of it that suggest that it is leading to a massive expansion of the state. What you said in response to that criticism was that “What I take a little bit of exception to is its being cast”—the budget, that is—“as this path-breaking move to big government. There is a conservatism around those numbers.”

What do you mean by that?

[Stephen S. Poloz]

Well, as I indicated in my opening statement—again referring to the same table, page 328 of the budget—shows that, once we get past the activities around COVID, next year and in subsequent years budgetary revenues settle down at about 15% of national income, which is the total tax take of the federal government and other fees. That's exactly what it was before COVID, and it's exactly how it was laid out in the 2019 budget.

If I look at program expenses, they, too, settle down to 15% of national income, and they were around 15% of national income before COVID and in the 2019 budget. Therefore, the budget is not taking more of the economy or spending more as a share of the economy than it was before.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you.

Finally, you've commented on economic growth and drawn a line under structural changes that could be put into place by way of programs that will add to economic growth, and here you've voiced support for the government's vision on a national early learning and child care program. Other countries have pursued this. Moreover, Quebec has pursued it with great benefit for its economic growth in general terms. Can you speak more about how, in your view, a program like this would add to economic growth for Canada?

[Stephen S. Poloz]

It would add to economic growth in the same way that it added to Quebec's economic growth during a similar program, which is now over 20 years old. What it does is allow for an uptick, particularly in female labour force participation. Labour force growth is the most important ingredient of economic growth. To put it in its simplest possible terms, the growth in the economy will be equal to labour force growth plus whatever productivity growth we're able to generate.

The Canadian labour force is no longer generating growth. All of our growth, pretty well, is now coming from immigration, so if we have immigration of around one per cent per year, we can generate one per cent economic growth every year, on top of which we get maybe half a point, or even as much as one percentage point, from productivity improvements.

What we can do is add to that equation some decimal points by getting more women to participate in the workforce through a more fulsome child care and early learning program. It worked in Quebec, and it's one of the reasons why Quebec's finances were in better condition going into COVID than other provinces'.

As I said in my remarks, I see no reason why it couldn't add as much as two per cent to the level of national income. That's $40 billion to $50 billion per year of additional national income, and it's also, of course, the additional tax revenues that come with that.

[Peter Fragiskatos, Liberal, London North Centre, ON]

The point that's being raised by some, and we heard it at one of our sessions—

[The Chair, Liberal, Wayne Easter]

Sorry, Peter, we're over the time. I was on mute when I tried to cut you off.