Finance Committee on June 3rd, 2024

[Yves Giroux]

Well, it's not based on.... It's based on our best judgment, as well as discussions with several academic and stakeholder groups, as well as discussions with Environment and Climate Change Canada.

[Ryan Turnbull, Liberal, Whitby, ON]

There are lots of people who disagree, like Trevor Tombe, for example, from the University of Calgary, who's done some really great analysis and work. He disagrees. He feels that the output-based pricing system could have a significant impact or that excluding that in the future report could have a significant impact on the overall findings.

I guess that's what I'm stuck on. You're already saying that you think that it's not going to have a significant impact. Do you really know that at this point, when you haven't done the analysis and made that correction?

[Yves Giroux]

What I mean by that is that it doesn't change the overall conclusion. In fact, as I pointed out in my opening remarks, our numbers have been out there since 2022. In that time—that's two years, according to my math—the government itself has not published anything regarding the economic impact of the carbon tax.

We know—and I don't doubt, Mr. Turnbull—that the government has these numbers on the economic impact of the carbon pricing, of the carbon tax and the OBPS. That's your government, sir. They have not published anything yet.

[Ryan Turnbull, Liberal, Whitby, ON]

Is that what you think we should do—publish the numbers that we have that may be contradictory to your own analysis?

My opinion was that you were the one who had an office and a very important position to elevate the debate and provide evidence. You're providing that analysis. I'm saying that you've admitted that you've made a mistake, which is fine, and I get it. Mistakes are made from time to time, but why haven't you issued a corrected report with new numbers?

This is a national debate that's going on. Conservatives are out there making claims based on your report that I think may turn out to be false, and they're campaigning on it. Wouldn't you think that they should be proceeding with caution, given the fact that there's an error in your report that's pretty significant?

[Yves Giroux]

I think that many parties have used our reports—the Conservatives, true, but also the Liberals. I think both sides of the debate have used our reports.

We have undertaken that we will issue an updated report, and that's a commitment that we have made since mid-April. We will update our analysis, but we want to ensure that we have the most up-to-date information and that we have updated our modelling capacity and our model, our CGE model, as I explained.

[The Chair, Liberal, Peter Fonseca]

That's time, Mr. Turnbull.

Now we're off to MP Ste-Marie, please.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Greetings to the witnesses.

Ms. Webb, Mr. Stanford and Mr. Hazell, first of all, I want to thank you for being here. Your testimony is definitely relevant, interesting and important. I would've liked to ask you some questions, but our speaking time is limited.

Mr. Giroux, I'd like to go back to the exchange I just heard.

Is the Parliamentary Budget Officer the only official required to publish data and analyses, or does the government also have a duty to be transparent with Canadians by publishing the data it has on these measures?

[Yves Giroux]

Thank you, Mr. Ste‑Marie.

That's an interesting question. It's often in the government's interest to advertise the merits of its policies and proposals to ensure the public accepts them. I think the government does a pretty good job in that regard. My office's role is obviously to provide cost analyses. That's part of my mandate, and we do our work as well as we can.

We also did the best we could on the carbon tax. As I noted, we estimated the costs of carbon pricing as applied to both consumption and the emissions of major emitters.

What I mentioned in my exchange with your colleague Mr. Turnbull was that the government has access to the economic impact analyses of all these plans, but, to the best of my knowledge, I don't think it has published them, at least not recently.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Then I'd like to ask Mr. Turnbull, who represents the government on this committee, to make those analyses public and available. As he said, carbon pricing is widely discussed in Canada. So that would add to the information the public has on the subject.

Now getting back to the budget, Mr. Giroux, my question concerns a somewhat technical aspect that troubles me, so I'd like to hear your opinion on it. You said in your analysis that the government had announced $61.2 billion in new spending that was partially offset by $21.9 billion in revenue-raising measures. We're eagerly awaiting the bill respecting the main revenue-raising measure, and we're obviously awaiting your analysis of that measure as well.

However, when I received the notice of ways and means motion, I was surprised to see that the measure wasn't in it. It isn't in Bill C-69 either. However, as I understand it, when the government announces measures in the budget, such as changes to capital gains taxation, it has to table a ways and means motion and then a bill.

Is it normal for that kind of measure announced in a budget not to appear in the notice of ways and means motion or in the bill to implement the budget?

[Yves Giroux]

I may be mistaken—I don't have the budget before me—but I believe that a notice of ways and means motion concerning the change to the capital gains inclusion rate was attached to the budget submitted on April 16.

However, it is normal for the Canada Revenue Agency to begin administering a tax measure when a notice of ways and means motion is included in the budget. It facilitates administration of the tax system. Of course, there's always a chance that the measure may not be legislated into being and therefore not see the light of day. The government would then have to recalculate the amount of tax to be levied. However, it's common for many governments to request that the agency administer tax measures announced in a budget before they're adopted.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

The capital gains measure is supposed to come into force at the end of the month, on June 25, if I'm not mistaken. However, we still don't have the text of the bill, including details and possible exclusions and exemptions. All we have is what appears in the budget. We're here today, on June 3, and we still don't have the text of the bill. In a previous exchange, you noted that this kind of tax measure could alter the behaviour of economic agents.

Do you find it troubling that we still don't have access to the text less than three weeks before the measure comes into force?

[Yves Giroux]

I agree with you that it's troubling that we don't have the measure. An increase in the tax on cigarettes announced in the budget came into force a few hours later.

Several details regarding capital gains could affect the decisions of many corporations and individuals whether to retain or sell assets. I don't think it will be a major issue if the measure is implemented as it was announced. However, there could be a problem if technical details tend to alter what was announced and to impact the decisions of certain actors. We won't know until we see in the text of the bill.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Mr. Giroux, I'm going to use my remaining time to ask a question that I'd like you to answer during the next round.

You say in your budget analysis that the government announced in budget 2023 and the 2023 Fall Economic Statement its intention to reallocate previously announced spending that has yet to occur. You also say that some information has been provided in that regard but that it remains difficult to track the overall plans, progress and results of that reallocation. I'll ask you for details on this during my next turn to speak.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Ste‑Marie.

Now we'll go to MP Davies for the next six minutes, please.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you, Mr. Chair.

Thank you to all the witnesses for being here.

Dr. Stanford, the Bank of Canada has argued that current inflation comes from excessive domestic spending and an overheated labour market. Do you agree with that analysis?

[Dr. Jim Stanford]

Thank you, sir.

No, I do not. I don't think that the experience of the rise and fall of inflation in the post-COVID environment confirms the traditional textbook story, which is that inflation arises from excess purchasing power, generally created in a labour market with unemployment that is too low. I don't think that this narrative fits the facts of the inflation that we have experienced.

There has obviously been a significant and helpful decline in inflation since the mid-2022 period, when it peaked in Canada. It peaked at an 8% rate year over year. That decline in inflation has not been correlated with any changes in wage-setting behaviour, for example. In fact, in Canada, nominal wage growth has picked up in that period because workers, of course, are trying to negotiate higher wages to keep up with the inflation that undermined their real wage growth in the earlier period.

We also haven't had a significant change in fiscal policy or injections from the government sector in that period.

What we have seen is a normalization of global supply chains, reduction in shortages of key commodities like semiconductors or building products—a shortage that drove up prices in the initial post-COVID period—and a significant decline in world energy prices. All of those factors explain why inflation rose and why it fell. It has no obvious connection to so-called excess demand.

In real per capita or real per household terms, Canadians are spending significantly less now than they were before the pandemic hit, so it's hard to say that we have too much spending power. In fact, Canadians are grappling with the impacts of high interest rates on their disposable income. It was rather a supply-side factor exacerbated, as I mentioned, by profit-taking by some companies that were able to take advantage of that situation.

[Don Davies, NDP, Vancouver Kingsway, BC]

You sort of anticipated where I'm going next.

In an April commentary on the federal budget, you wrote the following:

it is important to keep in mind that the main cause of the cost of living crisis in Canada is not government. Rather, it's companies charging more for what they sell (driving corporate profits to all-time records after COVID lockdowns ended, and sparking the wave of inflation that is only now subsiding), and failing to pay workers enough to keep up.

Can you elaborate on the role of corporate profits and the role they're playing in the current cost of living crisis?

[Dr. Jim Stanford]

Yes. We did see an unprecedented surge in corporate profits in Canada, which was particularly marked in 2022. Net corporate operating surpluses that year reached 17% of GDP, which is the highest in history, which is in itself striking. Canadians are trying to grapple with a health emergency and an economic emergency, yet for corporate profits, it was the best year ever.

That increase in profits was not spread evenly across the entire economy. In our research, we identified some key strategic sectors where companies had a combination of leverage in the overall supply chain, usually reinforced by a high degree of concentration in that sector, that allowed them to take advantage of the disruptions of the pandemic and the adjustments afterward to increase margins, markups and their final profits.

The encouraging side of this is that the same relationship has held on the way down as well as on the way up. We have seen a moderation in corporate profits in the period since 2022. That was confirmed again in this week's latest GDP data for the first quarter of 2024: Corporate profits fell again a little bit, as did inflation. In fact, measured by the Statistics Canada consumption deflator, which is equivalent to the CPI in terms of what it covers, inflation is now back to the 2% Bank of Canada target.

We've seen a normalization of factor income shares, in part because the initial conditions that allowed companies to increase prices so much have dissipated for the most part, so we are seeing, I think, a return to somewhat normal pricing behaviour. As a result, inflation has come down. It had nothing to do with our labour market or our wages.

[Don Davies, NDP, Vancouver Kingsway, BC]

I want to move to productivity. It's been getting a lot of news lately.

What are your views on Canadian productivity? What policy suggestions might you have to deal with it?

[Dr. Jim Stanford]

We've obviously seen some very unusual swings in the data on productivity in Canada. Initially, productivity seemed to surge during the COVID pandemic, but that was a composition effect resulting from the loss of so many lower-wage, lower-productivity jobs during the pandemic. Then productivity came back down as industries like hospitality and retail reopened and people went back to work in those sectors.

We still haven't fully adapted to the shocks of the pandemic. I believe there are some measurement issues involved in the swings as well. Other industrial countries have also reported big swings in productivity measurements. Hopefully, we're starting to see a normalization of productivity growth, which should be carrying on at 1% or more each year, thanks to technology, skills and other factors.

In my judgment, however, I do think that productivity is an important to issue in the longer run. We need more policies that try to better value labour and equip workers with more capital equipment and skills, so they can do their jobs to the utmost. I think poor business investment and innovation performance in Canada has been part of our problem.

[Don Davies, NDP, Vancouver Kingsway, BC]

Thank you.

Spending on machinery and equipment by businesses and on R and D and innovation has been falling as a share of GDP for many years, dating back to the corporate tax cuts that Paul Martin introduced at the turn of the century.

Can you explain why those corporate tax cuts did not result in, or have not resulted in, investment by businesses in Canada, and how that may underpin some of the productivity issues you mentioned?

[The Chair, Liberal, Peter Fonseca]

Be fairly quick, please.

[Dr. Jim Stanford]

Those tax cuts had no impact on machinery and equipment investment because they weren't tied to incremental investment. It was money given to companies that were profitable, whether they reinvested or not.

I would argue similar concerns around the capital gains inclusion change in this budget. The claim that this will reduce business investment in machinery, equipment and innovation I don't think is credible, given that experience.

[The Chair, Liberal, Peter Fonseca]

Thank you.

We're moving into our second round.

Members, as you know, these one-hour panels don't allow for a second round, so we're going to divide the time equally. It looks like about two and a half minutes for each party now.

I'll take the opportunity to thank our witnesses.

We're starting with MP Morantz for two and a half minutes.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you, Mr. Chair.

Mr. Giroux, in your earlier testimony, you said that you understood that the government had economic analysis on the carbon tax that it has not released. Are you saying that the government has not been transparent with the analysis it has?