I will. Thank you, Mr. Chair.
I think my colleagues have offered you a pretty detailed review of the challenges facing the sector, so I won't go into a long exposition here, but I would, if I may, offer a few comments to lead us into the question period.
The first comment I have has to do with a remarkable and somewhat troubling divergence within the Canadian economy. Essentially, the Canadian growth story has become a tale of two economies. We have the manufacturing sector and we have the resource sector.
For resource producers, of course, global demand is rising. As a result, so are prices and so are profits. For manufacturers, on the other hand, it's global supply that's increasing. The result, of course, is downward pressure on the prices they receive, and therefore lower profits—and in some cases no profits. For the resource sector, of course, high energy prices are a source of more profit. For manufacturers, they're a source of higher costs and therefore of lower profits.
The result is also a divergence between regions of Canada; I think that's significant to note. Much of the west, driven by the resource sector, has virtually full employment and severe shortages of labour in many skilled trades. Labour shortages I think are an issue for every sector in the country, and that's a long-term trend that's not going to change.
In the west, wages and other costs are rising particularly sharply. In central Canada, by contrast, the manufacturing sector has been shedding jobs. So far, those job losses have been absorbed by other sectors, so the economy as a whole still looks relatively healthy.
I think the point that's relevant here is that the inflationary pressures in the west have pushed interest rates higher than the economic situation in the industrial heartland, taken in isolation, would warrant. The point I'm making to start with here, Mr. Chair, is that I don't think we can look to the Bank of Canada to address the challenges facing the manufacturing sector, because of this regional split within our economy. I think we have to set monetary policy aside and look at what else governments could or should do.
The second point I'd like to address is the contrast between past performance, which has been pretty strong, and the future risks, which we think are considerable. The extent to which manufacturers in many industries have managed to keep their shipments growing despite the multiple challenges of intense competition from China or India, rising energy costs, the rising dollar, and those rising interest rates, is quite remarkable. Investment and the deployment of new technologies, new machinery and equipment, has been strong; it's been growing at double digit rates. Where Canadian manufacturers can find ways to compete, they are doing so.
The performance to date, however, is no cause for complacency. I think the risks, looking ahead, are significant. There is a lot of talk about the potential for the Canadian dollar to rise even further. It's of course a rise primarily against the U.S. dollar, not so much against other currencies. But as Jay has pointed out, when half of what we produce goes into the U.S. market, where we stand against the U.S. dollar has a big impact on how much money the manufacturing sector makes or loses.
Again, every company faces a different cost structure, but at some point every company hits the point where they ask, is it worthwhile to carry on? Can I make further investments that will make it profitable to continue from a Canadian base, or do I have to pack up shop altogether, or figure whether there's somewhere else that I can make what I need to make and do it profitably?
The other risk going forward is the macro risk, and that's in terms of where the United States economy is going. With such a large proportion of what we produce going into the U.S. market, it's not just the exchange rate that matters; it's how much American customers are buying.
It's fair to say that Canada has bitter experience with the consequences of long and continuing and rising government deficits combined with a high and rising current account trade deficit. That's where the U.S. is today. It's obviously a much larger, more resilient economy. There's no consensus about how long the current situation can go on, but I think it is fair to say that there is a significant risk for Canadian exporters looking to sell into the U.S. market. It's certainly foolhardy to assume that we can count on that demand carrying on at current levels.
Let me turn quickly to what we may want to discuss about what to do about the competitiveness challenge. The fact is, it's a complex problem. There's no silver bullet here; there's no one thing companies or governments can do that's going to suddenly make Canada the best place in the world to do business.
We produced a paper earlier this year called “From Bronze to Gold”. It was distributed to all members. We have some extra copies here if people need a new copy. I can address it if you want, but the fact is we suggested that even in the current political context—a minority Parliament, where, for measures to proceed, we need cooperation across the floor of the House—there is a lot that can and should be done.
A lot can and should be done. We put forward ideas for moving forward on everything from families in communities, education and immigration, innovation, regulation--the kind of thing Garth was talking about, environment and energy policy, and of course infrastructure and taxation.
The recent federal budget made a very important commitment to spend a good chunk of the next year developing a comprehensive plan, strategy, for making this Canadian economy more competitive. We certainly look forward to working with members of the committee, with members of all parties in this House, in shaping that forward agenda and a broad strategy that is going to produce more jobs and higher incomes for Canadian families over the next generation.
I would, if you'll indulge me, Mr. Chair, just like to focus on one aspect of policy that is especially important to the manufacturing sector right now, and that's the corporate tax side. It matters to manufacturers now because now is when manufacturers need to make fundamental choices about major investments on whether to invest in growth. The issue for them isn't investing in new technology, in new machinery and equipment to stay in business; the issue is where they invest. The issue for this committee is to figure out how we persuade Canadian companies that they can continue to grow profitably in a global market from a Canadian base.
In that respect, we need to look at two things. The reality is Canada sells largely into the U.S. market. New manufacturing operations, expansions, are going to be concerned with access to the U.S. market and that means a continuing concern in terms of the potential for delays at the border flowing from the U.S. preoccupation with matters of security. We also have concerns about the state of border infrastructure, given the huge increase in flows north and south that we've seen over the last decade.
The point I'm making here is that the border constitutes a risk. If your business is built on selling to customers across North America, there's already a powerful incentive to locate your operation in the bigger of the two markets between Canada and the United States. That means Canada has to figure out how we establish something compelling that says to investors, that says to businesses, “Canadian communities are where you ought to be”. Now there are lots of elements to that strategy, and I think the human resource side is one the committee may want to delve into in more detail.
In terms of making a compelling case to investors, the federal budget 2006 took a very important step forward. First, it acknowledged that in competing for investment with the United States, Canada needs to establish a meaningful advantage in the overall corporate tax rate with respect to the United States. We shouldn't just settle for something that's vaguely in the same ballpark. Second, it recognized that what matters to new investment is not just the statutory corporate income tax rate at the federal level, but the combined impact of all forms of corporate taxation at all levels of government, essentially the so-called marginal effective tax rate on capital.
Third, I think it noted that the federal government has done a lot of the heavy lifting in this respect. The previous government introduced a total of seven percentage points in cuts in the corporate income tax rate and proposed additional cuts over the next few years, which the new government has included in its budget and which we're hoping will go forward expeditiously. All of that is very important, and I want to recognize the progress that's been made.
But I think more needs to be done; provincial governments really need to step up to the plate at this time. The months ahead are going to see some extensive discussions on what's been called the fiscal imbalance. That essentially is the provinces saying they need help in terms of raising the money they need to deliver services Canadians are counting on that lie within their jurisdiction. In that discussion it's clear that both taxation and transfer payments are going to be on the table.
I'm suggesting it's critical for provincial governments to consider not only what they need, but how they can contribute to forging a stronger Canadian economy. The federal budget pointed out one item in particular, the continued use of provincial retail sales taxes in some jurisdictions that add to the cost of business inputs. The Atlantic provinces and Quebec have both switched to value-added taxes, and that's a major plus in terms of enabling and encouraging business investment. The remaining provinces with retail sales taxes need to follow suit as quickly as possible.
I want to conclude by suggesting that this challenge is most urgent in the province of Ontario. Ontario is the heartland of manufacturing. That is where, along with Quebec, the challenges of manufacturing are being felt most stiffly.
I think manufacturers need to make significant investments, particularly in Ontario, as well as in Quebec, if we're going to maintain and grow jobs in this sector nationwide. Yet research that's currently under way--and it's still at the draft stage, I have to say--at the C.D. Howe Institute suggests that Ontario has become not only the highest corporate tax jurisdiction in Canada, but it may be the highest tax jurisdiction among 32 countries worldwide in terms of the effective tax rate on business investment.
I'm mentioning it here today not because I'm expecting this committee to change the policy of the Ontario government, but because I note the presence of members of this House from more than one party who represent ridings in Ontario, whose constituents depend on a strong and growing manufacturing sector. I would simply encourage the members from Ontario around this table to consider talking to their colleagues at the provincial level, and giving this matter of the combined corporate tax burden greater attention at the provincial level and not simply looking to Ottawa to solve the problem for them.
With that, let me conclude my introductory remarks so we can move to questions.
