Well, thank you very much for inviting me back. It was about a year and a half ago that I was last here, but I think I've appeared before this committee, off and on, probably for the last decade. So thank you for the invitation.
I've provided a handout that updates some of the charts from May 2006. There are a couple of new charts as well on some recent data on the issue before us.
In my opening comments I'd like to focus on some of the policy challenges in particular, and if I have time I will make a couple of comments on the charts. If not, please feel free to ask whatever questions you wish on those.
First, I have a couple of comments on the nature of the challenges the Canadian dollar appreciation presents.
Something that sometimes escapes us is that by far the most important impacts of the appreciating Canadian dollar on the economy are the many ways in which this appreciation redistributes money and redistributes income among different groups of Canadians--different industrial sectors, different occupations, different income groups, and certainly different provinces of Canada.
After a challenging period of transition, it's very important to understand that the Canadian economy can operate and has operated at a good level of performance at a high dollar and at a low dollar. It's a redistribution issue, most importantly.
With a sharply higher value of the Canadian dollar, as we've seen since 2002, it's also important, I think, to understand that the industrial composition of the Canadian economy should be different. That's appropriate. When the dollar goes from 65¢ to par, it's appropriate that there be significant changes in the structure of the economy.
To be competitive going forward means that there simply should be, and there must be, and there will be, fewer people in the economy making their livings exporting to the U.S.
It's critical that the government fully recognize the adjustment that must take place among firms and workers and between the provincial economies.
I think the government can and should help workers adjust to the new reality with retraining and relocation. Where there are already policies in place, I think some supplementary policies to help workers adjust to this new reality are important.
But before talking about labour market issues, let me talk about business sector issues. What I'm going to say to you today is that the question of whether the government should provide assistance directly to the business sector to compensate for Canadian dollar appreciation is quite problematic.
Clearly, many firms rely heavily on exporting to the U.S., and they're suffering a significantly decreased ability to compete in the U.S. market. There's no doubt about that. And the adjustments are nowhere near all behind us by any means. However, from a conceptual point of view, whether it's appropriate to provide new assistance directly to firms, specifically to compensate for the difficulties they're having in adjusting to the higher dollar, is problematic.
Adjusting to a changed exchange rate is a well-known risk of doing business in Canada. That's the way it is. Adjusting to an exchange rate is a well-known risk of doing business. There are other well-known risks of doing business--higher energy prices, a weaker U.S. economy. A change in the value of the dollar is one of them. We opt for a flexible currency, and that's the way it goes.
Now, it's very difficult to design fair and effective assistance to firms suffering from the high Canadian dollar. So besides this point that whether we should be compensating companies for this risk is conceptually very problematic, let's just assume that you want to do that. My next set of points says that in doing that it's pretty difficult to spend the taxpayers' money wisely, and here's why.
Some firms have adopted hedging strategies, and some haven't. So are you going to compensate those who haven't done the appropriate management strategy?
Some manufacturers do not rely heavily on exporting to the U.S. Some rely on exporting to Europe rather than to the U.S. Some can switch more effectively to other export locations.
Some manufacturers don't export. In fact, some manufacturers are doing very well supplying the energy sector, for example.
Some manufacturers are suffering from problems other than the high Canadian dollar. High energy prices would be a good example.
Some manufacturers—and here I specifically mean the Detroit-based U.S. auto companies—have serious problems that go beyond the high value of the Canadian dollar, and those problems are going to be with them for a little while.
Other companies, firms, and sectors are suffering because of a weakness in the U.S. economy, maybe indirectly related to the value of the dollar.
Also, some non-manufacturers—computer software people would be an example—rely more heavily on exporting to the U.S. than some manufacturers do. Many non-manufacturers do not export to the U.S., but they suffer seriously from increased import competition from the U.S. The tourism sector would be a good example here. So any form of assistance directed at compensating manufacturers for their difficulties in adjusting to the high Canadian dollar, if you decided you were going to do that, would likely be seriously off target and unfair to some non-manufacturers.
Let me get quite specific about the capital cost allowance that was in budget 2007, and of course the government is considering extending that in budget 2008. I'm saying that no specific or special break for manufacturers relative to firms in other sectors should be made. Any breaks should not be justified by particular difficulties that some of these firms are having in coping with the high Canadian dollar.
To be clear, I'm saying that assistance to the business sector in coping with the high dollar is problematic. If you want to do it, it's very difficult to spend the taxpayers' money wisely. And with respect to this particular tax break, if you do decide to extend that tax break, you should make that tax break apply to all firms, not just manufacturers.
That tax break should be extended not with the justification that they're having a difficult problem coping with the high dollar; it should be extended for the very good reason that this tax break can be very helpful in improving productivity and competitiveness. It would have been a good idea to have done this kind of thing three years ago, two years ago, one year ago, and one year from now. It's a good idea. This can be a very effective tax break in improving productivity, another reason not to limit it to manufacturers.
It could also, of course, move us into getting the marginal effective tax rate on investment closer to some of the other countries in the OECD. We're doing well relative to the Americans, but we're lagging behind others. So international competitiveness is another good reason for doing this tax break.
This tax break will not be as expensive as you probably think it would be. The reason is that in budget 2007 or any budget document the government always reports what's called the fiscal cost. That fiscal cost never incorporates the feedback and the stimulation that the government will get from extra economic growth that will be stimulated by that tax cut.
So when the government, as it always does—and make sure you press finance department officials on this—costs anything in the budget, that's the so-called fiscal cost. It does not include the fact that certain tax cuts, and this is one of the leading ones, tax cuts on investment or marginal tax cuts on people, will stimulate economic growth and the government will get some of its money back. That's not counted in. That's why I'm saying that with this particular tax break, because in the fullness of time it will stimulate productivity and economic growth, the government will get some of its money back.
When they cost it out and say “Dale Orr says expand it to everybody. Gee, I wish we had enough money. It's going to cost us three times as much,” I would say, “Much better, don't be non-discriminatory. Put it for everybody, and if that's too much, then don't keep it at 50%.” Cut the cloth to fit the money that you have available. It's much better to cut the rate and keep it applying to everybody than to be discriminatory.
But on this tax break, the extension of this capital cost allowance in whatever form you decide to put it, I'm saying if you decide to do it, please have it apply to everybody and not just limited to manufacturers. And don't justify it because of the high dollar; justify it because it's a good move for productivity and competitiveness.
If you decide to do that, I think it should be on the agenda for budget 2008. It should be on the agenda. But is this more important than reducing certain personal income taxes? Is this more important than putting that government funding towards infrastructure development? Is it more important than putting government money to reducing poverty? I don't know. That's why I'm saying it's problematic.
Let me turn to the labour side. I'm much more sympathetic with the government increasing their assistance on the labour side than I am on the business side. The government can and should provide increased assistance to workers, but this assistance also should not be justified or tried to be identified only with workers who are suffering from a high Canadian dollar. It should be justified because we're helping these workers train, retrain, relocate to find more rewarding and secure employment to help them and their families, and help the Canadian economy.
One of the most pressing problems in Canada right now.... If some of you are from western Canada, you'd say “Well, what's the pressing problem?” It's a shortage of labour, right? We're sitting here saying, “Gee, we have all these people losing their jobs because of the high Canadian dollar.” It seems ironic, doesn't it?
The unemployment rate in Canada is about the lowest in 30 years, but there are still about one million Canadians unemployed. About 40% of the unemployed are living in regions of perpetually high unemployment rates, mostly in eastern Canada. About 70% of these unemployed are under the age of 45. So a movement by those people to where the jobs are in western Canada would have a good payoff. That's why I'm saying it's important to maybe focus this relocation on people who are younger--there's bigger payoff.
Many of the job openings in western Canada are now being filled by immigrants into Canada, while Canadians continue to pay unemployment insurance to people who do not move to where the jobs are. This makes the standard of living lower than otherwise in Canada, and it's unfair to hardworking Canadians.
In recent years, an increasing number of people have relocated to more promising labour markets, but these people have been motivated by their own personal, private initiative as well as significant initiative from some private sector employers in the west. However, the federal government has not significantly ramped up its assistance to help people relocate to where the jobs are in response to the growing labour market needs of the west--increasing federal government assistance to workers for interprovincial relocation. That's a bad word in the federal government. It was a bad word when I was working in the federal government 20 years ago, and I understand it's still a bad word. But I think it's good for Canada. It's good for those people, it's good for those families--interprovincial relocation. Ramp up those efforts; they're long overdue.
That's it. I have the charts. I think my ten minutes are up.
