Pre-Budget Submission to the House of Commons Standing Committee on Finance August 2011
Executive Summary The Canadian Chamber of Commerce welcomes the opportunity to participate in prebudget consultations and to share our views on the questions posed by the House of Commons Standing Committee on Finance: How do we achieve a sustained economic recovery; create quality, sustainable jobs; ensure relatively low rates of taxation; and achieve a balanced budget? We note that these objectives are interlinked and, therefore, public policies must be implemented consistently with due regard to possible trade-offs and complementarities. With the Finance Committee’s questions in mind, the Canadian Chamber of Commerce calls on the federal government to:
Achieving sustained economic growth The decades-long experience of OECD countries has shown that the economic policies that provide the strongest foundation for sustained economic growth are based on four principles: inflation control, fiscal prudence, trade openness and structural reform. A sound financial system is the anchor.
Creating quality, sustainable jobs Developing countries are aggressively competing with industrialized nations, including Canada, to gain an edge in the race for global market share, technological innovation, foreign investment and high value-added activities in global supply chains. China has solidified its role as a manufacturing superpower and is the regional hub for foreign outsourced production. Many developing countries are the spokes supplying China with parts and components, raw materials and energy products. China, India, Malaysia, Thailand and Vietnam are rapidly expanding their innovative capacity. They have a critical mass of researchers, scientists and engineers. Their commitment to research and development will make these countries global leaders in product and process innovation. Canada is at risk of being swept aside as more aggressive nations power ahead. To create quality, sustainable jobs Canada must embrace a culture of innovation. Innovation is "new or better ways of doing valued things. Innovation is not limited to products but includes improved processes like the assembly line, and new business models like web-based commerce...Radical innovations like the steam engine and the transistor create entirely new markets. Much more prevalent is incremental innovation in established markets in which goods and services are continuously improved."[2] Across every industry, innovation plays a critical role in an organization’s success. Innovation has led to new jobs in high-tech and advanced manufacturing sectors like aerospace, nanotechnology, life sciences, and alternative energy. It has also resulted in more jobs in support-related fields, for example in installing broadband networks and building advanced infrastructure. To foster innovation, the government must focus on:
Finally, it is worth studying Germany—a country that has been able to maintain a powerful manufacturing sector in the light of competition from China and other emerging economies. It focuses on high-end manufacturing, producing products renowned worldwide for their quality. Thus, they are able command a premium price. Germany’s manufacturing sector has developed strong connections with universities, technical institutions and polytechnics that have helped manufacturers develop world leading processes and products. The country places a high emphasis on scientific education, technical education, apprenticeship programs, training and retraining. Ensuring relatively low rates of taxation Relatively low rates of taxation can be achieved by reining in government spending, broadening the income tax base and growing the economy. Reining in government spending and improving the efficiency of government programs and operations are key to eliminating deficits and regaining the fiscal flexibility to tackle areas that are crucial to Canada’s long-term competitiveness, including reducing high marginal personal income tax rates (especially as they apply to individuals with modest incomes) that reduce the incentive to work, save and invest. The federal government should also review the hundreds of exemptions, deductions, rebates, deferrals and credits that are part of the federal tax system to ensure they are cost effective and economically efficient. For example, some credits simply subsidize activities many recipients would have done anyway. Others may stimulate spending in certain areas prompting suppliers to raise prices and, therefore, negate the benefit of the tax credit. In many cases, the government is using tax preferences to achieve social objectives rather than funding the initiative through spending programs. The incentives show up as tax cuts when in fact they are spending increases. Ultimately, the myriad of tax preferences enormously complicate the tax structure, increase compliance costs and open up avenues for evasion and avoidance of tax. Broadening the income tax base (by scaling back or abolishing inefficient and ineffective targeted tax provisions) would facilitate lower tax rates so that everyone benefits. Finally, putting our nation on track for strong, sustained growth and real job creation will result in more tax revenue, allowing reductions in tax rates. Achieving a balanced budget The Canadian Chamber has called on the federal government to balance its books by 2015 and to do so by limiting program spending growth to about 1.6 per cent per year, on average, through fiscal 2015-16. On the surface this may not appear draconian, but it would represent a dramatic shift since federal program spending increased around six per cent per year from fiscal 2000-01 to fiscal 2008-09. Savings can also be realized by improving the efficiency and effectiveness of government programs. The Canadian Chamber recognizes that across-the-board slashing of government programs without underlying structural reforms will generate little in the way of sustained savings. Close scrutiny of government programs must be an ongoing process. At the Canadian Chamber’s 2010 Annual General Meeting, delegates passed a resolution calling on the federal government to regularly evaluate all its programs and activities by asking the following questions:
The Canadian Chamber believes that increasing taxes on Canadian families and businesses is the wrong way to eliminate deficits. In a highly integrated global economy, the tax base is constantly on the move. Skilled workers, businesses, jobs and capital move easily across national borders, seeking the best economic opportunities. They are drawn to low-cost, low-tax environments. It is crucial that we do not undermine the progress that has been achieved to-date with respect to corporate and personal income tax reductions. In Conclusion Population aging presents a significant challenge to the continued improvement of living standards and to the sustainability of social programs in the decades to come. Demand for publicly funded programs, like health care and elderly benefits, will rise significantly, and a smaller number of workers will shoulder a larger share of the tax burden. To deal effectively with emerging demographic pressures, Canada must bolster its economic base. In other words, if we want a bigger-sized pie to divide among the elderly and non-elderly in the future, we must grow Canada’s economy. "The evidence is overwhelming that economic growth is strongly related to the openness and competitiveness of a country’s markets and that competition is a key driver of innovation, productivity and prosperity."[3] As such, Canada has much to gain by addressing long-standing structural impediments that stifle productivity, slow job creation and constrain economic growth. Restraining the growth in federal spending is imperative to eliminate deficits and regain fiscal flexibility to deal with changing economic circumstances. The Canadian Chamber of Commerce wishes the House of Commons Standing Committee on Finance every success as it conducts pre-budget consultations. We are anxious to assist in every way we can to build a stronger and more prosperous Canada. For further information, please contact: Tina Kremmidas, Chief Economist | tkremmidas@chamber.ca | 416.868.6415 ext 222
[1] Bank of Canada. “Financial System Review.” June 2011. [2] The Council of Canadian Academies. “Innovation and Business Strategy: Why Canada Falls Short.” Report of the Expert Panel on Business Innovation. June 2009. [3] The Commissioner of Competition. “Submission to the Competition Policy Review Panel.” January 11, 2008. |