FINA Committee Report

SUPPLEMENTARY OPINION OF
CONSERVATIVE PARTY OF CANADA

December 14, 2004

The House of Commons Standing Committee on Finance heard from a wide range of Canadians who presented their considered thoughts on the policies they felt should be in the 2005 Federal Budget. We are impressed with the commitment among Canadians to build a strong Canada where our quality of life is among the best in the world.

The Conservative Party of Canada (CPC) supports the majority of recommendations from this Committee. Nevertheless, our rationale for delivering a Supplementary Opinion is that the Liberal government simply refuses to listen and to implement the changes that Canadians need. This Committee’s report, is simply more of the same, a broken record of observations that can be seen in virtually every previous report.

To correct this sad state of affairs, we want to emphasize the following perspectives on the items we would like to see in the 2005 Budget to help Canadians sustain and build upon their high quality of life:

•	Encouraging investment in Canada’s productive capacity

•	Reducing corporate, capital and payroll taxes

•	Streamlining the regulatory environment

•	Vigorously reducing the national debt to reduce interest charges

•	Cutting federal spending to sustainable levels

•	Encouraging education and training

•	Promoting and stimulating affordable housing development

The world around us is changing dramatically and Canada has to be better prepared to deal with the new realities. We have seen the Canadian dollar soar to new highs, not because our productivity has sharply increased, but because the prices of our raw materials have risen. China is a growing force, not only as a consumer of our raw materials, but also as a competitor in manufacturing and as a magnet for international investment. Canada is not prepared to deal with this situation, and the urgency is building. Finally, the United States is heading toward serious economic difficulties as reflected in its fiscal and trade deficits—the resolution of which can only hurt Canada.

The Record is Really Not that Good

A few basic statistics back up our contention that the now is the time for major change—that more of the same is not good enough—that Canadians deserve better. First, during the past forty years Canada’s GDP per worker has remained little changed compared with that in United States—it remains stuck at about 85 per cent of the U.S. level.ⁱ

For a nation that has endured numerous innovation, competitiveness and productivity enhancing attempts from Liberal governments, we have precious little to show for it. Canada remains where it was some 40 years ago. “Lest any Canadian think that the productivity gap is irrelevant, it more than accounts for the income gap of $6,078 per Canadian.”ⁱⁱ Surely we can do better—having a family of four with some $24,000 a year less income to spend than they would have in the United States is nothing to celebrate.

Furthermore, unemployment rates in Canada are stuck well above those in United States. This has persisted for a quarter century. Whereas once, back in the early 1970s, Canadian and U.S. unemployment rates were the same, or ours were even lower, they are now locked in a gap that should be unacceptable to all Canadians.ⁱⁱⁱ 

It is obvious that doing the same thing over and over will not give us better results. This is why we believe that bold, new initiatives are needed to turn the situation around. It is not good enough just to be critical, which is why we are presenting viable options in this Supplementary Report. There are a number of areas that we want to highlight as being crucial to improve our productivity and guarantee the quality of life Canadians deserve.

The Drivers of High Living Standards

•	Investment in Productive Capacity

Throughout the hearings we heard that productive investment in Canada is lagging and that a number of key factors are the main culprits. Taxation levels affect the willingness of investors to build new industrial capacity in Canada. If taxation is too high and investment too low, the competitive abilities of Canadians can not be unleashed. Countries like Australia and Ireland have shown the way and are benefiting from large gains in productive investment—why can’t Canada do the same? 

We are not getting our share of foreign direct investment and in fact we have been experiencing a net outflow.  Sadly, Canadians see better opportunities elsewhere and, equally, there is little prospect of reversing this trend unless major change to tax policy affecting the Canadian business investment environment is brought forward in Budget 2005. We have made this point many times before and are frustrated with the timid proposals coming from this government. 

•	Taxation Remains too High

We heard from many presenters that corporate tax rates remain too high and are impairing investment that could improve our productivity and employment rates.  The CPC position is that more emphasis on tax reduction, especially those taxes that are well-known job killers, is a must.

First, as the Auditor General has noted, the government continues to flout its own policy about balancing the EI Account, now some $46 billion in surplus. “In our view, Parliament did not intend for the Account to accumulate a surplus beyond what could reasonably be spent for employment insurance purposes . . . “ ^iv  This government simply refuses to respect the intent of the Employment Insurance Act.  The CPC wants it to eliminate the $2.0 billion surplus in the EI Account estimated for 2005. The Chief Actuary’s Outlook shows that the three cent cut in premiums for 2005 to $1.95 is still some 10.8 per cent higher than the breakeven rate of $1.76.^v This government should stop overcharging Canadians!

Second, we want the capital tax eliminated in 2005 and are glad the Committee sees this as a priority. The best we could get this Committee to agree upon was to “review” the timetable for its elimination. This tax is universally deemed to be a job killer and has no place in the Canadian tax system. It should be gone before the planned termination date of 2007.

Third, we note that the evidence is clear that the effective large business tax rate in Canada remains well above that in United States. “Canada’s effective tax rate on capital (corporate income, capital and sales taxes on capital purchases) of 31.5 per cent in 2004 is substantially higher than that in the United States, where it is 20.1 percent”.^vi We cannot afford this situation and we want the Government of Canada to stop telling Canadians that our corporate tax rates are competitive with those in United States—this is simply not true. We must insist that the effective tax rate be considered in tax reform and are pleased that the Committee sees the merit in our perspective.

If the U.S. administration goes forward with further tax cuts, the situation will be even worse. Countries like Ireland and Australia have moved aggressively on corporate tax cutting, and their corporate tax revenues have risen because investment in those countries is so much more attractive that even with lower rates, tax revenues rise. We don’t think Canadians should have to put up with another decade of lost opportunities.

•	The Regulatory Environment Needs Streamlining

The CPC has no doubt that Canada has the potential to do better. We want cumbersome regulations removed, and improvement in the efficiency of those that are necessary to ensure the safety of Canadians. We want action on implementing the recommendations of the External Advisory Committee on Smart Regulation.

As for securities regulation, we have heard for years that having 13 jurisdictions governing securities is simply out of touch with the needs of a modern economy. Consequently, we applaud the Committee for recognizing the need for a “national securities regulator scheme”.  Unfortunately, the federal government has failed to show leadership and has little credibility with the provinces on this issue.  Nevertheless, we are hopeful that this will be resolved by June 2005, the timeframe recommended by the Committee.  Canada cannot continue to be the only industrialized country without a national regulator and expect to ensure the vitality of its capital markets.

•	The Interest on the National Debt is Too High

Perhaps most troublesome about this government is its unwillingness to allow proper debate about the uses of surpluses and their size. The Committee has taken steps to correct this by proposing regular updates to the estimate of the fiscal balance. The Conservative Party of Canada believes this is critical and in the public interest—after all, it is Canadians’ money.  We are nevertheless disappointed that the Committee did not emphasize this point, preferring to be silent on the need for a more transparent process that enables Canadians to debate the use of surpluses or to deal with looming deficits. 

The consequence of many years of deficits still plagues Canada. The public debt stands at $501.5 billion and interest costs are $35.8 billion annually.  Without such a heavy debt load, we could be spending this amount on social programs or reducing taxes. Imagine how we could improve the competitiveness of Canada and our quality of life if we didn’t have to tax ourselves so heavily to pay for past misdeeds!

The CPC is disappointed that the Committee can bring itself only to support the current rate of debt-to-GDP reduction. We have been arguing for a more rapid reduction in the level of debt, not just in the debt to GDP ratio which has recently declined mainly because of the growth in GDP. But this government continues to spend and shows no sign of being more prudent about the future as so many speakers demanded in our Committee Hearings.

•	Federal Spending is Rising Far Too Rapidly

The federal spending record of the past three years is very discouraging for those who want to ensure Canada remains on a sound fiscal footing. There is an entrenched culture of spending in Ottawa. The growth in non-interest spending has been 5.7 per cent a year from 2001 through 2004. As revenue grew by only 0.8 per cent over the same period, this trend is obviously unsustainable.

In this regard the CPC is very concerned that the current expenditure review is simply not going to deliver the goods. This endeavor is supposed to find billions in spending cuts, but these are cuts from what—levels of spending that would otherwise have occurred or from current levels of spending?

We are frustrated! At best, the Committee “hopes” that $3 billion will be found and maybe even “surpassed”, but we have absolutely no way of actually knowing if this will happen and no evidence was brought before the Committee that would make us believers. The growth in non-interest spending is simply too rapid and we want to see, in Budget 2005, a clear statement that this will stop. The priority must shift from spending taxpayers’ money to expenditure cutting and tax reduction.

•	Education & Training

The federal government continues to have a limited role in the support of education in Canada. While we are committed to respecting provincial jurisdiction in this area, we feel the federal government can do far more to promote education in our country.

Specifically, we want to see Budget 2005 contain initiatives to expand the tuition grant program for students of modest means who want to attend post-secondary educational programs. We heard a great deal about the problems faced by students from low-income families.  To help them further, we also want to see federal income taxes removed from bursaries and scholarships.

•	Promoting and Stimulating Affordable Housing Should be a Priority

The difficulties of our cities have received much attention over the past few years and the Liberal response has been to reduce the GST charged to municipalities and promises of a portion of the federal excise tax on gasoline. The CPC supports these initiatives, but we are also concerned about the lack of attention to the supply of affordable housing.

The Committee speaks of another federal “review” of housing policy—but, we have had enough reviews to know how to proceed. Two initiatives should appear in Budget 2005, one relating to tax policy as it affects housing supply, and the other to regulation.

First, “. . . it is clear that a reasonable tax regime will bring investors back into new rental housing production and . . . will keep owners of existing rental buildings in business.” ^vii The current federal tax policy works against the construction of affordable rental accommodation and this policy is especially harsh on smaller landlords.

This government continues to ignore simple solutions to the real difficulties faced by poorer Canadians in accessing rental housing. While the CMHC is researching issues related to building and fire codes for secondary suites, action is what is needed or the ongoing shortage of affordable housing will remain. This is simply wrong-headed policy and we want it changed in Budget 2005.  “Secondary suites in single-family homes provide one of the most cost-effective ways of providing affordable rental housing. . . yet many of these suites are technically illegal”^viii.

In Conclusion

The Conservative Party of Canada understands that our living standard is not simply reflected in high income.  It is also, however, not guaranteed. Opportunities to develop one’s potential are what we seek when we talk of a high quality of life.

Canadians should not have to settle for another round of lost opportunities. The true value of these pre-budget consultations lies in the ability of the Finance Committee to change policies that will lead to improvements in these areas.  Unless bold measures are taken, Canada will continue sleepwalking toward mediocrity.

Standing Committee on Finance

Monte Solberg, M.P., Finance Critic

Charlie Penson, M.P., Vice-Chair, Standing Committee on Finance

Rona Ambrose, M.P., Intergovernmental Affairs Critic

Brian Pallister, M.P., National Revenue Critic

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i	The Centre for the Study of Living Standards, Aggregate Income and Productivity Trends: Canada vs. United States, (Ottawa, October 2004) Table 7.

ii	The Conference Board of Canada, Performance and Potential 2004-05, (Ottawa, 2004), p. 60.

iii	Ibid, The Centre for the Study of Living Standards, (Ottawa, October 2004), Table 8, 9.

iv	2004 Report of the Auditor General of Canada, (Ottawa, November 2004), Chapter 8.3.

v	Human Resources and Social Development Canada, Chief Actuary’s Outlook on the Employment Insurance Account for 2005 (October, 2004).

vi	Duanjie Chen and Jack Mintz, The 2004 Business Tax Outlook: Lowering Business Taxes Would Spur Investment, C.D. Howe Institute, Toronto, 2004. p. 3.

vii	Canadian Home Builders’ Association, Anticipating the Future, Pre-Budget Submission, (Ottawa, September 2004), p. 4

viii	Canadian Real Estate Association, Pre-Budget Submission, (Ottawa, September 2004), p. 3.