Proceedings of the Standing Senate Committee on
National Finance
Issue 7 - Evidence - Meeting of May 5, 2009
OTTAWA, Tuesday, May 5, 2009
The Standing Senate Committee on National Finance met this day at 10:00 a.m. to examine Bill C-10, the Budget Implementation Act, 2009, Parts 1-6, Parts 8-10 and Parts 13-15, and in particular those dealing with employment insurance, and the Estimates laid before Parliament for the fiscal year ending March 31, 2010.
Senator Joseph A. Day (Chairman) presiding.
[Translation]
The Chair: Honourable Senators, this morning the committee is continuing its review of the 2009 Budget Implementation Act, or Bill C-10. At the same time, we are examining the 2009-2010 Estimates.
[English]
In recent weeks, we have been hearing about individual aspects of Bill C-10. This morning, we will be considering Budget 2009 in a more general manner. To that end, we are pleased to welcome Jeremy Leonard, Senior Fellow, Institute for Research on Public Policy. Mr. Leonard is the co-editor of a publication entitled: A Canadian Priorities Agenda: Policy Choices to Improve Economic and Social Well-Being, published in October 2007, and he currently directs the institute's research activities on innovation and competitiveness.
Honourable senators, Mr. Leonard was recently involved in a conference dealing with this general subject matter. We are pleased that he was able to find the time to be with the Standing Senate Committee on National Finance today.
Mr. Leonard, please proceed with your introductory remarks.
Jeremy Leonard, Senior Fellow, Institute for Research on Public Policy, as an individual: Thank you very much, Mr. Chairman, for affording me the opportunity to appear before this committee on the important subject of the 2009 Budget.
[Translation]
The Institute for Research on Public Policy is an independent, bilingual and not-for-profit think-tank based in Montreal. The Institute's independence is assured by an endowment fund established in the early 1970s.
The IRPP seeks to improve public policy in Canada by generating research, providing insight and sparking debate that will contribute to the public policy decision-making process.
[English]
My role at the institute is to direct our research projects on economic policy. My remarks today, although not the official view of the institute, are based on policy research that we have published as well as my own expertise.
The institute also publishes a monthly magazine called Policy Options, which is distributed to all MPs and senators. The February and March issues were devoted to the economic crisis and the budget, which offer useful background information and context for the subject of today's hearing.
The agenda today is to examine various sections of the 2009 Budget Implementation Act with particular focus on the Employment Insurance provisions, which are of critical importance given our position in the business cycle.
In the question and answer period, we can discuss anything and everything about the budget, and I will answer to the best of my ability. My prepared remarks will focus mainly on Employment Insurance.
I first want to contextualize my remarks and take a few minutes to sketch the current economic picture. I will talk about where the economy might be going in the next year or so, and then move on to the budget.
To say that we are on uncertain economic waters is to state the obvious. It is clear that the U.S. recession will probably be longer and deeper than any since the Great Depression, although it is misleading and disingenuous to compare the damage it has done with the calamity of the 1930s.
Conventional wisdom would say that Canada's recession must, of necessity, be as long and as deep as that of our southern neighbours. We all know the reasons because they have been repeated for decades. The vast bulk of Canada's exports go to the United States, with that share rising in the wake of free trade, and therefore we are chained to the U.S. business cycle.
However, are our economies really as joined at the hip as we think? The answer, in my view, is no. The main reason is that the commodities boom in recent years has allowed Canada to outperform the U.S. and stay out of recession longer. Because of strong underlying demand in China and other emerging markets, the medium-term outlook for commodity prices is actually quite bullish. It is for this reason that Canada, as well as other resource exporting countries such as Norway and Australia, will likely come out of the global economic downturn first, and relatively fast. It is important to note that after the wild ride of crude oil prices over the past year, they are still more than twice as high as they were before the commodities boom started. They are at about $54 per barrel. Similar stories can be told for many other commodities that Canada exports.
Because of these dynamics, our share of exports going to the U.S. has drifted downward from a peak of 84 per cent in 2001 to about 75 per cent today, which is not too much above where it was just before the Canada-U.S. Free Trade Agreement, and the slack has been taken up by fast growing, resource-hungry, emerging markets.
[Translation]
On the housing front, the contrast between Canada and the United States is even more striking than the headlines would have us believe. Housing starts in the United States have plummeted by nearly 70 per cent, compared to a 25 per cent decline here in Canada. Budget 2009 rightfully pointed out that the housing sector has slipped a little, but is not in the midst of a crisis. That is why I was surprised to see so much money, a total of $7.8 billion, set aside for measures to stimulate the residential housing sector. I believe these funds could have been put to better use.
[English]
I have several slides that illustrate the relevant contrast between the American and Canadian economies. You can peruse them at your leisure. For purposes of my remarks today, I would like to draw your attention to the chart pertaining to employment.
[Translation]
The contrast with respect to employment is also striking. In the United States, employment has been declining since January 2008. The market there began to shrink a full nine months earlier that it did in Canada. Notwithstanding figures showing a net loss of jobs since January 2009, overall employment figures in Canada are still higher today than they were two years ago. Consequently, our overall purchasing power is much stronger than that of Americans. Nevertheless, there are 330,000 more people unemployed today than there were nine months ago, and this figure could very well increase in the coming months.
Canada therefore faces an entirely different set of challenges than its neighbour to the south. The financial crisis has resulted in credit-related problems. However, we are the victims, not the source, of the problem. Budget 2009 contains several key measures to facilitate access to credit.
[English]
The extraordinary financing framework aims to backstop mortgages, provide financial institutions with the capital they need to resume normal lending practices and to provide additional lending authorities to Crown corporations such as Export Development Canada and the Business Development Bank.
I wholeheartedly endorse these measures, because in my view, they reflect an accurate diagnosis of the problem; it is blow-back from the very real and much more catastrophic financial crisis in the United States. In short, our financial system is fundamentally sound but our economic proximity and integration with the U.S. requires modest and probably profitable in the medium term — for the government anyway — infusions of capital into financial markets at home.
[Translation]
From a cyclical standpoint, the usual challenges present themselves. Plummeting commodity prices and job losses have diminished the purchasing power of Canadians. Even though they have more savings that their American counterparts to sustain consumption, these savings will not be enough.
[English]
To effectively mitigate a cyclical downturn, a budget must counteract the negative forces buffeting the economy. With regard to commodity prices there is very little that can be done. They are determined in global markets based on global supply and demand. As I mentioned, the medium-term outlook is good, but in the short term there is virtually nothing that Canadian budgetary policy can do to affect commodity prices.
However, with regard to bolstering purchasing power there is much that can be done, and there are several examples in the budget: the personal income tax cuts, increases in the Canada Child Tax Benefits, increases in the working income tax benefit and more generous Employment Insurance benefits. The WITB, Working Income Tax Benefit and EI provisions are particularly potent because they put money directly into the pockets of people who are most likely to spend it — low-income workers and unemployed individuals. These are exactly the kinds of automatic stabilizers that form the basis of sound, counter-cyclical fiscal policy.
[Translation]
That being said, I think the budget did not go far enough with the measures put forward in two areas: an additional $1.3 billion in funding for the Working Income Tax Benefit and an additional $1.9 billion in funding for EI. As I pointed out, this is a mere drop in the bucket compared to the nearly $8 billion allocated to the housing sector.
[English]
One concrete measure that should have been in the budget is more generous extended benefit provisions. The United States typically temporarily extends the employment insurance benefits by 13 weeks during recessions and they even went up to 26 weeks during the deep 1981-82 recession. The increase of five weeks in Budget 2009 is not really in tune with actual trends in the length of employment spells and worse, the public may perceive it as a permanent measure even though it is not. It just returns the benefit period to pre-1996 levels. In short, five weeks is not a large extension given the current economic conditions.
In my opinion much more needed to be done. The time was right to address some of the long-standing structural inequities in the program, but the budget did virtually nothing in this regard. The most glaring inequity is that the number of hours required to qualify varies substantially across the country according to the local unemployment rate. As a result, the areas of the country hardest hit by the recession, Alberta and southern Ontario, are the areas in which it is hardest to qualify for EI. This has reduced the proportion of unemployed workers who receive EI.
As of January 2009, less than 30 per cent of Albertans and Ontarians with no declared labour income were receiving Employment Insurance benefits. This compares to over 70 per cent in the Maritimes, which thus far has been spared the worst of the recession.
These large, implicit regional subsidies mean that EI has strayed far from its core function of providing income maintenance for unforeseen spells of unemployment. Canada may have an interest in maintaining regional development subsidies and supporting seasonal workers — I am not speaking against that — but I do believe they should be divorced from EI and made more explicit so we know what we are spending and for what purpose.
To move EI back to its core function and help put money into the pockets of those who need it most during economic downturns, the principle of experience rating must underlie contribution rates and benefit levels. What I mean is that firms that lay off fewer workers should face a lower EI contribution tax rate on their payroll. Similarly, workers who make fewer and less frequent claims should receive greater EI benefits when they do claim them. This is analogous to how private insurance is typically provided and it is the method by which unemployment insurance is financed in most of the state-run programs in the United States.
In practice, a better EI program would involve reinstating and reinforcing many of the provisions enacted in the Employment Insurance Act of 1996. This act sought to discourage use of the program as a regular income supplement as opposed to insurance against unpredictable job loss. The act brought modest experience rating to benefit levels by reducing the replacement rate by one percentage point for each group of 20-plus weeks of benefits claimed over the prior five years; the more a person claimed the fewer benefits he or she received. However, this measure was rescinded in 2000. At the moment, the Employment Insurance system has no experience rating in it whatsoever. Most changes to the EI regime since 2000 have involved increasing the generosity of benefits paid to seasonal workers, which simply encourages more seasonal employment and long-term dependency on EI.
If EI were operated on a strict insurance basis, it would eventually finance itself, as contributions would equalize benefits. This would contrast markedly with the operation of EI in the 1990s, when there were changes to the program that tightened eligibility and reduced benefit levels. This led to record surpluses that the government then used to finance other programs. This caused tremendous political difficulties and it also overtaxed labour income as a source of revenue for the federal government.
Experience-based contribution rates and benefit levels would allow EI to improve its coverage and its impacts. With EI operating on truer insurance principles, it would create fewer work disincentives and moral hazard problems. I mean that firms would think twice about laying off people because those decisions would have a direct effect on their bottom line. It would increase their experience rating and would cost them money in the short- and medium-term. It would then make sense to raise the earnings replacement ratio above the current level of 55 per cent and decrease the eligibility requirements in low unemployment regions, as I mentioned earlier. We could possibly have, for instance, a 360 hours requirement for eligibility across the country rather than the 420 to 700 hours we currently have. We could also reduce the current extremely high work requirement for new entrants and improve access to other benefits and services, such as employment support training and parental leave.
[Translation]
Summing up, I listened very attentively to Michael Ignatieff's comments about employment insurance which he made at the Liberal Party Convention in Vancouver. The themes that he raised are not developed fully enough for me to comment on them, but I do hope that they will spark an in-depth debate on the mission and workings of the EI system which I consider to be a front-line defence against the recession.
[English]
That is the end of my prepared remarks. I would be happy to talk about anything else in the budget that I am capable of answering.
The Chair: Thank you very much, Mr. Leonard. I am sure there will be discussions on other aspects of Bill C-10. It is a wide-ranging omnibus piece of legislation, as you know. One of our complaints is that maybe some areas did not get the thorough focus they should have received because the bill required quick attention.
Since you mentioned EDC, could you expand on the activity of the corporation and the permission to operate within Canada for a period of time with the ability of the executive, the government, to extend that activity? Is it your view that it was needed and desirable?
Mr. Leonard: The general thrust of using Crown corporations to extend credit and lending to where it is needed is a sound decision from a policy standpoint. The two main vehicles for doing that are the Business Development Bank of Canada and Export Development Canada. I have no problem with Export Development Canada lending domestically as long as there are provisions that such lending practices are temporary.
The issues are more political than policy. The notion that the government wants to start lending if the banks, for whatever reasons, are not lending sufficiently is sound policy. Should it have all gone through the Business Development Bank of Canada, whose mission is more focused on the domestic market? Possibly, but I do not think in terms of the process and mechanics that that would be a bad policy.
Senator Nancy Ruth: Thank you for appearing. I have read your papers on policy options and I listened to you on the radio this morning. I am interested in your desire to have us differentiate from the United States, while on the other hand, you would like us to copy some of their EI provisions and make them a little bolder. I am a little confused about sometimes and sometimes not. I am delighted you think there are some good things in the budget, such as the WITB and the bolstering of purchasing powers, the Canada Child Tax Credit and the income tax reductions.
To get back to the EI component, if you put in an experience rating and you hope that the system will pay for itself through premiums, both employers and contributions of the employee, there always remain those who do not have access to EI. Those that do not have access to EI are the poorest and are covered by the social transfer. Will the experience-rating-based EI that you dream about not exclude many groups such as students and women who have to work two or three part-time jobs and very rarely receive EI? If that were so, how would an increase of those that have to go on welfare be paid for because there is no insurance to pay for this?
If you go to an experienced-rating-based EI, it seems to me you are causing a greater tax burden for the provinces and a greater tax burden for the federal government and the social transfers. That is my general question.
Mr. Leonard: It is a very good question. You raise the point that the labour market has changed substantially over the last 15 to 20 years. As you mention, there is much more part-time work and much more self-employment, and those people are not covered by EI. I grant you that the experience rating can be complicated. The current system was built on the assumption of full-time or seasonal work. We need to think about how to restructure Employment Insurance to account for these changes in the labour market.
I see two options. One option is that the EI system remains focused on full-time and seasonal work, but, as I said, I would like to keep that divorced. A second option is that other kinds of work fall to the welfare system. Frankly, I do not want to see that type of system. We have to think about experience rating as a function of the number of times a person is laid off from the employer's perspective or the number of times that a person claims. We could think of a system with provisions for part-time work; however, it is a delicate balance because in part Employment Insurance is trying to encourage more full-time work and attachment to the labour force.
Experience rating is complicated. If a person can demonstrate that he or she is holding several jobs, it should play into his or her favour and counteract. You can incorporate the fact of people having multiple jobs, in particular single income earners.
Whether students should be treated differently is a tough policy question. When I was at McGill University, before the reforms, we all enjoyed our teaching assistant jobs, after which we were laid off. We all vacationed in Mexico and had our friends deposit our ``pogey'' cheques. I probably should not tell you about that but it no longer happens. Students are in a particular situation: They earn income when they are not studying and some work during the year. It is a policy question of whether we want to treat that group separately and differently. We might want to, and with an experience rating system, we can do so, although I am sure that they should be treated differently. I am coloured by my own experience.
Experience rating can be modified to meet these special cases but the question is whether we want to do so from a policy perspective. The system will self -finance in its own universe. Clearly, for people outside of that universe, the monies needed to finance those programs will have to come from elsewhere. I agree with you.
Senator Nancy Ruth: The problem is where the elsewhere is. If the EI system is refined so much, then only those with high experience rating or self-financing qualify, thereby leaving many other people out.
I have a broader issue on which I would like to hear your opinion. I agree with you that the function of EI is to allow people to consume at levels somewhat similar to those enjoyed when they were fully employed. No one has spoken to us about a different economic model other than as consumers.
We need to produce and we need to buy. There is a whole part of my heart that has always thought this to be a fallacious system, given the many goods that we consume. For example, is it a good thing to drill our land for this or that resource so that we can consume more? Have you toyed with other economic models that are not based on a consumer society?
Mr. Leonard: I have given quite a bit of thought to that philosophical question. Thinking in terms of the model that drives most industrial societies, I find it clear that we want to have a sustainable economy, whatever that means. We consume some things because they are necessities; and we consume other things because they are luxuries. The line between necessity and luxury varies from one person to another.
In the short term, in terms of a cyclical downturn, we return to our friend Keynes, although I do not claim to be a Keynesian. The fact remains that when we have cyclical downturns, it is effective to encourage consumption. Although I cannot say what kind of consumption that should be, it is effective to encourage people to consume to smooth out cycles. In booms, it should be the case that there are breaks on consumption so that we avoid the boom-bust cycle.
Whether we should dig things out of the ground so that we can consume more is a philosophical question. I am of the view that we should do so only to the extent that it is sustainable over the long term. Whether what we are doing in Canada is sustainable over the long term is a question that I am in no better position to answer than you are.
Senator Nancy Ruth: ``Sustainability'' still means digging it out of the ground.
Mr. Leonard: Absolutely. You have touched on something else: Eventually the resources that we dig out of the ground will disappear, although we do not know when. It is clear that over the long term, Canada's economic model should be evolving toward a value-added knowledge society, which we have heard about. One could argue that the resource boom was a blessing in terms of dollars but a curse in terms of the knowledge economy because we have seen the evidence from Alberta. For instance, people are leaving high school to make a great deal of money in the oil patch.
The other side of consumption is saving, a virtue which is taught to us by our parents and grandparents. However, when there is a recession, the collective instinct is to save more, but history has shown us that saving can make a recession deeper than it otherwise would be.
Senator Callbeck: Mr. Leonard, I want to discuss your proposal for the EI system. You said that companies that lay off fewer workers would face a lower EI contribution tax rate and workers who make fewer and less frequent claims would receive greater EI benefits.
My province has a great deal of seasonal employment in tourism, fisheries and agriculture because not too much happens in the winter. Yet, we need those workers in the spring, summer and fall. Your proposal would mean that the employers would have to pay more and that the employees would receive less.
Mr. Leonard: That is why I mentioned that I would divorce seasonal employment from Employment Insurance, and there are ways to address that situation. I agree that we do not want to have an employment insurance system that encourages excessive interprovincial migration.
From a policy perspective, there is a simple way to do that: lump sum amounts paid to seasonal workers. There is no experience rating and it is not a function of how long the person has worked. It is simply a lump-sum payment. Economists like that system because it does not change people's incentive to work more or less or to work elsewhere. In the United States where the experience rating is used, the dynamics are not the same. I would recommend that system over our current system in which there is no link between the frequency of EI use and layoffs and contribution rates and benefit levels. It is very inefficient nationally.
If we were to divorce the seasonal worker program, we could take advantage of the efficiencies for EI for non- seasonal workers and independently address the question of seasonal workers year round. My first recommendation for such laid-off workers is that there be a lump sum payment. However, that can be done in other ways. If it were separate from EI and not experience rated, I think you could have the best of both worlds.
Senator Callbeck: What do you mean by lump sum payments?
Mr. Leonard: I simply mean a fixed amount. If you are a seasonal worker, you are paid a fixed amount per year. That would be determined on a number of things, for example, a percentage of your average seasonal income for the time that you work. It would not be a function of how many weeks you work or of any other factor in EI.
Senator Callbeck: Regarding the housing initiatives, which are $7.8 billion, you mentioned that you feel the money should have gone elsewhere. Where would you have put that money?
Mr. Leonard: I would have put it into funding extended benefits for employment insurance. I would have also put more into the Working Income Tax Benefit. If we divorce seasonal employment from Employment Insurance, part of that money should go there. In my view, these measures are effective counter-cyclical policies.
The Working Income Tax Benefit is an effective tool for lowering the ``welfare wall.'' That is the situation where you start to get work and lose in-kind benefits from welfare. You could possibly end up being worse off working or you would not get much extra net income.
I would rather have seen less emphasis on the housing sector and more emphasis on these automatic stabilizers to which I referred such as WITB and more generous employment insurance while we move to experience rating. If we want to increase benefits and equalize eligibility criteria across the country, it will cost money in the short term.
Senator Banks: You raised the question of sustainable development. You have no doubt looked at the means by which governments account for revenue derived from natural resources.
I think all governments, including the federal government and certainly provincial governments treat revenues — or royalties as we used to call them — from resource sources as income. I can understand that resource income from electricity generation is income. However, resource income from non-renewable resources is not income in my view. It is a conversion of assets into cash, which is a different matter.
Have you thought about that question? How do we account for government income from non-renewable natural resources when, if you are operating a business, that is not really income?
Mr. Leonard: That is a good question. I have thought about it and essentially, the point you raise is absolutely correct.
One could argue that by digging something from the ground, you have not added value to it, you have simply moved it from where it was to where it is. That does add some value. The fact that it is not in the ground, but is in a truck, is valuable to the economy.
Senator Banks: It is also value-added when you smelt or refine the resource.
Mr. Leonard: Absolutely.
Senator Banks: Nonetheless, you have converted the asset into cash because royalties are paid not on the basis of the value-added to them, but on the extraction of the resource.
Mr. Leonard: I think our natural resources should more accurately be called ``natural capital'' because it is a depletable resource and we are essentially carving away our capital base.
From an accounting perspective, you should try to have measures of the depreciation of my asset base and compare the value of what you received and subtract, just as you would any investment in your capital stock. Your net capital increase is what you have added, minus what has been worn away and is no longer of use.
Currently, you are absolutely right. That same accounting principle has not been used. It is starting to be used among economists in how we think about natural resources.
A chart in the package shows gross domestic product and gross national income. That chart illustrates your point, Senator Banks. We can sell these resources at high prices, which is what we have been doing for the last five years and this generates real money because the price of these goods is high and we have a lot of them. The revenue has been in the hundreds of billions of dollars over the past few years.
The issue is that since we have depleted some of our natural capital, some of that money should be devoted to the sustainability issue. In Alberta, we have actually consumed most of that, both publicly and privately. There are some analyses of how Alberta has managed this influx of cash and the Heritage Fund, but I do not have enough knowledge to offer a comment. Alberta saw a tremendous increase of income. However, that income should have been corrected from an accounting perspective to reflect the depletion of the actual capital base.
Senator Banks: If we did that, we could change our mindset to a different way of thinking. We have inherited this store with a lot of stock in it and there are many people who want to buy that stock. We are selling it like crazy and we charge a little more because it is wrapped and packaged nicely. However, the stock is irreplaceable.
If we began to think that way, would that give us a different view of what ``sustainable development'' means? Would we have a different view of on prudence in balancing the depletion of our capital and its conversion to cash?
Mr. Leonard: We would. I do not know the magnitude, but if you went to a capital accounting basis, royalties would be smaller than we currently measure them. I do not know by how much. That would have an impact on the federal government's fiscal position and on the province's fiscal position. In turn, this change may affect public policies and how the federal government taxes and spends.
Your main point is a valid observation. We may be spending beyond our natural capital means in an unsustainable way because of the way we account for it. It would be useful to try to correct that in the future.
Senator Ringuette: I do not agree with your thoughts on experience ratings for EI. I have never agreed with the premise that the EI program and benefits are based on encouraged attachment to the labour force. That is like saying the auto workers in Ontario are being laid off and they do not have any real attachment to the labour force. The entire premise is wrong.
You talked about how seasonal aspects should be different and lump sums. I do not agree with what you are putting forth regarding the challenges in EI whether we look at experience rating or separate seasonal programs, which basically go back to experience rating.
To continue in the same vein as Senator Nancy Ruth, the last time I checked there were 23 different federal- provincial government financial assistance redistribution programs. Have you done any research with regard to a basic minimum income?
Mr. Leonard: Yes, we have. The chair referred to a book entitled, A Canadian Priorities Agenda. In that book, there is a chapter on economic insecurity, which was one of the challenges we looked at. The author of that chapter put forth a uniform minimum basic income as a better solution to the patchwork we now have.
We were not asking for political feasibility in this study. Clearly, there are political issues that I will not go into. However, if we were to build an income support system from scratch, there are many good economic reasons why we would want to do something like that. There are issues around it, but I will summarize some of the dynamics.
Such a system presumes that individuals are best placed to know how to best spend and use their money for their own purposes. In other words, we do not need in-kind programs; we do not need the government to say, ``You can qualify for this type of service, but we will provide the service rather than giving you the money.'' It is based on that premise.
The issue is that it is very expensive. It would be much more expensive to have a basic minimum income at a level a bit higher than current welfare levels, because it would cover everyone, not only certain subclasses such as people who are looking for work. With patchwork programs there are many eligibility requirements. This would be an across-the- board program. It would be quite a bit more expensive, but for administrative simplicity it could be run through the tax system. It has many efficiency arguments in its favour.
I am not certain whether this is doable in the current political context in Canada, but as an economist, I am very sympathetic to the notion of a universal basic income, which is sometimes referred to as a negative income tax.
Senator Ringuette: Could you supply this committee with the research you have done on this issue?
Mr. Leonard: Yes. I will provide that chapter to the chair.
Senator Di Nino: We often ask witnesses to supply us with information. Is this available through a source from which we can gather it ourselves?
Mr. Leonard: It is not available publicly.
Senator Ringuette: I must question your statement that the Canadian economy is not that much linked to the American economy. We export 80 per cent of our goods and services to the U.S. How are we not so linked, be it with regard to energy, agricultural or forestry products, although perhaps less so with forestry products? I find it difficult to understand your reasoning when you say that Canada's economy is not so linked to the U.S. because of commodity exports. Will you explain?
Mr. Leonard: Perhaps I misspoke. I meant to say exactly that, that it is not ``so linked,'' it is not as linked as it was in the past. We will always be linked, to some extent to the U.S. because, as you correctly said, the majority of our exports go to the United States. We must also remember that exports account for about one third of our economy. Of our entire economy, 20 per cent to 25 per cent goes to the United States.
I do not mean to say that our economies have been unlinked and we will each go our own way; far from it. That will never happen. My point is that our share of trade to the United States has been trending downward over the past six to seven years. It will probably never go under 70 per cent, but the very strong growth is being taken up by rapidly growing emerging market economies, most notably China. These are resource-hungry economies, particularly for crude oil, industrial metals, and lumber to a lesser extent because that continues to be a U.S.-dominated export market.
All of these factors that have helped Canada in the past several years, notwithstanding the discussion I had with Senator Banks about how we account for that extra revenue, are having a mitigating effect on the degree to which we follow the United States economy in lock step. In recent quarters, the effects of China's economic stimulus package have drastically increased investment. That has had an impact on the crude oil price trajectory that we have seen over the past couple weeks and for some of the industrial metals.
That is not to say that our economy will boom while the U.S. is mired in recession. It will not because we will still have our trade links. However, in my view, the recession in Canada will be shallower and shorter precisely because we have outside economic actors other than the United States that are taking up a more important role in Canada's economy, although they will never be the dominant role.
Senator Eggleton: I will start with the economy in general, as you did in your remarks. A front-page article in this morning's The Globe and Mail lists indicators that make one feel quite optimistic about coming out of the recession sooner rather than later. What is your reaction to that article?
Mr. Leonard: I did not see The Globe and Mail because I was driving from Montreal, but last night I read some positive news from the U.S. on the housing front. Some people are sticking their necks out to say that the U.S. housing market may have hit bottom. The housing problem is so fundamental to the U.S. economic crisis that it must bottom out before we will know where the American economy is going.
In terms of the Canadian economy, my view has not changed. I am a sort of optimist; I am in the ``Carney camp,'' for lack of a better phrase. That comes back to what I just said about the rise of China, where I think natural resource prices are going and, to the extent that the American economy may be bottoming out earlier than expected, although I have no basis for knowing whether that is true, that can only help Canada.
Senator Eggleton: You indicated that housing is not the best way to invest money in the stimulus package. However, housing meets a basic need, particularly for many of the people who are suffering in this recession. The people you mentioned should have more money available in the WITB and EI. However, at the same time, putting money into housing creates stimulus in the construction industry. There is quite a multiplier effect in housing. I wonder why you are as down on the housing side of things.
Mr. Leonard: There are two reasons: First, you are correct in saying that the multipliers are high for EI, WITB and housing. Depending on whom you ask, one is a bit bigger but, in my view, they are about the same. The provision with which I had the most trouble was the Home Renovation Tax Credit, which is not the only piece of the housing package. I tend to agree with all of what you have said but in terms of priority, counter-cyclicality and the housing sector slowdown, the employment numbers are much more worrying than the state of the housing industry at this time. I am not sure that the Home Renovation Tax Credit is an efficient way to reach the people to whom you referred.
Senator Eggleton: I agree.
Mr. Leonard: The program is focused on homeowners. I am doing a major home renovation, which was planned before this program came into effect, so I am happy that there is such a program. I am being paid to do something that I would have done anyway. Those comments do not necessarily speak to the social housing provisions.
Senator Eggleton: The renovation part of the program is a small percentage.
I like your ideas on EI, in particular the idea of 360 hours to qualify across the country and raising the 55-week limit, in particular in this economy. However, such changes have a cost. First, how much would it cost to implement your ideas? If it were to come from EI premiums, how much would the premiums rise? I recognize that you are suggesting a change in how the premiums might be applied, which is interesting. However, short of that, what would the premiums be under the current system?
Second, many people fall between the cracks of the existing EI system. Some of your ideas would allow such people to qualify for EI. I have heard that only 46 per cent of people who pay EI premiums receive the EI benefit; but the government will say that 80 per cent qualify. Your ideas would help that situation but there are still many people who are not even part of the EI system, such as those who are self-employed. Many self-employed people have no choice because they cannot find steady work in any particular field, which disproportionately encompasses many women. What would you do for these people? Interestingly, you talked about seasonal workers and suggested a separate fund for them. How would you handle the other people?
You said a moment ago in answer to a question from Senator Ringuette that you have done some work on negative income tax and guaranteed annual income and other phrases used in that regard. In fact, I think Senator Segal, who is an advocate of guaranteed annual income and negative income tax, wrote an article in your Policy Options publication; but that is an argument for another day.
What would you recommend to protect and train people to bring them back into the employment system so that they can avoid going on welfare, which most do not want to do. Many people will take longer than 55 weeks to find employment and need some training. How do you provide for everyone in this system and get them back to work?
Mr. Leonard: Thank you for your questions. On the first question of how much it would cost to implement some of my ideas, the best estimates that I have seen are about $1 billion per year if we reduced the floor to 360 hours. That is a great deal of money. That is why I said I would rather see money from the Home Renovation Tax Credit, for instance, used to do something like that. Over the long-term, if we moved to an experience-rating system, one would expect it to eventually self-finance.
Regarding the question of premium rates, if we went to an experience-rating system, the rates would adjust depending on various parameters such as frequency of use, et cetera. If we did not go to an experience-rating system, then contribution rates would have to increase, although I do not know by how much.
In terms of people falling through the cracks of the existing EI system, you talked about those who are not eligible because they are self-employed and, therefore, outside the system. You also talked about those who have not worked enough hours to qualify for the benefit.
Senator Eggleton: That category also includes people who leave their employment and the question then arises as to whether they left voluntarily or had justifiable reason to leave.
Mr. Leonard: On such an issue, a policy decision must be taken. If the purpose of Employment Insurance is to ensure against unanticipated spells, there is a fine line between voluntarily leaving and being laid off. This is where the intersection with experience rating comes in. If there is no experience rating, then there is no incentive for people who leave voluntarily to not make an arrangement with their employer.
The two go hand in hand. Are people who voluntarily leave a job falling through the cracks of the EI system? At the outset of the program, through the mid 1990s and before, we made a policy decision that people who leave a job voluntarily should not qualify for EI. It is one perception that they fall through the cracks, but that is simply a function of the EI program.
Senator Eggleton: There are many gray areas associated with the word ``voluntarily.''
Mr. Leonard: I would advocate creating separate, self-insured pools, as they have done in France, for seasonal workers. In that way, you could take advantage of the efficiencies of experience rating for the people for whom that makes the most sense.
Senator Mitchell: Mr. Leonard, this has been most interesting. My questions centre around the potential impacts of environmental policy on stimulative economic policy.
First, with respect to tradable credits and offsets, is it not true that money, in particularly offsets, would go directly into companies that are spending money on technology related to the environment. In that way, would you have a high ratio stimulative impact per dollar invested?
Mr. Leonard: Yes, the tradable credits and offsets will reward the companies that are most active in these new environmental technologies. If you are talking about stimulative impact in terms of the overall economy, there would be a positive effect. I am not sure the actual global amount of credits is large enough to have an impact, although, in Alberta, I think perhaps it would. I do not have the numbers and I cannot give you an exact number. However, you are correct in terms of the incentives: You would see that money going to the companies doing the most work.
Senator Mitchell: There is nothing to say that an investment in a certain kind of environmental project or technology — for example, a plant that uses cattle manure to produce ethanol — that kind of project would not be invested in be as equally stimulative as building a new road, except with longer-term economic potential.
Mr. Leonard: That is fair to say. You are getting to the economic effect of infrastructure spending. If your concern is increasing the number of jobs, there may be a difference to the extent that some of these new technologies will involve fewer people and more labs. I do not know because I am not an environmental technician. There could be differences in that regard. However, in terms of the money moving through the economy, there should not be that much difference. If we look towards the long term, it is an interesting question you raise and I do not know the answer. There is a long-term issue in Canada that deals with our rate of productivity growth and manufacturing and our competitiveness vis-à-vis our American neighbours. That is something I work on at the institute. There is that long- term issue. In fact, investing in roads and infrastructure, et cetera, it is extremely important for that strand of competitiveness.
There is another strand that is much more uncertain. We do not know where it is going. That strand is exactly these new, green technologies. We are moving into a paradigm where it looks like we will be in a carbon-constrained world. Whether we want it or not, it is coming. That strand of competitiveness and investment is important. Which one is more important or more certain in the short term, I do not know. However, clearly they are both important.
As far as short-term jobs, the difference is really in terms of looking at it project by project: How many jobs will it create? Is it lab-intensive work or ``hammering''? That will vary from project to project but I do not think one could make a general statement.
Senator Mitchell: On the tax side, you mentioned that higher-income people who get a tax advantage in this kind of economy would be very likely to save it. They might also be more likely to pay off debt. Is paying off debt in any way stimulative?
Mr. Leonard: It is not stimulative in the short term. It has very positive long-term effects but you cannot get out of squaring that circle. We see this in the U.S. more so because there are much higher debt levels.
Paying down debt reduces economic activity in the short run but it spans your long-run consumption or economic frontier. How does it do that? It creates more resources available for investments of all sorts, which then allows you to grow your economy bigger than your otherwise would have.
Senator Mitchell: Of course, one could argue that is what green investment does, too. Even if it does not have as much of an impact — although I think it does — it would certainly have a longer-term impact.
Mr. Leonard: Yes, that is right.
Senator Mitchell: If that is the case, the point you make that lower- and middle-income people who receive tax concessions are more driven to spend it. How much is the average amount of tax concession that a lower-income earner and a middle-income earner are getting under this package? Is it $160 per year or $200 per year? In which case, maybe if we reduced that instead of lowering taxes for higher-income people, we would actually expand the stimulative effect because this group of people is more likely to spend it.
Mr. Leonard: The principle you mentioned is absolutely correct. I have not read the budget since last week, so I do not know the figures, I am sorry to tell you. I can certainly provide them.
Senator Mitchell: If you could, that would be great.
Mr. Leonard: Yes, I can.
[Translation]
Senator Nolin: Mr. Leonard, I would like to bring the discussion around to microeconomics rather than macroeconomics, to focus on owners or employees of small or medium-sized businesses that supply goods and services to the Government of Canada.
Many people in the National Capital Region are affected because they are suppliers to one of, if not the largest, employer in the region, namely the Government of Canada, either directly or through agencies and Crown Corporations located in the area.
I have a question for you, bearing in mind a story relayed to me by one of the region's business persons. If you cannot answer it, I hope departmental officials will be able to do so, because it is a rather important matter.
Banks and small suppliers to the State are concerned about the commercial credit crisis. The Institute for Research on Public Policy has a program that examines innovation and competitiveness, so you will understand where I am coming from. Many small businesses developed ways of delivering services the State and the State recognized these efforts by awarding contracts to countless small businesses that have gone on to prosper in this environment.
In the past, everything went smoothly. These small businesses secured a contract, presented it to their banker who then extended a line of credit to them to acquire the goods and hire the people to fulfill the terms of the contract. The businesses would then repay the bank loan when the government held up its end of the contract. Everyone was happy.
Today, because of the credit crisis, banks are asking for outlandish guarantees that prevent these service providers from accepting these small contracts. The fact of the matter is that today, larger companies have an easier time getting credit. Small businesses are being squeezed out of the region at the expense of workers who are at the mercy of an employer that are not in a strong enough financial position to hold on until the tide turns.
From a legislative standpoint, what can we do to remedy this kind of problem?
Mr. Leonard: That is a good question. First of all, I agree with your analysis of the importance of SMEs.
Senator Nolin: They drive the Canadian economy.
Mr. Leonard: Unfortunately, they are often the first ones to feel the effects of a credit crunch because they are small.
Senator Nolin: Let me say right away that I am not a regular member of the committee, meaning that I have not looked at each and every section and provision of the bill. However, I see from the legislative summary prepared for members that there are plans afoot to amend the Canada Small Business Financing Act. This legislation covers all matters pertaining to small business loans.
I have already detected a certain level of concern among small businesses, but the scenario that you have described seems so dire that I truly wonder what we can do.
Mr. Leonard: I am neither a legislator, nor a lawyer.
Senator Nolin: But we are.
Mr. Leonard: In theory, the budget is an attempt on the part of the government to encourage banks to lend money and, if they do not lend money, to find other ways to get credit flowing. As I mentioned, Export Development Canada and the Business Development Bank have received injections of new capital.
I have not read the Budget Implementation Act from cover to cover, but I do not see why SMEs would not have access to this money. Of course, the lenders will demand repayment guarantees, but since the lenders are Crown Corporations, the rules could be relaxed somewhat.
Senator Nolin: Is the State prohibited by law from paying in advance for goods or services?
Mr. Leonard: I cannot answer that question.
Senator Nolin: Thank you, Mr. Leonard.
[English]
Senator Di Nino: I would like to make an observation. I cannot recall the exact term you used to describe those who save money, but it struck me — coming from a background where saving money was critical to be able to live tomorrow if you did not have a job — as a balance between consuming those things you need and also a program to self-insure for tomorrow when the need may come. I think that should go on the record because I do not think that is quite the message that you gave. Do you agree with that?
Mr. Leonard: I agree that saving at a personal level is absolutely critical to sustainability in the life course.
Senator Di Nino: I appreciate that. I also want to congratulate you on your confession on the misuse of the EI benefits that allowed you to go to Mexico, which is a concern that some people have about some of the uses of Employment Insurance these days. Good for you; that was an instructive comment.
I want to discuss a couple of different things that have been part of today's discussions. There has been, certainly from the Finance Minister and others around the world, a concern that the stimulus packages that have been introduced — and are being introduced around the world— will have some future impact, unintended consequences, with inflation certainly being one of them.
Have you had an opportunity to look at where Canada should be careful and where we should be paying attention so that we may minimize the potential negative unintended consequences?
Mr. Leonard: There can be unintended consequences to fiscal stimulus, particularly very large fiscal stimulus packages. In the case of Canada, I would say that in terms of our fiscal means and the size of our economy, our fiscal stimulus is fairly modest, especially compared to our American friends.
Coming back to the unintended consequences, you raise inflation as a potential problem. I am quite concerned about that. Economists know that inflation is always a monetary phenomenon. We have seen very loose monetary policy around the world, for good reasons. We have good reasons to do so at the moment. We have liquidity problems.
However, people's expectations about inflation can change. The monetary authorities will have to be cautious when managing inflation, which will likely occur when a recovery takes hold. We learned from the 1970s that not managing inflation is costly to the economy. I share that concern and we have to be mindful of it.
A second concern relates to currencies. This comes back to the United States; for perspective, the latest estimates of the federal budget deficit in the United States run in the order of 11 per cent of GDP. In Canada, we are talking about 2 per cent of GDP roughly. We are talking about a budget deficit of over $1 trillion in the U.S.
A couple of weeks ago, the Chinese prime minister talked about whether the United States will be able to guarantee its obligations. As we know, China sends a lot of money to finance the U.S. government debt. To say that publicly raised my eyebrows. The signal it sent was the Chinese are a little worried about the overall fiscal situation of the United States. If they were to become more concerned and started moving their money out, that would have a tremendous effect on the U.S. dollar and then on our currency.
More important, I would not say the role of the U.S. dollar as the global currency is in peril, but it is something we have to watch. This is something that the Americans will have to grapple with as they figure out how to right their economy without taking on unsustainable levels of debt.
It is a related concern, one that is less talked about — the role of the dollar as the global currency and the intrinsic value of the dollar. We know it is not on the gold standard. The value of the dollar is the trust and faith you put in the financial stability of the United States. That would be an additional concern I would have on my radar screen.
Senator Di Nino: What about the social consequences?
Mr. Leonard: It is a bit speculative. From an economic standpoint, I think of how the economic forces might play out and what social impact that might have.
In the industrialized world, that will be a function of whether the stimulus package is effective and the length of the recession. If it actually makes the recession shorter than it otherwise would be, clearly that would have social consequences.
For the developing world, I do not want to go there because I have not studied the issue enough.
Senator Di Nino: I have not, either, but I have concerns. I thank you for that answer.
We have seen some very difficult issues that the world has had to deal with, created by actions and positions of many people around the world. Have we made any structural changes that could give us some comfort — because not in the short term but in the long term, it may happen again? Will we forget that we need to have certain rules in place to govern ourselves? Are we making the structural changes to ensure the same characters that got us into trouble will not be there when we go back — or at least the same rules? Are we doing anything of that nature, in Canada and in the world?
Mr. Leonard: In Canada, I think it is clear that the regulatory mechanisms in place have served us fairly well through this crisis. As I mentioned before, I believe that this credit crunch we are witnessing in Canada is largely blowback from the crisis in the United States.
We may or may not see some small tweaking around the edges in Canada. However, the more important changes that may or may not come about are at the global level. We found that globalization of finance carries great risk and we have seen a crisis that started in the United States go global.
That is one of the few aspects of globalization where there was not consensus among economists about it being a good thing. If we talk about trade flows and the movement of goods, services and people, there is basically no disagreement. On the financial side, there were many worries about exactly this kind of thing. You get synchronized; you get relationships across countries; it is hard to follow who is bearing what risk.
The question is then whether we move to an international governance model, standard global regulations, or if we move to a national regulation model with monitoring by international groups like the G20 and the Financial Stability Forum. Given that we have many good things to learn from one another, I think there are many good things to learn from Canada. I am more a fan of the national regulation, international monitoring model. I like to think of it as the provincial experimentation in the Canadian federation that helps us learn a lot about social policy and helps us make better policy.
Yes, I do think that changes are afoot. They have not been completed and I think they are necessary.
Senator Gerstein: Mr. Leonard, you stated in your opening remarks that Canada outperformed the U.S. because of the commodities boom. In your article in Policy Options, you refer to Canada's fundamental problem being a ``. . . long-term structural erosion of competitiveness. . .'' Would you kindly expand on this point and perhaps refer to the auto industry.
Mr. Leonard: You are correct. I did not refer to that long-term structural issue in my remarks.
It is evident in whatever data you care to look at that the productive capacity of the economy at large has lagged behind the United States for years. In particular, I have been looking at the manufacturing sector because it is an important part of our trade relationship with the United States. That makes it more costly to produce similar goods because we cannot do it as efficiently.
There are a host of reasons. They typically have to do with insufficient investment relative to labour inputs, a lower rate of innovation and, in some cases, lack of demand for innovative products. We could spend a whole session on that subject. I am finishing a study that I would be happy to circulate to the committee on that subject.
The manufacturing sector is in crisis. We are in the middle of a cyclical crisis in which most of our manufactured exports go to the United States. We are in a situation where the United States is in a downturn and the Canadian auto sector will be hit badly. In fact, the Canadian auto and manufacturing sectors were declining in general. The output of the sector started declining about three years ago while the rest of the Canadian economy was booming and the U.S. economy was doing respectably.
Why was that the case? Part of it was the appreciation of the Canadian dollar. Raising the cost of Canadian goods exposed this insufficient investment and innovation at the core of long-run viability and prosperity of the sector.
That is what I meant by the fundamental problem for Canadian manufacturing. When we go through cyclical ups and downs, there are other problems that need to be dealt with and are being dealt with based on the current situation. Once that is behind us, these fundamental problems causing the erosion of job growth, output and wage growth will not go away after this business cycle. They need to be addressed with longer-term policies on investment and innovation.
Senator Gerstein: Thank you. I am interested in having you forward to the clerk your future writing on this subject.
Mr. Leonard: It should be ready in about two weeks.
The Chair: Thank you for giving us a timeline.
Senator Oliver: Thank you, Mr. Leonard, for your excellent presentation. I think there is dignity in work for a worker to be able to go to his or her job and work each day.
I am a little concerned with your response to Senator Callbeck about some of your ideas on Employment Insurance and how is should change. She asked about your concept of the lump sum. It scares me somewhat because you said it is not based on hours or weeks worked. It is simply a lump sum of cash, open ended with no conditions.
If a person worked in the lobster fishery in Atlantic for three months and made $45,000, you will give a lump sum for the rest of the year based upon what they made in those three months. Let us say that you gave them a lump sum cheque of $45,000. Is that person free to go to Barbados to lie on the beach or take a job somewhere else and make another $50,000 for the rest of the year?
Do you think giving an unconditional lump sum payment like that is in the best interests of Canadian taxpayers? If you agree it is not in the interests of Canadian taxpayers, what conditions would you put on it?
Mr. Leonard: That is a very good question and is one that economists often get when we talk about lump sum payments.
Regarding whether conditions should be attached, I think some parameters might be useful. You evoked a possibility that runs counter to what we think is appropriate. The advantage of lump sum payments is that they do not affect peoples' decisions about taking other work.
To back up a moment, I agree with you that there is dignity in work. If it happens that there is a part of the year in your line or work where you are not working, I do not consider that not working. Seasonal workers have a season in which they work. I want to be clear on that.
On lump sum payments, there may need to be some parameters on whether you have other opportunities to work. It may work in a theoretical world of economics. In practice, in order to keep the program fiscally sustainable and to ensure it is accomplishing what you want it to do, there would have some constraints on it.
Senator Oliver: Are there any constraints that you have considered?
Mr. Leonard: No, not in any detail. I think they would revolve around whether you work in the off-season. I have not considered the mechanics of such a program.
The Chair: Can you tell me if there is any magic in the 360 hours of work to qualify for Employment Insurance that you referenced in your presentation? How did this figure come about on page 6 of your presentation?
Mr. Leonard: Yes, I referenced it because it is a proposal that Mr. Ignatieff evoked. It is an example; there is no magic number. It is a question of incentives. If you make the qualification period too short, there is less of an incentive to stay attached to the labour market. If you make it too long or run into a recession, few people can qualify. One could evoke the possibility of 420 hours, which is currently the minimum number of hours required to qualify in Canada.
That is a question for the people with a better understanding of incentives and what balance they want to strike between ease of qualification and incentives to work.
The Chair: The difficulty is that when a number like that is chosen, it is sometimes difficult to change that number.
Mr. Leonard: That is correct.
Senator Nancy Ruth: You have twice suggested that those who were sole-employed did not have availability to receive EI. Are you aware that the Harper government has introduced a commitment to changing that so that women, in particular, will have access to maternity benefits, et cetera if they are sole employers?
In your speech, you said:
The most glaring inequity is that the number of hours required to qualify varies substantially across the country according to the local unemployment rate. As a result, the areas of the country hardest hit by the recession, Alberta and southern Ontario, are the areas in which it is hardest to qualify for EI.
I have two questions related to that statement. Are you aware that the number of hours required changes on a regular and monthly basis no matter where you are in Canada? In fact, in the Golden Horseshoe area of Ontario where I come from, unemployment currently ranges from 8.8 per cent to 9.6 per cent in the St. Catharines area. In New Brunswick, Newfoundland and Nova Scotia it ranges from 6.3 per cent to 7.4 per cent. In fact, it is easier to receive EI if you live in the Golden Horseshoe than it is if you live in some maritime regions.
Senator Callbeck: I have one question. In your remarks, you talked about purchasing power. You said that there is much that can be done, and you gave several examples including, personal income tax cuts, increases in the Canada Child Tax Benefit and the Working Income Tax Benefit.
In Budget 2009, at page 240, a table indicates what will have the most effect as a stimulus. Personal income tax is listed near the bottom of the table. Why did you use those examples?
The Chair: Mr. Leonard, if you are unable to quickly answer the question for Senator Nancy Ruth and Senator Callbeck, a detailed written response could be sent to the clerk of the committee. We are in your hands.
Mr. Leonard: Briefly, I acknowledge the fact that these unemployment figures change monthly.
Income tax cuts put money in the pockets of Canadians. I am aware of that table as well. That is why I put the focus on the last two items. The multiplier in the housing tax credit is much higher than that for personal income tax cuts. Currently, the biggest problem in Canada is the decline in purchasing power rather in housing. That is the short answer to why I included that in my prepared remarks.
The Chair: Mr. Leonard, thank you appearing today. We very much appreciate the work that you do at the Institute for Research on Public Policy. We will continue to follow your work. We look forward to receiving the documents you have undertaken to provide to the committee.
Mr. Leonard: Thank you, Mr. Chair and members of the committee.
(The committee adjourned.)