Proceedings of the Standing Senate Committee on
National Finance
Issue No. 12 - Evidence - June 16, 2016
OTTAWA, Thursday, June 16, 2016
The Standing Senate Committee on National Finance met this day at 2 p.m. to examine the subject matter of all of Bill C-15, An Act to implement certain provisions of the budget tabled in Parliament on March 22, 2016 and other measures.
Senator Larry W. Smith (Chair) in the chair.
[English]
The Chair: Good afternoon. Welcome to the Standing Senate Committee on National Finance, colleagues and members of the viewing public. The mandate of this committee is to examine matters relating to federal estimates generally, as well as government finance. My name is Larry Smith, senator from Quebec, and I chair the committee. Let me introduce the other members of our group: Senator André Pratte from Quebec; Senator Salma Ataullahjan from Ontario; Senator Percy Mockler from New Brunswick; Senator Nicole Eaton from Ontario; Senator Marshall from Newfoundland and Labrador; and from northern Ontario, Senator Beyak.
[Translation]
This afternoon we are continuing our study of the subject matter of Bill C-15, An Act to implement certain provisions of the budget tabled in 2016.
[English]
During the first part of our meeting to discuss different issues stemming from Bill C-15, we welcome and are pleased to have Dr. Jack Mintz, President's Fellow, School of Public Policy, University of Calgary. During the second hour of our meeting, we will have officials from Statistics Canada and from Finance Canada on specific provisions of Bill C-15 related to the Northwest Territories, Nunavut and Yukon.
Dr. Mintz, I know that you're very busy. We appreciate that you've altered your schedule to spend time with us. Could you give us some opening comments?
Jack Mintz, President's Fellow, The School of Public Policy, University of Calgary, as an individual: Yes. Thank you very much, Senator Smith. It's a pleasure to be before the Finance Committee. I've been before the Standing Senate Committee on Banking, Trade and Commerce several times in the past year, so it's nice to see a different group as well.
I want to say a few remarks on Bill C-15, which I look at as the campaign implementation bill of the government, which is moving ahead on a number of promises made during the campaign. You'll hear from my comments that some things in Bill C-15 I actually support and some things I will be critical of. Probably since some of you know my views, you won't be surprised. I come with a strong philosophy about two issues that are critical when it comes to fiscal policy. One is that I believe there's a certain important role that governments have with respect to redistribution, encouraging growth and several other objectives, but those two in particular.
When it comes to taxation, I have a strong belief that the tax system should be fair in the sense that taxes should be based on ability to pay where people with higher incomes should pay more relative to those with lower income. I also strongly believe in keeping tax bases as neutral as possible, for example across different business activities, and to keep rates as low as possible in order to encourage growth. You'll see that some of my comments are very much based on this philosophy.
With respect to deficits, I'm not a believer that you have to have balanced budgets every year. Given what happened in 2008-09, it was absolutely necessary to go into deficit. Because there was a coordinated action amongst G20 countries to undertake fiscal stimulus, of which Canada did its job very well, I was strongly supportive of what we did in 2008-09 in order to counteract what was truly a global recession.
Being around the table at Finance, including the years of Paul Martin, as Clifford Clark visiting economist in 1996 and 1997, I've also appreciated the tremendous work that both the Liberals and the Conservatives did from 1995 onwards to put Canada's fiscal picture in a much better balance. In fact, if we had not done that, and the major crisis happened in 2008 as we saw in terms of the global crisis, we would have had a really bad situation had we not dealt with our debt problem by running surpluses for over a decade. I think that was quite appropriate.
My view is that, yes, if you have a recession, you should think about running a deficit, but if you're in a period of growth, you don't need a deficit and should be looking towards having a balanced budget. You'll see some of my comments quickly on a few items are addressed to that.
I'd like to say something about the small-business tax reduction. I have done quite a bit of work in this area, especially with my colleague, Duanjie Chen, and with another colleague, Phil Bezel. We have shown in our work that one problem with the current system in taxation is that we penalize growth.
If companies move from being small to larger, they lose tax benefits, so effectively they see a wall of taxation that can impede their growth. I've been of the view that we should get rid of the small-business deduction, but the best way of doing that is to lower the general rate. When I did the business tax review for Paul Martin back in 1997, we actually recommended reducing the general rate and keeping the small-business rate the same. We've done that at the federal level by moving the general rate to 15 per cent with the small-business rate at 11 per cent. The 4 point difference wasn't too large. I would get rid of it entirely, but that wasn't a bad move. I have significant concerns at the provincial level.
When both parties recommended going to 9 per cent during the campaign, I was not in favour of that. I don't think moving to a 9 per cent rate is an appropriate thing to do with respect to the small-business deduction. In fact, if I had my druthers, I would look at the U.K. system. The United Kingdom had a 30 per cent corporate income tax rate, which they've now moved to 20 per cent. The small-business rate was 19 per cent, and now they have a 20 per cent rate; so there's no difference now between small and large firms. As we know, the United Kingdom is moving to a 17 per cent corporate income tax rate over the next few years. They've brought in a different incentive for small businesses, which is to provide expensing up to 750 million pounds. To me, that's actually a much better way of approaching incentives for small business. Even if they grow larger, they still have that expensing. If you give, say, $1 million expensing to a Canadian firm that's very large, it doesn't mean a lot to them, but it means a lot to small businesses.
Those are the kinds of incentives we should be thinking about. I also have some other comments that I won't go on further about. We should be looking at better incentives in the small-business case. I don't have a problem with the budget holding the small-business tax rate at 10.5 per cent, as it did.
On the labour-sponsored venture capital credit, numerous studies have shown that this credit has been not only ineffective but also harmful to venture capital markets in Canada. The reason is that it ended up attracting a lot of poor investments with low rates of return. One time when I was looking at the statistics, the average rate of return on venture capital with labour-sponsored venture capital credits was only 3 per cent. In the United States, it was more like 16 per cent to 19 per cent.
If I were a pension fund looking at investing in a venture capital fund in Canada versus the United States, it's obvious which I'm going to choose — the American, for sure. We really need to make sure that we have the appropriate incentives; and the wrong one to have is the labour-sponsored venture capital credit. I was most disappointed that the budget reintroduced it and did so in such a way that it will parallel only those provinces that have the venture capital credit today; and that's even more bizarre, we're setting up balkanization amongst the provinces at the federal level.
Another issue that came up in the budget was moving the Old Age Security eligibility age from 67 back to 65. I think that was a very important move that the previous government made, and I think it was the right thing to do. People are living a lot longer today and are in much longer periods of retirement. When you go back to when Old Age Security was introduced in the early 1950s, the age of eligibility was actually 70, but a person's expected lifespan was actually below 70 at that time.
Back in the mid-1960s, we lowered the age of eligibility to 65, but generally people, both men and women, lived to somewhere between 72 to 74 years of age, on average, but of course nowadays we're into the eighties. Most countries around the world have been increasing their age of eligibility and going to higher levels. In Holland, for example, they actually now have a policy whereby the age of eligibility is indexed to the life expectancy of the people, so the age of eligibility will be automatically indexed the longer people live. This is what they now do in Holland.
A number of countries, including the United States, have gone to 67 years of age for their social security system. It was exactly the appropriate thing to do, because we do need to worry about our aging society and the kind of fiscal requirements that will be needed to support people. I think it was a retrograde step to reverse the age of eligibility from 67 to 65 in the budget as this change will put more pressure on governments in the future as a result.
The final one I'd like to talk about is the tax package, which really had two major parts. One was the child tax plan, which did simplify things to a certain extent with one program as opposed to two, and it also had a middle-class tax cut but raised the top rate four points. In the case of the child tax plan, there are some elements I liked, and I think it was appropriate to try to simplify it into one program. I think we have to remember that it did increase marginal tax rates for families with more than $45,000 in income because the benefits are clawed back after that income level. I forget, now, the limit on that, but it actually raises the marginal tax rates in those cases.
It also got rid of income splitting, but I'll come back to that in a moment.
It raised the top rate four points, which I think was a major mistake, in public policy terms, for Canada.
The average top rate now in Canada, including the provincial rates, is 53 per cent. That is actually now the fourth highest among OECD countries. We're just a little bit below France and we're below, I think, Denmark and Sweden. I don't think it really does us a favour to be near the top level, especially relative to the United States. We're trying to attract talent. I already know there are a number of businesses that have been finding that the combination of the low dollar and higher marginal tax rates is having an impact on their ability to recruit people here.
But it also affects young people who are looking to be entrepreneurs and do well in the future; they look at this much more graduated system, which I think does have an impact. That is one negative aspect with the top rate at 53 per cent.
The other negative impact is that both the increased marginal tax rates under the child tax plan, as well as the higher marginal tax rate for high-income individuals, will discourage savings because people might earn a measly rate of return of 4 per cent to 5 per cent on their investment dollars, and this is without taking into account inflation. But if you're paying marginal tax rates of 40 per cent to 50 per cent, which actually is quite possible even for middle-class families with children, then you actually will be very discouraged to put money into savings because of the fact that your after-tax return will be reduced to about 2.5 per cent. Then, subtract long-term inflation at 2 per cent, and that's hardly giving you much of an after-tax return on your savings.
Here, we're worried about trying to encourage people to save for the future and for retirement purposes, and we've had a very good system in place. In fact, combined with these higher marginal tax rates, as well as reducing the limit for Tax-Free Savings Accounts, or TFSA, from $11,000 to $5,500, it's going to have a significant impact on increasing the tax on savings for many middle-income individuals. There have been many seniors who took advantage of the TFSA because it allowed them to shift assets that were taxable into tax-free savings, which allows them to accumulate wealth more quickly for their retirement purposes, or even during retirement, when they have some money to help support themselves. So I think that's been a retrograde step.
The other issue, I think, is that while the middle-class tax cut was a good thing, and that, of course, is for the opposite reason, in that it does provide some incentive for more work and risk-taking, et cetera, for the people at least earning between $45,000 and $90,000, we have to remember to ask the question of what we really mean by middle class, and I would call that more the bottom half of the middle class.
But I think there's also another issue on which we need more analysis and discussion on the table, and that is we have to remember there are different people and families in different circumstances and of different sizes. For example, if you have two teachers in Toronto that are earning roughly $85,000 each, that's $170,000 in family income. Is that middle class, or not? Under the middle-class tax cut and the $45,000 to $90,000 individual income level it applies to, you would say, yes, they are both middle-class individuals. But of course, as many of us know, if you own a house in Toronto, I think it's quite a challenge to deal with that.
However, what happens when you have a single earner who is earning $180,000 and has a spouse who is staying at home — who, these days, could be male or female — and raising a couple of young kids, and they feel it's very important for one person to stay at home to raise their family. Is $180,000 in that case not middle class when you have one earner and a family of two children and a spouse? I would argue, yes, they are middle class as well, and yet the income splitting that has been removed under this budget discriminates very much, as the numbers that I've calculated in the past show, against households where a single earner tries to stay at home and raise their children. I think that has some negative impacts as well.
The Chair: Thank you very much. You've given us many issues on which we can ask you questions: redistribution taxation, the ability to pay, deficits both good and bad, lowering the general tax rate, the combination of small and large business tax rates, the U.K. model, labour-sponsored venture capital and an old age pension reduction from age 67 to 65. You also said the child tax was a good move and mentioned the top tax rate of 53 per cent, the TFSA limit reduction, definition of "middle class,'' sizes of families, location and what it really means to earn income in terms of where you're classified.
With all of the points you shared with us, we have some senators who are anxious to ask you some questions, doctor.
Senator Eaton: Thank you, Mr. Mintz. Is flat tax not feasible? Is that why nobody wants to go to something simple like a flat tax?
Mr. Mintz: It depends on what you mean by a flat tax.
Senator Eaton: Instead of having a graduated income tax depending on your income.
Mr. Mintz: Let me explain why. Alberta once had a flat tax, and let's say it was at a 10 per cent rate. It was called a flat tax. However, it had a significant exemption level, which was $17,000 per individual. If you ask the question of whether that is really a flat tax, I would say it isn't because it's really two rates. It's 0 per cent and 10 per cent, because the 0 per cent applied to the first $17,000. When people talk about flat taxes, in my view there is no flat tax that anyone is really discussing, because what they're talking about is a less-graduated system.
If you look at the Canadian tax system today, we have so many different marginal tax rates that are involved. It's not just the official rates that are under the Income Tax Act, which are 15 per cent, 20.5 per cent, now, and 29 and 33 per cent. But it's also all of these clawback rates that people face. For example, if you're a senior and you're getting Guaranteed Income Supplement, there's a 50 per cent marginal tax rate that's added on for that individual because of the clawback. If you're getting Old Age Security, there's a 15 per cent marginal tax rate added on between the income of $70,000 and roughly $110,000, as the clawback goes for the Old Age Security. So we have a plethora of these different marginal tax rates that are sitting in the system. I think some people are getting to the point of, "Maybe we should start trying to integrate these things.'' The one concept that people have been talking about is going to, let's say, a minimum level of income, where the government gives a grant — it could be taxable, but, effectively, it's a minimum grant — and we try to unroll some of these various programs with all of these different marginal tax rates. Certainly, I've argued in the past that we should try to put a basket of these different incomes together and have one clawback rate that would apply to different benefits so that you can also get rid of some of these things that stack up because sometimes they can stack up to close to 100 per cent or even more in terms of marginal tax rates.
Senator Eaton: I guess I've listened to too many political speeches on both sides of the border. Why wouldn't we have something simple like a guaranteed annual income, guaranteed so that there was no clawback, no extras. You just got a guaranteed income and then a flat tax for people who fell above the guaranteed income.
Mr. Mintz: That was the Milton Friedman proposal, which has never been fully adopted. The public finance literature would probably argue against that. At least, it wouldn't be as simple as you'd think. The reason for that is there's a concept of tagging. Sometimes it will be more efficient and less costly if you can vary your support based on certain characteristics of individuals. For example, you may want to give more money to a disabled person compared to somebody who is not disabled. If you have a family of four, there's a big difference between that and a family of two in terms of support, et cetera. There is an argument for having some differentiation and that it's not as simple as the way that Milton Friedman had originally characterized it, but, certainly, you can ask the question. What I find intriguing about the concept is perhaps undoing some of the tremendous bureaucracies that have been built up providing various programs, of which I think unemployment insurance, what we call, in Canada, Employment Insurance, to give it a good spin, is a very complicated system, with a huge bureaucracy, where we try to identify different unemployment regions and different rates and different benefits. It is bizarre. I think if you came from Mars and you looked at this, you'd say, "This is absolutely the screwiest system that could be developed by a country to deal with that.'' If you had a minimum guaranteed income, you could actually probably get rid of the whole unemployment insurance system as a result.
That could actually have very significant benefits in increasing the incentive to work. In fact, studies have shown that Canada's unemployment rate is about a point higher because of our Employment Insurance system. That was from the past. The changes that were made in 1994, under the Chrétien government, and the later changes that were made under the Harper government reduced some of the cost of that unemployment insurance system that we have in Canada. But, from what I understand now, in many things, we've actually backtracked. That is actually going to impose significant costs on the Canadian economy, as well as undermine incentives for work.
The Chair: We have a full list, so I ask all of our senators to be prompt with their questions.
Senator Marshall: There's one area that I don't think you mentioned in your opening remarks, but I would appreciate any comments you might have on it because it's in the news today. That's enhancing CPP. Could you give us your comments on that? Do you see that as a tax on small business? I guess people at the lower end of the salary scale will now be required to contribute additional premiums, and that will have an impact on their take-home pay. Could you just speak a little about that issue that's currently in the news?
Mr. Mintz: The question is what's the problem? This has been the problem around CPP expansion. I was asked by the federal-provincial-territorial ministers of finance to be the director of a research project to basically put data together in 2009 to assess whether we had a pension crisis in this country. For that report and the studies that were done under it by various top academics in Canada, as well as the OECD, the overall picture you got from that work was that 80 per cent of Canadians were doing perfectly fine. We had a financially sustainable program of support for retirement. And there was no major problem, but there were a couple of pockets of areas of concern. One was what I call the modest-income individuals, who have roughly $25,000 to $50,000 in income, where some people had a drop in income support that was quite significant.
In some later work that I did on seniors, I actually found that the poverty rate for single seniors was much higher than for two seniors living together. In fact, for two seniors living together, the poverty rate for seniors is below 5 per cent. But, when you had just a single senior on their own, the poverty rate that we estimated, taking the most conservative line of the Statistics Canada poverty line, was 20 per cent. I had argued that we should top up the Guaranteed Income Supplement, which the last budget did, and I fully support what they did in the current budget. But if I was doing anything on CPP expansion, I would actually go from 60 per cent survivor benefits to 100 per cent survivor benefits because 70 per cent of the single seniors are women who, first of all, couldn't work part of the years during their life but also went through marriage breakdowns and other things like that and were actually below the poverty line. I think going to 100 per cent survivor benefits would be useful because when your partner dies, you lose an Old Age Security payment and you lose some of the CPP benefits of that partner. It may be $10,000, but, when you're dropping from $35,000 in family income to $25,000, which is a lot of people in that group, it really has an impact. I would support a very targeted approach on CPP. What really is happening now is that there's a movement afoot to try to kill off the Ontario Retirement Pension Plan, the ORPP. It is highly distortive. It balkanizes the Canadian labour market and pension markets. It also balkanizes the labour market in Ontario because you're going to have firms that are exempt because they have a rich enough defined contribution plan or they have their own defined benefit plan, and then you have others that don't. You are going to have people moving in between. Also, firms may make decisions like saying, "Maybe I'll get rid of my defined benefit plan or my defined contribution plan, and it will be cheaper if my employees are on the ORPP.''
It is a terrible idea, the ORPP, one of the biggest mistakes I've seen in public policy in years. There's now an attempt to try to get a CPP expansion to try to kill off the ORPP.
The bigger question is, what about the 62 per cent of the rest of the country? Do they need a CPP expansion? The recent studies that have been done by McKinsey, as well as Statistics Canada, show that the numbers that we found in 2009 in terms of which part of the population is threatened haven't changed at all. In other words, despite all the things that have happened since 2008, again, roughly four fifths of Canadians are doing perfectly fine and don't need CPP expansion. So, if a young person wants to buy a house — which, by the way, is the most important retirement asset in Canada, housing equity — and raise a family and now, all of a sudden, has to pay more CPP, you're actually making it that much more difficult for that young family to buy a house. I think we need to think very carefully about what we're doing to the population. As far as the employment effects of payroll taxes on businesses go, in the short run, it could have some negative response. In the longer run, less negative. What studies have shown is that payroll taxes on employers tend to get shifted back onto employees in terms of lower wages. So in the end, the employees end up paying, which makes it harder for younger families.
So I would actually argue that unless it's a very targeted approach on CPP expansion, I think it would be a big mistake for us to move ahead with it.
Senator Marshall: You're saying "if it's not broke, don't fix it,'' and for the pocketed areas, that's what you would look at.
Mr. Mintz: Exactly.
Senator Marshall: Do I have time for another question?
The Chair: If you could be patient, we're going to get you on round two.
Senator Marshall: Okay, I'll be patient.
Mr. Mintz: I'll try and keep my answers short, too.
Senator Beyak: Thank you for all your exceptional work over the years. You're so respected. It's an honour to have you here.
Mr. Mintz: Thank you.
Senator Beyak: I appreciated your remarks, as a small-business owner in the past. In Ontario, the pension plan idea is terrible. Every businessperson who contacts me tells me it's going to hurt their bottom line, hurt their hiring and hurt their competitiveness on the world stage.
I wonder if you could elaborate a little bit on income splitting. Everyone at this table understands it very well from the past government and why this government has taken it away. The average couple at home doesn't even really understand what it's going to mean to them, and your expertise would be much appreciated.
Mr. Mintz: The idea of income splitting is what I would call a partial approach to what you might call family taxation. The most general approach is something like what France does, where all the income is aggregated in the family, and you divide by a divisor. The divisor is usually one for each adult, plus a half for the first two kids, and then one for the third kid. If it's a family of five, then the divisor would be four. So you take the income, divide it by four, you apply the progressive rate schedule to that, and then you multiply by four. That's the tax paid by the family.
It doesn't matter who has the income within the family. You don't need income attribution rules. There's a lot of simplification you actually get with that approach, as well. And it's also very fair, in my view.
Of course, the United States has joint filing for families.
So I looked at the income splitting proposal we have in Canada, where people could designate up to $50,000, as a partial way of achieving income splitting. It only applied for families with children. That's not bad, because one of the most important decisions made by a family about whether people want to work or not is whether they're raising children, especially when they're young. And there are a lot of families that would like to have one of the two parents being at home to raise that family.
So I think the income splitting thing was actually very fair in that sense — more fair than pension income splitting, to be frank. It made a lot of sense.
Unfortunately, and I'm really quite disappointed in some of the think tanks that came out with criticisms of income splitting; namely, that it's only for a certain number of families, and it's a bonus to higher-income families. That's not necessarily true. In fact, it was a big bonus to many families. To give you an example, if you have two individuals working and one was fully working but one goes on maternity leave, and their income drops — let's say one's a police officer and one's a teacher. They're earning roughly $80,000 or $90,000 dollars each, but then one goes on maternity leave and goes down to $40,000 — getting support on EI — income splitting was helpful to them during that period. And it was capped at $2,000.
So my view is that it was actually not a bad proposal to at least have some family taxation in Canada. Getting rid of it still does not help, in my view. In fact, it's harmful in that it still makes it more difficult for those families that want to have one parent staying at home to raise their children.
Senator Pratte: Mr. Mintz, you said today and you wrote also about your concerns about Canada's debt, especially after the last budget. I'm concerned also, but yet I noticed that, for instance, the IMF applauded the last budget, showing that Canada is pointing the way by using its deficits because of its positive financial position. I noticed also in an article that you published in the Financial Post a table where you showed Canada's total debt, where there's a government debt, a private debt and corporate debt. And the corporate —
Mr. Mintz: Intermediary.
Senator Pratte: Intermediary, which is non-financial sector.
Mr. Mintz: A little broader than just corporate.
Senator Pratte: And the corporate total debt is really the intermediary debt, which has increased considerably.
There are two questions in that question, really. First, if it's true that our debt is so grave, why is it that the IMF, which is usually quite conservative, is applauding us? Second, is government debt the problem or is it more intermediary debt?
Mr. Mintz: First of all, I don't agree with the IMF. I think they were wrong in their assessment. Let me put it this way: Canada is not as bad as some other countries, so maybe they're just looking at other countries' positions right now and are thinking that Canada has more fiscal room.
My problem right now is that Canada's growth rate is somewhere between 1 and 2 per cent. It's actually getting closer to 2 per cent, and with the lower dollar, I think we'll be roughly in the 2 per cent range next year. Our productivity growth rate is only 1 per cent, and our population growth rate is only 1 per cent. You're not going to get much better than 2 per cent as a growth rate for a country.
I don't see us in a recession, and I don't see us having a significant problem; however, what I do see is that, just taking public gross liabilities — and this is a Statistics Canada measure — it's now hit 116 per cent of GDP. Some of us who remember the bad time of 1994 when the IMF almost pulled the rug out from under Canada, our public gross liabilities percentage to GDP was 135 per cent. We're not up to that yet, but if you go back to 2007, we were close to 80 per cent. So we're kind of halfway there now. My bigger concern is where we're going in the future.
If you look at corporate debt, the lowest point of corporate debt, or one of the best positions we were in, was in 2007. In fact, leverage wasn't very high in Canada, except for banking debt, but because of our capital requirements in Canada, our bank leverage wasn't too bad, either, relative to a lot of other countries. That's where the intermediary comes in, because it's the bank debt that's really important. But we've gone up there quite a bit.
Then if you look at household debt, we know that the household debt, at least as a shared disposable income, has now reached 165 per cent. Back in 2007, it was about 30 points less.
So we're now kind of turning the corner. We're going back to the old days.
What I'm concerned about is that I don't see the federal government needing to run a big deficit. I can understand a deficit in Alberta, Saskatchewan and Newfoundland and Labrador at this point in time, and I can understand a deficit maybe in a few provinces where they're having some difficulty. In my opinion, the federal government did not need to run a large deficit that is 1.5 per cent of GDP, if it's $30 billion this coming year; we'll see what it finally ends up to be at the federal level.
We have to remember that provinces are also running deficits, in general. If you add in the provincial deficits, you're roughly at over 3 per cent of GDP. If you look at the increase in net debt, it's over 3 per cent of GDP, because deficits are measured without capital spending. In other words, they depreciate capital, and if you have a lot of debt going into capital spending, then that doesn't get included in the definition of a deficit in the public deficit.
So when you start looking at net debt increases, it's over 3 per cent of GDP; that's actually higher than what the Maastricht Treaty limit would have been back in the 1990s in the European Union.
So, in my view, we're going into dangerous territory. What happens if we do run a recession? We will run much bigger deficits as a result. I think we have to be very careful not to undermine our position.
The other thing I find very disappointing is the way that net debt is calculated in Canada and some countries. I think it's problematic, because the way that net debt is calculated is that you take gross debt and you subtract financial assets. It seems appropriate to think of net debt in that way.
We subtract the Canada Pension Plan and the Quebec Pension Plan assets. If you look at the calculations of net debt, we do not include the future liabilities associated with those pension payments. In other words, we just add in the assets of CPP and QPP minus the current payouts of this year for pension liabilities, but not future pension liabilities.
In other words, all those assets sitting in social security are getting subtracted from our net debt, and we're ignoring a huge liability that's associated with that pension liability in the future because those assets are really promises to pay pensions under the Canada Pension Plan and the QPP.
I think we have to be very careful with these net debt calculations in terms of what they really mean. So if you take out social security surplus assets, you will find that actually you have a much higher net debt as a share of GDP in Canada, instead of being at the federal level right now it's around 35 per cent or 31 per cent, whatever the number is. The provincial one gets up to 60 per cent, but when you start getting the net debt numbers, you start getting up closer to 80 per cent. It's a much grimmer situation than one thinks — but not as bad as many other industrialized countries after 2009. I don't think we should just sit back on our laurels and keep patting ourselves on the back that we did a great job, which we did — I'm worried that we're backtracking.
Senator Ataullahjan: There was a lot of talk about restoring hope for the middle class. There are many different definitions of "middle class.'' With your great knowledge and experience, who would you define as middle class?
Mr. Mintz: I think the public looks at themselves as everybody being middle class. Economists will have different definitions, but usually you look at the median income level. Then you might say we'll calculate middle class, thinking of it in statistical terms, as some standard deviation, one or two, from the median. That would be what you might think of as middle class. In other words, if the average family or median family income is roughly, say, $60,000 in Canada, you might say the middle class is $30,000 to $90,000; and it captures a fair portion of the population.
One of the problems I have with this goes back to my comments about income splitting. What do we mean by "middle class'' when you have families of different sizes and different requirements? Of course, there are also people who are disabled who may have certain costs that are higher than people who are not disabled, and you have a different cost of living in some areas of the country compared to others. Of course, everyone will talk about Toronto and Vancouver housing prices. For people who are in a house it's not an issue, but for people trying to buy a house, it is. If you're living in the North, you have a higher cost of living because food and a number of other things, with the high transportation costs, are more expensive in the North than you would find in the South. That will also affect, I think, your definition of what you mean by "middle class.''
Senator Mockler: You once wrote an article about a smart tax and regulatory policies. Would you expand on that?
Mr. Mintz: What was the smart item?
Senator Mockler: In Ireland, a smart tax; and we called it the Irish miracle in the 1990s.
Mr. Mintz: Oh, okay.
Senator Mockler: We see that there seems to be a propelling back to where it was.
Mr. Mintz: It's actually a wonderful story for tax policy experts like I am because it shows you that taxes can have a pretty powerful impact. As many people know, Ireland was a basket case for centuries, really, in Europe. It was one of the poor countries of Europe. It was back in the late 1960s that they decided to undertake a significant change in the way they did things because they were always losing population to Europe and America. They also had poor education. In fact, not only did people not go into tertiary education, they didn't even go into secondary education.
What the Irish did had a three-pronged strategy. One was to invest in education. They started free tuition for tertiary education because they wanted to encourage people to get beyond the secondary stage and into universities and colleges. They tried to get their population educated and create many more skilled workers. Of course, they also understood that if you're going to have skilled workers, you have to create demand for those skilled workers or else they'll go off to other countries.
They had two policies to try to attract businesses to Ireland and to create jobs. One was infrastructure spending to improve the infrastructure in Ireland. The other was a significant adjustment to its tax system, in particular its income taxes, to much lower rates and broader bases — that type of thing. The key was their much lower corporate income tax rate, which they lowered for manufacturing and financial income to 10 per cent initially and then later undertook a broadening to make it 12.5 per cent for everything.
That attracted a lot of multinationals to Ireland after the late 1960s. By the time the year 2000 hit, Ireland was actually getting a migration inflow, not an outflow. It was the fastest-growing European country for roughly two decades. It also had a huge improvement in productivity as a result. The big mistake Ireland made was messing up the financial regulatory system. They were not very careful. I remember when I was in Ireland a cab driver was telling me that he could get a mortgage equal to 125 per cent of the value of his house. In other words, he could buy the furniture and all other things. So Ireland got very heavily hit by the financial crisis in 2009 and had to save the banks that got into serious trouble. The economy took a big hit. It had a major recession, much bigger than what we had in Canada and in Australia. It really paid the price of bad financial regulation at the time.
It's interesting that over the past couple of years, Ireland has become one of the fastest-growing European countries again. It's not quite at 6 per cent average growth rates or 7 per cent as it was before. It's in the 3 per cent to 4 per cent range, which is better, of course, that what we're doing in North America and many other countries. Much of that is because some of the main policies they had earlier on are still in place today and are playing a significant role in helping the country.
Senator Mockler: Would you comment on guaranteed annual income?
Mr. Mintz: I did say a few remarks earlier, but I could spend a little more time.
It's an intriguing idea if we can cut down some of the complexity in our system, but I don't think that the pure system of a single minimum income will work because there are too many differential needs of families. Going back, there are persons with disabilities and different-sized families with different-aged children and number of children — things like that.
You're going to have to have differentiation in your support systems. One thing is that you end up clawing back all the benefits at the same rate if you had a clawback. Maybe you could get rid of Employment Insurance because it may not be needed and all the bureaucracies associated with that.
Senator Marshall: I want to follow up on Senator Ataullahjan's question about growing the middle class. We have discussed this on numerous occasions in this committee with various witnesses. It starts with the budget where it says "growing the middle class.'' So we were trying to define the middle class so that this time next year we could go back and see if the middle class actually did grow.
Your suggestion was probably the closest I think we've come to being fairly definitive. So would you have any suggestions as to how we could, next year, go back to see if the middle class actually did grow as a result of the changes in the budget?
Mr. Mintz: I think you would have a tough time because usually there's a lag in data, right?
Senator Marshall: Right.
Mr. Mintz: It's more than a year, and so you're not even going to be able to assess it that easily.
For example, economists will predict the increase in the top rate, as we did in the latest budget, and as some of the provinces did, like Alberta, which has gone nine points in total, but we won't know for three or four years what implications that had for personal income tax collections in Alberta. It's going to take that long to get the data to really understand that. At least if it's public data. Now, maybe government can assess that more quickly, but I doubt they'll even know that next year, by the time Canada Revenue Agency is able to put everything together.
Senator Marshall: Okay, because the budget also talked about making evidence-based decisions, so what you're saying is that evidence won't be collected for four or five years down the road.
Mr. Mintz: Yes, or maybe two to three, depending on the kind of information. I think the key is Statistics Canada does do surveying and they do show what's happening to people's incomes, and I think the only thing that you can judge is whether family incomes or individual incomes are growing. Are people better off in two to three years? The problem there is this confounding factor that will influence that growth.
It's not just going to be the budget and the provisions in it; there are other things that are happening, including what's happening worldwide, such as the price of oil, or interest rates or whatever. All those things will impact on growth in the country, and so then you get into this debate about, well, maybe if we didn't take these measures it would have been worse or it could have been better. Who knows? That's the problem in trying to do that analysis. To do that kind of analysis, which is possible, you need data for a long enough period to understand it.
Senator Marshall: Multiple periods, okay.
In the context of your comments on the deficit and where we're going in the long term, there's quite a bit of spending in this year's budget giving rise to the deficit, and some has been categorized as stimulus spending. Would it not have been better for the government to have given further tax breaks rather than revving up spending? Do you have any comments on that?
Mr. Mintz: I'm surprised that you didn't quote my recent op-ed on that.
Senator Marshall: I'm giving you an opportunity.
Mr. Mintz: Tax cuts actually work much more quickly than infrastructure spending. In fact, even during the 2008-09 period I know that Minister Flaherty was really adamant about "use it or lose it,'' so we were looking at infrastructure spending that could be done right away, like filling potholes, as opposed to big infrastructure projects that might be needed but will take a much longer period to be done.
I actually think infrastructure is a lousy way to stimulate the economy, except for filling some potholes at a certain point in time. Because I think what infrastructure is important for is building capacity to produce goods and services in the future, and that's more of a long term-type investment, and it's important for the productivity of the country that there's both sufficient public and private infrastructure spending being done.
And in fact, for that reason I think that, as a stimulus, infrastructure is actually the wrong policy to use. What's more important for Canada is talking about how to get people moving faster within urban centres and how to get our goods and services out of the country in terms of exporting, or those things coming into the country in terms of importing, because those are important for growth.
Those are much longer-term infrastructure projects than what you're going to do in the very short run.
Senator Marshall: Thank you.
Senator Eaton: I'll pick up where Senator Marshall left off. Talking about stimulus and infrastructure, what about pipelines? Would they be a source if this government went and actually made the decision to do the east-west line and perhaps the Northern Gateway? Would that be a long-term stimulus?
Mr. Mintz: I don't want to use the word "stimulus,'' but a long-term —
Senator Eaton: Long-term benefit to the country and creates jobs.
Mr. Mintz: A long-term project that would have long-term benefits for the country.
I think it's more than just pipelines. I think we need a more general discussion about how we're going to get infrastructure built in this country.
Senator Eaton: But all we seem to do is discuss and think.
Mr. Mintz: One of the proposals the School of Public Policy is working on with CIRANO at the University of Montreal is the concept of developing corridors. We call it the northern corridor, through which you can move minerals, forest products, oil and gas, electrical transmission lines or whatever. You get the pre-approval in place for certain corridors, and then it becomes a much easier process on the regulatory side to get these things done more quickly.
Senator Eaton: I see. You just add what you need to that corridor.
Mr. Mintz: And if you look at the paper we put out, we actually showed how you could do a corridor right across the North as a major project that would connect Newfoundland going all the way to B.C., and it's more than just pipelines. It is trying to get our goods and services out, including ports and everything else. The problem in Canada is that we don't have a regulatory process to get easy approval for these things.
Australia has used this very effectively. For example, TransAlta has told me that they could build an electrical transmission line in Australia and get all the approvals within six months. Well, it could take two years in Canada.
Senator Eaton: Because the corridor has already been established, and they're just going down the corridor.
Mr. Mintz: Exactly.
Senator Eaton: It seems so sensible.
Mr. Mintz: It is. African countries have been doing this. I met a person in Toronto who has been doing this work around the world. This is something we could do in a much more effective manner.
The Chair: It's interesting you bring that up, doctor, because our banking committee this morning is looking at future projects. One of them is the northern corridor, and we have the article that you just alluded to from the University of Montreal.
Are you okay, Senator Eaton? Can we move on?
Senator Eaton: Yes, please do.
Senator Mockler: To follow up on Senator Eaton's question, there's a lot of talk about the concept of distributing wealth. Would we qualify the Energy East pipeline as a means of distributing wealth from coast to coast?
Mr. Mintz: The question is what benefits Canada gets as a whole from the eastern pipeline versus one particular region, and things like that. Alberta, maybe B.C. and, potentially, part of Saskatchewan may benefit because they can get oil sold more easily and shipped. But then, to me, when you talk about the pipeline itself, it goes through communities. There are property taxes that will be paid and there are certain things that are going to be involved that will help those communities, as well as provinces, and so there are some economic benefits. We also have to remember the taxes that are paid are from different regions in Canada and go to the federal government end up getting redistributed to other parts of the country.
So yes, there are some positive aspects for all parts of the country associated with that one project. But of course you can make that point about many different projects and many different things we do, and I think this really goes back to the whole question of what we do as a country. We talk about innovation, but part of innovation, which means getting things done more efficiently, is actually a regulatory system as well as how we are able to accomplish things to get them done. I think that there are a lot of things that get covered, and if we want to grow better as a country, we should be doing that.
The United States has been planting lots of pipelines right across the country. They have been developing their resources. They have had some opposition to development in certain parts of the country, but they're going ahead, aren't they, with things like LNG — liquefied natural gas — plants and stuff like that. We're still waiting to get our final approval on an LNG plant on the West Coast.
The Chair: Doctor, would you like to give us a 30-second to 60-second summary of what key message you want to leave with us today?
Mr. Mintz: I think we need a better plan for growth in this country. I think we need to get more focused on growth because, in the end, with our aging society and our productivity problems, if we're going to have the resources to redistribute to help low-income people in poverty, which I think all of us around this table would agree with — we would like to support individuals that need that support — we're going to need the growth and the income to do that and the tax revenues that evolve for governments to play their role.
The Chair: You said one thing that I picked up on: Developing or streamlining our regulatory system is one of the key steps. Is that a point that's strong in your —
Mr. Mintz: Yes. It applies to all sorts of policies in governments. We need to be more focused on a growth-oriented path than we're seeing right now.
The Chair: Did you have a chance to see the Banking study that we just announced on interprovincial trade?
Mr. Mintz: I got a copy of it, but I've been travelling.
The Chair: You'll have a chance to read it, maybe, on the plane.
Mr. Mintz: I'll be planning to read that because I actually have that and am interested in reading it.
The Chair: On behalf of our committee, we thank you very much, sir, for taking the time to spend with us today and sharing your thoughts on the implications of Budget 2016.
For the second part of our meeting today, we are particularly interested in the provisions of Part 4, Division 7 of Bill C-15, which deals with federal-provincial fiscal arrangements. Even more specifically, we're interested in the changes to the Territorial Formula Financing.
To discuss this issue, we welcome, from Statistics Canada, James Tebrake, Director General, Macroeconomic Accounts Branch; and Tom Dufour, Director of Public Sector Statistics. From the Department of Finance Canada, we have folks who have visited us many times: Tom McGirr, Chief, Equalization and TFF Policy, Federal-Provincial Relations Division, Federal-Provincial Relations and Social Policy Branch — I almost needed oxygen after that, Tom — and Duane Hayes, Chief, Program Payments & Estimates Section, Federal-Provincial Relations Division, Federal- Provincial Relations and Social Policy Branch. I took a deep breath, Duane.
Mr. Tebrake, do you have a brief presentation for us? If you do, please go ahead.
James Tebrake, Director General, Macroeconomic Accounts Branch, Statistics Canada: Yes, we circulated a presentation. Hopefully, everyone received it. I have some opening remarks, and the opening remarks are really kind of embedded in the presentation. It just makes it a little bit easier for you to follow along. Maybe as a preface, before I get into that, really, what I'm going to do in these opening remarks is explain a little bit the Canadian System of Macroeconomic Accounts and explain the revision that we made in 2015 to that, what was revised, and then how that fits into the TFF.
With that, the Canadian System of Macroeconomic Accounts is a set of macroeconomic statistics to provide governments, businesses and citizens with a current picture of the evolution and structure of the Canadian economy. Statistics such as gross domestic product, labour productivity, national wealth, the international balance of payments all emanate from the Canadian System of Macroeconomic Accounts.
A bit unique to Canada, these data are also used in the administration of a number of government programs, such as the fiscal equalization program, Territorial Formula Financing program, and Harmonized Sales Tax program.
Statistics Canada regularly conducts revisions to the Canadian System of Macroeconomic Accounts to incorporate the most current information on the Canadian economy that we obtain from censuses and annual surveys and to improve estimation methods. These revisions are generally limited to a few years. Periodically, the Canadian System of Macroeconomic Accounts undergoes a comprehensive revision, which is much broader in scope. These are reserved for incorporating conceptual, classification and presentational changes and to introduce major statistical improvements. These revisions are generally carried back over the entire length of the time series. These revisions improve the international comparability of our data, incorporate the latest advances in methodology in the area of economic measurement and integrate updated and higher-quality source data and statistical techniques, adding detail and relevance to the economic estimates.
This strategy furthers Statistics Canada's policy of ensuring Canadians' access to trusted, accurate and relevant economic statistics that meet the priority information needs of Canadians and the Canadian government.
In November and December 2015, Statistics Canada released estimates for the Canadian System of Macroeconomic Accounts based on the latest comprehensive revision. The comprehensive revision is the end result of a three-year project to more closely align the Canadian system with the international standards put out by the United Nations and the International Monetary Fund.
Over the last three years, there has been extensive communication with federal, provincial and territorial governments, as well as academics, businesses and international bodies, regarding the scope and timing of the revision.
On November 10, 2015, Statistics Canada released the 2014 Provincial and Territorial Economic Accounts, along with a revised set of accounts from 1981 to 2013. A few weeks later, on December 1, we released our Quarterly National Income and Expenditure Accounts, which included estimates for the third quarter of 2015, along with revised estimates from 1981 all the way to the second quarter of 2015.
There are some major changes included in those numbers: One was an improvement from the incorporation of higher-quality statistics related to government revenues, expenses, assets and liabilities. Another one was the incorporation of improved estimates of Canada's capital stock. We changed our treatment of pension and pension plans, and defined benefit pension plans, and we also incorporated natural resource wealth into our quarterly balance sheet.
Since the data from these systems of macroeconomic accounts are used in the administration of a number of government programs, such as the federal-provincial-territorial transfer program and the Harmonized Sales Tax program, revisions to these statistics can have an impact on payments between the federal government and the provinces and territories. Estimates from the provincial and economic accounts and the Quarterly National Income and Expenditure Accounts developed by Statistics Canada are used by the Department of Finance as inputs into the Territorial Formula Financing as per the Federal-Provincial Fiscal Arrangements Act.
Some of the estimates produced by Statistics Canada that are used by the Department of Finance as inputs into the Territorial Formula Financing include provincial and territorial government total expenditures, local government total expenditures, local government transfers to provinces, provincial and territorial transfers to local government — as you can see, it's a whole range of data.
As noted, one of the major changes associated with the 2015 comprehensive revision was an improvement in our government finance statistics. Over the last number of years, Statistics Canada modernized the government finance statistics program, and this included adopting the concepts and accounting methods outlined in the International Monetary Fund's government accounting manual as well as incorporating improved and more detailed data sources. These new accounting concepts and methods and improved data sources have resulted in more accurate measures of government revenue expenses, operating balances and assets.
These above series were revised with the release of the Quarterly National Income and Expenditure Accounts. If you have the presentation in front of you, I think slide 10 has a graph that shows the size of the revisions that were made to the data. You can see we've improved our government finance statistics and made revisions that were more substantial in the later periods than they were in the back periods.
The role of Statistics Canada with respect to the Territorial Formula Financing is to supply data to the Department of Finance, and the role of the Department of Finance is to apply these to the Territorial Formula Financing as per the Federal-Provincial Fiscal Arrangements Act.
Following the release of the data on December 1, the Department of Finance, as required by the Federal-Provincial Fiscal Arrangements Act, took the latest vintage of data from the provincial and territorial economic accounts and the Quarterly National Income and Expenditure Accounts and combined it with other information to determine the transfer payments to Nunavut, Yukon and Northwest Territories.
That ends my opening remarks.
Senator Elizabeth (Beth) Marshall (Acting Chair) in the chair.
The Acting Chair: Basically you produce the data and then you provide it to the Department of Finance, which uses the data to calculate to see what impact it has on the various provincial governments and the territories.
Mr. Tebrake: Exactly.
The Acting Chair: Senator Smith has been beckoned back to the chamber. I'm Senator Marshall from Newfoundland and Labrador. I'm going to sit in until he returns.
Department of Finance officials, do you have any comments in response to what was provided by Statistics Canada, or would you care to elaborate on the role of the Department of Finance?
Tom McGirr, Chief, Equalization and TFF Policy, Federal-Provincial Relations Division, Federal-Provincial Relations and Social Policy Branch, Department of Finance Canada: I think my colleague from Statistics Canada has said quite eloquently that Statistics Canada produces the data.
We have detailed legislation and regulations that set out the formulas used to calculate Territorial Formula Financing payments to the territories. That detail tells us exactly how the calculation should be made. Using data — and we've specifically pointed to data sources that Statistics Canada has.
As my colleagues from Statistics Canada says, they produce the data, and we are the data users, if you will, and we use those inputs in a defined way to calculate the payments to territories.
The Acting Chair: Could you tell us: This matter came up because of the impact that it had on Yukon. Senator Lang, who is a senator representing Yukon, raised the issue that Yukon was expecting a certain amount of funding. When the revisions were put through your formula, which I understood hadn't changed — just the input data changed — the territory ended up with significantly less money.
Were they the only territory or province that received less money, or did that have an impact on other jurisdictions also?
Mr. McGirr: Territorial Formula Financing payments are made to all three: the Yukon, Northwest Territories and Nunavut.
Let me first address the territorial expectation. I can't speak for exactly how the Yukon Territory has come up with its own estimate, but our best guess is that the expectations were built on the data that existed for provincial and local spending prior to the release of data that my colleague from Statistics Canada has talked about. They used this data to crunch through to come up with an estimate of what they thought their Territorial Formula Financing payments were going to be for the forthcoming year.
Of course, the formula set out in legislation and regulations specifically calls for the minister to use the latest data available. When we did that calculation, the number was less than the territorial expectations, and it was less for all three territories, not just the Yukon.
The Acting Chair: What about the other provinces?
Mr. McGirr: Territorial Formula Financing payments are not made to provinces.
The Acting Chair: No, but on equalization. Would it effect equalization payments?
Mr. McGirr: The data set my colleague is talking about is also used to calculate equalization amounts. The revisions to the data would have had some distributional consequences. The total amount of equalization is tied to the growth rate of the overall economy; we have a fixed amount that we pay in a given year. Then the equalization formula is then used to calculate the distribution of that fixed amount across provinces.
So the revised information would have had an impact on that distribution. Of what magnitude — I don't have that information available to me, but I don't believe that it was significant.
The Acting Chair: Senators, the floor is open for questions. Senator Eaton, do you have a question?
Senator Eaton: No, I'm sorry, I don't. You've asked my question about provincial transfers.
The Acting Chair: I did have questions for Statistics Canada. You were talking about the three-year impact and the retroactivity. How far back does it go?
Mr. Tebrake: With this revision, we actually made revisions back to 1981, which is kind of the start of our national accounting database. As you can see in the one chart on slide 10 — the government data — you see some of the changes all the way back to 1981. The more significant changes were for the more current period.
The Acting Chair: Right. So are you saying that the impact that it had on the Yukon was as a result of changes that went back as far as 1981?
Mr. Tebrake: Maybe I need to back up a little bit. Our statistics are based upon international macroeconomic accounting standards. These standards periodically get revised. It's the international community's way of saying the economy is changing, the way we're doing things is changing, so how we measure it needs to change. We then take those new standards and implement them into the Canadian national accounts.
Because our users like a nice, long time series of data, we implement those changes back as far as we can. In this case, we implemented them back into 1981. The reason for the revisions is, first, because of the new international standards. At the same time, we obtained some higher-quality government statistics from provincial governments, specifically, and integrated that new higher-quality data in. That resulted in a revision to the entire time series.
The Acting Chair: For 35 years?
Mr. Tebrake: Going back 35 years.
The Acting Chair: Thank you. Senator Beyak, do you have any questions for our witnesses?
Senator Beyak: No. The presentation was excellent. I'm replacing Senator Neufeld, who is ill. I'm not as up to speed as the others.
The Acting Chair: Thank you very much to our witnesses. Seeing no further questions, I'll adjourn the meeting.
(The committee adjourned.)