THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
EVIDENCE
OTTAWA, Wednesday, October 8, 2025
The Standing Senate Committee on National Finance met this day at 6:51 p.m. [ET] to examine and report on matters relating to federal estimates generally and other financial matters, and in camera for consideration of a draft agenda (future business).
Senator Claude Carignan (Chair) in the chair.
[Translation]
The Chair: I wish to welcome all senators as well as all the viewers across the country who are joining us from sencanada.ca. My name is Claude Carignan, senator from Quebec, and chair of the Senate Committee of National Finance. Now, I would like to ask my colleagues to introduce themselves.
Senator Hébert: Good evening. Martine Hébert from the Victoria division in Quebec.
[English]
Senator MacAdam: Jane MacAdam, Prince Edward Island.
Senator Ross: Krista Ross, New Brunswick.
Senator Kingston: Joan Kingston, New Brunswick.
[Translation]
Senator Miville-Dechêne: Julie Miville-Dechêne from Quebec.
[English]
Senator Loffreda: Welcome. Senator Tony Loffreda, Montreal, Quebec.
[Translation]
Senator Galvez: Welcome. Rosa Galvez from Quebec.
Senator Gignac: Good evening. Clément Gignac from Quebec.
Senator Forest: Éric Forest from the Gulf region in Quebec.
The Chair: Thank you, colleagues. We are continuing our study on a general financial and economic update on the state of our country. We had a brief consultation with the members of management and decided to combine our two groups, since one member who was supposed to take part in the first group was absent and we had a technical problem with our witness in Hong Kong. They are trying to resolve the issue, but I think it would be best to postpone it to be fair to the witness. Mr. Aubin has been offered a place in the first group, which will mean he can watch either the Blue Jays or the Canadiens game, whichever sport is his favourite, sooner.
Please welcome DT Cochrane, Senior Economist at the Canadian Labour Congress, and Steve Aubin, Partner, Audit and Assurance, Accounting and Reporting Advisory, Deloitte.
[English]
DT Cochrane, Senior Economist, Canadian Labour Congress: Good evening. Thank you for inviting us to share a worker-centred perspective on the Government of Canada’s finances and the state of the Canadian economy.
The Canadian Labour Congress, or CLC, is the country’s largest labour organization. We represent unions with over 3 million members in almost every sector of the economy. Canada’s economy is in rough shape. We should all hear the alarms blaring: 7% unemployment; youth unemployment at 14%; even higher, around 25% for Black and Arab youth; grocery prices and rent continuing to rise by more than 3% and 5% respectively; economic output falling every month of the second quarter; manufacturing output down 8% since 2022; business investment in machinery and equipment down 10% in the second quarter; and productivity lower than at the end of 2019.
This is not just about the trade war. The trade war is amplifying pre-existing problems, like weak hiring and under‑investment in productive capacity. These problems and others are the product of naive ideas about economic governance that justified bad economic policies. Governments were convinced by orthodox economists that the economy must be “left to the market” as much as possible.
For example, Canadians were promised that lowering corporate income tax rates would increase investment, improve productivity, diversify the economy and create more and better jobs. That did not happen. Productive investment has actually fallen.
Instead, these misguided economic policies facilitated more corporate concentration. Increased dependence on a single export and single trade partner hollowed out our manufacturing sector, made employment more precarious, increased inequality of income and wealth and recently failed to address an affordability crisis worsened by profiteering.
Part of the messaging associated with pro-market ideology is fear-mongering about the federal deficit and debt. This is driven by a common misunderstanding. The federal debt is money that the government has spent into the economy and not taxed back yet. The money remains in the economy as an essential part of our financial infrastructure. We face multiple, overlapping crises — housing, health care, climate, trade, unemployment, to name just five.
The federal government must accept its singular ability to provide democratically accountable economic leadership. To abdicate that role over misguided fear of the deficit is a dereliction of duty. Instead of the austerity that Prime Minister Carney says is coming, we need significant investment in the physical and social infrastructure required for a fair, stable, innovative and sustainable economy.
The government must strengthen the social safety net, including more support for people with disabilities, unemployed workers and retirees on inadequate fixed incomes; expand public health care, with extension of pharmacare and dental care, as well as access to mental health care; increase funding for childcare and all levels of education; build non-market housing to ensure affordable homes for all; repair and grow Canada’s transportation systems — bridges, roads, rails, ports, as well as inter- and intra-city transit; fund a green industrial strategy to transition our high-emission economy to net zero; and maintain the public services needed for efficient and effective coordination of this nation-building effort.
Done the right way, this produces valuable assets, creates many good jobs, reduces private sector uncertainty and generally improves well-being. It would carry a hefty price tag. While deficit fears are misplaced, the government needs to ensure the money spent keeps circulating. Money gets siphoned off by powerful corporations into the outsized fortunes of the ultra‑wealthy who use it to wield excessive influence over our culture and politics.
Taxes are needed for proper fiscal management, to ensure that everyone contributes to the provision of public goods and services, and to reduce the unearned and anti-democratic power of the ultra-wealthy elite.
That is why we need the digital service tax; full taxation of capital gains, a higher corporate income tax, a tax on excess profits and a wealth tax.
We have run a four-decade experiment testing orthodox economic ideas. The experiment failed. Workers paid the price while corporations and their owners became more powerful. The same policies that got us into this situation will not get us out.
Thank you.
Steve Aubin, Partner, Audit & Assurance, Accounting and Reporting Advisory, Deloitte: Thank you, Mr. Chair and honourable members of the committee, my name is Steve Aubin, and I’m a partner at Deloitte Canada. I’m a chartered professional accountant with more than 27 years of experience in accounting and financial reporting.
I want to be clear from the outset, I’m not a policy expert. My perspective today comes from my accounting and reporting background only.
I’m pleased to share this perspective and hope it will help inform the committee’s deliberations. My remarks will focus on the government’s proposal to separate operating spending and capital investment spending.
I propose to speak to three areas: First, what we actually know about the proposed policy; second, how the definition of capital spending fits into the Government of Canada’s financial reporting framework; and finally, I will leave you with reporting considerations.
[Translation]
Let us start with what we know. Right now, we do not have the full picture of how the government plans to roll out this change, but based on the information shared by the Department of Finance on Monday, we can see a clear shift in fiscal strategy. The government wants to separate operating spending and capital investment, and broaden the definition of “capital investment” for budgeting purposes.
In addition, Mr. Champagne specified that this change will improve, not replace, existing financial information. The bottom line: This is a policy change. It is not expected to affect how Canada’s Public Accounts are prepared.
[English]
The term “capital investment” is not formally defined within the generally accepted accounting principles, or GAAP, that the Government of Canada applies in preparing its Public Accounts and budget.
Under GAAP, the focus is on capital assets. These are assets that arise from spending incurred to acquire or develop assets that provide future economic benefits for more than one year and are controlled by the government. Typical examples include land, buildings and equipment owned by the government.
By contrast, the proposed capital investment category is broader in scope. It includes capital assets as currently defined under GAAP, and it includes spending like grants and other incentives that contribute to the creation of capital assets in the private sector and other levels of government. These are currently expensed in the year of grant.
The proposed budgetary approach contemplates presenting such capital investment as a distinct category for budgeting purposes. At this stage, it seems the government intends to relabel operating spending as capital investment while still including those amounts in the calculation of the budget target.
Finally, reporting considerations. As mentioned earlier, we don’t expect this policy change will alter how the Public Accounts are prepared.
However, we expect the November budget to define capital investment clearly and establish a robust and transparent policy framework to ensure that only genuine capital-building measures are captured.
Lastly, we would expect the government to clearly explain and reconcile any differences between the budget and the Public Accounts, including how the budget deficit and the Public Accounts deficit are calculated.
[Translation]
In closing, we view the government’s proposal as a fiscal policy choice. However, ensuring transparency and accountability in how these decisions will be incorporated into the Public Accounts of Canada should remain a priority.
Thank you for the opportunity to appear before you today.
The Chair: Thank you. We will move on to questions. Each senator will have five minutes.
Senator Forest: Thank you for being with us today. My first question is for you, Mr. Cochrane. We talk a lot about trade diversification efforts to find new markets, given the situation we are experiencing with our neighbours to the south.
Europe is an important market for reducing our dependence on the United States, but members of the common market are particularly aware of the carbon footprint of the products they import. They have a carbon tax at their borders. Is it realistic to believe that Europe is a real alternative to the United States, when we know that we have a lot of work to do to reduce our products’ carbon footprint?
[English]
Mr. Cochrane: We absolutely need to diversify our trade partners. There’s an expression that the best time to plant a tree was 20 years ago and the second-best time is today. The same is true of diversifying our trade partners.
We have been saying we need to diversify our trade partners for over a century. It needs to happen. It’s not going to happen quickly. We are not going to get access to a customer base anywhere close to the U.S. customer base anytime soon. We could rapidly advance trade agreements with Europe, and we still wouldn’t have anywhere close to the access that we need.
That said, there is a clear movement by every sector toward post-carbon economies. Everyone understands that this will be a difficult transition, but it’s a transition that is happening. Canada, at one stage, was among the leaders in making that transition, and we have absolutely regressed on that front, and we have lost a bit of an advantage.
There was some global regression on climate change and climate policies. We should have continued to be a voice for leading toward a post-carbon economy. This is an opportunity. It is not a threat. We need to grab hold of that opportunity, recognizing the risks that are involved, and move forward with it, the same way that we took on the war effort during World War II. We didn’t regress in the face of threats to our economy; we moved forward and came out of it much stronger.
[Translation]
Senator Forest: Thank you.
Good evening, Mr. Aubin. In a recent economic report, your chief economist wrote the following:
Canada is set to avoid a technical recession thanks in part to its CUSMA carve out.
We understand the great uncertainty that President Trump is currently causing. What are the other threats to Canada’s economic growth?
[English]
Mr. Aubin: I’m aware of the article, but that’s outside of my area of expertise. This is really more around policies and the economic situation, so I will not be able to speak to that today. If you have any questions, I would be happy to come back with that.
[Translation]
Senator Forest: Your work has more to do with politics?
Mr. Aubin: No, it has more to do with accounting, transparency and accountability.
Senator Forest: At this point, I suppose that budget restrictions could materialize in the Canadian tax system. Do you have any suggestions on that?
[English]
Mr. Aubin: Once again, I cannot really speak to the policies themselves. I’m really here to talk about the classification between operational and capital investment spending proposed by the government.
[Translation]
Senator Forest: Tell us a little bit about classification. I will manage to get an answer.
Mr. Aubin: In fact, we have very little information on classification so far.
What we expect in November, and what is really important in terms of accounting transparency, is for the government to define the term “capital investment” very clearly and to provide information on reconciliation, so that people know what information applies to the public accounts.
Mr. Champagne is currently talking about additional information. Any additional information is expected to be reconciled with what is currently being received.
[English]
Senator Ross: My question is for you, Mr. Cochrane. Thank you both for being here this evening.
I, too, like you, was alarmed at the youth unemployment rates that we’ve just heard about. To what do you attribute this? Does it have anything to do with skills gaps? Do you have a sense that AI is causing some of this impact?
Along with that, you mentioned 25% of Black and Arab youth. You didn’t mention Indigenous youth, and Indigenous youth is the fastest-growing youth demographic — four times faster than other youth in the country. How do you see that fitting into this?
Mr. Cochrane: A lack of hiring because of widespread uncertainty is the primary driver of unemployment in all categories. Whenever unemployment is rising, it’s always rising fastest at the margins. Any marginally employed group, including youth, people of colour, Indigenous people, will always be rising faster. There’s always a gap, and that gap grows as unemployment increases. It is well known that employment is last in, first out. The last people to get hired during tight labour markets will tend to be the first people to lose their jobs as labour markets loosen.
One of the truly unique parts about the current employment situation is how much it’s driven by new entrants and re-entrants not being able to find jobs. While the perception is that unemployment is rising because of the trade war, leading to people losing their jobs — and that is starting to happen, absolutely — unemployment was rising before the trade war started. It was rising because people entering the labour market were not able to find jobs.
One of the other consequences is that long-term unemployment is increasing very, very rapidly. That’s one of the worst things that anyone can endure, being without a job for a long period of time. That has a lifetime of consequences for people.
You are absolutely right that Indigenous youth, Indigenous People generally, will be among those who are struggling because of what’s happening in our labour markets. I don’t think the skills gap is really the problem; it’s uncertainty. It’s uncertainty that’s completely understandable by the private sector. They’re reluctant to hire when they don’t know where our economy is going. We had a direction moving toward a post‑carbon economy. That direction has been sort of obliterated. The trade war creates more uncertainty. Where will this investment actually happen? It’s not actually clear. So would you engage in investment in hiring in that situation? I don’t think so.
Is AI part of the problem? Maybe a little bit, but it’s a bit of a distraction. It’s a bit of an add-on where some employers might say, “Well, could AI maybe do this job in future?” Again, it’s not actually clear given all of the hype around AI.
Senator Ross: I’m hearing, in addition to your conversation on unemployment, some sympathy, maybe, for the small‑business community who are dealing with a lot of uncertainty. You also talked a lot about corporate taxation and increasing payments that businesses would have to make, too. How do you square that up with the uncertainties that businesses are facing and the challenges that they are facing in this challenging economy?
Mr. Cochrane: Let’s say the government spends the kind of money that I think they should be spending. Businesses will provide a lot of the goods and services that the government actually needs.
Businesses need revenue more than they need tax incentives. The government can be the source of that revenue because they are going to offer contracts to build the bridges, expand the ports, build the roads, build the hospitals.
Once you hire more care providers, those care providers spend their incomes. If you put money into the pockets of people with relatively low income, that money has a multiplier effect as they spend it into their economy. The small businesses, the restaurants, the local businesses where people spend their money, they will benefit from that money being injected. But as that money circulates, it gets siphoned off, and it ends up with the biggest corporations, the most powerful corporations, the ones that can choose to increase their profit margins, rather than increase their volume of output. We saw that exactly during the bout of high inflation.
Increase the taxes on the biggest and the most powerful to return that money to public hands, to put it back into the economy where it can continue to have that multiplier effect. Rather than it becoming concentrated and us borrowing that money back, tax it back, and put it where it can continue to do some good.
Senator Kingston: I will ask Mr. Cochrane to comment on something that has been provided to us. The Senior Deputy Governor of the Bank of Canada spoke here about a year ago on Canada’s declining level of productivity compared to the United States and other countries. She identified a number of areas, but she spoke about disincentives for growth for firms which should be removed. She also highlighted the level of business investment and machinery, equipment and intellectual property and the lack of policy certainty in respect to regulatory approvals and incentives and low-productivity growth.
I’m sure you have an opinion on this, but what are the main reasons for the lack of business investment in machinery, equipment and intellectual property? Because it is sort of the other side of labour growth in some sectors of the labour force. Can you comment on that kind of thing?
Mr. Cochrane: Okay. You’re not able to find the workers that you need. I’ve been very hard on orthodox economic theory, but orthodox economic theory says if you can’t find workers at the wage you’re offering, you need to offer a higher wage. All of these employers then say, “Well, we can’t find workers. We need access to precariously employed workers who won’t actually have full labour rights to come and work at the wage we are willing to offer.” That completely subverts the very theory to which the government is supposedly adhering to.
If those businesses had to do what orthodox economic theory says they should do — offer a higher wage — okay, well, that’s good for workers because they upped the wage that workers can command. Eventually, those businesses might decide, “Well, this is getting too costly.” That’s when they start investing in labour‑saving technologies. That’s when they start purchasing the machinery and equipment that actually increases productivity.
It might seem strange for an economist with a labour organization to talk about this, but this is really a virtuous cycle that exists. When you equip those workers with better, more novel innovative machinery and equipment, that pushes up their productivity. That frees up labour to then go work in other parts of the economy because there is still a lot of demand for those workers. They could be making that new machinery equipment and doing all of the other jobs that are associated with that.
We have completely subverted this process through the program that allowed businesses to substitute cheap labour, instead of the investment that we actually needed. Putting more money into the economy would also help incentivize more investment in machinery and equipment.
With all due respect to the deputy governor, what she is advocating is tinkering around the edges. The highest productivity by far was during World War II when government spending was close to 50% of GDP and our productivity absolutely skyrocketed, multiples of where it is today. That kind of leadership and boost to the economy had knock-on effects for decades. We got new technologies and whole new industries out of that. It wasn’t through regulatory tinkering.
Senator Kingston: — in the labour force as well. Thank you.
[Translation]
Senator Hébert: My question is for Mr. Aubin first. You described earlier what would be included in the government’s capital investments. You mentioned grants for businesses related to various government investment programs, including housing programs. I would like to hear your thoughts on that; it may be a formality, but it is still important. There are teams; there are people; there are operating expenditures associated with the administration of those programs.
Do you think the government should have its budget distinguish between capital investments and the amounts that will be awarded? My question is important because it could mean that certain agencies or departments are exempt from the budget cuts or efficiency measures that a number of departments and agencies will have to implement.
Mr. Aubin: That is a good question. To summarize, will capital investments include administrative costs instead of including only expenditures that go directly to the private sector? I say this is a good question because we do not have enough details at this time.
Senator Hébert: What is your own opinion?
Mr. Aubin: My own opinion?
Senator Hébert: Should that be the case?
Mr. Aubin: It is really a matter of policy; according to established accounting principles, administrative costs such as those would be an expense.
Senator Hébert: Operating expense.
Mr. Aubin: Yes, indeed.
Senator Hébert: My second question is for Mr. Cochrane. I am one of those naive orthodox economists you mentioned earlier.
Mr. Cochrane, in my career, I have had the opportunity to be a voice for Canadian SMEs and sit on a number of government committees, which were represented by unions, business representatives and other civil society actors. I was able to see the value of that co-operation. We are moving toward a rebuilding of the Canadian economy that will require everyone to make some compromises, including employers, the government, and all societal actors. What will unions do to participate in that collective agility, which is in everyone’s best interests, while fostering dialogue in the process?
[English]
Mr. Cochrane: Thank you very much for the question. Unions are an essential countervailing force within our economy. When we had stronger unions, income and wealth inequality were much lower than they are now. As unions have become less powerful in our economy, they’ve had less ability to push back against the power of the employers.
Unions have been essential in advancing a lot of employment equity policies, lots of general labour fairness policies. For example, people with disabilities have disproportionately higher union representation because jobs that have unions that enforce employment equity principles mean people with disabilities have better access to those kinds of jobs. Now, it is inadequate. We still have unacceptably high unemployment for people with disabilities, but unions have been essential for closing the gap that we have managed to close.
The same is true for all of these marginalized groups, so we need unions to have a strong voice within our economy because they really have been the voice for fairness, the voice for making sure that there is a broader distribution of the benefit from economic growth. We have had incredible productivity growth over the past 40 years, but the bottom 70% of workers have seen no increase in their actual purchasing power over those 40 years. So when the Bank of Canada says we need to see increased productivity if workers want higher wages, it is quite disingenuous. Where were those wages over the last 40 years as productivity was increasing? Unions have an essential role to play in making sure that we get a fairer distribution of the social product.
[Translation]
Senator Galvez: Good evening. My first question is for Mr. Cochrane. You mentioned that we have to move quickly toward the transition and that Canada is lagging behind.
[English]
You have published several articles on TMX’s construction and Indigenous Peoples’ rights and you have also written about the Deepwater Horizon oil spill. Now, we have Bill C-5 that is going to propose national building projects. What will your criteria be for a national building project that will take us also into this transition that you have said we need? It is imperative.
Mr. Cochrane: It is a big question. What are the exact principles that I would suggest? The one I would immediately advocate is that there would have to be labour conditions attached to it. These projects have to create good jobs. I think we should also be looking toward the future, and these projects should be moving us toward a net-zero economy, recognizing that the carbon economy is the economy of the past. I’m not saying it is going away today or tomorrow, but we need to be transitioning.
So what’s the economy of Canada’s future? It is an open question, but it should be an exciting question as much as it is a very daunting question. There are so many opportunities in the world. We can all look around and see that there is a tonne of work to be done. Put workers to work doing those jobs. Before World War II, Canada had, essentially, no airplane industry. By the end of World War II, we had produced 11,000 airplanes. We set that industry up in a matter of months — not years, months. We went from nothing to something truly unbelievably productive.
We can do that again. It just requires leadership. This is not making partnerships with private businesses, which are going to — blah-blah-blah — and then give us the Ottawa LRT and all its wonderful success. This is about doing truly impressive things. There are people out there with big ideas about impressive things we can do to build our economy of the future.
Senator Galvez: Mr. Aubin, we worry about the change to the presentation of the budget and this new terminology and the need for definitions and capital investment.
You talked a little bit about how this can influence how we account for the deficit. The other part that I really worry about is that the government, for example, bought a pipeline, TMX, and put it under an investment, but years after, we realized that it is not an investment, it is actually an expense, and we are not going to recoup this money. In my dictionary, that’s a subsidy to the oil and gas sector.
In light of having more accountability and transparency, how can this be interpreted with Bill C-5 and the new projects that eventually could become stranded assets?
Mr. Aubin: I can’t speak to the policy itself on that point, but to your question on how this will influence the deficit, I can say this: The way I understand it’s being proposed is that the deficit will still be calculated the same way, but there will be a different categorization for certain expenditures in the budget. There will be transparency from the perspective that the deficit calculation will not change. There will be some reclassification, and the government right now is proposing to actually reconcile those classifications, so we know how it compares to the way we’re doing it today.
We’ll have to see in November what they come up with, how they define capital investments and how they reconcile them to see if it meets the transparency and accountability criteria. For now, what is being proposed is that the deficit will be calculated the same way.
[Translation]
Senator Miville-Dechêne: My question is for Mr. Cochrane.
I am trying to follow your logic. You said that in orthodox economics, if employers cannot find labour, it is because they are not offering enough money. All they need to do is raise wages, and everything will magically work out. It seems to me that our economy is much more complicated than that.
I would like to return to a matter that has been discussed many times in this committee: temporary foreign workers. I have spoken with a number of companies in the regions. There is no young workforce, so temporary foreign workers are being hired. You said that we are going to the lowest level and hiring anyone. However, these workers are essential to our economy. I do not know if I misunderstood, but it seems to me that your reasoning is too uniform when it comes to labour issues. It seems to me that there are a number of problems and that there are indeed shortages in certain regions. It is not just a matter of the wages that capitalists give to workers, unless I am mistaken.
[English]
Mr. Cochrane: I would be the last person to suggest the economy is not much more complicated than in the orthodox economic theories. It absolutely is. That is the crux of my argument. Orthodox economic theory says that incomes are ultimately determined by everyone’s individual productivity. I would suggest that incomes are ultimately determined by everyone’s power, and their power has all kinds of complicated determinants.
Where I was voicing support for the orthodox economic theory was really to point out the strategic decision for when we lean toward orthodox economic theory and when we lean away from orthodox economic theory. When it serves certain interests, it’s all about the market. When it doesn’t, let’s ignore how the market is supposed to be functioning.
I agree, it’s not as similar as offering higher wages. However, coming back to that point, let’s look at Loblaws and the food supply chain. When the grocery CEOs appeared before the House of Commons Standing Committee on Agriculture and Agri-Food, the food suppliers’ testimony was about how terribly they were treated by these big grocery chains. This was before the pandemic. During that time, Loblaw’s profit margins climbed. We didn’t see that in the form of higher prices for us. How did they achieve that? They achieved that by stepping on their suppliers, putting downward pressure on the income their suppliers could receive. How did the suppliers respond? They need to pass that farther down the line, so they want to push that loss of revenue down onto their workers. They’re not willing to increase wages because that’s going to start cutting into their profit margins.
So now what’s the solution? A solution is to get access to cheap labour. It really is a power process in every single direction. Who are the winners? Who are the losers? I think it’s quite clear. You just have to look at the distribution of income, where wealth has become concentrated, to see the winners.
[Translation]
Senator Miville-Dechêne: I do not believe that to be as true when it comes to SMEs trying to survive and have a decent profit margin. You describe the economy as if we were still in the 19th century, but it seems to me that things have evolved. You describe big companies, but it is not like that everywhere. There are SMEs that sustain Quebec and offer decent working conditions. However, they cannot find employees, and now they are being told that temporary foreign workers have to leave. What do you think of that? Do you agree with the policies that seek to get rid of temporary foreign workers?
[English]
Mr. Cochrane: I can’t speak to the specifics of that specific program right now. There will be transition pains. I am not denying that. I have a lot of sympathy for the SMEs that have been squeezed by their own customers when they are the big corporations that can refuse to pay the prices because they are monopsonies. They are the only game in town. Where are these SMEs supposed to go if they say we’re not going to carry your goods? I have sympathy for that. This adjustment needs to happen because we can’t continue to allow those businesses to remain viable on the basis of having access to precariously employed workers.
Major reforms are needed in the Temporary Foreign Worker Program to give those workers more bargaining power. We have to see these wages get bid up. Those businesses where that squeezes their margins to the point they can’t survive, that’s a complicated question for what the solution is to that.
Senator Loffreda: Thank you, Mr. Cochrane and Mr. Aubin, for being here this evening.
My question is for Mr. Cochrane. I don’t know if I’ll have time for a question to Mr. Aubin. Mr. Cochrane, you’re advocating for higher taxes on corporations and capital owners to fund social programs, which you’ve mentioned. They are excellent social programs. Given that capital is mobile and moves to where it’s treated most efficiently — I think you’ll agree with me there — how do you see Canada competing for investment and capital, which are essential for job creation, innovation and wealth generation if your recommendations were put into effect? I believe wealth is most of the time created by entrepreneurs, not by government. If we increase taxes while other jurisdictions are reducing them or offering incentives, aren’t we risking an outflow of both capital and talent, ultimately hurting the very social programs you mentioned that you aim to strengthen?
You mentioned that trade wars and uncertainties require investments. Which investments would you recommend to offset your tax increases? Canada’s high rate for corporations is 31%; personal is 54%. This is versus when you take many states in the U.S. — allow me, I’m a CPA from the University of Illinois — zero tax rates in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Wyoming, not to mention the incentives that the U.S. has on personal tax.
I agree with you on one thing. Return on capital has been here; return on labour has been there. However, I’m not certain you have the right formula there. One thing you haven’t mentioned is that an entrepreneur, every day he wakes up, he risks losing everything he owns. Remember those words. There’s a risk return formula in business: The higher the risk, the higher the return. I don’t see where you’re going with all of that.
I’ll end on a Margaret Thatcher quote:
The problem with socialist governments is that “[t]hey always run out of other people’s money.”
What do you think about all of that?
Mr. Cochrane: When you talk about federal spending, Margaret Thatcher is completely wrong because what the government —
Senator Loffreda: I don’t want to talk about Margaret Thatcher. I just wanted to share the quote. Talk to me about the other things I mentioned.
Mr. Cochrane: Okay. The federal government doesn’t spend other people’s money. It spends its money. It creates the money. We don’t have a tax-and-spend economy. We have a spend‑and‑tax economy. It spends the money and then it taxes it back. That money “spent in” can do all the things that money does —
Senator Loffreda: With tax and spending, we have a productivity issue in Canada and a competition issue. We have to attract investment. You believe we will do that by taxing and spending, government spending?
Mr. Cochrane: Your fear is capital flight.
Senator Loffreda: Capital flight is a huge fear. We see it right now.
Mr. Cochrane: It is a well-made argument. When you talk about capital flight, what are we actually talking about? We’re talking about asset owners deciding to sell an asset in Canada to go buy an asset somewhere else. The asset still exists here. The productive asset is still here.
Now, them deciding to go and invest in an asset somewhere else where they can realize a higher return doesn’t actually eliminate the productive capital, which is the thing that we’re really concerned about. This is a big missing part of this capital gains discussion and the effect it will have on investment. What kind of investment are we actually talking about? Much of the investment that’s generating the higher returns is buying and selling financial assets on the secondary market. What is that actually doing for Canadian productivity? If we’re talking about building factories and hospitals, these are things that are actually produced here and are not easily removed from the country.
The spectre of capital flight really depends on occluding the distinction between productive assets and financial assets. We need to parse that before we can really have a discussion about what the impact will be of higher taxes on investment and what the meaning of that is, because the money spent into the economy can be used to invest. You don’t have to go to foreign investors and say, “We will promise you a 10% return if you will please come and give us some of our own money to build this factory.” Oh, we actually got a huge contract from the government. We have a huge influx of income that gives us a lot of certainty that we can now actually fund that out of our cash flows and borrowing from our own domestic banks. We do not have to rely on foreign capital in the way that we’ve been told.
If I could speak to the entrepreneurship part —
[Translation]
The Chair: Your time is up. You have a lot of passion.
[English]
Senator Gignac: Welcome to our witnesses. My question is to Mr. Cochrane. Gross Domestic Productivity, or GDP, per capita in Canada has done nothing over the past decade, and we have a problem with productivity. In the second quarter, U.S. companies invested an average $12,000 per employee. In Canada it was $4,000 per employee, if you check the second quarter. Do you have any suggestion or proposal to increase investment to accelerate productivity?
Mr. Cochrane: U.S. government debt per capita is about US$100,000. Canadian is about US$70,000. I am not suggesting we could match the U.S. However, I would suggest that we’re actually inefficiently under-indebted at the government level because that creates the financial assets that do become investment in the economy. Part of the reason the U.S. is outperforming Canada is because its governments have actually created more money, increasing the debt, the inverse of which is these are assets in the non-government side of the economy. These are perfect mirrors.
The federal debt is the perfect mirror of the net financial worth of the rest of the economy. That money gets used for all kinds of things, including investment. We’ve seen it in the higher productivity of the U.S. Being a smaller economy, a different economy, I think there’s actually even more role for the government to point in directions that we’re going to go here to give businesses the certainty that, “Okay, if we make investments to produce these kinds of goods in these kinds of sectors, we can trust that over the next decade, we will have a customer who will buy our output and then we will have support to actually find and expand to new customers.” We need actual support for the diversification. We need more diverse trade partners and more diverse sectors. Another thing we’ve been saying for over a century, governments have to lead the way toward that diversification, and that will amplify our investment.
Senator Gignac: When the new Parliamentary Budget Officer, or PBO — an independent, non-partisan entity — suggested that the situation at the federal level is already unsustainable, I understand that you disagree with the statement from the PBO?
Mr. Cochrane: Yes, because the PBO does not include in its calculations the multiplier impact of those dollars. It’s just not part of the way it models these things, so it doesn’t account for the impact that the higher debt will have on the denominator, which is the total government output.
The PBO actually produces numbers that show, say, for every dollar that is spent in housing generates $1.50 of economic activity by the fifth year. We can increase the size of the denominator more than the size of the numerator if we spend that money correctly.
[Translation]
Senator Gignac: My next question is for Mr. Aubin. Deloitte is quite a big company. I know that you may have to somewhat limit your comments tonight, but with all the uncertainty that is currently going on in the United States, are…. You are still a partner, and you are involved in advisory services. Are your clients increasingly considering moving their facilities to the United States because of all the uncertainty they are experiencing? Without revealing any figures, are you getting more requests to relocate production to the United States?
[English]
Mr. Aubin: I don’t have direct knowledge of that. When we talk to clients, we’re hearing — it’s a common theme — that more investments are required in Canada and we’re lagging behind. That’s the common theme we’re hearing right now.
In terms of moving to the U.S., I don’t have detailed information on that, but it depends a lot on the sector that the enterprise is in, the type of industry and how the capital flows. Unfortunately, I don’t have any numbers.
Senator MacAdam: Mr. Cochrane, in your pre-budget consultations submission, you’re calling for significant investments in climate adaptation. Can you expand on why you think it’s important to improve the economic climate? Can you talk about the level and the types of investments that you think are more opportune at this time or any suggestions you have?
Mr. Cochrane: Yes. We know the climate is changing rapidly. It will have all sorts of impacts on us. We need to have more climate-resilient infrastructure, so I called for more investment in repairing and expanding Canada’s transportation infrastructure. That includes making it climate resilient. Where we’re really talking about transitions that need to happen, it’s to the economies that are extremely dependent on high-emission industries. We need large injections of funds to support innovation and entrepreneurship, as Senator Loffreda has advocated.
Improving the social safety net, I think, would do more to encourage entrepreneurship than almost anything we could do. I heard that the average age of an entrepreneur is 53. Contrary to the idea of the young whippersnapper in tech, it’s actually someone who’s built up their own personal safety net. If their entrepreneurial, risk-taking endeavour fails, they have something to fall back on. If we had a stronger social safety net, more people could actually engage in entrepreneurial activity because they take the risk, and if it doesn’t pay off, it doesn’t mean they’re totally wiped out.
What is the economy of the future for Alberta? I do not have a blueprint for that, but I have a lot of faith in Albertans, that they can do a lot more things than just suck oil out of the ground and ship it to the U.S. It requires significant financial support in order to accomplish that in all of the ways that I have discussed.
Developing a climate-resilient, post-carbon economy for the future really is a massive opportunity. We just have to seize it by not looking to the past and actually looking toward the future.
Senator MacAdam: I have a question for Mr. Aubin. I’m not sure if this is an area that you’re comfortable with and if it’s an area that you work in, in your practice, but it has to do with Canadian sustainability disclosure standards. In your work in dealing with those? If so, I have a couple of questions in that area.
Mr. Aubin: I wish Ms. Steer were here because I think it’s something she would be comfortable with. No, it’s not an area I’ve worked in, unfortunately.
Senator MacAdam: Thank you.
[Translation]
The Chair: I have a question for Mr. Aubin.
You are saying that you would like accounting to continue to be as transparent as possible so that it can be “understood.”
There is a reason I am a lawyer, and that is that accounting was not my strength. However, I know that capital expenditures normally have to be amortized.
Will the government amortize those capital expenses? What choices will the government make to amortize them? Will that be included in the spending? Will an employee working on renovations to an already existing building be considered a capital expense, while another employee, who works as a receptionist, is considered to be a true operating expense? If we take a building like this one, for example, would we say that 15% should be capital expenses and 85% operating expenses?
I am concerned that your wish for transparency and deep understanding is just wishful thinking.
Mr. Aubin: Those are important concerns. I want to come back to the issue of transparency. Canada is in a very good position, with the government preparing its financial statements in accordance with generally accepted accounting principles, known as GAAP.
[English]
If you follow GAAP, it’s designed to provide a faithful representation of the performance and financial position in the cash flow. That’s our base and that’s why the Public Accounts are prepared. The budget follows that same accounting.
To your precise question there in terms of these capital investments are usually not capitalized for the financial statement purposes. What are they going to do with it? Are they going to be capitalizing that or still expensing it? The proposal doesn’t say that right now so we don’t have clarity around that. It implies that they would keep expensing it for budgeting purposes because — Minister Champagne is saying that it’s only supplemental information and reclassification, but we don’t know yet. It’s really something that remains to be seen.
The point I want to make is that whatever policy is decided, we need to understand very clearly what falls into capital investments and is accounted for. If it deviates from GAAP, to maintain transparency, we need to have that reconciliation that brings us back to what fair presentation is. That’s the two main points here.
Your concern is right. It’s something that could happen. We just don’t know yet. We don’t have enough information.
[Translation]
The Chair: I was talking about a Canadian SME earlier as a joke, but you have offices around the world.
Are there other countries in the world that use this accounting method for operating expenses and capital expenses? If so, which ones?
Mr. Aubin: I am not an international expert on other governments. However, while I was preparing, I took the time to read about what the United Kingdom and Singapore are doing, because those are two countries that Mr. Champagne mentioned. Once again, I am not an expert.
[English]
I want to be cautious here because when we compare with other countries, they have different systems. We have to be cautious when we look elsewhere and we have to be careful to not cherry-pick.
[Translation]
What is happening in the United Kingdom is that they have effectively defined a category called “capital spending,” which includes government subsidies and assistance that will create an asset in the economy. That does not mean a government-owned asset, but an asset in the economy.
That is how it is defined and presented in their budgets. The definition is quite similar to what we are proposing here.
However, the accounting procedure is completely different there. Singapore also has a concept of expenses — again, I am not an expert on Singaporean affairs — that they call “development expenses,” which includes the assistance they provide for the development of infrastructure that they consider to be “critical.” Those amounts are classified under that category. Those are the two examples I have seen.
The Chair: Thank you very much. It is almost 8 p.m. We will conclude our meeting for the evening.
For those listening to us on sencanada.ca, that concludes our meeting for today. We will have our next meeting on October 21, at 9 a.m.
I am going to suspend the meeting, in order to hold a short, in camera meeting to study a mandate related to a potential new study.
(The committee continued in camera.)