FINA Committee Report

Canadian Alliance Supplementary Opinion
November 22, 2002

The Canadian Alliance concurs with many of the recommendations in the Pre-Budget Report of the House of Commons Standing Committee on Finance, “Canada: People, Places and Priorities.” The Canadian Alliance recognizes that fundamentally, Canadians want an increase in our standard of living and a reversal of our long-term economic decline. Unfortunately, we do not feel that these priorities were adequately reflected in either last year’s Budget or this Report.

Last year, the Canadian Alliance Supplementary Report warned the government of the need to control expenditures to allow for further tax relief and debt payments. As Budget 2001 did not make these issues a priority, we feel compelled to raise them again.

Furthermore, this year’s Throne Speech increased the pressure to spend with its many promises for new programs. Private forecasts have estimated the aggregate bill for these new spending programs at an additional $37.5 billion over eight years and this does not include the costs of climate change commitments. Unfortunately, the Throne Speech hardly mentioned the need for further tax reduction and reform, and instead stated that the government will maintain its commitment to fair and competitive taxes. The Canadian Alliance argues that Canadian taxes are neither fair nor competitive.

It is against this backdrop that the Canadian Alliance feels compelled to submit a supplemental report. At a time when health care, security issues and taxation continue to be at the forefront of Canadian concerns, the Canadian Alliance insists that the federal government must not be distracted by costly and misguided legacy dreams.

We believe that these are the issues requiring attention:

Spending

The Canadian Alliance strongly supports Recommendation 2, which calls for a balanced budget, a cap of roughly 3% on increased spending (to keep it in line with the growth of population and inflation), paying down market debt and an ongoing review of federal expenditures. These have all been long-standing Canadian Alliance policies.

However, these recommendations can only work if they are carried out, which has not been the case to date. The significance of Recommendation 2 pales when one considers the government’s recent increases in federal spending. We note the concerns expressed by the Canadian Chamber of Commerce about the increased government spending levels:

In the view of our members, this ... creates a very dangerous precedent. If we look at the cumulative government spending, since the deficit was eliminated — very few years ago, in 1997-98 — that increase is almost 25%.

Nancy Hughes Anthony, President & CEO Canadian Chamber of
Commerce — April 23, 2002

The Canadian Alliance strongly urges the federal government to discontinue its new spending spree. We agree with C.D Howe Economist Jack Mintz when he said:

Those who believe governments have inadequate revenues to spend on critical public services have it wrong. The problem is that governments misallocate tax dollars by designing ineffective public programs. For example, in 1999, Canada spent almost the same as the United States on health, education, and protection, about 16% of GDP — by the way, protection includes defence and law and order.... However, Canada spent almost 25% of GDP on other programs and debt carrying charges, while the U.S. only spends about 15% of GDP on similar expenditures.

Jack Mintz April 30, 2002

Rather than increasing its spending every year, as new priorities are identified, the Canadian Alliance recommends that the federal government show leadership and make the required spending cuts from lower priority areas so that the overall federal spending envelope does not grow faster than population and inflation.

Taxes & Tax Burden

Our tax burden in Canada remains too high. Even after implementing the tax changes announced in Budget 2000, Canada will still have personal and corporate tax burdens far above the OECD average. Moreover, our overall tax burden remains over 10% higher than the United States. Currently, federal revenues remain at about 16% of GDP and are slightly higher now than they were in the mid-1990s.

Total revenues for all governments, netting out transfers, have only fallen from 41% [of GDP] in 1996 to 40.1% in 2002. It will be disappointing for Canadians to learn that this overall tax burden has not fallen that much.

Dale Orr: “Tax Burden and Debt Burden: How Are We Doing,”
DRI-WEFA, spring 2002.

The Canadian Alliance notes that Canada’s tax burden will increase even further in 2003 through payroll taxes, as the Canada Pension Plan premiums are set to increase a further 0.5%, which works out to $964 million out of the pockets of Canadian employers and employees.

So when I ask our operators about what they need to hire more young people, they’re very clear. They say “Make it less expensive for me to hire that person, and I’ll add them tomorrow.” They look at payroll taxes as a particularly expensive barrier to hiring more staff. As labour gets more expensive, they look for ways to drive more hours out of the workweek.

Mr. Don Maunders, Vice-President, Canadian Restaurant and Foodservices Association, November 4, 2002

The Canadian Alliance reiterates our call for the elimination of the capital tax. We note that the Finance Committee has once again recommended this move, but we urge the federal government to immediately commit to rid Canada of this damaging tax on productivity and investment.

Recommendation 4 on corporate taxes is somewhat disheartening, as the goal appears to be guarding against an “unacceptable divergence” with U.S. rates. Time and again, many witnesses before the Committee stressed the importance of creating a Canadian tax advantage, rather than attempting to keep up with our southern neighbour.

...the goal of tax policy should be clear. Competitiveness and taxation is not just a matter of playing catch-up with the neighbours. Rather, Canada should be trying to create a meaningful advantage over its major competitors.

Thomas d’Aquino, President and CEO of the Canadian Council of Chief Executives, April 23, 2002

Lastly, the Canadian Alliance recommends that the federal corporate income tax rate on profits from the resource sector be brought in line with other sectors.

Ongoing Productivity & Competitiveness Concerns

The Canadian Alliance is deeply concerned with the Report’s attempt to play down Canada’s problems with productivity and international competitiveness. Many witnesses expressed concern that the productivity gap between Canada and the United States remains wide and continues to grow.

The Report, however, appears to suggest that revised data has shown that the gap between the Canada and the U.S. is smaller than previously thought. There is a well-documented 30-year decline in Canada’s standard of living that can hardly be made up by revising data. Unfortunately, this is typical of the Liberals’ denial of the role public policy has played in Canada’s long-term economic decline.

According to the Global Competitiveness Report 2002-03, Canada tumbled five notches to eighth spot among the most competitive economies in the world — its worst ranking since 1996. Meanwhile, even with the current U.S. economic troubles, the Americans managed to improve their productivity by 4% in the last quarter.

The gap in productivity performance between Canada and the United States continues to grow. Productivity is a measure of the wealth-creating capacity of an economy. It’s also a measure of return on investment. Our lagging productivity performance is therefore not only an indication that the real incomes of Canadians are falling in relative terms to those of the United States, but is also a reason why Canada’s share of foreign direct and portfolio investment is declining, and why the Canadian dollar, in spite of all efforts aimed at improving fiscal and monetary fundamentals in this country, continues to depreciate against its U.S. counterpart.

Jayson Myers, Vice President and Chief Economist of the Canadian Manufacturers and Exporters, April 23, 2002.

The most troubling matter is the government’s long-standing refusal to acknowledge the failure of its own policies to encourage innovation and productivity. Liberal members who comprise the majority of the Committee do not recognize the role that successive Liberal governments have played in hindering Canadian economic progress and development. This state of denial is negatively impacting on Canada’s standard of living, which is currently 30% lower than our American neighbours.

Debt Burden

The Canadian Alliance believes that it is vitally important to control overall spending in order to accelerate debt repayment. Although our debt to GDP ratio has improved, our debt burden still remains very high and the interest costs to cover that debt continues to be a drag on Canadians.

Debt is currently at an unmanageable level in relation to the GDP. It’s taking 23 cents of every tax dollar to pay the interest. That has to be brought down to a more manageable level going forward....We’re certainly encouraged by the level of debt repayment that has occurred over the last few years, and a commitment, even on a five-year timeframe, in the order of magnitude we’ve seen over the last few years would be a step in the right direction, to have it up in that $5 billion to $10 billion a year committed repayment level.

Mr. William Strain, Chair, Taxation, Conference for Advanced Life Underwriting (CALU), Canadian Association of Insurance and Financial Advisors,
November 4, 2002

As the Report notes, reducing our debt will result in a permanent fiscal dividend, which can be used for strategic investments in other areas, like defence or health care, and future tax relief. To that end, the Canadian Alliance recommends that planned debt repayment be a specific item within the Budget and not left to chance at year-end.

Conclusion

Canada has untapped potential for growth, but Canadians need the proper environment to nurture our prosperity. The Canadian Alliance is confident that Canada can regain our prosperity and competitiveness. However, strong government leadership is required to provide crucial fiscal responsibility. Canadians deserve a significant reduction in taxes and prudent management of government departments.

It is up to this government, however, to put these priorities into action in the upcoming Budget.

Dick Harris, M.P. & Vice Chair

Charlie Penson M.P. & Chief Finance Critic

Rahim Jaffer, M.P.

Rick Casson, M.P.