FINA Committee Report

CHAPTER TWO — WHERE AND HOW WE LIVE

The Economic Context

Canada enjoys a strong foundation from which to foster economic growth, increase opportunity and enhance the prosperity of Canadians. Personal and corporate tax rates have come down significantly, with further reductions to take effect over the next few years. Inflation is firmly in check, and prime lending rates continue near their lowest levels in years. Moreover, Canada has experienced five successive years of federal budget surpluses, and the country’s debt-to-GDP ratio has fallen by 20 percent over the past seven years, faster than any other developed country. These are important and impressive achievements. (Computing Technology Industry Association, 9 September 2002)

The Canadian economy has experienced a strong recovery from last year’s slowdown, when growth fell to 1.5% from 4.5% a year earlier, well below its potential growth rate of 3%. Following the terrorist attacks of 11 September 2001 and the effect of these actions on the economy, economists in the private sector are now predicting that the Canadian economy will grow at a rate of about 3.4% in 2002 and 3.5% in 2003.²¹ Recently revised data show that Canada outperformed the U.S. in productivity growth in 1997 and 1999, and may be slowly closing the long-standing productivity gap between the two countries, as shown in Figure 5.

Employment is also rising after stagnating for most of 2001. As shown in Figure 6, 459,000 jobs were created between January 2002 and October 2002, while the unemployment rate has been steady at about 7.6% since spring 2002.

Canada has performed well relative to other G-7 countries, both in terms of employment and standard of living as measured by GDP per capita, as shown in Figure 7. The strong recovery has been reflected, to some extent, in income growth. Personal disposable income rose at a 5.3% annual rate in the second quarter of 2002, up from a 3.3% rate in the first quarter and 3% in the fourth quarter of 2001. In 2000, personal disposable income rose 6.9%, followed by a 4.4% increase in 2001.²²

Figure 7: Employment Growth and Real GDP Per Capita Growth, G-7 Countries, 1997-2001

           Source: Department of Finance, Economic and Fiscal Update 2002.

Partly in response to strong employment and economic growth, the Bank of Canada has raised its overnight interest rate three times in 2002 to its current rate of 2.75%, although more recently the Bank has held the rate steady because of signs that the U.S. economy is slowing, and more rapidly than most analysts expected. In raising the rate, the Bank indicated that the increases were necessary because the Canadian economy might be growing too fast and could push the core inflation rate (the rate used by the Bank when setting interest rates) outside the Bank’s 1% to 3% target range, with 2% as the anchor within the range.

On 6 November 2002, the U.S. central bank reduced its overnight lending interest rate by one-half of one percentage point to 1.25%, which has been interpreted as a sign of concern by the U.S. Federal Reserve that the U.S. economy may be slipping back into recession. Two weeks earlier, the U.S. Federal Reserve’s Beige Book review of the U.S. economy described an economy of declining retail sales, deteriorating manufacturing output and a continued slump in commercial real estate.

Historically, the health of the Canadian economy has been closely tied to that of the United States, as shown in Figure 8, largely because of the significant volume and value of trade between the two countries: the United States purchases more than 85% of Canada’s exports. While Canada has outperformed the U.S. economy in 2001 and 2002, the sluggish U.S. economy is starting to affect Canada. In particular, exports to the U.S. in the first nine months of 2002 were 3.5% lower than for the similar period in 2001. Concerns about the outlook for the Canadian economy were reflected in a survey of members conducted by the Canadian Professional Sales Association (CPSA), which told the Committee that:

[w]hen he appeared before the Standing Committee on June 19, 2002, the Finance Minister reported that the economy grew at an annualized rate of six per cent in the first quarter of 2002. Compared to that good news is the much less optimistic forecast provided by CPSA members. Only 16 per cent of respondents have predicted a Canada-wide growth rate of greater than three per cent … .

Spending and Saving by Canadians

Canada’s economy is back on the road to recovery following a year of very slow growth compounded by the uncertainties and business losses caused by the terrorist attacks of September 11th. Consumer spending and construction activity remain relatively strong. Exports and manufacturing production have begun to pick up, driven by stronger demand in our major export market, the United States. (Canadian Manufacturers and Exporters, 23 April 2002)

After stagnating for much of the 1990s, consumer spending has played a key role in Canada’s recent strong economic performance and has helped to compensate for the recent slowdown in exports to the United States. In the second quarter of 2002, for example, consumer spending rose 0.7%, driven by a strong housing market and related purchases of goods and services. As indicated in Figure 9, the surge in housing demand has increased overall mortgage debt, potentially leaving consumers vulnerable to an economic slowdown or higher interest rates. Nevertheless, the servicing costs on this debt are near historic lows. This last point has been emphasized repeatedly by the Bank of Canada, which in its October 2002 Monetary Policy Report noted that “households appear to be well positioned to finance this debt, with the share of personal income going to debt service remaining well below historical averages.”²³

The overall household debt-to-income ratio was 95.8% in the second quarter of 2002, while the personal saving rate was 5.3%, up from 3.7% for the same period a year earlier.²⁴ The ratio of total assets to total debt for individuals and unincorporated businesses has been steady throughout the 1990s, with increased indebtedness largely offset by higher housing prices and increased investments in savings plans, including employer-sponsored Registered Pension Plans (RPPs), Registered Retirement Savings Plans (RRSPs) and Registered Education Savings Plans (RESPs). Income is perhaps the most important factor in determining the rate of saving for retirement: in 1999, for example, 15% of the 6.1 million taxfilers with total income of less than $20,000 contributed to an RRSP or an RPP. Between 1999 and 2000, the median contribution to an RRSP increased by 3.9% to $2,700.²⁵

Housing and Homelessness in Canada

If a household cannot find an affordable, decent place to live, they can’t begin to share in Canada’s prosperity. (Cooperative Housing Federation of Canada, 9 September 2002)

In the midst of the housing boom, 2001 Census data reveal that there were 14,145 homeless people living in shelters in 2001, of whom nearly 1,490 were under the age of 15.²⁶ The federal government has taken steps to alleviate the homelessness problem, beginning with the $753 million homelessness strategy, the National Homelessness Initiative, designed to add emergency shelter beds and related services. There are two main components to the National Homelessness Strategy:

The homelessness initiative has four additional, but smaller, components:

While initially targeted at ten big cities, 51 communities have since been added to the federal government’s homelessness initiative. According to the government, the homelessness strategy has, to date, assisted in the construction or renovation of 5,600 beds for overnight or transitional housing and 164 food banks and soup kitchens. The strategy is now in its third and final year, and will be reviewed in 2003.

While the September 2002 Speech from the Throne suggested that the federal government would extend the SCPI component of its homelessness strategy, no decision has yet been made on whether to continue with other elements of the program, such as the RRAP or the Youth Homelessness Strategy. The SCPI program has been recognized by the United Nations as one of the best of its kind in the world.

To address a shortage of rental accommodation, the federal government signed a $680 million, five-year Affordable Housing Framework Agreement with the provinces and territories in November 2001, as part of its 2001 Speech from the Throne commitment to stimulate the creation of more affordable housing. The final framework includes the following elements:

To date, bilateral agreements to provide matching funds have been signed with all provinces and territories except Newfoundland and Prince Edward Island.

Increased Urbanization

The trend of rural depopulation and migration to our cities has not only stressed our urban centres, but has created an uncertain environment in many small and remote communities that has placed new pressures on existing resources. (Association of Manitoba Municipalities, 30 August 2002)

Data from the 2001 Census reveal that Canada is becoming an increasingly urban society. In 2001, 79.4% of Canada’s more than 30 million citizens lived in an urban centre of 10,000 people or more, compared with 78.5% in 1996. During this five-year period, the population of urban areas increased 5.2%, faster than overall population growth of 4%. As indicated in Figure 10, four major urban regions accounted for most of this growth: Ontario’s extended Golden Horseshoe; Montreal and adjacent regions; British Columbia’s Lower Mainland and southern Vancouver Island; and the Calgary-Edmonton corridor.²⁷

Figure 10

Source: Statistics Canada.

The population in some municipal cores, however, is growing more slowly than in the areas surrounding it, forming what has become known as a “donut effect.” The larger the difference in the growth between the municipal core and the areas surrounding it, the more pronounced the effect. This phenomenon was particularly prominent in such census metropolitan areas as Saskatoon and Regina.

The growth in communities surrounding the municipal core has been fuelled by migration and natural increase, as many young families choose to live and raise children in suburbs because of their affordability and convenience, and for personal reasons. Seventeen of the 25 fastest growing municipalities in Canada surround the core of census metropolitan areas.

Rural areas and small municipalities, defined as areas outside urban populations with 10,000 or more inhabitants, recorded a 0.4% decline in population between 1996 and 2001. In 2001, 20.3% of Canadians lived in rural and small town areas, down from 21.5% in 1996. The population of these areas declined in every province except Ontario, Manitoba and Alberta. The growth of rural areas in these three provinces depended on the proportion of their residents who commuted to urban centres, choosing to live just beyond urban boundaries in more rural settings. The population of rural areas in which more than 30% of the residents commuted to urban centres increased 3.7% between 1996 and 2001.

With the exception of a few remote areas, rural and small town areas where the proportion of commuters was less than 30% saw declines in their population because of out-migration. At the same time, an aging population meant that their rate of increase was low and, in some cases, negative. The population of the most remote areas grew by 1% because the birth rate, especially among Aboriginal Canadians, was high enough to offset out-migration.

In terms of provincial population growth rates, Alberta has experienced notable growth since the 1996 Census. It was the only province to increase its population growth rate, rising from 5.9% with the 1996 Census to 10.3% with the 2001 Census. Moreover, five of the ten fastest growing municipalities, defined as communities with 5,000 or more people, were in Alberta; most of Alberta’s increase was due to migration from other provinces.

Other provinces and territories experienced declining populations between 1996 and 2001, including Newfoundland and Labrador, with a decline of 7%, the Yukon Territory, which fell 6.8%, the Northwest Territories, which experienced a 5.8% decrease, and Nova Scotia, with a 0.1% decline. Declines in all of these provinces and territories were the result of out-migration. In the case of Newfoundland and Labrador, low fertility rates were also a factor.

Canada’s 4% population growth rate is well above that of many other developed countries, which are growing at an average rate of 1.5%, although below the 8.4% average rate in developing countries. For the first time in 100 years, the population growth rate in Canada was below that of the United States, in part because of very high fertility rates in the U.S., especially among citizens originating from Latin America.

Challenges for Municipalities

There is a need for coordination, collaboration, effective representation and commitment to a new approach for Canada’s urban regions. … Without a long-term source of infrastructure investment, cities cannot plan properly for the anticipated population and commercial growth expected. This can have a dramatic effect on the competitiveness and economic health of the region. (Urban Development Institute, 9 September 2002)

The increasing trend to urbanization documented by the 2001 Census has left many municipalities with challenges they are financially ill-equipped to address. According to many analysts, re-investments are urgently needed in social housing, water systems, sewers, roads and public transit systems. As evidence of the financial constraint, the Federation of Canadian Municipalities told the Committee that:

[g]rowth in municipal funding lags behind that of federal and provincial/territorial governments. From 1996 to 2001, federal revenues increased 38%, provincial/territorial revenues 30%, and municipal governments only 14%. Already over-reliant on property taxes, municipal governments are further disadvantaged with a form of taxation that is regressive and unresponsive to economic growth. Experts agree that property taxes are inappropriate for funding redistributive services, such as affordable housing.

Since cities have no constitutional standing, they have only limited tools to address the challenges they face. The downloading of services to municipalities, with no corresponding shift of taxation power, means that cities are being asked to do more with less.

Several solutions have been proposed. For example, municipalities could change the structure of their property taxes to better reflect costs, or they could make greater use of user fees. At present, cities generally over-tax commercial properties relative to residential properties, downtown properties relative to suburban properties, and rental housing relative to owner-occupied housing. Other suggestions focussed on the need for greater access to funds, including grants, taxation power, and revenue transfers (particularly from the 10 cent per litre federal excise tax on gasoline) from senior levels of governments.

Protecting our Environment

Whenever we look at the facts, it’s clear that Canadians can reduce their greenhouse gas emissions, make their air more breathable, reduce their health care costs, and make their homes more comfortable at the same time as developing new economies and new fortunes in the future. (Sierra Club of Canada, 7 May 2002)

At the Johannesburg World Summit on Sustainable Development in September 2002, Prime Minister Jean Chrétien announced Canada’s intention to ratify the Kyoto Protocol by the end of 2002. The Prime Minister affirmed his commitment to the Kyoto Protocol in a 4 November 2002 speech when he said, “I do not pretend that achieving our climate change objectives will be easy. It will not be. We have ten years to meet our obligations under the treaty. But we can make progress together. We can ratify Kyoto and implement our obligations with a made-in-Canada plan. That we will do.”²⁸

Implementation of our commitments under the Kyoto Protocol is likely to have implications in a range of areas. In terms of the economy, the data show that strong economic growth leads to increased greenhouse gas emissions, at least with current technology and energy sources. Moreover, in terms of housing, older homes tend to be less energy efficient than modern homes; upgrading and adding to Canada’s housing supply could play a role in reducing the country’s greenhouse gas emissions. Similarly, alleviating such challenges as road congestion, urban sprawl and crumbling road, rail, water and sewage infrastructure could contribute to meeting Canada’s Kyoto commitments.

While a majority of Canadians appear to support Canada’s Kyoto commitment to reduce greenhouse gas emissions to 6% below 1990 levels between 2008 and 2012, a number of groups and individuals are concerned that Canada’s ratification could harm the competitiveness of Canadian firms and lead to slower economic growth and large job losses, particularly in Canada’s oil and gas sector. Some witnesses suggested that the federal government should release a more detailed plan and engage in further consultations with Canadians before ratifying the Protocol. There is a need for greater certainty, which could be achieved through the collaboration of relevant parties with the objective of concluding sectoral agreements.

Supporters of the Kyoto Protocol argue, however, that ratification could prompt Canadian companies to make more efficient use of their existing resources and to develop or adopt new environmentally friendly technologies. They also suggest that atmospheric warming may already be imposing costs on Canadian society in the form of natural disasters. In their view, ratification is a first step in controlling the rise in greenhouse gases. As the David Suzuki Foundation told the Committee:

[c]limate change threatens the economic and social well-being of all Canadians and future generations’ opportunities for a sustainable future. However, solutions are both available and feasible. By designing budgets and funding priorities to promote sustainable renewable energy and energy efficiency we can ensure that Canada does its part to prevent climate change.

For its part, the federal government has said that its Kyoto plan would spread the costs of meeting commitments evenly across the country and across sectors of the economy. At the individual level, for example, reduced emissions could be achieved by programs that would provide incentives for individuals and firms to renovate homes and buildings and by encouraging greater use of public transportation. For businesses, the federal government could implement measures that would encourage firms to use the latest, most energy-efficient technologies. This could mean, for example, expanding the use of Class 43.1, which allows firms to write off certain kinds of environmentally friendly assets more quickly than they otherwise could. Moreover, “smart regulations” could be developed to encourage energy efficiency and help industry by purchasing a certain portion of the permits needed for Canada to achieve its target.

The value placed by Canadians on the environment is also reflected in the federal government’s recently announced plan to create ten new parks and five new marine conservation areas during the next five years. This promise goes beyond recommendations of groups such as the Canadian Nature Federation, which has recommended the creation of eight new parks and four marine conservation areas. The ten new parks will expand Canada’s park system by almost 50%, with a total protected area nearly the size of Newfoundland and Labrador. While the estimated cost of this proposal has not yet been released, the Canadian Nature Federation had estimated that its more modest proposal would have cost $165 million over five years.²⁹