With me is Dr. Mostafa Askari. He heads up our economic and fiscal analysis group. As well there is Chris Matier, a senior economist in that group. Jeff Danforth is another senior economist who helps us with economic and fiscal projections, and finally there is Sahir Khan, who is our assistant parliamentary budget officer for revenue and expenditure analysis.
[Translation]
Good morning, Mr. Chair, vice-chairs, and members of the committee. Thank you for inviting me and my colleagues to speak to you about Canada’s economic and fiscal outlook.
[English]
Good morning, Mr. Chair, vice-chairs, and members of the committee. Thank you for inviting me and my colleagues to speak to you about Canada's economic and fiscal outlook.
I will make some brief remarks about the Parliamentary Budget Office's updated fiscal projections and highlight issues for consideration in the context of the upcoming 2011 budget. A handout with charts and tables is provided to accompany my remarks.
The PBO's updated fiscal projections are based on the economic outlook from Finance Canada's December 2010 survey of private sector forecasters. On a status quo basis, the fiscal outlook is essentially unchanged from the projections provided to this committee last fall. The federal deficit is projected to fall from $56 billion, or 3.6% of GDP, in 2009-10, to $39.8 billion, or 2.5% of GDP, in 2010-11, to roughly $10 billion, or 0.5% of GDP, in 2015-16.
The federal debt is projected to rise from $519 billion, or 34% of GDP, in 2009-10, to $652 billion, or 31.9% of GDP, in 2015-16.
[Translation]
Before continuing, I would like to clarify some issues regarding the forecasting processes used by Finance Canada and PBO. First, both organizations construct their fiscal projections using the average of the private sector economic forecasts compiled by Finance Canada. From this stage of the process onward, both PBO and Finance Canada use their own assumptions to translate the private sector economic forecasts into fiscal projections. I want to be clear—the private sector economists with whom the Minister of Finance consults do not prepare the fiscal projections presented in the government's budgets or updates. Both organizations produce their own budgetary projections and should be willing to provide, and defend, the assumptions used.
Based on Finance Canada's recent survey, forecasters expect the Canadian economy to grow faster than PBO's estimate of its potential growth, allowing the output gap to close by the end of 2016. The unemployment rate is projected to decline to 6.6% by 2015, inflation is projected to remain stable, and short- and long-term interest rates are projected to rise only gradually over the medium term but remain low by historical standards. PBO views this medium-term economic outlook as relatively favourable given the elevated level of economic uncertainty.
PBO has identified four key downside risks to the private sector economic outlook. First, global growth, particularly in the U.S., could be slower than anticipated. Second, the recent appreciation of the Canadian dollar could restrain the recovery in exports. Third, sovereign debt concerns could restrain the recovery in Europe and put upward pressure on global interest rates and finally, domestically, the high level of household debt represents a further risk to domestic demand.
Thus, on a status-quo basis, and given the risks and uncertainty surrounding the private sector economic outlook, PBO estimates that the likelihood that the budget will be in a balance or surplus position over the period 2010-11 to 2013-14 is effectively nil; and, there is only a 16% chance that the budget will be in surplus in 2015-16. These estimates reflect the historical forecasting performance of private sector economists and Finance Canada's fiscal sensitivities.
[English]
The PBO projects that the reduction in the budgetary deficit over the medium term largely reflects a cyclical improvement, with the economy reaching its potential by the end of 2016. That being said, a budgetary deficit remains. This means that a structural deficit exists, which the PBO estimates to be about $10 billion, 0.5% of GDP, in 2015-16. As a consequence, policy actions would be required to achieve a balanced budget.
While the PBO's estimate of the government's structural deficit is small on a historical basis, and likely significantly lower than other central governments, any structural deficit is a potential concern, given the demographic transition that is under way.
I would now like to highlight two key issues for your consideration in the context of the upcoming 2011 budget deliberations.
The first one is that Canada's major fiscal challenge is long term, not short term.
Canada's serious fiscal challenge is underscored by aging demographics and weak productivity growth. Our population is getting older. In 1971 there were 7.8 people at working age for every person over 65, which fell to 5.1 in 2008. And it is projected to be 3.8 in 2019 and 2.5 in 2033. Growth in labour supply will fall dramatically due to slower population growth and the retirement of the baby boom generation.
Productivity growth is trending down: 2.6% average growth from 1962 to 1976, 1.2% since 1976, and about 0.8% since 2000.
The bottom line is that Canada does not have a fiscally sustainable structure. There is a fiscal gap. This means that sustained fiscal actions are required to avoid excessive debt-to-GDP accumulation. Based on the PBO's 2010 report, assuming that the Canada health transfer grows in line with projected provincial-territorial health spending beyond 2013-14, which is projected to be approximately 4.2% per year on average, the fiscal gap is about 1% of GDP, or $20 billion in 2016.
Alternatively, if the Canada health transfer continues to grow at 6% per year, as currently assumed by Finance Canada, the fiscal gap increases to 1.9% of GDP, or about $40 billion, in 2016. Moreover, a significant delay in taking fiscal action substantially increases the required amount of corrective measures.
Budget 2011 should include a fiscal sustainability analysis.
In 2007 the government committed to producing long-term sustainability analysis. It should deliver on this promise. Furthermore, in its 2010 article IV staff report, the IMF called on the government to increase transparency and communication surrounding the fiscal challenges related to the impact of population aging. Parliamentarians may wish to consider reforming the budget process to ensure a more forward-looking assessment and management of the nation’s finances. In my opinion, the current process and political climate gives too little weight to the fiscal impacts of current policies on future generations.
The PBO is committed to expanding its work on fiscal sustainability this spring to include all levels of government.
The second point is that Parliament needs more fiscal transparency and analysis, not less.
There is genuine concern that Parliament is losing control of its fiduciary responsibilities of approving financial authorities of public moneys as afforded in the Constitution. In the recent past, Parliament was asked to approve changes to crime legislation without financial information or knowledge of moneys set aside in the fiscal framework. Parliament was asked to approve authorities related to operational restraint without access to a government plan.
The PBO believes that the government should provide the strategy to achieve estimated operating savings in the 2011 budget and that the departments and agencies should outline their plans to achieve their respective three-year savings contributions in their 2011-12 reports on plans and priorities. It is our view that this would be similar to the approach the government took in its economic action plan, where the two-year stimulus strategy was outlined in the 2009 budget, including additional planned resources for government programs before Parliament was asked to provide financial authorities. The degree of transparency demanded by parliamentarians for stimulus spending should parallel those required for spending restraint measures.
The PBO also wishes to note that this government provided Parliament details on spending restraint by department and agency in 2006, prior to parliamentary approval of financial authorities, as did the previous government in 2005 on its expenditure review exercise. This raises the question of why the application of cabinet confidence with respect to restraint measures appears to have changed in such a short period of time. Further, the application of cabinet confidence has been used to withhold information regarding the assumptions used to translate the private sector economic forecasts into Finance Canada's fiscal projections.
New policy measures, such as the Afghan mission extension, and existing measures--for example, corporate income tax reductions--must be obtained and debated in an open and transparent manner with the information required for parliamentarians to assess their financial costs and risks.
Budget 2011 should provide a frank picture of the short and medium-term planning environment and budgetary constraints. Parliamentarians could benefit from having access to the government's estimates of the output gap, structural budget balances, and the quantification of risk and uncertainty.
Thank you for this opportunity to serve this committee. We would be honoured to address your questions.
I see that our Parliamentary Budget Officer's report still deals with a lot of access issues, with transparency and cabinet secrets. It's always the same complaint. I think you know that you can count on us to pressure our government colleagues to give you as much information as possible. By keeping things secret, they are realizing more and more that power lies in information. So, without information, there is no power. Since the Conservatives are in power, they control the information.
But you are saying that the likelihood that the budget will be balanced over the short term is nil. Your economic projections are for 2016 and you have identified the risks. Today is February 15 and there is in fact a fifth risk that has not been mentioned. It has to do with everything that is currently going on in the Arab world. This will all have an impact on the global economy. I don't want to dwell too much on this issue, but I would like to hear your opinion, if we have time.
I think you made a political choice. You are telling us that there is a long-term fiscal challenge and that the fiscal structure is not sustainable. On page 2 of your report, you say: “...Canada does not have a fiscally sustainable structure.” You are also saying that there are gaps in GDP. Then, you go into the Canada Health Transfer program. Before that, you clearly pointed out that the Canadian population is getting older. You reported that, in 1971, there were 7.8 people at working age for every person over 65, and that, in 2033, there will only be 2.5. We are lucky Mr. Wallace will still be of working age, but the working age population is in a steep decline.
You are sort of saying that the government should stop making transfers based on the provinces' needs. I am almost wondering what you are getting into. You are telling us that there is a problem with the fiscal structure, which we are well aware of, but this problem is not necessarily because of health transfers. I am wondering why you are scoring points against the provinces by saying that, if the federal government reduces health transfers to the provinces, its fiscal problem will be solved. That's all very nice, but the provinces will find themselves in a huge mess.
Why did you make this highly political choice?
:
I thought you might do that, Mr. Chairman.
Good morning, everybody. Bonjour, tout le monde.
I am part of the circle of economists who get to meet with finance ministers across the country pre-budget. I thought I would start with a few comments, basically the same thing I said to Mr. Flaherty last week, because we are allowed to talk about what we said. So here we go.
I started by talking about the economic outlook, and you have the private sector consensus forecast in front of you. We're actually below the consensus, which is a bit unusual. We've been leading the pack to a great degree for the last two years in terms of our growth forecast. We're now forecasting growth of just under 2.5%, let's say 2.2% to 2.3%, so just below the consensus.
We see this as a year of deleveraging across our economy. In our forecast we expect governments to withdraw the stimulus they injected in the last two years. We expect households to rebalance their balance sheet. We've seen things like the shortening of mortgage terms. We know personal debt levels are very high, and we've had warnings from Mr. Flaherty and from the Governor of the Bank of Canada, Mr. Carney, that households really have to start managing down, and therefore we expect a positive savings rate of about 5% for households this year. That'll take a bit of steam out of the recovery.
The dollar, of course, is having an impact on our trade balance with the United States. Other forecasters seem to think our exports will recover. We're certainly forecasting a recovery, but we expect the trade balance to be negative for this year, and that puts a negative sign into our forecast.
So growth of 2.25% is not great, but I would say it's much better founded than the growth you find in a lot of other places. The U.S. is still relying very heavily on fiscal and monetary stimulus. We're now at the happy point of being able to withdraw that and get back to a more solid foundation based on private recovery of consumption and investment. That's comment number one.
Comment number two is as follows. I've been in the public domain talking about the fiscal balance going forward and offering the view that we think the federal government can get back to balance as planned in 2015, and maybe even a little ahead of that. That view was very much founded on our belief that nominal income growth is going to be a bit stronger than has been forecast by the department and the consensus of forecasters. Last year we saw stronger nominal income growth than was forecast in the budget. On a going forward basis, even though we're putting the withdrawal of stimulus into our forecast plans, we think the government can get back to a balanced budget position by 2015.
That brings me to point number three, which is stay the course. The government put in place what we think is a very strong and appropriate framework in the last budget. We're now going to be looking for the details to ensure that the plans are put in place to slowly bring down the deficit over the next three years and then get back into a balanced budget in 2015. We're very mindful, for example, that the government managed to manage its forward obligations into the previous fiscal year. We see the government a little ahead of plan this year. I heard Mr. Page say a number of about $40 billion is the deficit for this fiscal year. That's more or less in line with our thinking as well. In fact, we'd be a little bit ahead of that, hoping for a number like $38 billion as the end number for the fiscal deficit.
We think the commitment to get back to a balanced budget in 2015 is very important. We've seen what happens when bond markets lose confidence in governments around the world. That's what has happened in many countries over the last year. So we think that re-anchoring fiscal policy by a commitment to get back to a balanced budget is very important.
I'll stop right there.
:
Good morning and thank you for having us.
I represent the Canadian Worker Cooperative Federation, and I want to remind you first that the UN proclaimed 2012 to be the International Year of Cooperatives. The UN accordingly recognizes the importance of cooperatives in economic development. I would also like to thank the federal government for supporting this UN initiative.
The Canada of today, especially rural Canada, owes much of its development to cooperatives. You may often hear about agricultural cooperatives, cooperative banks and credit unions, but we represent a third family of cooperatives, worker cooperatives.
First, I want to give you a brief explanation of what makes a worker cooperative, so that you can understand the difference between us and other cooperatives. Second, I would like to talk about the potential. Third—and this is especially important—I would like to talk about our focal point, the issue involving business transfer. About 200,000 companies will change hands over the next 10 years. The country will experience a shortage of business owners. In the regions, this could have disastrous results. However, the cooperative would be the ideal solution to this problem in the regions. This is a solution called for and encouraged by the European Commission in all the European countries.
I'll try to explain briefly what a worker cooperative is. Most people are not familiar with this concept. We, the cooperatives, share the same way of doing things. We are democratic businesses that operate somewhat like Parliament does: one person equals one vote.
However, the essential purpose might differ depending on the type of cooperative involved. For example, if a plant produces cedar shingles and is the property of private business owners who have invested in the company, the logic governing its management is that of maximizing profits in order to maximize dividends. That's the business logic at play. They strive to buy cedar—the raw material—as cheaply as possible, sell cedar shingles at the highest possible price and pay their employees as little as possible.
However, if this same company was the property of a forest cooperative—this could be the case in Quebec—the logic governing its management would be completely different. It would still be the same plant, with the same number of employees and the same equipment, but the logic behind its management would be to buy from wood suppliers at the highest possible price. So, they would always try to sell cedar shingles at the highest possible price and keep the payroll as low as possible.
If, on the other hand, this plant was located in Sweden or England, for instance, and was owned by a consumers' cooperative, the logic behind its management would be different yet again. The goal would be to ensure that consumers can buy cedar shingles as cheaply as possible. What all these cooperatives have in common is that workers are always losing out. In this case as well, the point is to pay the employees the lowest salaries possible and to purchase cedar wood as cheaply as possible.
This is where the worker cooperative concept comes in. Our cooperative is not a plant; we are professionals. However, if the plant were the property of workers, the logic governing its management would once again be different, as would its essential purpose. Its purpose would be to protect the workers' jobs, to provide them with the best working conditions, the best possible social benefits and the highest possible wages. To achieve this, the plant would try to buy the wood as cheaply as possible and sell cedar shingles at the highest possible price. The logic is somewhat different.
I'll now talk about the potential involved. I say and have often written that worker cooperatives can realize their full potential under modern and current economic conditions. Why is that? There are two major trends that are currently influencing the markets.
First, we, in the global north countries, have to work with salaries that are always higher than in the global south countries, the emerging countries. That's why we must always strive for high value-added products or products with high value-added intelligence. This absolutely requires very motivated workers who use all their intelligence in their work in order to succeed. This is a natural component of worker cooperatives, since they are owned by workers. They know that the profits belong to them. Consequently, it is in their best interest to remain constantly mobilized. A worker cooperative has the highest rate of potential productivity, which is especially favourable to the creation of what I call a smart business, which meets modern standards.
The second trend, which is currently not found in all regions but is in my region—I'm from Quebec City—is that we have been at full employment for years. Things are going very well, but the major issue is a manpower shortage. Tens of thousands of positions are not filled. We are experiencing genuine manpower shortages. The region is faced with the challenge of retaining and attracting workers. How does one keep and attract employees? Once again, the worker cooperative concept is very relevant, since it really enables employers to attract the most workers and retain them.
It works based on Maslow's hierarchy of needs. The basic personal needs, the psychological needs of self-fulfilment are satisfied within the worker cooperative. I could talk to you about this for a long time. I gave a 45-hour course on the topic. Regardless of that, I will stop here.
Before I yield the floor to my executive director, I will talk about the issue involving the transfer of 200,000 businesses. The Canadian Federation of Independent Business pointed out this risk almost 10 years ago. This unique phenomenon, which will manifest itself suddenly, will result in a bell-shaped curve. I am talking about business owners who will retire. It was assumed that the curve would peak around 2015, but I believe this will happen around 2017 or 2018.
There is currently a sufficient number of business successors, but within three or four years at the most, there will be a shortage. This will result in the closing of businesses. The situation will be much more serious in the regions because there will be few incentives there. The cooperative will be the only appropriate solution. The European community has understood this. The European Social Fund has been providing funding in places like France, Italy, Spain, Belgium and England for programs aimed at facilitating company takeovers and bail-outs by salaried employees.
This is basically what we suggest. The worker cooperative system could enable us to save jobs and businesses, and maintain the economic base in the regions.
I will now yield the floor to Hazel.
:
Thank you for inviting us to appear before you.
[English]
Just very quickly, there are about 350 worker co-ops across Canada, and about two-thirds of those are in Quebec. Our organization, the Canadian Worker Co-operative Federation, is a national association. It started about 20 years ago for worker co-ops, multi-stakeholder co-ops, and worker shareholder co-ops. Services include support for start-ups, a newsletter, research, and an RRSP program so that our members can invest in their own businesses. Currently the program has over $14 million invested in it.
The relatively small worker co-op sector in Canada stands in contrast to the sector in Europe, where hundreds of thousands of people work in worker co-ops. In the U.S., about 10 million people are in employee-owned companies under ESOPs, employee stock ownership plans. So Canada is far behind members of the EU and the U.S. in terms of the size of the sector and in terms of employee ownership as a business succession strategy.
I'm going to present a three-point plan in terms of how the federal government can help address this succession crisis that's coming, especially in rural communities and in particular through using employee ownership. Some of these points are also relevant to other parts of the cooperative sector.
The three elements are, one, a cooperative investment strategy; two, to make the federal cooperative development initiative permanent and to expand it; and three, to expand that program that I'll call the CDI--the co-op development initiative--into the new area of conversions to worker co-ops. We believe these programs would be an important legacy of the UN International Year of Cooperatives in 2012.
To go into more detail on the first one, the co-op investment strategy has two prongs. First is a Canada-wide co-op development fund that has previously been proposed by the umbrella organizations the Canadian Co-operative Association, or CCA and le Conseil canadien de la coopération et de la mutualité, CCCM. It's been supported by our organization as well as the Credit Union Central of Canada and others before Parliament.
The second point in the investment strategy is a federal co-op investment plan that is modelled on the Quebec Régime d’investissement coopératif, which is a tax credit program for investing in worker and producer co-ops or farmer co-ops and so on. Both of these components were unanimously endorsed by the finance committee in your 2010 pre-budget report, but they did not make it into the budget.
So in terms of a few details on that, co-funded with the co-op sector, the co-op development fund would provide financing to new and existing co-ops. It would require a one-time federal contribution of $70 million, after which it would be self-sustaining. It would be a repayable loan fund and not a source of grant funding.
Investments would only be made based on an analysis of a cooperative's business plan and its capacity to pay back loans. An example of such a fund is the arctic cooperative development fund, which received about $10 million in 1986 from the federal government and has grown through serving the largely aboriginal co-ops in the north to a $30 million fund now, and it continues to serve those communities. So it would be a very similar situation.
In 2008, the cooperatives secretariat of the federal government commissioned PricewaterhouseCoopers to examine this fund as proposed by the co-op sector and they viewed it very positively. We are convinced that this fund would be an effective source of support for employee-owned co-ops as well as other types.
The federal co-op investment plan, as I mentioned, is modelled on the Québec Régime d’investissement coopératif. It would be a partnership between citizens investing their own money and the federal government. In the plan in Quebec, from 1985 to 2006, almost $400 million in total was invested by members and employees in eligible cooperatives. The plan at the federal level is estimated to cost $17 million to $20 million per year.
:
Thank you very much for inviting me again. I'm not allowed to present the slides, but they're reproduced.
I want to run through the disclosures first because I think they're important. I don't have any investments or consulting contracts of any kind anywhere in the world. I am a poor professor. No organization, corporation, NGO, or political party influences my views. I do an enormous amount of research, and I talk to myself a lot, but I am a tenured professor who is free to speak my mind without any influence from outside organizations.
I've also taught over 100 times in the third world. That's relevant because I'm going to be talking about protectionism today.
I was thinking last night and this morning about not providing a title to you for my presentation, but I've come up with one. I'm going to call it “Toto, we are not in Kansas anymore”. I'm referring, of course, to Dorothy and the Wizard of Oz and that we are in a brave new world, a rapidly globalizing world. There are major new competitors coming on stream—such as China, where I have been teaching every year since 1997—and we cannot pursue the policies of the past.
Although I agree with much of what the PBO said in the broad big picture, that the long-term threats are much more critical to Canada than the short term, I think we're very strong. I'm not going to get into the details because I don't have a database that the Conference Board or the Department of Finance or the PBO have. I do want to deal with some “big P” policy issues in my short time.
I do think we have the strongest economy in the OECD today; that's been endorsed internationally. I agree, again, with the PBO that the economies of the European Union and the U.S.A. are in great danger due to profligate and irresponsible indebtedness by some of those countries, especially in the States and in southern Europe. I also put the assumption on the table that economic growth is absolutely crucial to grow the jobs that pay the taxes to finance the social programs that we value.
What I really want to talk about today are what I believe are three threats or harms or risks to Canada and individual Canadians.
The first one is protectionism. I think we have to reframe this tired debate that has been discredited in the research literature. I refer you to the Institute for Research on Public Policy, January 2010, dispelling myths about foreign investment. It's an excellent summary of all the research, and it blows all those myths out of the water.
We have to reframe the debate from who owns the company to who is investing in Canada and creating jobs. In other words, a Canadian company that is not investing here, versus a foreign company that is, is in worse position, in my view--is not doing as much--than a foreign company that's investing here. In fact, the research is showing very clearly that foreign firms have higher levels of productivity and they pay higher levels of wages. That's an important point. We have to open up and not shut down our Canadian economy. Why? Because one-third of the boomers are aging.
This was supported unanimously at the November G-20 in South Korea. The OECD, the World Bank, the WTO, and the ILO opposed protectionism. I have these documents for the committee if they want them, and I can copy them off the laptop. This was “Trade and employment...Lessons for the future”. You have the bullets there, the quotes, saying that protectionism of any kind is terrible for the economy.
On number two, again, I just want to mention one thing. I realize I am from the research-based community, the world of scholarship, and I understand that some of the things I'm going to say today are going to upset some people. That's fine. I'm not a politician. I'm not elected; I'm tenured. You can't get rid of me and my president can't get rid of me. I can say what I want. And I'm going to support it with research—refereed, scholarship research—in the leading organizations, such as the OECD.
Let's turn to corporate taxation. I've followed the debate over the past two months, and I'm astonished at the debate. There has been no reference to the OECD, to their 10-year tax policy research branch studies. They have published dozens and dozens of studies that have concluded, irrevocably, without condition, that corporate taxes are the most harmful type of tax for economic growth. There is no ambiguity in the research—none, zip, nada. I know that's going to upset some people, but that's a fact.
Also on the incidence of taxation, who pays corporate taxes? There's this myth in Canada that the corporations pay taxes. Corporations do not pay taxes even when they pay taxes. I am a former banker. I used to lend millions of dollars in this city to small and mid-sized businesses. Tax is just another cost of doing business, like wages. It's like the plant and equipment. If you don't pay those bills, guess what? The bank or someone else shuts you down and puts you into insolvency.
A corporation is an intermediary and it passes on all its costs of being in business, including taxes, either through increased price of goods and services or through lower wages. There is excellent research coming out of the Federal Reserve Bank, the research branch in the U.S., showing it manifests in lower wages.
The third debate is on the reform to increase CPP. There are many people saying, “Oh, my goodness, Canadians are falling off the cliff into poverty. Our elders are just falling apart.” This is fatuous, empirical nonsense.
The OECD “Pensions at a Glance” has said on the record—and again I have this report here in my laptop to give to the committee—that we have one of the highest social safety nets in the world for elderly people, and less than 5% of our elders are in poverty, one of the lowest on the planet Earth. If we're going to do anything, we should be targeting that 5%, which is about 250,000 families, and not doing a universal increase that's going to drive up payroll taxes on employers.
In conclusion, the Canadian economy is extraordinarily strong. I believe it's one of the two strongest economies in the west, along with Germany. But there are great dangers ahead.
First, protectionism is a cancer that is metastasizing in our country. We've got to stop it now for those who care about this country and care about individual Canadians. As I said in an interview on CBC's Lang & O'Leary last Friday, protectionism produces poverty.
Second, we've got to at least reduce, if not eliminate, corporate taxes because they are taxes on workers.
And third, we shouldn't be increasing the CPP; we should be targeting that 5%.
Thank you.
:
The most acute area of difference is our view on nominal income growth over the next five years, which is why Kevin said there was a structural deficit in 2015. We don't think there is. Frankly, there's lots of room for debate amongst the economists because we're talking about a 1% or 2% difference in the growth line going forward five years. So that's an area of difference.
But in areas of agreement, I heard a number of things that I deeply agree with.
First of all, we're as concerned as anybody about Canada's terrible productivity growth performance. The chart in his presentation showing productivity growth rates dropping on a decade basis is very striking. It's an area where we're doing a lot of research. I, personally, have done a lot of research there. We have to really change the argument now.
To a great degree, as a national economy, we've relied upon a cheap currency to be competitive in the world for way too long, and it's now caught up with us. That started, really, in about 2003-04, as oil prices were rising—and I think they're going to rise further—and the dollar rose along with it because our currency is a petro currency. We really have to come back to the productivity point.
The other point that I was really struck by was his point on demographics, which is going in the other direction. We're kind of caught in a vice right now. On one side is poor productivity performance and on the other side is aging demographics, which is going to mean much slower labour force growth going forward.
That really does suck the life out of our national economy, because population growth is a key driver of economic growth. If we could deal with the productivity issue, we can actually substitute for the slowing labour force growth. But if we do nothing, we're going to end up as a much poorer nation. So I was very struck by his medium-term view, with which I very much agree.
I want to begin by responding to something that Mr. Paillé said. I don't want to leave the impression that scholarship has nothing to do with the problems of real people in the real world. I grew up on a farm in eastern Ontario. I dropped out of high school in grade 12 and I was on the wrong side of the tracks for a long time.
That is not an excuse to shut down or protect the Canadian economy. It means we have to come up with adjustment policies, like the workers collective and the ILO are talking about, to deal with people who don't have the skills for the new economy.
To deal with your question directly, there is a large body of research by distinguished scholars across the United States, Canada, and Europe. One of the leading scholars is Dr. Devereux at Oxford University, the Saïd Business School. He's the director of tax policy studies, and he's published extensively for the OECD. Another node of scholarship is the Federal Reserve Bank, which is the central bank of the United States, the counterpart of the Bank of Canada. There is also the Kansas City branch of the Federal Reserve—each branch has its own economist on the payroll doing all kinds of wonderful research that is available free of charge. They have done a lot of research on the so-called incidence of corporate taxation—who pays for it, how is it financed? I've always taken it that corporations don't pay taxes any more than they pay wages, because it's all passed on in the form of higher prices or lower wages. If you don't cover all your costs of doing business, you're out of business, so somebody is paying for those taxes, and it's not the corporation.
Then the question is, who's paying for it? The research coming out of the Federal Reserve branch in Kansas City—there have been several articles published by Alison Felix that I can provide to you—shows that in small, open economies like Canada, it falls on workers.
:
Thank you very much, Mr. Chair.
Mr. Hodgson, always a pleasure.
Mr. Bridault, thank you very much.
Ms. Corcoran et Mr. Lee, welcome and thank you for bringing so much input to our discussion.
I will begin with you, Ms. Corcoran. You pointed out an element that was underdeveloped when we were studying various economic projection scenarios with a view to the upcoming budgets. Very few people have presented matters in the same light you and Mr. Bridault have.
Since you ran out of time earlier, I would like to give you the opportunity to finish talking about the possibilities of this economic model in preparation for business takeovers. You brought up two elements in support of your argument: the demographic challenge and the international trade challenge. Someone mentioned L'Islet. We all know about what happened to Stryker Médical Québec.
In the past, a Quebec representative would serve on the Standing Committee on Finance, but there are no longer any Quebeckers on the Conservative side. That speaks volumes.
I would like to give you the opportunity, Ms. Corcoran and Mr. Bridault, to finish sharing your input on the topic, for the benefit of this parliamentary committee.
:
I don't want to give you a course, but I wanted to point out that the global issue of businesses being handed over to workers has already been studied in depth. In some cases, we are not necessarily talking about workers. We could be talking about a small business, a small store with one or two employees. This is not necessarily a worker cooperative; it could be what we refer to as the
coopérative de solidarité, a community multi-stakeholder coop. This has been developed through federal funding. There are many documents on the global issue. We have with us the French version of
Relais COOP as well as the English version.
What I wanted to say concerns the research conducted by the CFIB, which sounded the alarm. Five per cent of the 200,000 businesses the research focused on are medium to large businesses with more than 20 or 25 employees. Everyone looking to cherry pick is targeting these companies. I am talking about accounting firms, banks, and so on.
However, 95% of businesses are overlooked because they are less profitable. Many of those businesses are in rural areas. These are the kinds of companies we are focusing on.
In the regions, a business owner who starts up a company with 20 employees is always proud of his business. These people don't want to simply sell and then go have fun in the sun without a care in the world. Their family reputation is on the line, since they live in the region where their business is based. This is our target. These are our main partners.
To complete the picture—and this is somewhat related to the question asked by Mr. Hiebert—business owners are not ready to let go. Ms. Corcoran talked about this. Research shows that 70% of business owners, who belong to my generation—grandpa boomers, rather than baby boomers at this point—don't want to think about retirement. They see their company as their baby. They are having a hard time thinking about leaving their company, so they are not preparing for this eventuality. The failure rate is huge when someone does not prepare.
That is why we were saying that people must prepare for this in advance. We must implement a system that will help prepare the aging business owners, raise their awareness, guide them and help them along in the process. We also need a financial system. That is why we were talking about the CIP and similar types of plans. A Canadian fund could offer loan guarantees so that workers can buy their share, invest in their company and buy it back.
:
Thank you very much for that.
It's a two-part answer.
First of all, before the Parliamentary Budget Officer position was created, we actually were doing a forecast for this committee. At one point, about three or four years ago, there were four independent forecasters engaged by this committee to give you a view on the fiscal outcomes. We were one of the four. If you would like to engage us, I'd be very happy to provide that service again. But as a not-for-profit organization, I don't have the internal resources to do things for free, to be quite frank, because then I'd be out of business. I think the comments from all four of us reflect that.
Secondly, in our forecast, though, which is available to subscribers, we see stronger nominal income growth in the early years. So we see stronger nominal income growth, which is basically the sum of inflation plus real economic growth, last year and this year, putting us ahead of the kind of track that Mr. Page has set out. And of course once you build that into your forecast, you have that as a permanent fixture going forward. So we see stronger nominal income growth.
Nominal GDP, by year 2015, will be higher in our forecast, and therefore government revenue will be higher, and therefore we have a smaller fiscal deficit, everything else being the same. That's basically the track we're setting out.
I would actually agree with Kevin, with his concerns on productivity and the demographic challenge we're going to face as a country. I think his analysis is very solid there, and it reflects all of our work.
A lot of our material is for free on our website, and I can provide that, but there are products that we have to do on a subscription basis because otherwise I can't pay salaries.
If I might continue, it's Thomas Mulcair's choice not to be here, as it is Scott Brison's--
The Chair: Order, order.
Mrs. Shelly Glover: --who refused to listen to these witnesses.
In any event, I have some questions. I found what you said very interesting, Mr. Lee, about the fact that when corporate taxes are actually in place, corporations look to recoup those taxes, either by doing what you've already indicated--raising consumer prices--or by affecting workers' wages. So although the Liberal Party wants to raise the corporate tax from the 16.5% that it's at right now, and they want to raise it immediately to 18%.... That's what they've indicated, and if they don't see it in the budget, they're going to vote against our budget and launch us into an unnecessary election. I want you to tell me how that affects our families, because they're claiming they need to raise corporate taxes by $6 billion to help families.
Well, if consumers and workers are the ones affected, as you say, by the increase of corporate taxes, tell me how that is going to hurt our families, our moms who are shopping for their kids, and the workers who are trying to make ends meet for their families? How is that going to hurt our families?
:
As a starting point, I agree with you. I said the same thing to our board last week. To a great degree, our governments have done the right thing in terms of tax reform: getting rid of capital tax, which for me is the dumbest tax you can imagine, taxing capital accumulation; reducing corporate income tax; harmonizing sales tax in the provinces, and on and on. There has been investment in everything from university chairs to the heavy public sector investment in Canada in R and D.
So I think our governments have largely done the right thing. The truth is that we probably went 25 years in Canada during which, because of the structure of our taxation system, we encouraged firms to underinvest. We did a piece of research last year, for example, looking at investment in human capital versus physical capital, and the track record is very clear. We have fallen behind. It takes time to catch up. I'm seeing that a little turning point event may be occurring right now. We've seen investment in machinery and equipment accelerate in the last three quarters--but this is only three quarters--which is what should be happening. Private firms should be investing now, when they can import technology at a much better exchange rate than they could for the last 25 years and when they have a very strong incentive, because they're not as competitive in the U.S. market or around the world, by virtue of the strong dollar.
So we may be at a turning point. The trouble is that our track record is so poor. We gave Canada a D in innovation for the last 10 years in our report card on Canada. We're doing that again now. It will be out in the next, say, six weeks to two months. My fear is that we're going to keep getting a D, because we really have not had to build a culture in Canada of innovation. I think that's maybe the critical piece.
So you're absolutely right, Mr. Chair, that the ball is being passed from governments, who have done their bit, to the private sector. Maybe we're seeing the early signs in terms of their investment behaviour, but maybe not. I'd like to look for more signs that firms actually appreciate that with globalization, in a very different world, we have to change our behaviour. We have to take business models apart, be prepared to relocate parts of our production, frankly, offshore, where it can be done more cheaply, and then focus on the high-value, high-wage jobs within Canada. But that's not automatic, by any means.
We're actually thinking of creating a new research centre at the Conference Board around this whole theme. I've spoken to some major corporations about that, and there's an appetite to invest in that kind of research, because it's the big challenge facing Canada: how to boost our productivity growth.