Welcome, everyone. Thank you so much for coming in. We had an unexpected vote this morning, so we apologize for beginning late.
This is the tenth meeting of the Standing Committee on Finance of this session.
According to our orders today, pursuant to Standing Order 83.1, this is the start of pre-budget consultations 2011 for next year's budget.
We want to thank all of you for coming in this morning.
We have with us Monsieur Marc Lavoie, professeur titulaire, Département de science économique, Université d'Ottawa; from BMO Capital Markets, Mr. Douglas Porter, deputy chief economist; from the Canadian Labour Congress, Monsieur Sylvain Schetagne, économiste principal; from the Conference Board of Canada, Mr. Glen Hodgson, senior vice-president and chief economist; and from Laurentian Bank Securities, Monsieur Carlos Leitao, économiste en chef.
Bienvenue. Thank you all for coming in.
We will have about five minutes from each of you for an opening statement, and then we'll have questions from members.
We'll begin with Mr. Lavoie.
Good morning, Mr. Chair.
I should first of all point out that I'm not a forecaster. What I'm going to tell you is based on my feelings, my experience and my understanding of the laws of macroeconomics.
Basically, there is no doubt in my mind that we are heading toward an economic recession or, at the very least, toward a period of almost zero growth. I think that we are going to see what I would call the "Nipponization" of the western economy, meaning that we would have close to zero growth or negative growth for several years.
For several months now, we have seen that all the large agencies are revising their forecasts on economic growth downward. Based on the consensus of the economists, the Department of Finance announced in the budget presented in March and in June a growth rate of 3% for this year and next year in Canada and the United States. When we read the most recent forecasts of the International Monetary Fund, we see that it has now gone from 3% to 2% for Canada, and 3% to 1.5% for the United States.
But we know that the forecasters are generally still too optimistic when the economy is spiralling downward. To give an example, as you know, the Lehman Brothers fell on September 15, 2008. Well, on October 13, 2008, the consensus forecast was still that Canada was going to grow at a rate of about 1% for 2008 and 2009, while in reality, Canada's growth rate in 2009 was negative 2.5%. For the United States, the consensus forecast for 2009 was that the growth rate would be 0%, when the United States' growth in 2009 was actually negative 3.4%.
But we have been going through a period of uncertainty, which is very similar to the one we had in 2008. In fact, every week we hear at least four or five news items that are stupefying or concerning. The United States economy is not really recovering. The budgetary consolidation plan that the American government wants to adopt is going to slow down economic growth, if it hasn't done so already. And the new recovery plan under President Obama has little chance of being implemented. So there is little hope there.
What's more worrisome is the situation in Europe that everyone has been talking about, particularly the sovereign debt crisis for countries using the euro. In May 2010, the European Central Bank stepped in and, for the first time, purchased government securities, something it had refused to do for the first 10 years it existed. A European Financial Stability Facility was created, but it is clear—and was already clear then—that it was too little too late. The crisis in Europe seems to be irreversible, especially since the European politicians think it would be better to focus on fiscal constraint policies. As the example of Ireland and the United Kingdom shows, these policies are not going to have the desired effect. I think there is a structural crisis for the euro zone. In fact, it was created on the hypothesis that there would never be a crisis and that the financial markets were always right. Now we know that the financial markets aren't always right and are in the middle of a crisis.
To conclude, Canada will not be able to magically escape the financial crisis when it is happening in Europe. When there is an earthquake in Europe, we in North America—the United States and Canada—will be hit by a tsunami.
Obviously, given our trade with the United States, we are going to be affected by this situation. So I think that the Canadian government must give up on its goal of balancing the budget for 2014-2015; it must give up on budget cuts that were already announced; and it must now implement a new recovery plan for infrastructure.
Thank you, Mr. Chairman.
Thank you to the members for inviting me here today.
There's no doubt that the world economy has been faced with numerous challenges since the start of 2011. It started this year with the crisis or the unrest in the Mideast that led to a spike in energy prices. Of course that was followed by Japan's trio of disasters that created supply chain problems globally. Then, in the summer, we were faced with the U.S. debt limit debate, which sparked turmoil in the financial markets more generally. Rumbling beneath all of these challenges has been the ongoing European debt crisis, which is probably now the single biggest risk to the global economic outlook.
All of these factors have in their own way conspired to no doubt darken the economic outlook. Through one channel or another, they have hit consumer, business, or investor confidence.
While we continue to believe that Canada and the U.S. will manage to claw out some growth over the next year, it looks to be very modest at best. We've recently revised our GDP forecast down to 1.5% to 2% for both Canada and the U.S. in 2012. That's not significantly different from the problem-plagued, underwhelming environment we've seen in 2011. It is down about a percentage point from where we would have seen both Canada and the U.S. as recently as four months ago.
Given such subdued growth, I would say that it would really only take one more negative shock to basically tip the economy over into an outright downturn--for instance, a serious policy error in one of the major economies, or something akin to the Lehman Brothers shock we suffered back in the fall of 2008.
For Canada specifically, we have consistently outperformed the U.S. and most of our global counterparts for the last five years. On average, the Canadian economy has grown by about half a percent faster than the U.S. economy, but I would stress that it really is only a difference of degree and not direction. The reality is that if the U.S. and the broader global economy got into significant difficulties, then Canada would unfortunately only be a step behind.
Even from Europe, there are a number of different channels through which a problem in the European economy can be transmitted to the Canadian economy. There is the direct export channel. Admittedly, Europe is not a huge destination for our exports, but they do still absorb about 8% of our total exports, which is by itself significant.
There is also the financial market channel. Much as we've seen in recent weeks, global equity markets are more interlinked than ever before. Whenever we suffer serious downdrafts, even in European equities, that can directly affect Canadian equities that very day.
There are the financial linkages through the banking sector. If European banks get into serious difficulties, that can affect the North American economy.
Finally, there is the indirect effect of commodity prices. We've certainly seen that in recent weeks. Concerns over the global economy can translate into much weaker commodity prices. We've seen that quite clearly in recent weeks, where we've had a huge step back in commodity prices. Of course, as a significant commodity producer and exporter, a significant drop in commodity prices at this time too can affect the Canadian economy.
In other words, even if we do everything right, even if we get every policy right, we can still be obviously quite clearly affected by a problem in the global economy.
As well, the Canadian dollar is vulnerable to a pullback in commodity prices, as we have seen in recent weeks.
For policy-makers, I'd suggest that in this kind of environment, caution really is the watchword. Certainly from the monetary policy front, we have seen the Bank of Canada on hold for the last year. Our view is that the Bank of Canada is likely to keep interest rates unchanged right through to the end of 2012. They will remain quite cautious in this kind of environment.
For fiscal policy, I think the important thing at this point is to be flexible. I don't think things have deteriorated to the point where we need a change of tack at this point, but I think policy-makers have to be cautious in this kind of environment where there are quite serious tail risks. I mean, right before our eyes we see the risks playing out in financial markets. It's almost as if we're having a day-by-day debate in the financial markets on whether we're headed for another global recession or whether or not the global economy will continue to turn out modest growth.
In that extremely uncertain environment, I think fiscal policy basically has to remain flexible. That's my main message.
On behalf of the 3.2 million members of the Canadian Labour Congress, I want to thank you for affording us the opportunity to present our views on the Canadian and world economy, and the next federal budget.
Economists—including bank, OECD, International Monetary Fund and ILO economists—are increasingly gloomy about the economic prospects of all the advanced economies, including Canada.
The United States, Europe and Canada could slip into a technical recession soon, and even if this was avoided, we are almost certainly in for a long period of very sluggish growth and continued high unemployment. Why? We've talked about many reasons for the problems with the world economy. I am now going to quickly touch on five issues that are at the source of the problems we are now experiencing.
First, all the government investments have run out. During the recovery period of 2008-2009 after the great recession, these investments helped lessen the effects and restore the economy. Unfortunately, these public investments are running out or have already run out, which is Canada's situation. What we are seeing more and more is a shift by governments to austerity and spending cuts, instead of maintaining public investments to support the economy.
The second significant problem we are seeing at the international level is putting off fundamental reforms—often through the G8—that our financial system needs to rectify the situation and prevent the type of problems we encountered in 2008. Not having these reforms means that the large banks and hedge funds continue to speculate on the markets.
The third issue that is very important for us and that explains the current problem is the matter of very high household debt, particularly housing-related debt, mortgage debt. As we know, this resulted in a mortgage crisis in the United States, as it did in England and in other countries.
Today, increasingly, total household debt means that spending is weak and, as governments are turning to austerity policies, governments are also contributing less to economic growth.
The fourth problem that we are seeing is more fundamental and is one we don't often deal with: it's the issue of trade surpluses among countries. Some countries have very large trade surpluses—I'm thinking of China and Germany—and, because of their policies, prevent wage increases and importing, so that they should import more products and services from countries that have large trade deficits and high unemployment.
So we are seeing that many developing countries are continuing to grow, notably China, but that others, like the United States, Canada and part of Europe, are having difficulty with exports and with the recovery of their manufacturing sector.
The last main fundamental problem, one we do not discuss much, is one that existed prior to the crisis in 2008: constantly rising inequality, rising profits and soaring incomes for the very rich. Combined with stagnant wages for the working people, this creates a number of problems.
The main problem is that the growth before 2008 essentially came from the growth of household debt and speculative bubbles, as opposed to a preferred growth based on real investment in a balanced economy, an economy that creates jobs, an economy of sustainable development that creates real investments and that increases productivity, which is then linked to rising wages and so on.
There are five major issues that are more fundamental than simple short-term and long-term problems.
In Canada, it is very clear that the economic growth is slowing very quickly. This year, the first quarter was positive, but that was mainly linked to a build up of inventories. The second quarter was negative. The third quarter is also expected to be negative.
As for the total number of jobs in Canada, during this time we found ourselves in a situation where we've recovered to pre-recession levels. The unemployment rate remains high at 7.3%, compared to 6% before the recession. The number of unemployed workers is a quarter of a million higher than before the recession. At 14%, the youth unemployment rate is twice as high as that of workers aged 25 to 54. The real unemployment rate, which counts workers who have given up looking for jobs and involuntary part-time workers, is about 11%.
As for the labour market this summer, there was no job creation. What's more serious—and I am stressing this—real wages have begun to fall.
The Labour Force Survey for August showed that average hourly wages were up by 1.4% whereas inflation was 2.7% in July, 3% in June and 3.7% in May. So we can see that real wages have been dropping. We believe that, if real wages continue to fall, it will have negative effects on consumer spending in the short term. Consumer spending played an active role in maintaining our growth during the economic crisis. But given that real wages are falling, we are likely to see a fall in consumer spending and, as a result, a fall in the Canadian economy.
So what is the way out? We are faced with the following situation: for the Canadian economy to continue to grow, there are basically three options. We could increase our exports and reduce our imports; businesses could invest more; and we could invest more through public investment. Given that Canada is an exporting nation, we know that business investment is closely linked to exports. And since our clients are not necessarily buying our products, things are not looking good. So what is left? We have the last option, meaning public investment.
At the moment, the Government of Canada can borrow through 10-year bonds at a 2.5% rate of interest. It is a very low rate. Canada's debt is also low at 33%, which is half of the OECD average. We have the means to borrow in order to be able to focus on public investment. That is not expensive. Our recommendation is to continue with public investment in infrastructure. That includes bridges, trains, and so on, but also our social infrastructure with child care and care for the elderly.
Thank you very much, Mr. Chairman.
I basically have three points to make as opening remarks.
First of all, on the global context, we're in the midst of a crisis of confidence right now, which is really a function of an inadequate policy response to what's happening in Europe and arguably to the fiscal position and the recovery in the United States as well. I won't go into great depth on that, but I think it really points to the need to build confidence as a critical purpose of the committee meeting today and indeed of the whole design of Canadian economic policy going forward. This should be all about restoring the confidence of Canadians as consumers, as investors, as people who actually believe we have a strong economic future.
I could go into great depth on what the solution is in Europe, for example, but I won't do that. I did spend the first ten years of my career at the Department of Finance and another three and a half years at the IMF, so I've actually lived through this. I feel like I'm watching a bad movie the second time around, and it's very tragic, but there are solutions; it's not a hopeless circumstance. But it's also going to be very painful, in particular for taxpayers in a country such as Greece, which is nowhere near the bottom in terms of its adjustment. So confidence is the critical anchor.
Secondly, on our economic outlook, the Conference Board actually had one of the weakest forecasts in the pre-budget round of forecasts. We came up with a forecast in the first quarter of this year of growth of 2% this year and a little bit stronger in 2012. I know we're at the lower end of the range, and unfortunately we think the future is turning out that way. We revise our forecasts each quarter and have just finished the revisions for Q3 and are now forecasting growth in Canada this year of 2.1% and about 2.5% for next year. The trouble is that this forecast is not symmetrical, in that I don't think the array of risks around it are even: I think there's a lot more risk of things happening on the downside, of bad things happening, than having upside potential. That means you really have to build a note of caution into the fiscal forecasts going forward, because I think growth is really being hampered right now. Growth in our economy is below the normal track that we felt we were on nine months ago. Exports, for example, are probably about $30 billion to $40 billion below what they could be if our economy were performing at potential. And of course nominal growth is the key driver for government revenues. Therefore, we shouldn't be at all surprised if government revenues are a little bit below the path Mr. Flaherty set out in his budget, because of slower nominal income growth.
That brings me to the third and final point, which is on the design of fiscal policy right now. These are exceptional circumstances. Rebuilding confidence should be our anchor point. That's the key objective of the budget going forward. For me that means being prepared to make course corrections along the way, being very pragmatic, building prudence into the outlook, and not being wedded to one view, because the circumstances clearly have changed outside our borders and we have to find ways to adapt to that change. That doesn't necessarily mean more stimulus, because in fact we don't have enough data right now to really reach a conclusion on whether the economy has slowed down—nor does it mean stepping on the brake.
I think, for example, with slower nominal income growth, if we have to move the target of balancing the budget out by a year or two—a very common-sense adaptation—we should be prepared to make that adjustment. If the economy needs more stimulus at some point, we should be open-minded about that—but certainly that's not the Conference Board's view right now, that we have to add anything exceptional. So it's not just a matter of staying the course; it's being prepared to make common-sense course corrections along the way, depending upon the needs of the economy.
Mr. Chairman, I'll make two more points.
I had a commentary on tax expenditures that was run in about half the newspapers in the country about a month ago. As the federal government thinks about reviewing overall government spending, let's not forget the fact that tax expenditures represent about a $100 billion revenue sacrifice for the federal government. We have 190 separate exemptions now within our personal income tax system. So let's at least be open-minded about considering tax expenditures as part of any overall review of spending, because there could be interesting sources of revenue there that would preclude the need to have quite as much spending contraction on the spending side.
The other point I would make, and here I'll echo what other speakers have said, is that infrastructure is the best form of adding stimulus to our economy. We did a series of studies for various governments across the country during the recovery period, and if there were a desire to add a little bit more horsepower within the structure, even within the current level of spending, then shifting spending towards infrastructure spending would both provide stimulus to the economy and address a real need. Any of you who cross the Champlain Bridge in Montreal know exactly what I mean in terms of the crying need for investment infrastructure in this country.
I'll stop right there, Mr. Chairman.
Once again, thank you for inviting me to appear before this committee.
I have the pleasure of being last, so I'm not going to repeat a lot of what was said. I agree generally with the fact that the global economy has indeed slowed a lot. Economic growth is now much weaker both in the United States and in Europe, as well as globally, than we thought it would be only two or three months ago. We have to adapt to that.
A recession in 2012 is possible. It's not part of our forecast. We still think it can be avoided, but certainly one needs to realize that it is indeed a possibility. However, unlike 2008, which really did hit us hard and almost unexpectedly, this time around we can see it coming. The reason I think that a recession is not inevitable is that policy-makers in the United States and in Europe know very well what needs to be done to avoid such an outcome.
Now, democracy is messy, as you all know, and it's not always possible to do what needs to be done right away, but I wouldn't dismiss the capability of the European governance mechanisms to address the situation. It will take time. They will probably push it to the last possible second, but I think they will be able to avoid a major, messy default of Greece, for example. It is very serious and it is very risky, but I am not ready to assume that it is necessarily going to collapse.
Now for Canada. Of course, as was said before, this time around if there is a recession outside our borders, we are not going to escape it. That's obvious. I'll go even one step further. Last time around, in 2008-09, we did escape most of the impact of the recession for two basic reasons. One was monetary policy: interest rates came down very quickly. Secondly, fiscal plans were put in motion by the federal government and the provinces to address those issues.
This time around, we won't be able to do the same things. Interest rates are already at very low levels. I don't think they can go any lower. I don't think the Bank of Canada will cut the overnight rate; I don't think it will serve any purpose. Market rates are very low. Ten-year yields are actually now at 2% or thereabouts. This is very low, historically speaking, so we've done that.
As for consumers coming to the rescue as they did in 2008 and 2009 by massively borrowing, by getting mortgages and what not, again, given the high levels of household debt at this point, I think that's a place where we should not go. We should not try to push that elastic any more.
So that leaves us with exports and business investment. On private business investment, there are perhaps ways that governments can think of to stimulate and to favour private business investment. Public investment is also welcome at this point, and I think that we, as a government, should be prepared to perhaps accelerate some projects. However, I also wouldn't also put a great deal of emphasis on those projects.
Glen, you mentioned the Champlain Bridge. It's something that needs to be done, so if we decide to rebuild the bridge it's because we need to rebuild the bridge, not because we need to stimulate the economy. That's a big project. It's $1.5 billion or something like that, but it wouldn't do much for GDP growth in the first quarter of 2012. But it needs it to be done and interest rates are very low, so this would be a good time to do something like that.
Finally, when it comes to fiscal policy, when we think of the upcoming budget we need to be flexible, because we're not quite sure what's coming down the line. We need to be able to think in terms of rebuilding confidence, of stabilizing consumer confidence and improving business confidence. To me, those are the keys. Also, if we need to boost confidence, perhaps there are measures that can be done very quickly and can put money in people's pockets. Indeed, incomes are low and wages are weak, so we should think of measures like that.
Thank you very much to the panellists for being here today. You had very interesting presentations. We certainly appreciate your experience and your expertise.
I hear similarities in what each of you is identifying as the problem. I hear some differences in terms of what Mr. Schetagne and Monsieur Lavoie are saying about how they feel it's probably very likely we're going to be in a recession. Others of you are saying that it's unclear and we should remain flexible.
We have had significant debate in the House and in this committee about the value of austerity at this point in time, which has been the government's approach, versus the value of investing in the economy through infrastructure investments. Each of you has mentioned this in some way.
My question is, could we be further damaging our economy by pursuing a path of austerity at this point, which we are doing by taking out $4 billion a year and cutting services? And should we instead be investing in building needed infrastructure now, rather than waiting for a further crisis to hit? Should we not be preventing problems down the road?
Let's start with you, Mr. Lavoie. Do you have any comments?
I agree with that analysis. I would even take it a step further.
First, what is behind the federal government's situation in terms of balancing its books? There is a drop in revenue not only because there is a drop in economic activity, but also because there is a drop in tax rates. As a result, the government is losing out on revenues.
So we have to see what can be done about the revenue we are depriving ourselves of. What decisions can we make? We have the following two choices.
First, we can give more money, in the form of corporate tax cuts, to companies that make a profit. We now know that these companies do not invest in the real economy. When they do invest, what is the outcome? Where do their investments go?
Second, we also have the choice of keeping or getting that money back and investing it in infrastructure programs, which create jobs. Numbers show us that $1 billion invested through corporate tax cuts will create 3,000 jobs whereas $1 million invested in public and social infrastructure programs will create 17,000 to 18,000 jobs.
What should we do as a corporation? Create jobs across the country and address needs, since more jobs are needed in order to restore the confidence of consumers, workers, and so on. The answer is clear to us. In the current climate, there should be no cuts; we have to invest more and create more and better jobs across the country.
I'd like to thank all of the witnesses for their appearance here this morning.
My question is to Mr. Porter.
Even going back to May 2, the number one issue during the federal election was the economy, as well as maintaining a prudent course. People chose to elect a strong, stable, national Conservative majority government for which the economy was the number one issue. Canada has been recognized as the strongest economy in the G-7 by a number of international economic organizations, from the IMF to the World Economic Forum to the Economist Intelligence Unit.
From your vantage point, in light of all of these factors, how would you assess the economic leadership of the Prime Minister and our finance minister?
You've said that the government must not implement spending cuts at this time.
Mr. Porter, you've said that caution is the watchword and that there shouldn't be a change now in terms of cutting government spending at this time.
Mr. Schetagne, you've said that now is the wrong time to cut.
Mr. Hodgson, you've said several times “don't put on the brakes” and have said “no fiscal contraction”.
Mr. Leitao, you've said the same thing.
Further, Sherry Cooper, your colleague and the chief economist at BMO Nesbitt Burns, has described it thusly: “the misplaced belief that the road to economic prosperity is paved by near-term fiscal tightening, as espoused by...Prime Minister Harper...shows that we've learned nothing from Herbert Hoover's response to the Great Depression”.
Is it safe to say that all of you believe that now is not the time to cut government spending in Canada?
Thank you all for coming here this afternoon. I apologize for the late start because of the vote, but still it's great to hear your comments on the economy and what Canada should be doing.
I come from Saskatchewan, where the unemployment rate is about 4%. Our economy is booming. If you talk about recession or possible recession, people look at you cross-eyed. It's hard for me, in a lot of ways, to talk about spending or not spending, especially when we're looking at a budget that's going to come out in February or March next year. I guess what I'm trying to do is to find out some facts and things that we can actually say “Okay, what's concrete at this point in time that we can take forward?”
Most of you talked about being flexible, cautious but flexible. Basically it sounds to me as if there's an endorsement of what we're doing right now, that we should be ready or flexible in case we see things get worse. We don't have crystal balls, and I think the Prime Minister and the Minister of Finance have always talked about there always being flexibility with something moving forward. But there are things that we can do as a government regardless, to make us more competitive, to increase our productivity. I think the one area on which I'd like your comment is on the kinds of barriers or regulations that could or should be removed anyway.
I know, Mr. Hodgson, you talked about a bridge, I believe, in Montreal, the Champlain Bridge, that should be replaced not because of stimulus but because it needs to be replaced. Is there anything in government right now that should be replaced just because it needs to be replaced, whether it's regulatory or programs that no longer meet the demand or are no longer relevant? Have you identified any of those things, whether regulatory burdens or stuff like that we should look at?
Maybe, Mr. Hodgson, I'll start with you.
We actually wrote a brief about three weeks after the election to give free advice to the new majority government, and it was a fairly comprehensive brief. We covered macro policy, which we're talking about today--that is, fiscal policy and the form of that--but also some of the micro adjustments required. I say this because our research program at the Conference Board is fully aligned around boosting Canada's real potential, raising productivity and prosperity for the country. It's a fairly long list. It's things like expanding our horizons when it comes to free trade and entering free trade negotiations with other parts of the world. We've made great progress in Latin America and we're now talking to India and the European Union. I'd like to see our being part of the trans-Pacific partnership, for example. Unfortunately, we have this thing called supply management that precludes our sitting at the table. That's the kind of barrier that's actually preventing Canada from seizing its full potential when it comes to free trade.
We believe we're severely under-invested as a country in infrastructure. We haven't done the numbers, but others have, including engineers and the Federation of Canadian Municipalities, and I think their number going back five years was of a deficit of about $130 billion in terms of infrastructure investment. That tells me there is huge scope for realigning government spending priorities and making sure we're making adequate investments in roads, ports, and bridges to ensure that the Montreal economy, for example, works well. Could you imagine if the Champlain Bridge actually broke and you could not have commerce between the south shore and downtown Montreal? That would be a huge loss to Montreal's GDP and to Canada's GDP.
So with things like that, reform is possible on many fronts. Maybe I can share the brief with you and we can have discussion about that in detail. It's on our website, by the way, but I will share it, perhaps with the clerk to share with the committee.
Voices: Oh, oh!
Mr. Glen Hodgson: I mean, we're on the record as saying that we thought the business tax adjustments undertaken over the last three years were really important to help companies adapt to the fact that we are now trading with a very strong.... We've become the Switzerland of North America when it comes to the exchange rate.
Our view is that the Canadian dollar is going to stay a strong currency for a long time to come, driven by the commodity prices that Mr. Brison talked about. We think the sales tax harmonization, elimination of capital taxes, and reductions in corporate income tax were a critical piece in helping Canadian companies adjust.
Now, revenues have to be made up someplace. We're also on record as saying that Canada should have a national carbon tax to support what provinces are already doing with carbon taxation.
But thinking about tax reform, I'm a big advocate. I'd love to come back and talk with you further about this.
In one word, yes: I think more free trade is good. It gives us access to other markets. It increases competition at home, which is also good for our economy. It forces companies to sharpen their pencils on an ongoing basis. It really is allowing Canadian companies to take advantage of what are called global supply chains or global value chains as they change their business model.
Again, we are on the record as strongly supporting bilateral, regional, or multilateral free trade however you can accomplish it. I think Canada benefits from access to more markets around the world.
One of the good things that happened after the financial crisis was that we saw very few trade barriers put in place, because under globalization, firms and national economies are more and more integrated. People understand that by doing a Buy American clause, for example, you just shoot yourself in the foot. You actually hurt your own economy by putting a barrier in the way.
I could only encourage the government to pursue more free trade, in Asia and.... I mentioned the trans-Pacific partnership. That will require us to address some barriers at home that are actually preventing us from having full access to free trade.
Well, it sounds somewhat like a rhetorical question, but thank you for acknowledging that work.
We do a report card on Canada's performance called “How Canada Performs”. It's entirely on our website. We did look at inequality in the major OECD countries over the last 20 years.
As part of globalization, sadly, inequality is growing in most countries around the world. In Canada the rate of growth of inequality as we measured it was actually greater than in the United States, which is a bit of a surprising result. We didn't do detailed analysis on the economic impacts of that, but I think we're starting to highlight them. They are things like how, if people with lower incomes aren't keeping pace with income growth across the economy, that takes away from potential demand in your economy. Often they're buying locally made goods. They're not importing BMWs, although there's nothing wrong with BMWs.
We were asking whether we're doing enough as a country to ensure that all Canadians are benefiting from economic growth. Whether we're talking about the lack of job security or about people retiring with insufficient incomes, ongoing poverty is kind of a festering sore within an economy, and I think it does drag down your ongoing growth potential.
It's something we're going to come back to in further research, because we didn't really go deeply into the causes, but I'd like to do that in our future research.
I'd also like to thank the panel.
To summarize in broad terms what I'm hearing, it's a softening from original projections, but certainly not below negative. Also, I'm hearing that we need to be very watchful. I've heard in general a suggestion that we need to be pragmatic and flexible. I think I also heard that debt in the long term is a big problem and that we do need to get back to balanced budgets. I think that was certainly an important piece.
If you look at where the government is going in terms of its reduction in government spending, I actually looked at the numbers, and I think we are looking at 0.02% of GDP, so really, we are looking at $4 billion and at government and how they are spending.
So I guess I would certainly say to Mr. Hodgson first, and maybe to Mr. Porter, that 5% of what might perhaps be inefficient spending in different areas of government expenditures seems quite feasible and doable to me, with a very modest impact. So government should be looking towards not spending money on programs that aren't efficient any more.
Well, there's an issue around structural spending, but I'm going to start with your first point. The track for nominal income growth, because that's what government actually taxes, is below what we were forecasting 18 months ago.
With my colleague Matthew Stewart, who was here, I talked about the government's capacity to actually balance the books by 2015, which was the conversation at that point. We said that it was quite doable. We are below that growth track now, not by a huge amount, but by a few billions.
This means that in our forecast the government will be able to balance its books in 2015-16 now, and I don't think that's necessarily a bad thing to be going out one year longer. It's not going to add much to Canada's overall stock of debt. As well, we have to be mindful of the ratio.
But I would not counsel withdrawal of stimulus. So don't just stick to the plan because you have a plan. Think about the plan in the real world context, where we're having these extraordinary shocks from outside, and then do a course correction with the end plan still being in sight.
I would like to thank you all very much for coming to share your views with the Standing Committee on Finance.
This summer, Statistics Canada announced that private companies have assets of around $500 billion. This is money that companies are holding at the moment. The Bank of Canada's financial system review indicates that these funds are not being invested. Investments are increasing very slightly, but the increase is not enough by far.
At the same time as all of that money is being accumulated, we have seen a loss of 300,000 manufacturing jobs in Canada in recent years. Our productivity is declining. Our research and development work is declining. Those high-paying jobs are being replaced by lower-paying jobs. This explains why, although 600,000 jobs have been created, we are seeing the situation in Canadian households deteriorate greatly. Their financial situations have become critical. Statistics Canada tells us that the average debt level in Canadian households is 147%. There are massive regional inequities. In some parts of British Columbia, 80% of people's salary goes to pay the rent or other costs of housing.
Could you tell me how tax cuts will allow Canada to benefit once more from the mass of unused capital, to regain our industrial base and to see an end to the drop in the real value of our incomes?
My question goes to all the witnesses.
Of course, when you increase taxes and mandate high wages, you lose corporations to other countries that are more competitive. I think you would all agree with me, Mr. Lavoie. But notwithstanding that, I noticed that Mr. Hodgson, I think it was, identified that the Federation of Canadian Municipalities had identified in 2006 an infrastructure deficit of somewhere around $123 billion. Our government's response to that and to this economic crisis, of course, was to invest somewhere in the neighbourhood of $47 billion, including all the programs, plus municipal and provincial money, of course. They were trying to leverage somewhere in the neighbourhood of $120 billion to $150 billion.
In fact I do want to remind the witnesses today that the program hasn't even ended yet as far as the outpouring of money is concerned. I would say that not all of it has actually been spent. In fact very little of it has, because the bills haven't come in, and I think the program actually continues until the end of next month.
It's fair to say, I think, that all economies are pendulums, and if you hit the pendulum or allow it to slide too far one way or the other you could run into problems such as overinflation or such as not stimulating the economy enough and having a downturn of fewer jobs. Is that fair to say?
Yes. There are different ways to make our country more productive, of course, such as providing help to the manufacturing sector, as I said earlier, and investment credits, for instance, as I've said, for research and development, not only within corporations, but across the country through the university sector, for instance, as well as worker training.
There are some issues about worker training and the renewal of the workforce, although we did capture the issue about the red seal program and mobility between provinces, which I don't think is an issue. But we can go beyond this. Corporations benefit from the kind of infrastructure they have around them, so a bridge that is falling apart is not good, but having enough workers who have the skills and education needed in order to provide productive work is also needed.
There are other things we can do. For instance, in social infrastructure we are facing an aging workforce, and we would like to see more Canadians working. We would like to see more women and more aboriginals working. There are programs such as child care that we can put in place to allow more women to go back to work, to improve labour force participation, and to make sure that companies have workers when they need them.
So it's beyond helping corporations. There are things we can do in terms of public infrastructure that help us make--
I know at least two witnesses have to leave sharply at one o'clock.
We've been having this debate about austerity and being in a period of stimulus and now being in a period of austerity, and I just wanted to clarify, so I pulled up the budget we passed in June. We have a temporary hiring credit. We have extension of the work-sharing program. We have extension of the accelerated capital cost allowance for the manufacturing sector. We have extension of the best 14 weeks in working for EI. We have enhancing the guaranteed income supplement. We have more money for health care workers in the rural areas. We have more money for the industrial research assistance program, more money for Canada excellence research chairs, more money for the federal granting councils. We have 6% increases for health care transfers to the provinces and 3% for education and social assistance for the provinces.
I know two of you are recommending more stimulus. Glen, I know that you are recommending that we stay along the path. But to the other two of you, is this austerity--6%, 3% increases, more money for R and D, more money for the manufacturing sector? Is this austerity?