FINA Committee Report

PROGRESSIVE CONSERVATIVE RESPONSE TO THE PRE-BUDGET CONSULTATION PAPER

FOREWORD

In presenting this response to the Finance Committee's report on pre-Budget consultations, Keeping the Balance: Security and Opportunity for Canadians, the Progressive Conservative Party has a number of observations on the process used by the Committee in arriving at the final report. The Committee heard from over 400 witnesses, but made little effort to arrive at a consensus respecting the testimony and recommendations. In addition, the draft text of the Committee's report was withheld from Members, who were allowed about 24 hours to review its contents. Taken together, these drawbacks seriously detract from the overall utility and credibility of the pre-Budget consultation process.

INTRODUCTION

Six years into Canada's economic recovery, the benefits of that recovery continue to be poorly distributed in Canada. While jobs have been created, unemployment remains at or above the level of 9 per cent. Young people across the country are facing serious challenges in making the transition from school to work. And in every region of the country, there are areas and groups for whom pervasive and chronic unemployment is the norm for yet another generation of Canadians.

Our national economy is facing other challenges:

• Since the Liberals were elected in the Fall of 1993, disposable income has actually declined by 1.6 per cent. This decline is largely the result of high personal taxation levels, particularly excessive and rising payroll taxes. The OECD recently warned that Canada's personal taxes are so high they could prompt a brain drain of people who contribute significantly to our growth and innovation.
• Our corporate taxation system is also cause for concern; the OECD believes it currently acts as a disincentive to investment and job creation, especially for large manufacturers.
• Inter-provincial trade barriers continue to cost our economy billions of dollars in lost jobs, lost labour mobility and lost productivity. It is still easier to trade our goods and services outside this country than within.
• Canada is increasingly unable to train the workers it needs for the expanding knowledge economy. Earlier this year, the federal government was forced to open the Canadian border to skilled software workers to meet an urgent shortage of skills. As we enter a new millennium, we face the challenges and opportunities of an exciting new global knowledge-based economy. At this juncture, strategic investment in education for young Canadians is a direct investment in Canada's comparative advantage, competitiveness and wealth. Since 1989 student debt has grown by 280 per cent, and tuition has risen by 110 per cent. At a time when Canadians need education and training more then ever, the barriers to accessibility continue to mount. Accessibility to post-secondary education for young Canadians is one of the most critical competitiveness issues in the new economy.

THE GOVERNMENT'S RESPONSE

The government's usual response to these issues is to point to the national job creation numbers and maintain that all is well. That misses the point on several counts. First, the lost productivity of unemployed Canadians costs this country billions in lost tax revenues and income support payments, not to mention the frustration of those who want to work and cannot. Second, government does not create jobs, the economy does. The appropriate role of government in managing the economy is to set the conditions for investment opportunity, growth and job creation. Third, redistributing incomes is a poor substitute for ensuring that opportunities to participate in the economy are shared throughout all regions of the country and all sectors of society.

THE LIBERALS' ECONOMIC AGENDA

When governments have no compass, no direction and no idea of where to take the country, they fall back on what they know best. In the case of the Liberals, this comes down to a simple and simplistic equation - that governing equals spending. The recent Throne Speech contains proposals for 27 new spending initiatives, the clearest indication that they have not learned the lessons of the last generation of public over-spending. The message from the Throne Speech is clear: "Investment, growth and jobs must wait, because we have to start spending again."

What Canadians will not find in the Throne Speech is any practical action to address the structural challenges facing the Canadian economy. Indeed, the Liberals seem intent on making a bad situation worse:

• By keeping Employment Insurance premiums excessively high, the Liberals have allowed a huge and unnecessary surplus of close to $13 billion to build up in the EI Fund. This surplus is nothing more than a tax on jobs that has been kept in place by the government to improve its deficit numbers. The Finance Minister admitted as much when he announced a small reduction in EI premium rates on November 21.
• The government's proposals to restore credibility to the Canada Pension Plan will result in a tax increase of $11 billion on taxpayers and employers alike. It is clear that the long-term contribution base of CPP must be re-established so that it can meet its current and future commitments. We believe, however, that the federal government must commit to end the unnecessary Employment Insurance surplus and to reduce EI premiums to offset the proposed CPP premium increases.
• The government's current efforts to reform the Canada Pension Plan are part of a broader set of initiatives to bring fundamental changes to the entire retirement income system. The Liberals' proposed Seniors' Benefit would penalise initiative by reducing the benefits paid to those who have put money away for their retirement. The Liberals have refused to spell out the specific impacts of the Seniors' Benefit on those who save. In addition, the government has reduced the annual contribution limits for RRSPs, instead of supporting increased retirement savings. We believe the government should publicly disclose the impact of its Seniors' Benefit on the future incomes of retirees, and increase RRSP contribution limits to expand tax-supported retirement savings.
• 20 per cent of Canada's national income and at least 1.9 million jobs are created by trade among the provinces and territories. During their first term, the Liberals negotiated an Agreement on Internal Trade (AIT) whose purpose was to reduce inter-provincial trade barriers. The AIT is an abject failure. There is no binding and enforceable dispute mechanism. Differing provincial standards for professional and occupational certification continue to block labour mobility. Government procurement is excluded from the Agreement. A secret 1997 Industry Canada study released earlier by the Progressive Conservative Party found that the AIT addresses only 13 per cent of internal trade barriers. We believe the federal government must exercise leadership in tearing down inter-provincial trade barriers to enable Canadians to grow their national economy.

THE FISCAL DIVIDEND

Canada is moving rapidly towards a balanced budget but we are not there yet. The current focus on the fiscal dividend is the first step in adjusting to that emerging reality. The government has announced its intention to devote half of its surplus to "addressing the social and economic needs of Canadians" (new spending) and the other half to a combination of tax and debt reduction. The time line for these commitments is the government's current mandate, in other words, the next four to five years.

The Progressive Conservative Party believes that this approach is limited and flawed on several counts:

1. Canada Needs Balanced Budget Legislation Now

The Liberals are planning no measures to ensure that the fiscal dividend will either be achieved or become a permanent part of the federal budgetary scene. We believe there must be tough balanced budget legislation, to ensure that this country is never again caught in the spiral of deficits and debt. We propose a balanced budget law that would reduce the pay of the Prime Minister and Cabinet if the deficit ban is broken.

2. Canada Needs Measurable Debt Reduction Targets Now

The government has refused to establish clear and measurable targets for debt reduction and debt-to-GDP ratios. This is a weak-kneed and short-sighted response that ignores the many calls the Committee heard for urgent action on the debt. It also flies directly in the face of public opinion. The recent Angus Reid poll found that 84 per cent of Canadians want the federal government to focus on reducing the accumulated debt and high taxes.

It is clear that the Liberals' debt reduction strategy consists solely and simply of letting time pass, and counting on economic growth to reduce the ratio. This approach forgoes the permanent dividend of reduced interest payments that results from every dollar of debt that is paid down.

Action to address Canada's debt is exactly what the OECD recommended in its recent report on Canada:

"Given the relatively high levels of public debt - at around 73.4 per cent, the net debt-to-GDP ratio remains the third highest amongst OECD countries - priority should be given to using these surpluses to put the ratio on a clear downward trend."

It is notable that even in fiscally profligate Europe, debt-to-GDP ratios of 60 per cent are required to comply with the Maastricht Agreement. Canada's tax-to-GDP ratio is approximately 7 per cent higher than that of its top 5 trading partners. Meanwhile, Canada's government spending to GDP ratio is 10 per cent higher. These high taxes and high spending have created lower competitiveness and a higher rate of unemployment compared to the U.S., Japan and the Netherlands.

We believe that one-third of the surplus should be devoted to debt reduction, and that action to reduce the debt should start now. The government must reduce our debt-to-GDP to 60 per cent by the end of this mandate and to 50 per cent by 2005.

3. Canada Needs Lower Taxes Now

Taxation levels in Canada remain too high. They penalise initiative, they depress investment that creates jobs, they force investment elsewhere, and they encourage high-skilled, entrepreneurial Canadians to seek their future in more hospitable countries. Despite the many calls for tax cuts heard by the Committee, it is clear that the government has no intention to respond to this need in the near future. We believe that tax cuts cannot wait until later in the government's current mandate. The next federal Budget must send a clear signal that one-third of the fiscal dividend will be used to reduce the tax burden on Canadians.

The role of government

As a result of the impending federal surplus, the national public policy agenda is about to change - from the management of scarcity and dismantling what we have known, to building what might be. Unfortunately, much of the current focus on the fiscal dividend, especially as expressed by the current Minister of Finance, assumes that the past decade of federal deficit reductions was an aberration - just a brief respite from the inevitability of increased government spending.

This approach accepts the current role of the federal government - its mandate, its objectives, its methods of operation and maintains the status quo. We risk being trapped there if we do not ask some searching questions about what the federal government currently does and how it does it. Furthermore, how can any government set spending priorities without first ensuring that the framework of government meets the needs of today?

We believe that before any decisions are made about the fiscal dividend, the federal government needs to answer some questions that are much more fundamental:

• What things should the federal government not be doing any longer?
• What things should the federal government be doing completely differently?
• What new things should the federal government be doing that it is not doing now?

Asking these questions would be the first step in ensuring the federal government has in place the appropriate framework for priority setting before it undertakes new spending. It is also essential in restoring the credibility of the federal government as the initiator of major national projects. The recent Angus Reid poll found that 56 per cent of Canadians believe the federal government should not launch new national projects because they would likely result in money being spent with little being accomplished.

SUMMARY

Canada has made significant progress towards balancing the federal budget, and will shortly be in a position to begin paying down the national debt. Unfortunately, the current government has refused to secure this progress and to put this country on a clear and measurable debt reduction track. Moreover, in presenting 27 new spending initiatives in the Throne Speech, the government is signalling its clear intent to spend first and address the need for debt reduction and tax relief later.

The Progressive Conservative Party calls on the Minister of Finance to establish a national plan for investment, growth and job creation by implementing the following measures:

• Commit to further reduce excessive Employment Insurance premiums to offset the proposed Canada Pension Plan premium increases;
• Exercise leadership in tearing down inter-provincial trade barriers;
• Bring in balanced budget legislation;
• Set measurable debt reduction targets and start paying the debt down now;
• Commit to using one-third of the surplus to reduce taxation levels; and
• Before allocating the fiscal dividend, redefine the role of the federal government to ensure that there is an appropriate framework for priority setting.