FINA Committee Report

While the Liberal Members of the committee do acknowledge that this was the case when this government assumed office in early 2006, the result of prudent fiscal management by former ministers of finance since 1993 but a series of missteps by the Finance Minister on issues such as personal taxation, federal spending, income trusts and interest deductibility have made the Canadian economy much more porous.
 
Liberal members of the committee would like to draw the Minister of Finance’s attention to the fact that last year the manufacturing sector shed over 131,000 jobs. In the agriculture sector there are now 18,000 fewer jobs than one year ago. This represents over 5% of the entire sector.
 
Numerous witnesses appearing before the Finance Committee emphasized that the high dollar and slowing US economy would lead to continuing major job losses in manufacturing, forestry, tourism and other exchange rate-sensitive sectors.
 
That is why Liberal Members criticize the Minister for his seeming indifference to job losses in manufacturing, and his refusal to take direct action. In a combination of laissez-faire and “I don’t care”, the Minister persists in his statements that everything must be left to the market.
 
While the government often cites the number of jobs that were created in other sectors of the economy in 2007, there is great concern among the Liberal committee members that the Canadian economy only created one private sector job for every seven government jobs created in 2007. While it is good to see that different levels of government across Canada were able to hire a substantial number of these laid off workers last year, this is simply not sustainable over the medium term.
 
There is also concern among Liberal committee members that the rate of spending increases by the Conservative government is quite simply not sustainable. It is likely adding to inflation and, as such is doubtlessly one of the underlying factors to the rapid appreciation in the value of the Canadian currency in 2007.  According to the 2007 fiscal update, the government has increased program spending by 13.3 per cent since coming to power, an average of 6.65 per cent per year. By contrast over the 13 previous years of Liberal rule the rate of spending increased an average of 2.2 per cent per year.
 
In the face of a struggling economy, the Liberal members of the committee must question why the Minister has persisted in cutting the GST by two points despite the fact that this is the least effective tax cut in terms of increasing productivity levels.
 
According to Department of Finance, equivalent cuts to income taxes would have offered roughly three times the benefit of the GST cuts in terms of improving Canada’s lagging productivity. Documents from the department show that the GST imposes a marginal efficiency cost of $0.17 per dollar of tax revenue raised while income taxes impose a marginal efficiency cost of $0.56 per dollar raised.  From an economist’s point of view it makes very little, if any, sense to cut the tax that imposes a much smaller efficiency cost.
 
The only reasonable conclusion that the Liberal Members of the committee can draw from the decision to allocate $12 billion dollars of fiscal room to a less productive GST cut rather than income tax cuts is that the Finance Minister has allowed politics to ride roughshod over the health of the Canadian economy.
 
The president of the Canadian Chamber of Commerce recently made a similar point when he wrote, “Knocking another point of the GST may be politically attractive, but it does not provide for improving our sustained economic performance.

Clearly the minister and his government are on the wrong track going forward.  Spending has increased imprudently.  The wrong tax has been cut, reducing the ability of the government to cope with the demands of a slowing economy and while not helping working families in any substantive way.  Income trust investors, the majority of the retired, have had their savings reduced by tens of billions of dollars.  The currency, which the minister lauded as a “strong dollar” has eroded the country’s competitiveness and sucked off tens of thousands of jobs.  On the cusp of an American recession, our country has lost maneuverability, the capacity to help its citizens and apparently its economic compass.

The Liberal members are also concerned that job loss, roiling financial markets and uncertain times will erode household confidence, consumer spending and have serious negative effects on the retail and real estate sectors.  Today Canadians have the bulk of their net worth in residential housing,, and the recent experience of Americans is that a slide in real estate values can have a profound national effect.  This, in our view, is a growing possibility.

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Poverty
 
The committee heard from several organizations, such as the Poverty Reduction Coalition, that the welfare wall continues to hamper the ability of many Canadians to work their way out of poverty.
 
Other groups unable to appear before the committee, such as the National Anti-Poverty Association and Make Poverty History, submitted briefings which echoed the need to reduce poverty in Canada and around the world.
 
After considering their testimony, the Liberal members of the committee recommend:

That the government develop a plan to reduce poverty by 30% and, more specifically, child poverty by 50% within the next five years.
 
That the government should create a Making Work Pay Benefit which would help to lower the welfare wall ensuring that hard work pays for low income Canadians.
 
That the government should improve the Canada Child Tax Benefit and support working families by making the non-refundable Child Credit into a refundable credit so that even people who do not pay taxes receive a benefit.
 
That the government should increase the Guaranteed Income Supplement payments for the lowest income seniors, ensure that the loss of a partner does not drive the surviving spouse below the low-income threshold, and encourage and reward those seniors who choose to participate in the workforce.

That the government implement the 2005 Kelowna Accord as agreed to by the premiers of all the provinces and territories as well as the federal government.
 
Environment
 
The Committee heard from several environmental organizations such as the Sierra Club of Canada, the David Suzuki Foundation, the Green Budget Coalition and the Pembina Institute. Nearly all environmental groups that either appeared before the committee or which made a submission to the committee called on the government to put a price on carbon emissions in order to reduce the amount of greenhouse gases produced in Canada.
 
After considering their testimony the Liberal Members of the Standing Committee are convinced that the intensity based targets favoured by the government are not an effective way to reduce the amount of greenhouse gases released in Canada. They therefore recommend:
 
That the government create a carbon budget for the largest 700 industrial polluters across Canada. It would require those emitters to deposit $20 per tonne of carbon above their carbon budget into a Green Investment Account. The deposit rate should increase to $30 per tonne by 2011. Companies that invest in green technologies should be able to retrieve up to 100% of the money they have deposited into their Green Investment Accounts. Money left in the account for two years should be given to the provincial government in which the company is located with a view to investing in green related projects.
 
That the government allow companies who are below their carbon budget to trade unused credits to other firms located in Canada. Companies should also be allowed to buy project based Kyoto-certified international emission credits to offset up to 25 per cent of the amount they are required to deposit into their Green Investment Account. The companies should not be allowed to purchase “hot-air” credits.

Manufacturing sector

Liberal Members of the Committee were pleased that other committee members agreed to hear from members of the manufacturing, forestry, tourism and retail sectors about the effects of the high Canadian Dollar and the slowing US economy on their operations. Witnesses indicated to the committee that the troubles and job losses these sectors experienced in 2007 are only the tip of the iceberg. As Jim Stanford, Chief Economist of the Canadian Auto Workers Union, told the committee, “If the Canadian dollar stays anywhere near parity with the U.S. dollar in the medium term, I project another 300,000 manufacturing job losses in the next two to four years.”
 
In light of the fact that the manufacturing sector lost 33,000 jobs in the month immediately following Mr. Stanford’s testimony, the Liberal members of the committee recommend:
 
That the government create a $1 billion Advanced Manufacturing Prosperity Fund (AMP Fund) to support major investments in manufacturing and R&D facilities. The criteria for accessing the funds should include leveraging significant private investment, and in so doing create jobs; attracting significant secondary industries: suppliers, services, and other support businesses; and help position Canada as a leader in the manufacture of greener technologies and products.
 
That the government should make the Science, Research and Experimental Development (SR&ED) tax credit partially refundable, allowing companies to take advantage of the tax credit, even if they are not profitable in the short term.
 
Income Trusts
 
The committee heard from several groups regarding the government’s decision to tax income trusts.
 
It is the view of the Liberal members of the Committee that a full 15 months after the government broke its promise not to tax income trusts, it has still not proven its allegation that income trusts cause tax leakage. Further it is the view of the Liberal members that the income trust tax has led to a rapid buyout of the sector, largely by pension plan and foreign private equity groups that pay little to no tax in Canada.
 
The Liberal Members of the Committee recommend that:
 
The government replace the current income trust tax scheduled to come into effect in 2011 with a 10% tax that be made refundable to Canadian investors.
 
Furthermore, in light of the confusion that has been created, especially in the Real Estate Investment Trust sector, the Liberal members of the committee recommend that:
 
The government clarify the income trust guidelines issued by the Department of Finance on 15 December, 2006.

Finally, as the government has failed to show the methods and calculations it used to claim that income trusts cause the federal treasury $500 million of tax leakage each year, and seeing as to how this unproven claim was used as the justification for breaking the government’s election promise not to tax income trusts, the Liberal Members of the committee:

Call on the Auditor General to examine the veracity of the government’s claim that the income trust sector cost was costing the federal treasury $500 million per year.

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