Courageous Choices and Clear Priorities

October 15, 1998

Chairman, Honourable Members, Ladies and Gentlemen,

When I last spoke to this Committee in June, I was able to say that most economic indicators were positive. I also warned, however, that the business cycle was not dead and that fiscal policy must not assume that good news will last forever. Global events since then have made that point abundantly clear.

I also told you that the BCNI was in the process of developing its fiscal priorities for the post-deficit era. In particular, our member chief executives were engaged in detailed discussion of ways to reduce the burden of taxes in an affordable and sustainable way.

Our recommendations for a framework of continuing tax reduction were sent to the Minister of Finance earlier this month. Our paper, entitled Creating Opportunity, Building Prosperity — A Tax Reduction Strategy for Canadians, has been distributed to members of the Committee. We also have distributed copies of the memorandum sent to the Prime Minister in September outlining our views on broader fiscal policy choices and strategies in these times of growing uncertainty in the global economy.

I will not attempt to review either of these documents in detail in my comments this afternoon, but I will touch on their major themes in light of the Finance Minister’s fiscal update yesterday.

In our September memorandum, we emphasized the need for accelerated debt reduction to minimize the risks to Canadians. We certainly were pleased to have our expectations of a significant surplus confirmed for the 1997/98 fiscal year, and to hear that all of this surplus was used to pay down the public debt.

Paying down debt for the first time in 28 years is a good start, but where do we go from here? We were encouraged by the Prime Minister’s speech to The Canadian Chamber of Commerce in mid-September, in which he pledged to increase the pace of debt reduction. We also appreciated his commitment not to introduce any more last-minute spending programs and to use this year’s surplus to repay debt.

What we have not heard from the government is any commitment to firm targets for debt reduction, neither in terms of an ultimate goal nor in terms of interim progress. The Minister of Finance said yesterday that the ratio of debt to Gross Domestic Product could fall to 55 percent in five years, but he made no promise even to try to reach that figure. He said that the ratio would continue to be reduced even if the 55 percent figure was reached, but set no goal.

The Minister achieved budget balance in a remarkably short time by being single-minded about his priorities and by setting targets that would be achieved come hell or high water. Reducing the immense risk to the well-being of Canadians posed by the huge debt that remains is just as important. But the degree of dedication and enthusiasm that Mr. Martin brought to bear on the deficit seems to fade when the subject turns to debt reduction. This is worrying.

Clearly the Minister is determined to be prudent in fiscal management, and we would support his every effort in this regard. Mr. Martin is dead right to be cautious. We cannot play fast and loose with Canada’s finances.

The dedication to prudence he professed yesterday would have been more convincing, however, if he had done a better job of telling Canadians where he stands on the options before us. At a time when Canadians and international investors are looking for unambiguous signals, Mr. Martin rambled through a long wish list.

"We wish we could reduce EI premiums significantly. We wish we could bring personal income taxes down dramatically. We wish we could devote large-scale new resources to health. We wish we could invest significantly more in the environment, in job creation, in research and development, and in addressing child poverty. We wish we could do all of that — and more," is what he said.

His intended point was that Canada cannot afford to do all of that, or even most of it. But he failed to tell Canadians where he stood.

This is a time for courageous choices, not wishful thinking. Making choices does not mean simply doing less of everything than planned. Making choices means standing up for what really matters. Making choices means concentrating the government’s efforts on those measures that will be most effective in helping our economy grow and will put the most money back into the pockets of hard-working Canadians.

Mr. Chairman, let no one be in any doubt about where the BCNI stands. We believe Mr. Martin when he says that there is not that much money in the federal pot. And within the limited resources that will be available, we believe that debt reduction must come first, and that broadly based personal income tax cuts must follow. This means taking a gradual approach to reduction of Employment Insurance premiums, and it leaves no room for new discretionary spending at this time.

When I spoke to you in June, it looked as if there would be a large enough surplus to contemplate some incremental spending in areas of urgent concern such as education and health care. This is no longer the case.

The Business Council made it clear to the Prime Minister in September that this would not prevent the government from addressing urgent concerns and emerging priorities. But any additional resources committed to such areas must be drawn from other programs that the government deems to be less of a priority. Such reallocations would involve difficult choices too, because they involve choices of relative need. But families make such choices every day, and the government should do no less.

This leads me to the BCNI’s emphasis on personal income tax cuts. The fact is that the battle to balance the budget has been won largely on the backs of taxpayers. Real income tax bills have risen for all taxpayers, and dramatically so for middle and upper income earners. Those rising tax bills have left all but the lowest income Canadians worse off after tax than in the mid-1980s. Canada now takes a greater slice of its economic pie in income taxes than any other leading industrialized nation. High personal income tax rates are sapping incentives to work and to invest, and they are damaging our competitiveness and economic growth. Significant, broadly based tax reduction can wait no longer.

In establishing our priorities for tax reduction, we engaged in extensive discussion and consultation with our member chief executives. We asked them to rank the relative urgency of various sources of taxation, and personal income tax was the overwhelming priority. Reductions in EI premiums came a distant second, followed closely by corporate tax cuts and reduction in provincial tax rates. And within the personal income tax system, the top three priorities were eliminating the federal surtaxes, bringing in broadly based cuts in tax rates and redressing the worst effects of partial deindexation, the so-called bracket creep.

These sentiments are reflected in our tax reduction proposal. It sets out a plan for $18 billion in annual tax cuts over the next seven years. Eighty percent of the cuts are allocated to reduction of personal income tax rates. This $14.5 billion income tax cut is equivalent to 20 percent of the government’s personal income tax revenue this year.

We set three objectives:

1. To reduce the overall burden of personal income tax from its current record of more than 20 percent of average family income, one dollar in five, to its 1985 level of less than one in six.
   
2. To reverse the worst effects of partial deindexation, in part by eliminating all federal tax for at least one million more Canadians with very low incomes.
   
3. To improve Canada’s competitiveness by cutting the marginal tax rate by five percentage points for those earning between one and five times the average industrial wage.

The first objective is reflected in the overall amounts set aside for personal income tax cuts. The second would be achieved primarily through substantial increases in the basic and spousal amounts, a total of $1,500 each over seven years. This should completely reverse the effects of bracket creep for the lowest income Canadians. It also is more effective than an equivalent cut in the 17 percent tax rate because it tilts assistance more heavily toward families.

The most effective way to give relief to middle and upper income earners is through reduction of the marginal rates they face — letting them keep more of each extra dollar they earn. You will note that the full five percentage point reduction would not apply on incomes above $150,000.

The reason for this ceiling is quite simple. One of our major competitiveness concerns has to do with the Canada-United States tax gap. American rates are significantly lower than Canadian rates even at the very highest incomes, but the gap is largest at relatively modest levels.

At the income at which a Canadian is considered rich enough to pay the top tax rate here, an American is still paying 12 percentage points or 30 percent less than the top rate in the United States. The American top bracket only begins at an income of US$271,000 dollars, and that is after deductions for such items as mortgage interest. The wide tax gap begins at middle incomes and extends well into six figures. Yet the range from about $70,000 to $150,000 covers most of the highly-skilled professionals and managers that Canadian companies are losing to American competitors.

I know that there is some skepticism on the question of the so-called brain drain. But I know that chief executives in every sector and in every region of the country have a serious problem on their hands. The numbers are not large in all cases. But Canadian companies are experiencing real and growing difficulty in attracting and retaining the people they need most to stay competitive in the knowledge economy. That may be anecdotal, but it comes right from the front lines.

Our tax system is not the only reason Canadians choose to leave, but it clearly makes a difference. We need a tax system that looks after those least well off, but that also provides incentives to work and to save. We need a tax system that leaves lower-income families with a decent after-tax standard of living, but that also lets hard-working Canadians keep more of what they earn. We need a tax system that not only encourages low-wage job creation, but also high-wage job creation. We do not have such a system now, and we have to move in that direction without delay.

This is the primary reason that the BCNI has swum against the tide on the relative merits of reductions in personal income tax and EI premiums. Canadians need as much individual tax relief as the government can afford. They have sacrificed mightily to get the nation’s finances in order. They deserve a break. And cuts in personal income taxes will get more money to more people than any of the alternatives.

The main reason is simple. The majority of the EI premium bill is paid by employers. The majority of any reduction in premiums would therefore flow to companies and other employers as well. A single element in the BCNI’s proposal for 1999 tax cuts, the $500 increase in the basic and spousal amounts, would cost $1.4 billion. Yet this would deliver more tax relief to most lower-income Canadians than a 40 cent per $100 cut in EI premiums costing $2.8 billion. The money that would otherwise go to employers would instead be available for further, broadly based personal tax relief.

Mr. Chairman, that is what we at the BCNI mean by making tough choices. As the heads of companies that employ one out of every ten working Canadians, our member chief executives would be delighted to see their labour costs reduced through cuts in EI premiums. But in their judgment, broadly based personal income tax cuts would be more effective in addressing the country’s needs and in improving Canada’s competitive base.

In one way or another, all forms of taxation take money that belongs to individual Canadians. Employment Insurance premiums are no more stolen from workers than are the personal income taxes withheld from the same paycheques. What matters most is whether the burden of taxation is allocated fairly and whether Canadians are receiving good value for the money that is taken from them.

Accelerated debt reduction. A solid start to broadly based personal income tax cuts. No new spending. That may not be popular, but it is what we believe would be best for the country. And that is where we stand.