Canada Needs Sound Strategy, Not More Spending: Comments on the 2005 Budget Implementation Bill

June 2, 2005

Thank you for the opportunity to appear before this committee to offer the views of the Canadian Council of Chief Executives (CCCE) on the 2005 budget implementation act, Bill C-43. 

In February, the CCCE offered qualified support for the 2005 budget.  In particular, we welcomed the government’s bedrock commitment to fiscal prudence, its pledge to make Canadian tax rates more competitive, and its new investments in core federal responsibilities such as national defence and Canada’s presence abroad.

Even then, however, we were concerned by the continued rapid growth of overall spending.  Spending grew by 12 percent in 2004/05 alone, bringing the five-year total increase to 44 percent.  The months since the February budget have seen announcements of at least $9 billion in spending beyond that already unsustainable pace.

The prospect of any election brings with it the temptation for governments to try to bribe voters with their own money.  This dubious tactic rarely leads to sound public policy, and this year the cascade of pre-election spending has reached a new order of magnitude.

Our concern is not with the merits of any particular initiative.  Health care, child care and equalization all are important to Canadians as are many of the other commitments made in Bill C-43.  We quite accept, as the Prime Minister put it last week, that investing in child care involves more noble purposes than handing $20 bills to toddlers to buy new squeaky toys.  But good governance also must involve more than throwing billion-dollar bills at squeaky wheels. 

We are hearing a lot of squeaking and seeing plenty of spending these days, but there is a troubling absence of unifying vision and coherent planning. “Gimme, gimme, gimme” does not qualify as national economic strategy.

The CCCE is a non-partisan organization, and we want to make it clear that these criticisms are not aimed only at the Liberal government in Ottawa.  Those who take advantage of short-term political instability to keep putting new demands on the table are just as guilty as those who give in to those demands. 

The federal government has been able to increase spending dramatically while remaining in surplus only because of courageous policy decisions made in the past: decisions to embrace freer trade, to battle inflation, to eliminate budget deficits and to reduce both personal and corporate tax rates.  Those decisions have paid off in terms of stronger economic growth, more and better jobs and spectacular growth in the government’s tax revenues. 

To take just one example, skeptics once predicted that free trade would kill both Canada’s economy and its social programs.  But since the signing of the North American Free Trade Agreement, our economy has prospered — and federal revenue from corporate income tax has more than quadrupled.  More than 15 cents of every federal tax dollar now comes from corporate income tax.  This is two and a half times the six cents of every tax dollar that came from corporate income tax in fiscal 1993.

The world, however, is not standing still.  If Canadians want the good economic news to continue, the government has to get much more aggressive about reinvesting in future growth.  Beneath the apparently healthy surface of Canada’s economy, some disturbing trends are emerging.   For example:

• Canada needs average productivity growth of 2 percent per year over the next 30 years to cover the estimated health care, pension and other costs of an aging population.  In 2003 and 2004, average output per hour increased a total of 0.1 percent.  In effect, we have had zero productivity growth for two years in a row.
  
• Foreign direct investment is a major driver both of job creation and of business innovation.  Foreign direct investment into Canada grew at an average pace of nine percent a year during the 1990s.  It failed to grow at all in 2003 — for the first time since the Depression of the 1930s — and did not do much better last year, rising just 3 percent.
  
• Consumers are spending freely, but they are counting on their incomes rising and on interest rates staying low.  The household savings rate fell below zero in the first quarter of 2005.
  
• In the same quarter, despite a major increase in business investment in new machinery and equipment to cope with the rising dollar, Canada’s manufacturing sector shrank, with 15 out of 21 industry groups showing a loss of output.

No productivity growth, minimal growth in foreign investment, negative household savings and a manufacturing base struggling to stay afloat in a competitive, volatile, high-dollar world: this does not bode well for the future prosperity of Canadian families.

It takes a first-class economy to sustain first-class social programs, and Canada desperately needs a coherent economic strategy that will deliver both.  We need to set aside some of the short-term political maneuvering and start talking seriously and constructively about what we want our country to look like a generation from now and what combination of public policies will be needed to achieve that goal.

C-43 does include elements of sound economic strategy.  Investment in transportation and border infrastructure, for instance, makes a direct contribution to competitiveness.  Greater investment in defence and security, for that matter, is a precondition for maintaining the open global markets on which our country’s prosperity depends. And, of course, the budget recognizes the importance of both personal and corporate tax policy in building a stronger economy.

As the C.D. Howe Institute noted in a study this spring, the corporate tax cuts in the 2005 budget combined with those of earlier years would stimulate $56 billion in capital investment by Canadian businesses, raising Canada’s Gross Domestic Product by $5 billion a year and creating 340,000 jobs at little fiscal cost to Canadian governments.

Further to this point, I would note that the latest figures for 2004/05 show that federal revenue from corporate income tax last year exceeded its previous historic high, a record set just four years earlier as the government began to cut corporate tax rates.  The tax cuts announced in 2000 have more than paid for themselves already — and that is without counting all of the other tax revenue flowing from the jobs created by the resulting business growth.

Canada is not alone in acting on this reality.  Since 1997, 25 of the 30 member countries of the Organisation for Economic Co-operation and Development have cut corporate taxes: Italy by 16 percentage points, Germany by 13 points; Japan by 9 points; France by 8 points and the United Kingdom by three percentage points to the lowest rate in the industrialized world. 

Governments around the world increasingly are turning to corporate tax policy as their single most effective tool for attracting new investment, accelerating economic growth, raising family incomes and funding social programs. 

Canada now has the third highest marginal effective tax rate on business investment in the industrialized world — and countries with far lower tax rates are collecting far more in corporate tax revenue.  Ireland, with a tax rate of just 12.5 percent, collects proportionately 25 percent more revenue than Canada.

Lower taxes by themselves cannot ensure a prosperous future for Canadians.  But if we want our economy to grow and our social programs to improve, we have to work harder at making Canada a place where more talented people want to live and work and where more investors want to create and grow businesses. 

The government has sent confusing signals about where it stands on corporate tax cuts, including them in the budget, promising the New Democratic Party they would be dropped and promptly promising the business community that they would go ahead on schedule.  In business, uncertainty is damaging.  What investors know for sure about future tax rates affects the decisions they make today.

Our suggestion to this Committee, therefore, is very simple.  Bill C-43 includes the promised tax cuts.  The vote at second reading indicated that this bill, including the tax cuts, enjoys the support of a substantial majority of the House.  Why make the situation more complicated than necessary? Leave the tax cuts where they are and pass them as is.

More generally, our sense is that Canadians would welcome action by this Committee to move Bill C-43 forward as quickly as possible.  Given its vast scope, all of us have some reservations.  In particular, the proposed amendment to the Canadian Environmental Protection Act, which was not part of the budget as originally presented, deserves more detailed study.  To avoid delaying the rest of Bill C-43, we would recommend splitting off the CEPA provision and debating it as a separate bill.  This issue aside, the CCCE maintains its support for the budget as originally presented and suggests that the best way to serve Canadians is to end the uncertainty by passing Bill C-43 without delay.

We do not, however, support the passage of Bill C-48, which asks Parliament for blanket authority to throw future funds in undefined ways at vague policy objectives.  The environment, education, affordable housing and foreign aid are worthy causes, but the basic principles of transparency and accountability require that members of this House have the opportunity to judge whether specific proposals for action in these areas would represent efficient and effective use of taxpayers’ money.  Bill C-48 represents neither fiscal prudence nor sound strategy; it is nothing more than a post-dated blank cheque that would give the Cabinet blanket authority over a $4.5 billion slush fund. 

Canadian companies face new competition and new opportunities every day within dynamic national, North American and global markets.  If our enterprises are to take full advantage of these opportunities, to keep investing in the new operations and new jobs that will lead to higher family incomes and a growing tax base, it is essential for Canadian governments to do their part in shaping a positive business environment through sound fiscal policy, competitive tax rates, disciplined spending and smart regulation.

At the federal level, this means putting a stop to the spending splurge and getting started on a meaningful debate about the strategic needs of the country.  What really matters to Canadians is not where the polls will be five minutes from now, but where our country will be in ten and twenty years.  This is where we at the CCCE will be focusing our efforts in the months ahead, and we hope others will join us in putting Canada first.