Toward Sustainable Tax Cuts

June 8, 1998

Chairman, Honourable Members, Ladies and Gentlemen,

It is a pleasure to appear before this Committee once again, especially at such a promising time. Far too often in the past, the BCNI has been forced to sound the alarm. We have warned of the consequences of deficits, of inflation and of trying to isolate Canadians from a vibrant global economy. The transitions made by governments and the private sector have not been without pain, but it is clear that Canadians are reaping the rewards for their hard work.

Almost every indicator of economic well being is now emphatically positive. The economy continues to grow at a very healthy pace. Canada led the G-7 last year and seems poised to do so again in 1998. Consumer prices remain remarkably stable and interest rates — a source of major expense for consumers and governments alike — have dropped to historic lows. More than half a million new jobs have been created since the beginning of last year — and Canada is leading the G-7 on this front as well. Almost all of these jobs are in the private sector. Almost all of them are full time. And perhaps most important of all, average income per person is also on the rise.

This has been good news for governments as well. The revenue from taxes — on personal incomes, on consumer spending and on corporate profits — continues to exceed all expectations. In the past four years, revenue from the GST has jumped by $4.1 billion or 26 percent, from Personal Income Tax by $17 billion or 33 percent and from Corporate Income Tax by $10.6 billion or 113 percent. For the first time in almost three decades, the federal government is taking in more money than it needs to meet its current obligations.

Five years ago, the BCNI’s call for a balanced budget by 1998 was called a fantasy. With a combination of good strategy, good execution and good timing, that milestone has been achieved. We must remember, though, that deficit reduction was never a goal in itself. It was a means of restoring real fiscal flexibility.

As you consider the choices that are now open to this government, please remember one thing. The business cycle is not dead — and fiscal policy must not assume that today’s good news will last forever. Do not launch spending initiatives whose funding depends on rapid growth. Do not cut taxes so fast that a severe downturn or sharp rise in interest rates could plunge public finances back into deficit.

The Business Council wants to see tax levels fall substantially. We want to see them fall as quickly as possible. We want to see tax levels continue to fall over time. But above all, we want to see sustainable tax cuts. When this government chooses to cut taxes, it must be sure that those cuts can endure through good times and bad.

This is why the BCNI has argued strongly for an initial emphasis on debt reduction. Growth alone will gradually reduce public debt as a percentage of the economy. But the size of that debt poses a serious risk. The budget for interest payments this year is greater than all benefits for the elderly and all transfers to the provinces combined. A sustained rise in interest rates, for any reason, could play havoc with fiscal strategy.

Fiscal progress and growing competitiveness have improved international confidence in Canada. But we still have some way to go. A dangerously high level of public debt, a heavy burden of taxation, a significant reliance on natural resource-based commodities and the threat of Quebec separation continue to render us vulnerable.

This vulnerability has to be taken very seriously given the profound uncertainty that is gripping the global economy: the Asian financial crisis is still with us; the world’s second-largest economy, Japan, is falling increasingly into recession; growth is slowing in the United States; and Europe is attempting to cope with far-reaching and risky structural reforms.

For all of these reasons, the BCNI has recommended that the government focus its efforts on debt reduction for the next two years and continue to reduce its debt in absolute terms thereafter. Given the current economic picture, we believe that debt to GDP targets of 60 percent within two years and 50 percent by 2002 are challenging but achievable. Finance Minister Paul Martin himself suggested to this Committee "that Canada, at a minimum, should be no worse than the United States," which he noted has a debt to GDP ratio closer to 40 percent.

Any homeowner knows that the best time to make extra payments on a mortgage is in the early years. Every billion dollars the government pays off this year will generate savings in each and every year thereafter. Payments on the debt today are not alternatives to tax cuts — they represent a guaranteed investment in even larger tax cuts and more freedom of choice down the road.

This also is a matter of principle, a debt we owe to our children. We ran up this debt to provide services to one generation. Surely we can bequeath to the next something more impressive than our bills.

In addition to the principle of maintaining equity between generations, our decisions will have practical consequences. The C. D. Howe Institute has just released a study looking at the long-term impact of Canada’s demographics on fiscal policy. It shows that current fiscal policy is sustainable if the government uses its expected surpluses to pay down debt over the next few years. If, on the other hand, surpluses are used only to raise spending and cut taxes, the net tax burden for future generations will rise dramatically. Only prudent debt reduction today can prevent a return to large deficits and rising taxes down the road.

Make no mistake. The goal of the BCNI’s early emphasis on debt reduction is to ensure the sustainability of major reductions in tax levels.

Canadians pay too much tax. The tax bill for an average family should not exceed what it pays for food, clothing and shelter combined as it does now. The de-indexation of tax brackets has stealthily forced more Canadians to pay higher taxes — even when their real incomes have been stagnant. The spread of income-tested benefits and clawbacks has left families at all income levels facing excessive marginal rates. This discourages initiative and breeds dependence. More to the point, Canada’s tax levels threaten the ability of our companies to compete in a global economy and to continue generating more and better jobs for Canadians.

Canada’s major employers are experiencing a growing problem that is directly linked to the country’s high levels of personal taxation. These tax levels, especially in comparison with those in the United States, are causing increasing difficulty in recruiting and retaining highly skilled employees. Their numbers may be small relative to the population as a whole, but the people we are losing are the ones we need the most.

Canadian society does offer benefits that offset higher tax levels to some extent. But highly skilled people are mobile. Many of them will go wherever they feel their overall quality of life is highest and opportunities for advancement are greatest. What people have left in their pockets after tax has a major impact on quality of life. As the base of the economy shifts toward knowledge work — work that is not tied to the location of resources or rail links — more individuals will be able to choose where they want to live and work.

This has significant implications for government policy. Where human rather than natural resources drive investment decisions, the best paying jobs will be created where the right people are or are willing to move. The challenge for governments is to foster the healthiest possible communities at the lowest possible cost to taxpayers. The drive toward lower tax levels is not a race to the bottom in the quality of our social union. But as employees, executives or entrepreneurs, Canadians want better value for the money they give to governments. This suggests that bringing down personal rates should be our most urgent priority for tax reduction.

Employment Insurance premiums have been the subject of vigorous debate as the surplus in the EI Account reaches a level that is clearly greater than required for the purposes of a self-sustaining insurance system. However, EI premiums flow into general revenue and are effectively just another form of taxation. We feel that EI premiums should come down over time, especially as Canada Pension Plan contributions rise sharply in the years ahead. But at present, the excessive level of personal taxation is in my view the more critical issue.

I will not at this time propose a specific sequence for reducing taxes. The BCNI is currently engaged in discussion with its members and we expect to flesh out our recommendations in the autumn of this year. But I would emphasize that we do not advocate major tax cuts until the debt to GDP ratio has been reduced substantially. The debt ratio is an important indicator of the ability to sustain those tax cuts over time.

The need to reduce tax levels does not preclude selective investments by governments. In particular, the evolution of the knowledge economy supports the government’s current focus on skills and learning. We recognize that the federal role in this field is constrained by jurisdiction, but many paths of support are practical. I would note two examples in passing.

The Career Edge internship program, designed, funded and run by the private sector, has proven to be a model open to effective federal participation. The government has acted in part as a major employer hosting thousands of interns. But it has achieved additional impact by using its resources to enhance opportunities for high-risk youth.

On another front, I would like to acknowledge Revenue Canada’s recent decision to revise its guidelines on employer-paid education and training. These revisions should ensure that employees are no longer penalized when their employers choose to invest in their knowledge and skills. This is an example of intelligent tax policy that will drive both personal and business growth. And as higher skill levels lead to higher incomes, governments will continue to see their revenues rise, not fall.

In closing, I would like to remind the Committee just how far Canada has come in the past decade. Only a few years ago, we felt trapped by the rising spiral of deficits and debt, inflation and taxes. Every year, the pile of public debt grew higher. Every year, prices rose. And every year, we knew, taxes would go up too. We saw little hope of a better future for ourselves, much less for our children.

We are now on the verge of breaking that cycle of despair. Inflation is negligible. Prices are stable, and for many goods and services, a dollar seems to buy more every year, not less. Most governments are living within their means. The World Economic Forum says Canada is the fifth most competitive economy in the world. The United Nations Human Development Index has ranked Canada as the best place to live for the past four years in a row. On the whole, Canadians are feeling more prosperous and more confident.

The challenge now is to build a future of enduring optimism. To achieve this goal, Canadians must know in their hearts that every year, their burden of taxes will fall. They must be sure that every year, they will have more to invest in the well being of their families and their communities. And they must feel that every year the prospects for their children look brighter than ever.

We have an opportunity to build that future. But the key is to build it on a solid foundation. If we fritter away our gains on ill-considered spending, if we are not diligent in paying down our debts, if we are too impulsive in slashing taxes for instant gratification, that future could crumble. But if we manage our spending, are disciplined with our debt and far-sighted with our strategy on taxation, we can achieve the kind of future that all Canadians wish to share.