FINA Committee Report

Standing Committee on Finance, 2016 Pre-Budget Consultations: Supplementary Report

This supplementary report reflects the views of the following Members of Parliament (“We”) who served on the Standing Committee on Finance (the “Committee”) during its 2016 Pre-Budget Consultation hearings: Ron Liepert (Calgary Signal Hill), Lisa Raitt (Milton), Phil McColeman (Brantford-Brant), as well as, Ziad Aboultaif (Edmonton Manning), who participated in a majority of the Committee meetings as an observer and alternate member.

We thank the 92 individuals and organizations who appeared before the committee as witnesses, many of whom appeared on short notice, all of whom provided thoughtful feedback on a range of issues in consideration of the 2016 federal budget. We hope and expect that the Finance Minister will provide every due consideration to the testimony that the Committee received.

We would like to also highlight some particular themes that came through in these meetings, as well as other economic and fiscal developments that are relevant to the preparation of the 2016 federal budget.

We believe that while the economic situation may justify limited measures to boost growth, this spending should be targeted towards depressed regions and economically productive infrastructure projects. Moreover, the government must ensure that any new spending fit within a responsible fiscal framework. Canada needs clear, credible ‘fiscal anchors’ that will discipline government spending, prevent runaway borrowing and avoid the structural deficits that have historically resulted in service cuts and tax hikes.

Growing the economy and creating jobs:

Although the Committee heard from witnesses that Canada’s economic growth will be below average in 2016, experts are not predicting a major downturn or recession. In fact, more recent data from Statistics Canada shows higher than expected growth in GDP and exports. The problems remain isolated to certain regions, notably Alberta, Saskatchewan and parts of Eastern Canada that have been hit hard by low oil prices. Though some targeted, short-term financial support to these regions may be necessary, current conditions do not justify the sort of deficit spending reserved for times of national emergency, such as the period following the 2008 financial crisis.

The primary drag on economic growth has been a decline in business investment. Witnesses warned against increasing taxes or other costs that would hold back companies from growing and hiring new workers. The government should avoid new taxes on payrolls and small business, as well as regulatory changes that create uncertainty and red tape. Some witnesses urged the Committee to consider ways to accelerate or incentivize private investments, such as those related to pipelines and upgrades to telecommunication networks. These would be cost neutral and more likely to be commercially sustainable than those selected by the federal government.

We agree with witnesses who told the Committee that federal investments in infrastructure can enhance long-term economic growth. However, we also heard from them that to achieve such positive returns, the government must choose projects that are ‘shovel smart’, not simply ‘shovel ready’. This means prioritizing projects proven to boost private sector productivity and enable Canadian exporters to move their products to global markets. It will be difficult to get these types of projects underway before the end of the 2016 construction season. There is more than enough time to identify the right investments and the best way to finance them, using arrangements with the private sector when possible.

Given that Canada is not in a recession; that the regions requiring immediate stimulus are limited; that investments to improve Canada’s long-term growth rate should not be rushed and can be delivered over a medium term and long-term horizon; and that there are a variety of steps that the government can take to encourage private sector investment without spending any additional taxpayer dollars; it is possible for the Liberal government to deliver a budget that promotes long-term economic growth without forcing Canada into a prolonged period of borrowing.

Responsible budgeting:

We are very concerned that there will not be sufficient fiscal prudence built into the upcoming federal budget. Canada’s current debt situation is sustainable thanks to the fiscal discipline exercised by governments of all stripes over the past two decades. The current government, however, plans to significantly increase spending and borrowing, even if that results in annual deficits far into the future. Should their plans fail to produce substantially higher rates of economic growth, this borrowing will inevitably have to be repaid through higher taxes or cut-backs to government services.

Already, the government has blown through three of its ‘fiscal anchors’. In the 2015 federal election, the Liberal Party campaigned on a platform that promised to run modest, temporary federal deficits of no more than $10 billion; reduce Canada’s debt-to-GDP ratio annually to 27 percent; and balance the federal budget in 2019:

“We will run modest short-term deficits of less than $10 billion in each of the next two fiscal years to fund historic investments in infrastructure and our middle class.

After the next two fiscal years, the deficit will decline and our investment plan will return Canada to a balanced budget in 2019.[1]

In every year of our plan, federal debt-to-GDP will continue to fall… Our plan ensures that the government of Canada remains in a sustainable fiscal position. We have two fiscal anchors that guide our overall fiscal framework.

In 2019/20, we will:

• Reduce the federal debt-to-GDP ratio to 27 percent
• Balance the budget” [2]

These were confirmed in Prime Minister’s Mandate Letter to the Minister of Finance:

“As Minister of Finance, your overarching goal will be to use the fiscal and budgeting tools at our disposal to implement our New Plan for a Strong Middle Class. In particular, I will expect you to work with your colleagues and through established legislative, regulatory, and Cabinet processes, including our first Budget, to deliver on your top priorities:

• Ensure that our fiscal plan is sustainable by meeting our fiscal anchors of balancing the budget in 2019/20 and continuing to reduce the federal debt-to-GDP ratio throughout our mandate.”

On Tuesday, February 23^rd, 2016, the Committee heard from the Minister of Finance about his budgetary objectives. His testimony included no commitment to operating within the fiscal framework that the Liberal Party promised during the election; there was no mention of a $25 billion deficit cap and no commitment to balancing the budget in 2019. While the Minister also made no commitment to annually lowering Canada’s debt-to-GDP ratio, as outlined in the Liberal Party Platform, the Minister did state general commitment to reducing the ratio overall during the government’s current mandate:

“It is our intent over the course of our mandate from the first budget to the last budget to reduce our net debt-to-GDP ratio. Those are very specific promises. We will follow through.” [3]

Following the Committee’s Pre-Budget Hearings, TD Bank released a report which projected that the federal government will likely far exceed all of its publicly affirmed ‘fiscal anchors’:

“Deficits of $30 billion in magnitude are likely to persist over the next five years, resulting in cumulative deficits of $150 billion …. The debt-to-GDP ratio is on track to edge up to over 36% by FY [Fiscal Year] 2020/21” [4]

We believe that the Finance Minister must ensure that the 2016 federal budget fits within a responsible and sustainable fiscal framework that ensures an annually decreasing debt-to-GDP ratio. We also believe that the Finance Minister must present, within the budget document, a clear plan to return the federal government to budgetary balance in 2019.

We are also concerned about the federal government’s now singular focus on Canada’s debt-to-GDP ratio with respect to its budget planning. Though it is a helpful indicator of overall debt sustainability, a country's debt-to-GDP ratio is not a suitable benchmark or 'anchor' for fiscal policy in the short or medium term. One reason is that it is imprecise. Public sector balance sheets are hard to capture in a meaningful way. The federal government's official net debt does not include the liabilities of the Canada Pension Plan, for instance. Neither does it currently cover the debt of the provinces. Different ways of measuring the ratio produces very different numbers across different countries; for instance, most small OECD countries have official debt-to-GDP ratios below 25%, but in Japan the ratio is over 200%.

The other drawback of only focusing on the debt-to-GDP is that it is very sensitive to changes in growth, inflation and interest rates. Unlike a balanced budget, it is a moving target. Whether a government meets this target says very little about their ability to manage the country's finances.

A responsible fiscal framework for the 2016 federal budget; recommendations

In light of our concerns, we offer the following further recommendations for the 2016 federal budget:

• That the 2016 federal budget reiterate the government’s commitment to balance the budget by 2019, while reducing Canada’s debt-to-gdp ratio.
• That the government refrain from repealing the Balanced Budget Act, requiring the government to report to parliament on the reasons for its borrowing and present a credible plan to get back to balance
• That the federal government respond to the pleas of organizations like the Alberta Chamber of Commerce who recommended: “Do no harm in this budget, please” by refraining from introducing any new or increased taxes or fees on job creating businesses in the 2016 federal budget.
• That new spending be limited to measures that are shown to generate either: a) a short-term economic stimulus in depressed regions, or b) long-term productivity improvements, within the boundaries of the Liberal government’s publicly affirmed ‘fiscal anchors’.
• That the government identify and state which key performance indicators it will use to assess the success of its spending plans.
• That, in order to avoid creating a structural deficit, the federal budget provide a clear plan to unwind temporary additional infrastructure spending.
• That the Government continue with its plan to reduce the Small Business Tax Rate from 11% down to 9% and maintain access to the small business rate for all small businesses, including professionals such as doctors, dentists and veterinarians.
• That the federal budgets continue building on the previous government’s track record of enhancing investments in skills training, with direct involvement from employers, in order to ensure that investments in skills training result in Canadians filling in-demand jobs.