Dear Minister Flaherty,

At this time of persistent global economic uncertainty, Canada is fortunate to be in a strong fiscal position relative to other G-7 economies.  The CCCE applauds your government’s responsible management of public finances and urges you to remain focused on the goal of eliminating the deficit by the middle of this decade.

As you know, Canadian companies have played an important role in driving economic growth since the recession. Over the past three years the private sector has created nearly three-quarters of all new jobs. In addition, Bank of Canada surveys of Canadian companies, and my own discussions with CCCE members, have consistently indicated high levels of spending on new machinery and equipment. Many CCCE members are currently engaged in the most ambitious capital expenditure programs in the history of their companies.

Your government’s efforts to improve the competitiveness of the corporate tax system were instrumental in creating the conditions that underpin private sector job creation and promote investment.  Further reforms aimed at reducing the administrative burden on Canadian businesses and workers would enhance efficiency, improve economic growth and contribute to a sustainable fiscal framework.  Over the medium term, we encourage you to consider a comprehensive overhaul of Canada’s tax system.  We concur with the 2011 report of the House of Commons Standing Committee on Finance, which recommended the appointment of an independent expert review panel that would bring forward recommendations to modernize and simplify Canada’s corporate and personal tax system.

As you and your colleagues make final preparations for the 2013-2014 federal budget, we wish to highlight the following additional areas of concern:

1.            Innovation

In last year’s budget, the government proposed a series of changes to the Scientific Research and Experimental Development (SR&ED) tax credit program. Overall, these changes will benefit smaller, privately held Canadian companies at the expense of larger companies with extensive R&D programs.  We estimate that these measures will result in a 25 to 30 percent reduction in R&D expenditures in Canada on the part of large enterprises. To offset the negative impact of these changes, we recommend that the government delay the implementation of these changes and consider the introduction of a new, direct R&D support program for major new private-sector innovation projects. Further down the road, as the federal budget returns to surplus, we believe it would be appropriate to move to a partial or full refundability model for SR&ED tax credits that applied to all companies, regardless of size.

Going forward, Canada’s innovation capacity will depend to a considerable extent on the availability of workers with undergraduate and graduate degrees in the so-called STEM subjects – science, technology, engineering and math. Many Canadian companies are finding it difficult to recruit workers with STEM skills, and studies suggest that the problem is likely to get worse. We therefore encourage your government to give favourable consideration to modest proposals such as that of “Let’s Talk Science” – combining public and private funding to promote science education programs and develop the potential of young Canadians to succeed in the 21^st century knowledge economy.

2.            Pensions

Canada’s private sector defined-benefit pension plans face significant challenges as a result of continued low interest rates and poor capital market performance. Recent changes to the rules governing federally regulated company pensions have greatly exacerbated such pressures, forcing plan sponsors in many cases to scale back current and future capital spending plans so as to meet new solvency funding requirements. This undermines the competitiveness of major Canadian companies and runs counter to the goal of improving productivity. We therefore urge the federal and provincial governments to consider reforms aimed at giving plan sponsors greater flexibility in meeting solvency funding requirements. This would eliminate the need for repeated requests for temporary solvency-funding relief.

3.            Trade

The federal government’s ambitious international trade strategy is creating new opportunities for Canadian workers, companies and investors at a time of weak economic growth in many of our traditional markets. As business leaders and major employers, we look forward to the successful conclusion of negotiations between Canada and the European Union on a Comprehensive Economic and Trade Agreement (CETA). We urge the government to ensure that the final agreement includes significant reforms in areas such as regulatory cooperation, government procurement, labour mobility and intellectual property protection. A world-class Canada-EU economic partnership agreement would boost Canadian GDP, create jobs and promote private-sector investment in innovation. It would also better position Canada to achieve an ambitious outcome in other trade negotiations, such as those underway through the Trans-Pacific Partnership.

For Canadian companies to take full advantage of new international opportunities – particularly in emerging economies – enhanced trade promotion services are critical. The federal Trade Commissioner Service (TCS) plays a vital role in marketing Canada abroad and supporting Canadian firms in their search for new customers and partners in unfamiliar markets. Given the importance of export diversification to the broader economic agenda, and in light of recent updates to the government’s Global Commerce Strategy, we believe the TCS is deserving of additional resources. We also encourage you to consider additional funding for tourism promotion within the context of the Global Commerce Strategy, recognizing the tourism sector’s significant contributions to job creation and economic growth. 

In keeping with our organization’s longstanding support for trade liberalization, the CCCE endorses the recent proposal of the Retail Council of Canada to eliminate tariffs on certain finished products that must be sourced outside of Canada, including footwear, children’s clothing and various specialized goods.  Eliminating these tariffs would reduce prices for consumers, improve the competitiveness of Canada’s retail sector, and mirror actions already taken by some of Canada’s key trading partners, including the United States.

In addition, we wish to reiterate our belief that the time has come to reconsider and reform Canada’s supply management programs for dairy and poultry producers. Every credible study of the existing system has shown that it penalizes consumers, inhibits innovation and restricts Canadian producers from pursuing opportunities beyond our borders. We recognize the complexities of this challenge, but the fact remains that the longer Canada waits to reform supply management, the greater the cost to taxpayers, consumers and Canadian competitiveness. We therefore encourage you to consider some form of transitional support program that would enable Canada’s supply-managed agricultural producers to modernize, expand and position themselves to take advantage of growing opportunities in global markets.

4.            Jobs

The CCCE welcomes recent reforms to the Employment Insurance (EI) and immigration systems but believes more can be done to help alleviate current and future labour shortages. For example, more consistent EI eligibility requirements and entitlement periods could promote increased labour mobility. Skills shortages could be further addressed through more concerted efforts to develop and train workers from disadvantaged groups, including Aboriginal communities, and by enhancing Canada’s labour market information systems to provide more comprehensive regional intelligence. Finally, implementing the recommendations of the Advisory Panel on Canada’s International Education Strategy could help to attract a greater number of international students and researchers to Canada.

Minister, in conclusion, CCCE members thank you for your leadership and commitment to fiscal responsibility. If I and my colleagues can be of any assistance in your deliberations, please do not hesitate to contact me.

Sincerely,

John Manley
President and Chief Executive Officer, Canadian Council of Chief Executives

Dear Minister,

A year ago, I wrote to urge you to declare war on Ontario’s deficit and debt, before it is too late.  As you and your colleagues make final preparations for the 2012 provincial budget, I want to underscore the importance of moving swiftly and with all necessary resolve to put Ontario back on track toward fiscal balance.

The challenges you face are considerable, and I have no doubt that vested interests will resist you every step of the way. Fortunately, the recent report of the Commission on the Reform of Ontario’s Public Services contains a wide range of timely and sensible cost-cutting recommendations that deserve to be implemented. In the words of Commission Chair Don Drummond, “We can all agree that change is disruptive, but the medicine does not go down more easily if it is dragged out over a long period.”

As you move forward with measures to restrain the growth of public spending and stabilize the province’s finances, let me assure you that the business community is prepared to do its part. At the same time, it is essential that the government do nothing that would significantly impair Ontario’s long-term competitiveness and ability to attract investment and jobs. You have indicated that you are considering a plan to temporarily freeze the statutory provincial corporate tax rate at the current level of 11.5 per cent, postponing a previously announced reduction to 10 per cent by 2013. As you yourself have acknowledged many times, lower corporate taxes are a powerful tool for promoting economic growth and higher living standards for Ontarians. Nevertheless, my strong sense is that most business leaders in the province are prepared to accept a temporary freeze in the corporate tax rate, so long as it is clear that the incremental revenues generated by such a freeze are to be used to reduce the provincial deficit rather than to finance additional program spending.

But, this budget cannot only be about cutting expenditures. You need a strategy for growth. To do so, minimizing the regulatory burden for business is vitally important. You deserve credit for reducing this burden by handing over to the federal government the responsibility to collect both corporate income tax and sales tax. The introduction of the HST has significantly improved Ontario’s investment climate and enhanced the ability of Ontario firms to make the kinds of investments necessary to improve productivity. But much more remains to be done to reinvigorate Ontario’s engine of growth.

And as I said to you last year, there is a need for courage in looking at new ways of meeting public needs. Services that can be delivered effectively by, or in partnership with, the private sector should be transferred to it. Don’t listen to the rhetoric that decries the profit margin in the private sector. The need to make a profit will drive efficiencies that cannot be realized otherwise.

Ontario has no choice: it must get its fiscal house in order. To achieve this vital objective will require a level of public spending restraint unprecedented in the province’s history, combined with smart public policies that encourage increased business investment, job creation and sustainable growth. I and my colleagues at the Canadian Council of Chief Executives stand ready to help in any way we can.

Sincerely,

John Manley
President and Chief Executive Officer, Canadian Council of Chief Executives

Dear Minister Flaherty,

As you and your colleagues make final preparations for the 2012-2013 federal budget, I want to congratulate you on the progress you have made in implementing your economic plan.  Last year’s budget established a target of erasing the federal deficit by 2015-16. Despite lingering uncertainty in the global economy and the continuing impact of the European debt crisis, your government has moved significantly closer to that goal. Indeed, since the beginning of the current fiscal year the gap between spending and revenues has been shrinking faster than originally forecast.

We encourage you to stay the course and, in particular, to remain strongly focussed on constraining the overall rate of growth in public spending. Canadians understand the need for well-funded public services and a robust social safety net, but much more must be done to reduce waste, eliminate unnecessary programs and improve overall government efficiency. The savings realized through careful stewardship of public funds will enable the federal government to  achieve fiscal balance faster than would otherwise be the case, further insulating Canada from future economic shocks.

As you know, Canada’s overall employment growth has slowed in recent months, after outperforming the United States during the recession. The good news is that if the U.S. economy continues to gain strength, exports to the United States, as well as job growth in Canada, should gradually pick up as well. Meanwhile, shipments to markets beyond North America, especially to the faster-growing countries in the emerging world, are expanding at an impressive pace. For an export-dependent country such as Canada, this gradual rebalancing of trade away from North America is a welcome and much-needed development.

A year ago, Minister, you underscored the need for Canada’s private sector to help fuel economic growth by ramping up investment and creating jobs. The evidence shows that the business community has done just that. Since the end of the recession, private sector employers across the country have created more than 400,000 new jobs – an impressive performance by any measure, and one that has helped to counterbalance public-sector restraint efforts at the federal, provincial and municipal levels.

At the same time, we continue to see impressive growth in two other key areas: corporate tax remittances and private sector investment in machinery and equipment. The corporate tax reform program you introduced in 2007 – the last phase of which took effect on January 1, 2012 – has bolstered business confidence and made Canada a significantly more attractive destination for capital investment. Even with the recent rate reductions, corporate tax revenues are rising as a share of total federal budgetary revenues.

As well, the Bank of Canada’s most recent business outlook survey shows that 40 per cent of businesses plan to ramp up investment this year, with only 19 per cent saying they plan to invest less. My own discussions with the chief executives of leading Canadian companies suggest that this positive trend is likely to continue. Across the country, CCCE member firms are expanding and upgrading their facilities, launching significant new capital projects and investing in new technology that will drive improvements in productivity and competitiveness. Your former Cabinet colleague, Jim Prentice, now Senior Executive Vice President and Vice Chairman of CIBC, estimates that in the energy sector alone, some $290 billion worth of infrastructure projects are poised to come on stream nationally over the next 20 years, fueling the next major phase of Canada’s economic development.

The federal government has an essential role to play in ensuring that Canadian enterprises continue to invest in these and other wealth-generating capital projects. With regard to energy infrastructure projects in particular, governments can help by providing loan guarantees where necessary and by making regulatory and environmental approval processes more timely, efficient and predictable. Doing so will give consumers across the country greater access to secure, sustainable supplies of energy while allowing Canada to take advantage of significant new export opportunities. 

Of equal importance is the need for additional flexibility in solvency funding requirements for federally regulated sponsors of defined benefit pension plans. When the government developed new solvency funding rules in 2009, long Canadian bond yields were approximately 4% and there was an expectation that they would rise, thereby reducing the financial pressures on plan sponsors. Instead, long bond yields have fallen, forcing companies to significantly increase their pension contributions at the expense of capital projects. By taking action now to provide plan sponsors with temporary relief during this period of historically low interest rates, the government can both support the objective of stimulating economic growth and improve the sustainability of private sector retirement income plans.

Provided that such challenges are overcome, there is every reason to believe that Canada will continue to be a leader among the world’s major industrialized economies in growth and job creation. Still, Canadians cannot afford to be complacent. International competition is intensifying, not only from our traditional trading partners but from China, India, Brazil and other emerging markets. The challenges facing Canadian companies and workers are destined to increase. As factories in Asia in particular shift from basic assembly toward higher value-added production, Canadian producers too must move up the value chain.

By continuing to pursue an ambitious trade strategy, the federal government is helping to position Canada for increased success in the global economy. In recent years you have eliminated tariffs on a wide range of items used by manufacturers in sectors such as food processing, furniture and transportation equipment. Your plan to make Canada a tariff-free zone for industrial manufacturers is enhancing the ability of Canadian-based firms to compete in domestic and foreign markets. But Canada can and should do more to open its economy to increased flows of trade and investment. Additional and sustained efforts to harmonize regulatory measures among the federal and provincial governments, and further progress toward labour mobility, would increase economic efficiency and flexibility. At the same time, the government should give serious consideration to the design of a transitional support program that would enable Canada’s traditionally supply-managed agricultural producers to expand and seize growing opportunities in global markets.

Your government’s pledge to make support for business innovation a central focus of this year’s budget is a welcome and much-needed commitment. The recent report of the expert panel led by Tom Jenkins, Executive Chairman and Chief Strategy Officer of Open Text Corporation, put forward a number of recommendations that would streamline existing R&D support programs, reduce compliance costs for small and medium firms, improve prospects for commercialization of new technologies and target assistance more directly at innovative companies with a proven capacity to grow. We encourage you to bring forward reforms aimed at maximizing the returns from public sector investment in innovation, while preserving and enhancing programs that have a demonstrated track record of success in driving R&D investments in key sectors. Specifically, I would again urge you not to amend the Scientific Research and Experimental Development (SR&ED) tax incentive in ways that could penalize companies that incur significant R&D expenses for materials and capital equipment as well as labour.

On behalf of Canada’s business leaders, Minister, thank you again for your efforts to expand Canada’s economic capacity. At a time when the global economic outlook remains uncertain, your government continues to win recognition internationally for responsible fiscal management. Equally important, the recent pace of investments by leading Canadian companies reflects high levels of optimism in our country’s economic prospects and support for the overall direction of economic policy.

If I and my CCCE colleagues can be of any assistance, please do not hesitate to contact me.

Sincerely,

John Manley
President and Chief Executive Officer, Canadian Council of Chief Executives

The Right Honourable Stephen J. Harper, P.C., M.P.
Prime Minister of Canada
Langevin Block
80 Wellington Street
Ottawa, ON
K1A 0A2

Dear Prime Minister,

The Canadian Council of Chief Executives (CCCE) strongly supports your Government’s recent expression of interest in the proposed Trans-Pacific Partnership Agreement (TPP).

The TPP represents an historic opportunity for Canadians as our country seeks to expand trade and investment relations in the Asia Pacific region. As a regional arrangement, the TPP has the potential to become a key instrument of Asia-Pacific economic integration. An ambitious agreement would contribute to stronger employment and economic growth in Canada through greater commercial opportunities and diversification of export markets.

In addition, the TPP could act as a catalyst in strengthening the North American partnership. It would enable Canada to build on the Canada-United States Free Trade Agreement and its successor, the North American Free Trade Agreement, both of which were completed before the emergence of global supply chains, the growing importance of the service sector and the rise of the Internet.

It is in Canada’s interest to enter the TPP negotiations this year, without pre-condition and with the objective of reaching a comprehensive, ambitious accord within the timeframe currently envisioned by TPP participants. Any attempt to impose preconditions would reduce the value of the negotiations to Canada and make it more difficult to achieve the sorts of tradeoffs that can make possible a balanced final agreement.

Canada’s commitment to open markets speaks for itself. Our country’s track record of trade and investment liberalization through the negotiation of bilateral, regional and multilateral agreements is well established. Your Government’s recent unilateral moves to eliminate tariffs on intermediate goods will position Canada as the first G20 country to become a tariff-free zone for manufacturers.

The recent adoption of legislation to end the monopoly of the Canadian Wheat Board is proof that Canada is prepared to make important trade policy adjustments. We believe that the same consideration should be given to Canada’s supply-managed dairy and poultry sectors – two industries that are capable of competing internationally at a time when global demand for food and nutrition is increasing.

The Government of Canada is fortunate to be able to call on a team of talented and creative trade and investment negotiators. Canada was an important contributor to the development of new global rules and standards at the G20. Canadian negotiators performed superbly in talks on the Canada-United States Action Plans on Perimeter Security and Economic Competitiveness and Regulatory Cooperation. These negotiating models deserve consideration in the TPP negotiations within the context of trade facilitation and security as well as regulatory coherence.

Canada could contribute to, and benefit from, an ambitious outcome in the TPP negotiations. At the same time, we would encourage a continued focus on other important bilateral economic partnership arrangements.

The CCCE looks forward to working with your Government on this important initiative and wishes you every success in this phase of TPP consultations.

Sincerely,

John Manley
President and Chief Executive Officer, Canadian Council of Chief Executives 

c.c.      Members of the Cabinet
            The Membership Canadian Council of Chief Executives

As published by iPolitics.ca, January 25, 2012:

Are corporate tax cuts starving the government of revenues? That’s what Ken Georgetti, President of the Canadian Labour Congress (CLC), wants us to believe. In a news release this morning, Georgetti said that “corporate income taxes in 2010 amounted to only 8.8 per cent of all government revenues.”  He added that, “In return for tax breaks, companies are supposed to invest to create jobs, but they are not. Instead, they are hoarding cash and paying out fat dividends to their shareholders.”

Georgetti’s claims conveniently ignore the fact that corporate tax rates have been falling across the industrialized world, and that Canada’s rates aren’t particularly low compared with the rates charged by our competitors. Among the 30 countries that belong to the Organisation for Economic Cooperation and Development (OECD), Canada is in the middle of the pack in terms of taxes on corporate income.

As The Globe and Mail put it last year, “The rapid series of tax cuts of the past decade have made Canada competitive, but still a long way from a tax haven. Based on virtually every metric, Canada’s business taxes remain above the average among the world’s richest countries. Measured as a share of the economy, Canada’s corporate taxes are also higher than the OECD average.”

But leaving aside the international context, Georgetti’s numbers are out of date. For example, the federal government’s most recent Fiscal Monitor shows that in the first eight months of 2011-12, corporate income taxes generated 10.6 per cent of total federal government revenues.

What’s more, government forecasts show corporate income tax revenues climbing by roughly a third between now and 2015-16 – at which point they will account for 12.2 per cent of total federal budgetary revenues.

In other words, corporate income tax revenues as a share of federal government revenues are on track to rise by 15 per cent in five years.

Georgetti’s claim that companies are sitting on cash rather than investing and creating jobs is equally misleading. Statistics Canada says that the private sector has created a net 429,000 jobs over the past two years. Corporate investment has also been growing. Business spending on machinery and equipment increased by 11.8 per cent in 2010 and 16 per cent over the first nine months of 2011 – the fastest growth in more than a decade.

Bank of Canada Governor Mark Carney told CTV recently that this strong pace of business investment is “crucial” to maintaining Canada’s overall economic growth.

A recent survey of 35 companies whose CEOs are members of the CCCE underscores the broader trend. Collectively, those 35 companies plan to invest more than $100 billion in Canada between 2011 and 2013. That is roughly double the combined stimulus spending of the federal and provincial governments during the 2008-09 recession – hardly chump change.

There’s one thing Georgetti did get right: Canadian companies have, on average, increased their dividend payments to shareholders since the recession. The suggestion that this is a bad thing, however, would come as a surprise to the large union-run pension plans – not to mention the Canada Pension Plan, the retirement system on which all Canadians depend – that collectively own a big chunk of corporate Canada. The health of those union plans – and their ability to look after current and future retired workers – depends in part on the returns they earn from corporate shares and dividends.

The CLC’s call to raise the federal corporate income tax to 19.5 per cent would not only destroy jobs and discourage much-needed investment, it would also hurt the very members whose dues pay Georgetti’s salary.

The Honourable John Manley is President and CEO of the Canadian Council of Chief Executives.

In the weeks leading up to the traditional August Congressional recess, the drama that played out in Washington over whether and how to raise the statutory federal debt ceiling at times reached crisis (if not comedic) proportions. At the eleventh hour cooler heads prevailed, averting a short-run catastrophe – yet the road ahead is fraught with uncertainty.

At its core this debate is not about economic policy but about competing visions of the role, scope and validity of government. The dominant faction in the Republican Party takes a libertarian-like view: the less federal government the better. This philosophy is predicated on a belief that the private sector, left to its own devices, will provide for society’s needs. Rather than approaching that goal agency by agency or program by program, their strategy is to deprive the entire government of funding, sparing only defense; the proposition is that a resource-starved government shrinks. The traditions of the Democratic Party, on the other hand, are rooted in the belief that even in an efficiently operating economy some members of society, principally the poor and elderly, are at risk of being left behind. The Democratic view also holds that there are some functions only government can provide; these include education, environmental protection, and healthcare for the poor, in addition to defense.  During stressed economic times this instinct leads to a desire for increased government assistance, even though that course exacerbates deficits and debt.

The statutory debt ceiling has been raised scores of times throughout recent U.S. history with the support of Presidents and Congresses of both parties, with no national angst and little public attention. Typically, a few members of the House and Senate would take the opportunity to score political points by accusing their opponents of a lack of commitment to fiscal restraint. In the end, the party of the President would provide the majority of the votes to get it done; it always seemed to be a necessary technical step that was detached from the underlying substantive fiscal debates.

In the Fall of 2010, two things happened that set the stage for this summer’s game of chicken. First, the Republican Party gained control of the House of Representatives through the election of roughly 70 new members, for whom shrinking the size of government eclipses all other priorities. This meant that, as of January 2011, the President’s party could not, by itself, pass legislation in the House to raise the debt ceiling. Second, the President made an ill-fated decision to postpone raising the debt ceiling until the Republican majority in the House took office. The ceiling could have been raised by a lame-duck Democrat-dominated Congress in November or December of 2010, but instead the President chose to force the Republicans to own some of the political consequences of the increased debt. That proved to be a mistake.

In the Spring of this year the Administration was proceeding on the erroneous assumption that the debt ceiling would be raised with the support of most Democrats and a few moderate Republicans.  This approach was surprising in light of the fact that Democrats had suffered at the polls in 2010 due in part to concerns about deficits and debt.  In the House, the newly elected conservative Republicans identified this as an opportunity to force the Administration to impose severe cuts in domestic spending as a pre-requisite to raising the ceiling. The President’s opponents, in other words, were threatening to precipitate a default unless the Administration acceded to their demand to meaningfully reduce social programs.

While reducing federal spending during an economic slowdown was not the President’s preference, he recognized the political realities and undertook a series of negotiations with the Republican Speaker of the House, John Boehner, aimed at achieving a compromise plan to reduce the deficit over time through a combination of spending cuts and revenue increases. (President Clinton’s 1993 budget plan, which passed with no Republican votes, took a similar approach by cutting spending and increasing the top marginal income tax rate by three per cent, to 39 per cent. The result was a budget surplus in 2000.) For a while these negotiations appeared to be making progress, with the President agreeing in principle to cut social programs (the Democrats’ sacred cow) and Boehner showing a willingness to accept some measure of revenue increases (a Republican litmus test). The plan they were discussing would have yielded $4.2 trillion in savings over 10 years.

While Democrats in both the House and Senate were reluctant to accept cuts to Medicare and Social Security, on balance they were prepared to do so provided the plan included increased revenue and would lead to a long-term resolution of the budget dispute.  They did not want to confront the need to raise the debt ceiling again prior to the 2012 elections.  When Boehner took the outline of this plan to his caucus the newly elected conservatives refused to support any revenue increases and made it clear they would hold Boehner accountable if he advanced such a plan. Boehner subsequently withdrew from the compromise talks with the President. From that point on, the acrimony increased and the discourse deteriorated.

While the world watched the developing soap opera, Washington looked more like a banana republic than the leading nation of the free world. In the final analysis the crisis was averted by a short-term budget deal involving spending cuts of roughly $1 trillion, but no increased revenue.  The two sides also agreed to create a special Congressional committee, or “Super Committee”, composed of six House members and six Senators, with equal numbers from each party. The committee is mandated to define a plan that reduces the deficit and debt by an additional $1.5 trillion. Unless a majority of the committee agrees on such a plan by U.S. Thanksgiving, and that plan is enacted by Congress, pre-determined spending cuts of $1.2 trillion will kick in, equally divided between national security and non-national security functions (but excluding Social Security, Medicaid and Medicare benefit levels).  The President’s concept was that the threat of automatic and substantial cuts in defense spending would put extreme pressure on Republican members of the Super Committee to agree to a debt-reduction plan that includes new revenue. Added revenue, Democrats believe, will moderate the degree of necessary cuts to social programs and will assist in deficit reduction.

The Super Committee will begin its work in early September. Its membership is such that there is some basis for optimism that a majority could agree on a plan that would harmonize the opposing views. The central question is whether some number of the Republicans, in the face of possible massive cuts to national security spending, will agree to “tax reform” initiatives (as distinguished from tax increases) that would contribute increased revenue to the equation. Given that any increase in revenue is inconsistent with the conservatives’ bedrock principle of starving the government, the inclusion of such measures in a committee recommendation will not be easy.  Any increased revenues would likely come from eliminating “corporate loopholes” and tax preferences in the federal tax code. On the other side, the Democrats will have to be willing as a quid pro quo to reduce the costs of Medicare and Social Security, perhaps by raising the age of eligibility or employing some form of means testing. Major constituencies of the Democratic Party oppose such action. All of this must occur as the country enters the 2012 election cycle, in which all of the seats in the House, one-third of the seats in the Senate and the Presidency are up for grabs.

The debt ceiling drama has damaged the credibility of all federal elected officials, of both parties. The President has been widely criticized for failing to lead, while Republicans stand accused of intransigence and of being hidebound to ideology. The level of public dissatisfaction with Washington is extremely if not historically high.

To complicate matters further, the process of selecting a Republican candidate for President is gearing up.  The debate among currently declared candidates is creating an atmosphere of focus on conservative principles in which it is even more difficult for Republicans in Congress to compromise on revenue increases.  The challenge for the President, meanwhile, is to explain to the country how his plan and vision will permit the United States to emerge from uncertain economic times.  There are many variables and unknowns but public dissatisfaction with both political parties could lead to a situation in which a respected independent candidate (New York City Mayor Michael Bloomberg?) emerges and makes the case that only an unaffiliated President can make Washington work – unlikely but not impossible.

As the President and the Congress return to Washington and the Super Committee begins its work, the press will once again focus on the ebb and flow of the budget debate.  The attention of the American public, however, will likely have shifted from the drama of July to more personal concerns such as jobs, consumer debt and education.  As a result, the President, beginning with an address to Congress on September 8, will place his emphasis on job creation and making government work to address real concerns rather than abstract issues.  At least until we approach Thanksgiving, the broader deficit and debt debate will be temporarily on the back burner.

The “Super Committee”

The Joint Select Committee on Deficit Reduction, or “Super Committee,” established by the Budget Control Act (BCA) is charged with finding an additional $1.5 billion in deficit reduction beyond the $841 billion in savings achieved as part of the deal to raise the debt ceiling. The “Super Committee” can cut spending – including Social Security and Medicare – raise  revenue, or propose a combination of both. (While the budget exercise does not have any direct implications for Canada-U.S. issues, funding for various initiatives that do impact the efficiency of how the two countries work together could suffer as a consequence of the process.)

If the Super Committee does not produce a report, or if the report does not become law, the BCA requires an automatic, across-the-board spending reduction (“sequestration”) of $1.2 trillion, with $109.3 billion in cuts per year beginning in 2013 and continuing through to 2021. Half the burden would fall on the Defense Department and the other half on the rest of the budget. These cuts would affect both mandatory and discretionary spending with proportionate cuts to both. However, Social Security, Medicaid would be protected, while Medicare providers would see, at most, a two per cent reduction in payments.

Should Congress approve a Super Committee plan containing less than $1.2 trillion in deficit reduction, the sequestration procedure would still be triggered, and the total amount of across-the-board spending cuts would equal $1.2 trillion minus the amount of the approved deficit-reduction package.

Ambassador Gordon D. Giffin is Chair of the Public Policy and International department of McKenna Long & Aldridge LLP, and a Special Adviser to the Canadian Council of Chief Executives. From August 1997 to April 2001 he served as the 19th U.S. Ambassador to Canada.