Managing for Growth: Fiscal Prudence, Competitive Taxation and Smarter Spending

Madame Chair, Honourable Members, on behalf of the Canadian Council of Chief Executives, thank you for the opportunity to offer our thoughts on the fiscal challenges facing the federal government in the next budget and beyond.

Smart fiscal policy matters because it drives both growth in jobs and incomes and the capacity of governments to provide high quality public services. How the federal government manages taxpayers’ money has a real impact on how effective it will be in improving the quality of life of Canadians.


The Council this year has prepared a substantial written submission. Many of its 15 specific recommendations reflect comments we have made in the past, especially with respect to the importance of prudent fiscal management and the use of tax policy to create real competitive advantages for Canada.


The Council’s central concern today, however, is the explosive growth of federal spending. I therefore would like to focus my remarks this morning on a proposal for a new, rigorous and practical process for spending review and reallocation.


The recent pace of growth in federal spending simply cannot be sustained. The 11.5 percent increase in total program spending in 2002/03 flowed in part from higher health transfers, but over the past four years, direct spending by federal departments has actually been rising even faster than transfers to the provinces.


From fiscal 1999/2000 to the current year, direct program spending is projected to rise by 34 percent. That’s an increase of more than a third in just four years. And even though the unemployment rate is low, spending through the Employment Insurance system is rising faster still, up 39 percent in four years.


It is clearly nonsense to suggest that tax cuts have stripped the federal treasury bare and bled essential programs. Federal spending is at a record level — and despite the cuts in personal and corporate tax rates, so is tax revenue.


Revenue has been growing even where tax rates have been cut. Both personal and corporate income tax revenues this year are forecast to be 10 percent higher than four years ago. And revenue from the GST, where the rate has not been cut, will jump by 30 percent.


Spending, though, has been growing more than twice as fast as tax revenue. If the government wants to keep meeting new or growing needs in areas such as health care and defence — and do it without undermining the economic growth that has kept the money rolling in over the past five years — it has to get serious about spending review.


Both the current and previous finance ministers have recognized the need for an ongoing review process, but progress to date is not encouraging. The budget of February 2003 launched a token exercise to identify $1 billion in reallocations by May, and even this took twice as long as planned. What will it take to make a serious review process work?


In the Council’s view, four elements are essential: an overall cap on spending growth; a multilevel process of review; creation of an annual reallocation fund equal to 5 percent of direct program spending; and greater transparency and accountability in the spending review process. Let me explain.



    1. An overall spending cap. Like every Canadian family, governments have to make choices. If your child needs braces, that new car may have to wait. Governments cannot simply tell taxpayers to give them a raise just because they want to spend more money.


    The first requirement for effective spending review is therefore some upper limit on overall spending growth. One option, a cap of inflation plus population growth, would essentially freeze real per capita spending. The Council would be prepared to support such a cap, but recognizes that it might prove overly restrictive in practice.


    The Council is therefore recommending a more flexible formula, nominal growth in Gross Domestic Product minus one percent (GDP-1). Governments should never grow faster than the economy that supports them, but GDP-1 recognizes that as their real incomes rise, Canadians may want to enjoy some of the benefits of growth in the form of public goods — better health care, schools, roads and parks — rather than only through private consumption.


    2. Multilevel spending review. To do a thorough job of constantly improving the value the country receives for each tax dollar spent, the government has to review its spending on three distinct levels: program, policy and function.


    At the program level, managers need to ask every year: Is this program doing what it is supposed to do? Could it be run better?


    The broader policies that drive programs need to be reviewed every five years. Have needs changed? Are there any new ideas or new tools for meeting these needs more effectively?


    And at least once every 10 years, government needs to review cross-cutting functions, such as how it attracts and develops employees and how it buys goods and services.


    Three priorities for review at the policy level are Employment Insurance, defence and Aboriginal affairs, if only because they involve the largest amounts of spending and some of the most disappointing results. At the functional level, the most immediate priority would appear to be government procurement, where helicopters and advertising contracts come to mind.


    3. The 5 percent solution. What gets measured, gets done. This is why the Council is calling for creation of an annual reallocation pool equal to 5 percent of direct program spending. Even though this would exclude transfers to the provinces, Employment Insurance benefits and old-age pensions, a 5 percent pool would generate potential reallocations of more than $3 billion each year.


    Each senior executive in the public service would be required to identify the least effective 5 percent of the spending within his or her area of responsibility. The deputy minister and minister would consider this advice in determining the 5 percent of the department’s budget that should be put on the table for discussion at the Cabinet level.


    Some of the contributions to the reallocation pool might, on final analysis, be left untouched. The rest would either be reshuffled within departments or distributed between departments.


    4. Improving transparency and accountability. The 5 percent solution is about making public servants and ministers accountable. This goes beyond poring over their expense accounts. It pushes them to create value, not just eliminate waste. Executives who can’t tell ministers where to find better value don’t deserve bonuses. And ministers who aren’t willing to pull the plug on programs that aren’t working should not expect taxpayers to give them any more money for their new projects.


    Two other changes in spending management practices would make these reviews more effective. First, the government should make the review process more transparent, by engaging outside experts from the private, nonprofit and academic sectors to work with public servants in identifying options for reallocation.


    Second, the government needs an effective internal champion, a body that can provide analytical support for departmental, policy and functional reviews and that can challenge the cost-effectiveness of existing programs and new proposals. The Treasury Board once had such a role and reviving and reinforcing this responsibility could make it the driving force for a new culture of constant review within the federal public service.


The goal of all this is not to slash spending. Overall, spending will continue to rise. But programs and policies that are not working well or no longer meet the real needs of Canadians should be the first place the government turns to find the money to pay for new initiatives. If ministers and their deputies are unable to tell taxpayers what is producing good value and what is not, why should they be trusted to spend even more?


In making this proposal today, the Council is suggesting that this Committee look beyond the next budget and make your influence felt in improving the way federal spending is managed. The government is collecting more tax money than ever before, and we are counting on you to ensure that this money achieves as much of an impact as possible in improving the lives of Canadians.


Thank you again for the opportunity to appear before you this morning. This concludes my opening remarks, and I would of course welcome any questions you may have.

Managing for Growth: Fiscal Prudence, Competitive Taxation and Smarter Spending

The Canadian Council of Chief Executives once again welcomes the opportunity to make a pre-budget submission to the Standing Committee on Finance.


By the time 2003 is out, the governing party federally will have chosen a new leader and most Canadians will have had the opportunity either to affirm the mandate of their provincial governments or to vote for change at that level.


This period of leadership transition is an excellent opportunity for strategic reflection. In fiscal terms, Canada needs to look back at what it has accomplished, assess where it is today and consider how best to chart its path forward.


As an organization made up of the chief executive officers of 150 leading Canadian enterprises, operating from coast to coast in every major sector of the economy, the Council always participates vigorously in discussions of fiscal policy. Because of the extent of leadership transition sweeping the country this year, the Council is offering a more detailed submission than usual, one that is not limited to the next budget, but also addresses Canada’s strategic challenges.


Smart fiscal policy matters because it drives both growth in jobs and incomes and the capacity of governments to provide high-quality public services. How the federal government manages taxpayers’ money has a real impact on how effective it will be in improving the quality of life of Canadians.


It is this belief in the power of fiscal means to enable Canadians to achieve their social goals that drove the Council’s leadership in battling for the elimination of the huge deficits of the 1980s and early 1990s and then for the reduction of personal and corporate tax rates once budgets had moved into surplus.


This submission recaps past progress and reviews our priorities going forward in the areas of debt reduction and tax policy. Its key recommendations, however, focus on the management of federal spending, on the need for new ways to get better value for existing spending and to identify potential sources of funds for reallocation to new or growing needs.


THE END OF EASY MONEY


Looking back, the fiscal news has been outstanding. During the tough years of the early and mid-1990s, the country tackled both spiraling deficits and excessive inflation at the same time as it adapted to the challenges of freer trade in North America and globally. The result of this hard work and sacrifice can be seen in the record of the past five years.


From 1997 through 2002, Canada recorded the strongest pace of economic growth among the G-7 industrialized nations. The result for Canadians has been an astounding pace of job creation and rising incomes, even as declining interest rates made home ownership and major consumer purchases more affordable. The virtuous circle that has produced six consecutive years of federal surpluses also has delivered record tax revenues to governments even as tax rates fell. Over the past decade, the federal government in particular has made tough but smart fiscal choices, and all Canadians have been reaping the rewards.


Today, the economic outlook globally may appear fairly strong, at least in the short term, but risks abound. Canada has faced more than its share of unexpected shocks this year, from SARS in Toronto and other centres and mad-cow disease in Alberta to the summer’s major blackout in Ontario and forest fires in British Columbia.


Looking ahead, our biggest trading partner, the United States, is fuelling its growth with massive government deficits and foreign borrowing, a path Canadians know from bitter experience cannot be sustained forever. Already we see the United States dollar slumping against other currencies including our own. The resulting sharp increase in the value of the Canadian dollar this year is putting heavy pressure on the competitiveness and profitability of Canadian-based enterprises serving the continental and global markets.


As they did in the early 1990s, competitive pressures are likely to make Canadian companies and our economy stronger in the end, but the transition may be painful. What is more, these pressures could affect not only jobs at private companies, but also the amount of money collected by governments through taxes. This in turn highlights what the Canadian Council of Chief Executives sees as the most significant challenge facing the federal government, that of unsustainable growth in public spending.


The easy money of the past five years unleashed a massive wave of new spending. The 11.5 percent increase in total program spending in 2002/03 flowed in part from higher health transfers, but over the past four years, direct spending by federal departments has actually been rising even faster than transfers to the provinces.


From fiscal 1999/2000 to the current year, direct program spending is projected to rise by 34 percent. This is an increase of more than a third in just four years. And even though the unemployment rate is low, spending through the Employment Insurance system is rising faster still, up 39 percent in four years.


Looking at such figures, it is clearly nonsense to suggest that tax cuts have stripped the federal treasury bare and bled essential programs. Despite the cuts in personal and corporate tax rates of recent years, tax revenue is at a record level, and so is federal spending. That said, there are both continuing and emerging pressures for additional government action that the next federal budget must take into account.


The government’s fiscal strategy must include three elements. A continuing commitment to fiscal prudence and responsibility will provide the necessary solid foundation. Tax policy will continue to play a central role in shaping Canada’s ability to attract investment and foster continued growth in jobs and incomes. Most important of all in the short term, new spending procedures are needed to put a roof on total spending, to get the best value for the money being spent and to generate the funds necessary to meet new needs.


FISCAL PRUDENCE AND RESPONSIBILITY


Through the global economic turbulence of the past couple of years, Canada has been the only G-7 country to maintain both a fiscal surplus and a current account surplus. Our record of strong fiscal management is certainly linked to Canada’s economic performance of recent years. Even more important going forward, however, fiscal management is becoming both a bedrock element of Canada’s global brand and a significant competitive advantage.


The moose wearing shades that recently graced the cover of The Economist captured that magazine’s verdict on Canada’s progress, from economically chilly to remarkably cool, from “honorary member of the Third World”, as the Wall Street Journal described us in 1995, to “an unfinished masterpiece”. The Council would agree with the magazine’s bottom line: that we should be proud of all that we have done right over the past decade, but that we must maintain our spirit of innovation in addressing the challenges of tomorrow.


Given the continuing degree of risk to the world’s economic outlook, the federal government should continue to budget in full measure for its contingency reserves and include significant prudence factors in its economic projections. This prudent approach to budgeting may frustrate some who have come to assume that the Finance Department is always sitting on a huge pile of hidden money, but it remains an essential tool for preventing the unexpected from plunging the government’s accounts back into deficit. It also ensures slow but steady reduction in the tax burden represented by the accumulated federal debt.


The combination of prudence and good economic news has allowed remarkable progress in reducing this debt, both as a share of the economy and in absolute terms. Paying off debt reduces interest payments that can then be diverted to other more productive uses whether in funding important public programs or cutting taxes. And cutting the size of the debt relative to the size of our economy, by reducing economic risks and helping to cut interest rates, leads to even more savings for governments, businesses and consumers alike.


The Council therefore would support the goal of continuing to aim for balanced budgets or better. We would repeat that any surpluses resulting from unused contingency or prudence factors be directed to debt reduction and not splurged on last-minute spending projects. And we would support the goal of continuing to reduce the federal debt over time until it falls below 25 percent of GDP. Because the biggest factor in reducing this ratio is the pace of economic growth rather than active measures to pay down debt, we would not set a target year for achieving this ratio, but simply encourage maximum prudence in fiscal planning until this level is achieved.


TAXATION AND COMPETITIVENESS


Many factors influence business investment decisions, from the size and productivity of the workforce and the quality of a community’s infrastructure and environment to the simplicity and transparency of regulatory processes. Regulatory reform in particular could be a powerful tool for enhancing Canada’s attractiveness with no risk to public safety and no net cost to taxpayers.


For instance, the current cost of federal participation in regulatory oversight of natural resource projects is high and likely unsustainable, largely because of the overlapping mandates of too many agencies, both federal and provincial. In other areas, the federal government should aim to lower the current cost and time involved in testing and new product approvals by establishing schemes of mutual recognition with regulatory agencies in other countries which maintain standards similar to Canada.


This is not a call for lower regulatory standards; rather it is a suggestion that more effective regulatory processes could lead to lower costs for both government and business. In this respect, the Council hopes that the work of the External Advisory Committee on Smart Regulation leads to systemic changes to current regulatory processes, ones that will greatly enhance transparency, timeliness and predictability, and thereby enable the federal government to live up to the commitment outlined in its Innovation Strategy.


But taxes do matter a great deal, and taxes on business profitability have more impact on investment and on the growth of jobs and incomes than any other form of taxation. While estimates of this relative impact vary, the Department of Finance told the Organization for Economic Cooperation and Development (OECD) some years ago that raising a dollar through corporate income tax does about nine times more damage to future economic growth than raising the same dollar through a sales tax. Tax policy has a direct impact on the bottom-line earnings of companies and individuals and therefore on decisions about where companies invest and where people choose to live and work.


Taxation and growth


The general principle of smart taxation is that you should tax what you don’t want, not what you do. While one goal of tax policy is to redistribute income fairly within the country, it is at least as important to shape tax policy in ways that stimulate the growth of employment and incomes. The economic evidence suggests that one way to do this, without reducing net government revenues by a penny, is to shift the mix of taxes, putting relatively less of the burden on incomes and investment and relatively more on current consumption.


This is in fact the direction tax policy has taken in recent years. Most of the cuts in tax rates have been on corporate and personal incomes. At the personal level, taxes on capital gains have been cut most of all, and more recently the federal government has begun to cut taxes on corporate capital as well. On the other hand, the steady cuts in Employment Insurance premiums have been offset by increases in Canada Pension Plan premiums, while the Goods and Services Tax has remained untouched. The Council would suggest that the beneficial economic impact of past federal tax cuts has been amplified by the kind of tax cuts that were introduced.


Consider the impact not just on economic growth, but also on federal tax revenues. Despite the five-year, $100 billion tax cut package announced in October 2000 and the additional measures adopted since, tax revenues have not dropped. To the contrary, both personal and corporate income tax revenues in the current fiscal year are projected to be 10 percent higher than they were just four years ago. And revenue from the Goods and Services tax, where the rate was not cut, will be up by 30 percent. When governments cut income taxes, they leave more money in people’s pockets. Some of that money is invested and generates higher taxes in future, but the rest is spent, and in the spending, generates tax revenue through other means.


Corporate taxation


Given the overriding need for prudence and the extent to which existing spending commitments are likely to reduce the residual surplus in the current fiscal year, there is clearly limited room for additional tax measures in the short term. Within the room that may be available, the Council would give top priority to accelerating the elimination of federal capital taxes. This was our top priority last year and continues to be the single most effective thing the federal government could do to encourage greater business investment in innovation and improving productivity.


Last year, the Council suggested that corporate tax policy is an area in which Canada could carve out a real competitive advantage in attracting investment at relatively low fiscal cost even in the short term. Because it is a relatively small market next door to a large one, Canada always will be at a disadvantage in attracting investment in businesses serving all of North America. Any perception that the Canada – United States border will become more of a barrier than in the past, for security reasons, would add significantly to this disadvantage, which is one reason the Council is working so hard on enhancing the bilateral partnership.


In this situation, the onus is on Canada to make a compelling case for investment on our side of the border, and corporate tax rates could be the most effective way to make such a case. The Council’s recommendation continues to be that federal and provincial governments working together should compete not just to stay in the same ballpark as United States jurisdictions. Rather, we think Canada should aim to establish an advantage of at least 10 percentage points in the combined federal-provincial corporate income tax rate.


An advantage of this scale may sound overly ambitious, but as the C.D. Howe Institute has pointed out, at least some of this is needed to offset factors such as faster depreciation and better treatment of inventory costs in the United States.


Given that Canada had a 6.6 percentage point disadvantage as recently as 2000, federal and provincial governments already have made considerable progress. As of September 30, 2003, the federal Finance Department projected that Canada would have a 6.2 percent advantage by 2008, just 3.8 percentage points short of the Council’s target.


The recent decision of the new Ontario government to abandon previously announced cuts in both the provincial capital and corporate income taxes, and to raise the corporate income tax rate back to 14 percent from 12.5 percent, will reverse some of this progress. The Council believes, however, that a 10 percentage point goal remains both affordable in the medium term and a highly effective strategy for attracting more investment and creating more and better jobs for Canadians.


Innovation and entrepreneurship


Canada already has achieved a modest advantage over the average United States statutory rate for corporate income tax. But what really matters is the effective tax rates paid by individual corporations. These are affected by a range of other factors including the rate at which specific assets can be written off, the tax treatment of inventory costs, capital taxes, sales taxes on business inputs and property taxes at the municipal level.


In addition to establishing a meaningful advantage on the statutory corporate income tax rate, therefore, the time has come for a thorough review of the way all forms of corporate taxation and government support for business interact in encouraging or discouraging innovation and greater productivity.


This review should include the capital cost allowance (CCA) rules, which in many cases no longer correspond with business reality. It also should address continuing questions about how best to stimulate entrepreneurship and investment in venture businesses.


Could vehicles such as Labour-Sponsored Venture Capital Corporations, the Business Development Bank of Canada and regional development agencies be made more effective? Do the rules on tax credits for research and development need to be revised to enhance their impact? Would better tax treatment of individual investments encourage more angel investors to put personal money into innovative but risky start-ups? Canada needs a better sense of which measures are working and which are not in the venture capital sector, which is critical to innovation and future economic growth.


Personal taxation


On the personal tax side, the most urgent issue appears to be continued improvement in the tax treatment of savings for retirement and for education. Members of defined-benefit pension plans at large employers typically expect to collect benefits of 70 percent of their pre-retirement income. For many other Canadians who must fund their own pensions, the contribution limits for Registered Retirement Savings Plans (RRSPs) are insufficient to enable them to enjoy a comparable income. Contribution limits also are significantly less than the limits in both the United States and United Kingdom, and for middle-income taxpayers have fallen behind the increases in other retirement benefits.


The level of increase in contribution for the next budget may be limited by the revenue impact of the various economic shocks Canada has suffered during 2003, but the Council would support the recommendation of many other groups appearing before the committee for a target over time of raising the limit to $27,000 a year in addition to the current indexation to inflation. While each increase in the contribution limit costs the federal treasury money in the short term, it is important to remember that these tax-sheltered savings are subject to full taxation when withdrawn. As a result, expansion of the RRSP system will in fact shift tax revenue to future years, just as today’s contributors begin to draw more heavily on public services such as health care in their retirement years.


Furthermore, if the government wishes to do more to encourage savings without immediate cost, it could consider an additional retirement and education savings plan that would be run on a tax-prepaid basis. In this type of plan, similar to the current registered education savings plans (RESPs), taxpayers receive no deduction for their contributions, but savings accumulate tax free and are not subject to tax on withdrawal as long as the money is used in designated ways. Two years ago, the Council suggested creating such a plan with an annual contribution limit of $12,000 regardless of income and whose proceeds could be withdrawn either in retirement or for educational expenses at any age.


In addition to expanding opportunities for tax-sheltered savings, the tax treatment of personal investment deserves ongoing consideration. The tax treatment of both capital gains and dividends has an important impact on Canada’s attractiveness as a country of residence for entrepreneurs and internationally mobile professionals, and rates should be reviewed regularly to ensure that they are competitive with those available in other jurisdictions. In particular, the Committee may wish to consider whether allowing the deduction of small business losses against other income might be an effective way to boost the flow of personal investment into high-risk start-up ventures.


Aside from improving the incentives for personal saving, the government needs to address over time three issues that the Council raised in 1998 that have not yet been fully addressed:




  • The first is the need to remove more low-income Canadians from the tax rolls altogether. Raising the basic personal exemption is costly, but must remain a priority if the government wishes to encourage more economically marginalized Canadians to upgrade their skills and enter the workforce.



  • The second issue concerns the excessive marginal tax rates that continue to face families with children at relatively modest levels of income. In particular, the National Child Benefit Supplement should be clawed back at more modest rates, but this will involve a significant cost and may have to be phased in gradually.



  • The third issue is the continuing need to make Canada more attractive to highly mobile professionals, especially in areas such as health care, research and head offices. While Canada has made significant progress in reducing its tax gap with the United States, it still pushes people into the top marginal rate at a much lower level of income. In addition to increasing the potential for tax-sheltered savings, the Council therefore continues to recommend raising the floor for the top income bracket to $150,000 a year.


In conclusion, the federal government has made a great deal of progress in improving its tax rates and structure since moving the budget balance into surplus. The tax cuts that have been made have in fact helped to produce the superb growth record of recent years that in turn has raised federal revenues to record levels. The unexpected shocks of 2003 may limit how much it is possible to deliver in the next budget. Over time, however, there is clearly a great deal more that could and should be done to make tax policy a truly effective tool for attracting both people and investment and improving the standard of living and quality of life of Canadians.


MANAGEMENT OF FEDERAL SPENDING


The most serious fiscal concern of the Council at this time is the pace of growth in federal spending. This pace is clearly unsustainable and raises three issues going forward. First, there must be a means of ensuring that Canada lives within its means, that today’s spending commitments will remain affordable over time. Second, it is essential to get the best value in terms of economic and social outcomes for the money that is being spent on behalf of taxpayers. Third, there is a crying need for an effective ongoing mechanism for the review and reallocation of existing spending in order to fund new or growing needs in areas such as health care and national defence.


The government has formally recognized the need for an ongoing review process, but progress to date is not encouraging. The budget of February 2003 set a very modest target of identifying $1 billion in reallocations by May of this year, and even this token exercise took four months longer than planned. This experience suggests that the time has come for a much more rigorous process of expenditure management and review.



An overall spending cap


The first requirement for an effective review process is an overall framework. In short, there must be some inviolable upper limit on the overall growth of government program spending. The most frequently recommended spending cap would be a formula equal to inflation plus population growth. The Council would be fully prepared to support such a cap, but recognizes that it might prove overly restrictive in practice. A more flexible formula would be nominal growth in the Gross Domestic Product minus one percent (GDP-1).


The difference between the total growth in the economy and the increase in population and price levels is effectively the extent to which each Canadian is working harder and more productively. While the Council would suggest that government spending should never outstrip the growth in the economy, it seems unlikely that Canadians would never choose to spend any of their gains in real per capita income on new or improved public goods and services.


A GDP-1 spending cap would allow the economic gains of higher employment and productivity to be shared between the public and private sectors while ensuring that over time, the federal government would gradually decline as a share of total economic activity. A cap of inflation plus population growth would provide tougher discipline, but on balance, the Council recommends legislation of the more flexible GDP-1 cap.


A cap, of course, is intended to be a maximum, not a minimum. Any proposal for new or additional spending will be subject both to the need for budget balance each year and to the need for each spending initiative to be fully justified on its own merits as a good use of taxpayers’ money.


Multilevel spending review


To ensure that money can be found for significant new needs or rapidly growing ones within this overall cap, and to ensure constant efforts to improve the value taxpayers receive from each dollar of existing spending, the federal government needs to adopt a multilevel process for continuous review and reallocation of its spending.


Spending needs to be reviewed on three distinct levels. Individual programs should be reviewed each year within their responsible departments. Policy areas such as defence, regional development or agriculture should be reviewed each five years on a rotating basis to see whether needs have changed and whether there are better ways to meet these needs. Finally, a broader review of cross-cutting government functions, such as procurement, human resource or informatics policies and practices, should be conducted every ten years, with perhaps one area chosen for review each year.


The Council would suggest that three priorities for review at the policy level would be Employment Insurance, defence and Aboriginal affairs, if only because they involve the largest amounts of spending and have some of the most disappointing results. At the functional level, the most immediate priority would appear to be government procurement policies and practices.


A 5 percent reallocation pool


In making such reviews effective, it will be essential to change the management culture through specific processes and incentives. The most important change would be to give each senior executive in the public service an annual responsibility to identify the least effective five percent of the spending within his or her area of responsibility. The resulting candidates for reallocation would be pooled at the departmental level, where the deputy minister and minister would determine the five percent of the department’s budget that should be put on the table for discussion.


This five percent target would apply only to direct program expenditures, not to federal transfers to other levels of government or transfers to individuals such as Employment Insurance benefits or old-age pensions. Even so, this process would generate potential sources of money for reallocation of more than $3 billion each year.


This is a significant amount of money, one that will require consideration of the effectiveness of entire programs, not just overhead costs at the margin. On the other hand, any large organization should be able to generate a steady 2 percent to 3 percent a year in savings from efficiency improvements and rising productivity, a daily responsibility of any manager. A preliminary review on behalf of the Council this year identified a potential pool of $6 billion for possible reallocation, suggesting that an annual 5 percent target is eminently feasible.


Expenditures contributed to the reallocation pool by each department would not necessarily be cut. Some might on final analysis be left untouched; others would be shuffled to more effective uses within their source departments; and the rest would provide the primary source of money for all departments to fund new initiatives or meet growing needs in existing programs.


There should be incentives for compliance with the 5 percent target at two levels. First, this responsibility should be written into the performance requirements of all senior managers, and account for a significant element in performance review and related bonuses. Second, to ensure support from ministers as well as managers, any department that failed to put its 5 percent on the table would be ineligible to receive any new funding either from the reallocation pool or from increased flows of tax revenue.


Improving transparency and accountability


Two other changes in spending management practices would make these reviews more effective. The first would involve a quantum leap in improving transparency. The budget-making process, once conducted with obsessive secrecy, has become steadily more open over the years and the country is better off for it.


This commitment to transparency should extend to the reallocation process. While decisions on whether to cut or change programs, policies and functional practices will be made by elected representatives at the Cabinet level, the government should welcome outside advice during the review process. This year’s reallocation discussions have been conducted entirely in secret. To make the ongoing review process more effective, outside experts from the private, nonprofit and academic sectors should work with public servants to identify reallocation options.


The second change in process terms would involve the creation of an effective champion for the review process within the federal government. The Department of Finance has responsibility for the budget process. The Auditor General has responsibility for identifying spending that goes outside the rules and to some extent that fails to deliver value for money.


What is needed now is both a stronger analytical capacity to support departmental, policy and functional reviews and a more potent role within government in challenging the cost-effectiveness of both existing programs and new proposals. The Treasury Board of Canada once had such a role, and reviving and reinforcing this responsibility might be the most effective way to ensure prompt development and implementation of a culture of constant review within the federal public service.


Restoring public trust


In putting forward these recommendations, the Council has no illusions about the difficulty of putting in place an effective review process. Every existing program has a history, internal champions and clients who believe it to be important. But needs change and so do government capabilities. Public servants and elected officials must dedicate themselves every day to a search for ways to make even better use of taxpayers’ money.


This is more than a matter of good management. Cases of both outright fraud and perceived greed have undermined public trust in both the private and public sectors in recent years. And in both sectors, greater transparency and accountability hold the key to rebuilding that trust.


The private sector has focused intensively on improving corporate governance since the Enron and WorldCom scandals inspired a massive legislative and regulatory response in the United States. In Canada, governments, regulators, the media, institutional investors and the boards of directors and managers of individual companies all have been determined in their efforts to improve governance. And the result is that the norms of actual practice have been changing far more quickly than Canadian regulators have been able to agree on and to put in place new rules for minimum acceptable standards.


Transparency and accountability are at the heart of efforts to improve governance in the private sector. Companies are disclosing far more information, and chief executive officers are being held personally accountable for their companies’ reports.


Like our counterparts in the United States, Canadian chief executives soon will be required to certify in each annual and quarterly report not only that everything we have said is true and fairly represents the results of our companies, but also that we have not left out anything that might make what we do say misleading, that we have put in place internal procedures to make sure that we are aware of all material facts, and that we have checked these procedures and reported any deficiencies.


How does this compare with the processes for ensuring transparency and the accountability of deputy ministers and ministers within the public sector? As members of the Standing Committee on Finance, the Council would suggest that at this time of transition, you not limit your consideration to recommendations for the next federal budget. In addition, we would recommend that you consider how to strengthen Parliament’s role in managing the public purse and how Members of Parliament and your committees in particular might help to improve transparency and accountability.


Committees of Parliament already have shown a willingness to examine certain areas of spending in great detail, but restoring public trust will require more than poring over expense accounts. The drive to improve governance should not be limited to the private sector, and the Council is suggesting in particular that the Standing Committee on Finance may be the most appropriate place to begin a discussion about how to improve the management of federal spending.


The federal government is spending more money today than ever before, and the Council would suggest that you as our elected representatives should take the lead in making sure that this money achieves as much impact as possible in improving the standard of living and quality of life of all Canadians.


Thank you again for the opportunity to make a presentation to this Committee. The members of the Council wish you well in your deliberations, and stand ready to help in any way that you may find useful should you have any questions or wish to explore any of our suggestions in more depth.


RECOMMENDATIONS


Based on the preceding discussion, the Canadian Council of Chief Executives makes the following recommendations for consideration by the Committee:



    1. Budget balance. Maintain as a bedrock commitment the achievement of a balanced budget or surplus in every fiscal year.


    2. Fiscal prudence. In support of this objective, maintain a minimum of $3 billion a year in contingency reserves and continue to include significant prudence factors in budget projections.


    3. Debt reduction. Establish a formal commitment to achieving a federal debt/GDP ratio of 25 percent or lower within a reasonable timeframe. To this end, ensure that all surpluses generated by unused contingency or prudence factors together with any planned surpluses are used to reduce the federal debt.


    4. Capital taxes. Within the limited resources expected to be available for the next budget, give priority to accelerating the elimination of federal capital taxes.


    5. Corporate income tax. Set as a medium-term goal the achievement of an average combined federal-provincial corporate income tax rate at least 10 percentage points below the United States average.


    6. Innovation. Initiate a comprehensive review of tax rates and other measures intended to promote investment in research and the deployment of new technologies. This review should include capital cost allowance rules, tax treatment of inventory costs, research and development tax credits, capital taxes, sales taxes on business inputs and property taxes.


    7. Entrepreneurship. Initiate a review of all tax incentives, loans, subsidies and programs intended to encourage Canadians to start and grow new businesses to see how well they are working and how they might be made more effective. This review should include the Labour-Sponsored Venture Capital Corporation tax credit, the activities of the Business Development Bank of Canada and various programs delivered through Industry Canada, Human Resources Development Canada and other departments and agencies.


    8. Tax-sheltered personal savings. Continue to expand the contribution limits for Registered Retirement Savings Plans as fiscal resources allow to $27,000 per year on an inflation-adjusted basis, and consider the creation of a tax-prepaid savings account to encourage additional saving for both retirement and lifelong learning.


    9. Personal income taxes. As fiscal resources allow, continue to increase the basic personal exemption, reduce the excessive marginal rates faced by modest-income families with children, and raise the floor for the top income bracket to $150,000.


    10. Overall spending cap. Legislate a cap on the rate of growth in overall program spending, including transfers to other levels of government, of no more than the rate of growth in the Gross Domestic Product minus one percent.


    11. Multilevel spending review. Commit to an ongoing process of spending review, with a review of each cross-cutting functional area at least once every 10 years, a review of each major policy area on a 5-year cycle and departmental reviews of each program on an annual basis.


    12. Policy review priorities. Three priorities for review at the policy level are Employment Insurance, defence and Aboriginal affairs. The most urgent functional priority for review is government procurement.


    13. A 5 percent reallocation fund. Establish as a performance requirement of all senior managers in the public service the identification each year of the least effective 5 percent of the spending under their direction, with the goal of establishing a pool of potential resources for reallocation to new and growing needs both within and between departments.


    14. Transparency. Encourage greater openness by having outside experts from the private, nonprofit and academic sectors work with public servants in the spending review process.


    15. Reinvigoration of the Treasury Board. Re-establish the Treasury Board as the internal champion of the spending review process, with a mandate to assist departments in their internal evaluations and to challenge the cost-effectiveness of both existing programs and new proposals.