Proceedings of the Standing Senate Committee on National Finance
Issue 2 - Evidence
Ottawa, Wednesday, March 27, 1996
The Standing Senate Committee on National Finance, to which was referred Bill C-10, to provide borrowing authority for the fiscal year beginning on April 1, 1996, met this day, at 5:15 p.m, to give consideration to the bill.
Senator Pierre De Bané (Chairman) in the Chair.
The Chairman: Honourable senators, I wish to call upon the Parliamentary Secretary to the Minister of Finance, Mr. Barry Campbell, to make his opening remarks, after which we will ask him questions.
Mr. Barry Campbell, Parliamentary Secretary to the Minister, Department of Finance: Thank you very much. It is a pleasure to appear before you this afternoon. I welcome the opportunity to speak to you on Bill C-10, the borrowing authority bill for fiscal year 1996-97.
Our goal is to have the borrowing authority in place on April 1, the beginning of the government's new fiscal year. This will ensure continued regular financing operations for the government.
I know that many of you are familiar with the way in which borrowing authority bills work; however, I want to provide some brief opening remarks about what we are trying to achieve with this bill. I will then be pleased to respond to questions. As I indicated before we began, I will be joined shortly by some officials from the department.
All borrowing authority granted by last year's Borrowing Authority Act, including the $3 billion non-lapsing amount, will be depleted by the middle of April. If the new legislation is not in effect by that time, the government's funding requirements will have to be met by using section 47 of the Financial Administration Act.
As many of you know, section 47 of the Financial Administration Act restricts borrowing to short-term funds. Having to resort to these could be quite costly to the government and to Canadian taxpayers and would expose the government to the additional interest rate risk implied by increased short-term funding. That is why it is critical that borrowing authority be secured as soon as possible.
Before I comment on the various clauses of the bill, allow me to place in context what this legislation is about. Bill C-10 provides the government with the authority to fund the financial requirements of the government as set out in the 1996 budget. That budget is the third milepost on the government's journey to securing fiscal stability in a vibrant, dynamic and competitive economy for Canadians. The measures in the 1996 budget consolidate and extend those measures in our first two budgets and further contribute to our economic and financial objectives by maintaining our focus on reducing program spending and not raising taxes. These measures will ensure that we hit our new deficit target to bring the deficit down to 2 per cent of gross domestic product.
Let me now turn to the various clauses of the bill before us. Subclause 2(1) requests borrowing authority in the amount of $18.7 billion for the 1996-97 fiscal year. This amount is required to meet financial requirements of $13.7 billion to cover exchange fund account earnings of $1 billion and to provide a $4-billion non-lapsing amount.
I want to pause here to point out that the $4-billion non-lapsing amount represents a $1-billion increase from previous years. Since 1986, the non-lapsing amount has been $3 billion. The increase in the bill is a prudent measure which will provide the government with the ability to manage foreign exchange requirements more effectively in light of the increased market flows and volatility that we have seen in recent years. It may either be used during the course of the year to manage contingencies, such as unexpected foreign exchange requirements, or can be carried forward into the next fiscal year.
Subclause 2(1) also ensures that the borrowing authority provided in this bill may only be used after the 1996-97 fiscal year begins.
Subclause 2(2) ensures that any portion of the $3 billion non-lapsing amount granted by the Borrowing Authority Act 1995-96 that is used in 1996-97 will be deducted from 1996-97 borrowing authority. This prevents any use of the 1995-96 non-lapsing amount effectively adding to borrowing authority in 1996-97.
Clause 3 states that all unused borrowing authority granted by this bill, in excess of $4 billion, will be cancelled on March 31, 1997. This allows the $4 billion non-lapsing amount to be carried forward into the next fiscal year; that is 1997-98.
Clause 4 stipulates that, for the purposes of calculating borrowing authority usage, the effective date is April 1.
Finally, clause 5 deals with the cancellation of unused borrowing authority from 1995-96. If this bill comes into force before April 1, any unused borrowing authority granted by the borrowing authority act 1995-96 is cancelled effective March 31.
If this bill comes into force after April 1, the $3 billion non-lapsing amount generated by the Borrowing Authority Act 1995-96 can be used in the period between March 31 and the date this bill comes into force.
Borrowing authority is a normal part of the operations of the government. It is exceedingly important for the smooth functioning of the government's borrowing program. It is very important that that authority be in place at the beginning of each new fiscal year.
From my knowledge in how these things are done - and you are, in some respects, better informed on these matters than I - this bill does not differ from the bills seen in prior years except as I have indicated. I noted only one change - the increase in the non-lapsing amount.
In all other respects, I am satisfied and I believe that officials will confirm that the bill follows the form and course of such legislation in the past.
Before I turn it back to you, Mr. Chairman, for questions, I would introduce the officials who have joined me at the table: Jon Cockerline, Paul-Henri Lapointe and Doug Wyatt.
Senator Stratton: It is my understanding, sir, that UI premiums are being used to fund the budget. In other words, there is $5 billion in it from UI. That amounts to a surtax on business, in essence. Instead of reducing the amount paid to UI, you are keeping that money to run the government. Is that true?
Mr. Paul-Henri Lapointe, General Director, Fiscal Policy and Economic Analysis Branch, Department of Finance: First, it is important to know that, since 1986, the UI account has been fully consolidated with the general account of the government. So any UI revenues which we collect are part of the overall general revenues. Benefits which are being paid out of the account are included in the general expenditures of the government. The UI account exists more as a theoretical concept, if I may use that term. All the revenues flow into the general revenues of the government.
Until 1994, we had, notionally, a large accumulated deficit in the UI account. In fact, it reached over $6 billion in 1993. As the provisions of the UI legislation indicate, we must now pay back or eliminate that accumulated deficit. At the end of 1995, we had essentially eliminated that accumulated deficit.
As indicated in the last budget, in order to avoid having to raise the UI contribution in the future when the economy goes into a recession or slow-down, the government indicated in the 1995 budget that it would accumulate a surplus of over $5 billion to provide more stability in the UI premium.
This year, at the end of 1996, the accumulated surplus will be around $5 billion. In a sense, it is true that the surplus in the UI account contributes to reduce the deficit just as, in any downturn period, the UI account contributes to the overall deficit.
Senator Stratton: You said you are building up savings or a kitty for when times go bad. Is your target $6 billion?
Mr. Lapointe: No, the 1995 budget indicated that the surplus would be allowed to go above $5 billion. As I said, at the end of 1996, we will reach about $5 billion. In this budget, we had assumed, for planning purposes, that the UI premium would be reduced 5 cents in 1997, although the actual rate will be set in the fall of 1997. But based on that assumption, the surplus would approach $10 billion by the end of 1997, if we set the premium rate as assumed for planning purposes in this budget.
Senator Stratton: Would you not set an initial target level for that kitty? Will you just let it grow at $5 billion per year ad infinitum, or will you tell Canadians that it is your intent to establish that target and then to drop the surtax on business? I would hope that would be your choice.
Mr. Lapointe: We are still looking for the appropriate reserve to meet future requirements when the economy slows down. So far, we have been working on the assumption that a surplus of between $8 billion to $10 billion would be adequate based on previous experience. However, if we were to keep the premium rate completely unchanged in the next downturn, we would need more than that. We are still looking at that question.
Senator Stratton: You are looking for a reasonable amount. Did the deficit in that UI account not get to $18 billion at one time?
Mr. Lapointe: If we had kept the UI premium rate from rising in the last recession, we would have accumulated a deficit of about $18 billion.
Senator Stratton: Yes.
Mr. Campbell: In light of the UI reform which is under consideration, this subject will be under continued review. Ultimately, it will come before this or another committee of the Senate. Those decisions will come in due course when that review is completed.
Senator Stratton: I understand that but my only concern is you are trying to jump into a surplus of $10 billion over two years. Could you ease the pain and extend that over three or four years, or are you expecting a recession in 1998-99? Is that what you are anticipating? I feel that we are being pretty onerous on small business.
Mr. Lapointe: We have already reduced the rate.
Senator Stratton: I understand that, but if you are building a sock of $5 billion a year, you will reach your target in two years. Why not extend it over three or four years so you hit the $8 billion to $10 billion target in three to four years rather than in two years? In that way you would be able to reduce the pain, particularly on small business.
Mr. Lapointe: The other thing I forgot to mention is that as part of this reform we are reducing the maximum contributory earnings. This, combined with the reduction in the premium rate this year, will reduce the total contribution from employee and employers by $1.2 billion.
Senator Stratton: I have just been given figures. My understanding of the projections over three years is that if there are no cuts in premiums over those you have already instituted, for 1996-97 you would have $4.7 billion, for 1997-98 the figure would be $4.6 billion, and for 1998-99 there would be another $5 billion. Therefore, you would be close to $15 billion to the good.
Mr. Lapointe: That would be so if we assume that the premium rates are unchanged, but as I said, the rates are determined in the fall for the following year.
Senator Stratton: I appreciate that. If your target is $8 billion to $10 billion, surely to goodness in 1998-99 you will be able to cut rates substantially. If you have the extra $5 billion, you could easily give the employee and the small business owner a heck of a break. Or are you intent on keeping this and using it as a way to pay down the deficit?
Mr. Campbell: In fairness, that is a political question rather than a technical one. I think we have already anticipated a certain reduction in the preparation of those figures. If further reductions are warranted, they will be visited at that time.
Senator Stratton: I know it is difficult for you to answer that, but if you reach your target of having over $9 billion in the kitty over two fiscal years, in the following year, 1998-99, you will have another $5 billion. Surely to goodness you can then tell the Canadian people, and small business in particular, that they will get a break on UI.
Mr. Campbell: I think we all look forward to that day, senator.
Senator Stratton: Thank you.
Senator Bryden: I want to refer, Mr. Campbell, to your statement. In the second paragraph on page 3 you tell us of all the good things the government is doing on reducing program spending and not raising taxes.
This is going to sound peculiar to some people, coming from me, but there are some increases in actual taxes paid, and one has come to my attention which is difficult for me to explain. Under the RRSP program, it used to be that the administration fees were tax deductible, if paid outside the plan.
One of the new accounts that is available is referred to is a RAP account, in which pools of funds are administered very much like a pension fund. It is a great passive way of doing this. The particular account I have in mind has a 25 per cent management fee. That is the only fee on this account. So a $50,000 RAP account would have a 2.5 per cent administration fee. Last year, that 2.5 per cent was deductible from your taxes. It is now quite clear that the 2.5 per cent will not be deductible. Therefore, if you are at the marginal rate, your taxes will have gone up by something like $600 on a $50,000 investment.
I have been told that if you continue to pay your administration fee outside of your account, that is, if you cut a cheque to pay for the management fee, the amount of that cheque is added to your account as a contribution. In other words, you get hit twice. No longer can you deduct 50 per cent of the management fee and in fact the management fee is added to the amount that you have already deposited in your account.
That sound very strange to me, but that is the way in which the brokerage houses are interpreting this. This affects a great number of people, and these are real tax dollars.
Mr. Lapointe: I am not sure I can adequately answer that question. I am not a tax expert. All I can tell you about the logic for what we are doing here is that the reason we are not allowing the deduction of the administration cost is that the earnings on the account are not taxable, so to provide a deduction for the administration of an investment fund that is not taxable would be to provide a tax break twice. It provides parallel treatment to a normal investment where you pay tax on the earnings on your account and therefore can deduct the administration cost of that account. That is the logic behind what we did.
The other part of your question I unfortunately cannot address.
Senator Bryden: Should that question be directed to the Department of National Revenue?
Mr. Lapointe: People in the tax policy branch could answer that.
Senator Bryden: It is not unusual to give a tax break to encourage people to save. That is the whole purpose of the RRSP. On accounts that are outside, you pay tax on whatever you earn and you can deduct your losses. You can do neither inside an RRSP. Up until this year, you could also deduct the cost of your administration and management fee.
My point is that while tax rates may not have changed, changes have been made which increase the amount of taxes citizens pay. That is just one example relating to the RRSP.
The backing up from 71 to 69 will be a huge hit at some point. This will probably end up at 65 at some point in the future. This is a political issue. There are competing policies here. We are asking Canadians to be more self-reliant and to look after their own retirement because Mother or Father Government will not do it any more. These policies are not encouraging people to save in those systems for retirement in the manner that the RRSP program used to.
Mr. Campbell: I would encourage you to take the technical question up directly with officials in the department. This is the first time I have heard that particular explanation or that particular problem. Officials have not heard it before either.
On the question of RRSPs, let us not overlook other changes which I think will be welcomed by those anxious to provide for their retirement. I am thinking in particular of the elimination of the seven-year limit on making up for contributions. That is good news, especially for younger Canadians starting out who are not able to make their full contributions now. Let us remember that the average RRSP contribution is around $4,000.
Senator Bryden: I am on your side. I just think that we need to be cautious in the way we state these things because there are problems. The tax treatment of some things has changed dramatically as a result of this budget.
Senator Cools: I should like to welcome Barry Campbell to his first meeting of the Standing Senate Committee on National Finance. I believe this is his first Senate committee of any kind.
Mr. Campbell: That is correct, senator.
Senator Cools: In your remarks, on the first page, the fifth paragraph, you state:
If this legislation is not in effect on time, it means that the government's funding requirements would have to be met by using section 47 of the Financial Administration Act.
Could you tell us what section 47 says?
Mr. Campbell: I will not bore you with the actual statutory language, but, in effect, the Financial Administration Act requires the government to obtain specific borrowing authority for each fiscal year. In the absence of obtaining that authority, the only authority that the government has is under section 47, which limits the government to short-term funds only, with all the risk and higher interest rates attendant on that kind of borrowing.
Senator Cools: I am not bored by the statutory language. Feel free to read it to me.
Mr. Doug Wyatt, General Counsel, General Legal Services Division, Department of Finance: Section 47 reads as follows:
Where it appears to the Governor in Council that the Consolidated Revenue Fund will be insufficient to meet the disbursements lawfully authorized to be made from it, the Governor in Council may authorize the Minister to borrow, for a period not exceeding six months, an amount not exceeding such amount as the Governor in Council deems necessary to ensure that the Consolidated Revenue Fund will be sufficient to meet those disbursements.
Senator Cools: We have done a lot of work in this committee on that particular section of the act.
We senators seem to go through this situation every year. Someone says that unless we pass this initiative in 24 hours, there will be disastrous results. It is quite interesting that officials from the department can sometimes find money for another few weeks. They are curious people.
Senator Stratton: Billions of dollars.
Senator Cools: They can keep going for quite some time.
How long was Bill C-10 in the House of Commons? When was it tabled?
Mr. Campbell: It was dealt with at all stages on Thursday last, I believe.
The Chairman: It was introduced in the House of Commons on March 6, and second reading was on March 18.
Senator Cools: And we received the bill today, March 27.
You are not a minister, Mr. Campbell, but is it not possible for the government, since the Liberals control the agenda in the Senate, to conduct its business so that we can have time to properly study these bills? Today is March 27. You must have the bill by March 31, which makes things very difficult for us.
Mr. Campbell: That is an excellent and understandable comment. I am told that it is often the case that bills come to you at the last minute. This year there were circumstances that made it impossible for this to be done in any more timely a fashion. If you recall, the House did not resume sitting until the end of February. A borrowing authority bill cannot be introduced and dealt with until the budget has been introduced. It flows from the budget. The financing requirements are called for in the budget. As a result, we were somewhat constrained.
The legislation was introduced extremely quickly following on the budget and was dealt with expeditiously in the House. On behalf of the minister, I want to thank this committee for assembling so quickly to deal with this bill in order that it can progress through the Senate in a timely fashion.
I take your point. This year we had a particular predicament. The House resumed only on February 26. A budget was announced a week later. A borrowing authority bill cannot be introduced until the budget speech has been delivered, and here we are.
Senator Cools: I quite understand. Obviously the solution was for the House of Commons to resume sitting before it did.
The Chairman: It is quite an improvement compared to Bill C-7, which has been in the other place for a year and a half now.
Senator Cools: To finish my point, I should like you to send a message to the minister. We all duly comply, but this is becoming tedious and tiresome.
Mr. Campbell: You message has been heard, Senator Cools. I will convey it on your behalf.
With respect to the other part of your question, I should like to respond by reminding you that a $3 billion non-lapsing amount out of last year's borrowing authority bill carries over in this fiscal year until mid-April to allow some leeway in the event that the new borrowing authority is not passed. If we you use that up, we are into the short-term funds.
Senator Stratton: So we do not have to pass the bill tomorrow; we can wait until Monday.
Mr. Campbell: Officials inform me that the non-lapsing amount will be depleted by Friday. We will be into the Financial Administration Act.
Senator Cools: I make the point partially in jest but partially in seriousness because we have to run like mad to get these things done. These kinds of fiscal matters obviously are issues of confidence. We work industriously, judiciously and diligently to expedite these matters. I would like you to take a strong message back that it would be better if we could have more time to study these bills. This means that members on the other side have to exercise a wee bit of restraint.
The Chairman: Can the Governor in Council use section 47 of the Financial Administration Act even when Parliament is sitting?
Mr. Wyatt: Mr. Chairman, I believe the answer to that is yes. It has the Governor General warrants when Parliament is not sitting to authorize expenditures. It might be useful if my colleague were to indicate in what circumstances it has been used in the past.
Mr. Jon Cockerline, Chief, Debt Policy and Markets Section, Department of Finance: The most recent usage of section 47 was for the period April 15 to 19, 1993.
Senator Cools: Do you know why it was used?
Mr. Cockerline: At that time, I believe the borrowing authority bill had not been passed.
Mr. Campbell: I am sorry you do not have the chart before you. If you had, you would see that in the two years immediately prior to this one, we have not had to resort to section 47, which I think is consistent with the prudence we are trying to demonstrate.
The Chairman: Clause 47, then, can be used by the Governor in Council whether or not Parliament is sitting.
Am I right in saying that the borrowing needs of the government for the next fiscal year will be substantially lower than the borrowing needs for the year which will be ending in a few days which, also, were substantially lower than the preceding year? Can you give us some idea of the reduction in borrowing needs?
Mr. Campbell: Yes, indeed. As I explained, the $18.7 billion consists of several components. If you look at the table in the budget plan which is a summary statement of transactions, you will see that it covers the years 1993-94 through 1997-98. After indicating budgetary revenues for each of those years, program spending, an operating balance, and after going through all the calculations, you come to something called "financial requirements".
You are quite right, Mr. Chairman. If we look at 1993-94, we see that those financial requirements were just shy of $30 billion. In 1994-95, they were just under $26 billion. In 1995-96, they were $20 billion. In 1996-97, they are $13.7 billion. Looking ahead to 1997-98, we see that they are $6 billion.
Coming back to 1996-97, which is the year we are talking about, $13.7 billion is the largest component of that $18.7 billion that the borrowing authority seeks. It has been on a decidedly downward track which will continue beyond this year.
Senator Taylor: Do you have at your fingertips the percentage of the public debt that is held outside Canada? It might be enough just to say if it is going up or down.
Mr. Cockerline: I have some statistics here for you, senator, with respect to the total foreign holdings of Government of Canada debt. The most recent statistic is from the end of 1994-95 where there was a total of $110.4 billion held by non-residents. This amount is split into $71.3 billion of marketable bonds and $39.1 billion of Treasury Bills.
Senator Taylor: That report has 1995-96 on it. The one for 1994-95, therefore, does not help me too much. You mentioned public debt in 1995-96, 1996-97 and the debt expected in 1997-98. There are no projections for what percentage of that is foreign.
Mr. Cockerline: No, we do not have projections, nor do we have very accurate data for the most recent numbers.
I could say that at least in the two most recent years for which I have statistics the amount has fallen by a small amount. It was $111.7 billion at the end of 1993-94.
Senator Taylor: On page 3 of the opening remarks by Minister Barry Campbell it states that the increase in the non-lapsing amount is a prudent measure which will provide government with the ability to manage foreign exchange requirements more effectively. Is this increase tied in any way to the fact that, perhaps, you are increasing the debt outside the country? You are mentioning that you want the increase for foreign exchange. Why would you be worrying about foreign exchange if it was not your foreign debt?
Mr. Campbell: Senator, I may defer to my more expert fellow witnesses here this afternoon, but the two really have nothing to do with each other. The budget contains references to a possible increase in the reserves. The non-lapsing amount is for one of two possible reasons; that is, either because of exchange transactions or the carry-over about which I spoke. The two really have nothing to do with each other. The reserves are maintained to deal with defence of the currency of the dollar. The borrowing requirements are for purposes of dealing with the deficit.
The Chairman: Mr. Cockerline, I should like to ask you a question about the money that our country owns to foreigners. Do we have to reimburse them in Canadian dollars or in foreign currency?
Mr. Cockerline: Mostly, we have to reimburse them in Canadian dollars. This number includes our foreign currency debt. However, I do not have an exact Canadian equivalent of the foreign currency component of that. I think it is in the neighbourhood of $12 billion or $13 billion. I would say that, perhaps, 10 per cent of that total is in foreign currency.
The Chairman: Why does Canada sometimes borrow in foreign currency? I understand that you are the Chief of the Debt Policy and Markets Section, Mr. Cockerline. Why do we sometimes think it is better for us to borrow in foreign currency?
Mr. Cockerline: The answer is one of policy. The government has a policy of borrowing in foreign currency only to fund its foreign exchange reserves. The most recent numbers for our foreign exchange reserves place our U.S. currency reserves in the neighbourhood of $12 billion. We have a corresponding amount of foreign currency debt. The remainder of our financing, which is done for our government operations, is done exclusively in Canadian dollars.
Senator Stratton: The borrowing authority amounts to $18.7 billion. The deficit is $24.3 billion. Non-budgetary transactions are $10.6 billion. Financial requirements then become $13.7 billion. Then add back in the exchange fund revenue of $1 billion. You have a reserve for contingencies of $4 billion. Those numbers add up to the $18.7 billion.
Mr. Campbell: That is the non-lapsing amount.
Senator Stratton: If the budget has a $2.5 billion contingency already in it, why is there a need for another $4 billion for extra room? It is my understanding that the two combined amount to $6.5 billion as contingency, although I may be wrong.
Mr. Cockerline: The two contingencies have very different purposes. The budget contingency is intended to meet contingencies in the expenditures, revenues and debt charges, whereas the borrowing authority contingency is, as Mr. Campbell has indicated, to meet two functions basically; the unexpected foreign exchange requirements -
Senator Stratton: So $4 billion is reserved for foreign exchange requirements?
Mr. Cockerline: Foreign exchange requirements and the non-lapsing reserve.
Senator Stratton: I understand. Thank you.
The Chairman: We thank you very much, Mr. Campbell, as well as your three learned officials.
May I ask for a motion to report this bill?
Senator Losier-Cool: I so move, without amendment.
The Chairman: Is that agreed?
Hon. Senators: Agreed.
The Chairman: Thank you very much.
Following the Easter holiday, the committee will begin its examination of the Main Estimates, at which the President of the Treasury Board will be the initial witness.
Also, following the Easter recess we will deal with Bill C-7, the Department of Public Works and Government Services Act. We may be able to start studying that bill even before the recess.
The committee adjourned.