Catherine Swift, president of the Canadian Federation of Independent Business (CFIB),was asked by Ontario's Standing Committee on Finance and Economic Affairs to appear Monday at pre-budget hearings as an expert witness.
"The Ontario government continues to send mixed messages to the province's job creators," Ms. Swift said in a release that outlined key recommendations. "While the plan to reduce personal and corporate taxes is a step in the right direction, you have, for example, the Minister of Labour intent on driving small businesses into the ground."
Here is a draft hansard copy of the transcript. (The official version is expected to be available this week.):
The Vice-Chair (Mrs. Laura Albanese): We now call the Canadian Federation of Independent Business to come forward. Good morning.
Ms. Catherine Swift: Once we get our technology organized, I'll introduce ourselves.
The Vice-Chair (Mrs. Laura Albanese): Yes.
Ms. Catherine Swift: I'm Catherine Swift, president and CEO, Canadian Federation of Independent Business, and I'm accompanied by my colleague Satinder Chera, who is our vice-president for Ontario.
We have a little package I believe you've received. There are a number of documents in it. As you'll see, we tried not to overload you too much. I'll be referring to them in the course of our overview presentation, in which a slide deck is also included.
Just a couple of brief comments about CFIB: Next year, we're going to be celebrating our 40th anniversary. We're currently the largest individual membership business organization in Canada. We have over 105,000 members across Canada and, of course, a good chunk-about 42,000-here in Ontario. We basically represent every sector of the economy. The commonality among our members is they're all Canadian-owned companies and they're all privately held companies. Part of our interesting history is that RIM used to be a member before they went public. But we do represent the small and medium-sized business sector of the economy.
All of our policy positions are based on input from our members. It's not what I or Satinder or anyone else cooked up that morning. We're 100% financed by our members, which is very rare among business associations; most of them accept money from large corporations or governments.
Just moving ahead to the demographics of the Ontario small business community, naturally most firms in the province are very small, as you can see by this pie chart. That's pretty reflective of the country as a whole, so Ontario is fairly typical that way. What is interesting is, during our recent recession we actually saw employment in the small and medium-sized business community stable or increasing. Certainly some sectors got hammered-we have a lot of members in the manufacturing sector-but others picked up the slack. What you see with small and medium-sized businesses is they're an amazingly stable part of our economy. So policies that help them tend to help with job creation and stability overall. Virtually all of the job reductions that happened over the recession came from large corporations.
Our Business Barometer is a survey we do monthly now; we originally did it annually, then quarterly, and then just in June last year we started doing it monthly. It's turned out to be an immensely useful tool to gauge what the economy is doing. Here, as you can see-the last one was the end of last year; we'll be releasing the January numbers in the next few days. We saw improvement, we saw recovery happening around the early part of last year. Although it's bopping around a little bit, as you can see, we see an improved-basically what this represents is the confidence level of business owners. Again, as you can see from the chart there, it tracks GDP very well. So we find policy-makers and finance ministers, governments and private sector economists are using this as a very good gauge of the economy overall.
When we look by province, you can see that the Ontario number is virtually identical-it's off by a couple of tenths of a percentage-to the national numbers. Of course, Ontario is about 40% of the national economy, so that's not too shocking. It's kind of the middle of the pack in that sense.
When we look at cost concerns of the small business sector, you can see that tax and regulation are clearly number one, and those are things that are very much within governments' control. Some things, of course, we don't have as much control over, but those we have a lot of control over.
Insurance costs are bopping up again. We anticipate concerns. As you may recall, back in 2002-03 we had a terrible shock to the system with respect to insurance costs going up, and for small firms this tends to be a lot of the commercial costs. It's not necessarily auto-related.
When I heard Warren talking about the dollar-it's very interesting how the value of the dollar has kind of an interesting impact on small and medium-sized firms. We track this very regularly. At any given time, no matter how high or low the dollar is, we get a very consistent result, which is that about half of the small business community feels it does not have a direct impact on their business; about a quarter would like it higher; about a quarter would like it lower. So overall, it's kind of a wash. I know the large corporate sector is very acutely affected, and certainly commodity markets are very acutely affected. But when we aggregate the impact across the whole small business sector, which is roughly half the economy in Ontario and nationally, we actually find it doesn't have that huge an impact. So when we see variations in the dollar, I think that's one reason we see the stability that we see in the small business sector.
Energy costs, not surprisingly, also a major factor, and wage costs as well, and seeing increases in things like minimum wage, naturally, factor into that.
When we look at employment plans in Ontario over the next few months, which is the time frame we look at, as you can see, when we look at full-time employment, basically we've got a very significant portion of the sector saying they will either keep the employment the same or increase it. Part-time is a little bit different.
One thing we always see at the beginning of a recovery is initially you see part-time employment start to grow, and the reason is because when there's still instability, a business doesn't want to necessarily commit to full-time. Once we see recovery kind of stabilize and people's confidence increases, that converts into full-time employment. A lot of people think part-time is not a good sign but that's not true. It's often just the precursor to more full-time employment.
When we look at the issues that are most important to small businesses, again, total tax burden is perennial number one, and government regulation and paper-again, two factors we have within our control.
Naturally, our small businesses are acutely concerned about debt and deficit levels. They know that just represents the need for future taxation and less money to spend on things that people want to spend it on: health care and so on.
Workers' comp has certainly been a big problem and an increasing problem over the last little while, and I want to get to that later.
When we look at this chart, it's pretty stark that we've got a spending problem in this province. We track things like inflation and population growth, to get a rough gauge-it's not perfect-and obviously, spending has taken off like a rocket, compared to those other two factors. Debt per capita, naturally, as well, has increased, and when we see large deficits we obviously see debt per capita at a higher level.
We asked our members recently, "In what time frame should the Ontario government balance its budget?" Just under 50%, I think, took a pretty measured approach: in the medium term, and we define that as about five to six years. That is very feasible. And again, although there was a certain proportion there that would like it to happen faster, I think they're being quite sensible in realizing we have a very large deficit and it's not going to be done painlessly and also not done overnight.
Again, this next chart, not surprisingly, really-I would think most Ontarians would probably have similar views as to their priorities that they want to see, if less spending is contemplated.
When we asked our members what they wanted to do to help Ontario adopt its deficit, cutting back costs in the public sector is a logical target. The public sector has grown in Ontario through the recession, which really is not a particularly sensible policy. You can see there the lists of possibilities.
The next chart speaks to some research that we have done which has been backed up by other organizations about provincial government wage advantages, and naturally we've done it across the country.
The advantage in Ontario, just on comparable jobs in the Ontario public sector versus Ontario private sector: There's a 13% wage advantage, but that advantage jumps to 28% when pensions are included. Of course, there's been a lot of discussion about pensions, something that we've done an awful lot of work on, as have others. The public sector, not just in Ontario, but across the country, has been virtually untouched by what's happened in terms of private sector pensions, and that simply can't continue. You can't keep this reverse Robin Hood of asking low-income people in the private sector to subsidize very rich pensions in the public sector.
Politicians in Ontario, under the Harris government, actually got rid of the gold-plated pensions that prevailed here previously and have the same sort of arrangements that the rest of us private-sector people have. You here actually have the moral authority to talk to the public sector and say, "There has to be some reasonableness here." I think freezing would be an eminently sensible strategy to try to get things back into a bit of fairness for private-sector workers.
Tax policy going forward: Again, the largest chunk in response to our survey said keep to current tax plans. It was definitely positive to reduce the small business corporate income tax and personal income taxes and to get rid of the surtax. Those were positive moves. There's always an appetite for cutting taxes further, not surprisingly.
It's interesting when you look at the next slide, which shows what forms of taxation have the most negative effect. We find it's payroll taxes and sales taxes. Certainly there are federal payroll taxes and, of course, workers' comp and the health tax here in Ontario, as well as property taxes in a way; that's not a payroll tax, but it is a profit-insensitive tax. Of course, sales taxes are a big impact.
When we look at the next slide, which deals with the HST in particular, by far the biggest challenge, our business members feel, will be the reaction of customers. There's no question there will be administrative improvements; administering one tax instead of two is always preferable. Administering none would be great but probably not realistic. Of course, the underground economy is also a big concern. That would vary from sector to sector.
I think one interesting factor with the harmonization of the sales tax is the fact that we don't seem to see any efficiencies on the government side. Surely, if one tax is being collected instead of two, you should be able to downsize significantly what used to be a large, large bureaucracy administering the previous PST.
In terms of adjustment costs, on average we see just under $4,000 for a business. Naturally, the very smallest firms, because they don't have the administrative capacity, are the most the effected.
I just want to speak briefly on WSIB. What we've seen is some major deterioration, in a number of different respects, of the workers' comp system in Ontario. We have, of course, seen the move to mandatory WSIB coverage for the owners and officers of construction-a totally questionable policy at best-railroaded into law in record time. Clearly, there was something to hide there, or that process wouldn't have taken place like it did. We find the vast majority of our members who are in this position already have private insurance, and the private insurance is way better than what the WSIB provides. It tends to be 24-hour and so on. We ask ourselves, "If a firm can prove they have private coverage, why should they have to be forced to be covered under the very ineffective and mismanaged WSIB?"
When we look to the unfunded liability, well, the chart speaks for itself. For some reason, benefits got indexed. That accounts, I would say virtually completely, for this increase in the unfunded liability. After we saw the auditor's report last year, which showed how very mismanaged the WSIB was, the minister snuck in-just before Christmas, I think it was-another piece of indexing, increasing the unfunded liability even more. The last thing we need right now is an increase in premiums, yet how do you account for this if you don't have an increase in premiums? We recommend we need some kind of outside review of the WSIB that's truly neutral to try to get at the serious problems there.
The next slide speaks to regulatory burden. Again, workers' comp and occupational health and safety come up at the top for those reasons. Our members are very pro-safety. They have been very proactive in so many areas, but the burdensome and very costly inefficient oversight of that is the problem there. Again, down the list are sales tax and so on.
I just want to wind up with some general recommendations. In terms of the total tax burden, we believe if we could see a lower combined HST rate, that would go a long way toward improving both business and consumer acceptance of the HST. We'd also like to see an increase in the small business transition credit; there are some monies that are included there, but we don't believe they reflect the true cost. Refrain from increasing payroll taxes, again the most pernicious form of taxation for the small-business sector.
Also minimum wage: Having minimum wage increases in the midst of a recession is very questionable policy. If you really want to help low-income people, the best way to do it is to lower income taxes on them. You can target lower-income groups, and minimum wages just tend to ratchet through the whole economy and not benefit the group that you are supposedly trying to target.
Also reject the proposed disposal levy on residences and businesses. Business already pays many, many times over through the property tax and through extra fees for things like waste disposal, so adding yet another cost is really dubious.
In terms of debt and deficit, we'd like to see a detailed plan to balance the budget over the medium term, five to six years, and address the accelerating pension benefits gap between private and public sector workers. In terms of government regulation and paper burden, track and regularly report the number of regulatory requirements. We have seen this approach be successful in other provinces. We are pleased to see this Open for Business initiative that has been introduced, but we haven't seen any action yet, so talk is cheap, but we would like to see some follow-through with that.
In terms of workers' comp, we'd like to see the independent review of the WSIB and amend Bill 119 to permit private insurance coverage in construction because that would accomplish the goals that the government purports to want to accomplish.
We have a summary of recommendations in the package for a little more detail.
At that point, I would welcome any questions or comments you may have.
The Vice-Chair (Mrs. Laura Albanese): Thank you for that presentation, and I would ask the official opposition, Mr. Miller.
Mr. Norm Miller: Thank you very much for your presentation. It kind of agrees with the first presentation of Dr. Warren Jestin, where he said that the future is small and medium-sized business in terms of jobs going forward. He also said that the government shouldn't be picking winners and losers, and that's something that this government seems to do. Do you have any comments about that?
Ms. Catherine Swift: Yes. Well, governments-we've always said that government can't pick winners, but losers can sure pick governments. There's a whole sub-class of businesses we call "grantrepreneurs." They're very good at extracting money from governments, but they're not too good at running a business. We all know the fiascos we've seen over years and years and years. So yes, get the environment right and the businesses will come. I think we have a lot of advantages. I agree generally with what Warren said earlier with respect to where we're going to see the growth. We know a lot of our older industries, manufacturing and so on, are going to have to be a lot smarter. We are going to have to deal with the dollar at parity and all that. I certainly agree with that. But if we can-and I think some of the tax reductions we've seen recently are a step in the right direction, the HST ultimately will be a better tax than two taxes, but again, why can we not see other efficiencies brought to bear like downsizing the cost of collecting it and so on. But no, governments are never successful at picking winners and unfortunately they waste the good businesses' money to put it on the bad, and I guess the auto sector was a pretty good example of that over the last couple of years.
Mr. Norm Miller: Now, we have a record deficit in the province of Ontario right now, $27.4 billion. Are you concerned that the government doesn't appear to have a plan to get us back to a balanced budget?
Ms. Catherine Swift: Well, that was why we included the recommendation we had. We've seen that if a plan can be put together, and a multi-year plan, because that's really the only way you're going to tackle it-you need the political will, obviously, at the outset-but if you can put a multi-year plan together-we saw it successfully at the federal level back in the 1990s-I would simple hope that the general public, and certainly our constituency usually has a heightened concern over deficits than your average individual, but I think all Canadians and Ontarians probably realize what we saw back in the 1990s, having to make some abrupt changes, let's put in place a plan now so that a few years down the road we're out of it. Also, Ontario is in very serious financial trouble right now. We're going to be seeing downgrading of bonds that increases your costs and you get into that vicious cycle. The best thing to do, putting together that plan, could well help forestall a lot of those developments, because (a) you've got a plan, and then of course you've got to stick to it.
Mr. Norm Miller: Regulations and red tape are a big concern for your members, as demonstrated by your slide deck. What would you like to see government doing in terms of addressing that issue. You brought up WSIB. You mentioned Bill 119 where mandatory coverage is required. Does it look like the government is tackling that issue? What would you like to see?
Ms. Catherine Swift: Well, I think on that one it's quite simple. The supposed objectives in construction were to bring people out of the underground economy. The kind of farcical nature of that is that it's going to put more people in the underground economy. Imposing more rules and regulations and costs never has the impact of pulling people out of the underground economy; quite the contrary. If businesses can prove they are already insured-and the vast majority are-then why would they be forced under the poorer coverage, WSIB? That makes no sense. So what we're asking-it hasn't been imposed yet; it's not going to be imposed for another year or so-if you're already covered, why can't that be a reason you don't have to come under WSIB? The coverage is better. It's even better insurance coverage at a lower cost.
On the red tape issue writ large, we've had some pretty good success with a few governments across Canada. It's serious work. We don't underestimate the work involved, but provinces have shown they can measure the burden, actually measure the amount of touches they do to a business. Sometimes it's as simple as something you do quarterly. Maybe you can do it annually. Sometimes you can remit something on a different schedule or whatever. There is the fact that Ontario and the feds are collecting corporate income tax together instead of doing it twice.
All those things can really add up to something significant, at a time, too, when governments don't have a lot of money to throw around in the way of tax reductions; I'm not talking about subsidies. This is a great way to improve productivity at low cost. I would say you would even reduce governments' cost if you could get this more efficient. You wouldn't need as many bureaucrats pushing paper.
So we do have a model that works. Like I say, we've seen the Open for Business initiative announced, but what we need now is follow up with action.
The Vice-Chair (Mrs. Laura Albanese): Thank you, and I would now turn it over to Mr. Prue.
Mr. Michael Prue: Yes, a few questions here, just on some of your charts. On page 11, "Provincial Debt per Capita," you show it going from $10,000 in 1997, or approximately that, to $13,013 today. Was inflation taken into account in this?
Ms. Catherine Swift: I'm not sure.
Ms. Catherine Swift: This is budget paper, so this is real money. This would be real, so no.
Mr. Michael Prue: The reason I ask is, if it was $10,000 in 1997 and $13,013 today-I go back to the chart just before that, it shows inflation in that period was 27.3%-it is almost exactly the same as it was in 1997.
Ms. Catherine Swift: I'll have to look into that because I didn't do this particular table, but it's kind of tough to buy because we haven't had huge population growth in Ontario.
Mr. Michael Prue: I didn't do growth because it's per person-
Ms. Catherine Swift: It's per capita.
Mr. Michael Prue: Yes, exactly. I've taken that one out.
Ms. Catherine Swift : But I'm looking at the overall debt levels.
Mr. Michael Prue: Just the inflation, $10,000 and 27% on top of that, would take it a little over $12,800, approximately, in there, and if it's at $13,000, that's only minuscule. Given everything that's happened in the last year, that's a minuscule increase.
Ms. Catherine Swift: But I don't believe Ontario ever paid anything down on its debt.
Mr. Michael Prue: Okay.
Ms. Catherine Swift: Did it? It has just added to it. It wasn't like the federal situation. Ontario never paid anything down.
Mr. Michael Prue: Okay. The next chart, again-and I listened to what Mr. Jestin had to say. Your members are suggesting, 73% of them, that we should in the medium, five to six years, or seven years or longer, try to balance the budget. I would take it they're looking at a 5-to-10 year period to balance the budget. They're not asking that be balanced right away; is that correct?
Ms. Catherine Swift: Absolutely, yes. They're businesspeople. They realize that it's very tough to eliminate such a sizable amount in a short period of time. I think they're being pretty commonsensical, actually.
Mr. Michael Prue : But your own comments were that we should be doing it faster.
Ms. Catherine Swift: No, they weren't.
Mr. Michael Prue: That's what I thought I heard.
Ms. Catherine Swift: I didn't mean to say that if it came out that way. No, I think they're actually pretty logical. I said in a perfect world everyone would love to see it disappear tomorrow.
Mr. Michael Prue: Maybe that's what-
Ms. Catherine Swift: But realistically, I think they're being quite sensible about it.
Mr. Michael Prue: In chart 15 your members talk about the wage differential and you talk about the pensions.
Ms. Catherine Swift: Right.
Mr. Michael Prue: Just to deal with the pensions, public employees, both federally and provincially, pay enormous amounts of their gross-
Ms. Catherine Swift: I realize that.
Mr. Michael Prue: -into the pension. You can't take that away. They've paid it, some of them, for-
Ms. Catherine Swift: We're not saying take it away. We're saying freeze it. The federal and provincial employees-the taxpayer is required to match what is put in by the employee. I don't begrudge anyone saving for their own retirement. Knock yourself out. But you will never find a private sector program that is as rich as all of these public sector programs, and right now you are beggaring the private-and it's not just Ontario; I said it's right across the country and some are worse that others.
But you will never find the richer pension than you will get in the public sector, and you retire much earlier.
We've done quite a bit of research on this. The public sector employee works fewer hours, makes more money now-it used to be the pension was a quid pro quo for lower wage levels, decades ago, but those wage levels have come up and exceeded the comparable private sector job, on average.
Any actuary you speak to-and we speak to them quite regularly-will tell you that something's got to give on the public sector pension front, because it has gotten way out of control and it's not even financially sustainable, even if you agreed that people in the public sector should get more than their private sector counterparts and should retire much earlier and so on.
The Vice-Chair (Mrs. Laura Albanese): Thirty seconds.
Mr. Michael Prue: But I don't understand what your members are expecting to happen with this-
Ms. Catherine Swift: Well, why can't things be frozen? Compensation levels could be frozen for a period of time. Private sector should be permitted to catch up. I mean, you want to help lower-income people. The best way to do it is reduce their tax burden. In the last budget-a lot of people didn't notice it; one of my actuary friends did and brought it to my attention-$2 billion was put in for the next three years, simply to cover off shortfalls in public sector pensions. And you know what? That's not even enough. So there's $6 billion in a three-year period alone to deal with this. It's milking everybody dry right now, and we're going to have a crisis in it.
Warren was referencing municipalities in the US going broke and having to increase taxes. You know the main reason they're going broke? Their public sector wage and benefit burden.
The Vice-Chair (Mrs. Laura Albanese) : Thank you. We'll now pass it on to Mr. Sousa.
Mr. Charles Sousa: Thank you, Ms. Swift, for your presentation. I've always enjoyed your perspective and the things you bring forward.
Page 9 talks about two main issues, as I see it, one being the tax burden and the other being government regulation as one of the higher-priority issues affecting small business.
In regard to the tax burden-on page 17-PST was an issue. Reductions in corporate tax is another issue; reductions in capital tax is an issue; and reduction in personal tax, all of which we're trying to address in the tax reform that we're bringing forward this year. So I think you agree that we're attacking those very issues.
On a point around the burden and the paper burden to small business, it too is something that we've heard loud and clear from your organization over many years. It's important for us, then, in terms of that harmonization, to minimize the impact with the collection. You've referenced already that it's going to be done by the feds. It immediately reduces the burden on small business by about $500 million, I'm told. The effective savings over time would accrue, given the attrition of those services by those individuals.
I've got a couple of questions. My initial question is, you see us going in the right direction as a result of these reforms?
Ms. Catherine Swift: Yes. We would have preferred a little more consultation on the HST front. It was announced kind of fait accompli. I think some other groups would have appreciated that as well.
That being said, we do believe that having one tax is better than having two. A lot of it is the actual transition situation. These are why we're talking about maybe some transitional-get some increase in transitional credits.
Right now, Ontario actually does compensate-it's not huge money-small businesses for collecting the tax. But we're talking to the feds right now. Can we have something happen there, now that we're combining these two taxes?
Mr. Charles Sousa: That's fair.
Ms. Catherine Swift: So there's a lot of detail-we haven't got time here to belabour it all-between here and when we actually do it in five months, I guess it is. We need as much information out of the government to convey to businesses generally, small and large, and consumers, and we'd love to see it come down a point.
One of the reasons we saw a pretty darned good success in the Atlantic region-and I know it wasn't identical; we were quite involved in that as well. Part of the reason that consumers were pretty neutral about it was the rates came down.
Mr. Charles Sousa : So we have a situation where we also have these input tax credits that flow through, representing about another $4.3 billion in savings-
Ms. Catherine Swift: Right.
Mr. Charles Sousa: -which is aside from the tax cuts that we're giving corporates and consumers-which, by the way, we spoke about briefly: About 90,000 of those consumers will no longer even pay tax. So we are reducing the personal income tax substantially to those individuals at the lower end.
On page 10 you talk about the debt increase. We heard from Warren Jestin about the importance of the stimulus funding that the governments around the world, for that matter, have done. Do you agree, then, that that was important for small business in order to achieve some of the situation that we're in? I mean, he mentioned the fact that we'd be in a depression had we not actually done those stimulus funding and increases.
Ms. Catherine Swift: I don't agree with Warren on that one, but anyways-I mean, economists, right?
Mr. Charles Sousa: Fair enough.
Ms. Catherine Swift: I'm an economist, too, so we never agree with each other. You know that.
I said at the time, even before-like a year ago, when this was all being contemplated, and it was more directed at the federal government-I didn't think we needed it as much. I did think we needed some. And I guess, you know, again, five years from now, we'll probably have the correct answer to that question.
Mr. Charles Sousa: Fair enough.
Ms. Catherine Swift: It's pretty hard to say right now, but I don't think we needed to go into deficit as much as we did, particularly at the federal level. But, listen, things like that home improvement tax credit were fantastic. That was a real focused-we still don't know what it's going to cost. I guess we'll see in this budget. Flaherty says he can't afford it again, but that was-those kinds of time-limited, focused programs, I think, are the things that governments can very successfully do in a recession.
Mr. Charles Sousa: You also-two more questions.
The Vice-Chair (Mrs. Laura Albanese): Thirty seconds.
Mr. Charles Sousa: Okay. There is the discussion about the reduction in the HST.
Ms. Catherine Swift: Right.
Mr. Charles Sousa: You're aware that the marginal effective tax rate in Ontario will be cut in half, will be lower than most of the OECD countries and lower than that in the United States. How do you balance-I mean, you have value-added tax systems in other parts of the world who are much higher than we are here. And page 13: It's a necessity for ??health care increase.
The Vice-Chair (Mrs. Laura Albanese): You're leaving no time for the answer.
Ms. Catherine Swift: Well, I just think that we should always try to be the best and not just compare ourselves to the worst and say, "Look, those guys are worse off than we are, so whatever." I mean, I think-and Warren kind of alluded to this, too-going forward, we're competing with countries that have way different-you know, it's not Europe we're competing with, right? It's Asia and so on. So we need to do the best we can possibly do from government to the private sector. That's where those levers we can control: tax, regulatory burden and so on-though we can't control the dollar; it's going to-
The Vice-Chair (Mrs. Laura Albanese): Thank you.
Ms. Catherine Swift: -do what it's going to do. We need to take charge of what we can control.
The Vice-Chair (Mrs. Laura Albanese): Thank you very much for that, and thank you for appearing before our committee this morning.
Ms. Catherine Swift: Thank you for your time.