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HANSARD

NOVA SCOTIA HOUSE OF ASSEMBLY

COMMITTEE

ON

PUBLIC ACCOUNTS

Wednesday, November 24, 2004

LEGISLATIVE CHAMBER

Department of Finance

Printed and Published by Nova Scotia Hansard Reporting Services

PUBLIC ACCOUNTS COMMITTEE

Mr. Graham Steele (Chairman)

Mr. James DeWolfe (Vice-Chairman)

Mr. John Chataway

Mr. Gary Hines

Mr. Howard Epstein

Ms. Marilyn More

Mr. Daniel Graham

Mr. David Wilson (Glace Bay)

Ms. Diana Whalen

In Attendance:

Ms. Mora Stevens

Legislative Committee Coordinator

Mr. Roy Salmon

Auditor General

Mr. Scott Messervey

Audit Manager

WITNESSES

Department of Finance

Ms. Vicki Harnish

Deputy Minister of Finance

Ms. Liz Cody

Assistant Deputy Minister

Mr. Bruce Hennebury

Executive Director, Fiscal and Economic Policy

[Page 1]

HALIFAX, WEDNESDAY, NOVEMBER 24, 2004

STANDING COMMITTEE ON PUBLIC ACCOUNTS

9:00 A.M.

CHAIRMAN

Mr. Graham Steele

VICE-CHAIRMAN

Mr. James DeWolfe

MR. JAMES DEWOFLE (Chairman): Good morning, ladies and gentlemen. This morning we have witnesses from the Department of Finance, as we investigate the taxpayer rebate program. Given the hour - we're a few minutes late - I think we'll move right into our introductions, beginning with Mr. Steele.

[The committee members introduced themselves.]

MR. CHAIRMAN: We also have Mora Stevens, clerk for the committee, with us, and of course Roy Salmon, our Auditor General. Along with Roy is Scott Messervey, audit manager from his department. Claude Carter is absent from his usual position with us today. Without further ado, I'll introduce Deputy Minister Vicki Harnish. Perhaps you could introduce your team, please.

MS. VICKI HARNISH: Mr. Chairman, we're pleased to be here today to address the committee's questions on the Nova Scotia Taxpayer Refund or, as we call it, the NSTR. I'd like to introduce the staff joining me here today. I think the committee members know both of these individuals from previous appearances before this and other committees. Liz Cody, on my left, is the Assistant Deputy Minister of Finance, and Bruce Hennebury, on my right, is the executive director of the Fiscal and Economic Policy branch in the Department of Finance.

1

[Page 2]

We're appearing here today before this committee to discuss administration of the Nova Scotia Taxpayer Refund, a program administered in 2003 to reduce taxes to Nova Scotians. As you are aware, Mr. Chairman, I wasn't the Deputy Minister of Finance at the time the program was introduced, so I'll not be able to personally speak to all of the circumstances around the Department of Finance's involvement in the introduction of this program. It should be noted as well that while our staff has been responsible for administration of the program, it is up to government to define what program it wants. Questions on the policy choices made by government would be best addressed to the elected officials who make them.

Having said that, I would like to help the committee, today, to understand what the program was and how it worked. Government decided on the overall structure for the program in early 2003. Government decided to offer a refund to provide tax relief as quickly as possible, and in a concentrated way, to help boost the provincial economy. The department was then asked to design and implement a program with those fundamental elements. Using the best information available at the time, the department based the program on the principles found throughout the tax system. The NSTR represented an estimated one-half of a full year 10 per cent tax reduction. The period from July 2003 to December 2003. That full tax reduction was estimated to be $136 million, and therefore one-half to be $68 million. At the time, there were an estimated 438,000 filers in Nova Scotia who would qualify. A straightforward calculation yielded a refund of $155 per taxable filer.

Since the refund was designed to be a tax-based program to represent tax reduction, the NSTR was paid only to those individuals who had paid Nova Scotia taxes. In order to determine this, there had to be eligibility criteria. The department, based on the direction from government, set the criteria by reviewing, first, the 2001 tax year, the latest year available at the time for which most Nova Scotians had been assessed, and the 2002 tax year as it was assessed in 2003. This ensured that the NSTR could be paid in 2003. Once filed, the 2003 tax year was also used to ensure that no one would be missed. The test was to determine if the individual was assessed at least $1 in Nova Scotia taxes. In other words, they were taxable taxpayers or they were not. The department was also directed to ensure that the individual had to be a resident of Nova Scotia.

Once the amount and the criteria were determined, the department worked closely with the Canada Revenue Agency to ensure the refunds could be delivered on time and that normal tax administration principles were applied to ensure a fair delivery. For example, because the NSTR was a tax-based program, it was appropriate that the existing set-off program would apply the NSTR to any outstanding Crown debt and to be subject to reassessment of an individual's income tax return or changes in residency. By using CRA to deliver this program, the NSTR was delivered independently and fairly. Decisions on eligibility were consistently applied through legislated parameters, and a call centre was established to handle individual questions and concerns. Over the course of the program so

[Page 3]

far, 504,000 Nova Scotians have received the NSTR, returning just over $78 million to Nova Scotia taxpayers.

Mr. Chairman, I and my colleagues would be pleased to answer any questions that the committee may have.

MR. CHAIRMAN: We will begin our 20-minute rounds as usual, beginning with the NDP and Mr. Steele at 9:10 a.m.

MR. GRAHAM STEELE: Mr. Chairman, because this is the first formal review, that I'm aware of, of the Nova Scotia taxpayer rebate program or the NSTR, I'm going to use most of my time today to just try to establish the basic facts of the program. What are the facts? In your opening comment, Ms. Harnish, you referred to the fact that the direction for the program came from government, which is a big word and covers a lot. Who, specifically, did the direction come from?

MS. HARNISH: The direction for the program, like any program, would have come from the Executive Council.

MR. STEELE: And in what form did it come?

MS. HARNISH: It would be through the Minister of Finance.

MR. STEELE: But in what form? Was it a formal minute of Cabinet, directing the department about the shape of the program the government wanted or did it come in some other form?

MS. HARNISH: At some point there would have been a minute letter emanate from the Executive Council, defining what the program would be, or at least indicating a number of options and one would have been selected. Of course, the Minister of Finance always comes out of Cabinet and relays to staff what the actual decision of the Executive Council would be.

MR. STEELE: When the program was first announced it was expected that as many as 438,000 Nova Scotians would receive this refund. This morning you told us that the actual number is 504,000 and the program isn't over yet, although it will be soon. What is the estimated total number of eligible Nova Scotians when the program finishes?

MS. HARNISH: We don't expect that it's going to be much more than the 504,000. As you can imagine, we get monthly returns, it would be based on the assessments in any given month. The last tax year eligible would be 2003, so as those returns are assessed the largest influx from new eligible filers would have been in the income tax season in the Spring. We're down to a very slow trickle the last few months.

[Page 4]

MR. STEELE: So we're down to the tail end of the program, if any more come in it will be very few, it will be people who, this late in the year, are filing their 2003 taxes, so you don't expect it to be very many. What accounts for the - to my eyes - quite large difference between the estimated number of people who would receive it and the actual number? It is 66,000 people more than expected, what accounts for that?

MS. HARNISH: The 438,000 estimate was based on the best information that the Finance Department had on the number of tax filers in the Spring of 2003, so it would have been based on the returns for 2001 mainly - at that point, Bruce? (Interruption) Bruce says actually the data would have been as old as 1999.

MR. STEELE: So doesn't that surprise you a little bit, Mr. Hennebury, that the estimate could be off by that much?

MR. BRUCE HENNEBURY: Typically we have in the area of that range of taxable filers every year and I think the difference may be caused by the fact that there are different filers every year who are taxable and who are not. I think that may be one of the reasons it was higher than we had expected. We had attempted to estimate eligible recipients, based on the latest tax tape data that we had, which would have been 1999.

MR. STEELE: There's a substantial number of that 504,000 that didn't actually get a cheque for $155 just before the election, like I did and like many people did. What happened was that if they owed the provincial or federal government any money, that was applied to their debt. What is the total number of people in that set of circumstances? Just, by way of reference, back in June 2003 there were at that point already 56,000 people who fell into that category. Now that we're very near the end of the program, what is the final number of people who simply had it applied to a debt?

MS. HARNISH: Our last statistic is the total number of offsets, 56,663.

MR. STEELE: And those are people who never saw the money but simply owe their government $155 less?

MS. HARNISH: For a number of reasons, that's right. They would have received a notice indicating that they were eligible for that money but it had been used to offset other debt.

[9:15 a.m.]

MR. STEELE: Another subset of people are people who were initially told that they were eligible for the $155 and later, when they were reassessed, or audited, or their circumstances changed, had the money taken back. How many people fall in that category?

[Page 5]

MS. HARNISH: We had 1,922 recipients required to repay, which would have been 0.4 per cent.

MR. STEELE: For these people who had been required to repay, or what has been offset to the debt, it doesn't represent a real cost to the government, because there would be a change in the government's account receivable. Surely I'm right in saying you can't really count that as an expenditure and outlay by government. On a net basis, no money changed hands.

MS. HARNISH: That Crown debt would not all be provincial Crown debt, it would be federal and provincial Crown debt, family enforcement orders, it would be for a number of purposes, so I don't think that is actually accurate.

MR. STEELE: So the net cost to the Government of Nova Scotia, of the Taxpayer Rebate Program is what? When everything is netted against everything, when you take into account people who had the money taken back and all of that kind of thing, how much money did this program cost Nova Scotia?

MS. HARNISH: We really don't have the amount of Crown debt that would have been deducted to repay provincial expenses. We just have the total value of the offset for all purposes.

MR. STEELE: What about the administration costs, what was the administration cost of the program?

MS. HARNISH: It was $1.6 million, approximately. The final calculations will be made at the end of the program in a few months, but the estimate is $1.6 million and we're pretty sure that it is relatively on track at this point.

MR. STEELE: If I remember correctly, that's money payable to the Canada Revenue Agency, is that correct?

MS. HARNISH: That's right.

MR. STEELE: One of the things I was curious about that you made brief reference to this morning, Ms. Harnish, was when the idea surfaced. As we all know, the budget cycle is a long cycle, it can be nine months, 10 months before budget day that the process begins. Yet, what you said this morning, Ms. Harnish, was that government brought the idea forward in early 2003. Now for a budget that is delivered in April, that's actually quite remarkably late in the budget process. I wonder if you could be more specific about when, exactly, the Department of Finance was informed that this was going to be part of the 2003-04 budget?

[Page 6]

MS. HARNISH: I would suggest that we would have known much earlier than that. The Progressive Conservative Government had been quite forthright, I would say, in stating that the tax reduction was going to occur as part of its platform. We probably would have had some confirmation it was a good possibility as early as Fall 2002.

MR. STEELE: I'm not talking about the reduction in income tax which they promised back in 1999, what I'm talking about is the specific idea of the $155 cheques landing in people's mailboxes a few weeks before the election was called.

MS. HARNISH: We wouldn't have known when the election was being called, of course.

MR. STEELE: No, when did the department first hear about the $155 idea?

MS. HARNISH: Staff indicate we didn't contact CRA until February, so to the best of our collective recollection it would have been December 2002, or January 2003.

MR. STEELE: I have an internal document from the Department of Finance dated January 2003, assessing the economic impact of the tax cut. There is no mention in that document anywhere, dated January 2003, of the $155 rebate program. Should I take it from that that as of January 2003, that was not part of the landscape that the Department of Finance was dealing with?

MS. HARNISH: I would take it that the cheque, itself, was a very tightly held piece of information that would not have been shared within the Department of Finance very broadly. I would suggest that that is not totally indicative of when the timing might have been, because the number of people who would have been even privy to that being considered, would have been quite small; maybe Liz and Bruce. Staff, I think, were not called upon to analyze that . . .

MR. STEELE: What impact does it have on the budget-making process when a program forecast at the time to cost $68 million isn't known even within the Department of Finance until a couple of months before the budget is delivered?

MS. HARNISH: It didn't really have much of an impact. We would have known that the tax cut was coming. We would have been developing budget scenarios for a variety of options, certainly we put options on the Cabinet table for months, as they look at those and reassess the gap as decisions are made.

MR. STEELE: What were the program's objectives? What was it trying to achieve?

[Page 7]

MS. HARNISH: It's our understanding that the 10 per cent itself was a government commitment, so we were fully aware that that was made for a number of purposes.

MR. STEELE: I'm not talking about that, I'm talking about the $155 cheques. That's all we're talking about today - that's all I'm talking about today.

MS. HARNISH: Our understanding of the program objectives would have been that the government wished to refund the actual taxes paid, starting in January 2003, I'm sorry, July 2003. So it would have been a half-year's worth of savings. We would have been asked to develop options for reinstating that particular amount of money or reducing the taxes. The actual objectives for tax reduction, I believe the government has consistently stated that they wanted to both stimulate economic development and improve our competitive position in terms of being able to attract and keep the best and the brightest in this province.

MR. STEELE: Okay, let's have a look at that, then. You mentioned two possible objectives for the program, and of course we have a third, which is an attempt to sway voters on the eve of an election, but I don't expect you to address that.

MS. HARNISH: We would not.

MR. STEELE: But let's look at the two that you've mentioned to see if they hold any water. The first one is economic stimulation. Is it the view of the Department of Finance that the $155 cheque program stimulated the Nova Scotia economy?

MS. HARNISH: We, of course, haven't done any formal assessment of that, the actual, however, we had some anecdotal evidence that the actual injection of money into the economy at that point in time would have stimulated spending in the economy. APEC, in its report in late 2003, did note an increase of 2.5 per cent in retail sales during the months of July and August, which they attributed to that in particular.

MR. STEELE: But that is not economic stimulation. You know that and I know that. What the APEC said was there would be an increase in consumer spending. When you put money in the hands of consumers, consumers spend. What that analysis doesn't say is that that is simply shifting money from government spending to consumer spending. It doesn't, by itself, mean a darn thing. It just says who's actually got the money. It doesn't represent a stimulation of the economy.

Now, I am somewhat taken aback to hear that a program that is now costing us $78 million has not been assessed to see whether its objectives have been achieved. Doesn't that surprise you that a $78 million program with the ostensible objective of stimulating the economy, that the Department of Finance and we, the legislators, have no idea whether it actually achieved that? Doesn't that surprise you?

[Page 8]

MS. HARNISH: I don't know if it surprises me. We have many tax programs, and we do assess them but certainly on a periodic basis. We wouldn't have had an actual purpose to analyze that.

MR. STEELE: Okay, so if you have a $78 million program . . .

MS. HARNISH: And it's very difficult to isolate the impact of one specific measure on an economy. You have to remember, 2003 was the year that we had a hurricane, we had BSE, we had SARS, we had a number of one-of incidents, and to try to isolate one specific event from that would have been almost impossible. Our models would not be sophisticated enough to do something like that.

MR. STEELE: I think you've answered the question, which is that if one of the objectives of the program was supposed to be economic stimulation, we really have no idea whether it did that. We have no way of knowing. We just have to take it on faith that maybe it did.

Now, you referred to anecdotal evidence, and you know as well as I do the Department of Finance doesn't work on anecdotes, and it shouldn't. I have here this analysis from the Department of Finance dated January 2003. This is an analysis before the program was put in place, and we received this under the Freedom of Information. This analysis itself

indicates that no one should reasonably expect that the entire income tax cut program would have an appreciable impact on the Nova Scotia economy. "These levels of economic impacts suggest that a personal income tax cut of this magnitude . . ." which at the time was $140 million ". . . should be viewed more as a tax burden policy rather than as an economic policy to stimulate the economy."

The analysis also says there is a direct relationship between income distribution and consumer spending behaviour resulting from a personal income tax cut. Low-income earners have a higher marginal propensity to consume than high-income earners. That is something we've been saying for a long time, if you want people to spend money, give it to poor people and they'll spend it within a few blocks of their home, at the grocery store, the clothing store, the hardware store. They're the people who are going to go out and spend the money.

What has always troubled me the most about this program is that the 300,000 Nova Scotians who are too poor to pay provincial income tax didn't get it. So, based on the department's own analysis, it is completely unreasonable to expect that this program, the entire program, never mind just the $155 piece of it, that the entire program would have an economic stimulus effect.

Let's go to the second justification, the tax burden reduction. What information does the Department of Finance have that the $155 program had any impact on the decisions made by people to stay or leave Nova Scotia?

[Page 9]

MS. HARNISH: I think what I said is the tax cut itself was predicated on the two bases. The actual taxpayer refund wouldn't have been expected, as a one-shot deal, to entice individuals to stay or to leave the province.

MR. STEELE: So the two justifications that have been offered by the government, economic stimulation - we've confirmed this morning that the department has no idea whether it actually did that or not, it has no way of knowing even if it wanted to, because the models that we have simply can't extract that out. The idea that it represents a reduction in the tax burden is something that we say, well, no, not really. Nobody can seriously suggest that a doctor, a nurse or anybody else is going to stay or leave Nova Scotia, one way or the other, because of the $155. So that objective of the program, really, we can't say it's been accomplished.

So that only leaves us with the third objective, which is the attempt to buy votes on the eve of an election. That's the only one that's left, because the other two, it is so absurd to suggest that this program actually accomplished either of those other two that the only thing left is the idea that it was politically motivated.

What I'd like to do is ask a question to the Auditor General. Auditor General, we have a program here costing $78 million, we have no idea whether it achieved its ostensible objectives or not, it appears that it may have been motivated by political considerations rather than considerations of sound administration, so my question for you is whether it's the intention of your office to do a formal audit of this program?

MR. ROY SALMON: We had not planned on doing a formal audit of this program. As part of our audit of the financial statements for that particular fiscal year, we did do some work in the area, in terms of verifying the amounts and confirming the amounts with CRA, but we have not gone beyond that. It's not on our radar screen.

MR. STEELE: Does it sound to you like the kind of program that ought to be on your radar screen?

MR. SALMON: Other than verifying the cost of the program and ensuring proper accounting for it, I would see no other objective for my office to get into the area.

MR. CHAIRMAN: Time has expired for the NDP caucus. Having said that, I want to welcome the students and teachers who are with us today. We are holding a Public Accounts Committee meeting, investigating the Taxpayer Rebate Program with the Department of Finance.

Mr. Graham.

[Page 10]

[9:30 a.m.]

MR. DANIEL GRAHAM: Thank you, Mr. Chairman, and thank you for coming once again to speak to us about events with this government and in your department over the last number of years. It seems that our visits have been more frequent than perhaps I might have expected in the circumstances. On this particular day I think it is important to overarch all that we say and do with the obvious comment that you don't make the political decisions. Someone other than you makes the political decisions and it's an unfortunate circumstance for you to have the thankless job of appearing before this committee from time to time to defend the actions of this government.

Nonetheless, it is our responsibility to get to the bottom of this and in the course of trying to get ready for this particular meeting, I discovered that when I thought I had gotten the offence of this cheque out of my system, I actually haven't. So if there is any residue of still feeling offended, and I think Nova Scotians felt offended by this, then I want to apologize up front. This was a naked bribe. This was, as I described it when the budget was first tabled, the rum bottle budget. It stooped to an unprecedented low in tax relief for Canadian jurisdictions and I think it is important for Nova Scotians to understand what steps brought this about in the first place. It occurs to me that there is the obvious question of whether or not tax relief was the appropriate course of action at that time. Many warnings came out from a variety, and disparate variety, of sources that included the chamber of commerce, it included trade unions as well and when the Premier put forward this program, the quote that I think he stuck to was promise made, promise kept. That ultimately became promise made, promise kept, promise broken.

I would like to first start with the process, the rather venal process by which this exercise was undertaken. It came in the form of a cheque and, Ms. Harnish, you said that your department worked closely with Canada Revenue Agency and that perhaps this began as late as February. Now at that time, surely it would have been known by the officials in your department that the money could have been deducted from people's cheques starting July 1st, instead of having the cold, cash transaction of a cheque.

MS. HARNISH: Yes, we were aware that we would have until the middle of April to make such a request of CRA.

MR. GRAHAM: And was it your recommendation that this be the approach rather than having the cheques cut?

MS. HARNISH: To my knowledge, we didn't make a recommendation. We would have provided the Minister of Finance and his Cabinet with information that this was an available option. We also knew that a cheque would be an option. I think Ontario had done it, for example, in the year 2000. So certainly there were a variety of options available to the Executive Council.

[Page 11]

MR. GRAHAM: The Conservative Harris Government did it with a $200 cheque back in the year 2000. I do recall that. The decision to go to the cold cash transaction, then, was made by Cabinet. Is that fair to say?

MS. HARNISH: Decisions related to budget of that nature are always made by the Cabinet, yes.

MR. GRAHAM: Presumably you were told by CRA in advance the cost of the cheque-cutting.

MS. HARNISH: Yes, we had an estimate in March.

MR. GRAHAM: And the estimate was in what range?

MS. HARNISH: $1.6 million.

MR. GRAHAM: And in the end it has actually cost $1.6 million?

MS. HARNISH: Yes. We have no indication that it is (Interruption) And we do have a guarantee, as Bruce has just reminded me, that it will be no more than 10 per cent in excess of that ever. That guarantee was part of the original deal.

MR. GRAHAM: The last time Nova Scotians I believe, were told publically about the cost of cutting the cheques, just the cost of administering the cutting of these cheques, they were told it was about $1 million and now we learn that it is $1.6 million. Has it ever been stated publicly that in fact this cost $1.6 million instead of $1 million?

MS. HARNISH: I don't think we would be able to tell you definitively if it was or not. The agreement, as signed by the Department of Finance, indicated $1.6 million would be the cost.

MR. GRAHAM: When was this agreement signed?

MS. HARNISH: It was formally concluded in December 2003 but earlier drafts of the document go back to June/July.

MR. GRAHAM: So we agreed to cut the cheque without knowing how much it was going to cost to administer.

MS. HARNISH: We would have had the rough estimate, Bruce tells me, as early as March.

MR. GRAHAM: Okay, and the rough estimate at that time was what?

[Page 12]

MS. HARNISH: We don't recall.

MR. GRAHAM: Upon what was it based?

MS. HARNISH: We had an estimate that was based on a number of factors. We would have paid for program development, actual development of procedures, issuing the cheques themselves, developing database systems to process and retrieve the available client information. The call centre that was set up by CRA to respond to customer inquiries, mailing and postage, envelopes, that kind of thing, as well as legal services provided by Justice Canada. They would all have been enumerated and set out.

MR. GRAHAM: So you are not able to tell us today what the estimate of those costs were back in 2003. Is that correct?

MS. HARNISH: Liz just confirms that originally way back in the early days, we may have been given a cost per cheque. At that point, that may have been when the $1 million estimate originated because we would have been estimating, at the time, fewer filers but honestly, I don't think that any of us can definitively answer your question.

MR. GRAHAM: So we blindly went into this without knowing what the final cost of administering the cutting of the cheques would be and it turned out to be $1.6 million. When we know, as you have confirmed, that the money could have been deducted from people's cheques starting July 1st, surely you would agree with me that this is a waste of $1.6 million of taxpayers' money.

MS. HARNISH: Surely you don't expect me to respond to something like that.

MR. GRAHAM: Well, it was. There is just no getting around the fact that Nova Scotians have paid $1.6 million to get bribed. If the objective in the end was to provide some kind of prudent course for Nova Scotians, we must have budgeted properly for this and we must have known that it was affordable. Correct?

MS. HARNISH: We knew that we could accommodate it within the budget that was being developed at the time.

MR. GRAHAM: But it was just in the first quarter of that year, 2003, that we discovered that we had a $32 million shortfall. Is that correct?

MS. HARNISH: That would have been due to changes in federal transfers, predominately, unanticipated changes as you will remember.

[Page 13]

MR. GRAHAM: Well, I remember that they weren't so unanticipated. In fact, it was in 2002 that your department was first told about these things and those things were also budgeted for by the Province of Saskatchewan and noted by the Province of Prince Edward Island. Or was it the reverse? In any event, these were things that were known well in advance. I will take up the issue of what is known and what gets noted or marked in a moment but it was just in the first quarter of that year that you had a $32 million shortfall that you needed to cut and, as was described by the Minister of Finance and the Premier, had to make painful cuts in order to adjust for. Those cuts happened to community services, they happened in respect to housing budgets, and they also happened to school boards, as I recall. It's noteworthy that we have students here who were affected by that.

The data that this committee reviewed, and I'm happy to provide, it suggests that, for example, in the school board in this part of Nova Scotia, this school board receives less money, per student, than virtually every place in all of North America, with the possible exception of Utah and Arizona and we don't have the final stats with respect to that. But they were asked to cut further after what we learn now is $78 million was taken out of coffers that could have gone to school boards instead. Surely, we would have had a better ability to forecast a shortfall as great as $32 million in such a short period of time.

[9:40 a.m. Mr. Graham Steele resumed the Chair.]

MS. HARNISH: Mr. Graham, we have a budget of $6.3 billion. We forecast based on the best available information at any given point in time. That $32 million dollars, while a lot to individuals receiving cuts, is a very small amount with respect to that entire budget. I would suggest that most private sector companies would be quite pleased to be that close on their budget amounts. We forecast based on the best available information. The budget was based on that best available information and we didn't anticipate, at the point we developed the budget, that there would be changes in federal transfers coming to the extent they did, we didn't know that until September of that year.

MR. GRAHAM: I disagree with that, with the greatest respect, Ms. Harnish, $32 million is a significant sum of money to the people of Nova Scotia. Given the events of the last several months, I don't think there should be any preening of feathers about whether somebody did a good job or a bad job of being in or out of budgets because as we know, in early 2004, this government cancelled the other aspect of this cut at a later date, $150 million worth, or at least they reduced the amount of the tax cut that was scheduled to begin on January 1, 2004. So it begs the question, it was apparent that the money was unlikely to be available, not just in the current year that we were in, but for the following years, when you made the forecast in the Spring of 2003, surely it was obvious that you were going to have a shortfall?

MS. HARNISH: It wasn't obvious. We showed you the numbers in the budget at the time, we believed that those numbers were accurate.

[Page 14]

MR. GRAHAM: The Premier came forward and said to Nova Scotians, Ottawa made me do it, Ottawa didn't come through with respect to funding. That was the official response from the Premier's Office, if only Ottawa had come through.

Are you familiar with any promise, any specific promise, that Ottawa made that would satisfy accounting principles that you could have budgeted on, that constitutes the broken promise that the Premier put forward?

MS. HARNISH: I'm sorry, I'm not quite clear what your question is.

MR. GRAHAM: The Premier, when he reversed the tax cut said that this is the fault of Ottawa, Ottawa didn't come through for us Nova Scotians. What I'm suggesting is that Ottawa made no such promise and that you and the Finance Department cannot point to a single document that would suggest that Ottawa made any promise that would have made up for the shortfall that ultimately occurred.

MS. HARNISH: We were, and have been, in the middle of discussions with Ottawa on equalization renewal and we would have been in 2003. Certainly we, and a number of the receiving provinces, very strenuously argued for more adequate levels of equalization funding for well over 18 months at the time, and for health care funding as well. Now we have been successful, and we were successful very recently, it just was too long in coming, one might say.

MR. GRAHAM: You were in the middle of equalization discussions. Nothing was committed in the course of those discussions by the federal government. You surely, as the accounting arm of the provincial government, would recognize that negotiations do not satisfy the standard that is required in order to book something and budget for it.

MS. HARNISH: Mr. Graham, our revenues are audited by the Auditor General. The Auditor General would have audited the forecast that we made. I would suggest that that indicates the information in the forecast at that time was made on the best available information to the extent that the Auditor General was also of the opinion that they were accurate.

[9:45 a.m.]

MR. GRAHAM: Well, it's curious that you raise that because, in fact, the Auditor General of this province specifically complained in November 2003, that he wasn't provided with all the information and that it specifically related to the federal government's comments about the census adjustment. So the Auditor General has already publicly stated that he wasn't given all the information when the Department of Finance was putting together the budget. So, clearly, what you're suggesting is inaccurate.

[Page 15]

MS. HARNISH: That statement would have related to the Fall update, not the budget itself that was tabled in the Spring earlier in the year.

MR. GRAHAM: His comments in November 2003 related in part to the Fall update, they also related to whether or not he received full disclosure in his revenue estimates for the budget of 2003. You can check the records if you wish, but that was one of the four comments that he levelled in the complaint that was raised in November 2003.

MS. LIZ CODY: Just to recast on that one, what we knew about in the Spring of 2003, as it pertained to the census, in our minds, did not have the factual evidence to support the scrutiny that the Auditor General would expect in terms of booking additional revenues or losses to revenues to that point.

MR. GRAHAM: As I've pointed out before, two other provinces had either booked it or had noted it and they felt it was sufficient. It is one thing not to note it or book it, it's quite another not even to tell the Auditor General and the Auditor General comes forward and lodges an unprecedented complaint, as it was described, about not being provided with the full disclosure of information. It is interesting to note the high standard to which one might apply the question of census data and not noting it, but when it comes to a question of whether or not we can afford a tax cut, we're relying on the hope that negotiations on equalization or health care transfers are ultimately going to come through. I'll leave it there.

The final question that I want to touch on right now relates to whether or not Nova Scotians can rely on budget figures for an extended period of time. In the Spring of 2003, a budget was tabled that provided for a tax cut that would annually reduce taxes to Nova Scotians by about $150 million. It was less than 10 months later that the Premier came before Nova Scotians and said, sorry folks, we can't afford it. I'm left wondering, what does that say about the confidence Nova Scotians should have about the budgeting process that we're in, if we can't meet a commitment as large as $150 million? What came to me, as I went through the deliberations about this, was the school announcements that were made, the frankly farcical school announcements that were made in June 2003.

In those announcements school construction or renovation extended out to places often in Progressive Conservative ridings, like the one down on the South Shore, to the year 2010. We see the one in Mr. Dooks' riding that extended out to 2010-11. Surely, you would agree that for amounts of $4.7 million for specific schools that will not be completed in their construction until eight or nine years hence, it was imprudent to make announcements when it's obvious we can't even make budget for $150 million, nine months hence.

MS. HARNISH: We have a capital allocation policy and a commitment to spend $250 million a year on Tangible Capital Assets. That was budgeted within that $250 million a year capital allocation. We have a kind of running schedule of how that capital will be allocated on an annual basis and each year we then take a look at what is available additional

[Page 16]

within that amount and make decisions accordingly. So the announcements would be first call on the capital allocation for any given year.

MR. CHAIRMAN: Thank you. That concludes the time for the Liberal caucus. We will now move on to the Progressive Conservative caucus.

The honourable member for Pictou East.

MR. JAMES DEWOLFE: Again, good morning, ladies and gentlemen. The Opposition's perspective of our tax reduction is well known, there is nothing new being said here today. Our Tax Reduction Program was far more effective than the previous tax rebate program and I'm thinking back to the Liberal's GST rebate cheques from a few years ago, there were many people who received those cheques who shouldn't have received them. That is absolutely not the case with our cheques. I can tell you my constituents in Pictou East were very pleased to receive those cheques. There was only a very few people who I've heard of who said they were giving them to the food bank and so on, and it was a matter of, sometimes, I think, getting a little press on the issue.

The budget shortfall was due to Ottawa not coming through for us. The Opposition members, this morning, asked if there was a promise that the federal government has made that would have prevented or helped reduce the shortfall. Well, gall darn it, there was a promise, and that promise was the Atlantic Accord and, more recently, Paul Martin's promise to deliver 100 per cent of the offshore resources to Nova Scotians, a promise that Nova Scotia's Liberal MPs have shamefully turned their backs on. It was reported by the news outlets and the media that Paul Martin called Danny Williams on the morning of Saturday, June 5, 2004, and told him the Liberal Government will meet his demand for 100 per cent of the royalties. The Prime Minister has so far refused to honour that, unless something has transpired in the late hours of last evening that we're not aware of.

I'll ask you this, if the Prime Minister honours the Atlantic Accord and gives Nova Scotia 100 per cent of the offshore revenues without any clawbacks, like he promised prior to the election, how much new revenue would that mean for the province each year?

MS. HARNISH: The estimates at this point would indicate that it's in the neighbourhood of $640 million over the first eight-year period.

MR. DEWOLFE: It's $640 million. That's nothing to sneeze at. Would this new revenue reduce our vulnerability to revenue shortfalls we occasionally experience with the equalization program?

MS. HARNISH: The additional revenues would be very helpful in our budget planning, of course. Equalization, for the next couple of years, is fixed. We will have less fluctuation in that amount. In fact, we'll have no fluctuation in that amount since the

[Page 17]

government has set it now for 2004-05 and for 2005-06. On equalization, our bigger concern is really how the fixed amount of the equalization pool will be allocated across the various provinces beyond 2005-06. As you know, the federal government is striking a panel of experts to look at something which is of critical importance to us in Nova Scotia. It scares us because we really don't know on what basis this panel of experts may make decisions on how that money should be distributed.

MR. DEWOLFE: Ms. Harnish, a senior economist with the Bank of Nova Scotia, Mary Webb, said last year that there is a window here to start getting the debt down and trim the tax burdens so that Nova Scotia can become more competitive. Indeed, a senior economist with CIBC, Warren Lovely, also wrote about Nova Scotia last year, saying, "household incomes will be further bolstered next year as the 10 per cent income tax is fully implemented". The Atlantic Provinces Economic Council shared his view, and, for heaven's sake, Paul Martin is also a big supporter of tax reduction. I guess the question is, can lower taxes - and when we really think about this, it's most interesting, but I would like to hear your answers - lead to the generation of higher tax revenues?

MS. HARNISH: Yes, they can. In fact, our estimates would have indicated that that would happen. What the estimates didn't deal with at the time the very preliminary analysis was done was the impact of the attraction aspect of the tax reduction and being able to attract companies and individuals to locate in this region. We've been fighting a bit of a losing battle when you look at what's gone on in the rest of Canada over the last number of years. We've had tax cuts in almost all other provinces since the late 1990s, and in fact we have been slipping behind somewhat because of that in our ability to attract and keep people in this province.

For example, New Brunswick has made tax reductions, which since 1999 total about $130 million annually, according to their December 2002 Budget Speech. Ontario reduced taxes by 30 per cent since 1996. If you look at the actual comparisons of taxation levels for personal income tax, you'll see that we are somewhat among the highest, which is not where we want to be.

MR. DEWOLFE: Indeed, tax relief is part of the government's ongoing effort to ensure that Nova Scotia remains an attractive place to live and work and raise our families and all those apple pie things. It's true, tax relief is also endorsed by other Parties, is it not, across the country? For example, like Paul Martin. I go back to Paul Martin. Paul Martin endorses tax reduction as a way to stimulate the economy and boost federal revenues. So if it can work for Paul Martin in the federal level, it should work here as well. There's no difference, it's just there's bigger amounts of money to deal with. That's the only difference. Would you agree?

[Page 18]

MS. HARNISH: I believe that it's been the goal of every government over the years to reduce taxes, yes. They all see that it's quite important to a number of aspects to keep our economy running, to keep people here.

MR. DEWOLFE: I heard a colleague from the Liberal Party muttering comments when you mentioned the $640 million figure that this could mean over eight years, going back to the Atlantic Accord. I'll be very interested to hear when he once again has an opportunity to ask questions, where he stands, whether he feels that indeed Nova Scotians don't deserve the 100 per cent offshore revenues. Perhaps he doesn't feel that Nova Scotians deserve that. I'd be interested to hear that when that comes back again. It's not the $640 million, it's what happens after the eight years that's of a big concern to us, with regard to that offshore accord, the way it's proposed currently. Hopefully, an agreement will be made so that it will help Nova Scotians get what they rightfully deserve from our offshore revenues.

As of January 2000, Nova Scotians began a new system of tax on income. Quite frankly, I don't know a whole lot about TONI, as it is called, a new method of calculating provincial income tax, replacing the old tax-on-tax method. What is the tax on income? Can you just clarify that before we go any further?

MS. HARNISH: Bruce is our TONI expert, so maybe he could do just that.

MR. DEWOLFE: Bruce is the recipient of the TONI award.

MR. HENNEBURY: The essential difference between tax on income and tax on tax is that under a tax on income system provinces are allowed to apply individual tax rates to individual tax brackets. So under that system we're allowed to set rates against taxable income and we're allowed to set the brackets in which those taxable incomes fall. We're also allowed to set the levels of the brackets as well and we're allowed to have different brackets; for example, in B.C. there are five brackets, in Alberta there is one, and so on and so forth. The tax on income has given provinces the flexibility to set not only their rates but their brackets as well, as well as what's called the non-refundable credit block. What it does is allows provinces more flexibility in tax policy as well as prevents the effects of federal decisions on provincial tax revenues.

[10:00 a.m.]

MR. DEWOLFE: Premier Hamm took to the people four years ago, a plan to reduce taxes. This is a long-term plan that we've had - I'll go back to Ms. Harnish - a sound plan for economic growth, putting tax dollars back into the hands of the taxpayers. What happens to us if we lose our competitive edge? I guess there's no question that by reducing taxes it makes our province more competitive. If we lose our competitive edge, high income earners will leave the province. High income earners are usually the skilled workers who add

[Page 19]

considerable value to Nova Scotia's economy; not only that, they pay approximately 40 per cent of the personal income tax that's collected in Nova Scotia. So what happens when our province's economy becomes less competitive?

MS. HARNISH: You'll see that individuals and companies move elsewhere and establish themselves to take advantage of lower tax rates in those other locations. One of the main driving forces behind tax cuts is in an effort to remain competitive with other locations; as well, as you say, government can make decisions about spending or individuals can make decisions about spending. Part of the objective of the government was to leave some of those decisions in the hands of consumers, as opposed to the hands of governments, by leaving additional revenues in their pockets.

MR. DEWOLFE: Indeed, lower personal income tax is not the start of something new, it's just another increment and a step of ongoing tax reform. Mr. Chairman, I will pass to my colleague, the member for Waverley-Fall River-Beaver Bank.

MR. CHAIRMAN: The honourable member for Waverley-Fall River-Beaver Bank.

MR. GARY HINES: Welcome guests, it's a tough task sometimes that you have and today is no exception, I can see that. I would like to make a statement. Perception is a wonderful thing, we all have that tool, we all choose to use it differently or to our own advantage or for other reasons. We can use it for political posturing if we like, and to some extent I would suggest that this has been an opportunity for that to happen.

One of the things that was left out in the discussion to this point regarding the $155 back to the taxpayers of Nova Scotia is that it was there to help ordinary Nova Scotians. I had the enviable opportunity at the time that this happened, of being the owner of a small company in the Province of Nova Scotia, in the excavation business. I can tell you that as a small company we do a lot of meaningless small jobs in the backyards of peoples' homes. At the time this $155 came back people chose to use it in different ways, they chose to posture themselves regarding their expression of how they used it.

I did several jobs in peoples' backyards, from building small portions of decks that were stimulated by the $155 back, to removing that stump that had been bothering them for a number of years because it disrupts the mowing of the lawn, et cetera. So as a small company owner I saw the economic advantage that some Nova Scotians derived from the $155 cash back. I just wanted to point out that there was economic advantage. Maybe there was no survey done to the extent of the magnitude of the economic advantage.

I can also tell you that to put 2.5 per cent in the hands of those who retail in Nova Scotia, it allows them the opportunity to expand their business, maybe take on another employee, to grow their business and so on. There may be no measurables but certainly,

[Page 20]

when you come from a business background you understand that opportunity is there and that opportunity was derived from it.

Making that statement, there was also another statement made on the projection of budgeting for schools. Now in your position of working with budgets, I don't think it is any different than private sector budgeting. We had Ray Ivany in last week and I asked the question to Ray Ivany directly, has it been beneficial to you and do you see the benefit from long-term budgeting in the field of education. Now let's take that to a greater degree because his answer was very positive and he told us how beneficial it was to allow them to move forward with projects. I just wanted to ask you, do you see an advantage of government acting like a business and giving you the opportunity to look at long-term budgeting, because I can tell you, these schools were not all built in Tory ridings - Bill Estabrooks was able to receive one, just one that comes to mind. Could you elaborate on what opportunities long-term budgeting gives you?

MS. HARNISH: Long-term budgeting is extremely useful to those individuals who have some certainty of what they will be expecting to receive over the long term. For us, as the spending portion of it - in other words, knowing what the school construction schedule is and will be - it allows the Education and the TPW Departments adequate time to plan to allocate resources, both money and staff; to let their tenders; and to do their design and architecture work. It provides the Education Department the ability to constantly look at the demographics of the students to sort out how best to allocate those students to elementary, middle, what grade ranges. To our way of thinking, it certainly makes things much easier.

It also has another added benefit in that if the parents know when school construction will take place, it provides them with the certainty that they need as well, so it stops a lot of the lobbying effort that generally consumes a lot of staff time to address. Generally, if parents do know that the school is to be constructed five years from now, they can plan around it as well.

MR. HINES: Does taxation have an impact on businesses choosing to contract work outside the province?

MS. HARNISH: Maybe you could clarify your question for us a little.

MR. HINES: Does a tax situation within our province leave the door open to allow other provinces to bid more competitively on jobs within our province?

MS. HARNISH: Well certainly, overall tax rates are a factor in the actual ability, the relative position - profitability or not - of a specific business, so tax is another cost to a certain extent and would be a determinant of the amount of money that they need for any service that they provide. So as a businessman, I would expect that you would find that your

[Page 21]

overall take-home is greatly influenced by your tax rate and therefore is an impact or an influence on what you would have to charge for a specific job.

MR. HINES: That's right, and that's the point I wanted you to make, that by having a tax system in our province that is competitive, it allows us to remain ahead of the competition who might bid on the jobs from outside the province. We were in a position where we were losing some contracts, in particular within construction, which is my background. We were not able to bid competitively under former tax structures as the other provinces were moving ahead with tax cuts and so on. They were coming in and sweeping it out from under us.

Tax cuts have helped us to regain that advantage that we have for bidding within our own province. Yes, we have to have a tax system that works in our favour, protects Nova Scotians and keeps our workers here. If they aren't working here with our contracts that we've lost outside, they will go to another province and work there. Mr. Chairman, I believe my time is just about up.

MR. CHAIRMAN: We will turn it back now to the NDP caucus. The next round of questions will be 12 minutes.

The honourable member for Halifax Chebucto.

MR. HOWARD EPSTEIN: Mr. Chairman, I was interested to hear my colleague, the member for Waverley-Fall River-Beaver Bank, say that he had received an economic benefit from the cheques that were sent out in the Summer of 2003. I would like to say that I, too, received an economic benefit from those cheques, when I looked at the records for donations to my election campaign I found that there were 17 cheques in the amount of $155 that had been endorsed and made out to me, and who would deny that my re-election is a benefit to the economy of the Province of Nova Scotia. (Laughter) I think I can join with my colleague in that.

I wonder if the witness would go back with me to some of the technical aspects of the taxpayer rebate program. I was curious about the number of taxpayers who showed up here. If you look at the numbers, there's a bit of a peculiarity because you started out estimating that $68 million would be the cost of the program, and yet in the end it was $78 million. So this is a 15 per cent increase. I'm wondering about these numbers, and I'm wondering if you could help us understand exactly what occurred here. It seemed clear enough at the start, that is, clearly, what you did was you looked back at the preceding tax year and you looked at the total dollars of personal income tax, that is about $1.38 billion, and you did a division by the number of filers, which at that time was, apparently, 438,000, and ended up with $155, when you did the calculation for half the year.

MS. HARNISH: That's right.

[Page 22]

MR. EPSTEIN: That's what you told us before.

MS. HARNISH: That's right, it was a division, yes, $68 million divided by 438,000, and that's what you have.

MR. EPSTEIN: The question was, really, how do we get from 438,000 to 504,000? Can you help us understand that?

MS. HARNISH: Bruce is going to volunteer to explain that.

MR. HENNEBURY: First of all, as my deputy mentioned earlier, we were working with the best information we had available at the time, and had estimated that 438,000 potential recipients were out there. Traditionally, we have in the range of 438,000 to 450,000 taxable filers in any one year. I think the difference occurred, and we can only speculate, obviously, but we think the difference occurred in that quite often it's not the same 438,000 in a particular taxation year. So, once you have three taxation years involved, 2001, 2002 and 2003, there may be some individuals who were taxable in one of those years but not taxable in the other two, or vice versa, as they enter and exit the system. So, we think that's what caused the number to be closer to 500,000 than it was to the 438,000 that we had originally estimated.

MR. EPSTEIN: Just to nail this down and to be very clear, I take it it's only individuals who were recipients of the cheques and no corporations or other forms of business associations that would have been eligible or received cheques.

MR. HENNEBURY: That's correct.

MR. EPSTEIN: You think the number doesn't represent a sudden and hidden increase of 15 per cent of employment in Nova Scotia over a one-year period.

MR. HENNEBURY: Well, some of it could have been contributed to that, for sure. The number of taxable filers will differ upon individuals' personal circumstances. As well, our taxable income tends to grow over time.

MR. EPSTEIN: I guess one of the things I was curious about is that the number of 438,000 that you used seems to be what you call taxable filers, that is you were building into that the assumption that these people had actually paid Nova Scotia tax, which in fact wouldn't have been an assumption, you would have had an actual record. Is that correct? All right. So this number, in fact, is pretty similar to the actual number of employed people in the workforce as reported by Statistics Canada around that time.

[10:15 a.m.]

[Page 23]

What I'm wondering is why that number is the same, wouldn't there be a significant percentage of those who were employed but who would be below the income level that would have generated Nova Scotia tax? For example, just to give you exact numbers, if you would like them, you're saying 438,000, which would have been based on your tax returns from 2002, presumably, when you were sitting down early in 2003 to look at this, but in December 2002, the total employed workforce in Nova Scotia was 432,000. So they're pretty well exactly the same number.

MR. HENNEBURY: They're close, but they're not necessarily directly related.

MS. HARNISH: You would have individuals who were taxable who were not employed, senior citizens for example. You would have others who were employed but not taxable. There are a lot of individuals who do not pay taxes for one reason or another, their income levels are low, they have specific deductions, some of them are students, some of them are part-timers and so on. So they are similar and there would be a large base of commonality, but they would not be identical.

MR. EPSTEIN: So the explanation that you're suggesting for the 15 per cent difference is people who have moved in and out of the category of people in receipt of taxable income over a three-year period, is that basically what it is, but still around in order to file for their rebate, if it didn't come to them automatically?

MR. HENNEBURY: Yes. Just to clarify, though, they didn't have to file for their rebate, it was a matter of fact as to whether or not they were taxable. You're correct, it's not the same 438,000 in each particular year. So as they come in and out of the system, they would have received the rebate.

MR. EPSTEIN: Since it was automatic, then that was something, really, you would have known, as well, early in 2003, at the same time. So do I take it it was just an error to base the calculation, the arithmetic on the 438,000?

MR. HENNEBURY: I wouldn't classify it as an error as much as I would that as we got better data we were able to revise the estimate, later in 2003.

MR. EPSTEIN: Was the decision to base the eligibility on having paid tax within three years a decision that was made subsequently to the time when the first calculation was done?

MR. HENNEBURY: I'm not sure it would have changed our calculation at the time.

MR. EPSTEIN: Okay. I have to say it looks like an error to me if you actually had the information, then it seems to me - oversight might be another word, but surely if you had the information it would have come into play in the arithmetic.

[Page 24]

[Page 25]

MR. HENNEBURY: We were trying to forecast what the final number would be, and we worked with the best data we had at the time. It's fairly easy to say, nine months later, oh, here, we have better data but at the time we were simply trying to forecast what we were dealing with.

MR. EPSTEIN: The consequence of using a correct number at the time, I would suggest to you, of course, would have been that the per person dollar value would have been a lot less, it would have been, presumably, around $100 rather than $155. Is that correct?

MR. HENNEBURY: We had calculated the half-year to be $68 million. Had we predicted 500,000 eligible, then the math would have given you a different amount.

MR. EPSTEIN: The half-year amount was known because you did know the personal income tax revenues from the previous year. That was a known figure and then, apparently, you had the denominator known as well, but for some reason didn't apply it. Anyway, let's move on to another thing. It has to do with economic models. When my colleague, the member for Halifax Fairview was asking you about economic stimulus, the response was that it was really too difficult to assess the economic impact of the taxpayer rebate program. What, I wonder, if you can tell us, just what is the nature of the economic model that you are able to work with?

MR. HENNEBURY: Sure, we have two models, an economic forecasting model and an input-output model.

MR. EPSTEIN: Say the second one, please.

MR. HENNEBURY: An input-output model.

MR. EPSTEIN: Yes, that's right.

MR. HENNEBURY: Generally speaking, these are macro models that deal with the entire economy and so to try to isolate a particular event would be difficult to do.

MR. EPSTEIN: Okay, I understand except at this point the answer has trailed off and what I am hoping is that you can give us some idea of how it is that you do your macro-economic modelling?

MR. HENNEBURY: I guess I'm not exactly sure what you are asking.

MR. EPSTEIN: Well, what factors do you put into your economic model?

[Page 26]

MR. HENNEBURY: Well, there are a number of factors that go into it. Personal income levels would go into it, things like corporate profits, personal expenditures on goods and services, retail sales, all of these impact our model.

MR. EPSTEIN: Is this a model that you have ever published or made available?

MR. HENNEBURY: Not to my knowledge.

MR. EPSTEIN: Do you regard it as private information?

MR. HENNEBURY: Yes, we regard it as proprietary.

MR. EPSTEIN: Why is that?

MR. HENNEBURY: It would be a model that would have been developed in house. We do use it on occasion to do modelling for other departments and that kind of thing.

MR. EPSTEIN: Is it something that you have ever shared with the Auditor General?

MR. HENNEBURY: I'm not sure. The Auditor General does review our economic forecasting model as part of the annual review of the revenue forecast.

MR. EPSTEIN: Is it tied to personal income tax returns?

MR. HENNEBURY: No, it's not.

MR. EPSTEIN: So it doesn't incorporate individually identifiable information in that sense.

MR. HENNEBURY: It does not.

MR. EPSTEIN: Well, I ask because on a previous occasion, although it is a number of years ago now, I had actually asked your department for some information about this model and was discouraged to pursue this inquiry but I think I will pursue it again since it seems to be a useful item.

MR. HENNEBURY: If I may, it does include statistical information from Stats Canada that would be considered confidential because given the nature of some of the information, it could identify specific companies.

MR. EPSTEIN: I think the chairman is telling me my time is up but we will have further discussion about this. Thank you.

[Page 27]

MR. CHAIRMAN: Thank you very much. We will move on to the Liberal caucus and I recognize the member for Halifax Citadel.

MR. GRAHAM: Mr. Chairman, I would like to return to the issues with respect to the $1.6 million of wasted money that could have gone to, for example, transition homes or it could have gone to help fund ABA Therapy for families who have children with autism, for example, but instead it would appear frittered away because we wanted to cut the cheques as opposed to reducing the amount on the cheques that were going to workers starting July 1st.

We had indicated that the original estimate was about $1 million and that may have been provided back in March 2003 and I would like to just get a clearer understanding of what you understand to be the actual facts around this. Was the $1 million, approximately, and my recollection is that it was a number slightly less than $1 million, was that CRA's estimate to us or was that our estimate that we somehow created without consultation with CRA?

MS. HARNISH: Staff tell me that it would have been made in consultation with CRA at the time but there wouldn't have been all of the details calculated so if there was, and I don't think any of us can remember what would have been announced as a dollar figure and when, but if it was $1 million, my assumption is it would have been based on some calculation made jointly by CRA and the Department of Finance at the time in the early days.

MR. GRAHAM: So we are unclear on whether or not it was done jointly but your assumption is that it would have been.

MS. HARNISH: We wouldn't have pulled it out of thin air so there would have been discussions. As I said, we think they were as early as February that year so there would have been some discussion then and some amount speculated on.

MR. GRAHAM: It was suggested in the first round of questioning that the method of calculation went from a per cheque estimate to what would appear to be a services rendered approach. I'm wondering who instigated the change from a per cheque estimate to a services rendered type of approach?

MS. HARNISH: We would always have anticipated that the cost would have been based on services rendered. The per cheque kind of cost estimate would have been a proxy in the early days as we were trying to determine magnitude of cost.

MR. GRAHAM: The increase in the number of people captured by this went from 440,000 to about 500,000 people but the cost went up by less than $1 million, the range of $1 million, to $1.6 million. What I'm curious about is how tightly we nailed down our estimate and what the likely cost would be before we announced the program.

[Page 28]

MS. HARNISH: A large portion of that cost is general cost and not based on per cheque, for example, the call centre, setting it up, the staffing and so on. I think you are trying to get at the incremental cost of the additional cheques rendered. Is that where you are going with this? I think none of us are quite following your process here.

MR. GRAHAM: I will be as clear as possible. The cost of cutting the cold cheque was $1.6 million. It could have been deducted from people's cheques. It's not clear, based on what we've heard, that at the time this program was announced we had even nailed down a certainty with respect to what those costs were and the concern that I have is that if CRA came back to us in May 2003 and said sorry folks, it's $5 million, let's say, would we have already committed ourselves to the program and have been obliged to pay that $5 million?

MS. HARNISH: Both the staff at Finance and the staff they were discussing this with at CRA at the time had some confidence level that the ballpark that we were using would not be, for example, five times what was actually envisaged but honestly, we aren't real firm on the dates at which any given conversation would have taken place at that point in time.

MR. GRAHAM: It might not have been five times as much but we now know that it's $1.6 million with the possibility of rising by the 10 per cent figures that you mentioned earlier. If the estimate was in the range of $900,000 originally, then it would appear that we are at risk of the cost of administering this, of potentially doubling from what was originally estimated.

MS. HARNISH: Well, as you have pointed out, it's about 50 per cent more than was originally estimated. It's $1.6 million compared to a very rough early figure of the $1 million range.

MR. GRAHAM: And there is a chance that that number could, as you said in your earlier comments, continue to rise.

MS. HARNISH: We do have a guarantee of an upper limit of 10 per cent additional cost. We haven't, at this point, any information on which to evaluate what the final cost will be but in no case could it be more than 10 per cent above $1.6 million. That guarantee was built in.

MR. GRAHAM: Could I ask for the following things, please, that you provide to the chairman of this committee, as a result of the questions that were partially answered today: a copy of the original estimate the documents surrounding the original estimate of the cost of administering this program; secondly, the correspondence associated with these costs; thirdly, the agreement itself; and fourthly, the invoices associated with that agreement?

MS. HARNISH: We will take a look through and provide you with what we have from those items, yes, sure.

[Page 29]

MR. GRAHAM: Thank you very much.

MR. CHAIRMAN: The honourable member for Halifax Clayton Park.

MS. DIANA WHALEN: I would like to thank you very much for being here. I don't think there is too much time so I'm going to jump right into a couple of questions. In the Canadian Centre for Policy Alternatives, they have done two reports, alternate budgets each year, the last year 2003 and 2004, both of them focused on the tax cuts and what was coming in those proposed years. In the one year it was the tax rebate cheque, the next year more the tax cut. In that, I would like to read just one sentence. It is on Page 10 of the 2003-04 alternate budget. It says, "If the government has a surplus and wants to use it to stimulate the economy, research shows that improving programs and services is much more effective than tax cuts.

[10:30 a.m.]

What I have heard this morning are a lot of questions about whether or not you could assure us or give us any studies, analyses or indication that the rebate cheque actually stimulated the economy, and whether or not in principle tax cuts stimulate the economy. It seems to be very ephemeral, you can't really say, possibly it did but there are many other factors. Would that be a true analysis of what you said this morning, that you can't say definitively that tax cuts stimulate the economy?

MS. HARNISH: I would say we wouldn't be able to definitively identify by how much they stimulate the economy, whether it's great amounts or not so great amounts. The literature on it isn't all unanimous, let's say that.

MS. WHALEN: Would you say that when government spending improves on programs and services that that has a positive impact on the economy?

MS. HARNISH: Spending of any type has a positive impact on the economy. The relative magnitude of the impact would be dependent on how the money was spent at any given time.

MS. WHALEN: Well, it's a known fact that we have the lowest spending on programs and services in the country, so I think that that tied with the same time that we have tax cuts seems to be a very unusual combination of factors, in terms of decisions made. But we were already told that you didn't make the decisions, you provide the options. I just feel that looking at that, the options to stimulate the economy, we would have had a more direct impact if the money had stayed in Nova Scotia and been spent directly on services needed.

[Page 30]

I wanted to go to the subject of competitiveness with our neighbours in other provinces in Canada. To make a tax cut of the magnitude that was proposed, the $155 cheque or the 10 per cent tax cut that was to follow, would that actually bring us in line with the rest of Canada? Would you say that we would have been competitive with the rest of Canada? There are certainly provinces, like Alberta, that are so different from us that these small tax cuts would never compare competitively.

MS. HARNISH: It certainly put us in a better competitive position with our Atlantic neighbours. There is a table in the binder that Mora put together that shows the relative tax rates for each of the brackets. I can't find it right now but it is certainly there.

MS. WHALEN: Can I ask you about New Brunswick, in particular, because you've raised our most immediate neighbours in Atlantic Canada. Usually what we want to do is try to be competitive, at least in our region.

When we made the reversal of the tax cut - and I have to assume that your staff helped to outline options and how that could be done and perhaps how to do it in the most effective and least harmful way - we introduced a new tax bracket, so that was brought in with the Financial Measures Act in the Spring. That tax bracket set up a new high income level of $93,000. I would like to point out that when you compare that to our closest neighbour, New Brunswick, they do have a fourth tax bracket, but it kicks in at $104,648, from what I have here, so $11,000 higher than our high tax bracket. What would the impact be of that for the high income earners in terms of competitiveness?

MS. HARNISH: In terms of total additional dollars in taxes?

MS. WHALEN: I would like to know whether you think that makes us competitive, when we're trying to retain high income earners?

MS. HARNISH: There would be a small number of people between $93,000 and $104,000 in taxable income who, under that circumstance, would be paying more in Nova Scotia than in New Brunswick.

MS. WHALEN: I noticed today that we were expecting to have your senior tax policy analyst join us. Is there a reason why he is not here today?

MS. HARNISH: We added him to the list because at the time, Liz and I weren't sure that we would be available and as it turned out, we weren't the first time around and we didn't want to send Bruce alone. This isn't an enviable spot to sit solo and now that Liz and I were available, we thought that we could manage with the three of us.

MS. WHALEN: There is a tax policy division . . .

[Page 31]

MR. CHAIRMAN: Excuse me member, that was your one question. We will now move on to the Progressive Conservative caucus.

The honourable member for Chester-St. Margaret's.

MR. JOHN CHATAWAY: Mr. Chairman, I very much appreciate this opportunity to meet with these finance experts, per se. It certainly is an interesting conversation we're having because I think some of this is surely based - in my regard - on misinformation. Any questions or thoughts that I have, please correct me if I'm incorrect.

I know we have been in government since 1999. Basically, one of the reasons, I think, Nova Scotians at that time voted for us was because they began to realize - many people realized - that 40 years of public debt in Nova Scotia had gone on. Every government, whatever political faith they were, said, we can do this and this and at the end of the year they were in a deficit and a deficit and basically, we have had to deal with that. When we became the government in August 1999, the budget had already been passed, et cetera and that year alone we were $500 million overdrawn. The government that was replaced at that time, of course, had been in government for six years and they had run up the public debt to $3.6 billion, a very good start.

Obviously, we have different thoughts, but I know who was the Leader at the time and still is the Leader, Premier John Hamm, said, there are no quick fixes or easy solutions to financial things. Only by having a sound plan for economic growth and job creation are we going to be able to provide the services that Nova Scotians expect and deserve. My impression is that the Department of Finance has been very instrumental in getting at sound, economic policy.

When we did take over in 1999, all the assets that the Government of Nova Scotia owned, the public debt was something like just under 50 per cent and getting worse all the time. At that time all the other provinces, on average, their provincial debt was about one-third of what their assets were. Of course, Alberta was only 11 per cent but we don't want to talk about them because they are the province with no public debt, so basically, we had to do something about it.

I think it is very important, too, that we're talking about tax reduction and things like this, some people don't seem to see that the people who gave the government the money, to give it back to them, that's the best way to do it if you possibly can. The people who gave you the money have a very good idea of what they can do with their money - which it originally was their money. Be it an individual or be it a company, they would know their greatest needs and go in the right direction.

[Page 32]

Now we've had three years of balanced budgets and we're going to continue with that. I will ask you a question about what influences provinces - this province, specifically - to have government bring in lower taxes? The other thing is the present Minister of Finance had said about this tax cut specifically, our new tax plan means that more than half of all taxpayers - fully, 53 per cent - will continue to receive their full 10 per cent income tax reduction. It means that 96 per cent - 96 is not 100 per cent, 96 is 96 - of all taxpayers will continue to pay less provincial income tax in the 2004 taxation year compared to the year before. Is that correct?

MS. HARNISH: That's accurate, yes.

MR. CHATAWAY: Thank you, very much. That is what we have to get out, my goodness. The other thing is all politicians are worried about people who aren't so fortunate. Sometimes you may be a millionaire one day and the next minute buried in great need. Most Nova Scotians will continue to benefit from some tax reduction, even after the adjustment. All tax filers save 10 per cent in the first $29,590. So the people with the lowest income weren't affected at all.

Anyway, the question I certainly have is, I would like to know - I'll read the question and change it a bit, too - what factors have promoted the province to revise its tax reduction program? What factors did the government consider, maybe the top three factors, when they had to consider reducing the tax? The other thing is, in this province, specifically, but in the other provinces, what are the few factors they think are most important in having tax reductions? I understand it's come out that tax reduction has gone on in many other provinces. Maybe you could just outline exactly which provinces and what they did.

MS. HARNISH: Some of the tax cuts that have occurred in other provinces to date, P.E.I. had a very modest tax reduction in 2001, in about the 2 per cent range. In New Brunswick, tax reductions since 1999 total over $130 million annually, and that's based on information in the December 2002 Budget Speech. Ontario reduced taxes by 30 per cent since 1996, and had hoped to put in place additional tax reductions. Manitoba, tax reductions amounting to $181 million annually since 2000. That's based on information in their 2002 budget papers. B.C. cut provincial taxes by 25 per cent for all taxpayers in 2001. Saskatchewan introduced tax cuts in 2001 that they indicate will lower taxes by at least 11 per cent in all brackets by 2003. Quebec implemented a 20 per cent tax reduction in 2002, along with full indexation. Alberta has had numerous deductions since 1994, eliminated surtaxes in 2000, followed by a flat tax in 2001 and indexation, giving total reduction of $758 million in 2001.

MR. CHATAWAY: And no public debt. (Interruptions)

MR. CHAIRMAN: The honourable member for Pictou East.

[Page 33]

MR. DEWOLFE: Ms. Harnish, some accusations were made today suggesting that the motivation of the rebate program was somehow wrong, somehow political. Those are, in my mind, serious accusations, serious allegations, and there has been no evidence of this. Opposition members have used language bordering on the unparliamentary, in terms of describing our government's attempt to keep our promise to the people of Nova Scotia, the promise we made in our blue book, to deliver tax reductions to Nova Scotians. In fact, the province has also taken great strides in the path towards a self-sustaining economy. The direct debt to GDP ratio has improved. It now stands at 42 per cent, down from 48 per cent, just three years ago. The province is now better able to meet its commitments because the debt level has been stabilized and the economy is growing. It's a good thing.

Now, back in March 2003, the province once again set new employment records. The fourth since the Fall of 2000, the fourth. Statistics Canada says that 1,000 more people were working in Nova Scotia in February than in January, just one month earlier. Since 1999, in fact, according to Statistics Canada, 26,000 new jobs have been created in Nova Scotia. That means Nova Scotians are contributing more to our shared prosperity and feeling really good about themselves.

[10:45 a.m.]

Ms. Harnish, Ms. Cody and Mr. Hennebury, I want to thank you for the role that you have played in making Nova Scotia a better place. All these things are important to Nova Scotians in the short term. They also work to the collective good of Nova Scotians in the long term. They show business operators and prospective investors that the province provides a business-friendly environment, a place where work can be done and indeed where life can be enjoyed. Still, until recently, Nova Scotia was one of the only provinces that has not lowered personal income tax in recent years as indicated by yourself with the previous comments. So I think we are on the right course and I thank you again and keep up the good work on behalf of Nova Scotians.

MR. CHAIRMAN: That concludes the question and answer session of the proceedings today. I would now like to invite Ms. Harnish, if you so choose, to take up to five minutes with a closing comment.

MS. HARNISH: I will be very brief. Thank you to the committee for your attention this morning. I can't say it is always a pleasure but we certainly do appreciate the role of the committee.

MR. CHAIRMAN: Thank you very much. We do have one item of business to discuss. I would, first of all, like to remind members that next week's meeting is the Department of Transportation and Public Works. The ostensible topic was privatization and outsourcing but I do understand that members had asked that it be clear to the department that the questioning could range well beyond that. In my absence last week, this committee

[Page 34]

took certain steps in dealing with the Canada Revenue Agency and I would like to call on Mora Stevens, the Clerk of Committees, to give the committee an update on progress in getting Canada Revenue Agency to attend before us.

MS. MORA STEVENS (Legislative Committee Clerk): I contacted CRA after last week's meeting to inform them that subpoenas would be issued and gave them the option of a few dates. December 8th is the date that has been settled on and the subpoenas will be issued for that date. Some members might be aware that the chairman, prior to their appearance that was scheduled for April, had volunteered to meet with them to talk about the procedures of the Public Accounts Committee before they actually came. They have requested this meeting again with the chairman and that will take place on Thursday with myself, hopefully Gordon Hebb. They are also going to bring their attorney plus the two officials from CRA that are attending just to go over the set procedures of the Public Accounts Committee, how it works. Also, Gordon Hebb will issue the subpoenas and they will be delivered to them on Thursday so everything will be set and clear by then.

MR. CHAIRMAN: I do want to make it clear to the members that tomorrow's meeting is in no sense a closed meeting. If anybody else wishes to attend, they are perfectly welcome to do that, 10:00 a.m. over in the Committees Office. The purpose of the meeting, again, is simply to answer any straightforward factual questions they have because they represent an agency that has never appeared before this committee. They simply feel they need to be informed about how this particular committee operates. That will be the extent of the discussion tomorrow.

Are there any questions from members?

The honourable member for Chester-St. Margaret's.

MR. CHATAWAY: Okay, who is meeting tomorrow?

MR. CHAIRMAN: The meeting is the chairman, myself, with the committee clerk and a representative from Legislative Counsel office and the witnesses from CRA plus their lawyer to discuss strictly procedural matters. That is the meeting tomorrow.

MR. CHATAWAY: Will minutes be made available from this meeting?

MR. CHAIRMAN: It will be an informal meeting. It is not intended to be a formal, transcribed session, no.

MR. CHATAWAY: Then otherwise, tentatively, on December 8th they are going to meet publicly or in private with this committee?

[Page 35]

MR. CHAIRMAN: The direction from this committee is that the meeting will be public. We have previously refused CRA's request to hold the meeting in camera.

MR. CHATAWAY: So on December 8th this committee will meet with them in this building or in a public location.

MR. CHAIRMAN: That's correct.

MR. CHATAWAY: Thank you.

MR. CHAIRMAN: Are there any other questions from members about that particular meeting? If not, I do have one more question for the Deputy Minister of Finance. CRA had previously indicated that one of their conditions for attending was that they do so jointly with representatives from the provincial Department of Finance. Is it the intention of the Department of Finance to have somebody observing or attending on December 8th?

MS. HARNISH: To be honest, I didn't even know that you were subpoenaing them for December 8th, so we haven't given that much thought at this point in time.

MR. CHAIRMAN: I do have one other question for committee members. I apologize, I should have raised this earlier and that is in light of the rather unusual circumstances where we have a witness that we have felt the need to subpoena who has never appeared before. Is it the wish of the committee to ask them to attend for three hours or at least to leave three hours open, or should we have a regular two hour meeting? Any thoughts from the committee members on that? Okay, I think we have a consensus that we will simply have one of our regular, two hour meetings.

That concludes the business for today. Is there a motion to adjourn?

MR. GRAHAM: So moved.

MR. CHAIRMAN: Would all those in favour of the motion please say Aye. Contrary minded, Nay.

The meeting is adjourned.

[The committee adjourned at 10:52 a.m.]