FINA Committee Meeting

37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Monday, November 3, 2003

À

1035

The Chair (Mrs. Sue Barnes (London West, Lib.))

Hon. John Manley (Deputy Prime Minister and Minister of Finance)

À

1040

À

1045

À

1050

À

1055

Á

1100

Á

1105

Á

1110

Á

1115

Á

1120

The Chair

Mr. Monte Solberg (Medicine Hat, Canadian Alliance)

Mr. John Manley

Á

1125

Mr. Monte Solberg

Mr. John Manley

Mr. Monte Solberg

Mr. John Manley

Á

1130

Mr. John Manley

Mr. John Manley

Mr. Monte Solberg

Mr. John Manley

Mr. Monte Solberg

Mr. John Manley

Mr. Monte Solberg

Mr. John Manley

Mr. Monte Solberg

Mr. John Manley

The Chair

Mr. Pierre Paquette (Joliette, BQ)

Á

1135

Mr. John Manley

Á

1140

Mr. Pierre Paquette

Mr. John Manley

Mr. Pierre Paquette

Mr. John Manley

Mr. Pierre Paquette

Á

1145

Mr. John Manley

Mr. Pierre Paquette

The Chair

Mr. Pierre Paquette

Mr. John Manley

The Chair

Mr. Shawn Murphy (Hillsborough, Lib.)

Mr. John Manley

Mr. Shawn Murphy

Á

1150

Mr. John Manley

Mr. Shawn Murphy

Mr. John Manley

Mr. Shawn Murphy

Mr. John Manley

The Chair

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)

Á

1155

Mr. John Manley

Mr. Nick Discepola

Mr. John Manley

Â

1200

Mr. Nick Discepola

Mr. John Manley

The Chair

Mr. Scott Brison (Kings—Hants, PC)

Mr. John Manley

Â

1205

Mr. Scott Brison

Mr. John Manley

Mr. Scott Brison

Mr. John Manley

Mr. Scott Brison

Â

1210

Mr. John Manley

Mr. Scott Brison

Mr. John Manley

Mr. Scott Brison

Mr. John Manley

Mr. Scott Brison

Mr. John Manley

Mr. Scott Brison

Mr. John Manley

The Chair

Â

1215

Mr. Gary Pillitteri (Niagara Falls, Lib.)

The Chair

Mr. John Manley

Â

1220

The Chair

Mr. Tony Valeri (Stoney Creek, Lib.)

The Chair

Mr. John Manley

Â

1225

The Chair

Ms. Judy Wasylycia-Leis (Winnipeg North Centre, NDP)

Mr. John Manley

Â

1230

Ms. Judy Wasylycia-Leis

Mr. John Manley

Ms. Judy Wasylycia-Leis

Mr. John Manley

Ms. Judy Wasylycia-Leis

Â

1235

The Chair

Mr. John Manley

Ms. Judy Wasylycia-Leis

Mr. John Manley

The Chair

Hon. Maria Minna (Beaches—East York, Lib.)

Â

1240

Mr. John Manley

The Chair

Mr. Bryon Wilfert (Oak Ridges, Lib.)

Â

1245

Mr. John Manley

Mr. Bryon Wilfert

Mr. John Manley

Mr. Bryon Wilfert

Mr. John Manley

Mr. Bryon Wilfert

Mr. John Manley

Â

1250

The Chair

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CANADA

Standing Committee on Finance

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NUMBER 096

l

2nd SESSION

l

37th PARLIAMENT

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EVIDENCE

Monday, November 3, 2003

[Recorded by Electronic Apparatus]

À  (1035)  

[English]

    The Chair (Mrs. Sue Barnes (London West, Lib.)): Good morning. Bienvenue à tous.

    Pursuant to Standing Order 83.1, we are now doing the economic and fiscal update of the Minister of Finance.

    We welcome the Honourable John Manley, Deputy Prime Minister and Minister of Finance, to our committee meetings.

    Minister, go ahead when you are ready. The floor is yours.

    Hon. John Manley (Deputy Prime Minister and Minister of Finance): Thank you, Madam Chairman.

    I have a short speech here that I would like to read before we go to questions. I thank the members of the committee for inviting me today to provide our annual update on Canada's economic and fiscal situation.

    Let me start by saying that my appearance here before the committee today has special significance for me and for our government, since tomorrow marks the tenth anniversary of our government. Ten years ago Canadians invested in us their hopes and aspirations for a better life for themselves, for the communities, and for Canada.

    I probably don't have to remind you of the economic situation we found when we assumed office. Ten years ago Canada was in the grip of a fiscal crisis. We faced an annual deficit of $38 billion and a crushing debt burden. Our federal debt equalled two-thirds of our nation's total annual economic output and was devouring more than 35¢ of every tax dollar simply to pay interest. The Wall Street Journal called Canada an honorary member of the third world, and there was real concern that the International Monetary Fund would have to step in to stabilize our financial situation.

    That was then. Ten years later, through the hard work and sacrifice of Canadians and a commitment to sound fiscal management, we've turned things around. We've put an end to 27 years of deficits and we have significantly reduced Canada's debt.

[Translation]

    Madam Chair, the federal government has succeeded in keeping the annual inflation rate low, within the target band of 1 to 3%. We have actively pursued freer and fairer trade. We have made smart investments in innovation and skills development and in key areas such as health and poverty reduction, defence and security. We have renewed our commitment to improving accountability and transparency in the management of public resources. We have reduced taxes by $100 billion, the largest personal and corporate tax cuts in Canadian history.

    Our ongoing review and reallocation exercise represents the beginnings of a culture change in the public service. We will eliminate programs that don't work. We will adjust programs to new realities. We will align our programs to the changing priorities of Canadians. We will be prudent in our spending.

    There are many reasons why our surplus last year was higher than projected. But one reason was that our program spending was lower than budgeted. That's a good sign and important for the future. Prudence, rigour and spending aligned with priorities are part of this government's commitment.

[English]

    Madam Chair, the result, I think, is clear. Today Canada is among the economic and fiscal leaders of the G-7. We have led the United States and the world's other largest economies in average growth over the last six years. Our debt-to-GDP ratio is now the second lowest in the G-7, a remarkable improvement from ten years ago, when it was the second highest. We are committed to keeping this ratio on a permanent downward track.

    There's no doubt that we had to make some tough choices, and Canadians supported us in our resolve. In ten short years Canadians have come together to create an economy that is entrepreneurial, resilient, and capable of handling adversity at home and abroad, which brings me to the other reason that underscores the special significance of my appearance here today.

    I'm presenting this economic update to you in a year that has seen a dramatic series of unforeseen challenges affecting Canadians and our economy. I think we all know the list: the fires and now floods in British Columbia, mad cow disease, the SARS outbreak, the August blackout in Ontario, and Hurricane Juan on the east coast. They all had an impact on communities, on families, and on our daily lives.

    As a government, we made the decision that we had to be there for Canadians who were put at risk, whether it's SARS or BSE or natural disasters. I'm proud of that decision. But add to this weak global growth and the rapid rise in the value of the Canadian dollar, and I think it's fair to say that by any measure, 2003 has been a tough year for the Canadian economy.

    Yet, our mettle tested, Canadians continue to be optimistic about the prospects for our economy and I believe confident about our future and the future of Canada.

    And the world is taking notice. The Economist magazine recently described Canada as “rather cool”. The magazine declares that our responsible fiscal management, combined with “a certain boldness” in our social policy, “points to an increasingly self-confident country”. And I, for one, agree with this assessment.

    Thanks to the determination of Canadians and the economic and fiscal measures taken over the past ten years, our country has been able to withstand unforeseen shocks. And we are in a position today to take advantage of a global recovery that many economists believe is already underway.

À  (1040)  

[Translation]

    Madam Chair, part of the story behind the relative strength of our economic position can be found in the recent efforts our government has made to help strengthen Canada's economic and fiscal framework. As I have often said, sound fiscal management means continually reassessing government programs against the needs and priorities of Canadians. It means finding the most cost-effective ways of delivering high-quality services. And it means being accountable to Canadians by being transparent about how their tax dollars are managed and ultimately spent.

[English]

    As we set out in the February budget, we've taken significant steps to meet the demands of sound fiscal management and to improve public confidence. First, as I mentioned earlier, we've begun the process of making reallocation of public resources an integral part of the way the federal government operates. To that end, the Treasury Board is leading a systematic and ongoing examination of all non-statutory program spending. Last month the President of the Treasury Board announced that this year the reallocation exercise has secured savings of $1 billion. And this is just the beginning. Canadians can expect to see even greater savings in the years to come as the federal government continues to do a better job at moving resources from lower to higher priorities.

    This is not a one-time exercise, and we will get better at it. We will continue to strengthen our commitment to sound management by ensuring that reallocation remains a permanent feature of the way we manage the fiscal affairs of Canadians.

    Second, we have taken important steps toward honouring our commitment to create a new rate-setting mechanism for employment insurance premiums. Consultations on this issue wrapped up this summer, and our goal now is to bring in legislation next year to establish a permanent rate-setting regime for 2005 and beyond.

    Third, we are continuing our efforts to encourage reform in Canada's system of securities regulation to ensure that it promotes competitiveness, innovation, and growth. Last March we established an independent panel of highly respected Canadians to review this issue. Their report is expected by the end of this month. This report will provide recommendations that all governments and stakeholders will be asked to consider to ensure that Canada's role in global capital markets remains strong.

[Translation]

    Madam Chair, in other areas of the government's business, we are pursuing our discussions with provincial and territorial governments on renewing the equalization and territorial formula financing programs. As you know, these programs are vital to securing the well-being of millions of Canadians. Together with the provinces, we are working to improve the stability, predictability and integrity of equalization funding.

    We have made real progress on key issues. Our government will work to complete the renewal process by the end of March 2004. Also, last June the government set out its response to the report prepared by this committee on bank mergers. In our response, building on the important work of this committee and the Senate Committee on Banking, Trade and Commerce, we clarified public interest considerations in reviewing bank merger proposals.

    We also explored other significant issues affecting the structure of the financial services industry as a whole. Public input on these issues is currently being received and the government is committed to delivering a new policy in June 2004.

À  (1045)  

[English]

    All of these issues are important public policy matters. As always, they will require some difficult choices, but as the events of the past year have shown, we must be prepared to make these decisions to preserve our strong fiscal position, to continue to build confidence, and to confront an increasingly competitive global economy.

    Let me now turn to the global economic picture. From a global perspective, 2003 has generally been a disappointing year. World growth remains unbalanced, with domestic demand in advanced nations outside North America generally quite week.

    The euro zone, which includes the 12 countries that use the euro currency, has seen another sluggish year. Germany, Europe's largest economy, barely saw any economic growth in 2002 and is not expected to grow at all this year. Most European countries have large fiscal deficits as well. In the period ahead, the significant and protracted weakness in domestic demand in the euro zone is expected to continue.

    Japan has experienced six consecutive quarters of growth, led by strong exports. However, domestic demand remains weak and consumer spending is essentially flat.

    As always, the country that looms largest on our economic horizon is the United States. The last two quarters suggest that a robust U.S. economic recovery is at last unfolding. Economic growth picked up in the second quarter, rising by a better than expected level of 3.3%. In the third quarter it accelerated further, to a very strong 7.2%.

    Consumer demand and business investment have enjoyed broad-based strength, supported by fiscal stimulus, continued low interest rates, and a weaker American dollar. Consumer demand has been particularly strong for big ticket items such as automobiles and housing. With corporate profits rising in 2003, business investment appears to be picking up, especially investment in software and equipment.

[Translation]

    Madam Chair, in response to the large and persistent U.S. current account deficits, a broad array of currencies have appreciated against the U.S. dollar this year. These include gains of 11 per cent by the Euro, 9% by the Yen and 25% by the Australian dollar. And while a strong fiscal stimulus is contributing to the acceleration of growth in the U.S., at the same time the combined deficits of federal and State governments is forecast to climb to more than 6% of GDP this year. This could adversely affect market confidence.

    Let me now turn to Canada. As I mentioned earlier in my presentation, recent developments in the Canadian economy have been dominated by a series of unforeseen challenges. Assessing the economic impacts of these challenges is not easy. Some of the evidence of the impacts of SARS and BSE can be found in a wide range of economic statistics. For example, the number of visitors to Canada in the second quarter declined by 15% from the first quarter.

À  (1050)  

[English]

    The export ban on Canadian beef imposed as a result of the single case of BSE led to a 10% drop in the output of the slaughtering and meat processing industries between April and June. The Ontario electrical blackout and its lingering impact was a significant factor behind a 4.5% decline in manufacturing shipments and a large decline in real exports and GDP in August. We continue to assess the impacts of Hurricane Juan, which devastated Atlantic communities, and the forest fires and floods that hit western Canada.

    In addition, the sharp decline in the U.S. dollar has been mirrored by a strong upward surge in the value of our own currency. Since the beginning of 2003, the Canadian dollar has risen in value by more than 20% against the U.S. dollar. A higher dollar will affect businesses in Canada as they adjust to the short-term effect on the profits of exporters and to lower foreign demand for higher-priced Canadian goods and services.

    As a result of these shocks, the Canadian economy stalled in the second quarter. In the third quarter, which included the August blackout in Ontario, private sector economists are forecasting a rebound to about 2% real growth.

    Canadian job creation numbers reflect our challenges. After very strong job growth last year of more than 500,000 new jobs, employment numbers increased by 98,000 in the first nine months of this year, while the unemployment rate rose slightly to 8%. At the same time, Canada's inflation rate has declined more rapidly than most analysts had predicted earlier this year. The consumer price index, or CPI, inflation rate was 2.2% in September. Core inflation, which excludes the most volatile components of the CPI, was down to 1.7%, from over 3% at the beginning of this year. Slower economic growth and the rapid decline in the rate of inflation have led the Bank of Canada to lower its target interest rate by 50 basis points since July. These lower rates will help support growth going forward.

    Consumer and business confidence in the health of Canada's economy has remained strong. For example, the latest survey done by the Canadian Federation of Independent Business says that confidence among its members has recovered most of the ground lost earlier this year. Furthermore, it also indicates that CFIB members are now more positive about what they expect over the next 12 months.

    Having reviewed where we are at, I would like to turn to where we are going and our assessments of both the global and Canadian economic outlooks. First to the global outlook, the IMF forecasts that the economies of the world's advanced nations will expand by 1.8% this year, with growth rising to almost 3% in 2004. Next year's forecast represents a significant improvement from the sluggish global economy of recent years.

À  (1055)  

[Translation]

    In the Euro zone, however, the short-term outlook remains quite weak. Growth of 0.5% is expected in 2003, rising to 1.9% in 2004. In Japan, after a modest pickup of 2% in 2003, growth is expected to slow to 1.4% next year as that country deals with continued deflation and with persistent weakness in corporate and financial balance sheets.

[English]

    In the United States, the recovery seems to be on a more solid footing. Fiscal stimulus and low interest rates continue to support U.S. consumer demand. This, along with improved corporate profitability, will give firms the confidence and the means to invest and create new jobs. The decline in the value of the U.S. dollar will help fuel the recovery by making American exports more attractive.

    Private sector economists have raised their forecast for U.S. growth in 2003 to 2.7% and have also revised their growth forecast upward to 3.9% for 2004. A strong U.S. economy obviously is good news for the world economy and for Canada in particular.

    Let me now turn to the economic outlook for Canada. The Department of Finance regularly surveys a group of private sector economists to get their views on Canada's economy. In the most recent survey, conducted in September, economists lowered their estimate of 2003 GDP growth to 1.9%, down from the 2.2% they forecast in June and the 3.2% they anticipated at the time of the February 2003 budget.

    However, private sector economists believe that a variety of factors should lead to an increase in economic growth over the balance of 2003 and through next year. These factors include continued strong U.S. growth, recent interest rate reductions by the Bank of Canada, and a return to more normal output levels.

    Historically, low interest rates will support consumer spending and business investment. The Conference Board of Canada's index of business confidence supports this view. It showed a strong rebound in the third quarter, with a large increase in the proportion of firms that expected economic conditions to improve in the next six months and thought that now was a good time to invest.

[Translation]

    Madam Chair, private sector economists now forecast real growth in Canada of 3% in 2004. This is down from the 3.5% projection at the time of the February budget. The economists believe that the trade and other adjustments resulting from the rapid appreciation of the Canadian dollar will continue into next year. This is the main reason they have lowered their Canadian growth forecasts, even as they have revised upward growth estimates in the U.S.

    It is also worth nothing that the private sector economists we have surveyed expect Canadian economic growth to average about 3% for the four years after 2004. This is largely unchanged from what was anticipated at the time of the February budget.

Á  (1100)  

[English]

    I'm happy to say that these economic forecasts point to an improving picture for both the Canadian and global economies, but we must remain prudent. There are a number of uncertainties that could affect these forecasts in the months ahead.

    First is the sustainability of the U.S. economic recovery. In the short term it depends upon a return to job growth. Without this, consumer demand could weaken and investment would slow as companies lost faith in the durability of the recovery. As well, the growing U.S. fiscal imbalance will need to be addressed, or the rapidly rising debt could put upward pressure on world interest rates.

    Second, private sector economists are of the view that a significant downside risk to the Canadian outlook is the impact of the appreciation of our dollar on the economy. Because of the extent and speed of the appreciation of the Canadian dollar, economists have told me that the impact of the appreciation may be greater than they have predicted.

    All this being said, on balance, Canada's economic fundamentals remain strong and sound. Our economy remains well placed to show sustained growth over the medium term, even in this somewhat uncertain global environment.

    Let us now turn to Canada's fiscal situation and outlook. First I would like to deal with the fiscal results for 2002-03 and put them in an international context. On October 22 the government released its audited fiscal results for 2002-03. These results were presented for the first time on the full accrual basis of accounting. This is a major achievement and establishes Canada as a world leader in financial reporting. The Auditor General has strongly endorsed this change, as it presents a more comprehensive picture of the government's financial position.

    The surplus for 2002-03 on a full accrual basis of accounting was $7 billion, marking the sixth consecutive year in which the federal government has been in surplus, something that we have not seen in 50 years. As a result of these surpluses, the federal debt has been reduced by $52.3 billion over the past six years. Let's understand what this means. We are saving $3 billion each year on interest payments, which we can spend on other priorities for Canadians. As a result, for the first time in 19 years the federal government spent more on direct transfers to Canadians than we paid for interest on the public debt.

[Translation]

    Also, Madam Speaker, the federal debt-to-GDP ratio has been reduced by nearly 25 percentage points, from its peak of 68.4% in 1995-96 to its current level of 44.2 per cent.

    Taking all levels of government together, Canada was the only G-7 country to be in a surplus position in 2002. Both the IMF and the Organization for Economic Cooperation and Development estimate that Canada will again be the only major industrial country in surplus this year and next.

    Canada's total public debt burden, as a share of the economy, is now second-lowest in the G-7, behind only the United Kingdom. This is a remarkable achievement when you consider that Canada had the highest public debt burden among G-7 nations as late as the mid 1990s.

[English]

    It's important to note the reason behind the better than expected fiscal results last year. Budgetary revenues, primarily personal income tax revenues, came in lower than expected. This reflects the weaker than expected economy in the first months of this year. However, this was more than offset in lower than anticipated program expenses. These were principally attributable to one-time factors.

    The weakness in the personal income tax revenues we witnessed toward the end of the 2002-03 fiscal year will carry forward to the current fiscal year. The fiscal results to date for the current fiscal year confirm this fact. Fiscal results for the April to August period of 2003-04 show a cumulative surplus of $1.3 billion. This is less than half the surplus of $2.8 billion recorded over the same period last year.

    Based on these results and private sector forecasts, our estimated surplus this year has been lowered to $3.5 billion, down from $4 billion estimated in the February budget.

Á  (1105)  

    As you will recall, this $4 billion included $3 billion of contingency reserve and $1 billion of additional economic prudence. As I mentioned earlier, Canada has been faced this year with a series of unforeseen challenges that have required the federal government to act.

    Since the February budget we have announced $1.2 billion in new spending this year to meet these challenges. This includes measures to assist those Canadians most affected by SARS and BSE. It also includes additional spending on our international obligations, including support for the role our troops are playing in Afghanistan.

    After taking into account the cost of these measures, this leaves us with an estimated budgetary surplus of $2.3 billion for 2003-04. This means there is $2.3 billion left in what was a $3 billion contingency reserve to ensure that we meet our commitment to achieve a balanced budget.

    Last February the Prime Minister and the provincial premiers and territorial leaders reached an historic accord on health. As part of this accord, the Prime Minister agreed to transfer up to an additional $2 billion, provided the federal surplus was more than the $3 billion contingency reserve this fiscal year. Notwithstanding the conditional nature of this agreement, we now know that many provinces have already earmarked this money for spending on health care.

    As we have seen, the revised fiscal predictions suggest it is unlikely that the federal government will see a surplus of more than the $3 billion contingency reserve this year. Despite this fact, the Prime Minister has written to the provincial premiers and territorial leaders today to inform them that if there is any federal surplus this year, we will provide up to the first $2 billion of it for health care spending when we close the books. This is an important decision, one which addresses a top priority for Canadians while promoting the spirit of cooperation that is essential to the accord on health.

[Translation]

    The Prime Minister has written to the provincial premiers and territorial leaders today to inform them that, if there is any federal surplus this year, we will provide up to the first $2 million of it for health care spending when we close the books.

    This is an important decision, one that addresses a top priority for Canadians while promoting the spirit of cooperation that is central to the accord on health.

Á  (1110)  

[English]

    Let me stress again, we will not run a deficit this year. Our commitment to balancing Canada's books remains the cornerstone of our fiscal planning. This is a one-time change in policy in regard to the contingency reserve. Reducing Canada's overall indebtedness continues to be an important priority for the federal government moving forward, but Canadians expect us to make responsible prudent choices when dealing with unforeseen circumstances. We are doing that this year and we will continue to do so in future years. Our debt-to-GDP ratio will decline this year. We will lead the G-7 in fiscal performance again this year.

[Translation]

    Madam Chair, before turning to the medium-term fiscal outlook, allow me to remind committee members of how these projections were arrived at.

    The Department of Finance surveys private sector economists every quarter and uses their average economic forecasts as the basis for its fiscal planning. For this update, four macroeconomic modeling firms used these forecasts to generate fiscal projections for the next five years.

    Over this period, before making any allocation for prudence, the average private sector projections forecast a surplus of $3 billion in both 2004-05 and 2005-06, $4 billion for 2006-07, $6 billion for 2007-08 and $9.5 billion for 2008-09. These figures include the cost of measures announced since the February budget.

    Those figures show that in the short-term Canada faces a period of relatively modest fiscal surpluses as we deal with a weaker economic outlook. These surpluses will allow us to set aside the normal $3 billion contingency reserve every year. However, there will be no additional economic prudence until the third year of the forecast period.

    The reason for this is quite simple. While private sector economists have substantially lowered their forecast for economic growth this year and next, they have not changed their views about the growth prospects over the medium-term. This means the loss of production and income resulting from weaker growth this year and next is not expected to be made up by stronger growth in the near future. This, in turn, means that national income—the broadest measure of the government's tax base—is expected to be lower throughout the five-year projection period than the economists anticipated at the time of the February budget.

[English]

    Madam Chair, I believe this underscores the importance that we must place on our annual reallocation efforts. These efforts will be crucial if we are to continue to be able to address the highest priorities of Canadians and respond effectively to unforeseen shocks, as we have seen this year. We must strive to restore our normal prudence as soon as possible. And we must continue to find savings by improving the way the federal government manages and spends taxpayer dollars.

    Nevertheless, it should be remembered that without the fiscal discipline of the last several years, we would be facing a real deficit situation and a return to a growing national debt, a burden that would continue to weigh even more heavily on future generations. And over the long term I believe this would pose the single biggest threat to our ability to spend on the programs that Canadians want and need.

    Thankfully, that is not the case today. In fact, our national finances remain in the black and are forecast to do so in the foreseeable future. We are the only G-7 country in that position. This Canadian advantage is a direct result of the progress we have made over the past ten years to put Canada's finances back on track and to keep them there.

Á  (1115)  

[Translation]

    Madam Chair, 10 years ago, Canadians elected a new government. They entrusted us to take the actions that were needed to provide a better future for themselves and their children. Together, Canadians have come a long way. We can take great pride in the progress we have made—progress achieved through the determination, hard work and dedication of Canadians across our country.

    But to fully appreciate how far we have come as a country, we need to remember where we were 10 years ago. As I mentioned earlier, 10 years ago, our economy was in crisis. Our government inherited a disastrous economic situation—high unemployment, low growth, high deficits and low confidence.

[English]

    A decade ago it was virtually impossible to imagine how our nation might come so far, so fast. Who honestly believed that within ten years we could erase an annual budgetary deficit of $38 billion, produce six consecutive surpluses, and reduce our federal debt by more than $50 billion?

    Who thought we would have been able to implement a five-year $100-billion tax cut plan, amounting to the largest cuts in Canada's history?

    Who thought our corporate tax rates would be lower on average today than those in the United States? This is an important element in attracting new investment to Canada, which helps create jobs and fuels economic growth.

    Who believed that we would be able to commit to substantial increases in the national child benefit, boosting funding for kids by more than $5 billion by 2007, and helping to reduce the number of Canadian children living in poverty?

    Who would have conceived that we would be able to place the Canada Pension Plan on a sound financial footing for the next 50 years, thereby guaranteeing that the current and future generations of working Canadians will be provided with the means to live in comfort and dignity when they retire?

    Who thought we would see job growth and economic expansion to the point that today there are 3 million more people working in Canada than there were in 1993?

    Who would have forecast that over the past six years Canada's GDP per capita, which represents the best measurement of a nation's standard of living, would grow by 20%? This is the fastest level of growth in the G-7.

    Who would have predicted that we could invest an additional $63 billion to strengthen our health care system based on accords with the provinces and territories?

    Who dared to think that by now Canada would have seen the largest investment ever, $13 billion, in research and innovation, turning Canadian universities into world leaders in the pursuit of knowledge, new ideas, and development of cutting-edge technology?

[Translation]

    Madam Chair, all that, and much more, Canadians have achieved in 10 short years. Yes, we called upon Canadians to make sacrifices. And it was painful for people who felt the impact of cuts as we came to terms with our financial situation. As the then Minister of Industry, I had to cut my budget by 50% and in the process lay off hundreds of excellent public servants, many of whom lived in my community here in the national capital. I know firsthand the sacrifices that people made.

    But the bottom line is clear—the Canada that we know today is a very different and much better place in which to live, work and invest. It is a Canada that is rapidly shedding the burdens of the past and is poised to take full advantage of the opportunities of the future.

Á  (1120)  

[English]

    Certainly there are still major issues we must tackle and pressing needs that must be addressed. Our work is not finished. There remains much to do if we're going to build a more innovative, more intelligent, more inclusive, and more international Canada for our children and grandchildren. Still, we can be certain that the fiscal path we are on is the right one. It's taken us far. It will take us even further as we build an even better Canada for all Canadians.

    Madam Chair, this has been a year of some trial and tribulation. It has tested the resolve of many Canadians from coast to coast. Despite the shocks we have experienced, Canada's fiscal balance remains intact and our economy is poised to benefit from the general global upswing in the months ahead. But balance sheets alone don't tell the story of Canada in 2003. I believe the real story is found in the spirit shown by Canadians time and time again this year in the face of crisis. Through the fires, the floods, and the blackout, through SARS and BSE, through the ongoing challenges found in farming, forestry, and fisheries, Canadians have responded with compassion and resolve.

[Translation]

    Madam Chair, it is a spirit born of a new-found confidence and driven by a strong sense of purpose and a determination to excel. It is the kind of spirit that allowed us to meet the great economic and physical challenges of the last decade. And it is the kind of spirit that will make Canada a model of prosperity and security in the 21st century.

    Thank you.

[English]

    The Chair: Thank you very much.

    We will do one complete round, which will take 80 minutes and will extend the meeting by about 10 minutes. I will be strict on time, but if parties wish to share their time, that is permissible on five-minute rounds, which include both the questioning and the answers. People can let me know. I already have some members on the government side sharing time.

    We will start with Mr. Solberg for up to a 10-minute round.

    Mr. Monte Solberg (Medicine Hat, Canadian Alliance): Thank you very much, Madam Chair.

    Minister, you have a credibility problem. Last year you delivered a budget one month before the end of the year in which you said there would be a $3 billion surplus at the end of the year. At the same time, your government was on a $5 billion spending spree. You were purchasing jets, the infamous Challenger jet purchase in one day. Even though you were only a month from year end, you were out by 133%, or $4 billion, on your forecast for the size of this surplus. The surplus was actually $7 billion.

    Why should we believe you today? Why should we believe you when you were so far out last year? Isn't this just an example of the sort of bookkeeping that got companies like Enron into trouble? Aren't you really deceiving the public when you suggest that we are going to have surpluses as low as you suggested last year and they actually end up being much larger?

    Mr. John Manley: First, Mr. Solberg, let's understand what the forecast of a surplus or a deficit is. It's really first a forecast of revenues less a forecast of expenditures.

    We have revenues of approximately $180 billion and expenditures of roughly the same. We're really talking about forecasting numbers that approximate $360 billion.

    Yes, the surplus may have been $4 billion more than we anticipated at the end of the year, but $4 billion on $360 billion is not over 100%, as you suggested. It's actually about 1%, and it compares very favourably to the estimates made by other governments.

    If I were to take the path that you suggest and try to be more optimistic in the outcome, we have a pretty close to home example of what happens when you do that. Your friends in the Ontario Progressive Conservative Party did that, and guess what they were left with. Now there's a credibility problem: coming in with a $5.6 billion deficit when you projected a balanced budget.

    I'll tell you, we try to be cautious and we try to outline the prudence. I believe in that approach. I'd much rather find a surplus where we expected it to be smaller than a deficit where we had promised people a surplus.

Á  (1125)  

    Mr. Monte Solberg: Minister, obviously I see it quite differently. Last year you were out on your spending projections by $2.6 billion. In other words, that was the majority of the difference in the surplus. Your strategy seems to be to lowball the forecast and highball the spending. In the previous year it was the same; you were out by $3.1 billion.

    Obviously you are in direct control, I would argue, of the direct program spending. Isn't that correct? You have control over that. It's not something that you really have to project. You can call the shots on that. That being the case, spending last year went up 6.6% in any event, even though it was $2.6 billion lower than you were forecasting. Isn't this direct evidence that what you're doing is amounting to cooking the books?

    Mr. John Manley: Madam Chair, perhaps I could introduce my deputy, Kevin Lynch, and assistant deputy, Paul-Henri Lapointe, who are here to assist.

    No, Mr. Solberg, in fact we don't call the shots, as you put it, on all program spending. In fact, there was a very large reduction in program spending as a result of Statistics Canada numbers that affected both the equalization and transfer payments amounts. Those are program spending amounts. Those are affected by a formula basis. We operate as always on the best estimate available, which is on existing numbers, and when Statistics Canada releases, in this case, its census numbers, there's an adjustment.

    I don't know how you would do it, but I think it's better to stick with the numbers that we have rather than guess at what they might be before StatsCan comes out with them.

    Mr. Monte Solberg: My point is $3.1 billion two years ago, that's what you were out on direct program spending, and last year it was $2.6 billion. That's a lot of money by anybody's accounting, Minister. I think your problem goes deeper than that.

    Even in the beginning of your statement today you talked about the $100 billion in tax cuts, which is simply untrue, simply untrue. In fact, what you have done is you have cancelled future tax increases, which you count as a tax cut, which is very deceptive. You include increases to the national child benefit as a tax cut, which of course is beyond deceptive. You don't include increases to Canada Pension Plan premiums when you net out your tax cuts. The result is you end up with less than half of a tax cut compared to what you say you're going to do. It works out to $47 billion.

    What I'm suggesting is what you're really doing here is you are finding ways to limit the size of the surplus so you don't have to offer Canadians real tax relief. In fact, we still have the highest personal income tax burden in the G-7. I submit that what you're doing is you're opening the way for another year-end pre-election spending splurge, which will allow Mr. Martin, who has already made $34 billion in spending commitments, to go ahead and do that. Isn't that true?

    Mr. John Manley: I think we come at this a little bit differently, Mr. Solberg. I think you're ideologically a lot closer to the former government of Ontario, which delivered big time on tax cuts. The result was a deficit, and people were very frustrated with the level of public services they were receiving.

    I think your approach is the exact opposite of what you recommend. I think you advocate tax cuts in order to so impoverish government that public services can't be delivered and people in frustration ask for private sector solutions for them.

    An hon. member: But you were boasting about the impact of tax cuts.

Á  (1130)  

    Mr. John Manley: I don't agree with that approach. I think we need to have a balanced approach.

    An hon. member: You said that corporate tax cuts help.

    Mr. John Manley: I think the balanced approach is one that sees tax reductions--and I don't care how you count it, but a reduction in revenue, in my book, is a tax reduction--and spending to fortify those areas of Canada's social advantage that are important to Canadians. That's why in the last budget the biggest spending increases were in the area of transfers to the provinces specifically for health care as a result of the health accord.

    Canadians made it plain. You travelled with the committee, you heard it as well as I did in my pre-budget consultations that what Canadians were asking for was some assurance that the health care system was going to be there to meet their needs. That's the need to which we responded.

    Mr. Monte Solberg: Isn't it true that in your economic statement you argued that corporate tax reductions actually helped and they created jobs? Isn't that what you said? I think I heard you say that.

    Mr. John Manley: And I said that we have a lower, on average, corporate tax rate than in the United States, and that is a Canadian advantage.

    Mr. Monte Solberg: Our personal income tax burden is still the highest in the G-7.

    Middle-income Canadians have not seen a real tax decrease at all. They haven't seen a real tax decrease at all. They're bearing a tremendous burden when it comes to paying the shot. Low-income Canadians have seen a tax break, but middle-income Canadians simply have not seen real reductions. Isn't that true?

    Mr. John Manley: No, you're wrong. In fact middle-income Canadians have seen a large tax reduction. Furthermore, when you look at Canada's total tax burden, we are the third lowest in the G-7. I don't know what numbers you're working from, but they're wrong.

    Mr. Monte Solberg: Well, they're certainly not the $100 billion tax cut numbers that you were using, which are deceptive.

    Isn't it true that at the end of the year we're going to end up with an $8 billion to $10 billion surplus, somewhere in that range, provided that you don't go on a massive spending spree?

    Mr. John Manley: That's not the forecast that I've presented today. If we were to do better than we anticipate because revenues were stronger, because growth was stronger, I for one would be the first to celebrate it.

    Mr. Monte Solberg: I guess the issue is that in the last number of years the government has yet to come even close to being where the Liberals said they would be when it comes to surpluses. I think the minister would acknowledge that is true.

    Given that very shoddy record in terms of forecasting surpluses--which is quite different, by the way, from being honest about what your projections are in terms of spending and that kind of thing and then coming up with different planning so you end up with a surplus--given the fact that you've been so far out, I want to return to my very first question: why should people believe you? Why should we believe you today when you say that the surplus will be $3.5 billion?

    Mr. John Manley: Because when you compare our forecasts with those of other countries, you'll find that we do pretty well. When you compare our forecasts with those of your allies in the previous Ontario government, you'll find that we've done very well. I'd suggest you believe us rather than them.

    The Chair: Thank you.

[Translation]

    Go ahead, Mr. Paquette; you have 10 minutes.

    Mr. Pierre Paquette (Joliette, BQ): Thank you, Madam Chair.

    Mr. Manley, thank you for that economic spin. To my mind, it wasn't an economic and fiscal update at all; in fact, you're keeping us in suspense over the $2 billion that was promised to the provinces. And you're doing it for essentially political reasons, i.e., so that Mr. Martin himself can announce the $2 billion before the next election, in the spring.

    In your statement, you said that for health care spending, the federal government would provide up to $2 billion from this year's surplus once the numbers are finalized in the fall.

    Does anyone actually believe Mr. Martin would head into an election without spending that $2 billion?

    It's an economic joke. It's just a political manoeuvre. You know that you have the money and that you will have a surplus, but instead of announcing the amount now, you prefer to keep up the suspense so that Mr. Martin, after the Liberal Party leadership convention on November 15, 2003, and before the next election, can announce it himself. Furthermore, with respect to the economic statement, as my colleague from the Alliance was saying, you're doing the same thing you did last time: you are quite obviously underestimating the surplus. In the past two years, you have racked up $4 billion in revenue. We're no longer talking about being prudent here, we're talking about being unrealistic.

    As for spending, I think that has been overestimated. However, I will agree with you that there is an awful lot of unnecessary spending. For example, in the first four months of 2003-2004, spending went up by $3.3 billion, or 7.9%. The statement from the department shows that this increase is above all due to departments' operating expenditures. It has nothing to do with the mad cow crisis, SARS and the fires in British Columbia.

    In my opinion, you know full well, just as you probably knew last year and in June, that the surplus will be larger. Your performances in recent years as well as Mr. Martin's give cause for concern. Here are a few figures. In 1999-2000, you forecast a surplus of $3 billion, which in fact reached $12.7 billion. That's a margin of error of 323%. In 2000-2001, you forecast a surplus of $4 billion, which in fact totalled $18.1 billion, for a margin of error of 353%. In 2001-2002, you forecast a surplus of $1.5 billion; it was in fact $8.9 billion, off by a margin of 493%.

    I will agree with you that this year, your margin of error is a bit lower than your predecessor's. Since June, you have been forecasting a $3 billion surplus, and it's $7 billion. We're talking about a margin of error of 133%.

    Given that this economic and fiscal update is supposed to enlighten the public and business people on the actual situation the government is in, there is cause for concern. For your information, the parliamentary secretary owes me two bottles of wine. I had bet that the surplus would be $10 billion. If you add the $2.5 billion that you have transferred to the provinces to honour the health accord, you get a total of around $9.5 billion. So he owes me two bottles of wine: one from Ontario and one from Quebec.

    I'm going to ask you the following question anyway. Mr. Manley, if you were serious and actually intended to wait until the fall, how, in your opinion, could the provinces forecast these amounts in their budget? Isn't it irresponsible toward the provinces, which, as you know, are heading for a total deficit of around $10 billion? They are all in trouble except Alberta.

    I think that this political manoeuvre, which is also an economic spin, reveals an irresponsible attitude.

Á  (1135)  

    Mr. John Manley: First of all, Mr. Paquette, allow me to make a comment on the forecasts.

    You may not have yet had the opportunity to examine the figures for 2002-2003 but our revenue is $1.2 billion less than forecast. We may not have underestimated the revenue but the revenue was smaller. It is the expenditures that were lower than forecast.

    As for the 2002 revenue and expenses and the difference between the forecast and the actual situation, Canada's margin of error was 1.4%. The only country at the same level of Canada is the United Kingdom where there was a discrepancy of 1.4%. When we compare Canada with other countries, we observe that Italy had a margin of error of 1.9%, Japan, 3.8%, Germany, 2.3%, France, 3.7% and the United States, 7.5%. We have income and expenditures of $360 billion and we are doing our best. I do not agree with the claim that we are failing to do what is necessary to provide the most accurate estimates of the future situation and reserve the necessary funds for contingencies.

    With respect to the health funds, I met the ministers of finance in Ottawa on October 10. They unanimously adopted the position that the federal government should not run a deficit. They realize that this could affect the reputation of all Canadian governments and they are not willing to accept a deficit.

    The Prime Minister has just sent his letter and I think that they will all be quite pleased with the assurance given to them, namely that the transfer will be made if we can avoid a deficit.

Á  (1140)  

    Mr. Pierre Paquette: I maintain my claim that this money will be transferred before the next election in the coming months. You will certainly not be waiting until next September to find out whether a surplus has been achieved.

    I sent a letter to Mr. Martin to inform him about the Bloc Québécois' forecasts that are normally better than those of the Department of Finance. Our margin of error has never been greater than 10 per cent whereas you have systematically been off by as much as 500 per cent during your time in power.

    Mr. John Manley: But the consequences of a mistake on either side are not exactly the same. It is much more serious when we make a mistake and create a deficit as was done by the Government of Ontario and the former Pequist government in Quebec.

    Mr. Pierre Paquette: It is largely because of the federal government that the provinces are experiencing difficulties, because the $7 billion that you were able to come up with—what a surprise!—, went to paying off the debt when the funds could have been used for other purposes. This point was made by the Auditor General in November 2002.

    Who, 10 years ago, would have thought that we would be lowering taxes by $100 billion in Canada, was the question you asked earlier. There was something I found even more surprising. Who would have thought, when the Liberals came to power, that they would divert $45 billion from the employment insurance fund? The private sector forecasts are probably the only ones with any credibility of all those that I have seen. For the coming years, it is expected that there will be a surplus of $2 billion to $3 billion in the employment insurance fund. In spite of what you say in your update, in the private sector, they believe that the federal government will still be making use of the employment insurance fund to sock away more money in the form of a surplus.

    Was the consultation of the past months a serious one and when will the results be known? You promised that for the next budget we would know exactly how the mechanism for determining the premium rate works. Absolutely nothing is known about this. You tell us in your update that significant steps were taken. The only significant step that was taken was to engage in consultation, largely on the website. For now, we have no indication of the direction in which the federal government will be heading.

    Personally, I'm outraged, it's as simple as that.

    Mr. John Manley: We've often had this debate in the House. In the year 2000, a tax reduction over five years was adopted. This could include a cut to employment insurance premiums. The fact remains that this amounts to a decrease in government revenue of $100 billion.

    I've already set the rate for 2004 in the February budget. Furthermore, a decrease in employment insurance premiums is already planned for next year and we promised that by the year 2005 there would be a new system in place for setting the rates. As I said in my presentation, the consultations are over. I believe the bill will be adopted in 2004. That means that as of 2005, we will be in a position to set up a process allowing us to generate sufficient revenue for the payment of employment insurance benefits.

    Mr. Pierre Paquette: In the last budget, you said, and this was repeated on several occasions by the parliamentary secretary, that premiums were just enough to cover benefits and expenses associated with the Fund. It so happens that once again this year, there is a surplus in excess of $3 billion and next year it is expected that the surplus will be above $2 billion.

    It is important to take steps now to correct this situation. The taxes that you are collecting are regressive and affect the lowest wage earners, the very people who have not been able to benefit, like others, from the generous tax cuts introduced.

Á  (1145)  

    Mr. John Manley: I agree, and it is for this precise purpose that I have adopted this measure.

    Mr. Pierre Paquette: We expected there would some debate about it today.

    The Chair: That's all.

    Mr. Pierre Paquette: Is it possible?

    Mr. John Manley: Time passes quickly when we initiate this kind of discussion.

[English]

    The Chair: Now I'll go to Mr. Murphy for ten minutes.

    Mr. Shawn Murphy (Hillsborough, Lib.): Thank you very much, Madam Chair.

    Mr. Minister, I just wanted to ask a few questions on the $2 billion that will be allocated for additional health funding. As your presentation indicated, that was conditional upon certain budgetary surpluses being met, which, it appears, according to your projections, aren't going to be met. But you've made the statement that you're going to fund it anyway, and the Prime Minister has written the premiers.

    First, I want to congratulate you. I think everyone wants the federal and the provincial government to work together.

    Mr. Minister, there was another condition there, which I do want to talk about, and that was the agreement by the provinces and the territories to establish the national health council. That was a firm agreement made at a meeting of our first ministers. It wasn't an agreement made at the Tory leadership convention. And Canadians really wanted that to be fulfilled.

    It's been quite a time now. Several premiers have reneged on it and there's been a lot of dithering on it. I think Canadians really want it. I think Canadians would be disappointed if $2 billion were advanced and there was no national health council.

    I guess I have two questions. The first question goes back to the conditional allocation. Having been able to reflect on it for the whole year and considering that five provinces booked it immediately, do you really think it was a wise move in the first place? Although I must say I agree 100% with the government in doing it.

    Second, if the provinces continue with their position not to establish a national health council, are you still going to go ahead and advance the $2 billion in additional funding?

    Mr. John Manley: First, I think the commitment to put additional money at the disposal of the provinces was really predicated on the notion that somehow the economy would be performing better than we expected and that we would be able to foresee a larger than anticipated surplus. When I met with the finance ministers a couple of weeks ago it was quite clear at that time that they understood the implications of the slower economic performance this year. We were essentially saying “Look, we need the money. We don't want you to go into deficit, but we don't want to see you spend on a whole lot of new things and prevent there from being a surplus.”

    In the Prime Minister's letter of today he particularly underlines the fact that the establishment of the health council is key to involving Canadians in the implementation of the accord. He also goes on to say that the reason we are modifying the condition is to ensure the successful implication of all aspects of the accord for Canadians. As he says, we are in a position to do this because of the greater reduction in the debt that occurred last year than we had anticipated.

    Is it expressly a condition, as it's written in the letter? No, but I think the demonstration of good faith and commitment on the part of the federal government will undoubtedly have its quid pro quo in cooperation from the provinces as well. And I, for one, would consider the establishment of a health council to be an important element of that.

    Mr. Shawn Murphy: Mr. Minister, last year you embarked upon a $1 million reallocation process, which is a reallocation of priorities, which I believe is probably important as we go forward in public policy, because every year there will be a reallocation, but there will always be resistance any time you reallocate. Can you take us through how it went, the resistance you met and the challenges you faced--because I think this will be an ongoing process--and some of the lessons learned?

Á  (1150)  

    Mr. John Manley: Yes, of course there is resistance. There was resistance when we did a program review in 1994-95 as well. I well remember my own meeting with the Minister of Finance at that time. When he told me what my target was, and I seemed rather sanguine about it, he said, “Well, some of your colleagues have been catatonic”. I said, “Well, just for the record, since maybe I don't express myself clearly, I want you to know I'm catatonic also”.

    There will always be resistance. People get up in the morning believing the things that they're doing are important and valuable, and they are, but this is about an exercise in priorities. It's about saying this may be good, but is there something better? Is there something more important? Is there something that Canadians consider to be more vital to their interests that we ought to be doing with the limited resources that are there?

    I think we will have to increase the capacity of the Treasury Board to make those kinds of determinations, and we may need to enhance the process going forward to ensure real deliverables in terms of the ongoing review. However, I think it's an absolutely essential element of what we need going forward.

    If we don't do it in a methodical way, as we suggested in the budget and as we began to implement this year, I think we inevitably will be driven to another full-scale program review process such as we had in 1994, which would be very disruptive and difficult to manage.

    I think we need more teeth and we need to do this quickly.

    Mr. Shawn Murphy: Can you tell us exactly where these cuts were made? Has any particular department had a greater share of the burden?

    Mr. John Manley: Treasury Board put this out, and therefore the numbers come from most of the departments. I can't tell you specific programs, but Agriculture, $17 million; Canada Customs, $22 million; CIDA, $130 million; HRDC, $105 million; Industry, $117 million--

    Mr. Shawn Murphy: But it was shared across the board?

    Mr. John Manley: It was generally across the board, and it resulted in managers being compelled to be more efficient in the way they spend their resources.

    I can tell you that in my own experience as a line minister dealing with that, although it's painful on the way in--and Mr. Lynch was my deputy at the time, and we had to endure, as I said, some pretty serious reallocations--I think we ended up, if I might say so, doing things better than before because we were forced to look at what the new priorities were in the mid-1990s rather than what they had been in the 1980s or the 1970s with programs that had existed that long.

    The Chair: We'll go to Mr. Discepola for ten minutes.

    Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you, Madam Chair.

    Minister, if we look back over the past several years and analyze your projections, to a certain degree I agree with some of the members of the opposition that you do have a credibility gap. I looked at the numbers for last year, and if I take the projections versus the actual results, you were off by upwards of $60 billion.

    I personally feel that to err on the side of prudence is probably better. If Mr. Roth had erred that way or had used your forecasting techniques, my shares of Nortel would still be at $125 today, I would think. You need to have that confidence.

    My first question is on how there has to be something in your ministry whereby you track the performance of your budgeting techniques. First of all, do you have such a system in place? Also, at what point in time will our credibility--or more importantly, our government's credibility--eventually suffer if we don't start getting a little closer to the actual projections?

    You used the example that $4 billion on $180 billion in revenue and $180 billion in expenses is not bad, but when I see that all you can get is a billion dollars in reallocation on the same $360 billion, then it doesn't seem to me that the effort is there too.

    I'll leave you time to answer one of those two.

Á  (1155)  

    Mr. John Manley: Remember, the reallocation is only on the expenditure side, so that's not out of $360 billion; that's out of $180 billion. But I grant your point: it's still not a big amount out of $180 billion.

    I guess what I'd go back to, Mr. Discepola, is that no one has any better reputation in forecasting than we do. When you look at the results in other countries, it's a similar challenge. What we're trying to do with a forecast is predict the future. If you were able to do that, you'd have sold your shares at $120, so what can I say? Except that I really want to stress this fact: I sat on this committee on this side, Mike Wilson came into this committee year after year, and what we did to him over the accuracy of his forecasts was a little more ruthless than what our friends in the opposition are doing today. But his forecasts were always the other way: it was always a hockey stick, and revenue was going to go up and the deficit was going to start coming down. They never got the deficit below $29 billion, I think, in the course of all those years.

    So look, if we've been too cautious, I plead guilty. We try to be cautious, because what has rebuilt Canada's credibility in the world is that we are outperforming everybody else on fiscal performance. That is why the provincial ministers, even though they have money at stake themselves, sat around a table like this one and said, “Don't go into deficit, federal government”.

    We try to be as accurate as possible. We try to rely on private sector forecasting. It was an innovation when we came to government and stopped doing in-house forecasting. We take the 20 outside forecasts and we use them as the basis for our economic projections. We use outside modelling firms to give you the deficit and surplus projections you see before you today. That gives it a certain element of objectivity, which was lacking before. I think that's the key to it. Then too, we recognize that we can't predict the future with any certainty.

    Mr. Nick Discepola: Minister, my concern is that any excess surplus has always in the past gone to offset the debt, and I think that at one point in time it comes to where.... Right now we're standing at $40 billion by the end of the next fiscal year. It seems to me that there's a fixation with getting debt-to-GDP down to an acceptable level. I personally figure that 30% is sufficient, but if you take a look at the amount by which we have actually written down the debt with each of the surpluses, it really doesn't affect the overall percentage that much.

    I think we can achieve that objective with, in essence, good sound economic growth, and as a result maybe we can take some of that surplus in other priority areas. That's my only concern in saying that if we're going to lowball it, we're obligated by law to take that surplus and write it down to the debt.

    I haven't heard this, and a couple of my colleagues and I were asking each other. Whereas Mr. Murphy said that we must have accountability in any of the transfers we do with the provinces, this is paramount: at any of the cross-Canada hearings we've had, Canadians are demanding transparency and they're demanding accountability, but I for one believe firmly that we have an obligation to invest in health care.

    So yes, maybe there are conditions tied to the $2 billion transfer to the provinces, but I think what we want to hear today is that this $2 billion is going to go to the provinces, regardless. You seem to indicate that we have roughly only a $2.3 billion projected surplus, so if we give $2 billion to the provinces, we only come down with a $300 million surplus. But I believe firmly that Canadians want the constant bickering among all levels of governments to stop and they want to reinvest in the number one issue, which is health care. Will the $2 billion be there for them?

    Mr. John Manley: First, I agree with you that this is what Canadians want. They want an end to the bickering. They want us to work constructively together. I can say to you that my sense is that the atmosphere for federal-provincial relations is improving quite significantly.

    The second thing I'll say to you is that I expect the $2 billion will be there. Why don't we just simply give it to them today? Because I think $300 million as a contingency reserve for five more months of the year is just too tight for comfort. Think of what we've spent money on this year: SARS, BSE, and disaster relief, and there's the hit we've had from an appreciating dollar, none of which was foreseen on budget day, February 18. Then the dollar was 65¢. Nobody had ever heard of SARS. Nobody believed then that Canada would suffer from a case of mad cow disease. Of course, the natural disasters are never foreseeable. I just think that $300 million would be too tight for us to risk slipping into deficit.

    Part of your question implies, I think--I'm putting words in your mouth--that maybe if we did pretty well last year, we shouldn't worry so much if we have a little deficit this year. My belief is that Canadians have come to understand the impact of letting our spending grow and letting our discipline against deficits get out of control over many years. They understand the sacrifices they were asked to make in order to get back onside. I think they understand that if we say a little deficit is okay, it just might turn into a big deficit. I think we should be firm, and this is why I'm adamant: no deficit. Period. I don't want to take any decisions that will put that at risk.

  (1200)  

    Mr. Nick Discepola: Thank you.

    I'll ask the direct question, Minister. One area of concern for me is program spending. You alluded in your speech to the crucial 1995-96 budget and program review, but successively over the past several years we've seen program spending increase and increase. In 1995-96, yes, we cut almost 50,000 public service employees in this immediate area, but we've seen that creep up again over the past few years. I'm concerned. Are you concerned?

    Mr. John Manley: Yes. That's why we brought in some measures in the last budget. That's why I've commented on the fact that we need to toughen them and perhaps increase the degree of scrutiny we put on programming and reallocation. We need to have real targets that are enforced.

    At the same time, I remind you, the words “program spending” imply that it's all federal government programs. Program spending includes transfers to provinces and territories, both for CHST and for equalization. So when we increase, as we did in the health accord over five years, by $35 billion in CHST transfers, a lot of that, $2.5 billion of it, in the last fiscal year, that is part of program spending.

    I think what we're really getting at with the reallocation is how we focus on the things the federal government is doing, making sure that we're doing the things we should be doing well, that we're not doing things we shouldn't be doing, and that we're really matching our spending with the priorities that Canadians think are important.

    The Chair: Thank you very much, both of you.

    Mr. Brison, ten minutes, please.

    Mr. Scott Brison (Kings—Hants, PC): Thank you, Madam Chair.

    Thank you, Minister, for appearing before us today.

    In your presentation you said that the government will deliver a new policy on the financial services industry. That's what the banks thought you said in the spring and summer of 2002. Then the Prime Minister, in October 2002, said “Wait a minute. There aren't going to be any bank mergers until I retire.” Isn't the only new policy you're talking about the fact that Canada will have, under Paul Martin, a prime minister who will allow the banks to merge?

    Mr. John Manley: You know that we have had a merger of Toronto Dominion with Canada Trust. We've had other changes, and significant changes, in the financial services sector. We've had mergers of insurance companies.

    What I was intending, at least, to say in the response we issued to this committee and to the Senate committee was that going forward we look at a policy that takes into account the fact that we're no longer talking just about banking or retail banking the way most people think of it intuitively. The industry has changed significantly over even the last five years, and therefore that's why we've asked for some broader input.

    We've committed to having a policy document out by the end of June and then opening the door to applications some months after that. I think that will serve the needs of the industry. What they told me was that they wanted some certainty. They didn't want continuing uncertainty. They wanted us to take a clear position on when we would receive proposals so that they could get about their business.

  (1205)  

    Mr. Scott Brison: The World Economic Forum, in its evaluation of Canada this year, has actually reduced Canada's global ranking from third to sixteenth over the last two years, citing, among other things, high taxes, infrastructure deficits, and, more troubling in some ways, lack of transparency and in fact allegations of corruption. In fact, the description of Canada could be interpreted as describing Canada as some sort of banana republic or as evolving in that direction.

    Consider the extraordinary impact of the Prime Minister's retirement schedule on important public policy decisions. Earlier I mentioned bank merger policy. There is also budget planning. On August 29, you speculated that there probably wouldn't be a budget in February. You said, “It is always a job done between the finance minister and the Prime Minister. And for that reason it's impossible to do a budget before the transition.”

    So we can't have a budget until after the Prime Minister retires. On equalization, the provinces have to wait in limbo as Canada's most important social program is put on hold until after the Prime Minister's retirement. On the VIA Rail commitment of $700 million made by the current transportation minister, the incoming Prime Minister is speculating that there may not be a fulfillment of that commitment.

    Doesn't the Prime Minister's refusal to retire earlier and the delay of these important public policy decisions contribute to the international perception of Canada being more like a banana republic as opposed to a functioning democracy?

    Mr. John Manley: Let me just refer Mr. Brison to a letter that was issued last Thursday by Tom d'Aquino of the Canadian Council of Chief Executives to Klaus Schwab, president of the World Economic Forum, after the release of the WEF competitiveness survey. He outlines the concern he has with the survey techniques that were used by the WEF, and then says this:

...I worry that findings so much at odds with the reality of Canadian competitive performance run the risk of having the work of the World Economic Forum in this area subject to ridicule. Some soundings that I have taken this morning among my CEO colleagues and senior government officials bear this out.

Despite their methodological limitations, the WEF's findings have a worldwide audience, and an inaccurate portrayal of Canada may have an unwarranted impact on perceptions in the foreign investment community of Canada's economic performance and prospects. Fortunately for us, other respected international assessments have given us high marks. I refer you, for example, to the International Institute of Management Development's third place ranking of Canada's competitiveness according to its 2003 report. I also refer you toThe Economist intelligence unit's first place global business environment ranking of Canada for 2003-2007.

    Mr. Scott Brison: With respect, Mr. Minister, you can go to a thousand doctors and you may find one of them that will say that smoking doesn't cause cancer. The fact is there's an overwhelming--

    Mr. John Manley: Yes, and I think that's what the WEF did. It put a survey out to a very small representative sample. I could also refer you to the KPMG competitiveness alternatives, which rank Canada number one. The Institute for Management Development was number three, as Mr. d'Aquino pointed out.

    I think that if you want to take a look at the numbers for yourself, you might have a hard time substantiating what some businesses surveyed by the WEF seemed to have come up with.

    Mr. Scott Brison: Minister Manley, this morning we committed $2 billion for health care for the provinces. In fact, according to table 3.8, in terms of the projections for alternative payments to the provinces or the fiscal arrangements, which effectively refers to equalization, there's a $10 billion decrease over the next five years over last year's figures. The fact is, it's a wash. It's not new money for the provinces. You're projecting a $10 billion decrease over the next five years for equalization transfers to the provinces. Therefore the health care increase is a wash over last year's projections. Why is that less?

  (1210)  

    Mr. John Manley: What line are you on, Mr. Brison?

    Mr. Scott Brison: On table 3.8. If you compare that table with table 3.5 of last year's projection, you see a $2 billion decrease or $10 billion over the next five years in the alternative payments for standing programs under fiscal arrangements.

    Mr. John Manley: As you can see in table 3.8, in fact the amount steadily goes up from the actual in 2002-03, which is $10.4 billion. It goes to $11 billion, $12.1 billion, $12.7 billion....

    Mr. Scott Brison: Under fiscal arrangements, Mr. Minister, there's a $10 billion decrease over the next five years compared to last year's numbers.

    Mr. John Manley: First, you have a steadily increasing number, and second, equalization works this way. You take a complex formula to measure fiscal capacity of provinces. You compare each province to an average of five provinces, which does not include the richest and does not include the four lowest-income provinces, to get the average, and you make payments based upon what is needed to bring that fiscal capacity of the receiving provinces up to the average. Where the data indicates that the disparity between the average and the recipient provinces has narrowed, which is the case, and the other factor is that there's been a change in population in recipient provinces, of course the amount we have to pay would go down.

    What is not in the table is any estimate of what it might go up based on some of the proposed changes we're working on with the provinces.

    Mr. Scott Brison: But based on these projections, the government will enjoy a $10 billion windfall over the next five years, so in fact the $2 billion increase in health care is not an actual increase in terms of transfers to the provinces, it's a wash.

    Mr. John Manley: It's not a wash. It's not going to the same provinces, for one thing. It's going out under the CHST, which was the commitment. You're talking about equalization.

    Mr. Scott Brison: You say here that the change to the treatment of the contingency reserve is a one-time change of policy, but it's a very significant departure from the policy that you'd previously stated and have maintained. Isn't it really setting up a brilliant opportunity for you to engage in extraordinary pre-election spending with this type of major policy change? I think you've underestimated the impact of this and have tried to minimize the impact of this. This is a very major policy change for your government.

    Mr. John Manley: Well, it is a major policy change, which is why I underlined that it was a one-time response to fulfilling a commitment, albeit conditional, last February, taken by many provinces, as witnessed by the fact that five provinces actually booked the conditional payment in their revenues as something that would simply occur. Therefore, although it's not really a legal obligation, I think there's a political imperative.

    In fact, you might think of it in the opposite way that you proposed it. If that $2 billion is committed to the provinces, it's not available for other things that anybody might want to do.

    The Chair: Now we'll go to a ten-minute round, and it will be shared between Mr. Pillitteri and Mr. Valeri: five minutes each, and that's for questions and answers.

    Mr. Pillitteri.

  (1215)  

    Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Madam Chair.

    I'm glad I'm on this side of the House, Mr. Minister, not on the other side of doom and gloom. I represent an area where it was doom and gloom prior to 1993, when we had 14.5% unemployment. I think today we are below the national average of somewhere around 7%. Now, this was not all the government's doing, but certainly the government had some part in planting the seed in order to have economic recovery.

    Let me start by saying that within my own area—and all politics is local—you have the private sector, especially the tourist industry, where it invested over $2 billion in the last seven or eight years into building hotels. It is a mecca. We are the tourism mecca of Canada.

    A lot of my constituents have asked me about the Canadian dollar. Mr. Minister, maybe I should not ask you this question, but it is imperative that I do, because we have to take a look at the dollar, which has gained in value by 20% when compared to the dollar in the United States. We have all the projections; the United States is doing so well, and we have an increased dollar.

    It is no different from a manufacturing product developed in Canada: the same for tourism, it is an export commodity. Since the dollar went up 20%, they're doing long-term planning. SARS had a devastating effect on Ontario, and specifically in Niagara Falls and the Niagara Peninsula, to the point where it even affected your projection for growth in the second and third quarters. I really think that in the tourist industry I am not seeing any growth in the second quarter, more likely a little in the third quarter, and it's really grown in the fourth quarter. What can we do to help, in a sense, to make sure we continue this export industry in tourism?

    Also, we see that the Bank of Canada failed somewhat by not lowering interest rates, because it also had an effect on the manufacturing sector and so on. It has now lowered the interest rates, but they're still 1.75% or 2% higher than those in the United States.

    The Chair: Minister Manley, you have two and a half minutes.

    Mr. John Manley: First, you're right, the tourism sector was seriously impacted by SARS. I'd say that's not just true for Ontario. Tourism and hospitality across the country were affected. Really, the farther you get from the Toronto area, it diminishes somewhat, but it has had an impact across the country.

    On the dollar, I think the important thing to remember here, as I think the slides indicated, is that this is not really a story about the Canadian dollar; it's a story about the U.S. dollar. The U.S. dollar has fallen sharply against other important currencies, particularly against the euro and to some extent the yen. Against the Australian dollar, it has fallen more than it has against the Canadian dollar.

    What you had here was a long-anticipated adjustment in the U.S. dollar exchange rate, reflecting the fact that the U.S. had been consistently building up large trade deficits and current account deficits. So the adjustment needed to come.

    For not an insignificant period of time, people have been worrying about there being a rapid devaluation of the U.S. dollar and what that would cause in terms of instability. Those worries turned out to be well founded. We've seen over the course of this year a rapid decline in the U.S. dollar.

    Now, certainly monetary policy is very much the purview of the Governor of the Bank of Canada. He has been here, as he has been in the public, to explain his decisions with respect to interest rates, but these are not determined according to what it will do to the exchange rate. The monetary policy decisions are rendered in the context of how we ensure the achievement of the stable price policy the government has adopted with the Bank of Canada, maintaining inflation in the 1% to 3% range. That's where it is. That has contributed, as have other aspects, to our generally positive economic story.

    I think the answer to your question is that since we can't really forecast where the dollar will go, it is important for Canadian businesses to make sure they are competitive. They must invest in productivity, in training, and in skills development for their people to enable them to compete, whether the dollar stays where it is, whether it goes up, or whether it goes down. That's what a prudent business person will do in order to protect himself or herself against an exchange rate fluctuation, which is really beyond our control and beyond their control.

  (1220)  

    The Chair: Thank you very much.

    Now we'll go to Mr. Valeri, please, for five minutes.

    Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Madam Chair.

    Thank you, Mr. Minister, for your update today. I'd like to touch on two points. I'd like to put them both on the table and then give you an opportunity to respond.

    I think the document provides a snapshot and a picture of the successes we've had in terms of debt repayment. It's true, program spending has fallen off since 1993-94. It has edged up a little recently. We even have real disposable income per capita increasing, some 13% in the document, which is a very valuable statistic, which we shouldn't lose sight of.

    We have an appreciating currency, which is good, although I think you've heard concerns from others that it's the rapid appreciation of this currency that has caused some difficulty in our economy. However, the issue of productivity is still one we're grappling with. While we see our labour productivity improving, the gap in productivity between ourselves and the Americans is still large.

    The Conference Board recently put out a document that talks about differences in industrial structure, perhaps accounting for a significant part of that productivity gap between ourselves and the Americans. I'm concerned about that, and I'm wondering whether the government has done any work in examining the effect of this economy structure on productivity levels. What do we need to do to refocus on the non-resource-sector aspects of our economy?

    It also states in that report that the Canadian economy is essentially more focused on or has greater reliance on early stage natural resource industries, as compared to our American counterparts. I'd like you to address that if you can.

    The other thing I'm concerned about is the fact that we're not allowing for prudence going forward until we get to 2006-07. Prudence has been a very integral part of our fiscal framework. We've seen the benefits of it, given what has happened with September 11, SARS, and mad cow. We're now saying that for the next couple of fiscal years we will not have any prudence.

    I'm concerned about that. I'd like to know your level of comfort and what you are considering doing going forward as we get to a position where we can now include that prudence factor again. Perhaps you could deal with the reallocation exercise as well, whether we might be able to draw from reallocation moneys and deal with the prudence component of our fiscal framework, because I do think it was a very integral part of ensuring that we didn't get back into deficit and that the economy performed as well as it did.

    The Chair: Mr. Minister.

    Mr. John Manley: Thank you, Mr. Valeri.

    If you look at the tables on page 46, you'll see that there has been some improvement in our productivity growth, certainly, over the years since the year when we moved from deficits into surplus. I don't know how much of this is causal and how much of it is coincidental, but it was a transforming year. If you start from that point and go forward you'll see that in productivity and labour productivity growth measurements, we're on a par with the United States. That's the point at which we began to overtake the U.S. in GDP per capita growth. That's where a lot of good things started to happen to us. It's where we really got onto the positive cycle.

    When we look at the structure of our economy, I think it is a little difficult, as you suggest, for us to move some of the big numbers when there is still a large part of our economy that is based on natural resources. But when you segment out the industrial sectors and the service sector of our economy, you can see that we are doing quite well in terms of productivity and labour productivity growth.

    The other thing, the positive side of having a stronger currency, is that much of the equipment and machinery that we use in generating productivity growth is imported and therefore becomes less costly for us, so I'm optimistic going forward.

    The final thing I'd say is that very often productivity growth lags--and you see this historically--behind technological development. We've seen in Canada in the mid-1990s a rapid increase in investment in technology. You've seen the speed with which we've connected all our schools, for example. Sometimes the productivity gains from that lag the investments a little.

    The prudence issue is a very important issue, and I think it's one we are going to need to reflect carefully on. Our previous experience with this, as was mentioned, was the December 2001 budget in the aftermath of 9/11. We basically were in a situation similar to where we are today. We no longer had prudence and we had a contingency of less than $3 billion.

    As economic events unfolded, growth in 2002 proved to be greater than expected, so we were able to restore the normal prudence as well as the full contingency reserve. This obviously is the best option: that we see stronger growth and are able to foresee results that allow us to restore prudence as well as maintain the contingency reserve.

    Failing that, I would be an advocate for undertaking expenditure review in a manner that would result in us being able to restore a degree of prudence in the early years, together with maintaining the contingency reserve, but I think that's a decision that's going to have to be taken once we've seen more of this year's numbers unfold.

  (1225)  

    The Chair: Thank you very much.

    For ten minutes, Ms. Judy Wasylycia-Leis.

    Ms. Judy Wasylycia-Leis (Winnipeg North Centre, NDP): Thank you, Madam Chairperson.

    Thank you, Mr. Minister. Obviously we have some very different world views and different visions for this country. You've set yourself this grandiose goal of being best of the G-7 in terms of our debt-to-GDP ratio. I happen to think it makes more sense to be the best of the G-7 and in the world in terms of how we treat people and where we fall on the human development index. By the way, we've dropped from first place to eighth place on that index in a short period of time.

    I guess I got off on the wrong foot when you talked about the last decade being one of progress. I see it more as a decade of despair and disappointment. So I would put to you the question that you put to all of us: who would have thought that after ten years child poverty would still be with us and growing, as opposed to having been eliminated by the year 2000?

    Who would have thought that medicare would have been brought to its knees in the last decade?

    Who would have thought that seven out of ten children of working parents would still be looking for licensed day care?

    Who would have thought that food banks would have multiplied a thousandfold?

    Who would have thought that the gap between the rich and the poor would have grown?

    Who would have thought that we would be singled out by the UN for third world conditions on reserves?

    Who would have thought that we would be in breach of the UN in terms of ending discrimination against women?

    I could go on. So you see, I have a different view of the last ten years.

    My question to you today is, are you now going to realize that the old ways don't work? First we have to get off your fetish with deficit elimination, then your focus on tax cuts that benefit the wealthy and large corporations, and now your fetish with the debt. When are you going to start to put that human deficit and the social debt that has resulted because of your fiscal policies ahead of other issues?

    Mr. John Manley: That's the kind of speech that makes social democrats in Europe just shake their heads and wonder why the Canadian NDP is so far out of the loop in terms of what kinds of choices have to be made in order to effectively govern today. That's not the kind of speech that I would have heard from any of my counterparts in Sweden or Germany or other countries where social democrats realize that you have to make pragmatic choices in order to secure the kinds of objectives that you want to achieve.

    That, I think, is one of the reasons why your party is just not seen as a credible option to govern. Because if you start with the presumption that it doesn't matter a whit what our debt is, then of course it will be “Let's just spend”. I could have a great time spending. We could announce all sorts of things. But sooner or later--

  (1230)  

    Ms. Judy Wasylycia-Leis: But that's not what I'm suggesting, Mr. Manley.

    Mr. John Manley: Well, you began by asking why should we target having the best debt-to-GDP ratio--

    Ms. Judy Wasylycia-Leis: Let me rephrase the question, then.

    Mr. John Manley: Let me finish now. You gave me a litany. Let me give you one.

    Yes, our debt-to-GDP ratio has fallen, and you know what? I think that's how we secure our commitment to our social programs, not how we put it at risk. The debt was eating us alive. When we came into office, 37¢ of every tax dollar we received from any source went to pay interest on the debt. Today it's 21¢. It should be lower.

    That's what has enabled us to introduce the child tax credit, to increase it by $5 billion. Where were we in 2000 in eliminating child poverty? We weren't there, because we didn't have the resources yet. Now we've built them up. Now we've made a difference on it.

    As for health care, sure there are strains on the health care system: look at the demographics and you'll understand that in an instant. What are we going to do to ensure that as the demographic profile moves farther into advancing age we can sustain a public health care system? We're not going to do it by running ourselves into debt. We have to make sure we can afford what we're doing. We have to make sure that we have economic development on one side and that we keep those three million Canadians working who weren't working in 1993. Because guess what? They have families and they pay taxes; they keep the whole operation going.

    That's why pragmatic balance between economic development and social development is a tandem that is the key to having the best quality of life in the world. It's not one to the exclusion of the other.

    Ms. Judy Wasylycia-Leis: Listen, I'm glad you let me have the chance to rephrase my question. You've obviously chosen to go into a speech here, missing the point, which is that question of balance between prudence and compassion.

    In fact, I would suggest that the European Union social democratic countries you've referred to are a model in terms of trying to find that balance. That's what I'm asking you to do.

    It seems to me it's been recognized that a debt-to-GDP ratio of about 36%, which we're at, is a good standard to follow and that we now need to start investing in Canadians who have taken the hit because of your fiscal policies.

    My questions to you are as follows. Number one, if you were a low- or middle-income Canadian with a mortgage and with a couple of pre-school or school-age kids, would you in fact, in all honesty, eliminate or reduce your mortgage even though it meant having to cut back on sports, on your son joining the hockey team, or on your kid going on a field trip or having nutritional breakfast and lunch programs? Would you choose to do that in order to do as you say, to pay for their education down the road even though they may not ever get there because you've really killed their future in order to save it? That's the first question.

    The second question is in terms of the flexibility you have. You've been out in estimates by $80 billion. You've heard that a lot this morning. Surely if you started accurate forecasting, which is a good accountability measure, we'd be little more able to have a serious debate about Canadians' priorities instead of this false debate about how low do we go in terms of this debt fetish.

    By the way, you accused Monte Solberg of being awfully close to the former Ontario government. It seems to me that you more than anyone are closer to Ernie Eves' government. You sound exactly like he sounded in the campaign when he held up Paul Martin. In fact, you and Paul Martin are both saying the same thing: let's forget about the urgent priorities in terms of human conditions and let's put our efforts into a ludicrous debt-to-GDP ratio of 25%.

    Finally, Mr. Minister, let me say that you have flexibility in terms of your surpluses--I just hinted at that--with $7 billion last year. You still won't make a commitment, an absolute commitment, that we can actually pay the $2 billion because of that surplus. Knowing you have more flexibility, you're still saying if there's a surplus, you'll pay the $2 billion. That's not cause for celebration. It was a promise made by the Prime Minister, and surely you can do it now.

    Finally, let me suggest this to you. You did actually acknowledge that tax cuts are a form of spending. So if you're looking for flexibility, you can look there as much as you can in terms of program spending. You have $7 billion next year, going from this fiscal year to the next fiscal year. You're going to pay out because of the rollout of your $100 billion tax cuts. Now, surely if you're looking at priorities, if you're looking at addressing some of the concerns you claim to be interested in, why isn't that on the table as well?

    I give you those scenarios and those options and ask you to consider them.

  (1235)  

    The Chair: You have two minutes to give an answer.

    Mr. John Manley: I was a low- to middle-income Canadian with kids, and our first mortgage was at 14.5%. I got in before the rates really spiked. Do you know what? I made the choice that we had to try to get our debt load down as quickly as I could. It was the right choice. And I think that for you to say--

    Ms. Judy Wasylycia-Leis: I said that if you had the choice of programs for your kids and maybe could afford them.

    Mr. John Manley: --here that a debt-to-GDP ratio of 25% is ludicrous, and I take it that you mean that would be way too low, I suggest you take that out on the campaign trail. You go for it. I'd like to see that debated, because Canadians understand this.

    If Mr. Solberg is associated with the last Conservative government, you're associated with the last NDP government. The people in that party were always projecting that things would get better, but they finally got thrown out of office because they couldn't balance the books. I don't understand why the NDP in Canada don't understand that Canadians are too smart for that now. They know we have to balance the books and pay as we go.

    Yes, they want us to make the right choices between all the various interests that there are to try to achieve it, which is why we expanded the support for children in low-income families. The two biggest items in the budget were that one and money to the provinces for health care.

    People are saying that spending went way up. Well, spending did go up a little bit, but we are still below 12% of GDP in program spending. When we came to office we were almost 16% of GDP. I think that's a much more healthy and sustainable ratio.

    However, I think the objective of making sure that we keep the proper balance starts with our ability to maintain our credibility with those who set the interest rates. It's not me and it's not even the government or the Bank of Canada, except in the short term.

    We have to make sure that we have the credibility as a country that keeps us being able to give those low-income people access to low-interest mortgage rates. The one-year mortgage rate in January 2001 was 7.7%. On October 22, 2003, it was 4.55%. Annual payment savings for that low-income family were $2,254. All that money can go to hockey camp and everything else. That's the kind of program that I think we ought to be pursuing.

    The Chair: Now we will go to the Honourable Maria Minna for five minutes.

    Hon. Maria Minna (Beaches—East York, Lib.): Thank you, Madam Chair.

    Thank you, Minister, for appearing in front of us today.

    First I want to say that I'm hoping the low projection of the surplus is actually higher, obviously. Last year it turned out to be higher, and I'm hoping that maybe this year will be a repeat of the last time, because that would certainly give us more space.

    I'm glad to hear the commitment of $2 billion on health care to the provinces. I think that's needed desperately. I know that this year a number of graduates from medical school are not finding placements in a practice, and that's a problem.

    I would put on some condition with respect to the health council. I think Canadians really want to see accountability in health care, and the health council would be the most independent organization for accountability, both through the Government of Canada as well as the provinces, that this would not be affecting all levels of government. I hope we would be able to do something there.

    I just want to go back to the surplus for a moment, simply because I know we have forecast very conservatively to some degree, but then there have been other forecasts like the Council for Policy Research, the alternative budget, which has forecast a little bit closer to the line. If I err a little bit on that side it may simply be because, from what we've seen so far, a lot of the debt-to-GDP ratio has been lowered as a result of economic growth that we've had, not just the debt that we've paid. Investing in areas like research, training, education, infrastructure, and health would certainly increase our economic growth, and I think that's one way of reducing our debt-to-GDP ratio. I would like to see us be more bullish on that side.

    I guess I'm saying that I would err a little bit on the side of being a little less cautious, to come to the line and end up with a surplus that then goes to debt--not that I have a problem with that, but I do in the sense that we're not spending in areas where we should.

    For instance, SARS was a major crisis. We couldn't have prevented it from happening, but if we had invested more earlier on into having the infrastructure in place it might have prevented the seriousness we had to deal with.

    I guess what I'm asking you, Minister, is if you could respond as to the investment areas of education, health, housing, and infrastructure, those areas that I think would go to the productivity and increasing our economic output, which will also affect the attitude of people in the long run to be a little less cautious about the surplus.

  (1240)  

    Mr. John Manley: I think the areas you've mentioned as being priorities are ones that deserve that recognition. We've heard about the deterioration of infrastructure in the country. We certainly know that the provincial governments are under pressure in terms of education and health care, and that we have a direct role in this. We also know there's pressure on the university community, post-secondary education, universities and colleges.

    Those are all areas that merit investment, which I think our government, to some degree at least, has been able to champion over the years. Those should continue to be priority areas for us going forward. They contribute not just to our quality of life but to our future prosperity, because they're investments in things that generate a successful economy.

    On the question of whether we're too cautious, we're too cautious as long as the adjustments are on the right side, but if things go the other way, then we may be accused of not having been cautious enough. As I said earlier, we are in the business of trying to foretell the future when we do these forecasts. I guess it comes to a question of whether we ought to be satisfied with being close enough that we're within a range, plus or minus a certain percentage, or whether we should maintain the fairly rigid view, which I've held today, that under no circumstances should we permit ourselves to fall into deficit.

    My view is that we need to get our debt-to-GDP ratio down to an appropriate level, and I don't consider 25% ludicrous. I think it's a worthy target, but we're not in any danger of getting there tomorrow. It's a target. However, until we get to that kind of level we would be much wiser to err on the side of caution and prudence. If we are hit, as we were this year by every trial and tribulation one can imagine--although there are one or two I could think of, but I won't suggest them in case they happen--we at least would have the ability to respond to them and not find ourselves falling into deficit. I think that's an important part of what enables us to get the kind of international recognition, the low interest rates and the ability to build for the future that you're talking about.

    The Chair: Mr. Wilfert has the final five minutes.

    Mr. Bryon Wilfert (Oak Ridges, Lib.): Mr. Minister, first, I would put up your credibility against that of the former ministers of finance in Ontario and Quebec.

    In terms of the presentation, I have a couple of concerns, Minister. First, credibility notwithstanding, I have a question on the health care council. Apparently the Prime Minister, as you have said, has written a letter to the premiers indicating that when the books are closed, depending on our ability to pay, we will turn over up to $2 billion. What are we getting for that?

    I would suggest to you that those provinces that have already booked that did so knowing that the agreement clearly states that it depends on the state of the finances in January. In my view, those that have signed on should receive the appropriate dollars, and for those that haven't the money should be put aside in escrow until such time as they do sign on. My first question is what are we getting in return? I hope this isn't a blank cheque to the provinces.

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    Mr. John Manley: Well, not a blank cheque, but as I said, the Prime Minister's letter certainly does underline the importance of the accord in response to us fulfilling the financial commitments. Obviously there are some steps that lie ahead of us before we can effect the payment, including parliamentary approval, so I am sure there will be further discussion around this, and I hope one of the first aspects of it will be the announcement of the health council.

    Mr. Bryon Wilfert: That's certainly a message, Minister, that I want to make loud and clear. I believe in cooperation and working effectively with the provinces, and you certainly articulated that very well in your meetings on equalization. But if we're going to go down the same road we've gone in the past, of turning over money to the provinces without the other side of the equation, I would be very concerned about that.

    An area you mentioned with regard to prudence certainly is the issue of reallocation. You indicated that the government has launched a broad review of expenditures and management review in all departments over a five-year cycle. Now, you talk about shocks to the system, Minister. I think the shock to the bureaucracy was your clear intent--and obviously delivered on at the end of September by the Treasury Board minister--of the $1 billion reallocation.

    There are often concerns about results, as to how we are going to speed up and effectively monitor this reallocation. It seems to me that when you're going to come that close, if in fact we wind up with $300 million at the end of the day, which is far too close to the bone as far as I'm concerned, how do we assure Canadians that this will not simply be, as you've indicated, a one-time exercise, but that it will be accelerated? How do we accelerate that process and make it effective so that we can have those dollars in advance? How do you get ministers to look at priorities in a different way from what many of them have up until now?

    Mr. John Manley: I refer to it as a culture change because we had a culture change when we did program review. Some would have called it the Stockholm syndrome, but there was a culture change. We really recognized the fact that we were approaching a crisis and that we had to do something profound about it.

    I think, going forward, what will drive it is a recognition that if we don't accept that there is a need for an ongoing serious review of expenditures based on an assessment of new priorities, we inevitably will end up doing a full-scale program review exercise. That would be vastly more painful for ministers and for the bureaucracy than what we embarked upon in the last budget.

    Mr. Bryon Wilfert: Minister, on the issue of equalization, I know you had very productive meetings and that there have been over 27 meetings with the provinces and officials since 1999. They released a paper called “Strengthening the Equalization Program”, a ten-province standard. Of course, at the moment we have the five-province standard, which brings us, I think, up to about 97% of the ten provinces. But you talk about hits to the system, if in fact we were to implement the ten-province standard, that would hit the treasury for about $3 billion.

    Mr. John Manley: That's our estimate. When you say 97%, it's 97% on the per capita basis, but when you look at the total it would be about a $3 billion increase on a program that's currently in the range of $10.5 billion.

    Mr. Bryon Wilfert: So that's either a lot of reallocation or we don't have the $3 billion. I would suggest that 97%, in terms of equalization, Minister, that we have to get a clear message across. At the same time, I think your comments after that meeting with your counterparts indicated that there certainly was a new spirit.

    Mr. John Manley: I think their response was quite positive. I was quite frank with them. I told them that we couldn't afford a $3 billion increase in the equalization program but that we were working on very serious changes with respect to the formula that would enhance stability and predictability, which has been one of their big concerns.

    We are looking at other adjustments to the base that were discussed and are rather technical in nature but which I think we can advance. However, it is complex. The base has 15 elements to it, and if you change something here it affects the distribution among provinces.

    This is why, given the parliamentary calendar, it was my suggestion to them that we consider buying a little bit of insurance to ensure we have the ability to continue to make payments going forward after March 31 if in fact we haven't yet reached the point of accommodating a bill that would renew equalization with the changes. That's why there's a bill before you now. It's a pretty short bill, but it's basically just an insurance policy.

    The ministers were given advance notice of consideration being given to tabling the bill with the assurance that it was a temporary measure that would not preclude the renewal of equalization with changes.

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    The Chair: Thank you very much.

    On behalf of all our colleagues, members of this committee, Minister Manley and your associates, thank you very much for coming today.

    We are adjourned.