FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, September 22, 1998

• 0910

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.): I'd like to call the meeting to order.

As you know, the finance committee is studying pre-budget consultation, listening to input from Canadians from coast to coast as we begin the process of preparation of the report that will be tabled to the House of Commons and which of course the Minister of Finance will look to for recommendations.

This morning we have the pleasure of having with us Mr. Jack Wilkinson from the Canadian Federation of Agriculture. Welcome.

Mr. Jack Wilkinson (President, Canadian Federation of Agriculture): Thank you very much. I'm sorry I was a little bit late. The traffic coming into Ottawa was not that good this morning, and then cabs, even after you did get to where you were going to go, ignored you totally. So I'm sorry for being a few minutes late.

The Chairman: Are you advocating an infrastructure program?

Mr. Jack Wilkinson: For agriculture, yes, as you will find out when I get further into the presentation, and then people won't have to move to the cities.

What I'd like to do is just quickly go through the presentation, if that is okay, and highlight a few points. I would rather spend time focusing on questions. I assume the document in its entirety is accepted into the record. Without going through it in detail, then, I will just highlight the points.

Basically the agriculture industry, as people are well aware, is a very substantial part of the Canadian economy. The agrifood industry in particular employs about one in fifteen. There are around 280,000 farm families involved in farming and we represent around 200,000 of those families through our members. We are a federation of organizations.

I think it is fair to say that we see two or three critical issues in general facing the agriculture community in the next number of years from a primary production point of view. One very clearly will be how we adapt and maintain the progress we have made on environmental issues. A lot of those initiatives have occurred over the last number of years at the provincial level, using the remaining portion of green plan money from many years ago as it wound down to start a program. Today we are working on some small moneys in relationship to adaptation funds that are moving through Agriculture Canada. Very clearly, though, those are very limited dollars. I will make a few recommendations we think are appropriate in relation to the environmental activities we view as critical.

The second issue will be a general number of tax-related issues we see as critical.

The third, which is new and developing and is getting very serious, is the farm income situation in Canada. We have been concerned about the numbers for some time. We have had many consultations with the agriculture people provincially and federally and I think it's fair to say the numbers for next year look substantially worse than this year, with concerns in relation to the last number of weeks on the trade front with the United States, our biggest agriculture trading partner. If that develops and gets much more serious over the next number of weeks we could have massive pressure on farm income. As you can well imagine, when you trade as much as we do with the United States on primary product, if the border gets closed or disruptions occur when you're exporting over 40% to 50%, and in some commodities as high as 84%—granted not all to the United States—28 million people just cannot eat that much food. Therefore, massive price depressions can occur very quickly, so it is of major concern to us.

The international trend is a concern, but the recent developments make it even more critical. How that relates to the safety net policy that is in place—because we are not talking general agricultural policy here—and then how that relates to financing becomes a critical issue that I'd like to spend a few minutes on as well.

I'll just go quickly through the points. On page one we're talking about Canada and the environment and a number of related issues. We propose that a Canada environment measures program be introduced that would encompass a number of issues. There's draft legislation coming forward on the endangered species legislation, which clearly has ramifications, if adopted by all the provincial counterparts, to deal with land use policy issues. Clearly, if there are endangered species or threatened species in an environment on privately owned land, we know this will fall under the jurisdiction of the provincial government; but very clearly remedial actions under that jurisdiction may impact very dramatically the land use for individual farmers.

• 0915

Obviously then our view is that there needs to be some sort of compensation package for producers, if in fact they're going to have to meet federal and provincial legislation and if they're going to have to change the way they farm to protect endangered or threatened species. So we see that this may be an issue. We hope it will come forward with the legislation.

As well as this, we see that there are a number of other issues related to agriculture commitments to the reduction of greenhouses gases as time unfolds, and in general to nutrient management, which is a major problem—water quality and air quality issues. All of those, we think, are best handled in one encompassing program, versus having stovepipes for each individual type of activity.

So that's why we're purporting that it makes sense to bring forward a Canadian environmental measures program that would in fact outline a broad spectrum of activity in the agriculture community, in conjunction with provincial governments, so we have a holistic approach to these issues. Because a farm impacts an environment in many sectors, and you have to balance off maybe what you would want to do on your farm in relationship to reduction of greenhouse gas emissions in conjunction with nutrient management, in conjunction with a host of other issues.

In our view, it makes more sense to look at how the farm as an entire entity impacts on the environment, and to have a program to deal with that. Even though there may be individual aspects of funding that may come from agriculture, that may come from environment, that may come from other sectors, it goes into that pot jointly shared with the provincial government, and money obviously from the farm community, to meet a number of overall objectives.

We've already talked to the environment ministry, the finance ministry, as well as our agriculture minister, but it would be very important if a recommendation came out of your committee endorsing that concept. When we try to do further work, some support and recommendations coming from committees such as this one will help us along the way. Hence there are two or three individual items on page three, as well as on page four, that would highlight those areas.

We think it's appropriate to have a combination of effects. There will be some places where grants may be appropriate, in cost sharing with producers to encourage activity, as well as tax measures. The ability to have accelerated write-downs or early write-downs for action on the farm we think will fall in line with what will be proposed in relationship to early actions on greenhouse gas, for example, where you want people to move very quickly.

It's our view that the farm community is already in tune to this sort of activity, because in just about every province now we have environmental farm plans. As I say, the tail end of the green plan money was used to develop these plans, where farm families have analysed their farms and have rated areas that need improvement on their farms as they relate to the environment.

Usually, even though a number of activities have already taken place... In some provinces these plans have been up and running for some time. I think as many as 15,000 farm families in Ontario, for example, have already done the farm plan assessment. It's at different stages in different provinces.

A lot of times the least expensive issues tend to be the ones that are done first on the farm, as you can well imagine. Often the big-ticket items, like increasing manure storage or changing your manure handling system—ones that cost a great deal of money for large livestock operations—may be places where a modest grant or tax incentive applies, when such changes are going to have very little positive impact on the cashflow of the farm yet may cost in the order of hundreds of thousands of dollars. It seems to me to make sense, and would have a quite high level of support from the consumer and the taxpayer at large, that we encourage initiatives in those areas.

We're at the point now where many of the livestock operations are handling a nutrient loading similar to that of towns and small cities, to be very blunt. And it doesn't make much sense to assume that one person's individual net farm income is going to be able to handle a situation that many municipalities, with a broad tax base, have trouble handling without provincial and federal government support. So we encourage any help you can give us in these areas in your recommendation.

• 0920

We talk about new moneys needed to encourage the technology that will be required, the transfer of that technology. As I said, one model we're suggesting is environmental farm plans, because they are well accepted by the farm community. I have many farm organizations participating, and we think that can also deal with areas such as compensation for wildlife damage, if needed.

We're quite disappointed, actually, that we went to the agriculture ministers' conference now for three years running with proposals on compensation for wildlife damage, and to date we still haven't had any action. There are only four provinces that have programs in that area: the three prairie provinces and Quebec. I think all farmers are willing to accept a certain amount of damage, acknowledging the fact that they live in the countryside and share the habitat with many species. But when you live on migratory fly routes with massive numbers of snow geese, for example, major problems can occur, such as is happening in Quebec and other areas. So when the numbers get out of line and we as farmers do not have the ability to control or manage that wildlife, we think it's appropriate that when there's significant crop damage, some compensation be made available, the same as it would if there were other weather-related damage.

On page five we talk about dealing with the whole question of farm income support. I think it's important to encapsulate—and I'll do it as quickly as I possibly can—why this issue is being brought up again. Some people might think that a review of farm income programs is just an annual event. To some extent it almost is an annual event. But we're coming up to a five-year lapse in time with the memorandum of understanding that was put together with the provinces. It is due to expire next year. Therefore, there have been consultations going on with the farm community. We reported to the agriculture ministers' meeting in July. They decided they would not to do anything that year but would rush to have something done before it expires next year. So now we're in a situation where we have deteriorating farm income and an acknowledgement we have significant holes in our farm support programs.

It's a major problem. I think to give some sense of it, most farmers in Canada would hold the view that the United States supports its producers substantially more than Canada does. Even Glickman, their Secretary of Agriculture, has acknowledged publicly that they have substantial shortcomings in their income system. In fact, they have $5.5 billion in additional moneys for their program support, which is before a committee in Congress. They're looking at a whole farm income support program similar to what we have in Canada, only financed better, I presume, because there are many commodities in the United States that are not under their particular programs.

I think it's fair to say that the drop in the buying power of Asia over the last number of months has very seriously hurt exports. For example, I was talking to the chairman of the Canadian Cattlemen's Association, and he ran through a number of Asian countries. It has decreased their sales from 20% to 100%, although they are moving more and more into the United States. Again I would say that with the trade-related issues that are there, people are very concerned about what will happen. As well, pork exports to Asia have dropped off very substantially, and we export around 40% of our pork.

The Canadian Wheat Board will be having a briefing. Sally Rutherford, our executive director, is out there—I believe it's either today or Thursday, I can't remember which—for two meetings in which they'll be briefing the farm leaders as to the serious price depression on board grains, plus the fact there are next to no buyers coming forward.

So all in all there's a very serious situation developing this year, and expectations are of a decrease of up to 40% in income for next year. I think it's important to know when we talk of this that one of the high price regimes was in 1974-75, when we had net farm income of around $5 billion. In 1986 it was $3.5 billion. This past year when we close off it's estimated it will be between $2.3 billion and $2.5 billion, and we're now talking of a further decrease of 40%.

• 0925

Nothing got any cheaper in that time period, obviously. A family's expectation for net disposable income has gone up since 1974. I would hazard a guess that your salary has gone up from 1974 and not been cut in half. Obviously, people are using a substantial amount of off-farm income to keep their farms going, but there are limits to that. The safety net system will need some more resources.

We're working very closely with Agriculture Canada and provincial counterparts to design what needs to be done. All I want to do is acknowledge to yourselves that there is not nearly enough money at $600 million in the system from the federal government to cover what is going to be needed from the price depression. I will leave it at that and will be happy to answer any questions.

Tax and other measures on page six—obviously we think it is critically important to maintain the $500,000 capital gains exemption to farmers and small business, or if there's going to be something looked at, it will require a substantial number of consultations to find something that can meet family farm retirement needs better.

I think people, as they move further away from the farm, often look at the capital gains exemption as some sort of Christmas present to farmers upon retirement, without much appreciation of just how a farm operates and how you build up a farm business. People who are involved in the farm community or know people in it know very clearly that for a number of years people reinvest into the farm operation to build the type of income that's required. Often the farm is really the pension plan of the farm community. There is no contributing employer that is making matching contributions. Therefore, it becomes critical that a portion of the money that's been put into that business—farming as well as small business—is not hit unduly by tax burdens upon retirement, that there is some flexibility to roll it into pension funding.

It has eroded in its benefit, obviously, over time. The $500,000 is a number that sat there for some time period, and we think it's not an undue amount of money. As you may well know, the type of money that is required for the principal in a pension plan is substantially more than that if one wants to live on that and have a good retirement. We view this as a critical aspect of allowing two things: first, the building of pension plan; secondly, the opportunity for parents who have children who want to enter farming to lower their cost of entry. Often it is the case that parents subsidize their children, and we think a lot of that subsidization would not occur if in fact they needed to have the dollars to pay this type of tax on retirement. We think the exemption serves two very useful services and we would like it to stay in existence.

We know the Mintz report has recommended substantial changes. We are holding the finance minister to his word. The first time I became CFA president he said there would be no changes to the capital gains exemption unless there was something better and unless there were extensive consultations with the farm community. Since we have not been called to his office, I'm assuming the capital gains exemption is in place, since he's still the finance minister and he's still in place.

Regarding the emergency preparedness, we want to bring up a couple of points. We think the disaster legislation that exists and is operated by the federal government does have some problems as it relates to the farm community in rural areas. I think those problems have shown themselves in the floods in the Saguenay, the floods in Manitoba—last year the Red River and the Assiniboine two years before that—as well as British Columbia, and the ice storm in Quebec and Ontario. Our view is there need to be some general changes to the legislation, both in the way farm income is dealt with so that it doesn't become a contentious issue on every disaster the federal government gets into, and on the preparedness side of things. We're doing some work in that area. We don't have the final report yet. Our sense is that when it's due, we would like to talk to you and others to try to design something that works more effectively in the future.

Agriculture research is an absolutely critical area, which sounds like a broken record from the farm side and other areas, where the federal and provincial governments have drawn back substantially and off-loaded their responsibility for basic research. I think there are many warning signs out there of concern that we're now starting to see, and people will take no great comfort in saying that we told you so. We're getting into a situation now where private businesses are very aggressively moving into the research side, wanting to have the ability to tie up patents for extended time periods and limit that obviously to their situation.

• 0930

On competition policy, it's fair to say there are hearings going on now where a number of companies have come forward with concerns in those areas, that because public research has decreased, the amount of genetic material that's available on the public side has decreased. And there is an increasing amalgamation of very large chemical and agrifood businesses, which is making people very nervous as to what the future may be in relationship to this.

Our sense is there still needs to be broad-based R and D. There could still be some changes to the matching investment, which would allow more flexibility in that area and would maintain a lot of this research in the public purview. If there's going to be any sort of benefit, it needs to come to the farm community, the taxpayers and food consumers in Canada.

We're nearing the end. I can only talk so fast. I'm sure the interpreter has noticed.

With regard to cost recovery, we're pleased the federal government has gone on hold with this over the last couple of years. Our view, though, is that it was very important to stop initiatives in some areas and to take a look at just what the impact is on the agrifood industry. The agrifood industry is a very heavily regulated industry provincially and federally. Everywhere we turn around, everywhere grain or meat is looked at, moved or touched, it is reinspected, reinspected, reinspected. That has given us a very high level of market penetration in many countries, because there's a sense of confidence that the agricultural products in Canada are the best in the world and meet very high standards.

But when you move into cost recovery with a system like that, it means that the bill at the end of the time period becomes very large. In fact, there were 40-some areas of cost recovery that were impacting the farm community over the last couple of years. Each one was dealt with individually by individual managers in certain departments with no cost accumulations being calculated.

A study at Agriculture and Agri-Food Canada is nearly finished. It is very modest in its scope and is very gentle on the government, as we anticipated, since it was a section of government that was doing the study on cost recovery. But even there, it does indicate some very serious problems for the agrifood industry.

There are some new initiatives coming forward with future cuts at the provincial level that will again incur more cost.

In our view, one way to help net farm income is for the federal government, and hopefully provincial governments, to back off in their cost recovery, because that becomes a straight expenditure on the farm.

We think that now that some of the impacts are showing through, there are many areas where reinvestment back into the farm community and different ways of doing things can be instituted to help lower the cost to the farm community. We will be working with Treasury Board and other areas to try to deal with that, because it's a major problem.

On rural development, and then I'll conclude, we talk about infrastructure and highways coming into Ottawa and the bad weather. The infrastructure in rural Canada, quite frankly, is a very serious problem. In many areas people will say it's not the federal government's responsibility, a lot of these issues are the provincial government's, and in some cases that's true. But in many cases the federal government is still the regulator of choice. It still has the responsibility and I think is often, in the minds of some of the people on the rural side, paying too much attention to big corporate enterprises.

As an example, with the deregulation of the telephone system, no one wants any more to be the service deliverer in rural Canada. The area I live in, New Liskeard, is one of the last holdouts in Ontario for still offering its residents party lines. I'm telling you, the fact that it only has party lines is not appreciated all that much by the residents. There's also an area in Quebec that still has that situation.

This is not cottage country or for people who live there part-time. These are actual businesses that can't hook up to a modem. They can't do inter-banking. A whole bunch of opportunities that exist as a natural way of just doing business in other parts of Canada don't exist for these people. They don't have natural gas. They don't have a host of services. And with the downloading that's occurring, their costs in many areas are increasing.

With changes to the transportation policy in the prairies, the infrastructure for the roads, it's very obvious that will not be able to handle it unless there's a very massive infrastructure program. The seaway system will not be able to maintain its sorry state of affairs into the future unless there is some very substantial work being done in those areas.

• 0935

We think there are still some areas in which the federal government can look into the future and maintain a type of infrastructure so we can be competitive. Our view is that there has to be some investment in those areas.

I know everybody likes to say there's no money, but I think it's fair to say that probably two-thirds of the provincial governments have balanced their yearly budgets. The federal government has balanced its yearly budget. We believe many of those cuts have come on the backs of rural Canada. Our view as small-business people is that we took it on the chin without a great deal of opposition over the last number of years, because as small-business people we know you can't spend more than you make; but, quite frankly, we have to have some ability to reinvest now in those areas or we are going to slip behind.

Don't take rural Canada for granted. Don't take farmers for granted, because they are in a very competitive world right now. We need to have our governments compete just as aggressively as other governments do, to keep us in business.

If we're all going to price our farm products on the Chicago Board of Trade, and we have minimal ability to price our product more expensively than anywhere else, then it really gets to the point of survival. Who that survivor is depends on how much our governments—provincial, federal, and other areas—try to underpin the type of existence farmers' families and businesses need, or we can slip in our productive capacity.

Thank you very much for hearing us.

The Chairman: Thank you very much, Mr. Wilkinson. That was a very comprehensive report to us. It certainly touched upon many issues, and we certainly appreciate that.

We're going to move on to the next presentation, by the president of the Fisheries Council of Canada, Ronald Bulmer. Welcome.

Mr. Ronald W. Bulmer (President, Fisheries Council of Canada): Thank you, Mr. Chairman. I also got tied up in some bad weather, some bad traffic, and obviously bad planning, because I didn't plan on it, so my apologies for being a little bit late.

The Fisheries Council of Canada is a not-for-profit, private trade association located here in Ottawa but representing firms through provincial associations, Northwest Territories, Quebec, Ontario, and throughout all of the Atlantic provinces. The member firms that make up these associations and hence the fishery council probably produce about 80% of the fish and seafood products in the Atlantic region. Many member companies, while they are primarily processors, are also directly involved in the harvesting component of the fishery through holding licences, vertical integration, etc., and probably represent in excess of 40% of the harvesting of seafood in Atlantic Canada.

Here is a quick paragraph about the industry. If you only read the media, you would think there is no fishery in Atlantic Canada. Surprisingly enough, from a dollar value point of view, the industry has actually been fairly stable over the last three to four years, but that is masking some other problems. The reason the dollar value holds is that the increases have tended to be in high-priced shellfish—in lobster, in crab, in shrimp, in scallops. These are lower volume, lower users of people, lower components of plant capacity than existed when the fishery was driven by groundfish species like cod, haddock, pollock, etc. Therefore, while the dollar value has held, it has still left some 30,000 people out there wondering what they are going to do with their futures, either as harvesters or as employees in small plants.

I don't want to be doom and gloom here totally, but I have to echo the warning, of course, that as an industry we're over 80% export-oriented, and a great deal of those products I just mentioned that we have, and have been exporting, have gone to high-income Asian markets.

Take a look at a product like crab in the Gulf of St. Lawrence. Three years ago we were able to pay the fisherman something in excess of $3 to $3.50 a pound for the animal out of the water. This year that was down to around eighty to ninety cents. And if I track the 1998 exports to a place like Japan, which is so critical to us, we see that our exports this year are down some 30%, even compared to a year ago. We've got products that we're inventorying now and we're wondering at what price they actually can be sold to some of these Asian markets that themselves are in such economic turmoil.

• 0940

That is a very quick review of the Atlantic fishery. And while I don't represent the B.C. industry, it's no different out there—shortages of raw material, falling prices because of their dependence on Asian markets, etc. Many of the same things that I'm talking about I'm sure would hold as you relate to that fishery.

The message is pretty simple from our point of view. Atlantic Canada and rural Quebec just have to diversify their economies and create sustainable jobs. Those jobs are going to have to be outside of the natural resource industries that so long have been part of the social fabric and the government policy for the region to create those jobs, to sustain them, etc. They're not there now and they are not ever coming back under any scenario, even as fisheries and resources return, because they will be fished more efficiently, harvested more efficiently, packed more efficiently, with less labour component involved.

So I guess the best thing you could do for the Atlantic fishing industry is focus your attention on the overall economy of Atlantic Canada. Work toward putting in place the policies that are needed, that are going to absorb labour, help communities, keep people located down there, but do not expect that an industry like the fish industry could ever pick up the slack and put all of those people back into active employment in the years ahead.

The question is, what can the government do when it contemplates creating jobs and diversifying the regional economies of Canada? Obviously the answer is not simple, but we do think some of the basics are there. We certainly want to focus on payroll taxes and some of the other things that can be done, and I'll touch just quickly on the tax issue.

I guess the first thing we want to say is that if you're going to focus on job creation in the Atlantic region to help the fishery, the first thing that needs to be done concerns the overall tax requirements of the federal government. Obviously the budget has been balanced now for two or three budgets. There is a fiscal dividend. We read the media and see the pressure that is on the government. Everybody wants to have their hand in that pot and where that fiscal dividend should go.

Simply put, the federal budget and the Atlantic provincial budgets that were balanced by modest reductions in government expenditures really were built by higher expenditures or higher accumulation on the tax side. We think the first thing that needs to be done to help the economy is to reverse that role. In fact, if you look at 1993-94 compared with 1997-98, revenue on the government side increased 27% while program spending went down 11.6%. So the governments have been taking more out of the system. That's an area that probably needs to be carefully considered and redirected for change.

Governments have approached program spending reductions by cutting all things more or less equally, and that applies to the fishery, the subsidies, the Department of Fisheries and all of that. One of the messages we try to bring to all departments is that the government has to more fundamentally examine what the priorities are for spending and how it will run its business with fewer people and less money in the years ahead. We don't think you can just keep asking a downsized bureaucracy to continue to do all the same things with fewer resources and actually get the job done effectively. You've got a lot of good people who are working 18 hours a day trying to do the job where there were three people before.

I think there has to be fundamental change in the way government departments try to do their jobs, and that certainly applies in the fishery. It applies because in the fishery not only do the products have to be world-competitive, but the government and the fisheries management also have to be world-competitive.

• 0945

The first general point I want to make is that with the fishery down, with world markets that we have depended on over the last five years in decline both in terms of demand and the price they're willing to pay, certainly from our industry... Probably lots of them are going to have to be more focused on the domestic market here, and therefore we think the government has to be focused on the domestic demand for people and for goods if you're going to provide the opportunities for lots of these people to be able to stay in the regions where they currently live.

The second area I want to touch on is EI premiums. I'll admit, first of all, that our industry is a very heavy user of the program, and always has been. On the other hand, payroll taxes, particularly in the form of EI premiums, have been an increasing part of the cost of payroll. A Bank of Canada study, for example, concluded that the increase in payroll taxes to 14.1% of wages in 1994, up from just over 10% in 1991, alone probably accounted for a 1% increase in unemployment levels.

I would say on a personal level that there isn't anybody here who doesn't know that everybody and their brother now is a consultant working for companies. It's not that the companies don't need people or that they aren't prepared to pay some money to get a job done, but companies just don't put people on the payroll, because when you do that, then you absorb all of those other payroll taxes that go with it. And the EI premium is a big one to focus on. As everybody knows, it's up to something like a $17 billion surplus. It has been growing, and the overflow or the surplus has been actually moving into general revenues. It hasn't been a pot of money that's been increasing companies or a capital base to draw from, etc. In fact, EI surpluses pretty much have been a deficit reduction surtax on the business community of Canada. That's one that we would like to see the government focus on, to have those EI premiums go back down.

The changes that have been made to date have been to put more part-time workers into the paying side of the equation and to reduce the benefits—the number of people to get them or the amount of benefits seasonal workers can get. All of that has increased the spread and led to the big surplus that is there. We'd like to see the overall rates go down so that companies can get back to actually employing people in a greater long-term capacity than they probably do now because of these hidden payroll taxes.

I also want to follow on where Jack was talking about, on the whole cost recovery issue. If you look at the government overall from 1994 to 1995, cost recovery inside the federal government is now something like $7 billion or about 5% of the total federal government revenue. It's a very big overall program and generator of revenue for the government.

As a council, we certainly support the policy that the private sector should pay for those public services that provide an identifiable private benefit. We have no problems paying for an inspection certificate if that's something that's needed for export to France. Otherwise you're not going to make a sale to France, and therefore that is definitely a corporate benefit. It becomes more suspect when you get into these highly regulated industries whereby the government is both the regulator and the passer-on of the costs for the regulations they pass. They make the rules in Environment or they make the rules in DFO: there shall be dockside monitoring, there shall be an onboard observer in every boat—and oh, by the way, that's of benefit to you, and therefore it will cost you $350 a day to have somebody out on your boat to watch you haul in your nets.

So it's an area that has to be very carefully looked at, controlled, and as I say, while we're not against it where there is a real private benefit, in these highly regulated industries you have to be very careful that departments don't fall into the trap of just using it as a way to pass on costs for the regulations they have, as opposed to providing some kind of substantial benefit to the person paying the bill.

We have a lot of coastline, we have a lot of people, and we understand that there has to be a pretty big department of fisheries. But as a government and as a country, we have a ratio in the department that would exceed that of any of our equivalent competitors in the seafood fishing business. Therefore, as more of those costs are passed on to us, we get less competitive than a New Zealand or a Norway or an Iceland. Those are the people we have to meet in Tokyo or New York to make the sale to the end customer.

• 0950

The final area I want to touch on is a specific request in terms of tax changes. We've asked before and nobody has listened. Maybe this year. You never know. In 1996, under the Oceans Act, the 200-mile economic zone was put in place. We would now like to see Canada's Income Tax Act allow manufacturing and processing tax credits to be extended out to the 200-mile limit. Right now they only go to the 12-mile territorial sea.

This gets back to my earlier point on the size and cost of government. For example, the department is going to have to depend more on industry to do things like science and research out there and use the commercial fishing vessels as the platform to do scientific research, etc. All of that would certainly be simpler and more achievable if you were going to put special manufacturing or different kinds of machinery on boats, etc., and you could write that off just as if that was a shore investment. Therefore, industry is going to be in a better position to help the government take on some of those programs, to pay for some of those requirements that are done out beyond 12 miles and inside the 200-mile zone.

We would see that as a benefit to industry and certainly not a harm to any of the coastal communities or shore processing plants that currently exist and, as I say, have the advantage of those kinds of tax credits.

Mr. Chairman, as I mentioned, we represent a lot of companies from the far north, Quebec, Ontario, and throughout eastern Canada. We have been pleased with the direction of the government to date in many of its budget policies in getting the books balanced, but there is still further fine tuning to do. There certainly is still a watchdog role to be performed in terms of the cost of government and the passing of those costs on to the resource industries, who must be world competitive and, as we all know, are facing tougher markets in 1998 and are looking forward for the next two or three years than even in the past three or four years.

I think I would close with those as opening remarks. Thank you.

The Chairman: Thank you very much, Mr. Bulmer. We will now proceed to the question and answer session and we'll begin with Mr. Forseth.

Mr. Paul Forseth (New Westminster—Coquitlam—Burnaby, Ref.): Thank you. First of all, I would like to address my questions to Mr. Wilkinson of the Canadian Federation of Agriculture.

I notice in part of your presentation you talk about pension reforms and RRSPs. Specifically, you say:

Therefore, the CFA requests that the contribution limit on RRSPs be increased to $14,500 and $15,500 over the next two years. This request is also consistent with the RRSPs Alliance recommendations.

I'm just wondering if you've done any underlying calculations as to why you picked those numbers and what would be the particular consequence if those numbers were put in place—the consequence both for individuals and for the overall tax situation or budget situation of the government. Are these numbers you've just picked out of the air? Is it kind of like “it would be nice to have”, or do you have some supportive documents about calculations as to why you've chosen those numbers?

Mr. Jack Wilkinson: As you know, there has been for a number of years an alliance of groups and organizations who are to a great extent self-employed. It becomes particularly interesting on the farm side. What happens generally for farm families is for the first number of years often there are very modest incomes as they reinvest and build on their farm operations. In the last few years, in particular as they start to wind down their operations, they can have fairly substantial incomes. At the tail-end the investments stop and they start to wind down. Therefore, we often have a relatively short time period to try to build up both the combination of the capital gains and pension contributions to make the types of investment required.

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In relationship to doing the calculations as to the impact on the federal government, I don't know of the type of documentation that the alliance in general has done. We've had a turnover on our staff recently as far as economists are concerned. I would be quite happy, though, to check and send any analysis in. We probably spent more time analysing the benefit to ourselves than the cost to government, but that's just an assumption on my part.

Mr. Paul Forseth: As a supplement to that, do you have any comment about the current 20% foreign content rule related to RRSPs?

Mr. Jack Wilkinson: No.

Mr. Paul Forseth: In another part of your submission, you say:

The CFA requests that serious consideration be given to safeguarding Canada's primary natural resource industry by ensuring that adequate funding is available to deliver the necessary support programs, just as our major trading partners do.

I'm wondering if you perhaps could highlight just how much Canada is out of sync with our main competitors. I would assume you're recommending that we be brought into sync so that we're not at a disadvantage. You're looking at a level playing field situation. Perhaps you could expand on that as a rationale to get to your recommendation. I take it you're reciting a previous figure of $550 million.

Mr. Jack Wilkinson: I don't think $550 million is a number that I recall from the presentation.

Program support in agriculture in the mid eighties was about $2.5 billion. It decreased, if my memory serves me right, from around $850 million in 1994—the federal government's contribution—to what is estimated as a current level of expenditure of $600 million this year. According to the memorandum of understanding, that is to be in a ratio of 60/40 with the provinces. Hence the $600 million put by the federal government is supposed to have a matching contribution of $400 million by the provinces, and then many of these programs are cost-shared with producers.

Where the problem has come in over the last number of years—and it gets very complicated when you start looking at other governments as to how they do the calculations on their programs. One example is the United States. They have a very substantial food aid program where they buy product off the marketplace. It doesn't come under the agriculture budget, and therefore when they table on the WTO commitments it's not tabled as an agriculture program, even though from our point of view it has major impacts on prices for primary agriculture product in the U.S. by these massive purchases. Plus, with the FAIR Act legislation, the change to their equivalent farm bill in the United States, they had very substantial decoupled price support. What was occurring in that time period is calculations were done on historic acreage on commodities. Even when wheat prices eighteen months to two years ago were at a thirty-year high, producers in the United States were still receiving in excess of a dollar per bushel for wheat—even though it was at a thirty-year high. That was the sort of program support that was occurring in the United States, even when our producers were getting nothing for that type of production.

We've had what we view as a widening. We've moved more aggressively in cost recovery, in our view, than the United States has. There are many fees in the system. If you look at OECD numbers, for example, of the countries there, I believe Canada is fourth from the bottom. So this rhetoric that occurs continually that we're just following the world trend in fact is inaccurate. What we're doing is we're following the world trend—Australia and New Zealand are often quoted, but there are very few quotes that come from the expenditure in the European Union and in other jurisdictions. There are very few expenditures as to the increased support going into the United States.

Our only concerns are that since we price our product on the Chicago Board of Trade for anything outside of supply management, we effectively have no ability to add on to that. So it's wheat in the midwest minus transportation cost. It's higher than in the United States in most cases, and it's priced on the Chicago Board of Trade. That's what everybody buys on. Our guys then end up netting that back and having a lower net farm income. We're worried that over time if you don't have some bottom impact—for example, hog prices are now substantially below the cost of production. An Alberta farmer I talked to last week says that with a 300-sow, farrow-to-finish operation he's losing $40,000 a month. Well, you don't stay in business for very long, even if you have a large farm, at that sort of loss rate.

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So our view is that you have to look at not only support to individual farm families but also to primary producers. It is the place that you underpin the agrifood industry. If we're going to talk a processor into building an addition to a processing plant, for example on the prairies, we have to guarantee x number of hogs arriving there every week, regardless almost of the price of hogs.

Now granted you want to have people sensitive enough that if the price is down for a long time, you move away from that production because obviously the world isn't wanting it. But at the same time you don't want people to drop off their production one week after you have a drop, or that processing plant starts laying off people, the 1.5 million they hire, and on it goes.

We think you need to underpin the primary production at a rate that is compensatory to some of our major competitors or we slip behind.

Mr. Paul Forseth: Thank you.

I have one question for Mr. Bulmer of the Fisheries Council of Canada. In your brief you say that historically fishermen and unemployment insurance has been a political issue, and that “EI should be returned to its original purpose and run as an insurance scheme”. That's quite a statement, coming from the Fisheries Council of Canada.

What do you recommend to reduce EI as an annual income supplement, as the basic part of someone's economic planning, and actually return it to an insurance scheme? Would you include experience rates, variable premiums, or what? How do you envision a real insurance scheme, especially in respect to the special categories that fishermen have traditionally enjoyed with EI?

Mr. Ronald Bulmer: First of all, the fishermen program is actually a reduced program from that of a worker in a normal business environment, in that there are only certain periods of the year when they can actually qualify for that for a set number of weeks. But the bottom line is that the first step that needs to be done is to get the rate you're collecting, whether it's from a fisherman or a car worker in Oshawa, in balance with the needs of the scheme where you have built up something like a $17 billion surplus. That is certainly the first step that could be taken. And premiums could reflect, then, the requirements of the program as you look forward over the next one or two years, rather than just keeping on taking that extra $7 billion or $8 billion over the top.

After that, certainly from the plant worker point of view in the fish processing plants, they are treated just like any other business, again whether it's the car industry, the steel industry or whatever. People on the edge of Moncton if they are in a zone have to work a longer number of weeks than somebody, let's say, in Newfoundland, where the general unemployment rate is higher. We don't think there are any really special benefits. Of course, as I said, in the previous changes to the program seasonal workers who draw on it every year now get less each year for the first five years. So some of those changes have been put in place. It is treated like a general program for plant workers.

It is a less rich program for fishermen. But on the other hand the purchasers are deemed to be their employer for purposes of this program even in the case of independent boats, and they have to pay the premium rate for all of those people. So if I buy their fish, I have to pay the unemployment insurance for those fishermen as part of my cost of that raw material. We'd like to see the program get back to being insurance to the point where it is self-sustaining and not creating these huge annual surpluses, which is now the present state.

The Chairman: Thank you, Mr. Forseth. Mr. Desrochers.

[Translation]

Mr. Odina Desrochers (Lotbinière, BQ): My first question is for Mr. Wilkinson. I will then ask Mr. Bulmer a question.

Mr. Wilkinson, you talked about the Farm Income Stabilization Program. You know that the agricultural export rules will be dramatically changed over the next few years. We know that multilateral negotiations will be held at the end of 1999. I don't need to remind you that one sector is presently hard hit in Quebec by the drop in exports. Given the budget surplus that the federal government currently has, how will it be able to, in your opinion, support the agricultural exports in the light of multilateral agreements?

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[English]

Mr. Jack Wilkinson: There are some defined rules that were put in place at the last round of the WTO that put some limitations on expenditures. A base period, from 1986 to 1988, was picked. We made a commitment to decrease export support by 36% on a certain percentage of volume, 20% on domestic support, with green programming having no decreases required up to the next round of negotiations.

We have eliminated export support versus 36%. We have 15% support on domestic versus the requirement of decreasing it by 20%. Therefore, we could have 80% of the base period of 1986 to 1987. We're at 15% of that. In fact, on green program expenditures—those areas that we would normally consider to be cost-recovery items, on inspection, on education, on a host of other areas that were unlimited expenditures, and environmental—we either had the program cancelled, as at the end of the green plan, or we went into cost recovery where the government made money on behalf of the agrifood industry.

So there are no problems in many of these areas other than that we have to watch some of the definitions of rules and calculations as we design programs. But in general, we are so far below the WTO commitments that we do not have any concern from the farm community on an expenditure limitation. We can increase substantially farm income supports without its being a concern, as long as we design the programs with the rules in mind so that we don't run into countervail.

For example, as long as a program is generally available, as in the last ruling to come down on pork—i.e., generally available across the country and for various commodities—U.S. commerce law, which is in addition to the WTO rules, has historically ruled that as non-countervailable. Therefore, we could have a NISA program. We could have a disaster relief program. As long as all commodities are considered and they're available nationally, we're very comfortable that those programs could exist and move into higher levels of support with no risk of countervail at all.

The key element in the WTO that gets you into problems is when you take a particular commodity—for example, hogs—and, because of the poor prices in hogs now, you introduce a program to support only hog producers. Hence, that's why we're working very closely with the Canadian Pork Council to design a program that in fact will cover all producers—the grain farmer in the prairies, somebody hit by drought and it's weather-related, as well as somebody hit by a very poor hog price so that their incomes are supported at a certain level. Therefore it would be generally available and would have, in our view, no problem on trade retaliation. All we need is money now.

[Translation]

Mr. Odina Desrochers: I understand you completely. Now, you said that we rate second-last of the G-7 countries, with Italy being last, in terms of investment in agrifood research. Do you have any suggestions to make to us so that we can increase the level of research we do? What should we be focussing on in agrifood research right now? Did you identify any priorities?

[English]

Mr. Jack Wilkinson: Our view is that it just requires reinvestment by federal and provincial governments. That's one tool. The second is to make some changes to the matching investment initiative that allow more flexibility as to the way the rules are put in place. Let me give you an example.

Some of us would believe on the outside—probably cynical people like myself—that part of the off-loading exercise with the matching investment agreement was in fact bringing money from the farm community in to support the incomes and bricks and mortar of the federal government. You weren't allowed to do a matching investment initiative with a university or with other private sectors. It had to be with government researchers in government buildings, as an example. That looks suspiciously like off-loading the federal government's responsibility in research and development onto producers versus bringing in a matching investment initiative to do additional research.

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So our view is that two things need to happen. The same thing to a great extent happened with cuts at the provincial level, where nearly every provincial government substantially cut its resources to research through the closing of colleges, universities, and initiatives.

We think there needs to be some basic government reinvestment now, and we think there need to be changes to the matching investment initiative to offer more flexibility so that we can move to new areas.

One thing that wasn't really thought through here was that government had downsized for some years. Many areas of primary research in fact no longer had the type of expertise in them that was needed. So when you tied the matching investment to requiring it to be done within government, it in fact meant there would be no new research done because the expertise no longer existed in some departments for some selected types of work.

With Canada being so involved in exports, the only chance we have to stay ahead in an income situation, ahead of other people in the industry, is to be leaders, and to do the R and D, and to have new products constantly, lower the cost of products, cut the cost of inputs, etc., or we'll never have the types of net incomes that we want in this country. So we view it as absolutely critical.

[Translation]

Mr. Odina Desrochers: Thank you very much. Mr. Bulmer, you recommended that the employment insurance system be amended. You know that we set the premiums in accordance with the regions and their corresponding unemployment rate. Would you not want us to identify a specific region in the Atlantic, where there is currently a very serious crisis? Or would you prefer that we go back to the old system? How do you analyze the situation given the surplus available in the Employment Insurance Fund?

[English]

Mr. Ronald Bulmer: First of all, the regional rate is the number of weeks that you have to qualify based on the level of unemployment. As I was saying, there are differences: If your plant is close to Moncton, Moncton would influence that region and therefore you would have to work an extra two or three weeks to quality.

That is not the problem that we see. It is the fact that the amount per $100 of earnings—and I don't make fish an exception to this—is at a point where companies try to find almost any other possible way to have labour, whether it's through a consultant who is just on a contract basis, etc. Employers try to resist putting people into full-time positions with all of the benefit and social baggage that comes with them.

We do not think the regional rate system that is in there now is a disadvantage to the fish industry relative to any other industry that either exists or could be created in Atlantic Canada.

[Translation]

Mr. Odina Desrochers: Have you already taken action with the Minister of Human Resources Development?

[English]

The Chairman: You said there was a final question?

Mr. Odina Desrochers: Yes.

The Chairman: That was your final question.

Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, gentlemen, for your presentations and writing them in advance, as a matter of fact.

I wanted to raise an issue because I think there is one aspect, for Mr. Wilkinson, that has maybe slipped through the cracks a little bit, because it is in a grey area, but it does relate to agriculture and of course it relates to people.

Mr. Wilkinson, in your presentation you touched on a couple of tax measures related to RRSPs, lifetime capital gains exemptions, etc. Agriculture isn't often talked about in terms of social requirements and social needs. We have representatives from urban centres who come here and talk about day care centres and all kinds of interesting aspects. I wanted to raise with you whether or not you have heard from your constituents in the agricultural industry of Canada about farm women who under the Income Tax Act are not considered to be working and as a result do not qualify, for instance, for a child care expense deduction. That to me tends to put them in a category that I don't think applies to any other class of person who raises children. And it's not just farm women, but farm men as well. This is a unique situation in terms of the agricultural industry, the farm industry of Canada, so vital to Canada. Not only do they grow the food for our children, but they also raise many of our children as well.

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I don't know if you have any comments on this. Since you're from the agricultural community, however, it's very important for you to speak up in regard to the equity and fairness of the income tax system vis-à-vis raising children on the family farm. Are there some recommendations—for instance, some sort of a benefit or something to level the playing field—so that we fully participate in the benefits we all pay for?

Mr. Jack Wilkinson: There are a very select number of tax items that we listed in here, but I don't want people to think those are the only ones that are policy within the organization, the only ones needing to be dealt with.

The one you raised is one in particular. A lot of farm families have in fact incorporated their companies or their farms so that they can pay salaries in order to get around these rules. That's an additional expense to the family as well.

I started farming in 1979, having left the military. Our accountant recommended that we incorporate the farm because under the tax law, if you're a farmer, it's just expected that your wife and your children work for nothing on the farm. From a tax point of view, it's extremely difficult to pay them a salary and not have it challenged. Hence, we set up a partnership, a corporation in which there were no questions asked because she owns 50% of the shares. Those are the extremes to which people have had to go on the farm side to in fact get some type of equal treatment in many areas. So that issue is of major concern to us, as well as are a very substantial number of other tax measures.

Our view is that an erosion of support for primary industries in this country has taken place over a number of years. I think it's led by a host of people who do not appreciate the value-adding that occurs in Canada, both from a production point of view and an employment point of view, in relationship to the future. We have gone through a wave of individuals who give policy recommendations while thinking that if it isn't a computer chip, it's not happening, it's not a business that you could possibly want to attract to your community. They have no idea that the agrifood industry is an $80 billion industry; that we export $20 billion of that; that we employ 15% of the population—and this is just in agriculture, let alone other primary production. The damage that is done and the whole measure of how that group is treated have to change into the future.

The areas you raised are typical examples of the whole social fabric in the farm community changing substantially. Men and women do not wish to carry their children around on their tractors as they're farming or in their barns as they're working. They want to have the ability to have child care and other aspects of that. It's important and it should occur.

The Chairman: Ms. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairperson.

Mr. Wilkinson, it's interesting that when you answered the last question, you talked about this not being exhaustive. I would tell you that some of the requests you've put before this committee to consider are really quite exhaustive, from tax measures to new grants. Have you figured out how much these measures would cost if we were to implement them? Have you put a price tag on them?

The other question that comes to mind is why agriculture should be a great priority in the government's next budget. How does this stack up against health funding, reduction of debt or personal income tax reductions? In your view, why would agriculture be more important than these issues?

Mr. Jack Wilkinson: Agriculture is more important, in my view, but I don't think there will be exclusive... We did not ask for the entire budget surplus here. I'm not saying we're more important than everyone else. We're working on the assumption that we won't get $8 billion in additional money in agriculture, that there will in fact be reinvestment in health, that there will be some sort of program that'll come forward for rural poverty. Our assumption is that there also will probably be some sort of program for child care. And there are a host of areas in which reinvestment will occur, from health all the way through.

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Our point is that the farm community gets hit unduly by a number of the policy reductions that occur. Rural Canada is hurt worst by reductions in health care because of loss of services. Rural Canada is hurt worse by changes to just about every program, from the deregulation of hydro, telephone and natural gas to the downloading of increases in municipal tax because of reductions from federal and provincial governments. The list goes on.

Plus, we lost $750 million because of transportation policy reform and $1.5 billion because of farm income support programs being cut out of the system. And the list of pluses of cost recovery in generating revenue was substantial.

In our view, agriculture and rural Canada paid an undue and disproportionate amount in meeting the federal government's obligation to balance the budget and produce a surplus. Our view, therefore, is that we have cut our sector so much that although it was able to survive with high world prices it cannot sustain itself at historically low world prices. If you want to maintain the infrastructure that feeds off primary production in agriculture, we need some reinvestment in these areas. I don't think it's unreasonable to ask for that.

For example, we could have a disaster relief program in place in Canada in the order of between $100 million and $200 million, which would be substantially below what was spent on safety nets even two or three years ago. That is an absolute minimum.

On the environmental side, we believe consumers and taxpayers will quite willingly give some resources to the farm community so that it can increase its activities in reducing pesticide and fumigant use and dealing with improvements in water quality. We need to start on that. We don't have a number for that at this time.

We're not asking for billions and billions, but we need some reinvestment. It's cut too deep.

Mrs. Karen Redman: If I may, I'll ask just one additional question.

Has your association tracked the movement from the family farm to the large corporation? You touched on that in your last answer. When I look at my community, my impression is that a lot of the small “husband-and-wife” farms are being bought up and operated as large corporations.

Mr. Jack Wilkinson: It varies substantially from area to area. We don't have an exact tracking of it. For example, a lot of our members have incorporated in order to deal with tax measures and other areas that have been talked about here earlier and get some of the benefits.

There are numbers as far as foreign ownership goes. They're tracked by provincial land title organizations. Those numbers are still relatively low.

Because of the very low margins, many of the farm operations have increased dramatically in size, as you're well aware. We're seeing the diminishing of the importance of the mid-size family farm operation that tended to use husband-and-wife and family labour, with maybe a little bit of off-farm seasonal help. There's a very substantial movement to larger operations. Many of the livestock operations coming in now are much more substantial and tend to be designed around employing individuals.

What is happening is twofold. As I said, the margins are very low, so you have to farm a lot of acres or keep a lot of livestock per unit if you want to have a reasonable income. And I think many of the farm families want to have weekends or days off, so in livestock operations many of them are moving to a scale where they can bring in some labour so they can have a reasonable quality of life and not, for example, have to milk cows seven days a week. We're seeing the 20-, 30- or 40-cow operation moving to 80, 90 or 100, with labour being brought in as a part of it, even though family labour would predominate.

The Chairman: Thank you.

Mr. Gallaway is next, followed by Mr. Pillitteri and then Mr. Discepola, each with one question.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Thank you, Mr. Chair.

Mr. Bulmer, you raised an interesting issue, which is that in this era of cost recovery, a number of industries are required—if I can use that verb—to pay for services that are of little or no benefit to them. I think in an era when government funded a lot of these services or permits, if they're that, out of general revenues it was of no consequence to industries; but now that you're being required to pay for them, I think there's a need to start examining the necessity of a lot of these services, or what one would refer to as the overbuilt administration that is driving these requirements.

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I wonder if you could comment further on that in terms of what kinds of permits are required in your industry and what you feel the benefit or the lack of benefit is in applying and paying for these, because I understand there are a number of them.

Mr. Ronald Bulmer: Yes. Cost recovery is a big area in the fishery and it's a growing area. The single biggest cost, of course, is your fishing licence, which is just the general privilege to earn your living from a raw material that technically is the property of the taxpayer of Canada. That's $40-some-odd billion that comes right out of the pocket of the primary harvesting group. So if you were a B.C. salmon fisherman who had maybe a one-hour opening and the first cheque you had to write before you could even go on the water for an hour was for your licence fee, that was extremely painful for many people this particular year. So perhaps there's less flexibility in the system than there could be.

The second thing, of course, and where we really get concerned, is not so much for that primary licence privilege just to be a harvester of fish, but rather it is this combined activity of the department. They used to have fishery officers, let's say, who were charged with enforcement programs. As those had to be cut, they just invented new programs called dockside monitoring, where a private company now stands at the end of the dock and watches everything unload. But then they tell you there's also a cost for that guy; and by the way, we also want an observer actually out on the boat to take a look at the size of the mesh and whether you did any discards, etc., and that'll be $350 a day.

So what you have is this changing environment whereby the people who pass the regulations find themselves squeezed for budgets and people, so they invent programs. But then at the same time they just pass out invoices for the programs. That's the gross side of the business that has us very concerned.

To their credit, the department has sort of put a hold at this point and they have just initiated a study, which was a response to this standing committee about a year ago when this issue of cost recovery in the fishery was raised, and they are actually starting a study on cumulative impacts on the fishery to try to get a handle on all of these costs from the federal government, whether it's your navigation costs or your licensing costs or your enforcement costs, etc. What does it really mean and what is it doing to people; is it putting them out of business, etc.?

So it's an area of concern, but I will just give that small kudo. The department finally—after some pressure from this committee, thank you—actually is responding and is going to actually take a look at it in a more systematic way, and maybe I'll be able to report to you with better information a few months down the road. But you can't automatically keep passing on costs just because you have to change your business.

The Chairman: Thank you, Mr. Bulmer.

Mr. Pillitteri.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you, Mr. Chairman.

Mr. Wilkinson, Jack, I'm a little surprised at you this morning. My colleague asked you why you would want all this money back, and I would have been surprised if you had answered to the effect that it's because we produce the finest food for Canadians, barring none in the world; the cheapest food for Canadians, barring none in the world; and the safest. That would have been my premise, because of course our industry has done that. But also, the Canadian farmers are competing with the Europeans, farmers all over the world and of course the Americans, and I know how highly subsidized they are compared to Canadians. But having said that, I think most of us are well aware of that.

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Let me ask you a question. You did ask about the contributions, through the NISA program, to be retroactive like RRSPs. Is that what you were asking in your deposition—in other words, to go back seven years?

Mr. Jack Wilkinson: No, there are two points in the NISA program. One is that they be tax deductible, and it was always our premise that they should have been. At the time, the finance minister wouldn't allow them to be tax deductible; hence that was the logic for giving the 3% bonus for contributions.

The question in relationship to the catchup principle is that there can be very large fluctuations. We're not talking here about retroactivity back seven years, but there can be very large fluctuations in farm incomes and time periods in which farmers feel they cannot make contributions to be matched with. So we view that you should be able to account for that and, in a good year, be able to not lose that past year. We're not asking at this time to go back to when NISA started, but we feel that would be a very positive change to help to deal with the cyclic nature of the agriculture business, so that people can maximize their contributions when they do have some surplus cash.

Many of the commodities we have are very cyclic in nature. We have a double impact right now. We have cycles that are very high in production, as in beef and hogs and what not, at the same time period when many of our big buyers in Asia are under very serious economic conditions. So not only do we have an overproduction cycle, which would normally do a bit of a swing and come back up again, but coupled with that, the massive cutback in purchasing has really crashed the price on hogs. So it'll be very difficult for them, but we think that in a normal cycle maximizing the lost benefit and being able to make that contribution would be very useful.

The Chairman: Thank you.

Mr. Jack Wilkinson: Mr. Chairman, I just want to make it clear that we're not asking to go back right now. We're saying make that change now so we can do that in the future.

Mr. Gary Pillitteri: But you're saying we can go back, the same as RRSPs, as much as seven years because the cycle could be much longer than one year and in the Asia-Pacific it could be two, three or five years.

Mr. Jack Wilkinson: I agree, but all I'm meaning right now is that with the price where it is, farmers aren't going to be making additional...

Our point is that we don't want to scare you with the number by necessarily going back to when NISA came into existence. If you just made the change right now so we could do it in the future and make it tax deductible, we'd be happy with that move.

The Chairman: Mr. Discepola.

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

Generally I like your comments, and please try to be specific, because our committee's role here is to listen to Canadians and be specific on our recommendations to the Minister of Finance.

None of you has touched on what we're going to do with the surplus. Again, I want to caution Canadians that the surplus can be very quickly eroded. Just take into account the payment on hepatitis C, the payment on pay equity, the payment on health care investment, and right away we have no surplus. So when people come here and say they would like to see spending...

I'd like to ask both of you two questions. First, why have you not made a recommendation on reinvesting in reducing our debt? I know basics in entrepreneurship tell you that when you have any revenue, the first thing you want to try to do is write down your debt, because that's the biggest investment. In our case, if we were to write down our debt by $1 billion, we would stand to gain recurrently, year after year, over $100 million that we could then spend as we saw fit.

The second question would be probably for Mr. Bulmer. I would like you to be very specific on your recommendations when you say “tax reduction”. Should we target small business, large corporations? Should we target across-the-board tax reductions, or should we be specific in areas where we would like to see personal tax reductions?

Mr. Jack Wilkinson: I think, quite frankly, in our presentation there are some very clear recommendations on what you should do with the surplus, so I don't agree with you when you make the comment that there are really no specific recommendations in relationship to—

Mr. Nick Discepola: I was referring to debt.

Mr. Jack Wilkinson: Okay. I think you had two questions. One was what should we do with the surplus? We have some very clear recommendations on reinvestment that I think are in here, from an environmental program to some changes to farm income support—

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Mr. Nick Discepola: No, let me be specific, then. I was asking why you didn't put any priority on reducing the debt. None of you has touched it.

Mr. Jack Wilkinson: The reason we didn't put a priority on reducing the debt, I think, is fairly simple. As a small business person, I would agree with you totally, and that is why for ten years we paid down our debt and we now have our farm paid off. That is a very critical priority as far as reducing your expenditures is concerned.

Mr. Nick Discepola: Should it be a priority for our government?

Mr. Jack Wilkinson: Just a second, let me answer the question, please.

If you are starving to death, it is very difficult in fact to take the money out of the cookie jar and hand it to the banker. A lot of people stop at a grocery store in between because they prefer eating first.

The point we're trying to make over and over in here is that with the massive reductions and cutting that occurred in agricultural expenditures and in a host of others that related to agriculture, we view that balancing the budget is critical. The next step is to do some reinvestment because of the current price cycle we're in right now. If we were in a price cycle, as we were two years ago, for example, and farm incomes were sitting at around the $5 billion, you may very well have seen us come in and make recommendations as you propose. But with farm incomes—

Mr. Nick Discepola: So you're saying that debt reduction is not a priority to your industry at this stage.

Mr. Jack Wilkinson: We're saying very clearly what I just said. We're saying that with farm incomes being as low as they are, reinvestment in safety nets and something to keep environmental activity is the most critical priority in front of this standing committee this year, and there's a host of other recommendations around that.

The Chairman: Thank you, Mr. Wilkinson. Mr. Bulmer.

Mr. Ronald Bulmer: We do think that tax reduction...and that's why we wrote in response to the question of what to do with the fiscal dividend. What we're really arguing is that from the Atlantic Canada point of view and hence the Atlantic fishery point of view, what you need to do is have less fiscal dividend to work with by taking less money out of the pockets of people and businesses and leaving it with them to try to diversify, to create other kinds of job alternatives in those regions. If you don't, this surplus labour that is currently just sitting there and has been sitting there based on government money that has been sent to the tune of almost $4 billion over the last six years through three different programs—that is over. Therefore, we are going to have either mass exodus or mass welfare or something if we all don't try to figure out how to stimulate an Atlantic economy and give these people some kind of job alternative.

If I were looking at the 1999 budget coming forward, I would say that collecting less revenue and leaving the revenue in the hands of people in Atlantic Canada so they could try to get on with building that regional economy would be a higher priority for my members than general deficit reduction at this point.

The Chairman: Thank you, Mr. Bulmer. Mr. Riis.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): Thank you, Mr. Chairperson.

Gentlemen, your presentation this morning was quite sobering, I found, in terms of the trend lines in both the agricultural sector and the fisheries sector. We've moving into some pretty murky territory. I have one general question and then two or three short specifics.

You mentioned the declining offshore markets, particularly the Asian markets, and the impact that's having on both your sectors. Could you comment on the extent to which others who perhaps wouldn't normally be competing with us head to head so heavily are now competing with us in other markets?

Specifically, Mr. Wilkinson, you represent 200,000 farmers. What percentage of those farmers would be incorporated businesses? What percentage would rely on off-farm income? I'm speaking generally now, but could you give us a ballpark figure? Also, you mentioned the endangered species legislation. That is of concern to people in agriculture as well as other sectors. Do you have some indication from your soundings that a compensation component will be in the new legislation?

Mr. Jack Wilkinson: In relationship to who we are competing with in the marketplace now and how that changes, I think everyone was building up in particular, say, countries in South America, Australia, New Zealand, as well the United States and the Caribbean for exports into Asia. With the growth that was occurring there, people were ratcheting up their production to move into those markets. The collapse of the buying power of many of those markets has just driven down the price.

• 1040

As an example, Australia used to export live cattle—700,000 head a year—to be finished in Malaysia. When the Malaysian crisis occurred, that dropped to zero in one month. That's just one country that stopped buying, putting out 700,000 head looking for a home anywhere. It's here the same as it is anywhere. They're struggling. Argentina increased its production. A host of countries massively geared up their production as a way to help as an employment stimulant, as well as to help farmer income. They did that only to find out we're all chasing the same market. As it collapsed, we all looked for anywhere else around the world where people would buy our products. You therefore start discounting, hence the price collapse, and you know how it goes. So that's a major problem.

In relation to the breakdown of the corporate sector as members, I can't give you those numbers for the simple reason that there are nineteen people sitting on our board of directors, and the individual farmer is a direct member to them. I just don't have it off the top as to what would be the percentage breakdown other than taking Stats Canada figures and assuming that our 200,000 is a subsample of the 280,000 census farms out there.

As you can appreciate, we have a very substantial amount who rely almost exclusively on off-farm income for a substantive part of their family income. That's simply because the return on investment in agriculture is not great, and some would say it's pitiful. We've therefore created a diminishing of the small and medium-sized, unless they're close to urban areas and can tie into niche markets, have different types of production and what not. We've had a massive expansion of the volumes that the larger farm operation is having to run through constantly to get a reasonable income.

So we can get the schematic of that breakdown from Stats Canada and send it over to your office quite quickly. I just don't have it here, and it would only be a sample of the other.

I'm sorry to say that I think the endangered species legislation is not going to have any kind of compensation in it. We have no inside track as to this, but Sally Rutherford, who is our executive director, has attended many of those sessions. Just last week, she was very pessimistic about having a compensation package that was being offered, and I'm disappointed in that.

I think too many people are expecting the farm community to do too many things. For example, during my lovely drive in at 2 a.m. this morning I got to pick up all the international news on CBC and was brought up to date. The agricultural ministers in the European Union are meeting in Austria. They're talking about the need to pay agricultural producers for more than food production. Food production as a European concept is not deemed appropriate as the only place in which farmers will get money if they're going to look after the environment, if they're going to look at the habitat requirements, and the whole list of things goes on. Somewhere, you have to pay them more than the 10.9 net disposable income. We're the lowest country in the world when it comes to what we're paying our farmers on food.

I hope some of these things have not been finalized. There is still input for people to show that, in all of these additional areas, we need to have some avenue of offsetting resources if they're going to impact on the way we're allowed to do business on our farm. It's not that we're against being social citizens and doing what needs to be done, but there really is a limit to how much you can do as a business operation on the social side while picking up cost after cost after cost. People aren't paying for it in the grocery store, that's for damned sure.

Mr. Ronald Bulmer: Mr. Chairman, I almost echo that. As I said earlier, we're depending on a lot of those Asian markets for a lot of products, for anywhere from 100% of our sales to significant amounts. While our dollar has dropped against the yen in the last few months, to the tune of 14% or 15%, the Australian dollar is down a lot further, so they have currency advantages. If you look at the Aussie markets and those in between, such as Malaysia, Vietnam, and all of those big producers, they're just saying to export for hard currency almost regardless of what it's worth, but get your hands on it.

• 1045

The Russians, for instance, are huge producers of seafood, a product that used to stay home and feed Russians. They are now actually selling quota in the water for fleets to just go and get because of their need for hard currency in this environment. That's product that instead of being eaten in a Murmansk household is going to be on the Tokyo or New York market over the months ahead.

I have almost the same kind of list. It's tough and it's getting tougher for the primary industries, particularly if you depended on Asian markets. In those markets themselves we were expanding sales because of a developing middle class in Korea and Taiwan. Those are the people who are really being pinched over there because of the banking systems and their investments falling, etc. The person who was thinking about a lobster from P.E.I. is probably not thinking about it any more. He's thinking about some kind of fish for his bowl of rice. That whole end of the demand side is backing off.

As an industry, we're not, because of that, asking for a whole bunch of support programs or any of that sort of stuff, but we are saying that as an industry we're going to have to be even more cost efficient. This means two things. First, government can't just continue to merrily download its own costs because they think it's a nice way to keep a nice big department of whatever. Second, if we're going to be cost-efficient we're not going to be able to pick up labour, and we're sure not going to be able to pick up expensive labour.

Those are just realities, and I'm trying to make the committee aware of the realities of the fishery as I look at 1999 and probably also the next three to four years.

The Chairman: Thank you, Mr. Bulmer. Mr. Brison.

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

Firstly, I represent the riding of Kings—Hants, which includes the Annapolis Valley in Nova Scotia. We have 50% of the agricultural product for the province and actually a greater agricultural output than the whole province of P.E.I. So agriculture is very important to the people in my riding.

We also have had two years of the worst drought conditions in 100 years. Prior to getting into politics I was a business person. I didn't have an understanding, frankly, of the challenges facing agriculture. Having been elected at the beginning of the summer that was to be the worst drought in 100 years, and now having had a second one, I am very familiar with these programs.

As for NISA, it's extremely unrealistic in terms of the ability for individual farmers to contribute, particularly if they have two bad years. It seems almost impossible for a farmer to benefit if the provincial programs have effectively worked to make it easier for farmers to get in debt. While the government may promote or trumpet the debt or deficit reduction, increasingly we have individual farmers, and I would suggest an entire sector, where the debt loads are increasing significantly.

Is that accurate, first of all?

The question we have to ask ourselves, then, is do we want a domestic agrifood industry, and what are we willing to pay for that? If we believe it is like any other industry, and if we believe in fact it is something we can effectively allow some other country to produce, without any ramifications, I think we're being very naive and very short-sighted.

In terms of government reinvestment in research, one question I had for you was with regard to the centres of excellence plan, particularly for the fruit growers. We have a centre of excellence in the Okanagan Valley that is researching for the entire country, and the Okanagan Valley is significantly different. The conditions in the Okanagan Valley are significantly different from those in the Annapolis Valley, and using distance as a determinant in the cost of telecommunications, I don't see the cost benefit of concentrating researchers in one geographic location.

The current safety nets are not meeting the needs of the producers. Do you have a holistic plan, significantly more detailed than what you have provided, that would give us an idea of some of the safety net-type programs you would be recommending?

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Mr. Jack Wilkinson: Yes, we can certainly give you more detail.

The farm community never expected NISA. In fact, when the last MOU was signed the program had a relatively low priority, but because of the trade pressures of having a decoupled, non-commodity-specific program and looking at income as triggers, it had some merits. Our view was that NISA was of some benefit—and for some commodities it was a fairly substantial benefit—in helping to average out the normal price cycles that farmers get.

It's not a bad principle to say that in good years you put in a little additional money, match it with contributions from the government and pull it out in bad years. It really helps to offset some of the losses that we had, like the ability to do the forward averaging and whatnot that got taken out of the block averaging and that used to be such an important priority for farmers. When tax regimes took a lot of that away, NISA helped to offset it and brought in the ability to do some averaging.

But that was only one element of a program, and we always said that if you would take that crop insurance and a disaster program, then we would have a package that would be more reasonable, acknowledging full well that for some commodities a crop insurance system doesn't work well. There are obviously a number of commodities in the maritimes like that, because of the small acreages and the cost of administering things. In fact, in the maritimes there are some commodities that have very low levels of coverage and we acknowledge very clearly as a national organization that there are some flaws in the system.

We were very supportive of the Nova Scotia federation trying to get a disaster program in last year only to find out that some of the provincial people had spent all the money in the cookie jar and there was no money to support farmers. There was money for researchers, but not for farmers and their income situations. We are working very hard to bring in a disaster program that would deal with drought and/or income loss due to other things. We think that if we can get that package together it will be very useful in dealing with a very severe price depression and/or drought.

In regard to areas of excellence, as a general policy it has some merit. There are certain commodities that it can be adapted to much more readily. For example, in dairy production, poultry production and others, it is of benefit to put a critical mass of researchers together. Having a few spread out all over is probably not as good as concentrating them in one place.

I agree with you when you say that in horticulture and tender fruit one must be very careful not to forget about the huge regional disparities in soil types, in microclimates and in the markets they are producing for. In that area, it doesn't make sense to minimize it, to have one or two across the country. There may be some level of critical mass that is important in any research establishment in order to have people working with others, but I can see your point in that regard. One has to be careful in horticulture because there is a huge variation.

Mr. Scott Brison: It's very important that you're here at this committee because it's important for people who may not be in direct contact with agriculture on an ongoing basis to recognize that Canada's agricultural producers are not oversubsidized. In fact, in a global environment, they are undersubsidized, if you will, and we do enjoy a very low food cost, as Mr. Pillitteri mentioned earlier. For once, I agree with Mr. Pillitteri. Ideologues can pontificate about Adam Smith as much as they want, but the fact is that in a global environment this industry in Canada, farming, is threatened.

Mr. Jack Wilkinson: It's very competitive. In a USDA study of net disposable income in capital cities around the world, Ottawa had the lowest costs, costs that are the lowest percentage of net disposable income of any capital city in the world, even substantially below Washington's. And we're almost at the bottom in support for producers in OECD countries, so we have this double whammy coming at producers, which has caused massive growth in the size of family farm units.

We are now at an all-time high in debt in the farm community, for example, and to a great extent that has been fuelled by people running on such narrow margins for years. The only way you can anticipate making a reasonable income in comparison to other counterparts in society is to substantially increase your production, year in, year out.

• 1055

If you're going to pay $250,000 for a new combine on a yearly basis, which is what it costs—that's not an exaggeration—you have to have a lot of acres. You're going to run over that machine just to keep reasonable equipment, and the list of those things goes on and on.

We have an all-time debt, as you said as well, so we're very sensitive to interest rates.

Mr. Scott Brison: I have one question for both of you, relative to cost recovery and the regulatory burden. I think the whole issue of regulatory burden has been addressed much more holistically in the U.S. than it has been in Canada.

Are you familiar with the regulatory budget initiative in the U.S. whereby for every regulation Congress is effectively assessing a cost to that regulation for the implementation, the enforcement, and thirdly and perhaps most importantly, the cost of compliance? Usually that is the cost the government leaves out. Based on cost-recovery schemes, that may be the most significant cost.

In any case, there's a regulatory budget or an attempt to do a regulatory budget, where every regulation is effectively costed. Then there is a third-party independent risk analysis done that compares and costs out the actual risk that society is being protected against, relative to the investment we are making. This does not mean that any of these regulations will be arbitrarily removed, but what it does provide and would provide, for instance, to Parliament is a set of data that would provide the evidence for meaningful debate on individual pieces of legislation or regulations. In fact, sunset clauses are part of that as well, that we do evaluate these after a period of time.

How would you feel about a regulatory budget in Canada?

Mr. Jack Wilkinson: I do know in general how it works, but I don't know the type of detail to automatically, as an organization, recommend it. It does sound like you'll be one of the speakers at the rally on gun control when you talk of the cost of implementing a regulation and that this should be put forward by government before it moves ahead.

I'll give you a specific example from the agricultural point of view. The Pest Management Regulatory Agency, for example, in Canada has a price tag in the order of $24 million to $25 million. It has staffing of around 320 people. When we compare ourselves to similar jurisdictions, like Australia, which is only slightly smaller than us on agriculture inputs on that side, their agency is in the order of $9 million because basically they have chosen to have a much more open debate of what they can afford to do as a mid-size agriculture community. How, then, do you still meet the health requirements of the consumer in this and not put that at risk? Can we find ways of streamlining and harmonizing our data collection, and so on, to in fact not put the consumer at risk and still create an environment in which producers can afford in cost recovery to pay their fair share?

I do concur that there are many areas in Canada where, as Ron has talked about, we've off-loaded part of the cost without a very thorough debate on whether all of this was needed, did it meet public good or private benefit, and then what can we honestly charge back to a sector and not make them uncompetitive?

I think Treasury Board thought more of that was going to occur. We're a long way from that analysis being complete enough to make recommendations. We think every line department should be doing that, in a hold on cost recovery, to analyse where they need to reinvest back in, how they need to do business differently, and not just automatically go ahead with 20% now, and next year it will be 30%, and yet you don't have any flexibility of changing the system.

It is very disconcerting to hear consumer groups constantly cry of the foul that is taking place with business somehow getting into the regulatory system and putting the food system at risk, when in fact it was government, through changes in cost recovery, that insisted we become part of the business side as in paying our share. Every time we make a suggestion on how we could streamline the regulatory system to make it cost-effective and still keep the consumer good in place, somehow that's viewed as industry getting in charge of the chicken coop here.

Consumers, through their organizations, are going to have to decide whether they want to pay and keep it regulated by government or, if not, through taxes. Then they're going to have to allow us to have some input into trying to streamline things somewhat so we can afford to still be in business.

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The Chairman: Mr. Bulmer.

Mr. Ronald Bulmer: I would just keep my answer short by saying that because this is such a growing area and an area of concern, our industry would support anything that attached some level of cost analysis to the regulatory process. A huge gap exists right now whereby people pass them for all sorts of reasons but nobody ever questions what they cost and who's paying the bill.

The Chairman: Thank you, Mr. Bulmer.

We're going to have two final questioners: Mr. Epp, followed by Mr. Valeri.

Mr. Ken Epp (Elk Island, Ref.): Thank you.

I have three really quick questions. I'd like you to be really brief in your answers so we can get them in. My questions are directed to Mr. Wilkinson.

I'm surprised you did not mention anything about income tax averaging in the long run, since, in agriculture particularly, an annual income can be really good in one or two years and then be zero or less for one or two years, when you actually have a net loss. I would think a longer-term, backward averaging of income tax would be very useful. You didn't saying anything about that. Why?

Mr. Jack Wilkinson: There is a limit to how many things we can put in as critical items in our presentation, and it's getting fairly long as it is. But that is why you see such huge changes in inventory adjustment that normally occur in farm figures now. Because of loss in the block average to a great extent farmers use both NISA and inventory changes to try to help deal with it.

Of course we would like to see those things back in there, but, as I said, there are only so many things you can put in a presentation.

Mr. Ken Epp: But you would favour it if it were done?

Mr. Jack Wilkinson: Yes.

Mr. Ken Epp: The answer to this second question can be very brief: What is the impact of GST on your industry?

Mr. Jack Wilkinson: It is a paperwork problem to a great extent, with some loss of income on cashflow. On a quarterly basis at minimum, most serious farmers put in the rebate and get it back out of the system, but the accounting side is added to cost and you lose that money as part of your cashflow as well. So you have the carrying cost of not having that within your system. There are also a fair number of smaller ones who do not keep track of it, and it will therefore be a direct additional 7% increase on their operations. But as I say, for mid- to large-size farms, it is a paper burden and loss of the carrying cost of that money while they're waiting for refunds.

Mr. Ken Epp: And for my third question, I have personally advocated income splitting, particularly as it pertains to farm families, for whom really it's two people—and sometimes more—earning one income. For many farm families, it's a husband-wife situation with the kids helping. I just want your reaction to that. Would that help you in terms of the income tax burden? Also with respect to being able to qualify both people for RRSP limits, according to your scheme, if they had it they'd be able to put in over $30,000 a year as a tax shelter.

Mr. Jack Wilkinson: The only problem is that it actually requires that you make a certain amount of money before you can put $30,000 away by your percentages that max out—

Mr. Ken Epp: We're talking about good years though.

Mr. Jack Wilkinson: On the more serious side, income splitting becomes a problem when you have operations that, more so historically than now, are often in the husband's name because of men buying the property from their parents, etc. With the property being listed in their name for tax reasons, it's very difficult to be able to automatically split incomes under the Income Tax Act.

What has happened is that those people for whom it is a substantial benefit have either gone to legal partnerships or incorporated so that they have a better capacity to do that under the tax system. In the example I gave earlier, if my wife has 50% of the shares in the farm, which she does, there are no questions asked about filing a joint return and splitting the income on the farm operation, whereas if it were sole proprietorship there would be a major problem.

So the Income Tax Act changes there that would make that easier would be beneficial, because incorporating for that benefit only is an expensive way because of the extra income tax charges that are done on the accounting side.

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Mr. Ken Epp: Thank you.

The Chairman: Mr. Valeri.

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

Mr. Bulmer, I just want to make reference to a couple of points you made that were included in your submission. You focused on the Atlantic economy and talked about how tax cuts, tax reductions, would assist the Atlantic economy and perhaps provide some assistance in terms of the brain drain, which is another issue. You continued in your presentation with a reference to EI and the fact that there was a surplus of $17 billion in the EI account.

I think you know or you might recall that back in 1986 the Auditor General had indicated to the government of the time that they were understating their deficit by approximately $6 billion. He had asked the Conservative government of the time to collapse the EI fund into consolidated revenues and essentially add it to their cumulative deficit, because ultimately government would be responsible for the deficit that sat in the EI account.

You continued to say here that the reduction of EI may be a route to go when it comes to cuts or a reduction in taxes.

I guess I want to make a blanket statement here. First, when I speak to business people and companies they essentially say they hire people when they need them, and essentially the employment insurance premium is not really the one factor that will convince them to hire or not hire an individual. It's really market conditions, and if they need someone they will hire them to absorb the market demand.

Politicians and governments would really want to be all things to all people. Governments in the past tried to be all things to all people, and we got into a problem. This government has attempted to make some choices and to set forward and reflect Canadian priorities and make decisions that reflect those priorities.

In a world of trade-offs, what I would like to know from you is this. When we compare personal income tax reductions, which essentially would affect some 14 million Canadians and would also impact self-employed individuals and retirees, versus a reduction in unemployment insurance premiums, which would be a 5¢ reduction and be worth $350 million, which of the two would you choose in a world of trade-offs?

Mr. Ronald Bulmer: I guess I would start with the EI reduction, because in my opinion it is more of a hidden tax and more of a restraint on employment of people. You may have talked to business people who state that's not the case, but there are others, at least in my industry, who argue that they go the other way around and look for any other way than actually hiring a person as an ongoing employee. Payroll taxes make up one of the big negatives in terms of that.

If you had to make one of two choices, and if you forced me to make that option for you, I think getting this EI thing straight, as an impact on everybody who employs people in this country, would be the first step, and then, if there's money left, depending on how far you take it down, tax relief.

Again, I think many of these areas are going to require a stronger domestic economy. If you're going to continue with the cars and the fish sales and the food sales and whatever, I just see bad news on the horizon on the export side of that trade balance. So we'd better be working on a strong domestic economy.

Mr. Tony Valeri: I just want to be clear, Mr. Bulmer, that what you're advocating is a reduction in tax that would impact 8 million people versus a reduction in tax that would impact 14 billion people, and that you're advocating a reduction in tax that would essentially have no impact whatsoever on self-employed Canadians or retirees. Essentially you're advocating a reduction in tax that would have a greater benefit to employers than actual Canadians.

I just want to make sure I understand that this is what you're advocating.

Mr. Ronald Bulmer: Yes. I work for an industry that is a manufacturing industry, that employs people and that tries to operate manufacturing plants. That's why I'm putting forward that recommendation.

Mr. Tony Valeri: Given the position you've just stated, you wouldn't be overly surprised if in fact politicians might advocate, on the other hand, a reduction in tax that would benefit more Canadians, because in essence we work for Canadians in general rather than manufacturers or employers.

Mr. Ronald Bulmer: After 21 years, nothing politicians put forward surprises me.

Voices: Oh, oh.

Mr. Tony Valeri: And I must also tell you—

Mr. Ronald Bulmer: Look, if you think the net impact on the Canadian economy is $100 for 24 million people, and if your judgment of what's good for the economy is getting the payroll taxes down for employers of 8 million people, I have no problem with that. All I say is that should be the basis for your judgment, not that you are trying to support some social industry in a particular community and to heck with the Canadian people.

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If, in the end, as the standing committee, that's where you fall with your recommendation as to what's good for Canada, then I'm behind you.

Mr. Tony Valeri: Well, I'm not quite sure where that last comment was coming from, because nowhere in my statement did I talk about funding some social program. What I asked you was, essentially, in a world of trade-offs, which would you support?

Mr. Ronald Bulmer: I should explain that. We are an industry that has been used in Atlantic Canada as the engine of jobs over cost efficiency at all cost. Part of the pressure on the stocks, part of the fact that there are 30,000 people who require government cheques, and the fact that there is 50% more harvesting capacity and 50% more plants has been because of governments that have said here is an industry that we can manipulate to artificially create things and keep people there.

All we are saying is we are waking up in the nineties in an economy that cannot support either the infrastructure or the people, and now we have products that can't be cost-effective and world-competitive in the export markets. That's why we think there has to be substantive, real directional change. But I haven't got the analysis that tells me the net trade-off to Canada is better going one way than the other.

Mr. Tony Valeri: No, I realize that, and that's why I tried to lay out for you a couple of pertinent facts with respect to the two.

Unfortunately, essentially we are in a world of trade-offs. We do have to decide and we do have the best interests of Canadians at heart. Essentially, that's the purpose of this committee. That's the purpose of having individuals like yourself come forward so we can have that kind of dialogue. Thank you.

Mr. Ronald Bulmer: I'm trying to influence a particular region for the benefit of the people in that region, and, as I look at it, I fall on one side of the equation. If you're looking at the whole of Canada, you may end up falling on the other side because of more spending in Ontario, or something like that, if there was a general tax reduction.

Mr. Tony Valeri: That's not really true. Essentially, what I got from your submission was that you were advocating tax cuts for Atlantic Canada. That's why I posed the question to you.

Mr. Ronald Bulmer: Of course, I'm like Jack. If there is enough for everybody, that's wonderful. Then let's increase health benefits and everything else as well. But we know, in the end, you have to come as far down the list as you can and that is where it is, without going out to borrow more money and increase the debt, because we all know that got us in big trouble.

Mr. Tony Valeri: Absolutely. Thank you.

The Chairman: I have a question. You mentioned that word “debt” in your last comments. When you're looking, for example, at people from agriculture or the fisheries, consumer groups, etc., they all bring to the table, of course, the specific needs of the constituency they represent. Then there are issues like the debt that speak to our economic system in a very serious way. You have probably noticed the volatility that exists in the global marketplace. That's something we've all lived through and witnessed. We also understand the relationship between debt reduction and low interest rates. We also understand the benefits of low interest rates in generating economic growth.

I'm just wondering where you would place debt as a priority. Let's say we had a $10 surplus and you had debt reduction, personal income tax, EI reduction, and health care. How would you divide it? What percentage would go where?

Mr. Ronald Bulmer: On your farm, Jack, how much of your cashflow did you put to debt reduction?

Mr. Jack Wilkinson: I think there are two or three things that have to be taken into account.

The answer to that question will vary, depending on the circumstances you're in. Because there has been so much very substantial rebalancing taking place at the provincial and federal government levels, both at the same time, and it had to be done in a way that didn't show much sensitivity to those areas that could handle it, I think you have to step back after you do the amount of cutting that has taken place and ask, what did we get right? What did we get wrong? Do we need to rebalance that now before we start lowering tax and paying down debt?

• 1115

I think that's what occurring. People are saying it to you in spades in health care, and they're saying it in spades in education at the provincial level. There are many areas where people are saying you have to do some rebalancing here because our particular sector can't handle in a sustainable way what happened over the last five years.

That's the case I'm making for agriculture. Because of what has happened to prices in the last 18 months, if you carry on and start paying down the debt, as an example, right now with no rebalancing, with no acknowledgement of the situation we're in, then you're going to do damage to the primary producer. If we were sitting where we were 18 months or two years ago, we could probably handle—although we would not be pleased—carrying on the way you're going with our level of cost recovery, our level of income support, etc.

On my farm, as a businessperson you have to generate income before you can pay down debt, because you have to live. All I'm saying is that I wouldn't get carried away with paying down debt for a year or two unless the Canadian economy gets more buoyant than it is right now, that you need to do some rebalancing, which will sort out some of the money. If you take a big chunk of your money and pay down debt and ignore absolutely the needs of the primary producers in agriculture with the circumstances they're in, I think you've done us a disservice.

The Chairman: I heard that. That was part of your comments. I asked a very specific question.

Mr. Jack Wilkinson: I gave you a specific answer.

The Chairman: Everybody brings their point of view, but I also want to bring forth the issue of national interest and what is the national interest.

Mr. Jack Wilkinson: Exactly. So what are we going to do? Are we going to take a poll and anything more than 50% on any item, because it's more than 50% of the voting population, gets attention and everything else that is less doesn't? Part of the national interest, I would think, is to keep primary agriculture production, which is going to increase its exports by another $20 billion in the next five years if it stays on track and is going to employ even more than the 15% of the population it currently employs, growing. It can't shrink back simply because its net income dropped. Every 1% interest rate increase is a $300 million extra cost to the farm community. So from a farm side our desire as an export country is to let the dollar sit down there, let the interest rates stay relatively low, and keep enough basic support at the bottom so that we can keep in existence. And you'll have employment so that you can pay down the debt as time goes on. But you have to do some rebalancing now in the national interest.

The Chairman: Mr. Bulmer.

Mr. Ronald Bulmer: The first thing I want to recognize from the industry I represent is that this government and governments in general have been very responsive to the people side of the equation. Let's face it, the balance-of-payment system sends tremendous amounts of money to support Atlantic provinces that would not be able to provide health care and all kinds of infrastructure without the balance of money that comes from central Canada, western Canada, etc. So, first of all, everybody from Atlantic Canada I think has to recognize that. And then even from our industry point of view, if you look at the last four years, as I've already mentioned, this government has sent $4 billion to people in our industry who had no fish to go fishing for and who were sitting on the shore and waiting it out. I want to give everybody credit for what has already happened in terms of sensitivity to the industry in our region. And you had to get that money from somebody else in Canada to send it down east. That's the first thing.

With that said, then, the slightly unfortunate part of that is that all of that fund, or almost exclusively all of it, just went to keeping people in place in the great hope that the fish were going to come back and suddenly it would be right back to status quo the minute you reopened the northern cod fishery or whatever. Unfortunately, we're now five years into the program and it hasn't happened. As a result, now we're going to have to address capacity reduction, dislocation of people, and people moving out of the Atlantic provinces because there is no opportunity there for them. That's why we're saying that the next phase of responsibility to people and concern for them has to be to focus on getting the general business environment right and try as much as possible to create the alternative employment opportunity. Otherwise, for a whole lot of people these programs have run out and it's all over. They are going to have to be on buses or whatever.

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My wife was reading an ad in the Ottawa Citizen for a three-bedroom house in Newfoundland from one of these fish families. You could get the video. It was $6,400. There is somebody who is just kissing their lifestyle goodbye. They're up here trying to get $6,400 for a fully finished three-bedroom home in Newfoundland, to get a bit of cashflow out of it. I'm sensitive to that.

I say the government has done a lot of things to help the Atlantic region and the fish industry, but there is still more pain to come—I want you to be aware of that—a lot more pain to come, and we're going into the world's worst environment for the products we make, which is going to increase that level of pain.

I'm trying to argue here for a set of policies that somehow try to provide as much as possible the alternative to as many people as possible—and it won't be all of them—to try to give them something to do and be able to maintain their location and some degree of lifestyle and continuity in Atlantic Canada. I'm not being negative.

The Chairman: Thank you, Mr. Bulmer.

Mr. Wilkinson, thank you very much for your presentation. Certainly it illustrated that there are some challenges we all have to face, whether dealing with agriculture or fisheries. We will make sure your points of view are expressed as eloquently as possible in our report. Once again, thank you very much.

We're going to suspend for approximately three to five minutes. We will be back with representatives from the Automotive Industries Association of Canada, the Coalition to Renew Canada's Infrastructure, the Conference of Defence Associations, the Hotel Association of Canada, and Stentor Telecom Policy Inc.

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The Chairman: I would like to call the meeting back to order.

As I said earlier, we will now have representatives from the Automotive Industries Association of Canada, the Coalition to Renew Canada's Infrastructure, the Conference of Defence Associations, the Hotel Association of Canada, and Stentor Telecom Policy Inc.

I'd like to introduce the following individuals: from the Automotive Industries Association of Canada, the president, Mr. Dean Wilson; from the Coalition to Renew Canada's Infrastructure, Jim Facette, president; from the Conference of Defence Associations, Retired Colonel Alain Pellerin, executive director, and Retired Colonel Sean Henry, senior defence analyst; from the Hotel Association of Canada, Anthony P. Pollard; and from Stentor Telecom Policy Inc., Barry W. Pickford, chairman, Stentor tax committee.

Welcome. We will begin with the Automotive Industries Association of Canada, Mr. Dean Wilson.

Mr. Dean H. Wilson (President, Automotive Industries Association of Canada): Good morning, Mr. Chairman, honourable members of Parliament. It's a pleasure to be here and have the opportunity to give our views to your committee.

The Automotive Industries Association of Canada is a national trade association representing suppliers, distributors, wholesalers, and major retailers of automotive parts, accessories, tools, and service and repair equipment.

We have 2,000 members across Canada. Our industry employs more than 200,000 Canadians, and our volume of sales at the retail level is over $15 billion.

I'll address myself specifically to the four questions that were posed by your committee. With respect to the first question, I would like to congratulate the Canadian government on having a potential surplus or fiscal dividend to discuss. That's certainly a welcome change from previous years.

The question is, with the budget now balanced, what message do you wish to send to the government as to the priorities it should set for the fiscal dividend? Our recommendation is that 50% of the dividend should be targeted to debt reduction, and that would be the number one priority. The other 50% should be targeted to selective tax reductions, which I will discuss under question two.

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The second part of question one would be that I believe the Canadian government should establish a three-year plan for debt reduction. In other words, establish exactly where you think you are now and where you are going to be three years down the road. For example, if you end up with a surplus or a dividend of $10 billion in 1999, then target 50% of that or $5 billion for debt reduction. I think you need to make Canadians aware of what your plan is to reduce the debt.

The second question is, what are the appropriate new strategic investments and changes to the tax system that would allow the government to best achieve those priorities? We have a number of suggestions here. The first one is to allow automotive technicians, apprentices, and journeymen to receive income tax relief for purchase of tools, which is their stock in trade. It could be in the form of a straight deduction for income tax or a percentage credit similar to charitable donations. This would help make the automotive technician trade more competitive and fill a severe technical need in addition to creating more employment.

We have a lot more information on this particular suggestion through a coalition that is submitting a separate brief to the House of Commons committee. That coalition is headed by the Canadian Automotive Dealers' Association along with ourselves and the Canadian Automotive Repair and Service Council.

Our second suggestion is to raise the ceiling of the small business deduction from $200,000 to $300,000. This would help compensate small business for structural costs that are not faced by large businesses. The ceiling of this deduction has not been changed since it was started in 1982, despite inflation. So this needs to be fixed.

The third suggestion is to reduce corporate tax, because it is high in comparison to jurisdictions in the U.S. We are in competition with Americans, so we should be more competitive with them in tax structure.

Fourth, lower personal income tax for all Canadians. It seems to me that this is a no-brainer. It's really a question of trying to target how you are going to do it and how much of it gets devoted to it. But I think it's pretty obvious that Canadians are overtaxed.

We're suggesting that all foreign debt should be retired before attacking domestic debt to eliminate vulnerability to foreign creditors. I think the fall of the Canadian dollar is a further illustration of the reason to do this.

We're suggesting that you lower the rate for employment insurance to a level that maintains a safe but not exorbitant surplus. I believe the surplus now is over $6 billion. It's an embarrassment of riches. We also believe that more funds should be directed to training and retraining of people to lower the rate of unemployment.

Harmonize the GST with the retail sales taxes for the remaining provinces. This is an issue that we have been suggesting all along. I know the government has been working on it. It's not an easy arrangement to have with some of the remaining provinces, but I think you need to stick with it until you get a deal.

We're also suggesting that the luxury tax for upper-scale new vehicles with air conditioners be eliminated because air conditioners are no longer viewed as a luxury by consumers.

The third question is, how can we help Canadians prepare to take advantage of the opportunities offered by this new era? First of all, I believe there needs to be a reduction in duplication between regulations at all government levels. There is a lack of harmony between jurisdictions. This would reduce costs to both business and government. We suggest that you use the Regulatory Efficiency Act and regular consultations with business to streamline regulations. We believe regulations should be simpler to comply with, such as the WHMIS legislation. The requirement should be an accurate MSDS, with review and changes triggered only by product changes.

Finally, reduce regulations and red tape such as paperwork and reporting to government bodies. I point to the research and development tax credit arrangement that the government has. I can tell you that the manufacturers in our industry refuse to apply for it because it would cost an exorbitant amount of money to make a case to the government. There is a ridiculous paper trail required to qualify.

The fourth question is, what is the best way the government can help to ensure that there is a wide range of job opportunities in the new economy for all Canadians? My first suggestion to you is that if you act on the comments I've given you for the first three questions, it will lower operating costs for business and increase disposable income for Canadians, which will automatically result in greater employment for Canadians.

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We also believe that the review of the Canada Labour Code should be cancelled. There's always this sense of “us” versus “them”, labour versus business, and I think this Canada Labour Code review just draws more attention to that. We believe this piece of legislation would place Canadian business at a competitive disadvantage.

I'd like to re-stress the point of automotive technicians being given a break on taxation of tools. I've already talked to you about that.

We also believe that EI funds should be directed to training initiatives that result in employment of people. I discussed that earlier, but specifically I draw to your attention the Canadian Automotive Repair and Service Council, which is really a model of how an industry got together and formed an organization that is helping to train automotive technicians. It's a very positive model, one that I think you should study, and I encourage more support of that type of organization.

We believe you should lower the costs of doing business and increase disposable income. Growth in the economy will help generate jobs. To put it more specifically, government should get out of businesses' faces and let them operate in a more effective manner.

Finally, I suggest that the government promote the industries where demand exists, such as automotive trades, including the auto-body trade. We encourage government to promote industry training and to allow deductions for training expenses if the provider is certified.

Those are my comments, Mr. Chairman.

The Chairman: Thank you very much, Mr. Wilson.

We'll now hear from the Coalition to Renew Canada's Infrastructure.

Mr. Jim Facette, welcome.

Mr. Jim Facette (President/Secretary, Coalition to Renew Canada's Infrastructure): Good morning, Mr. Chairman. Thank you for this opportunity to appear before you once again. As have others, we've been asked to answer the four questions.

Mr. Chairman, the CRCI is of the opinion that an answer can be found in a federal-provincial initiative that would address the needs of Canada's national highway system.

It is important for governments to govern in a manner that is compatible with creating an economic climate conducive to investment. Competing for business investment today has changed. Canada must offer a climate that reflects worldwide realities. Businesses must now be prepared to compete with companies worldwide.

Providing necessary basic infrastructure is critical for any government that aspires to promote economic growth and job creation. As the collective voice of a broadly based coalition representing all areas of the economy, we are greatly concerned about the deterioration of our national highway network and its negative impacts on Canada's economic growth and on job creation.

Recent work just completed by a federal-provincial working group confirms our concerns. Despite increased overall capital investments in highways by provincial governments, the state of Canada's national highway system has deteriorated. Cost estimates have now escalated from $13 billion to $16 billion. This joint study also indicates that more new construction is required, with the greatest need being the twinning of many sections.

When the current Liberal administration was in opposition, a Liberal task force on infrastructure recognized the importance of highways in our economy. It recommended a federal commitment to rehabilitate and expand the Trans-Canada Highway.

What that task force said then in 1990 is valid today, and I quote:

The economic consequences of poor roads are staggering. Studies reveal that the productivity of a region is very much dependent upon its transportation system. Traffic congestion increases the cost of transporting materials, reducing an industry's competitiveness, revenues, and jobs. Bad roads also have a negative impact on tourism, an important sector of our Canadian economy.

This was confirmed last year in a report of the House of Commons Standing Committee on Transport, which came to exactly the same conclusion. The committee report said:

An efficient, competitive highway system is one of the fundamental requirements of a healthy economy. It has been demonstrated beyond any doubt how important a safe and competitive highway transportation system is to trade and tourism.

Mr. Chairman, our full brief outlines the built-in returns on the investment, including tourism, lives saved, increased productivity, unity, and trade. The special infrastructure project conducted by Transport Canada in 1996 reaffirms these returns.

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Many of the current bilateral agreements have been allowed to lapse with the provinces. Despite sending over $1 billion a year in gasoline taxes to Ottawa, the provinces of Manitoba, Saskatchewan, Alberta, and British Columbia do not receive any money for highway investments. In Ontario, despite the more than $1.5 billion in gasoline taxes sent to Ottawa, only $15 million will be transferred to Ontario this fiscal year, and next year nothing will be transferred to the province of Ontario.

Given those realities, the CRCI recommends that the federal government adopt a national highway policy that would be long term in nature and oversee rehabilitation and, where necessary, expansion of Canada's national highway system.

While the federal government is collecting more than $4 billion a year in gasoline taxes and investing less than 5% of it, the United States has just made a major commitment that will ensure any revenue from taxes is reinvested into their transportation infrastructure. The Transportation and Equity Act for the 21st Century, TEA-21 as it's known, will provide for the investment of $217 billion in transportation infrastructure. Of this total, $175 billion will be invested in highways alone.

Quoted in The Wall Street Journal of July 8, 1998, economists state that the six-year plan could generate more than $450 billion in economic activity in the United States. In addition, the huge program's real impact could be more than double its price tag. Public works tend to generate even more economic activity than other kinds of government investments.

As noted by Jeffrey Simpson, a columnist with The Globe and Mail, on Thursday, September 17, 1998:

Treasurers and finance departments north of the border dislike dedicated taxes because they limit fiscal manoeuvring room; Americans applaud dedicated taxes for the same reason. They don't want politicians and bureaucrats spending money on other things. A penny for roads is a penny for roads, not something else.

When governments examine how infrastructure investments are made, it is attractive to look at the private sector for assistance in the form of public-private partnerships. Creative ventures of this nature require creative solutions and a willingness to be open to non-traditional methods. The private sector will, if asked, participate in the design and implementation of a national plan with creative, non-traditional mechanisms for Canada's national highway system. However, the federal government must take a leadership role to commit to a long-term plan. As stated by the Standing Committee on Transport last year, the federal government must make a long-term, secure, sustainable funding commitment to rehabilitation and maintenance of our national highway system.

The provinces have indicated on a number of occasions, and as recently as May of this year, that they are eager to move ahead. The building and maintenance of Canada's national highway system by provincial and federal governments was and is paid for from tax revenues.

The quality of Canada's highways influences corporate decisions regarding location, capital investment, production methods, relationships with suppliers and customers, location and availability of inventory, and access to labour. A long-term plan such as the one laid out by the national highway review policy report and Transport Canada would carry out reconstruction of our national highway system with maximum efficiency and create a larger economy.

The editorial of The Globe and Mail on August 24, 1996, may have said it best:

The quality and appeal of a region's highways are among the most important factors in maintaining prosperity and attracting visitors and investment; their well-being should be carefully maintained.

I will end there, and I look forward to our discussions this morning as we proceed.

The Chairman: Thank you very much, Mr. Facette.

We will now go to the Conference of Defence Associations. Welcome, Colonel Pellerin and Colonel Henry.

Colonel (Ret'd) Alain Pellerin (Executive Director, Conference of Defence Associations): Thank you, Mr. Chairman. Good morning. I am pleased to appear here before you today on behalf of Retired Brigadier-General Jerry Silva, the chairman of the Conference of Defence Associations, CDA.

The Conference of Defence Associations was founded in 1932 to advise the government on defence policy on issues influencing the effectiveness of the armed forces. Today it comprises some 500,000 members in most communities across the country. I wish to state very strongly that the CDA is not a lobby for the defence industry or any other private interest group. It comprises ordinary citizens, most with a military background, who have a deep interest in supporting the positive contribution the armed forces make to national well-being.

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CDA sponsors a range of public information programs and defence studies. It also serves as a focus for other pro-defence activities. That is why it is known as the voice of defence. Members of CDA express deep frustration over the difficulty of convincing their fellow citizens and the government of the need to provide proper support, and especially money, for the armed forces. To advance our arguments and prove our points, the CDA has prepared the paper entitled “Canadian Defence at the Crossroads”, which states our pro-defence case in some detail. Copies have been distributed to all members of the committee.

Today, large parts of the Canadian Forces are in distress and disarray. Some parts are in crisis. As a result, they are not capable of executing the more demanding missions set out in the 1994 white paper. The malaise of the armed forces is visible in the scandals and associated problems that have appeared over the past five years. Although extensive action is under way within the Department of National Defence to deal with individual shortcomings, the wellspring of these difficulties appears not to have been recognized or accepted. I am referring of course to severe underfunding of the defence budget over a long period.

Unless budget relief is forthcoming, more unpleasant incidents will likely occur. More importantly, the operational effectiveness of the armed forces will continue its downward spiral. In June of this year the Chief of the Defence Staff, General Baril, confirmed this appraisal while testifying before SCONDVA. He stated that the armed forces would not be able to carry out their missions and also provide vital support to serving members without additional money. Both the military and civilians in DND deserve our praise for continuing to exhibit professionalism in the face of this adversity; however, there are limits to what dedication alone can achieve.

Since 1993, the DND budget has been reduced by 28% against original projections while the demands imposed by new armed forces missions and high technology have increased. Canadian defence expenditures have fallen from 11% to 6% of the total federal budget and from 2.2% to 1.1% of the GDP. The average for G-7 nations is 2.3%. The average for NATO nations is 2.4%. Canadian defence expenditures rank at roughly 133 out of 190 nations in the UN in terms of percentage.

These figures and others are also displayed on the charts attached to our main submissions. They are both shocking and a national embarrassment. Defence capabilities and the armed forces are still integral components of the foundation of our nation. Most nations recognize this and allocate the necessary resources. Canada's defence shortfalls are starting to generate an increasing chorus of public criticism from allies and trading partners. Despite the end of the Cold War, the threat to international security and stability remains at the high level. Canada is seen as trying to evade its military responsibility related to this situation. This criticism is important as our country relies heavily on international trade and stability.

The most visible sign of our armed forces' decline is the reduction of regular forces strength from 87,000 to 60,000. This imposes conditions of high stress bordering on personal chaos as people are often double-tasked in their work and units are created and disbanded in an ad hoc fashion. Although all services suffer, the worst problem is in the army, where units are in the first instance only manned for 65% of their authorized strength establishment. Similarly, with the reserves, the militia struggles within the confines of a shortage of up to 4,000 people.

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The equipment state is variable. The navy is in relatively good shape with its modern frigates, but it is in urgent need of new shipborne helicopters and a supply ship.

I also refer you to the newspaper article that appeared yesterday in the Gazette about the HMCS Toronto, deployed in the gulf, and the shortcomings encountered by members of that ship. This will be attached to our statement.

The air force is also approaching difficulties as it takes vital resources out of service, such as the recent decision on the electronic warfare trainers and tankers. Once again, the army is in the worst shape as it makes do with worn-out combat vehicles and even basic items such as clothing.

Several underfunding factors are critical: first, the drop in the capital equipment budget from 23% to 17%, leading to so-called rust-out of equipment inventory; and second, the critical shortage of money for operations and training, with emphasis on the army, where an ongoing shortfall of $150 million to $200 million exists. This places operational effectiveness on a downward spiral.

Beyond capital and operations and training deficiencies, the worst problems centre on quality-of-life benefits for people. The parliamentary defence committee is studying these. It will likely recommend well-justified increases in spending on these benefits. However, the current fiscal plan of the government does not cater to these in the defence budget.

The 1998 report of the Auditor General underscores the extent and seriousness of the DND underfunding crisis. It states candidly that the government will soon have to make tough decisions about the future of the armed forces and the nature of the military commitments that could be undertaken. This is a very relevant observation. What it boils down to is whether or not the current budget of $9.3 billion is being wasted, since it produces ineffective armed forces.

The fiscal position of the government has improved in the past year and even with the recent worldwide economic downturns will still result in a surplus. In April 1998 a poll was taken to test public opinion on matters of Canadian defence and security policies. Results indicated that Canadians understand the important role of armed forces in support of national well-being and would approve a reasonable increase in defence spending.

Therefore, following from this analysis, CDA recommends strongly that up to $500 million of supplemental funding be added to the DND budget for the next fiscal year and that thereafter the base of the DND budget be adjusted upward to achieve a steady state of $10.5 billion by the year 2004. That sum was in fact recommended by a parliamentary joint committee in 1994.

Other detailed recommendations in response to your four specific questions are to be found in our written submission.

Thank you very much, Mr. Chairman.

The Chairman: Thank you very much, Colonel Pellerin.

We will now move to the Hotel Association of Canada.

Mr. Pollard, welcome.

Mr. Anthony P. Pollard (President, Hotel Association of Canada): Thank you very much, Mr. Chairman. It's a pleasure to be back here again. We welcome this opportunity to appear before this committee. We all value and benefit from these consultations.

The Hotel Association of Canada is the national federation of provincial and territorial hotel associations. We represent hotel chains and suppliers. Our mandate is to represent our members nationally and internationally and to provide cost-effective services that stimulate and encourage a free market accommodation industry.

To put it very succinctly, Mr. Chairman, we're the good news industry. We are the hospitality industry.

Our association represents all of the accommodation industry across Canada, which makes up approximately 7,500 properties, including hotels, motels, resorts, and inns. Last year we generated $9.1 billion for the Canadian economy. We employ 235,000 people in every part of the country.

At the outset, I would like to say how much we appreciate the government's continued recognition of the hotel, travel, and tourism sector. In particular, we commend the government for its support of the Canadian Tourism Commission. Furthermore, we applaud the finance committee for bringing forward our recommendation last year that food, beverages, and catering services be eligible items for GST/HST rebates for international meetings and conventions coming to Canada. These changes were announced in the finance minister's 1998 budget, so it's lovely to be able to see a return on our investment in coming to this committee, and we thank all of you.

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We'd like you to keep in mind two points. Governments at all levels like the hotel industry. Why? We create jobs. We're one of the few industries that do so. Secondly, hotels, travel, and tourism reduce travel deficits and generate net revenue for governments: 32% of all gross tourism revenue goes to governments at the federal, provincial, and municipal levels. This obviously is solid currency for governments.

We commend the government for its deficit reduction; however, we need relief from taxes, which remain too high. Unfortunately, up to 45% of all hotel gross revenues goes to taxation.

Before getting into specific recommendations, we'd like to provide you with the following brief overview.

Tourism is the fastest growing industry in the world. By the year 2005 or earlier, it will be the world's largest. Tourism is expected to triple to 1.6 billion international arrivals by the year 2020, this according to a new forecast by the World Tourism Organization. In 1996, there were 592 million international trips made.

In 1997, tourism generated $44 billion for the Canadian economy. Approximately $31 billion of this was a result of Canadians travelling in our own country. Soaring spending and longer stays by American visitors have pushed Canada's travel deficit down to its lowest level in a decade according to International Travel Account preliminary results. During the first six months of 1998, Canada's travel deficit fell 17.5% to $3 billion, down from $3.6 billion during the same period in 1997.

Our tourism industry took in $5.5 billion from foreign spending during only the first half of this year. That's an overall increase of more than 14.5%. At the same time, overall spending by Canadians on tourism abroad was stagnant, rising less than 1% to $8.5 billion. Tourism receipts from the States jumped 30%. In contrast, Canadian tourism spending in the U.S. fell by 2.3%. As a result, Canada's travel deficit with the States alone plunged 31% to $2.1 billion.

The Canadian dollar, low interest rates, and a robust stock market all play a key role. We commend the federal government for its fiscal policies, which have created positive results. We are concerned that the dollar has slipped too low, forcing interest rates up and thus negatively impacting all of us.

As a result of the establishment of the Canadian Tourism Commission, advertising and marketing campaigns, promotions, and public relations are all delivered in a more timely and professional fashion. Funding has risen from $15 million in 1994 to $145 million—that's both joint public and private—in 1997. We commend the federal government for its support of the Canadian Tourism Commission. This commitment has seen the travel deficit fall by more than $2.5 billion over the last four years. This is certainly one heck of a return on investment.

Signing of the Open Skies agreement between Canada and the United States has provided business and leisure travellers from the United States with more options when travelling to Canada. There are now more than 97 new Canada-U.S. city pairs, more than double the number prior to Open Skies.

The Hotel Association of Canada has a partnership agreement with the Department of Foreign Affairs and International Trade. This program for export market development assists Canadian hoteliers to export their hotel-related products, services, and management expertise. Our efforts are now paying multi-million dollar dividends in several markets around the world, including China, Romania, Mexico, Brazil, Israel, Eastern Europe, the Middle East, and the Caribbean. We commend the government for this partnership that greatly assists all of the Canadian economy.

Taxation in all its forms remains one of our biggest problems. Employment insurance premium payers are forced to contribute to the tune of $6 billion per year. Despite the fact that the accumulated EI surplus will exceed $30 billion by the year 2000, the government has budgeted no premium decrease in 1999 and only a 10% reduction in the year 2000. Instead of dropping rates to more reasonable levels, the federal government is taking $15 billion from the EI surplus to increase the general ledger. Not only do the government's actions contravene the intent of the EI program, but they also ignore the two conditions required for job creation, that is, reduce payroll taxes and increase consumer spending.

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Minimum wage laws, the competitive marketplace, and other restrictions further limit our ability to absorb these payroll costs. We also point out that any increase for the performance of music, proposed by the Society of Composers, Authors and Music Publishers of Canada, and neighbouring rights are totally unacceptable.

The hotel industry in Canada has been significantly damaged by the government's decision to reduce the business meal and entertainment deduction to 50%. The government's intrusive action resulted in a 30% taxation increase to the cost of doing business. We strongly recommend that the deduction be restored to 100% of the purchase, similar to all other business expenses.

In closing, Mr. Chairman, ladies and gentlemen, the government is to be complimented for making remarkable progress in turning around our country's fortunes. Now is the time to make selective and judicious changes.

Thank you very much for this invitation.

The Chairman: Thank you very much, Mr. Pollard.

We'll now move to the representative from Stentor Telecom Policy Inc., Mr. Barry W. Pickford. Welcome.

Mr. Barry W. Pickford (Chairman, Stentor Tax Committee, Stentor Telecom Policy Inc.): Thank you.

Good morning, Mr. Chairman, committee members. I'm here today representing the Stentor alliance of provincial telephone companies from across the country.

Many of you may have read recently about some changes that were made at Stentor. It does not mean Stentor is dead. It simply means that we've come to new arrangements with respect to the engineering and R and D components within Stentor and with some of the marketing aspects that were done on a joint basis. But certainly from a policy point of view, Stentor remains very much alive.

Members of the Stentor alliance are a very important force in the total Canadian economy. It really stretches from NewTel on the east side to B.C. Tel on the west side and all of the provincial telephone companies and their cellular affiliates in between.

In total we employ over 80,000 people and spend about $4.6 billion a year on wages, with $3 billion in capital spending on an annual basis. Perhaps more importantly, we spend something like $1.8 billion a year on income, sales, capital, property, and other types of taxes, with about $500 million to $600 million of that being spent on purely income tax and another $500 million being spent in the provinces on things such as gross receipts or gross revenue taxes paid by the combined companies. In addition we withhold taxes from our employees to the tune of about $1.1 billion, which we remit to the various governments, and we collect about another $2 billion in sales taxes, which we remit.

As you know, today the telecommunications industry is going through very massive changes. Our technology is exploding. Competition is expanding within Canada and on a global basis. Markets have become much more open than what we ever had before, and clearly distance is dead as a concept so that most of you benefit today from $20-a-month long distance rates that were never seen before.

Probably the biggest issue is the development of the Internet and, with that and its continuing use, the existence of e-commerce, which will continue to develop over the next few years. Where today we talk about Amazon.com as being an example of e-commerce, in a very few years to come we'll see a continuing and greater use of e-commerce as we go forward.

So the real question for us is how we upgrade our networks while competition is increasing and revenues are under more pressure, and this really requires a public policy environment that is goal-focused and conducive to Canadian achievement. We believe this can happen by working together with governments to draw upon the strengths of our broad customer base and world-class technology to offer Canadians high-quality service and to keep our place of leadership well into the new millennium.

The economy does remain strong within Canada. There is now the very strong likelihood of surpluses beginning in 1999 and continuing hopefully beyond that. Corporate profits, despite the pressures from other areas of the world, do remain in relatively good health, but we do have a concern about Canada's debt position and we do recommend that steps be taken to take some of that surplus and reduce our debt load with it.

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We also have another concern. We in Canada effectively need to do more to develop qualified people through training courses and to retain qualified people, particularly in the high technology area, and not let them escape from here.

So first of all, we really believe that new programs—working with the federal government—to develop qualified people have to be found, with focused investments being made to increase quality technology graduates, be they electrical engineers, computer science graduates or community college graduates, with technology as a real focus.

Having done that, it's really the government's responsibility to find ways to keep those people in Canada. It's been mentioned by other speakers today that our tax rates for individuals are clearly not competitive on an international basis. And we have to do something if we're going to ensure ourselves a staple supply of highly qualified people within this country and ensure the retention of those people.

The brain drain is often talked about, particularly the brain drain as it exists between Canada and the U.S. There are a lot of different reasons for it and some of them even come down to personal choice, but taxes do have a big impact, particularly when people measure their after-tax cashflow with respect to having a job in Canada versus having a job in the U.S.

Recent statistics have shown that Canadians today are paying more income tax. Income tax for 1996 made up 20.5% of a family's income, and that's before you even start to count GST, provincial sales taxes, and property taxes, etc.

In our system today, we have one temporary surtax after another, at both the federal and provincial levels. As a result of all of that, we now have the top marginal rates in Canada, which kick in at about $60,000.

At slightly higher rates, you get into provincial tax rates. If you look at B.C., Canadians there are paying a 54% marginal rate on their higher incomes. The rate is 52.5% in Quebec and is slightly under 50% in Ontario and coming down a little there. But they are still very high rates, particularly in comparison with the United States. In the United States today, a family could have a taxable income of $278,000 before it starts to pay the highest marginal rate, which is around 43%, state and federal taxes combined. Those are very big differences.

I think we Canadians clearly need lower tax rates in order to attract businesses, to retain highly skilled employees and really be able to compete on an international basis.

On this whole issue, I recommend to you the paper from the Business Council on National Issues, which is about to be released—only the drafts are out right now—and in which the council made a number of suggestions about how to phase in personal tax reductions over the next six years and through that eliminate our surtaxes and raise our brackets to new levels such that a reasonable goal by the year 2005 is that only those people making $150,000 or more should be looking at the highest rates of marginal tax in Canada. Indexation has to come back.

Clearly, the provinces have to co-operate with the federal government in all of this.

Probably our number one priority is to really look at a revenue-neutral form of business taxation. The report of the Mintz committee, the technical committee on business taxation, which came out much earlier this year, seems to be almost forgotten from the federal government's point of view. After working on it for 18 months, nearly two years, the committee suggested that business tax reform was possible without decreasing government revenues. We very much support the theme that lower rates and a broader base are imperative and reflect the international trends in tax policy.

In our view the Canadian tax rate for service industries is far out of line when we compare it with those in the United States, while manufacturing and some other industries compare much more favourably with international standards.

In our industry, as in many service industries today, the average corporate tax rate is around 43% to 44%. In our industry our lowest corporate tax rate is 42.4%. For some of the companies in our alliance, it ranges up to 46%. This is about 3.5% to 7% higher than comparable rates for the same type of company carrying on business in the United States, where their combined federal rate is more in the 38% to 39% range.

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This high rate discourages business from locating non-manufacturing activities in Canada. More importantly, where it does happen here, you really look to find as many deductions generally through interest deductions by borrowing offshore to ensure that you can drive your Canadian taxable income down to an acceptable rate.

More importantly again, with e-commerce—and that is happening today—and the competition that will happen to it, our borders are going to start to blur. It will be a little more difficult to discern where taxation applies. The U.S. company can effectively sell into Canada, if it doesn't have a permanent establishment here, and not pay Canadian tax. A Canadian company could do the same in the U.S. by advertising over the Internet, but the rate difference is very substantial, this 3.5% to 7% difference that exists today.

As a result, we very much support the conclusion of the Mintz committee, not just in pulling out negative and positive parts of it, but the Mintz committee report as a total package. We think some of the suggestions they have made to look at CCA rates and determine if they are up to date and if they make sense in today's environment... The rules with respect to scientific research and experimental development have already been referred to. They are complex, and even though the law hasn't changed in the last ten years, those rules are interpreted differently today. Most taxpayers are probably uncertain of what those interpretations are.

More credit should be given for not just discovering technological advance but actually being able to implement that technological advance as well.

We believe the Mintz committee proposals for business tax structure constitute a balanced package that will provide new opportunities for economic growth and job creation for Canadians. Lowering our tax rates towards international norms will provide a greater incentive for business to invest and create jobs in Canada while also protecting the revenue base.

Fourth, we think this business tax reduction and personal tax reduction really can be done together. It's not an unobtainable goal. Perhaps one of the ways to start with this is to look at the lowering of employment insurance premiums. Doing so would put cash in the pockets of individuals. It would also put cash in the hands of companies as well. That is a start towards reduction.

As a final point, it is essential that we get on with the question of harmonization of our sales tax systems across Canada. With e-commerce we will have risks of double tax within our sales tax system, as you have different systems across the country. If the federal government doesn't take the lead in this, we'll never achieve sales tax harmonization, which really is quite needed.

Thank you very much. I look forward to your discussion.

The Chairman: Thank you very much, Mr. Pickford.

We have 45 minutes now for questions. We'll begin with Mr. Epp.

Mr. Ken Epp: Thank you, Mr. Chairman.

I'm delighted to start off the questioning. I'd like to commend all of the presenters for giving us a very good oversight of what your concerns are.

Several of you mentioned harmonizing the tax. Have you really come to the place where you're ready to accept a huge sales tax as a permanent fixture in Canada? I'm surprised that none of you said the GST/HST should be eliminated rather than saying it should be harmonized. Your comments.

The Chairman: Mr. Wilson.

Mr. Dean Wilson: I'll be glad to start.

We've been beaten into submission to a certain extent in the acceptance of sales taxes. Yes, it would be nice to get rid of all sales taxes, provincially and federally. That would be wonderful, but I don't know if it's economically feasible at this stage of the game. The harmonization of the sales tax from the three Atlantic provinces resulted in a net reduction of tax for those three provinces. There was actually a reduction through the harmonization.

It also makes it simpler for business to comply with one tax than it does to comply with two sets of taxes. I think what has happened in the three Atlantic provinces and Quebec has been positive in the sense that at least they're moving in the right direction in trying to be more efficient.

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The fact that you have a harmonized sales tax doesn't mean it always has to go up. If it's 15% now, as provinces get their deficits eliminated and their debt under control, perhaps they can lower their needs from a sales tax. I don't see necessarily that since you have a harmonized sales tax, it needs to keep going up. It can start going down once there is no longer a need.

But certainly one tax is better than two taxes. There is no question about that.

Mr. Ken Epp: I just want to throw this out, especially for the members of the committee. The most economically sound province in the country is Alberta, which until GST had zero tax. Now we have this imposed GST and it's been a break on our economy. But we're still ahead because we have no provincial sales tax.

We pay taxes on taxes on taxes. Over and over, you're saying we need to bring our tax regime in line with the Americans to prevent the brain drain, to prevent businesses from scurrying to the United States, to encourage businesses to establish in Canada. We need to reduce the overall tax rate. Yet I don't see any concrete suggestions on how that would be done. Do you have any suggestions?

Just before we do that, Mr. Pickford, I think you also mentioned the concept of harmonizing. Perhaps in your answer you could enlarge for us why that harmonization would be particularly useful.

Mr. Barry Pickford: Some of the comments have already been made. I would like to come back to the question of whether we need the GST or provincial sales taxes. I think all of us would agree that we'd like to do without them, but we recognize that in most situations if we were without them, there would simply be another type of tax there.

We've paid federal sales tax for many years prior to the GST. The GST was seen to be a benefit, particularly for the export industry. I think we have been stuck with these taxes for some time, and they are not something we can easily make go away.

Having said all that, harmonization is looked upon as a real cost-saving measure for business. If we have harmonization, we have one sales tax form to do and we have one payment to make. Quite honestly, if we can reduce the cost of collecting tax, hopefully we will be in a position where we can actually reduce the tax itself.

The real issue, I think, as we go into an e-commerce system—and we have it to some extent today—is we may well have goods being sold from Toronto into Vancouver, and the question will remain, who collects the sales tax on that? There is the great possibility of double taxation existing in those situations. A harmonized system will clearly remove the risk of any double taxation at all.

Mr. Jim Facette: Mr. Epp, I will just hone in a little bit on your comment about Alberta and the tax situation there and how they have been able to get their economy moving along at the lowest levels. One of the things the Alberta government did, in addition to having low taxes, is they stayed in the business of doing certain things and got out of the business of doing other things. The Alberta government is no longer in business.

On the infrastructure side, one of the things they did was to get out of the business of maintaining their primary highway network, as a prime example. That saved their department in excess of $43 million a year at Alberta Transportation and Utilities. They have taken that savings and have reinvested it back into their infrastructure to allow their economy to grow. That reinvestment has allowed them to recently invest an additional $150 million over the next three years in their highways. It's allowed them to create a four-lane highway, starting in northern Alberta and going right down and connecting to the U.S—it's called the export highway—and in effect right to Mexico.

As a government, they have looked at what things they should do and do well and have done them, and they have gotten out of the business of being in business. In terms of infrastructure, they have reinvested in it, which has allowed them to keep their taxes down and their revenues up. That's one of the reasons.

Colonel (Ret.) Sean Henry (Senior Defence Analyst, Conference of Defence Associations): One of the factors in this situation has to do with the amount of work that needs to be done within a given area of taxation. One thing both the GST and PST has is its relative stability and predictability as far as the government is concerned.

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By the way, it adds up to 15% in this province. If you look at a lot of European countries, you will find that the equivalent tax, VAT and what have you, goes up to 19% or 20%, so that may be a necessary evil.

The place that I think really needs looking at—and you'll find this in the CDA submission—is the Income Tax Act. The Income Tax Act is a horrendous patch of weeds. All sorts of work ought to be done in the Income Tax Act, not necessarily to reduce it per se but to clean it up. By cleaning it up you are probably going to end up with some reductions, and the reductions in personal income tax, we suggest, will have more of a beneficial effect on the Canadian people than many other features. It will get them cranked up and ready to go, because the tax burden in this country is crushing, absolutely crushing.

The response is, well, what about the social programs? I think many people would say the social programs have gotten to the stage where they are perhaps not supportable.

So looking at the Income Tax Act as opposed to the GST is probably the priority.

The Chairman: Is there anybody else who would like to comment?

Mr. Ken Epp: I'll go on to another question.

My next question is for Mr. Facette. He talks about highways exclusively. It seems to me that in a country like Canada, where we transport over large distances great tonnages of industrial and agricultural products, that the railway system should be supported.

You never made mention of that, Mr. Facette. Why not?

Mr. Jim Facette: First of all, I don't represent or work for the Railway Association of Canada.

Mr. Ken Epp: Oh, oh.

Mr. Jim Facette: Second, I didn't mention it specifically because the CRCI has chosen to focus on the highways, but that's not to say that other modes of transportation are not important in Canada. The fact of the matter is, my colleagues beside me from the automotive industry make great use of multi-modes of transportation, whether it's rail, air or land.

The fact is, the government is no longer in the railway industry. The railway industry to a large extent is privatized—the short lines and the long rail, except for perhaps one other one, VIA Rail, being the exception. They are doing a good job in terms of investing in their capital projects, investment that is needed. Many of our members are working for them.

They need to be supported. Many products don't travel exclusively by rail. A lot of products in this country use more than one mode. A prime example is the agriculture industry. There are less and less grain elevators than there were in the past. They're going to the large cement grain elevators being built right now. What's happening is that the farmer has to get his grain from his farm to the elevator. That farmer is getting it there by road, more and more every day, and the roads that farmer uses weren't built to meet those demands at all.

Mr. Ken Epp: Thanks. I'm sorry to cut you off, but I have one more quick question and then my time will be up.

I want to address my last question to the military people. I happen to have a large military installation in my riding, and I go and visit there quite regularly. I asked them specifically in my last visit there, which was only about two weeks ago, about the state of their physical equipment—their vehicles, their arms, and so on. I got assurance from people at different levels in the organization that they were now relatively happy with the way things were.

I just wonder where you got your data and whether they're just telling me that to be nice to me. What's the source of your data?

Col Alain Pellerin: I guess maybe military people are generous and kind people, and maybe they want to be nice to you. But I don't mean to be facetious.

When I joined my regiment in 1965, for example, we were just receiving armoured personnel carriers that you still see on track. The first ones arrived in 1965 and they're still around. These pieces of equipment should not be held on our inventory. All our infantry regiments, for instance, still have them. Some of them have been replaced by wheeled equipment.

That's only one example. The Sea King helicopters, for example, have been flying for over 30 years, and not just flying but flying over sea water, which adds to the obsolescence of the helicopters.

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For instance, early in the next century the F-18 will have to be looked at as to either updating or replacing them. They have been around for almost 20 years now and these pieces of equipment take a lot of battering.

It's the same with the tanks, for instance. They were bought in 1975. They are the first generation of the German tanks that we bought, the Leopard.

So there are a lot of pieces of major equipment around that need replacement and can't be replaced, mainly because the portion of the budget allocated normally to the purchase of equipment has been reduced and we can't afford to buy the new equipment.

Col Sean Henry: To add to that, there are two factors—I don't know if we're talking about the army or not—that are a bit of artificiality in the situation.

First of all, when the troops were pulled out of Germany, that temporarily put a reasonable amount of equipment into the army and Canada. To some extent the army is still living off that, but all that equipment is going downhill.

More importantly, if you remember what Colonel Pellerin said about the manning of the army, in the first place the army was reduced like everybody else, and they are 65% below what they are supposed to be. But very recently, they are going even further. There are sub-units that are disappearing out of units, so that instead of four rifle companies you only have two rifle companies, and so on and so forth.

Going back to your question, under those circumstances you will have lots of equipment but nobody to man it, and I submit that this is a big factor right now. You have units out there that appear to have equipment, they can't man it, and therefore they are not as effective as they should be.

The Chairman: Thank you.

Col Alain Pellerin: If I could add a comment on that, not related to the equipment but to the people, since the end of the Cold War we have reduced the forces by over 25,000 people and also increased the commitments, like the peacekeeping commitments.

During the Cold War we had peacekeeping commitments, but they were few and far between. The problem now with the peacekeeping commitments is that they touch mainly on the army, the large bodies that go on peace missions. With the reduction of the forces, you have the same people going on peace missions over and over—to Bosnia, for instance. It's not just the 1,200 who are there; it's those standing by in Canada to relieve them in six months' time and those who have been identified. It means that in the rotation it's always the same people going back to peace missions, and it affects the families back home, who are living in very difficult circumstances sometimes. You would know, having a large military garrison in Alberta.

So that also is a major problem, and hopefully that will be addressed in the standing committee. Unfortunately, the recommendations that will come out will probably come out of DND's budget, unless there is a budget increase. So the problem will be compounded, not resolved, in the long run.

The Chairman: Thank you.

Mr. Valeri.

Mr. Tony Valeri: Thank you, Mr. Chairman. I want to make a general comment and tie in some of what I think I'm hearing.

It was said earlier that we need to become more competitive. I think Mr. Henry indicated that we need to be much more competitive in terms of our personal income tax system. It was also mentioned that any changes in personal income tax would have an impact on the brain drain. There is globalization out there and certainly the borders are blurring, so you have movement of capital and of people.

Then there was some talk about EI as a tax, and I think, Mr. Pollard, you mentioned that the government is actually drawing upon an existing surplus in the EI. I want to again state for the record that it was back in 1986 that the Auditor General stated that this needed to be collapsed into consolidated revenues, because at that time there was a $6-billion deficit in EI and ultimately the government is responsible for that. The government of the time was actually understating its deficit, so he was pointing out that you need to account for that in your consolidated revenue numbers.

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So in essence you have had EI premiums going directly to consolidated revenue since that time, and anything you do on EI would essentially have to be done as a trade-off for other things.

It was also mentioned, I believe, that a reduction in EI might help employment prospects. I often find when I speak to individuals who are employers that the EI consideration is not a prominent one in their decision to hire. They normally hire when market forces create a demand and they need to fill that demand.

In the world we live in as politicians and governments, we have a limited amount of money to deal with, and we really want to reflect Canadian priorities. My question to you is, in a world of trade-offs, with EI, personal income tax, and Mr. Epp mentioned the GST, which would you choose? Certainly, for governments and Canadians it would be great to eliminate all taxes, but I don't believe that reasonable people expect all taxes to be eliminated. How can you help us decide which to choose when it comes to EI versus personal income tax, when personal income tax reductions affect 14 million Canadians and an EI reduction would affect 8 million Canadians and when self-employed and retired people would not in any way benefit from an EI reduction but would benefit from a personal income tax reduction? And all of that is coupled with the objective of increasing consumer spending, which I think was also mentioned in the briefs we've been given. Which way do we go and how can you help us? Perhaps you can give me your rationale for your comments.

The Chairman: Mr. Pollard, do you have a comment?

Mr. Anthony Pollard: No, I just wanted to respond to his question.

The Chairman: That's what I mean. Would you like to respond?

Mr. Anthony Pollard: Yes.

The Chairman: So we'll hear from Mr. Pollard, followed by Mr. Pickford and Colonel Henry.

Col Sean Henry: I think you'll find one of the CDA points—

The Chairman: Maybe not.

Some hon. members: Oh, oh.

Col Sean Henry: Sorry.

The Chairman: Okay. Go ahead.

Col Sean Henry: I think you'll find that one of the sections in the CDA paper addresses your specific questions. The point is made that the problems the armed forces finds itself in and the problems our colleague from the infrastructure organization finds himself in, as do many other areas out there, are the result of what I can only call a rather cavalier approach that was taken by the government several years ago, in 1994-95, with respect to the so-called program review. The program review was designed to take very extraordinary measures to reduce government program spending for obvious reasons, that is, to reduce the annual deficit and as much as possible to do so without touching social programs.

Now I think the two of us here today from these two organizations would indicate that perhaps the pendulum swung too far and a lot of the very fundamental framework organizations in this country, including the armed forces, infrastructure, and many other vital government services have been reduced alarmingly. So that did get the government out from under, temporarily. It was a bit of a shell game, but that's the way the game is played, I suppose.

We would suggest that now that has been done to the fundamental infrastructure, in addition to putting a little bit back into infrastructure to try to keep its head above water, you launch a program review of the welfare system, of the social program system, not to cut it down to nothing but to find savings. I think everyone understands fully that with many of these programs having been around so long, you're going to find duplication, waste, some fraud, and so on. I think you would find hundreds of millions of dollars that could be freed up, which then would allow you to lower taxes.

The Chairman: Thank you.

Mr. Wilson.

Mr. Dean Wilson: First of all, I'd like to give you just an idea of what happens in our industry with respect to the brain drain. The majority of the manufacturing companies in our industry are subsidiaries of multinationals primarily based in the U.S., so their bosses are in the U.S., and quite often they take the better people from Canadian companies. Those are the ones who get promoted and get an offer to go south. Now I don't say the move is necessarily made because of lower income tax, but it's because of that that they don't come back, I can tell you that. Once they get down there, they realize how much lower the income tax is for a person, so our experience is that they very seldom come back.

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The question is to find the proper balance. I stated that our position was that the 50% is devoted to debt reduction, period. That comes first. That leaves you 50% of the surplus for other things. That's our point of view.

How you split that among income tax reduction or corporate tax reduction or the combination of the other things, I don't know. You're going to have to find a formula. But suppose it was one-third for income tax deduction, one-third for corporate tax reduction, and one-third for other things, like the automotive technicians getting relief for purchase of tools, as we suggested. We're suggesting you raise the ceiling for the small business deduction from $200,000 to $300,000. If you add up the combination of these other bits and pieces, that might be a third, corporate tax reduction could be a third, and income tax could be a third, or some other formula. I think it's your job to do it.

We're saying to you 50% for debt reduction—don't play with that. To us, it is very important that you stick to that and devote that 50% to debt reduction. Then the other 50% is going to have to be split and you're going to have to come up with the magic formula to recommend to the finance minister.

Mr. Tony Valeri: Let me rephrase my question. In a world of trade-offs between a reduction in EI premiums, which cost about $350 million for every five-cent reduction, and personal income tax, which do you suggest would have the greatest impact and benefit to Canadians in our economy?

Mr. Dean Wilson: I would say both. You need to devote—

Mr. Tony Valeri: But you don't have both. Unfortunately, we don't have that luxury.

Mr. Dean Wilson: You have $6 billion sitting in your EI fund and you should devote some portion of that to retraining people—

Mr. Tony Valeri: Mr. Wilson, I'm very sorry that I'm interrupting you, but the reason is that the challenge we often face and the purpose of this exchange in the committee is to try to put some real facts on the table. There is no surplus in an EI fund that one can go to and pick. I'm indicating to you that EI premiums are going into consolidated revenues. When you decide to reduce EI premiums, you're doing so as a trade-off for something else. If EI premiums are reduced, that means you may not be able to reduce personal income taxes or invest in health care or perhaps reduce corporate tax. It's a trade-off. My question—it's a difficult question, I agree with you, and that's why I'm struggling with it—is to try to get some sense from individuals like yourselves in that world of trade-offs that you believe would most benefit Canadians.

Mr. Dean Wilson: I believe employment insurance is very important to Canada, that you have it in place and you have enough money to devote to training people to get them back on the job. That is very important. What's left over gets to go to income tax reductions or corporate tax reductions or the other things.

Mr. Tony Valeri: So you would invest more in employee training, and then whatever is left—

Mr. Dean Wilson: Absolutely. We have to get the unemployment rate in this country down so we get more people back so there are fewer drawing from government welfare or from insurance programs or whatever. We have to get the people working in this country. That's the number one priority. That's clear to me.

Mr. Tony Valeri: Certainly, that would be a goal that I would share.

The Chairman: Mr. Pollard.

Mr. Anthony Pollard: I'm delighted to occupy the centre of the table. I have to say, Mr. Chairman, just at the outset in responding to the questions here, I've been appearing before this committee, I guess, since the late eighties and I can remember not that many years ago when the question was not what do you do with the surplus but what the hell are we going to cut now. This is a nice problem to have. I realize it's difficult for your committee in terms of putting forward recommendations, but I would much rather have this problem than the one we had seven or eight years ago.

The second thing is that I take your point very well that it was a decision back in 1986 that any funds had to be put into the government's revolving fund to be able to pay for everything in general. I understand that completely. However, that was 1986 and this is 1998. All of you are legislators and perhaps the time has come to look at that and make changes there.

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In terms of what the split should be vis-à-vis a surplus in employment insurance or having an income tax cut, and these numbers are somewhat arbitrary on the part of the group I represent, I would suggest very strongly that 75% of it would be devoted towards an EI cut, in large part because of the numbers of people we employ, particularly at a level—for the youth of the world, the people between the ages of 18 and 25—where that's a big hit in terms of the amount you have to pay for EI, in terms of numbers we employ, and that the other 25% of it would be for income tax reduction.

I hope I've been able to respond to your question in a direct way.

Mr. Tony Valeri: And that response is essentially coming from the hotel association.

Mr. Anthony Pollard: That is correct. That's the entire industry. As I stated in my comments at the outset, it's about a $9 billion industry employing about 235,000 Canadians.

The Chairman: Thank you, Mr. Pollard. Mr. Facette.

Mr. Jim Facette: Thank you, Mr. Chairman.

In the world of trade-offs, there's an assumption built into your question that reduced income tax comes from people who are gainfully employed. They have an income. In order to be—

Mr. Tony Valeri: All I said was that 14 million Canadians are essentially employed—

Mr. Jim Facette: Right, exactly. But in order to have those 14 million employed, they need to be employed, and the best way to have them employed is to create an environment where business can hire them. In investing in infrastructure and allowing businesses to invest and giving them the cashflow in terms of your trade-offs, reducing the EI premiums would be first, which in turn would create employment and create more tax revenue for governments, which would allow you in the long term to reduce income taxes.

Mr. Tony Valeri: Okay, I take your point, Mr. Pollard. But with the exception of perhaps those occupations that are at the lower end of the scale, where perhaps EI premiums become a consideration because someone is making minimum wage in terms of hiring, I have never run into an employer who is paying the average wage or more who has said “I am not going to hire someone today because the payroll taxes we pay in this country are too high”, even though they are competitive internationally with respect to the OECD. I have never met someone like that, and you just said that EI reductions would help create employment.

Mr. Jim Facette: Correct, they would help. I didn't say they would exclusively provide the motivation to hire people.

Mr. Tony Valeri: But don't you think a reduction in personal income taxes, which would increase consumer spending, would help create market demand, which would also create employment?

Mr. Jim Facette: The only way someone would benefit from decreasing income taxes is if they have income. You have to have an income first to realize the net benefit of reduced taxes. My membership hire people based on market forces in terms of need. If the work is there, they'll hire the people first and foremost. And they're in the business of making money; they're not in the business of necessarily always creating employment first.

Mr. Tony Valeri: Oh, I agree. Sure.

Mr. Jim Facette: So if they have a business environment in which their payroll taxes are less and the business opportunities are there, they're more conducive to hiring people. So I would say that EI reductions are one of the factors that will help them hire people, but not the exclusive one.

Mr. Tony Valeri: Okay. And EI premiums are paid by those individuals who have a job.

Mr. Jim Facette: Correct.

Mr. Tony Valeri: Okay.

The Chairman: Final comments, Mr. Pickford.

Mr. Barry Pickford: I guess one of the difficulties in answering this question is that many of us were sitting in the audience and heard your response to the person who suggested that EI premium reductions were the best way to go. However, let me try it from a slightly different tack.

Despite the decision that was made in 1986, I don't think that's the general view of people today. Most Canadians believe a great fund exists there towards which they've contributed way too much, and they would like some of that back in the form of reductions.

More importantly, I think you have to start somewhere, and I think employment insurance has a more visible effect because people will see that on their paycheque stubs every time. It's very difficult to read just how much your taxes come down. If you see your employment insurance reduced, you know it right from the start. I think it would have a bigger bang.

I appreciate the fact that there are a number of people who do not pay employment insurance today, but I think this is a concrete way of starting towards tax reduction in Canada. I don't think it stops there, because I think you also have to follow up with the income tax reductions.

The next point is that clearly it does have a two-pronged effect. Yes, maybe it only affects the 8 million employees in Canada, but it also affects those employers. And although it may not lead to jobs, it will put more money into those companies, which will allow them to perhaps finance themselves in a better fashion and may allow them to do capital investments, which ultimately may lead to jobs in other industries.

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So despite knowing what your reaction to it is, I am in favour of employment insurance reductions.

Mr. Tony Valeri: Obviously I have a reaction to it, but the reason I asked the question is that I'm interested in hearing—

Mr. Barry Pickford: Sure. Absolutely.

Mr. Tony Valeri: —what you have to say about it. Despite the facts I thought I had articulated, I have some difficulty reconciling one versus the other when I hear the arguments you put forward. Nonetheless, thank you for your input.

The Chairman: Thank you, Mr. Valeri.

We're going to Monsieur Desrochers. Then we'll go to Ms. Bennett and Mr. Brison.

[Translation]

Mr. Odina Desrochers: I don't know where my colleague Valeri is getting his information on unemployment insurance, but I can tell you that the Bloc Québécois has just toured Quebec and learned that employers and unions want to see not only a drop in premiums but also some in-depth reform, because a lot of workers are being penalized.

As well, there are questions about what the federal government is doing with the surplus. Is it using the surplus to create jobs or to get rid of a deficit? A lot of things need clarification.

I would also like to state that the Auditor General has asked repeatedly that the Employment Insurance Fund be kept in a separate account so that everything is transparent and we really know what the Minister of Finance is doing .

I have a question for Mr. Pollard. The cost of employment insurance has an impact on many sectors. There are many small hotels, restaurants, small establishments in the riding I represent and elsewhere as well. Do you know what the people in this sector think about the way that the current employment insurance system operates?

[English]

Mr. Anthony Pollard: Thank you very much.

The first point, very clearly, is that we strongly recommend that employment insurance be reduced. Second, we would like to see it removed from the general revolving fund. I stated that in my comments at the outset, and we believe very firmly in that. We hope this committee brings forward such a recommendation.

[Translation]

Mr. Odina Desrochers: Thank you, Mr. Pollard. By how much should we reduce the employment insurance contribution rate? You said that by the year 2000 we will only have 10 per cent. What do you see for 1999 and the year 2000?

[English]

Mr. Anthony Pollard: First of all, we do not know what the amount of the surplus is going to be when the budget actually comes out, so my association cannot come up with a specific number for you right now vis-à-vis how much that should be. We saw yesterday that the government is faced with a variety of issues right now, including pay equity, and including funding the millennium scholarship and a variety of programs. The government, as it was pointed out earlier, has to make decisions on what is politics, the art of the compromise, the art of the possible; hence they have a variety of concerns to deal with.

So if you ask me to give you a specific recommendation on a percentage decrease, it is difficult to do so without knowing what the final numbers are. What we would like to be able to see is an immediate announcement of a decrease in employment insurance.

[Translation]

Mr. Odina Desrochers: I have one final question. Under the current employment insurance system, are employees in the hotel industry, which is often a seasonal industry, penalized by the fact that the eligibility rules for employment insurance have been significantly changed? If this is the case, do you have any recommendations to make on this issue?

[English]

Mr. Anthony Pollard: What I would like to do is make two points, first of all. Our industry is becoming less and less seasonal as time goes by. Certainly our occupancies are less during the months of December and January; however, over the course of the year we're doing better and better. Secondly, just to make a point of an earlier statement, we are not an industry that simply employs minimum-wage individuals. That is certainly not the case.

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What would be the impact for the future, Mr. Chairman? To go back to what I said before, in terms of numbers it's difficult to determine that now. However, our internal research shows very clearly that it is a drain on employment creation when you have EI premiums at the level they are at now.

The Chairman: Thank you, Monsieur Desrochers.

Ms. Bennett.

Ms. Carolyn Bennett (St. Paul's, Lib.): Thank you.

It's no secret that I have a huge interest in health care. None of you mentioned it. A lot of you have employees, and I believe that one of the big attractions for our companies, particularly the ones that are labour intensive, is our health care system in Canada.

Mr. Wilson, are you saying that when the health care groups come here this afternoon we should tell them that the Canadian health care system is perfectly well funded?

Mr. Dean Wilson: I'm representing the Automotive Industries Association of Canada, companies in that industry, and I can tell you our perspective: the over 200,000 people employed in our industry have a number of options in terms of health insurance. We have OHIP, obviously, but most of our member companies have a company health program, which is run by private industry, by the insurance business. Our policy in our particular industry, at least for our association, is that we pay 50% of additional extended health care and these sorts of things. We don't see a critical problem in terms of health care for the people who are employed in the automotive industry.

I do understand that you have a larger issue here in terms of Canadian people who are not well served.

Ms. Carolyn Bennett: I guess what we're saying is that if you had to pay, like my patients who moved to New York and had to write a $10,000 cheque for their health insurance... They didn't consider that a tax. And we don't consider that a payroll expense here in Canada because we assume that if they need a heart transplant, it's covered by the public system. There would be huge pressure on your companies should Canadians lose confidence in the health care system and press in every union negotiation for a totally private system. It would actually cost you a great deal of money if they press for more private coverage because they don't trust the health care system we have now.

Mr. Dean Wilson: I'm just saying that from our perspective my sense is that our health program in Canada is reasonable. I think it's better than it is in the U.S. That's a personal opinion. But I understand that we're a small segment of the Canadian population.

Ms. Carolyn Bennett: To the whole panel, when we keep talking about being overtaxed, I don't think we as a government are doing a very good job explaining that because health care is in there both on the employer side and for personal income tax, these people are not now writing a cheque for health insurance, as they would south of the border. How could we do a better job of that?

The Chairman: Who would like to comment on that?

Mr. Pollard.

Mr. Anthony Pollard: We can all read the polls. This weekend, before all of you came back to Ottawa, we saw that the number one issue for Canadians seems to be health care.

As an employer, the hotel sector employs 235,000 people. Needless to say, benefits are critical to employees. If you don't have happy employees—I don't want to sound corny here—they aren't going to do a very good job. A lot of you live in hotels here in Ottawa and I don't want to tell you what the ramifications of that would be. We saw on This Hour Has 22 Minutes last year where a senator, who shall remain nameless, ended up getting into a little bit of difficulty over a service issue, but that's a story for another day.

The reality is that as employers we have to ensure there are proper programs in place for our employees. Is the government doing an effective job of going out across the country and asking what the benefits are of being a Canadian citizen, what the benefits are of the medicare system? Sometimes I don't think it is.

Maybe you need to make it more anecdotal. I have a brother-in-law who lives in Boston. He's still a Canadian. He has to write out a cheque for his wife and two kids for a certain amount. The offset of this is that his tax level is considerably lower than mine is.

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You have to start doing some cost-benefit analysis here. Where are the advantages? What works and what doesn't? You have to bring it to a simple level that says, okay, it's going to cost you more for health care, but your taxes might be less. Give examples to the public so they can appreciate this a little more.

It's like comparing living in Canada versus the States when it comes to crime and security. A lot of benefits we get up here you don't have in other parts of the world. Do we explain that very well? Sometimes I don't think we do.

But I'm not here to tell the government how to run its business in terms of promoting itself. I'm simply saying there are some opportunities here that maybe you could take advantage of.

Ms. Carolyn Bennett: I guess my question really was for Mr. Wilson.

It's nice to ask for that, but in actually asking for 50% tax relief and 50% debt reduction, I'm not sure it really is what's best for even the people within your industry.

Mr. Dean Wilson: I believe it's the best for Canadians, because if you have a high debt, you're paying huge interest on the debt. That's just a waste of money.

Ms. Carolyn Bennett: But we're very proud in Canada of our debt-to-GDP ratio going down better than in all the other countries.

Col Sean Henry: It's not.

Mr. Dean Wilson: You really have to get this debt out of our system, because we're just wasting money on the interest on the debt. It's a waste of money. If you get rid of that—

Ms. Carolyn Bennett: We're trying.

Mr. Dean Wilson: —think of all the dollars you would have available to do the things you're talking about.

Ms. Carolyn Bennett: We balanced the budget, right?

I have one other little question. Colonel Pellerin, the health care system within the military is an issue. Do you feel the people within the military are feeling they do not have the same access to high-quality medical care as do the rest of Canadians?

Col Alain Pellerin: It's difficult for me to go into the details. It depends on where they're stationed, for instance. Some do get the same medical care as others, but there are isolated communities.

As well, I think the problem there is linked to the family being split, the husband being out of country quite often and the wives, quite often young wives with young children, feeling they don't get the facilities. Health care is one, but there are a number of facilities that might not be available to them. The husband is away for six months or nine months.

We talked about the ship that just came back. It was away for over six months. That doesn't happen in most normal families in Canada, but in the armed forces, it's now a matter of course. It happens all the time, and more and more often. I think the families, the wives left behind with reduced budgets—

Ms. Carolyn Bennett: But if some people would be better off going to the local town to get their health care, should it be in the military budget any more?

Col Sean Henry: The only place where the dependants of military personnel have to depend on the military system is at remote bases. The one that jumps to my mind is Cold Lake, but even then I'm not sure whether that's still the case. In all other regions the military families are the same as any other citizens.

The question is pertinent, however, with respect to the medical care military people, particularly in overseas operations, such as in Bosnia and on this ship, information about which is attached here. The military medical system has been driven to the wall, and people within DND will say, no, we're still providing an adequate level of service.

There are many of us who question that because of what has happened. The sheer number of people in the medical service has been cut, and they are now farming out the medical care to local facilities and so on. The question is, in a military situation can those local facilities deliver? I would be suspicious that they couldn't.

The Chairman: We'll have to move right along to Mr. Brison.

Thanks, Ms. Bennett.

Mr. Scott Brison: I appreciated all of your presentations this morning.

There's been a significant amount of economic history revisionism around the table today. I was positively reinforced to hear the affirmation of the consumption taxes versus income taxes, recognizing that we do need tax revenue from somewhere, that maybe the GST wasn't such a bad idea after all. I know the members opposite now agree with me, but in 1993 we probably would have appreciated more vocal support at that juncture.

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The Chairman: You weren't around.

Mr. Scott Brison: No, but on consumption taxes, there does seem to be a recognition here that consumption taxes are more equitable, are no more neutral than income taxes or payroll taxes.

On the EI, there seems to be also a consensus here that the EI taxes or the payroll taxes are the most insidious in terms of their direct impact on employment. Is that as an increase to the cost of the labour input? It reduces the demand for labour. Is that effectively what you're finding in your own organizations, particularly in services?

Mr. Barry Pickford: I think the point was made before that at least in our industry employers are not going to go out and hire people specifically because of a cut in employment insurance. I don't think that's an appropriate statement, but it would, in fact, through EI premium reductions, put more money back into the company as well as putting money into the hands of the individuals who work for those companies. So it gives them the possibility of spending more; it also gives the companies the possibility of spending more on capital, and that capital has its own spinoff effects that deal with infrastructure within the company itself and from a Canadian perspective as well.

Mr. Scott Brison: Mr. Pickford, you spoke a fair bit about the Mintz report, and I agree with you that the goal of a flatter, fairer corporate tax and more neutrality is a worthy goal. I would posit that having a flatter, fairer tax system on the corporate level would mean that we would probably be likely to decrease payroll taxes, because there is a disproportionate onus on service companies in that sense.

On the brain drain issue, we've heard from the government side that in fact we should be focusing more on telling Canadians why they should be staying. Perhaps Canadians are discovering that they can, for the difference in tax rates between the U.S. and Canada, purchase a quality of life and a health care system south of the border, and being fairly bright people as Canadians they're making their decisions and they're voting with their feet.

Particularly in the technology sectors we seem to be losing an awful lot of bright people; 80% of Waterloo computer science graduates are going south. How is that going to affect that sector? I'm talking about telecommunications and information technology. As we enter the 21st century, these are growth areas. How will that affect the industry if we don't do something significantly through taxes to effect change in that?

Mr. Barry Pickford: Most importantly, it risks those people with the most up-to-date knowledge in technology disappearing from our system. Alternatively, it's simply going to drive up the cost of getting that, because it means we'll either have to pay more for those individuals to stay in Canada to give them effectively the same after-tax cashflow that they believe they need...

I mean, there are lots of different reasons for people moving to the States and for staying in Canada. Quality of life has an awful lot to do with it. Many people do start to measure it in dollars and cents, and if I can go and live in a suburb of Denver that seems to me to be just as attractive as living in Mississauga or living outside of Montreal but have much more cash in my pocket, I'm likely to do it. To convince that person to stay in Canada, his income is going to have to be higher, because he wants to establish the same thing.

Alternatively—and this is probably the most frightening aspect of all—is that we're going to have to buy those services from the U.S., because that may well be where they're located. We'll have to effectively pay out of Canada to a U.S. company that's prepared to hire Canadians to work there and buy those services from them in order that we can continue to develop our technology here.

Mr. Scott Brison: Okay. In terms of personal income tax, would you agree that the same principles of the Mintz report in terms of corporate taxes should be a desirable goal in terms of a flatter, fairer tax system on the personal side, as a goal in a general sense?

Mr. Dean Wilson: I think as a goal it's a good idea to be competitive with the U.S., because we do so much trade with the U.S. That's our biggest trading partner, and we're their biggest trading partner. We're often affected by corporate tax or individual personal income tax because we're dealing so much with the U.S. We have a free trade agreement. It doesn't mean you have to design your system exactly like theirs. I think we're on the high side in terms of taxation, both for income and for corporate. They're at a much lower level. You need to narrow the gap, but you don't need to parrot what they're going to do. That's my view.

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Mr. Scott Brison: Let me ask you a question about taxes from a holistic perspective. The temptation with economic policies is one of tinkering. For instance, it would certainly benefit the hotel and restaurant industry if we were to increase the ability to deduct meal expenses. You were talking about the tools mechanics use. Any tax reduction is positive. But would it be better for us all to try to pull back from this political Pavlovian tax policy thing we try to do in terms of encouraging one type of behaviour or discouraging another? If we were to lower taxes and simplify the tax system, maybe with the long-term goal that a Canadian need not hire—no offence, Paul—a chartered accountant to deal with his or her own government...

Mr. Paul Szabo: You're looking at tax breaks for the highest income earners.

Mr. Scott Brison: We're suggesting a simplicity and a neutrality of the tax system that allows Canadians to make their decisions as to what to do with their own money and where to invest, and taxes actually to generate revenue as opposed to control people.

Mr. Dean Wilson: I'm a bit skeptical about the government's ability to overhaul the tax system. If we look back at history in terms of the GST, which was implemented—I forget the year, but it seems like an awfully long time ago—we still have only four provinces that have harmonized with the GST. You see the horrendous internal bickering between federal and provincial governments on issues like this. If you try to do a major overhaul of the tax system, which ideally would be a good way to go...I see trying to make it happen as virtually impossible. I guess that's my view. It's a very difficult job. Maybe if you looked at it from a very long-term point of view, in terms of really studying it and getting the buy-in of the provinces with a view to doing it over the long-term, fine, but if you try to push through something like that, I can see all kinds of problems, as we've had with the GST.

Mr. Anthony Pollard: There are two or three things. I remember—obviously not personally—that income tax was introduced in 1916 to fund the war. It was supposed to be a temporary thing. I don't know what happened.

So I'm not that idealistic to be able to think that... We would love to be able to see a reduction, obviously. We would love to be able to see everything that the Mintz report has suggested, but at the end of the day that's not going to happen.

Needless to say, each of us has our interests that we represent, and we want to be able to see that all Canadians are treated fairly. That's why, Mr. Chairman, we're here today to bring forward these views to you.

Mr. Barry Pickford: I just want to add one comment to that. The Mintz committee really wasn't suggesting a flat tax, if that's what you're getting at, Mr. Brison. It has an awful long way to go to that. It leaves an awful lot of complications in there, with the continuation of capital taxes being paid both to the federal government and the provinces, with a continuation of a number of complexities that will continue to exist in the tax system. Since my job is taxes, I'm not sure I'm in favour of a flat tax.

I think the real issue would be, if you could ever get to a flat tax, could the government ever restrain itself from not wanting to tinker with that in the future, that charitable donations are not deductible for tax purposes, or not creditable. I think it just raises a whole new world of complications that will never go away.

So as complicated as our tax system has become, I think there are measures to simplify that, but I don't think a flat tax is the answer.

The Chairman: Thank you, Mr. Pickford.

Just a quick note. On the issue of tax cuts, of course, everybody is advocating tax cuts. Who is going to disagree with a tax cut? But there also has to be integrity in the process of achieving tax cuts, and by that I mean you can't simply have a tax cut today and then you're going to have a tax increase two or three years down the road. I think at any point in time in which we will move, we have to look at sustainability of the tax cut. Otherwise you really create expectations within the Canadian public or the corporate sector that will create unnecessary problems down the road. I think we need to be very responsible in that particular issue of sustainability.

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I'll let Ms. Redman ask the final question.

Mrs. Karen Redman: Thank you, Mr. Chairman.

My question is for Mr. Facette, and it's in bit of a different direction. I'll ask it all at once and then allow you to answer it.

I was wondering exactly who the members of your coalition are. Are they the road construction people or asphalt companies? I'm not quite clear on that.

The substance of my question really is, do you see increased partnerships between private sectors and governments as the way to go to ensure that the infrastructure you're advocating exists? I would use the example of the 407 in Toronto.

I'd also ask you if you think the Canadian public is ready for toll roads and if that's a direction that governments should be investigating to ensure that the infrastructure exists.

Mr. Jim Facette: Three good questions.

First, our membership is made up of construction people, yes. We also have suppliers in the oil industry. We have automotive people as our members. We have high-tech companies that are members as well. So it's not just one industry. And we have asphalt producers as well.

In terms of public and private partnerships and is it the way to go for infrastructure, the answer is maybe. There's no one definition of what a public partnership is that can really be applied across the board.

The best example we have today where public and private partnerships are being used is probably in the water and sewer area. In Ontario it's quite popular. Many residents of Ontario pay their water bill on their consumption levels. It's not a flat rate like it used to be. There's a designated revenue stream that business can rely on to some degree. But is it the panacea? Not all the time, because as the past chairman of the transport committee said last year—I believe it was Mr. Alcock—what do you do about Wawa to Winnipeg? Wawa to Winnipeg is part of the Trans-Canada, highway 17. It is a major route that links the east to the west, but in terms of traffic volumes it's significantly lower than the 401 going to Toronto. Do you apply a toll there? Well, no. It's just not sustainable from a business plan perspective.

On the issue of tolls, people think public and private partnerships in the highways are exclusively about tolls. That's not the case. What we're talking about is a national highway system that already exists in Canada and is being used. It's 25,000 kilometres of highways that are known quite clearly. We know where they are. We know what highways constitute this system. They're being used, and they're being used at no direct fee or charge to the user.

In business they call governments owners. As the owners of those highways, do you as legislators want to impose a direct fee on that road, which now does not have one? I have not found a politician yet, regardless of political strategy, who says yes. The answer is no. So where does the money come from? Well, in 1994 we appeared before this committee, and my chairman, Mr. Redfern, said... There was a discussion of looking at increasing taxes. At the time it was gas taxes. We came before this committee and he said, if you're going to look at increasing gasoline taxes, increase them by one penny and allocate or dedicate those taxes to highway investment. But we were told, you're off your rocker, the Canadian public will never go for increasing gasoline taxes, take a hike. Well, in February 1995 the exact opposite happened. A penny and a half was added to the gasoline tax. At the time it was for debt deduction reasons, and the Canadian public took it.

There is a revenue stream—and the provinces have called upon this as a possible revenue stream—for a program that will invest in a national highway system.

So the answer is no.

Is the 407 the model for the national system? The answer is no, because the 407 will very soon be a private highway; it will not be owned by government eventually. It currently still is.

There are parts in New Brunswick where it is going to be tolled, but you have to remember too that the ownership ultimately remains with government.

Is the 407 the ideal model? No. Can we apply triple P's universally? Not necessarily. You have to look at the project and the system. Where it's more cost-beneficial for traditional forms of payment on the project, that's better. Where it's better to look at a cost-benefit and say yes, we can do this, you do that where a jurisdiction says, we're no longer in the business of providing the resources to build or maintain this facility any more. That's when it's your best answer.

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I know it's a long way to answer a very difficult question.

Mrs. Karen Redman: I just wanted to clarify. I didn't mean to hold that out as a panacea but rather a component of ensuring infrastructure.

The Chairman: Thank you, Ms. Redman.

I'd like to thank the panellists for excellent presentations today. As you can tell, we're going to be challenged by the various choices put forward to us, but in the final analysis what we try to do here is come up with budget recommendations that improve the quality of life for the people of Canada. Ultimately, that is the litmus test for public policy.

On behalf of the committee, I would like to thank you very much.

The meeting is adjourned until 3.30 p.m.