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EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, December 6, 1995

.1629

[English]

The Chair: Could we come to order?

The finance committee of the House of Commons is pleased to have with it this afternoon as a witness in its pre-budget consultations the Minister of Finance, the Honourable Paul Martin.

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We have an agreement, Mr. Martin, that after you have spoken, each of the two opposition parties will have fifteen minutes in total before we go to questions from other members.

Thank you for being with us, Mr. Minister. We look forward to your remarks.

Hon. Paul Martin (Minister of Finance): Thank you very much, Mr. Chairman and members of the committee. I am very grateful for your invitation to be here this afternoon.

I have been able to follow your consultations with Canadians across the country with a great deal of interest, and as a result I look forward to your report with much anticipation.

[Translation]

In October last year, when I appeared before this committee to provide an update on the state of our economy, I outlined the unprecedented challenge before our country.

We talked about the necessity of increasing economic productivity - and restoring health to our public finances. And we discussed the need to restructure the role of government.

Following our discussions, in last February's budget, substantial progress was made. We are well down the road. But it must be emphasized that we are not yet at our destination.

[English]

Prior to reviewing the challenge that lies ahead, let me reiterate one fundamental point. Our objective is not simply a better balance sheet, nor is our goal limited to more effective government. It is a better country, it is a fairer society, and it is an economy that more than anything else is capable of producing the kinds of jobs and growth that will enable Canadians to believe in themselves and to have faith in their future.

To get there, we believe government must pursue two tracks simultaneously and with determination. The first is to address the macroeconomic fundamentals. That means continuing our firm policy to sustain low inflation and it means continuing our strategy to clean up the nation's finances. The second track is to get the structure of the economy right, and to do that we must get the structure of government right, a government that knows where it can and where it must make a difference, a government focused as never before on key national priorities.

Pursuing these two tracks is not a temporary challenge. It is not some one-year task. The very essence of economic and government renewal is that it is dynamic, that it never slows down. In our 1994 budget we set the stage. In our 1995 budget we set the course. In the budget that lies ahead we must keep on course. We must consolidate our achievements. We must build further on the foundation we have laid. We must continue to forge ahead.

Today there are some who doubt our resolve. There are those who say we won't stay the course. There are others who say we shouldn't. Well, Mr. Chairman, they are mistaken. There is too much at stake to stand still and too much has been accomplished to let up.

[Translation]

Those who would have Canadians believe that there is a contradiction between deficit reduction and job creation are simply wrong. Continued deficit reduction is essential if we are to get interest rates down, since those interest rates stand in the way of the creation of jobs.

For this reason our determination to restore fiscal health will not falter.

As in the past, we will meet our targets using prudent economic assumptions. And we will set aside a substantial contingency reserve.

Let me now deal briefly with the state of our economy as it has evolved since the last budget.

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Last February, we projected an economic slowdown, as higher interest rates weakened the U.S. economy. But the fact is that slowdown came much sooner than economists anticipated and was much more pronounced than they had predicted.

However, today as we speak, the signs are more promising.

The U.S. economy is poised for moderate expansion through 1996 and beyond - which is good news for Canadian jobs and growth.

Domestically, interest rates have been falling - down almost two and a half percentage points from their early 1995 peak. Analysts widely agree that this is partly in response to the action we took in our last budget.

And although interest rates went up during the referendum campaign, they returned to previous levels in the aftermath of the result. That being said, they are still too high. Mr. Chairman, nobody can deny the tremendously damaging effect political uncertainty has on economic confidence and growth.

If today we are talking about stimulating job creation through the pursuance of sound economic policy, no one should be under any illusion as to the costs imposed on our economy, on every Canadian, by political uncertainty.

[English]

Since this government came into office, about 450,000 new jobs have been created, all full-time, and the unemployment rate has fallen by 1.7 percentage points.

Real gross domestic product was up by 2.1% in the third quarter of this year.

That being said, we are not out of the woods yet. For instance, after three consecutive good months, employment numbers for the month of November were disappointing. What that demonstrates is that we cannot let up - and we are not letting up.

Our cost competitiveness as a country continues to rebound strongly vis-à-vis the United States. It is the best that it has been in the entire 45 years since data became available.

Our merchandise trade balance, exports over imports, at $34.6 billion, was at an all-time high in September. As a result, relative to GDP our current account deficit has fallen to its lowest level in ten years, thus slowing - and this is very important - the build-up of our foreign debt.

In short, our economic fundamentals are strong. The challenge is to keep them strong, to take the budgetary action that will translate those basic strengths into more jobs for Canadians.

It is widely agreed that the 1995 budget made very real progress. However, it made even more clear what our priorities must be in the future.

Let me begin with the fiscal challenge.

Our fundamental problem remains a debt that is growing faster than our economy. You can approach this in fourteen different ways to Sunday, but there is only one solution. It is an economy that is growing faster than our debt. In short, we've got to stop the growth of our debt and increase the growth of our economy.

For economists, the relationship between the growth in our debt and the growth of our economy is captured by a key ratio, the debt-to-GDP; that is to say the level of our debt, what the nation owes, as a percentage of our gross domestic product, which is what the nation produces. Over the past two decades that ratio has been rising relentlessly.

All of us know the nature of the relationship between what we as individuals earn and what we owe. When we owe a great deal of money, we know that the worst thing we can do is to go out and borrow even more. But we also know that making payments would be easier if we were able to earn more money. In fact, we know that the best strategy of all is to both limit our personal borrowing and increase our income.

You might say that that's not easy, and you'd be right. But that is precisely our challenge as a country.

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Twenty years ago the debt-to-GDP ratio for the federal government stood at 19%. Ten years ago it stood at 50%. Today it is close to 75%. Over the years there were those who said that economic recovery would suffice to turn the situation around.

Let's just take a look at what has actually happened over the course of the last twenty years. The orange bars on the screen indicate the periods of economic recovery - at least I hope they're orange - and the yellow bars indicate the periods of economic downturn. What happened to the debt-to-GDP ratio throughout this period? As you can see on the line chart, in times of downturn and in times of recovery the debt-to-GDP ratio continued to rise.

There are also those who declare, on the other hand, that the only answer lies in cutting government spending. They, too, are wrong. Why? Because they ignore the reality that the social deficit and the technological deficit are central to the financial deficit. The issue is not simply cutting excessive government spending.

The very nature of a ratio is that it is a relationship between two variables. The debt-to-GDP ratio reveals the two things on which we must concentrate. One is to keep our spending under firm control. The other is the absolute necessity to maximize the nation's potential, its productivity and its capacity to grow and to create jobs. The debt, Mr. Chairman, is about what we owe. The GDP is about what we do.

The logic is clear. Yes, governments must cut their spending in order to bring their deficits down, but as well, in an economy that is growing, incomes grow, increasing the revenues that governments get. That also brings the deficit down. In an economy that's growing, jobs are created. That decreases the need for governments to spend more, and that also brings the deficit down.

[Translation]

To focus on economic growth and jobs is not to ignore the debt-to-GDP problem. In fact, it is an essential part of the answer.

Our strategy must be based on synergy. Neither growth nor deficit reduction is sufficient alone. But pursued together, they can do the job.

[English]

This brings me to the steady pace approach that we as a government have adopted right from the beginning. There is no doubt that if our only priority as a government were to get the deficit down to zero immediately, that could be done in theory, but it would be very damaging in practice. Our goal is not simply to get the deficit down; it's to keep it down. That requires careful and considered reform and implementation. That is something that a slash and burn approach precludes. It is something that a measured strategy assures.

But the issue goes beyond that. We believe there are things that a responsible government must provide its citizens. Hard fiscal times require hard choices. A zero deficit, yes, that will be achieved, but we simply refuse to get there by leaving Canadians behind. This is a question of values, but it's also a question of sound economics. Mindless cuts without concern for the consequences or the need for adaptation may result in short-term savings, but it can also result in substantial long-term costs.

[Translation]

In our unemployment insurance reform, just announced, the Axworthy reform, we could have achieved more savings in the short term by focusing only on lowering the benefits - without giving Canadians the tools to help them get back to work.

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But where would that leave Canadians who want a job? You know as well as I do that it would mean more hardship, a weaker economy - and much greater spending pressures in the end.

[English]

We could abandon our tax preferences for small business. In the short term the government's revenues would go up. But in the long term there would be less innovation and fewer companies, and the result would be lost income and lost jobs. In fact, there would be greater pressure to spend in the future.

We could shut down our program for export assistance. Money would certainly be saved. But if we lose exports, Canadians lose jobs.

The point is that a single-minded dash to a zero deficit would be counter-productive in every sense. We are pursuing a strategy that is measured, deliberate and responsible. That's the course we set out in the red book and that's the course we are on today.

Meeting the debt-to-GDP challenge may sound to many Canadians like a priority for economists or for finance ministers, not for them. Unfortunately, Mr. Chairman, nothing could be further from the truth. All of us pay the price of government deficits and debts and all of us will realize the benefits once that burden is lifted.

[Translation]

Why? Look at the facts.

Only 20 years ago, 11 cents of the federal revenue dollar went to pay the interest on our debt. Today, it eats up 36 cents of every dollar sent to Ottawa.

Canadians want their tax dollars to be used for services and programs for them. If those services and programs are to be available in the future, we simply must act now to reverse the growth of the debt-GDP burden.

[English]

As well, Mr. Chairman, there is a second reason to act. For many it is even more compelling than the first. Our debt-to-GDP ratio is such that it is a clear damper on jobs and on growth. Why? Because it keeps tax rates too high. It pushes interest rates up and it discourages savings and investment. High interest rates exact a terrible cost for households, investment, consumer confidence, and jobs. And what's the connection between this and the nation's balance sheet? It is the fact that it is the rates of interest that national governments must pay that ultimately determine the rates of interest citizens must pay.

I ask you to consider the impact in two examples. Two additional percentage points of interest on a $100,000 mortgage means $1,600 more per year in extra payments. That money can't go to purchase goods and services. That means fewer jobs.

This chart makes a compelling case. Between November and January of this year, one-year mortgage rates went up from 8% to 10%. Is it a total coincidence that housing starts fell 10% in the first quarter of this year and another 15% in the quarter that followed? The result: fewer jobs and lower incomes.

[Translation]

Another example is the effect on small and medium-sized businesses. A two percentage point increase in interest rates would increase the cost of a two million dollar business loan by $28,000 per year. That also means, once again, unequivocally, lost jobs.

[English]

Our bottom line is straightforward. There can be no more effective job creation program by government than to get interest rates down, and there is no more effective way to get interest rates down than to get the deficit down. Mr. Chairman, it is that reality that drives our determination and reinforces our reserve.

For example, recent economic analysis suggests that a 2% decrease in interest rates would, over four years, make the economy 2.25% larger, to the tune of more than $13 billion. This represents sales gained by employers. It represents wages paid to new employees. It represents raw materials bought to make new products. That means jobs, and surely there can be no more successful job creation initiative by government than to take the steps that will make those benefits available to Canadians. That is what we are doing.

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By 1996-97, with our 3% interim deficit target secured, we will have halted the growth of the debt-to-GDP ratio. But that simply sets the stage for the next challenge, which is to ensure that ratio continues to track downward, year after year, cycle after cycle.

Meeting that challenge means more jobs. It also means a country whose economic independence and sovereignty are being strengthened. It means a nation less dependent on foreign lenders. It means a country freer to focus on the broad national interest of its people.

It is for all these reasons that this government has mounted the largest assault on the federal deficit in Canadian history. Last month we announced that the deficit for our first full year in office was $37.5 billion. That's $2.2 billion below the target we set in our first budget. It's $4.5 billion below the previous year.

In 1993-94 the Canadian deficit stood at 5.9% of GDP. Last year it went down to 5%. This year the deficit will continue to decline to 4.2% of GDP, on its way to 3% in 1996-97.

Our goal is to eliminate the deficit. Our approach is to set a series of rolling two-year targets: an approach we have demonstrated works better than any other.

Our progress is clear. In order to maintain that progress, I am announcing today that the deficit for 1997-98 will be brought down to 2% of GDP. This is estimated to be approximately $17 billion. This means we will have cut the deficit by more than half in that year. It also means the debt-to-GDP ratio will be on a downward track. Furthermore, this means the government's new borrowing requirements on credit markets in that year - which is the way many other governments, for example the United States, calculate their deficit - will be less than $7 billion, less than 1% of GDP.

[Translation]

Mr. Chairman, in order to maintain that progress, I am announcing today, that the deficit for 1997-98 will be brought down to 2% of GDP.

This is estimated to be approximately 17 billion dollars. This means we will have cut last year's deficit by more than half.

That means that by 1997-98 our new borrowing requirements relative to the size of our economy will be at their lowest levels since 1969.

[English]

Let me now turn to the second track of our jobs and growth strategy. In our view, significant as fiscal measures are, what is as important is the redesigning of the very role and structure of government itself. Restructuring of government has been central to our approach from the very beginning. It was at the heart of the first program review, as it is for program review II, which is currently under way.

In our view, fiscal reform that is durable is possible only through government reform that is structural. Furthermore, to reduce government spending without redesigning government itself would be to embody a short-term approach, a quick fix, that by its very nature would be fundamentally flawed. It would result in weaker government, government unable to meet the challenges and to take advantage of the opportunities of our revolving economy and of our changing society.

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At the core of a more effective government must be the recognition that Canada cannot escape - indeed that Canada must embrace - the implications of an increasingly interdependent world. It is simply a fact of life that as a relatively small but very open economy there is no more pressing responsibility than to make globalization work in our favour.

[Translation]

This means, in areas where only the federal government can provide leadership and direction, its effort should be enhanced. It also means that in areas where other levels of government are better positioned to serve the needs of our citizens, other reforms must occur.

[English]

In this evermore interdependent world, when problems intersect, where solutions cross issues and borders, where local realities have global impact and vice versa, it is more important than ever to recall, and to reinforce, the very core meaning of federalism itself. Federalism is about dynamism, a dynamism flowing from the flexibility, the experimentation, the adaptability that only it can bring. That dynamism is not some accidental by-product. It is one reason federations exist.

[Translation]

This is why we should concentrate on federalism's strongest suit - governments exercising their own jurisdiction on the one hand and partnerships on the other hand - then coming together to work out joint decisions on joint problems.

That is the essence of the 1994 internal trade agreement. That's what the infrastructure program is about. And that's what the Team Canada trade missions led by the prime minister - to China, to Latin America and next to India, are about.

There's another question as well we must ask - and that is whether in some cases government at any level is the answer. In our view, governments should focus on what they can do best and leave the rest for those who can do better, whether business, labour or the voluntary sector.

That philosophy, for example, was behind the privatization first of Petro-Canada, more recently of CN and in the future of the Air Navigation System.

[English]

What should the national government do? It should focus on key national priorities. What does that mean? It means, among other things, jobs. It means making the improvements to the unemployment insurance system that are the most profound in the last 25 years, bringing it into line with the labour market realities of the 1990s.

It means encouraging small business to invest and to hire, by lessening the regulatory burden, by improving their access to capital. For example, it means giving the Business Development Bank of Canada new flexibility and new lending capacity. It means making our regional agencies a single entry point for small business access to government programs.

[Translation]

Jobs priority means strategic support for science and technology - support for programs where the economies of scale are such that only a national approach will work.

In today's financial circumstances, we are doing all we can in terms of research and development. In the future, when the situation has turned around, when public finances allow, we will have to do more and, Mr. Chairman, we will do more.

[English]

What are our priorities? They are answering the need for the sustainability of our social programs posed by an aging population and by a changing economy. This priority is reflected in our unequivocal support for Canada's system of health care - support demonstrated by our commitment to stabilize cash transfers to the provinces. This priority is reflected in our commitment to ensure that Canadians are not discriminated against when they move from one part of the country to another and seek social assistance.

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[Translation]

This priority on sustainable social programs is also reflected in our commitment to our publicly funded system of pensions, our commitment to today's seniors, and our commitment to young people so that when the time comes, the system will be there for them too. A commitment on which we will act.

[English]

On these two central priorities - more jobs and better social programs - we would be less than candid if we said to you today that we are doing all that we would like. The bottom line is that the state of the national pocketbook simply does not make that possible.

That we are in this situation is unacceptable. That we must get out of it is essential, which is what, Mr. Chair, makes deficit reduction and its eventual elimination so necessary - not as an end in itself, but as a means to achieving the nation's greater goals.

[Translation]

Mr. Chairman, let me summarize our course. In 1994 and 1995, this government took the decisions necessary to put this country on a new and better road. The road of fiscal recovery. The road of government renewal. Both of which lead to more jobs and greater economic growth.

We are on track to meet the fiscal targets we have set. Our course is clear.

We are on the right road. The task now is to turn the next corner.

In our third budget, we must build on the progress we made in our first two. We must ensure that the substantial savings from our previous budgets continue to take hold and pay off for Canadians. We must consolidate our gains. We must ensure that we never fall back.

[English]

Mr. Chairman, I would like to conclude by making one final point. We have talked a lot today in terms of numbers. And yes, we need to get the numbers right in order to get the nation right. But none of us in this room is here simply to write new entries in a ledger or to keep better books. Surely we are here to write a new chapter of history, to build a better country.

We are a free people founded on diversity and sustained through tolerance, a society that believes that success and civility can and must be achieved together. More than anything else, it is those values that will strengthen us; it is those values that must guide our economic vision.

[Translation]

The point is, whether we're from Val d'Or or Fort McMurray, despite our diversity, most of our challenges and all of our opportunities do not differ. On the contrary, we hold them in common.

What are these challenges and the opportunities they present? To create more and better jobs. To create better social programs. To improve the finances of all levels of government. To succeed in a world where the opportunities are greater than ever, as well as the risks.

We can have a future second to none - in a country which safeguards the identity and pride of each and everyone of us. How? We have only to build upon the extraordinary values - compassion, tolerance and ambition - that are our common heritage.

[English]

Mr. Chairman, we are a country where tremendous success is ours for the taking. The raw materials we have at our disposal are extraordinary: our foundation, already achieved, as one of the leading nations of the world; resources, natural and human, that few others can touch; skills that in so many areas are second to none; and a culture that mirrors the diversity of an entire world. It is time for us to draw these together, to shape them to our advantage for a new century.

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While there are differences among us, there is nonetheless a remarkable consensus on the kind of country that we want to create, a country where everyone who is able to work can find a meaningful job, a country where Canadians in need can have confidence that their social programs are going to be there for them, a country that sets new standards of excellence across the board. It is these goals that must reinforce our resolve to work together.

Mr. Chairman, we talk a lot in this country about creating strategic alliances with others abroad. Surely, now more than ever, it is time to form a new strategic alliance here at home. I look forward to a discussion with the members of this committee on how we can do that together. Thank you.

The Chair: Thank you very much, Mr. Minister. We have fifteen minutes

[Translation]

for the Bloc. Mr. Loubier.

Mr. Loubier (Saint-Hyacinthe - Bagot): Good afternoon, Minister. We're happy to have you here today. On the other hand, we would have preferred meeting you three weeks ago before pre-budget consultations got under way for you to draw out the main points for us. However, we're still happy to have you here today.

If I go by the demonstration you made for decreasing the 1995, 1996 and even the 1997 deficit, I have to point out that you're basing this reduction basically on the unemployment insurance fund.

This year, you're already setting up a surplus of roughly 5 million dollars for 1995-96. Had it not been for the surplus generated in the unemployment insurance fund by the different steps you took over the last two years, your deficit for 1995-1996 wouldn't be 32.7 billion dollars but 37.7 billion dollars.

Next year, you're also forecasting a surplus of some 5 billion dollars in the unemployment insurance fund if your figures are correct. So you're decreasing your apprehended deficit by 5 billion dollars again. Now the philosophy and basic principles of the unemployment insurance fund state that it should be an actuarial fund allowing the completion of a complete economic cycle. the funds coming in during the good years are supposed to accumulate to form a surplus to attain the objectives of the unemployment insurance fund during the leaner years.

So could you confirm, Minister, that had it not been for the 5 billion dollar surplus taken from the unemployment insurance fund this year your deficit wouldn't be 32.7 but 37.7 billion dollars for 1995-96?

Mr. Martin: Should I answer right away?

Mr. Loubier: Yes.

Mr. Martin: When you look at the cuts of 20 billion, 25 billion and 29 billion dollars that we've committed to over a three-year period for the 1994, 1995 and 1996 budgets respectively, it's clear those cuts are made in the government apparatus itself, department by department, and that they have nothing to do with the unemployment insurance fund.

On the other hand, it's important to point out that when we were put in power, the unemployment insurance fund was running a deficit of some 4 to 6 billion dollars. We got rid of that deficit and now the fund is showing a surplus of no more than 1 billion dollars. I think the member should congratulate us not only for having downsized the government apparatus but also for having improved the unemployment insurance fund that is now showing a surplus. That's what you call good management.

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Mr. Loubier: I'll congratulate the Minister once he's answered my questions. I put a question to him. In his 1995 budget document on pages 89 and 94, it says that the unemployment insurance fund surplus must be taken into account in forecasting the government's expenditures and revenues and thus in forecasting its deficit.

So I have a specific question. Had it not been for the 5 billion dollar surplus taken from the unemployment insurance fund into which the federal government has not been putting any money for the last five years because only employees and employers now contribute to that fund, the 1995-96 deficit would have been 37.7 billion dollars and not 32.7 billion dollars.

How can he deny that, with his own budget documents there bearing witness to the fact? Actually, you have the same calculations in the government's financial statements. The unemployment insurance fund surplus is added to the deficit estimates.

So you're enjoying a five billion dollar surplus on the backs of the unemployed to attain the targets you had set to decrease the deficit and you'll be doing the same thing next year.

Mr. Martin: If the member has problems, it's not with me but rather with the Auditor General. It's an accounting question. When the government was put in power, there was a deficit that was part of the Consolidated Revenue Fund deficit. And that's how the Auditor wants us to keep our books. And thanks to our good management and the stimulation of our economic growth that progressed well, we managed to put the unemployment insurance fund afloat.

If I understand the member, then, he's telling us that we shouldn't have put this fund back on its feet; we should have cut even more. On the contrary, I think we have to govern in a balanced way, in other words increase revenue through better management of our economy and cut government expenditures. Your problem, sir, is a book keeping problem. You should have a chat with the Auditor General.

Mr. Loubier: Mr. Minister, I'm not presuming anything. I'm putting a question to you and I expect an answer. You gave me part of the answer.

You said that you had calculated the surplus in the unemployment insurance fund as part of your revenue and expenditure forecast and it was thus part of your forecast deficit. Thus, if there's a five billion dollar surplus taken out of the unemployment insurance fund in 1995-96, it has to be taken into account in the deficit objectives for 1995-96. That's why your real deficit in 1995-96 isn't $32.7 billion but $37.7 billion.

The surplus you took from the unemployment insurance fund becomes a disguised tax on the payroll or a tax on jobs. When you look at the 1995 financial statement, there's no net creation of jobs during the first three quarters. By using the unemployment insurance fund to decrease the government's real deficit, you're taxing job creation even more for 1995-96.

Mr. Martin: No.

Mr. Loubier: Well then tell me where you're accounting for your unemployment insurance fund surplus if you're not accounting for it there. That's how you're accounting for it in your own documents.

Mr. Martin: First of all, we're setting up an unemployment insurance reserve fund so that the next time there's a downward movement in the economy we won't be forced, contrary to previous governments, to increase unemployment insurance contributions because there's nothing less efficient during a recession than to go ahead with increases like that one. So we're setting up a reserve fund and everyone agrees that that is the best way to go.

Second, the fund isn't in a deficit situation anymore and actually shows a one billion dollar surplus which is not really enormous.

Third, there have been a lot of jobs created in the private sector this year.

Mr. Loubier: How many? Zero.

Mr. Martin: A lot of jobs. The member's figures aren't valid, as usual.

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Fourth, when we're here to discuss real problems like job creation, deficit reduction and necessary improvements to our public finances, the member wants to talk about bookkeeping.

The unemployment insurance fund is part of the Government of Canada's consolidated revenue fund. It's been like that for years and that's why the federal government absorbed the deficit. If you're having problems with your bookkeeping, you should talk to the Auditor General.

Mr. Loubier: Mr. Minister, you therefore accept my version. Is the unemployment insurance account a separate account? And when a contingency reserve is mentioned, in other words a fund that would help to go through the complete economic cycle, it's an actuarial fund. The cash inflow from the good years helps to pay the benefits during the bad years. That is how these surpluses are used.

So my questions are the following: is there a separate unemployment insurance account and is it an actuarial account?

If you says no, you'll contradict your colleague, the Minister of Labour, who says that surpluses from the unemployment insurance fund are never used to reduce the deficit. According to your budget paper and your own words concerning the consolidated fund, you did in effect use the5 billion dollars of surplus generated in 1995-96 in the unemployment insurance fund by premiums paid by employers and employees, and which the federal government hasn't contributed to in five years, to meet your deficit objectives and to look good as a steward of the state. You haven't contradicted me. You've confirmed what I said, which is to say that your real deficit for the next year will be 37.7 billion dollars.

It seems to me that you have to call a spade a spade. It's very nice to make speeches with beautiful charts, but why not talk about real things!

Mr. Martin: I can repeat myself if you want to use the time given us for an accounting lesson. First of all, the unemployment insurance fund is not a separate account and never has been. It is part of the government's consolidated fund. When that fund has a deficit, the government has a deficit. When it has a surplus, the government has a surplus. That's the way it has always been.

As to creating a reserve, we want, before touching the premiums any more than we already have this year, this reserve to increase in order to offset the effects of the next recession, even if we have to lower it a bit if it turns out it isn't necessary.

All of this is accounting. That's the way the government has always operated and if that doesn't please the MP, he should talk to the Auditor General. All that I can say is that we work with the tools and books inherited from previous governments.

Mr. Loubier: Mr. Minister, even the Business Council of Quebec and the Canadian Institute of Actuaries are asking you to keep separate books so as not to distort things because of your accounting practices.

Admit that for the time being the surplus generated by the unemployment insurance fund is being turned into a tax on employment, a hidden tax on the payroll. While you say we must favour job creation and economic growth, by your measures, to disguise your inability to manage Canadian public finances and reach acceptable deficit-reduction objectives, you tax job creation.

You talk about spectacular job creation this year. It only started to go up a bit in November. In the first three quarters, there was just about no net creation of jobs - 34,000, I think.

Mr. Martin: First of all, this year, in the private sector, over 200,000 jobs were created. When you come here, you should come prepared! If we accept your argument, when the fund runs a deficit such as it did three years ago, who should make up for it? Should we ask each of the unemployed to absorb the deficit? Is that your idea of equity?

Mr. Loubier: The question I was asking you had to do with the surplus of 1995-96. Admit that by having accounting that isn't separate, you use the surplus of the unemployment insurance fund, which you have not put a cent into in five years, to reduce your deficit and give the Liberal government the image of an excellent public finances manager. It's a false image!

Your results this year and for next year are purely the results of a disguised tax on payroll. Admit it! You've just said that anyway!

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Mr. Martin: We've just lowered it one and a quarter billion dollars. A million and a quarter! We've just lowered unemployment insurance premiums. While other provinces are increasing the payroll tax, we are lowering it.

Mr. Loubier: You've tightened the eligibility criteria. You've cut benefits.

The Chairman: Excuse me, Mr. Loubier. I'll now give the floor to Mr. Grubel.

[English]

Excuse me; the junior member of the finance committee from the Reform Party. Welcome, sir.

Mr. Manning (Calgary Southwest): Thank you, Mr. Chairman, and thank you, Mr. Minister, for your presentation.

I think because our time is limited I should get right to the point. I think the words were fine. There was tough talk about getting after the deficit. The slides all worked well. But I think you know what we're going to say, and that is that you're not going far enough, fast enough with respect to spending reductions. It's not just us who are saying that; it's the IMF, it's the business community, it's the investor community. The unemployment numbers are saying it, and even the polls are saying it.

What you're giving us, in our judgment, is the worst of both worlds. You're giving us enough spending reduction to cause pain, but you're not giving enough spending reduction to give stimulus. You know as a business person that deficit reduction itself can be stimulating if you go hard enough and fast enough so that the business community in particular believes you're going to get to the end of the road and you're going to be able to offer them tax relief. But it seems to me that the minister is hung up halfway between.

As you know, eight of the eleven senior governments in the country are committed to deficit elimination as their target, not deficit reduction, and they are actually on a steeper curve than the minister.

My first question, and it's our most central question, is what would it take to convince the minister to revise his spending reduction target to deficit elimination by 1997-98 rather than the soft target that he's presented? What do we have to say to you to convince you that this is where you ought to be?

Mr. Martin: First of all, may I just say, Mr. Chairman, that while I obviously do not agree with the leader of the Reform Party, it is a pleasure to be discussing a real problem rather than accounting procedure.

The fact is that when we first took office, it was very important to re-establish the credibility of government and basically say that government will do what it says it will do. That's what we have been in the process of doing, and we have had a very deliberate schedule of deficit reduction. We believe that this kind of a procedure will lead in the end to a much stronger economy than would a slash and burn approach, which in the end may give you better short-term results, but if your ultimate goal is long-term deficit and debt reduction, it will give you a much better result.

The fact is, as I go through the examples - and I say this to the leader of the Reform Party - if you take a look at the areas where you would have to cut faster, the net result, either in human terms, technological terms, social terms or economic terms, would lead to escalating deficits, not reducing deficits.

Mr. Manning: We know that you have set up this straw man of the slash and burn mindless cuts, no doubt with somebody in mind, but that's a straw man that's easy to knock down. Surely the minister is not arguing that these eight other governments that are on a steeper curve than himself are insensitive to those things and are pursuing that type of a policy.

I think the minister knows from his interactions with the business community that the way they react to this rolling two-year target, it does not convey to them an impression of determination or stability. They think of it as some fiscal drunk staggering down the highway following some illusionary target over the cliff. That's the way they react.

The minister has said he doesn't want to get into slash and burn because he wants to give people the tools they need for social security and economic growth and that type of thing. But isn't the tool that people need, both for social security and for job creation, more dollars in their pockets, and those dollars not taken from their pockets by the government?

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My second question is, does the minister believe a dollar left in the pockets of a business person or a worker or an investor or a lender is more productive than that dollar in the hands of a bureaucratic politician?

Mr. Martin: In the vast majority of cases I would certainly agree with the leader of the Reform Party in that statement. On the other hand, when you take a look, as an example, in the kind of world in which we live, at the need for governments to facilitate export financing, that kind of money in government hands is worth while. Governments that are funding basic research and development, which ultimately lead to huge commercial gains...those dollars spent by government are far better.

So the answer to your question is in theory you're right. But quite clearly, if you took that to its logical extreme you would completely eviscerate government.

We don't believe in that. We believe there is a role for government. It has to choose its priorities. Yes, the more money left in the private sector the better. But the fact is we do believe there is a positive role for government in research and development, in export financing, as examples, and in the funding of our basic social programs.

It's very important... I know the leader of the Reform Party would not disagree when he says a dollar left in the hands of the private sector...means we should take money away from our old age pensions or our health care or other social programs. The fact is you have to do it. You have to have a balanced approach, and that's what we have laid out.

Mr. Manning: One last question. If the minister then concedes that a dollar left in the pocket - and I didn't say just the private sector; I said the worker, the family; I'm talking about individuals, not just the private sector - is more productive, then the minister must have tax relief somewhere in his agenda. The whole purpose in going through this, in many respects, is to leave more dollars in the pockets of the people. So can he tell us how long it's going to take him to get to tax relief, if he's on this slow curve?

You can argue this whole curve is advantageous when you're trying to ease the burden. But really what you're saying to people is that tax relief is going to be further and further down the road. There's no tax relief in here by 1997-98. There's no tax relief in here by the year 2000. What is the minister's target date for offering tax relief, which is the kick, the stimulus, you get out of real deficit reduction?

Mr. Martin: First of all, if I could just deal with the preamble about the slow curve.... We are not on a slow curve. We are proceeding on deficit reduction as fast as we possibly can, taking into account the need not to engage in cuts that will have negative medium- and longer-term consequences. That is the balance we are engaged in here.

On the question of tax relief, it is our belief that the most important tax relief we can provide Canadians at this point is a reduction in interest rates. That reduction in interest rates will flow from deficit reduction, and that deficit reduction - and we are seeing it - must take priority over a reduction in taxes.

We want to reduce taxes. We fully intend, when the nation's finances have been cleaned up, to proceed to a package of tax reduction. But at present, tax reduction that would take away from deficit reduction we believe would be a bad bet, simply because of the effect on interest rates.

Mr. Manning: So when is the soonest you can see tax relief out of your scenario?

Mr. Martin: I certainly hope to be the Minister of Finance to stand up and make that budget.

Mr. Manning: You anticipate a long career.

Mr. Martin: If I might say, looking at the opposition, I think so.

The Chair: Mr. Grubel.

Mr. Grubel (Capilano - Howe Sound): Mr. Minister, it was indeed very impressive to see how the curve is coming down, but I would like to remind people that there is a planned deficit for 1997-98 of $17 billion, and if my arithmetic is correct, $17 billion is still adding to the debt at the rate of roughly $50 million every day. So I would say it's very important. But I would like to elaborate on the need for faster cuts and then ask a question on this.

We had witnesses here who told us the reason why you need to have a zero target within the government's mandate is that the business-cycle boom is not going to last. You have to be prepared.

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Secondly, it is highly unlikely that really significant cuts will take place in the last year of this government's electoral mandate.

Thirdly, it was suggested to us that we need to have a fiscal cushion for the contingency that we will have another Quebec referendum, which will cause havoc with our finances.

In your last budget you made a memorable statement. You said, ``I'm going to meet those targets, come hell or high water''. I wonder if you could assure us that you will do that also if within that time horizon there will be a change in the business cycle, there will be all of those contingencies.

Mr. Martin: I'm getting more notes here than I could possibly read in a month of Sundays.

If you will take a look at that $17 billion, Mr. Grubel, the deficit we just announced, of$37.5 billion, will have been cut in half within a couple of years. That is very significant, and I would like to give you an examination....

In 1994-95 our program spending was $118 billion. By 1996-97 it will have dropped to$108 billion. To the best of my knowledge - and you're equally, if not more, knowledgeable - we are the only country in the G-7 that is actually cutting program spending as opposed to slowing down its rate of growth.

To answer your first question, we have substantial contingency reserves in our projections. When we come with the budget, we will do what we did the last time: we will accept the advice of this committee; we will be very prudent in terms of interest rates; and we will continue to have that contingency for whatever reason may occur.

In your last question, you asked me if I am prepared to say whether this government will hit the new target. I have to tell you that I have two maiden aunts watching this. When I said ``hell or high water'' the last time, they pointed out that that was not proper language. But, since it's your fault, I want my aunts to understand that, yes, we will hit the 2% come hell or high water.

Mr. Grubel: When you look at the record and the achievement up to this date, your record shows that you have cut zero, zilch, spending out of programs to get to where you are today. You've got to where you are today, between last year and this year, simply as a result of economic growth. That means you're going to have all the hard cuts coming in the future.

Are you confident that you will have the support of your caucus and cabinet colleagues in making all those program spending cuts necessary to reach those targets?

The Chair: Absolutely, Mr. Grubel.

Mr. Martin: That is a very good question when you look at the history of the previous government. One of the things we found when we came into office was that a lot of cuts had been announced, had been booked, but there had been no discussion.

One of the fundamental changes we brought to this whole procedure was that immediately after the first budget, we went to work on the second budget. So when I stood up last February and announced those cuts, every one of them had been agreed to and the means of implementing them had gone into effect.

So the answer to your question is that that support is already there. Individual ministers have already taken all of the steps necessary to making sure that they will happen.

I can tell you, as well - and the chairman just indicated this - that I have had tremendous support from my caucus. I have had tremendous support from the cabinet. I have to say - and without this no Minister of Finance could survive - that I have had tremendous support from the Prime Minister.

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Mr. Grubel: But you do see that all the complaints we heard here in the finance committee were about cuts. Those haven't even taken place yet. I can just envision the pressures that are going to build up and what you will have to face, and I'm so glad to hear that you are confident you're going to get it past your colleagues.

Thank you.

The Chair: Mr. Campbell, please.

Mr. Campbell (St. Paul's): Based on Mr. Grubel's last comment, it's clear that even Reformers couldn't help but be moved by what we heard on the road about the budget measures we've already taken.

Minister, last year this committee endorsed the concept of rolling targets, because clearly setting and meeting deficit targets, something no other government has done in recent history, goes a long way to restoring our credibility in these matters and our confidence and our ability to do just that. We're going in the right direction. You've set a new goal for 1997-98, 2% of GDP continuing to take us in the right downward direction.

The budget in 1994 effected $20 billion in savings measures and the budget in 1995 an additional $29 billion. These cuts are still being absorbed. As we've travelled across the country as a committee, half of us to the east and half of us to the west, we've seen that evidence.

My question is simply this. To what extent do you believe measures that have already been taken in those earlier budgets I mentioned take us on that road to the 2% target? Canadians out there are asking us how much more of a hit they are going to have to take.

Mr. Martin: I think that's a very good question, and in fact it does follow from the question from Mr. Grubel.

First of all, if anybody would like to take a look at this particular document, which is a document that summarizes where we have been, the fact is that it is not true that significant cuts have not taken place. I appreciate you giving me the opportunity to correct that. The fact is that very significant cuts have already taken place. So this idea that they're only going to be coming down the road is simply inaccurate.

To take your question one step further, the last budget has been characterized as probably the most significant budget in Canadian history. We took an enormous amount of action in that particular budget. Yes, there's going to have to be further action taken, but the fact is that the significance of the last budget is such that it has set us on the right course.

Mr. Campbell: Thank you.

The Chair: Thank you, Mr. Campbell.

Mr. St. Denis, please.

Mr. St. Denis (Algoma): Thank you, Mr. Minister, for being here. We've just about concluded our pre-budget consultations and it's been a marvellous process again, which I think is testimony to the openness of this government and the many things we've learned. There are two that stand out in my mind.

First, Canadians really want the federal government to be there when it comes to national standards, not just in health but in education and many other areas. They may allow that provinces can possibly administer things better, but they want the feds there.

The second thing that stands out in my mind is that trends are as important as goals. I remember one economist saying at a round table that he didn't really care whether we had zero deficit in 1999 or 2001, as long as the trends were consistent.

I wonder, Mr. Minister, when you try to imagine what the rest of the world or investors are thinking about the country and what the people are thinking about this country, whether it isn't a lot better that we just try to have a predictable economic environment, a stable environment, an environment with no surprises in it. We don't know; if we try to slash and burn to get to zero tomorrow, we could end up with one heck of a big surprise on our plate.

Mr. Martin: I think that's absolutely right.

In fact, if you want to take a look at trends, one of the things I was told when I came into this job was that just because governments in terms of deficit reduction had consistently been over-promising and underachieving, until you demonstrated that you would do what you said you would do, people weren't going to give a lot of credit. It simply wasn't enough to say, well, I think what's going to happen now as a result of what we're doing is that people are going to see that when we came into office the deficit was at 5.9% of GDP, that we then brought it down to 5%, that this year it's going to be 4.2% and next year 3%, and now we've said we're going to be at 2%. I think you're dead on that people are going to see that not only have we promised a trend, but we have realized a trend. On that basis I think the credibility we require will be there. I think your question's right.

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The Chair: Mrs. Brushett.

Mrs. Brushett (Cumberland - Colchester): Thank you for coming, Minister.

Canadians have told us this deficit and debt didn't happen overnight, and by taking the more sustainable approach to looking at the longer term, we are doing the right thing, and it will take a little longer than slash and burn, cut away very quickly.

But in doing that, they've also indicated to us that perhaps we should look at the longer term of sustainability in the economy in terms of the social fabric we wish to have and the human factor as well as the economic factor. They wonder if we should not be looking at the debt-to-something ratio in terms of the deficit and that we would be better off. Is there an answer there?

Another question that comes up - maybe you can answer this today, perhaps not - is, why does the Bank of Canada not assume a greater portion of the debt as it did in years gone by?

Mr. Martin: Dealing with your questions in reverse order, I think that in terms of the Bank of Canada, one of the great assets this country has is very low inflation, and I think that one of the things we want to do, because we paid very dearly to get that low inflation, is to not do anything that would jeopardize it. I think that if the Bank of Canada were to act other than it is acting now, there would be that threat of inflation, and we don't want that to happen.

Your first question is dead on. I think it is very important that we begin to talk about the debt-to-GDP ratio. It is the one that markets look at. It is also the one that basically gives you an idea as to the financial soundness of your overall structure. So while we must continue to talk about eliminating the deficit, we should talk about the debt-to-GDP ratio.

A lot of people will talk about the debt-to-GDP ratio in only one way. They'll say, you have to cut the debt. The fact is that's incorrect. Sure, you have to cut the debt, you have to get the deficits down, but you also have to increase your economy, and that means people going back to work. I think it's very important that we pursue that double track.

The Chair: Mrs. Stewart.

Mrs. Stewart (Brant): Welcome, Minister.

I just want to begin with some comments on the questions from the leader of the third party, because as he pretends to be a grassroots politician, I'd say he's about two-thirds up the stock.

Certainly in my province of Ontario where the slash and burn approach is now under way, I have the people at the grassroots, at the bottom end of the economic stem, in my office who are unable to keep their homes and to afford food because that process came so quickly and without any kind of warning so that they weren't prepared, and they can't look after themselves. So I congratulate you on your approach, and I certainly support it.

Having said that, I turn to a couple of things you have in your documentation, where in fact you're referring to our commitment to stabilize cash transfers to the provinces. Certainly in the representations we've had from different groups, there is a great concern with the new CHST that the federal government is walking out. As you talk about stabilizing cash transfers, can we now say to those people, look, folks, we're in the game; there is going to be cash there for the transfers to education, health and social assistance?

Secondly, in a couple of paragraphs you talk about a commitment to act so that when the time comes, young people will have a system of support and pensions that will be there for them, too. How significant are the changes to the current structures going to have to be to make sure we have that support for them? As you talk about creating better social programs, can we in fact at the same time create a system that supports our young people when they are old in a way that is even better than we can do now for our seniors?

Mr. Martin: On your first question about the cash transfers, as you know, when the government put the current system into effect in the 1970s, what it essentially said is we are transferring tax points and cash to the provinces. The basic concept was that as the value of the tax points went up, the need for cash would diminish until such time as there would in fact be no cash.

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Depending on the individual province, the basic projection is that by anywhere from about the year 2005 to the year 2020 the cash will run out and the federal government's responsibility to those transfers will be settled only by the value of those tax points that have been transferred.

We have said as a government that the cash portion is very important. That cash portion is an essential part of the preservation of the social fabric across the country, so we have said we will stabilize those cash transfers at some point. We have not said when and we have not said at what level. That is really going to be a question of negotiation and discussion with the provinces, but the commitment to do so...in other words, we have taken the commitment to reverse that run to zero.

Your second question is very well taken. We all know there is a view out there among young people that the Canada Pension Plan is not going to be there for them. The fact is that there are going to have to be modifications. There's no doubt about that. The current premium level.... The actuary has said that at the current premium level, eventually the plan runs out. There are obviously going to have to be changes in the benefits as we look at them.

But right now we are meeting with the provinces. There have been meetings of officials on that matter. It will undoubtedly be a topic of the finance ministers' meeting next week. I can tell you that this government's objective - and I am very confident that we will attain it - is that the net result is going to be a Canada Pension Plan, a retirement assistance program, that will be there for young people.

The Chair: Mr. Pillitteri, please.

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

Mr. Minister, I travelled with the finance committee last week in the Atlantic provinces. When we are here in Ottawa we're somewhat sheltered from the abuse we might have to take outside.

Let me share this with you. There was one presentation where a certain gentlemen made this remark: ``I don't want you to be political cowards and take the easy way out of going to zero deficit within this mandate. Stay the course and let the human element, rather than balancing the books, take its course.''

Mr. Minister, today you said we will meet a 2% debt-to-GDP ratio. Of course, you've answered part of this. Are you predicting looking toward 1% in the next budget within this mandate?

Mr. Martin: The toughest questions come from your own side, Mr. Chairman.

The Chair: We have very intelligent members on our side, Mr. Martin.

Mr. Martin: I think we will stay with the two-year rolling targets. The commitment to 2% is rock hard. I look forward to appearing before this committee next year, at which point I'll answer your question.

The Chair: Mr. Discepola.

Mr. Discepola (Vaudreuil): Thank you, Mr. Minister. I fully concur with your 2% objective. However, during hearings we're always - and this is what's bothering me the most - having the business community come after us to say that 2% is not enough. They say we've got to go to zero, zero, zero, and the faster the better. I've arrived at the conclusion that the reason for this is as you stated: we need to get our interest rates down.

You stated in your own presentation that if we could get the interest rates down by 2%, our economy would probably grow by 2.25% to the tune of $14 billion. The average Canadian would then ask you why you don't get your interest rates down and why you don't use the Bank of Canada. We've heard it time and time again.

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I've done some research in the library, and I quote some figures that shouldn't be wrong. In 1989, the prime rate was 13.33% and ten-year bonds were at 9.92%. The five-year mortgage was at 12.06%. So you look at that and you think 10-year bonds were roughly 3.4 basis points lower. If you take a look at 1994, Mr. Minister, the prime rate was 6.88%; 10-year bonds only went down to 8.63%, which means 1.7% higher; and the mortgages were at 9.53%, 2.68% higher. I wonder, if you take a look at those figures, whether the banks are playing their fair role.

When you take a look at today's profit pictures by most of the major banks, are they actually keeping the point spread higher than necessary?

Do we have any leverage, as you used last year in your budget? You indicated and almost instructed the banks that they had to come up with benchmarks for lending access to small business.

Have you explanations for the large variance in the 10-year bonds? In other words, is our strategy working? Can you give us an indication of what you plan to do to the banks if they don't live up to the commitment to providing access to capital for small business?

Mr. Martin: The fact is, we have been very successful in terms of encouraging the banks in non-legislative ways to increase their lending to small business. First is the acceptance of the need to provide information. The establishment of not only individual bank ombudsmen but a national ombudsman to give small business an opportunity to appeal decisions they feel were unfair is a tremendous step forward.

We have basically said, look, the banks have a responsibility to lend to small and medium-sized business. We intend that they will live up to that and we are prepared to take whatever steps are necessary to ensure that happens, but we are really not all that keen to do it legislatively. We have to see it happen. The fact is, we've just set the ombudsman thing in place and I think we have to give it a chance to work.

Probably nobody has been as critical of the banks as I have. I believe the banks have made progress, and I really think we now have to give them a chance to see if in fact they can live up to the commitments they have made.

On your second question, having to do with interest rates, the problem there is not the banks. The banks are simply one financial institution among a lot of financial institutions, and they are part of a very different and very interdependent world.

If you're asking why our real rates are so high, which is a very good question, the answer is, first, no country is an island. Between them, the U.S. Federal Reserve and the Bundesbank have an enormous amount of influence on the level of world rates. As we know, both of them over the course of the last year have either not lowered, as one would have expected, or in fact have brought interest rates up. That impacts upon Canada.

The second thing is our level of indebtedness. Compared to the numbers you were given, we owe a lot more money. The fact is that the more you are indebted, the higher your interests are going to go.

The document that has been circulated to you is very interesting. It deals with countries, but it also shows provinces. Those provinces that are more heavily indebted than others pay higher interest rates. That happens to be an unfortunate fact of life, which is one of the reasons we have to get them down.

The last reason is I don't think anybody should be under any illusion as to what the cost of political uncertainty on our interest rates is. We are paying a penalty in terms of interest rates for the fact that outside investors, and indeed Canadian investors, take a look at us and they basically look for the political stability that they don't see there to the degree they think it should be.

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The Chair: Thank you, Mr. Discepola.

[Translation]

Mr. Brien, please.

Mr. Brien (Témiscamingue): What the minister is saying surprises me, because he's the one, specifically, who told us that if we voted no, that uncertainty would disappear. And now, he's just confirmed that it still exists. The minister therefore did not tell us the truth during the campaign.

Mr. Discepola: You should accept the results.

Mr. Brien: We accepted them! We didn't declare out sovereignty, Mr. Discepola.

I'd like to come back to the Canadian social transfer, which was brought up by my colleague Ms. Stewart earlier.

In your budget for 1995, it is written that:

The new CHST criteria will mean that there will be 2.5 billion dollars' worth of cuts in 1996-97 and 4.5 billion dollars' worth in 1997-98. We know how that cut will be split up in 1996-97, because Quebec will have to absorb 650 million dollars of it.

Can you tell us how the additional cuts of 4.5 billion dollars in 1997-98 will be split up amongst the provinces?

Mr. Martin: First of all, as to political uncertainty, as Mr. Discepola said to you quite clearly, it comes from politicians' statements. If your party is prepared to say that it accepts the results of the referendum and that we can start to build together, I can assure you that it will have a very positive effect.

As to your question, you know as well as I do that we are supposed to meet with the different provinces. Next week, I will meet the ministers of Finance from the provinces. I will certainly ask them how they see the matter of allocating transfers, and I'm sure that the opinions will be very different from one province to the next.

That being said, I can't answer your question because it wouldn't be fair to do so before having met with the ministers of Finance.

Mr. Brien: Can you confirm for me whether there are two scenarios concerning the criteria used? Those scenarios are: if we apply the same criteria as we did in 1996-97, Quebec will bear, in 1997-98, 1.2 billion dollars of the 4.5 billion dollars to be cut. And if the population criteria is used, which Mr. Axworthy refers to in his paper, Quebec will bear 1.9 billion dollars, 42% of the4.5 billion dollar cut.

Can you confirm those figures?

Mr. Martin: Non, I don't agree with those figures. They are not valid.

We have before us many options that we will have to consider. I am in no position, however, to confirm anything whatsoever because I haven't yet met with the ministers of Finance. But I can tell you one thing: it's very easy to choose a figure here and forget other figures there. You're playing the economist, or the accountant, just like your colleague.

You know what economists do!

Mr. Brien: We also know what ministers do!

Mr. Martin: Yes, but it works better when the minister isn't an economist!

Mr. Loubier: I'm not so sure!

Mr. Martin: When we look at the transfers to provinces, we have to include equalization payments. Up until now, for Quebec, the equalization payments were increasing.

If we include the equalization payments in your statistics, the gap is much smaller than the one you alluded to, in the option you were discussing.

Mr. Brien: So you are saying that Quebec will not have to deal with 1.9 billion dollars' worth of cuts out of 4.5 billion dollars. Is that true?

Mr. Martin: No, no.

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Mr. Brien: Out of the 4.5 billion dollars, you are committing to Quebec not having to deal with cuts of 1.9 billion dollars. I'm happy to hear you say that!

Mr. Martin: Yes.

Mr. Brien: That will mean significant savings.

We were speaking about the Unemployment Insurance Fund. And yet, there's a part of that which is illusory, for it's only because of the unemployment insurance surplus that you can reduce the deficit. In 1997-98, you will be able to reduce the deficit by 4.5 billion dollars, because you will have saved by reducing transfer payments to the provinces.

Don't you agree that for the taxpayer, this is not a reduction of the deficit, because the 4.5 billion dollars that you will have saved that year will have been saved at the provinces' expense? You are presently cutting the deficit thanks to the Unemployment Insurance Fund surplus, but in 1997-98, you'll reduce it by transferring the burden to the provinces. The result for the taxpayer is the same: his or her overall debt will not change, because it will have been transferred from one government to another.

Mr. Martin: Two things. First of all, I was very clear. Concerning options relative to the Canadian health and social transfer, I don't have a preference. And, as I was saying to you earlier, I am not in a position to confirm anything before meeting with the ministers of Finance next week.

Concerning the taxpayer, obviously it is the same. But when the federal government makes cuts, given that its transfers to provinces make up 25% of its expenditures, it must, among other things, proceed to a reduction of those transfers. However, if you look carefully at the cuts for 1996-97, you realize that they mean, for Quebec, less than 1% of its revenue.

Allow me to give you some statistics for Quebec.

In 1993-94, we transferred 11.2 billion dollars; in 1994, we transferred 11.4 billion dollars, an increase of 200 million dollars; in 1995-96, 11.7 billion dollars will be transferred, an increase of almost 500 million dollars; and in 1996-97, there will be a decrease. As a result, cuts to Quebec are not just the result of transfer reductions from the federal government, because up until now, those transfers have increased.

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

[English]

Mr. Solberg, please.

Mr. Solberg (Medicine Hat): Thank you, Mr. Chairman.

Others, and in fact the minister himself, have invoked the human factor as a reason why cuts haven't gone deeper. But I point out to the minister that we're adding $100 billion to the debt and that the interest payments on that debt will continue to undermine social programs, will continue to undermine some of the plans people want to make in the future.

One of the things we heard when we were on the road is that people want to be able to plan down the road. In this plan there's no certainty what's going to happen down the road, because there's no target here such that we can say after that point we will have sustainable social programs, or after that point we will be able to start to move towards tax reduction.

I would like to assert that under your plan basically you're saying to people that we are not going to know, any time in the near future, about the planning you can start to make so you can ensure you indeed will have a secure future down the road. By putting this off indefinitely, or at least for a long time down the road, indeed you're undermining the ability of people to make plans down the road and you're undermining the programs you say you are trying to save.

Mr. Martin: Actually, it's quite the opposite. The idea of five-year projections down to deficit elimination...that's been the history of Canadian governments. They never arrived at it, and there was a huge problem of credibility, which we have re-established. The fact is that by going on these short-term targets we've set in motion by far the best spending control mechanism one could have. We have hit those targets, and that's re-established the credibility.

About the 2%, I answered Mr. Grubel unequivocally, in words that are going to get my aunts mad at me again. I believe that is crucial.

I'll tell you something. I think we have a real problem here with these longer-term targets that people have never hit. I would far rather do what I say I'm going to do than to make all kinds of promises far out at a point when nobody is really going to be able to hold anybody to account.

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The Chair: Mr. Benoit.

Mr. Benoit (Vegreville): My colleague wasn't referring to long-term targets. Our plan would eliminate the deficit in three years, a very short term.

On page 52 of your document, ``The Economic and Fiscal Update'', that you brought with you today, Mr. Minister, you indicate that transfers to persons actually increased slightly over the 1994-95 to 1996-97 period. Transfers to governments, though, have decreased from $16.7 billion to about $13 billion. I wonder why you don't have better balance in cuts, between actual federal spending cuts and cuts in transfers to the provinces, because the cuts in transfers to the provinces have certainly led to a very difficult deficit reduction program in the provinces.

Where's the balance?

Mr. Martin: The balance is in exactly what we have done.

The fact is that your budget represents the kind of approach that I believe would leave Canadians behind. It would not allow Canadians to adjust to change. You're not simply eliminating the deficit in your budget over a three-year period; you're also eliminating most of our basic social programs. That we cannot accept.

I want to answer your question quite specifically, as an indication of what I mean. You're talking about the increases in transfers to persons. The fact is that the increases in transfers to persons arise primarily because of the increase in elderly benefits. That increase will occur because there are going to be more seniors two years from now than there are today. So we're not increasing by vast sums of money on a per capita basis; there are going to be more seniors in two years than there are today, and we're taking care of them.

That is fundamentally the problem with your approach: you're not taking into account that there are real people out there and that you're basically going to take away very important -

Mr. Benoit: Provincial governments also deal with payments to seniors and to others, through health care and other programs.

The Chair: Mr. Riis.

Mr. Riis (Kamloops): First I have a positive comment about the commitment to cash transfers for health care and other programs. I appreciate that comment. It will send a very clear signal for people everywhere.

I want to reinforce the point made by Mr. Grubel, which was reinforced again by Mrs. Stewart, that the issues will hit the fan this spring when those cuts start hitting people. So we had better brace ourselves for that reality.

My question refers to the comment about small business and that lessening regulatory burdens will be helpful in job creation. This is a two-pointer.

One, information has just come out from the banks on the tremendous profits they have accrued in the last year. Much of that comes from service charges that they have imposed. When I talk to small business people, many of them comment on the incredible and increasing burden they face with these bank service charges. Could you talk to your banking colleagues about this when you chat the next time?

Second, have you considered identifying targets, as you do for deficit reduction, for reducing unemployment as well?

Mr. Martin: I have talked to the banks on the issue of service charges. One of the things that the banks point out is that service charges in Canada are in fact either in line with or below those in most other countries.

One of the things we have to look at when we talk about the banks is their return on equity versus simply those very large profits.

Also, we have to encourage as much competition as we can possibly have in the wide area.

Your question on unemployment targets is very well taken. The difficulty, as you know, is the accuracy of the numbers, because the unemployment rates are either understated or overstated depending on the backlog of people who are out there waiting to come in, depending upon their level of confidence.

If you're going to be able to establish targets, then it is very important that they be targets that you will be able to meet as a result of your own actions and that you not be totally at the mercy of other forces, because then in fact those targets lose a great deal of credibility. That's the problem with unemployment targets.

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I think there's a lot to the concept. As you know, the Australians have done a lot of work within this area. I think it's something we should continue to work on.

The Chair: Mr. Godfrey, please.

Mr. Godfrey (Don Valley West): I want to ask a question about economic growth. The OECD has just put out a report identifying an innovation gap in Canada as a major structural problem. Do you see the federal government, over the next two years, despite the tremendous fiscal restraints we all labour under, leading a kind of Team Canada partnership approach with the provinces, the private sector, labourers, and academe, in addressing that in a more vigorous fashion than we've done in the first two years of our mandate?

Mr. Martin: The suggestion is a very good one. I know it's one John Manley and Jon Gerrard have talked about and you have been very active in. That's a very good idea, John.

You may have noticed in my remarks in fact I really did single research and development out, along with another area, as an area in which I believe we are not doing enough. Unfortunately the state of the national pocketbook is preventing us from doing more. So anything we can do in a non-financial sense, along the lines of the structural things you're trying to talk about, would be very worth while, and I would really hope as the national balance sheet improves, research and development will be something we'll be able to do a lot better on.

The Chair: Mr. Ianno.

Mr. Ianno (Trinity - Spadina): Thank you very much, Mr. Chair.

First of all, I'd like to state it was an excellent presentation, Mr. Martin. But of course I'm going to go towards your base and your premise that job creation helps achieve most of the goals government is after.

I go back to the banks and benchmarks you addressed in your last budget...and setting the$100 million tax for the banks so they would sit down with the government and deal with the benchmark. As you know, in the last year we've spoken to the banks again and got their numbers. I agree with you that they're forthcoming with setting data and giving us data, but in the end the amount of money given to small business has been small in the overall amount.

With the proposal I put forward last year about the 33% of all corporate loans to small business...that the banks could achieve, that the Bank of Montreal has achieved...and in effect on a dollar-for-dollar basis is doing much better than the other banks...and they still get a return. I wonder if something is going to be done sooner rather than later, so in your next budget we might achieve something that will strongly encourage them to give more to the job creators, the small business sector.

Mr. Martin: I have some difficulty with quotas. What I really do applaud and would support is the kinds of activities you and a number of your colleagues have taken over the course of the last year.

It's quite interesting...and Mr. Riis' question asking me what I, the minister, will say to the banks.... The fact is that I will say a great deal. But I have to say to you that I think the banks have improved their act enormously in the course of the last year, and that is because of the activities of members of this House of Commons: the industry committee, the finance committee, and individuals around this table. I really do believe the continued pressure you have been putting on them...and I must say also the acknowledgement that they're doing better is a very important part of the process, and it's one such that I would like to see if it works. I think what you people have done has been really significant.

The Chair: Mr. Shepherd, please.

Mr. Shepherd (Durham): Accountants have been much maligned today...as ministers are often want to do.

To get back to the discussion of total debt within our country, I was interested in this schedule on page 34 that talks about provincial debt and debt-to-GDP ratios. I wonder if you could make one comment there. It must be very difficult for the federal government to deal with its foreign reserves and so on when some of the provinces are similarly borrowing in foreign markets. I do notice one oddity of that graph, in that it shows the deviation in interest rates within the province of Quebec is somewhat inconsistent with its debt-to-GDP ratio relative to that of other provinces.

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Mr. Martin: You mean it's higher?

Mr. Shepherd: Yes.

Mr. Martin: First of all, most of the provinces have in recent years been very responsible. It is unfortunate that the provinces have had to borrow as extensively as they have in foreign currencies over the course of the last decade. But when you begin to take a look at the actions on deficit reduction that most of the provinces have engaged in, I think you have to say - given that some of them started four and five years ago - that they started before the federal government, and that there is now a pretty happy coincidence of attitude in all governments across the country on what ought to be done, some having begun earlier than others.

In the case of Quebec, the political uncertainty that was created in the run-up to the referendum, that was created during the referendum, and that has been created since the referendum has impacted on borrowers across this country, whether they be the private sector, the provinces, or the federal government, but none has been affected as much as has the province of Quebec. As a Quebecker, I've got to say that it just seems strange that the Government of Quebec does not seem to appreciate the effect of political uncertainty on economic growth, job creation, and interest rates.

The Chair: Thank you, Mr. Shepherd.

Mr. Martin, on behalf of members from all parties, we want to thank you for an excellent presentation. You will always be welcome before our committee.

This committee adjourns until seven o'clock this evening.