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EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, October 9, 1996

.1532

[Translation]

The Chairman: Order, please. Ladies and gentlemen, the Minister of Finance, the honourable Paul Martin.

[English]

We welcome you, Mr. Minister. You may begin.

[Translation]

The honourable Paul Martin (Minister of Finance): Thank you very much, Mr. Chairman. Good afternoon, members of the committee.

[English]

Mr. Chairman, in previous appearances before this committee, we outlined the extraordinary economic and fiscal challenges faced by our country. The purpose of my presentation today and of the document I am tabling is to provide an update on how we are meeting these challenges and on the work that still lies ahead.

[Translation]

Before doing so, however, let me reiterate what our paramount objective was when we formed the government in November 1993. We have talked about the need to clean up the nation's finances - and the requirement to get the government right.

But this is only a means to a much greater end - a country whose economy is growing, a future where the prospect for more jobs is growing, a future where the prospects for more jobs are much brighter, and a society of fairness and compassion.

[English]

From the outset, this government has pursued an agenda that focuses on the three tasks we believe are the key to the achievement of our goals. The first is the absolute necessity to get the foundation right - to restore the confidence of Canadians in their economy and of investors in our country. The second task is the parallel obligation to make our great social programs sustainable over the long run. Finally, the third task is to provide Canadians with the support they require to take advantage of the modern economy, fulfilling the responsibility in particular of giving our young people the best opportunities to succeed that we can. We have always believed that these challenges are linked and that meeting them therefore requires acting on all three fronts together, and that is what we are doing.

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Today I believe we can say that success is much closer than we had hoped. It is far less distant than many had feared.

Let me begin with the fiscal challenge. Only three years ago the financial health of our country was deteriorating rapidly. Consistently for two decades governments had been spending much more than they brought in. Consistently they had been papering over the problem - borrowing here, borrowing abroad, always borrowing against the future. As a result, the nation's finances were being strangled in the ever-tightening grip of compound interest. The deficit stood at $42 billion, and it was destined to rise even further.

[Translation]

The federal government's debt to GDP ratio - the ratio of what we owe to what we produce - had ballooned from 19% in the mid-1970s to over 70% in 1993 and was climbing.

As a result, the markets were demanding a very large risk premium on interest rates, a huge cost when tacked on to a debt level that was way out of line.

[English]

In short, by 1993 our economic sovereignty had been undermined. We had become hostage to every foreign market, whim, and whisper around. There is a wide range of opinion as to how we got into this mess. Important as that debate is, the point is we were in one and we knew that we absolutely had to get out of it. That we had to take dramatic action was not a question of ideology; it was simply that a terrible price would be paid if we did nothing - a price measured in high interest rates, in lost investment, in lost income, and in lost jobs. Furthermore, we knew that our goal had to be permanent fiscal recovery, not a temporary quick fix.

[Translation]

We knew that if we did not act to restore fiscal health, literally nothing else we might to do to boost jobs, to preserve our social programs, would work.

We also knew that a necessary condition for restoring a government's fiscal health was to create a climate conducive to lowering interest rates, and that the only way for the government to do that was to restore market confidence in the way we manage our business.

[English]

Our objective, therefore, was clear: to balance the books. Our pace was measured, deliberate, and responsible. Our strategy had two tracks: economic growth and spending cuts. With respect to the results, in 1993-94 the deficit represented about 6% of GDP. In 1994-95 the deficit came in at $37.5 billion or 5% of GDP, which was $4.5 billion below the previous year.

Today, Chairman, we are releasing the financial report for the 1995-96 fiscal year. It shows that the deficit was brought down further to $28.6 billion.

Only one side is clapping, Mr. Chairman.

Some hon. members: Oh, oh!

Mr. Martin: This is almost $9 billion less than the previous year, and, Chairman, it represents by far the largest single year over year decline in four decades.

.1540

[Translation]

Mr. Chairman, today, we are releasing the annual financial report for the 1995-96 fiscal year. It shows that the deficit was brought down further to $28.6 billion. This is almost $9 billion less than the previous year and represents by far the largest single year-over-year decline in four decades.

[English]

Mr. Chairman, this deficit result announced for last year is $4.1 billion below our target of $32.7 billion. We have always said that our targets were not the best we would achieve, but the minimum. Why have we done better than target? One major reason is that government spending was $1.7 billion lower than we had projected. In fact, program spending in 1995-96 declined in absolute terms for the third consecutive year. It was $6.7 billion below the previous year's level and $10.6 billion below that of the peak year, 1992-93. The new system we have put in place to rein in spending - a system that forces trade-offs, assesses risks, and controls costs - is clearly working.

In addition, the contingency reserve of $2.5 billion was not touched. It was established to cover the unexpected, and we said from the beginning that if it was not required, it would not be spent.Mr. Chairman, it was not required, and it was not spent.

[Translation]

Looking ahead, the question obviously arises - what about the year underway? The answer is - we will hit our target for 1996-97 - a deficit of $24.3 billion, or 3% of GDP.

We may indeed better it. It is expected that lower revenues, due to lower than anticipated nominal income growth, will be offset by lower than expected short term interest rates.

We also believe that the deficit target for 1997-98 - $17 billion, which works out to 2% of GDP - will be achieved as a result of the continuing expenditure cuts made in our previous budgets.

Mr. Chairman, it is appropriate to ask what the payoff has been for these efforts to restore fiscal health.

In the 1995 Budget, we pointed out the great problem of escalating interest rates. We attributed this escalation partly to global factors on the one hand, but particularly to a lack of discipline in domestic economic management.

Since then, in no small way as a result of the actions taken by the federal and provincial governments, the interest rate picture has improved dramatically.

[English]

As recently as early 1995, short-term interest rates in Canada were almost 2.5% above American rates. Today Canadian short-term rates are about 1.5% lower than the U.S. Indeed, Canadian rates are lower than U.S. rates up to a term of five years and then some. The fact is that short-term rates in Canada have come down by more than 4.5% since early last year. This decline will put more Canadians back to work and more money in their pockets than could any conceivable government program or tax reduction.

There have been 17 interest rate reductions, in fact, over the last 17 months. What does this mean to Canadians? For those of you who were in Question Period when the Prime Minister scooped me, to a consumer who buys a new $15,000 car next week, it means a savings of almost $500 per year. To a small business person with a $1 million loan, it means more than $28,000 in yearly savings, and to someone who is renewing a one-year $100,000 mortgage, it means a savings of over $3,000 annually.

.1545

[Translation]

It should also be noted that the drop in rates has helped the provinces meet their deficit targets.

Between January of last year and June of this year, for instance, the provinces have saved $1.3 million in interest charges on their debt. As three examples, Alberta saw its interest charges drop by 165 million dollars, Ontario saved $325 million, and Quebec realized savings of 625 million dollars as a result of reductions in interest rates.

[English]

It is very clear that interest rates count. It is very clear that they count importantly. Looking ahead, it is in the very nature of interest rates that they go up and come down. No one country can control the global conditions that make that happen, not Canada, not even the United States, Japan or Germany. But what we can control are Canadian conditions, making sure that our economic fundamentals are such as to minimize any potential rise, and that is what we have done, and, Chairman, that is what we will continue to do.

Interest rates are not the only numbers that confirm the dramatic turnaround in Canada's economic condition. Inflation remains firmly under control. Our competitiveness vis-à-vis the United States is the best in the 46 years that such data has been made available. Our merchandise trade balance, exports over imports, is running at its highest annual surplus ever. Canadian tourism has been given a strong boost, with the balance in the travel account improving significantly.

[Translation]

As a result of these factors, our current account deficit - which measures the difference between the payments we make to foreigners and the payments we receive from them - has improved significantly.

In fact, in the second quarter of this year, Canada ran its first current account surplus in 12 years. This means that our net foreign indebtedness actually fell. The bottom line is that the benefits of sound monetary and sound fiscal policy are now being joined.

[English]

Mr. Chairman it is clear that Canada is beginning to enjoy the fruits of its labour. The numbers are better than they have been for quite some time. The question is, are we ready now to declare victory? The answer is no, not yet. For this reason, those who would suggest we now alter course by bringing in a broad-based tax cut are wrong. Make no mistake, offering a broad-based tax cut is certainly tempting, and as hard-working Canadians everywhere know, the tax burden is higher than any of us would like it to be, but should the government consider a broad-based tax cut when the fiscal challenge is not fully met, that would be simply irresponsible.

Just consider the example I described earlier, where a car buyer currently saves $500 annually as a result of interest rate reductions since last year. For the government to provide the equivalent savings to the average Canadian taxpayer would require a personal income tax cut of over 11%. That would cost between $7 billion to $8 billion a year. Clearly that money would have to come from somewhere.

One choice would be to borrow it, to let the debt pile up by $7 billion plus interest every year. What would that mean? It would mean losing the financial credibility that Canada has been able to re-establish. It would mean, as a result, higher interest rates for Canadians. The consequences of this would be goods not purchased, investments not made, and jobs not created, and we do not believe Canadians want their government to expose them to that risk.

.1550

[Translation]

Another choice to pay for a tax cut would be to reduce government programs by a further $7 billion. Put this in perspective. Seven billion dollars is more than half the cash component that we will transfer to the provinces next year to support health care and other social programs. It exceeds the federal government's total annual contribution to research and development. It's more than 25% of the current cost of old-age security and the guaranteed income supplement.

[English]

By 1998-99 we will have cut total program spending by 14% from its peak level in 1992-93. This will represent a reduction of $17.1 billion.

Certainly more savings are possible, and certainly we will continue to look for them. But having been through this process and knowing the implications, let me tell you that finding another $7 billion would impose a staggering burden on Canadians. Those who propose broad-based tax cuts never tell people which major program cuts would be required to compensate. Mr. Chairman, as a matter of simple honesty, they have a responsibility to do so.

Some hon. members: Hear, hear!

Mr. Martin: We believe the time will come when the government will be in a position to consider a broad-based tax cut, but it's not now. On the other hand, it is feasible and it is desirable to use the tax system in a much more targeted way, reallocating within the revenue system, making it fairer, focusing on the specific needs of the disadvantaged and the fostering of jobs and of economic growth. In fact, that is exactly what we've been doing. For example, eligibility for the child care expense deduction has been broadened, tax credits for those who take care of adult relatives with disabilities have been increased, as have tax credits that support the education of our young people.

[Translation]

The tax treatment of charitable donations has been improved.

Delivered through the tax system, the working income supplement, which assists working parents with low incomes, was doubled in the last budget, providing $250 million in extra assistance each year to some 700,000 low income working families.

And, as part of our effort to reduce payroll taxes as much as we can, our first act on taking office was to prevent the high premium rates from rising to $3.30. Subsequently, the premium rate was reduced from $3.07 in 1994 to $2.95 in 1996. We have also reduced the maximum earning base on which the premium rates are applied.

As a result of our efforts, workers and employers will save $1.8 billion in employment insurance costs this year and even more in the years to come.

Mr. Chairman, our bottom line: targeted tax changes certainly. Broad tax reductions, yes - but only when the country can afford it.

[English]

Mr. Chairman, just as there are those who would alter course by slowing progress on the deficit, there are those who would alter course by seeking to eliminate it virtually in one fell swoop. The question is, is it time to accelerate the pace we've adopted from the beginning? Again, we believe the answer is no.

We have always said that our pace had to be measured, that a mad dash to zero was not on. The fact is that slash-and-burn budgets carry with them the seeds of their own destruction. They would leave too many Canadians out in the cold, and that is something we will never agree to do. We refuse to back away from the need to make the key investments that will spur growth and the creation of jobs, and, Mr. Chairman, we will preserve health care and the social underpinnings of the nation.

So we will maintain our pace. We will keep on course, firmly and forcefully, an approach that has been virtually unprecedented in the results it has secured.

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Therefore, consistent with our practice of rolling two-year targets, we are announcing today that the deficit target for 1998-99 is $9 billion or about 1% of GDP. This target will be achieved by continuing the implementation of the structural changes set in motion by our 1994, 1995 and 1996 budgets. This means that in over five years we will have brought the deficit down by $33 billion, a reduction of almost 80%, and we have done this by focusing primarily on spending cuts, not tax increases.

[Translation]

Mr. Chairman, consistent with our practice of two-year rolling targets, we are announcing today that the deficit target for 1998-99 is $9 billion, or about 1% of GDB. This target will be achieved by continuing the implementation of structural changes set in motion by our 1994, 1995 and 1996 budgets. This means that over five years, we will have brought the deficit down by $33 billion - a reduction of almost 80%. And, we will have done this by focusing primarily on spending cuts, not tax increases.

But that's not all. Today's announcement means that in 1998-99, the federal government will not be borrowing any new money in the markets. New borrowing requirements will be eliminated. They will be zero. We will thus be taking a crucial step.

[English]

Mr. Chairman, the deficit target announced today is important, but what is even more important is what it means in terms of our need to borrow new money and where it places us in relationship to other countries. Today's announcement means that in 1998-99 the federal government will not be borrowing any new money in the markets. It will no longer have to borrow new money to pay for its interest charges. It will no longer be borrowing in the markets to pay for its ongoing programs.

As far as the rest of the world is concerned, new borrowing requirements are the measure most countries - the United States, the United Kingdom, Italy, France and Germany, for example - use to measure their fiscal health. Borrowing requirements are also similar to the national accounts measure of deficits used by the OECD to make international comparisons.

The year prior to this government taking office, on a borrowing requirements basis, Canada had the worst record of any country in the G-7 outside of Italy. In 1997, by this measure, we will have the best fiscal health of any G-7 country.

Furthermore, the deficit target we've established today will ensure that the debt-to-GDP ratio will continue to decline. This means that we will have confirmed a new trend in which the growth of our economy finally exceeds the growth of our debt. It means that over time our debt will become more manageable, and our commitment and our course is to make this trend irreversible, to make it irrevocable. An improving debt-to-GDP ratio means an improving economy. It means that a smaller portion of each revenue dollar will have to go to pay interest on the debt. It means more consumer spending, it means more investment, it means greater economic growth, and it means more jobs.

Mr. Chairman, thus far we've talked a lot about budget numbers, but this is only one part of the picture. Canadians look to their governments to be more than a keeper of good books. They want them to safeguard a caring society. What do they want? They want the social programs that have provided security and equality of opportunity to be there for them into the future.

[Translation]

The social program challenge demands going well beyond making the short-term numbers add up. It demands a longer view and a broader horizon, planning forward into the next century.

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In effect, it requires what few other countries have done - looking at changing demographics, ensuring not only that our fiscal health is sustainable, but that our social safety net is as well.

Are we meeting this challenge? We believe that we are. We have acted to ensure that federal support for health care, social assistance and post-secondary education is secure. At the outset, in order to get our fiscal house in order, reductions in transfers to the provinces were necessary, because they represented well over 20% of our program spending.

However, today, with the new Canada Health and Social Transfer, a sustainable, stable and predictable five-year framework is now in place. Under the CHST, we have established a floor below which the cash transfer will not be allowed to fall, and we have put in place a formula that will allow the overall transfer to grow in the future.

[English]

Next, we are pursuing an agreement with the provinces, as joint stewards of the Canada Pension Plan, in order to ensure that the CPP will be put on a sound financial footing and done in a way that is sustainable, affordable and fair. Mr. Chairman, let there be no doubt about it. We will ensure that the CPP is there for all Canadians, and we will also protect the most vulnerable in our society. No one should have any doubt about that.

Furthermore, we are reforming the second pillar of the pension system: old age security and the guaranteed income supplement. Legislation to implement a new seniors benefit will be introduced soon, to take effect in the year 2001. The seniors benefit will make the pension system sustainable, while increasing help for those most in need. Benefit cheques will not be reduced for current seniors and near seniors, and they will continue to be fully indexed.

In addition, those who receive the GIS and spouses allowance will see their pensions increased by $120 a year. Mr. Chairman, the seniors benefit is indeed a reform of which Canadians can be very proud.

Let me now turn to the third leg of our strategy - making the modern economy work for Canadians. In terms of the numbers on job creation, no one can be satisfied. But the fact is that our economy is going through a period of transition, one in which stronger private sector job activity has been somewhat overshadowed by job losses in the public sector, which represents about 15% of total employment. Ultimately, however, the public sector job losses will come to an end, and it is the private sector job creation figures that count.

[Translation]

And here, the picture is much brighter. For instance, since we have taken office, over 3/4 of a million new jobs have been created by Canadian companies - 220,000 since last November alone.

Furthermore, there is every reason to believe that the state of the economy will continue to improve in the period that lies ahead. Private sector forecasters expect the Canadian economy to grow at an annual rate of almost 4% for the second half of this year. They also expect this momentum to carry on into 1997. The International Monetary Fund agrees with this assessment, and says the Canadian economy will grow faster than any other G-7 country next year.

[English]

The IMF and the Canadian forecasters all attribute this positive outlook to the reduction in our interest rates, as well as to our improved competitiveness. This is a pay-off from our policies of getting deficits under control and low inflation. The strengthening economic outlook is already showing up in the data. Real growth in the economy was up 0.5% in July alone. The housing sector, one of the most interest-sensitive, is recovering strongly, with resales and new starts up dramatically over last year. In addition, since the beginning of this year, business confidence has been strengthened and investment intentions have been revised up significantly. All of this is good news for jobs, but it is not good enough.

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We have made considerable progress in establishing the preconditions for growth, low inflation and low interest rates, but we believe the role of government in supporting job creation goes well beyond that. Indeed, this is where we differ fundamentally with those whose perspective on the role of government is apparently to make it disappear. In particular, we believe government has a responsibility to help Canadians adjust to the challenge of the modern economy.

The context for this challenge is unprecedented globalization, rapid technological change, instantaneous capital flows and high speed communications. It is a context we cannot change, nor should we try, for it presents tremendous opportunities for our country and for individual Canadians. That being said, however, behind these opportunities is a human reality that for other Canadians is far more sobering, one reflected in an unemployment picture that endures.

In dealing with the problem of adjustment, some have said that government should leave it to the private sector alone, that the government should focus solely on getting its own house in order. But we don't agree. Our response was provided two years ago before this committee when we put forward a plan, a new framework for economic policy, a guide as to how we believe government can contribute to a growing and more productive country.

Let there be no doubt - creating a healthy fiscal and monetary climate is absolutely essential to achieving everything else. However, getting the fundamentals right by itself is not enough; it's only the first step.

Mr. Chairman, as you know, before coming into government my whole working life was spent in the private sector, and I believe very much in its dynamism and creativity. But let me tell you, there are things that business and the markets cannot and will not do. The private sector can't succeed in providing universal health care, markets can't provide decent pensions for all those who need them, and business doesn't do enough basic research.

The private sector by itself is not able to do all that it can to promote trade, and markets do not provide enough Canadians with the training they need. In this context the role of government must be to ensure the expanding economy is large enough to accommodate everyone's needs and ambitions. The fact is that the evolving economy, while benefiting many, and money, can also cause jobs to be lost, in some industries temporarily and in others forever.

[Translation]

For instance, it is of little solace to the 55-year old machinist who has lost his job to know that technology and trade are creating jobs elsewhere - for someone else, somewhere else, with different skills or qualifications.

The question is how do we respond to this reality? There is no quick fix, no miracle cure.

[English]

The responsibility of government is clear. It is, on the one hand, to do all that it can to stand by those who are having difficulty adjusting to the changing economy, and on the other it is to ensure that each generation of Canadians is equipped to take advantage of the opportunities it presents. This government's point of departure is the fact that Canadians' success in a world of growing trade and evolving technology is not accidental, nor is it founded on low wages. It does not lie in some race to the bottom. In fact, it is based on a race to the top.

We have to develop new strategies of action that are not founded on the old ways of throwing money at problems. That is an approach we can't afford and one that we now know simply doesn't work. Our strategy must lie in continuing to strengthen the strategic advantages we have - innovation, entrepreneurship, trade and our youth and its skills.

In terms of government spending, our focus must be on reallocation and concentrating the limited resources we have where their impact will be the greatest. What do we need? We need leverage, using seed money in ways that will bring others onboard, initiatives where $1 of funding can trigger many more dollars of action.

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[Translation]

No government today can go it alone. All governments must work in partnership. This is true of public-private sector partnership. It is true of the partnership needed between governments.

Rather than fretting only about the division of powers, we should all be focused more on the sharing of responsibility.

[English]

It is time to rediscover the virtues of partnership and innovation. It is those habits, not profligate spending, that built this great country.

Mr. Chairman, in closing, there is a reality called the national interest, and Canadians expect us - and all governments owe it to them - to act accordingly. The past several years have been extraordinarily difficult for Canada and for Canadians. Fiscal irresponsibility sent interest rates sky high. The dysfunctional relationship between monetary policy and fiscal performance helped make the last recession long and deep. Free trade and globalization have forced a painful process of adjustment on the whole country, and among those who are without jobs there has been despair, and among those who have jobs there has been fear.

Today it is possible to say we're emerging from these shadows. What our three budgets have done is to begin the process of restoring policy sovereignty to Canada, giving us the room, the capacity, to make new choices, freed from the need to ever have to look back over our shoulder again. Cleaning up the nation's balance sheet need not paralyse the nation's government. What is required is the will to reallocate scarce financial resources, to identify new approaches that can be effective in helping Canadians today without borrowing from Canadians tomorrow. That, after all, is what governments used to do before they substituted money for solid thinking.

[Translation]

The purpose of our fiscal strategy is to restore freedom of action to Canada. And we will not rest until the task is done. The transition is not easy, but it is being made. With forbearance and fortitude, Canadians from coast to coast have recognized and responded to the need for fundamental change.

Provincial governments of all political stripes, each in their own way, are part of a broad, common effort to put our economic house in order. If we are finally turning the corner, it is not because of anyone of us alone; it is because we are doing it together.

[English]

Mr. Chairman, no one should doubt that Canada will stay the course, that history will regard this period as a pivotal point in the history of our country, a time when we dealt decisively with the problems we inherited from the past, strengthened thereby to prepare the way for the future. If we are confirming today that we will not let up, it is because we know how great the distance is we have travelled. And if we are redoubling our resolve to go further, it is because we know how much brighter the future will be if we persevere. I look forward to a discussion with this committee and with all Canadians as to how we can continue and complete this great journey together.

Thank you.

The Chairman: Thank you, Mr. Martin.

Mr. Loubier,

[Translation]

could you begin the questions?

Mr. Loubier (Saint-Hyacinthe - Bagot): Welcome to the Finance Committee, Mr. Minister. You should come more often. We have things to say to each other, and question period alone is not sufficient. You attract a crowd, and the proceedings are made more interesting for everyone.

Having said that, Mr. Minister, perhaps you have satisfied financial markets today. I don't know; we'll see later what the reaction was. But I think that the poor and the unemployed of this country are very disappointed.

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This disappointment can be attributed to two factors. First of all, you said you were staying the government course with regard to budget policy and economic policy. That means, Mr. Minister, that you will pursue your policy of reducing the deficit by two main methods: first, by cutting into the Canada Health and Social Transfer and then by using the surplus in the unemployment insurance fund, a surplus generated by the premiums of employers and employees, to reduce your deficit.

Let me take the example of the 1996-97 deficit. If we take your objective of $24.3 billion, and add to that the cuts that you have made in welfare, postsecondary education and health care - the new Canada Health and Social Transfer - and you also add the unemployment insurance fund surplus of $5 billion per year, you get an actual deficit of $32 billion for the current year, 1996-97.

Yet, you've just told me that you will not stop this, that you will continue in the same direction. It means that once again, you'll be hitting the most underprivileged and attacking the unemployment insurance fund. That's my first comment.

The second concerns the unemployed. In your statement, you simply announce that they will have to wait, and that they better not be in a hurry if they experience any problem related to unemployment. You've just said that you are forgetting the situation and that priority must be job creation.

If we compare the current situation in the labour market with the situation that existed before the last recession, in 1989, we see that there were more people who worked then than there are now. That means that far from having improved the labour market situation, as the participation rates show, you have discouraged people from joining the ranks of the labour force and from continuing to look for a job. The activity rate has actually dropped three points since the last recession compared to the labour market conditions that existed in 1989.

If you make simple calculations, that means that in order to have the same labour market conditions that existed before the last recession, you would have to create 879,000 jobs. It's therefore not surprising that the Conference Board, in a recently published study, said that the unemployment rate in Canada is not 9.5% but 12.5% if we take into account discouraged workers, downsizing and the seriousness of the problems in the labour market.

The first question that I'd like to put to the Minister of Finance is as follows: Would you admit, for once, that the situation of the labour market is catastrophic, that it may be one of the worst post-recession situations ever? Indeed, if we look at the history of recessions in the past 25 years, we see that the one we just experienced is the worst, because we have been unsuccessful in attaining the labour market conditions of 1989. That's my first question and I would have two others.

Mr. Martin: Would you like me to answer now?

First of all, Mr. Loubier, I would be very pleased to come back anytime. I think it is clear, and you're right about that, that discussions - not necessarily debates, but examination of the problems - are much easier around the table like we have right now. I fully agree and I will be very pleased to come back anytime.

Secondly, when you talk about cuts, the ones that hurt, it must be said that we have cut much more at the federal level than we have cut from the provinces. Moreover, we try to cut wherever it would hurt the least. For instance, we made much deeper cuts in subsidies to certain industries compared to subsidies for social programs. For example, we cut over 60% of subsidies to industry.

Having said that, you are right, Mr. Loubier: we have made cuts that hurt, and we see that. Every government is doing the same thing. It doesn't please me, but I'm convinced that my counterpart in Quebec, Mr. Landry, is not enjoying making the cuts that he's making right now. We would prefer not to have to make them, but I think that all governments are facing exactly the same situation: the absolute necessity of getting our financial house in order. Because so much time was wasted, we have a lot of catching up to do.

.1620

Mr. Loubier: Mr. Minister, you will agree that with respect to the current fiscal year, if you've come up with a result of $24.3 billion as the deficit for 1996-97, 93% of that result is linked to cuts in the Canada Health and Social Transfer and to the fact that you are grabling over $5 billion in surplus from the unemployment insurance fund. That's how you've arrived at that figure of $24 billion. In reality, without those two measures, your deficit would be $32 billion.

We have no business bragging and talking about sound management of public finances when we arrive at that kind of result largely by downloading to the provinces and using the surplus of a fund to which you haven't contributed a penny in many years.

Mr. Martin: Mr. Loubier, when you look at the cuts that have been made or that are forecasted, you see that between 1994 and 1998, the federal government has reduced its expenditures by 21%. In the same period, the total entitlements of transfers to provinces, in tax points or cash, are only being reduced by 10%. We hit much harder back home than in the provinces.

Now with regard to your second question concerning jobs and unemployment, as you undoubtedly know, the public's participation rate in the labour market is highly variable. Since we took power, it has gone up and down.

I think it must be underscored that the unemployment rate is calculated the same way today as it was when we took power. At that time, the rate was 11.5% and today it's 9.4%. It has therefore gone down by 2% based on exactly the same calculation. At the same time, a net total of three quarter of a million jobs were created in the private sector; in fact there were 660,000 jobs.

I think you raised a very important point when you talked about the situation prevailing before the last recession. Mr. Loubier, I can assure you that we in government are also very worried about unemployment. When we look at the human problems that result from it, eliminating unemployment and putting Canadian men and women back to work is our number one priority.

Mr. Loubier: If it's your priority...

Mr. Martin: If you will allow me, Mr. Loubier, you talked about the situation before the last recession. That's the real problem today. The last recession, from 1989 to 1992, hit Canada much harder than the United States and other industrialized countries. It hit much deeper and much longer. Even today, Canadians have not yet recovered from that recession. That's why the level of household indebtedness is going up and consumption is going down. You're therefore quite correct in referring to that recession. I think that for our generation, this recession was virtually as dramatic as the one experienced by our fathers and mothers in the 1930s.

Mr. Loubier: Mr. Minister, if you're worried about the labour market situation, if you think that what's going on right now in many Canadian families is dramatic, why don't you walk the talk? Many suggestions have been made to create jobs quickly and you can afford to implement them right now.

Let me take as an example the proposal by the Canadian Chamber of Commerce, which would like to see unemployment insurance premiums drop by 60 cents. It is believed that through such a measure, between 100,000 and 200,000 jobs would be created. Why don't you do that? Why are you so resistant to the idea of reducing payroll taxes to encourage job creation? Why are you refusing to take consistent and substantive decisions? And again, when asked to undertake talks quickly with the provinces about a possible new infrastructure program, which would have more durable and permanent effects on job creation, why do you refuse to listen to these suggestions?

You admitted yourself that the situation is catastrophic. The activity rate is three poinst lower. The real unemployment rate is 12.4% according to the Conference Board of Canada because there are people who are discouraged and others who've been pushed to welfare by the application of your measures. It may be time to take action, Mr. Minister, if your financial results are so good.

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The financial markets are not the only ones that must be satisfied, Mr. Minister. There are Canadian men and women who are looking for jobs, who want to work and who expect you to assume your responsibilities.

Mr. Martin: With regard to payroll taxes, we will not do that. We did it last year; we reduced payroll taxes by $1.8 billion. That's a huge amount. In 1994-95, we reduced unemployment insurance premiums by $1.8 billion thus reducing the burden in that area. So on the one hand, we've done that.

On the other hand, it must be said that if we compare ourselves to other governments, we have reduced payroll taxes more than any province. If Ontario followed our example, if Quebec followed suit, their payroll taxes would be infinitely lower than what they are now.

These questions must be asked not only of the federal government but also of provincial governments. If the burden on the payroll is heavy, it must be recognized that this is because of more than one level of government.

Why don't we do more? Because we all face the same situation. We are doing what we can. I would really like to reduce it. However, you have to put that question to other governments. Why don't other governments reduce it? It's because they are grappling with the same financial burden we are.

With regard to the infrastructure program, I think the answer was quite clear. It was given by the Ministers of Finance after our meeting last week. We proposed an extension of the existing program to the Ministers of Finance. But most provinces said that they had other priorities. They said this publicly, on television, not just behind closed doors. You saw them: Mr. Landry, Mr. Eves and other ministers.

[English]

The Chairman: Merci, monsieur Loubier.

Welcome to our committee, Mr Manning.

Mr. Manning (Calgary Southwest): Thank you, Mr. Chairman.

I want to say to the minister that I found his statement informative. I'd like to begin perhaps by observing, because I don't join your committee very often, that both the finance committee and finance ministers here in Parliament have been frequently out of touch with reality and behind the times.

Let me illustrate that. Some members will recall that, five to ten years ago when this committee met and received statements like this, both the ministers and the committee members grossly and consistently underestimated the seriousness, at that time, of the deficit and overspending. Ministers would come with $20 billion, $30 billion, and $40 billion deficits, and people would say that it's not too bad, that they could manage it, that they could fix it, etc.

I see history being repeated here and a similar mistake being made - not on the deficit. The deficit is finally taken seriously around here, and I suggest as a result of actions of fiscal reformers, not just members of the government.

The weakest part of this statement is section 5 on employment and jobs. I see the same mistake being made today that we used to make on the deficit: grossly underestimating the seriousness of the unemployment situation in this country.

The minister knows the numbers. We went through them in the House today - the 1.4 million unemployed. There are probably half a million to a million that the statisticians tell us drop through the cracks that don't even show up, 2 to 3 million underemployed, and 4 million workers afraid of losing their jobs. That amounts to 8 million people, or over half of the workforce. If you figure that every year in this country since 1981 there have been from 1 million to 1.7 million unemployed, that's a cumulative total of some 20 million lost man years. If you figure that out at the average wage, that's probably in the vicinity of $350 billion in lost wages.

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The point I'm making is that this country needs a job creation strategy of a depth and a magnitude that is infinitely greater than anything in this statement or anything the government has conceded today.

Section 5 is deficient - and I'd argue completely deficient. To remedy that particular problem - and after all, this government is the group that ran on ``jobs, jobs, jobs''; we were the party that ran on ``deficits, deficits, deficits'' - the minister needs two things that are not in here. He needs a budgetary surplus and a major tax reduction. The minister's statement not only contains no reference to either, but it contains no prospect of either until well into the 21st century.

With respect to the current deficit, I would have to say, Mr. Chairman, that only in the never-never world of Ottawa would members clap for a $29 billion deficit. You would never get an ovation for a $29 billion deficit in any other place or part of this country.

Now, my question.... I think the minister sees where I'm headed. It's really the question of when is the government going to provide us - and it's not so much us but the Canadian public - with a real job strategy, based on tax relief, that matches the depth, the magnitude, and the seriousness of that problem?

Mr. Martin: Mr. Chairman, first of all, I would remind the leader of the Reform Party that this is a fiscal update, not a budget, and that there is a distinction between the two.

While I would like to say in terms of the deficit reduction program that the Reform Party has had something to do with it, unfortunately I cannot agree. The great support we have received for this deficit reduction package, right from the very beginning, has come from the Canadian people, and we have felt this very strongly.

I would also point out that, to be quite honest - and you'll forgive me if I find it a little paradoxical - if I'd been in the House most of the time since we came back after the summer break.... I cannot remember the leader of the Reform Party asking questions about jobs, and I wonder if it's coincidental that this is the day of the fiscal update -

Mr. Manning: Can I respond to that question? You've asked a question.

Mr. Martin: I do know that the leader of the Reform Party has been occupied by a lot of other things in the House that he deemed to be far more important than putting Canadians back to work. So it may well be that he would have delegated to others...but to be quite honest, I see a number of people of his party for whom I have a great deal of respect and they've not been allowed to ask questions in the House about jobs, or in fact about anything else in terms of the economy.

I'm certainly prepared to take the leader of the Reform Party at his word in terms of his concern for jobs, and I believe he sincerely is. But I have to say that it hasn't been manifested in this House, nor, Mr. Chairman, was it manifested in the first budget of the Reform Party. When we brought down our first budget and we said we were going to proceed to do two things - operate on the basis of the necessity to see a strong economy that would create jobs and at the same time operate on the basis of deficit reduction - the Reform Party spoke only about deficit reduction; they did not speak about job creation. They basically did not make it a priority. They essentially said to us that the only thing we should get out there is to rip the heck out of our spending, because that was the ultimate solution.

Mr. Manning: Let me respond to this, Mr. Chairman.

You've asked a question, so let me respond to it. One of the reasons for not asking persistent questions on this subject in the House is because we never get a straight answer. That's the basic reason.

The second reason for not raising a lot of this in committee is because of the way this Parliament works. This Parliament is incapable of reducing the estimates on its own initiative. That has to be done by the executive. So the tools that members themselves need to implement the strategies we are talking about are simply not here.

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The second point I'd make is that if the minister had followed our advice when we began with our budget, which got to the bottom line balanced budget faster, he would be in a better position today. He would have a surplus like Alberta has, like Saskatchewan has, like Nova Scotia is going to have, and like Ontario has so that he could offer the tax relief that would provide job creation. If the minister had taken our advice then, he would be able to implement the strategy that is not in here and that I advocate today.

Mr. Martin: Mr. Chairman, if we had in fact followed the advice given by the Reform Party in its first budget, we would have totally destroyed medicare, we would have virtually no old age pensions left, and in fact we would have that much higher job -

Mr. Manning: Mr. Minister, that is totally not true.

Mr. Martin: Mr. Chairman, let me take the Reform -

Mr. Manning: That is not true.

Mr. Martin: Wait a minute, now.

Mr. Manning: That is not true.

Mr. Martin: I think I struck a nerve, Mr. Chairman.

Mr. Manning: The minister has cut more out of health care in his reductions to transfers than any proposal the Reform Party has ever put forward.

Mr. Martin: Mr. Chairman, the purpose of this committee is to have a discussion, and I think we're having a discussion.

Under those circumstances, the leader of the Reform Party is recommending tax cuts. So the question I would really put to him is.... I've made my position very clear in my opening remarks. Would the leader of the Reform Party now tell us, in the spirit of the kind of open discussion he would like to have, specifically where he will make the tax cuts of the kind that will generate the results he says he can come up with?

Mr. Manning: I will make that presentation, and we'll be making that presentation,Mr. Chairman, not here today, but to the Canadian people as soon as next week.

The minister is still avoiding my question. I know why he's avoiding it, but I would ask him to answer it. When is he going to be able to deliver the surplus and the tax relief required to provide the job creation stimulus that this country needs? There's nothing in here that even holds that out as a remote possibility.

Mr. Martin: There is nothing in here except a record that states that, when we took office, our interest rates were substantially higher than the Americans, and now they are lower. There is nothing in here except an interest rate reduction of 4.25%. There is nothing in here except a re-establishment of confidence around the world so that investors are now looking at Canada for the first time in over a decade as a place where they want to invest, where they want to create factories, and where they want to create jobs. There is nothing in here, Mr. Chairman, except, since we took office, 750,000 new jobs that have been created by the private sector.

The fact is that as a result of the actions taken by this government and by the Canadian people - and it's very important to understand that this is a partnership -

Mr. Manning: And by seven provinces that balanced their budgets better than yours.

Mr. Martin: These are seven provinces that had an enormous head start, largely because most of them didn't have to succeed Tory governments. But the fact is -

Mr. Manning: Tell that to Alberta and Ontario.

Mr. Martin: The fact is, on the jobs issue...I don't think the leader of the Reform Party should be trying to spar in a partisan way.

I'll tell you something about the jobs. I think we have done an enormous amount in the last three years, but it isn't good enough. I stated that in here. We are very worried about job creation. We're very worried about our ability as a society to make the transition to a technological society. We're very worried about innovation. We're worried about our ability to trade. But I have to say that if you look at what's happened over the last three years, you have to have an enormous amount of confidence in the Canadian people.

We're going to see job numbers going up and we're going to see job numbers going down, but the overall trend is good. It just isn't good enough, and we're going to keep working on it.

The Chairman: Thank you, Mr. Manning. The finance committee would welcome your making your statement before our committee.

Can I turn now to Ms Whelan, please?

Ms Whelan (Essex - Windsor): Thank you, Mr. Chairman.

Mr. Minister, I want to thank you for your presentation today. I've just heard some incredible statements about how successful the provinces have been.

I know that some provinces have been pressuring you to have a greater ability to tax, and I was wondering whether, in the upcoming budget, you will be or would consider transferring tax points to the provinces and whether it makes sense to do that at this time.

Mr. Martin: This is a question that has been raised by a number of provinces over a period of time. I think it's worth while dealing with it, and I think I should deal with it almost within the context of the leader of the Reform Party's earlier question about the provinces' coming to surplus before the federal government.

I think what we really have to understand.... The reason I have been very reluctant - which is an understatement - to transfer tax points to provinces has to do with the relative financial conditions that exist between the federal government and the provinces.

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The fact is that since we have taken office, number one, we have cut substantially more than the provincial average in terms of spending. We've done a great deal more than they have within the same period. But I think you really have to take a look at the relative situations. The federal government's debt-to-GDP ratio - that is to say, what we owe as a percentage of what we produce - is about 75%. The average for the provinces is under 30%. There is not a province that has a debt-to-GDP ratio within 25% of ours. The highest, which I think is Newfoundland, is around 50% to 52%.

So first, transferring tax points from us to them, when they're in a much better financial shape than we are, obviously would require a lot of hard thinking.

Second, if you take a look at the percentage in terms of interest rates, the provinces spend approximately 14¢ out of every dollar on interest. We spend 36¢ out of every dollar on interest. So we inherited a much worse situation than any of the provinces, and at the same time a number of those provinces have surpluses.

The answer to your question is that at the present time we are not in a position, given the greater financial strength of the provinces relative to us, to transfer tax points. This is very important for the provinces as well, because it is the federal government's debt and the federal government's balance sheet that establish interest rates in this country.

I have mentioned earlier the tremendous gain that the provinces have because of this reduction in interest rates, because of the clean-up of the federal government's balance sheet. The provinces are far better off enabling us to get our act together - which we're doing - because in the end it really benefits their own balance sheets.

Ms Whelan: Thank you very much.

The Chairman: Thank you, Ms Whelan.

Mr. St. Denis, please.

Mr. St. Denis (Algoma): Thank you, Mr. Chairman.

Thank you, Mr. Minister, for being here.

I'd like to say for the record, for our opposition here and for those viewing this on television, that this government began its pre-budget process in the fall of 1994. And it's a tribute to you,Mr. Minister, that you have cooperated with this committee on each of its sessions and again this fall. We look forward to hearing from Canadians as we help you in any way we can to prepare for the next budget.

I'd like to ask you about the low inflation policy this government has supported, a policy of price stability that has received some, albeit limited, criticism from some quarters, but a policy that I believe and we on this side believe has helped to create a climate that attracts capital, and capital for investment.

Do you think that's still the right policy? Do you think there's any room for relaxing the policy? Or do you feel it's still an important element in ensuring the climate that we need to attract the investment and jobs that go with it?

Mr. Martin: As the member knows, when we were in opposition - what almost seems an eternity ago - we were quite critical of many aspects of the monetary policy. We said at the time that we felt it made the recession longer and deeper than it otherwise would have been.

When we took office, we recognized one thing very clearly, which was that Canada had paid a very high penalty to get inflation down, but that once the penalty was paid, it would have been the height of folly to ever let the fruits of that low inflation get away from us again.

As a result we agreed with the Bank of Canada on a target inflation rate within a range of 1 to 3, and that is the target range that currently applies. We have tremendous benefits from being a low inflation country. Canada must never give up that asset, and we will never allow it to do so.

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That being said, if you take a look at the actions of the Bank of Canada, as I mentioned earlier, there have been 17 rate decreases in the last 17 months. This has been a tremendous spur to the economy, and what we finally have in this country is fiscal policy and monetary policy working together. We think that really is the way to operate.

Mr. St. Denis: Thank you.

The Chairman: Thank you, Mr. St. Denis.

Mrs. Brushett.

Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chairman.

Well, Minister, I was certainly pleased to hear you say that you're going to go along on the same strategy. I did a survey this summer in my constituency, and 97% of my constituents said they hoped the financial strategy would be continued through the remainder of our term and into the next one.

I wanted to talk for just a moment about our unemployment. Although we're relatively better off than most of the G-7 countries, when you are a 50-year-old man in a community, it's intimidating to be out there in the world without a job, given globalization, competition, and fast-paced communication. What does this investment in our communities mean in terms of giving him some hope?

Mr. Martin: Well, as you know, I - and the entire government - very much share your view. To clean up the balance sheet without it being translated into jobs for Canadians would be a very empty victory. What I believe we have done is set the conditions for growth - the low inflation and the low interest rates - and the confidence of those who would invest and create jobs. I just wish we didn't have to spend three years to get here.

As a result of this, I now believe the measures that we have taken in terms of small and medium-sized business, where the bulk of the job creation is going to take place, and the measures that we have taken in terms of community development as the communities come together themselves to support their small and medium-sized business structure, are going to pay off. I also think the focus on research and development, the link between universities and the private sector, is going to pay off. I think the Prime Minister's trips abroad and the Team Canada approach that has been so successful are the kinds of things on which we want to build.

There is no single answer; there is no single panacea. What we really have is a wide range of answers to your question of how we create jobs. There is a focus primarily on innovation, on young people, on small and medium-sized businesses, on community development. At the same time, we have been able to introduce a number of selective tax changes that have benefited small business, and we will continue to do this.

I think we are going to have to understand that this is a bumpy road. I think we were all taken aback last June when we had a trend of rising job creation and then, all of a sudden, bang, we had a very bad month of June, in which there was actually a job loss. But then it started going up again. I think we have to recognize that because of the recession we went through, because of the need for adjustment change, and because all of the provincial governments are cutting back on their spending at the same time as we are, there are going to be ups and downs. But what we really have to do is focus on building the kind of framework that will allow small business and the private sector to create jobs. It's paying off, it's long and it's tough, but we're going to keep at it.

Mrs. Brushett: Thank you.

The Chairman: Thank you, Mrs. Brushett.

[Translation]

Mr. Tremblay, please.

Mr. Tremblay (Rosemont): Good afternoon, Mr. Minister. I must admit that you are a very eloquent person. However, I must say that your speech lacks imagination. I think that all those who heard Michael Wilson's speeches will agree with me that he said exactly the same thing you are saying now.

When it is possible to say the same thing as a former minister, who has been out of Cabinet for many years, it's because there is not much new to say. You use a trick to say that you've changed your mind regarding monetary policy because, in the final analysis, we have already paid dearly enough. Yet, deep down, you agree that the Bank of Canada's drastic monetary policy has resulted in very low interest rates. You're very proud to say that the reduction in the deficit is due largely to reductions in expenditures and you're proud of the fact that taxes haven't increased.

That is the conservative line to a tee. When you were in the opposition, you denounced this line. It is not the first time that Liberal pre-election speeches differ from post-election speeches. People will recall Mr. Stanfield's proposal to freeze salaries, which wasn't suppose to make sense, but the day after the election, the Liberal government implemented the same measure. The same thing happened with Mr. Clark's proposed gas tax. Mr. Lalonde introduced it once he became Minister of Finance.

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I am not going to hold it against you for having implemented, as the Minister of Finance, the policies of the previous Conservative government. This is what Liberal governments have always done.

Nevertheless, a few years have gone by and the situation has changed. My colleague clearly demonstrated earlier that discouraged people have not gotten back into the labour market. Since the last recession, millions of people have not gotten back into the labour market and are not included in the unemployment statistics.

At the same time, Mr. Minister, just last Friday, in fact, your own government published statistics indicating that the production capacity utilization rate in Canada had declined by 0.9% from the previous year, that is a decline by nearly 1%. The capacity utilization rate in industry is sitting at 82.7%. That means that Canadian industries have a great deal of unused capacity. So there has been a decrease in the utilization of our production instruments has diminished over the past year. At the same time, we have millions of discouraged people who have not been able to get back into the job market.

Earlier, you asked Mr. Manning to come up with some suggestions. He asked you to wait until next week. We thought that you would at least have something to announce. Perhaps you are waiting for his suggestions before making a decision.

We, however, do have a suggestion, and it is one with which the Canadian Chamber of Commerce and all major unions are in agreement. Businesses have unused production capacity, and a lot of people don't have jobs. If you were to decrease employee and employer unemployment insurance contributions, more jobs would be created. This would not occur if all production capacity was being used. If this were the case, businesses would have to purchase equipment, take the time required to build plants, etc. However, we currently know that the production capacities are under-utilized. We know that millions of people are looking for jobs.

Listen to us when we ask you to take action, and at least adopt this measure. When you first became Minister of Finance, the forecasted deficit was $37 billion. You assessed the situation and you calculated that the figure was $42 billion. Since then, you have reached your objectives, you have even surpassed them. Based on your figures, everyone knows that you will surpass your objectives next year. We also know that a surplus of $5 billion is sitting in the unemployment insurance fund.

I would like you to reply to my questions in very concrete terms. These are your statistics. You know that our economy has under-utilized capacity. You know that that may represent millions of jobs. Why are you refusing to decrease unemployment insurance contributions?

Mr. Martin: First, I would like to say that, during the last Parliament, we were together as members of the opposition during the lock-ups. It must be said that we did not always have very good things to say about Michael Wilson. You hurt me a great deal by comparing me to him.

Voices: Ah! Ah!

Mr. Martin: Let me answer your question. First of all, as for what the Bank of Canada did when we were in the opposition, we saw, month after month, interest rates rise. Over the past 17 months, the Bank of Canada's interest rates have dropped. There is no doubt that the Bank of Canada, like any good central bank, is concerned about inflation. But when you take a look at the Bank's monetary policy, when you see the difference ranging from 1% to 3%, you cannot compare the two situations.

One of your other questions dealt with the production capacity in Canadian industry. This under-utilization of part of their capacity can be explained when you look at the amount of money invested in machinery and equipment. Canadian companies have invested tremendously to increase their competitiveness. Moreover, this is one of the reasons why our exports are climbing. Capacity for these industries has increased. If companies have under- utilized capacity, it is because they are investing in machinery and equipment to increase productivity.

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Secondly, you know that there is no magic recipe for job creation. We heard what Mr. Bouchard had to say yesterday. Mr. Bouchard is grappling with exactly the same situation we are facing, because Quebec is part of Canada and we all have these problems. Mr. Bouchard must deal with these problems just as we do. I believe he said that the only solution was to improve government finances and to invest in sectors which would create employment. This is what we intend to do.

That being said, I would add something with respect to unemployment insurance, if I may. The member said that the unions are hoping for a drop in unemployment insurance contributions. We really want to lower unemployment insurance contributions and we will do this as quickly as possible. However, if you were to read an article that appeared about a week ago in Le Devoir, written by Mr. Paquette of the CNTU, you would see that he was making a plea to maintain unemployment insurance contributions at the current level. I do not believe that the member's suggestion has the support of the unions.

Mr. Tremblay: I would like to point out that this is the first time that a Minister of Finance of Canada has turned to the CNTU for his fiscal policy.

Mr. Martin: Yes, by I am a Liberal!

Voices: Ah! Ah!

Mr. Tremblay: To be brief, our concern and our desire for immediate action on the job creation front arise from the 5% unemployment rate that exists in the United States. We fear that inflation will return and that interest rates will climb south of the border. Consequently, we know that we have to move as quickly as possible because the current situation will not last forever. You are benefiting from the American economy, which has not performed so strongly in years. Our exports are very high. More than 80% of our exports still go to the United States. But you know as well as we do that this will all come to an end one day, Mr. Minister. Therefore, we have to act swiftly.

This is a concern that we all share. You know very well that Michael Wilson, like you, had beautiful looking charts during the years he was in office. Up until the end of 1989, performance was extraordinary. After, the situation was catastrophic because we were very tied to the American economy. A lot of people are saying that maybe things will go well, that we can perhaps maintain the course for some time. However, you know that our concern is legitimate. You know that the days for taking action are numbered.

The Chairman: Thank you, Mr. Tremblay.

Mr. Martin: Mr. Chairman, I would like you to give me two seconds. First of all, we in the government share this concern. It is very clear that our main priority is job creation. Moreover, the Government of Quebec, to which the member may feel somewhat tied, shares exactly the same view as us. No? Well, it shares the same point of view, namely, that we have to put government finances in order because that is the only way to regain confidence and to lower interest rates.

Now, if it were possible to take another course, I would agree with it. However, our problem is that putting government finances in order is a prerequisite to job creation. Are we making this a priority? My answer to the member is clearly, yes.

The Chairman: Thank you, Mr. Tremblay.

Mr. Grubel.

[English]

Mr. Grubel (Capilano - Howe Sound): Thank you, Mr. Chairman. I always enjoy the minister patting himself on the back. I'm glad he didn't dislocate his shoulder today, especially since the achievement was really bragging about jumping two inches rather than one inch over a twelve-inch hurdle that he had set for himself.

I'd like to make two points that are relatively minor - my leader already has addressed the main questions - but I think they're disturbing. One of them concerns interest rates. Low interest rates accrue to countries that have bad economic conditions, so it's a two-edged sword. I also remind the minister that for every car owner or person who borrowed $150,000, there are pensioners out there who have had their incomes reduced as a result of the lower interest rate.

Finally, I'm somewhat puzzled. I don't know whether his excellent researchers have told him why the 30-year bond rate in the United States is still almost a percentage point lower than it is in Canada when all the other interest rates have come down. It seems to me there is still some long-run deep-set fear about whether everything is really all right in Canada, and 30-year interest rates are the ones that are used to take care of long-term investment projects.

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Secondly, I'm a little disappointed that the minister had to use creative accounting to make the point that - maybe I totally misunderstand it, but in his 1996 budget number the underlying deficit is $30.2 billion. However, the underlying deficit in the document he released today is $28.6 billion. That means an improvement in the figures of $1.6 billion. In his speech he talks about an improvement of $4.1 billion. Mr. Minister, you have such good news that you really don't have any need to overstate this. Creative accounting like this has a bad side to it because people start asking whether there are other numbers that look so good because of creative accounting. So it's really not necessary.

I'd like to turn to a question that concerns the proportion of the total program spending reductions that are due to downloading on the provinces. We know that the total program spending since 1993 by next year will have dropped $14 billion. Here is the Minister of Intergovernmental Affairs of the Government of Ontario, Diane Cunningham, saying in a speech:

Mr. Martin: Maybe what I'll do is answer the questions in reverse order.

First of all, our transfers to the provinces, as a percentage, were less than our cuts to ourselves. The fact is that if you look at the average cut that we applied to individual departments, the cuts to the transfers are roughly on that average, although obviously there were some that were much greater and others that were less. But the more important point - and I'm sure the member, who is a reputed economist, would not want to deny what his party said before - is that our reductions in transfers to the provinces are substantially less than the reductions in transfers recommended by the Reform Party - unless I read a different document.

An hon. member: You must have.

An hon. member: Yes, you did.

Mr. Martin: Then you really ought to start producing the same document across the country.

Mr. Grubel: We ought to get together some day.

Mr. Martin: Okay, Herb, we'll do that.

The second thing in terms of the underlying deficit the member refers to is that we have to make sure it's an apples-to-apples comparison. In other words, you have to compare the underlying deficit last year with the underlying deficit this year, or you have to compare the total deficit last year with the total deficit this year, which I think has not happened.

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Mr. Grubel: That's what I'm saying you should do, and you didn't do it. For 1995-96 you claimed you had an improvement of $4.1 billion -

Mr. Martin: Yes, we did.

Mr. Grubel: - but in fact it's only $1.6 billion.

Mr. Martin: On an apples-to-apples comparison, I think we've done pretty well, Herb, but I'm certainly prepared to sit down with.... I really enjoy sitting down with the honourable member.

On the other two points that you've raised, the question about low interest rates - in fact, low interest rates are not a sign of an economy that is in trouble. If you look at Switzerland, for example, low interest rates are often a sign of a currency that people have confidence in. I think what's been happening over the course of the last couple of years is that more and more investors have real confidence in the value of the Canadian currency, and that is what's permitting us to have these low interest rates.

On your last point, the 30-year bond rate, first of all, what happens.... There was a time when investors wondered about the inflation outlook for Canada. What happened is that as we began to gain credibility our short-term rates could have been lower than the Americans', because they were prepared to give us credit for three months. Then it went to one year and it's been rising steadily, because what they're seeing is what I described earlier. They have real confidence that the inflation psyche has been knocked out of Canada and Canadians realize how important having low inflation is. Mr. Chairman, I think that is why the term is gradually being extended.

Why haven't we got out to 30 years yet? I suppose there are a couple of reasons. One, it takes a long time, but on the other hand, Mr. Chairman, it may be that is how long investors think it will take the Reform Party to take power and....

Mr. Grubel: For the media, what is your answer to the question about the $14 billion reduction in program spending that appears in your document? How many of those were achieved by downloading on the provinces? Could you please answer that question? Mr. Dodge should have that, I'm sure.

Mr. Martin: Mr. Dodge has every answer and sits here absolutely panic-stricken at something the minister might say, so I think I'll let Mr. Dodge answer the question.

Mr. Grubel: I don't know where the Ontario minister got her numbers, but 80% of the recorded reductions in program spending in a three-year period, according to her, are due to downloading. Is that right or is that wrong?

Mr. Martin: That is not right, and of course as - this is Ms Cunningham?

Mr. Grubel: Yes.

Mr. Martin: She normally does not take into account the tax points, and the trend is upside on the tax points she has received. So she does only half the accounting, and given the demand by the provinces for tax points, I think they should take into account both sides of the ledger.

Do you want to come and answer it?

This is one economist to another, Mr. Chairman, so this may take a long time.

Mr. Grubel: It's a simple question. You should have that on your fingertips.

Mr. David Dodge (Deputy Minister, Department of Finance): It is $6 billion.

Mr. Grubel: Six out of fourteen.

Mr. Dodge: Six out of about fourteen - it depends what year, yes.

Mr. Grubel: Thank you very much.

And you are proud of that.

Mr. Martin: I knew the answer.

The Chairman: Thank you, Mr. Grubel, and a special thanks to you, Mr. Dodge.

Mr. Pillitteri, please.

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

Thank you for appearing, Mr. Minister. After so many questions - I don't recall the questions asked by others, but I do recall asking you when we would go down to 1% of GDP. So thank you very much for answering me one year later.

My question - and I don't care if you don't answer it as long as you take the same action you took on the deficit reduction. First of all, as a small businessman, and given the size of my operation, I don't think a reduction in employment insurance would create any jobs. It certainly will have some benefit to the larger corporations, which do create jobs, but not to small businesses, and as we know, most of the jobs are created in small businesses.

More important, given the economic conditions we are having and the need of small businessmen to have access to capital, will this government and you, Mr. Minister, take any action to make more capital available for small business, which creates the jobs in Canada? This is really the problem we face above all. What action, if any, will be taken?

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Mr. Martin: There is no doubt that if one is going to pin a great deal of one's focus on small business, one has to make sure that small business has the capital. That's why, as an example, we have the lower tax rate for small business so that in fact they can build up their retained earnings, which will give them the equity to borrow more. It is why, as a government, we, along with the members of the industry committee, put such tremendous pressure on the banks to report on a periodic basis on what kind of lending they were making to small business. It is why we put in, and the banks agreed, to have a national ombudsman who would give the small business a right of appeal. It is why we continued on with the LSVCC tax benefits, the Labour Sponsored Venture Capital Fund, so that in fact they could lend to small business. And it's why so many of the Prime Minister's trade trips have been focused on trying to help small business get markets abroad.

What the member raises is of course a very important question; that is, that's fine, but where are we going from here? It is our belief that the community development things, of which the member has spoken a great deal, are very important. How do we, as a federal government, work with municipalities and small business to make sure there is the agglomeration of capital that is required?

The Department of Industry, under Mr. Manley, has come out, as you know, with a series of community programs, and it is our intention as a government to hopefully see those grow.

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

Mr. Fewchuk.

Mr. Fewchuk (Selkirk - Red River): Mr. Minister, I noticed from your annual financial report that corporate income tax revenues grew by more than $4 billion last year. What causes this? Is the government satisfied that business is paying its fair share of taxes?

Mr. Martin: The answer is that the main reason corporate revenues grew - in fact, they are one of the fastest growing sectors of our revenue base - is because they earned more profits. Business was better, and as a result of that we make sure we get our share. That is as it should be.

In terms of your second question, as to whether we are getting our fair share, I believe we are getting a much fairer share today than we did three years ago. I have here somewhere - I could read it out - about three pages of major changes to the corporate tax act that we have brought in. They include the closing of loopholes and ensuring that people who are operating abroad pay their fair share of taxes in Canada. We have increased, in certain cases, some of the large corporation taxes.

So the answer to your question is yes, I believe corporations are paying a fairer share certainly than was the case three years ago.

Mr. Fewchuk: Thank you.

The Chairman: Thank you, Mr. Fewchuk.

Mr. Solberg, please.

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

Welcome, Minister. You've come here to put the best face on the economic picture, and that's of course what we expect. But I want to ask you about a statement you made recently where you suggested that youth unemployment was the biggest issue before the country today. There's very little to offer in your document with respect to youth unemployment.

The point I want to make today is that we have youth unemployment of over 15% today. We have all kinds of young people out there who are desperate for jobs, and you have offered nothing in the short run, nothing even in the medium term, for these people. Because, as my leader has pointed out, you haven't talked at all about balancing the budget or offering lower taxes for people, or you certainly haven't put dates on them, you are also not sending the right signals to the job creators out there. In other words, the point I'm making is, for young people, the message is in 2001 maybe you'll find a job. But for people today that's simply not an option. They need a job now. I wonder how you respond to that.

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Mr. Martin: Mr. Solberg, first of all, you've quoted me accurately. I think that probably around this table we would all share the view that youth and employment is perhaps the greatest priority, because essentially a young person who is not able to get an entry-level job, a young person who is not able to get into the workforce, is obviously affected by that throughout the rest of their working career. I suspect there is no difference between us on that issue. It is for this reason that in the last budget we really did do quite a lot in terms of the increase in education credits. It was one of the areas where, despite the need to fight the deficit, the government substantially increased the amount of money that was available for entry-level jobs and for summer jobs.

The fact is that within fairly tight fiscal constraints we have done a great deal. One would hope that the negotiation with the provinces in terms of training and development will allow us to do a great deal more.

I must say, Mr. Solberg, I have some difficulty with your last comment on the lowering of taxes. For one thing, the leader of the Reform Party was unable to say what he would compensate a cut in taxes with. However, I also have some difficulty with the party's position - and perhaps you could clear it up - because while the Reform Party appears to be calling for a cut in taxes now, it was my understanding that their position was that there should be no cut in taxes until such time as the deficit is eliminated. Is there a contradiction, or are you saying that you could eliminate the deficit so fast that you would be able to immediately proceed to a cut in taxes?

Mr. Solberg: Of course, our position is that we want to balance the budget and then introduce lower taxes, but simply having a plan that would get you to that point would be stimulative. Even in Alberta and other provinces that are undertaking those kinds of programs, the effect has been one where you stimulate the economy. Alberta, where you have a tremendous amount of job creation going on, is a perfect example of that. The flip side of this is that when you have it you have more jobs being created, certainly for youth and everyone in general.

The further point to this is that when you take credit for 689,000 jobs, I think you also have to bear some responsibility for the 15% youth unemployment. I don't hear you accepting that. I also don't hear you accepting responsibility for the $3,800 drop in disposable income in the three years your government has been in power, nor for the record bankruptcies. I recognize that you come here to put this face on it, but I think it's your responsibility to own up to the figures when they're not good as well.

Mr. Martin: First of all, I would again remind the member that this is a fiscal update; this is not a budget. The purpose of a fiscal update is essentially to tell the country where we have been since the last budget. I don't think we should mix the two up.

I think the second point, and we should be very clear, is that I think we all have a responsibility to create jobs. It was one of the points I tried to make. We don't believe that governments can simply say it is the responsibility of the private sector and then turn their back on it. There's absolutely too much that is required in terms of changing the nature of our economy for governments to not say that we all have a responsibility. I certainly am prepared, Mr. Solberg, to accept my fair share of that.

Within this context - and I think we've been very careful in our words - I don't think we do take credit for the job creation that has been incurred. I think we take credit -

Mr. Solberg: How about the Prime Minister's words in the House?

Mr. Martin: I think what the Prime Minister says is that we take credit for having substantially improved the climate. I think we understand that Canadians are creating jobs. It is Canadian companies; it is Canadian small business.

Mr. Pillitteri's question I think sets our position quite clearly, that in fact what we have to do is establish the climate where Canadian entrepreneurs can create those jobs.

Let me pick up a couple of points. We did in the last budget put in $315 million in youth initiatives, precisely to deal with your point, because we happen to think that's such an important issue.

The last point I would make in terms of jobs in Alberta, just to pick up on this one issue, is that there's no doubt we're all overjoyed with what is happening in Alberta. I wouldn't say this is necessarily totally accurate, but it has been said to me that the federal government's initiative in the oil sands was one of the major job creation initiatives in Alberta, and I would agree with you that kind of thing will lead to a lot of creation of jobs for young people.

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The Chairman: Ms Chamberlain, please.

Mrs. Chamberlain (Guelph - Wellington): Thank you.

I want to begin by congratulating the Minister of Finance. There is no question this is a really good fiscal update.

I too canvassed my riding this summer, and I can tell you what my constituents were saying. This won't be news to you, Mr. Martin - I did share some of this with you in caucus - but my constituents were talking about things such as Canada being a hostage to foreign markets. They do believe we are getting that under control. As you have indicated today, that definitely is the case. They did also talk about reduction of the deficit, and eventually the debt, and I was congratulated time and time again for your good work in that area, for staying the course.

The one thing that was very clear from my constituents was they did talk about the human element. They do believe this government, you, are responsible for maintaining a lot of the social safety net, CPP. They really felt we were always watching that human element. I think you have done a wonderful job in that area.

Unlike my colleagues across the table here, I don't think there has been any voodoo economics in this at all. Clearly, it has been hard work, it has been deliberate, and it has been responsible. Again, I'm just very pleased to have you as a finance minister at this particular point in history.

I do want to ask you a specific question about the document here, on page 5. It's really just to clarify exactly what this does mean. You talk about three examples:

I'm new to the finance committee, so I really want to understand what this means. Is it the borrowing power of each province that is reflected in these numbers? Is this the low end of the scale and the top end of the scale?

Mr. Martin: The fact is that as has been mentioned by some of the members around this table, a number of the provinces, New Brunswick as an example, began work on their balance sheets way ahead of the federal government. We've seen some very favourable results, to the point where today we have six or seven provinces predicting or enjoying surpluses. But the problem those provinces run into is that it is the federal government's deficit, the federal government's indebtedness, that essentially sets the tone for interest rates across the country, for provinces and in fact for companies, to the point that a Canadian company will find its interest costs higher if a level of government has a bad balance sheet. So what was happening was that because the federal government wasn't dealing with its financial problems, those provinces that had really begun to deal with their balance sheets were not getting the benefit.

As a result of our actions, because these provinces, the examples I gave of Alberta, Ontario, and Quebec.... They have long-term debt and they have short-term debt, and they're constantly rolling that debt over. They roll their short-term debt over a lot faster, but even some of the long-term debt comes in. They're rolling that debt over at substantially lower interest rates. Those substantially lower interest rates are what are giving Ontario the $325 million or Quebec the $625 million bang they're seeing.

That's what's happening. That's why it's so important that we stay the course: because the net result of this is really good for the country.

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Mrs. Chamberlain: I want to wrap this up by saying that what these figures on page 5 reflect is that Quebec has actually benefited the most out of the fiscal climate of Canada right now.

Mr. Martin: Yes, your point is well taken. The reason for that, of course, is that compared to some of the other provinces, Quebec has a very high level of indebtedness. That's the answer.

All I was going to say to Mrs. Chamberlain was that I very much agree with her question about the human element of all of this. I really think it is important, especially as we look to the unemployment numbers and the effect on children and poverty, that we really do understand that deficit reduction is not an end in itself, but a means to a better situation.

We have a tough row to hoe. I don't think we should kid ourselves. We're not out of this yet. We're going to see ups and downs in unemployment; we're going to see social problems that are out there. What we have to do, as do all governments, is deal with them.

The Chairman: Thank you, Mrs. Chamberlain.

Mr. Speaker, please.

Mr. Speaker (Lethbridge): Thank you very much, Mr. Chairman. My question is with regard to the effect on the projections of the harmonization of the GST, as to where it's at....

In terms of the Maritimes, I think there was a commitment to put a billion dollars into the transition. In the discussions with the other provinces, are we faced with the same kind of obligations, potentially? If we are, what effect would that have on the projections that are here?

We're looking at the $9 billion in 1998-99 as a deficit. Has that been figured into this? Is there some calculation there, or is that a sleeper that could still come up and affect these projections?

Mr. Martin: No. As the member knows, the payments to the three Atlantic provinces have been provided for in the numbers for this year, the $28.6 billion. If I understand the member's question, he's really talking about the other provinces as well.

Essentially, the nature of the formula we put out was that this compensation was available to any province that, as a result of harmonization, would lose more than 5% of their sales tax revenues. Three provinces satisfied that criteria: Prince Edward Island; Manitoba; and Saskatchewan. We have provided in our numbers for that possibility. If that did occur - and I would very much welcome it - it would not be a deficit hit.

Mr. Speaker: What is your time line in terms of harmonization? You were hoping to do that in this Parliament. Is that still there, or not?

Mr. Martin: Well, hope springs eternal. I don't think anybody wants to make any analogy between medicare and the tax system, one being highly popular and the other, under any circumstances, not. But I was told that it did take the provinces about five to six years from when the first province came into medicare until the last one came in. So I think we have to understand that we may well have a bit of a long haul out there, but we have provided for the numbers on the assumption that maybe somebody would come in a little earlier.

If that's the end, may I make one comment, Mr. Chairman, before it closes?

The Chairman: Please.

Mr. Martin: I have to say, I think it does show that there's a lot of benefit to committees. This has been a good session, from my point of view.

I want to repeat one thing, and I really picked on what Mrs. Chamberlain said about the human element. This is a finance committee, but we really do represent real people. Those real people are very worried about job loss and about the preservation of their social programs. In the end, I really do believe the ultimate goal around this table, for all of us, is the same. We may approach it in different ways, but there can be no doubt that what we want is the betterment of our people.

Thank you.

Some hon. members: Hear, hear!

Mr. Martin: Even you, Herb.

The Chairman: Mr. Martin, on behalf of all members, I thank you for appearing before us.

I can assure you that even though we may be called the finance committee, we are here because each of us represents human beings. They deserve and merit our help. They are foremost in our minds as we carry out our deliberations.

As you well saw today, there may be differences around the table about how people approach the problems we face, but one thing I can say, having observed finance ministers for two decades.... This is the third time you have appeared before us with your economic and fiscal update. This is the third time in a row that you have more than met or surpassed your budget predictions, and I think members from all sides and all Canadians thank you for this great achievement.

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Some hon. members: Hear, hear!

The Chairman: This meeting is adjourned.

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