FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Monday, October 20, 1997

• 0914

[English]

The Vice-Chair (Ms. Paddy Torsney (Burlington, Lib.)): I call this meeting to order.

[Translation]

Good morning, everyone. The Standing Committee on Finance is very happy to be here, in Montreal. A lot of people are attending today's session. I would like to welcome Robert Demers and Martin Comeau of the Quebec Chamber of Commerce.

• 0915

We will then be hearing from Mr. Claude Montmarquette of Cirano; Mr. Yves Morency of the Confédération des caisses populaires Desjardins; Mr. Denis Beauregard of the Conseil du patronat du Québec, who will be accompanied by Mr. Jacques Garon; Mr. Lachance and Mr. Caron and Ms. Bélanger of the Association de planification fiscale et financière; and Mr. Ingerman of McGill University, my alma mater. Welcome everyone.

Every group will have five minutes to express its point of view. We will begin with Mr. Demers.

Mr. Robert Demers (Member of the government Finance Committee, Quebec Chamber of Commerce): Speaking on behalf of the Chamber, I would like to say that we read the Department of Finance 1997 economic and fiscal update with a great deal of interest. The Chamber is pleased that the deficit for the fiscal year 1996-97 is only $9.8 billion. We are satisfied with the progress achieved and with the speed at which this has been accomplished. This augurs well for the current fiscal year, and we would encourage the government to continue on this path.

As far as the methods used by the government are concerned, the Chamber has always been a strong advocate of reduced government spending to achieve a zero deficit and to hold it at this level.

The Chamber is concerned about the government using the employment insurance surplus to finance deficit reduction. Each and every year the government has a surplus of some $5 to $6 billion, a surplus that goes directly into the consolidated revenue fund. According to the Chamber, employment insurance contributions should not, in any fashion whatsoever, be used to lower the deficit since, from the outset, this money was not intended for this purpose.

The recent study by the Department of Finance and the Department of Human Resource Development, which reveals that the employment insurance surplus will almost hit the $13 billion mark by the end of the year, confirms our concern.

Although this is not something desired by the Chamber, if this is in fact a tax to be levied on Canadians, let us say so instead of disguising it in another form.

On this subject, the Chamber would like employer and employee contributions to be reduced by at least 20%, which would amount to $4 billion. We feel that the current surplus is in fact a reserve more than adequate.

As far as government priorities are concerned, we are also happy that Canadians can finally see the light at the end this dark deficit tunnel. However, the Chamber is concerned about the series of new measures announced by the government in the Throne Speech and about the fact that these measures could cause the government to face new deficits.

As the Chamber has been recommending for many years, the zero deficit must be reached through reduced spending, particularly spending related to various government programs.

According to the Chamber, it is essential that the government deal with the debt and reduce the tax burden of taxpayers. We are happy to see that Canada appears to have its deficit under control and that the country is in a good position with respect to the other G-7 members.

However, the fact remains that Canada's debt is considerable and, if we view the debt in terms of a percentage of GDP, our position with respect to the others is not so good. Indeed, only Italy's situation is worse than ours when it comes to total debt- GDP ratios.

The Chamber feels that the government should take advantage of the current economic growth and of the excellent fiscal position it has created for itself in order to reduce its debt dramatically. If it does not do this now, we wonder when it will be able to do so.

Over the next few years, Canada will be facing considerable financial requirements in view of its aging population and the specific requirements of these people. We feel that the time is right to reduce the debt and to put Canada in a good position so that it will be able to handle these new challenges.

Furthermore, although the tax burden of Canadians has not changed over the past few years, when we express this tax burden in terms of a percentage of GDP, we can see that Canadians are overtaxed. The Chamber reports that the $4 billion resulting from reduced employment insurance contributions will stimulate consumer spending, will enable businesses to hire workers and to create jobs and will provide some flexibility to workers and employers whose pension plan contributions are going to skyrocket.

• 0920

Finally, we know that the disposable income of Canadians is dropping and that Canadian consumers are heavily in debt. Part of the problem is linked to the fact that, although we have not had tax increased over the past few years, our tax system is not fully indexed. Indeed, indexation kicks in only when inflation exceed 3%. Consequently, year after year, a portion of the taxpayer's disposable income is eaten up by income taxes without the government ever having to lift a finger.

We also feel that the government should consider a complete reindexation of the tax system with respect to income tax tables, personal income tax credits, child tax benefits, GST credits and thresholds from which we begin to lose these various credits.

In conclusion, we feel that the objective is clear: we must reduce the debt and the tax levies to ensure that our businesses are competitive, to stimulate spending and to foster accelerated economic growth which is absolutely essential for job creation.

The Vice-Chair (Ms. Paddy Torsney): Thank you, Mr. Demers. Mr. Montmarquette will be the next to speak. Since the previous speaker used up only four minutes, he has one left.

Mr. Claude Montmarquette (Cirano): There is no free lunch, but...

Cirano is an interuniversity centre that deals with organizational theory. The centre comprises five universities in Montreal. I'm going to be providing you with a few figures and, I am essentially going to be saying just about the same thing that has just been said, but in a different way.

Right now the debt exceeds 100% of our gross domestic product, and the debt of the federal government represents 75% of this ratio. For every dollar spent by the federal government, 25 to 30 cents go towards payment of the debt. Obviously, this is a serious situation that deserves the attention we are currently giving to it.

I would remind you that in 1980, economists had noted with a great deal of alarm that the debt represented 30% of the gross national product. Thirty percent! This created quite a sensation, however the newspapers more or less let the matter drop. Of course it was not socially correct to protest about this matter, but the economists were very cautious with respect to this difficulty. At that time it was 30%. Now we are looking at 100%. Obviously, this percentage began to climb considerably with the recession of 1982.

Consequently, progress has not come too soon given the magnitude of the problem, particularly the current level of indebtedness. Any level of deficit increases the debt in absolute terms. Consequently, we have to deal with the problem. The only permanent method—and I emphasize the word "permanent"—to reduce the deficit and the debt is to restrict spending. We have to reduce spending if we want to reduce the deficit on a permanent basis. The government has made some efforts in this direction, although everyone acknowledges, without agreeing to the extent to which this has been done, that responsibilities are being off-loaded to the provinces, who in turn pass the buck to a lower government level Consequently, at the end of the line, there has been an increase in taxation for taxpayers and, since we are no longer able to vote with our feet, we are forced to pay the taxes that have been hoisted upon us.

When a government's capacity to tax is increased, its capacity to intervene in the economy is always increased. At that point, it cannot resist using its capacity to tax. Taxes have been increased, and that signals a contradiction with respect to the relative size of future governments.

Our government has clearly benefited from a very favourable economic climate, owing to very a strong growth in the United States, and very low interest rates. It has attacked the deficit in a credible way. This must be recognized.

From an economic standpoint, there are only two acceptable priorities. The first and most important is reducing the debt. No household could avoid bankruptcy if it was so heavily in debt. Unfortunately governments cannot go bankrupt, and this difficulty therefore endures. Reducing the debt is therefore essential. I would remind you once again that in 1980, at 30%, there were already enormous difficulties.

The second priority which should follow the first because it would then be possible to do it would be to reduce taxes. It is high time that working became a profitable operation in this country. We have to encourage people to work and not the reverse.

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All the measures that the federal and provincial governments are using are encouraging people not to work. People are looking to not work. There is something that is not working in our system. We need to encourage people to work and, for that, work has to become profitable. This would help eliminate the black market, which we continue to be worried about. When there is high taxation, there is an incentive for the black market.

Secondly there is a fairly recent phenomenon, but an extremely important one, and that is the brain drain happening across Canada, including in Quebec. People go where effort and talent are rewarded significantly. They leave for the United States in particular, and also for Europe.

In particular, expenditures must not be increased. If it is felt that certain expenditures are more important than others, the lower priority expenditures must simply be reduced. We must never lose sight of the fact that, in a less favourable economic climate or when interest rates are rising, deficits will reappear quickly if new expenditures are added as soon as budgets surpluses appear. And the deficit spiral will then increase. The deficit will rise again, as was the case in the 1970's. I would remind you that between 1970 and 1975, when inflation was high and tax rates were not yet indexed, governments started to want to spend the surpluses and create all sorts of programs that have led us to the present situation. Thank you.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much, Mr. Montmarquette.

Mr. Morency, please.

Mr. Yves Morency (Secretary for Government Relations, Confédération des caisses populaires Desjardins): I think that I will not be original and that I will not scare those who spoke before me, because what I am going to say is very similar to what they have said.

To begin with, the Caisses Desjardins movement would like to emphasize that it is very pleased that the Minister of Finance has been tenacious and persevered in his efforts to eliminate the federal deficit. As an organization, over the last 10 years, we have repeated the same message to each Minister of Finance that has had the pleasure of preparing budgets in Ottawa. We have said the same thing: you must make major efforts to reduce deficits and give companies and the Canadian public enough room to manoeuvre so that they are ready to compete nationally and internationally.

Sustained economic growth and relatively low interest rates have even enabled the Minister of Finance to meet his objectives a few years ahead of time. Our economic forecasts anticipate budget surpluses, which we feel need to be spent wisely, given changes in economic cycles. All good things come to an end one day, especially economic ones. We know that the national debt is around $600 billion and that nearly one third of government revenues are spent on interest every year.

There is thus a wonderful opportunity here to give ourselves some room to manoeuvre. If we could spend this $42 billion elsewhere, I think it would be more efficient.

There is also the heavy tax load on the Canadian public, and the financial situation of the provinces, particularly Quebec and Ontario.

This gives a framework for our comments, and we intend to propose certain priorities that will be very similar to those that have already been expressed.

First of all, we would like the government to give itself financial room to manoeuvre, and this financial room to manoeuvre would be obtained by reducing the debt. We propose that the non- budgetary operating surplus be used to reduce the debt and that unused contingency reserves be added to that amount.

It is not because we do not want the government to have contingency reserves, because we feel that these are useful and important. But when they are not used, we would like them to be applied to reducing the debt.

• 0930

Secondly, the tax burden on Canadian taxpayers should be reduced. We propose reducing employment insurance deductions, indexing personal exemption amounts and tax tables and eliminating surtaxes imposed over the years. I will not elaborate because by colleagues have already done so.

Finally if money was left over, and I mean left over, it might be possible to increase transfer payments to the provinces instead of incurring new expenditures, and even then in areas of provincial jurisdiction such as education and health. We believe that the provinces have already reduced their various expenditures in those areas. They have to be given some room to manoeuvre. They are the ones closest to the public, taxpayers and their needs and who are in the best position for all practical purposes.

I used to work for the federal Department of Finance. In the 1970's, to stimulate the economy, we put in place what were called Local Initiative Programs, the famous LIP programs, which created expectations among the public. The federal government had used its spending power for programs such as daycare, which is not bad in itself, but once the government had no more money to spend on these programs, it turned things over to the provinces and told them to get by with those amounts. This situation must not arise again.

We would like to mention the new program coming up in the next few years, the seniors' benefit, not because we are opposed to the principle of this program, which is an interesting initiative, but because we would like to give a word of caution. The rules put in place must be incentives for taxpayers to plan their retirement and must not discourage them from considering the RRSP as an important aspect of their retirement.

At present, we see a lot of worried people in our caisses populaires. There are people who ask us if they would not be better off cashing in their RRSP to avoid being penalized by this program. I am not saying that it may not be that people have a poor understanding of the program. We are starting to have an analysis done by tax experts, who are beginning to point the finger at the perverse effects of some of the elements of the program. We agree with the principle, but the rules need to be analyzed.

This conclude my statement. I'll come back to other aspects later. Thank you.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much, Mr. Morency. Now it is Mr. Beauregard's turn to speak.

Mr. Denis Beauregard (Chairman, Conseil du patronat du Québec): I will ask Mr. Jacques Garon, who is director of economic research at the Conseil du patronat, to introduce the CPQ which, as you will see, will cover a certain number of points that we have already heard previously.

I will note right away that over the coming days, we will be able to communicate to you a certain number of much more specific points following the meeting of CPQ directors which will take place tomorrow. Thus it is a question of timing. There is a certain number of elements that I cannot disclose to you this morning, but we will transmit them to you during the coming days, as well as to all other interested parties.

Mr. Garon, please.

Mr. Jacques Garon (Director of economic research, Conseil du patronat du Québec): In the little time that is allowed to us, I'd like to raise three subjects relative to your two themes.

Regarding the first question, which is whether the progress made up to now has been too slow or too fast, we think that it has been just about right, but this topic is a debatable one.

Regarding the methods, were they appropriate or not? The answer is no, and I'll explain to you why in a second.

I would like to raise three questions very quickly. First, there is the monetary policy of the Bank of Canada. Why should we raise this question within such a context? Because it has a considerable influence on the revenues of the federal government, on the revenues of the provinces as well as on servicing the debt. Therefore we're already talking about eventually sharing a budgetary surplus. This eventual sharing depends, a great deal, on what Mr. Gordon Thiessen is going to do as governor of the Bank of Canada.

Now recent actions by the Bank of Canada have left us wondering. As a matter of fact the discount rate of the central bank was raised on October 1st of this year by 25 base points, which raised the preferential rate of the chartered banks by 50 base points.

• 0935

Moreover, the governor of the Bank of Canada clearly indicated after this that we should expect other increases in lending rates during the coming months. We do not accept Mr. Gordon Thiessen's argument that we need preventive measures in order to make sure that the present economic growth can be sustained, and consequently we must discourage any inflationist expectations right away.

This action is contradictory with the previous declarations of the governor, that the Canadian economy could progress at a steady rate over the coming quarters without driving inflation up, because of the very large margin of unused productive capacity in the economy, as we can see by the unemployment rate which is still very high.

Moreover, at the same time the short term rates were being raised, on October 1st of this year, five-year mortgage rates went down by 15 base points, which obviously proves that there is no pressure in sight that would drive inflation up.

There still remains the argument that the weakness of the Canadian dollar would be partly due to the real interest rates which are lower in Canada than in the United States, but we do not accept this argument either, because it is not by protecting artificially the value of our currency that we will succeed in improving our competitive position on foreign markets.

As a matter of fact, this is really a question of productivity. Within this context, every study has shown that up to now, productivity, especially in the manufacturing sector, has decreased over the past five years when we compare our performance to that of other countries, namely the United States.

In short, increasing short-term interest rates is not justified at the moment, and is unlikely to be justified in the next few months.

Why were the methods used inappropriate? Well, I'll come back to what was said a little earlier. I am referring, of course, to the use of the cumulative surplus in the employment insurance fund. The government is using this to justify the larger than expected reduction in the deficit. If the economy continues strong, it is expected that the employment insurance fund will have a surplus of approximately $17 billion by the end of next year.

This is a completely artificial measurement, because if there were a recession, the government would have to put money back into the fund in order to meet its obligations. Furthermore, we fully agree that there is no reason to maintain the premium rate at $2.80, as the Finance Minister announced a few months ago. We think the rate should be reduced to $2.40 at least, or possibly even $2.20, which would still be enough to leave a cushion of some $8 billion in the EI fund, would give employees much greater purchasing power and would reduce employers' production costs.

Finally, once the budget is balanced, what should the government's priority be? As we can see, pressure is already coming from all sides to reduce individual income tax or increase transfer payments to the provinces, particularly in the area of post- secondary education and health, once the budget is balanced.

We think the budget will be balanced when budget revenues exceed expenses by $8.4 billion. Let me explain what I mean. We have to ensure the EI fund contains a billion dollars so that the federal government will not be in a deficit situation in the case of a recession. Since it has to pay interests into the fund on this amount at a hypothetical rate of 5%, the interest would amount to $400 million.

We also think it is essential to reduce the debt of over $600 million, if, in the years ahead, we really want to guarantee that the social programs so dear to Canadians will be there for them in the future.

Consequently, the federal government should use any budget surplus to reduce individual and corporate taxes and reduce the debt, rather than to get into any new spending programs.

The Vice-Chair (Ms. Paddy Torsney): Thank you, Mr. Caron. We will also be hearing from Mr. Roberge from the Metropolitan Montreal Chamber of commerce, but I must now give the floor to Mr. Caron and then to Mr. Ingerman. Mr. Caron.

Mr. Yvon Caron (Association de planification fiscale et financière): First of all, Madam Chair, I would like to apologize for an error in my written presentation, which reads "Mr. Chairman". I was told that there would be a Chairman this morning.

Madam Chair, committee members, ladies and gentlemen, our association is pleased to have an opportunity this morning to present its view on the federal government's deficit reduction.

• 0940

As requested, we will focus chiefly on the priority the government should assign to reducing the debt, increasing spending or reducing income taxes.

I would like to make it clear that the APFF is a non-profit, apolitical organization which receives no subsidies. Consequently, our comments will be neutral and objective.

Canada has significantly improved its financial situation in recent years. Efforts were made not only by the federal government, but also by the provinces. As a result, the deficit, expressed as a percentage of the GDP, of all governments in Canada is reported to be the lowest of the G-7 countries in 1997. Our figure is 1.2%, while the average for the G-7 countries is 2.6%. In 1992, the total deficit of all governments in Canada represented 7.7% of the GDP, or almost twice as much as the average for the G-7 countries, which was 3.9%.

Moreover, government debt in Canada has remained high in comparison with the other G-7 countries. Canada's net debt is roughly 65% of its GDP in comparison with 44% in the United States and Germany, 40% in France and in the United Kingdom, and 18% in Japan. It is also important to remember that Canada's economy is the smallest of all G-7 countries.

This deficit and debt reduction has been done in two ways. It has involved increasing the tax burden. Taxes paid by taxpayers in all tax brackets in Canada have increased from 31.6% of GDP in 1980 to 36.1% in 1994. In the United States, the percentage remained more or less the same. It was 27.1% in 1980 as compared to 27.6% in 1994. In 1994 in the G-7 countries, excluding Italy, the average was 34.6%.

This debt and deficit reduction has also involved cuts in program spending by all governments. Program spending represented 42% of Canada's GDP in 1992. In 1997, it represents 34% of GDP. But program spending in Canada in 1997 did remain higher than the G-7 average, which was 32%.

Before going on to the suggestions, I would like to point out that we did not dwell on the issue on whether the government moved too quickly or not quickly enough. When a car is speeding out of control, you have to slam on the brakes. That is the point we were at, and it was high time that we put on the brakes.

We focused to a greater extent on the priorities. As a result, based on these facts, being aware of the sacrifices made by all Canadians in reducing the deficit and the debt, but recognizing nevertheless that these efforts made a significant reduction in interest rates possible, which in turn stimulated the economy, the APFF feels that it would be premature to immediately substantially reduce the tax burden on taxpayers before all governments in Canada start finding stable budget surpluses.

Moreover, the ATFF would like to make at least three suggestions, which we feel are important and must be echoed in the pre-budget consultation process.

If the tax burden is not reduced by 1998, it must at the very least not be increased, and I would like to stress that. The measures announced to solve the significant funding problem for public pension plans, the Canada Pension Plan or the Régime des rentes du Québec, involve raising premiums.

The APFF is not challenging the proposed solutions, but we must find ways of reducing taxes to avoid a net increase in the tax burden on workers by 1998.

Secondly, the tax burden must not be increased indirectly, as it has been for several years. For example, several tax measures, like abolishing the employment expense deduction in 1988, increased the tax burden on taxpayers without directly increasing tax rates. So, while the idea of increasing fees for public services is healthy in itself, implementing new fees is an indirect increase in the tax burden when these fees are not accompanied by a reduction in taxes for taxpayers.

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Thirdly, tax authorities can decide not to raise taxes, but they require more and more forms from taxpayers and make tax legislation more complex, and that results in additional costs for taxpayers, simply to comply with legal requirements. These costs go up year after year, and unfortunately, they do not serve to defray the cost of public services and result in lost productivity for our society.

Madam Chair, I would like to introduce Ms. Lucie Bélanger, who is the association's Chairman of the board, and Mr. Renaud Lachance, who is an economist. If necessary, they will both help me during the question period.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much. That took you exactly five minutes.

We will now move on to Mr. Ingerman.

Mr. Sidney Ingerman (Individual presentation): Madam Chair, members of the Standing Committee on Finance, I received your invitation to appear late Thursday afternoon. I was busy on the weekend, and I finished my presentation at 3 a.m. this morning. Unfortunately, I did not have time to have it translated. You have received it, and I am going to read it in English only this morning.

The Vice-Chair (Ms. Paddy Torsney): This is a bilingual country.

[English]

Mr. Sidney Ingerman: I'm going to begin by reading a little bit of the first part of the presentation, and then I'll quickly summarize the main points as we go along.

The first part is what budgets can do. Federal, provincial, and municipal budgets and government fiscal policies affect aggregate demand and supply in the economy, and thereby economic growth, employment, income distribution, and ultimately, realized deficits, surpluses, and government debt levels. That's how they work. They are instruments of economic policy, not the object of economic policy.

This pre-federal-budget hearing should clarify what should be federal, economic, and social objectives, and the means by which the budget can contribute to them in the coming and not-too-distant budgetary periods.

Budgets are statements of intention about government spending, expenditures, and taxation revenues. Actual outcomes that affect aggregate demand and supply, and produce annual deficits, surpluses, and debt levels in Canada are influenced by monetary policy—Mr. Garon certainly made this point a moment ago—commercial policy, international trade policy, and most importantly, by our economic activity in the highly integrated North American and global economy. That's what determines the outcome, not just the budget.

The objectives of national fiscal policy are best accomplished by the co-ordination of policy determination within governments and co-operation among various levels of governments, which brings us to another topic.

Let us look at important objectives and the possible budgetary means to achieve them. I tend to use the word “objectives” rather than “priorities”, if you like. There are three objectives I'd like to comment on this morning.

The first objective is to increase employment. The second objective of budgetary policy should be to reduce income, inequality, and poverty in this country.

• 0950

The third objective I'm going to discuss is to stop the deterioration of education and health programs.

Let me briefly summarize each one of these and go on to the means.

In discussing the question of employment, I think it's important to look at both what's happened in the United States and what is happening in Canada. This is a highly integrated economy, and one cannot understand events in the Canadian economy and poverty or lack of it without looking at what's happened in the American economy.

In the U.S. there have been six years of strong economic growth, six years of progressive decreases in unemployment, and at this point the unemployment rate in the U.S. is down to 5%. There is no accelerated inflation. There is no serious problem in this respect, and budget deficits as a percentage of output have come down, and debt is falling as a percentage of output as well.

In contrast, in Canada we've had a relatively weak return, reprise, from the 1990-91 recession: relatively sputtering economic growth, inadequate fall in unemployment because the economic growth has not been sufficient to reduce outstanding unemployment and absorb the growing labour force. Our unemployment rate in 1996 was still at 9.7% on an annual rate. In early 1997 there has been some progress, with it going down to 9%. Growth seems to have stalled in August and September and we still have this very unsatisfactory situation.

The situation is best summarized by the fact that in 1990 the Canadian unemployment rate was 40% higher than the American unemployment rate. By 1996 the Canadian unemployment rate had risen to be 80% higher than the American unemployment rate. We have a serious problem here. I don't have to go into the details. It should be high on the priority of government.

The Vice-Chair (Ms. Paddy Torsney): I'm sorry, Mr. Ingerman, we're actually out of time for your section. If you would like to make one summation comment, I'll allow you to do that, and there will be time at the end—

Mr. Sidney Ingerman: Sure.

The Vice-Chair (Ms. Paddy Torsney):—in the question period to elaborate further.

Mr. Sidney Ingerman: I think the document can speak for itself.

The problem of income distribution and poverty is well known. It's a serious problem in this country. There's been an unequal distribution of income, given the modest gains from the reprise. The situation in health and education is deplorable. This is in the provincial jurisdiction. Playing around within the federal jurisdiction is not a solution. Certainly there has to be a return of funds to the provinces that were taken away under the Canada health and social transfer. These could be done by various kinds of tax cuts, various kinds of spending within the boundaries of a sensible fiscal and monetary policy.

Thank you.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much, Mr. Ingerman.

[Translation]

Mr. Roberge.

Mr. Françoy Roberge (Director Public Affairs and Research, Chamber of Commerce of Metropolitan Montreal): Good morning, Madam Chair and members of the committee.

I would like to start by apologizing on behalf of the president of the Chamber, who is in Toronto today, and our Director General, who is in Chile.

As Director of Public Affairs and Research, I will take a couple of minutes to go over the position that the Chamber has taken over the past two years on the Canadian government's budget and that the Chamber reiterated after this year's throne speech, that seemed to mark a change in direction that we don't fully approve of.

If we understood correctly, this Throne Speech seemed to indicate that only 25%, instead of 50%, of the Canadian government's projected budget surplus would go to reimbursing the debt once the deficit has been eliminated.

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The Chamber encourages the Canadian government to stay the course and continue devoting 50% of its projected budget surplus to eliminating Canada's debt, because that is probably the best investment we could make, like companies, when they buy back their shares. By eliminating the deficit more quickly, Canada is buying some very good assets.

Moreover, we feel that the overall situation in Canada must be improved. We believe that the Maastricht formula in Europe is a good objective for Canada and that the debt must quickly be brought to below 60% of the gross national product. That covers the improvement aspect.

The second aspect deals with stimulating the economy. We think that the federal government must devote 25% of its projected surplus to reducing the tax burden for individuals and businesses, and we have included a drop in employment insurance premiums in that reduction.

Moreover, to stimulate growth in domestic demand, we feel that it would be preferable to keep interest rates relatively low. Since consumption has started to go up, we feel that keeping rates low, perhaps even at the current rate, would give citizens more confidence in their economy.

The other 25% should be used to comfort people and consolidate existing programs, namely social programs. However, the Chamber feels that the Canadian government should not get involved in areas under provincial jurisdiction, but that a good part of the 25% of the projected surplus should be handed over to the provinces to give them some leeway to administer or maintain better social programs in the areas of education and health, which are provincial jurisdictions.

Transferring responsibilities results in transferred costs. It starts with the Canadian government, which transfers costs to the provinces, which in turn, off loads the bill on the municipalities. At present, municipalities are on the verge of being suffocated, not only in Quebec, but also in the other provinces.

So if money is to be reinjected in programs, a large part of that money should be injected into transfer payments to the provinces to help give taxpayers a bit of breathing room and perhaps, at the end of the line, contribute to restoring health to municipal finances.

The Vice-Chair (Ms. Paddy Torsney): As far as the questions are concerned, we are going to give each party five minutes. We will start with Mr. Jaffer from the Reform Party.

Mr. Rahim Jaffer (Edmonton—Strathcona, Ref.): I'm going to put my questions to Professor Montmarquette. You talk about tax cuts. When should the government start cutting taxes? Do you think that the government should indicate when and how this will be done?

Mr. Claude Montmarquette: I said that reducing the debt was the main priority. I think that would give us a reasonable buffer, because we not think that economic growth will always exist. There will be downturns that will bring the deficits back quickly. We will end up with the same problem.

All governments considered, I think the debt represents 100% of GDP. As for the federal government, its debt is roughly 60 or 65% of GDP. Once we have reached 50 or 60%, I think it would be reasonable to cut taxes.

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It is a very high priority, for two reasons. People must be encouraged to work. The Quebec government launched an early retirement program aimed at 18,000 people, but 30,000 people took advantage of it. What does that mean, what is the message? The message is that it pays not to work. Essentially, it's the message.

So we have to make work profitable again. What worries me, as I said earlier, is that more and more people are leaving Canada, and not those who are the least skilled. People who have the opportunity to leave do leave. There's also that aspect.

I would like to highlight another point on the issue of tax cuts. As long as taxes are collected, politicians will be tempted to increase spending, because they will have a source of revenue. It is always dangerous to move in that direction, because it increases government involvement in the economy. That does not seem to be the right way to ensure sustained growth, as was mentioned in the case of the United States, where the gap in the unemployment rate is considerable and has widened since 1992 and again with the 1988 recession. What will happen during the next recession?

The unemployment rate is still high in Canada. It is 18% in the Maritimes and almost 12% in Quebec.

The Vice-Chair (Ms. Paddy Torsney): Would someone else like to comment?

[English]

Mr. Ritz.

Mr. Gerry Ritz (Battlefords—Lloydminster, Ref.): I have one quick question. A couple of the gentlemen commented on our need to see increased productivity. That will benefit Canada rather than protecting our currency value and our banking system as we see it now.

In some of the other meetings we've had up to this point, there seems to be quite a bit of concern over the proposed MAI, the multilateral agreement on investments. Do you gentlemen have any light you could shed on that? Is that a scary thing we should all be concerned about, or is that something that will benefit Canada in a world economy? I'd like your comments, please.

Mr. Jacques Garon: I'm sorry, I haven't studied the proposal in full detail, but I don't think having a shield would increase productivity in Canada. In the latest numbers I've seen—and they pertain to the manufacturing sector—they came to the conclusion that in 1980 we had on average about 20% lower productivity than in the United States, and by 1994 it was 40%. There is no shielding from that.

So I think the problem is not whether we're going to sign an international agreement. You have more leeway in terms of cross-national investments as opposed to what we are able to deliver in Canada to compete with our best products. Unless we realize that, there's no way increasing the Bank of Canada rate is going to protect the Canadian dollar.

We can witness what's happening to the dollar right now. It's going right back to where it started before the increase. So I think it's a question of productivity and not perhaps trying to shield ourselves from international development, which is already occurring anyway.

Mr. Gerry Ritz: Thank you.

[Translation]

The Vice-Chair (Ms. Paddy Torsney): Mr. Loubier, you have five minutes.

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): I will try to be brief, but I have a number of questions.

I'm happy to be here this morning. I'm especially happy with what I have heard. There is so much consensus around the table that we could form a coalition to go to Ottawa and present our demands to the federal government.

There is consensus on reducing unemployment insurance premiums. We have been working on that for almost two years and always get the same answer.

And then there is automatic indexing system, and I am happy that you mentioned it, because it is a factor. It explains, at least in part, the fact that the federal government has raised $23 billion in new tax revenues over the past three years. And then they wonder why consumers spend less.

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There is consensus on a third issue, and I am also happy to learn that. The surplus that will probably emerge by the end of the fiscal year, and that will be roughly $4 or $5 billion according to our estimates, should be used to return in part to the provinces what they were stripped off with respect to established programs rather than to fund new initiatives. We have also made that suggestion to Mr. Martin.

That was one of the strong points in the economic update. All types of initiatives in the areas of education and health, which are provincial jurisdictions, were announced. Enough about the coalition, we can talk about it more later. I will take down your names and we can meet in Ottawa.

Here is my first question. Regarding unemployment insurance premium rates, each time we have asked Mr. Martin to reduce premiums by at least 35 or 40 cents for each $100 in insurable earnings, Mr. Martin says that first of all, he needs proof that that type of reduction would have a positive and significant impact on employment. So I put that question to the Conseil du Patronat, or perhaps to Mr. Montmarquette, to Mr. Morency or to Mr. Caron. I would like to launch a discussion. Is there any analysis underway at present, if not, can some be done? If that is all Mr. Martin needs, we can hand it to him on a silver platter.

My second question deals with the Bank of Canada's monetary policy. Mr. Garon talked about it. How could we explain, as you said earlier, that we continue to wage a fanatical war on inflation, when at present, there is no inflation in Canada? Even with mistakes in estimates that may occur, whether they be positive or negative, it would still appear that we are at the start of deflation. Last year, Gordon Thiessen did not categorically reject this deflation hypothesis. If I go by what Mr. Montmarquette taught me at the University of Montreal, it is almost as dangerous as hyperinflation. So why stay the course when we have some problems with job creation and we should take advantage of three years of economic growth?

Thirdly, Mr. Montmarquette, would it be a good idea for the federal government to introduce anti-deficit legislation, like the piece of legislation that was adopted in the National Assembly, to avoid repeating past mistakes?

Fourthly, I would like Mr. Morency to elaborate on the issue of contingency reserve.

My fifth question is for Mr. Garon directly. Would it be possible to clearly define, in financial terms, what a budget surplus is? Everyone knows that with current transfers and accounting techniques, it is easy to run a surplus or a deficit as the Minister of Finance sees fit. That concludes my questions.

The Vice-Chair (Ms. Paddy Torsney): You each have 30 seconds.

Mr. Beauregard.

Mr. Denis Beauregard: I'm going to address the first part of the first question and then I will give the floor to Mr. Garon.

Have there been any studies on job creation that would result from a substantial decrease in employment insurance premium rates? You have to be careful with those type of studies, because reducing employment insurance premiums would represent a cut in payroll taxes. It is a whole host of things.

At the Conseil du patronat, brief after brief, year after year, we say that payroll taxes are much too high. Of course, there aren't that many in Ottawa, but there is that one and there is a series of other payroll taxes in Quebec.

We feel that payroll taxes must be substantially reduced, and then I think we could say with a lot of certainty that yes, there would be a significant impact on job creation, especially in small and medium-sized businesses, where that plays an extremely important role.

For the other part of your question, I will give the floor to Mr. Garon.

Mr. Jacques Garon: On the issue of the Bank of Canada's action and the exchange rate, we must admit that the Bank of Canada is on a tightrope. If the Canadian dollar drops bellow 72 cents, imports start to shoot up. Moreover, over the past couple of years the trade balance surplus has been constantly dropping. The result of that is that if, in the United States, the inflation rates stays at roughly 3%, the more imports there are, the more inflation is imported. So we are walking a tightrope.

On the other hand, at present, if you consider that aspect, it is less important than considering the fact that killing short- lived economic recovery would be more detrimental for the 97% of SMEs that make up the industrial pool in Canada, than preventative measures such as those advocated by the Governor of the Bank of Canada.

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So in our view, it is certainly too early to talk about any increases, given the inflation rate in this country, which is completely under control, whereas in the United States, it is only 3% and they are still resisting.

The Vice-Chair (Ms. Paddy Torsney): Mr. Montmarquette.

Mr. Claude Montmarquette: I would like to go back to the question on payroll taxes. Any cut in payroll taxes is an incentive to create jobs, as are reductions in labour regulations. That could contribute to bringing up the employment rate in the economy.

I won't comment on the Bank of Canada. There is an important trade off between inflation caused by imports that increase if the exchange rate continues to go down and the fact that there is not much inflationary pressure on the horizon in this country.

As for the anti-deficit legislation, since the question was addressed directly to me, the issue is whether or not it would be better to have policies... I would like to start by going back to one of Mr. Ingerman's arguments. Everything is very interconnected, it is very difficult to respond to one aspect without addressing the others. You can do something good on one side and completely abolish a positive effect simply by pushing monetary or fiscal policy in directions that completely wipe out what has already been done. So it is very difficult to have an overall view.

In my opinion, the issue regarding anti-deficit legislation is whether it is better to have rules or discretion. If we know how to manage the economy well, if we have a clear ideas as what needs to be done, discretion is always preferable. But I do not think that we know how to manage the economy well, at least not at the government level. I do not see why governments should have a monopoly on managing the economy. They all have their own policies, so I prefer rules, at least rules are clear and they are followed, but there again there has to be agreement. When they attempted to propose something similar in the United States, an awful lot of amendments were made and they sort of lost sight of what anti- deficit legislation was intended to be.

I prefer rules that are agreed upon ahead of time and that are respected. I prefer that to discretion that is often in response to concerns that are much more political than economic.

The Vice-Chair (Ms. Paddy Torsney): Mr. Ingerman.

Mr. Sidney Ingerman: Mr. Loubier, regarding your question on reducing employment insurance premiums, it is a bit theoretical in the sense that the idea involves unit costs. Some people say that businesses would be more competitive and that it would create more jobs and lead to better productivity. There is not much empirical evidence of that. It is a theoretical proposal, and the department has a number of questions in that regard.

On the other hand, unions are more concerned because the percentage of unemployed people who receive employment insurance benefits has dropped from 87% in 1990 to roughly 47% today. That means that only 47% of the unemployed in Canada can receive benefits. So they're more interested in increasing benefits and in having better coverage.

The Vice-Chair (Ms. Paddy Torsney): Mr. Lachance.

Mr. Renaud Lachance (economist, member of the Association de planification fiscale et financière): Mr. Loubier, I will answer three of your questions. First of all, have any studies been conducted to determine if a decrease in taxes will lead to job creation? I examined that several years ago. There are no studies as such. However, there are studies, including a very serious one by the Bank of Canada and other Canadian economists, that have shown that raising taxes has created unemployment. According to a study conducted by the Association des manufacturiers et des exportateurs du Québec, the opposite could be true; if taxes were cut, unemployment could be reduced.

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Your second question dealt with anti-deficit legislation. In the United States, some studies have shown that credible anti- deficit legislation, at the state level in the U.S., has succeeded in reducing interest rates paid by the states on their debts. It would have to be extremely strict legislation and it would take a few years before it had an effect. Would it have the same effect at the national level? I'm not fully convinced it would, because the markets would perhaps think that a national government should have leeway in comparison with other levels of government.

In highly econometric and theoretical terms, at levels of government other than the national level, anti-deficit legislation has a certain effect when it is credible.

Finally, what is a budget surplus? Having worked at the Department of Finance, I know that the Department controls some information. A budget surplus is determined using a modified cash basis of accounting.

You have a cheque. If you cash it on March 31st, it will be an account entry for the fiscal year ending March 31st. If you cash it five minutes later, at five after twelve in the morning, it will be an entry for the following year. The thirteenth month is not something that was dreamed up; it is a reality.

In the last federal budget, it was quite obvious that the government was looking for all types of ways to try to bring down the deficit. They play a kind of game and the only person who can really police and control that is the Auditor General of Canada, who can take a closer look at it and instill some discipline.

The Vice-Chair (Ms. Paddy Torsney): Mr. Brison, you have the floor.

[English]

Mr. Brison, do you have another one?

Mr. Scott Brison (Kings—Hants, PC): Thanks, Paddy.

One thing that has emerged this morning is a consensus, or near consensus, about a number of issues. One area in which I believe we have close to total agreement is that of payroll taxes. There was a great article on the politics of unemployment in the Economist a few months ago. The magazine actually pointed to some specific examples internationally where payroll taxes, or the reduction of payroll taxes, demonstrated an ability to reduce unemployment or at least stimulate economic growth.

Mr. Ingerman raised or emphasized the issue of unemployment. While I think we probably agree on the end—that being, that we want to reduce unemployment—we may differ on the means to get there.

I think one thing that has emerged internationally is the ability of the private sector to produce economic growth and employment growth more effectively than government in terms of sustainable growth. A reduction in payroll taxes, or job-killing payroll taxes, is one way to do that.

My first question is a very simple question, and it requires a “yes or no” type of answer. I'm going to ask all of you to answer it by a show of hands. How many of our presenters at this table this morning feel we should reduce EI premiums in order to stimulate employment growth in Canada?

The Vice-Chair (Ms. Paddy Torsney): Unfortunately, our recorders don't record hands, so they'll have to actually give a yes or no into the microphone.

Mr. Scott Brison: Okay. How many of our presenters here this morning—and you can answer with a yes—feel the reduction in payroll taxes, specifically EI premiums, would help stimulate job growth in Canada?

[Translation]

Mr. Robert Demers: Yes.

The Vice-Chair (Ms. Paddy Torsney): Did someone say no?

[English]

Mr. Sidney Ingerman: I'm not sure.

The Vice-Chair (Ms. Paddy Torsney): Mr. Ingerman, a trail-blazer.

Mr. Scott Brison: He's from Missouri—“Show me”.

I just want to make sure I have this right. Do we have everyone saying yes, except for maybe one? Is that a definite maybe?

Mr. Sidney Ingerman: Maybe.

Mr. Scott Brison: Okay.

[Translation]

Mr. Renaud Lachance: Tell me where you get $10 billion in taxes. People say that the employment insurance program is running a huge surplus. We know that Canada already has the highest marginal tax rates, a relatively broad tax base, consumption taxes that are higher than in the United States and that there is a little cross-border shopping. If you are saying that the employment insurance surplus should not have been created, tell me where you would get the $15 billion. There is no more room in the Canadian tax base to raise that much money through taxes. Almost all of the other taxes have been used.

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If you put yourself in the shoes of an apolitical economist at the Department of Finance, it is clear that all taxes are examined and that they feel the only tax base that has perhaps not been used to the fullest extent and will hurt less than the others is the payroll tax. That is the one that was used.

The Vice-Chair (Ms. Paddy Torsney): Mr. Beauregard.

Mr. Denis Beauregard: I could perhaps tell you where to get the money needed. You could begin by not invading areas under provincial jurisdiction that have not already been invaded. That is a start.

The Vice-Chair (Ms. Paddy Torsney): Mr. Montmarquette.

Mr. Claude Montmarquette: In fact, there have not been any econometric studies on payroll tax cuts. There have never been any payroll tax cuts. Studies could be conducted, but there have never been any yet. However, we know that there are comparisons between what is happening in Europe and what is happening in the United States. That is where the difference lies.

Now, if we want to truly raise these amounts, taxes do not have to be taxed; we will succeed by cutting spending even more.

Mr. Yvan Loubier: There is still a 9% difference; 8 billion dollars can be raised through spending cuts.

Mr. Denis Beauregard: There's another 25% on transfers to the provinces, another 25% on transfers to individuals...

The Vice-Chair (Ms. Paddy Torsney): Mr. Loubier, your time is up.

[English]

Yes, that's five minutes. It goes quickly.

[Translation]

Mr. Charbonneau, you have five minutes.

Mr. Yvon Charbonneau (Anjou—Rivière-des-Prairies, Lib.): I would like to thank our guests this morning for participating in these pre-budget consultations. I think that obtaining your views is a very important part of our annual political cycle.

The election has just taken place, and the current government has made a widely publicized written and verbal commitment to balance public finances and to use what could be considered a surplus in the following way: by reinvesting 50% in targeted economic or social measures, by using 25% to reduce the debt, and 25% to cut taxes.

Earlier, I heard one of you say that 50% would go to the debt. The commitment is that 50% will go to initiatives, 25% to the debt and 25% to tax relief.

However, what that does not show is how these factors influence each other. Will reducing the debt help improve growth? Will tax cuts have an effect on the economy that will make it possible to invest more in programs?

It is difficult to determine that when using the 50%, 25% and 25% approach. But that is the general idea. So there is a balanced approach. Naturally, some people will call it a scattered approach, a lack of clear government direction. On the other hand, the government must consider the various sectors in society and try to present options so that there is something for everyone.

Another indicator in this debate is the debt-to-GDP ratio. I think that is very important. That is one area where Canada is clearly not performing all that well. The debt-to-GDP ratio is very troublesome. However, when you look at debt and GDP... Obviously, if there's progress on the growth side, the ratio improves.

I would like to suggest that we use this debate to define our views on the direction this country must take. It is always tempting to increase the number of recipes and techniques. Earlier, in the space of seven or eight minutes, twelve ideas were listed, and about 50 have probably been put on the table: we adjust this, we adjust that, we adjust the other thing, etc.

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When you prepare for a Formula I race, adjustments are all very precise. However, if I am getting ready to go to Florida in a Winnebago and I want to see my mechanic, he will perhaps tell me to pay attention to a number of things. That has nothing to do with Jacques Villeneuve's mechanic for the Formula I race. If I am getting ready to go out hunting and I tune up my 4 x 4, the adjustments will probably be different from those of the Winnebago or the Formula I car.

What is our vision? Where do we want to go with this country? That is why it is important to discuss these issues during the pre- budget consultations.

I would like to take this opportunity to ask Mr. Ingerman, who spoke last and who did not have enough time to express his views, to elaborate on his vision or his objectives. You seem to have reflected on this a lot in preparing certain objectives. You did not have the time to tell us about them earlier.

In addition, if you have the opportunity, tell us why unemployment in Canada is still higher than in the United States. What needs to be adjusted to change that particular aspect?

[English]

The Vice-Chair (Ms. Paddy Torsney): Mr. Ingerman.

Mr. Sidney Ingerman: An extensive study of living standards that just came out the other day looks at this difference between American and Canadian unemployment rates. Most of the usual conclusions that unemployment insurance is too...[Inaudible—Editor]...and unions are too strong don't hold up under study.

The conclusion, which is very tentative because no one is really quite sure of it, is that because economic growth in this country has been and continues to be relatively weak compared with the United States, the unemployment rate has stayed high and has been compounded by rapid technical change, globalization of the economy and other factors. But the main thing is that we have not grown fast enough to absorb the growing labour force and the unemployment.

It's not a fancy answer, but I think it's pretty close to the right answer.

[Translation]

The Vice-Chair (Ms. Paddy Torsney): Would someone else like to comment on that point?

Mr. Yvon Charbonneau: That always brings us back to the same question. You were saying that it is because growth has been quicker and better, but I ask you, what factor is involved? It is the same thing; those are the two sides of the coin. The unemployment rate is lower, and you are telling me that is because there was more growth, but what adjustments made that possible?

[English]

Mr. Sidney Ingerman: The control government has is fiscal and monetary policy. We're looking at the budget now to see if we can think about better adjusting growth in the economy within the bounds of government budgetary policy. The government can do this by promoting the private sector in many ways through tax policy, subsidies and other policies. The government can do this on its own through programs in the public sector like reinvesting in child care, which is highly labour-intensive, and reinvesting in the hospitals via the provinces, as we've all said. These are all methods the government can try to use.

It may be beyond our government's control. It may be that Mr. Greenspan in the United States has ten times more influence than Mr. Martin does on Canadian unemployment, but we can't do anything about that. The best we can do is use the tools we have, and one of the important tools is the budget. It's not the only one.

[Translation]

The Vice-Chair (Ms. Paddy Torsney): Mr. Montmarquette and Mr. Beauregard.

Mr. Claude Montmarquette: On the issue of the different rates, the unemployment rates went up during the recessions, between 1982 and 1990. Moreover, that was consistent. The rate is still a little higher in Canada than in the United States, possibly because of our broader social policies. So that means what we call the normal employment rate is probably higher in Canada than it is in the United States.

But in 1982, the gap started to get wider, and in 1989 the gaps were wide again. That means that we are incapable of managing recessions. That's what that means. We are unable to overcome the rigidity in the workforce, or ever-increasing government intervention in these areas, which is perhaps not the right solution, whereas in the United States, they seem to rely on private sector decisions.

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I heard what you said, Mr. Charbonneau, and I'm a bit surprised that you did not really understand the message around this table. We did not talk about a 50% cut in spending.

Mr. Denis Beauregard: That is perhaps an impression more than a certainty based on studies. Mr. Montmarquette has just said we do not manage things as well as in the United States, in terms of results, during difficult times. We are dealing with two countries that were built and that developed with central governments that played completely different roles.

The United States chose to offer people less support in difficult times than we did here. We have social programs that are a lot more developed, and that are a lot more costly.

As Mr. Montmarquette mentioned earlier, for a long time, I think we sort of cut off the link between work and income, at least to a certain extent.

So there is a lot of incentive in the United States, in some cases, to make an extra effort. If you do not work, you do not eat. It is as simple as that.

We made a different choice, and that led to a society that has problems adjusting when times get tough, and the problems last a lot longer. However, that has also led to a society that does not face the social problems the Americans face. We do not experience violence in our large urban centres. We not have the extreme poverty in Canada that exists in the United States. Our health system is quite a bit better than the health systems in most other countries, even if we are currently experiencing some problems.

Canada has invested public money very differently from the United States. In the United States, this results in a level of economic performance that rises very quickly given a certain impetus. In Canada we have a heavier, more expensive apparatus that we have to keep stoking longer. Which way is better? I do not know, but one thing is certain. As Mr. Charbonneau said, we might have to know which very, very, specific adjustments are needed, because it is very tricky to make these changes.

People are saying that the debt must be eliminated. Just one minute. We did not say that. The debt must be reduced, it must be reduced in size by reducing its ratio with respect to our collective wealth, but eliminate the debt completely? I dissociate myself from the fine consensus that was mentioned earlier. In any case there was no consensus.

The Vice-Chair (Ms. Paddy Torsney): We have eight minutes left, one minute for each group.

Mr. Comeau, do you have something to say?

Mr. Martin Comeau (economist, Quebec Chamber of Commerce): I might like to complete Mr. Charbonneau's answer.

One of the reasons that the unemployment rate is lower in the United States than in Canada may be that the labour market is more flexible in the United States. Adjustments to economic changes take place more quickly, so that in a recession, the unemployment rate increases less in the United States than in Canada.

Why is the labour market more flexible in the United States? First of all, because productivity is higher. I have seen a number of analyses on the productivity of investments or training in the United States. When we look at the raw data, we see that investment by American companies as a proportion of GDP is lower than in Germany or France, for example, but that the return on those investments is much higher than in Germany or France, so that in total, American productivity is much higher than that of its main competitors. It's somewhat the same thing in the area of training.

Finally, with respect to monetary policy, that of the United States in the early 1990s was perhaps a little less restrictive than Canada's, which gave some oxygen to the American economy. That is what I wanted to add.

The Vice-Chair (Ms. Paddy Torsney): Mr. Montmarquette.

Mr. Claude Montmarquette: No, I have said enough.

The Vice-Chair (Ms. Paddy Torsney): Mr. Morency.

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Mr. Yves Morency: I would like to come back to the adjustments that Mr. Charbonneau mentioned. Here, most people have just talked about adjustments. There is perhaps one adjustment that we should look at more closely. That is the tendency, when there are surpluses, to spend then immediately, even if only at a 50% level. We know what it costs, because we have been through it over the last 20 to 25 years. I don't think we should return to that situation.

We feel, for our part, that our leeway must be adjusted and that the tax burden of individuals and companies should be lightened to a certain extent.

Jacques Villeneuve may have the best-tuned engine, but if he comes into the pit and someone has trouble getting the pump in to add gas to his car, he will be delayed by 20 or 25 seconds. Those are the adjustments that we have to pay attention to.

The Vice-Chair (Ms. Paddy Torsney): Mr. Beauregard and Mr. Roberge.

Mr. Denis Beauregard: I think that it is extremely important to have a vision of things. We have to know what kind of a country we want. I am exaggerating a little bit, but I would almost say that we have the vision that we can afford.

A great deal needs to be done to clean up our extremely high individual and corporate income taxes. Some of it has already been done, but there is still work to do. We should not give people the impression that the financial problem has been solved. That is simply not true.

With a debt that exceeds the total domestic product for the year, we are still facing a serious problem. And the reason we got into the situation is that we got into spending more than we could afford.

Yes, we should think about the kind of country we want to live in. That is absolutely essential. But we must also focus on the fiscal problem, which will probably be solved once the debt is brought down to a reasonable level, namely 60% of the country's wealth, and when our new ways of doing things will enable us to maintain the debt at this level and not have it increase to 100% in a short space of time.

The Vice-Chair (Ms. Paddy Torsney): Mr. Roberge.

Mr. Françoy Roberge: I would like to clarify something. Perhaps I was misinterpreted regarding the Chamber's position. We say that two years ago the Canadian government talked about spending 50% of any budget surplus on eliminating the deficit or the debt. We think there has been a change, because in some provinces, voters have sent the Canadian government a message in which they seem to be asking for a little more compassion, and a little more spending on programs.

We would like the government to stay the course. Until the deficit has been brought below the 60% figure mentioned in the Maastricht Treaty, the government must use 50% of any budget surplus to reduce the deficit. That would also reduce the annual interest on the debt, which does account for a significant part of the federal government's spending.

The Vice-Chair (Ms. Paddy Torsney): Mr. Caron.

Mr. Yvon Caron: Everything, or almost everything has been said. The only thing I would add is that I don't think anyone here is talking about eliminating the deficit, but rather reducing it. In our view, eliminating the deficit is not the same as reducing the debt.

The Vice-Chair (Ms. Paddy Torsney): Mr. Ingerman.

[English]

Mr. Sidney Ingerman: One of the strangest twists in the current tax reduction debate is finance minister Martin's declaration that for the immediate future he wants to concentrate on lowering income tax reductions to low- and middle-income people. But just last June he floated a balloon when he talked about raising the RRSP contribution rate, which is a tax expenditure that affects deficit and debt, that is very expensive to Canadian taxpayers, and that tends to more or less benefit people whose incomes are quite high.

It's a very strange business. I wonder if the committee might think about it and maybe sort it out a bit.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much for that challenge, and thank you all for giving us your best ideas. Have a good day.

We'll adjourn for a short break.

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• 1056

[Translation]

The Vice-Chair (Ms. Paddy Torsney): Good morning. The Standing Committee on Finance of the House of Commons is continuing its pre- budget consultations. We will be hearing from Mr. Benoît Latulippe of the Fédération des étudiants et étudiantes universitaires du Québec (Federation of Quebec university students), Mr. Pierre Paquette and Mr. Peter Bakvis of the Confederation of National Trade Unions, and Mr. Pierre Beaulne of the Centrale de l'enseignement du Québec.

You will each have five minutes to make your presentation, and then there will be a question and answer period. Mr. Latulippe.

Mr. Benoît Latulippe (Fédération des étudiants et étudiantes universitaires du Québec): So I'm going to start things off.

I am a member of the Quebec university students federation and a student at Sherbrooke University. I am the coordinator of sociopolitical research, and I was asked to tell you what students think about the pre-budget consultation.

My presentation will deal with education a little, with the Canada Social Transfer, corporate taxes and the debt.

When the government came to power in Ottawa in 1993, it identified the problem clearly. The problem was clear to everyone: it was the deficit, which was growing every year, and resulted in a debt that compromised our future and restricted our latitude. The government therefore decided to slash spending to get the deficit under control. It succeeded, but at what cost? It sacrificed the most disadvantaged people in society, education, health care and social services. This is unfortunate, because they are the very pillars of a healthy society.

The Federation of students feels it is important today to criticize the financial choices made in the past, because they are going to compromise our future. We are a generation of young people who are very hopeful of the future, but who are also very fearful about it. The choices made by the federal government are unfortunate; they will reduce our competitiveness and mean that we will have even less latitude in future.

In this pre-budget period, it is important that this latitude, which was restored somewhat in recent years, be restored further. Consequently, it is important that the Canada Social Transfer be returned to its former level and even increased if possible. We are in an economy based on knowledge, information and high technology. If Canada and its labour force want to remain competitive, we are going to have to invest in it. It is very important for us that, through the Canada Social Transfer, spending on education be restored and even improved if possible.

• 1100

In recent years, we have managed to stabilize the Canadian debt even though everyone agrees that it is still huge and is restricting what we can do.

If we want to ensure that the young people of today, the labour force of tomorrow and the future taxpayers of this country can deal with the financial responsibilities they will have to assume, we will have to think about giving them some flexibility too.

Clearly, the education system, like the health and social services system, will be increasingly costly. Because of demographic trends and the aging population, we can expect the demand for health care services to increase in the next few decades. The labour force is decreasing, which means that taxes will be even higher in future. If we add to all these responsibilities that of the debt, the situation will be even more difficult. Hence, we must start paying down the debt so that it will be reduced for future taxpayers, because they will have many other costs to pay in the decades ahead.

In summary, the government should reinvest in the Canada Social Transfer, and even increase it if possible. We have to begin paying down the debt.

Some might say that the modest amounts that could be paid down would not have any impact. That may be true in the short term, but it is not true in the long term.

A 1995 OECD study, which used the SEN index, showed the weaknesses of the welfare state in Canada. The index showed the distribution of income in society. It showed that as we move into the future, the number of poor people increase. The only country with a less expensive welfare state than Canada is the United States. The European countries beat us soundly.

This closed, insecure job market for young people is very difficult. At the moment, a number of European countries are seriously studying work week adjustments and reductions to try to fight this concentrated unemployment. Although there's been no serious implementation of any measures, there's nothing to prove that this is an appealing solution. However, theoretically at least, people are in agreement.

It is easy to establish a link—and the studies have already done this—between approval by workers who would be affected by work adjustment and reduction proposals, and the issue of the welfare state. Compared to their European counterparts, Canadian workers are far from approving a concept of this type. It is easy to make the link, because our welfare state is even weaker than it is in countries where there are many poor people facing very heavy financial burdens.

In order to guarantee the long term future of our generation, we must control the debt and restore the social transfer to ensure that our financial responsibilities will be lessened. Otherwise, the financial burden our generation will have to bear will be very heavy, both for us and for people already retired today or those who will be retiring in 10, 15, 20 or 25 years.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much, Mr. Latulippe. Mr. Paquette.

Mr. Pierre Paquette (Secretary General, Confederation of National Trade Unions (CNTU)): I would like to introduce Peter Bakvis, who is the assistant to the executive.

I would like to thank the committee for inviting me to appear and I would like to remind you that the CNTU has 250,000 members in all sectors of activity in Quebec. It should also be remembered that we are an independent organization, affiliated with the CLC.

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Like the Minister of Finance, we can see that the government's success in reducing the deficit is attributable to three main factors: first, the growth in the economy, which meant that more revenue was coming in than during the period following the 1990- 1991 recession, next, the reduction in interest rates, which made it possible to stabilize the debt servicing cost, but particularly the drastic cuts in program spending. Spending went from $120 billion in 1993-94 to some $105 billion in 1997-98, which is a reduction of $14 billion or 13% in program spending.

Three quarters of these cuts occurred at the expense of the unemployed and the provinces, in the area of transfer payments for health care, social assistance and post-secondary education. This meant that the provincial governments, particularly the Quebec government, were forced to neglect health care, social services and education, and in some case actually allow them to deteriorate.

I would mention in passing that the Quebec government had to reduce its program spending by about 5%. Consequently, much of the pressure applied by the federal government resulted in higher taxes or cuts in other areas.

I would point out once again that three quarters of the cuts were made at the expense of the unemployed. For example, in the area of employment insurance, there was a reduction of over $4 billion in the benefits paid to the unemployed, and in transfers to the provinces half of the cuts, close to $7 billion, were downloaded onto the provincial government.

We know what impact these budget cuts had on employment insurance. In the next few weeks, we will probably be able to see the negative impact even more clearly when the measures passed last January come into play, particularly those affecting seasonal workers. For our part, we are starting to see some dramatic cases, which we will be making public in the next few weeks. In 1993, 90% of the unemployed were receiving benefits, whereas today, according to the figures for July 1997, only 43% of the unemployed are entitled to benefits. We are expecting a further drop in the next few months.

I've already spoken about the indirect effects of the reduced transfer payments in the areas of health and post-secondary education. The damage caused by these cuts will leave an indelible impact.

One of the things we would like to speak out against this morning is that while Mr. Martin's predecessors, Mr. Mazankowski and Mr. Wilson, tended to overstate and to be optimistic in their forecast, the current Minister, although not pessimistic, because that is hardly what we can expect from a Minister of Finance, does seem to have a tendency to overestimate or underestimate—to overestimate his spending and to underestimate the revenues. We think it is just as harmful to the public debate for a Minister of Finance to overestimate things as to underestimate things.

In that regard, we would ask the committee to urge the Minister of Finance and the government to be more transparent about the real state of the Canadian economy and the country's financial situation.

For example, in his economic and fiscal update presented to the committee in Vancouver, the Minister announced that legislation would be introduced to increase from 11 billion dollars to 12.5 billion dollars the minimum cash amount given to the provinces and territories under the Canada Social Transfer for health and social programs.

In last year's budget, we were told that the amount would be reduced from 12.5 billion dollars to 11.8 billion dollars. In other words, the Minister of Finance was not announcing an increased transfer in his update, but rather a freeze at 12.5 billion dollars. There is nothing to brag about in announcing that 700 million dollars in planned cuts will be frozen.

I think that in this regard, we have to set the record straight: there is no increase in the transfer to the provinces, the amount has simply been frozen for this year. I think it would be a good idea if the government could be more open in its dealings with the people of Canada.

The text we submitted to you contains a number of suggestions. The first is to restore the Canada Social Transfer. We consider this extremely important, because of the flexibility we now have, and which was present before in our view—because the Minister himself said that according to the procedures used, it can be said that we already have a surplus, because there are no further net financial requirements.

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We insist that the government should avoid duplication or competing with existing programs.

I find it particularly significant that the Minister is now talking about health and education infrastructures, simply in order to have a pretext to use his new flexibility in the areas that come under provincial jurisdiction. We are opposed to that. Things should be done through agreed-upon mechanisms, such as the Canada Social Transfer.

As regards to the employment insurance program, there is room to improve benefits while reducing premiums slightly.

Were also calling for a withdrawal of the proposed new seniors benefit. I think the Mouvement Desjardins has already clearly stated the reasons why we are calling for this. This plan would penalize retired low and middle-income individuals in our society.

In addition, if there is a tax reduction for the target populations, particularly low income earners, the overall effort must be offset by tax reform that seeks to achieve greater equity, in the area of family trusts among others. Some tax shelters should be reviewed. This was one of the commitments made by the government in its Red Book.

We think the federal government must deal fairly with Quebec and compensate it for the harmonization of the GST and the QST. This would involve paying Quebec approximately 2 billion dollars. We would probably be better to make a concession and agree on a figure of 1.9 billion dollars.

The same is true as regards family policy. It is essential that negotiations with the Quebec government be resumed.

I would like to close by saying that we expect the government and the Minister of Finance to apply some pressure on the Bank of Canada to maintain stable, low interest rates to encourage investment and job creation and to maintain a realistic exchange rate in light of the Canadian economic situation.

Thank you very much. We would be pleased to answer your questions.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much, Mr. Paquette.

Mr. Beaulne.

Mr. Pierre Beaulne (Economist, Centrale de l'enseignement du Québec): Good morning. I would like to start by thanking the committee for inviting us to appear before it.

The Centrale de l'enseignement du Québec has 120,000 members, most of whom are francophone teachers working for school boards, but also the teaching staff at colleges, support staff in schools and colleges and a range of health care workers, although fewer of our members are from this field.

I would like to focus my remarks on those aspects we consider priorities, and leave aside some issues we may be able to discuss in the question period. So I will be concentrating on the following five priorities: first, that the government try to achieve a balanced budget next year; second, that it restore funding to the CHST for health, education and social assistance while respecting areas of provincial jurisdiction; that the coverage of the employment insurance program be improved while reducing employer and employee contributions; four, that the 3-billion dollar contingency reserve be used, if available, to pay down the debt; and five, that we continue to try to make the tax system fairer.

Let me now go into more detail. The government forecasts a 17-billion dollar deficit for 1997-98, even though it seems to be on track toward a deficit of some 9 billion dollars. We therefore think that a balanced budget is quite achievable next year, because it would include the 3-billion dollar reserve. So the budget would actually include a disguised surplus.

In recent years, federal transfer payments to the provinces for health, education and social assistance were cut by 7 and a half billion dollars when the Canada Social Transfer was introduced. As a result, it has been particularly difficult to restore Quebec to fiscal health. The budget for health care and education both dropped in absolute terms. Our health care system is in a desperate situation, while our education system is less and less able to meet the challenges facing it for the future.

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At the same time, employment insurance reform forced thousands of people onto social assistance, at a time when the financial support formerly provided by the federal government under the CAP was reduced. This resulted in additional problems for the Quebec government, which passed on the cuts by making cuts in its own income support programs.

We think the fiscal dividend reported by the federal government should be used first and foremost to increase transfer payments for health, education and social assistance, while respecting areas of provincial jurisdiction.

The surplus in the employment insurance fund, which seems to be about to reach 10 billion dollars, is a scandal in our view. The federal government which contributes nothing to the fund, is using this surplus to reduce its deficit at the expense of the most disadvantaged members of society. Since the reform was introduced, fewer than 50% of the unemployed receive unemployment insurance benefits, compared to 87% in 1990. The program criteria must be reviewed to broaden the coverage. At the same time a reduction in premiums for employers and employees appears desirable given that CPP and QPP premiums are supposed to increase systematically over the next three years.

Fourth, once the budget is balanced, the debt will stop growing. Because of the country's economic growth, the relative weight of the debt will be reduced. A trend is already well underway. Even though paying down the federal debt, which is mainly domestic, is not a priority in our view, we could nevertheless support the idea of using the contingency reserve for this purpose, if it is not used for the purposes for which it was intended.

Finally, we think greater tax equity must be an ongoing priority. There's a general perception that businesses do not pay their fair share, particularly in income taxes. The OECD's international comparisons back this up, as do comments made by the IMF. We therefore think the government could try to rebalance the tax burden between corporations and individuals, because in recent years, individuals have assumed most of the burden of getting the country's finances in order.

We also think that something could be done about sales tax collection. Department of Revenue investigations show that in Saint-Sauveur, 30 per cent of the businesses were not registered with Revenue Canada for the GST; in Varennes, the figure was 22 per cent; in Beloeil, almost the same, and on the Saint-Hubert street mall here in the heart of Montreal, the figure was 17 per cent. I think serious efforts must still be made to combat tax dodging, particularly in the case of sales taxes, because this would make it possible to provide relief for taxpayers in other ways. Thank you very much.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much. We will move to the question period. Mr. Jaffer will ask the first question. I would ask those who would like to ask questions to kindly raise their hands.

[English]

Mr. Rahim Jaffer: I have a question for Mr. Beaulne. I wonder if you could expand a little bit on your last point. You mentioned that we have to try to equalize the tax system in cases of businesses and various other people who are maybe effectively not paying taxes.

I'm curious as to how that would relate to, for instance, other countries that have looked at reducing tax rates effectively, like New Zealand or the U.K. or even the U.S. In some cases when they reduce corporate tax rates and various other rates of tax, in fact it increases the amount of money that governments collect in the long run.

Is that the direction you're talking about, or in fact maybe increasing corporate taxes? Perhaps you could expand on your fifth point a little bit more.

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[Translation]

Mr. Pierre Beaulne: We looked at the OECD figures that compared the breakdown of various taxes in premiums; contributions to social programs, individual income tax, corporate income tax, property tax, and so on.

While these figures are not necessarily up-to-date, they do show that the corporate income tax collected here in Canada is lower than that collected in the U.S. and most other countries. In the United States, for example, where the overall tax burden is much lower than in Canada, corporations pay much higher income taxes in terms of the ratio to the GDP. If we include contributions to social programs such as unemployment insurance, CPP and so on, we find that, compared to the GDP, Canada's contributions are lower than those of the U.S., not to mention all the other countries.

It has been quite clear for a number of years that individuals are being asked to make the greatest effort in reducing the deficit. In light of these international comparisons, we think careful study should be given to rebalancing the taxes.

The Vice-Chair (Ms. Paddy Torsney): Mr. Paquette.

Mr. Pierre Paquette: I would like to add that much has been said about the effort Canadians were asked to make to restore some order to the financial situation. If we look at the overall tax burden of G-7 countries in 1993, we find that Canada placed fourth. We always hear that we are overtaxed. Canada placed first as regards to taxes on individuals. So it is true that individual Canadians were called on to make a greater effort, relatively speaking, than the people of all of the other G-7 countries. On the other hand, Canada ranked fourth overall with respect to taxes on businesses. So the taxes need to be rebalanced.

At the request of the Taxation Commission, a study was done in Quebec by Price Waterhouse which found that corporate taxes in Quebec—which has a reputation for high taxes—were lower than in the northeastern United States and almost the same as in Ontario. Here again, individuals are shouldering the lion's share of the tax burden.

Now that we have a balanced budget, we should not fail to talk about tax fairness, which is still a current issue, in the area of family trusts, among others. Last year we reminded the committee, and we would remind it again this year, that the government made a commitment to reopen the matter of family trusts by 1999. Although the date has already been postponed several times, we are not questioning that this must actually be the cut-off date for opening family trusts. In the interest of greater tax equity, the federal government should also be examining certain tax shelters.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much. Mr. Latulippe.

Mr. Benoît Latulippe: I would also like to clarify a few things about fairness in personal and corporate taxes. An OECD study—maybe the one you were referring to—proves that over the past 20 years, personal income taxes as a share of government revenue have dropped, on average, within the OECD nations, whereas they have risen by more than 5% in Canada. That's rather high.

We also wonder whether the private sector and the rich are doing their fair share in this effort to put our fiscal house in order. We believe that individuals have done their share over the past few years. To prove this, we would point to an important statistic from the Department of Finance that shows that until 1988, corporate tax deferrals were rising exponentially.

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In 1988, businesses were able to defer $27 billion indefinitely from year to year. Because of these tax deferrals, governments are losing enormous tax revenues. So I think some work has to be done on tax deferrals. I also believe that work is needed on tax evasion. We know that businesses are setting up headquarters outside of Canada so that their profits can leave the country, thereby avoiding paying Canadian taxes.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much.

Mr. Loubier, you have five minutes.

Mr. Yvan Loubier: Good morning, gentlemen.

Mr. Paquette, a few moments ago you were looking for a word to describe the way Mr. Martin has manipulated the figures. I have two words for that: hypocrisy and lies. Just yesterday, I was speaking with the president of Informetrica, and we agreed that back in February, we could see a deficit of approximately $10 billion on the horizon. We said so at the time, and Paul Martin said we were incompetents and that our figures were totally hypothetical, etc.

You brought up another point. As a matter of fact, last week, in Vancouver, I asked Mr. Martin about the figures for social programs. The government grandly announced that it was going to increase contributions to social programs. A few hundred million dollars are going to be sprinkled here and there over the next five years.

In actual fact, the budget cuts announced in Mr. Martin's 1996 budget will continue until the year 2001-02, if my memory serves me correctly. In the final analysis, $42 billion will have been slashed from funding for social programs and health care. Once again, the government should show some transparency to the people, and inform them properly. The medicine Mr. Martin has been prescribing for the past two years does them very little good.

My first question is as follows: would you be willing to join us in asking for a true public debate based on the real figures for the government's finances about the use of the surpluses that are coming up? I asked Mr. Martin a question in Vancouver, and he refused to have any debate other than what we might have during the pre-budget consultation.

Mr. Pierre Paquette: It is extremely important to have a broad public debate, because it will have a major influence on how the provinces behave. Clearly, if the federal government decides to reduce its taxes, a great deal of pressure will be placed on provincial governments, including the government of Quebec, to reduce their taxes as well, at a time when they are having a hard time maintaining services at a minimum level with current resources. These issues have to be debated, and I agree with you, that people have to have all the figures, objective figures, for such a debate.

You used the word "hypocrisy". The CNTU used the same word to describe the last federal budget. Indeed, the budget that was brought in just before the election was unremarkable, even though the worst of the cuts were being implemented that year. So there was a major problem with transparency there.

So, we are not just ready to join in with you, we are also asking for a public debate on the future of government finances, particularly given the amount of maneuvering room that the government now has.

Mr. Yvan Loubier: Look at the reform of the tax system. I think that everyone around the table mentioned this. Last year, the Bloc Québécois produced two detailed reports on the tax system, one on personal taxes and one on corporate taxes. We realized that there have not been any major changes to the tax system since 1962. There had been some top loading and a few measures were changed, but all in all, the tax system had not really been looked at.

There are tremendous possibilities within the tax system to transfer the tax burden. At present, the big corporations are getting benefits from the system, even though there no longer is any reason for them in 1997. Perhaps this would be an opportunity for you to make your views known, and we will certainly do the same, since professor Mintz's report will be coming in.

I don't know whether you remember, but Mr. Martin set up a working group to look at the need for reforming the tax system, in response to pressure from the opposition. I'm not expecting the working group's report to contain anything particularly valid about tax fairness.

Would you be willing to work on that issue as well? It is an extremely important issue, one that is not getting enough attention. It's as if it has been set aside. This issue has been overshadowed, because of the additional $23 billion that have flown into the government's coffers and the surplus coming up next year, but tax fairness remains a fundamental issue, a question of effectiveness and equity. If we were to tighten up the tax rules and take away some of the privileges that big corporations get, including Mr. Martin's, we could even exceed our fiscal targets.

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Mr. Pierre Paquette: The CNTU has been asking for a debate on our entire tax system for several years. I would just point out that basically, the tax system has three objectives.

The first is to pay for the government services we receive. At present, there has to be a debate, both federally and provincially, on the level of government services we want to have. We have mechanisms here in Canada to ensure that the services are paid for, but they have been threatened by this obsession with a zero deficit, both federally and provincially. So, we have to determine what level of government services we want to have, and how we are going to provide them. One of the issues that comes into play is the entire question of provincial jurisdiction, which was questioned in the Speech from the Throne.

The second objective of the tax system is to redistribute wealth fairly to the less fortunate.

The third goal is to help create jobs. Ottawa has shown no interest in this particular goal. The Quebec government has made an effort, although it was insufficient, starting in the last Landry budget, which decreased payroll taxes in order to create new full- time jobs.

We expect the federal government to take up this cause. For example, the surplus in the employment insurance account could be used intelligently to adjust premiums. For instance, companies that make adjustments and reduce the number of hours of work, thereby creating full-time jobs, could be exempted from paying premiums.

Another possibility would be to compensate workers, through the tax system, who agree to reduce their hours of work, thereby creating employment. There are all kinds of issues relating to employment and tax fairness that are not part of the public debate, and which should be at the heart of this debate, which is so essential to the future of this society.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much.

Mr. Brison.

Mr. Yvan Loubier: We will respond.

[English]

Mr. Scott Brison: The issue of downsizing has been discussed quite a bit this morning, and the reduction in the federal debt has come at the expense of the provinces, which have had to make very difficult decisions on the provincial level and in fact on the municipal level. Those costs have been passed on to ordinary citizens in Canada, and I think quite possibly the people impacted most negatively by that have been the students across Canada.

We're a trading nation; 40% of our GDP comes from trade. We're in the information age. Knowledge-based industries and information technology-based companies are the ones that are going to be producing jobs as we enter a new millenium.

At this time we have seen an increase since 1988 of 280% in the student debt load when they graduate from university, a 110% increase in tuition. I'm taking these figures from some other figures I've read over the past few weeks.

What specific proposals, Mr. Latulippe, has your organization developed to target reinvestment in education to ensure that Canadian youth help make us the most competitive nation as we enter the 21st century?

[Translation]

Mr. Benoît Latulippe: I think you are asking us what our federation is suggesting to insure reinvestment in education. Is that your question? You also mentioned student debt load.

[English]

Mr. Scott Brison: Targeted reinvestment.

[Translation]

Mr. Benoît Latulippe: Regarding the student debt load, our federation would suggest changes to the system for repaying student loans. We are in favour of income-contingent repayment. It's a pity that students, no matter what area they are studying in, are all facing the same limitations as soon as they enter the job market. No matter what their income may be, it is very important for them to be able to continue getting ahead in life. If a graduate goes six months, a year or a year and a half without any income, the banks shouldn't be putting pressure on him to pay back his student loan. So we would suggest income-contingent repayment, so that people could pay down their student debt at a rate that is in keeping with their actual income.

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As for reinvesting in education, as we were saying earlier, this depends on the Canada Health and Social Transfer. Over the past few years, there have been tremendous cuts and you could argue that not enough money is coming in. In addition, the government could get enormous revenue in the form of corporate taxes by cracking down on tax evasion. We think that Canadian corporations and the rich are not doing their share, and this should be looked at. That is why we are discussing a review of the tax system. Does that answer your question?

Mr. Pierre Beaulne: Could I say something about that?

The Vice-Chair (Ms. Paddy Torsney): Yes.

Mr. Pierre Beaulne: First of all, I'd like to point out that the situation is somewhat different in Quebec than in the other provinces. In Quebec, the level of student debt is slightly lower, tuition is slightly lower and the province has a pretty good system of student loans and bursaries, unlike the rest of Canada. The government of Quebec just reviewed the loan and bursary program. A number of corrections and improvements were made recently, and these adjustments are still being studied.

Nevertheless, we think that the millennium scholarship program that was announced is not relevant for Quebec, which already has its own system of loans and scholarships. At a time when the federal government has brought in massive cuts, particularly to the Canada Health and Social Transfer, thus, to the educational system, it is reintroducing funding, in a devious way, using a program that already exists in Quebec and that operates well. So we don't think that this initiative is particularly relevant for Quebec. We think that the funding for such programs should be sent to the government of Quebec through the usual channels, that is to say, through the Canada Health and Social Transfer. As I was saying, Quebec's program is not perfect, it could be improved, but it already does exist, and does a pretty good job of meeting its objectives.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much. How much is tuition these days for one year at university?

Mr. Benoît Latulippe: Full time, about $900 per semester, or approximately $2,000 per year.

The Vice-Chair (Ms. Paddy Torsney): It was lower than that for quite a long time.

Mr. Benoît Latulippe: Yes. Tuition has almost tripled over the past seven or eight years.

The Vice-Chair (Ms. Paddy Torsney): It was $570 in 1985, and it was at that level for 15 years or more.

Mr. Assad.

Mr. Mark Assad (Gatineau, Lib.): Gentlemen, thank you very much for your presentation.

I listened to Mr. Latulippe, Mr. Paquette and Mr. Beaulne. They discussed a number of current issues, such as balancing the budget, reestablishing funding for hospitals and health care in general, employment insurance premiums, using some or all of the surplus to pay down the consolidated debt, and a request for changes to the tax system.

It certainly isn't easy to bring all these things together in the space of five minutes. Ever since I first came to Ottawa, in 1988, I have been interested in the taxation system. Unless I'm mistaken, you were not paying lip service to anything, but rather, you were talking about the changes you would like to see made to our system. So the key is reform of the tax system, and Lord knows that we do need a reform of our tax system.

I don't want to go over the history of all that, because I only have a few minutes, but someone was saying that our tax system really hasn't been reformed since 1962. That's true, since the Carter Commission began its work in 1962 and finished in 1967. I should also say that the Carter Commission's report was a revolutionary document, but it was not implemented.

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Harvard University got a copy of it to demonstrate how the industrialized nations of the world could balance their tax system and make it as fair and equitable as possible. Some Scandinavian countries did implement many of the recommendations made by the Carter Commission. The only country that did not implement them was our own, Canada.

As I was telling you, it's not easy to summarize all that in a few minutes. Let's have a look at the statistics. Statistics Canada released a report in 1990, written by a retired former public servant, Mr. Mimoto. I think you should read this report, because it describes how our country's debt rose and it says who the guilty parties are, if I could use such an expression. The report also explains how the deficit rose drastically and why we did not have the revenue needed to meet these needs.

There is no doubt that the governments of the day did not have the courage to tax. Instead, they funded all their programs by increasing the deficit. In the old days, our deficit was very low. It's incredible when you think about it. We mustn't forget that around 1972, our deficit was negligible.

If we look at 1980 statistics, we see that 1% of the population owned 17 or 18% of the entire country's wealth. Twelve years later, in 1992—I don't have the latest data, and I don't know whether it exists—the same 1% of the population owned 27% of the country's entire wealth. The only country where things are worse, where the concentration of wealth is even greater, is the United States.

So, reform is necessary. You mentioned all the issues that should be examined. It's true, but I am deeply convinced that it is very difficult to have such a public debate. It's very difficult. You asked for a broad public debate. That's a mistake, and I'll tell you why. You would be giving the financial elite too many opportunities to divide and conquer.

A public debate should not be too broad. You have to focus on something. We have guys like Pierre Fortin, and others, in the country, and even here in Quebec, who have certainly helped explain what has been happening over the past few years. The Bank of Canada has a role to play. People completely ignore this. There's our monetary system to consider. Gentlemen, if you wait for the media, who are controlled by the most affluent in this country, you will never have a true public debate about the deficit or about reform of our tax system.

The Vice-Chair (Ms. Paddy Torsney): Mr. Paquette.

Mr. Pierre Paquette: I don't share your pessimism as far as the wider debate is concerned. Of course it is extremely onerous for a government. Here in Quebec we've had a commission looking into the tax system. As a matter of fact, Peter Bakvis was one of the commissioners. In a very short period of time, the commission was able to identify a number of areas where there was consensus. The problem is that after the commission's report, the debate came to an end in Quebec. Minister Landry decided on a tax reform that no one had heard about.

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In that respect, the problem is not so much the debate taking place in the population at large, but rather the follow-up given by the government to such a debate. You are probably in a better position than I am to seek such guarantees.

We had a very interesting and stimulating debate. One of the problems we face in discussions relating to the tax system is that people are put off by the many technical points that come up. It takes on the appearance of a debate among specialists when the money actually comes from our pockets. Something must be done to make this subject more democratic. A wider debate would also have to deal with the issues involved in reforming the tax system. You know as well as I do that there is a lot of magic thinking in this area. People think that anything is possible with the tax system or else that we have no room for choice at all but must replicate the system south of the border so the Canadian and American systems are the same.

I'd like to make an additional point to which you referred at the end. Reference was made to the fact that wealth is concentrated in the hands of 1% of the population. The tax system surely has something to do with this, but monetary policy has also played an important role. When millions of workers are jeopardized in their job security and their livelihood with the two recessions that were provoked at the beginning of the 1980s and the beginning of the 1990s, with all the repercussions that this had on wage negotiations and on wage rates, we find ourselves in the present situation we have in Canada and the U.S., that is an increasing polarization as far as income is concerned.

The tax system can play a role in correcting this state of affairs, but something must also be done to ensure that the Bank of Canada does not regularly provoke recessions as has happened in the past. Those are the terms used by Pierre Fortin in Le Devoir just two weeks ago.

I think that the people of Quebec and Canada are mature enough to engage in a public debate. Any commitments taken by the federal government with respect to this type of initiative strikes me as the best guarantee for the success of this operation.

When the commission on the tax system was set up and travelled throughout the different regions of Quebec, those who made their opposition known turned out to be lobbies for employer organizations, the Conseil du patronat, the Chamber of Commerce and the manufacturers' alliance. They were afraid that the people in the different regions would speak out on behalf of tax equity as a priority. This kind of initiative should not be a cause for alarm, but on the contrary should be based on objective data.

Mr. Fortin could be a member of this commission, along with other well-known intellectuals in English Canada.

Mr. Yvan Loubier: Madam Chair, I have a short question.

The Vice-Chair (Ms. Paddy Torsney): No, not now.

Mr. Yvan Loubier: A short question for you.

Is there any provision for a technical round table with people like Pierre Fortin, Mr. McCracken, Mr. Sonnen...

The Vice-Chair (Ms. Paddy Torsney): [Editor's note: Inaudible].

Mr. Yvan Loubier: I see, thank you.

The Vice-Chair (Ms. Paddy Torsney): There are two who would like to speak. We will then have one or two minutes for each group.

Mr. Latulippe.

Mr. Benoît Latulippe: I don't have much to add. I agree that debates have taken place. The last debate in Parliament occurred in 1962. Very often it's just a matter of paying lip service but when it actually comes down to applying the recommendations, nothing is done.

Yes, I agree that a public debate should be held to denounce the absurdities of our tax system. Equity must be restored.

You also talked about the Bank of Canada and monetary policy. I observe, and this is not a position of the Federation, that wealth is increasingly concentrated in the hands of several individuals. Nowadays world financial markets can communicate with each other in a matter of seconds and this means there is an enormous amount of speculation. People with financial power have become very demanding about the profits they expect from businesses and their investments. To that end, they are quite clear in what they want businesses to do; cut back. The purpose is to obtain profits from labour and the investment of speculators.

Along with this debate on the tax system, I think there should also be a debate on regulating financial operations in Canada and perhaps outside the country as well.

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The Vice-Chair (Ms. Paddy Torsney): Mr. Beaulne.

Mr. Pierre Beaulne: I fully agree with the comments of Mr. Paquette. Last year in Quebec there was a great deal of discussion concerning the tax system. A great amount of time and efforts were devoted to the discussion on the tax system within the special commission set up for this purpose. Union organizations were the instigators of this commission.

In our own field we have been involved in consultation, awareness campaigns and wide-ranging and varied discussions that led to the hearings of the commission and its report. Unfortunately, the attitude of the Quebec government to this report was quite disappointing for us.

I'd particularly like to emphasize that the discussion process was very much appreciated by our members at least and by most of the social intervenors. At the same time, one of the things that struck us in the study was a particular problem relating to the Quebec government's capacity to act because of the significant harmonization of several provisions of the tax schemes.

We could give you some examples but there is so much harmonization of tax measures in the two systems that we realize it is rather difficult to induce one government to act alone, in spite of all its good intentions. At the same time we asked the Quebec government to intervene with the federal government whenever the need was felt. Thank you.

The Vice-Chair (Ms. Paddy Torsney): Thank you. We have a few minutes left. We have one or two minutes for each of you.

Mr. Mark Assad: Is money made available to you to prepare this kind of meeting among yourselves?

The Vice-Chair (Ms. Paddy Torsney): Mr. Assad, this is time for the witnesses. You used up 15 minutes. Thank you.

Mr. Latulippe.

Mr. Benoît Latulippe: We think that the Canadian Social Transfer is very important and that money should be reinvested in it. In our view, the debt is of sufficient urgency today and something must be done to avoid compromising the future of our generation as well as that of yours, because we will be the ones looking after you at some point.

We have to start doing something about this debt as well as giving ourselves room to manoeuvre. This depends to a large extent on reforming corporate taxation. Businesses and the rich are not doing their share in Canada's tax system.

The Vice-Chair (Ms. Paddy Torsney): Thank you.

Mr. Pierre Paquette: I'd like to answer your question briefly. Something is already being done and both the CEQ and the CNTU are involved. It is an alternative budget prepared by the Canadian Centre for Policy Alternatives. This leads us to a debate with our union counterparts and various people's groups in Canada concerning our vision of the country, among other things. They published a very interesting book on a different approach from the one we have seen in the past several years. This is an exercise they do every year. As a matter of fact, a meeting on the subject is taking place in Ottawa today and one of the people who was to accompany me is present at it.

I'd like to conclude by saying that for us the priority is the Canadian Social Transfer. The important thing is to stimulate economic growth and stimulate job growth but certainly not to reduce taxes, except perhaps for targeted low-income groups, which would be made up by tax contributions at another level.

As far as the debt is concerned, we do not consider it to be one of the big priorities as long as there is growth. When there is economic growth, there is a lessening in the relative weight of the debt. We should remember that after the Second World War, our debt was more than 100% of our GNP—in those days we talked about the GNP—and that it took several years for it to disappear or to be brought down to a quite acceptable level.

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If the paying off of the debt were to occur at the expense of economic growth and job growth, we would be shooting ourselves in the foot, as we did in the case of our fight against inflation and the effort to bring the deficit down to zero.

We are at a turning point and it is important for us to take the right direction for the coming decades.

The Vice-Chair (Ms. Paddy Torsney): Thank you, Mr. Beaulne.

Mr. Pierre Beaulne: My view is similar to that of my colleagues. Putting our fiscal house in order required very significant sacrifices and at the present time it is a real threat for the viability of our public health and education systems.

A major priority for us is the injection of new money from the financial surpluses into those areas.

The Vice-Chair (Ms. Paddy Torsney): Mr. Bakvis, do you have something to add? No? Then I wish to thank you.

This brings our round table to a conclusion. I would like to thank all of our witnesses. We shall adjourn until 1 p.m.