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STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, October 14, 1998

• 1408

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I call this meeting to order. Pursuant to Standing Orders 108(2) and 83.1, the committee now resumes its pre-budget consultation process.

Today, we have the pleasure to have with us the Hon. Paul Martin, Minister of Finance, who will deliver his economic and fiscal update.

Welcome, Minister. The floor is yours.

Hon. Paul Martin (Minister of Finance): Thank you very much, Mr. Chairman, and as well, let me thank the members of this committee for the opportunity to be here with you today.

Our country will begin a new century, a new millennium, in little more than 400 days. The decisions that we make now, the path that we choose to follow, will in no small way determine Canada's economic strength and confidence as we enter that new era.

[Translation]

Last week, a series of international meetings were held in Washington. The G-7—finance ministers and central bank governors of the United States, Japan, Germany, the United Kingdom, France, Italy and Canada—met, followed by meetings of the International Monetary Fund and the World Bank. These were significant discussions. And the reason is clear. The international economy has entered a period of turmoil not seen for a very long time—and it is far from easy to predict how long the uncertainty and volatility will last.

[English]

Comparatively, Canada, while not immune to the economic volatility outside of our borders, is well positioned to weather the storm.

Consider what is happening elsewhere. Much of the globe is now in recession. The IMF's estimate for overall world economic growth this year is now down to 2% from 3.1% only a few months ago.

• 1410

Japan, the world's second largest economy, is in recession. Korea, Malaysia, Indonesia and Thailand, once known as the Asian tigers, are in difficulty. Their economies are predicted to shrink, on average, by over 9% this year alone.

Major economies in Latin America, including those of Mexico, Brazil, and Venezuela, have been badly shaken by world capital markets. Worrisome political and economic chaos has gripped Russia, with the system of government itself showing signs of very serious stress.

People everywhere have been disconcerted as stock markets around the world have tumbled from their recent highs. Many parts of the world are suffering as a result of the inability to borrow the money they need to grow, a drying up of resources that is bringing whole economies to a virtual halt.

The prices of world commodities—natural resources—have fallen by nearly 30% since their peak at the end of 1996. In real terms, they are now close to their lowest level since the early 1970s.

And most tragically of all, millions upon millions of people in the developing world are being thrown into poverty, and families throughout the developed world wonder if their well-being and their security are now at serious risk.

These facts and others fill the headlines, but they also illustrate serious fault lines—fault lines that must be fixed.

Until recently, we have seen and have benefited from several years of significant economic expansion throughout the world. Now we are seeing globalization's other face. In an unprecedented fashion, negative developments in far-off corners of the world are having immediate repercussions everywhere.

Very clearly, the global economy has entered uncharted waters, and this might well be the first real test of the sustainability and the stability of globalization.

[Translation]

Let there be no doubt. Open markets and economic growth have brought previously unheard of prosperity to hundreds of millions of people around the globe. And the successful quest for a higher standard of living can and will resume once the current challenges are met. The instability that we are now seeing in so many countries was inevitable at some point.

Faulty domestic financial systems, inadequate oversight and regulation, political rigidity, structural economic flaws, distorted competition and cronyism—these and other faults could be papered over, but not forever. The foundation was weak and eventually bound to crack—and now it has.

The global challenge is to repair the damage, to build a durable foundation—to take the measures necessary to ensure the world economy can restore and maintain sustained growth. The pursuit of protectionism is no answer. Indeed, it would be a grave error. Markets must remain open. In order to move on to the next stage of growth, our challenge is to mend and reinforce the fabric of the global economy, not to abandon it.

As we speak, the challenges domestically for many economies are profound—and they are profound as well for the international community and its institutions. The discussions we held in Washington focussed on these really difficult, complex and very significant issues—and they marked an important first step in building the new foundation we now need.

We agreed that the Bretton Woods institutions, which have served the global economy well for over 50 years, are now in need of renovation. We reached a consensus that the time for diagnosis is over. Meaningful solutions have been advanced. Job one is now to implement them.

• 1415

[English]

Canada has put forward a six-point plan to deal with the international situation. Our initiatives were well received by the global community last week in Washington and many of our specific suggestions will form the building blocks of the new financial architecture. All of us, G-7 and emerging markets alike, agreed on the absolute necessity of creating and maintaining domestic policy environments conducive to steady, non-inflationary growth.

We made progress in Washington, but not nearly enough. More must be done. And we must act quickly, because in the end, Mr. Chairman, this is about protecting people. Ultimately they are the ones who will suffer if strong and resolute action is not taken.

No country, no matter how large, can prevent or control the kind of worldwide economic turbulence we are experiencing today. No economy, no matter how strong, can shield itself fully from its consequences. This is especially true for Canada, a country that always has and always will depend on trade for so many of its jobs, so much of its prosperity.

The global economy will come through this period of difficulty, as it has before. And let there be no doubt: Canada is particularly well placed, with our public finances restored to health.

But let us make no mistake. It's likely to be a year of heavy weather ahead. The winds of financial turmoil will continue to blow and Canada is going to feel the effects, even if we are well prepared and even if we are only at the edge of the storm.

In the face of these forces, we have spoken about what our international responsibilities are.

The question now arises as to what our responsibilities are here at home. Our view on this is crystal clear. It is our responsibility: to act in the short term but to always look to the long term; to continue to put in place the kind of robust policy framework that can cushion the impact of global shocks and at the same time sustain and strengthen the social safety net on which all Canadians rely; to do what we must to weather the tempest around us; and to strengthen the economy to face future storms that will inevitably arise.

That, Mr. Chairman, is what our balanced approach is all about, an approach that we knew was long overdue when we came into office. We understood then that the economic and the fiscal problems facing the country were not superficial; they were structural. We realized that there were many interrelated problems to address, that a simple solution focused on a single problem alone would not work, that tinkering would not do, and that deep reform was required.

For that reason, we put in place a long-term plan. Its goal? To provide Canadians with what had been absent for far too long: the architecture of a modern productive economy, one of growth and jobs. In short, our goal is to forge a new alliance between the strength of our economy and the security of our society.

[Translation]

The steps to reach that goal were clear.

First, we knew we had to get interest rates down—because they were standing in the way of growth and the creation of jobs. And to get interest rates down, we knew we had to restore sound financial management and move decisively towards a balanced budget.

Second, we knew we had to reduce our debt-to-GDP ratio, because interest payments on the debt were chewing up precious resources the country needed to build and secure the future. And we recognized that this meant not only getting the debt down, but improving productivity of the economy—getting growth up.

Third, we recognized that spending cuts would be necessary in the short term, and that these would be difficult. But we knew as well that, once our financial health was restored, focussed investment in the key social and economic priorities of Canadians would be essential if we were to reach our overarching goal, Mr. Chairman—a Canada of opportunity, one where citizens could be confident of their future, able to enhance their own prospects and those of their families.

Finally, we also knew that taxes had to be brought down—because Canadians simply deserve to keep more of the income they earn through their own hard work.

• 1420

[English]

Through all of this, Mr. Chairman, we knew that the nature of government itself had to change, not only in its budget but its focus, and not simply in its size but its direction.

But the days of trying to be everything to everyone at any cost were over. We knew that the need to have clear priorities—to realize where government could make a difference and where it could not—was essential, that the pursuit of frugality had to become a defining feature of everything that we do, that partnership in today's modern economy was not a sign of weakness but of strength.

That approach, one that we have been pursuing for five years, has worked. As the Prime Minister has said, it will not be abandoned. Indeed, it will be bolstered.

Let me emphasize that we have not been doing any of this because it satisfies some textbook definition of good economic fundamentals. We're doing this because it speaks to the fundamentals that really count for Canadians: a higher standard of living for the many, not the few, and a higher quality of life in communities from coast to coast to coast in this country.

Mr. Chairman, when we were talking about our plan and our prescription several years ago, it was proposition. But today we are well beyond that. Today, we can talk about proof and we can talk about performance.

Consider the progress the country has made. Five years ago, the federal deficit stood at $42 billion and rising. We said we would bring it down steadily each and every year, and we have, not only meeting but beating every target we set. Last February, we said we would balance the budget in the 1997-98 fiscal year that was then coming to an end. And we have. Indeed, as outlined in the annual financial report being released today, we have done better than that.

Mr. Chairman, I am pleased to announce that for the first time in more than a generation, the Government of Canada recorded a surplus—$3.5 billion. That money has been applied directly to the debt. This marks the first time in 28 years that Canada has actually paid down the debt. This is an historic milestone, and it is an achievement that belongs not to government but to Canadians.

[Translation]

I am pleased to announce that, for the first time in more than a generation, the Government of Canada recorded a surplus—$3.5 billion. That money has been applied directly to the debt. This marks the first time in 28 years that Canada has actually paid down the debt. This is an historic milestone. And it is an achievement that belongs not to government but to Canadians themselves.

Let me emphasize a further point as well. The accounting method we in Canada use to calculate our balance sheet is considered among the most rigorous in the world, for it includes all the liabilities the government incurs in any given year. This is the measure on which I have just reported. Most other industrial economies use another measure—financial requirements—which includes only the borrowings that that government makes in the financial market. According to this measure, Canada has in fact recorded a financial surplus for two years in a row—the only G-7 country to do so.

This has allowed us to lower the amount of debt we owe to financial markets. As such, we paid down $9.6 billion of market debt last fiscal year. And we will likely be able to report a significant further paydown at the end of the current fiscal year as well.

[English]

Mr. Chairman, this speaks to progress at the federal level. However, the provinces have made very significant progress as well. In 1992-93, the federal and provincial governments, taken together, recorded a $66 billion deficit. That has now been entirely erased.

Beyond financial progress, consider as well the economic progress the country has made over the past four years. This too serves as an essential starting point for our future course of action, for the choices we must make in this period of economic uncertainty.

• 1425

In the fall of 1993, the unemployment rate was 11.4%. Today, while still too high, it is at 8.3%, its lowest point in eight years, a track record of improvement exceeded only by the U.K. among the G-7 nations. Over 1.3 million jobs have been created throughout this period—636,000 since the beginning of last year.

Interest rates have been brought down substantially. The spread between Canadian and U.S. interest rates is significantly less than it was only three years ago. And just as important, interest rates on long-term government bonds—which have a key influence on mortgage rates and on what businesses pay on the money they borrow to invest and thereby create jobs—are at their lowest level in over three decades.

And finally, inflation is under firm control. It will remain so. Indeed, Canada now enjoys a solid reputation as a low-inflation country.

Now, as we have said, no one is immune from the developments in Asia, Russia and elsewhere. Clearly they are having an impact on our economic prospects, as they are on those of others. For instance, through to the end of the first quarter of this year, the economy enjoyed seven quarters of robust growth, averaging 3.7%. However, over the past few months, performance has been disappointing.

Our exports to Asia are down sharply. They're down by more than 30% in the first seven months of 1998 compared to the same period last year, although this has been offset somewhat by an increase in our trade with the United States. Economic growth has slowed in many parts of the country. Western Canada, particularly British Columbia, is being hit hard. And as a result, private-sector forecasts for overall Canadian growth are down for this year and next. And the fact is, our currency has been under pressure.

But consider, Mr. Chairman, not only where our currency would be but where the country might be today if we had not acted five years ago. Consider what the impact of today's global uncertainty would be on Canada if we were still running massive deficits, if our reliance on foreign lenders was still increasing, and if our interest rates were sky-high and rising. We would be talking about more painful cuts, not new investments. We would be talking about how large the debt would grow, not about bringing it down, and we would not be talking about cutting taxes.

No one should downplay the danger posed by the current global economic environment. But the fact remains, despite recent developments, that the major international institutions, that is to say, the International Monetary Fund and the OECD, expect Canada's economic and employment growth this year to be among the best of the major industrial nations.

And we will, as we said in February, balance the budget this year, and we will balance the budget next year.

And let us be very clear on the issue of the currency. Yes, these have been troublesome times for the Canadian dollar, but it is the structural problems that were allowed to fester over a period of 25 years that have caused its long-term decline—problems that Canadians have gone a long way to address.

The markets have an image of the Canada of yesterday, not of the Canada of today. The perception is wrong. The filter is false. Consider the following.

For two decades, Canadian inflation was consistently above U.S. inflation. For the last five years, it has been consistently lower.

Throughout the 1970s, the 1980s and the early 1990s, government deficits were much larger in Canada than in the United States. Today, Canada has a surplus.

Our debt-to-GDP ratio has been rising for more than 20 years. Now it's falling.

For many years, Canadian productivity growth lagged behind that of the United States. Last year it was much higher in Canada—2.8% here versus 1.7% there.

In 1980, exports of resource-based commodities accounted for 60% of Canada's total exports. Today that share is down to 35%.

Exports of machinery, equipment and automotive products have accounted for a larger share of our exports than have commodities for every single year since 1992.

• 1430

The high-tech sector in Canada has posted a level of growth in jobs and output throughout this decade that is twice the rate of the rest of the economy.

Mr. Chairman, this reality is Canada: more diversified, more sophisticated, and anchored in a much more solid financial footing than it has had for decades.

[Translation]

That being said, we still have a long way to go. Let me elaborate on how we will meet the challenges still before us. Despite the headway we have made in balancing the books, it is clear that a quarter century of deficits has left us with a debt burden that is still far too high. The best measure of this burden is to look at the debt in relation to the size of the economy that supports it. This is the debt-to-GDP ratio—what we owe in relation to what we produce. The lower the ratio, the more manageable its debt. For 20 years, that ratio was rising relentlessly.

However, in 1996-97, as a result of the growing economy and the restraint measures we introduced, it fell meaningfully for the very first time. Last year, it fell even further—from 71.1% to 67.8%. This represents the largest single year improvement since 1956. It also represents the first consecutive back-to-back reduction in the debt-to-GDP ratio since the early 1970s.

However, we still have a long way to go. Our debt-to-GDP ratio is the second highest in the G-7. Too much of every tax dollar goes to pay interest on the debt rather than to purposes that are productive—for the country and for Canadians.

[English]

Looking ahead, our commitment is to keep the debt-to-GDP ratio falling permanently. The debt repayment plan we put in place in the last budget will ensure that it happens.

First, we will, as we always have, present two-year fiscal plans based on prudent economic assumptions. This year, the budget will be balanced, and we will balance the budget, as I've just said, next year. This will mean three consecutive years of budgets that are balanced or better. We will not forego the gains that we have made. Our commitment to continued financial progress is rock solid.

Second, we will build into our plans, as before, a buffer, a $3 billion contingency reserve.

And third, if the contingency reserve is not needed, it will go directly to paying down the debt.

Based on a realistic assumption of between 3.5% and 4% average nominal income growth and budgets that are in balance, in five years the debt-to-GDP ratio will be down to around 55%. This would represent real progress. But we cannot stop there, and we won't.

The fact is, the federal government has a responsibility to all Canadians to continue to make progress on reducing its debt burden.

Let me give you just one example. The interest rates the federal government pays on its debt determine in large measure the interest rates that the provinces pay on theirs. As our financial recovery continues, they'll benefit. However, were we to stall or fall back, they would pay the price too. Moreover, while the federal debt-to-GDP ratio stood at 68% last year, the provincial debt ratio stood at only 26%. Last year, we paid 27¢ out of every revenue dollar for interest on the debt. The provinces paid only 13¢. The provinces may want to take this into account when making demands on the federal purse.

Mr. Chairman, let me now turn to the second element of our balanced plan: investment in the highest priorities of Canadians.

• 1435

It is critical to restate the fundamental point that the role of government does not begin and end with taking care of the books. Its purpose is to respond to the needs of its people. Its role must be to help Canadians adjust to change and prepare for the future. And there are crucial needs that market forces, if left alone, will simply not meet.

Government has a clear responsibility to act, for example, on protecting the environment, on advancing research and development, in fostering the creation of jobs and in helping to lead the fight against child poverty.

We can never lose sight of the fact that a strong economy and a secure society are not separate, distinct ends. A strong economy is necessary to support a secure society, but so, too, a secure society provides strength to the economy. It gives Canadians the confidence they need to reach as high as their talents and ambitions will allow them to go. A secure society widens the mainstream. It expands opportunity. It allows each individual to act upon and to realize his or her own potential.

Clearly, health care is at the top of the list for Canadians in every region of the country. It is at the core of how we define ourselves as a national community—one of fairness and compassion. That's why, as the Prime Minister has said, “the government will invest more of our resources in the years ahead to reinforce our public health care system”. The principles contained in the Canada Health Act—of access to care based on need, not income—are, for most Canadians, not simply another piece of legislation. They virtually constitute a charter of rights.

Yet today, Canadians are profoundly concerned that their health care system is declining, that quality health care will not be there when they or their loved ones need it, and that the worst may, in fact, lie down the road.

This concern, Mr. Chairman, must be addressed. Let me repeat: no one can take on the challenges of the new economy while preoccupied with the availability of basic health care—no parent of an ill child and no child of an aging parent. And we welcome the assurances of Canada's premiers that any additional federal funding provided to the provinces for health care will indeed be used for that purpose. We share strongly their desire—and the desire of all Canadians—to have confidence in the health care system restored, and we want to work in partnership with the provinces to secure that confidence.

[Translation]

Let me turn now to the third part of our plan—reducing taxes for Canadians. With the budget in balance, Canadians have the right—and we have a responsibility—to ensure that more money is left in their pockets. This is one key to raising the standard of living and increasing disposable incomes for all Canadian families. When the deficit reduction challenge had yet to be fully met, we were not able to move forward to broad tax relief. We simply could not afford it.

However, as a result of our better-than-expected financial progress, we were able to provide targeted tax relief where the need was greatest—for students, for charities, for persons with disabilities, and for the children of working parents with low incomes.

Then, last February, for the first time, with budget balance finally secured, we were able to not only offer even more significant targeted tax assistance, but to also move on to broader tax measures, focussed, as a matter of fairness, on low-and middle-income Canadians. These were only the first steps, but they were important—affecting 90% of all taxpayers in Canada.

In total, the tax measures in our last budget will provide $7 billion of relief over three years. We said in the last budget that we would build upon these measures as we can, and that we would do so in a measured and responsible way. That is what we will do.

• 1440

[English]

Mr. Chairman, at this point, it is essential that we step back and consider the economic context in which we must make our policy choices in the coming months. In a very short period of time, the world has become an inhospitable place, one of great danger and considerable risk. We are in a situation that calls for great care and caution and we must be realistic about the resources at our disposal.

Today, some seem to believe that we have mountains of money to spend. We don't. Some seem to feel that we're now in a position where we don't have to continue to make hard choices. We do.

Look at what has happened to the average economic growth forecasts by private sector experts since only the beginning of this year. In January, they were estimating nominal income growth of 4.7% for 1998. That has now been revised downward to 3%. For 1999, private-sector forecasters were projecting a 4.9% nominal income growth. That, too, they have revised down significantly to 3.5%.

What do these revisions mean for the size of the dividend as projected by the private sector? The answer? They would knock over $5 billion out of government revenues in 1999-2000. Only a few months ago, these forecasters were estimating a 1999-2000 surplus—before any new budget actions—of around $10 billion. The recent downward revisions would lower their estimates to around $5 billion, or $2 billion once the $3 billion contingency reserve is subtracted.

[Translation]

Mr. Chairman, at the time of our last budget, many criticized us for being too prudent, too cautious. Well, in the face of today's global turmoil, I doubt if there are many people who would still subscribe to that notion.

The dramatic downward revision in private sector forecasts illustrates more clearly than anything why this government must stick to its careful approach to budget planning, while we simply cannot afford the risks associated with changing planning assumptions so drastically. This is not academic, some arcane point from economic theory.

Consider the results if we had followed the advice of some not long ago to take $9 billion to $10 billion worth of tax- action—action they claimed we could afford. We would now be headed for a substantial deficit.

Further, while we have noted that the downward revision to economic forecasts could lower the private sector estimate of the dividend to $2 billion—when the $3 billion Contingency Reserve is taken out—with all the uncertainty that exists worldwide, it may well be that further downward revisions will occur.

[English]

In any event, Mr. Chairman, it is clear that the dividend in the next two years will be modest, much less than would be required to provide sufficient funding for the size of initiatives on taxes and spending that many are calling for. Clearly, careful choices in allocating that dividend will be required.

Now some, of course, would throw caution to the wind. They would say, “Well, maybe we will have the money.” They would say, “Maybe the dividend will be larger than we think.” They would tell us that maybe it's worth the risk to cross our fingers and pray that things will turn out that way. In other words, some people will say to us that it's time now, that it's acceptable now, to set aside the careful and cautious approach that we have been following—which has worked.

Well, in my opinion, Mr. Chairman, that is the financial equivalent of reckless driving. You may not have an accident, but if you do, you not only hurt yourself but you side-swipe a lot of innocent people.

And the very reason that we have met our target, the very reason we are now able to say that despite the global economic crisis we are still on track, not only to balance the books but to have a dividend?

• 1445

All of this is anchored in the caution that we have applied from the very beginning. And those who propose that we can now comfortably contemplate putting aside caution are either shooting from the hip or suggesting that we should shoot ourselves in the foot.

Let me give you an example of what I mean. Despite recent events, some people are saying that we should implement a major personal income tax cut, for example, one of an average of $600 annually per taxpayer. That would cost about $9 billion a year.

Some are demanding that employment insurance premiums be reduced to the so-called break-even level. That would cost more than $6 billion per year.

The provinces are asking, despite the rise in tax points, that cash transfers be increased. Their proposal would cost about $6 billion per year.

And still others are saying that we should mount a larger attack on the debt, which could cost, for example, another $3 billion per year.

Now add all of that up. The total bill is $24 billion each and every year, and that's a long way from a complete inventory of the demands being made.

We've already pointed to the downward revision in private-sector forecasts and the impact that slower economic growth is likely to have on our revenues and, therefore, on available financial resources. Adopting all of the proposals that we have just outlined would very clearly put the country back into a situation of serious, chronic deficits. But not only that, apart from debt reduction, adopting just one of those proposals in its entirety would put us in financial difficulty. And that, quite simply, is the very worst thing that we could do.

Safeguarding our financial health at home is the sine qua non of riding out the global storm we are now in. Turbulence abroad mandates vigilance at home. Make no mistake: we will do what we can, but we will only do what we can afford.

[Translation]

It is in this context that the discussion on the reduction of unemployment insurance premiums must be engaged. As we noted earlier, many are demanding that premiums be brought down dramatically. This flows from the procedure that has been in place for some time to set premium rates. Under this procedure, the Employment Insurance Commission is mandated to set the rates so that premiums paid in will balance the cost of benefits paid out over the course of an economic cycle. In order to monitor the status of this program, there is a national Employment Insurance Account that records revenues and expenses each year and shows a cumulative balance between them over time.

[English]

Mr. Chairman, what has caused a great deal of misunderstanding is that while there is a notional employment insurance account, it is an accounting mechanism only. Since 1986, twelve years ago, at the insistence of the then Auditor General, the employment insurance program has been fully integrated into the overall finances of the federal government.

In other words, as a result of decisions taken by those who came before us, EI premiums paid in are entered in the country's books just like any other source of revenue, as are benefits paid out, just like any other program. Even prior to 1986—indeed, from its inception in 1940—the EI program was specifically designed in such a way that no actual funds enter into a special account.

Now, some are saying that we are breaking new ground in continuing to have EI premiums cover more than the cost of the program itself. We are not. This is not new, far from it. Throughout the history of the EI program, the cumulative balance between premiums and expenditures has swung between deficit and surplus.

In fact, there has been a cumulative deficit at the end of 10 of the last 17 years and the government assumed responsibility for it. In years of deficit in the EI account, the government covered the excess of costs over premiums, and as a result, the government's overall deficit was pushed up.

• 1450

On the other hand, in years of surplus in the EI account, the government's overall fiscal balance improved as a result.

It's true that the surplus is much larger now than before. However, it's important to note that other political parties have either explicitly or implicitly advocated over the last five years that the resources generated by the EI program be part of our successful effort to balance the nation's books.

Therefore, Mr. Chairman, what is the fundamental issue before us? Every year since we have taken office, we have reduced EI premiums. Employees and employers are saving $2.6 billion this year alone as a result.

However, some say that it is now time to bring the EI premium rate down even more sharply. Where the rubber hits the road is that this could cost us more than $6 billion annually and could drive the country back into deficit. Moreover, with such a large reduction, clearly there would be no room for personal income tax cuts and no possibility of any needed investment in health care or anything else.

The issue, therefore, isn't simply how much we cut EI premiums. Do we ignore the turmoil that is enveloping the world economy? Do we abandon the balanced approach that has served this country so well for over five years? It is at this point that the debate is truly joined and it is here that some very straight talk is required.

Let there be no doubt. We wish we could reduce EI premiums significantly. We wish we could bring down personal income taxes dramatically. We wish we could devote large-scale new resources to health. And we wish we could invest significantly more in the environment, in job creation, in research and development and in addressing child poverty. We wish we could do all of this and very much more, but we can't. We simply do not have the money now.

And as we have just discussed, the world economy is going through a period of major difficulty and disruption. As a government we have many responsibilities, but today there is one that is most immediate, and that is, to use every means at our disposal to protect this nation and its people from the global troubles that surround us. And this, Mr. Chairman, we will do.

The challenge today is not to concoct some wish list as if money were no object, as if the world were a tranquil place. The challenge we face is to take the limited resources that we have and make responsible choices in a world of great turmoil.

Therefore, there can be only very limited action—if any—in bringing down the EI rate for 1999, because we are determined to protect the finances of the nation, to continue to foster jobs and growth, and, as resources permit, to invest in medicare and the reduction of personal income taxes for Canadians.

Mr. Chairman, we have stated today what our priorities and our choices are. Others, of course, will have different views. And this committee is a very important forum—the most important forum—for the debate that is now under way.

When people make the case for a drastic, immediate EI rate cut, ask them if we should put the financial strength of the nation at risk at a time of worldwide economic turmoil and ask them if they place less importance on investment in health or on reducing personal income taxes for Canadians. When people are asking for additional spending, ask them where we are to get the money. And when others say that the way to pay for a larger reduction in taxes is to slash spending, ask them to tell you specifically what it is that they would cut, especially now, when, in relation to the size of the economy, government spending on programs is already at its lowest level since demobilization after World War II.

• 1455

[Translation]

Mr. Chairman, today we have outlined our plan for the future. Although many of these measures of which we have spoken relate to the short term, they are also very much part of the longer-term agenda which must be the focus of all our efforts going forward. The goal of that effort is to raise the standard of living and the quality of life for all Canadians. The only way to get there is to continue, year after year, to put in place the foundation for a stronger, more productive economy.

[English]

Despite the problems of the day, we must never again allow short-term preoccupations to blind us to the long-term needs of the nation. The fact is, that's what governments have done all too often, neglecting the need for consistent long-term economic strategy. And it is Canadians who paid the price.

Employment policies were adopted that actually discouraged people from working. Intrusive regulation, micromanagement of the economy, became a growth industry. In good years, there were big deficits. In bad years, there were bigger deficits. And through it all, trying to square a circle that couldn't be squared, governments adopted rosy economic outlooks that were almost always wrong. They focused on fine-tuning economic performance to smooth out bumps in the road. What they didn't do was look far enough down the road and see that it was in fact a dead end. The result? Soaring taxes, double-digit deficits and triple-digit debt.

Our plan has been dedicated to addressing each one of these root causes one by one. Progress has been made. Is it significant? Clearly, yes. Is it good enough? Clearly, no. We must press on, and we will.

We began today's discussion by addressing the economic turmoil gripping much of the globe, whose consequences are today reaching our shores. We have made it clear that while concern is warranted, Canada is very well positioned, something that would not have been possible, say, only four years ago. But it must also be understood that as much as all of us wish it were otherwise, today's period of difficulty and uncertainty is neither the first nor the last our country will face. As globalization widens and deepens, as it surely will, other disruptions will occur. That's simply a fact of life.

However, this does not mean that our only response can be a fatalistic shrug. Indeed, it means the opposite. Let me quote from our February budget, brought down at a time when the clouds were only beginning to gather on the horizon:

    Globalization and technological change are a reality. They are not a religion. They are a fact. They are not a faith.

    We commit a very serious mistake if we ever come to believe that the global economy abroad means there is no role, no responsibility on the part of government to provide opportunity and security at home.

What does that mean for the future? Well, as the Prime Minister has said, first, it means continued sound financial management, and second, it means responsible and focused economic and social investment, both of which will work together, reinforcing each other, to build a strong economy and a secure society, one that will provide a higher standard of living and a higher quality of life for all.

In short, it means exercising the kind of economic leadership that will help shield us when times are bad and propel us forward when times are good. That is our purpose. That's our course.

And there can be no doubt that recent economic developments are disturbing. After spending years of effort and sacrifice cleaning up the mess inherited from the past, Canadians are now confronted with new challenges, this time not of our own making, but originating beyond our shores.

We face a choice, a test. Do we look to the long-term needs of the nation or do we pull back, seeking refuge and quick fixes and desperate measures and shortcuts to nowhere? Do we stick to and strengthen our balanced plan of financial management, of responsible tax policy, of careful and focused investment? Or do we fall prey to the temptation to tilt, to take undue risks with the financial health of our country?

[Translation]

Mr. Chairman, today we have provided our answers to those questions. Do we stick to, and strengthen, our balanced plan of sound fiscal management, or do we fall prey to the temptation to take undue risks with the financial health of our country?

The plan we have pursued, and the principles which underpin it, have served our country well. Ours is not a plan only for good times. It is a plan not to be implemented—or judged—on the basis of one budget, one year—or one mandate. It is a plan of solid and sure steps, each building on the last, of careful construction of the new framework for the new economy of the new century.

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Canada is no longer the high-deficit, high-inflation, commodity-dependent, low-productivity country of the past—but is in fact becoming a leader, a country that can set its own standards of excellence because we have already met the standards others have set.

[English]

In conclusion, Mr. Chairman, the most important debate in this country is no longer only that between left and right. It's between those who believe we should settle for second-best and those who know our country has the potential to be the very best. It's between those who believe that our future will be but a pale imitation of our past and those who see our story as one whose greatest chapters have yet to be written. It's between those who believe that the role of government is to simply stand aside and do nothing and those who know that today, more than ever, government has a responsibility to stand with and alongside Canadians.

We believe in a strong and secure Canada. Canadians are building that country today.

And make no mistake: while the winds may buffet us, they will not drive us off course. We will succeed.

Thank you, Mr. Chairman.

The Chairman: Thank you very much, Minister, for your economic and fiscal update.

We will now enter the question-and-answer session, beginning with Mr. Solberg.

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

Minister, welcome. I don't suppose it will surprise you to find out that the Reform Party disagrees completely with your approach. And we are quite alarmed when you say you want to continue with the same approach.

In fact, we argue that it's the Liberal high-taxes approach that is really killing this country. To further make our point, we have produced a paper which we made available today and which shows how, in the last five years since you've been finance minister, disposable incomes have stayed flat while the U.S. has seen disposable incomes grow by $6,000.

In fact, Minister, you'll be interested to know that your own finance officials point out that since you've been minister you have taxed back 155% of all the wage increases people have received.

We don't want to see that approach continue. We think it's the wrong approach and we believe that the real prudent approach, the way to soften a blow in any kind of economic downturn, is to introduce tax relief. That's the first point we want to make.

Secondly, we do applaud the government for paying down debt. We think it's extraordinarily important to do that. We've been advocates of that for a long time. We feel we have an obligation to pay back the people who we borrow money from.

My question is in regard to that, I guess. If the minister understands the need to pay back foreign and Canadian bankers, surely he understands that we have to pay back the $7 billion we've taken from waitresses and plumbers and all those people who have contributed to the EI fund, to the $7 billion overpayment. Surely he understands that it's a moral obligation we have and that if we do that, we will help those people weather any kind of a storm. We will help the economy in general, because there will be stimulus, and we will give businesses the incentive to keep people on in a downturn. Would the minister respond to that, please?

Mr. Paul Martin: Well, first of all, Mr. Solberg, you began by stating that I would not be surprised that you disagreed with me. Mr. Solberg, I would have been very worried had you agreed with me.

The fact is, you have brought out a paper which I believe has demonstrated, going back 15 years, that disposable income in this country has gone down, and you have pointed out, quite properly, the tax burden that Canadians have had to endure.

To be quite honest, Mr. Solberg, on that we would agree with you completely. There is no doubt about what's happened over the last 15 years. There's no doubt about the depth and the length of the recession—1989-92—and the length of time it took us to recover from that.

In fact, we put our plan into place when we took office in 1993 exactly because of our analysis of what had happened in the previous decade, which resembled that which you have just put forth.

The net result? In 1997, productivity in this country, for the first time in close to a decade and a half, actually rose and was better than that of the United States. In 1997, family disposable income rose for the first time in some 15 years.

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The fact is, the plan we have put in place was designed to counter exactly the problems you have set out. And, Mr. Solberg, it has worked. And the reason we want to continue with this plan is that we want to see it continue to work.

On your other question, about EI, let's understand the nature of the debate. I simply want to quote from your own party program—the Taxpayers' Budget—in which you say,

    To ensure that savings from reform of UI translate into deficit elimination, the Reform Party recommends the establishment of a permanent reserve fund for UI.

Now, what you're saying is that it was perfectly acceptable—in fact, you, the Reform Party, recommended it—that the EI fund be used to reduce the deficit. Now you're going to say to me, well, that's fine, the deficit is eliminated.

The question that I would simply put to you—and let's understand that there is no longer a difference in principle here—is this: are you saying that it was okay to use the EI funds to eliminate the deficit, but that it's not okay to use it to prevent us from going back into deficit?

Are you saying that it was okay to use it to eliminate the deficit but that if the fabric of medicare is fraying and needs some more funding, it's not there? Are you saying that if there is a better way to stimulate the economy, we should not do that? Because if that's the case, then I think we simply have to look at your hierarchy of values.

Mr. Monte Solberg: Let me respond to that. In 1995, we did argue that we should use that money to pay down the deficit—but we would borrow that money. What you're proposing to do is confiscate $7 billion a year. There's a huge difference. Surely you understand the difference between borrowing money, paying it back and putting it into a fund so it will there for workers in the long run, and what you're proposing, which is to take it outright, take it out of the pockets of people who are at the low end of the wage scale. How can you justify that?

Mr. Paul Martin: First of all, if there were to be an income tax cut like last year, when the bulk of the income tax cut went to people at the low end of the scale... A lot of those people were not receiving EI premiums... The fact is, when we increase the threshold, that is people at the low end of the scale. Our last budget demonstrated very clearly that where we would start with any personal income tax cuts is in fact at the low end of the scale and that we would work up.

Second, nobody is talking about confiscation. What we are saying is that we are going through a very difficult period here. The world economy is substantially different this year from what it was two years ago—and we are not going back into deficit.

Mr. Monte Solberg: The world economy is also different for the people paying into that fund. They are the ones who are going to be affected, so why not leave the money in their pockets?

Second, you talk about “a national debate”. I say your debate is a sham. You have already decided that you're going to take that money. It's already shown up in future yearly projections as your surplus. If you had decided that you were going to have a debate and it was all up in the air, it wouldn't be there, but it has already shown up in future projections. How can you say we're having a debate? You've already made up your mind.

Mr. Paul Martin: Mr. Solberg, it showed up in your projections. Take a look at every one of the Reform Party's projections for every year. In every single one of them, you have used the UI surplus. I don't want to talk about pots and kettles, Mr. Solberg, but you might look in the mirror.

Mr. Monte Solberg: In our budget proposals, we have consistently given EI back to people. In fact, we've always said that it would be the first tax we'd cut, so I suggest that you recheck your figures.

But I would like you to answer the question. If you already have it included in your projections for future years, where is the debate?

Mr. Paul Martin: Mr. Solberg, first of all, we're having the debate. That's what this is all about. Second, do you really believe, with the kind of turmoil that exists outside our borders, that if we went back into deficit interest rates would not go up?

And do you really not believe that if interest rates were to go up the very people who would suffer the most are those people who basically depend on business to invest to create jobs? Do you really not think that it would be the workers across this country who would suffer if, as a result of us going back into deficit, our economy slowed down?

Mr. Solberg, I understand the point that you—and, in fact, a number of members of our caucus and I, myself—feel very strongly about the importance of the integrity of the EI fund. But I also understand that with what's happening outside of our borders and with the priorities of this nation—to make sure that not only do we not go into deficit, but that our economy is productive and that growth increases, in fact—this is not the time to play fast and loose with the finances of the country. That's the basic issue.

• 1510

Mr. Monte Solberg: I will respond by saying that if you leave the $7 billion in the pockets of workers and business, that will obviously have a stimulative effect. I point to Ontario and Alberta, where they have seen their revenues grow exponentially when they've had tax relief. We would argue that you're going to see revenues increase.

Secondly, there is still a tremendous amount of waste in the federal government. There's no reason why we would have to go back into deficit. You've asked for examples. I'll point to the $1 billion a year that you hand out to businesses, despite the fact that every year the chambers of commerce and the Canadian Taxpayers Federation and everybody else comes to us and says “Please, don't give more money to business.” But you do it anyway.

We also have $1 billion going to fund a national television network every year. And we have billions of dollars of waste in departments like Indian Affairs. We just had the Auditor General point to $90 million that was wasted on treaty negotiations. Not a single treaty was produced.

We argue that there is a tremendous amount of waste. So sharpen your pencil and you'll find that going into a deficit isn't a problem again, and you can fulfil your moral obligation to workers to return that fund.

Mr. Paul Martin: Mr. Solberg, I think you really have to reconcile your statements here with your party program and, in fact, with the statements you have made in the House over the course of the last number of years. While at the same time saying we should use the EI fund for deficit reduction, you have consistently advocated that we reduce income taxes.

What you have said for the last five years, therefore, is that we should reduce income taxes while at the same time using the EI surplus to fight the deficit. That's the very same thing you're accusing me of now. Mr. Solberg, I think you'd better get a little consistency into your statements. That's the first thing.

Second, let's take a look at some of those subsidies you're objecting to. Research and development: are you trying to tell me we're going to build a modern economy in this country if in fact what we do is knock the very foundations out of the new economy? That's what you are in fact recommending.

In regard to Indian Affairs, basically what they're talking about is social housing and health care. Are you going to simply say that the fastest growing segment of our population should be essentially deprived of those basic social needs?

And let's be quite honest. Fortunately, you went on record, so we know where you'd cut. You'd take $1 billion out of equalization in Manitoba and Saskatchewan and you'd take $3.5 billion out of the CHST. That's what you have said.

The Chairman: Okay, Minister. Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Mr. Martin, your figures are simply not credible. In fact, your credibility has been shrinking in the past few years, whenever you're presenting figures, particularly when you make errors that look like playing with the figures and even lying. In my view, this makes absolutely no sense.

I would remind you that in the 1996 budget, you were talking about a 24-billion deficit for 1996-97. Then, six months before the real deficit figure came in for in 1996-97, you were claiming that the deficit would be $19 billion. In fact, the figure was in keeping with the Bloc Québécois' forecasts—namely a deficit of $9 billion.

You were talking about a 17-billion dollar deficit for 1997-98. The actual deficit was $3.5 billion. These are not forecasting errors; this is playing with figures and lying to people.

Your 3.5 billion-dollar surplus figure for 1997-98 is not correct either, because $2.5 billion went to the Millennium Scholarships. So your surplus is more like $6 billion. So you are already playing around with the figures. You have even greater latitude this year than you claim. This makes no sense.

In the first four months of this fiscal year, a $7 billion surplus has already accumulated in the federal government's coffers. So you cannot come up with a balanced budget or with only a $5 billion surplus next year. That is impossible. Your surplus for next year will be around 12 or $15 billion. That is where your latitude lies, and it is there to stimulate economic growth.

Since the beginning of August, the Bloc Québécois has been sounding the alarm about a coming economic downturn. All the indicators at that time, and all the more so today, show four consecutive months of GDP decline. They also show that since the last recession, since 1990, we have not recovered all the jobs that were lost. We are still 700 000 jobs short, and the unemployment rate is 8.3%, when there was about 7.8% in 1989. At the moment, everyone is telling you that we are heading toward an economic slowdown, if not a recession, next year. And yet you refuse to act to stimulate the economy.

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At the meeting of G-7 finance ministers, it was in fact concluded that the major G-7 countries should be the catalyst of the world economy and support economic growth. Even today, there is mention of the World Economic Forum in the newspapers, which brings together 700 world business leaders, including international experts and economists, and they say that all Western economies must quickly take steps to stabilize their economy.

We asked for three things: to reduce income taxes in a positive way for middle-income earners, the people who have been suffering from your income and other tax increases over the last four years; to reduce the employment insurance premium rates, which would be a reduction in the tax paid by middle-income earners, the people who financed the deficit reduction specifically; and to reinvest in social programs the money you took away from the provinces. This would be another way of stimulating the economy.

Instead of boosting your own popularity, as you are doing with today's exercise, why not respond to people's expectations? That's my first question, and I have two more.

Next year, when you are sitting at this table again, what explanation will you give for sticking your hands in your pockets and not taking any measures to stimulate the economy, despite warnings of a major economic slowdown? What will you say to the thousands of people who will lose their jobs next year because of a major economic slowdown or even a recession?

You're going to tell them, "For the second year in a row, we have reached a large surplus totalling $10 billion." Yes, but everyone will be unemployed, Mr. Minister. What are you going to tell these people once they have lost their jobs or once the recession hits?

Now I'll go on to my second question, and I'll ask it right away because you're in the habit of giving us very long answers.

Mr. Paul Martin: But the questions are long too.

Mr. Yvan Loubier: Yes, but we very rarely have the chance to make a few introductory remarks like the ones I just made. So, we take advantage of the opportunity. You avoid any debate on economic management. So it's nice to have at least one such debate here today.

Throughout your entire presentation, you talked about a balanced, prudent approach. Why did the Prime Minister travel throughout Canada in August, saying that over the past 15 months, you had allocated $15 billion to paying down the debt, even though throughout the country, in Quebec and in Canada, people were clamouring for you to restore the funding that you had cut for health care in particular?

Despite this balanced approach, as you put it, why didn't you take six of the $20 billion that you paid back to Canadian shareholders, who are not middle-income earners, but rather people with extremely high incomes, and restore social transfers and reinvest money in health care, given that there are waiting lists throughout Canada and the health care system is deteriorating because of you?

Now I'll come to my third question. Mr. Martin, aren't you ashamed of trying to legalize your highway robbery of the employment insurance surplus even though you posted the surpluses, which you post year after year, given that the people who are actually paying for them are the ones that you excluded from the employment insurance system by tightening up the criteria, the people who are getting fewer and fewer benefits from the system? Workers earning $40,000 and less are the ones who paid those premiums.

How are you going to explain that by legalizing this form of highway robbery, you are going to take the premiums that low-income and middle-income workers have been paying to pay for tax cuts for the rich? I also have some supplementaries for later.

Mr. Paul Martin: Mr. Loubier, you are contradicting yourself. On the one hand, you say that you expect our surplus to increase, that it will rise to 12 or $15 billion, and that we will not attain this surplus unless we have strong economic growth. At the same time, you say that the economy is going to slow down. There's something not quite right there.

Secondly, you mentioned the IMF, the G-7 nations' forecasts and demands. The IMF supports the Canadian approach. At our meetings in Washington, they said that this economic approach was the most appropriate one at this particular stage. It's exactly the approach that the government is taking. If you're going to quote the IMF, at least you should mention their support of our approach.

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Third, let's have a look at what you are asking for. On the one hand, you want large tax cuts and major reductions in EI premiums, while on the other hand, you are asking for increased spending. That's exactly what I was talking about in my speech. All in all, you might as well admit that what you want is for us to run up a deficit again.

Here's what I'm asking you. If you want us to run up another deficit, why is it so important for Quebec to achieve a zero deficit? And if you're asking for tax cuts, let us recall that the highest-taxed province in Canada is the province of Quebec. If the formula is good for us, it should also be valid for Mr. Bouchard's government.

Now, you also said that you were against debt reimbursement. I remember that this summer, when the dollar encountered certain problems, you said that we had to push its value upward. John McCallum, one of the most renowned economists in Canada...

Mr. Yvan Loubier: Oh, oh!

Mr. Paul Martin: Are you telling me that he isn't? Well, all right. Mr. Loubier, I think he can compare to you any time.

In any event John McCallum stated that 40% of the drop in the dollar was due to Canada's debt-to-GDP ratio and that the best way to stabilize the economy was to reimburse the debt. Now you are saying that we should spend money. We are spending some. For example, over a five-year period, we've earmarked $7 billion for transfers. That was our first gesture after having regained power after the elections. In the last budget, we doubled the national child benefit, once again in order to help poor families.

Your third question was with regard to employment insurance. Mr. Loubier, right now you're doing exactly the same thing as Mr. Solberg. You're telling us that we have to spend and cut taxes, and you're making projections regarding the government's surplus, including the employment insurance surplus. You're telling us that, according to your own recommendation, we should be using these surpluses to reduce taxes and transfer other sums of money to the provinces. That's the conclusion that arises, because you're including 100% of the employment insurance surpluses in the government's surplus, as recommended by the Auditor General.

Mr. Yvan Loubier: Minister, you did not answer my most basic question. What do you say to people who are gravely ill and on waiting lists? What do you answer to them now that they know that over the past 15 months, the government has taken all the surpluses, all its reserves to guard against contingencies, to reimburse part of the debt, namely $20 billion, whereas they did not find 6 billion for social programs, 3 billion of which would have improved health programs, to correct the harm you inflicted on the health care system throughout Canada? That's exactly the consensus that the premiers arrived at in Saskatoon. They let you know that you should reinvest in health care, because that's what's important right now.

What do you answer to citizens who are on waiting lists, who are not receiving the care they need because of you?

Mr. Paul Martin: I will quote Dr. Rochon, who told them very clearly that health care reforms in Quebec were not attributable to a lack of money.

Mr. Yvan Loubier: Oh, oh!

Mr. Paul Martin: Dr. Rochon stated that reforms were necessary and that these reforms had nothing to do with the lack of funds, on the one hand.

Secondly, I will tell you to look at money...

Mr. Yvan Loubier:

[Editor's Note: Inaudible]

Mr. Paul Martin: Are you scared?

[English]

The Chairman: Order! Order!

Thank you, Minister.

Order!

[Translation]

Mr. Paul Martin: The truth hurts.

Some hon. members: Oh, oh!

[English]

The Chairman: Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, Mr. Chairman.

Thank you, Minister. It was very important for Canadians to hear your message today. I think it was clear and I think it's a good starting point for tomorrow. You talked a lot about yesterday and today, but we have to start talking and thinking about tomorrow.

In 1994, when you first addressed the finance committee, you said—to quote you—that “good fiscal policy makes good social policy and good social policy makes good fiscal policy”.

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I'm pleased to see that theme again, to see those linkages between social and fiscal policy sustained in the philosophy and fiscal approach of the government.

Last year in Vancouver, in the social vein, I raised with you, as you may recall, the issue of education of our youth, particularly high-school dropouts, whom I suggested were Canada's poor-in-waiting. We made some moves on the education front, and we also, I think, through the social union talks, have entered into some important initiatives or prospects for changing federal-provincial relations. I think it would be helpful if you could advise us, on the social union side, about interprovincial and federal relations.

I also, however, wanted to put some focus on it with regard to child poverty. We hear a lot about child poverty in our budget consultations across the country. And as you know, “child poverty” is somewhat a political term; in fact, we're talking about family poverty, and with regard to that, obviously people need jobs and social supports. We need to strengthen Canadian families so that they're able to fend for themselves.

In the past, we have looked at advancing funds to low-income Canadians through the child tax benefit and in other ways, but as you know, at the end of the day, that really approaches, ostensibly, a guaranteed annual income. And under the current definition of poverty in Canada, using the LICO definition of StatsCan, it is not possible for the government of Canada to fund a guaranteed annual income to those levels to eliminate poverty.

So my question to you is this: do you believe the government should redefine or define in the first instance true poverty in Canada—true poverty where we're talking about food, clothing and shelter—and establish dealing with fundamental poverty in Canada as a priority for the Government of Canada? I believe it stacks up with the other priorities you've laid out.

Mr. Paul Martin: Your question is very deep, and there are a number of ways in which one could answer it.

Let me deal first with the measurement question and then with the second part.

I think it would be quite helpful, in fact, to have a definition of poverty that isn't a relative definition of poverty, that did deal with the basic necessities, as you have just described. And very clearly, I think, when one establishes social policy, the priorities and where they're going to lie, that has to be a a very important priority. And I also, by the way, share your view that the definition of children in poverty is in fact a family issue—whether they be single parents or families—where they are the working poor. I would share that view.

There's one thing I would not want to do, however. There are some major advantages of the LICO definition of poverty as well. I just want to explain this. Do I believe we have to define it in terms of the absolute necessities? Yes. Do I believe that in a wealthy society like Canada there is such a thing as relative poverty and discrimination which flows from it? Yes, I believe there is, and I think it's also something that we should never lose sight of.

Now, having said that, governments have a certain amount of money to spend and if what we're going to do is attack recurring cycles of poverty that are passed from generation to generation, the approach that you want to take to this, if I understand you correctly—I hope I do—is one that we should look at very seriously.

Mr. Paul Szabo: Okay. Now, I wanted to flow from that: it seems to me there is another element of poverty, other than the financial angle. It's really the “health poverty” of children, the physical, mental and social health outcomes of children. And it's that poverty that translates into the heavy burdens of health, social program and criminal justice costs in Canada.

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So it seems to me that there is an important difference we have to take into account between investing and spending. And it seems to me that investing in children, in terms of improving the probability of better social, health and general outcomes for children, is better. I hope that as we talk about poverty—and I know that you will—we will look not only at the financial poverty aspect but also at the health poverty of children and how we can invest in improving that.

But it does lead me to the principal question I want to ask you, I guess, and it's about our tax system. As I see from your presentation, granting across-the-board cuts in taxes is cost-prohibitive at this time, given our expectations or our outlook. It also is no more difficult than a one-piece jigsaw puzzle to achieve that, but our tax system is much more complex. It's at the other end of the extreme. And in fact, in my view as an accountant, the tax system has quickly approached the point at which the issues of equity and fairness within the income tax system have become important concerns.

If we are going to, over the longer term, be able to deliver targeted tax cuts where they're going to get the best value for the investment, then, I think, income tax reform is inevitable. So I'm asking you, Minister, whether or not you and your department have considered what kind of approach we are going to have in Canada to our income tax system and whether or not you believe that tax reform is basically a necessity before we're going to be able to sustain a fair and equitable system and deliver the kinds of tax cuts that Canadians deserve—which you've stated very clearly.

Mr. Paul Martin: Yes, I think there is a need for both: tax reform to ensure continuing fairness, and tax reform to ensure, or actually to regain, some simplicity in the system. The way in which I think we should proceed to tax reform is to make sure that we get the structure right, and then, as we in fact have the resources at our disposal, we should eliminate the distortions and get fairness by cutting in that way.

There is one thing. Some people abuse the words “tax reform” as being synonymous with “tax increases”, and we do not want to see any tax increases. What we would really like to do is proceed to longer range tax reform, step by step, as we're able to reduce the income tax burden in the country.

The Chairman: Thank you, Mr. Szabo.

Ms. Leung.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chairman.

Minister Martin, I want to say I'm so delighted to hear you announce that $3.5 billion surplus. This is the first time in a long time we're going to see the paying down of the debt. As you know, I'm from Vancouver, B.C., and we had a clock for you at the board of trade, which counts down the paying off of the deficit. Now, I must say, we're delighted we're going to do that on the debt.

Around the world now, we're all very concerned. We have feelings of uncertainty in regard to the financial markets. There are also many people suffering from the economic recession. What role is Canada playing to contain the worldwide financial instability? How can we Canadians help the people in those countries that are in difficulty?

Mr. Paul Martin: As you may know, just prior to the G-7 and IMF-World Bank meetings in Washington, Canada put together a program that really was designed to do two things: as much as possible, deal with the current crisis, and secondly, put in place the means of prevention. We got a very good reception. And as a matter of fact, the communiqués that came out from the IMF and the World Bank adopted a number of our measures.

Perhaps I can just summarize them very quickly. First, we basically said that the world's major central banks have to—central banks only look internally—understand when they look internally that they're going to be impacted by what's happening externally. We said they should take that into account in monetary policy.

Second, we said that the emerging economies themselves have to proceed with their reforms, which I must say, if you look at Thailand, is in the process of happening.

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Third, most international problems occur because of bank failures, and we said that what they have to put in place, really, is an international overseer of banks, much the same way as we have domestically.

The fourth area was the whole issue of capital liberalization. We are not in favour of permanent capital controls, but we do believe that certain countries at a less developed stage of development ought to have the right to slow down hot money coming in. There seems to be general agreement about that.

One of the last two things we dealt with was the necessity of having some kind of a standstill clause, so that when countries get into trouble they don't suddenly see all the capital flying out of their borders. If that had been in place, I think the problems that have occurred in Indonesia and Malaysia, as examples, would have been considerably less.

Lastly, and very importantly, I think we really have to understand that all of this is about people. All of this is about either people at home or people in those countries. There are famines now in those countries. Their children have been pulled out of school. The women have gone back to work in very terrible kinds of jobs. The situation that's going on there, the human cost of this, is just awful, and we have to understand that this is not about protecting bankers.

So what we really said is that the World Bank, which essentially looks at the social side of this, has to be an equal partner with the IMF. During crises in these countries, you cannot put into place solutions which protect banks and leave people bereft. And I must say that I think that view is now much more widely shared.

The Chairman: Mr. Riis.

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

All of us around this table on the finance committee have been touring the country on pre-budget hearings and probably have all been in our constituencies over the Thanksgiving weekend. I was wondering, Mr. Minister, how I would feel after I got here today and heard your report, and you may not be surprised at this, but I don't feel very good. As a matter of fact, if I can quote—or misquote—Edith Piaf: “Is this all there is?”

You just responded to my colleague by suggesting that you had a deep concern about the suffering that men, women and children are experiencing in countries around Canada.

Well, throughout your presentation—and last year you started by using the storm metaphors, that storms were coming, that you could see it last year in Vancouver—you talk about how you're getting ready to weather the storm. On page 9, you say, “It is likely to be a year of heavy weather ahead.” I'd like to suggest, Mr. Minister, that for a lot of Canadians that storm has already hit them.

And I was surprised that you didn't reflect that more in your presentation today, when you consider the middle-income people of this country who are really worried on a day-to-day basis that they might be entering the ranks of the unemployed very quickly. Every family knows somebody who likely has. Some people are thinking that as a family they're just a few weeks away from poverty themselves—to say nothing about the people already in that category.

And yes, you make the strong case for fighting the deficit and winning the deficit war. I might say that part of the way that war was won was the fact that you've off-loaded onto provinces and territories and municipalities and onto Canadians themselves in terms of their own debts.

Also, let's not gloss over the fact that one of the reasons you have a deficit war is that you are dipping into that EI fund and 63% of people that have paid into EI don't even qualify for those benefits. And you don't even acknowledge that. You don't say anything about that. It's a terrible situation!

A voice: Shame!

Mr. Nelson Riis: And now it's the war on the debt. My God, Mr. Minister, this is probably the beginning of the Hundred Years War—a new version of that.

A voice: Even Valeri is embarrassed.

Mr. Nelson Riis: And how can you make a statement today, concerned as you are and as articulate as you've been about the concern you have for people around the world who are suffering as a result of globalization, and really not refer to the people who have been suffering, who were the casualties of these wars on the deficit and on the debt in our own country?

And how can you not only not say anything about them, but indicate not a shred of interest in doing anything about it, other than working on the fundamentals, at some time in the future?

And yes, I know—sometime you're going to deal with health care. And there's no mention of student debt. There's no mention of children with lone parents today who are depending on the food banks, the booming banking business of this country. There is not a reference to these people, other than in some oblique way.

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Now I know you're not a mean, cruel person, Mr. Minister. Why have you forgotten and not even mentioned these Canadians—

A voice: Scrooge!

Mr. Nelson Riis: —in the same way that you've mentioned people outside of Canada?

A voice: Scrooge!

Mr. Paul Martin: I know, Mr. Riis, that you are not a mean person either and that you would be fair in your assessment. I find it hard to believe... Let me just take one example, because you went through quite a number and time is limited.

You sort of say, “Why have you done nothing for students?”

Mr. Nelson Riis: What mention—

Mr. Paul Martin: But then I take a look at the last budget. The last budget, Mr. Riis, was dedicated to students. We had the Millennium Fund, with 100,000 students across this country who are going to receive grants, not only students who are going to university, but students who get certificates for apprenticeship jobs.

At the same time, we've brought in a $3,000 grant for single parents, mostly women, who dropped out of school and want to go back.

We introduced a 17% credit so that students can in fact deduct income tax from their student loans so they can afford to pay them.

We brought in a whole new way of dealing with students who are unable to pay their debts so that, in fact, if at the end they can't pay it back, it's virtually all written off.

Mr. Riis, I very much share your view, and I believe you are sincere in your concern about people. That's what it's all about. This is not about deficits. It's not about cleaning up the books. It's not about making the balance sheet look better. It's about giving Canadians a better opportunity, a better shot at life. It's about making sure that the next 15 years aren't like the last 15 years, where disposable incomes in fact dropped. It's about continuing what we now have, when disposable incomes are rising.

So what have we done since we've taken office? We've put $1.5 billion a year back into the Canadian Health and Social Transfer for health care. The one budget that we have not cut is the budget for aboriginal funding. We put money into medical research for students. We had a whole budget last time for students.

Mr. Riis, every single thing that we are doing is being done in order to give Canadians a better quality of life. We've made that very clear.

Mr. Nelson Riis: Mr. Minister, this winter in our major metropolitan areas we will see tens of thousands of homeless people without a place to stay. As a matter of fact, Toronto is talking about the whole thing of setting up tent cities. It's just almost unbelievable that this is even occurring.

We have a generation of young people looking for hope in terms of moving into a culture of innovation, and when you talk about the plan for the future, what I hear today, and what I read in your presentation, is this sort of staying the course, the status quo, more of the same. But when you look around, Mr. Minister, a lot of people are falling off this “more of the same stuff”.

This isn't working for a lot of Canadians. As a matter of fact, considering that consumer confidence is down and business confidence is down, what is there in this particular statement today that would give those people hope that things are going to turn around?

Mr. Paul Martin: The fact is, with all the storm around us, this country is going to have the funding that is required to take care of people, which it didn't have before. The fact is, Mr. Riis, that the two New Democratic provinces, both Saskatchewan and British Columbia, have said to us, the federal government, that what they deem the greatest priority is health care. They have said to us that's where we should help.

Now, if you're saying that those two New Democratic provinces have their priorities wrong... But if you're not saying that, then you will accept that what we should do in areas such as those you're describing is work as closely as we possibly can with those provinces.

And let me tell you, Mr. Riis, if we have more money, then we will devote it to helping people. For instance, when you take a look at the income tax help that we brought in, we started with the lowest incomes, because that's where our priorities are too.

Let me tell you—and I said this in my remarks, I did, I went through it my remarks—I wish we could do more here. I wish we could do more here, and we will do as much as we possibly can.

The Chairman: Mr. Nystrom.

Thank you, Mr. Riis.

Mr. Lorne Nystrom (Qu'Appelle, NDP): That's an interesting way to follow up on the question I want to ask Mr. Martin this afternoon, if I may.

Around noon, an ordinary citizen said to ask Paul Martin the following question if he says he has no more money. It came, I guess, out of the reading this morning of The Ottawa Citizen and a front-page story saying the Senate has $3.3 million to spend on PR to help improve its bad image.

The Senate is a non-elected body, I remind you, that has the support of 11% of the people, Mr. Martin. It's not democratic. It's not elected. It's not accountable.

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And yet, they announced, according to the article this morning—just before they took a break from sitting for two and a half weeks because they didn't have enough work to do—that they wanted to spend $3.3 million in additional money on PR. A $1.27 million surplus from 1997-98 would mean the Senate would only need $1.98 million in new funding for the campaign.

Now, if you have no money for aboriginal people—who would be ranked 65th among countries in the world if they were a country—for homeless people or for a hospital in my hometown of Wynyard, Saskatchewan, how can you, as Minister of Finance, sit there and idly agree to the Senate spending $3.3 million on a flashy PR campaign to try to say that they're doing a damn good job in this country?

Mr. Paul Martin: I'll ask Roger Gallaway.

Some hon. members: Oh, oh.

Mr. Lorne Nystrom: Roger and I have talked, as you know, and Roger's a member of this committee—

Mr. Paul Martin: Yes.

Mr. Lorne Nystrom: —and I'm sure if he were here he'd ask the same question.

Mr. Paul Martin: Yes, well, I—

Mr. Lorne Nystrom: People understand this, Mr. Minister. People understand this kind of question.

Mr. Paul Martin: I under—

Mr. Lorne Nystrom: Now, C.D. Howe said, “What's a million!” And maybe you'll say, “What's $3 million!”

Mr. Paul Martin: No, I—

Mr. Lorne Nystrom: But $3.3 million is a lot of money and I want an answer to that question.

Mr. Paul Martin: I understand that. Look, the Senate has allocated a certain amount of money, and how the Senate allocates it... You know as well as I do, as a House of Commons member, that in our parliamentary system the Senate is supreme within its own area. I do not have the right to go in there and tell the Senators how to run their affairs.

Mr. Lorne Nystrom: But Mr. Minister—

Mr. Paul Martin: But as far as the aboriginal spending is concerned, Mr. Nystrom, I think again, if you're going to be fair—

Mr. Lorne Nystrom: Just answer my question.

Mr. Paul Martin: You raised the issue of aboriginal spending.

Mr. Lorne Nystrom: I raised the Senate question—

Mr. Paul Martin: When we went through the whole question of program review, recognizing the tremendous poverty that existed there, it was the one area in which we allowed budgets to grow. We did not cut. So in fact, as we established where we were going to spend money, we put as much as we possibly could into aboriginal spending. In fact, last year we put another $350 million into that area.

So we are, within the context of very narrow resources, trying to fulfil as many of the deep-seated needs of Canadians as we possibly can.

On your question about the Senate, again, I'll simply go back to my answer and say that the Senate is supreme within its own area. No member of the House of Commons is in a position to go in there and tell the Senate how to run its own show.

Mr. Lorne Nystrom: But the Senate, like the House of Commons, is allocated so much money per year. Would you be willing to cut back on their budget by $3.3 million? Would you be willing to introduce that in the House of Commons? We'd certainly support you in that endeavour, in sending a signal that we can spend money on purposes that are more useful than a flashy PR campaign to advertise the Senate as a useful institution.

Mr. Paul Martin: Let me tell you, Mr. Nystrom, I spend a lot of my time cutting back on unnecessary spending and saying no.

The Chairman: Thank you, Minister.

Thank you, Mr. Nystrom. We'll have to move on.

Mr. Pillitteri.

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

And good day, Mr. Minister. Today a lot of questions have been asked of you after your introduction of the outlook for the coming year. A lot of those asking questions are of course politically motivated, and some are also looking through their technicolour glasses.

But I want to ask you a question and it has to do with this EI “fund”, as a lot of people call it.

Mr. Minister, before entering Parliament, I've never had one job, always two, and I always paid into this fund, most of the time as an employer—and an employee, both at the same time. And I've never collected from this fund, you know. As I see it, I call it an income tax. I see it as a business tax, as a component of redistribution of wealth, the same as the corporate tax, the same as income tax, and no different from the GST, which also has a redistribution of wealth in it.

In regard to the EI fund, as they now call it, Mr. Nystrom and Mr. Riis, a minute ago, said that 63% of the people who pay into it do not qualify. If they were to revise that... I think possibly it would be higher, because the people who pay into it don't qualify. So for those people who pay into it, it's not that they would qualify, because there are a lot of people paying into it who are employers who don't qualify. Therefore, let's call it a tax, because that's the cost for me to do business. That's what any other business person does. He calls it a tax.

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Mr. Minister, I look at it this way. I know that we as Canadians have done much—you have done much—in regard to some redistribution of wealth with this government, and I would look at it this way: it's about time that this redistribution of wealth affected a lot of Canadians.

You know, Mr. Minister, for my family or those people who work for me, the most sacred thing to them is health care. They look at me and say, “Mr. Pillitteri, if you're going to do anything or help anyone, make sure the health care system is there for us.”

I have to say to you that last night—and this is quite genuine, Mr. Minister—my son went to see a doctor and got a prescription, and for the first time he said, “Dad, look, I ought to be thankful that my wife has a job now and some of her medicines are paid because it only cost me $2.” That's part of a medicare system.

I don't think individuals see this, and through this redistribution of wealth, Mr. Minister, this redistribution of all these taxes that individuals are paying, why not put it back?

Mr. Solberg says, “Let's give it back to the people who paid it.” I'd be very happy to receive that, as every Canadian businessman would be, but the fact is, who would benefit? It would only benefit a specific few.

But putting some of this money, some of what has been taken out in the past—not only by federal government but by provincial governments—into medicare and also into some of what I won't say are “tax cuts”; what I would call it is just raising the threshold a little so we would all benefit. I don't see that as robbing the EI fund. I see it a redistribution of wealth, because the EI fund, as far as I'm concerned, is a tax.

What do you have to say to that, Mr. Minister?

Mr. Paul Martin: Mr. Pillitteri, I think you have said it very well. In the previous exchange of views, Mr. Riis talked about the very real social needs that are out there. I think we feel those social needs. I think it's impossible to be a Canadian with any sense of compassion and not understand that there are a lot of people out there who are in need of better health care, that there are a lot of children out there who are in need of a better shot at life, and that there are a lot of Canadians from coast to coast for whom all of the brand new economy is really a very difficult thing to adjust to. We have a responsibility as a government to protect those people as much as possible.

Essentially, the way that I've looked at it is that it was a very difficult battle to eliminate the deficit. We didn't eliminate it because we wanted to make the numbers look good. We eliminated the deficit because what in fact we wanted to do was to have the room to do the right thing by our citizens. Now, through no fault of any Canadian, we're in a very difficult world situation, and that world situation is really shrinking the government's revenues and its room to manoeuvre.

So what we're saying is yes, we do believe that people who pay unemployment insurance premiums should have lower premiums. We've lowered them every single year since we've come into office. And we would like to give as much of that money back as we possibly could.

But what we're also saying is that we're going through a very difficult period in the world. I don't know how long it's going to last, but while we're going through that, we really do believe as well that if more money is required for medicare, medicare should get it, that if low-income Canadians are suddenly finding themselves boosted and paying taxes we should be out there protecting them. In fact, we have a much broader vision of responsibility and it's one that we have to try to accomplish as we go through what is a very difficult world situation. Now, it's not going to last forever, but I don't think we should ask millions of Canadians to be sacrificed while the world gets its act together.

The Chairman: Thank you, Mr. Pillitteri. Ms. Redman.

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

Minister, I really appreciate this update and the fact that we're looking at the long term and not the short term, because I think that is going to put us on the right road and that's what has stood us in such good stead so far.

I want to go back to something that's on page 16, because it talks about health care. And certainly, that's something we heard about all across Canada last year when we did the pre-budget hearings. And I continue to hear that while we're out east this year.

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But I also heard, in both Alberta and Ontario, a real suspicion about giving the provinces more money. On page 16, you talk about additional federal funding being provided to the provinces and you say the premiers have assured us that it will be used for health care.

I look back at last year's example of Ontario and the fact that having to reduce $1.2 million in federal transfers turned into a $4.3 million tax cut by the Harris government. So I question how solid the grounding is. Can we assure Canadians that the federal dollars that flow through the CHST will indeed be used for the health care they feel they require?

Mr. Paul Martin: In terms of health care, there is no doubt, as you have said, that some provinces have either cut taxes substantially—in the case of Ontario, as you just mentioned, four times the reduction in federal transfers—or have declared substantial surpluses and have still cut back on health care. Those are the decisions they made, whether we agree with them or not.

At the same time, while the federal government did reduce our transfers, the tax points that those provinces have received have gone up substantially, so, in fact, that has increased their benefits. As a result of the action that we have taken, interest rates have dropped, so those provinces have more money.

And at the same time, we've put a lot of money into areas that the provinces previously had to fund. The child tax benefit is a very substantial federal contribution to child welfare, really relieving the provinces of the necessity of spending that money. The infrastructure program was exactly the same thing. A lot of federal government money went into the provinces in an area, really, that the provinces have jurisdiction over.

Essentially, I think you're raising a very important point. I think Anne McLellan, who is negotiating the social union, is obviously very much aware of this, and it's something she has to take into account.

I would very much hope that we would take the premiers at their word, that in fact the moneys we put in would go back into health care. I also think it's something we would obviously want to monitor, and there would have to be an accounting, not to us, but to Canadians.

The Chairman: Thank you, Minister.

Mr. Brison.

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

And thank you, Mr. Minister.

The EI Act is quite specific in terms of setting the premiums at a level that would cover the benefits, no more than what is necessary. I understand your reasons for your belief and why you would change the law to allow unimpeded access to the EI fund for whatever purpose, but with the unemployment rate remaining unacceptably high and with four months of a shrinking economy... You have stated in front of this committee in the past that high payroll taxes kill jobs and are a direct impediment to employment growth. Why wouldn't we reduce payroll taxes as opposed to providing a general income tax cut if, in your own words, high payroll taxes are an impediment to job growth?

Mr. Paul Martin: Perhaps I could answer the first part of your question and then the second part, Mr. Brison.

First, in terms of the use of the EI notional account, as it were, as I have pointed out, this is not new. It is not new historically and it is not new in the last five years. Indeed, the Reform Party, as an explicit part of its program, has the use of the EI account to fight the deficit. But the next—

Mr. Scott Brison: I'm not in that party—

Mr. Paul Martin: I know you're not—

Mr. Scott Brison: —at this point.

Mr. Paul Martin: —but Reform is trying to get you there, Mr. Brison.

Some hon. members: Oh, oh.

Mr. Scott Brison: Can you blame them? Of course they're trying.

Mr. Paul Martin: Let me just go on, then, to talk about the other uses of EI. There's another misunderstanding out there: that EI is a straight insurance program. The fact is, it is not.

Let me just give you an example. If it were a straight insurance program, a number of the uses to which the surplus has historically been put would not be there. Let me just go through them. The EI fund currently has maternity benefits, parental duties benefits, adoption benefits and sickness benefits. That's not part of what would be conventional straight insurance.

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The EI fund also provides wage subsidies, earnings supplementation and self-employment assistance. There are community-based projects, skills and grants and loans, and as you know, there are special programs for Atlantic Canada.

The only point I'm trying to make here is that there is this idea that the EI program has only been dedicated to one thing—you pay in—when in fact, historically, it has been used to support a wide range of government projects.

But now I will come to your question. I think it's an important point to make clear to everybody.

Now then, on your issue, why would somebody argue that there should be a preference for personal income tax cuts versus EI reductions? And I will simply give you two points, which I think are very important.

People have said that because of the discrepancy in tax regimes in Canada and the United States, Canada is at a disadvantage. One can argue that point either way, but the fact is that payroll taxes in Canada are substantially lower than the OECD average. They are substantially lower than payroll taxes in the United States. And our income taxes are substantially higher than those in the United States.

So the first question I would ask you is, if what you want to do is maintain your competitive base vis-à-vis the United States, why would you lower a payroll tax and leave your income taxes high? Why wouldn't you bring your income taxes down? That's the first thing.

I'm sorry for going on so long, Mr. Brison, but I think your question is an important one.

Mr. Scott Brison: It was a great question.

Some hon. members: Oh, oh.

Mr. Paul Martin: It was. Let me give you the second part. And I think this goes back to questions that were asked by others as well. If, as appears to be the case, we are heading into economies that are slowing down and that require stimulus, then surely whatever action you take should provide you with the greatest degree of stimulus.

And within the last couple of weeks, Wood Gundy, the CIBC and the C.D. Howe have all come out—like Josh Mendelsohn, for example, of the CIBC—and said that the stimulus to the economy that would be provided by a personal income tax cut versus an employment insurance reduction would be substantially greater. So I simply ask you: you have only so much money and you want to stimulate the economy in a time of slowdown, so why wouldn't you act in the area of greatest stimulus?

Mr. Scott Brison: With all due respect, Mr. Minister, you treat economists like a buffet. You choose economists based on them saying something that is consistent with what you want to do.

There are other economists in Canada, including the chief economist from the TD Bank, who are saying that the most stimulative effect in terms of reducing unemployment would be a payroll tax cut. And the fact is that we've seen payroll taxes increase significantly with the CPP premium increases. In a situation where we do have unacceptably high unemployment, the payroll taxes directly increase the cost of the labour input. And you do believe in the rules of supply and demand? You may change the EI act, but you can't really change or repeal the law of supply and demand. It could directly effect change and improve unemployment if we were to reduce EI premiums.

And the other issue with EI is that it's a fairly regressive tax, in a sense; people who make up to $39,000 pay into it. And it's the small businesses and their employees and low- and middle-income Canadians who are paying into it. And to take from that and to distribute it generally does not seem consistent with your earlier assertion that you will continue to provide tax relief for lower income Canadians or the Canadians most in need of that.

Mr. Paul Martin: Well, I think there are two things here. You're quite right when you talk about the differing views of economists. I say this knowing that behind me is a whole series of economists and my back is turned.

Some hon. members: Oh, oh.

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Mr. Paul Martin: But let me just simply say that's why I quoted three very highly reputed economists—

Mr. Scott Brison:

[Editor's Note: Inaudible] only find four.

Mr. Paul Martin: And then I suppose we could go on.

But I must say, Mr. Brison, I do share the view that a personal income tax cut would be a much greater stimulation to an economy in need than would an EI cut at this present time.

Second, you're quite right when you say, listen, if you leave the EI premiums there, or if you only cut them slightly, you in fact have to watch that you're not discriminating against low-income Canadians. I agree with that, which is why, if we did anything on income tax, our number one measure would in fact be to deal with low-income Canadians, as it was in the last budget. I think it's important to understand that in regard to any income tax cuts we brought in at the low end, a substantial portion of them would go to the people who would in fact have received those EI cuts. It's just that we want those people to get it and a lot of other people to get it as well.

Mr. Scott Brison: I said earlier you had stated in the past that high payroll taxes kill jobs and are an impediment to job growth. In the last budget, you provided an EI premium “holiday” for youth. If you didn't believe that would provide a significantly stimulative effect or would not increase employment, why did we have it in the last budget for youth? If it was not designed to create more jobs for young people and if, in fact, your assertion or your logic was correct then, why wouldn't you consistently continue that type of policy for all Canadians? Because regardless of age, there's a... I'm all for youth being employed, you know, but I think there are a lot of other people who need jobs too.

Mr. Paul Martin: First of all, the youth program is a pilot. I very much hope it works. It remains to be seen whether it is going to in fact have that result. I very much hope it does, but it's too soon to cast a judgment.

Second, the statement I made about payroll taxes was that increasing payroll taxes costs jobs. I was very clear about that. And all of the studies have demonstrated that in fact stable payroll taxes do not cost jobs. Increasing them does. That's why it is so important to understand that we have cut EI premiums in every year since we've taken office. We want to cut EI premiums and we've done it every year—well over $2.5 billion so far.

Just let me come back to it. If you ask me if I want to cut payroll taxes, the answer is, unequivocally and absolutely, I do. But as well, I want to cut personal income taxes and I want to protect the medicare system, and I have to make choices.

We're not talking here about huge permanent changes and everything else. What we're saying is that we're going through a very difficult period here and the most important thing is to protect Canadians from a reversion, essentially, to a whole series of more debt being added upon debt and deficits being added upon deficits, which is what Canadians have lived for the last 15 years. Canadians don't want that. They've seen that movie; they don't want to see the rerun.

The Chairman: Thank you, Mr. Brison. Time's up.

I have a question, Minister.

You spent a good part of the early part of your economic and fiscal update dealing with the issue of globalization and technology and the impact that it in fact has had on the Canadian economy. You went on to describe Canada as a diversified, sophisticated, financially sound nation, and you said that markets, unfortunately, have an image of yesterday's Canada.

I would like to know from you who is responsible for this image. Do you see a role for the federal government in enhancing the image of our country?

Moreover, Minister, judging from debates in which I've participated in relationship to, for example, the MacKay task force, I will also submit to you that many Canadians have an image of yesterday's Canada. How does your statement today—and perhaps your budget speech—address this challenge? And when do you expect Canadians and the markets to clearly understand your diversified, sophisticated, financially sound new Canada?

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Mr. Paul Martin: I think you've put your finger on a very important point. One of the things we really did take note of over the course of the last six months as I have talked to a number of market players around the world—and market players Canada, in fact—are the misconceptions about our economy. I believe that it is incumbent upon all of us in government and, in fact, in opposition, to make sure that the world understands the tremendous progress that the Canadian economy has made. This is not a partisan issue.

I'm sure, for instance, that Mr. Manning regrets some of the statements that he made abroad this summer. Because if you take a look at Alberta as an example, a province very heavily involved in natural resources, the tremendous value added, the tremendous technological change that has been brought to the development of our natural resources, is really something to take a look at. They can now bring in oil at a very low cost compared to where they were 10 years ago. The fact that in our economy high tech now has a growth rate twice that of the normal economy in this country is very significant.

I believe that all of us in this room have a great responsibility to get that message out. It's getting out, but I suppose, Mr. Chairman, we have made such considerable progress as a country—and this is not government, by the way, this is the private sector doing it—that it takes a little time for perception to catch up with reality.

The Chairman: Thank you.

Mr. Harris.

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Thank you, Mr. Chairman.

And, incidentally, I'll bet Mr. Manning regrets some of the statements that the minister has made in the past too.

Mr. Minister, despite some of the colourful and heart-rending phrases your writers have used in your statement, what we in the Reform Party see is that this statement is setting the scenario for increased government spending, in much the same way as the government increased its spending by $2.8 billion in the last go-round. We're very concerned that you're just simply setting the stage for another round of increased spending.

Also, I'm just astounded to see that throughout your statement you consistently ignored the real benefits of lowering the tax levels for Canadians. You've in fact given us somewhat of a Chicken Little scenario: if you lower taxes, the sky is going to fall.

The reason I found it astounding is that despite the mountains of historical evidence which you, as a businessman in your other life, can't deny, despite the mountains of evidence that there is a huge economic benefit when taxes are lowered, including benefits such as increased consumer spending, investor confidence, the ability of businesses to expand and hire more people, thus providing more job opportunities, and also increased tax revenues coming into the government coffers as a result of these benefits...

And as you know, we only have to look to the province of Ontario to see that personal income tax levels have been cut some 30% since 1995, and despite the tax cuts, which you seem to be afraid of, they've increased their total tax revenue—PIT—by some 10%. And there's been an explosion of almost 20% in sales tax revenue in the province of Ontario.

Despite all this evidence, you've continued in your statement to ignore any of the real and substantial benefits to decreasing taxes. We're just wondering why you're sort of trying to mislead us and mislead Canadians by saying that lowering taxes is going to place our economy in jeopardy. Why have you taken this track despite the undeniable evidence, which you know is so supportive? Why are you choosing to ignore this?

• 1615

Mr. Paul Martin: Mr. Harris, I believe that you're raising important points. I want to go back to something that Mr. Solberg said earlier, at the very beginning. I very much believe that we are engaged in a very important debate in this country—and I believe that it is a debate, that it isn't a question of anybody having their minds made up. It isn't a question of the die being cast—

Mr. Dick Harris:

[Editor's Note: Inaudible]see that—

Mr. Paul Martin: It's important, Mr. Harris.

Mr. Dick Harris: You've made your mind up, Mr. Minister—

Mr. Paul Martin: Mr. Harris, let me finish.

Mr. Dick Harris: Minister?

Mr. Paul Martin: Mr. Harris, I think it's important. I started by saying that I thought you raised some important points. I think if we're going to have a debate we need to have it in a rational way. The die has not been cast. We are in the process right now. And I hope, as a result of the recommendations of this committee, that we are going to continue this debate. I suspect we will be doing it in the House of Commons and I certainly think we will be doing it at this committee.

Now, when you ask if we are looking at increased spending, Mr. Harris, there are very important needs in this country. Medicare is a very important need. It really is an essential part of the fabric of this nation and we cannot allow it to fray. The issue of education, the issue of child poverty, the issue of the kind of country we're going to build, these are things none of us can ignore.

But let me deal with your basic point on the question of taxes.

Mr. Harris, I and this government very much want to lower taxes. We demonstrated that in the last budget, at a time when we had not balanced the books. The fact is, we cut taxes for close to 90% of Canadians.

Now, you're going to ask me why I couldn't do what your namesake, Mr. Harris, did in Ontario. Let me tell you. You can ask yourself whether in fact the increases in Ontario and the property taxes in Ontario are paying for that tax cut and you can ask a number of questions about priorities, but I won't get into them.

But I will make one very important point for you, and that is, it is the federal government's balance sheet that sets the tone for interest rates in the country, not a province's. So if the federal government has its finances out of whack, our interest rates go up, and we've seen that historically. And that means the provinces' go up. It means the private sector's go up. It means mortgages go up. Basically, if we don't have our act together at the federal level then, in fact, there's a dislocation all the way through the piece.

In regard to Mr. Harris, you can argue about whether he did the right thing or the wrong thing, but what he stated unequivocally was that he was going to delay deficit reduction—he also did some other things, which one can argue with—because he wanted to bring in a tax cut. That's a choice which he can make in his province. It is not a choice that we in the federal government can make, because I simply say to you, if we had delayed the deficit fight and were going into the kind of world that we're going into now with a huge deficit over hanging us, the rise in interest rates would offset any cut in income taxes that you would see.

Mr. Dick Harris: But Mr. Minister—

The Chairman: Mr. Harris.

Mr. Dick Harris: —the fact is—

The Chairman: Mr. Harris. Your time is up.

Monsieur Desrochers.

[Translation]

Mr. Odina Desrochers (Lotbinière, BQ): Listening to you, Minister, it seems that you're prepared to appropriate the employment insurance surplus for your own ends. You'll therefore have to think of the means you will use to achieve your ends. I think you have two choices to make.

First of all, are you presumptuous enough to amend the Employment Insurance Act so that you can avoid reducing the premiums, or are you going to get rid of the chief actuary in charge of the employment insurance account, who is calling for lower premiums? After Mr. Dussault, who would it be?

Mr. Paul Martin: Look, a decision has to be made. The Commission has to report, and there is no doubt we will wait for the report. A decision has not been made, and as I said, a proposal has not been made to Cabinet. We are grappling with the dilemma: how to protect our social programs, on the one hand, and on the other how to reduce personal taxes, and lower employment insurance premiums, all in a global context that is not very attractive. Decisions will have to be made one of these days.

Mr. Odina Desrochers: But if he does not agree with you, what will you do?

Mr. Yvan Loubier: Are you going to get rid of him like you did the other one?

• 1620

Mr. Paul Martin: He is an actuary, he will make a decision and say: "This is what I think." Then the government—we are not actuaries—will make its decisions based on the priorities that we have discussed.

Mr. Odina Desrochers: You personally, and not the government.

Mr. Paul Martin: It has nothing to do with me.

Mr. Odina Desrochers: You are the head of the Department of Finance. You must have a say in that.

Mr. Paul Martin: I will undoubtedly have a say. As I just said, we are going to decide to what extent we can reduce premiums and taxes and to what extent we can spend. That is a decision we are going to make.

Mr. Odina Desrochers: The provincial ministers of finance reached a consensus a few weeks ago. They unequivocally request that you invest the money in health. Are you going to comply with this consensus?

Mr. Paul Martin: I have a bit of trouble with that. I just told you that according to our figures, and it's very clear, we cannot invest in health, reduce employment insurance premiums drastically and cut taxes.

Now, if I understand you correctly, you are telling me—

Mr. Odina Desrochers: No, no, what I'm saying—

Mr. Paul Martin: —that your priority is to increase health transfers. So it is not reducing employment insurance premiums.

Mr. Odina Desrochers: No, that is not what I'm asking. If you inject new money—

Mr. Paul Martin: That is how I understand it.

Mr. Odina Desrochers: —in health, will you do it in accordance with the social contract that was signed in Saskatoon or are you simply going to go over the heads of the provinces once again? That is what I want to know.

Mr. Paul Martin: I stated very clearly in my remarks that we want to do it in partnership with the provinces. Moreover, the prime minister said that he wanted to proceed in partnership with the provinces.

What you are telling me is that in your opinion, health is the priority and not reducing employment insurance premiums.

Mr. Odina Desrochers: I am saying that the priority is health, but that reducing employment insurance premiums is also important. Those are our three traditional requests.

Mr. Paul Martin: So you are not interested in the deficit.

Mr. Odina Desrochers: We are also interested in the deficit, but you have a lot more leeway than you are admitting to here today.

[English]

The Chairman: Mr. Riis, briefly.

Mr. Nelson Riis: Thank you.

I want to thank you, Mr. Minister, for some comments and perhaps go back to a couple of points I raised earlier.

I think Canadians everywhere were anticipating today with a great deal of expectation and a great deal of hope that we'd maybe see some comments in terms of: the government's commitment to restore health care funding, more than simply at the conceptual level; a reference to educational support in order to support the culture of innovation that presumably Canada is pursuing; and some comments on research and development through production support and so on.

And more than simply mentioning that these are areas of interest to you—and I assume that they are, Mr. Minister—could you say something to us at the table that would give us some inclination that these are more than simply areas of interest and concern and that we actually will see some investment, perhaps not as much as some would like, in health care in this next budget, some investment in education, and an acknowledgement that the EI issue needs to be addressed? It may not be addressed 100%, but we have to admit the fact that so many people who are supporters and pay into that system never use it; they can't, because of the tight rules. Surely there's a sensitivity that this has to at least be acknowledged and modified somewhat.

Can you just give us something, Mr. Minister, so that we can say we leave here today with some very clear hope that when we get together in the House of Commons in February, I guess, that you will in fact be saying you have more than simply an interest in these areas, that you will in fact have a commitment to additional funding in some of these particular areas?

Mr. Paul Martin: Two things, Mr. Riis. First of all, as you know, this is not a budget. This is a fiscal update, essentially an update, basically, on the state of the economic union since the last budget. One would not make announcements in this particular forum.

But on the issue that you raised, again, I think, you're really putting your finger on the debate that has to take place, which is very much alive right now, and that is the debate about priorities.

• 1625

And it isn't simply whether you are going to move in only one area. But it is this: how are you going to, without going into deficit—because I see this new-found fiscal responsibility which I think you're probably responsible for within your party—make sure that you protect medicare, that you deal with the issues of the environment and child poverty and, in fact, that you deal with the EI surplus in a way that is acceptable to Canadians?

I think that is the debate and I think you're quite right to raise it in that way. I would very much hope that this committee will continue to debate it. I am sure that in the House of Commons you and I will probably debate it as well, Mr. Riis.

Mr. Nelson Riis: Perhaps a supplementary?

The Chairman: Yes.

Mr. Nelson Riis: And then I'll get off and allow my colleagues who haven't asked a question to have an opportunity.

To go back to the casualties of the war on the deficit and the debt, I think we all acknowledge that there are a lot of people in this country who are really suffering in personal ways as a result of changed programs and a weakened economy. I'm thinking particularly of people who have lost hope in many of the resource sectors of the country, where we've seen a major collapse and so on.

And I realize this is not a budget, but you have made statements in the past that indicate clearly where the government plans to move. Are there not some comments—or a comment—you can make today for the casualties of the deficit/debt war who are really paying an incredible price and who are feeling a bit hopeless? I think that's what people were hoping for today. Will you give some word of encouragement that things are going to start changing for some of these people who have suffered the most?

Mr. Paul Martin: Well, I think they already have. There is the fact that we were able, in the last budget, to bring in the education budget, which really dealt with a crying need among students. The fact that we were able to increase the transfers to the provinces, most of which hopefully went to health care, is another indication of that. There's no doubt that I wish we could do more, no doubt about that at all.

The real problem, I think, has been not only the deficit fight; it has been the fact that for 15 years this country has been on a steady downward track in terms of the amounts of money made available to deal with social programs and social problems. What's very important—and I think that you're raising it quite properly—is that now, for the first time, we're in a position to make choices.

Yes, what's happening around the world is very worrisome, but in fact, as long as we don't allow ourselves to slide back into the mess which we were in, then we will be able to make those choices—and we will be able to make them with every increasing year, stronger and stronger.

I share your view. That's why the debate we need to have in this country should not be limited to “how does the EI fund operate?” It should really be expanded to deal with the country's priorities. That's the important debate, and I would think that as parliamentarians it's our responsibility to lead that debate.

The Chairman: Thank you, Mr. Riis.

Mr. Discepola, followed by Ms. Bennett.

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

Mr. Minister, if we're going to have that fundamental debate, we have to stop the rhetoric and the grandstanding for the media cameras inside or outside this room and get down to the fundamentals. If we're going to make that recommendation to you, then I would like the members of the opposition to be realistic in their claims. They can't have it on both sides.

If we're going to have to return the money in the EI fund to those who contributed, as was said, we're going to have to come up with a consistent factor on how we then make up that shortfall to start with, let alone the additional spending everybody wants.

I want to tell you that in answer to the questions you've asked us to ask our constituents, I've talked to my constituents. They're very simple people in Vaudreuil—Soulanges, but very smart people. When I ask them if they want to put the nation's health at risk, they say no, absolutely not, because the sacrifice has been too great so far. When I ask them if they want to improve the investment in health care, the absolute answer is yes, definitely. When I ask them if they want reduced personal taxes, the answer is yes.

But at the same time, you asked me to ask them the last question, which was whether they wanted to do it through additional government spending, and the answer was no, because they don't want to incur a possible deficit.

So I can tell you, Mr. Minister, from my community, from the small business community, for example... And if we're going to call a spade a spade, if the opposition members want to return that money to those who contributed it, then let's be fair: 60% has to go to the employers of this country, to the small businesses.

• 1630

And I can tell you categorically, Mr. Minister, that the $3.6 billion would be better spent for the business community in keeping the deficit in hand and keeping the interest rates low, because the $200 per employer that they are going to benefit by is not going to give them a bang for their buck. There is no one in the business community in my riding saying, “Give me back that money.”

So now we're talking about the $2.4 billion, and to that end, I can echo the sentiments of my community. What I'm hearing, Minister, is that we should do a combination of balanced things. First, we should continue decreasing premiums over the next four or five years, again, down to the actuarial levels where they should be. At the same time, we should invest in job creation measures and maybe take a look at enlarging those that haven't been covered so far. That's the message. In other words, the surplus is there, it's generating revenues and we're going to have to keep it, but invest in those areas.

However, like Mr. Riis, I come to these meetings and usually leave very upbeat. Up to last year, I guess, I did that, but this year I had bigger expectations. I don't know, maybe it's because of the analogy Mr. Riis used about the storm and how last year we were probably ahead of the storm but in a rowboat without any oars, and maybe we're now still ahead of the storm but with one or two oars...

But I do remember that last year you stated categorically that Canada was well positioned because of the efforts we had made. I expected to hear that again this year. Last year, you said that Canadians should probably see continuous sustained growth. I think you even quoted a figure of almost 20 years. What has changed so drastically that you paint such a dismal picture, since we should be very optimistic about the future?

Mr. Paul Martin: You're absolutely right. I said that, and I would repeat it. I very much believe that we have a very long period of sustained growth ahead of us. What we are looking at is an analogy that is much closer to the period of 1950 to 1970 than it is to the period of 1970 to 1990-95, when we did not in fact have that. If you look at all of the measures, whether it be our productivity, our ability over time to get our taxes down, what our companies are doing, our ability to penetrate other markets, or, in fact, what's happening in the world, I very much believe in and am very optimistic and very confident about the future.

But that does not mean that you have a steady period of growth like that; there are ups and downs. No period, no matter how good, no matter how long, is deprived of declines in the economy, either because of the great changes that are happening in the world or just simply because of the business cycle, which has not been abolished, despite what some people say, and never will be.

My view is very much what you have just described. Yes, we are going through a tough period worldwide. I think Canada has both oars, and I think we probably even have an engine back there that's going to make us stay ahead of the waves. So to be very clear in terms of what is happening worldwide, I feel that Canada, as part of North America, is going to come through this better than anybody. I feel that we are going to weather this storm, let there be no doubt about that.

At the same time, I believe the long term for us is very good, but there are going to be downturns, declines, and we're going to feel them. We're feeling them right now. A couple of years from now, when we look back, I think we will see that what we're feeling now was a downturn in the steady long-term up-trend.

Mr. Nick Discepola: One short question, Mr. Chairman?

The Chairman: Sure.

Mr. Nick Discepola: The debate seems to be about additional spending. There is no doubt in my mind that we have to reinvest in some key areas and priorities, as you stated before. But there seems to be very little debate—or not enough, in my opinion—on the reduction of the debt. I don't know, but my home economics 101 always tells me that I pay off all my credit cards and all my debts because that's after-tax interest that I'm gaining.

The same principle has to hold for the debt. We have written down the debt by almost $9 billion. That translates, roughly, into $270 million? If we take 8% as our long-term debt, average borrowings, that's about $500 million or $600,000 million more that we now have annually. So isn't that one of the best investments that we can make—writing down the debt so that we can then have access to that money year after year?

• 1635

Mr. Paul Martin: Again, we go back to the balanced approach, which essentially says we have to proceed on many fronts at once. And you're absolutely right that one of those fronts is reducing the debt. That's where the $3 billion will go, and in fact we'll be reducing more debt this year.

Our ultimate goal has to be getting that debt-to-GDP ratio down. That's the single most important thing. Essentially, you can get that down by two ways. You can get it by paying down some debt, which is what we should do—I agree with you fully—year after year, but also by getting growth up, because if you get growth up, that ratio goes down substantially.

The best way to get growth up is to invest in those areas that really count, like research and development; it's to make sure that young families are able to raise their children so that they contribute; and it's to get taxes down. There's no doubt about that. And that's why, essentially, I don't think this idea of going off and only doing one thing makes any sense. What we have to do is proceed on the key courses at once.

The Chairman: Thank you, Mr. Discepola.

Ms. Bennett.

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

Last year during the election, we talked about—

Mr. Lorne Nystrom: GST.

Ms. Carolyn Bennett: I never did.

Some hon. members: Oh, oh.

Ms. Carolyn Bennett: —reinvesting in programs and taxes and debt, and I guess I'd always thought the spending part was the most interesting, particularly with Ms. Redman's question around health care and accountability, because I too have some concerns about the pledges of the provinces and how we hold them accountable.

But now, I must say, having listened a great deal, that the tax part seems pretty interesting as a remedy for a lot of things. And when you hear about people on disability pensions who are paying taxes or about some of the minimum-wage people who are paying so much on rent that they don't have food security or about some of the fixed-income seniors, and this bracket creep stuff... I would like to know from you what you think the remedies might be for those people if we get to do something on the tax side. And what would be the trade-off?

Mr. Paul Martin: Well, very clearly, I think, you have to begin with a threshold, because the threshold applies to everybody, and people who are at the lower income end will benefit the most by far. And then, I think, you do what we did in the last budget. You basically do your income tax reductions as you move up the scale. And I would like to see us move higher up the scale so that we don't have any distortions in our system.

Ultimately, the answer has to be what the best way is of getting money back into Canadians' pockets. That's what it is really all about. A substantial portion of it, as you know, is that the only way Canadians are going to live within their means is if the government lives within its means. That's what we're all about.

I believe we should establish—and we did it in the last budget—very clearly that we are going to reduce taxes in each and every budget. For 15 to 20 years, people have lived with the situation where every single year their tax bills went up, and unfortunately, we can't turn that around overnight.

But what Canadians are entitled to hear from their government is that from now on, each and every year, we're going to reduce their taxes. And I think that's a very important part of this EI debate, by the way, it really is. It's this: what is the long-term thrust of the government? And just as we've been able to bring down EI every year, I would really hope that Canadians can count on us to bring down taxes every year.

The Chairman: Thank you, Ms. Bennett.

We'll have two final questions, one from Mr. Solberg, one from Mr. Loubier.

Mr. Monte Solberg: Thank you very much, Mr. Chairman.

First, I just have to say that the annex to the 1986 budget points out that:

    The consolidation of the Unemployment Insurance Account and the Western Grain Stabilization Account for purposes of financial reporting in no way alters the operations of these programs.

I just want to point out that the AG and the annex itself make the point that this was just an accounting change and in no way alters the operation of the program.

Second, you went almost $3 billion over budget this year according to your documents, and that which we have feared greatly has come to pass: the moment you got a surplus, you spent it.

Now, the point I'm going to make is that you're asking me how we could afford EI premium reductions. Well, how about if the government just stays within budget? Wouldn't that go a long way? Wouldn't it go $3 billion of the way to ensuring that we can return these EI premiums and also continue to run a surplus?

• 1640

Mr. Paul Martin: I'm not quite sure I understand why the conclusion that you draw in terms of the Auditor General changes anything. One of the points I made was that what the Auditor General did was to insist that the EI account in fact be part of the government's consolidated revenue fund, that it be integrated.

But I also, in my remarks, made the point that from the very beginning, from 1940, there was never a separate account with money in it. And that is the basis. So in fact, when people say there is an account out there with a pot of money, well, there never has been. Never. From 1940. So essentially, all the Auditor General did—he made other changes as well—was say, “Look, this is part of your revenues.”

On the other issue, the question about the spending of money, yes, we did, I think you're right. There were areas in which we did increase spending, and it was spending that was not anticipated. Look at the last year and a half: we have had a major flood in Quebec, a major flood in Manitoba and a devastating ice storm in Ontario and Quebec, as well as a very large payment for hep-C, none of which was budgeted.

So I think we have to understand that the federal government will project its spending, but the federal government ends up with a very important stabilizing and funder-of-last-resort role in this country. It's one that we have met. I'm glad we did that spending, to be quite honest. I'm not going to apologize for that spending at all. The one point I would make to you is that despite having done all that, we came in with a $3.5 billion surplus.

The Chairman: Monsieur Loubier.

Mr. Monte Solberg: Could I have one brief question?

The Chairman: Go ahead.

Mr. Monte Solberg: Finally, in the report you've delivered today, this total report, when you talk about economic turmoil around the world, what is in that report that is going to help Canadians one iota in dealing with all that uncertainty and all the impacts of that international turmoil?

Mr. Paul Martin: The fact that we are able to say, which we never could have said five years ago, with this turmoil swirling around our head, that we have a balanced budget and we are going to stay in balance, which means our interest rates aren't going to go up.

There's a second thing I think we can say. And you were here then as well, Mr. Solberg. I remember very clearly when the Mexican peso crisis occurred, which was much smaller compared to what's happening now. Our interest rates went through the roof. Our economy ground to a halt. There were huge job losses. Today, with a world situation that dwarfs Mexico's in its ramifications, our interest rates have not only not gone up, they've gone down. Our job growth has not only not gone down, but in fact, we have created more jobs.

Essentially, what Canadians can take away from this, I think, is that this country has licked the deficit devil, that this country is on a course that is in fact going to see steady increases in the standard of living each and every year, and that we are able to handle the kind of crisis the world has foisted upon a lot of us.

The Chairman: Thank you. Mr. Loubier.

[Translation]

Mr. Yvan Loubier: Mr. Minister, you probably know as well as I do who is holding Canadian debt. Thirty percent of Canada's debt is in the hands of foreign debt holders. About half of them are American. About 21% of the debt is held by pension and insurance funds.

I would like to check something. When you decided to use $20 billion over 15 months to pay down part of Canada's debt, were you aware that at the time you were pouring Canadian dollars into the money market, that as soon as the Americans holding Canadian debt had the Canadian dollars that you had given them in exchange for their debt certificates, they took these Canadian dollars and dumped them on the money market in exchange for American dollars? Did you know that other debt holders, like the pension and insurance funds, were, especially over the past few months, seeking maximum returns and also moved towards inflation hedges, like the American dollar, as soon as you had given them the opportunity to do so by reimbursing part of the debt?

• 1645

In short, were you aware that by proceeding this way and at the same time asking the Bank of Canada to step in and use its reserves to shore up the Canadian dollar, you were implementing very contradictory policies?

Mr. Paul Martin: Yes, we did in fact pay down part of the debt, but it was only the part of the debt that had matured. Once maturity has been reached, these debt holders have an opportunity to buy more Canadian debt or to buy foreign debt.

So it was not our decision. It is very clear that some debt holders wanted to buy American bonds. They made that decision. We did not force them to do so. Simply put, the debt had matured and Canada had the money it needed to pay it off. If the debt holder had wanted to buy other Canadian bonds, he would undoubtedly have been entitled to buy some, but he did not want to do so.

So first of all, it was not our decision.

I would like to add something to complete my answer to a question you asked me. You were talking about huge surpluses that we can anticipate for the future. I would simply like to give you some figures, Mr. Loubier.

The Bank of Montreal calculated the projected surplus for next year. You were saying that it will be roughly $15 billion. According to the Bank of Montreal, it will be $6 billion, or $3 billion after subtracting the reserve. According to DRI Canada, it will be $3.8 billion, or $800 million after subtracting the reserve. J.P. Morgan said today that it will be zero. Wood Gundy is now saying that it will be $4.1 billion.

All I wanted to say, because you asked this question earlier, is that most economists are predicting a much lower surplus for next year.

Mr. Yvan Loubier: I could quote other sources that are talking about a 10-billion dollar surplus for next year.

Mr. Paul Martin: I hope that you are right. I hope that you are right.

Mr. Yvan Loubier: No, no, no, no. Some have predicted that next year's surplus will be $10 billion, and we have always maintained that it would be between 12 and $15 billion. Of course, if you sit there and you do nothing to stimulate the economy, the surplus will melt away.

Mr. Paul Martin: You are right.

Mr. Yvan Loubier: I might remind you that, for the first four months of the current fiscal year, a surplus of $7 billion has already been reported and presented in the Fiscal Monitor.

Mr. Paul Martin: No, it is $8 billion, but you know full well that the first six months are always stronger. Secondly, as you also know, there is a carry-over from previous years, and the first quarter was very strong. However, when we look to the future, unfortunately, we see that it is not as strong.

But I hope that you are right.

[English]

The Chairman: Thank you, Monsieur Loubier.

Minister, thank you very much for providing us with the economic and fiscal update and your perspective on the challenges and choices we face.

Of course, as a committee, we look forward to presenting our perspective on the choices that Canadians present to our committee. That will be done through our pre-budget consultation report which will be tabled in December.

Thanks again.

Mr. Paul Martin: Mr. Chairman, I very much look forward to receiving this committee's report, and thank you very much for giving me the time.

The Chairman: Thank you.

The meeting's adjourned.