FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, October 23, 1997

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'll call the meeting to order and welcome everyone back.

We have the pleasure of having another interesting round table of panellists. From the University of Western Ontario we have David Laidler, and from the Direct Sellers Association we have Jack Millar and Linda Herron, along with the president, Mr. Vic Prendergast.

As you probably know by now, we operate in this fashion. You have approximately five minutes to make your presentation and thereafter we'll enter into a question and answer session.

We will begin with Mr. David Laidler, Department of Economics, University of Western Ontario. Welcome, sir.

Professor David Laidler (Department of Economics, University of Western Ontario): I have prepared a brief statement, and I think it's best if I just highlight it by way of opening remarks, if that meets with your approval.

The first question we were asked was to react to the improvement in the fiscal situation. My reaction is a very pleased one. I've been both pleased and surprised at the speed with which the deficit has evaporated.

I was also asked to comment on the means that had been adopted to bring the fiscal situation under control. Two or three years ago I was sufficiently concerned with the problem itself that I wasn't too concerned with the means. Almost any means would have done, since I regarded the situation so seriously.

On balance I would have liked a little bit more on the tax side and a little less on the spending cuts side. I am an academic fan of broadly based sales taxes, and I understand that was a political non-starter. But a broadening of the base of the GST and perhaps a temporary increase in its rate would have sat very well with me.

I would note, however, that taxes have been raised as part of the deficit reduction program but that it's been done by sleight of hand. The failure to index personal income tax at inflation rates less than 3% has been a major source of revenue. I think that's been barely tolerable, given the circumstances, but because I attach a very high value to an honest and transparent tax system, it's not a measure I feel very comfortable with.

The failure to index the GST low-income tax credit I simply think was disgraceful. It should have been indexed. That was an increase in a hidden tax on people least able to bear it.

In terms of what might be done now, I must point out to you that the debt-to-GDP ratio is higher now than it was in 1993-94, so frankly I see next to no room for cutting taxes or increasing government expenditure in any shape or form. The Canadian economy is simply too vulnerable now to unforeseen shocks: a political crisis in Quebec or a downturn in the United States' economy. Events like that could turn the fiscal situation around so quickly when the burden of interest payments on annual expenditure is so high that I believe we have to go through another few years of getting that debt-to-GDP ratio down to get some flexibility back into the public finance system.

If, however, there is a little room for manoeuvre, I would suggest looking at two things on the tax side. I think it's simply wrong to argue that EI contributions are a job killer. I believe there is no evidence for that across the board. However, for low-income earners, they do interact in a rather unfortunate way with the other aspects of the social safety net to reduce the employment opportunities for unskilled, inexperienced workers, and there might be something to be said for reducing EI contributions for low-paid workers.

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However, there's a very large caveat there. There is at the moment a very large surplus in the EI fund—I was distressed to see that the economic update did not display those data, by the way. If the EI system is evolving into a payroll tax, then it would be a good idea to call it that, but if you're going to call it an insurance system, then I think perhaps there might be a case for across-the-board cuts in order to bring the system back into line with its label.

The other thing I think you might want to do on the tax side is put indexation back into the income tax system. You can either index from now out into the future or you could introduce some backdating if there were a little fiscal room. I think there is a serious case for combining such measures with a raising of the tax thresholds at the bottom of the system.

That refers back to my concern with the way in which the social safety net interacts with the tax system, the welfare system, and the EI system to put very high marginal tax rates on people who are trying to get out of welfare and back into the labour force. I think that's a serious flaw in the Canadian labour market at the moment.

Finally, I have a comment on monetary policy. I believe monetary policy is unbelievably lax at the moment. It's interesting to note that interest rates now are lower than they were at this time last year, whereas the indices of consumer and business confidence, which are charted in the economic and fiscal update—chart 2.5, page 13—show significant increases in consumer and business confidence over the same period. The consequence of that is that the money stock at the moment is growing at close to 20% per annum. That's not going to bring inflation overnight, but I think it certainly carries with it the risk that a healthy expansion might develop into an old-fashioned boom, and old-fashioned booms have an unpleasant habit of being followed by unpleasant busts—old-fashioned busts—which is the last thing the Canadian economy can afford two years down the line.

I really do think, on the monetary front, that the policy choice now is between modest—and I really emphasize modest—increases in short-term interest rates over the next few months, which is one alternative that I think could easily bring that monetary situation back under control before it does too much damage, and the other alternative is to let things go on as they are, and I think that carries with it the risk of much larger interest rate increases a year or 18 months hence.

So that aspect of the economic situation gives me a little cause for concern. I was very pleased to see the Bank of Canada raise its overnight rate a few weeks ago, and I will be very interested to see whether that was enough to do the trick. I doubt if it was.

I think that's all I would say by way of introduction, Mr. Chairman.

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

Now we'll move to the president of Direct Sellers Association, Mr. Vic Prendergast. Welcome, sir.

Mr. Vic Prendergast (President, Direct Sellers Association): Mr. Chairman and hon. members, as has been said, I'm the president of the Direct Sellers Association in Canada. I'd like to thank the committee once again for the opportunity to raise or highlight several issues that are of concern to not only our member companies but the independent sales contractors that form the base of our businesses across the country.

By way of expansion, I'd like to introduce the two people with me: Linda Herron is vice-president and legal counsel for Electrolux, one of our member companies, but is also chairman of the Direct Sellers Association; and Jack Millar is tax adviser to the DSA and also a member of our board.

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By way of background, for those who aren't familiar with the Direct Sellers Association, we were founded in 1954 as a national organization of Canadian direct-selling companies and their independent sales contractors. We market a wide variety of products and services directly to the consumer, normally in the home but not necessarily, and definitely not in retail outlets.

The association currently has over 50 member companies. Within those 50 member companies, over 600,000 independent sales contractors across the country are represented, who in 1996 sold just over $1.4 billion in retail sales in a wide variety of products and services.

Again, by way of giving you an understanding of who we are, the association is made up of a number of multinational corporations, well-known names like Avon, Amway, Mary Kay, Tupperware, Electrolux, and Shaklee. There's also a significant and growing number of members who are Canadian-based companies, some of whom are now quite large, like Weekender Ladies Wear, Beauty Counsellors, Kids Only Clothing, and Relance.

The strength of direct selling lies in its tradition of independence and its operation through independent sales contractors, who are generally people seeking alternate or supplemental sources of income where there are no entry restrictions. We should note that about 81% of all the independent sales contractors are women. About 78% work part-time and 22% full-time.

Of great significance is the fact that direct selling offers ordinary Canadians and small businessmen and women who live in towns, cities, and rural communities all across the country a manageable economic opportunity that can generate and augment family incomes with minimal disruption and, most importantly, with minimal investment.

The company listings indicate that the products are widely diverse, ranging from the classics, like cosmetics and personal care items, through to home appliances, natural remedies, educational products, books, and so on.

In our initial presentation today we'd like to focus on just three items that are of specific interest to the industry and then make some general comments about future priorities in view of the progress that's already been made in the economy.

The first recommendation we'd like to make is that the government amend existing social programs to allow for some transitional relief to facilitate those individuals who are trying to move from dependence on social assistance to independence in their own small businesses. In recent years there has been some transitional relief allowed within the social assistance and employment insurance areas for some level of employment income as a transition before individuals start to lose benefits from those programs. But at least in many of the offices, at this point, there appears to be no transitional relief for self-employment income. Any income that is generated from an attempt to start an independent business either is withdrawn directly against benefits or makes the person ineligible for the benefit program itself. We feel that if the thrust is for creation of employment opportunities, transitional relief is extremely important.

The second point we'd like to refer to is the harmonized sales tax and future sales tax harmonization. From an industry standpoint, the harmonized sales tax in Atlantic Canada was very successfully and smoothly implemented and has certainly helped to level the marketing playing field, particularly in those areas where direct marketing products were not always taxed appropriately. Now, operating through the direct selling special collection arrangement, harmonization has levelled that playing field.

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Going forward, we would strongly recommend continued efforts to harmonize further in other areas across the country.

A third specific item we would like to reference is the GST and the direct sellers mechanism. At the time of implementing the GST, through negotiation with the industry, we were able to implement for the GST a direct sellers mechanism that had existed for provincial sales tax. It has been highly successful, both in terms of removing a lot of administrative load from the independent sales contractors in our businesses, but also ensuring that from a GST standpoint there really is no underground economy there. The tax is collected up front, so the return to the government is certainly much higher than it would have been, making it a win-win situation.

There are, however, about four items relating to that mechanism that we would like to see corrected, and we strongly urge that there be immediate legislative action to do so.

First, we feel that shipping and handling charges from direct selling companies to their independent sales contractors should be treated as non-taxable. Second, the post-sale adjustment provisions should be amended so that exclusive products provided as hostess gifts in party-plan situations be fully relieved of tax. Third, the mechanism should be amended such that general bad debt relief provisions can be made available to the independent sales contractors, not just to the companies under the direct selling mechanism; and over the long term, that provision be made for the mechanism to function for independent sales agents, in addition to independent sales contractors.

Briefly, in terms of general comments, as I mentioned earlier, over 600,000 individuals and families are involved in our industry as independent sales contractors. They are spread roughly in line with the population through all of the provinces and territories across Canada. There are also individual supporters of different political parties, so that to indicate to the committee or anyone else that there is complete consensus within the industry would, I think, be a little overly optimistic. However, because the industry is built on individual entrepreneurs, there are some areas of broad consensus within the industry.

First of all, there is general satisfaction, I think, with the focus of the government on deficit reduction, and the progress to date, as was mentioned earlier, demonstrates a remarkable rate of reduction.

Because of the self-employment status of the sales contractors, there is, however, a great concern with any further weakening of some of the base programs that will ultimately become important to self-employed individuals in our type of business: the health care system and the ability of individuals to adequately provide for their retirement income. Consequently, we believe there is solid support from the industry for priorities based on, first, long-term further debt reduction to enhance future expenditure flexibility; second, ensuring that the health care system is adequately funded in the long term; third, ensuring the long-term viability of Canada Pension and the seniors' benefit program, however it is finalized; fourth, continuing to allow full protection of RRSP contributions, increasing on an indexed basis; and finally, ensuring that in the short term there are no effective total tax increases, as there have been, and implementing medium- to long-term personal and business tax reductions.

Thank you for the opportunity of making this presentation.

The Chairman: Thank you very much for your presentation and thoughts on this particular issue.

Now we will move to the question and answer session. We will begin with Mr. Harris.

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Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Thank you, Mr. Chairman, and thank you, panel, for your presentations.

I have only a comment for Mr. Prendergast. I understand exactly what you're talking about when you speak about job creation and the transition to independence particularly for people who are on social assistance or unemployment insurance.

When they go to a government agency that is making proposals to help them become independent, everything goes well until they're told they're planning on getting into the sales business. It seems that the government's attitude toward people who want to sell things for a living is totally different from people who want to make something, whether there's a market out there for it or not.

I know exactly what you're saying. I think people who are on social assistance or some sort of program like that who have an opportunity to sell a product through an organization that you present are considered for the most part to be second-class applicants as soon as they go to apply for assistance.

That's my only comment. I'd like to talk to you further about that, and we'll make the time to do that.

Mr. Laidler, I appreciated your comments, too. I just wanted to ask you a couple of quick questions. I hope there are quick answers.

We've been enjoying sort of an interest rate honeymoon here recently, and inflation has also been fairly acceptable. In your opinion, what could be the single biggest influence to either one of those, or possibly both of those, for holding them at this comfort zone we're in now? What could be the single biggest threat?

Prof. David Laidler: The biggest threat is the current rate of money growth, which is close to 20% on the narrow M1 aggregate. According to the Bank of Canada's own studies, that is a very reliable indicator of the future of real expansion in the economy. It's well known that the faster the rate of real expansion, ultimately, the faster the rate of inflation that you will get as well.

The rate of money growth that's compatible with the Bank of Canada and the government's own inflation target in the long run is probably somewhere in the region of 3% to 6% per year. That number was at 19.5% at the end of August. That's a little bit scary.

Mr. Dick Harris: That's very well explained, thank you.

The Chairman: Thank you, Mr. Harris and Mr. Laidler.

We're going to move to Mr. Perron.

[Translation]

Mr. Gilles-A. Perron (Saint-Eustache—Sainte-Thérèse, BQ): Good morning gentlemen. I would like to start with a comment. I am kind of fed up to hear people saying that the Canadian economy is in a bad shape because of the political climate in Quebec. Even before the sovereignty issue was on the table, it wasn't all that rosy for the Canadian economy. That's all I had to say. Now, let's turn to serious matters.

Professor, in your presentation you said that inflation should be kept below 3%. What would be the impact of maintaining this inflation around 3%, plus or minus 1%, like they do in the States while maintaining the balance with job creation?

[English]

Prof. David Laidler: I'm afraid, sir, that the translators did not translate the middle part of the member's question. I'm terribly sorry.

The Chairman: We'll get him to repeat the middle part, or maybe the whole question. Mr. Perron, can you ask the question again?

[Translation]

Mr. Gilles-A. Perron: You said that inflation rate should be less than 3%. However, many people claim that it should be maintained around 3%, plus or minus 1%; in other words that the inflation should fluctuate between 2 and 4%, like in the States. What kind of impact that could have on job creation, etc.?

[English]

Prof. David Laidler: Thank you.

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First, may I apologize to Mr. Perron. I did not mean to blame Quebec for Canada's economic woes. On the contrary. It's just that a new referendum would, I think, increase interest rates. I don't think that's happening at the moment. I think that is not part of the economic scenario. If I said something differently, I apologize.

As to the choice between inflation targets of 1% to 3% and 2% to 4%, I think first of all we have to keep a sense of proportion. That is not the kind of thing I want to be hanged for one way or the other. That is so much better, 2% to 4% or 1% to 3%, than the inflationary experience of the 1970s and the 1980s that I think we would be a lot better off than we were in those decades regardless of where we settled down.

I believe perhaps underlying your question is some of the work of my friend Pierre Fortin on wage stickiness. I'm not really an expert in the functioning of the Canadian labour market, but my sense is that perhaps Pierre's preliminary results exaggerated the extent of the gains to be had from edging the inflation rate up from 2% to 3%. My gut feeling, if you like, is that if we settle for an inflation rate of 2% or an inflation rate of 3%, you wouldn't be able to tell the difference in the measured unemployment rate. I think lots of other things are more important than moving that around in that range. I do think, however, that the government and the Bank of Canada, for good or ill— given that they have nailed the 1% to 3% to the mast, as it were, there is something to be had in the way of international confidence in the Canadian dollar from their persisting with that.

That really brings me back to my earlier concerns. Not only is the debt-to-GDP ratio still very high, but Canada's foreign indebtedness, though falling, is still rather high and there are gains to be had on the confidence front, I think. But this is not an issue that economists should be fighting a civil war about.

The Chairman: Mr. Pillitteri.

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

Mr. Laidler, the remark you made is refreshing, but I do recall some of those fights here in this exact room in the last few years, with economists such as Mr. Fortin on one side, and of course I recall you trying to affirm 1% and 3% versus 2% and 4%.

The question I would like to ask you is this. Is it possible that you have started to take this stance because of the enormous gains we have made on the deficit and possibly on the debt?

Prof. David Laidler: If you detect a change in my position, sir, I'm not quite sure there has been one. I have on balance had a preference for an inflation rate in the 1% to 3% range. I do think my old friend Pierre Fortin exaggerated the case for increasing the inflation rate last year. I do think the question of confidence was a more important question last year, and an even more important question the year before, than it is now. I think that's right. The improved fiscal situation has made a world of difference. There's no question about that.

The Chairman: Mr. Assad.

Mr. Mark Assad (Gatineau, Lib.): Mr. Laidler, I very much liked your comments about the fact that the payroll taxes are not really job killers. Like you, sir, I believe that is exaggerated. Also, your comment that maybe we could use the surplus of the EI to offset probably the damages of the increase in the CPP— I think those are very good suggestions, and I hope the committee will keep that in mind when we make our report to the Minister of Finance.

Now, on your point about the 3%, of course I'm familiar with Pierre Fortin's writings. I find them extremely interesting and I believe a lot of his positions, because I've had the chance to read a lot of his work. I believe, as he does, that the CPI is flawed, that in reality it does not accurately measure inflation. There are some who will tell you that the inflation rate is even below 1% at this time.

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First, I would like your opinion, sir, regarding the CPI. From what I've read there's room for improvement. It is flawed; it doesn't reflect real inflation. I think there was some period of time when we lived with deflation, and that is quite serious also.

Prof. David Laidler: I again have to cite Pierre Fortin's own work published by the C.D. Howe Institute four or five years ago. I think his best estimate of the inflationary bias in the measure of the Canadian CPI was about half of one percentage point. So if inflation was 1.6% on the latest number, that might be about 1% per annum.

The Canadian CPI is a much more carefully constructed number than the American one, and it's the American number that may be biased upwards—if I understand my American colleagues correctly—by as much as one percentage point per annum.

So I don't think that flaws in the Canadian CPI are really a major issue.

Mr. Mark Assad: You mentioned that we have a lax monetary policy. I feel that the monetary policy in this country in the past years was disastrous when you consider that three-quarters of our accumulated debt is interest. Again, not only Pierre Fortin but others, such as the committee on monetary and economic reform, who are responsible and knowledgeable people, have shown that the monetary policy has been very detrimental.

In what way is our monetary policy lax now?

Prof. David Laidler: Let me first go to the premise of your question, sir. This is actually the first time since 1989 that I have criticized the Bank of Canada for being lax rather than too tight, but over the last few years I have tried to walk a rather delicate tightrope. I believe the strategy of the Bank of Canada in bringing inflation down and keeping it at negligible levels has been exactly right. I believe that from time to time their tactics erred on the side of tightness. Now I believe their tactics are erring on the side of laxness.

I emphatically do not agree with the committee on monetary and economic reform that monitoring policy is responsible for most of the debt. I think you'll find those calculations probably come from assuming that the debt could somehow have been carried interest free, and I think you'll find that the projections from which they come do not ask the all-important question of what would have happened to Canadian inflation, the Canadian economy, and ultimately the interest rates Canada would have had to pay if the kind of monetary policy they were supporting in the late 1980s and early 1990s had actually been followed through. In my view, they would have had the Canadian economy roughly in the shape that Argentina was in during the last decade.

Mr. Mark Assad: The gap between the American and the Canadian interest rate at one time was as high as four points, which was considerable, and that had a profound effect on our deficit. I find that at the Bank of Canada, needless to say, they exaggerate.

There are others who believe that instead of using the monetarist point of view we should bring back reserves, which we got rid of. That passed here while we were in opposition, and I have to admit we were dead asleep at the switch when it was passed. Why not, as I said, bring back reserves and limit the amount of the proliferation of credit cards? We don't know where the money supply is any more. The Bank of Canada pretends, and they use some of that excuse to tighten it up. Basically, they're shots in the dark.

I'd like to know how you feel about bringing back reserves and using reserves a little more than interest rates.

Prof. David Laidler: Let me comment on the interest differentials vis-à-vis the United States. Canadian interest rates are now lower than interest rates in the United States, all the way out to 30 years. That is the consequence of sound fiscal and monetary policy in Canada. Regrettably, those very high interest differentials in the early 1990s were the price we had to pay to put the policy back on track, after a couple of decades of something close to incompetence.

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Reserves are simply a tax on the banking system. If you want to tax the Canadian banking system specially, by all means do it. It will become less competitive internationally, it will become less competitive domestically, it will become less efficient, and the main sufferers from a tax on the banking system, through imposing reserve requirements along the lines that COMER wants, will be the very small business community that supports them. Those are the people who rely on getting credit as cheaply as possible from the banks, and they will have to pay the difference if you tax them.

The Chairman: Thank you, Mr. Laidler.

We'll move to Ms. Redman.

Ms. Karen Redman (Kitchener Centre, Lib.): Mr. Laidler, you touched on bracket creeping. It's a topic that's come up from time to time as a serious concern. Have you done any calculations as to what the cost would be to redress that?

Prof. David Laidler: I was terrified I was going to be asked that question, because the answer is no. I was rather hoping that I would find it in this document, but it isn't there.

I believe the Department of Finance have those calculations and that they're fairly easily available. I'm sorry.

Ms. Karen Redman: That's quite all right. Thank you for your honesty.

Ms. Paddy Torsney (Burlington, Lib.): Professor Laidler, what do you think of the 50-50 target? I guess the second part of that is, for the 50% that would go to reduce taxes and/or increase spending, what do you think our priorities should be?

Prof. David Laidler: I want to say this politely. A phrase like a 50-50 target is more for the political marketplace than the conduct of economic policy.

I would give first priority, honestly, to driving down the debt. The longer you can delay implementing the 50-50 target, the happier I will be, because the further around the virtuous circle of debt reduction we will be and the more flexibility we will have for the conduct of economic policy in the future.

I think the same thing has to be said for whether you're cutting taxes or raising expenditure. You put a cheque in the mail to people, if they have children, and that's expenditure; you give them a tax credit and that's a tax cut.

I once had the honour to serve on Marc Lalonde's advisory panel, and the first question he always asked, if a proposal came up, was, is there a way I can do this through the tax system so I can make government look smaller rather than larger?

On the margin, I don't think these things matter very much, quite honestly, because I don't think we have very much room to manoeuvre. I think the most we can do is massage a few corners, make the tax system a little bit more transparent, a little bit easier to see through, and that's about it for the moment.

Ms. Paddy Torsney: I wanted to note that, while you're getting most of the questions, I think the presentation that was received from the direct sellers was quite clear. I certainly appreciated your comments specific to the transition to independence. I think those are some issues that we definitely have to address.

I appreciate your support on trying to get the harmonization of sales tax, particularly in my province. With Shaklee being a representative from my riding, I was very pleased that you were with us today.

Professor Laidler, since there's been so much comparison between Canada and the U.S., I wonder if you could comment on why our unemployment rates are higher in Canada and what it would take to reduce our unemployment rates to something more similar to those of the U.S.

Does the Bank of Canada have anything to do with that?

Prof. David Laidler: Honestly, if I could answer that question with a clear conscience, I would be a candidate for a Nobel prize—please understand me.

Ms. Paddy Torsney: We could work on that.

Prof. David Laidler: I think there are a few obvious things.

The first is that, for good or ill, the American social safety net is a good deal less generous and puts a much higher premium on people having to go to take any job that's available to make ends meet. That keeps the measured unemployment rate down. I think the implication of that is that just because the unemployment rate, as measured, is lower, this doesn't mean the economy is functioning better. It may be addressing different values. So there is a bit of that.

The other thing that's important to recall is that the last recession was relatively mild in the United States. In Canada it was extremely severe. The United States' recovery was much faster. The Canadian recovery has been much slower. Has this had anything to do with the Bank of Canada?

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I'm on the written record from 1990 as saying monetary policy is far too tight and you are going to cause a major recession. I'm on record from 1993 saying that monetary policy is not expansionary enough for this stage of the cycle; you are going to slow down the recovery. I am on record from late 1994, early 1995, saying that monetary policy has become too tight and if you don't watch it you're going to have us in another recession. So I do think the depth of the recession and the slowness of the recovery has on a number of occasions been the result of clumsy tactics on the part of the Bank of Canada.

At the same time, it is very easy for an academic economist to sit and make remarks like that, because he doesn't have to carry the can for the policies, and it's very easy to be wise with hindsight, as I am now being.

On balance, I think the Bank of Canada has done an enormously good job under terribly difficult economic and political circumstances. I wouldn't want to hide that opinion. I have a very high opinion of the Bank of Canada's integrity. For a while, it was the only component of economic policy in this country that had any integrity. I think that has been terribly important.

Ms. Paddy Torsney: Thank you, Professor Laidler. Perhaps if you or Mr. Millar have any actual numbers on what it would be like for your members or for the economy in general on changes to address the issue of bracket creep, we'd be interested in seeing those. I certainly would be.

The Chairman: Mr. Millar, would you like to make a comment on that?

Ms. Paddy Torsney: Mr. Millar, I'm not sure if you have the numbers here with you, but if you did have some implications for what it would mean to the members of your association, the individuals particularly who are selling, what kind of investment that would be in the economy, I would appreciate that.

Mr. Jack Millar (Tax Adviser and Member of the Board, Direct Sellers Association): Yes.

The Chairman: Thank you.

I'm going to use a few minutes here to ask you three questions. You've probably seen this document that was put out by the Minister of Finance, Economic and Fiscal Update: Strong Economy, Strong Society, Security and Opportunity. If you were to look at page 58, three questions are being asked: first, what economic assumptions, including prudence factors, should be used for 1998 and 1999 in planning for the 1998 budget; secondly, what are the appropriate new strategic investments and changes to the tax system that would allow the government to best achieve its priorities; and thirdly, what is the best way the government can help to ensure that there is a wide range of job opportunities in the new economy for all Canadians? Areas of discussion could include how government can best support Canadians in acquiring the education and skills needed to thrive in a knowledge-based economy and how government can best foster the application of knowledge in the new economy.

If you can, I would like the panellists to address those three points. Can we start with you, Mr. Laidler?

Prof. David Laidler: I am, you understand, sir, a one-man band.

The Chairman: You play an interesting tune.

Prof. David Laidler: Thank you very much.

I would have thought that economic assumptions over the next couple of years of real growth of, shall we say, 3%, inflation in the range of 1% to 3%, and short-term interest rates higher than they are now, perhaps 4% and whatever that might imply for the term structure of interest rates, would be very prudent assumptions. I think there's reason to believe you might be going to do better on the real growth front. You might get lucky on inflation as well, and so on.

I think I would do some quiet planning just to see how badly things could go awry if one had a typical cyclical downturn some time in the next eighteen months. The United States' recovery is very long-lived now and its economy is pretty clearly bumping along at capacity ceiling, and it might turn down. Certainly, if I were the Minister of Finance, I would be asking for some in-house exercises to see how badly a United States downturn could blow me off course, and then I would want to take account of that in my budgetary planning.

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On the tax front, I honestly wouldn't want to go beyond what I have put in my recommendations. It seems to me there's a lot to be said for a transparent tax system. That does mean paying attention to indexation, and it also means being honest about whether employment insurance contributions are an insurance premium or a payroll tax. I think one has to make up one's mind about that and act accordingly, but I don't think there's very much room for large tax cuts in the next two or three years.

In terms of how governments can ensure job opportunities and so on, perhaps I could indulge in a little bit of special pleading. I'm a university teacher. I see a significant minority of students who come into university with grave difficulties in writing essays. Some of them even have difficulties in reading textbooks. Something is pretty clearly wrong in the high school system in equipping these young people with basic skills of numeracy and literacy. Clearly, that's not a job for the federal government, but equally clearly, since secondary and primary education are in the public sector, it's a job for some government.

The other thing that concerns me particularly as a university teacher is that I know that all Ph.D.s aren't equal. A Ph.D. is a minimum qualification and some are better than others. I have seen a distressingly large number of the better Ph.D.s either not come back to Canada or leave Canada in the last few years, and I believe the research capabilities of Canadian universities—certainly in my discipline—are being seriously eroded in the long run.

What could the federal government do about that? Well, the federal government makes grants to the Social Sciences and Humanities Research Council of Canada. That's where young people get their $15,000 or $20,000 a year to hire a research assistant, pay the phone bill, pay for a little bit of travel, pay a typist, and get their research support. That research support has dried up terribly, and it's the absence of that kind of research support that's making young Canadians very unwilling to stay in this country. I think there's a big bang for very few bucks in increasing that kind of funding. Never mind strategic research initiatives, never mind great big infrastructure programs for university buildings; what we want is that $10,000 or $15,000 a year that enables people to pay their phone bills when they want to talk to a colleague in another university about an interesting problem.

The Chairman: Thank you very much.

Is anybody else going to comment? Mr. Millar.

Mr. Jack Millar: Mr. Chairman, I'll attempt to answer those three questions, remembering Mr. Prendergast's commentary about diverse members and diverse political viewpoints and so forth within the industry and in the association.

In terms of the first questions about various factors and the issue of prudence, as indicated in our remarks in terms of priorities, deficit reduction still remains the overarching goal. What that suggests is that there has to be a very significant degree of prudence when the next budget is put together, particularly with any thoughts of additional spending. The worse thing that could happen, in our view, is that after having reached this physical balance we would move back into deficit because of matters beyond our control, such as business cycle developments.

In terms of changes to the tax system, the comments that were made were from the perspective of the independent sales contract. There is concern about the removal of the indexation, of the brackets. We've talked about the bracket creep. That's been very important to the members of this association. The other area in which there has been concern is with the speculation as to what may happen with respect to RRSPs. The point on the tax side is that the RRSPs are very important. Indeed, for a number of the ISCs they're only a nest egg in retirement. We believe no changes should be made in terms of attempting to impose taxation in that area. Indeed, we believe there should be some return to increasing the thresholds. As we have an aging society, it's more important that people, particularly people who are self-employed, be able to save for their retirement.

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The third question dealt with the best way to move forward with job opportunities. The comment we have made is that there has been movement in recent years to help people transition off social programs. When they have re-entered the job market, they have become employed again. Our proposal there is that those types of transitional relief measures be extended to where people attempt to start their own businesses and start to earn income from those activities.

With respect to high-tech and so on, I just want to let the members know that the direct selling industry is moving into this area. There are a number of new members of the association involved with technology products and telecommunications. Obviously, it's to the benefit of this industry that this part of the Canadian economy continues to be supported.

The Chairman: Thank you very much.

Are there any further questions? Mr. Assad.

Mr. Mark Assad: I'd like to get back to Mr. Laidler about the monetary policy. To me, the fact that Canada, Great Britain, and Switzerland are the only countries that do not have reserves doesn't bode well. If we're going to combat inflation by simply jacking up interest rates, we're going to go through these cycles of bust and boom continually. I'm convinced that there have to be other ways to ward off inflation—or at least control it to a reasonable degree—without constantly going back to jacking up the interest rates. Reserves did play a role. I just don't understand how they are a tax on the banks, sir.

Prof. David Laidler: Reserves are a tax on the banks because you are forcing them to hold a proportion of their assets in non-interest-bearing government debt, whereas they could be holding them in earning assets. Therefore, the spread between the rate they pay their creditors or depositors and the rate they charge to the people who borrow from them has to be larger. There's just no question about that.

By all means, you can tax banks that way. Of course, banking systems have functioned under that kind of regime, but the fact is that the British banking system, the Swiss banking system, and the Canadian banking system are very competitive internationally given the size of their respective countries. That comes partly because they're not subject to punitive taxation. I have no inside information, but I am sure the British banks are just rolling on the floor with glee at the thought that within the European monetary system they're going to have required reserves. That is going to give London a major competitive advantage over Paris, Frankfurt, and all those other financial centres.

I repeat, I do not understand how it can be that the committee on monetary and economic reform gets a lot of support from small business people who really do have difficulty in borrowing and getting credit from banks, and who then have difficulty meeting the interest payments. These people are so eager to support a policy that will hurt them more than anyone else.

In terms of jacking up interest rates to combat inflation, we have the lowest interest rates in three decades in Canada now because we have low inflation. What I am suggesting is that when business confidence has increased so much and when the real economy is expanding at 5%, holding the overnight rate at around 3.25% is asking for inflationary trouble eighteen months or two years down the road. I'm suggesting that perhaps a rate as scandalously high as 3.5% or 3.75%—which would still be among the lowest interest rates in the last twenty years—might be a prudent measure. I find it hard to refer to that as jacking up interest rates.

An interest rate is a market price. Of course, it fluctuates. It's much better to have it fluctuate between 3% and 4% than to have it fluctuate between 17% and 22%, as it did in the early 1980s. That is what you get if you pursue inflationary policies long enough.

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The Chairman: Thank you very much, Professor Laidler.

On behalf of the committee, I'd like to thank you, our panellists, for your interventions today. As you know, we have just finished travelling across the country, from coast to coast, listening to Canadians. I think I reflect the sentiments of the committee when I say that many interesting ideas and perspectives have been forwarded to us. You can rest assured that you will find some of the thoughts and ideas you've shared with us in the report of the finance committee.

We have one quick housekeeping item before we adjourn. The next meeting of the finance committee will be held on Monday, October 27, at 9 a.m., in room 253-D, Centre Block.

The meeting is adjourned.