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STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, October 15, 1997

• 1305

[English]

The Chairman: (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order. Good morning, everyone.

[Translation]

Pursuant to clause 83.1 of the Standing Orders, the committee will now commence its pre-budget consultation with the annual economic and fiscal update of Canada as well as the Government of Canada's annual financial report for the fiscal year 1996-97.

[English]

As we begin our pre-budget consultations in Vancouver, we are breaking with tradition. This is the first time that the economic and fiscal update is being delivered outside of Ottawa. On behalf of the committee, I would like to thank the Minister of Finance for accepting our invitation to appear before us here in Vancouver.

The committee has called on Canadians to get involved in what is expected to be the most expensive pre-budget consultations ever held. As we enter a new economic era, full of challenges and choices, it is vital that we hear from Canadians about their priorities, their values, and their expectations. I hope that the minister's economic and fiscal update will provide us with the necessary framework required to plan for the future.

I now welcome the minister and invite him to deliver his statement. Minister, welcome.

Hon. Paul Martin (Minister of Finance, Lib.): Thank you very much, Mr. Chairman.

Before I begin, perhaps I might be allowed to congratulate you on your appointment as chair of this committee. I'd like to congratulate both of the vice-chairs of the committee, and in fact I would like to thank all of the members of the committee. I want to congratulate them, I want to thank them in advance for the work I know they're going to do, and I look forward to working with them.

I would also like to thank the committee for issuing the invitation for me to meet with you here in Vancouver.

We are at an important juncture of our economic history. It is therefore timely to deliver the economic statement beginning this year's pre-budget consultations outside of the traditional venue and to do so here in this great province of British Columbia, the gateway to the Asia Pacific, the gateway to an important part of our future.

[Translation]

I have had the privilege of appearing before this committee on several occasions, but this is my first opportunity to do so since Canadians gave a new mandate to our government. Therefore, the purpose of my presentation and the document I am tabling today is two-fold: first, to provide an update on economic and fiscal developments since the last budget; and second, to build on the framework for our economic future presented to this committee at the beginning of the last mandate—doing so by highlighting certain areas of endeavour on which Canada must focus if we are to succeed in the new millennium that lies before us.

[English]

Our goal, from the day we took office in October 1993, has been to build a country that provides opportunity and security, one where our citizens can be confident of their future. Meeting that goal has required a plan and has demanded sustained effort. It has involved deep and broad reform, reform that has been dependent on Canadian support for significant and sometimes difficult change. As we speak, it is clear that a corner has been turned, that we are now at a new beginning and that a new optimism is emerging across the land.

• 1310

Four years ago this country stood at the brink. The nation's finances were in disarray. Canadians and the world had lost confidence in our economy and in our future, and we knew that if we did not act, it would not be bondholders or bankers who would suffer, it would be ordinary, hard-working Canadians, and indeed they already were. Canadians knew the fiscal mess had to be cleaned up. They said from the beginning that there was only one way to do it, and that was to get economic growth up and to get government spending down. That is precisely what we set out to do, and today, because of the efforts and the understanding of millions of Canadians, that is what the country has done.

In 1993-94, the deficit represented about 6% of GDP, or $42 billion. Our target for the fiscal year just ended, 1996-97, announced during the 1993 election campaign, was 3% of GDP, or $24.3 billion. Last May we said that the deficit number would be no higher than $16 billion. This was based on 12-month numbers of $9.6 billion plus an estimate of the normal negative year-end adjustments, which have ranged anywhere from close to $3 billion to more than $6 billion over the last eight years.

Today we are releasing the annual financial report for last year. It demonstrates that for the first time in decades, the normal year-end adjustments were positive, not negative. As a result, I wish to announce that the 1996-97 deficit came in at $8.9 billion, almost $20 billion lower than the previous year and the largest year-over-year improvement in Canadian history. Mr. Chairman, this represents the smallest federal government deficit in over two decades, and indeed as a proportion of our economy, at 1.1% of GDP, it is the lowest deficit recorded since 1970-71.

[Translation]

Today, we are releasing the Annual Financial Report for the last year. As a result, I wish to announce that the 1996-97 deficit came in at $8.9 billion—almost $20 billion lower than the previous year and the largest year-over-year improvement in Canadian history. As a proportion of our economy, at 1.1 percent of GDP, it is the lowest deficit recorded since 1970-71.

[English]

The annual financial report provides a full accounting of why we have done so well. It includes certain one-time factors. However, the most important reasons are as follows.

First, program spending fell by more than $7 billion, to come in at just under $105 billion. This means that between 1993-94 and 1996-97 total program spending has fallen by $15.2 billion, a reduction of almost 13%. This reflects the unprecedented restraint measures introduced in our budgets. Of equal importance, it also reflects the new management system that the government has put in place, a system that on the one hand affords departments greater flexibility in budgeting, while on the other hand forcing trade-offs and reining in spending.

The second reason for the dramatic decline in the deficit stems from lower public debt charges, a result of the significant decline in interest rates.

Finally, the third reason reflects a stronger economy, one that has created more jobs for Canadians, thereby increasing revenues that we have received.

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The dynamic that has taken hold is clear. The significant restraint measures introduced in our earlier budgets brought the deficit down. The lower deficit then triggered lower interest rates, which, while acting to further reduce the deficit, also strengthened economic growth. This in turn has contributed to greater job creation, which has then been reflected in higher government revenues, which have also brought the deficit down even more.

In summary, it is this strong, virtuous circle that underlies the unprecedented progress that Canada has made and will continue to make.

[Translation]

There are two principal ways to calculate the deficit. The first, the method used in Canada, is considered to be one of the most rigorous in the world. It includes all the recorded liabilities the government incurs over the course of a year, including the liabilities to the public sector pension fund. This is the deficit on which I have just reported.

The second measure of the deficit, used by other G-7 countries, includes only the borrowings that the government incurs in financial markets to pay for ongoing programs and interest on its debt. This we refer to as financial requirements. It is also similar to the national accounts statistic used by the Organization for Economic Cooperation and Development to make comparisons among countries.

According to this comparative measure, in terms of the deficit, the Canadian government is now in the best fiscal health of the G-7. Last year we projected that, by 1998-99, the federal government would be in a position where it would no longer need to go to the markets to borrow new money.

The results announced today demonstrate that we are doing even better than that. Our new financial requirements have, in fact, been eliminated. Indeed, in 1996-97, we recorded a financial surplus, the first since 1969-70. Furthermore, we were the only G-7 country to do so.

[English]

Mr. Chairman, the results announced today demonstrate that our new financial requirements have been eliminated. Indeed, in 1996-97 we recorded a financial surplus, the first since 1969-70. This has meant that for the first time in 27 years it was not necessary for the federal government to borrow new money to pay for ongoing programs or to pay for interest on the debt. Even more to the point, thus far this year we have actually been paying down marketable debt, and this is indeed a significant milestone for Canadians.

Finally, because of the country's better fiscal situation and because of the improvement in our current account, Canada's overall dependence on foreign debt has been reduced. This is important because it means that more of the money earned in Canada is staying in Canada, creating new jobs, and it is also an important component in the battle to have Canadian interest rates reflect the fundamentals of the Canadian economy, in particular the fact that we have become a low-inflation country and intend to remain so.

[Translation]

Two and a half years ago, short-term interest rates in Canada were almost two and a half percentage points higher than those in the U.S. They are now almost two percentage points lower than American rates. More significant still is the relative improvement in our long-term rates. The fact is that, since last February, Canadian ten-year bond rates have been consistently lower than those in the U.S. This is unprecedented in our post-war history.

[English]

Our interest rates will be affected by many factors. Domestic conditions can change and many global influences are beyond the control of even the largest economies. For this reason, our commitment is to maintain and strengthen still further our economic framework so as to cushion the impact of interest rate shocks. For instance, from the beginning our objective was to increase the amount of longer-term fixed-rate debt versus shorter-term. The reason was clear: to reduce our vulnerability to unexpected changes in interest rates. Our specific goal was to increase the share of such longer-term debt to 65% of the total. Mr. Chairman, we have now reached that goal, and this is far from trivial.

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For example, two years ago a one percentage point increase in interest rates would have cost us $1.8 billion the first year alone. Today such an increase would cost us $1 billion, $800 million less, and the protection this provides us is significant.

Clearly, all of this is progress, but the more important question for Canadians is not how much better the books are, it's whether this improvement is beginning to be reflected in their own lives. The answer, I believe, is yes, very much so. Lower deficits and lower interest rates are now having a powerful and positive impact on our lives and on the Canadian economy. Five-year mortgage rates today are at their lowest level in decades. Consumer confidence is at its highest level in more than eight years. Business confidence is at record levels. The sale of consumer goods is strong. Housing resales have rebounded. Business investment has surged. In the second quarter of this year the economy grew at an annual rate of almost 5%, and as a result the pace of job creation is accelerating dramatically.

Since the beginning of this year 279,000 net new jobs have been created, the vast majority of these full-time and all in the private sector. What is also important to note is that in the last four months we have seen the biggest improvement in youth employment since 1990—some 63,000 jobs.

Looking ahead, economists now say that Canada's growth over the next two years will be at its strongest level in decades. Indeed, they predict that we as a nation will have the strongest back-to-back growth of any G-7 country—stronger than Japan, stronger than Germany, stronger than the United States.

[Translation]

Returning to the deficit, the numbers for the first five months of this year have been very encouraging. Detailed projections will be provided in the February budget when we will be closer to the year-end.

However, as was announced by the Prime Minister, we can now confirm that we will eliminate the deficit by no later than next year, 1998-99. This will represent the first time the federal government's books have been balanced since 1969-70.

[English]

As was announced by the Prime Minister, the deficit will be eliminated by no later than next year, 1998-99. This will represent the first time that the federal government's books have been balanced since 1969-70.

It is clear, Chairman, that the country is now on the verge of a new era and, clearly, of a new debate. This will be a healthier debate than the one required at the beginning of the last mandate, but it will be no less challenging and certainly no less important. For that reason, we owe it to Canadians to keep our feet on the ground. Yes, we must debate the use to which the fiscal dividend will be put, but we must as well maintain a realistic perspective.

First, the books are not yet in balance. They remain to be balanced. Second, the dividend when it arrives will be small, and it will grow slowly in the first few years. There will not be any instant windfall. Because of this, our commitment to prudence must not change. The reason is clear. For years—we remember it well—our country suffered from the practice of governments routinely failing to be cautious and, in so doing, causing confidence in our finances to falter. From the outset in 1993 we were determined to break that pattern, and we have.

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We have always said that our deficit reduction targets would not be the most we would do but the least we could do. We know that while private economists and forecasters can play the odds in predicting the future, government should not. As a result, we've always been more prudent than the consensus forecast of the private sector, and the pay-off has been clear: credibility restored, confidence regained. That has been our purpose, and it will continue to be our practice.

Therefore, our core guidelines for financial management in the future will be as follows: first, we will continue to present two-year fiscal plans in our budget; second, these plans will be based, as before, on prudent economic assumptions; third, we will continue to build into our financial plans a buffer, a contingency reserve to handle unforeseen circumstances. Until now, when that reserve has not been needed, it has gone to reduce the deficit. In the future, when not needed, it will go to reduce the debt.

Let me now address the components of the debate itself. The potential use of the future fiscal dividend is cast in terms of three options: one is to spend it; another is to use it to reduce debt; another is to use it to reduce taxes.

On the first option, spending, it is evident that the country is approaching the point where more forceful, responsible investment in the future is desirable and possible. However, that being said, some seem to believe that now that the books are near to being balanced, it is time to set frugality and discipline aside; it is time to turn on the taps; it is time to start spending as if there were no tomorrow. That's not the way it's going to be. The old ways are over. The old days are gone. Mr. Chairman, this government has cut up its credit card.

Responsible financial management is not a fad or a phase. It is a permanent feature of a successful society.

[Translation]

This is not simply a question of budgets and their size. It is a question also of what government does and how it does it. Government must never again lapse into the old pattern of not being able to chose between priorities, of always believing it could act in isolation, of treading where others can do a much better job. Government must be focused. It must work in partnership. It must chose to act only where it can make a difference.

[English]

Let me repeat something I said a couple of years ago. Governments do not have money; they are given money. And it's money that comes from the hard-working pockets...from the pockets of hard-working Canadians—actually, their pockets may be hard-working too. But it's money, Mr. Chairman, that Canadians have worked terribly hard for, from coast to coast to coast. These are Canadians who have been through a difficult period of adjustment and they do not want their efforts to be squandered. Because of this, as the Prime Minister said two weeks ago, we will never again allow the financial health of our country to get out of control.

Mr. Chairman, the era of overspending and chronic deficits is behind us forever. Let me be very clear. As a matter of principle, we believe that being able to present a balanced budget is a key and enduring component of a successful strategy for economic growth and jobs.

[Translation]

The second option being presented to Canadians involves the national debt. The fact is, Canada's debt burden remains very high. It is reflected in taxes that are higher than they otherwise would be—and services that are less than they otherwise could be. The most useful measure of our debt burden is to consider our debt in relation to the size of the economy that supports it.

• 1330

That measure is the debt to GDP ratio—what we owe in relation to what we produce. The lower the ration, the more manageable the debt.

In 1995-96, our debt to GDP ratio was 74 percent. In the year ending last March, the ratio—at 73.1 percent—recorded its first meaningful decline in more than 20 years.

[English]

Canada's debt-to-GDP ratio, at 73.1%, has declined appreciably for the first time in 20 years. However, it is still far too high.

As we look ahead, our commitment is to secure a permanent decline in the debt ratio. Our strategy will be continued strong fiscal responsibility: paying down debt on the one hand, focusing on economic growth on the other.

The third option being put to Canadians is to use the future fiscal dividend for tax reduction. The tax burden in Canada must be reduced. It will be reduced. Canadians have a right to expect that when their country's financial health is firmly secured, they can look forward to an easing of their tax burden, and I can assure them this will take place. But here again, we also owe it to Canadians to be realistic and straightforward.

Four years ago Canada was up against the financial wall. We have made an unprecedented comeback. However, no one should be surprised that, as I mentioned earlier, when the fiscal dividend emerges it will be small, at least in the initial years. Consequently, to implement a major tax reduction now would run the risk, at the first sign of an economic downturn, of plunging us back into deficit or else forcing crippling cuts to essential programs, and that would make no sense. Therefore our view is that until the dividend is large enough to support a meaningful reduction in the overall tax burden safely, the most responsible course is to bring in targeted tax relief where the need is greatest.

[Translation]

Indeed, in previous budgets, by virtue of our better-than- expected financial progress, we have already begun to provide targeted tax relief—through, for example, tax assistance for students, for persons with disabilities and for the children of working parents with low incomes.

We have also lowered employment insurance contribution rates every year since we came into office. In the short term, we will continue on this path. However, as soon as possible, we must go further and reduce the broader tax burden shouldered by all Canadians. And the priority in doing this will be to provide tax relief to low-and middle-income individuals and families.

[English]

This brings me to what I believe is a fundamental point in the presentation today. That is the need to lift the debate, which is now under way, out of its current narrow focus. There is a tendency on the part of some to conduct a debate over the use of the fiscal dividend, as if higher spending, debt reduction, or tax reduction are options to be considered only as ends in themselves, without reference to the nation's needs. Well, that is not what the debate should be about. The debate should be about national priorities, about how best to build a strong economy and a strong society, one of both opportunity and security.

[Translation]

We have already said we must reduce the debt burden. We have already said we must reduce the tax burden and we will. The government's 50-50 allocation formula will be a guideline to ensure this happens over the course of the mandate.

However, those who define the responsibility of government in terms of debt and tax reduction only, are in effect saying that targeted investments in health care or education, in innovation or the reduction of poverty are not critical to meeting the Canadian vision.

[English]

To rule out the need to invest strategically, whether through targeted tax measures or new spending aimed at core national needs, is not just bad social policy, it's bad economics. The question is to find the right balance. What we must do is ensure that the quantity of growth we all seek contributes to the quality of life Canadians deserve. This has been a priority we as a government have pursued right from the beginning.

• 1335

It stems from two fundamental propositions. The first relates to core values. Ours is a nation that believes in sharing the risks and the benefits of our common citizenship. It is a community that holds that there are certain fundamental rights more important than privilege or the pocketbook. It states that fairness and compassion are not secondary but are in fact the cornerstone of a civil society.

The second proposition stems from an understanding of what the infrastructure of a successful economy must include, and in our view programs such as health care, education or public pensions should not be seen as a nicety. They reflect our values. They are also an economic necessity, for they provide Canadians with a sense of security that allows them to participate in the economy with confidence.

Indeed, confidence in the programs on which all Canadians depend is more, not less, important in an era of profound economic change. Therefore the judgment as to investment, debt reduction or tax cuts must be borne and made with this in mind.

For example, our system of health care is one of the great assets we have as a nation. The principles it reflects of quality and access based on need and not wealth go to the heart of how we define ourselves as a country.

[Translation]

This is why, for example, we will introduce legislation increasing the cash floor of the Canada Health and Social Transfer to the provinces and territories from $11 billion to $12.5 billion. Another priority must be the provision of an adequate retirement income for Canada's seniors.

Our current retirement income system has worked well. However, new demographics and economic developments will soon put it under severe pressure. That is why action is called for now. This action is not related to the health of Canada's current finances. It is related to the long-term health of Canadian society.

[English]

It is an undeniable fact that the aging of our population, combined with slower rates of expansion of our labour force, threatens the long-term affordability of our public pensions. To not respond now to that reality would be to repeat the errors of the past. It would be unfair to young Canadians, who are entitled to have confidence that the system will be there for them when their times comes. To not respond now would be to pass on to future generations a great burden, and in our view this would be totally unacceptable. We have an obligation to act today to plan ahead, and that is what we are doing.

Legislation was tabled two weeks ago, following the agreement reached between the provinces and the federal government, that will put the Canada Pension Plan on a fair and sustainable financial footing. Later on, the seniors benefit will address the need to protect those seniors, the majority of whom are women, whose income throughout their lives was too low to ensure an adequate retirement. Finally, as quickly as circumstances permit, the tax assistance provided to those savings through RRSPs and RPPs will be improved.

Our reform of the retirement income system has but one purpose: economic security—to ensure by acting now that the seniors of tomorrow will have an adequate income when they retire, all the while assuring today's seniors that their pensions will be protected.

If the need to protect health care and the pension system are examples of how the debate over national priorities must be widened, then the responsibility of an economy to produce not simply growth but good jobs heightens the debate even more.

• 1340

[Translation]

Those who argue that smaller government is an end in itself do so in the belief that market forces alone are a sufficient judge of a nation's economic potential. We firmly believe in the free market. But we do not believe that a strong society and a strong economy will be maintained through benign neglect. It is here that the need to broaden the debate over the fiscal dividend beyond its current narrow focus becomes even more manifest.

[English]

For some time now our economy, like many others, has been going through a period of profound and accelerating change. It is change that is opening up vast new opportunities, new industries, new markets, new technologies, and new techniques. But so too it is change that has given rise to deep fears and anxieties. Canadians understand that we cannot erect walls to the world and that the pace of technological change cannot be brought to a halt. But they also worry that they or their children might well be left behind by forces over which they have no control.

A rising economic tide does not lift all boats. There are things the market cannot and will not do, and there are things government can and must do. The market alone will not provide the infrastructure that is necessary to make the forces of change work for us, not against us, and the market does not care for those who are left behind.

Filling those gaps is one of our central challenges. We must secure the kind of economic growth that brings good jobs. In short, our core economic priority must be to build an enduring foundation for employment in today's economy and in tomorrow's economy.

[Translation]

We know that there are no easy answers. But we also know key areas where we must act. One of these is to make accessible to the largest number of Canadians possible, the opportunity to acquire the skills and knowledge they need to succeed. The reasons are clear. Economic success is increasingly based not on raw natural resources—but rather on excellence in human resources. Ideas and entrepreneurship are, more than ever, the key to better incomes and a higher quality of life.

Nor is the trend towards higher skills restricted to high tech. Everyone, from mechanic to trucker or salesperson, is becoming a participant in the knowledge-based economy. There has been a steady rise in skill levels and requirement across all industries. No wonder, then, that four out of ten workers worrying that their job skills may become obsolete within a decade—or that one-third worry that their skills already are.

[English]

The skills and learning challenge is not only about producing the workers the economy demands. It is also about creating the kind of society that Canadians deserve.

Recent history demonstrates that while technological change enhances growth, it can also create great inequality. History also proves that education and training are the best tools we have to address those inequalities. They make the economy more inclusive, they widen the mainstream, they expand opportunities. We worry about the prospect of an increasing gap between the rich and the poor. Mr. Chairman, the acquisition of knowledge and skills is the greatest equalizer of all.

The fact is that education has become the quintessential infrastructure for everything else. Growth may be central to a strong economy, but knowledge and skills are central to growth. They are also central to a society that is fairer.

In the end, Mr. Chairman, what this is about is people. It's about giving them the opportunity to become the very best they can. It's about expanding their horizons and their hopes. It's about giving Canadians the capacity to make their dreams come true.

[Translation]

What we need in Canada is a new partnership. Education is a matter of provincial jurisdiction. This, we respect unequivocally. At the same time, we recognize that education is not an activity to be seen as restricted to the classroom, from ages 6 to 18, nine in the morning until three. It is a challenge to be met starting at birth, one that lasts a whole lifetime.

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That is why the private and voluntary sectors and all levels of government are key players. All must come together if we are to rise to the challenges of a rapidly changing world economy.

[English]

What does all this mean in concrete terms? It means governments must get their priorities right, and in turn those priorities must guide the use to which the fiscal dividend is put. Government has a responsibility to help as many Canadians as possible join the economic mainstream. Government has an obligation to reach out to those left behind. Quite simply, government has a responsibility to ensure our citizens not only survive in an evolving economy but are equipped to succeed.

First we must focus on early childhood, life's most critical stage, where the capacity to learn is developed. That is why the new partnership we are building with the provinces on behalf of Canada's children is so important. Our purpose is to put an end to the situation where the price parents pay for rejoining the workforce is to see that the circumstances of their children actually worsen through the loss of needed services provided them under social assistance. Going to work should make people's lives better, not worse.

[Translation]

To this end, as announced in the 1997 budget, we provided $850 million in additional resources under the child tax benefit. And, as confirmed by the Prime Minister, we will work with the provinces to establish a timetable to increase that contribution by an additional $850 million.

[English]

Next, we must do everything we can to improve access to learning and retraining opportunities. This requires action on four fronts: first, encouraging savings towards education and training; second, providing financial assistance to those in school; third, helping students manage increased debt loads; and finally, providing incentives for life-long learning.

We've already begun to address these issues in previous budgets. For example, we've taken measures to make RESPs—registered education savings plans—more attractive and more flexible. We've increased tax assistance for a typical student by one-third, and we have taken steps to assist students who have difficulties in managing their debt burden. However, clearly there is much more that can and must be done. That is why the Prime Minister has announced that we will create a millennium scholarship endowment fund, an investment made possible by our better-than-anticipated financial performance. The fund will be operated completely at arm's length from the government. It will reward academic excellence and assist thousands of low- and moderate-income Canadians from coast to coast to coast each year. There can be no better investment in their future, or ours.

A second example of the use to which the fiscal dividend can be put is to seize the opportunities for Canadian industry to lead in the modern economy. If knowledge is one side of the coin, then the other side is innovation, helping to build the infrastructure of ideas and information on which growth and jobs depend.

The United States is enjoying an extraordinarily long period of strong economic growth, but without the kind of inflationary pressures economists would anticipate at this point of the economic cycle. There is no consensus on why this is happening. One view is that together with the impact of globalization, the application of technology is dramatically altering the traditional economic model. This may or may not be accurate; but one thing is for sure, and it is that countries that lead in new technologies and in their application will offer to their people the prospect of a much more positive economic future. This is not of academic interest only. Far from it. It means sustained improvement in incomes and sustained improvement in employment.

• 1350

[Translation]

Leadership in innovation is not something of relevance only to the few. It is essential to realize—an act upon the fact—that from agriculture to aquaculture, from mining to manufacturing, innovation has been, and will be, the foundation for the creation of new jobs. That is why, for instance, we created the Canada Foundation for Innovation—to provide world-class facilities at our hospitals and universities—facilities that will support world- class research and keep Canada's top-flight researchers here at home.

[English]

Knowledge-based growth offers the prospect of equalizing opportunities across the country. With communications causing distance to lose much of its meaning and with education and skills becoming the most important raw material of all, our goal must be nothing less than to change the economic culture of Canada to one of innovation. And what this means is that it is the synergy between the components of the strategy that has just been outlined that really counts.

On the one hand, a country with the very best learning culture in the world will fail if there are not the opportunities to develop and apply newfound skills in an innovative workplace. On the other hand, a country with the entrepreneurial infrastructure required to make it a world leader in innovation will not succeed unless the skills of its people are nurtured and developed with great care.

So what we seek and what we are determined to build as we contemplate the fiscal dividend is a society of both skills and innovation, a society where each reinforces the other, creating jobs, sustaining jobs, keeping faith with our commitment to safeguard the Canadian quality of life.

[Translation]

Our purpose must be to make Canada not simply a participant in the modern economy—but a leader, one in which Canadians have access to the greatest range of opportunities available. This has been our purpose from the beginning.

[English]

What is new today is not our agenda; it is the strength we as a country are now gaining to pursue it. Having spent the last decade paying for past consumption, we are now finally in a position to focus on investments for the future.

Let no one underestimate our commitment to move forward on this agenda. Canadians have not acted with determination on the deficit only to fall silent once the job is done. Indeed, our determination to lift the financial burden from the nation has been governed in no small way by the view that Canadians had to regain the ability they had lost to forge their own destiny.

It is for this reason that I stated at the beginning of these remarks that the debate as to how the fiscal dividend should be allocated should not be limited to dealing with new investment, with debt reduction, or with tax cuts only, as if they are ends in themselves. The decision should be made with the nation's priorities very much at the forefront of our consideration.

Those priorities, I would submit to you, are clear.

First, we must preserve and improve the valued programs on which all Canadians depend, such as our health care, our education and our pension systems.

Second, we must work together to enhance the learning and training opportunities available to all Canadians, focusing on accessibility and addressing the wide range of needs that begin in early childhood and extend through working life.

[Translation]

Third, we must foster and seize the opportunities to make Canada a leader in the modern knowledge-based economy. And finally, throughout, we must continue to act on a new ethic of partnership, anchored in a strong sense of the national interest.

[English]

Well, Mr. Chairman, this brings me to the end of the presentation, so let me simply summarize as follows.

Some see the discussion ahead as a financial debate only. It isn't. It's a debate about values.

Next, we have set out our priorities. Now, some may feel that these priorities are at odds with giving Canada the strongest balance sheet and the lowest tax rates possible. Well, let me tell you they are wrong. A strong economy is dependent on a strong society.

• 1355

No country is better positioned than Canada. Some have great natural resources. Others have impressive technological capacity. Still others have strong human resources. We have all three. As well, we have our basic values: our recognition that fiscal health is not the end but the beginning of our march to a better life for all Canadians; our desire to reach out to those in need even as we reach forward to the future; our abiding belief that the pursuit of prosperity should not cause the principle of fairness to be set aside.

[Translation]

Some seem to see Canada as a little country that can't. We would suggest it is time to see ourselves as a great country that will.

[English]

Some seem to see Canada as the little country that can't. We would suggest it is time to see ourselves as a great country that will. Let nobody question our resolve. Let no one doubt that Canadians can rise to any challenge. Let no one doubt that Canada is at the dawn of its greatest age.

Thank you.

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

Now we will move to the question-and-answer session. It will be a five-minute round and we will begin with Mr. Manning.

Mr. Preston Manning (Calgary Southwest, Ref.): Thank you, Mr. Chairman. I would like to commend the minister and yourself and the committee for holding the first of these sessions in British Columbia. We see a number of British Columbia MPs here. I think they are conscious that in the 21st century B.C. is going to be the second-largest province in the country, Pacific rim trade is double Atlantic rim trade, and B.C. could be the eighth tiger of the Pacific if its tax levels were competitive. I think it deserves the recognition you're giving to it. We just hope it will continue.

I would like to preface my questions to the minister with two brief observations. First, the minister has highlighted the bright spots in the performance of the economy and the financial performance of the government, particularly deficit reduction, interest rate levels, and stronger growth. We're also encouraged by these things. We think it's predictable that the minister would dwell on them, and he's certainly entitled to do so. But second, our task, since we are the official opposition, is to identify the weaknesses and the failures in the performance of the economy and the financial performance of the government and to demand answers to the questions the minister's statement failed to address adequately.

I would like to give the minister four questions. Maybe I can go through them all and he can respond in depth to one or generally to them all. I'm sure we'll be talking about these for months to come. All of these pertain to the social and economic well-being of Canadians. We agree that is the ultimate objective. Our questions are on how to get there.

The first is the debt question. You have a $590 billion federal debt, 25% of it held by non-residents, and it's the interest payments on that debt that are eating the heart out of the social programs. So where are the concrete targets, the strategies, and the specific measures for reducing the debt burden on Canadians and therefore stabilizing our capacity to fund social programs?

The second question is the jobs question. The truth is that the job creation level of the past year, the 280,000 jobs that have been created, is totally inadequate when you measure it against the needs: the needs of the 1.4 million unemployed, the 2 million to 3 million under-employed, and the 20% unemployed youth. So where is the new employment strategy? We see nothing in here other than more of the same. Where are the targets, the measures that will go beyond what the government has done in the past and provide more hope for jobs? We're looking for job creation rates that are double and triple what has been accomplished over the last number of months.

The third question is the tax question. The minister glossed over the fact that tax levels are simply too high. He said the federal government is in the best shape of any of the G-7 governments, but he failed to mention that the taxpayer is in the worst position of any of the taxpayers in the G-7. Our personal income tax levels alone are 56% higher than the average of our G-7 partners, and that's killings jobs, it's killing incentive, and it's killing dreams.

• 1400

So my third question is, where are the concrete targets, strategies and measures for tax relief?

We see in this document, as we saw in the Speech from the Throne.... The last 10 pages are essentially proposals for so-called strategic investments, which I know is the new Ottawa word for spending. Where are the 10 pages on tax relief measures or debt reduction measures or some of these other questions?

Then the last question, Mr. Chairman—and I'm conscious of using up my time—

The Chairman: Mr. Manning, the minister has 45 seconds to respond.

Mr. Preston Manning: Okay. This will give him lots to think about.

Fourth, once the deficit is controlled, the easy thing to do is to go back to spending and taxation, making them the number one priority. That's still what we see in the Speech from the Throne and what we see in this document. So my question is, where is the leadership that rejects spending and taxing as the highest priorities of the Government of Canada and makes debt reduction and tax relief, as means to job creation and social security, the number one priorities?

We'll welcome the answers from the minister.

Mr. Paul Martin: As I mentioned at the very beginning, I too am delighted to be here in British Columbia. I perhaps would point out to the leader of the Reform Party that in fact it was at a speech last year here in Vancouver, where they created the debt clock, that I found myself the first finance minister in an awfully long time, perhaps since they created the debt clock, to actually watch the clock being slowed down, and discussed with them very clearly the great anticipation, in coming out here, to watch that debt clock actually come to a halt.

I must say that when I listen to the questions of the Leader of the Opposition, I wonder if he in fact had written his questions prior to my remarks.

The fact of the matter is, of course, that in order to have debt reduction you must have a surplus. What has become very clear is that in fact, as a result of the track we are on, we will now have, for the first time in nearly two and a half decades, a surplus, and that in terms of marketable debt, as will be seen from the annual financial report, which was issued today, in the first five months of this year, although the number will fluctuate, we actually paid down $11 billion of marketable debt.

So I guess that the answer to your first question is, what we have done right from the beginning is that we would rather be judged on our results, not on our plans, and the fact is that our results show very clearly that we are in a position, and will continue, to pay down marketable debt.

I would correct the Leader of the Opposition: we do not have the worst tax record of the G-7. That's simply not—

Mr. Preston Manning: For personal income tax.

Mr. Paul Martin: No, that is not statistically correct.

In any event, I have stated at the same time that I believe our taxes ought to come down, and that we intend to bring them down. Again, the reason they will come down is as a result of the actions that we have been able to take in our first mandate and the actions that we will continue to take.

I am a bit surprised to see the Leader of the Opposition knock initiatives such as the tax benefits provided for students and for the physically disabled, or in fact the child tax benefit. I would have thought he would applaud that, but in any event, such are his own decisions.

In terms of job creation, the whole presentation, the whole thrust of everything we are doing is directed towards job creation. But what we are saying very clearly is that job creation as we head into the next century is going to be very different from job creation as it has occurred, really, over the second half. We do not want to repeat the mistakes that governments have made over the course of the last decade, in which what they did was to simply focus on the economy that had come before them and not look at the economy that was in front of them. Government has a positive role to play in educating Canadians, in providing research and development. That's what we have done, and that along with debt reduction and tax reduction is intelligent investment.

• 1405

The Chairman: Thank you, Minister.

We'll now move to Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Mr. Chairman, I hope you'll grant me a few extra minutes in view of the length of the intervention made by the leader of the official opposition.

Welcome to the finance committee, Minister. Don't take this personally, as we say back home, but do allow me to question the professional integrity of your team.

Never before have I seen such figures forecast concerning the deficit. I find this to be a mental aberration. For example, in March 1996, you were forecasting a $24.3 billion deficit which, at that time, was a praise worthy objective but during your 1997 budget, you were talking about $19 billion and finally you come in at under $10 billion.

I would like to remind you of the questions we were putting to you in the House of Commons last March about a deficit of some $10 billion. You almost called us twits, a bunch of incompetents, saying that we were just throwing figures into the air and now you show up with a figure that looks a lot like the forecast we were predicting. Between the March 1996 budget and today, Minister, you made a little forecasting error of some 63%.

There are two possibilities then: either you and your team are totally incompetent at forecasting, or you felt, in the run-up to the election campaign, that it was just inappropriate to demonstrate transparency and integrity in the debate on deficit forecasting so as to avoid any debate on the draconian budget cuts that you had imposed on the poorest people in society, the sick and unemployed.

Now here is my first question. Did you deliberately hide the true face of public finances a few weeks before the election was called in order to avoid any debate on the real state of public finances during the election campaign?

My second question concerns budget cuts. Mr. Minister, with what you are presenting to us, you make me think of an old saying, from Africa, I believe, that goes like this: the crocodile's wisdom lies in crying over those it eats. That is exactly what you are doing this morning, Mr. Minister.

You seem to be focusing with great compassion on those with the lowest income and on poor children. I would like to point out that over the last six years, the poverty rate among children has increased by nearly 35%. In 1995, about 20%, that is about 1,5 million children, were poor. You are in a large part responsible. Why?

It is because at the same time as you are announcing measures involving hundreds of millions of dollars a year to help people that you have totally lacked compassion for over the last few years, you are carrying on with your budget cuts, which will result, by the end of your mandate, in cuts totalling $42 billion in social programs, that is programs to assist poor children and their parents. We are told there are some 5 million poor people in Canada. The budget cuts also affect health services and students. All these cuts will add up to $42 billion by the end of the second liberal mandate.

With a few hundreds of millions of dollars a year, will you be able to help these people and cushion the $42 dollars in cumulative budget cuts? Is the minister telling us that he will carry on with his budget cutting and that everything he has indicated to us this morning about compassion for the lowest income Canadians is just for show? That is my second question.

The Hon. Paul Martin: Thank you, Mr. Loubier. It is unfortunate that, in debate or discussion around the table where we have very important issues to deal with, you should it necessary to make personal attacks instead of really debating the substance of the different opinions that we may have.

Is it because of a lack of substance? I will leave that to you. I would just like to say that I have the greatest admiration for the professional integrity of all public servants, whether in the Department of Finance or any other government level, provincial or federal.

• 1410

Secondly, if I had known that the deficit would be $8.9 billion, I can assure you that I would have announced it in the middle of the election campaign: this is not something to hide.

As for the difference between the $16 billion I was forecasting in May and the $9.6 dollars that eventually came out of the official statistics for the year, which take into account end- of-year adjustments, this is unheard of. This was unheard of, at least for a very long time, for adjustments to be positive and not negative. I was certainly not going to deny what has been happening for the last three to five years. I had said it very clearly: we will see what the results will be.

Why have these adjustments been positive and not negative? It is because the government has managed its affairs well, and I must congratulate my colleagues and the ministers of all the other departments who have tightened their belts and achieved these results.

Secondly, I am pleased that economic growth is so strong. We are not the only government to see such growth. The United States has considerably reduced its deficit and has also seen stronger economic growth than expected. The same thing happened in several provinces, not only at the federal level. We are, of course, extremely proud of the control we have had over spending.

I am also very pleased that you fully support our initiatives to help students and I hope you will continue to do so. As you know, we have just added $6 billion over five years to the transfers payments to the provinces for health and education. It is like paying a dividend. You also know that the Prime Minister has announced that during our mandate, an additional $850 million will be granted as a child tax benefit, because we really want to help those who cannot help themselves, namely the poor children of our country.

[English]

The Chairman: Thank you, Minister.

Now we'll—

[Translation]

Mr. Yvan Loubier: Earlier on, the leader of the opposition was given two additional minutes, where as I only had an extra 30 seconds. I would therefore like to continue asking my questions to the minister.

[English]

The Chairman: Mr. Loubier, order, please. Mr. Manning had eight minutes and four seconds. You had seven minutes and fifty-six seconds. I think it's close enough.

Mr. Riis.

Mr. Nelson Riis (Kamloops, NDP): Thank you very much, Mr. Chairman.

Mr. Minister, it's great to see you here in British Columbia, as everybody else is saying, recognizing us, appreciating British Columbia. It's something many of us have known for our lifetimes, but it's nice to see that you're here.

I'm trying to predict what the newspapers will be writing, and I think the financial pages are pretty clear. They will be happy with this, Mr. Minister. The money markets will be a lot happier. The bankers and bondholders you mentioned earlier will be happy.

You had a great line in your presentation about how the government has cut up its credit card. That's good news. But I couldn't help but wonder whether the reason we've been able to cut up the government's credit card is that we've asked others to buy new credit cards. I'm thinking of students. They're graduating now with an average debt load of $25,000 before they begin work. I know a scholarship fund is going to appear three years from now and it will help others, but I would like to hear you say something that will be good news to these people.

Secondly, I'll borrow a question from Mr. Manning. I'm not used to doing that, but he raises an excellent question about targets. I'm thinking today what the 1.4 million people who don't even have a job are going to feel about your comments, or what the 3 million people who are working part-time or at two or three jobs trying to provide for their family will think.

• 1415

I wonder why you wouldn't use this opportunity—very upbeat presentation, very good news economically and fiscally—to set targets to get those unemployment levels down, just like we set targets on almost everything else. As you say, we've met the targets—we've even surpassed them. Why not set targets for unemployment levels, say, for the two-year period so we can have something to shoot for and in two years we'll know how successful we've been, we'll have something whereby to measure the results?

Just a last question, Mr. Minister. We've won the deficit war, essentially. You've indicated that the bankers and bondholders were not the heroes. They benefited from this war. But the real heroes surely are those people today who have paid the ultimate price—they're paying a tremendously high price personally: the people on waiting lists to get into hospital for a hospital bed, the 1.5 million children living in poverty today, the jobless, the students with high debt loads, the 10,000 people a month who have to declare personal or business bankruptcy.... I could go on with this list.

The financial markets will be happy with your presentation, Mr. Minister. What good news could you tell the people who are the real heroes in this deficit war?

Specifically, I'm going to go back to the past month in Kamloops. I know that you know the city well, Mr. Minister. It's a small city. This past three weeks, 1,300 people had to rely on the food bank in Kamloops, and nearly 400 of them were children.

Please give us some good, encouraging news other than what you've said here so far.

Mr. Paul Martin: Thank you very much for your questions, Mr. Riis. You're right. I certainly know British Columbia very well. I've spent a lot of time here. And, yes, I know Kamloops very well. I've spent a lot of time there. In fact, I was there during the last election campaign.

Your questions are very well taken. In fact, it's the reason why this is such a good news budget for so many Canadians. I say this because deficit reduction was never for us an end in itself. Deficit reduction for us was simply the means to a greater end, and that was the ability to get that huge debt burden off young Canadians' backs, to reduce taxes, and to be able to invest in the things that are important to people.

That's why during the last election campaign the Prime Minister was able to announce that in fact he was going to increase the cash for transfers to the provinces from $11 billion to $12.5 billion. It is why, for example, he was able to announce that we are going to double the child tax benefit.

What we had to do was to get ourselves as a country in a position where we were not being dictated to by bankers and the market, but where we in fact were able to follow the needs of Canadians. We're in that position now, and that really is the good news.

What's important is in fact that we continue on that course, which is fiscal responsibility, so we will never get into trouble again but at the same time we'll be able to invest very much in the needs of Canadians.

On your question on setting targets for jobs, I've got to say that, to the best of my knowledge, the province of Saskatchewan, where there is an NDP government, doesn't do that. To the best of my knowledge, the province of British Columbia doesn't do it.

There's a reason why those governments don't. We're all concerned about jobs. In fact, through control of spending and through control of your margin of manoeuvre, you can basically bring a deficit down. I would hope very much that, together with the provinces and the private sector, we can make a great national effort towards bringing the deficit down, and then we might get ourselves to that position.

I'll just take the little bit of time that I have to really answer Mr. Riis' last question, because I very much agree with him. That question is on the whole question of students.

As we look into the kind of economy, the need for skills, the need for training, there is no doubt that in fact a focus on student debt, to focus on helping parents save for their student income.... We very much are at one with you on that. That's why in our last couple of budgets, even when we had a deficit, we put a lot into helping students, and we want to continue to do it. The Prime Minister's millennium fund, the scholarship fund, is a very tangible example of that kind of thrust, and I would very much look forward to working with you on that.

• 1420

The Chairman: Mr. Jones.

Mr. Jim Jones (Markham, PC): First of all I would like to congratulate the minister on almost reducing the deficit, and especially next year, in the 1997-98 budget. Before I came into government, one of the things I could never understand is why for 27 consecutive years governments spent more than they took in. I think that has to stop.

What I think you should also be proposing is...you said never, ever, are we going to use deficit financing again. I would like to see tabled, right behind that, a deficit financing amendment to make sure there can never, ever, be another deficit. How you got there, nobody really cares. We're there.

Also, the thing I don't understand, Mr. Minister, is that we're almost balancing the budget and then you want to spend on new programs. I think Canadians are fed up with being taxed. Instead of spending on new programs, if you want to spend on anything, I would say you should find your financing from existing programs. Cut back. That is what corporations have done. That is what companies have done in the private sector. They have not gone out and spent more when times have got a little better for them. I would like to see you get your new spending from existing programs.

Also, I have noticed in here there is no mention of a plan to reduce the debt. We're in this global economy. It's very competitive and the other countries in the world, especially the U.S. and the Far East, are going after us. They are being very competitive. Therefore we must get rid of the debt. We should have a debt-reduction plan. I would like to know what your plans are there. A debt-reduction plan...and any time you reduce the servicing costs, maybe you could use that servicing cost savings for new programs, but not spending new money.

So first of all I would like to know where you are sitting on an amendment for a balanced budget from here on in—every government must do that—and a debt-reduction plan so we can see some savings now and into the future. Also, we all know high taxes cost jobs. When are we going to see some tax relief?

Mr. Paul Martin: Thank you, Mr. Jones.

I'm sure you will indulge me, Mr. Chairman, because I've not had an opportunity to do this in the House of Commons, if I congratulate Mr. Jones on being named the finance critic for the Conservative Party.

I will deal with your questions somewhat in reverse order. I think if you take a look at what we have said about the contingency reserve, if you take a look at the Prime Minister's statement on the 50:50, if you take a look at the fact that the government very clearly intends to control its spending and intends to bring in tax relief, the plan for reduction of the debt is clearly there.

The first goal has to be to make sure the debt-to-GDP comes down on a constant basis. That debt-to-GDP ratio is in fact the best measure of a government's ability to handle its debt. We brought it down for the first time in an important way. We intend to maintain a constant decline.

You asked a question about why we should spend on new programs. It is because you have to have a balanced approach. If you look at the exchange I just had with Mr. Riis as an example, we both agree that the need to help students finance their education, the need to help universities build stronger, better faculties, is an essential part of the new economy. We have to recognize the market cannot do it all by itself. That is why we would be spending in those particular areas.

What I will do is perhaps just take more of my time to answer your first question, about why we would bring in legislation to deal with debt reduction. Perhaps I will do so by referring to the Reform program. They have made a similar suggestion.

• 1425

When we first took office, there were spending limits that the previous government, with which you have some connection, had put in place. One of the things that one found was that an awful lot of attention, once the bloom had left the rose, was on how you get around those limits. It really struck us as being not a very productive use of time to be spending a lot of time on trying to figure out accounting. It was a lot more important to get on with the job.

I've discussed this with people around the world, and this is a phenomenon to which, unfortunately, democratic governments often fall prey.

If you take a look at the Reform suggestion, as an example, which is a typical suggestion for these kinds of things, Reform has said that in the case of economic downturn—I can't remember the exact words, maybe strong economic downturn—that would be an exception. Let me tell you that as soon as you start putting in those kinds of exceptions, you have created a hole that you could drive an army of trucks through. What happens is governments spend their whole time trying to look for the way around it, rather than dealing with it.

What the New Zealanders have done is a much better thing. New Zealanders don't have the same kind of legislation. What they have done is what we have done, and that is they have said publicly, “This is what we're going to do”. Then public opinion holds government's feet to the fire and makes them do it.

In my view, Mr. Jones, that is a far more effective way of getting at it than forcing government into some kind of an accounting debate, which inevitably happens around the world.

Mr. Paul Szabo (Mississauga South, Lib.): Mr. Minister, I was encouraged by your statement about the important thing being not the numbers but, rather, the real effect on people's lives. I think that's an important reference point for us.

Yesterday, in the Globe and Mail, David Foot, the author of Boom, Bust, and Echo, talked a little bit about youth unemployment. He characterized our youth as being well positioned and well trained for our knowledge-based economy. But, as you very well know, Minister, our unemployment rate for youth, at just under 17%, is not very reflective of the true skill set, as it were, of our youth. In fact, university graduates have an unemployment rate of only 6.8%. High school graduates have an unemployment rate of some 15%, and the critical number is that high school drop-outs, those who have not achieved high school credentials, have an unemployment rate of some 23.8%. These, Mr. Minister, represent Canada's future poor, our poor in waiting.

It does raise a dilemma, as you know, Mr. Minister, because we're talking now about jurisdictional responsibilities, manpower training, and secondary education, which is a big issue for all Canadians.

I would like to ask you about this large group, who represent about 50% of our unemployed youth, who have opted out and have basically decided that they're going to sit on the curb and watch the parade go by. Have you received the kinds of assurances that you think you will need to enter into fiscal provincial co-operative arrangements to deal with Canada's poor in waiting?

Mr. Paul Martin: You've certainly put your finger on what really is the most difficult area and one of the most important areas on the whole question of employment that we have to deal with, Mr. Szabo.

It's as a result of that that in the last budget we brought in the new hires program, which said that it will not be necessary for some 900,000 small and medium-sized businesses to pay unemployment insurance premiums on new hires. We were essentially targeting that they would be hiring young people within the category you've just described.

At the same time, that is one of the reasons why we have put, for instance, a lot into areas such as tourism, which has the ability to provide jobs for people in that area. You will have noticed really in the last three budgets we made a very concentrated effort to help the tourism industry, which of course is one of the major industries in the world, precisely for the reasons you have just given.

• 1430

Now, that being said, again, you are very much on point. The first thing any government, whether it's the provincial government or the federal government, really has to do is to get as many as possible of those young people back to school. One of the real problems we face if we take a look is the number of people who are unemployed at the ages of 15 and 16 and 17 and who really ought to be back in school.

Essentially, yes, we have talked to the provincial governments about this, and we are certainly prepared to co-operate. This is primarily an area of provincial jurisdiction. But we really do not believe this is an area that should be left to any one segment of society, whether it's government, whether it's the private sector, or whether it's voluntary groups, community groups.

So much of the action in this country actually takes place in communities. Those are on the front lines. I think it's the responsibility of all the institutions of the state basically to help those communities help young people get back to school.

We are prepared, as a federal government, to the extent that we have the ability to do it through the tax act or in any way of co-operating...that is the kind of thing I was really talking about when I was making my overall remarks. If you look at the new economy and you look at the skill shift from this country to other countries, there is no doubt that helping young Canadians or those who have left school regain the skills or get the skills they are going to require is a major challenge.

The Chairman: Mr. Solberg.

Mr. Monte Solberg (Medicine Hat, Ref.): Thank you very much, Mr. Chairman, and Minister, thank you again for appearing before us.

I want to put the government's deficit victory in a bit of perspective. According to the government's own figures, if you add up the total of the increase in revenues and the decreases in the Canada health and social transfer, it accounts for about $28.7 billion, or about 87% of the decline in the deficit.

The point I'm making here is that Canadian taxpayers are the real heroes in this battle. They have borne the brunt of this thing. I think it's important that they be recognized, not just in words, Minister, but also in action.

One of the things to strike me is that the government talks a lot about needing to be compassionate towards people who are less well off by providing them benefits. I don't have a particular problem with that, but I should point out to the minister that at the same time as the minister is talking about that, this government has continued to allow, for instance, the non-indexation of income tax brackets. “Bracket creep”, which is not mentioned in the tax measures part of this economic statement, adds up to about $3.2 billion. It affects lowest-income Canadians the most.

The other thing not mentioned in here anywhere, although it's going to be the biggest tax hike in Canadian history, is the 73% increase in Canada Pension Plan premiums. It's a payroll tax. I point out that this tax will hurt young people especially, in two ways. It will hurt the most vulnerable people. One way is it will have a negative effect on the ability of the economy to create jobs. This is backed up by the department's own studies. Secondly, of course, young people will be putting in a dollar, but for every dollar they put in they will take 50¢ out of this plan.

To put the thing in perspective, we've had a speech from the minister on his ability to deal with the deficit, and that's fine, but I'm wondering why the government is so insistent on ignoring the punitive impact of these taxes, both the ones that are part of the government's present plan and the ones that are coming up, and what the government is going to do about it in the short term to ensure there is a positive social benefit for these people through the tax system.

Mr. Paul Martin: If you look at the government's numbers, the successful fight against the deficit has been waged because the government has cut its spending far more than any other G-7 country, but a 13% increase since we've taken office is very large. The $15 billion from a number of $120 billion is a significant number.

There is no doubt our revenues have gone up, and I outlined that in my remarks. Our revenues have gone up overwhelmingly, because economic activity in the country is much stronger and people have gone back to work, and when people go back to work they pay taxes; and that's the kind of thing we want to see happen.

• 1435

But let me deal with the member's last point, on the CPP premiums. Let's be pretty clear. The easiest thing in the world would have been for us to do what previous governments have done and simply sit back and do nothing; let the problem build up until the solution to the CPP problem would have been beyond anybody. It would have been the easiest thing in the world to do, but we didn't do it. We didn't do it because we felt it was not fair, to be quite honest, that my generation should continue to get the benefits of the CPP without paying a commensurate rate and our children and grandchildren would have to pay much higher.

As a result, we have brought in those reforms, and those reforms are going to make sure that, as was demonstrated by Canadians from the three coasts, overwhelmingly, in an unprecedented federal and provincial consultation that took place right across the country...they wanted to see the CPP protected. Why did they want to protect it? They wanted to because they knew the Canadian government stood behind it, so they were not going to have to worry about a market crash. They wanted to protect it because they knew if they were hurt in an automobile accident they would be protected. They wanted maternity benefits. I would remind the honourable member that it wasn't only the federal government but the provincial governments that wanted it.

Mr. Monte Solberg: B.C.?

Mr. Paul Martin: B.C. wanted to see the CPP protected. They just didn't want to have to deal with the problem.

B.C. and Saskatchewan wanted to see the CPP protected. The fact is that Alberta, Ontario, all those provinces the honourable member knows well, also wanted to protect the CPP, and they also signed on with this.

The real issue—and perhaps we should have a discussion here—is not the increase in the CPP premiums, which I admit is very substantial, but that if we had not done it that increase was going to be 140%. The chief actuary calculated it was going to have to go to 14%. That is what we have avoided. What we have done is to pay a bit more now, my generation, so as I look at the chairman, his generation won't have to pay quite so much.

I didn't have you in mind when I thought about it, Chairman.

That is what the issue is.

What the Reform Party has told us, and tells us now, is that there is a $600 billion liability. But how is Reform going to ensure existing Canadians are going to have their CPP guaranteed; existing people who are retired? What Reform has done, very clearly, is to say this is the plan going forward, but what they have done is to abandon all those Canadians who are currently receiving the CPP.

[Translation]

Mr. Yvan Loubier: Point of order, Mr. Chairman.

[English]

The Chairman: Mr. Loubier.

[Translation]

Mr. Yvan Loubier: I have been part of this consultation and economic update process for four years now, and this is the first time a fan club has been brought to this type of consultation. With all due respect for the supporters of the Reform Party, could they possibly keep quiet so that we can understand these most intelligent and interesting discussions between the participants and the Finance Minister and so that we can have a process that is respectful of parliamentarians and our audience?

[English]

The Chairman: Yes, I have great faith in the Canadian people to act accordingly, and I am sure the attitudes expressed till now will perhaps change.

We will now move to the next round, with the Bloc Québécois.

Mr. Preston Manning: Mr. Chairman, can we answer? The finance minister put a direct question to the official opposition about how it would save CPP. Could we clear that up right now?

The Chairman: There will be plenty of time to answer that question in another venue. Perhaps you would have had a chance to answer the question if people kept their questions short and to the point.

We'll now have to move to the Bloc Québécois, who have stated that Mr. Perron and Mr. Desrochers will be splitting the time.

[Translation]

Mr. Gilles-A. Perron (Saint-Eustache—Sainte-Thérèse, BQ): You are right, we will share our time. Thank you for the opportunity to speak to the Finance Minister.

• 1440

Mr. Minister, I am delighted to see that the cumulative cuts to social spending in provinces will be $42.4 billion instead of $48.4 billion. Instead of continuing to cut the social transfers to provinces, of digging into the unemployment insurance fund, why do you not honour your commitments? In 1995, you committed to reduce departmental spending by 19%, and it was only cut by 9%.

Mr. Minister, why do you not make a concerted effort to reduce waste in all federal departments, as the Auditor General tells you to do year after year?

You have the floor, and I expect a good answer.

The Honourable Paul Martin: I think you are asking me whether we are going to reach the objective we had set for program review. The answer is yes. Bear in mind that the program review is ongoing. We are at the half-way point and some departments are ahead of schedule while others are behind. However, we are pretty much where we should be, and I can assure you that at the end of the program review, we will have reached our objective.

Mr. Gilles-A. Perron: As for the second part of my question, what do you have to say about tackling waste?

The Honourable Paul Martin: Our fight continues. I think federal, provincial and municipal governments must always keep struggling. The battle is never won, but we soldier on. We try to eliminate waste throughout the year. In fact, you are right in saying that it is a matter that a committee such as this one or perhaps even the Standing Committee on Public Accounts should address. Governments must continue to eliminate waste.

Mr. Odina Desrochers (Lotbinière, BQ): Mr. Minister, the initiatives you are announcing today show once again that your government wants to meddle in areas of provincial jurisdiction. The Liberals have made significant cuts to the provinces over the past few years, which hindered their ability to meet the needs of our youths.

Are you telling us today that you will continue to deprive the provinces of considerable sums of money so that you can then be perceived as a saviour by spreading thin millions of dollars throughout the provinces?

The Hon. Paul Martin: Not at all, Mr. Desrochers. There is no meddling in provincial jurisdictions. For example, the federal government has always been involved in research and development and has always played a leadership role in student aid, for instance. The federal government has always managed a student aid program.

You were not there during our last mandate, but I remember that the Bloc Québécois had asked us to increase our student aid. So we certainly have no intention whatsoever of meddling in areas that are strictly of provincial jurisdiction. However, we want to work in partnership with them, because there are areas where that is possible, such as research and development, student aid and tax credits. It is a huge problem. How do we provide training for our youths? How can we guarantee them a future?

[English]

The Chairman: We will now move to Mrs. Redman.

Ms. Karen Redman (Kitchener Centre, Lib.): Among my constituents in Kitchener Centre, there's a great deal of angst as they look at the institutions, specifically health care and education. The Ontario provincial government is expending a lot of rhetoric in placing the blame for that restructuring at the feet of this federal government. I would like to know how you'd respond to the provincial charge that our success with the deficit has largely been at their expense.

Mr. Paul Martin: The first thing is that the Prime Minister announced during the election campaign that we would be putting $1.5 billion back into health care and education in the provinces. It will be very interesting to watch individual provinces—Ontario is an example—to see if in fact they will take that money and put it back into the health care or education systems.

• 1445

At the same time, the provinces, as a result of the federal government getting its fiscal act together, received over $2 billion in lower interest rates. Ontario has received almost a quarter of that $500 million, which is money it can put back into health care and education. As has been discussed around this table, we have also put money back into helping students, which means that provincial governments have money they can put into education and elsewhere.

One can go through quite a long list of what the federal government has done, but I think the basic issue is the political choices that have been made by individual provinces. The fact of the matter is that the reduction in transfers to the province of Ontario was about $1.2 billion. The reduction in taxes that the provincial government in Ontario is bringing in is $4.9 billion. So when you take a look at what is happening to health care and the education system of Ontario, that $4.9 billion is the reason they are doing it.

I'm not arguing. If Ontario has decided to do it, that is its political choice, but understand that this political choice is leading to what is happening in health care and education in Ontario. They should be prepared to defend their political choice and not really look for some kind of a scapegoat.

The Chairman: Mr. McWhinney.

Mr. Ted McWhinney (Vancouver Quadra, Lib.): Mr. Minister, you have stressed the government's commitment to supporting advanced research in science and technology in the new fields in medicine, pharmacology, and elsewhere as a condition of our industrial growth in the next century and our competitive advantage abroad, and you have linked the issue also of aid to students and researchers. Do you anticipate any need for special constitutional accommodations with the provinces because of that federal initiative?

Mr. Paul Martin: No, we don't, Mr. McWhinney. The fact is that the Foundation for Innovation, the research and development foundation, is a stand-alone, arm's-length institution—arm's length from government—with an independent board of directors and the capacity to make any of its decisions totally independently from government.

The scholarship fund will be an arm's-length fund operating on its own. What the federal government has done is to put in place two institutions that are capable of working quite independently of government, so there will not be any requirement for the kind of measure you have talked about.

We will be discussing extensively the scholarship fund with the provinces. I had extensive discussions in terms of the Foundation for Innovation with the provinces. A number of the provinces were very much on side, even before it was announced, i.e. your own province as an example.

The Chairman: Mr. Gallaway.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Thank you, Mr. Chairman.

Mr. Minister, I have two short questions. One has to do with your general statement. You said government must choose to act only when it can make a difference. I am mindful of the fact that last week the Auditor General was critical of certain programs of the federal government, namely TAGS. My question is, today, if you were confronted with the same scenario as exists on the east coast, would you apply a different test in terms of whether you would decide to proceed with that? Would there be a more empirical test to determine that in fact the program as foreseen would have the desired effect?

Secondly, we are hearing comments this morning about accelerating the rate of job creation. There are a number of economists in this country who suggest that to get below 8% unemployment one must be prepared to see a higher inflation rate. If in fact those people are correct about getting below that 8% ceiling, are you prepared to let up on the inflation rate, or are you prepared to stand hard and fast on that?

Mr. Paul Martin: Mr. Gallaway, the statement you have picked up is quite an important one, that governments should act where they can make a difference. Governments should not try to be all things to all people. One of the reasons governments got themselves into a lot of difficulties was because they used a shotgun instead of a rifle, where they could really have an effect.

• 1450

If you take a look at the whole question of the fishery in Atlantic Canada, that is very clearly an area where adjustment policies by government are important. The fact is that a natural calamity befell.... I mean the disappearance of the fish. You had communities, you had people, you had whole industries built up on that. It is the role of government to step in to help people adjust, whether the problem that has arisen is one of long-term duration, such as what is happening in the fishery, or it's a short-term disaster, which occurred, as occurred, for instance, in Manitoba or in the Saguenay. The responsibility of government is effectively to galvanize the people of the country as a whole to help any particular region that has had a problem.

On your second question, dealing with the NAIRU.... I do this, Chairman, knowing the officials of the Department of Finance are sitting behind me and not all of them are in agreement with me. But if I could just explain, although I know how members of this committee understand it, there is a theory that essentially says there is a point to which your unemployment level will drop and where inflation will begin to accelerate. I happen to believe that is true, and I think it is of great theoretical interest. I think it is of no practical interest, because the fact is that nobody knows what that number is. What we have just seen in the United States is that they thought the NAIRU was about 6%, and they kept pushing it down, pushing it down, below 5%, to just slightly under 5%, and inflation did not take off.

So it's the kind of thing I would be prepared to discuss with economists at great length, but from the point of view of basing government policy on it, well, no. Unless you can name a number, it really doesn't bear further scrutiny.

The Chairman: Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): Thank you.

Minister, on page 9 you clearly acknowledge that the tax burden in Canada must be reduced. I'm sure residents in Burlington and right across this country are asking why not a 1% or 2% tax cut now, why not a GST tax cut now, or why not put some of that dividend into alleviating the pressure on the CPP? I wonder, Minister, why there is not a broad-based tax cut now. It's hard for me to say.

Mr. Paul Martin: We would very much like to bring one in, but the fact of the matter is that we still have a deficit and we simply do not have the room to manoeuvre. The one thing we do not want to do is to bring in a tax cut and then, in the case of any kind of an economic downturn, find ourselves back in a deficit. We do not want to go back into deficit. As a result of that, it strikes us that by far the most intelligent course of action is to bring in specific tax cuts, targeted to specific needs, until such time as we have brought in a margin of manoeuvre large enough to enable us to pay for that large-scale tax cut.

I think it's important to make a further point. We have a debt-to-GDP ratio of 73%. We've just brought it down. On average the debt-to-GDP ratio of the provinces is somewhere around 30%. Out of every dollar we receive as a federal government, 32¢—when we took office I think it was 35¢—goes to pay interest. The average for the provinces is 14%. The fact is that for us to take a chance on a large-scale tax cut is much riskier. Given that it is the federal government that sets the economic tone for the country, it is the federal government that sets the interest rates for the country, it would really be running a great risk with Canadians' lives if we were to bring in a premature, broad-based tax cut. But let me tell you, I would very much want to be the finance minister who does it when the time comes.

The Chairman: Mr. Harris.

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

Mr. Martin, having listened to you give your report, I think one thing is clear, and it's that your writers and your spin doctors deserve a lot of credit. They have in fact cleverly disguised the fact that you have achieved your deficit-cutting targets on the backs of Canadian workers and Canadian business, as well as some dramatic cuts to the Canadian health and social transfer payments.

• 1455

In fact, to use one of your favourite terms, the personal tax levels have increased since 1993. The corporate tax levels have increased since 1993, to both large business and small business. The payroll taxes have increased since 1993 and are destined to go through the roof. As well, the fees and licences and regulatory costs, which all come as a direct cost to Canadians, have all increased.

So when you talked about increased revenue from your tax base, I think you very cleverly missed using the term increased tax levels that have added so much to that increased tax revenue.

I suppose that it wouldn't take a rocket scientist to achieve the numbers that you have in your deficit cutting if they in fact had a magic tax handle that they could pull at will whenever they wanted to wrench more tax dollars out of Canadian workers and Canadian business. That, Mr. Martin, is clearly what your fiscal policies have done.

Taxes kill jobs. Your own financial people have testified to that on more than one occasion, and this gets me to my question.

British Columbia sits, and has sat, in a position of becoming a powerful force in Pacific rim business. As a matter of fact, it has been described as having the potential of being the eighth tiger in the Pacific rim economy.

The fact is that the tax levels that have been imposed on British Columbia business and British Columbia workers and the costs of manufacturing and transportation have been very detrimental to B.C.'s taking advantage of the opportunities that exist for us in the Pacific rim business.

Why has your government basically disregarded the opportunity that B.C. has? Why have you increased taxes to such levels that they are basically making us uncompetitive and unable to take advantage of this tremendous opportunity that exists for our province?

Mr. Paul Martin: Let me just go through the various points.

First of all, in terms of payroll taxes, with respect, your numbers are not correct. The payroll tax that you are referring to, of course, is the EI premiums. The fact is—

Mr. Dick Harris: CPP as well.

Mr. Paul Martin: You basically said that they had gone up. The CPP premiums are projected to go up, but, as you know, they have not done so yet.

Let's take a look at the one payroll that is out there, the EI premiums. When we took office, those premiums were going to $3.30. We held that to $3.07. Then we brought it down to $3. Then we brought it down to $2.90. Then we have announced that we're going to bring it down to $2.80. The fact of the matter is that in every single year since we have taken office, the payroll tax that is in the federal government domain has come down.

Incidentally, in every single year prior to our taking office, that payroll tax went up.

The second thing is that overwhelmingly—and the numbers bear this out—the government's revenues have gone up because economic activity has increased. That is simply a fact.

There is one other thing. If you also take a look at the numbers, you will see very clearly that the federal government could cut itself first, before it cut the provinces, and could cut itself hardest. That is a fact. But I'll tell you something that is really a bit problematic in what you are saying, and that is the great joy that some members of the Reform Party seem to take in government cuts.

I didn't want to make those cuts. Nobody wanted to make those cuts. People are hurt when governments cut back on their spending, and I am glad that we were able to solve this deficit problem to the extent that we have with as little cuts as we have, despite the fact that they have been very, very severe.

The biggest problem that I have with Reform is the seeming joy that is taken in slashing and burning. It's just wrong.

• 1500

On your last point, your point about why B.C. taxes are so high, all I can tell you is I think you're asking the wrong finance minister.

The Chairman: Mr. Iftody.

Mr. David Iftody (Provencher, Lib.): Thank you for that presentation, Mr. Martin.

I want to pick up a bit on the discussion of taxes, Paul. Of course there is the problematic—and you've alluded to it and spoken to it; the Reform Party has talked about it—the relationship to the gross domestic product and the level of debt Canada is carrying in comparison with other countries are still high. This is shackling our ability to free up other kinds of investments and expenditures, and I think it's prudent in terms of the government's overall objective to continue to work toward lowering that accumulated debt.

But on the tax-cut question, I found it quite interesting in reading some of the polling done by your department and reported in the papers, other polling groups, that Canadians are studying these questions carefully, Mr. Minister. They want to have a look at a balance among tax cuts, expenditures on health care and education, and of course, in looking to the long term, reducing our overall debt.

One of the things I would like to focus on, and particularly for the province of Manitoba and rural Canadians, is the fact that 80% of the jobs created in the last four years, the jobs we talk about as a government, have been created by small and medium-sized business, in particular those companies with four or five, maybe half a dozen employees. If that is the case, perhaps one of the things we can do in these consultations is start to look very closely in a strategic and selective manner at some incentives and tax cuts for small business. Could you comment on that just briefly?

Mr. Paul Martin: I think that's an excellent initiative. The chairman indicated that this was going to be the most extensive set of finance committee hearings ever held by a finance committee, and I would really hope that happens and the very questions you've put come to the fore.

There's no doubt about the importance of small and medium-sized business in creating jobs. One of the things we would like to know about, for instance, is the new hires programs that we brought in with employment insurance. Is that a good idea? Could we bring in modifications to it? The Prime Minister...the last Team Canada mission was one that concentrated on small and medium-sized business and whether there are things we could do in that way, because there's no doubt that when your economy is roughly 40% exports it's very important that your small and medium-sized business be a major part of that.

So I think the answer to your question is as follows. Employment is the number one priority. Small and medium-sized businesses are major employers. In that context youth employment is a major area any government must attack. I can tell you, if as a result of the consultation process you're going through you're able to come up with policies that will enable us really to build on that, we as a government would be very interested in them; very much so.

The Chairman: Mr. Pagtakhan.

Mr. Rey D. Pagtakhan (Winnipeg North—St. Paul, Lib.): Thank you, Mr. Chairman. I too would like to congratulate the Minister of Finance.

Mr. Minister, what would you advise the committee as we travel around the country as to when the contingency reserve fund is deemed no longer needed? What would be the guidelines that should guide the government in defining that it is not needed any more in terms of timeframe and criteria?

The second question is this. To me as well a balanced approach is the right approach in life. I am reminded of a distinguished colleague who says that a bird has two wings, the left and the right, and if the bird uses only one or the other it does not fly as effectively, but if you use both wings the bird flies in a balanced way. What set of data do you have that makes you convinced that indeed your confidence that Canadians share our balanced approach is indeed the right approach?

• 1505

Mr. Paul Martin: As far as the contingency reserve is concerned, I suspect that the best way you might get at that as the consultation process goes on is to talk about the debt-to-GDP ratio and levels. While we are clearly on the threshold of solving the deficit problem, we have a very high national debt. That debt-to-GDP ratio is obviously something we're going to have to watch.

As long as the debt-to-GDP ratio is substantially higher than the average of those of the other G-7 countries, as an example, we are going to require a contingency reserve, because we simply cannot afford, in our projections going ahead, to be wrong.

So you might want to get into discussions of the debt-to-GDP ratio, but there is no doubt that it has to come down. It has to come down substantially before any government can give up on the contingency reserve.

On your second question, about what other support we have for the balanced approach that we are in the process of enunciating, one example I can give you where there was extensive consultation was of course the Alberta summit.

Actually, David, you and I have talked about this.

Rey, the Alberta summit in fact brought together all segments of Alberta's society to deal with that very question. What the summit essentially confirmed is the kind of approach that we have put before the committee today and the one we have really been pursuing in our recent budgets.

The Chairman: Thank you, Minister.

Now we will move to a one-minute round.

Mr. Manning.

Mr. Preston Manning: I have one short question. The minister, in referring to the new hires program, for example, concedes that if you reduce—in that case, eliminate—payroll tax, it helps create jobs. That is what you are doing in that program. Why is it that the minister concedes that cutting a tax there creates jobs but says that general tax relief is not a mechanism for job creation? How can he be consistent?

Mr. Paul Martin: Mr. Manning, that is not the point. We want to cut taxes very much. Let us just take a look at the situation.

There is no difference between us as to our desire to cut taxes. The question we ask is, what is the cost of that?

To be quite honest, if you will take a look at your own program, the fact is, as an example, you were prepared to cut equalization by $3 billion in order to pay for that tax cut. We won't do that. You have said that you—

Mr. Preston Manning: You have cut it already.

Mr. Paul Martin: No, the fact is we have not cut equalization. Equalization is a formula—Mr. Manning, you know that—that basically operates.

You would cut equalization by $3 billion to pay for a tax cut. We won't. You have said quite clearly that you will cut the Canadian health and social transfer by $3.5 billion for a four-year period before you will put any more money back into it to pay for your tax cut. Mr. Manning, we simply won't do that. I don't think Canadians want to see those programs cut in order to pay for a tax reduction.

Mr. Preston Manning: The question, Minister, is simply—

The Chairman: Mr. Manning, you have had your.... We will move....

It is very important to maintain order here.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier: Mr. Minister, you said earlier that you will continue with the cuts announced in the 1996 budget, cuts to social programs that will total $42 billion by the end of your second mandate. At the same time, you announced a few initiatives in those areas where you had drastically cut billions of dollars and you plan to continue cutting over the next few years, especially in education, health and social assistance.

Would it not be better to have a real debate in the coming months on the second part of your plan, which is to get our financial house in order, and especially on how to use the budget surplus? I think there could be a real public debate on the real issues, on what you have done, what you plan to do and the token funding in areas that are exclusively of provincial jurisdiction.

The Hon. Paul Martin: Mr. Loubier, I do hope that you will hold that debate during your national consultations. As far as we are concerned, we are perfectly willing to hold that debate in the House. In fact, I am sure that when the time comes to table the budget, that is exactly what will happen. The answer to your question is yes.

• 1510

Mr. Loubier, I just want to say one thing to you. You know very well that the federal government cuts less in its transfers to the provinces than the provinces' cuts in their transfers to municipalities. So I hope you will stand up for the municipalities when they confront their provincial government.

[English]

The Chairman: Mr. Riis.

Mr. Nelson Riis: Minister, much of your presentation and the discussion on the table has focused on education, training, and the importance of that for the knowledge-based economy of the next century. Mr. Szabo had some empirical evidence of the value of education in the future. All of us would agree.

I'm going to issue a challenge, in a sense. I don't know if you actually want to be the leader of the party one day, or run for prime minister, but I can probably guarantee you a good shot at it if you respond to this question in the right way.

Education is important. There is no question about that. Three years from now there is going to be a scholarship program to assist students. That's a positive step—three years from now. Why don't we get really serious about post-secondary education, education at the college, technical, university level, and do what a lot of other countries do, recognizing it costs a lot of money to attend, in terms of living, books, transportation, and so on? Why not say as a federal government we're prepared to work with the provinces to do away with tuition fees, as other countries do now?

Mr. Paul Martin: I don't know what the provincial reaction would be to that particular suggestion. As you know, the costs of education have risen substantially, and whether the provinces would find themselves in a position to do that I think would have to be decided by them.

I can tell you that from our point of view to use surpluses as they develop, in addition to reducing debt and in addition to cutting taxes, to focus them very heavily on the new economy and on educating young Canadians, getting people back to work, as I think I indicated in my remarks, is certainly a priority; very, very much so. Whether the particular suggestion you brought forth, Mr. Riis, is one that would work remains to be seen, but I can assure you we are prepared to sit down with the provinces and essentially work in the kind of partnership you have just described, one that would enable all levels of government effectively to concentrate on how we make ourselves the most progressive society in the next century.

The Chairman: Mr. Jones.

Mr. Jim Jones: Thank you, Mr. Chairman.

Mr. Minister, we all recognize that the UI fund generates a surplus of $4 billion or $5 billion or $6 billion a year. Also, the new proposed legislation for the Canada Pension Plan, once implemented over the next six years, is going to drain the economy by $11 billion. Don't you think it's not really ethical to take a surplus of the UI and put it in the general revenue fund to offset your deficit, versus helping use it for the Canada Pension Plan fund to defray some of those costs? Both of these taxes are a payroll tax, and in the end you are going to cost more jobs than you are going to save.

Mr. Paul Martin: Mr. Jones, I'm sure over the course of the next four years we're going to have very many interesting debates. You were not part of the previous House and the previous government, but it must be a terrible thing to have to bear the burden of what that government did. You know what the previous government's record was with EI premiums; and it wasn't, by the way, only the previous Tory government. I wish previous governments had dealt with the CPP earlier. But they didn't, and the reason we find ourselves in the pickle we are in now is that we had to deal with it, in all morality and good responsibility towards young Canadians.

You also know the CPP premiums do not come into the government's coffers. The CPP premiums go into a separate fund, which is going to be invested at arm's length by professional money managers. It is not part of the government's consolidated revenues.

• 1515

On the other hand, the EI premiums are part of the government's consolidated revenues. It happened in 1986 as the result of a decision of the Auditor General, and that is a reality with which we simply have to deal.

But if you take a look at what's happened over the last three to four years, we have brought those EI premiums down as much as we possibly can, and we will continue to do so. But the problem is that there is a certain arithmetic reality out there that we have to deal with.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Mr. Minister, welcome to Vancouver.

I want to congratulate you for your good work in reducing the deficit, and also in creating jobs.

In my riding, Vancouver Kingsway, we have a great deal of concern, especially about youth employment. I know that we do offer special grants, and also programs, especially related to crime prevention. I wonder if you can suggest if there is any way we could involve the young people in community activities, partially as training and also partially involving crime prevention.

I have a second question. As you know, Vancouver attracts a lot of foreign investment. I know that you have been very sensitive or conscious about such investment. It could be a great force to build our Canadian economy. I'd like to know if you have any suggestions to encourage more investment.

Mr. Paul Martin: Again, certainly in terms of the investment, when you take a look at all of the G-7 countries we will have done the most in terms of deficit reduction. We are very clearly on a path of steady downward movement in the debt-to-GDP ratio. In other words, we're going to get the debt under control. As a result of this, we're going to be able to reduce taxes, we're going to be able to put money in education, a productive workforce. Clearly, I think there are very few countries that are as well positioned as Canada is in terms of foreign investment.

In terms of your first question, you're dead-on. Community involvement is where the action takes place. That's why in fact the whole voluntary sector is an essential part of any country's progress, whether it be the development of a social economy, taking care of an aging population, or taking care of youth, as you've just mentioned. The fact of the matter is that action in this country takes place in the community, and it is a responsibility of governments at all levels to make sure that communities have the tools to do the job that you've just described.

Mr. John McKay (Scarborough East, Lib.): Mr. Minister, thank you for your clear and unequivocal commitment to debt reduction. I think that's good news for all Canadians.

I'm more interested in how we will get there. As I understood your remarks, once the budget is balanced the reserve will automatically kick over towards debt reduction. Obviously fiscal prudence in managing the government's finances will also kick over to debt reduction.

My question relates to how that will interact with our commitment to apply 25% of our surplus to debt reduction.

My second question is related to that. Will you, in the next budget, set specific targets for debt reduction vis-à-vis GDP? In other words, will it be below 73%, will it be below 70% or 67%, and will that be set out in the next budget?

Mr. Paul Martin: The 50:50 formula as was set out in the red book applies over the course of the mandate. What we are essentially saying is that at the end of the mandate, when you look back you will see that in fact we will have lived up to that particular outline.

In any particular year there will be variations obviously, depending upon economic circumstances and when some of the programs trigger in.

The question about having a specific debt-to-GDP target is one that has been debated by economists at considerable length. Our basic viewpoint is that it is way too high at the present time and that what is most important, rather than setting a target, is that we set it on a permanent downward track. That really is what we intend to do.

The Chairman: The final question goes to Mr. Valeri.

Mr. Tony Valeri (Stoney Creek, Lib.): This, Mr. Minister, is an opportunity to close off the questioning here this afternoon now.

• 1520

I must say that in listening to the questions I'm somewhat at a loss to explain why the official opposition party, Mr. Manning in particular, continues to argue that we are not making progress and that Canadians are not better off today than they were back in 1993, before our coming to power. I want to close with this comment and ask you to answer these questions. I would like you to confirm for us as members of this committee, and for Canadians who are watching here today, that you are committed to balancing the budget, that you are committed to reduction of the debt, that you are committed to reduction of the tax burden for Canadians, and that you are committed to strategic investments in Canadian priorities. Would you confirm that for us, Mr. Minister?

Mr. Paul Martin: Thank you, Mr. Valeri.

We are committed to balancing the budget. More to the point, we believe balancing the budget is—and I am repeating what I said in the speech—a key component, if not the key component, to ensuring greater job creation and stronger economic growth. We are going to reduce debt. We are going to reduce taxes. We are going to invest in the future of Canadians.

Quite clearly, what we are now in a position to do, and what we have attempted to set out this morning and what the Prime Minister set out in the Speech from the Throne and in his speech following the Speech from the Throne...is that Canada is now at a point where it can begin to take control and forge its own destiny. What that means more than any other thing is that generations of Canadians to come can be the leaders in every single field they want, whether it be research, the arts, or business. That is the vision of the kind of country we want to build. For the first time since we have taken office we are in a position to do that, and that is what it is all about.

The Chairman: Thank you very much, Minister, for a very informative presentation. I think you have succeeded in providing us with the necessary framework as we travel across the country seeking public views on this very important issue. There is no question in my mind that we are indeed entering a new economic era, one, as I said in my opening comments, full of challenges and choices, but they need to be a function of the values and the priorities that Canadians have.

As chair of this committee, Minister, I think the real litmus test for you and your government will be to see if at the end of this mandate Canadians are more hopeful, Canadians are better off, and Canadians will look to the future in a more positive way than they do now. That is more or less our focal point. You will see that many of the recommendations we will forward to you will be based on one central issue: how do we improve the quality of life for Canadians?

With that, on behalf of the committee, I would like once again to thank you.

The meeting is now suspended until 1:15 p.m. Thank you very much.

[Editor's Note: Proceedings continue in camera]