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FINA Committee Meeting

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[Recorded by Electronic Apparatus]

Tuesday, November 2, 1999

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The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I would like to call the meeting to order and welcome everyone here this afternoon in London, Ontario.

Today the finance committee kicks off its pre-budget consultation for Budget 2000. The first order of business is the presentation by the Minister of Finance of his economic and fiscal update for the year 1999.

Welcome, Minister. The floor is yours.

Hon. Paul Martin (Minister of Finance): Thank you very much, Mr. Chairman. Before beginning, there are a couple of points of a personal nature I would like to make.

First of all, I want to thank the people of London and this beautiful city for hosting this meeting. This is a city that I have spent a lot of time in.

Joe, I know it's one you're very proud of; we all are.

Furthermore, Mr. Chairman, as somebody who grew up not very far from here, in Windsor, I'd like to thank the committee for having chosen southwestern Ontario as the location for this particular presentation.

The second point I'd like to raise is of a somewhat different nature. The language of economics is spoken in ratios, in algebraic equations, and in graphs. This is fine for economists, but it's somewhat hard on finance ministers.

Fortunately for me, in any event, I met Larry Hagen a little over five or six years ago. For those six years, he wrote these fall presentations to your committee and he wrote all of the budget speeches. He did so by enveloping the substance with understanding and, I must say, a little bit of poetry. His was a unique talent.

Three weeks ago, a meeting with Larry—to prepare for this presentation, in fact—was called at the Department of Finance. Larry was late. He had passed away from a massive heart attack earlier that morning.

I certainly speak for myself, but I know I speak for all of the members of the Department of Finance who are here, and I also feel, Mr. Chairman, because all of us have been very much a part of these presentations, that I speak for you, when I say he will be missed very much.

Mr. Chairman, a year ago when we met, there was great concern over the turmoil emanating from Asia, its contagious effect on the world economy, and the impact this might have on our country. Thankfully, while the international recovery is still fragile, things have turned out much better than many had feared. In Canada, in fact, in almost every economic indicator that matters, we have made enormous strides.

Since January of last year, over 600,000 new jobs have been created, a pace matched by no other G-7 country. As a result, while still too high, our unemployment rate has fallen to 7.5%, its lowest level in more than nine years. Interest rates remain low and inflation is within our target range. Canada's current account has improved sharply. World prices for our natural resources are rebounding strongly, while at the same time, Canada continues to make healthy progress in diversifying into new areas of manufacturing, agriculture, and services.

Given these developments, average economic growth estimates for 1999 have gone from just over 2% to 3.6%. Looking ahead, the major international economic institutions, the OECD and the International Monetary Fund, project that Canada will record this year and in the year 2000 one of the best rates of economic growth among the major industrial countries. Even more importantly over the same period, we are expected to lead all G-7 nations in job creation.

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Mr. Chairman, our strong economic performance reflects in part our strong financial performance. Thanks to the efforts of Canadians, this country is in the process of achieving a financial turnaround of historic proportions. In the space of only four years, the deficit was eliminated. Last year, we announced that for fiscal year 1997-98, the Government recorded a surplus—the first time it had done so in 28 years.

In September of this year, when the final numbers for 1998-99 were in—a year in which we invested heavily in health care, knowledge and tax relief—we announced that Canada had recorded a surplus of $2.9 billion. This is the first time in almost 50 years that our country has recorded back-to-back surpluses and I can assure you, Mr. Chairman, that this trend will continue. Clearly, Canada has entered a new era, one of financial surplus.

And clearly, a great debate is now underway as to how these surpluses should be used. This is an important debate. It should go to the heart of the country's values, its goals and its options for reaching them. It should not be a debate about numbers. Unfortunately, this is exactly what is happening. Too much of the debate so far has revolved around that very issue—not the use but the size of the surplus. Therefore, in order to establish greater common ground, the Department of Finance, over the past several months, has conducted an unprecedented process of consultation with the chief economists of Canada's major chartered banks and four leading forecasting firms.

The objective was to agree upon a set of economic assumptions, which the forecasters would then use to develop projections of the surplus for each of the next five years. Allow me to say how grateful we are to all those who participated in the process. Their contribution has been invaluable.


Mr. Chairman, the dialogue with the economists in which we have been engaged over the past several months has yielded agreement on a number of important points.

First, they believe we should maintain our practice of setting aside $3 billion each year as a contingency reserve to guard against unforeseen developments—and that this reserve, if not needed, should at the end of the year be used to pay down the debt. This we will continue to do. The reality is that no one can predict with sufficient confidence when world interest rates will rise and by how much, nor can anyone predict precisely when an economic downturn will hit, how deep it will be, or how long it will last.

Second, the economists endorsed our practice of adding an extra degree of prudence in order to ensure that we do not fall back into deficit. This we will also continue to do. Economic forecasting is hardly a precise science, and this reality must be allowed for in budget planning.

Third, the economists were unanimous that the extra prudence we build into our forecasts must be explicitly shown. Henceforth, that is what we will do.

Finally, the economists propose that for the purposes of public debate on policy options, a five-year rather than a two-year time horizon is now appropriate. We agree. The debate over the use of the surplus will inevitably involve proposed strategies for debt and tax reduction and investment, whose impact will take effect over a longer period of time. Therefore, it makes sense to allow for discussion on both the greater resources that may be available in later years as well as the more limited resources that will be available in the earlier years.

But let us be clear. Although longer-term projections are appropriate to facilitate public debate and planning, the economists agreed with us that caution was warranted in their use as a basis for budget decisions. Why? Because the uncertainties underlying five-year projections are simply too great. As we have seen over the last several years, we live in a world of great volatility. For this reason, it would be a mistake to make commitments today of significant resources that may not be available five years down the road.

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From the beginning, we have felt strongly that government must have sufficient room to respond to the needs of tomorrow, and that its financial commitments must evolve only as the economy evolves. Therefore, as a Parliament and as a people, we should debate the use of the surplus over the longer term, and plan on that basis. As a government, however, we will continue to take decisions only within a rolling two-year time horizon, as we did throughout the successful period of deficit elimination. In a world that calls for maximum flexibility, we must maintain the capacity to respond to the unexpected. In this sense, prudence is much more than a financial principle, it is a prerequisite for sound economic and social policy.

With that as background, and taking the average private sector forecast, the following are the estimates of the planning surpluses for the next five years. This is after subtracting the annual contingency reserve of $3 billion, and the extra prudence of $1 billion in the first year, rising to $4 billion in the fifth year; for the next fiscal year, beginning in the year 2000, a surplus of $5.5 billion; for 2001, $8.5 billion; for 2002, $12.5 billion; for 2003, $17.5 billion; and for the year beginning in 2004 and going into 2005, a surplus of $23 billion.


With that as background, Mr. Chairman, and taking the average private sector forecast of the surplus, the following are the estimates of the planning surpluses for the next five years—this is after subtracting the annual Contingency Reserve of $3 billion and the extra prudence of $1 billion in the first year, rising to $4 billion in the fifth year.

For the next fiscal year starting in the Year 2000—a surplus of $5.5 billion; for 2001—$8.5 billion; for 2002—$12.5 billion; for 2003—$17.5 billion; and for 2004—a surplus of $23 billion. Now obviously, each year these projections will have to be updated—and we will continue to seek the views and advice of private sector economists and forecasters in that process.


Mr. Chairman, we now have the financial context for the debate that lies before us. That being said, however, there is still a critical part of the broader context that is missing if the debate is to be fruitful. Fiscal responsibility is essential, but by itself it does not constitute a road map to the future.

Before deciding how surpluses should be used, before working out how numbers should be divided, we must be clear about the kind of future we want and how we propose to achieve it—all of this within an understanding of the kind of world in which our children will be living, because the consequences of our actions today will be felt for generations to come. Therefore, the questions are: First, what will it take to firmly establish our place as a leader in the new economy of the new millennium? Second, how can we provide every Canadian an equal opportunity to succeed? And third, how can we ensure the best quality of life for all Canadians, not simply the fortunate few?

Mr. Chairman, in these, the closing days of the 20th century, Canada has a unique opportunity to take hold of its destiny, to translate better finances into better lives for all, to give Canadians what they have a right to expect: the promise of higher incomes and increased security. However, we must accomplish all of this against the backdrop of an economy that is undergoing historic change.

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Some talk of the new economy as if it were a distant concept, removed from our daily lives and set in the far-off future. This is not so. It's all around us, it is here, and it is here now. The fact is that we are experiencing the early stages of a new wave of advanced growth, one that is as powerful as it is pervasive. This is giving rise to whole new industries—information technology and environmental technology today, biotechnology and fuel cell technology tomorrow. What does this mean for us? It means that new times require new approaches.

It is becoming clearer with every passing day that the fundamental challenge and opportunity before us is to make our whole economy one of innovation, one of excellence. The solution is not to set aside the old economy and somehow or other, as if by magic, replace it with the new. Our opportunity is to infuse the entire economy with the potential that the new economy presents, for such is the transforming capacity of the new technologies that our traditional industries are being revitalized and renewed.

Just as new areas of enterprise are being invented, so too are the staples of Canada's 20th-century industrial base being remade in the image of a new, high-tech, value-added, global economy. It's an economy in which ideas are shared instantaneously. It's an economy in which technological innovation and intense competition are reshaping the marketplace and the rules that run it. It's an economy in which challenge is as likely to come from the other side of the world as it is from the other side of town.

Needless to say, the implications of all of this are vast. For individual Canadians, it is manifest in their daily workplace, in the fact that lifetime learning is now a condition for lifetime advancement. For business, it means new definitions of success, by which companies will spend more on research and development than they will on buildings and equipment; in which being first to market with newer and better products, processes and services is critical; and in which the thirst for talented, resourceful employees is insatiable.

This change has the potential to accomplish great things. With lightning speed, it is already lifting the world's ability to generate prosperity and create vast new opportunities. It holds out the promise of new jobs at higher wages, of a better and more plentiful future. At the same time, however, we can never forget that wealth for some is mirrored by inequality and insecurity for too many. Who among us has not felt anxious about the extent and the profound nature of the change that we're experiencing? Who has not worried about its effects upon our own communities and upon our own families?

For this reason, Canadians want to know how, as a country, we propose to tackle the challenges that lie ahead. They want to know that their government has a plan and that there is a place for them in that plan. It is against this background, it is within this context, that we should discuss the use of the surplus.

The economic framework required to take Canada into the 21st century is multifaceted. Let me focus today on four crucial elements. First, we must build a solid foundation for economic growth by providing sound financial management. Second, we must promote economic growth and a better quality of life by reducing taxes. Third, we must recognize the need to make our country more competitive by making it more innovative. And fourth, we must recognize that providing security and opportunity for Canadians in the future means investing today in their skills, in their knowledge, and in their capacity to learn.

None of these elements alone can give us the strong economy and the secure society that we want, but together they provide the balance for a forward-looking plan to make Canada the place to be in the 21st century, as long as we remember one fundamental principle, and that is that while a plan for growth is important, so too must we ensure that growth is shared widely.

Consequently, let us commit today to take full advantage of this moment to see to it that new growth permits us to better tackle old challenges; that the gap between the rich and the poor is narrowed; that urban Canada thrives, that rural Canada prospers; and that every community becomes a potential location for new jobs and new hope. For a nation such as ours, with a diverse population and our vast geography, this is where the true promise of the next century is to be found, and the fact is that the new economy makes all of this possible.

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In summary, Mr. Chairman, the question before us is not simply how we deal with the surplus, it's what we do now to take the financial resources that are at our disposal and use them to bring together our human, our natural and our technological resources, so as to take advantage, for the benefit of all Canadians, of the very exciting world that is opening to us in the 21st century.


Mr. Chairman, let me turn first to the issue of providing sound financial management. What must we do? First, we must keep inflation low and stable. That is why our agreement with the Bank of Canada is so important.

Secondly, we must constantly review our regulatory framework to maintain a proper balance between reducing the regulatory burden of our businesses and promoting innovation on the one hand, and protecting the interests of the public and consumers on the other. This, for example, is the underlying philosophy of the reforms of the financial sector that the Government proposed last June.

And thirdly, we must continue to bring the debt burden down so that more of our dollars can be used to invest in the future, rather than paying for the consumption of the past.

Mr. Chairman, sound financial management is crucial to protect us from punishing cycles of boom and bust and the long-lasting problems they create. Consider the devastating impact of the last two recessions. Interest rates climbed to alarming levels. Business investment dropped by over $11 billion. And half a million jobs were destroyed.

It took five long years for business investment to recover after the recession in the early 1980s. It took four long years to regain the jobs lost in the early 1990s. We know that sound financial management will not put an end to business cycles—with their ups and their downs, but we also know there have been times in the past, when we had poor financial policies in our country, that difficult situations turned into crises, that economic problems became dramatic compared to those of our main trading partners.


Mr. Chairman, being able to look forward to a new era of surpluses at long last is a historic achievement for Canadians, but does this mean that our financial challenge has been fully met, that our obligation to future generations has been fulfilled? Well, the answer is no. For instance, the fact is that our debt burden is far too high. Indeed, it is the second highest in the G-7. This is not some errant statistic, this has real and abiding consequences for all Canadians.

The single largest expenditure that the federal government makes is to pay interest on our debt. These payments, almost $42 billion a year, represent huge resources that cannot go to reducing taxes or investing in education, the environment, health care or child poverty. They hinder our ability to prepare for a better future, and they leave future generations with a large bill that they had no part in racking up. Quite simply, the debt burden must come down.

The best way to measure the debt burden is in relation to the economy that supports it. This is called the debt-to-GDP ratio. The lower the ratio, the more manageable the debt. In 1995-96, the debt-to-GDP ratio peaked at 71.2%. In 1996-97, as a result of both our progress on the deficit and economic growth, the ratio fell meaningfully for the first time in more than twenty years. In 1998-99, it has fallen further, to 64.4%. As a result, the portion of our revenues going to pay interest on the debt has gone from 36¢ out of every dollar five years ago to 27¢. This is major progress, but it's not good enough.

We must and we will ensure that the debt burden continues to fall year in and year out. This will happen in two ways.

The first is by paying down the absolute level of the debt. Over the past two years, net public debt has declined by $6.4 billion, resulting in interest savings of more than $300 million each and every year. As well, market debt, the debt that's issued in financial markets, has fallen even further, with $16.4 billion of such debt being retired.

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Second, and even more importantly, our debt ratio will be brought down by ensuring strong economic growth. In other words, a strategy focused on growth is also the best strategy for reducing the debt burden.


So far, Mr. Chairman, in outlining the criteria for a successful economy of the 21st century, we have talked about sound financial management within Canada. The fact is, however, sound financial management outside our borders is also of vital importance to the economic well-being of our citizens. This was made evident by both the Mexican peso crisis five years ago and the recent Asian financial crisis. In both cases, our country suffered the effects of a weakening dollar and a spike in interest rates. In the case of the Asian crisis, these effects were compounded by declining commodity prices. The fact is, no country—no matter how powerful—is immune to economic and financial turmoil outside its borders.

Thus we clearly have an interest in improving the management not just of our own, but of the international financial system as well. That is why Canada has taken a leadership role in reforming the international financial architecture. It is also why Canada pushed hard for the creation of the Group of Twenty (G-20), a new group that brings together G-7 countries and several key emerging economies, and whose objective is to reduce the likelihood of international financial crises and to reduce their severity if they do happen.


Let me now turn to the question of taxation. For this government the need for tax reduction is not a matter for debate. It is not just one option among many. It is not secondary. It is not something to be considered only once the list of spending proposals is exhausted. Tax reduction is essential to secure strong and sustained economic growth.

Indeed, there are many reasons for reducing taxes. Most are well known and do not need repeating here. However, there is one I would like to mention because it is too frequently overlooked. It is quite simply that Canadians are entitled to keep more of the money they earn. After all, they work for it. It's theirs.


Mr. Chairman, Canadians had to pay more taxes when we were in deficit and the debt was increasing. They have a right to expect government to reduce their taxes now that the era of surpluses is here. In particular, they have a right to expect their disposable income to increase, and this is, in fact, happening.

In the early 1990s, Canadians saw their real after-tax incomes shrink. Fortunately, that trend has ended. Real per capita after- tax incomes are now almost 3 per cent higher than they were three years ago. Our job now is to ensure their incomes grow even more.


Going forward, Mr. Chairman, the principles of our plan to cut taxes are clear. First, our approach to tax relief must be fair. Tax reduction must ultimately benefit all Canadians, but first it must benefit those who need it most—namely, middle- and low-income Canadians, especially families with children.

Second, broad-based tax relief should focus initially on personal income taxes. That's where the burden is greatest. That's where Canadian taxes are most out of line with our history and with other countries.

Third, we must ensure that we have an internationally competitive business tax system.

Fourth, broad-based tax relief should not be financed with borrowed dollars. To do so would not be to put money back into the pockets of Canadians; it would be a promise to take more money out of their pockets in the future.

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We promised we would bring the deficit down year by year, and we did. Two years ago, when we balanced the books, we promised to bring in broad-based tax relief, and we have.

In 1998 tax reduction was focused at the lower end of the income scale. In our 1999 budget tax relief was provided to all Canadian taxpayers, while at the same time middle- and low-income Canadians benefited proportionately more. Indeed, together the 1997, 1998, and 1999 budgets reduced the income tax burdens of Canadians by some 10%. However, these are only the first steps. We must and we will cut taxes more.

In our next budget we will set out a multi-year tax reduction plan and we will explain how we intend to carry it out. We will set out objectives and we will achieve them as quickly as possible. That's how we eliminated the deficit, and that is how we will continue to reduce taxes.


Clearly, we must and we will cut taxes more. In our next budget we will set out a multi-year tax reduction plan and we will explain how we intend to carry it out. We will set out objectives and we will achieve them as quickly as possible. That is how we eliminated the deficit. That is how we will continue to reduce taxes.

Mr. Chairman, it is in the context of this plan for income tax relief that the issue of reductions in the employment insurance (EI) premium rate must also be addressed. For the past five years—every year since we have taken office—EI premiums have been brought down. This is unprecedented—both in terms of the size of the reduction and its duration.

The Employment Insurance Commission has just set the rate at $2.40 for the Year 2000, down from $2.55 this year. Today, we are confirming that we accept the rate set by the Commission.

Mr. Chairman, this reduction is reflected in the surplus figures outlined earlier in this presentation. This means that employees and employers will save a further $1.2 billion next year—bringing total savings, compared to the rate which prevailed in 1994, to $5.2 billion.


Sound financial management and appropriate levels of taxation are prerequisites for success in the new global economy, but they are not the whole answer. More, much more, must be done. The fact is Canada is not the only country to restore sanity to its public finances. If we want to gain a competitive edge, we will need to find it elsewhere.

The question is, what choices can we make today that in 20 years will be seen as having made a critical difference in making this the land of opportunity? The answer is those choices that make our economic culture one of innovation, our perspective that of the entrepreneur.

The economies that will thrive over the next decade are those that excel at innovation. With the second-lowest level of research and development expenditures in the G-7, clearly our country needs to do a lot more. The fact is the greatest gains in productivity today and the economic benefits that flow from them are the result of research carried out years, if not decades, ago.

For instance, it's largely the newest of the high technologies that are driving the U.S. economy, which is the strongest in the world this decade. However, as recent studies in that country have shown, much of the product and much of the process innovation underpinning those new technologies is the result of investment in basic research that was done in the 1950s, 1960s, and 1970s.

That's why we have to accelerate our support for the kind of groundbreaking research that will provide the new ideas and methods that will generate economic growth in the Canada of the future. That's why we must continually update our research facilities. It's why we must continually create new opportunities for the best and the brightest to pursue advanced research and advanced studies right here at home.

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Mr. Chairman, that is why in 1997 we established the Canada Foundation for Innovation, which through partnerships will lead to over $3 billion in new world-class research facilities at our universities, colleges and research hospitals.

That is why in 1999 we proposed to create the Canadian Institutes of Health Research, which will enhance greatly the scope and reach of research in all disciplines that contribute to the better health of Canadians.

That is why we have increased to their highest level ever the budgets of the Government's granting councils, which provide financial support for researchers all over Canada. That is why the Prime Minister has promised that up to 2,000 new research chairs will be created in Canadian universities. These funds will provide financial support for the world-class researchers of today and future generations to work in Canada and carry out the research that will pay off for decades to come.


It is not just up to Canada's governments, our scientists, or our engineers to create an innovative and competitive economy for the 21st century. As a recent Conference Board study pointed out, the capacity of companies to innovate successfully is determined by the quality of their management and their leadership.

The point is that all of us have a role to play in building an economy that can innovate and compete with the best of the rest of the world. This includes everybody, from the venture capitalists who provide the financing to the researchers who generate the ideas, to the workers who turn these ideas into products and services, to the executives and the managers who lead the development and marketing of these ideas, to the governments, which create the right environment, the right social and economic framework.

The fact is innovation doesn't just happen. It requires investment. It requires basic research, infrastructure, imagination. It requires creative management. It requires a sea change in much of our approach to the economy. How that comes about must also be part of the national debate.

Innovation is the foundation of the new wealth of nations, but if we are to become a nation that excels in innovation, we must also become a nation that excels in education, skills, and knowledge. These are the raw materials of today's global economy, and our challenge is to translate them into the finished product of universal opportunity.

Skills provide Canadians with the flexibility to adapt to a world in constant and unpredictable evolution. They're the key to higher incomes. They're at the core of a better quality of life. More than ever, in today's modern economy they provide the best way to widen the mainstream, to strengthen the middle class, and to level the playing field between the rich and the poor. In a real sense, good skills are an essential part of the social safety net of the future. They're not only about an economy's growth; they're about a society's health.

In the fall of 1997 a substantial part of my presentation to this committee was about this very subject, and in the 1998 budget, four months later, access to knowledge was our first post-deficit priority. That's where we launched the Canada opportunities strategy, a seven-part plan to improve access to skills, training, and higher education for all Canadians.

As a result of that strategy, post-secondary students are now receiving substantial help from the Government of Canada to finance their studies. Every year for the next 10 years, 100,000 scholarships will be awarded. As well, students are receiving increased tax support for tuition and living expenses and further help in repaying debt after graduation, including a tax credit for interest on student loans.

Furthermore, as a result of the Canada education savings grants, also announced in the 1998 budget, the government has since then put $500 million into the registered education savings accounts of individual children right across this country.


Mr. Chairman, let me say a little more about the latter part of the strategy. The 1998 budget created the CESG, a forward- looking initiative designed to help families save for their children's post-secondary education. Canadians have responded overwhelmingly to that measure. During the first 25 years of registered education savings plans (RESPs), $2.5 billion of savings were accumulated. In the short time since the CESG was introduced—only 21 months ago—private savings have doubled to $5 billion. The fact is, thanks to the CESG, RESPs are becoming as essential and as valuable to saving for education as are registered retirement savings plans to retirement.

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Looking forward, we believe we must build on the foundation laid in 1998. We must continue to help Canadians build up their finances to learn. As well, we must help them build up their capacity to learn.

Knowledge joins the ambitions of the individual with the potential of the country. It's the meeting place between social and economic policy. It's the best guarantee of a well-paying job. It's the best assurance of individual security. However, learning is no longer something we do at a certain age or at a certain place. It's something we must do throughout our lives, no matter where we live, no matter where we work.

I suspect all of us around this table would agree with that. Where, however, our thinking must evolve is in recognizing that the effort must begin at the earliest of years. The fact is, readiness to learn does not begin at school. It depends on the caring and the nurturing environment provided to the smallest infant.

Dr. Fraser Mustard made this point in a recent report. I would like read you a quote from it:

    There is powerful new evidence from neuroscience that the early years of development from conception to age six, particularly for the first three years, set the base for competence and coping skills that will affect learning, behaviour and health throughout life.

Mr. Chairman, we must accelerate the development of ways of providing our children with the best possible start in life. Helping Canadian families provide a supportive environment for their children is one of the best investments we can make.

The fact is, children equipped to learn become adults equipped to succeed. That reality is one reason behind the new resources in which we've invested, such as the community action program for children, aboriginal head start, and the Canada prenatal nutrition program.

It lies as well behind the new partnership established with the provinces to create the national child benefit system whereby the federal government is providing some $7 billion a year in income support for middle- and low-income families. It's why the Prime Minister announced that the government will make a third major investment in the national child benefit by the year 2001. It's also why he announced that the government will extend the time employment insurance, maternity, and parental benefits are available.


Mr. Chairman, across the country there is a very strong consensus on the need to provide income support to families, to improve the services that children need and, especially, to focus on the very earliest years. There is also a recognition of the value of governments working in partnership. That consensus is reflected in the National Children's Agenda, launched last year by federal and provincial ministers, and which was the subject of a dialogue with Canadians across the land. Our opportunity in the budgets that lie ahead will be to turn that agenda into action. The obligation to do so stems from one straightforward fact: we may not know what the future will be, but we do know who the future will be: Our children.

Mr. Chairman, the framework we are proposing raises a number of issues and questions for Canadians to debate. In addition to discussing the framework itself, your committee can play an important role in seeking the views of Canadians on the following questions, among others.

On personal income taxes: What should the tax rates be? What should the income thresholds be for various tax rates? And how soon can we get there?

On business taxes: When should the process of tax reduction begin?

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On unemployment and employment insurance, what is the appropriate timing for further reductions in premium rates in the context of other priorities?

On research and development, what are the best ways for the government to encourage the private sector to invest more in this vital area for the future of our country?

And finally, on skills and knowledge, how can we make lifelong learning a reality accessible to all?

Mr. Chairman, long ago Canadians made a defining decision. It was that a strong economy and a secure society are flip sides of the same coin. That's why two years ago we in the provinces acted to secure the future of the Canada Pension Plan; it will be there now when people need it. That's why the largest investment we have made since taking office was last year and it was in health care. The reason we were able to do this was that we had turned the corner in managing the finances of the nation.


Mr. Chairman, the reason we were able to do this was because we had turned the corner in managing the finances of this nation. I raise this in the context of the questions just put to you because, as you answer them, we must all be conscious that we must not return to the old ways of the old days—when every priority was declared equal; when every problem was met with yet another program; when government often over-reached, over-promised and under-performed. Those days should be behind us forever. We have come too far and accomplished too much to do otherwise. Government should act only where it can make a difference. After all, we are not here to spend the surplus. We are here to create better lives for Canadians.


With that in mind, Mr. Chairman, what must our goal be? Quite simply, I would submit to you that it must be to lead to world in the things that count. It must be a fostering nation that will give every Canadian, young and old, every opportunity to realize their dreams, a nation where not only our best and brightest want to remain, but where the freshest talents from around the globe are drawn to come.

How do we do that? One thing is for sure: success in the modern economy does not lie in luck. It requires knowing what the ingredients of a strong society are and then creating them through partnership and investment. Growing economies today are anchored in the creation of an environment where the capacity and the incentives are there to generate new ideas, to turn those ideas into new products, and to take those new products into new markets. They're anchored in creating new waves of innovation and then riding them and giving our economy the tools to grow and in giving all Canadians the means to share in the benefits of that growth. That in effect is the main message of this economic update.


Mr. Chairman, I believe there is a further point to be made. We bat around statistics—average rates of economic expansion, average income per capita—quantitative measures of every kind, all of varying degrees of reliability. Based on those statistics, we make comparisons with our own history and with other countries—and then declare ourselves winners or losers.

Well, statistics can illuminate. They can also blind. The fact is, narrow economic indicators do not speak to child poverty. They do not speak to the quality of the air we breathe or the water we drink. They do not speak to the safety of our communities or the tragedy of the homeless. Yet these are fundamentals that count for Canadians, for they are fundamentals that count for the future of our country. They must also be part of the debate.


In conclusion, Mr. Chairman, let me just say that a nation is not static, economies are not static, people are not static. Anchored by a set of core values, our greatest strength as a country is our capacity to respond in new ways to the new challenges before us. We must not let this period of worldwide innovation slip by unmet. We must turn this moment of opportunity into a sustained era of accomplishment.

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So let there be no doubt, we will strengthen our economy, we will bring down taxes, and we will recast the foundations of individual security for our seniors, for the disabled, and for all Canadians. But as well, we will do much more than that. We will forge a culture of innovation, we will build upon our traditional industries, and we will build a society that nurtures its children like no other. On the eve of the 21st century, that must be our ambition. That must be the Canada we seek to build.

Thank you, Mr. Chairman.

The Chair: Thank you very much, Minister, with your comment and fiscal update.

We will now proceed to the question and answer session, and we will begin with a five-minute round.

Mr. Manning.

Mr. Monte Solberg (Medicine Hat, Ref.): I'll go first, if I could, Mr. Chairman.

Mr. Chairman, after those 25 pages we've heard from the minister, we're still confronted with the reality of taxes that are going up, spending that is going up dramatically, as we know from recent news reports, and disposable income that is mired at 1980 levels. The minister showed us some charts, and we'd like to show him some charts back, because we think this is an important dialogue to have. We don't think it should be a one-way conversation.

We have a chart here that shows, Mr. Chairman, that in fact disposable incomes have fallen dramatically since this government came to power. They were at $39,200, they're now down to $38,300. We see income taxes per taxpayer rising.

Mr. Chairman, we also have other charts. We have a government share of personal income that has gone up from 22.2% to almost 25%. Now, the minister just said a minute ago that personal income taxes have gone down 10%. Well, this is from the TD economics branch from last Thursday. They don't have a vested interest, Minister. They looked at the numbers independently, and here's what they've discovered: personal tax revenues from people's pockets are going way up, thanks to this government's policies.

On the next chart we find that federal tax revenue per family has gone up dramatically under this government's watch, up $4,200. The fact is that the public is not seeing their share of that huge increase in government revenue.

Finally, on the last chart we show what will happen now that the government is launching this massive spending spree, this $47-billion spending spree. A moment ago we heard the minister lay out $67 billion worth of surpluses coming up in the next several years. That doesn't take into account statutory spending increases, as far as I can tell, and on top of that we have $47 billion in spending that was released in a cabinet document just the other day. That will leave us with virtually nothing left over.

So my question, after all of this evidence that we've brought forward, is where does the minister get off suggesting for a moment that taxes really are going down, and that we can afford a $47-billion increase in spending?

The Chair: Minister.

Mr. Paul Martin: Unfortunately, pretty charts don't mask lousy input. The fact is that the disposable income of Canadians.... I'll have to go with my own...the Department of Finance has given me notes and I can't read the writing. However, I don't think I need help for this.

The fact is that over the course of the last decade, over a decade and a half—but very, very much affected by the recession that hit at the end of the 1980s and the beginning of the 1990s—Canadian disposable income dropped substantially. But the fact is that if you take a look at over the last two and a half to three years, disposable income after taxes of Canadians has increased by 3%. Those are the correct numbers.

The second thing is that you're absolutely right, the government's revenues from taxation have in fact risen. But they haven't risen because income tax rates have gone up; they've risen because of far greater economic activity and the fact that there are a billion and a half more Canadians working today than were working when we took office.

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Essentially, if you want the numbers.... If you take a look at what the TD did, it is basically showing the revenues are from economic activity. But I'll give you the numbers. By the year 2000, our personal income tax revenue, which is about $75 billion to $77 billion a year, will decrease by about $7.5 billion from what it would have been if we had not begun the cuts in taxes in the 1997, 1998, and 1999 budgets. That's 10%.

You talked about families. In fact, for a family of two, that reduction is approximately 16%. Those families pay about $25 billion in taxes, and the reduction is about 16%. Those are the real numbers.

The other answer, of course, in terms of the surpluses is that you're wrong, our surpluses assume the normal projections for statutory spending. We are not in the process of saying—unlike some people who have recommended this—that we are going to pay for tax cuts by cutting old age pensions. Not at all. Old age pensions and other statutory spending will increase as projected. The surpluses take that into account.

Finally, on the last thing, we have had this discussion, and I think you well know that it's a perfectly understandable thing that a costing is made of virtually every proposal, whether that proposal is going to go ahead or not. It's part of the decision-making process, and those are the numbers you saw. But there is no plan to spend that kind of money.

The Chair: Thank you, Minister.

Mr. Manning.

Mr. Preston Manning (Calgary Southwest, Ref.): Thank you, Mr. Chairman. I'd like to circulate one piece of paper here. Could I have that done by the secretary? Could I give the minister one?

I think this committee, the minister and the department, and Parliament itself have to start looking at financial position from the perspective of the hard-pressed taxpayer, not from the perspective of the department. I suggest that the hard-pressed citizen is not going to judge a financial position by the fancy documents and the video presentations we make. He's going to judge the financial performance of the federal government on what it does to his paycheque and what it does to his family's bank account.

Now, this simple piece of paper is a presentation from the taxpayer. You'll notice it's not quite as fancy as the one from the department. I was in Saskatoon a couple of weeks ago. I stopped at a cafeteria and I got into a conversation with a millwright from a forestry plant in that part of the country. We got on to taxes, and he said, “I'll tell you something about taxes. Let me show you my pay stub.” This is the piece of paper that eventually he gave me.

I'd like to point this out to members of the committee, and I'd like to ask the minister a question on this. This is a millwright. I took his name and his company's name off it. He didn't seem to mind that it was on the copy he gave me. You'll notice that this particular person worked 40 hours during this pay period, plus 20 hours of overtime. He's a hard-working person. You'll notice the first circle is his gross earnings, worth $2,000, but you'll note further down the stub the net earnings were about $1,000.

In other words, the deductions from his paycheque, the vast portion of which are income tax and payroll taxes, are actually higher than his net pay. Is that sinking in to everyone here? This is an ordinary taxpayer. His disposable income has been cut more than in half just by income and payroll taxes alone.

Now, this is an ordinary person. He can't hire a fleet of accountants and lawyers to try to fix this up. He can't fly a Liberian flag on his pickup truck in order to get his assets into some lower tax regime. To add insult to injury—and now he's got only half of what he earned—his point was that when he goes out on the way home and buys gasoline, he pays tax on that. When he goes and spends it in the store, he pays tax on that. He ends up with way less than half of his gross earnings as a result. I run into this story every time I go to a plant, an office, a factory, a union hall, and ask, “Show me your pay stub.”

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What does the minister say to this worker? He is looking for real tax relief and a real increase in his disposable income and has not found it from anything the government has done in the last two years. And, I would suggest, he will not find it from anything that's contained in this document.

Mr. Paul Martin: Mr. Manning, I think there are a couple of things.

First of all, quite clearly, looking at this list, I'm not in a position to speak to field dues, building fund or union dues or the other. Nor, Mr. Manning, would I deny that we want to bring personal taxes down in this country. We want to continue to do it. I just said it very clearly. It is our goal. And let me tell you we are going to bring taxes down. The reason we're going to bring taxes down is so that this millwright in Saskatchewan and Canadians right across this country can have steadily increasing after-tax income.

On the other hand, I think what we have to take a look at is that in fact this particular person, prior to our taking office, was paying a 3% surtax, which has now been eliminated. The threshold below which nobody pays any tax, including this person, has been increased by $675. And if this particular person has any children, then they may well have received an increase in the child tax benefit that is quite substantial—close to $2 billion, Mr. Manning, since we have taken office. The increase in the child tax benefit, the increase in the threshold below which no taxes are paid, would not show on this particular stub. I think you would admit that, being the fair person I know you are.

Mr. Preston Manning: Yes, but as well, I asked you that—

Mr. Paul Martin: Let me just say one other thing, Mr. Manning. What you've talked about of course is the tax. The one thing you never talk about is that the taxes go to pay services. We're going to bring taxes down. We made it very clear. We have done so, we will continue to do so. But, Mr. Manning, we are not going to shortchange health care. We are not going to shortchange the children in this country. We are not going to shortchange education.

This particular person—on the assumption that they have a family—wants to have decent medical care, they want to have decent education for their children, and they want to have decent services, and that's also what in fact governments have a responsibility to provide.

Some hon. members: Hear, hear!

Mr. Preston Manning: What I was going to say—

The Chair: Your time is up.

Mr. Gallaway, followed by Mr. Fontana.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Minister, you've talked a lot about children. I have to say to you that there's no one in this room, I'm sure, who's opposed to caring for children. You've talked about education and you've talked somewhat about health care.

What I'm concerned about is this talk about a children's agenda. Your view of caring for children, does it come through the tax system or through tax credits or tax breaks? Or does it come through a regime of new programs?

Mr. Paul Martin: I think it is actually a combination of both. For example, there are many families out there for whom tax credits really are not the answer, very low-income families, many families where there is for instance a single mother, who really require community services. I think it's very important that governments at all levels essentially work together with those community services to provide those. So that's certainly one area where I think governments have a responsibility to act.

But at the same time, there is no doubt that through the tax act there are a number of areas in which we should act. A number of us, as you know, have talked about the fact that essentially the costs of raising children may not be adequately recognized in the tax act and that there are things that should be done in this area.

The answer to your question, Mr. Gallaway, is that there are both.

Mr. Roger Gallaway: We're in London here. London is both a regional and a national centre known for health care—health care research, health care delivery—and for education. You've raised the spectre of innovation, of research, of how we can turn that into centres of excellence such as the University of Western Ontario.

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But there's a more fundamental problem in all of this. In this province tuitions have increased 100% in the last seven years. A recent study done by medical schools in this province would show that in the graduating class of 2000, 40% of those future doctors come from families where the combined income is $60,000 or less. That's in the graduating class of 2000. In the graduating class of 2002, that $60,000 number decreases to 27% of the class, which tells you something about access to higher education.

It tells you something about access to education, that despite the idea of registered education, the RESPs, which are a great tool for the future, the fact of the matter is that a number of people from lower incomes cannot plug into the system. A medical student cannot plug in, because tuition is $15,000 and the fact of the matter is that student loans are premised on a tuition somewhere in the neighbourhood of $4,000. You can't go to university in this province for $4,000.

What do you say to your provincial counterparts in that case about transfer payments with respect to post-secondary education? What news do you have or do you foresee for them?

Mr. Paul Martin: I think your question is very well taken. There were studies done a little over a year ago that showed there was an unfortunate correlation between access to post-secondary education and family income. Quite clearly, if what one wants to do is level the playing field and give every generation an equal shot, those are the kinds of statistics that one simply cannot live with.

This is the reason why, as a federal government, in the first budget after we eliminated the deficit, we brought in that seven-point plan to essentially—because we're not in a position to deal with provincial tuitions, that is a matter of provincial jurisdiction—help students deal with the problem of rising tuitions and the consequent increase in student loans. It's also the same reason we focus so heavily on helping universities fund their research and development, the whole promise of the 2,000 new chairs to simply help universities bring in the best and the brightest for teaching purposes.

The point you raise, that all levels of government have to work very heavily on making sure low-income students can afford post-secondary education is obviously a major national objective.

Mr. Roger Gallaway: My last question will revolve around polls that have been done nationally and for your department—I know, I've seen them—that would suggest that Canadians, and there is a great deal of consensus on this point, from a federal perspective, are interested in health care, they're interested in post-secondary education, and they're interested in tax cuts.

There is, as I say, a consensus on children—it's difficult to be opposed to children—but it's a low priority in terms of what is a children's agenda, why are you spending money on social engineering programs, and why aren't you talking about tax cuts. You are talking about tax cuts, but I think when we get into this 50% in terms of social spending and 50% in debt reduction and tax cuts, as you've pointed out, a nation is not static, an economy is not static, and I would suggest to you that perhaps those commitments are not static either. There is concern in this country that, yes, looking after children is important, but our priorities aren't there. That's number three, and it's a little vague.

What do you say to those people, then, who say this is all about social engineering, following the Fraser Mustard trail of...? All these things are from the social sciences, but what do you say to them about...? You're talking about their disposable income and what their priorities are. Why not follow their priorities? Why are we injecting this children's agenda, though?

Mr. Paul Martin: Let me explain. You're absolutely right, three-quarters of all of our new spending has been in health care and education. What I was essentially outlining here is that when you look at education, you have to look at education on a much broader basis than we have done in the past. And part of education is in fact readiness to learn, preparing students for that education, because the studies have now shown that in fact the better prepared you are prior to the age of six, prior to going to formal school—in fact beginning at the age of zero, when you are first born—the better you will be able to absorb that higher education. So obviously it is part of the package.

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But your basic point is one that is very well taken. Let me simply repeat what I said in the speech. Tax reduction is not an option among many for us. Tax reduction is not something we will do only once. The list of spending proposals is exhaustive. This is a parallel process. We are going to invest in those things that are essential for Canada in the next millennium, and we are going to bring our taxes down with exactly the same fervour with which we proceeded to eliminate the deficit. This is a parallel process, and we're going to succeed.

The Chair: Thank you, Minister.

Mr. Fontana.

Mr. Joe Fontana (London North Centre, Lib.): Thank you, Mr. Chairman.

I offer a welcome to not only the minister but committee members for coming to London, Ontario. While some people think Toronto is the centre of the universe, I'd like to think London, Ontario, with its great hospitals and health care and education, in fact is very much that—next to Saskatchewan of course, Lorne.

I also want to welcome Mr. Manning back. I know that on two occasions Mr. Manning decided to use London because it's a great test city.

Mr. Manning, you launched Fresh Start here in London in 1997, and it didn't go anywhere.

Voices: Oh, oh!

Mr. Joe Fontana: Then you came back with the United Alternative, I think about a year ago, and it didn't go anywhere. So I want to welcome you back to a good city that has some good sense.

Voices: Hear, hear!

Mr. Joe Fontana: I want to follow up on a couple of questions.

London has demonstrated its ability to innovate. I want to talk about the third leg of your four-part strategy to create that innovative economy. We've demonstrated by our research facilities, the university, the college, and a number of biotechnology firms that if government can be involved, as you indicated, on the basic research side, and if we have investors and capital, we can translate those into jobs. The 1.6 million jobs that have been created in this country primarily have been created by small business.

But there's a gap here, and I think you've heard that; you've been here many a time. There is a real gap. We are the greatest inventors in this country, but we can't commercialize what we invent and hence create the wealth and the jobs necessary, because there's a missing link. While capital is very important, tax incentives are going to be necessary for that innovation to be turned into businesses that will create jobs for the young people we are educating in this country.

So how can we make the third leg of your strategy work? Is it more tax incentives for research and development? Is it more tax incentives for investors to be able to invest in these biotechnology firms that will create the jobs? You indicated the United States is spending $80 per capita on R and D, and we only spend $9 per capita. I'm just wondering whether or not you could comment on the R and D side of growing an economy.

Mr. Paul Martin: Well, being a member of Parliament from Montreal, I'm not going to get into a discussion as to where the heartland of Ontario is, but Joe, I would certainly welcome everybody to visit Windsor as well.

Voices: Oh, oh!

Mr. Paul Martin: The question you have raised is a very important one, and let me respond in two ways.

This committee has to deal with the question of how we increase R and D in this country. The fact is we have some of the most generous incentives of any industrial country, and yet we have a very low record, compared to the other members of the G-7, of take-up in R and D. Is that because of the large number of branch plants that exist in this country? Are there other reasons? Those are things this committee should investigate.

I would say at the same time that a lot of the expertise in this area has indicated that in fact our ability to manage the new technologies, our ability to manage and assess risk, and the financial structure we have in this country for raising capital are also things we have to take a very serious look at.

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But the question you have raised, Joe, is a crucial one. We have demonstrated time and time again—and this city is a classic example—the tremendous brain power we're able to bring to a wide range of areas in the new economy. And we do have the incubators. In fact a number of them flow right out of the hospitals and universities in this city, as well as other parts of the country. Yet we're not penetrating the new economy to the extent we should. I would hope that's something this committee will look at.

Mr. Joe Fontana: Mr. Minister, you invited Canadians, and my colleagues Sue Barnes, Pat O'Brien, and Gar Knutson—who unfortunately couldn't be here, but are chairing a number of meetings—had a pre-budget consultation meeting already in London, Ontario, and invited the community to comment. I think it's fair to say the balanced approach is what Londoners have said: debt reduction is absolutely essential, tax reduction is a priority, and strategic economic and social spending is also very crucial, especially in the areas of health, education, research and development, and others.

With regard to tax cuts, I wonder if you can comment in this respect. At one time we had 11 tax brackets; now we have three. A person making $29,000, or whatever that threshold is, is paying 17% federal income tax, and if all of a sudden they make $29,501, automatically they jump from the 17% tax bracket to the 26% tax bracket.

If we want to help families and children, especially at the middle- and lower-income levels, might there not be a way of being able to either increase those income thresholds or reduce the 17% tax bracket further? Or should we have additional tax brackets, say at 19% or 21% and then at 27% or 28%, in order to make it much more progressive and fair to those people?

Mr. Paul Martin: Those suggestions have been made. One is that we drop the middle tax bracket, another is that we increase the threshold, and another is that in fact we introduce a fourth bracket. Again, I don't want to prejudge the work of this committee. I would very much hope this committee will come back on this.

What is unequivocal is that we are going to reduce personal taxes. The only issue is the mechanism, and that's what I would very much hope this committee will deal with as one of the questions.

The Chair: Thank you, Mr. Fontana.

Mr. Nystrom.

Hon. Lorne Nystrom (Regina—Qu'Appelle, NDP): Thank you very much, Mr. Chair.

I'd like to ask the minister questions in three different areas, but I'd start off by commenting that I really look forward to a debate in this country about what we do with the fiscal dividend, or the surplus. It should be a balanced approach. We need money for emergencies; money to reinvest in our social programs, which were cut back quite drastically a few years ago; money to invest in education; and also some progressive, targeted tax cuts.

I'm not sure there's much new, actually, in the fiscal statement that hasn't been leaked. I suppose, Paul, you'll go down as the leakiest Minister of Finance in the history of the country. But at least you practised equality between the National Post and the Globe and Mail.

That being said, I want to start off with the so-called tax issue Mr. Manning was pursuing, but do it in a little bit of a different way. I remember in 1993, when you were the co-author of a red book, you said, and I quote from that red book: “A Liberal government will replace the GST with a system that generates equivalent revenues, is fairer to consumers, is fairer to...small business”.

Then your leader in the House of Commons, once he became Prime Minister—not that you would ever disagree with Mr. Chrétien—said in the House of Commons on 2 May 1994, and I quote, “We hate it”—meaning the GST—“and we will kill it.” That's a commitment from the Prime Minister of the country.

You're not talking about the GST today, despite the fact that Earnscliffe did a survey in the summer that said of all the various tax options, 55% of Canadians thought the GST should be reduced. That was the favourite option in terms of tax change or tax reduction in the country.

Can you confirm officially today that your promise of 1993 is dead and that the Prime Minister misled the country and his promise of 1994 to kill the GST is dead? I'm sure you never disagree with the Prime Minister, Mr. Martin, but perhaps you can confirm that that promise is dead.

Voices: Hear, hear!

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Mr. Paul Martin: First of all, I think the record is very clear. What we said is that the GST would be replaced with another tax, but there was no possibility of giving up $18 billion in revenue.

When we took office, this particular committee in fact was convened and did cross-country hearings on the issue of the replacement of the GST. The view was very strong that the GST should not be replaced, that it had now been sufficiently well anchored in the operations of small and medium-sized business, and in fact that would cause an immense disruption in their business and we should stay with it as it was. And that's what happened.

If you go across the country, small and medium-sized business come to you and say, “Listen, we're the people who are creating the jobs; we want you to stay with this; we don't want you to change it.”

There are other reasons as well. Our payroll taxes in Canada are lower than those in the United States, lower than those in most European countries. On the other hand, our personal income taxes are higher than those in the United States and, in fact, higher than those in a number of the European countries. Therefore, if you're going to have a priority as to which tax you should lower, it seems to me it makes sense that you first lower those taxes that are either historically higher or are higher compared to other countries. That's the reason for proceeding with personal income taxes first.

Mr. Lorne Nystrom: But don't you feel uncomfortable, as the Minister of Finance and a very credible politician, that the Prime Minister made a promise in the House of Commons as Prime Minister, saying he would kill the GST, and yet 55% of the Canadian people are saying in the polls that it's the first area of tax change or tax reform that they want tackled? It's done by Earnscliffe.

By the way, you have a few friends who work in Earnscliffe. It's a very credible operation. Doesn't it make you uncomfortable to say that you are forgetting about this promise made by the Liberal Party of Canada?

I remember, Mr. Martin, in the opposition days when you were there, you were ranting and raving about the GST being a terrible, unfair, disastrous tax and you were going to kill this thing, you were going to stop it, you were going to replace it and get rid of it and eliminate it—all the words and adjectives that one can possible think of. All of a sudden, that promise is now dead. Right?

Mr. Paul Martin: What happened was, first, there was a House of Commons finance committee that went across the country, and small business said don't do it. The second thing is that we have personal income taxes that are out of line.

You see, Mr. Nystrom, the one thing about government is that unfortunately you have to make choices. It's one of the things you don't always have to do in opposition. Choices simply mean that you have only so much money. What you have to do is make priorities, and if your priorities say that given a limited amount of dollars, we're going to bring personal income taxes down, then that's really the best thing to do. In the end, I don't think anybody is criticized for doing the right thing.

Mr. Lorne Nystrom: Okay, I'll ask you about choices, then, and doing the right thing.

I've been looking through your fiscal update by looking through the throne speech. I know you have a contingency there of about $3 billion for crises.

We have the worst farm crisis in Saskatchewan and Manitoba since the 1930s, and you're aware, of course; Premier Romanow and Premier Doer met with you last week in Ottawa.

In my own province, the farmers who are now in the grain business have a negative revenue, a negative income, and yet there is not even a word about the farm crisis in your statement today, a speech that went on for about 45 minutes—not even a reference to it, the same as in the throne speech.

I wonder if you can explain to us why you are not using some of that contingency fund to help the farmers in Saskatchewan and Manitoba, the grain farmers in the prairies. I'm not talking about the AIDA program, the money that was there in the last year. I'm talking about the premiers' request for $1.3 billion for Manitoba and Saskatchewan. Why is there no reference to that? Why are you saying no to them?

Mr. Paul Martin: Essentially—and the Prime Minister said this yesterday, as did the Minister of Agriculture—in the numbers you have in front of you, Mr. Nystrom, there is $900 million that the government has put on the table in order to deal with the crisis. There is no doubt about the extent, there is no doubt about how serious this is, and there is no doubt about how concerned we are. There is a severe short-term problem and there is a longer-term problem, and we as a country have to deal with it, and both levels of government have to deal with it to the best of their ability.

But we have put $900 million on the table. The Minister of Agriculture is certainly prepared to continue his meetings, and in the end, I think it's very important that the country recognize that when each region is in trouble, we have to come and help, and we've always been able to do that.

Mr. Lorne Nystrom: Are you saying, then, the door is open for extra money? I remind you again, it's the worst crisis since the 1930s. It's not the fault of the farmers.

Mr. Minister, in Canada grain farmers, wheat farmers, get 9¢ out of the dollar in terms of subsidies. In the United States it's 38¢ out of the dollar. In Europe it's 55¢ out of the dollar. That's one of the reasons there's a tremendous crisis in terms of farm income, not for the dairy producers or the hog producers in terms of subsidies, but for the wheat producers in our country. I think that is what a contingency fund is there for. If that isn't a crisis, then what is a crisis? Why wouldn't you be more generous in terms of considering their request?

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Mr. Paul Martin: There are a couple of things. First of all, you're absolutely right, and the government has made it very clear, that at the WTO negotiations we're going to go very hard on this particular issue. The fact is, the way the Europeans and the Americans are operating in terms of agriculture with these huge subsidies simply makes no sense. Canada is going to fight very strongly on that.

There is one thing that has perhaps just slipped my mind. You might help me. How much new money has Mr. Romanow said he would put into the farm crisis?

Mr. Lorne Nystrom: Mr. Romanow has already put money into the AIDA program, as you know, Mr. Martin. Also, don't forget that Saskatchewan has around 40% of the grain farmers and only about 3% or 4% of the population of the country. It's very unfair to have them cost-share this program like some other provinces can, like Alberta and Ontario, which are wealthy enough and have a smaller proportion of farmers.

Also, don't forget that a big base of the taxpayers in Saskatchewan is the farmers themselves, who are suffering, so I think it's very unfair to have them cost-share this on a 60-40 basis.

Mr. Paul Martin: I guess all I would say is that it's not an unreasonable request. I was just wondering how much Mr. Romanow had put on the table. The fact is that this is a very serious crisis. This is not the kind of thing that governments should be shouting at each other about. As you know, I was out there about 10 days ago. I think we're all very worried about it and very concerned.

Mr. Lorne Nystrom: My last question is about the whole area of health care.

In your 1995 budget, there were radical and drastic cutbacks in terms of transfers to the provinces for health care. Despite the reinvestment of money in your last budget, we're still behind where we would have been if the investments had continued as projected in the early 1990s.

When health care came into force in this country, it was a cost-shared program, roughly 50-50, between the federal government and the provinces. Now, I think, the federal share is down to 12%, 13% or 14%. I wonder whether or not you would be open to considering a much greater investment in health care.

We all know the problems: waiting lists, emergency room problems, and hospitals closing across the country. Despite last year's investment, we are still way behind where we would have been if you hadn't cut back in the first place. I think you overdid it in 1995. Do you regret that move? Are you now considering putting in more money than you did last year?

Mr. Paul Martin: Again, as you know, in the last year, there was the largest investment we have made as a government since taking office. It was $3.5 billion—it will be $11.5 billion over the next five years—and it was made in health care for the very reasons you have given.

I would dispute your analysis slightly, to take just two provinces as an example. In your own province—before we took office—the provincial government closed 60 hospitals. The closure of those hospitals in fact had nothing to do with any actions that we might have taken as a government.

If you take a look at what happened in this province, in fact, the reductions in transfers to the Province of Ontario were substantially less than the cuts in income taxes that the Government of Ontario brought in. I would go one step further: in fact the reductions in transfers from the federal government to the provincial government were less than were the reductions from the provincial government to the municipalities.

Again, I don't think anybody wants to get into federal-provincial fights. All governments found themselves in a very difficult situation. Some of them reacted one way; others reacted in other ways. What is really important is that now, in fact, governments' balance sheets are in better shape, the economy is in better shape, and there is a real opportunity for all of us to work together for the betterment of the citizens.

The Chair: Thank you, Mr. Nystrom.

Ms. Leung.

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

Mr. Minister, thank you for your very thoughtful report. For the last two years, you have been giving the report in Ontario. I think it's time for you to go to the west. Come to Vancouver next year.

Mr. Minister, you mentioned the importance of doing more for all the different regions and communities. What do you really mean by that? What are you going to do for the western provinces? Specifically, are you going to help British Columbia to overcome some of its economic decline, such as its recession? How are you going to strengthen its declining industries, such as forestry, mining, and the fishery?

• 1630

Mr. Paul Martin: First of all, fortunately we are seeing a bit of an upturn in the forest industry and in the mining industry. The fact is, when one talks about investing in the new economy, even through the depth of the recession in British Columbia there was increasing job creation in all areas of the new economy, for instance. A lot of that was not unrelated to activities sponsored by the federal government.

If you take a look at what has happened, for instance, with the Foundation for Innovation and the effect it has had in terms of dealing with the major universities in British Columbia, you will see that it has had very favourable consequences and quite good spinoffs in terms of economic development.

Obviously the whole great trade push towards Asia-Pacific is something that benefits British Columbia directly. There's no doubt that British Columbia was affected by the downturn in Asia-Pacific. Now that we're seeing a real upturn there—and we are—I feel quite confident that British Columbia will come back. There are some political problems in British Columbia, but I'll leave it for you to comment on them.

Ms. Sophia Leung: Thank you.

Also, Mr. Minister, in the past Canada has been very successful in attracting a lot of new business and foreign investment, as you've mentioned. But today it really doesn't seem to be coming to the west. We all know that. A lot of the investment, especially from overseas, is not really coming to the west. How are you going to do that? Are you going to create some business incentives to attract more investors in this very competitive global market?

Mr. Paul Martin: Again, if there are specific suggestions—and I'd look to the chairman—I would hope that this committee would come out with them, and especially in your meetings in British Columbia.

Let me say to you it is my belief that targeted incentives certainly can have their benefits, but the most important thing we can do in terms of the business climate in this country is to make sure that we invest in education, that support for basic research is there, that the whole support of the new economy is there, that our tax levels come down, and that we be competitive.

If we understand that these are parallel processes, that in fact we cannot succeed in the modern economy without strong education, without strong health care, and without a healthy and confident population—which is one parallel track—on the other side, government's share of the total revenues must in fact be competitive, not crowding out. If you understand that you require those two things, let me tell you this: I don't believe anybody in the world will be able to take us on.

The Chair: Thank you, Ms. Leung.

Mr. Szabo.

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

Thank you, Mr. Minister.

First of all, very quickly, thank you for the words of encouragement with regard to families and children.

I also wanted to let you know that as a result of the exchange with Mr. Manning, I quickly checked the numbers, and Mr. Manning is absolutely correct. What he didn't tell you, though, is that the typical example he presented to you was that of a person who makes $105,095 per year. That's the typical hard-working guy in Canada, according to Mr. Manning. It is quite true that this person does pay 40% in income taxes, 6% in statutory deductions, and 4% in union and other dues, which account for in fact half of his gross earnings. So he's right—but he's wrong.

Mr. Paul Martin: That's how I've described him as well.

Voices: Oh, oh!

Mr. Paul Szabo: I suspect they've also left out the Canada child tax benefit in dealing with the income tax burden on the disposable income, because that has changed; we've brought it out of the tax act and put it outside.

But I'm not going to spend all my time getting the facts on the table for the Reform Party; they're going to have figure it out themselves.

• 1635

Mr. Minister, I looked at the ANDEX chart for the last sixty years, and I found that Canada was in a recession at the end of each and every decade for the last sixty years. It was like clockwork: 1951, 1957, 1970, 1980 extended into 1981, 1982, and again in 1990 through 1992. The chart shows that the key indicator each time, the consistent indicator, was rising inflation. As soon as inflation started to rise, as soon as it hit the peak, Canada started to enter a recessionary cycle. From that standpoint, I'm encouraged about the prudential provisions that you've entered into the budget.

Last week Alan Greenspan, the chairman of the U.S. Federal Reserve Board, talked about capacity. His opinion was that, in the U.S., there was sufficient room for them to continue to grow without inflationary pressures. The capacity to grow was there. But last year when the Governor of the Bank of Canada appeared before us, he raised the spectre of concern about the capacity of the Canadian economy to continue to grow without inflationary pressures.

In the last two quarters Canada has outgrown the U.S., and inflation in the U.S. has remained relatively stable. In Canada we're seeing very slightly some upward pressures on inflation. On top of that, we've seen some wage settlements that eventually may lead to further pressures. We've also seen some sectoral changes that may lead to some downturns. I would think one would be the auto sector, which constitutes 30% of our economy.

I raise that simply to highlight that Canada is not inextricably linked to the U.S., but there are some things there. It would be interesting to have your comments about this. How are we going to improve the productivity of Canada so that we can improve the capacity for Canada to grow, and so that we can have real sustained economic growth over this longer term, without having the inflation or the inflationary pressures that you commented upon in the statement you read to us?

Finally, just to wrap up the theme of the questions, I think Canadians are going to be grateful that you made a commitment to a multi-year tax reduction program in a prudent manner. But, Mr. Minister, when you commit to tax reductions, it's very difficult to reverse them. When you have a downturn in the economy, I believe it means you have to have the levers to be able to address the downturn in the economy. I guess the question is this: Do you think this committee should also be looking at a multi-year expenditure restraint plan to mirror your multi-year tax reduction plan, so that we have the levers or the tools—whether they be in legislation, regulations or otherwise—to be able to address the variability that is quite possible in Canada?

Mr. Paul Martin: Yes, I think both of your questions are on point. I can't go back sixty years, but I can certainly remember the nineties, the eighties, and the beginning of the seventies, and you're absolutely right. Inevitably what happens is that it isn't so much inflation that causes a recession as it is central banks essentially stepping in to crunch the inflation. The way in which they crunch the inflation is of course by raising interest rates. When inflation gets out of whack the way it was a number of times over the course of the last twenty or thirty years, that crunch becomes very severe and leads to recession. I think your analysis is dead on, and I think what it demonstrates is why it's very important that central banks be vigilant in terms of inflation.

I also believe that the point you raised, however, is absolutely true. What has happened is that with the U.S. FED probing whether there were in fact inflationary pressures and taking a look at whether in fact the new economy has changed the paradigm somewhat.... It is interesting that the new economy is what is driving all of this growth, both in Canada and the United States, yet intrinsic in that new economy are constantly declining prices of its basic commodities. Chips, as an example, just go down steadily until you have this driver and you have these declining prices. I think that is what has given the United States that long period of growth without the inflation pressures, and I believe Canada has shared in that benefit.

• 1640

So I think your analysis is right. I think a number of the central banks, including the Canadian central bank, have demonstrated the ability to probe, and there's a judgment call that constantly has to be made.

On your second question, I think you are absolutely right, one of the things we have to do, and that this committee has to do, is to not.... When we cut taxes, we want those tax cuts to be permanent. We do not want to get on a roller-coaster ride of cutting taxes on a Monday, only to increase them on a Tuesday. What we want to do is give Canadian consumers and Canadian business the confidence that they are not going to be facing escalating taxes somewhere down the road.

Quite clearly, if one is going to do what we are going to do in terms of revenues, one has to do the same thing in terms of expenditures. I think the suggestion you have made is one for which I now look to the chairman. It is certainly one that I think would be very worthwhile for this committee to look into.

The Chair: Thank you, Mr. Szabo.

Ms. Guarnieri.

Ms. Albina Guarnieri (Mississauga East, Lib.): Before you became Minister of Finance, it was practically a law of physics that governments would expand to use all existing cash resources. If I can follow up on something Paul Szabo touched on, your program review of 1994 changed that, and I know all members of this committee would agree that we have the luxury of talking about how to spend the surplus because of that change in direction.

Having seen the benefits of vigorous program review, and having seen programs that had perhaps outlived their usefulness give way to new programs and new priorities, do you think it would be appropriate to have just as vigorous a program review today in order to find money for new priorities, rather than taking all those funds out of the surplus?

Mr. Paul Martin: I think governments have a responsibility to their populations to constantly review everything they do. I think we should do a much better job of measuring outcomes. A lot of people talk in terms of new programs that are going to be introduced, and they say to measure the outcomes to see if, three years later, we in fact got the outcome that we expected from that program.

At the same time, I think you're absolutely right, we should measure those outcomes to see if existing programs are delivering what we in fact hoped they would deliver. If they're not delivering those outcomes, then we should ask ourselves whether those programs are worthwhile or whether they should in fact be changed in order to do so.

I have to say that the reason program review worked so well was that cabinet and the public service really came together and made it happen. It certainly would be my view that there is a great desire on behalf of the government to have us do a much better job in measuring outcomes of both new programs and old programs, but not to do it as was done in program review, under which it was being done and then we stopped. Instead, we have to basically make that an ongoing part of the government's way of operating.

Ms. Albina Guarnieri: I gather from your answer that we can rest assured that there will be more balances and checks.

Do I have time for quick question, just to shift gears, Mr. Chairman?

You touched quickly on the new G-20. Sometimes it's a bit hard to distinguish one G-initiative from another. How might the work of this group actually benefit Canadians in their day-to-day lives?

Mr. Paul Martin: Let me go back to Sophia's question in terms of what happened in British Columbia as a result of the Asian crisis.

British Columbia was very severely hit. Our commodity prices, the price of pulp and paper and the price of raw materials produced by our mining right across this country, dropped precipitously because of the Asian crisis. Essentially what you see is that we're an open economy and we're dependent upon the world working. So we have everything to gain by having the world's financial system work well without these kinds of dramatic recessions and in fact, in parts of the world, depressions that were created.

• 1645

The question is how do you make the world work? The G-7 has a tremendous advantage. It is seven very large compatible economies where the finance ministers in this case can sit around the table and basically talk and then come to a decision. There's not a huge bureaucratic load that prevents decision-making.

The problem is of course that it is seven compatible and very large economies, and that a lot of the emerging economies—China, India, Brazil and Korea, for example—were not part of it and are not part of it. So the view was that it has to be expanded so that in fact we can really take action. But on the other hand, we don't want to be so large that we'll be paralyzed by simply ongoing analysis.

That's where we came up with the G-20. My own belief is that 25 or 35 years from now the G-20 is going to be seen to have been one of the very important steps in how national governments come together to basically make the market work for the betterment of people. And that's really the main issue. This isn't a question of making it work for governments. This is a question of making it work for the firefighter in British Columbia, the secretary in northern Ontario, the pulp and paper worker in New Brunswick. It really is how do you make globalization work for ordinary people? That's what this is all about.

Ms. Albina Guarnieri: Mr. Chair, how is the Minister of Finance going to talk to the province next year?

The Chair: I'm sure he'll find a way. Thank you.

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): We're very impatient. We Tories have a problem with patience. But it's great to be here today with you, Mr. Martin.

I appreciated your comments. It's a very important step that we are taking now as a country in a surplus position. I think it's very important to realize, first of all, who's responsible for that surplus. Ultimately it's Canadians who have seen an increase in the level of taxation and a drop in personal disposable income in the 1990s by 8% during a period of time when Americans have enjoyed a 10% increase.

I think it's very important when we consider the global economy, particularly our competitive situation with the U.S., that we take a look at some of the fundamentals between ourselves and the U.S. In the U.S. 28% of GDP is consumed by taxes; in Canada it's 40%. In the U.S. 4% of GDP goes to debt service charges, and in Canada it's 9%. In the U.S. 3.3% of GDP is used for defence spending; in Canada it's 1.2%.

Earlier today you referred to health care as if it was a playoff between health care and lower taxes. In fact, in the U.S. 13% of GDP is consumed by health care expenses, largely due to an inefficient insurance-based payment system. In Canada we're at 9% of GDP for health care. So I don't think that's a fair comparison.

You referred earlier today to the success in the U.S. due to increases in basic research in the 1950s. I would argue that the success in the U.S. economy has been largely due to two of the largest tax cuts in the history of the U.S., one that took place in the early 1960s and one that took place in the 1980s, both of which emanated from the advice of a Canadian, Robert Mundell.

My question to you is, why aren't you listening to a Canadian economist, or an expatriate Canadian, who received a Nobel prize two weeks ago for his work in economics? Obviously your balanced approach is not addressing the significant imbalance we have in Canada relative to our tax system or to our tax issues and debt issues relative to the U.S.

Mr. Paul Martin: Mr. Brison, there are two ways to answer your question. One of them is to delve into a lot of history, which will get you and me into some partisan wrangling and won't do either one of us any good. I don't think either one of us wants to engage in that, however satisfying occasionally it is.

Mr. Scott Brison: I enjoy it as much as you do, sir.

• 1650

Mr. Paul Martin: Probably not as much.

Mr. Scott Brison: But I am looking forward to answering your questions, though.

Mr. Paul Martin: Let me deal with your question in the spirit in which I think you've asked it, which is really to say, look, what are we going to do here? Let there be no doubt that one can debate whether in fact the Reagan tax cuts, or indeed the Kennedy tax cuts, led to that increase in economy activity. My own belief is that it did. I don't think that by any means the tax cuts will recoup in terms of government revenues, but I think there's no doubt that cutting taxes in the short, the medium, and especially the long term does an enormous amount for an economy, for job creation, for confidence in terms of the kinds of risk taking that are required. It puts a lot more money into people's pockets, there is no doubt.

When you look at the numbers I've talked about, I think the 16% tax cut for a family that we will have brought in by next year gives us a lot of grounds for satisfaction, and I would really hope that either I myself or another finance minister at a future time can talk about much larger numbers. So there's no doubt, absolutely no doubt, about the point you're taking on the benefits of cutting taxes.

The issue is the following. We still have the second highest debt-to-GDP ratio of any of the G-7 countries. We have eliminated the deficit, but we still have a very large debt. In terms of interest rates, despite the fact that we have been able to recoup sovereignty over our interest rates to a considerable extent, today no country is immune from what happens in the rest of the world. So when markets look at us, we are still in that situation where we have to understand the effect that a volatile market can have on us and what happens with that very high debt-to-GDP ratio.

The problem is that when we took office, and through that period, it took but a blip to see our interest rates go through the roof. And the effect of rising interest rates absolutely negates—not just once, twice or three times, but five times—the effect of any tax cut.

So the first thing we have to do when we approach whether or not we should be cutting taxes is ask whether there is a risk that in cutting taxes we're going to go back into deficit or jeopardize our ability to pay down debt and to maintain a declining debt-to-GDP ratio. That's the first thing we have to ask. And even if the debt-to-GDP ratio keeps coming down, is it going to come down at a rate that's fast enough to prevent rising interest rates throwing us off?

Mr. Scott Brison: Wouldn't that—

Mr. Paul Martin: Just a minute, because I'm not disagreeing with you, I'm simply trying to provide some of the background.

The second issue is that when you look at the new economy, and when you look at the effect of basic research and the tremendous benefits of education, when you look at the fact that for instance we have a crumbling infrastructure in this country in terms of waterworks, for the environment, in terms of highways—which is very important in terms of productivity—what you see is the absolute necessity of being balanced in what you do.

So it is not a question of saying, should we not cut taxes? We absolutely should cut taxes. The benefits to the economy are clearly there. But at the same time, we have to make sure our balance sheet is in shape and that we are investing in those areas that will enable us to build for the new economy. That's the balance I talk about.

Mr. Scott Brison: But when you talk about the new economy, one of the facts is that in a new economy we don't live in isolation. You refer to debt and taxes, yet our level of government spending comparatively is very high compared to that of our trading partners, particularly the U.S. In that regard, the balanced approach you are speaking of does not reflect the global reality that our taxes and our level of debt are comparatively too high.

In my opinion and in the opinion of our party, we should be focusing on those two priorities and on prioritizing spending to, first of all, ensure the sustainability of those programs that Canadians already value. Nobody will argue against investments in child care from a theoretical perspective, and we recognize its importance. But the question Canadians have to ask, and are asking, is can we afford this in the long term? Can we afford these new programs when in fact the sustainability of the programs that we already value are by no means guaranteed with the levels of debt we have?

• 1655

It would take very little change in an international situation or in interest rates to eliminate, for instance, the fiscal surplus we are seeing right now, based on that level of debt. Why aren't we tackling debt and taxes more aggressively?

Mr. Paul Martin: There are several ways of answering your last question on why we are not tackling debt and taxes more aggressively. The answer is that we are paying too much in interest on the national debt and we have no choice. We are paying $42 billion. It is the highest expenditure of the government. It is double the amount we spend on old age pensions. That is a legacy we inherited as a government, and we have to deal with it.

In terms of our spending, at the present time it is at 12.4% of GDP, which is its lowest level as a percentage of GDP in 50 years. It is hard to believe. Is there waste? Absolutely there's waste. There's waste in any institution. Should we be more efficient? Yes, we should, and we always have to strive for it. But spending as a percentage of GDP is at its lowest level in 50 years. When we took office, spending was $120 billion and it's now down to $112 billion. We are dealing with a situation here that is in direct correlation to the size of our debt and those interest costs.

If you take a look at some of the things we're talking about—I'm sure you're not asking this—nobody thinks we shouldn't be spending the appropriate amount of money on search and rescue. Nobody should be saying we shouldn't be spending the appropriate amount of money on the RCMP and all of their computer programs. There is a wide range of programs that the government has to spend money on if citizens are going to feel confident.

Again, it is a question of balance. The issue really is that with almost any one of the programs that deal with children, it is not simply the cost today. If you want to deal with it in a very narrow economic perspective, it's the cost seven years from now of not doing it. Most of the studies show that on these child programs, $1 spent today saves you $7 in ten years. Think of the deficit we will leave if we don't begin to deal with these problems.

So I guess the answer to your question—and this is the debate we must have—is that we cannot be more aggressive because we're spending too much on interest. We have to cut taxes and we absolutely will. But in terms of the programs on which we are spending money, the real question is not whether we can afford to do this but whether we can afford not to.

Mr. Scott Brison: Mr. Chair.

The Chair: Final question.

Mr. Scott Brison: You speak of participating in a knowledge-based global economy and the new realities of that. One of the realities is that the nation's success in that kind of environment is contingent on its ability to attract and maintain highly skilled workers and people with the skills to participate and prosper in that environment.

We've seen a growth, from 19,000 to I believe 86,000, in people going from Canada to the U.S. in the last several years. Many of them are the types of people we should be trying to attract to and keep in Canada. They are people with education in the high tech sector, who are poised to produce a great deal in that environment. Some of this is a function of corporate tax. Companies can afford to pay more in the U.S. because of the tax system. The Mintz report in fact addressed some of that, but it hasn't really been addressed by the government.

On the personal side, capital gains taxes play a big role in that because compensatory systems are increasingly using stock options to compensate people. Will there be movement from the government on both corporate tax and capital gains tax issues? They affect people from all walks of life in Canada, and particularly in the high tech sector. We need to keep those people here if we're going to be successful in the new economy.

Mr. Paul Martin: Mr. Brison, that's certainly one of the things I would like this committee to come back to—the wide range of taxes. I'm very much looking forward to hearing the opinions of this committee on that area.

• 1700

The one thing I would say is that in the kind of world in which we live, people are mobile and they're going to move. People are going to leave the country and other people are going to come to the country. Hopefully, people who leave the country will gain experience and come back.

There are many reasons why people leave, but the main reason is obviously opportunity. One of the reasons for investing so heavily in basic research, research and development, and our universities is to make sure people have that opportunity.

Mr. Scott Brison: I have one closing remark, please.

The Chair: Sure.

Mr. Scott Brison: I guess the fundamental difference is that I believe those opportunities are created by the private sector. I firmly believe that you believe in the 1970s Liberal model that those opportunities can only be created by government spending. I guess we agree in the end, but we definitely differ on some of the means to get there.

Mr. Paul Martin: I certainly believe that those opportunities will be created by the private sector. In fact, in the core of my speech that's why I talked about the perspective of the entrepreneur. But we also have to understand that there are certain things the private sector needs.

Again, just looking at the new economy and those studies in the United States, the private sector will do the applied research and the market development. But if governments, whether in this country or in the United States, do not do the basic research, in many cases it won't get done.

One of the real problems they're running into in the United States is that the basic research is not being done. If that happens, there will be a dry-up and you will see a slowdown in their economy in about 20 years.

Again, it comes back to the balance. We absolutely have to cut taxes; there is no doubt about that. We have to deal with this huge legacy of debt. Government has a responsibility, not to pick winners—let there be no doubt about it—but to provide the basic infrastructure that the private sector can build on to create the kind of jobs we both want to see created.

The Chair: Thank you, Mr. Brison.

Minister, I have a question. First of all, I want to thank you for giving us the sort of framework for the type of debate you want this committee to engage in. When you look at the questions on personal income taxes, EI, research and development, and skills and knowledge, there is no question in my mind, if I read between the lines, that you're truly talking about an economic growth agenda.

Another thing I really liked about this report was the fact that you gave us the five-year projection. This raises the very interesting point, for the work of this committee, that there is a commitment on the part of the government to have a 50-50 split for tax and debt, versus strategic investment and social and economic spending. But I sense, judging from the question you asked me, that you want this debate to be open. You want Canadians to give their input, and you don't want them to be tied down to any preconditions.

Of course, as chair of this committee, I know that in the last two years we've had to look at the 50-50 split. But now you're going right into the fifth year, which is over the commitment made to the last mandate. Can I lift the 50-50 split, as we debate these issues?

Mr. Paul Martin: You're right that we want this debate to be as open as possible. We hope that you will hear from every Canadian, expert and otherwise, in every part of this country.

Essentially we were talking about two things in terms of the 50-50. Number one, it is the symbol of the balanced approach, which we believe is very important. The commitment on the 50-50 per se is made within this mandate, and the statement is that at the end of this mandate the government will provide Canadians with an assessment and demonstrate that it has followed the 50-50 approach. But the 50-50 does operate within this mandate. The decisions taken after that will really be separate policy decisions.

The Chair: As your colleagues from cabinet present to you their wish list for programs, would you commit yourself to the questions that were asked on program review, as Ms. Guarnieri alluded earlier?

Mr. Paul Martin: I think those are very good questions. As I mentioned in speaking to Ms. Guarnieri, they are quite valid questions that can be asked of new programs and of ongoing programs on an ongoing basis.

The Chair: Are there any further questions?

Mr. Manning.

• 1705

Mr. Preston Manning: Thank you, Mr. Chairman.

I have another question for the minister, but before I ask it perhaps I can comment on Mr. Szabo's math, which I think is typical Liberal math. What he did was take this fellow's earnings and multiply the number by 50 to get this figure of $100,000. He failed, apparently, to notice that this is a huge chunk of overtime, which would not occur in each week, and cannot be multiplied by 50.

Mr. Paul Szabo: It's a tax on annualized income.

Mr. Preston Manning: To any foremen or any millwrights out there, there's a Liberal member of this committee who thinks millwrights make in excess of $100,000 a year, and I would encourage you to perhaps correct that, because it would help the image of the committee.

I would like to return to my question. I asked what the minister would say to this worker who feels he's being gouged by the taxman because he ends up getting 50% of what he thought he earned. It's important that we get the minister's answer straight, because we intend to go to thousands of workers—we're going to go to factories and offices over the next year—to ask for these pay stubs, because it's a great way to get out what's actually happening to Canadians on tax relief.

The minister's answer to that question—and I want to get this straight, because when I talk to people I want to say “Here's what he said”—was that, first of all, this fellow's taxes are lower than they were. Second, he's getting all these services for this tax that's being gouged out of his paycheque.

Of course, that's a typical political answer. These workers are not stupid. When I talk to fellows like this, I always ask a second question after asking to see their pay stub—that is, do you feel better off today than you were five years ago?

The answer you get from workers like this is, no, I don't. I feel that my total tax load is higher than it was five years ago, because my disposal income is being pinched.

If you try to say, well, we're giving you all these services, you can imagine what this worker—and this is from your province, Lorne—would say to that.

Is the minister saying this worker is getting more health care in a province where one out of six hospitals have been shut down—and he's in the Saskatoon area—or in a province where the federal government used to pay 50% of every total health dollar spent and is now contributing 10¢ on the dollar? Is the answer we're going to give this worker, well, you should feel happy about this, because you're getting more health care or services? It simply doesn't wash.

So my question for the minister, again, is what does the minister say to this worker—and I contend there are millions of them in the country—who gets this paycheque that's been mutilated by the federal finance department and who feels that his tax load is higher and not lower and that his federal tax dollar buys less today than it did five years ago?

Mr. Paul Martin: Well, I think I would say two things to him, Mr. Manning. The first thing I would say to him is that, as I look at that stub, the provinces and the federal government came together and accelerated the Canada Pension Plan premiums in order to save the plan. They essentially said that this particular worker, who would have had to pay ultimately 14%, will now only have to go to 9%, but we're going to accelerate that in order to protect the Canada Pension Plan.

If you take a look at what people have said across this country, they want to protect the Canada Pension Plan.

The second thing I would say to him is that we have eliminated the 3% surtax, and that is a lot of money in his pocket.

The next thing I would say is that there has been a $675 increase in tax-free income, and if he has children, there are three stages of ever-increasing child tax benefits that he is in the process of receiving, none of which shows up on this particular stub.

I would say that all of that has been done in the less than 18 months since we eliminated the deficit. I simply remind you that the province you come from, for reasons that are perfectly understandable, essentially did not begin to cut taxes for three years after they eliminated the deficit. In fact, that was the Reform Party's program, as stated in Fresh Start. We began to eliminate taxes immediately.

So the first thing that is happening here, Mr. Manning, is that you're arguing against the party program that you yourself set out.

The next thing I would ask is that, as you go across the country and begin to talk to these people, you essentially tell them what the Reform Party would do under these circumstances. Let me give you an example.

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The Reform Party has a tax plan that is based on a surplus of $52 billion in three years. Now, you've seen the numbers, which were agreed to by the economists. You have said that in three years you will cut taxes by $26 billion and that you will retire debt by $26 billion. That requires a $52 billion surplus. That is off your own website.

The only thing I would say to you, Mr. Manning, is that you should be consistent in your programs. You cannot stand up in the House of Commons and on a Monday say we should put more money into health care, put more money into this, put more money into that, and then at the end of the week stand up and say we have to scrap all of these programs and cut taxes.

The Canadian people are entitled to know whether the official opposition has a consistent and logically coherent program. So far, Mr. Manning, we have not seen that. When you meet with the millwright again, I think you have a responsibility to provide him with those numbers as well.

Some hon. members: Hear, hear!

Mr. Preston Manning: Mr. Chairman, I think now is not the time to get into that debate. We will on the budget, and we think we'll win that debate. We think the minister is talking about tax relief today because of things that were said by Reformers.

I do think the minister's comments for the millwright explain why the Liberals are becoming an endangered species in the province of Saskatchewan.

I would like to turn the mike over to my friend for the last question, if I may.

Mr. Gary Lunn (Saanich—Gulf Islands, Ref.): Thank you.

I have three very short questions, Minister.

First of all, this afternoon you've stated a number of times that we're going to bring taxes down. It's not an option. We're going to reduce personal income taxes. However, when you look at the numbers since you became the finance minister, the revenues have gone up about $40 billion or $45 billion, about 45%. The number of taxpayers has gone up 10% to 15%, in that range. In other words, government revenue, where you get your money from the taxpayers, has gone up at a rate three times greater than the number of taxpayers.

So that's number one. I want to know how that has any credibility when you say you're going to reduce taxes and yet you've claimed over the last two years that they're going down and no one has been able to see that.

My second question has to do with the brain drain. I want to suggest to you that you're shattering the aspirations of our young people, that you are choking our economy with your tax policies. You're driving the leaders, the CEOs, the entrepreneurs out of our country today, and they're the ones who have to drive this economic engine 15 years from now. I see parents coming into my constituency office all the time, on a regular basis, shattered that their children are now going down to the U.S. to work in the sectors of health care, technology, and engineering. They're the stars of tomorrow.

I suggest that we need to work on that vigorously today. I'll quote from your statement: “one thing is for certain: success in the modern economy does not lie in luck”, but then you say we want to be “A nation where not only our best and brightest want to remain. But where the freshest talents from around the globe are drawn to come.” And yet you think it's not based on luck. So we really need to focus on that.

There's one last premise I want to leave with you, and I'd like your comments. I'll bring us back to an analogy concerning my wife. Whenever we get extra money or something by mistake in our house, she gets all excited and says “You know, we got some free money today. I get to go out and buy....” She always equates it with how many pairs of shoes it can buy. She always forgets that I have to pay that money back, that it really doesn't belong to me. She gets quite excited.

I thought today, as you talked about a $5.5 billion debt, and some of the other economists are talking about $9 billion or $10 billion—the number is out there—that I want to put this premise out to you that it's not free money. It's not even our money. It's not even the government's money. It's the taxpayers' money.

Don't you agree that we should have a budget, and that included in that budget should be a certain amount of paying down the debt? Any excess is not our money. It belongs to the taxpayers. It's not free money. As much as I love my wife, I would hate to see that theory of economics take over.

I'd like your comments on those three proposals, please.

Mr. Paul Martin: Let me deal with your questions in reverse order.

I absolutely agree: governments don't have money, they're given money. It's money that comes from the pockets of hard-working Canadians from coast to coast. That is why, when I look at the questions asked by, for instance, Ms. Guarnieri with regard to measuring outcomes, I think how you handle that money is incredibly important. You're quite right that to the extent we can, we should cut taxes and we should put that money back into the pockets of Canadians. There should be no doubt about that.

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I also agree with you on the necessity of cutting debt. The drop in the Canada debt-to-GDP ratio over the last couple of years has been greater than that of any other industrial country. In other words, we are cutting that debt faster than anybody else, a combination of absolute debt pay-down and economic growth, and that's something we want to continue. There is no doubt about that point, so on that, we would certainly agree.

On the second point, that should we be cutting taxes right up the income stream, again, absolutely, we agree with you, we should be cutting taxes right up the income stream. What we have said is that clearly the priority should go to those who need it most, and they at the present time are low-income and middle-income Canadians. That's where our priority lies. It doesn't mean we shouldn't go up the income stream; it simply means there is a priority for those who have the greatest need. How we work that out is going to be one of the benefits of this committee looking down the road.

I have some difficulty with your last question. You're absolutely right that our revenues are up. Our revenues are not up because of increased rates of taxation. Our revenues are up because—

Mr. Gary Lunn: They're going up at the rate of three times greater than the number of taxpayers.

Mr. Paul Martin: Of course. The fact is that our revenues are up because our economic activity is up, because the country is doing better. The fact is we're going to have this year and next year one of the strongest rates of growth of any of the G-7 countries. We're also going to have the strongest rate of job creation. Yes, our revenues are up because this country is doing well.

On the number of taxpayers, yes, you're right, the number of taxpayers is up. The reason the number of taxpayers is up is that there's a million and a half more Canadians working than were working five years ago. That's a good thing. We want Canadians to work.

Mr. Gary Lunn: The point you're missing is that the taxpayers are paying more money. Revenue is increasing at a rate three times greater than the number of taxpayers is increasing, and it doesn't take rocket science to do the math. This means the taxpayers are paying more money per taxpayer than they were when you became the finance minister.

Mr. Paul Martin: That is not true. In fact, the tax cuts that we have brought in have been substantially greater than anything that would be brought in—

Mr. Gary Lunn: I don't know which numbers you're looking at. I must have a different sheet.

Mr. Paul Martin: I'd be delighted to take you through the numbers.

The Chair: Thank you very much, Mr. Lunn. That was a final question.

Minister, on behalf of the committee, I would like to express to you our sincerest gratitude for giving us yet another opportunity to hear the economic and fiscal update for the year 1999. We look forward to engaging Canadians on those particular questions that you cited in the report, and of course we look forward to preparing recommendations for your perusal come the week of December 10.

Mr. Paul Martin: Thank you very much, Mr. Chairman.

The Chair: The meeting is adjourned.