FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, November 6, 1997

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[English]

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

As you know, pursuant to Standing Order 83.1, the finance committee is holding hearings, and has held hearings across the country, to seek input from Canadians as to measures we should be taking in the upcoming budget that would in fact reflect the priorities and expectations Canadians have.

Today we have the pleasure to have with us as an individual, Mr. Pierre Fortin, from the Department of Economics, l'Université du Québec à Montréal. We also have representatives from the C.D. Howe Institute, from the Ontario Teachers' Pension Plan Board, from the Canadian Home Builders' Association, from the Canadian Centre for Policy Alternatives, from the Bank of Canada for Canadians Coalition, and from Friends of Canadian Broadcasting.

You have approximately five minutes each to give us an overview of your presentation. Thereafter, we will proceed to a question and answer session. We will start with Mr. Pierre Fortin.

Mr. Pierre Fortin, welcome.

Professor Pierre Fortin (Department of Economics, Université du Québec à Montréal): Thank you very much, Mr. Chairman.

[Translation]

I'm going to read my presentation slowly in English. I gave a copy of my comments to the interpreter, and that should help those of you who do not understand English.

[English]

I shall break down my presentation into five subjects: first, short-term economic assumptions; second, financial targets; third, UI and social transfer cuts; fourth, education; and fifth, inflation targets. My presentation will take five minutes and twelve seconds.

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First, economic assumptions. My view about inflation, real growth and interest rates coincides with the broad private sector consensus here. There will be inflation below 2% in the next two years, real growth decelerating to 3% by 1999 and interest rates rising a bit to cool off the economy and prevent inflation from exceeding 2% in strict conformity with our monetary strategy.

The bottom line is that our recovery will last only 18 more months instead of the four years we would need to return to full employment as the U.S. has done.

Second, financial targets. I think the government should pursue three financial targets. One, lower the federal tax burden to 16% of national income over 10 years from 17% currently, which means reducing taxes by $4 billion in the next four years. Two, register a small budget surplus every year so as to lower the federal debt burden to 40% of national income in 10 years from 71% currently. That would put us at 55% in 2001, four years from now. Three, in normal times index program spending to inflation and population growth, but until 2001 make a one-shot $3 billion to $5 billion injection of funds to mend the severe distortions introduced by the recent spending cuts.

So one, two, three. One, reduce the tax burden a bit—not too much, because the federal tax burden has been pretty stable over the last two decades. Have a small budget surplus to accelerate the reduction of the debt burden and index spending to inflation plus population growth rates, which would be something between 3% and 3.5% at this time.

Third, UI or EI and social transfer cuts. It's my view that the damage done to Canada's income protection system by UI and CHST cuts has been severe. On average Canada's UI system has become no more generous than, say, the Alabama system. Only 40% of unemployed Canadians now receive UI benefits. The research paper I've just tabled, which you can find around here—although I warn you it's in French—finds that UI cuts in the 1990s will soon have sent some 194,000 additional Quebeckers onto social assistance and that the additional cost to the Quebec treasury will be $845 million annually.

Projecting these Quebec numbers to all provinces, the $6 billion cumulative federal savings in benefit payments will have forced the provinces to pick up a $2.5 billion bill in additional welfare payments. The way we run social policy in Canada, with two levels and people playing ball against the wall against each other, is in my view outrageously inefficient and extremely unfair of course to poor, unemployed Canadians.

Fourth, education. The evidence from recent economic research is very strong that what we need to sustain growth and prevent wage inequality from increasing is not so much to foster elite education and specific training but to raise mass educational attainment and keep our workforce fully employed. Canada is doing very well on the first criterion, educating its young people, and very bad on the second, full employment.

In the last two decades Canadian provinces have been fairly successful in raising the percentages of adolescents and young adults attending school full time. In Quebec school attendance in these two age brackets now reaches the startlingly high level of 85% in the 15 to 19 age group, and 38% in the 20 to 24 age group. Actually, Quebec dominates all other provinces in school attendance between the ages of 15 and 24. With my own fellow citizens in Quebec in the forefront, our young Canadians rank very highly internationally in language and mathematical proficiency, and definitely above young Americans.

My advice here is simple. Don't fix a system that works well. Don't mess with the exclusive provincial jurisdiction in education, and don't add another layer of government in this area.

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Fifth, and finally, inflation targets. Let me emphasize that the cause of persistently low incomes and high unemployment in central and eastern Canada is the unwise targeting of an inflation rate of between 1% and 2%, and conversely, that the source of high incomes and low unemployment in the United States is the wise targeting of an inflation rate of between 2.5% and 3.5%.

The Americans have understood that a little bit of inflation—not much, but a little bit—is needed to grease the wheels of the economy, but we have yet to recognize this requirement in Canada. Only by raising the inflation target range a bit, to 2% to 4% from the current 1% to 3%, and allowing inflation to rise in the 3% range if necessary, will Canada be able to achieve its full income potential and full employment.

This would entail four years of 4%-plus real growth, and the decline of the unemployment rate into the 6% to 6.5% range, which is entirely feasible. Keeping inflation below 2%, whatever the cost, amounts to declaring that we will never return to full employment in this century. By contrast, adjusting the target range upward a bit would represent an extremely small risk to take for a very large potential pay-off. People are ready to buy lottery tickets for a lot less than that.

Thank you, Mr. Chairman.

The Chairman: Thank you, Professor Fortin, for your presentation. I'm sure there will be many questions during the question and answer session.

The next presentation will be made by the representatives from the C.D. Howe Institute, Mr. William Robson.

Mr. William Robson (C.D. Howe Institute): Thank you very much. I want to thank the committee for its tolerance in allowing me into this room twice in one day. Your forbearance is appreciated.

I want to start off by saying that it's a pleasure to join the pre-budget consultations under circumstances such as we face today. Soon we won't be congratulating the federal government on moving towards a balanced budget, but on actually achieving it. Low national saving and high unemployment are causes for concern, but the immediate outlook for growth and job creation is better than it has been for years.

That's a happy preamble. Let me give necessarily brief responses to the questions you asked us today. But in case I go overtime, I'll prefigure.

I think that buoyant growth over the next few years puts us in a superb position to pay down debt. By lowering interest costs, which I think is the true definition of the fiscal dividend, we can make room in the budget for a broad-based personal income tax cut at the low end before the end of this Parliament.

On the economic assumptions that we were asked to comment on, as I just signalled, I think the near-term outlook for growth is excellent. For the past year and a half the Bank of Canada has been pushing money into the economy at an extraordinary pace. My favourite money measure is M1, cash and chequing accounts. That's spending money. It has obvious links to consumer behaviour and it has a tremendous record as a leading economic indicator. Since the summer it has been growing in a range in the high teens year over year, and that foreshadows a surging economy and strong job growth at least through 1998.

There is a cloud on the horizon, and this is something that Pierre Fortin alluded to, although I would take some issue with him about the significance of the inflation targets. I think that the bank, if it continues to maintain money growth where it has over the last little while, will have to pull back more in late 1998 and 1999 than it otherwise would have done. If that's true, then the fiscal year 1997-98 is the time to reduce debt. If even prudent forecasts that assume unchanged fiscal policy are producing surpluses that are just a little too mouth-watering, my advice would be to add to the contingency reserves, because these are the fat years, during which we should prepare for leaner times.

On the question of strategic investments and tax changes, I may have signalled already that I do not favour new federal spending. The economy is moving ahead without it. Low national saving and high unemployment are problems, but when I look down the spending side of the federal ledger, I don't see many programs that, if increased, would do much to help us out of that problem.

One initiative I think we should scrap, looking a little further ahead, is the seniors' benefit. This change will dramatically hike the effective tax rates that middle-income Canadians face after retirement and I suspect that it will therefore seriously depress their saving before retirement. The result of that would be even lower national saving just when an aging population should be saving more, and if that reaction on their part is strong enough, the fiscal savings projections accompanying the suggestion that we should have a seniors' benefit may not even materialize.

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On the tax side, I would like to speak against selective reductions or new spending disguised as tax breaks. Everything in the budget competes for the same dollars, and so what those proposals essentially amount to is an advocation of higher taxes for the many to finance subsidies for a few, and that's not a promising route to fairer, simpler or less distorting taxes.

Finally, on jobs and human capital creation, the third question, as I suspect may be obvious, I don't have any innovative schemes for creating jobs and human capital. I'll take the opportunity to second Pierre Fortin's comment about education even in provinces that don't do as well as Quebec. I think the provinces should clean up their own mess on elementary and secondary.

What I do want to say is something rather old and, I think, rather reliable. Demand in the Canadian economy is sprinting ahead right now, but our productive potential, the supply side, is staggering. We need broad-based tax relief to encourage work and saving. We need it most, however, where it costs the most, low down. Thanks to various taxes and clawed-back social benefits, marginal tax rates in Canada are much higher for people who are under the median income than they are for people who are above it, but even a one point reduction in the bottom personal income tax rate would cost a lot of money, more than $2 billion annually.

Where do we find that money? We have to earn our fiscal dividend. We have to cut our annual interest bill by paying down debt.

So I'd like to close with a suggestion. Last fiscal year net federal interest amounted to about $5,400 for a Canadian family of four. That was down from the previous year's figure of $5,700 but it was well above the $4,800 we paid at the end of the 1980s. Why not make the interest bill the key target for the next fiscal plan. With good results this year, we could get below $5,000 per family in 1998-99 and a nice big surplus that year, 1998-99, would put us back below $4,800 the following year.

That would make room in the budget for a lower bottom personal income tax rate, which I think would be a very nice way to start the next century.

Thank you.

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

I will now move to the representative from the Ontario Teachers' Pension Plan Board, Mr. Leo de Bever. Welcome.

Mr. Leo de Bever (Vice-President, Research and Economics, Ontario Teachers' Pension Plan Board): Thank you, Mr. Chairman. I will stick to the instructions, give you a brief summary of the points I intend to make, and then spend the remainder of the time elaborating on some of these key issues.

First of all, I think the good news is that we're going to have the first surplus in about 20 years, but it's also the bad news in the sense that the intervening 19 or 20 years have resulted in deficits that have driven up our gross debt-to-GDP to an amazing level.

There's also an implicit assumption that from here on we are going to be wiser and not run any deficits. I would suggest to you that the business cycle has not been suspended and at some point we are not going to be able to avoid running deficits. So some prudence in the spending of whatever fiscal dividend we think we have would be prudent. In particular, I would recommend we continue the practice of having a contingency reserve.

I've been an economist for over 20 years. I'm probably as good as anybody at trying to figure out when the next turning point comes and I don't think as a profession we've been very good at it, so we should keep our powder dry just in case.

I'd also like to point out that the surpluses are in part being achieved by effective tax increases. The way our system works, a 1% increase in nominal GDP generates more than 1% in extra taxes. That's an effective tax increase. I suggest that now when we're starting to run surpluses we consider tax decreases that would effectively cap the tax-to-GDP ratio.

I would also warn you that the next 10 years are going to be a hiatus from the standpoint of demographics. The pressures on social programs are not going to be particularly increasing for about 10 years. After about 2005, that starts to change very dramatically and it really accelerates after 2010. In the medical area and the seniors' benefits area there are going to be significant increased pressures on social programs, and I think in preparation for that we should try to put our debt position in the best situation possible.

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You asked for recommendations on what to do about unemployment—where to spend money in terms of extra job creation. I know as a government it's very tempting to find some extra money and spend it to create jobs. Unfortunately, good intentions and the effect of those good intentions are not always the same thing. I'm referring in particular to the fact that in your instructions, for instance, you ask how we can create more jobs in small or medium-sized businesses in the knowledge industry, or the knowledge part of the economy. I have observed that the greatest deterioration in job and earnings prospects is not in that knowledge part of the economy, which is doing relatively well, it's on the bottom end. Both Rob and Pierre have referred to that implicitly.

It's the low-skill individuals who are having the greatest challenges, and putting more money into high tech isn't going to help that. There's also the implicit assumption that the problem is providing more capital in conjunction with labour to get these businesses going. That's not our observation, and my observation in many cases is that it's a lack of skill in being able to run the small business you want to create. Perhaps that is where government can have the biggest impact.

There's also the bias of small versus large. I don't want to get into an ideological debate, but I don't think we know enough about the symbiosis of big and small companies to determine that supporting small businesses is necessarily the best way of creating more jobs. So I'd urge you to be cautious in not having too much of a bias there.

Finally, governments like to think that they can operate on the economy through macro conditions, through macro effects—spending money here, moving levers there. The history of that kind of activity shows us that the effects of it have been very mixed. I would urge you therefore to focus more on the basic functions of government, the one that Pierre referred to, the educational aspects, the mass education, which I think has a much bigger impact on fundamental job creation than some of the other things that may be under discussion, which are more high profile and will give you initially some press impact but will not give you the longer-term effect.

I think I've used up my five minutes, so I'll stop there.

The Chairman: Thank you very much, Mr. de Bever.

The next presentation will be made by the representative from the Financial Executives Institute Canada, Mr. Kast. Welcome.

Mr. H.M. (Mack) Kast (Chair, Financial Executives Institute Canada): Mr. Chairman, members present, my name is Mack Kast and I'm vice-president of finance at Centra Gas Manitoba Inc. I'm from sunny Winnipeg and friendly Manitoba. I am chair of, and here on behalf of, the Financial Executives Institute of Canada. I thank you for the opportunity to appear before this esteemed committee today in this important consultation process relating to the 1998 federal budget.

Financial Executives Institute Canada is a national professional association of over 1,350 senior financial executives representing more than 900 companies across Canada.

Overall, the attitudes and actions of the government relating to a fiscal responsibility for our nation have improved significantly. Canada has retreated from the precipice of bankruptcy. The retreat, however, is but one small step and there remains much room yet for improved performance. In the spirit of improving performance, Financial Executives Institute Canada believes the government should give consideration to four areas in its upcoming 1998 budget: debt reduction, tax reductions, retirement systems, and government expenditures.

First with respect to debt reduction, as the government moves closer to deficit elimination it is now time to address shrinking Canada's debt load. Reduction targets need to be set. As well, we need to ensure the budget parameters are realistic so as to minimize any false sense of security that might otherwise lead one to the temptation of increased spending. Many projects and initiatives compete for government dollars. In the longer term, however, the most important strategic investment the government can make is an ongoing investment in debt reduction. We believe the major portion of fiscal surpluses should be directed to debt reduction.

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The second area to be given consideration is tax reduction. Canada must address the issue of its high and uncompetitive personal tax burden. High personal taxes have an insidious, negative effect on our economy. We recommend that a modest portion of any sustainable fiscal surplus be directed to tax reduction. We believe any reduction should be applied first to payroll taxes, second to the issue of bracket creep, and third to reducing the high temporary surtaxes. Tax reductions will generate renewed hope and give a positive boost to our economy.

The third area for consideration is retirement income. The government should motivate self-reliance for retirement. The seniors' benefit must encourage work and savings across the full income spectrum. The CPP review must address intergenerational inequity. Registered pension plan benefits are out of step relative to when the limit was frozen over 20 years ago. Registered pension plan contribution limits should be increased to promote more self-reliance for seniors. As well, the 20% limit on foreign property investment should be eliminated.

The fourth area for your consideration relates to government expenditures. Just as private industry faces competitive pressures, so too does the government. Inordinate levels of expenditure and the associated high levels of taxation not only discourage growth and vitality in our country; they also tend to make neighbouring jurisdictions a more attractive place to do business. Real government spending per capita targets need to be set, implemented, and followed.

In summary, our present government has been steering a steady course away from troubled waters, but not so much so that we can relax. The resolve of the past three years must be not only sustained but improved upon at every opportunity.

Thank you, Mr. Chairman.

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

We'll now move to the Canadian Home Builders' Association, Mr. Bob McLaughlin, Dick Miller, and John Kenward.

Welcome.

Mr. Bob McLaughlin (President, Canadian Home Builders' Association): Thank you very much, Mr. Chairman. My remarks will be brief.

We are here representing Canada's residential construction industry, an industry of which we are very proud. I am the president of the Canadian Home Builders' Association and a builder from New Brunswick. Dick Miller is a member of our national executive and a builder in Halifax. John Kenward is our chief operating officer. We are speaking for thousands of firms in our industry from across Canada.

The residential construction industry is one of Canada's most important domestic industries. We employ hundreds of thousands of people in communities across Canada. It is estimated that our economic activity represents at least 6% of GDP. Our activity has a direct impact on other sectors, such as the building products manufacturing sector. In short, our industry produces real wealth and contributes substantially to employment. For that reason, our industry continues to be a principal indicator of Canada's overall economic health.

My principal message today is that the economic health of our industry continues to be precarious. We are not on the path of sustainable improvement. While housing activity has improved in many markets across Canada this year, the industry continues to operate below its potential. The reasons for our underperformance are the same reasons that jeopardize the prospect for sustainable improvement. We do not have a public policy environment that supports the return of an economically viable and healthy home-building industry in Canada.

We applaud the federal government for having got its fiscal house in order. It was essential that this be done. The next step is equally essential: taking Canada's improved fiscal and economic condition and translating it into public policy actions that will support continued economic growth and produce benefits for Canadians. Balancing the books is the means to this end. The Minister of Finance has made this point very clear in his economic and fiscal update.

We would caution the minister not to read too much into the improvement in housing activity this year. Don't believe the current improvement in housing activity signals the return of an industry able to operate with a reasonable return on investment and contribute to Canada's economy on a sustainable basis. Behind statistics and economic analysis is the real world of doing business in this industry.

The minister points to certain key principles in his statement: governments must focus on key areas, as governments can no longer be all things to all people; an effective government works with the economy and markets, not against them; taxes should be collected in a manner that is conducive to creating jobs and growth; and taxes that are owed should be paid.

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All these principles ought to be applied to public policies that affect housing. The fact that they are not being applied is resulting in the continuing erosion of industry capacity, the loss of tens of thousands of jobs, the loss of substantial government revenues, dysfunctional housing markets, and the growth of the underground economy.

The public policy environment is working against the return of a healthy housing industry. Indeed, it is poisoning our industry. What we want is an environment in which we earn a reasonable return on investment and operate our businesses intelligently. Unless this environment is put in place, a sustainable recovery will elude us.

Dick Miller has some comments.

Mr. Dick Miller (Secretary, Canadian Home Builders' Association): Mr. Chairman, I would like to begin by saying that there are a number of initiatives currently in place with respect to the housing industry, and they evolved through the leadership of the government of the past number of years. What we have to do is build on those initiatives; I don't think we have to reinvent the wheel.

We have a document that we are leaving for your perusal, entitled “The Housing Industry and the Government's Job Creation Strategy”. In that document, I'd like to highlight two areas that I think are most important for the leadership to look at today. Again, these are initiatives in place.

One surrounds the area of the GST rebate. The rebate is in place. It is time to re-evaluate that current level of rebate and look at an increase in that rebate to bring this industry to a level playing field and to eliminate the bumps in the road that we have faced as an industry since the introduction of that particular tax.

Another area that is very important for us to look at is the area of tax reform. We have to look at the regulatory reform systems. We need the leadership to surface in this area, take this issue, and work with the industry, again, to look at creating a level playing field for this industry to participate.

We are a key economic indicator. We're proud of the fact that we enjoy a substantive impact on the Canadian economy, and we'd like to do better. We know we can do better. And again, I don't think we have to reinvent the wheel. We have some excellent initiatives. With adjustments and consultations, we can improve the housing numbers, we can improve the housing stock, we can build new houses, and we can add increased revenues to the renovation side.

Just before I end, since I am from Atlantic Canada and one of the provinces that is a recipient of the HST environment, I do want to throw out some caution in that area. The HST implementation has negatively affected the cost of housing to the extent that the demand in our area is meeting with substantial resistance by the consumer on the basis that it is a tax initiative that has driven a cost factor in our production of housing.

With that, I thank you for the opportunity to provide those comments to you. I urge you to review the documents we have provided and left for you. You will see a number of suggestions and alternatives that are workable, and we would be pleased to continue the consultation process on those initiatives.

Thank you.

The Chairman: Thank you, Mr. McLaughlin and Mr. Miller.

The next presentation will be made by the representative of the Canadian Centre for Policy Alternatives, Mr. Bruce Campbell.

Welcome.

Mr. Bruce Campbell (Executive Director, Canadian Centre for Policy Alternatives): Thank you for inviting me.

I'm appearing as executive director of the Canadian Centre for Policy Alternatives, and also as one of the co-ordinators of what's called the alternative federal budget project, which we've done for the last—well, we're into our fourth year now.

In that regard, I've tabled with the clerk the first technical paper that we've released in connection with our consultations and deliberations for this year's alternative federal budget. It's called “Over the Rainbow: The balanced budget, how we got it, and how to hang on to it”. The author of that report unfortunately couldn't be here, so I'm sort of carrying the ball in his place.

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Let me give you a few words by way of backdrop. The nineties have been a harsh decade for most Canadians. Measured by GDP per capita, living standards had fallen by almost 3% by 1996. You can compare this to the eighties—which itself was not a great decade when you compare that in turn to the three previous decades—when GDP per capita grew 24%. If it continues, the decade of the nineties will be even worse than the thirties.

Average real wages adjusted for inflation have hardly grown; it's 1.2% so far, although productivity has grown much more, at close to 5%.

And some have benefited. For example, executive salaries have grown rapidly, at in excess of 50% during the first six years of the decade, and profits have also been quite healthy, especially after 1993.

Now for the main point of my presentation. As has been stated previously, the budget is basically in balance now or very close to it. In the technical paper we demonstrate that the government could have met and could in fact have exceeded its official deficit reduction targets if it had just frozen federal spending at its 1994-95 levels instead of taking a big whack out of federal spending.

The question now is what to do with the fiscal dividend. But for us, the prior question is how big will the fiscal dividend be?

The size of that dividend is crucially dependant on the Bank of Canada's monetary policy. If the bank maintains interest rates at their levels at the beginning of the year, letting inflation nudge up to around 3%, and allows the economy to maintain its current modest growth rate of 4% for the next five years, according to our calculations the cumulative fiscal deficit will total $152 billion.

If the Bank of Canada, with the finance minister's approval, continues on its current path—it has already raised interest rates twice and the third hike seems imminent—of pre-emptively cooling what it claims is an economy in danger of overheating and maintaining ultra-low inflation, the economic and fiscal damage, and thus the damage to the fiscal dividend, is considerable.

Two scenarios are possible. Under the soft landing scenario, average growth falls to 2.5% over five years and the fiscal dividend falls by $70 billion to $82 billion. The other scenario is the stall scenario, where the hike in rates precipitates a recession in 1999 similar to what happened when the bank raised rates in 1994, inducing a mild recession in 1995. In this scenario the fiscal dividend shrinks to a five-year total of just $34 billion.

So the question I pose is the following: is $70 billion or possibly more, which is the cost of the current monetary policy direction—and I stress that the Bank of Canada is accountable to government—an acceptable price for the people of Canada to pay for a monetary policy singularly preoccupied with keeping inflation at near zero?

Our preliminary recommendations, as we move towards the culmination of our alternative budget, are—and we would recommend that the government adopt the same macro policy—as follows:

- maintain the budget in balance or close to it over the next five years;

- hold GDP growth to 4% per year over the next five years;

- raise the Bank of Canada's inflation band from the current 1% to 3% or 1% to 2% to 2% to 4%;

- hold the global tax rate steady—don't increase it or reduce it;

- rebalance the tax system to achieve greater fairness and to advance social, industrial and environmental policy goals;

- make strategic public investments to rebuild our failing public infrastructure, namely, social, health, education and training, environment, physical, telecommunications, cultural, etc.;

- and establish targets to reduce outstanding deficits, namely, the social unemployment deficits.

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If the government moves in that direction, our preliminary calculations show that the debt-to-GDP ratio will fall from its current level of just over 70% of GDP to 50% of GDP in the next five years, which is a substantial reduction in the debt burden. Thank you.

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

We will now move to the representative from the Bank of Canada for Canadians Coalition, Mr. Jordan Grant. Welcome.

Mr. Jordan B. Grant (Chairperson, Bank of Canada for Canadians Coalition): Thank you, Mr. Chairman and committee members. I appreciate the opportunity to address you today.

The committee sent us three questions to be addressed. I am going to skip the first one, except to touch on one aspect of it.

Essentially, on the private sector forecasts you are getting, I have no objections to them. But I would like to point that the general forecast you are getting is that unemployment is going to remain above 8% for the foreseeable future, given the current and proposed policy directions.

That leads me to the third of your questions, which I think is the most important: what do we do to ensure that there is a wide range of job opportunities for all Canadians?

Let us be clear. There is one overriding reason why the economy has done as well as it has over the past several years, and that is an accommodative monetary policy. To quote Governor Thiessen, the Bank of Canada has provided “substantial monetary support to the economy...to offset both the direct impact...of fiscal restraint, and the effects on consumer confidence of the...major restructurings” that we have experienced.

Now the Bank of Canada appears poised to begin tightening up in order to stave off the threat of anticipated inflation. If the bank misjudges, as it did in 1994, its actions could counteract the other well-meaning efforts of this government to try to foster job growth. This judgment could also jeopardize the government's painfully won fiscal health.

Let's look at some basic facts here. Many of the budget cuts that were announced in the previous term are only now beginning to take effect. Many of them are to be fully implemented over the next two years. Ontario, one of the obviously largest provinces economically, has many more cuts to come. We are going to continue to see a great degree of fiscal drag.

I would also point out that almost half of the savings that have been achieved through cuts in federal government spending have been eaten up in increased interest payments on the debt. In fact, in this most recent fiscal year interest charges amounted to almost $45 billion out of total spending of $150 billion. Almost one-third of the entire government spending has gone in interest charges.

I would also point out that most of the improvement in the fiscal situation has come from an increase in budgetary revenue that has come about because of the increased growth in the economy from monetary policy. After you take into account the increase in interest payments over the past four years, net spending reductions only amounted to about $8.2 billion of the turnaround.

We need to reduce our spending on interest in order to free up money both for tax reduction and for more socially productive spending. The debt equation set out in the finance department's macro document, Jobs and Growth, sets out quite clearly the conditions needed to lower the debt service burden, namely, continued modest interest rates and high economic growth.

In the meantime, the unemployment rate still hovers at about 8%. That represents 1,350,000 people officially unemployed, not to mention the many more hundreds of thousands of underemployed and discouraged workers. Does this really sound like an economy that is in danger of being overheated? Do we really need to raise interest rates at this point?

Let's look at the effect of higher interest rates. Monetary support the bank has lent has been through a combination of both lower interest rates and a lower exchange rate on the Canadian dollar. These are lower as compared with the levels that brought on the sustained recession of the 1990s. Are they really abnormally low now, or were the rates then disruptively high?

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I point out that in fact real interest rates, the difference between the nominal interest rate and inflation, are not remarkably low compared to the period of Canada's best economic performance from the 1940s through the 1960s. According to some economists, for the system to be sustainable in the long run, short-term interest rates should be about equal to the rate of inflation, which is pretty well where they are now. Long-term rates should be no higher than the sustainable rate of growth in the economy, in other words, about 5% or 6% assuming 2% inflation. So right now, rates are at about the right level economically speaking.

On the exchange rate side, the lower dollar has helped us to almost eliminate our current account deficit. But despite all of the fiscal pain, we have not as a nation begun to pay back our foreign debt. We still owe overseas residents almost $400 billion. If we wish to restore a greater degree of economic and therefore political sovereignty, we must become less indebted internationally.

Anyone who advocates deliberately raising the level of the Canadian dollar through higher interest rates is in effect advocating going deeper into hock to foreign lenders. The only way we can pay down the foreign debt is by running sustained current account surplus. Only then will we have earned the privilege of buying foreign goods more cheaply with a more valuable Canadian dollar.

Yes, the stock market is overheated and volatile. Corporate profits are soaring. So it's understandable that from the perspective of Bay Street the economy seems to be booming. My colleagues say things are just going great. The benefits are only just beginning to be felt on Main Street. We're still nowhere near to operating at our full capacity.

In some economists' judgment, including unfortunately many at the Bank of Canada and in the Department of Finance, unemployment has to be maintained at the 8% to 9% range in order to keep inflation from rising. The U.S. experience has shown us that the conventional wisdom in this regard is simply wrong. Technological innovation and international competition have changed the environment under which inflationary pressures are formed. There's a judgment call that is likely wrong. The consensus in the U.S. was that its so-called NAIRU was 6% and has now been at 5% for over a year with no inflationary pressures in sight.

Regardless of the judgment calls about the trade-off between inflation and unemployment, the underlying assumption is also too narrow. This notion of keeping people unemployed as the foot soldiers in a never-ending war against inflation is immoral. To quote the late Professor John Hotson, “Any economist who advocates unemployment as the means of fighting inflation ought to be unemployed himself”.

Higher interest rates are a very blunt and damaging instrument to use to dampen Bay Street's enthusiasm. The challenge I put to you, members of this government, is to develop more sensitive tools to maintain our hard-won anti-inflationary record without permanently depressing the overall economy.

I differ slightly with Pierre and Bruce in that I think we can have our cake and eat it too. We can get unemployment down without seeing an increase in inflation, but we need some solid thinking. We need to look at other tools besides high interest rates for combating inflation. I have a number of suggestions in that regard, which I'd be pleased to address during the question and answer period.

Thank you.

The Chairman: Thank you very much, Mr. Grant. I now move to the representative from the Friends of Canadian Broadcasting, Mr. Ian Morrison.

Mr. Ian Morrison (Spokesperson, Friends of Canadian Broadcasting): Mr. Chairman, members of the committee, I want to thank you and your staff for sandwiching us into this process. I think it's a little like switching from the weather channel to the comedy channel, but I assure you that in five minutes you can switch right back.

Friends of Canadian Broadcasting is a citizens' organization supported by 45,000 households throughout the land. Our mission is to expand and defend the quality and quantity of Canadian programming in the audiovisual system.

In our experience, members of Parliament are busy people who just don't have time to watch television. What you do watch is often news programs, non-fiction, or at least we hope it's non-fiction. But as you know, your constituents watch a lot of television. The average Canadian watches 23 hours of TV each week, mostly fiction entertainment programs, and only one in every 20 hours of this entertainment programming is Canadian in origin.

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The average English-speaking 12-year-old child has watched 12,000 hours of television—twice as much time as she has spent in school. Most of the 9,000 hours of that time is American fiction programs, much of it very violent stuff. It's little wonder that she grows up knowing more about life in Miami and Los Angeles than about life in Halifax or Edmonton.

We've attached to our brief presentation a graph that shows how much Canadian programming is available on the main English-speaking networks in this country between 7 p.m. and 11 p.m., when most people are watching. Note that if it weren't for CBC Television, there would be very little share of mind for Canada on English television in prime time.

The CBC is the core of the Canadian broadcasting system. It is by far the largest source of programs intended for Canadians and responsive to their concerns—nationally and regionally, in English, French, and aboriginal languages—on radio and television.

The government has cut CBC's funding by $379 million since 1994. That's a reduction of 33% in the parliamentary allocation, compared with an overall reduction in government programs of 19% for the same period. As a result, repeat programs on CBC English Radio, for example, have increased over the past year from 15% to 30% of airtime. Listeners are noticing.

CBC is centralizing its programming in Toronto and Montreal and cutting back in smaller centres. Last year, for example, CBC cut 7% of its staff in Montreal, 8% in Toronto, 15% in Vancouver, and 23% in Regina. In Newfoundland the cuts were even higher.

The result of all this is to weaken the CBC's ability to cover local issues and to convey a sense of life in each part of Canada to the rest of the country. It's weakening the CBC's capacity to reflect the diversity of Canada to Canadians, to reflect regional differences, and to contribute to shared consciousness and identity.

The famous Vancouver television producer, Daryl Duke, said recently, “If there's going to be an earthquake out here, it better not happen on the weekend—or CBC Television won't be able to cover it.”

The best analogy is to a tree. If you cut off the roots, ultimately you kill the tree, but it happens gradually. It's the death of a thousand cuts.

Therefore we call on you to recommend to the Minister of Finance that the government not proceed with the planned $50 million cut to the CBC in the next fiscal year, 1998. Beyond that first step, the government should reinvest in the local and regional capacity of the CBC, both radio and television, English and French.

Some people will tell you that the Canada Television and Cable Production Fund is a high priority. While Friends does not dispute the fund's value, we remind you that the CBC can only access that fund for certain types of production, and only to buy programs from the private production companies who lobby so hard for the fund. That fund does nothing for CBC Radio, for news and current affairs, or for CBC's local capacity. Instead it gives the CBC board and management an incentive to divert funds away from those priorities.

Public opinion surveys confirm that more than 80% of Canadians consider CBC one of the most important national institutions and recognize its key role in building a sense of belonging and common identity in the northern half of this continent. At a time when the future integrity of our country is open to question, the CBC's role is absolutely essential.

Thank you, Mr. Chair.

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

We will now proceed to the question and answer session. Mr. McNally.

Mr. Grant McNally (Dewdney—Alouette, Ref.): Thank you, Mr. Chair.

I thank all of our presenters for the information. You've overwhelmed us with a lot of information. Thank you for making your submissions.

I listened with great interest to all your presentations, and I'd like to follow up on a few points that some of you made. I'd like to ask you all questions, but I don't think there's enough time.

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Mr. de Bever, you mentioned the coming balanced budget and a number of you mentioned that and said things are looking good. You made a very cogent point that the reason this has happened is because of higher taxation. Basically, a balanced budget is approaching because of the fiscal policy of the government and because there's been a higher increase in taxes. I would agree with you on that point.

Mr. Robson, I believe you were talking about broad-based tax relief as a possibility for economic stimulation. I would agree with you on that point.

Mr. de Bever, you mentioned EI, GST and CPP or a combination of tax decrease opportunities that would help the economy.

Mr. McLaughlin, you talked about the underground economy that has sprung up.

Mr. Kast, you mentioned a high personal tax burden and high government spending and that the government needs to control its spending and expenditures just as we, as individuals, have to do.

I agree with all those points and that our direction needs to go in those areas.

I'd just like to ask one question to maybe a couple of people. Mr. McLaughlin, you pointed out Mr. Martin's key points and principles in your presentation. One of the points was that taxes should be collected in a manner that is conducive to creating jobs and growth. How can a government create a job, in your view? Perhaps a couple of the others could comment on that. What do you see as the government's role in job creation?

The Chairman: Mr. McLaughlin.

Mr. Bob McLaughlin: As a small business person working in the construction industry with my wife as my partner, over the last six or seven years it's been very discouraging in this business because we're working in two economies—one that's illegal and one that's legal. I have employees who I've tried to retain but I've lost a couple over the years. They leave and go on unemployment, but they also get caught in another type of economy, which is the illegal economy. It's very hard to compete on that level. I find it very discouraging to try to employ people as a small business person. I need those employees. The only way I can survive in my business is to maintain that same employee and try to keep him working. We have done that and work very hard at doing so.

In order to create employment I have to have a level playing field. As a business person, I don't see that happening. The consumer and the business person make the deal, but it's always the business person who has to pay his taxes who is asked by the consumer to deal in another type of economy, which is very discouraging. In other words, he's asked to make cash deals in the underground economy to save the consumer from paying taxes, and it's very discouraging.

I thought it was just my wife and I who were getting frustrated in this industry, but I've had the opportunity this year, as president of the association, to travel from one end of the country to the other, and I find the same concern from every member I've had the opportunity to talk to. It's not a very level playing field. It's very discouraging. When I say we do not get the return on investment, we do not get the return on investment. If we don't get the return on investment, how do we employ new people?

Thank you.

The Chairman: Mr. Kast, and then Mr. Robson.

Mr. Mack Kast: I just want to make a brief comment with respect to job creation.

The focus of what I was saying was debt reduction. In the linkage between debt reduction and job creation, I believe businesses are the engines of our economy. We need a vibrant economy. We have to appreciate that one-third of every dollar of revenue that's collected goes to interest payments. If we can reduce the interest payments, we can reduce the cost of doing business for companies through tax reductions. If we can reduce tax reductions, we can create more opportunities for businesses to become more vibrant and our economy will start to grow. With growth in the economy we'll have job creation. It always comes back to the fact that growth fundamentally begins with businesses.

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The Chairman: Mr. Robson.

Mr. William Robson: I'll try to be quick. I have three points in response to your question.

First, as far as stimulation of the economy goes, the sort of Keynesian effect of tax cuts, I don't know how big such effects are or how quickly they kick in or a whole lot of other unknowns. I think that over the years people have gotten a little more skeptical about our ability to manage the economy through that sort of thing.

I would be much more of a supply-sider on this issue and would focus on two things. First of all, with respect to the marginal tax rates that I talked about, the Department of Finance has a marvellous computer program that will kick these out at the request of anyone. If you look at the low-income levels, people are facing these high barriers there, which are much higher than they are later on, and that's one of the reasons I think tax relief at the low end is needed.

In regard to the underground economy and the brain drain issues, it's been said that the underground economy is the poor man's Cayman Islands. They are the average tax rate problems, not the marginal. It's not how much your last dollar earned that determines whether you're going to go underground or abroad. It's your overall tax burden.

Again, what that points to is some tax relief at the low end, because that way it's for everybody. But it's expensive, and I can only repeat my earlier point that in order to get to the point where we can deliver that tax cut, it would certainly help if we could get the interest burden down first. I think the debt repayment comes first and then you look at a nice broad-based tax cut at the bottom personal income tax rate.

The Chairman: Mr. Grant.

Mr. Jordan Grant: I'd like to echo Mr. Robson's comments in part. I'd just like to point out that those who are advocating tax decreases in order to get the economy going while at the same supporting the Bank of Canada's policy of keeping the economy cooled down through high interest rates are advocating a contradiction in policy, which has the disastrous effect of not getting the desired economic effect we're looking for. And at the same time, it effectively means that money that otherwise would have gone to paying down the debt is just going into the hands of moneylenders.

The Chairman: Professor Fortin.

Prof. Pierre Fortin: I would like to make two points. First, I think the committee should listen very carefully to what Mr. McLaughlin has said.

To make things much more precise, if you as a consumer have the choice to have repairs done for $15 an hour under the table—and with the sedimentation of all sorts of taxes and benefits and everything—and in the white market it costs you something like $35 to $40—and there is a range across provinces—I think we are enormously taxing the morality of our average consumer. This is exactly what he refers to, and that hurts jobs in the white market tremendously as well as hurting government revenue. I think this is a major problem both in economics and in morality.

Second, let me emphasize that the Minister of Finance cannot create jobs overall in the economy with his budget. He can redistribute jobs, depending on where he chooses to spend or to de-tax, but he cannot create jobs.

The way the system works is that the Bank of Canada has its inflation target, and in order to achieve that target the bank has an intermediate target for where economic growth should be. And if it so occurs that the Minister of Finance has an expansionary budget that is going to lead to growth higher than the Bank of Canada wants, then Mr. Thiessen says to Mr. Martin, “I am going to raise interest rates in order to avoid this excessive expansion that is going to create inflation.” Therefore, through higher interest rates he is then going to offset any net job creation in the aggregate that the Minister of Finance is going to make.

Let me repeat, the budget has no effect whatsoever on net job creation in the short term or the medium term in Canada. The driver's seat belongs to the Bank of Canada, and it's not a question of how big or how small the multiplier effects are, as Mr. Robson pointed out, it's essentially who is running the Canadian economy in the short term to the medium term. The answer is definitely not the Minister of Finance, but the central bank.

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The Chairman: Mr. Perron.

[Translation]

Mr. Gilles-A. Perron (Saint-Eustache—Sainte-Thérèse, BQ)): Mr. Chairman, I'm going to tackle an issue on which I am not completely clear. Professor Fortin, you advocate an inflation rate of about 3%.

Prof. Pierre Fortin: Between 2.5 and 3.5%

Mr. Gilles-A. Perron: The Governor of the Bank of Canada aims for the lowest possible inflation rate. What should be the right one? I'm asking everybody.

What would be the impact on the Canadian economy as a whole?

Prof. Pierre Fortin: Nobody can say with absolute certainty what is the ideal inflation rate for the economy. But at one point, decisions have to be made and we have to be practical. What we see around us, in North America, is that the United States aimed for an inflation rate which, over the last seven or eight years, fluctuated between 2.5 and 3.5%. And by following such a monetary policy, they were able to bring unemployment down to the lowest level since the 60s. Therefore, if I want to be practical— and here, I do not speak as an academic, advocating the ideal 1% rate—, I have to say that if the Americans were able to reach full employment in their country, that is an unemployment rate of 5%, there is no reason why we could not consider a 2 to 4% range and get the same happy result in Canada. Given that here, in Canada, the measures we can take are slightly different, we could have, as I mentioned earlier, an unemployment rate fluctuating between 6 and 7.5%.

[English]

The Chairman: Mr. de Bever.

Mr. Leo de Bever: This issue of differential inflation rates has come up a number of times now. There's actually less to that than meets the eye. Inflation in the United States is probably overestimated by 1.5%. In Canada, it's probably overestimated by 0.5%. There are some technical reasons why there are these differences.

So when you net it out, yes, we still have a marginally lower inflation rate, but the difference is not that significant.

Inflation alone and the Bank of Canada alone do not explain in my mind what has been happening in Canada. If you want to get to the bottom of why unemployment is higher in Canada, you have to go deeper. As I get older I become less and less of a macroeconomist, because I'm coming to the conclusion that a lot of these factors are at a very fundamental personal level and they have to do with skills and a differential ability to function in what is a fairly rapidly changing economy.

So I think tinkering with monetary policy makes the assumption that raising inflation is costless and all you're doing is imposing costs on different agents in the economy. If I raise inflation, what I do is devalue all the nominal assets: bonds, GICs. So I'm imposing costs on some people rather than others. That's a matter of social choice, and maybe we're talking here about some people being more deserving than others, but to claim that raising inflation is costless is just not accurate.

The Chairman: Professor Fortin.

Prof. Pierre Fortin: We're not talking about raising inflation; we're talking about lowering unemployment.

I quite agree with Leo that high rates of inflation are damaging to the economy. There is substantial international evidence indicating that high rates of inflation damage economic growth. But we're here talking about the difference between a 1% to 2% rate of inflation, as we have now in Canada, and a rate of inflation between 2.5% and 3.5%, as they have in the United States.

If you look at the functioning of the labour market, the evidence we can muster on this is that the lower you reduce the rate of inflation the more you rigidify your labour market, the more difficult it is for businesses to change wages, because there's extraordinary resistance to wage cuts. When inflation is very low, there's no way you can simply freeze wages and hope for some downwind adjustment in real purchasing power of wages if you need it.

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Therefore, I'm definitely 150% in agreement with Mr. de Bever that high inflation is damaging. But what I'm saying is simply that some small rate of inflation is needed to grease the wheels of economic growth. The Americans are doing it and are very successful. I'm a Canadian nationalist and I don't advocate imitating the Americans in every circumstance, but in this instance they are the ones who are doing well and we are the ones who are not doing well, and I think their experience is worth emulating.

The Chairman: Thank you, Professor Fortin.

Mr. Campbell.

Mr. Bruce Campbell: I'd just like to add that at the outset of my remarks I talked about the fall in living standards in the first half or more of the decade. I didn't talk about causation, but I'd like to stress now that the reason, or a big part of the reason, was this austere monetary policy of the Bank of Canada—the obsession with zero or near-zero inflation.

I think it is true that near-zero inflation has benefited some people, but for the large majority of Canadians in the 1990s it has been incredibly destructive. When the committee looks at this question of monetary policy of interest rates, to the extent that it's going to make recommendations I think it should carefully look at the balance between who has benefited and who has paid.

The thrust of the paper I tabled is that you're discussing the issue of the fiscal dividend. Well, if the government and the Bank of Canada persist with this preoccupation with this ultra-low inflation policy, then the effect on growth, on employment, on the fiscal dividend, on the size of the fiscal dividend to do whatever with, will be enormous.

The Chairman: Thank you very much.

Mr. Riis.

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

I want to say to Bob that I appreciate his comments. In my own region I hear many people who have recently built large homes say that they saved $15,000 to $20,000 by building them on the black market, basically. Others, forced into this market through desperate economic situations, feel bad about it but in fact operate totally underground. It obviously is a very serious issue, particularly in your sector, and we have to look at that.

There are so many questions to ask, but I'm going to just concentrate on you, Mack, if you don't mind. I want to say first of all that you remind me of my economics professors. I listened to them and then often tried to apply what they said to the real world and never could do that very well. I'm not criticizing you personally, but some of your remarks...and we've heard them from others.

First, you mentioned that insurance premiums should be reduced dramatically—payroll taxes. We now recognize that most of the new jobs being created are in the self-employment sector, others in the small business sector, and very few I think are being added in the larger corporate sector. Do you really think a 50¢ drop or something in EI premiums would significantly create jobs, recognizing where the jobs are actually being created these days?

That's one question, and I'll just add two quickies.

Calling for an increase in RRSP contribution limits—acknowledging that less than 2% of people presently file RRSP contributions at the limit, should we really make that increase a priority, for the 2% of people who file at that level?

You say the 20% limit for foreign property investment should be increased—you actually say eliminated. Countries that currently have no limits seldom go above 20%. The United States is at 10%. Australia, with no limits, is at less than 20%. If it's so good, why aren't these other countries having much more foreign investment?

Mr. Mack Kast: I believe the concise answer to your question, sir, would be one of direction. It's a beginning. It's a beginning of change. It's to give people hope, inspiration and motivation. I cannot say that a 50¢ change will make a big difference in payroll taxes, for example, but I think we have to start someplace.

• 1350

On the other hand, why did the government implement a 50¢ increase in payroll taxes? I think that, for the same reason, it should be reduced.

When I look at RRSPs, I'm trying to suggest that people should be given a greater opportunity to be self-sufficient in their senior years. With the changes that are taking place and when we look at the change we see coming with the seniors' benefit program, I think we need to get better integration. Giving people more opportunity to invest through RRSPs will give them greater flexibility and make them self-sufficient.

Exactly what the multiplier effect might be if you deal with a small percentage of the population versus a larger percentage I don't know, but I think it's the right thing to do directionally. It's the right thing to do because what we want to do is make the seniors' benefit less onerous for the government.

If we move away from RRSPs, we're saying that the government will look after people with the seniors' benefit to the minimum of the $19,000 level, if you like, for couples. I don't think that's the right direction to go. It's a good default, fallback position, but the more fundamental one is that while people are working and have the ability to save, give them an opportunity. So “directionally” is really what I'm after.

As for the 20% limit on foreign investments, what I'm after there is that I think people should be given the opportunity to basically maximize their return and be given the full opportunity to do that. To say that it should be restricted when you're dealing with RRSPs is using the RRSP as a vehicle for the wrong reason: to restrict foreign investment. I don't think that's the right place to go for attacking that particular issue.

I'd say that if you can give people a better opportunity to maximize their investments, they'll do better. In the end, there will be more taxable income and people will be better off. I'm trying to eliminate the cross-border issue and move into more of a global economy, if you like.

I hope that responds to your questions.

Prof. Pierre Fortin: I would like to give some support to what Mr. Kast just said. I think Mr. Riis is very clear that countries are usually very wary of increasing those foreign investment limits, but it might depend on the circumstances of each country.

On the one hand, you do not want to de-tax people's savings in Canada through RRSPs and all that. Those guys will take that money that's de-taxed and go to develop other country's economies. That's the reason why we want to maintain some limits.

On the other hand, after 30 years of studying what the Caisse de dépôt has been doing in Quebec, the federal government has finally come to the conclusion—this is also after fighting the caisse actually 15 years ago—that it was a great idea to take people's money in the Canada Pension Plan and build a diversified portfolio with it, instead of investing it 100% in provincial bonds. It would be a great idea to have the pension money of Canadian fructify.

If this is so, we're going to have, in the next few years, with this building up of the big Canadian caisse portfolio, so to speak, an enormous involvement in the Canadian stock and bond markets by this huge, gigantic institution. It therefore may be the case that we should consider enlarging the foreign investment limit precisely to avoid this market being totally disturbed by this huge involvement of the new caisse.

On the one hand, I agree with being worried about increasing it too much, for the standard reasons: you de-tax RRSPs and allow people to send this money to develop foreign economies. But on the other hand, I think we should be very careful about what the big Canadian caisse will do to the Canadian stock and bond markets.

Mr. Leo de Bever: Mr. Riis, I would turn your argument around on itself. If foreign countries have observed that if they have no limit they don't go over it, why have the limit?

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Mr. Nelson Riis: Why the worries? I think my question has been misinterpreted.

I'm not suggesting that we should reduce the limits or whatever, but when I look at countries that have no limits and see where they're investing, almost all of them are far under 20%. That's why I'm wondering this: if this is so prudent and useful, why wouldn't these countries like the United States and Australia be 35% or 40% in the foreign market?

Mr. Leo de Bever: Because different players in that market have different abilities to diversify. For instance, my fund has more than 20% abroad. The reason is that this is a prudent thing to do in terms of a global diversification portfolio. This is the same reason as the one that Pierre pointed out, which is that the caisse has been restrained by its operating objectives of maximizing returns for its citizens.

I think it's a sign of a mature and a confident economy that you're not worried about these capital flows. Canada doesn't have, in an abstract sense, a capital shortage. There are plenty of people who are willing to invest in the Canadian economy for the same reasons that we invest in foreign economies, which is for diversification and spreading risk.

Mr. William Robson: I would just like to add a footnote to the question on the 20% limit by observing that if I belong to a nice, big, well-run pension fund, like Leo's, I have someone at my disposal who uses derivatives to get around the 20% limit. At no cost virtually to myself, I can get the benefits of that foreign exposure. But if I'm a little guy, I don't have that. It's unfair in its incidence.

On the question of RRSP and RPP limits, I feel obliged to ask: if the limits are fair, why are they not applied to MPs and federal civil servants? It seems to me there's some sense there that there's a special case, but I'd like to hear the justification. I see a big problem when we have limits that separate some of our policy-makers and also some management in the private sector from the same pension plans and concerns that affect their employees and ordinary citizens.

Mr. Dick Miller: I just have two quick comments. I'm not an economist, as you can tell.

I'd like to go back to the underground economy just for a second. We made recommendations to Revenue Canada and others. I think we have some partial solutions, at least, as to how we can address this and turn some of these black market jobs into the taxpaying jobs that should be in place. The government should enjoy those revenues.

It's a very simple equation, as it relates to renovation. There's a major impact in this industry of some $14 billion to $16 billion that's spent in renovation. We have a GST rebate in renovation. There's a tax on what is referred to as a “substantial renovation”. It's unworkable. Staff have agreed with industry that the current definition just does not work.

Again, we have a building block and an initiative. I think all we have to do is make some minor adjustments to that and you will see a direct result in additional tax revenues coming in.

The other comment I'd like to make is on interest rates. I come from an area where, province-wide, the average unemployment rate is probably about 12%. What we don't need is a raise or an increase in the interest rates. We don't have a heated economy in our area. How you address it on the national scene I know is a difficult situation. You can't have regional interest rates. You can't have a regional monetary policy. But I can tell you that there will be additional duress and unemployment if interest rates are allowed to increase in our area.

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

Mr. Jones.

Mr. Jim Jones (Markham, PC): Yes, thank you, Mr. Chairman.

Pierre, in your comments, you said something like the recovery will last only 18 more months. I'd like you to expand on that. Whatever you say, let's see if the other economists around this table agree with you.

Prof. Pierre Fortin: Okay, this is based on my reading of Governor Thiessen's recent speeches and policy pronouncements. He said in his last monetary policy report, in May of this year—there's going to be another one I think this coming month in which he probably is going to repeat this—that the Canadian economy at this time is at about 1.5% of its full potential, above which there's a danger of rekindling inflation.

• 1400

What you infer from this, given that we know that at the Bank of Canada they believe the potential growth rate of the economy is about 2.5% or 2.6% over the medium term and since we're now growing at 3.5% or 4% per year, is that there is only another year of one percentage point above the normal 2.5%, in other words, another year of 3.5% to soak up the last percentage point that he believes we are under potential.

Therefore, you can infer that from now on he's going to operate interest rates to raise them to the point where he will ensure that in 18 months to 2 years from now the economic growth rate in Canada is going to go down to 2.5%. At a 2.5% growth rate, the unemployment rates stops declining and we're just staying steady there. You can also infer that the minimum unemployment rate we're going to witness with this strategy is probably around 8.5%.

Those guys are very good friends; I'm on very good terms with them. But I'm extremely critical of their strategy, which is actually minimizing the risk of not fighting inflation when it's there. Consider that it's totally opposite to what you have in the United States. Greenspan's strategy in the United States is to minimize the risk of fighting inflation when it's not there. With this strategy, they've been able to lower unemployment to 5%. My view is that if Mr. Thiessen used the same strategy, we could reduce unemployment in Canada to between 6% and 6.5%.

The Chairman: Thank you, Mr. Jones, and thank you, Professor Fortin.

Mr. Campbell.

Mr. Bruce Campbell: I agree with that. I would like to add one point.

If the strategy backfires as it did in 1994, then far from creating a soft landing to 2.5%, it could precipitate another mild recession 18 months hence and it would also do great damage to the potential fiscal dividend, which is what they argue.

The Chairman: Thank you.

Mrs. Redman.

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

Professor Fortin, you made a comment. You said the Minister of Finance has no control over the economy in the short to medium term. Do you really give no credit to the Minister of Finance and this government for the reduction in the deficit, increasing economic prospects, and reducing interest rates in Canada?

Prof. Pierre Fortin: Yes, we have a great Minister of Finance. It's simply that he cannot create jobs. But he can reduce the deficit, and he did it.

He's probably the most astute and foresighted minister we've had since C.D. Howe—I'm looking at Bill Robson here. I would rank him at the same level. He has had the support of the Prime Minister, and I think we should give credit to the Prime Minister also.

He's had some supernatural help from God up above because of the Mexican peso crisis at the end of 1994, which helped him deliver this big budget cut in February 1995. I think he's responsible for the federal budget being on the right path at this time, despite what a number of people here have said, that monetary policy in this decade has sent Canada into the deepest depression we've had since the 1930s.

• 1405

I just want to repeat something Mr. Campbell said a few moments ago. Among all industrial countries, Canada is the only one to have experienced a reduction in its standard of living since 1989.

So we're in a pretty deep depression, but this is not at all the fault of the Minister of Finance. He has had to deal with the high interest rates and the economic crisis that have created the financial crisis he has had to deal with.

Mrs. Karen Redman: I would agree that it's not the role of government to create jobs. What you do is foster the climate in which the private sector and business can create jobs—

Prof. Pierre Fortin: Oh, that's my view, too.

Mrs. Karen Redman: This government has done that.

Prof. Pierre Fortin: On the other hand, it is also my view that the guy who can create the jobs does create jobs. That is the person who runs the central bank in Canada.

The Chairman: Are there any further comments on that question?

Mr. Leo de Bever: We should get off the whole issue of job creation. I think Pierre is absolutely right: fiscal policy doesn't create jobs.

I'm also not convinced that we.... I'm harking back to my history at the Bank of Canada; I started out there.

Prof. Pierre Fortin: It shows.

Mr. Leo de Bever: No, that's fine.

Why is it that the bank is solely responsible for certain miscalculations? Take yourself back to 1989 when, in Ontario in particular, we had asset prices going way out of sight. People were operating on the assumption that inflation was going to go on forever. If they had listened to the bank at the time it announced that it wasn't going to tolerate inflation at that level, that draconian depression that followed—everybody talks about it—would have been a lot less severe.

I'm simply saying that it takes two to tango. A central bank will only go after inflation when there is a lot of inflation. Now, you can argue over the level of inflation at which it should intervene, but there's no denying that what was going on in the 1980s was an economy that had severe imbalances. We had an imbalance not only in the way people were spending but also between fiscal policy and the economy.

So to blame the Bank of Canada for what happened afterwards is a little simplistic. If we had been more restrained, the effects wouldn't have been as severe.

The Chairman: Mr. Campbell.

Mr. Bruce Campbell: I'd just like to dissent from the views I've heard on the role of government with respect to job creation. I think both government and the private sector have important roles in job creation. In terms of government, that is indirectly through its control over monetary policy, and directly through investments in the public sector.

By saying the government doesn't create jobs.... It certainly has had a great role in destroying jobs in the public sector. If you look at the loss of jobs in the federal public sector, that has been something like 50,000 in the last three years, by my reckoning. It certainly has had a role in destroying jobs, so is not the reverse true as well?

You can extend that to the cultural sector, to the CBC, and other cultural institutions. You can extend that to education and health care. God, there's a great need for public services and goods that fulfil useful purposes in child care, for example.

The private sector and private sector investment have failed to create jobs. So certainly there's a role for the public sector, both directly through strategic investments and indirectly through macro policy, particularly monetary policy.

The Chairman: Professor Fortin, did you want to add something?

Prof. Pierre Fortin: Thank you very much. I must say again that I completely agree with what Mr. de Bever said. At the end of the 1980s there were excesses the central bank had to deal with. My point is that there were excesses throughout North America at that time. For example, look at inflation. We had a 5% inflation rate in Canada. There was a 5% inflation rate in the United States. There was a lot of public debt in Canada already accumulated then. There was a lot of public debt accumulated in the United States.

If you look at the OECD figures, for example, they indicate that debt represented 40% of the national income of the two countries. In other words, the debt problem in Canada was not worse than the debt problem in the United States. There were problems, but they were not worse here than in the United States. There was also a real estate bubble, a stock market crash, and all that, and nobody can claim that those excesses were worse in Canada than in the United States.

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So my point is that in the 1990s we both have had to correct those excesses. Why is it that they're doing well and we're not doing well?

My answer is that our monetary policy has been too ambitious, looking for a 1% inflation—very low—that has rigidified the labour market and has raised the unemployment rate. They've been more prudent and stopped at 3% inflation. That is why they've been successful to a very large extent.

The Chairman: Mr. Robson.

Mr. William Robson: I don't want to try the committee's patience on this issue of inflation. I wasn't aware that it was going to be such a focal point of the discussion. It's important not to confuse the tactics of a central bank as it tries to hit an inflation target with the debate over the inflation target itself.

One of the reasons I emphasized money growth in my earlier comments is that I think money growth is a very good indicator of what monetary policy is doing. We are on record as having criticized the Bank of Canada many times for being too tight when money growth indicated that they were too tight.

The year 1994 is one of the examples of that. The fact that our inflation rate has come in under the target of 2% is the aftermath of the fact that they were too tight.

Is the 2% inflation target wrong, though? We seem to be getting into a discussion of that here. I would second very strongly—I would repeat word for word if I could remember it word for word—what Leo said about the difference between the Canadian and U.S. inflation rates.

Given the biases and the indexes, we're talking about a small proportion of 1%. If anybody can demonstrate to me that this small proportion of 1% is responsible for all the differences in their economy and ours over the last few years, I'm sorry, I have a bit of difficulty with that.

Let me just say very quickly that if we had been brought together to talk about inflation targets, I would have made a point that we're in danger of missing. Money is like a system of weights and measures, length, distance, whatever else. There's a dimension in this discussion that's in danger of being lost.

Suppose—and this is going to stretch your patience, and you'll bring this session to a close possibly—the government could shrink the metre every year by a small amount. Everybody's houses would get bigger if we were taxed on the square footage of our houses. Revenue would roll in. Our home-building friends would be able to advertise larger houses every year—my goodness, you had better buy now. I can imagine that if the government could manipulate other systems of weights and measures, we could even imagine thinking that we were creating prosperity by doing it. Money is an important signpost. People hate inflation, because they don't like it getting messed up.

For that reason, if we were to argue about a percentage point, or a fraction of a percentage point, being the answer to all our difficulties when we compare ourselves to the U.S.A., we'd be in danger of missing the point that money serves a whole other purpose. If you raised your inflation rate for the sake of fiscal policy, you'd be making a big announcement to people on which they could rely.

End of speech.

The Chairman: Mr. Grant.

Mr. Jordan Grant: It's helpful to look at past history to try to find out where you went wrong, in order to avoid making the same mistakes again. But there are limits to that.

At this point I think we would all agree that over the past year and a half or so the Bank of Canada has done a good job. It's done a good job of bringing Canadian interest rates down and helping to support the Canadian economy.

A couple of years ago some of the same people here appeared before the same committee. Some of us were arguing that interest rates should come down below those in the U.S.A.; other people were saying it was impossible. The Bank of Canada managed to engineer that with the help of fiscal restraint by Mr. Martin. He must get credit as well.

The question is, where do we go from here? Speaking for my other two colleagues, I must say that I don't think we're advocating any change in monetary policy at this point. We're saying they've done a good job, and it's having the effect it's supposed to have. Just stay the course. What we're concerned about is that the Bank of Canada is thinking ahead and making a misjudgment here. It may act unnecessarily to slow down the economy when there are no signs that the economy is becoming overheated.

The Chairman: Thank you, Mr. Grant.

We only have one minute, because we have a break for question period. Mr. Assad, do you have a question.

Mr. Mark Assad (Gatineau, Lib.): Yes. Thank you, Mr. President.

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[Translation]

Professor Fortin, many groups have mentioned the need to reduce unemployment. There is no doubt about that; we heard that time after time.

According to you, are the monetary targets established by the Bank still the main reason why we have an unemployment rate which is too high?

Prof. Pierre Fortin: Let me make a distinction. First, is it a good thing for the central bank to establish targets jointly with the Finance minister? As far as I am concerned, it is. It is useful, it is important and it is particularly informative for the people who make decisions concerning the economy. As soon as the central bank has determined a range within which it wants to maintain the fluctuations of the inflation rate, its actions, from one semester to the next, become really predictable, and to do that, there is no need to be a doctor in psycho-analysis to know how it is going to react. It is enormously useful.

However, what is arguable is not whether or not there should be a range within which inflation is allowed to fluctuate, but the actual target which is set. Among countries aiming at the moment for a 1 to 2% inflation, there is none where the economic performance is satisfactory. Each and everyone of them faces major economic problems.

Since the beginning of the 90s, during the first part of the decade, interest rates remained high in Canada for much longer than in the United States, which led here to a quasi-recession. Later on, since this economic crisis had put governments in severe financial trouble, enormous budget cuts had to be made. Mr. Martin was not necessarily the first one to do so; there was also Mr. Klein. Everyone had to make huge budget cuts.

So, for seven or eight years, the quasi-economic recession persisted. Yes, because we were more ambitious than the United States, because we set a 1 to 2% rate rather than a 2.5% to 3.5% rate, our economic problems have lasted longer. In fact, we have first to consider salary inflation. Even if Mr. de Bever and Mr. Robson have focused their comments on prices inflation, in fact, if you look at the way the labour market works, the setting of these targets have rigidified the labour market.

However you measure inflation and despite any technical arguments you can have in this regard, you cannot dispute the fact that, in the United States, over the last few years, salaries have progressed by 4% per year, which gives to businesses a lot of flexibility to adjust when cuts are needed. The only thing they have to do is freeze wages, knowing that prices are going to rise to offset such a move. Here, we cannot do that.

Therefore, if you want to find out, not why unemployment has risen but why it rose so high and is taking so long to go down, the main reason is a too restrictive monetary policy. I wish the same thing as Mr. Grant. Obviously, nobody here would jump from a bridge if interest rates were to rise by a quarter or even two or three quarters of a point of percentage. Everybody knows that ultimately, interest rates are going to be higher. But it may be that such an action is premature. We might be in the process of fighting inflation when it is not there by trying to minimize the risk of not fighting it when it is there.

I believe we should be as wise as Mr. Greenspan and that we should wait for concrete signs of inflation before we start fighting it. In any case, it comes very very slowly and we have ample time to act if necessary.

[English]

The Chairman: Thank you, Professor Fortin.

On behalf of the committee, I'd like to thank you very much. This has been a very interesting round table, as you can tell by the exchanges that occurred and the questions that were asked and the excellent answers that were given. On behalf of the finance committee, I would sincerely like to express to you our gratitude for taking the time to present your views to us.

Thank you very much.

The meetings is adjourned to the call of the chair.