FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Monday, June 8, 1998

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I call this meeting to order, and welcome everyone back for the afternoon session of the pre-budget consultation hearings.

This afternoon we have the pleasure to have with us representatives from the Canadian Association of Insurance and Financial Advisors: David Thibaudeau, president, and Bill Strain, chair, taxation, Conference for Advanced Life Underwriting.

We also have representatives from the Canadian Printing Industries Association: Michael Makin, president; and representatives from the Business Council on National Issues: the president, Tom D'Aquino, and David Stewart Paterson, senior associate, policy and communication. We also have representatives from the Canadian Real Estate Association: Pierre Beauchamp, CEO, and Gregory Klump, senior economist.

Welcome, gentlemen. You are aware of how committee hearings work. You have approximately 10 to 15 minutes to make your presentation, and thereafter we will engage in a question and answer session.

We will begin with the Canadian Association of Insurance and Financial Advisors, Mr. David Thibaudeau. Welcome.

Mr. David Thibaudeau (President, Canadian Association of Insurance and Financial Advisors): Thank you, Mr. Chairman.

My name is David Thibaudeau and I'm president of CAIFA—the Canadian Association of Insurance and Financial Advisors, formerly known as the Life Underwriters Association of Canada. With me today is Bill Strain, who is chair, taxation, for the Conference for Advanced Life Underwriting, which is a conference of CAIFA.

I want to thank this committee for the opportunity to be with you today and to share with you the views of Canada's insurance and financial advisers on what the government's priorities should be for the 1999 federal budget.

Since 1906, CAIFA has been the national, voluntary, professional association of life insurance agents and brokers in Canada. The name change reflects the recognition by CAIFA's members that they provide comprehensive financial advice—products and service that include, but are not limited to, traditional life and health insurance.

CAIFA formed the Conference for Advanced Life Underwriting in 1991 to meet the needs of its members who specialize in such areas as estate planning, business succession, employee benefits and pensions. Many of the clients of CALU's members are the owners of small and medium-sized businesses.

CAIFA and CALU members help Canadians achieve financial security. Association members are in daily contact with millions of Canadians, determining their personal, family and business needs and then providing product solutions to help meet those needs. The frequency and the nature of our members' contact with Canadians shapes to a large extent the comments and recommendations we will make to the committee today.

I would like now to briefly highlight our responses to this committee's four pre-budget questions. Our detailed responses are contained in our submission, copies of which have been provided to you today.

First, I'd like to share what CAIFA members believe are the general priorities for the fiscal dividend. While the exact size of the physical dividend is difficult to calculate, private sector analysts project a budget surplus of about $ 10 billion for the current fiscal year. Assuming a fiscal dividend of this order, CAIFA and CALU recommend that the government devote 50% of this dividend exclusively to paying down the debt, and approximately 25% each to tax reduction and new expenditures to address economic and social needs.

Now I would like to offer some specifics.

On the subject of debt reduction, CAIFA and CALU are concerned about too heavy an emphasis on the debt-to-GDP ratio, as compared to the absolute value of the debt. Reductions in that ratio can be achieved through increases in the GDP, reductions in the debt, or a combination of both. But relying on increases in the GDP will not help to reduce the tax burden for Canadians.

As the C.D. Howe Institute estimated in a February 1998 study, the interest on the federal debt costs the average family $ 5,500 annually in taxes. If the debt remained unchanged and the GDP grew to twice its present size, the debt-to-GDP ratio would be reduced to 34%, but interest payments on the debt would still cost the average family $ 5,500 a year in taxes. Failure to significantly reduce the absolute level of the debt will result in unnecessarily high interest charges and therefore tax burdens for Canadians.

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CAIFA and CALU believe the government's debt repayment plan of using prudent economic planning assumptions and applying the unused portion of the annual $ 3 billion contingent reserve to the debt will help put the debt on a permanent downward track. CAIFA and CALU also support the two-year planning cycle, because it enforces discipline and focuses attention on achievement of specific targets over a manageable timeframe.

It is very important that the federal government continue to publicize the significance of its efforts to reduce the federal debt. It is important that Canadians understand that the restoration of Canada's economic health and competitiveness is based on a long-term commitment to prudent fiscal management and that the elimination of a deficit does not imply this fundamental goal has been achieved.

CAIFA and CALU therefore recommend that the government make reduction of the absolute value of the debt its top budgetary priority. CAIFA and CALU also recommend that to assist in the achievement of debt reduction, the government continue to use two-year planning horizons for the conduct of fiscal policy.

Turning now to the subject of tax reduction, CAIFA and CALU welcome the $ 1.5 billion in tax relief for low- and middle-income Canadians announced in the 1998 budget, but as this committee is well aware, Canadians' overall tax burden remains too high, especially compared to our most important trading partner, the United States.

Among other things, this high personal income tax burden is contributing to an exodus of highly skilled executives, scientists, computer engineers, and other highly paid professionals. Given the size of the fiscal dividend, now is clearly the time for the government to begin offering modest personal income tax relief, beginning with the reintroduction of indexation of personal income tax brackets.

As this committee noted in its 1997 pre-budget report, a tax system not indexed against inflation increases the tax base, increases the average rate of tax applied to the tax base, and raises the marginal tax rate that individuals face with respect to employment and investment income.

Next, CAIFA and CALU are concerned about the relative spacing between the three federal tax brackets: 17%, 26%, and 29%. The steep 9% increase from the first to the second level compared to the 3% increase from the second to the third level has long been a concern of taxpayers. A reduction of the middle rate, in stages if necessary, would be a welcome improvement to the tax system.

CAIFA and CALU therefore recommend that the government reintroduce indexation of personal income tax brackets. We would also recommend that the government reduce the 26% personal income tax rate.

CAIFA and CALU believe these tax relief measures can be accomplished without jeopardizing the government's hard-won battle against the deficit. While such measures would not, for example, immediately stem the tide of talent moving south, they would send an important signal to Canadians pondering such a move that more significant tax relief is on the way.

This committee and this government have indicated their desire many times to reward hard-working and overtaxed Canadian taxpayers, who have sacrificed so much over the past few years, but actions speak louder than words, especially when it comes to taxation.

CAIFA and CALU believe that RRSP contribution limits represent another opportunity for positive change in the tax system. While it appears that RRSP limits have been frozen, the limits actually have been declining in real inflationary terms. More taxpayers are reaching the maximum earnings limit, because their wages are rising, but the RRSP contribution is capped until at least 2004. Had limits not been frozen, we estimate that the RRSP contribution limit for the 1998 taxation year would be approximately $ 20,000 and rising, up from the current static limit of $ 13,500.

Defined pension benefits, the other significant element of Canadians' private retirement savings, have experienced frozen pension limits. Had limits not been frozen, CAIFA and CALU estimate that the defined pension limit for the 1998 taxation year would be approximately $ 2,200 and rising, up from the current static limit of $ 1,722 for each year of service.

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We recommend the government immediately increase the annual RRSP limit from $ 13,500 to $ 14,500 for the 1999 taxation year, to $ 15,500 for the 2000 taxation year, and thereafter index the limit to inflation. We also recommend the government index the annual pension limit for defined benefit plans, beginning with the 2000 taxation year.

An issue of great concern to our members and their clients is access to supplementary health and dental plans. CAIFA and CALU want to take this opportunity to thank this committee and this government for the decision to allow unincorporated businesses to deduct the cost of supplementary health and dental coverage from income, effectively putting them on the same footing as the incorporated self-employed. We believe that now is the time for the government to take the next step and allow employees whose employers do not provide supplementary health and dental plans to deduct from income the cost of acquiring adequate coverage.

CAIFA and CALU also wish to recognize the efforts of this committee and this government to strengthen the partnership with non-profit and voluntary organizations that provide services that enhance the quality of life for Canadians. Particularly welcome were the measures contained in the 1997 budget to enhance the tax assistance for donations of certain publicly traded securities, and the increase to 75% of the annual income limit on the use of charitable donations tax credits for most charities.

As my colleague Bill Strain indicated in his October 1997 pre-budget presentation to this committee, and as the Charitable Incentives Review Task Force reiterated during its February 1998 appearance before the finance committee on Bill C-28, the legislation contains an excessive anti-avoidance measure. We believe this anti-avoidance measure exceeds the requirements of addressing the issue of loan-back transactions and imposes an unreasonable requirement, which will have the effect of disqualifying many current and potential donors from making a gift to charities, especially as concerns the work of private foundations.

We believe a way can be found to address the concerns about taxpayer behaviour expressed by the finance department. We would therefore recommend that the government re-examine the anti-avoidance measures contained in Bill C-28 and develop appropriate measures to prevent abuse, without introducing disincentives to charitable giving.

I want to conclude by addressing the committee's final two questions about helping Canadians prepare to take advantage of the opportunities offered by this new era and ensuring a wide range of job opportunities in the new economy for all Canadians.

CAIFA and CALU welcome the 1998 budget's initiatives in the priority areas of health care and education. Increased transfers to the provinces for medicare and social programs, as well as financial assistance to students through such measures as the Millennium Scholarship Endowment Fund and the SchoolNet, typify the kind of investments CAIFA and CALU members support.

With the exception of infrastructure-type economic and social spending initiatives indicated above, CAIFA and CALU believe the role of the federal government generally should be to create the proper environment for businesses and individuals to create and take advantage of opportunities. This includes maintaining a budget surplus, low inflation, and a declining debt-to-GDP ratio.

It would appear that Canadians would generally agree with this approach. A February 1998 Angus Reid survey revealed that Canadians have no appetite for bigger government, and 55% of respondents said the size of the federal government should either stay the same or decrease. CAIFA and CALU members could not agree more.

Thank you, Mr. Chairman, for the opportunity to participate. We look forward to the questions.

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

We'll now go to the representative from the Canadian Printing Industries Association, Mr. Michael Makin.

Mr. Michael Makin (President, Canadian Printing Industries Association): Thank you very much, Mr. Chairman, committee members. Good afternoon.

The Canadian Printing Industries Association welcomes this opportunity to appear before the House of Commons finance committee to address the committee's questions pertaining to the 1999 federal budget.

Just to explain a little about our industry and CPIA, we're the national voice of the pre-press, press and allied printing industries in Canada. We're proud to represent companies from coast to coast. Since 1939 we have served as the collective body to represent the interests of this industry for policy formation, regulation and legislation.

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The commercial printing industry is one of the most economically important and technologically advanced industrial sectors in Canada, as you well know. Every community has a printer and virtually every single Canadian can name someone who works for a printing company. We are really often taken for granted, but we're very much part of the fabric of the Canadian small business community.

We are primarily Canadian owned, 93% Canadian owned. We have 75,000 Canadians who work for printers from coast to coast. In 1998, $ 9 billion worth of shipments will be produced by our industry. With a gross output multiplier of 1.9, an additional $ 8 billion will be generated in other sectors of the Canadian economy.

In terms of manufacturing establishments, one in every ten manufacturing establishments in Canada is a printing operation. So we are by far the largest manufacturing industry in the country, just in terms of sheer establishments.

We're also an exporter. Canadian exports of commercial printed and related matter to the U.S. exceeded $ 800 million in 1997, and we are well on our way to approaching the $ 1 billion mark.

I should point out, however, that we are primarily a small business organization. Even though we have companies like Quebecor and Transcontinental that represent a huge segment of the industry, we also represent small businesses, and it is in this regard that we'll be making our comments today.

In our submission, there is detailed information on the types of challenges the industry faces, as well as the average sales volumes of our companies from one to nine employees, to mega-companies with a hundred employees and more. So as I said, our observations on the budget will be presented with these realities in mind.

We took the approach of addressing your questions as asked, so we'll respond accordingly.

Your first question dealt with the message we would like to send to the federal government with respect to the fiscal dividend. I think it's fair to say that with a fair degree of unanimity our industry, and our association in particular, commends the government for its diligence in reducing the deficit to zero by focusing on expenditure reductions. Finance Minister Martin, in particular, we believe should be singled out for his leadership in turning the country's fiscal house around, for he has met deficit targets year in and year out, and that's something the vast majority of his predecessors were incapable of doing.

I think it's also fair to say, before we get too partisan, that the success story is also a little skewed by the fact we have some creative accounting in the government's books with respect to the employment insurance fund, which used to be an off-account book and is now part of the consolidated revenue fund. So when there are surpluses in the account, the deficit picture looks a lot brighter, and that has been the case for the last number of years. In that vein, we think the current substantial surplus in the employment insurance fund is, to be blunt, obnoxious and some of it has to be addressed.

We strongly urge that the government's focus, in a post-deficit environment, should be on policies that encourage job creation. We also believe the government should pay down the debt, which continues to choke the progress of our nation.

Those are very generic comments, and now for some specifics.

On the appropriate new strategic investments the government should pursue to attain these priorities, just to repeat, we think an immediate and substantial reduction in employment insurance premiums must be introduced by the government. Even a 20% reduction from the current $ 2.70 of $ 100 of payroll would inject more than $ 4 billion into the Canadian economy and create some 80,000 jobs. We think the time is right. The government is on the right track and it's time to turn back and, as the finance minister himself said a number of years ago, let the small business community create jobs and provide them with the tools to do so.

Our most specific recommendation is a little bit technical, so I ask you for some indulgence, with regard to the tax system and competitiveness. I refer to our submission with respect to depreciation policies on computer depreciation.

Prior to 1988, most manufacturing and processing machinery and equipment and the supporting computer equipment was subject to a class 29 depreciation schedule, which carried a three-year 25%-50%-25% straight-line write-off, and I'm sure all of my colleagues at the table will remember this. Legislation introduced by the government in 1988 changed this schedule to a 25% declining balance, and in addition a half-year rule was put into effect that essentially cut the first year write-off in half. Even though the federal government introduced in 1992 an increase in the eligible rate for manufacturing and processing equipment and computer equipment from 25% to 30% on a declining balance rate, the half-year rule remained in effect.

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In lay terms, this means that it can take up to seven years before a piece of computer equipment can be written off or substantially depreciated for tax purposes, when in fact, as we all know, in this new age this equipment is becoming obsolete a very long time before that. We believe that tax policies of the 1970s and 1980s have no place as we head towards the millennium, and we think the government can take some substantial leadership in this area. That is why we have this particular proposal before you.

We believe that to compete effectively Canadian manufacturing firms that rely on computer equipment, like our industry and others, must be able to invest at economic rates of return, and as such, our depreciation rates should reflect the realism associated with the technological advances made and the obsolescence factor. Just in our own industry, most equipment becomes obsolete in 14 to 36 months, long before many of our companies are writing this off. And we're not talking just laptops and little computers here. I've appended some information—and I apologize for the type—on the type of equipment that is used in our industry, or used in the Quebecor Aurora plant; and we have some equipment that costs $ 625,000, our front-end computer equipment, that becomes obsolete after a certain number of years.

So we are suggesting that the federal government should introduce what we are coining “a high-technology depreciation schedule”, which would encourage technological investment and enhance our competitiveness. CPIA proposes a straight-line depreciation schedule, which would allow a 50% write-off in the first year and 25% write-offs in years two and three respectively. This is going back a little bit to the former system, but we believe it's still a competitive one.

We can't sit by and not take the opportunity to do so, because as we speak, there is a piece of legislation that has been introduced by the ways and means committee in the United States to see their depreciation schedule go from five years to two, even more than what we're suggesting. But because we want to commend the government where we're going, we don't want to be flip with our expenses. We think this is a responsible gesture.

Mr. Chairman, I won't bore you with the details, because I'll allow your committee members to ask questions, but the table is in the submission as to how this would work and compares a $ 10,000 piece of computer equipment as a depreciable asset as an example.

The benefits of such a tax change would obviously be economic stimulus, enhanced competitiveness and improved productivity, all of the things that were mentioned in the Speech from the Throne, which we think are very important. We do not think it's a tax dodge, we think it's encouraging investment and job creation, and to do anything else would be for the government itself to dodge its responsibility.

Question three asks how we can help Canadians prepare to take advantage of the opportunities offered by this area. As previously stated, industries must constantly invest in technology in order to survive, so obviously amending the tax policies that we have would be a step in the right direction. But of course investing in technology is only one thing. We also have to invest in people.

We suggest, and we don't have any particular concrete suggestions in this regard, that the government should look at ways to assist small businesses to train their employees through the tax system. There is no panacea to the training situation in Canada; there is no one simple solution, but perhaps the solution lies in the government assisting small business to invest in their employees. Whether that's a tax break on training or allowing them some mechanism to write this off in their taxes, we think it could be a step in the right direction and something that Finance officials might explore. We've begun the discussion with some Finance officials in that regard.

To wrap up, number four, what is the best way the government can help to ensure that there is a wide range of job opportunities in the new economy for all Canadians, is a very simple question to answer. I think I've answered it through the first three questions.

The best way for the government to ensure job creation is to assist employers with tax policies and an investment environment that is conducive to job creation, not one that hinders job opportunities. And to address the small-business payroll burden is a huge step that could be taken, as well as to examine antiquated tax policies and explore means to invest in employees.

Thank you very much.

The Chairman: Thank you very much for your presentation. We'll now move to the representatives from the Business Council on National Issues, starting with the president, Mr. Tom D'Aquino.

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Mr. Tom D'Aquino (President, Business Council on National Issues): Mr. Chairman, it's always a pleasure to appear before this committee, and I'm very pleased to have with me my colleague David Stewart Patterson, who's a senior associate with the Business Council.

It's particularly pleasing for me to be able to appear before the committee at such a promising time. Far too often in the past the Business Council has been forced to sound the alarm; we've warned about the consequences of deficits and of inflation, and of trying to isolate Canadians from a vibrant global economy. The transitions that have been made by governments and the private sector, as we all know, have not been without pain, but it is clear that Canadians are now reaping the rewards of their hard work.

Almost every indicator of economic well-being is now emphatically positive. The economy continues to grow at a very healthy pace. Canada led the G-7 last year and seems poised to do so again in 1998, and I believe it will. Consumer prices remain remarkably stable, and interest rates, a source of major expense for consumers and governments alike, have dropped to historic lows. More than half a million new jobs have been created since the beginning of last year, and Canada is leading the G-7 on this front as well. Almost all of these jobs are in the private sector, almost all of them are full-time, and perhaps most important of all, average income per person has actually started to rise again.

You may remember that in past appearances before this committee, I've expressed great concern about the flatness of personal incomes. This has been good news for governments as well. The revenue from taxes on personal incomes, on consumer spending, and on corporate profits continues to exceed all expectations. It's something that I'm sure makes Mr. Martin very happy.

In the past four years, revenue from the GST has jumped by $ 4.1 billion or 26%, from personal income tax by $ 17 billion, or 33%, and from corporate income tax by over $ 10.5 billion or 113%. For the first time in almost three decades, the federal government is taking in more money than it needs to meet its current obligations.

Now, five years ago—and some of you will remember this—the BCNI's call for a balanced budget by 1998 was treated as pure fantasy. With the combination of good strategy, good execution and good timing, that milestone in fact has been achieved. We must remember, though, that deficit reduction was never a goal in itself, it was a means of restoring real fiscal flexibility.

As this committee considers the choices that are now open to the government, please remember one thing. Contrary to perhaps what some economists may have said to you, the business cycle is not dead. Fiscal policy must not assume that today's good news is going to last forever. Do not therefore launch spending initiatives whose funding depends on rapid growth. Do not cut taxes so fast that a severe downturn or a sharp rise in interest rates could plunge public finances back into deficit.

The Business Council wants to see the tax levels fall substantially. We want to see them fall as quickly as possible. We want to see tax levels continue to fall over time, but above all, we want to see sustainable tax cuts. When this government chooses to cut taxes, it must be sure that those cuts can endure through good times and bad.

This is why the BCNI has argued strongly for an initial emphasis on debt reduction. Growth alone will gradually reduce public debt as a percentage of the economy, we all know that. But the size of that debt poses a very serious risk. The budget for interest payments this year is greater than all benefits for the elderly and all transfers to the provinces combined. A sustained rise in interest rates for any reason could play havoc with this fiscal strategy.

Fiscal progress and growing competitiveness have improved international confidence in Canada, but we still have some way to go. A dangerously high level of public debt, a heavy burden of taxation, a significant reliance on natural resource-based commodities, and the threat of Quebec separation continue to render us vulnerable. This vulnerability has to be taken seriously given the profound uncertainty that is gripping the global economy. The Asian financial crisis is still with us. The world's second largest economy, Japan, is falling increasingly into recession. Growth is slowing in the United States, and Europe is attempting to cope with far-reaching and risky structural reforms.

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For all of these reasons, Mr. Chairman, the BCNI has recommended that the government focus its efforts on debt reduction for the next two years, and continue to reduce its debt in absolute terms thereafter.

Now, given the current economic picture, we believe the debt-to-GDP targets of 60% within two years and 50% by 2002 are challenging but achievable. Finance Minister Paul Martin himself suggested to this committee: “that Canada, at a minimum, should be no worse than the United States”, which he noted has a debt-to-GDP ratio of closer to 40%.

Any homeowner knows that the best time to make extra payments on a mortgage is in the early years. Every billion dollars that the government pays off this year will generate savings in each and every year thereafter. Payments on the debt today are not alternatives to tax cuts. They represent a guaranteed investment, even larger tax cuts, and more freedom of choice down the road.

This is also a matter of principle. It's a debt we owe to our children. We ran up this debt to provide services to one generation. Surely we can bequeath to the next something more impressive than our own bills.

In addition to the principle of maintaining equity between generations, our decisions will have practical consequences. The C.D. Howe Institute has just released a study that looks at the long-term impact of Canada's demographics on fiscal policy. It shows that current fiscal policy is sustainable if the government uses its expected surpluses to pay down debt over the next few years.

If, on the other hand, surpluses are used only to raise spending and cut taxes, the net tax burden for future generations will rise dramatically. Only prudent debt reduction today can prevent a return to large deficits and rising taxes down the road.

Make no mistake: the goal of the BCNI's early emphasis on debt reduction is to ensure the sustainability of major reductions in tax levels. Canadians pay too much tax. I think that's the message that every government across the country is receiving.

The tax bill for an average family should not exceed what it pays for food, clothing, and shelter combined, as it does now. The deindexation of tax brackets has stealthily forced more Canadians to pay higher taxes even when their real incomes have been relatively stagnant. The spread of income-tested benefits and clawbacks has left families at all levels facing excessive marginal rates.

This discourages initiative and breeds dependence. More to the point, Canada's tax levels threaten the ability of our companies to compete in a global economy and to continue generating more and more better jobs for Canadians.

Canada's major employers are experiencing a growing problem that is directly linked to the country's high levels of personal taxation. These tax levels, especially in comparison with those of the United States, are causing an increasing difficulty in recruiting and retaining highly skilled employees. Their numbers may be small relative to the population as a whole, but the people we are losing are the ones we need most.

Canadian society, Mr. Chairman, does offer benefits that offset higher tax levels to some extent, and we recognize that. But highly skilled people are mobile, and many of them will go wherever they feel their overall quality of life is highest and opportunities for advancement are greatest. What people have left in their pockets after tax has a major impact on quality of life. As the base of the economy shifts toward knowledge work, work that is not tied to the location of resources or rail links, more individuals will be able to choose where they want to live and where they want to work.

This has significant implications for government policy. Where human rather than natural resources drive investment decisions, the best-paying jobs will be created where the right people are or are willing to move to. The challenge for governments is to foster the healthiest-possible communities at the lowest possible cost to taxpayers.

The drive toward lower tax levels is not, as some people would suggest, a race to the bottom in the quality of our social union, but as employees, executives, or entrepreneurs, Canadians want better value for the money they give to governments. This suggests that bringing down personal rates should be our most urgent priority for tax reduction.

Employment insurance premiums have been the subject of vigorous debate as the surplus in the EI account reaches a level that is clearly greater than required for the purposes of a self-sustaining insurance system. However, EI premiums flow into general revenue and are effectively just another form of taxation.

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We feel that EI premiums should come down over time, especially as Canada Pension Plan contributions rise sharply in the years ahead. But at the present time, Mr. Chairman, the excessive level of personal taxation, in my view, is the more critical issue.

I will not, at this time, propose a specific sequence for reducing taxes. The BCNI is currently engaged in discussions with its members, and we expect to flesh out a CEO position on this later this year.

I would emphasize that we do not advocate major tax cuts until the debt-to-GDP ratio has been reduced substantially. The debt ratio is an important indicator of the ability to sustain those taxes over time.

The need to reduce tax levels does not preclude selective investments by governments. In particular, the evolution of the knowledge economy supports the government's current focus on skills and learning.

We recognize that the federal role in this field is constrained by jurisdiction, but many paths of support are practical. I would note two examples in passing.

The Career Edge internship program, which is designed, funded, and run by the private sector, has proven to be a model open to effective federal participation. The government has acted in part as a major employer by hosting thousands of interns, but it has achieved additional impact by using its resources to enhance opportunities for high-risk youth.

On another front, I would like to acknowledge Revenue Canada's recent decision to revise its guidelines on employer-paid education and training. These revisions would ensure that employees are no longer penalized when their employers choose to invest in their knowledge and skills.

This is an example of intelligent tax policy that will both drive personal and business growth. As higher skill levels lead to higher incomes, governments will continue to see revenues rise, not fall.

In closing, Mr. Chairman, I would like to remind the committee just how far Canada has come in the last decade. Only a few years ago, we felt trapped by the rising spiral of deficits, debt, inflation, and taxes.

Every year, the pile of public debt grew larger. Every year, prices rose. Every year, we knew that taxes would go up too. We saw little hope of a better future for ourselves, much less for our children.

We are now on the verge of breaking that cycle of despair. Inflation is negligible, prices are stable, and for many goods and services, a dollar seems to buy more every year, not less.

Most governments are living within their means. The World Economic Forum even says that Canada is the fifth most competitive economy in the world. It was fourth last year. I think they made a mistake: we should have been fourth this year too, but that's another matter.

The United Nations Human Development Index has ranked Canada as the best place to live for the past four years in a row, and on the whole, Canadians are feeling much more prosperous and confident.

The challenge now is to build a future of enduring optimism. To achieve this goal, Canadians must know in their hearts that every year, their burden of taxes will fall. They must be sure that every year, they will have more to invest in the well-being of their families and communities, and they must feel that every year, the prospects for their children look brighter than ever.

We have an opportunity, Mr. Chairman, to build that future, but the key is to build it on a solid foundation.

If we fritter away our gains on ill-considered spending, if we are not diligent about paying down our debts, if we're too impulsive in slashing taxes for instant gratification, then that future will crumble.

But if we manage our spending, are disciplined with our debt, and are farsighted with our strategy on taxation, we can achieve the kind of future that all Canadians wish to share.

Thank you very much.

The Chairman: Thank you very much, Mr. D'Aquino.

We will now move to the representatives from the Canadian Real Estate Association. Mr. Pierre Beauchamp.

Mr. Pierre Beauchamp (Chief Executive Officer, Canadian Real Estate Association): Thank you very much, Mr. Chairman.

We welcome this opportunity to share the views of the Canadian Real Estate Association with both the committee and the representatives of other industries around this table this afternoon.

The Canadian Real Estate Association represents about 70,000 members in Canada, who are involved in various aspects of the industry. The majority, though, are basically sales people and brokers of residential real estate, but we also have a significant division of specialists in industrial, commercial, and investment properties. Our members represent small-scale real estate in all of its forms. Our industry is a major contributor to the economy.

Last year, through the multiple listing service, which we own as a trademark in Canada, our members were responsible for nearly 371,000 individual property transactions, with a total dollar value of $ 58 billion. These facts in part underscore much of what we have to say here today.

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For several years we have taken the view that the sharing of basic information in advance of these round tables will improve the level of discussion in the limited time that is available to us here. For this reason, we have provided a summary of our issues and our answers to many of the questions asked by the committee, and we've advanced copies of these to both the committee and other members who are around this table today.

I must tell you that the timing is unfortunate for us. We have undertaken additional research on our proposal to allow the investment of RRSP funds in small-scale real estate. We intended this to be the centrepiece of our pre-budget presentation. What I can do today is give you some idea of the course we are following at this particular time on this issue and submit the new research when it is finished later in the summer.

However, I will touch on five issues that are important to our realtor members in Canada. The first one is the economic outlook as it is seen from the perspective of our industry; second is the case for RRSP investment in small-scale real estate, as I've mentioned earlier; third, our continuing concern about the shape of the proposed seniors benefit; fourth, the related matter of protecting RRSPs as a pillar of our retirement income system; and lastly, the disclosure to the consumer of whether a mortgage may be prepaid before maturity and the cost of discharging that particular mortgage.

We have distributed copies of our current market analysis to all of you. At this particular stage, we expect relatively low interest rates, further job growth, and strong consumer confidence throughout the rest of the year. So we expect housing activity to be strong in most markets. We have long held to the view that the fundamental role of the federal government in housing, and of real estate generally, is to maintain economic conditions conducive to low interest rates.

We believe in the interests of long-term low interest rates and growth, the minister must commit to a fairly modest debt reduction plan.

Fortunately, Mr. Chairman, you and other members of the committee are somewhat familiar with the proposal that RRSP holders be able to borrow from their accounts to invest in small-scale commercial and rental residential real estate. We are talking about letting your constituents invest in their own communities. As a long-term option, they would be able to consider investing in a twelve-unit apartment block or a neighbourhood mall in Sarnia, in Burlington, or wherever.

Representatives of our real estate boards raised that issue with our own members of Parliament during our annual political action conference in the month of March. They reported to us an overwhelmingly positive response as a result of these meetings. Many members of Parliament expressed an interest in working with us to put this idea into practice. Many made very constructive comments. We were encouraged by the response and decided that further research was justified on this particular proposal.

Federal tax policy has facilitated major capital investment in the public real estate market through tax-exempt large pension funds and the Canadian version of REITs, real estate investment trusts. This investment is drawn into large-scale real estate—and I emphasize that we're not critical of these developments; in fact, we support them—but we believe the time has come to consider the small capital investor. In our view, existing policy is inadequate to maintain a healthy flow of capital back into small-scale property holdings, yet these properties play a major role in the supply of product, whether it be rental apartments, retail, office or industrial units.

It is a large market, and it plays a critical role in the health of a nation's housing stock. Direct investment is essential if we're going to maintain the thousands of small properties that constitute the backbone of our communities. They should be equally valid investments, even though they cannot attract pension fund or REIT capital.

Direct investment of RRSP funds by small investors does not entail more risk than many of the opportunities now available to these investors. We see this form of investment as middle risk, situated somewhere between the safest GICs and the high-risk stocks that are eligible today. The evidence we have produced to date all points to historic return on investment in the order of somewhere around 8%.

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Mr. Chairman, most of our members belong to that group of Canadians who must save for their own retirement. They have taken advantage of government policy that has encouraged them to use RRSPs.

Realtors have told us clearly at this point that they oppose a seniors benefit as proposed in the 1996 budget. They consider it unfair. Through diligent saving, many of them expect to have reasonable independent retirement income. The proposed clawback and the effect of income taxes, when taken together, result in an effective rate of taxation which we believe is punitive on independent retirement income.

And because it is based on family rather than individual income, some low-income spouses will lose the benefit entirely because they happen to be married to a higher-income spouse. Mr. Chairman, this discourages self-reliance and the incentive to save for retirement. It is one of the basic weaknesses of the current proposal.

We provided details in the research paper that we shared with the committee during last year's consultations. Through our membership in the Retirement Income Coalition over the last year, we've had access to some of Canada's leading pension experts. Together, we've had useful dialogue with the Department of Finance, Mr. Chairman, most recently on May 29.

We're encouraged to know that the government has substantially delayed implementation plans and is engaged in a major rethinking of this particular proposal, but we doubt that it can be easily rehabilitated in its present form. With many other members of the coalition, we believe that it should be dropped, and we support an alternative proposal based on reform of the existing old age security and guaranteed income supplement programs.

The projected savings for the government from switching to the seniors benefit are only 0.4% of GDP by the year 2030. These savings seem grossly inadequate to justify the consequences we have identified.

While the government has taken initiatives to reform old age security and the Canada Pension Plan, RRSPs have been subjected to almost annual budget tinkering. This causes unease and uncertainty amongst realtors and, indeed, amongst all Canadians who rely on them. I refer particularly to changes in annual contribution levels.

We urge the government to take the time to examine the impact of each of the three pillars of retirement income on the others. For RRSPs that means ensuring certainty and fairness in relation to all other pillars that are involved.

Mr. Chairman, I will close by asking the committee to support greatly strengthened disclosure requirements for the prepayment of mortgages. The consumer today has no right in law to prepay a conventional mortgage of five years or less. It is entirely up to the lending institution to provide this privilege or to not provide it. We have reluctantly agreed to support regulations that would at least require the lender to state clearly and prominently in the mortgage document whether a mortgage is prepayable, along with the terms of discharge.

In March of last year, the finance committee strongly supported new regulations. We understand the promised draft has been delayed because of other financial sector issues. We would, however, urge you to support the implementation of this consumer measure without undue delay.

Mr. Chairman, I will stop here. I will be glad to answer questions later.

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

We will now move to the question-and-answer session. We'll start with Mr. Harris.

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

Gentlemen, thank you for your excellent presentations and your written submissions. We sure appreciate them.

For the most part, I can't do much more than agree with you all on most everything you've said. I do want to ask you to expand on just a couple of things.

First of all, Mr. Thibaudeau, you touched on something that until today has not been talked about much, and that is the government's preoccupation with addressing the debt as a ratio to GDP. Its vision of getting that in order was to simply grow the GDP so the debt will look smaller and more manageable, when in fact, as you appropriately point out, the size of the debt is not reducing. And if we do have an interruption in our economic growth, then the ratio could be reversed very quickly.

• 1625

So of course I like your recommendation of devoting 50% of the fiscal dividend to beginning to pay down the debt. I'd like you to just take a couple of moments and talk about the importance of addressing the debt by way of real reduction as opposed to simply letting the growth in the economy make it appear smaller.

Mr. David Thibaudeau: I think the issue is the numbers that we got from the C.D. Howe Institute survey, which showed that somewhere in the neighbourhood of $ 5,500 a year was what it was costing each taxpayer. And that isn't going to go away if you don't reduce the actual debt itself.

So it makes it easier to finance a lot of things if you relate it to the GDP, because it's in relationship or in proportion to, but the fact is that the bill is still there, the debt is still there. So we felt that if you don't in some way attack the actual debt itself, how are you ever going to win the game? There is $ 45 million of interest that you can't use for something else if you're still paying it in interest.

Mr. Dick Harris: And I guess the average Canadian family could relate that debt to their mortgage. As long as their income is stable—and is increasing, in fact—they're able to handle their mortgage, but if there's a hiccup in their cashflow, then it becomes a tremendous problem almost overnight.

Thank you, Mr. Thibaudeau.

Mr. d'Aquino, I appreciated your comments. I wanted to ask you about something in particular: the so-called brain drain. If I understood you correctly, you recommended that we don't take immediate steps as far as tax reduction goes.

I understood what you were saying, but in relationship to the brain drain, whereby, as we speak, our best and brightest are leaving the country at an alarming rate because of our taxation regime in Canada, do you not think it might be appropriate to perhaps try to give Canadians some small tax relief now and some positive promises in the future in order to give them some incentive, so that they can see the light at the end of the tunnel? Maybe that will help to arrest the brain drain that we have now.

Mr. Tom d'Aquino: I think that is an extremely important point. Let me elaborate just a little bit on how, with respect, I think the government can achieve both of those objectives.

First of all, the focus of what we have said here is that the tax cuts must be sustainable. It's no good if the Harris government, the Klein government or the Chrétien government brings in very sizeable tax cuts and we find ourselves 12 months or 18 months from now in a global financial crisis of some kind; then we'd have to say, “Terribly sorry, but we've changed our minds.” That's basically what seven, eight, if not nine, finance ministers have told me over the last 15 years: “Here's our goal, but sorry, we didn't make it because times have changed.”

So the key word here is “sustainable”. And the people of Canada are not gullible. They know what sustainability is. If you're going to offer them tax cuts, they want tax cuts that are going to be sustained. The only way we're going to be able to do that is in fact to ensure that the huge fiscal hurdle that we still have, namely, the size of the debt, seriously begins to come down.

Now, for the first time since I've been appearing before these parliamentary committees, it has started to come down, and that's good news. But as Mr. Martin himself said before this very committee.... And I know there was some suggestion that he may have thought that he misspoke himself, but the words are there. He made reference to the fact that the United States had a 40% debt-to-GDP ratio, and he made reference to the fact that we live in very troubled financial times and our vulnerability would be much less today if our debt-to-GDP ratio were 40% rather than 68%. That goes without saying.

So here's what we're saying: let's make an additional effort in the next two years to knock that debt down faster so that the promises of tax cuts will come.

• 1630

Let me make one final point, Mr. Chairman. I have proposed and we have suggested to the Prime Minister and to the government, that the big tax cuts should come next year. Promise them in the forthcoming budget. You will not implement all of your tax cuts immediately, but if you lay out a tax strategy reduction plan in the budget of 1999, what will the signal be?

It's exactly what you're saying. You're not going to bring in all these massive tax cuts at once, but what you're going to be saying to young people and to all Canadians is, yes, we're doing more on the debt. That means rejigging the 50-50 formula—that I know was promised in the heat of an election campaign and, with respect, Mr. Chairman, was a mistake. Rejig the formula, put heavier emphasis on debt right now, and you will have tax relief and it'll happen over the next three to four years.

This is totally unsolicited, but if you happen to do that next year, I dare say it'll even enhance the chances of the Liberal government's re-election. Those are all good reasons why you should do it.

Mr. Dick Harris: That's a scary prospect. You may want to rephrase your question.

I have a final one, if I have time. Thank you, Mr. D'Aquino.

I've lost my paper here but I think it was to Mr. Klump, his presentation regarding the seniors benefit. I'm sorry, it was Mr. Beauchamp. You were talking about the seniors benefit.

It is a concern of mine and of many Canadians that if we can take the present tax regime and try to look down the road, given the same pattern, Canadians who are making sacrifices now during their working years to provide for a worry-free retirement are in great danger of being severely penalized by the tax regime 20 to 25 years from now, using continuing assumptions. I think this really acts as a disincentive for Canadians to look after themselves as best they can, as far as their retirement savings go, knowing that they could face heavy taxation down the road.

Has your organization done some study on this, and what kind of results have you come up with?

Mr. Pierre Beauchamp: We completed a study that we gave to the committee last year, in its entirety. We'd be happy to make sure you get a copy, if you don't have one already.

We've demonstrated, as have many other studies done by recognized actuaries in Canada, that there were serious problems, serious flaws with the seniors benefit. The thrust of our position at this particular stage is that the seniors benefit needs to be re-examined, if you wish, in the context of the entire system of retirement income in Canada, as opposed to simply changing the system and going from an individual-based system to a family-based system. I think the consequences in this particular case have demonstrated the very heavy taxation for those whose retirement income is going to be in the range of between $ 40,000 and $ 58,000 at age 65.

We're not the only ones to come to that conclusion. Many others have done so. Again, we express our gratitude to the government for their patience in listening to the positions we've outlined, but I still reiterate that the thrust of our position at this point is to look at seniors benefit in the context of other pillars of retirement income in Canada.

Mr. Dick Harris: One final comment.

Mr. Makin, I appreciated your submission. I got the material you left at my office a couple of weeks ago and I appreciated that. I want to comment and thank you for the use of your words describing the EI surplus as somewhat obnoxious and suggesting that the government really work to adopt a post-balanced-budget philosophy in making their short-term and long-term plans in order to give Canadian businesses and workers and consumers some hope that they're getting closer to the light at the end of the tunnel.

• 1635

Mr. D'Aquino pointed out that Canadians are now reaping the rewards of all their hard work, and I'm sure we are, in a lot of senses. But there are many taxpaying Canadians who have not seen those rewards, either in a real way or in a promised way. I think it's time for the government to do that, and give Canadians something to feel good about over the next decade.

Mr. Michael Makin: Mr. Chairman, to use Mr. D'Aquino's words, if the finance minister...and this finance minister is extremely credible. I know that's often an oxymoron—finance minister and credible—but this finance minister is very credible in the business community and, I think it's fair to say, with Canadians. If he sent out the signal that he's going to be as diligent on payroll taxes and the tax burden facing business in this country as he was on the deficit, I think we'll have a very great and promising future for this country.

The Chairman: Thank you.

Mr. Riis.

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

Mr. Harris is interested in the “united alternative”, and although you folks weren't here this morning, Mr. Harris is also losing sleep—and Thomas, your comment just a minute ago won't help them on that, I suspect. However, I do want to say I appreciated everyone's presentation this afternoon.

As we strive to find ways and means to reduce tax rates, and since this is just the beginning of our pre-budget consultations, we often hear requests for further tax exemptions. We've heard half the witnesses today ask for further tax exemptions, and happily this is not necessarily referring to that, so this is a balancing problem that we will have to face.

I have two quick questions to Michael. You may be able to help our committee here in a great way, Mike, because in your presentation you referred to the fact that a 20% reduction in the EI premiums would result in 80,000 jobs. If you can explain that, that will certainly help us in determining what we ought to do in terms of EI. Perhaps we should even consider 40% and go for 160,000, or whatever, if there is a correlation. But I'm curious about your methodology there.

Secondly, Thomas, you referred to the Minister of Revenue's recent education and training decision, which will help a lot of people. Michael, you made the case that the government should provide some kind of tax incentive to encourage firms to invest more in their employees' training and education. Don't misunderstand when I ask this question of you, but why should we ask taxpayers to assist businesses to invest in their own employees? Why wouldn't they just want to do that on their own, without a tax incentive to do so?

Mr. Michael Makin: I guess the first question on the 20% creating 80,000 jobs or whatever the figure is—that's a figure that has been used for a number of years by the Canadian Federation of Independent Business and other economic think-tanks that have done the macroeconomic model as to how that's....

In practical terms, how does it happen? It's very simple. You have an employer in Kamloops or in Kitchener or anywhere else who has a tremendous payroll burden—it's not only the employment insurance fund, it's the Canada Pension Plan, which is going up exponentially—and the tax burden that he or she faces to hire somebody is just too great. If that burden was reduced, and there was an incentive on the part of the government to say, “We're going to treat employers fairly in this country, and we're going to give them a chance to add to job creation”, then I think you'd see people going out and hiring people.

We've spoken with small-business people from coast to coast, and we raised this point with many of you when we met in your offices, and I know that small-business people are prepared, but they just need the investment climate that's going to do that.

I know the government will say there is the New Hires program, and that was a step in the right direction, and there was significant job creation as a result, but that's only one step. We have to have a permanent signal to show that there's an investment climate where people will want to create jobs.

Mr. Nelson Riis: Going back to the 80,000 jobs statistic, you picked that up from other organizations that have used that figure?

Mr. Michael Makin: That's correct. It's a widely quoted number. It's been put through all the macroeconomic models and—

Mr. Nelson Riis: You know, there have been many witnesses who oppose that logic, who suggest that there's no empirical evidence that suggests that if a business has their EI payment reduced 20% or 30%, that would necessarily mean another employee.

Mr. Michael Makin: I think we just have to look at the government's New Hires program, which did create jobs. If that created jobs on a temporary, one-year basis, what would be done if it were on a permanent basis?

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Mr. Nelson Riis: I just thought maybe you had something additional to what we've seen before. But on the matter of encouraging investment in training and education....

Mr. Michael Makin: I think you answered the question for yourself, because it's not just taxpayers assisting businesses. Businesses are creators of jobs, so they're assisting themselves. If you create an environment where people are encouraged to train people and they'll hire more people and they'll have a competitive company and they'll be able to hire more people, all Canadians benefit. We benefit from the tax system and we benefit from local community job creation.

It's not just businesses that win. We're trying to do this for our employees. We have to be competitive in the international marketplace, as Mr. D'Aquino and others have said, and we can't do that unless we have the skills to do so. Often small business in particular doesn't have the wherewithal to do that.

There's no shortage of government programs that have existed in the past and have not been successful. All we're suggesting is it's time to.... If we earn the luxury of having some money to spend—and we want to be frugal, as others have pointed out, but if we're in that position—then let's see if there can't be a mechanism in place whereby we can encourage people to invest in their people.

Mr. Nelson Riis: Would you say such incentives should apply across the board, whether it's the Royal Bank or a printer with five people? Should it just apply across the board?

Mr. Michael Makin: I don't think we'd draw any distinctions, quite frankly. Once you start drawing distinctions, you start creating more problems than you need to create.

The Chairman: Mr. Jones.

Mr. Jim Jones (Markham, PC): Mr. D'Aquino, you talked about tax relief and that. Is Canada creating high-paying jobs, or are all the high-paying jobs being created in the U.S.? And if they are, if we reduced personal income tax, would the Canadian corporations be able to create these jobs and retain our best and brightest Canadians, and have them not move to the U.S.?

Mr. Tom D'Aquino: Absolutely. I cannot emphasize enough to this committee how serious a problem this is. Remember, the members of my organization are the chief executives of our largest companies. John Roth of Northern Telecom; the CEOs of the financial institutions; an individual with whom I had lunch today, the chief executive of McCain, which does a lot of investing and recruiting—every single one of them is deeply concerned about the ability to attract young people.

If Bill Gates comes up and simply takes the largest swath of the graduates coming out of Waterloo, this is a big problem. We are all paying to educate these young people, and we have some of the brightest and the best in the world, and they are leaving.

Are we creating the jobs here? Yes, we are. Witness the job numbers I gave you, and I promise you those job numbers will continue to improve. Don't hold your breath at 8.4%. That number is definitely going down. The vast majority of those jobs are full-time jobs, and they're good jobs. The best jobs are being created in the most advanced industries, certainly the knowledge industries.

So without overstating the case, I would say it is a problem that has reached near crisis proportions and it will get worse. That is a very powerful argument for saying we have to deal with this issue.

I know the argument was, shouldn't you be doing it today? Announcing that there will be a serious, detailed program or strategy for tax reduction will in itself be an inducement. It will send a very powerful signal. But in the meantime, we have to be very realistic: we're going to continue to lose people.

Let me make the point here as to what's really at stake in broad strategic terms. We have now in Canada some very healthy Canadian-based multinationals that are creating jobs here, in the United States, and in other parts of the world. To me, the strategic question is: will we continue to have those 25 what I call flagship enterprises operating in Canada 10 years from now, or will we gradually lose those head offices to somewhere else?

When those companies, which may still be notionally Canadian, employ a much greater number of their young people and others in the United States, because they find it easier to attract people or to retain people there, this, ladies and gentlemen, is a big problem. So we want our flagship enterprises to stay here.

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There are many other reasons why we should be reducing personal income taxes, but if we want flagship enterprises to stay here—and that is certainly our goal—then this has to be a top priority. That'll be told to you by any chief executive who runs any large company that employs Canadians on both sides of the border. You'll hear more and more of it in the course of the next year or two. Maclean's magazine devoted a cover issue to the issue of the brain drain. We have a serious problem on our hands.

Mr. Jim Jones: Is there any reason why companies like Microsoft wouldn't locate a research facility or programming lab up here instead of taking them all down to Redmond, Washington? They have roughly 17,000 to 20,000 people in their Redmond, Washington facility, and we should be getting at least 8% of those types of jobs up here in this country. Is this a conscientious decision by companies like Bill Gates' and maybe Intel? Do they look at our tax rates and just take them across the border where they can offer them a lot better amenities, etc., instead of investing in this country?

Mr. Tom D'Aquino: First of all, we have to be very careful. I don't think it's a deliberate decision to denude Canada of talent. In many cases, their headquarters happen to be somewhere else, and they prefer to draw those people to where they are.

The very same question can be asked about Northern Telecom. Why do they have 48% of their R and D in Canada, and why do they employ a huge number of young Canadians every year and actually put them to work in Ottawa, Calgary, Toronto and Montreal? There's a reason for doing that. I'm just saying it's becoming increasingly difficult.

If you want a dramatic example, what I call a cross-border example—and I know Mr. Riis won't necessarily like what I'm about to say—why is it that Seattle has become such a hub of high-technology development and employment and Vancouver—I grew up in Vancouver—is doing so badly? There's a reason for that.

British Columbia has the highest marginal rates of taxation in the country. If you compare Vancouver and Seattle, which in many respects are sister cities, why are so many people migrating to Seattle? Why is Seattle growing much more quickly, in the sense of both industry and advanced technology? There's a reason for that.

The world, young people or countries look at Vancouver and Seattle and say, “Hey, that's a place where the climate is the same and the attractions are the same, but the tax rate kicks in at about $ 66,000 in Vancouver and kicks in at about $ 266,000 in the United States. Secondly, I'm paid in U.S. dollars, and thirdly, I'm taxed much less.” So for people who happen to like the west coast lifestyle, you can understand why a lot of young people will go to Seattle and not Vancouver. That's an example.

Mr. Jim Jones: Can Canada be an island and continue with high taxes, while the U.S. has low taxes, and expect us to really have a healthy, long sustainable future?

Mr. Tom D'Aquino: No. What I see at work right now is the slow attrition of the knowledge-intensive capability of what I call our flagship enterprises, and that attrition is moving increasingly. What is happening before our very eyes is that an increasing number of people are employed in the United States by U.S. managers of Canadian companies. It's only a question of time when the locus of activity and focus will shift to the United States.

I see this already. It's happening before our very eyes. So the question is—we don't have to do it tomorrow—can we in the course of the next two to five years reverse that process? If we do, with a better balancing, coupled with the other enormous advantages we have to living in Canada and why young people choose to live here, we can then rectify that situation.

The Chairman: Thank you, Mr. Jones. Thank you, Mr. D'Aquino.

Monsieur de Savoye.

[Translation]

Mr. Pierre de Savoye (Portneuf, BQ): I have a few minor questions, the first is for you, Mr. Makin, but I would like to begin with a comment.

You use the expression "fiscal dividend". You're not the only one who does. The reason I am mentioning it is that you are responsible for distributing it. But this create a poor impression. Let's call a spade: what it is a surtax. I am somewhat surprised to see that you, a businessman, are using this expression which, in the final analysis, makes a poor impression.

• 1650

My first question is as follows. In your text—I am translating freely as I do not have a version in French—you say that employment-insurance is an obnoxious surplus and that, consequently, the premiums should be slashed. Do you not also think that benefits should be adjusted upward to their former level because the surplus is not only an abuse of taxation—let's call a spade a spade—, but also a considerable reduction in benefits to the beneficiaries? What do you think?

Mr. Michael Makin: The question of the surplus is a committee matter that has simply been repeated. We obviously agree that employees and employers should both benefit from employment- insurance. I believe the government must realize that something has to be done, now, to lighten the burden that is crippling Canadian businesses.

Mr. Pierre de Savoye: You understand the purpose of my question. Because employment benefits have been slashed, some people are now on welfare, a provincial responsibility and provinces also collect taxes. Consequently, if we want to achieve, economically speaking, a reduction of the tax load, it is not enough to shift the burden from the federal to the provincial level. Integrated management is absolutely essential. In your approach, you seem to ignore real integration, stressing only the federal aspect. Do you not agree that it is not sufficient to reduce the contributions, but that we must also make sure that the people who need employment-insurance do not shift the tax burden from the federal to the provincial?

Mr. Michael Makin: You are right, governments should adopt policies to assist people in difficult situations. I understand your question. The contribution rate has recently been lowered from 70% to 55%. However, the committee has asked us what Canadians could do, and this is why I said that something must be done immediately. The public burden is another matter, if I may say so.

Mr. Pierre de Savoye: I will now ask Mr. Thibaudeau a question.

Mr. Thibaudeau, according to you, your two organizations believe that the plan for the repayment of the government debt, based on prudent economic forecasts and applying the unused portion of the $ 3 billion reserve, will produce a progressive reduction of the debt. But Mr. Thibaudeau, this will take 200 years. There is a flaw in your reasoning somewhere. Please help me understand.

Mr. David Thibaudeau: We have to start somewhere. I will ask my colleague Mr. Strain to answer.

[English]

Mr. Bill Strain (Chair, Taxation, Conference for Advanced Life Underwriting, Canadian Association of Insurance and Financial Advisors): The thrust of our recommendation is much the same as Mr. D'Aquino's. We think the government has to place a lot of emphasis on the absolute reduction of debt. To accomplish that and set a specific measurement stick, at least 50% of the fiscal dividend as defined in the government's budget papers should be devoted exclusively, without exception, to the absolute repayment of debt. With that ongoing commitment we will see an increase in the decline in the absolute value of the debt over time. With the growth in the economy, it will precipitate an even greater decline in the ratio of the debt to the GDP, down to levels that are internationally competitive.

We also have to recognize that we sit here before this committee and talk about the federal debt, but there's also a huge amount out there of provincial and municipal debt that forms part of our national debt as a country. Some estimates put it at close to $ 1 trillion currently, as opposed to the federal level.

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So we can't lose sight, as Canadians, of the burdens we are facing, not only with regard to federal debt but with regard to provincial debt, which I think makes it all the more important to have that concentration on the debt reduction currently in order to ensure that we are not passing along that extreme tax burden on future generations.

I would commend to the committee—and Mr. D'Aquino referred to it as well—the C.D. Howe report that was released last Thursday on tax transfers and generational impacts, which presents a pretty frightening picture if, indeed, attention really isn't focused on the debt reduction issue.

Mr. Pierre de Savoye: Mr. Strain, you are hitting the right nail here. If we have a fiscal dividend, it's because a number of dollars have been withdrawn from the provinces, who consequently are not in as easy a position to manage their own debt, although they are doing it for those who need to do it.

Don't you think, rather than using 50% of the fiscal dividend, that is not a fixed amount of money, it's just overtaxation? If one year we don't overtax, there's no dividend, and of course there's no refunding of the debt, because 50% of nothing is not very much.

Shouldn't we put a stick somewhere saying that in 20, 30, 40, and 50 years from now the debt should be extinct? Shouldn't we put also some guidelines, like not shovelling the debt to the provinces because we're just displacing the problem? What do you think about that?

Mr. Bill Strain: To address the point about having a target for debt reduction that goes out far into the future, 20 or 30 years, that is not something that those who are making the decisions today will have any control over in the future. I think it's important, just as the finance minister targets two-year horizons for planning purposes, that we have to take action today that is measurable today and achievable today.

As I mentioned, I agree that the level of national debt is the issue facing Canadians. It's not an issue that directly affects, necessarily, the federal government and its effort in terms of a government, but it certainly affects the Canadian people and their share of that burden. But I think if the federal government does not take action and demonstrate that the federal government is taking that action to reduce the debt, then the message is certainly diffused.

[Translation]

Mr. Pierre de Savoye: Mr. D'Aquino, you said it was important to train staff properly. The question of making things easier for business by means of a credit for training costs incurred by the business has been aired repeatedly. We know that in Quebec—you probably know more about that than I do—, there is a 1% policy that enable businesses to invest in training rather than paying that amount in taxes. Do you see something similar being introduced federally, or perhaps improvements or other measures that will be more productive could be suggested?

[English]

Mr. David Stewart Patterson (Senior Associate, Policy and Communications, Business Council on National Issues): If I may, Mr. Chairman, I think I should note that one of the things we found when looking at investments in training by corporations is that there is a relationship between corporate size and the amount of money being spent both in absolute terms and as a proportion of payroll.

First of all, I think investments have been increasing in real terms, regardless of the tax treatment. Back in 1996, I think the Conference Board found a national average of around 1.6% of payroll being invested, regardless of the tax treatment.

In a survey of our own members and the Business Council's 150 companies, whose chief executives are members of the Business Council, we found in the same year an average of 2.5% of formal training budgets. When we asked about a broader view of all the expenses being incurred in the course of developing people, the number rose to about 4.2% of payroll, an average of more than $ 1,800 per employee per year, and that's in the absence of any coercion through the tax system.

• 1700

So I think it is clear that large companies, at least, do see the value of investing in their people. They are doing so in growing amounts in real terms. What we objected to in the recent Revenue Canada decision was the way employees were being penalized when they worked for companies that were wise enough to see the value in those investments. That had nothing to do with the tax treatment on the employer's side; that was strictly an employee taxation issue.

There is a legitimate question, though, as to what the situation is with respect to smaller companies and the self-employed, and as to why it is that smaller companies in particular don't seem to be investing as much. Is it because the investments are not being made, or is it simply because training tends to be more informal and therefore is not being measured?

If it's more than a measurement problem, then there's a legitimate policy question to be raised as to how to ensure that employees of smaller companies and the self-employed have adequate access to opportunities to develop their skills and the skills of their employees. But if we look at the economy as a whole, if we look at larger corporations in particular, the investments being made by companies are substantial.

The Chairman: Thank you, Mr. Stewart Patterson. We have to move on. Thank you.

Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): Thank you. I have a couple of questions.

One, Mr. Makin, you advocate a substantial reduction in EI premiums and suggest it would correspond to 80,000 jobs for Canada. How many members of your organization specifically have indicated that they would hire people, and how many did they suggest they were going to hire, with the 54¢ you're advocating we reduce the premiums by?

And in terms of the New Hires program, what kind of advertising did your association do amongst its members and how many jobs were created in your industry specifically?

Mr. Michael Makin: I'll answer the second question first, Madam Vice-Chair.

Our association did not widely publicize the New Hires program. It was really more of a communications problem with the government than anything else. It was there, it was available, and we could have done a better job at promoting it, and I think we would do a better job of promoting it if we had the right tools and were able to do that.

So I can't tell you definitively how many. I have no empirical evidence to suggest how many were employed.

As far as our association is concerned, we in our government affairs surveys have asked our members if they would indeed hire new people if there were an investment climate, and of course the investment climate is a much broader definition, which includes EI employment reductions. The answer was overwhelmingly yes.

So I can't say to you how many of our 600 companies from coast to coast would say, if we gave them 54¢ on the dollar, they were going to go out and hire somebody, but it certainly would be a step in the right direction. It's an overall payroll burden.

The CPP is another burgeoning, obnoxious dinosaur that is costing a lot of money, and in fact there's a great inequity in the CPP as well, because even though this year we have a nice little corresponding offset of the EI reductions with the CPP premiums, unless that continues in the years to come, we're going to see a terrible imbalance. Private sector employees are going to be paying a certain amount of CPP and government employees are not, because as you know, under the Public Service Superannuation Act, government employees cap their contributions at 7.5%. Once the CPP reaches a certain level, they don't have to pay any more. So we're going to see private sector employees being shielded where 250,000 government employees are not.

Ms. Paddy Torsney: Thanks. Maybe I can ask you to ask in your next survey of members about how many hired under the New Hires program, because part of the issue of EI premiums, or payroll taxes in general, is it's a bit of an urban myth; it's an excuse. So I'd really be interested in seeing the actual numbers of people who did take advantage of a huge government expenditure, to see how that reaped rewards. You are obviously surveying on a number of things. I'm not sure it would be a huge burden to figure out how many people exactly and how that matches with our own numbers.

And I'd like to hear Mr. D'Aquino's answer to your proposal for a 54¢ reduction in EI premiums at this time, and then I have a question for everybody.

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Mr. Tom D'Aquino: Mr. Chairman, Madam Vice-Chair asks a very interesting question, because it's obvious in our presentation that we give much higher urgency to the reduction of personal income taxes than we do to employment insurance premiums.

That having been said, let me tell you why we've taken that position. We've taken that position because we are realists. We know the Minister of Finance will not do both. I read his testimony before this committee, and I think he raised the question. For those who are not following very closely what he has to say, the simple truth of the matter is he cannot afford to do both. He cannot massively reduce employment insurance premiums and massively give us our tax cut. We know that.

Now, are we happy about that? No, we're not. Do we believe that payroll taxes do hurt? Yes, they do. There's no question about it. It's not a question of going back to every single member and asking whether or not it will hurt. To argue whether a payroll tax hurts or not is to try to reverse the Newtonian principles of the universe and say that gravity does not work. Of course, if an individual has to pay or not pay, it's going to make a difference as to whether they're going to hire people. That is standard, accepted logic in every industrialized economy in the world.

That having been said, we are saying to go slow on the reduction of employment insurance, Mr. Martin, because regrettably, regrettably, regrettably, you're going to have to to that. Rather than talk about 70¢, 80¢, or $ 1 reductions, I have a proposal to put to this committee that I think is a very good one. I'll suggest to the Minister of Finance that he set a target of five years from now, at which time he will say that he will bring the premiums right down to $ 2. He can announce it in the next budget and say that he's going to give himself five years. That will take a bit of the pressure off.

At the same time, it will give him the kind of flexibility that he needs in order to bring in—in our view, this is more important—tax cuts. These are tax cuts that will affect all Canadians, not just some, namely, the reduction of personal income taxes.

Ms. Paddy Torsney: Thank you.

One of the benefits of having panels like this is so that we can hear you debate each others' ideas as well. That's why I asked for that particular comment.

My next question is this. Businesses make decisions all the time about whether to buy a new piece of machinery, go after a new market, hire someone, or work in Asia, for instance, and develop a whole new trade area. They make an investment and they often take out a loan to be able to go after that new area. Lots of groups will be coming before this committee to talk about making investments in social infrastructure and making investments that will pay off in the long term for society.

All of you have come here pretty well unanimously advocating debt reduction, tax reduction, and no increase in government spending. But arguably, some people will go the other way and say that now is the time to make investments in crime prevention and child care for the future of our young people.

Today we heard a really important plea for investments in women's participation in civil society to increase opportunities for 51% of the taxpaying population. We heard requests for more research initiatives and increased support for charities. We've had the provinces demanding lots more money. We know the numbers on child poverty are appalling in Canada.

So what do you say to all those people? If you were going to choose in some of these areas, where would you make investments?

Mr. Tom D'Aquino: If I could just begin, first of all, I would say that there's hardly a businessperson I know in this country who would not support the idea that there should be no further cuts to education or health.

I think if you consult your internal polls, you will find out that's exactly what Canadians are saying to all of you. They're not interested in the big, long laundry list of all the other expenditures, some of which Ms. Torsney has mentioned, and some of which, if Canada were not as heavily taxed and indebted as it is, would be highly desirable.

If the advice of some people had been taken 15 years ago, our debt-to-GDP ratio today would be at 40% and we would have vast amounts of money to spend on these things. Now we don't have the choice.

So we're saying you should pick your big items: health and education. That's what people want. That's what people expect. I happen to believe there is a crisis in the health care system in this country. These are the areas to focus on.

As far as the other things are concerned, do what our grandmothers and grandfathers taught us: it's highly desirable to be able to have the new clothes and the candy and the toys, but not until we can afford them. But let's really go after the things that we really need.

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If you hear from all sorts of groups, as I'm sure you are hearing, about the other long laundry list, go back to Mr. MacEachen, Mr. Lalonde, Mr. Wilson, and Mr. Mazankowski and add up all the requests that they got and adhered to and look at the terrible mess that we got ourselves into. Then ask yourself if you are really doing something that is helping civil society: am I really doing something, or am I in the long run making short-term decisions that are going to do terrible damage?

The last thing I would say is that I hope, as we now get into surpluses, that somebody will do one important piece of arithmetic, and that is the incalculable damage that has been done to women, poor people, and all the disadvantaged in society over the course of the last 20 years because of misspending. When the tally of that damage is done, that should be a very cold shower on anyone who comes back and wants to take a fiscal dividend that doesn't really exist—it's a myth—and start spending it all over the place.

Ms. Paddy Torsney: Some might argue that poor children are asking for an investment right now, and that we can't afford to put off that investment. This is in the same way that in order to grow a business, we might not be able to put off buying the latest piece of computer technology in order to keep all our employees going in order to make profits for tomorrow. Some people present a pretty good case for making an investment now, in that we have a responsibility to not sacrifice in the same way as you wouldn't sacrifice to lose more employees, profits for your shareholders, or whatever.

This is not just to Mr. D'Aquino, but to the whole panel: where do you want to make the investments, or do you not want to make them? I'm interested.

Mr. Tom D'Aquino: I just want to say that you're making a very strong case, but with respect, let me tell you where the flaw in the logic is. Yes, investment in children. Yes, investment in child care. Yes, investment in home care and pharmacare. All of these things are desirable. You don't have to convince anybody around this table that those would bring benefits.

But the real issue is this. At a time when we let our deficits get out of control, when interest rates soar, what is the greatest single virtue of the Liberal government in office today? It is the fact that it eliminated the deficit and brought down interest rates.

Now we're beginning to see the benefits roll themselves into the elimination of the deficit, whereby today we can be having the discussion about what we do with the surplus. Do you realize that we couldn't have had that discussion about what you would do with the surplus three years ago, when people barely had their noses above the water.

I'm really saying, again, applying the principles of Newtonian physics, let's get the big balls and the little balls in the right order, and then the benefits will flow. If they're not in the right order, then all we're making is false promises, which is what people made over the last 20 years. There were all those promises I heard that were never able to be fulfilled.

The Chairman: Mr. Strain.

Mr. Bill Strain: I'd just like to say I couldn't agree more with Mr. D'Aquino. We represent quite diverse interests from the Business Council on National Issues in many ways. The issue is really one of the tough choices that have to be made with the allocation of scarce resources.

We talk about the debt. The debt is nothing other than a tax burden imposed on our future generations. To that extent, I think the emphasis and focus has to be on debt reduction. That's why we think that at least 50% of the fiscal dividend goes to that. We're saying that then there's a choice of what to do with the remaining 50%. We recommend 50% for tax reduction for the very reasons that Mr. D'Aquino has so articulately said.

We think the increased spending on social programs, as a priority, has to go to education and health care. I think that is the common picture you're hearing from many, and we certainly support that position wholeheartedly.

Mr. Michael Makin: I would say that when I first appeared before the House's finance committee 10 years ago it was a different government, but the same competing interests exist. There was a call for a national child care program. There were calls for investments in certain programs.

I think that if we had addressed our debt situation 10 years ago we would have been able to have all of that money to take your shopping list and address each of them.

As far as child poverty is concerned, I think it's a crime and it's disgusting. It should be addressed, but there have to be vehicles within the health care and education systems that the government can use right now to reallocate existing resources to address that additional problem.

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And as far as the propositions that have been put forward with the committee today are concerned, these are all long-term investments, which I think will reap benefits to everybody—women, children, everybody in society—because when you have a productive economy people can earn gainful employment and contribute to their advancement. That's all good.

Mr. Pierre Beauchamp: Education and health care, and I don't think anyone in their right mind today would suggest we abandon debt reduction as a focal point of what the government has to do.

How the moneys are distributed otherwise I think becomes a very difficult question, but I think that we cannot, in all fairness to our future generations, abandon the main goal that I think most of us recognize today, which is debt reduction. We have to do that, we can't abandon it in favour of something else.

The Chairman: Mr. Pillitteri.

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

I was going to ask Mr. Makin a question about the reduction of UI, but I've seen it's been beaten to death. But let me say, if that is not enough of a signal, having a reduction from $ 3.30 down to $ 2.70 per hundred, I think it's much more than creating the environment for business to say we're going in the right direction.

Having said that, I sometimes ask myself as a small businessman whether, with a reduction of 54¢ on the employment insurance, I would now create another job. The answer would be no. In other words, if I was employing 100 people, definitely maybe then I would think about creating another job, but certainly if I had five to ten employees it wouldn't give me the revenue to do it.

The New Hires program was a prime example. We did see the increase of youth employment through the New Hires program, which is a benefit. But I'm not going to be asking that question.

Having sat in this committee here for the past five years, I recall Mr. D'Aquino coming here five years ago and making a presentation. I must congratulate you, given that the first time I saw you before this committee.... If this government has not achieved anything—even though we have achieved much—we have certainly have made a believer out of you as compared to the day when you made the first presentation in here. I think the idea was that you no longer believed governments were able to achieve what we said we were going to do, specifically in the elimination of the deficit.

My question to you, having said that we've made a believer out of you, is how attainable is the goal of reducing the GDP ratio down to 50% within the next two years, as you've stated? And what do we have to do in cuts in order to achieve that?

Mr. Tom D'Aquino: First of all, if I am a believer, and I am, what I'm a believer in is the fundamental common sense of the Canadian people. Remember, the first government in this country to balance its budget was the social democratic government of Saskatchewan, and now there isn't a single government in this country that has not pledged itself to balancing their budget. And in addition, they've pledged themselves to tax reduction.

Consider, Mr. Pillitteri, how different that is from the environment we were in five years ago, when, regrettably, the Liberal Party was going through what I call it's aberrant period. We were then being told that deficits didn't really matter very much; but now we're all in agreement, and that's why we're all believers.

But on the issue of debt reduction, I think this committee's report—which, incidentally, we lauded very strongly—of last year, which said that the debt-to-GDP ratio in fact should come down to the low 50% range and that it was attainable, is something that we endorsed. In effect, what we've really been arguing is that if you just do a little more, coupled of course with no surprises, though, on the global economy, and if the so-called fundamentals remain attractive, we can get there.

What we're really saying is, do a little more in order to just give it that extra little bit of a push. And how do you do it? The very first thing you have to do—and forgive me for saying this, but I have to come back to it again—is drop the 50-50 commitment. The 50-50 commitment, I realize, was made in the heat of an election campaign and it sounded very good, and it's certainly won approval from people—a significant number of people, I assume—but it was bad economics. And the reason it was bad economics is for the reason the people of Canada are speaking of right now, as well as the people around this table, and that is that debt and taxes are impediments to future growth.

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The people of Canada have said they don't want you to spend a great deal more money, they want you to retain, and maybe slightly enrich, in the educational and health field, but to please not go go off and spend a lot of money on a lot of other things. And governments sometimes do change their minds, as you know. If the government were to come back and say the 50-50 rule was a nice promise but we're now getting the message, the message is that we have to do more....

What you should really do is commit yourself 50%; devote 25%, if you must, to spending, and the remainder divide between tax reduction and debt. If you do that, and you do your calculations on your numbers, and we continue to have these wonderful windfalls that are coming in as a result of good fundamentals, you'll be able to do it, you'll be able to surpass it and you'll be able to do what Mr. Martin suggested you should do before this committee: get it down to 40%, because the cycle is not dead. Rough times are ahead. And when they come, if you're sitting on 45% as opposed to 55% or 65%, it'll make life a lot easier for you and for the people of Canada.

So I think it can be done, but you're going to have to change the 50-50 formula.

The Chairman: Thank you.

Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): I think Mr. Redman also wants to ask a question, so I'm going to ask just one. I wanted to ask Bill about the taxation thing.

Jack Mintz was here; your former colleague Bob Brown was on that committee, and I met with him about this. What hasn't been talked about here—and I think everybody understands that we do want to see a lowering of the burden of taxation generally on individuals, and certainly corporations—the Mintz report did not talk very much about the personal tax or about the sharing of the corporate versus personal burden of taxation. If we are going to go for tax reductions, is there a point at which we have to look at wholesale personal tax reform, as opposed to tinkering with rates? Is there a danger in making small adjustments to a thing like a rate, or indexing a tax bracket or something like that, or are we getting to the point where we no longer have an instrument with which we can focus benefits?

Mr. Bill Strain: It's an excellent question and one that seems to come up every 10 years or so. The tax system seems to be able to survive for a 10- to 15-year period before it becomes overburdened and collapses of its own weight. But I would resist the suggestion that we ought to step back and look at a wholesale reform of the personal income tax system now, not that I don't think it may be needed—and it may well be needed—but for the reason that it will divert the attention from the necessity to bring rates down. As rates come down, of course, the significance of the overall tax burden becomes less intrusive in individuals' decision-making. It becomes easier to bear without going to the heart of things and saying, do we have to rip up our tax system and start all over again, which would take, as we've seen in the past, a process of many years to get there and stall any real adjustments we may be making in the interim.

So I think the broad-based suggestions we've put forward to the committee today in terms of trying to move the progressivity of the rate structure downward by reducing that middle bracket and to reintroduce the full indexation to stop the bracket creep and the automatic tax increases that occur with inflation, are general measures that can be taken today without really going back to a fundamental overhaul of the basic structure.

Mr. Paul Szabo: I hear what you're saying and it's useful. I'm interested in knowing if anybody would hazard a guess at what minimum percentage tax reduction would be necessary to make it useful. What's the lowest reduction that would be useful?

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Mr. Bill Strain: I'm not sure I could put a number on that, certainly. But I think the signal is as important as the absolute reduction—as Mr. d'Aquino said, taking the step today to send the signal that, yes, tax reductions are here now and more are coming in the future.

The Chairman: Mr. Iftody.

Mr. David Iftody (Provencher, Lib.): Thank you, Mr. Chairman.

I want to ask a question, if I may, about the notion of productivity and competitiveness. It's something that came up in our discussions in the presentation of the Mintz report, and it's something that's being explored right now by the Bank of Canada.

When Governor Thiessen was testifying before this committee, he talked about his concern about the gap between American and Canadian levels of productivity.

I guess we've recently slipped from fourth to fifth, which isn't terribly dramatic in terms of our overall global picture, but with the Americans being our senior trading partner and the very, very low Canadian dollar, if the dollar goes back up to 79¢ or 80¢, we'll lose that margin. There's perhaps a danger that many of our trading companies are relying for their productivity and their sales essentially on a low Canadian dollar.

We've heard a number of different companies testifying before the committee how increasingly they're relying on technology in terms of enhancing their competitive abilities. For example, we heard recently from our good friends, the banks, who told us they watch what Intel and Microsoft are doing just as much they do their competitors, because their view is on one side of the equation, for their new desires and hopes and dreams, that by merging the technologies and increasing the nature of these technologies, they're going to reduce costs and deliver those services more effectively, so they argue.

That raises the whole question of cost to businesses and to the Government of Canada, and provinces as well, for capital depreciation costs. I'm sure many of you have members who do this in the printing industry, and I have one in my riding, for example, Friesens in Altona, where every time I visit there's a new piece of equipment that has to be brought in. To keep up with your competitors, this is happening very quickly.

Historically, even ten years ago you might have kept that same piece of equipment for four, five, six or seven years; now it's twelve months, perhaps. So this is an incredible cost, and I think a cost that's going to increase.

One of the areas I'm interested in pursuing is changes to that allowance for those depreciation costs and whether this is something that the government, in terms of another form of tax reduction, certainly not personal tax reduction, should be pursuing. I wonder if some of you could comment on that.

Mr. Michael Makin: It just so happens, Mr. Iftody, that one of the issues we raised in our submission was that exact issue.

Your point is well taken, because as with Mr. Friesen's plant, if you go to Kitchener or Kamloops or anywhere else, in our industry there's constant investment in manufacturing equipment. But more importantly, the equipment that goes out of date a lot faster than the big iron that you see when you tour is the computer image setters, the computer technology to feed those huge machines. It is that technology that is becoming obsolete a lot faster than the tax policy in the current system allows.

Our suggestion—and I know when we met with you and your colleagues we had tremendous receptivity—would be exactly for a high-technology capital depreciation policy that would essentially take it from a declining balance schedule to a straight line, 50%, 25%, 25%. We believe that would inject tremendous competitive advantage to Canadian industry, who are indeed competing with the United States.

What I also point out, as I did to the chairman earlier, is that in the ways and means committee of Congress, your counterparts in the United States, two individuals are putting a bill through right now, sponsored by a Republican and seconded by a Democrat, that would see their computer depreciation go from five years to two years.

Ours is essentially seven years, so what we're suggesting would be tremendously beneficial to all manufacturing, not just the printing industry. This is a big ticket question, Madam Vice-Chair, that you referred to earlier, the big picture about how other industries benefit.

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Mr. Nelson Riis: Five to two years—is that right?

Mr. Michael Makin: That's correct. In the States.

An hon. member:

[Editor's Note: Inaudible]

Mr. Michael Makin: No, no, this is computer.... There's a class, and I have the tax code here for anyone who wants to see it. There's a class. It's class 29 depreciable assets, and as it happens, the same class of depreciable assets for manufacturing and processing equipment applies to computer ancillary equipment. So if you address both, even if you took class 29 and class 12 and went from a declining balance rate to a high technology rate, you would address that in one fell swoop.

We actually have a representative from your party who was prepared to introduce a private member's bill to that effect—not that it would have the same weight as this committee could bring. We believe that the committee could send a much stronger signal to Finance, because we know that the Finance officials listen to your committee.

The Chairman: Thank you for that.

Mrs. Redman.

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

My question is to Mr. Thibaudeau. CAIFA recommended that the middle tax rate be reduced. The previous government had intended to reduce the rate to 23% once the GST was introduced. I was just wondering if you had reviewed the 23% rate, and if you think it's appropriate. And the income threshold at which the second tax bracket starts, which I think is about $ 30,000—do you feel that's appropriate?

And because you've dealt with all three, there was a comment made by another presenter about the difference between the thresholds in Canada and the United States. Our highest tax rate commences I think at around $ 55,000. Do you think that's appropriate as well, or is that too low?

Mr. David Thibaudeau: On moving that gap, the key area there was saying that from 17% to 26% was a long way relative to 26% to 29%. It was quite a gap jump. If it were dropped back at the rate that we could afford, then that would likely hit a fair amount of people in a way that would be beneficial—that would provide a personal tax reduction that would fit in that area. It would seem logical to do that.

You asked a question about the highest limit—$ 55,000, was it?

Mrs. Karen Redman: Yes. Do you think that's too low compared to the United States? The point was made that in the United States it's vastly higher. Was it $ 250,000 that somebody said? Anyway, it was huge before you kicked into that top tax bracket, whereas in Canada it's relatively achievable for a certain sector of the population.

Mr. David Thibaudeau: Definitely it's way too early. I can only repeat that when working with some colleagues from the United States on some planning ideas, I was showing how someone would be able to achieve their own personal financial independence over a period of time, and I was using this maximum tax rate at such a low level of income in some of the illustrations, and the question was, “Why would anybody want to live there?”

The fact that we are so heavily taxed is definitely an impact. And if we're talking about the brain drain, we're looking at people who are hitting that bracket coming out of university. So I really do think it has an impact on young people choosing to work in Canada versus in the United States, where it's a little more favourable and conditions are quite similar.

Mrs. Karen Redman: If I can, I'm just assuming that you countered that question, “Why would you want to live in Canada?” with our crime-free cities and our medicare system, and told them why we're very happy north of the 49th parallel?

Mr. David Thibaudeau: I did suggest that we did have a great quality of life in Canada.

Ms. Paddy Torsney: And good parliamentarians?

An hon. member: Don't push it.

Mr. Bill Strain: And wonderful parliamentarians!

Mr. David Thibaudeau: Great government.

Mrs. Karen Redman: Mr. Chairman, can I ask one other tiny, quick question, as well?

The Chairman: Sure. Absolutely.

Mrs. Karen Redman: Mr. D'Aquino, you mentioned having a five-year target, and how that was something that would be desirable for EI and maybe something we would look at. The premise that we're working on currently is a two-year rolling target. Do you feel that's too short to make some of the gains that you see the government needing to make?

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Mr. Tom D'Aquino: You're very much aware of how the EI rates are set and how they're announced. I think the problem we have here is that everybody—the Auditor General and virtually every commentator on it—recognizes that the principle of insurability and the principle of having a nest egg for a rainy day require that you do have a program.

In fact, as I think Mr. Martin pointed out before this committee, when the Liberals formed the government, there was about a $ 6.2 billion deficit in the account. So we all know it swings from deficit to surplus.

The real issue over the years—and I've studied this very carefully—is what amount of money would be acceptable, more or less, to everybody? I think the general consensus is that somewhere in the range of $ 8 billion in the so-called surplus—and I say so-called surplus—would be acceptable. You can argue whether it should be $ 7 billion or $ 10 billion.

Now that you're adding $ 5 billion-plus a year to it, everyone knows that is unsustainable. I listened very carefully to what Mr. Martin said before this committee, and he was very careful, but obviously what Mr. Martin has been using that for is to help deal with the deficit problem, or our numbers wouldn't be nearly so good.

So the real issue is how can he satisfy the critics in a credible way but at the same time give himself the breathing space he needs in order to make the changes and move in other, in our view, more important areas of tax reform? Hence the idea of setting a five-year target—in other words, standing up in the House and saying, “Look, you're all right. We cannot continue to build up these surpluses. It's unacceptable. First of all, let me assume that $ 8 billion or $ 9 billion is what we need and that's what we're going to get and this is the level of premium that's going to pay for it. But what I'm also saying to you is I'm not going to be able to drop $ 1 tomorrow. I'm going to give you a period of five years in order to get down to $ 2.”

If he did that, politically, would it be saleable? I don't know. You are the politicians; I'm not. But at the very least he would then signal to critics and everyone alike that the amount is going to come down and there is a target for it coming down. Maybe some of the heat then would be taken off the minister.

That's just an idea. I haven't tried it on the minister yet. We're meeting with him on June 16 and I'm going to try it with him then. God knows what his reaction will be. That's just an idea on how to get the commitment out there that you're going to do something about a situation that is really unsustainable. That's really what the proposal is all about.

The Chairman: Mr. Pillitteri and then Mr. Iftody.

Mr. Gary Pillitteri: Thank you, Mr. Chairman. I want to make some comments to that.

I have a small question for you, Mr. D'Aquino. A little while ago you said all of us are believers. Isn't it a fact that by having put in a two-year target and those targets becoming achievable, we all became believers, rather than going back to the five years, as previous governments have done, and never achieving those goals?

Mr. Tom D'Aquino: Mr. Chairman, I hope Mrs. Redman was not.... We were talking about EI; we were not talking about the deficit. The rolling targets on the deficit in fact were a brilliant piece of strategy on the part of the Minister of Finance, and in fact have been very successful. We strongly endorse it. It's been credible. I can't say enough good about it.

Mr. Gary Pillitteri: But by the same token, if you were going to put in five-year rolling targets, no longer could you hold this government responsible to it, and others could never achieve it before.

Mr. Tom D'Aquino: No, no, and I'm not suggesting five-year targets for debt reduction. I'm only suggesting them as a way of dealing with the EI surplus. I was simply saying the Minister of Finance could say, “By the year 2002, we will be down to $ 2. Now please leave me alone and let me get on with other things.” Would that work? I don't know. It's just a suggestion.

The Chairman: Mr. Iftody.

Mr. David Iftody: Mr. D'Aquino, you use the number of $ 8 billion. I want to check with our officials here, but I thought the auditor responsible for the UI fund had said most recently that in order to equip ourselves to deal with, for example, a recession, as we had in 1989-90—when incidentally, as you know, Bernard Valcourt was running back and forth to the Treasury Board every six weeks, asking for another $ 1 billion—we would need $ 12 billion to sustain that.

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Also, on your comment that you give possibly a two- or three-year window in terms of another recession, those universal rules have been changed. Don't you think perhaps that $ 8 billion might be a bit too low, and then we'll be back dipping into the consolidated revenues to pay off these problems?

Mr. Tom D'Aquino: If you go right back to when we started following this issue, we talked about a $ 6 billion to $ 7 billion stabilization fund, and then it went up to $ 8 billion, $ 9 billion and $ 10 billion. There's a very significant prudence factor built into what I call the $ 12 billion figure. Nobody can be sure because nobody really knows how serious a recession will be.

If you have $ 12 billion, you're really building a very significant prudence factor into it. Since Mr. Martin has been brilliant at building prudence factors into everything he has done, which has made him, the government and the economy look so good, then maybe $ 12 billion isn't bad. But don't try $ 15 billion or $ 18 billion because I don't think you'll get away with it.

The Chairman: Mr. Valeri.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Mr. Chairman. It's nice to see a panel that doesn't have complete consensus on a number of issues. We're seeing views somewhat divergent, especially on the EI issue.

I have a question for Mr. D'Aquino and perhaps some of the other members of the panel. You talked about seeing tax levels continue to fall over time, and then you talk about a range of tax, on the personal income tax side, that would equate to the cost of clothing, food and shelter. Can you give us a sense of what kind of timeframe is in the thinking behind that statement, and the kind of timeframe you have in mind to achieve that objective?

Mr. Tom D'Aquino: I'm going to ask David Stewart Patterson to say a word about that. Just let me say one thing on the size of the cut. Some people ask how much of a tax cut you really need to have a real impact on consumers, where people feel they're really putting some money in their pockets and where the macroeconomic effects will be significant enough to have a positive impact on the economy.

My own view on that is that you cannot have a tax cut that's less than $ 5 billion to even begin to move the envelope. If you're talking about a tax cut perhaps in the $ 7 billion to $ 8 billion range, then I think you're really starting to talk about a positive impact.

The second point is that there is a danger, and if you go back over the last six or seven governments you will see proof of this. When ministers of finance just give little bits and pieces of tax relief it's really not very effective. I'm of the school that says to hold back on major personal income tax cuts until you have a very significant amount of money in the surplus, and then introduce them in one big fell swoop so you really feel the macroeconomic effects on the economy. Just think of it. Right now when you hear about a small tax cut, people will come out ask what that means. It's just a few dollars and doesn't mean much. But if people have the impression they're seeing a major tax cut and it's putting real money into their pockets, everybody wins on that.

David, on the issue of the equivalencies we've used in our paper, do you want to say something about that?

Mr. David Stewart Patterson: When we looked at how much taxes might come down in the future and where our debt targets were going to be set at, we weren't tying ourselves to any kind of particular projection on GDP or anything like that. We looked at a wide range of forecasts that are out there.

If we look at the debt targets as the first priority, the initial priority, our sense was that in rough numbers, if we put it in the context of the fiscal dividend formula and so on, we were probably looking at around 75%, heading into debt reduction in the initial phase. But our expectation would be that if you put that discipline upfront, you would then see the percentage of the dividend reducing over time, and the percentage available for tax cuts therefore increasing over time.

I think the central point was not so much where the target date should be, because that to a great extent depends on how the economy unfolds over the course of years, and I don't think it's sensible to make huge predictions.

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Mr. Tony Valeri: I'm not asking for a January 1, the year, or whatever. What I'm saying is, when you make the statement, do you have a sense that it's over the next business cycle, or some sense of how much time you're actually looking at before you say this government has missed the opportunity to bring personal income taxes to this particular percentage?

Mr. Thomas D'Aquino: Oh. Let me be clear on that, Mr. Chairman. I think that the Minister of Finance should lay out a strategy for tax reduction in the next budget, in February 1999, and that strategy may be implemented over five years.

But the important thing—and this comes back to some of the concerns that were expressed—is that people want action now. The action now does not necessarily mean a Harris type of approach, saying, “We will balance our budget by the year 2000 or 2001, but we're going to give you a big tax cut now.” That's another way to go. Mr. Klein did it another way. What we're really saying is, signal to the Canadian people that the tax cut is coming, and lay out a program of tax cuts.

I know Mr. Martin would probably be very reluctant to do that, because he's very much in a two-year mode and would be reluctant to go out to five years. Maybe he'd do it on a two-year or a three-year rolling basis. But the key thing is to signal to the people of Canada that the tax cuts are coming, and that they be announced in the February budget of 1999, so that when it comes to all these questions and concerns that we have, to a large extent people will then say, yes, the tax cuts are coming.

Mr. Martin has said publicly time and time again that tax cuts are coming. We're just saying let's be a little more precise and a little more disciplined in offering people the certainty that they are coming. You, we, and everybody will reap rewards as a result of that. And some of these kids who are rushing south may say, hey, maybe the situation's going to turn itself around here, and decide to stay.

The Chairman: Thank you, Mr. Valeri.

Mr. D'Aquino, just a final comment here. On the issue of this signalling to Canadians in reference to tax cuts, as you know, in the last budget $ 7 billion worth of tax cuts were in fact announced. Over 400,000 people are going to be off the income tax rolls of this country. Are you saying that the minister should be doing something that is stronger than that?

Mr. Thomas D'Aquino: Oh, absolutely. Mr. Chairman, you know that there's a big, big problem with bracket creep—a huge problem. You know that the government has to take measures just to hold people from their situation really being worsened because of bracket creep. At the very, very least, the government is going to have to deal with the bracket creep question. Incidentally, for those of you around this table who are concerned about progressivity and equity, I don't have to tell you what bracket creep does to the people in the lower income scale. Some relief was provided, but they're going to have to do more.

I'm saying that in addition to that—in addition to that—a commitment to personal income tax reductions across the board, which will be enormously expensive, is the kind of commitment we should be talking about. Unless the issue of indexation and bracket creep and the commitment over a three- or four-year period that the overall tax burden on the marginal side is going to come down...we're going to continue to be less and less competitive, not only in terms of our industries, but also in terms of our ability to attract and hold people. That has to be done.

To me, it's as compelling that this be done, Mr. Chairman, as it was six, seven and eight years ago when I argued for deficit reduction. The benefits will be there. The critics didn't believe in deficit reduction. Now we have low interest rates, and the benefits are huge. Bring down taxes, and the benefits will be there as well.

To do that, you have to take a larger portion of this so-called growing dividend and use it for that purpose. And right now I think there's a large appetite in the country for cutting taxes. We know that, and you know that. The only thing is, people are debating what kind of taxes. Should it be EI?

There's a powerful case to be made that those taxes should be reduced. All we're saying is, if you're compelled to make a decision, yes, bring EI taxes down, and set yourself a target to do so, but put the lion's share on PIT, because that is where the real benefit will be seen.

The Chairman: Much of this debate about EI has dealt with the rate. Should the government simply abandon this EI account and just say, look, we have a general payroll tax; this is the price of doing business in this country, and this is all there is to it?

Mr. Thomas D'Aquino: I know some people have recommended that you do that, but remember, the principle behind employment insurance—or as it used to be known, unemployment insurance—is I think a very good one. I mean, what do we do with people who are thrown out of jobs in the next recession?

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It is true that our unemployment insurance—and I happened to be around the Hill in my earlier incarnations when Mr. Mackasey brought in those changes—turned out to be much too generous. We reached a point where unemployment insurance payments in fact were too generous, and were a powerful disencentive to work.

Everybody recognized that. That's why you brought in some of the changes that you did, and it was difficult to bring them in.

I don't think you should abandon employment insurance; I think you should keep it. But in order to give it credibility, you must return it to its fundamental principles.

People do not like.... Mr. Harris said you're stealing money. Other premiers have been almost as unkind. The reason they're saying this is because employers and employees are being asked to pay for one thing, and yet large amounts of that now are being used for something else. The principles of transparency, equity, justice—call it whatever you may—dictate that you use the program for what it was really meant for. That means a stabilization fund of $ 8 billion to $ 12 billion, if you must, but then make sure that the rest goes back to employers and employees.

The Chairman: But not in increased benefits. You're not advocating that.

Mr. Tom D'Aquino: No, not in increased benefits. In reduced premiums.

The Chairman: Okay.

On behalf of the committee, I'd like to thank the panel. This was a very interesting panel.

Yes, Mr. de Savoye?

[Translation]

Mr. Pierre de Savoye: Mr. Chairman, I had asked to have the floor during the second round. Other people were called instead of me. Why?

[English]

The Chairman: There's a 50-50 split in questions. That's why.

[Translation]

Mr. Pierre de Savoye: I will return to the matter later. Thank you.

[English]

The Chairman: But just one second. Mr. de Savoye, if you want to ask....

[Translation]

Mr. Pierre de Savoye: I don't want to insist.

[English]

The Chairman: No, no. You can ask your question.

[Translation]

Mr. Pierre de Savoye: Do you mind?

[English]

The Chairman: Yes, absolutely.

[Translation]

Mr. Pierre de Savoye: I have two questions for Mr. Thibaudeau and one for Mr. D'Aquino. I will begin with Mr. Thibaudeau because he represents tax advisors. I'll turn next to Mr. D'Aquino because he asks good questions, and usually provides good answers. But there is one question that he did not answer. I will come back to it later.

Mr. Thibaudeau.

[English]

Mr. D'Aquino mentioned earlier that he believes a tax cut should be proposed to the population, but only when massive enough to have a microeconomic effect. My first question here is, don't you think that could fuel inflation?

The second question I have for you is, interest rates are related to the value of the currency. The value of the currency is also related to productivity and the interest rates. Furthermore, we have debt, 60% of which is owed by Canadians. If we increase the interest rate 1%, we're $ 3.6 billion in the red, or we have to spend more money to pay those extra rates. What do you feel a sound fiscal policy should be, by the Minister of Finance, to address that second issue?

So, two questions.

Mr. David Thibeaudeau: Those are very difficult questions.

I think it originates in the beginning. What do you do first? Do you do tax reduction until you're in a position to really have an impact? That's in relation to that part of the question.

I'm not a fiscal specialist or anything like that, but I'll give you my best shot. I really think the key issue here is at what point are we able to appropriately decide whether we are going to use and continue to grow our debt by giving away tax reduction? And if we do that, are we really doing anybody a favour in the long run? I think from a political standpoint you have a great impact if you can really bang it out there and show people they're saving a whole lot of money all at once.

But I really think the key issue here is to deal with the debt first. If we deal with the debt first, I think a lot of the other concerns that you mentioned in your question really kind of diminish, in terms of the interest rate, the Canadian dollar and everything else.

So my feeling is that I wouldn't want to see this government come out with a big whacking income tax reduction if they didn't have a huge, huge surplus to really do a job on reducing it.

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Mr. Pierre de Savoye: Monsieur d'Aquino, you mentioned a few problems we have to address, and you've addressed them through this committee with some of your good advice. I quote you:

A dangerously high level of public debt, a heavy burden of taxation, a significant reliance on natural resource-based commodities and the threat of Quebec separation continue to render us vulnerable.

You perceive the threat of Quebec separation. Can you suggest a credible and workable solution? You've done so for all the rest of these problems.

Voices: Oh, oh!

Mr. Tom d'Aquino: Well, Mr. Chairman, let me just close with this. On Thursday night I was in Winnipeg at the awarding of the distinguished international entrepreneur award to Laurent Beaudoin. Laurent Beaudoin joined a company that had $ 10 million in sales. Today it has $ 8.5 billion in sales and it is a leader in world aerospace.

I had to give a testimonial to Mr. Beaudoin and then he spoke. Let me answer you by just taking one quotation from his speech. Mr. Beaudoin said the tragedy is that the country that some of our compatriots would want to create already exists and that is why he is so successful.

And I don't think I have to say anything else on that score, Mr. Chairman. I'm just quoting Mr. Beaudoin.

The Chairman: We'll consider that tabled.

Voices: Oh, oh!

Mr. Pierre de Savoye: Mr. Chair, thank you for those extra minutes.

The Chairman: Absolutely. We're very flexible.

Once again, on behalf of the committee, thank you very much.

The meeting is adjourned.