FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, May 2, 2000

• 0905

[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'll call this meeting to order. As you know, the order of the day, pursuant to Standing Order 81(4) and the order of reference of Tuesday, February 29, 2000, is a study of the main estimates for the fiscal year ending March 31, 2001—votes 1, 5, 10, and 15 under Canada Customs and Revenue Agency; and votes 1, 5, L10, 15, 30, and 35 under Finance. These are the ones we'll be dealing with.

We have the pleasure to have with us, from the Department of Finance, the parliamentary secretary to the finance minister, Mr. Roy Cullen; Don Drummond, associate deputy minister; and Guy Bujold, assistant deputy minister, corporate services.

Welcome.

You'll have five to ten minutes to make your introductory remarks, and thereafter we'll engage in a question-and-answer session.

Mr. Roy Cullen (Parliamentary Secretary to the Minister of Finance): Thank you very much, Mr. Chairman and ladies and gentlemen. I appreciate the opportunity to speak and exchange views with you today, and with the officials here, and respond to your questions about the 2000-2001 main estimates of the Department of Finance.

As you know, the department's fundamental purpose is to assist the government in developing and implementing economic, social, and financial policies and programs that foster growth, create jobs, and promote a secure society. This means that the analysis and advice provided by Finance draws on and ultimately touches on the interests and concerns of every Canadian.

[Translation]

Departmental priorities, of course, are shaped by the government's agenda—to enhance the standard of living of Canadians—and by the department's analysis of the strengths and weaknesses of the Canadian economy.

As we all should recognize, one of those weaknesses, a federal government deficit, has been decisively overcome.

The deficit is behind us and we are now in an era of budget surpluses.

[English]

A balanced budget or better is again expected for 1999-2000, for the third consecutive year. Further, the government is committed to balanced budgets or better in 2000-2001 and 2001-2002—the first time in 50 years that the budget has been in surplus or balance for five consecutive years. This means that underpinned by the work of the Department of Finance, the federal government's economic and financial policies brought Canada to the point where it entered the new millennium equipped with renewed economic strength and confidence. Building on that foundation, with a growing economy and our nation's finances in order, this February budget 2000 charted a course to greater prosperity for all Canadians in the 21st century.

The annual budget is perhaps what first comes to mind when Canadians think about the Department of Finance, and yes, it is the department's most visible accomplishment each year. But preparing the federal budget is but one of the department's responsibilities.

Its other equally tasking responsibilities include: providing analysis, advice, and recommendations on tax and trade policy and preparing tax and trade legislation; providing analysis, advice, and recommendations about the management of the federal financial assets and liabilities, including the management of federal and crown corporations borrowing on financial markets; managing transfers and fiscal relations with the provinces and territories; developing financing and investment policy for the Canada Pension Plan in conjunction with the provinces; representing Canada with international financial institutions and international economic and trade fora; and developing policies for and advising on the financial sector and financial markets.

In addition, Finance operates two statutory spending programs, the public debt program and the federal-provincial transfers program, and has the responsibility for the delivery of payments to major international financial institutions such as the IMF, the World Bank, and the European Bank for Reconstruction and Development, and for the domestic coinage program.

[Translation]

Mr. Chairman, I indicated earlier that the work of the department touches directly on the lives of every Canadian in each province and territory.

As the Minister has said:

We recognize that the only true measure of long-term success for our fiscal and economic policies is their ability to generate jobs, secure social programs and growing real incomes that deliver the quality of life all Canadians deserve.

• 0910

Because its work directly affects all Canadians, the department emphasizes active public consultations—through its own initiatives and the work of parliamentary committees such as yours—on policy directions and options.

[English]

While the department has an annual budget this year of $64.9 billion, an increase of just about $1 billion over last year, the vast bulk of this funding goes to the public debt program and the federal-provincial transfers program. On an internal operating basis the department is actually one of the smallest in the government, with a staff of approximately 750 people, half of whom are economists.

The explanation for the department's year-over-year increase rests with the three programs delivered by the department and includes a $300 million increase in the economic, social, and financial policies program; a decrease of $500 million in the public debt program; and a $1.2 billion increase in the federal-provincial transfers program.

The $300 million increase in the economic, social, and financial policies program can be attributed for the most part to increased payments to the International Monetary Fund's poverty reduction and growth facility. It reflects anticipated payments under a new loan commitment announced on March 25, 1999 by the minister as part of the government's debt strategy to help the poorest countries.

The $500 million decrease in the public debt program reflects a lower stock of public debt.

The $1.2 billion increase in the federal-provincial transfers program is due to increases in the Canada health and social transfer and equalization.

The 2000 budget announced a $2.5 billion increase in CHST payments to help the provinces and territories fund post-secondary education and health care—the fourth consecutive federal enhancement to the CHST. Starting in 2000-2001, CHST cash will reach $15.5 billion—a 25% increase over the last two years. Total CHST, cash and tax transfer combined, will reach an all-time high of almost $31 billion in 2000-2001.

[Translation]

Moving on, Mr. Chairman, as in past years, the Department of Finance continues to undertake projects that have significantly increased its workload. Time precludes discussing all of these projects but I would like to highlight two of them.

First, the department is developing a new policy framework for the financial services sector that responds to the challenges posed by new information technology, increasing globalization and a rapidly changing marketplace.

[English]

Second, the department is planning an important new international role in supporting the G-20, the recently instituted forum of finance ministers and central bank governors, representing 19 countries, the European Union, the World Bank, and the International Monetary Fund. Finance Minister Martin currently chairs the G-20.

Its purpose is to ensure broader participation in discussions on international financial affairs and to help achieve a more stable global economy.

Mr. Chairman, I could go on and on, but I feel that your committee's interests and concerns will be best served by letting you focus on the issues and questions that most concern you. I simply wanted to highlight the scope and volume of work undertaken by the department and the increased workload it has undertaken and will continue to undertake in the future. These facts, I believe, are important to your deliberations today.

Together with the officials with me, I will be happy to answer your questions at this point.

Thank you. Merci beaucoup.

The Chair: Thank you, Mr. Cullen.

Mr. Forseth.

Mr. Paul Forseth (New Westminster—Coquitlam—Burnaby, Canadian Alliance): Thank you very much.

Looking at the Department of Finance 2000-2001 estimates, section III, on page 17 there's a reference at the bottom of the page that says:

Global economic and financial volatility may affect the Canadian economy, and thus the government's revenues and program expenditures, as well as the costs of servicing the government's debt.

The point I'm talking about there is mainly servicing the government's debt.

On page 18, also under “Risks”, it says:

Economic and financial volatility, globally or within Canada, could affect the government's revenues, program expenditures and the cost of servicing the debt.

• 0915

Relate those two comments to the comment in your dialogue that the $500 million decrease in the public debt program reflects a lower stock of public debt.

Perhaps you could discuss in a little more detail what that phrase means, and why in the last budget there was no specific line item that particularly sends a message to the international community that we have a specific plan for retiring debt, rather than it being somewhat nebulous at this point, as whatever happens to be left over.

Mr. Roy Cullen: Thank you. Maybe I'll start off, and Mr. Drummond or Mr. Bujold might like to add.

The reduction in the estimates flows from the decreased amount of public debt and the decreased cost of servicing the debt. The department has been on a program of replacing, let's say, shorter-term floating debt with more longer-term, fixed-interest rate debt. That has been very beneficial and will actually make us less sensitive to changes in interest rates, up or down, into the future.

Why the amount was not disclosed separately in last year's estimates, I'm not sure. Perhaps Mr. Drummond or Mr. Bujold would like to expand or comment on that particular aspect.

Mr. Don Drummond (Associate Deputy Minister, Department of Finance): Just in terms of your question about the lower stock of debt, the particular numbers show the total stock of debt, the net public debt, is down $6.4 billion, and that is from the surpluses recorded in 1997, 1998, and 1999. If we look at the marketable debt—what we have outside of the public sector pension plans—that's down $16 billion to the end of 1998 and 1999, and of course that's what's leading to the lower interest rates.

Despite flagging the potential impact of the volatility in world markets, I think we'd have to say the economy came through that quite well. As we know, we had 4.2% growth in 1999. So we had that plunge in commodity prices at the beginning of 1998, but it seemed to have a fairly short impact on the overall national economic performance. That's not to say it didn't hurt some regions and some sectors quite badly, particularly British Columbia. But overall, the economies remained quite strong.

On sensitivity to the interest rates, as Mr. Cullen noted, when we first published these sensitivities back in 1994, we indicated that a 100 basis point—a 1% interest rate increase—increased our public debt charges by $1.8 billion in the first year. That is now down to $900 million, so we've actually cut the first year's sensitivity to a change in interest rates in half. That is because, as Mr. Cullen noted, we've been moving more of our debt into long-term issues. We used to have roughly 65% of our debt turn over within a 365-day period. Now it's really the inverse of that. We have only about 35% of it turning over in a one-year period. So our sensitivity to the type of volatility we saw in markets over the 1998-99 period is greatly reduced.

In terms of the specific debt reduction plan, we do have one, and we put it out in the budget. We've put aside $3 billion of contingency reserve in each year's budget plan, and if that's not needed for unforeseen reasons, it goes entirely to pay down the debt. In 1997-98, $3.5 billion went to paying down the debt—in other words, $500 million on top of the contingency reserve. In 1998-99, we paid down $2.9 billion, so only $100 million of the contingency reserve was needed for unforeseen reasons, and almost all of it went to paying down the debt.

Going forward and calculating the public debt, we've always assumed the contingency reserve is needed, but it's very much part of the plan that if it's not needed, it will go to pay down the debt. At worst, we'll have a budget balance, but if we don't need the contingency reserve, we'll have that $3 billion surplus per year that will go toward paying down the debt.

Mr. Paul Forseth: Okay, I have one supplemental question.

Can you just again briefly describe the phrase “public debt program”? Essentially, what is the program? Then just give us the rounded-out figures of what our debt is, both short-term and long-term.

Mr. Don Drummond: Well, when we're referring to our public debt, it's really the distribution of that debt across the different term maturities. There are many different ways of measuring that. We have 90-day treasury bills, 30-year bonds, and real-rate return bonds. I guess one of the key indicators that observers use is what percentage of your debt turns over within one year. That is one of the driving features of our public debt program, and we try to keep about 65% of our debt longer than one year and 35% or less for less than one year. As I indicated, that's virtually flipped from what we had about five years ago.

• 0920

That 65%-35% is quite traditional in other countries. When we were running our debt program in the early 1990s, we had the shortest stock of debt of all the major countries, whether you compared it to the United States or the European countries or Japan. Our program is much more similar to others at this time.

Mr. Roy Cullen: Maybe I could just respond to that. The number we're focusing on as a government is the debt-to-GDP number. When we came into office, I think the number was about 71%. We're down to 63%, and within the next two or three years it'll be down to 50%. So that really recognizes the capacity of the economy to support a certain debt load. We think as long as the economy keeps moving at the rate it is—it has been performing very well—that debt-to-GDP ratio will continue to come down. That's really the number we should be focusing on.

Mr. Paul Forseth: What is the debt?

Mr. Roy Cullen: It's $570.8 billion.

Mr. Paul Forseth: The servicing of that debt is still rising, though, is it not? You talked about a reduction in the interest rates, but it looks like interest rates are actually going to go in the other direction in the next year—up.

Mr. Don Drummond: In the last budget we had, the public debt charges were estimated at $41.5 billion for 1999-2000, with a slight increase to $42 billion in 2000 reflecting that modest increase in interest rates, and then back to $41.5 billion in 2001. So it's essentially flat over the coming period, which is a mix between a slightly lower stock of debt and a slightly higher average interest rate.

Mr. Paul Forseth: That's fine for now, Mr. Chair. Thank you.

[Translation]

The Chair: Mr. Loubier.

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): I'm interested in the same issue: the management of the debt, the plan for paying down the debt, and so on. I would like you to provide us with more details on that. I do not know whether Mr. Cullen, Mr. Drummond or Mr. Bujold could tell us more about how the Department of Finance manages the debt. Is there a specific management plan in place, and do we have objectives for paying down the debt? For three years now, it seems that the amount of debt repayment is dependent on the surplus that is not forecast at the beginning of the year by the Minister of Finance. This surplus is deliberately understated so that at the end of the year, when we have this huge surplus that had not been forecast, accounting conventions are such that it goes to pay down the debt. I would like you to tell me a little bit about that.

[English]

Mr. Roy Cullen: In general terms, of course if the contingency reserve is not needed then clearly that goes to pay down the debt. To the extent that there are surpluses available, they go to pay down the debt.

I think rather than focusing on the absolute amount of the debt.... In fact, if there is a huge amount paid against the debt, there is the distinct possibility that it could actually create a drag on the economy. Clearly you can go beyond $3 billion a year, but what the magic number is.... It starts to create a drag when we have this incredibly strong growth in the economy. That's certainly something we don't want to slow down, but perhaps—

[Translation]

Mr. Yvan Loubier: That means you've paid much more than $3 billion in the last three years. One year—I think it was 1998...

A voice: [Editor's note: Inaudible].

Mr. Yvan Loubier: Yes, but there was more than that. Clearly, even last year, you put the contingency reserve toward the debt. Then there was an amount of 4 or $5 billion in surplus that also went to pay down the debt, because this surplus had not been forecast in Mr. Martin's second to last budget. So my question is this: do you always operate in this erratic way?

If the contingency reserve is not used, it automatically goes to pay down the debt. That is correct. The surplus that was not forecast at the beginning of the year is automatically used for the debt. Is that how you manage the debt, solely according to the unforecast surplus, or do you have a specific management plan and even a plan for paying down the debt?

What I really want to know is whether you have a specific plan. Whether you have one or not, I would like you to tell us more about this. If there is some documentation available on this, I would like to know about it, because I think this is one of the rare areas of public finance where there is no documentation that is as specific as that available on revenues, expenditures and issues of public finance management generally.

• 0925

[English]

Mr. Don Drummond: In fact, the Department of Finance does have an annual publication on the public debt program. I'd be happy to provide the committee with a copy of that list released just shortly after the budget.

Our plan has a number of steps, as Mr. Cullen indicated. Our primary focus is on getting the debt-to-GDP ratio down. It's the same for any of us. If you have a mortgage, the absolute amount of the mortgage doesn't make a lot of sense; it makes a lot of sense if you put it in the context of the income you have. In Canada, we peaked out at a debt-to-GDP ratio of 71% in 1995-96. We're down to just about 60% right now, and by 2004 we should be at just around 50%. That's still too high, but you can see that with the sustained growth in the economy, it will continue to come down.

We're very explicit in all the budget documents. Our objective is to reduce the amount of the debt by $3 billion per year. That's why we set aside the contingency reserve. As you indicated, as we're coming towards an end of the year and it looks like the surplus might be higher than that, we have to make a decision. Is the best use of those surplus funds to pay down the debt further or are there other uses for it?

In the example you gave, in 1998 we decided at the end of the year to put $3.5 billion into the Canada health and social transfer because there was a need and a willingness on the part of the provinces, and they sent the letter to the Prime Minister that they would invest that in health care. So in a sense, as you noted, we paid down $2.9 billion of the debt, but on top of that $2.9 billion, $3.5 billion went to CHST.

Similarly, at the end of this year, right now it looks like we will again pay down that $3 billion. We won't need the contingency reserve. We don't have the results yet, but that's what they would suggest so far. But on top of that, we put another $2.5 billion into the CHST. That $2.5 billion, instead of going to the provinces in CHST, could have gone to paying down the debt, but a choice was made there. A decision was made that the better use of those funds was to provide that, which the provinces have indicated is going to be invested in the health care systems again.

[Translation]

Mr. Roy Cullen: There are also the two documents prepared every year by the department. Perhaps we should also give them to the committee chair. They are referred to as the Debt Management Report and the Debt Management Strategy. These two reports are published every year by the department and we will provide them to the committee chair.

Mr. Yvan Loubier: I am familiar with the existence of these two documents. But that does not answer my question. We find ourselves in a time of budget surpluses. Since last year the Minister of Finance has been announcing that there will be five- year planning for budgets, in other words that an attempt would be made for a period of several years to determine what the income and expenditures would be. It would be an attempt to portray the overall fiscal situation of the government.

I wonder whether there is such a long-term debt management plan with precise objectives and targets to be met. It would give us some idea of the efforts being made by the government to reduce the debt burden.

I know these two documents. After seven years in finance, you get a pretty good idea of what all the documents are. But so far I haven't seen any real strategic planning for long-term reduction of the debt.

Mr. Roy Cullen: Mr. Loubier, the Minister also presented the committee with the economic and fiscal plan. I don't know what exactly its name is in French but it was presented last November. It contains a plan to bring down the debt by $3 billion every year and it is included in the five-year plan.

The Minister also made a comment on the debt-to-GDP ratio but we have not set any precise target for that.

Mr. Yvan Loubier: A target...

[English]

The Chair: Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chairman.

Thank you to the parliamentary secretary and the associate deputy minister for meeting with us today.

My first question is related to personal capital gains taxes. The most recent budget addressed the issue partially by reducing the inclusion rate from 75% to 66%. Why wouldn't the government have moved further to, say, a 50% inclusion rate, which would have reduced the effective rates to those of the U.S.? Currently, we still have a 13% disadvantage over the U.S. Why that level of incrementalism when it's such a fundamental issue to the new economy, whether in e-commerce or biotechnology?

• 0930

Mr. Roy Cullen: I'll just start it off, and then Mr. Drummond can comment further. In preparing a budget it's about choices, and we elected to do a number of things in the budget. The predominant theme, of course, was general tax relief for Canadians, with a particular emphasis on Canadians with families and children.

There were other initiatives in the budget in terms of the tax-free rollover of capital gains for start-ups, where we know there is clearly a gap in access to capital for small businesses. There were a number of other measures in terms of the stock options, as you know, so that the capital gain will only accrue when the option is exercised.

When you start moving the inclusion rate down, at some point you run into the balancing of how we treat all types of different income, because there is a balancing of a taxation of capital versus salaries versus business profit, etc.

With that, I'm sure Mr. Drummond can comment further on some of the policy aspects.

Mr. Don Drummond: Further on that latter point, one thing we did take a very close look at was the relative tax treatment of different forms of income. Some people have a choice on how they take it and others don't. You can have employment income, interest income, dividend income, or capital gains. So you have at least four different sources of income. We are quite concerned about not having a large differential in the taxation of those. The number with the current dividend tax credit system that gave a neutrality among those different forms of income was 66 2/3%.

If we went to 50%, we would have a much lower taxation regime on capital gains than we would on those other forms of income. What was cited to us in a number of cases is that you might get more capital gains revenue if you lowered the capital gains inclusion rate and didn't necessarily think of it as a cost. That may be true in the first instance, but you would get that additional revenue from the capital gains because there would be an incentive for employers to shift their compensation for employees out of employment income into capital gains. We're quite worried that we would then have to add hundreds, if not thousands, of pages to the Income Tax Act in order to avoid that.

It's difficult to pick one aspect of the United States and try to achieve parity when other aspects aren't in parity. It's regrettably true that the overall employment taxation, interest taxation, and dividend taxation in the United States are all lower than they are in Canada at the moment. We hopefully are moving toward theirs. But it would be difficult to pick the capital gains and match that up when we're not matched up on the other sources of income.

Mr. Scott Brison: I appreciate that.

You could take steps to address the issue on the dividend tax credit side, which would reduce the resultant draw toward capital gains. You could do that. That is more of a technical issue.

My point is that in one area of taxation it would be great if we were significantly ahead in terms of the type of taxation that has the most deleterious impact on areas in the new economy. I see capital gains tax as being not just in reality an impediment, but also symbolically as being a significant impediment to attracting capital.

I would argue as well that with the volatility of the markets currently, particularly in the area of technology stocks, you would not see a wholesale movement from salary to stock options as a compensatory asset. I don't think people would have been as likely to have been drawn to that in recent weeks as they may have been a couple of months ago. So I don't think that fear is as realistic.

• 0935

Often we talk about tax reduction, debt reduction, or health care investment almost like a zero-sum game. It's one or the other. You can't have tax reduction and significant reinvestment in health care and a lot of these other things unless you're willing to take baby steps in every direction.

If you look at the huge differences between the U.S. and Canada in terms of where we're spending money, government money to business, whether through HRDC, ACOA, or any other development program, as a percent of our GDP, grossly exceeds what is spent in the U.S. I'm not speaking specifically about employment insurance. I'm talking about some of the more general government-to-business spending through vehicles such as HRDC. The recent budget increased HRDC's budget by $1.5 billion. I think that was the amount. Instead of providing increases or in fact reducing the investment in that department in real terms, why aren't we using that money to reduce taxes or to make a greater level of commitment to debt reduction?

Mr. Roy Cullen: Thank you, Mr. Brison. You talk about subsidies to business. In fact, our government launched a major program through program review, and in the case of Industry Canada, for example, which was heavily into business subsidy programs, those were completely slashed.

I think the role HRDC plays with business has been somewhat overstated in the partisan zest of debate.

The reality is that in Canada we have some fairly significant regional economic disparities. We don't have the population density and the richness of the capital markets that are available in the United States, so I think Canada sometimes requires unique solutions.

Clearly, we could do better, but with unemployment being the lowest it has been in a generation, maybe these programs have had some beneficial effect.

I'd like to come back to a point and then turn it over to Don. On the issue of capital gains and the role of the government in assisting access to capital, Michael Porter did his report about ten years ago, which was entitled Canada at the Crossroads. He looked at Canada's competitive positioning. Ten years later he did a retrospective on how we were doing. His comments generally were that although it was not all done yet, we had done a very good job on the macroeconomic side. There was a lot more that local governments and governments generally could do with regard to supporting clusters, etc.

But he also said that the business community needs to sharpen its business strategies. We tend to be a little risk averse in Canada. I don't think it's all dependent on the tax treatment. For example, we have R and D provisions that are the most progressive in the world, and still the take-up is quite low. The government can provide a certain policy framework, but ultimately business.... Let's look at e-commerce. Business as well has to step up to the plate at some point.

Having said that, Mr. Drummond, would you like to add something on the latter point that Mr. Brison made?

Mr. Don Drummond: Vis-à-vis the HRDC program, I wouldn't want to leave the inference that the bulk of that grant money is going to business. In fact, little of it is going to business. There has been a lot of discussion about the Canadian Jobs Strategy, but that's just over $100 million. Four of the biggest programs under the HRDC grants would be the Canada student loans program, the Canada study grants, the Canada education savings grants—that's the top-up for RESP money—and the initiative on homelessness that was announced in December 1999. That alone is $432 million, which is being administered from HRDC. There's the disability Opportunities Fund, as well as support for literacy. So a lot of those programs within that fund you've mentioned are not going to the business community whatsoever.

• 0940

Mr. Scott Brison: We were talking about the regional development programs. A lot of times people compare the Irish example to Canada, and that's probably not the best comparison. But if you compare Ireland's relationship with the EU to Atlantic Canada's relationship with the rest of Canada, you can see some parallels in terms of equalization systems and transfers.

Mr. Cullen, has the government investigated the notion of an aggressive tax strategy of equalization, in Atlantic Canada or in recipient provinces, as a means by which regions could grow out of the traditional equalization system, which feeds us a cycle of dependency?

Mr. Roy Cullen: My first comment would be that you can't really have a differentiated federal tax regime through tax policy that would look at that sort of disparity.

Mr. Scott Brison: But you could create incentives through equalization for provinces to adopt more aggressive provincial tax policies.

Mr. Roy Cullen: Maybe I'll ask Mr. Drummond to comment on that further.

With respect to Ireland, if we look at going into this particular budget billing exercise, initially there was some reluctance to look at business taxes until we had significantly addressed the personal income taxes. I think there is more of an acceptance now that business tax reduction can play a powerful role in attracting investment and jobs. So we've started the process. Some have called it timid, but I don't see it that way. We are moving the tax rate from 28% to 21%, admittedly over five years, but that can be brought forward. As the minister has outlined, the $58 billion tax package is an absolute minimum.

If you look at Ireland, it's a unique success story in a sense, but I understand, as you've implied, they've had some huge subsidies from the EC, and I gather some of their tax rates may now be going up again. Certainly it's a benchmark we should be looking at and are looking at, but I'm not sure whether that's the solution for Canada.

Mr. Scott Brison: Sure. I think a lot of people point to Ireland and compare it to Canada in totality. I don't think that's a fair comparison, but I think some elements of the example might be applicable. If we were able to engage the provinces in a realistic discussion on regional development, there might be some opportunity.

Mr. Cullen, you mentioned that reducing the debt could create a drag on the economy. Could you explain that?

Mr. Roy Cullen: I guess the point is it's the order of magnitude. At the level of about $3 billion a year, that's clearly not an issue. For example, in the five-year economic forecast we predicted surpluses of $95 billion gross or $62 million net. If you took the bulk of that and just applied it to the debt, as I understand it—and maybe Mr. Drummond can expand on it—that could create a drag on the economy. We're really striving to keep the growth and the performance of the economy going at the rate it is at right now, which is parallel or exceeds that of the industrialized world, and is projected to continue that way.

Mr. Scott Brison: Wouldn't it apply that the growth in the economy currently is due to government spending or investment as opposed to private sector development? I guess I'm concerned about the current upward pressures and indicators on interest rates.

• 0945

In that context, I don't see where reducing the debt or having firmer debt reduction targets and plans would have a drag on the economy. Quite the contrary, a large government debt has the capacity to create a crowding-out effect on private markets, if the government debt is particularly out of whack, as a percent of GDP, with those of other countries. It's not something we can afford to maintain when we're north of the greatest capital markets in the world and a country with a debt reduction plan that could potentially eliminate the debt in the U.S in 15 years.

Mr. Roy Cullen: I think there's a report just out that really makes the argument that to slow the economy down and avoid future industry rate hikes by the Bank of Canada, it may be smart to pay off huge amounts against the debt. But I'm not an economist, so maybe Mr. Drummond would care to expand on this.

Mr. Don Drummond: I guess my perspective is not so much whether debt reduction would slow down the economy. I think it's clear that if the only difficulty we encountered on the economic and fiscal front in Canada was our debt burden, that's clearly where we would put all the emphasis, but unfortunately that's not the only difficulty we encounter. I think we all accept that our tax burden has become too high.

You do have to make choices. I take very much your point that you don't want to look at it as a zero-sum game, but I don't accept the notion that tax reductions pay for themselves. I think there is a return from the tax reductions, but there is still a net cost. So to the degree you allocate money for tax relief, as we've done in the last couple of budgets and on a fairly significant scale in the 2000 budget, it takes away from the amount we can put into debt relief.

We've done substantial amounts of both. We certainly could have done more on debt relief, but that would have meant doing less on the tax relief side. That would have left both our personal and corporate tax burdens quite high, from an historical perspective and vis-à-vis our major trading partners—not just the United States, but many other countries as well.

So it's true, and it does dilute the effort in both directions, but we felt it was necessary to move on both the debt and the tax relief sides. As I said, to the degree you do one, there are less resources you have available for the other.

The Chair: Thank you, Mr. Brison.

Mr. Szabo.

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

We're talking more about the budget than the estimates, but they're related, to some extent.

I want to just pursue a couple of things. First of all, on the national debt, we had a forum with some economists last year about the size of our debt, the debt-to-GDP ratio, and the various scenarios approaching it. I guess by simply looking at the mathematics, paying down debt, starting with $3 billion and moving up, will do very little in terms of adjusting the debt-to-GDP ratio. It's not a big bang for the buck, but the question does come up—I think the Auditor General has commented on it—about an appropriate level of debt to GDP.

Mr. Drummond, you commented that even a 50% debt-to-GDP ratio, which is what we will be approaching in the next short while, might still be too high. I wonder if you could elaborate, on the basis of the statement that a 50% debt-to-GDP ratio may be too high, on the context or the consequence of staying at that level.

Mr. Don Drummond: I guess one would have to start by saying that one of the great failures of the economic profession is to establish what an appropriate debt-to-GDP ratio is. There are a variety of views on it, but I would say there is no consensus on what it is. There was certainly a consensus—I don't think anybody would disagree—that when we hit 71% it was too high. I conjecture that at 50% we would still be somewhat uncomfortably high.

One of the ways of looking at it is that when we hit a 71% debt-to-GDP ratio, it meant that out of every revenue dollar we were collecting from Canadian citizens, we had to allocate 36¢ to pay interest on the public debt. So that's not helping anybody get any current goods and services or investments from the government; it's entirely paying for past consumption. We're still at 27¢, and that's quite a high number. When we're down to a 50% debt-to-GDP ratio, we'll still be allocating almost 25¢ of every revenue dollar. So that's one perspective where I feel one could argue that's probably too high.

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A second perspective is that at 50% debt-to-GDP, that would put us back to where we were in the mid-1980s. I know if you look back at budgets, if you look back at private sector commentary, if you look back at the statements made by opposition leaders at that time, there was a feeling that 50% was too high at that. I don't know why anything would have changed since then.

I think also you want to look at the levels of debt in other countries. At 50%, that would also put us not as far out of line as we have been in the past, but still somewhat higher than most of our trading partners. And we have to keep in mind too that many of our trading partners are moving down their debt-to-GDP ratio.

But unfortunately I can't tell you.... If 50% is too high, is 40% the right number? Is 30% the right number? I think one still wants to continue moving towards those numbers.

Mr. Paul Szabo: I tend to agree with you that there are many opinions on the discussion, but as for your comment that there's no current benefit, I'd probably be able to find someone to debate that with you, because debt is an accumulation of past deficits, which were incurred for certain reasons, not just thrown out the window. It was to sustain health care. It was to sustain social programs. It was to make sure there was that buffering when the economy was going through some very severe periods. We were buried in the deepest recession we ever encountered, and yet Canadians continued to have the protection. Debt was incurred to make sure the country wasn't going to have to take draconian steps simply to keep out of going into debt.

Strategically and over a longer term, there's nothing wrong with having debt. The issue probably for a lot of people is a sustainable level of debt, and even from the standpoint of explaining to Canadians whether or not there is a need to eliminate the national debt. What would be the consequences of that, when you think of the magnitude?

It's not a bad thing to have debt when in fact it's been for protection against severe swings in economic situations and when it provides the leveraging you need to be able to take advantage of opportunities when they come up. That's primarily what happens in the corporate sector.

The reason I wanted to talk about the debt side is that last month, for the first time in 19 months, there wasn't growth in the economy. The consecutive string of economic growth has now been broken, and I think it was a surprise to a number of people. It probably is a good point at which someone has to ask the question, how have we responded in terms of preparing ourselves for a downturn in the economic cycle?

You can throw the economic textbooks out in terms of having low interest rates and low inflation all the time, but the issue for me is, what is the finance department doing to prepare strategy or prepare for that economic downturn, again to ensure Canadians continue to enjoy the benefits and the protections we continue to offer now?

Mr. Roy Cullen: To start off, as I understand it, in the fourth quarter the economy grew 4.6%, the 18th consecutive quarter of growth.

Mr. Paul Szabo: I talked about last month.

Mr. Roy Cullen: Last month? Oh, okay.

My other comment, before I turn to Don, is about the notion of the traditional business cycle, where we've seen these sharp peaks and valleys. I'm not suggesting it's a thing of the past, but with the tools at the disposal of governments and other institutions, other stakeholders, it's possible we won't see those kinds of swings. Nonetheless I suspect there could be peaks and valleys, but maybe of a different magnitude. But your point is a good one.

Maybe, Mr. Drummond, you could pick it up from there.

Mr. Don Drummond: If I could, I'll return just for a moment to the debt issue. When I was saying there were no benefits, I was trying to distinguish between current and past benefits. What we're now allocating, 27¢ for every revenue dollar for interest on the public debt, is not paying for any current goods and services the governments are providing.

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As you point out, there are benefits from the past expenditures of the government. That's why it really wouldn't be a sound proposition to contemplate eliminating the debt. To the extent that there's capital formation and forward-looking spending from the government, that's quite a legitimate reason to borrow against, because there is a rate of return in the future.

First, on the one negative month, as you pointed out, we had 18 consecutive positive gross domestic product numbers and then that one negative. I don't attach a huge amount of importance to that. In fact, if you look back at any of the periods of long suspensions we've had before, what was the exception was not the one negative but that we had 18 positives.

If you look back at the latter half of the 1980s, when the economy was growing very strongly, there were all kinds of negative months. If you go back further, into that long period of expansion we had through the 1960s, there was a fair bit of volatility. Now when you look back on the average, it looks as though it was all on a straight upward trend, but there was fair bit of volatility.

Remember, even right in the midst of that expansion in the late 1980s, we had that stock market crash in October 1987. At the time we were living through it, it seemed, if anything, like a long, sustained expansion.

So I don't attach a great deal of importance to this. Nonetheless, it is important to look forward and try to mitigate, to the extent we can, the possibility of having a downturn and be prepared if we do have one.

We've done a number of things on that. I think the most important is what we've been doing on the low inflation management. If you look at why we had the severe recessions in the early 1980s and the early 1990s, it was because inflation got out of hand going into those periods. There was not only a move to reduce the cyclical upswing in inflation but to reduce the underlying rate of inflation. So there was a need for quite a strong monetary response.

At worst, we're in a situation right now where we have to deal with a cyclical pickup of inflation. We don't have an underlying inflation problem.

Secondly, the experience of certainly the early 1980s and 1990s was exacerbated by the fiscal management side. Again, there, we have gotten rid of the deficits. We're getting the debt burden down quite strongly. As well, as we pointed out at the beginning of the session, we have insulated the government to a much greater degree from the effect of higher interest rates on the debt program by increasing the term maturity to the debt.

So I think a number of very important and positive steps have been taken not only to mitigate the possibility of having a downturn in the economy, but to mitigate the effects that might feed through to the Canadian population.

Mr. Paul Szabo: I did notice that we've locked in a lot of the debt to take advantage of the low interest rate scenario, which is exactly what Canadians would hope we had done.

I would finally turn to this capital gains issue, even though it's more a budget item than an estimates item. Have we done an analysis of the impact of the $100,000 capital gain exemption that was introduced in the mid-1980s, how many people took it up, and what impact it may have had on the economy, as almost a study that could give us some wisdom with regard to the anticipated benefits of making some modifications to capital gains?

It seems to me, from what I am aware of, the problem with that first go-round was that when it was introduced, it was not a prospective provision but was available even for holding gains, so that much of what was taken up in the $100,000 was in fact of no benefit. On top of that, it was also available for gains that were incurred in offshore investments and so on, which would never have any direct benefit to Canada, like vacation properties, or even artwork, for that matter.

It is a very serious question, as far as I'm concerned, simply because there are many equity instruments within the public marketplace that have developed strategies in terms of their dividend policy and reinvestment policy—that balancing. It seems to me that for companies that pay very poor dividends and allow or promote growth within their business and therefore capital appreciation in stock prices, all of a sudden those kinds of companies would be significantly impacted in terms of their attractiveness for the public investor.

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To make a change in terms of the taxability or the percentage of capital gains that are actually taxable would have an enormous impact within the marketplace and in fact vis-à-vis one company to another, depending on their strategy and their segment and whether or not they are blue chip high-dividend-paying stocks. Do you agree that this is a very complex and sensitive issue to be dealt with and that it should not simply be focused on, that, oh, there are some high-tech companies out there that give stock options and we should try to spur them or target them very narrowly without worrying about the impact on anybody else?

Mr. Don Drummond: You began with the $100,000 exemption. A number of studies were done. There was an evaluation done by the Department of Finance. A number of evaluations were done by academics. I can't remember if any of them were favourable, but I think it's fair to say the majority of them were not favourable.

As you said, a large number of people took advantage of it, but it was largely around things like secondary properties; that is to say, cottages. The way we closed it down—and I think it was the only way we could do it in fairness—was to allow people to re-evaluate those properties at a certain valuation date, and we know a large number of people did that. But again, it was largely not what you would think as being productive investments in the economy; it was largely on secondary residences of people.

I think we're in a better regime right now, where the incentive is on the margin for every dollar as opposed to capping a certain limit on it. I certainly would not disagree in the slightest that the whole capital gains, the whole capital income thing, the treatment of gains, the treatment of losses, is very complicated. As I was trying to explain in the context of the answer to Mr. Brison, I find it's difficult and potentially harmful if we just pull out one issue of capital income and treat quite differently the taxation on one source from all the other sources. Our objective is to try to bring down the tax burden on all the sources. Whether they all have to come down exactly in parallel is an open issue, but I find it difficult to open up a huge gap where we have quite a different taxation regime and one form of income versus the other forms of income.

The Chair: Thank you, Mr. Szabo.

I have a question.

Mr. Paul Forseth: I have one too.

The Chair: Okay.

I think the minister last year, in addressing this committee, stated that the world has sort of an outdated version of the Canadian economy. In fact, we're not as reliant on resources and commodities as we once were. It's more diversified.

If there's a view of Canada that is outdated, who takes responsibility for that? What is the department, the minister, the parliamentary secretary, or in fact the government doing to change that view?

Mr. Roy Cullen: I remember when the Prime Minister was in Davos at the World Economic Forum, not this last year but the year before. In this encounter with some groups there, he was trying to ascertain why the Canadian dollar was getting hammered the way it was. A noted world market player said, well, the problem is that Canada is too much of a commodity player. To that, the Prime Minister replied, or subsequently followed up, “Look at the amount; the commodity play in the Canadian economy has really shrunk.” I don't know what it is now, but it could be 15% to 20%, or something in that order.

As far as I know, there are efforts being undertaken with Team Canada, with Industry Canada and other departments, to try to get the word out internationally that we're not just hewers of wood and drawers of water. A lot of these countries, as I understand it, are quite amazed when we trot out the high-tech companies. So my response would be that we need to do more of that and get the message out. That's being done, and maybe we need to move even more aggressively on that.

The Chair: I'm also struck by the fact that—and correct me if I'm wrong here—I remember during the years we were fighting the deficit, on budget day you would get a number of ministers travelling abroad to tell the Canadian story. I'm wondering why, at a time when we are in a surplus position, we have made not.... We've made some steps towards developing an internationally competitive tax regime, and I say “some steps”. Why would we not, as a government, engage in that type of exercise again?

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Mr. Roy Cullen: I'll get Mr. Drummond to expand on this, but certainly officials went to New York and London to spread the word.

Mr. Drummond, do you want to expand on that?

Mr. Don Drummond: I absolutely agree that as the news gets better there's even more incentive to do those visits. I must say from the other end of it that there's a slightly less receptive audience than there was five years ago when these countries had huge exposures to Canada and were deathly afraid of what was happening to their investments. We had a keen audience. It wasn't the type of environment you might have wanted to go to speak to them in, but if you went at that time to London or Tokyo, you had hundreds of people, all worried about their investments.

We find that right now most of those investors have a certain percentage allocation in Canada. They're very confident in what it is. They feel positive about it. Certainly the onus is upon us to try to encourage them to increase their stake in Canada, but they're not sitting on the edges of their chairs wondering what's going to happen to their money. They're quite confident; hence there has been a little less interest in those types of sessions.

That being said, as Mr. Cullen noted, we did have officials go to all the major centres after the budget. We certainly didn't have the type of turnout that we had six and seven years ago, but we had a reasonable turnout and reasonable interest. It's something that I think is a longer-run program to try to sustain the interest in Canada, as opposed to dealing with a crisis environment where we do these types of things.

I would note something. What's often highlighted in Canada when we talk about the commodity base, the figure many people point to, is that a number of years ago 60% of our exports used to be commodity-based and now it's less than 30%. But I think it goes further than that. That sort of denigrates the importance of commodities in Canada. I think we should note that commodity production in Canada has totally changed. In fact, the commodity-based industries are amongst the most developed in terms of using the latest technology.

I'll just cite one example of that. When the oil sands developments began, they used to need, in U.S. dollars, about $25 a barrel to break even. Now, through the technological improvements, they're breaking even in the low tens, and at $11, $12, and $13. So there are huge changes even in that.

I think the case for Canada is even stronger. There are two worlds, a commodity-based world and a non-commodity-based world. Even in the commodity-based case, I think, we are very much a modern economy in Canada now.

The Chair: On the issue of standard of living, I'm going through some of this on pages 20 and 21 where you talk about reducing the tax burden. The “planned results” are “better incentives for economic growth, entrepreneurship and productivity”. How important is the issue of productivity in your department?

Mr. Don Drummond: It is extraordinarily important. It is something we live and breathe. The word “productivity” also often takes a negative connotation, so sometimes we might not use that precise word, but the standard of living and the quality of life ultimately do rest on productivity. In the longer run, that is what's going to determine the wages and the income compensation, and it's what's going to determine the employment level.

We just got a reasonable number for 1999. We had 1.4% growth in productivity. That was better than we've had in the previous couple of years. It wasn't as strong as that of the United States, though. Certainly our perspective is that we can do better than that.

But I think if you look at the foundation of virtually everything that we've attempted to do over time, it has been geared to getting that productivity number up. Whether that was free trade or the tax reforms we've done or the changes in regulations, they're geared towards that, but not to productivity as an end in itself. It's very much because productivity is what's ultimately going to drive the standard of living in Canada.

The Chair: I don't think you'll get any kind of disagreement from this committee. As you probably know, we published a report a year or so ago, Productivity with a Purpose, in which we advocated certain issues to resolve the productivity.

The challenge is a very complicated one, but I don't sense that it's.... While I agree with you that when you analyse each point, it is directly related to a standard of living issue or productivity, I'd like to speak to you as chair of this finance committee and say that there isn't the passion, I guess, that was associated with the issue of the deficit, for example. I think that standard of living and productivity are the issues. There's no question about that in my mind. I'm convinced a hundred times over that if we don't deal with this issue, we're going to have some serious challenges in the future.

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I'm just wondering why, from a communication point of view, since you also addressed it in this report on plans and priorities communication, that issue isn't more in the forefront of the communication plan of the department.

Mr. Don Drummond: Again, I would say there is as much passion within the department on productivity as there was on the deficit. In fact, I would argue that the primary reason why we were so passionate about reducing the deficit wasn't to reduce the deficit per se, but that there would be an improvement in productivity and hence the standard of living. In some sense the deficit was an input into the standard of living as opposed to an end in itself.

I think you would probably not likely expect a huge effort on the communication side geared around productivity per se, because, as I said, there tends to be a bit of a negative connotation about that term and some people interpret it as meaning working harder for less. That's why I think you will see that many of our communications, as the one you just cited from the main estimates, are couched in terms of the standard of living. But we have not done well in Canada on the standard of living in the last ten years, and it certainly is the primary driver of all of the work we do in Finance, by every one of the employees and the minister and Mr. Cullen. It is the number one objective, to bolster that.

I think we'll have to try harder in the communications, because that's not coming through, but I think all of the policies we've got, if you look in the 2000 budget, are all geared toward that objective of raising the standard of living.

The Chair: That's my beef. I think you're moving on these particular points but I get the impression as an elected official, when I go back to my riding, that in fact the standard of living issue is an issue for the electorate, but they sense that.... Why isn't the government talking about it? There are certain levers we have, quite frankly. It's fiscal, monetary policy, taxation. You've got investment in people. I mean, there are seven or eight levers really that we can deal with to improve the standard of living. I just think the message is not getting out to the people. I think it ought to get out in a more aggressive way. I think I've made the point.

Mr. Don Drummond: We find this a more difficult one to communicate. Although the government can certainly not control the deficit, you do have a strong influence on it. You have levers that influence the deficit fairly directly. If you do a program review, as we did in 1995 and 1996, you can be reasonably confident that's going to have a certain impact on the deficit. You can say we did such and such and you can report the results.

On standard of living, as you've indicated, you can do a variety of policies to influence the standard of living, but in a fairly indirect fashion. It's not as though you can say we're going to do X and the impact on the standard of living is going to be Y. So it tends to be a little bit more difficult to communicate to people and a little more difficult to monitor the progress of the policies you've implemented.

The Chair: My experience has been that.... You're right about the word “productivity”. I mean, once you say “productivity”, you're going to lose quite a high percentage of Canadians in the sense that I think there is a negative reaction to it. I think while you can't sell productivity, you certainly can sell its benefits: higher incomes, higher wages, better opportunity, that kind of thing. I think we ought to perhaps be concentrating a bit more on the actual benefits rather than the word itself.

Mr. Roy Cullen: With productivity, too, people tend to relate it as labour productivity, output per worker or something like that, where we know it's much more complicated than that. It's how we use all the resources, capital, people, technology, etc., to further improve the quality of life. Then, when you're looking at quality of life for Canadians, do you measure that strictly in economic terms? How do you value the health care system, or access to education, or crime—

The Chair: Yes. In fairness, I think quality of life is an issue, but, quite frankly, people deal a lot more with income. They say, well.... Say the gap between the United States and Canada is widening. It concerns them if they're making $7,000 less. You've got to get practical about these things as well.

Having said that, should we be working toward narrowing the gap or not? Sometimes I think we ought to just try to be the best we can possibly be, because there are different dynamics that work in the United States that don't apply in Canada. But if in fact the gap has been widening over the past two or three decades, then I certainly think it becomes a bigger and bigger issue as the gap continues to widen.

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Mr. Forseth.

Mr. Paul Forseth: Looking at our order of the day, we're actually supposed to be focusing on the Canada Customs and Revenue Agency and the votes associated with it. I have some specific and pointed questions around that.

It's interesting that the individuals in the Ottawa area who have recently filed their income tax returns have noted that the address on the envelope is Shawinigan. I've had some people telling me the trouble people in the Ottawa area have in trying to communicate with this centre. The poor English competency they get on the end of the telephone or even a refusal to accommodate an English speaker as almost a political statement are among the complaints I've had. I hope that management message gets through.

Also, there have been specific interpretations of tax law related to Quebec that are inappropriate for Ontario, and there has been a real difficulty there.

I wanted to ask, first of all, how big is this processing centre? How many employees are there? Then, from that I want to talk about what the plans are for tax return processing centres. What is our growth plan? Where are we going? As a subset to that, I want to ask where is the emerging e-filing centre? Where is that managed, and what are the plans there? Now, instead of paying someone to e-file for you, a significant number of Canadians have been personally invited to go to a website and file their returns directly.

My question is around the substance of the Canada Customs and Revenue Agency concerning tax collection, looking at some of the numbers around Shawinigan, and also the larger scope of the plan of where we're going, and then also some questions around the e-filing prospect.

The Chair: Before you attempt to answer that question, I would clarify for your information that while the order of the day actually reads that votes 1, 5, 10, and 15 under the Canada Customs and Revenue Agency are included in the order, as a committee we're actually only dealing with votes 1, 5, L10, 15, 30, and 35 under Finance. That's why we have the Finance officials here.

I'm sure you have other questions they can answer, though.

Mr. Roy Cullen: Yes, we'll let the other questions suffice. I suppose we could take them under advisement or maybe—

The Chair: No. The committee decided to deal with votes 1, 5, L10, 15, 30, and 35, so there's no need to. If you want to answer them, you can go ahead.

Mr. Roy Cullen: No, I'd prefer not to, because I don't know if we have the answers at this table in any case.

Mr. Paul Forseth: Okay. May I ask another question?

The Chair: Absolutely.

Mr. Paul Forseth: There was the comment about the relatively low take-up on R and D, even considering that it's seen as a very generous measure by international comparisons. This has come up a number of times, certainly from the government side, where it's seen as a bragging point of the government as to how good we are in that area. But then we scratch our heads and wonder why the take-up is so low. I'm suggesting to you it may have something to do with the reasonable estimation, from those who might take up, of what comes afterwards, related to other taxes and regulatory climate. Have there been any studies looking at this question? Certainly, the thought has been mentioned by many government officials about the low take-up in the R and D, even though it's very generous. Why is that? What's going on here? Can you give me any answers about why that might be so?

Mr. Roy Cullen: Maybe I'll start it off. A number of theories espouse—and perhaps there are some studies Mr. Drummond can talk about—the fact that there's a tendency for us to be suffering from the branch plant economy syndrome, if I could use that term. I think that for some small businesses, frankly, there have been some administrative challenges, paperwork and so on, that the revenue agency is continually trying to improve on. But I can tell you that in my experience from talking to companies that might be interested in locating in Canada, for some companies this is a very big deal.

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Don, do you have any work on that?

Mr. Don Drummond: Yes, sure. There have been a number of studies both in the department and by academics. The two most common findings, the first of which was mentioned by Mr. Cullen, are that they're branch plants. A lot of the R and D is done in the home office of the company, often in the United States, and is the reason why we tend to be quite high in Canada on the adaptation of new technologies and less so on the development that tends to be done in the home plant.

The second factor is, as in many other things, we tend to compare ourselves with the United States, and our overall R and D is so much less than theirs. A huge chunk of the R and D in the United States is connected with the defence industry, much of it done either directly or indirectly through financing of the federal government. Of course, we have very little of that. And if you take out the defence component of the two countries, it doesn't look quite as unfavourable to Canada versus the United States.

It would not surprise me if a third factor was the one you pointed out, that with our higher corporate income tax rates—the general corporate income tax rate being higher in Canada—you have less of an incentive to do that. The payoff is not quite as much, and I would say that was very much one of the reasons in the budget why we proposed to reduce the general corporate tax rate from 28% to 21%. That would put us, combined with the average provincial rates, about on a par with the average rate that confronts companies in the United States. So at least there will no longer be a bias to doing something in the United States rather than in Canada because of a better after-tax rate of return there.

Mr. Paul Forseth: On a comparative basis, first of all in absolute numbers, how much does it cost us to collect our taxes? Certainly, we must be doing some comparative analysis about how we are doing as a nation, a productivity number about how much it costs versus what we raise, the use of technology and so on, and certainly trying to get down to the computer filing and so on. How are we doing in that regard? First of all, do we have some numbers about how much it costs us to collect our federal tax? And how are we doing on a productivity basis compared to, say, G-7 or OECD countries?

Mr. Don Drummond: Again, you might want to come back to the agency for more details, but the budget of the agency is around $2 billion and the total revenue collection for the federal government is $160 billion. But we have to keep in mind that the agency also collects most of the revenues for the provinces, and also that the agency does much more than just revenue collection. It actually administers many of the social benefit programs as well, such as the child tax benefit and the GST credit.

So if you put together what it does on the social policy front, what it collects for the federal government, and what it will collect for the provinces, for about a $2 billion budget they're probably involved in about $300 billion worth of activity. So the administrative overhead cost is very low. That budget, despite the increase in their workload, both in terms of collecting more money and also in terms of the huge increase of things like the cross-border traffic, has hardly changed in recent years. This is because they're taking advantage of efficiency gains that have been made possible.

In particular, one of your questions was on e-filing, and of course the shift to that in the last couple of years was no doubt going to increase over time, again driving down costs. So relative to other countries, it's a very low-cost operation, and its efficiency has been increasing quite markedly in the last number of years.

The Chair: On behalf of the committee, I'd like to thank you very much, Mr. Cullen, Mr. Drummond, and Mr. Bujold, for answering our questions and for your presentations.

For the members of the committee, this afternoon we'll be dealing with the votes on the estimates at 3:30 p.m.

Thanks again, Mr. Drummond.

Mr. Roy Cullen: Thank you very much.

The Chair: The meeting is adjourned.