[Recorded by Electronic Apparatus]

Thursday, September 28, 1995

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[English]

The Chair: Order, please. The Finance Committee of the House of Commons is continuing its pre-budget discussions. We're honoured to have with us today a number of distinguished experts on our economy.

I will introduce them to you: Mr. Filip Palda, from the Fraser Institute; Mr. Tom Hayes, from the Atlantic Provinces Economic Council; Dr. David Elton, from the Canada West Foundation; Mr. Leo de Bever, from the Ontario Teachers' Pension Plan Board; Mr. Geoff Bromfield, from Informetrica; Mr. Jim Frank, from the Conference Board of Canada; Ms Rose Potvin, from the Coalition of National Voluntary Organizations; Judith Maxwell, from Canadian Policy Research Networks; and Lynne Toupin, from the National Anti-Poverty Organization.

Thank you for being with us today for these important hearings.

We will begin with each one of you making a five-minute presentation, followed by the opportunity for you to react to what others on the panel have said.

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We'll come back this evening. Members of Parliament will then have the opportunity to ask you questions.

Mr. Palda, we will begin with you.

Professor Filip Palda (Associate Member, École nationale d'administration publique (ENAP), Fraser Institute): I think the theme of these meetings is practical suggestions about the budget. I have ideas and economic suggestions for you, but I think some of the people here will cover those ideas.

I have a suggestion in the form of praise for what this committee is doing. In other words, I have praise for consultation. Pre-budget consultation is a good idea. Things get discussed. You hear what the experts have to say.

But you may have been a bit too modest in your ambitions with this committee. Instead of having 10 or 12 people sitting around the table, I suggest having 27 million people consulting with you. I'm not thinking of having a big Internet seance. I'm thinking of a slight modification to the tax form, which would make government more efficient, more sensitive to the needs of people, and smarter. Smart government was a big theme of the budget last year.

When people fill out their tax forms it's a form of agony. In part, it's a form of agony because they have to pay, but also because they feel they have no control over where that money is going.

How could we give them back that sense of control? We could have an additional sheet on the tax form that asks how they want the money spent. It wouldn't have to be complicated. We could have a clause asking how many tax dollars people want earmarked for paying down the deficit or paying down the debt. Earmarking the money for paying down the debt would mean government spending would have to be cut.

How would that be done? We could have a clause asking if cuts across the board are what is wanted or if people want the government to take care of those cuts.

We could complicate the tax form. We could give the different categories of government spending and have people indicate if they want 10% of their taxes spent on the military, and so on.

Why would this make government more efficient? It would make government more efficient because it would lead to more information for voters. For example, imagine voters who are deciding they want less money spent on the secondary school system or less spent on universities. It will be up to the interest groups that currently speak to and lobby government to lobby the Canadian people and to explain to them why those programs should be preserved.

The big theme in Porter's report on competitiveness is that smart consumers make smart producers.

My suggestion would make Canadian voters smarter. They would have more information because the link between interest groups and government would be redirected to a link between interest groups and the people. This is probably not a unique suggestion. In 1990, before the Senate Standing Committee on National Finance, the head of the 1966 Carter Royal Commission on Taxation said government is not accountable and government ministries do not give enough information to the government.

This is one way that government ministries or interest groups will be forced to give their information to the Canadian people. I'd be willing to discuss the practicality of that later.

The Chair: Thank you very much, Mr. Palda.

Mr. Hayes.

Mr. Tom Hayes (Chairman, Atlantic Provinces Economic Council): Thank you, Mr. Chairman. I am not often described as an expert in these matters. I'm here today as the voluntary chairman of APEC.

I think it's been traditional when APEC makes a presentation to a group like this that several of the staff economists are here to provide relevant facts and figures from an Atlantic Canadian perspective. Unfortunately that isn't possible today, so I hope I can make some positive contribution as we go through today's proceedings.

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The Chair: You're doing very well.

Mr. Hayes: Thank you.

I thought I would make just a few brief comments about the economies of the four Atlantic provinces and then make some comments with respect to some of the changes we're already seeing in our region relative to budget cuts that have already been announced.

In the case of Newfoundland, the unemployment rate continues to exceed 20% and the development stages of Hibernia are starting to wind down. It is not expected that some of the more recently announced developments in Voisey Bay or the west coast oil exploration will offset this wind-down in Hibernia.

In terms of the fishery, I think we're all quite aware of the situation in the groundfish fishery, but offsetting that to some extent have been good crab and shrimp fisheries this past year.

In P.E.I., the construction of the fixed link continues to have a positive impact on the island's economy, although again from a job creation point of view, that impact has probably peaked this year.

The lobster fishery was extremely strong in 1995, and of course tourism was once again very successful. This is the second year in a row where we've had an extremely good tourism industry. The two reasons for that would be exceptional weather this past summer coupled with an attractive Canadian dollar.

We are seeing some major investments in value-added food processing in P.E.I., particularly in the potato industry, and that has helped the construction industry as well. However, I'm told that yields of potato crops are expected to be down this fall due to the dry growing season.

In terms of Nova Scotia, growth this year will be less than 2%, as this is really the first full year where we're seeing the impact of provincial deficit reductions, which of course have a dampening effect on the economy. All indications are that there will be more reductions to come at the provincial level.

Provincial cost-cutting of course is also aggravated to some extent by federal restraint initiatives in Nova Scotia, and I'll say more on that in a minute.

The unemployment rate in Nova Scotia is expected to be just over 13%.

In terms of New Brunswick, it's a bit early to measure the effects of the transportation subsidies. However, the resource sectors have had a good year, and that should continue into 1996. Retail sales are flat and housing starts are weak.

The province has been successful in attracting the call centre industries; however, some questioned whether those jobs in effect adequately replace some of the higher-paying jobs that are being lost in the resource industries.

Unemployment in New Brunswick is expected to again be in the 13% range.

I would like to make just a couple of brief comments relative to the impacts of some of the federal budget measures.

APEC estimates that the change-over from the EPF transfer system to the Canadian social transfer payments announced in the 1995 federal budget will take about $383 million out of the Atlantic economy over the next two years. This will particularly have an impact on employment levels and expenditures in quasi-government areas such as health care and post-secondary education.

The major hit comes next spring, when the provinces will have to balance the books with a $233 million shortfall from the federal government. In the following year, that shortfall is expected to be around $150 million.

I mentioned already the transportation subsidy cuts, with $100 million being removed from the economy. Of course Atlantic businesses with heavy transportation costs will suffer the most. These include forest products, food products, coal and some other minerals. The biggest impact of these cuts will be felt in New Brunswick, which received about 36% of all subsidies.

On proposed UI changes for seasonal workers, we've done some analysis and we estimate about 95,000 Atlantic Canadian workers use the system as an income supplement for seasonal jobs. On average they receive about $250 per week and remain on the UI system for approximately 27 weeks per year. In total this amounts to about $650 million of personal income annually that will disappear if some of the suggested changes are in fact implemented.

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This $650 million will disappear mainly from rural parts of Atlantic Canada since this is where many of the seasonal industries exist. I'm referring to tourism, farming, logging, construction, fishing of course, and mining. It will have a significant impact on consumption industries such as retail, grocery stores, and other personal services. I should also note that 40% of this cut will be in the province of Newfoundland.

In terms of federal job cuts, the impact on Atlantic Canada will be substantial. We estimate that over 9,000 federal jobs will disappear over the next two to three years, and this amounts to about $330 million less in payroll that would flow mainly into the urban centres of Halifax, Moncton, Fredericton, St. John's, and Saint John, New Brunswick.

Defence spending is estimated to fall by $1.6 billion over the next three years, and of course Nova Scotia and New Brunswick will be more impacted by that because they're very dependent on defence spending, as well as federal government office presence.

In summary, the deficit reduction measures announced in the past budget are widely felt across all sectors of the economy in Atlantic Canada. I think while we agree that deficit reduction is a necessary measure for the long-term stability of the country, we are somewhat concerned about the pace of these cuts and the impact they may have on our regional economy.

There are some other things I would like to comment on, but perhaps I can do that in our discussion.

The Chair: Thank you, Mr. Hayes. None of us like to make cuts.

Dr. David Elton (President, Canada West Foundation): That's precisely what I want to talk about, Mr. Chairman. Thank you for the lead-in.

A couple of weeks ago we sent every member of the committee this document called Red Ink III: Understanding Government Finances. It is a publication that seeks to summarize and assess the budgets of the 13 major governments in this country, including provincial, territorial and federal, to provide people with a comparative assessment of who's doing what to whom and when.

There are about 40 tables and graphs in this document. I'm certainly not going to try to go over them in any detail, but I would just like to pull one out for you. I know you can't read it from where you are, but I also know you've had an opportunity to see the document. Basically, it is a very simple graph that indicates which governments are borrowing the most money on behalf of Canadians and which are borrowing the least. It's a list of deficits by family.

The chart says that in 1995-96 the federal government will borrow approximately $4,500 for every family of four to pay for its expenditures. The single largest expenditure and the one I really want to dwell on is interest payments. I think that is at the heart of the budget of 1996-97, as it has been at the heart of budgets for well over a decade. The decisions made by this committee and this government in preparation for the budget of 1996-97 will determine how much interest Canadians will have the privilege and obligation of paying for in future years.

In doing the assessment of all of the governments' budgets over the last year and looking at their plans for the next five years, we find there are only two senior governments in this country that have not yet achieved a balanced budget in the 1990s or even stated clear plans to do so. Those two governments, of course, are Ottawa and Quebec. There's nothing even on the books yet about plans for a balanced budget.

The three provinces of Saskatchewan, Alberta and New Brunswick have all passed balanced budget legislation. Manitoba is currently debating its balanced budget legislation, so it is in the process of being passed.

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Note that this is not a partisan issue. In that list of provinces we have provinces of Conservative, Liberal, and New Democratic persuasion. These bills have become the heart of a fundamental restructuring of government, what we tend to refer to as affordable government.

The other point I'd like to make on this issue is that no matter how we cut it, deficits are postponed tax increases. In this country the Government of Canada has seen the debt increase at a faster rate than growth in the economy for the past fifteen years. This is not something that we should anticipate will go away this year or next year. Any time the debt grows at a faster rate than the economy, any deficit is simply a postponed tax, with of course a bite with regard to increased and compounding interest rates.

My last point is that the failure to reduce expenditures now means that this government and Canadians will have less money to spend in the future. To put it in one short phrase, here is your choice: cut some now or a lot later.

Thank you.

The Chair: Thank you, Mr. Elton.

Leo de Bever, please.

Mr. Leo de Bever (Vice-President, Research and Economics, Ontario Teachers' Pension Plan Board): You were looking for views on where we were, where we are, where we're going to be over the next three or four years, what the deficit outlook is, and what are some of the ways to achieve the deficit reduction that I'm recommending.

First of all, where are we? This business cycle is now five years old. Few business cycles last ten years, so if we're talking about 1997-98 and beyond, to be fairly conservative, I think one could not assume that we can grow on average faster than 2.5%. I suggest to you that a good working assumption is 2.5% for the next couple of years, and probably weaker thereafter. We could get lucky and it could be a bit stronger, but given that the fiscal risks are so asymmetrical, it's not a good idea to count on that.

Inflation is not a big issue. It will probably be around 2.5% to 3% for most of this period, given that we have relatively modest growth and a high rate of unemployment. As a matter of fact, most G-7 countries have this kind of profile - 2.5% to 3% growth and 2.5% to 3% inflation - with the exception of Japan, which is expected to grow only about 1% or 1.5% over the next year or so.

In fact, that's where the risk is. If there's going to be less growth than I'm stating here, it will probably be because of some financial failure, most likely in Japanese markets.

What's the deficit outlook in this environment? It probably means that over this cycle, if we keep on the track we're on now, we wouldn't be able to go beyond $15 billion. In other words, it will be lower than $15 billion.

What's the appropriate target? I guess I'm still somewhat old-fashioned, but I believe that over a business cycle we should be able to balance the budget, to run surpluses in good times and have deficits in bad times. Of course, getting there is not that easy, but I think we should not make too many compromises in trying to get there.

The 3% target was a good step, but it's a pretty weak step in the sense that it was patterned after a European target that covered the whole country. If you take all governments in Canada, we started at between 6% and 7% and we're only down to about 5%.

The additional reason that the target is particularly weak is that most G-7 countries, excluding the United States, have the internal financing and savings to cover those deficits, but Canada doesn't have that luxury. We're borrowing this money and 4% of our national production now goes simply to pay the interest on the debt we've already incurred.

How can we get the deficit down? I know there is an argument about one-year promises versus multi-year promises. I still think the government should make a stronger commitment to multi-year deficit reductions. I know there have been statements that this is the plan, but I think it's still not strong enough to really have the impact on capital markets and to generate the confidence in capital markets that would give us lower interest rates, which in themselves would help reduce the deficit.

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Right now, with Quebec still an issue, of course we face a cost in interest rates that is not due to fiscal policy per se. Interest rates should come down after the referendum, but I think there's also a case to be made, particularly given what's happened in Ontario in the last few months, that we should get a combination of fiscal and monetary policy with somewhat lower interest rates than we're facing now.

In terms of the areas where you should try to get your cuts, I feel there's a desire, not just in Quebec but in other parts of Canada as well, for more devolution of spending power. That would suggest to me that you should emphasize transferring as much spending power to the provinces as possible and cut your funding, particularly to health and education. It's not that I don't think those areas need money - in fact, they do - but I think it's much more efficient from an economy point of view to have the decisions and the spending occur in the same place.

The most drastic contrast between Canada and the United States is in labour markets. We have an unemployment rate that is 4% higher than that in the United States. Most economists believe that's due to the way we structure our unemployment insurance scheme and other social programs. I think that's one thing you should continue to put some emphasis on in terms of your reforms. I would favour the UI reforms that are on the books now, but I would also look at lower payroll taxes and even a negative income tax to put the incentives in all places in the right direction.

Another thing that isn't much talked about is that there are all sorts of impediments to part-time work in this economy, particularly in the way benefit provisions are being administered. I suggest to you that you might get 50,000 or 100,000 jobs simply by trying to remove as many of those as possible. There are people who are currently working full time who would rather work part time. It's a form of job sharing, but it's not forced by any kind of legislation.

Of course it's clear that one of the areas that's causing us a lot of trouble in the long run in terms of deficits is publicly funded pensions. Again, I would urge you to increase the age of eligibility to reduce the overall long-term cost of these programs.

On the subject of privatization, a lot of privatization is being discussed because of the money it brings in and the reduction of the debt that generates. I would suggest to you that there are other areas of government worth looking at for privatization, not because they bring in dollars but because the activity can just as well be undertaken in the private sector, and therefore should generate efficiencies from that perspective.

Thank you.

The Chair: Thank you, Mr. de Bever.

Mr. Geoff Bromfield, please.

Mr. Geoff Bromfield (Director of Modelling and Database Group, Informetrica): Thank you, Mr. Chairman.

I have a few prepared remarks, which I'll keep as brief as possible. I have given you a handout, which I hope you have in front of you now.

I'd like to stick to remarks that I generally have some information about, and I'll leave some of the other topics to some of the other speakers.

I'd like to begin by summarizing the current economic outlook and how it's changed since the last budget. It has changed dramatically. The current economic situation is not nearly as positive as it appeared 8 to 12 months ago. The most recent national accounts release revealed that economic activity declined in the second quarter by 1% following a modest first quarter growth of 0.9%. This was the first quarterly decline in activity since the GST was introduced in 1991.

In light of that weak first half performance, the consensus forecast for economic growth has been reduced to 2.2% this year and 2.4% for 1996, well below the budget projections of 3.8% this year and 2.5% next. The most recent Informetrica forecast is for growth of around 2.4% this year and only 1.6% in 1996. Our forecast was, however, produced before the second quarter numbers came out, and we expect to be revising it downward in the next few weeks.

Neither our forecast nor the consensus, I expect, includes a recession in the years 1996 or 1997. We do, however, recognize that a recession is a possibility and that we may in fact be in one currently. It's precisely this uncertainty about the course of events that's the impetus behind our producing a variety of scenarios.

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I've included in the handout a graph that compares GDP growth in our reference case with that in a recession scenario. In both scenarios we manage to avoid a recession in 1995, but in the recession case we experience almost no growth in 1996 followed by negative growth in 1997.

Since we first produced this scenario in June we've come to realize that our timing with respect to a possible recession may be a little off. Timing aside, the important point to note from it is we are now and will continue to be very vulnerable to small wiggles in U.S. activity given the weak domestic demand that is occurring now and is likely to continue.

Given the current situation of high government debt, high real interest rates, a large output gap, uncertain growth prospects and the expectation that 1996 will be the year in which the largest year-over-year government cuts and spending occur, one might expect a move toward monetary easing is appropriate.

Simulations we've done indicate that over a two-year period, a 100 basis point drop in short-term interest rates increases real output by roughly 0.5%, increases employment by over 40,000 and reduces the federal deficit by $5 billion.

Of course the benefits of reduced interest rates for the economy as a whole and the federal deficit in particular are well known. The subject of much debate has been: can lower real interest rates be engineered directly through monetary policy, or can we only reduce them by earning the confidence of investors through restrictive fiscal policy?

It seems to me the logical follow-up to this question is if you believe we can reduce real interest rates through monetary policy, then let's do it. If you believe we have to earn the real rate reduction through prudent fiscal policy, then let's do that in a way that does the least damage to the economy.

On the next page of the handout I've outlined the costs in terms of employment losses associated with deficit reduction. You can see they vary greatly depending on the choices you make regarding tax increases or spending cuts.

I'm not going to address each number in the table, but I'll generally state that the adverse impacts of deficit reduction are minimized if expenditure cuts are concentrated in areas with high import content, like expenditure on foreign-produced aircraft with no domestic offsets.

Similarly, the contractionary impact of a tax increase is minimized if it's applied on those who tend to save and not spend. Perhaps increasing income taxes on those who are benefiting from the current high real rates of interest is something worth considering.

In the 1995 budget, expenditure reductions were concentrated in two main areas: departmental budgets and transfers to the provinces.

The effect of departmental budget cutting obviously varies depending on whether the savings are at the expense of a reduced workforce, lower wages, reduced purchases of goods and services or reduced subsidies to business.

Similarly, the effect on the economy of reduced transfers to the provinces depends on the reaction of the provinces to the cuts. If the provinces simply absorb the revenue reduction, then there is no direct impact on the economy. If, however, the provinces decide to reduce their expenditures or increase taxes, then this would have an adverse impact on the economy and, indirectly, on the federal deficit.

I've also included in my handout a table that shows the impact on government deficits of reduced expenditures on goods and services by various levels of government. This table indicates that a sustained $1 billion reduction in provincial expenditure on goods and services would increase the federal deficit by $421 million over five years. The five-year period was chosen so that lagged effects on taxes, unemployment insurance contributions, etc., could be factored in.

The general message from this table is that reducing the federal deficit by reducing transfers to other levels of government is not without its costs and may result in substantially less deficit reduction in the long term than if the federal programs were cut or taxes increased.

As a final comment, the question occurs to me: are further cuts necessary? As noted in the last budget, actions taken in 1995 and previous budgets will result in a declining deficit and declining debt-to-GDP ratio in 1997-98 and beyond, even with conservative interest rate and growth assumptions. Simulations we produce are consistent with this view.

Perhaps before we start suggesting new areas to cut, we should get a better understanding of what the status quo deficit is for 1997-98 and in future years.

Thank you.

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Mr. James G. Frank (Vice-President and Chief Economist, Conference Board of Canada): I left two pieces with you; one is a copy of the executive summary of our latest forecast, which has actually just been produced in the last few days, plus a handout with some graphs on it. I'd like to talk to that for five minutes if you don't mind.

In terms of the outlook for the near term, we have a set of consumers in Canada who are now carrying extremely high debt loads, much like their governments. We've gone through a borrowing binge over the last decade and it's now made us extremely sensitive to any moves in interest rates.

There's no doubt we are going to have a very weak third quarter this year. Whether we're in recession or not I think is an academic debate. The seriousness of the slowdown we don't think parallels what we've recently been through in terms of recession, but that said, it's going to make it very hard for governments to continue to meet these targets.

The issue of interest rates is really troublesome for us. We have been consistently assuming that there will be a ``no'' vote in the referendum. If that does not happen, then I simply have nothing to say about the next year or so in terms of the outlook. It's just terribly problematic.

In the outlook we do have, we have a prime rate of about 9% in the week before the referendum is held. So we do bump rates fairly sharply on the assumption that we will not remain unscathed through the next month or so.

If you look at page 2 you'll see the interest rate profile we have and the spread between Canadian and U.S. rates. The important thing here is once we're past the October 30 date, we believe that because of the deficit reduction plans of governments, financial markets will be a little more tolerant of narrower spreads than we've had in the last number of years, and that secondly the political debate having been more or less put behind us will allow a little more tranquillity.

That allows us to narrow the spreads, because as you can see there, rates in the U.S. will gradually rise as we go through 1996 and on into 1997. Also, 1997 will be a year of relatively slow growth for us here in Canada.

When we ask the question about how Canadians are feeling about their current affairs, you find in our consumer attitudes index that they took a real bath in the first quarter and the second quarter numbers didn't move. The third quarter survey is being compiled now and we'll have some numbers within the next week or ten days.

An important point here is that in Ontario the confidence index jumped from 98 to 104 between the first and second quarters. That is a large increase. In contrast, Quebec confidence levels dropped from 96 to 90. That is a large drop. So Canadians are feeling very nervous about their immediate prospects, and it's driven largely by very poor employment performance and of course rising interest rates.

If you look at the real consumption spending side, you'll see we're only forecasting 1.5% to 2% over the next two years. From a business point of view that is pretty modest performance - nothing to write home about. It's basically because consumers have so little disposable income to spend. That's the chart on the top of page 3.

This is really the key to the domestic economy. Within this chart are embedded all of the wage increases that we estimate from our surveys of Conference Board members across the country as well as our own judgment of what's happening on the labour relations front, plus employment gains and of course inflation. You can see there that 1995 and 1996 will have growth of just under 2%. That is a very weak level of income growth in purchasing power terms if you compare it to 1988 and 1989, which were considered to be good years.

The important thing in the second slide on that page is that the personal savings rate now in Canada is bumping along about as close to the bottom as it can go. The floor is approximately 7% to 7.5%. Why is this important? Well, as you can see there, in 1994 there was a sharp drop in the savings rate in Canada. What Canadians did was dip into their nest eggs to support current consumption. You can only do that once, and it's been done.

So now Canadians are faced with very low savings rates, at least compared to historical levels, and there's nowhere to move on the down side. We think this is going to make people relatively resistant to spending unless they're really confident about the future.

That bottom slide on consumer and mortgage credit is important because it shows the total of that credit is now 88% of people's disposable income in Canada. The government's managed to get into the 100% club recently in terms of their debt-to-income ratio; consumers are at 88%. You can see the sharp growth that occurred throughout the 1980s, and of course now we're paying the price for that.

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To indicate how sensitive people are to interest rate moves, if you look at the increase in credit between the first and second quarters of 1994 and compare that with the increase between the first and second quarters of 1995, you will see that in 1994 we added $8.3 billion to our total debt level, but only $1.7 billion this year. When interest rates are rising, people automatically pull back quickly.

There was a quite sharp setback in the level of overall business confidence in the second quarter. This is based mainly on businesses' view that the next six months to a year is going to be less profitable for them and that business conditions are going to deteriorate. We're not making too big a thing of this right now, because the level of the index remains quite high, but it is an early warning signal that things are moving in the wrong direction.

As far as business investment growth in Canada is concerned, there's nothing to write home about here - nothing on the housing sector, nothing on non-residential construction. I think we had one crane in Ottawa at Canada Post. It's now gone. Nothing is happening.

We've heard about Hibernia, the fixed link, and so on. Those are major projects in their regions, but they are small in the Canadian context.

So where do we get the growth that you see in that chart? It's coming from machine and equipment spending. Canadian businesses continue to add heavy investment in machinery and equipment. It's mainly labour saving in its focus, and also driven toward enhanced competitiveness.

You cannot expect that to change, in particular given the North American market and the world economies' competitive situation.

Turning to the exchange rate, the Conference Board's view is that the Canadian dollar is worth between 80¢ and 83¢. We are not going to get there in the near term.

We believe that any movement upward in the Canadian dollar will be taken by the Bank of Canada and the government in lower spreads. There is simply no interest now in a higher Canadian dollar for any kind of control purposes.

You can see that exports of goods have been performing fantastically. That continues to be the case. We have a highly competitive industry in this country with a currency in the low seventies, and no one should be deluded about that. We have made enormous strides in our competitive position - cost cutting and cost control - and it's paying off.

On the bottom slide you can see the fiscal record of governments over the recent years. These are official numbers. They collate the provincial deficits plus the federal deficit to the bottom line. In our view at the board, it is futile to be debating about who the source of the problem is. All levels of government are in this and somehow they have to work more effectively together to solve the problem.

You can see that the deficit in 1994-95 was $54 billion. The peak was $66 billion 1992-93. This is simply not sustainable. The peak was 9.6% of GDP in 1992-93. If the estimates in fact come true, it is now going to be 5.7% of GDP, federal and provincial together. So there's a long way yet to go before this issue will be resolved.

On the last page you can see the results of the restraints that have been put into place. Real government spending is declining for three years in a row. It actually declines in 1997 as well. This implies smaller governments, fewer hospitals, fewer schools, fewer government services; in other words, physically smaller government. This is very unique.

In this outlook we have incorporated all of the federal government changes in its recent budget. We have anticipated virtually all of the Ontario government changes in this outlook. We have incorporated nothing on behalf of Quebec. It's our view that once the referendum is over restraint measures will be introduced in Quebec, and once they're factored in we'll of course see the obvious results.

The middle slide on that page is really important for politicians to understand. Even with all of the changes that we have in this outlook, the fundamental fiscal position of governments in Canada has not changed. The debt-to-GDP ratio, federal plus provincial, is still about 100%. You can move it up and down a point here and there, but I think real people in the real world would say that doesn't make a lot of difference.

Historically this ratio has been very hard to reduce. It was flat, for example, during the boom years of the late 1980s. We did not reduce that debt-to-GDP ratio.

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In the last chart, just quickly, you can see our growth rates, which are 2.2% this year and 2.7% next year. To reinforce the point about 1994, that strong growth rate there was partly the result of the cut savings rate, and we can't get that any longer.

So when you look ahead for the next few years, 1997, which is not on this chart, is a risky year. We only have 2.3% growth there. That's the year when we think it's most likely that we could in fact have a worse year, largely depending on what happens in the U.S. after their presidential election.

So with those comments I'll just leave it with you and we can get into any discussion later.

The Chair: Thanks, Mr. Frank.

Rose Potvin, please.

Ms Rose Potvin (Executive Director, Coalition of National Voluntary Organizations): Thank you very much, Mr. Chair.

If you don't mind, just before I start my comments, I'd like to direct one comment to Tom Hayes. I'd like him to know that all the money I've earned in the last twenty years in Ontario and the money I'm going to earn in the next several months has just been invested into a house and renovations down in Nova Scotia. I think that's called a transfer payment, and I wanted him to know that I'm doing my bit to send money down his way.

The Chair: What is your address and phone number?

Ms Potvin: I'll give you that later, Mr. Peterson, once we have one.

As for my comments to the questions you raise, I'm not going to touch the very first one. I really don't know a whole lot about how you look at interest rates and deficit reduction. I'm much more concerned about the election promise that brought this government to power, and that was the promise of jobs, jobs, jobs.

After almost two years, or almost halfway through your mandate, it doesn't look to me as if any new jobs have been created. What's even more worrisome is that it doesn't look as if anybody is even addressing the research that needs to be done in order to determine where those jobs can be created, in what sector or what skill levels or anything else. I've seen no reports coming out of the government on this, and of course until you do that you can't even look at what kind of training has to be put in place.

So that's a very big concern. I didn't expect to see a whole lot of new jobs created two years into the way, but unless we start the planning and unless we start putting the structures in place, we're not going to see that in four years.

You might say that's not necessarily the job of the Department of Finance; maybe it's the job of Human Resources Development. The fact is we all know that the hard decisions about spending happen at Finance, and unless Mr. Axworthy can convince Mr. Martin that money has to be spent in this area and can convince him that it's going to provide more jobs, then it's not going to happen. So I do raise that with you today.

I'm also very concerned when you ask the question here about what areas of federal activity should be considered for further cuts: commercialization, privatization, or devolution to other levels of government. You are already devolving some of the services that are offered by government and sending them down. Sending them off to another level of government will do no good whatsoever because they're in the very same position that the federal government is in. They are also into cutting, so they're not going to pick up these pieces.

If you look at the private sector and whether they will pick up these pieces, I doubt it very, very much. We're looking at all kinds of social services that need to be done. We need to look at a strategy for children and youth. We're looking at training programs.

The Frank Stronachs of this world are not going to jump at an opportunity to start providing meals to children who go to school hungry, and they're not going to jump at an idea of some kind of training. There isn't a lot of money in that, but it is something that definitely has to be done, and the only way it's going to be done is if the voluntary sector picks up those pieces.

We've heard it thrown around many times that government is looking to the voluntary sector to help along these ways, but there doesn't seem to be the understanding that a voluntary sector needs to be supported. Volunteers have to be trained, supervised, and managed. They have to go through security checks if they're dealing with children and they have to go through screening processes. All of that kind of work has to happen before we can have volunteers in place to pick up a whole lot of these pieces.

Because of the shortage, people are being not allowed into hospitals when they should be in or they are being sent home long before they are able to take care of themselves. Somebody has to come along and fill those gaps, and I do think it's people in the voluntary sector who will be able to help.

We're very prepared to help with this; we want to. We've already talked to some of your departments, but we'd sure like to see some thinking going into just where those needs are and what kind of infrastructures must be place so that very soon we can be in a position to help with all of this and hopefully lend a little bit more dignity to the lives of Canadians. I think a lot of them are feeling pretty desperate these days.

Thank you.

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The Chair: Thank you. Hopefully we can respond to the challenge you've given us.

Judith Maxwell.

[Translation]

Ms. Judith Maxwell (President, Canadian Policy Research Network): Thank you, Mr. Chairman. Thank you for having invited us today. I will first of all deal with your first two questions, but in a different perspective.

[English]

The first question is what our deficit reduction target should be. I would like to see that question rephrased. The real problem is the debt, so the target should be to reduce the debt. Governments will have to continue to be very aggressive on this aspect of policy until we see the ratio of debt to GDP start a downward trend. It has now been promised two years out for about a decade, but we haven't quite managed to turn the corner. Eventually we'll have to get used to the idea that we're going to have to start paying down some of that debt.

So the targets that need to be set need to be much more aggressive those we've seen so far.

It's probably realistic in the target-setting exercise to have intermediate targets, because I don't think one can get directly from where we are now to the downward trend in the debt-to-GDP ratio, but the debt has to be kept very much front and centre in the discussion.

The second question you posed was how budget measures can be used to create an environment for jobs and growth. I see that question as the effort on the part of the committee to keep a balance in this discussion between fiscal correction and what I would prefer to see phrased as social well-being. Given the dimensions of the adjustments we face, the fundamental question is how we maintain social cohesion as we go through a traumatic restructuring of federal and provincial finances.

We have to bear in mind that Canadians are undergoing a lot of other stresses that are non-fiscal, such as the changes in family structure and the polarization of work.

So the budgets of the mid-1990s, beginning with the one last February, are not just about deficits and GDP, but they're transforming the relationship between citizens and the state. I think they're also transforming the federal-provincial relationship.

Maintaining social cohesion is a big task. My sense of what Canadians are looking for is that they want accountable and efficient government. You will hear that just as much from someone who's receiving social assistance as from a businessman on Bay Street. But I think the very large majority of Canadians also want compassionate government. It's this balance between getting the fiscal correction under way and also ensuring that, out of the decisions that are being made by eleven governments in the country, we shall end up with a safety net that doesn't have too many holes or too many cracks in it, and that we shall have overall a set of programs and policies that first provide incentives to create jobs, but also provide incentives to work and to learn and for people to become more self-reliant.

The task of going in the direction of more accountable and efficient government is particularly troublesome in a federation and I think forces a dramatic rethinking of how federal and provincial governments coordinate fiscal decisions but also coordinate on the social side of the agenda.

At the moment, though, we don't have a committee of any legislature in this country that's responsible for looking at the national outcome from what eleven governments are proceeding to do. I think we also don't have the institutions in place that encourage provinces to think about their national role and encourage them actually to plan the national consequences of the decisions they're making with respect to important programs such as health, education, and social policy.

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I think to go on from there, accountable and efficient government will demand from both federal and provincial governments that they stop thinking in terms of turf - this is my jurisdiction, that is yours - but they will have to begin to think more in terms of integrated programming, so the spaces between unemployment insurance and social assistance, for example, have been well thought through and the way in which people move from one system to the other are actually thought through in human terms and also open up options for citizens so they can do their adjustment to these new circumstances and will be able to find pathways that take them out of dependency and into self-reliance.

Finally, I'd like to suggest that all the legislative committees in the country - and if only there were a way to have one that had the overview - need to be asking questions about who is bearing the burden of fiscal and social adjustments. Nobody knows at this point where the burdens are falling. My concern is that possibly too much of the burden is falling on the younger generation, if you look at the cumulative impact of fewer jobs, lower wages, higher private costs of post-secondary education and health, not to mention the changes in social programming.

In effect, because each government is trying to adjust its own programs and deal with its own fiscal problems, we're moving in the direction of a patchwork. We really don't know whether all the patches can be sewn together into something that makes sense for citizens.

I don't think we have a very good understanding of what the incentives or the signals are that flow out of this. One possible signal is that there's no hope, that anyone who loses their job has become a victim and victims will be punished, that self-reliance will be taxed and that people who fall into dependency will be trapped there. But there is another whole set of signals that will be very much more positive in terms of the growth and development of the society as well as for social cohesion, where the signals are that it is worth going to school, it's worth looking for work, it's worth starting up your own business, it's worth investing in yourself and in your community. It's that second kind of Canada I hope we will aim for.

[Translation]

The Chairman: Thank you, Judith Maxwell. Ms Lynne Toupin, please.

Ms Lynne Toupin (Executive Director, National Anti-Poverty Organization): Thank you, Mr. Chairman. I know we are gathered here today to discuss the next federal budget, slated for 1996, but I would be remiss in my function as Executive Director of the National Anti-Poverty Organization if I did not briefly tell you about the repercussions of the last budget. I will try to be very brief, because I want to talk about other issues which will hopefully be more positive.

Following the introduction of Bill C-76, the Canada Assistance Plan, as well as national standards, became history. And we still don't know the full impact of those budget cuts. Mr. Kroeger gave an apt description of the budget by calling it the ``Contact C'' budget. We still don't know what its effects will be, and we are greatly concerned that communities and individuals will be affected.

I know that the ministers responsible for these issues talk about policies and objectives, but we want to remind you of our concerns, given the fact that national standards are now a thing of the past.

[English]

In fact, you only have to go back to yesterday's throne speech from Mr. Harris to know what are the real and immediate impacts of having no more national standards. We now have mandatory workfare and learnfare in Ontario. I hope I can contribute to this discussion by giving you a bit of a direct line to some of the people who will be affected by such policies.

I had a person come into our office last week looking for a job. He was bringing with him large laminated pages of a major newspaper in Ottawa. I couldn't figure out why he was doing this. As it turned out, the man had been a reporter with this paper for a number of years. He has a PhD. He's out of a job.

We started talking. I said it was unfortunate we hadn't had his help. He was willing to volunteer, because we were doing a piece on workfare. He was then forced to admit to me that he was in fact on welfare.

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I do not know what mandatory workfare will do for this man. I don't know what kind of program Mr. Harris will be able to provide. I just know that this man's dignity has certainly been attacked and I'm very fearful for his future.

We're already seeing cuts to welfare. Without national standards, without the leadership we still so desperately need from our federal government, we are seeing the impact of 20% cuts in Ontario. As we speak there are people in the Ottawa-Carleton region right now who are looking for cheaper places to stay. They can't afford their rent any more.

I also want to point out that Janice MacKinnon, who is the finance minister of Saskatchewan, told our organization last May it was clear they could not maintain current welfare rates because of the impact of the incoming federal cuts.

The effects are also being felt on kids and child care spaces. Again, as a pretty graphic example, my licensed daycare provider pleaded with me this morning to try to find her another child. She was slated to have a child come into her program at the end of the month, but the parents had to rescind because they cannot afford the fees without any kind of subsidized support.

Here is a good example of that hardworking Canadian family. Without that extra income she will certainly have more difficulty. At the same time, her husband has had his wages unilaterally slashed from $8 an hour to $6 an hour.

These are the hardworking Canadians we are talking about. You have to know that the policies and programs you put in place in the budget have ripple effects. There are not just direct effects but also a number of indirect effects on people.

We are also seeing an increased demand at food banks. I spoke to Gerard Kennedy from Daily Bread Food Bank in Toronto and went to see its warehouse. It has about three days' worth of supplies left and it has clearly done the research that says when these cuts come into effect demand will double. Gerard has no idea how it will be able to meet the demand.

A report yesterday stated that the shelters in this area as well as in others are bracing themselves for an increase in their numbers.

I know this last budget was about choices and tough choices, but I also want to move on to inform you, if you're not aware already, that a number of groups are concerned about budgets and are trying to seek alternatives. There are about 40 groups from various churches, unions, and social justice organizations across Canada that are embarking on year two of what we call the alternative federal budget.

The premise that underlies the budget is that a budget embodies choices and the choices that are made reflect the political values and priorities of the government. In other words, a budget is a tangible expression of a political vision.

I would hope we are going to do this year after year after year. We recognize that the debt and the deficit are important and we deal with them within the budget, but we feel there are credible and tangible alternatives to the kind of budget we unfortunately had last year. I would invite any members who wish to have more information or who wish to participate in some of these meetings to do so. We'd be happy to accommodate you.

I hope the discussion later this afternoon and this evening will give us an opportunity to not only look at the expense side of the equation but also to go back to the revenue side. There was a 7:1 ratio last year. I think you will find many groups, including ours, will reiterate our request to look at revenue generation. If this deficit and this debt are so important and have to be dealt with, it seems to me that all prospects for revenue enhancement have to be looked at.

You might wish to ask Jocelyne Bourgon, the Clerk of the Privy Council, to come to present her views to the finance committee. She made a speech at the Governor General's study conference in Saskatoon last May, and I think she made an eloquent plea to look at new types of revenues. She talked about the prospect of a technology tax.

Since our manufacturing base is being eroded and we are moving into different types of economic activities, I thought she had some very interesting ideas about looking at taxing other forms of economic activity. While I don't have all the details, I would certainly invite you to speak to her.

I hope we will also have an opportunity to talk about the redistributive role of government. Our fear is that we had a period of unprecedented economic growth last year, and yet no significant decrease in unemployment. There were also cuts in social programs.

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I've heard some people here talk about the prospect of a recession. That, of course, makes our organizations and the people we represent even more fearful. Recessions represent more unemployment, and with the prospect of fewer programs of income support we are very fearful we will have the Canadian workforce right where we want them - fearful for their jobs, fearful for their future and willing to accept low wages and insecure working conditions.

Finally, I would just like to point out that

[Translation]

1996 has been declared by the United Nations the International Year for the Elimination of Poverty.

At the Social Development Summit held in Copenhagen in March, Canada and many other countries committed themselves to implement concrete and specific action plans to fight poverty in each of the participating countries.

I might also remind you that in 1993, the previous government was severely criticized by the United Nations for not having done enough - given its many resources - to eradicate poverty.

We still hope that the 1996 Budget will allay the fears of Canadians by presenting specific job policies and specific policies to fight poverty in Canada. Don't forget that 4.8 million Canadians live below the poverty level, including 1.5 million children.

The Chair: Thank you, Ms Toupin. We are all looking for tangible measures to help the private sector create jobs.

[English]

Who would like to start? Obviously we have no unanimity of views at the table. We have those who have stressed that we must go even faster than the current course we're on to reduce the deficit, and those who have very eloquently told us some of the consequences in human terms of where we are today.

Maybe you would like to start, Mr. de Bever. I am sure there were certain things in Mr. Bromfield's suggestions that you might not agree with in terms of monetary policy.

Mr. de Bever: I'm not sure that's why I picked a bone.

The thing that struck me about the dichotomy in this discussion is that when you talk about cutting deficits you always come across as the bad guy who doesn't have a heart, who doesn't have compassion.

My profession was originally called political economy. It's also about distribution of income. I think it's a more appropriate name.

Even if you have compassion, the fact still remains that if we go on this tack, governments become less and less powerful as time goes on to do the kinds of things compassionate people would like them to do. My reason for wanting to go faster than we are going now is exactly that. If we arrive at the next recession with government even less able to deal with the issues that are important to us, have we really done ourselves a favour by not cutting back?

The fact remains that in aggregate we are spending 4% more in this country than we're earning. We have an artificially inflated standard of living, so somewhere in the system we have to cut back. We can argue how we should distribute the cost of that 4%, or the pain of that 4%, but we have to do it. We have to do it quickly because, as a number of us have pointed out, we have been promising stabilization and decline in debt to GDP now for the last 10 years and they haven't happened. The consequence of that over time has been a consistent rise in the real rate of interest that we pay on that debt because, as the debt stays higher for a longer period of time, there is less and less confidence that we will eventually do something about it.

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So, far from being heartless, the reasons why you should support some of the proposals for deficit reduction and debt reduction are exactly that - that you want to create a government that in the next downturn or ten years from now will again be in a position to do what governments are supposed to do rather than be an elaborate board of debt management.

The Chair: Who wants to pick up on that?

Mr. Frank: I have the same sorts of sentiments, particularly in terms of the remarks of Ms Toupin, but I'm very troubled by the point that is made about the distribution or the redistributive role of government. I'm a child of the 1960s, and at that point I was much more of the view that the political system could in fact manage itself over business cycles and that we would all be better off as a result of that. In the face of the record of the past fifteen years, I've sort of lost faith in that.

I have personally been paying very close attention to this issue for at least a decade. I've looked at every provincial and every federal budget in depth. There have been literally hundreds of tax increases in the last decade. There have been literally hundreds of so-called expenditure-control expenditure cuts in the past decade.

It hasn't worked.

I guess the reality here is that we've learned a few lessons. I think the general public has learned a few lessons. From my perspective, here are some of them.

One is that we cannot grow our way out of this. I used to believe we could, but I don't think that's the case now. The structural problem is very deeply embedded in the system, and now we've added on top of that a debt stock that's 100% of our income, with, frankly, no prospects of meaningful reduction.

Judy, I'm very sympathetic to your point that this has to be more focused on the stock, but let's take one step at a time. It would be fine to get the deficit to zero and then talk about reducing the stock.

The second thing is the magic of compound interest. The bottom line here is that we have too much of our debt held offshore and too much of our debt held even by Canadians. To suggest that we have an option of not paying our interest costs is to fly in the face of the consequences of that, which would be horrible for us. So the interest costs are going to get paid, and they get paid first. That's of course where governments, because they have such a power in the marketplace that they can capture whatever resources they need because they can pay fairly high interest rates, will always get first dibs on available capital. But the cost will go up - and it has gone up.

A third lesson of the 1980s is that incrementalism will not work. This problem will not get solved by marginal tinkering. As I say, there have been hundreds of tax increases and hundreds of expenditure cuts, but we still sit, as I showed you, with a deficit this year of $45 billion to $46 billion.

By the time we get to the year 2000, Canada and the provinces will have run deficits for thirty years straight. The challenge you face here is not further tinkering; it's a complete structural reform. This is why it's going to touch everybody in our country.

Redistribution is very much front and centre in the issue of how this is going to get resolved, because the only other option is to raise the taxes of the people who are working. If you're going to pay more to those who are not able to support themselves, then you must raise taxes to those who are working.

If they raise taxes, then very few governments in this country will survive another election. I think that is the reality.

So with that sort of editorial comment, it's very problematic.

Dr. Elton: One could get a little bit pessimistic about this process if one just followed Jim as far as he went. However, I don't think that's necessary, because in the last seven to ten years, starting in the late 1970s with people like New Brunswick and Manitoba and more recently with late-comers like Saskatchewan and Alberta.... We have examples out there, Jim, of governments that have instituted the fundamental restructuring that's necessary. When one starts talking about doing away with hundreds of school boards, as has been done in each one of these provinces - not a few, but moving from 150 down to 45; that order of magnitude - it isn't taking place just in Alberta. Indeed, Alberta is the Johnny-come-lately to this process.

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If one takes a look at what McKenna was doing in New Brunswick in the late 1980s and what Filmon was doing in the early 1990s in Manitoba, it's there. The format as to how one goes about doing this is there. It's in place. The problem is we have not yet had the national government learn from the lessons of those provinces. They all take basically the same approach.

This isn't rocket science. It's very practical reduction of expenditures through restructuring, through sending messages, through the public service and through the use of the media. First and foremost in every one of the examples of these governments that have made fundamental change, it has started at the top. It has been through a dramatic commitment by the leader and then his involvement directly in worrying about such simple things as cabinet ministers' expense accounts and whether or not there's pop in the ministers' offices. It gets down to those kinds of things.

That sounds very silly, and in and of itself it probably is, but what it does is send a message through the entire system that business will not go on as usual. It's one of the fundamental things you find in every one of those provincial governments' restructuring processes.

The Chair: You'll note, David, that we have no free coffee in the finance committee.

Some hon. members: Oh, oh!

Dr. Elton: I'm a water drinker, thank you very much.

Ms Maxwell: First of all, I think it's important to recognize the importance of what a number of provinces have done, and I think David is quite right to highlight the way in which, in some provincial governments, there has been a sea change in the whole notion of what governments are there to do.

Although we don't have really good, concrete, in-depth research projects that compare those provinces, you can see there are quite strong differences in the ways in which the new regime has been implemented. Although in substance it's been a similar process of reorganizing the way health care is governed and the way school systems operate and so on, in some provinces this has been done by a New Democratic Party government or by a Liberal government with an effort to deal with the kind of social cohesion issues I raised earlier, and in other cases there's been much more of what we in the east have come to call the slash-and-burn approach.

The jury is out at this point as to whether or not slash-and-burn might somehow be better because you get there faster, but in terms of the depth of the revolution in the way governments are structured, that shows up across the board.

The federal government has certainly started in this direction with the last budget, and I don't think anybody should underestimate the dimensions of those changes. Presumably work is now under way in furthering that process at the federal level.

There's a couple of additional comments I would make about a couple of things that have not been mentioned in the discussion so far.

Be careful when you talk with pessimism about the rate of job creation. If you break down the employment statistics, what you see is that although it's wavered recently, there has been significant job creation in the private sector, but there is this process of restructuring in the public sector, which leads to job destruction in the short run at least. In fact we have some counterweights in the Canadian economy that are helping Canadians to absorb the shock that comes from the public sector.

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The private sector has been through a very rugged process of restructuring, which was painful in the earlier part of the decade. It's probably a good thing the two were not totally synchronized, but the point is there are other forces in the economy that are helping us along at this point.

The other issue that hasn't been mentioned, but one on which I have strong views, is the question of the wage freeze in the federal public service. I believe what Canadians want is accountable and efficient government. I don't think you get accountable and efficient government with wage freezes across the board that go on for more than a year or so. It goes against the whole notion of what we're aiming for, which is to rethink the way services are delivered, to rethink who should deliver them and to actually begin to rethink how work is done in the public sector.

You can abandon the wage freeze and still have pretty rigorous controls on the total cost of compensation in the public sector. I think that responsibility should be delegated to the senior mangers in agencies and departments. But the overall impact of continuing the freeze, which I think is now into its fifth year, is to discourage efficiency, to discourage performance and to actually encourage the best of the public servants to leave and go elsewhere, where they can be better rewarded for their work.

The overall effect of wage freezes is in the wrong direction, towards inefficiency.

The Chair: Thank you.

Cheers from those public servants who are with us here today.

Tom Hayes.

Mr. Hayes: I should start by thanking Rose for renovating her house in Nova Scotia. We not only welcome the impact she's had on the local construction industry, but we also welcome her as a volunteer, because we sure need more of those at all levels.

I would agree with David. I'm distressed at the inability to reduce the operating deficit, and beyond that, what do we do with the debt? But I think the provinces, particularly in Atlantic Canada, have made some real progress and are setting some good examples. I know New Brunswick had led the way, and I think the others are following.

This has not been without pain, but it does inspire a sense of confidence in the private sector when they see politicians who are prepared to make some really tough and difficult choices in dealing with those kinds of problems. I'm a bit encouraged by that.

Over the years, every time they talked about tinkering with the trucking subsidy - I think it's called the Maritime Freight Rates Act - there was a great hue and cry from the manufacturers and so on. I'm a manufacturer in Atlantic Canada. This year that act and the subsidy were eliminated in one step, and there were no riots. People just accepted that these are the kinds of things we have to somehow live without. Certainly in my own business it has had a direct impact, but I have to live with it. We will deal with it and we'll find ways of living beyond those kinds of things.

I do share the concern of Judith about how quickly we get there in the slash-and-burn approach, because I'm not sure we really know what the outcome of that approach will be in terms of any hard data and research. It took us thirty years to create this mess and I don't think we're going to eliminate it overnight.

The Chair: Thank you.

Both David and Leo, you've suggested we don't have a firm enough timetable for elimination of the deficit. Do you have specifics on what you recommend?

Dr. Elton: Yes, absolutely. Let me go through the different experiences.

If you take a look at New Brunswick, when the McKenna government came into power, they talked about the need to restructure government but did not set - In conversations I've had in the last few days with people in New Brunswick who were involved in this process, they said the government couldn't see far enough into the future to think about when they would be able to establish - They didn't talk about a balanced budget until they had been into the process for two or three years. But then they did set a goal.

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When one takes a look at Saskatchewan, when one takes a look at what Mr. Harris did yesterday, when you take a look at what Mr. Klein did in four years, there is a general pattern there. I was involved in many discussions where we urged the Premier of Alberta to set a three-year goal. He refrained from that. He said no, we won't set a three-year goal, but we will set a four-year goal. When you look across all these provinces that have been involved in this, they all basically come down to that four-year-plus goal in saying it is at that point, within a four-year period, we will have a balanced budget.

In Alberta's case, because of extraordinary revenues from oil and gas and so on, they made it within three years. They are the only government in this country that is projecting a deficit and running a surplus. But that is an unusual circumstance.

My answer to you is yes, four years. That seems to be what has worked for people who have done the job.

The Chair: That is four years from today?

Dr. Elton: I would have preferred it four years from 1995-96. But we are talking about the 1996-97 budget. I would say it is a realistic goal to say you can balance the budget in four years. The experience shows that.

The Chair: Leo.

Mr. de Bever: We are taking it down roughly at $5 billion a year. I would say once we get to $25 billion, which is the 3%...keep going at that rate...and perhaps using the 1997 renegotiation of some of the agreements of the provinces to speed it up.

I disagree with the comment that merely transferring the problem to the provinces doesn't resolve the problem. As a first take that is true, but take health care, for instance. I know the federal government is opposed to backing out of that because of national standard issues. But it is clear that sector is not going to get along without a new infusion of cash, and it is pretty clear the public sector is not going to provide it. So the alternative has to be more experimentation. I think it would be much easier to have that experimentation if the provinces were more or less in control of the agenda to try various ways of dealing with the very complex issues that exist there.

The short answer to your question is I would take it down $5 billion a year, despite the fact that, as I have stated, it is likely that during that period you are going to be close to a recession or in it.

The Chair: That would mean a balanced budget by the fiscal year 2001-2002.

Mr. de Bever: Right.

The Chair: Mr. Bromfield, you were very cautious about us making any cuts for the fiscal year 1997-98. Why was that?

Mr. Bromfield: I am concerned about a couple of things. First of all, when we discuss some of the accomplishments of the provinces, perhaps the best time has passed for this already. I am harking back to some remarks that were made at this committee last December, when economic growth was running at about 5% at an annual rate. Some people mentioned that now was the time to cut more deeply, because the economy was growing so robustly. Unfortunately, even in the six- to eight-month period we have seen that experience can be lost very quickly, as we have seen in the second quarter of the year.

There is a reason for that, though. It is because we are seeing that the policies of the Bank of Canada and the fiscal actions of the Government of Canada and the provinces are not without their effect. The years of the Bank of Canada focusing entirely on inflation targets and fiscal authorities focusing their effort on deficit reduction have had the expected effect on personal consumption and domestic demand in Canada. It is not surprising that we are seeing the weakness in the economy now. To ignore the linkage between further deficit reduction and the effect it might have on the economy I think would be a mistake, especially given the poor starting point we have right now compared with last December.

The other point I would make is that when you examine the budget documents, they talk about their underlying deficit and the actual deficit being 3% of GDP, incorporating this reserve fund or contingency fund. So if you actually hit your targets in 1996-97, the deficit-to-GDP ratio will be 2.7%. We expect that it will decline to around 2.2% in 1997-98 in the absence of any further action, given the restraint that's in place on transfers to the provinces that have already been mentioned in previous budgets.

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So I think we may well be in line with the four-year target of deficit elimination, even with no additional action for the 1997-98 fiscal year.

The Chair: We've won the battle.

Judith Maxwell.

Ms Maxwell: I feel we're kind of pussyfooting around some of these issues here. I think Leo's right in saying that we need a lot more experimentation with different ways of doing things. We have to recognize that to reach these kinds of goals, whatever target is set, whether it's over four years or longer, we really have to break the old mould. We can't go on doing things the way we've done them for the last twenty years.

You need to look at each block of programming or each envelope of public sector activity and figure out a better way to do it. Often that may mean having two levels of government get together to decide who should be doing what and to make some administrative agreements. It may mean that both of them will deliver their services and get a specific clientele through the same office, or it may mean that one level of government will back out and basically delegate the responsibility to another.

The equivalent in the federal context of getting rid of all those excessive school boards is perhaps difficult to interpret and put on the line here, but the point is that you have to get at more of the micro-workings of government and figure out what should be delivered and then how best to deliver it. It's likely to be in quite a different fashion from what we have today.

The Chair: Rose.

Ms Potvin: I think the first comment was made by Filip Palda when he talked about perhaps asking Canadians on the income tax form how they would like their money to be spent.

I would have some trouble with that, regardless of what their answer is. That isn't the point; it's the process I'm commenting on. The reason is that, first of all, Judith just finished telling us that with the research they've done it looks as if Canadians do want an efficient, effective government, but they also want one that is compassionate and cares about Canadians and takes the lives of Canadians into concern.

So we do already know that. The minute you get two statements like that, then what do you do with them anyway? You still have to go off in several different directions.

I think what happens at any election is that a mandate is given to a particular government to demonstrate leadership. You're given four or five years to use that time well, to look after all the issues you promised you would do.

If you look at Frank McKenna, I think the one thing he's done over and above everything is demonstrate leadership. He's gone along with the briefcase under his arm and talked to different people and encouraged business. He's really taken it on himself. He's taken all kinds of criticism and he's said, so what? This is my job, this is my mandate, I have to do it, and I'm going to do it.

That kind of leadership has to be demonstrated more strongly than it has been before. People follow those kinds of leaders a whole lot more quickly than ones who appear to be ambivalent.

In the last budget, certainly in our sector, we did see where there was a fear of leadership. We went before the finance committee and said, listen, you have to come up with a plan and a policy for funding of the voluntary sector. You can't just try to drop everybody by 10% or 15% and keep everybody a little bit happy and a little bit sad. In fact, that's what you did. There was no plan, there was no paper, there was no policy, there was no discussion. It was 15% across the board.

If that's what's happening in these other areas, then that's a lack of leadership. Hard decisions have to be made. They have to be made with the views of Canadians in mind, and that is compassionate and effective. Otherwise, move on. We'll tell you how you've done in two years' time.

The Chair: Thanks, Rose.

Mr. Palda.

Prof. Palda: I have just a brief comment on that. I don't think there's a contradiction between my suggestion and a compassionate government. Compassion means that one person knows what he is doing for someone else. A tax form where you have more control over how your tax dollars are spent will, if anything, bring Canadians closer together.

.1705

Sociologists and psychologists have studied the fact that people are becoming apathetic about giving money and that charities are less subscribed to because those people feel they've lost control over their money. They don't see the link between their own actions and someone else's welfare.

I will now take a 90-degree turn to comment on the issues of forecasts and forecasts for deficits. When you hear experts saying that the interest rate is going to be 6% or 7% next year or that the growth rate is going to be 2% or 3% next year, I would advise you to discount those estimates simply for reasons of safety. If someone says the growth rate is going to be 2.5%, imagine it's going to be 1% for your planning purposes. If someone says the interest rate is going to be 6%, imagine for your planning purposes it's going to be 8%.

When you're making decisions based on these quantities, you're taking risks with the finances of the Canadian people. When you're taking risks, you want to minimize the worst possible outcome. People do not like risks. People do not like bad outcomes. Bad outcomes hurt more than good outcomes help. I add this cautionary note that the estimates on which the budget is based should take the worst possible situation into account.

The Chair: You don't trust economists.

Prof. Palda: I certainly don't. I am one. Do you think I'll trust them?

This is based on suggestions that economists make. Bad outcomes hurt more than good outcomes help. If the bad outcomes will have that effect, you have to be extremely cautious in your estimates. It doesn't mean that you throw the estimates out. But you do adjust them.

The Chair: A word of caution, Jim Frank. Do you agree with his assessment of the economists?

Mr. Frank: I'm always tempted when I hear people ask what the economists say to ask what they want to listen to.

People have to have some frame of reference for looking ahead. At the Conference Board - as elsewhere, I'm sure - we made an enormous effort to do the very best we could.

I don't think the fact that we are wrong quite regularly in terms of the details undermines the need to do that work. Every organization makes budgets and every human being plans about the future. Sometimes those plans turn out and sometimes the course is changed in mid stream. I would be extraordinarily nervous about a government saying it wouldn't do anything other than taking the worst possible scenario and basing the budget on that. I think that government would have very little credibility in very short order.

Here is my perception. We have watched over many years. The government has done a good job of making its forecast quite airtight over the last couple of years. In our view, the forecasts have become much more reasonable and accurate.

The Chair: Do you agree with the proposition put forward earlier that we should be looking at reducing our deficit by about $5 billion a year, which means it'll be early into the 21st century before we have a balanced budget?

Mr. Frank: I'm not sure $5 billion is the right number. It has to be a fairly large number. In this fiscal year, you're running at $32 billion, so if you took $5 billion a year, that would be six years.

The Chair: We have promised $32 billion for this year and $25 billion for next year, which is a cut of $7 billion. We want to know where we should go from there.

Mr. Grubel (Capilano - Howe Sound): Mr. Chairman, this is a technical detail. Isn't there any growth in revenue over the next few years when you cut $5 billion each year? Is that what you're talking about?

Mr. Frank: Yes. This is net of revenue and expenses, Herb.

Mr. Grubel: Is that what Leo meant?

Mr. de Bever: By cutting the deficit by $5 billion you'll have revenue growth, but there will also be growth in programs you already have in place. You must do something about the growth rate in those programs, which are primarily transfer programs. But I'm talking about a $5-billion cut from the $25 billion that we expect to achieve in, what? Next year?

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The Chair: In 1966-67.

Mr. de Bever: Right.

The Chair: Well, 1996-97. I'm a child of the 1960s; I'm sorry.

Mr. Grubel: That's off revenue gain. I just wanted to clarify it.

Mr. de Bever: Right.

This has been a depressing meeting so far in the sense that we all seem to think that this problem's pretty big and there's no way out. I would generally agree that economic forecasts have to be conservative, particularly when you do budgeting, because of the asymmetric fiscal risks, as I mentioned earlier. However, there is also a risk of arguing your way too deep into a depressing situation.

Ultimately, part of the pay-off from what we've gone through in the private sector in the last five years has to be an increase in the capacity of the economy to grow. In many sectors it's already apparent. It's the changing of gears that is producing a lot of the low-growth numbers that we're dealing with now.

We should probably be a bit more optimistic than I sense we are here today, in terms of expecting our ability to grow because of productivity to be larger than it was over the past ten years. So while I don't disagree that 2.5% or so is about the top for which you could plan in terms of economic growth, there's reason to believe that growth rates over the next ten years will be somewhat higher than what we've seen over the past ten years.

Mr. Frank: I want to come back to the issue of what happened in Atlantic Canada. I am not trying to imply here that little progress has been made in changing the structure of spending within any of the provinces. Clearly there have been some successes in getting their deficits turned around. I would simply draw your attention to the fact that in the last five or six years every province has had its credit rating downgraded, and there's nothing like a downgrade to cause you to pay some attention to your fiscal issue.

The highest debt-to-GDP ratio in Canada among the provinces is in Newfoundland. It's 45%. It's not surprising that Mr. Wells brought down a very restrictive fiscal policy in the last couple of years.

The second highest debt stock is in Nova Scotia, at 40%. These are current numbers. This is not forecasting. This is the reality now.

New Brunswick is at 36.6%. The next one is Quebec, at 34.5%.

These are large fiscal problems, large debt stock problems. The bond raters have spoken on this. All of the leaders simply had to recognize that they had to move very quickly, and of course they have. This has not been as obvious at the national level, where there has been no downgrading of our sovereign debt. In any event, I wouldn't expect it in the near term. That's the only place where we haven't had a downgrading.

Dr. Elton: Wait a minute. Didn't Moody's have something to say about that a few months ago, Jim?

Mr. Frank: Yes, Moody's downgraded a couple of percentage points of our national debt that's denominated in U.S. currency. I don't know why they did that downgrade. It's an accounting exercise. The Canadian government holds those balances. They could hold them equally easily in Canadian dollar terms. There was no downgrade of Canadian-dollar-denominated sovereign debt.

The Chair: You're right. Moody's made a big mistake.

Dr. Elton: It seems to me as if in this discussion an assumption is being made that, as one dramatically cuts government expenditure, somehow it has a negative impact on jobs, and that one cannot find reductions in government expenditures in the same jurisdiction where one sees jobs increasing at the same time. The facts do not bear that out.

If one looks at Alberta, which from 1993 to 1995 had the most dramatic cuts, proportionately, that any government in this country has ever made, there was an increase of 62,000 jobs in Alberta during that period. In Saskatchewan, where initially there was a drop, if you look at it over a two-year period there's an increase of over 3,000 jobs. If one takes a look at Manitoba over the same period in which they were doing it, there's an increase of 10,000 jobs in total.

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It's not necessarily true. Indeed, the data would suggest that one can dramatically restructure and make government more affordable at the same time as you create jobs.

The Chair: Lynne Toupin.

Ms Toupin: This whole discussion about accelerating our path towards a zero percent deficit is scary. I would just caution that at the very least the finance committee should try to find some independent mechanism that can look at the impacts of the cuts that are being made year after year. Call it a social audit, call it what you will. Provincial governments have in some cases been very remiss about telling us what are the real impacts of cuts from a community perspective, from a human perspective.

I would also argue that the last round of cuts disproportionately affected a certain proportion of this population and did not really affect upper-income earners in any way, shape, or form. If we're going to take a hit again, I would caution that it has to be a fair hit. There's a growing sense of dissatisfaction among many people that this deficit is not being dealt with in a fair manner; that we are asking certain sectors of society to bear a disproportionate brunt of the load.

When we talk about jobs and job creation in relation also to deficit reduction strategies on the part of provinces, there are two things. One is we know they're not keeping accurate numbers on people moving out, people going off welfare - on where they're going. Alberta is an example we can cite.

The other thing is we have to be careful about the types of jobs that are being created. Maybe 60,000 jobs sounds good on the surface. But if you're part of a family and you have two kids, the job that is part-time, part of the just-in-time strategy at $6 an hour, isn't going to cut it. So again, let's be careful about what kinds of jobs we are creating. While 60,000 sounds good, I would suspect some of these are not jobs that allow for families to sustain themselves.

The Chair: Tom.

Mr. Hayes: I just want to come back to what David said, because I'm not sure I followed the relationship between major cuts by governments and how that turns into job increase. In Atlantic Canada, an area where unfortunately over the years, and in certain provinces in particular, we've become very dependent on government spending.... Certainly one would expect as we cut back in those areas it's going to have a dampening effect on the economy.

We haven't talked much about inflation today, but it's one of the reasons...I'm not an economist, but I don't have a particular concern about inflation for the next few years, because I'm of the view that we're only starting now to feel the impacts of all the cuts that have been announced. Really, they're only beginning to be felt at the ground level.

But I'm not sure, David, I really understood that relationship.

Dr. Elton: I wasn't arguing that there's a necessary and sufficient relationship between...there was a causal link there. I was simply saying that to make the argument that government cuts necessarily reduce the community's ability to produce jobs isn't borne out by some of the data we have.

It's very true - and Geoff would be the first one to point this out to me, I'm sure - you're talking about those years in which there was phenomenal growth in the economy, and that may very well explain the job growth much more than any relationship to deficit cuts. But I think that simply reinforces the need for governments to reduce their expenditures dramatically in the good years, which hasn't tended to be done. That's one of the big problems we're facing now as we go into the 1996-97 period and the business cycle Leo was talking about. It's going to be much more difficult to do it.

The Chair: Rose.

Ms Potvin: Two very quick questions. First of all, I read in the paper a week or two ago that the government earned $1.9 billion or something in the sale of PetroCan shares. Is that figure close? Where has that money gone - to pay down the deficit directly?

The Chair: I'll answer that question later, but no, money that goes into the coffers does not get earmarked. All of it helps us.

Ms Potvin: But were you counting on that $1.9 billion in this year with your...?

Okay, we were, so it's not new.

The other question is that when Jim Frank was giving his comments at the very beginning, I thought...and maybe I misunderstood that you were saying something to the effect that job creation, or maybe spending to create jobs, is not going to help us with this deficit problem we have. You mentioned something about jobs that seemed to dismiss them as a way of getting us through the problem we have right now with the deficit. Nobody is really speaking a whole lot about job creation as a way of getting us through this morass, and I'm just wondering why it isn't one of the ways. I thought you dismissed it.

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The Chair: Who will rise to the challenge of how we create jobs? We all recognize that the unemployment level in Canada is unacceptable.

Mr. de Bever: You have to make it attractive for people to be hired. By most counts, part of what's different about this business cycle compared to the last one is that in the last one we started out with relatively low wages and relatively high interest rates and this time it's been the reverse, which has caused a lot of employers to opt for technology to reduce their unit labour costs. If you want more people to be hired, then the relative cost of hiring people has to come down.

That may be perceived as solving the problem on the backs of the unemployed, and I suggest maybe we can address some of those issues through the kind of negative income tax provisions that have been kicked around lately. But the fact remains that no employer is going to hire someone if he cannot make more revenue from that employee than he's paying out in wages. I think that's part of the reason that employment growth has been so weak.

The Chair: Lynne.

Ms Toupin: I think you have to be very careful about moving towards a cheap labour strategy. Through its years with Thatcher, England had a lot of experience with that.

There's an interesting study that's come out recently that has indicated that in fact with this whole notion of a just-in-time workforce, low wages have actually led to lower productivity. They've gone around the loop, done away with minimum wage rates, reduced their programs, and we are now seeing the impact and the effects of this kind of policy.

So again, I would caution people that there are other countries that have taken this route we are going down. There is going to be a cost to pay in terms of productivity. They are saying that if people are not committed and there are no training dollars, it's a danger.

The Chair: Thank you.

David.

Dr. Elton: I would suggest, Mr. Chairman, that you take a look at the experience that Manitoba had in the early 1990s.

They addressed this issue directly and it wasn't necessarily with a cheap job strategy, Lynne. It was reducing the labour burden that was imposed on employers by government. They reduced payroll taxes. They reduced the price of diesel fuel, for example. Manitoba is now the centre of the trucking industry in this country. That isn't by chance. They provided incentives by reducing the burden of government on employers, assuming that would result in jobs. The evidence suggests that it does.

The Chair: Thank you, David.

Judith Maxwell.

Ms Maxwell: I think we're all still groping for what the new philosophy around job creation is. A lot of us grew up in the 1960s and are still struggling with that. So all I can do is quote some anecdotes here that make me more optimistic about the capacity of people to either create or find jobs for themselves or for employers to create them. It all has to do with getting the signals right, getting the incentives in the design of existing programs correct.

In the self-sufficiency project that the federal government is financing in New Brunswick and British Columbia, sole-support parents who have been on welfare for a year are given an opportunity to get a supplement to their income if they can find a job where they work at least 30 hours a week. The supplement is quite considerable. It makes a genuine difference in the standard of living of that family.

What is very interesting is the high percentage of people who are selected for this program who do find jobs, and they are jobs that are well above the minimum wage. As I said, they are in southern New Brunswick and the lower mainland of British Columbia, which are two quite different economic regions. But with the incentive there not only to get the income from the job...but they get this supplement, it made a significant difference in the behaviour of those parents, most of them being women. I'm sure that all of them are making a difference in the way in which they are going to work out the rest of their lives. This will be the test within this research project.

.1725

I have another anecdote. I had a visit today from a consultant who specializes in the questions of compensation policy and organizational change. He was saying that his business is growing at a dramatic pace and he would hire five people today if he could find them. He has been looking for two years, but he has not yet found the right people to add to his business.

So the question of skills matching is still a really important one.

Finally, I originally came from Atlantic Canada and when I was visiting there last summer I heard of two cases of small franchise types of businesses that wanted to locate in Atlantic Canada but could not find a committed workforce that would be there for them all year round. We all suspect that this has something to do with the existing structure of the UI system, because certainly there are very large numbers of unemployed people in Atlantic Canada.

Therefore the signals from the existing program are wrong.

There need to be signals that will encourage people to think in terms of committing their lives to the full-time jobs that could be there if the right combination of the business opportunity and the willingness of the workforce were there.

Prof. Palda: Just a positive note for the people who don't like spending cuts: the government controls more resources than actual cash, and it controls those resources through its regulation.

Last year that was part of the budgetary platform. There was a lot of talk about paring back regulations.

If you want to look at creating jobs, then you could look at the kinds of regulations that make it difficult to hire and fire workers, that mandate safety standards -

Alice Nakamura, an economist at the University of Alberta, has found that one of the reasons why Canadian businesses are going more and more towards machines is that the cost of labour is artificially inflated through these regulations. So these are incentives that the government can change.

Another big incentive you could change is going from the type of tax system we have now to a flat tax system. They're talking about it in the States. If they go through with it there, then it's going to make people more eager to work and to invest, and we're going to be trailing again if we don't move fast there.

Mr. Hayes: Certainly our experience in Atlantic Canada in the past number of years indicates that government alone is not the answer in trying to generate wealth and jobs.

We've had many high-profile stories of trying to attract large multinational firms to the region, with disastrous results. We have to rely more on our local people with home-grown talent, entrepreneurs who have a vested interest in making the region successful.

One specific initiative is taking place or is under discussion in Atlantic Canada at the moment, which I think is a quite unique approach. It involves the establishment of a privately run venture capital fund called the Atlantic Investment Fund. It would see the partnering of both levels of government with the banks - the federal government, the four provinces, and seven banks - to establish a fund that would make available equity, patient capital, to Atlantic-based companies that require that type of investment to grow their businesses. While it's not a done deal, it's very much under discussion, and I think it's an innovative approach involving not only government but the private sector, specifically the banks.

That's an example of something that I think will be very positive.

Mr. Frank: On the jobs issue, I would like to put two things on the table for you. One that has always impressed me is that when I look at myself, or anyone else, the only thing I have to sell is my time and what I can do that someone else wants to pay for. That's a function of my -

The Chair: I had better issue a disclaimer right now. We're not paying for your time today.

Mr. Frank: No. I understand that. Actually, I sometimes feel as if I'm paying for your time, when I pay my taxes every two weeks.

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The Chair: You are, and I thank you very much.

A voice: We want a raise.

Mr. Frank: Right on.

It's the skills and abilities of people to do things. One of the big issues or concerns I have, and I'm involved a lot in education, is the level of dropouts in the school system. It is a major disaster in our society that we have such a large number of students who drop out of high school. There's always an exception to the rule, of course, but rarely do these folks ever come back into the system in a big way and gain the skills they are capable of gaining.

What allows or creates an incentive for young people to leave school? I think any government that is trying to get a grip on this has to press on that.

I'll give you one anecdote or one fact of life here. In the public school system now a student can decide to drop a course, take that course at summer school or take that course at night school. If you want to start talking about structural change, why do taxpayers now have to pay twice for something they are already paying for in day school? The idea was originally to allow people such as adults who wanted to go back to school to do so at night or in the summertime when it was convenient for them. This has turned into a system that allows day students to drop courses willy-nilly throughout the year because they know they can take them any time during the summer and at night. So Jimmy Frank pays twice for those people to go to school.

So the skills people acquire are the central issue. I don't think there is any exception there.

The last point is investment in Canada. We are a very competitive country. Our performance on the trade side, as I said earlier, is just stellar, and nothing can take that away from us. Why are we so good there? It's because we have top quality capital, top quality people, and we produce very competitive products.

Some of the things we have as advantages in Canada are twofold. We have a legal system that is very conducive to sensible resolution of legal disputes, or, to put it simply, we are not as litigious as our neighbour south of the border and therefore Canada is a more attractive place to invest. You can look at small aircraft companies as an example.

The second thing is our health care system. It is an enormous national competitive advantage for us because it costs us less to provide world-class health care to our people than it does our major competitor south of the border. These are just two things that I think are important. First are the skills people have and how they acquire them, and second is the investment climate, or, to use Leo's terms, we have to make it more attractive for people to employ people in Canada and invest here.

The Chair: Thank you, Mr. Frank.

I'm in your hands. Do you wish to continue or should we break now and have our informal, private discussions before we return here at 7 p.m.? I think the mood is to break now.

Before we adjourn, a lot of very important issues have been raised and touched on. We will have to return to some because they are very important to our future.

Thank you very much. See you at 7 p.m.

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PAUSE

.1911

[English]

The Chair: We reconvene our pre-budget hearings with our group of experts. Now we're going to begin the questions by the members of Parliament.

[Translation]

Mr. Loubier has a few questions for you.

Mr. Loubier (Saint-Hyacinthe - Bagot): I listened very closely to the first part of our experts presentations and I found there was something missing: Canadian corporate taxes. I did not hear any of the experts say that to improve Canada's public finances, we should perhaps scrutinize corporate taxes. And yet, from 1980 to 1987, for example, a number of Canadian firms made fantastic profits and did not pay any taxes. We do not know what happened after 1987 because the Finance Department stopped publishing those data.

In 1980, for example, 62,000 Canadian companies had made profits of approximately $10 billion and did not pay any tax on those profits.

In 1987 - I imagine the trend has continued over the past few years, but we will never know because the Finance Department no longer publishes the figures - 93,000 Canadian firms, with profits of $27 billion, did not pay any taxes.

There are two good reasons for this. First, those companies can defer their taxes. If those companies pay one tax dollar in five years, it will be worth only $0.68 based on a rate of 8%. So if a company owes the Canadian Government $10 million in taxes and defers that over five years, the company will in fact only pay $6.8 million in today's dollars.

There is also a second reason, which nearly all researchers now support. Companies can avoid paying taxes because of the tax treaties Canada has with so-called tax havens. The Canadian Chartered Accountants magazine recently published an article on how Canadian companies could save taxes and provided examples: Barbados, Bermuda, in sum, every country in the West Indies.

I wonder if Messrs Frank, de Bever, Elton and Palda couldn't answer those questions. I am not excluding the others, but when they spoke earlier, they dodged the issue of the wonderful world of corporate taxes, so perhaps they should be the ones to answer those questions.

The Chairman: Mr. Palda.

[English]

Prof. Palda: First of all, I'd like to disabuse you of the notion that corporations aren't paying tax or have been paying less tax. As a percentage of their profits, corporate taxes have almost doubled on corporations over the last ten or fifteen years.

There was a study done by the Fair Tax Commission in Ontario by the NDP government on these so-called exemptions that corporations benefit from. What that study found is that many of these so-called tax breaks or taxes that the corporations don't pay are due to losses in previous years that they carry forward to the present.

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That's number one. Another thing is inter-corporate transfers, where money is transferred from one branch to another. In other words, money is taken out of one pocket and put into the other pocket. In the view of the Ontario Fair Tax Commission, there was no severe problem of under-taxation of corporations. The last place you want to be taxing or increasing the tax burden on now is corporations.

Let me just add that corporations don't pay any tax. In the end it's individuals who pay the tax. I agree with the Carter commission of 1966, which recommended the abolition of the corporate tax and the integration of that tax into the income tax so that people could actually see how much tax they were paying.

Right now corporation tax is a very attractive tax because people don't realize. They say tax the corporations, get it from them. They don't see that corporations pay out dividends and pensioners live on that money. It's very hard to trace the path of those taxes.

I think this is why the Carter commission, for reasons of visibility - I'm pretty sure it was the Carter commission - recommended getting rid of the corporate tax and making sure that people see where their taxes come from. Simply on a factual level, the burden on corporations has been increasing in the last ten or fifteen years.

[Translation]

Mr. Loubier: There are two points on which I disagree with you. First of all, corporate tax rates have indeed increased, but the actual tax paid has not increased over the past 10 years. That is my first point.

Secondly, four Quebec researchers recently published a study which showed that of a sample of 767 businesses, more than 45% had not paid more than 20% in actual taxes over the past years, whereas the official rate was 45%. If 200 of those 767 businesses had been forced to pay a minimum tax rate of 20%, in 1992 alone, more than $700 million would have been collected. And that is for just 200 corporations. Right now, there are discussions going on in the United States on a possible tax reform to impose a uniform corporate tax.

Prof. Palda: Mr. Loubier, I will respond to your first point. The actual amount collected from taxes on profits may have dropped. That is because since 1960, corporate profits have been dropping. That has now changed. For a long time, the proportion of profits that went to taxes increased. The income derived from those taxes has dropped because the profits themselves have declined.

I am not familiar with the study you referred to, but the study by the Ontario Fair Tax Commission was based on a survey of 175,000 businesses. The purpose of the study was to determine why businesses did not pay taxes on their profits.

It was found that for approximately 11% of the profits on which no taxes were paid, the businesses had incurred loses in prior years and could defer those losses to the current year. That is one of the reasons.

There is another reason as well: 45% to 60% of those profits were non-taxable because the businesses transferred their profits to another branch. It's as if you took money from one pocket and put it into the other. So when people say there is a problem because corporations don't pay any taxes, you have to be very careful.

[English]

The Chair: Thank you, Mr. Palda.

Mr. Frank.

Mr. Frank: I have just a couple of points on that.

As far as tax havens are concerned, I'm not knowledgeable enough on the extent to which that in fact is occurring. I know there are anecdotes, but I don't have any basic information on it.

I'd just remind you that in the government of Mr. Mulroney there were major changes to the corporate income tax system in Canada. The goal of that was to ensure that the tax rates of corporations in Canada were equivalent to those in the United States in particular. The importance of that, of course, is that any country that has tax rates for corporations that are out of line with countries that are nearby, or could at least compete for investment, will lose investment. Canada felt it was important that its tax regime be roughly similar to what was going on in the United States. Otherwise we would lose business investment.

.1920

As to the statistics regarding corporations with profits in any particular year not paying taxes on those profits, it does have to do with loss carried forward and so on.

In 1989, for example, corporate profits peaked in Canada at $68 billion. They plummeted sharply to approximately $32 billion at the beginning of 1991. That was a drop of about $40 billion in a period of a couple of years. There were lots of companies that lost lots of money. In subsequent years - and this is what you're seeing now, of course - they took those losses that they had in the period of the earlier years of the recession into their current income and wrote off those losses. That's what explains that.

Whether or not the tax loss should be tightened up is a matter of public policy, and I wouldn't debate that with anyone here.

One other fact is that in 1995, Canadian corporations paid to the Government of Canada $12.8 billion in corporate income taxes out of total corporate profits of $63.7 billion, for an average tax rate of 20%. So that's the record as of right now.

[Translation]

Mr. Loubier: Here's the question I was asking, Mr. Frank. Mr. Palda, you haven't answered me. According to present tax law, when it's a matter of carrying forward losses, are they considered real losses? Are they real losses tied to production or are they tax losses? We read in newspapers - you've undoubtedly read them, too - that there are businesses that don't use their tax losses and that may sell them to other businesses. When there's a market for this kind of tax benefit transfer between companies, you have to wonder. When you ask people who can't sell such tax losses to others, in Quebec as in the rest of Canada, to tighten their belts, is it fair?

According to the latest statistics from the Department of Finance, $27 billion worth of profits were not taxed in 1987. We don't know what's happening now because this data is no longer published. We also see that the Canadian Chartered Accountants magazine suggests investing in Barbados because the actual tax rate is 2.5%. This leads to questions concerning what is real versus what is fictional in losses and the possibility that Canadian businesses may be shamelessly avoiding taxation.

I think it is our responsibility, Mr. Frank, Mr. Palda and others, as specialists, to open the door to a more in-depth analysis of our tax system. This hasn't been done in 30 years. Some aspects have been carefully scrutinized, but we haven't dealt with the real matters which are, on the one hand, the complexity of corporate taxation, and secondly, the fact that large corporations can hire tax experts to shamelessly bypass rules and, thirdly, the fact that it is beyond the control of all of us here, around this table, and even often of specialists.

Prof. Palda: I agree with Mr. Loubier as to the fact that the complexity of the law means that some may avoid taxation. That's why I suggest eliminating the corporate profit tax. This isn't something I'm inventing; it's something that's been talked about for 30 years. It's been said that we should integrate the tax, simplify it, because in the end, income and profits go to individuals. We'd have to find who these profits go to and tax them when they appear, as income, in the individual's pockets. In that way, we could avoid the complexity and all the irritation concerning taxes that may occur today.

The Chairman: Thank you, Mr. Palda. Thank you, Mr. Loubier.

[English]

Mr. Grubel, please.

Mr. Grubel: Thank you, Mr. Chairman.

.1925

I would like to make one comment and then ask two questions. The first one refers to what David Elton was saying about the Alberta and Saskatchewan experience, where tax cuts did not necessarily lead to reduced employment.

In June I was in Europe and I talked to an Italian economist. In typical Italian fashion he hasn't sent me the paper yet, but his research results are that when he looked at the historic experience of European countries - when a country had a serious problem with its government finances and it made dramatic cuts in spending to restore equilibrium, the effect was exactly opposite to what our Keynesian models are teaching us: they experienced a restoration of confidence among both domestic consumers and investors. As a result of this, instead of the economy slumping, it boomed.

On the other hand, in economies where we had the normal sorts of budget deficits and problems, when they cut spending we did have the expected reduction in consumer demand and employment. I believe Canada is in that case, where one reason why consumption expenditure and investment expenditure have not recovered is a lack of confidence. There are enough episodes of people we know who have already moved their money abroad or are having it liquid, asking their brokers every day, is it time for me to move? I believe if confidence were restored we would get a boom.

I'm still looking for the paper where this was developed, and the way he reported his results -

The second point is that in the labour market adjustments I believe we can work on two margins. What we have to do is get, on average, wages and labour costs equal to productivity. Studies are around that are showing that historically the unemployment rate was high when productivity was less than wages and vice versa. I believe this is one of the problems.

It doesn't necessarily have to mean we get lower wages. Some adjustment may have to be lower wages. Some adjustment may have to be increased flexibility in people moving around, removing obstacles that government has introduced in all sorts of ways to prevent adjustment the way Filip has indicated. But it may also have to be having measures for increasing labour productivity.

My third point is - and then I'll shut up.

May I go on?

The Chair: I'd just like to give our experts time to -

Mr. Grubel: They can take notes. I took notes too. Otherwise I'll never get through.

I want to say one thing. When you talked about cutting spending, you never specified in which area it takes place. Even within the areas, I think a couple of things need to be remembered.

I believe we have already cut government services in the traditional way, and quite substantially. Anybody who has looked at the accounts the way we did in our Reform efforts to write an alternative budget is struck by the fact that the only way you now can really get any headway is by cutting transfer payments. If you look at these in some detail - and I say this with all sincerity to Ms Toupin - these do not have to be at the bottom. Reform will at all costs defend the programs that now go to the poor.

One of the most ludicrous things that have happened in the last thirty years is that 40% to 50% of all our payments that are going out to social programs are going to people in the upper income categories and upper middle income categories. It makes no sense to run a deficit, taking in a sense from future generations and giving it back to people who have less to pass on to the children who have to pay those debts. What we have is a system that takes the money out of the one pocket, from the middle class and the upper class, and puts it back into the other.

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I believe that would be the solution - that we can have it both ways.

The Chair: Lynne, I believe on this last point you might have found an unlikely ally.

Some hon. members: Oh, oh!

Mr. Grubel: We have been demonized a lot because nobody ever wants to hear it.

The Chair: Lynne, do you wish to respond to that last point of Mr. Grubel?

Ms Toupin: Again, I don't have those figures, Mr. Grubel, that 40% to 50% of all of the programs are going to middle- and upper-income earners.

Mr. Grubel: I'm disappointed; you should have a look at them.

Ms Toupin: Well, you should give them to me.

A lot of the programs are already targeted.

Again I go back to the point Janice McKinnon, the Minister of Finance for Saskatchewan, made very clear, and that is they don't have a lot of room to manoeuvre any more in relation to the transfer cuts they're being dealt. An economy like Saskatchewan's has only limited levers with which it can play, and she clearly stated that they're going to have to make those cuts. I consider Saskatchewan to be a rather progressive province, and when she gave us that answer....

I don't agree with you that moving the cuts to the provincial level will not mean hardship to the people we represent. Even in best-case scenarios, I think it's very difficult.

Mr. Grubel: Old age security spending is over $20 billion, unemployment insurance spending is over $20 billion, and the statistics released by the Minister of Finance indicate that people making over $50,000 a year are getting 40% of the old age security benefits, and only $0.5 billion of that is clawed back.

It's the same thing with unemployment insurance benefits. People who are making several hundreds of thousands of dollars for fishing for four weeks are getting huge amounts of unemployment insurance benefits during the rest of the year. These are not isolated cases.

Ms Toupin: May I speak to the UI issue? My spouse comes from the fisheries sector, and when I go down to New Brunswick I hear time and again how there is abuse within the fisheries sector in relation to UI. That is perhaps a problem. It is perhaps true there are people who are making significant income, but you do not deal with it by throwing the baby out with the bath water and significantly reducing UI payments for people who desperately need them when there is a loss of jobs.

What you need to do is perhaps reform the tax system so we can recover that money in other ways. But I plead with all of you on this committee: don't do tax reform just because we have one particular problem in one particular area. Address that problem and try to deal with it or deal with it through a reform of your tax system.

Mr. Bromfield: I think it gets to the difference between federal spending on transfers to persons and transfers to provinces.

It also relates to one of the points I brought up in my opening remarks, which was if you examine the composition of provincial expenditure, a tremendous percentage of the spending is on health, education and welfare, and a large bulk of provincial expenditure on transfers to persons is for lower-income, direct relief types of programs - the kinds we saw cut in yesterday's throne speech in Ontario. But the federal government is largely responsible for transfers to persons for OAS and UI, which are not generally for people in society with as low an income as that of those who receive the transfers from the provinces.

By cutting transfers to the provinces, the federal government is relinquishing the responsibility for allocating the cuts to the people themselves, and as such is inevitably causing the hardship to be felt by those who are more in need, because they're more related to the provincial programs.

So perhaps what's necessary to address your concerns is for the federal government to address its transfers to persons directly rather than downloading the problem to the provinces.

On one other point that was made, the idea of increasing productivity in line with wage rates is very important, and the role of investment is a key to doing that. Perhaps we should be examining the role of interest rates in stimulating investment to augment productivity, to bring these factors into line.

Mr. Campbell (St. Paul's): Mr. Bromfield's last comment is quite interesting and is something that perhaps we should follow up on.

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I want just to reflect for a few moments on the presentations we heard this afternoon. Those of us sitting here listening and taking notes, I as one of them, have noticed several very troublesome dichotomies. I want to take advantage of your presence to see if you can help us to find a way to bring these various sides together and give us some guidance as a committee as we begin our pre-budget consultations.

We've heard some of you say that it's just a matter of mathematics. It's the hard, cold numbers that you have to pay attention to. Others, by contrast, say no, that you have to focus on the impact on people, that you must not lose sight of the people. A few of you are saying there's time; more of you are saying there isn't time. Some of you say that we have to plan this, we have to analyse impacts, we have to ask ourselves who will bear the burden of the cuts - Mr. Bromfield's last point was related to that - and what the role of government is. Others say we should let the chips fall.

How do we join issue as Canadians? It has been interesting to me, as an observer this afternoon, that none of you really did join issue with each other on either side so those two sides would come together. There were those of you who spoke mostly about the numbers and those of you who spoke mostly about people. I wanted to avoid the temptation - but won't - to say that there was a split between the suits and the skirts. I think it was entirely a coincidence, but that's just the way it struck me on this side of the table.

I wonder if our experts, our guests, can give us a little bit of guidance on how we can get away from the rhetoric and solve the problem in such a way that we shall take into account all of those viewpoints. Is there a balance to be struck? I don't know if that's something people care to comment on.

Ms Potvin: I will answer your question in one minute.

The Chair: Who is wearing a suit?

Ms Potvin: We're all in pants. I don't think there's a skirt in the room, unless it's on our clerk.

Mr. Campbell: I'll withdraw that comment.

Some hon. members: Oh, oh!

Ms Potvin: I want to tell you a little story that just dawned on me. Just as we were finishing dinner around our table with Mr. St. Denis and others, we had a very interesting chat. It didn't really dawn on me that I had a story to tell, and I now regret that I didn't remember it before our AGM yesterday when I was reporting to our membership.

One very interesting thing happened in my office in the past year, which was that for the first time ever I got several calls, faxes, and letters from various departments in the government in Japan and also from the Canadian embassy in Japan. The nub of all of these queries was that the Japanese were humiliated by their lack of ability to deal with the earthquake and the difficulty they had in sorting out that problem. It seemed to be because they didn't have a voluntary sector in place, and therefore they were calling on people like me in Canada please to explain to them how we had set up this infrastructure that allowed us to deal with these traumas that happen.

I did my best to answer their questions. I remember writing one long letter to somebody and saying that it's very hard to explain because it just exists in this country. I'd have to go back probably a hundred years to tell you how it all started to happen.

It just plain happens. If there is a huge fire downtown in some city, it takes no time at all for the volunteer fire brigade to be there, for St. John's Ambulance to be there, for the restaurants to send up coffee for those who are helping, for the Salvation Army to come with blankets.

I said that it all just happens.

How we built that up I don't know, but we have it. It wasn't until I answered those questions and talked tonight that I realized just how precious that whole infrastructure that we have in this country is. In fact, it didn't dawn on me that other countries didn't have it.

I raise it only because - and I'm not trying to push our sector again; that's my job and that's what I feel I should do when I have an opportunity - I think it's important for us to know that in this country we have something precious that works very well, and we mustn't lose sight of it in all of these deliberations, and it can work to our advantage. I want to raise that.

I'm having trouble with another thing. You're talking about us not speaking the same language. I am in fact disappointed with these talks today. I was disappointed with them a year ago too, but I couldn't quite put my finger on it. It's because we're spending too much time tinkering around the edges. We're spending too much time in arguing about whether it's 2% or 1.5%, whether it's an extra job here or not one there, whether it's a little bit more unemployment. In order to get out of the dilemma we're in, we're going to have to start thinking on a different, bigger level.

.1940

There is only one example I can think of - and I'm sure it's not an accurate or good one, but it will give you an idea of what I'm talking about. It seems to me that when I was growing up and in university in the 1960s, that was a time when we had a huge crowd of kids in this country who felt very disenfranchised, who were against the establishment, who were walking around smoking pot and in bare feet and whatever, and who were screaming and yelling against it. Somehow, as a country - and I think it was in fact the government in power federally at the time - we found a way to harness all of that.

An hon. member: They were Liberals.

Ms Toupin: They were the Liberals, you're absolutely right. It was under Pearson.

I think we borrowed ideas from others. I don't think we invented them. But that's when we developed the Opportunities for Youth, the Company of Young Canadians, and this and that. We transformed all that energy into something positive. Instead of having them complaining and on welfare and with their hand out on a street corner, we twisted that all around and had them help to develop a stronger community and got them all out working in various types of social work.

I'm thinking of your area. I think it was up in Elliot Lake. A friend of mine, Dal Brodhead, said, ``I was sent off to Elliot Lake. I got to this empty classroom. There I was alone, and on Monday morning I had to open up a course on something. I called my buddies down in Montreal and said I will pay your train fare. I need ten more people up here quick. We have a program.''

That's how loosely it was all done.

What happened was really quite remarkable in that turn-around of vision and youth and putting all that energy together in a positive way. Those same people today - I bump into them all the time - are now that social infrastructure that is working in community economic development and working at the Ys and in training. You have a whole generation of people who've done a great job.

We have to think higher than tinkering around the edges.

Mr. Campbell: I don't know, Mr. Chairman, if others want to respond. I hope they will.

Mr. Frank: I'll try to be brief, but you're asking awfully complicated sorts of questions, and I must say, as a taxpayer, I'm a little uncomfortable being asked that question.

Mr. Campbell: Who better to answer than the taxpayers of this country, Mr. Frank?

Mr. Frank: That's exactly what I'm going to say to you. That's why parliamentarians get paid the big bucks.

This is a complicated thing. All of us have our views. The record of the past several years is pretty crystal-clear on this.

The last federal election saw a huge groundswell of public opinion that made very clear statements as to what it wanted. Ontario and Alberta, Newfoundland, Saskatchewan, and so on have similar agendas coming -

Mr. Campbell: I'm not suggesting we do that - we heard the message loud and clear - without regard to the impact on people.

Mr. Frank: I'm coming to that point, sir.

If you look at the record of the last decade and go back and simply look at all the budgets, what I think you will find in them is an approach that was very sensitive to the people consequences of cutting spending and deficits. It truly was. It reflected the ethos of the day and the era. It was marginalism. It was incrementalism. It was very slow and cautious because it would hurt, and it does hurt. But the record is so clear that it didn't work that I would have to say to you that in my judgment here you have less time rather than more time. But don't ask me if we have one year or two years to come to grips firmly with this.

The last point I would make here is that if we ask who bears the burden of the system, the record of these elections in recent years suggests pretty strongly that the middle class has said they do not want to bear that burden any longer, and they want change, and the change should come on the spending side. To me, that's the message in the elections. Where those cuts come is what the job of the parliamentarian is.

The Chair: Mrs. Stewart, please.

Mrs. Stewart (Brant): Thank you, Chair, and thank you all for being here. It's been fascinating.

I just have to make a comment. There have been some indications, I have felt, from Mr. Frank particularly, that there has been no leadership or direction at the federal level to make significant change directionally. I heard that before dinner. It may have been David too who indicated that.

.1945

I would just say that when we look at the budget of 1995, there were significant structural changes. We had privatization, 60% cuts to subsidies, and for the first time ever, cuts to spending - not marginal, not reduction in timing for pay-outs, but cuts. That's happened.

We've been talking here about how long it takes for significant change to really take hold and make a difference. We've been talking about four to five years. My experience in the private sector has been that as we've seen restructuring and turn-arounds, it is in fact, almost in every case, four or five years before we start to see the real change and then the zoom forward.

I would agree to an extent with Mr. Bromfield that the significant changes that were effected in 1995 are going to be felt, certainly by individuals, but we will see structural change have an impact on our fiscal circumstances in four or five years, even if nothing else happens at this point. I'm not advocating that, believe me, but I just want to make that point.

There's a couple of specifics I'd like to return to.

Mr. de Bever, you talk about negative income tax. I personally have a strong affinity for the notion, particularly the broader notion of a guaranteed annual income. I think that may be one strategy that does bring the two sides together in terms of fiscal management and an understanding and appreciation for the impact fiscal constraint has on individuals. I'd like some comments on that particularly.

Mr. Bromfield, correct me if I'm wrong, but I think it was your comment just made about the responsibility we should take at the federal level for taking control directly of our transfers to people - not just pass transfers to provinces on to them, but take responsibility ourselves. I'd ask you, specifically in terms of pensions - as Mr. Grubel points out, we spend $20 billion in that regard - and unemployment insurance, if you have some suggestions for us on those particular programs.

Mr. de Bever: With negative income tax, the basic principle is you put the incentives where they belong.

In other words, suppose the earning power of a worker with limited skills is only $6 an hour. Someone who worries about how a family is supposed to exist on that would say ``That's not a job worth having. You might as well stay on government support.'' A negative income tax would basically mean you earn whatever you can earn, and as you earn more, we tax back only a portion of the incremental gains so that effectively you're coming very close to a guaranteed annual income.

I think a lot of the reforms in this government, and even in the last few years of the last one, were in that direction. The child tax credit is in that vein. I am a strong supporter of that, because I feel it gets away from not enough people partaking in the workforce because it doesn't seem to be worth their while to do it.

We're at a stage where beggars can be choosers. If we have jobs that are menial and low, they're jobs, and if people can make a contribution, to the extent they do, they lessen the impact on the fiscal structure. I think there should be a reward for that in terms of giving an incentive to improve the earning capacity you have, even if it's limited.

The negative income tax has been kicked around for years. I think Milton Friedman originally proposed it in the 1960s - it's again one of these 1960s things - but it never really caught on, in a practical sense, in any big way. I think it's time for us to really take a good look at it.

Mr. Bromfield: I think you interpreted my comments correctly.

The Chair: She always does.

Mr. Bromfield: I'm not anxious to make judgmental decisions about what is a good thing to do and what is a bad thing to do, but to the extent that significant amounts of federal money are paid out in old age security or in other areas to people who may be relatively well off, those might be opportunities for cuts.

Mrs. Stewart: So you wouldn't consider pensions to be sacrosanct.

Mr. Bromfield: That's not a comment for me to make. My intention today was to try to indicate that there should be a framework for assessing whether something is a legitimate or useful expenditure reduction.

A couple of those points were that since high interest rates and high real interest rates are much of what have caused our problems both on the employment side and fiscally, perhaps increasing taxes on those who have benefited from those high interest rates would be an equitable solution.

.1950

The other comment I had in my opening remarks was that you should target expenditure cuts and revenue increases to those areas that would do the least damage to the economy, by impacting on those who save and do not spend. To the extent that seniors fall into that category, perhaps that should be reviewed.

I have no intention of making a comment other than that.

The Chair: I think you just did.

Some hon. members: Oh, oh!

The Chair: I'll give the final word on this issue to Mr. Elton.

Dr. Elton: I don't know why you're so hesitant, Geoff.

Shortly after taking office in Saskatchewan, Mr. Romanow had a review of the budget of that province, in 1991. He is not traditionally of such a persuasion that one would think of him going out and making across-the-board cuts, but it's said to me that about three months after he had taken office he made a no-sacred-cows speech to a group of public servants wherein he said that in that province even medicare is not sacred, that when it comes to trying to find a way to resolve this issue it doesn't matter whether it's pensions, medicare, universities, or whatever - they're all going to have to be examined very carefully in order to find a way to reduce their expenditure patterns.

In looking at Alberta, we generally hear the story that they have knocked x tens of thousands of people off the welfare rolls, so it is immediately responded, ``What a heartless thing to do''. Yet if you take a close look at the expenditures in Alberta, while, yes, they did cut dramatically in social welfare, you will find that they actually increased expenditures to children, disabled people, and so on.

So one might, for example, be able to say - and I will say it without hesitation - that, yes, we must look at pensions. But when one does that within that portfolio, one has to be sensitive to how it will impact on individuals, because not every pension received has the same value to the person receiving it, depending on other sources of income they might have.

Mr. St. Denis (Algoma): Thank you all for being here.

I'd like to ask a question in a different area, and hopefully this relates to the bigger picture. I asked a couple of you during dinner, and this question came from some of the comments made just before we went to dinner.

In my riding of Algoma, in northern Ontario, we have the natural resource sector of the economy well represented, mining and forestry in particular. We see a growing trend toward mechanization in mining, forestry, and other sectors. Of course mechanization means more production from less manpower. The forestry and mining companies have to do this in order to remain competitive in the world, because labour costs per hour are more in Canada than they are, say, in a typical Third World country, such as Chile.

I wonder how well our economy has taken advantage of the shift from labour to technology. We see our mining companies and forestry companies surviving fairly well in the world economy because they've done that, but have we in fact displaced Canadian workers to the advantage of, say, European workers because we are not producing the technology - for example, the mining equipment, the forestry equipment, and the pulp and paper equipment - that allows this increased productivity to take place?

I guess the short question is, have we effectively benefited - and if not, how can we more effectively benefit - from the improving use of technology by getting Canadian companies to manufacture this kind of technology and at the same time made sure we don't leave our less educated and possibly illiterate fellow citizens behind? It comes back to the question of what we can do, possibly through the budget process, to improve job prospects in the area of higher technology.

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Mr. de Bever: You have to be careful when advocating that we always manufacture productivity-improving machinery at home.

In a lot of these sectors the equipment is so specialized that only a few manufacturers in a few countries can efficiently produce it. As a matter of fact, in some of these sectors we do produce the equipment and we are the world's providers. From a budgetary point of view, I wouldn't try incentives for manufacture of equipment if the desired end result is improved productivity.

It's the same thing with computers. Making computers is not what makes you money. Applying them is what makes you money. The fact that we don't have too many computer manufacturers in Canada doesn't necessarily hurt us. What does hurt us is not having the smarts to apply them.

Governments can help in terms of productivity improvement by not trying to slow the process down. Too often over the years governments have tried - and it's all very intentional because we worry about people - to keep certain industries alive for longer than they should have been. Government created $40,000-a-year jobs at a cost of $100,000 per year per job. That is not a wise expenditure of public money.

If there is a structural problem, the best thing government can do is to take care of the losers and get out of the way. There is no point in prolonging a hopeless situation.

Algoma Steel is probably a case where you could argue that was allowed to happen. But there are other situations that, out of compassion, government kept going and that should have been restructured much earlier at a much lower public and private cost. If the government hadn't interfered, the adjustment probably would have taken place more rapidly.

The Chair: Tom Hayes.

Mr. Hayes: I want to follow up on your comment in terms of machinery from offshore. The seafood industry is a good example of a fair degree of mechanization over the years. I would suspect that over 90% of that type of equipment has come from offshore. It's very difficult for Canadian manufacturers to compete because some of these European countries in particular have been in this business and are servicing a worldwide market. Maybe there are things that one could do on the tax side with respect to R and D.

But there are other areas in Canada, in aerospace and other sectors, where Canada is leading the way. I think it works both ways.

The Chair: Lynne Toupin.

Ms Toupin: I'm responding to the comment about not worrying about people in the promotion of productivity improvement. We can't have hard and fast rules in that area either.

For example, in Leaf Rapids, Manitoba there was a mine at risk because the price of the commodity had dropped. The government made a decision to give a subsidy to that mine for approximately one year. Then the prices were raised again. Lay-off of a number of people was avoided. We can't have any hard and fast rules about getting out very quickly. The role of government intervention in certain specific circumstances is important.

Concerning the whole notion of technology - maybe I'm going out on a limb here - is there no way for the budget to stimulate interest in investing in Canada? Perhaps it's not through large machinery, but I certainly would like to see some possibilities to allow investors to invest in Canada and to invest in companies and industries in Canada. It seems to me there are levers we can use within that process.

Mr. Grubel clearly does not agree.

Mr. Grubel: No.

But Mr. Loubier will come back and say they're not paying any taxes.

The Chair: Thank you, Mr. St. Denis.

Dianne Brushett.

Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chairman, and thanks to each of the witnesses for being here today. I have two questions, which I'll try to make quite specific.

The first one concerns the previous discussion about who has a job and who doesn't have a job. We're dividing our society into two categories today and it's all about the distribution of wealth.

I have an example in Nova Scotia where a large pulp and paper mill will use a tree harvester in the forest to cut the trees rather than bringing in 50 or 100 men with chain-saws to do the harvesting.

Do we give those men jobs and get that productivity? Or do we get a higher productivity with a machine and have no jobs for those people? Do we give a tax incentive in the budget for that? We need specifics. We can generalize here forever, but when we put a budget together we have to come to some specifics on what we do to create jobs and to keep people working.

.2000

That's number one. I did have a second question, more directed to Geoff Bromfield when he says to be very careful in how you slice this economy so you have the least detriment when you try to develop your policies to lower the interest rates. Again, we have to be specific. Do you think we've been rather cautious or wise or prudent in what we did in the last budget, or do you think we're way off base and you have some more specific recommendations?

The Chair: Mr. Bromfield, you're on the firing line.

Mr. Bromfield: I guess part of that question was a critique of the 1995 budget. I don't think I would give it terribly high marks for equity, since the bulk of the cuts was in programs, people, government goods and services within the federal public service, and transfers to the provinces.

I've expressed my concern about cutting transfers to the provinces. One might say that there was room to do it this one time; that it was overly generous; that these are responsibilities the provinces should be undertaking; that they should have more funding responsibility and hence more responsibility for how the programs are run. My general concern about that would be that we not consider it an ongoing solution. If we think it was an appropriate thing to do in the 1995 budget, we should not continually look back at that as well, thinking it was an easy solution.

Similarly, I'm sure there are diminishing possibilities to reduce the size of the federal public service. I don't expect that will be an ongoing solution to the next $20 billion in problems we have to overcome in solving the debt.

I'm not thrilled with what happened in the 1995 budget, but I'm more concerned with expressing the idea that I don't think these are things that are necessarily worth revisiting in future budgets. We're going to have to look in other places in future.

The Chair: Mr. de Bever.

Mr. de Bever: On the subsidy issue, it's an interesting question, because it really goes back to what has been happening to Canada in the last twenty years. There have been a number of industries where the cost of the product being sold has dropped relative to the cost of things in the domestic economy. So all of a sudden the employer is getting less for this product than he used to get. At the same time the workforce, particularly if a union is involved, has been advocating its rights and has been building up a structure where it has gained certain benefits and wage levels and wants to maintain those. This structure then becomes an impediment to keeping people employed.

The notion that no matter what happens wage levels are sacrosanct is just not on. We found that, for instance, when Algoma was taken over by the union the first thing they did was cut wages, because they realized they couldn't make a go of it otherwise. That's what is happening in a number of cases. How restructuring is playing itself out is that companies that cannot come to terms with that problem go out of business and instead you find other companies cropping up that do not work under the same constraints.

A good example of that was in the mid-1970s the construction industry in Alberta, over a period of a very few years, essentially became non-unionized. This phenomenon was at work there.

What that means is that smart bargaining for people who want to keep their jobs may involve having to let go, simply because Canada is not fetching in world markets what it used to get for resources. In fact, over the last twenty years the relative price of resources has dropped by about 50%. You need an awful lot of productivity to make good on that.

About your example of the forest workers versus the machine, we want to get out of government subsidies, not get into more of them. What has to happen there is perhaps looking at the way the tax system works in terms of encouraging investment in technology versus investment in the encouragement of the training of people and the productivity of people. Given that we have such a high unemployment rate, what we probably should do initially is go to a more labour-intensive economy, which means in some sense lower productivity if you measure in a particular way.

.2005

Mr. Hayes: I have a comment on the analogy you used in terms of the harvester or the subsidy to the employees.

If you look at it in an Atlantic Canada context, our domestic market is very limited, and therefore businesses that are going to grow in Atlantic Canada, at least manufacturing businesses, have to be export oriented. When you get into the marketplace, your products have to compete in terms of quality and price. The customer doesn't really care whether you employed 1,000 people to make it or whether you employed a certain piece of technology.

So we have to encourage our companies to adapt to the latest in technology in order for them to remain internationally competitive.

If we were to put in some kind of a wage subsidy, that would just delay the inevitable. In fact, that would be a regressive step in terms of ensuring that we have competitive, first-class companies that will continue to survive and grow.

Mrs. Brushett: So how do you distribute this wealth and keep people working?

Mr. Hayes: You encourage more entrepreneurial companies that will continue to seek out export markets and utilize the resources of our region and utilize the human capital. It doesn't necessarily mean that there aren't going to be more jobs for people as well, as you grow your business.

Mr. Grubel: A quick answer to Mrs. Brushett is, let the government get out of the way. Until the government got into these things as heavily as it did, there was no problem with unemployment. In 1930 it was the same problem.

I have a comment on the negative income tax and the guaranteed annual income. Very expensive experiments took place both in the United States and in Canada. They were all evaluated, and the people who were pushing them very hard decided that they weren't working.

A few years ago I asked Friedman what his view was on this, and he said, ``Well, I have regretfully concluded that, after all, we will again have to introduce very stringent tests on people before they become eligible''.

I once met a Frenchman who lived in a suburb of Paris, and he said, ``We just introduced the guaranteed annual income. We used to have all kinds of carpenters, electricians, and plumbers. They've all shut down. What has happened is that the government has said that you can get a guaranteed income of $15,000 or $20,000 a year with no questions asked, and suddenly they all have said, `Here we are - we don't have a job any more'. They got their guaranteed annual income. You can still get a plumber, but there's no official business to get it to you''. That is the problem.

Geoff, I very much appreciate the distinction you made between transfer payments that on the one hand go to people in social programs by the federal government and those that go to the provinces. In my comment I'd like to abstract from interprovincial income equalization.

Let's again assume that there was a balanced budget and the government stopped making those transfers. What is preventing the provincial government from raising taxes and providing those services that, if we can believe people, the general public wants? What is wrong with doing that? After all, the money that they used to pay to Ottawa and that is going back to the provinces they don't have to pay to Ottawa any more, and therefore they should be that much richer. So why can't they themselves decide that they would raise the taxes to keep those programs in place?

Mr. Bromfield: I have a fairly simple response to that, which is that I'm appearing before a federal committee, who I assume want to take responsibility for their own budgetary actions and not simply have all of the responsibility and all of the taxing power devolved to the provinces. So, in that framework, I assumed that you were looking for solutions where you could assess the merit of them and then make the choices you desired, rather than leaving that to others.

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Mrs. Stewart: You have to let me respond to Mr. Grubel since he responded to me.

I'd just say that the studies from Manitoba particularly don't necessarily bear out your comments there. We have to ask Mr. de Bever for a comment on that, surely.

Mr. de Bever: Mr. Grubel, I think it all depends on what level you set the guaranteed income at. If you set it too high you're going to get the effect you indicated. If the intent is to provide a very basic level of income on which people can build, you would get, to my way of thinking, just by the way people reason about what's best for them, quite a different result. So it all depends on the level you set it at.

Mr. Grubel: Of course, and they tried with all of the different levels in all these experiments. The demand for not working is much higher than people believe, if the price falls.

Mr. Frank: I sort of hate to admit to this, but Herb, I did my doctoral thesis on negative income taxes. I am - or at least I was some years ago - quite familiar with those experiments that went on. They were relatively modest in terms of the amounts of money that were in place at the time.

They were horribly difficult as social experiments because they were launched within a city. There was an income experiment in Brandon, I believe. You can't just isolate one city and try to adjust or tinker with the incentives to work or not to work.

All of the work that was done at that time and that I did in the context of Canada basically comes down to what level you want to set the support level at. Quite clearly, if you set it at $50,000, people won't work. Well, what else is new?

The second thing was the family unit you had to look at. This to me was one of the trickiest things, because you could say you'd support a family unit at a certain level of income, or else individuals. It was a very complicated issue, and of course it did die because those experiments were not successful.

Mr. Szabo (Mississauga South): Nobody has said the word ``NIMBY'' yet. I thought I'd like to say ``NIMBY''.

Some hon. members: Oh, oh!

Mr. Szabo: It's certainly an acronym that was well used during the last round.

I think we've all been thinking about the old idea of NIMBY - Not In My Back Yard. It does raise the interesting point that there is one group that is not represented here and never has been represented, ever - maybe, Mr. Chairman, the next time you have a panel, you can include them - and that's the youth of our country.

The young people of Canada are finishing their education, hopefully at a high enough level. They're faced with 25% unemployment and low employment prospects. They're not at this table, but we are asking them to take over our country in the future. At their starting point, after we balance the budget and based on the information our panels have given, they will be assuming a national debt of about $700 billion.

You have to wonder why those youths aren't at this table and telling us how they would want to -

The Chair: Mr. Szabo, with all due respect, they will have the opportunity to appear at our table many times during our consultations. They made it the last time around as well and we look forward to their presentations.

Mr. Szabo: Okay. But it's interesting because it is part of the NIMBY aspect. There are different people.

I think one of the discussions we had at dinner was if we had an inter-generational discussion, we'd find out what the senior spectrum would talk about and what their needs are, and what the youth would say. And everybody in between would say ``I don't want to pay for this''.

The rhetorical point I make to the panel has to do with the social trends and social values and the costs to our system. I don't have to tell you about the trends with regard to divorce rates, mother-led or lone-parent families, or the fact Mr. Frank mentioned about the school drop-out rates. All of these things put together, which are all part of our Canadian society today and are in fact growing, do have a social cost. They all do have a very significant cost to all Canadians.

I hope the panel may have some comment on the kinds of things we may be able to do. These are not quick fixes, clearly, and not for this current budget. But everything can't be just a cut to balance a budget, because what are you going to have left in the future? Obviously there must be some investments, investments either in a new Canadian value or in the seeds that will flourish in the future.

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If you have time, nobody has commented yet on the underground economy. If you have any comments, I would be interested.

Prof. Palda: I don't think you really have to cut spending to raise government revenues. A study was put out by the OECD called ``Managing with Market-Type Mechanisms''. They found that by contracting out government services you could save anywhere between 10% and 30% of the costs of operating.

You wanted to know about some long-term solutions that are possible. These aren't entirely in federal hands. A lot of these are provincial. But there could be some influence on the federal to the provincial.

Privatize the hospitals. Privatize the universities. There's nothing that says government is a more efficient operator of hospitals or universities than the private sector. In fact, a lot of evidence shows it goes the opposite way: when the government runs these operations there's a lot of feather-bedding, a lot of costs are run up in the salaries of the employees.

That doesn't mean government shouldn't fund, say, insurance for people who use hospitals, or it shouldn't give subsidies to people who use universities. There's a role for government there. Government can help the needy to get access to these services. But there's no reason at all why these services have to be owned and operated by the government. If we could get between 10% and 30% of savings there, we could get the same level of service but at a lower cost.

The Chair: On behalf of all members, let me thank our experts for having come in. It's always very presumptuous to try to summarize what people such as you have brought to us, so I don't do so on behalf of anybody else other than myself.

All of you have talked about the tremendous debt problem we have. You have not necessarily approached it in the same way. David Elton, Leo de Bever, Jim Frank, and Judith Maxwell have talked about how we urgently have to get into if not a balanced then perhaps even a surplus position, so we can start paying down the debt and get out of the terrible interest burden we're under.

Geoff Bromfield talks about the deficit problem but says under the measures we have already taken it might be self-correcting more than we think, without the addition of further measures.

Tom Hayes has talked to us about what has happened with cuts in the Maritimes and how it has been difficult and people have had to adjust. But even provincial governments have taken more vigorous steps in terms of fiscal responsibility than perhaps the federal government has and the people are coping. Businesses can have some opportunities, such as the new ones he was talking about, involving patient equity capital for small businesses that are just starting out.

Mr. Palda has talked to us about a number of subjects tonight, not only the deficit but also the possibility of using our income tax returns as a means of communicating directly with taxpayers in order to get their advice on a number of issues.

Lynne Toupin, on behalf of your clients, the poorest in our society, you have suffered a number of hits; budgetary hits from the federal government and more recently from provincial governments. If I might say this personally, you are...

[Translation]

somewhat depressed and perhaps rightly so.

[English]

But you have made an eloquent plea before us tonight to find ways to make sure that the cuts we undertake are fair, that we don't leave behind those people who are most deserving of our collective help, because none of us knows when we ourselves might be in that position.

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You have suggested there might be other ways that we can find sources of revenue or deal with some of our issues. We're searching for them. We encourage you and all members to bring those forth to us.

Rose, you have given us an undertaking that you will return to us and set forth a specific program, before we conclude our hearings, as to how we can help you mobilize that wonderful resource called volunteers in Canada to work with us to help overcome our problems.

We heard a number of mentions tonight about getting people back to work. I hope we as a committee can focus on this particular issue for the rest of our hearings in a very major way. If we had more Canadians working, we would have far fewer expenses at the provincial or federal level, but more importantly, we would have a much more upbeat, self-confident Canadian people.

Could you work with us in terms of bringing forth from your respective sectors and groups and parts of Canada and giving us specific ways that we might as a government, not necessarily ourselves but serving as a catalyst or as a prod or as simply a vehicle for publicity, bring to Canadians new ways that we can create jobs, jobs for today and jobs for tomorrow?

We've heard a fair amount of doom and gloom tonight, but we've also heard people express what incredible opportunities we have as a country, a country that has one of the highest levels of educated people, a nation that has people from so many backgrounds and so many different countries who can help us in coping with the problems and meeting the challenges of the global economy and going abroad.

Just the other day an individual I know who came to Canada from the Far East was appointed the chief executive officer of a huge conglomerate to go into the People's Republic of China on behalf of North American interests. Perhaps in our diversity as Canadians and from our respect for that diversity we have gained one of the greatest advantages and tools that any country can have in terms of meeting the challenges of the global economy.

We have a lot to be thankful for when we look at the resources we have. We are among the richest nations in the world, and people have talked about the rule of law, which does apply here, where we can play by the rules and get ahead.

So we have a lot to be thankful for, but we're falling far short of our potential. We know that with your help tonight and as you bring us more specifics in the future, as we travel across Canada and meet here again in Ottawa, we look forward to coming up with some concrete ideas as to how we can proceed to make that future that we know can be ours a reality.

[Translation]

On behalf of all members, I thank you very much.

[English]

We adjourn.