FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, October 2, 2001

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[English]

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

The finance committee is, pursuant to Standing Order 83.1, undertaking pre-budget consultations. This morning's round table consists of the following individuals and organizations: the Canadian Advanced Technology Alliance, the Canadian Animal Health Institute, the Canadian Film and Television Production Association, and WEFA Canada Inc. First in order will be David Paterson, executive director of the Canadian Advanced Technology Alliance. Thereafter we will proceed with the Canadian Animal Health Institute, the Canadian Film and Television Production Association, and WEFA Canada Inc.

Mr. Paterson, as you know, you have approximately five to seven minutes to make your remarks, and the same applies to all the witnesses. Then we'll proceed to a question and answer session.

Welcome.

Mr. David Paterson (Executive Director, Canadian Advanced Technology Alliance): Thank you, Mr. Chairman. Good morning, ladies and gentlemen.

I believe most of you know the Canadian Advanced Technology Alliance is the trade association that represents the Canadian high-tech industry. We have over 600 member companies, and another 1,500 companies belong to affiliated associations, mostly local. Our membership is mostly in the information and communications technology industry, and the vast proportion of it is made up of small and medium-sized enterprises.

Our members have been telling us for some time that an effective economic policy must focus on three factors, a competitive tax structure, strong support for R and D, and human resources. These are all horizontal issues that effect the entire economy. They create an environment in which not only the high-tech sector can thrive, but all Canadians can as well.

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The government has made great progress on the first item on the CAT Alliance agenda, a competitive tax structure. The October mini-budget was a huge step forward, particularly in the area of personal taxes. We feel there are still strong grounds for further reductions in corporate taxes, especially on the capital tax, which is a notorious disincentive for investment. It's a very negative factor when people are looking at investing in Canada.

The challenge for the government will be to improve Canada's competitive position vis-à-vis the United States. The tax cuts the Americans have just put through have restored much of the advantage they enjoyed, and they are our biggest competitor for people and investment.

The government has also made considerable progress on our second issue, support for R and D. Unquestionably the most popular R and D program with our membership is the scientific research and economic development tax credits. We've been working with Revenue Canada and the CCRA for several years now to improve the administration of that program. We're pleased that we published our second report card on their progress recently and it has been very good. There are grounds for further work to make it more efficient and consistent, but we're confident that progress is being made on that front.

There are two other R and D programs our members are particularly keen on, and they address the opposite ends of the R and D spectrum. The first one is the support provided by the granting councils, NSERC and SSHRC, to academic research. The second is the NRC's industrial research application program, which funds R and D performed by small businesses. It is our members' view that one cannot be effective without the other. Basic speculative research provides the technologies and practices that businesses can develop into new products and services. Also, like SR and ED, these are essentially horizontal programs, which have a very broad reach and are accessible to a very wide range of innovators.

It can be argued that our third priority, human resources, ought properly to be ranked first. An innovative economy cannot succeed without a rich mix of entrepreneurial, technical, and communication skills. There are two sources of these key skills: education and immigration. The Constitution limits the federal government's role in the education area, but it has made very valuable contributions to post-secondary education through the granting councils, the Canada Council for Innovation, and the research chairs program. On the immigration side of the equation, we believe that Canada's policy must be directed toward attracting the maximum number of skilled immigrants. Efforts should be directed at simplifying and accelerating the process for skilled and educated applicants.

Many of you will recognize that these three elements have been the core of our economic policy for some years, and you may be wondering if we don't think that perhaps some changes are necessary to reflect the events of September 11. We don't think so. It is clear that steps must be taken to strengthen security and to stabilize air transportation, but we don't think they require a major net increase in government spending.

There will be need for increased spending on the armed forces and police and security agents. I gather that the committee will be holding hearings on this subject, and unquestionably you will be making recommendations in this area. I would point out that there have been very serious fears raised about the potential vulnerability of communications and computer networks, which are key elements in our financial, energy, and transportation infrastructures. Several CAT Alliance members are global leaders in this area. They're major forces in information security technology, and they can make a major contribution to strengthening network security for Canada and its allies.

CATA's members compete in the global high-tech economy. They are highly dependent on good-quality air transport, both for people and materials. We're a member of the coalition of concerned airport users, a group of associations that has been working to improve the conditions of airports across the country.

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We feel that the government is to be congratulated on its response to the first air transport problem, the sudden suspension of insurance for war and terrorism risks. The interim support will give the airline industry an opportunity to negotiate something with its underwriters that they may be able to afford.

The committee will examine air travel security in the coming weeks. It will make recommendations and determine the costs of these changes. We think they will probably not be trivial. We hope the committee will be able to make some recommendations on how these costs should be shared among travellers, carriers, and airports.

We believe there's a role for government to play in ensuring and funding security in a situation that has transformed what was previously a low-profile airline problem into what is a serious national security issue.

In the same vein, however, we do not believe that it is necessary for the government to intervene in any substantial way in the financial problems of the airlines. Grounding the planes on September 11 was a case of force majeure, and arguably grounds for compensation, which I gather is now under consideration.

We do not, however, believe that the government should step in to solve the financial problems that existed before the terrorist attacks. Some of the airlines overexpanded during the boom years, acquiring other operators and massive debt loads in the process. They were suffering heavy losses as the economy and air travel slowed earlier this year. That has now been, of course, substantially exaggerated by the events of September 11. That must be solved by major restructuring of the airlines, reducing flights, staff, and particularly debt. Some airlines may not be able to avoid receivership. That is the case in Canada and in other parts of the world. I note that Swissair went under yesterday.

We believe that the challenges that face us can be met without a major boost in government spending and without damaging Canada's fiscal integrity. Increased spending on security is essential, but we believe it can be offset by reduced spending on less important programs. New initiatives can be postponed until the budget surplus has been restored to a more adequate level.

Both the innovation agenda and the broadband initiative are of major interest to our membership. We'll supply the infrastructure that makes the broadband work. We would benefit substantially from some of the elements that have been proposed for the innovation agenda. But we feel that there are ample grounds at the moment for postponing the launching of these initiatives until the budget surplus is in better shape.

We believe the interruption in Canada's economic growth that has been caused by the slowing economy and exaggerated by the terrorist attack will not last long if the government continues to pursue a policy of competitive taxes and spending restraint. We urge that it maintain a balanced approach and that it resist demands to increase spending.

Thank you.

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

We'll now proceed to the Canadian Animal Health Institute, the president, Ms. Jean Szkotnicki. Welcome.

Ms. Jean Szkotnicki (President, Canadian Animal Health Institute): Thank you.

Good morning. As Mr. Bevilacqua said, my name is Jean Szkotnicki and I am president of the Canadian Animal Health Institute, or the CAHI. CAHI represents companies that develop and manufacture the pharmaceuticals, biologicals, feed additives, and animal pesticides used in agriculture and veterinary medicine. Our companies make the products veterinarians and animal owners rely on to protect the health of Canada's domestic and agricultural animal populations. We generate about $430 million in annual sales and create jobs for thousands of Canadians.

You should have a written brief, which outlines our key budget priorities based on the three questions posed by the committee. Before going on, I want to say that CAHI recognizes that the tragic events in New York will affect Canada's budget priorities. Issues such as customs and immigration, national security, defence, and the health of our economy must take priority.

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The events of September 11 remind us how closely our economy is tied to that of the United States. Canada is a trading nation, and the U.S. is our largest market. This applies to agriculture as well.

To maintain economic growth, the government must ensure that Canadians continue to have reliable access to the U.S. markets. This means more than ensuring market access; Canadian companies also must have the tools to take on the U.S. as competitors. While we must deal with the emergency, the policy issues we were struggling with before September 11 have not been resolved. Government must still consider how to promote innovation in the economy to generate jobs and prosperity.

You have asked stakeholders how the government can ensure that Canada will remain a major global economic player. I believe that any plan must include a strategy for making our regulatory framework more effective and efficient. Canada's system is less responsive, more outdated, and more costly than our trading partners'. Canadian businesses need regulatory relief if we want them to remain competitive.

For the Canadian animal health industry, the responsiveness of our regulator has declined significantly. The Bureau of Veterinary Drugs in Health Canada currently averages 926 days to review a new veterinary drug submission, twice the time it took in 1995 and five times longer than the 180-day standard the bureau committed to in 1996, when we entered into user fee discussions.

This delay is not the result of additional scrutiny. In fact the BVD has a product submission on average of four years after initial screening before they even begin to review it. The BVD's poor performance hurts industry, competitiveness, and denies our customers—livestock producers and veterinarians—access to the safer, more targeted pharmaceuticals used by U.S. and foreign competitors.

Not only is the BVD inefficient, it is also more costly than comparable regulatory bodies in other jurisdictions. In Canada it costs on average about $54,000 to approve a new animal drug, and up to $100,000 for a food animal product. The U.S. charges no fees.

This combination of inefficiency and costs is a severe burden. Canadian red meat producers export about 50% of their production, nearly all to the United States. They have to compete with U.S. producers who have access to more modern management tools and who do not have regulatory costs to pass on to their customers.

Unresponsiveness also reduces corporate R and D and innovation in Canada. Canada's veterinary product regulators were once seen as world leaders. Companies often submitted new products to Canada first, supported by strong domestic R and D efforts. Today Canada gets drugs secondarily, if at all. As the number of original submissions has declined, so has supporting research and development.

Appendix one of our submission includes four case studies showing how regulatory delays result in lost sales, jobs, and R and D. I would like to highlight one of those cases, case number one.

A small Canadian company developed a ground-breaking vaccine capable of protecting animals from a variety of diseases. Animal vaccines are regulated by the Canadian Food Inspection Agency, an organization more efficient than the BVD, but which still does not meet its targeted performance standards.

The vaccine was submitted to U.S. and Canadian regulators simultaneously. The U.S. approved it in three months. In Canada, where the maximum response time is supposed to be four months, the process took two years. This delay was estimated to have cost the company 53% of forecast revenue from the vaccine. The delay was also costly to beef producers, the buyers of the vaccine. Canadian producers lost over $28 million in a year from the need to trim additional meat to remove unneeded vaccination marks.

U.S. producers were able to use the Canadian-developed vaccine to avoid this loss. Sales of the vaccine to the U.S. producers totalled $4 million during the two years it was unavailable in Canada.

This company was later bought by a multinational corporation. The effect of the delay for the foreign parent was equivalent to 5% of total Canadian animal product sales. It is easy to see why Canadian R and D is unlikely to continue.

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Regulatory inefficiency is not unique to our industry. I also am co-chair of the business coalition on cost recovery, an alliance of Canadian industry groups committed to improving the federal cost-recovery system. The coalition includes drug companies, chemical producers, the CFIB, Canadian manufacturers and exporters. All of us are experiencing similar anti-competitive regulatory delays.

By limiting access to breakthrough products like new medications, these delays can seriously harm our quality of life, and sometimes the delays are so long and expensive that some companies are avoiding the Canadian market altogether.

What can be done? Most of you have heard about this problem before. The coalition first told you about this during your consultations leading to the 2000 budget. At the time, the committee noted the problems in its report and suggested a complete regulatory audit of cost-recovery implementation. In spring 2000, the committee held follow-up hearings with business, government, and consumer groups. The resulting unanimous report contained 12 recommendations for action. These recommendations focused on improving transparency and efficiency, and suggested that departments be accountable to Parliament for their cost-recovery and regulatory activities. CAHI and the business coalition fully supported these recommendations, believing they would result in significant improvements.

Despite your work, and a similar report from the Auditor General, the bureaucracy seems unable or unwilling to fix the problem. Health Canada, even after years of requests, has no plans for improving the performance of the BVD. Treasury Board, which is responsible for monitoring cost recovery, has not implemented even one of the recommendations you made more than 15 months ago.

I believe that the next step must be to address the concerns about regulatory burden within the budgetary plan context. Regulatory inefficiency hurts Canadians' ability to remain competitive in the new economy. It limits innovation because it delays access to newer cutting-edge products that are critical inputs for business. It also impacts on our quality of life because it limits our access to new products, whether they are new drugs to treat parasites in pets, or a new drug for asthmatics.

Many of the recommendations in your report, such as improved accountability to Parliament, can be instituted within the budget framework. I encourage you to revisit the issues raised in your June 2000 report and consider how the recommendations can be incorporated into the budget process.

Thank you. I would be pleased to answer any questions.

The Chair: Thank you very much, Mrs. Szkotnicki. Also, I want to personally thank you, on behalf of the committee, for the contribution you made to the cost-recovery report. Above and beyond that, we really appreciate the case studies you have provided the committee.

We'll now hear from the Canadian Film and Television Production Association: the president, Elizabeth McDonald, and Guy Mayson, senior vice-president. Welcome.

Ms. Elizabeth McDonald (President and Chief Executive Officer, Canadian Film and Television Production Association): Thank you very much, Mr. Chairman and members of the committee, for this opportunity to appear before the standing committee.

My name, as you said, is Elizabeth McDonald, and I'm the president and chief executive officer of the Canadian Film and Television Production Association. I'm joined today by my colleague, Guy Mayson, executive vice-president of the association.

The Canadian Film and Television Production Association—or CFTPA, as we call it—represents almost 400 independent film and television producers from all regions of the country. The CFTPA has appeared before this committee each fall for the past several years, and we very much value the opportunity to participate and the committee's attention to the issues we have raised. We also recognize the significant contribution and with to thank this government for its efforts to help grow this sector of the economy.

I appreciate that our time is short, and I won't waste the committee's time with lengthy remarks. We trust that the committee has had time to consider the suggestions in our brief submitted earlier. We will outline some of the main points and will be happy to answer any questions or discuss them in greater depth.

Many industries and interested parties will be presenting many suggestions on new initiatives to encourage new economy and productivity, but it is against a difficult backdrop. We appreciate too that the recent tragic events in New York have had far-reaching impacts on major issues of international security and economic stability. We recognize that the Canadian government is now reassessing its own fiscal plans to ensure that fundamental priorities of national and international security are met, while continuing to encourage the growth of a healthy Canadian economy and society.

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We feel strongly, of course, that our industry is well positioned to contribute to the government's long-term objectives of building a strong economy and contributing to an enhanced quality of life for all Canadians. Our brief outlines a number of important suggestions in these areas.

As the committee members are certainly aware, the government has traditionally maintained a policy commitment to encourage the growth of a strong Canadian-owned production sector to ensure the creation of Canadian content for film and television. The emergence of a strong industry has been a major success story. Our annual production profile, which we've submitted to the committee, indicates dramatic increases in overall production activity, export dollars, and jobs between 1995 and 2001.

While public funding remains crucial to the financing of Canadian production and the attainment of the government's cultural objective to tell Canadian stories, the dramatic developments in export and job figures during this period underline that public funding can also be viewed as an important stimulus or as leveraging the growth of a labour-intensive industry.

We believe government support for the industry is a good investment in the economic future of Canada and in the cultural future of our country, playing a partnership role in our industry's growth. I will briefly summarize a number of areas outlined in more detail in our brief where this partnership can be strengthened and improved.

The first is tax credit simplification. As we outline in our brief, we would urge the government to follow through on its Budget 2000 commitment to redesign the Canadian film or video production tax credit in order to simplify its operation and improve its return to producers of Canadian content.

There are presently two systems of tax credit for Canadian film and television production in the federal tax system. One is the certified production credit, created in 1995, which exists for productions that meet high levels of Canadian creative and technical content and are produced by Canadian-controlled companies.

The second, the production services credit, was created in 1997, and it provides a rebate of Canadian labour costs to a producer or service providers for productions that meet no minimum Canadian creative content criteria requirements.

While we strongly endorse both credit systems, as they have both led to growth in this industry, we are concerned that the benefit of the certified credit has been reduced by the overly complicated design of the credit calculation, a complexity that is not present in the operation of the production services tax credit. The complicated calculation also results in a number of administrative complexities that delay processing and create greater bank financing charges, which undermines the benefit of the credit.

I should note that the major banks have now formed a committee within the CFTPA to at least work with producers to try to reduce some of that burden, but we still need some help with the system.

In our brief we summarize a number of proposals for simplifying the credit process while reaffirming the objectives of the program. We are currently in the process of constructive discussions with senior finance officials, but the endorsement of this committee to finalize this process would indeed be extremely valuable.

We would like to thank the committee for its past public and strong support of the government's commitment to the Canadian Television Fund. The fund has been a unique public-private sector partnership that has made a major cultural and economic contribution to Canadian society. More than any other production incentive available in this country, the CTF has ensured the presence of distinctly Canadian stories and a chance to tell them in an increasingly diverse and fragmented television market often dominated by foreign product.

A recent study of CTF activity undertaken by PricewaterhouseCoopers produced some dramatic conclusions on the economic impact of the fund. We have made that study available in both French and English to the committee. Among the most important, the Canadian Television Fund contribution helped create over $6 million in production activity in Canada in 2000-01. That activity created over 16,000 direct and indirect jobs.

The fund has had an enormous impact on regional activity. It has assisted 93% of productions in Atlantic Canada, 58% in the prairie provinces, and 42% in B.C. Without the Canadian Television Fund, the financing model for Canadian content would be destroyed, resulting in a major decline of production activity, a major loss of jobs, and we would no longer be able to see stories about ourselves.

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The fund is now at a critical crossroads in its growth. The government's contribution is due to expire on March 31, 2002, but such a development would be devastating for Canadian programming.

While private sector contributions continue to grow, so does the demand. The introduction of over 50 new digital channels, all with significant Canadian content requirements, and a competitive launch environment will impose new demands on the fund in the coming year.

The government is now in the process of considering a longer-term renewal of its commitment beginning in 2002. We would strongly urge the committee's support for the renewal of the fund in its recommendations to government.

Continued productivity and improved corporate financing increase job opportunities. In terms of future challenges, the industry needs to find better access to more traditional forms of financing. The problems of the financing system involving tax credits in the Canadian Television Fund underline the precarious nature of project financing and the perennial problem that our members face in terms of cashflow.

As the industry matures there is a need to improve access to bank loans and lines of credit on a corporate basis as well as a project basis. There is also a real need for venture capital and equity investment. Despite the large volume of activity in the industry, the problems of the project financing have never been greater. The financial burden for ensuring completion and delivery of the project always falls on the producer. I should be clear that while many of you may know some production companies, you probably can only name about five. The other 395 members of our association are small and medium-sized enterprises, often only made up of one or two people who in turn hire all of the jobs that we report on.

Financial stability for production companies is essential to future growth but is very elusive. Government needs to look at ways of improving the situation if the industry is to prosper.

As we indicated earlier, the Canadian film and television production sector has been growing rapidly, as have the number of jobs linked to it. In 1999-2000 the industry supported almost 46,000 direct and 73,000 indirect jobs in every region of the country. There's every indication that as long as there are measures to encourage production in Canada, job creation will continue to expand. These are highly skilled, well-paying, creative positions providing new opportunities primarily for young people. For any of you who have children, these are jobs you'd want your children to have.

The production sector is increasingly high-tech as well, with major technological developments occurring within traditional production and post-production environment as well as in the creation of new media entertainment tools.

As the industry expands, Canada has become well respected for the quality of its creative and technical teams, which helps to generate new market interests and increased opportunities. Production increases have resulted in increased demand for trained personnel, especially in the regions. Recognizing this, our association has developed a number of internship or mentorship programs with the public sector, principally Human Resources Development Canada and the Department of Foreign Affairs and International Trade, and more recently, thanks to the help of the CRTC, with private sector partners, including Bell Globalmedia, CanWest Global, and Corus Entertainment.

The positive response to all programs has been overwhelming from both intern and mentor companies. The leverage factor—which is for every dollar invested by one of our partners $1.50 of activity is generated in the industry—is strong and the level of future demand is seen as very high. The job rate for these young people having left the program is in excess of 95%.

Support for our sector is a good investment in the new economy and the future of our cultural and economic life of our country, as well as the energy and creativity of our youth. We would ask the committee to support recommendations to the finance minister that encourage that additional resources be made available for the creation of more mentorship and internship programs, particularly in the areas of new technology and content creation industries. You will find the industry will meet and exceed the leveraging created by these dollars.

Thank you for your time and consideration, and we'll be pleased to answer any questions.

The Chair: Thank you, Ms. McDonald.

We'll now hear from Dale Orr, from WEFA Canada Inc.

Dr. Dale Orr (Senior Vice-President and Chief Economist, Canadian Services, WEFA Canada Inc.): Thank you, Mr. Chairman.

First, I did prepare a piece that looks like this that should be in front of you.

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Secondly, our company has merged with DRI, so it's now called DRI-WEFA Inc.

Of the many important questions before the committee, I'm going to address only one of them this morning, and that is the allocation of future fiscal surpluses. The contribution I have for you is the piece that was circulated that gives an update on the impact on the Canadian economy—the financial implications—of the September 11 terrorist activities.

Also, just last Friday we finished our economic forecast, so I'm happy to talk about that this morning, as well. That forecast goes from this year to 2005. Some of the conclusions are quite familiar to you, I know, and others may not be.

The first conclusion is that it appears for fiscal year 2001-02 it's reasonable to expect a fiscal surplus even when you account for all the bad news we've had. It's not only the terrorist activities, but we had a lot of miserable-looking economic indicators before that happened. But accounting for all of that, it looks like it is reasonable to expect a fiscal surplus this year in the order of magnitude of about $6 billion.

It's the following three years that are a problem. I did a fiscal update in July, and that was exactly the message from that piece—that it's not this fiscal year, it's the following years that appear to be quite a problem. This is partly because there's a significant amount of tax reduction out there. Of course, we're expecting the economy to grow in those years. So in July it looked like there would be very little fiscal surplus after this fiscal year, and now it looks like there'll be even less. Things are very tight.

I think, against that background, it is still on target to afford the tax plan that was introduced last year. Also, an increase in program spending in the order of magnitude of about 3%, enough to cover inflation and population, still appears to be affordable as we go out.

As you know, last year the government increased program spending by almost 7%. That was not recommended by most of the people I associate myself with—business groups and economists have been recommending increases in the order of magnitude of 3%. Last year is something that was not wise and is certainly not sustainable.

It appears the military and security spending for this year should be able to be financed from the contingency fund. This is the sort of thing the contingency fund was designed for. It's $3 billion a year. My recommendation is that the military and security expenditures for this fiscal year come out of the contingency fund. The important implication of that is it is money that would have otherwise, if not used, at the end of the year gone to debt reduction. That means the unexpected military and security spending required for this year would not threaten the tax reductions or a reasonable amount of program expenditures for this year, but it would make debt reduction a little bit less than it otherwise would have been.

If we assume we're facing higher military and security spending over the medium term, which seems like a distinct possibility, my strongest recommendation is that the government go right back to ground one and reassess their priorities. If this is an increase in priority, it's time to pull a lot of things out of the top drawer that are weaker and falling priorities, and let them fall and be replaced by the higher-priority military and security spending.

So it doesn't appear that the financing of that military and security spending will threaten the fiscal situation for this year. Over the long term, of course, it's difficult to tell, but the secret of handling it over the longer term is certainly trying to have it as far as possible replace other priorities in the budget.

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Another recommendation I have for the upcoming budget is that I think it's very important that the finance minister, whether in late October or early November this year, prepare a five-year plan. Just to address the next two years, as he did in May, will not be sufficient.

The reason for that is the economic cycle we're in covers about five years. We're going to have a miserable time this quarter, next quarter, and into the second quarter of next year. Of course that will create quite a bit of excess capacity in the economy, and we're expecting by the end of next year the economy will be moving along pretty well. It certainly should be, because we've put a reasonable amount of tax reduction and interest rate reductions into the economy.

It looks like 2003 will be a year of recovery. In the U.S., they're forecasting economic growth to be 4% in 2003; we're forecasting it to be almost as strong here. We're forecasting that by 2006 the economy will be almost the same size as it otherwise would have been if we hadn't had these very tough times we're going through now and into early next year.

So it's very important in this next statement that the government present the whole picture, because it is a combination of weak times, creating capacity, and recovery.

On the fiscal side, it's also extremely important the government present the plans through to 2005-06. The reason is there's pretty much agreement that there's not a big fiscal problem in this fiscal year. So if that's all that's covered, with some loose comments for next year, it is not very informative. What people like me who study this say is that the problem is not this fiscal year, it's the next one and the couple after that. How are you going to afford the many different things that have been mentioned as increasing priorities? That issue must be addressed.

I think there are two very important risks facing the Canadian economy at this point. The first is the risk of further terrorist attacks. Just addressing the economic side of that, let alone the human side, there is obviously a reasonable probability we have not seen the end of it. If there are others, what will be the impact of that on consumer and investor confidence in the U.S., the implication on us, and then directly on Canadian consumer and investor confidence? This is extremely important, and I don't need to emphasize the downside risk is tremendous. It really is a tough situation.

The second one is the Canada-U.S. border crossing. From an economic point of view this was probably the worst thing that affected Canada. It sent out a message to people who build plants in Canada to serve the North American market that they're subject to some disruptions if they put their plants in Canada that they would not be if they put their plants in the U.S.. We tried to rid ourselves of that fear in investors when we went to the free trade agreement—in fact that was very much one of the driving forces of the Canada-U.S. Free Trade Agreement that served us so well. So that is a very difficult and troublesome message that has gone out to people who are saying to themselves, I want to build a plant to serve the North American market; should I put it in Canada or should I put it in the U.S.? It's a situation that can be very, very expensive for us over the longer term.

As to how we're going to deal with that, there are several different possibilities, but that's something we're going to have to watch very, very carefully. There's a downside risk for the Canadian economy, and there are really two things here. One is investor expectations—what does it do to people who are making those plant location and job creation decisions, and there's the day-to-day, week-to-week basis as truckers sit in lineups nine hours long. I know the situation is quite a bit better now, and hopefully it can stay that way. This is the second source of very troublesome downside risk the Canadian economy faces at this time.

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Thank you, Mr. Chairman.

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

Now to proceed to the question and answer session. Mr. Epp, you have seven minutes.

Mr. Ken Epp (Elk Island, Canadian Alliance): Thank you very much, Mr. Chairman.

Thanks to all of you for your presentations today. They were enlightening and interesting.

I would like to start off with Dr. Paterson. You mentioned, and I agree with you, that the whole hub of the economy nowadays is on R and D and technological advances. In your view, what is the best model for involving both the private sector and public funds, in some combination? What's the ultimate model for administering this, and do we have it now?

Mr. David Paterson: I don't believe we have it now. The best models tend to be the ones offering very broad access for all parts of the economy—for big and small businesses—to the programs. That, of course, fits the description of the SR and ED program very well. One of the problems we perceive with the SR and ED program is that it is delivered by CCRA. It's very difficult to fit the words “incentive” and “audit” into the same sentence and come out with a productive result.

We will probably propose to the government this year that its industrial research activities and programs be rolled into one administrative centre that would include the SR and ED tax credits, the IRAP program at NRC, and the Technology Partnerships Canada at Industry Canada. If you combine the three under an organization accustomed to dealing with industrial development and benefits and R and D, the whole process will be much more efficient and much more productive.

Mr. Ken Epp: In Canada we have a lot of entrepreneurial spirit. We have many businesses and different organizations, particularly in the communications industry, where R and D is going along very well. Are you aware of any government hindrances to this? We heard from the Animal Health Institute that the government seems to stand in the way of the development, marketing, and success of these programs. Does this happen in the telecommunications industry too?

Mr. David Paterson: The R and D programs have administrative problems that I discussed before. Under the SR and ED, for example, there are uncertainties. The administration of the program has not been consistent either geographically or over a period of time. The CCRA has made significant progress in this field, but there is room for further improvement.

On the other side, the application-oriented programs like IRAP and TPC—the ones where you need to apply and then wait while they make a decision on whether to support you—the delays can be excruciating in this area. From the perspective of our industry—the high-tech industry—where speed to market is a critical consideration, some members have told us that they look at the programs but don't even bother to apply, because they know the delays are so long they would miss their opportunity.

Mr. Ken Epp: I want to move across to Dr. Orr. I found your analysis very interesting, especially because of all of the doom and gloom around us now, but you're saying we'll still have a surplus this year and the next couple of years are going to be at risk. Though you didn't say as much, do you foresee an actual deficit in the next couple of years?

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Dr. Dale Orr: It's pretty close, but it's difficult to say, for two reasons. First, we just finished our economic forecast, and we have not yet completed the work of going from there down into the details to say whether it will be slightly positive or slightly negative. But clearly it's pretty close.

Then, of course, we have the question of what may be the specific order of magnitude of the military security spending. That's a pretty big area of uncertainty. At this point I'm only willing to say that things look pretty tight, and I would recommend that, to be prudent over this period, the finance minister not make any commitments beyond those he has already made.

Mr. Ken Epp: Okay.

You mentioned also that you thought the contingency fund should be used to finance any of these unexpected expenses now. And the surplus essentially disappearing in the next couple of years means our debt reduction will be gone. It's possible that the total debt might even increase somewhat. What effect does the knowledge that this is going to happen have on our economy? Does that slow things down as well?

Dr. Dale Orr: Well, it certainly has a negative impact on the economy, because it's extremely important that we reduce debt as much as we can. As you know better than I, one is met with all sorts of conflicting high priorities. And just saying yes, it's very important that we reduce the debt... As you know, we've done a great job of reducing the debt since 1993, but we still have the largest debt burden of any developed country except for Italy. So we're still very vulnerable.

This means that if there's a spike in interest rates we will be hit. It means that about 23 cents of every dollar of revenue going to the government right now has to go to debt reduction. It's not available for program spending. That's a fiscal constraint. So debt reduction is a high priority, but tax reduction is a high priority too, to distribute money in the way the government feels it should be doing to keep us competitive. And program spending is a high priority. People still think that health care deserves a lot of money, and now we have this military and security question.

My recommendation for this year was that when we put in this contingency fund we put it in for this particular purpose, and that's the purpose it should play for this year.

And I must say there's money there. If you look at where the 7% increase in program spending went last year—a heating fuel rebate, which had virtually nothing to do with the intended purpose, equalization payments—you can find low and falling priorities that can finance these higher priorities.

Mr. Ken Epp: Okay.

My last question is a very short one. In the immediate short term we expect interest rates to go down. What do you anticipate will happen in the future? Is it going to dip down and then level off, or are we going to see higher interest rates after this?

Dr. Dale Orr: Yes. Well, in the very immediate future—this afternoon—the Fed in the U.S. is going to reduce rates. Whether the Bank of Canada will wait until October 23 or not is a reasonable question. They might not. They might reduce rates before their next announcement date. There will probably be still further reductions in interest rates beyond these October reductions.

The forecast calls for the economy to start picking up in the third or fourth quarter next year. The Bank of Canada, of course, says there's a lag six months to a year, so it's going to be looking at this type of forecast. Our forecast calls for interest rates starting to move up by around the fall of next year. And when you have a forecast of 4% growth in the U.S. in 2003, for example, that will be about the time the central banks will start moving back up again.

Mr. Ken Epp: Okay. Thank you.

The Chair: Thank you, Mr. Epp.

Madame Picard.

[Translation]

Mrs. Pauline Picard (Drummond, BQ): Thank you, Mr. Chairman.

My question is directed to Mrs. McDonald. You spoke about the importance of the government contribution in support of the film and television industry. I would like to hear your views on the impact of new technologies such as the Internet on aspects such as copyright and international trade.

• 1030

[English]

Ms. Elizabeth McDonald: Thank you very much for that question.

The Internet is both a blessing and a nightmare for our sector at the moment. It is providing a new distribution avenue that is very attractive to young people, allowing for stories to be extended in many exciting different ways.

Tomorrow I'm going to the launch of Degrassi: The Next Generation. It is not only going to be on television, but it will also be on the Internet, allowing you or your children to become students at Degrassi High, to vote in elections, etc. This same program will be going to England, to the BBC, and the Internet model will be translated into a British school, with all of the issues that would be there.

So on the one hand the Internet creates a great opportunity, but there are two problems with it. The first is that we have yet to identify the economic model for Internet product. We know it's there, but certainly many of the people accessing Internet product are like my 21-year-old son at Guelph, who perhaps doesn't do it in a way that recognizes copyright. And there are many young people in this country who do that. I'm not particularly proud that he does it, but I did find out that that's how he sees many feature films.

So having no economic model is a problem. People have an expectation, particularly in North America, that this product is free, and it is hard to assess the impact if advertising is associated with it. We have to invest in it and take advantage of it, but we have to recognize the economic realities.

A second issue is copyright. As you know, Canada has a serious problem with section 31 of the Copyright Act. We're hoping to deal with it through the process launched by Canadian Heritage and Industry Canada, which has highlighted the weakness in our copyright legislation, and it means we cannot yet protect our programming adequately.

Programming—television programming, feature film—is sold by markets or geographical areas. And you asked me about export. If someone can access that program from Europe and not have to go through a European broadcaster or distributor, but simply get it for free, then the whole value of export models is very diluted for Canadian content producers.

Other jurisdictions—the United States through its Digital Millennium Copyright Act, Australia—have moved to tighten up thier jurisdictions and make it difficult. We are not Luddites in the British history way. We are not opposing innovation, but we are saying that when a product is created, we have to ensure that its creators can be paid.

From the producer's point of view, we are responsible for paying the directors and the actors and the technicians, and when somebody takes that product for free and distributes it, without recognizing the costs associated with paying for it, then we have the problem that not only are we not paid, but we also cannot pay the people who we employed.

It is an issue. Canada is not in the lead on this issue, unfortunately, though we have a very strong interactive production area. Changes we would favour to section 31 of the Copyright Act could be achieved quickly. Then we will have to move on to the challenges of phase three of the copyright legislation.

[Translation]

Mrs. Pauline Picard: I have another question for Mr. Orr. You said that the government needs to put forward a five year plan and that you would be in favour of doing it right now. I would like you to elaborate on this.

Secondly, I imagine you know what the Minister of Finance intends to do since you said you would be making recommendations with regard to his intentions. Do you know what he intends to do?

[English]

Dr. Dale Orr: It's easy to answer the last one. No, I don't know what the finance minister plans to do. At this point there is even some uncertainty in my own mind what I would recommend him doing. We've been living in such uncertain times over the last month, and will be over the next month.

• 1035

You also asked me to elaborate on why I think he should have a five-year plan. I gave a reason why it's very important that he deal with the economy with the full five-year cycle. You put out a very pessimistic picture if you only look at the next couple of years, because the following three are looked at as years of recovery. That's the way these things normally operate.

The key assumption under that is that the Bank of Canada is doing its job, and generally they do. They're a very capable group and serve us well, but a key assumption underlying that is when excess capacity is created in the economy, they will stimulate the economy and bring us back to an equilibrium.

On the fiscal side, the point I made is that we're already well into this fiscal year and we're reasonably confident that there's some surplus. The problem is in the following years, and the people who have been urging the finance minister to have a budget, as opposed to an economic statement. We really need to know what his plans are for the following years. That's even more important than it was six months ago. People urged him, in May, to be more forthcoming than he was.

Whether you call it a budget or an economic statement is almost a meaningless point. The key issue is that he give details on both the economic forecast and the fiscal plan over the five-year period. There's not much money left to spend. He's not in a position to move forward on his tax plan, and he's not in a position really to increase program expenditures on net over what the plan now calls for. So whether you sort of beat him over the head and say he must give us a budget and not an economic statement, there wouldn't be much in the budget anyway.

I think the May document was called an economic statement budget update anyway. So this issue of budget versus economic statement is kind of meaningless. The substance is let's see what his view of the economy is and how he's going to finance these various things that have been mentioned over the other years.

The Chair: Thank you, Mr. Orr. Thank you, Madam Picard.

Mr. McCallum.

Mr. John McCallum (Markham, Lib.): Thank you, Mr. Chairman.

I have one comment directed to Mr. Paterson, and two questions for Dale Orr.

I haven't been on this committee that long, but generally speaking, people come and ask for tax cuts for their industries, or whatever their issue happens to be. That's natural, normal, and good. But I was delighted to hear you say that you thought the expenditures on the broadband and the innovation economy should be deferred, even though that's directly at the cost of your representatives. So congratulations. I think that's exactly what will probably have to be done.

I'd also just like to say—you mentioned deficits—that having been in the banking world and now this world, the commitment to never again go back into deficits is stronger among my Liberal colleagues in caucus than it was among bank economists. That says quite a lot. So I think you can be assured that unless things get a lot worse than anyone is now predicting, we won't go back into deficit.

As for Mr. Orr, I mean no offence to you personally, Dale. You're doing your job and we're doing ours. But I must say, now that I'm sitting on this side of the table, this steady stream of economists lecturing us on things we already know gets a little tedious after a while, but it is your job and it's our job.

On my first question, in your statement you say that airline travel will be negatively impacted for at least a decade. My airline travel was negatively impacted for two days, and governments around the world are telling people to get back to normal. So what information do you have? How can you possibly say that it will take more than a decade? Are you assuming that terrorists will attack every year for the next ten years? I don't understand the basis of that statement. I would suggest it's not helpful, in terms of trying to get people back to normal lives.

• 1040

Dr. Dale Orr: There are really two parts to that.

I guess on the first statement, it's probably because there were a lot of younger people watching what happened on September 11. That's going to leave scars for a long time. They will not think of airline travel as a fun thing, or a perk, for a long time. That's the reason for saying this is not something that will be forgotten in a matter of days by a large group of potential airline travellers, in spite of what the airline industry and the government might try to do about it. Now I could be wrong. My job is to try to assess these things and bring my thoughts to people. I hope I'm wrong, but that's the reason for that comment, John.

Mr. John McCallum: Okay. I'm not convinced, but anyway...

My second question is on your comment that terrorists and truckers would travel as freely between Ontario and Michigan as between Ontario and Manitoba. Then you said Canada would retain its immigration policy. So that implies the effective disappearance of the Canada-U.S. border, because there's no stopping at all between Manitoba and Ontario.

I don't understand that either. Obviously we understand that smooth traffic at the border is essential, and we may get back to normal, and maybe even improve through smart technology and things like that.

When you say there would be absolutely no barriers, we'd have to have the same drug laws as the United States on marijuana and send people to jail for marijuana, or they wouldn't do that. We'd have to accept all of their guns coming across the border. We might not want to do that.

We couldn't have our own immigration policy. They wouldn't accept no barriers, if we were letting in different people from those they were willing to accept. Finally, it seems to imply we'd have a customs union with a common external tariff, or else there'd have to be some stoppages at the border.

I don't understand your basis for that statement, unless you are implicitly assuming that we will harmonize with the United States on gun policy, marijuana policy, external tariff policy, immigration policy, and every other kind of policy. How can you envisage us moving from Ontario to Michigan, exactly the same as from Ontario to Manitoba, unless you envisage harmonization in all of those four areas I've mentioned, and I'm sure many others that I haven't mentioned?

Dr. Dale Orr: That is generated by the statement that from an economic point of view we cannot tolerate nine-hour delays at the Canada-U.S. border crossing. That's what we had immediately after September 11. If it's even half of that, it's still a tremendous cost to the Canadian economy. Something would have to give, if that were the situation. There would be no easy way out of it.

There are several ways of dealing with that type of situation. One possibility I have raised, because something would have to be done, would be to have the perimeter around Canada and the U.S. sufficient that we could then do away with the Canada-U.S. border crossing.

As you well say, that raises all sorts of very vexing economic, cultural, and sovereignty types of issues. Yes, it does, but if trucks have to wait for five hours to get through the Canada-U.S. border, that raises all sorts of tough problems, as well. It's in that context. There is a menu of ways of dealing with that tough problem. This is one of them. You raised those issues. They are probably the sorts of things that people in France and Germany were talking about ten years ago. Now you can now cross between France and Germany, and there is no border.

I think it's a reasonable statement to make that between our trading partners it's time to take another look at that border. We have a lot of commerce with the Americans; they're very good friends of ours, in all respects. Is it still appropriate to have that border crossing, when we look at how things are done in Europe?

I'm raising the question. I think it's a pretty interesting question. If we have to tolerate hours of delays at the border for the truckers, this question should be pulled out of the top drawer.

• 1045

The Chair: Mr. McCallum, your final comment?

Mr. John McCallum: No one's talking about five-hour delays. I'm saying that we should get back to where we were before, or to a better position, through technology.

I'm disputing the factual basis of your comment, when you say we could have our own independent immigration policy with zero barriers at the border. I just don't agree that this is factually correct, not to mention the other issues I also raised.

Thank you.

The Chair: That's a valid point, and this is going to be part of a debate outside this room as well as internally. There are people who come from different perspectives, and I must say that economic efficiency at the border is extremely important, particularly as it affects the standard of living for Canadians. I think that at the end of the day this decision will also be economically driven.

Mr. Cullen.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman. Thank you, presenters.

I have a question first for Ms. McDonald. If I recollect, some time ago there was an issue with respect to actors, directors, and other production people based in California coming to work in Canada on TV or film productions in Canada. The State of California, if I recall, was not allowing a tax credit against the taxes paid in Canada. I guess they weren't terribly excited about a lot of the work coming up here to Canada.

If I recall, there were some accommodations made with the revenue agency and finance department, and I just wondered how that's working.

Ms. Elizabeth McDonald: There's no accommodation. I'm going to let Mr. Mayson answer this, because I seem to be perplexed by the...

I'll start off on the broader issue of the runaway production issue. I think it has to be clear to everybody that the Screen Actors Guild, which is the strongest union in the entertainment industry in terms of numbers of people, is making a lot of noise right now about runaway production. Interestingly enough, the mayor of Los Angeles does not agree with what they're taking. The general issue is that it is very expensive to shoot in Los Angeles and that our dollar is one of the principal issues in terms of attracting people to come up to Canada, plus the crews and the infrastructure we've developed.

There is a lot of misinformation that gets put out into the media about this issue in general. I think that just has to be clear, and it's exacerbated by the fact that SAG is presently having elections for president between Valerie Harper, formerly of Rhoda, and... I'm trying to think of the other person's name, formerly of Little House on the Prairie. They're having this great debate, and they managed to take up ink in the newspapers—not as much in recent weeks—and it's usually based on lots of misinformation.

However, for the particular question you're asking, Mr. Mayson will answer.

Mr. Guy Mayson (Senior Vice-President, Operations and Membership Services, Canadian Film and Television Production Association): I think the one you were referring to is the issue of the old withholding tax regime, which had been in place for a number of years. There was a lot of concern, particularly to the higher income foreign actors, about now suddenly being required to file tax returns and about the complexity that would go with it.

I'm happy to say that a solution was reached at the end of last year, where basically a new, more equitable withholding regime was put in place, one that provides the convenience of the withholding regime and that also gives the government a fair return in income tax. It's actually, I think, a little soon... it's really only been in place this year. There does not seem to have been a problem in terms of deterring actors at all, so we're pleased to say that it's been very successful.

Mr. Roy Cullen: Good. Thank you.

Mr. Paterson, you mentioned that human resources ought to be properly ranked first. With respect to stock options, one thing the government introduced in the 2000 budget was a different tax treatment for stock options. The capital gains is realized when it's exercised as opposed to when it was given. Now, that's put some people in a bit of a difficult spot as I understand it in that they're facing a capital gains exposure, but the shares in certain high-tech companies have really gone belly up. I gather there's some discussion going on with the finance department. Are you aware of this issue, and could you tell us where it's at?

• 1050

Mr. David Paterson: This has been an issue right from the very beginning. We, along with some other associations, proposed to the finance department that the gains from stock options be taxed when the shares were sold.

In that budget, the Department of Finance took a half-step forward. They agreed that you could postpone the payment of the tax until you actually sold the shares, but they still required that the tax be measured on the difference between the option price and the market price on the day the option was exercised. With the performance of the stock market, particularly with the high-tech companies in the past year, that has proved to be disastrous.

We have tried to persuade the finance department that this is not the right way to go and that they should in fact determine the gain and the tax liability based upon the difference between the exercise price and the selling price, but we have not been successful.

It is a serious problem. There have been many, many people in the industry who took huge baths last year. When we realized the problems this was likely to create, we advised our members at the time that they should caution their employees to sell enough shares to cover the taxes immediately on exercise and that they should not assume that they could sell the shares somewhere down the road and pay off the taxes then. Despite that caution, we are aware that there are a large number of people out there in the high-tech industry who have a big problem at the moment.

Mr. Roy Cullen: I just have one final question.

Mr. Paterson, as to the stock options, generally they're targeted for middle management and up. Employee share-ownership plans reach employees more broadly. I think it was last year in the United Kingdom that they came out with some tax provisions that said that if you had a qualifying employee share-ownership plan, the capital gains would not be taxable as long as you were in the plan for at least five years. Do you think that this government should be doing anything in terms of tax policy to encourage the formation of employee share-ownership plans, or are we doing enough?

Mr. David Paterson: There's been considerable agitation to persuade the government to adopt a more encouraging tax policy towards stock ownership plans and stock option plans. In the high-tech industry in particular, stock option plans extend much more broadly than has been customary in the past. There's often the case where everybody is in the option program. We would like to see the Department of Finance move forward to simplify some of these tax policies and lessen the burden on employees, certainly we would.

The Chair: Thank you, Mr. Cullen.

The final questioner will be Mr. Nystrom.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Yes. I have two or three questions. I want to do a follow-up to what Mr. McCallum was asking.

What are the delays now at the border? You were talking about nine-hour delays a little while ago, down to five hours. What are those delays now? Do you have any idea?

Dr. Dale Orr: I have some idea from some of the people I've talked to that it's pretty close to normal. That's what they're saying.

Mr. Lorne Nystrom: How does that affect your suggestions then that we have this eraser that erases the border in terms of the future if the delays are roughly back to normal?

There's a difference between synchronizing our laws with the Americans' and the European situation. In Europe you have a balance between a lot of large states. In North America we have one dominant state. It's the mouse sleeping with the elephant. It might be great for the mouse until the elephant has a nightmare and rolls over. That's the kind of situation we're in. If we're getting back to normal then, why would you advocate such a radical solution to a problem that is getting back to normal?

Dr. Dale Orr: There are two things. One, I'm not advocating it. I'm saying that if we can't have truck traffic moving smoothly, that imposes a very high economic cost. Something would have to be done, and this is one of the things that could and should be looked at. That's what I'm saying.

How long will it stay at normal? I don't know. It depends on quite a few different things. I'm just saying that if we can't keep it moving smoothly, we're going to have to pull some pretty significant plans out of the top drawer, including this one. That's all.

• 1055

Mr. Lorne Nystrom: In terms of priorities, you're saying we can still afford the $100 billion in tax cuts, but you're cautioning us about program spending. On the one side, we've had a real downsizing in public sector spending in the last decade. As of last year we had experienced a 7% increase over the preceding decade. In this sweep of time there has been a real downsizing, to the point where we have a smaller role now for the federal government than we've ever had since the Second World War.

On the other side, we have this creation of a human deficit. Household debts are about 98% of household income. The health care system is suffering. So is education. We have humungous problems with aboriginal people in terms of a lack of economic development. We have a huge farm crisis in this country, particularly in the prairies, with drought, massive subsidies to the United States farmers, subsidies by Europe, and so on. I wanted you to respond to that.

You seem to say it is okay for these tax cuts to stay. On the other hand, we've had this tremendous human deficit created by cutbacks, starting in 1995 with Minister Martin's budget, with the consequence I've mentioned.

I have to speak to my constituents, who are farmers and aboriginal people, people suffering from lineups in hospitals, and so on. What do you say to those people about the priorities that you seem to think are of lesser importance than maintaining huge tax cuts, many of which are for wealthy people?

Dr. Dale Orr: It's a tough question. It sure is. It's really what government is all about.

I guess the first point to make is that the impact of program spending versus tax cuts is a very murky issue. Some of the program spending goes for things other than health and education, as you well know. In fact, some of it has been studied to death and found to be pretty counterproductive.

On the other hand, some of the tax cuts are bumping up the basic personal amount. It's going to lop Canadians off the tax rolls. So it's to reduce poverty and things like that.

I don't know what I can say beyond saying we also have tax expenditures that are suspended midway between being a tax cut and a program expenditure. Sometimes we deal with things that way.

So yes, this is a very tough question. Even the distinction between what's a tax cut and what's a program expenditure at times can get very murky.

I guess also, to make that point, public opinion polls and what we seem to be hearing suggest that Canadians want to see money going to health care and to education. To a significant extent those are provincial government responsibilities. So part of the question concerning the optimum size of the federal government is not an issue about how much money should go into health care, because there's the question what the role of the federal government should be versus the role of the provincial government.

I guess this is just to say I support the tax plan that's out there. I think it's affordable and should stay on track. Taking everything together, having program spending grow at about 3% a year strikes me as a reasonable plan to be on.

It's a tough question. These definitions get very murky. Many people do think tax cuts are for the rich and program spending is for the poor. That's really not the way it is at all.

The Chair: Thank you very much.

Mr. Lorne Nystrom: I have one last question.

I think you mentioned equalization might be an area in which we can cut back.

Dr. Dale Orr: Yes.

Mr. Lorne Nystrom: Again, I'm worried about that in terms of the balance between the wealthier and the poorer provinces and in terms of an area that might be cut back. Many provinces rely on equalization, particularly Atlantic provinces, but also Manitoba, Saskatchewan, and of course Quebec. I'm curious why you've mentioned that equalization might be an area we should target for a rollback.

Dr. Dale Orr: It's been studied by quite a few people. It should be studied much more. It's pretty questionable whether that's the best way of addressing the objectives we have for equalization. That's all I can say.

The Chair: Thank you.

Mr. Orr, by the way, is it true that equalization payments, since 1993, have risen by 33%?

Dr. Dale Orr: I don't have that number in front of me, sorry.

The Chair: I can tell you that's the case.

Dr. Dale Orr: Okay.

The Chair: I just wonder how many provincial programs have risen by 33% since 1993.

• 1100

I want to go back to what Mr. Nystrom stated vis-à-vis going back to normal.

Whenever a crisis occurs, people always want to go back to what they consider normal, meaning the conditions prior to a crisis or an event. Then we say, “Well, you know, if things could just go back to normal...”. But the reality is that prior to September 11, our country was also facing challenges, whether you're looking at the issue of regulatory environment or of productivity, the border issue.

The point I'm making is that as legislators, while we deal with the immediate, which is the September 11 aftermath, should we in our pre-budget consultation report to the minister also focus on the long term, in the sense that next year, the following year, and ten or twenty years from now we are going to face some challenges? For example, this committee has produced a report on cost recovery as one challenge. The issue of productivity is another one.

What do you think of that? Should we be addressing the immediate, but then always looking toward the future?

Dr. Dale Orr: Well, obviously I think you should focus on both. I understand your mandate is to give advice for the next budget, but that doesn't necessarily mean you're shortsighted, because to address long-term problems you have to put things in place in the next budget that are there for long-term fundamental reasons. I think the committee has been on the right track in addressing some fundamental longer-term issues like productivity. I commend you in that and I think you should continue looking at those longer-term structural issues.

The Chair: I'm just raising that point because going back to normal is not... Actually, we don't want to go back to normal. We want to better the situation that was considered our normal situation prior to September 11.

Dr. Dale Orr: I might just add on that, too, Mr. Nystrom, that while it's normal that trucks are going through the border at the times they were going through in July, it's not normal in the sense that we've been burned. An emergency situation came up and people came to understand what can happen in emergencies. That's also part of what goes into investors' thinking.

The Chair: Thank you, Mr. Orr.

Since Mr. Solberg has rejoined our finance committee, he will get a question for five minutes.

Mr. Lorne Nystrom: Which party is he with now?

Mr. Monte Solberg (Medicine Hat, Canadian Alliance): I think you could ask that question of yourself, Lorne.

First of all, productivity has been mentioned. I have to express my frustration that Ms. Szkotnicki has to be here again to talk about this issue. I just want to mention... what is it, the Bureau of Veterinary—

Ms. Jean Szkotnicki: Bureau of Veterinary Drugs.

Mr. Monte Solberg: —Drugs, and point out that it's time they got their act together. I know we don't have much time to talk about this, but I'm frustrated you have to be here again to relay these horror stories year after year.

Like John McCallum, my ears perked up, Mr. Paterson, when you mentioned you would consider deferring the innovation program and the broadband program because of the unusual circumstances we're in. But I think we should also give serious consideration to one of the other things you raised, which is the elimination of the capital tax in this country, which does impede innovation. I will simply mention that.

To Dale Orr, I want to say I agree with you that airline traffic will be impeded for a long time, if not because of consumer confidence, even though I think that's obviously an issue, but because of the extra security measures people will have to go through that will make travel by train, bus, and automobile much more attractive. It can't help but have some kind of impact. I think your assessment is absolutely correct, and I'd love to talk to you at greater length about some of these things.

My question will be to Ms. McDonald. First, I'll simply say I agree with you 100% on the copyright issues. I think it's completely wrong that we don't have proper legislation in place to protect copyright holders and that we're unable to enforce it, and you have my support in finding ways to do that.

• 1105

I do have a question about the television fund. Mr. Orr made the argument that we have to move things that were in the top drawer down the chain. As somebody who has a satellite dish, I've seen all these new channels come on board, and what occurs to me is that there is a huge demand now for content, which should be good news for your industry. I'm wondering whether or not it's necessary to have that fund now. If these programs have to be produced in any event to provide all this content, wouldn't it make more sense to simply ask consumers to pony up for the extra cost of producing these programs when we have these other priorities now, like putting money into intelligence gathering or screening of immigrants or building up our military? Isn't that an appropriate way to handle this, given this new reality?

Ms. Elizabeth McDonald: First, I should be clear that we're not asking for new money for the Canadian Television Fund; we're just asking that an investment that's been made by the Canadian government continue. We're not asking for more money than we had before.

I think when you talk about what would happen, the economic profile for those new channels is very challenging, and it is likely that if the Canadian Television Fund were withdrawn, just in terms of the new channels, all you would get would be more repurposed Canadian programming, so nobody would benefit in any big way.

You're right that the number of hours and shelf space seem to be infinite, but the pie that's feeding that for the moment is not infinite. The advertising market has gone through quite a shock, and it will probably take it several years to come back. That has an impact on all of the broadcasters, whether they be the new channels or the existing ones.

Subscribers for the satellite services or those digital services... We are quite a leader in terms of that technology and delivery of those services, and we're coming at a time when people are going to have to re-examine their expenditures in terms of unemployment, etc. So the growth for subscriber uptake will probably have to be conservative over the next three to four years.

One of the important things about why we fund Canadian programming and Canadian programming with high levels of Canadian content is that those are the programs that not only tell our stories, but ensure more Canadians work on them. While we do need industrial programs and we need to work with our foreign counterparts, if you make a story written by Canadians, directed by Canadians, produced by Canadians—the sort of programming targeted by the Canadian Television Fund—you don't just meet the cultural objectives of this country; you also ensure Canadian writers are writing, Canadian directors are directing, and you ensure that the technical infrastructure that serves that industry continues to work. And this is an industry that works in every province and every region of this country.

So if you want all those people to work, the Canadian Television Fund responds to that.

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

On behalf of the committee, I'd like to express to you our sincerest gratitude for your input. As always, it's been a very interesting panel. You've provided us with some of the latest numbers, which will be very helpful. Our commitment is basically to address the September 11 issue, but with an eye to the future. After all, nation-building continues, and our committee will do its best to provide the type of guidance that's been requested in the past. Thank you very much.

The meeting is adjourned.