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37th PARLIAMENT, 1st SESSION
Standing Committee on Finance
EVIDENCE
CONTENTS
Tuesday, April 30, 2002
¿ | 0935 |
The Chair (Mrs. Sue Barnes (London West, Lib.)) |
Dr. Thomas J. Courchene (Individual Presentation) |
¿ | 0940 |
¿ | 0945 |
¿ | 0950 |
The Chair |
Mr. Jack Mintz (Individual Presentation) |
¿ | 0955 |
À | 1000 |
À | 1005 |
The Chair |
Professor Herbert Grubel (Individual Presentation) |
À | 1010 |
À | 1015 |
À | 1020 |
The Chair |
Mr. Mario Seccareccia (Individual Presentation) |
À | 1025 |
À | 1030 |
À | 1035 |
À | 1040 |
The Chair |
Mr. Charlie Penson (Peace River, Canadian Alliance) |
Mr. Jack Mintz |
À | 1045 |
Mr. Charlie Penson |
Mr. Jack Mintz |
Mr. Charlie Penson |
Mr. Jack Mintz |
Mr. Charlie Penson |
Prof. Herbert Grubel |
Mr. Charlie Penson |
The Chair |
Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ) |
À | 1050 |
Prof. Herbert Grubel |
Mr. Yvan Loubier |
À | 1055 |
Prof. Herbert Grubel |
The Chair |
Mr. Jack Mintz |
Á | 1100 |
The Chair |
Dr. Thomas Courchene |
Á | 1105 |
The Chair |
Ms. Maria Minna (Beaches--East York, Lib.) |
Á | 1110 |
Dr. Thomas Courchene |
Prof. Herbert Grubel |
Ms. Maria Minna |
Prof. Herbert Grubel |
Á | 1115 |
Ms. Maria Minna |
Prof. Herbert Grubel |
Ms. Maria Minna |
Prof. Herbert Grubel |
The Chair |
Mr. Jack Mintz |
Ms. Maria Minna |
The Chair |
Mr. Scott Brison (Kings--Hants, PC) |
The Chair |
Mr. Lorne Nystrom (Regina--Qu'Appelle, NDP) |
Mr. Mario Seccareccia |
Á | 1120 |
Mr. Lorne Nystrom |
Mr. Mario Seccareccia |
Á | 1125 |
Mr. Lorne Nystrom |
Mr. Mario Seccareccia |
Mr. Gary Pillitteri (Niagara Falls, Lib.) |
Á | 1130 |
Á | 1135 |
The Chair |
Mr. Mario Seccareccia |
The Chair |
Mr. Jack Mintz |
Á | 1140 |
Mr. Gary Pillitteri |
Mr. Jack Mintz |
Mr. Gary Pillitteri |
The Chair |
Prof. Herbert Grubel |
The Chair |
Mr. Scott Brison |
Mr. Jack Mintz |
Á | 1145 |
Mr. Scott Brison |
Prof. Herbert Grubel |
Á | 1150 |
The Chair |
Mr. Scott Brison |
Dr. Thomas Courchene |
Mr. Scott Brison |
Dr. Thomas Courchene |
The Chair |
Mr. Scott Brison |
Dr. Thomas Courchene |
Á | 1155 |
The Chair |
Ms. Carolyn Bennett (St. Paul's, Lib.) |
Mr. Jack Mintz |
Ms. Carolyn Bennett |
Mr. Jack Mintz |
 | 1200 |
The Chair |
Mr. Bryon Wilfert (Oak Ridges, Lib.) |
Prof. Herbert Grubel |
The Chair |
Dr. Thomas Courchene |
 | 1205 |
Mr. Bryon Wilfert |
Dr. Thomas Courchene |
The Chair |
CANADA
Standing Committee on Finance |
|
l |
|
l |
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EVIDENCE
Tuesday, April 30, 2002
[Recorded by Electronic Apparatus]
¿ (0935)
[English]
The Chair (Mrs. Sue Barnes (London West, Lib.)): Good morning. Bienvenue à tous.
We are, pursuant to Standing Order 108(2), in pre-budget discussions today. We're very happy that our witnesses have joined us as a panel of economists.
We have with us: Dr. Thomas Courchene, from Queen's University, welcome; Jack Mintz, the president and chief executive officer of the C.D. Howe Institute, welcome; Professor Herb Grubel, senior fellow, Fraser Institute, welcome again--this is a former home for you so welcome back; and Mario Seccareccia, who is from the University of Ottawa, bienvenue Monsieur.
I will invite you to do your presentations and then we'll have discussions, and questions and answers, from the committee members. All of you have been here before. So we'll just do this in the order that you're listed in our agenda.
Mr. Courchene, please, go ahead.
Dr. Thomas J. Courchene (Individual Presentation): Thank you very much, Madam Chair.
It's a privilege and a pleasure to be asked again to appear before the House of Commons Standing Committee on Finance. I'm going to start with a few congratulatory comments to the committee and to Finance.
Last year, I had the occasion of reviewing Canada's fiscal performance in the context of the G-7 nations. On the deficit front, Canada was the first G-7 nation to return to budget balance in the wake of the 1990s recession. It now appears that the string of budget surpluses, which began in fiscal 1997-98, will continue through to 2001-2002 and beyond. No other G-7 nation can claim five consecutive surpluses, and Canada may well be the only G-7 country, maybe with one other, to run a surplus this year.
Second, while Canada ranked as one of the most indebted G-7 nations, second only to Italy, in the mid-1990s, our debt-to-GDP ratio has dropped by about 20 percentage points since 1995, from 70% to 50%--here I'm talking only about the federal level--which is the largest decline among G-7 nations. We still have some way to go, but we're nonetheless converging on the G-7 average.
Another outstanding accomplishment is that we have successfully addressed the unfunded pension liabilities of the CPP/QPP. Tax hikes are how we did it, but nonetheless we've addressed it. No other G-7 nation can make such a claim, and for some of these nations the unfunded liabilities of their public pension funds are going to loom as an enormous fiscal challenge.
Finally, we have now begun to reap the rewards of putting our fiscal house in order. During the 1990s recession, our debt and deficit overhang was such that we were actually forced to increase taxes during the recession, while recently our return to fiscal flexibility has meant that in the current economic slowdown we have undertaken a degree of fiscal stabilization that is historically unprecedented in our country.
The key stabilization initiatives were the huge tax cuts, and to a lesser extent the increase in health transfers, that took place on January 1, 2002. In the most recent budget, last December, Ottawa undertook further stimulus by postponing the small business tax installments for a six-month period. In tandem, these initiatives played a role in ensuring that Canada did not fall into recession, nor did the economic slowdown interrupt our string of successive budget surpluses, as many had predicted. So, as I noted, plaudits to Finance and to the finance committee on all counts.
Taxes, debts, and deficits in the information age. In my book, A State of Minds: Toward A Human Capital Future for Canadians, I focus on the implications of globalization and the information revolution for citizens, for markets, for governments, and ultimately for Canadian public policy. The bottom line here is that in an information era what will happen is we will privilege human capital in much the same way that the Industrial Revolution privileged physical capital. Combining this perspective with the longstanding Canadian notions of desiring economic competitiveness and social cohesion, I developed a one-sentence mission statement for century 21:
Design a sustainable, socially inclusive and internationally competitiveinfrastructure that ensures equal opportunity for all Canadians to develop,to enhance and to employ in Canada their skills and human capital, therebyenabling them to become full citizens in the information-era Canadian andglobal societies. |
Among the economic implications that flow from this mission statement, especially the “employ in Canada” aspect, is that our marginal tax rates on mobile factors--physical, financial, and human--must be competitive with those south of the border. In the 2000 budget and in the 2000 economic statement, we made important progress, but it's still the case that the top combined, federal plus provincial, marginal tax rates for personal income taxation are too high vis-à-vis the U.S. rates. High marginal tax rates are one of the factors that can fuel the brain drain.
More generally, as Canada becomes progressively integrated into North American economic space, our system of taxation should shift away from income and towards consumption. Indeed, the export-import neutrality of value-added taxes makes the GST a critically important tax if we want to run a larger government sector than the Americans.
I'm sure that Jack Mintz and Herb Grubel will have much more to say on the taxation front.
On the social cohesion front, the challenge here is to upgrade the skills and human capital of Canadians, and particularly the lower half of our labour force. As Lester Thurow noted in this context:
If capital is borrowable, raw materials are buyable and technology is copyable, what are you left with if you want to run a high-wage economy? Only skills, there isn't anything else. |
So the principal imperative that flows from the mission statement in this regard is the democratization of the opportunity to access the fruits of information and human capital.
¿ (0940)
Among the specific suggestions I make is a bill or charter of human capital rights for our children and a reorganization of our bureaucracy to make it consistent with the fact that knowledge is now on the cutting-edge of competitiveness on the one hand, and we must provide equality of opportunity for all Canadians to develop their skills on the other.
Here's where I may differ with some of my colleagues. In view of these tax and social policy imperatives, I am quite satisfied with our existing approach to debt control, namely, that in the enhanced debt reduction plan, as I already noted, Canada has reduced its debt-to-GDP ratio by more than any other G-7 nation over the last half dozen years and will soon find its debt-to-GDP ratio to be below the G-7 average. So I'm quite happy with ensuring budget balance in the context of a growing economy, and this will imply a debt-to-GDP ratio that continues to fall.
I have an issue I'll skip that relates to the fact that Finance always seems to underestimate the degree of surplus in its budgets. I attribute that to the fact that the forecasts have been underestimating actual growth. These forecasts come from the private sector, not from Finance, and indeed, it's not even the private sector's fault. They must focus on U.S. forecasts. I think the real culprit is that Americans have been underestimating their growth, and it's been carrying over to our side.
At any rate, let me now go to some different perspectives that relate not so much to the current budget but to the issues this committee is going to have to direct its attention to in the short term.
These issues are, first of all, that there will be an increasingly vertical fiscal balance in the federation, namely, the fiscal interplay between the federal government and the provinces is being shifted in favour of the federal government. Led by British Columbia, several provinces will surely run deficits this year. Indeed, the Conference Board of Canada's submission to Quebec's Seguin Commission has noted that, under the assumption of current revenue and program structures, Quebec would post recurring deficits of about $3 billion each year until 2019-2020, while the federal government would achieve ever-increasing surpluses, eventually reaching $90 billion in 2019-2020, and cumulatively enough to retire the existing federal debt.
This is one definition of the degree of fiscal imbalance, and Quebec is probably not an outlier here--except maybe for Alberta--so it's not surprising that the issue of federal vertical imbalance is coming to the fore.
I might also say on the issue of vertical imbalance that the 1990s recession was intriguing because Canada's deficits at both levels increased by roughly $30 billion over that period, and the provinces took two-thirds of that, or $20 billion. Part of this was the fact that Ottawa was putting the cap on CAP and was de-indexing federal transfers. But recently, beginning in 1995, Ottawa also took advantage of the provinces, in a sense, and shifted the deficit in part to them via the major cuts in the CHST transfers, from $18 billion to $11 billion.
This meant that while Ottawa was able to achieve budget balance in 1997-1998--that is early in the 1990s boom--in fact the majority of the provinces only achieved budget balance last year, at the peak of the boom. Therefore, the provinces are far more vulnerable than Ottawa in terms of the ongoing economic slowdown, and while Ottawa's focus can be on managing the surplus, the majority of the provinces will be preoccupied with wrestling deficits to the ground.
This is bound to rekindle a call for rebalancing the federation. This call was being rooted, in part, through the Romanow and Kirby commissions, but with the recent rosy forecasts of surpluses for this current year, it will be made directly to Ottawa.
Let me just give one other aspect of how this is impacting on federal-provincial finance and focus again on the implications of the transfer cuts. In the general public's mind, what has happened is that Ottawa has cut transfers to health. This may or may not be true. The fact of the matter is the provinces have not let health expenditures fall. Indeed, almost every province has increased its health expenditures, and in fact they're running about 40% of provincial budgets right now.
What has happened is that the provinces have decreased expenditures on environment, on municipalities, on education--everywhere but health--because of the political power of the health constituency. What has happened, therefore, is this landscape has been decimated in part, or levelled, in terms of spending. The Millennium Scholarships are an example of how Ottawa is now stepping in and spending money in some of these fiscally starved areas, like homelessness, and soon perhaps with direct transfers to municipalities.
¿ (0945)
Now, I'm not saying this is good or bad. What I'm saying is this won't play very well with the provinces. We're going to see some dramatic responses from the provinces on a variety of fronts. Reports calling for the GST revenues to go to the provinces will only be the opening volley in this fiscal tug of war. It seems appropriate that this committee in the not-too-distant future give some attention to this emerging vertical fiscal balance.
Alongside this there's a horizontal fiscal balance that has always been there but is really coming to the fore now as we have shifted from the tax on base to the tax on tax. You have situations where Alberta's top marginal tax rate is 10%, while some of the other provinces have 20%. These are enormous differences in a highly mobile system. Some of it reflects philosophical differences across the provinces, but a lot of it reflects the different fiscal ability of the provinces.
There's another important thing at play here where I begin to get back into the tax side. The 2000 federal budget approached taxation from a social policy perspective rather than a competitiveness perspective. Most of the cuts were geared to low- and middle-income Canadians. Later, the 2000 statement actually went to reducing high tax rates, but nonetheless the essential message that Ottawa sent to the provinces was as follows. We have cut our low and middle personal income taxes and corporate income taxes. If you want personal and corporate income taxes to be competitive north-south, you cut your taxes. Alberta did that by cutting its personal income tax rates to 10%. Ontario cut its corporate tax rates in half and Alberta followed.
This is an inappropriate policy on Ottawa's part. Ottawa should not abandon its leadership role and should take some responsibility for ensuring that competitive tax rates exist for mobile factors and not just let this fall on the provinces.
One might counter that one could see why Ottawa might do this, because if it had very flat PIT rates and the provinces followed Alberta, then there'd be very little progressivity left in the personal income tax system. But you can get around this by reducing the entire range of federal taxes, and that would make more tax room available for the provinces.
What's happening is it looks like the have provinces will end up with much lower personal income tax rates than the have not provinces. We'll get the internal version of the brain drain, as well as the north-south brain drain. This has led in part to the repeated calls from the Atlantic provinces to make sure equalization is rethought, because they're not able, under the current system, to continue to provide reasonably comparable public services at reasonably comparable tax levels.
What I'm getting at is I'd like this committee to go back to the 1980s and think about something that was called the Parliamentary Task Force on Federal-Provincial Fiscal Arrangements, which was headed up by a member of Parliament from New Brunswick, Herb Breau.
It's time to rethink some of these aspects, and this committee would be the ideal entity to look at it.
This is particularly the case because we have another element now that has to be taken into account, and that's the rising role of the municipalities, in particular the global city regions. They want in to federal-provincial negotiations and they want to make it federal-provincial-municipal.
Just one short word on this. These global city regions are viewed as the new principal motors of the new economic order. These regions are emerging as dynamic export platforms, as creative centres for human capital and for research concentration, and as key competitive nodes in the global network of economic activity. If our global city regions are not competitive in North America, Canadians will never achieve the standard of living we need. Global city regions such as Montreal, Toronto, and Vancouver are going head to head with U.S. global city regions. The big difference is that Pittsburgh and Washington--those U.S. global city regions--can directly access infrastructure funds, and they can't in Canada because they are features of the provinces. I argue that the cities are mounting an effort to try to get more influence and getting into having a more full and formal relationship with Ottawa and the provinces.
The most recent aspect of this is the TD Financial Group calling for greater fiscal and financial independence for Canada's cities. This provides a further impetus for increasing, or thinking about increasing, the role of cities. I think the title of the TD report is instructive. It's called A Choice Between Investing in Canada's Cities or Disinvesting in Canada's Future.
So here is another issue that the committee should consider looking into. It's really part of the same ball of wax, namely to look at federal, provincial, and municipal, to rethink the federal-provincial-municipal underpinnings of taxation in this country.
¿ (0950)
It's an issue that's going to creep up on us very quickly, and I think it would be a fascinating activity for your effort.
In conclusion, I should note that in my appearance before the committee last year, I devoted far more attention to north-south integration within NAFTA than I've done this year, and part of this integration included support for a North American monetary union or a common currency, modeled along the lines of the euro. The events of September 11, 2001, have made creative mechanisms and instruments to enhance trade even more important.
Should members wish, I would be happy to answer questions on NAFTA integration as well as those that relate to my opening statement. Thank you very much for your attention.
The Chair: Thank you.
Mr. Mintz.
Mr. Jack Mintz (Individual Presentation): Thank you, Madam Chair. I'm very pleased to be here today, and I want to thank the committee for inviting me. I've been here many times, and I've certainly enjoyed meeting the various members and talking to them.
I also want to commend the committee in terms of looking at our standard of living and what fiscal policies have to be considered in terms of what it can do. This committee has actually been a very active one on that front over the past several years. It has put out some very fine reports that have made some very important policy recommendations. Many of those recommendations have actually been adopted by the government, so I want to encourage you, first of all, to continue along those lines in looking at these very important questions, as I think this committee does make a very significant contribution to public policy in Canada.
Certainly we have seen a lot of changes over the past decade. Total government expenditure has fallen from about 51% of GDP in 1991 to close to 40% in the year 2000. Federal expenditure, which includes program expenditures and interest expense on debt, has fallen from about 23% to 18% of GDP in the same period.
We've also seen, as my colleague Tom Courchene has mentioned, the elimination of deficits at the federal level. We've had a string of surpluses, which is quite commendable, in my view. We've also seen a sharp reduction in the debt-to-GDP ratio in Canada, at the federal level particularly, and I think that has been rather good.
In addition, we've started on the road to tax reform, where there have been reductions in corporate tax rates, especially for the service sectors, which were highly taxed under our previous regimes. In addition, we've been moving on the personal tax side with cuts to personal tax rates.
But my message today, really, with respect to productivity, is that even though we have made some significant progress in Canada, it is too early to stop the process. In fact, my concern right now is that there's a growing view that perhaps we don't need any more tax cuts in this country, that we've achieved our objective. So today I just really want to talk about taxation and tax reform and why we need to continue moving along this path.
Canadians, including myself last night, after filling out their difficult-to-comprehend income tax forms this past week, know that the government continues to absorb a large share of their paycheques. Our bloated tax system, with high rates and targeted preferences, continues to be an impenetrable obstacle in improving Canada's standard of living. Further tax reform is needed if Canada is going to reverse the slide in our standard of living relative to other growing economies, including the United States.
Canadians should understand one fact first. Despite fiscal restraint and tax cuts introduced in recent years, Canadian governments are the largest they've ever been in terms of revenues. This you can see in the graph that accompanies my notes, showing government revenues as a percentage of GDP for the years 1961-2000.
In 2000, Canadian governments accounted for 44% of GDP, compared to 29% in 1965. Federal revenues have not grown this much, from about 15% of GDP to 18% in 2000, but this has resulted from the transfer of tax points to provincial governments to fund health education and social services during this time.
Those who believe governments have inadequate revenues to spend on critical public services have it wrong. The problem is that governments misallocate tax dollars by designing ineffective public programs.
For example, in 1999, Canada spent almost the same as the United States on health, education, and protection, about 16% of GDP--by the way, protection includes defence and law and order, domestic expenditures on law and order. However, Canada spent almost 25% of GDP on other programs and debt carrying charges, while the U.S. only spends about 15% of GDP on similar expenditures.
In some areas, like post-secondary education, transportation and communication infrastructure, defence, and research and development, Canada actually spends less than governments in the U.S., once adjusting for size. Yet, overall, the Canadian governments are much bigger than those in the United States and require more tax revenue to fund their programs. From this I conclude that a significant share of surpluses that will be realized in the future should be directed at tax reform and debt reduction.
¿ (0955)
Expenditures should be limited to grow with population and prices, and priorities should be funded by reallocations.
Canada's tax system remains remarkably inefficient and unfair, despite the progress made in the past several years. An even greater worry is that we might embark on a path that will lead to higher taxes that could fund inefficient programs. With high levels of taxation, any relief will be given through targeted preferences that only complicate and undermine the efficiency and fairness of the tax system. Three consequences for productivity result from a poor tax structure.
Many businesses find that, from a taxation viewpoint, Canada is not a mecca for investments, nor will it be by 2005. This you can see in some graphs that I have on effective tax rates on capital for selected countries in manufacturing and service sectors. This is based on the international tax program at the University of Toronto--the work that we do on a constant basis. As you can see, Canada and the United States will have effective tax rates on capital that will be relatively close to each other.
I should mention that we not only take into account differences in statutory rates where Canada's statutory rate will be well below the U.S. rate by the years 2004 and 2005, but we also take into account other features of the tax system, for example, the tax treatment of depreciation costs, inventory costs, capital taxes, sales taxes, and capital inputs.
However, we may have a similar effective tax rate compared to the United States by the years 2004 and 2005. But as you can see from this graph, we're going to have higher ones compared to many other countries, such as the United Kingdom, Italy, Sweden, interestingly enough, and Ireland. That is really the problem.
When you look at Canadian investments and North American investments and the way they are done, most companies will move to where markets are largest, capital pools are deep, and labour markets are quite heterogeneous. For that reason the United States tends to be the favourite location for many businesses to service the North American market.
If we want to really try to change the level playing field and make it better for us, then what we have to do is something much better than the United States. Comparability is not good enough. We actually have to have an effective tax rate on capital that is substantially below that found in the United States if we want to tilt the level playing field towards Canada. In fact, that's really the lesson that has been learned by a lot of smaller countries with respect to large countries around the world.
Ireland has certainly succeeded in doing that in the past 15 years. But it's also been true of Finland, Sweden, and a number of other smaller countries in Europe, where they've actually had relatively good growth because of the way they have moved ahead with much lower taxation of capital.
Secondly, Canadian taxes impede entrepreneurial investments far more than many other industrialized countries. Taking into account corporate and personal taxes on interest, dividends, and capital gains in 2001, Canada's effective tax rate on entrepreneurial investment in manufacturing and service industries is above 70% of income for medium-sized businesses.
You can see this in some graphs I've also attached. This is based on some work that we have done for the OECD. We have done some comparisons, in which we've taken into account not only corporate and personal taxes but also the aggregate of those taxes that impact on entrepreneurs, since entrepreneurs, when they must make investments in a particular country, have to take into account not only the corporate taxes they have to pay but also the personal taxes they pay on their dividends, capital gains, as well as interest income.
In this chart, in which the legend is missing, the first bar for each country is actually the effective corporate tax rate. The middle bar is the effective personal tax rate on investments. The white bars are the aggregate ones. If you look at Canada, we actually have made some progress. We're the third bar. You can see that in 1995, for manufacturing, the effective tax rate was well over 80% on income adjusted for inflation. That has fallen to 70% until the year 2001. So we have made some significant progress in reducing the effective tax rate on entrepreneurial investment.
À (1000)
On the other hand, you'll see that our 70% rate, while much better, is certainly much higher than what you'll find in some other countries, again, looking at Italy, Japan, the United Kingdom, and Sweden. So our effective tax rates are still much larger compared to many other countries, and again, we just don't look all that great when you put it on a comparability index across countries.
Third, even though Canada provides favourable tax treatment for the creation of ideas through research and development, the tax system discourages the adoption of new technologies through investments in machinery and other capital goods. The high effective tax rates we have on machinery actually discourage the adoption of capital that has important technology attached to it, and in fact that is a very significant reason for why Canada's productivity is undermined.
A significant opportunity, therefore, lies ahead for Canadians if further tax reform were to be adopted in Canada, both reducing the tax burden and making the tax system more efficient and fair. One of the most important steps taken by the Minister of Finance was to introduce a five-year plan for tax cuts over two years ago. It's time to revisit the plan and introduce new tax cuts for the future in order to improve Canada's standard of living. Several key issues could be addressed in the next federal budget.
First, business taxes have a powerful effect on productivity and could create a significant Canadian advantage for businesses to locate in Canada to serve the Canadian market. Further, corporate tax cuts should be taken with the aim of cutting tax rates and broadening the tax base in order to improve productivity. Federal and provincial capital taxes that are over $5 billion remain a fiscally unattractive part of the tax system.
Second, taxes have discouraged Canadians from saving, therefore making capital less available to Canadian businesses. Registered retirement pension and savings plans have failed to keep up with the times since contribution limits have been effectively frozen for many years. Further, many lower- and middle-income Canadians faced with excessively high marginal tax rates from income-tested benefits find that there's little point to saving income for future contingencies.
Third, the employment insurance program is inefficient, resulting in higher unemployment and lower productivity. The current annual surplus of contributions over benefits, now almost $6 billion, is a tax that falls most heavily on lower-income workers with incomes below $40,000. Many businesses, especially smaller ones, are faced with increasing Canada/Quebec Pension Plan payroll contributions without a commensurate reduction in EI premiums. Further, businesses laying off workers pay the same EI premium as do other businesses with good employment records. The EI system encourages layoffs by not following some good insurance policies.
Fourth, withholding taxes on income paid to non-residents are a barrier to the integration of Canadian and U.S. capital markets. Such withholding taxes encourage Canadian businesses to access capital through the U.S. rather than Canadian financial markets. Moreover, increasing capital market efficiency can substantially improve the returns Canadians receive from their savings. Many policy proposals shall be made with the intent of improving Canada's standard of living. One obvious candidate lies in front of us, and that's tax reform. Canada should continue down this path for several years until our tax system creates a Canadian advantage in North American markets.
Thank you.
À (1005)
The Chair: Thank you very much.
Professor Grubel, please commence.
Professor Herbert Grubel (Individual Presentation): Ms. Barnes, members of the committee, I thank you very much for giving me this opportunity to come back and reminisce about my four years with you, where there were many happy memories but also some tedious times we spent together.
You've asked me to suggest to you what I would recommend Canadian government policy should be in order to increase the living standard of Canadians while at the same time assuring equality of opportunity. Well, I'd like to briefly discuss two subjects and then elaborate on a third one.
The first concerns common currencies. I have appeared before you on this subject. I have published quite a few articles. I'm still deeply involved. On Friday, I'll be flying to Kuwait to consult with local ministers of finance and central bankers of the Gulf Co-operative Council, who are thinking of establishing a common currency in that area. You may also know that dollarization--one form of hard currency fix equivalent to a common currency but much easier for smaller countries to do--has taken place in Ecuador and has succeeded in many dimensions. It's also being contemplated in some Central American countries and may soon be taking place.
If you wish, I would also be happy to talk to you about the Argentine experience and to what extent it proves that hard currency fixes are no good. I've just written on that subject, and the media has left really quite the wrong impression that the cause of their problems was the fixing of the exchange rate. There were many more serious fundamental flaws, which it was hoped might become easier to solve with the common currency but obviously were not. Of course, they never had a common currency. They only had a currency board and, as Stephen Hanke says, only a quasi-currency board.
As a last remark on common currency, many of my colleagues in the profession, including the governor, David Dodge, who is on record as such, say yes, having a common currency is a good idea, but the biggest obstacle is that the Americans won't cooperate. What's in it for the Americans? Why would they want to link their currencies to the Canadian dollar no less than to the Mexican peso?
Last week we had as a speaker at the annual general meeting of the Fraser Institute, Steve Forbes, who is best known for the journal that carries his name, Forbes magazine, but who also spent many millions of dollars on running for the presidency of the United States. He mentioned as one of four key policies needing to be undertaken to improve the world that we should have a common currency in North America. I didn't prompt him. I don't know how he got the idea. But at a reception afterwards I asked him this. Since the biggest obstacle people always raise about this subject is that the Americans have no interest, what would you suggest we do in order to get the Americans interested? And he said, have your government ask our government. This is something that I have suggested for a long time. Of course, it requires that we make up our own mind first whether it's in our interest to do so.
There's no guarantee that if we ask the Americans, we will succeed. But I think it is silly to say, as one of your distinguished colleagues, John McCallum, told me the last time I was here, that it is totally absurd even to think about it because the Americans would never agree. I think that's putting it the wrong way around. I see some nodding on some sections of this committee.
Secondly, I'd like to tell you that the Fraser Institute has embarked on a major project to study what it takes to create a common frontier for North America, which then implicitly allows us to reduce or eliminate the importance of the border between Canada and the United States. I think this is very important. We have already had a preliminary series of articles on that subject in Fraser Forum, but I will be organizing a conference this fall that will bring together Canadian experts on various aspects of the subject. On top of that, I will have an expert from the United States who takes the position of what is in it for them and what their concerns are, and also one from Mexico.
À (1010)
I would, in the current context of the issues that are surrounding this problem, raise an issue that Gary Hufbauer did in his paper in the Fraser Forum. If by any chance a terrorist based in Canada sneaks into the United States and does major damage, we will have a big problem on our hand. And while this is not exactly the responsibility of the finance committee, I would still say we must not put our heads in the sand and pretend that there are no terrorists here, or that we have a handle on them, or that we have just in fact minimized the chances that they're coming in.
The latest figures are that we had 50,000 refugees last year, 80% of whom came into the country without papers. They are asked to fill out forms for which we have no way of checking whether they give the correct information, and within one hour and a half of having started their consideration they are let out to appear sometime in the following year for some refugee hearing. In the meantime, they are able to draw on our welfare and health care systems.
Ladies and gentlemen, I urge you to have a hearing on this and seriously reconsider whether this is in our interest. I can tell you from the few political antennas I still have that whenever Canadians hear this story I've just told you, they are extremely unhappy, and I think justifiably so. We are by far the most generous country in the world in terms of the conditions we impose for letting people enter this country as refugees. About a quarter of them since September 11 have come from countries that are known to be harbouring great ambitions with respect to terrorism.
Let me now turn quickly to the subject of tax reforms. There are three reasons why every once in a while countries need to have a serious look at their tax systems. One of them is that the tax system has become too complicated through a series of amendments and rulings. Any of you who have filled out their tax form within recent times I'm sure will agree with the assessment that we may have reached this point. I laud the efforts of what used to be the Department of Revenue to make it as simple as possible. But in order to be fair and reasonable, we have now inserted so many clauses and subclauses and so on that it is almost impenetrable.
Secondly, tax reform is needed whenever the circumstances in the world change. Since our last major tax reform in the seventies--I think that's right, Jack--we have seen the world move towards a tremendous amount of globalization and integration of capital markets, higher living standards, and, most important, technology, which makes it possible to shift capital around the world at the push of a button. I think a system that may have been adequate before certainly lacks certain attributes now.
But the third and most important thing I believe is that through time, pure research, applied research of the sort that Jack Mintz is famous for, and rightly so, has developed new information about the effects of the tax system we have. Let me tell, you there is one concept for which Jim Mirlees of Oxford University has received a Nobel Prize, and that is the concept of the marginal efficiency effects of taxation. What that says is if the government raises a dollar of tax, it always induces the people taxed to behave in ways that they can avoid as much of the tax as possible. So, for example, if you tax capital in today's world, in which there are new conditions of completely integrated capital markets, people will not--if there are other alternatives--keep their capital in the country.
À (1015)
As a result of this, and various other conditions--which I don't want to get into now, but we can talk about--whenever the government raises $1 of tax by taxing capital, the losses in output are equal to an additional $1.55. Now, this may not seem impressive, but it is impressive in relationship to the alternative ways of raising taxes. The marginal efficiency cost of personal income taxes is only 56¢, rather than $1.55. The marginal efficiency cost of the sales tax is only 17¢. By the way, these numbers are from the Department of Finance.
Last fall I organized a conference in Toronto that brought together a number of tax experts, including Jack Mintz, who graciously agreed to appear, in spite of all the work from other jobs he has. We considered what should be done in light of these three developments: new knowledge, changed environments, and increased complexity. A book will be published in a couple of months with the papers on the subject. I will make sure all of you receive a copy, if you are interested in the details.
Let me just quickly summarize the details. The first one is quite obvious. We could get a tremendous competitive advantage in the global setting, especially relative to the Americans, if we shifted our taxes away from direct taxes on effort in investment and into sales taxes. We have a form of sales tax, which is really very efficient and a great tax, the GST. It would be very much in our interest to lower taxes and make ourselves more competitive with respect to work effort--to keep the brain-drainers here--and with respect to capital, get more capital in here by raising the GST or sales tax generally.
À (1020)
We tax it when the owners of the capital receive a dividend. On the side, we also have a capital tax, which is payable whether or not you make profits, and on top of that we have a capital gains tax in case there is anything left over.
If you think about it, it makes no sense. The most important source of increased productivity is more capital per worker. Even if we spent oodles and oodles of money in creating new technology and research, in order to put it into effect, you need new machines. So we absolutely have to reconsider whether or not we're doing the right thing on the level of taxation of capital.
Finally, there is the question of work effort. The high progressivity of our taxes has been reduced. In British Columbia, we're now below 50%. We were once the highest in any jurisdiction in the western world at over 55%.
But I think more can be done. I have my doubts about a flat tax, or, as my colleagues call it, a single tax, because if you have a big exemption, the average tax rate still goes up over the reasonable ranges.
Nevertheless, I am still a little bit worried about the fact that the real justification--the economists' justification--for a flat tax is based on a full integration of the capital and business taxes, and that, unfortunately, has not been the plan of many of the people who propose what they often call flat taxes.
Thank you, Madam.
The Chair: Thank you, Mr. Grubel.
Our final witness for this morning is Mario Seccareccia.
Please commence.
Mr. Mario Seccareccia (Individual Presentation): Thank you very much.
[Translation]
Madam Chair, first of all, I'd like to take this opportunity to thank you for inviting me here to share some ideas with this committee.
It is indeed a very great pleasure for me to address this important issue, namely how Canada should go about achieving a high level of growth and further improve the quality of life and standard of living of Canadians.
Since some of the invited panelists may not understand French, I will be making my presentation in English, but I will be happy to answer any questions in either official language. That's what I was planning to do, but had I known that simultaneous translation services were available, I might have decided to proceed otherwise.
[English]
I would like to begin here by indicating that as the committee highlighted in the statement I received at the beginning of April, the major theme of the pre-budget consultation process has to do with the issue of how Canada can attain maximum prosperity while further improving our current high quality of life.
I'm an economist who was trained in what is referred to as a Keynesian tradition here. I not only believe that there's a positive role for government in the economy and that government should not be concerned with budget deficits per se, with fighting deficits at all costs, or targeting surpluses, which is indeed what has been happening, but also that if well-endowed, developed economies such as ours are not performing as well as they should, it is primarily because of demand constraints rather than supply constraints.
Hence, if there are problems facing us, as will be discussed in a moment here with the growth of our standard of living and productivity, perhaps it has more to do with incentives on the demand side than with factors pertaining to the supply-side behaviour of individual economic agents here. As emphasized by many public policy analysts in Canada, the issue that should be of concern to government should be the continued long-term slow growth in our standard of living, which we have especially witnessed over the last decade.
It is well known that measures such as GDP per capita are often highly misleading, since they do not pick up the significance of all sorts of factors like non-market activities, which may be as important to our quality of life than consuming marketed goods and services out there. Also, there are problems with measurement, especially when it comes to the not-so-hidden costs of the environmental degradation that is a result of both the production and consumption of these marketed goods. These qualifications notwithstanding, there's no question that a high standard of living vis-à-vis that of other countries can only be maintained over time if we are sufficiently productive as a society in achieving high rates of measured productivity growth.
Hence, productivity growth should certainly be of primary concern for any government whose goal is to achieve the maximum welfare of its citizens. If one looks at the chart I did--I only have a few charts and tables available there, but that one would indicate that since the late 1970s, real GDP-per-hour prices have been gravitating around a trend growth that is less than half what it used to be during the first two decades of the post-war period.
À (1025)
While there are a large number of factors that would account for some of this trend decline, and one could list a whole bunch of them, I would like to point to at least one factor that is directly under the control of the Minister of Finance and that has suffered largely as a result of the deficit-fighting measures of most Canadian governments since the late 1970s, literally. This has to do with the link, which I think my colleague Professor Mintz here also referred to at the beginning of his presentation, between the composition of government spending, of government outlays, and private sector productivity growth.
Now, since the 1980s, a number of economists, especially in the U.S., have in fact been pointing to the important contribution of public investment as a factor in promoting productivity growth in a country's standard of living. If we want to have higher productivity, we should have a higher--and in fact I fully agree with Professor Grubel here that we should have more capital per worker, in a sense. But it could be public capital per worker, which in fact has been shown to be--at least it has been suggested by a number of economists--rather important in impacting on our ability to produce more efficiently.
Indeed, I remember quite clearly that even before this government came to power in 1993, Monsieur Chrétien had invited Lester Thurow, a well-known American economist, who I think Professor Courchene cited, to speak on exactly this issue at a party convention, if I remember correctly, in Aylmer, Quebec, at the time.
Subsequently--I remember that Mr. John Manley was federal industry minister at the time--Industry Canada invited, among others, another well-known American economist by the name of David Aschauer, who also emphasized the strong complementarity between public capital and private sector productivity.
Some of that discussion appeared in Industry Canada publications at the time, and indeed, to my understanding, even now there is an important research project promoted by the federal government on the role of social capital, not only to promote social cohesion and social integration, but also to enhance our country's standard of living.
Despite the strong interest shown by the government, when one looks at the record of our finance minister, although it has been outstanding on the one hand in delivering budget surpluses--which do little, I believe, to increase Canadian living standards per se; it has meant lower spending and higher taxes for people--on the other hand, there is nothing in fact that has been done on the public investment front to promote productivity growth.
Indeed, if one looks at table 1, one can easily see from the middle column of that table how the share of public investment out of GDP of all levels of government combined--I reviewed them all--had reached in fact a percentage level lower than where it used to be during the 1940s. I went back to the 1940s in order to get some data on the shares of public investment, out of GDP, out of government outlays, out of overall investment in Canada, to get some indication here of the importance of it, and even in the 1940s, when we had other priorities, needless to say, that were more important, we had a share of public investment out of GDP that was much like we have today. To me that is quite appalling.
Now, regardless of which indicator one picks on my table, there is no question that the current government has not turned the tide in favour of a larger share of public investment, which I thought was one of the elements, in terms of ideas, in their coming to power at the time.
Now the last column of the table gives the average percentage growth rate of real GDP per hour worked and shows how the latter has plummeted since its high average growth rate of the 1950s and 1960s.
À (1030)
Many economists who have advised the government during the last decade have argued that there is in fact a causal link between this dramatic slowdown in public investment and the general productivity decline. I would hasten to add this is not a phenomenon that is specific to our country. Public investment, in fact, has fallen victim to deficit fighting in all western countries since the late 1970s, with similar consequences on productivity growth, I would argue.
Now, shall we go back to the days when public investment was as much as one-third of government outlays, that is to say, about three times the current share as was reached in the mid-1960s? In fact, in the peak, in the mid-1960s, around 1966, about 33% share of total government outlays went toward infrastructure investments basically. And that has gone down, as we see, to around 10% over the last couple of decades.
Now, undoubtedly, such an attempt to go back to the 1960 scenario might not be realistic in the short term. However, what is clear is that if the federal government wishes to promote productivity growth, it must significantly increase its spending, not reduce it. Allocate it in the areas that will be most productive, which is creating public capital for Canadians.
Well, the Federation of Canadian Municipalities, in fact, has pointed to numerous infrastructure needs that desperately require funding. However, one can think of many areas, not only native health care, education, and human capital--as some have referred to--that are crying for much-needed funding. There's also promoting a safe environment for all Canadians. Think of safer drinking water. Once again, that requires infrastructure investments, and it would make us more productive if we were healthier.
Of course, there's no magic formula here that will quickly push up productivity growth, but unlike tax cuts for businesses and households whose effect on productivity is at best tenuous, if not inconclusive, greater public capital expenditures are a more direct method of achieving the stated goal by offering a more active role for government on this front.
But even an accelerated public investment program that would be implemented tomorrow would only have its effect on productivity over many years to come. There is therefore no formal, simple formula here that I could provide you with, except that we should take the direction of greater investment rather than less, which has been the norm, if you look over the last 20 years at what has been happening in Canada.
When we drive the streets and whatnot, it's easy to see the problems we face, and how provincial governments face such enormous constraints in being able to engage in this kind of public investment and provide for the municipalities on that basis as well. As I said, this is critically important for us if we indeed wish to achieve higher living standards through productivity growth.
Before I conclude, I wish to warn the federal government not to succumb to the discourse of those who argue that there is such a magic formula, as you find sometimes in the newspapers out there. Over the last few years we have been told from numerous sources that what is presently needed is a new monetary arrangement with our NAFTA partners that would bring about higher productivity growth and a higher standard of living for Canada. The culprit has been our floating exchange rate or more precisely the decline in the Canadian dollar.
À (1035)
I would like to inform the committee that during the last half century, since 1950, let's say, to start somewhere, we had only eight years between 1962 and 1970 where we followed the route of a fixed exchange rate around a narrow band of a plus or minus 1% around the fixed parity at the time of 92.5¢ to the U.S. dollar. While the period stands out as a high growth period in terms of both productivity and overall output growth, as my table 1 would suggest, this high growth in productivity was also characteristic of the 1950s, during which time Canada, almost alone in the world at the time, had adopted a floating exchange rate.
It's hard to conclude from this that we need to peg the rate. I agree with Professor Grubel. I don't think that's the way to go, as Argentina suggests, nor do I believe we should go the route of dollarization, which would be the other alternative that is realistically offered to Canada. Moreover, if you look at the data in my table 2, as it's shown there, when we look at output per person employed in Canada--I took this data from the Bureau of Labour Statistics in the U.S. primarily and filled in where I could for Canada because of some holes from Statistics Canada data--for the period since 1960, Canada showed a mild decline. If you look at the last column, which gives you the percentage decline in productivity growth, when we look at the pre-1980 and the post-1980 period, one sees that in fact Canada showed a mild decline comparable to that of the U.S. and the U.K., for instance, between those periods. This would question the significance of a depreciating, in this case, Canadian dollar as the cause of this decline in productivity.
Hence, one would hardly conclude that fixed exchange rates are necessarily associated with higher productivity growth. In much the same way, prior to the launching of the euro between 1979 and 1999, the Europeans worked with an exchange rate mechanism that would allow the varying exchange rates of the participating countries to in fact fluctuate also between a very narrow corridor, which at the time was described as the European serpent. Now, if exchange rate fixing is in fact of such crucial importance to productivity growth, why is it that the European countries that joined the European monetary system at the time, and subsequently the MU, the European monetary union, during the post-1979 period, faced even sharper declines in productivity growth than did Canada at the time? Even small, open economies such as Austria and Belgium, for instance, which are probably in a similar relationship vis-à-vis the poor counties of the MU--France or Germany at the time--as Canada is with the U.S., if you look at their growth rates of average overall productivity, as indicated there, or any of those indicators I have on that list, you'll see where they suffered an even more dramatic decline than we did during the same period, hardly suggesting that fixed exchange rates will solve the problem, or indeed that floating rates were the culprit for this problem we face.
There are many other factors on which I could easily elaborate that would indicate why we've had a slowdown in productivity growth, but clearly one element that is of direct concern to the finance minister is the idea of trying to reallocate public spending in a way that would provide greater capital, social and public, for Canadians.
Thank you.
À (1040)
The Chair: Thank you very much. We have certainly had a wealth of divergent views presented to the committee, and now it's the committee's turn to explore some of these views with our questions.
Mr. Penson, eight minutes, please.
Mr. Charlie Penson (Peace River, Canadian Alliance): Thank you, Madam Chair.
I'd like to thank the panel for being here today. I particularly welcome my former colleague, Mr. Grubel.
Madam Chair, if your objective was to stimulate debate by having such a diverse panel, I guess you're going to get that.
It seems to me, though, Mr. Seccareccia, your point of view represents a failed policy that we have been on for about 30 years in Canada. We heard from Mr. Mintz and Mr. Grubel that some of the problems seem to be around turning off people from paying taxes, or disincentives for work, if you like. I'm more interested in trying to correct this 30-year decline in productivity and standard of living in Canada than going down that same failed road that we've been on for a long time.
So I'm interested, Mr. Mintz and Mr. Grubel, in hearing more about, first of all, how you would see the tax reform taking place. I've read some of your papers. Essentially I gather what you're saying is, instead of turning people off working, and disincentives, you would try to shift that tax burden to a sales tax, which would be less inefficient than the others.
Also, Mr. Mintz, I see you've said government in Canada still represents 44% of the GDP of the country. Isn't that very high compared to countries like the United States?
I see there was some talk about total debt-to-GDP ratio going down, but our total tax burden in Canada is still 40%. It has been there, as a percentage of GDP, for seven years. In the United States, it's 29%. The amount of GDP that we pay for debt service charges in Canada is 6%; in the United States, it's 2%. Aren't those major problems that we have to overcome in order to become competitive with our major trading partner, not only in their own market but where they're functioning in our market and in third countries where both of us are competing? Isn't that a problem that we have to resolve?
Mr. Jack Mintz: Thank you very much, Mr. Penson.
Let me first say one thing about debt. I really wanted to talk about taxes today, but I also feel the debt-to-GDP ratio is still too high in Canada. When you include provincial and municipal debt, as well as Government of Canada debt, it totals almost 80% of GDP. This is still one of the highest ratios in the world.
I have been increasingly concerned about demographic changes in Canada, and the implications they're going to have for fiscal balances. There was an excellent OECD study last summer that showed that once you take into account the aging impact of society, fiscal balances in Canada by the year 2040 will worsen by about ten percentage points of GDP. In other words, if we continue with what we're doing now and don't try to deal with our expenditure side of government as well as with the tax side, we could end up with tax-to-GDP ratios of about over 50% of GDP.
The OECD took into account five factors. One was the growth in elderly benefits as a percentage of GDP, as a result of aging. Another factor was the growth of health care costs as a percentage of GDP. In fact, their number was very similar to my colleague Bill Robson's number, that that would increase by about four percentage points of GDP. The OECD also took into account declining education and child benefit expenditures--because of the fact that we have fewer children--and the impact on tax-to-GDP ratios, which will fall slightly. Even though people might be cashing in their pensions and RRSPs, the replacement income is often less than the working income of a person, and the aging impact would cause the tax-to-GDP ratio in Canada to fall by a little more than one point. So all this suggests that we've got a major problem down the road. I think debt is something we're going to have to think about.
With respect to tax reform, I mentioned some areas where I think we should definitely look at in the near term. If you want my view on where we should go in total, it's in my book, Most Favoured Nation, which C.D. Howe published last fall. This is really based on work that I started before I joined C.D. Howe. I still continue to be at the University of Toronto. It does outline major tax reforms, which isn't just raising the sales tax rate, the GST rate. Herbert Grubel has already mentioned that. I strongly believe in moving to an expenditure tax system, which would include the integration of corporate and personal taxes, not just on the personal tax side.
À (1045)
Mr. Charlie Penson: Mr. Mintz, can I interrupt you here?
Doesn't this really have to do with confidence in investing? Our direct foreign investment has been going down for 30 years. Even Canadians are looking outside our country increasingly for investment opportunities. If we don't get our tax rates in line with our major competitor, the new plants, the new expenditures in machinery and equipment, aren't going to happen in this country. They're going to happen elsewhere. Isn't that true?
Mr. Jack Mintz: I agree with you. In fact, that's really what I want to stress. But I think there's something more than that. Comparability with the United States just won't be good enough, because the United States...you have conglomeration effects, clustering effects, where resources will go to where markets are largest.
Mr. Charlie Penson: So ours has to be better; it has to be lower than the U.S. market.
Mr. Jack Mintz: We have to think like a small country. We have to actually do something even better than the United States.
That's the reason why I argue that we should not view our policy as being harmonized with the United States, in the sense of being the same as the United States. In fact, what I argue is that we should have better policies than the United States. There are areas where I think Canada can have better policies. In some areas, we already have had better policies. I think we need to exploit differences.
One of the most powerful tools that some small countries have found has been the tax system, particularly business taxes.
Mr. Charlie Penson: Mr. Grubel also makes the point that further moves towards integration with the United States in some type of arrangement might be beneficial.
I gather that things like trade law, which the U.S. is exercising against our softwood lumber, would be things that would be negotiated in any kind of integrated union that would be beneficial to Canada. Is that true, Mr. Grubel?
Prof. Herbert Grubel: Well, I was just going to agree with everything Jack said, but expand a little bit. There's a correlation. The other aspect is if we could minimize the importance of the border, the following, which did happen, would not have happened, and that is, I've been told that during the last ten years or so, with Microsoft booming, Boeing booming, and the whole Seattle area having a tremendous expansion, they have traffic congestion and deterioration of the quality of life that comes along with it--the kind of quality of life these high-tech people, with lots of human capital, really appreciate. What they did was form a committee and send some people to British Columbia saying, we should have some of our offices for writing software, etc., in British Columbia, because they're not congested, as we are, and they offer the kind of qualify of life these people want.
They were there for a day and went back saying it's hopeless, because of the bad taxes and other environments that are relevant to quality of life, other than nice mountains and the ocean. I think we can in fact, Jack, become part of an agglomeration economy, in the Windsor-Detroit corridor, in New England possibly, but certainly in British Columbia and the Seattle area, where, if the border didn't exist, we would certainly be part of the agglomeration that is now Seattle and has one of the highest productivities and per capita incomes in the world.
Mr. Charlie Penson: Thank you.
The Chair: Thank you.
Monsieur Loubier, commencez, s'il vous plaît.
[Translation]
Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Thank you, Madam Chair.
Welcome to the Finance Committee. We've been calling on the expertise of most of you for the past several years.
Professor Grubel, you stated earlier that you had many happy memories of your time here, but that there were also some tedious times. I trust these weren't times spent in my company. We had some very lively discussions which brought me closer to centre and at the same time put a little more socialism into your economic vision. I don't think my move to the centre was very successful, however.
I have a question for you. Earlier, you talked about North American borders. You stated that we should work toward a common frontier and toward pooling our resources to enhance and protect trade. Some disruptions occurred for several days following September 11. May people have forgotten that some trucks were held up at the US border before they could deliver their shipments to the United States. I believe you've put your finger on a fundamental component of Canadian policy, namely that protecting our common borders with the United States and even Mexico must be a joint effort. It's not just a matter of security and defence, but also a purely economical consideration. If our borders proved to be unsafe at some point, the Americans could restrict our access to their market. Am I wrong to say that it would be in our best interests to pool our resources with the United States in order to beef up border protection and in so doing, safeguard Canada's trade objectives?
À (1050)
[English]
Prof. Herbert Grubel: I fully agree. I think it's something we must not be lulled into complacency about just because nothing has happened since September 11. I find myself getting more and more relaxed about the whole subject and more and more ridiculing the rigamarole one has to go through as one gets into the airport or enters the compound of the House of Commons here. It's a kind of sad thing that's happened. And already everything is being relaxed, and maybe that's correct; it's optimal.
But in terms of the macro-policies we should undertake, to ensure we have the confidence of the Americans by cooperating with them is very much in our interest.
I would suggest cooperating with them is by far the best method, because I can tell you that if tomorrow there were a threat to the security of the United States that involved the territory of Canada, the Americans would not hesitate to trample on our sovereignty to protect themselves. They have all the means to do so. If we refuse to cooperate with them, we will have no say over what they're going to do to defend against that threat. I think it is much better if we have some input into what they're doing, in the same way a common currency would allow us input as members of the board of governors and the federal open market committee to have a say on what is the optimum monetary policy for the continent. Now we don't. All we do is react or maybe lead by a few months whatever the Americans are going to do. I think it would be superior to have direct input of this sort.
[Translation]
Mr. Yvan Loubier: You talked about establishing a common currency. As you know, this is a fundamental issue for my party, and in particular for me and my colleague from the Quebec region.
Earlier, Mr. Seccareccia stated that the Canadian dollar could rebound and appreciate in value. Of course it could always recover and surpass the 80 cent mark. One never knows how the currency market will respond. However, the long-term trend seems to be toward a weaker dollar. Today, this instability is the prime concern of entrepreneurs.
Some business people argue that while they are encouraged to increase their productivity, when the time comes for them to sign supply contracts with US buyers, problems arise. The risk factors are significant, given the exchange rate which wasn't much of an issue 30 years ago. Today, however, particularly after what we experienced two years ago, the risks are enormous.
Given that competitiveness is weak, as Messrs. Grubel, Courchene and Mintz all mentioned, and that general taxation levels are high, an increasing number of middle and senior managers are asking to be remunerated in US dollars, a more stable and safer currency.
What's the solution then, other than establishing a common currency coupled with an integrated monetary policy? What alternative would you propose? In Canada and, to a lesser degree in Quebec, there is systematic opposition to even discussing the issue. It's made out to be a matter of Canadian nationalism, whereas in reality, it's an economic issue, one that has to do with successful adjustments and a failure in terms of increasing our productivity.
Mr. Mintz, you stated that overall productivity has increased in the past two years. Canada has moved up one spot and now ranks ninth in the world. However, the fact remains that we must contend with a neighbour, our biggest trading partner, that leads the pack. What alternative would you propose to a common currency regime if most Canadians want no part of this scheme? What other options are there, when Mr. Martin and Mr. Chrétien continue to refuse to even hold a debate and to consider whether the move to a common currency could be made gradually so as not to disrupt and hurt our businesses?
À (1055)
[English]
Prof. Herbert Grubel: I wish there was an alternative. I don't see it. I'd be happy to hear it from you. Send it to me in writing. But I think you're mistaken in assuming that Canadians are not ready for it. You can imagine, because of the publications I have made and the public appearances I have made, I get invited regularly to speak to audiences on that subject. I can tell you that inevitably, however sophisticated the audiences might be, including one in Mexico City the other day, people come to me and say, “You know, Mr. Grubel, I came to this meeting totally convinced that your idea is crazy and I was opposed to it. Now that I've finally understood what it's all about, I'm in favour.” Generally, when I try to ask people, 30% say, “Yes, why didn't we do that yesterday?” Another 30% say, “Over my dead body.” But 40% say, “We need more information.”
That's where I think it is a shame the demand of the finance committee in preceding years, originating with the Alliance, to have a series of hearings on that subject and take the pulse of the nation and explain to Canadians what is involved, especially that it doesn't mean loss of national sovereignty with respect to health care or any other things that are so dear to the left.... We would make progress in this way.
But I assure you, Mr. Loubier, when the dollar hits 50 cents, there will be a major upheaval, and Mr. Chrétien and Mr. Dodge will have to say, “Something more fundamental has to be done.”
The Chair: Okay.
Mr. Mintz.
Mr. Jack Mintz: I'll be relatively brief, mainly because this is a really important topic that deserves a much fuller discussion. In fact, some of the people who should be on the panel are not here. They would express perhaps a contrary view to that of Professor Grubel and Professor Courchene. They've been two important proponents of having dollarization or a common currency with the United States.
I'd like to take the view of some of our other colleagues who would debate some of those concepts. For example, David Laidler from the University of Western Ontario and Bill Robson from the C.D. Howe Institute would first of all acknowledge some benefits of a common currency, certainly in facilitating trade and reducing hedging costs. Those are very important.
There are some associated costs, if your economies are not well integrated, and there are some different economic shocks. Those macro-economic shocks can impact when you have a fixed currency, in terms of greater variability in employment and incomes of individuals. That, of course, imposes a significant cost on people. Part of the debate is not knowing whether those benefits are more or less than the economic costs of dollarization.
Even if you did move to either dollarization or a common currency, a big issue would be how you would set it up with the United States and the institutional framework that would be required. We have to remember that the role of central banks in Canada is not to simply conduct monetary policy, which is important. There are many other aspects, such as lender of last resort, fiduciary responsibilities, and things like that.
Of course, if we did move to dollarization in Canada, would we expect the Federal Reserve in the United States to undertake the same sorts of functions the Bank of Canada now undertakes, or would the Bank of Canada itself need to have some of those things? How would that relate?
So there are some very deep issues involved. Debate is welcome, but I have to admit I'm personally not yet persuaded by the argument that we should move to a common currency.
Á (1100)
The Chair: Dr. Courchene.
Dr. Thomas Courchene: Could I get into this discussion? I too have done a considerable amount of writing and speaking on common currency. The most recent time was last Saturday, at a big conference at Queen's University. I think, Herb, our problem is to choose which one of these events we go to, because there are so many of them.
But let's not forget that in the recent poll, 55% of Canadians said they were in favour of a common currency, and only 35% said they were in favour of using the dollar. So at least they got that part right. A common currency is a more appropriate instrument than dollarization.
You can come at it the way Herb Grubel does, and I do as well. I think having the exchange rate buffer, as the Bank of Canada calls it, so that it falls along with commodity prices, does increase the size of the commodity sector in Canada, or keeps it at levels beyond where it would otherwise be. But it has some pretty negative impacts on the new economy, partly because labour and capitalism tend to stay in the resource sector, but more importantly because this new technology is priced in U.S. dollars, and the Canadian dollar following these by 20%, for example, means the price of the new technology goes up by 20%. So I think part of the productivity shortfall we're seeing in Canada arises from the fact that we're ending up with a labour force and an industrial structure that is less capital intensive and more resource based than it otherwise would be.
If we have a problem with the resource sector, we can solve that problem. I don't think we should use the exchange rate to do it.
But the other way you can come at the common currency is to look at what the euro tells us. Forgetting about why the euro was set up...I agree with the Governor of the Bank of Canada that the reason Europe moved towards a common currency is in relation to things that happened in Europe; they don't want to relive the terrors of the 20th century again in the 21st century in Europe. But once it's in place, it signals that common currencies are an international public good. It signals the denationalization of common currencies.
There are obviously 12 nations in Europe that are using the euro now. All the accession states, 10 or 12 states, are in the process of either tying their currency to the euro or actually using the euro. The entire east-European community, and the Russians as well, are starting to have euros replace their other currencies. Israel is talking about it; South Africa is talking about it; in the middle of Africa, the whole CFA franc area is now a euro area. Some places in this hemisphere, the protectorates of the Dutch, for example, are using the euro, and I presume French Guyana is as well. This currency is going to be used by a population that's two or three times that of the U.S., with a GDP that is larger than the Americans'.
At some point the Americans are going to say, we want a larger dollar area too. So along with Herb, I think the Americans are going to be far more interested in accommodating our interests in a common currency than they have to this point. In any event, as he pointed out, we have to make sure that, in our own skin, we're happy, that this is what we want. That's why I think the debate has to occur.
Along the reasons that Jack has mentioned, too, there are alterative ways to structure a common currency. Some of them are much better in Canada's long-term interests than others. We would not want to have, for example, the clearing process to go north-south. We want to clear initially east-west and then clear the differences internationally, like they do with the euro, because if you start doing everything and New York gets integrated with Toronto immediately, then we're destroying the east-west polity that keeps us independent.
But I would like to make one final point on nationalism, or identity. First of all, in a common currency as I talked about, we could have one side of the currency being the dollar, being the Rockies, and the other side being off the ten-dollar bill. We could put our own symbolism on it in the same way the Europeans have their own symbolism on their coins. The Germans have an eagle on one side of their euro two note. I don't know what the French have, but it's not an eagle. But you could have currency symbolism.
If you look at the great free trade debates we had in 1988, Canadians were saying we had to protect those things we did in our likeness and image in the upper half of North America on the social policy front. If you think about when most of those were put in, it was during the Pearson era, a fantastic period of five or six years when we got a final version of equalization. Americans don't even have an equalization program. We had hospital insurance and medicare updated. We ended up with CPP/QPP. The Canada Assistance Plan came in during that period.
Á (1105)
What was characteristic of that period, and not of any other post-war period in Canada, is that we used American monetary policy. We were tied to the U.S. currency. We had a fixed exchange rate. In fact, we had a version of a common currency. Yet that allowed us to strike out in a very dramatic fashion to recreate our country in our own likeness and image. So it may well be that there are problems on the identity and nationalism sides for common currencies. But I'd like those who are against it to at least recognize that much of what we hold dear on the Canadian front really had its origin in a time when we had a fixed exchange rate, or a common currency, with the Americans. Indeed, it may well be that we didn't have to worry about where the exchange rate was going on a daily basis. That allowed us and our compatriots to turn our attention to things that really mattered to us.
I think a common currency is a matter of economic efficiency and not of identity. I don't believe for a moment that these 12 nations in Europe are throwing in their identity. It's just that a common currency is one of the things that is going to have very little to do with defining nationalism in the 21st century.
I think there will be two, three, or maybe four currencies in the next decade and a half. I really don't think the Canadian dollar is going to be one of them. So it behooves all of us, in preparation for this, to take a close look at how we would like to restructure a consolidation of currencies in this hemisphere. We may or may not like it. But we did the same, as economists, anyway, in terms of the free trade agreement. We had done our homework, and when the opportunity was there we said yes, we want it.
The opportunity may come in the not-too-distant future. The Americans are being urged by the South Americans to help them get more currency stability. It doesn't have to be the dollar, necessarily. Implosion after implosion of currencies is really hurting them. They don't know what to do. They're asking for a system to provide currency stability within North America. I think that as Canadians we have to make sure we end up--
A voice: The Liberals want to ask you a question.
Dr. Thomas Courchene: I'm sorry, Madam Chair.
The Chair: We're well over the time. Other people want to get in. It won't be possible for everybody to comment on every question. We have to be fair to everybody around the table. Colleagues, when asking your questions, please ensure that you leave enough time for answers. Thank you.
Next is Ms. Minna for eight minutes.
Ms. Maria Minna (Beaches--East York, Lib.): Thank you, Madam Chair.
I have to go to another meeting, so perhaps one of my colleagues will pick up the slack on my side. I'm actually late for the other meeting, but I want to stay behind because I have some things I want to comment on.
First I want to address Mr. Grubel's comments with respect to immigration. I highly resent the constant suggestion that possibly there are criminals in the 40,000 refugees that come here. The 80% figure is high, but I think 60% of refugees come here without documents, and we check each and every one of them.
In addition to that, I think you should know that 50% of those 40,000 come from the U.S. That means the U.S. lets them in, in the first place, for them to come to our borders. Let's not pretend that U.S. security is such a great thing and it's all our situation that isn't working.
Even if we had a common perimeter or a common frontier, there would still be people getting in, as they have in the U.S. With respect, the ones who hijacked the planes all had legal visas in the U.S.
We really want to stop this constant beating up on Canada about our inability to deal with things, and this misinformation.
It's interesting that you suggest raising the GST, which would really hurt the majority of people, because it's a tax that hits everyone across the board. While there's a rebate to some of the lower-income households, it doesn't necessarily really help everyone, because everybody has to pay it at the same rate.
At the same time, you suggest raising the RRSP levels, which benefits the wealthy because the people who can actually deduct high levels of RRSP are those who have lots of money. The average deduction of RRSPs claims, at least a few years ago, was around $5,000 a year.
If you have a family and a mortgage and what have you and the average income of a Canadian, you're not going to be able to benefit from the higher levels anyway. It seems to me you're taking money like Robin Hood in reverse, from the poor to the rich. I have some real problems with that kind of philosophy.
Mr. Courchene, you said earlier in your comments that we had done well in addressing the CPP issue. The business that came before us last week stated that the premiums should be cut, first of all. Secondly, they found the liability was a problem, and therefore it was non-stable and not a realistic thing to count on. I'd like you to comment on that. When you say “addressed”, does it mean positive or negative, or do you agree with them?
Mr. Mintz, when you talk about health and protection, which is about 16%, and we're the same as the U.S...with all due respect, our health costs are 10%. The Americans are close to 16% on health alone--14% is the last I saw anyway.
If you're talking about protection, are you talking about water and health issues or are you talking about police and that kind of protection? I'm not sure which one you're lumping in when you're talking about protection. I know that if you're talking about police and policing, in some parts of the U.S. police officers are making $15,000 a year and subsidizing their income in other ways, whereas I think our police officers are a little more looked after.
I'll put those two questions, because I will probably get back to some of you on my own. I apologize. The whip has yanked me into another committee, so I have to rush it a little.
Á (1110)
Dr. Thomas Courchene: On the CPP, the commissioner of the Canada Pension Plan and Quebec Pension Plan suggested that if we went pay as you go, we would end up having rates of 14%, 7% each. What Canada decided to do was to pre-fund and to ramp up rates immediately or quite quickly to 9.9%, to build up a fund, invest it at market rates, and therefore you can save four percentage points in terms of ultimate tax rate levels.
My hope is that this pre-investing will do incredibly well. It's a bit of a bumpy start, because of the nature of the markets recently. Therefore it will build up enough capital so that we can reduce to 9.9% rates.
I've always argued that one of the ways to keep these payroll taxes down is to recognize that we still have an excess of EI premiums that has been pocketed by the Department of Finance and really should be transferred to allow room for the CPP payment rates.
I believe the CPP rates are a success. When you compare tax rates across countries, we have to remember that some of those other countries are going to have to have some dramatic increases to pay for their Canada Pension Plan, whereas we have it prepaid right now.
Prof. Herbert Grubel: May I please quickly respond to your question on the refugees?
It's a great thing that we have this opportunity to exchange ideas. I can understand, and you can understand, we have different sources of information. I rely on the information of people who have worked inside the Canadian system, including a senior fellow and colleague at the Fraser Institute who was the coordinator of security for the foreign affairs department, Martin Collacott. His numbers suggest his insight into what is going on is what I suggested. Now, I do not know whether his information is obsolete, whether you have information that is completely contrary, or whether in fact there is a tendency in your party to believe that new immigrants vote Liberal and therefore we need their support.
Ms. Maria Minna: That was partisan politics. These are facts from the department itself and from the security group.
Prof. Herbert Grubel: Except for all the people who left, who were there and are now speaking out that they have been muzzled, because they were complaining about this.
Let's agree to disagree. All I'm coming here to say--and I was very careful only to say--is that I think in Canada we should worry about it. I hope you're right, because if you are not right, we're going to call you to task.
Á (1115)
Ms. Maria Minna: All I'm saying, though, is you're asking for a guarantee that there will never be one individual who gets across the border, and this is unrealistic. Secondly, maybe we should take a look at the 50% coming from the U.S. too.
Prof. Herbert Grubel: Well, we already have an advance of excuses on what's going to happen. We're talking about the probability of this happening. If you let in 50,000 people--and we do not know who 60% of them are; we have to take their word about who they are. Then they are let into this country, and most of them don't show up for their refugee hearings. If that is a safe and happy system, then I'm very happy.
Ms. Maria Minna: It's not true that most of them do not show up. I've worked in the field for many years and I was--
Prof. Herbert Grubel: What percentage does not?
Ms. Maria Minna: --parliamentary secretary in the department. It's not true that most of them do not.
Prof. Herbert Grubel: What percentage do not show up?
The Chair: I'll indicate the mikes and that might make it easier not to have two people speak at once. Thank you very much.
Prof. Herbert Grubel: What percentage?
The Chair: Thank you.
Mr. Jack Mintz: Madam Chair, there are a couple of questions I didn't answer yet.
The Chair: Okay. Mr. Mintz.
Mr. Jack Mintz: I'll try to do it very briefly.
The Chair: All right, go ahead.
Mr. Jack Mintz: As to the question on protection and health expenditure, first of all, the numbers you were quoting referred to total public and private expenditure in health care, not just government expenditure. What I was talking about was the government, or the public portion, of health care.
In Canada, Canadian governments spend about 6.5 percentage points of GDP on health care. Actually, U.S. governments spend almost as much as Canadian governments on health care. It's close to 6.5 percentage points of GDP. It's also a more expensive system, as we know, in the United States.
Secondly, with regard to protection, I was including law and order. So it does include police forces. I was just looking at my book that has all this stuff. Canada spends about 4 percentage points of GDP on protection, about 1.5 percentage points on defence, and 2.5 percentage points on other things. The U.S. spends about 6 percentage points of GDP on protection. And then in education, Canada spends a bit more than the U.S. as a percentage of GDP. But the point is that when you add these things up, they spend almost the same thing.
My comment is that education, health, and defence, or protection, do not explain the differences in the public sectors between Canada and the U.S. That's the point that I'm trying to make clear to you.
Ms. Maria Minna: Madam Chair, thank you.
The Chair: Thank you.
Mr. Nystrom, and then we'll be going to Mr. Pillitteri. Eight minutes for questions and answers, please.
Mr. Scott Brison (Kings--Hants, PC): And then, Madam Chair, I assume you're coming back to the voices of good on the opposition benches.
The Chair: Go ahead, Mr. Nystrom. See if you can live up to Mr. Brison's words.
Mr. Lorne Nystrom (Regina--Qu'Appelle, NDP): First of all, welcome to everybody here this morning, and I'll start off by asking Mario a couple of questions.
I was in my riding in a place called Indian Head last Saturday. You've talked about public investment, and I'll tell you what people out there were saying. They say they want more government investment in health care in particular. They want some government investment in terms of the major farm crises we're facing in this country. They want more government investment in infrastructure, particularly in safe drinking water systems, and more public investment in public education.
I think what you're doing is reflecting what public opinion is, namely that overwhelmingly and decisively the public sector has declined in this country. What we need is a growing public sector, not a smaller one.
I also note that in Britain very recently the Blair government has decided to make a massive reinvestment in national health care and have brought in a tax to fund national health care. The interesting thing about this, which I'm sure Mr. Mintz is interested in, is that the overwhelming majority of British people in the polls are applauding this decision as the way they want to go. Support for the Labour Party is now increasing in Britain because of this, and support for the Conservative Party is decreasing.
I think what you are doing here is reflecting a trend among the Canadian population and the people of the world in thinking that the public sector should not be receding, that there is a role for government, for public institutions, and for public policy to represent the common and collective good. It's good to hear a good, refreshing voice.
I want to ask you what your priorities would be in terms of public investment and in terms of planning for the budget coming up next year, since you reflect, I think, the opinion of the majority of the Canadian people.
Mr. Mario Seccareccia: Thank you, and thank you for the compliments. I'm very happy to hear that what is happening in Britain is in fact going in that direction, especially in light of the fact that the Blair regime did not do that in the past. They moved in rather a different direction.
As to where we should go, I'll tell you right now...actually, Professor Courchene referred to one area, education, indirectly through the human capital stuff there. That is certainly very important, and I fully agree with that.
This is one area, but most of these areas pertain to provincial jurisdiction. What has to be done is to make some transfers to the provinces that will allow for that and to put some mechanisms in place that will in fact move it in the direction of providing funds for education and for health care.
I was referring earlier to the Association of Canadian Municipalities, and municipalities face real physical infrastructure problems in the cities. The biggest one we've been talking about is of course in the area of drinking water, but there are many other areas I could think of right now. It seems to me the key here is not so much that the federal government should take the initiative directly in terms of having in this case to provide for building a treatment plant for water or anything like that, but rather that it should provide funds for the provinces, funds that could perhaps be earmarked in such a way that they do in fact go into those areas, as we have done to some extent in the past with health care funding.
It seems to me that is the way to go. There are three major areas that come to mind right now. One is health care, obviously, another is education, and the third is physical infrastructure, of our cities in particular.
Á (1120)
Mr. Lorne Nystrom: I'd like to ask you more of a technical question. Right now there's a surplus that's automatically applied to the national debt, and last year we had a surplus of $17 billion applied to the national debt.
Some provinces, including Saskatchewan, have what's called a fiscal stabilization fund, where any money goes into the stabilization fund. If we had such a fund in Ottawa, we could debate where the surplus should go, and maybe some would go towards the national debt, some would go towards the farm crisis or whatever, and some might go towards other important priorities in the country. But right now there is no debate because it automatically goes to the national debt.
So what about the wisdom of creating a stabilization fund so that Parliament, on behalf of the people, can make a decision on where that $17 billion goes? I know the Prime Minister's Office and Treasury Board decided at the last minute to spend $101 million on a couple of Challenger airplanes. I'm not sure if that was an important priority or not, but there was no national debate on it. But the debt payment is just automatic; it's an automatic transfer.
When I look at the problems in this country, you could take half of that $17 billion and apply it to health, education, the farm crisis, environmental concerns, infrastructure, and problems of training and education for aboriginal and first nations people. We could create a country that is a lot more wealthy and productive, paying more taxes into the economy and society, and we'd all be a lot better off.
What do you think of that in terms of having a stabilization fund or some flexibility where Parliament is not handcuffed? We're not even handcuffed; we're just totally impotent.
Right now we have a surplus that Mr. Martin said in his budget was, what, $1.5 billion? Now the Department of Finance is predicting something more like $7.5 billion to $10 billion. Are we going to be in the same situation again? Nobody can predict where these are going to be precisely, and if we could, we wouldn't need that kind of mechanism at the end. What's your advice?
Mr. Mario Seccareccia: My first point would be that as much as it sounds like an interesting idea to have a stabilization fund, one obvious fact is that the federal government doesn't face the financial constraint that you have to put money aside in the bank, so to speak, so you can spend it on a rainy day. It doesn't work that way. Anybody who thinks of it that way has a problem with the way the monetary system works in this country.
What I would say, rather, is that they should not try to target surpluses at a time when we've gone the other way, when we've faced a significant slowdown in the economy, as we did over the last year. Things have markedly improved right now, but they certainly haven't done so because of the federal government's fiscal policy, I would argue, which has in fact been a very tight one because of targeting huge primary surpluses right now.
So in that regard, what you want to do is have less fear about deficits. I mean, if surpluses are going to come along, they're going to come along. If deficits are needed, they should be there, to stabilize the economy. You don't need a fund for that. You just need to be able to engage in the kind of financing that would be necessary via the central banks, or through borrowing from households, as we do through selling bonds and whatnot. But it seems to me we should not fear deficits, regardless of whether we have a fund there for a rainy day for that purpose. I don't really think that's the way. It sounds like an interesting idea, except it's a kind of analogy that doesn't quite fit the way governments, federally at least, face constraints on financing.
Á (1125)
Mr. Lorne Nystrom: I'd like to ask you to reflect for a moment on the idea of a common currency and the potential loss of sovereignty.
I was in Britain awhile back, and what happened in the EU...of course, there's accountability with the European Parliament, there's the new institution being established, and there are countries of roughly equal size--the Germans, the French, and so on.
We have us. We have the Americans. It's sort of like Mr. Grubel stepping into the ring with Mike Tyson--I'd watch out for his ears. There's that imbalance in terms of the size of the economies. That's the concern a lot of people express. So I wanted your reflections on this.
Mr. Mario Seccareccia: Actually, I wanted to address that concern a bit earlier, so I'm glad you've allowed me to do so right now. It was a question Mr. Loubier also referred to earlier.
The first thing I should mention is that if you look at the European experience, first of all, it's a political project going back to the Treaty of Rome in the 1950s. It's always been a political thing. It's never been an economic question per se.
Of course, there are economic concerns. There are benefits and there are costs to monetary unions, and one could debate those. In fact, I've been doing some work as well in that area, and I've written quite a bit in the recent while. Clearly, my concern is with the argument that somehow this is just a decision about whether or not we could benefit economically. The reality is that anything that we are going to do is a political decision. It means, of course, that we're going to also give up certain things in the process.
What we're going to give up is not a question of sovereignty, as if we were going to be militarily taken over by the United States, or whatever. That is not the issue. However, by sovereignty we mean the ability to conduct independent monetary policy, even in a globalized world. Although there are constraints in the ability of national governments to do so, when you have your own currency, you can conduct to some extent, within those constraints, monetary policy as well as fiscal policy.
The European experience right now, if I look at what has happened in terms of setting up the European monetary union, is one where they have given up totally the national monetary policies, transferring them to the European Central Bank, which is really accountable to no national government.
There's also the fact that they have given up fiscal policy by the Maastricht Treaty and the Amsterdam Stability and Growth Pact. What these did, basically, was fully constrain--I would argue literally constrain--national governments to essentially run surpluses, de facto. This is the way in which they've been set up. They've been set up to constrain fiscal policy.
So what it means is you are no longer going to have independent ability to conduct your monetary affairs, other than maybe having a seat, if we're lucky, as a 13th district of the Federal Reserve, or whatever, or, where we would align ourselves, if we set up the European monetary union type of straitjacket, as I see it, on the fiscal front, and we would again not have the ability to conduct our affairs, other than if somehow we aligned with the rest. In this case, this would be the real loss of sovereignty, the way I see it, in our ability to conduct our affairs on those two major fronts of macroeconomic policy. That's where the problem arises.
The Chair: Thank you very much.
You're out of time now, three minutes over.
Mr. Pillitteri, Mr. Brison, and then Ms. Bennett.
Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Madam Chair.
Welcome here this morning, Mr. Mintz, Mr. Grubel, and Mr. Seccareccia. Thank you for your presentations this morning. I apologize for being a little late.
It's always good to see you, Mr. Grubel. You had the pleasure of sitting on this committee for three and a half years. No offence to your former colleagues, but you had quite a lot of stimulus on this committee for three and a half years. You always managed to create a lot of debate--that's not to say controversy.
Your presentation this morning almost made me feel like you were trying to marry me off to someone. As a Canadian, I love my Canada, I love my currency, and I even love what we do as a country, especially since this is my adopted land. I'm one of those immigrants, and so are you, Mr. Grubel.
Somehow, being in a marriage of some 52 years in Canada, to have a change all of a sudden sort of hurts me. I cannot see any country, on this list presented by Mr. Seccareccia, where they're doing so well. I feel I'm not ready for marriage with any of them. I like my system as a Canadian...and how we can better our system.
Mr. Loubier talked about business people doing business in the United States, and found there was no stability. I'm a businessman. I love making money. I have investments in the United States. But on the issue of buying American dollars, there's no problem. You could do business just the same in the United States. I buy and sell properties, I export, I do everything. So there's nothing too much wrong with our currency.
The only problem with our currency is our own investors, our own money managers. They feel insecure about being Canadian, so they constantly try to park blocks of Canadian dollars in the most common strongest security in the world. That's the way I look at it, basically.
Why does anyone want to go to dollarization? They want to have stability and protect their money. As a business person doing business, I don't feel so much.... But I'm not here to ask you to make some comments on that.
Mr. Grubel, a few years ago New Zealand was a star because of what it had done and how well it was succeeding. I understand New Zealand is in trouble today. Of course, Argentina is a common example we see of pegging the dollar to the other currencies.
I'd like to see, in your presentation, how Canada compares to countries of similar size that you mentioned; how we could best do it as a country. Let's not forget the size of Canada, in land mass. Delivering those services is more expensive; therefore governments need to collect more taxes.
I have a question for Mr. Seccareccia. If I recall, in 1948, right after the war, we had a population of 11 million. We were bringing into Canada about 500,000 or 600,000 people a year. We were bringing in consumers. Just as much as immigrants we were bringing in consumers. You see the rate of growth in your chart. And of course we did not have any debts. In 1974 we first started to have debts, and that's when we started running into some trouble.
Á (1130)
Sir, I do accept a lot of things that are in your presentation here, but do you still today want to have a control on inflation? What's your ratio? One to three percent, two to four, or infinity? That's one question to you, sir.
Mr. Grubel, I read your presentation, and I have to ask you if you want the total elimination of taxes on capital, that is, to eliminate capital gains totally and eliminate all business tax? Do you think it's feasible to have a Canada with only value-added taxes? That's what you're saying in your paper. Do you really think it's possible to have only value-added, such as GST, or whatever we want to call it?
Mr. Mintz, when we're talking about taxes and how much lower they are in the United States, when we add up, as you did, the cost factor, what is the difference between total Canadian taxes and total American taxes? Basically, here we're always comparing Canada to the United States, which has 10 times the population and 11 times the economy that we are. So what is the total difference between total taxes, meaning property taxes, business taxes, whatever it might be, and including in that mix the cost of living within the area in which taxes are not redistributed?
Á (1135)
The Chair: We have only 20 minutes left, so I'll ask for a short answer from each of you. We're going to end at noon and we have two more questions. Please go ahead.
Mr. Mario Seccareccia: I will answer directly your question after one comment I want to make in regard to the issue you raised of immigration in the 1950s, because it's directly connected with what I was defending, which has to do with public investments. If you were building infrastructure for housing or anything like that, obviously immigration was an important element in all this.
So it's obvious, but I wanted to mention that in fact we had high growth and high public investment in the fifties and sixties, in part because of that. But if you look at the current band of 200,000 or 250,000 immigrants these days, it's not totally far off from what we used to have in the 1950s.
But in any case--
Mr. Gary Pillitteri: One percent today.
Mr. Mario Seccareccia: --that's not the question that you....
On the issue of inflation control, basically we have rates of inflation of about 1.5% nowadays. In fact, we've had fairly low rates of inflation throughout the last decade. In fact, even in the 1980s we had fairly low rates as compared to the 1970s double-digit inflation rates. If you look at the reason why we had such high inflation rates at the time, it had to do with oil prices initially, and then it fed into the economy through the wage increases and so on that followed as a result of these major jumps in oil prices in the 1970s. And it's only because of these cost factors, usually shocks from abroad, that we've had very high inflation in the country. We've never had very high inflation rates historically.
If you look at the post-war period, if you take out the 1970s, you'll find that there is very little that would in fact attest that we're an economy that generates inflation. We have fairly high unemployment compared to other countries, both for structural reasons but also because we tend to keep a lid on growth rates in this country. So in terms of inflation control, I think frankly we would be misdirected if we were to be very obsessed about that.
In fact, if you look at the experience of the late 1980s and the early 1990s, when the central bank was fighting inflation at all costs, so to speak, and there were zero inflation commitments, we created a lot of trouble domestically because of that. If we look at the experience of the inflation rate over the last decade, it has been quite good. You could argue it's because of the central bank policy. I would think it's primarily because there are no kinds of shocks that we've had compared to the kind of experience we witnessed during the 1970s.
That's my take on that one.
The Chair: Mr. Mintz, please.
Mr. Jack Mintz: It's a good thing I brought this book along because it's hard to remember all the data.
Looking at total revenues as a percentage of GDP, which are taxes plus other forms of government revenues--including royalty payments by oil and gas and mining companies to provincial governments, for example, and a little bit to the federal government--there's about a ten percentage point difference or gap between total revenues as a percentage of GDP in Canada and the U.S. In other words, Canada is at 44% and the U.S. is at 34%.
I'm trying to remember, was there another part to your question?
Á (1140)
Mr. Gary Pillitteri: How much does government give in the delivery of services?
Mr. Jack Mintz: Well, that's actually a big part of this book. I modelled not just the tax but also the expenditure side of government and its impact on the cost of doing business. This includes, for example, health care benefits, education benefits, infrastructure expenditures, government R and D grants, etc. What I found is that, taking into account both the subsidy side and tax side, the difference between effective tax rates on the cost of doing business in Canada and the United States is still pretty large. Sorry to belabour this point, but in 2001 there was about a 15% point difference between the two. In other words, Canadian businesses face a 15 percentage point higher cost. It's like adding a 15% excise tax in Canada on their cost of doing business, taking into account both taxes and subsidies.
A major reason for that is that a lot of our tax revenues go into funding interest expenses of government, which we know accumulated during the 1980s, particularly, and early 1990s. As you know, this government has had an excellent record in starting to reduce that over time. My argument has been that a lot of these interest savings should go into tax cuts, because the buildup in taxation over the past 20 years has been the result of very bad fiscal mismanagement. Now that we have good fiscal mismanagement, we should keep pushing reductions.
Mr. Gary Pillitteri: Good fiscal management.
The Chair: Mr. Grubel, a very short comment, as you understand the restraints here.
Prof. Herbert Grubel: Whether or not it's feasible to eliminate taxes on capital begs the question of what you mean by feasibility. If you mean asking the average NDPer whether he thinks that's a good idea, it's totally unfeasible. It is my job--now that I've returned to being an intellectual and policy analyst--to push the frontier and to suggest that this is what's best for Canada. It is up to you guys in Parliament, and in other forums, to try to make it politically realistic.
One quick comment. Mr. Seccarreccia's positions on all of the issues discussed today were the ones that were very much in vogue in the 1970s. They were tried. They have been seen to fail throughout the world, in Canada, the United States, and everywhere else. They are now being discarded. In fact, countries have been trying to prevent governments from running deficits and from having inflation, because of these experiences. I'm surprised that this information has not yet reached the University of Ottawa.
The Chair: Thank you very much.
Mr. Scott Brison: For an intellectual, Professor Grubel, you still sound like a politician sometimes. We miss you in this place.
The first question I have is on the issue of tax reform, particularly tax reform focused on capital taxes and corporate taxes. The government has presented an innovation agenda that doesn't mention tax policy. I'd appreciate your feedback on that.
The goal of an innovation agenda is to enhance productivity. Given the inextricable link between productivity and tax policy, I find it incongruent that the government would pursue an innovation agenda without some focus on, or even mention of, tax policy.
Mr. Jack Mintz: This is a problem when you have bureaucratic turfs. If the Department of FInance had been involved in helping write the innovation agenda, maybe there would have been some more discussion of tax issues. The industry department is not the conductor of tax policy. Perhaps one of the things about the innovation paper is it couldn't cover things that maybe should have been covered.
With respect to research and development and innovation, first of all, often people assume that research and development is innovation, that all of innovation can be explained by research and development. While research and development is important, there are a lot of aspects to innovation that go beyond research and development, such as good managerial practices in business--thinking of the right way of running a firm and how to deal with difficult problems.
Another example is--this wouldn't count as research and development in OECD figures--when Fisher Black found option theory, which led to very major reductions in financial cost for businesses, it all appeared in social science journals that do not qualify for what we would call research and development under the OECD definition. There are a lot of things that we do in terms of innovation that are difficult to measure exactly.
One of the things I want to say is we in Canada have had a very generous system toward tax benefits for research and development expenditure, primarily the ones that qualify under the OECD definition. We have, however, had very high taxes on other.... Once you get past the research and development stage, when you get into marketing and all the other things that bring the product to the market, that actually is our problem. We often have, let's say, a research lab sitting in Canada, but a lot of the spin-off jobs are actually sitting in other countries such as the United States. There is something wrong with our innovation policy. And our tax system has been unfortunately geared too much toward just helping create ideas, not in terms of adopting innovations.
Á (1145)
Mr. Scott Brison: In particular, given the importance of commercialization of intellectual property, I think the tax system has to play a greater role.
As to the issue of fiscal imbalance, recently the issue has been quantified somewhat by the Conference Board report and the Séguin report. I'm very concerned about that issue. Some would argue that the equalization system, as it stands now, is currently broken, with the feds abdicating their role to provide tax reform, particularly corporate and capital tax reform, and some provinces, based on their own individual fiscal capacity, pursuing logical and important tax reforms in these areas. I'm thinking of Alberta and Ontario.
For a province like mine, Nova Scotia, I think the feds pulling back from their responsibility to provide tax reform, and Dr. Courchene referred to this, could be putting provinces like mine at a huge disadvantage. We're struggling just to deal with an onerous debt load now at the provincial level--the highest per capita debt load of any province in Canada. As to the notion of tax reform, we just don't have as much fiscal capacity.
I'm concerned that this fiscal imbalance, combined with the federal abandonment of tax reform, is creating an increase in the gap between rich provinces and poor provinces, in terms of the growth and opportunity we can expect from those provinces.
I have one last point, Madam Chair, before the response. I would also add that I believe our regional economic development system is fundamentally broken. ACOA was an old-economy vehicle that played a role in the old economy. In the new economy, it's like a Model-T on the autobahn, and it needs to addressed. The amount of $360 million per year goes from the federal government to the Atlantic region in terms of ACOA money. The federal corporate taxes in the Atlantic region are $380 million. Theoretically, you could eliminate federal corporate taxes in that region--pull an Ireland. I know that's an over-simplification in some ways, but I think there are more innovative ways using the tax system to create the levels of economic growth and prosperity that all Canadians would benefit from as well as Atlantic Canada. ACOA, and pet projects of ACOA, are not hitting the mark.
I would appreciate your views on both those fronts.
Prof. Herbert Grubel: I really just have a quick comment on the need to also adjust taxes in order to get more innovation. The Soviet Union spent huge amounts of money on research, and they developed some wonderful things, materials, processes, and whatnot. If Communism had worked, they would have been the richest country in the world because they had spent all this money on research.
The fact of the matter is, to translate knowledge into marketable products, goods and services people want to buy and society needs, you need what is known as a market process, a “discovery process”, as Hayek said. What you need is a group of people called entrepreneurs and risk-takers, people who take some of these ideas produced by knowledge, try them out in the market, and see whether they work. But because of the uncertainty, it's a bit like buying lottery tickets.
We now have a tax system that says, oh, if you're an entrepreneur and you lose because your product didn't work out, well, that's just too bad; you wanted to play the game. But then if you make it big, which is necessary in order to keep the people buying the lottery tickets, we say, oh no, you're too rich; we have to take that away from you. You see, this is the lack of understanding of the dynamics of an economy Mr. Pillitteri implied in his question. This is what drives the economy, namely that we have these entrepreneurs out there buying the lottery tickets.
Á (1150)
The Chair: Thank you very much.
Now, for the final round we have Ms. Bennett--sorry?
Mr. Scott Brison: I apologize to Dr. Bennett, but is it possible, Madam Chair, for Dr. Courchene to answer just briefly? They're both very good doctors. If I were sick, I'd go to Dr. Bennett, but if I wanted economic advice, I'd go to Dr. Courchene.
Dr. Thomas Courchene: I may be the one to cause people to keel over; that's why you're needed, Dr. Bennett.
The person who should really be answering this and who has written most recently on it is Donald Savoie from the University of Moncton. His book Pulling Against Gravity is his own version of the economic and fiscal history of the Atlantic region generally but more specifically of New Brunswick.
I think there is a growing problem on the fiscal imbalance side, and some provinces feel they're being hit two ways. They're being hit federally and provincially, first of all, and then interprovincially. There is a bit of a problem when we have a potential tax haven as well as the largest spender in the country within our midst, namely Alberta. We are now starting to draw talented people from one province to another. Some of that's inevitable; it's just a part of the way the system is operating.
The one part I don't like about where this discussion is going is that the finance department has indicated or toyed with the idea--I don't think it's been formally adopted--that it would be nice, as you indicated, to have separate types or levels for corporate income taxation in certain parts of the country. I really think this is very problematic and it's not the appropriate way to go. It would set off enormous problems in other parts of the country.
It is the case that we should start looking again at the equalization formula, and in particular.... There's one feature of the formula that applies to New Brunswick and Nova Scotia, for example. It's that if they enact appropriate policies that end up, say, increasing their sales in the province by 10% or the incomes in their province by 10%, they won't get one single penny in terms of extra revenue. The way the equalization program is run, it's 100% confiscation--
Mr. Scott Brison: Like the offshore.
Dr. Thomas Courchene: No, the offshore is actually not fully confiscatory. It's the other taxes.
This is another reason this committee might look in depth at some of the issues relating to both vertical and horizontal fiscal imbalance. It's going to be an issue coming to the fore very dramatically and substantially within this calendar year.
The Chair: Please finish up your comments, Mr. Brison, and then I'm moving on.
Mr. Scott Brison: Dr. Bennett, you're a great Canadian, and I'll appreciate your indulgence for just one second.
Instead of various lower corporate taxes, what about this notion? Nova Scotia receives, for instance, $160 million per year from ACOA. What if the provincial government were to cut a deal with the federal government, saying something to the effect of, we have a $10 billion provincial debt; give us the present value of the future payouts from the federal government--say if it's over a ten-year period, about $2.5 billion or $3 billion--give us $3 billion now and cut us out of ACOA. That would provide the fiscal capacity to a province like Nova Scotia to do what is necessary and it would basically take it off ACOA completely. I'm just saying that as an idea. Improve the fiscal capacity and cease and desist with ACOA.
Dr. Thomas Courchene: In principle, that could be an interesting idea, but what would prevent the Nova Scotia legislature from asking for another regional development program? They're the only province that doesn't have one.
Á (1155)
The Chair: Thank you.
I understand that Dr. Bennett and Mr. Wilfert are sharing their time. Please go ahead.
This will be our last one.
Ms. Carolyn Bennett (St. Paul's, Lib.): I apologize to the witnesses in that some of us just returned this morning from our weekend in Jerusalem, so I have just scanned the briefs. I can see that I need to buy at least two books in order to fill in the gaps.
Obviously, I am obsessed by health care. I talk about it in terms of the cost per car in Oakville versus Detroit for the health premiums corporations pay and the difference between Canada and the U.S., particularly for companies that have large numbers of employees. Do I just have to read your book, Mr. Mintz, in order to figure out what the different...?
Mr. Jack Mintz: It's all there.
Ms. Carolyn Bennett: I think we do see this in terms of payroll taxes. It just happens to be paid to an insurance company instead of the government. Can you tell me what that actually means company to company in terms of a climate for doing business here?
This is a question I always have about Stats Canada. My real obsession is that we're not very cost-efficient in either health care or education. Why isn't productivity measured in these two free lunches such that we could get more for the tax dollars we're spending in those areas? Is that something Stats Canada should be doing? How could we help along those lines?
Even though tax policy wasn't mentioned in the innovation and skills agenda, neither was day care. We're the only OECD country without a day care policy.
Can you help me with those items, or should I just buy the book?
Mr. Jack Mintz: On the health care side, when we model these things, we take into account benefits received from programs funded by payroll contributions. We calculate them by industry. The firm-by-firm experience will be quite different, actually. Just to take health care as an example, if you're a company with a relatively young workforce, as in the high-tech sector, under a private insurance system you might end up paying less for insurance premiums for a period of time, while if you tend to have older workers in your workforce, you might pay more.
Under our current system in funding health care, we just tax people without any relationship to the actual usage of the system.
The same thing applies to employment insurance, where there's no relationship between the contribution companies pay and the layoff experience of those companies. Companies that are busy laying off people get a significant benefit from employment insurance, while other companies that have an excellent employment record and don't fire workers very often end up paying just the same.
In the United States they have experience rating. Therefore, there's a closer relationship, although not 100%, between contributions paid and benefits received. That does encourage a lot more efficiency. It especially helps companies that tend to have a lower layoff experience than others, such as those in the high-tech and other service sectors, although that may not be true lately in high tech.
All of that is calculated in the book with all the net amounts, and I'd be happy to talk to you more about the details.
The second question was on....
Ms. Carolyn Bennett: Productivity in health care and education and the two free lunches.
Mr. Jack Mintz: The problem we have there is that when these things are publicly provided, there is no measure of output. There's no value. There isn't a market price that we can say is the value of education services. We measure them according to cost, the largest part of which is wages in the public service. So you're really not measuring productivity because you can't measure the outputs very easily.
There are two ways of doing that. One is to try to get a price evaluation of what the output is. The alternative is to try to get some sort of benefit measure, as in a cost-benefit analysis, in order to analyse it. But it's extremely difficult, and that's why it's so hard to measure productivity in those sectors.
One of the problems even in measuring GDP per capita is that government expenditure is only measured at cost. It's not necessarily the value people put on public services. So it's a difficult problem as well in terms of measuring productivity.
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The Chair: Thank you.
Mr. Wilfert.
Mr. Bryon Wilfert (Oak Ridges, Lib.): Thank you, Madam Chair. I apologize to the witnesses for being in and out, but I'm responsible for managing a bill that's before the House at the moment and it's keeping me busy, shall we say.
I found the comments about this virtual fiscal imbalance rather interesting. Both levels of government have access to the same major tax bases, both provincial and federal. Total provincial revenues have substantially exceeded federal revenues for more than two decades, and my understanding is it probably will continue to do that for the foreseeable future.
As you know, we have made, as a federal government, significant federal transfers to the provinces, and we expect that to grow on an annual average of about 5.5% over the next five years as well, almost three times faster than the expected growth in federal revenues. We pay 24¢ of every federal revenue dollar on the debt, compared to 12¢ for the provinces; 70% of all new federal spending has been on education and health care, and I guess revenues in terms of transfers to provinces will reach about $44.9 billion in this year alone.
All provinces last year did well financially, in terms of their fiscal balance, as obviously we did as well. So my question, through you, Madam Chair, is, where is this imbalance, when the facts would seem to indicate that we both have the ability to raise the same kinds of dollars, if needed?
Clearly, we are putting money on the table. In Ontario alone last year, that province announced $1.2 billion in new health care funding but neglected to mention that $1.1 billion of that was federal transfers. So, from my perspective, the federal government is certainly engaged as a participant.
Again, very brief responses.... I'm sorry, it has probably been more complex than one I'm seeking at this point.
Prof. Herbert Grubel: If I may respond in a very non-complex manner, what we're seeing is that politicians love to buy votes and gain popularity by spending money without having to pay the cost of having to raise the taxes. So it is a very high return for their own level of satisfaction and success to go to the federal government and say, you guys raise the money for me, take all the blame for the high taxes, and give me the money so I can spend it. That's the most simple and fundamental answer and why they always come back to you.
The subsidiarity principle, which is now widely accepted in fiscal policy, and so on, is that in fact the local people, at as local a level as possible, should decide what they want and raise the money to have it, not somebody imposing uniform standards from somewhere 2,000 or 3,000 miles away.
The Chair: Dr. Courchene.
Dr. Thomas Courchene: Here I'm on the side of the provinces. I do think there is a fiscal imbalance in Ottawa's favour. Part of the problem is that generally the access to taxation is similar. The provinces can access direct taxes, but they can't use indirect taxes, so they couldn't put in the GST without permission from Ottawa, for example.
But the problem here is that if you have a single taxpayer, basically the Canadian people, it matters who's there first and who's there fastest, and Ottawa was there way before everyone.
Suppose you were in a situation where the provincial income taxes were 29% and the federal income taxes were 18%, like the reverse of Ontario and Ottawa. You could say, okay, why don't you just raise the taxes to the federal government? Well, 29% plus 29% will make 58%. That's too high. So there's an overall constraint, and the person who gets there first has the advantage. What the fiscal imbalance issue is now is to ask Ottawa to back down a bit and create some tax room.
The second problem--and this is a huge one because it's largely untransparent to all sorts of people, including me sometimes--is that there are two components to the tax, to the transfers, the tax point transfer and the cash transfer, right?
In terms of the cash transfer, which the provinces like to focus on and which we should really redesign if it's only the cash transfer, Ottawa's cash transfers on the CHST are approximately equal to what they were in 1995, before they made the major cuts in the CHST.
They've been ramping up recently, but they're at about that same level, whereas in Ontario, I think, for example, health care expenditures have increased $6 billion.
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So there is a decrease in federal transfers to the provinces across the board, and that was what helped Ottawa balance their budget so quickly. They're now returning some of that back to the provinces, and under pressure from Kirby and from Romanow, I think they'll be asked to transfer a lot more. That's part of the solution. The other part of the solution would be for Ottawa to pick up some branch of the health care funding. If Ottawa really wants a drug program, run it on your own. But I think we're in a situation where some provinces are just going to say, “We can't afford health care, you do it”, because I think the expenditure responsibilities that are really growing are at the provincial level, and they don't have access to the level of taxation or the flexibility on the taxation side that Ottawa has, because Ottawa's already there.
Mr. Bryon Wilfert: I'd make one very brief comment.
I think when we talk about cash and tax points, you're absolutely right. It's ironic that the provinces, in my view, talk about the cash aspect only, particularly on health care, and leave out the tax points. Yet, dealing with the richer provinces, if the tax points go up, they obviously benefit by that. At the same time, they're asking for more tax points, but they don't necessarily give us credit when it comes to the issue, particularly on health care. You make an interesting observation as to whether we should go completely to cash rather than tax points. If we're not getting credit for it, should we devise something different? I don't know the answer to that, but I think it's an interesting comment.
Dr. Thomas Courchene: Speaking on Ottawa's part, I can sympathize with members of Parliament saying that since we're not getting credit from the provinces or adequate credit for all these transfers of funds through the provinces, we'll go directly to Canadians. That explains the Millennium Scholarships, the child tax benefit, both of which I think are good policies but nonetheless have exacerbated this federal-provincial fiscal tug of war, which now becomes a political and a jurisdictional tug of war. But I think if that's one of the problems we can't solve, we can probably attempt to cope with it, though.
The Chair: Thank you very much.
Thank you, panel, for giving your thoughts to all of us today. As we start these pre-budget discussions, it's very, very useful to have your thoughts.
Thank you, colleagues. This meeting is adjourned.