FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, October 23, 1997

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I will call the meeting to order and welcome everyone back here in Ottawa after a couple of weeks of travelling across the country to hear from Canadians from coast to coast. Pursuant to Standing Order 83.1, the committee of finance will now continue with its pre-budget consultation.

As you know, we now are living through a new economic era. For the first time in a long time we will have a balanced budget, and thereafter a surplus. One of the key reasons for holding these pre-budget consultations is to determine, as Canadians, what our priorities, our values are. What's going to drive the fiscal agenda of our country?

One of the major issues we will have to deal with, of course, is the fiscal dividends. We are fortunate this morning to have experts from Loewen, Ondaatje, Mccutcheon Ltd. Maureen Farrow, welcome, good morning.

We also have, from the Royal Bank of Canada, Craig Wright, deputy chief economist; from the Canadian Imperial Bank of Commerce, Josh Mendelsohn, senior vice-president and chief economist; and from the Bank of Montreal, Rick Egelton.

The way we've operated this committee—and Mr. Mendelsohn, we welcome you back again—you basically have five minutes to give us an overview and to share with us your points of view on the challenges and choices we face. Then we'll get into a question and answer session, and perhaps some rebuttals.

We'll begin with Maureen Farrow. Welcome.

Ms. Maureen Farrow (Executive Vice-President, Director of Economics and Portfolio/Equity Strategy, Loewen, Ondaatje, Mccutcheon Ltd.): Good morning, ladies and gentlemen. It's a pleasure to be here again.

I have distributed something, but it's only a very quick little summary. What I would like to do is address my comments around the questions you asked us. You asked us to make some comments on the process of deficit reduction and methods used. I'd like to be very brief on this topic. My main point would be to congratulate Canadians who are putting up with the pain, and also this committee and the finance minister for taking a lead and getting the deficit solved.

• 0910

In passing, I would say it's pretty meaningless to discuss whether we did it quickly enough or we should have done it more slowly. It's done, and that's what we should be concentrating our minds around.

As for the lessons learned, I think there are a few that are quite critical, that we should take the benefit from.

The first, and most important, I think, is that when as a nation we focus on a problem and we define the goal and we explain the benefits and we also set out very clear measurement criteria, we see very significant success. This has happened on the inflation targets and it has also happened on eliminating the deficit. That's just fine, and we should take those lessons and apply them to the debt-to-GDP ratio.

The second lesson I think we've learned, and a very important one as well, is that the budget should always be put together based on very conservative economic assumptions. This philosophy should continue. It removes the pitfalls of the past and allows targets to be met and even surpassed at times. This has really restored confidence in the government's planning capabilities, both for Canadians at large and also the financial markets.

Another lesson learned from the past is the use of a contingency fund—setting aside a sum of money that is budgeted for unforeseen circumstances, so that we don't throw the budget off track—and then applying that to deficit reduction and obviously in the future to debt reduction.

The fourth lesson I think we've learned is the need to work, and I stress work, to continually control government spending, both on the administrative side and also on the program spending side. This has become well accepted, and should continue.

Going forward, what are the priorities?

I turn to the debt. We can congratulate ourselves on winning the fight of the deficit, but the real battle begins—our Waterloo is the debt. Canada's combined federal and provincial debt is the issue. The combined federal and provincial debt stands at $800 billion at the end of the last fiscal year. That's just over 100% of GDP.

In our opinion the total debt load of the nation is what is critical, and as a nation a consensus must be built that sets out a plan to reduce this combined debt-to-GDP ratio to a more manageable level. I am going to suggest that the combined debt-to-GDP ratio should be at 40% today, and not at 100%. This is the level we were at in the early 1980s.

Mr. Martin shied away from setting a debt-to-GDP target for the federal portion of this debt load, except to say that the current debt stood at $583 billion—that's the federal debt, 73% of GDP—and that this was too high and must be reduced.

I would suggest today that the budget has to have a target. It must have a target for a debt-to-GDP ratio that puts Canada on a sustainable, long-term position. I know it will be beyond the term of this government, but as a Parliament, that is your duty to do. This plan would then enable Canadians to understand this very critical issue and be able to assess the trade-offs that must be discussed in arriving at it.

You talked, Mr. Chairman, about a fiscal dividend—a surplus. You could argue that it's not a fiscal surplus or a dividend, it is actually what we owe to pay down the debt.

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If Canadians can understand what is meaningful around the debt-to-GDP reduction that's required, I think we will achieve a lot. The financial markets will also be able to monitor us and we'll see continuing good reception. It will also prove a very useful tool on the Hill in terms of setting spending priorities. That discipline is going to be required, and you will all welcome it when you are sitting down discussing these items.

I've suggested 40% for the total combined debt-to-GDP ratio for the following reason. It's difficult to choose a target, especially in the few minutes of this committee, but 73% for the federal portion is too much and 100% for the total is too much.

If you look at what the European Community in the Maastricht Treaty has suggested, it's 60%. That too is too high. The finance minister has also commented on that and I applaud that.

If you look at where we have been historically—and you have a chart that shows you that—you will notice that if you go back to the early 1980s or 1970s targets, we would be more in line with where the U.S., Britain and France are today. I think we would find, based on demographics and the demographic wave that will hit as we go forward, that would be sustainable.

Another message I would like to give you about bringing the debt-to-GDP under control is this—it's not just bringing it down, but we in Ottawa have to be careful that we're not passing the debt down to the next layer of government. It is the total debt-to-GDP ratio that is important, because there is only one group of Canadians that pays the bill. We don't have two sets of Canadians out there. We only have one.

On the division of the so-called surplus or dividend—the 50-50 split—I would suggest this committee re-examine this. If you look at past business cycles...and the cycle is going to come back. We're not out of business cycles. They may be less severe because of the demographic consumption function and the inventory terms, but they will be here and there will be times when we run deficits in the future. I think it's very important that we use the early dividends.... We all recognize that the economy is on a roll. These early dividends should be applied directly to bringing down the debt load. It's like paying off your mortgage early. We should be applying that rule.

I think we also have to set up some competitiveness criteria for government spending. Government spending today must be applied against a set of competitive criteria that mean we're going to have long-term growth from that investment. That is not to say we shouldn't recognize that within our society the pain of bringing the deficit down has also caused some inequities, and we should be looking to use some of this gain against some of these inequities. But we must look carefully at expenditures against long-term competitiveness.

For example, I live in Toronto and I was horrified when I walked to my local park one day and a big sign said the new lights that were going up around the park were part of the infrastructure program. That has nothing to do with long-term competitiveness. It's not going to achieve anything. Nobody walks in that park at night.

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So let's think before we spend. We know there will be an election. There's always an election every four or five years, but I don't think Canadians are going to buy that kind of waste.

You also need to start looking very carefully at tax reform in this country. The U.S. is going to embark on another set of tax reforms. We have a very uncompetitive tax system. I don't think we should be playing with it or tinkering at the edges. I think we need a fundamental examination and then a strategy. As part of that strategy we need to bring the tax take back down to the 32% of GDP level and away from the 36.6% level it is at today.

Lastly, I would urge you to maintain a vigilance on the cost of running this government and government spending. We still need to work to significantly reduce the total share of GDP spent by Ottawa from the 19% level today to the 16% level of the late 1960s and early 1970s.

Ladies and gentlemen, I have urged you to think critically about the next budget and the messages and the focus of dealing with the real issue for Canada—the debt-to-GDP ratio. This will not be easy, but I trust my remarks will assist you in your deliberations, and my support, as it's always been, is with you. Thank you.

The Chairman: Thank you, Ms. Farrow.

We'll now move to the Royal Bank representative, deputy chief economist Craig Wright.

Mr. Craig Wright (Deputy Chief Economist, Royal Bank of Canada): Thank you.

My comments today rely heavily on work our chief economist, John McCallum, has done, and he regrets not being able to make it here today. There will be a lot of similarities with the comments Maureen just presented, and I apologize for any overlap.

One part will deal briefly with the past and then a bit more detail on the future—a little forward-looking analysis of what Ottawa might do after it achieves a balanced budget, a situation we're probably in right now. We're all familiar with the numbers so I won't go over them, but the deficit has been virtually eliminated from the significant shortfalls of only a few short years ago.

We in the economics department think the attack was appropriate. True, the restraint did impose significant fiscal drag and job losses, but we think the alternative was not an option. The status quo would surely have been reflected in higher interest rates, slower growth and weaker employment than we've had since the change.

With respect to the future, in coming years and under current policy the debt load in Canada can be expected to shrink continuously in relation to the size of the economy. As this happens Canadians will benefit from large and rising fiscal dividends. These dividends, however, are the consequence of a lower debt ratio, and as a result cannot be paid in advance.

Today Canadian governments of all political stripes, together with the major parties, have achieved a broad consensus on the desirability of moving from deficit financing to balanced budgets. Over the coming period a consensus on a desirable mix in spending and tax changes will never be reached, nor should it as it runs to the heart of politics—ideology and elections. But it may be possible to take a smaller step to a broad consensus on a medium-term plan to reduce the federal government's debt-to-GDP ratio, and hence on the affordable size of the coming fiscal dividend at any point in time.

Benefits of achieving consensus on debt provide Canadian markets and Canadians in general with a credible fiscal anchor, which will result in lower interest rates and stronger growth and job prospects. It will also enhance intergenerational equity. Younger Canadians have received very little of the run-up in debt, and they're faced with increasing costs of retiring baby boomers. With a credible plan to reduce the debt-to-GDP ratio, the resulting fiscal dividend could be used to support the aging population with any undue taxes on future wage earners.

Third, the country would be less vulnerable to external shocks, which has been a weak spot for Canadian markets in the past. Finally, the relative debt is also important, as Maureen pointed out, as it does have a bearing on our international competitiveness. Canadian debt is now higher than the U.S. debt. With this comes higher debt servicing costs, which drives a wedge between taxes and public spending, forcing us to accept higher taxes, lower government spending or some combination of the two. In fact, we have debt servicing and higher government spending relative to the U.S., and this imposes a double whammy in terms of higher taxation.

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If a lower debt ratio is achieved, taxes could be cut and/or spending increased, which would be an important plus in our struggle to have firms locate jobs and businesses in Canada in the context of growing trade agreements. The ingredients of such a plan—drawing on some of the successful endeavours undertaken—the core fiscal plan recently.... We'd recommend still having two-year targets to be met “come hell or high water” and continuing reserves and the maintenance of prudent economic assumptions.

A new twist would be five-year rolling projections. These are not to be considered targets; rather, they would be in the form of point projections or some sort of range implication of the government's medium-term debt plan. One of the key numbers in these five-year projections would be the fiscal dividend or the amount of new money that is projected to become available. One could assume targeting balanced budgets for the foreseeable future, which aside from their simplicity also have the benefit of already commanding public support.

As for the more hawkish steps, the reduction types, this example calls for balancing budgets, but the most likely outcome would be a string of surpluses in normal years, with the cushion coming from both conservative economic assumptions and the maintenance of high-contingency reserves. Operationally, the additional information required in any budget would be three additional years of projections—not targets but projections, which could be revised—plus some estimated fiscal dividends, which would largely be a mathematical endeavour at that point.

The advantages have already been discussed—low rates, intergenerational equity, a more competitive economy, and diminished vulnerability to external shocks. But there are others. This plan would build on the fiscal successes of budgetary processes achieved over the last few years. Basically, don't fix it if it's not broken. The credibility of targeting has received a significant lift under the last few budgets and is unlikely to get much higher, so it may prove sufficient to erase the memories of earlier medium-term forecasts that typically were missed.

The proposal is also ideologically neutral on core policy issues such as the role of government and appropriate taxation levels, which gives it a reasonable chance of achieving some consensus. Key issues for such a plan: appropriate economic assumptions and contingency reserves, a desirable path for debt reduction, and the long-run target of a debt-to-GDP ratio, all of which could be subject to broad debate in forums like this and others prior to the drafting of any plan.

Thank you.

The Chairman: Thank you, Mr. Wright.

We will now move to the representative from the Canadian Imperial Bank of Commerce, senior vice-president and chief economist Josh Mendelsohn.

Mr. Josh Mendelsohn (Senior Vice-President and Chief Economist, Canadian Imperial Bank of Commerce): Thank you, Mr. Chairman.

Good morning, ladies and gentlemen of the committee. I'm going to be somewhat brief. I believe some of you heard my observations on Monday when I represented the Canadian Chamber of Commerce before the committee. But I'm going to take a slightly different spin on the same theme. There is no question there is agreement around the table, or at least among the presenters, in terms of some key issues the next budget and Canada need to address. Clearly, debt reduction would be at the head of the list.

We're at a crossroads in Canada. We've managed to balance the budget. We believe it's conceivable that we'll do it this year. We should be starting to look at a long-term strategy for Canada. That long-term strategy requires us to look at how we can reduce debt loads in Canada in a number of ways or combination of ways. One would be to pay down the debt by keeping balances and developing surpluses. Another would be to do that as well and to reinforce it by promoting economic growth. Reducing the debt load would help economic growth, but we can promote economic growth in other ways too.

I think we need to look at all of Canada's policy options, whether debt reduction, tax reduction or spending increases, within a framework—and I believe Maureen touched on this in a fashion—that allows us to evaluate what each of these policy measures and their sub-measures will contribute to Canada's long-term economic growth. As we grow we will reduce the debt load and generate a greater well-being. Within that framework, the requirement is that we judge not every policy, because clearly, certain social policies will not be able to be measured in that context, but as many policies—in fact, I would say most would fall into the category—as will contribute in the context of economic growth, economic productivity, Canada's competitiveness, our ability to grow our wealth, and by implication, our ability to distribute that wealth for the benefit of all Canadians.

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It's interesting that Maureen brought up the example of the lights in the parks. You could take a lot of positions on that, but that is certainly a way of looking at it.

Within that model, I guess in the early years, even though we will have surpluses, we have to assume and expect that it will not be smooth sailing. As I have already noted in other presentations, a lot of the assumptions about the Canadian surpluses over the next several years...I can generate spreadsheets that will give us $30-billion or $40-billion surpluses, but they all assume consistent growth, no hiccups in the world. But we can see what can happen even in Southeast Asia, where everybody thought there was no end to Utopia. We have a unity problem in Canada, which can still cause hiccups for our economy, possibly substantial ones. We should not assume that we will have consistent economic growth and no recessions.

In that context, I would argue that we do need to start off by reducing our debt load as a way of giving us flexibility and allowing us room as we move forward.

I would also go into the long term on that perspective. We are going to be facing a major retirement boom in 15 years or so, and we need to give ourselves flexibility to deal with the issues that will arise from that retirement situation. That means we will be faced with increased demands for government services, such as increased demands for attention to the aging.

So I think we do need to take that debt load and work backwards. We know we need to be substantially lower, whether the number is 40%, 25%, or 30%, I don't know. I don't think there is a clear message there, but we do know it needs to be substantially lower than where it is today on an overall national basis. I agree with Maureen that it isn't just federal debt, it's federal-provincial debt. So that would be the first order of business.

In the context of the growth model, I guess my position and CIBC's position is that we should also very carefully assess Canada's tax structure and regulatory structure in the sense that it needs to be reviewed in the context of what it would contribute to economic growth. I'm not thinking here of tax reductions to sort of goose the economy to create an added 1% growth this year or next year. I think that's last year's story, when we didn't have the kind of performance we're having now and are likely to have in the coming several quarters.

The issue is one of competitiveness. The issue is one of incentives. The issue is one of getting Canadians to take rational risks to build and create enterprises and activities that will generate high-value jobs. It's a way of reducing our long-term unemployment rate with good-quality jobs, not the so-called McJobs, as people refer to them sometimes.

Finally, in the context of spending, our assessment does not exclude that, because within that framework there is room for spending if it can be shown that it will be beneficial. In that context, I would argue that in determining spending programs, those programs must be extremely tightly targeted, their measurement of success must be explicit, and each program should be subject to review.

In that context, as I've already noted in some other forums, the notion that the child benefit program, which was recently introduced, will be evaluated as to its effectiveness on a regular basis is certainly a step in the right direction. That's what we need to do in every program, whether it's a social program or an economic program.

That's really the overall context in which I think we need to look at our future. I think we do need to have some explicit targets. The markets have become accustomed to having those targets in countries that, as I guess Mr. Martin said in the past, keep the government's feet to the fire. That's a good way to do it, because you do have something against which to measure the performance of the government. This is the same way as the performance of any business enterprise or any individual in any activity is evaluated.

So I think that is certainly necessary. Perhaps the best way to do that is to put out some debt-to-GDP ratio guidelines or something of that nature.

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We proposed one that's kind of odd to some people: recapture Canada's triple-A rating on the foreign currency debt. We know it's not within Canada's independent control, because the rating agencies will use measures other than pure debt ratios and the like. They'll look at the unity issue. Until we get that straightened out, they're not going to give it to us, but we can certainly put all the remaining factors in place. So if we get over that other hurdle, that will come as a natural attribute. So that may be one benchmark.

Consider tax measures. We're not suggesting that everything be done at once. We need to see that the surpluses are there. We need to see that they're sustainable.

One thing that certainly does need to be done fairly quickly is the reindexing of the tax system. Bracket creep has raised Canadians' tax rates quite substantially over the years. That's something that can be done. If we keep Canada's inflation rate down, which appears to be the clear intent of the Bank of Canada—I think most Canadians would want this despite some of the arguments against recent measures—then there really isn't that much risk in terms of tax losses, but at the same time, it does compensate Canadians for that bracket creep.

As I said, there are other things we need to do. We need to restructure our unemployment insurance programs further to increase flexibility and increase the mobility of labour in Canada.

In terms of the spending programs, I've already noted that in my comments.

So I'll stop here. I welcome your questions in the next few minutes.

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

I'll move to the representative from the Bank of Montreal, Mr. Rick Egelton.

Mr. Rick Egelton (Senior Vice-President and Deputy Chief Economist, Bank of Montreal): Thank you, Mr. Chairman. Good morning, ladies and gentlemen, it's a pleasure to be here.

I would like to set out very briefly what we see as the priorities the government should be following as it sets the budget for February or March and in the years ahead.

Very briefly, I would like to say a few words about the past pace of deficit reduction, and the notion that perhaps that pace has been a little too fast.

We reject that almost categorically, in a sense. We've been at this really since the mid-1980s. There was a “go slow” approach from, I think, the mid-1980s right through until the early 1990s toward getting the deficit down. The deficit ended up higher than when the program was started, so I don't think that approach worked very effectively.

Second, I think it's important to note that monetary and fiscal policy can work together to achieve common ends. So to the extent that fiscal policy over the past four or five years has been very tight, the question was not whether it was too tight but whether monetary policy was sufficiently flexible to accommodate the fiscal policy action that the government put in place.

Finally, for a country with a high debt burden like Canada, it isn't even clear to me that an expansionary fiscal policy is all that effective because of the loss in investor confidence this would generate and the back-up in long-term interest rates. So I would argue very strongly that the pace of deficit reduction we've seen over the past four years was very appropriate.

If we look ahead in terms of setting the stance in upcoming budgets, the economy for Canada right now is quite strong. We're growing at a 5% pace. We have a long way to go to get to full employment, but it's growing quite strongly and we expect that to continue. In this environment, there is clearly not a need for more expansionary policies. Indeed, the key issue is how quickly we remove the stimulus we have in the system.

It's useful to think back about a year ago, prior to the last budget, when there were some calls for tax cuts that were not accompanied by spending reductions. So you're looking at deficit-induced tax cuts in order to get the economy going.

Fortunately, that advice wasn't followed. I think history has proven that advice to be clearly wrong. Had that advice been followed, we would be looking at a deficit picture today that would be far less promising. Growth might be stronger, but we would be looking at a Bank of Canada that probably would be more aggressive in tightening short-term interest rates, and long-term interest rates would be higher. So the tax cut that these proponents would have given Canadians would have been eaten up to some extent by higher interest rates and mortgage costs.

The current fiscal stance, I think we would all agree, is going to generate a surplus probably by next year. Thereafter, we'll see increasingly large surpluses. The question is what do we do with that?

I think our fiscal situation is far from being fixed, as other individuals have indicated. We still have an extremely high debt burden in comparison to those of other triple-A-rated industrial countries. Our tax rates are punishingly high in comparison with our major trading the partner, the U.S.

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This has a very pernicious impact on economic growth over the long term. When I look at the fiscal situation, I see high debt levels as being very negative for the performance of the economy because it leaves you very vulnerable to swings in international interest rates. It leaves you very susceptible to changes in investor confidence and interest rates. I think high tax burdens make it difficult for us to attract and maintain highly skilled labour. There doesn't seem to me to be a lot of evidence going forward that we're not spending enough money or that we have inadequate resources in programs in which the federal government has responsibility.

When I look forward and say what I believe Mr. Martin should be targeting over the next few years, I think for 1998 and 1999 he should target as a minimum a balanced budget of a zero deficit and at the same time continue to use very prudent economic assumptions: interest rates above those of the private sector consensus, growth assumptions below that of the private sector consensus, and a $3-billion to $4-billion contingency reserve.

If you implement an approach such as that, on average, this will generate roughly $5-billion surpluses as you go out. If you apply that to the debt, then by roughly 2002-03, you're looking at a debt-to-GDP ratio that's roughly in the ballpark of other triple-A-rated countries like the United States, France and Germany. As Josh indicated before, perhaps that'll go a long way to restoring Canada's triple-A rating.

In addition, down the pike we have very substantial tax hikes coming in the form of increases in CPP premium rates. I think the government should, given the already punishingly high tax burden confronting Canadians, give serious thought to trying to offset, as much as possible, those impending tax hikes from the CPP through EI rate reductions so as to keep the payroll tax burden from rising or at least mitigate the extent to which it's going to rise.

Beyond that, I believe that any fiscal dividend we see in which the budget turns out to be better than our plan should be first applied to reducing our debt burden and restoring our triple-A credit rating. Once we get back down to the range where we're in at least the same ballpark on a debt-to-GDP ratio basis as other triple-A-rated industrial countries, then I think it's the time to give serious consideration to corporate and personal income tax cuts.

The big picture is this. I think the debt burden is the most pressing problem we're facing today. Tax burdens come very closely after that.

In addition, as we go ahead, I would urge caution. As Josh indicated, we're all projecting surpluses to get bigger and bigger. All those projections are based on continued strong economic growth and relatively low interest rates.

While that is my best forecast at this point in time, anything is possible. Anything is possible in the U.S. economy. We also saw Southeast Asia and the unity front. These things could cause disruptions. I think we have to proceed, but with caution.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Egelton. I'd like to thank the panel for a very interesting perspective.

I'm going to move now to the question and answer session. Mr. Harris.

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

I apologize to the panel for being late. It was my understanding one of my colleagues was going to be sitting in today, but that didn't work out.

I caught the last comments of Mr. Egelton. I certainly have to agree with you that our huge debt burden does put us in a vulnerable position, in particular if there were a hiccup in the world economy or even in our domestic economy. It's much like having a huge debt burden in your household: if you have a hiccup along the way, you can be in some serious problems.

But in particular I wanted to ask this. You're talking about the impending tax increases, such as the CPP hikes, coming along. Can you encapsulate your opinion? What kind of impact will those CPP premium hikes have, first, on the economy, and second, on the employment picture? There is a direct relationship between tax increases and economic performance, as well as employment.

Mr. Rick Egelton: Thank you. Clearly, in an era in which we're trying to create job growth, payroll taxes are really not the type of tax you want to be increasing. I believe over the very long term the impact on job creation is not all that negative, but in the short term I think rising payroll taxes have a very negative impact on job creation.

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I'm not able to give the exact numbers of how many thousands of jobs we're going to lose by ramping up the CPP rate, and I don't think we have much choice but to bring the pension system back into balance. But what I am suggesting is that the tax burden we're confronted with now is already very high. I don't think it can go higher, and I think we have to take the occasion to try to offset as much of it as possible in order to mitigate the negative impact it's having on jobs.

In my mind that means the impending surpluses we're looking at aren't really as big as some people think, when we're trying to offset the impact of such a large tax hike.

Mr. Dick Harris: To direct a question to the rest of the panel, I missed your remarks, but is it the opinion of the other members of the panel that we should continue to attack the debt now with the surpluses that are generated?

Let me rephrase that. Once the budget is balanced and we realize surpluses, the debt is the first target, but very soon after that we start looking at lowering the tax level, both personal and corporate, in the country. Is that the general consensus?

Mr. Josh Mendelsohn: Let me pick up on that from a slightly different perspective.

You're right in the sense that the first order of business is to reduce the debt load, and I'm speaking for myself now. The order of business really is to find some way to evaluate what each policy measure is going to contribute to long-term growth. It may well be that you find some magic bullet—and I don't believe you will—on the spending side, on the tax reduction side, that beats out the debt load reduction. I doubt it, but if you were to find it I would certainly go along with it.

From my perspective, yes, it would be the first order of business, for many of the reasons Mr. Egelton noted.

I think, in fact, I would go further and reinforce the position during the election campaign and recently in the economic update, when the finance minister noted the 50-50 split of surpluses between spending and tax cuts and deficit-debt reduction. That's a line in the sand that I think is totally unnecessary and unreasonable until we actually see what needs to be done.

Ms. Maureen Farrow: I'd like to pick up on what Josh has been saying, because I think, yes, the first order of business is to assess what we think is the sustainable level, so that Canada is competitive in the long term, and the debt level we can carry. It's the total debt—that's federal and provincial debt and the debt-to-GDP ratio—and the benefit of focusing on it and having some targets, etc. I think if we don't do that we will have missed a very critical.... As Josh said earlier, we're at the crossroads in our history.

I think then you come back and ask what else you should be looking at. We don't want to become myopic. It's very important that we think about long-term competitiveness for Canada. Our tax system isn't competitive, and that's where you started on this discussion, but it's not whether you tweak this piece or that piece. We need to look at it on a comprehensive basis and understand what we're doing. That's very important, because the U.S. is going to go into another round of tax reform.

We blew it in the 1980s. We just blew tax reform. We started out thinking very soundly and sensibly and then we just blew it. We cannot afford to do that kind of thing again.

We're in a very unique position right now.

Mr. Craig Wright: The long-term anchor, as I said, has a number of advantages associated with it and I think everybody here has addressed them in a number of different ways.

With some uncertainty about what the political appetite is, how strong a will is there for anything above a balanced budget? If balanced budgets are the targets, with very conservative economic assumptions and large contingency reserves, then, as I pointed out and Rick as well, more often than not you will be having surpluses rather than balances, which obviously then feeds into debt reduction.

• 0950

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

[Translation]

Mr. Loubier.

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): I have four questions and one comment. My first three questions are for Ms. Farrow, my fourth one for the panel as a whole, and my comment will be addressed to the representative from the Royal Bank.

Here is my first question, Ms. Farrow. You say that we must continue to put forward very conservative assumptions as to the evolution of public finance and the deficit, along the lines of what Mr. Martin has been serving us for the last two years. Would you nevertheless not agree that the fact that the deficit predictions varied by some 53% over an eight-month period might lead people to trivialize these predictions and to not afford them any credibility whatsoever? People will say that they are exaggerated and that they do not hold water. If your shop hired an economist whose predictions were off by 53% over an eight-month period, my guess is that he would be shown the door post-haste.

My second question is once again for you, Ms. Farrow. You say that the target for the federal and provincial governments should be a debt-to-GDP ratio of 40%. Oh no! I believe that the 40 per cent level applied only to the federal debt. What timeframe would like to see followed for such a reduction?

Thirdly, you say that we must pay off the mortgage as quickly as possible and, thus, apply the first dividends of our public finance clean-up, namely the surplus, to the repayment of the debt. Do you not believe that this type of reasoning might be dangerous? Let us make a logical comparison. A family will spread out the repayment of its mortgage over a longer period of time so as to be able to better feed its children.

At the present time, the incidence of poverty is greater still than it was in 1993; it has risen from 16 to 20%. This change is at least in part due to the cuts made by the federal government.

My fourth question is addressed to all of you. You who are disciples of efficiency, competitiveness, improving Canada's competitiveness vis-à-vis other countries, do you not believe that the new initiatives announced by the Minister of Finance last week, in Vancouver, relating to increased investment in sectors such as education and health, are equivalent to top loading in sectors that come under provincial jurisdiction and that are already being worked on in the provinces by armies of civil servants in charge of already existing programs? Would the issue here not be to increase federal transfer payments, which have been cut over the last two years, so as to resolve some of the problems denounced by Mr. Martin?

Lastly, my comment is for Mr. Wright. Would you please relay a message to Mr. McCallum. I had thought that he would be here this morning and I had prepared a message specifically for him. Would you please ask him on my behalf to stop playing politics and to devote himself a little bit more to carrying out serious economic analyses?

When he tabled his predictions last week and stated that the spread between Canada and Quebec was due to political uncertainty, he forgot to mention that there has been a structural spread between the two GDPs for the past 35 years. Indeed, when you use credible measures, such as the GDP per capita in Quebec compared with the GDP per capita in Canada, you see that the ratio is 90% and this has been the case for 35 years now.

Thirty-five years ago, the sovereignist debate was not even on the agenda and no referendums were being held either. That being the case, might we perhaps ask him to refine his economic analyses? I am giving you this message because he is not here with us. Had he come, I would have told him myself to do a little less work on the political analyses side and to maintain the Royal Bank's credibility, that has taken quite a beating since 1992, since the publication of a pseudo-analysis predicting complete disaster following a no to Charlottetown: a million Canadians were going to move to the United States, the GDP was going to drop by 25%, etc. The Royal Bank's credibility will wind up losing quite a bit of its lustre, and the same goes for you who are a representative of the Royal Bank. That is all I have to say.

[English]

The Chairman: Go ahead, Ms. Farrow.

Ms. Maureen Farrow: Let me take the questions in order.

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When we're talking about the need to perpetuate conservative economic assumptions, I think as a panel we would all agree the advantages are that the surprises tend to be on the good side. It has also restored credibility, both in the financial markets and with Canadians, because we were always missing the targets. In the 1980s every budget, everything, was always wrong every time, and that's no way to do your planning. In a business you tend to have conservative targets as well.

The first things we are really stressing are the interest rate assumptions and the growth assumptions, which are always very crucial.

Concerning the latest issue that has been developing, which is the deficit, I think on this panel we'll say that the deficit for this current fiscal year could come in as a surplus, a small surplus, and it could also be a small deficit. It could be anywhere in the range. We're not privy to what's actually in the books right now, but the latest numbers you saw in the latest fiscal monitor would say that. Why hasn't the finance minister said it?

I'm not speaking for him, but I think it's just a continuation of not wanting to get a bad surprise when you've said that you're going to be in a certain position. I think when this budget comes up, his credibility and the credibility of the government will be on having to say we got there, this is why we got there, so let's congratulate ourselves and move on to the next thing.

The goal: we could sit here and debate forever what the goal was. We used to sit and debate all through the 1980s what the deficit should be, and I used to be part of those panels. We'd have fights in this room about what the deficit-to-GDP ratio should be, etc. We all know that it would be better if we didn't have any debt. We wouldn't be here today in that position.

I've given you some charts, and you can see how the debt-to-GDP ratio will come down. I think you have to look at the total government, federal and provincial, which is in the last chart. You can see where we are at 100%, and you can see what happens if you get normal GDP growth at 5% a year, which is really safe, and 2% inflation, or 2.5% inflation and 2.5% growth, which is about our long-term average. It's a nice, rounded number. You can see it comes down, and you could say that we can sit back and let it happen.

I'm saying I think it would be very good to look at other governments that also have some problems. But 40% seems to be a number. If we go back in history, you could say we would like to be back at 20%. My message is, let's pick a number and understand why we want to be there. I would pick 40% within 10 years for the total government sector, debt to GDP. That would be roughly about 30% for the federal portion and 10% for the provinces.

The reason is that the demographic wave of retirement starts to hit you 10 to 15 years out, and I think we want to be in a sustainable position fiscally before we get there. As a nation we're going to want to increase spending or change the mix of spending as our demographic mix changes. That's really my reasoning.

Why do I say the first dividend? I would emphasize that the series of dividends should go to debt reduction. I don't like this arbitrary 50-50 thing. I think we should have had more discussion. I think the last election should have been around the whole issue of what we should do. This is a critical next step, and I hope the finance committee will be doing this.

I'm not discounting there's been a lot of pain. I congratulate Canadians for the pain they put up with to get the deficit where it is. I think your leadership is important, but I think Canadians have really done the suffering. There may be some equity things we need to address, but you take a very small piece of this and do it. Any cash you spend.... And I'm with Josh. There may be a whole mixture of things we should be looking at. But if we spend too long looking for the right mixture—debt reduction, spending increases, and tax reform—we're going to mess it up. We will have spent it on the wrong things.

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That's why I come back to the competitiveness criteria. I think education, health spending, etc., are all part of having a competitive society and a competitive country and they are important areas of spending. There are some equity issues we're going to have to address over the next few years, but don't let's bend over backwards.

The Chairman: Thank you very much. We'll move to Mr. Wright.

Mr. Craig Wright: I just have a comment. I'm sure we'll look forward to your comments too, John, but I have two points of clarification.

First, neither John nor I was at the Royal at the time of the study. Second, reading it from another financial institution, where I was at the time, I don't think you could fault a lot of the economic analysis in it and I don't think that was the case for the timing of the release.

The Chairman: Thank you, Mr. Wright. Mr. Egelton.

Mr. Rick Egelton: I would like to pick up very briefly on the question of competitiveness. I think it's an extremely important issue.

The term “strategic investments” always scares me a little bit when I think of governments implementing strategic investments, because we had those from the late sixties to the late eighties and they resulted in a huge increase in our debt burden.

By and large I think perhaps the best thing the federal government and any government can do to ensure that our economy is competitive is to keep inflation low, to keep our fiscal finances in order so that business people are planning and not looking at huge debt burdens and impending tax increases down the road, and to have a tax system that's competitive, one that encourages initiative among the population and makes them internationally competitive.

Certainly spending on education and job training—not spending so much, but those types of programs are crucially important in having a highly productive workforce. Whether or not there are sufficient resources in those areas remains to be seen. I don't think that's conclusive at this point. Thank you.

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

Now we'll move to the government side. Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): Thank you, Mr. Chair. I have one technical question and then one a bit longer.

I'm not sure I understood you correctly. Are you suggesting that EI premiums be reduced as soon as possible, for instance next year, knowing that a 25¢ reduction would cost us $1.7 billion? Where do you suggest we get the money if that is in fact what you're suggesting to offset the CPP increase?

Second, while I don't doubt that a lot of the things you're saying are correct, I'm trying to reconcile them with what I've heard across the country. We heard from people who are living on $263 a month in lots of parts of this country, and what do we tell them? That they need to fight the big fight for the debt? That we're going to be internationally competitive? Don't worry that you can't feed your kids?

Are you concerned about what you're seeing on the streets of Toronto when you leave your office late at night? How do we address that issue, knowing that everything we give to those people is spent completely and fully and injected right into the economy? How do we address that issue, given your presentations on increased debt reduction?

The Chairman: Who wants to take that question? Mr. Egelton, followed by Mr. Mendelsohn.

Mr. Rick Egelton: On the EI premium rate, it is extremely expensive to offset the CPP increases and it may not be feasible. What I'm saying is to the extent we better our fiscal targets, that should be the first area we look to offset. It may be the case that we're not able to do any of it, but I would hope it would be the number one priority, because I think it has a very important impact.

In addition, your comments about the level of poverty out there...and in fact the level of employment right now is extremely high. I think the best way to improve that level of employment is to have sound economic policies. I think keeping the deficit down and generating the low interest rates we have today will hopefully put more and more people who are unemployed back to work. That, I think, is the best prospect for increases in the living standards of Canadians.

Thank you.

The Chairman: Mr. Mendelsohn.

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Mr. Josh Mendelsohn: With respect to the EI and things of that nature, there is no question that it is expensive, and we should only do it when we can do it.

I must admit that I was kind of amused when so many complaints came in that we have such a huge surplus in the EI program and we should reduce it. Well, the point is that it's an accounting figment; the real money doesn't exist there. In fact, it is being used to reduce the deficit, and if we reduced it sharply we'd have a deficit again.

So I think it's a question of if, as, and when we can do it. But I think we do need to keep in mind, and never forget, that we are increasing the tax burden automatically, both through bracket creep and now the CPP premiums. So we need to keep that in mind, and we need to do it as soon as possible.

EI, by the way, isn't just the premiums. We need to change the program so that it is back to what it originally was intended to be: an insurance program, maybe even experience rated, to intensify the mobility of labour within this country.

There are a lot of other issues we can talk about, including interprovincial transfers and everything like that.

With respect to your other issue on poverty, I don't think that when we come out of our office, or anywhere we go, anyone doesn't realize what is going on. Part of the reason we have it is that we have mismanaged the economy in the past. We have spent money in wrong directions that didn't generate the kind of growth and performance that would create the kind of jobs.... And because we spent it in wrong places, we didn't have enough to spend it in the right places.

I recall that when we started really tackling the deficit issue I was in Vancouver on a telephone talk show. A disabled person called in, and he was very concerned about what would happen to his benefits as a result of this program. And the answer really is, if we do it right, there should be more money for that kind of individual, rather than less.

So in terms of people who cannot fend for themselves, if we do it right, there should actually be more funds available for the reallocation and redistribution of funds. And to the extent that we do it right and we get the economy growing, you have a larger pie that you can then redistribute to those people who do need it, and deservedly need it, rather than just spending on all sorts of special-interest issues.

Ms. Paddy Torsney: Ms. Farrow, did you want to say something?

Ms. Maureen Farrow: Well, I would agree with what Josh is saying. It comes back to the total tax burden. When you look at whether it's UI, whether it's the CPP, or whether it's the overall personal or corporate taxes, the whole thing needs to be examined. And I really do stress that, because we cannot just tinker.

On the $263 issue, I started off by saying that Canadians have taken the pain. But I don't think you can turn around and say, well, we have the deficit under control, so it's okay now. And I don't think just throwing money at it is the solution. I think it's using this opportunity, getting this economy building. And I would endorse what Josh just said: if you don't mismanage, you are going to have more to distribute more appropriately.

But you have to deal obviously as the politicians. You have the problem that this is going to take a little bit more time; it's not instant rewards that you can give people.

The Chairman: Thank you very much, Ms. Farrow.

We'll move to the next questioner, Mr. David Iftody.

Mr. David Iftody (Provencher, Lib.): Thank you, Mr. Chairman. And thank you very much for your presentations.

In Toronto we heard from a Dr. Mullins. He referred to a number of models and theories with respect to debt payment and what would be most appropriate in terms of government initiatives with respect to debt payment. He said that perhaps rather than looking at aggregate numbers in terms of reductions, interest rates or the amount we're paying in interest was a more realistic target with respect to looking at the debt.

It's interesting that in the charts provided by Ms. Farrow we had the lowest level of debt in the country during the post-war era, between 1975 to 1980, roughly around 20% to 25%. That would suggest that our vulnerability with respect to outside influences—I think Mr. Wright and Mr. Egelton had referred to that—would be less.

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Yet what happened, when you see this dramatic increase, which is reflected in other G-7 countries at about the same time—in 1975, of course—is the OPEC oil crisis pushing up government debt right across the spectrum. Commensurate with that, and only a couple of years later, you see a tremendous increase in interest rates to almost 20% at a time when Canada's debt was at its lowest.

So when we're talking now about reducing our debt with respect to the relationship to interest rates, how do you account for this apparent disparity, and what advice can you provide this committee? I'd like to know with respect to those two important variables, the OPEC crisis and then the following interest rate hike when our debt was at 20%—somewhere where we would enviably like to be right now—how you account for that.

Ms. Farrow, Mr. Mendelsohn or other panel members, could you please speak to that.

Mr. Josh Mendelsohn: Let me pick up on that quickly. First, we are not kidding ourselves and saying that Canada is immune from international capital flows and international financial developments. What happened in the seventies was in fact the reaction to the inflationary impact of the OPEC exercise and the fact that at that period we also had, to some degree, some synchronization in the economic performance of many countries. So what we had was a situation where the interest rates were ramped up for anti-inflationary purposes and uncertainty in the world.

The problem is that we had a 20% debt ratio at the time. Think about what our interest expenses would have been if we had been at a 75% debt ratio at that time. And that's really what we're saying.

I was at that session with Mr. Mullins, and I don't really think one can target your interest expense. In fact, it is one of those elements that you can control to a degree by controlling or managing the term structure of your debt between the short term and long term.

The government is now trying to do that, having moved towards the longer end of the yield curve, so that it's protected against any short-term volatility, or to a greater degree. In fact, our interest sensitivity has moved from about $1.8 billion for every one of your basis points to about $1 billion now, so we can protect it that way.

The other way we can protect it, in fact, is by having a lower debt ratio, because we can't stop interest rates from going where they will, except for some small adjustments. But basically our rates will reflect world rates and, more normally, U.S. rates. But if we keep our debt ratio down, it means the total interest cost will be lower than it would otherwise be in the event that rates went up. It should also help us maintain negative spreads against the U.S.A. and may even put us in a better position as we continue to move forward.

So at the end of the day I don't believe the interest expense itself can be explicitly controlled, because it is a market rate. But we can control our exposure to it by controlling the debt load. I think that's where I would come at it.

The Chairman: Thank you, Mr. Mendelsohn. Ms. Farrow.

Ms. Maureen Farrow: I would like to endorse what Josh has just said. I agree with him 100%.

I think there's another thing when you look at this chart you've been looking at. Starting in the late sixties in this country we embarked on a number of very important programs in terms of health care, and all sorts of programs were put in place. We also embarked upon an indexation mechanism, which also ramped up our spending. As our revenues fell short of the spending, that's how we got these deficits.

So we didn't just get the deficits coming out of interest rate costs; we also got them out of a very distinctive decision that we were gong to embark on a certain level of spending and certain programs, and we would do it in a certain fashion. We felt we could do that because we were in such a good fiscal situation.

One of the messages I have today is to say, let's really think before we spend any surpluses, because we don't want to do that again. Also, the demographics going forward are something to think about very seriously.

The Chairman: Thank you, Ms. Farrow. Mrs. Redman.

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Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairperson. I would like to ask this question of all four presenters.

We've been offered three types of long-term targets. We've heard of the debt-to-GDP ratio, whether it's federal or federal plus provincial. We've also heard about the achievement of a triple-A credit rating as a target we might look at. In some of the presentations we also heard about the reduction of the federal debt servicing cost to about 14% of revenues.

I would really be interested to hear the relative merits of all these three suggestions.

The Chairman: Who wants to start? Mr. Egelton.

Mr. Rick Egelton: Unfortunately, optimal debt-to-GDP ratios is probably one area in economics—one of many—where the discipline doesn't have a lot to say in terms of what's optimal. Is it the 40% that others have suggested, or is it 20%, or 25%?

I think what is clear is where we are now: it's far too high. We want to get it down as quickly as possible. As an interim target I would see as a first step at least trying to get it back down to what other creditworthy industrial countries have. That is getting it down federally maybe 20 percentage points from where it is today. That would likely restore your triple-A credit rating.

So I think to target on the average debt-to-GDP ratio of other creditworthy countries would probably satisfy both those targets: restoring the triple-A credit rating and hitting that target.

Where do you go beyond there? Do you want to get it lower than that as a competitive edge to provide you with a further buffer? Yes, probably. I think some of the suggestions by Josh are quite reasonable.

But since we're so far away from that, that the other industrial countries that have triple-A credit ratings...in my judgment that would be a very good first step to go in terms of a long-term debt-to-GDP target. I think we could get there in not too long a period of time.

The Chairman: Thank you, Mr. Eggleton. Mr. Wright.

Mr. Craig Wright: I have a very similar view to Rick's. In terms of the three targets you mentioned, the first two would probably go hand in hand in getting the debt-to-GDP ratio down to more reasonable levels, and would probably restore our triple-A credit rating.

As Rick highlighted, theory offers very little on this, but there are some considerations you can take, and one would be the competitive side of the thing. The high debt servicing costs, over which we don't have much control, as Josh pointed out, do tend to drive this wedge between revenues and spending. Like Rick, I would say that a target would probably be to get more in line with our trading partners, and in particular, levels similar to those of the U.S.A.

The Chairman: Mr. Mendelsohn.

Mr. Josh Mendelsohn: As I guess the creator of the triple-A target...there is a very simple reason for creating that target. You need a benchmark, you need something to shoot for. Whether it's the triple-A, or whether you choose what we could look at as a rational guideline, that's really the rationale behind it. There's nothing other than that.

Rather than saying we'll be on a downward trend—and so how much, when, by what?—we said triple-A by the turn of the century. It does give you a benchmark, as I say, the same way your benchmark for the long term is what you will need to survive with the retirement bulge. It does go hand in hand with the general debt reduction.

As I've already noted, and as has been noted, as far as the debt servicing costs are concerned, to me that is a non-starter.

Ms. Maureen Farrow: I would agree with what Josh has just said in the panel.

The Chairman: That was a very concise answer.

Mr. Valeri.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Mr. Chairman. I'll be very brief. because I know the chairman has a timetable to follow.

Ms. Farrow, you talk about the U.S.A. embarking on a new round of tax reform, and how we need to bring the total tax load down to 32% of GDP versus the 36.6% today. You talked about the 1980s, and how we missed the mark then. Can you give us some indication of a timeframe? What's the window of opportunity that we have now to deal with that tax burden?

Second, what would be some of the priorities? You're talking about the aggregate tax burden. Perhaps you could give us an idea of where we should look first in order to start to bring that tax burden down. That's one question I have.

Second, Mr. Mendelsohn, you talked about the need to look at tax and regulatory burdens and, regardless of the policy, to really have a system in place to be able to evaluate the effectiveness of whatever changes we make. I grant that's certainly good advice. Could you give us an indication of what some specific initiatives might be that we as a committee could consider, that would really lend themselves to the competitiveness and incentive required to get our economy moving?

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Perhaps Ms. Farrow could begin.

Ms. Maureen Farrow: I'm coming back to what I would call a comprehensive tax reform package. What we really need to do is starting right now, and that is a federal and provincial discussion. This is important because in the eighties we split up the tax reform into two pieces. The provinces, of course, went straight up the middle, and took the window or the gap that we had put together at the federal level.

I say it because I think it needs more thought. It takes time first to understand what you want to do with the total tax system in terms of the set of competitiveness criteria you're going to have for the next decade. You don't tend to do this tax reform every year. You can play around at the margin from year to year, but we need to really say what it should really look like for the next decade ahead, and have that discussion.

We should make sure we understand what we're doing, look at it against our trading partners. We should not just look at the personal tax rates, the corporate tax rates, or the capital gains taxes. You have to look at it from the standpoint of the CPP and all the way through, and from the employment tax side as well.

Then once we've decided what's right for Canada and where it fits in, and we understand what we give up on the competitive side and what we gain, we can also develop other policies that fit in with that, so we're developing our competitiveness and not detracting from it. That's an exercise that quite likely will take a couple of years for us to do. We should be ready then, as we turn into the next decade, to be able to follow through with implementation.

So that's what I'm really talking about, not tweaking things. We're very good at just saying, well, we'll do a bit here.

From time to time we need to do that for the equity issues. As your colleague said, there are people out there to whom we have to give help. I think we can't be an uncaring society. I don't think anyone on this panel would say we should be uncaring, but we have to have balance, and we have to understand what we're doing and why we're doing it.

We really are at a crossroads—I'll say that again—and I think we now have a fantastic opportunity ahead of us. We haven't seen this opportunity in 15 years.

Mr. Tony Valeri: Thank you.

The Chairman: Thank you very much, Mr. Valeri. Thank you, Ms. Farrow.

Mr. Mendelsohn.

Mr. Josh Mendelsohn: There was one outstanding question here. I hope I understood the question properly, and if I didn't, please stop me. In terms of the approach to this—and let's take the tax system as one guideline—one can go through the entire tax structure and look at what each tax measure, as an example, does in terms of income redistribution as opposed to generating an incentive for entrepreneurship, risk-taking, growth, whatever.

Then you have to come at this, unfortunately or fortunately as the case may be—and you gentlemen and ladies have to deal with this—in terms of the priorities from a governmental perspective, in terms of the redistribution rate versus the growth rate. You can hierarchize the various elements that you do, and that can be done in the context of spending plans and the like.

In terms of specific measures, clearly education and health have been noted, and there's no question they have contributed, and will continue to contribute, to Canada's performance. But I don't believe the issue here is purely that of spending more dollars. I think we need to take the systems apart, look at where they are working well, and where they are not. From an efficiency standpoint that can be done. Our health care system is something to be proud of, despite some failings because of some cutbacks. But having said that, we're still the second most expensive health care system in the industrial world.

Let me turn to our educational system. The numbers I've seen show that we are either at the top or the second highest spender on a per capita basis. Yet every report you see tells you you're not getting the results from that. Why? It is because the benchmarks, the targets, are wrong.

What should the targets be? Then you spend and restructure the system, and do so in the same vein in the regulatory process. We have regulations, we have limitations on various sectors of the economy, or promotions from various sectors of the economy, that don't necessary jibe with what's going on in the international community.

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We're going through—and as a banker I guess I have to raise this—a reform of the financial services industry, and there will be documentation from us and others that will point out some of the issues we need to deal with if we are to maintain a healthy, strong, vibrant and contributing financial sector in this country. So it's along those lines, and I will not deny it. Within our own shop we have devised this concept of the framework—at least the way we think about it. We are working and trying to develop more specific criteria for how we go about doing this.

Mr. Tony Valeri: Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Valeri and Mr. Mendelsohn.

I have a question for Ms. Farrow. You said the 50-50 split should be reconsidered. Have you reconsidered it?

Ms. Maureen Farrow: Yes.

The Chairman: What's your split?

Ms. Maureen Farrow: Initially I would take virtually all of it to pay down debt. I don't think I'm ready to deal with the tax side because I don't think we've done enough of the thinking to do the reforms. I think we need to have done that and then move on. We'd need to know whether it's growth or redistribution and what is the mix, etc.

I would take a small portion on the equity issue. I think there is a need to re-address some of the equity issues, but it would be a very small percentage. That's where I would go at the beginning.

The Chairman: Can you expand on that? What do you mean by equity issue?

Ms. Maureen Farrow: The $263 person, that's where, children who are in poverty. Child poverty is a disgrace in this country.

So there are a few critical issues. You could also argue that child poverty with our education system is a long-term investment in longer-term competitive advantage. It's those kinds of issues, but I think you have to be very careful that you don't say “Suddenly we have this money” and you chase this. You have to deal with the debt to begin with, and that's what Canadians want. Canadians want to know that we are focused and we are going to be dealing with this serious issue, because we now have the means to do it with the growth we have in the economy.

But they also recognize that there are some areas in society where the pain...as I said in my opening remarks, Canadians have paid a very high price. They've done it relatively willingly and we should congratulate them. But we need to make that next step; otherwise you've blown it out the window, you've just blown all the gains away, and I think all Canadians will be very angry if that occurs.

The Chairman: On the issue of competitiveness, many studies that I've read state that infrastructure is an important part of any competitive society. If the economy doesn't have the right airports and roads to distribute our products, it is difficult to (a) increase productivity, and (b) bring about the type of competitiveness you were talking about. Yet I sensed from your statements—I know the lights were just an example.

Ms. Maureen Farrow: There were just an example.

The Chairman: Walking in the dark is dangerous sometimes.

What is your point of view on that issue?

Ms. Maureen Farrow: Competitive infrastructure is crucial to a nation's longer-term competitiveness, but I think we have to look in this age and ask what competitive infrastructure is. It's not just bricks and mortar; it's education, health, training and communications. There are a lot of elements that we would add in the second half of the 1990s to what we mean as infrastructure. I think we need a redefinition of infrastructure. Governments often think of it as a new airport or road, and we do need those things, but I think there are other ways of getting those, such as user-pay methods of building those resources.

I've always thought, as I've travelled around Canada, that we are actually pretty well endowed with bricks-and-mortar infrastructure, and in fact, we need to be turning to some of the softer infrastructure expenditures or investments that we should be making, but really understanding what we want from them.

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Again, I would agree with Josh. I would take education as the major stumbling block. We have spent a lot of money on education and we do not have the results. It's a matter of focus and standards, and I think we are beginning to turn that pendulum around.

The Chairman: Thank you.

A final question, Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman.

Ms. Farrow, what would you think of this suggestion? I agree that we have to attack the debt, but instead of a 50-50 split, what if we applied all of the surplus toward the debt, and then the amount we were able to reduce the debt service charges by perhaps could be applied to some of our social programs? That would work out to far less than 50% of our surpluses, but it would still give the government some wiggle room in their secret desire to start spending more money.

Ms. Maureen Farrow: I would like to quote you on “the secret desire to spend more money”. I think this is the time to caution all politicians on the secret desire to spend money. I don't think it's the way to get votes, and I think it's not the way to build a competitive Canada as we go forward.

You may want to do some of what you're saying, but don't get your eyes off the debt reduction targets. Come out very clearly with what they should be, and then we will know and we can start dealing with the trade-offs. The private sector can be part of that trade-off. They're going to benefit with lower interest rates as a result, so you have a job-generating mechanism going forward. So don't tweak these things and don't give way to these secret thoughts of spending.

The Chairman: Thank you for your comments.

On behalf of the committee, I would like to thank the panel. I think it's been very informative. I think the message of reducing the debt came out loud and clear, but also the fact that you view a competitive society not as an end in itself but as a way to make sure.... A competitive society and a caring society are not mutually exclusive. They can go hand in hand. I think that's the message we come away with from your panel discussion. Thank you very much.

I will suspend the hearings and we'll come back in five minutes.

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• 1042

The Chairman: I'd like to call this meeting to order and welcome everyone back to this morning's second round table.

I want to introduce to you the panellists. From the Insurance Bureau of Canada, we have George Anderson, president, and Paul Kovacs, chief economist. We also have, from Sun Life Insurance Company of Canada, Don McIver, chief economist; and from the Business Council on National Issues, Thomas d'Aquino, president and CEO.

Welcome, gentlemen. As you know, this committee has travelled across the country and is back in Ottawa to listen to panellists such as you about the issues related to the fiscal dividend and the challenges and choices we face in this new economic era.

I also would like to bring to the attention of the viewers that there are three questions we've asked of the panellists: First, what economic assumptions, including the prudence factor, should be used for 1998 and 1999 in planning for the 1998 budget? Second, what are the appropriate new strategic investments and changes to the tax system that would allow the government to best achieve its priorities? Third, what is the best way the government can help to ensure that there is a wide range of job opportunities in the new economy for all Canadians? Areas of discussions could include how government can best support Canadians in acquiring the education and skills needed to thrive in a knowledge-based economy and how government can best foster the application of knowledge across the economy.

This sets the framework for discussion, and we will begin with a presentation from George Anderson and Paul Kovacs.

Welcome, gentlemen.

Mr. George Anderson (President, Insurance Bureau of Canada): Thank you, Mr. Chairman. Thank you for the opportunity to appear today. We welcome this occasion to take part in what's a very important debate. Fiscal progress in the last four years has been really remarkable. As I was musing to my colleagues last night, I wonder how many of us four years ago really thought we would be where we are today. It is quite a remarkable achievement for our country. The government is to be congratulated on it. Our message today is, let's push on and finish the job.

• 1045

There are numerous advantages, as we all know—we heard some of them from previous presenters—emerging from our fiscal health. One of the by-products of the debate is how to allocate the benefits of the fiscal dividend, even if that dividend proves to be relatively small in the short term. I think this is a very healthy debate for us to have, and, as others have said, an extremely important one. We're at a critical juncture in our history.

I think everybody's aware that there are numerous advantages to paying down debt. First of all, there are the inevitable international comparisons, which show that our total debt-to-GDP ratio is too high by international standards. Certainly when we look at the federal government and the provinces together, it is way too high.

Second, there's the prospect of emerging affordability issues if we don't pay down the debt. With a high debt, if our economy stalls we would be left to pick up the cost to government of additional interest rate charges and more reliance on social spending. So we feel that debt reduction is an important element of what we should do as the fiscal dividend becomes apparent.

We also believe that Canadians supported expenditure reductions and significant tax increases over the last few years to avert what they believed to be, I think quite rightly, a national crisis. It is perhaps entirely reasonable that they should expect some direct reinvestment of the fiscal dividend in visible ways, especially if the economy continues on its current path. After all, federal spending as a percentage of GDP is expected to fall next year to the lowest level since 1949. So I don't think there can be any argument but that government has retrenched significantly in our economy over this period.

In our submission, we support a balanced approach that targets selected program spending and focused tax cuts—and I emphasize the terms “selected” and “focused”—while retaining the flexibility to be more aggressive on debt reduction if circumstances warrant it. The primary themes of our tax reduction and spending proposals are to create jobs, to enhance our competitiveness, and very importantly, to help those most in need.

Later on this morning Mr. Kovacs can elaborate on some of these questions, but now, Mr. Chairman, if you'll permit me, as we did last year I'd like to draw attention to the environment and to the prospect that natural disasters in this country could have a devastating effect on our fiscal progress.

Last year we spoke to the committee about the inevitability of a major earthquake in the lower mainland of British Columbia and possibly in Quebec. The cost of that event in British Columbia could be as high as $30 billion. That's a number that is agreed upon not only within the insurance industry but also within government.

Most of this is uninsured. As a nation, we are nowhere nearly adequately prepared for this event. We called on this committee last year to help us persuade the government to act to be better prepared. I'm pleased to report that the committee and the government responded positively. Working together, we've made progress on this issue over the past year. With your continued help, we hope to see further progress in the upcoming budget.

But we are not there yet. Let me remind you, for those who are new to the committee, about what the committee report recommended on this subject last year. It said:

The Committee recommends that the Government work in partnership with the insurance industry to ensure that Canadians are protected financially against a major earthquake. In particular, consideration should be given to allowing premiums to be set aside in untaxed funds and to build to a point where they can cover eventual losses.

We hope you will see fit today and in your subsequent report to reiterate this recommendation to the government.

We also think it's time that we look beyond the threat of earthquake, although that is the most pressing natural catastrophe we face in the country, and begin to work on programs that provide more security for Canadians facing a rising tide of natural disasters, most of which will have a huge federal price tag associated with them.

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This is a cross-Canada and worldwide phenomenon. Here in Canada we have been spared the worst so far. We haven't had a Kobe or a Hurricane Andrew—yet. Still, we are living in a country that is increasingly exposed to the prospect of a major natural disaster.

When you look across our land, you can examine the possibility of major earthquakes in British Columbia, in the lower mainland; in Quebec, in the Ottawa-Montreal-Quebec City corridor; and you can look at hail and tornadoes in the prairies. Of course, we're all vividly reminded of the Red River flooding last year. Who can forget the devastation of the Saguenay just two years ago? What about the flood in New Brunswick and the prospect of major hurricane damage along the eastern shore and in Newfoundland?

So our belief is that this is a national problem. It's a problem that's going to accelerate in the years ahead. We need the lead of the national government on this issue. To that end, our submission recommends that we look to a series of measures that will help us build safer communities in Canada, to establish safety partnerships with all the players in the field—we've seen many examples of where we are not ready even to clear a little snow in Vancouver when we get four inches of snow out there—and to promote consumer awareness. We believe informed individuals and community action are the most effective means of reducing the loss of life and property.

The property and casualty insurance industry has recently established an Institute for Catastrophic Loss Reduction in Canada. We invite the government to join us in this enterprise, one in which Canadians from coast to coast can join and help each other.

Thank you.

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

We will move to the representative from Sun Life Insurance Company of Canada, Don McIver. Welcome.

Mr. Don McIver (Chief Economist, Sun Life Insurance Company of Canada): Thank you very much.

Like so many of my colleagues, I would first like to recognize the achievement of the government in balancing the budget. I would like to take the opportunity here to speak to a single theme. I know the chair has put several issues to us, and I'm sure there will be an opportunity to address those in the discussion period, but I would like to start out by talking about how we have been able to achieve this significant improvement in the fiscal situation and just what we should be looking at as we go forward.

The accomplishment of the balanced budget has been aided, I think in substantial measure, by the publishing of fixed deficit-to-GDP targets. When the finance minister adopted that approach, he in essence drew the line in the sand and attached his personal credibility, and the credibility of his department, to those targets being met. He and his officials worked diligently and spoke very persuasively to ensure that the outcomes consistently exceeded expectations.

It is precisely because that approach was so effective that one must voice concern over the apparent vacuum that now seems to define the government's fiscal strategy. The notional fiscal dividend is ill defined and its prospective division between competing objectives has been arbitrarily decided. Canadians and the international marketplace are left without any clear milestones whereby to assess progress along our new fiscal path. Indeed, we have as yet not developed a concept of what our desired destination should be.

The fiscal dividend is defined in the economic and fiscal update as the projected surplus of total revenues over total spending that would arise in the absence of any new tax and spending action since the 1997 budget. Surely a more meaningful concept of a fiscal dividend would be the interest savings that would arise from actually paying down the debt. In any case, the dividend is defined in terms of projected figures and the assessment of fiscal results only made over the mandate of the government.

This scheme is greatly vulnerable to shifts in economic conditions. Slower-than-expected growth rates or higher-than-foreseen interest rates can adversely affect the actual outcome in any one year. However, new program spending or tax relief, once introduced, cannot sensibly be retracted in the ensuing year. In other words, if there is a mistake in judgment it's very difficult to correct.

• 1055

In any case, the objectives being cast in terms of the full mandate of the government make it impossible to unequivocally and equivocally evaluate achievement until the term is over. That contrasts again markedly with the ready reckoning of progress that added so much credibility to the first term—the concept of fixed deficit reduction numbers.

The 50-50 allocation is arbitrary. The plan to spend half of the projected surplus assumes that the federal government is not currently spending enough, but enough for what? Is it enough to support employment growth, enough to provide essential services that can best be provided by the federal government, or enough to foster long-term economic growth?

There are many in the economics community who would argue that notwithstanding recent cuts, government spending still accounts for far too high a proportion of Canadian gross domestic product.

Canadians have the absolute right to determine their preferred level of government expenditure. There's no question of that. But at the very least the government should facilitate the public determination of what that appropriate level should be, rather than arbitrarily presuming to increase the level.

The finance minister along with a great many Canadians believes our citizens are paying more than enough taxes. The government's plan calls for some portion of the other 50% of the dividend to be returned to Canadians through lower taxes. In recent years, however, we have witnessed increasing resort to tax relief measures whose impact is indistinguishable from expenditure increases.

Refundable tax credits have the same fiscal consequences as government grants but have deliberately uneven distributional effects. They're planned that way. The discretion to design programs that can be classified as either expenditure increases or as tax relief casts further doubt concerning the usefulness of the 50-50 rule. Again, it's somewhat arbitrary, depending on how you construct the plan, under which category the relief or the expenditure appears.

The 50-50 rule is mute on how one-half of the surplus would be split between revenue relief and debt reduction. It is worth noting that the finance minister has been adamant concerning the importance of pursuing debt reduction, and his assurances that high levels of prudence in contingency will be built into budgets provide a very considerable degree of confidence that significant debt repayment will take place. Yet in the absence of a clearly defined program of staged decreases, it will be difficult for observers to evaluate how committed the government is.

Once more the contrast between present uncertainties and the previous commitment to transparent deficit-to-GDP targets is glaringly apparent.

In light of these criticisms, what framework should the budgetary process deliver over the next few years? First, there should be a clear commitment to hold the level of expenditures constant unless the increases are explicitly justified in terms of improving economic efficiency.

Second, there should be a commitment toward introducing tax relief in the context of removing the distortions in the present system that most severely curb employment prospects and introducing no further discrimination of the personal tax system, at least until existing progressivity has been the subject of a public debate.

Third, there should be a clear delineation of the desired ultimate goal of debt reduction. Where do we want to be at the end of the road? This would provide some indication of what levels of debt the country should maintain and for what reason. This would assist domestic and foreign analysts in assessing how dedicated the nation is toward reducing indebtedness and provide a framework within which to gauge progress.

Fourth, there should be a less arbitrary and more timely set of budget objectives than that offered by the tentative 50-50 rule for dividend apportionment.

The Chairman: Thank you, Mr. McIver.

We'll now move to the representative from the Business Council on National Issues, Mr. Thomas d'Aquino. Welcome.

Mr. Thomas d'Aquino (President and CEO, Business Council on National Issues): I'm delighted to be here. With me is our Business Council house economist, Sam Boutziouvis.

Let me add my congratulations to your recent appointment as chairman of this committee. The Business Council on National Issues and I have had a long association with this committee over many years. I have a very high regard for the work you do and I know how important it is to win your approval for the ideas that are put before you, because we like to think you have a considerable amount of influence over where the Minister of Finance is going.

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Obviously you're engaged in a very important challenge, and after 20 years of appearing before this committee, I think perhaps these are the most challenging days for you, because the single-minded objective of eliminating the deficit, which we should all have been addressing during the last 15 years, now becomes a much more complex issue. The Minister of Finance raised these issues in Vancouver and I want to speak to a few of those issues this morning.

First of all, I am extremely encouraged, as are my colleagues in the Business Council, with the progress and success to date on deficit reduction. Why are we encouraged? Last year's deficit of $8.9 billion, which is 1.1% of GDP, was actually more than $15 billion less than targeted. For this the Minister of Finance deserves great praise, although I have to tell you there are many who say that overshooting the other way so dramatically raises questions in some people's minds about the effectiveness of the targeting ability of the Department of Finance. But we won't address that this morning.

Second, in a statement on October 27, 1994, before this very committee I recommended that the federal government should balance its budget by 1998-99 at the very latest. When I made that recommendation the majority of the members of this committee were highly skeptical, as were members of the government. It was impossible, unreachable, and I was asking for far too much.

Yet the recent Speech from the Throne, as well as the minister's economic and fiscal statement, included a commitment to a balanced budget by 1999. This does not prove the wisdom of either our advice or our forecasting, but it does show that it is possible if governments really put their minds to it. The achievement is not a minute too soon.

On the basis of net financial requirements, which is a less stringent measure to utilize to compare ourselves internationally, a relatively tiny amount of debt was actually paid this year. When we put together our graphic presentations for people outside of this country and can show that our financial requirements have gone down to zero, our fellow business chief executives from the G-7 “ooh” and “ ah” , so it certainly is an achievement.

On the current economic situation, expenditures have come down and, as you know, are at their lowest level in more than two decades as a percentage of GDP. Rapid economic growth and historically low interest rates have also contributed significantly to the recent improvement in our fiscal situation. It is clear that Canada has entered a long and strong period of economic growth and momentum is continuing to build.

Most economic forecasters have adjusted their growth projections upwards for Canada once more this year. It is our view that Canada will lead the G-7 or at least match the United States with in excess of 3.7% real growth. For more than five years, inflation, which again my colleagues and I fought so hard to contain against a highly skeptical committee and government, is rewarding Canadians enormously. Business confidence is at record levels and consumer confidence is on the rise.

In our own organization the chief executives come together quarterly to assess how the individual corporations are doing, and the levels of confidence in terms of growth—orders that are coming in and export possibilities—have never been higher. However, taxes paid to the federal government, notably personal and payroll, have increased dramatically. Personal income tax revenues as a percentage of GDP have increased by 2% and unemployment insurance premiums have doubled as a percentage of GDP over the past two decades.

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As predicted in 1994, the progress made to date has not been without much pain and dislocation for many Canadians. We're acutely conscious of this, and it is a bitter lesson that I don't think any of us should forget as Canadians collectively begin to contemplate the future course for fiscal policy.

The unemployment rate today remains stubbornly and unacceptably high at 9%. Still, there has been improvement in employment growth, with seven consecutive monthly gains in employment. Canada now has the best job creation record in the G-7—something we predicted would happen three years ago—surpassing even the United States in recent months. So far, the private sector has accounted for the creation of more than 300,000 net new jobs in the Canadian economy. While still high, the unemployment rate among youth is also beginning to drop, albeit very slowly. Youth employment has in fact increased by more than 50,000, with at least three consecutive months of growth since May, the largest sustained increase since 1994.

Now, Mr. Chairman, the challenge ahead will be to both sustain and harness the momentum that I am describing and that we have in the economy, and to ensure an extended period of output in employment with rising productivity and steadily improving standards of living for all Canadians. The future course of fiscal policy will be a decisive factor in meeting the challenge of enhancing Canada's overall competitive position, which of course underscores the ability to raise the standard of living. Key, in my view, will be to not fall into the same trap of uncontrollable spending increases and runaway deficits and debt for which this country has paid so dearly during the course of the last fifteen years, Mr. Chairman.

There has been a great deal of discussion about something called the fiscal dividend—how to define it, how to spend it, how to save for it—but with the greatest of respect, my colleagues and I believe such talk of dividends is improper, premature and short-sighted. The use of the term “dividend” implies some sort of reward or jackpot, and this is far from the case. The evidence is clearly before you. It's not a question of conjecture; the numbers do not tell lies, Mr. Chairman. Canada remains one of the most indebted countries, second only to Italy among the industrialized G-7.

Canada's foreign debt, while in decline, remains the highest among the G-7 countries with about 40% of GDP. The interest costs on our almost $600 billion of debt are close to $45 billion. They are enormous, and this means the federal government must run an operating surplus in excess of $40 billion a year just to keep the books balanced. This is $45 billion that could be spent on health care, education, tax cuts, debt reduction or other priorities. Instead, it is going to pay interest on the accumulated debt.

The key to a healthy fiscal position is to build a true fiscal dividend, Mr. Chairman, one that will put Canada's debt on a sustained downward track over the course of the government's mandate, and to decidedly lower interest rates on that debt. I think Canadians will understand this position, Mr. Chairman. In fact, we have strong polling evidence showing that Canadians in fact care a great deal about the national debt.

Why is it that they care so much? It is because it is exactly what homeowners are engaged in today. Ask anyone who has a mortgage today. The key issues will be the interest rate the homeowner pays on his mortgage owing, and the terms of payment. Today, Mr. Chairman, Canadian homeowners across this country are paying down their mortgages more quickly and are constantly searching to reduce their interest costs. Gone are the days of 25- or 30-year amortization. Canadians homeowners today are paying off their mortgages in 15, 10, and even 5 years, all with the view towards greater financial freedom—a true fiscal dividend.

Explained in this way, the federal government should do the same. The federal government's priority should be to reduce debt interest costs by reducing the debt outright over the course of its mandate.

There's another reason, which I won't have time to get into, Mr. Chairman, but you've heard it many times before. It is the intergenerational impact of the debt. That is critical. There's a moral question here—not just an economic question—of passing on these huge burdens to future generations.

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Let me say something quickly about the prudence factor. The BCNI endorses the use of a contingency reserve. Indeed, we would argue that the contingency reserve should even be increased to perhaps $5 billion. The 50-50 rule now seems to have become the mantra. We challenge the 50-50 rule. We don't think the 50-50 rule is a good rule. In our view, it shouldn't be fifty, the other fifty divided in half, because we are convinced that the greatest single benefit will come in up-front debt reduction.

Some of you may be skeptical of that assertion today, but think back to what I said in 1994, that the greatest single benefit to the people of Canada will be the interest benefits as a result of our reduced deficit. The greatest single benefit to the economy of Canada today has been lower interest rates. It is what has made the Minister of Finance look so good. So please take very seriously what I'm saying about debt reduction.

In my view, let's scrap the 50-50 rule and let's put heavy emphasis first on debt reduction. Get it down more quickly than is contemplated. Automatic pilot will not do; applying the contingency reserves, in addition, will not do; it must be brought down more quickly.

Finally, to conclude the issue of taxes, obviously we have a big problem on the tax front in Canada. Our position on the BCNI has not been to support the idea of immediate, up-front tax cuts. We have fought the deficit for fifteen years and we know how hard the task is. First, we want to see convincing progress on debt reduction.

Mr. Chairman, every Minister of Finance from Mr. MacEachen to Mr. Lalonde, to Messrs. Mazankowski and Wilson all promised me that the debt-to-GDP ratio would fall, and they all were wrong. Mr. Martin, for the first time, has made it fall, but I remain unconvinced, as do my colleagues, until we see it fall much more dramatically.

When we see that progress, then we should turn our minds to significant tax reduction. Why significant tax reduction? The share of GDP of personal income taxes is among the highest in the industrialized world. The overall tax burden is too high. There is a serious brain drain taking place, and I can tell you that in the 150 largest companies in Canada we are having enormous difficulty in both retaining or trying to bring back young people, for whom we use our tax dollars to train, from the United States.

Finally, I would say that this government is sitting on a time bomb on the tax issue. At the end of your second mandate, unless you have brought dramatic tax relief—that is, after you have put the debt up front—Canadians are going to ask a very simple question: why is it that you've been in power for eight years, yet we've seen no appreciable increase in our disposable income and we have seen such a heavy increase in taxation? The Government of Canada, supported I hope by all the parties, including the NDP, should argue that a tax reduction strategy should be put in place and that this strategy should contemplate significant decreases in years two, three and four of this government's mandate.

I will conclude there, Mr. Chairman, and again I appeal to you: debt first. Deal with the issue of debt in a dramatically effective way. Gain the results that will give you the dividend. That dividend can then be used for many purposes it cannot be used for now because it is being diverted to the payment of interest on this debt, which is unacceptable. Finally, long term, start putting in place now a tax reduction strategy where we will begin to see some real benefits in years three and four of this government's mandate.

Thank you very much.

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

Now we'll move to the question and answer session, beginning with Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman. As you can imagine, I'm very happy that I was able to attend this morning. I really appreciate the comments I'm hearing.

In particular, I want to thank Mr. d'Aquino, Mr. McIver and Mr. Anderson for clearly defining in their presentation who the real heroes are in this deficit battle: the Canadian people. I think if any praise is to go to the finance minister, it should be equally shared with the Canadian people, who, as Mr. d'Aquino pointed out, have seen their disposable income shrink over the last three and a half years as their taxes rose.

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I also agree with Mr. McIver that the 50-50 allocation is very arbitrary. If you were preparing a business plan for the next three or four years, the last thing you would want to put in there to impress your banker is an arbitrary figure you dreamed up on the kitchen table one morning.

Given the target setting you talked about that Mr. Martin and the government have done.... In the first year of their mandate it is surprising that when we seem to be reaching those numbers, we now have an arbitrary figure that has no basis and does not appear to be part of the plan.

I have one question for Mr. McIver. It's about the impending Canada Pension Plan premium increases, which are regarded by many economists as another tax. Given the management of the Canada Pension Plan since the 1960s until now, and the unfunded $560 billion liability that we have, as an economist with an insurance and investment company and having looked at some of the proposals the government has put forward, what kind of confidence do you have with the management of the Canada Pension Plan from this day forward? Do you see serious flaws in it?

Mr. Don McIver: The proposals as they stand sound quite reasonable. I think the notion of dedicating a board with the responsibility to oversee the investment of pension premiums in the financial market is a very reasonable one. I think the difficulty one has is looking back and recognizing, as Mr. d'Aquino mentioned, the intergenerational inequities. They have already taken place.

There's not a lot you can do about that. In my mind there's no doubt that management of the CPP has been extremely poor in recognizing simple demographics.

As we look forward, my concern is that if you don't have any type of obligatory plans for Canadian citizens as they age, you're going to have to fund their retirement in any case. When people reach a certain age where they are no longer capable of working, if they have not through one means or another put moneys aside to take care of themselves in their senior years, they will fall back on the state. I'm sure none of us would recommend any other solution than that we help people out when they are in need.

Are there deficiencies? Is it an ideal plan? I think you have to answer that question in terms of where we are today rather than what might be your answer if you were starting from scratch.

Mr. Dick Harris: There is a direct relationship between higher taxes and unemployment and economic growth. Given that this increase in CPP premiums could be defined as a payroll tax, Mr. Anderson, have you tried to find out what kind of impact this would have on the employment numbers in Canada, what type of impact it would have on small business owners, for example, who are facing a much higher payroll tax level that might cut back their thoughts of expansion?

Mr. George Anderson: Not specifically, although in our recommendations we talk about looking at some targeted tax reductions in this very area of payroll taxes, because we see that's where you could get the best impact in terms of overall job creation. So I agree with you that there's a relationship, but we haven't tried to figure out how powerful it is with respect to the changes in the CPP. More broadly speaking, we do see that payroll tax decreases are important in terms of job creation in the country.

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Mr. Thomas d'Aquino: Mr. Chairman, I know the business community doesn't speak with one voice on this issue, but I welcome this opportunity to say something about it. The fact of the matter is that Canada's pension system, like many others in the world, has to be shored up so that we can face the challenge of an aging population and the retiring baby boom generation. I believe the agreement that has been reached between the Government of Canada and the provinces really does represent a balanced approach to these issues.

It is true that CPP contributions will rise quickly in the short term, but the fact of the matter is that we haven't been paying enough towards the CPP—which goes back to a criticism of how the system has been managed. Frankly, the chickens are now coming home to roost. It's far better that we should start shouldering a fair share of the costs now rather than passing the burden on to the young.

Now, I know the argument has been made, and nobody has to convince me of the benefits of a private system, but I would say this: the only problem I have with the position of the Reform Party and of those others who have been critics of the system is in regard to the administrative costs of running a public plan. There the board is at arm's length, and hopefully some of my colleagues and people in whom I have a great deal of confidence will be in fact administering those funds and getting maximum returns for them. It would be very difficult to convince me that administration of millions of plans would in fact be a greater efficiency.

I guess the last thing I would say is that there is this issue that has always disturbed me about the Reform position. What about the near $600 billion liability? Who is going to look after that? Who is going to pay that? While I'm a strong believer in the use of the RRSP and the private system—and I think not only should this system be protected but the limits should be enhanced in order to provide a greater, more level playing field in order to be able to have people look after their retirement needs—there is clearly a need for a public pension plan.

So to your concern, what does this mean in terms of the hike in costs? I know the debate is over whether it is an investment or a tax. The fact of the matter is that my recommendation is to accept it as a good and necessary piece of public policy, and to look for the tax returns or gains in other areas, where we'll be happy to work with you to push for them. But that's where I think the trade-off has to take place.

The Chairman: Thank you, Mr. Harris and Mr. d'Aquino.

Mr. Perron.

[Translation]

Mr. Gilles-A. Perron (Saint-Eustache—Sainte-Thérèse, BQ): Good morning. Thank you for being here and for your wise comments.

During our pan-Canadian tour, Ms. Farrow and several others came to speak to us about the urgency of carrying out an in-depth reform of Canada's tax system and monetary policy.

In your comments this morning, I hardly heard you make mention of these issues. I would therefore like to hear what you have to say in this regard.

[English]

Mr. Thomas d'Aquino: Oui, monsieur. After a long and protracted period of public debate, I think the Bank of Canada has now achieved a position on monetary policy that is eminently defensible. What I mean by that are its targets.

It is true that monetary policy has been extremely accommodative in recent years, and this has in turn been appropriate given the economic climate that we have been in. The fact of the matter is that both the fed in the United States and the Governor of the Bank of Canada have signalled that, given the strength of the economy, they are absolutely determined not to see the return of inflation. I think you and I would agree that right now there is very little evidence that inflation is likely to assault us or catch us by surprise.

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That having been said, signal of the kind that we have seen just to show that the central banking authorities have not gone to sleep is, I think, desirable. The real issue is not whether we want to see growth dampened significantly. The real issue is whether we believe growth rates of 4.5% to 5% or 6% are really sustainable without it in due course creating problems.

As you know—I'm sure you're a student of monetary policy—these decisions have to be made well in advance of those events taking place. But with an unemployment rate at 9%, with inflation well under 2%, the danger of an inflationary explosion is simply not there, for which, incidentally, we should all be very thankful. This will likely guarantee that over the next year, and probably two, we will have good economic performance in Canada.

The Chairman: Mr. McIver.

Mr. Don McIver: I find central bankers, not just in Canada but also throughout the world, and certainly in North America, are becoming increasingly less convinced themselves about the applicability of monetary policy, or the ability of monetary policy to deliver real economic results.

That coincides with a period of time, again looking not only at our own situation but also at that of the Federal Reserve Board in the U.S., of a declining confidence in historical relationships between money and measures of economic activity. There is in effect a lack of information about what would happen if you were to accelerate money supply or drastically curtail it.

As a consequence, I think it's evident that the U.S. has been adopting a very steady hand trying to judge things on a day-to-day, month-to-month, year-to-year basis. I think under the circumstances, that is the proper course of action. We're seeing that emulated here in Canada.

The last thing I would recommend would be for an active engagement on the part of monetary authorities in attempting to achieve any other macroeconomic goal, with the exception of price stability.

The Chairman: Thank you, Mr. McIver and Monsieur Perron.

Mr. Jones.

Mr. Jim Jones (Markham, PC): Thank you, Mr. Chairman.

A lot of my questions have been answered, but then I missed a couple of presentations, which I'm sorry about.

Mr. McIver, could you expand a little bit on the second point in your brief, about no further discrimination in the personal tax system? What do you mean, exactly?

Mr. Don McIver: What I'm suggesting in this case—and I think Ms. Farrow in a previous presentation alluded to the same observation—is that the entire Canadian tax system requires a very considerable degree of review and a resetting of priorities. The question was asked earlier about the implication for employment of raising the CPP pension or raising any payroll tax. The point is, all taxes destroy jobs. What we need, I think, is to look again, and I suppose we really should start with the expenditure side, at saying as a country what it is we need to spend, and on what programs, then finding the most efficient way to raise the revenues to meet those expenditures.

Mr. d'Aquino mentioned the difficulties many corporations in Canada are experiencing because of the high progressivity in the tax system as it stands. A telling statistic I used the other day before a committee in Toronto is that if you look at the ratio of the upper quintile of income earners, pre-tax, to those of the lowest quintile, you'll find that the ratio is around 20:1. That is, the highest group earns 20 times, pre-tax, what the lowest 20% earns.

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After you've taken into account taxes and transfers, which are sort of reverse taxes, if you like, and look at the entire thing, that ratio falls to 5:1. Now, that may be a good ratio. I don't know. I suspect it's dangerously low because of its impact on the incentive to work. But I think some thorough investigation and some public debate needs to be undertaken to, first of all, alert Canadians that this is the degree of tax progressivity that we have, and to help give Canadians an opportunity to decide if that's what they want.

Mr. George Anderson: Perhaps I can comment on this as well. I'll go back to the beginning of Mr. Perron's question.

We would also say that the review of the tax system is overdue, and would be a productive thing. I wouldn't agree with Ms. Farrow that we should stop everything else while we're doing it, because we could be many years arguing about what the best system is, and we have to make decisions in the meantime. But there's no doubt that elements of our tax system need a thorough overhaul.

I'll ask Mr. Kovacs to give you an example of our tax burden in the property and casualty insurance industry.

Paul.

Mr. Paul Kovacs (Chief Economist, Insurance Bureau of Canada): We commissioned a research paper by Ernst and Young that tried to look at taxes paid on property and casualty insurance products relative to the size of the industry. We found that roughly 100¢ of every dollar that our industry contributes in value added is taxed away—all of it. That's a rate that's triple that of banks and life insurance and a variety of other industries.

We have such a range of complex taxes, a very large number of them at the provincial level, that it's leading to a circumstance where all of this gets built into the cost of the product. While the law requires everybody with a car to have insurance, there's actually quite a few people driving around without insurance. It's just too expensive. Part of that is tax. Practices in the banking community require that everybody with home insurance has fire coverage for their home, but some people don't, or are underinsuring their property, again because of all the costs.

There are special provincial taxes on the premium and there are special provincial taxes from the sales tax system. There's a variety of complex taxes. That's focusing on one industry that we know well, the insurance industry, but similarly, if you go through individual taxation in other industries, you find very large differences in the actual, effective tax rates from one sector to another. These lead to changes in behaviour that are not necessarily good for the economy or good for society.

The Chairman: Mr. Jones, further questions?

Mr. Jim Jones: Yes.

The U.S. unemployment rate is 5%. Ours is 9%. Is this something we should have to expect for the next 20 years, or is there something we could start to set in motion to get us at least to the U.S. unemployment rate?

Mr. Don McIver: A lot of work has gone into trying to determine why it is we have a different unemployment rate from that of the U.S. If you go back to the early 1970s, we didn't. We had basically a coincident rate with that in the U.S.

I don't want to belittle the very dedicated effort of a lot of analysts who have dismissed some of the obvious—or to me apparently obvious—explanations, but when all is said and done, I think one has to recognize that we have in this country a system of employment insurance and regional subsidization that clearly discourages the mobility of labour from one part of the country to another.

The best example, one I've given a number of times, is from the late 1980s, when we had in the city of Toronto an unemployment rate in the region of 3%. At the same time, we had in Newfoundland an unemployment rate somewhere in the high double digits, in the 16% or 17% range. There is a problem there, a structural problem that can only be addressed by a re-examination of the type of fundamental social, redistributive policies we have in this country.

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Again, I wouldn't pretend.... As an economist I can express opinions, but the decision as to what social values we wish to support with these programs is one for Canadians to make in an educated forum. But I think they need to be made aware of what we are paying for it. To the extent that we support regional programs that discourage labour mobility, I think we want to be explicit about it and pay for it explicitly.

The Chairman: Mr. d'Aquino.

Mr. Thomas d'Aquino: Mr. Chairman, Mr. Jones has really put an extremely important question forward.

If I may quickly complement what Mr. McIver has said, when I travel abroad and people ask how it is that there's a 14% unemployment rate in France, a 9% unemployment rate in Canada, and a 5.5% unemployment rate in the United States, first of all I immediately disabuse those people who say—and incidentally, these were subjects of debate at the various G-7 job summits, as you know—well, you know, the Americans have 5.5% percent unemployment because it's all McJobs. That's McNonsense. That is not true. The United States is the most innovative economy in the world, and even the most skeptical of Europeans have now come to accept that the jobs and the level of jobs that have been created have really not been matched anyway.

With the exception of the United Kingdom, if you look at France, Germany, Italy and Belgium, and then you look at Canada, there are a number of things we have in common.

First of all, we have higher burdens of taxation, which definitely costs jobs.

Secondly, we have a vast array of so-called structural impediments, the disincentives to work, which is why people are rioting in the streets of Paris and Berlin today, because attempts to remove some of those structural impediments are highly resisted by union and corporate interests, as well as a great number of people who don't want to see those impediments removed.

Thirdly, there is the problem in Canada of regional differences. It is a stunning statistic that unemployment west of the Ottawa River is about 7.7%, and I don't have to tell you what it is in Alberta today, whereas if you then build into that Quebec and the maritimes, it rises to 9%. So this east-west factor and the regional differences have contributed to it.

We have not achieved our full potential in Canada yet as a result of coming out of the recession and this growth. We will see those numbers come down as we predicted they would. I've studied seven recessions; there's always a lag. Unemployment will come down in Canada as sure as the sun will rise tomorrow, but the issue is to what level?

The final point I would make is that we cannot discount what I call the political instability factor. I can tell you categorically that there is no question in my mind that there's a cost attached to the uncertainty that results from the unresolved question of the desire on the part of Mr. Bouchard and his colleagues to take Quebec out of the federation. Now, if you press me to say whether it is worth half a point or a full point....

So if you factor all of that in together, that explains why there's at least a 3.5% difference in our unemployment rate. Eliminate those problems, including taking the advice you've been offered this morning on the debt, and I can promise you that unemployment in this country will fall much more rapidly than you think it will.

The Chairman: Thank you, Mr. d'Aquino.

Mr. Szabo.

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

I would like to quote a couple of lines from the finance minister's economic update. He said:

...those who define the responsibility of government in terms of debt and tax reduction only, are in effect saying that targeted investments in health care or education, in innovation or the reduction of poverty, are not critical to meeting the Canadian vision.

To rule out the need to invest strategically—whether through targeted tax measures or new spending aimed at core national needs—is not just bad social policy; it's bad economics.

I believe what we heard when we were travelling across the country dealt in one extreme, and what we're hearing today is at the other end of the spectrum. The finance minister seems to be in the middle with some sort of a balance.

With regard to the differential in the unemployment rates, I know the finance minister once told me about the breadth and depth of the last recession having an impact, which I didn't hear; the gap between the rich and the poor in Canada versus the U.S., which I didn't hear; the 10 times greater crime rate in the U.S. per capita than in Canada, which I didn't hear here; and the fact we have a health care system that is the envy of many countries around the world, which is the converse of higher taxes because of the social.... So I don't accept for a moment that it's simplistically a mechanical thing.

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My question has to do, however, with the preoccupation with debt reduction without some sort of a balance or focus.

Mr. d'Aquino, you said let's think of it like a house mortgage. Everybody's paying down their mortgage more quickly. I'm a house owner, and I'm not paying it down more quickly. But I'm not just paying off mortgage principal and paying interest; I'm also repairing my roof, I paint, and I replace consumer durables. I do these things because I don't want to just pay off my mortgage and then find that I have a dilapidated home.

I think the analogy you use says, Canada, keep your nose to the grindstone, get the debt down, and when it's all over with you'll have all these wonderful things to spend. Well, Mr. d'Aquino, I'm awfully afraid that if we take that very linear view of Canada, what happens is we will then see a devastated Canada and a devastated people.

Mr. Thomas d'Aquino: First of all, Mr. Chairman, I'm deeply distressed that despite our best efforts, Mr. Szabo did not get the message, if I may say so with respect. Nothing I said this morning suggested that we have a linear preoccupation with the debt. The analogy I drew to 1994—and I have no idea whether or not he was here at that time—was when a very skeptical—and it could have been another Mr. Szabo—said, “Mr. d'Aquino, your obsession with the deficit will drive this country into oblivion”.

Today the Minister of Finance is able to stand up in Vancouver, Mr. Szabo, and say to Canadians and to the international community that the vast dividend, or the benefits, or the rewards we are seeing are as a result of having balanced the budget against a lot of advice that came from members of your party in the last five and six years.

The point I'm making here is this, and this has been missed by a lot of people: the objective of deficit reduction is not an end in itself. We said that long before Mr. Martin did. The objective of deficit reduction is to get the country's finances in order, in order that we can put money where it can best be used. If you're going to convince me that $45 billion a year of payment in interest is a good use of money, then I think you and I are in fundamental disagreement. If in fact our advice had been taken seven years ago, the deficit would have been settled three years ago and today we would be running surpluses of $15 billion to $20 billion a year. What would those surpluses have been used for? They would have been used for the kinds of things this country needs.

There are enormous needs for additional expenditures in this country in key areas. We have supported those over and over again: health care, education, training—critical. There is no difference of opinion, in our view. The question is, what is the best means to get there?

The message I want you to understand is why there is this obsession with debt reduction. It's in order to provide for better intergenerational equity, in order to reduce the $45 billion that we pay to bond holders in order that we can spend it for good uses. Is that lacking in social conscience? No, it's not only good economic policy, to quote Mr. Martin, but it's good social policy. So the issue is how do we get there most effectively?

So please don't interpret the concern about debt as being somehow driven by numbers and being devoid of social conscience. The people who have done the greatest damage to Canada in the last 15 years are those who argued that deficits did not matter, and there are a great number of those in your party, sir. Today we are seeing differently.

The Chairman: Mr. Anderson.

Mr. George Anderson: I think we'd agree with you that there's more to running a house than balancing numbers. You have to nurture the spirit in the household, too. Government has a role there.

Our submission does very definitely suggest that reinvestment in the health care system, in education and training, in renewing our aging infrastructure, which is in a woeful state in many parts of this country and is making us non-competitive, are all important investments. Many of them speak directly to all the issues you've raised. So I think if you look at our submission when you get a moment, you'll see that we do focus on those matters. We do not believe that a single-minded approach to debt reduction is the appropriate way to proceed, although we think it's important we stay on that file.

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There is just one other thing about the unemployment rate in Canada. I spend many of my summers in Nova Scotia among the fishermen and there is an intergenerational deficit going the other way too. The programs we ran in this country were a positive incentive to leave school when you were 14 and go out on the boats to fish. If you could put in sufficient minimal time you were rewarded by government programs that took you through the winter. These people are now in their fifties and they are illiterate. We can't sit them down at computers and train them to be mainlanders. We're going to have to carry that deficit for another 30 years.

The Chairman: Mr. McIver.

Mr. Don McIver: The quality of life arguments are entirely valid. As an economist I wouldn't have the presumption to say what programs we should spend money on in this country by what level of government. That is a decision for Canadians. I think it is a decision, however, that needs to be made explicitly, with full information and full understanding of the consequences, because there are consequences.

When you share an open border with a country that has quite different expenditure priorities and, as you suggest, perhaps a quite different quality of life, if you are going to trade with that country and exist in the shadow of that country, then there is a limit to how far you can conduct your policies in a differential manner to those in that country.

All I'm saying is let it be explicit, and having decided what we want to spend, let us pay for it. That's a different issue. If we decide we want a higher degree of government provision of services in this country, fine, let's pay for it. If, however, in paying for it we find that generating the taxes is so painful that we're losing some of our best brains and some of our better producers, we may have a problem. I'm sure we would have a problem.

There is one other difficulty I have with looking now toward expanded expenditure as being automatically necessary. More than 50% of the citizens of this country today still live in provinces that are dealing with substantial deficits and have planned—in progress—additional curtailments to expenditure in, for example, the area of health. You know the provinces I'm talking about.

Would it be correct for the federal government at this time, having put its full house in order to the extent of getting a balanced budget, to turn around and introduce a new health care program, for example, when the Canadians in those provinces—more than half the population—might, given a choice, prefer to see the pace of curtailment of existing programs slowed rather than pay for new programs to be introduced?

The Chairman: Thank you, Mr. McIver.

Ms. Torsney.

Ms. Paddy Torsney: First of all, Mr. Anderson, I really appreciated your information on the natural catastrophes. I'll look at that carefully and see what the committee recommended last time, since I'm a new member on that committee.

I also wanted to let you know how much I appreciated your comments about the 50-year-old worker. We've had many comments on intergenerational issues with a focus on young people—still being mostly part of that group, although the days are passing quickly. I appreciate that issue and how careful the balance is, but we also have to look at various intergenerational and interregional issues. I think that's an opportunity and a role for the government and for this committee.

You mentioned in your presentation specifically EI premium cuts. I question whether they should be this year, next year, equal to CPP, and how much exactly.

To all the participants, we've heard lots of talk about a different debt-to-GDP ratio. We've heard 60% and we've heard 40% earlier this morning. I haven't heard about a time line, though. Should it be equal to Maastricht, different from Maastricht—when exactly would people like to see us hit that target? What exactly is the target people would like?

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Mr. Paul Kovacs: On the employment insurance premiums, it's our sense that the surplus in that fund is getting very large and there's definitely an opportunity here to make some changes. Where those changes to reduce the payroll tax are as large as the increases that are expected, are known to be happening in terms of the CPP is a question that needs to be addressed, but there's certainly an opportunity to ease some of the burden that's going to come because of the CPP increases, and there's flexibility now.

Of all the tax opportunities, I think the two most pressing opportunities to help Canadians at this time that should be coming forward as tax reductions are with the employment insurance premium rates and continuing support for low-income people through the child benefit program that will be enhanced. We think those are the right priorities and that's where the focus should go on the tax side, but we don't actually have an opinion on how far to go on those.

With respect to the debt retirement and an appropriate timeframe to work toward, we've also had considerable discussions amongst ourselves about where we are, what a reasonable timeframe might be, and a goal and a target to aim for, and it's not straightforward. It's been a challenging discussion.

In our submission we suggested we are now at the point where our deficit is one of the best, or the best, of the G-7 countries, but our debt is one of the worst of the G-7 countries. Perhaps using a benchmark of comparing ourselves with our major trading partners, we've proposed that a target for debt retirement could be to get our debt-to-GDP ratio at least below the average of the other G-7 countries. A reasonable timeframe for that is not straightforward, but I think that can be done over a medium term of four to five years. But there are others better qualified to put a precise timeframe if that's the target to be used.

So our suggestion was to look at our debt relative to our major trading partners, the other G-7 countries, and try to at least get below the average of those countries.

The Chairman: Mr. McIver.

Mr. Don McIver: I'll try to deal with that last issue. It is immensely difficult. The first thing I would urge is that we begin to engage in a public debate, as I've recommended several times today. We have to decide what the desired end result is.

I quite appreciate that there is considerable vagueness within the economics community about what the desirable debt-to-GDP ratio should be. Should it be 40%, 60%, or should we just arbitrarily choose the lowest that it's been in the post-war period and say that's an ideal? This is decidedly draconian perhaps, but I would first ask the question, if we did not have a debt today, for what purpose would we mount one?

There may be some reasons. One of them is infrastructure development, which perhaps would produce a stream of rewards over a number of years. Another might be to help address some of the difficulties with intergenerational inequity, to go back to an earlier era. If someone fought a war for you, perhaps you owe him a debt. You might need to go into debt to maintain him, and perhaps the debt should be carried over several generations, I don't know.

First we have to decide on the desired end result. If we say it's zero we can set a path for it. We may find in consultation that some other number bubbles to the surface, and again I don't know for what reason. Maybe 25 is a nice number, or 50, or the Maastricht number. If we know where we want to get, then we can do exactly what the finance minister did in his previous term and set targets for how we intend to get there. If the world explodes somewhere between where we are and our end result, we'll change course, but it's going to be hell or high water that will deflect us.

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The Chairman: Mr. d'Aquino.

Mr. Thomas d'Aquino: Mr. Chairman, on the specific issue of EI and personal income tax reductions, the actuary has recommended that a balance of roughly $15 billion is appropriate in the EI account. We won't quarrel with that number. One could make an argument that perhaps it should be a bit lower, but assuming it is about $15 billion, unless there are more progressive reductions in EI, the EI account will rise to $20 billion, $25 billion or $30 billion. The Minister of Finance is going to have to deal with that at some point.

However, in our view the EI issue is really secondary to the personal income tax issue. The real benefits to Canadians, broadly, will be through a reduction in personal income tax. Both the threshold levels.... We were talking about the brain drain earlier. When you have top marginal rates kicking in at $65,000, or in the $60,000 to $70,000 range as opposed to the $250,000 range in the United States, you can readily understand why there are problems.

On the other hand, we are very much aware that the arithmetic militates against Mr. Martin's providing any significant personal income tax reductions now, given the state of public finances. But it does not necessarily militate against a significant personal income tax reduction in year three of this government's mandate—which, incidentally, would be very convenient in advance of the next election. But putting political issues aside, given the vision that we have for the country's public finances and from a timing point of view, the point is debt reduction first and tax cuts later as a form of reward.

On the final thing about the debt to GDP, Mr. Martin has been remarkably successful with his short-term, so-called rolling targets. What we've recommended to Mr. Martin is that he should apply the principle of rolling targets to debt reduction. I may have said to you this morning that in the world I live in and where we do our arithmetic—or indeed how the rest of the world would see Canada—if we had a 40% debt-to-GDP ratio, I can assure you we would be seeing vastly more positives.

So what I would recommend to you and to the Minister of Finance is to set your targets just as you've done with deficit reduction, then meet them and continue to meet them. If you do that, it is a very viable target that, once met, will bring the same rewards both fiscally, in the marketplace, and to the government as the rolling debt reduction targets take.

The Chairman: Before I go to Mr. Pillitteri, Mr. d'Aquino, I'd just like to follow up on what you've just said.

You stated that the first should be debt reduction, and then you said we could deal with tax in the third and fourth years of our mandate. I don't think the numbers we would gather on the first and second years would be that large—I'm talking now about possible surplus. In essence, the impact on the debt wouldn't be that much either. So can you explain to me how you come to this sort of analysis?

Mr. Thomas d'Aquino: Happily. Let's assume we have another two to three or possibly even four years of good growth, with low inflation and growth rates that are very significant and of the kind that we have seen—more or less in the 3% to 4% range. Let us assume that productivity levels continue to edge themselves upwards and that our exports are strong—in other words, the broad economic climate we are now living in really continues to sustain itself. Add to that the fact that Mr. Martin has promised that the contingency reserve will be allocated to debt reduction. With the combination of the contingency reserve applied to debt reduction coupled with the benefits that will be achieved through sustained economic growth and the benefits of low interest rates, the debt-to-GDP ratio will automatically fall, as we we've already seen.

I suggested to you this morning that I would like to see the contingency reserve at $5 billion. Why? If we applied $5 billion to debt reduction every year, we would see the debt-to-GDP ratio fall more quickly. In the meantime, unless people decide to spend money like drunken sailors—which I don't think the people of Canada will allow anyone to do—what we will see is only modest increases in spending, hopefully. Against that kind of environment, by year three or year four you will have significant surpluses. While some of it will be carved away for spending you have committed yourself to, those significant surpluses and the accumulation thereof by year three and year four will be of such a size that the Minister of Finance will be able to bring in a tax cut that will be politically and economically meaningful and Canadians will say, yes, I've really had some money put into my pocket.

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That, broadly speaking, Mr. Chairman, is the scenario we draw for you. The reason I ask you to take it very seriously is because in our view not only does it address the priorities in their proper order.... All Canadians have been brought up to say—and certainly that's where their mindset is now—yes, I will make sacrifices, but then I want to see significant rewards.

Mr. Szabo asked where the rewards are going to be. Big tax cuts are a form of reward. Low economic interest rates are a form of reward. All the benefits I talked about today are the rewards for which Canadians are having to pay a very painful price. That is the scenario, Mr. Chairman, we're strongly urging you to undertake.

The Chairman: Mr. Pillitteri, a final question.

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

Of course, Mr. d'Aquino, I've had the pleasure of being here in the last four years every time you appeared before our committee. Let me also say to you that, as you stated earlier, there are some pessimistic views, and I might add that here is one that was not pessimistic. I recall about two years ago I asked the Minister of Finance, Mr. Martin, a question, when he was having his rolling targets of 2%. My question to Mr. Martin was, why not 1% by the year 1996-97? So I think we're not all pessimistic.

I want to touch on something else that was said this morning on how the economy is growing and how enthusiastic business people are about the growth of the economy and the orders coming in—how fantastic it is. Also, we have such a stubborn unemployment rate of 9%, and for some parts of the country even higher.

You touched on—this is quite interesting to me, and I've been following this for quite a while—the European scene, about Italy, Germany and France also having such high unemployment rates. But I do understand one thing that has happened in Europe. A lot of times it is far cheaper for them to have programs in place for not having the mobility of people across the country. Keeping them within their region is far less costly than having the people mobile, because the state has to provide. We know this has happened systematically in Europe. You did not comment to that extent but on policies in place that actually do this.

In Canada we don't have that, but we have something similar. How can we as Canadians, since we have such an economic growth and we're all benefiting from it, benefit from this growth in all parts of Canada, not just in certain parts? What should we be doing? Or should we be following the pattern of the Europeans and say, you're a have-not province, we'd just as well pay you and keep you there without giving you the opportunity of mobility? I'd like your comment on that.

Mr. Thomas d'Aquino: Mr. Chairman, this is a very important social problem as well as an economic problem in Canada. If Mr. McKenna were here today...and you heard what he had to say very recently at a premiers conference in the maritimes. Mr. McKenna, who has had a very successful record of fiscal management in his own province, said that throwing money at people to keep them where they are, throwing money at companies to induce them to invest, is not the answer. We've been preaching that for 15 years, and there has been a lot of resistance to that idea. People say, well, does that mean you have to empty Newfoundland of people in order for them to go find work in Ontario and in Alberta? No, I don't believe that.

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Then again, if Mr. Tobin were here today, he would tell you that between Hibernia and Voisey's Bay and some of the other goals and economic objectives Newfoundland has, perhaps the day will come when Newfoundland will not be a have-not province and people in greater numbers will be able to stay there.

But fundamentally, the greatest strength of the Canadian economy and the Canadian people, unlike the case in Europe but like the case in the United States, has been the phenomenal degree of mobility that has been possible and that we have promoted in our country.

Canada had the highest job creation record in the industrialized world between 1983 and 1990. Why? Because jobs were created in great numbers. Jobs were lost, but jobs were created in greater numbers, and people went to those jobs.

I'm from British Columbia. I work in Ontario. How many people do we know in this country...? A great number of people in Vancouver are from Saskatchewan and an enormous number of people in Ontario are from New Brunswick and Newfoundland. This is a great strength. We shouldn't consider it somehow an unhappy attribute.

To mothers, fathers, and grandparents who would like to keep their children at home—they don't like to see them leave—consider it a blessing that we have a country that allows for as much mobility as we have and where the psyche has accepted that a young person will pick up their bags and go off to another province and work. There's nothing wrong with that. After all, we are one country. There's nothing wrong with mobility. The Europeans have much less of it than we do. That's one of the reasons the United States and Canada, in relation to Europe, have done much better than the French, the Germans, or the Italians.

The Chairman: I want to remind you that we're well past noon.

Mr. Tony Valeri: I promise I'll be very brief.

I just wanted to make a comment and thank Mr. Anderson and the Insurance Bureau of Canada for once again bringing to the attention of this committee the need to look at the impending liabilities that may emerge with possible disasters.

I'd also suggest that the approach is one the people around this table are also suggesting the government should take, and that is one of being prudent and starting to plan for impending liabilities. So I thank you for that.

My question is for you, Mr. d'Aquino. Part of it was answered when you mentioned that you want the contingency reserve increased to $5 billion. I know now that the reason for that is to have it go to the debt if it's not required. The other half of the equation, which the government has been very successful in using in winning the battle on the deficit, is the prudent economic assumptions. I just wondered if you could comment on whether, along with the contingency reserve, which I know you're supportive of, we should continue with the prudent economic assumptions.

Mr. Thomas d'Aquino: Absolutely. When Mr. Martin became finance minister, in a very early conversation I had with him I was speaking about his predecessors and I said, “I've never understood why Mr. Wilson, Mr. Mazankowski, or any of your predecessors did not do something that we in the private sector like to do all the time to make ourselves look good, and that is to be prudent in your economic assumptions”. If you're running big Corporation X and you make promises you can't keep, the market will punish you. Likewise governments are punished when they set targets they cannot keep.

So I said, “I don't understand why a Minister of Finance would not set very conservative assumptions, even more conservative than private sector assumptions”. Set them very conservatively, because in politics, as in economics, we never know when the rainy day is going to come—when you're going to have a disaster as we had in the maritimes, where the entire fishery is taken out, at enormous cost to the Canadian taxpayer, or when you'll have in any particular year a massive shortage in agricultural production. We're always going to face those kinds of problems, so prepare for a rainy day. Make prudent, conservative assumptions and save more rather than less, because in the final analysis you, the government, and the country will all look better.

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Well, that is what Mr. Martin has done, and God bless him for having done that, because he has delivered results that have brought the single greatest benefit to the government and to this country in the form of low interest rates. So I agree with those assumptions in the current economic statement. We have no quarrel with those assumptions. We just hope they will continue to be very prudent and modest.

The Chairman: Thank you, Mr. Valeri. Thank you, Mr. d'Aquino.

Mr. Assad, a final question, very short.

Mr. Mark Assad (Gatineau, Lib.): Mr. d'Aquino, Mr. Szabo gave an opinion that I share in good part: the rewards we've seen have been slight. We had hoped to see a lowering of unemployment a little quicker and a reduction in transfer payments to provinces. We were hoping to put an end to that.

My question is on your view of the debt. I realize the debt matters, but there are other voices out there, responsible people, qualified people. I bring to your mind that the former president of the Canadian Economics Association, Mr. Pierre Fortin, and his colleagues published something a year or so ago called Unnecessary Debts. They put their finger on the Bank of Canada and the monetary policy we've pursued in the past years, to the effect that when we look at our accumulated debt, three-quarters of it is interest.

I'm glad somebody brought up getting our fiscal house in order. That includes, I hope, a complete revision of the tax system. Maybe we could go back to the Carter commission and pick up some of the recommendations it made at the time, which was, I consider, a revolutionary document. A national debate on where our level of debt should be would be very welcome, but when it was asked by our Auditor General a year or so ago, I did not see any kind of encouragement from the financial element in this country that maybe we should have this debate.

If there's any organization that could say yes, let's have an open debate on the debt and even on the role of the monetary policy in this accumulated debt and call in these other voices out there, I believe, Mr. d'Aquino, it's the BCNI.

Mr. Thomas d'Aquino: Mr. Assad, if you've followed any of our statements over the years, we've constantly called for public debate, first on the fight against inflation, then on the fight against the deficit, then on free trade, now on debt, and this morning on global climate change.

We believe debate is the best way in which way to not only include Canadians but enable Canadians to see why certain issues are so important, well in advance of perhaps the gurus or the politicians or the business people. The reason for that is you cannot find Canadians, or you will find very few in the country today.... Even the New Democratic governments of this country have all embraced the principles of competitiveness and balanced budgets. That was not the case 10 or 15 years ago. It took 15 years of advocacy to convince people—also fired by shots from the markets—to get Canadians believing in deficit reduction.

Now you know and your polls tell you that the vast majority.... If someone went out there today and said let's spend, or deficits don't matter, they'd be shot out of the water. The same thing goes with debt now. What we're urging, wanting, desiring, and advocating is the broadest possible debate on the issue of debt reduction, because we believe....

I used the analogy this morning of the Canadian who has a mortgage. Mr. Szabo may not be paying down his mortgage, but the numbers show that the vast majority of Canadians are trying to do so, as well as paint their roofs and maintain their sidewalks. The fact of the matter is Canadians understand. They understand, and that is why today your polls tell you there is no stomach for massive or significant spending increases.

Canadians are also saying to you that education and health are critical. I agree with that. I support that. I do not want to see any further erosion in health and education, nor do my colleagues. But when it comes to additional spending or how you deal with the problem of the debt, by all means, let's have that debate. We're reasonably confident as to where Canadians will come. In fact, the greater the number of Canadians who participate in and understand that debate, the clearer I think will be the message that comes to all of us as to what Canadians really want. So by all means, yes, yes, yes, let's have that debate.

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The Chairman: Thank you.

Mr. McIver.

Mr. Don McIver: Very briefly, I think one of the biggest frustrations that many of us in the economics community have felt over the last decade has been the difficulty in getting the message across to members of Parliament that the deficit was important. We very often found there were other pressures on the members of Parliament that made it difficult for the message to filter through. It has filtered through, there's no question about it.

I think the message now with respect to debt, because the door has been opened that much more easily, has filtered through a lot more in a much more substantial regard and a lot faster. I do think the onus lies on the Parliament of this country, on its members, and on the Department of Finance in support of those members to help orchestrate the debate, because it's not something people talk about in typical social gatherings.

The Chairman: Thank you, Mr. McIver.

On behalf of the committee, I would like to express to you our sincerest gratitude for your interventions. You have been a very thoughtful panel.

One thing I want to leave you with is the fact it's becoming quite evident that we all understand that in order to generate wealth in a society, we have to achieve productivity gains, that we all need to generate the type of wealth required if in fact we want to maintain the social programs Canadians have accustomed to.

One issue I want to underline is that the debate simply cannot be an either/or debate. I think you can invest in people. I think you can invest in health and education and at the same time deal with the debt issue. I think that's the final thought for this morning. We want to make sure the panellists understand that in this process we are looking at it with a very open mind.

We will adjourn until 1 p.m.