FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Monday, October 20, 1997

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone. As you know, pursuant to Standing Order 83.1, the committee is holding pre-budget consultations. There are two groups criss-crossing the country to seek input from Canadians as to what we do now that we have a different or a new fiscal order in Canada. With a balanced budget on the horizon and a possible fiscal dividend in the future, we're attempting to devise a plan and make recommendations to the Minister of Finance about what the priorities should be in the coming years.

This round table works in this fashion. You have approximately five minutes for your presentation. I will give you a one-minute signal, as I don't like to cut people short. Then we'll enter into questions and answers. Keep your comments within your five minutes and give us the highlights of your presentation. If time permits, witnesses may also challenge each other's positions.

We'll start with the representative from the Princess Margaret Hospital Foundation, Malcolm Burrows.

Mr. Malcolm Burrows (Director of Gift Planning, Princess Margaret Hospital Foundation): Good afternoon and thank you for letting me speak to you. I'm speaking on behalf of the Princess Margaret Hospital Foundation, where I'm the director of gift planning. I'm a fund-raiser.

The Princess Margaret Hospital Foundation is the charitable foundation that raises money for the largest cancer centre in the country, the largest research and treatment centre, the Ontario Cancer Institute at Princess Margaret Hospital. I'm here with my colleague, David Boyd-Thomas, from the University of Toronto, and together we're members of the Canadian Association of Gift Planners.

I'm here to speak to you today about looking at charitable incentives for giving, specifically gifts of shares and debt in private corporations to Canadian charities.

Just briefly, for context, you have to understand what we're supporting. I will speak about my own organization. As I mentioned, we're the largest cancer centre in the country, the largest treatment and research centre. We're an internationally renowned institution. For instance, we've made contributions to cancer treatment for Hodgkin's disease. The current basic treatment, which increased survival rates from 25% to 75%, started at our Canadian hospital in Toronto. Also, the standard treatment for breast cancer started at our hospital and is used around the world.

Our hospital has been greatly affected by cutbacks, as have all hospitals in the country. In the past five years we've seen close to a 20% cutback in our total operating budget.

Since we're also a major research centre we've seen a huge cutback in available research funding. Through the Medical Research Council alone we've seen a cutback of 10% over the last seven years, compared to our peer countries, such as the United States, which in the same period has seen a 60% increase, and Australia, Germany, and Great Britain, which have seen a 40% increase. That's the context we're working in.

Fortunately, hospitals like mine have foundations, charitable organizations that rake in money from the public. Increasingly it's partnership between public money and private money that delivers cancer treatments, particularly new ones. For example, we've just implemented a brand-new treatment for prostate disease, which is the most common cancer among Canadian men. It's a high-precision radiation treatment, which wouldn't have happened without private donors as well as public dollars, the two together.

What we need is stable long-term funding, and obviously we need to to attract people to provide the best care. Increasingly we're moving towards endowments to provide that.

That's why I'm here before you today: to look at allowing new rules for donations of private debt and shares in private companies.

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The last two budgets have been real landmark budgets in Canada in terms of charitable-giving incentives. Particularly in the last budget, the inclusion rate for capital gains for gifts of publicly listed securities was increased. This has been a huge boon for the charitable community, and of course for the organizations and causes we support. We are very grateful for this. In the 1997 budget, however, we ended up with a new provision, resolution 21. It was amended in July because there was a lot of discussion about it and the first drafting was considered inadequate.

Basically, resolution 21 effectively eliminates the ability of entrepreneurs to make gifts of shares in debt in their private companies. These gifts are an important way of creating a significant endowment. They are infrastructure funding and really provide the only way in which we can make long-term progress. There is just so much wealth in private corporations in Canada. This wealth, in terms of assets, is not going to be transferred to the charitable sector for public good until we allow it to be transferred in the form of shares in debt.

I think there is an issue of fairness. Resolution 21 and its successors are basically unfair to generous entrepreneurs. If you're an owner of stock in public corporations and you donate shares, you only pay tax on 37.5% of the capital gain, plus you receive tax credits. Owners of shares in private corporations who donate stock pay on 75% of the capital gains and do not receive an immediate tax receipt. This inequity obviously is going to really hurt our ability to attract large donations from this group. I think that will ultimately hurt public good.

There is an issue in terms of value evaluation. Chartered banks, for example, will accept these shares as collateral and government will tax them. But we are not allowed to receive them as gifts and hand out receipts for them.

We make two proposals. One is to withdraw the current legislation that will be before the House soon, and also the related draft legislation. The second is to have another look at it, to work with the charitable communities across Canada.

There are a number of organizations, and these talks have been ongoing for the last two or three years. Look at them, find a solution that works well, find a way to let the good gifts through, and close out any potential bad gifts that are considered by Finance to be unacceptable.

Thank you.

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

We will move to the Board of Trade of Metropolitan Toronto. John Bech-Hansen and Don McIver, welcome.

Mr. Don McIver (Board of Trade, Metropolitan Toronto): Thank you. As you mentioned, John Bech-Hansen is with me. Although he is not sitting at the table, I hope he is going to interject as many comments and observations as I will.

Just to give an overview, like many of my colleagues around the table, I am sure we do applaud the government's achievement in eliminating the federal deficit. It has obviously been attempted by a number of people, but certainly not with the degree of success that the present administration has managed. We appreciate also the message of caution that the finance minister delivered to this same committee a week ago.

Talk of a fiscal dividend is definitely premature. A relief of expenditure constraint is ill-advised. We have not yet brought our country's finances into order. We have merely reached a stage at which we can see the process of fiscal deterioration coming to an end. Nevertheless, we do of course recognize that there has been dramatic improvement, and this has in part been because the public has been given notice respecting targeted goals in terms of deficit to GDP and because the minister and his staff have consistently affirmed their intention to meet those goals.

We are now concerned that with these targets having been largely achieved—that is with respect to deficit—there exists a vacuum in terms of the path that the government is now prepared to follow. “Fiscal dividend” is very poorly defined. It is confusing to many, and the 50:50 rule seems to provide little information about year-to-year commitments. In consequence, we can see little clear direction in fiscal policy over the next few years.

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In framing the upcoming budget we would ask the government to address those concerns in several ways, first by providing some clear framework around which Canadians can determine what level of continuing debt they might consider appropriate. While we recognize that there may be some justification in terms of infrastructure development or in terms of inter-generational equity for accepting a certain degree or level of debt, we cannot see why, if as Canadians we had no debt outstanding now, we would at this point in time undertake new borrowing. Canadians of all political persuasions cannot happily accept a circumstance that, despite improvement, still sees 30¢ of every tax dollar being remitted to bond holders.

Secondly, we would ask the government to provide a more usable definition of the fiscal dividend. It surely is not simply the excess of projected revenues over expenditures, which is what it is defined as in the fiscal update.

The extent to which our fiscal actions enable us to reduce our interest payments...now, that constitutes a fiscal dividend. If we are actually reducing our interest payments, that's a dividend. By talking a projected surplus as opposed to surplus, the government is likely to confuse Canadians. Of course, when spending or tax plans absorb a large portion of the projected surplus, the surplus itself has already diminished, and since these programs continue into future years—that is, the expenditure or the tax programs—the scope to accelerate debt reduction has been lost forever.

Thirdly, we ask that the government initiate a public debate concerning the appropriate level of government expenditure and the various goals of tax policy, and I applaud the minister for having mentioned this in his speech.

But before undertaking new spending, the government should consider that Canadians in several provinces have yet to undergo additional curtailment of programs in health and in education—remembering that education has been a major focus of the finance commentary—programs that until recently, at least, have been judged essential. These cuts have come about in part because the federal government has cut expenditures to the provinces.

Let me give an example, and several examples come to mind. One is, would Canadians living in Ontario who still have to face additional cuts in hospitalization prefer a pharmacare program delivered by the federal government or a slowing in the planned cuts to provincial hospital closures?

One might make the same comment with respect to education, where there is still in this province substantial anticipated curtailment of spending in education at the same time as the federal government is indicating the desirability of new initiatives in that regard. The decision simply should not be determined by which level of government has the available cash.

We're also concerned that the increasing reliance on tax credits as a means of providing relief to certain income classes may tend to obscure the active role of government in society. By that I'm referring to the possibility of expanding tax credits, which can be defined either, depending on which way you look at it, as tax relief or as the equivalent expenditure that would be engaged in if government were to spend it through a direct program.

We're concerned that there's a possibility that some confusion may develop from that type of usage, and the implication may be that Canadians are being given a more desirable tax environment where in fact a targeted expenditure has just been raised.

Let me turn to the fourth point: ensure that sufficient caution is built into fiscal projections. Of course, we've had that throughout, and we applaud that. But it has to be recognized that the type of tax programs that have been put into place and are being talked about—I'm thinking particularly of tax expenditures—and other federal programs, have had the consequence of making government revenues more sensitive to economic conditions than they were in the past.

So we must bear that in mind, and we must also bear in mind the fact that sharp interest rate movement can take place without relation to strict government policies. They may arise from development externally.

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For all these reasons, we ask that the government adopt a longer-term perspective than that implied by a budget of a year or two.

The Chairman: Thank you very much for an excellent presentation.

Now we will move to York Technology Association, Mark Durst.

Mr. Mark Durst (President, York Technology Association): I'd like to thank you for allowing us to speak today.

As far as the process of deficit reduction is concerned, we believe it's been at a good pace and that the methods of deficit reduction have also been acceptable.

York Technology Association strongly recommends that the government not increase spending or reduce taxes until the annual deficit is completely eliminated.

As for the priorities, once the annual deficit has been eliminated, the government must set priorities as to how to spend the fiscal dividend. To set these priorities, we must first understand what the goals of Canadians are.

We believe that the goal of Canadians is to maintain and improve the quality of life of each Canadian that was recently recognized by the United Nations when they selected Canada as the best country in the world to live in.

To achieve this goal of maintaining and improving the quality of life of each Canadian, the government must set balanced priorities with the surplus money received, or the fiscal dividend. Just like a family household where the parents just received a raise, the Canadian family must set priorities on how to spend this additional money. A family receiving additional money would likely spend it to reduce their debt, some to spend on education and health, and third, to invest or save for the future.

York Technology Association is recommending the same goals for the Canadian family. York Technology Association is recommending that the government spend any fiscal surplus equally among the three areas: debt reduction, education and health care spending, and tax reduction—in other words, investing in the future.

Debt reduction. Canada's current level of debt is at an all-time high. The federal debt-to-GDP, gross domestic product, ratio is now at 74%. Over 30¢ of every tax dollar must be used to pay the interest charge on the debt. The problem with this level of debt is that an increase in interest rates means that even less money can be spent on programs or be used to reduce taxes.

With this level of debt, Canada has lost its flexibility to control its own destiny and has become a slave to interest rates. For the sake of Canadian fiscal freedom today and in the future, debt reduction must remain the top goal of the government.

Number two, education and health care spending. Government spending cuts have cut deeply into Canada's education and health care programs. In order to remain competitive in the global business market, Canada must continue to reinvest in Canadians by continuing to provide world-class education.

In the technology industry, as well as other industries, there is a skill shortage. The technology industry happens to be one of Canada's strengths in the global economy. This skill shortage needs to be improved.

Seneca College's new joint venture with York University in creating a new high-technology campus is an example of education initiatives that are needed. Sunnybrook Health Centre's new M-wing that they're creating, which is focused on a very high-technology approach, as well as what Princess Margaret is doing, is an example of the initiatives needed to keep Canada one of the best countries to live in.

The last of the three that we recommend the surplus be split evenly for is tax reduction. Canada's current top tax rate is 51% while the United States' top tax rate is 36%. Canada's top entrepreneurs and technology experts are all moving to the United States to avoid Canada's huge tax burden. As a result, Canada is losing some of its best entrepreneurs, minds, and money.

To reduce the brain drain and the money drain, the government should use a portion of the fiscal surplus as well to reduce taxes, not just to lower-income earners, but to all Canadians.

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The Chairman: Thank you very much, Mr. Durst. We now move to Dr. Mark Mullins from Midland Walwyn Capital Inc.

Dr. Mark Mullins (Senior Vice-President and Director, Midland Walwyn Capital Inc.): Thank you very much.

What I would like to do is talk about some of the fiscal priorities and perhaps set out a different type of target, or a different approach, as we look to the future on the fiscal side.

One goal of fiscal policy certainly is to encourage stability in capital markets and in the tax environment. As we've seen over the past 25 years plus, we're not achieving that kind of goal in terms of what happens to the federal debt servicing, interest charges and the economy, and the overall tax environment.

Many have suggested that the way to go, once the budget is balanced, is to target the debt-to-GDP ratio and to talk about some sort of level for that ratio over time.

This is, though, a somewhat ambiguous concept. First, debt is an outstanding stock, while GDP is a flow in the economy. You have a classic apples and oranges comparison here.

Second, there are various—one can even call them infinite—combinations of growth, interest rates, spending, and tax policies that are going to achieve the same debt-to-GDP ratio.

As well, if one looks at some of the academic literature in the private sector for corporations and business, in terms of optimal debt to equity ratios, the conclusion is that there is no optimal mix.

Perhaps a better target or focus on the federal government's part is an analogy to mortgage payments, whereby we talk about the servicing of debt, which is a flow variable comparable to that of government revenues. In other words, what can we afford to pay on the debt outstanding? In all, it's a measure of affordability over time.

Look back at the period from 1950 to 1975. It was a very stable period of government finance. This ratio of interest payments to revenue was in a very stable band of around 11%, compared to today's level, which is just a touch under 30%.

I've done three projections in the paper I've handed in. They essentially take a 10-year target of that ratio and ask, under various assumptions, what would happen to the government's fiscal path.

One thing you find when you investigate the interest payments—this is rather than debt to GDP—is that the cost of the payments, the interest rate per se, is far more important than the amount of debt that is repaid. So I guess a prerequisite to all of this is to suggest that low and stable interest rates are the key here, and indeed behind that are low and stable inflation rates.

Here are the three projections that are talked about in the paper. First, aim for no debt repayment; keep the stock exactly as it is. Run a balanced budget for the next 10 years, to 2007.

What happens then is that we basically see something in the order of $50 billion of demographically based spending, which may or may not include new spending programs on net, as well as about the same in tax relief over that 10-year period.

The second projection I think is the most realistic one. In fact, it's entitled “implicit debt reduction”. It has to do with the way the federal government is working its budget these days. It's taking rather prudent assumptions in terms of growth and interest rates, and also using a contingency reserve. This means that, on average, by the end of each year, the government should have guessed correctly and should have excess funds. It was committed in the latest statement from the finance minister that those funds would be used for debt reduction.

In this scenario, we see something in the order of almost $60 billion of debt reduction. We'll meet the challenge on our demographic spending needs, but there will be no money left over for any net tax relief if one uses the 50:50 formula that has been put forward.

The third scenario is the more aggressive one. In terms of debt reduction, it explicitly targets the debt interest costs. We go back to exactly the average that we had between 1950 and 1975. By doing so, the debt repayment is in excess of $100 billion. However, under this scenario, there is no money whatsoever for either tax relief or demographic spending increases. Therefore, I think it's somewhat unrealistic.

At the end of the day, looking at this type of analysis, one could say three things.

First, let's challenge the assumptions. Perhaps they could be more optimistic or upbeat. That may well be the case. We know what the cost of that was in the past in terms of missing fiscal targets.

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Second, perhaps we can relax the 10-year progress that we might anticipate on debt interest costs and say to ourselves that if it took 25 years to get to this situation, perhaps you want to allow the same amount of time to restore full fiscal health.

Finally, perhaps there could be a re-examination of spending priorities so as to open up some room on the tax side given the fact CPP/QPP premiums are going to rise over the next several years and we have added stresses coming down the road from health care costs, which would have to be financed on the tax side in the context of a balanced budget world.

The Chairman: Thank you, Dr. Mullins. We'll move now to representatives from the Markham Board of Trade. Robert Kiefer is the president.

Mr. Robert Kiefer (President, Markham Board of Trade): Thank you, Mr. Chairman, good afternoon.

I'm Robert Kiefer, president of the Markham Board of Trade. I have with me three representatives from our board. The chairman of our government affairs committee is Dave Wallace. Our treasurer is Cal Bishop. Our executive director is Ruth Burkholder.

We thank you for the opportunity to present our views regarding the federal deficit and debt reduction.

The Markham Board of Trade is a non-profit business organization that was incorporated in 1981. It currently represents 770 businesses in the Markham area. Of the 203 chambers and boards in Ontario, we rank number 16 in size. We work closely with the Ontario Chamber of Commerce and Canadian Chamber of Commerce on issues affecting business.

In order to be brief, the following recommendations are a summary of our position paper, with which you've all been provided. However, we ask that it be reviewed in detail and that the issues be seriously considered.

Recommendation number one. Fiscal restraint should be continued well after the deficit has been eliminated, and the highest priority must be given to debt reduction rather than to program expenditure increases or significant tax reductions, at least until the debt-to-GDP ratio has fallen below 60%.

Recommendation number two. The federal government should increase the small business deduction annual threshold to a minimum of $320,000 and revise the capital cost allowance rate for assets that have been significantly affected by rapid technological change, which is now occurring.

Recommendation number three. Government should clarify its rationale for changing tax laws on a retroactive basis. By allowing the least possible margin of different interpretations, corporations would have a higher degree of certainty about the effects of tax law.

Recommendation number four. There should be no increase in CPP premiums until the viability of the Canada Pension Plan program is examined and Canadians are given the chance to choose whether to commit to achieving its viability or to abandon the plan completely.

Recommendation number five. The federal government should work together with the CICA's public sector accounting and auditing standards boards to develop a clear and consistent policy for financial reporting that provides the maximum information in a form that is understandable.

Recommendation number six. A high priority should be given to the implementation in 1998 of full funding limits for RRSPs and other registered retirement plans. Retroactive increases to the funding limits for previous years would honour the promises made to working Canadians over the past decade and should be considered.

Recommendation number seven. The federal government should build the restoration of full-bracket indexation into future budgetary plans.

Recommendation number eight. The disharmony of federal and provincial tax policies and fiscal regimes and the increasing competition for tax revenues and tax bases is a matter that should be settled by intergovernmental negotiation.

Thank you.

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

We'll now move to the Toronto Chamber of Commerce. Joshua Mendelsohn and David Brown are senior policy analysts there. Welcome.

Mr. Joshua Mendelsohn (Chair, Economic Policy Committee, Canadian Chamber of Commerce): Thank you, Mr. Chairman.

We welcome the opportunity to address the committee.

I have just one correction. As chair of the economic policy committee, I'm actually representing the Canadian Chamber of Commerce, not the Toronto Chamber of Commerce.

First of all, on behalf of the chamber, we applaud the government's efforts and success in moving toward a balanced budget. It's certainly ahead of schedule. The accelerated deficit reduction has contributed to much lower interest rates in Canada, which have helped foster economic growth, which in turn has also contributed to accelerating the pace of deficit reduction.

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In the economic update that the finance minister presented several days ago there were some clear philosophical directions that included achieving a strong economy, a strong society, and security and opportunity for all Canadians. We certainly share all of these goals with the federal government. Our view is that strength, security, and opportunity can best be achieved, however, by pursuit of private sector non-inflationary growth in output and employment that will in turn hopefully reduce the unemployment rate.

The Canadian chamber's view on how to get there includes continued fiscal dividends as discipline, measurable fiscal targets, tax reform, and accelerated breaking down of the barriers to job creation. I'll talk about some of these in some detail.

First, on fiscal responsibility, rapid and sustained debt reduction and reduction of the debt-to-GDP ratio is the single most important means to generate the confidence and low interest rates that we believe will strengthen the private sector initiative in Canada. Certainly in the early years, when any surpluses that do materialize are not likely to be especially large, we would suggest they go entirely toward debt reduction.

The government's use of credible targets and prudent economic assumptions for deficit reduction were a key element in the success of the first mandate policy direction. The Canadian chamber strongly believes that the second mandate should similarly have measurable targets for debt-to-GDP ratios and debt reduction, while continuing to apply very prudent economic assumptions.

It's interesting to us that many of the statements that have been put out in the public about the size of the future surplus are all based on continuous economic growth with no hiccups in the economy, politically or anywhere else in the world. That is untenable, and we have to allow ourselves as much flexibility as possible. Reducing the debt-to-GDP ratio will also provide us with the fiscal dividend many people have spoken about around this table and allow us more flexibility in directions in which we want to move.

I would add one other thing before getting into some of the job creation and other measures. Canada needs to develop a long-term framework within which to assess all policy measures, whether they are debt reduction, tax cuts, spending increases, or spending changes as the case may be, so we can evaluate what the policy proposals contribute and cost in terms of our long-term growth, productivity, and competitiveness. Only by generating wealth will we be able to look at reallocating that wealth and making all Canadians better off.

In terms of barriers to job creation, a strong society embodying security and opportunity will exist on the conditions of non-inflationary employment growth. In Canada, many public policies perversely affect labour markets and contribute to higher unemployment.

We have a number of priorities here. First, the current level of EI premiums is a tax on jobs as well as being a regressive tax that over-funds the EI program to the tune of several billions of dollars per year. They artificially raise the cost of hiring and have their worst effect on exactly those Canadians whose security and opportunity is most at risk—the young and the less skilled. While we would argue for reducing the debt load first and foremost as opportunities arise, as the surplus builds we should be cutting our employment insurance premiums.

Second, the original intent of the employment insurance program was to be insurance against short-term unemployment. However, excessive expansion of the program in the early 1970s led to distortions in Canada's labour market and served to increase the nation's unemployment rate. Although the EI program has been improved, there is clearly room for further reform.

Finally, Canada's society and economy will be strengthened by a tax system that rewards work and savings efforts and does not tax inflationary increases in nominal income. The Canadian chamber's view is that the tax system should be re-indexed fully to treat taxpayers as fairly as recipients of transfer income. Higher RRSP and RPP contribution limits should also be restored, especially when we're looking into the future and the need to develop retirement savings. The proposed seniors' benefit should be designed to reduce the disincentive effect on savings.

Last but not least, in some of the commentary there is discussion of tax reductions. We would support the notion of tax reductions if, as, and when they can be afforded and on the premise that they are not just the return to Canadians for their investment in Canada but are an incentive to retain the quality and attract the quality of individuals we need in Canada to build our long-term future. Thank you.

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

We will now move to Eckler Partners Limited, Paul McCrossan.

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Mr. Paul McCrossan (Eckler Partners Ltd.): Thank you, Mr. Chairman. While I am a partner with Eckler Partners, I want to talk today as an individual who has served on this committee, both in government and opposition, who has been an adviser to the committee, and who has been involved in developing national budgets. I want to talk about a process the government and the committee might consider following to avoid the problems of the past, which got us into the pickle we were in.

Until 1979 there were no long-term cost estimates for any major government program except the Canada Pension Plan. That included the old age security, the guaranteed income supplement, family allowances, unemployment insurance, medicare, university support, the Canada assistance plan, and all your own employee pension plans: the public service pension plan and so on. In 1979 both the auditor general and the comptroller general became aware that for most programs the best we had was a year-and-a-half-forward look at cash expenditures. This was at a time when the demographics and the economy of Canada were changing very significantly.

Following the national pension conference in 1981, an all-party committee was established to recommend long-term pension policy for this country. They found very quickly that they were unable to get any information whatsoever about the long-term cost implications of the programs we had, either as an employer or as a nation.

The auditor general made this a feature of his 1985 report. I brought with me—and hopefully it was distributed—a two-page extract by the auditor general of the day, Ken Dye, who pointed out that you as parliamentarians and you as members of government cannot do your job if you deny to yourself the information on which to make decisions.

In 1986, following that report, and following the experience in trying to develop a coherent national pension policy, all three parties got together and passed a law to ensure it would never happen again. The law was called the Public Pensions Reporting Act. It required public reports to the government and to Parliament at least every three years on every national social security program and on all employment programs where the government was an employer. Since that time those reports have been available to Parliament, and indeed they gave the forewarning that led to the necessity to change the Canada Pension Plan that was announced in the 1996 budget and enacted in this budget.

My first concern is that the government appears to be about to embark on a new social program, the seniors' benefit, without any of the information that was felt necessary and without any of the understanding of what is happening with the existing programs that were felt necessary in the past. That is, the position seems to be that since the seniors' benefit was not listed in the list of plans for which information should be provided to parliamentarians, no projections need take place. And since the old age security and guaranteed income supplement are to be eliminated, no information about the effects of those plans need take place either.

So we have a new plan coming in which has substantial ramifications in both 2001 and 2010 and members of Parliament, and even the government—and I know it's the government, because I've sought to find out if the information is available internally—do not have information about who is receiving the plans that are being eliminated in terms of the GIS payments. We do know they are not being made in accordance with what was anticipated. That is, while the rate of GIS take-up is dropping, the average rate of GIS payment is increasing fairly sharply. This shouldn't be happening, but no one is trying to analyse why. Then we're using that as a basis on which to launch a new program, the seniors' benefit, without doing an impact analysis of where the money is going to be saved, where the cross-subsidies are, and what the net effect on Canadians will be.

I suggest, just as the auditor general did in 1985, that as a government and as members of Parliament you cannot do your job if you don't have information with which to analyse the proposals. What is apparent with respect to the seniors' benefit is that labour, business, professionals, and the Canadian Association of Retired Persons are all opposing it as currently designed, for different reasons, but they're all doing it from partial analysis, because neither you nor they have the information on which to build a comprehensive strategy.

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I'd argue that individuals in Canada are going to live under many different governments of different parties, and they have some right to expect stability and proper planning. Therefore it's an obligation of all members of Parliament to design plans that are stable and the ramifications of which can be understood.

So let me then start with the recommendations on the back of my one-page handout.

First of all, you should include the seniors' benefit under the plans that must be examined under the Public Pensions Reporting Act so that you have the information with which to examine it.

You need to look at the trends of the GIS payments to understand why they've grown, who they're being made to, and why or if they should be used as the base on which to build a new program.

You need to understand who the seniors' benefit is going to be paid for. We know that in the first year, a considerable majority of Canadians will be better off by a little bit. We also can see a 10-year-out projection to see there's a very large net savings, and we have no analysis in between whatsoever available to you or the government. You should articulate the goals, both social and financial, for the benefit and then design a plan with articulated goals.

Let me come to the government pension plans. The Minister of Finance has made the point that last year the government, for the first time on a cash basis, had no borrowing needs. A large part of the reason for that was that the contributions made by government employees—public service, armed forces, RCMP, and so on—come into the government and are invested in non-marketable government securities.

Now's the time to stop treating government employees as a cash cow, or at least their contributions, and to do what other provinces and other government organizations have been doing and set up, just as you're doing with the CPP, properly funded pension plans that have access to private sector markets.

As a government and as members of this committee, you need information about the unemployment insurance system. There used to be a principle that unemployment insurance was based on insurance principles whereby excess contributions were made in the good years to carry us through in the bad. That mechanism has been suspended. The excess contributions are flowing into the consolidated revenue account. We are in the happy position right now where it looks as though the deficit is about to be eliminated. Surely it's the time to ask for long-term reports about the viability and financing of UI and to look at whether the premiums can be justified—and I don't believe they can—within any sound long-term strategy for this country.

May I also say it's time for you as members of Parliament to look at your own compensation package. Compensation of MPs was last looked at in detail in 1981. Since that time, in roughly half of the years, the government has suspended the normal changes in MPs' compensation, to a point where you have dropped significantly behind the pay for the service you're supposed to offer. Either admit that you're not offering that service or get the pay in line. Conversely the benefit package doesn't correspond with anything available to anyone else in Canada. Maybe it's time to look at the compensation package for members of Parliament.

You need to examine the private sector pension system, the limits and the incentives. The limits were deliberately set high to encourage a successful transition so that individual Canadians would have an incentive to save for their own retirement. The 18% of payroll and the factor of nine that leads to it, in my opinion, were pitched high. Now that the government is about to introduce long-term lifetime carry-forwards, those factors are too high to be justified in terms of the long term.

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That being said, the income that is covered by a registered pension plan in Canada is almost the lowest of any of the major countries. I think you should look at that as well.

Finally, the government in the last election indicated that it would be shifting its focus to deal with the problems of children in poverty. I think we can probably agree that the largest single problem we have now in Canada is the problem of children in poverty, particularly in single-parent families. My plea is that we not introduce ad hoc solutions but that we follow the same process I was trying to articulate earlier in terms of building a long-term plan that is stable, which has well-articulated objectives, and about which the members who are asked to approve the plan and the government that introduces the plan understand what they are doing, why they are doing it, and what are the long-term implications.

Thank you.

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

Now we will move to the Stafford Technology Institute, Mr. Steven Rieck.

Mr. Steven Rieck (President, Stafford Technology Institute): Thanks very much. I just found out when I got here that I have five minutes. I am going to cram this 25-minute presentation into five minutes.

The Chairman: You will have to reduce it as quickly as we reduce the deficit.

Mr. Steven Rieck: If you guys can do it, I can do it.

My name is Steven Rieck. I am president of Stafford Technology Institute, based in Oakville, and also executive director of the Institute of Professional Webmasters, which is an association bringing standards to the Internet industry that was launched here in Toronto.

One of my favourite quotes is that technology, people, money, information, and contacts are tools the business can use to leverage and to do wonderful things. If you do not use it properly your competition is going to surpass you. I believe Canada needs to concentrate on key growth sectors to continue to compete globally and avoid losing the talent to other countries. This may mean reducing the support of traditional businesses that are in decline and refocusing and putting money into high-tech business with a future.

Years ago the biggest problems companies were facing was finding financing. Today the most common comment from companies is that they are having difficulty finding the right people with the right skills to step into their company and take them to the next level. Hence the need for government support to assist in research and development of new and innovative training options for Canadians. It is through leverage opportunities like the ones we did with IPW that the government can foster leadership in certain sectors while preparing Canadians for jobs with a future. It is through my experience in that area that I make recommendations to help Canada prepare for an exciting future.

The Internet will make all Canadian companies compete on a global scale in the next couple of years. What this means is we have two years to prepare for globalization of the marketplace. Either we are proactive and take a leadership role and create new jobs in expanded global markets or we wait to see what happens and we are the last ones to the market, resulting in lost jobs and businesses. It is a wake-up call to Canadian businesses to take hold of a potential, a future globalization.

The topics I am going to be discussing are in four major areas: the need for skills training; the promotion of entrepreneurship across Canada; sectoral supports on high-tech businesses such as the Internet, biotechnology and other sectors like that; and since we are moving to globalization in the marketplace, the government needs to support initiatives to take companies global.

When it comes to skills training and education we need to create the labour force that businesses need to be competitive. Rewarding careers and successful businesses tend to go hand in hand. There are successful post-secondary school education facilities like the University of Waterloo that are creating computer science graduates that foreign companies are snatching up. If we can duplicate that in other universities across the country and market that to a global audience, we will be seen as leaders in high-tech training and hence they will be more willing to invest in setting up their businesses in Canada.

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When it comes to youth strategies, youths, as I see it, are our long-term investment, an insurance policy for the future. If we invest in eight-year-olds right now, they're comfortable with technology. Allow them to continue that education in our systems and 10 years from now, when they're ready for the workforce, we will have a guarantee of continued growth and support and initiatives. It's not a quick fix. That is my point with that one.

For adults who are currently in education, lifelong learning will be the next stage in education. One of the recommendations I will be making is to offer a 100% tax deduction for all training that businesses and individuals make in themselves, the reason being that if they invest in their future, obviously that's going to ensure their employability, and obviously you're going to get more taxes out of it. You could consider a tax deduction for all forms of training and education to foster lifelong learning development to be competitive. Upgrading the skills should be an incentive to our people, who collectively will drive the economy.

Social programs like EI should be based on continued training, as well as looking for work. If they find work, great; if not, they're taking the time to learn skills that will help them find work. The challenges to do so must come cost-effectively. Current schools in technologies could offer a solution, and that's something we're actually working on.

High-tech training in education is a big area. Again, high-tech industry in general does have the potential to expand. They just can't find the people to employ. So we need to have a stronger initiative to train the high-tech savvy in potential employees.

I must congratulate the HRDC on investing funds in the Software Human Resource Council, which will listen to the marketplace and offer specs on what the market needs in software developers. When the education facilities across Canada get that information, they will be better able to train what the market needs. We need more initiatives like that. We have a people skills deficit. High-tech companies are only as good as the people, who are the only ones who can make their employers more productive in a global economy.

Sectoral focuses on training will help support those industries' needs for growth and employees. The industry should tell us what skills they need and when. Education will in turn fine-tune the program, training people to fulfil those specs. The SHRC is a step in the right direction and they, and others like them, should be given additional funding. Government will need to help pull together education leaders to help develop access to education. Also, we should be funding new educational research projects for immediate delivery.

To do this, we need additional funding to study future businesses and the needs for skills, and then hand off to educational institutions, both private and government funded, to deliver and continue to improve this. We need to have a much more entrepreneurial vision.

When it comes to leadership, the government will need to create a grand vision for the general public, which they need to buy into the thought of self-sufficiency and lifelong learning, hence a program that they will themselves commit to.

So the main initiatives on the training side of it are: create learning incentives and programs; initiate lifelong learning and education; offer financial payments and student loans, so those who don't have the funding can finance their futures; offer 100% tax deduction for training, both from businesses and individuals, so they can invest in their future; and on EI, create a fast-track personal development training program to encourage self-sufficiency and, again, improvement of skills.

On entrepreneurship—as you can tell, I'm an entrepreneur—we need to continue the promotion of entrepreneurship, to build the base to hire the skilled employees who we are training through the educational systems. This will bring in additional tax revenue and offer other successful track records to promote Canada.

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Entrepreneurs are the lifeblood of the future and the creators of new jobs. Not all companies will succeed, but if we create an environment that assists in lowering the barriers to success as well as encouraging more companies to start, then averages suggest that we have more long-term businesses overall.

Tax cuts to foster entrepreneurship and programs to assist youth and elderly folk should be reworked. Handouts are not as important as the infrastructure.

Currently there are many youth programs, but we should also consider tapping into the 45-plus crowd who got a pink slip and a large cheque and are looking for options. The choices are that these experienced gold mines of knowledge can work for themselves and build an economy or they can go to Florida.

In regard to supports in the growth sectors—high tech, biotech, medicine, health, communications, the Internet, etc.—Canada needs to nurture the industries with a future. We need to be known for our knowledge-based industry leadership and as Internet and high-tech friendly.

On sectoral support, opportunities will arise, and government needs to have sectoral SWAT teams that will assist groups in furthering their goals. If the right sectors are supported, entrepreneurs will have greater success, firms in that sector can grow and feel confident in Canada's leadership, and, as the word gets out, Canada will be recognized as a great place for others to invest in.

I believe Canada has an opportunity to lead development of the high-tech sector. Our telecommunications sector is the best in the world. Our post-secondary system is pumping out some of the best minds and they're being snapped up by other countries.

Stay out of regulating business, especially the Internet. Let the forces direct themselves.

The Internet, again, I believe is going to have a dramatic future.

My last point is that international opportunities promote Canada to the world. We need to focus on opportunities to learn from other countries on what programs they're doing well and what we should consider implementing. We should also aid in the expansion of Canadian businesses globally while promoting investment in Canada for foreigners wanting to open facilities in Canada. We need a critical mass of high-tech companies to make it worthwhile for them to invest. Hence my point in assisting sector developments.

A lower corporate tax rate comparable to the U.S. would be helpful in luring other companies to Canada. Reduce tax incentives—I don't where I was going really. I had crossed that out.

If the government sales efforts would open up the eyes of foreign countries we could bring in a lot more foreign investment from companies. IMSI is investing in Ottawa. That was in last week's paper. They didn't realize we had such a potential gold mine in employees and in the standard of living.

Another thing—just a last point—is to learn from the experiences of other countries, implement the most successful programs that work elsewhere, and have the embassies and foreign sector officers study what works in other countries to promote certain sectors and copy it. They're spending millions of dollars in investments to study what works. We can feed off their experience.

The Chairman: That was your final point, I gather? Thank you.

Now we'll move to the representatives of the Association of Canadian Pension Management. We have Gretchen Van Riesen, past president, and Malcom Hamilton. Welcome.

Ms. Gretchen Van Riesen (Past President, Association of Canadian Pension Management): Thank you.

Mr. Chairman and members of the committee, thank you for the opportunity to appear before you in this important consultation process.

The Association of Canadian Pension Management is the national voice for plan sponsors in Canada. Established in 1976 as a national non-profit association, ACPM has almost 1,000 members representing 500 organizations. Members have pension assets in excess of $226 billion and member plans range in size from $2 million to $38 billion.

In addition, members of ACPM include representatives of the major actuarial consulting, investment management, and legal firms providing advisory services.

My name is Gretchen Van Riesen. I am a past president of the ACPM. With me is Malcolm Hamilton, a principal with William M. Mercer Ltd.

Both Malcolm and I are members of our ACPM advocacy and government relations committee.

Let me briefly outline the views of the associations that are relevant as the federal government plans its next budget.

ACPM appreciates the leadership shown by this government in meeting deficit reduction targets. We also applaud the actions that will be taken to put the Canada Pension Plan in a fiscally responsible position by setting realistic contribution rates and investing surplus funds.

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Our association believes that Canadians should be encouraged to take increased responsibility for their economic security at retirement through individual and corporate retirement plans; that we must not mortgage the future of our children by taxing pools of retirement savings for consumption today; that governments should be promoting the expansion of private pension plans; and that regulations should not impede the investment of pension assets for maximum returns.

As a result of these beliefs we have some concerns about the current state of the retirement income system.

First, we are troubled about the proposed seniors' benefit because of the negative impact it could have for the middle class to save for retirement.

Second, we are concerned about government policies that guarantee senior couples an after-tax income of $19,000 per annum, while working people who earn $19,000 are asked to pay $2,500 of income and payroll taxes.

Third, we're opposed to policies that index government benefits while freezing the tax brackets and tax credits in the Income Tax Act, effectively treating taxpayers, in particular low-income taxpayers, as second-class citizens.

Fourth, we continue to be concerned about the freeze on RRSP and pension limits. For pension plans, limits have been frozen for 21 years, during which time the benefits paid from the Canada Pension Plan and old age security have tripled because of indexing.

We were heartened by the Minister of Finance's assurances, in his remarks to this committee, that the retirement savings limits would be improved as soon as the circumstances permit. Unfortunately, the problems caused by inadequate limits will be with us long after the limits are changed.

Just as it was important to address the CPP's problems long before the baby boom retires, we must address the inadequacies of the retirement savings system soon, or the changes will come too late to help many of those now at work.

Fifth, there is a significant gap in retirement savings between the public and private sectors. We are troubled by the fact that public civil servants shelter three times as much as those in the private sector.

Sixth, we are uncomfortable with the fact that the federal government continues to contribute $1.5 billion per annum to the pension plans covering its own employees notwithstanding the planned surplus of $25 billion.

Seventh, we continue to believe that the 20% foreign property rule should be eliminated to help Canadians create additional wealth and to obtain optimal diversification of their retirement assets.

Finally, there is a significant complexity and lack of harmonization in pension regulation in Canada. We believe this is discouraging the growth of registered pension plans in Canada.

These and other concerns have prompted our association to sponsor a working group of distinguished thought leaders in the pension community to take a comprehensive look at the entire system. This working group has produced a paper, currently being finalized, called “A Retirement Income Strategy for Canada”. This paper attempts to identify some key principles for an effective retirement income system, isolates where our current system falls short of these objectives, and seeks to set out some recommendations for change.

Key principles identified by our association are adequacy, fairness, sustainability, transparency, and efficiency.

We should be able to share this document publicly within a few weeks.

Mr. Chairman, that concludes my remarks. My colleague and I will be more than happy to respond to any questions.

The Chairman: Thank you very much.

We move to the question and answer session now.

Mr. Solberg, do you have a question?

Mr. Monte Solberg (Medicine Hat, Ref.): I'd like to congratulate all on their excellent presentations. They're a breath of fresh air.

I just want to say first of all that I'm interested in some of the remarks that we heard about unemployment insurance or employment insurance. I gather that what Mr. Mendelsohn and Mr. McCrossan are saying is that there is room for reform of employment insurance.

Does that mean that you're suggesting we reduce benefits, equalize benefits, that kind of thing? If so, do you have any numbers in mind?

Following on the heels of that, my question is, are there other areas in government where we can find savings, given, for instance, that most of the cuts that the government has made have been in transfers to the provinces but departmental spending was relatively unscathed? I think of areas such as Indian Affairs and Canadian Heritage and Regional Development. Are there ways we can still find some efficiencies so we can rededicate that money either to debt reduction or to health care and higher education or to tax relief?

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I guess that's the only question I'll get to ask, so whoever would like to tackle that, I would be interested in hearing what you have to say.

Mr. Paul McCrossan: I could start.

There is a government actuary in Human Resources Development who produces reports on employment insurance now, or unemployment insurance. There was for a long time, under a series of governments, a plan for what was covered and what was not going to be covered. There was also a plan to tie the contribution rates to what was intended to be covered and to build up a fund to handle fluctuations in the economy.

For some years now that plan has been suspended. The contributions have been set by government. It's part of the consolidated revenue account, and it has contributed greatly to the reduction in the deficits.

Well, times might have justified those emergency measures five years ago. Now we are at a time when we can plan for the long term. It seems to me we should go back to articulating the objectives of the system, how much of a contingency fund should be set up, and how premiums should be set with those objectives borne in mind. That is, premiums should be held up to provide excess cash just to reduce the deficit, and we're at the point where the deficit is about to be eliminated. It seems, therefore, that we should, as a country, or as a government, or as an all-party committee, look at the plans from first principles, articulating objectives, articulating who pays, when they pay, how much contingency funds are made up, and then let what comes out of that flow out.

I can tell you this. In my opinion, if such a process is followed, the contributions will be reduced sharply.

Mr. Monte Solberg: Could you move it off budget, as in the Forget commission report? Would you recommend going that far—letting the employers and employees run the thing?

Mr. Paul McCrossan: In theory the old commission was a tripartite commission, with employees, employers, and government each with a third of the say. But as long as the government could set the premium rate and as long as they could consolidate the revenues to absorb the deficit there was a tendency for the government to be by far the most equal of the three partners. I think if you are trying to design for the long term, you articulate your objectives and then you follow out the plan.

The Chairman: Mr. Mendelson.

Mr. Joshua Mendelson: I might take a moment with that. We come at it from a somewhat different perspective. There is no question the large premiums on unemployment insurance have contributed to reducing the deficit. In fact, if you reduced them sharply today you would be back into a deficit mode, very likely. They are figment surpluses at this point. They are counting surpluses.

That having been said, we look at it more from a structural perspective, as long-term once again. The question is whether the employment insurance program is working to help Canadians reduce the unemployment rate and create jobs or it puts a floor to the unemployment rate. We think it actually puts a floor.

Two things are involved here. One is that the premiums themselves obviously add to the costs of both the worker and the employer. They are also a regressive tax, by any measure.

Equally importantly, we have a system that has gone from being originally intended to be an insurance program for short-term unemployment to being a program that covers a myriad of areas, not all of which are consistent with each other. We can get into the whole question of education and training, but I would like to keep that separate.

Secondly, we have a program right now that creates regionally differentiated benefits. One can argue it on moral grounds, but it also prevents labour mobility within Canada. If one compares Canada with the United States, one of the reasons for the lower unemployment rate in the United States is the fact that there is a greater degree of labour mobility within that country. We may not like some of the side effects of that, but that's something we may be able to deal with.

Secondly—and I'll make one additional observation here—from time to time the notion of somehow experience-rating the program has been proposed and rejected, and I'll bring it up again. It's the notion of somehow experience-rating the program. We have areas that perennially have short-term employment. They do add to the cost of the whole system. So we're not looking at this in the sense of whether or not we are going to save more dollars from the budget perspective; we're looking at it more from what it will contribute to the flexibility of the Canadian economy long term. It goes back to the original framework, what it will potentially contribute to the longer-term growth prospects of this country.

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The Chairman: Thank you, Mr. Mendelsohn.

[Translation]

Mr. Desrochers.

Mr. Odina Desrochers (Lotbinière, BQ): Like my colleague from the Reform Party, I have a question about unemployment insurance. You were saying, Mr. Mendelsohn, that the federal government should reduce the unemployment insurance premium. We in the Bloc Québécois suggest the reduction of at least 35 cents, but the minister of Finance is proposing small reductions spread out over several years. Is this procedure satisfactory to you?

I'd also like to know your opinion on one of the recommendations of the auditor general published two weeks ago where he advocates that the surplus should be reported separately so that we can make a proper decision on how to use it rather than allowing the minister of Finance to use this money to wipe out his deficit, as is now the case.

[English]

Mr. Joshua Mendelsohn: In terms of the short-term effects, I think we would be kidding ourselves—which is why I refer to it as an accounting surplus—to assume that we could reduce or balance the EI budget and still not have any adverse effect on our overall government fiscal position. So to that degree, I think early on I would not spend all this money. My view, as I said before, is that most of it should go into debt reduction initially.

I think as time goes by and as we redefine the program...and I would agree with the notion that the EI should be placed as a stand-alone, self-supporting system, where it has real investment over time, where you have a fund there. But that is something we need to look at from a structural perspective and a longer-term perspective.

Actual amounts of how much you reduce it immediately really will depend, to a large extent, on how quickly and how strongly the economy grows. If the economy continues to grow at 3.5% to 4% in real terms, you may have more room to reduce the EI premiums more quickly because you'll be getting revenues from other sources to balance it off. But if for some reason it slows down, then you lose that, and I don't want to place all of our bets just on the pace of economic performance, because we do have some hiccups that can come up.

[Translation]

Mr. Odina Desrochers: Thank you, Mr. Mendelsohn.

[English]

The Chairman: Thank you, Mr. Desrochers.

Mr. Riis.

Mr. Nelson Riis (Kamloops, NDP): Thank you very much.

To continue on a little bit, setting aside the EI as a separate issue and particularly keeping in mind projection number two, which Dr. Mullins presented as, in his judgment, perhaps one of the more prudent courses of action at this point—I'm trying to recall all of the interventions—is there anyone at the table now who would suggest that a priority of this committee's recommendations should be to recommend a tax cut? If so, what should that tax cut be?

Mr. Mendelsohn: Can I ask you for a clarification? When you say a priority being a tax cut, is it before debt reduction or anything else?

Mr. Nelson Riis: I think everybody agrees that we ought to maintain a vigilant course of debt reduction, in terms of reduction and perhaps even setting targets. I've heard some interest in returning some expenditures, but not much, but particularly around the tax expenditure file.

Would anybody recommend that tax cuts or selective tax expenditures ought to be a priority initiative in the next budget or two?

Mr. Malcolm Hamilton (Principal, Association of Canadian Pension Management): Yes, I would think that should be a priority—not across-the-board cuts, but I think specific things need to be done.

One of the most important is taking things like the personal and the married income tax credits, which have been frozen now for the best part of decade. As a consequence of these things, we see couples in Canada earning $15,000 to $20,000 paying quite a bit of tax, while the government takes seniors and other groups to after-tax income higher than these people can earn. I think that's an imbalance, a growing imbalance, arising from the fact that we fully index government benefits but don't fully index the Income Tax Act. That should be moved on as soon as possible.

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The other thing we need to move on is retirement savings limits. As we said in our brief, the pension limit for private sector plans in this country has been frozen for 21 years now. It seems to me it's time to move on that. We're way below any other developed country in that regard. I think it's a high-priority item.

The Chairman: Mr. McCrossan.

Mr. Paul McCrossan: I'd also add the payroll tax for employment insurance. I think the comment was made earlier—and I think most economists would agree with it—that payroll taxes are probably the least efficient in terms of job creation. That is, they're the most damaging to job creation. If you have a payroll tax dedicated for employment insurance and you are running large surpluses, even if they are “accounting surpluses”, it is a regressive tax and it's one that should be acted upon to bring it closer to the limits the benefits provided by the system warrant.

The Chairman: Are there any further comments?

Dr. Mark Mullins: Yes. I'd add an issue of higher financing the tax cut. If the question is today that we're not going to have any further expenditure reductions, then very likely it's not a prudent course to embark on a large, across-the-board tax cut. If the issue is this versus new spending initiatives, I think I'd argue quite strongly on the tax cut side, particularly on income tax, simply because you're likely to see an incentive to save and to invest for the future out of the tax system, whereas with the new spending initiatives, they're more likely to be more or less fully on the consumption side.

One of the major issues we have right now in the Canadian economy is the lack of personal savings. Our growth rate today in the Canadian economy is exceptional, but it is essentially coming out of our savings rate rather than out of net new income growth for Canadians. I think a tax cut in terms of an outlook on national savings could be argued for over a new spending program.

The Chairman: Mr. Mendelsohn.

Mr. Joshua Mendelsohn: I'm sorry if I keep coming back to this notion of a framework, because what I'm hearing, not just here but in other locations as well, is “this program, that program, this program”. I know some people around the table here have talked about consistency among all the programs. That's why I raised this first and foremost, this framework within which to assess all policies.

I would assess within that framework the benefits from debt reduction versus the benefits from various tax cuts versus the benefits from various spending increases.

If you have your criteria right—and I'm not suggesting that any economic model is so good that it can give you all the answers here, nor can any model for that matter—certainly within that context you could very well find various tax cuts and/or spending increases that would ramp up economic growth, not inflationary growth, so that your debt load can actually decline. History shows us, however, that we end up getting caught up in a quagmire where every special interest group gets its own particular issue across.

If, as Dr. Mullins suggested, you are not going to increase spending and in fact you are maybe going to bring down spending, then I would argue that yes, you can make a very strong case for tax reductions, particularly if they give incentive to the entrepreneurs and the workers in this society to remain here and to build this country. That said, I think that first and foremost we can spend all the so-called surplus we have right now—or are looking forward to right now—on day one and we won't even see it if we just give it all away before we even see the first numbers.

The Chairman: Thank you, Mr. Mendelsohn.

Mr. Jones.

Mr. Jim Jones (Markham, PC): Thank you very much, Mr. Chairman. All the presentations were excellent.

I have only one question, but there are many that I'd like to ask. In Canada we have an unemployment rate of 9%. Is it realistic to say that we can have an unemployment rate of 5%, as the United States does? If it is realistic, what do we have to do to get to that rate? I'll ask Mark first.

Dr. Mark Mullins: The key here is structural reform. It seems to be the case that Canada's unemployment rate does exceed the United States' for a number of reasons related to the flexibility of our labour market and some of our social programs. Obviously there's a trade-off there on social equity and some incentives to be in the labour market.

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Having said that, even with those structural reforms we'd need many years of solid growth to catch up to where the U.S. is, given the extent of discouraged labour we have in the country and our relative labour force growth.

The key thing is to keep the economy turning here over the next three to six years and to embark on those structural reforms that are required to offer better incentives to be employed, to get the training and education that's required so we can match the skills. I say this because the structure of our economy is not dramatically different from that of the U.S. on an industrial basis, though one might argue that we have a greater mismatch here in some of the industries our workers are trained to work within.

Mr. Don McIver: I have an issue that has already been raised around this table. I think one of the key difficulties that differentiates us from the United States is the extent to which we have programs that discourage labour mobility.

The example I've always used, and it comes quickly to mind, is that if you think back to the late 1980s, we had an unemployment rate in this city in the order of 3%. I think it was below 3%. Coincident with that, we had an unemployment rate in Newfoundland that was still up in the high double digits, I think 17% or 18%.

As Mark suggests, obviously there are some structural impediments, programs and regulations in place, that prevent us from emulating the United States.

Another example that is worth bearing in mind is that of Europe, which has an unemployment profile very similar to that of Canada. It's easy to be simplistic and come up with overly simplistic answers, but it's undoubtedly true that labour regulations in Europe are far more structured than they are in the United States. You don't have to be a whiz kid to figure out that there is something between the two systems that encourages that high level of unemployment in Europe and that very dynamic situation in the U.S.

Dr. Mark Mullins: Just one last follow-on. Statistics Canada over the years has done a number of studies on the labour market, not looking at the net numbers that we tend to concentrate on that are released every month in our surveys of employment but, rather, looking at the labour market churn or turnover, in terms of net new business formation, the exit of firms from active business activity, the growth of firms that exist, and also the contraction.

If my reading of that literature is not incorrect, it seems to suggest that the key to much of the growth of employment possibilities in the country comes from new business formation. In other words, it's the entry of new business and the incentives for entrepreneurs and others to start business and to hire new employees that's one of the longer-term keys to helping with the employment situation.

The Chairman: Are there any further comments on that?

Mr. Joshua Mendelsohn: I keeping coming in at the tail end.

By no stretch do I shy away from the issue of unemployment, but I think unemployment to some extent is a residual issue. That is, it comes as more people come into the labour market. We can have the same high rate of unemployment, yet we can create hundreds of thousands of jobs.

I think the first order of priority is to reduce the structural and the educational impediments to labour mobility. If we keep the economy growing, we create significant numbers of jobs. That to me is one of the key focuses.

We keep focusing on the negative side of this, but we need to focus on the positive—what do we need to create jobs—and then, along with that, the structural adjustments to allow for mobility.

The Chairman: Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): We have heard quite a bit from other groups about the social side of the dialogue we're having, particularly poverty. There's been a lot of reference to the CHST drops.

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Interestingly enough, very little blame was passed on to the provincial government in Ontario, for instance, for having cut taxes across the board at a cost of some $4.9 billion, compared to the reduction of the CHST of about $1.2 billion, but that's what we have to live with.

There hasn't been too much talk on this panel about poverty, but I do want to acknowledge, Mr. McCrossan, that your comments with regard to the lone-parent family situation and its impact on poverty are absolutely bang-on.

I was surprised that there wasn't more interest in corporate tax cuts. There was some reference to small business, an annual limit and CCA tinkering, but no appetite for major corporate tax cuts. That will be interesting as the Mintz report comes out.

Ms. Van Riesen came out with principles to guide pension management, and one of them was of course fairness. I think we can all assume that fairness and equity should be applied not only to the pension system but also to our tax system.

What I want to do is raise an issue that many of you have raised, and it has to do with RRSPs. Anybody who would like to comment, please do.

As you know, fewer than 5% of Canadians use their full limit. That's the facts. Therefore, asking for an increased limit doesn't seem to be justified, based on the experience we've had.

Secondly, in the marketplace we have a process of arbitrage that establishes a move towards willing buyer, willing seller. The same principle applies to compensation for those who have plans or do not have plans, etc. The combination of salary and benefits moves, under a process of arbitrage, to a choice. If you don't have a pension, or an adequate pension, it's compensated in other ways. So it's easy to argue if you take it in isolation, but the whole thing, including the debate about U.S. versus Canadian tax rates, cannot be taken in isolation. We have to look at all of the implications, which someone has said.

Given that the RRSP is a deduction, not a credit, you all are aware that the value of a $5,000 contribution for someone at the lowest marginal rate, compared to someone at the highest marginal rate, is worth about $800 less to the lower person, which means there is an inequity. Secondly, because of the 18% unearned income, the amount that can be contributed favours higher-income earners over low.

Then when you consider that by structuring an RIF or by splitting a spousal, in fact a high-marginal rate earner who got the high deduction could buy a spousal and get the deferred taxes out at a lower marginal rate than when they put it in, which gives them an automatic windfall on rate, whereas a low-income earner has no opportunity whatsoever on rate.

Fairness and equity; does anybody want to comment?

Mr. Malcolm Hamilton: Yes, I'd like to comment.

When you're talking about retirement income, you'll have to try to get this in some kind of perspective. The number you used was, I think, 5% of people contributing the limit to an RRSP. What you have to realize is that in Canada, if you're low-income—let's say your income is $20,000 a year—and you get to age 65 and you haven't been able to save anything in an RRSP, you've been in the Canada Pension Plan and you get the seniors' benefit, when you add it all up, your after-tax income doesn't drop. You got to 65, so with Canada Pension Plan and the seniors' benefit, you get full income replacement. So low-income Canadians don't need to save to maintain standard of living.

You came out with the statistic that only 5% are at the limit. Only 5% are at the limit because only 5% need to be at the limit. We have a large number of Canadians who don't need to save anything; we have an extremely large number of Canadians who, if they save 5% or 6% or 7% of pay, are going to retire very comfortably relative to what they were used to their whole lives.

If you go up to the high end of the income spectrum, where people will pay for the seniors' benefit through their income tax and get none of it, where they'll contribute to the Canada Pension Plan on earnings up to $35,000 and get a benefit on earnings up to $35,000, and you calculate what percent of their pay they need to save for retirement, you don't get the 0% or the 5% or the 8%; you get something closer to 20% or 30% of pay just to maintain standard of living when they retire.

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What I would submit is that a system where low-income Canadians need to save next to nothing to maintain standard of living and high-income Canadians need to save 20% to 30% to maintain standard of living is a fairly progressive system.

Mr. Paul McCrossan: Perhaps I can provide a little context, since I was involved in developing these limits in the 1985 budget.

The pension limit was set at $86,600 in 1976. At that time it covered about seven times the average industrial wage. It was actually the Business Council on National Issues in 1982, I believe, that suggested that was far too rich an income to be covered and that a lower level of income should be covered through government-afforded tax assistance—something in the order of two and a half to three times, I think.

In the 1985 budget, the plan was developed to cover incomes up to three times the average industrial wage. In 1987 it was reduced to an objective of two and a half times the average industrial wage. But as the Association of Canadian Pension Management pointed out, that $86,600 limit has now been frozen since 1976. We are now cutting into the guts of what would normally be thought of as the middle-class worker, in terms of caps.

The system is seriously inequitable in that while we had one of the most generous systems, we now have one of the least generous systems through the fact that we've had a 21-year freeze on the limits in pension plans. There are reasons we moved that way.

The point about the income-splitting is important under the current tax regime, but recognize what's happening under the proposed seniors' benefit. Under the proposed seniors' benefit, family income is now the target, not individual income. While the projections made in the 1986 budget paper illustrated what would happen in 2001, the cohort of people who would be retired in 2001 were generally born in the middle of the depression or earlier, when single-earner families were the norm. The cohort of people who will be retiring after 2011 will be primarily post-war babies, where the pattern has been double-income families.

So one of the reasons that the effect of the seniors' benefit is so serious is the shift to a family income basis just at the time when the generation of Canadians who had two-earner participation in the labour force starts to retire. And the disincentives to that group to save are immense, because the cutback starts off at just over the level of two Canada Pension Plan incomes from a retired couple.

The all-party consensus that derived out of the 1981 national pension conference was to encourage people to save for themselves. The effect of the seniors' benefit is to penalize those who did and to provide a disincentive, particularly to working couples, who more and more are the norm in Canada.

When you raise the issue of equity, you need to consider intergenerational equity as well.

The Chairman: Further comments?

Mr. Don McIver: I'm really glad the issue of equity and fairness of the tax system is being brought to the table, because it has to be part of that longer-term structural debate sort of thing that Josh Mendelson was talking about.

The degree of income redistribution we have in this country we've arrived at almost by default. Perhaps the standard example that most people may be familiar with around this table, but that the general public would not be familiar with, is that the ratio of the highest-earning quintile to the lowest-earning quintile in terms of their incomes is something like 20:1 in this country. Now, that may seem extremely large, but when you take into account the after-tax position and the after-transfer position, it falls to 5:1.

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So we have a very progressive tax system in this country as it stands. And that may well be fine. The question is whether or not we've arrived at that result through deliberate action or through default. It's not up to the economists, it's perhaps not even up to the public policy analysts, to tell us what ratio is desirable, to tell us how we should distribute income in this country. I think it is incumbent upon government to articulate the debate and to involve the populace in deciding what that level is, no matter what it is. Let's get it on the table. Let's determine how we get there. Just as we should be talking about what level of government expenditure is appropriate in this country, who should be conducting that expenditure, as a residual of both those processes, the third debate is around what level of debt is appropriate for the country.

The Chairman: Ms. Van Riesen.

Ms. Gretchen Van Riesen: Your question about participation limits is one that ACPM actually spent some time looking at, and our research really identified something we have found very interesting. In 1995, I think, Statistics Canada reported that 29% of Canadians participated in RRSPs. We felt, based on comments Malcolm has already raised today about who needs to, we would take another cut at these numbers and try to understand a little better, for those who need to save for themselves for retirement, what the actual participation rate is.

When we took out those who are under 25 and over 65, we found that participation rate jumps to 36%. When we took out people earning less than $20,000 a year—again a group, as Malcolm identified, who are amply protected by our social protection—it jumps to 56%. When you exclude those who are in other pension plans, private pension plans, who may see those as their retirement savings and have less of a need to be in RRSPs, the participation rate jumps to 77%.

The Chairman: Any further questions? Mr. Harris.

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Are we on the second round now, or are we still on the first?

The Chairman: I will exercise flexibility.

Mr. Dick Harris: Great. I'm first up on the second round, Mr. Chairman.

I would like to thank all of you presenters for coming today. It has been, as someone put it earlier, a breath of fresh air. I guess the question is, how do we get you to stay here all afternoon? I'm sure there are a few of us here who would like to have you hang around for a while.

I'll ask a couple of questions, the first one to Mr. McCrossan, on his sixth point.

I think the general public really is quite unaware that the reason why the government is not going to be borrowing money from outside sources this time around is that it has the government pension plans to help it along, as well as the UI fund surplus. You have a comment here that the cashflow should be invested in the real marketplace. I really believe that too. Is it possible just to encapsulate how much better an investment advantage it would be if the government were in fact investing this money in the marketplace, as opposed to using it for their own internal use?

Mr. Paul McCrossan: Mr. Harris, you actually have an expert at the table, one who is not I. But let me cite the examples. In Ontario you have the Ontario Public Service Pension Plan, the Ontario Teachers Pension Plan, and OMERS. Mr. Hamilton, sitting over there, happens to be the actuary for the Ontario Teachers Pension Plan. I would think he would be able to recite off the top of his head the sort of returns involved, which, since my wife is a teacher and I actually read the bumf he puts out, I think have been running in the high double digits since the conversion.

Mr. Malcolm Hamilton: They have, but I don't think we should expect that to continue. The fact is that every pension fund, every RRSP, has done extraordinarily well in the last 10 years. You just couldn't miss. They were an extraordinary 10 years. I think anybody who is expecting that going forward will be sadly disappointed.

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The pension plan covering federal civil servants is earning a pretty high rate of interest; it's over 10%. If you look at the public debt, I think we pay about 7% on the rest of the debt; but we pay over 10% on the debt in the superannuation account for federal public service pension plans. About one-quarter of all the interest payments that are booked each year is money going into the pension fund for federal civil servants.

If the comparator that we're using is going forward return, I suspect that 10%—which I think is virtually guaranteed for the next five years or so—going forward is going to look pretty good. But that's really not the issue, in my view.

The issue is, if that plan is to stand on its own feet, if people at the end of the day are to be confident that the members of the plan are getting what they should get for the amounts contributed by and for them, then the only way to do that is to do what was done in Ontario, and that is to spin the plans off and set them up independently and let them run their own investments, bear their own risks, and reap their own rewards.

Whether that's going to be more or less than 10% going forward I don't think anyone really knows at this point.

The Chairman: Mrs. Redman.

Ms. Karen Redman (Kitchener Centre, Lib.): I appreciate all the presentations that are being made. I guess I'm sorry that we listened all morning to people from the social sector talking about poverty and how much balancing the budget has cost in human terms. I really think that government is in a lot of ways nothing more than a balancing act between competing needs.

While I appreciate your presentations today, I would like to ask a question that wasn't really touched on by anybody, except Mr. Rieck peripherally.

When we were in Vancouver we heard a lot about reinvesting in post-secondary education and the transfer payments. There were suggestions that it would be a great idea to do away with any kind of tuition. While I can't support that, they talked a lot about student debt and how the average graduate from a Canadian university has roughly that of one coming from Yale, which is around $25,000. I asked those presenters—and I would like to pose it to anyone who would like to answer it here—what's an appropriate debt for a university graduate to come out of school with, given that likely there will be some kind of debt? I would be interested to hear from this sector what kind of value we as a society can put on post-secondary education.

Mr. Don McIver: That number is an interesting one. It has been put to me, however, that $25,000 is about the cost of an average motor vehicle these days, so basically the opportunity to get a lifetime's training, with commensurate income flow, from that type of indebtedness makes the comparison an interesting one with the notion of a vehicle that lasts you three or four or five or six years.

I think it is a very important issue that we have to face and one that we haven't done a very good job of doing so far. I wouldn't want to suggest that there is a simple answer to this, but I think there are a number of considerations that we should bear in mind.

First of all, the chief beneficiary of post-secondary education is the student himself or herself and, as a consequence—I'm speaking from a personal bias, I suppose—I would like to see as much as possible the responsibility for meeting that obligation resting upon the individual who has obtained the benefit, just as with any other consumer good.

I recognize that there is a problem when you have some people who have had their education funded by somebody else who then is called upon to fund their own. There are some intergenerational equity issues there, but I believe the principle is fairly sound. Especially today, when one is increasingly talking of lifelong learning and the notion that at any stage in life, instead of being just a wet-behind-the-ears teenager being set loose without any resources in the world looking for an education, the person obtaining an education may be someone of quite mature years, I think there is a tremendous virtue in suggesting that that individual should have the primary responsibility for paying for their education.

I certainly strongly believe that it is extremely desirable that no one should be precluded from obtaining an education because of lack of funds, but that problem can be met through an appropriate loans program with an income contingent repayment system.

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One of the side virtues, to me at least, of what I'm describing is that education then would become driven far more by market forces, with the result that the quality of education provided will be much more reflective of economic standards if the individual purchasing it has to put up the money, or at least make the commitment themselves, for the service they are receiving.

The Chairman: Mr. Mendelson.

Mr. Joshua Mendelson: I want to comment on something Don McIver raised, because I think it's going to become a harder and harder issue. You've all seen the press reports in the last little while about “petrified universities” and the like. I think the issue is you can give everybody cost-free education. The question is what kind of an education are you giving them.

The issue is really one of causing the student and anyone who wants the education to demand, and to get in return, a high-quality education. We talk about excellence and we use all these wonderful terms in Canada, but there are some questions about what we have.

The issue is not so much one of throwing money at it. We do spend an enormous amount on education in this country. But as the World Competitiveness Report out of Switzerland will tell you, repeatedly, year after year, and as our own individual experiences around this room come in, when we look for qualified individuals and the quality in individuals, we're not necessarily getting the quality of that education.

So I support Dan's view. If you make it a situation where there is some individual responsibility here and you are paying for it, you're hopefully going to demand better quality and we will force that better quality to come into the system.

The Chairman: Mr. McCrossan.

Mr. Paul McCrossan: I suggest the question may be the wrong question. Let me throw two different concepts at you.

One is, looking at Canada in terms of the ratio of secondary school graduates versus the rest of the world, we rank very low. Looking at Canada in terms of the ratio of university attendees versus the rest of the world, I believe we're either number one or number two.

The second fact to put in front of you is that the ratio of income of those with university education as a multiple of those without university education is widening fairly quickly. So you've chosen to focus on those who graduate from university and who are the most fortunate in society when they come out.

I suggest, in fact, that our problem in Canada, the one we're going to have to deal with, is the low level of people with secondary education, relative to the rest of the world, and what we do with them as a country and what we should be doing to change the situation. They are the tag end who will cause very real social expenditures if we don't get that problem addressed.

I'm sympathetic, having three daughters in university, to the potential debt load of university graduates, but they all face a fairly bright future. As a country, I think the problem we face is what about the very, very low rate we have of secondary school completers.

The Chairman: Mr. Jones.

Mr. Jim Jones: I read that a year or so ago we had a balance of payments with the U.S. of $40 billion and this year we're trending towards a $15 billion surplus. Is it possible that within the next year or so the U.S. could be creating a surplus with us, instead of the other way around, and what ramifications, if that does happen, could that have for Canada?

Mr. Joshua Mendelson: Let me pick up on that.

I think you have to look at the economic cycle; the way it's turning. That's really the underlying cause of a lot of this. In recent years, when the Canadian economy was doing quite poorly and the U.S. economy was going ahead quite strongly, most of our economy was based on the export sector. As our domestic economy picks up momentum and our performance is much more broadly based, needless to say we will be importing more, and that will cut into our trade surplus.

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As well, we expect the U.S. economy to slow down. In fact, for all of our well-being in the next several years we kind of hope the U.S. economy slows down so we don't get a sharp ramp-up in U.S. interest rates. I think the cyclical phenomenon of the stages in the business cycle where the two countries are will very largely reflect that.

I think we'll also see some side effects on both countries from what's happening in South East Asia. We don't export all that much to that region at this point, but in terms of commodity prices that will impact our exports and our price of exports to other parts of the world, we may have some side effects from that as well.

The Chairman: Thank you, Mr. Mendelson.

Doctor Mullins.

Dr. Mark Mullins: There is also a strong positive from the pace of imports recently, and a lot of them are going into the capital spending boom by business. Presumably those people are making decisions in terms of future production activity that are going to reap rewards as time goes on. It's not unambiguously bad for Canada to have a deterioration in its net position. Certainly for the cyclical reasons mentioned already, this is exactly what you'd expect to see, at least for this year and possibly into 1998.

The Chairman: Thank you, Doctor.

We'll move to Mr. Pillitteri and then Mr. Iftody for some brief questions.

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

This morning we've heard from different groups. In the past on this finance committee there was a blend of the two groups—the social groups and of course this group here today, which possibly has done more venting and will possibly come to a better consensus and a better understanding.

First I'll make a remark about entrepreneurship and what we as Canadians are doing. I hate to be painted by the same brush as an entrepreneur. Before this life I was an entrepreneur, and I still am.

Sometimes as individuals we take responsibility for paying rather than asking somebody else to pay for all of our needs.

Let me be quite specific. In Canada we have a health care system that is free, while in the United States the industry has to pay for it. I've had industries in my area and my riding that have said people don't understand what kind of benefit it is for a manufacturing sector to locate here in Canada, because they would have to pay for it in the United States.

Having said that, there are shortages today in the high-tech industry. It's quite rewarding for those who invest and who are in that industry. Don't you think some responsibility should be taken by that private entrepreneur, that industry, to help, and not only pay for but also have a partnership with the universities for the skills they need, which show shortages today as well as tomorrow? In my industry we had to put in a few dollars in order to fulfil our needs. Don't you think industry or entrepreneurs should be partnered with universities to take some responsibility in order to create the educated people who can enter the workforce we need today?

The Chairman: Any comments from the panel?

Mr. Durst.

Mr. Mark Durst: I'm also president of Patriot Computer I and consider myself an entrepreneur. We're trying to partner with Seneca College, but we also hold the view that the technology industry is the number one growth industry for Canada. Unfortunately, Patriot Computer cannot carry the whole weight of Canada's future or that of the other technology companies. We can help, and I agree wholeheartedly with you that technology companies have to work with education. It's not just the technology companies.

I'd like to just congratulate Steve Quinlan of Seneca College, who has gone around the world as an entrepreneur in the education community trying to help technology companies get more business around the world.

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The difficulty I have lies in the fact that while you have a good basis of priorities, not every entrepreneur does. The difficulty that can I see is that a lot of the entrepreneurs say the difference in tax rates for Canada is 51% versus 36%—although I agree wholeheartedly that there are a lot of benefits—and the reality is that these guys go to the United States. Friends of mine in the technology industry say they're moving down there. My concern is that not only are the entrepreneurs going down, but the best programmers coming out of the University of Waterloo and the best technology people are too.

One of my biggest concerns is that the biggest growth area for Canada is the technology industry. I'm very concerned that this industry can slip over to the United States because of the tax difference and the economic difference. The technology companies should be in partnership with education, but so should the rest of the country.

Just to follow up on some comments about education and your question about how much the average loan should be, it depends on what they're educated in. If they got jobs in environmental.... If they have an education that doesn't have much of a future for jobs, they can't pay back that tuition very easily. In many ways, we have to direct the future of education to where we believe Canada should move.

In Taiwan, the government is much more progressive. The government there says—and I like this framework concept—it wants Taiwan to be the number one country in technology. With that, technology is promoted and they make it a big part of everything. It's not just existing companies that are paying the bill. Because the whole country's mandate is to be number one, the whole country is paying.

I think we have to step back and look at where Canada can compete globally. The problem we have right now is that we're all looking at where the future jobs are. The future is a global economy. I'm seeing it quite a lot in the technology industry. As an entrepreneur, you probably see this more and more now. The competition is not just local, it's worldwide. So as a country, we have to ask about the areas where the best jobs are. Let's make our education system go that way. And yes, I agree the technology companies should come in and help with education, but the country—or everyone else—should probably come along.

There are widely varying views. Some technology guys ask about a secondary school program that focuses on technology. I agree with the arts, and you can still have them, but make them more relevant to the job market. The question then becomes whether or not students will go. Students will definitely go to these types of programs. That's why all these private schools are starting to sprout up. What's happening is that the rich people are getting the education that is getting the jobs; the poor people can't.

There are some differences. Steve Quinlan, from Seneca College, is trying to change that gap. But as I stated earlier, there has to be a structure or framework by which the country can say what the goals are for the next ten years, as Taiwan has done.

The Chairman: Thank you, Mr. Durst.

We'll have one final question from Mr. Iftody.

Mr. David Iftody (Provencher, Lib.): Thank you, Mr. Chairman.

Thank you very much for the presentations. They were obviously very well thought out. We are graced here with the presence of some experts in their particular areas.

I was particularly intrigued by Dr. Mullins' thesis with respect to a way of protecting the Canadian economy and wrestling down the debt. I think it's a very innovative and interesting idea in terms of attacking and approaching it from the level of interest payments rather than from the aggregate numbers that are accomplished year over end in terms of the close to $600 billion that is owed.

Obviously we are heavily dependent on our exports to the United States right now. Of course, both the United States and Canada are like horses being held back right now, at a time when they both want to raise interest rates. If we have a change in our exports and a change in the economy, if there is an increase in interest rates and a number of economic assumptions are changed—particularly those assumptions that we have used in the past four years in terms of our budgeting.... I'd like you to comment first about this, and perhaps hear from some other learned people, as well. If we have a change in interest rates over the next three, four or five years, how is that going to affect our planning here? I would suggest from your arguments that it's going to be extremely painful and difficult.

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Then, of course, what about the assumptions that the finance department is using right now in terms of our long-term forecasting and planning with respect to these budget measures and our debt reduction? Do you feel that those assumptions are valid or sound ones, and if they are not, what's that going to do to our level of interest payments? Then, of course, our whole debt reduction, our tax plans, and our plans on expenditures go completely out the window.

Dr. Mullins: I'd say the prudence factors and the contingency reserve have worked as expected, in fact even more strongly than expected, and we're well ahead of budget in a context of what I would describe as a booming economy. So the real issue is, when you get back to average growth, or if you're unfortunate and you go below average growth, what is the fiscal impact?

One buffer is that the odds of a significant, prolonged hike in interest rates is rather low. Not only do we have low inflation here, but also in the U.S. and most of the industrial world. We're not going to see rates at 8%, 9%, 10%, 15%, which would really cause a major backtrack on the debt interest costs. So even with a slowing of growth and a modest rise in interest rates, you may still see an advantage, an improvement, on the debt interest side.

But I think there's a broader answer to your question. That is, what is the risk to the framework today? What is the risk going forward? I think, in a word, it's expectations. Most people today, through the media partially, believe the task is done, thank goodness, and we can go on now and spend the so-called fiscal dividend, whether it's spending or on the tax side, without actively noting that much of the debt outstanding is a future liability that is going to arise from demographic factors in health care and on the pension side, and that actually we have a window here, which probably is going to last something in the order of 10 or 15 years, to get things back into line to prepare for the next fiscal challenge as our economy ages and as we have to meet some of those future liabilities.

So the worry I have is less that the framework isn't sound or that we're not being prudent enough. I think these are reasonable assumptions. The greater fear I have is that we're really not preparing ourselves 10 or 15 years out, and we can make some rather important decisions today that are going to have some very long-lasting implications and are going to cost us a lot of money if we don't get the answer right today.

The Chairman: Would anyone else like to comment on that? Go ahead, Mr. Mendelsohn.

Mr. Joshua Mendelsohn: As a very quick comment in view of the time, I think that is the reason why you are hearing so many people around this table and other places focusing on, first and foremost, debt reduction. When you reduce that debt load, you are giving yourself that added flexibility that if something does go wrong, you have some room to manoeuvre. If you don't have that, you're going to be right back where you started from.

The Chairman: Thank you very much.

This has been an excellent round table. I duly noted, of course, the consensus on tax cuts, the priority of the debt. The whole concept, I think, of establishing a framework for a policy decision-making process was noted. Also, the issue of the ratio, which I think Don McIver raised, is a very interesting point, and as well addressing the structural challenges of our economy and the importance, of course, of education and training. This all goes to prove, of course, that we have many, many challenges and choices to make. But you can rest assured that the decisions we will make and the recommendations we will make to the minister will, in large part, reflect the values and priorities and expectations that Canadians have.

So on behalf of the committee, I really would like to express to you our warmest and sincerest gratitude. Thank you.

I'm going to suspend for approximately five minutes so we can get ready for the next round table.

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The Chairman: I'd like to call the meeting to order and welcome everyone for round table number four of the day here in Toronto.

It's been a very interesting day for us. Many points of view have been expressed quite eloquently, giving us valuable input as we prepare ourselves to write the recommendations to the Minister of Finance.

To start, I just want to say something to you. Our mission is really to make recommendations that eventually will result in the improvement of the quality of life for the people of Canada. That's what drives the agenda of this committee.

We want to give you an overview of how we've been operating. Some of you have watched the previous round table.

You will have five minutes to give us the highlights of your remarks. Thereafter, we will have a question and answer session. If time permits, we will have some rebuttals.

The first presentation will be made by Keith McIntyre, former president of Mohawk College.

Mr. Keith McIntyre (Former President, Mohawk College): I started off by combining my remarks and my notes into two and a half pages or so. I'm going to use that.

Point one, we were asked to comment on the process of the budget deficit reduction. I indicate that I felt that it had been slower than would have been expected, but I think generally the methods used have been appropriate. Government is finally demonstrating fiscal responsibility by doing what it takes to adjust expenditures to be reasonably balanced with revenues.

I think the forecasts have been appropriately more conservative and the government is demonstrating ability to live and operate within its means, as all Canadians have had to do. So I think you score a big point in that regard.

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However, point two, the $583 billion of accumulated Canadian debt must be reduced or eliminated as the next fiscal order of strategic priority. Don't think we can let the euphoria of recent exceeding of the annual deficit reduction targets and generating of the surpluses overshadow the huge accumulated federal debt legacy from past governments. The huge interest carrying costs, estimated at $46 billion per year, not only are strangling the government's current choices and flexibility but also have created a millstone around the necks of future generations of Canadians.

I suggest that if you can publicize the rationale for reduction of the debt, set targets, and bring it down to give governments the breathing room to tackle other pressing political priorities, then you will win the day.

That's contrary to Dalton Camp's recent Maclean's article.

Point three, Canada is rated by the UN as the best country to live in. As we heard in the previous session, we have a deplorable unemployment rate, hovering at 9%, in spite of globalization, NAFTA, and our above average level of education. However, it's particularly high among youth and middle-aged adults.

Government must stimulate a better environment for the creation of jobs across the country.

In line with the government's recent throne speech, which mentioned the value of expanding internships for secondary students to improve the transition from school to work, co-operative education programs at the colleges and universities should also be expanded by federal assistance, and employers who are willing and able to provide paid co-op work placements for co-op students should be given a meaningful tax credit. I'm suggesting $5,000 per co-op job year created.

It has been shown that co-op graduates obtain better jobs faster, and with better pay, than grads from non co-op programs.

More assistance also needs to be provided to middle-aged workers who have lost their jobs due to downsizing, technology, automation, etc., and who are willing to risk starting up new companies and firms as entrepreneurs.

Young people do face a catch-22. They need experience to get a job, to get employed. As a recent graduate of a college or university, where do you get the experience to get the job and get the first employment? Co-op is clearly an answer across the country for this dilemma.

Point four, the overall crime rate in Canada has been declining slightly, but crimes of violence have increased dramatically, particularly among and by young people. This is a serious problem in our society, and it needs to be investigated and addressed.

Point five, the best country to live in also has one of the highest child poverty rates in the developed world. It is well known that poverty fuels many, if not most, of Canada's social problems. It needs priority attention because the solution has a big leverage pay-off for Canadian society.

Food banks are beginning to play an important social role beyond the mere distribution of food to needy people. The same is happening with the school nutrition programs.

Governments should pursue these developments, perhaps enlarge and legitimize the programs, and work with the agencies involved to implement earlier intervention and prevention strategies to reduce the number of individuals, particularly children, who are at risk.

Related to point five is the parenting issue of raising and rearing and nurturing children from birth to age three. Social research continues to confirm that the first three years of life are absolutely critical in the development of an individual's future well-being, that many risk factors can be alleviated and that the children raised by single parents are at far greater risk of developing unwelcome outcomes.

These findings have enormous consequences for our society. So government needs to explore ways and means of making it more desirable, feasible, possible for one parent in a family to provide professional parenting of children from birth to age three without diminishing career opportunities and double income opportunities and without restricting educational upgrading for the parents.

The valuing of part-time work higher than it is and the valuing of a parent who works at home rearing and upbringing a family would be some ideas.

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Seventh, tax cuts. I don't think they are going to be necessary or expected by people if sufficient new jobs are created and the unemployment rate is correspondingly reduced.

Eighth, the government's election promise to remove the hated GST will be long remembered by the electorate. There is an opportunity to start phasing it out by reducing it by 1%—I don't mean 0.01%, I mean 1% of the 7%; yes, 1.0%—to restore the government's credibility on this issue.

Lastly, the shared infrastructure renewal program the government implemented with the provinces has been very successful, providing much-needed improvement in municipal services, the infrastructure, and the physical resources in labs and shops at schools, colleges, universities, hospitals, etc. However, now is the time to renew the Trans-Canada Highway system, because so much of our commerce and tourism depends on it. A much greater percentage of the federal gas taxes paid by motorists and truckers should be devoted to significantly upgrading our national highways.

About three weeks ago I travelled through Michigan up to Sault Ste. Marie to see the colours. By comparison, with the same terrain as in northern Ontario, the Michigan roads are much better, much better marked, easier to drive. We need to upgrade our national highways.

Mr. Chairman, later perhaps I'll comment on the thing you thought I might talk about, which was funding post-secondary education, student tuition fees, and the debt load of students.

The Chairman: Mr. McIntyre, thank you very much.

The next representative will be from the Ontario Hospital Association, David MacKinnon.

Welcome.

Mr. David MacKinnon (President, Ontario Hospital Association): Thank you very much, Mr. Chairman. I'll make a few very brief comments.

First of all, on behalf of the hospitals of Ontario, we acknowledge that the process of deficit reduction has produced major benefits. Low interest rates have proven to be particularly helpful, given the debt load Ontario hospitals are carrying.

Secondly, we would like also to recognize the measures the government has taken in the recent budget as they affect hospitals. Even while we work through the reductions from past years to the Canada health and social transfer, reductions that continue to affect us, the helpful measures include the inclusion of research hospitals in the activities of the Canada Foundation for Innovation, the health transition fund that is proposed to help provinces test ways to improve health systems, the Canada Health Information System, and others. We think it is very important that these programs become operational as soon as possible and that these programs be equally available to people in all provinces.

By way of background, as many members of the committee will know, one of the largest public sector restructuring projects ever undertaken in Canada is under way in the Ontario hospital system, which includes 215 public hospitals. There are some issues that are of the first importance in avoiding future financial demands. I thought I might touch on one or two of them.

The first issue is that there is little evidence on some of the principal elements of change in the health care industry, including two in particular, the shift from hospitals to other providers of various types.... There has been substantial study all around the world of the relative cost-benefit performance of various providers of health services. It is very inconclusive. Some of the best current research in this area is happening in Saskatchewan, but much more needs to be done.

The second area where the impact of changes in health care may be very important is to understand the impact of what we are doing now in the kind of changes we're making, particularly reduced lengths of stay in hospitals involving families and other caregivers. Our general view is that if we persist in making decisions in these areas where the information is at best inconclusive, we risk major unanticipated demands on governments and others in the future.

The issue of large new compensation programs to help pay families for the costs of looking after people at home arose in a recent British election. It has arisen in other jurisdictions. It is entirely possible that similar pressures could be felt here. By coincidence there is a very interesting article on the front page of the Globe and Mail this morning, dealing with this very issue, which I commend to all the members. Basically we really do have an emerging issue here, which is that we may well see that forcing certain kinds of activities onto the family due to funding decisions may well have unintended consequences, which could loom at least as large as those consequences that are intended.

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Second, we really need to know the operational impact of change in the health care system as it transpires. In Ontario, the Ontario Hospital Association recently sponsored two major studies, one by the Richard Ivey School of Business on the practicality of current changes as viewed by nurses, physicians, and others, and one by the CIBC on the overall financial condition of the hospital system.

The CIBC study, which was done, I think, as a major contribution to the hospital system, may be of particular significance to this committee. It showed that for the system as a whole, significant deterioration has taken place in part because restructuring expenditures were incurred upfront.

Again, if we want to avoid large expenditures and other problems in the years to come, we need to pay much more attention to the proper financial planning of health care changes and to make sure that what is practical from a theoretical point of view is also financially and operationally practical.

The hospitals are very important in terms of their economic impact, and I'll just touch on that very briefly. In almost every major city in Ontario, hospitals are the first, second or third largest employer, so we really need to understand from an economic development point of view how we can phase in changes so that those changes are consistent with the interests of the communities around them and the community at large.

Second, several major hospitals do much more than care for people. Some hospitals in this province, including the Toronto Hospital, Mount Sinai, the Hospital for Sick Children, the Sunnybrook Health Sciences Centre, the London Life Sciences Centre and others, have very significant research functions and are of central importance to economic development. If, as some speculate, the life sciences are to be to the 21st century what information technology has been to this one, the performance of this small group of hospitals will have an important impact on all Canadians.

Very briefly, turning to the future, we believe that the next budget should address the following issues.

First of all, we clearly think that the time for shifting costs onto the province in any way has ended, and clearly, judging from Mr. Martin's statement, the risks of that are greatly lessened.

Second, we think there is an emerging issue on the modernization of hospitals and the medical infrastructure. Much of what we've got is fairly old. This is not dissimilar to the comments of Mr. McIntyre on the highway system. Many of our hospitals date back to 30 or 40 years ago, with some dating back to 100 years ago, and we have a major issue of modernization there.

Third, we need improved predictability. Our business is a long-lead, quality-intensive business and predictability is very important.

Fourth, we would like to see much better information on the strategic decisions respecting health care. If the data to conclusively support some of those directions cannot be mustered, then decisions should be postponed until it can be.

In addition, we would like to see much broader and better partnerships. We think there is a very substantial benefit for private sector assistance in the problems of the Canadian health care system without in any way erasing the fundamental principals of the Canada Health Act.

Finally, anything we can do to celebrate volunteerism is very important. In the Ontario system at the moment there are 54,000 people contributing their time and energy free to Ontario hospitals, and we really need to find ways of celebrating that, ways of making it easier, and generating additional recognition for it.

Thank you very much, Mr. Chairman.

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

Now we will hear from the representatives from the Council for Health Research in Canada, Dr. Lou Siminovitch and Helen Ghent. Welcome.

Ms. Helen Ghent (Representative, Council for Health Research in Canada): Thank you, Mr. Chairman.

Ladies and gentlemen of the finance committee, I'm here to speak to you today on behalf of the Council for Health Research in Canada. Dr. Siminovitch will help answer questions during the round table discussion.

I think it's important that you understand who we are. We're a group of voluntary health agencies and research institutions with lay boards. The objectives of the council are the promotion of stable and sustained quality health research and the enhancement of health research funding in Canada.

Our reason for making this presentation today is to put forward the issue of investing in health research as a strong priority for the federal government, because Canada needs a solid science and health research vision, and the challenge of realizing these goals depends and demands federal leadership.

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We know the Hon. Paul Martin says he's cut up his credit cards, and we think this is a good thing. But we believe that investing should bear dividends. A lot of the money that has been funding various and sundry things has not been bearing good dividends. We believe health research could accrue many dividends if properly funded. I think the dividends could in fact be enormous.

If you look at what has happened in this sector with the cuts of the last few years, you'll see false economies. You'll find that you have workplaces that are seriously out of debt, but they don't have the personnel, they don't have the proper equipment. You'll find empty desks because they haven't been able to recruit or train people. Finally, what happens is that you have a lack of Canadian researchers who are internationally competitive. That doesn't put us in a very good spot.

We have an incredible stable of bright minds, but in order for them to do their research they have to have stable funding, they have to have appropriate laboratories to work in, and they have to be continually upgraded. And we know it has to be long-term, because of course research takes years.

If these components are in place, however, Canada can benefit from the industrial, the technological, and the therapeutic outcomes that in turn spawn new industries, and that of course translates into new jobs. Furthermore, the health outcomes will translate into improving treatment and containing—hopefully even reducing—health care costs.

If you look at what has happened in Canada over the last few years, you will see that Canada has consistently fallen behind all the other G-7 nations in its funding of health research. I refer specifically to the Medical Research Council, whose funding has been continually eroded over the last four years. As a result, we've lost many fine scientists who have left this country to secure funding and facilities abroad. The important thing with this is that with them go the patents and the partnerships designed to transfer the knowledge from the laboratory to the community to the marketplace.

As a representative of the Canadian Cancer Society, I'm only one of thousands of volunteers who work tirelessly to raise money for research. We believe it's necessary. As was indicated in the polls, Canadians care passionately about health care. I'm sure the general population has no concept as to the extent to which health research influences the economy. They really just want cures for disease and they want cost-effective treatments.

The Cancer Society alone has raised hundreds of million of dollars in its lifetime. We give this money to the National Cancer Institute of Canada, which funds some of our researchers. If you look at the record of those investments, you'll see handsome dividends. I can also tell you how frustrated I felt when I sat on the board of the NCIC and saw how little of the incredible research projects were put forward for funding and how little we could fund.

There are also many other agencies that represent other health issues and raise dollars from the public, but there's no question that the federal government has to be the leader. The other thing is that the government should consider substantial tax breaks to agencies who are legitimately funding research. Obviously, it should also think carefully about tax incentives for businesses and people who invest in research.

We are really pleased at some of the things that have happened during the last few years with the federal government in terms of the Canadian Health Services Research Fund, the Canada innovation fund, the networks of centres of excellence, and the Canada health information system. However, until the government commits that, strategic investments now made in knowledge and innovation will be translated into action in the next federal budget and be considered long term, as was stated in the Speech from the Throne, it's really all rhetoric.

Health research should be a priority because it will keep an emerging generation of talented researchers here. Health research should be a priority because government investment in research creates conditions favourable for long-term sustainable jobs, economic growth, and a healthier society. Health research is necessary to ensure that Canadians receive state-of-the-art health care. Health research is necessary to build a modern, integrated health system for Canadians, one that is able to ease fiscal pressures and cost-drivers. Health research is a cultural activity that any G-7 country has an obligation to foster.

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In conclusion, we expect the government to follow through on its commitment to reinvest in health research. We see this as a logical sequence, as the Canada Foundation for Innovation investments in research infrastructure creates the platform of opportunity.

It ensures that the Canadian scientific enterprise is strengthened. It enables it to work and grow in an increasingly worldwide competitive marketplace.

We have three very specific recommendations to make to the federal government.

One is that the federal government should convene a national health research consensus round table. This would clearly demonstrate and help articulate a national health research vision for Canada.

Secondly, we would suggest that the federal government continue to improve the tax policy in order to build upon the 1997 budget, to encourage Canadian businesses and individuals alike to invest, and also to give benefits to the bona fide health charities who contribute to the health research enterprise.

Finally, we believe that you need to double the budget of the MRC by the year 2002, in order to bring us up to speed. Today the National Institutes of Health in the United States average $50 per capita. We in Canada are just over $7 per capita, and that's a dreadful discrepancy.

We feel that if over the next four years the government invests $60 million per year, we'll be up to speed. We believe that these are sane figures and that this is an industry and an investment that will pay handsome dividends.

Thank you.

The Chairman: Thank you very much for a well thought out presentation.

We will now move to a representative from the Burlington Chamber of Commerce, Scott McCammon.

Mr. Scott McCammon (Executive Director, Burlington Chamber of Commerce): I want to start today by congratulating the federal government. In 1994, when chambers of commerce across Canada resolved that the federal deficit should be eliminated by fiscal 1997-98, many people felt that this target was far too aggressive. Now here we are in 1997 with the elimination of the deficit on the horizon.

Of course, with surpluses looming, discussions now shift to how this fiscal dividend should be spent. This is cause for great concern, I think. By suggesting there's a dividend, it gives the impression that the entire battle is over. This is far from true. The remaining battle is the reduction of the debt.

Chambers of commerce have consistently emphasized the fiscal problem surrounding Canada's high level of debt. If Canadians or foreign investors lose confidence in the Canadian economy or Canadian economic policy, interest rates will rise and the debt level will increase further.

In short, the high level of debt relative to our ability to pay for it has stripped our government of the ability to exercise its taxation and spending policies in a flexible, responsive manner.

Currently the federal debt-to-GDP ratio stands at 74%. The Canadian Chamber of Commerce has concluded that a reasonable target is below 60%.

For this reason, chambers of commerce across Canada recommend that fiscal restraint continue to be the government's objective, rather than dividend allocation. The highest priority must be given to debt reduction, rather than to program expenditure increases or to significant tax reductions, until the debt-to-GDP ratio will have fallen below this 60% target.

The only exception to this is the chamber's position that employment insurance premiums be reduced by nearly 60¢ cents on the employee's side, with of course the resulting cut on the employer's side.

Surveys done by the Canadian Chamber of Commerce consistently indicate that payroll tax remains one of the biggest barriers to private sector job creation. A reduction in EI premiums would lower unemployment, increase the number of taxpayers, and, in turn, create revenues for the government. It would allow more people to come off EI and welfare systems, thus reducing government costs.

Today I come with three specific recommendations. One, that the federal government, in recognition of the real fiscal problem from the level of debt relative to our ability to pay for it, continue its policy of fiscal restraint well beyond the time the deficit is eliminated, at least until the debt-to-GDP ratio will have fallen below 60%, which according to the Canadian chamber forecast is expected in 2001-02.

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Secondly, the federal government should give the highest priority to debt reduction by vigorously restricting any increases in program expenditures and by slowly phasing in any significant reduction in taxes, except for the 60¢ cut in EI premiums that has been the subject of past submissions to the government from chambers of commerce.

Thirdly, the federal government should develop a debt management plan and a plan for debt reduction for the next 10 years.

In closing I want to continue on the finance minister's theme of credit cards to suggest that the government is at its spending limit and the bank will not routinely increase its credit limit once again. We can manage the monthly payments now, but just barely, so what do we do with this sudden windfall of money? Do we go out and make more purchases or do we pay down our debt so that we're not suddenly caught if the economy sours? Sure, it would be nice to have new toys, but the answer is that we must reduce our debt.

I'm here today to act almost as a credit manager and make sure the government's credit card remains cut in half.

The Chairman: Thank you very much.

We'll now move to the Toronto Real Estate Board, with Mr. Joseph Bozzo, vice-president.

I believe you're joined by Mr. Fareed Khan, the board's policy adviser on government and legislative affairs, and Pierre Beauchamps, the CEO of the Canadian Real Estate Association.

Mr. Joseph Bozzo (Vice-President, Toronto Real Estate Board): Correct. Thank you, Mr. Chairman.

The Chairman: Welcome.

Mr. Joseph Bozzo: TREB is one of the world's largest real estate boards, representing more than 20,000 realtors in the greater Toronto area. In 1996 TREB members accounted for the sale of 65,760 properties of all types, valued at more that $13.49 billion and resulting in approximately $1.05 billion in economic spin-offs.

During our presentation we would like to address three issues that are important to our industry and its members at this time: the federal government's deficit elimination and debt reduction strategy; amending the Interest Act to allow consumers the right to prepay a mortgage under fair terms and with a fair penalty for prepaying; and the proposed seniors' benefit and the financial penalty it will impose on seniors who use RRSPs for retirement income.

On the issue of the debt and the deficit, we would like to commend the federal government and the finance minister on the efforts to bring the deficit under control, to a point where a budget surplus is foreseeable.

Since 1984 our industry has made annual submissions to the federal government proposing measures to reduce federal spending and attack the country's growing burden of debt. Unfortunately our proposals were ignored until 1994, when the federal government got serious about tackling the deficit problem.

Consumers are finally realizing the first pay-off from the government's deficit fight: sustained low interest rates. The hidden tax represented by high rates has been lifted, allowing homebuyers, homeowners, and businesses to realize substantial savings.

But the battle is not over yet. The second pay-off is yet to come and will only happen when the deficit is eliminated and the upward trend of the debt is reversed. To achieve this, we urge the government to stay the course towards eliminating the deficit and to commit itself to allocating at least 50% of any future surpluses to debt reduction. Only by following this course of action can we hope to see returns in the form of lower taxes and other measures that foster long-term economic growth.

On the issue of the Interest Act, the current Interest Act, which last saw major amendments in 1917, does not allow consumers the legal right to prepay a mortgage of under five years. When the prepayment is possible, it is at the lender's discretion and on the lender's terms.

Realtors have reported huge differences in penalties levied to discharge mortgages of the same terms from one lender to another. In some cases the difference in penalty represents thousands of dollars to the consumer.

Over the past three years TREB and CREA have lobbied the federal government to amend the act as follows: one, to allow a legislated right to prepay a mortgage; two, to establish a standard formula for calculating a prepayment penalty; and three, to require lenders to disclose in plain language the prepayment formula, standard terms and conditions of a mortgage, and the true cost of borrowing.

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Frankly, we've been disappointed by the response—disappointed because the banks rejected a proposal that would have protected both the lender and the consumer, disappointed because the previous finance committee chose to drop the right of prepayment provisions, and disappointed because the government made no mention of this issue in the material released in its legislative package on February 14.

While the government did try to partially address our concerns by including a disclosure provision in its amendments to the Bank Act, we feel this is inadequate and there is no substitute for giving consumers the right to prepay. Let's not forget that a mortgage is the single biggest and most important dealing that most consumers will ever undertake with a financial institution. Given its importance, we don't understand the government's silence on this issue, especially since it was a Liberal government that attempted to amend the Interest Act on two previous occasions, once in 1976 and once in 1984, both without success.

Now to turn to the seniors' benefit. When this plan was announced by the finance minister in his 1996 budget, it was claimed that it would make the system fairer. A study commissioned last year by the Canadian Real Estate Association contradicted this claim and determined that if implemented, this program would result in punitive effective tax rates on seniors who have saved through RRSPs or investments and expect to have a private retirement income of more than $30,000.

Similar conclusions were reached by several other expert studies. These results are of great concern to our members as well as to other Canadians who rely on RRSPs as the basis of their retirement income.

The CREA study concluded that seniors with total retirement incomes, including the seniors' benefit, below $26,000 will be a little better off, and those with incomes over $26,000 will be worse off, while those with incomes greater than $40,000 will be left with considerably less.

In addition, because the seniors' benefit will have a lower clawback threshold than the existing old age security and guaranteed income supplement programs, all additional retirement income will be subject to income tax. The net effect will be extremely punitive, resulting in an effective tax rate of between 50% and 75% for a private retirement income.

Given the impact this program will have on Canadians saving for their retirement, it is surprising the government put forth this proposal without supplying long-term actuarial projections, especially since Parliament voted unanimously in 1986 that no changes shall be made to the retirement program without them.

In light of the conflicting claims being made about the program, we are calling on the government to hold full public hearings on this issue to examine the effective tax rates under the seniors' benefit at all income levels for both single Canadians and married couples, and to ensure that RRSPs and other tax-assisted private retirement savings plans are not undermined, resulting in a major discouragement to Canadians providing for retirement income past the age of 65.

For a generation, governments have successfully encouraged Canadians to use RRSPs. If the seniors' benefit is implemented as proposed, it will not just start unravelling the system, but will betray the faith that we have placed over the years.

Mr. Chairman, thank you for your time.

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

Now we will move to the representative from the Canadian Tax Foundation, Mr. David Perry.

Mr. David Perry (Senior Research Associate, Canadian Tax Foundation): Thank you, Mr. Chairman.

I'd like to thank the committee for the opportunity to participate this afternoon. I would remind you that the Tax Foundation doesn't take stands on budget policy, and I'm going to try to do the same thing. Since my area of expertise is taxation, I'm going to concentrate on the last two words in your terms of reference, “tax relief”.

What I'd like to do is try to put some perspective on the direction tax policy could take in the 1998 and subsequent federal budgets. I have sent to the committee copies of the most recent OECD survey of tax burdens, which you're probably familiar with now. I do an article every year in the tax journal summarizing this, and it's the manuscript I've submitted.

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I'd just remind you, though, that the OECD data show that our tax burden is really not out of line with industrialized countries. We are 17th from the top, which is not bad at all. It's well below France, Germany, and even New Zealand, that pillar of fiscal reform. We're a little above the United Kingdom and unfortunately well above the United States, that undefended border. While we're below the average OECD European country, we're above the G-7. The G-7 average is influenced greatly by Japan and the U.S., which are relatively low-tax jurisdictions within the OECD and the industrialized world.

The other thing to remember in looking at overall comparisons of tax burdens using tax-to-GDP ratios is you get an approximate idea of the tax burden, not a complete one, but you don't get an idea of the services that have been provided by those taxes nor the fiscal stance of the governments. Obviously our higher ratio in Canada relative to the United States is at least partly attributable to the richer public services we enjoy on this side of the border. Certainly if you look at the last 10 years, the increase in our overall tax burden in the ratio is part of the price we've had to pay for deficit reduction at both the federal and provincial levels.

Looking further at the OECD figures you can see that our tax mix is quite different from most of our trading partners because of our very heavy reliance on personal income taxes. We have the sixth highest personal income taxes in the OECD. We also have the distinction of having the highest property taxes in the OECD. Social security levies in Canada, on the other hand, are below average and consumption taxes are generally considered to be under-utilized compared to most OECD countries. Again we have the problem with the border, and we're well above the U.S. level, so that makes it a bit sticky.

These overall comparisons have implications for those responsible for dividing up the fiscal dividend, whatever its size. Personal income taxes would seem to be obvious targets. I did a little table based on Statistics Canada's national income and expenditure accounts to provide figures as late as 1996. These show that personal income tax collections, expressed again as a percentage of GDP, have risen dramatically in the last 10 years since 1985. The interesting thing is that they've also risen in each of the last three years when no specific rate increases were introduced and when provincial governments were introducing rate reductions. Clearly the favourable elasticity of the personal income tax system is kicking in again.

Until 1974, this automatic growth in the personal income tax system was tempered by propitiously timed tax cuts, usually just before election time. After 1974 we had an automatic indexing system that significantly reduced the rate of growth in the personal income tax system. The fact that we have a 3% threshold for indexation of the personal income tax system is once more becoming an issue, because for one or two years you can live with it quite nicely, but the cumulative effect over a longer period tends to be significant.

The table appended to these notes shows that corporate income tax collections are recovering from the recession and have begun to reflect the 1988 round of tax reform. They've just risen now again to the 1988 levels. While this is interesting, it's really out of bounds for the 1988 federal budget. The whole issue is under review by the Mintz committee and there will be a significant amount of material coming from that organization.

Our traditional payroll taxes have been criticized for their short-term effect on employment. The room that may become available if EI levies are dropped will certainly be eaten up by the proposed increases in the Canada Pension Plan levy.

Incidentally, I provided the committee with a copy of our most recent monograph on general payroll taxes, written by Jonathan Kesselman at UBC. Unfortunately, I couldn't bring more than one copy. We're moving offices almost as we speak and I couldn't find any more copies. We'll send them to the members as soon as we find the box.

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The book is interesting, because it shows that payroll taxes can be used as effective and economically efficient revenue raisers without the negative short-term reductions in employment simply by levying the tax on workers and not on employers. The Northwest Territories has this at the moment and it's very effective, although done for other reasons in the Northwest Territories.

You can see again from the table that sales and related taxes don't have the same elasticity as the personal income tax. It's hardly surprising that such taxes have fallen back almost to their relative importance in 1985, despite some significant rate increases at the federal and provincial levels, although the recent recovery in consumer spending isn't reflected in that table because it doesn't pick up the bump at the end of 1996 and the strength in 1997. However, the picture will probably not change all that much, because provincial retail sales taxes, which are a big part of it, miss a lot of the service sector and over the long term it's operations in the service sector that are growing faster. So a sales tax that doesn't catch personal services is a sales tax that's going to fall behind.

The past three budget rounds in Canada have been almost unique in Canadian history because they haven't contained any increases in excise taxes. They haven't had the traditional cent or two per litre on gasoline. They haven't had the traditional one or two cents on cigarettes. They haven't increased liquor board mark-ups. Without that kind of regular increase in specific taxes, the relative importance of those taxes will fall behind.

These are just quick notes to indicate that the tax system is changing even if we do nothing. Just sitting there, we're going to have a system that is quite different from the one we designed nine years ago, and certainly from the one we designed in 1972, and even the one we designed much earlier than that. So it's a matter of not just sitting there; it's a matter of perhaps doing something.

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

Our final presentation will be made by Dan Leckie, Toronto City Council.

Welcome.

Mr. Dan Leckie (Councillor, City of Toronto): Welcome to you. On behalf of the mayor, Barbara Hall, and myself and other members of the city council, welcome to Toronto.

The role I play, besides my being a city councillor, includes membership on the Toronto Hydro commission, and I'm the president of something called the Toronto Atmospheric Fund. As well, I'm involved in international negotiations with the International Council for Local Environmental Initiatives, which will be meeting in Kyoto and Nagoya, Japan, just before our Canadian government meets in December with the conference of the parties and the UN agencies to come to an agreement on climate change negotiations. It's in regard to that issue that I would like to speak to you today and make some clear connections.

You face a really difficult challenge. Canada is party to agreements on environmental constraints that could have a devastating effect on the Canadian economy if mishandled. We have the embarrassing situation that our Prime Minister had in the United Nations earlier this year of having signed agreements, yet at the same time our greenhouse gas emissions have increased by 11% instead of moving towards stabilization, as we had promised.

I think you all know that tax initiatives or subsidies aren't the way to go. They would create significant problems for the Canadian economy. But you're going to be faced with the potential of capping and trading agreements that the Americans and Europeans are going to propose and that could also have serious effects on the Canadian economy.

What I would like to do today is just present you with an option we feel has been successful in a number of Canadian cities. You may wish to follow it, and over time it doesn't need to cost a lot of money. This is the option of creating a national atmospheric fund. I just wanted to present to you how it could work, and how it could work very successfully, to meet this challenge.

The city of Toronto established an atmospheric fund some four years ago. It started off as a $19 million fund. The value of the fund is now $26 million, so none of the capital has been spent. The fund has been allowed to grow.

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Basically what the fund does is make loans to other city departments, other sectors within the public sector. By so doing, it has managed to make upwards of $1 million in profits per year, which it then gives as grants to the community sector. It also has managed to grow with the cost of living growth allowance so that it actually has increased in value over the period of time.

The really successful part of what the fund has been able to do is it has been able to invest in environment projects that have significant benefits to the quality of life, the environment, the jobs, and the overall fiscal situation in the city of Toronto. This is something that I think could be replicated on a national basis.

I'll just give you a couple of specifics about the fund's operation.

One of the most significant loans the fund got involved in was a $16 million loan back to the city to systematically change street and lane lights throughout the city to a more efficient technology. The net result of so doing is about a six-year payback of the initial investment, with a very profitable interest rate to the atmospheric fund and the creation of some hundreds and hundreds of jobs. Also there has been a $2.2 million saving per year in energy costs and maintenance costs to the city of Toronto, in that one budget sector alone.

When you consider the scale of energy costs that a city faces, both within its corporate responsibility area and overall, you start to get a sense of what would be possible in terms of savings if only there was a satisfactory investment plan related to those savings.

To speak to this in a very simplistic manner, the new City of Toronto Hydro Commission will have sales of $3 billion of electricity per year. If you have a systematic program of conservation, we know that you can easily make arrangements so that savings can be in the 15% to 30% range, through an appropriate investment mechanism, most of those with four- to seven-year payback structures. The net impact, as you can well realize, is that you could save somewhere in the range of $300 million to $400 million on an annualized basis after the end of your investment program.

That's related only to the use of electricity. It doesn't include any other sources of power—natural gas, oil, coal—that are also consumed in a city like Toronto.

So I put to you that there is a concept available to you of establishing a national atmospheric fund, which could have the benefits of meeting Canada's greenhouse gas emission targets. I point out that while the country has increased its greenhouse gas emissions by 11% over the terms of the Rio agreement, the city of Toronto has actually decreased its greenhouse gas emissions by 6%, despite the overall Canadian average.

It did it by a variety of strategies, of which the atmospheric fund is only one part. I will definitely acknowledge that. But most of the factors are not related to reduction in growth. Most of the factors are related to intensification of use, as well as investments that have been made in energy-saving technologies within the city.

It is accomplishable. We've reduced our emissions by 6% while Canada increased its by 11%, and it's actually been something that's increased the quality of life and the number of jobs.

I point out to you, very definitely, that these investments also increase the energy efficiency and competitiveness of downtown buildings.

When you look at the price structure of large cities and you try to look at where it is flexible, everybody instantly goes to property taxes; cuts the taxes. But you also have to look at indirect property taxes, such as the cost of energy services to a building, that come from public sectors. All of our buildings have very high electricity costs. If you can cut those costs by 30%, then you can be very effective.

One of the things the tariff has done, other than the street and lane lighting program, is we have been part of setting up something called the Better Buildings Partnership. It is with the BOMA, the Building Owners and Managers Association, of Toronto. They are a major member of the partnership. We've generated over $100 million of energy retrofits in downtown commercial buildings through a city-based program.

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Most of the time, the only role the city played was the securitization of the loans. Buildings like First Canadian Place went out and got their own financing. We were the backstop, that's all. It was a very effective fund.

Just to wrap up, you face a challenge. Your minister and the Minister of the Environment are already negotiating with the Sierra Club on this concept. The Sierra Club has put in a formal proposal. The challenge you face is how to meet greenhouse gas emission targets without a major disruption to the Canadian economy.

I think that by investing in a national atmospheric fund, which could be operated through cities across Canada in a very reliable, public sector manner, you could both realize those emissions reductions and help the Canadian economy grow and be more competitive.

Thank you.

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

Now we'll move to the question and answer session. We will begin with Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman. I thank those who presented their briefs today. I have three questions.

Mr. McIntyre, I appreciated your input, in particular the last point on your paper regarding the greater percentage of highway fuel taxes being directed to infrastructure maintenance and new construction. I assume it's your opinion that a designated portion of the fuel tax should be established to go specifically to highways. The previous government and current governments rejected this, despite proposals put forward.

I guess the only comment would be that I would hope your organization would keep pushing for that as well.

Mr. Keith McIntyre: Yes, it was the intention that a threshold would be set, because we are falling way behind in that in comparison with most other nations.

I think I was persuaded into this thinking by a recent article in Reader's Digest by the president of the Canadian Automobile Association, Mr. Brian Hunt. He pointed out comparisons to other nations—as well as the unsafe conditions in which we don't have road surfaces, particularly in the northern parts of our country—that have shoulders to allow passing and for automobiles and trucks that require maintenance on the side. He makes a very compelling argument in what I think was one of the editions of Reader's Digest produced in the last few months.

Mr. Dick Harris: Thank you.

Turning to Mr. Bozzo, I know that the Canadian Real Estate Association has done a lot of work on taxation levels in Canada, in particular in relation to the new seniors' benefit. I think if you look at the tax effect that comes into play under the new proposals, it becomes very clear that people who throughout their lives privately saved for their retirement and made sacrifices in the early years so they could have an income that would be appropriate to the lifestyle they wanted to have are in a position of becoming—this is in my opinion and CREA's—severely penalized for making that effort. I wonder if you could just take a moment or two to talk about that.

Mr. Joseph Bozzo: Sure. If you don't mind, I will let Pierre Beauchamps from the Canadian Real Estate Association give you an answer.

Mr. Pierre Beauchamps (Chief Executive Officer, Canadian Real Estate Association): Mr. Chairman, basically, the research work that has been done supports the comments you just made. Our big concern is this. While we recognize that change is often absolutely necessary, we also recognize that we have to study this type of topic in depth.

With the professional studies that we and many other groups in Canada have done, we've come to the conclusion, again supported by research, that couples with a combined income of between $26,000 and $40,000, for example, will see their tax rate jump from 26% to 46%. Obviously, we have to be concerned.

We're suggesting very strongly that there has to be a forum for public hearings.

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We were very happy last week when we read the announcement by the minister that there would be some research done in order to better understand investment by individuals in RRSPs and how these gaps and these increases in tax rate are occurring, or whether or not they are. We're glad it's been recognized by the government that there are some questions that absolutely need answers before we proceed.

So we're simply asking, very strongly, that legislation be postponed and that we at least get the required information, because on the basis of the proposal given to us—and as you well know it's taken a number of actuaries in Canada quite some time to come up with these figures—our understanding is that there will be some major gaps with groups, not with groups that are going to have retirement income in the huge amounts, but with people in the group that I mentioned earlier, the couples with combined incomes between $26,000 and $40,000. My goodness, we're not talking about the people with $100,000, $200,000 or $300,000.

Does that answer your question?

Mr. Dick Harris: Yes, it does. Thank you.

I have one more short question, Mr. Chairman, if I may, for Mr. Perry.

Unless I'm hearing you wrong, Mr. Perry, it seems to me that you've somewhat downplayed the fact that our personal income taxes are, I think, about 25% higher than those in the OECD countries and an astounding 50% higher than the average of the G-7 countries. I understand those are the figures.

I really believe that this gives us a couple of disadvantages. Number one, our biggest trading partners are countries in the G-7, but also, just talking about the brain drain to these countries given that high disparity between the PIT levels...I think this is a really important thing. You've used the words “slightly higher”, I think. It warrants harsher language than that.

Can you talk about that for a minute?

Mr. David Perry: My background is English so I tend to understate. I'm sorry about that.

It's a significant problem. You've mentioned the brain drain, but the problem is those high marginal rates kicking in for all the managerial and scientific talent that we're trying to attract or retain in order to build the economic engine, stay competitive and stay up to date in a very competitive international economy.

The other thing is that because this personal income tax attacks both labour income and investment income, you're raising the spectre of double taxation of savings, once when the income is earned and the savings are kept after tax and the second tax hit when those savings earn some interest and the interest is once again taxed.

That makes it difficult for the people we're talking about to accumulate retirement savings beyond the minimums required through the public plans. It makes it difficult for us to compete with those other jurisdictions where those individuals face a significantly lower marginal rate. We're not talking about top marginal rates; we're talking about marginal rates for the managerial class, for the scientific class.

This is something the tax system will have to address. The tax system will have to look at it because it is becoming more serious.

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

[Translation]

It is your turn to ask a question, Mr. Desrochers.

Mr. Odina Desrochers: First of all I'd like to thank all those who have come today to present their views and their concerns about the Canadian economy.

My question is addressed to Mr. David MacKinnon, from the Ontario Hospital Association. Since the Standing Committee on Finance began its hearings last Tuesday in Vancouver, unions, associations and other health related organizations have maintained that the reduction to the provincial transfers implemented by the Liberal government are an important factor in the deterioration of our health services. Does your association share this view, Mr. MacKinnon, and do you think that before it begins creating new programs, the federal government should pay back the money that it did not deliver to the provinces?

[English]

Mr. David MacKinnon: Mr. Chairman, I think the Ontario Hospital Association has always recognized that deficit reduction does come at a price. We have also recognized it's our responsibility to restructure operations as fast and as quickly as possible to accommodate and to achieve as many savings as we can achieve.

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We have in the last few years saved some $700 million in terms of the Ontario taxpayers' contributions to hospitals. We have not done this easily, and not in a way that we would always want. Basically our view has been that we have a significant contribution to make to the cause of deficit reduction because we will gain significantly from it.

However, there's no question that the federal cuts in transfers to the province have been very difficult to accommodate. There is also no question that we need to talk to unions in a different way so that we can achieve the flexibility we need to accommodate the change very rapidly. This is an issue that is ongoing every day.

I don't think this situation can be dealt with by looking back to the past. From Mr. Martin's statement to the committee, we think we're into a somewhat better era in terms of federal-provincial fiscal relations. We hope that continues. We hope that as the deficit picture turns we can benefit significantly from it, knowing that we have contributed significantly to its solution.

[Translation]

Mr. Odina Desrochers: I have a second question addressed to Mr. Scott McCammon from the Burlington Chamber of Commerce. One of your main recommendations is that the federal government should set up a plan to better administer the debt and reduce taxes over the next 10 years.

Should this plan take into account the commitments made by the federal government to the provinces, particularly with respect to the transfer payments that were substantially reduced over the past several years?

[English]

Mr. Scott McCammon: Unfortunately, you're beyond my level of expertise. What the chambers generally have looked for is some sort of a strategy in terms of long-term deficit and debt management.

I'm sorry. I can't answer that.

[Translation]

Mr. Odina Desrochers: Thank you.

[English]

The Chairman: Mr. Riis.

Mr. Nelson Riis: Thanks, Mr. Chairman. I have two short questions. One is to Mr. Leckie regarding the energy retrofit program he outlined, which I thought was extremely interesting. I'd appreciate his views in terms of its applicability across the country in terms of a very cost-effective way in the long term of creating jobs.

My second question is to Mr. Perry. I appreciate all of the information you provided us in terms of the comparative tax levels and rates. It's a question, Mr. Perry, that has always perplexed me, and I'll use your expertise to seek some guidance on this.

When I look at the overall tax revenues that countries obtain as a percentage of their gross domestic product, I think, looking particularly at Europe where some countries have relatively low rates, others have extremely high rates.... As you say, Canada comes in about the middle.

In terms of brain drain and companies reallocating to lower tax regimes, do these countries, such as Norway, Sweden, France, Luxembourg, the Netherlands, Austria, and Germany, have brain drains there? Do companies move to other jurisdictions to take advantage of lower tax regimes in the European experience? Is that a fair question?

Mr. David Perry: If I can weasel out of it, certainly it's a fair question.

The issue of what you get for your tax dollar is a critical one, especially when you're looking at the Scandinavian countries. For many levels, the benefits provided more than offset the high tax rate. You don't get the same emigration. Also, they are not blessed with the same kind of neighbour we are, which is a critical factor. Someone supposedly speaking the same language with a relatively open border and so on makes it difficult in Canada to counteract the brain drain.

The Europeans are having trouble attracting capital in some cases because of tax levels. There is the situation of the European countries, the first ones to develop extensive use of tax havens in international planning in order to minimize the amount of tax that appears within the jurisdiction with the high taxes. This has always been a problem for the high-tax jurisdictions in Europe. It's interesting that some of the high personal income tax countries in Europe are now looking at other variations. They're looking at flattening the system to a certain extent, but they're also looking at a different system of taxation income, the thing I touched on earlier, which means in Sweden a significantly lower but flat rate of tax on all interest dividends and capital gains.

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Mr. Nelson Riis: Thank you.

The Chairman: Mr. Leckie.

Mr. Dan Leckie: To answer your two questions, the first one was on applicability and the answer is yes, it is applicable. The Federation of Canadian Municipalities has what's called a 20% club. It's cities across the country that have joined in making a commitment to reduced greenhouse gas emissions. They've all been exploring ways to do so. Every city, every municipality, has a large building stock of their own, public sector buildings as well as hospitals and schools, which could easily be subject to significant retrofits. Most of them would be willing to do so if they had the financing available, and the financing could easily be recovered if there was a loan program put in place.

Our proposal would be that the public sector is the first area where such a program could be very quickly applicable. So, yes, I think there are hundreds of millions of dollars worth of savings available through the direct investment in municipal buildings, with the money being recovered by a national infrastructure program or a national atmospheric fund.

The second question is an easy one to answer. All of the work we have done indicates very clearly that energy conservation is a labour-intensive process, whereas energy consumption is a very capital-intensive process. Energy investment, in order to put new energy sources on line, is incredibly capital consumptive, whereas energy conservation creates far more jobs. We actually have commissioned a study to get hard numbers on the relationship between the two, which should be available in the new year. I'd be glad to make it available to people. But we know for a fact that the construction jobs created in downtown Toronto as a result of our work are in the area of 10,000 jobs just in the last three years, and most of those are electricians and carpenters and people doing energy auditing. It's very hands-on work and with very good paybacks and very easy financing.

So, yes, it's a great way to create jobs in the Canadian economy while increasing the efficiency of our building stock.

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

Mr. Jones.

Mr. Jim Jones: Thank you, Mr. Chairman.

The U.S. has half our unemployment. They have a lower tax rate, and I know that both Scott and David were commenting on the high premium on UI. Without reducing the UI and then bringing in the Canada Pension Plan premium increases, is that going to have any impact on jobs, or are we going to lose jobs with that implementation?

Mr. Scott McCammon: From my perspective, clearly any time the Canadian chamber surveys business throughout Canada, payroll taxes are the biggest impediment to job creation. So the extension of that is that any reduction in payroll tax—and I think I heard that supported in terms of the employer contribution versus the employee contribution—means employment. Clearly the private sector is the sector to create jobs, sustainable jobs, in the future.

The relationship to CPP I'm not as familiar with.

Mr. Jim Jones: What I'm advocating is that you reduce the UI to offset the premium increases to CPP, but by not doing that and introducing the premium increases to CPP, are we going to have a serious impact on job creation? Are we going to lose jobs, or will there be no effect? That's what the question really is.

Mr. Scott McCammon: Not being an economist, my inkling is sure. If CPP is a payroll tax, if you're increasing that without a corresponding decrease in EI, it is an impediment.

Mr. David Perry: An economist is torn here between short term and long term. Certainly the research has shown that the short-term effects of higher payroll taxes is a reluctance to hire, if I can put it that way. Particularly for the bottom end, the cost of CPP, UI, workers' comp, and any sort of benefits that are provided for an employer tend to be highest, in percentage terms, at the bottom end of the wage scale, because it's more economic to look at it over time for the senior people rather than new hires in order to carry an increased load.

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In the longer term, though, research in the United States, which has twice the overall payroll tax burden we do, shows that the effect is eventually passed along to the employee in the form of lower wages than would otherwise prevail. In the long term and in most sectors the payroll tax shouldn't influence employment. The economists for years stuck with that, while business people said they couldn't afford to hire new people. Then they came up with the short-term/long-term thing, and it's a matter of what trade-offs you want in the short term for the long term, or vice versa.

Thank you.

The Chairman: Thank you, Mr. Perry.

A final question for Mr. Valeri.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Mr. Chairman.

I just want to pick up on what Mr. Jones said, because that's the area I want to discuss as well.

You indicated in your response that payroll taxes in Canada are less than what they are in the United States. As Canadians and as a business community we tend to continue to make the comparison to, as you said in your commentary, the undefended border of the United States and how we have to be competitive. I'm glad you made that comment, and certainly this committee will take that information and make reference to it.

The point I want to go to as well is the comment made by the Chamber of Commerce, where—and correct me if I'm wrong—the message was to deal with the debt and ensure that there is a paydown of that debt, because there is a fiscal dividend, as it was described earlier, when you no longer have to pay the interest on that amount of debt.

You go on to say in your second recommendation that you would want to slow or restrict any increase in any other program expenditure, with the exception of a 60¢ cut in employment insurance premiums. A 60¢ cut in employment insurance premiums would essentially translate into a $4.2 billion expenditure for the government, which would in turn have a major impact on either the deficit or the amount that may be paid on the debt.

I'm just trying to reconcile the fact that payroll taxes are less here than they are in the United States, when we compare them—and the fact that the United States is our competitor and where we'd like to do business. How can we reconcile the fact that you're calling for that type of substantial cut in employment insurance in an area of the taxation system that is competitive right now? I'd like you to make some comments on that.

My last comment is to Mr. Bozzo with respect to the seniors' benefit. The minister said—and I just want to reiterate for the benefit of the committee—that when the seniors' benefit legislation comes forward there will be ample opportunity for public consultation on that benefit and there will be an attempt to have a broader-based discussion of the three pillars involved in our retirement system, not only the seniors' benefit but also the RRSPs and registered pension plans, along with the Canada Pension Plan, because the debate needs to include all of those pillars since they are all part of our retirement income system. I just wanted to make that comment since you brought it up in your briefs. Perhaps I could get a comment from the chamber now.

Mr. Scott McCammon: I guess the bottom line is that you're here to decide direction and make choices. My understanding of EI right now is that there's an expected $5.7 billion surplus this year, which will bring the surplus balance or the cumulative total to just over $12 billion. Again, not being an economist, my understanding is that really only a $5 billion surplus is required in that fund, so there's room within the fund itself to make the reductions.

Mr. Tony Valeri: As a result of the request by the auditor general in 1986, all the EI premiums are going into consolidated revenue. There is no separate fund, so when you say there is a surplus there may be an accounting surplus on paper, but if there's any reduction in employment insurance it does affect the bottom line of the government.

I think that's a very important point. We're not out there making statements that we want to have drastic cuts in employment insurance, but at the same time not realizing it will affect the bottom line of the government. It has been stated by a number of economists that when the fiscal dividend does appear, it will appear in a very small amount initially and it will grow over time. The purpose of the committee is to make recommendations so that we can sustain ourselves on a balanced budget track, as well as continue to pay down the debt and make some strategic investments. I just wanted to make sure we were able to put that information on the table.

Thank you.

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The Chairman: Mr. McCammon.

Mr. Scott McCammon: I guess there are two sides to an income statement as well. There is the expense side, which is the EI premium, and there is a revenue side for the government. So it's a consolidated item, but I guess the philosophy is that if you're reducing the amount of payroll tax and there's job creation, job creation creates more taxation. It also takes people off the social safety net, so there are expenditure savings in other areas.

Mr. Tony Valeri: It's just that when we're this close and are able to eliminate the deficit and stay on a fiscally prudent track, it's kind of difficult to sometimes make those decisions based on an event that might happen.

The Chairman: I'll go to Mr. Szabo for a very short follow-up.

Mr. Paul Szabo: Just in regard to the mathematics, we're talking about one time. Keep in mind that when we went through the last recession, the same paper accounting was up there in the $12 billion range of deficit. It can move very quickly. So it's not totally out of line.

I think the finance minister made a very important point that we can't forget. It has to do with dealing with a spike or the potential of a spike. Anything we do has to be sustainable. We have to be able to put it in and make sure we can keep it there, so that Canadians have the security of knowing that once it's there, it's theirs.

Mr. Scott McCammon: That's also why we offer a caution in terms of this fiscal dividend that we're looking to spend. If we suddenly end up in surplus budgets, that spike changes on the entire economic picture.

The Chairman: Thank you very much.

A final question, Mr. Jones.

Mr. Jim Jones: This gentleman can go ahead.

Mr. Pierre Beauchamps: I just have a comment in support of what you mentioned.

We welcome the government's approach to researching everything that deals with the retirement income system in Canada. Like many other groups, such as the retirement income coalition to which we belong, we have a very profound sense that Canadians are looking for answers so that they themselves can do planning in the future. Tinkering with RRSPs or coming up with a seniors' benefit or whatever is very confusing at the moment. We have to use plain language to explain to Canadians where it is we're going. We certainly applaud and welcome the government's search for answers, not only with the seniors' benefit but with the other items as well.

The Chairman: Thank you.

Mr. Jones, did you have a final question?

Mr. Jim Jones: It's more of a comment. I asked this question of the minister out in Vancouver. I know the expectation is that when you collect EI, it's going to go for employment. When you collect for Canada Pension, it's going to go for pension. Do you think it's ethical to take taxes that you're collecting separately for one thing and put them into the general revenue to pay off something else?

Mr. Scott McCammon: I don't know whether I have the expertise to argue with the auditor general in suggesting consolidated statements. I think it touches on a lot of the things that I heard today in terms of some of the spending on infrastructure coming from gas taxes and road taxes. You have a bigger issue there than I think I can answer right now.

Mr. Jim Jones: I served nine years on municipal council. I thought it was interesting that the different levels of government above us could put restrictions on the money we collected. It had to be spent on certain things. Yet when the provincial and federal governments collect money from the taxpayers, they can just lump it into anything they want. Whatever they're collecting them for should be self-funding.

Mr. Scott McCammon: I think it's also interesting that municipalities are not allowed to run deficit financing.

Mr. Jim Jones: That's right.

The Chairman: Would you like to ask a question, Mr. Harris?

Mr. Dick Harris: Certainly, I do have a question. If I can have the final question, then why not?

On this same subject, I would like to ask Mr. McCammon—or maybe Mr. Perry—to be a little more specific. The fact is that the governments have a designated EI tax or EI requirement. It is a designated amount based on whether you're working or not.

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I think it does beg the question of whether it is ethical that the amount taken as a direct result of someone working be put into consolidated revenue. I happen to think not. I happen to agree with Mr. McCammon that a surplus is in there that does not belong to consolidated revenue. Therefore requesting a 60¢ decrease in the EI is logical.

Would Mr. Perry agree with that?

Mr. David Perry: There's no code of ethics for tax policy makers, unfortunately.

Mr. Dick Harris: I think we're all aware of that.

Mr. David Perry: I think they are checked on it every five years.

When you're looking at the tax system overall, though, the idea of earmarked taxes has really gone out of fashion in the last few decades. Sometimes it's a definite hindrance to those objectives you want to further through earmarked taxing, because you limit the resources applied to a particular activity because you are restricting that activity to the related taxes. The highway system is the classic example of that sort of thing, where a gas tax is not enough to fund new highways, therefore you don't build new highways. The Americans have used earmarked taxes a lot for that sort of thing and they have fallen on the same problem.

The unemployment insurance premiums are so big that really questions of ethics have to be put aside at this point. If you are looking at a 60¢ drop in the EI rates, it has such a tremendous impact on the federal deficit that you can't look at whether or not it's appropriate to link premiums directly to the expenditures.

If you look at something like Jon Kesselman's book on general payroll taxes, as I mentioned earlier, the EI premiums are working not too badly as a general payroll tax. The money is all going into general revenues. It's used coincidentally to fund unemployment insurance, but it's a very effective revenue raiser. It has some costs in short-term unemployment and so on, but in terms of bringing the bucks in it's quite effective.

There's an interesting problem. The natural thing is to say that the reductions in EI can go to cover increases in the CPP premiums. It sounds great if you're looking at the tax system overall, but if you're looking at the finance minister's dilemma, that's taking the deficit out of the CPP and putting it back in his books.

Mr. Jim Jones: But if we have a surplus this year or early next year and then you're going to use that surplus, the new surplus when you truly balance the budget and start new programs, and UI is the one that helped you get that surplus, don't you think you should give the unemployment insurance premiums a break?

Mr. David Perry: If it's an effective way of raising revenues—and by “effective” I mean is it reasonably fair, is it reasonably economically neutral, does it not penalize certain areas—if it meets the general criteria of a good tax, then I think you're forced to look at it.

Mr. Jim Jones: We've been told by several people who have come before us that high taxes in the UI area cost jobs. Why would we want to keep it high when we don't need it high?

Mr. David Perry: It's a difficult problem. If they were small amounts, then the principles would be much easier to cope with, but when you're talking about $4 billion dropped off the surplus, or the deficit, whichever the case may be, and when you're counting on that balance to be used for a number of different things, whether increased spending, debt reduction, or tax relief, then you've blown your whole program in one move. That's the difficult part. It's a practical thing.

The Chairman: Mr. Jones, I think you're satisfied with that answer.

Mr. Jim Jones: No, I'm not, but....

The Chairman: But that is the answer.

Mr. Jim Jones: The other side of the coin, the one that hasn't been answered, is if we do reduce it, how many new jobs can we create? Maybe the jobs we create can offset the taxes we lost.

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The Chairman: That is the debate.

Mr. Jim Jones: That is the debate.

The Chairman: You're forwarding your position and I appreciate that.

Unfortunately, this is the end of this round table. It's been a very interesting day here in Toronto. We've heard many people promoting different ideas and presenting different perspectives to our committee. It will go a long way towards helping us as we get ready to write the report and the recommendations to the Minister of Finance.

On behalf of the committee members, I'd like to express to you our sincerest gratitude for your presentations.

Thanks again.

The meeting is adjourned.