FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, October 29, 1997

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I call this meeting to order.

I'm sure this is going to be an interesting round table. We have a representative from the Canadian Chemical Producers' Association, Mr. Richard Paton. Also with us we have representatives from the Conference of Defence Associations, Colonel Gilbert Saint-Louis and Colonel Sean Henry, and from the Hotel Association of Canada, Tony Pollard.

As you know, this committee has been travelling across the country, and we are now of course participating in Ottawa hearings to address some of the key issues related to the budget. We're looking for ideas and wisdom from our witnesses so that we can present to the Minister of Finance some recommendations that essentially come down to one key issue, and that is how do we improve the quality of life for Canadians and what choices do we have with this upcoming budget that will lead us to that conclusion.

On behalf of the committee, I'd like to welcome you all. We'll start with the representative from the Canadian Chemical Producers' Association, Mr. Richard Paton, president and CEO.

Mr. Richard Paton (President and CEO, Canadian Chemical Producers' Association): Thank you very much.

This my second year appearing in front of your committee. Last year I learned that a few short messages are probably more useful than a more long-winded presentation, so I'm going to be quite short here today.

I'll tell you a little bit about us as an association, because that frames the context within which we regard the budget and the economic statement of the minister, and give you basically three messages, as you can see in the document we have circulated.

First of all, we represent 72 chemical producers in Canada, which is about 90% of a $15 billion industry of manufactured chemicals. We are a very strong exporting sector and, as a result, we must be globally competitive to survive. Those of you who know our industry—I know Mr. Gallaway does because there are a lot of companies in his riding—know that we have very global companies: Dow, Du Pont. These companies are highly globalized and have production facilities all around the world.

We have an environmental management program called Responsible Care, which is a condition of membership. It's probably a world-leading voluntary industry program that sets an ethic of responsibility for the environment and transparency of information and is a very rigorous program, including verification of our members' reporting on environmental standards and achievements.

Our products are probably part of everything that you have in your home and your car and your building. Chemical products are parts of many other industries in Canada: steel, plastics, vehicles, paper industry, agriculture, information, technology, etc. So often the products that we produce are not products that you see in final form in your home, but are part of those products.

By having a strong chemical industry, we effectively help produce jobs and growth for the economy, but we also produce important inputs to pretty well the whole Canadian economy and allow that Canadian economy to produce even more jobs and growth for the country.

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After giving you that background, I'll give you our three messages. First, we are very strongly supportive of the government's direction to reduce the deficit and the debt and the debt-to-GDP ratio. Our message is to stay the course on balancing the budget and then reducing the debt. We think government fiscal responsibility is a very positive factor in convincing potential investors that Canada is a viable location and in attracting new chemical investments.

I have been down to places like Houston, and when I explain the fiscal situation in Canada and what we have achieved on the debt and the deficit to potential investors—more the deficit than the debt—people are really quite surprised. When they see our inflation rates, the cost of doing R and D in Canada—which is quite low—and the positive economic climate that the federal and provincial governments have created, in international eyes it definitely does create a much more positive view of Canada as a place to invest in.

Although the deficit is almost eliminated, I guess our message would be that if 32% of our revenue is still going to debt payments—a number I remember very well because I use to work for the Treasury Board in the federal government—one has to realize that we're already paying out a huge amount of our tax revenue for debt payments. As Mr. Martin points out in his statement, a 1% increase in interest rates means $1 billion in expenditures.

As we saw in the last few weeks or days, the market can be very unstable. I think we have to be very careful and understand that the deficit is almost eliminated but the debt is still there. It's a serious issue and we should continue to work to reduce it.

We think that the debate now should focus on national priorities, on building a strong economy and a strong society. There probably is room for targeted program expenditures but debt reduction and some personal tax reduction have to be core priorities.

Our own view in our association is that using a formula like 50% to debt reduction and 50% to new expenditures is maybe useful for the government, but one should not necessarily see every expenditure in that form. Expenditures should be related to priorities as opposed to following a particular formula.

Second, in a stable fiscal and competitive environment the private sector can and will deliver jobs.

Last year when I was here, Ron Duhamel, I think, asked me the hard question: are you guys creating jobs? And last year I don't think I was able to answer in a very positive way. This year I am able to answer in a positive way, and that is an answer that I can give which is strongly related to the economic climate created by the fiscal discipline the government has shown.

The chemical industry will invest almost $4 billion in Alberta over the next two to three years. This represents construction jobs and long-term high technology jobs. It also produces a lot of other jobs in the IT sectors and for suppliers, etc. In the construction sector alone, it's estimated that 3,000 jobs are going to be created per $1 billion of investment. This means 12,000 construction jobs in Alberta alone. Given that about 80% of production from Alberta investments will be exported, the government estimates that this level of direct investment creates about 144,000 new jobs for Canada over five years.

The major competitiveness factors are right in Alberta, partly because of the way petrochemical feedstock prices are, but also because of the fiscal environment that we have created as a country.

However, competitiveness—and I guess this is the message I've learned since I've moved into this industry—is somewhat fragile. Countries are constantly changing their tax structures. And the U.S., for example, is rapidly changing its electricity system in order to be much more competitive and cost-effective. We have to be constantly on our guard in order to keep ourselves in a competitive situation with respect to all the elements that affect our industry, like transportation, taxes, interest rates, etc. If that business and policy environment is right, we can make a significant contribution to jobs. I've just illustrated the investments in Alberta, which really show tremendous job growth.

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My last point is that Canada must strive for regulatory-economic balance. I believe several years ago this committee did some work on regulatory initiatives in relation to competitiveness; some very, very good work. I think regulatory issues are again something of quite a bit of concern to a lot of industry associations, and particularly the chemical producers.

One of the competitive advantages of Canada is that we do not have an American litigation-type system where everything is put in legislation and we have to fight it out in the courts or with lawyers. We work relatively co-operatively with government, and with programs such as Responsible Care, in many cases that means the private sector delivers more performance in some of these areas than it would under more stringent legislative or regulatory regimes. We prefer and promote greater reliance on voluntary, or non-regulatory programs, market-based instruments, performance-based regulation, or any other kinds of approaches that result in environmental improvement or health and safety improvement where the industry takes responsibility for the effects on the environment or health of Canadians.

I must say, however, that government has a mixed record of supporting regulatory reform. Some days it talks regulatory reform and other days it produces regulations that are in fact not very helpful for business and most of the time are not very helpful even for the objectives they aim to achieve.

So I think one of the messages to your committee is the fiscal environment is important, deficit reduction is important, perhaps not with the 50-50 formula the government is currently using, but the impact that government has on how business operates in terms of the regulatory regime is just as important as a competitiveness factor for our industry, and it is one of the factors companies look at today when they decide whether to invest one country or another.

Thank you very much for the opportunity to speak to you. I hope your deliberations are productive.

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

We will now move to the representatives from the Conference of Defence Associations, Colonel Gilbert Saint-Louis and Colonel Sean Henry. Welcome, gentlemen.

[Translation]

Colonel Gilbert Saint-Louis (President, Conference of Defense Associations): Good afternoon, Mr. Chairman.

[English]

For those who will not understand my good language, copies of the English text are available. I don't know if you have them in front of you. If not, then just ask, because maybe I will not have the Westmount accent.

[Translation]

Mr. Chairman, ladies and gentlemen of the committee, I have the pleasure and the privilege of representing, today, and for the second year, the members of the Conference of Defense Associations.

For the benefit of new members of your committee, I should say that the CDA represents an advocacy group of some 500,000 Canadians across the country. Our mandate is to encourage pro-national defence policy and to ensure that our armed forces are effective and adequately staffed. We are a volunteer organization whose members derive absolutely no personal gain from these activities.

In order to illustrate our concerns and answer the questions that you submitted in proper fashion, I have attached a few documents and tables to this brief. This will save us some time, however, I would ask that you take the time to examine them properly.

My demonstration will be simple and will cover four points.

First of all, some important aspects of our Canadian Armed Forces are about to collapse.

Secondly, this situation weakens national interest and is contrary to the Canadian government's foreign policy which views security as one of three important pillars of its policy.

Thirdly, the current crisis can be resolved by increasing the National Defence budget by a few hundred million dollars, which is not an astronomical amount.

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Finally, as an alternative, this additional funding could be in the form of defense equipment contracts awarded by other departments, such as Industry, which would provide us with better protection and, at the same time, increase high-tech jobs in the important defence industry sector.

In support of my affirmation that there is a crisis in the Armed Forces, I would refer you to the questions recently raised by Senator Forrestall about the Department of National Defence's proposals to eliminate three infantry battalions as well as many small organizations.

Other options could include cancelling or reducing big equipment contracts. Such measures would place Canadian soldiers in jeopardy and also increase unemployment in regions of the country desperately in need of job creation. The major system, such as the ship system, could also be put out of commission. In a nutshell, the Armed Forces are or could be unable to fulfil any of the combat roles assigned to them in the 1994 White Paper.

This unfortunate situation is encouraged by public apathy and ignorance with respect to the important contributions made by military people to the national interest and welfare. An article published in the Canadian Defence Quarterly, which I handed out to you along with the brief, analyzes the negative aspects of having the so-called "soft power" handle Canadian international relations.

Among other things, the article lists certain drawbacks. First of all, there is the loss of diplomatic influence and the loss of a seat at the international table.

Secondly, as a result of Canadians' reluctance to get involved in the demand side of military operations, we are penalized in the area of international trade and in other commercial sectors.

Thirdly, we undermine the safety and morale of Canadians who are posted overseas and given inadequate tools for fulfilling their duties.

Perhaps the most telling evidence can be found in the tables that I submitted to you. In general terms, the situation is as follows: Canada currently spends only 5.8% of its total budget and 1.2% of its gross domestic product on defence. These figures mean something internationally. Of 155 nations in the United Nations, we rank 133rd, far behind our colleagues in the Group of Seven most industrialized nations.

Fourth, since 1993 and 1994, the National Defence budget has been slashed by 30%.

Fifth, although Defence receives nearly 30% of the government spending program, this is misleading. Such funding was reduced by about $15 billion over the past four years, and the cutbacks experienced by the Department of National Defence are greater than those of all the other departments combined.

Once again, let it be said that it is the percentage of the total budget and the percentage of the gross domestic product that really count.

Sixth, the strength of the regular forces has been reduced to 60,000, a far cry from the 78,000 soldiers required to meet our current commitments adequately.

Seventh, the amount of money earmarked for the purchase of new equipment, investment, is in a free fall.

Number eight, the cost of peacekeeping and humanitarian aid missions has risen by $250 million and yet the government has not earmarked any additional money for the National Defence budget. This alone warrants increasing the Department of National Defence budget by several hundred million dollars.

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Finally, of all the NATO countries, only Luxembourg spends less than Canada on defence.

In 1994, the Special Parliamentary Joint Committee that reviewed Canada's defence requirements concluded that the Department of National Defence budget should not be less than $10.5 billion per year. As a result of constant cutbacks, the Department of National Defence budget will soon be at the $9.2 billion mark. I am sure that you can understand how devastating such a drop is.

Moreover, and perhaps on a slightly more positive note, we would like to congratulate the government, in general, for the spectacular improvement in Canada's finances announced a few weeks ago. The members of the CDA agree that the Department has to do its part in reducing government spending. However, our criticism is levelled at the amount of cutbacks we had to contend with compared to other government spending, which has remained relatively weak or has been transferred elsewhere.

As I mentioned at the outset, the fact remains that Defence is a fundamental responsibility of government. This was confirmed by Minister Martin in a recent statement. If this is the case, it seems to me that Defence should be among the first to partake in the rebuilding efforts made possible by the Canadian government's improved fiscal health.

Canada lives and dies by trade. This fact has also been acknowledged by Minister Martin. Trade is the striking force of the Canadian Prime Minister's economic trips around the world. What has not been understood very well, is that trade occurs only when there and is peace and stability. Such peace and stability are achieved and prosper under the mantle of multilateral diplomatic and military co-operation.

At one point, Canadians grasped this and our military contribution was handable. Today, we are viewed as a third-order power and a nation that relies on others for its military problems. Peacekeeping does not in any way offset our inability to participate in conventional operations. We are paying the price in terms of lost influence and lost business opportunities. This, in turn, will have a negative impact on our country's economic and fiscal well-being.

In conclusion, I should say, in answer to the three questions for which you asked my comments, that, first of all, the economic assumptions for the next two years should consider the fragile nature of Canada's finances. Our productivity is weak, an increase in interest rates could have a serious impact on us and the international stock markets are showing signs of weakness. The message is to stay the course and to refrain from increasing government spending significantly. However, the amount of additional money sought by Defence is in keeping with this trend.

Secondly, taxes and spending must both be reduced. Most Canadians are facing a tax bill equal to 60% of their income.

Also in the world, particularly in Europe, it is worth pointing out that the nations with the highest level of taxation and social costs also have the most unemployment. Canada fits this profile.

Thirdly, the high tech defence sector could create 50,000 jobs. This number could even be increased if we were to define some way of financing major government projects for Defence outside of the Defence budget, by, for instance, increasing the Department of Industry's budget rather than earmarking additional money for the Defence budget. And this would give a breather to the Canadian Armed Forces, a breather they sorely need in order to survive right now.

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In summary, the Conference of Defence Associations' main concern is to stop the bleeding that has gone on for too long in the Canadian Armed Forces. These people fulfill impossible tasks in a truly professional way. They are overworked and underpaid. They have to do their job with obsolete equipment or without any equipment whatsoever. We owe them a great deal of recognition and we should be ashamed of the way that they are treated by an unknowing and largely uncaring public.

It is almost a miracle that there have been no serious accidents during our recent overseas missions. I would therefore ask that you support the recommendation of the Conference of Defence Associations, namely, that the government approve a modest increase to the Defence budget in 1998. You will then have the satisfaction of knowing that you have made a significant contribution to rebuilding Canada's Armed Forces, which will benefit all Canadians.

I will conclude by quoting Mr. Martin, and this is my own translation: Some see Canada as a little country that can't.

We would suggest it is time to see ourselves as a great country that will. The members of the Conference of Defence Associations agree wholeheartedly and suggest that great countries support and utilize effective armed forces. Thank you for your attention.

[English]

The Chairman: Thank you, Colonel Saint-Louis.

We'll now move to the representative from the Hotel Association of Canada, Mr. Tony Pollard. Welcome, sir.

Mr. Tony Pollard (President, Hotel Association of Canada): Thank you very much, ladies and gentlemen.

We're the good news industry; we're the hospitality sector. Thank you for this opportunity to appear before you. We seem to have a little contest going about who's been doing this the longest. This is my sixth appearance.

We all benefit from these consultations. Frankly, when I look at some of our previous recommendations to the committee, we're very pleased with it. The committee is results oriented.

We recommended for a few years that we establish a Canadian tourism commission, and that happened. As a result, Canada has move from the twelfth most popular destination in the world to the tenth—and obviously there are other factors that come into play.

Secondly, we recommended for several years that we have the establishment of open skies between Canada and the United States. Since the establishment of open skies in February 1995, when the President and the Prime Minister signed the agreement, we now have 110 new city pairs between Canada and the United States that didn't exist before.

We've all benefited, and these were recommendations we brought forward to this committee. So I thank you.

First of all, what is the mandate of the Hotel Association of Canada? We represent our members nationally and internationally, and we provide them with cost-effective services that stimulate and encourage free market.

In Canada, our association represents all of the accommodation industry. We're made up of 7,200 hotels, motels, resorts, inns, and so on. Last year we generated $8.6 billion for the Canadian economy. We employ 226,000 people, literally in every part of the country.

In this presentation, I'd like you to keep in mind three points. First of all, governments like us; we create jobs. We're one of the few industries that actually does so, and we're doing more and more of it.

Secondly, the hotel-travel-tourism industry reduces travel deficits and generates net revenue for governments. Of all gross tourism revenue, 32% goes to governments at the federal, provincial and municipal levels. This is solid currency for governments. Last year the tourism tax dividend to government was $13,376,000,000. That's a lot of money.

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Thirdly, we commend the government for its deficit reduction; however, we do need some relief from taxes, which remain too high. Unfortunately, up to 45% of all hotel gross revenue goes to taxes.

Let me give you a very quick overview. Tourism is the fastest growing industry in the world. By the year 2005 it will be the world's largest. The increase in revenues generated by tourism has been equally remarkable. During the period from 1960 to 1994 tourism experienced a growth rate of 12%. On the revenue side it went from $6.9 billion annually in 1960 to $340 billion in 1994. Last year in Canada tourism generated $42 billion in total. It also employs directly 491,000 people, and this was up by 2.2% over the previous year. In total, approximately 1.2 million people earn their living in some form or another from tourism.

There are a couple of issues for us that need to be brought to the floor.

Hotel financing remains a big problem for us. The Canadian Bankers Association about two or three weeks ago were patting themselves on the back, saying that they'd approved 87% of all loan applications from small and medium-sized businesses. Well, the chairman of my board, Mr. Julian Koziak from Alberta, stated immediately that the banks do not have an appetite for the hotel industry—and I'm quoting here:

If we are going to have a country that is going to be successful in the tourism market the banks will have to stand behind our industry, when growth needs to be financed.

What are we looking at for the future? Are we positive? Yes, we are.

Assuming that there's going to be continued growth in the GDP of between 2.5% and 3%—and many are predicting more—our industry is expected to perform well.

As a result of the establishing of the Canadian Tourism Commission—I mentioned that in my opening statement—advertising, marketing campaigns, promotions, and public relations are all now delivered in a more timely and professional fashion.

Funding for the Canadian Tourism Commission, and again this is a recommendation we brought forward to this committee, has risen from $15 million in 1994 to a total of $130 million—that's joint, both public and private—in 1997. We commend the federal government for its support of the Canadian Tourism Commission. This commitment to the travel industry has seen the travel deficit in our country fall by more than $2.5 billion annually over the last four years. I think anybody would agree that this is one heck of a return on investment.

The Hotel Association of Canada has a partnership with the Department of Foreign Affairs and International Trade. We have a program for export market development agreement, or PEMD, as many of you would know it, which assists Canadian hoteliers exporting their hotel-related products, services and management expertise. Our results in this area are now paying multimillion-dollar dividends in several markets around the world, including China, Brazil, Israel, eastern Europe and the Caribbean. We've signed agreements exceeding $110 million, and this would not have happened without the assistance of Foreign Affairs and International Trade.

Taxation in all its forms remains one of our biggest problems, if not the biggest. As noted, up to 45% of gross revenue goes to 32 different taxes at the federal, provincial and municipal levels.

We commend the government for moving up the global competitive ladder last year to fourth place from eighth place. This is according to the global competitive report prepared by the World Economic Forum, or WER. Unfortunately, the WER states that Canada's main weakness is due to high corporate taxes, where our country ranks twenty-fourth out of fifty-three.

Most experts agree that payroll taxes reduce competitiveness. They also agree that the higher payroll costs charged to employers punish the employees through reduced wages and benefits.

The Minister of Finance has stated he would proceed judicially, offering “neither broad tax relief nor spending in the upcoming budget”. We recommend selective payroll tax decreases, which will stimulate job creation. We would be heading in the right direction if government aimed a significant cut in the employment insurance premium tax at those at the bottom of the income scale. With unemployment concentrated amongst Canada's inexperienced, unskilled, and young workers, this type of tax cut would create jobs.

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We commend the government for its review of the visitor rebate program. The international convention business is very attractive, and the competition between countries for this is very high. The government recognizes this by allowing GST rebates for a number of goods and services in international meetings and conventions.

However, the only major item not allowable is the food and beverage cost included in the price. Given the highly competitive nature of this sector and its potential for growth, we urge the government to expand the GST rebate program to include food and beverage costs in international meetings.

The Hotel Association of Canada applauds the government for allowing the tobacco companies' sponsorship of auto racing. This must be expanded to include all events and attractions, an integral part of the hotel, travel, and tourism industry. In just 20 events across Canada receiving tobacco sponsorship, there was a total economic impact of $240 million, including $18 million for government, and the creation of 5,000 jobs.

The hotel industry in Canada has been significantly damaged by the government's decision to reduce the business meal and entertainment deduction to 50%. The government's intrusive action resulted in a 30% taxation increase to the cost of doing business. We strongly recommend that the business meal deduction be increased to 100% of the purchase, similar to all other business expenses.

In closing, the government must be complimented—and we do compliment the government—for making remarkable progress in turning around our country's fortunes. Now is the time to make selective and judicious changes.

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

We'll now enter the question and answer session. Mr. Solberg.

Mr. Monte Solberg (Medicine Hat, Ref.): Thank you very much, Mr. Chairman.

I'd like to thank all of the presenters for their presentations. I want to start by noting that I don't recall any presenters suggesting we need to dramatically increase spending.

I appreciate very much the presentation from the representatives of the Conference of Defence Associations.

You have very accurately described the situation in the armed forces today and you've come forward with some responsible solutions. It's true that over the last several years, defence has been the whipping boy for successive governments and successive budgets, and has taken an extraordinary hit relative to even other departmental spending. In fact when you look at departmental spending overall, defence stands out as the one area that has been hit the hardest, and meanwhile we see expenditures in other areas such as Industry and Canadian Heritage that I think are truly irresponsible.

I do appreciate very much what you have to say. I appreciate your analysis of the situation in Canada today vis-à-vis taxes and debt. I want to ask a question, though, of Mr. Paton.

I appreciate your presentation and I agree with your analysis. Could you reflect a little on why you think it is that Alberta has the right fundamentals? Or putting it another way, what are the fundamentals that you think are right in Alberta that the federal government may draw a lesson from?

Mr. Richard Paton: Thank you very much. I'd love to answer that question.

In our industry there are a number of general factors that probably would affect any industry, and there are some specific factors that affect our industry.

For example, feedstock—I mean the cost of natural gas and oil—is a particular advantage in Alberta, because it's there on the spot and it's being produced at a low cost. That advantage is not as high in, for example, Ontario or Quebec. So that's a specific advantage Alberta has.

A disadvantage it has is transportation. Most of our product is being exported through the Vancouver port, and therefore there is a cost there.

As for the regulatory structure, some argue that if a regulatory structure is supportive of business, it must be weaker or less performance-oriented. Our view of that is it's not true. You can produce regulatory structures that are just as strong in performance but a lot less onerous in terms of red tape, information burden, etc. Alberta has made a very strong effort to do that, so we have plants being developed and going through approval processes that are quite rigorous, but we're not having to go to five different departments to do it.

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A last factor—and I won't take too long here—is that Alberta, partly because the chemical industry is important to their overall economic strategy of diversification, spends a lot of time worrying about what industry sectors can contribute to the growth of their province. We've had consistently good relations with the Alberta government on that.

If I contrast that to the federal government, we're very happy with the macro fiscal approach the federal government has taken, but, for example, a number of bills were introduced in the last Parliament that are completely contrary to the competitiveness of our industry. The CEPA bill is one, as was certainly Bill C-66 on the labour arrangements that would have dramatically and negatively affected our exports through Vancouver port, which $4 billion of investments depend on. Notwithstanding that, we had bills proposed that seemed to be insensitive to those impacts.

At the federal level, it's more complicated, there are more issues and more players, but you don't get a consistency of purpose. You get, one day, “Gee, the deficit's going down; that's good for competitiveness. The trade missions are taking place”, and the next day you have a bill that is very hard to explain to the headquarters of some of our global companies as to why this is happening when they just put out $1 billion investment in Alberta and it has to go through Vancouver port.

That would be the answer to your question: a lot less focus on competitiveness issues when it comes to business.

Mr. Monte Solberg: I have a quick follow-up to Mr. Saint-Louis.

You mentioned in here that $10.5 billion is the base that the government had suggested defence spending shouldn't fall below, and also you have suggested that an increase of several hundred million dollars would be adequate for now to fund national defence. Do you have, though, a figure that you, yourselves, are recommending? Would be it be $10.5 billion in the spending for national defence?

Col Gilbert Saint-Louis: I will start to answer and then I will ask the senior defence analyst, Sean Henry, to give a much more accurate figure.

Mr. Monte Solberg: Okay.

Col Gilbert Saint-Louis: There are a lot of figures in the package that we annexed to my remarks. It was not our intention to really pinpoint this and give a classroom lecture on it.

First of all, the $10.5 billion is the figure in the white paper of 1994. Now we are at $9.2 billion. At this time we're not asking to go to $10.5 billion, because your reaction will be to think we are not very moderate, and this is not a good contribution to the work of this committee.

When we say “a slight increase”, it is at least—and I'm referring to one of the paragraphs of our presentation—$0.25 billion of the additional cost for the peacekeeping operation, the Red Sea activities, last spring. This was additional spending incurred by the department, which was not in its budget. You will see this on the civic street: if you have a contract and you give additional tasking, you will pay for it. This was not done.

At least, if you would just give the $250 million additional, it would help. It would help in a lot of cases, for instance in keeping more soldiers on the field, to do the work. If you just look at what we have, the number of tasks assigned to the Canadian Forces for the last four years, they almost doubled at the same time as we decreased the budget. It would not be sensitive to the situation, as we say. We would have to go back to $11 billion at least to give something that will stop the erosion, put a dam somewhere, and start to get something.

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Colonel (Ret.) Sean Henry (Senior Defence Analyst, Conference of Defence Associations): I think the funding suggested in this presentation has to be seen as a stopgap. If anyone is interested, there is something here that elaborates Senator Forrestall's examples in the Senate.

The $150 million to $250 million is strictly a stopgap. The problem is even if you come up with that for the next budget, as we sincerely hope the government will, the day after you're faced with the same problem. This is what is so frustrating. This problem goes on and on and on. You have to build up again the so-called base of the DND budget over time. Unless you build up the base, you're just taking money and spending it right away.

The $10.5 billion, I should point out, came out of the Special Joint Committee on Canada's Defence Policy, chaired by Senator Rompkey, and he in fact made that famous statement about the “line in the sand”. If you went below $10.5 billion, the armed forces would be very severely injured. That has proven to be the case. My memory is that the government looked at something around $10 billion and by the time the cuts were finished it was down to $9.2 billion.

A very interesting point is that back in January or February former Minister Young did use the term “$10 billion”. I'm not sure whether he was using that as a generality or he was drawing on some trend or some willingness within the government perhaps to reconsider going back up to that level. A $10 billion level, after a few years, would not be unreasonable. But then as Colonel Saint-Louis has pointed out, you need to get up eventually to the $10.5 billion.

[Translation]

The Chairman: Mr. Desrochers. Welcome.

Mr. Odina Desrochers (Lotbinière, BQ): First of all, I would like to thank the associations who have come to express their views on Minister Paul Martin's economic outlook.

My question is for the Canadian Chemical Producers' Association. In your brief, you said that you had good news for the people of Alberta. You also talked about your choices for Alberta.

A little bit further in your document, you said that the government estimated that these investments would create 144,000 new jobs in Canada. I would like to know whether the jobs will be concentrated in one province or whether or not you feel that they could be distributed in other provinces in Canada.

When you talked about the transportation issue, did you have other solutions in mind, solutions for Quebec or Ontario, to develop other markets and perhaps gain better access to exports?

[English]

Mr. Richard Paton: I think the answer to that question is that jobs will be produced in several different places in the country. The construction jobs obviously will be concentrated in Alberta itself. However, Alberta, I think, has already found in its recent summit that there is some concern about a shortage of labour skills. It's quite likely there will be a flow of labour from several other parts of Canada to Alberta during this construction period. Building a chemical plant involves pipe fitters, electricians, all sorts of trades, which obviously are not going to be just sitting there waiting in Alberta if the growth isn't there.

Once the plants are actually operating, those chemicals become parts of other industries throughout the country. The skills it takes to operate them are skills that are required from IT companies that may be located in Ontario or whatever.

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So I think when you have growth of $4 billion in investments in Alberta you end up with growth throughout the country in some way, shape or form. It's not even—probably most of it, or a good proportion, goes to Alberta—but certainly a lot of parts of Canada do benefit. Certainly B.C. benefits, because the traffic goes through there. The rail companies benefit, because we move the product by rail. Ontario benefits, because the engineering expertise often is located in Ontario. Certainly the information technology is located in Ontario.

I don't know if I can be more specific than that.

[Translation]

Mr. Odina Desrochers: Is Quebec also included in your planning? You talked about Ontario and other provinces, but what are you doing in our province, in Quebec?

[English]

Mr. Richard Paton: Again, this is a global industry and it's a national industry. One of the companies that would probably expand in the next few years is Celanese, whose headquarters happens to be located in Montreal. We have many other companies in Quebec that are also the same companies in Alberta.

So the answer to that is yes, you have expertise in Quebec that probably will flow west for the period of the construction period. But I can't be specific as to what the impact would be on Quebec.

[Translation]

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

[English]

The Chairman: I think Mr. Desrochers really wanted to know if there were going to be any new jobs in his riding.

Some hon. members: Oh, oh.

The Chairman: Mr. Riis.

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

I have three quick little snappers here, one for each person.

Colonel Saint-Louis, you mentioned in your presentation that you felt it was appropriate that expenditures be reduced further. Could you help us as a committee and identify two or three areas in which you think we might be able to reduce federal expenditures?

Tony, have you factored in or given any thought to the impact on your industry of the CPP premium increases that will be coming down very quickly? You mentioned payroll taxes and so on.

Richard, this is a little bit off from your presentation, but in terms of the meeting coming up in Kyoto, Japan, you talked about the regulatory economic balance. I'd be curious to hear your views on what that's all about.

Just quickies.

[Translation]

Col. Gilbert Saint-Louis: Naturally, I could talk about all kinds of horror stories. Obviously, we could say: Yes, there may be some savings, but which ones? You probably know them as well as I do. I could even list some within the Department of National Defence. I talked about this at noon as I ate my hot dog with my colleague.

We built, at a cost of 174 million dollars and perhaps even more, a training centre for military combat engineers in Chilliwack, and just as the work was completed, just as we were able to take ownership of the building and the centre, it was of course decided to close it. I am not saying this to criticize my former Defence colleagues, because they were not necessarily the ones who made the decision to leave the place.

As far as management of the country is concerned, obviously, I feel that some poor decisions were made. The case of the Saint-Jean Royal Military College, at least as far as its location is concerned, is a case in point and I also feel that it was very sad to have lost it. And there's a whole list of more specific cases.

[English]

Mr. Nelson Riis: That's history, Colonel; what about the future? That's been done. You suggest we should make cuts into the future.

Col Sean Henry: I have one point in relation to what Gilbert Saint-Louis has said.

It may not be understood amongst members of the committee and others that the huge cuts and savings that have been made at Defence have not been reapplied to what is left in Defence. This is a tremendously important point. When the dust settles in Defence, you will still have the same problems but in a smaller context.

In other words, all the money that was shaved and saved and what have you has not been reapplied to what is left in Defence. That's important to begin with.

• 1630

To go right to the heart of the matter in Mr. Riis' question, the easy answer is that if you take that book that lists all government agencies and activities and so on—I can't remember the name of it, but it's about so thick and there are all sorts of funny little things in there—I think you could apply a rather strong broom in that area, but I also would have to say there is a political price even when you take that easy approach.

The big problem is that notwithstanding the action that has been taken by the government, and much of it is laudable and understandable, there are large problems out there that have to do with social spending. That needs to be addressed. And in the opinion of many people, not just those in CDA, until those problems are wrestled to the ground there will be no real progress made in the fiscal situation.

It was pointed out in the presentation that France and Germany are running into the same problems of high taxation and really high social costs. At the same time there is high unemployment. We don't have time this afternoon to get into why this is the case...and we are not saying that you throw people into the streets. That's not what anybody is saying. Obviously the government has to maintain a certain level of social spending, but you must examine closely where that level needs to be.

I believe that many people believe the level is perhaps a little too high. And when it is put too high it becomes counterproductive because you then have to cut back on things like defence, and defence is a fundamental building block in the foundation of the nation.

Mr. Tony Pollard: Thank you for the question, Mr. Riis. We're suggesting that there be payroll tax decreases. Obviously we're looking at CPP as well. We're looking at the—I'm still not used to saying EI, I'm used to the old acronym—employment insurance and looking at CPP.

In an industry that next year on the hotel side will probably create about 5,000 jobs, the reality is that a lot of these positions are fairly well-paid jobs and yet at the same time are often entry-level jobs. They are often positions for people who are just starting out and looking for work. And frankly, even though this isn't the right approach...I was once 19 and 20 and 21 and I didn't really worry too much about pensions and things like that. The reality is that in industry when we have to pay major payroll taxes for people who may not be preoccupied most by their pension plan that they'll probably only be collecting on 25, 30 or 40 years out...it's not the biggest thing. The reality, though, is that by having to pay large amounts of payroll taxes we employ less people.

Mr. Nelson Riis: I must have misstated my question. You refer to EI and are calling for some minor reduction in EI.

Mr. Tony Pollard: Yes.

Mr. Nelson Riis: Yet we're talking about an increase of hundreds of dollars a year in CPP payments.

Mr. Tony Pollard: That's correct.

Mr. Nelson Riis: It seems to me that to be worrying about dropping it $1 or 50¢ or 10¢ or something on EI and not mentioning the other is puzzling.

Mr. Tony Pollard: That was an oversight on my part. I should have mentioned the CPP component at the same time. That is of concern to us and I thank you for bringing that to my attention.

Mr. Nelson Riis: You're not the only one that has failed to...I wonder if people are actually factoring this into their thinking at all these days. However, I'll just set that aside.

Mr. Tony Pollard: It's a very valid point. Thank you.

Mr. Richard Paton: I was wondering if anybody was going to ask me the climate change question. It's obviously a very complex and highly politicized issue, but I have a couple of points.

First of all, climate change from our point of view as an association, as an industry, is not just an environmental issue, it's an economic issue. Why is it an economic issue? It's an economic issue because we know it's a global problem and we know there can only be a global solution. It's not much use to have Canada going through some very dramatic draconian initiatives and then having China or India or whatever increase their CO₂ emissions tenfold.

In a global industry our companies are making decisions every day on where to invest. I mentioned earlier that we have $4 billion in investments in Alberta right now. All of that investment is predicated on the far eastern market. So just imagine the scenario in a world where we have adopted very stringent CO_{2* targets for a growing industry—because the original Rio numbers don't account for either economic growth or population growth—so we've tried to flat-line whatever we were in 1990 into the future.}

• 1635

If we were to accept those numbers to 2010 that Mr. Clinton has proposed, we would be basically saying that any growth—all that nice growth I've just talked about that may create jobs in Alberta and maybe even in Quebec, Mr. Desrochers—is not very good because it's going to produce CO₂, or we have to find a way of taking CO₂ out of any kind of emissions, which could be energy-intensive in itself and certainly very costly.

Let's assume that's the scenario and we actually go forward with that scenario. Let's also assume that the markets for which we are going to be selling these chemicals are not part of the deal. So we are not going to include Malaysia, Thailand or China. It would not take a company very long to question why it would produce a chemical in Alberta, send it over a rail line, send it through the port of Vancouver and pay a huge amount to reduce CO₂, when it could just produce it in another country where the market already exists.

Why is it an economic issue? It's an economic issue because if you are not careful you can change the trade structure of the world dramatically. You can make it very expensive to produce a product in one country and not so expensive in another country and you will shift growth from one country to another. That's one reason why we have been very concerned as an industry that the government has not recognized the economic realities that are associated with climate change.

The discussion also hasn't been very interesting because we keep focusing on the 1990 targets in CO₂. We haven't recognized that Canada is a cold country, a transportation-intensive country and a growing country. There are a lot of countries in those numbers that are not growing population-wise at all, yet they are supposed to use the same numbers as we are.

So there are a lot of problems with the way the real formulation was developed, and one should look very hard at whether we want to recreate those problems just by moving those numbers out to 2010 or whatever.

The Chairman: Thank you, Mr. Paton.

We'll now move to the final question from Mrs. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman.

I have two quick questions as well. Mr. Paton, you mentioned in your presentation we should stay the course and your association supports reducing the debt-to-GDP ratio. Has your association discussed what that ratio should be?

Mr. Pollard, surely representing the number of people you do in your organization you must have international players. We have wrestled down the deficit and are now looking at a balanced budget. Has that had a residual benefit for the members of your association?

Mr. Richard Paton: I will start out very quickly. The answer is no, we have not discussed that. I think our approach is prudent, steady reduction in the ratio with no big jumps. That's what I mean by staying the course. Just carry on, keep reducing it, and do it carefully, because I think a lot of big changes here can reduce job growth and the fabric of our society. If we just keep on a nice track, steadily reducing the expenditure side of this and increasing the revenue side of government through both economic development and a good fiscal framework, then gradually that ratio will change, for two reasons: expenditures will be lower as a total proportion of the economy and the economy will grow.

Mrs. Karen Redman: Should our ultimate goal be to be debt free?

Mr. Richard Paton: My previous job was in government, and there are times in a government's history, and I think the U.S. is a great example, when it enters into a lot of debt but it creates growth that enables the country to expand. So I think one should never be too fixated on that issue. It's more useful to say the budget you have and the expenditures you're making are the right ones you need, and where you are making expenditures they are either essential expenditures or they're helping you to expand that economy so that your growth is larger, and therefore revenues are larger, and everyone's better off.

• 1640

Mr. Tony Pollard: In response to your second question, because we are a global industry, low interest rates, a robust stock market—notwithstanding yesterday and the day before, or maybe that's very robust—and the fact that the business climate in Canada has improved significantly, and these are all as a result of government fiscal policy, have made the hotel industry in Canada, the real estate market for hotels, very attractive around the world, particularly because of the low Canadian dollar.

Last year in Canada, $680 million worth of hotels exchanged hands. This year we expect it will be even higher. Who's buying? Very few Canadians. Certainly there are some Canadians who are purchasing, but the investment typically is American and Asian, and we expect that will continue for a period of time.

The Chairman: Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): I apologize. I was caught in another meeting. But I did have a chance to read the briefs.

As you know, we have a lot of choices to make as a nation, and I certainly want our troops to be using safe equipment. But I have to tell you, you must know that there's a movement out there that says: why spend on this?

Really, we're going to have a very small fiscal dividend. How do you explain the rationale for investing in defence spending instead of injecting money into medical research, into post-secondary education, into addressing child poverty, into some of the real needs that are in the country?

Col Sean Henry: I'm glad you raised that point, because I realize I left Mr. Riis in mid-air there.

I'll pick up where I left off and say that I counted defence as a basic building block in the foundation of the nation. That's not just an idle statement. In most countries in the world, that is understood.

In Canada, for a whole variety of reasons, which I am sure members of the committee know as well as I do, there is a peculiar slant to things like defence. Yes, unfortunately there's a large number of people out there who look at this as a zero-sum game. In other words, if you have $9 billion worth of defence and you take that all away from defence, right away you can apply it to social programs and we'll all be better.

I'm sure you understand that it is not that simple. In most nations they understand that there is a basic bill to be paid for security, and that basic bill in the longer term comes back and improves your national interests, your national well-being, and your social programs. The huge challenge for people like CDA, who are in the pro-defence constituency, is to be able to convince people that by spending a reasonable amount on defence—not huge amounts but a reasonable amount—in the long term you are aiding social programs.

That is a pretty difficult statement for some people to understand. But believe me, if we had more time in this committee, like a day or so, I could probably convince you of that, because there are ways and means of proving it factually and statistically. The big one is that you need stability for international security; you need international security to foster trade; and as Colonel Saint-Louis said, Canada stands or falls on the basis of trade.

The Chairman: Thank you, Ms. Torsney.

Mr. Riis.

Mr. Nelson Riis: Can we do a couple of quick supplementaries on Paddy's question?

The Chairman: Go ahead.

Mr. Monte Solberg: Mr. Chairman, thank you very much.

I want to follow up on that. First of all, I think it's important to point out, as a practical matter, that I think Mr. Henry is right, because of course it wasn't long ago when it was in the news that we had members of the Canadian military actually on welfare because the wages are so low. I think we've had a direct impact on social programs already.

• 1645

I would also point out that in recent days we've had our military task of helping out people who were lost at sea. We count on the military to go and fly the flag for Canada around the world, routinely.

As we approach the millennium and we're trying to talk about Canadian symbols, the government is finding money for art and things like that, which is wonderful. However, the Canadian military has a long, proud history, and I think it's shameful how the military has been the whipping boy—and I said this before, but I really must say it again—when it comes to government cuts, far more than any other departmental spending cuts.

I think the gentlemen here today have just made a very responsible presentation. While I appreciate Ms. Torsney's line of questioning, and think it's a question people do ask, I really do think that the military has more than paid the price up till now.

I don't think I had a question. I guess I had a statement.

Col Sean Henry: We don't have it today, but I would undertake to give you a paper, in addition to the ones you have, that would help explain this.

The Chairman: Mr. Riis.

Mr. Nelson Riis: Thank you, Mr. Chairman. I have just a quick supplementary question. I'll preface it by saying I am an active legion member; I'm an active army, navy, air force vet member; I'm active in our local armoury. I'll just set that aside.

I'm going to go back to my constituency—

Col Sean Henry: Are you a member of the CDA?

Mr. Nelson Riis: No, I'm not a member of the CDA.

I'll go back to my constituency Friday, and over the weekend I'll meet with many constituents. I'm trying to think of a single instance when I've ever talked to anybody who suggested we should put more money into defence. I can't remember a single person ever, in the 17 years I've been here, coming to me as an MP and saying please add more money to defence.

I think that's a problem. I don't know if you guys operate in some isolated little world. Everyone else out there is lobbying and lobbying us, and yet I never, ever hear from anybody in the general defence community.

So where do you think my emphasis is going to be? Education? Oh, we have a lot from education. I have lots of bankers, I have lots of all kinds of people lobbying me for changes, but never a single person from defence. So I think you guys have done a crummy job in keeping the public informed as to what's important for you.

Col Gilbert Saint-Louis: Okay, if you'll just permit—and you can add what you want after—

Mr. Nelson Riis: This is positive criticism, it's not negative.

Col Gilbert Saint-Louis: Yes, I know.

In fact, I was in Toronto last weekend—I travel a lot, as you can see—and I heard a presentation on submarines. This retired captain was studying the submarines about 14 years ago, and at that time they decided this would not be a good submarine, or a good piece of equipment, and now it's here. Also, he said that the government is not aware enough of the needs of the Canadian Forces, because there are not enough people talking about what the forces are doing.

We confess that we didn't do our job for the last maybe 20 years. Maybe we were a bit shy, maybe too shy to go and do our job, even wearing the uniform and saying we are here to get trained and to protect the freedom of this country. This is our job—under your decision...I mean the government. And we should have been doing it.

What we are asking at this moment—and this is a bit also in answer to Madam Torsney.... It's an investment. You invest in the freedom of your country when you get troops prepared and skilled to be able to protect the sovereignty and protect the security of your country. But that investment is just for the normal role, the normal task of the forces.

The other investment is in direct research. If you read a bit, not only about the United States but about some other big countries, you will see that a lot of the current applications you are using even in your house today come from defence research. But doing that research is not our primary role; we are doing it to be able to have better tools to do our job.

We just realized, maybe recently, maybe because of some turmoil that the media put on our backs, that our own citizens, our own colleagues across the country, were not aware of what the Canadian Forces were doing. The CDA, the Conference of Defence Associations, just takes the message and is trying to get organized to do this job, to properly inform the Canadian public of the proper role and the proper lead for good defence of our country.

• 1650

The Chairman: Mr. Solberg, do you have any further questions?

Mr. Monte Solberg: No. Thank you, Mr. Chairman.

Ms. Paddy Torsney: I just want to say to Mr. Solberg that I think the issues of personnel and equipment are different and I don't think people should infer a particular position on my part from my question. It's something that we have to wrestle with.

The Chairman: I'll take that as a form of rebuttal.

Mr. Shepherd.

Mr. Alex Shepherd (Durham, Lib.): Mr. Pollard, you've mentioned your problem with a source of capital: banks. I'm interested because my committee is the industry committee. The banks are coming to see us tomorrow, and they're going to claim that they're lending all kinds of money to small and medium-sized businesses. What are you hearing from your constituents about your problem with that and what problems they're getting relative to access to capital?

Mr. Tony Pollard: First, I realize that it's not my position here to comment on things, but I'd like to say that the peace dividend that followed the Cold War is really an increase in travel and tourism. I just wanted to slip that in.

The reality is that the banks do not look at all favourably upon hotels. I will be the first to say that, yes, we did have difficulty in the early 1990s. There was a problem with more hotels than demand. We had something called the recession that came along. Frankly, any new hotel built between 1986 and 1991 went bankrupt. So the banks do have a reason to be concerned and cautious. I have no problem with that at all.

However, the economy, as we all know, is performing quite well. The reality is that the big banks will not touch the hotel industry even when you have good, solid guarantees from other secondary sources.

Who is providing us with funding right now? It is non-traditional groups. The banks are just not looking favourably upon us at all.

The other thing, if I could just add in here, is that there's a new phenomenon in Canada. It's called REITs, real estate investment trusts. It's basically mutual funds for different groups. Hotels are very attractive. We've had nine hotel REITs in the last six months in this country. They've raised over $500 million. Obviously, there's a lot of interest in this.

The question I pose to the committee is why is it that the banks don't touch us but a lot of other individuals and groups are very happy to invest in the industry?

The banks are saying that they're now starting to look a little bit more favourably upon us, but we still have not seen good and hard and fast evidence of that.

Mr. Alex Shepherd: You described a situation of mergers and acquisitions that's going on and that a lot of that is going to Americans and other nationals.

Mr. Tony Pollard: Yes, it is. “Consolidation” is the big word.

Mr. Alex Shepherd: Are they raising their capital domestically, or is that—

Mr. Tony Pollard: Outside of the country, typically.

Mr. Alex Shepherd: So it's American capital coming with Americans to buy Canadian hotels.

Mr. Tony Pollard: That is correct.

Mr. Alex Shepherd: The American capital—are they recognized American banks?

Mr. Tony Pollard: Yes, very much so.

The Chairman: Mr. Pollard, before you leave, I just want to see if you can get some information to the committee in reference to your second-last paragraph, saying that the hotel industry in Canada has been significantly damaged by the government decision to.... Can we get supporting documents for that? Can you forward it to the committee?

Mr. Tony Pollard: Certainly. I will be more than happy to. That's regarding the business meal tax deduction?

The Chairman: Yes. Thank you. I appreciate that.

On behalf of the committee, I'd like to thank all panellists for your intervention at this round table. You should look forward to the committee's report, and I'm sure that some of the ideas expressed will be reflected within it.

• 1655

I need your attention here. We have a couple of housekeeping items to deal with.

We have to deal with the motion that when required, the clerk be authorized to make the necessary arrangements for working meals for the committee.

Ms. Paddy Torsney: I so move.

The Chairman: Who seconds that—Mr. Solberg?

Mr. Monte Solberg: Actually, Mr. Riis seconded that, but I'll vote for it.

The Chairman: Seconded by Mr. Riis.

If there's no debate on this issue, we'll vote on it.

(Motion agreed to)

The Chairman: We now have to deal with estimates. We have until December 5. Since we don't have anything else to do, we'll deal with this particular issue.

We'll have to find a date that is mutually acceptable to both the minister and the committee members. The only thing we know for sure is that it will be before December 5.

Is that okay, Mr. Solberg?

Mr. Monte Solberg: Absolutely. You bet. Wonderful.

The Chairman: Okay.

The meeting is adjourned.