FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 4, 1997

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I would like to call the meeting to order and welcome everyone.

As you know, the finance committee is holding pre-budget consultation hearings pursuant to Standing Order 83.1. We have criss-crossed the country and received inputs from Canadians from coast to coast. It has been an interesting exercise. Valuable information has been tabled with the committee, and I'm sure this afternoon is not going to be any different.

As you have probably noticed, the round table—although it's rectangular—is well attended, so please stick to your five-minute overview. Then we'll enter into a question and answer session. We'll also encourage some rebuttals, if there are any, to some points from various members of the round table.

We will begin with the representative from the Geomatics Industry Association of Canada. Hugh O'Donnell is the vice-chairman.

Welcome, sir.

[Translation]

Mr. Hugh O'Donnell (Vice-Chairman, Geomatics Industry Association of Canada): Good afternoon, Mr. Chairman, ladies and gentlemen.

On behalf of my colleague, Neil Anderson, from Nautical Data International, and on behalf of Geomatics Industry Association of Canada, I am pleased to take part in these proceedings.

We are going to make our presentation in english using a few slides. Of course, it will be our pleasure to answer your questions in french.

[English]

Good afternoon. We're indeed pleased to participate in this consultation. We certainly encourage it.

We'll be using about eight overheads. You have already received documentation in your packet this afternoon.

Geomatics is part of the information technology sector. Our preoccupation is with the collection, storage, analysis, management, and distribution of spacially related information. It's an umbrella term we have coined here in Canada. It's being used worldwide to deal with surveying, mapping, remote sensing, and geographical information systems.

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Where is it applied? It's used in many cases, especially in dealing with the environment in monitoring disasters such as the Saguenay and Red River floods and the Mississippi River a number of years ago. It's also used for safety and efficiency in shipping operations, monitoring crop yield, and improving planning and management of forest production operations. It's also used in telecommunications, major utilities—electricity, gas—and local and municipal governments, and it has a major area of applications on the marine side.

We represent 1,500 companies in Canada. Gross revenues are running about $1.8 billion. The average export is around $500 million. We operate in over 100 countries worldwide. This is a young, growing branch of IT. It's about $20 billion now and growing at 15% to 20% per annum.

We basically have two recommendations for your consideration. It's the Canadian geo-spatial data infrastructure. This is the integration of all spatial data across Canada. The second one is the earth observation component of the Canada space program—the long-term space program.

We have been involved in the information highway since the mid 1970s—we call it the on-ramp—collecting all this basic information. The Canadian geo-spatial data infrastructure is bringing together the principal departments in the federal government, the provinces, the municipalities, the various public sectors as well as industry to manage this complete infrastructure, not only on the land mass but on the marine side.

You know very well that Canada is the second largest nation in the world from a geographical point of view. It's some 10 million square kilometres, and the marine side is very impressive as well. This particular initiative, we believe, on the conservative side, would generate new economic jobs on the knowledge side in the order of 1,000 jobs per annum.

On the space side, Canada leads with the RADARSAT program. We have RADARSAT I. This is Canada's contribution to the environment. RADARSAT penetrates cloud and darkness and operates 24 hours a day. This is a major contribution, funded through government and the private sector. There has already been over $15 million in savings on the Canadian ice services of Environment Canada. We have over 11,000 data orders throughout 44 countries, and for every $1 spent in data acquisition there's added value of $8. There are tremendous royalties now coming back into the federal system in return for its investment. So it's very important in the fiscal budget 1998-99 that the data acquisition continues and the unlimited applications being addressed now are maintained.

We have two specific recommendations. We no doubt encourage the direction government is taking. I recall back in 1994 the Minister of Finance, Paul Martin, saying the business of government is to get out of business and to encourage moving-out operations, efficiency, and effectiveness into the private sector. It's working very well. We have very large contracting-out programs that are some of the largest in the world. But again we need support from both government and industry. We're prepared to make our contribution as well for this Canadian spatial data infrastructure.

There is still duplication going on. There are tremendous economies that could be benefited by providing this lead in standards in the various policies dealing with copyright, cost recovery, and partnership. This can be a model to the world. The opportunities are there.

Second, the earth observation program on the long-term space program is fundamental. We must maintain the support for this joint venture between industry and government, especially on the application side through this international network we've set up.

Thank you very much. We'd appreciate any questions or clarifications on this presentation.

The Chairman: Thank you, Mr. O'Donnell.

The next presentation will be made by the Alliance of Manufacturers and Exporters' Association, Mr. Stephen Van Houten. Welcome.

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Mr. Stephen Van Houten (President, Alliance of Manufacturers and Exporters' Association): Thank you very much indeed, Mr. Chairman. It's a pleasure to be here.

I'd like to introduce my colleagues with me. Mr. David Burn is vice-president of taxation for Northern Telecom and chairs the alliance's national taxation committee. Jason Myers is our vice-president and chief economist at the alliance.

We certainly appreciate the opportunity to appear before the committee this afternoon, and we'll try to make sure our comments not only don't exceed the five-minute limitation but hopefully will be significantly less, so there'll be ample room for discussion at the end.

Let me say that our members, members of the alliance, account for approximately 80% of Canada's industrial production, which exceeds $430 billion a year. It also accounts for 95% of Canada's total exports. It's an important sector, an important part of the Canadian economy, one we think it's critically important that we work to grow.

Our message to you today, members of the committee and Mr. Chairman, is very simple. It is that in order to grow Canada needs investment. Our view is that investment in technology and investment in skills yields economic growth on a sustained basis. As Kevin Lynch, the deputy minister of the industry department, noted at our annual convention about a month ago:

Trade follows investment, and if you want to attract manufacturing into Canada, we must have a favourable investment climate.

We couldn't say it any more clearly or directly than he did. Right now, quite frankly, we are struggling to retain and grow our investment and achieve new product mandates. In fact, many companies in our membership are finding that their after-tax earnings are not sufficient to cover capital replacement and depreciation cost, let alone sufficient to finance major expansion or the acquisition of new technologies. If we can't compete for international investment, if our companies are not investing to grow, then our capacity to generate long-term employment and to compete in international markets successfully will be critically weakened. In short, our task must be nothing less than to ensure that Canada is the location of choice for companies to invest, produce, export, employ, and grow.

We recommend, in summary, that four major things be done on the part of the federal government.

First, the government must not only balance its budget but aim at running a budgetary surplus of 1% of GDP, roughly $7 billion per year, which in the short term should be used to pay down the debt.

Second, the federal government must place its deficit reduction achievements on firmer ground than its present reliance on running a substantial annual surplus in the employment insurance account. We recommend specifically in this respect that the EI account be allowed to accumulate a $5 billion surplus, which would stay at that cap. After that we'd be in a position to maintain the EI surplus at $5 billion on an accumulated basis with a premium rate of $2.25. That's a heck of a lot lower than it is at present.

Third, the federal government must undertake corporate tax reform aimed at attracting long-term investment in Canada's manufacturing and exporting sector. We must ensure that our tax system is competitive when it comes to attracting and retaining investment. If it isn't competitive, the companies won't come. Today, companies can locate their operations anyplace around the world—and they're doing so—in order to maximize their returns on investment.

As another speaker at our convention said a month ago, there is no such thing as a Canadian company any more; all companies are essentially international. In this regard, we think corporate income tax rates must be reduced so that they're competitive with those of countries such as Korea, Ireland, and China. Our tax credit system for new investments in technology and training should be competitive with those of countries such as Singapore and Malaysia.

We should reciprocally eliminate withholding taxes on dividends, interest, and royalties paid to non-residents, as is done essentially throughout the European Union. We should also take action to reduce taxes on capital gains, as the United States, our major and nearest competitor, announced last month.

Fourth, the government must maintain its support for innovation and exports in a direct and substantial way. I know the government recognizes the importance of innovation for industrial competitiveness and growth, and we appreciate its continued support for the SR and ED tax credit program. We appreciate and support the Technology Partnerships Canada initiative, and we certainly support an active, and indeed strengthened, role for the Export Development Corporation in the years ahead. Its capacity to leverage financing for exports is well known and all-important as a trigger of financing from the more conventional sources.

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Those are our major points, Mr. Chairman. We have deposited with the committee clerk a formal submission. We didn't have sufficient copies, I'm afraid, for everyone around the table who would have liked to have one. I didn't realize how many people would be here. We look forward to discussion with you at the end of the presentations.

The Chairman: Thank you very much, Mr. Van Houten.

I will now move to the representatives from the Canadian Pulp and Paper Association, Ian Young, chairman, finance section, and senior vice-president and chief financial officer, Noranda Forest Inc.; and Steve Stinson, director, finance and business issues. Welcome.

Mr. Ian Young (Chairman, Finance Section, Canadian Pulp and Paper Association; and Senior Vice-President and Chief Financial Officer, Noranda Forest Inc.): Good afternoon. We're pleased today to have the opportunity to participate in the pre-budget consultations of the Standing Committee on Finance and to present the views of our industry, which we hope will be addressed in the next federal budget.

The Canadian forest industry is the largest single industry contributor to Canada's balance of trade. Our exports last year were over $38 billion and we contributed net $31.2 billion to the balance of trade. We support directly and indirectly about one million jobs in Canada. We're the largest single sector of manufacturing spending on capital of machinery and equipment. We're a high-tech industry, a key purchaser of technology products and services, and an integral part of Canada's economy.

Our industry has struggled with difficult business conditions over the past two years, reflecting substantially increased fibre costs, primarily due to higher provincial stumpage and other taxes—particularly in B.C.—combined with a weak global pricing environment. Largely as a result, the regions where our industry presence is greatest, B.C. and Quebec, have experienced the weakest economic growth. Our industry's importance, however, extends beyond these regions that directly depend on it such that our knowledge-based industries also increasingly depend on us as a buyer particularly of machinery and equipment.

The current outlook for 1998 is for moderate improvement. However, it's fragile and it certainly will be negatively impacted by the current currency devaluations and market turmoil in Southeast Asia, which is both a major customer and a major competitor.

The CPPA commends the federal government for the significant progress it has made in reducing the federal budget. However, with 32% of federal tax revenues presently allocated for the payment of interest on the debt, attention must now shift to reducing the federal debt. I certainly echo the comment made by my colleague a minute ago.

We recommend the continued use of prudent conservative economic assumptions to reflect the potential for economic weakness in coming years. We recommend the setting of achievable targets for reducing the federal debt to say 50% of GDP by the end of the current government mandate; that all existing and any new spending programs be subject to rigorous review against pre-defined objectives; and that preference be given to general reductions in tax levels, both personal and corporate, in order to bolster the international competitiveness of Canadian industry overall and offset the impact of the increases in CPP payments.

A key area where our industry can be helped, and industry overall, is the tax system, which effects the ability of our industry to attract investment and create new employment. As I mentioned, directly and indirectly we employ just over a million people today.

With the Technical Committee on Business Taxation expected to report shortly, we're hopeful that its recommendations will set the stage for meaningful improvement in Canada's system of business taxation. We've taken the opportunity to include a copy of CPPA's recent submission to the committee with this brief. It's attached to our one-page summary.

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We want to stress the fundamental importance of keeping Canada's business taxation system internationally competitive in terms of overall tax burden and costs of compliance. The current manufacturing and processing tax credit is a key element, keeping effective tax rates for manufacturing in line with those of our competitors, particularly in the United States.

As a matter of interest, I also sit on the U.S. forest industry finance committee, and they have a major initiative going with the U.S. government now to lower U.S. rates. It's interesting that U.S. and Canadian rates overall are much higher than those in other competitive countries in our industry, particularly the Scandinavian countries, South America, Indonesia, and Malaysia.

The ability of the Canadian forest industry to compete in the global economy, as well as employment in the many communities where often we're the sole employer, depend on it, and it would be seriously and negatively affected if there were any increase in overall tax burden.

Second, we strongly advocate that the government reverse the trend to non-income-sensitive taxes, such as the large corporation tax, and consider their replacement with taxes that reflect ability to pay.

Third, compliance costs would be significantly reduced if the government adopted a system that permitted filing of a single consolidated tax return for each corporate group. This would make us competitive in this area with other international jurisdictions, including the U.S. It would also be fundamentally fair and would eliminate the need for corporate restructuring for tax purposes.

Next, the integration of the federal and provincial corporate and sales tax systems into a single system would greatly reduce the compliance and administrative costs of the business tax system, so we'd certainly encourage the government to keep working to get one system across Canada.

Finally, we'd like to stress the need for broadly based policy initiatives that do not discriminate against single industries. While such approaches may be appropriate in the social policy area, when it comes to industrial development, government should only use such discriminatory policy levers with the utmost care.

Thank you.

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

We'll now move to the representative from the Certified General Accountants' Association of Canada, Don Goodison.

Welcome.

Mr. Don Goodison (Partner, Kemp Harvey Goodison, Certified General Accountants; Certified General Accountants' Association of Canada): Mr. Chairman, it is a pleasure to appear before you and your committee today on behalf of the 50,500 certified general accountants and CGA students who live and work across Canada and overseas.

With me is Mark Boudreau, CGA Canada's vice-president of public and government relations.

We at CGA Canada are pleased that your committee is even in a position to undertake the reference you are examining. We recognize the extraordinary accomplishments that the government and Canadians in general have achieved over the past several years. We are clearly on the right track, and no small measure of credit is due to the federal policy and the finance minister's crusade in particular.

If you had told us three years ago that we would be talking about the end of the deficit and the investment of fiscal dividends at this point in time, I don't think we'd have believed you.

To address your first order of reference with respect to the economic assumptions for the next budget, the Canadian economy is still in the middle of a profound structural change. The recent volatility in global exchange markets and the consequent impact on the Canadian stock exchanges demonstrate the fragility and precariousness of the domestic and global financial marketplace.

In this kind of economic climate, governments and their agencies must consider very carefully any fiscal policy measures they implement. This is particularly true in Canada of any measures that may be taken by the Bank of Canada.

However, there are a number of positive and encouraging trends in Canada's economic performance. The pace of economic growth for 1997 is expected to be in the 3.5% range, unemployment is expected to fall to some 8.7% by the end of the year, and consumer spending will likely rise by 4% in 1997 and by 3% in 1998. The consensus view is that the federal deficit will fall to $4 billion by the end of 1997-98 and will be eliminated in the next fiscal year. Clearly the fundamentals of the economy are on the right track.

However, there are a number of events that could derail us if we are not vigilant and prudent. Some economists are concerned that inflationary pressures are on the horizon. This committee should consider and recommend an acceptable level of inflation as a benchmark for fiscal policy action. In particular we must be careful to ensure that interest rate adjustments are not taken hastily, as if such actions occur precipitously, our economic growth could stop dead in its tracks.

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We are well aware that the finance minister has insulated the Government of Canada from interest rate hikes by tying a large portion of the national debt to fixed-rate interest instruments. But the business community, and especially Main Street Canada, cannot do the same. Banks simply do not lend on a fixed rate any more.

I'd now like to turn to your second reference, appropriate fiscal initiatives. CGA Canada has always maintained that we cannot put all our fiscal eggs in one basket. Our recent survey of CGAs across Canada reinforces this principle. But our priorities for these three options differ from the minister's. CGAs believe we should apply 50% of the dividend to the national debt, 25% to tax reduction, and 25% to target expenditures.

During the last federal budget, CGA Canada called on the government to consider a modest, prudent, broadly based tax cut in the order of $4 billion. We still believe that Canadians deserve and need a tax reduction and that our economy can benefit from the resulting stimulation. However, we have reconsidered our position to some extent.

We agree with the finance minister's commitment to cut up the nation's credit cards and his stand that we should be patient and refrain from spending any fiscal dividend until we actually have one.

We stand by our call for a tax cut, but we agree that a broadly based cut can wait until a surplus is firmly established. What we need now is a targeted tax cut, perhaps in the form of an increased GST tax credit for low-income Canadians.

We also stand by our call for an increase in the current $200,000 small business deduction, which has been in place since 1981 and has not changed. This measure would add fuel to the real engine of the economic health of this country, which is small business.

Another fiscal concern of CGAs is the status of the employment insurance fund, which is expected to reach a $12 billion surplus by the end of 1997. In our view, we need an upper and lower cap on the fund to ensure that the tax burden, especially for small and medium-sized enterprises, does not become a drag on job creation, and to ensure that the fund is managed on a sound actuarial and accounting basis. Perhaps your committee can recommend appropriate levels.

I'd also like to address your third reference, creating jobs. We continue to believe jobs are created by a healthy and vibrant private sector. This applies particularly to jobs for youths. We at CGA Canada believe government youth employment initiatives alone will not tackle the high unemployment levels among Canada's young adults. What is needed is a concerted national effort led by the private sector, not by the federal government.

The measures we have already recommended to you will go a long way to creating and maintaining an economic environment to support job creation. The government policy initiatives that are needed to complement these measures lie in the areas of training, education, and innovation. We agree with government initiatives to stimulate further training, particularly in the technology sector. In fact it is our belief that having suitable candidates to fill employment opportunities is likely to be an even greater issue than the actual creation of those opportunities.

To summarize, CGA Canada believes Canada is on the right fiscal track, but our government needs to remain prudent and responsible in its budgetary policies.

I would be pleased to respond to any questions the committee may have.

Thank you.

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

We now move to the representative from the Fisheries Council of Canada, Mr. Patrick McGuinness, vice-president.

Welcome.

Mr. Patrick McGuinness (Vice-President, Fisheries Council of Canada): Thank you very much.

The Fisheries Council of Canada is primarily an Atlantic Canadian organization. Our member companies produce about 80% of the fish products in Atlantic Canada, and at the same time our member companies harvest about 50% to 60% of the actual fish in the water.

The federal and provincial governments have almost won their collective war against high deficits, but the fight is still causing heavy casualties in Atlantic Canada. We would agree with the alliance that the employment insurance premium should be quickly reduced to sustainable levels.

Government cost-recovery initiatives should be in keeping with a new, streamlined, service-oriented public sector, not simply a mechanism to transfer a high-cost, low-productivity public service. In this respect we note that the 1996 and 1997 figures indicate the federal government collected about $3.8 billion in user fees for government services.

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While you've saved quite a bit—congratulations—in terms of the outcome of the fiscal strategy...we have no problems with the outcome of the fiscal strategy in terms of eliminating the deficit and reducing the debt, but we perhaps have a problem with the mechanism. First, we feel a strategy to reduce the federal deficit by transferring more program costs to the provinces, transferring more of the cost of government services to industries through cost-recovery and user-fee initiatives, and using EI premiums to subsidize government operations may be a sensible strategy in the robust economies of Ontario and Alberta, but we just don't think it's satisfactory for a Canadian strategy, and particularly a strategy for Atlantic Canada.

Just to demonstrate, Finance's own figures will show that between 1994-95 and 1998-99 federal government tax revenues increased $22 billion. That's a 19% increase, or a 6% increase in tax revenues per annum. Meanwhile, over the same period the federal government's expenditures in federal-only activity decreased only $8 billion.

What we're saying, to a certain extent, is instead of taking this opportunity to re-engineer and reinvent government, what we are getting is downsizing; simply doing the same job with less resources. We think there's a lot more opportunity to look at how the government is operating the various departments, including the Department of Fisheries and Oceans, and figure out how you can do it in a different way and do it in a way that's less costly. That may be a better way of trying to resolve the deficit and debt problem than increasing taxes.

Certainly with the fisheries we've had a difficult time since 1992, since the downturn in the groundfish, and we've been recipients of considerable program assistance directed to our industry. It started off in 1992 with AFAP and it's now more recently with the TAGS program. Over the course of that time about $5 billion worth of direct assistance has been provided. Unfortunately, at this time none of those programs have been successful and we have many Atlantic Canadians who are left stranded, looking for a new life.

Basically, what we're saying is if there are new programs, let's learn from the lessons of the past. Let's provide support for people to get on with their lives.

On some of the questions the committee posed, one of the assumptions we have is that the export-led resurgence of the Canadian economy is weakening. Our international competitiveness will falter with a strengthening Canadian dollar and our export markets will shrink with the retrenchment of the Japanese and Asian economies.

The committee asked a question about strategic investments. Our view is that the government, rather than thinking of strategic investments, should think of strategic tax incentives, particularly in Atlantic Canada. For the fisheries we have a specific type of tax recommendation, that the manufacturing and processing tax credits and the research and development tax incentive should be made available for processing, research, and development activities within Canada's full 200-mile economic zone. At this time those incentives and credits are available only for activities within Canada's 12-mile territorial sea. This recommendation is consistent with the recommendation of the science and technology report to the Prime Minister of Canada.

On your question on education and training, there's no question there should be considerable focus on that area. Our view is that the challenge for Canada is to keep well-trained and well-educated people in Canada. This means Canada will have to reduce the current high cost of living in Canada and its high tax rates.

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

Now we will hear from the Railway Association of Canada, Mr. Bob Ballantyne. Welcome.

Mr. Bob Ballantyne (President, Railway Association of Canada): Thank you very much, Mr. Chairman. We appreciate the opportunity to meet with you today and take part in this discussion.

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Before I make the comments, let me suggest that they be taken in the context of some of the other presentations you've heard today. You've heard from groups that represent our customers. In effect, what we do is dependent on what they do.

Last year Canada's freight railways moved 3.7 million carloads of freight and 1.2 million containers and trailers, and the commuter and passenger railways carried more than 30 million riders. Both freight and passenger operations reduced road congestion and greenhouse gases and conserved fuel. The potential is there for the railways to do more to help Canada and Canadians work, and to do so with less impact on the environment than most other options.

Canada is a world leader in international trade, as you've heard. Its economy is heavily dependent on trade. Forty percent of our exports move by rail. These include automotive and industrial products, grain, coal, lumber, pulp and paper, ores, minerals, metals, and intermodal traffic.

Canada's railways directly employ 47,000 people, and there are certainly about 2 million more Canadian jobs that are trade related. Partly because of Canada's geography, transportation costs are a significant component of many export commodity prices; therefore, competitive, modern transportation is key to Canada's success as a trading nation in global markets.

Canadian railways also compete with American railroads and North American truckers for traffic. U.S. railroads have a natural market mass and benefit not only from economies of scale but from support of transportation policies.

There is also a fiscal imbalance. Canada's major railways pay approximately 53% more in fuel, sales, and property taxes than U.S. railroads, even though railways have to finance, own, construct, maintain, and upgrade their own infrastructure, clear snow, and control the traffic flow on their networks.

Canada's railways have to pay 4¢ a litre in excise fuel tax to the federal government, while American railroads pay about 2.2¢ in U.S. currency, or about half the Canadian rate.

Railway tax depreciation rates in Canada are much less favourable than in the U.S. and for competing modes. Great Lakes ships in Canada can be fully depreciated within three and a half years; Canadian and U.S. trucks, in less than five years. While U.S. railways can depreciate locomotives fully in 8 years, it takes more than 21 years for Canadian railways to get to the same finish line. This depreciation rate certainly affects our ability to invest in new technology, which we and our customers desperately need.

It might be true that U.S. federal input taxes are higher than those in Canada, but this is really an apples and oranges comparison because U.S. federal authorities levy approximately 77% of U.S. taxes, whereas in Canada the federal government levies approximately 40% of Canadian taxes.

Consideration in the implementation of public policy decisions regarding surface transportation should not be limited to paved roads and highway bridges. Privately funded railways and intermodal linkages are just as much surface transportation as their competitors. North American trucking benefits from publicly funded infrastructure and related services at significantly less cost than they actually incur. That allows truckers to underprice their freight transportation.

One effect of such policy is apparent: the shift of freight traffic from one transport mode to another for other than really commercial or economic reasons. Yet rail freight transportation is almost four times more fuel efficient for every ton of cargo moved than trucking, the environmental impact is less, and road congestion can, of course, be alleviated.

So in response to the three questions, we have the following recommendations: we think it's necessary to harmonize policies in taxation with our NAFTA partners so that all industries can compete on an equitable basis; we need to establish equivalent capital cost allowance rates for rail assets investments in Canada, as in the United States; we'd like to see the federal excise tax on fuel be comparable; Canada and the U.S. should seek the least cost intermodal efficiency, rather than focus on highway corridors only for moving growing transporter trade; and lastly, we'd like to see equitable treatment also in the exercise of federal jurisdiction over transporter and interprovincial trucking.

Such action will enhance the competitive capabilities of Canadian railways and the shippers they serve, and also the nation as a whole. The benefits include more efficient use of fossil fuels and reduced environmental impact and pollution, and cashflow generated can be reinvested in capital projects that will result in more competitively priced Canadian products on domestic and world markets.

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The Chairman: Thank you.

Now we'll hear from the Canadian Restaurant and Food Services Association, with Mr. Michael Ferrabee and Joyce Reynolds. Welcome.

Mr. Michael Ferrabee (Vice-President, Government Affairs, Canadian Restaurant and Food Services Association): Thank you, Mr. Chairman.

I'm the vice-president of the Canadian Restaurant and Food Services Association. CRFA is Canada's largest hospitality association. We represent a $33 billion industry. We've come here today to talk to you primarily about three issues: GST, supply management, and payroll taxes. I will be asking my colleague Joyce Reynolds to address payroll taxes, but I would like to talk to you briefly about GST and supply management.

Followers of this committee will be aware of our continued concern about GST. It taxes our meals but leaves the meals at our closest competitors, grocery stores, tax free.

Supply management over the years has artificially inflated our costs on key inputs like chicken and cheese, and we face a 4% to 6% increase in the milk price this February.

Let me give you one tangible example of how our industry is affected by these two policies. The frozen pizza suppliers to grocery stores, because of an aberration in supply management, get a special class of milk that lets them buy cheese at a fraction of the price available to restaurants. With these cheaper inputs, the frozen pizza is then taken to the cash register and gets a tax break equal to 15%, compared to our product. This is quite simply not fair, equitable, or a good tax policy.

The before-tax income of the average pizza restaurant in this country has dropped from 10.4% four years ago to 3.6% today, in large measure because of this anomaly. The result has not only been lost opportunities, but lost jobs for Canada's young people. Our industry has to run uphill to create jobs.

My colleague Joyce Reynolds will now address our primary concern for this year's budget, which is payroll taxes.

Ms. Joyce Reynolds (Senior Director, Government Affairs, Canadian Restaurant and Food Services Association): I'm glad the committee is interested in the best way to ensure a wide range of job opportunities in the new economy. The reality of the new economy for two in five young Canadians is no job.

We think there are things the government can do to encourage entry-level and bridge jobs for Canada's inexperienced and unskilled youth, where unemployment is concentrated, jobs that will give young Canadians the confidence and the experience to get the next job or to keep trying when they're out of a job.

The participation rate of youth in the workforce fell an unprecedented 9.1% between 1989-1996 and has continued to decline during the recent recovery. It means that double the number of Canadians are turning 25 without having held a single job. That period happens to coincide with the implementation of GST and skyrocketing payroll taxes, which have both been devastating for our industry.

In particular, youths aged 15 to 19 have been hard hit. The real tragedy for these young Canadians is not only that they can't find a job and so miss out on the work experience and training that helps them to build their careers, but they also become discouraged about their prospects for being productive contributors to Canadian society.

The government's tax policies have shifted the tax burden from companies that earn income to companies that employ people. We are currently faced with a 70% increase in CPP premiums over the next five years while the government sits on an enormous surplus in the employment insurance fund. We think this surplus is obscene when the direct link between excessive payroll taxes and entry-level jobs is so clear.

The argument that the surplus in the EI account is necessary for rate stabilization reasons is no longer valid. We agree that a $5 billion surplus is sufficient to protect us against an economic downturn. The fund is fast approaching $15 billion, which is the upper limit the fund's chief actuary has advised is prudent.

Government could actually drop the rate 90¢ to $2 from the current $2.90 and still maintain a $10 billion surplus, and that's using the worst-case unemployment scenario of 10.2%. If you look at the best-case scenario of an unemployment rate of 7.7%, the surplus could balloon to $27 billion, and that's at a premium rate of $2. This 90¢ difference in EI premiums translates into a potential 9,000 jobs in the food service industry.

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Valuable first-time jobs get people in the workforce and increase their experience, their skills, and their self-respect.

We do not believe there is a need for new strategic investment, and we think that returning the EI surplus to the employees and job creators who fund the program does not constitute a change to the tax system but rather a necessary change in tax policy.

One other thing that government might like to consider is targeted premium reductions for labour-intensive employers: employers of youth, employers of entry-level workers. In our industry, 30¢ of every revenue dollar goes directly into the pockets of employees. So payroll tax increases have a disproportionate effect on our business.

Forty-six percent of our 870,000 employees are under the age of 25. We are the largest employers of youth, and we are the industry with the greatest potential for providing jobs and opportunities for the nation's 400,000 unemployed if barriers such as high payroll taxes could be removed.

If the government is serious about making headway on the youth unemployment front, a significant overall reduction in EI premiums or, alternatively, targeted premium reductions for youth and entry-level employees are both economically feasible and the surest way to create job opportunities, which Canada's young people desperately need.

Thank you.

The Chairman: Thank you very much, Mr. Ferrabee and Ms. Reynolds.

We will move now to the Canadian Automobile Dealers Association, Mr. Richard Gauthier and Mr. Huw Williams.

Mr. Richard Gauthier (President, Canadian Automobile Dealers Association): Thank you, Mr. Chairman and committee members.

The Canadian Automobile Dealers Association, CADA, is a national trade association representing the franchised new automobile and truck dealers of Canada. There are some 3,700 dealers selling and leasing and servicing new automobiles and trucks in Canada, both domestic and vehicle imports.

Canada's auto dealers employ over 115,000 people and have annual sales in the order of $40 billion. The auto industry is the largest contributor to Canada's GDP. One in six Canadians depends on the automotive industry for employment.

We encourage the federal government to continue with its fiscal policy aimed at reducing the deficit while maintaining a low interest rate, low inflation policy. We believe these policies are essential in fostering a healthy fiscal climate for job creation and setting the fundamentals in place for economic growth.

The success of this policy framework is reflected in the positive sales trends for the Canadian new car industry. When improved consumer confidence comes together with lower interest rates, no sector of the economy feels it more quickly than new car dealers.

A review of our industry's economic performance for 1997 is worth outlining. Canadian dealers experienced the best first quarter sales since 1984, and overall the market is expected to exceed 1.3 million vehicles for the first time in seven years. This represents an increase of 12% for the big three domestic manufacturers, 36.9% for the Asian vehicle manufacturers, and 13% for the European manufacturers. Consequently, the Canadian market will outperform that of the U.S. for the first time in this decade.

Employment in new car dealerships is up by 2.2% this year and is well ahead of the overall auto industry growth of 0.8%. This represents a continued trend towards small business job creation providing tangible jobs for Canadians in communities across Canada.

However, it must be noted that youth unemployment levels still remain unacceptably high at 16%. We believe that a key component of the government's new priorities should be to increase youth employment in Canada. CADA is willing to work with the government and all interested stakeholders in finding solutions to alleviate youth unemployment.

This submission proposes two such solutions: one, providing auto technicians with a tax deduction for their tools, and two, increasing the small business deduction from $200,000 to $300,000.

Firstly, the tax deduction for auto technicians' tools: Canada's 170,000 automotive technicians and apprentices are required as a condition of their employment to purchase, maintain, and insure the necessary tools and equipment to properly service the vehicles they work on. On average, automotive technicians spend $15,000 for a working set of tools and approximately $3,000 per year thereafter to maintain them due to changing technology and normal wear and tear.

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Canada's auto dealers have an average investment of $400,000 per dealership in service bays, diagnostic equipment, and large capital expenditures. Technicians, however, cannot deduct the cost of their tools as a business expense. We see this as extremely unfair, since chain-saw operators and musicians can deduct the cost of their chain-saws and musical instruments.

Our studies show that as a result of this unfair tax treatment we are experiencing the following problems: a serious decline in youth enrolment in automotive technical schools, a shrinking workforce, and a shortage of skilled workers. Therefore, CADA recommends that the federal government implement legislation that would grant automotive technicians and apprentices the ability to deduct the cost of their tools as an employment expense in securing these jobs.

As possible solutions, CADA recommends that the federal government implement the following. One, treat automotive tools as they would musical instruments by including tools in class 8 of depreciable properties with a maximum CCA rate of 20%, or provide a limited annual tax credit.

CADA believes that by providing this tax deduction the federal government would stimulate interest in the profession while creating real jobs for Canada's unemployed youths. These measures, by the way, were supported by the finance committee in its 1996 pre-budget report.

Ladies and gentlemen, what we have here, in short, is that our dealers have the jobs for youths, but we need your help to fill them.

Second, the small business deduction. This deduction was put in place to lower the federal corporate tax rate applied to Canadian small businesses in order to help stimulate job creation and allow employers to reinvest in small business growth. The SBD lowers the federal corporate tax rate on the first $200,000 of taxable income from 28% to 12%. This ceiling was set in 1982, and despite inflationary pressures has remained frozen ever since.

Car dealers, as classic small business players, desperately need the ability to reinvest in their businesses and to create jobs, particularly in times of economic expansion. This action was also recommended in April 1997 by Revenue Canada's national small business advisory committee.

In closing, I would like to thank the committee for providing us with this opportunity to appear. We'd be pleased to answer any questions you may have.

Thank you.

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

We'll now move to the Canadian Automotive Repair and Service Council, Mr. Bell.

Mr. Daniel Bell (President, Canadian Automotive Repair and Service Council): We are pleased to be here to discuss some of the concerns of our industry.

With me today is Keith Lancastle, who will speak to you later. Keith serves as CARS' spokesman on the issue we are presenting here.

Our intention in appearing here today is to express our concern over an inequity in the current income tax provisions related to the treatment of employment expenses. As you've just heard from the CADA, which is also part of the CARS organization, our specific concern deals with the fact that apprentices and technicians working in our industry cannot deduct from their income tax the cost of tools that they must, as a condition of employment, purchase and maintain.

This is a long-standing issue that has an impact on the continuing employment of more than 170,000 Canadians. It further affects young Canadians seeking to make the already difficult transition from school to full-time employment.

Our purpose in appearing here is to speak to the committee to ask for your support to change the income tax provisions to allow Canadian employees to deduct the cost of their mandatory employment expenses from their income.

There are some key points we would like to point out relative to our industry and its role in the Canadian marketplace.

The Canadian automotive repair and service industry is a key player in Canada's economy. It is estimated that we provide employment for upwards of 341,000 Canadians and that the industry's activities are responsible for an annual contribution to the economy of approximately $52 billion. Our industry is recognized as a major contributor to Canada's economic success, both now and for the future.

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As I have noted, I'm here today representing the CARS Council. The CARS Council was established in 1988 to develop and implement a national human resource strategy for the entire automotive industry. The impetus of our creation was a comprehensive human resource study of the entire industry.

The study has identified a number of critical short-term and long-term human resource issues. We have developed a unique sector-wide partnership with organizations such as the CADA and many other automotive associations across Canada.

This wide partnership has been effective in addressing issues around the need for improved occupational standards, the image of the industry, and more effective liaison between industry, its employees, and educational institutions.

CARS has worked to facilitate entry for young people into our industry. This effort has brought together the combined efforts of a number of stakeholders, including the automotive industry, the educational institutions, and of course the government.

Much work has been done to date and many of our key human resource issues are being addressed. There remains, however, an unresolved issue that we are seeking your support for today, which we must address as soon as possible.

I'll ask Keith to continue with this and highlight the issue.

Mr. Keith Lancastle (Spokesperson, CARS Institute, Canadian Automotive Repair and Service Council): Thank you, Mr. Bell.

Mr. Chairman, hon. members, ladies and gentlemen, my name is Keith Lancastle and I am acting as a spokesperson for the CARS Institute on this particular issue.

The CARS Institute was created to provide the 341,000 Canadians who work in the automotive repair and service industry with a national voice on the key human resource issues that were impacting industry's workers.

The issue we are addressing today is a long-standing one, and it's likely one of the most important issues that is of daily concern to Canada's technicians and apprentices. As you've heard, apprentices and technicians working in our industry must, as has been noted by Mr. Bell and by CADA, purchase and maintain up-to-date sets of tools in order to get and keep jobs. The reality facing these individuals is very clear. Without their tools they can't work, yet they are not allowed tax deductions for these mandatory purchases.

Our research has shown that the average technician has invested approximately $15,000 in his or her tools. We do know of individuals who have invested upwards of $35,000 to $40,000. These same technicians will spend thousands of dollars annually updating and replacing their tools.

For entry-level apprentices, this situation is even more acute. These young people must purchase starter sets of tools valued in the area of $4,000 before they can get their first jobs. Over the three to four years it will take them to complete their apprenticeships, they will invest about $4,000 to $5,000 each year to build their tool boxes.

The extent of this investment must be measured against what can only be called modest income levels. According to the 1991 census, the average annual income for an automotive technician was only $29,131. Apprentices, who make even more significant investments in tool purchases each year, earn a fraction of that journeyperson's wage.

We are aware of no other Canadian employees who face such a significant burden and must make such a large investment as a condition of their employment. As Mr. Bell has said, we're here today in the hope of moving our case forward on this issue so that technicians and apprentices will be provided with the same tax deduction and consideration as those Canadians who are employed as artists, chain-saw operators, and musicians.

This is not a new issue. As a matter of fact, this is not our first opportunity to bring this matter forward to the committee. In 1992 we expressed these same concerns to a subcommittee at a similar session. In that report it was noted that our concerns were not without merit and there were inequities in the system that made it unfair.

The Department of Finance was asked at that time to re-examine this issue and make proposals and recommendations for change. The instructions from the subcommittee asked that these proposals be provided no later than the end of 1992.

Since that time, despite continuing representations from our organizations, representation from CADA and other organizations, and a number of private members' bills, no action has been taken. It is our belief and the belief of the technicians and apprentices working in the industry that this has gone on far too long.

The impact of this situation is felt on a number of fronts. The problem is recognized as contributing to the attrition within the existing workforce, but more importantly, we believe it places a considerable impediment and barrier to young people seeking to gain footholds for careers in the automotive industry. It is our belief and our concern that the positive impact, the good work that has been done to date by our organization, will be reduced without action on this issue.

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We've been asked to comment on initiatives that would help to ensure that there are a wide range of job opportunities in the new economy for Canadians. It is our belief that a positive step forward on this issue would be a very good step in assisting our industry in its efforts to grow, to prosper, and to continue to provide job opportunities.

I wish to thank the members of the committee for the opportunity to appear here today. We look forward to your comments and questions.

The Chairman: Thank you very much, Mr. Lancastle, Mr. Bell.

We'll now move to the last intervention of this section. From the Pharmaceutical Manufacturers Association of Canada, we have the Hon. Judith Erola. Welcome.

Hon. Judith A. Erola (President, Pharmaceutical Manufacturers Association of Canada): Thank you, Mr. Chairman and members of the committee.

On behalf of the research-based pharmaceutical industry in Canada, we welcome the opportunity to share with the standing committee our views on appropriate new strategic investments and changes to the tax system that will allow the government to achieve its priorities.

I'd like to play back some of those priorities that were enunciated in the Speech from the Throne: stimulating job creation and economic growth; encouraging new investments that create new jobs; making Canada the location of choice for global investments; supporting science and technology in the creation of knowledge; providing public support for research in our universities and in our teaching hospitals.

We have several recommendations, but I'd first like to tell you that we have 61 member companies. Approximately 40 of these companies are full manufacturing companies here in Canada. We also represent the burgeoning and booming biotechnology industry that has been quite successful within the last decade in Canada.

We increased employment in our companies by over 3,300 over the past 10 years, despite the fact that during this period there was great global reorganization, with mergers and significant job losses. Canada emerged a big winner in this sector. Extramural R and D in universities, hospitals, and research institutes is approximately $4,500. Last year alone, we spent 15.7% or $768 million on research and development, and the total over the past decade is something like $4 billion.

We have a number of concerns, however, in that the current definition of research and development does not harmonize with that which is defined by the OECD. I'd like to point out that we've had some correspondence with Revenue Canada, and we note with regret that they are not contemplating any changes to the legislative definition of SR and ED. This is a matter of great concern to us, because the definition of research as defined by the OECD is broader because the fundamental concept is innovation. Therefore, unlike the Canadian definition, it is not limited to science or engineering and includes research in the social sciences. Indeed, the government's focus on partnerships in this area—for instance, the Canada Foundation for Innovation, the Technology Partnerships Canada investment fund, and the Health Transition Fund—and the encouragement to seek industrial partners are being constrained by the current definition.

There was a consensus conference held just last year by Health Canada that made exactly the recommendations we would like to see incorporated, and I will table those documents. But suffice it to say that, in synopsis, what they said was that there is a need to develop clearly defined terms to facilitate communication within the health research community and with the public policy-makers and the media. In fact, the conference also noted that the definition of “health research” goes beyond the current standards and includes such areas as evidence-based health care, studies of population health, epidemiology, and methods of health care delivery. I stress that none of these at the moment is covered under the current SR and ED definitions.

There is an urgent need in Canada to revisit this definition and to fully account for the level of activity being carried out in Canada. I would suggest also that if Canada wants to remain a key player in attracting global pharmaceutical research and development, it must consider harmonization with the international definitions of SR and ED.

We also note with some concern just what has happened in research spending in Canada by our industry—and I beg the committee's indulgence, because we have some charts here to show you. I'll do this very quickly.

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By the way, Grant Perry is my colleague, the head of regulatory affairs at PMAC.

This chart shows you what has happened in less than a decade in R and D expenditures in the health field. You will see government expenditures particularly at the federal level have declined significantly over the same period as industry's R and D figures have climbed.

The next slide will show you what is happening in our industrial partners, the United Kingdom, France, the United States, where government funding has indeed climbed significantly during this time, whereas the Medical Research Council of Canada, which is the principal funding body for medical research and with whom we have a significant partnership, has declined considerably. We would suggest to the members of the committee the reason Canada has been able to attract global investments to this country is that base of infrastructure that has been built up over a period. We think there is a serious erosion of that base and the base must be revisited in order to have the industrial partnerships and that continued economic growth here in Canada.

Thank you for your attention.

The Chairman: Thank you.

We'll proceed to the question and answer session. We will begin with Mr. Ritz.

Mr. Gerry Ritz (Battlefords—Lloydminster, Ref.): Thank you, Mr. Chairman.

It's great to hear the presentations here this afternoon. It's hard to come up with earth-shaking questions when you agree with just about everything you fellows and ladies are saying.

There are major components in input costs that hold Canada back or put us in the front in global competitiveness. I'm wondering if you people would like to comment on what government can do to complement rather than complicate those business administration problems and so on we seem to have here.

Mr. Jayson Myers (Vice-President and Chief Economist, Alliance of Manufacturers and Exporters' Association): Let me take a starting shot at that.

In 1993, when we were developing the Treasury Board and Industry Canada compliance impact test, we estimated the cost of regulatory compliance for business in Canada. The cost at that time we figured was between $30 billion and $50 billion. Since then the United States has come up with an estimate of about 9% of private sector GDP. If you applied that to Canada with the 10% rule of thumb it would be somewhere around $65 billion. These are huge hidden costs and they are going up all the time.

Mr. McGuinness was talking about cost-recovery initiatives. That's particularly a problem in the area of regulatory costs where the regulatory compliance is mandated, yet it seems to me there's no direction in the federal government here about an overall policy for cost recovery. We see more and more departments simply trying to recover revenue that has been cut by turning around and charging user fees for things such as product approvals, which have a direct effect on innovation. I would think that is one of the top priorities this government has to look at.

Ms. Judith Erola: Time didn't permit me to bring this up in my original presentation, but I would second exactly what was said earlier. This year we will be spending approximately $35 million in fees to the government for drug approvals. While we have seen some decline in the time that is taken, the decline is not significant enough to place us at the competitive level of our member companies. We do not object to paying these fees, but what we would like to see government do is bring the performance levels of those drug approval agencies, in whatever form they take, to our competitors' levels and to see some performance standards built in.

I agree there seems to be a hodge-podge, if you will, of cost-recovery measures. For every cost-recovery measure that is brought in and that industry is asked to pay for, some significant performance standard should be laid upon those agencies.

Mr. Michael Ferrabee: One issue I wanted to raise is the whole issue of supply management. As the committee is probably aware, on both the poultry and the dairy side we are essentially restricted from competing internationally as a result of a system we've built up internally.

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We're very much in favour of working with that industry and trying to bring them along the competitiveness cycle and to increase their ability to compete and over time produce a very solid, strong, Canadian- and world-competitive industry in those two areas. We've begun our process over the last number of years on the chicken side. We've just begun on the cheese side as an association and are quite concerned about a dramatic increase in prices that is likely to affect us, starting this February.

Mr. Huw Williams (Director, Public Affairs, Canadian Automobile Dealers Association): We must look at the costs imposed by the government. If you had to look at one single area, it would be the burden imposed by having to administer two taxes.

The federal government's movement to harmonize the sales tax in Atlantic Canada has worked well, and any initiative to extend that into Ontario and the remainder of the provinces would be welcome.

Mr. David Burn (Vice-President, Taxation, Nortel; Alliance of Manufacturers and Exporters' Association): I would agree with the harmonization point just made. That's a significant opportunity for cost reduction across the country.

Two other areas that are of ongoing concern are the costs of obtaining the R and D tax credit claim from Revenue Canada—and I know you heard about this from the high-tech associations last week—and, secondly, more recently, the proposals on transfer pricing. Interestingly, I heard an American commentator say last week that we are now the pariah of the world in terms of international taxation.

Mr. Bob Ballantyne: Just generally, in this era of NAFTA and free trade one of the inputs that governments have to take into consideration, in both taxation and in the regulatory area, is what our major trading partners and competitors are doing in the same areas. Clearly, if we're really going to be competitive, not only do our companies have to be world class but also our government has to be world class, and the regulatory and tax regime has to be as well.

So really it's just a case of saying that it's not only looking inward, not looking only at what the companies are doing and what internally we feel is necessary, but also looking at what our competitors are doing in the same areas.

Mr. Michael Ferrabee: I'd like to come back for a moment to the harmonization issue. It's one on which we appeared before this committee before the end of the last parliament. We have very big concerns as an association with respect to any extension of harmonization around the country, beyond the borders of Atlantic Canada. It is an issue that we raise concerns about. Particularly, as well at the time we raised the issue of tax-included pricing and exactly what kind of effect that would have.

I just wanted to make sure that was on the record.

The Chairman: Mr. Jones.

Mr. Jim Jones (Markham, PC): My first question is on the tools. What would happen if the business bought the tools? Would that business be able to write them off, versus the employee?

Mr. Richard Gauthier: Of course that would probably fall in the realm of capital expenditures, subject to those particular regulations. However, it is a condition of employment for mechanics. As I mentioned earlier in my presentation, dealers are now investing approximately $400,000 a year in diagnostic equipment, paint booths, and those sorts of things.

Tools are a very personal item for technicians and mechanics. I would say that could be analogous to a musician and his guitar. For a musician to play with somebody else's guitar—

Mr. Jim Jones: The question I'm really asking is, can the business deduct the cost? If the business can deduct it, then the employee or the technician should be able to have the same opportunity.

Mr. Richard Gauthier: That's what we're seeking, yes.

Mr. Jim Jones: Yes. So I'm saying that if the business can write it off, then there's an inconsistency in the act.

Mr. Richard Gauthier: In that regard, yes. If you want to look at it in that way, yes, certainly.

Mr. Jim Jones: I agreed with the comments that said there is no such thing as Canadian in the manufacturing industry. Do you have examples of when you do comparisons and looking at different countries in deciding where to locate? Could you provide those examples to the committee here, saying—if I was going to set up a plant in Ireland or the U.S. or Malaysia, those countries—what tax incentives and advantages they have over the Canadian marketplace? Maybe it's also labour costs and all that. That would give us a good idea of what you're competing against.

I know there have been a lot of plants looking for locations in the U.S. in the last few years, probably 600 or 700 plants, and I just wondered how many we've gotten out of those.

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Mr. Stephen Van Houten: Yes, we have a good deal of that information you're asking for. We have some of it right now.

Mr. David Burn: Naturally, I have a list of corporate tax rates from around the world in front of me, which I think will answer Mr. Jones's question. Ireland, for example, does have a 10% tax rate.

You heard Mr. Van Houten refer to China earlier. Many countries such as China have offered a zero tax rate for a number of years to attract start-up industry and the type of investment we're all seeking to compete for today. In addition to lower tax rates, they have withholding tax exemptions, and so on. There are a number of areas to look at as we try to assess the advantages of one country over another.

The accounting firm of KPMG recently came out with a study in which Canada came out quite high. But that particular study omitted to compare something. In the U.S, they offer something called a fisc, which is an incentive that reduces the tax rate for exports by about 5%. Also, in these comparisons, we usually average out the average provincial tax and average U.S. state tax to come to a north-south equation. In actual fact, of course, most of the U.S. states with zero tax rates are the ones that are attracting the new investment.

So the combination of a zero tax rate in some states plus this export credit makes the U.S. tax rate considerably better than ours. Again, as you indicated yourself, sir, there are countries around the world with much lower rates.

Mr. Jim Jones: Is that information in the handouts you gave us?

Mr. David Burn: It's not in the handout, but I can certainly make this particular chart available.

Mr. Jim Jones: Okay.

The last question I have is on the currency devaluation in Southeast Asia and how it's really impacting the pulp and paper industry. I thought you would have sold fewer goods to them.

Mr. Ian Young: Yes.

Mr. Jim Jones: They would be more competitive. Are they taking our raw materials, processing them, and sending them back to us, or are they getting them from other places?

Mr. Ian Young: No, they're not. Particularly in Indonesia and Malaysia, it takes 8 to 10 years to grow a tree, whereas here it takes 40 to 80 years to grow a tree. Now the fibre is a different quality, but at the low end, the real commodity end, we had a hard time competing with them before. But with a 25% to 50% devaluation of their currency, it'll be that much lower.

Plus, in some areas where they didn't have the higher-quality fibre for specialty papers such as that for scientific journals or bible-quality paper, they would be importing. With the devaluations, these products are much more expensive to them, so they would be buying fewer exports from say, North America because, first, they don't have as much money, and second, they're struggling to survive with their local currency.

If I could make a non-gratuitous comment, the key thing the forest industry would like is not to have any tax increases. We can survive the way we are. Overall, we're competitive with the U.S. on our tax rates. The key thing that helps us is the devaluation of the Canadian currency, if I could just piggyback on that, against the U.S. currency. The total profit of our industry would disappear if the Canadian dollar went up 5¢ in value as an average cycle cost.

What Mr. Martin, Finance, and the government have done has been absolutely critical to export industries. As I mentioned in my presentation, we're the biggest single net-basis contributor to Canada's balance of trade. We've been talking to people like Jeff Rubin of Wood Gundy, and others, to ask them to please keep talking up the importance of a lower dollar to Canada. It's terribly important, particularly now.

The Chairman: Thank you very much, Mr. Young. Thank you, Mr. Jones.

Mr. Pillitteri.

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

Thank you very much for the presentation, but I was just wondering. It looked mostly like doom and gloom while saying you want more.

Gentlemen, I understand that 40% of our total GDP was in exports. I don't think this was a tightening of the waist of the government, which has done quite well—including me as a businessman. I think we've all done well in the last few years with the government's policies—and I know everybody is looking for more help and more ways to find revenues.

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But I want to comment specifically on a remark you made on supply management. Of course, many of us Canadians know supply management is a stable food policy and we have the best food policy in the world as far as supplying and management. But let's not forget that in the last round of GATT we also opened up the market to the Americans from 3% to 7%. There's no tariff in the first 7% within supply management. It only accounts for the poultry and milk.

But let me also say to you that in having conversation with some Americans, congressmen have said they wish they'd had in the United States something like those kinds of programs, because through their enhancement export program they have driven up the prices of their own commodities; they are the culprits for driving up their own prices. This was admitted to us by some American congressmen. The ones who are complaining to us about the influx of wheat products into the United States wish they had that, because they created their own problems.

Here we're just picking at one little issue because of the cheese, the milk, and the poultry issues. But remember, they have access to our market and it is not costing Canadians anything. The only thing it's giving Canadians is a stable food policy.

May I add that I take exception, when I go to the United States...if I'm going to eat chicken or not.

Mr. Michael Ferrabee: I could respond. There are a number of issues I think I'd like to deal with, if I could. I'll begin with your closing comment, which is that it's not costing Canadians anything.

We pay as consumers 40% to 60% higher than world price for the cost of cheese in this country; 40% more for the cost of chicken than we pay for world price in this country. So if you don't think it's costing consumers anything, you obviously haven't done any cross-border comparison shopping, because it's significant. These are not little teeny bits.

Secondly, on the issue of having opened up our markets to the United States, if a 352% tariff on imported cheese is opening up our markets, yes, you're right, technically they can bring it across the border if they want to pay 352% to bring it across, which is ludicrous and nobody is ever—

Mr. Gary Pillitteri: But from 3% tax free to 7% of our total market, they could bring in; they could supply 7% of our total market without any taxes on it.

Mr. Michael Ferrabee: As an industry, our interest is not in bringing American product across the border. Our interest as an industry is in developing a competitive domestic industry, and I think we all agree with that.

Mr. Gary Pillitteri: Yes, at 350%.

I don't want to be argumentative, but in the support programs they have in Europe it's almost $2 to $1 the way we have it here in Canada. Supportive programs and subsidies are incredible in Europe and the United States compared to that of Canada; we have the least supported programs within agriculture.

Mr. Michael Ferrabee: I think we could probably spend a fair amount of time arguing over statistics, because certainly everything we've looked at suggests quite the opposite. But I think there is an important point to be made when you start talking about key inputs to an industry like ours—like cheese. Have you ever had a pizza without cheese?

It's a commodity we're paying 40% to 60% more for in this country, and it's one that is being regulated now. We've now learned they're looking at a 4% to 6% increase overnight February 1. They're going to decide they're going to do this, and our industry will suffer dramatically as a result of that.

Also, on this managed pricing system, what we'd like to do is see a competitive industry. I don't think you and I disagree fundamentally about where we're going with this. I think we all want to see a strong economy and a strong and competitive world industry.

The only other point I would make is.... You speak about some Americans you spoke to. They're challenging our programs all the time. There may be some rogue congressmen out there who think they'd like to have a supply-managed system—

Mr. Gary Pillitteri: I could name you the congressman.

Mr. Michael Ferrabee: Great, but the U.S. administration—

Mr. Gary Pillitteri: On section 301 yesterday, the MAI wanted to challenge us, but they haven't brought their challenge forward.

Mr. Michael Ferrabee: There may be a number of congressmen who are perhaps prepared to say something different, but the administration itself is presently challenging our export policies on dairy and our two-price system.

I'll give you one little anecdote, if I could, to conclude.

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I had a gentleman from a very large Canadian pizza company with me when we did the rounds in Ottawa of some of the senior people on the dairy side. He said he had been getting together with his international suppliers and franchisees. Over dinner they were talking about their suppliers and where they get their cheese. One of his people from Mexico, who runs a franchise there, said, “It's absolutely great. I found this new supplier. It's a Canadian company.” They compared notes, and the person in Mexico was buying his cheese for 40% less than this person could buy his cheese for in Canada.

The Chairman: Mr. Szabo.

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

I was glad that the harmonized sales tax issue was brought up, although there doesn't seem to be unanimity.

When we were travelling across the country, we found that particularly on the east coast where they have the harmonization there was no question that it was an excellent move for them. But it's not working as well as it could because they must have two systems. They have to deal with those who are harmonized and, in other provinces, those who are not, and this is frustrating the full benefit of it.

The input tax credit on the provincial component of the HST is a whopping big nest egg for business out there...if we could only convince the other provinces to get onside.

I want to ask my question of Mr. Gauthier. It has to do with the statement that “I have the jobs for the youth”. The unemployment rate for university grads under 25 is 6.8% and for high school grads it's about 15%. More than half of unemployed youths are high school drop-outs, who have about a 23% unemployment rate.

Since the automobile industry employs one in six people in Canada, here's my question. Do you have a place for high school drop-outs? Are you prepared to train them? What is really the barrier for those people in getting jobs in the auto industry?

Mr. Richard Gauthier: Our industry is fully supportive of educating and bringing people into the industry. We have the Canadian Automotive Institute operating out of Barrie, which so far has produced in excess of 700 students. We have SAIT in southern Alberta, the Southern Alberta Institute of Technology. We're working closely with them.

So yes, we do have a place for them. The problem is that enrolment is declining. These people are 18 years old and it's very difficult for them to get a loan of $15,000 or $20,000 in order to equip themselves with the appropriate tools.

Mr. Paul Szabo: But that's post-secondary.

Mr. Richard Gauthier: Yes.

Mr. Daniel Bell: I'd like to jump in here, Mr. Chairman.

Through CARS, for our industry we have worked on the youth employment program to see if we could match opportunities with individuals across the country. We've been very successful. In fact, in the past three years we've found employment opportunities and matched them with individuals in that catch-22 position where they couldn't get a job because they had no experience and, vice versa, they couldn't get experience without a job.

Our industry has been very supportive of this concept, and in fact we've placed 1,080 people in programs in every major city in Canada. We've done this through an internship that is funded jointly, by our industry with matching dollars from the government. It's been a very successful program.

We're doing a study right now on the attrition rate and where these people are after they've been in the program. The industry continues to need more people. There are more opportunities for young people, but the barriers we've talked about today are the things that we must overcome. We can find opportunities to place people in good career-opportunity jobs, but things like the tool-tax issue for a young person who has had no opportunity to earn any income and is faced first thing with a $4,000 or $5,000 investment before you can even place him in a job environment...you're certainly tying his hands behind his back.

That's why today we think we can even do more to create job opportunities as an industry if some of our concerns are listened to as far as the tax breaks go.

The Chairman: Thank you, Mr. Bell.

Any further questions?

Ms. Redman.

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Ms. Karen Redman (Kitchener Centre, Lib.): Mr. Chairman, could I ask a question of Mr. Goodison?

It's on page 6 of your presentation. You say what is needed is a concerted national effort led by the private sector, not by the federal government. I was wondering if you could flesh that out a little for me. I would agree the best long-lasting jobs are created by the private sector. I'm just wondering what you envision by a“concerted national effort”.

Mr. Don Goodison: With a concerted national effort such as encouragement of technology training, the entry-level positions.... We heard the people over there saying their entry-level positions are being eroded by excess taxation; by GST. When you look at the tool situation it seems odd that under the Income Tax Act an employee can write off a car or an aircraft but can't write off the cost of his tools. I think what we need is a fiscal policy that encourages the employment of youth and encourages companies to employ youth rather than one that discourages employment by excess government regulations and burdens.

Ms. Karen Redman: I guess I could make an observation. We truly are in a global economy and we are always looking to other countries and other places. I know of late education has come under attack a lot in Ontario and we've often looked to Germany and its apprenticeship program, but one of the things it demands of the sectors you people represent is the buying into it, the willingness to take these people on. For businesses this is a huge investment and somewhat of a gamble.

I guess that's also inherent in my questioning. Are your sectors ready to do that, to put that gamble forward and allow young people that kind of opportunity?

Mr. Daniel Bell: Certainly in the automotive industry we've always had that challenge with real jobs for people. We don't believe in jobs that train people just to have a seat in a classroom or where there's no opportunity for them.

A commitment is made in our industry through our organization. When we talk with the Canadian Automobile Dealers Association or the automotive industries association, when we go out to the small businesses that make up these organizations—and these are small businesses—we say, you must show us there is an opportunity for this individual and then help us mentor that person through. It's one thing to put them in school, but when they are in the job not only do you have to pay for their existence while they are there but you also must take the responsibility to mentor and help the individual. It's an investment you have to make, and you have to be willing to make, so you reap the benefits of having an employee who is going to stay with you and work through a career and so he or she will find a very worthwhile and productive opportunity.

In our particular industry, and I'm sure Mr. Gauthier will agree with me, we've had no problem getting support. Once we mention we want to run a program the industry is there.

Mr. Richard Gauthier: As I mentioned to Mr. Szabo earlier, Ms. Redman, if we are looking at CAI as an example, we have a 100% placement rate since its inception.

The biggest problems dealers are facing right now with skilled technicians is the availability of them. I'm a former dealer myself. It was of great concern to me every day when I would go home...I would have specialized technicians and I would say to myself, I hope none of these fine people get hit by a bus tonight, because I don't know how I will replace them. There are no replacements out there. That was a grave concern to me.

Mr. Michael Ferrabee: From the restaurant standpoint, obviously we are the people who provide those bridge jobs and we are in the service business. We do train them. They are often people's first jobs and I think they are important jobs.

I would also very much like to commend Mr. Szabo for his analysis. As far as we are concerned, that's really what it's about. As much as we like to bandy around phrases such as “new economy”, as Ms. Reynolds pointed out, the new economy for two in five young people is no job. It really is exactly those kinds of people I think our industry can help.

Further to comments earlier, we are not looking for a handout. We are not here with our hand out. In fact, if you ask us, we are not in favour of them. What we would really like to see is for you to return some of the money that has built up in the UI surplus so we can put people back to work, so we can let the economy look after it; put a lot of people in our industry back to work and create those important jobs.

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The Chairman: Two final comments. Mr. Boudreau followed by Mr. Van Houten.

Mr. Mark Boudreau (Vice-President, Public and Government Relations, Certified General Accountants' Association of Canada): We were trying to allude to the fact that what we really need is a Team Canada approach to youth unemployment. We've done this on the export side very successfully, but we need businesses to sit down and have a round table to figure out where we're going.

I'll give you a small example. Kids in, say, grades 3 or 4 have never seen the inside of a factory. They don't know about tools...and they should be taught at a very young age. As industry leaders we should be taking them inside of Corel, places like that, saying, “This is the future of the world, folks”. We don't mentor the young people to know what the skills are at a very young age. That's only a small measure of what we can do.

As you know, Hon. Member Szabo, there's a declining job market for those who are dropping out at grades 11 or 12. They drift from one job to the next and to the next, and then find themselves at 25 years old—I see these examples coming across my desk—with no experience. They've just gone from one to the next, and to the next.

So we really have to tackle that particular problem. How do we do it? Is it in a classroom setting or is it in another setting that we have to provide young Canadians? We have to look seriously at those issues.

The Chairman: Thank you, Mr. Boudreau.

Mr. Van Houten.

Mr. Stephen Van Houten: Thank you, Mr. Chairman. I'd certainly support the comments just made about the importance of skills and the right kinds of skills.

You asked a question about the private sector's commitment to creating employment. Our sector, I think, has a lot to be proud of, and nothing to be ashamed of. In fact, net direct employment in the manufacturing industry in Canada has grown on average by 100,000 people per year for the last handful of years, which means 500,000 more people are employed in the industry now than four and a half years ago. That's a heck of a lot of job growth.

But it doesn't happen, actually, because governments or businesses say, “Let there be jobs; let's go hire some people; let's create employment”. Governments don't create jobs. Businesses don't create jobs. Customers create jobs.

Our employment has gone up because our exports have gone up. That's because customers all around the world have been saying “yes” to Canadian-made products. If we produce the right product, with the right service, at the right price, with world-beating quality, customers will say “yes” in volume. Then we'll need to hire some people to help us deliver. To do that, we'll have to have all the right skill sets and so on.

Customers are not just the people who buy our outputs; they're the people who decide to put their next factory in a particular country. So investors are customers too, and boy oh boy, we have to be the best if we want to get them to decide that Canada's the place.

The Chairman: Thank you very much, Mr. Van Houten.

Ms. Erola.

Ms. Judith Erola: Let me build on that as well. We're at the other end of the scale with the high-tech jobs. Most of our jobs involve people with the very minimum of a university degree, but generally, most of our people—I think 48% was the last statistic—have at least two degrees.

When cutbacks to the funding agencies, which bring your students up to the doctoral and post-doctoral levels, are spread so thinly that you can't fund them here in Canada, they leave. It is a brain drain at the upper end. That's a matter of real concern to us, because that has been happening across the country.

I have several stories of young students who have not been able to get into a master's program simply because the university cutbacks have cut back so deeply that they can't obtain a master's. Well, ten years from now we're going to be in serious trouble if we don't have that constant supply of master's and Ph.D.s and post-doc programs. That's why the government funding is so essential.

The Chairman: Thank you very much.

On behalf of the committee, I'd like to thank you. It's been a very interesting round table. You've provided us with some very valuable information that we'll make good use of as we write the report and make what I hope will be excellent recommendations to the Minister of Finance.

I'm now going to suspend, members, but please stay for an in camera meeting.

[Editor's Note: Proceedings continue in camera]