FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Monday, October 5, 1998

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this morning in wonderful Vancouver, B.C. The committee is here, of course, pursuant to Standing Order 108(2) and 83.1, to resume its pre-budget consultation process.

Before proceeding, I want to bring this to the attention of the committee. I need approval from you to invite the Minister of Finance, Paul Martin, to appear in front of the committee to deliver his economic and fiscal update on the morning of Wednesday, October 14, 1998. Is that okay? Can we have unanimous consent?

There's unanimous consent to have the Minister of Finance, Paul Martin, appear in front of this committee on Wednesday, October 14, 1998, in the morning, in Ottawa.

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Mr. Odina Desrochers (Lotbinière, BQ): What's happening with the Toronto people?

The Chairman: For Toronto, the clerk will arrange that any overflow will be taken care of in our Ottawa hearings.

Mr. Odina Desrochers: I know that next Friday, October 9, 1998, we are supposed to finish at 10:30. So what happens if you scratch Monday and Wednesday?

The Chairman: That's taken care of. The clerk said there's no problem with that. Is that okay?

Mr. Odina Desrochers: Yes.

The Chairman: So we have unanimous consent for that. Thank you very much.

I'm sorry that we had to take care of some housekeeping items. I'd like to take this opportunity to welcome the following groups: the Advanced Education Council of British Columbia, the British Columbia Teachers' Federation, the Canadian Federation of Students—British Columbia Component, the College Institute Educators' Association of British Columbia, the Confederation of University Faculty Associations of British Columbia, and the National Graduate Council. Welcome.

We will begin the presentation with Dr. Gerry Della Mattia, executive director, and Neil Nicholson, president, from the Advanced Education Council of British Columbia. Welcome.

Mr. Neil Nicholson (President, Advanced Education Council of British Columbia): Thank you, Mr. Chairman. We're also accompanied by Dr. Gitta Oldendorff, our director of communications and policy analysis.

We would like to apologize to the committee. Our organization is meeting at 11 this morning, a date that was set some time ago, so we will be leaving probably at the first coffee break. We will look forward to seeing the briefs of the other groups and the results of your deliberations.

The submission we made to you earlier follows the format you outlined in your letter of May 28, 1998. I don't intend to read it all to you, but simply to hit some of the high spots. Your first question was, with the budget balanced, what message do you wish to send to the government as to the priorities it should set for the fiscal dividends?

The Advanced Education Council of B.C. supports the goal of a continued balanced budget. At the same time, the government must provide the means to continuously improve our global competitiveness in a fiscally sustainable way. Fiscal dividends should be invested in areas that make Canada less dependent on raw natural resources, invested in those areas that define us as a nation. Our concerns for our citizens are for the provision of a variety of social programs, including a high-quality, public post-secondary education system.

You asked, what appropriate, new strategic investments and changes to the tax system would allow the government to best achieve those priorities? In Canada we believe in affordability of public post-secondary education. High student debt loads have already become a high priority.

In addressing those problems, our provincial government has frozen tuition fees for three consecutive years. While the province maintains and in some areas expands post-secondary education funding, the severe reduction in funding by the Government of Canada has put an excessive burden on the citizens of B.C. We believe the Government of Canada must accept its responsibility to restore funding for post-secondary education through improved transfer payments.

Conditional grants to match the investment of the provinces in post-secondary education would be a viable option in restoring transfer payments. To demonstrate the federal government's desire to reinforce the pan-Canadian values of accessibility and affordability of education, the government could match the funds the provincial government currently provides.

This reverse order, a 50-cent dollar, where the federal government matches provincial expenditures as opposed to the provinces matching federal funds, is highly integrating in character. It serves the desirable purpose of creating a more co-operative federalism in areas where the country as a whole will gain.

Tax credits, the millennium scholarship, expanded availability of RESPs—other measures introduced in 1997—are initiatives that are designed to help individuals pay for their post-secondary education and reduce student debt. These actions are important steps to make post-secondary education more accessible. We support those initiatives but we encourage the federal government to expand these programs to offer the benefit to more students.

We recommend further changes to the tax system to make it easier for Canadians to pursue post-secondary education. Some new businesses get a two-year tax holiday. We suggest new graduates from post-secondary schools could similarly get a two-year personal income tax break. The universality of this measure would not require costly needs assessment and would be a fair and equal investment in post-secondary education.

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Our community colleges respond quickly to regional and economic needs, to help create the workforce that forms an economic base in all Canadian regions. They're an important tool for regional economic development and job creation and are capable of being a strategic partner in labour market development. To neglect this system as a whole and devolve all assistance to the individual consumer would weaken a strong system and undermine the success of one of Canada's highly demanded exports: services in education.

Those policy changes in the employment insurance training fund put the public post-secondary education sector, particularly the colleges and institutes, at a disadvantage and jeopardize its leading position of provider of high-quality, accessible, and affordable training and education. If the government wants to keep education affordable for all Canadians, it cannot treat private education and training providers more favourably than public institutions.

With respect to employment insurance training funding, the government must continue to compensate post-secondary institutions for the full cost of training and not just the tuition portion of the cost.

Your third question was “How can we help Canadians prepare to take advantage of the opportunities offered by this new era?” We suggest that if the new era is an economy that's knowledge-based, increasingly global in scope, characterized by the fast exchange of information where physical borders become less and less important and are no longer an obstacle to the exchange of goods, services, and knowledge, we can best prepare Canadians to take advantage of that new era by enabling Canadians to obtain as much education as possible.

The Council of Ministers of Education Canada has identified affordable, accessible education as a pan-Canadian value. The Government of Canada can help preserve this important common value by investing the fiscal dividend in post-secondary education. This initiative provides all Canadians, regardless of gender, income, age, race, or residence the opportunity to obtain the education they want. If we provide Canadians with the knowledge and skills they need for the new economy, they will discover for themselves how to take advantage of the opportunities in the new era.

What is the best way the government can help ensure there's a wide range of job opportunities in the new economy for all Canadians? On an international scale, in service-related sectors of the economy, Canada has a competitive advantage over many other countries. Our post-secondary education system is the basis for the highly skilled jobs that are the centrepiece of a healthy service sector. Canadians are internationally recognized for expertise in environmental management, education and training, consulting engineering, and other services. In the current global economy, where competitive advantage is increasingly based on knowledge, Canada until now has been able to draw on the graduates of its universal and accessible education system. The future of our nation's competitiveness will depend even more on the quality of our labour force than in the past.

To curtail investment in education now may jeopardize Canada's favourable position in the international service sector. Other G-7 nations, as well as emerging economies, are already gearing up to use the economic potential of the knowledge-based economy. If we want to tap into the growing market for education and training and not fall behind the emerging economies, we need to build on our competitive advantage in post-secondary education.

Strengthening research and development is another way to ensure a wide range of job opportunities. Only by staying on top of the latest scientific research will Canada remain competitive in the long run. As we strive to make the shift from a resource-based economy to a knowledge-based economy, our competitive advantage lies not in cheap labour, but in knowledge-based skilled labour.

We can't rely on market-driven research if we want to explore all options to create jobs in the new economy. We have to think broadly and laterally, and we must support R and D in all areas, not only the obvious ones such as high tech, biotech, or engineering. An example of a new highly demanded area of expertise is knowledge management. In areas like this, social science research can help give Canadians a competitive edge over other economies.

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The Canada Foundation for Innovation is a welcome initiative for the support of research in all areas. The Advanced Education Council encourages the Government of Canada to increase research funds open to the college and institutes sector. Brian Wilson, the Scottish Office Minister of State for Education, Industry and Tourism, has summarized the importance of education for our country and its economy in saying “Education is the best economic policy we have. A highly trained and educated citizenry is our country's most precious possession.” We would urge the Government of Canada to adopt this view.

We express our appreciation for being invited to provide input for the 1999-2000 federal budget and will be pleased to answer any questions you might have. We'd like to reiterate our plea for federal investment in the post-secondary education sector. Canada is as strong as its people, and education is the cornerstone of that strength, now and in the future. That alone justifies substantial investment in post-secondary education. Thank you.

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

I will now hear from the British Columbia Teachers' Federation, Ms. Elsie McMurphy.

She's not here.

I will then call on the Canadian Federation of Students, British Columbia component, Michael Conlon.

Mr. Michael Conlon (National Executive Representative, Canadian Federation of Students, British Columbia Component): Good morning.

My name is Mike Conlon. As national executive representative for British Columbia, I am pleased to be here today on behalf of the Canadian Federation of Students. Our organization represents more than 400,000 students at public colleges, institutes, and universities across Canada.

I'd like to start by thanking the members of the committee for the opportunity to present our views on the 1999-2000 federal budget and for taking the time to come to British Columbia.

The Canadian Federation of Students was founded on the principle that post-secondary education should be fully funded and accessible to all Canadians. In our submission, we will argue that as a nation we are in fact moving further from that principle rather than closer, and the trend must be reversed. Successive budgets in this decade have moved funding away from post-secondary education and concurrently undermined the principle of a publicly funded and administered system of grants and loans. The result has been a decline in the accessibility and quality of Canada's post-secondary education institutions and the development of a student debt crisis.

As the federal government determines the spending priorities for the 1999-2000 budget, we hope it will make addressing the erosion of funding and the resulting crisis in student debt the key priority. In support of that we will argue that social investment, particularly in the area of post-secondary education, offers the government a tangible and pragmatic avenue to ensure that all Canadians enjoy the fiscal stability we have all contributed to.

Our argument stresses both the economic and social benefit of post-secondary education for Canadian society. In addition to this argument, we will also offer a counter to the prevailing view among some that measures contained in the 1998-1999 budget address the crisis of student debt in this country.

The 1999-2000 budget will be the first in many years to contemplate the means by which to use surplus resources; the first to allow the debate to move from one centred on expenditure-cutting measures to one of how to best reinvest in Canada. We understand that while this is an exciting opportunity, it also creates significant challenges for the government through competing demands for these resources.

There are two general directions that have been identified in our brief for use of the surplus in this post-deficit era: debt reduction or increased spending. Increased spending could take the form of either increased social expenditures or a reduction in the tax base in the form of tax cuts. We, of course, would like to argue for the value of education and social expenditures.

It is our contention that restoring social spending offers the best economic and social value for Canada. Specifically, reinvestment in post-secondary education is the most effective method of investment from the treasury's point of view and for the future economic and social well-being of Canada. There are strong and conclusive arguments that the direct economic return in post-secondary education alone is greater than the cost of providing that education, not to mention the cost of not providing that education.

In a recent study, Robert C. Allen, an economist at the University of British Columbia, analyses the returns on post-secondary education by comparing the additional earnings of post-secondary graduates and the assumed taxes to be paid on these earnings with the cost to the government of providing education. Allen determined that in all but a few very small program areas, students more than paid for the cost of their education through higher future taxes.

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As we move increasingly to a knowledge-based economy, the return on investment in post-secondary education will increase, as will the consequences of not investing. At the same time, the supporting arguments for a substantial increase in spending proposed through tax cuts or tax expenditures offer far less assurance of a measurable social and economic dividend.

By their nature and scope, the magnitude of tax expenditures required to make a difference in the lives of the majority of Canadians is prohibitively expensive. For the majority of Canadians, any return they would see through a lower personal income tax bill will be more than offset through higher user fees for public programs, such as universities and colleges, or less directly through declining services. While a $2 billion annual increase in post-secondary funding would have a profound effect on the accessibility and quality of our post-secondary education system, tax cuts of a similar magnitude and a similar cost would put less than $20 back in the pocket of the Canadian taxpayer.

It is our view that the pressures to restore the level of social spending in Canada to a respectable and competitive level take priority. It is the wrong time to consider tax cuts. The opportunity this committee enjoys is to recommend that the federal government reassume a leadership role in the area of social spending and take action to address the crisis in student debt and the erosion of funding for a public system of post-secondary education.

It is therefore our recommendation that the federal government reinvest in post-secondary education through two distinct mechanisms: first, funding for post-secondary education through the Canada health and social transfer should be restored to levels that existed in the final year of established program financing; and secondly, funds should be allocated for a national grants program, to be administered through existing federal-provincial arrangements for student assistance program delivery, so that Canada can join every country in the OECD, except Japan, in offering a national system of grants. In the interests of time, I will point you to our written brief for more detail on these recommendations.

I would now like to turn your attention to last year's budget, which the government proudly proclaimed “the education budget”.

Let me start by saying we were certainly pleased with the priority and profile afforded post-secondary education in that budget. However, though it contained several cosmetic changes to the program of repayment of student loans, the beneficial effects of these measures were overshadowed by punitive changes to the Canada student loans program and the Bankruptcy and Insolvency Act.

In fact, the last budget confirmed students' worst fears of the damage that would be caused by the privatization of the student loan system in Canada through risk-sharing arrangements with the banks. With these changes have come credit checks for student loans and prejudicial changes that forbid students from declaring bankruptcy for ten years after the date of graduation. Each of these measures will cause direct hardship to students and reflects the new and disturbing attitude toward the principle of accessibility, as outlined in the brief submitted to you today.

It is therefore our recommendation that the following actions be taken to reverse the changes from last year's budget: that the amendments to the Bankruptcy and Insolvency Act be repealed; and that the system requiring credit checks be scrapped. This system for credit checks is still under consultation and has not been implemented.

I would now like to turn to the millennium scholarship fund and offer some comments on the fund and its effect on students.

The last budget also contained a provision for the federally administered millennium scholarship fund at the rate of approximately $300 million per year, approximately 12% of what's currently paid out through student loans. Though in principle the Canadian Federation of Students supports the infusion of money into a program of grants, the millennium scholarship fund does not relieve any of the pressure currently on the system of student aid. While the news that the fund will essentially operate on a needs basis has been well received, the effect of this fund will do little to reverse the growing sense among Canadians that post-secondary education is only for those who can afford it.

The proposed $3,000 scholarship will not even cover the cost of tuition for a basic arts degree in any province; for a law or medicine degree, the fund will cover less than 50% of the tuition; and for a dentistry degree, about one-sixth of the tuition. In addition, the government's own research tells us that the program will reach only about 8% to 12% of students.

It is our recommendation that resources applied to the millennium scholarship fund be applied to a national grants program to be administered through existing student financial assistance delivery mechanisms at the provincial level.

In conclusion, by looking at the past and the future in our brief and our presentation, I hope this presentation has given you a sense of some of the anxieties and challenges facing students today. Access to our colleges and universities is quickly falling behind the United States and other OECD countries.

The Chronicle of Higher Learning recently reported that, on average, every state in the United States increased funding for public institutions—that is, state universities—by approximately 6.9% in the last fiscal year. In fact, I was shocked myself to learn that the University of Washington's tuition for a liberal arts degree for in-state residents is now comparable. It's about $200 or $300 American more expensive than tuition at the University of Toronto.

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The crisis of student debt remains the number one barrier to democratic access to post-secondary education, and the shrinking pool of operating dollars for our post-secondary education institutions is making the undeniable social good of universal access to post-secondary education an anachronism. We must work together to ensure this does not happen. The alternative is to reconcile ourselves to a system of post-secondary education that, consciously or not, sets wealth rather than merit as the primary admission requirement.

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

Now we'll hear from the College Institute Educators' Association of B.C., Mr. Ed Lavalle, president. Welcome.

Mr. Ed Lavalle (President, College Institute Educators' Association of B.C.): Thank you, Chair. I very much appreciate being here.

I must say, I certainly appreciate the fact that the committee continues to come to British Columbia. I think it's a very important point you make when you come to British Columbia. It sort of emphasizes our pan-Canadian reality and our national aspirations.

The theme I intend to develop could be embraced by saying we would request an enhanced role of the federal power in post-secondary education, and probably through either the restoration of the CHST to levels that were previously enjoyed before the cut, or as a new opportunity opens up to us, maybe through the social union. We hear a lot here about the social union, and the theme that is constantly coming through the media, at least, is that it revolves around health. I would say to you that the health of the country, economically, depends on increased investment in education.

I probably do not have to tell the committee why post-secondary education is important. It can be found within the documentation of the government itself. In our brief, we report on the first report of the Standing Committee on Human Resources Development, from which a few significant facts may be drawn.

Since 1981, employment among those with high school diplomas has fallen by two million, but for people with higher qualifications, it has risen by five million jobs. In fact, the new jobs are the jobs that are founded on education and, as many people say, on lifelong learning.

The report indicates that by the year 2000, 45% of all new jobs will require at least 16 years of education and training. That is 4 years past the classical 12 years known as K to 12.

In 1996 the unemployment rate for university graduates was only 5%, while for those with less than a high school diploma it was 15% and higher as you get into the younger ages.

There are social benefits as well. The OECD Observer, in June-July 1998, observed that almost all forms of social improvement are better when the population is highly educated, whether it be health, lower crime, the environment, parenting, political and community participation, and social cohesion. A large part of our capacity to improve in these areas depends on the educational level of the society.

I would now like to turn to something the committee may not have heard before, that educational involvement in Canada as a whole is becoming stagnant. The latest statistics coming out of Statistics Canada indicate that enrolment increases in 1997-98 were less than 1%, which is less than the rate of population growth.

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If we in fact accept the proposition that education is required for a job-expanding economy, then we would expect that the rate of those receiving higher education will grow substantially in each given year as the economy expands and new jobs are created. This in fact does not seem to be happening. Full-time enrolment has not exceeded 1% since 1993. Furthermore, much of the education people are seeking in order to enhance their employment possibilities or to add value to what they're doing in their existing jobs depends on part-time enrolment, and in fact part-time enrolment as a proportion of the whole is in the process of decline.

So we see that there is a significant problem. We have not done all the research necessary to be able to explain it, but we would say that government must attend to finding the reasons for this decline in full-time enrolment, relative to the increase in population, and for an absolute decline in part-time enrolment.

We don't exactly know why it's happening now, but we think there are some very good indicators, which can probably be better expressed by the Canadian Federation of Students. We know there is a substantial disincentive arising out of the cost of education, as the general retraction in education spending by all the provinces in Canada, except perhaps Quebec and British Columbia, and by the federal government becomes a reality and works its way through the system.

The tuition fee price index, for example, indicates that tuition fees rose by 11.8% for the 1996-97 year, whereas the rate of inflation was 1.9%. Since 1992-93, that index has risen 43%, while the consumer price index has only risen 6%. This makes the cost of education one of the commodities or public consumer goods that has risen in cost higher than almost any commodity that's hit the market, and that includes fuel oil and anything else you might want to talk about. So whereas all other prices seem to be headed downwards, the cost of education has risen substantially.

Whether or not this is a disincentive really depends on further evidence, but I would refer the committee to the work of a scholar by the name of Diane Looker, who has written in the Canadian Journal of Education. Her studies indicate that substantial numbers of youth list the high cost of education as a substantial disincentive, and the measure of the disincentive, as you might expect, actually becomes greater as you approach those who come from low-income areas. So obviously tuition and the support costs of education are part of the factors that are stratifying this society.

Unemployment among young people is another substantial problem. The dual problem of anticipated student debt combined with the lack of capacity to earn, as evidenced by high unemployment rates for young people, is probably part of the general disincentive that is working its way into the system and causing the enrolment stagnation I referred to.

There are a number of problems involved, and I think we've substantially covered those in our brief. But I'd like to highlight a couple of additional ones that have emerged in the past year, as opposed to problems I've probably been raising before this committee for the last three or four years. One of them is indirectly financial in the sense that it represents the financial policy involved in the management of the employment insurance account and the Employment Insurance Act and that which arises in the devolution of labour market programs.

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Labour market devolution would seem to indicate this was a transfer of jurisdiction and a change in the nature of federalism. What in fact is occurring is a disguised form of federal offloading onto the provinces. For those provinces that are unwilling to take it on, the negative effects are passed on to the user—the client, the citizen. In provinces like British Columbia, where education is being propped up against this, it becomes an additional charge on the existing provincial government.

One of the worst cases of this that is occurring now is as a consequence of amendments to the Employment Insurance Act. The Employment Insurance Act has transferred the power of purchase for training to the individual recipient of employment insurance. The problem with this is that although the federal government continues to have some financial responsibility in this area, in its administration and authority over the act, it is discriminating between public and private institutions.

If you're a private institution the federal government will pay the totality of the costs, which if you're a private trainer obviously means costs plus—in other words a profit—whereas if you are a subsidized public institution, the federal government will only pay the tuition fees. Hence, the value of the actual cost of training, minus the tuition fees, is the degree of offloading you can attribute to the result of federal government action.

The result also has qualitative effects for the recipient under these training programs, insofar as the private institutions are not regulated and their quality is not guaranteed. Nor does what they offer fit into a system of seamless laddering from one form of training to another, both from the point of view of credentialling and banking experience and education to proceed up the ladder—to get the skills and perhaps the education and training required for better jobs.

I think this policy has in fact undermined the intention to enhance the individual's flexibility, and at substantial cost both to the province, and ultimately, from a quality point of view, to the individual.

Having said these things, I believe my time is drawing to a close. I would like to refer you to how we answered the questions the committee put before us. We have eight recommendations.

Asked whether the budget should be balanced, we said yes, go on, but restore funding to post-secondary education. I might add, it isn't in the report, that you might consider making this a major piece in a pan-Canadian social union.

We have very few recommendations on strategic investments and changes to the tax system, but we believe the federal government should take further steps to encourage people in the workforce to upgrade their skills. This means financial incentives.

We believe a progressive income tax system is the fairest way of ensuring that those who are able to take advantage of post-secondary education get it.

We believe the federal government should work with the Council of Ministers of Education Canada to develop pan-Canadian standards and should assure comparable access to post-secondary education regardless of where people live. There should be increased support for literacy programs.

The federal government should reconsider its EI Act decisions and get back into the business of purchasing blocks of seats for people in need of training. In any case, none of that training should be done by people who are not accredited and cannot guarantee quality. Secondly, in any case the federal government should pay the full cost of training programs provided under the Employment Insurance Act.

Thank you for your indulgence. I hope these will be considered as you put together the ideas the finance minister will consider in the coming budget. Thank you very much.

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

We will now hear Mr. Clift, who is representing the Confederation of University Faculty Associations of British Columbia. Mr. Clift, you have about a ten-minute presentation.

Mr. Robert Clift (Confederation of University Faculty Associations of British Columbia): I can double my comments, then, that I have prepared.

Good morning. I bring, first of all, the apologies of our president, Jim Gaskell, who was originally scheduled to appear before you this morning. Unfortunately, the invitation to come to the committee came quite late and he had already made a commitment to be elsewhere in the country. I think he's winging his way over Regina about now, on his way back to Vancouver.

The Confederation of University Faculty Associations of British Columbia represents about 3,600 professors, professional librarians, and other academic staff at B.C.'s four largest universities.

We appreciate the opportunity to appear today as this committee attempts to map out a fiscal strategy, or at least come up with recommendations for a fiscal strategy, for the Minister of Finance.

There appears to be consensus at least among my co-presenters this morning that Canada's future economic success will be dependent on its ability to compete in the so-called knowledge-based economy. I guess the thing that we miss so often in this discussion is the assumption that the knowledge-based economy will simply come upon us without preparation, and that's simply not the case. It's a matter of choice.

If we want to participate and succeed in the knowledge-based economy, we have to make conscious decisions to do that. If we don't make those conscious decisions, then we will continue to be stuck in the old ways and the old modes of production. We will continue to try to advance in our resource economies, for instance, which we know will have a limited usefulness, or alternatively we may try to compete on a wage or a tax basis with other countries that have made the decision that they will be low-wage, low-tax economies.

While there's certainly incentive to try to choose these various bits and pieces and cobble them together, there has to be a realization that it has to be an integrated strategy. Key to that, assuming we want to participate successfully in the knowledge-based economy, is the commitment to higher education.

In our view, success in the knowledge-based economy is built upon two pillars, the first of which is the sorting and analysis of vast quantities of information, and the second is the commitment to continuous discovery and innovation.

For example, the strategic value of the Internet, that ocean of data out there, will be in the extraction of valuable data from that information that's out there, synthesis of these data into useful information, and the resale of use of this information for profitable ends.

The data in and of themselves do not have value. It's the strategic use of that data where the value lies, which will be built upon in the knowledge economy. In other words, those people with the ability to research, to analyse, to synthesize, and to communicate will be the people who will know how to use these vast quantities of information. Predominantly these people are the people who graduate from our academic programs at our colleges and universities.

The manipulation of existing data alone will not, however, ensure success in this economy. The winners in the knowledge-based economy will also be those committed to continuous discovery and innovation. Without the capacity to generate new ideas and new products, an economy will forever be dependent upon others for its future.

If I can draw an analogy, let's look at the forestry industry. There's this quantity of wood out there that we can draw upon; however, if we don't replant the new trees, there'll be a practical limit to that.

The other dimension of this in terms of the new developments the knowledge-based economy is bringing to us is, of course, that at this point there's a great quantity of knowledge, of data, out there that is freely available and freely communicated. However, as we all know, particularly from discussions of about two years ago on copyright, the move toward controlling this information and controlling its subsequent use is a feature of the knowledge economy. So while at this point there may be free information out there that we can draw upon to go further, at some point that information is going to be constrained.

There's a case in point for those who watch these things. I noticed last week that the U.S. Congress is considering changes to its copyright legislation that would protect original source data from being used in databases. What does that mean?

For instance, you may or may not know that right now, although the broadcasting of a sports event is something that's controlled by copyright, the score of that sports event is freely available. You can take that score and print it in your newspaper or you can put it on your newscast. The legislation being considered by the U.S. Congress at this moment would make that score the property of that sports league, and you could not use that score unless you had paid the sports league a licensing fee. This is the type of thing we're moving towards with a knowledge-based economy.

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The point is, if that's the direction we're headed in—and I don't think that's a good direction—if we do not have our own capacity to generate information, then maybe that means more native Canadian sports leagues—I don't know—so that we have our own scores to report. But if we don't have that capacity for new ideas and new products, we are going to be dependent upon others, and at some point that resource may be gone from us completely.

So it's not only necessary but imperative for Canada to develop the capacity to generate new ideas and products. Once again, this capacity is dependent primarily on our country's universities, as it is through these institutions where new research—that is, research that can be publicly used—is generated and new researchers and innovators receive their training, both in direct instruction in programs and through participation at the graduate level in research activities.

We are in a good position in this country. We are well placed to meet the demands of this new economy if we make these choices to do so. We have amongst the highest rates of participation in formal education of OECD countries. Amongst OECD countries, we have the highest proportion of population with post-secondary credentials, though I have to say that many of those post-secondary credentials are not domestically generated; they're from the immigration policies in which we brought highly skilled people into the country, which is a good thing, of course, but we also need to develop the capacity for the children of those immigrants as well.

Our major competitors are, however, catching up to us. While many of our competitors in the OECD have increased the proportion of their economy they devote to education funding, Canada, amongst that group, experienced the second largest drop in funding as a proportion of the economic output between 1975 and 1993.

Unfortunately, things are not so rosy with respect to our research capacity. Canada ranks low amongst OECD countries, and in the most recent data available, which is 1995, Canada was second to last in total public and private research expenditures as a proportion of economic output; only Italy fared worse. This deficiency is also borne out by the fact that in a study that was published last year, it was indicated that Canada had only 4.7 researchers per 1,000 workers, compared to the U.S., which had 7.4 researchers per 1,000 workers.

The poor research capacity in Canada can be explained in large part by Canada's legacy as a branch plant economy. As a case in point, the pharmaceutical industry in Canada is very much largely foreign directed, and a great proportion of the research conducted by and for the pharmaceutical industry in Canada is not in the creation of new drugs but in the refinement of existing drugs.

New medications are developed elsewhere, largely in the U.S. This is not because Canadian workers or Canadian researchers are second rate—far from it. We have produced outstanding medical researchers, many of whom have headed to the U.S., where the opportunities for ground-breaking research are both more plentiful and better funded. When we speak of the brain drain in the post-secondary community, this is the brain drain we're talking about—not about taxation, but about the fact that opportunities are better elsewhere and this is why we're losing people.

If we want to make the choice of moving towards a knowledge-based economy, there are three necessary courses of action, in our minds. First, we have to reverse the trend of reducing support for education and for post-secondary education.

We recognize that the government has ceased its cuts to CHST and committed to a small increase in the coming year, and for this we are thankful. These cuts have been magnified, however, by additional provincial cuts, and as my colleagues from the Canadian Federation of Students have already mentioned, we stand in stark contrast to the U.S. Between 1995-96 and 1997-98, state appropriations for universities grew in 45 of 50 states. In contrast, in the same period in Canada, 8 of 10 provinces decreased appropriations for universities.

The second necessary course of action is to continue to support and expand broad access to post-secondary education and training—and here I won't repeat the remarks made by my colleagues from the Canadian Federation of Students. It is simply that rising costs are making it difficult for existing students and are dissuading potential students.

Third, we must build our research and development capacity. The restoration of federal granting council funding last year to 1994-95 levels was welcome news, but in the meantime, our competitors have moved ahead. In addition to support through the federal research granting councils, however, there must also be a commitment to core funding of institutions, as might come through the CHST. Such funding provides support for research not funded through the granting councils and helps to attract and retain researchers.

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We recognize that the federal government has turned to targeted programs and direct allocation in an effort to receive political credit it did not receive in the past. We appreciate this desire, but moving away from general allocations to directed programs has had the effect of increasing disparity across the country.

We in B.C., for instance, have been relatively unaffected in the past three years by the cuts in CHST because our provincial government has made the commitment. Still, 0% increases have their effect when you're dealing with inflation. Other provinces, like Newfoundland, for instance, have had severe cuts in their post-secondary systems.

This type of disparity is growing between types of institutions as well. If there's more money coming in through research granting councils and research contracts, the research-intensive institutions are in the better position. They can, in effect, draw away the talented faculty from other institutions. So where you might be able to develop a native research capacity in a particular province, let's say Newfoundland, if the opportunities are better in Toronto for that researcher, why should they stay in that community when they can go to Toronto and have a better time of it?

This disparity is important to understand because although there are spillover effects, they're national in scope. That is, research conducted in Toronto can be taken up elsewhere in the country and effectively used. Many of the effects of research and education are localized to communities and regions. For instance, even though we may be able to take a certain class of researcher and put them in Toronto when those efforts could be used in Newfoundland, the ability to develop local spinoff companies with direct contributions to that economy is dependent on having that research capacity in that community as well.

In conclusion, Canada's ability to compete in the knowledge-based economy is dependent on our ability to produce workers with high-level thinking and communication skills and on our ability to grow research and development capacity. Both of these things are typical of academic programs, and with the latter item, particularly university programs.

Although recent government initiatives have been a positive step, the efforts are too small and are having the effect of increasing disparity between provinces. The answer for us, in large part, is a commitment to new funding for core operating grants to post-secondary institutions. These are difficult questions as the provinces try to tackle, with the federal government, how these measures will work. I don't have an easy answer for you. Our own national association, the Canadian Association of University Teachers, is grappling with this as well right now. We're leading up to a November conference where we hope we will have some insight about how to deal with these matters. But at this point I don't have specific recommendations.

Thank you.

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

We will now hear from the National Graduate Council, Ms. Joy Morris. Welcome.

Ms. Joy Morris (Member, National Graduate Council): Thank you.

My name is Joy Morris and, as was mentioned, I'm from the National Graduate Council, which is a group of over 45,000 graduate students at 22 different public universities across Canada, all of whom are members of the Canadian Federation of Students. I'd like to thank you for giving me the opportunity to present to you today. We have submitted a brief, but I will be highlighting a few points from that brief that I hope you'll pay particular attention to when it comes time to make your recommendations on the budget.

Like the other presenters today, the general direction of my comments will be in terms of increasing the core funding of social programs. As students, we feel this is a critical direction for our economy and our country to take. We believe Canadians are committed to and proud of the public funding of social programs. This is one of the things that sets us apart from the United States, and we believe it's something we're willing to spend tax money and public money on to ensure we have good, solidly funded social programs in the country.

The points I will be highlighting are that, as with the Confederation of University Faculty Associations, we would like to see increased funding for the granting councils and to the Canada health and social transfer. We would like to see the changes that have been made to the bankruptcy legislation removed. We would like to see the removal of discussion of implementing credit checks on student loans, and we would not like to see tax cuts as opposed to increased funding for social programs.

As graduate students and people who are earning higher education, we expect to be earning higher incomes once we have graduated and paying higher taxes as a consequence, so I think we're not entirely disinterested when we're not asking for tax cuts.

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To begin with the granting councils, I'd like to commend the government and the members of the committee for the measures that were implemented last year. But as was mentioned, these have only increased the funding to the national research granting councils back to the levels they were at in 1994. In the meantime, other countries have increased their funding to research, and consequently many researchers are moving to other countries where they can get increased funding, adequate support, adequate research equipment, and so on.

Graduate students are the researchers of the future and the trainers of future researchers, and will become the cornerstones of any knowledge-based society. It is absolutely critical that this research funding be properly supported. In particular, I'd like to draw members' attention to the fact that although over half of graduate students in Canada are studying in areas that are funded by the Social Sciences and Humanities Research Council of Canada, only 12% of the funding that goes to the research council is given to that particular council.

One of the projects we've heard about that we support for granting council funding is the national institutes of health that have been proposed by the Medical Research Council. We support this on the understanding that, as the Medical Research Council has proposed, some of this funding would not merely be specifically for medical research, but would also go to social sciences research relating to health, such as social impacts on health, psychology, and other similar related fields.

I'd like to emphasize that funding to the granting councils is much more important to us than many of the programs that have been developed for research that supports more industrial-relevant research only. Industrial-relevant research is important, but it's something that companies are willing to invest in because it brings them immediate and direct dividends. Basic research is also important to lead to that industrially relevant research later.

I'll move along now to the Canada health and social transfer. Some of the moves that have been made by the government over the last number of years seem to be toward funding of the individual rather than the system when we fund social programs. This has a number of problematic implications. One of these is that people have more worries, as there's no guarantee that individual funding will continue from year to year. Of course, there's no guarantee that system funding will continue from year to year either, but it seems to be a more solid basis than applying for an individual grant, loan, or whatever each year.

In addition to this, one can be individually funded, but if one is relying then on an overcrowded system that is underfunded in itself, then one is not receiving the best service, education, or whatever may be the social service one is dealing with. It's very important to have core funding for the programs so the system itself runs smoothly and well. So we believe that funding must be restored to the operating costs of all social programs through the Canada health and social transfer.

Some of the individual measures that have been implemented, I'd like to mention, are not at all as helpful to graduate students. The recent indications are that the Millennium Scholarship Endowment Fund will not be available to graduate students whatsoever. That's certainly troubling to the members I represent.

We have other concerns about the Millennium Scholarship Endowment Fund in as much as it seems to be counting on industry to kick in more money when the public funding runs out, and we have our doubts as to whether or not such funding from private companies would actually be new funding or would simply be a move from donations they already make to other causes—such as individual university scholarship or bursary programs, and so on—to the national program. Whether or not it would actually mean any increased money, we have our doubts.

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Let's move along to the bankruptcy legislation. The new legislation that has been introduced that prohibits students from declaring bankruptcy—they can declare bankruptcy but they can't discharge their student loan debts for ten years after graduating—is very disturbing to us. We don't believe that bankruptcy is a pleasant experience for anyone. We don't believe it's something people go into lightly. It's a desperation measure, and if people can't employ that desperation measure to remove their debts when they absolutely have no way of paying them, that's just not acceptable.

Last is the issue of credit checks on student loans. We believe that student loans are a government support program and they should be helping students and individuals who most need it. The people who most need it may have had credit problems in the past. If credit checks are implemented, that may mean that the people who most need the funding that is available, and who may be very responsible people but have been unable to pay back money in the past because of an inability to find a job or whatever, are not going to be able to access education to improve their situation in life.

Thank you again for the opportunity to present. I will be happy to answer any questions.

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

That completes the presentations from the panel. Now we'll begin the question and answer session with Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman, and presenters, thank you for your presentations and the literature you gave us.

I want to do my annual poll, which I do at these pre-budget consultations. How many of your groups receive funding for your organization at either the federal or provincial level?

How many of your groups are 100% funded by your supporters?

Wonderful. We're off to a good start.

My first question would be to the College Institute Educators' Association of B.C. Mr. Lavalle, that's your organization. Your recommendation number 2 is that the federal government should take further steps to encourage people in the workforce to upgrade their skills. I like that recommendation, if, as I suppose, you're talking about the government giving a tax break or a tax deduction to the employer and the employee to participate in an upgrading course. Is that basically what it means? In addition to their work hours, if they are taking a night course or a home study weekend course—is that what you mean?

Mr. Ed Lavalle: It means that and more. It means people in the workforce taking longer training; they may in fact take part-time training, but they should also be let go for a period of time to do a program of studies if that is value-added in terms of the employer.

The basis of funding it, though, is a bit problematic. In our system, I think all across Canada and federally, public funding has had to be the rule because the amount of actual corporate funding and employment retraining has been substantially low—it's one of the lowest in the OECD. So how you deal with that in terms of incentives and things is uncertain. But the outcome is what we're interested in, that more workers have a chance to upgrade.

Mr. Dick Harris: I would certainly support that idea. I don't want to take it too far, though. I would want to limit it to programs that were jointly agreed upon by the employer and employee where the employer—the corporation or company—was willing to pay for the new training cost if that employer would be given a tax deduction for it. I think in fact in many cases they are. As well, any money that was put into the training by the employee would be eligible for a tax deduction.

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I think once someone gets out into the workforce and is earning a living, they should try to rely on government aid as little as possible, but certainly take advantage of whatever tax incentives or tax deductions there are to further their education.

I have another question here. In recommendation 4, regarding the pan-Canadian standards—I'm not sure if I understand this right—are you talking about pan-Canadian standards of levels of academic achievement or are you talking strictly about access to post-secondary education?

Mr. Ed Lavalle: It's more than just access. I think we are talking about... For example, the Council of Ministers of Education Canada is developing some standards in transferability for the first two years. So if you took your two years of arts in one province it would be transferable to another province. The social cost of duplication wouldn't be there. That's on the academic side.

On the skills or industrial training side, there's now the regulatory field program, which means that an apprenticeship outcome in one province in a certain number of areas would be recognized in another province.

These would include mobility in the country.

Mr. Dick Harris: You would have to get, of course, agreement from all the provinces on those as well, I would think. Is there agreement among the provinces?

Mr. Ed Lavalle: Oh yes. In our brief, one of the principles of our organization is that since education policy is a provincial right, and respecting the status of Quebec, your best policy in this area is a negotiated one between the Council of Ministers of Education Canada and the federal power.

If I could just go back to standards, we're not just talking about standards in terms of course credentialling. We're also talking about national standards, and asking questions like “What is an acceptable level of tuition fees?”; “What is an acceptable level of student support?”; and “What are national standards to overcome barriers?” So there'd be a national program.

Right now what's happening is there are tremendous fee differentials between one province and another. In the province of British Columbia, where fees have been frozen for three years as opposed to Ontario, where they've gone up double digits, are we going to have an economic push whereby a provincial government might then start to bring in differential fees, so a mockery is made of this kind of mobility across the country, even though we recognize that if you have to do that, you have to do that?

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

I have a question now for the Canadian Federation of Students, Mr. Conlon. I guess Ms. Morris is included somewhat in this because you both spoke on the same subject.

It was concerning the bankruptcy and insolvency changes you wanted to see addressed. You wanted a reversal of the new funds.

Ms. Morris, you mentioned that bankruptcy isn't something that someone goes into lightly. I think in comparison to about 20 years ago or 25 years ago, these days bankruptcy is in fact something people don't have as much fear about as they used to.

I can remember—and I'm a little bit older than you; not much—20 to 25 years ago bankruptcy was a terrible sin to commit in this country. It's gone from that into something that's taken, in pretty general terms, as just something that happens. The reason for that, in my opinion, is the easier you make it for someone to absolve themselves of responsibility, the more opportunity people have, as a general rule, to take advantage of a way to absolve themselves of that responsibility. And I'm not just speaking about bankruptcy; I'm talking about life in general.

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I'm not trying to philosophize here, but it seems that when society is able to easily strip itself of responsibility, we find that it's not generally a benefit to society.

Using your premise, if someone were to go and complete their studies and finish with a $20,000 or $30,000 student loan—and let's say they're 22 or 23 years old. They've finished their education. They really haven't been in the workforce yet, so they haven't acquired any assets, they haven't paid many taxes, and basically, they don't have a whole lot to lose by jumping into bankruptcy and getting rid of that $30,000.

I'm playing the devil's advocate for a minute.

They say, “Heck, I'm going to declare bankruptcy and get rid of that $30,000 student loan, and after it's done, a few months down the road I'll go get a job. I know that in three of four years, maybe even less, I'm going to start getting credit card applications”—which happens now. “I'll fill them out and get a credit card. I'm back in the swing of things again and I've left that loan behind.”

Do you think it's good that we make it easy for someone to do that? Let's say no one really would take advantage of it, but if the opportunity were there, do you think it's a good thing?

Ms. Joy Morris: I'll start and then Mike can continue.

I was talking to a student not too long ago who had declared bankruptcy at 17 years of age because of a debt that he hadn't realized he could take other measures with and he just had no way of paying at the time. He was much older at this point, and he was telling me about the seven years he'd gone through of trying to develop his family, his job, and so on, trying to look at things like a mortgage, a credit card, and having a total inability to get any credit for anything for seven years because of the bankruptcy he'd declared. I don't think it makes it easy for us.

Mr. Dick Harris: Well, okay.

Ms. Joy Morris: It's because of the stage of life people are at when they are students. Shortly after their education, they tend to be at the stage of life where they're wanting to establish a family, to maybe get a mortgage, and this sort of thing.

Mr. Dick Harris: Well, let's say someone comes out of a bankruptcy at age 22—you used 17 years of age, but let's take a few more years and say age 22—and successfully writes off a $30,000 student loan and then goes into a job. They're basically going into a job with zero debt. They have their monthly living expenses to look after.

But I'll tell you what. There are a lot of 24- and 25-year-olds who are working now who would love to have a zero-debt position and say, “I just won't go back into debt until I know I'm capable of handling it”, and maybe two or three years without a credit card or without buying a new car and having car payments would be a good thing to build a solid base.

Mr. Michael Conlon: I want to jump in at several different points, and your question touches on several different levels.

I think the Canadian Federation of Students is disturbed, as you are, that bankruptcy has become almost routine. But our sense is that this legislation attacks the effect of it, rather than the cause. Our argument is that it's the increase in student debt and the rapid increase in youth unemployment. The statistics on that are undeniable.

But there are a couple of other factors as well, and I think our discussion highlights one of the problems. Most of the evidence we hear coming from government folks and other folks about the justification for this punitive measure that doesn't affect anyone else in society is anecdotal. There aren't a lot of statistics on what the effect of this will be. By forcing someone to wait ten years, does the government expect to recoup that loan, that this person will suddenly acquire those resources? It's those kinds of issues.

I think it's also important to point out that the rate of return on a student loan is in the neighbourhood of 90%, according to the government's own figures. The repayment rate for Industry Canada is far lower, yet there are no measures being brought about to preclude companies that get Industry Canada taxpayer loans from declaring bankruptcy.

So that argument takes place on a couple of different levels. The first is to analyse why it is that bankruptcies are skyrocketing. The second is to ask students across the country why, based on these skyrocketing bankruptcy statistics, students are being singled out as no other segment of society is being singled out.

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It seems to me that the best way to address the bankruptcy issue is to address the student debt issues, not to invoke these kinds of punitive measures based on anecdotal evidence of students being irresponsible. The student rate of repayment is actually fairly good when compared with Industry Canada loans. It's our feeling that, first, this measure is really not going to do anything to recoup the government's investment in loans in the first place, that these loans will eventually default anyway. Second, the measure of singling students out is in fact punitive and not really supported by any hard data that we have gotten from either HRDC or the finance department.

Mr. Dick Harris: Thank you. I have just one more little question, Mr. Chairman.

Maybe we could have a show of hands. You know that a few years ago the federal government rolled all their social transfers and education and health care into one CHST. I'm still a big fan of targeted federal funding for education, health, and social programs. Is there anyone here who would like to see us go back to targeted funding?

Thank you very much. I'd love to expand on, that by the way.

The Chairman: Monsieur Desrochers.

[Translation]

Mr. Odina Desrochers: My first question is addressed to Mr. Conlon.

Mr. Conlon, in your document, you talk of the priorities for 1999 and the year 2000. You talk of restoring the funds that were cut in recent years in higher education, health care and social programs. Do you want this restoration to be done through the provinces or do you suggest another way to help these sectors?

[English]

Mr. Michael Conlon: Our view is that although in terms of legislation education is a provincial jurisdiction, the funding responsibility remains with the federal government. The context for our recommendation is that the federal government restore the levels of funding and in addition to that address the issues we've outlined as severe problems in terms of student debt and declining quality, through the creation of pan-Canadian standards, which Mr. Lavalle indicated support for as well.

We feel there needs to be a sense of co-operation and we're not unaware of the difficulties that creates in terms of the federal-provincial relationship. Our sense is that the dollars and the support for post-secondary education come from taxes paid into the national treasury and that the funds to restore post-secondary education need to come from there. Our sense is also that there needs to be a commitment made by the provinces that this funding will go to post-secondary education and that it will be acknowledged that's where the funding comes from and that's how the funding takes place.

[Translation]

Mr. Odina Desrochers: I have another question to ask you, Mr. Conlon. Do you want everything that was cut in recent years to be given back to you, or do you prefer that we start this year, since we have a surplus, restoring the shortfalls of the past years?

[English]

Mr. Michael Conlon: I think realistically before the government cut what we estimate to have been about $5 billion from post-secondary education, it was the contention of the Canadian Federation of Students that we did not have a universally acceptable system of post-secondary education. The last four to five years have taught us that in fact there was a level of access that we did not acknowledge at the time. As we see accessibility slipping away quickly—and in Ontario right now I'd argue that accessibility has been practically choked off—the reality for students is that we need action right now in terms of base funding for post-secondary education. But I think more urgently we need to address the notion of the debt crisis.

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The figures are $25,000. Those figures are about two years old. We don't have actual figures for graduate students, and being realistic about the resources that are available, I don't think there's any way that all the cut funding can be restored this year. But it seems to me, on a philosophical and pragmatic level, the goal ought to be to restore that funding, at the very least. If Canada and this government want to continue to call our system of post-secondary education accessible, that commitment ought to be made.

We are very aware of the comparison with the United States, because that cuts both ways. But I think the reality and the statistics tell us that those who do the lobbying in the United States and those who consider public policy in the United States are actually reversing their policy in terms of post-secondary education and reinvesting. Canada seems to be moving in the opposite direction, or holding the line after $5 billion of cuts.

[Translation]

Mr. Odina Desrochers: You talked about the student debt problem. My question is addressed to all panel members. Do you think that post-secondary institutions, that is universities and colleges, really meet the current needs of students? We know that we are in a context of globalization, that everything changes rapidly, etc. Do you think that the education programs that are available allow you to easily access the labour market, or are you sometimes confronted with programs that are 15 or 20 year old?

[English]

Mr. Michael Conlon: I think that's a very difficult question to answer.

Post-secondary education is like any institution in our society, and it changes relatively slowly, but I would actually argue that our colleges and universities do a relatively good job of adjusting on the fly to the changes that the labour market forces upon them.

I can't stand here this morning and tell you that there aren't some programs that don't directly address the needs of the labour market, but I think, philosophically, universities especially, and indeed colleges as well, are in place for more than just that direct labour value correlative, not that it's not important, and not to minimize that, but my sense is that if you were to ask me to list the top five problems with post-secondary education, I'm not sure the relevance issue would be one of them.

I think most of the administrators in our campus are scrambling every day, doing kind of crisis management, based on depleted funding, and doing their best to adjust to these kinds of demands. There are people on staff there. There's research coming in every day about where to best invest the dollars in the institution and how best to ask government for better dollars to train people.

But as well, I wouldn't want to lose sight of the ideal of post-secondary education as not simply a training mechanism, but as a way of preparing people to participate democratically in society and to become full and active citizens, not just in the labour market but...

The Chairman: Dr. Della Mattia.

Dr. Gerry Della Mattia (Executive Director, Advanced Education Council of British Columbia): Regarding the programs, speaking on behalf of the community colleges, at least in British Columbia, a big challenge we're facing now is the need to replace technology in our programs. The funding that's available to do that is only a fraction of what we see is needed to ensure that students completing our programs have experience with the latest technology to go out into the workforce.

But there's something else we do in B.C., and I think many other institutions do across the country, and that is, we ensure the relevance of our programs through very close connections with the employers. Particularly the occupationally oriented programs in our institutions have advisory committees made up of people employed in the field and of people who are employing graduates in their institutions. So we try to keep our programs relevant in that way.

The Chairman: Mr. Lavalle.

Mr. Ed Lavalle: I want to add to that.

There is a cost-effectiveness equation that is being worked on nowadays, and that is how you deliver education through technology. The main problem there is that in a rapidly changing system of technological possibilities, we don't have the equipment to do it. In fact, there's a very good possibility that some private trainer will come in and cream off a portion of the students, because they'll capitalize for that kind of training, while the public institutions, who have to meet a great diversity of needs in a declining base of revenue, will have trouble adapting to that technology.

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Having said that, I think the watchword of the decade, the number one phrase that has dominated particularly the college, institute, and agency system in British Columbia, has been labour market sensitivity. That is, that growth and programming and development, not only in terms of content but in terms of scheduling and access and being able to supplement work with training, have been very important considerations, and I think the social partners in the education enterprise have met that challenge quite well. It's an organic thing, though. It continues to evolve as you determine what you need to specialize in as opposed to what you can offer across the province.

The third component of this is trying to meet the learners' needs. This is really probably the most important, because these learners are not the learners of the 1950s. They often are holding two jobs. They have parenting and relationship responsibilities at an earlier age. What they learn, if it's in the vocational career area, gets out of date quicker, so there's a constant need for upgrading, and I think we're doing a pretty good job of being able to meet that. We can do a better job. We should constantly be asking whether we in fact are meeting the learners' needs, and I think we do.

The Chairman: Ms. Morris.

Ms. Joy Morris: I think there is a lot of vocational training and I think it's done rather well, but I think one of the things we can't lose sight of in this is that the basic skills that are taught in a post-secondary education in all fields and all areas are critical thinking and problem solving. Those are things that allow people to have amazing ways of adapting to whatever situation they find themselves in later in life.

I've been to a number of seminars given by alumni who have degrees in things like philosophy, which you wouldn't necessarily think would lead to anything, who have managed to use those degrees very directly in what they have found to do with their lives in their later careers.

The Chairman: Monsieur Desrochers.

[Translation]

Mr. Odina Desrochers: It's fine. Thank you, Mr. Chairman.

[English]

The Chairman: Mr. Clift, would you like to respond?

Mr. Robert Clift: Yes. I'd like to start off by saying that certainly with respect to the universities and I think with respect to colleges and institutes, our post-secondary system has been ahead of the game. At a time when the most money to be made was by going out into the forest in B.C. or going into the mines or becoming a tradesperson, the universities were moving ahead with thinking, analysis, research skills—those types of things—preparing us for a new economy.

Further, with regard to access, my own personal example is that I had access to international e-mail at the universities long before it became a public consumable item. Before the Internet exploded we had access to these technologies in the institutions and we were using them. So you have to consider that.

There was a time when the universities were not very responsive to the labour market, and I think that's clear. That's changed dramatically, though. I would doubt that there is a university program in this country that does not have an advisory committee that has significant representation from the business community. But our challenge is to deal with the immediate needs of the business community and at the same time prepare people for what the future needs may be.

In fact, those are the future needs of business as well. As we know, business, and rightly so, thinks on small horizons because that's the only way they can plan and be profitable. Other institutions of society have to think much larger, and that's what we do in universities.

The Chairman: Okay. Mr. Riis.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): Thank you, Mr. Chairman.

This has been a fascinating presentation this morning. I suppose if there was a common theme from all of you, it was that if Canada is going to be successful, however we might define that in the future—in a knowledge-based economy, for example—education is crucial, as well as the proper funding and support of education.

Then, Mr. Lavalle, you come along and provide us with some startling figures, that in fact we've stalled in terms of people entering post-secondary education. Part-time students, or part-time studyers, are down at a time when we should probably be having more people going into the system, particularly in terms of lifelong learning.

There were some fascinating pieces of information. Mr. Nicholson, I particularly found interesting your reference to North Carolina and California as two states considering eliminating or cutting tuition fees as a way of, I guess, addressing this disincentive issue that raised, Mr. Lavalle.

I've got a lot of questions, but I'll just ask you to respond to two.

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In terms of the debt load and the ongoing problem that's going to be, could we not consider having a tax write-off for all accumulated debts? And if you've got a $30,000 debt load when you graduate, over a five-year period it's like the cost of doing business; you can write it off from your taxes over five years once you enter the workforce. Is this something that we couldn't do?

And why not be bold? If we really believe that education at the post-secondary level is crucial, and, as is in the evidence Mr. Lavalle presents, that people obviously have difficulty accessing it, then at least eliminate the tuition fees, which a lot of countries have done, and as you say, California and other states are now looking at.

Why not eliminate tuition fees? Lets face it, I think somebody said the other day that if you added up all the tuition fees presently collected from post-secondary institutions in Canada, it would come to about $5 billion. We have a surplus of at least $5 billion, so technically, we could actually just eliminate every tuition fee in the country right now if we wanted to. The feds could pick up that tab if that were a major priority.

Well, other countries do this as a matter of course. Why not eliminate tuition fees completely over a period of time for a phase-out, and why not have a tax write-off of all accumulated debt that one would have—either a graduate student like yourself, Ms. Morris, when you graduate, or somebody going back for a quick course. It costs $5,000 to take a two-month course in your upgrading. Allow a person to write off that cost when they start paying taxes or when they go back into the workforce. Anybody?

The Chairman: Would you start, Mr. Conlon?

Mr. Michael Conlon: Yes, I think those are excellent proposals, ones that we've been calling for for years as an organization. I'll just let other folks address the substantive parting proposals and perhaps address something you indicated at the beginning.

Our brief, as well as the briefs of most of the other folks at the table here today, indicates that Canada's success as a society and an economy depends on an accessible system of post-secondary education. I think it's important to emphasize the means by which we define success—and our brief emphasizes the notion of economic success. But we also want to argue as importantly that in terms of the debt level you pointed to, we're in danger of becoming a complete failure as a society in terms of accessibility—based on tuition fees, the rate of tuition, and the trend we see in Ontario, for instance, and in the maritime provinces especially. If we're talking in terms of success, we need to also bear that in mind, that accessibility also needs to be a measure of success, not just the economic indicators as indicated.

But I would fully support the notion of elimination of tuition fees. The reality of it is that in the paper I pointed to, which Robert Allen prepared and which we'd be happy to provide for the committee, he in fact argues tuition fees are an extra layer of tax, an extra burden in user fees, which in fact are doubly recouped. So that would be one of the economic arguments we'd make for the elimination of tuition.

But I'll just pass it on.

The Chairman: Mr. Nicholson.

Mr. Neil Nicholson: Thank you.

The idea of providing tax deductibility for student loan repayment is initially attractive, and in the absence of anything else I think would certainly be attractive. But I would suggest it has the potential, as a tax expenditure, of being regressive—of being considerably more valuable to the person who's achieved a high level of income and has not a great deal of difficulty in dealing with his student debt, as opposed to somebody who's chosen to study something that's of considerable interest and perhaps of great value to our society, but produces a relatively low level of income. They have a good deal of difficulty in making their repayment, and because of the marginal tax rate system, the value of the write-off is relatively small.

I would welcome such a move in the absence of any other, but I think, along with my friends to my right, a system that would preclude the incurring of the debt would be far preferable.

The Chairman: Mr. Lavalle.

Mr. Ed Lavalle: I think the policy of our organization for many years now has been to eliminate tuition fees. We think they are a disincentive. They are a disincentive at the psychological level, because they're the single biggest one-time payment a student must make when accessing post-secondary education.

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Keeping body and soul together in terms of month-by-month attendance is something people have to plan for as well, but the tuition fees are big institutional barriers, so we would say they have to be eliminated. However, the elimination of tuition fees is a provincial power, and I would say the most important thing the federal government can do is sit down with the provinces and develop an overall financial strategy for the institution.

There was no real agreement when the Canada health and social transfer system was set up. It has now stripped $5 billion out of the system. You can't just turn around and pick one or two things. This is not a system that one or two little engineering things like the Millennium Scholarship Endowment Fund or the elimination of tuition fees is going to fix. There has to be a support strategy for post-secondary education that takes into account all the things we know have to happen, such as employment, labour market sensitivity, and protection of traditional forms of knowledge. These all have to be addressed and they can't be addressed by one particular measure. If there were a particular measure, I would ask the federal government to do it. It would not be targeted funding on tuition fees, it would just be to restore the CHST.

The Chairman: Ms. Morris.

Ms. Joy Morris: Our organization has long advocated for the elimination of tuition fees and it would certainly strongly support such a measure. As you've indicated, tuition fees do not exist in a number of countries. We believe, particularly with the increased need for the post-secondary level of education in order to achieve any sort of employment, the same reasons why we don't have tuition fees for K to 12 education should be applied to post-secondary education.

As far as a tax write-off for the debt load goes, I think there are a few areas where I would be cautious. Any measures that make things easier to deal with after graduation form a temptation to many layers of society to believe that, since we're making it easier to pay off afterwards, it's okay to let them go into debt further when they want to pursue their post-secondary education. I think a large measure of the barrier to access is not simply that people think it won't be easy to pay it off once they've graduated; they're worried about getting into that much debt in the first place.

The Chairman: Mr. Clift.

Mr. Robert Clift: I would echo the comments Mr. Lavalle made about thinking about these things in an integrated fashion.

First and foremost, we return to funding for the CHST. But for an example of the problems of piecemeal approaches, Mr. Harris, who unfortunately is not in the room now, made the comment earlier about being inclined to direct funding support for young people who have not entered the workforce already, and people who are in the workforce would deal with it through some other means.

What about those people who entered the workforce without having the opportunity initially for post-secondary education? If we make a choice as a country for a strategy toward a knowledge-based economy, do we simply leave these people behind because it's their own responsibility to upgrade themselves? This is part of the problem. Those people would be affected by the tuition fees. If there were no tuition fees it would make life easier for them, but they would have the opportunity costs and the costs of supporting a family. They might have a mortgage and children they have to support. We would tell them we'll take care of their tuition, but there are no other forms of support. This is the problem. It hearkens back to the points made earlier.

Mr. Nelson Riis: Thank you.

The Chairman: Mr. Gallaway.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Thank you, Mr. Chair.

Mr. Lavalle, I think a recommendation from your brief says that the federal government should acknowledge that a progressive income tax system is the fairest way of ensuring that those who are able to take advantage of post-secondary education make a fair contribution to the cost of post-secondary education.

Are you advocating that those who go to university pay more or pay something tied to the investment made?

Mr. Ed Lavalle: No.

Mr. Roger Gallaway: Okay. I wonder if you could explain it then.

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Mr. Ed Lavalle: I'm suggesting that people get their capacity to earn through their university education, and we should have a progressive income tax system to basically tax that, but on the basis of net income. People who go into the professions are the high income earners. They are as high income earners as people who go into the trades. So rather than looking at the origin of how you got into the trade or the profession you're being taxed on, it should be done purely on an income basis.

The argument can be made that university educated people have foregone many years of earnings. For example, they don't get a start on their RRSPs or they don't get a start on equity positions in housing until much later, whereas others might earlier. I don't think you want to tamper with the source of income. In other words, you don't want to say tradespeople or people with small businesses should be differentiated from people with professions, because right now the professions are small businesses, and in some cases very large businesses.

I think the simple thing is that if you keep your income tax progressive, you will tax back the benefits you invested in the people you trained or gave education to.

Mr. Roger Gallaway: Using that argument then, what about the people who choose to exercise what I would call their mobility rights and leave the country?

Mr. Ed Lavalle: They want to leave the country.

Mr. Roger Gallaway: They do in fact leave the country.

Mr. Ed Lavalle: They take their skills away. I think it's a problem, but I think it could probably be handled through an incentive system.

Mr. Roger Gallaway: For example?

Mr. Ed Lavalle: In an incentive system you could advance certain kinds of scholarships and grants but on the notion they would be taxed back or there would be a penalty for them if you exercised your mobility rights. So if you took the value of this out of the country, there would be some financial cost attached.

Mr. Roger Gallaway: Okay.

Ms. Morris, I was a little confused about the business of the credit checks. Has that been instituted?

Ms. Joy Morris: It hasn't been instituted, but what was instituted last year as part of the budget enabling act was a provision that enables the government, without further consultation or legislation, to implement such measures as credit checks.

Mr. Michael Conlon: I was at a meeting of HRDC two weeks ago in Ottawa to strategize about the December meeting for the next two years of planning, and it was acknowledged that credit checks were on the table for implementation almost immediately at the federal level.

Mr. Roger Gallaway: On whom are they going to run the credit checks? Is it on the applicant, the extended family, or the parents?

Mr. Michael Conlon: It would be on the applicant. As I understand the provision as it stands now, a credit check would be run on anyone over the age of 21, and if that person has more than three debts outstanding over $100 they would be precluded from any form of student loan.

Mr. Roger Gallaway: Really. Since you were there, do you know if this is being driven by the banks—it's a subject that's much on our minds these days—or by someone within HRDC?

Mr. Michael Conlon: The informal answer we got was that this is a direct product of the risk-sharing agreements and it was demanded by the banks in return for risk sharing; in return for signing the agreement.

Mr. Roger Gallaway: All right.

Ms. Joy Morris: I would like to add to that. I think it may not have been directly requested by the banks, but the increasing pressure that the banks are putting in preparation for negotiating future risk-sharing agreements in the year 2000, if that goes ahead, is having its inevitable effect on government. They want to make it easier for the banks so the banks have more incentive to continue in the program.

Mr. Roger Gallaway: They want a money-back guarantee. Okay.

Mr. Clift, you raised the issue of research. This must be of concern to all of us, and you make the comparison that in Canada it's the mirror image of 4.7 versus 7.4 in the U.S. Is this simply a matter of more government funding, or is this a matter of partnerships? How do you view closing that gap?

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Mr. Robert Clift: There are a couple of different dimensions to it. First of all, in terms of opportunities for graduate education, those people who train as researchers in the first instance are not doing so at the same level as they are in the U.S. Graduate education is funded both by core operating grants to the institutions and through money that will come through research grants and research contracts as individual faculty members get those grants and contracts and then hire graduate students to work for them. This creates not only the opportunity to engage in the research but also funding to allow the graduate students to continue in that type of training. That's one aspect.

The second aspect, which I alluded to in my presentation, was the idea that we need to move off the mentality we have as a branch plant economy. There certainly are incentives already in the tax system for investment in scientific research and development. I'm not an expert in those, so I won't comment upon them, but even though those incentives are available, it seems to me—certainly looking at the OECD data—that the private sector in Canada has not taken them up, has not taken up the call for domestic research and development to the extent that it should. I can't say that I know why. I think in part it is because it's been easier in the past to import knowledge from elsewhere and exploit it, and I guess everyone is slow in coming to the realization that being able to take that information from elsewhere is going to be choked off on us before too long.

Those are aspects of it, and certainly the public funding is an aspect as well. Canada is behind these other OECD countries in terms of public funding. So these all fit together to make a generally gloomy picture. It's not just the institutions, but certainly that's the part that can be directly affected by core funding and granting council funding.

Mr. Roger Gallaway: Dr. Della Mattia, you made the point that the Government of Canada, with respect to keeping education affordable, can't treat private education and training providers more favourably than public institutions, and I'm not certain I understand that. I wonder if you can just explain that to me.

Dr. Gerry Della Mattia: Under the recent provisions for employment insurance recipient training—and my friend, Ed Lavalle, made the same point actually—the grants are going to be given to individuals rather than to the institutions. Formerly, Human Resources Canada purchased seats in our institutions and they paid the full cost of those seats. Now the grants are going to be given to the individual, so if the individual chooses to go to a private institution the grant will cover all expenses and the costing structure of the private institution will cover all overheads and, as Mr. Lavalle observed, a portion for profit. That's their business.

The policy of the federal government for students who attend public institutions is to only give them the tuition equivalent of their training, which means in turn that the provincial government is subsidizing the balance of the costs of that training. That's our point; it's another measure of offloading on the provinces.

Mr. Neil Nicholson: I want to demonstrate that Dr. Della Mattia and I are truly a team and finish his answer for him.

There's a very significant aspect. First of all, I think you should understand that the first change, which removes the ability for the EI fund to make block purchases as they used to and substitutes what most of us call a voucher system, is legislated. The second change, which deals with the amount they will pay to the public post-secondary institution, is a policy matter. It's not required by the legislation; it's how they indicate that they're choosing to apply the legislation.

The second aspect that I think is really devastating for the unemployed, or potentially so, is it puts the training institution, the public institution, in an invidious position. Previously when block purchases were made they were buying additional seats that did not exist except for the EI fund coming in and buying them. That provided the full cost. We could then mount the seats.

If they now wish to pay only the tuition, then in effect we have to turn to the EI claimant and say, join the queue. You're unemployed today, it's been determined you need this kind of training; put your hand up, we'll let you in when you get to the top of the list. Some of those lists, particularly for programs that are headed toward considerable improvement in employment prospects, are quite long. So it's counterproductive.

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Mr. Roger Gallaway: One final question, and whoever wishes to might answer. One of the things I think we're very aware of is the fact that there's this high level of debt when people graduate from universities. It's totally unreasonable, and these people get into trouble, as you've acknowledged, with respect to going to the point of bankruptcy and actually making an assignment.

One of the changes that was made in the last budget had to do with the fact that those who were in the workforce could upgrade and use their RRSPs to fund that upgrading.

I want to ask you what you think of the idea of a parent being able to use an RRSP to withdraw funds for their child's post-secondary education. There are those who would argue that in fact you should prepare for that and you should buy a registered education savings plan and that sort of thing, but I think, as all of you have pointed out, the cost of post-secondary education has accelerated at a rate that I think was unforeseen by many people. I'm from Ontario and it's gone up, I believe, about 100% in the last six years. It's an ongoing and a real problem for a lot of people.

What do you think of that concept? It puts the government out of the loop, it puts the bank in one sense out of the loop, and it puts that relationship between the student and their parent in a position where the parent is going to enforce the repayment.

Mr. Michael Conlon: I'd like to respond on two levels. I think initially when most people read that provision, and indeed when some students read it, their first reaction may be positive and they may see it as an innocuous provision, but we would argue on two different levels that it's problematic.

The first is a sort of cultural-philosophical level, that it's a further shift in the notion of who is responsible for public post-secondary education. That's a political-philosophical discussion that we could have as the Canadian Federation of Students. It signals a further retreat by the state and by taxpayers as a whole to supporting a public system and moves toward a system where the responsibility is solely on the individual.

The second issue that we would have with this is a much more pragmatic issue, that it does absolutely nothing to address those who are in the most peril right now of being frozen out in terms of accessibility. What you are doing is in fact rewarding those parents and those income earners who have sufficient means to put money away for a post-secondary education. It does nothing to address the vulnerable population at the low end of the income scale who are living month to month in terms of rent and other issues. That would do absolutely nothing to address what the statistics tell us are their lower and lower rates of participation.

So from our standpoint, it's problematic on those levels.

Mr. Roger Gallaway: Okay, thank you.

Mr. Robert Clift: In principle it's a good idea. The thing that worries me, though, is that for our members—I keep track of things about pensions and I get the statistics, I forget how often, from Statistics Canada indicating the amount of unused RRSP contribution room—I'm wondering where is the disposable income to make those contributions in the first place that could subsequently be drawn upon. If that was realized through tax cuts, for instance, the question has to be raised as to whether the tax cuts would be sufficient to allow individuals the necessary RRSP room to make these savings or by general taxation are we making a more efficient investment in education? I don't have the answers to that.

Certainly for the high-income earners it makes great sense. It's a mechanism that works very well. For low-income earners it doesn't. For the folks in the middle, who knows?

Mr. Roger Gallaway: Thank you.

The Vice-Chairman (Mr. Dick Harris): Ms. Bennett.

Ms. Carolyn Bennett (St. Paul's, Lib.): Thank you, Mr. Chair.

I too was concerned to hear that even some applications for full- and part-time study at the college level are falling off. Do we have any evidence in terms of grants versus loans and statistics in terms of what deterrent the debt actually is? Do people at grade 9 know whether they're going to university or not and make sure they get there against all odds? Do you have good data in term of what the deterrents are?

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Mr. Michael Conlon: American universities are ahead on this count, because I think they were first affected and primarily affected by this.

There is research by a collaboration of maritime universities that suggests that the lower rate of participation in the Maritimes can be tied directly to socio-economic factors. There's a myriad of studies out there, but that's the most tangible one that asks the very question you've put forward.

Indeed, in terms of the analysis, The Chronicle of Higher Education, the major research organ of public research in the United States, has done an analysis of Britain versus the United States, and of the ability of Britain, which is consistently referred to as a class-linked society, versus the United States, which is allegedly a classless society. The statistics were alarming; Britain does a much better job of ensuring participation from lower socio-economic categories.

The data are there, but they're scattered. But the data more than support the argument that grants in fact increase accessibility to education.

Ms. Carolyn Bennett: On that point, in needs versus merit discussions, whether it's the millennium scholarship or whether it's any other sort of support, in the merit students, do we know if they're well looked after by scholarships and whether we can therefore make an argument that any additional support from government should be on the needs basis?

Ms. Joy Morris: I think we do, at least to some extent. There are programs at most post-secondary institutions, individually as well as nationally and provincially, that do tend to look after the scholarship-merit type of student, in addition to which repeated studies have shown that the vast majority of those students are exactly the students who least need the financial support. The students from the privileged background who haven't had to be working a job or two on the side while they're pursuing their studies are the ones who have spent the time to get the high grades to be able to earn these merit-based awards.

Ms. Carolyn Bennett: On the CHST, as we look at the social union negotiations and the sort of federal-provincial stuff, the word “accountability” is creeping into at least the discussions on health. I wonder where you would like to see those negotiations go on post-secondary education and whether there were accountability pieces you would want to see in those negotiations.

I think when you watch certain provinces take off in terms of tuition and accessibility, and also certain provinces—namely, the one I live in—who don't seem to understand what, Joy, you've been talking about in terms of critical thinking and problem-solving... With the existence of a university education, whether it's in philosophy or anthropology, ultimately at 30 years of age you will have a good job, regardless of what topics you studied in university. So if you have provinces that are going to hook funding based on job market availability, to my mind, that wouldn't be part of a national standard I'd want. Do you have any sort of...?

Ms. Joy Morris: Yes, I think that ties into the sort of thing Ed Lavalle was talking about in terms of some sort of national standards post-secondary education agreement.

What we'd look for in such an agreement would be similar sorts of standards as exist in the Canada Health Act, things about accessibility, reasonable levels of funding, numbers of spaces, and also transferability. As he mentioned, transferability is a key point, because you can't have any sort of national standards if you can't transfer those standards and that education from one province to another.

Mr. Michael Conlon: Also, in terms of some of the answers we get when we do our lobbying, in terms of the notion of a social union in co-operation between the federal government and the provinces, it's obviously an incredibly huge problem. One of the problems we face as students lobbying on these very gut-level issues, with our anecdotal evidence as well as our empirical research, is we are told by federal folks directly that in terms of the political issue here, the question is why ought the federal government to transfer more money to the provinces when certain provinces, such as Ontario, spend that money on tax cuts, and the federal government gets no benefit, based on what they hope would be investment in education and health? This is a vexing problem that seems to come back again and again. The only solution we've been able to come up with is a national pan-Canadian set of standards of funding for post-secondary education.

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Ms. Carolyn Bennett: In my constituency office I have a number of constituents who have been concerned, particularly with Quebec, in the approach of McGill and some of those universities to attract... They're receiving brochures attracting American students to come and pay the high tuition. Somehow that doesn't seem to be the way we should be funding universities, by filling slots full of Americans. Do you think there should be national standards on how...? Somehow, filling Canadian universities full of American or overseas students paying huge amounts just doesn't seem the right way to fund a university.

Mr. Michael Conlon: Absolutely. In terms of my experience at the University of Victoria, a significant portion of the operating budget goes to recruitment in Asia of international students, based on the revenue recovery model those students offer the university. We think that's absolutely the wrong way to do that.

I must say, however, that our administrators are telling us, and we don't always disbelieve them, that they've been forced into these kinds of measures by the kinds of cuts they face in some universities. The operating cut alone over the last five years has been about 25%. So they turn around to us, when we analyse politically this drive for international students, and ask us where that revenue is going to come from. While we're against this cash cow model of international students, whether they be American or not—

Ms. Carolyn Bennett: I think all of us believe in an academic climate it is good to have people from other places, and that's the way we all grow and learn. It seems to be much more on the development side than on the academic side.

In the business of...particularly medical students—50% of our family practice residents at U of T may be going south of the border. Do you think there is an ability to create a deterrent for that? If you actually never ever use your skills in the country that paid for it all, is there a way we could actually have that money repaid?

Mr. Michael Conlon: I think it is an issue and I don't want to minimize it, but in terms of the incredibly vexing issues we face in post-secondary education, I think the reality is that Canada gets—as somebody mentioned earlier—the benefit of the skill and university education that immigrants bring to Canada. While we may not get a full return, and we may be on the loss side in terms of how that happens, I don't really see an effective way of putting in standards at some border check that would somehow recoup that investment. It's definitely a problem. But I think the way to improve that problem is to make the climate better in Canada such that people don't leave.

This is another one of those areas where the evidence seems so much more anecdotal than empirical.

Ms. Carolyn Bennett: I had two students in my riding who got huge scholarships to Brown but couldn't get into U of T. Somehow that seems funny.

Mr. Michael Conlon: Right.

Ms. Carolyn Bennett: Is there something wrong with this picture?

Ms. Joy Morris: Absolutely, there is something wrong with this picture.

Ms. Carolyn Bennett: How do we explain that?

Ms. Joy Morris: It is an issue of not having the spaces in Canadian institutions because the institutions are underfunded and can't afford to increase their size, increase their enrolment, and still provide adequate levels of education.

Ms. Carolyn Bennett: I just had one quick little question on Dr. Friesen's proposal. I guess it was Joy who talked about that. Dr. Friesen's proposal for national institutes of health comes with a very big invoice attached. I think most of us think it's pretty terrific. Do you feel that the social sciences are comfortable that this proposal will do what we need to do in terms of research around the broadest definition of health care and health care delivery, or are you hearing concerns that it's too medical a model?

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Ms. Joy Morris: I have certainly heard concerns initially that it was too medical a model. I've heard ongoing debate, discussion, and negotiation about that. The latest indication I have is that the social sciences are reasonably satisfied with the proposals as they currently stand. But certainly, I think social sciences do need to be a key part of it.

Ms. Carolyn Bennett: My small commercial would be that unless we actually have the results of research on poverty, violence, and the environment, we will never have a sustainable health care system.

So you're giving some strong support to giving Dr. Friesen some money for his health institutes.

Ms. Joy Morris: We do certainly support that.

I think this also feeds back into your earlier question of how we convince people to stay in Canada. My understanding of the statistics I've seen is that it tends not to be immediate university graduates who leave the country as much as people who are further advanced in their careers, who then choose to accept a more attractive offer. In fact, at the immediate university level of graduation, we tend to break fairly even. So what we need, I think, are systems like the national health institutes, etc., that will encourage people to stay in Canada because there is funding and there are resources so that they can work in the fields they care about.

The Chairman: I'd like to go back to the question asked by Dr. Bennett in reference to your constituent who couldn't find a place at the University of Toronto but found a place at Brown University.

Ms. Carolyn Bennett: With a scholarship.

The Chairman: Exactly, and I think Mr. Riis was commenting on that in reference to public funding in education. My question is, do you think that percentage-wise they have as much public funding at Brown University as they have at the University of Toronto?

Ms. Joy Morris: No.

The Chairman: This is also another issue to deal with.

Ms. Joy Morris: What they seem to do in the States is rely far more on public funding, and they have a much more indoctrinated, I guess, system of getting money from their alumni one way or another. However, I don't think the U.S. model of social programs is something that most Canadians would want in anything.

The Chairman: No, I was just making a comment.

Mr. Clift.

Mr. Robert Clift: The Brown University example is indicative of the differences between the Canadian and the U.S. system. If memory serves, Brown University is a private institution. However, the federal government through its national grants, such as the Pell grants and the Stafford loans, provides an incredible amount of support through that institution to its students.

Alternately, given its age and the fact that U.S. institutions are far more efficient at milking the money out of their donors, the institution is able to offer a policy of needs buying admission; that is, they choose the students they want and then they build a package to suit them. So if they really wanted these Canadian students, who wouldn't be eligible for the U.S. grants or loans, they would draw upon their private sources of funding and their endowments. If it involved an area of particularly high demand programs that we may have a small supply of, they may not have been able to get in. That's where that comes from.

The Chairman: I think Mr. Riis has a follow-up question.

Mr. Nelson Riis: Thank you, Mr. Chairman.

Later this morning we're going to be receiving a presentation from the Fraser Institute, which will probably be making the case for lower taxes to work against the brain drain. We've heard this in a variety of sessions.

I'd like to ask you folks, how significant is the factor of taxation when people move to another country? What I'm hearing this morning is people saying that university graduates will tend to move to another location in order to enhance their ability to do the work they're trained to do, as opposed to taking advantage of a lower tax system or some other motivating factor. Do you have any views on that in terms of how crucial the tax system is to professionals moving to another jurisdiction?

Secondly, do you have any observations in terms of the demographic changes to the country? Mr. Lavalle's comments in terms of people participating troubled me. Should we be aware of some of the demographic changes, immigration patterns, the aging population, or other changes to understand some of these realities occurring with our post-secondary institutions?

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Mr. Ed Lavalle: I'd like to tackle the problem of taxes. I don't think it's been proven that high taxes are a real disincentive, particularly to professionals. I keep looking for it, but I don't really see it.

Let's take the medical profession. I have actually explored this a little bit with some of its practitioners. Most of them go across the border, so to speak, because they can be paid more money; they can make a greater income. Let's not talk about retention of how much; they can make an absolutely high salary, and there is a reason for that. Canada spends 2% less of its GDP on health than the United States. So the United States spends more money on health per capita than Canada, but the services don't reach per capita the way they do in Canada. In fact, a substantial amount of the American health system is a health system for the elite and the privileged. The tendency is to go down there, if you're—I wouldn't even say if you're good. The tendency is to go down there as a business investment and try to make more money.

I think Canadian professionals have a number of ways to avoid taxes. I don't believe that any doctor in this country who has a good tax adviser is paying any higher rate of tax on the margin than any other business person, any other small manufacturer, or...they don't have to be so small. They develop clinics, they develop tax shelters, they spin off companies, they buy buildings, they form societies. I don't think that is really a problem. I'd like somebody to demonstrate to me that it is. They go because on the margin they will make a much greater salary.

Mr. Michael Conlon: Just in terms of the demographics, I'm not sure how many of you heard Cross Country Checkup yesterday at Western, but the president of Western, Paul Davenport, as well as a member of our organization, a faculty member from York University named Jennifer Lewington, were part of a panel. It was a two hour call-in show, and one of the debates that came up was this issue of deregulating tuition fees.

Paul Davenport made an argument about all the wonderful things Western was able to do with deregulated tuition fees. They can now charge dentistry students $18,000 a year, and all of these kinds of issues. What he didn't mention was how that reality changes the demographic of that campus and how it will inevitably change the demographic of that campus.

The research I indicated earlier I think proves beyond a reasonable doubt that if you increase tuition fees, you're going to change the demographic of who gets a post-secondary education. It is essentially going to push the demographic up and cut off those at the lower end from participating. I think the evidence is strong there. The question really is not whether or not that will happen; it's whether or not we want it to happen or do we have the will to stop it from happening.

The Chairman: Ms. Morris.

Ms. Joy Morris: On the issue of tax, I heard an interesting statistic recently, which is that in a majority of American cities, because of property taxes, they actually pay a higher percentage of their income overall in taxes than in a majority of Canadian cities. I don't think the tax is necessarily the issue that is moving people.

On the issue of demographics, I think we should note that in British Columbia the numbers of students attending post-secondary institutions are not decreasing. I think that is a key thing to note when you realize that here we've had a tuition freeze for the last three years and education remains, relatively speaking, affordable compared to certainly what's happening in Ontario. I think the cross-country differences right there can be studied and used to show that the demographics of what's happening are not necessarily the factors as much as cost.

The Chairman: Mr. Clift.

Mr. Robert Clift: I can't speak generally with respect to the professions, but certainly in academe and in the margins of academe and research-intensive industries, the issue more often than not is simply basic support. Let's face it, faculty members at universities on average are paid relatively well. It's not more money they need; it's more opportunity to be able to carry out their research.

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One of the big problems we've been experiencing in the B.C. universities, as all the universities across the country have, is in attracting bright young faculty members to deal with the fact that we have an aging professoriate that will soon retire. In bringing a new faculty member on, one who has not established a research program, there's the cost necessary to help them establish their laboratories, or to add to the library collections in a specialty area. These are the things that in the past were funded by core funding of the institutions. These are not provided for in research grants, by and large, so this is the problem we have there.

With respect to the private sector and these industries, my understanding, from my limited exposure in the software industry, in which I have many acquaintances, is that more often than not it's a problem of growth. Initially, they have the people they need and they're able to retain them here and they're able to grow their products to a certain extent. Then it becomes a question of where we get the next level of funding in order to grow us to the next level.

In part, this is a problem with the banks not investing in small businesses, particularly businesses that don't have hard assets. Banks will fund factories because there's a piece of equipment there that can be repossessed, but when you need the money to grow a software industry in which there is no physical thing—you may put something onto a floppy disk, but there is no physical thing to be repossessed—this is more of a problem.

The Chairman: Mr. McKay.

Mr. John McKay (Scarborough East): Thank you, Mr. Chairman.

One of the beauties of going last is that pretty well everybody has nibbled your question.

I want to go back to the issue of the discrepancy in the tax regime in the U.S. versus the tax regime in Canada. The federal government would dearly love to pass on a tax cut at this stage, in this particular budget, and is contemplating doing so, but would like to pass on a tax cut to the people who have really contributed the most to the deficit reduction, namely the middle and upper middle class, and that creates in and of itself its own difficulties.

One of the things we've discussed here this morning is the anecdotal evidence of people in medicine going somewhere else, going down to the States. In my own profession, the law profession, the opening salary in New York is $90,000 U.S.; the opening salary in Toronto is $54,000. How long do you need to think about that sort of thing? Then when you add on a tax regime... Ultimately, the federal government only has very limited instruments to play with, one of which is the tax regime.

How long do you think we can maintain a discrepancy in the tax system for the middle and upper middle class, which is so obvious to those we most wish to retain in this country? Is it your position that under no circumstances should the federal government pass on a tax cut to those individuals at this time?

The Chairman: Mr. Conlon.

Mr. Michael Conlon: In terms of the position we outline in our paper, the quick answer is yes. But I think the issue of taxes and the support for taxes, how wide it is and how deep it is among Canadian society, is a debate that still needs to happen. As several people have alluded to, I think the reality is that once we start digging into what the day-to-day reality for a citizen in the United States is versus the reality of a citizen in Canada, based on support for post-secondary education, based on support for health care, based on the social safety net, which Canadians still tell us they value and that the United States essentially does not have, in terms of the direct user costs that get passed on to middle-income Canadians especially—not so much upper-class Canadians because they don't feel it as much—it is direct.

For instance, in terms of tuition in Ontario, I think Ontarians got in the neighbourhood of a $300 tax cut. For a middle-class family of two, say, making $60,000 to $80,000 a year, that's a horrible investment if they want to send either of their two children to university, or at least contribute to that education, based on the kind of tuition increases that were directly passed on as a product of that tax cut, not to mention the increased user fees at municipal levels and the ripple-down effect tax cuts have. I suppose our argument is both philosophical and economic. Philosophically tax cuts are a threat to a democratic egalitarian society—

Mr. John McKay: Let me go on that for a second. The people we're talking about here are your crowd that's going to be making $150,000 to $200,000 a year, and frankly, the social safety net is a nice little academic concept somewhere off when they were in first-year political science.

• 1425

So I go back to my fundamental question. We're talking about an elite group of people here. How long can we have that discrepancy for that elite group of people, where your tax system is in the order of one to one and a half times greater than a similar tax regime in the U.S.?

Mr. Ed Lavalle: First of all, I think it hasn't been demonstrated that we're a net exporter of brain or profession yet. It's pretty well a wash.

Mr. John McKay: Is that because of our clever immigration policy or our clever education policy?

Mr. Ed Lavalle: The education policy isn't that clever, so it must be the immigration policy.

On the other hand, though, attributing the flow of entrepreneurial-minded professionals...because that's really what it's all about. Mother Teresa doesn't go to the States. Somebody who wants to go to one of those big agencies in what is my profession too, law, will go to Philadelphia or Boston or Chicago.

You ask how long that will last. That will last as long as there is demand in the United States and the economy there expands. If we had economic policies in Canada that stimulated employment, that produced growth, we wouldn't be able to chunk out enough lawyers or doctors or symphony leaders, or anything else, to meet the demand.

It's the basically sluggish economy, as opposed to the more vital economy in the United States, from an entrepreneurial sense. How long that is going to last, I don't know, because of the recession. But I would say we are going to lose people as long as there is a market that pays more, in an economy that produces more jobs and more opportunities and demands those kinds of people. I think that's where we have to start.

Mr. John McKay: So effectively, there is nothing the government can do, absent other economic policy.

Mr. Ed Lavalle: I don't think that. Tax incentives are more likely to actually stimulate capital investment and stuff like that. I don't think tax policies personally affect individuals making choices that much, because at the point where a person is a high income maker, they have already learned not to pay too much personal income tax. Their basic concern is in their investments, in their capital position and their relationship to it.

Ms. Joy Morris: To add briefly, if I'm not considering people who can hire out their children themselves if they want to, I think one of the big incentives for people, even in an upper income bracket, to remain in Canada is concern for their children, their parents, and other family members who may require the social safety net, even if they don't themselves.

Mr. John McKay: Let me switch to another line of questioning that has also been touched on by previous questioners, and that is the CHST.

The general position of all of you is that CHST funding should be restored. Can you outline to me what that would mean for British Columbia? How much in dollars and how much in the B.C. budget would that mean, $60 million?

Mr. Ed Lavalle: Oh no, it's more like 3%. I think $800 million was the value of the...

The Chairman: Are you saying $15 billion or $16 billion?

Mr. Ed Lavalle: To restore over the years...I think it was $110 million last year, or the current year we're in, and slightly less than that the year before.

Mr. John McKay: So $110 million on an annual basis, is that—

Mr. Ed Lavalle: That was for post-secondary education.

Mr. John McKay: I'm talking in global terms here as to what the cut actually meant in absolute terms and in percentage terms to the B.C. budget.

Mr. Ed Lavalle: I think it was $385 million in total.

Mr. John McKay: It was $385 million?

Mr. Ed Lavalle: That's if you put social assistance, health, and education all in the same bucket.

• 1430

Mr. John McKay: What's that in terms of B.C.'s budget?

Mr. Robert Clift: It would be 3% or 4%.

Mr. John McKay: Okay, 3% or 4%. So the overall effect of reducing from $18.5 billion to $12.5 billion was 3% or 4% of British Columbia's budget. Is that roughly it?

Mr. Ed Lavalle: Yes, because I do remember a finance official saying that if we had a robust economy you would wash out the effects of these cuts as long as they didn't go beyond the present level, but of course you didn't get the robust economy.

Mr. John McKay: Do you know what the federal government's actual percentage of the budget is for British Columbia in terms of transfers to British Columbia and what that represents as a percentage of its—

Mr. Ed Lavalle: Total transfers and tax points and outright...quite frankly, I don't.

Mr. John McKay: The argument that we should restore CHST has taken on a bit of a holy writ status. In Ontario, in particular, it doesn't really wash, partly due to a robust economy but partly due to some dubious policies on the part of the Ontario government. Even with the meltdown in moneys, the actual cash moneys to the Province of Ontario, the transfers from the federal government still represent 19% of the budget. It's 19% before, 19% during, and 19% after, and I'm just wondering whether a similar or parallel situation is true here.

Mr. Ed Lavalle: I didn't understand the question.

Mr. John McKay: Ontario is roughly 40% of the national economy, and so when you take a reduction of roughly $6 billion in actual cash transfers, Ontario eats about $2.4 billion. When you factor that into the provincial budget, it's 1% or 2% of their budget. But when you look at their budget at the beginning of the year and the end of the year, the federal government's still contributing 19% of their budget to the overall budget requirements of the provincial government.

What I'm trying to understand is whether the CHST reductions in British Columbia have had an absolute reduction in the budgetary revenues of the British Columbia government, or whether in percentage terms it's been a sideways exercise much like in Ontario.

Mr. Ed Lavalle: It's not been sideways, it's been substantial. In other words, money that went to the areas that were supported by CHST had to come from other sources, as in fact it did. It came from the administration of justice, it did from all government departments, it did at the level of public goods and services outside of health and education. It didn't in social assistance in terms of the aggregate, but other services than those three...

About the CHST, that's a code word, right? That's an easy definition of what was lost. The CHST as an idea is neither here nor there, at least for my members. My members are saying get an education strategy, support it financially, let it be built on a certain kind of reality that exists between the federal power and the provincial power. Fund it adequately to reasonably meet demand and to have certain criteria like relevance and quality, accessibility, affordability.

Let the education strategy be in part harnessed to the economic development strategy. I don't care what that gets called or what the acronym is. But the problem is that damage has been done to this process, and quite frankly, I'd be the first to say that damage has been over-responded to in some provinces. They've used that as an excuse for reconfiguring their approach to education. Ontario is a really good example of that. Alberta is partly an example of that.

Mr. John McKay: Do you see any meaningful way in which a federal government can, prior to any consideration of funding restoration, involve itself in a kind of report card exercise or some sort of structure whereby the provinces are held accountable?

• 1435

Mr. Ed Lavalle: You have a really easy mechanism. There is a well-defined Council of Ministers of Education Canada. We don't have a minister of education at the federal level, but all the vehicles are there to do something about it. They go through a painful national consultation every year and then nothing happens.

The Chairman: Thank you, Mr. McKay.

I have a quick question in reference to an issue that's been discussed quite a bit lately, and that is employment insurance. As you know, every budget is really about choices and priorities, and today we've heard about the importance of investing in education, research and development, student loans and all sorts of things. If we were to add up the amount of money required to deal with all the requests that are made to the finance committee, you're talking literally billions upon billions and billion of dollars.

This employment insurance issue, of course, raises an interesting situation. I have a question related to it. There are people who are saying the Minister of Finance, indeed the Government of Canada, should be returning to employers and employees in the neighbourhood of at least $5 billion. I would like to know how you would react to the Minister of Finance's budget speech that would basically say, “Ladies and gentlemen, this is the budget for 1999. I shall return $5 billion of EI premiums to employers and employees” and he sits down—just in case the surplus is only $5 billion. Do you think Canadians would endorse such a budget?

Mr. Ed Lavalle: They might, but the question is should they? Put the right spin on it...

The Chairman: In all seriousness, we spend a lot of time listening to Canadians, and everybody has a proposal. It's a balancing act, quite frankly. People want not just a balanced budget, but a balanced approach and priorities. I'm just wondering, for those who are advocating that the employment insurance premiums should be returned—$5 billion, $6 billion, it depends on what the so-called surplus is—whether Canadians would rally behind such a budget.

Mr. Nicholson.

Mr. Neil Nicholson: I wouldn't. I would much rather rally behind a government that sets the employment insurance fund as a fund, as an insurance practice that is soundly actuarially based and has a clearly set purpose. When we talk about the present surplus in the EI fund and what to do with it, for the most part we forget there were a number of years when it was in deficit and was fed by the federal government. It's above or below; it never breaks even. In the good years it becomes an instrument of policy that does things other than support unemployed workers, or it supports them in rather far-reaching ways.

I'd like to have it completely out of the argument, out of the discussion. The workers and the employers together provide a fund to deal with the economic dislocation consequences of unemployment, and to see that set aside and kept separate would gratify me greatly.

The Chairman: Right now it goes into general revenues.

Mr. Neil Nicholson: Yes, I know, and I think that's wrong.

Mr. Ed Lavalle: I don't think it should either. I think there is some call on the employment insurance fund. I don't want to get into it here because this is post-secondary education, but there are many people, including the Canadian Labour Congress, who find the insurance level of the fund for unemployment workers unnecessarily restrictive and unhelpful in terms of having unemployed workers meet the needs of survival and living. So I think something could probably be done in that area.

But the main area I'm interested in, in terms of appearing before you for post-secondary education, is that the government should re-examine the purchasing of education and training activities and fully fund them, rather than offloading the cost of them to the provinces, as it would do if they were delivered by the public system. I think that's a very serious problem. There has been a withdrawal by and large of federal support for apprenticeship. There has not been a federal incentive to look into the areas of new apprenticeships and the evolving economy.

• 1440

So to make it very brief, I think there are education and training needs as an alternative to just paying pogey that should be explored, and there should be a federal role in that in partnership with the provinces.

The Chairman: My question is a little more direct than that and it's very simple, if given the choice now. I understand Mr. Nicholson's point in reference to revisiting the whole structure and perhaps re-engineerng the entire employment insurance system. But given the present situation, where reports say there's a $20 billion surplus in the EI fund, which I think in 1986 was folded back into general revenues, what would you like to see in this particular budget? Do we advocate, like some people—and perhaps some people in this room—that $5 billion should be returned just to employers and employees, or do we deal with some personal income tax cuts and investments in health and education? There are also people in this country who want us to maintain the $3 billion contingency reserve fund to direct toward the debt. There are other people who want some EI premium cuts.

There's only so much money to go around. Do we do all that and bring the country back into a deficit position? These are the decisions we have to make, but there's no question this is a new dilemma and challenge that we face. I would just like to know from you where you think the balance lies.

Ms. Joy Morris: I don't think we can talk about employment insurance without linking it to all of the other issues that are part of the social safety net. Unemployed people on employment insurance, just like everyone else, tend to need education, health care, etc. If those premiums are in some way returned to the public, they should be returned through the public system through perhaps increasing eligibility requirements again for employment insurance, and increasing funding for the systems that exist that protect the people who have paid into that system.

The Chairman: Would you say that even at the price of people on whose behalf you speak—they might not get any money and you might not get any enhanced funding of the CHST—or people who want personal income tax cuts, payroll tax cuts, or the debt...?

Ms. Joy Morris: I'm speaking of all aspects of the social safety net. I think that covers the constituents I'm speaking for—the graduate students who also are not eligible in many cases for employment insurance after taking TA positions because they don't have enough hours of work in the year because of the nature of the work.

The Chairman: So you are saying to invest in health care, then.

Ms. Joy Morris: Invest it in health care, education and increasing the eligibility criteria for employment insurance.

The Chairman: Mr. Clift.

Mr. Robert Clift: I actually anticipated a question of this sort, because you did the same type of thing to us last year; you gave one of these hard questions to us.

First of all, when you hire me to work for you, then I'll go behind closed doors with you and we can have these discussions. You will have the benefit of my intellect and my experience there.

The Chairman: We can go in camera if you like.

Mr. Robert Clift: You'll have to reimburse my boss for the billable hours, I suppose. I'm not going to answer the question directly. If I did I would be a bad academic, I think. I want to reformulate the question back to this idea of what the purposes of the fund are, which Neil and Ed have brought up.

• 1445

If anything, where I think we have the largest deficiency in education in Canada is in helping people make the transition from the changing economies. Many Canadians who were eligible for benefits years ago are ineligible for benefits today. Subsequently, they're also ineligible for training opportunities.

An example of the kind of shift Ed mentioned with respect to the question about how the CHST has affected British Columbia is that a large proportion of social assistance recipients were moved off social assistance and put on student loans, because that was the way to move it—make a public expenditure move to a private expenditure.

Similarly, we've done the same thing for unemployed Canadians who may have benefited in the past by retraining from the EI fund. EI should be there for the purpose it was originally intended, and if there's a pressing educational need, it's in providing these opportunities for upgrading and retraining. At the same time, that will also benefit our public education system, not to the same extent for the universities as for the colleges, but all those investments are good things.

The Chairman: So if we have to push the budget back to a deficit position because we have to return $5 billion to employers and employees, you would support that?

Mr. Robert Clift: I don't think you should move it back to a deficit position, no.

The Chairman: Okay.

Mr. Conlon.

Mr. Michael Conlon: My sense of it is that this gets into the debate about how we attained the surplus in the first place—who it was that contributed and who it was that paid, not just economically but socially. And I think now that the government is in a position to invest some of that money, I would echo Joy's comments that the money ought to go back into the areas that suffered the most under these cuts. And I would disagree with the comment that it was upper-middle-class and upper-class Canadians who sacrificed the most for this deficit position, at least not in pure economic terms, anyway.

So my sense is that it's a difficult dilemma for the government in terms of what to do with this EI money. It came from a certain place and there are strong and good arguments about sending it back to that place. But the reality is there are areas that we sacrificed, as a society and as post-secondary students, to put us in this kind of position in the first place, not just in the EI fund but in this larger surplus that we're here to talk about today.

So I think it should go back into social programs, without putting us back into a deficit position, which I think many people, many economists and other people, would argue is actually a threat to social programs.

The Chairman: Your point is actually well taken. You're saying there are people who have paid, not necessarily... Paying doesn't necessarily have to be in monetary, economic terms. You may pay in social terms as well. Is that correct?

Mr. Michael Conlon: Yes, absolutely.

The Chairman: So these people who have paid in social terms are indeed part of this society as well, right? And therefore, some of the surplus money can in fact offset some of the pain that people endured during the deficit-cutting years. Is that correct? So in essence what you're saying is some of that surplus may in fact be redirected to things like health care and education or, for example, raising the basic personal exemption in tax so that people are off the income tax rolls. Those sorts of things, you think, are justifiable.

Mr. Michael Conlon: Absolutely.

The Chairman: Okay.

Mr. Lavalle.

Mr. Ed Lavalle: In employment insurance, there are a lot of creative things being done, if you look at Europe and some other countries, to use the employment insurance activities to in fact go into value-added activities. They invest in the person. They move away from the old notion that it's just maintenance payments. If that's all you've got and you need that, I'm not saying you shouldn't do that, but in France and Germany they invest in the unemployed person, whether it be education, training, or even a little venture capital or something like that. They accelerate the process of EI payments and they get people moving.

The effect on the economy is then very, very beneficial because those people, not all of them obviously, but many of them, then get off the EI roll and they become contributors to the GDP.

The Chairman: Isn't that part 2 of the act...? When we reformed it to become the EI act, isn't that what part 2 was supposed to do? We have skills and loan grants, and basically five measures to help people reintegrate into the economy.

• 1450

Mr. Ed Lavalle: But it hasn't been adequately funded or developed.

The Chairman: So you're saying you should in fact increase that portion?

Mr. Ed Lavalle: You should look at this money... The HRDC strategy in this country has not really advanced in the last decade and the public institutions in my mind could play a great role in facilitating that.

The Chairman: Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman. I just have a comment and maybe some response.

Of course none of you have really talked about or given your support for a tax cut. I suppose that has more to do with the economic philosophy one follows, whether you follow a Keynesian theory of economics or a Friedman theory of economics. You have called for no tax cuts but rather increased spending of that surplus. You know, economic philosophy is one thing, but the fact is there is ample evidence around the world in countries that have a robust economy that there is a direct link, an absolute proven direct link, between a low taxation regime and a buoyant economy and higher employment.

It's nice to have everything we'd like to have, but when you say the government should not consider giving middle-income Canadians and upper-middle-income Canadians—the biggest contributors, by the way, to our tax regime—a tax cut, when you say we should spend any surplus rather than try to pay down our debt, when you say we should ignore most of the things other countries have done that currently have a robust economy, how can you rationalize that?

Aren't those the same things, the things you're talking about, that got us a $500 billion debt on which we pay $43 billion or $45 billion a year in interest payments alone? Isn't it the constant increasing of taxes that has caused us to become almost uncompetitive in the world markets?

Incidentally, there is a 25% to 30% difference in the taxes paid in the U.S. and in Canada, and it is a factor for the brain drain; there's ample evidence to show that. Don't you think it's time we maybe should be doing the things that will generate a more robust economy, which incidentally will bring more taxes because of the success of our economy into the government coffers, which then could be spent on more education and health care and some of the social programs we all love to have?

The Chairman: Mr. Nicholson, followed by Mr. Conlon.

Mr. Neil Nicholson: Thank you, Mr. Chair.

I went back through my brief very quickly while Mr. Harris was speaking and I cast my mind over the words that were spoken by my peers. I don't remember hearing anybody say they were opposed to a tax cut. I don't recall being asked whether I favoured a tax cut. We responded to the questions we were asked, namely, what are the actions the government could best take in order to accomplish a variety of things. Those were the questions we answered.

Everybody loves tax cuts. I'd like a tax cut myself, but I wasn't asked to deal with that. I might also have ignored the questions you asked me and told you where you might cut spending in other areas in order to appropriately support post-secondary education. I didn't come here today prepared to answer those questions; I came prepared to answer those you asked me.

I think we've answered those well. I think the actions we've proposed—and there's remarkable similarity from a somewhat disparate group—would put the country on the road to the economic recovery that would lead to the ability to spend elsewhere, to cut taxes, to do a variety of things.

• 1455

Mr. Dick Harris: Mr. Nicholson, in the presentations, though, when each of you started talking about any surpluses that might arise, there was no mention of possibly passing those surpluses on to lower the tax regime in Canada. The focus was all on increased spending. Although it wasn't a specific question, the panel did talk about surpluses, and the most appropriate companion to surpluses is more spending, I guess, rather than trying to lower our taxes.

Mr. Neil Nicholson: With respect, I think there is little virtue in you and I arguing with each other. There are some references to tax measures within our paper, targeted reductions aimed at achieving certain ends, and I would prefer to leave it there, if I may.

The Chairman: Thank you, Mr. Nicholson.

Mr. Ed Lavalle: I have a question for Mr. Harris, to follow up. If I'm a super-duper plastic surgeon and my average medicare system... There has to be a medical reason for fixing a nose or doing a breast reduction or something like that, but I can go down...if I do it outside the medical plan I can get $10,000 to $15,000 for doing such an operation, whereas I can get $90,000 in Canadian funds in L.A. What tax incentive can you give me to make me stay here, to close the gap between a $15,000 breast reduction surgery and a $90,000 one, if I can get into the carriage trade in L.A.? I just don't know the answer to that.

Mr. Dick Harris: I suppose there are a number of reasons why we have the brain drain, particularly in the medical profession, and I can give you numerous examples from my own town of Prince George, where half the specialists are in Fargo, North Dakota, right now, making wonderful money, plus they're paying about 25% to 30% income tax. I can assure you that both the salary and the access to operating room time, as well as the tax regime—as important as the other two—are the reasons they're down there and they're not coming home.

The Chairman: We're going to have to wrap this up, unfortunately, because Mr. Grubel, a former member of the finance committee, is ready to make his presentation.

On behalf of the committee, I want to express to you our sincerest gratitude for an excellent panel, as always here in Vancouver. The issues you raise are extremely important, but you also understand the challenge we face when we travel across the country and we hear from many people who have a different set of priorities.

Our goal, of course, is to try to balance the needs and aspirations of Canadians, with the ultimate goal to improve the quality of life for the people of Canada and look forward to a brighter future.

So on behalf of the committee, once again, thank you very much. It's been very interesting.

We're going to suspend for approximately one minute so Mr. Grubel can come forward.

• 1457

• 1501

The Chairman: I call the meeting back to order.

I'd like to take this opportunity to welcome Professor Herb Grubel, a former member of Parliament and indeed a former member of this committee. He will give us his perspective on what he feels should be the priorities of the 1999 budget, a view from outside the House of Commons.

Mr. Grubel, welcome.

Professor Herbert Grubel (Individual Presentation): Thank you, Maurizio, for inviting me. May I still call you Maurizio?

The Chairman: Of course.

Prof. Herbert Grubel: I thank you for the invitation. I just want to say that I'm speaking for myself, neither as a member of the Reform Party nor as a former caucus member, but as an academic and an employee of the Fraser Institute.

I also want to thank all of you here for your continued dedication to the political life and political work. I know how taxing and trying it is, how instead of rewards and thanks, you get from the public and media mostly criticism and questions about motive.

Congratulations upon running again, re-election, and your election success.

In my autobiography, which I've just finished, I had a chance to look back at my four years in politics, and I must tell you that my memory of what went on in the finance committee is one of the most positive. I think the finance committee does important work. I know Mr. Martin and the Department of Finance have representatives here who feed back information. Much of it is anticipated, but every once in a while there is information. I think that is good to have for the Department of Finance.

I found that it was a very educational experience. I am professionally an economist, so I think I'm aware of the complexity of the world, but to hear so many witnesses talk about their own situations was to me a very revealing thing, and it just shows that there are no real simple solutions that will solve all problems. It's a very complex world in which we live.

It turned out that it strengthened my view that maybe those conflicts and different interests should all be resolved in the market rather than by the political process. But that's whatever someone wants to take away from these experiences.

• 1505

I also took time in my book to indicate where a couple of times—not all that much in four years—I think the finance committee actually had direct influence. Those of you who were with us at the time will remember the representation of the banking community, trying to keep out foreign competition. We unmasked the selfishness of their presentation, and I think the Department of Finance reacted very positively. Similarly, I think our efforts to try to get a more generous treatment of charitable deductions were positive. There were a couple of others, but I don't want to dwell on this.

I have sent you to, Maurizio, a notice that I have a book for you that summarizes and contains papers of a conference we held in December 1997 on the topic that is the main question raised by the Minister of Finance for your committee; that is, what do you do with the upcoming surplus? Unfortunately production of this book was delayed, but if I may, I would like to quickly summarize it, because it leads immediately into answering the questions that you are addressing at this meeting.

In the book we have the political positions that you all know, held by Mr. Charest, Mr. Manning, and Nelson Riis. We also heard several provincial perspectives by Stockwell Day from Alberta, Janice MacKinnon from Saskatchewan, and Ernie Eves from Ontario, who were essentially complaining about the downloading problem that you're very familiar with.

But what I think was new at the conference, and is available in these papers within six or eight weeks, are some papers by scholars, and they refer to the subject Dick Harris raised in his question a little while ago, that there is strong evidence around the world that there is something called an optimum size of government. There's empirical evidence and lots of theory backing it.

You can imagine that when there is no government at all in a country, everybody has to have their own police force to protect themselves. There is no contract law, and there is no reliable money supply, and so on. It is a very inefficient kind of a system, when roads are all maintained or...

Anyway, the smaller the government in the beginning or, if you can envision it as a sort of experiment, no government at all...the productivity of the people in that country is relatively low. As government increases its expenditure, some of the things private individuals did are now done collectively and done more efficiently. However, as we keep on increasing the spending, you reach a level where, beyond that, increased government spending requiring taxation leads to inefficiencies and ultimately a decrease in the rate of economic growth.

It is very interesting that in a paper that one of my graduate students and I have included in this text, based on some other work by a man named Scully who gave a paper at the conference, we found that in Canada, if you look at a graph, in the 1920s and 1930s, when government spending was low, the economic growth rate was high. After the war, for a while, increasing government spending still added to the economic growth rate. But once we reached over 34%, the increased spending then resulted in a slowdown in the rate of economic growth. This is based on Statistics Canada data, using statistical techniques that can easily be replicated by anyone, and you will see that this is a powerful result.

There was also a paper by a man from the IMF and someone from the World Trade Organization, Schuknecht and Tanzi—Tanzi, especially, is a famous economist—who showed that when you divide countries in recent years, and also historically, into countries with high, average and low levels of spending, in fact once you go over 25% to 30% of national incomes being spent by government, a very interesting thing happens. You don't get any better performance in terms of gross per capita income, infant mortality rate, all the measures that are in this famous UNDP book that ranked Canada so high, number one. You don't get any improvement.

• 1510

The only thing is, for income distribution, the countries with high spending levels have a better record than those with low spending. However, the gains are very modest. In high-spending countries the poorest 40% of households receive 20% of all income. In countries with moderate and small governments, these shares are 18.7% and 17.3% respectively.

So the evidence is clear. If you go beyond a certain level, and I would include Germany and Sweden and all these countries, you do not get better economic growth, living standards, and all the social indicators, except for income distribution. The income distribution benefits are relatively small given the sacrifices you make in terms of reduced economic growth.

For my students I have a graph that shows that if one thing grows more rapidly than another, 15 to 20 years in the future the amount of income earned by the bottom quintile will be greater if government spending is low, because economic growth is greater, and the total amount of resources available are better.

This leads me immediately into the issue that the minister asked you to investigate, and that is what to do with the fiscal surplus. The answer from evidence contained in this book is unambiguous. Keep spending constant on programs, increase spending only to the extent that needs are increasing as a result of growth in population and for pensioners, and for the rest reduce taxes. As a result of this, you will gradually—in fact, depending on economic growth, relatively quickly—reach a level of spending as a percentage of GDP that gets back to the level we had when we grew most rapidly. We can get there again. It may be impossible to reverse some of the institutions and practices that we had developed during the high spending period, and it may take a while, but certainly we will never get there if we don't reduce the size of government.

I will just add to this that, with the current crisis, please let us all be cautious about spending money that we don't have. I think Mr. Martin's idea of a contingency reserve and the contingency reserve going automatically to the debt reduction if it was not used up was a very, very good idea. I hope it will be continued and made larger. Instead of just $2 billion or $3 billion, it should be a certain percentage of total spending in the future.

I want to run through this quickly so that we can have discussion. On tax changes, the problems are clearly the brain drain. It's a very serious issue. We are going to have another conference in November, organized by the Fraser Institute, on the subject of the brain drain and I'll be giving a paper.

It's a complex issue, as Dick Harris was told as an answer here. The question I would have raised, Dick, with the gentlemen here would have been that the Government of Canada cannot do anything about the fact that a plastic surgeon earns $100,000 for a procedure in Hollywood when he earns only $15,000 here. There is nothing the government can do about this except a fundamental overhaul of our medicare system, which is a completely separate issue. The only lever we have is of course the punitive tax rates that everybody has.

You may have seen, in an article in the Globe and Mail, pictures of my daughter and son, who were interviewed because they both had moved to Los Angeles. They gave their reasons for having done so.

I would also urge the government, and I hope you can report back... It is a shame that the excellent work done by the Technical Committee on Business Taxation in their report is not taken more seriously. Really, it has been put to bed. I think it would be very good in the longer run for the well-being of the country, though not necessarily for the party in power, that some action be taken on these recommendations.

• 1515

On unemployment, I would say that this is a battle I have fought for the last 25 years. It is a scandal that we have now reached a level of unemployment in Canada that's approximately twice that of the United States. I have done a number of studies that show it isn't differences in interest rates that can explain this. It isn't the Keynesian deficit spending that is supposed to get people to work. It isn't international trade. We have a huge export surplus, which should create employment. The Americans have a huge export deficit, which should reduce their employment.

It's clearly structural, and the structural characteristics that cause our unemployment are all government created. There's a long list. The UI benefits are too generous. You are not going to get people to work if you say “as long as you stay in this outport here in Newfoundland and stay poor, we will make sure that you don't have to move and everything will be okay. You'll get enough money.” It's not a way to reduce unemployment.

There's an article today in the Globe and Mail about the fact that employers in the Atlantic provinces have difficulty finding workers, and it's not just highly skilled workers. People who want casual labourers can't get them. There's something very badly wrong, including minimum wage and unionized rates, all those kinds of things.

I understand that as a society we have a choice as to whether we want to have a really thorough social security net and have the bragging right at every opportunity to say in the House of Commons that we are better than the Americans, and have all the intellectuals thumping their tables and saying we're better than the Americans. But don't forget, you can't have it both ways, as much as we would like to. This is the reality of the world. If you pay people not to work, many of them will choose not to work—not everyone, but some will—and there are sufficient numbers of them that this has happened. We're going to have to accept these high unemployment rates.

What is very scary is another story in the Globe and Mail today about the fact that we once were number two in the world in per capita income. In the last 15 years we have stagnated. We have fallen behind. Today we're eleventh and falling further behind. The Americans have moved while we have stood still.

I want to respond quickly to the issue of government-financed job training programs. Before I left the House I obtained a set of papers, which had been commissioned by Lloyd Axworthy when he was Minister of Human Resources Development, that evaluated such training programs around the world, and they all said that it isn't worth the money spent on them. Now, I know the problems we all face, that you will get witnesses here who swear up and down that they got the job because they went into this government-sponsored training program, and there's no way of disproving this. But the fact of the matter is that if you took all the people who found jobs after they were through with their training, you'd have to adjust for the fact that a high proportion of them would have found jobs anyway.

In my judgment, the best way to get people ready for a job is to give them a good basic education and, for a certain proportion of them, good higher education, because we need certain highly skilled people. But for the rest, the best way to get unemployment down is to make Canada a friendly place for companies from around the world to invest in. If they want workers and they don't have the skills, they will train them. It's been like that historically. We had low unemployment and lots of economic growth when there was no government intervention in these markets.

• 1520

I would suggest that the evidence from around the world is that this is not a solution. Europe is spending huge amounts of money, as one of the witnesses here said—and nobody caught him when he said that. You should have asked him, if Europe is spending these high proportions of their UI premium revenue on job re-training, why are their unemployment rates at 12% to 14%? They're much higher than anything we have, and certainly two to three times what the United States has.

I just wanted to conclude with an issue I had already raised briefly, and that is that the real issue facing our country now is to get back on track with respect to economic growth. The budget problem has been licked. We now have to look hard at why we are falling behind so much.

One of the subjects I would like to raise with you for just a minute is that we should try to get a currency union with the United States. I know this is not a popular subject, but I'm writing a report on this. Let me tell you what I think has been one of the most detrimental things with respect to the floating exchange rate.

Consider that we have now had a decrease in the demand for and price of commodities: natural resources we export. We know this is a serious problem. As a result of this, our exchange rate has gone down. It has had two detrimental effects, and it has had these in every cycle in the post-war years. What has happened to the profitability of the manufacturing sector in Canada? What has happened to the profits of the automobile industry in Ontario as a result of the depreciation of the exchange rate? Profits have skyrocketed, because their costs remained the same but their profits have gone up.

So what happens? The unions say now is the time for us to get higher wages to share in these high profits. But as you can understand, this depreciation of the currency did not increase the productivity of the workers. They are getting an advance. It's like a phantom profit that they are going to share in. Then we get arguments that we should spread wage equity throughout the economy, and as it spreads, workers' wages go up, and when the exchange rate comes up again, or is expected to go up again because world prices for natural resources recover, what happens? All the industries come and say “Oh no, we can't afford this because it would wipe us out.” Sure, that's because the wages have gone up so much.

Second, industries like forestry in British Columbia are protected and don't have the incentive to bite the bullet and make the hard adjustments necessary, in light of the fact that this might be a permanent decrease in wages and prices. They, in turn, have a cushion. I know enough about politics now to understand that no party can afford to go out and take on the interests that are causing this lack of adjustment, these high profits and high wages in the manufacturing industries, which are protected by this depreciation.

But a system, just a little bit like free trade, that would eliminate the depreciation of the exchange rate in the light of falling commodity prices would be the solution for that. I'm writing a paper on that subject and I just wanted to share it with you.

The big problem is that our income per capita has now fallen 30% below that of the United States, when we were maybe three to five percentage points behind the United States before. There is something very seriously wrong with our country, and I think we should look at all the questions you have raised and want to address in these hearings in the light of what they will do to the long-run productivity of our economy. In the longer run—and the longer run comes in 10, 15, or 20 years—everything we do will be dependent on how well we have done.

• 1525

I want to stop here and allow you to shoot at me. I'm also happy to give you my views on the MacKay report. I understand that's the subject now. I was one of the witnesses, and I have the report and have read it, so I'd be happy to talk to you about it.

The Chairman: Mr. Harris.

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

Mr. Grubel, Herb, I'm sure that most of the panel would like to see you hang around for two or three hours and enlighten us in some serious economics about how we can get our country back in shape.

I want to ask a couple of questions. First of all, do we really have a balanced budget? I know the government has been crowing about balancing the budget, but it's my opinion that we haven't reached a balanced budget yet, and this is why: if we have been constantly borrowing every year from, say, the bank to pay for our deficit in spending, and then all of a sudden one year we find a rich relative within the family and we say, well, we don't have to borrow from the bank any more; we'll borrow from Uncle George and then it's in the family so it's not really a debt.

Prof. Herbert Grubel: Yes, I get it.

Mr. Dick Harris: You see, I have trouble with this balanced budget thing that the government is talking about when we know they're using the EI surplus, which is around $19 billion at this point of the year, to get their so-called balanced budget. Also, I understand that they've borrowed from the public service pension fund to balance the budget as well.

Don't we still have a debt—a deficit, really, but we've simply borrowed from within the family?

Prof. Herbert Grubel: I think you're right at one level, but Paul Martin is right also in saying, look, these are all taxes; they've all gone into a big pot.

I think the argument against continuing the accumulation of the surplus of the EI is that it is a bad tax. Payroll taxes raise wages. If you draw a demand and supply curve, as I do for my students, there is an equilibrium where everybody who wants a job has a job. Then the government says the wage that used to be $100 is now going to be $110. At the higher wage, you move up the demand curve, and less labour will be demanded, for obvious reasons. They substitute capital for labour. They rationalize on capital.

Of course, the workers travel along the supply curve, because now their wage is not $100, it's $110 because of the present value of the benefits they get from those programs. That's why we have unemployment. It's called the wage wedge, the tax wedge on wages. So it's a bad tax. It's a regressive tax.

I think there is also some merit in maintaining the integrity of the UI program. Mr. Martin and you guys are getting yourselves into potentially some trouble for the future, because the next time there is a severe recession and we run out, then you can't raise the premiums, because everybody says, well, this fiction we have, a system of premiums that responds to there being shortfalls or surpluses, is all nonsense; finance it out of general revenue. Then the deficit will be even larger at that time than it would have been otherwise.

So it's a very complex issue. On the other hand, a lot of criticism of the variability of the premiums in response to cyclical conditions has been that it is pro-cyclical. You see, historically when we have had surpluses we also had a boom and inflation, at which point taxes are reduced, and vice versa at the bottom.

So maybe the whole UI system should be reformed. But I think if the taxes can be reduced... There is a surplus. Let's hope there is a surplus and that the Asian flu will not overtake us.

The Chairman: When you say taxes, is that personal income tax?

Prof. Herbert Grubel: No, let me review. Let's assume we are going to have a surplus. The first point I made was that we should not increase spending. We should allocate a certain amount to reducing the debt and the rest to tax cuts.

• 1530

The second issue is, what kind of tax cuts? I would say a reduction in the payroll taxes, for the reasons I've indicated, because of their effect on unemployment, would be one of the best to do. The second one would be to reduce the high margin tax rate of high-income people so that the brain drain for the longer run will not be as bad as it has been.

The third is that we open up the basic exemptions so that people with low incomes don't have to pay and generally the middle people and so on could have a greater disposable income.

Mr. Dick Harris: I have just one more question.

You talked about the income per capita. Canada has gone from number two to number eleven. You're talking about gross incomes. If you are, I would shudder to think where we are in disposable income per capita given the increase in our tax regime. Or are you talking about...?

Prof. Herbert Grubel: The whole thing is very complicated.

I've just quoted John Stewardson from today's Vancouver Sun, who said that Canada's income per person is now 30% below that of the U.S., and instead of ranking number two in the world we've tumbled to the eleventh spot.

I know so much about it that it would really take a long time.

This is really just the current exchange rate. This is before or after taxes, or purchasing power parity, and all those kinds of things. But there is no doubt that whatever the precise numbers are, we have been falling behind. Sweden—I have clear statistics—was number two or three in the world in the 1960s. It did what Canada did, just more so. We imitated Sweden, and Sweden is now, instead of second in the OECD, 20th or 30th. It's below the average of the OECD, and I think that's going to be ahead for us.

Mr. Dick Harris: One final question, Herb.

I don't think Mr. Martin is anything less than a reasonably smart guy—I was trying to word that very carefully. Since 1993, how have we not only had increases in taxes, but given the historic evidence and the experience around the world with countries...? The best example that comes to mind is the state of New Jersey when Christine Todd Whitman was campaigning for governor. They had something like 11% or 12% unemployment. It was in terrible shape. She said, “I will immediately bring in tax cuts in these areas and these areas”, and she got elected. There was just a complete turnaround in the economy of that state. It emerged as having one of the lowest unemployment rates, and government revenues actually increased after the tax reductions.

How can we have stayed on this high tax regime for so long without somebody—Mr. Martin—saying...

Prof. Herbert Grubel: I congratulated Mr. Martin in 1994 on the floor and I got in trouble with the Reform Party as a result of it. For the first time in post-war history, since demobilization, he has actually cut spending. I think it has been a major achievement, and he should be given a tremendous amount of credit. Sure, a lot of it went through downloading on the provinces, but that was necessary as well. But there has also been a shrinking in government, and I think this is a great achievement.

The first priority that this country faced was to stave off bankruptcy, and at that point you couldn't afford a tax cut. I think it was a prudent move, and I would encourage you to continue like that. Don't spend money you don't have. If you have to err, when it comes up put it into tax cuts. Don't increase spending.

The Chairman: Thank you, Herb. Now that you've endorsed Mr. Martin's direction, are there any further questions?

Mr. Dick Harris: Repeat what you said about tax cuts.

The Chairman: But then again, New Jersey is not Canada, because you ran on that stand of cutting taxes and you didn't form the government. I guess she was dealing with a different electorate.

• 1535

Mr. McKay or Mr. Gallaway. Who's taking the question here?

Mr. Roger Gallaway: I want some time.

Mr. John McKay: I'll be very brief.

Mr. Grubel, your priorities surprise me. Your priority was, I heard you say, to cut the payroll first, personal income tax second, and play around with exemptions third. That was the order. Yet Canada has the lowest payroll taxes of the G-7 and our unemployment rate still remains fairly high. As I read these stats, our payroll taxes are 6% of GDP and the United States is 7% of GDP.

So if the simple equation held, the lower the payroll taxes the lower the unemployment, you would think intuitively that that should work, but it's not working.

Prof. Herbert Grubel: It's a multi-faceted kind of thing. I could turn it around and say, well, look where Europe is with its huge payroll taxes.

Mr. John McKay: Why wouldn't you then emphasize a personal income tax where really there is quite a discrepancy? We're at about 14% and the U.S. is about 10.7%. Why wouldn't you reverse your priorities and say that personal income tax is the number one priority—assuming the flat line on spending, which is your underlying assumption here. Why wouldn't you go to that as a priority over payroll?

Prof. Herbert Grubel: It's because I am preoccupied with labour market conditions, and labour market conditions are as follows. Look, if tomorrow the NDP of old came in and said, “We think making $5 working for McDonald's is too low; we should give them $15 an hour”, and they pass a law to do so, what do you think would happen to the employment at McDonald's? Some McDonald's outlets would close down. But I can envision a couple of years later we would have robots flipping the hamburgers, robots taking your money, taking your orders, and so on. You substitute capital and mechanical equipment for labour.

Our problem—the high unemployment rate we still have—is due to these kinds of labour market adjustments. We have wages that are so high that we are encouraging the substitution of capital for labour.

Mr. John McKay: Isn't that in some respects beyond the levers of government?

Prof. Herbert Grubel: Well, I'm just saying—

Mr. John McKay:

[Editor's Note—Inaudible]...here is up or down the income tax rate, up or down the EI rate, up or down this or that. In some respects we're not able to play with the larger picture.

Prof. Herbert Grubel: Mr. McKay, for my students tomorrow I will use an article written by a local person here, an economist. He calculated that if you make minimum wage, you get about $14,000. If you take the current charges the government has put on the employer with respect to UI, CPP, Workers' Compensation, you get to $16,000. I'm saying it's just like the example I gave with respect to the McDonald's worker. The government has said “Okay, you don't have to just pay $14,000 a year, you have to pay $16,000 a year”, except that the worker doesn't see it. That means that wherever possible the employers will substitute labour-saving devices for others.

This is not to say you're not right with respect to income and the disincentive effect of income tax, especially corporation income tax. All of these have detrimental effects, because people are leaving, people are choosing not to work.

In the book we have a story where Compas, a research organization, asked people a hypothetical question: Your employer approaches you and says “I have work for you this weekend and you will get a certain amount of money, a nice sum of money”. Then they asked some people “But the tax rate you have to pay on that leaves you only half.” The other question is that it leaves you a quarter, and the other is more than half. The answers are clear. If the taxes are too high, people will not take these jobs. It's common sense.

Mr. John McKay: They vote with their feet is what you're saying.

• 1540

Prof. Herbert Grubel: That's right, they just will not take these jobs that are offered to them. Therefore we have less output, less tax revenue, we have all these negative impacts. So I fully agree with you, the whole structure should be changed. I must admit frankly to you I don't feel very strongly about where exactly we cut the tax.

I have lost my family; they have gone to Los Angeles—all the productive ones. I have five kids from two marriages. The two who are not productive—one of them is mentally handicapped and the other one is still fighting with what he wants to do out of life—they are here. The ones who have all but doctoral dissertation are making well over $100,000 a year. One has a master's in public health and the other one has an engineering degree. They all have gone there. I didn't encourage them. I wish they were here. I would love to have my grandchildren here. It's a serious, serious problem.

The Chairman: Mr. Gallaway.

Mr. Roger Gallaway: I think somebody should ask the obvious question when a former member appears before a committee, and that is why do they always look so healthy and so animated and so lively? But I'll pass on that one.

Prof. Herbert Grubel: Roger, your answer is obvious. It's good to see you again.

Mr. Roger Gallaway: It's good to see you.

I think you've raised something that tells us there is not a single factor that is going to cure all of our problems. It's a very complex problem.

As you know, I live in Ontario and Mr. Harris has said tax cuts are the only way to go. Yet I finally received my municipal tax bill the other day and it's gone up 15% or 20%. I have a son in university and every year I see the tuition go up 10%, 15%, or 20%. I don't know what he's doing; I'm assuming he's not increasing his spending, he's just shifting it in a very substantial way, redefining the roles of government but not redefining the expenditures of government.

In your brief I think you raised a very valid and interesting point. To me the first paragraph under strategic investments and tax changes refers to the fact that we've undergone what is called program review, that in fact expenditures have shrunk; but now, in doing that, we have to talk about what's necessary and what isn't necessary in terms of government programming. Secondly, we didn't do that when we did program review, for obvious reasons—it was a matter of time. I think that's a really interesting observation. That's just a comment on my part.

When you talk about unemployment being partly structural and partly cyclical, I totally agree with you. You referred to one of the contributing factors to structural unemployment being levels of unionization. I want to tell you, I spoke to an executive from Imperial Oil recently who told me that in the province of Alberta, where, relative to Ontario, there are low levels of unionization, the productivity of the workers is abysmal compared with that of the unionized workers in Ontario. What I'm asking is—and I know it's terribly anecdotal—is it levels of unionization that create structural unemployment or contribute to it, or is it something much more profound or complex than that?

Prof. Herbert Grubel: Whenever I raise these issues I get accused of union bashing, but if you look at the United States you see there are some states that have right-to-work laws. They just are more prosperous than the states that don't have right-to-work laws. In fact, they have taken counties adjacent to each other where you hold everything constant—the climate is the same, the education level, the occupational composition, and all that—and on this side of the state where there is a right-to-work law, economic growth and per capita income is higher than it is on the other side.

Sure enough, if you pay high wages you have employees with higher human capital, and in a sense the workers who are unionized and got themselves high wages are earning their income because otherwise the company would go bankrupt. What you have done is you maybe have even over-invested in human capital in those particular occupations.

This is a week's lecture on what unions do, but there is very little doubt if you talk to most employers that it takes a lot of time to deal with these people and, for them, institute work rules, which are not in the long-run interest of the productivity of the society.

• 1545

I'd like to mention one thing about higher education. I just read something that I want to share with you. It's really fascinating. For people to make an investment in higher education or in any kind of training, there has to be a rate of return at the end. I have often encountered people who have said, “I've now been in university for four years. I have spent so much money on tuition and all that kind of thing, but worst of all, I could have earned a lot of money between the ages of 18 and 22.” That is an investment. Now what you need to have back is an income that is higher than for the guy who went to work at 18, in order to get a sufficiently high rate of return for getting a higher education. Do you see what I mean?

In the United States the cost of going to university is much higher. Even state universities have higher fees than we do, and certainly the private universities do. So as an inducement for young people to go to university, they have to pay in the end a wage high enough to provide a return that compensates for the cost of the higher education.

In Canada we have decided to do it the other way. We have low tuition rates and other subsidies for students. Therefore, we thought we could afford a more egalitarian society in the end, because the wages you have to pay to people who paid so much less for their investment could be lower. If this were a closed economy and there were no migration, that would be very neat, and we would not have the big differences the Americans have. What we do is subsidize people to get higher education in this country, and so when they get out, they can get wages that are much lower. And that would be okay if they stayed here, because they had been subsidized. But we live in a world in which people can move, so they go to the United States and get themselves a huge capital gain.

I would like to suggest that whatever these people were arguing about here before ought to be seen in this context, that unless we can change the way the Americans do things or keep people from taking advantage of this capital gain, you will get these people taking advantage of the different system they have on the other side.

Mr. Roger Gallaway: Thank you. I would say to you that the exception to that rule is a degree in theology. But in any event, thank you.

The Chairman: Ms. Bennett, do you have a final question?

Ms. Carolyn Bennett: Just on that point, your example of plastic surgeons is actually not a good one, because the cosmetic surgeons in this country can set any fee they want. In fact, they have set low fees, and they have lots of Americans coming here to get the work done. In terms of our health care system, I don't see how you can use as an example something that is outside the system.

I also don't follow, in terms of the broad economic landscape, how you can actually say that our perennial mortality rate doesn't change, so we can actually tell that nurse in the neonatal intensive care unit right now, who knows that those babies are dying because the cots are too close together and that they're getting cross-infection and dying, we are not going to spend any more money on health care because in the broad picture it's better for the government to spend less money.

We ran on a platform that said we would put 50% back into programs, and we won. So we are committed to do that.

I feel that it is very difficult to tell the people in the emergency departments and those waiting for chemotherapy that the government shouldn't spend any more money.

Prof. Herbert Grubel: I agree. But I think we need structural changes to our system as well. I think it is a fundamental mistake to say—and I have published articles about this in the Medical Post—that whatever you want and need, here it is for free. If you make something free, you get excessive demand. I think we should have co-insurance, and the sooner we go to it—

• 1550

Ms. Carolyn Bennett: We need research on actually what works and what doesn't work. We know co-payments are bad for people, because if somebody can't afford the co-payment, they don't fill the prescription and then they end up in the intensive care unit three days later. We have good research showing that kind of deterrent costs the government more money.

So I think we need to spend some money on the accountability framework in our health care system. That's going to cost us some money because we don't have any right now, and we can't actually find out what the duplications are and what the gaps are unless we can measure, and we can't measure unless we spend some money on an information technology infrastructure.

Prof. Herbert Grubel: I think we'll have to agree to disagree on these subjects, because my empirical evidence of experiments around the world with people having to pay a minimum amount, or even being given money and being told, “Now you do whatever you want to”, is very strong evidence that the health outcomes do not change but that there is a tremendous amount of savings. But we have different empirical evidence on those subjects.

I want to say, on the irrelevance that you suggested of this plastic surgeon, that my wife is a doctor. She has a method for getting people off smoking, but the government has decided that anti-smoking therapy is not covered by the medicare plan. So in order to recover the costs that she has in order to get this—she has had a tremendous success rate for a long time; she uses a special medication—she has to charge. People come and say, “I'm dying; my doctor says I have to do this and that.” Then when they're told what it will cost, they say, “Thank you very much, the government is going to look after me anyway.” Therefore, what she can charge is dependent on whether or not it's available for free in the public sector.

The whole society would be better off, including the system, if the incentive structure were different. It's the wrong incentive structure.

The reason—

Ms. Carolyn Bennett: I think the other answer to that question is that the government should spend more money on smoking reduction programs—

Prof. Herbert Grubel: That could very well be.

Ms. Carolyn Bennett: —because ultimately we will save money in the intensive care units on the 40,000 people a year who are dying of tobacco diseases.

Prof. Herbert Grubel: I agree, but there are all these competing interests and other uses that you've talked about.

Ms. Carolyn Bennett: Co-payment won't help that problem.

Prof. Herbert Grubel: I'll send you the literature on how well it works.

Ms. Carolyn Bennett: The pregnant teenager will not pay to go to her prenatal appointments and will end up with a 25-week baby in the intensive care unit. We know that's what happens if we charge pregnant teens for their prenatal appointments.

Prof. Herbert Grubel: With all due respect, I've had this discussion when I was on the finance committee, with doctors and everybody else.

That is an urban myth. There is no evidence of that. I remember that in the 1970s there was a conventional wisdom that every six months or every year we had to have a complete medical examination because this would do exactly what you're saying. It would prevent what might be small difficulties becoming really serious difficulties, you see? We catch diseases early. Doesn't that sound good? Therefore, by everybody getting regular, total, full examinations, we end up saving money.

What has happened?

Ms. Carolyn Bennett: I have to tell you that there's good evidence showing that an annual exam or doing exactly what's appropriate for that decade is a good thing, and to spend some time on prevention every year is a good thing. But throwing the book at people and doing useless amounts of tests, without any accountability, is a bad thing.

You can't lump those two things together as an economist, because you're actually talking to somebody who has spent a lot of time in the urban myth of the cold face of the health care system. For somebody to tell me that somebody only needs a Pap smear every five years...when you see one individual whose Pap smear has changed in a year, who then dies, it's not a good thing. Averaging doesn't work in health care, because people aren't widgets, right?

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Prof. Herbert Grubel: All I wanted to say was that we don't have any more universal, full examinations, and the reason is that upon close examination the costs were found to be too high relative to the benefits. I suggest that in many ways the idea that when people have pain they don't go because they want to save money is also subject to empirical evidence. I accept your expertise, and I will put it into my bag, that you are on the side of people who believe that only access to completely free medicare is going to be best for the country and that it will save money. I will confront you, if you wish, with other evidence that this is not the case. There are cases where it has been done—

Ms. Carolyn Bennett: I want it to be accountable and evidence based. That's what I want: evidence based.

Prof. Herbert Grubel: I'm sorry, what do you want to be accountable?

Ms. Carolyn Bennett: We should be doing the things that work and discarding the things that don't work any more, and we have to have everybody doing audits with the evidence to back it up.

Prof. Herbert Grubel: Absolutely. You are on the side of the angels, as we all are.

The Chairman: Thank you, Ms. Bennett.

Mr. Grubel, thank you very much. You must miss the committee.

Prof. Herbert Grubel: I do. I think it was one of the most interesting experiences I've had in my whole life. The experts who come before you on many issues are the best the country has. It is a unique opportunity to learn all kinds of things. Of course, you have to use your patience and so on to deal with special interest groups, but even that was interesting for me.

I will never forget one of the highlights of my time. For the first time in my life I was in the Atlantic provinces, and I asked a man who was asking for higher unemployment insurance and welfare benefits, “Could you please help me by explaining to me what fishermen and other seasonal workers did in the Atlantic provinces before there was unemployment insurance? How did they live? How did they keep going during those periods when there were no fish to be caught, or the Atlantic was too rough?” He said “We used to work in the forest, and many of us used to go to Montreal to find work.”

The next summer I met somebody in Quebec—my wife's from Quebec—who said she had had a terrible experience. She had a summer home on Prince Edward Island and her children—the husband and wife are professionals—really loved the housekeeper they had. She offered her a job in her Montreal home, with good pay, good holidays, the whole works, to come and take care of her children, who loved her so much, during the winter. She said okay. Two weeks later she called back and said it wasn't worth it for her because the extra income she would have made relative to what she would have got through unemployment insurance benefits did not make it worth while for her to go.

The Chairman: Was the reason that there was UI around?

Prof. Herbert Grubel: That's right. Mr. Axworthy said it himself—I couldn't believe it—in an interview. Small business, the major creator of all the jobs in the world, as we know... He said, on record, that the reason these small businesses are not expanding in Atlantic Canada to soak up the unemployment is that they can't compete with the pay offered through the subsidy programs that we offer through our social insurance.

The Chairman: Yes, particularly during the years when there was away-above-average industrial wage. You had employers competing for employees in the marketplace, and one of the major competitors was in fact the UI system back then.

Since you're concerned about people's record, I want to get you on the record. If you were the Minister of Finance just for a second and you had a $5 billion to $8 billion surplus this year, how would you divvy it up?

Prof. Herbert Grubel: I believe that to save the integrity of the unemployment insurance program and to prevent the opening up of a Pandora's box that will create serious difficulties in the future when we have a recession...because then the demands will be “Oh, this is out of general revenue, so let's be as generous as we can; let's buy ourselves the next election by being generous.” That's why I think it would be best to use reductions in the UI contributions.

• 1600

The second reason for recommending this is that it is a payroll tax, and especially with the payroll taxes going up with the CPP premiums in a couple of years, it will be very useful to keep wages, as they are faced by the employers, down as much as we possibly can.

The Chairman: What happened to your debt reduction?

Prof. Herbert Grubel: As far as debt reduction is concerned, I think $2 billion or $3 billion every year, if things continue to go well, from the contingency reserve is a good step forward. I think debt reduction is a priority according to public opinion surveys, but for the country as a whole, I believe debt reduction can take place very effectively and very quickly by economic growth.

The Chairman: Let me understand this. I said between $5 billion and $8 billion surplus. Are you telling me that the $3 billion is included in this or not?

Prof. Herbert Grubel: Well, you know how Martin handles this.

The Chairman: I know how Martin how handles it; I want to know how you would handle it. That's why I'm asking you. I'll ask him when I see him.

Prof. Herbert Grubel: No, I'm just...never mind. The main point is that I believe taking money out of current income to repay the debt should not be as high a priority as public opinion surveys suggest. I'm saying that to you as an economist.

In the booklet I will be sending you as soon as it comes out, I have made simulations in which I show that even if we do not make any repayment on the debt, we will get as a result of economic growth, and even with a 1.5% inflation rate, a reduction in the effective burden of the debt in every meaningful sense—disincentives, taxation requirements and so on. It becomes a smaller and smaller percentage of GDP, and it will go down very, very quickly.

The Chairman: So you're saying reduce debt by economic growth, not by putting money in there?

Prof. Herbert Grubel: That's right.

The Chairman: Did you get that, Dick?

Mr. Dick Harris: I want to read the way you wrote that.

Prof. Herbert Grubel: The $3 billion a year will also help.

The Chairman: So you're saying now that a $5 billion to $8 billion debt...do you still want a $3 billion contingency reserve or not? That's all I'm going to ask.

Prof. Herbert Grubel: That's right.

The Chairman: Do you say no?

Prof. Herbert Grubel: No, no, I still want it in there.

The Chairman: You still want it in there.

Prof. Herbert Grubel: Every year, and hopefully we'll always be conservative in our forecasts and we will have a surplus, and that should go to debt reduction.

The Chairman: Tell me, you're so concerned about your kids leaving and you want personal income to be reduced as well. How are you going to do all this with $8 billion?

Prof. Herbert Grubel: I don't. I know this is a difficult problem. But a lot of this is also perception. If Mr. Martin, at his next conference, could say “We have gone on the road to understanding that we must have a competitive income tax and corporate tax structure, and here's our first down payment; I will do the following”, then it will be just like... He had tremendous success when he said, “We're going to eliminate the deficit, come hell or high water.” It would be the same if he made a commitment to say “We want to restore the competitiveness and the growth of our economy to get back onto the track we have fallen off.”

The Chairman: You're an economist and you're really concerned about economic growth, right?

Prof. Herbert Grubel: Absolutely.

The Chairman: Tax cuts at the low level have a higher multiplier effect vis-à-vis generating economic growth because the people who receive that tax cut spend that money right away.

Prof. Herbert Grubel: What you're talking about is the Keynesian idea that economic growth, but especially unemployment, is a function of getting more active with demand, and that's been thoroughly discredited. It's something in the short run. What you need is confidence. We've been on a tremendous growth boom, and it was because people's confidence was restored, that they don't think the country is going to go bankrupt. That's when they start spending again.

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Oh yes, I forgot about capital gains.

The Chairman: Let's not introduce that topic. Let's stick to the one—

Prof. Herbert Grubel: I'm going to tell you. This is absolutely essential. In the United States people don't save. All the money they get, they spend. Why? The story is that it's because they feel so much wealthier. Why are they feeling so much wealthier? It's because of the big boom in the stock market. Correct?

Now, you take an expected increase in earnings of a corporation in Canada and in the United States. How much are you prepared to pay for the present value of that increased stream of income? Well, this depends on whether, if you have to sell the stocks five years from now, you have to pay 20% or 50% of it in capital gains taxes.

So why has the stock market in Canada performed half as well as that in the United States? It's because of the capital gains taxes. If we could have lower capital gains taxes and it would be translated into higher stock market prices, you would get more spending and you would get exactly that Keynesian effect that you have, which would wipe out anything you could do on the personal tax rate in terms of just stimulating people to go and spend.

I'll be organizing a conference on that subject.

The Chairman: How much of a tax cut is required to get the same impact as you get by lowering interest rates by 1%?

Prof. Herbert Grubel: I don't know. I'm sorry.

The Chairman: I heard it's anywhere between $5 billion and $10 billion. Is that true?

Prof. Herbert Grubel: If you heard it from a reputable source, I'm sure it's true. I don't know. This is very difficult.

The Chairman: Putting $3 billion towards the debt...and I agree with your analysis, by the way, that you should reduce the debt through economic growth. What it does do, though, is signal to the market that the government is very serious about reducing the debt. It speaks also to the confidence issue that you were talking about. So in real terms, $3 billion isn't a lot, and you would have to agree with that—

Prof. Herbert Grubel: That's right.

The Chairman: —but I think the signal is a very powerful signal.

Prof. Herbert Grubel: I agree.

The Chairman: And the relationship between the debt and the interest rate is really where we also draw great benefits.

Prof. Herbert Grubel: I agree, but I don't think you will ever see our interest rate getting significantly lower than that in the United States. There's nothing we can do. And the reason is that there is always going to be an exchange risk premium. If you were an investor in the United States or even an investor in Canada, you would have to take account of a probability distribution that in the future you may lose a part of your investment through the depreciation of the exchange rate. You need to be compensated for that, whether that is true or not.

That would be, by the way, one of the big advantages of having a common currency with the United States. But I wouldn't make it a U.S. dollar; I would make it a North American dollar. That premium would disappear and we would have much lower interest rates. But I don't think it is in our power to lower long-term interest rates...

The Chairman: On behalf of the committee, I would like to thank you very much, and I also want to draw to your attention the fact that you may be out of the House of Commons but you are a very skilful debater. As a matter of fact, you didn't answer my last question on what you were going to do with the $5 billion to $8 billion, but still it was very well done. Thank you very much.

The meeting is adjourned until 2 p.m.

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• 1703

The Chairman: I'd like to call this meeting to order and welcome everyone here this afternoon.

This afternoon we have the pleasure of having with us, from the B.C. Federation of Labour, Mr. Phillip Legg, director; from the British Columbia and Yukon Territory Building and Construction Trades Council, Mr. Joe Barrett, researcher; from the Canadian Centre for Policy Alternatives, Mr. Seth Klein, director; from the Hospital Employees' Union, Mr. Fred Muzin, president; from the Vancouver Board of Trade, Mr. John Hansen, chief economist, and Richard Fraser, vice-president, corporate and project development.

As you know, because many of you look familiar from last year's pre-budget consultation, you have approximately five to seven minutes to make your introductory remarks, and thereafter we will engage in a question and answer session. Of course, we do build in some flexibility for timing.

We'll begin with Mr. Phillip Legg from the B.C. Federation of Labour. Welcome.

Mr. Phillip Legg (Director, British Columbia Federation of Labour): Good afternoon, everyone. The federation welcomes this opportunity to meet with the Standing Committee on Finance. It's an opportunity for government to not only gather a variety of policy perspectives on key fiscal and monetary issues but also ensure that there is a balance of regional perspectives included in that consultation.

• 1705

The B.C. Federation of Labour represents over 450,000 working men and women in the province. It's a membership that covers both public and private sectors and is regionally diverse.

In our comments this afternoon, we will be highlighting four issues that your committee needs to consider during the pre-budget consultation. These are important issues not just in terms of implementing effective public programs but also in terms in ensuring balanced and sustainable growth in our economy.

The first issue is the growing surplus in the EI fund. That surplus exists because protections and coverage for the unemployed do not. Today less than 40% of the unemployed receive EI benefits, down from close to 90% less than 10 years ago. On the benefit side, payments have dropped by about $4.2 billion since 1995, even though the number of unemployed has remained relatively constant at about 1.42 million Canadians.

It's important to remember the context in which UI was changed to EI. It has long been argued by mostly the business community, but not exclusively by that group, that Canada's unemployment system was too generous. The argument was clearly anchored to the view that unemployment was voluntary, and by reducing income protections workers would find work. In effect, it was a policy prescription that implicitly endorsed the idea that making the unemployed more desperate and a little more vulnerable would ultimately reduce overall unemployment. The reality in our communities is quite at odds with this prescription.

Gutting UI and replacing it with EI has only ensured that those who are unemployed are less protected than before. The surplus that has developed in the meantime is a more of a testament to new hardship than a reflection of some underlying improvement in job prospects. If EI has been an experiment, it is one that has failed badly. If there is a debate over what to do with the existing surplus, the priority should be to improve benefits and coverage to those whose hardship has essentially delivered that surplus.

The labour movement is only prepared to consider premium reductions once the benefit coverage issues have been properly addressed. It's worth noting that while public concern over the initial changes to EI did not generate a significant outcry at the time, it was because most of the people didn't fully understand the magnitude or scope of the changes. Workers in the resource sector, for example, are now feeling the full effects of these changes. There is frustration and resentment building in these communities, and it shouldn't be underestimated.

The second issue we want to stress is the need to improve health care funding. The cuts in federal transfers over the last four years have had a major impact on the sustainability of health care in Canada. That condition is moving Canada closer to a U.S.-style health system in which access and coverage are a function of income. The more money you have, the better your standard of health care.

It's a concept that polling tells us Canadians reject and reject wholeheartedly. There is a very real threat that will emerge if federal funding for health care is not restored. Fred Muzin will go into some of the details on the impacts of those health care cuts, specifically here in B.C., so I'll leave that for him to cover. It is clear that by continuing to ignore this issue, the problems of health care are only going to get worse.

The last two issues we want to talk about involve monetary policy and capital controls. The labour movement has long opposed the preoccupation the Bank of Canada and the Department of Finance have for controlling inflation. It's an obsession that was taken to an extreme under bank governor John Crow in the middle to late 1980s. His view of taming inflation at any cost caused an enormous economic backlash in Canada when it forced us into a recession in the early 1990s and wiped out thousands of jobs in the process.

Although Mr. Crow has been replaced at the Bank of Canada, the policy bias has not. We still have, for example, our monetary policy that threatens to move interest rates higher and slow down economic growth if unemployment dips below the target range of approximately 8%. In the bank's view, that's as good as it gets.

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The unemployed have effectively become the shock absorber in our economy; the guard against inflation. It's a wrong-headed strategy that forces the most vulnerable in our economy to shoulder all the adjustment. It is also a strategy that forces our economy to chronically underperform. We think it's time to re-evaluate the merits of the bank's focus on controlling inflation. It is a policy choice that disproportionately penalizes workers and is sustained through their hardship.

During the summer months we had a chance to see monetary policy lurch yet again in the wrong direction. After months of resisting pressure to support the Canadian dollar by jacking up interest rates, the bank moved in late August and pushed up short-term rates one full percentage point. In regions like B.C., where exports are critical and therefore the lower value of our dollar has a positive effect, the move made little sense. Again, we seriously question the value of monetary policy that overweighs its priority to control inflation.

If the exchange rate problems of the summer months and the various international financial panics of the last year tell us anything, it is that the increasingly unregulated flow of capital internationally has an enormous destabilizing effect on national economies. Financial deregulation only adds momentum to this problem, and so too would international agreements like the proposed multilateral agreement on investment, MAI. Strong and effective regulation is the only way to shield economies against the speculative excesses that have become far too common in our globalizing economy.

Canada has a direct interest in establishing international agreements that would limit these speculative excesses. We need to champion those kinds of agreements and do it in ways that ensure long-term sustainable growth is something we experience, not just talk about.

In summary, your pre-budget consultation needs to consider a wide range of new fiscal and monetary policies designed to get the Canadian economy operating at full capacity. It is an objective that all Canadians support, and it's one that your committee can play an integral role in achieving.

Thank you.

The Chairman: Thank you very much, Mr. Legg. I would also like to thank the B.C. Federation of Labour for their contribution in the pre-budget consultation.

We will now hear from the British Columbia and Yukon Territory Building and Construction Trades Council, Mr. Joe Barrett.

Welcome.

Mr. Joe Barrett (British Columbia and Yukon Territory Building and Construction Trades Council): Thank you very much to the committee for having us give a presentation.

The Building and Construction Trade Council represents 48,000 construction trades workers in the province and the Yukon Territory. Our members are particularly affected by the UI question, which I'll come to in just a second. Our industry is one of a cyclical nature, not a seasonal nature. We're more than able to work in the middle of the winter as long as the economic conditions are fine.

One of the big problems we're seeing is just an acceptance of constant high unemployment. There's been over 9% unemployment running straight now for four or five years. This is in spite of the number of people who have actually left the labour market altogether because they are self-employed now or they're no longer counted in the labour market because they've been out of work for so long. The result of that is just increasing poverty. We all see it on the streets of our cities, right across the country. Since 1989, the poverty in the country has grown by about 40%, and that includes not just those who are in that poverty designation; in the middle class, expectations are down.

A new study shows that in 1989 13% of the population felt they weren't as well off as their parents were at the same point in their lives. Today that figure is closer to 40%. We all know about the recent UN study that shows that Canada has now fallen to tenth place in the world at distributing income inside the country. We might rank quite high up on general living standards, but the income disparity in the country has really grown.

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I do want to make a quick comment about these trade deals. They were much heralded at the time they came in, but since they've come in we haven't seen a great increase in new investment in the country. In fact, if my figures are right, from 1995 to 1996 there was a very small increase from $10.9 billion to $11.3 billion in foreign direct investment, and over these years we're seeing more money being invested outside of the country. So it really has been a net loss for Canada.

Now, this EI—or UI, as most people still call it—really affects our industry. In just these two years—not going back ten years, just these last two years—the eligibility rate has dropped from 80% to 40%. That is why we are seeing that huge surplus in the EI fund. Again, that money was meant for workers, not this behind-the-door taking of the money. The money was not intended for those purposes. We see that $6 billion have already been drawn off, and the deficit target wouldn't have been achieved if it hadn't been for that $6 billion that the finance department took last year.

We are very concerned about the transfer payments. Again, Fred Muzin will have something to say about this. But just in B.C. alone, since 1981 $8 billion is what the province has been asked to come up with to fund medicare in this province, and I know all of the provinces are under the same budget restrictions from Ottawa.

This is a time of recession. We are entering into a very difficult time. It's time for help from the federal government for the municipalities and the provinces, for infrastructure in the form of roads, sewers, water lines, and port development. If there was ever a time when we needed some help, this is it.

I do want to make a final comment about the underground economy, particularly in the construction industry. A recent study done by Revenue Canada, the Department of Finance, and Statistics Canada came up with a figure of $160 billion a year going untaxed in this country. A lot of it is because the markets have been just thrown wide open. We're into an unstructured, ruthless market out there.

What we are asking is for the federal government to rededicate itself to some of its own policies. There's a prevailing wage or fair wage policy that the federal government has on the books, but there is no set wage for this fair wage policy. We would like to see the federal government come in with enforcement of its own fair-wage policy. This will help to cut out some of the unstructured competition that is out there. It'll set a baseline so that work on public projects, which amounts to about 12% or 17% of all the capital out there, can guarantee those workers a wage that is a decent living wage, so they will not have to work for an employer who is bypassing the system and going into the underground economy.

So those are some of the points we would submit to the committee. Thank you.

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

Now we'll hear from the Canadian Centre for Policy Alternatives, Mr. Seth Klein, director. Welcome.

Mr. Seth Klein (Director, Canadian Centre for Policy Alternatives): Thank you, Mr. Chairman, for this opportunity to once again appear before the Standing Committee on Finance.

I know the members of this committee already have received copies of last year's alternative federal budget. I of course recommend the whole document to you. It's full of ideas for job creation, reinvestment in public programs, and fair tax reform. The terrain has changed, however, since last year's budget, so my comments will serve to update some of those ideas raised in last year's alternative budget. We, like you, are in the process of our own pre-budget consultations as we write next year's alternative federal budget.

I want to begin by raising some concerns about the direction of last year's federal budget and recent monetary policy. I passed around a couple of other handouts in addition to my brief.

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In the Liberals' most recent election platform, Canadians were told that a Liberal government would devote one-half of the fiscal dividend to renewed social spending, one-quarter to tax cuts, and one-quarter to debt reduction. Opinion polls tell us that this distribution is more or less in line with the desires of the public.

The first article that I've circulated is by Jim Stanford. As it explains, this is not at all what Canadians got in the 1998 federal budget. Mr. Martin's budget included about $1.5 billion in tax cuts, most of which were rightly targeted to low- and modest-income Canadians. However, these tax cuts were offset by a further $1.5 billion cut in program spending. In practice, the full fiscal dividend, which will likely be in the order of $5 billion to $8 billion, was devoted to debt repayment.

It appears the government has replaced the 50-25-25 formula with a 0-0-100 formula. This may look good to Bay Street and financial markets, but it isn't what Canadians have asked for. It means there is no net fiscal stimulus to boost the growth rate or improve the employment picture, and ironically it has less of an impact on reducing the debt-to-GDP ratio than a more pro-growth strategy would have.

In contrast, the AFB, which maintained low interest rates by injecting new spending into the economy, would result in a higher growth and a lower debt-to-GDP ratio even without direct debt repayments.

By further cutting program spending, program spending relative to GDP will fall to a mere 11%, its lowest level since the end of World War II. It is no wonder that Canadians are worried about the future of public programs such as medicare. This past year's budget locked in place the continued deterioration of public services and infrastructure.

With respect to monetary policy, I would echo some of the comments that have already been made. We are very concerned about the interest rate increases since the last federal election. Rates have gone up by over two percentage points since that election. Already growth is slowing. Indeed, there has been no growth and no job creation since April, and the August increase in interest rates will only compound this. Canadians are beginning to fear that the economic recovery may be slipping from their grasp just as it was finally starting to show signs of benefiting ordinary people.

We believe this committee must demand that the Bank of Canada not increase interest rates, that it lower rates at the earliest possible opportunity, and that it set rates in accordance with the needs of the domestic economy. Last week's quarter-point drop will not be sufficient to boost growth in employment.

The second handout that I distributed—again an opinion piece by Jim Stanford—indicates that the bank cannot justify high interest rates on the basis of maintaining price stability. Governor Thiessen has consistently scored a rate of inflation below his own target, but at what cost to the economy and the unemployed? Indeed, there are now indications that Canada faces deflation, not inflation, which discourages investment and consumption.

I'll turn now to our priorities for the fiscal dividend. In last year's AFB we confidently allocated the entire fiscal dividend to restored program spending and we will do the same in this year's alternative budget. We restored cash transfers to the provinces for health, post-secondary education, and welfare; increased benefits and access to employment insurance; and put substantial new funding into pharmacare, student grants, and traditional social and ecological infrastructure. There is a desperate need in this country for more social housing, more elder care facilities, and programs including home care and a national child care program. These initiatives would create many jobs and make a qualitative difference to people's lives.

We need to restore those programs that economists refer to as automatic stabilizers, namely UI, welfare, and a multi-bracket progressive income tax system.

Over the past 15 to 20 years we have significantly eroded those programs that people in communities need when the economy experiences a downturn, which is certainly the case in B.C. and likely the case nationally. Instead of paying down the debt, which has a pro-cyclical effect, we need to restore funding to those programs that put money in people's pockets just when they need it the most and just when their communities need a fiscal injection.

A more progressive income tax system means that people automatically get a tax cut when they experience a drop in income, again just when they need it the most.

In last year's AFB we recommended tax cuts for most Canadians, but these were paid for by tax increases for those who have fared well in recent years, plus overall the AFB was revenue-neutral.

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Across-the-board tax cuts are an inefficient way to go about the job of job creation, as direct government hiring and spending would create substantially more jobs than an across-the-board tax cut. Especially now, as consumer and business confidence starts to wane, we are even less likely to see the hoped-for benefit of a tax cut. Consumers are more likely to save and pay down their debts, and businesses, worried about future demand, may also be more inclined to pocket the savings of a tax cut.

We specifically recommended eliminating the GST on books and magazines, increasing the GST tax credit, increasing the child tax benefit by $700 per child in the first year—a substantially higher increase than was contained in last year's federal budget—cutting the bottom tax rate while reintroducing two upper-income tax brackets at $100,000 and $150,000 of income, instituting an inheritance tax at the same level as the U.S. rate, and implementing a minimum corporate tax, as our corporate taxes are among the lowest in the OECD, including well below the U.S.

Finally, another tax reform idea the committee should consider, and which we recommended in the alternative budget, are those changes some environmentalists have begun referring to as “tax shifting”. Specifically, tax cuts for low- and modest-income people should be offset by tax increases on those activities that deplete our natural resources and pollute our environment.

First among those should be a carbon tax. Not only would such a tax reduce greenhouse gas emissions, but it would also create a market incentive for those new technologies and alternative energies that use our resources more efficiently and pollute less.

There is no longer a debate, if there indeed ever was one, over whether or not the deficit should be eliminated. The more important debate is over what kind of a society we will have in the post-deficit era. We believe it can and should be made a more humane and equitable one.

Thank you.

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

We'll now go to the Hospital Employees' Union, Mr. Fred Muzin. Welcome.

Mr. Fred Muzin (President, Hospital Employees' Union): Thank you very much, Mr. Chair.

The 44,000 members of the Hospital Employees' Union work in hospitals, long-term care facilities, and community health and social service agencies across British Columbia. As front-line health care workers, we see the impact of federal policies on patients and their families. From that standpoint, we would like to make a number of recommendations for the next federal budget.

Our comments on federal spending priorities will echo the call from citizens across Canada for socially responsible fiscal policy. There is no mistaking that Canadians want the redirection of government spending, from the corporate sector to social programs, and a renewal of our public health care system tops the list.

Not just any health budget will satisfy those demands. What is required is a budget that reinvests in the equitable and efficient public health care system so highly valued by Canadians. Citizens are alarmed at the declining quality of the public health care system and hold the federal government, in significant part, responsible.

We are calling for a restoration of transfer payments through a health care fund. We call on the federal government to invest a portion of the fiscal dividend in health by restoring $3 billion in transfer payments and establishing a separate fund for health care.

This province has lost $633 million in federal transfer payments since the CHST was introduced three years ago. What does this figure represent to British Columbians? To put it into context, $638 million would pay for the entire pharmacare program and all adult mental health services in this province for one year. It would run all the facilities and programs in the capital health region of Greater Victoria for two years. Or, it would pay for the vital support services provided to children and youth at the risk of abuse across the province.

At considerable cost, the B.C. government has rebuffed the federal transfer cuts in order to meet the demand for health care services. Yet the transfer cuts have still seriously strained the health care system in British Columbia, evidenced by bed shortages for continuing care and surgery in many regions, intense workload pressures on front-line health care workers and the highest injury rates of any workers in the province, and a lack of money for new and innovative programs required for primary and continuing care in particular. The transfer cuts have also limited the provincial government's ability to address the pressing social issues beyond the health sector, and the situation has worsened with the economic downturn of recent months.

The urgency of renewing our public health care system is affirmed by Canadians in one public opinion poll after another. Our pollsters tell us that three-quarters of British Columbians believe that the system needs more funding, up from 52% four years ago. Dissatisfaction is even more acute in provinces that have delisted procedures, dramatically cut services, and shifted care to the private sector.

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Support for equity and portability in the medicare system remains steadfast. The next federal budget must substantially increase transfer payments in order to ensure the principles of the Canada Health Act are upheld. This government should keep their promise and establish a national health care program. The time has come. The National Forum on Health called 18 months ago for a national home care program that would be seen as an integral part of publicly funded health services and include the full range of services, from post-acute care and chronic care to health promotion and respite care.

The goals of health care reform to achieve an integrated and efficient system can only be achieved by having a public network of home care programs that are coordinated with institutional care. The federal government should institute a national home care program by establishing, in the 1999-2000 budget, an additional $2 billion fund dedicated to universal public home care programs modelled on the existing programs in Manitoba and Quebec.

The Hospital Employees' Union supports a call for a national pharmacare program as part of a truly comprehensive medicare system. The absence of such a system is a formidable barrier to health reform. Thanks to the Liberal government's refusal to change the drug patent laws, the cost of drugs for regional health authorities across British Columbia is increasing by 10% to 15% each year. We recommend that $1 billion be set aside in this budget to launch such a national pharmacare program.

The National Forum on Health also urged the federal government to allocate new resources for research, monitoring and evaluation of non-medical determinants of health. The report states:

In addition the federal government should provide Canada, its provinces and territories, and various interested parties with a vehicle to coordinate information and advocate for the development of policies conducive to population health.

In order to continue the valuable work begun by Health Canada in facilitating links between provinces to address common health information needs, the budget should invest $50 million in research and policy development on public sector health information strategies. A necessary complement to public health information infrastructure is research and policy analysis of the non-medical determinants of health, such as poverty, and intervention options that are under-resourced at this time. As a first step, the government should establish an annual fund of $10 million to support research where there are gaps in knowledge about the impact of key determinants and new service delivery practices.

In our view, the Minister of Finance would be going in a direction diametrically opposed to the wishes of most Canadians if he favoured tax cuts over social spending in this budget. Many polls have shown that when asked to choose, the vast majority say the fiscal dividend should first go to shoring up our social programs. The degree of inequality in this country has escalated during the term of this Liberal government, and there is an urgent need to address the social and economic needs of the most marginalized in our society.

The unemployment rate is still at double-digit levels in provinces east of Ontario, and the national average is not expected to fall below 8% this year or the next. Many Canadians are unable to find full-time, secure and decently paid jobs. The poverty rate in Canada is intolerable at 18%. While wages for most workers are flat or falling and income support from social assistance and unemployment insurance has been slashed, corporate profits and executive compensation continue to soar. Banks posted record profits of $7.13 billion last year and the combined assets of the big five totalled $1.05 trillion. In 1997 the top 50 CEOs in this country raked in a total of $207 million in compensation.

The share of federal revenues generated by corporate taxes plunged from 18% to 10% between 1966 and 1996, while the share borne by individual citizens rose from 29% to 43% over that time. The choice is obvious, and the minister's sincerity in wanting to help working Canadians will be tested by his willingness to tax wealth in this country.

Deep cuts over the past four years have created an accumulated employment insurance fund surplus that will top $20 billion by the end of the year. The federal government has eliminated the deficit off the backs of workers by using the surplus as general revenue. Eight years ago, 87% of unemployed workers received UI. Today fewer than 40% qualify for benefits and young Canadians are amongst the hardest hit by the narrow eligibility rules.

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The next federal budget should return to workers the wages they paid into it by making significant improvements to eligibility criteria, benefit levels and training supports. The government shouldn't forget that they don't contribute any money to this fund; the fund is paid for by the workers and the employers. We support the proposals by the Canadian Labour Congress for an increase in coverage to 70% of the unemployed, an increase in benefit levels to 60% of weekly earnings, and a repeal of the divisor formula and intensity rule. These improvements would cost less than the $8 billion surplus for this fiscal year alone. Also called for is a renewal of federal spending on training under EI, which has been cut by almost two-thirds or $700 million under this government.

In conclusion, it's time for the federal government to reinvest substantial funds in the public health care system and other social programs that have been starved for the past decade. In the last three years alone, the federal government has reduced cash transfers to the provinces by $5.7 billion, saving itself an astounding $11.8 billion in cumulative payments over that time.

We believe the federal government is bound by the Canada Health Act and its commitment to electors to reinvest in medicare by taking the following actions:

It should restore the $3 billion in cash transfer payments for health care. It should eliminate the CHST and replace it with a health care fund and a separate fund and set of national standards for social assistance transfers. It should establish a national home care program with an additional $2 billion fund dedicated to universal public home care services modelled on the existing programs in Manitoba and Quebec; launch a national pharmacare program with a $1 billion investment; invest $50 million in research and policy development on public sector health information strategies; and establish an annual fund of $10 million to support population health research.

In addition to reinvesting in medicare, we call on the government to implement progressive tax reform by eliminating tax breaks on property income and inheritance wealth, and increasing taxes on large corporations and high-income earners. It should increase unemployment insurance coverage to 70% of the unemployed, increase benefit levels to 60% of weekly earnings, repeal the divisor formula and intensity rule, and increase spending on training under unemployment insurance.

What we need is a socially responsible budget that puts the health of Canadians first. We trust you will take that leadership.

Thank you.

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

We'll now go to the Vancouver Board of Trade, with Mr. John Hansen and Mr. Richard Fraser. Welcome.

Mr. John Hansen (Chief Economist, Vancouver Board of Trade): Thank you very much, Mr. Chairman.

My name is John Hansen and I'm chief economist with the Vancouver Board of Trade. With me is Richard Fraser, who is vice-president of corporate affairs for Sandwell Inc. and a volunteer chair of the Vancouver Board of Trade committee on the federal budget.

Thank you for the opportunity to meet with the committee today. I think this is the ninth or tenth time I've had the good fortune to spend some time with you.

By way of introduction, the Vancouver Board of Trade represents some 4,400 enterprises of various kinds, small and large, around Greater Vancouver, including quite a number of non-profit as well as for-profit enterprises. We've been in operation for 111 years.

Our submission to the committee today is in the form of two letters. One is a letter we recently sent to the Minister of Finance, Paul Martin. The second is a letter sent to you, Mr. Chairman, in July on the subject of the upcoming budget and the so-called dividend. I would like to make just a few comments on the submissions.

In a nutshell, we recommend the upcoming budget include 50% of the surplus to be allocated for tax reduction, and 50% of the surplus to be allocated for debt reduction. We recommend that any new spending for new programs come from reallocation of funding priorities.

I believe these pretty well reflect some comments I heard recently in a speech from the Prime Minister, an excellent speech, to the Canadian Chamber of Commerce in Saint John, New Brunswick.

In addition, we have some views about the Employment Insurance fund. We believe the surplus in the EI fund should not be used as a cash cow for other spending purposes, but it should be used to reduce premiums to employees and employers to reduce the cost of hiring

• 1740

There are two other areas I'd like to comment on very briefly, Mr. Chairman. Our comments build on what you've heard from our colleagues here today. We, too, are extremely concerned about the level of unemployment in Canada, which is now almost twice that of the U.S. overall. One can argue with the individual numbers, but generally our rate is much higher than that of the U.S.

We believe that one of the reasons has to do with Canadian competitiveness relative to the U.S. I have with me a copy of the Global Competitiveness Report, which was published by the World Economic Forum. They produce this once a year. This one lists Canada as being the fifth most competitive country out of the 53 they evaluated, the top few being Singapore, Hong Kong, the U.S., and the U.K. Canada is next on the list. So we don't score too badly overall.

However, when you start to look at the tax policies in Canada, we score very poorly in terms of having a competitive tax regime. Out of the 53 countries scored, we rank 43rd. I believe we fall between Russia and Zimbabwe, so we're not in terrific company.

So we think that tax reduction and tax reform should be a high priority for the government. Certainly, the first step in that direction was taken in the last budget, and we believe that much more needs to be accomplished.

The other reason we believe that tax reform and tax reduction is important has to do with the number of young people and not-so-young people who are leaving the country, what we refer to as the brain drain. My numbers show that between 1990 and 1994 some 20,000 professionals left Canada for the U.S. I believe that the C.D. Howe Institute will be putting out shortly a study that will further document the trend, which I think has escalated since then. We're losing an awful lot of very talented people to the U.S. Part of the reason—it's not the only reason, of course—has to do with the level of taxes in Canada relative to our competition. It's a huge loss to Canada, both in the replacement of those people as well as in the loss of the potential for the future that these very talented and educated people would have for Canada.

My final comment relates to the fiscal dividend. We think that the real dividend will come once part or all of the debt has been repaid, and the dividend that can then flow back to the taxpayer in the form of a tax reduction or in programs is the amount that's now paid just to service the debt, which right now amounts to some $43 billion a year. We think it's a terrible waste for the future for that kind of money to simply pass through that way. Hence, we feel that one of the priorities has to be to pay down the debt. Thank you.

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

We'll now get into the question and answer session. Mr. Harris.

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

Thank you for your presentations. Mr. Hansen and Mr. Fraser, you've been quite consistent. We have your three letters, which are dated from June to July, and in every letter you've recommended that the government address the tax regime in this country, and you've talked about what to do with any fiscal dividend that comes from reducing the debt and of course tax relief.

I think it is most appropriate for an organization such as yours, which represents basically the job and wealth creators of the country and which has organizations all across the country, to talk about what it takes to create a buoyant economy, to reduce unemployment, to be competitive in our world markets, and indeed what it takes to build a domestic economy that's buoyant.

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Invariably we'll end up somewhere in that discussion talking about about the taxes we pay in our country. As you know, with our taxes the highest in the G-7 countries—among the OECD countries, I think we're about 45% above the average paid—we're at a distinct tax disadvantage when it comes to international competitiveness, certainly, but also in allowing Canadians to have the privilege of a disposable income that will allow them some extra spending. There just seems to be less and less of that.

I don't know where my question is going or if I have one, but I wanted to recap some good stuff that he's talked about.

Your counterparts on the other side, of course, want to spend every cent of fiscal dividend we can into job creating programs, increasing our social program—and incidentally, no one will disagree that health care and education do need more money in them.

Here's my question. Using a conservative approach to how we use our money, how would that generate the funds for what the gentlemen on the other side are talking about: increased health care, increased education spending, increased social spending?

Mr. John Hansen: The answer to your question has to do with getting the economy growing again. I'll give you an example of a very extreme case right now is this province. In this province we've seen an increase over the last few years in the rate of unemployment; we've seen the economy slow down for a number of reasons. Because of that slowdown in the economy, there is less tax revenue coming in, and because there's less tax revenue coming in, there is less available for expenditure on programs and education and health care, and so on. This year in this province, I think we're going to run a substantial deficit once again.

Conversely, if you look at it in a growing economy, the more people who are employed, the less unemployment you have, you generate more revenue not only for the employees and for the employers but also in terms of tax revenue, so that more does become available. So I think really the long-term answer is to make sure the right policies are in place for an economy to grow.

Mr. Dick Harris: Thank you very much.

I just have one more question, Mr. Chairman. Seeing as how we're in Vancouver and I am a British Columbian, I guess I can ask this question.

I read in the paper the other day that our premier was considering starting a bold new infrastructure program to try to get us out of our recession—that's along the lines of spending our way out of the recession. What are your views and those of your members on that pronouncement?

Mr. John Hansen: Our views are that public infrastructure expenditures are important, but they ought to be valued on the basis of the costs and the benefits of each project. You don't do it just for the sake of putting down blacktop and creating jobs. That becomes a secondary or tertiary objective. The first objective ought to be to spend on those areas where there's a need for building additional classrooms, or whatever, or if there are investments that clearly will return more to the economy than the investment involves, so that there's a rate of return on those investments.

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Mr. Dick Harris: Thank you.

[Translation]

The Chairman: Mr. Desrochers.

Mr. Odina Desrochers: My first words will be to thank the members of the panel for participating in this exercise today. What is interesting is that today this context brings us management representatives and workers and union representatives.

You pointed out on both sides that this summer's dollar crisis had very badly hurt British Columbia's economy and affected the city of Vancouver. My question is addressed to both workers and management representatives. What would you think if, next week, when the Minister of Finance tables his economic program, he would announce a special budget, that is a budget that might include targeted tax cuts, that would restore payment programs to provinces, in order to get a balance in health care and education, and a substantial reduction of the employment insurance rate? I would like to have your opinion on these this.

[English]

The Chairman: Mr. Klein.

Mr. Seth Klein: If I could, I'd like to link your question with the previous one.

A lot has changed since the last budget, and as we speak, the finance minister is in Washington meeting with other finance ministers and central bankers trying to stave off a global recession. I don't know if that means we should bring in an interim budget; I think we probably shouldn't.

I don't think you are going to hear any of them talking about the need to pay down the debt. It makes no sense. They are in the process of trying to stave off a global recession, and they are weighing various forms of fiscal stimulus, whether they be tax cuts, an increase in spending, or a reduction in interest rates—and a coordinated reduction in interest rates, which is really what we need to see at an international level.

But as I mentioned in my talk, if our decision is to put money into debt repayment, that has the opposite effect. It takes money out of the system just when we are trying to mitigate what may be a global recession.

Also, when it comes to the dollar crisis—

[Translation]

Mr. Odina Desrochers: Sir, I asked a question. I am asking whether you agree or not. I understand, I read your documents. I am asking you if you agree or not with tabling a special budget soon.

[English]

Mr. Seth Klein: Of a special budget?

Mr. Odina Desrochers: Yes.

Mr. Seth Klein: Before February?

Mr. Odina Desrochers: Yes.

Mr. Seth Klein: I think that would probably send the wrong signal, except for this: ever since he became finance minister, Minister Martin has systematically underestimated the revenue each year. Each year, he has surpassed his targets in total by about $50 billion. What that means is he actually does have some discretionary power of spending available right now, which could be used, particularly in terms of infrastructure or health spending. I don't know that it would require another budget.

I would make the point also that we're reducing debt faster than any other industrialized country right now; that's the debt-to-GDP ratio and market debt. That doesn't seem to have helped us much in terms of what has happened to the dollar, and so on. I would add that in as well.

The Chairman: Okay.

[Translation]

Mr. Odina Desrochers: May I have an opinion from the other side?

[English]

The Chairman: Mr. Legg.

Mr. Phillip Legg: I agree with Seth's comments.

Mr. Harris was making the point that somehow you have to get locked into this cycle of hoping that some external forces would grow the economy, and that somehow the role of government, especially at the federal level, is a passive, compliant one. I think that's part and parcel of why we are in the problem we are today. This has been a prescription we've bought into for the last 20 years, and it has been a disaster.

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Clearly we're not going to turn things around in a year or in one budget. But from a policy perspective we have been pushing the idea that our focus should be on deficit, our focus should be on controlling inflation, and those are clearly the wrong priorities. That is not how you grow an economy.

Mr. Harris was commenting about what was happening provincially and the prospect of some fiscal stimulus coming from the provincial government. If you want to grow your economy, you have to build some capacities. You have to build the capacity in terms of human resources, through training and education, through infrastructure at the community level, whether it be through transportation or a variety of other infrastructure projects. Those are the kinds of things that B.C. needs to move forward on if we're going to have a prosperous and sustainable economy.

Clearly we need to do it in concert with the federal government. If we are always at odds with the federal government because of different policy prescriptions, that too is a recipe for disaster, so I think that's a course we want to stay away from.

The Chairman: Mr. Barrett.

Mr. Joe Barrett: To add one comment about the currency evaluation, I think it's important to just look beyond this immediate crisis that we've had, and look back to where we were prior to the trade deals that were signed.

The Canadian dollar was at about 84¢ in 1984, and has continually gone down. Critics at the time predicted that the dollar was going to have to come down in order for us to compete against the United States. It just made sense that our labour would have to be devalued if we were going to be able to continue trading with the States. We've dropped to about the 66¢ margin today, in our view largely because of these ill-thought-out trade deals.

It's almost ironic to hear the finance minister over the weekend and today saying now is the time for us to tighten up on the free reign of currency between borders and that we've got to bring some stability back to our domestic economy.

Earlier too there was a comment that the only way to bring about greater wealth and bring about the distribution of wealth is by having a healthy economy. In fact that's not what took place throughout the mid-1980s and into the 1990s. It was in the 1950s and the 1960s that we did actually see a reduction of income disparity across the country. But for the last 15 years now, since this neo-liberal philosophy that we've all been sold as a bill of goods, we've seen the disparities increase.

Just in the one year, 1995 to 1996, the income of the poorest one-fifth in the country dropped about 3%. It fell from $17,882—this was a family income in 1995—to $17,334. And 1996 was a robust economy year for us. So it's not simply a trickle-down effect; it has to do with tax policy, it has to do with the overall economy in the country.

Thank you.

The Chairman: Any further questions?

[Translation]

Mr. Odina Desrochers: You are referring to NAFTA. If we did not have these basic agreements, what would Canada do with market globalization? It is easy to say that we predicted this, that we predicted that. But the situation being as it is, we must reinforce our foreign trade. However, if the agreements did not exist and we were to negotiate other agreements with the WTO, what would we do?

[English]

Mr. Joe Barrett: The whole problem is they aren't free trade deals. All along we've been calling them managed trade deals. They aren't made for the people who actually create the most wealth in this country—the small businesses, the merchants, the local economies. These deals are made for investment capital. We're talking about the huge players here.

As I said earlier, if you look at what has happened with investment capital, it has actually been only incrementally increasing into the country. We've only seen a very slight change at all, and in fact we've seen Canadian capital leaving the country.

• 1800

I'm not denying that we live in a global economy more than we ever have before. It's time for us to change our policies, start thinking about 10 and 15 years from now with the e-commerce that's coming.

But you don't sell out the sovereignty, the wheels of the country, to meet a very narrow policy goal. I guess I would go back to what was said earlier. On what we can do immediately, I think we have to pull back from these talks that are still taking place on the MAI. In the Canadian economy, I think we have to, where we can, improve our diversification. It has been said many times we're still just too dependent on a commodity export-dominated economy, and we've got to try to use the resources we have to create wealth right here in Canada before we just export them abroad.

The Chairman: Thank you.

I think Mr. Hansen would like to comment.

Mr. John Hansen: I have just a brief comment, Mr. Chairman.

Until the early 1970s, the Canadian debt was pretty low and the economy of Canada was growing rapidly. I think one of the problems we face today is the unfettered spending that took place during the 1970s and 1980s and until fairly recently. This spending is what put us into the black fiscal hole we have now.

I respect the views of my colleagues here. But if I could just offer a comment, I don't know of any place on the planet that the kind of economic policies you hear advocated here are working to achieve those objectives.

The Chairman: Thank you. Merci, Monsieur Desrochers.

Mr. Riis.

Mr. Nelson Riis: I don't know quite where to begin. There are so many points. But it seems like part of the problem we face is what is happening here. We have obviously very intelligent people, knowledgeable people in the economy, and you would think we're on different planets talking about this topic. I think we have a lot of talking to do to find more common ground.

I wonder if where we err is in some of the assumptions that we work with. I noticed, John, in your presentation, you were surprised about this idea of a new era, I guess implying you are surprised there is a surplus at all. Is there a surplus? Listening to Phil's presentation, I suppose we could actually make a case that there isn't a surplus, that if the EI fund was being used as it ought to be used in the original concept of it, there may be very little surplus, if any. I think he referred to the fact that more than 60% of people who lose their jobs who have been paying into the EI fund are not eligible to get any help. If they were receiving help in the traditional sense of employment insurance, there would not be a surplus. We would not be having this discussion, I suspect.

I have three or four short questions, and then I'll certainly pass it over to my colleagues.

You make the point that 60% of people do not qualify. To help us as a committee understand, can you give us three or four examples of who doesn't qualify? This is a tremendous figure. It's sort of like paying into fire insurance, but then when your house burns down you can't collect. What changes have occurred to make these numbers so staggering in terms of people whose needs are not being met at all by this program?

Mr. Phillip Legg: Let me go into some examples, but I beg your indulgence for a moment, because I think one of the points that needs to be addressed is this.

Yes, it may appear as though there is not a lot of common ground. But I think one of the things we have to consider in this debate concerns spending. The example that somebody was using—I think it was John—was that there were all sorts of spending initiatives in the late 1970s and early 1980s and they didn't seem to do much for the economy. It begs the question, what were we spending the money on? Was it well thought out? Was it well implemented? Was it properly supervised? I think the answer you come back with is no.

• 1805

The infamous scientific research tax credit scheme of the early 1980s was a $12 billion fiasco. Dentists and doctors who invested in it as a tax shelter did quite well, but I don't think from a general tax perspective it delivered what it was supposed to.

Don't fall into the trap of treating spending as some sort of generic that you either do or you don't. I think you have to go one step further and ask yourself what you are spending money on.

The Chairman: You said it was $12 billion?

Mr. Phillip Legg: It was something in the order of $10 billion to $12 billion.

The Chairman: That's $10 billion to $12 billion?

Mr. Phillip Legg: Now, I'm going back to 1982-83.

The Chairman: It's just that when a figure is thrown out like that, I have to verify it.

Mr. Phillip Legg: It was huge amount of money. In fact, there was a lengthy inquiry into this and there is still litigation in the courts trying to catch up with people who posed as scientists.

To your point, Nelson, with regard to some specific examples, I think the best examples are to be found outside the lower mainland and in the resource communities across the province.

The fishing industry is another example of where federal and provincial co-operation is absolutely important, and it just does not exist right now. In the fishing communities up and down the coast, we have people—I'm talking now of shore workers more than fishers—who either have not been able to get enough hours in order to qualify under the program or are now being penalized because they are going back three or four times to pick up UI. We've had a couple of disastrous fishing seasons over the last two years. Those kinds of people are badly affected both in terms of benefits and actually being able to qualify, even though they are unemployed.

Another good example would be in the logging communities up and down the coast and in the interior as well. To some extent you have seasonal problems and in other cases it's clearly cyclical. Again, you have people who, because of the nature and cycle of their work, are not qualifying for unemployment insurance, or when they do qualify, they are receiving far fewer benefits than they had previously.

I would caution the committee to give serious consideration to this problem emerging in B.C. and I suspect elsewhere across Canada. This problem is the emergence of a dual economy—an urban economy that seems to be doing relatively well, contrasting with a rural, mostly resource-based economy that is not doing well. In fact, it's suffering great hardship, and ill-considered fiscal policies and programs are simply exaggerating this disparity emerging in our economy.

Mr. Nelson Riis: Thank you, Phillip.

Fred, in your presentation, you mentioned a number of important issues. One that caught my eye was the comment that dissatisfaction is even more acute in provinces that have delisted procedures, dramatically cut services and shifted care to the private sector. I think one of the fears in Canada today is what's perceived to be an emerging privatization of the health care system into a two-tiered system.

Can you comment on what I would refer to as the stealth-like change going on towards privatization of health care? In other words, people aren't talking much about it, but it seems every day when you open up the phone book there's another private firm here, another private firm there, providing various health care services. Do you have a view? Or would you agree that this is happening, this not even terribly stealth-like but gradual shift into increasingly more privatization of services?

Mr. Fred Muzin: Yes, I would agree. Right now a third of our health care system is privatized. Trade deals like the multilateral agreement on investment are only going to exacerbate this. One hundred percent of people in this country expect health care services, and corporations regard this as a captive market. So when you have federal governments that provide $20 billion in savings to the multinational pharmaceutical companies, that's going to result in higher costs for health care. And you have the home care operators; with the demographics in the aging population, that's one of the largest areas of incursion of private enterprise into old-age care homes. In this province, just in the last year and a half, we've had failures of a number of these private care homes because they can't make enough money from the elderly. It's a constant battle.

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We believe the government should not get into schemes such as public-private partnerships. We think they're absolutely wrong. And it will bankrupt the system if they extend those programs, because ultimately they wind up paying for things multiple times. So we think there should be government accountability for a public system, because you cannot enforce the five principles of the Canada Health Act.

So yes, there's an increasing pressure to privatize their health care system and wind up with a system such as that in the States, where there are 42 million Americans with no health care coverage, and on any given day it's probably closer to about 63 million or 64 million because health care benefits are tied into your employment. So yes there are tremendous pressures on trying to privatize our health care system.

Mr. Nelson Riis: I have a last question, Mr. Chairman.

Joe, you made the point about the $11.3 billion in direct foreign investment that came into the country in 1995-96. I don't know if you mentioned it, but 95% of that direct foreign investment was to take over existing Canadian companies. Nothing much was added to the landscape in terms of new productivity.

The last question to you is a general question in terms of some of the assumptions that are being made today in our economy. Our interest rates are at historic lows. Our dollar is at historic lows. The Minister of Finance reminds us regularly that the fundamentals are in good condition. I don't think many people would really that say our economy looks really hot, or that the future looks very good. I think all of the think-tanks now are suggesting the unemployment levels will not go down, but in fact will probably go up slightly next year.

I think you mentioned in your presentation that over the last number of months those unemployment figures have stalled. Things are not getting better. I think in certain sectors, particularly the resource sectors, you can say clearly things are getting worse. The farm sector is bordering on crisis, to say nothing about the fishing industry, and it goes on and on.

What is wrong? Are we really missing the boat? Do we really not understand what's going on? When you listen to the Minister of Finance and the IMF with their solutions, you get an impression that no one knows what the hell is happening out there.

Mr. Seth Klein: I think when the minister talks about the fundamentals being in place, he's talking about the fundamentals in the eyes of some. If you are a player in international financial markets, if you are an investor, or if you have a lot of financial wealth, the fundamentals look good. Inflation has been wrestled to the ground and debt payments are being made.

Mr. Nelson Riis: But I would say, so what?

Mr. Seth Klein: Exactly. So what? The point I would make is the fundamentals that matter to most Canadians, things like the poverty rate, the unemployment rate, and funding for the institutions like health care that they care about, look bad and are deteriorating. Employment, as you mentioned and as I mentioned, has stalled.

One of the distressing things about the poverty rate is that however it's measured—and I don't want to get into a debate about how it's measured—what's happened in the 1990s is unique. Normally the percentage of the population that's counted as poor follows a path that's similar to the unemployment rate. Yet in the 1990s we've seen the level of poverty and the depth of poverty increasing even while we were in an economic recovery and the unemployment rate started to go down.

I just want to correct one point. Interest rates aren't at a historic low. Nominal interest rates are at a historic low. I think this is a really important point, that we have to distinguish, as business does when they're making considerations about investment, between real and nominal interest rates. Real interest rates are still, depending on which ones we're measuring, 4%, 5% or 6% because inflation is so low.

• 1815

Between World War II and 1980, the so-called golden age, the average real interest rate was 1.5% That was the kind of interest rate policy that was needed for sustained growth and for an unemployment rate that came much closer to full employment. In fact—and this is really interesting—when you look at the bank rate and the prime rate, they are higher in real terms today than they were in 1994 when the deficit stood at $42 billion. We were told back then that if we swallowed Finance Minister Martin's fiscal medicine we would be rewarded by financial markets with lower interest rates. And I think Canadians are right to ask, what happened to the dividend that was promised from financial markets? It seems that just as you pass through the latest hoop, there's another one.

I think that really points to the need to start making monetary policy on the basis of the needs of the domestic economy rather than on the basis of demands from financial markets, and one of the series of ideas that I would point out in the alternative federal budget is those ideas that we categorize as giving us a greater ability to set interest rates domestically.

The ideas include having the Bank of Canada assume more of the debt, lowering the ceiling on how much pension capital is allowed to go overseas, a community reinvestment act so that more of the bank capital remains reinvested in domestic economies. All of these ideas would keep capital in Canada and over the course of a few years, when implemented, would give us a much greater ability to set interest rates according to the domestic economy's needs.

The Chairman: Thank you.

Mr. Klein, I'm just going to ask you a question. You've struck a very philosophical position here. You're saying sort of retrench, come back in, don't go out into the “globalized world”, come back to the cocoon.

Mr. Seth Klein: I don't think I'm saying retrench. What I'm saying is that global markets are at best irrational and often hostile, and it makes no sense to set public policy based on their demands. Again, I would point out that it's ironic that as we have this discussion the industrialized nations' finance ministers are meeting, talking about ideas that would have been considered heresy just six months ago in terms of international capital controls and global efforts to reduce interest rates.

All of these ideas—an international Tobin tax is another one—that we should have been pursuing in earnest with the Mexican peso crash four years ago, we've only just started to deal with more seriously since the Asian financial crisis, now that there are fears of the crisis spreading. These aren't about eliminating international trade and they're not about a failure to recognize that we all live in a global economy. They're about setting rules that allow for some control and allow all countries to set policies based on domestic interests and not be constantly buffeted by the up-and-down swings of either financial markets or commodity prices or what have you.

The Chairman: On one hand, you're saying you believe that there are sort of interdependencies between economies, and on the other, you're saying that regardless of that, you can play by your own rules at home and not worry about that. I just find it hard to understand how you can be playing in the global sphere and at the same time say that when it comes to certain things you just want to stick with things at home.

Mr. Seth Klein: Some of these things a country can do on their own and some of these things require international agreement. I think, sadly too late, what's going on now globally with the financial crisis is leading to a growing international consensus. We're hearing about this from very unlikely sources—people like Jeffrey Sachs, the Harvard economist who just a few years ago was this guru of free trade and globalization, and people like George Soros. There is a growing consensus on the need for international agreements.

The Chairman: Okay. International.

• 1820

Mr. Seth Klein: Right. And they would be international agreements that are in exactly the opposite direction of the general thrust of the multilateral agreement on investment.

When I looked at Minister Martin on the news last night, he's clearly frustrated by a few countries that are still balking at that consensus. I do think there are things national governments can do without having to wait for that international consensus.

Mr. Nelson Riis: Chile.

Mr. Seth Klein: Chile is a good example in terms of some of those capital controls; I think it's an excellent model.

The kinds of things I'm talking about in terms of the Bank of Canada assuming more of the debt in terms of lowering the ceiling on pension investments going overseas—I don't think those require international agreements. I think we're foolish to wait.

The Chairman: Because there are those advocating to raise the limit.

Mr. Seth Klein: Oh, I know. And Minister Martin, to his credit, didn't listen to that. When you look at what's happening with the dollar in the last six months, imagine if those had been increased to 40% what would have happened to the dollar.

The Chairman: Mr. Gallaway.

Mr. Roger Gallaway: Mr. Legg, in your presentation you talked about tougher regulation—that's my adjective, “tougher”—for what you call the speculative excesses tied to globalization. At the same time, you were critical of the Governor of the Bank of Canada's regulation of interest rates. I want to know, if you can explain, just what are those speculative excesses of globalization? I'd like to know about that.

Mr. Phillip Legg: Well, Seth and the chair were just covering that point. The regulation I complain about with the Bank of Canada has to do with their obsession over controlling inflation. I think that's clearly weighting the priority scheme in the wrong way. The priority, at a minimum, should be balancing full employment and inflation. While that was a priority in the 1970s, it has all but been erased in the last 20 years.

Mr. Roger Gallaway: This morning we had someone here who talked about what is commonly referred to as the brain drain. Mr. Muzin, in your brief you talked about increasing tax rates on higher-income wage earners in this country and on corporations. Yet there seems to be a popular philosophy that in so doing you're only going to accelerate the departures of a number of corporations and individuals, and that their presence in this country is necessary to employ people and to pay taxes so we can have a health care system. What do you say to that philosophical approach?

Mr. Fred Muzin: I'm saying the tax system has to be fair, that there are many things that attract people to this country, not just low tax rates. If not, why would people live here? They'd go to the biggest tax haven in the world. Yes, taxes are important, but there has to be a fair distribution so there's a better quality of life, whether it's your education system, whether you have people sleeping in the streets... It makes no sense to have super-rich and banks untaxed while children are living in poverty, because that's not going to alleviate anything. If you set your whole financial policy just to cater to the rich and the super-rich, you're not going to have much of a society left.

Mr. Roger Gallaway: If that is the case, then, and what has been told us is in fact correct—I'm not saying it is, but I'm saying there seems to be a trend for corporations and individuals to leave this country because of tax policies in this country, that there's greater benefit for them to live and work principally in the United States—then might that not be an indication that we have reached a critical point, and in fact we've gone beyond it, or are these people leaving for other reasons?

Mr. Fred Muzin: I don't believe we have reached a critical point. I think the government has to take a look at the costs. When some of these corporations can just pack up and move, they leave a social impact cost and they're never taxed. There are no controls over companies doing that. I think we have to look at them paying their fair share, which I don't believe they currently are; I don't think it's anywhere close. This constant shift from lower corporate taxes to higher individual taxes is a prime example.

• 1825

Mr. Roger Gallaway: What about the young people? There's an estimate that 60% of the graduates of the University of Waterloo computer courses are going to the United States. They've never in a realistic sense paid taxes in this country. In fact they've absorbed a great deal of tax money in receiving an education, and bang, they're gone. They're gone probably forever, because their perception is, whether it's real or not, that they can do much better in the United States. And they can. What do you do with them? Do you stop them at the border?

Mr. Fred Muzin: No. It's a matter of taking a look at things. When you talk about doing better, maybe they have higher disposable income as long as they're young, but when they get sick and they can't afford health care, then look at their net level of income—or when they have pollution, when they have poverty in the streets. You have to take a look at the overall quality of life.

Mr. Roger Gallaway: But of course some of the—

Mr. Fred Muzin: So yes, when people are young, they're young and healthy and they're not disabled and they don't need a lot of social services. But as the population ages and as these people get some life experience... There have been lots of professionals who have moved to the States and come back here.

Mr. Roger Gallaway: No, I understand that, but it's a question of the net loss to the country, as opposed to the individual passage.

Of course there's the other argument, that in a very short period of time these graduates I'm talking about are making $250,000 U.S. a year and they're not really concerned about those things you mentioned because they're among the privileged who have health care in the U.S., they live in safe neighbourhoods, they're not concerned about a number of these things you talked about. We're not talking about somebody who's making $30,000 or $35,000 a year Canadian. We're talking about the well-educated young in this country looking to other pastures.

Mr. Phillip Legg: Could I just jump in here?

This reminds me... Thank God I was here last year, because Seth at one point jumped in and said “The plural of anecdote is not data”, and I think that's one of the problems we're running into. You're talking about anecdote of brain drain, and I have some problems getting my head around the dimensions of that. Yes, people leave Canada. Why they leave is a question mark. How many people leave? We could probably be a little more precise on that. Whether or not taxes have anything to do with it—I have serious questions about that.

Here's an interesting thing you should consider. The federal budgets since 1994 have drastically slashed research and development expenditures federally. If you looked at comparable numbers for the United States, they have not gone through anything like that. Of course they do it through a rather bizarre system where they support their military and their aerospace industry and a variety of other industries. We can get into a great argument about why it is that the U.S. government is allowed to subsidize various industries to the extent they do yet take trade action against other countries that even consider doing a portion of that kind of subsidy.

I think you have to seriously look at that kind of an issue to gauge what it is that may be attracting talented young Canadian graduates to the United States. There are a number of factors that are going to act as magnets to pull people to work. You may well want to consider some of the fiscal policies we have done away with here in Canada as a counter-balance to pulling them back.

Mr. Roger Gallaway: I think that's a fair statement.

The Chairman: Mr. Klein.

Mr. Seth Klein: I've been dying to say a few things about brain drains and competitiveness.

First of all, I feel that some corrections are needed on the discussion on competitiveness. I know that John mentioned the study from the World Economics Forum. Before coming over here I was looking at the KPMG study on the competitive alternative, which compared a bunch of cities in Canada and the United States. I'm sure you're familiar with it. It finds that virtually all the Canadian cities are more competitive for businesses than all of the cities in the United States and most of the ones in Europe. They're including in that effective corporate taxes, which are substantially lower, according to the KPMG study, in Canada than they are in the United States.

• 1830

Mr. Harris was referring to the OECD comparisons. I didn't bring copies with me, but I happen to have the OECD tax comparisons off their web page, and I think there were some inaccuracies there. Canada's total taxes as a share of GDP are basically average—exactly with the OECD, and a little lower than the EU average. Where Canada tends to have slightly higher taxes is on personal income tax. That's because its property taxes and payroll taxes and consumption taxes tend to be quite a bit less. So the balance gets skewed that way.

Where it's also interesting on the OECD comparisons is when you look at our upper-end taxes, our taxes for upper-income earners. We are about average with the EU and OECD, a little bit above average. Where we are dramatically above the average is in how much we tax low-income people at the bottom bracket. This is why in the alternative budget we've emphasized targeting those tax cuts toward low-income and modest-income people.

We have seen cuts in the corporate taxes. We saw them under Trudeau and we saw them again under Mulroney. If in fact that has failed to result in sufficient new investment, I'm not sure why we would continue down that road.

I want to say something about the brain drain. Phil talked about the need to actually look at the data. First of all, it's important to talk about net flows, not just absolute flows from Canada to the United States. It's my understanding that there is a small net outflow from Canada to the United States now of university-educated people. However, there is the net inflow of university-educated people from other countries, which is a good thing. But as people have said already, it's important to understand why they are moving. I don't think the bulk of it is about comparative taxes.

As you just mentioned in your example, Mr. Gallaway, a lot of that has to do with the income differential, not the tax differential. I'm not quite sure what the public policy answer is to that, except to say that the United States has decided to accept a much wider distribution in income. Therefore, at the upper end it pays people a lot more in the private sector, and even in the public sector. Part of our university professors leaving has to do with the fact that there has been a freeze in most provinces, or a cap on how much professors can make in Canada. The answer there seems to be restoring public finances.

Our job, of course, is to remind people why they pay taxes, and the fact that they get a lot of services in Canada for their taxes that they don't get in the United States. If they have kids going through university they will pay a lot less in Canada. Or when you factor in what Americans pay privately for their health care premiums, the tax differential looks a lot different.

I want to point out one final thing on the brain drain. Twenty to thirty years ago there was a reverse brain drain, from the United States to Canada. My parents were part of that. I'll give you the example of my parents. They were university-educated and they came twice from the United States to Canada. The first time they came because of the Vietnam War. Then they went back. Then they came back again, this time by choice, not under duress. My father is a family doctor and professor of family medicine. My mother is a documentary filmmaker and worked at the National Film Board. They are both recognized and respected in their fields and have made a significant contribution.

My father could have made a lot more money in the United States, and he's known that all along, but he came back because he found the Canadian health system a lot more humane. My mother was tired of chasing private dollars for documentary filmmakers and found the National Film Board a lot more appealing.

What I worry about is that we have systematically underfunded the very institutions that attracted dynamic, energetic, university-educated people to this country.

When I look at the people I graduated with—and I've only recently completed my post-secondary studies, just a few years ago—what do people want? They want a job that pays a decent wage, hopefully doing meaningful work. Many of them would like to teach, but there are no teaching positions in the universities because of the underfunding. Many of them would like to do research, but as Bill mentioned, those research councils have been systematically underfunded. Many of them would like to dedicate themselves to public service, but downsizing of the public service and hiring and wage freezes have ruled that out as an option.

• 1835

We have undercut those institutions that actually held a lot of those university educated people here and attracted them here in the first place.

Mr. Roger Gallaway: I appreciate what you have to say. I just looked at your last name and noticed you were proposing a carbon tax. I assume you're not related to that guy in Alberta.

Mr. Seth Klein: The wrong side is napping.

Mr. Roger Gallaway: They didn't get it.

You've talked about across-the-board tax cuts as not being a good or efficient way of creating jobs. You think the public purse should do that. I would like Mr. Hansen to maybe present the other side of that assumption.

Mr. John Hansen: I think we have to recognize that we do live in a competitive world, whether we like it or not. The fact is that Canada is one of the most trade-dependent countries in the world. A lot of our employment and wealth depends on viable exports and trade relationships with other countries, primarily the U.S., which still remains our most important trade partner, but certainly also Europe, Asia-Pacific and so on. I think it's really important to recognize that we live in a competitive world, and companies and individuals move to other places where they can be more competitive.

We in this province do surveys of various businesses and individuals around Greater Vancouver from time to time, and we know a number have left to go to Alberta, Washington State, Oregon and so on, for a number of reasons. Mostly it relates to competitiveness.

Mr. Roger Gallaway: Okay, thank you.

The Chairman: Ms. Bennett.

Ms. Carolyn Bennett: First of all I'd like to say, Seth, you should say hello to your dad. Part of the reason the health care system in this country is so much more humane is because of people like your dad, who certainly renovated childbirth. I think your mom's work on the film board is something that actually has made us all proud as Canadians. I just hope we can send all the Republicans south and bring people like your parents north. That would make it a better country.

The Chairman: It's heading north.

Ms. Carolyn Bennett: I think the health care system is a huge positive thing for our commerce and our economy in this country. I worry that the employers I speak to who have tons of employees have a different view of whether or not we should be investing in health care compared to the people who have companies with a small number of employees.

Our health care system, as long as Canadians have confidence in it, is a huge asset in this country and a huge attractive incentive to come here. My concern is, do you not think that if we slide the slippery slope to more of a two-tiered system there would be huge pressure on the companies in this country to spend much more money on private insurance and all the employee health benefits that are part and parcel of running a business in the states?

Mr. Richard Fraser (Vice-President, Corporate Project Development, Vancouver Board of Trade): Our company has employees on both sides of the border and internationally, and the health care system is a huge asset here; there is no question about it.

I don't think what we're talking about is really making it more efficient. In trying to cut out in general these barriers to change, as change takes place not only in health care but in all segments of our economy, the U.S. is speeding up ahead of us, and the U.K. as well right now. If we don't reduce these barriers to change we're going to get left in the dust. We can compete.

But on your opening line, yes, our health care system is an asset.

• 1840

Ms. Carolyn Bennett: One of our problems is that there's not enough accountability in our health care system at the moment. We spend only 2% on health care information, and most people feel it has to be at least at 4% if we're going to actually know what the gaps and duplications are. I always wonder when people say it should just be taxes and death, because in order to ultimately maintain our health care system, we're going to have to spend a little bit of money on information technology in order to put in place the accountability that will ultimately save money.

Mr. Richard Fraser: What you're talking about is improving the efficiency of the system.

Ms. Carolyn Bennett: But you can't do that without spending money. We're not tracking anything now. There's no accountability in the system now, so we actually have to spend some money. I submit that 1999 seems like a good time to do that, because at some point we have to start spending the money so we can actually see where it's going.

The Chairman: Mr. Muzin.

Mr. Fred Muzin: As far as efficiency goes, the Americans spend over 14% of their GDP on their health care system and we spend about 9%. So we're already quite a bit more efficient. With labs, if you bring them into the public sector there's a huge amount of money that can be raised here.

Ms. Carolyn Bennett: They have a terrible mortality rate, too.

Mr. Fred Muzin: I agree we need a lot more investment in health information systems, but the way the Canadian government is going now, they're leaving it wide open to corporations to, in effect, breach confidentiality of medical records and statistics and use them for commercial purposes and not toward improving the health care system. That's a real fear.

Ms. Carolyn Bennett: Mr. Muzin, obviously a lot of us feel we should be paying some money for information technology so we can free up dollars for patient care. If the federal government could spend some money on information infrastructure there would be more dollars for patient care.

One of the concerns about just raising the CHST is that even though in your document it says 8,000 jobs were lost in hospitals in this province—obviously we had hoped those jobs would go into the community and into home care, and we're not seeing that there—the minute there's more money in the CHST for the provinces, the unions will negotiate richer contracts and there won't be one more job created. We would end up not actually doing what we need to do in terms of hiring that extra nurse.

Mr. Fred Muzin: Except that has not been the history in this province. If you take a look at the bargaining in our union, we went to a shorter work week because we wanted to facilitate the government not spending more in health care but shifting those services to a closer-to-home model. We're very interested in erasing the inequities in the low-wage redress, but we're also very cautious that our primary objective is to maintain services in a new form. So that really hasn't happened in this province.

Ms. Carolyn Bennett: Could you show us? Certainly one of the concerns that keeps getting articulated to us is that to just change the CHST alone would mean it would go in raises to the union.

Mr. Fred Muzin: In our current contract in our facilities agreement that we concluded in May this year, the general wage increases are 0%, 0% and 2%. The primary objective is to address our members who are on workers' compensation. There were 6,300 injuries last year in health care, and we have 2,200 members on long-term disability. A huge amount of money is being spent on a system that's supposed to cure and help people who are injured. If workers are injured they're not providing the service, so our main focus is to get those people productive and providing the front-line services people demand.

Ms. Carolyn Bennett: In Ontario one of the nursing contracts, I believe, has 75 sick days a year in it. Do you think the unions would be prepared to come to the table with a change to that?

Mr. Fred Muzin: I can't speak for the Ontario unions, but I would highly doubt that on average people take 75 sick days a year. In our contracts, because you're exposed to all sorts of illnesses, we have fairly generous sick leave provisions. You accumulate a day and a half per month, but that's not the utilization rate. You may have the odd individual who takes more because of some medical problem, but a lot of our members are at their maximum accumulation of sick leave. You may accumulate it but you don't necessarily expend it.

Ms. Carolyn Bennett: I think everybody wants this system to work and feels everybody should come to the table with something they themselves would be prepared to change in order to make it work better.

• 1845

Mr. Fred Muzin: The other issue we have here is that there are a lot of health care workers who are underutilized. So we pump them through our education system... For instance, licensed practical nurses are not utilized to the full extent of their training and ability. It's the same thing with registered nurses in this province. We certainly need more of both, but we have an investment in health care workers who are being underutilized.

If you talk about providing services, which we're all interested in, that's one area that we keep calling on and pushing the provincial government to deal with, to utilize people. There's no point in training them if you're not going to utilize them.

The Chairman: Thank you, Ms. Bennett.

Mr. McKay.

Mr. John McKay: Thank you, Mr. Chairman.

First of all, I want to ask the board of trade representatives this. With respect to EI and tax cuts, speaking in your representative capacity for the people you represent, if you had a choice today as to whether your members would prefer an EI cut or a tax cut, what would they say?

Mr. John Hansen: That's a good question. I don't know what the answer would be on that.

I suspect the answer would be that EI reduction should take place, and the reason for that is that the EI is a cost of hiring additional people, and most of the people I deal with are concerned about that and they do want to see the payroll taxes, if you want to call it that, reduced.

Mr. John McKay: Even though the payroll taxes are lower than the U.S. tax payroll component?

Mr. John Hansen: In some areas they are.

Mr. John McKay: Among the sizing of your membership, smaller employers versus larger employers, would there be any differential opinion on that?

Mr. John Hansen: I don't know. I can't say.

Mr. John McKay: Have any surveys been done in the board of trade membership on that issue?

Mr. John Hansen: To refine it to that point, no, we haven't.

Mr. John McKay: The other thing you advocate is debt reduction. We've heard representations from a previous witness that we should simply ignore debt reduction and let the economy grow its way out of the ratio, if you will, that the ratio will fall as the economy increases. In fact, Mr. Klein commented negatively on the fact that we're the only G-7 nation that's actually progressively knocking down debt and reducing the ratio that way.

Are you of that opinion, that we should simply sit back and wait for the economy to show the ratio decline from 73 to 71, to 69, to 67, that sort of thing?

Mr. John Hansen: No. We think...

Mr. John McKay: What do you think the economy accomplishes by reducing debt in a measured way?

Mr. John Hansen: It starts the ball rolling in a more accelerated way in reducing the total debt if you start to put something on the principal, rather than simply paying on the interest every year. The close to $600 million becomes less over a faster period of time. As I said earlier, we think the real dividend to Canadians is when the interest that's paid on the national debt becomes a lot less than it is now. That's the $43 billion that simply flows through.

Mr. John McKay: We have lately enjoyed a bit of a reduction in interest rates. There's an argument as to whether it's an absolute reduction or relative deduction vis-à-vis the rate of inflation and things of that nature.

When we had the Mexico crisis—if memory serves me, around 1992 or 1993, somewhere in there—I believe the basis rate went up 400 points, and that was, if you will, the peak of our debt and deficit. The crisis we presently are going through is much larger in many more counties—Thailand, Japan, Russia, Latin America, and so on—yet we've only seen the rate going up one point, as I recollect. The Bank of Canada racheted it up one point, and then it quickly came down.

In your mind, is there a correlation between debt management and that interest rate response to those two particular incidents in financial circles?

Mr. John Hansen: I think there is a correlation between debt management and the international money markets and the way interests rates in Canada turn out, in terms of the confidence of international investment in Canadian bonds, and so on.

• 1850

Mr. John McKay: Mr. Klein, I'd be interested in your response on that.

Mr. Seth Klein: First of all, I think you've raised some good points about debt management. Obviously it is a good goal to want to minimize as much as possible how much of the federal budget goes into debt payment, debt servicing. That is a part of our savings in the alternative federal budget. By increasing the amount of the debt that's held by the Bank of Canada over a period of five years, you are effectively eliminating a good chunk of debt service payments, because those interest charges to the Bank of Canada just get passed back to the treasury at the end of the year. So you're essentially paying interest to yourself.

Mr. John McKay: That would require the co-operation of the chartered banks, wouldn't it?

Mr. Seth Klein: No. Twenty years ago, about 20% of the federal debt was held by the Bank of Canada. Now it's less than 5%.

It just means that instead of issuing bonds and selling it as market debt, the Bank of Canada holds onto those bonds themselves, and our recommendation in the alternative budget is that at a rate of 2% a year over the next five years, we have the Bank of Canada assume more of that market debt. So over five years, that would bring the level up to 15%.

Mr. John McKay: Frankly, then the Bank of Canada has to buy the debt. How do they buy the debt?

Mr. Seth Klein: It is monetizing the debt, and the charge against it is that it would be inflationary.

I don't see that as a risk, and if anything—to answer your previous question—I think the only reason Governor Thiessen didn't react to what's going on now the way he did in 1994, in terms of really jacking up interest rates, is because he's afraid of deflation, as are a lot of other central bankers. There is no risk of inflation.

Our recommendation in the alternative federal budget is that if the risk of inflation did appear, the response should then be to reimpose reserve requirements of the chartered banks, but we don't believe this would be necessary, to begin with.

To come back to your point around whether or not these debt payments assist us in terms of what's happening now in international financial markets, I would point out that all you need to do is look at the experiences right now of some other countries. You have countries like Australia and New Zealand, which have lower debt-to-GDP ratios than Canada, which have been much harder hit with the currency crisis that's now going on.

Mr. John McKay: That could be explainable by their dependency on commodities.

Mr. Seth Klein: That's it, exactly.

Conversely, you have countries like Belgium and Italy, which have much higher debts and have barely been touched, the point here being that in terms of the reaction of financial markets in terms of what's happening now in various currencies, it seems to have very little to do with debt and a lot more to do with factors like whether or not a country is an exporter of resource commodities.

Mr. John McKay: But that surely has been one of the frustrations of Minister Martin in terms of the analysis of the Canadian economy, because if you look at a proper analysis of the Canadian economy, we've moved a great deal away from commodity dependency and much more towards a service orientation and a sale of intellectual property, yet we still seem to be getting the, how shall we say, international discounts based upon commodities.

Have you any recommendations with respect to how we get through to the currency traders that this is a very sophisticated economy here?

Mr. Seth Klein: We are more diversified, but we still have a long way to go. Forty percent of Canada's exports are still resource commodity exports. Obviously that is known, and that is a part of what's happening now.

I believe there is no short-term solution to what's happening with the dollar, with the sole exception of...and Phil was raising the point earlier about how much of this is about speculation. A huge amount of currency trading is not done, of course, to buy a good or service from another country; it's people betting against the dollar, and we have seen an awful lot of the Canadian chartered banks betting against the Canadian dollar. About $10 billion worth of Canadian currency is traded every day.

• 1855

Mr. John McKay: But about 10% of that is actual betting. The other 90% involves legitimate trades. People need to buy currency to go another country—

Mr. Seth Klein: No, it's definitely not 10%, nowhere close. I would say the ratio is the other way around. Maybe 10% of that $10 billion is used to buy a good or service from the United States or another country, and the rest of that consists of international investors and investment funds betting on the direction of the Canadian currency. So I would say that in the shorter term, part of the solution rests with the kinds of things that are being discussed in Washington right now. But to the extent that we bring in controls on currency speculation, as I was mentioning to the chair, some of those require an international agreement, such as the Tobin tax. But again, a lot of this is being done by the chartered banks, which are federally chartered institutions, and they're in a good bargaining position right now, given what you're asking for—

Mr. John McKay: So you think we should get back to the shopping list, do you?

Mr. Seth Klein: I think it should be a demand, frankly. These assets are federally guaranteed by the Canada Deposit Insurance Corporation. There should be a quid pro quo, and you shouldn't be able—

Mr. John McKay: But as soon as you do that, the capital will move somewhere else, to another institution, whether it's provincially regulated, offshore regulated, or non-regulated.

Mr. Seth Klein: I don't know that it is as complicated as we are often told it is. These are large corporations that are federally chartered and federally regulated. If the directors are held accountable for what happens to their assets and investments, I don't see why that can't be done.

Mr. John McKay: This side of the table has been fairly critical of the way the Department of Finance/Bank of Canada handled the decline in the currency from around 68¢ through to 63¢ and back up to 65¢ and 66¢. The instruments that are available are the interest rate policy and basically buying dollars. What would be the view of this side of the table on how that currency movement should have been handled over those two or three months? What do you think that the Department of Finance/the Bank of Canada did wrong in that process?

Mr. Phillip Legg: Linking. The bumping up in late August of Canadian interest rates by a full percentage point was a mistake. Again, it shows this bias that exists within the bank and the Department of Finance towards obsessively focusing on inflation at the expense of everything else.

Mr. John McKay: So your view is that using the interest rate as a protective instrument of currency is not a good thing to do.

Mr. Phillip Legg: I think that the interest of the bank and the Department of Finance in defending the dollar was wrongly placed. I think they should have let the dollar fall. There was a lot of speculative excess in the marketplace at that time, and had it gone below 60¢, I think it would have rebounded to the level it's at right now.

Would that have had an effect on inflation? It would have had a minimal effect, if at all. The price of broccoli might have gone up by 10% during the winter months, but more shifts would have been employed in the Prince George sawmilling region. So those are the kinds of things you're having to weigh one against the other. Quite frankly, I would pay 10% more for broccoli. It think it's just that simple. Again, it's because the department and the bank put far too much weight and far too much importance on controlling inflation. I agree with Seth's comments that the thing we have to be guarding against at this point is deflation, not inflation.

Mr. John McKay: So let inflation run, let the currency float, and nail the big earners.

Mr. Phillip Legg: Let inflation run—you say that as though we're headed for 200% inflation.

• 1900

Mr. John McKay: No, no, I'm saying the theme of your presentation has been that the Bank of Canada is excessively fixated on inflation—

Mr. Phillip Legg: On controlling inflation, and the price we pay has been that every time the economy starts to approach what I would call full capacity, it's immediately reined in. That's been a consistent pattern in terms of monetary policy; I would go back 20 years, but you could probably go back further than that. You see as a result of that policy consistently applied over such a long period of time—surprise, surprise—revenues to government decline, which immediately feeds a frenzy of “Well, we have to cut programs”, which in turn leads to this downward spiral.

I mean, if we're looking for longer-term solutions, and clearly the answers are to be found in longer-term solutions—you can't simply flip a switch and things will be all better tomorrow—you're going to have to grow the economy. And I agree with Seth Klein that at that point you can look at—

Mr. John McKay: Does inflation grow the economy?

Mr. Phillip Legg: I'm looking at real growth in the economy in the 4% to 5% range, and I think we should be targeting those kinds of growth targets. We should have very explicit employment growth targets. In the current economic conditions that exist internationally, would we be looking at high inflation? The answer is no.

Mr. John McKay: My final question is with respect to tax rates. We're told that about 10% of the taxpayers pay 50% of the taxes. Are you still of the view that the 10% should be ratcheted up further?

Mr. Phillip Legg: The answer as far as rebalancing the tax system is not just zeroing in on a narrow band and saying that they have to pay more. I think there's a broad spectrum of—

Mr. John McKay: Isn't that what you're saying—increase the taxes on large corporations and high income earners?

Mr. Phillip Legg: That would be part of the strategy. I don't think there is one magic bullet as far as tax reform is concerned. I mean, we're looking at corporations paying their fair share of the taxes. The last time I looked there was a Statistics Canada study that showed for—I think the year was 1994—82,000 corporations in Canada, which had profits totalling $17 billion, paid not a penny in tax. That's an awful lot of money that goes untaxed. That would be one element in rebalancing and bringing fairness back to the tax system, another part of the strategy—yes, high income earners.

Mr. John McKay: But there's been a general reaction on the part of Revenue Canada that corporations are, how should we say, problematic in terms of trying to tax, and therefore the burden has shifted from the corporations onto the individuals. Our corporate rate is not overly different from that of the U.S. We're at 3.3% of GDP and the U.S. is 2.7%, but the really significant difference is in personal income tax, where Canada's at 13.9% of GDP and the U.S. is at 10.7% of GDP.

With write-offs, depreciation, accelerated depreciation, CCA, on and on and on, you can with a minimum amount of creative accounting bring your income tax rate down. I'd be interested in knowing what area of the Income Tax Act vis-à-vis corporations you think needs to be eliminated or changed so that revenues are not written down to zero base for tax purposes.

Mr. Phillip Legg: There are as many ideas as there are people at this table, but we could start with accelerated depreciation. I think that's probably something that's overly generous.

Mr. Seth Klein: If I may, just in terms of what we recommended in the alternative federal budget, we didn't recommend an increase in the corporate income tax rate, with the exception of a surtax on financial institute profits—

Mr. John McKay: Which they don't like.

Mr. Seth Klein: Of course.

Mr. John McKay: And their argument is that they're the highest-taxed industrial segment in the entire economy.

• 1905

Mr. Seth Klein: They don't seem to be faring too badly for it.

Mr. John McKay: Well, they might have a—

Mr. Seth Klein: To answer your question around corporate income taxes, what we call for in the alternative federal budget is the elimination of a few of the tax exemptions. What we call for is a minimum corporate tax, which they have in the United States, the reason being that there are all manner of tax deductions and exemptions out there, some of which serve legitimate public policy purpose. But in terms of Phil's example, what happens is many corporations do pay their fair share. And then there are some who stack those tax breaks on top of one another and manage to reduce their taxable income to zero. That's why you need a minimum corporate income tax.

As far as individuals are concerned, we're fairly unabashed to say we think there should be more brackets. Before Mulroney there were ten income tax brackets; now there are three. That's where we compare quite poorly with other OECD countries. In the progressivity of our tax system, we have an unusually low number of brackets in Canada.

The point I was making around automatic stabilizers I think is a really important point in B.C. right now. A multi-bracketed tax system is part of how you deal with the downturn. In a sense, this whole debate about tax cuts would be addressed by having a multi-bracketed income tax system. If you were laid off at the mill, as is happening in resource communities across this province, and you saw a drop in your income, you would automatically experience a tax cut.

Mr. John McKay: I guess I'm attracted back to my original question. I don't really understand the angst about the EI. EI, if you gave a significant cut, would benefit 8 million taxpayers at best, whereas a tax cut would benefit 20 million taxpayers, so I don't understand how—

Mr. Seth Klein: It's because the people who used to qualify for UI and now don't are hurting, much more than most people—

Mr. John McKay:

[Editor's Note: Inaudible] for these people.

Mr. Seth Klein: —and the communities are experiencing downturns harder. In B.C. we believe the downturn is very much localized in those resource communities. Small businesses feel that as well. The value of the UI program is that it targets money to exactly those people who need it the most, when they need it the most.

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

Ms. Bennett.

Ms. Carolyn Bennett: I just wanted to ask Seth a question.

One of the things about a promise of this much in program spending, this much tax, and this much debt is there are some things you could put under almost a couple of columns. What I would like to know from you, and from anybody else who wants to comment, is if we increase the personal exemptions, would that not help a lot of people in terms of child poverty, or people working part-time and going back to school? Wouldn't that be a good thing to do, which you could actually also put under...? It's not program spending, but it actually would provide an ability to deal with this working poor problem we have in this country.

Mr. Seth Klein: But the exemption applies to everybody. We weighed all of these things when we were dealing with the alternative federal budget last year, and we did call for an end to the 3% surtax.

Ms. Carolyn Bennett: Which we did.

Mr. Seth Klein: Yes, although it was targeted, which I think was good. Our feeling is if you concentrated on lowering the tax bracket... I do actually think there should be an increase in the exemption, although part of that would be addressed automatically by the points I'm making about having a multi-bracketed income tax system. What the Mulroney changes did is they effectively lowered taxes on upper-income earners, but they brought a whole bunch of people at the bottom end who were never taxed before into paying income tax.

Ms. Carolyn Bennett: So what I'm saying is wouldn't it be a good thing to reverse that now?

Mr. Seth Klein: Yes.

Ms. Carolyn Bennett: Particularly for the people on CPP disability and some of these others who are actually paying taxes on an extremely small amount of money.

Mr. Joe Barrett: If I could just make a comment here, I think one of the things we're driving at here is how can you raise more money, and where are the sources? I mentioned briefly that we've seen a tremendous increase in the black market economy in the country, particularly in the construction industry. We blame that on the systematic deregulation that has taken place across the board. Our trades people are less likely to be working on construction projects today. More likely, you're going to find unqualified people being employed by people who don't pay taxes and who, because of the extreme competition in construction, have driven the price down so low that the legitimate people can't compete. What we're finding is that the few legitimate people who are left out there are either going out of business or themselves going into the underground economy.

• 1910

I think what the federal government can do is use some of the levers they used to have at their disposal, such as requiring that at least on federal government jobs a minimum wage be paid so that people aren't cutting each other's throats to such a level that we're seeing them become part of the underground economy.

The Chairman: Mr. Fraser.

Mr. Richard Fraser: I'd like to make just one last point, and that is that we have to compete. The yardsticks are getting higher, and the U.S. is moving away from us. We can compete, but what you'll need to do in your deliberations is find a way to lessen some of the inhibitions towards changing our economy where we need to. A lot of the old solutions of the last 20 years inhibited change, and what we have to do is change. That's what's going to give our young people some hope so that they'll stay here and work. But going back to a dependency culture is not going to help make these changes. We have lots to do to make these programs work, and we can generate it, but we have to compete. I just want to reinforce that we have to break down these barriers to change.

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

I'd like to make a final comment. We've held hearings in Ottawa, and members of Parliament have had town hall meetings across the country. During our travels we've listened to various points of view, including yours, which you have expressed quite eloquently.

Budgets in many ways are used to signal to Canadians the future direction of a government. Although Minister Martin has used the two-year rolling targets, I think that when you are in a surplus position, the dialogue has to be expanded a little bit more, and it has to have a certain vision attached to it.

But having said that, there are also certain push-and-pull factors involved. Some people want to increase benefits, others want to reduce the debt, and others feel that high-income earners are as much a part of our society as others and that they should reap the rewards just as much as low-income and middle-income Canadians. They're part and parcel of our Canadian community. Some feel there should also be a signal sent to them that their agenda is very much a part of a Canadian agenda. So you look, for example, at the issue of the 3% or 5% surtax and a need to move there. There's also the basic personal exemption, which a lot of people support. Then there are those who advocate that if you want to build a modern economy, you need to invest in research and development. These are all fair comments.

Then of course, as Mr. Riis pointed out earlier today, there's the challenge that Finance is dealing with now, which is the employment insurance issue and whether we should reduce EI premiums by $5 billion. There are people who want debt reduction, because they may understand that there are global forces and signals that affect the market. These are all choices we on the finance committee have to deal with.

• 1915

But my question, if I may—there is a question, believe it or not—is how flexible can we in fact be with the employment insurance so-called surplus that exists, so that we can make recommendations to the Minister of Finance that speak to a greater flexibility? Any budget or any economic plan needs to have the people of Canada behind it. It's the only way it works. There is no other way around it. I'm just wondering whether, particularly on this side of the table, it is really important that $5 billion be directed toward employment insurance premium reduction or enhancement of benefits.

Mr. Phillip Legg: If you have to rank the priorities, you have to start with coverage, then you can go to repairing the damage done in terms of benefits, and much further down below that would be premium reductions.

The Chairman: What about health care?

Mr. Phillip Legg: The unemployment insurance system in Canada wasn't put in place to fund health care. It was an insurance system, and I think it has been a badly gutted insurance system, but an insurance system nonetheless to help workers who become unemployed. For the federal government, at this point, to decide that it is going to reach inside that kitty and pull out a whole bunch of extra dollars to rebalance a fiscal agenda that I think was wrong-headed in the beginning is a huge mistake.

The Chairman: So you are saying that you would accept a budget speech that would have one line in it, meaning we will reduce employment insurance premiums or—

Mr. Phillip Legg: No, no. Start with coverage. We have to get back to full coverage—

The Chairman: Do you think we could rally a country around that budget? In all sincerity, I understand the box that has been created. I understand that. I also understand how the government finances, although it does get interest back when there is an economic downturn. In the past, the so-called fund has basically borrowed from the government. So it is a two-way street. I grant you the fact that it's, according to some numbers that we have seen, up to $20 billion.

Having said that, I repeat the question. Do you think that we, as a country, will accept from the Minister of Finance a budget speech that may in fact be a one-line budget speech because it will only deal with returning $5 billion to workers and to employers? Can you accept that?

Mr. Phillip Legg: I would go back to first principles. I think the problem this government has is that it can't get its mind out of the box. It has to get its mind thinking about growing the economy and basically putting to one side the prescriptions that have brought us to this mess that we are in right now.

The Chairman: I know, but in February—

Mr. Phillip Legg: Well, in February, it's time to come of age.

The Chairman: I understand what you are saying, but it doesn't answer the question I am asking. I understand that in 1986, when it went to general revenue, maybe that shouldn't have been done; maybe we should just have payroll tax and say, if you want to do business in Canada, this is how much you pay—worker and employer; that's the way it works. We can go that way too. I am just saying that's not the situation we find ourselves in and I want to know whether there is support in this room for a budget that will speak to possibly one item.

Mr. Seth Klein: I don't think anyone wants a one-line budget. I appreciate your question, because we are wrestling with the same issue as we prepare the alternative federal budget, as we have all along. I'll tell you how I think we're answering it.

First, in terms of getting out of the box, as Phil said, we would look ahead to the next fiscal year. We believe it is possible to have a fiscal dividend that is quite a bit larger than the annual surplus in the UI fund. We believe it's realistic to think of a $13 billion fiscal dividend if you incorporate the UI surplus and the additional revenues from a more pro-growth strategy and the savings from having the Bank of Canada assume more of the debt for the savings on interest charges. So there's more than just the UI surplus.

• 1920

Part of the difficulty, respectfully, that we run into is that there have been so many programs, including UI, that have been gutted that in a single year of the alternative federal budget it's hard to know where to begin undoing the damage. I think the approach, then, has to be a balanced one.

We also believe there should be a return to a much fuller coverage under UI and a restoration of benefits. I think that should be done much the way Martin has had rolling targets. I think it should be done on a three-year schedule or something like that, so we get a sign that we're heading in that direction in this year's budget, and we also see a sign that we are restoring funding to health care, and we also start to see a down payment on some of the other social programs or programs that I think people who are in hardship really want to see, such as social housing.

The Chairman: Quite frankly, when I was listening to Mr. Muzin, I think the $6 billion paper that I was reading... That was your presentation, I believe. I don't think we would have enough money in this year's budget to reinvest $6 billion and $5 billion, which is $11 billion—because you're assuming there would be an $11 billion surplus. And if there isn't, what happens to your pharmacare, home care and all the other things you had mentioned?

Mr. Fred Muzin: Well, the budget is a matter of choices. When you have 20% child poverty in this country, just returning money in EI premiums is not going to address that, because the children don't pay into EI. So I would echo what Seth has said. It would have to be balanced. If you don't alleviate the problems with the health care system, then you're not going to have a workforce. You're going to spend most of your time trying to get people healthy so they can be contributing Canadians. So just by reducing in one area...I think you have to look at—

The Chairman: So you don't agree with just doing an EI premium reduction or—

Mr. Fred Muzin: Absolutely not. No.

The Chairman: Okay. Thank you, Mr. Muzin.

Mr. Hansen.

Mr. John Hansen: Mr. Chairman, I think you put your finger exactly on the right spot when you mentioned that the budget is really a financial directional statement for the country, and I don't think a one-line budget would do that. I think the issues are much more complex and go well beyond the one issue of the EI. I think that's a component of it. I think tax reform generally and the plans for more tax reductions are an important component, as is a program for starting to pay down the debt. I think those are all elements of a budget.

The Chairman: Thank you.

Mr. Barrett.

Mr. Joe Barrett: I think what we're talking about is changing some of the changes that were made in 1996. Yes, I do think we could put a cap on UI at $20 billion, so that at least we do know what the outer limits of this surplus are. But we want to change the way of determining eligibility so that more people can qualify. That's really one of the reasons we're in the situation we're in today.

And it is more than just workers. UI is connected to families in the country, and once we get over the idea that it's just workers that are impacted, I think it wouldn't be the only popular step. There are a lot of other steps that the federal budget should bring in.

The Chairman: Thank you, Mr. Barrett. And we need to balance them all, as a finance committee, and that's the reason we really appreciate listening to the various points of view expressed throughout the country.

As always, it's been great, panellists. You always provide us with insightful information and clearly outline the challenges and choices that we must deal with as individuals but, more importantly, as members of the Canadian family. On behalf of the committee, thank you very much.

We're going to take a two-minute break and be right back.

• 1925

• 1929

The Chairman: I call the meeting back to order.

It is my pleasure to introduce to the committee members the mayor of the city of Vancouver, His Worship Mr. Philip Owen.

• 1930

Welcome. You probably know how this committee operates. You have approximately five to ten minutes to make your introductory remarks, and thereafter we'll engage in a question and answer session.

Mr. Philip W. Owen (Mayor of Vancouver): Thank you. It's nice to see some of you again. There are a number of familiar faces from last year.

I have two things on a personal basis. The big question last year was to pay down the debt or reduce taxes and so on. Personally, my view is that at this stage we should be both paying down the debt and reducing taxes. We're heading into a world situation that's not looking very good. In Canada, British Columbia is having some difficulties and may continue to do so. People have been saying for years that their taxes are too high. I think at this stage I'd recommend a look at both those issues. That long-term debt has to be dealt with, but I think some kind of relief to the taxpayers is very much in order at this time.

I did hand out a letter, but I don't know whether you all have it in front of you. It has been passed out? Fine. I'm just going to highlight a couple of things on this letter, which I wrote on July 31.

From the city's point of view, the Canada infrastructure program was very good. We liked that very much. The City of Vancouver said infrastructure is infrastructure—hard infrastructure, sewer pipes, and water lines and roads and streets—although we eventually of course accepted the 20% soft infrastructure. But we like the hard infrastructure. We think it's an excellent program. We're in for a third. We'd like to see that with some permanency. Over a longer period of time, from my perspective and Vancouver's perspective, I think it would be beneficial all around.

The other thing was the federal government's paying its fair share of property taxes. This is a payment in lieu, and we know the federal government will honour that in 1998-99. There was no commitment in 1998 that it would continue beyond that. That is for a variety of reasons, as we're continuing to find pressures from all levels.

The other thing I would like to touch upon is item four on that page, which is social housing. We are building in Vancouver now approximately 800 social housing units. We announced 300 units earlier this year, and we've announced another two sites since then. So we're staying onside on this.

We used to buy property in Vancouver and put it out on long-term lease to social housing organizations on a 25% write-down, so we'd give 75% of its value and put it in a long-term lease. Recently, the only way you can strike up a deal is to buy land, and we've put 100% in with no 25% return to the city and so on. We're struggling and working hard. We recently opened, with VanCity, an SRO facility, a single-occupancy facility on Pender Street for street youth at risk, and we're very pleased with what we're doing in this whole area. It deals with the whole issue of crime and safety issues, and housing and social housing is very much on our list. We have a stirling record in that area.

We're hoping that the policy of the federal government to stay out of social housing doesn't remain forever, and that it's back on the list. I've mentioned it as third in there.

The fourth issue I want to touch on is the whole issue of crime and safety. The national crime prevention program, the $32 million, is an excellent program. We have an application in. We've been lobbying hard with local MPs, and our staff have made contact with various MPs' offices in Ottawa. We want to thank the government for that program, because again that's five years, and if you can get into that, it's very nice stable funding that allows programs to continue and go beyond elections. It brings some stability and an opportunity for the municipalities to have a long view of things.

As you know, we in Vancouver have had tremendous problems with crime and safety issues. I had a meeting last Friday for three hours with the Vancouver MPs and MLAs, and we had a very good turnout, and we had a good turnout from Victoria. Several cabinet ministers and senior people from the opposition in Victoria were there, two Liberal and several NDP people, and Hedy Fry was there. And several other MPs from Vancouver I've met are familiar with this. I've talked to them personally on what we're doing on the downtown east side of Vancouver.

• 1935

We're looking for a co-operation, and we have a policy and a plan. We have a very large document with all sorts of options dealing with the whole issue on the downtown east side—crime, safety, particularly drugs, which leads to tremendous social decay and huge costs down the road—and we're coming to a strategy of co-operation. We think the money for a national crime prevention program, if we can get in on that, will coordinate with the province and the federal government.

Our pitch on Friday afternoon was, let's leave our politics at the door. We have a huge problem down there. We'd like to have some long-term solutions. We'd like some buy-in.

As I've told the MPs in Ottawa, we're dialoguing tremendously with the people in the downtown east side of Vancouver who are involved in the needle exchange, and people who are involved with the Carnegie Centre and all kinds of social programs, the Salvation Army and so on, getting them to come together with some opinions where we can find some common ground. So we're going to move forward with some building blocks that we think are going to be important in dealing with this issue.

It is not only in Vancouver; it's in every city right across the country. I have the Big City Mayors' Caucus onside—I've talked to them about it, and they're looking to us for leadership—and the Federation of Canadian Municipalities, the Union of B.C. Municipalities. We're showing leadership in all those areas and have said to them that if we can get this going, we can have a model that can start to work right across the country, because we have to have a national drug strategy; we have to have some national drug policies in place. That's very important.

We think the national crime prevention program starts that. It shows an indication from Ottawa, and we want to build on that. That's very much on the top of our list, and it's in every single municipal government right across this country, no matter how big they are. There are drugs everywhere—Vancouver, Prince George, Kamloops, and so on, but they're in every little town and community. Wherever I go in the Union of B.C. Municipalities and in the Federation of Canadian Municipalities, they talk about the same thing.

That is all leading to the fact that the cities all over the world are growing, particularly in Canada. Vancouver is growing. There are more and more demands on us. We have this social decay of drugs, drugs, drugs, leading to property crime, prostitution, destroyed lives, and all those problems.

At the same time, the federal government had to get its house in order and has done an excellent job in doing that, but we've lost an awful lot of transfer payments back to the city as our city grows and our demands grow, and the province has cut us off. We used to get $50 million from the province in transfer payments annually 15 years ago. We're now down to $5.8 million, and there's the possibility that might go.

So we've had to absorb all that. At the same time, our demands have increased. Our source of revenue is property tax or fees. We can't get into revenue streams. We can't add a penny onto the gas tax of British Columbia and get $20 million. We don't have access to any revenue streams. We get our money from going to people who are asset rich and cash poor in their homes, a lot of them widows or widowers, and saying, squeeze some more cash out of your non-cash-producing asset, which is your home.

So we're getting burdened, and our sources of revenue are limited. Keeping our budgets balanced, which we have to do, as the senior governments are doing...and I think there has been great leadership in Ottawa to get the financial house in order. We just hope you will not forget the cities and the municipalities; keep us in mind as you're looking at bringing some balance back into the situation. We just hope we don't have to absorb more cuts and more reductions in transfer payments.

There are a few other things you can read in this paper. Time doesn't permit me to go through all of them, but I wanted to touch those few things. There are others in the attachment you have, which is fairly brief.

Thank you very much for your time.

The Chairman: Thank you very much.

I'm mindful of the fact that you must leave pretty soon, so we're going to try this, Mr. Harris. Can we place maybe four questions, and the mayor can address each of the four questions?

Mr. Dick Harris: Sure.

The Chairman: We'll begin with you, Mr. Harris, and then we'll go to Mr. Riis.

Mr. Dick Harris: Mr. Mayor, I appreciate your being here again; I saw you last year. It was an excellent presentation. You talked about the problem with drugs, and of course we all recognize what a pressure the drug trade is on our society.

Recently I saw that the budget for the RCMP is such that they've had to discontinue or shut down or park their boats in the harbour and have had to cut back on their policing service because of budget restrictions. In particular with the drug trade, exactly how do you think that's going to affect the port of Vancouver, which is a major port of entry for drugs?

• 1940

Mr. Philip Owen: The Vancouver city police took over the port policing a year and a half ago. We have a police department that is highly regarded by the citizens of Vancouver, with an 85% approval on what they do, even though there's a lot of police problems and crime problems. All those kinds of things add up. We have that issue. The port is a huge problem.

I think it's better now that the Vancouver police have taken over. We have the infrastructure; we have the computers. A separate police force down there of 36 people, and so on, has not been effective.

We're building an emergency communications centre. It's a $25-million building at the corner of Cassiar and Hastings in Vancouver, a post-earthquake building where we're centralizing an awful lot of issues. We're hoping that out of that, when police, ambulance, and fire from Vancouver and surrounding municipalities come together on a wide-band radio system for the whole area—and Ericsson has just received the contract for that radio system, $120 million—we're going to start to have some coordination.

I don't know if I fully answered your question. I'm not too familiar with the RCMP thing, but I know they have had lots of cutback problems.

We've had the Pender detox close, and we have a huge needle exchange in downtown Vancouver. I'm talking about safe injection sites, and masses of things. It all comes together, and it's very serious. It's getting worse, and the citizens are saying, do something.

Mr. Dick Harris: I have one quick question, still on drugs.

I think about two months ago the chief coroner of Vancouver and the chief medical health officer and the chief of police were on provincial television, at least, making the statement that we've lost the war on drugs. As one of the alternative solutions, perhaps, they had put forward that we provide free drugs to the addicts and this would go a way to helping the problems we have. Do you support that?

Mr. Philip Owen: No. I support it perhaps in the end, when we have the continuum of care. The problem in Canada now is we don't have the continuum of care.

The City of Vancouver put on a drug symposium last June 12 and 13. We had two people from Switzerland, one from Sweden, and one from New York and one from California, plus our local people, talking about this whole issue. They had a very liberal approach in Sweden and Switzerland in the 1970s and early 1980s. It failed miserably. Now they have a restrictive policy. What they have is a continuum of care, and when I talk about a national drug strategy, I'm talking about dealing with it on a national basis.

They have heroin maintenance, funded by the government, as a last resort. In Switzerland, where there are 7 million people, they have 800 people on that program. As regards those people, generally the model would be a 45-year-old male who has been a hard drug user for 25 years, and they've been through treatment, they've been through all kinds of detox programs, they've tried methadone, and it's basically a hopeless case. They are so wired that it's almost impossible to get off it. They are on a federal government heroin maintenance program.

We're not ready to even think about that, because we don't have all the other steps in place. We don't have treatment. We have an awful lot of young children in Vancouver who are on hard drugs. We can go down to Hastings and Main Streets right now, this afternoon, and we will find a 12- or 13-year-old girl. Our police tell us that 30% at least, every two or three weeks, get moments of sobriety and they say, “I can't stand this life; I need some help.” What do we say? We say, “Okay, break your arm and we'll take you to the hospital; commit a crime and we'll put you in jail; otherwise, have a nice day.” There's nothing you can do, nothing. We can't offer them.

That's what they have in Sweden and Switzerland, treatment on demand. That 12- or 13-year-old person, dead-end user, is not a criminal; they're a victim. That's a health issue for those people, and you have to go and rescue those people. That's why we need a national policy.

If we had treatment in Vancouver and we had the money—and the Vancouver city council has put up about $2 million, and I know we could do this with a private view—if we had a treatment centre in Vancouver, we'd be one of the first to have a significant government-supported treatment centre in Canada and we'd have them just pouring in. We'd have the 1,500 people taken care of tomorrow. Then there'd be 2,000 people the next day, and 3,000 people the next day.

We have a problem with Alberta. Ralph Klein has a solution; it's the Greyhound solution, a one-way bus ticket, and they'd be just pouring in here.

That's why I'm talking about national strategy. We have to educate young children with grades two, three, four, five, and six educational programs. We have to have treatment for teenagers. We have to take the major trafficker and the major drug importer, especially those people who are not users, and have a mandatory 25-year life sentence, period. That was in the Cain report. It was much supported in British Columbia.

There's a whole series of things we have to do before we can talk about heroin maintenance. At this point, no, we're not nearly at that point yet.

I'm sorry to be so long. I gave you kind of an overview, because it's a big issue with us.

The Chairman: Thank you.

Mr. Riis.

• 1945

Mr. Nelson Riis: Actually, your comments around this issue are very insightful, and you're absolutely right, it has to be a national strategy. You obviously have thought this through and could play a major role in the development of that, and I appreciate your help with that.

There are many questions, but I'm just going to go to the one I wanted to ask and others haven't asked yet. You've indicated the value of the infrastructure program for a city like Vancouver, and that you support it generally—generally people support it across the country—and you mentioned the bridges and roads and the hard stuff. That's great and it's pretty obvious, but some people now are arguing that if we're going to have an infrastructure program, perhaps we'd be better off to start putting some money into some more sophisticated infrastructure in terms of information technology and the development of technologies and so on as infrastructures, then come back and deal with this harder—the typical—structure.

Have you or your colleagues given that some thought, in terms of infrastructure that is a little bit more sophisticated than building a bridge or a road?

Mr. Philip Owen: Yes, I think that's the general trend that's developing and we hung on to the position that infrastructure is infrastructure. We want hard infrastructure. When the government came up and said 80%-20%, we said, well, that makes some sense. So I think we would look favourably upon that. Maybe we have to think differently and measure it out and see that there's better return for the dollar by putting some percentage into the sophisticated area instead of the hard infrastructure.

I think that's a trend that would be acceptable, definitely.

The Chairman: Thank you, Mr. Riis.

Mr. Philip Owen: The world is changing, and we have to keep shifting and changing with it.

The Chairman: Mr. Gallaway,

Mr. Roger Gallaway: I have just one question. I wanted to ask about the recommendation dealing with compensation for land claims and treaty negotiations.

With respect to land claims in particular, I was here in Vancouver in November for a conference involving aboriginal law. I think your problems here are perhaps unique—I'm not positive about that—but what kinds of problems is the city of Vancouver encountering with respect to the Delgamuukw decision?

Mr. Philip Owen: I guess, in one word, devastating.

Mr. Roger Gallaway: Could you elaborate on that?

Mr. Philip Owen: Well, I think people are in shock. It has certainly thrown a monkey wrench into everything, and it keeps coming up as a major issue that's caused huge potential problems. Nobody could believe that decision came down from the Supreme Court, because of the claims and the fact that it was 115% of the province.

Mr. Roger Gallaway: I wonder if you could just tell us what you foresee, then, in terms of cost to your municipality.

Mr. Philip Owen: Well, I think there will be ongoing disputes and litigation. I think it's quite unrealistic; I think it's just horrendous; and I think it's beyond the wildest dreams of what any aboriginal people thought—to even get near to that kind of a decision.

I remember when it came out I read it very quickly, but I guess I'm just influenced by the public press and what people are saying on our treaty advisory committee. Councillor Nancy Chiavario from the city of Vancouver is on that committee; it's thrown them into a real tailspin. So the treaty advisory committee is sort of functioning around that locally because they just can't deal with it.

Mr. Roger Gallaway: Okay, thank you.

The Chairman: Thank you, Mr. Gallaway.

Your Worship, I had the occasion to appear on a national task force on youth a few years ago and visited, in fact, your needle exchange program in Vancouver East. I can tell you I was a bit surprised to find the various challenges that exist in the city of Vancouver, but what I took heart in was the fact that there were so many groups and individuals who really rolled up their sleeves and worked hard to try to bring about positive change to that particular area and the individuals who live there. This is, I guess, also a credit to people's willingness to chip in for a common cause and to essentially come to grips with the fact that communities are really built from the bottom up.

Now, one of the issues that is in reference to your national program on a drug strategy—basically that's what you're referring to—and also connected to what Mr. Riis said, is that particularly when they're imposed from above, I find these initiatives don't always work. They don't always work, because I believe—and it may not be the opinion of everyone here—that sometimes the federal government is too far removed from where things happen at the community level.

• 1950

I was just wondering, if we were to pursue this particular issue, whether we should be pushing for a bottom-up approach—I guess initiatives and objectives and goals that come the actual communities rather than something national. The cookie cutter approach doesn't work. That's all I'm trying to say. You can't have one size for all. I just want to get some comment.

Mr. Philip Owen: You're absolutely right. That's why in mid-July the city put out a a white book. It's now called the bible in the downtown east side and we have six reports in there. It deals with housing. It deals with drug treatment. It deals with Gastown issues, Victory Square and issues in that area. Each report is 40 to 60 pages long, and we were working on those for a long time. We put them together as a package, and it's our job, before we can go to the province or to the federal government, to deliver consensus within the community because there are 50 ideas for every 50 people. There are some common threads on two or three of the ideas so we can start to address this issue.

This is what the national crime prevention program money we are going to get is for. We are going to be able to take forward from the community a community-supported initial step so we can start going step by step in dealing with this. We have to address those serious problems on the downtown east side.

I am going to the big city mayors meeting on November 20 and 21 and I'll be taking those recommendations then. Jim Knight of FCM has said the whole conference will be built around Vancouver's initiatives on drug treatment and crime prevention in the downtown east side of the city of Vancouver.

Yes, definitely, the top-down approach doesn't work. There's nothing worse than politicians finding out they've got this great big idea and then the press is dumping all over it and the communities that are really in the trenches are just dumping all over it. We're taking steps to prevent this.

The national parts of it come in where we have a model, where I can say “The Union of B.C. Municipalities are accepting this, and here are some principles we're going to follow along with.” This is what we did on Friday, with the representatives of two senior levels of government. We're going to move forward with those—the Union of B.C. Municipalities and the Federation of Canadian Municipalities—and it will be something that is palatable and deliverable, how we approach our serious crisis in the downtown east side.

We think it's a model that can be crafted and used across the country. I hope to have this by November 20 and then go forward to the national crime policy and strategy for things like drug treatment. We have drug treatment here. We have drug treatment all over. In Switzerland, they pick you up in Geneva and decide you've committed a crime. The judge says, “Do you want incarceration or treatment? I'm going to put you in treatment.” We can't do that now. You're from St. John's, Newfoundland, so you're going to treatment in St. John's, Newfoundland. Or maybe you're going to Edmonton. Or you're caught in Toronto and you belong in Vancouver; that's where your support service is, and your family is, so you're going to treatment in Vancouver.

This is where the national aspect of it comes in and this is the direction we're going in. It has to come from the grassroots. It definitely has to come from the bottom up.

The Chairman: Your Worship, on behalf of the committee, I'd like to thank you very much. We're mindful of the fact that you have another meeting.

Mr. Philip Owen: It's a pleasure to be here.

The Chairman: On behalf of the committee, I would like to express to you our most sincere gratitude for the input you've given and to also tell you that you may have many challenges as mayor of this city, but you do have a beautiful city and many hard-working men and women who make it work. I think this something to really be proud of.

Mr. Philip Owen: We have literally hundreds of agencies in the downtown east side, and somewhere between $175 million and $200 million a year. If we can get co-operation through senior levels of government right in Vancouver, we'll start to find out where there's duplication and where there are needs. So it's not a whole bunch of new money. It's shifting resources. We're not looking for a whole bunch of money, because there isn't money. We're just talking about paying down the debt and reducing taxes. We think this issue was 20th on the list 20 years ago. It's now moved its way up, I think, to the top of the list and so we have to shift our priorities and shift resources.

The Chairman: Thanks again.

We will now move to the BC TEL taxes department, with Mr. Robert G. Seney. We also have, from the British Columbia Business Council, Mr. T. McEwen, senior policy analyst; and Jock Finlayson, vice-president, policy and analysis. Welcome.

Mr. Robert Seney (Tax Director, BC TEL): Am I up first?

The Chairman: Yes, you're up first.

Mr. Robert Seney: I'm Bob Seney, tax director at BC TEL, and I'd like to welcome the committee to Vancouver. You are to be applauded for sitting through all these presentations all day and all across the country.

• 1955

The Chairman: They're all very good. We like doing it.

Mr. Robert Seney: I can tell you that in my job I monitor development from an economic point of view. I watch what goes on in the newspapers and articles. I'm well connected in the tax community here in Vancouver and across the country. I provide tax advice on business transactions at BC TEL and I'm approached by individuals on tax issues. I can tell you the concern from all these different spectrums is that Canadian tax rates are too high.

Perhaps I'll just start with a bit of an overview of BC TEL. It's a full-service telecommunications company providing wire line and wireless communications throughout B.C. It has 12,000 employees and spends about $500 million annually in capital. As a taxpayer, we're a fairly significant force here in B.C., paying some $500 million in income, sales, capital, property and other taxes. The payroll taxes from our employees are another $250 million and the sales taxes collected from customers are another $250 million. So all told, this is roughly $1 billion in taxes.

The telecommunications industry contributes about $18 billion to the Canadian economy or 3% of the GNP. There are massive changes within the telecommunications industry. Technology is changing, there is competition, there are open markets. And again, the biggest impediment to the prosperity of Canadians is the high tax rates. I think we need tax rates to be at internationally competitive levels, both for business and to ensure stable supply and retention of workers in Canada.

I'd like to comment briefly on the balanced budget and the fiscal dividend. Many countries are experiencing budget surpluses, and in my paper I indicate that while spending restraints played a part, really a large part of this seems to be due to strong economic growth, increased tax revenues and the reduced cost of unemployment.

On a global basis, however, there's concern that these fundamentals aren't really sustainable. There's the Asian crisis making the saga more real, and indeed it appears the surplus may be vanishing before our eyes.

From a Canadian point of view, I'd like to urge you to focus on the longer term and manage this budget over the entire business cycle, since this fiscal dividend may not really be readily available. It appears the government has recently moved away from the announced intention to spend 50% of the surplus and allocate the other 50% to debt reduction and tax cuts. From BC TEL's point of view, the number one priority should be tax cuts. Again, high tax rates just seem to be an impediment to Canadian prosperity.

I'd like to comment on the Technical Committee on Business Taxation, the Mintz committee. Its mandate was to review taxes paid by Canadian business and recommend ways of improving the business tax system. Its objectives were to improve the tax system, to promote job creation and economic growth, simplify the taxation of business income to facilitate compliance, and enhance fairness by ensuring all businesses share the cost.

The committee concluded that there are a number of deficiencies in the business tax structure, particularly our average tax rate being 43% compared to 39% in the U.S. There are also distortions in the tax system, burdens that vary across different types of business activities and, in particular, from BC TEL's point of view, the fact that service industries are taxed more highly than other sectors compared to the U.S. There is a growing reliance on profit-insensitive taxes, which results in economic inefficiencies and unfairness among businesses.

The committee concluded there ought to be one overall principle for business taxation, and that is neutrality together with internationally competitive rates, this being consistent with the aims of job creation and economic growth, simplification and fairness. With neutrality, the total tax paid on income from different businesses is similar so decisions aren't affected by the tax system. Furthermore, tax rates were to be kept as low as possible by being applied to the broadest possible base.

The committee recognized that Canada must take a look at where the jobs are being created and ensure the tax system is not biased against growth in these sectors. It recommended the following measures: lowering the corporate tax rates for businesses towards international norms and correspondingly broadening the tax bases; making certain profit-insensitive taxes fall more heavily on those who drive the related benefits—that principle of user pay—reducing compliance costs and improving enforcement; and measures to facilitate harmonization.

• 2000

BC TEL supports the conclusions of the Mintz committee. Its proposals constitute a balanced package that provides new opportunities for economic growth and job creation. Lowering tax rates will provide a greater incentive for business to invest in Canada and create jobs, while also protecting the revenue base. The broader base with lower tax rates will make the business structure more fair and efficient.

I would like to move on to high tax rates, which is clearly the single biggest issue facing Canadians. The marginal tax rates for individuals are resulting in this so-called “brain drain”. From a business point of view it's a problem, and clearly the Mintz committee provides a revenue-neutral basis for reducing business tax rates to get them in line with international scales.

In the interest of time, I might just move on to employment insurance and say I think reducing employment insurance premiums is perhaps the simplest way of reducing both the personal and corporate tax burdens at the same time. The employment insurance surplus is a significant contributor to the projected budget surplus. Reducing premiums would put cash immediately back into the pockets of individuals, thereby achieving the personal tax reduction objectives while at the same time providing a benefit to businesses.

BC TEL advocates balanced budgets within the federal government programs. Accordingly, we support the proposal that the EI program should be actuarially sound, balancing its budgets over the economic cycle.

Finally, the Mintz committee refers to the fact that employer contributions should be experience rated, based on the user-pay principle.

Those are all my comments.

The Chairman: Thank you very much.

We will now move to the British Columbia Business Council, Mr. Jock Finlayson.

Mr. Jock Finlayson (Vice-President, Policy and Analysis, British Columbia Business Council): Thank you, Mr. Chairman and committee members.

We received our invitation on Friday to come, so we don't have a fully worked-out submission, although your staff will pass around a copy of some of my remarks. I'd like to introduce Tim McEwan, who is a senior policy analyst with our organization and does some of our work on economic issues.

Our association is an industry association representing large employers in B.C., and we do have most of them. Our companies and affiliated associations account for about one-quarter of all jobs in British Columbia. Normally we have an opportunity, which we appreciate, to meet with this committee as part of the pre-budget process.

I'm just going to make a few comments on the economic setting the federal government finds itself in, which I believe is deteriorating by the minute, unfortunately, in the lead-up to next year's budget. I say that having just come from my computer terminal. It has been another horrific day in global financial markets, with probably another half-trillion dollars of accumulated wealth wiped out as a consequence of what's happening in the U.S., Asia and Europe. It's a very destabilizing environment from the point of view of Canada.

I'll say a word or two on the broad policy options we see the federal government facing. I'll make a couple of comments on taxation, although I would associate myself with the comments made by Mr. Seney, on the whole. Finally, I'll make just a brief comment on productivity and the challenge over the medium term for Canada of improving our performance on productivity.

As an economist I have to say that in retrospect it's crystal clear that my profession badly underestimated not only the magnitude of the Asian economic crisis but the persistence of it, because this started about 17 months ago with the devaluation of the Thai currency and the wave of instability that was triggered by that. The spectre of recession, from today's point of view, actually hangs over the global economy, and that is a dramatic change from where we were three months ago, never mind six or twelve.

The IMF and the World Bank have been furiously downgrading their forecasts for global economic growth in 1999. They're currently down in the 1% range. As recently as six months ago they were up to 3% or 3.5%. I would warn you that these international organizations have a chronic tendency to be too optimistic in the forecasts they come up with. So we could be looking at a truly dismal scenario for 1999, temporarily, in terms of world economic growth.

• 2005

For Canada, I think economic growth will come in roughly where finance minister Martin's budget said, at 3% a year for 1998. I would remind you that Mr. Martin was roundly criticized by Bay Street economists for being too pessimistic when he brought his budget down in February. But in retrospect we can be very thankful that he built a prudence cushion into his forecast, because it will allow us to deliver on the fiscal and economic projections that were contained in that budget.

Unfortunately, the outlook for next year has clearly deteriorated, not only compared to last February but even compared to last week. Our economy is losing momentum. We've had negative growth, which is the economists' way of saying declining real output, for four months in a row. Although there are some temporary factors like strikes and labour disruptions that have triggered that, the underlying momentum of the economy has eroded dramatically in Canada.

It has also slowed down in the United States, and as somebody who monitors the economic data pretty closely, it's clear to me that almost all of the global and North American economic indicators are pointing in the direction of a slowdown in Canada's rate of economic growth next year.

Mr. Martin's budget in February forecast 2.5% growth in real GDP for 1999, and again he was roundly condemned by many of my counterparts on Bay Street for that forecast. From today's perspective, I would argue that's probably a bit too optimistic. We'll probably be closer to 2% or maybe less. If so, the implication is clear that the federal government's fiscal manoeuvring room is more limited than many Canadians, and perhaps some members of Parliament, have been led to believe, notably by the economics profession, which has been trumpeting this massive and now disappearing fiscal dividend over the past year.

From a B.C. perspective, my remarks will be even more sobering. In the view of virtually all informed observers, the British Columbia economy is currently in a recession. That is to say, the value of economic output is contracting in British Columbia. At best, we can look forward to zero growth in our economy this year, although I rather suspect it will be worse. The outlook for next year, particularly in light of the deteriorating external environment, is for at best only a slight improvement over where we are this year.

Moreover, our province, contrary to the mindset that exists in Ottawa, has actually been lagging behind the country, and indeed badly lagging behind the other western provinces in Canada, in overall economic growth, business investments, exports, manufacturing shipments and productivity gains, not just this year with the Asian crisis but from the start of 1995.

We are actually stuck at the moment, in British Columbia, in a protracted period of economic stagnation or slow growth. By the time we see our way through it, probably in the year 2000, it will have been five years of essentially standing still in terms of overall economic performance here. I very much regret to say that, but we certainly see that within the business sector in B.C.

There are a number of ingredients in that, including the horrific situation in our forest industry. If the Ontario automobile industry were in as bad a shape as the B.C. forest industry, you would have a province-wide crisis being advertised in the newspapers and on television every single day.

Our forest industry is literally disappearing from the face of the earth. It is destroying capital every day it opens its doors. It's faced with uncompetitive costs here at home, as well as a disastrous external market situation. Those of us in the business sector who are dealing with the forest industry in British Columbia are profoundly concerned about where the future of that industry lies.

We also have the problem of unresolved aboriginal land claims, which Mayor Owen made brief reference to earlier. From an economic point of view, the key issue there is the uncertainty that is created in the operating environment for British Columbia businesses by the fact that we have these native land claims. No one really knows how they will be resolved or what it will all look like when we get through with them. Having said that, I would add we support the effort to reach treaties and land claims agreements with the natives. We don't see any real alternative to trying to make that work.

The third problem here in B.C. is the high burden of household debt. This is a Canada-wide phenomenon, but B.C. leads the country in the ratio of household debt to disposable income. It's over 100%, and that reflects the fact that we've had no or negative growth in real incomes here in the 1990s. We've had as well, of course, high housing costs, which means people have higher debts from taking on mortgages to purchase accommodation.

• 2010

Without strong employment and income growth, which is not in prospect in B.C. in the next two years, our consumers are simply not in a financial position to take on additional debt in order to purchase goods or other consumer durables. This is one of the key negatives in the economic environment of B.C. Our housing starts, for example, have literally plummeted almost off the face of the earth.

Finally, of course, there is the Asian crisis and the linked disastrous decline in worldwide commodity prices, which is having a very big effect in B.C. We do one-third of our trade with Asia, compared with 8% for Canada, so we're being hit by that. In addition, three-quarters of our international exports come out of the resource-based industries. So not only are we selling less to Asia, the prices of everything else we're selling are going down because of this deflation in global commodity markets.

There is no solution to this in Ottawa. We are often asked by visiting MPs what the federal government can do about this. Not a whole lot, I think, but the federal government does need to be sensitive to the very severe economic problems this province is having and to the deterioration in our underlying competitive performance.

In terms of the budget, I would make three points. First, the priority in our view is to ensure that the budget remains in balance, at least. I'm not suggesting that the fiscal dividend has entirely disappeared, but it is eroding, as I said at the beginning, literally on a daily basis. So at a minimum, the hard-won gains to actually achieve a balanced budget have to be safeguarded, notwithstanding the deteriorating economic outlook.

Second, we believe very strongly in a gradual but disciplined approach to reducing the ratio of debt to GDP. The dollar value of the debt is less important than its size in relation to the Canadian economy and that is now going down, which is fortunate but it needs to continue going down, and that will be challenging as GDP growth perhaps falls a bit. Mr. Martin laid out some medium-term targets in his budget that would see the debt ratio fall to 63% by the end of the decade. We believe it's important to go beyond that after the year 2000 and get that debt ratio down to, say, 30% or 35% by the time the baby boom generation starts to retire in large numbers in the year 2010 or 2012, depending on who you believe.

Third, we believe the federal government needs to take a disciplined approach to managing its overall spending. Given the enormous pressures that are building in every province and from every interest group, including the business community, for more spending, I think a very disciplined approach is warranted there. Perhaps there could be a rule that says total spending will increase but by less than the combination of inflation and population growth. Set that as a kind of metric that you could use to manage overall spending in order to fend off these enormous pressures that are percolating out and that I gather you heard a lot about earlier today, judging from the list of interveners who appeared before the committee earlier.

On taxation, again a long-run view is necessary. Lower taxes are absolutely imperative, in the view of my organization, but they cannot be implemented if they will undermine the federal government's effort to have a sustainable fiscal policy. They cannot be lowered if they are going to push us back into deficit, and they should not be lowered if doing so results in a failure to reduce that federal debt-to-GDP ratio. That is absolutely imperative. We need not just tax cuts but fiscally sustainable tax cuts going forward.

Here I would mention three areas. The first is personal tax rates. Again, this is from a medium-term point of view and not necessarily next year's budget. There may be very little room to cut taxes, frankly, in 1999 but hopefully there will be some. The big problem in Canada is that we loaded up too much of the tax burden on PIT rates. As a consequence, we have the highest ratio of PIT taxes collected to GDP of any of the G-7 countries and it is fuelling the brain drain that the previous speaker referred to.

I have some suggestions in my remarks about priorities for getting that personal tax burden down, but it's going to take a lot longer than I think a lot of people think, partly because the federal government itself is so dependent on personal income taxes supplying close to 50% of tax revenue. So it stands to reason that if you cut tax rates you will get some of it back through the supply side effects, but that is going to take some time. In the meantime, in the short term, you will look at a significant revenue loss.

Employment insurance premiums too is an area with a lot of misunderstanding. All of the so-called surplus that's been accumulated in the employment insurance account is not sitting in a bank; it's been spent. Arguably the employment insurance fund should actually be detached from the federal government's general budget and maintained separately as a kind of social security program, which is what happens in some of the European countries. In the meantime, we do support a modest cut in EI premiums next year, with further reductions to follow, assuming fiscal circumstances will allow it.

• 2015

You can see again that I'm much more pessimistic on the fiscal picture than a lot of my colleagues are within the economics and business community. On the other hand, I worked in Ottawa for 15 years, so I know a little more about it.

Finally, on business taxes, I would echo Mr. Seney's plea that the federal government take a serious look at the technical committee on business taxation report. A tremendous amount of analytical work went into that report. On balance, we think it's a good effort. It points in a positive direction for developing a fair and more sustainable business tax system in Canada. There are some difficulties that are posed within that report in terms of the inter-sectoral shifts in tax burden that would be triggered by following the recommendations, but we still think the government, perhaps through this House finance committee, should start the process of reviewing.

The only flaw in the technical committee report is it was an academic exercise. I know some of the academics on it, who are fine academics, but there was little consultation with business and other interested parties. So it's now necessary, I think, to vet and review the technical committee's recommendations and analysis with a wider constituency to sort of get the reality check from out there in the economy. But as overall policy direction we do strongly support it.

Finally, a comment on productivity—not a very sexy topic, I guess. We sit in Ottawa and wonder about our economy, which is not doing badly, but we've got all these terrible problems. Governments don't have money. We have a lot of unemployed people. We seem to be losing ground certainly to the United States in terms of competitiveness. Underlying all of this is a very mediocre record of productivity growth. Productivity growth is really the only sustainable source of rising real incomes in the long run. It's the only way to increase real incomes for workers but also provide government with the resources it needs to deliver the services and programs that Canadians want.

Canada's productivity performance did pick up a bit in the last two years, but overall it has been very disappointing in the decade that's just ended. Why our productivity performance has not been very impressive is not fully understood, either by economists or anyone else. People have looked at taxes issues, the quality of business investment as opposed to the quantity, the availability of skilled labour, the impact of government regulation, and technology diffusion. Those are some of the issues that have been looked at.

Clearly, we need a concerted effort at the national level to look at this issue of productivity and how we can increase the sort of secular trend of productivity growth in the Canadian economy. Frankly, if we don't do that, solving a lot of the challenges and problems that you folks hear about on a daily basis as elected representatives is going to be extraordinarily difficult, and we're not going to really be able to make progress in addressing many of the economic challenges the country faces.

Productivity is actually front and centre. Even though it's a kind of nebulous concept, it's front and centre to dealing with the economic challenges that Canada confronts.

Thank you.

The Chairman: Thank you, Mr. Finlayson.

Could I ask a question out of interest here? When you were looking over the productivity gap and what have you, we still look to the manufacturing sector. The productivity gap with United States now is estimated at 25% to 30% in the manufacturing sector and somewhat less than this but still significant on an economy-wide level. How are we doing in what we would refer to now as sort of the new economy technological innovation-based sector? How are we doing in productivity?

Mr. Jock Finlayson: Inter-jurisdictional productivity data by industry is better in some industries than it is in others. One of the reasons why people look at manufacturing is the whole statistical measurement system, not just in Canada but in all OECD countries, is very much geared to the production of tangible goods. If you look at Stats Canada's publications, they've got them monthly on pig-iron, on railway ties, everything, but they don't have them on software.

The Chairman: Why not?

Mr. Jock Finlayson: Well, because the system of national accounts that has developed has great difficulty—and these things are being looked at and revised—as it now stands in capturing precisely a lot of this economic activity that is occurring. So in many ways the numbers may present a somewhat distorted picture of what's really going on. I happen to believe that. But then that's also true for other countries. It's not a unique Canadian problem.

My sense, from just knowing a bit about this but maybe not enough to be too confident, is that our productivity performance vis-à-vis the U.S... And here I'm talking about the level of productivity, not the growth; the level of productivity is measured by aggregate GDP per employee or per hour of work, as opposed to the growth rate, which is how fast that changes each year. But the aggregate level of productivity in a lot of our knowledge-based industries is probably much closer to the U.S. numbers than we would see for the manufacturing sector as a whole. And the manufacturing sector as a whole is worse in terms of the U.S. comparison than the whole Canadian economy, actually.

• 2020

I don't fully understand why that's the case. I would have expected to see that productivity gap close with the onset of some structural changes in Canada, freer trade and things of that nature. Although it has done so on some individual plant and industry levels, it doesn't appear to have done so.

Of course the other factor is the Americans are moving ahead all the time. They have an extraordinary, vibrant, and aggressive business sector. They also have had the strongest economic growth among the G-7 countries over the past decade, and that tends to push up productivity, because you're doing a heck of a lot of investment during that up phase of the economic cycle.

The Chairman: What I find interesting when you talk to economists and people who are studying these particular issues is that while everybody talks about the paradigm shift and all these sorts of things, we still use methods that are very much... If we were to believe this paradigm shift and this new economy, then we're using methods that may in fact be outdated or do not project into the future, which means that essentially we may be either doing worse or better than expected.

Mr. Jock Finlayson: I don't want to criticize Statistics Canada unduly. In fact Statistics Canada has been ranked by The Economist magazine as one of the top three national statistical agencies several years running. So they are a very good national statistical body. But they do have the problem, as all of these national statistical agencies do, that the pace of change in economic activity—driven particularly by technology but also by growth of global trade and investment—has vastly outpaced their measuring systems and tools.

So there probably is a growing gap there, which from a policy-maker's point of view is a bit troublesome. It's one of the reasons why people in my profession are so lousy at forecasting, in my view, what actually is going to happen in the economy. You don't want to make a living as an economic forecaster, because you can't deliver enough value to warrant a client paying you for it. In my organization we don't pay for any forecast, because I'll get them off the Internet for free. It has become incredibly difficult to forecast.

The Chairman: I think one of the challenges we face as a committee is that data collection and information is a real challenge. I won't say it's a challenge; it's a problem in all sorts of issues, whether we're dealing with the financial services sector or we're dealing with health care or we're dealing with the manufacturing sector and productivity. Anyway, it's not your problem; it's ours.

Mr. Jock Finlayson: It's a problem for all of us.

Mr. Dick Harris: Gentlemen, thank you for your presentation. I have to say that there is nothing in your presentation on which I don't share your opinion and your recommendations.

Having said that, I wonder if I can take a little liberty here and talk about the state of the B.C. economy. We have some guests here who are very much in tune with what's happening in B.C. I know that given the disastrous state of our economy, you probably have had a good long look at some possible solutions so that we can up our ranking from number ten, behind Newfoundland, to somewhere maybe up in the middle, far less than what we deserve. Could you just briefly outline some of the thoughts you have on the recession we're in and some solutions that perhaps our provincial government might take to heart?

Mr. Jock Finlayson: The provincial government? Well, from a short-term point of view, to be candid, I don't see a large inventory of options available that are going to make much difference in the immediate future, simply because there are lags.

Our home-grown problems in B.C.—if I can use that term, as opposed to what's happening in Asia and commodity markets, all the things we don't control—have developed over a period of time, including our tax structure, the way we do regulation in the province, perhaps an over-dependence on the resource industries, which historically have been a rich source of economic rents for British Columbians, including the people who work in the industry and the shareholders of the companies. Unfortunately, the world is an unforgiving place for commodity producers these days, and I don't really think that's going to change in the future.

• 2025

If you look at a graph of the inflation-adjusted prices of primary commodities at a global level—forget about the business cycle and the temporary ups and downs—that graph shows you one thing: they've been heading down for 30 years, with a lot of downward momentum.

The price of a barrel of oil today, in inflation-adjusted dollars, is lower than it was before the OPEC cartel and the embargo associated with the Middle East war in 1973. People wonder why oil consumption is not going down or why greenhouse gas is being produced by automobiles in the United States, in particular, where taxes are lower. Well, it's because the underlying price of the commodities keeps going down, down, down.

I have membership of a lot of companies that are in the resource sector, so I'm not saying they're not going to be able to survive, but some of them aren't going to survive, because that is not where you want to be as an economy for the future, if you want to have a high standard of living.

We can have a competitive resource sector in British Columbia, but it's going to be smaller. So we need an economic diversification strategy. We've got to be very aggressive in building new industries, high-value industries that aren't tied to the resource base. We've got to improve the competitive position of our resource industries—and there are a lot of things our provincial government should be doing in that respect. And we've got to fix our tax structure, as my colleague here mentioned, and look at the impact of government regulation.

Our B.C. government is working on a few of those things in a preliminary way. We think they should be doing more. But frankly, there isn't a whole lot they can do in the next six to twelve months that's going to lift British Columbia out of the economic doldrums we're in now. They can start the ball rolling, but it's going to take longer.

Mr. Dick Harris: Okay. Well, let's throw a little federal flavour in here as well, and talk about the softwood lumber agreement.

We see more and more of the industry people—I think we're up to all of them now—who were so supportive of the softwood lumber agreement and the quota system starting to say that this deal simply doesn't work any more. And indeed, it isn't working any more, given the price of forest products. Being from Prince George, I'm pretty close to what the industry is doing and the problems it's facing.

Where do we need to go on the softwood lumber agreement with the States? When the time to renegotiate comes up, should we be playing hardball at this stage, given the experience we've just had? Where do you see the future of our relationship with the U.S. with regard to softwood lumber?

Mr. Jock Finlayson: I'm not an expert on that agreement, but historically the industry in the province was divided on that agreement. Basically, some producers have quota to ship into the U.S., but a lot of the ones who were doing even worse than the ones in your area don't have quota to ship into the U.S. Suddenly their Asian markets are gone, and they can't turn around and try to ship into the U.S., which at least is still a growing market that is not in recession.

Mr. Dick Harris: But a lot of the big names in the forest industry in the province were part of that softwood lumber agreement.

Mr. Jock Finlayson: Oh yes.

Mr. Dick Harris: I remember when Mr. Eggleton was the Minister of International Trade, he took a lot of comfort in saying that the industry helped put this together and—

Mr. Jock Finlayson: Yes, it was a priority for COFI, the association that represents the forest industry.

Yes, we have to play hardball with the Americans. The ideal thing we want, of course, is no softwood lumber agreement, and free trade, which is what we're supposed to have with the United States, actually apply. But because of the history of that issue and some very effective lobbying by some very concentrated interests in the United States in the forest industry, we've been targeted. And it's not new; it's been going on for a decade, in one form or another.

Our first and best choice is to get rid of that softwood lumber agreement and have trade rules that are no different from selling widgets in the United States, or any other product. If we can't get that, we obviously would like to see a bigger quota. That's going to be awfully tough to achieve, knowing how the Americans negotiate, but certainly we should try in Canada.

I think the choice we face is whether we let that agreement go and take our chances before the U.S. trade remedies system. I don't know enough about that system to know if that's a good bet, but the industry is certainly looking at that, and that may be the position they come out with: that this isn't working for us, and we'll take our chances with the U.S. countervail and the procedures that are in place to produce a countervail ruling, rather than go around that and negotiate a political deal. So that's a call the industry may have to make. I don't know if they've done that yet.

• 2030

Mr. Dick Harris: Okay. Thank you.

The Chairman: Thank you, Mr. Harris.

Mr. Riis.

Mr. Nelson Riis: Thank you very much.

Yours is a fascinating presentation. It's not terribly encouraging, but it's probably very realistic. You're quite critical of some of your colleagues and their reactions to predictions in the past and so on.

You say in your written presentation that a spate of recent global and North American economic indicators suggest the real GDP growth in Canada could well fall short of the 2.5% that is forecasted. I realize we're into a very imprecise art form in terms of looking ahead, but through your computer you've gotten some idea of what's going on today and you've obviously been watching these processes closely in the last little while, so I wondered if you would help us out by giving us your view of the next few months, particularly between here and budget time.

Mr. Jock Finlayson: Thank you for the question.

Between here and budget time, we're looking at a situation where economists would say that all the risks are on the downside. Let's take that 2.5% number for 1999 that Finance Minister Martin included in last year's budget. I can't see anything happening today, nor would I anticipate anything happening in the next three to six months, that would lead me to believe growth is going to be better than we would otherwise expect. All the risk is on the downside. It's only a question of how big you think that risk is. I happen to feel it's quite significant.

As I mentioned, some of my colleagues, notably in the Bay Street financial community, have systematically downplayed the importance of what's going on globally. I don't want to be critical of them necessarily, but I really think there has been a kind of myopia in the financial community throughout North America, and certainly in Toronto as well.

Asia accounts for one-third of the global economy. All of Asia, with a partial exception of China, is either experiencing zero growth or shrinking economies. Some of those economies will shrink by up to 15% in 1998, which means that the value of GDP in, say, Indonesia or Korea will be 12% to 15% less this year on average than it was last year. Japan is shrinking at an annual rate of close to 5% to 6%. That's the second largest economy in the world, with a GDP of three or four times that of Canada, and it has a huge influence in the Asian world. Japan is spiralling down right now. I don't know what's going to happen there, but it doesn't look very attractive at the moment. China has been growing quite strongly, and it has been kind of a positive sign out there in Asia—if you think we have data problems in Canada, you should look at the Chinese economy—but the Chinese growth rate is clearly slowing down, although it's still positive.

But my primary point is that Asia has been the main engine of worldwide economic growth for the past decade. If you take all those things together and run them through any kind of simple model of a global economy, you'll come out with a prediction that says that world economic growth is going to be pretty poor as a result of what's happening in Asia.

The thing that worries me, as an analyst, about Asia is that I don't have a clear sense of where the bottom is. In most cycles, either from looking at historical data or from just a reading of current data, you have some notion of where things are going to bottom out. But when stock markets in countries such as Indonesia and Thailand are 80% lower than they were 15 or 16 months ago and they seem to still have some downside, you really begin to wonder how you forecast the bottom of something. Because of interdependence and the development of very close global economic linkages, these tumultuous events are being instantaneously transmitted beyond the countries in which they're occurring into the world financial markets and into the markets of trading partners.

Now, let's be balanced about this. Except for Japan, which is the one that really worries most economists, most of these other Asian countries aren't a big piece of the world economy, even though some of them are quite heavily populated, such as Indonesia with, I think, 200 million people. California is 20 times more important than Indonesia in terms of world GDP. But the number of economies that are affected by this disturbance and the impact that's having on world commodity markets, the deflationary pressures, which are extremely destabilizing in any economy when you actually get overall deflation occurring... We don't have that in Canada. We have what I would call zero inflation, but we don't have economy-wide deflation. If we do, we're in deep trouble.

• 2035

These things are occurring now. They seem to be accelerating. I don't have a whole lot of confidence that the meetings that are occurring in Washington this week are going to produce a fix to that. I think they'll help. Russia has no operating government.

Mr. Nelson Riis: What about Latin America, particularly Brazil and Mexico?

Mr. Jock Finlayson: Brazil and Mexico are the next countries in the gunsights of the speculators. I think you'll see the U.S., notwithstanding the problems their administration is having, and the U.S. Federal Reserve and the U.S. banking system step in to ensure that an Asian-style meltdown does not occur in Latin America, because the Americans have a tremendous economic interest in Latin America. Their banks were not heavily exposed to Asia as lenders, but they are very heavily exposed to Brazil. Brazil is the key. It's 45% of Latin American GDP. That will be the one to watch.

The excesses that are occurring in these financial markets are extraordinary. What makes one country have a stock market worth $100 billion U.S. capitalization one day and $47 billion U.S. three weeks later? It's insanity on a level...there's no rational economic explanation. I remember when I learned economics in graduate school, it all worked together in interlocking equations that were beautifully rational and there was that sort of seamless logic that underpinned everything. We're seeing here that's not how things work.

From a Canadian point of view and a federal budget point of view, I think you have to have an even bigger prudence factor built into your economic forecast, your fiscal forecast. There is some real merit in staying the course through a time of turbulence like this. We certainly support tax cuts and all that stuff, but I think you have to lay it out as a medium-term strategy and try to do some things to enhance the credibility of what you're promising. We're not going to be able to deliver on some of these benefits, some of this fiscal dividend that has been much touted in Canada over the past 12 to 18 months. I really think that has to be revised and the expectations have to be deflated very quickly.

Mr. Nelson Riis: I noticed in your report you included a reference to the land claims issue and comments about the instability that's creating. I noticed with some surprise, when the mayor spoke, almost an element of panic in his voice around the Delgamuukw decision that my friend Roger asked about.

This may sound like an odd question, but I do mean it sincerely. With the uncertainty surrounding the land claims issue particularly, anyone thinking of investing in British Columbia, other than in some obvious areas where I guess you would be insulated from this, why would anybody invest any money in B.C. until this Delgamuukw land claim issue at least has a process of resolutions in place? Right now there's nothing. When you hear the mayor's voice, it almost starts to quaver when he starts talking about Delgamuukw. That must be a very terrible signal to be sending out.

Mr. Jock Finlayson: I'm a little surprised about his comment from a Vancouver point of view. I don't necessarily see it as having too much effect.

In those parts of our province that depend on access to the crown land base for economic activity, which would certainly include your part of B.C.—the part that includes most of B.C., outside of the lower mainland and the southern tip of Vancouver Island, and the Okanagan to some extent—this is a chronic systemic problem.

It didn't start with the Delgamuukw decision. We don't have treaties in British Columbia, for the benefit of your colleagues who aren't from here. You, I know, realize this. We don't have treaties negotiated with first nations. Consequently we have a greater degree of legal uncertainty as to who has what kinds of rights, ownership, and jurisdiction over non-private land, and in B.C. 94% of our land is crown land. The provincial government is the landlord that owns that land and has the jurisdiction over it, we hope.

The natives for a number of years have said they never signed away their treaty rights; they don't have treaties. And they have said they are going to pursue this process of obtaining some land. Again, we support the effort of our government here in British Columbia and the federal government to reach treaties with first nations. The Delgamuukw decision has made that more urgent, I think, but also perhaps more possible to do it quickly because it has changed some of the parameters.

• 2040

Mr. Nelson Riis: Also, you may be aware that the Auditor General, who just filed his report last week, had a major section on this. He reminded us, to our chagrin, that once you get a treaty signed, that's just the beginning of the resolution. Out of that will flow hundreds of other agreements, of course, that will depend on that umbrella signature. So even the completion of a land claim is just the beginning of the resolution.

Anyway, I would leave that—

Mr. Jock Finlayson: Which is why we should be moving quickly on it, because we need a batch of treaties to be reached quickly that can be implemented, and people will see that it doesn't create disaster. This is what we hope will occur, and once that is seen, hopefully some of this uncertainty that does now cast a cloud over the resource economy in B.C. can be partially lifted. I think that's a key problem. Even if the markets turn around for commodities, will we get the investment in the resource sector? It's increasingly unlikely.

Mr. Nelson Riis: Mr. Seney, I have one quick question for you. I take it you wrote your report.

Mr. Robert Seney: Yes, that's correct.

Mr. Nelson Riis: On page 4 you say: “The differences between Canadian and U.S. personal tax rates is a major factor in the”—and you use the word “so-called” and then in quotation marks you put “brain drain”. Why do you qualify that? Why do you call it “so-called”? You're not sure it's a brain drain? And why do you put the words “brain drain” in quotation marks? Nothing else is in quotation marks in the entire paper except that one word.

Mr. Robert Seney: Well, it's just because people refer to it as the brain drain. It refers to the exodus of highly qualified professionals out of the country, and I suppose brain drain just on its own could refer to some sort of medical condition. It's just to sort of characterize it in the tax sense.

Mr. Nelson Riis: And what about “so-called”? That's not the right word? Again, do you think people—

Mr. Robert Seney: I think more straightforwardly you would call it an exodus of highly qualified people out of the country for tax reasons. You could probably describe it in a much better manner by a paragraph or so. That's all that means.

Mr. Nelson Riis: Okay, thank you.

The Chairman: Mr. Finlayson, perhaps I can go back to you. This may sound like an odd question, but it's not. Our economy is very much tied to that of the United States. Do you agree with that?

Mr. Jock Finlayson: Absolutely.

The Chairman: Because of these problems in the east, capital must be leaving the east and going to a safe haven, which is United States, is that correct?

Mr. Jock Finlayson: In large volumes.

The Chairman: Now, does that strengthen or weaken the U.S. economy?

Mr. Jock Finlayson: It strengthens the U.S. dollar. It will strengthen the U.S. economy if the capital is invested in productive assets, physical plant equipment, new technology, business start-ups. If it's parked in short-term treasury bills and other instruments, it still benefits the U.S. economy because it frees up domestic capital to be directed into other kinds of investments.

The Chairman: You know what I'm getting at, right?

Mr. Jock Finlayson: Not actually. Maybe it's late in the day.

The Chairman: No, no. You were excellent at stating how bad the situation was and how all these global forces are working against, I guess, even Inuit in Canada. There are many people who would agree with you. But I'm just saying there is this flow of capital from the east going to United States, and you agree with me that this might in fact strengthen the economy by freeing up domestic funds that may in fact generate the type of access to small business that may not be available today. If you put it to productive ends, and if our economy is tied to the economy of the United States, then the fact that there's been this flow of capital away from the east and that we're tied to them really helps us absorb the shock quite a bit.

Mr. Jock Finlayson: We have to put things in perspective. Canada is doing relatively well in the context of what's occurring around us. If our economic growth next year is 2% instead of the 2.5% that Mr. Martin put in his budget, or the 3.5% that a lot of my counterparts on Bay Street felt would be the likely number even six months ago, even 2% is not too bad.

Someone asked me in a media program recently if we in B.C. are in economic crisis. I said “No, economic crisis is when you're in Indonesia and your economy has contracted by 20%, and your unemployment rate is tripling, and your government has no money, and the IMF comes in and tells you what you're going to do.” We're looking at a slower rate of economic growth in Canada than we anticipated a year ago or even six months ago, but I don't believe we're looking at an actual recession in Canada, although there are a few bearish economists who feel that could occur.

• 2045

But don't forget the United States. It's true that their economy is a safe haven and that they are benefiting from the flow of liquidity into the U.S. short-term capital. But the U.S. also sells in the world market. They export a fair amount in dollar terms to Asia. Look at the stock prices of big U.S. capital producers or companies like Boeing International, just two and a half hours south of here. They've taken some major hits. They're doing layoffs. The U.S. is more insulated than we are from the external world because they're more self-sufficient, but they are still feeling the effects. In addition, they've had a growing economy for seven or eight years, so their own economic cycle was probably going to run out of gas a bit even without Asia. I mean, the unemployment rate is 4.5%. It really can't go any lower than that, and it has now started to inch up.

But I would agree that one of the things we can count on for the coming budget year is some modest level of economic growth south of the border, albeit slower than it has been, which will certainly help to keep our heads above water and will be particularly beneficial to provinces like Ontario, which are very heavily exposed to the U.S. as a trading partner. We're less so. We are actually the least dependent on U.S. markets, even though we do sell 50% of our exports there. But for Ontario, of course, it's 90%.

The Chairman: Eighty-five percent of our exports out of the country are to the United States, right?

Mr. Jock Finlayson: It's about 55% for our province.

The Chairman: What I'm saying is that I agree with you that we need to be prudent. I think really with that inflow of capital to the United States and the fact that we are so close to them and the fact that we export to them, I think they'll be able, as you correctly say... They have 300 million people and a pretty self-sufficient economy, although there's no question that they export like everybody else and what have you. But if there's one economy you want to be tied to during this type of crisis, it would be that of the United States.

Mr. Jock Finlayson: Let's recognize, though, that for the health of the global economy, you'd like to see some of that capital that has flowed into the U.S. and is parked in treasury bills and bankers' acceptances and who knows what else returned to other countries so that their financial systems can be re-liquified. The credit crunch in these Asian economies is a very severe structural problem.

Now, fortunately, what has been done can be undone. Those flows of capital could actually reverse and go back with surprising quickness if the confidence is there and the structural measures are in place to make it happen.

But the U.S. is a safe haven, and Canada can be very thankful that the U.S. economy is in very good shape by our relative standards and those of other countries, and that will give us a measure of confidence in going forward. But I still would argue that we need to trim down our outlook for growth.

The Chairman: No question.

Mr. Jock Finlayson: But only for the next 12 to 18 months. The medium-term picture may or may not be what you're interested in, but I think the medium-term outlook for Canada and for the world economy is considerably better than the short-term outlook. We're going through a very turbulent period now, and we will come out at the other end at some point and then we can have a more—if I can use the term—normal discussion about what you're going to do in a federal budget or anything else.

But we're in a very peculiar period right now. The NASDAQ high-technology market in the U.S. fell 6% today. That is big stuff. Those kinds of movements in market indices are indicative of an incredible underlying instability in consumer attitudes, business confidence—

The Chairman: How much did it rise in the past two or three years?

Mr. Jock Finlayson: It would have more than doubled, and an orderly decline was probably welcome, but these kinds of... And the U.S. was of course more stable than some others. Brazil's stock market has been bouncing around 15% a day, and that's almost unprecedented.

I'm not a gloom and doom person, but I'm just saying that I feel, as an economist, that we're at a somewhat fragile and perhaps unprecedented time, because this is a global economic contagion that's occurring and we need to address it. I think the normal process of budget-making and policy-making has to recognize that we are in a peculiar period that will pass. You're not going to develop the budget that Mr. Martin brought down last February with the same mindset as he did then, because the situation really is different today.

• 2050

The Chairman: We can't dismiss the fact, though, that when you look at the stock markets and that, you see there has been exponential growth.

Mr. Jock Finlayson: Yes.

The Chairman: I'm not an economist, but in life, anything you're excessive at eventually is going to catch up with you, including profits, including all those sorts of things. That's exactly what's happening also; a bit of it is adjustment, a bit of it is obviously what's happening globally. But I don't think you could sustain the type of growth that we've seen over the past few years, because it was astronomical.

Mr. Jock Finlayson: In the U.S. stock market.

The Chairman: Yes, the U.S. stock market.

Mr. Jock Finlayson: Clearly, until recently they were overvalued by all conventional measures.

The Chairman: Yes.

Mr. Jock Finlayson: There are speculative excesses there that are being cleared up. The speed with which they get cleared up is awe-inspiring to somebody who is a student of the markets, but it still could be seen as a healthy process. The U.S. is not going to crater. The U.S. economy will remain in a positive growth territory.

The other good news is actually western Europe through the creation of the single currency area, which unfortunately is preoccupying the Europeans to be inward looking and means that they're unlikely to cut interest rates, which is what the world economy needs right now. But going forward a little bit, the European economies actually are likely to enjoy reasonably good growth perhaps by the year 2000, maybe even decent growth next year, assuming we don't have a wholesale global financial collapse.

So Europe and the U.S., the two biggest markets in the world, are growing. They're in positive territory. So that will help us. That allows us to say with some confidence that we will enjoy a reasonable level of economic growth next year, maybe something in the 1.5% to 2.5% range, if you want to set it out. But it's not going to be 3% or 3.5%, which is what many people thought even six months ago, and I would still argue that the risks are on the down side for short-term forecasting.

The Chairman: I want to ask you a question about the capital inflows into the United States because of the crisis in Asia. You said not to forget that this could change very quickly. I would think it would change very quickly provided that the investors felt that capital outflows from the United States were going to markets that would generate economic growth. That's pretty logical, eh?

Mr. Jock Finlayson: Yes.

The Chairman: If that happened, that would mean you'd have expansionary activity in those countries, which would in essence also increase exports from the United States and countries like Canada and Europe, from all those countries, as they regenerate growth.

So I'm not saying that the crisis is not there. It is there. But these types of inflows and outflows may in fact be timely in the sense that they're going out into a place that is safe for the time being, while the economy may readjust itself and then go out when the economy is ready to absorb those types of capital flows.

Mr. Jock Finlayson: I quite agree with that.

Here we're talking about short-term capital flows, not about direct foreign investment, which is sort of the long term. Nothing would be healthier for the world economy over the next two years than a repatriation of some of that short-term capital, which in voluminous amounts has fled the emerging markets, mostly to the U.S., some to Europe. That capital will go back not just because investors look at the growth prospects, but also because they may perceive that markets have been oversold. This is outside of my area of expertise, but many financial analysts would probably argue that the declines in asset values, stock market values, real estate values, currencies in a number of the emerging markets have been excessive—there's been a sort of overshooting on the down side—and so there will be attractive financial return opportunities to flow back in.

So if you're a contrarian or you're someone who believes things will improve in Asia over the next year or two, clearly it would make sense for those investors to put their capital back into a country like South Korea, for example, which has suffered some huge hits over the last year and a half. But I have been to South Korea, and I would say probably its productive potential as a society and an economy has not declined anywhere nearly as much as a look at its stock market and currency would lead you to believe.

• 2055

So it would be rational to go back in and you will see a lot of this occur. This will re-liquify the Asian economies and alleviate the credit crunch, and allow them to start growing again. That's hopefully the scenario we will see unfold.

The Chairman: And by then the domestic capital that was freed up will have been activated in the American economy.

Mr. Jock Finlayson: Yes, but because the American economy has grown for so many years so strongly, and because there has been a huge amount of business investment, arguably the rational thing to happen from a macroeconomic view is for investment growth to slow down in the United States.

You're not going to get 10% or 15% a year growth on business investment indefinitely. This really doesn't make sense. There is almost too much finance in the U.S. today. It is not there because the U.S. needs it. Their government is not even running a deficit any more, so they are not even issuing any more government debt.

The Chairman: May I ask you a question? Where does this place Canada if in fact, as you are stating now, they will reach a point of saturation? You simply can't invest any more.

Mr. Jock Finlayson: Well, you get lower and lower returns.

The Chairman: Exactly, lower and lower returns. So you'll look elsewhere. Do you think the Americans will look to Canada?

Mr. Jock Finlayson: I think Canada is actually oversold, although to nowhere near the extent of the Asian markets. It's been oversold on the markets. Our currency has fallen by more than what most people would have anticipated, given what has been a deteriorating external picture. It's gone down too far. I think our stock markets are oversold, certainly in terms of the resource stocks.

So these things could change very quickly if international capital decided that world commodity markets have stabilized, which hasn't happened yet, if the outlook for Asia starts to improve, if Japan gets its problems stabilized, and if investors globally see those things occurring. There could be quite a strong rush into Canadian financial instruments and securities, which would be welcomed by many of the companies that I represent, given what has happened to their stock prices over the past couple of years. It would also be good for the broader Canadian economy.

I think it almost can turn on a dime. As I said earlier, the speed with which market sentiment and financial flows appear to shift today, compared to history, is really quite extraordinary.

The Chairman: I already feel better than when you started.

Mr. McKay.

Mr. John McKay: I think the beauty of coming to British Columbia is that everything is in stark relief, including the witnesses. It must have something to do with the mountains or whatever. I'm not quite sure what it is.

I want to go back and ask you some questions that came up with previous witnesses, with ultimately the view of trying to figure out what Minister Martin's manoeuvring room is.

We were urged to let the loonie just float, to in effect have a hands-off attitude by the Bank of Canada. Don't bother ratcheting up interest rates to protect the currency and don't do anything. We are urged to be proactive to reduce interest rates. We are urged to let inflation simply take off, get it going, create activity. We are urged to, in effect, monetize debt, and I'm not quite sure I follow it all, but shift debt from the market into the Bank of Canada.

I'm curious as to what your reaction is to those specific policy directions from a previous witness, given what you understand to be our current economic state, our short-term projection and the status of the Canadian government and the Canadian economy.

Mr. Jock Finlayson: Well, it sounds like you had some interesting witnesses earlier.

Let me deal first with monetizing the debt. Such a policy, if enunciated, or if the markets are aware of it, is automatically doomed for failure.

• 2100

If I were going to buy a bond issued by you and I thought that your strategy for relieving the real economic burden of that bond was to ratchet up your inflation rate, which is what monetizing the debt means, clearly when I bought it I would demand a substantially higher return, that is to say, a much higher interest rate. So any notion that any country, never mind Canada, was going to pursue a policy of monetizing its debt would, in today's fast-moving world, instantly trigger dramatic increases in the interest rates that issuers of debt would have to pay, and ergo it would be almost, not ultimately, but immediately, self-defeating. I don't want to be critical of a presentation I didn't hear, and I'd be very interested to look at their submission. But that's my take on monetizing the debt.

With respect to monetary policy and what we should do with the dollar, the exchange rate, and all of that, we should let the dollar go to a very significant extent. We have done that in Canada. When I was working in Ottawa in November 1991, the Canadian dollar was worth 89¢ U.S. Today it's worth 65¢. This is with our major trading partner. So during that seven-year period we've already had a very substantial decline in the value of our currency in U.S. dollar terms.

Canada has a floating exchange rate policy that says that by and large our currency will be determined by the supply and demand of currency in the marketplace. In Canada the monetary policy, that is to say the interest rate policy, is run, we're told, by the Bank of Canada to pursue inflation objectives. But you actually can't do both. If you're going to target the exchange rate as the variable you want to influence, then that's what you have to do, and the inflation cannot be the target. If you want to target inflation, then by definition you can't have a monetary policy that targets the exchange rate.

Now, in fact they do a bit of both, and many central banks do that. They face the challenge of enormous flows of short-term money swashing around, which means their ability through their own reserves, for example, to influence prices in the currency market is somewhat limited. No central bank can be expected to sit back and comfortably watch its currency fall day after day after day, well below what they would think its long-run equilibrium value is. Leave aside how you determine that, but they have a view on the long-run equilibrium range of the Canadian dollar that would be substantially higher than it is today, and I would basically agree with that. I don't know what the right number is, but it's higher than 65¢.

So they also boosted interest rates in August, I think, because speculating against the currency had become a one-way bet within the currency markets. So if I were a speculator, I could make money with very little risk by betting against the dollar. So you don't want the scenario, it seems to me, where speculators don't face the risk that they might actually lose money.

Mr. John McKay: But you can only smack them once or twice, and then it's over with.

Mr. Jock Finlayson: The trick is not to smack them so hard that you smack your own economy into a recession. You see the problem.

But in defence of the Bank of Canada, I would note that while short-term administered interest rates were increased by 100 basis points on August 29—I was on vacation, but that's when it happened—long rates in the bond market and so on, 10-, 20-, and 30-year rates, actually came down a bit when that happened, and they've continued to come down since. Now, that says to me that the financial markets recognized that this was a short-term phenomenon designed to deal with a speculative problem, and that they still have a positive outlook with respect to Canada in terms of long-term inflation risk, which is very favourable. If long rates start backing up, first of all, it has a very significant negative effect on the economy, and secondly, it signals that investors believe there's a risk of substantially higher inflation down the road, which on balance is a negative thing for the economy.

So it has been a very difficult process for the Bank of Canada to deal with in the last six or eight months. My goodness, Mr. Thiessen, when he was in Vancouver last fall speaking at a luncheon, was talking optimistically about 4% growth in the economy, that Canada was absolutely booming, and that there was no end in sight to the strong growth. They also, I should add, underestimated the impact of the Asian crisis and the fact that it has gone on for so long and the turbulence has continued. Really, the strangest feature of it is this persistence of instability, with no clear sense of where the bottom is in these markets.

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Mr. John McKay: If the Bank of Canada changed their policy from having a range of one to three points for inflation, and either switched that, took off that policy or whatever, would there be a short-term benefit to the economy?

Mr. Jock Finlayson: If they changed it to what?

Mr. John McKay: If they made it higher, to four or six or something like that.

Mr. Jock Finlayson: I think it would be a difficult thing to do through an articulated policy—for Mr. Martin to stand up in the House of Commons and say that following discussions with the Bank of Canada they've revised their medium-term inflation range to 3% to 5%. It could be done, but in my view the net economic effect would be negative. You would spook the financial markets into fearing a substantially higher inflation rate down the road.

One of the things we have going for us now is that we are seen increasingly as being a low inflation country, almost like Switzerland or Germany or something. It's been painful getting there, and there's a lot of debate among economists about whether it's worth it. We have that reputation; we have a track record in Canada of having had lower inflation than the United States for six years in row, which interestingly should be driving our currency up and not down, but that's another discussion. I think it would be very risky to throw that away through a change in our policy.

Mr. John McKay: But that's one of the issues, you see. The folks in here keep repeating the mantra that the fundamentals are right, we are accelerating our GDP-to-debt ratio downwards faster than any other G-7 nation. We have the highest growth rate and the lowest inflation rate; we have this, we have that. We've gone from a $42 billion deficit down to a surplus. We actually talk about a real surplus and things of that nature. I put it to you—where's the payoff here?

Mr. Jock Finlayson: The payoff for fiscal consolidation has come through an improved interest rate structure. A lot of people, but not many economists, believe there are monetary policy fixes for our problems. I don't happen to believe that. The fiscal improvement we have seen will pay off with sustainable tax cuts, I hope, or in the form of increased government spending that hopefully, if it's going to happen, will be done wisely so it will benefit Canadians and improve our prospects for economic growth and productivity growth in the future.

Monetary policy contributes to good economic performance by establishing a framework of stability within which economic agents can make decisions to buy, sell and invest without worrying that the value of money will be corroded by inflation. In Canada we've created an economy that for a number of reasons now is a very low inflation economy overall—maybe a little bit too low, frankly.

Maintaining this kind of stable inflation picture and a stable macroeconomic framework, as far as inflation is concerned, will be beneficial to the economy in the long run, but it doesn't deliver a lot of short-run benefits. I think it will pay off for us, and already has to a certain extent. So to tamper with it would be a risk that I would not want to take without some very careful thinking of what you are trying to accomplish that would cause you to put this at risk.

Mr. John McKay: The difficulty here is that Minister Martin is staring into a precipice and, as you properly say, you don't know where the bottom is. He will try to send a proper signal to Canadians and the markets in a statement in another few weeks—maybe less than a few weeks. I'm trying to figure out where his manoeuvring room is. Can he do something like give stimulative tax cuts? Is that a meaningful thing to do and would it do anything for us?

• 2110

Mr. Jock Finlayson: If the fiscal room is there to stay in the black, then a tax cut, particularly one that was carefully designed to simulate the economy—or if you felt there was weak spending in certain parts of the economy and wanted to encourage that and it was designed for that—would be beneficial. But if it's fiscally sustainable, I don't see much merit in a short-term tax cut that then has to be reversed.

Mr. Nelson Riis: Just to elaborate on a point, what kind of tax cut could have that impact?

Mr. Jock Finlayson: Given what I have said in my brief in terms of the policy position of my organization, we feel personal income rates in Canada—

Mr. Nelson Riis: Across the board?

Mr. Jock Finlayson: I guess if you're worried about stimulating growth in the short term, across the board would be the way to go. Structurally, our biggest problem is the marginal rates, not the average rates. But it depends what you're trying to accomplish.

Mr. Nelson Riis: Whatever fiscal dividend we end up with, it would be a few billion dollars across-the-board tax cut—that's a pretty modest tax cut.

Mr. Jock Finlayson: It is. That's the problem with the PIT.

Mr. Nelson Riis: Would a modest tax cut to save a few hundred bucks have any stimulative impact on the economy?

Mr. Jock Finlayson: It would have some, but it would be very small. We're dealing with a number of interrelated things here with your question. With respect to interest rates, we do need lower global interest rates. Japan has already cut their interest rates almost to zero, but in all the other countries in the G-7 and the OECD, I would argue very strongly for a coordinated effort to lower interest rates, and we should be part of that.

Mr. John McKay: Isn't that Mr. Greenspan's decision?

Mr. Jock Finlayson: Yes. That's a decision central bankers will make, and it's not necessarily a decision you announce as a Minister of Finance, because it's not his or her job to do that. But given the dramatic drop in the outlook for world economic growth in 1999 from 4% to 1%, I would strongly argue for a coordinated OECD interest rate reduction. We can't lead that, but we should certainly be part of that as a country.

Mr. John McKay: Then you have the irony there that, in effect, a reduced interest rate jump-starts the equity market—

Mr. Jock Finlayson: Or puts a floor under a falling star. That might be a better way to put it.

Mr. John McKay: Yes, that probably is a better way of putting it.

Mr. Jock Finlayson: The markets would definitely benefit from that, but so would consumers. The markets are only one part of the economy. The household sector, homeowners, people renegotiating mortgages, people carrying credit card debt, and businesses that have loans would all benefits from a lower interest rate structure here and in other countries.

The Chairman: Ms. Bennett.

Ms. Carolyn Bennett: Thank you, Mr. Chair.

Mr. Finlayson, your closing paragraph is about the disappointing productivity. Some commentators have said it may be even worse than we think, because the low dollar has made it look as if we're doing better in exports of all kinds of things than we actually are. The Americans have had to be more competitive, aggressive and innovative, so should our dollar go back up, we will actually be caught without the kind of innovation and competitive companies that will take us into this next chapter.

You have said concerted effort is needed to come to grips with the productivity challenge and develop policies. What do you think we should be doing about this, as government? Do you agree with the commentators who think that some of our so-called successes are just because of the low dollar?

Mr. Jock Finlayson: Let me answer that by saying what the fault is from the point of view of economic history. It's hard to depreciate your way to prosperity. Currency depreciation can help provide a measure of competitive benefit to an economy, certainly in the tradable goods and services part of the economy, and it is a stimulus to economic activity. Lower interest rates are actually a stimulus, but so too is currency depreciation.

On the other hand, there's not much historical evidence that a policy of continuous currency devaluation is a sound basis for any nation. We also have to remember that the downside is that you are suffering a decline in your global buying power, which you see whenever you either travel abroad or have to import anything that's produced elsewhere. Canada is a very import-dependent country. We import a large proportion of our food products. We import a lot of machinery and equipment, medical equipment, pharmaceuticals, a lot of stuff we don't make here and for which we depend on other countries. If our currency is going down in relation to theirs, we're paying more for every unit we purchase, which is another way of saying our standard of living goes down.

• 2115

Ms. Carolyn Bennett: What I'm really saying, though, is do you feel we, as a country, are doing enough in terms of competitiveness and innovation? Being in Vancouver, I worry a little bit about the film business. I think it's artificial. I think that—

Mr. Jock Finlayson: We'll take it. It's growing now.

Ms. Carolyn Bennett: But I think that should the dollar change, we don't have crews or companies that are willing to make Canadian product; so we are just doing the service part, and we don't really have a film business here in Vancouver. The Canadian companies are having a terrible time getting crews.

Mr. Jock Finlayson: Yes. I'm not an expert in the film business, but that's an example of an industry that's incredibly exposed to the exchange rate, to movements, and the reason for that is the vast majority of their costs is labour. If you can pay a production worker, or a stage hand, or a makeup person, or an assistant on a set in Canadian dollars instead of U.S. dollars—and these are all union scale jobs on both sides of the border—it's a big competitive advantage. On the other hand, we are developing some of the infrastructure here in terms of training and apprenticeship programs, college diplomas, and so on and so forth, which is helping to produce the skilled people you need to make that industry work.

I don't know the right value of the Canadian dollar, but what I do know is that part of the reason it's worth a lot less than the U.S. dollar is the underlying gap in productivity between the two economies. In fact, if you do a correction analysis or whatever, you would see that this is one of the key factors that's caused the decline in the Canadian dollar.

In the long run we would all be better off as Canadians if we had a higher growth rate in productivity, a higher level of productivity, and that bought us a higher currency value. That's how the chain would work. That means we would be more prosperous relative to where we are now. That's why I go back to productivity. It's a difficult issue to deal with. I don't think you can rally Canadians on the streets around productivity, but I do think it's a central conundrum.

I would add, very quickly, that the people in my profession don't have all the answers, by any means, on what's actually going on. Are we measuring it right? How are we really doing relative to other countries? What are the success ingredients? Where do we have leverage? Particularly in terms of public policy, what are the levers that might be available to government to actually make a difference? You have lots of levers; many of them don't matter for this particular issue. Those are all open questions, frankly.

The Chairman: Doesn't it really come down to the sophistication of our business people? If all of a sudden you're winning contracts you've never won before, only because of the low dollar, and you're not smart enough to reinvest in human resources or research, greater technology diffusion within your firm, better processes of producing goods and services, then, quite frankly, what can we do besides say we have a feeling a lot of contracts are being won because we have a low dollar? It comes down to the individual business person using his or her brain to realize that he or she will not be very productive.

Mr. John McKay: That's the John Ralston Saul argument—that we are poorly served by our business beliefs, that in fact for 150 years we've been poorly served by our business beliefs, and that our real absence of productivity, our losses in productivity, are more due to, how should we say, a business climate and business culture that are clearly not in the same league with the Americans.

Mr. Jock Finlayson: Presumably, he will then welcome a more open border—and having read his books, I don't believe he does—with the U.S. and the creation of a much more competitive economy, We've had, historically, a somewhat more insulated economy in terms of the role of government and regulation and tariffs. We have a smaller economy. In the U.S., a lot of their industries have benefited from the sheer scale on which they've operated, even in a domestic setting.

• 2120

So good management is part of the ingredients, which is incidentally one of the reasons the personal tax issue is important. Skilled management is probably the rarest talent that exists. We all know that from our experience working in organizations, or trying to be managers, skilled or unskilled, and you want to be able to have those kinds of folks available in all your institutions—not just business, by the way. So I think being able to attract them and retain them is important.

But I agree with you on the currency. I think probably today there are a lot of Canadian industries, especially those that export heavily to the U.S., that perhaps have a misleading view of their underlying competitive position because of the benefit they have derived from the somewhat surprising decline in the value of the Canadian dollar, and if that backs up the other way, and it could—I have no idea if or when, but it certainly could—you may be hearing in the federal government the pleadings of some of these companies and industries for help, which you should ignore.

The Chairman: You know, back in the days when Bill Clinton was running during the primaries for the leadership of his party, he was playing with all sorts of ideas, like a payroll tax, sort of a negative tax, that every major firm would have to invest 1% or 1.5% into training. I think the French have it at 1%.

Mr. Jock Finlayson: Quebec.

The Chairman: But then you're always caught between the fact... I think that's an imposition on business, quite frankly. I would much prefer that they would do it on their own. Yet if they're not investing in human resources and they're not investing in those things that we were talking about earlier, how do you get the message to them?

We're policy-makers; we're not business people. I think business should be run by business. But the point is, how do you wake them up to certain realities? Productivity is a problem. Okay. So whose problem is that? It's the business sector that has to realize that it is, right?

Mr. Jock Finlayson: The question essentially is this: is there a systematic market failure in the business sector that leads firms to systematically underinvest in human capital formation and training? That's an issue that has been explored by some academics.

I would point out that the U.S., which does have the largest and most productive business sector in the world, doesn't have any kind of French-style tax—Quebec actually has a training tax, too.

We did a survey of our members to try to ascertain in larger companies how much they devote to training. Tim did it.

Mr. Tim McEwan (Senior Policy Analyst, British Columbia Business Council): On average, it was found that 2.2% of payroll was expended, with our corporate members—

The Chairman: That's high.

Mr. Tim McEwan: —which is very high.

Mr. Jock Finlayson: The dilemma, as you will find—and I don't want to pick on my friends in the small-business community, although they pick on us sometimes—is that if you say 1% or whatever the figure would be, most larger organizations... This is the experience in Quebec, which has imposed a provincial tax. I've talked to my counterparts in the Conseil du patronat, which is our counterpart in Quebec. Most of their members already were at 1% or more in terms of a payroll devoted to training, but they had to deal with the administrative and bureaucratic apparatus that was created to administer this government program.

Smaller businesses tend to be where less formal training is done, and being a parliamentarian, you would know they're not going to be terribly anxious to see any kind of government mandate imposed on them with respect to money that would be devoted to training. So the tendency is to exempt small business, which is where formal training is occurring less frequently, but you then capture all the large and mid-size enterprises, the vast majority of which, at least in our case, are already doing a fair amount of training.

Maybe they should be doing more, and maybe there is some role for government in that. I think that's an open issue. But if you look at this productivity problem and the ingredients in it, you might find that we're not investing enough or investing in the right way in human capital development. If that's true, you want to have an open mind on what the solutions would be.

I raise it as a question. I don't really know what the answer is.

The Chairman: Ms. Bennett.

Ms. Carolyn Bennett: I have a small question on the “brain drain”.

The Chairman: So-called.

Ms. Carolyn Bennett: So-called.

The Chairman: In quotation marks.

Ms. Carolyn Bennett: Do you have measurements? You must actually be losing people to the States from BC TEL. Do you have exit interviews? Are they leaving for the salary, or are they leaving for tax reasons? I was just thinking that the film business in this city is like a little laboratory. People are paying the same taxes, but they're going to work for the American production companies because they pay them a hell of a lot more and Canadians companies pay them less. It's not actually a tax problem, it's a salary problem.

• 2125

Mr. Robert Seney: I don't really have any specific facts for you. It's more just continual stories that you'll hear from different areas—

Ms. Carolyn Bennett: I'm going back to Mr. Riis' point. Before we talk about so-called brain drains and—

Mr. Robert Seney: Well, let me just finish. We're a high-tech company and a lot of our various areas hire very highly qualified people. You continually hear from senior management people stories of the turnover in those areas, of people being able to get jobs in the U.S., for example. So you're right that it's a salary issue, but what's generating the ability of the American companies to pay those higher salaries vis-à-vis—

Ms. Carolyn Bennett: I'm not a business person. I grew up in science. In the pyramid of evidence we have, at the very bottom, anecdotes. I guess I don't like the fact that we would actually develop public policy based on anecdotes—

Mr. Robert Seney: No, fair enough.

Ms. Carolyn Bennett: Until we actually have facts around this stuff—how many come back and how many—

Mr. Robert Seney: Well, I think there's some published material on this.

Mr. Jock Finlayson: If I may add to that, the Laurier Institute here in Vancouver, which is run by Dr. Roslyn Coonan, who used to be the chief economist for Human Resources Development Canada in B.C., has just launched an empirical study of the brain drain issue. In it they're going to try to document, at least from a B.C. point of view, in more detail what's actually been happening—who has been leaving; from what kinds of occupational and industry backgrounds; what are the factors that account for their departure, because I think tax is one, but there are others; do some of them come back, and so on. They're trying to put some flesh on the bones.

I would add that there's an overwhelming set of anecdotes within the major corporate sector—particularly the technology companies, but not just them—in British Columbia that the brain drain issue is a real one and it's bound up with a bigger issue of the shortages of certain kinds of skilled labour. You're right, as an economist I can tell you the evidence on it, the systematic scientific evidence, leaves something to be desired. So any kind of work we can see done that will give you as policy-makers better information, I think we should push for aggressively.

Ms. Carolyn Bennett: Mr. Chair, will the Laurier people be coming to present to the committee?

The Chairman: We will try to get in touch with them.

Ms. Carolyn Bennett: Thank you.

Mr. Nelson Riis: I'd like to add to Carolyn's point. Last year at this round we were given evidence that Canada was actually in a net brain gain situation, that when you looked at all the people coming in, particularly because of recent immigration policy changes, we were actually gaining brains. They didn't break it down in terms of what kind of brains or what these brains were doing. It'll be refreshing to get some actual hard evidence.

I think it's fair to say that most people I know—as a matter of fact everybody I know—who have gone to the States in whatever field make a lot more money there, a lot more. Not that they actually keep more in some respects, but even that's arguable in terms of the different kind of taxes and different charges and no capital gains on home sales. But I don't know anybody who has said to me they were moving to the United States because they were going to have a better tax deal. It's that they make three times as much money down there. I mean, look at the politicians.

Mr. Jock Finlayson: I think there's a whole mix of reasons people go, including very practical professional opportunities in many fields. I did an MBA at an American university and I was the only Canadian who came back—that was quite some time ago—because the sheer opportunity was very significant on Wall Street or wherever you wanted to work. Of course, you'd be paid in U.S. dollars, and then you got the tax stuff on top of it.

• 2130

I also would agree that Canada does benefit from the fact we are a net recipient of skilled people from other places, and the Laurier study, I know, is going to look at that as well. But I'm not sure that the skilled or knowledgeable people we gain are necessarily able to replace the ones who are going. It depends on the industry.

Mr. Nelson Riis: We don't know that.

Mr. John McKay: They're all driving taxis in Ottawa.

Some hon. members: Oh, oh!

Mr. Jock Finlayson: But I do think this is an area we have to look at from a policy point of view in order to try to get some better evidence, because it is significant for us.

Putting my Business Council hat on, I can tell you that it is an issue we hear about. Our companies cannot attract people to B.C. We can actually attract them from other provinces, but we absolutely can't get them from the U.S. That's not a huge problem in some industries. But in the software industry, for example, the person you need to take your business to the next platform here in Vancouver may be an individual who has done that in Silicon Valley, as a manager of product development or something, but unless you're prepared to distort your salary schedule all out of whack because of the combination of how much they make down there plus the taxes, you won't be able to get that person to come up here.

So it is an impediment to growth in some industries, I'm convinced of that. Don't forget that even a relatively small number—not a handful, but perhaps a few thousand—can make quite a big difference in various lines of endeavour if they are your best people.

The Chairman: Mr. Finlayson, we also have to be realistic as to what we can do. We can raise basic personal exemptions, we can try to get rid of some of the surtaxes, and we can do this and that, but to try to compete with the $200,000 American salaries by making a tax cut across the board is not realistic. That's more for the business person here in Canada to deal with.

We can do our little bit on the tax side. Perhaps we could say that one of our ultimate goals in 10 or 15 years will be to have one of the lowest tax jurisdictions around, if that's one of the public policy issues we decide to tackle. But on the salary side, as legislators we can't start telling firms they would have to pay $500,000 to an individual so he or she can compete with a job in—

Mr. Nelson Riis: How do the bankers do it? Our banks pay their CEOs a salary that is probably higher than that of most bankers in the world.

The Chairman: Yes, but how many CEOs are there?

Mr. Nelson Riis: Only a handful, but—

The Chairman: This has been a very interesting discussion. We certainly know what the challenges are, but we also understand that there are some limitations. Mr. McKay referred to the Bank of Canada policy, and we face limitations vis-à-vis taxes. An array of demands has been placed on us by the hundreds of people who have already appeared before the committee. There are all sorts of issues we have to deal with, such as R and D and health care.

This has been a very interesting panel, and we thank you.

Mr. Jock Finlayson: Thanks for the opportunity.

The Chairman: The meeting is adjourned until tomorrow morning, same place, same time.