FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, October 28, 1998

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call this meeting to order and welcome everyone here this afternoon.

This is one of my most interesting round tables. We're going to be dealing with research, and that's always an important discussion here during the pre-budget consultation.

I would like to take this opportunity to welcome the representatives from the following organizations: the Medical Research Council of Canada; the Council for Health Research in Canada; the Canadian Cardiovascular Society; the National Cancer Institute of Canada; the Social Sciences and Humanities Research Council of Canada; and the Coalition for Biomedical and Health Research. Apparently this is also the order in which you would like to speak, so we will begin with the Medical Research Council of Canada, Dr. Henry Friesen. Welcome.

Dr. Henry Friesen (President, Medical Research Council of Canada): Thank you very much, Mr. Chairman, ladies and gentlemen. I'm delighted to have this opportunity to come before you and represent to you the directions that the Medical Research Council and other champions of health research are taking with us in what I think is a message of hope and opportunity and innovation. It's about doing business differently in the health research arena.

I hope I can convey to you a transformative vision of what is possible if we as a nation pursue the right course of action. It is about integration. It is about removing some of the partitions, even the silos, if you will, that have divided both the science and the geography, and at times the lack of integration that flows from the knowledge generated by health research, to see it adapted and adopted to improving our health care system.

First of all, let me say that the Medical Research Council is the lead agency of the federal government in support of health and medical research. We fund some 2,000 grants, in all regions of the country, as well as through support of young researchers in training and emerging scientists who fund career development. That is our business, building the research capacity of this country.

When the Minister of Finance met before you and made his economic statement, he made the point that health and health care issues are a priority, not only for its people but for this government. I share that view. We see it expressed in many different ways. We see it expressed in results of a poll taken very recently where health care was the number one priority.

But I would like to draw to your attention to, and it surprised me to see this, the recognition that Canadians gave to the importance of health research. It was the number two choice when offered the question: Where would you see investing if you were the Prime Minister for a day? Only six percent below their priority for health care was the investment in health research. That was an astonishing revelation. But I'm sure my colleagues from the health charities would say they know that; they see that in the generosity of Canadians every day.

I think it brings an important message, because Canadians understand that research is about progress and hope, and we see that expressed in so many stories, Canadian stories, of Canadian discoveries that have benefited this country, from young to old. We see it in terms of the investment opportunities, where the health industry sector is seen as an emerging growth sector of the Canadian economy. That is why Canadians see the knowledge platform as being central to the economic growth of this nation and job generation opportunities for highly qualified young Canadians, where they see this as getting the Canadian environment for this sector right as part of the answer to the brain drain.

Last year I came before you and made the case that at the international level we are not fully competitive. I'm sure I speak for thousands of colleagues across the country to thank you, to express appreciation for a decision taken by the government to begin to address the gap.

But the nations of this world are not standing still either. Just last week, you should know, on the balanced budget agreement, Congress gave to the NIH, our counterpart agency, an additional $1.9 billion, a 14% increase to the already very substantial resource that the NIH receives, which is at a level, when all qualifiers are in place, at least four times what MRC's investment is. So I think there is an opportunity for us to look carefully at strategic choices as we face the future.

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This presentation, I say again, is about hope, about opportunity; it is about innovation. I put before you that as a country we have in the past had an excellent record of discovery. We've had a poor record of seeing those discoveries exploited and commercialized for Canadian advantage—hence the balance of payments deficit in this sector of $2 billion. We think there's an opportunity to begin to address some of those deficiencies.

We have had some considerable discussion and built a coalition, an extraordinary coalition of voices, around the idea of whether as a nation we could build on what exists. Could we reorganize ourselves to advantage? Could we see collected as a virtual network of opportunity and science a platform of health research that is grounded and built in some of the great institutions surrounding universities? They stretch coast to coast and are often related to the health science complexes that exist, and you would have them in each of your communities. To move from the wonderful activities that each of them do on their own, to see this national enterprise, collected as a virtual consortium, a Canadian health research enterprise, integrated in the foundations of our health care system, shaping its renewal, a driving innovation force— And we suggest as part of that integrated view seeing the investment made from both the most fundamental, the molecules, to the community, because it is in the end the individual Canadian's health that should be the focus of our attention, and is.

You will hear from my colleagues, from the health charities, from the universities, from the industry, how important the opportunity is. I believe if we get our vision right we have the opportunity to move into the 21st century with a 21st century approach to managing our health care enterprise in a way that is bold, that is innovative, that provides and addresses Canadian concerns about access and about availability.

This will ensure that young Canadians who are trained at public expense don't find their opportunity and their home south of the border. You will be aware of the C.D. Howe Institute study just released a couple of weeks ago that demonstrated $400 million alone of Canadian investment for the education of these individuals, in building their intellectual capital, is now going to benefit the American economy. That's unfortunate; we have to change it.

When I looked at that study I noted the equivalent of two of our graduating classes from our great medical schools, two out of the sixteen, flow into the American environment each year. That's in a sense a foreign aid program of Canada to make sure that the American health care system works well. We have to change this, in my view. That's the challenge. I think there's an opportunity here for all of us to work together, to make common cause, and to galvanize the resources that exist for Canadian advantage. That's the vision I have for this country. I think we can do it.

As the Minister of Finance said, there are those who believe and would settle for Canada being second best. I believe that with this vision, Canada's poised to be the very best.

Thank you.

The Chairman: Thank you very much, Dr. Friesen.

We'll now hear from the Council for Health Research in Canada, Dr. Mark Poznansky, chairman, and Dr. Peter Glynn. Welcome.

Dr. Mark Poznansky (Chairman, Council for Health Research in Canada): Thank you.

I'd like to start my presentation by offering a confession and then asking a series of questions.

I've been coming to Ottawa for the past 15 years to try to impress upon government officials the importance of medical research and the implications for Canadians. Largely I saw how underfunded science was in Canada compared to the United States, and quite frankly I felt under-appreciated. The importance of research was simply a given.

I present to you today not only in the belief that medical research saves lives, saves money, and creates jobs, but in the belief that without very significant new investments in our laboratories we will be seriously jeopardizing the physical and economic health of our children and future generations.

Let me then proceed to ask a number of questions. On a per capita basis, the incidence of bypass surgery in Columbus, Missouri, is ten times higher than in Edmonton, Alberta. Why is that?

Why is it that twenty years ago a newborn child and its mother were likely to stay in hospital for more than a week, a few years ago it was down to four to five days, and today it's sometimes as little as six to twelve hours?

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The Province of Ontario spends $135 million a year on home oxygen. Is this the proper number?

The incidence of heart attacks in southwestern Ontario is approximately 35% higher than in the southeastern part of the province. Why is that?

Many Canadians 50 years of age and older routinely had their tonsils removed when they were young. In 1998 this operation is extremely rare. Why is that?

The answer to the first four questions is straightforward. We have not done the research, so we don't have the evidence one way or another. In fact in the first three cases, practices are based simply on the budgets available to hospitals or health districts rather than evidence. This is surely an appalling way to conduct what is in effect Canada's second largest industry.

In respect to the changes in practice in tonsillectomies, someone did the research to determine the effectiveness of this operation, when it should and should not be done. The study was done at the University of Pittsburgh in the early 1970s at a total cost of $700,000. Today that evidence saves the American health care system in excess of $400 million each and every year.

As a result of that study, the frequency of the tonsillectomy operation is now based on evidence, and not on the willingness or ability of individuals or health care plans to pay. Surely we must establish a mechanism to make sure that all parts of our health care system are evidence-based, and not determined by what budgets governments or hospitals make available.

Another set of questions deals with issue of discovery. Why is it that the commercialization of the discovery of the cystic fibrosis gene and the muscular dystrophy gene, both of which were discovered in Toronto, have occurred exclusively in the United States?

Why is it that Randy Read, an outstanding Canadian scientist, one in whom the Canadian and Alberta governments invested in excess of $3 million, is currently residing permanently in Oxford, England?

Why is it that Suzan Rosenberg, an American whom we attracted to Canada with an investment in excess of $2 million, has now left Canada to work in Houston in one of the most exciting areas in biotechnology?

Why is it that Roland Tisch, one of Canada's brightest young scientists, a Toronto graduate we sent for additional training south of the border at Stanford, has refused to come back to Canada?

Why is it that the discovery of the gene responsible for the aging process, the early work of which was done at McMaster University, has been achieved in Texas and commercialized in California, with a value in the hundreds of millions of dollars?

The answer in every case is clear. We have the brains in Canada to make some of the most fundamental discoveries in biology and medicine, but we haven't supported those brains adequately, and more often in recent years they have fled south of the border.

Finally, I have a few brief points on the economy and the growth of knowledge-based industries associated with biology and medicine, and specifically biotechnology.

Canada has a huge trade surplus with the United States, largely in the natural resources, but a greater than $2 billion a year trade deficit with our major trading partner in the pharmaceutical, biotechnology, and medical device areas. Why is this?

Why is it that Canada makes 12% to 14% of the cars and trucks produced in North America but only approximately 2% of the drugs, medical devices, and products of biotechnology?

Boston, a city that in the 1970s and 1980s owed its wealth to the military-industrial complex and the General Dynamics and the General Electrics of the world, today has a thriving economy with the biotechnology and medical devices arenas at its core.

Until the 1990s, San Diego's economy was principally dependent on the United States navy. Today there are more than 250 biotechnology companies that have filled that void created by the closure of two major naval shipyards and bases.

What is the basis of these two major turnarounds? The answer to each question is the same. Unlike our American counterparts, we are not making the investments in research that will result in the production of discoveries and a new knowledge that will form the basis for the new economy.

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We should ask the question, are we too late? Have we missed the boat? I believe the answer is clearly that we have not missed it. Charles Holliday, president of DuPont, spoke of the coming biosciences century at last year's World Economic Forum in Switzerland. He spoke of how we are just scratching the surface of biotechnology in solving problems in human health and in learning how to better feed the planet and take better care of our environment.

Surely as Canadians we want to be part of this revolution. Until now we seem to have taken the safe, conservative route toward prosperity and have relied largely on our resource-based industries and branch-plant economies. Surely it does not take a trained economist to determine that this approach is shortsighted. We must now make the necessary investments in the higher-risk knowledge-based economies to ensure that our children and their children will share the same prosperity we have.

The message should be clear. If we want a health care system that is based on evidence rather than simply the numbers of dollars available, if we want to keep our discoveries, and if we want to create wealth in the future based on knowledge-based industries, then we must invest in research and do it much more heavily.

The proposal that's been discussed in Ottawa and in other parts of the country called the Canadian Institutes for Health Research surely represents an excellent start.

Thank you.

The Chairman: Thank you very much, Dr. Poznansky.

We now go to the Canadian Cardiovascular Society. Mr. Charles A. Shields, Jr., is executive director, and Dr. Michael Baird is secretary. Welcome.

Mr. Charles A. Shields, Jr. (Executive Director, Canadian Cardiovascular Society): Thank you, Mr. Chairman.

I'll make a presentation, and Dr. Baird will be available for participating in the question period later on.

First we'd like to thank you all for the opportunity to meet with you and share some of the ideas of the CCS in your pre-budgetary consultations. We particularly appreciate the opportunity to bring a practitioner's point of view to some of the discussion. We share a lot of the concerns of others who have spoken already and of those who have yet to speak. In fact I sense themes coming out of the presentations already.

There are two particular areas to which the society wanted to draw the committee's attention. One is the need to improve the quality of care provided Canadians by strengthening Canada's support to health researchers, especially its clinical researchers. There's a particular concern in that area. Second, there's the need to improve Canadians' access to health services by ensuring that health system decision-makers have the information they need to manage the system.

I'd like to address that first issue. The clinical researcher is in a subset of the group we've heard of so far, and is a key person in the health system. They may seem like somebody who's a bit distant from the actual provision of care, but these people are clinicians. They are the direct providers of services. They are often the backstop. They are the top experts their colleagues look to for information.

We have been seeing a situation emerging in the last few years of these people becoming discouraged because of the changes in the health system. They are represented among those Dr. Poznansky was referring to who have been leaving Canada to go to the United States and other locations.

Canada cannot afford to continue losing these people. We need to keep them here because they are, in some cases, the bedrock of the system. We would suggest that the committee should perhaps consider establishing a program that might be called something like “Keep the Best in Canada”. This could use some federal support and would draw on the assistance of the provinces and the voluntary health organizations. Each of us, in our way, deals with this issue and looks to find ways and incentives to keep these researchers in Canada to provide the care they have to provide and do the research that's necessary to provide that link that's made between basic scientific research and applications in the clinical area.

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The second area I wanted to address is the need to make certain that Canadians have access to quality health services. There is a role the federal government can provide in this area. It's by helping to ensure that the information is available to those who are making decisions in the health system.

One of the consequences of the stresses that have occurred in the health systems as they are in the different provinces across the country has been a squeezing of resources of various sorts. As the resources have been squeezed, those left in the system have had to make decisions about how to use them, often without sufficient information.

We believe that by putting in place systems that will gather the information people within the system need, we're going to be able to manage the system better, direct the resources more effectively, and make certain that Canadians do get the resources and access to care they need.

One example of a program like this that was undertaken by the Province of Ontario was called the cardiac care network. Once of the results that has occurred in the three years of its existence is that the waiting list for cardiac surgery in the province has nearly been halved. It has been a process of gathering information about those who are waiting for cardiac surgery and marshalling the services so they quickly go to those people who need them the most.

There are lessons from this that can be taken in other parts of the country. We believe that the cardiovascular area can provide an important early step in that effort. The heart disease area is one that is of particular concern to Canadians. It's one of the principal killers in Canada. We and some of our partners, the Heart and Stroke Foundation of Canada included, have been working to develop a Canadian cardiovascular database that, with some modest investment, can help to begin to pull together the information and draw on the voluntary sector, as well as government, to make certain that the information is available to manage the system better.

I will conclude with that. I look forward to answering questions that might come from the committee later. Thank you.

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

We'll now move to the National Cancer Institute of Canada. I welcome Ms. Dorothy Lamont and Dr. Robert Phillips.

Ms. Dorothy Lamont (Chief Executive Officer, Canadian Cancer Society and National Cancer Institute of Canada): Thank you, Mr. Chairman.

I want to first of all start by thanking the committee. I understand this is the third year in a row that some time has been set aside for a discussion of matters related to health research. While that matters very much to those of us before you, we're glad that it also matters to you.

I'm going to make a short presentation. Then my colleague, Dr. Bob Phillips, is here to work with me in discussion with the committee.

The Canadian Cancer Society and the National Cancer Institute of Canada strongly support the creation of the Canadian institutes for health research. Specifically, we recommend that one of the institutes should have as its primary mandate the support of research on the control of cancer. This presentation is not meant to be self-serving, although it may seem that way. In fact, it's really meant to show by way of example what could happen if some creativity, commitment, and energy is put behind this initiative.

The past two decades have seen remarkable advances in fundamental and applied research. Despite this progress, cancer remains a serious health problem for Canadians. It's the second-highest cause of death in Canada and the leading cause of premature death and years of life lost.

However, new data has raised expectations that an increased, concentrated research effort could have a significant impact on the burden of cancer in Canada within a relatively short period of time. Indeed, other organizations, such as the World Health Organization and the American Cancer Society, have adopted specific, concrete goals for their research and cancer control efforts over the next 20 years.

In Canada, much improvement could come from increased efforts on prevention. Four cancers account for 50% of all cancer deaths in Canada: lung, colo-rectal, breast, and prostate. All four could be reduced by prevention measures.

We know that tobacco accounts for at least 30% of all cancers, including 80% of lung cancers. To reduce tobacco use, we must better understand the factors that influence its use and make these known to decision-makers in policy and program development.

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Similarly, studies indicate that dietary modifications could lead to reductions in the incidence of cancer in the range of 20%. Improved screening procedures could hold hope for reducing the incidence of breast, colon, and prostate cancers. However, this type of research, which leads to new public health programs, is expensive. It's culturally sensitive and it must be done in Canada to develop policies and programs that will work within communities in Canada.

Remarkable advances in understanding the molecular basis of cancer have also occurred in the last 20 years. Together with breakthroughs in imaging technology, these are heralding a new era in early diagnosis and rationally designed therapies. Through such approaches, which are still in their infancy, we are already beginning to see a reduction in the mortality from cancer. Although reductions at present are modest, we believe that further improvements in the early diagnosis and treatment of cancer can lead to very substantial increases in survival rates.

Although research advances will come from many scientists in many countries, Canada must support a broad spectrum of health research for two important reasons. First, implementation of new diagnostic and treatment procedures is a complex thing, requiring detailed analysis by many experts. Adoption of new advances must be rapid and appropriate in order to ensure that Canadians benefit as quickly as possible. For this purpose, we need Canadian scientists who are acknowledged international experts in their field.

Secondly, many of the advances are already leading to the creation of new companies. It is important that Canada becomes a major international player in this area to enhance a new and vigorous knowledge-based Canadian economy.

The Canadian Cancer Society and the National Cancer Institute of Canada support the creation of a Canadian Institute of Health Research devoted to the control of cancer. At the present time, the NCIC, with funds from the Canadian Cancer Society and the Terry Fox Foundation, distributes $45 million annually in support of cancer research.

Our 50 years of experience as Canada's major funder of cancer research has proven that a disease-based organization can support a broad spectrum of research from fundamental studies on growth control in yeast to population-based studies on tobacco control.

We have many examples of innovative cancer research in Canada. The NCIC has created a network already of 60 hospitals in every province to coordinate clinical trials, to test new treatments in cancer. The success of this network is indicated by its leadership of several international trials, by its growing support from industry, by its receipt of funding from the U.S. National Cancer Institute, and by its successful completion of trials that have improved the treatment of cancer.

In addition, the clinical trials network is a world leader in including quality of life assessment as part of every large clinical trial. This network has provided Canadian cancer patients access to innovative new cancer therapies and it has provided advice to provincial cancer agencies on the best methods of treating cancer.

The recent creation by the NCIC of a network of behavioural scientists and a new research program on tobacco control will link researchers with community groups and with government policy and program people to develop novel and effective interventions to control tobacco use. It is important to note that these programs are being developed in cooperation with other disease groups interested in the control of tobacco use.

For the past five years the NCIC has served as the administrative home of the Canadian Breast Cancer Research Initiative. This initiative has brought together breast cancer survivors, patient advocates and scientists with five different funders: two government, Health Canada and the Medical Research Council; two volunteer groups, the Canadian Cancer Society and the Canadian Breast Cancer Foundation; and the private sector, Avon, through the Breast Cancer International Centre.

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All of these groups are working together on a jointly developed strategic plan to eradicate breast cancer. This initiative has stimulated needed research in novel areas such as communication, health services and alternative therapies.

So in many ways the NCIC already represents a miniature model of how the Canadian institutes of health research could function. Our experience has proven that a disease-based institute can support and stimulate research studies on topics ranging from molecules to communities. It can cooperate with many partners to achieve common goals and it can carry out continuous planning to respond rapidly to new opportunities.

The CCS and NCIC are confident that the creation of federal Canadian institutes of health research will stimulate health research, will dramatically reduce the burden of disease, and will enhance the creation of new health industries that are internationally competitive. We strongly support the creation of the institutes, which have ambitious goals in tackling diseases in Canada. For cancer, ambitious goals are realistic and achievable if sufficient resources are devoted to the task.

Thank you.

The Chairman: Thank you very much for your presentation.

We will now hear from the Social Sciences and Humanities Research Council of Canada. Dr. Marc Renaud, welcome.

[Translation]

Mr. Marc Renaud (President, Social Sciences and Humanities Research Council of Canada): Good afternoon, ladies and gentlemen.

[English]

This is my fourth talk of the day. I am literally brain-dead, so I'll have to revert to my primitive instincts and speak French, if you don't mind.

[Translation]

You invited us here today to give our views on how a tax surplus—if there was one—should be invested. We prepared a brief on the subject, and submitted it to you a little over a month ago. In our brief, we tried to explain as best we could how the surplus should be invested to help Canada move forward.

The brief contains two messages. First, we have to identify the important issues. Health is undoubtedly an important issue. The Social Sciences and Humanities Research Council and other colleagues in the humanities strongly believe that new health institutions should be established, insofar, of course, as they provide a link between social sciences research and biological research. In my view, that is where the future lies.

But there are other important problems we have to deal with today; for example, in many parts of the country, there are problems regarding children, young people and their adjustment to the labour force, and social cohesion. In many cases, these problems result from globalization. In a nutshell, the brief sets out our perception of the issues the government must deal with in the near future.

Secondly, the briefs attempts to explain how we could make better use of social sciences and the humanities to move forward together in the future.

I was told very firmly that I should not speak for more than five minutes at this point. So I will not go over everything that is in the brief. What I would like to do, however, is give you two messages. The first is that the social sciences and humanities in Canada are focussing on issues which are extremely important to our collective future; this must be recognized. The second message is that SSHRC—the Social Sciences and Humanities Research Council—knows where it is going, and needs your help to get there.

Today, we have brought you a variety of documents to illustrate the status of social sciences and humanities in Canada. Please take a look at one of the publications in the purple folder—the one called "Leading-Edge Knowledge and Skills for a Changing World"; please take a look at the last two pages.

[English]

Look at the two last pages of this document, because we have tried to outline here very quickly the kinds of things that the Social Sciences and Humanities Research Council delivers in this country.

I won't go through all of this. Let's just take the first issue, for example, the whole problem of access to education and the notion of a virtual university. We have in Canada a major tele-learning network of centres of excellence that is looking at how we can use the new computer technology, for instance, for long-distance education. Long-distance education is a major business of the future.

If, for example, the Americans would put their act together on that front, we would lose our own students in our own universities, because they're going to get the best teacher of such and such a thing out of the media. So we have in Canada a base on which to build, which is this enormous team around virtual universities.

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This is a list of the kinds of things we deliver for Canada. Again, it's important to realize we have this critical mass of people—20,000 researchers across the country and 40,000 graduate students. It's an enormous amount of grey cells to bring to bear on the issues that challenge us.

[Translation]

The second message is on our focus, our direction.

The publication I showed you was approved by the SSHRC board of directors last week, as our plan for the future. It states that we have no choice but to reinvest in basic research.

However, there are other sectors where a great deal of funding is required as well. Health is undoubtedly one. I would be extremely happy to see opportunities for us to join forces with biomedical researchers. Good administrative structures, and agreement on what our research institutions should be doing, among other things, are very important to Canada's future.

It appears there are also other sectors requiring priority investment. For example, Canada has one of the best statistical agencies in the world—Statistics Canada—yet only very few researchers from Canadian universities study Statistics Canada data. With statistics Canada, we therefore decided to establish a committee to look into what is happening, and determine what we must do. Now here is what the committee is getting ready to tell us: We have to invest $10 million into better training for young people, so that they become more efficient at analyzing major data banks, thus becoming better demographers. This will help us stabilize some critical masses; let's not forget the brain drain problem. Our best researchers are also sought after by universities in the U.S., for about the same reasons as those universities try to attract biomedical researchers away from Canada.

So, in our brief, we identify this as another sector in which major funds should be invested. We at SSHRC are convinced that our universities' future can be assured only be building bridges among disciplines, and among universities and private sector organizations. We will also have to build bridges among universities and communities, community partners. Even as we speak, SSHRC is carrying out a pilot experiment designed to encourage inter-university research partnerships. The program has been resoundingly successful, even though we do not have the funds for it.

We also point out that, if we want to energize the vast numbers of researchers and students there are all over Canada, we have to reinvest in social sciences.

A few weeks ago I was in the United States. Some things I saw there made me green with envy; some less so, admittedly. There is much more government funding for the social sciences in the United States than in Canada, on an average per capita basis of course, and they have an additional advantage as well, with these huge foundations that perform all kinds of knowledge brokering tasks, fund research and fund debates. This does not mean that policies in the United States are better. It just means that they have the resources they need to keep knowledge development on track to meet society's future needs.

So I appeal to you in despair, you might say. As you know, the Social Sciences and Humanities Research Council, the SSHRC, does not fund 95% of graduates in our universities. Ninety-five percent of those students can never hope to receive an SSHRC grant one day. And as for the NSERC, 80% of students will never get a grant. So the government needs to invest. Students are far less motivated when they have to work during their studies.

As for researchers, we can fund only some 15%. That figure has to go up.

Here is what we ask you: If there is a surplus, though we understand full well that there are many priorities, please do not discount the social sciences and the humanities. Thank you.

The Chairman: Thank you, Dr. Renaud.

[English]

We will now hear from the Coalition for Biomedical and Health Research, Dr. Barry McLennan and Dr. Clément Gauthier. Welcome.

Dr. Barry McLennan (President, Coalition for Biomedical and Health Research): Thank you, Mr. Chairman. I will make the presentation, and my colleague Dr. Gauthier and I will be available to answer questions.

Thank you for giving CBHR an opportunity to submit a brief and speak to the committee this afternoon. I believe each committee member has a copy of the brief.

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Canadians want to ensure that the standard of living they have enjoyed can be maintained. In order to do this we must be more productive. We must increase our real GDP per capita. The economic and fiscal update released two weeks ago identified the improvement of productivity growth as the key challenge for Canada.

Innovative research drives productivity, and one of the most important assets a country has for supporting innovation is its public investment in research. Therein, I believe, lies the solution to the challenge facing Canada.

Renewing our health care system by enhancing our health research capacity will lead to the increased productivity we desperately need. The federal government must play a key role by helping to build an internationally competitive research enterprise. At the same time, Canada's health care system will be revitalized through a targeted investment in health research amounting to only 7.5% of the estimated budgetary dividend for the coming fiscal year.

I refer to the implementation of the CIHR concept presented initially this afternoon by Dr. Henry Friesen, and others who have spoken to it. This bold new initiative will transform the health research enterprise in Canada by integrating the full spectrum of health research in support of Canada's health care system.

The results of two recent national polls are relevant to this debate. I refer to the CBC Environics poll and the Ekos Research poll. From both of these polls it is clear that maintenance of our health system is of immediate concern to Canadians. In the Ekos poll, the vast majority of respondents—over 80%—indicated an overwhelming commitment to health research being conducted in Canada, and they support investment by the federal government of 1% of health care expenditures on health research. Reference was made to this by Dr. Friesen earlier. You'll also be aware that the Ontario Hospital Association made a similar recommendation to your committee on August 31.

Research, especially university research—so says the OECD—is the key determinant to productivity. In 1993 the academic health science research activities were at the heart of a supplementary or additional GDP of about $37 billion or 5% of the total GDP, representing about 100,000 jobs. Investment in biomedical, clinical and health research offers a double bang for the buck because it not only increases productivity in the health industries, but decreases the loss of productivity due to illness.

You will be aware that Health Canada's 1997 study revealed that the economic burden of illness totalled $156.9 billion in 1993—in other words, $5,450 per person. This amount was roughly equivalent to 22% of the GDP for that year. The same study urged government to strengthen research in order to minimize the burden of illness in Canada.

Prime Minister Chrétien has stated that his government will invest more of our resources in the years ahead to reinforce our public health system. Canadians are profoundly concerned that their health system is declining. Finance Minister Martin said two weeks ago that this concern must be addressed.

The CIHR initiative will work to address the health concerns of Canadians and serve as the platform to revitalize our health care system. The objectives of such a national effort are listed on page 3 of our brief. Let me speak briefly to some of the objectives.

Health research is conducted in a wide variety of settings, including universities, teaching hospitals, research institutes and community facilities. Each one is a partner with a research sponsoring agency such as the MRC, the NCIC or the Heart and Stroke Foundation of Canada. This partnership approach has served Canada well, but gaps in the overall research policy framework are now acting as a barrier and preventing us from being internationally competitive.

While the 16 academic health centres are well integrated locally, there is no framework in place for national networking. Others this afternoon have spoken to this need for networking.

As documented in our brief, the brain drain in the health research sector is both real and increasingly costly. For every seven investigators leaving Canada, only one comes back. The C.D. Howe Institute estimates the churning costs to the Canadian economy for this brain drain at $11.8 billion over the seven-year period of their study. That's $1.68 billion per year. If you assume that at least one-third of that cost is attributable to health science professionals, then the cost is about $560 million. Look at that: stopping the brain drain will pay for CIHR, and CIHR provides a mechanism to address the brain drain problem.

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Developing responsive health policies should be a priority for Health Canada. If scientists are brought together in multi-disciplinary teams, as is envisaged in the CIHR model, a mechanism will be in place to augment Canada's surveillance and risk management framework and provide additional expertise that can be focused quickly to address specific health threats.

We simply must avoid another national expansive catastrophe such as the tainted blood scandal. Enhanced research capacities are also needed to respond to the implementation of evidence-based medicine at the primary care level. Dr. Poznansky made reference to that in his comments.

There is a tremendous potential for Canada to be a world leader in health research. With our emerging biotechnology industry and our ever-expanding university-based technology transfer programs, we have the ability to compete successfully with the rest of the world. We must build, however, an attractive research environment in Canada with competitive regulatory policies, appropriate SR and ED tax credits and an effective drug review process. We must above all maintain a cadre of well trained scientists in order to assume our rightful place on the world stage.

From CBHR's previous presentation to this committee, you'll be familiar with the shortfall in funding in Canada for health research, and reference has been made to that by other speakers this afternoon. While we are most appreciative of the additional for health research provided in the last federal budget, you can see from the graph on page 9 of our brief we're still losing ground to our international competitors.

The implementation of the CIHR concept will require budgetary allocations of $150 million, $300 million and $500 million over the next three years. Accordingly, by 2002 our level of investment in health research will then be in line with most other G-7 countries at about $28 per capita. The U.S.A. will be an exception, of course, as pointed out by Dr. Friesen.

In conclusion, Mr. Chairman and committee members, we must increase our productivity through appropriate federal investments in health research. In so doing we will renew our health care system by generating improved treatments and better access to health care. We will also stop the costly brain drain and become internationally competitive in an area that is known to be a major growth sector in the next century.

Thank you.

The Chairman: Thank you very much, Dr. McLennan.

Those were excellent presentations by all. We'll now go into the question and answer session and begin with Mr. Epp.

Mr. Ken Epp (Elk Island, Ref.): Thank you, Mr. Chairman, and thank you all for your very interesting and challenging presentations.

I'm going to ask a question none of you addressed, which has to do with all of you here.

We have all of these different councils, and there's very little difference even in the names of some of your councils. I'm just wondering whether we could be more efficient in this country if we somehow consolidated the organization of medical research. I'm speaking specifically of the medical part right now, since I think the social sciences and humanities part is related but maybe should be separate. All of you are here with what I think are very excellent cases. Are you duplicating your work, or is there really a niche for each one of you in your individual specialities?

The Chairman: Dr. Glynn, go ahead.

Dr. Peter Glynn (Member of the Executive Committee, Council for Health Research in Canada): Maybe I could deal with that issue. I think there may be some confusion because of the use of the word “council” describing many different things.

The Council for Health Research in Canada is actually a coalition of the health charities and the institutes that raise money from the public. It is small. Pierre Fortin is here and he is the sole staff member. It is not an organization that funds research. The Coalition for Biomedical and Health Research is small. Clément is the staff and it is not an organization that funds research. The Canadian Cardiovascular Society is a coalition of people interested in cardiovascular research. The Medical Research Council, as you are well aware, is a funding agency. The National Cancer Institute, which gains its money from the Canadian Cancer Society, is a funding agency.

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So I think maybe using the same name to describe many different endeavours confuses people that there are all of these people not working together. Actually, they are all working together and going in exactly the same direction.

The Chairman: Thank you.

Dr. Phillips.

Dr. Robert Phillips (Executive Director, National Cancer Institute of Canada): Yes, I often actually get asked the same question by members of the Canadian Cancer Society who give us money.

I think we have a record of trying to work closely with many other agencies to make sure we don't duplicate effort. It's clearly not in anybody's interest. One of the major factors that we use in evaluating any research we fund is whether this work is innovative and whether there is similar work going on anywhere else in the country. We're confident that the individuals advising us are giving us good advice and we are not duplicating efforts.

I think our problem is that we are not supporting enough of the good research we're doing. To give you an example within our own organization, our experts tell us that about half of the individuals who come to us have really good ideas that we should fund. Of that 50% that they say we should fund, we can only fund half of that. So we're missing a lot of really good ideas. I think our problem is not duplication, but a lack of resources to fund the really good ideas we have.

The Chairman: Dr. McLennan.

Dr. Barry McLennan: Thank you.

That's a good question you've asked. To echo some of the other comments in a slightly different way, CBHR is a coalition representing about eight different organizations. Most of them are researchers or physicians. I think collectively what's represented in this room are two categories, research funders and research performers. One of the common themes someone referred to earlier this afternoon is the notion—and it's reflected in the concept of CBHR—that we need to involve all the stakeholders and pursue our common objective together.

Collectively, I hope we've answered your question.

Mr. Ken Epp: The next question I have has to do with the actual research and how it's done. It seems to me that the best way of doing research would be to integrate research with, in almost every case, the institution that actually provides a treatment service.

Since most of you are looking at research on how to cure disease, in my view there's altogether too little emphasis on prevention, although several of you did mention it in passing. It seems to me that if you're looking for a way to cure a disease, you should be working at the place where the disease presents itself with patients. Very often I think there are insights to be shared even from people who aren't designated researchers per se but who work with people who are suffering and who have these diseases, as we call them. Sometimes that interaction would probably be better. To what extent is that done?

Dr. Mark Poznansky: I think that's done in spades all the time.

Perhaps the best example is the cardiovascular area. I'm not sure who said it, but it was probably an American who said the best way to prevent a disease is to understand the disease. It was only once we started to understand that issues like high blood pressure, smoking, and high cholesterol were some of the causes of cardiovascular disease that we could then go ahead and start preventing those types of disease that were caused by those specific, if I could say, environmental areas.

So we're working constantly at that area, and going from the area of understanding the disease to start intervening and preventing it, either using environmental and social ways to do it, or by therapeutic intervention. So I think your point is well taken, but that's exactly what we're all doing.

The Chairman: Thank you, Dr. Poznansky.

Dr. Renaud.

Dr. Marc Renaud: I want to add a note to the second part of your comment about prevention.

One of the reasons I think the CIHR is a good idea is because it will allow new forces to be brought to bear on issues of prevention.

My own field is the field of social determinants of health, and I've been very active in the national health forum on this question. When we synthesize all that material, where Canada actually has a leading edge in the world, we realize that now the key question is what are the biological pathways by which the social environment affects the human body. This question can only be addressed if social sciences work hand in hand with life science people. Therefore, it's important to realize that this is a cutting-edge issue and that we can make a lot of headway if we link up our forces.

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Ms. Dorothy Lamont: In this area, we tend to talk about the interface between the scientists and clinicians when it comes to integrating the knowledge gained from research into real life. But we are in fact going further than that now.

I spoke earlier about one of the things the Canadian breast cancer research initiative has been innovative in—it has in fact prompted the NCIC to do this—is in incorporating the use of survivors, lay people of all sorts, in the process of scientific review of the applications for research. We're learning how to do that and how to do it effectively, and there's no question that this component now represented in panels is changing the face of how we make decisions. It is definitely connecting the issues that are of importance to patients right into both the research efforts and the decisions we make around the research that we fund.

The Chairman: Dr. Baird.

Dr. Michael Baird (Secretary, Canadian Cardiovascular Society): Thank you, Mr. Chairman.

To answer the question concerning the interface between basic research and clinical application for disease, I think the universities and the academic health science centres in Canada are that interface. The practical interface is the clinical researcher, usually a physician who treats patients for a fraction of his time, and does either basic or applied research for another fraction of his time. He is often the person who interfaces between the basic researcher in the laboratory—perhaps in the faculties of biology or biochemistry or the faculty of medicine—and the patients for whom these therapies would be of benefit and on whom they would be tried. One of the points noted by the Canadian Cardiovascular Society is that we think these clinical researchers deserve funding to carry on this effort.

The Chairman: Dr. Friesen.

Dr. Henry Friesen: Just to echo some of the points already made, Mr. Epp, I think of the phrase that is often used. I think the key questions to the prepared mind are often triggered at the bedside by confronting issues of patients with illness. So the phrase is “Bedside to bench and back to bedside”. Now, happily, it's sometimes also to boardroom, where product development feeds back.

Just to let members understand the changing face of the landscape, you might have thought most research in some disciplines in the health sciences still takes place in the university community. In others, there's a growing component of it in hospitals. In our case, at least 50% of our funds go to researchers who are in hospital-based environments, so that very interface is an important dimension. I can't emphasize enough the point of that translation of new knowledge for the benefit of patients.

That cadre of individuals is widely acknowledged as being an endangered species not only in this country, but also in the United States. The pressure is on everyone now to earn a living, as opposed to the days when funds were a little more easily available. In my era, we could spend a day seeing patients, or perhaps a week. The rest of the time was spent in research. That era is long over. Now, you either go and practice, or you do research and struggle. The gulf, the gap has widened. So I share the view that we need to pay attention to that group in order to make sure there's a cadre of individuals who can translate those innovations for the benefit of patients.

The Chairman: Thank you, Dr. Friesen.

We'll get a final comment from Dr. McLennan.

Dr. Barry McLennan: Thank you.

Mr. Epp, if you look at the mission statement in every faculty of medicine or teaching hospital in this country, you'll see something to the effect that the best patient care is based on good teaching and good research. There is a continuum there, and others have mentioned it. There is a link between the knowledge-generating research and getting it to to the bedside, as Dr. Friesen said. I think that's in place, but an additional focus needs to be put on this.

Mention was made about our overworked clinical scientists, and this is true. As an assistant doing research in my home university, one of the things that is really frustrating to my mind comes up when I ask clinicians if they could work on a disease-specific problem. Of course, their answer is that they're too busy seeing patients or doing service work, you see. So it's part and parcel of the whole picture. We've under-resourced the system for so long that we're really down to just doing a few things.

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Another component that we also need to remember is that, increasingly, it's clear that there's a close link between good animal health and good human health. We need to bring our animal health researchers into this picture as well, along with our primary care physicians. Primary care physicians will describe their work sometimes as looking through a wide-angle lens, not the specific, narrow lens that the specialist is using. But they also bring a perspective to medicine and to health care that we need to encompass, along with those of other stakeholders in the community.

So I think the answer to your question is that it is happening, but it's not that we couldn't do it better and not that we couldn't bring in more pieces.

The Chairman: Thank you, Dr. McLennan.

Thank you, Mr. Epp. That was twelve minutes. We have to move on.

[Translation]

Mr. Rocheleau.

Mr. Yves Rocheleau (Trois-Rivières, BQ): I would also like to thank all witnesses for having taken the time to appear before us today. The issues they are dealing with are very interesting.

I have five or six questions for you. A number of you emphasized the brain drain from Canada to the United States. Are there any statistics that break down the brain drain by province, for example? With regard to Quebec, I have seen contradictory statistics regarding doctors, with some sets of figures indicating a significant brain drain, and others appearing to show the opposite.

Secondly, do we have some idea of why many researchers leave Canada? Is it because they get paid more? Is it because of working conditions or the technological environment they find elsewhere? Do we really know what the reasons are?

Thirdly, if Canada were to have a budget surplus, do you feel that the federal government's assistance could lead to specific solutions, if we thereby accepted federal encroachment in health, something that would not be welcomed in Quebec? Do you have any clear ideas of the specific objectives we should be aiming at in investing the surplus?

Mr. Renaud, a few moments ago you talked about the contributions of private U.S. foundations. What kind of commitment should private sector organizations in Canada be making to assist you?

Finally, what about the personal responsibility of a researcher who benefitted from public funds, thus from people's personal income tax when he finished his Ph.D. or postdoctoral studies and has been recognized as a scientist? Is there any feeling of loyalty towards Québécois and Canadian taxpayers who helped this researcher with his career? Does that have any bearing on the old problem of the brain drain?

[English]

The Chairman: Would you like to start, Dr. Renaud?

[Translation]

Mr. Marc Renaud: I just have one remark about the whole issue of the brain drain. Statistics Canada has published a study that shows that apparently we do not have a brain-drain problem. According to Statistics Canada's data, the number of people leaving is equal to the number of people coming in.

The Industry department organized a discussion about this data, because it was very intriguing and it contradicted the conclusions that one could arrive at intuitively on the basis of current observations. Thanks to this discussion, we realized that we didn't have enough data to come to a clear conclusion from the figures that were available to us.

In fact, it would appear that people tend to leave the country at the top of their career, whereas immigrants from Eastern Europe or other places come here early on in their career. That is why the figures are equivalent. However, Canada may be really losing skills. Apparently, this may not be as much of a problem in Quebec because language protects us, in terms of immigration. But apparently that's what's happening.

In my own field, people are not so much drawn to the United States because of the money, because they have to pay for their health insurance, among other things. The crime rates are higher, and so on and so forth. What really draws them to the States is that they have been asked to come, they are given an annual research budget of so many thousand dollars, and they don't have to spend all their time filling out grant applications. Furthermore, the whole research environment is much, much better. This is why they are going.

As for the private sector, in my own particular field, the humanities—of course, things are different for them—I am not very hopeful. There are two or three people from the private sector on my own board, and some of them sit on the boards of Canadian foundations. They say that they are swamped with applications for partnerships and that they cannot offer enough of them. The structures are not the same as in the United States. In our own particular field, the assistance really has to come from the government. I think that we mustn't fool ourselves on that point.

[English]

The Chairman: Dr. Friesen.

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Dr. Henry Friesen: The point made by Dr. Renaud about Statistics Canada is accurate except for the fact that even they recognize that there is an important, real brain drain in one sector, and that's the health and science sector. It may also be in the management sector as well. I think that was reinforced graphically and convincingly by the C.D. Howe Institute.

In those three sectors, the brain drain is real—and the training costs have been referred to. They do also have a province-specific nature. I don't recall them, but we'll be pleased to furnish you with that information. You would be interested to know, though, that there is a shortage of managers in Quebec, where the biotech sector is such a thriving sector of the provincial economy. I hear from financiers in Quebec that they're having to import American managers to manage start-up companies in Quebec. So there are selective shortages.

In my view, scientists leave because of the opportunities that Dr. Renaud mentioned, and I think the Howe Institute also emphasized that. For the managers, I think it has more to do with the taxes and the net income. For scientists, it's the opportunity to conduct their creative bent.

Yes, we do have specific proposals should there be a surplus, and if health is the issue. We say there's a special role for the federal government in research. The council has supported research for many years. Quebec, particularly in the health field, has achieved a special competitive advantage partly because of our provincial partners. From MRC, greater than 30% of our budget flows to Quebec, and so it should. I sometimes say that if you used our index of which city captures the most funding, and used that as the criteria, Montreal remains the intellectual capital of Canada because of the great strength of two great universities.

In terms of the private sector, you might be surprised to discover that the private sector—by which I mean the pharmaceutical industry—is investing four times more than the federal government. In the United States, it's one to one. So thanks to changes in the patent regime, the private sector has stepped up to the plate, and I believe there's a great opportunity to see even more investments if we get our regulatory system right.

Research is obligation and loyalty. I would rather see the solution in creating opportunities as opposed to creating barriers. I think that's a more productive route to go.

Thank you.

The Chairman: Dr. Glynn.

Dr. Peter Glynn: Mr. Chairman, I'll just carry on in regard to Dr. Friesen's points about the question of health.

In a sense, one of the unfortunate things here is that the only commonality between all the issues I know the committee has been dealing with—the transfer to the provinces for today's health services and for health research—is the word “health”. I can tell you that I live this every day. I'm president of Kingston General Hospital, which is the teaching hospital for Queen's University Faculty of Medicine.

There are things that need to be done, but we quite frankly need to worry about the future. The issue that has been presented by these various groups is about the future, and it's about the future in three ways. It's about the future of our health care system. As many have said, we need answers to some very fundamental questions. Dr. Poznansky laid out a set of questions. If we could answer them, it would change the way we deliver service.

Let me use one example of a question that has been answered and is being put into practice. It was discussed at our medical advisory committee yesterday morning, and it concerns measuring cardiac enzymes in order to determine whether or not a person has actually had a heart attack. The number of admissions to hospitals in this country for people who may have or who think they have undiagnosed or undiagnosable heart attacks is profound and significant. It is the view of the group working at KGH that by instituting a five-dollar test, we could reduce those admissions by about 40%. They may stay for only two days, but that's two days for a lot of people. So these issues are being put into practice.

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On the question of where this idea came from, I suspect, and Dr. Friesen and Dr. Baird know better than I do, it has come from about 25 to 30 years' worth of small discoveries, which when put together said if we can detect this enzyme, we know it is a determinant of whether or not the person had a heart attack. This is a profound issue.

There are lots of other examples where significant changes in the delivery can be made. So it has that issue.

The second piece, which we've also been talking about, is that this is about the future of the Canadian economy. This is about the future of Canadian society. We will be, whether we like it or not, a knowledge-based society and a knowledge-based economy.

Let me talk about knowledge-based society. That's in a sense the softer side. That's what Dr. Renaud has been talking about. It's what Fraser Mustard talks about when he talks about investing in children. We now know brain development takes place at a very early age and if you don't worry about brain development you get behaviour, I think, Marc, that is not desirable. We know that. That's about a knowledge-based society. But also it's about creating jobs and creating industry.

The Conference Board put out a document this month called Performance and Potential 1998, which I would recommend to the committee. One of the things it says is that boosting innovative capacity must be priority number one. It talks about innovation as a process through which additional economic value is extracted from knowledge.

The problem is if we don't create the knowledge, we can't extract any economic value from it. And we need to worry about that.

The last point I would make, Mr. Chairman, is that I see this very much in the category of, as Dr. Friesen said, progress and hope, and the hope is for the young people of this country, that they can see themselves in a career with a future in science. And quite frankly, they don't at the moment. And they certainly do not see in science, in some of the fundamental issues, being able to spend their lives in it, and being able to spend their lives in it without spending half their time looking for money to fund the other half.

I hope the committee can put these three things together and deal with these as two separate issues—funding of health care and funding of health research.

The Chairman: Thank you.

Dr. McLennan, your final comments.

Dr. Barry McLennan: Thank you.

I'd like to address your question on the brain drain and your question about the loyalty of the individual student or researcher. Reference was made to the C.D. Howe Institute report, which in my view is an excellent report, very thorough and very detailed.

The brain drain is a complex issue and it also moves with time. Up until 1990 we probably didn't have a brain drain, at least in the health professions, but since 1990 the numbers are clear. We do, and it's increasingly costly, as I said.

On page 5 of our report we identify the results of a recent survey, which deals with actual warm, breathing bodies rather than cold numbers. Each one of those numbers represents an individual who was tagged when the survey was done in August. So it is real. And it is very serious, very costly for Canada.

We are currently subsidizing the American economy with our export of people, and we can't continue to do this. It's very nice of us to do that. I'm sure the Americans are quite appreciative. But it doesn't really help us very much.

I have a couple of quick examples that came to light in discussion a few days ago. One is a recent competition of the Borrough's Wellcome Foundation in the States offering money for researchers—post-doctoral fellowships. Four Canadians who live in Canada applied. Eighteen more applied who were Canadians living in the United States. That gives you an interesting comparison.

Last Saturday someone also mentioned there are 14 Canadian Nobel laureates. Ten of the 14 live in the States. Why?

Regarding your question on research loyalty, from the student and the post-doctoral fellow point of view, yes, you're quite right. We as taxpayers have invested heavily in these young people. They want to stay in Canada, in my view. The problem is they struggle to get a job out of university—a teaching hospital or a research institute. So now they're in place; they've got the job. Now they need the tools to do the work they've been trained to do.

The frustration comes in when they can't get the research money to do the work they're trained to do. As someone mentioned earlier, our researchers spend 40% to 50% of their time justifying their own existence—in other words, trying to get funds to do the work they've been trained to do. And they notice, when people leave and go to the States, the environment is so much better.

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I don't think it's a question of loyalty; I think it's a question of research environment. Certainly in the health research community, my understanding from the data is that it's not taxation differences and it's not salary differences that draws them away; it's the research environment, the ability to get the funds they need to do the work they love to do.

So I think a lack of a proper research environment is the reason they leave, not salaries, not taxation. It may be the case in some instances, but I think generally it's the environment problem.

The Chairman: Thank you.

[Translation]

Thank you, Mr. Rocheleau.

[English]

Mr. Riis.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): Mr. Chairman, I have two short questions, although they might take a longer time to answer.

Dr. Poznansky, you indicated you seem unappreciated these days. I'm just going to make a point here; I'm not going to go back and ask you to explain that.

Mark, you indicated that you feel rather despairingly sometimes in terms of the way things are going. I guess all of us around the table probably agree with everything you say. I know you all agree with each other, and I suspect that we all agree more or less with the point you make, that we have an under-resourced system, that we're losing ground to our international competitors in these fields of medical research, that we must increase our productivity, that young people don't see science as a viable future, and so on and so forth.

I don't think there's a single person here who would disagree with probably anything that has been said. Yet in the documents you present to us, the graph showing the relative research dollars in the United States compared to Canada over the last ten years, it seems to be worsening, let alone Europe and those other places.

As an intelligent country and as a group around this table that I think understands everything that has been said here today, without necessarily reading through all the briefs—but we will—what is it that causes us to have this problem?

When that question was put to a previous group, a different assembly, they felt that we were still thinkers often in Canada of hewers of wood and drawers of water, and therefore perhaps we don't make the necessary investments in some of the technology to make us more competitive in the business sector.

But we're not talking about that here. We're talking about a different set of issues. So could you answer the question, not what the problem is, which you describe adequately, and what the solution is, but why is it that we don't implement that solution to a sufficient degree, in your judgment?

Dr. Mark Poznansky: I think up to two or three years ago the word “despair” was really serious. We really did feel that to a large extent we were such a prosperous country, based on our natural resources, and somebody said I couldn't use the phrase, rather than hewers of wood and drawers of water, exporters of wood and importers of chain saws. I think we felt that for many years. But in the last three years the government has proceeded to make some very important investments in research: the millennium fund, the Canada Foundation for Innovation, the restoration of the MRC budgets, and NSERC and SSHRCC budgets. So our despair is lessened.

To a certain extent, when you look at the amounts of money being invested, we're really in shallow water, wading, and we really have to learn how to swim. When we learn how to swim and when we make those serious investments, and when we really understand that our economy and our health will change as a result of those investments, that's when we'll begin to prosper in that area. We've made those small steps in the last three years, but I guess because of the economy and for other reasons, they have just been small steps. Hopefully with the surplus now we'll understand that we can make large steps and make major changes.

The Chairman: Dr. Renaud, would you like to comment?

Dr. Marc Renaud: I'm not so sure the problem is so much in implementing the solution as in finding the winning solution. I'm struck by the fact that on the health front, as well as on the social well-being front, it's difficult to figure out how we should get organized for the future.

Historians are telling us that we're now undergoing the third most important change of the millennium, not of the century, because of globalization, because of the communication revolution. These historians say also that our great-grandchildren won't have a clue of the world in which we live, because the world will have changed so much.

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So I think that the real challenge in front of us is to figure out the winning solution for the future. This is what the biomedical people are trying to figure out. This is what we're trying to figure out. I really think that's where the crux is. But we need your help financially, because otherwise we won't go forward.

Mr. Nelson Riis: Could I perhaps just add to the point you're making? You drew our attention to this chart where you've mentioned a virtual university and now you talk about the forces of globalization and the communications revolution, and now we're starting to talk about the electronic commerce that's beginning to flow. Are we possibly trying to push a rope uphill by trying to devise a Canadian medical research facility, as opposed to a North American one or a global one?

Mark, you mentioned in your presentation that at the University of Pittsburgh they came up with this study that saved the American system $400 million a year. I assume it saved our system similarly $40 million a year or whatever.

Are we trying to find solutions to these problems by perhaps being too narrow in our rather nationalistic approach to these solutions when everyone else is looking at a globalized solution? I wonder if you folks are there yet, in the same way that some of the more commercial sectors are.

The Chairman: Dr. Phillips or Dr. Friesen.

Dr. Henry Friesen: I wonder if I could join in this discussion, because it is an important question. We asked Canadians through the poll—or the task force on our behalf asked that question—and only eleven percent of Canadians thought that. Eighty-five percent said strongly they believed as a country we should also ensure that Canadians are contributors to this global enterprise that affects us all, our health. And there are some unique Canadian dimensions in that.

On the issue of science, it is international. Of course it is. But it's that very internationalism— Canadians produce about 3% to 4%, in the health field, of the world's knowledge. That means a 96% leverage opportunity for Canadians to capitalize on. In order to import knowledge, we have to have knowledgeable importers. Otherwise, we might make mistakes in what we choose to import because we're not knowledgeable.

On the issue of what is the solution, the issue of the investments already made, we have invested and the governments have made strategic choices about investments: CFI, building the infrastructure, building the pipeline network, if you will. But somebody has to drill for oil. Otherwise the pipeline network investments really are unhelpful.

So I think there is an opportunity for us to see a Canadian solution that is part of a global reality. The global reality is to see building on strengths, making economic clusters, and making sure they're joined and linked in this vast country: geographic linkage, integration across sciences. And sometimes those multi-disciplinary discussions bringing new perspectives are the most productive; new insights are generated.

It is not about discovering new continents; it's about seeing with new eyes new opportunities.

The Chairman: Dr. Phillips.

Dr. Robert Phillips: I would second Dr. Friesen's comment.

I also wanted to go back very briefly to your first question about why do we get in this situation. While I was tempted to turn the question back to you, let me say that I think one of the issues in fact has been that scientists have not been very good at explaining to you or to the Canadian public why science is important to our society and to our economy.

I think that's changing, and certainly within our organization we're much more conscious of our need to communicate to the public about why it is important. It's not a right that we have as scientists; it's something we have to demonstrate a need for. And I think we're trying to do that. So we clearly have a responsibility to communicate.

With regard to the globalization issue, clearly science is a global industry. Within cancer we have many examples of where our scientists are leading international clinical trials. But we can only do that if we have the resources here to establish a group that has the credibility to be a leader within the international community. We're missing a lot of opportunities because we're not taking advantage of all the leadership opportunities we have, because people who are capable simply don't have the time or the resources to do it. So I think that's where we need to focus our efforts.

The Chairman: Any further comments? Dr. McLennan, followed by Dr. Poznansky.

Dr. Barry McLennan: Thank you.

Just to add to what's already been said and by the way of an answer to your question, I think we do have some pieces in place that are very important, and a couple have been mentioned: the national centres of excellence program, the CFI program, and the millenium fund. And in a sense this is another piece in the puzzle, the CIHR concept, which I think will really accomplish what we have not done.

• 1700

Why haven't we done it? Maybe partly it was the psychological answer that Mark gave, that they didn't think it was important. But as we've seen recently, Canadians— Just to give you one example, the Canadian Medical Discoveries Fund has raised several hundreds of millions of dollars to help create companies, which can now be established on the basis of research results for which the investment was made 10 or 15 years before. We need to continue that chain. We have to keep priming the pump. We have to keep feeding that engine to produce more discoveries, more medical devices, and market them and so on.

We've been slow in Canada to get at this, but we are now showing across this country that we can do it. We don't need to rely on the rest of the world to do it. And you have to pay to play in this game. We can't hold our heads up around the G-7 group if we don't do our fair share of basic research and knowledge-generating activity in this country.

I spoke a while ago about the research environment. If we want to attract foreign investment in this country and create jobs and economic activity, we'd better have our machinery in place. We'd better have the scientists ready, the research labs, the teaching hospitals, the infrastructure in place; otherwise we don't reap the economic benefit of doing that. I think there are a lot of pieces to this puzzle, but we're well positioned, in my mind, to really make a difference in Canada as we go into the new millennium. We do have an excellent reputation for training people. Canadians can do research. We don't need to bow our heads to anyone. We have the talent in this country, but we have to give them the tools to do the job, and the federal government has a primary role to get it started.

Thank you.

The Chairman: Thank you, Dr. McLennan.

Dr. Poznansky.

Dr. Mark Poznansky: I was very aware that I was using an American example in terms of the tonsillectomy. I would have much rather used a good Canadian example but I couldn't find one. The problem we have in Canada with the health care system is we are the world leaders in having a universal health care system, and because we're the universal leaders we have to be the first people in line doing the evidence-based medicine to make sure our system is working. We can't follow on from others.

In terms of the issue of globalization, you're absolutely right. We have more of a globalization in terms of the economy, but it's all the more reason that we as Canadians have to be leaders in innovation and wealth creation in this country and not be purchasing that. If we want to do that we have to make the investments, which we haven't done.

The Chairman: Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chairman.

Thank you for your presentations.

The productivity issue in Canada is of great concern. We've seen a secular decline in the Canadian dollar over the past 30 years and there are some structural impediments we have to productivity intrinsic in the Canadian economy, like interprovincial trade barriers and high taxes. I guess our inconsistent commitment to research and development could be, particularly in a global knowledge-based society, considered another one of those structural impediments to productivity and arguably to the strength of the dollar. It's of huge concern.

The first question I have is relative to an engagement process. I understand the proposals for increased commitment to basic research, but to what extent through tax policy and patent protection can we encourage a greater participation or greater level of research, for instance, from corporations, the private sector? Also, how can we support the volunteer sector more fully? I really do believe sometimes that the government can engage the volunteer sector a heck of a lot more effectively than it's doing right now. Arguably, some of the research and development or some of the services that are provided through government could, if we gave the right incentives—maybe through tax policy—be delivered through the volunteer sector, or a lot of this could be. I'd be interested in your feedback on that, to begin with.

The Chairman: Dr. McLennan?

• 1705

Dr. Barry McLennan: First of all, on the question of getting greater participation by the private sector, as Dr. Friesen mentioned in his comments a while ago, the global pharmaceutical industry doesn't do too badly, in one sense. Their investment in Canada now is approaching $1 billion, and that's good. As we must be aware, we're a small country. We're not a major player on the world stage, and when we can persuade a head office in Geneva, Switzerland, for their company to make an investment in Canada, that's good news.

What we have to be careful of, and we make this point in our brief, is that we have the right, and we use the word “environment” again— We need to have all the tools in place so they'll make the investment. Part of the tools in this case are appropriate SR and ED tax credits. Reference was made earlier to the patent law change; that's terribly important. In other words, all these elements come together to make a level playing field for the investor.

What makes Canada a good place? Well, they're going to look at taxation levels, the patent law, the research environment and so on. So we need to be aware and mindful of all those things, including regulatory policies. Those are global decisions that are made. Yes, they'd like to do business in Canada, they like the way our scientists are trained, they like our attitude towards excellence and so on. But there are a number of elements in there that go to a company making a decision to invest in Canada.

The Chairman: Ms. Lamont.

Ms. Dorothy Lamont: I'm delighted that you're interested in engaging further the voluntary sector. In fact, the extent of the contribution of the voluntary sector in this country to many things, including health research, is one of our best-kept secrets. The numbers are quite staggering, and they certainly are the subject of many discussions with our colleagues to the south in the U.S., who cannot believe the kind of contribution we make. On a per capita basis it really is very different.

One of the aspects to the proposal for the CIHR that we should consider is that in addition to a significant federal government contribution as a base, we perhaps should think about establishing some sort of a matching arrangement on top of that. This arrangement would be where the Canadian public can say we want to direct money to health research and we'd like to see ourselves in partnership with the federal government and have the government match those funds.

It could offer funding to the voluntary sector agencies, particularly to the smaller ones. It's an important aspect of this. Many health charities are very small, yet their causes are very large. They could very much engage the Canadian public in a dialogue. For instance, if you give x amount of dollars to us, then we will be able to extract from the government funds a similar amount of money, or double the amount of money, or whatever. It would have to be on top of a significant core funding. There is something here that could be very helpful to the voluntary sector.

You also discussed tax policy issues. There have already been discussions at this committee earlier this year with voluntary sector organizations about tax policy, obviously, in a much more generic way. We need to keep on the table what kinds of credits the Canadian public could be given for making contributions to the voluntary sector.

The Chairman: Dr. Renaud.

Dr. Marc Renaud: I'd like to make a note on that tax credit issue. There are no tax credits whatsoever in human sciences, period. There's nothing. That's unfortunate, because it would help steer the interest in certain directions. I don't think it should be wall to wall, but in certain directions it may be key.

Let me give you just one example. A few years ago the Minister of Health in Quebec convened a meeting with about this size of people to brainstorm around the psycho-social problem around drugs. The reason he was calling this up was the statistics were showing that the elderly were consuming three or four times more drugs than ten years before. It was a very puzzling find. Although the drug matter hadn't changed that much, the consumption had increased very much.

• 1710

So we were sitting around the table discussing the compliance of doctors, the compliance of patients, evidence-based medicine, etc. At the end of the day, the Minister of Health turned to the pharmaceutical companies—Merck, etc., were there—and asked if they could help us figure out what the problem was. The pharmaceutical companies said “Absolutely. We're convinced there's a problem there, but give us a tax break.”

The Chairman: Thank you.

Mr. Brison, you have a final question.

Mr. Scott Brison: Thanks very much.

I represent a riding in Nova Scotia. We have a terrific network of post-secondary education institutions. My alma mater, Dalhousie, is a great university and a great research facility.

I'll issue this challenge and I'd appreciate your feedback. If you look at the whole Atlantic Canada economic issue, part of it resulted from governments trying to sustain an involvement in resource-based industry far longer than it was actually sustainable.

Now we sit at the beginning of a new millennium with an opportunities-based and global knowledge-based society and we have really a very good post-secondary education system down there. Perhaps we could make the right decisions now and we could actually provide policies in Atlantic Canada, combining what is right for research and development, combining what is right in terms of health care policy with education and economic development.

So instead of the research and development people talking about what is good for research and development, the economic development people talking about what is good for economic development, and the education people talking about what is good for education, there's a synergistic possibility here that's very exciting.

I'd appreciate your feedback on that. I would issue a challenge that perhaps we can get you together sometime with the economic development and education people at a primary, secondary, and post-secondary level and see what we can come up with for Atlantic Canada and for the whole country.

Thank you.

Dr. Henry Friesen: If I could begin a response to that very important challenge, this very thinking is at the heart of the Canadian institutes of health research—to have a holistic, integrated view. If we work together, surely we could accomplish more than working apart.

I agree with you about Dalhousie and its important role in that region. Mark Poznansky spoke about the Canadian Medical Discoveries Fund. That's a labour-sponsored venture capital fund. Some of the Canadians in the Atlantic region have been key investors in that fund, believing that this investment will secure a better future in old age for them. It's an important dimension, and now that fund is beginning to invest in that region.

As a result of the patent regulations change, the Atlantic clinical trials program was constructed to take advantage of the resources at Dalhousie to do clinical trials. That has attracted multi-million-dollar investments from the pharmaceutical industry.

The population health approach to managing heart health is a perfect example. Merck has invested I believe $30 million to have a population health approach to heart illness, both in its prevention and management. It is a very attractive program for that region. That occurred because of some of the integrated views of what is possible if everybody works together.

The Chairman: Thank you.

Ms. Lamont, do you have a final comment?

Ms. Dorothy Lamont: One of the things that we in the cancer field have found in recent years is that the cancer research infrastructure just wasn't there in certain provinces. We weren't able to fund cancer research in several provinces. In looking at what the reason for that was, we decided we really needed to somehow kick-start a greater team effort within those individual provinces for the various players and stakeholders to work together to develop ways of having sustainable research in that province.

Frankly, three out of the four locations where we have this going are in Atlantic Canada provinces. In fact we have found recently just how much of a struggle it is to get the provincial buy-in. That in turn is related very much to the state of things we've been talking about this afternoon. There's a willingness, but it's very difficult to move money around that isn't there.

• 1715

I think we would have found that kind of development much easier, much more successfully, and much more quickly if there had been more money available. Some of it's around that need for base funding to make sure that people can take advantage of the opportunities that programs such as our regional research development program are able to offer.

The Chairman: Mr. Szabo.

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

I want to go into this very quickly, then hopefully we can get quick feedback.

The issue of having a discussion on prevention versus remedies or cures is very important. The national longitudinal study on children and youth found that 25% of our children are entering adult life with serious problems. I can't imagine anybody not thinking this is a top priority.

The first year of neural development is dynamite. I don't have to explain that to you, because you know that. This summer a research study came out of the University of North Carolina by Dr. Christopher Ruhm. It was on the linkage between childhood health outcomes and parental leave. It found a 29% reduction in infant mortality where there was at least one year of direct parental care given in the first year of life. Significant factors were breast-feeding, accidental death, and sickness causing death simply because of exposure to more public places.

For me, this is an area where you all have a role to play. You probably all had a role in identifying this and bringing this to attention, but what hasn't happened yet is that we haven't acted on it. We haven't delivered solutions on how we can improve the quality of care to children during the first year of life so we can have a better physical, mental, and social health outcome.

So I would ask whomever wants to answer on behalf of the entire panel whether it's possible for you, because you're respected and have a great deal of influence, to call for the delivery of solutions and take credit for them so that we can in turn reinvest the dollars saved into the research you're asking for.

The Chairman: Who's going to begin? Dr. Renaud?

Dr. Marc Renaud: For us at SSHRC, the children issue is a priority. This wiring in the brain that Peter alluded to is happening in the very young and apparently has a major impact on one's coping abilities of the future. That's the raw data in a way. We have to find what we can do.

We have these researchers. There's one at UNB, for example, who's a world leader in studying what helps stimulate the children. He compares children who play with blocks with those who don't. He looks at what it does to their mathematical abilities later on in their lives.

We have targeted research on these questions, because they're the key to our future.

The Chairman: Dr. Friesen.

Dr. Henry Friesen: As for the issue of implementation, you're obviously trying to force us to answer quickly. I think you'd agree that there isn't one solution, but probably a series of solutions. The heart of research is to examine which ones are the best.

In my own field, I was involved in researching the endocrine control of breast milk formation. I'm well aware of the Canadian study that also showed—it wasn't from North Carolina, it was Canadian—that there was a tenfold difference in gastroenteritis and a tenfold difference in admissions for gastroenteritis among the children of moms in the aboriginal community who chose to breast-feed. So it's very real.

How does one begin to look at that? Obviously there are family structures and areas of responsibilities. So there is an opportunity to engage in social science research to understand both the links of the biological and the social environments to see how they impact on the results you so eloquently put.

The Chairman: Dr. Phillips.

Dr. Robert Phillips: One of the conclusions we came to in looking at a related problem is the use of tobacco in youth. In planning our new behaviour research programs, we decided we needed to set up a network where we linked the researcher to the program and policy people so that the research that gets done has the potential to be applied. There's no use developing solutions that are not implementable.

That's going to be a key. We're not sure how to do this always, but we feel that's an important barrier such that we need to make sure these kinds of observations, when they're made, lead to the development of policies that can be implemented and have impact.

• 1720

The Chairman: Dr. McLennan.

Dr. Barry McLennan: Mr. Szabo, just to answer your question, we're going through health reform across this country in various shapes and dimensions, but clearly, the key element in all provinces is doing just what you said, which is putting into practice the results of research we know, whether it's children's health or whatever.

But clearly, the determinants of health in that whole area of research, population health, and so on, is receiving increasing attention in every province. Just to reassure you, the College of Family Physicians of Canada recently put together a section of researchers from their group so they can collectively address some of the very issues you've just talked about. I think that group is concerned, as are others, that we need to move the research results into the community and the bedside.

The Chairman: Mr. Szabo.

Mr. Paul Szabo: A White House conference on children found that the neurological foundations for abstract reasoning, problem-solving, and general logic were all largely established by the age of one. The evidence seems to suggest that 80% of the lifetime development of the brain is complete by the age of three. So if I were going to define formative years, I would probably choose prenatal to three years of age.

Everybody's talking about brain drain. There are certainly two ways to deal with it. One way is to stop the brain from flowing out. The other way is maybe a brain gain in terms of developmental gain. I really hope that you will take the opportunity—this is more of a speech than a question—to collectively call for some action.

It may be emerging research, but it has been emerging for the last four or five years. It certainly happened since I became a member of Parliament back in 1993. That's when I first met Fraser Mustard and first talked to Dan Keating and met some of the others from the Canadian Institute for Advanced Research.

Let's stop emerging, and let's start doing.

The Chairman: Is that a comment?

Mr. Paul Szabo: Sure.

The Chairman: Ms. Redman.

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

I really appreciate the fact that you've come to articulate a vision that obviously a lot of you share. We have many round tables, we look at pre-budget issues, and we can fill this room with people who would tell us we need to pay down the debt. So I appreciate the fact that we have a collection of like minds and interests. I have two universities in my community, so I was very pleased to see that we reinvested in some research and development money.

One of you spoke about the $1.9 billion—as a matter of fact, it's a 14% increase—that the United States made to bolster its research. I looked at the graphics you provided. They're very instructional. I would tell you that the committee certainly heard the request last year for an investment in research, and that's why the budget reflected those kinds of figures for the granting councils.

It also strikes me that this is a moving target. If we're going to keep comparing ourselves to the United States, we may never get to the position we want to. We need to look at what the right balance is within Canada. Some of the presentations have been very specific about that.

I look at this, and I hear some of the comments, and I certainly do support the partnerships with the private sector. But there was a presenter when we were in Nova Scotia who talked about that as polluting a pure kind of research. So there are many different focuses as well within the community of research.

The real question I want to ask you is, given the global stage—I think Dr. Poznansky talked about the fact that you need to be a player—is there a percentage we're looking at? Obviously what we're hearing collectively is that we're not contributing enough as a government, and we need to do more. But really, what is the right figure? Is there a proper kind of balance? I don't know if you do it in percentages. I don't know how specific you can be. But is there a best balance between government participation, non-government agencies, and the private sector that we should be aspiring to so we'll know when we get there?

The Chairman: Dr. Glynn.

Dr. Peter Glynn: There is a campaign going on this week that you may have heard of called “100% for 1%”. The suggestion is that health research funding should be increased to be 1% of the federal support of the health care system, which is the public cost. I think that's a good measure.

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In our view, what we need is a bold initiative that creates this willingness among everybody to really do something, rather than just sort of keep it together. We've been alluding to the Canadian institutes for health research, and there is a task force chaired by Dr. Friesen and Dorothy Lamont together. There is a business case being put together that deals with actually the issues that have been raised around the table. How do we put this in a context of the issues of the economics of Canada and its future society and its health care system?

I think when that business case is finished being put together, it will form a very powerful argument that in the order of $500 million within a reasonable period of time— This is not a request for $500 million tomorrow. Quite frankly, we couldn't spend it appropriately tomorrow. But we need to get ourselves and see ourselves as having that kind of endeavour in health research. That will change the whole context, and we'll start meeting some of the other issues we've talked about.

The Chairman: Are there any further comments? Dr. Poznansky.

Dr. Mark Poznansky: In terms of the numbers, let's understand for a moment what the $1.9 billion increase in the NIH budget really means.

On a per capita basis, the increase in the NIH budget this year is almost equal to the total per capita MRC funding. So their increase is about $8 or $9 per person in the United States—that's the increase. The total funding of MRC is approximately $9 or $10 per capita, so we're really talking about huge differences.

You bring up a very important point in terms of the ratio and the balance between private sector investment and government sector investment.

I'm going to use a cancer example. There is no company that I know of who is going to pay for a researcher to try to understand the fundamental events that cause a normal cell to becoming a cancer cell. There is no individual pharmaceutical company that could afford to pay for that type of fundamental research. However, the second somebody gets a clue as to what's happening, you're going to have the entire private sector on top of them, because there's a lot of money to be made.

So we have to differentiate between where the private sector could invest, and I think that's in the early areas where discoveries have already been made, and where real innovation comes from, and that's from university-based research funded by the public sector. That has been shown time and again, not only in the United States or in Europe, but that's a direction that countries like Japan and Singapore are moving towards in the 1990s.

The Chairman: Dr. McLennan.

Dr. Barry McLennan: I don't think there's a correct answer to your question with respect to what's the right number or what's the balance. But clearly, if you look at the graph on page 9 of our brief, I'm sure it's obvious to everybody in this room that what we're doing isn't quite right.

Although a good start was made last year in reversing the downward trend, we need to build on that. I think that's what this initiative is all about. This is a real kick-start, a quantum leap forward to reconfigure the way we do business, the way we do health research.

I would like to remind you of the AUCC report that's referred to in our brief, where they point out the return on the investment. If you invest a dollar in research, you get $7.50 real increase in GDP. You can translate that whatever way you want. You can compare it to the numbers of jobs, or percentage of the total GDP, or whatever. The point is, it's good news for Canada. This is excellent. This is what we need to be doing in this country, and not exporting our people to the States.

The American appetite for our scientists is insatiable. We may never catch the Americans, but I'd sure like to get up so we're at least equal with Europe—the U.K. and France and some others. Heck, let's catch the Americans, but they're a long way up on us.

So I think the answer to your question is we've made a correct start, but we really need to jump-start the process to get in the game.

Thank you.

The Chairman: Dr. Bennett.

• 1730

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

As you saw last year, I think there was a great case made by your community to increase the dollars for medical research. There's an excellent case to be made about the economic brain drain, increased GDP, and all of the new stuff.

I guess I need some reassurance that we would support the CIHR. I would also hope that Dr. Renaud would answer my questions first. Are we able to make sure that the criticisms in terms of medical models, the social determinants of health or research, how you get people to not start smoking, how you get research— How was the tonsillectomy research done? How do you do research in unnecessary surgery? Who's going to do that kind of research in terms of there being ten times more hysterectomies in North Bay than in Toronto? What are those hysterectomies being done for? There's gallbladder surgery. Ninety percent of obstetrics is not evidence-based, as far as my experience goes.

How do we get research done in the things that we, as government, determine are of urgent public importance? And how do we make sure we aren't pushed to do things that are politicized, like breast cancer and AIDS, while the prostate people ask what we're doing about them? How can you show me that in this next model the SSHRCC people will be happy; that the consumers will be happy; that the people interested in complementary alternative approaches will be happy; that the people worried about partnerships with the private sector won't be quoting Nancy Olivieri to me? How do we make sure there is a real way of designing an ultimate system that we can all feel really good about, and that will satisfy all these concerns?

Dr. Marc Renaud: That's a very difficult question you're asking. We're sure the answer is no—I think. But there's an amazing goodwill. There's something happening and it has to be pushed further. To be frank, the relationship between the social science community and the biomedical community is not particularly great. The social scientists wrongly perceive biomedical scientists as trying to eat them alive and use them as tokens. At my last board meeting, there was somebody who had brought back a T-shirt from Australia. The person showing the T-shirt said that what was on it were the biomedical people. There was a smiling crocodile on it saying “Trust me”.

Even if we caricature things, what's happening now is an effort on both sides to move further. That has to be built upon. That being said from my side of the world, health issues are one thing; they are my own field of research, and are a key issue. But there are other aspects as well. What SSHRCC is pleading for is a doubling of its budget—which is very tiny, by the way—over the next three to four years. Otherwise, we'll totally lose the momentum we've created in mobilizing this research community.

Dr. Mark Poznansky: I'm a biophysicist by training, so I'm going to be way out here.

Evidence-based medicine is not rocket science. On the tonsillectomy study, it was a simple pediatrician at the University of Pittsburgh who said he didn't know why he was doing all these operations. He applied to the National Institutes of Health and got a grant for $700,000. He separated out a whole bunch of kids who came into the hospital and who would normally get tonsillectomies. Half of them got tonsillectomies, and the other half got the best non-surgical treatment. He then followed them up. He had a couple of deaths among the tonsillectomies, and he had no deaths in the other group. The latter group got better, got just as healthy just as quickly. He therefore concluded in a well-published paper that we were doing tonsillectomies inappropriately.

For every one of the examples I gave, one can do the identical type of clinical trial to find out what the evidence is on carrying out a given medical or given surgical treatment. Most alternative medicines are in fact medicines that simply haven't been put to the scrutiny of good clinical trials.

• 1735

Unfortunately, we invested $50 million in the Canadian Foundation for Health Services Research as an endowment. We need five times that on an annual basis to really make our health care system evidence-based as opposed to budget-based. So it's really an economic issue.

The Chairman: Dr. Phillips.

Dr. Robert Phillips: As everyone said, it's not an easy question to answer, but there are two points that I would make.

First, in my experience, there is a much greater willingness among the entire biomedical community to embrace a much broader group of people in research. I've certainly seen in cancer that we don't look with disdain on behavioural and social sciences any more. We embrace them and try to get them involved in our clinical trials. All of our clinical trials now include quality of life assessments that bring behavioural researchers in.

But another point is what Ms. Lamont mentioned in our presentation: if there are any disease-based institutes, we think it might be wise to set goals. Let me give you an example. Suppose the National Cancer Institute set as a goal a reduction in mortality of 50% in a generation. To achieve that goal would require a lot more increased basic research to understand cancer, but we couldn't forget the social determinants of health and prevention, because we wouldn't be able to achieve that goal unless we looked at the entire spectrum of research.

Ms. Carolyn Bennett: Dr. Friesen, from the genesis of the idea of the CIHR, there has been a huge movement. You certainly need to hear that Brandon University was very supportive when we were in Winnipeg last week, because they have their aging expertise. But if we only link medical schools, we have to make sure the people who are interested in women's studies, and all of the other great people in this country, feel they are part of this in order for us to be able to push it forward.

I worry that we can't look at substance abuse without looking at incest. We're not very good at talking about homelessness in this country from the perspective of mental health, substance abuse, or incest instead of just housing, which is a lot tidier. I hope that if and when we are able to launch this thing, we feel there's a place somewhere for everybody on this list and a place for all of these things that Canadians are worried about, including the tough ones.

Dr. Henry Friesen: Thank you very much, Dr. Bennett. If I could, I'll just add one or two comments.

I know I've had the chance to talk to you on this before. One of the thoughts is to certainly see the barriers across those institutes broken down through targeted or defined domains or divisions for basic clinical health outcomes, and the kinds of studies that Dr. Poznansky mentioned. Also, there should be an envelope for social sciences as applied to each of those institute domains, in addition to seeing an opportunity for targeted or managed approaches that suit the social science community. The goal is to see that integration.

Although Dr. Renaud talked about the caricature, I think he understands very well—and has been quite courageous, perhaps ahead of other members of his community—the need for forging those linkages and reaching out. In a sense, we're trying to come together for Canadian advantage, because that's what it's all about. Our competition isn't between institutions in this country or domains in this country. Our real competition, as a country, as a nation, is the world, so we'd better get our equation right at home if we're going to be successful as a nation.

Ms. Carolyn Bennett: I have one more question for Dr. Shields, and anybody else who wants to answer it.

I guess I'm a lowly family physician. When I see the cardiac care network, and when I talk to my rural colleagues, there is concern that we would be measuring waiting lists from the time somebody has a positive angiogram. If you have chest pains and have been sent away from emergency, it sometimes takes months to see the regular cardiologist. It sometimes takes a long time for that person to call his or her friend who happens to do the angiograms, and you actually only start counting time then in this country. That isn't a patient-centred approach.

• 1740

I would just hope that as we move to new ways of doing report cards on all of these things, the patient's perspective is where we begin the clock ticking.

Mr. Charles Shields: If it helps, I must say that the conversations that I've heard have been echoing the kinds of comments you're making. We need to start looking at when the matter starts being an issue for the patient. I saw Peter Glynn nodding his head here, and my guess is he probably deals with this more on a day-to-day basis and may have something else to add to it as well.

Dr. Peter Glynn: Your statement is absolutely valid. The problem is deriving that data. It's the same problem as deriving waiting list data in this country. It is a very complex issue. Quite frankly, it's something we need to do more research on in order to really define the issue.

Mr. Chairman, as a member of the task force for CIHR and as the Heart and Stroke Foundation representative, I wonder if I could just reassure Dr. Bennett about one of the things that Dr. Renaud is correct about. Something is happening here. There is a coming together of people from diverse fields—the charities; the softer side, meaning the social side; the hard side, meaning the biosciences; and the universities, including Rob Pritchard, Martha Piper. And a lot of them are people who have a profound understanding that health is more than medicine and that the determinants of health are more than in the health care system. Something is really coalescing here, and it will give you the assurance that CIHR will deal with the broad spectrum. I can tell you the charities will insist that it does.

The Chairman: Thank you, Dr. Bennett.

I have a question. The key to the recommendations that we make to the Minister of Finance really speak to the issue of improving the quality of life for the people of Canada, improving their standard of living.

As I've travelled across the country and listened to Canadians as they present their various points of view, it has become really apparent to me that once you really get into the subject matter, it comes down to productivity. It comes down to enhancing the productivity of our country if you do in fact want to enhance the quality of life of people. Quite frankly, I believe this next budget ought to be viewed through that light. Every recommendation that we make as a committee needs to pass the productivity measure. Whether you're talking about investments in health or any other investments, ultimately they have to bring about productivity gains, because they are really essentially key components in generating wealth. If you want to have social programs, you have to generate wealth. You have to generate wealth if you want to have excellent university programs, because somebody has to pay for them.

So I'm just wondering whether or not you agree with me that productivity definitely should be a key component of the upcoming federal budget.

Mr. Shields.

Mr. Charles Shields: I would agree with you.

Some of you may know that the World Bank issued a report five years ago on investing in health. It talked exactly about the kinds of issues you're talking about. They were talking more to the developing world, mind you, but what they said holds for Canada as well: the health of a nation's people is a key element in the productivity of the country. So I don't think there is a bit of inconsistency between what we have been saying and the kind of objective that you see as being sought after in next year's budget.

Thank you.

The Chairman: Dr. Gauthier.

Dr. Clément Gauthier (Executive Director, Coalition for Biomedical and Health Research): Our brief is indeed based on increased productivity through investments in health research. We strongly support the view that you just expressed: the next budget should indeed foster increased productivity.

We didn't invent what we submitted here through our brief. It is in line with the recommendations made by the OECD, beginning with their 1996 job strategy. One of the five key recommendations they made actually was to increase productivity through investments in research.

• 1745

On page 2 of the brief we made the point that by investing in health research government gets a double bang for the buck. It increases productivity in the health industry, as it would in any other industry—and this is recognized—and decreases the loss of productivity resulting from long-term disability.

We believe that this approach of investing in the economy would provide the foundation for increased productivity. And that resultant increase in GDP per capita would provide an economically sound and autocatalytic basis to resolve Canada's national debt as well on an ongoing basis. This basically is giving a positive spin to something we do well but something we would do more of if we had more resources invested into it. So yes, productivity is key. And yes, investment in health research would definitely increase productivity on the two sides I've just mentioned, decreasing the burden of illness and increasing in fact productivity of people as in any other industrial field sector.

The Chairman: Dr. Glynn.

Dr. Peter Glynn: Yes, I agree with Pierre on two points. One is I used a small example of productivity increase in the health care sector, enzymes to determine whether heart attack exists or doesn't exist, and that has a definite impact in improving the productivity of emergency departments and hospital beds.

The second part is again to go back to my comment about the Conference Board's report, which is exactly on the issue you're talking about, that we need to be more innovative to be more productive and we need knowledge to be more innovative.

The Chairman: Dr. Renaud.

Dr. Marc Renaud: This is entirely a personal opinion; I'm not convinced that the key issues can be boiled down to productivity. There is no doubt productivity is a key issue; it's a question of our competitiveness and so on and so forth. I'm not denying this. But look at the issues we've raised today. On the children issue, do we have the right policies to support the development of children in this country? Is that productivity? At the end of the day, somewhere it is, but it has to be confronted as the children issue.

The Quebec-Canada debate, can that be boiled down to productivity? It cannot be—this issue of Quebec's position and Canada. It also has productivity implications, but in a way— If we want to find an imaginative solution to this quandary there needs to be research on things that have nothing to do with productivity, on the working of the federation, on how people relate to one another in the world when they have different languages and different cultures.

I'm just expressing a hesitation toward reducing everything to productivity.

The Chairman: Mr. Poznansky.

Dr. Mark Poznansky: You really have to develop a belief system in a long-term strategy in terms of children and in terms of education. If you have measurements of productivity that are based on the next three to five years and you look at investment in Bombardier or whatever and you look at an investment in long-term innovation for our children's children, it's a tough issue. It's a tough thing to actually measure, so you really do have to develop the belief system in the issues of higher education, innovation, research, and wealth creation. Obviously quite a few of us around the room have seen that and believe it intensely, but it's hard to see short term. So it's a tough one.

The Chairman: The only point I'm making, quite frankly, is the fact that if we don't have productivity gains in this country in a sustained fashion—not just for one or two years, but in a sustained fashion—I don't think next time you come here we'll be talking about funding for you, because there won't be any funding available. That's the point. It's the same thing with social issues. The reality is that you need to generate wealth to have the programs everybody wants. I'm saying we need to always focus on the fact that everything is a function of trying to achieve greater wealth, and therefore everybody agrees here that through higher productivity they can in fact achieve this type of wealth.

I've taken too long here as chair. I'd better go back to Mr. Epp, otherwise he'll get very upset with me. Mr. Epp.

Mr. Ken Epp: I think probably we're going to run out of time here if I ask all of my good questions. There's one burning one that I really want to ask you all. We're dealing here with the need for increased research funding; I think that's the theme I hear from all of you. Spoken in simple language, you want more money from the federal government.

• 1750

Again, we've talked about long-term versus short-term goals. We have right now in Canada a situation in which one-third of every dollar collected in taxes goes toward paying interest. So if you really want to do something that's good for the country in the long run, you need to reduce the debt so you don't have to deflect so much of our national income into interest payments and principal payments on a debt for money that was spent 30 years ago.

What is your view with respect to whether, in the long term, we should in the budget be allocating money to paying off and reducing our debt so as to decrease interest payments?

The Chairman: Who would like to answer that question? Dr. Glynn.

Dr. Peter Glynn: I think, Mr. Epp, that the chairman has it positioned absolutely appropriately. Without increased productivity we cannot afford to sustain the country and provide the kinds of environment that we as Canadians have come to expect pay down the debt. We need to invest to increase the productivity of the country in whatever way you want to view this, and couple that with its social approach to life, to enable us to pay down the debt. Because if we start going this way, all we're going to do is increase the debt. You have to invest, and this is about investment.

The Chairman: Mr. Shields.

Mr. Ken Epp: Could I get you to restate that in one sentence? You are opposed to reducing the debt. It's at $580 billion, and you'd like to leave it there and you'd like to continue to pay $41 billion a year in interest. Am I right in that?

Dr. Peter Glynn: No, that's not what I said. What I said is that we need to invest in the productivity of our economy in order to create the tax dollars to pay down the debt.

Dr. Mark Poznansky: We have to pay down the debt and create wealth.

Mr. Ken Epp: You want both then.

Dr. Mark Poznansky: Absolutely.

Mr. Ken Epp: Okay. I was confused on that.

Mr. Charles Shields: I would reiterate the points that have been made. I think you can look to just pay down the debt, which means like you would in a household you just pay down debt, or you can go out and try to make some money that will allow you to pay down the debt as well. I think what we are identifying is that there are a number of opportunities we have to generate money, generate wealth, that can be used to pay down the debt.

I think it's quite right that this needs to be tackled, but there are different strategies for addressing it. I think Dr. Glynn had us pointed in the right direction. I think a lot of us today have identified the number of ways whereby Canada can increase its resources, its wealth, by investment in health research.

Thank you.

The Chairman: Dr. McLennan.

Dr. Barry McLennan: Thank you. I'm going to make the same point.

I think we all agree in Canada that we need to work on the debt, and we've made a remarkable progress, and I applaud the government for the progress we've made. But as my colleagues over here have said, we need to put in place an engine that will keep generating wealth. That's what this increase in productivity aims at.

Thank you.

The Chairman: Dr. Friesen.

Dr. Henry Friesen: The ultimate expression of creating wealth that ultimately then comes back to address the issues we have here is in the U.K., with the Wellcome trust, which is a product of the equity built over many years that was bequeathed to people of the U.K. by Sir Henry Wellcome. It's a $16 billion endowment, which is now supporting the health research in Britain. We're a partial beneficiary of that result through the Burroughs Wellcome fund, where Canadians now can apply for that support. That fund in Britain, the trust, is supporting a greater amount of health and medical research in the U.K. than is the British MRC. That's the ultimate expression of creating wealth to advantage.

The Chairman: Any further comments? Mr. Epp, do you have a question?

Mr. Ken Epp: Yes, I have one more quick question with respect to the actual funding mechanisms.

As I understand it, funding comes both directly from government. In other words, the government has the function of relieving taxpayers of some of their money, which is then funnelled through funding organizations to research—well, not directly, but perhaps through funding organizations. The second role that we would have as a government in a budgetary sense is in regard to policies with respect to private enterprise participation in that funding.

• 1755

I wonder whether you have any other recommendations that you have vis-à-vis tax credits, deductibility of expenses in this area. We've had a few. We've heard the one from you with respect to the social sciences, but are there any others that you think would be really nice for the Minister of Finance to include in his budget speech next February?

Dr. Clément Gauthier: May I answer this one?

The Chairman: Absolutely.

Dr. Clément Gauthier: Actually the only other recommendation that we have in our brief—it's on page 8 of the English version—to attract global R and D investment in Canada is to actually broaden the eligibility for the SR and ED tax credit program of the federal government to include expenses on pharmaco-economics and pharmaco-epidemiological studies. These studies also could lead to savings for the health care system, but they are not eligible now because of the closed border and the closed interface with some work being done in the social sciences. Through the definition of scientific research and experimental development from any tax credit, social sciences are being systematically excluded. So recommendation 2 is to broaden this slightly. Don't open the gate completely, but at least include some targeted studies for eligibility under the SR and ED tax credit.

The second measure that we suggest here is to consider the possibility of a separate agency to catalyse and improve the efficiency of the review of the drug process. That doesn't mean a less rigorous review, it means probably faster, more effective review. Such a system has been implemented in the United Kingdom very effectively.

So these are the two measures that we, as a group, the CBHR, present here to government.

Dr. Mark Poznansky: I just wanted to make a comment to make sure you don't think we're all exactly like-minded.

I actually don't agree with the issue of that tax credit specifically. It is a good idea, but we have an excellent series of tax credits in this country for R and D. If a dollar is to be spent, I think it should be spent on the Canadian institutes for health research rather than on additional tax credits.

The Chairman: This is actually encouraging. I thought this was a well-coordinated group.

Do you want a rebuttal?

Dr. Clément Gauthier: There's one complementary here. We did not recommend to increase the total amount. We said to consider it within the $1.2 billion, actually, to consider making eligible these expenses. We didn't recommend an absolute increase. If there are any new dollars to come, of course we'll take them. Because CIHR is about new investment, I would suggest strongly that it be prioritized and given to CIHR.

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

On behalf of the committee, I'd like to thank you very much.

I want to tell you something on a personal note. Every time you appear in front of this committee, I really get energized by the potential of this great country. If we really focus on a well-defined vision, as articulated by many of you this evening, the future of this country is extremely bright. However, we have to do that in a disciplined fashion and consistent way, because future generations really depend upon individuals like yourself to lead the way.

On behalf of the committee, I can sincerely tell you that, even judging from the recommendations we made last year, we fundamentally believe in what you believe in. We have to invest in the future of this country if we want to have a future. That's fundamental to any discussion about the budget.

• 1800

Just the other night I was thinking that an interesting exercise for the Minister of Finance would be to divide his budget in three ways. One part would deal with all the expenditures that deal with the past. Another part would be the budget measures that deal with government operations, with what we in fact invest in the present. Then we'll have to find out, really, how much we invest in future. I'd be really interested to find out what that budget would look like. It would really be a signal to find out whether or not we are taking the future as seriously as we should be by making investment in those areas that speak to a brighter future for Canadians.

On behalf of the committee, thank you very much.

We're going to suspend for fifteen minutes.

• 1801

• 1821

The Chairman: I'd like to call this meeting back to order.

This evening we have the pleasure to have with us the following individuals: Mr. Rick Egelton, vice-president and deputy chief economist, Bank of Montreal; Maureen Farrow, head economist, Loewen, Ondaatje, McCutcheon Limited; Professor Pierre Fortin, Université du Québec à Montreal; William Robson, from the C.D. Howe Institute; and David Rosenberg.

We will begin with Professor Fortin. Welcome.

[Translation]

Mr. Pierre Fortin (Université du Québec à Montréal, Individual Presentation): Thank you, Mr. Chairman. First of all, I would like to say a few words about Canada's economic outlook, and then I will move on to what I think are the principles that should guide the federal government's financial policy.

First of all, I would like to stress that Canada's economic situation is particularly fragile at present, first of all because we are beginning a rather delicate phase in the economic cycle after 10 years of rather poor performance.

In 1988, our standard of living was 85% compared to the Americans standard of living. This figure has now dropped to 76%. In other words, our spot on the world ranking of standards of living has dropped substantially. According to the OECD, our standard of living has dropped from fourth place internationally to tenth place.

Consequently, after all these years in the 1990s, during which the economic situation was difficult, we are now beginning a new critical phase, but we haven't recovered the one-third or the 40% that we lost over this period. Not only that, but Canadian interest rates have also risen 225 basis points over the past 15 months, because people fear that inflation is coming back or because of measures taken to support the Canadian dollar. As I'm sure you know, the economy has been treading water since April.

I do not want to spend much more time discussing the current economic situation. However, if I had one piece of advice to give to the members of the Finance Committee and to the Minister of Finance, it would be try to use every avenue possible to monitor borrowing in Canada, namely the cost and terms of securing credit, not only interest rates but also the terms of credit, which appear to be becoming increasingly stringent.

As for budget planning, I feel that the minister should be particularly careful when he prepares next year's economic forecasts before he gives a green light to his colleagues to increase spending or before he offers tax cuts to the general population. He must be particularly careful in his economic forecasts.

Secondly, the budgetary policy of the country should be governed, in my opinion, by four principles, three of which apply to all government levels and the fourth to the provincial level in particular. I would therefore imagine that this fourth principle is less important for this committee, although given that it deals with the health sector, it should also be of interest to you.

• 1825

The first principle is that we must ensure, to the extent possible, that we have a nil fiscal balance or a slight surplus, so that we can achieve a zero deficit and set aside our reserve fund, as was done in past years, although we may use it to pay down the debt a bit if it is not spent during the course of the year.

By "a nil fiscal balance" we mean that, since our gross domestic product will tend to increase by 4% per annum on average, the size of the debt, with respect to domestic revenue, should decrease by the same percentage every year. We were on the right track by doing this. At the end of 10 years, the size of the federal debt, with respect to domestic income, should drop from 70% to 40%.

Secondly, as far as increased spending is concerned, without going into the particular sectors where this must occur, I think that we have to abide by a general principle that goes beyond merely determining which sectors warrant increased spending. According to this principle, we would index government program spending to the cost of living and demographic growth, namely, to the combined inflation rate and demographic growth rate. These two rates together should be less than the growth rate of domestic production. Accordingly, the government should always err on the side of caution so that it does not make the same mistakes made in the 70s and 80s when there was an increase in government spending.

Thirdly, in my opinion, we must, in national terms and at every government level, target a certain differential between the Canadian and the American tax burdens. Right now, and this includes every government level, Canada taxes 37% of its domestic income, whereas the figure in the United States stands at 32%. I believe that we can keep the same philosophy followed in the past whereby the Canadian State was committed to playing an active role in the country's economic life, providing and maintaining a gap that is brought down to 4%.

Obviously, if we wanted to have the same tax burden as the United States, we would have to undergo a complete change in our State philosophy. A political debate would therefore be in order at that point. For the time being, however, we could certainly reduce the Canadian tax burden by an amount equivalent to at least one or two percentage points of our domestic product, namely by $10 or $15 million for all three government levels.

However, this would also mean that the federal effort could account for one percentage point, because there has been no excessive increases in the federal tax burden. Such increases have occurred primarily at the lower government levels. This 1% of domestic product that the federal government could grant in tax cuts over the next two or three years would represent nearly $8 million.

I like the idea of coming up with a vision, of setting general targets to be achieved, which would govern everyone, such as the nil fiscal balance I just mentioned. As you know, a few provinces have even legislated along this line.

Indexing program spending to the cost of living and to demographic growth, and no more, would be one of these targets. The third would be to maintain a small differential, not to exceed 4% of our domestic product, between the Canadian and American tax burdens.

Finally, given the constraints that have been placed upon the provincial governments in the health and education sectors, it is clear that the provinces will have to revisit the way they do things in these sectors, while at the same time ensuring that they achieve the general objectives of equity and fairness, which form the very basis of our public system. Thank you.

The Chairman: Thank you, Professor Fortin.

[English]

We'll now hear from Professor Tom Wilson.

• 1830

Professor Tom Wilson (Individual Presentation): My remarks are based on a paper called “What is the Room for Tax Cuts”, which two colleagues and I are presenting at a conference this Friday. I have given a copy of the paper to the clerk of the committee to be reproduced for committee members, but I would ask that no copy be released to the press until after Friday.

What I want to focus on is the room for tax cuts and the related medium-term fiscal strategy. I think the Minister of Finance clearly deserves congratulations for having replaced a substantial structural deficit with a substantial and growing structural surplus. The interaction of this surplus with debt and interest payments on the debt would generate substantial increases in the surplus if we had growth near potential, and what I would call a neutral expenditure policy. It's this potentially growing surplus that provides the room for tax cuts.

We believe there's growing room for tax cuts over the coming decade, while allowing for moderate but steady reductions in the debt ratio. More ambitious debt reduction targets or lower assumed potential growth would reduce the room for tax cuts. More limited growth of program spending—such as that recommended by Pierre Fortin—or higher potential growth would increase the room for tax cuts.

A medium-term plan for tax reduction should be developed. By “medium-term”, I mean a five- to ten-year horizon, with priorities established for what taxes to cut and how to cut them. We estimate that with growth near potential—about 2.8% per year—and program expenditures starting to grow at the same rate as GDP after 2001, there is room for modest tax reductions. These reductions are modest in this coming year, but they then increase steadily over time. In the twelve years of our analysis, to 2010, the cumulative reduction—and this is only at the federal level—would total 3% of GDP. I believe Pierre's reference was more to the first year or two.

I want to now address the issue of whether or not, when we have established the medium-term plan for tax reductions, whether they should be postponed when there's evidence that the economy is weakening. We believe strongly that the answer is, no. Postponing tax reductions would amplify a recession. Taking into account the interaction of monetary and fiscal policy, postponement of tax cuts would also tend to weaken the exchange rate. The only possible grounds for postponement would come if planned tax cuts would move the debt ratio from a declining to an increasing path, thereby threatening to take us back to the days of structural deficits. The near-term modest tax cuts that we would estimate would not pose such a threat.

The other issue I want to address in this connection is whether or not the government should be committed to a balanced public accounts budget come hell or high water. Again, I would say no. We should not confuse a structural deficit with a deficit generated by a severe recession. Attempts to reduce the deficit in a severe recession increase the risk of an even deeper or more prolonged recession. With our model, we have estimated an alternative projection that involves a mild recession next year and slower growth in the year 2000. Even under those circumstances, the federal debt-to-GDP ratio would continue to decline over the interval.

Let me just talk briefly about which taxes should be cut. In the short term, we would favour first reducing employment insurance payroll taxes in order to offset the adverse economic affects of planned increases in CPP/QPP payroll taxes. The balance of the room for tax cuts in the near term could be used to reduce the PIT surtaxes.

Over the medium term, there are a number of issues that should be explored. First, the recommendations of the technical committee regarding business taxation should be implemented, perhaps at the cost of some increase in the deficit, although I add parenthetically that their recommendations are revenue neutral. Consideration should be given to indexing the PIT again, and then other structural issues of the PIT should be addressed, such as moving up the RRSP limits, which have been frozen for some time.

• 1835

Thank you.

The Chairman: Thanks very much.

We'll have some questions for Professor Wilson and Professor Fortin. Mr. Epp.

Mr. Ken Epp: Thank you very much. I will forgo the preamble and get right to some questions.

I think both of you are on the same general track, although you differ in details. I would like to ask you what the economic downturn or economic consequence is of having a continued difference between our tax rates and those of the United States? You talk about bringing them together. What happens if we don't do that?

The Chairman: Professor Fortin.

Mr. Pierre Fortin: Between 1970 and 1985 we had a differential, in terms of our total tax intake relative to the United States, of approximately 4% of national income, and nothing happened. Probably the reason for that is we financed a higher level of public spending in Canada, program spending, which was well received by Canadians in general.

But the problem has been that in recent years, this differential with the United States has increased to 6%. You see this by the fact that in the last 10 to 15 years over which this has taken place—in other words, that the differential tax burden with the United States has increased from 4% to 6%—you've seen, first of all, much more political resistance in Canada. You've seen a general functioning of the economy that has been much less strong than it was before 1985, in general, and in the 1970s. Therefore, I would say the increase in tax burden over the last 10 years has not been well received by Canadians.

Let me make a very quick comparison—I don't want to extend myself. When my parents began to pay a lot more taxes in the 1960s, they did it very willingly because they knew they were building schools, hospitals, infrastructure, and income protection. They supported that. But in the last 10 to 15 years the increases in taxes have not brought these new visible benefits. They have been essentially there to support the higher debt burden or debt service. Therefore, this is the kind of so-called unproductive tax increase I think people want to get rid of.

Of course, opinions differ among Canadians. Some would like to have a tax burden that would go as low as the U.S. tax burden, and some, like me, would like to maintain what it took 40 years for our parents and grandparents to build, in terms of social security, education, and the health system in Canada.

Mr. Ken Epp: Okay. Do you attribute the higher rate of our unemployment and the more sluggish performance of our economy to the fact that we have a higher tax rate?

Mr. Pierre Fortin: No, not really. But it may affect our productivity growth rate to the extent that down the line, if we have slow economic growth, a higher tax burden, and a slower rate of productivity growth, and if we continue to lag more and more, relative to the United States, we're going to lose our investment in education through emigration.

Mr. Ken Epp: But when you say this may slow our rate of economic growth, is there not a connection there, because if our economic growth is slower, our employment rate is slower, and it's a sort of positive feedback loop?

• 1840

Mr. Pierre Fortin: There are many factors that have slowed our economic growth over the last 10 years. Taxes are not necessarily the only one, and certainly not even the most important one, but it has become a burden to a very large extent. This tax increase over the last 10 to 15 years has been very visible and has not brought visible benefits to offset that burden. Therefore we should get rid of it. We have done the first step, which has been to cut spending in areas where we thought there were excesses. We should do more to help our economic growth recover and then allow more fiscal dividend, to let us reduce the taxes.

Mr. Ken Epp: If I have time I'd like to get into the details of how to do that, but I have some questions for Professor Wilson.

When you suggest taxes could be reduced, are you speaking in absolute terms—in effect, how much tax in absolute value we're taking out of the economy and bringing to government—or are you talking about the reduction of tax rates? Some say a modest reduction in tax rates would actually increase government revenue because of the impact on the economy.

Prof. Tom Wilson: I'm talking about reductions in rates. Revenues would continue to rise because the economy is growing. It's partly the growth of the economy, together with this basic condition of a structural surplus—and a large surplus over program spending—that gives rise to the development of room for tax rate reduction. So the rates can be cut, but revenues will keep growing.

I don't think I would share the extreme supply side view that a general reduction in taxes is so stimulatory to output that you actually increase revenues. There are some cases of selective tax cuts where that could occur. It might occur if you reduced the very high taxes on distilled liquor, for example. In the case of the very high taxes on cigarettes, I believe when the government reduced those taxes they showed virtually zero revenue losses. This was because they knew that without reducing those high taxes smuggling would continue to erode the tax base.

When we're talking about general tax cuts, like a general payroll tax cut or giving relief to middle-income workers under the personal income tax—which I should have mentioned I also feel is a priority—you'll get some stimulus from that, but not enough to actually cause it to generate an increase in revenues. Revenues would still be growing, even with modest cuts, because of the underlying growth of the economy.

Mr. Ken Epp: Professor Fortin suggested we were safe in assuming a 4% rate of growth in our economy. I read recently that is probably double what the actual rate will be in the next two or three years. What's your opinion on this?

Prof. Tom Wilson: I think Professor Fortin was probably referring to nominal growth, incorporating a bit of inflation. So his view would be roughly consistent with our projection of about 2.8% over a 12-year interval of real growth, with inflation in the 1% to 1.5% range, typically. These are in our projections. There is a modest cycle, perhaps too modest, and we may be revising it. But in terms of planning tax cuts over the medium term, we should be looking at Canada's growth potential and what it will yield in the way of room for debt reduction, expenditure increases and tax reductions.

If we run into weaker growth in the next two years, it would not be grounds for postponing planned tax cuts or deferring spending, unless you thought it was so severe you might be getting into a situation where the debt ratio would start to rise, but I don't see that being likely at all. It would take a virtual meltdown of the economy. And then you have to ask, even in that circumstance would you want to make the meltdown worse by not cutting taxes?

Mr. Ken Epp: So you're saying very clearly a cut in personal and corporate income taxes would be a stimulant to the economy.

• 1845

Prof. Tom Wilson: Any tax cut in and of itself tends to be stimulatory, although corporate rate cuts probably are the least. When we look at the corporate structure it's really more a long term matter of how do we get our system right, in comparison with the Americans. You've had that technical committee report. It's an excellent report and was well received. It has a number of recommendations for getting our corporate structure more or less in line and also moving toward neutrality in corporate income tax, which I think has important efficiency gains.

A personal income tax cut or payroll tax cut would provide a stimulus unless it's offset by a monetary policy counter-reaction.

Mr. Ken Epp: Do you think personal income tax cuts could be achieved best by increasing the amount of money a person can make before he or she pays any income tax at all? In other words, would increasing the basic exceptions be the best way?

Prof. Tom Wilson: This is one where it's worth studying the PIT and coming up with recommendations on this. I see a very strong case for raising that personal exemption. People who are earning money below the poverty line should not be paying a high rate of tax. Not only are they paying taxes, they're also seeing their transfer payments clawed back. If you look at the effective marginal tax rates in Canada, the highest effective marginal tax rates are paid by relatively poor people because they're not only losing money through income tax, they're paying payroll taxes and seeing their various benefits and transfers clawed back. That's one area of priority.

Another area of priority would be the middle to upper-middle-income individuals. One effect of de-indexation has been that the threshold for the top marginal rate has steadily been dropping in real terms. It isn't so much that our top marginal rate is that much higher than the Americans—in some states in the U.S. that have fairly high incomes taxes, it's almost the same as here—but the threshold at which you hit it is very low in Canada. We're looking at the low $60,000 range. In the U.S. you're looking at maybe $200,000 U.S., and that's a big difference.

Young professionals going out to work after they have their university training and advanced degrees have starting salaries in the $60,000 to $100,000 range, and that's where we have a very onerous burden of tax relative to the U.S. I share Pierre's concern that we don't necessarily want to go all the way to equalizing, but certainly it's a priority to bring our rates down where we have large differences compared with the U.S.

Mr. Ken Epp: That's very interesting, but perhaps others have questions as well.

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

Mr. Szabo.

Mr. Paul Szabo: I want to just deal with one issue, Mr. Wilson, and that is the last one you slipped in there—it wasn't a throwaway, though, I think it was well intended—about the RRSPs having been frozen for a number of years. Today you have to make $75,000 of earned income to be able to qualify to put in $13,500 in a year. Only 3% of Canadians make $75,000 or more. Of those, two-thirds have defined pension plans. That means somewhere around 1% of Canadians would benefit from an increase in the RRSP contribution limit. That goes to the issue of priority, and you may want to comment.

Do you feel there is an amount we should target or a ceiling of how much you should be putting away for your retirement, whoever you are? If there is, what is the amount of capital and income you have to earn within an RRSP or whatever, and what kind of level of income are you trying to generate? Is there a ceiling?

Prof. Tom Wilson: I was using that as an example of something to be looked at. There's a large number of structural issues in the PIT. In the modelling we did, we simply had a surtax increase, and when we ran out of surtax room we introduced the flat federal tax credit to use up the tax room, but that was just for simplicity. If you have room for significant cuts—and we're looking at 3% of GDP over this 12-year interval—and a lot of that will go into the PIT, there's a lot you could do. We've just discussed two. You've brought up the one I mentioned.

One thing to look at with the RRSP is whether the limit should be moved back relative to the average industrial wage to the way it was before the freeze started. RRSP contributions have been limited as well as the defined benefit plan payments.

• 1850

Maybe that's not a priority for you now, because you have other higher priorities, but it seems to me that would be the issue you could look at.

Mr. Paul Szabo: Under the current system, if someone purchases an RRSP and they're in the highest tax bracket and they purchase a spousal RRSP for a spouse who has no earned income, ultimately they can generate, achieve, or crystallize a rate gain in terms of the taxes ultimately payable because they got the deduction at the high rate and the costs will be at the low rate. That is not available to Canadians who are at the low income rate. Consider that $5,000 contributed by a high-income earner will get a refund of $2,500. For a low-income earner it will only be about $1,250.

The issue here is equity and fairness. If you believe it's probably not so equitable because there is a different leverage rate and the opportunity for a capital gain on rate of tax savings versus tax flowing out later, do you believe the RRSP system should first be changed to incorporate an equitable treatment with regard to either credits or deductions, and then establish a lifetime limit or something so there's no abuse by going beyond a certain limit, and then we should open it up and let Canadians save as much as they want for retirement?

Prof. Tom Wilson: I really like the idea of a lifetime limit and greater flexibility. The government introduced flexibility for carrying forward unused RRSP room. If hard times occur and you have to pull your money out of RRSPs right now, you lose that RRSP room permanently. I think that should be rebuilding your lifetime RRSP room.

To get to the equity issues, some people believe consumption is a valid basis for tax. Others believe income is a valid basis for tax. If you believe consumption is the best basis, you should have unlimited RRSP deductions. You should only be taxing consumption. Historically we've always had a hybrid system and I think a hybrid system may be appropriate. I happen to think wealth itself is worth taxing in some way. It's very difficult to do it with a wealth tax for administrative purposes, so having a hybrid system where we tax income and tax consumption makes some sense. The RRSP in a sense is part of the compromise. It moves the income tax system more toward a consumption tax.

Many years ago I think the Economic Council of Canada actually recommended that the RRSP limits go up to 30% from then 20%. We're now at 18%. That sort of measure would benefit moderate-income Canadians as well as higher-income Canadians.

The Chairman: Thank you, Mr. Szabo.

Mr. Pillitteri.

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

Mr. Wilson, in your presentation you said first there should be a reduction in the payroll tax, specifically the EI. You did not state how much this reduction should be. You said there could be a small recession next year. You also emphasized tax cuts, and if there were a small recession next year of course this could be weathered.

You also said we should not be worried, come hell or high water, about the reduction in EI and the deficit and the debt. Are you anticipating what you just said? I understood a reduction in EI, because you well know 10¢ relates to $700 million. So if you're proposing to bring that down to $2 you're eliminating $5 billion from the surplus this year. Also, if there is the possibility of a recession—as you stated, not me—next year, how could you have all three of them?

Prof. Tom Wilson: Let me clarify first the amount. I'm not in favour of eliminating that surplus right now. There are all sorts of issues of how you do it under the law. What is built into our model—and it was roughly offsetting the planned CPP increases, which of course are not in the federal budget—is a 30-cent reduction this year in the EI premiums, followed by two 40-cent reductions. I forget what's after that. The fund finally reaches a balance in terms of its income flows in about four years, and then of course there's a large accumulated surplus in that fund. So it isn't using up all that room, and there's still room in this growth scenario for a very modest PIT cut.

• 1855

So the combined cut this year would be about $3 billion. In the second year it would be about $6 billion, which is somewhat less than what Pierre was talking about in the second year, but that's because he's got a more modest debt reduction target. We're assuming that under conditions of growth of 2.5%, the government would be aiming at a public account surplus in the $6 billion to $10 billion range, and that would be feasible with these modest cuts. I believe you were recommending a balanced public accounts budget. But he's got a slightly more gloomy scenario than we have, and that's how he comes up with a somewhat larger room for tax cuts.

Mr. Gary Pillitteri: I just want to continue. Prior to the budget last year, 2.5% growth was anticipated. That was a modest growth. Could you still state today that the growth of Canada would be sustained at 2.5% or lower, and that's what's been happening in world economics in recent months?

Prof. Tom Wilson: This is a very difficult time to be a forecaster, as I'm sure everybody here would say.

Mr. Gary Pillitteri: That's why I'm asking the question.

Prof. Tom Wilson: I belive now, if you get this consensus economics document, the consensus forecast for Canada is 2.3% for next year. That's hot off the press; I just got it before I left. Our forecast for next year I believe is 2.5% or 2.6%.

On the other hand, when you look at what's been happening to these forecasts over the last few months, the consensus is dropping, not only here but in the United States and in other countries. So the risks clearly are on the downside. That's why we did develop an alternative scenario in which the growth next year is less than 1%, which would be consistent with a classic mild recession—two quarters of negative growth—to see whether in that event the public accounts balance would move into deficit. And it did. It got close to a balance.

Now the national accounts budget—let's remember that—has a healthier balance. And that is a better measure of the burden the government puts on capital markets. So the government's running a national accounts deficit, which means it's retiring the publicly held or the marketable debt. We're not seeing any prospect that the government would actually have to go back as a net borrower in capital markets. They'd still be retiring publicly held debt, even under the recession scenario.

The paper I gave to the clerk has more details in it. I should also mention this conference is on tax-cutting, and all of the papers in the conference are going to be in a special issue of Policy Options, published by IRPP in December. I'm sure it can be arranged that those be made available to you.

Mr. Gary Pillitteri: I have one last comment, Mr. Chairman.

I've been here five years, you know, and it's interesting that all of a sudden this year I see almost reverse roles from Mr. Fortin and you, Mr. Wilson—one being more pessimistic and one being more optimistic. I just wondered, if it's within the world, how we see it, how we interpret it, and what colour of glasses we look at it with.

Thank you, Mr. Chairman.

The Chairman: Mrs. Redman.

Mrs. Karen Redman: Thank you, Mr. Chairman. I'd just like to segue from Mr. Pillitteri's question.

The Asian crisis is about a year old. In your view, is the worst over, or are we to expect more aftershocks? For instance, do you think interest rates will go up in Canada? Should the financial department use more generous prudence factors when we build growth and interest rate assumptions over the next two years?

Prof. Pierre Fortin: No, I don't think interest rates will go up within the next 18 months—not at all. It seems as if the Bank of Canada has the current policy of following or duplicating any downward reduction in interest rates— Have you seen an upward reduction? I think this is the right thing for them to do. But my disappointment was with the full one-point increase in interest rates in Canada in September. I think we could have avoided that and put the economy at less risk. As I said, at this time we do have the highest interest rates of the developed world, net of inflation, and that puts us more at risk.

• 1900

I don't anticipate it will go up. I think we should write down with reductions in interest rates. That is what we're going to see in the United States. I think the danger for Mr. Martin is down the line. We always have to remember that $600 billion debt. If you put a variation of one percentage point in interest rates on this, spread over three or four years because some of the debt rolls over a number of years, then this means a one-point hike in interest rates increases the deficit or reduces the surplus by $5 billion to $6 billion.

So this is why— You have to understand the man, facing this kind of risk all the time. I don't believe this risk is going to be with us in the next one or two years. Because of the difficult situation in the economy, interest rates are going to be down. But prudence is really, I think, the best advice we have to give to ourselves.

The Chairman: Mr. Brien.

[Translation]

Mr. Pierre Brien (Témiscamingue, BQ): None of you have talked about Canada's tremendous dependence on natural resources. I would like to hear your opinion on the matter. This sector has been hard hit by falling prices throughout the world. What is the short- and medium-term outlook for raw goods in general? And what impact will this have on the government of Canada next year?

Mr. Pierre Fortin: Could you repeat the question? I wasn't listening at all.

Mr. Pierre Brien: I would like to know how you think natural resources will fare on the world markets. Canada still depends a great deal on natural resources, whether this be mining, forestry, etc. What impact will the downturn have on the Canadian economy over the next year? Do you think that we have hit rock bottom? Do you think that next year will be even worse for this sector?

Mr. Pierre Fortin: First of all, prices for natural resources have been falling drastically since 1996. The regions that depend on these resources are starting to suffer, particularly British Columbia and Alberta, where growth, without being poor, has slowed down compared to what it could have been. I recently looked at the situation in my own province, Quebec, and it is clear that the ridings or regions where employment has been affected over the past year are those that are more dependent on natural resources.

Consequently, we are already feeling the effects of this situation quite significantly, as is our dollar, of course, although to a lesser extent than some other countries that rely as heavily as we do on exporting natural resources, such as Australia, New Zealand, Chile and Norway. The currencies of these countries have depreciated more than ours has.

I have not made any personal forecasts for the next coming months, but according to the forecasts arrived at by my colleagues, world prices for raw goods, prices that will affect the Canadian economy, will continue to decline slightly until the end of the year and will stabilize over the next year. Perhaps we'll see prices start to climb by the end of 1999. Those are the forecasts that I have seen recently and there is consensus on them. Consequently, we are heading toward stabilization. The good news is that prices will stop falling. However, we don't really see any signs that prices will climb in the near future, as they did between 1992 and 1994.

Mr. Pierre Brien: I have a brief question about—

[English]

The Chairman: I just want a quick note. Professor Wilson is leaving. I'd like to thank you very much, Professor Wilson, for your input.

• 1905

[Translation]

Mr. Pierre Brien: You referred to a concerted plan for comprehensive tax cuts at various government levels to the tune of $10 to $15 million in the medium term. I'm not sure that I understood you very well. What is the amount of the tax cuts to be granted by the federal government, according to your assessment, in this process, and when should this occur?

Mr. Pierre Fortin: One percent, $8 billion over five years, perhaps with front loading—to use a term we see in collective agreements—that is, by granting a bit more immediately, given the uncertain economic situation. I'd be very receptive to the proposal that Mr. Wilson just made, namely, a payroll tax cut of $3 billion for next year.

A payroll tax cut has the advantage of affecting mainly middle and lower income earners, who do not save large amounts. So we can be almost certain that the money put into their pockets will be spent. This is exactly what the economy needs now.

[English]

The Chairman: I understand, Professor Fortin, that you must leave as well. On behalf of the committee, thank you very much for your input. Your comments are always welcome.

We'll now hear from Mr. Rick Egelton.

Mr. Rick Egelton (Vice-president and Deputy Chief Economist, Bank of Montreal, Individual Presentation): Thank you very much, Mr. Chairman and hon. members.

I won't belabour our view of the economy. It is one that is not particularly sanguine. We see relatively slow growth over the next couple of years in Canada because of events outside our borders and Asian commodity prices and because of what we perceive to be unfortunate interest rate increases by the Bank of Canada, increases that we didn't really think were necessary.

In any event, we see economic growth sufficient to generate surpluses in the federal budget of around $8 billion a year over the next two to three years. And this is obviously a tremendous accomplishment, given where we were just five to six years ago. However, I would hold short on the tickertape parade, because I think we have a fair ways to go.

First, Canada has staggeringly high debt levels by international standards and I think we continue to be at risk in regard to that. Canada also has staggeringly high tax rates by international standards, particularly relative to our most important trading partner, the U.S. And I think we're seeing some negative impact of the high tax rates we have in our economy, both in terms of productivity growth rates and in terms of being not solely responsible for what people have termed the “brain drain”, but certainly contributing to that.

We're struggling with the question of what to do with this fiscal dividend. If fiscal policy remains on track, like where it is today, we're looking at potential surpluses in the range of $8 billion to $10 billion over the next few years. What do we do with this?

I think the principle we have to go by is where the best place is for that marginal dollar. Is it via a tax cut? Is it via a spending increase? Or is it via reducing debt? In our judgment, the best contribution the government can make to strengthening our economy and enhancing job opportunities is to get the debt level down and get it down very quickly. That, for us, is the number one priority. We think the debt-to-GDP ratio is extremely high now and has to come down, and it has to come down fairly quickly.

We would closely follow that with reducing our tax burden. We think the tax burden is having a very negative impact. We have extraordinarily high marginal tax rates at very low income levels. Those are the types of things that discourage effort, discourage work. We have extremely high tax rates vis-à-vis the U.S. Those rates encourage people to move across the border and do not encourage them to come back.

So for us, the bottom line on the fiscal side is that the debt levels have to come down as a share of the size of our economy and we have to reduce our tax burden.

On the spending side, over the course of a year we in the economics department of the Bank of Montreal give many presentations, and I've had a number of people tell me about the impact of high taxes on their businesses. And I've had a number of people tell me about the impact of high debt levels—through interest rates—on their businesses. I have yet to have a business person tell me about the impact of inadequate government spending on their business.

And my sense is the levels of real program spending we have right now are probably adequate to do the job at hand and the government would be best advised to reallocate program spending towards its higher priority areas.

• 1910

Operationally, as we look ahead, we would recommend, like what Pierre said earlier, keeping program spending constant in real per capita terms. That means allowing the level of program spending by the federal government to grow, along with the rate of population growth and the rate of inflation, and that would allow you to provide the same real level of program spending.

We think the minister should continue to pursue an extremely prudent course, and by that I mean keeping a $3 billion contingency reserve which he does not spend as well as implementing extremely prudent economic assumptions to take into account the weakness in and the potential risks to the economy.

What that could potentially give you, we think, is about $6 billion worth of debt relief a year. I don't think there's any magic in a particular number, but in our view that would be an adequate pace of debt reduction, and still, even four to five years from now, we would have a debt-to-GDP level of over 50%, which would be relatively high by international standards and certainly by the standards of most credit-worthy countries. On the fiscal side, we would advocate applying any excess beyond that to tax relief.

And on the tax side, I think the initiative should be geared towards lowering marginal tax rates, which encourages effort. On the international competition side, it's interesting to see the focus on reducing payroll taxes; Canada's payroll taxes are relatively low, internationally, and our income taxes are staggeringly high, internationally.

So it doesn't concern me particularly that we have a fairly substantial surplus in the EI system. Before we embark on substantial reductions in the EI rate, we may want to think that perhaps that money could be better used towards lowering personal income taxes. And there I think the suggestion that Pierre made about simply re-indexing the system so people don't move into higher tax rates would be quite important. That could be done. It's not extremely cheap. I think it would cost about $560 million to $600 million a year for every percentage point of inflation, and with inflation around 1% to 1.5%, I think the government can afford that.

I think the government could also contemplate, maybe not for next year but for some time in the future, extending the tax relief in last year's budget to all taxpayers by eliminating the general surtax.

Looking ahead, we see a lot of rifts in the economy. We think the government should proceed in an extremely cautious fashion, keeping a contingency reserve and very prudent economic assumptions, which de facto will give you debt relief in excess of $3 billion and perhaps as high as $6 billion. Beyond that, the government should apply any fiscal dividend beyond that amount to providing tax relief, particularly on the personal income side.

Thank you very much.

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

We'll now hear from Ms. Maureen Farrow.

Welcome.

Ms. Maureen Farrow (Head Economist, Loewen, Ondaatje, McCutcheon Limited, Individual Presentation): Good evening, committee.

I'm following a number of people with whom I sort of agree quite a lot, so I'll try not to repeat some of it.

I think we should start off by really saying very clearly that in regard to the surplus we're currently enjoying—not just last year but currently enjoying—the surplus that's running currently on the books, all Canadians have made a great contribution to that and we need to congratulate ourselves for it.

Second, I'd like to basically agree with the conservative economic assumptions the finance minister is actually putting forward. I think that's been one of the strengths of the finance department in the preparation of the past budgets. We have had these very conservative forecasts and therefore we've stayed out of a lot of trouble that we might have put ourselves in.

Now, that's where I sort of end my good news, I suppose. I want to raise what I think in regard to talking about spending the dividend, the surplus that we've generated. Anyone would think we're talking about $20 billion or $30 billion the way we're discussing this around this nation, and we're really talking about decimal points. This is not a big pot of money. So I just want to point that out very clearly; as of yet, we have not created large amounts of money that we can spend easily. We cannot fall back. I will be coming back to that topic in a moment.

• 1915

I suppose why I'm so concerned is that I do not really believe that the policy-makers in Ottawa or the policy-makers in Washington have correctly read the world economic conditions over the last year; I think there has been a great misreading of the world's economic conditions. And I'm not going to take you through the risks that I think we face, but I would warn you: I'm an old lady and I've never seen the global economy look so fragile and so much at risk. I think Pierre mentioned that and so did Rick, really.

We have close to 40% of the world economy in recession. These recessions are very deep in many of these countries. In a quarter of the world's economy, Japan, there has been no indication this decade that they can get out of the deflation, stagflation, no-growth situation that they're in, whether it's through lower interest rates or fiscal stimulus.

When I look at the rest of the world, I see that there's not one place in the world today that has accelerating growth; everywhere it's decelerating growth. There's not been one point like this in the 30-odd years I've been an economist; I haven't ever lived in this kind of world. This is very worrying, because if the world slips into a global recession it is very difficult to get out of.

Added to this problem is what we call the “liquidity track” the world seems to be in. And that is also worrying because it's happening at a time of decelerating growth. So if you put these things in front of us and then we start talking about spending this fiscal surplus, this fiscal present that we've created for ourselves in Canada, and it's not very large currently, I would urge us to really, over the coming months, act prudently and conservatively—as I urge this committee to act—in order to try to steer this economy through very troubled waters.

Lower interest rates will be critical. Some of my colleagues have mentioned that the actions of the Bank of Canada have not really been in tune with keeping the current fragile economic cycle on the right path and possibly have put it at risk. It is very important that we follow the U.S. down on interest rates, and the only way for world interest rates to go is down. I anticipate we're going to reduce short-term rates at least another 150 basis points in North America before it's over—and I think it will happen a lot faster than everyone thinks—and long-term rates by another 50 basis points.

So that's the world we live in, and against this we have a debt load. And although we're very pleased that we have created a surplus, if you put the total government debt load of Canada together, it's 94% of GDP. It's down from when I spoke last year, the year before, and the year before that, but it's still 94%. I think we need to get that number down to 40% of GDP, which is where it was in the early 1980s. We're a long way from that.

I would also urge this committee and the federal government to realize that there's only one taxpayer and that it's very important for you talk to your provincial colleagues and co-ordinate these policies together.

• 1920

I would also like to mention a priority that I think the federal government is not taking note of these days. I would like you to go back and look at what the business world has had to do in the 1990s, and that is, adopt policies of continuous improvement. We should be working to reduce the operating cost of government on a continuous basis. I think we should be aiming to get the operating costs back down to around 16% of expenditures, which is where they were in the 1960s.

Why do I think that's important? If you look at where the surplus has been created, it's really because rising revenues come from the tax side, and then the cuts in the programs; the stronger economies delivered better revenues, and then the cuts in the basic programs— It's not out of the operating side of the government. That's something that's small but important, and it's very visible; what you do is visible to everyone.

Now, to come to the priorities of whatever you could do with this fiscal dividend, which I'm not so sure you should do too much with right now, my calculations are that if the economy surprises us and brings in solid growth next year, we would have something close to a $10 billion surplus. And in fact, I have an average surplus—if I can get over the next few years and if I don't have any recessions—of anywhere between $8 billion and $12.5 billion.

But I would just say that it's very nice to know we could get those numbers, but I would take us back to what I think the priorities are. The first is to avoid creating a new deficit trend. With this kind of surplus, the size we have now, we are always flirting with a deficit. So that's the first priority.

The second is like a number of my colleagues here have said, and that's debt repayment. That's why I concentrated on talking a lot about the size of the debt-to-GDP ratio and the problems we have. I think you have to keep to the stated plan and enhance it wherever you can.

I would then come back to the personal tax side. I think it is important that we aim to bring back the total tax take as a share of GDP to the historical levels, which were around 32% of GDP. They're currently running around 36%.

Now, you'll see that every economist will give you a different way of looking at how you do this. Basically we're saying that this is a highly taxed country, that personal tax rates distort the system, that they encourage the immigration to the United States and the loss— The C.D. Howe has produced a paper and I'm sure Bill is going to be talking to it. We've seen that we've spent a lot on education and then we have the exit of those people, that resource, whereas we should be investing in education trying to keep those people here so we get the multiplier effect into our economy. Otherwise, this is just throwing the money away. So that's a very important piece.

I'm not sure you can really do a lot on the personal tax side in the next budget. I think you could do some marginal things. You may be able to do something about reintroducing some indexation. There are all sorts of things you can play around with, but fundamentally, on the personal tax side and in the total tax system, it's time for a total review, not tinkering around the edges. And in the federal budget this time, I would really rather see a statement of what the tax system should look like and how, over a number of years, we're going to move to that position. That would mean something—rather than tinkering.

You asked us about the spending side. I don't really think you should increase spending any more than is slated out of the last few budgets.

• 1925

Health care is a big issue in the country. It's at the top of the opinion polls now, I think. Therefore, I'm very sympathetic to all of you being very conscious of it, and I think every Canadian is conscious of it. We've taken a large slice out of what was being spent. The pendulum has possibly gone too far on the restricted side, on the cuts. I expect we need to move it back. In my mind, it's more like we cut $6 billion and we need to put $2 billion back in over a period of time. I think the question you have to ask is whether this is a provincial jurisdictional issue or a federal one. I know what I think it is and I don't think you should necessarily be concerning yourself with it.

I think you should think more about competitive infrastructure. I think you should think longer term about science and technology. It comes up from time to time and was quite verbally explained last time in the budget, but I think it should be a focus.

You asked a question of us: how can government help Canadians take advantage of the opportunities? I think you should be doing this in a number of ways—and not just this committee but government at all levels. You have to raise the level of understanding of Canadians about how the economy works, about what's going on globally, about what competition means. They have to understand the type of economy we live in. There's not much education for the general public. Even though, I suppose, we have a second national newspaper, we're still very short, I think, of really good communications with the public.

Training and skills required: we cannot drift away and we cannot cut back in that area. We have to teach people how to obtain training and education and we have to encourage labour mobility, which our system does not do.

I think you need to have the right policy mix and you need to concentrate on that. This committee's focus should be on good fiscal management and on the right policy mix in terms of tax policy.

But it goes beyond that. It's trade policy, education policy, etc. You have to create a positive business investment climate in this country. We do not have a positive business investment climate and that has to be attacked. You also have to create a positive personal tax environment and that comes back to the personal tax reform I spoke of earlier. I think if you did these things and we maintained education and training, we would actually create a lot more jobs and the job opportunities would come forward.

With those comments, I will close. Thank you.

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

We'll now hear from Bill Robson.

Mr. William Robson (Senior Policy Analyst, The C.D. Howe Institute, Individual Presentation): Thank you. You've already heard a lot of very sensible things. I'll try to keep to that standard.

Like my colleagues, I want to congratulate everyone on the fiscal turnaround. It really is a remarkable thing by world standards or by historical standards. Here in Canada, it gives us the prospect of another big change, from the vicious circle we've been in for a number of years now—as long as I've been in the think-tank business anyway—to a virtuous circle.

The vicious circle I'm talking about is the one of higher debt leading to higher interest costs and higher taxes, those higher taxes eroding the base of taxation for a variety of reasons, like the underground economy discouraging work and saving and like the brain drain. You've heard about those things. Then, as the base eroded but the pressure to get more revenue was there, there were yet higher taxes.

And as Pierre Fortin mentioned, the 1990s expansion has been very disappointing. It has defied most indicators. People were forecasting earlier in the decade how quickly we would expand and how robust job growth would be, but we've had fewer jobs created than we'd hoped and the productivity performance has been terrible compared to what we were entitled to expect on the basis of history.

• 1930

Canada, through that vicious circle, became a less attractive place to work and invest. Globalization is a cliché, but we hear about it for good reasons. Canada has always had open borders. We've always been open to people coming and going. We've been open to goods and services and we've been open to investment. Those things have by and large been good for us, but they certainly became a problem for us when we became less attractive than some other places where people could live, work and invest.

The brain drain has been talked about. I won't say much more about it now except that focusing on the numbers is a mistake. Just as a hockey team can suffer very disproportionately from the loss of one player, some of those people who are going south are missed more than simply the loss of one head would suggest.

On the corporate side, there's the problem that corporations can arbitrage their profits to a certain extent. Corporations can control where they want their profits to show up through where they have their expenses and so on and where they borrow and that type of thing. That's working to our disadvantage now, because we're not an attractive place to locate profits.

The result of these movements of people who have choices and people who have options is that more of the burden of our taxes is falling on those who have fewer options and who aren't as easily able to move. That's one of the reasons why the marginal tax rates on low- and middle-income Canadians have gotten so high: they are the people who have the least opportunity to escape it.

As I say, we're on the verge of a virtuous circle here. We're on the verge of a virtuous circle of lower interest costs and lower taxes, and what we should be thinking about is trying to turn our situation around so that the brain drain and arbitrage of profits and heavy taxes on less skilled and less mobile labour are somebody else's problems, not ours. We want to be on the receiving end of these things, the receiving end of the flow of talented people, the receiving end of profits and so on.

Now clearly, to realize that, we need lower debt and we need lower taxes.

On the subject of lower debt, you've heard a number of things already. The only additional thing I want to throw into the pot is that looking at the long term, in this country we have a demographic shift of a sizeable scale. You've all seen numbers in a variety of places about the change in the numbers, from people who are working to those who will be relying on investment income and government transfers. For those reasons, it really does make sense to aim for a lower debt-to-GDP ratio over the course of 15, 20 or 25 years than you would get just by balancing the budget and letting the economy grow. That alone won't quite do it.

At the core of a fiscal plan, I think there should be a baseline of fairly substantial surpluses over the next few years to kick-start that process towards lower debt. We've had a lot of success with these short-term budgets, the two-year rolling targets and so on. At this point, it's gotten very difficult to argue with kind of success, but the one thing I would say is that if you want some flexibility in the budget so that you can allow the budget to move into a smaller surplus than you had hoped as the economy turns down and so you can allow those swings to happen, it really does help if you have some kind of baseline out there that people can see so they know what you're aiming for through the cycles of the economy. It's a lot harder to have that kind of flexibility if you don't have that long-term plan.

Like Rick Egelton, I would have thought that— Again, economists like to talk in percentage points of GDP, so I'll do that and talk about 1% of GDP as kind of a healthy baseline surplus. That's $8 billion to $9 billion in today's money, and we seem to be headed for surpluses larger than that right now. Certainly that would kick-start us towards lower debt. It would guard against the return to deficits and it would generate the interest savings from which we might be able to finance some good tax cuts.

I mention the interest savings because it's been talked about and it was part of the Liberal Party's campaign documents, which said that tax cuts would be delivered when they would be seen as lasting, when people could have confidence that they wouldn't be reversed. I think there's a lot to be said in favour of that approach, and it does point out to me the desirability of linking your tax cuts to some extent to the reduction in interest burden as the debt burden shrinks relative to the economy. I won't say more about that because you've already heard a fair amount, unless in the question period there's anything that you feel I should add.

But if you are going to go beyond what interest savings will allow you to finance by way of tax cuts, make sure that you get a big bang for your buck.

• 1935

We had a bit of a conversation earlier about supply side effects, about where the taxes are that might give us the most economic growth. If you're going to get beyond what lower interest payments enable you to cover, at no risk to the budget, then you have to pay a lot of attention to where those biggest responses are going to be. And there are some examples other than booze where I think we could expect that, although booze is an interesting one to talk about.

Secondly, there are a lot of concerns about the rate structure, about where people start paying taxes, things like sheltering, retirement savings and so on. All of those issues become less pressing as rates fall. In that sense, lower rates trump everything. A lot of the concerns we have about the precise structure of the tax system—evasion, enforcement, all that type of thing—really become less important when the rates are lower. In my view, as sort of simple approach, rate cuts really are the most important thing that you can think of.

There are two hurdles to get there. First of all, there are health transfers. Maureen anticipated something I was going to say there, so I'll just be very brief. I don't think that bumping up health transfers is the right thing to do. There is not a province in this country that doesn't have the fiscal capacity, if it feels its health system is underfunded, to either raise the taxes or find the money itself elsewhere in its budget to meet that shortfall.

And if we are talking about new money that's going to be parcelled out on anything like an equal basis across the country—equal per person—then even in the fiscally weaker provinces, any conceivable amount of increase we're talking about doesn't amount to a whole lot compared to what the provinces can do themselves. I really think that would be a bad idea.

The other hurdle is the one that has already been alluded to in the case of the EI surplus. I will just very quickly refer to something that we published a while ago. There's a bitter political pill in our prescription, but there are a lot of payoffs from it. Like Tom Wilson, we think that it would be a good idea to cut the EI premiums sufficiently to offset the CPP premium increases.

Second, if you are determined to continue levying a payroll tax, a large part of which is significantly feeding through to the bottom line and another very significant portion of which is covering things other than EI benefits— This gets overlooked, but we are funding a lot of things that aren't EI benefits with that money. There are very high administrative costs. We are funding a whole series of things that happen at the Department of Human Resources Development.

Those should be levied, if it's going to be by a payroll tax, by a tax with a different name. Relabel it. You can then de-cap it if you want. It doesn't have to stop at $39,000. You can run it all the way up. There are a variety of things you can do, but for goodness' sake, stop calling it “EI premium” when it's not. Leave the employers alone to fund the EI program. It works out beautifully in terms of the numbers, you'll be over a huge accountability hurdle, and it really does clear the way to do some more attractive things in the budget.

I hope I didn't go on at too great a length about that. Just to recap, it really is a marvellous opportunity for us to turn what has been a vicious circle around into a virtuous circle and make Canada the place that people want to come to and live in, work in, invest in and pay taxes in.

Thank you.

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

We'll now hear from Mr. David Rosenberg. Welcome.

Mr. David Rosenberg (Vice-president and Senior Economist, Nesbitt Burns Inc., Individual Presentation): Thank you very much.

I think we all share a similar view that the global economic outlook is fraught with risk. I'll start by maybe answering a couple of questions asked previously.

When you take essentially a top-down view of the world, what falls out of that for this year in terms of global GDP growth in real terms is something around 1.5%, which essentially is a global growth recession, down from 4% last year. I think we're going to be looking at something like 1% to 1.5% for next year in terms of global GDP growth.

It comes back to your question, sir, concerning commodity prices. The sort of global excess capacity buildup that this sort of very weak growth globally implies is decisively negative for commodity prices. We've already seen a 30% slide in most resource markets without the U.S. economy turning over, and we've already just seen that start in the last couple of months.

Gold prices stuck at $290 an ounce are quite an ominous sign for commodities. The fact that gold has not been able to break $300 an ounce when you have Korea lobbing missiles over Japan and Bill Clinton's problems and former KGB agents taking over in Russia— You would have thought gold would have broken well above $300 an ounce by now. The fact that it hasn't is an ominous sign for commodity prices and, therefore, is not exactly a great sign for the Canadian dollar either.

I guess it's against that backdrop that Mr. Martin gave what I thought was a fairly bleak assessment, and maybe rightfully so, on October 14, but I think that masks the fact that the federal government still managed to post a $3.5 billion surplus for the 1998 fiscal year—which, by the way, would have been closer to $9 billion if it weren't for an array of one-time charges, including the millennium scholarship fund.

• 1940

So while it's true that the size of the upcoming fiscal dividends may not be that large—and certainly I think everybody has shaved their estimates alongside the weakening economy—we in Nesbitt Burns economics see very little chance that real GDP growth in Canada will do much better than 1% for 1999. So in regard to the consensus of 2.3%, well, when has the consensus ever been right? We think 2.3% is hopelessly optimistic.

The bottom line, though, is that Ottawa is way ahead of the game on the fiscal side, something we shouldn't lose sight of, and that even with a stagnating economy, this year's surplus still seems destined to come in at no less than $5 billion and, I would venture to say, $8 billion for the fiscal year 2000.

Now, just to put things into perspective, less than two years ago the federal government was projecting a $17 billion deficit for the 1998 fiscal year, and we got a $4 billion surplus. That's a swing of over $20 billion. And even if the prognosticators were off the mark and instead of, let's say, a $10 billion fiscal dividend that most were expecting for this fiscal year we come in around $5 billion, keep in mind that the original target for fiscal year 1999 was a $9 billion deficit. The bottom line is that we are still way ahead of the game in terms of the fiscal targets.

I actually find that fiscal policy in this country is inordinately tight, that one measure you could look at, for example, is the “X” interest balance, the operational surplus, which is going to hit $50 billion over the next year. That's 5.5% of GDP. It's never been that big. So here we are, heading into a slower growth environment, and what we are seeing is a de facto tightening in fiscal policy. From a macroeconomic standpoint, I don't know if that makes a whole lot of sense.

The finance minister was characteristically cautious at his midyear update, and it always pays to be cautious. Let's just keep in mind that Ottawa has bettered its fiscal targets by a cumulative $50 billion during Mr. Martin's tenure as finance minister. The way I see it, yes, the revenue stream is going to fall short of expectations in the year ahead, to be sure, although it's worth noting that the economists at the Department of Finance, to their credit, had already built in a moderation in growth for 1999 in last year's budget.

But we still have a $3 billion contingency reserve to guard against the unexpected, and we have a set of interest rate assumptions that would make even the biggest bond bear blush: an average of 5.6% for three-month T-bills for 1999 and 7% for 10-year Government of Canada bond yields. How do we get sluggish growth and interest rates going up? It does not make a whole lot of sense. That's a little disconnect there.

When I left the office today, 10-year Government of Canada yields were at 5%. If the economy slows down further and we are in a global deflationary environment, I would venture to say that we will see 4% 10-year Government of Canada yields before we ever see 7%. And it's been these overly bearish interest rate forecasts—some people call it prudence, but I think it redefines prudence—that have been at the heart of pushing the budget into surplus years ahead of schedule. After all, debt service charges were supposed to come in at almost $50 billion in the 1998 fiscal year, according to the finance department's interest rate projections. Instead, interest charges came in just a bit above $40 billion.

So let's make no mistake about it: there is still plenty of padding in the fiscal numbers, and even under a slow growth environment, Ottawa is in such good shape that cumulative surpluses over the next three years should still total roughly $25 billion.

So the question isn't whether there's going to be a fiscal dividend. There's still going to be one. I think the key question is this one: what problems should be addressed with these fiscal dividends?

It seems to me that the government has already made up its mind to spend a good portion of the dividend to date, since program spending came in fully $2.8 billion higher in the 1998 fiscal year than what was projected in the 1997 budget. So that decision about where the dividend was initially going seems to have been already made.

Yes, there have been deep cuts in spending across all levels of government in Canada in recent years. Total public sector outlay—and I include interest charges here because I still think they should be included as a cost of running government programs—has essentially been brought back to 1989 levels as a share of GDP.

Total government spending—again, this is across the board—amounts to $40,000 per household in this country, a sum that is 50% greater than the average industrial wage.

Similarly, as a share of GDP, the national debt has been trimmed to 67.8% from the 71.9% peak in 1996.

• 1945

Now, it would take a return to annual deficits of around $15 billion to cause the debt-to-GDP ratio to go back up. So maybe the ratio isn't declining rapidly enough for some, but it is declining and will continue to do so for many years.

I'm not advocating a return to deficit financing and I never would, but I would say that even in a slow growth environment, balanced budgets alone will be enough to take the ratio below 50% in a decade's time, from roughly 68% where it is today. Maybe that isn't fast enough, as I said, for some, but it certainly is a continued improvement, and for financial markets, it's the trend that matters.

I think what's really lacking is a sense of urgency on the tax side, something that I think we've all agreed with, to varying degrees. We've already seen spending renewed. Debt-to-GDP is coming down. The deficit dragon has been slain. The one ratio that doesn't seem to go down is the tax-to-GDP ratio in this country; at all levels of government it continues to set new record highs, as it has over the past year. At a time last year when program spending, as I mentioned, came in $2.8 billion above budget, Ottawa's revenue take came in almost $6 billion above target.

I don't doubt last year's budget message that an overwhelming number of Canadians—I think 14 million was the number used—were the recipients of some tax relief. But it does somehow seem striking that federal revenues absorbed 18% of GDP last year, one of the highest totals of the past 20 years and almost two percentage points higher than when the Liberals took office in 1993, that is, an additional tax bill that's equivalent to more than $1,000 per household over that time.

So the case for a broadly based income tax cut, I believe, has rarely been as strong as it is today. If the government is concerned over the economic outlook, tax cuts would certainly be one remedy.

On a more fundamental basis, I wonder how the government can sit back and watch as Canadians' real after-tax income erodes year after year. That real after-tax income, on a per capita basis, has fallen 8% so far in the 1990s and is no higher today than it was in the fourth quarter of 1985. That is a statistic that is cause for pause and is at the very heart, in my opinion, of the brain drain that Mr. Robson alluded to before.

We can throw all the money in the world at health care, but what sort of quality medical care can we really ensure Canadians when it is estimated that 12 health professionals are leaving this country for the U.S. for every one that comes north of the border? There are similar ratios for engineers and education professionals, people who are making economic decisions to maximize their after-tax income by moving to the United States. Lower taxes, at the end of the day, will ultimately be good social policy against that backdrop.

Tax rates in Canada are simply too high. They must come down. In my estimation, there is $25 billion, conservatively estimated, in aggregate surpluses over the next three years to tackle what should be the government's top priority. We've discussed where the government should cut taxes. EI has been mentioned and so on and so forth. I wonder if Bill Robson would agree with me that when you take a look at where the biggest gap is between Canada, say, and the U.S. or other countries, I don't think you seee it in payroll taxes: it's in personal income tax rates.

Even in Ontario after Mike Harris' tax cuts, we still have a top marginal rate in Ontario of just a little under the 50% threshold, and it's not just the top rate that matters—and it's on average ten percentage points higher than it is in the U.S.—it's the income level it kicks in at. The top marginal rate in Canada kicks in at a level of income of almost $60,000, and when I take a look at the G-7, we are off the map. In the U.S., in Canadian dollar terms, the top rate kicks in at $418,000. Even in Japan, where the top marginal rate is admittedly higher than Canada's, it kicks in at an income level of $390,000. In Germany, the top marginal rate kicks in at $223,000.

Looking forward, considering that we've redressed the fiscal problem and that we have renewed some spending in the economy already, I think it's time that we start moving the tax-to-GDP ratio in the same direction as the debt-to-GDP ratio.

Thank you.

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

We'll start our question-and-answer session with Mr. Epp in a 10-minute round.

Mr. Ken Epp: Thank you, Mr. Chairman, and ladies and gentlemen.

• 1950

I am overwhelmed. I have found all of the presentations interesting and, Mr. Chairman, from these six people, the ratio of my number of pages of notes to the number of presenters is even better than the tax-to-GDP ratio.

Voices: Oh, oh.

Mr. Ken Epp: Look at these pages. This is incredible.

I really appreciate what you have told us today. So much of what you have said seems to square with what I consider to be common sense, and it's amazing to me that not more people in the country, including our government officials and people in the finance department, wouldn't have come to these same conclusions.

But I want to ask an opening question about something you never even mentioned. I'm very curious about what your read, with your expertise, would be on this. I have had some people tell me that there has probably been nothing more damaging to our economy than the imposition of the GST and other sales taxes in the provinces, that they just basically cut down purchasing by consumers and they really cripple the economy. I'd like to know what you would have to say with respect to giving a tax break by reducing or eliminating the GST in the country.

The Chairman: Mr. Egelton.

Mr. Rick Egelton: I couldn't disagree more. I think the GST replaced one of the worst taxes that any country was imposing, the Manufacturers Sales Tax, which was, in a sense, a tax encouraging imports and discouraging exports. And I think that's part of the public relations problem of the GST. People know the GST, but it replaced a tax nobody knew about, a tax whose tax base was eroding every year, the Manufacturers Sales Tax, whose rate went from around 3% to 13%, I think, at the time it was replaced. It was bad for exports and was bringing in imports.

The only problem I have with the GST is that the base hasn't been broad enough. By excluding items like food and that, I think we complicated the tax and made the rate higher than it otherwise would have needed to be.

But I think the GST is a far better tax than the tax it replaced and, by international standards with the exception of the United States, our value-added taxes are not all that high. So if you're talking about potential tax cuts, that would be one of the last rates I would cut.

Mr. Ken Epp: Okay. Others?

Ms. Maureen Farrow: I would sort of agree with Rick on this. The Manufacturers Sales Tax was a disaster, so in regard to the GST, I think you have to move with the demographic profile that the western industrialized world has: you have to move to a consumption tax. I don't think our consumption taxes—our GST and our sales taxes—are out of line. I think it would be a very good idea if you got them harmonized. We've been through that a number of times, and I won't open that one up, but that's still outstanding.

Mr. Ken Epp: Okay.

Mr. William Robson: Just to weigh in here, you're confronted with a table full of economists, and economists have this irritating habit of liking consumption taxes much better than other types of taxes.

If you're going to raise a dollar, the question to ask is, what sort of activity do you want to discourage? Do you want to discourage work? Do you want to discourage saving? Do you want to discourage investing? Or do you want to discourage consumption?

Right now in Canada we are horribly short of savings and we have been for years. Even now that government borrowing has come down, we still have a big current account deficit with the rest of the world. Every year we're importing over $20 billion worth of savings from the rest of the world to make up for what we don't have at home. And for that reason I would—unfortunately for your question—be with my colleagues here in saying that's not the tax we should be looking at cutting. In terms of bang for the buck and getting more revenue and faster growth over time, I think income taxes are where it's at, not sales taxes.

Mr. David Rosenberg: Yes, I'd second that motion. You have to keep in mind that if you're talking about cutting sales taxes, for example, a lot of what Canada buys is imported. There's an import leakage impact there as well.

Let's attack the real problem. The real problem is that real take-home pay is going down. Let's increase the incentive to work. Let's increase the incentive to hire. Cutting the GST in itself might not be a bad thing, but I don't think that's what the top priority should be.

• 1955

You might not like that answer, but actually I was thinking of you because you asked a question before about the link between taxes and unemployment, and I actually have a chart that I've been taking along on my dog-and-pony show. It plots out the unemployment rate gap and the tax-to-income gap between Canada and the U.S. over time, and it's very interesting that they match up almost as income and consumption would. You might want to look at a copy of this. I have it here for you.

Mr. Ken Epp: I can see it from here. It is very close—

Mr. David Rosenberg: It's striking in the sense that our tax-to-GDP ratios were equivalent in the early 1980s. Magically, that's the last time our unemployment rates were equivalent, somewhere in the low 7% range. As our tax-to-GDP ratio gap widened, lo and behold, we've had an unprecedented gap in unemployment rates. I somehow think there's a logical link and it shows up quite nicely here. I just thought I'd do that for you.

Mr. Ken Epp: This is incredible. I'm sure not in a position to argue with learned economists, but I think of even my own situation. I drive an 18-year-old car, and one of the reasons is that I can't bring myself to buy a new one, simply because to earn the money to buy a new one I have to leave half of my earnings in the hands of the government as income tax on my incremental income. And when I go to buy a vehicle—we used to have no sales taxes at all in Alberta, but now we have the GST—if I'm looking at buying even a reasonable car, I'm going to pay another $1,500 worth of tax. So I say, “Oh, I'm just going to forget about paying that tax and I'm just going to drive my old car.” Which is what I do. And on Saturdays sometimes, instead of doing political work, I'm lying underneath my old Chevy Suburban trying to make it run again.

And what's true for me has to be true for thousands of other Canadians. And certainly, buying in Canada would help our Canadian economy. I don't know why you're so opposed to people consuming things.

Ms. Maureen Farrow: You said that we import a lot of what we buy in the stores, so we're not actually creating jobs to manufacture those articles: we're only creating jobs to sell those articles. It's not a very comprehensive multiplier that we're creating in the economy to create jobs. We would do much better by leaving money in people's pockets. They would feel a lot better and they would spend a lot more.

Mr. Ken Epp: Okay. Well, we'll drop that part.

Voices: Oh, oh.

Mr. Ken Epp: I have some other really good questions here.

The next question that I have to ask is with respect to the reduction of the debt. Now I've heard things here from learned people. I've even heard them say we shouldn't pay off the debt, that we should just let the economy grow, that as it does our debt-to-GDP ratio will decrease and everything will be just fine and we won't need to worry.

The fact of the matter still is that our debt transfers a lot of taxpayers' money from the middle class, who are the greatest taxpayers in this country, to investors, including investors in other countries, because we're paying them interest. Surely it would be an advantage at a time of low interest rates to tackle the principal value of our debt, to bring the debt down in absolute terms as well as in a ratio to GDP so that we will have more revenue from the taxpayers available to pay for all of these valuable programs we want. Would that not be a superior way of tackling the problem?

Ms. Maureen Farrow: Well, I think in the numbers that we've been talking about— I want to get the federal debt-to-GDP down to 30%.

Mr. Ken Epp: Thirty per cent?

Ms. Maureen Farrow: Thirty per cent. Forty per cent for total debt for Canada to GDP. That's where it was in the early 1980s, late 1970s. And it means you have to pay off some of the principal, so to speak, to do that in any meaningful rate of time.

So I'm with you. I think we should be paying principal off as well as just letting us grow out of the problem. And I don't think anyone—and I'm not talking for my colleagues here—said that we could just sit here and grow out of it.

Mr. Ken Epp: Nobody said that? I misheard that, then. Okay, that's good.

But Ms. Farrow, you said that our total government debt load is 94% of the gross domestic product. Does that include the provincial—

A voice: Yes.

• 2000

Ms. Maureen Farrow: Yes. It's roughly 27%, I think, for the provinces. And what are we? Close to 68% or something.

Mr. Ken Epp: I don't remember which one said this, but—

Mr. David Rosenberg: I said it.

Mr. Ken Epp: —it seems to me that it is absolutely critical that the government, whether in a budget speech or in some other area, makes a very clear statement to the provinces—and this would be a huge unity builder too—and says, look, let's consolidate our provincial and federal debts in some sort of a plan to pay them off. Because as one arm of government goes out of spending, the other arm goes in, and it seems as if we live under a constant cloud of debt and interest at all levels of government.

Mr. Egelton, go for it.

Mr. Rick Egelton: At this time, though, I think we are, by and large, moving in the same direction. I think most provincial governments have their fiscal houses in order and their deficits coming down. Alberta is now in a position where their net debt will be eliminated in about two or three years, I think.

So probably more than at any other time I can remember, we have the provincial governments and the federal government moving in the right direction. I think debt-to-GDP ratios in every jurisdiction are by and large coming down, some more quickly than others, Ontario's more slowly because they decided they were going to cut taxes at the same time.

But I think finally we're moving in the right direction. I think that's pretty positive.

The Chairman: Thank you.

Mr. Ken Epp: Thank you, Mr. Chairman.

The Chairman: Ms. Leung.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chairman.

I really enjoyed all your presentations. Some of you mentioned that we must have positive business investment. That's very good. I like to hear that.

Now, I'm from the west coast, where we are very much a resource-based economy. Now our resource commodities are really down. Where will the economy go? I'd like to know how we create that positive business investment. I know B.C. better so I can't say too much about the east coast. A few years ago, everything just went up, like real estate, and heavy investment was just coming in.

Ms. Maureen Farrow: In B.C.?

Ms. Sophia Leung: Yes.

Now this has all just evaporated.

Ms. Maureen Farrow: Yes.

Ms. Sophia Leung: Everything went down. And you talk about positive business investment and I am puzzled, because we had a special foreign asset declaration. And certainly we can attribute some of the discouragement of the investment to that. I don't think it was purely that, but I'd really like to know how we can recreate that kind of a positive investment environment for Canada, of course, specifically for the west coast.

Ms. Maureen Farrow: Let's deal with the west coast and then with Canada. There's not much that can be done around the commodity price problem we have. Between 20% and 30% of all commodities are consumed in Asia. And with that area of the world in a pretty deep recession and with very little chance of that recovery coming about until at least another year now before they get some export-led recovery that has some momentum behind it, you are not going to see commodity prices either reach bottom or begin to rise.

B.C. is caught in that and is particularly caught if the U.S. goes into a recession next year or if that economy slows down sharply, because, really, a very large percentage of our commodities out of B.C. actually go to the United States. The pulp and paper market is really a regional market and our industrial minerals are as well.

You can't really do anything about that in the short term. It's a global supply/demand problem. You're going to see rationalization of the industries and the fittest will survive.

The tourist industry is also very badly affected in B.C. because of the currency issues, etc. Let's come back, though, to—

• 2005

Ms. Sophia Leung: I don't think so. Excuse me, but I think tourism is still growing. It's our saving grace.

Ms. Maureen Farrow: It's changed. The Asian tourists have disappeared and it's really the U.S. tourists that are on those cruise boats going up to the Arctic at this time.

What do I mean by creating an attractive investment climate? I think that's the reason government is in place. If government does it right, what you get is a very nice garden for all the flowers to grow in. What I mean is that you have to create an umbrella of programs that are conducive to investment: tax policy, trade policy, the training of the labour force, the amount of regulations we have—we mustn't be over regulated—all of the policies must be co-ordinated, and for Canada it has to be linked in with provincial policies. Otherwise you can create roadblocks to business being created. And here at the finance committee I think you should concentrate primarily on tax policy.

Ms. Sophia Leung: Also, I find even in investment that business really is going out because of the capital gains and the high tax. It's not just that we cannot attract them—they are leaving.

Ms. Maureen Farrow: The other thing is that in some businesses, particularly high technology, the new economy—I think the question was very carefully presented to us in that way—these people are very mobile. They're being sought after and it comes back to the personal tax question as well.

Ms. Sophia Leung: I have just one more question.

Mr. Robson, you commented about transfer payments. You said you feel there's no point. In the meantime, where do you get funding if we don't put it in? All the provincial governments say they have been getting cut short so much and now they're waiting. We would love to hear where you get all the dollars.

Mr. William Robson: I'm going to make myself possibly quite unpopular by saying that I think one of the great accomplishments of this government so far has been to disentangle federal and provincial finances to the extent that it has. I think big federal-provincial transfers are unhealthy. They promote dependency on the part of the provincial governments and they really cloud accountability because everybody blames everybody else, and quite plausibly, for problems with the services.

If we are talking about a $2 billion increase in health funding and if, as I would fervently hope, it is shared equally around the country, equally per person— And of course this is a really big problem in this country. Those transfers are not spread around equally, and in many respects they're getting more unequal.

Let's assume that the transfers are going to be spread around equally: $2 billion is about $66 per person. If you're in a small province, with a population under 1 million, what does that amount to? It's not a lot of money. It's less than $50 million. I don't see that as all that significant in the overall scheme of things. I'll repeat again that I don't think there's a province in this country that doesn't have the fiscal capacity to raise that money itself. We talked about how there's only one taxpayer; it's ultimately going to come out of the citizen's pocket. I don't see why the federal government should step in, take the heat for raising the money, turn it over to the provinces, and then get us into this jurisdictional tangle of the federal government trying to tell the provinces how to run their health care programs.

I don't think that's appropriate at all. The provinces ought to be on the line if their citizens are dissatisfied. We have a bad situation in Canada, where the federal government can grandstand opportunistically when a province is doing something it doesn't like but isn't there to manage the really serious problems, the waiting lists and all the actual life-and-death issues that arise in the health care system. I really think that if the provinces feel their health care systems are underfunded, they can find the money themselves. It's not appropriate for Ottawa to do it for them.

Mr. David Rosenberg: Could I weigh in with a comment on that?

The Chairman: Sure.

• 2010

Mr. David Rosenberg: Further to that, I would advise you to look at the OECD numbers on a comparative basis. For example, you'll see that in health Canada is actually an above-average spender in terms of per cent of GDP in the G-7. In fact, in proportional terms, we spend just as much as France on health, more than Japan, more than the U.K. and more than Italy. On education, there is no country in the G-7 that devotes more expenditures to education as a share of GDP than Canada does.

So I would hazard to say that if there are shortfalls on quality it might be how the money is being spent rather than a question of the actual dollars that are out there.

The Chairman: Ms. Redman.

Mrs. Karen Redman: Thank you, Mr. Chair.

I would like to wade into this as well. I have to go back and ask Mr. Robson why it's so problematic for him that this is not on a per capita basis.

Mr. Robson, it sounds to me like you're having a real problem with the fact that there may be wealth redistribution through the granting system from province to province or region to region. Your comments sound like you think there's something wrong with that. Why is that inherently wrong, in your opinion?

Mr. William Robson: The problem is not that it happens but that it happens in every program. When you add them all up you have a tremendous amount of redistribution going on, more than I think is sensible for the country. The personal tax and transfer system is automatically going to take from the rich and give to the poor. It does that. Under that system, if you have a disproportionate number of rich people you'll lose, and if you have a disproportionate number of poor people you'll win. That's fine, because everybody is being treated equally. It's a matter of redistribution and it's the same no matter where you are.

As far as governments are concerned, we have an equalization program. It delivers transfers to the less fiscally able provinces. If there's a difficulty in the amount of interregional distribution going on in the country we should probably look to the equalization program, but we shouldn't forget that whenever you have that kind of a system, to a considerable extent you're going to be taxing people who are less well off in the rich provinces in order to provide breaks to people who might be considerably better off than they are in the poor provinces.

I think it's inappropriate for us in program after program to provide the same sort of redistribution, because if you look at the balance of winners and losers across the country, there are provinces where you can be a net recipient even at a family income of $100,000 a year, and there are other provinces where you're a net loser at an income of $30,000 a year. And that's not right.

Mrs. Karen Redman: Mr. Robson, you mentioned the fact of comparing our spending on health care, but I would also point out that one of the things I think contributes to the fact that for the fifth year in a row the United Nations has found us the best country in the world to live in is the fact that we do have medicare. One of the tenets of medicare is the fact that is is accessible and portable. It is the federal government's charge to make sure that those kinds of services are available as equally as possible across Canada.

So as much as I appreciate the fact that you talk about our spending as compared to Italy or France, there are differences that I would contend make Canada a very desirable place to live.

Mr. David Rosenberg: Yes, I would agree with you. It was just more of an argument as to why, as a group, I think, we probably agree that going into the future public spending should be kept exactly where it is today, as opposed to increased spending going forward.

Mrs. Karen Redman: Mr. Egelton?

Mr. Rick Egelton: I think the thing to bear in mind as well as we talk about these jurisdictional issues is that now we and basically all provinces are in a position of having the fiscal wherewithal to bring forward the programs and enrich the programs their citizens see fit to enrich. Maybe other provinces don't want to enrich similar types of programs. But two years from now, basically every province in this country will be running either a balanced budget or a surplus, so if they choose to enrich health care or they choose to enrich education they're able to do that on their on.

I think the point is—and other people have made it—that they probably don't need significant increases in transfers from the federal government to accomplish that.

Mrs. Karen Redman: I find that really interesting. I don't know if any of you were here earlier. We were hearing people zero in on research in the medical field and how they are looking to have reinvestment. They talked about the injection that has for the economy, the fact that it creates jobs, the fact that it will help stop the brain drain, which is something that we've heard the economists talk about as well.

One of the things that medical people across the country tell us about is the need for standards. I would contend that the model you're referring to would really work against having national standards, yet that's something that we hear when people talk about medicare. It's a concern right across every province in Canada; they're asking for more stipulations and more strings rather than what you're saying, which is less, which is to give the provinces more rein.

Mr. Rick Egelton: There are substantial transfers from the centre, from the federal government, to provinces. There are cash transfers around $11.5 billion, I believe, tax points that are transferred, so there is that leverage that exists.

• 2015

And I believe there still is the ability of the federal government to agree on what are and are not acceptable standards together with the provinces. I think part of the political process is for people to say what types of standards they want. I think most Canadians want what you're talking about, the ability to move across the country and be assured that similar standards will be maintained. I think that is part of the impetus that allows people to come to those agreements.

The Chairman: Ms. Farrow.

Ms. Maureen Farrow: I'd like to pick up on what you were saying. I think there's health care, what the general public is participating in every day, like hospital care, etc., and then there's medical research. They are really two separate pieces, maybe of the same jigsaw puzzle, because they're linked, but medical research is really part of your science and technology funding. And yes, it does create jobs. We do need to have the appropriate allocation to it and I expect the government has to be a very active participant in pure research. I expect that's what that group was talking about that was here before us, very much so.

Mrs. Karen Redman: Yes.

Ms. Maureen Farrow: That does need funding. If it's not funded, the overall quality of the health care system, from a different perspective than just putting money into it in terms of hospital beds and the number of heart operations you can do, etc— They're two different things.

Mrs. Karen Redman: Yes, by grouping them together I didn't mean to say they are the same thing. They're very definitely different, except that the CHST, which is the block transfer that goes to the provinces, not only covers medicare, it also covers post-secondary education and we talk about funding researchers and keeping the best and brightest here in Canada. So, yes, they're not the same thing, but they are very much interrelated.

Ms. Maureen Farrow: Well, one of the most important things to do to keep the best and the brightest here is to cut their personal income tax rates. Because two things drive them out: one is how much they're going to earn and be able to retain in their pockets for their standard of living, and the second is how much money is being put into their particular area of expertise, and what the equipment's like, etc., so they can further their research. Those two things will drive someone away.

Mrs. Karen Redman: There's one other thing I'd like to clarify. I sort of empathize with Mr. Epp, because I too was trying to write madly. Because we didn't have anything in writing, it was hard to keep up.

Ms. Farrow, you talked about a lot of things in your presentation, but you went on to talk about the need for an overall comprehensive look at the income tax system. I guess I question how that could be part of any budget. The comments I heard from you that I jotted down say that direction should be laid out in the next budget. Yet it's an incredibly complex and time-consuming exercise.

Ms. Maureen Farrow: We haven't been through comprehensive tax reform since the mid-1980s. As a nation, we were on the right tack when we started doing it. For various reasons, we've divorced the first part and the second part and we let the provinces come in between. We didn't achieve the ends we were trying to reach.

We need to go back and really ask ourselves what kind of tax system this country requires to be competitive over the next 20 years and to meet the demographic needs of society. And with all this tinkering around, we may do the right things, but we'll also do some of the things we shouldn't do. So that's what I would urge us to do. I'm sure the finance minister can't bring forward a comprehensive plan in February, but it could be laid out that we're going to be doing it. I've been on record at these meetings for a long time over the last few years as saying that I thought we really should go back and do that.

Mrs. Karen Redman: Thank you. I appreciate that clarification.

The Chairman: Thank you, Ms. Redman.

We'll go to Mr. Pillitteri and then Mr. Brien.

Mr. Gary Pillitteri: Thank you very much, Mr. Chairman. I have two things.

• 2020

Ms. Farrow, you made a remark about tourism, about how the Americans are coming over. I represent an area that lives off tourism—Niagara Falls, Niagara-on-the-Lake—and I remember the time of cross-border shopping, when the cost of gas and the cost of everything— The Canadians were going over in droves. We have— what do you call it? Not a self-respect within ourselves. We have a tendency to try to get the cheapest possible. We don't care. We're not that nationalistic. On the other hand, today I see the lower Canadian dollar and I don't see the Americans really coming in droves. They come for overnight and one-day shopping, but not really in the amounts that Canadians were going across the river.

You also stated that it's the Americans who are coming over, not the Japanese or Chinese. I beg to differ with you. If you'd ever see the amount of tourism that I have coming into Niagara Falls and Niagara-on-the-Lake— Even on my own premises, there are tens of busloads every day.

But the question I want to ask you, and specifically Mr. Robson, is about your comment on the ability of the provinces to raise their own taxes. And as we started in the mid-1970s with transfer of tax points to the provinces versus the health care, and now the packaging of the three, the health care, the post-secondary education and the— Do you believe that the component of the cash portion, at $12.5 billion, should always stay there? Or should it be a total transfer of tax points to the provinces, with the provinces administering the health care system, like you stated? I want specifics on that. We've been avoiding this for quite a few years.

Mr. William Robson: I owe you a straight answer on that. I think it should be as complete a tax point transfer as possible.

You give me the opportunity to go back somewhat to the previous question and say that people are in favour of national standards in the abstract, but if you ask people what the five principles of the Canada Health Act are, it's quite possible that only a minority in this room would even be able to say what the answer to that is. And certainly among the population at large, it's not something people know, and, in fact, they are all process-oriented things and not really anything that speaks very directly to health care.

But what it seems to mean at the bottom of it all is that if a province elects a government that has a platform in health care that someone else in the country doesn't like, Ottawa has some right to step in and say no to Quebec or Alberta or whichever province it is, that it can't do what its electorate voted them in to do, that they have to do something else. And I think that's inappropriate. Medicare originated in the provinces. If it's as popular with the population generally as I think it is, and therefore the population generally wouldn't stand for any radical tinkering with the system, I don't think that in fact it would result in anything very different from what we have now, except that around the edges provinces would be able to tailor their programs more to the wants and desires of their electorates.

Mr. Gary Pillitteri: Mr. Robson, what do we, as politicians, tell our constituents when they take a look at us and say that we're the only ones, really, to protect medicare, that we're the only ones they believe are capable of protecting medicare? How do we address that? When we go out and talk to the people, they say they no longer trust the provincial governments, specifically in Ontario and Alberta. What do we tell those people? They put their trust totally in us and yet you are here saying to us that we should let the provinces do it. If there were no dollars, no cash transfers, definitely the provinces could do whatever they want. What do we tell those people?

Mr. William Robson: I'm not sure what the federal government is actually stopping the provinces from doing now that they would do without those transfers. I really find there's a lack of concrete examples here. And there are violations going on. There are violations of portability and there are problems with reimbursement around the country that the federal government does not address.

But you asked me what I would do. I'm not in your position, but if I were, I would continue to transfer the same block cash amount that you're already transferring, and I would continue to talk in very grand terms about the principles of medicare, and I would leave it there.

Voices: Oh, oh.

The Chairman: Thank you, Mr. Pillitteri.

Mr. Gary Pillitteri: Thank you.

• 2025

The Chairman: Mr. Brien.

[Translation]

Mr. Pierre Brien: We will probably not discuss health, because you and I will clearly not agree on it, Mr. Robson.

Mr. Rosenberg, I believe that you are the one who raised the point about the differences in the marginal tax rates between the United States, Canada and other countries. You said that, in the United States, the top marginal rate kicks in at an income of $260,000, while here in Canada, it kicks in at $63,000. This is a huge difference. You say that it's one of the things we must deal with. But since the difference is so huge, do you really believe that we would be able to change this differential even slightly? To do anything meaningful about it, the entire fiscal dividend would have to go to a single class in society, those earning between $63,000 and $260,000. I'm not sure that would be a very popular move.

[English]

Mr. David Rosenberg: The top marginal rate in the U.S. actually kicks in at an income in Canadian dollars of $418,000. My point wasn't that every last dollar of fiscal dividend should go toward lowering just the top marginal rate. I think taxes have to go down for everybody. Top marginal rates across the strata should come down. We had a situation in last year's budget where the 3% surtax was eliminated for people who made up to $50,000. What makes $50,000 a magical level? In a high-cost jurisdiction like Toronto, $50,000 is not an overly high level of income. I think we have to address some issues in this country.

One of them is the issue of people leaving this country to go to the U.S. We're going back to the brain drain question. I think the data are sketchy, but it's been reasonably well documented that we know the areas where people are leaving. Health professionals are leaving the country for the U.S. The move-out ratio is higher in that profession than any other. This is a top income profession. In fact, the people we're losing in terms of education, engineers, and computer science are upper-income individuals. What more can you say? That is where the gap is greatest between the two countries, and these people are leaving the country. The move-out ratio is growing, and I think we would solve a big social problem by addressing marginal rates that have yet to really be addressed, which is the top end of the income scale.

That's the primary reason why I was focusing on that particular area. It would solve a lot of the social problems we have in this country right now. Doesn't it bother you that the latest statistics show that every two years, one out of four Ph.D. grads in Canada moves to the U.S.? After being funded so greatly by the Canadian taxpayer, they're moving to the U.S. They're not moving to the U.S. because of the crime rate and they're not moving to the U.S. because they think they're going to pay less in health care; they're moving to the U.S. because they know they're going to be making a heck of a lot more money. Ultimately that's an economic decision. The economy and the social fabric are deteriorating. I don't want to blow it out of proportion, but it is an important issue that can be solved through the tax system. That was my major point.

Thank you.

[Translation]

Mr. Pierre Brien: This is exactly what I wanted to talk about next. There seems to be a problem; there's something I don't get or I can't understand. It appears that people give rational reasons to justify their decision. I can well understand that part of their reasoning is based on economic factors, but a society is much more than that. I imagine that an individual's feeling of belonging—to either Quebec or Canada—goes beyond the tax system. I can't believe that people would make a decision solely on the basis of that variable. If the Canadian or American identity is based only on the rate of taxation, then there's something wrong with the society, and it's much more complicated than our tax system.

• 2030

When I'm told that we are losing one Ph.D. graduate in four because he or she decides to move to the United States, I have to ask myself serious questions about the kind of society we are building. I have trouble agreeing with your view that the brain drain is a result of the difference between the marginal tax rates and that this is our biggest social problem. I would like you to clarify your views.

[English]

Mr. David Rosenberg: Well, you want more clarification. You're trying to tell me that the decision to move is not an economic decision. I would argue that it is, so maybe we just have a difference of opinion there.

Mr. Pierre Brien: I'm telling you that I'm surprised the people are making their choice only on that factor.

Mr. David Rosenberg: I'm not saying that's the only choice. What I'm telling you is that it's probably the top choice most of the time. We had the unemployment rate bordering on 9% last spring. Can you explain to me why a firm called Fast Lane Technologies, which is a Halifax-based computer software company, had to offer a $1,000 bounty for anyone who would refer a successful candidate at that time? The firm needed to fill fifty jobs immediately. The company had to essentially fire its headhunter and go directly towards offering a $1,000 reward.

I know of personal examples. I deal with businesses every single day. That's the profession I'm in. I can tell you that we are having difficulty filling jobs in high-skilled areas even with an unemployment rate of 8.3% now—and that's still double the rate in the U.S.

In the U.S., you can understand it. You hear horror stories about trying to find high-skilled labour in the U.S. Of course, you expect that when you have a 4% unemployment rate. In Canada, we have unacceptably high unemployment rates, yet in key professions, high-skilled professions, firms cannot find a labour pool because the labour pool is moving to the U.S. That's a problem, and it's one that again comes down to the comparative tax system between Canada and the U.S.

[Translation]

Mr. Pierre Brien: I will take this further. I see that Mr. Robson would also like to speak. You appear to be fairly well educated, intelligent people, but you haven't decided to go live in the United States. What keeps you here? I am asking you this because I'm sure that you are not more masochistic than the people you claim to be analyzing.

[English]

Mr. David Rosenberg: I'm waiting for an offer.

Mr. William Robson: If I could, I'll start off with a quick response to that one. I'm probably the person at this table who has specialized most completely in Canadian issues, thus I am not easily employable anywhere else and I'm stuck here no matter what.

I have two points, and I'll try to be quick. First, the question of a more dynamic environment is important here, and I'll go back to my hockey example. If a few marquee players go south of the border, it has an effect on other players because they look around and ask themselves who the serious contender is, who they want to play with, who they want to be with. Losing key people has an important impact on the environment for those who stay or those who might choose to go.

One thing I don't like to see right now—and it is happening—is Canadian companies going to the U.S. for managers. They're hiring talent in the U.S., but those managers aren't coming to Canada, they're staying in the U.S. That's a problem for us. From a variety of points of view, we'd be much better off if they came here, but one of the reasons they don't come here is the tax differential. It's not the only thing, but everything else being equal, it does make a difference, as economists like to say.

Going back to your first question, if I may, there is an additional technical point I want to make. The brain drain, a bit like the underground economy, is not a marginal tax issue. It's not how much you keep of the last dollar you earn that matters. For the decision on whether to be here or south of the border, it's an average tax burden. How many different dollars would I have in total if I made the switch? For this reason, it's not necessary for us to cut the top marginal rate necessarily to address this problem. You could still have a top marginal rate right where ours is now, but you would lower the total tax burden if you brought other rates down. That would affect the brain drain even if the marginal rate didn't change. This comparison is a remarkable one. A U.S. family filing jointly and with an income in Canadian dollars equal to our top marginal rate would still be at the bottom U.S. federal rate. There is a huge difference.

• 2035

The Chairman: Ms. Farrow.

Ms. Maureen Farrow: In 1969, I left England with my husband. The reason I left was that the tax rate was lower in Canada than it was in the U.K. The general economic environment to live in and work in was more negative in the U.K. There were labour problems, there were government debt problems, and the infrastructure was decaying. I could go through a litany of problems. The IMF arrived shortly after we left.

We chose Canada—or you chose us—and it was to our benefit. We looked at Australia and we looked at Canada, and Canada came out on top. The tax rate was number one, and the general overall environment was good, too—and I must admit that it was cheaper to fly home for a vacation than it was from Australia.

I think that's how my son—who is now coming to the age I was when I left England—could look at the world again. He could look at the world and say to himself, I'm educated, where would I like to locate my life? Much to his mother's chagrin, it may quite likely not be Toronto, because Canada is a very costly place to live, and it's the tax rate that drives it.

So I'm a living example of why you move, and I think that's exactly how these people look at it today. Why don't I move again now? I'm too old. I'm at the end of my career, not at the beginning.

The Chairman: Mr. Egelton.

Mr. Rick Egelton: I agree that there is a host of factors that go into people's decisions as to whether they are going to stay here or whether they're going to move. Taxes are one, and they are an important one, but I wouldn't want to overplay the idea that the entire brain drain is due to differential tax rates. Probably the most important factors this decade have been the poor performance of our economy; the decline in real incomes in Canada; the relatively good performance of the American economy; the corresponding tremendous opportunities that are opened up for people there; and the high and rising incomes in the U.S. So taxes play an important part of it, but other factors like quality of life, income gains, and the strength of the economy and opportunities are equally important.

[Translation]

Mr. Pierre Brien: I agree with you that our tax burden is too heavy. However, we should be careful when we talk about the brain drain because there are other factors that come into play. I know two people who left for the United States, not because of the tax rates but because they had trouble breaking into the job market, that's all. So there are other factors that must be considered. We politicians, as well as others, also look at the school system, the health care system, etc., which are additional factors that influence quality of life. We cannot base all our decisions on the marginal or average tax rate. I agree when you say that the tax rate is too high, comparatively speaking, and that we must bring it down, but there is nevertheless a line that we should not step over.

[English]

The Chairman: Mr. Epp.

Mr. Ken Epp: Thank you.

I actually contemplated getting up out of my chair and walking to the other end of the table the next time I got a chance to speak, but I'm not going to do it because that is where our NDP member sits. I'm therefore just going to change hats a bit here.

You know, what's really wrong in this country is the fact that businesses just don't pay their fair share of taxes. They get away with nothing. We need to really increase the taxes on businesses.

Now we come back to this end, and I hear Ms. Farrow saying that what we need to do is create a positive business investment climate. I then hear Mr. Robson saying that corporations have some advantages, but Canada is not a favourable place for corporations. What is the truth?

Ms. Maureen Farrow: It's the same thing.

The Chairman: If somebody has found the truth, please tell us about it.

Mr. Ken Epp: You say it's the same thing, but my NDP friends are saying that they don't pay their fair share of taxes. If that were true, then you'd think the place would be just teeming with corporations that would come here from all over the world.

• 2040

The Chairman: Of course, we also want to know what the Reform Party has to say.

Go ahead, Mr. Robson.

Mr. William Robson: Excuse me if you've heard this before, but I work in a business in which, if it's worth saying something, it's worth saying it more than once.

Corporations are legal fictions. Corporations don't pay tax; people pay tax. The only question you have to ask yourself when you levy a tax on a corporation is who, and in what share, is paying it? Is it the workers, the consumers, or the shareholders? I think the assumption is usually that it will be the shareholders. Shareholders have more choices than most workers, though, so most economists think a lot of it eventually comes out of the worker's pocket.

Our formal tax burden on corporations is high. When you look at the composition of it, it is tilted. When you look at that tilt of the corporate tax system, the Mintz committee report is well worth looking at to see which sectors the system discriminates in favour of and which sectors it discriminates against. As a very broad generalization, our corporate tax burden is highest on the new-economy industries, the ones we are most hopeful of hitching our wagon to as we go forward, the ones that tend to employ highly qualified, highly skilled people, the ones that tend to pay very well.

In looking at our corporate tax burden, the question came up indirectly earlier on with regard to the resource industries. In a sense, we seem to have steered our tax system in a way that is favourable to industries whose prospects are less good. When you look at who's paying the lion's share of this higher tax burden in a formal sense, on the face of it, it's exactly the sectors you'd think we'd want to try to encourage more so as to be more prosperous in the future.

Ms. Maureen Farrow: There's another part to that as well. The new economy is able to locate anywhere in the world, so corporations will go to the most favourable places, which are usually where there is a supply of talent for the new-economy jobs and where they will pay less taxes.

So my reply to the gentleman or the lady sitting here is that I really don't think there's much use pursuing trying to take the biggest tax take you possibly can out of the corporate sector. I think you want to create a business environment in which you have a hell of a lot more corporations here creating jobs, because the workers would then be paying income tax, along with GST as they spend their money. That would create a much better environment.

Mr. Ken Epp: I would like to have you be as specific as possible. What precisely should Paul Martin say in February that would enhance Canada's ability to attract and to have more home-built, good, job-creating corporations in this country?

The Chairman: Who would like to answer that question?

Mr. Robson.

Mr. William Robson: Well, businesses have typically focused on the personal income tax as their business problem. The corporate tax regime matters, but such a huge proportion of the input to any business—and especially some of the new-economy businesses—is labour, the people. When you ask businesses what is confronting them with their biggest problem, they typically do talk about the personal income tax as the single biggest obstacle they face.

So I'm being a bit of a johnny-one-note here, but I would take that seriously. I think the people problem is probably number one in their minds.

Mr. Ken Epp: I want to ask Mr. Egelton a question, though, because he said payroll taxes aren't very high and there's no change needed here. I'm thinking that for every person a corporation hires, it has to match those CPP premiums dollar for dollar and those EI premiums at a rate of $1.40 per dollar. They then collect from the employee and remit on their behalf the income tax as well. Every month, every corporation in this country sends in a huge cheque, with a penalty if they don't get it in by the 15th.

Mr. Rick Egelton: What I said was that payroll taxes are relatively low compared to those in most other countries, and personal income taxes are extraordinarily high. If I have a dollar of tax cutting room, what I would want to do is lower personal income taxes and address some of the difficulties that David was speaking about earlier. In a sense, that's where you get the best bang for your buck. I don't think it's a bad thing to lower payroll taxes, but payroll taxes aren't as out of whack as personal income taxes in Canada vis-à-vis our major trading partner.

• 2045

I'll get back to your earlier question about Paul Martin and what he can say in February. As a business person, to encourage people to create jobs in Canada, I think you can reassure Canadians that increased spending won't be on the way. We've gone through many years of cutting spending and we're going to maintain a low level of real program spending.

For Canadian businesses, that would mean lower debt levels, which ultimately mean lower tax rates. This would apply some of that fiscal dividend in lower taxes. Those are the things business people want to hear. Those are the things that increase business confidence and make Canada a place for businesses to invest.

Mr. David Rosenberg: I've got to follow that up by just saying you should take a look at the surveys in the past year that have been put out by the Canadian Federation of Independent Business. This organization represents small businesses, which are the predominant hirers of labour in this country. They will tell you that the biggest hurdle they've had over the past 12 months is finding qualified skilled labour. With an 8%-plus unemployment rate, it's almost a crime that we can't find good quality labour in this country. That's been their primary concern.

Mr. Ken Epp: As a member of Parliament, I've had people come directly to my office to complain about that. It's very interesting that the one person who came had as their biggest concern the fact that they couldn't find a person in Canada who had the skills they needed. When they tried to bring a person from Europe with very high-quality machinist skills, then the government, via our immigration department, refused to let them in. That's why he was in my office. The poor businessman said he guessed that he would have to go to Europe where he had the skilled people. He would then just ship his product to Canada and let it be imported. So it's very interesting.

Mr. Chairman, I think I'll quit for now.

The Chairman: Thank you, Mr. Epp.

[Translation]

Mr. Brien, do you have another question?

Mr. Pierre Brien: Some of you, Ms. Farrow in particular, mentioned that there should be a medium-term commitment with regard to tax reform. Several of you also alluded to the commitments that the government should make in its next budget for the medium and long terms. You said that the most recent short-term scenarios were very conservative.

Would the government not have a credibility problem if, in its next budget, it adopted a very long-term horizon, while we are in this time of economic uncertainty and instability? How much credibility would it have with markets worldwide if it made forecasts and commitments for the next five years, without a clear idea of what will happen in the next 12 months?

[English]

Ms. Maureen Farrow: I would not recommend that this budget would switch from looking at two years to looking at five years or ten years and start saying the average growth rate is going to be this much over a long period of time.

I wouldn't do that for two reasons. First of all, it would change the credibility that has been built up in the current budget process. I think Canadians and the financial markets have bought into that, and it would be very silly to risk that, particularly at a time when there is a great deal of volatility.

We don't know right now. When we bring down this budget and when we listen to it in February, we could be in the worst global recession we've ever seen. Or we could skirt through this knowing we're not going to be in it. But none of us here is going to tell you which way that really is going to go right at this moment. So while the budget is being put to bed, so to speak, and these choices are going to have to be made, I think you've got to be very prudent and conservative in your economic assumptions.

I would say, though, that I don't think it's wrong for the finance minister and this committee to consider that it's time to say we've come over this edge of deficits and gone to surpluses. So now we can look at what we want to do over the next 10-year period. We can start talking about some of the things like comprehensive tax reform and some of the objectives, etc. I didn't have to lay them out in the budget, but you could set that process in motion. I don't think you can move from the short term to the long term in one budget. I think you're going to have to do it as a process.

The Chairman: Thank you, Ms. Farrow.

Mr. Rosenberg.

Mr. David Rosenberg: This will actually partly answer the question. I have to catch a flight, but there's one thing nobody talked about: the Y2K issue. This has to be talked about, not just glossed over.

• 2050

We're talking about the Department of Finance coming out with a forecast and budget for 2000. You're talking about a near-term forecast even. You're 100% right that this is going to complicate a lot of things. The RCMP announced they're going to be mobilizing resources. Recession risk is very much alive and well. Major economic disruption is potentially there.

I hope this is something that's going to be addressed in terms of what the federal government is doing about it. How compliant are different government agencies? As for industry, does the government have an idea in general in terms of how compliant we are going into this thing and what the risks are?

I hope the budget has a section in it devoted to Y2K. I'll just leave it at that. Thank you very much.

The Chairman: Thank you.

Ms. Maureen Farrow: I would endorse that as well. I think it's something that has to be addressed.

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

Mr. Szabo.

Mr. Paul Szabo: Mr. Rosenberg, I want you to know that I'm going to be strongly recommending that Canada should increase its highest marginal rate to 29.1% and apply it to all incomes over $1 million. As for all that stuff you were talking about, such as other countries, we'll have them beat. Everybody will be happy because only bank presidents will have to pay the additional 0.1%.

Voices: Hear, hear!

Mr. Paul Szabo: Anyway, we have to bring this back down to reality. I've enjoyed the repartee I've heard tonight. I want to ask the remaining panellists if they could tell me what they view to be the fiscal dividend for the current year.

Ms. Maureen Farrow: You want to know about the current year?

Mr. Paul Szabo: It could be for any year. You tell me what you're talking about. What's the fiscal dividend we're talking about in terms of distributing, as it were, for the purposes that the red book laid out?

Mr. Rick Egelton: We would estimate that for the current fiscal year and probably the next couple of years, if you leave fiscal policy unchanged—that means to make no changes to tax rates and keep program spending in check—you're looking at, we would guess, numbers between $8 billion and $10 billion in terms of a fiscal dividend.

Mr. Paul Szabo: Does that include the $3-billion contingency?

Mr. Rick Egelton: Yes. So if you take that off, you're at $5 billion to $8 billion.

Mr. Paul Szabo: Now, I assume the others are in the ballpark.

Ms. Maureen Farrow: Yes, that's fine.

Mr. Paul Szabo: Okay, so it's $8 billion to $10 billion, including the $3-billion contingency.

We won't know that until a year from now. Of course, by that time, any surplus that's identified is applied against the debt. So when exactly do we spend this fiscal dividend? If you can't determine it until six months after the year is finished, when exactly do you determine how much you're going to spend on the fiscal dividend?

Mr. Rick Egelton: I think you have to determine what you think the fiscal dividend is ahead of time, what your margin for error is, and how much debt reduction you want to do.

My preference is for much more debt reduction than tax relief. So at the end of the day, if the government has been too cautious and we've reduced the debt by $8 billion or $9 billion, I'm not going to be too upset. I don't think that's necessarily a bad thing. But you probably have room now to plan for tax cuts in the range of $1.5 billion to $2 billion. Those aren't tremendous tax cuts and people aren't going to be—

Mr. Paul Szabo: The point is that you have to estimate the fiscal dividend and spend it before the end of the year; otherwise everything goes against the debt. This is that virtuous circle, which means you can't get there from here.

Mr. William Robson: May I just quickly comment that I think the phrase “fiscal dividend”, as it's being used, is enormously destructive. It's a very weird concept. I'm sorry that it ever became popular.

The only meaningful definition of fiscal dividend that I can think of is the amount of interest that you no longer pay because your debt burden has gone down. That's something you can measure. It's not as big and sexy, but if you finance a tax cut out of that, it's in the bag.

Mr. Paul Szabo: Thank you. That's the point, I think.

Ms. Maureen Farrow: I was going to make the same point.

Mr. Paul Szabo: I did some quick calculations. If you make $30,000 a year, your effective tax rate is 25%, assuming you have a 50% provincial rate. So 17% plus a 50% provincial rate gives you an effective rate of 25%.

On the next $30,000, the federal rate is 26%, assuming a 50% provincial rate. That means your effective rate for the next $30,000, is at 39% to 40%. Your effective rate while making $60,000 is now 33%.

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If you earn $90,000 a year, that last $30,000 you earn is at the highest Canadian marginal rate, 29% plus 50% gross-up for the provincial rate, which gives you a marginal rate of 45%. That's assuming the 50% provincial rate. Your effective rate at making $90,000 a year is 37%. So if the middle effective rate is 33%, the highest, the $90,000 effective rate, is only 7%.

If I were to reduce the effective rate of the highest income level down to the same as the middle class, the middle rate, that's a 4% differential in effective rates between someone making $60,000 and $90,000 a year. On $90,000 a year—4% effective rate—that's worth $3,600.

I think I've proved to myself that I agree with Ms. Farrow about tax reform. I don't agree with the others, because the highest marginal rates are insignificant when you consider that the effective rate impact is only 4% or about $3,600 on $90,000 a year. That $3,600, even if I lowered the top rate down to the middle rate, is not going to be enough to change anybody's economic scenario about going to the United States, simply because health care would cost them more than $3,600 a year. So it's a moot point. We can't do enough for the highest marginal rates in Canada to make a difference to brain drain.

I think you have all said it in different ways, that in fact it is not just rate; it is the amount of compensation you can get there, because they're prepared to pay. If you analysed the fact that only 10% of Canadians make more than $60,000 a year and you looked at the equivalent number of taxpayers in the U.S., you would find out that although they have these high brackets, the number of people in those is minuscule compared to the overall population. It's all playing around with— The fact is that in real terms, the vast majority of Canadians don't make more than $60,000 a year. My assessment of this is, as Ms. Farrow said, not to tinker around with the Income Tax Act.

Issues of fairness and equity have to be dealt with, because people have to perceive their Income Tax Act to be fair and equitable. We do have a problem, though, because, as Mintz found, if you assume revenue neutrality, all you're really doing is shifting the burden between groups. That wasn't tax reform. I was very disappointed in Mintz because they gave us absolutely no entree into personal income tax reform, because they didn't deal with what a fair and equitable share of taxation from the corporation sector is vis-à-vis personal.

Now we have this problem that we don't have a real starting point. But I'm of the view that Canadians need to see that their income tax system is fair and equitable and that it deals in something that they can buy into, that they can understand. I think it may in fact mean a shifting of the burden of taxation between groups, unless we can say, on the fiscal dividend, everybody is going to get some sort of a break, but others will get much more of a break, simply to put the system into line.

So my real question to you is, income tax reform could take some time. It did the last time, although New Zealand did it in two years. Do we have to—

Ms. Maureen Farrow: It doesn't have to involve a long time.

Mr. Paul Szabo: If we can't do it by lowering rates, if we can't get there from here in terms of stopping brain drain and all the other negative consequences of high income taxes, and we can't get there by tinkering, as you say, around the fringes, then is it your recommendation to the finance committee or to the finance minister that we in fact need income tax reform that brings back fundamental principles of taxation that Canadians can buy into, if we're going to be able to get to where we want to go?

Ms. Maureen Farrow: Yes. That's what I said at the beginning. But I think it's not just income tax reform; I think you have to look at total tax take by the government. That whole thing has to be looked at.

Mr. Paul Szabo: Could I give you an example? The $100,000 lifetime capital gains exemption we had was never grandfathered. It was available to holding gains. The day it was brought in, if you had $100,000 sitting there, you got the instantaneous— That was the biggest mistake we ever made. But do you know what? It was the most significant tax break that was ever given to Canadians in the history of this country.

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To those who had holding gains or could accumulate them while they were still alive, it was worth a $50,000 tax break. A $50,000 tax break wasn't taken by someone making $30,000 a year or in fact $60,000 a year. It was pretty hard to accumulate a $100,000 capital gain. You had to be a high-income earner.

That means high-income earners got a tax break, which, if you amortise it over a reasonable number of years, probably gave them a lower effective rate than middle- and lower-income Canadians, or at least the middle class, simply because there was this special break that was done so poorly.

I was appalled when that thing went through. And then to get rid of it, of course, there was grandfathering, and there are a lot of people who still have that gain locked in.

We haven't got rid of that, and nobody takes that into account when they're comparing the effective tax rates of Canadians when in fact we had one of the single largest tax breaks ever that would amortise or reduce that effective rate to something much, much lower than what you presented. I think it's unfair for you to suggest high-income earners are overtaxed when in fact a large number of them had an opportunity to get a break that other Canadians couldn't get.

The Chairman: Are there any comments from the panellists?

Mr. Egelton.

Mr. Rick Egelton: I think in terms of overtaxing, there has to be some context to that. I think everybody who pays taxes considers themselves overtaxed. I think the “overtaxed” terminology comes from comparing ourselves to what similar people in the U.S. are paying. They're paying substantially less, and it's becoming more and more difficult to attract those kinds of people.

I think you make some excellent points, but I think there are two things that are very clear. One is that taxes at almost all levels of income in Canada are too high, and taxes of corporations, as Jack Mintz pointed out, are too high vis-à-vis our major trading partners. The problem with tax reform, I think, in the context of no major reduction in taxes, is all you're doing is shifting the tax burden around, and there are going to be huge winners and huge losers. Whenever you try to do that, it never works.

The only way you can have any sensible tax reform, I think, because of the politics involved, is if it's accompanied by a significant cut in taxes, so you have some winners and no losers.

Mr. Paul Szabo: Thanks, Mr. Chairman.

The Chairman: Thank you very much, Mr. Szabo. On behalf of the committee, Mr. Egelton, Ms. Farrow, and Mr. Robson, I'd certainly like to thank you very much.

Ms. Maureen Farrow: There is one thing we didn't discuss and I think we should raise it. One of the themes in the last budgets has been to pay closer attention, as Canadians, to children, the zero- to five-year-old age group. I would just like to make a point that it's extremely important not to neglect that group in our society.

This is the future. This is where it's very important in terms of making sure they have the right kinds of education—we don't have the right education system for zero- to five-year-olds—health care, and nutrition, etc. I just would like to make sure— None of us has discussed it; it wasn't something that was really asked for this time. But I'd just like to remind the committee that we should not lose that initiative that's been taken, and in fact we should enhance it.

The Chairman: I appreciate those final comments. Once again, thank you very much.

We'll be back here at the same place at 9 a.m.

The meeting is adjourned.