FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 11, 2000

• 0906

[English]

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

As you know, the order of the day is Bill C-32, an act to implement certain provisions of the budget tabled in Parliament on February 28, 2000.

We have the pleasure to have with us the following witnesses: Mr. Dale Orr, economist; John Staple, director of economic services of the Canadian Teachers' Federation; and Ryan Dunford, the government relations coordinator from the Canadian Alliance of Student Associations.

Most of you have appeared in front of this committee before. You have approximately five to ten minutes to make your introductory remarks. Thereafter we'll engage in a question-and-answer session.

We'll begin with Mr. Orr. Welcome.

Mr. Dale Orr (Economist, Wharton Econometrics Forecasting Associates (WEFA) Canada Inc.): Thank you for inviting me.

I first want to commend the committee on an excellent report last December and on the constructive impact they had on the federal budget of last February.

I've written two papers evaluating and commenting on budget 2000. I've brought and circulated to you and am going to make a couple of comments to you this morning on the key recommendations and conclusions from those two papers.

The first paper is called “The New Fiscal Framework for Canada”, and you should have that, with conclusions, recommendations, and a couple of tables, in front of you. The second paper is “Will the Tax Reduction Plan of Budget 2000 Reduce Our Personal Income Tax Burden?”

The purpose of the first paper, “The New Fiscal Framework for Canada”, is to assess the fiscal options facing Canada over the medium term. Some of the key conclusions and recommendations from that paper are the following.

I did think the budget was pretty good. Overall I gave it a C-plus. And I did like the finance committee's report, but—

The Chair: What did you give the finance committee report? I hope you were more generous.

Voices: Oh, oh!

Mr. Dale Orr: But last year in the parliamentary finance committee I described the fifty-fifty rule as non-operational and unwise, and now it's obsolete.

Another point is that under the arrangements we have had for budgeting in the last several years, spending has consistently exceeded budget plans. Too much of the spending has been unplanned. In case you're not familiar with this, there's a nice little table in the front that shows the overspending in the 1997 budget was $3 billion, in the 1998 budget it was $7 billion, etc., constantly exceeding budget plans. Some of that spending done at year end has been ill conceived, some has been on low-priority items, and some of that last-minute spending binge has been otherwise inappropriate. So it's very important to go forward to try to clean this up.

Another point is, when new priorities have emerged in the last three years, different from the priorities in the years before that, the government has been far too prone to cater to these new and emerging priorities by just increasing total spending, and not going back to the base and looking at low and falling priorities and trying to serve new priorities by cutting out spending on low and falling priorities.

• 0910

I've made the point before. I've heard many, many ministers give talks on many, many occasions. Invariably they're talks on new and emerging priorities. You hardly ever hear a minister give a talk on low and falling priorities. If you're spending well over $100 billion a year, there have to be low and falling priorities somewhere.

Also, I've made the point that a budget constraint, if not absolutely and technically, then certainly roughly in principle, to try to keep program spending increasing so that we're spending about the same amount in real per capita terms year after year, would be an appropriate target. That's appropriate, not because there aren't growing needs for program spending, but because at this stage in our economic and fiscal history, it's also important to show respect for the taxpayer as well as our children, who must finance our debt load in the future.

I have another chart, on page 2 in the second one, which shows the tremendous tilt that's happened in program spending. The government did visit low priorities over the 1993 to 1997 period, when they were attempting to hit the deficit target, which they did successfully, but as soon as a balanced budget was in sight, the floodgates opened and spending went back up again. That tilt was too dramatic given the high level of our taxes—we're making progress, but they're still too high—and the very high level of our debt. Again, we're making progress, but our debt burden is still far too high.

In this paper I've made the point that given the economic forecasts, the $58 billion spending program should be well within hand. As a matter of fact, keeping spending constant in real per capita terms, from the $58 billion, you could easily go up into the $90 billion range for tax cuts given the current economic forecast. And if you did a tougher job of financing new priorities from the existing budget, you could have tax cuts over the next five years up into the $120 billion range rather than just the $58 billion.

I'll make just a couple of comments on the second paper. It's a fairly technical little exercise entitled “Will the Tax Reduction Plan of Budget 2000 Reduce Our Personal Income Tax Burden?” The answer to that question is pretty much explained on page 2 in this chart. Yes, a $58 billion tax reduction over a five-year period certainly will reduce our tax burden. Of that $58 billion, $40 billion is in personal income tax. What I'm focusing on here is personal income tax.

If you take our federal plus provincial personal income tax over GDP, as you know, we get just over 14%, and that is the highest number of the developed countries. Of course that's why the government is quite appropriate in recommending strong personal income tax reductions over the next five years. When that package is implemented, that will take this burden from just over 14% to just over 13%.

The personal income tax burden of the Americans, our chief competitors, is at 12.5%, quite a bit below our 14.3%. If they make no tax reductions over the next five years, their burden will go down from about 12.5% to 12%. So in the $58 billion tax reduction package, the $40 billion in personal income tax reduces our burden from just over 14% down to just over 13%, but the American tax burden is going to be no higher than 12%. As a matter of fact, after the election, when a new party gets in, they're going to have pretty steep personal income tax reductions; it's a matter of degree.

• 0915

So after implementation of this plan of $40 billion in personal income taxes, personal income taxes in Canada will still be significantly higher, from a tax burden point of view, than they are in the U.S. It's a good move in the right direction, but that's why I and a lot of other people are very happy to see that Mr. Martin and the government have said it's $58 billion at a minimum, and they're going to do their best to do better than that.

I'm saying, even with reasonable spending control, you can easily get up into the $80 billion range, and let's hope we do even better than that.

Thank you.

The Chair: Thank you very much, Mr. Orr.

We'll now hear from Mr. John Staple.

Mr. John Staple (Director, Economic Services, Canadian Teachers' Federation): Thank you.

I'd like to comment on the process of budget-building and the 2000 budget. We've appreciated over the past several years the opportunity to present fairly detailed briefs to the finance committee. We like the process the government has adopted in listening to the Canadian public. It's an exhaustive process—I know you feel that way sometimes—and it's very inclusive and comprehensive in terms of what you're able to obtain and then subsequently pass on to government.

We were pleased on the one hand. Our primary objective in this year's budget was the promotion of the children's agenda. On the one hand the income security side of that agenda was adequately addressed, but on the other side, program implementation and program development remain to be addressed. We recognize the provincial-federal jurisdictional difficulties with all of that and are prepared to continue to hammer away at it in preparation for the 2001 budget.

The reason I'm here this morning is specifically to address the implementation or the commencement date of those changes that are pending to the EI program. Considerable concern has been expressed by our members across the country at the number of outstanding cases we have within our teacher organizations of individuals who have been denied benefits under the old rule of 700 hours but would qualify for benefits under the new rule of 600 hours. We had hoped there would be some flexibility in the implementation date to accommodate some of the concerns of those individuals who had been previously denied benefits, but in my reading of the bill, that flexibility does not seem apparent.

So from our perspective, quite simply, the implementation date of the changes to the EI program that would allow individuals to qualify under the 600-hour rule should be made retroactive to the extent that it would pick up those individuals who would have qualified under that rule since January 1, 1997. Barring that, at the very least, the 600-hour rule should be applied to those individuals who have been denied benefits and whose claims are still proceeding through appeals processes across Canada.

That's essentially the issue I'm here to address this morning. It's fairly well clarified in the letter to the Honourable Jane Stewart from our president, Marilies Rettig, of which you have a copy, I believe. It's that issue of the application of the commencement date of the benefits that have been announced under that program. We have previously written Minister Stewart and members of government applauding them for that action, which we feel is long overdue.

The Chair: Thank you very much, Mr. Staple.

Mr. Dunford, welcome.

Mr. Ryan Dunford (Government Relations Coordinator, Canadian Alliance of Student Associations): Thank you.

I'm appearing on behalf of Mr. Mark Kissel. He's the national director of CASA currently. He was caught in Toronto and unable to attend the meeting, so I pass on his regrets. I hope I'll prove to be a good substitute for him this morning.

I'll start off by saying I also appreciated the Standing Committee on Finance report that was released last December. We found it very useful, and we appreciated our role, our small part, in providing some input for that report. We thank you very much for it.

• 0920

I've been in student leadership for three years, which is an eternity, by the way, in student leadership.

Mr. John Staple: You should try being an MP.

Voices: Oh, oh!

Mr. Ryan Dunford: That's fair.

I can honestly say I don't think amendments to the budget have ever been so welcome as the amendments proposed for the government financing of student loans. I haven't talked to a student yet who is mourning the loss of the banks in this student loans program. Everyone sees it as a very positive step.

The government capitalization will help solve a lot of problems we've had with banks in the past. The dissemination of student loans data we found very difficult with banks. Problems with service, communication, and high interest rates have been identified by students as particularly prohibitive in their commencement of studies. Prime plus 2.5% fixed or prime plus 5% floating are pretty aggressive interest rates.

The opportunity we see now, with the government getting involved in this program, is that a private bank is now not involved in a social program. We've already had an opportunity through HRDC to meet with potential service bureaus that will be involved in the administration of the student loans. This has basically been an unprecedented role for stakeholder groups in shaping how the student loans program is going to look in the future, and we certainly appreciate that.

I would be remiss if I didn't say some refinements need to be made to the student loans program, but I have a feeling that falls outside the scope of this committee—that you're simply interested in the amendments as presented in part 3 of Bill C-32.

I would just close by saying, good job. This is great news for students, and they're very happy about it. The devil will be in the details, in working with the human resources development department and Katalin and her department on trying to improve the policy and improve the social program students really rely on, and increasing rely on going into the earlier part of this century.

Thank you very much.

The Chair: Thank you very much, Mr. Dunford.

We'll now have a ten-minute round, starting with Mr. Marceau.

[Translation]

Mr. Richard Marceau (Charlesbourg, BQ): I will wait a few moments so you can adjust your earphones. Of course, when things like this happen, we wish we had the

[English]

universal translator from Star Trek,

[Translation]

but unfortunately it does not exist yet.

[English]

Voices: Oh, oh!

[Translation]

Mr. Richard Marceau: First I would like to thank you for meeting us this morning and for your interesting presentations.

Mr. Orr, you gave a C-plus to the budget, a generous grade I think. On top of the income tax reductions that you are advocating, can you give us in four or five points the initiatives Dale Orr, Minister of Finance, would present us with tomorrow morning?

[English]

Mr. Dale Orr: I'd make four points.

First, accelerate the reductions that were in the budget. That could take the total up to a value of about $70 billion to people, as opposed to the $58 billion, by merely moving them forward. It's too back-end-loaded.

Second, it should have expanded the RSP amount.

And I would like to see more reductions on the business tax side, particularly to make the service sector treatment neutral with other sectors in the economy.

[Translation]

Mr. Richard Marceau: One of the problems I foresee personally regarding the budget and all the data that preceded it is that the Finance Minister has announced surpluses in the order of $95 billion over five years while many economists—I don't know where you stand—are talking about surpluses of $137 to $140 billion.

• 0925

In that perspective, don't you think that tax reductions should be accelerated? Would the Finance Minister be hiding part of the surpluses like a squirrel would do in order to be able to say after the tabling of the budget “Look, we succeeded in reducing taxes and we did better than we expected”? Is he playing at what we call the expectation game, so that if surpluses exceed $95 billion he will be able to tell us how good he is? Is this the game the government is playing at?

[English]

Mr. Dale Orr: I thank you very much for that question.

I wrote a paper post-budget. I have it here. It's called “Is Mr. Martin Hiding Money Again?” That paper says in a nutshell, no, he isn't, actually. He saved himself when he said the tax package would be $58 billion “at least”. If he had said, “It's $58 billion. I wish I could make it $59 billion, but there's no more money there”, then I would have said he's hiding money.

With respect to around the time of budget, when economists like me... As you know, I am one of the people who helped frame those numbers, where we said there was about a $95 billion surplus, and as you also know, the forecasts for the Canadian economy have strengthened consistently from that time.

In this paper I say that post-budget, the $95 billion, because of stronger forecasts for the economy, grew to a total of about $115 billion. That's about what's there. Some people would raise that up a little bit more today, slightly above, because the forecasts have continued to strengthen. But that's the order of what's there.

So I'm saying there's more than $58 billion to be had. Even if you keep spending at a real per capita constant, you can get up into the $90 billion range. That's reducing debt by about $4 billion a year, the contingency fund, plus another $1 billion from the economic prudence.

[Translation]

Mr. Richard Marceau: As we were able to see at the premiers last meeting, I think that the provinces seem to be suffering generally from what I would call a fiscal unbalance. They are facing growing needs, notably in health care, and are having problems reaching fiscal balance or generating small surpluses. It is a bit frustrating for the provinces to realize that the federal government has such large surpluses. If the forecasted surpluses are in the order of $95, $115, $137 or $140 billion, don't you think that we should give ourselves a little cushion and instead of having tax reductions or all sorts of levies totalling only $58 billion, we should increase this amount to make sure that the federal government is not using the enormous surpluses at its disposal to interfere once more in fields of provincial jurisdiction and impose a new national standard by using this money as a carrot to convince the provinces to abandon their constitutional prerogatives?

[English]

Mr. Dale Orr: I'd make a couple of points there.

On health care, federal and provincial going back and forth, to me, from what I've heard from the Ontario government over the last couple of months—gee, they're in such trouble with health care, because they're not getting enough money from the federal government—and then to look at what they've produced in their budget, they have money everywhere. There's lack of credibility on the part of some provincial governments, in this case Ontario. They have plenty of money for health care in Ontario.

• 0930

I'd make another point with respect to provinces. I make the point that the federal government should set as a target keeping real per capita increases about constant, and I'm saying that even assumes they collect some money from the low and falling priorities to put against that 3% increase in the total each year so that they have about $5 billion or $6 billion to increase total spending. Then there's another point behind that. After all, when we poll Canadians and ask what's really important to them, health keeps coming up time and time again, and second is education, and so much of that responsibility is with the provinces. So why in the world should the federal government be a growing part of the economy? That's yet another reason a 3% increase per year would be about appropriate.

The federal government should not be, in my view, a growing part of the economy over the medium term, because the spending priorities that do come out are heavily in provincial jurisdiction, let alone the point I made that tax reduction and debt reduction are very important.

An interesting point to ponder is this. I was at a couple of papers just last week on education, and there's a lot of analysis on the benefits to the public from education. Those benefits spill from province to province very clearly; a lot of the doctors educated in Saskatchewan end up working in Alberta, etc. In fact as we well know and what has an awful lot of profile is some of them end up working in Texas. But what has less profile is how many of the people financed at the expense of one province end up working in another.

Should there be more federal role in education? From an economic point of view there's a strong argument that the benefits of university education, especially graduate school training of doctors and other very mobile professionals, accrue more to Canada in general; they're not really contained in a province. So there should be more authority and spending at the federal level. Educators at the university level make the point that we're one of the very, very few countries that doesn't have a federal department of education. There are a lot of good economic arguments for why there should be more federal presence, authority, and spending for that type of professional education in Canada.

That's not the answer you were expecting, but you have the questions and I have the answers.

Voices: Oh, oh!

[Translation]

Mr. Richard Marceau: No, things normally happen differently. You will understand that it is hard for me to agree with you. Unfortunately, we don't have enough time,

[English]

time goes quickly.

The Chair: By the way, the people in Richmond Hill agree with him.

[Translation]

Mr. Richard Marceau: I know. That's why they elect you. In Charlesbourg, they elected me.

[English]

Voices: Oh, oh!

[Translation]

Mr. Richard Marceau: Thank you.

[English]

The Chair: Mr. Szabo, do you have a question?

Mr. Paul Szabo (Mississauga South, Lib.): Sure. I have three points I wanted to cover and maybe just one very quick question.

Dale, do you believe you can put too much money into an RRSP?

Mr. Dale Orr: That a person could put too much money into an RRSP?

Mr. Paul Szabo: Yes.

Mr. Dale Orr: Yes, he could.

Mr. Paul Szabo: I agree.

Mr. Dale Orr: You're not asking an accounting question.

Mr. Paul Szabo: No, no. There are strategies in which it's probably not the best strategy.

Mr. Dale Orr: Exactly; there's an optimum amount to put away for retirement.

Mr. Paul Szabo: We're going to work on that for the next budget, because it's a very important issue. There's this myth that somehow higher is better when you consider the individual differences and ability to roll over and collapsing and getting fully taxed, etc.

Second, you commented about the comparative levels of income taxation burden in Canada versus the U.S. I'm glad you raised that, because it's extremely important and there's a lot of fuzz there. I listed very quickly some of the differentials. We can just say, “Let's look at the tax returns or the tax rates, and that's higher than this one”, but there are obviously many other monetary and non-monetary considerations, such as user fees in each jurisdiction, non-taxable benefits, estate taxes, taxation of capital gain on the sale of principal residence, health insurance costs, differential in state income tax rates, and deductibility of mortgage interest, not to mention non-monetary things such as quality of life issues, Safe Homes/Safe Streets, social security, poverty, etc.

• 0935

It would be an enormous task, I think you would admit, to in fact do a comprehensive analysis, particularly when you consider that the variance in state income taxes is all over the map in the U.S. Can you give us an idea of the extent to which you have made some analysis to make the conclusion that, notwithstanding all that other stuff, in fact overall the taxes are higher, and it's not for any good reason?

Mr. Dale Orr: The answer to that is yes. First, the chart you have in front of you looks at it from the point of view of the U.S. economy and the Canadian economy. You see down there in the footnote that on the U.S. side, it includes all of the federal, state, county, city—every personal income tax. This is a chart on PIT. So it's average U.S., and as you know and as you said, that average in the U.S. varies quite a bit depending on what state and city you're in, just as it varies quite a bit in Canada depending on what province you're in. But overall this does represent the tax burden, the PIT over GDP, for Canada and the U.S.

However, the OECD has done a study looking at total taxes, taking everything. That shows—and I believe the latest numbers are from about 1998—that Canada is about average in the OECD. Overall, when you bring in all those other taxes you mentioned, we're about average in the OECD. But we're significantly higher than the U.S.

Mr. Paul Szabo: Do you have any idea of what the comparative mix is of self-employed activity versus incorporated activity, which would shift the ratio of PIT to GDP?

Mr. Dale Orr: Between Canada and the U.S.?

Mr. Paul Szabo: Any jurisdiction.

Mr. Dale Orr: On self-employed, no, I don't know. I know we have relatively more small business than the U.S.

Mr. Paul Szabo: Would you concede that if more people who ran businesses that are not incorporated, i.e. proprietorships, incorporated those, the figures would change?

Mr. Dale Orr: Yes, they would probably change.

Mr. Paul Szabo: Yes, and yet the income tax system would not have changed.

Mr. Dale Orr: Right.

Mr. Paul Szabo: So to use personal income tax as a percent of GDP to reflect the tax burden is probably an erroneous calculation or indication of personal income tax burden.

Mr. Dale Orr: No, it's not erroneous. It's personal income tax, and then the other chart in the paper—and I'd be happy to give you the complete paper—looks at total taxes.

Mr. Paul Szabo: Yes. I raised it only because it's not black and white, is it?

Mr. Dale Orr: Oh, nothing is black and white, and it's pretty important to understand that we're really out of line on personal income taxes, but we're less out of line on all these other taxes you mention. That's why when we look at the total burden, we're still well out of line with the U.S.

Mr. Paul Szabo: Sure.

I have one last issue, Mr. Chairman, if I may.

It's not because you said it; it's because a lot of people say it, and it really carries a lot of baggage with it. You made the statement that it's our children who must finance our debt load. Those are simple words, but first of all it says our children got no benefit; that all they got is the one side and they have to over the future carry the financing cost of debt; that there were no pluses to having incurred that debt. It says having this debt is a negative.

This year I celebrated my thirtieth year as a paid-up member of the Canadian Institute of Chartered Accountants, and I have never come across a substantive business entity—a successful, growing entity—that didn't have long-term debt. And it has long-term debt for good reasons, as you well know. It's called leverage ability. It means somebody with a dollar can run a business so that it looks like it's $10. It means there's opportunity.

• 0940

This statement is condemning, and yet the reality is this. Say you take our $573 billion national debt and unravel the compounding interest on that and find out what the relative absolute dollars would have been in each of those years when we incurred deficits, and say you asked what we would have changed not to have incurred that debt and what would have been the consequences had we done that. Chances are, I would submit to you, the consequences of lower economic growth, higher unemployment, higher health care costs because of lower average income of Canadians, social problems, criminal justice problems, kids dropping out of school—the social consequences of not having sustained a quality of life on a reasonable, stable basis over the period, to give that security and to give that underpinning to a Canadian value system and a Canadian way of life—probably would have resulted in as much if not more debt, simply because, with the absolutely necessary spending on criminal justice costs, social program costs, health costs, education costs, and all the other problems that occurred because you didn't sustain the system, we would have had a higher debt than we do today.

So how is it that people always come here and say, “Our children have to bear the burden of the debt. It's $40 billion a year in interest. Isn't that obscene?” The consequences of not having done that may have been worse, so why do we say this? Why don't we defend the reality of reasonableness of debt?

Obviously there's the question about whether it is affordable. Have we been reasonable and realistic? Can we carry that debt? Is the debt-to-GDP in a reasonable range? Those are the real questions. Are we being irresponsible by carrying this level of debt? It has to be not in relation to this year's budget and how much interest cost there is. Doesn't it have to be in relation to the asset of Canada that we have developed to this point in time?

Mr. Dale Orr: Well, I disagree with almost everything you said, Mr. Szabo, and I hope most people do. The one part I did agree with is that the burden of the debt should be measured by the debt-to-GDP ratio. That is our level of debt relative to our ability to pay for it. But that level of debt is far too high by almost any standards. You've had any number of people come here and say it's definitely too high today. It should be below 40%. Is 30% about right? Well, we don't know.

Here are a couple of points. That debt was run up from 1984 to 1994, over that decade. In 1984 we didn't have a debt problem. We only had about $200 billion in debt and about a 40% debt-to-GDP ratio. So it was over that decade. That was bad debt.

Had we run up that debt by investing in things that would give benefits to our children, that would have been wildly different. We didn't run up that debt by massive investments to give us the best education system in the world, or R and D so that we were spewing out a lot more inventions and innovations and whatever than we were before. We didn't run up that debt in infrastructure so that we had highways and whatever far exceeding the Americans.

We ran up that debt for, among other things, EI benefits that were far too generous and were grossly misused—and fortunately, and belatedly, we cleaned that up in 1994 and 1995—and other programs that we couldn't afford and shouldn't have afforded.

I agree with you that debt is not necessarily bad. It depends. Had we incurred it in a way that our children would be seeing the benefits of it through investments, that would be different; but that didn't happen.

Well, $40 billion is what we're paying, and that's what we're going to be paying. Some people have done some very interesting little things. That's a lot of money, $40 billion. The typical Canadian family is paying more to finance the debt than they are for all sorts of other things they value very highly.

Another point I would like to make is I did a little piece in September—and I mentioned it—in which I made the point that the reason personal income taxes are higher in Canada than they are in the U.S. is not that we're getting better health care than the Americans. It's not that. The Government of Canada's and the provincial governments' public spending on health care in Canada is about 6% of our GDP. In the U.S. public spending on health care is about 6% of their GDP, and in fact 6% of America's GDP probably buys a lot more and better health care than 6% of our GDP. So that's not why taxes are high.

• 0945

Taxes are not higher in Canada than in the U.S. because we're offering a better education system. I made the point. If you're a person living in any number of states—California, Washington, Illinois, Wisconsin, North Carolina, Indiana, any one of those states—you have an excellent, first-class university. You send your student there at in-state fees and you get a first-class education at fees that are reasonable by Canadian standards.

The reason we're paying a lot more taxes than the Americans is our debt load. That's how it washes out. We're paying a lot more than they are on their debt load, and that's where the big difference is.

Mr. Paul Szabo: I think we'll agree to disagree. The case about whether it's good debt or bad debt or something in between still has to be examined.

A statement was made by the Prime Minister at some time that bears some consideration, and that is, having the best country in the world in which to live and work does carry a price tag.

Thank you, Mr. Chair.

The Chair: Thank you, Mr. Szabo, for both the comments and the questions.

Ms. Redman.

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

If I could be allowed to comment on Mr. Szabo's point, sometimes it's worth lending our minds to whether it's possible to cost the absence of investing in something or the avoidance of a cost. I think part of the premise Mr. Szabo is touching on is the fact that we're not investing in bigger jails than potentially we would if we had chosen to not spend that money or to spend it in a different way.

My question is for you, Mr. Dunford. I have two universities in my community, and they're greatly interested in students and student debt. This past summer I got a huge reaction when the newspapers ran away with headlines when we were looking at renegotiating the role the banks might play in student loans. You made the statement in your presentation that private banks ought not to be involved in social programs, or something to that effect.

The withdrawal of banks from the student loans program is expected to increase the cost. Indeed that's why the government in its wisdom originally moved in that direction. So my question is, should efficiency not be a legitimate goal in the delivery of social programs?

Mr. Ryan Dunford: That's an excellent question. Of course as students, we want to see as much money in the student loans program as possible, because that allows more students to have more resources to attend university. But we shouldn't sacrifice the quality and accessibility of the program for the sake of efficiency, in my opinion. Yes, the banks probably can run it more efficiently than the government will, but at what cost? Students have been very angry, quite frankly, about the banks' involvement over the last five years in the student loans program, and I don't think it was worth it.

As you said, in the government's wisdom, in 1995 they turned over student loan administration to banks. Well, now we're back to where we think it ought to be. It's a social program that the government should be the proprietor of, not a private business. We don't think efficiency is more important than that.

Mrs. Karen Redman: Can you just flesh out a little bit what aspect of the banks' involvement made students react with anger?

Mr. Ryan Dunford: The level of service was quite often a concern. Interest rates were another, which aren't necessarily the banks' fault, but at any rate the banks had that propelled on them. Communication with students on repayment was quite often an issue. A lot of students received no communication once they finished their studies, and then six months down the road they had to consolidate and start repaying their loan. Some of them had no contact with banks at all and found their loan went into default unnecessarily. There were a lot of instances of that.

There's no doubt that students have a responsibility to repay their loans, and we're not suggesting they should shirk those responsibilities. But we know it can be run better, and we feel this is a great opportunity to have a student loans program that will serve students better.

Mrs. Karen Redman: Thank you.

• 0950

The Chair: Thank you, Ms. Redman.

Mr. Pillitteri.

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

Mr. Orr, I'm glad you clarified what is a good debt and what is a bad debt, and I'm glad you clarified that in the years from 1984 to 1994 there was an accumulation of over $300 billion of debt. That clears us on this side of the table.

Mr. Paul Szabo: It's the Brian Mulroney debt.

Mr. Gary Pillitteri: Yes, it's the Brian Mulroney debt that was a bad debt.

The Chair: We still have to pay it though, right?

Voices: Oh, oh!

Mr. Gary Pillitteri: Yes.

Your last remark was that we have to pay $40 billion of debt. I get asked this question a lot: How much effect have the interest rates had? We're fortunate it's only $40 billion, because interest rates are in the neighbourhood of 7%, and long-term they have been about 8%. But for the life of me I cannot understand what's happening today. All the economists have said we should get our debt down, and you also stated the debt-to-GDP ratio should be sustainable. We had a debt ratio up to 72% to 75%, and we're down to somewhere around 61% to 63% now, but I cannot understand one thing: the value of our Canadian dollar.

Even when we had a debt-to-GDP ratio of 72% to 75%, we had a Canadian dollar at about 69¢ or 70¢. And yes, I also understand the trends. In the fall, or let's say just before Christmas, with the Americans, we have a branch economy in Canada. I understand taking away their profits just before Christmas, just before the end of the year.

Could you explain to me now why our Canadian dollar, as of yesterday, went down to 66.9¢? What is happening? Who's controlling that element? I mean, we're getting our house in order, and by all means that dollar should be above 70¢ right now. Yet we're at the highest peak of the growth of our economy in Canada, and it's still going down. Or does none of this have an effect—the debt ratio and so on?

Mr. Dale Orr: Okay, let me try. Trying to explain why the Canadian dollar moves is a challenge. It's very difficult sometimes to explain why it moves from day to day or even week to week, but over longer periods of time it's a bit easier.

At least half a dozen important things determine where our dollar goes.

One of the most important points to understand is that whether our dollar goes up or down, that dollar is a relative price. That 67¢ says our dollar is worth 67¢ U.S. The dollar could also be evaluated in terms of pounds or euros or whatever. So it's a relative price. It's a competitive situation.

The high level of debt-to-GDP ratio in Canada has a negative impact on our dollar, all other things constant. One of those other things depends on just how bad the other countries are in terms of debt-to-GDP ratios. In other words, if we had a 70% debt-to-GDP ratio but the Americans and the Brits were at 80%, then international financial markets wouldn't be dumping on our dollar. We wouldn't look so bad. If we get down to 40% or 50% debt-to-GDP ratio but the Americans and the Brits and the Germans are way lower, we're still going to be a little bit vulnerable. So yes, the debt-to-GDP ratio is one thing international financial markets look at, but they look at it relative to other countries.

• 0955

Another very important point in determining the strength of our dollar is the interest rate gap in Canada relative to the U.S. We've been running a negative interest rate gap relative to the U.S. reasonably consistently since 1996, so that makes the dollar lower than otherwise. I know the governor has come and talked to you and these things are not new to you. I'm just putting them in the context of what you said about the debt. The debt is important, but these other things shouldn't be forgotten.

Commodities are important. We're a net commodity exporter. When commodity prices go up, international financial markets become more confident in the future of the Canadian economy and they bid up the value of the Canadian dollar.

So yes, debt-to-GDP ratio is important, but it's also important relative to where we are with other countries, and it's one of the things, set beside interest rate gaps with the U.S. in particular, where commodity prices are going, as well as the overall forecast for the growth of the Canadian economy, in determining where the dollar is going.

Mr. Gary Pillitteri: Mr. Orr, I do understand all of that, but you missed part of my point. When we were at 71% to 75% debt-to-GDP, we were at 70¢ a dollar. Today our debt-to-GDP has gone down, but so has our dollar gone down.

Is it that we're looking at one element only, and the element is U.S.A., rather than the others? The debt-to-GDP of all of the others you mentioned—the Europeans, England—has not gone down as much as the Canadian one has. The debt-to-GDP in Italy, France, England, and Germany has not gone down as fast as the debt-to-GDP in Canada. Yet their currencies also are going down. I see only one currency in this world—one currency, that of the United States—that is keeping pace and almost keeping the rest of the world enslaved to their currency.

So actually one of the things we have done is not as relative as we seem to think it is, in order to bring the value of our currency up. The speculation of money and the speculation of where we are going is far greater relating to that one country, the United States, than anything we do in-house.

Mr. Dale Orr: I'd make a couple of points.

Yes, you're right. When we had a 70% debt-to-GDP ratio, the dollar was higher than today. But at that time we had a positive gap on interest rates with the U.S., which has generally been our history. Now we have a negative gap.

Yes, we've improved our debt-to-GDP ratio. We've even improved it relative to some other countries. But two other very important factors that influence the dollar are in worse shape today than they were seven or eight years ago: the interest rate gap and commodity prices. That's why. Yes, we have improved our debt-to-GDP ratio, but there are other factors in there, and they've worsened.

On the other point, yes, we've brought our debt-to-GDP ratio down very nicely, down more than other countries, but look at where it still is. It's worse than every country except Italy. Still, after coming down from 71% to around 60%, Italy is the only other developed country out there with a worse level of debt-to-GDP ratio.

The other point is that in fact over the last year, the Canadian dollar has been the strongest currency of all developed countries, with the exception of the yen. Over the last year, we gained 5% on the U.S. dollar and we gained about 20% on the euro. So in spite of the fact that commodity prices moved against us in 1997, 1998, and early 1999, and in spite of our negative interest rate gap, the Canadian dollar has been pretty strong over the last year, partly because we have improved our debt-to-GDP ratio.

• 1000

Mr. Gary Pillitteri: Mr. Chairman, I was just trying to make a point as a businessman, and I just want to see how much more debt I'm going to get into in my life. I want to qualify Mr. Szabo's point that sometimes, as a businessman, it does bode well to stay in debt for your lifetime.

The Chair: You don't think the dollar is declining because we have five members of the committee who are of Italian origin or anything, do you?

Mr. Dale Orr: Heavens no.

Voices: Oh, oh!

Mr. Roy Cullen (Etobicoke North, Lib.): That was the right answer.

The Chair: Well, thank God for Italy. It makes us look good.

Mr. Cullen, followed by Mr. Forseth.

[Translation]

Is that all Mr. Marceau? Thank you.

[English]

Mr. Roy Cullen: Thank you, Mr. Chairman.

Thank you, Mr. Orr, Mr. Staple, and Mr. Dunford.

I have a number of questions and comments for Mr. Orr in the context of his presentation, but I'd like to include Mr. Dunford and Mr. Staple in the discussion as well.

Mr. Dunford, when our government increased parental leave to a year, we also, as you've noted, reduced the hours requirement from 700 to 600. What you're proposing is to make that retroactive for teachers who didn't qualify since 1997. I can understand why that might be an attractive proposition, but I'm wondering...

The government makes policy changes on an ongoing basis. There are many changes to EI. If we followed this advice, wouldn't we then also say the moment we change EI rules, we would go retroactive and include everyone who was missed because the rules didn't apply then? I'm just concerned that it would set a very difficult precedent. Perhaps you could comment.

Mr. John Staple: Yes, I can understand that, and I can understand the difficult nature of making a piece of legislation such as this retroactive. From our perspective, however... and we're talking about workers in general. This is not only the teachers, although we have 250,000 teacher members within our teacher organization, and between 60% and 65% are female, and that number is growing rapidly. So you can understand where the concern comes from, from our organization's perspective.

This set of circumstances is different from most other changes to the legislation that have occurred, primarily because it's brought about by a fundamental change in the EI program that went from weeks of employment to hours of employment. It was recognized at the early stages that the new hours-based system had some drawbacks in responding adequately to some of the work patterns of Canadian workers, particularly part-time workers. We worked, as did other organizations, with HRDC and the Department of Finance in the early stages of the introduction of the new EI program in making some modifications and amendments to the legislation that did accommodate some of those offside work patterns of Canadians.

The situation with respect to part-time workers was never adequately addressed, and I think everybody recognized that, particularly from the perspective of the ability of those people to obtain the special benefits of parental, adoption, paternity, and sick leave under the new rules. So it's different from that perspective, in that we're talking about a new set of rules that never fully, adequately addressed the plight of part-time workers in a reasonable fashion.

And no, we're not suggesting this be the pattern for legislation, but for this set of rules. I recognize the difficulty, but then I turn it around and say well, it might be difficult to make it retroactive, but it's a far more difficult problem for us and other groups that represent workers when two individuals, both of whom have, say, 605 hours, and one, whose baby is born on 30 December, gets no benefits, and the other one, whose baby is born a day later, gets benefits. That's even a more complicated and more unjust problem that we have to deal with.

So I recognize it's a difficulty, but it's a special set of circumstances, and it's applicable only to the new rules in the legislation. We feel going back to January 1, 1997, or at the very least addressing those cases that are in appeal of people whose benefits were denied and who have 600 hours, would be an appropriate way to go.

• 1005

Mr. Roy Cullen: Thank you.

Mr. Staple, in your remarks you limited your discussion to the student loans program in the context of Bill C-32.

Mr. John Staple: I think you have it switched. I'm Mr. Staple and this is Mr. Dunford here.

Mr. Roy Cullen: Oh, I'm sorry. Mr. Dunford, yes.

With the permission of the chair, I wonder if we could just expand the discussion a little bit beyond the confines of Bill C-32. I know the chair is usually very magnanimous.

The Chair: Amongst other things.

Mr. Roy Cullen: Yes, amongst other things.

Mr. Dunford, you mentioned there were some issues with the program. Let me put one on the table from my perspective as well. We won't have time to get into every single issue, but I'd like to talk about the default rate on loans, particularly with respect to private institutions. That's why the program is back here.

You can have your laundry list and in a very high-level way maybe tell us about that, but I wonder if you could respond to the default rate and how we're going to deal with it as a country.

Mr. Ryan Dunford: Actually, based on data released by HRDC when all this happened, the default rate is going down. A lot of the public perception regarding the student loan default rate is simply unjustified. I gauge public opinion by how my stepdad feels about certain issues with student loans, and I asked him, “What percentage of students do you think default?” He thought it was in the order of 25% to 30%, but it's way lower than that.

A voice: It's 27%

Mr. Ryan Dunford: It's not 27% default.

A voice: All student loans, or just post-secondary?

Mr. Ryan Dunford: Student loans.

Ms. Katalin Deczky (Director, Canada Student Loans Program, Human Resources Development Canada): May I clarify this point?

The Chair: Please take a seat and identify yourself, just for the record.

Ms. Katalin Deczky: Thank you for the opportunity to clarify this point.

How default rates are counted in the system is that anybody who has missed three consecutive payments is counted as a defaulter. Whether or not later we recover all or part of the outstanding amount is not counted in that particular calculation. So from that perspective, yes, the default rate is around 27%, and yes, it has a slight declining trend, and we certainly hope that trend will continue.

It is also true that after recoveries, which of course carry a significantly higher expense than normal repayment schedules would, we recover a significant portion of that 27% default.

The Chair: Which is...

Ms. Katalin Deczky: We're down to about 90%, which ultimately gets paid over a very long time, about fifteen to twenty years.

The Chair: That's 90% of 27%?

Ms. Katalin Deczky: Yes.

The Chair: So you're down to 3%. That's very low.

Ms. Katalin Deczky: But very high expenses are associated with those recoveries. That includes tax set-offs and other measures that are not usually part of normal collection activities.

The Chair: So when you look at the aggregate situation then, Mr. Dunford is right; it has gone down.

Ms. Katalin Deczky: Yes, it has. The trend is a declining trend, and we do hope that with all the measures, especially... We attribute the decline to the introduction of extended interest relief, which was introduced in the 1998 budget. We're just starting to see the effects of that. It allows a reprieve from paying interest for borrowers who go out to the workforce and who may not have a job immediately or whose income is lower than expected. We pick up the interest payment, and that allows them not to be counted in the default rate, but they don't have to pay. The trend is that as their economic situation improves, they are in fact able to pick up the payments at a later date.

Mr. Roy Cullen: Thank you.

The Chair: You can stay if you like.

Mr. Roy Cullen: I'd like to give Mr. Dunford an opportunity to very succinctly elaborate on and talk about some of the beefs, if I could put it that way. And if there's a chance, I'd like to get to Mr. Orr.

Mr. Ryan Dunford: Beefs with what specifically?

Mr. Roy Cullen: You said at the outset there are some problems with the design or the implementation of the program, and I just wanted to give you a chance to put some of the highlights of that on the table.

• 1010

Mr. Ryan Dunford: Okay. Well, I would say of the highlights, interest rates are always a concern for students. The interest relief certainly has helped students in repayment of loans. But what we've found is a lot of students are debt-adverse. They see an interest rate such as prime plus 2.5% or prime plus 5% and they get turned away. It's certainly very prohibitive, we find, for a lot of students who want to go to a post-secondary educational institution.

The other beefs we've had are in the communications arena. We have found communication from HRDC has been excellent, but when the banks are working with students on repayment, we've found it can be lacking, and it's a very confusing and convoluted process as well.

As Katalin mentioned, if a student doesn't pay for three months, it's classed as a default as far as the bank is concerned. Those can be drastically reduced by simply clear communication with students on what their obligations are in relationship to their loan, etc. I think we'll really see a drop in default rate, and of course that will make it a lot cheaper for the government to administer, so that they don't have to pay collection agencies extra money to get that money back.

Mr. Roy Cullen: Thank you.

Do I have time for a short one for Mr. Orr?

The Chair: Yes, sure.

Mr. Roy Cullen: Thank you.

Mr. Orr, I wanted to talk a bit about your notions of the government's expenditure patterns. I'd probably agree to disagree with some of your commentary, in this sense. According to the numbers I have, about two-thirds of the spending our government has made since the budget was balanced has been in the priority areas of health, post-secondary education, science, technology, and innovation. I just throw out some programs: the CHST, the Canada Foundation for Innovation, assistance to farmers and the homeless, the RCMP, infrastructure. It seems to me a fair dose of priority is attached to them.

Also, if you look at direct program expenditure of the federal government, that's down $4 billion just in nominal terms since 1993-94. If you factor in demographics and inflation, it's down about $20 billion, in nominal terms at least, since we restored the CHST.

So maybe we can come back to that, but Mr. Orr, the Minister of Finance, in building this document, the economic and fiscal update, brought in eight of Canada's leading economists to help him do that. Were you part of that group?

Mr. Dale Orr: Yes.

Mr. Roy Cullen: Yes, I thought so. In that document—I was at the last meeting, as you know—the gross surpluses over the five years were $95.5 billion and net of $67 billion, after contingency, prudence, etc. I know there was much discussion about whether that was a consensus or an agreement, but generally eight of Canada's leading economists, including you, agreed with those numbers.

The Minister of Finance has said the tax package of $58 billion is a minimum, and if the economy keeps ticking away the way it is, we can probably do more. But I just have a little bit of difficulty rationalizing the kinds of numbers you're looking at. I think, if I heard you correctly, you're saying the tax package of $58 billion could go to over $90 billion. I'm wondering how that stacks up against this notion here, where eight of Canada's leading economists, including you, talked about a net... And the economists, as you know, agreed on the need for prudence and the contingency. So how does that stack up, taking the tax package of $58 billion to a $90 billion tax package when we only have $67 billion in surpluses forecasted?

Mr. Dale Orr: I sensed there were two questions there.

First you were saying gee, we haven't been overspending, and what we've been spending has all been on very worthwhile things. The first thing I have to say is yes, I'm glad I'm not in your shoes and don't have to make these tough decisions, because certainly people are very grateful to get every dollar the federal government spends. It's a question of making hard choices. I'm just making the point that when you look at our tax situation, how we stack up to the Americans, and the impact of taxes that are too high, it's a very high priority to do better even than what has been put in the last budget. It's a very high priority. You shouldn't sit back and say, “Well, there you go.”

As for the debt situation, we're still hanging out there with the highest debt-to-GDP ratio except for Italy. If we get hit with an interest rate spike, we're going to be in big trouble. Even if we don't get hit with an interest rate spike, we're still passing that debt burden on to our children. And even if we don't get hit by an interest rate spike, we're still spending $40 billion a year that almost all Canadians would rather see go somewhere else.

• 1015

I'm not really here to say where you've been spending your money isn't appreciated or isn't important. I'm here to really emphasize the value of debt reduction and of tax reduction as well.

But within that, as for the innovation program you talk of, some people describe that as merely a pork barrel for Pratt & Whitney. That may be a little bit of an overstatement, but it's not one of the government's finer hours. What about all the Shovelgate in HRDC spending? It's pretty hard to say every dollar the federal government spent over the last five years has just been efficient and effective, I would say.

The Chair: But that's true of a lot of organizations.

Mr. Dale Orr: Yes, that's right. Sure, it's true, but if you own stock in a company and you don't like the way they're spending their money, you sell their stock and you go and buy somebody else's. We don't have that choice when the government gets involved. Likewise, if you're a consumer and you don't like the way you're treated, you go down the street. You don't have that choice when it's the government. So it's a little bit different.

Your second point on the update in the economy is very important, and it has a very simple answer. That exercise was based on an economic forecast done in September, which did represent the views of the economists. The forecasts for the Canadian economy since that time have ramped up quite considerably. This one paper, “Is Mr. Martin Hiding Money Again?”, addresses exactly that question and explains quite clearly the impact of the stronger economic forecast we saw in March—this was done in March—as opposed to last September.

That's what explains how we went from a $95 billion surplus, based on an economic forecast of September, to about $115 billion now. That's cumulative over a five-year period. That's what it is.

Mr. Roy Cullen: That still is quite a swing, and I know that Canadians looking at the debate... The Alliance party in their fiscal plan has used those kinds of surpluses, and Canadians looking at this would say, “How can it swing that wildly in such a short period of time?”

Can I just comment briefly on a couple of things? One, I think you know that with the way the debt has been restructured over time—longer maturities, more fixed debt—the expenditure is much less sensitive to changes in interest rates. You would have gone through that sensitivity analysis. I just want to make that point.

Do you think in Canada we have a savings challenge? Are Canadians saving enough?

Mr. Dale Orr: Before I answer that, just let me just make one comment on this move from the $95 billion to $115 billion accumulated over a five-year period.

Don't forget we're running a GDP of about $900 billion per year, and the surplus is the absolute tail end of everything. It's the residual. So when you take into context that it's over a five-year period and it's a residual from an economy that's churning out $900 billion to $1 trillion in GDP each year, then I guess you put that in context.

On the savings, that's a very good point. As you know, the savings rate in Canada, say over the 1980s and early 1990s, was around 10%. Now it's around 1%, and the forecast is that it's going to be between 1% and 2% over the next couple of years. Is that a problem? That's an excellent question.

I'm not exactly sure how much of a problem it is, except it's not as much of a problem as would be indicated by those numbers, for a couple of reasons. But it's enough that I think we should bump up that RSP amount from the $13,500 to, say, $15,000 or $16,000—not infinity, to respond to Mr. Szabo, but it would be about appropriate to up it by a couple of thousand.

• 1020

One of the reasons it's not quite so much of a problem is the capital gains and the treatment of capital gains and the wealth people have in capital gains. But for now I would just want to say that's a very important question. When you look at that data, it says, boy, we'd better make sure we really understand what's going on. I've done enough to say it's not quite as bad as you might think, but it's a problem.

It's the mirror reflection of this chart you've seen, which I've brought here before, on personal disposable income per family. It went down from 1989 to 1997 and has just now started to turn up. With luck, next year we'll regain in personal disposable income per capita to where we were in 1989, and that doesn't leave a lot of money for saving. So it's a bit of a response to that.

The cut in personal income taxes and the big gains in employment, the reduction in the unemployment rate, are going to be helpful in bringing that back up again.

The Chair: As you probably know, this committee has always been, at least in the past three years, very much a pro-growth committee in its agenda. It's made productivity one of the key issues.

I agree that on corporate taxation we need to move at a faster pace. I think the same thing on personal income tax, and I think we should go up towards middle and higher incomes. That's all part of the debate, and hopefully the Minister of Finance will in the upcoming budget address those key issues.

Having said that though, when you look at Porter's report, the last one, where he did the review of the past ten years since his first report, he does write at length about the role of corporations and firms, and he determines that in fact Canadian firms could be doing a lot more to generate greater wealth for the country. While I know this is the finance committee of the Government of Canada and we're speaking a lot about the role of government in this session, let's be very clear that when you look at investments or lack thereof of companies in productivity enhancement, equipment, and what have you, it's not that great.

As a government, you have certain levers, whether it's taxation, investment in human resources, or research and development, but then at the end of the day, productivity enhancement takes place within the firms. That's a challenge corporate Canada needs to face up to. You can't grow the economic pie just with levers government has. We have to make sure our firms also become world-class in the sense of productivity, because that's what it comes down to. We can talk until we're blue in the face, but if we don't get productivity gains, we're just not going to grow the economic pie. It's just that simple.

What do you say about that?

Mr. Dale Orr: Well, I guess I have to open with the statement you've heard many times: productivity is the only route to sustained economic growth. It's absolutely appropriate for this committee to be looking at what can be done for economic growth, because that's what gives you the bigger fiscal dividend, and then you can try to keep everybody happy and it makes your life easier. So yes, productivity is key.

I have just a couple of points to make. One, you were saying firms have not been doing all that well in Canada, and they have to start doing better before we're really going to be where we want to be on productivity. I certainly agree with that, although there's some evidence that to some extent it's a question of us lagging behind the Americans. Over the last year there was tremendous investment in machinery and equipment, and it could be that in terms of competitiveness, the information economy, and whatever, we'll be in much better shape two or three years from now relative to the Americans than we are today. It's possible.

• 1025

Another point to make is that a lot of the right things have happened within firms in the last couple of years. I was mentioning the private investment and how we've improved the investment climate. The Minister of Finance and the governor of the bank have said—and I agree with them—there's really never been a time that the economic outlook for Canada has been stronger than it is today. That's true.

But when it comes to keeping up with the Americans, they're just in an incredible situation. Even though we've done a lot of things right, we're doing better, and our forecast is pretty good, believe it or not, it's probably going to be the case that over the next couple of years we are not going to keep up with the Americans in productivity. Even though we had a good year in 1999, we lost ground to the Americans. That's going to be true again this year, and it could very well be true over the next couple of years.

This is difficult for Canadians to understand. We've done so many things right, people have made so many sacrifices, we're doing better than we were before, and we're still losing ground to the Americans. Well, they're just grinding out GDP at record bounds in investment and whatever. It's very difficult to keep up to them. So we don't want to be complacent in terms of our gaps with the Americans.

Another point to make is that while yes, a lot of this has to be done within companies and it depends on their management and whatever, what we have to do a better job of policy-wise is working on adaptation and adoption of best practice techniques in factories and in offices. We have to do an awful lot better there. To some extent there are government policies where we can improve, and to a great extent it's better management within the Canadian firms.

As you know, we have the most generous tax treatment for R and D going, but we can double or triple the amount of R and D we do in Canada, and it's still only going to be a very small fraction of all of the new inventions and best practice techniques generated in the world and available to the Canadian business community.

The real key to productivity is that Canadian managers bring all of those new ideas and inventions and innovations that are being generated anywhere in the world and get them onto their shop floor and into their offices as quickly as possible, because most of the new ideas and inventions are happening outside Canada. It's that adoption and adaptation process we really need to focus on. That's really important in improving our productivity.

The Chair: But some of the issues you're talking about come down to a greater entrepreneurial spirit and that. These aren't things you legislate. We can't go tomorrow and come up with a bill on how Canada should be more entrepreneurial. That's within the—

Mr. Paul Forseth (New Westminster—Coquitlam—Burnaby, Canadian Alliance): Sure you can. I'll give you a long list of things that do that.

The Chair: We can take all sorts of measures, but you're either entrepreneurial or you're not. It's just that simple. You can look at the tax issue, but if the managers aren't adopting best practices, for example, there isn't much a government can do about that. We can liberate markets; we can free them up. We can reduce regulations. We can do all sorts of other things to make the market work more efficiently, but at the end of the day it's also people.

A lot of what's driving the American economy, above and beyond taxation and everything else, is attitude. They're more entrepreneurial than we are. That's just the reality of life. If we want to become more entrepreneurial and want to be more American... I feel very comfortable, by the way, being North American. I have no problem with that. But these are personality traits that I don't know if we have.

What I'm saying is we will do what we can as a government, and I think we're headed in the right direction, but in the final analysis, people have to develop a bootstrapper's attitude.

Mr. Dale Orr: I would agree with you, Mr. Chairman, that there is a contribution government can make to entrepreneurial activity, and that is by freeing up markets and reducing taxes, as you've said. We're moving in the right direction, but one reason we're not as entrepreneurial as the Americans is undoubtedly that we've run an economy with much more regulation and higher taxes than they have for many many years.

• 1030

While we're moving in the right direction, it's still a more regulated and higher-taxed economy, and it's still going to be for the foreseeable future. That's a factor. You're very right in saying it's a complicated process of individual people and managers, but that tax-heavy regulatory environment we've been living in for so long is a part of it.

The Chair: It's part of it; I'll grant you that. But I don't think it's the whole thing. You can blame regulation up to a point, but there's a lot more firms can do to make their firms more efficient and more productive.

You can buy the argument up to a point. As you probably know, I'm one who pushes for tax cuts, freer markets, and all that, but I also notice that firms have to really pick themselves up quite a bit.

Mr. Forseth.

Mr. Paul Forseth: Thank you very much.

Further on that theme, I certainly agree with what has been said, but on the issue of productivity, maybe you can give us some evidence about one of the levers of government you talked about: the capital cost allowance rates for purchase of new technology and our international comparisons.

When we're sliding behind the U.S., certainly on that particular item, then our numbers or our rates should be better than the United States'. I suspect we're worse than they are on that particular one. Can you give us some comment on that before I go over to Mr. Dunford?

I was directing my comments to Mr. Orr, about the discussion we had on productivity. The discussion came out about us continuing to fall behind the United States. I just raised one particular issue, and that's the Canadian capital cost allowance rates in comparison to the United States.

Mr. Dale Orr: Exactly what is your question?

Mr. Paul Forseth: How do we stack up?

Mr. Dale Orr: On the capital cost allowance?

Mr. Paul Forseth: Yes. In the decision of a large firm about purchasing new technology or whatever, one of the levers of government to allow us to be more entrepreneurial is to change those rates. How do we stack up against the United States, who seem to have their pedal to the metal in taking up new technologies?

Mr. Dale Orr: Well, we're worse than them, but this is covered very adequately in Jack Mintz's work. I believe that's the case, and obviously it's important, but I can't say anything more than that.

Mr. Paul Forseth: Okay.

Mr. Dunford, you said one of the problems with banks being involved in student loans is simply communicating carefully with the clientele, explaining their obligations, and staying in an ongoing relationship, because often students are a more transient group. I'm just wondering if a federal bureaucracy is going to be any better than a private market institution in staying connected and communicating with a student group that is perhaps somewhat transient.

Mr. Ryan Dunford: A move the government has done well is they're not going to create an infrastructure to administer and collect loans. It's going to be contracted out to a service bureau. If a service bureau is sensitive to communication and sensitive to how students are fairly transient and moving around, it shouldn't be a problem. I think there's a big chance for improvement.

Mr. Paul Forseth: Okay. What about the comment I've heard that there's been some difficulty in the nature of what student loans have been used for, so perhaps there should be some regulation that student money applied under a program must be directly applied to fees first, before it's applied to buying a computer, buying a car, or paying for more expensive accommodation than what might have been normally expected?

When we look at some of these bankruptcy situations where we have students in the realm of $25,000 or $30,000 of debt and question where the money went, we find out that yes indeed, it went to a computer or a car or to living expenses and didn't go to the university at all.

• 1035

Can you respond to the suggestion that perhaps there be some kind of change in the regulatory environment so that it's required that the money go directly to fees first? Have you ever heard of that suggestion?

Mr. Ryan Dunford: Well, yes. As I understand it, the university does get its cut immediately for tuition and fees, and then the students have their living expenses allotted on a monthly basis, as well as those costs. I'm not aware of a situation where a student has bought a car and not used their student loan for their education, and if they have, they'd be asked to repay immediately, as I understand it.

Mr. Paul Forseth: You recall at one time, the way the program was, whether the student needed the money or not, it was worth their while to borrow the maximum and simply invest it elsewhere, and then pay it back. It was a great scheme.

Mr. Ryan Dunford: That's no longer the case. With the credit checks that are in place now, that's certainly prohibitive as far as students who would abuse the system are concerned. There's also bankruptcy legislation that says a student cannot declare bankruptcy to get out of their loan for ten years. So some pretty aggressive measures are in place already that will take care of a lot of those problems. I don't necessarily agree them, but they are in place.

Mr. Paul Forseth: What about the comment that to make sure we have real capture and people don't disappear, student loan repayment could be administered through the income tax return form, really relating directly to ability to pay?

Mr. Ryan Dunford: CASA is certainly in favour of an income-contingent repayment regime, as long as it doesn't snowball and get out of hand. If a student's ability to pay is very low for ten years and the debt is accumulating at an enormous rate, then they'll never be able to repay it. So a balance has to be struck between the ability of the student to repay and where the government can step in and help eliminate some of the debt for students who can't repay.

At CASA we've certainly talked about the idea of doing it through the tax system, and we think it might be a good idea.

Mr. Paul Forseth: Okay.

Previously I think it was Mr. Pillitteri who brought up the discussion of the dollar value. Perhaps Mr. Orr can comment on this. Essentially the dollar's value is the final international judgment of the Canadian economy and the performance of the economy. Looking at both fiscal and monetary elements in the overall trade situation and the nature of the economy, it's the final single look at how we are doing as a benchmark.

When we talk about the problem of the debt or the debt bomb, it's like a missile that is sent, and we must look at the elements of the launching pad. The launching pad for the debt bomb was created during the Trudeau years of not anticipating, despite all the warnings, the impending interest rate spikes that were going to come. Certainly the debt went completely out of control during the Conservative years, but that was a set-up from the amount of debt that was created earlier. They couldn't manage.

From my perspective of course, I don't have much confidence in the track record of either Conservative or Liberal management of the economy.

The Chair: You do in the Alliance, of course, right?

Mr. Paul Forseth: Yes.

Mr. Paul Szabo: The Reform didn't exist, so you were one of them yourself.

Voices: Oh, oh!

Mr. Paul Forseth: Yes.

Mr. Richard Marceau: I wasn't voting at the time.

Voices: Oh, oh!

Mr. Paul Forseth: We must remember that one fatal budget. I think Mr. Turner was the finance minister at the time that economists see as a fundamental change of when the airplane went into a dive. The critical messages were ignored at that time.

Perhaps you could comment about our alternative solution to some of the things you've brought today. We looked at the numbers, and we were able to say we can collapse the three personal income tax rates into the single lower one of 17%, raise the basic exemption to $10,000, and still keep all the other deductions in place. What is the overall economic feasibility of that, and still not being subject to the criticism that there would be a revenue problem?

• 1040

Mr. Dale Orr: You had three different points there; let me respond in that order.

You said the Canadian dollar is the final judgment on the Canadian economy. For the most part I would agree with you. The one caveat to that is it is the Bank of Canada's choice how they want to run the interest rate gap relative to the Americans, and that's one of three or four major factors determining the dollar. That's a little bit of fine-tuning, but other than that, that's right. Obviously we've had a severe judgment cast on us; the dollar was 89¢ in 1990 and got down to 63¢ in 1998 and is now at 67¢.

Mr. Paul Forseth: Just to interject, we've always had our suspicions about the reality of the true independence of the Bank of Canada. When I look at the finance minister's face when he's asked certain questions, he smiles on certain under-the-table communications that go on there. But anyway, carry on.

Mr. Dale Orr: Okay, so that's the first.

On the debt situation, yes, our debt was about $200 billion in 1984, and it got up to pretty much $600 billion in the mid-1990s. Two phenomena were really important. Interest rates got very high, higher than expected, in the mid-1980s, and they ramped it up. Then in the early 1990s, 1991, with the recession, government revenues were lower than otherwise, and some of those expenditures that are recession-sensitive caused the deficit again to go up.

Yes, in hindsight, had somebody, in the period after 1984, taken the hard position on government spending that Paul Martin finally did in 1995, we'd be an awful lot better off today. There's no doubt about that.

On the flat tax situation, the flat tax has four very important things to commend it. It certainly does get those high marginal rates down, and getting those rates down is where we really spur incentive and productivity and entrepreneurship and get the benefits of economic growth. It's when we reduce those higher marginal rates. Reducing the brain drain a little bit is a part of that, and obviously a flat tax does that in spades. Also, by definition, that package eliminates bracket creep. That's already been done, but it does that too.

That particular proposal also in fact is more generous to low-income people than the package that was recently introduced, because it bumps up to $10,000 the amount of income you can earn before you pay tax. So it also shares the benefits of economic growth with low-income people importantly in that way.

Is it affordable? Yes. We did look at most but not all of that package. The component we looked at, which covered most of it, was about a $90 billion package, and I've said yes, even if you spend at a pace of 3% per year, and even if you put about $4 billion aside for debt reduction, you can afford that type of package. And if you reduce spending a little bit and get a little bit more out of the existing base, those falling and low priorities, to finance the new ones, as opposed to just adding on the top every year, then you can go above $80 billion or $90 billion a year in tax cuts.

Mr. Paul Forseth: I know my colleagues on the other side were particularly concerned about the influence of the personal income tax return on the family. I know issues of the family have been a concern of Mr. Szabo, and he's published on that topic.

I would like you to comment on the one factor of our proposal that it eliminates the current discrimination against single-income families vis-à-vis dual-income families. Currently a single-earner family of four earning $45,000 a year, according to the notes I have here, pays 136.5% more in federal tax than a dual-earner family of four with the same income level. Going to what we call a single-rate tax—not a flat tax, because a flat tax involves a lot of other concepts, but the single 17% rate we're suggesting—would address that problem particularly, the issue of fairness. A lot of our critics in the NDP are always talking about tax fairness.

• 1045

Is that true? Is that possible? Is that deliverable?

Mr. Dale Orr: Yes. Yes. Yes.

Mr. Paul Forseth: Then why don't we do it?

Mr. Dale Orr: There are ways of making our tax system more family-friendly. That's one way. Other proposals have been made, but this is a proposal you have for one way of doing it effectively.

Mr. Paul Forseth: I'll go to the comment that a lot of the defence of where we're at in the economy and our rates, and the whole economic philosophy of the current government, is premised on the comparison with the G-7, or the larger international community. I will turn around and say that's an unfair one, because of the nature of our economy.

We are so intertwined with the United States in where our trade connections are, especially since NAFTA and all the rest of it, that that larger defence really doesn't matter. The thing that really matters is how we are doing in comparison to the United States. That is our benchmark, because that's where our economy is tied. Can you comment on that particular line of thinking?

Mr. Dale Orr: I'd be glad to, because I've made the point that by far and away the most important international comparison is with the Americans. I wouldn't agree with you when you say our comparisons with Britain, Germany, France, etc. don't matter. But 85% of our exports go to the U.S., something like 80% of our imports come from the U.S., and in terms of financial markets we're linked, so by far and away the most important comparisons are with the Americans.

When we're not competitive with them in taxes and if the Government of Canada is not delivering services comparable to what the Americans get, we know it, and Canadians are upset about it. So by far and away, that's the most important. That's the language I would use. The 80% numbers, exports and imports, are indicative of the other countries.

The other countries matter. In terms of looking out there for good ideas of what we should do, a lot of them we'll find in the U.S., because we have a lot of common tastes and aspirations, but it's also really important to look at other countries. Finland is a good example. That country produced Nokia. They're a small country. In terms of information technology, wireless technology, the Scandinavian countries are doing some really interesting and valuable things that we can learn a lot from.

So there's a little bit of difference in where we look outward for good ideas about what we should do. Here I would say we should cast that net, purposefully, much wider than the U.S. and particularly look at other small countries, these days particularly the Scandinavian countries.

But in terms of where we have to make sure we're competitive on the tax front and all of those competitive issues, by far and away the Americans are the most important.

The Chair: Thank you, Mr. Forseth.

Mr. Orr, on the issue of the standard of living, which is an issue we often talk about, what about purchasing power parity? We always think of the dollar as though it's at 68¢, but on the purchasing power parity, we're at around 79¢ or 80¢, right?

Mr. Dale Orr: It's higher than that. It's more like 86¢.

The Chair: Which from a standard of living point of view is a lot better than 68¢.

Mr. Dale Orr: Yes. That's a very important point. When we're comparing our standards of living and we look at our GDP and the Americans' GDP, it's clearly most important to use what's called purchasing power parity. Our dollar is worth about 86¢ in that sense, in purchasing power parity, and that's what we should be using when we're looking at our standard of living, not the exchange rate.

• 1050

The reason for that is the exchange rate is reflective only of items that are freely traded between Canada and the U.S. That does not cover the whole panoply of what Canadians get from their governments or personal services or whatever. So, for example, if you go to get a haircut or you go to your dentist in Canada, that price is very low by American standards.

The Chair: That's an important factor in the debate.

Mr. Dale Orr: Yes. That gives us a standard of living, a GDP per capita measured by PPP, at about 75% or 77% of the Americans. We're 20% to 25% below the Americans measured by PPP.

The Chair: Yes.

Ms. Redman.

Mrs. Karen Redman: Thank you, Mr. Chairperson. I just have two questions for Mr. Orr.

When you were answering Mr. Forseth's question, you said there were four things to recommend a single tax. You neglected to mention what happens to the middle class in that scenario.

Mr. Dale Orr: They would pay lower taxes.

A voice: Everybody would pay lower taxes.

Mrs. Karen Redman: Everybody would pay lower taxes, but it would cause a $90 billion investment or forgoing of that tax revenue.

Mr. Dale Orr: The cost to the government of that proposal—the part we looked at, which covered all the personal income tax part of it—was a $90 billion package accumulated over five years, to be compared with the government's $58 billion. It was $90 billion. So it's not surprising that virtually everybody would end up paying less tax under that proposal.

Certainly the middle people, if I go to 1999, or even taking the new package, are still on the margin. They're still paying 25% or 26%. And some of them, the $60,000 people, are paying 29%. Under that proposal they'd be paying 17%. They wouldn't be paying anything on the first $10,000, and then on the rest they'd be paying 17%.

Mrs. Karen Redman: In going from the current package of $58 billion to $90 billion, would there not be increased benefits accruing? That's more money invested in tax reduction, period?

Mr. Dale Orr: Yes, in tax reduction, right.

Mrs. Karen Redman: So there are really two elements to this. It's not just a single tax; it's an increased forgoing of tax as well.

Mr. Dale Orr: Yes. If you spend $90 billion on tax reduction instead of $58 billion, that leaves you with $32 billion that could have otherwise gone to program spending or could have otherwise gone to debt reduction. Roughly speaking, that's right. The little caveat on that is, if you put the money into tax reduction, the government does get some of it back.

I don't know whether this has been discussed, but it's very important to understand that the $58 billion the government identifies for their package is the savings to taxpayers. It doesn't cost the government $58 billion. In fact we figured out what that cost would be. I think it's something like $45 billion. That's because when you put out that tax reduction to somebody, they spend the money, and whoever gets it, their income goes up and they spend more personal income. GST is generated, EI premiums are generated, and heaven forbid, if they spend some of that money on gasoline, the federal government is in there again with more GST; if they spend it on cigarettes, the federal government is in there taking some of that money too; and if they spend it on a bottle of wine, some of that goes to the federal government too.

The Chair: So you expect people to drive a lot more as a result of the tax cuts?

Voices: Oh, oh!

Mr. Dale Orr: Well, some, some. But there's no question; if you put $90 billion into tax reduction instead of $58 billion, that's money that could have otherwise gone somewhere, for the most part. But there are those economic benefits from tax reduction.

Mrs. Karen Redman: You also referenced the Mintz report. I really like the recommendations of that report, but one of the criticisms was the premise that it be revenue-neutral. I'm wondering if you'd comment on that.

Mr. Dale Orr: Yes. That was a mandate given to the committee, and I understand the purpose of it was so that they would be focusing entirely on reform rather than cyclical economic issues. But the easiest time to reform taxes is when economic conditions are good and you can pass on benefits to one group without hurting another. So I recommend and I anticipate that the recommendations of the Mintz report will be implemented, not in a neutral way, but in passing on some of the tax savings package on the business tax side.

• 1055

The Chair: We have to vacate this room, unfortunately.

I want to express to you, Mr. Orr, Mr. Dunford, and Mr. Staple, our sincerest gratitude for your input. It always helps members of the committee clarify some very important points related to the working of the committee. On behalf of the members, thanks again.

The meeting is adjourned.