FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, June 8, 2000

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[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this afternoon. As everyone knows, the order of the day is the report on plans and priorities for the Department of Finance.

We have the pleasure to have with us the Minister of Finance. Minister, you have the time you need to make your remarks, and thereafter we'll engage in a question-and-answer session. Welcome.

Hon. Paul Martin (Minister of Finance, Lib.): Thank you very much, Chairman. I want to thank the committee for inviting me to appear, as you just said, as part of your review of the Department of Finance's report on plans and priorities.

Today I would like to look ahead and to talk about how we can create the kind of Canada all of us want for our children, the kind of vibrant economy and compassionate society we must seek to build in the 21st century.

The reason we need to focus on the future is clear. We are in the midst of the most fundamental economic transformation of our time. New technologies are bringing about profound changes in how goods and services are produced, distributed, marketed, and consumed. Many of today's leading industries did not even exist a few years ago, and in traditional sectors of the economy, successful firms are changing before our very eyes as they apply new technologies and new ideas and take on new markets.

As a result, the potential for economic growth, new jobs, and higher incomes is simply awesome. Against this backdrop, there are three objectives that we might want to discuss today: first, to secure our position as a leader in the new economy; second, to provide every Canadian with an equal opportunity to succeed; and third, to ensure the best quality of life for all Canadians.

These objectives must be front and centre in any economic debate on the future of the country, and yet all too often the debate is cast narrowly in terms only of what to do with the budget surplus, important as that is. For example, some people argue in favour of paying down the debt faster; others emphasize spending more on economic and social initiatives; and for others, reducing taxes is the priority.

Mr. Chairman, the fact of the matter is that we must act strategically in all of these areas, making each one a complementary part of our formula for success. In other words, that formula has to add up to the kind of Canada we seek to build in the 21st century.

[Translation]

Mr. Chairman, the national debt is a major factor in this equation. Canadians can take pride in having eliminated the deficit. But the fact remains that we are still in debt to the tune of $577 billion.

The good news is that, in each of the two previous fiscal years, we paid down $3 billion in net public debt. For the 1999-2000 fiscal year, we will do a lot better than that.

In addition, Canada's debt-to-GDP ratio, which measures the amount of debt relative to the size of our economy, is also improving rapidly. In 1995, the debt ratio was 71%. It is now down more than 10% percentage points and should fall below 50% by 2004. But this downward trend must continue and indeed accelerate. We are still a long way from getting it back below 25%, where it was as recently as 1978.

[English]

Mr. Chairman, smart spending is a necessary part of building a stronger economy and a more secure society.

As Canadians, we are heirs to an enviable reputation. Canada is known as a country that cares for its sick; a country where everyone has access to education and skills; a country that treats its elderly, its disabled and its disadvantaged with compassion and dignity. Building on this reputation and ensuring a better quality of life for all Canadians means being prepared to spend on health and access to skills and knowledge. For this reason, since balancing the budget, fully two-thirds of all of our new spending has been in these crucial areas.

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Education is the key to success in the new economy. This reality is reflected in the choices we have made. Our government has invested billions of dollars to help Canadians acquire knowledge and skills through programs such as the Canada study grants and registered education savings plans. At the same time, we have made vital investments in the nation's research capacity, investments that will pay off for decades to come.

In health care, in the last two budgets we have invested an addition $14 billion over five years in the Canada health and social transfer, an increase of 25%. Total CHST transfers, including tax points, have now reached $31 billion. Fundamentally, we have to restore the confidence of Canadians in our health care system. We will do so only by demonstrating that it will provide the tangible results they deserve and expect. Let's be clear: this means that new funding will be required and that new funding will be provided.

Let us also understand that federal and provincial governments must work together to make sure the new funding addresses squarely the concerns we all have, whether that be long waiting lists, crowded emergency rooms, or the structural changes that will ensure that our universal system of health care remains affordable, effective, and sustainable.

In summary, then, Canada's health care system is essential to the fabric of the nation, and the federal government stands ready to work with the provinces to strengthen it.

Mr. Chairman, cutting taxes is part and parcel of the government's balanced approach to putting the nation on a solid economic and social footing in the new economy. In the 2000 budget we set out a five-year, $58 billion tax plan that will deliver the largest tax cuts in Canadian history. Our plan is designed to promote economic growth and to help Canada gain a competitive edge in the new economy.

On July 1 Canadians will see its benefits on their pay cheques and in the benefits they receive. Twenty-three days from now, the 26% middle tax rate falls to 24%. The Canada child tax benefit will increase by about $250 per child annually. The deficit reduction surtax will be eliminated on incomes up to about $85,000. Furthermore, the tax reduction plan also put an end to bracket creep by restoring full indexation as of the beginning of this year. Starting in July, therefore, all Canadian taxpayers will see the benefit of this permanent protection against inflation. Of particular significance to lower-income Canadians is the fact that inflation will no longer erode the amounts they receive under the GST credit, the child tax benefit, and the age credit for seniors.

[Translation]

Mr. Chairman, that addressed personal income taxes. But the five-year tax plan also included measures to make the business tax system more internationally competitive.

Canada's service industries, where much of the high-tech job creation is occurring, are subject to tax cuts that are much higher than in other sectors. At the same time, they are competing against countries around the world that pay less tax in their home countries.

In this spirit, the tax plan will reduce the 28% federal corporate income tax rate to 21%—making Canada more internationally competitive.

Finally, the 2000 budget reduced, to two thirds from three quarters, the amount of capital gains included in income for tax purposes.

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The tax system must also recognize the role of small business. After all, small business is a major engine of both innovation and job growth. To help them, the corporate tax rate applicable to business income between $200,000 and $300,000 will fall to 21% as of January 2001.

[English]

Mr. Chairman, at the beginning of these remarks I said that we must look ahead. Therefore, let me be very clear. As substantial as these reductions are, they are a long way from being our last word on taxes. As I said in the budget speech, the tax cuts outlined in this plan represent the least, not the most, we will do. What the 2000 budget did was to introduce for the first time the discipline of a five-year tax plan. This tax reduction plan will be updated each and every year so that we can go faster and do more as resources permit. That is how we eliminated the deficit, and that is how we will reduce taxes.

As announced in February, the plan legislates tax cuts for this year and next year, and it sets out other tax cuts that will happen within five years at the latest. I can tell you now, Mr. Chairman, that we will accelerate these measures in the 2001 budget, and furthermore, we will look at new options for cutting taxes. For example, on the personal income tax side, taxes are still too high, particularly for middle-income earners. For low-income Canadians, marginal rates could be high because of the clawback on social benefits. On the corporate tax side, we must accelerate our rate reductions as well.

In short, in the 2000 budget we put tax cuts to work for Canadians. But let us understand, our work has only just begun.

A hallmark of the new economy is the need for a change of mindset not only on the part of government but also on the part of business and society as a whole. If we want Canada to offer all of its citizens a better quality of life in this rapidly changing global economy, then we have to think boldly, creatively, and strategically.

A couple of years from now, five years from now, ten years from now, we want Canadians to have real incomes that are substantially higher than today. We want Canadian firms that are world leaders in the new economy. And we want Canadian research to create new technologies and new industries. If we're going to do this, then together we must ask ourselves: What can we do to give Canada an edge in a world of rapid change and intense competition? How do we foster an international perception of Canada as a model of innovation and excellence?

The early 1990s were not so good to Canada, but economic developments in recent years certainly show what we are capable of achieving. In the first quarter of this year, our economy joined the “trillion-dollar club”. Real economic growth accelerated to 4.9%, building on the already strong growth of 4.5% last year. Moreover, our recent current account surplus was the largest ever recorded. Inflation remains in check, and Canada's unemployment rate is at 6.8%, its lowest rate since 1976. This means that no one under the age of 24 has ever known a lower unemployment rate than the one we have now.

Canada has been doing well because of low interest rates, because governments have been getting rid of deficits, and because of the strong performance of the world economy. These factors give us every reason to be confident about the future.

But this is only the beginning. It can only be the beginning, because what should give us even more confidence is that this government's investments in education and research as well as its tax cuts are only now beginning to pay off. The challenge before us is to build on this momentum and to put in place the lasting conditions for sustained economic growth. The greatest enemy of our future prosperity is complacency.

We must encourage entrepreneurship and risk-taking. These are the pillars of success in the new economy.

[Translation]

Mr. Chairman, we need to increase investment. Companies that invest heavily in leading-edge equipment and employee training are companies that enjoy rapid increases in productivity and pay higher wages.

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For their part, governments must continue to invest in education, research and innovation. Countries that have a skilled workforce will win in the 21st century new economy. Countries that build a world-class research and innovation system are countries that will be at the leading edge of the new economy.

[English]

Mr. Chairman, Canada must ensure an attractive environment for knowledge workers, for countries that do not do so not only do not retain but they do not attract the best and the brightest.

We must redouble our efforts to renew and improve our infrastructure, for countries that do so are countries that have the best platforms for success in the new economy.

In doing all of this, we must never forget our responsibility to the most vulnerable among us.

Mr. Chairman, the new economy offers tremendous possibilities for all Canadians. Canada must not only be where the action is, the world must know we are where the action is. We cannot simply wish for success. We have to create it through smart choices and bold vision. We cannot be timid about these opportunities; we have to seize them. Make no mistake, time is of the essence.

The last few years have taught us that we can overcome great obstacles. Let the next few teach us that we can rise to even greater possibilities. It is a decade during which we can realize our ambitions in full: to create a stronger economy with lower taxes, less debt, and better jobs; to sustain a cleaner and healthier environment; to build the great cities of this new century; and to extend to Canadians in communities of every size the tools they will need to succeed.

The fact of the matter is that all of this is possible if we maintain focus, if we sustain priorities. We can create an economy and a society that are second to none in the 21st century, a Canada that inspires our children to make their mark here, building a new century of achievement. That is our task, that is our opportunity.

Thank you, Mr. Chairman.

The Chair: Thank you very much, Minister.

We'll now proceed to the question-and-answer session. It will be a ten-minute round, and we'll start with Mr. Harris.

Mr. Richard M. Harris (Prince George—Bulkley Valley, Canadian Alliance): Well, thank you Mr. Minister, that was some speech. For a moment I was almost taken in, but then reality set in. You know, there's an old saying that goes like this: a government cannot give to the people that which they haven't first taken from them.

Now, when you talk about tax cuts for Canadians, you take great pleasure in that, but what you don't talk about is what your government has done to Canadians since you came to power in 1993. You don't talk about the fact that the average disposable family income has dropped by around $4,000 and the average Canadian worker is paying approximately $2,000 more.

So, Mr. Minister, when you talk about how benevolent you're going to be and how generous you're going to be to the Canadian people, the fact is that you have ripped this money out of their pockets continuously since 1993 and now you're going to give them some of their own money back. I think there's an element of reality there that tells us this is not really tax relief as someone would normally understand it—I'm going to get something—but basically they're just getting some of their own money back.

Your government seems to be so reluctant to look at some historical examples of what real tax relief does to an economy. One need only look at the provinces of Ontario and Alberta to see the results, the economic results, of real tax cuts. You know yourself, because I know you've been watching these two provinces very carefully, trying to take some direction from them, which you have a great resistance to.

I guess the question is, when are Canadians going to see some real tax relief, some substantial tax relief? The middle-income workers in Canada are grossly over-taxed, and it's because of your fiscal programs over the last six years.

So to talk about tax relief over a five-year period, looking at the numbers—it's far less than you've taken away from them over the last six years—strikes me as a sort of false benevolence on the government's part.

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You talked about new options for getting taxes down. I see the spending has gone up dramatically every year, and this in spite of the charges of mismanagement within different departments, the lack of accountability, certainly the wasteful spending that's talked about on a daily basis in this country.

As the Minister of Finance, don't you think you have a little bit of a hammer to get these departments to cut their wasteful spending and be more efficient, and then take those savings and put them into some real tax relief for Canadians?

Mr. Paul Martin: Mr. Harris, first of all, I'm delighted that you liked my opening remarks, and I wish I could say I agree with your statements, but unfortunately your facts are just wrong.

If I might take disposable incomes as an example, you're quite right, the early part of the 1990s—arising primarily out of the recession that began in 1989—were very tough for Canadians, and I said this in my remarks. But the fact of the matter is that in 1996, disposable incomes in Canada, real after-tax disposable incomes, stabilized, and since then they have begun to rise. In fact, they are expected to rise quite substantially. They rose quite substantially last year. They are expected to rise quite substantially this year, and most economists are projecting that they will continue to rise, that in fact that has been turned around. The story of the early part of the 1990s was in fact stagnation and the story of the second half of the 1990s was a major rise in disposable incomes. So Canadians, on an after-tax basis, are in fact doing better.

The second thing is that when you identify middle-income Canadians, you are absolutely right, and that's why a substantial portion of our tax reduction plan was the drop from 26% to 24% as of this July and down to 23% ultimately for middle-income Canadians. In fact, the basic difference between the flat tax that you espouse and the progressive tax system is the protection for middle-income Canadians.

Now, on the comparison you raise between Ontario and Alberta, the fact is of course those two provinces did not see eye to eye. Alberta agreed with us that before you begin a major tax reduction, you should eliminate your deficit. You shouldn't essentially do tax reduction for this generation on the backs of future generations, which is what Ontario did by borrowing substantially throughout the first term of the Harris government in order to fund its tax cuts.

On the last point about the spending, I pointed out that in fact two-thirds of all of our new spending was in health, education, research, and the environment. If I may say to you, Mr. Harris, I would not back away from that one bit. Governments ought to be spending on health. They ought to be spending on education and research. I think we have seen that they certainly ought to be spending on the environment.

Mr. Richard Harris: But that's just the same money your government has taken out of CHST spending. It was up at one point to $20 billion that you had ripped out of CHST spending, and the health care portion I think was around $12 billion or $14 billion. You're simply giving them a little bit back in dribs and drabs. You gave them $2 billion back in this budget, and there was nothing in this budget that projected any more. Now, magically, you have some more money you're going to give them. Are we surprised, considering there could be an election within the year? I don't think we're surprised at that.

The fact is this is not new spending as a result of savings you've created by running an effective and efficient and cost-conscious government. This is new spending that results from a combination of what you've ripped out of the spending programs such as health care and education in the first place, as well as the tax increases you've imposed on the Canadian people. There is no new money as a result of more prudent government financial management. That's the bottom line.

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As far as flat taxes go, or a single-rate tax, which you appear to be deathly afraid of, it's really surprising that we read in the paper this morning that Mr. Robert Mundell, who is a Nobel prize-winning economist.... I think the headline says “Mundell, the Nobel Prize winner, signals his approval for a single tax”, and he goes on to espouse the virtues of a single-rate tax. It would be nice if we had more people like this working for the government. Unfortunately we don't.

Your argument about how benevolent the government is going to be and how much they care about the health care crisis in Canada just doesn't hold water, considering it was your government that created it in the first place.

I'm ashamed to say, and I'm ashamed for the government, both the provincial Government of B.C. and the federal Government of Canada, that in a ranking of fifty health regions in Canada, the health care delivery service in my riding of Prince George—Bulkley Valley ranked fiftieth in service to health care patients—people requiring services. That is unacceptable in a country that has so much potential as Canada.

Your government has been in power for the last seven years, and we have seen a deepening crisis in health care. Now there's a little bit going back. Well, it's only what was taken out in the first place.

Mr. Paul Martin: Again, there's a slight problem with the facts, Mr. Harris. The amount of cash transfers of course has never been as high as $20 billion. That number is incorrect. And as you know, this year, in cash and tax points, the transfers to the provinces will be at $31 billion, which is an all-time high.

But if I might address your comment about the elections, the fact is we have increased transfers to the provinces for every one of the last four years. In the last two years those transfers have increased by 25%. And we have made it very clear, as have all the health experts across the country, that what is required is long-term solutions, and the federal government has said unequivocally that we will be at the table with our share of the long-term funding that those long-term solutions require.

What we really need in terms of health care is in fact an end to the rhetoric. Canadians don't want to see their governments fighting. What they want are solutions, and we are there. We are there, and we will do our share. We believe very strongly in the Canadian system of universal health care. We believe it can be saved, provided we put the rhetoric aside and in fact get to work at it.

On your second point about the spending, let me simply point out to you that our spending as a percentage of GDP is at less than 12.5%. When we took office it was over 16.5%. That is obviously a substantial reduction, and it does show the cost control.

On the issue of the flat tax, I would hope we will have the debate on it. Let me say what the flat tax does to the middle class is simply unfair. It asks them to bear the burden of taxation in this country in a way they have never done before. The best proof of that—the best proof that it is a tax system that benefits the rich at the expense of the middle class—is the fact that even the Harris government won't accept it. If you can't convince Mike Harris and Ernie Eves of the benefits of the flat tax, I don't think you're going to convince anybody.

Mr. Richard Harris: Well, that's a shame.

The Chair: Mr. Harris, your time is up. I think you might get a second round.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Good afternoon, Mr. Minister. I have a very specific question to ask you about changes to the financial sector. In your statement, you said that you were getting ready to table a new piece of legislation that will govern the Canadian financial sector.

This legislation will deal with the whole issue of ownership of small and medium-sized banks. Mr. Landry has sent you the terms and conditions that he needs in order to support this new legislation on banks, to protect the National Bank of Canada and the Laurentian Bank of Canada from the perverse effect of having one person hold up to 65% of all shares in the National Bank and up to 100% in the case of the Laurentian Bank, which is much smaller.

I will list the criteria that Mr. Landry wanted to see in your legislation. He spoke about criteria to maintain available services if ever one individual held more than 20% of the shares in the National Bank, for instance. These criteria would also include the effect that changes would have on employment at headquarters, as well as on professional categories or positions requiring special expertise.

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There is also the impact of these changes on the economy and technological development of Quebec, as well as on the ability to maintain decision centres in Montreal. Mr. Landry adds:

We believe that the legislation should contain mechanisms to ensure compliance with measures taken to prevent the negative effects of allowing one person to hold more than 20% of votable shares of a bank in the aforementioned sectors.

First of all, do you intend to agree to Mr. Landry's conditions? Secondly, do you intend to stipulate such criteria in the legislation itself? Thirdly, how are you going to formulate this type of proposal or request?

Mr. Paul Martin: As you no doubt already know, Mr. Loubier, all of the banks have asked us for greater flexibility so that they can forge alliances. Because of globalization, these alliances are very important for the growth of these industries. Moreover, this applies to any industry that wants to operate on a broader scale.

In the case of the big banks, namely banks with profits that exceed $5 billion, we decided to increase the ability to forge the alliances by allowing shareholders to own 20% as opposed to only 10% of all shares. The banks that do not meet the 5-billion-dollar mark, namely, the two banks in Quebec, the Laurentian Bank of Canada and the National Bank of Canada, have told us that, since they were smaller, they needed more flexibility. We felt that their request was well-founded. This is why we decided to make it possible for them to forge alliances that exceeded the 20% limit, that had a limit of up to 65%.

Mr. Yvan Loubier: Mr. Minister, if your legislative framework complies with your White Paper, you will allow small banks to join forces with, for instance, trust companies, insurance companies, etc., as part of a consortium. You already allow that. You already allow alliances. How do you give the National Bank greater flexibility by allowing one individual to own 65% as opposed to 10% of the shares? In order to get more capital, why do you have to be able to sell to one shareholder who would hold 65% of the shares? Since when has capital in the Canadian market been so scarce that the National Bank has had to resort to selling itself to one individual in order to expand?

Mr. Paul Martin: First of all, the main objective is not to sell a bank, but to make it possible to forge alliances. We said up to 65%, but we did not say 65%. It may well happen that these alliances will be formed with 30% or 40%. We decided to allow for all kinds of options, and the Canadian government has reserved the right to have the final say. It is the government of Canada that will decide whether to give the green light, not only after, but before the banks form an alliance.

Mr. Yvan Loubier: Yes, but I am asking you...

Mr. Paul Martin: If I may...

Mr. Yvan Loubier: In that case, I would like to ask you whether or not you'll be including the criteria suggested by Mr. Landry in your legislative measure...

Mr. Paul Martin: No. We are going to...

Mr. Yvan Loubier: ... to avoid the situation where there is one shareholder with 65% of the shares, with all of the perverse effects that that would entail.

Mr. Paul Martin: I understand your question very well. I am trying to answer it, but you're not giving me the time to do so.

Mr. Yvan Loubier: Are you going to answer this question?

Mr. Paul Martin: That is what I am doing, however, it is impossible to answer the question while you are speaking.

Mr. Yvan Loubier: I am asking you whether it is a yes or a no. You do not have to define your legislative measure.

Mr. Paul Martin: No, but since you do not seem to understand it, I have to explain it.

Mr. Yvan Loubier: I understand very well.

Mr. Paul Martin: It is not possible to elaborate on every possible option in a legislative measure. We do not want to be too constraining. We want to provide more flexibility. The points Mr. Landry included in his letter will be examined carefully by the Canadian government. These are considerations that we have already thought of ourselves.

So, the answer to your question is that we will be acting in the interest of the public. In the case of the National Bank, for instance, we will be acting not only in the public interest of Canada, but also in the public interest of Quebeckers and other Canadians.

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Hence, Mr. Chairman, we will be acting in the public interest, and these are certainly considerations that we will bear in mind.

Mr. Yvan Loubier: Mr. Minister, that means that we are going to have to trust you and that we cannot rely on you to integrate Mr. Landry's criteria in your legislation.

Mr. Paul Martin: That's right. We will be acting...

Mr. Yvan Loubier: We have to trust you to defend Quebec's financial sector, to defend the interests of Quebeckers...

Mr. Paul Martin: Mr. Loubier, I'm going to tell you one thing. You can be absolutely certain that I will protect Quebec's financial sector. The Canadian government is there to do just that.

Mr. Yvan Loubier: Let's talk about trust. Earlier, Mr. Minister, you mentioned... You resemble your leader more and more. I do not know if he is rubbing off on you, but...

Mr. Paul Martin: That's a compliment. Thank you very much.

Mr. Yvan Loubier: You're describing a virtual country. You said that this country deals with individuals compassionately and respects their dignity. How can you state such a thing given that, since your government came into power in 1993, the number of impoverished children in Canada has climbed from 1 million to 1.5 million? You have not invested an additional dime in building social housing at a time when more and more poor people are spending more than 50% of their income on rent.

If this is a compassionate country, how do you explain the fact that you yourself excluded 60% of the unemployed from the employment insurance system when you reformed employment insurance? How do you explain the fact that, between now and 2002, you will have cut, as Minister of Finance, an excess of over $30 billion from the Canadian Health and Social Transfer, which is used to fund social assistance, higher education and health?

How can you say that we are living in a compassionate country, in the virtual political country that you have in your mind, when a family comprised of two adults and one dependent child start paying tax to the federal government as soon as they earn an income of $13,700, whereas in Quebec, for example, this family starts to pay tax only when their income is at $30,000?

And how can you say that we are living in a compassionate country when you allow big corporations to defer payment of their taxes indefinitely, as is the case with your friend Monty's company, which manages the Millennium Scholarships, which owes the federal tax office $2.3 billion, an amount that has remained unpaid although it is due? How can you say that we are living in a compassionate, fair country, a country where there is social justice?

I cannot believe it when I hear your prime minister and you say such things. It makes me fall off my chair. Explain that to me.

Mr. Paul Martin: You're going to fall from an even greater height when you see the facts. It must be said that we, over the past year, have created in excess of 350,000 to 400,000 new jobs. You have to look, for example, at the number of jobs created for women and youth. We are in the process of creating jobs at an almost record-breaking level.

You talked about taxes. Since our last budget, a family living on an income of $35,000, for example, will not pay any net taxes to the Canadian government. They will be paying zero taxes. The family will pay a certain amount of taxes, but no net taxes.

And you talked about children. Take a look at the National Child Benefit. According to the last budget, the National Child Benefit, which was established by this government, is now giving $1,800 for the first child, an amount which will be increased, within three years, to $2,400, an increase of $2.5 billion.

Hence, whether you are talking about jobs, children, or about lowering or eliminating taxes for families with children, the results are clear to see. Unfortunately for you, Mr. Loubier, the results are there. This is one of the reasons why the real income per family is growing. And this is one of the reasons that we have for creating jobs in Canada.

That is the situation as it exists today.

Mr. Yvan Loubier: What will your surplus be this year, a surplus that you gain by reaching into the pockets of the unemployed, into the pockets of the poor, and into the pockets of the provinces as well? A surplus that you brag about, saying that you do so much for Canadian families? What will your surplus be this year?

Mr. Paul Martin: I'm hoping that it will be very high and that we will be able to use it, as we have already done, to cut taxes, to invest in health and to lower the debt. And that's that.

Mr. Yvan Loubier: How much will it be? How much will it be? You do not answer. Incredible!

Mr. Paul Martin: Yes, it is.

[English]

The Chair: Thank you, Mr. Loubier.

[Translation]

Mr. Paul Martin: It's truly a revolution. In Canada, things are going very well.

[English]

The Chair: Minister, we have a question on the right side now.

Mr. Gallaway.

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

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Make it tough for him.

Mr. Roger Gallaway: Not me.

Minister, you're ostensibly here to talk about part III, the report on plans and priorities, so I want to ask you specifically about certain broad policy perspectives that are laid out in that. It's well known that during your time as Minister of Finance, you have very closely and fastidiously guarded the spending habits, if I can call them that, of other departments. According to the objectives of your department, you've offered sound financial management advice to these departments. Your department talks about its contribution to getting government right, and you yourself, in your opening remarks, talked about smart spending.

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I'll just ask a question about smart spending. There's one sector of government that has, without a change in its client base, without any increase in business, if I can put it that way, increased its spending by 30% over the past three years. I'd like to know what sound financial management advice you're giving to the Senate of Canada.

Voices: Oh, oh!

The Chair: That's a good question.

Mr. Paul Martin: There's no doubt about it. Are you going to do the supplementary, Lorne?

Mr. Lorne Nystrom: [Inaudible—Editor]...the Senate.

Mr. Paul Martin: Wouldn't that be heaven sent!

The fact is that we did impose very strict controls on Senate spending and we do sit with the Senate and look at their spending, although, as you know, they are an independent house within the parliamentary system. The Senate has undertaken recently quite a number of major studies. They were very active participants in the whole question of the bank legislation, along with this committee, obviously. They have now undertaken a major study on health.

Obviously we sit down and discuss with them all. I think what they are doing in a number of these major areas, Mr. Gallaway, is providing very good service in those kinds of studies they're doing.

Mr. Roger Gallaway: Okay. I'll move on from that very brief topic.

I want to ask you about a policy of the government, which I think a lot of people agree with, and that is the elimination of the $1 bill and the $2 bill. That has resulted in great savings for government. At the same time, it has imposed on certain types of businesses in this country a concurrent cost. Do you think it's unreasonable for the government, because it's reaping considerable savings, to partially compensate those on whom a concurrent and substantial cost has been imposed?

Mr. Paul Martin: Are you referring, for instance, to vending machine operators?

Mr. Roger Gallaway: Yes.

Mr. Paul Martin: As you know, there has been partial compensation for some of those costs. There is an open debate as to whether the compensation was adequate, whether it was full compensation or whether it was partial. There's a difference of opinion on that issue. There was on the loonie, especially.

I think the point you raise is a valid one. But when government changes legislation, which is required, should government compensate everybody who is affected by that? If so, how do you determine how far that compensation should go? That's the issue that really arises.

The principle you've outlined, that the government should certainly consider compensation, is one that we would accept. The debate is about how far that compensation should go and what the compensation should be. What happened in this particular case is that the government made a judgment call as to where it would essentially draw the line.

Mr. Roger Gallaway: The introduction of the loonie was pre-1993. This is an issue for which there has been no compensation to the industry. The estimate by one part of the industry is that the cost to them was in excess of $50 million.

Mr. Paul Martin: I stand to be corrected on this, but I do know that when I first became the minister, the question of compensation on the loonie was still very much a live issue. Although it had occurred under a different administration, the question of compensation was one that we dealt with.

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I think the compensation for the toonie became an even more acute issue, but there was compensation in the case of the loonie. The debate is whether in fact there has been adequate compensation, whether we've gone far enough. This is always the case, as you know. It's always that issue of where to draw the line.

Mr. Roger Gallaway: My final question is a question of where you draw the line.

With respect to the EI fund, in 1996 there were a number of new rules introduced, things called the intensity rule and the clawback rule. What has resulted is that certain.... I'll refer to skilled tradespeople in this country who don't work seasonally, but who work as a result of the strength of capital investment in this country. From time to time, they are unemployed on an annual basis.

Under this 1996 regime, because they're into the second year of these rules, we are now seeing people who have collected a payout of $2,000, about five weeks of employment insurance, and who are facing a tax liability. They have incurred a tax liability on $2,000, the rate being 70%. Nobody else in this country who has an income of $42,000.... That is $40,000 earned, on which they would pay whatever the marginal rate of tax is plus whatever their deductions are. On the $2,000 their liability is $1,400 or 70%, or it can be as high as that. Most of them are at that rate now.

What do you say to those people in light of the tremendous surplus in EI collection?

Mr. Paul Martin: First of all, any piece of legislation, including employment insurance, is obviously under constant review. It's as a result of that, as an example, that the government introduced parental leave, which has been a major benefit to families with children. That's obviously a new change, part of the ongoing review.

The issue of very large marginal rates, which are essentially clawbacks on the last dollar of income that has come in, is an issue in any program that is income-tested. That's the reason for that. This is not unique to the EI system. It arises in any sort of income-tested benefit program that government has, and it's simply part of the arithmetic. The answer to it, essentially, is to get your income tax rates down. That's by far the most important answer.

The Chair: Thank you, Mr. Gallaway.

Ms. Redman.

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

Minister, it's great to have you here. I'm looking at the notes of the speech you just gave, and one of the lines is:

A hallmark of the new economy is the need for a change of mindset—not only on the part of government, but also on the part of business and society as a whole.

I absolutely agree with that and I see that evidenced in Kitchener Centre, my riding, because we've gone from a largely manufacturing base to a high-tech base.

I know our research and development tax credits are generous by international standards. Corporations obviously invest in research and development when they can commercialize it. The uptake of the research and development is not proportional. For how generous it is, you would think that more companies would take it up.

I'm wondering if we sometimes look at too narrow a focus when we look at just research and development. We should also be looking at the corporate tax structure and whether it penalizes companies. My husband's perennial favourite is capital gains, which I would again like to thank you for moving on in the last budget.

When I reflect on the big picture, I know internationally one of the challenges we have as a nation is demonstrating that we're not as dependent on resources as we historically have been. Again, I go back to the growth of the high-tech sector and the gains and the innovations that really seem to be the new economy. I wonder if you could comment on that. It seems to me this all needs to be taken in context.

Mr. Paul Martin: On the question of the scientific research and development credit, you're absolutely right. There is a very strong take-up and there's no doubt that it has been of immense benefit. But one of the things we have really learned is that a number of smaller companies have found themselves unable to take it up, either simply because of the paperwork or because they're not at that stage. What they have said is that essentially it has been too narrowly circumscribed or focused on medium-sized or larger companies. That is something that I think the government has to look at and we are looking at, as a matter of fact.

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When you look at the phenomenal number of start-ups that are occurring almost out of a paper bag, they're so small, and the tremendous success, obviously, in your home area of Kitchener, I think that's a valid point. It is one that the department is looking at.

Your second point I also think is very important. One of the things we learned during the Asia crisis was that the perspective of Canada in the rest of the world was very much of a country totally dependent upon natural resources. No recognition was given to the fact that high tech had made phenomenal ground in the past 15 years, to the point where we are really one of the leading high technology countries in the world. It is very important to turn that perspective around because it has an effect on the perspective that people have when looking at investment here. It has an effect on whether we're going to attract talent to this country. It goes right across the wide range.

One of the things that we as a country have to do is essentially sell the fact that we really are one of the leading countries in terms of the development of the new economy. So your point is very, very well taken.

Mrs. Karen Redman: Thank you.

The Chair: Ms. Leung.

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

Thank you for your report, Minister Martin. You talk a lot about the new economy and the increase of funding for health, education, investment, and also retirement of the debt. What specific steps are you prepared to take for the next budget?

Mr. Paul Martin: Do you mean in terms of the debt?

Ms. Sophia Leung: Yes.

Mr. Paul Martin: You have to look at the debt on two bases. We have obviously retired market debt substantially. In terms of the public accounts, we will have retired debt an average of over $3 billion in each of the last two years. I can tell you that when this year's numbers come in, sometime in the late summer or early fall, we will be retiring a substantial amount of debt. This essentially says that as the surpluses built up last year, we focused those surpluses on health care, on research, and on debt retirement. That really does lead to very substantial benefits going ahead and substantial interest cost savings that we can put to more important uses.

At the same time, in terms of debt, we have extended the maturities of our debt to where our medium-sized long-term debt is approximately two-thirds of the total. What that has meant is that a 1% rise in interest rates, which would have cost us about $1.7 billion in the first year when we first took office, would now cost us about $900 million. That's a substantial savings. So not only are we retiring debt, but we're managing our debt in a much more expeditious way.

The other point I would make is that apart from the United States and, I guess, the United Kingdom this year, we are one of the very, very few industrial countries that are actually retiring debt. Most countries are increasing debt. Their deficits are still going up. We're actually retiring debt. When you look at our debt-to-GDP ratio—which is a different question as well—we probably had the most dramatic reductions in debt-to-GDP ratio of any industrial country.

Ms. Sophia Leung: In B.C. right now we have a little bit of an economic problem, with a downfall. You're from B.C. too, isn't that right?

Mr. Ken Epp (Elk Island, Canadian Alliance): No, I'm not.

Ms. Sophia Leung: The west, anyhow.

An hon. member: He wants to be from B.C.

Ms. Sophia Leung: Anyhow, I would like to know, Mr. Minister, what kind of help you think you can provide to try to readdress this and maybe give a boost to B.C.

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Mr. Paul Martin: The British Columbia economy was hit by a number of problems, and certainly the Asia crisis. British Columbia is an important province in terms of its natural resources, mining, pulp and paper, and it was obviously hit by the Asia crisis.

This goes back to Ms. Redman's question about the investment in R and D. When you look at the amount of money we have been putting into research and development in this country and then you take a look at the effect on the great universities of British Columbia, which have benefited so strongly from our investments in research and development, when you look at the great teaching hospitals in British Columbia and you look at the benefit they have received from that investment, when you look at the changes in the tax act benefiting people who want to make large gifts with the reduction in capital gains, and you see that UBC in fact received a $50 million gift—one of the largest gifts ever given in Canada—as a result of that change in the tax act, and then you turn around and see that latest numbers show that job creation in British Columbia in the high tech area is growing exponentially, you begin to see that the policies this government has put in place are in fact having a very beneficial effect in British Columbia. That's obviously because of the dynamism that exists in those sectors of the British Columbia economy.

Ms. Sophia Leung: As the chair of the G-20, how will it fit into your plan for Canada and the Canadian economy? How can we benefit in Canada?

Mr. Paul Martin: There's probably no other country whose future is tied as much as ours is to the success of international trade. No country trades as much as we do. As a result of that, instability in international markets affects us very much.

Again, I'll go back to British Columbia. Take a look at the effect on commodity prices that happened in the Asia crisis. Quite simply, when commodity prices drop, Canada suffers. When commodity prices drop, it's the United States economy that benefits. So, essentially, stability in international markets is very, very important to us.

What the G-20 is all about is ensuring that we're putting in place internationally the kind of structures that are going to give us stability. This means that a secretary in Montreal, a truck driver in Vancouver, a plant worker in Atlantic Canada will be able to have stable incomes because world incomes are going to be stable.

Ms. Sophia Leung: Thank you.

The Chair: Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Minister, if there is an increase in the Canada child tax benefit that is a non-taxable item and not included in the tax return of Canadians, is that additional money in Canadian pockets included in the numbers you quoted with regard to increasing disposable income? Is the disposable income related to tax returns, or all sources?

Mr. Paul Martin: No. It would be disposable income from all sources.

Mr. Paul Szabo: From all sources.

I was interested in the dialogue you had with Mr. Harris about taxation. It appears to me that the one item Canadians can get very excited about is taxation and the need for tax cuts. In fact, it very likely will be one of the key points in a future election campaign, based on what the various parties have said about it.

Right now, I don't believe we know exactly what the mechanism would be for introducing a 17% flat tax. We certainly hear a lot about a 17% flat federal rate for all levels of income. But I'm familiar with what Steve Forbes had proposed in two presidential campaigns for a flat tax in the U.S. Concurrently with reducing the rate down to 17%, or whatever it might be—a flat rate—it also took off the exemptions for all other sources of income, like inheritances, other windfalls, gifts, etc., which would now be taxable. So even if your rate came down, more items would be taxed.

Similarly, there would be a lot fewer deductions. In fact, there would be very few deductions, because the whole purpose of a flat tax, for Forbes, was to simplify the system. Generally, any money in was taxable, and don't expect any deductions because we're going to increase the basic exemption or tax-free income levels for all Canadians.

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Since we don't know the full plans that any party has proposed on some sort of flat tax, if we assumed that the only change we made to the Income Tax Act was to take the current 26% and 29% brackets and reduce them down to 17%, can you tell us roughly how much that would cost the Canadian treasury in terms of lost revenue?

Mr. Paul Martin: Obviously all the details are not in, but our estimate—for instance, the Alliance package—is that it would cost approximately $20 billion in revenue.

Mr. Paul Szabo: Is that annually?

Mr. Paul Martin: Annually.

Mr. Paul Szabo: Today I read in a newspaper that one of the Alliance candidates suggested there are some crown corporations we might be able to sell off. I'm not sure which ones they were, but it appears that those would be only one-time generators and the balance would come, presumably, from departmental spending. If we use the HRDC as an example of a department they would want to cut spending in, have we given any thought to...? If the programs run, for instance, under HRDC were cut substantially enough to be able to cover such a tax cut, have we given any thought as to whether there would be some unintended consequences or negative consequences in terms of higher social program costs, criminal justice costs, education costs, etc.? What are the consequences of not doing those programs?

Mr. Paul Martin: Absolutely. Let me simply give you two examples. You can approach it in one of two ways. If you take that $20 billion.... Reform's estimate is it would cost them about $15 million in reduction of revenues, but in fact a couple of things were omitted. If you took the $20 billion, which would appear to be the more reasonable number for the cost of moving to that tax package, and then marked that against that funding that cannot be cut—interest costs cannot be cut, I assume they would not be cutting old age pensions, transfers to the provinces for health, that kind of thing—without factoring in the increases in defence spending that are advocated, essentially the Canadian government would probably not be able to afford food safety; we would not be able to afford the RCMP; I think we would have to close down every penitentiary in the country. Essentially, the numbers they are talking about would make it impossible for the Canadian government to operate on almost any basis in terms of the very basic services that are required.

That's one way of answering your question. That does not take into account the fact that they have also said their tax cuts and their debt reduction would be on a 50-50 basis. So if you're going to have an additional $20 billion worth of tax cuts, you've got to have another $20 billion worth of debt reduction. That means you're down to $40 billion. That's $40 billion off about a $112 billion package, which is what our spending is, exclusive of debt. So you can imagine what you're looking at in terms of the government's ability to fulfil its basic services.

The other way of looking at your question as well, Mr. Szabo does arise out of what Stockwell Day said this morning. What Stockwell Day said is that he would not bring in his flat tax right away, as I understand it, because there were certain areas—I think it was students he referred to and other areas—that he would want to take care of. Understand what that's really saying. What he's saying is that under our progressive tax system, you can take care of people like students, people with disabilities, all of those people who are going to require special tax treatment, none of whom would be taken care of when the flat tax system was at its maturity.

I have to tell you, I think that's a fatal flaw. I think it's one of the reasons why—you've talked about Steve Forbes—the Republican Party, who worked very hard at the flat tax, could not make it work. It was because they were just not prepared to marginalize vast segments of society, which is the inevitable result of a flat tax.

Mr. Paul Szabo: I have a final question. As a principle of taxation, the real difference between the current system of overtaxation and what's being proposed by some people under a flat tax is the whole concept of progressivity.

Mr. Paul Martin: Absolutely.

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Mr. Paul Szabo: I wonder if you could affirm, or reaffirm, the government's commitment to retaining progressivity. As well, although I understand we're trying to bring the disparity of the rates in line, or flatten it a little bit, why is it important for Canadians...or what is the basis for retaining the principle of progressivity in a tax system?

Mr. Paul Martin: Quite simply—and I would reaffirm it unequivocally—you ought to simply on the basis that you should pay more in taxes if you are earning more. You're quite right, we would like to flatten it. That's why we want to bring the middle-income rate down. Essentially we believe that when tax reductions are put in place, while they should go right up the income stream, the benefit should occur primarily to those who need it most, and those are middle- and lower-income Canadians.

There is a reason that even the Harris government agrees with us—namely, that at any given level of tax reduction, the progressive tax system will provide greater tax cuts to the middle income, those earning between, let's say, $25,000 and $55,000, than will the flat tax.

Mr. Paul Szabo: Thank you, Mr. Chair.

The Chair: Thank you, Mr. Szabo.

Mr. Nystrom.

Mr. Lorne Nystrom: Thank you, Mr. Chair.

I couldn't help but wonder, when you were talking about the flat tax ending up closing down all the federal institutions, does that include the Senate as well? It might be one way of dealing with that problem.

At any rate, I get rather confused, Mr. Minister. I remember Mr. Day saying a while ago that he didn't want the federal government to collect any taxes; he wanted the provinces all to write cheques to the federal government once a year as a way of collecting revenue. That seems to be rather bizarre as well. I'm sure you agree with that.

I want to—

Mr. Ken Epp: I would like to raise a point of order. It seems to me we're here to talk about the finance minister and his plan. I find it rather distracting that these people are engaging in a debate that basically totally misrepresents our position, and I think we should get back on track.

The Chair: Mr. Nystrom.

Mr. Lorne Nystrom: As I was saying, Mr. Minister, I wanted to ask you about three or four questions.

The first one is on the CHST, the Canada health and social transfer. You say in your Department of Finance statement that the CHST must be of course reviewed within a five-year period of time—that will come in the next mandate, not in this one—as it expires, I believe, in 2003-04. I wonder if you could give us a couple of minutes of your thinking as to what kind of renewal you'd want to see. Right now it's a bit of a black box; the federal government puts in money and the provinces produce different programs. We often have bickering between the federal government and the provinces or between the provinces as to what programs to produce. The provinces have certain constitutional jurisdictions, of course, as to what they can and can't do.

I'm just wondering what your thoughts are, as the Minister of Finance, as to what change you might want to make after seeing how the CHST has worked. Are you more inclined to keep it roughly as it is? Do you want a bit more targeted funding? Do you want some new mechanisms in place? I'd be interested in your thoughts.

Mr. Paul Martin: I think it's an important question, Mr. Nystrom, but I think it would be premature to respond. I think we have to see as well how the provinces view it. As you know, last year it was as much at the provinces' request as our own that the full amount of the very large increase in the CHST transfer went to health. That certainly is a model that one could follow, whether it be in terms of health, whether it be in terms of education, or whether it be in terms of welfare, which would be, in a certain way, a return to where we had been before.

The other alternative is to stay with the current formula, which is to say that this one package goes to health, but from now on it will go for all three, and the provinces will make the choice. I think that really is going to be very much part of the ongoing discussion with the provinces, and I think the provincial view on that is going to be very important. It was interesting that in fact last year it was the provinces who said “Look, why don't you focus it all on health.”

So I think that's something I would rather leave up to those discussions when in fact they open up.

Mr. Lorne Nystrom: Do you have any disposition you could share with us at this time as to which way you'd prefer to go?

Mr. Paul Martin: I think that would be premature. One thing is very clear; we do want to make sure the moneys we transfer for health, the moneys we transfer for education, or for any other thing, go to that. In other words, I think what Canadians really want is that when we transfer moneys to the provinces for health, they don't go to tax cuts or to something else.

• 1640

No, I think it's very important that the moneys transferred for a social program or a health program or education in fact go in the direction the moneys are meant to go.

Mr. Lorne Nystrom: I think this is a very important issue. It's sort of fiscal federalism, and it's a very important thing we have to sort out or modify in the next two or three years.

Another question that's also federal-provincial is the Canada Pension Plan and the investment board. I've asked you in the House about ethical screening on investments, and you seemed to be positively responding to that in terms of where I think you want to go. I wonder if you could elaborate a bit more on your position.

More and more people out there are concerned about tobacco companies targeting young people for smoking and about certain companies that are involved in terms of trade in parts of the world where we have great abuses of human rights. A lot of Canadians are now saying that maybe we should have some ethical investments. Some American public pension plans, of course, have ethical screens. Can you elaborate a bit more on what your thinking is there?

Of course, I am fully aware this is also a federal-provincial question. It also depends on the provinces, getting seven on board, I think, before you make any major changes.

Mr. Paul Martin: I think the question of ethical investing is really an important debate. There's certainly a strong prime facie case to be made for it. There are those who certainly share the views that no pension plan, including an organization like the Canada Pension Plan, should in fact sustain companies that are doing things that essentially they don't agree with. Nonetheless, they feel this is a question of rules and regulations, not something that should be imposed on market players through the back door.

It's my understanding, for instance, that a number of the major union pension funds, who would otherwise share the view that ethical investments shouldn't be done, are not prepared to impose that on their own pension funds, and for exactly that reason. They say look, these are two separate silos, and they should be operated that way. So I think we should have that debate.

There are two considerations in there. The first is the one you have just raised, which is that this is not something the federal government, even if we're inclined to do so, would do alone. It would require a majority of our provincial partners on that.

There's one last thing that I think is also part of the debate, Mr. Nystrom. I know you would agree with me that the independence of the Canada Pension Plan board is quite important. In other words, we don't want to see government interference. We want to make sure they are in fact investing for the betterment of their fiduciary relationship with the beneficiaries of the plan, but one of the things we would have to watch in here is that government isn't in fact taking steps that might in some way impugn that independence.

But I did give you the undertaking in the House, and I will. We have raised it with the provinces, and it is part of the ongoing discussion.

Mr. Lorne Nystrom: Yes. I think it's very important. Take tobacco, for example; there's now a major campaign on to change the packaging of cigarettes, which you're fully aware of. So here we have one agency of government wanting to do what it can to persuade young people in particular not to smoke, and then the other agency of government—and this is a little bit different, with the CPP—doing something that may contradict that.

At any rate, I wanted to ask you another question. This goes back to the whole issue of family trusts, and the Bronfman family trust in 1991. I think it was 1996 when you promised to bring in legislation to rectify the situation. I don't think it appeared on the Department of Finance website until about four or five days ago, and it was tabled in the House on Tuesday, I think.

Why did it take so long to do that? I'm curious. The commitment was made four years ago to bring in the legislation, and it only came via a ways and means motion, Mr. Martin, two days ago in the House of Commons. You have a lot of very competent officials in the department. I'm just wondering why the delay.

Mr. Paul Martin: We have been very active on this from the day we said in the House that we would do so. We've engaged in extensive consultation. There has been an enormous amount of public debate. If the department were to bring it all here, I'm sure there would be a pile that high of submissions that have come in on this particular issue to the department. So it certainly has not been a quiescent file. It's one that's very much alive.

At the same time, it is one that requires a lot of negotiation with other countries. You have all of the tax treaties that are involved in this, because what you're doing is changing the rules of the game, and when you're going to change the rules of the game, you have to talk to your tax treaty partners as to how you proceed on this.

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I can tell you, Mr. Nystrom, we are proceeding on this issue. I'm not quite sure what appeared on the website, but let me tell you that we've been at it for all of these years, and the thing you don't want to do is to simply start imposing double taxation on people. Somebody who's been an immigrant here and then decides that they want to go back to their country of origin as a place to stay could suddenly find themselves, for a relatively small income, penalized.

We want to make sure we don't impose an undue sacrifice on an awful lot of very ordinary people, and that's really what the work has been devoted to.

Mr. Lorne Nystrom: I have time for one more question, the chairman says, Mr. Martin.

I wanted to ask you about the Tobin tax. I know you supported the idea of the Tobin tax in the House last March 23 and you made a commitment to bring this to the G-20 this fall, but I wanted you to tell us whether or not your department is taking any concrete measures to popularize the idea and to help sell the idea in effect to important players around the world.

How do you put in effect the intent of Parliament last year that you would do this in concert with the world community, and express that it's an idea whose time has come? You are going to be chairing a very important meeting, and you do play a very important role there and you're putting this on the agenda. What is the legwork ahead for that meeting that you're planning to undertake to make sure this becomes a bit closer to reality?

Mr. Paul Martin: I've raised it at the G-7. Following the vote of Parliament, I raised it at the G-7; I have discussed it with the G-20; but furthermore, I have discussed it at the other international financial organizations that we attend, whether it be APEC, the Commonwealth, the Latin American finance ministers.

I can tell you that it is not an idea that has much resonance. Some countries—the Dutch, as an example—who you would have thought would be great supporters, were really not. And of course the problem is that it isn't a question of the smaller states, but when the major market states, the United Kingdom, Germany and the United States, essentially say they won't do this, then it is an idea that just isn't going to occur.

As you know, my reasons for supporting it were essentially that I thought it meant an ability to raise money for certain major international problems such as the environment and third world aid.

The other issue that it's raised, and the one that you've spoken so well on, Mr. Nystrom, is the question of putting a bit of sand in the gears of international speculation. My own view is that we're far better off to do what we are doing as a country. In other words, trying to put in place the structures—openness, transparency, consistency of financial statements, banking regulation and supervision, all of those things—we believe, is a better way of getting at that particular problem. So I guess you and I agree on the concept, but for different reasons.

Mr. Lorne Nystrom: Thank you.

The Chair: Thank you, Mr. Nystrom.

Mr. Brison.

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

I would like to thank the minister for joining us today. It's great to be here in the committee setting, which is far less partisan than the floor of the House of Commons, and here amongst friends we can discuss matters more candidly and without that pervasive partisanship that so often prevents good dialogue in the House.

My first question is relative to the recent McGill University study on the economic performance of governments since World War Two. The minister no doubt is aware that the previous government, the Progressive Conservative government under the leadership of Brian Mulroney, achieved the top ranking in terms of economic performance; and his government, or the government over which he has served as finance minister, received the lowest ranking. The specific policies that were credited for the success under the Mulroney government were the free trade and GST as well as deregulation of financial services, transportation, and energy—all policies vociferously opposed by the Liberals at that time.

First of all, I want to commend the minister and all members of his government for having swallowed themselves whole and effectively embraced the policies they were so vociferously opposed to, because it was the right thing for the country. I think it takes a big man to do that, and to in fact admit that they were wrong and to do the right thing. Because there's only one thing worse than the Liberals stealing Tory policies, and that is if the Liberals were to implement their own, which is what we're beginning to get nervous about.

• 1650

I guess that's more of a comment than a question.

The Chair: Can we have your non-partisan question?

Mr. Scott Brison: With all seriousness, Minister, you did mention that in the new economy we can't be timid in Canada about the types of changes that are required. The BCNI referred to your tax measures in the most recent budget as being timid and grudging. Before that budget we had the highest personal income taxes in the G-7, the second highest corporate taxes in the OECD. After the full implementation of those budget measures we would still have the highest personal income tax rates in the G-7, and we'd have the fourth highest corporate taxes in the OECD. That's assuming none of the other countries reduced their corporate tax burdens.

We're going in the right direction potentially by reducing taxes, but we're doing it so slowly that I'm concerned that.... A tortoise on the autobahn moving in the right direction will still be roadkill, and this is a very competitive environment to be moving in such a timid manner.

Mr. Paul Martin: Mr. Brison, I'm very appreciative of the total lack of partisanship in your opening statement.

Let me say—and I may be mistaken here—I believe that William Watson, Bill Watson, who's not necessarily known as a Liberal, in fact is not known as a Liberal, did a comment on that particular study in which he—I think it was Watson, it may have been another economist—essentially took issue with the Volcker study. He pointed out that in fact under a different set of numbers—and we know that economists are able to play with numbers—the results—

Mr. Scott Brison: So are governments.

Mr. Paul Martin: That's right. So are oppositions. But the results would have been very different.

Yes, we did see the opening rhetoric from the BCNI. It is quite interesting that if you take a look at what the Canadian Federation of Independent Business said about the budget, they in fact ranked it quite favourably. I was not that long ago at the Board of Trade in Vancouver where there was extensive discussion about the whole tax package and the direction we are going in, and they were very favourably inclined.

I think you saw the reaction budget night from the Canadian Taxpayers Federation. I think you saw how the Caledon Institute reacted. So when you get Ken Battle on one side and Walter Robinson on another, both of them saying that the budget is in fact in the right direction, I think it's clear the government has done something right.

On the issue of personal taxes and corporate taxes, you're absolutely right, they are too high. I said that in my statement. Despite the fact that we have brought in the largest tax reduction package in Canadian history, I also made it very clear that we have only begun and that they have to come down more. I don't think there should be any doubt about that.

We are not prepared to do that at the expense of our health care system or our education system. The purpose of taxes is in fact to pay for basic services; and for Canadians the priorities—and quite properly they should be their priorities—are health care and education. And we are not prepared to cut taxes on the backs of those priorities.

But having said that, yes, we want to bring our taxes down. We fully intend to bring those taxes down. Now, we do have some problems in that. While 36¢ out of every dollar was what we spent on interest when we took office and we have gotten it down to 26¢, it is still substantially higher than that of most other countries. Our debt-to-GDP ratio is still far too high, and in the same spirit of non-partisanship that you introduced with your opening article, I would say our problem is that in fact the previous government allowed that debt to build up to a point and we have had to deal with it. Obviously one would have hoped that perhaps if they had done some good things in their period of office, they might have taken care of that one small problem, which is a $577 billion debt.

• 1655

Mr. Scott Brison: Mr. Minister, the previous government reduced the deficit as a percent of GDP by half during its period in office, and also implemented free trade and GST, which has been a little bit helpful in your efforts to eliminate the deficit completely.

My next question is further to Mrs. Redman's questions on capital gains tax. There was some movement in the recent budget, and it was a step in the right direction, to reduce our capital gains tax burden in Canada. I would think no form of taxation or tax reduction would speak more clearly to the new economy, in terms of the ability for new technology and new economy entrepreneurs to raise capital here in Canada, than capital gains tax reduction. Alan Greenspan said a couple of years ago that if the capital gains tax were eliminated, we would presumably over time see increased economic growth, which would raise revenues for the personal and corporate taxes. Its major impact is to impede entrepreneurial activity in capital formation. I would assert that capital formation and entrepreneurial activity are the exact types of activities we need to be encouraging in Canada.

We don't really get a lot of revenue from personal capital gains taxes in Canada. Wouldn't it be great on one issue, or one area of taxation, to actually be ahead of the U.S. in a significant way? We're still 13% behind in terms of effective capital gains tax rates, even after the budget measures. Why wouldn't we eliminate personal capital gains taxes in Canada, which wouldn't cost the treasury that much, but would provide an immense boom for capital formation in the new economy and for entrepreneurial activity in biotech and e-commerce areas of Canada?

Mr. Paul Martin: It is interesting, Mr. Chairman, to witness this reaching across the table from Mr. Nystrom and Mr. Gallaway, Mrs. Redman, and Mr. Brison.

Mr. Lorne Nystrom: The new alliance.

Mr. Paul Martin: Yes.

Let me say that the first thing we have to start with is that government must maintain the integrity of the basic programs, and I think we would all agree. And that means you cannot impugn your health care system, you can't impugn your education system, you can't impugn.... Given the fact that government is a major source of research in the new economy, it basically has to be providing money in those areas. So I basically say you start with that as your premise.

Then the second thing is I think that once you've done that, there's no doubt about the economic benefits to the country, especially in the new economy, of reducing taxes. Absolutely. So then the debate comes as to where you start. And you would start with—I'm not sure you would; I don't want to put words in your mouth—capital gains tax. My own preference would be to start with personal taxes, because I think that's where the burden is the largest, and that's in fact where the gap is the largest. Following personal taxes, I would then cut corporate taxes generally, because again I think that's where the competitive factor enters into it.

This does not mean you would not, while you're doing this, cut capital gains taxes. It simply means that for a given dollar of tax reduction, I would give a greater preference to personal taxes, followed by corporate taxes, than I would to capital gains taxes. I believe we must pursue all of them at once. So it really is only a question of a preference.

The fact is that capital gains taxes actually bring us in a lot more money than people normally think. The most recent numbers.... The department is here and can correct me, but I believe the capital gains tax is bringing us in close to $4.5 billion to $5 billion.

Mr. Scott Brison: Not personal—

Mr. Paul Martin: The capital gains tax reduction. So those are much higher numbers than what people normally throw around. And I don't believe we're in a position to simply turn our backs on that number.

As you know, people will argue, wait a minute, what you're going to do, unless you eliminate it completely, is accelerate the amount that comes in. It's our feeling that while you may well accelerate some of your...if a reduction will accelerate the amount of money you bring in, then in fact what you're doing is accelerating money that is eventually going to come in. So there is going to be a net loss. Again, this is not an argument against not reducing capital gains taxes but it is an argument for saying that as you establish your priorities, perhaps personal taxes, then corporate taxes, are a more important way to proceed.

• 1700

Mr. Scott Brison: The experiences in other countries, Minister, indicate that effectively reducing capital gains tax actually does not impact revenue that significantly because of the increase in economic activity that results from the significant unlocking of capital.

One of the impediments we have to capital formation in Canada is the degree to which our capital is locked up. Sometimes investments make more sense from a tax perspective than they do from an economic perspective, and I would assert that this represents, because of the relatively small amount raised with personal capital gains tax, a huge opportunity for Canada to actually be ahead in one critical area of taxation of the new economy. It would not just be symbolically important, but it would substantively important as well.

There may be some aversion to the equities markets with the numbers opposite, but I think if we look at how important in the new economy these areas are, we need flexible and innovative equities markets and participants. I think it would be very important.

The Chair: Would you please place the question.

Mr. Scott Brison: No, that was a rebuttal to the—

The Chair: Oh, was it? Well, I'll go to Mr. Epp.

Mr. Scott Brison: There is another question on tax reform.

At the BCNI conference in Toronto, a question was asked of Minister Manley about the idea that Canada doesn't simply need tax reduction, it also needs a significant level of tax reform. Tax reduction can in fact be used as a vehicle to achieve that, without having the commensurate winners and losers that typically emanate from tax reform. Minister Manley's response was that we can't really do that because it requires consensus. Tax reform requires consensus and we just can't get consensus on it.

Isn't tax reform too important an issue to abdicate leadership and focus just on populism and polling data and focus group economics? Shouldn't we be doing the right thing in reforming our tax system based on growth, not on greed but on growth?

The Chair: Thank you, Mr. Brison.

Mr. Paul Martin: I'll say a couple of things.

Again, if I might, in terms of the capital gains tax, the amounts are not small. The department has just confirmed the number I gave you. Personal capital gains tax brings in from the federal government's point of view about $3.5 billion and from the provincial point of view about $1.5 billion. What you would be looking at if you were to eliminate the capital gains tax is about $5 billion. So I think we're dealing with relatively large sums.

The second thing is that essentially, while you may be right...obviously if you eliminate you lose all of that revenue. While people will argue that a reduction in capital gains tax will be compensated by an acceleration because people will in fact sell things or they'll turn them over more quickly, the net result of what you've done, however, is simply to advance the particular sale. Ultimately governments will lose the money. I just think, in terms of having the debate, that we ought to make sure our facts are correct.

Now, do I think reduction in capital gains tax in the era of the new economy would be beneficial? The answer to your question is yes. Do I, however, think it should have a greater priority than a reduction in personal taxes or a reduction in corporate taxes? My answer would be no, that personal taxes, beginning, as I mentioned, with middle-income Canadians, is the greatest priority and will provide the greatest benefit to the economy and the new economy.

I must say—and I simply repeat this—all of this tax reduction I think is very important on the basis that government is not impugning its basic services, whether it be environmental protection or health care or education.

• 1705

Now to deal with your second question, I think tax reform is clearly easier to do when you're cutting taxes, and I think the kinds of taxes in fact you should be cutting are those taxes that will eliminate distortions in the economy. The best example of that I can give you is that when we reduced the 28 down to 21, we did it in those areas where a certain portion, the high-tech area, exactly the one you're referring to, was paying the highest tax rate.

What John Manley was saying in his response to the BCNI is there is no doubt that government has to show leadership, and there are going to be areas, whether it be taxes or others, where the bold move is required. It's what I said in my opening statement. But consensus is also important. There comes a time when government has to make the move. But before it does that, it has a responsibility in a democracy to explain to public opinion why it is doing that, and that works very well. If I simply give you an example, that's one of the reasons there was such tremendous Canadian support for the elimination of the deficit. The Canadian public understood it was necessary to deal with that issue. Then when government dealt with it—basically they said now is the time to strike—there was support for that.

That's really what John Manley was referring to. There's no doubt that bold moves are required. But before you make them, you owe it to Canadians to explain to them exactly why you're doing it and what its consequences are going to be.

The Chair: Thank you, Mr. Brison.

This is going to be a five-minute round for the following members: Mr. Epp, Mr. Loubier, Ms. Redman, and Mr. Cullen. Mr. Epp.

Mr. Ken Epp: Thank you, Mr. Chairman. I think it's only fair that I take about 10 seconds to give a quick rebuttal. I think Canadians and Parliament are best served when we enter into debate, as the finance minister just said, based on actual facts.

So I'd like to put on the record here—and I don't want to talk about this, because that isn't the topic today—that our solution 17 does in fact work. We've used help from Statistics Canada and from the Library of Parliament's economic division. We have used a WEFA study, which does the same projections for us as they do for the Department of Finance when the Minister of Finance brings out his budget. And if those guys say that our system works, that we'll have a surplus, then I think we need to deal with those facts rather than the innuendo that went between one of the Liberal members and the minister previously, particularly when he's talking about a flat tax versus simply one single rate, which is a huge difference.

We've always said that. So what we're doing is dealing with a distortion. There's a huge difference, as you know.

Mr. Paul Szabo: What's the difference?

Mr. Ken Epp: I'm sorry. I'll talk about it with you later, because that has to do with deductions, which you said were removed and are not.

Mr. Minister, I appreciate your being here, and I want to follow up on a question I asked you in the House the other day, and that has to do with the debt.

You know the OECD economists are asking Canada to reduce its debt. When I read that statement earlier this week, I did not hear in their statement “please reduce your debt as a ratio of GDP”. They didn't say that. They said debt should be reduced in real terms.

Now, when I asked you that question in the House, you of course answered by talking about the fact that our debt is being reduced as a ratio of GDP, which is of course due to the fact that the economy is increasing and our GDP is increasing. So you're quite right in your statement, but you're not answering the question.

I wonder whether today, in this non-partisan context here in the committee, you could answer whether or not you are going to do anything to reduce the debt and thereby reduce the $41 billion a year in interest that we have to pay, which is not insignificant.

Mr. Paul Martin: All right. Just before answering the question.... A statement that the flat tax works is not a statement of fact; that's a statement of opinion. I believe what the flat tax does, regardless of the way in which it's configured, Mr. Epp, is that it in fact is unfair to the middle class, and that the progressive tax system for that reason is by far the way to go.

• 1710

Mr. Ken Epp: Yes, well, the numbers don't show that.

Mr. Paul Martin: The numbers in fact, with respect, do bear that out.

But let me now deal with your main point on the question of debt reduction, dealing with debt reduction in absolute terms. In each of the last two years we have reduced debt by an average of $3 billion. I think it was $3.5 billion the previous year and $2.9 billion last year. I can tell you that this year we will be reducing our debt in absolute terms by an amount substantially more than that, both in debt-to-GDP ratio and in absolute terms as well—the way that you put it. We have had a very successful debt reduction program since we have eliminated the deficit.

But I would say to you at the same time that if you were to talk in terms of priorities, I mean, we have to reduce debt, we want to reduce taxes, and we want to basically spend in those areas that we.... Certainly the government's priorities would put health care, education, and tax cuts at a higher level than the necessity to reduce debt in absolute terms.

It doesn't mean we shouldn't reduce debt in absolute terms; it's just that if you were to ask me what is more important, here's what I'd say. Health care? I'd say health care is more important. Education? I would say education is more important. Tax cuts? I would say tax cuts are more important.

Mr. Ken Epp: Okay. So you would put the reduction of the debt fourth on the list.

Mr. Paul Martin: Well, I certainly wouldn't put it ahead of health care, education, or tax reduction.

Mr. Ken Epp: Okay. Well, that's fine.

I want to go something else and I only have a minute left here—not even. I want to talk about your Canada health and social transfer. You've increased the numbers nominally on the sheets, but a large part of that is the tax transfer.

I had a question from one of my constituents not long ago. He asked, “Why, if the feds are in fact increasing these transfers to health care, do we still have this crisis in health care in our city?” I mentioned to him that, well, the feds claim that they're increasing the money, but it doesn't seem to be getting there.

Then I looked at the book and I saw there that you're using a tax transfer, so I mentioned that to him, and he said, “Well, if you're transferring taxes, does that mean, then, that my federal taxes are going down so that the province can tax me more?” How would you answer that question? What should I have said to this constituent?

Mr. Paul Martin: I guess there are two possible answers, both of which come to the same conclusion.

You would say to him that this is exactly what happened. That is exactly what happened. The fact is the Canadian government vacated tax room that was taken up by the provinces. As a result of that, the provinces had more tax room to fund health care and education, as an example, to the point that the Treasurer of Ontario then, Mr. Miller, wanted all of it in tax points, because he recognized that tax points have an increase in value far greater, in fact, than do transfers in cash.

As a result of that, the provinces, because of the transfer by the federal government of tax points, because they vacated that room, have been very strong beneficiaries—primarily the richer provinces, that is to say, your province, as an example, and the Province of Ontario. In fact, one of the reasons the Canadian government went so heavily into deficit was that it did transfer those tax points, that it did lose that tax room to the benefit of the provinces.

So the first answer to your question, Mr. Epp, is that this person would be absolutely right.

The second answer, of course, as to why there is a problem in the health care system.... There's no doubt that money is part of the problem, but the second part has to do with the whole question of administration. The finance minister in Quebec said that it was not a question of money but a question of administration. You see the Ontario government cutting taxes dramatically and, at the same time, dealing with its health care system, and you have to say, “If it's only money, how can you afford to cut taxes?” We know the great wealth that exists within Alberta, yet they have problems in their health care system.

So you have to ask yourself.... It is a question of money, but it's also a question of administration.

Mr. Ken Epp: Mr. Chairman, I just need to ask a follow-up question on this.

If the federal government vacated tax room, why didn't the federal tax then go down?

Mr. Paul Martin: But in fact the federal tax did go down, and the provincial tax went up. That's what happened.

Mr. Ken Epp: As a percentage...? On the income tax form...?

An hon. member: Yes.

Mr. Paul Martin: Yes. That's exactly what happened, Mr. Epp.

• 1715

Mr. Paul Szabo: But more people work and the economy grows, so more revenue is generated.

Mr. Ken Epp: But the actual federal rates went down...?

Mr. Paul Martin: The federal government—

Mr. Ken Epp: In what year?

Mr. Paul Martin: The late 1970s.

Mr. Ken Epp: The late 1970s—but you're talking about increased tax room here, tax transfers.

Mr. Paul Martin: But it was recognized at the time that those tax points were going to increase in value every single year. I mean—

Mr. Ken Epp: So all you're doing is making a bookkeeping entry on the presumed increase of this ephemeral tax transfer—

Mr. Paul Martin: Boy, I'll tell you—

Mr. Ken Epp: —that doesn't exist anywhere.

Mr. Paul Martin: Let me tell you something, Mr. Epp: would I love to have those tax points back. Boy! Let me tell you, those tax points are one of the reasons the federal government, as I just said, went into deficit. Those tax points have increased every single year. That's why, as I mentioned, Frank Miller wanted them 100%, because he understood what was going to happen. They are a very valid part of the ongoing debate.

But, you know, Mr. Epp, there's no doubt that within the context of the universal health care system there really are solutions required, and the debate that you and I might have, or the debate that occurs between federal and provincial governments, is really of very little concern to Canadians. What they're saying is, “For heaven's sake, will you fix the system!”

Mr. Ken Epp: Right.

Mr. Paul Martin: That's what I think all of us really want to do, and it's what we ought to get at.

Mr. Ken Epp: Okay. I agree with that.

The Chair: Thank you, Mr. Epp.

[Translation]

Mr. Loubier.

Mr. Yvan Loubier: Mr. Minister, I would like to go back to the issue of financial sector reform. I would like you to explain why allowing one person to hold up to 65% of the National Bank's votable shares rather than allowing 65 individuals, for instance, to each hold 1% of the shares of this bank, will increase the capital available to the National Bank and how this will increase its flexibility. Explain that to me.

Mr. Paul Martin: First of all, one shareholder may hold 65% of the shares, but what we envision... We must understand that it is not the banks that want to sell their control. The banks want to be able to forge alliances. In order to create an alliance, you do not necessarily have to have 65% of the shares, but you certainly have to acquire more than 1%.

Take a look at alliances that are being established. Take a look, for instance, at the alliance that has been forged between Ameritech and Bell Canada Enterprises, whereby another company has acquired 20% of the shares in BCE. This is happening everywhere in the world. These are alliances with shareholders who have interests in other companies. This is what the banks want to be able to do. They're saying that if they are given the opportunity to carve up a place for themselves in another bank, they will be able to increase their market penetration and create jobs here at home. The banks are saying that they may very well have to create alliances so that they come here.

Mr. Yvan Loubier: Why then did you not use the same reasoning with respect to the big Canadian banks which, on a global scale, are, for all intents and purposes, small banks? They too need to be able to forge strategic alliances. Why did you not apply the same logic?

Mr. Paul Martin: That is exactly what the big banks asked us to do, but we decided to guarantee greater flexibility to the smaller banks.

Mr. Yvan Loubier: Yes, but the National Bank is the biggest bank in Quebec. Why treat the largest bank in Quebec differently from the largest bank in Canada? In the final analysis, who is being helped by this reform?

Mr. Paul Martin: Mr. Landry answered this question very well. We want to give the National Bank, which is the smallest of the bigger banks, the ability to forge such alliances.

Mr. Yvan Loubier: Mr. Landry has asked you to include, in your new piece of legislation, the criteria and the measures required to reach these objectives via a legislative base. Mr. Landry has asked you to do this. What is your answer to that? Earlier, you were very evasive.

Mr. Paul Martin: I was not evasive at all. I said that the points raised in Mr. Landry's letter were the exact ones that I have already spoken about publicly. These are certainly points that will be taken into account in the decision to be made by the Department of Finance. I do not intend...

Mr. Yvan Loubier: But if you share the same point of view, why not make a commitment that you will include these criteria in your law to ensure that, whenever there is a risk that one individual will assume total control over the National Bank...

• 1720

Mr. Paul Martin: If we want greater flexibility, many considerations have to be taken into account. Those are not the only considerations; there are others, such as security.

Mr. Yvan Loubier: You could add a section that says “and other considerations”.

Mr. Paul Martin: There are many considerations.

Mr. Yvan Loubier: You could add “other considerations”, Mr. Minister.

Mr. Paul Martin: I have just said...

Mr. Yvan Loubier: What is the problem?

Mr. Paul Martin: No. I do not intend...

Mr. Yvan Loubier: Who is going to be helped by your reform? Who are you serving? What interests are you defending? It has always been said, in the Canadian banking sector, that wide ownership was extremely important to avoid the situation whereby one individual, for example, acquires full control over a bank and twists the arms of its competitors, in other industrial sectors, by refusing to give credit, or things like that. You know that the National Bank is the bank for small and medium-sized businesses in Quebec. There are some situations that are very dangerous and require much stronger guarantees than simple trust. If that is the case, why did you not apply the same logic to the big banks? Why did you not say, in the case of the big banks, that there would be no problem with a 65% limit, but that certain criteria would have to apply and the situation would have to be monitored?

Mr. Paul Martin: Listen here.

Mr. Yvan Loubier: The same thing applies to mergers, moreover.

Mr. Paul Martin: Do you want me to answer or not?

Listen to what I have to say. Your position is very clear. I have just said that these considerations echoed those I have already made publicly. These are certainly considerations that the government will take into account.

The government has the authority to make decisions. It does not intend, when it wants to provide greater flexibility, to create rigidity in the legislation.

Now, Mr. Loubier, if it is your position that we should not be giving this flexibility to the National Bank, that we should not be giving this bank the opportunity to forge alliances and if you think that we should treat this bank exactly as we treat the big banks, that we should not take into account the fact that, because of its smaller size, it may need more flexibility...

Mr. Yvan Loubier: No. That is not what I am saying at all.

Mr. Paul Martin: If that is your position, I accept it as such.

Mr. Yvan Loubier: Mr. Minister, listen.

Mr. Paul Martin: I do not agree with you.

Mr. Yvan Loubier: My position is that your legislative measure contains dangers for a bank such as the National Bank. It contains dangers for the Quebec financial sector. You also acknowledge that there may be certain risks. Why not provide us with additional guarantees by agreeing to include these criteria and measures to ensure strict compliance with these criteria and any others that you deem important? Why not set them out in your legislative measure? Why are you not doing this?

Mr. Paul Martin: Because—and you will see this in the philosophy behind the legislative measure—the purpose is not to constrain our banks, but to give them flexibility. We all know...

Mr. Yvan Loubier: As far as that is concerned, Mr. Minister, we agree.

Mr. Paul Martin: Let me finish! Mr. Loubier, do you want me to answer your question or do you want me to listen to you?

We are well aware of the fact that these industries are changing. With globalization, things are changing so rapidly that we are not able to foresee every eventuality in our legislation. This is why we're going to use regulations and why, in certain sectors, we're going to give the Canadian government the opportunity to use its judgment and to determine whether or not something is in the public interest.

Mr. Yvan Loubier: Don't you think that you are giving a great deal of power to one man by enabling him to make these big decisions?

Mr. Paul Martin: It is not one man who is going to have the power. A man will make this decision, but he is part of a government. A man will make a recommendation to Cabinet and the decision will be one made by a democratically elected government.

Mr. Yvan Loubier: Hence, you are refusing to include this in the legislative measure.

[English]

The Chair: Thank you, Minister. Thank you, Mr. Loubier.

Mrs. Redman.

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

One of the things we spend a lot of time doing in the finance committee, Minister, is looking at how we stack up to the G-7 countries. Very often it comes down to using American yardsticks. When we look at productivity, personal income tax, and disposable income, we often compare ourselves to the United States.

From my recollection, it was John McCallum who actually said something along the lines that if we try to be Americans we will fail, and we really need to have a Canadian brand.

In your opening statement you say Canada must create an attractive environment for knowledge workers, and countries that do so not only retain but attract the best and brightest. I know that newspapers and magazines have spent a lot of headlines on the brain drain as well.

So I guess the essence of my question is, really, how do we establish a Canadian brand, so we distinguish ourselves in a meaningful way to a highly mobile workforce?

Mr. Paul Martin: I think you have put your finger on what we really have to do over the next couple of years. We have to invest in basic research, make sure our educational institutions are second to none, and make sure there is confidence in our health care system. We have to make sure that when somebody wants to do an IPO they can do it in Canada. We have to make sure the premiums are here and there is access to risk capital at not only the mezzanine level, but at the angel level—that the initial seed capital is there.

• 1725

Quite a cultural change is required. There's the whole definition of risk and how we approach it; making sure we're producing not only the best researchers, but the people who know how to market it; and making sure we're establishing the kinds of alliances that will allow our major exchanges, for instance, to operate around the world—which is in the process of happening.

I think it is really a combination of all of those things put together that will essentially give us that brand, to use the term.

Mrs. Karen Redman: Thank you.

The Chair: Mr. Cullen.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman. Thank you, Mr. Minister.

I'd like to talk a bit about the financial services sector legislation that will be introduced in the House of Commons very shortly by you and Secretary of State Peterson—the kinds of objectives and results you will be looking for, given a rapidly changing financial services sector, increased business combination activity or expectations, and the expectations of consumers and small business.

But before we get into that, I'd like to look at this single-rate tax concept just for a moment, because I think Canadians watching this might be a little confused. It seems to me that if, for example, you take a single tax rate of 17%, and our highest rate is now 29%, it doesn't take a lot of rocket science to figure out that if your rate is between 17% and 29%, you're going to do better with a single rate of tax of 17%. Those people, as you've pointed out, are typically the higher-income Canadians. So you don't have to be a rocket scientist to figure that out.

In terms of progressivity, you can build in some progressivity at the low end, which is a good thing. I mean, if you're looking at moving the tax burden from high-income Canadians to middle-income Canadians, we should call a spade a spade, and I think you did that. But a lot of Canadians look at the single-rate-of-tax concept as being much simpler. You know, they'll get a sheet of paper, they'll get their income, they'll multiply their income by 17%, and they won't have to be bothered by all those tax returns.

But it seems to me if someone is looking at that, they're going to be seized with a question about what kinds of deductions, if any, you're going to allow. Are you going to allow deductions for RRSPs and pensions? Are you going to allow deductions for medical expenses? Are you going to allow deductions for charitable donations? Are you going to allow expenses for alimony or maintenance? Are you going to allow deductions for child care? Are you going to allow deductions for tuition? If you do, of course, then that's going to cost you money. It might be a good thing to do, but it's going to cost you money.

How does all that fit, and how does all that fit within the concept of taking a single form and multiplying by 17%? I think Stockwell Day, if I can use his name, talked about the fact that it would be implemented, in his view, over a period of time. I think that's clearly the problem he's faced with as he tries to deal with these special interests or legitimate concerns of Canadians.

I wonder if you can, for the benefit of Canadians watching this, clarify why this government wouldn't support a single-rate-of-tax system.

Mr. Paul Martin: We wouldn't support it for a number of reasons.

By far the most important reason is that it is a tax that benefits wealthy Canadians at the expense of middle-income Canadians. Under a single rate of tax, you can protect the lowest-income Canadians. You cannot protect middle-income Canadians from the inevitable arithmetic that says they will pay more tax under a flat tax than under a progressive tax system.

So the first reason for being against it is that I and most people—certainly most of us on the government side—simply do not believe that as taxes start to come down, the middle class should not benefit.

The second point you raise is also a very important one. In many ways, the attractiveness of the flat tax is its simplification. Let's face it, all of us would like to have a simplified tax system; all of us think it is too complex. But we have to look at the reasons it's complex. It's complex because we do recognize that there are people with disabilities who need a break, that there are students who need a break, that single mothers carry a burden others don't. There is a long list of people in this country for whom the playing field has to be more level than it is today. That's the reason for the complexity in the tax system.

• 1730

You're absolutely right. What occurred, and certainly the statement I saw in the paper, is that Stockwell Day, in the case of students, I believe it was, recognized this. But the inevitable conclusion of his statement, “I'm not going to implement the flat tax right away, because of this particular problem”, is that eventually he's not prepared to recognize that there are whole segments of society for whom the circumstances are not the same as or as favourable as for others, or who at a certain stage in their life need a break. That is a second reason for opposing the flat tax, as indeed Mr. Szabo also alluded to in his remarks.

On your second point, the purpose of the financial sector legislation is really twofold. Our banking system is an incredibly important part of the new economy as well as the old. They are major employers of Canadians. They play a major role in the success of our business, small, medium-sized, and large. They are an integral part of every community in the country.

The world is changing, and it is changing very quickly. What we have to do is not only put in place a reform that will allow them to take advantage of what's happening out there and to compete with others, but we have to put in a reform in a way that is going to allow it to constantly evolve without having to come back to government every five minutes.

So essentially we will operate as much as we can through regulation—there is a certain amount of government discretion in there—in order to be able to be as flexible and as quick as possible. The ultimate goal is to make sure our financial institutions can grow and continue to benefit Canadians.

At the same time, the other goal is to make sure that Canadian consumers, whether they be Canadian business, Canadian individuals, wealthy Canadian individuals, or in fact the lowest-income Canadian individuals, have access to banking services, and not only that, but that they have access to those banking services in as open, transparent, and cost-effective a way as possible.

We're proceeding on those twin goals. How do we make our financial institutions as competitive as they can possibly be—give them the possibility of extending themselves to be as large and as powerful as they can possibly be—and at the same time protect Canadian consumers in all segments of society? That's our goal, and when we bring down the legislation, that's what the legislation will be directed towards achieving.

The Chair: Thank you, Mr. Cullen.

I just have a very brief question in relationship to the transformation that's taking place in the Canadian economy. Minister, while we're indeed Canadians, we're also very much North Americans. In economic terms, this is our major market. The issue of taxation becomes important, because that essentially becomes a tool to equip Canadian firms and Canadian individuals to compete with Americans on a level playing field.

In the whole issue of taxation, unfortunately some people say if you're in favour of tax cuts, you're absolutely against health care or education or other social issues. I think that's wrong. You can be for both things at the same time. The reason you want your Canadian firms to prosper is precisely to be able to provide the social services Canadians need and require.

John McCallum, when he came in front of our committee and in speeches I've read from him, also called for a moderate tilt towards tax and debt reduction. Obviously that brings up the question of the fifty-fifty split. With the growing surpluses being what they are, when do you think Canadians will be ready to accept a shift? Is a shift in your mind at all? Are you thinking about that at all? We are looking at planning and priorities for the future. Where are you at on that particular issue?

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Mr. Paul Martin: The last budget unequivocally set out the direction the government is embarked on. It was major tax reduction, and many of its most important aspects were put into place immediately. Indexation was done in fact retroactively to January 1 of this year. Two-thirds of the cut in the middle rate takes place in 23 days. The capital gains tax cut took place immediately budget night. The elimination of the 5% surtax up to $85,000 takes place as of this July. So we set that direction out.

Our perspective now, in terms of tax reduction, is that in the next budget and in subsequent budgets we have to accelerate the direction we're already set in, and then we also have to be prepared to look outside the box and look at other areas of tax reduction.

Quite simply, we have to make sure that in fact those areas of our economy that are going to grow, which is the new economy, which is so important, are able to grow in competition with anybody anywhere in the world. So whether it be those companies, whether it be knowledge workers, or on the other side, whether it be single parents or very low-income Canadians, we have to recognize that marginal tax rates in this country are too high, and they have to come down. The only question is, how quickly can we accelerate the process we set out in the last budget?

The Chair: Minister, one of the challenges you're going to be facing in the next budget, I think, will be the issue of health care. While there are many groups calling for greater health care funding, there are also many, many Canadians looking for greater accountability of the health care system. In other words, if you're going to give the provinces $2 billion, $3 billion, $4 billion, $5 billion, or whatever the case may be, they want to know exactly what they are getting for the $5 billion or $3 billion. That's not going to be possible until the provinces themselves, amongst themselves, begin to come up with some kind of standard, some accountability measure—comparing best practices, for example. We have absolutely no information on that, and when we have pre-budget consultation hearings in the fall, no one can really tell us where this money ends up.

Mr. Paul Martin: There's no doubt that what is required is to re-establish confidence in the health care system, which is why certainly the rhetoric has to be toned down and the solutions have to be brought forth. The measurement of outcomes is a very important part of that. Canadians want to know how their health care system is working and where it's not. That is a very important part of the process.

They want to see that when additional moneys go into health care, whether from us or from the provinces, in fact they go to deal with the problems they're worried about, whether it be clogged emergency wards, acute care, primary care, or anything else. You're quite right; they want to make sure that money not only goes into the health care system but goes into the health care system in those areas where in fact the need is greatest.

That's really what the whole debate is all about, and it's why I do hope the health care ministers, when they meet, if they meet, are going to be successful, so that ultimately we can bring the solutions that are going to give Canadians back confidence in their health care system.

All I can say to you, Mr. Chairman, from the point of view of the finance minister, is the Canadian government, you can rest assured, in terms of the financial contribution, will do its share.

The Chair: Minister, thank you.

Mr. Paul Martin: Before I end, Mr. Chairman, may I just say something to all the members of the committee?

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Whether it be the pre-budget consultation or a meeting such as this, I always come before you before the budget, and sometimes I don't get the chance to come before you after the budget. I really would like to thank the members of the committee, and I want to congratulate the committee. Your work in going across the country has really been an essential part—and I say this to both sides of the House, without partisanship. The work of this committee in furthering the whole question of consultation, making budget secrecy a thing of the past and making this much more open, and really being very constructive, even in areas where we don't agree, is very important. You provide a very important benefit to Canadians, and I just want to say, from my point of view, thank you very much.

The Chair: Thank you, Minister.

Voices: Hear, hear!

The Chair: The meeting is adjourned.