FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, October 4, 2001

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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 morning to hear from the following organizations: the Canadian Association of Insurance and Financial Advisors, the Canadian Federation of Agriculture, and the Insurance Bureau of Canada.

We will proceed in the order that appears on the agenda. Therefore, we'll begin with the Canadian Association of Insurance and Financial Advisors, David Thibaudeau, president and chief executive officer. Welcome.

Mr. David Thibaudeau (President and Chief Executive Officer, Canadian Association of Insurance and Financial Advisors): Thank you, Mr. Chairman.

With me today is Bill Strain, the chair of taxation for the Conference for Advanced Life Underwriting.

CAIFA and CALU members have frequent contact with clients and prospective Canadian consumers of financial products. Our reach is considerable. CAIFA members can often be found in the towns and smaller communities where there are no other financial services to fill the need. This has helped to shape our recommendations to you today.

Our submission offers specific recommendations relating to the first and third of your three objectives for the committee's pre-budget report. In the interest of brevity, I won't go into our submission in any great detail, but I'd like to draw the committee's attention to our major recommendations.

Perhaps the greatest threat to the quality of life and standard of living for all Canadians is the impending impact of Canada's rapidly aging population. Longer life expectancies will mean that Canadians will face the prospect of outliving their savings and needing health care that may not be fully funded by the public system.

We believe that privately purchased life and health insurance is a fundamental component of Canada's social infrastructure. We urge the government to continue to maintain a tax environment that encourages Canadians to be self-reliant and to protect themselves from the financial risks associated with death, disability, illness, and retirement.

We commend the government for retiring more than $33 billion in debt over the past four years—$29 billion in the last two years alone. This amounts to a saving of almost $2.5 billion a year in interest payments. The amount saved in interest payments is an annual saving. This amount can be reallocated to other priorities. In our opinion, Canada has two priorities: debt reduction and health care.

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Following the events of September 11 in the U.S., Canada's and the world's priorities have changed. Clearly, the defence of our borders, the security of our citizens, and the support of our allies have taken centre stage. While we appreciate and support the need to reallocate current spending to such priority areas, the protection of Canada's health care system must also remain a top priority.

For these reasons, an even greater commitment to continued debt reduction is necessary to ensure that funds are available to meet the growing health care needs of Canada's aging population. By 2016, the number of those aged 80 and older could increase by 250%, from approximately 1 million today to 2.5 million. With an aging population, the ability of governments to adequately fund a broad-based publicly funded health care program is a concern to all Canadians.

Consequently, CAIFA and CALU urge the government to reconsider the current formula that allocates half of any budget surplus to new spending initiatives and gives even greater priority to debt reduction.

I'd like to move to retirement savings. Canada's current integrated retirement savings system has its origins in the 1982 green paper, “Better Pensions for Canadians”. The green paper set out three goals for Canada's retirement system: to guarantee a basic income for those without resources of their own; to assure fair opportunities for Canadians to provide for their retirement years; and to enable Canadians to avoid serious disruption in their standard of living upon retirement.

CAIFA and CALU continue to support these goals, set out almost two decades ago. We believe they are as valid today as they were then. The last two objectives, however, have not been met. Contribution limits to RRSPs have been frozen since the 1996 federal budget, and increases in the contribution limits are not scheduled to commence until 2004. Further, the maximum pension benefit from defined benefit pension plans, for most pension plan members, has been frozen since 1976.

From both a competitive and demographic point of view, investments by Canadians in private retirement savings vehicles will both reduce dependence on government programs and produce additional tax revenue when governments need to maximize their tax base and control their spending the most—when the baby-boom generation enters its retirement years, 10 to 15 years from now.

The 2000 federal budget reintroduced full indexation to Canada's system of personal tax credits and deductions. CAIFA and CALU recommend that the government complete the full indexation of the tax system by immediately increasing the RRSP contribution limits and the RPP defined benefit limits to $27,000 and $3,000 respectively, rather than waiting until the scheduled increases begin, in 2004. These contribution limits should then be indexed.

Finally, I'd like to conclude my comments with a few words about corporate taxation.

In his address to this committee on May 17 of this year, the Honourable Paul Martin noted that “...the real engine of growth is the human mind...”. We fully agree and commend the government for the 2000 budget measures that will provide over $4.1 billion to promote leading-edge research and innovation in universities, research hospitals, and the private sector.

The 2000 federal budget also set in motion a five-year plan to reduce corporate tax rates, intended to make Canada's tax system more competitive internationally. While CAIFA and CALU welcome these proposed reductions, we do not believe they go far enough or fast enough.

I thank you for the opportunity to participate in this round table. We look forward to any questions you may have.

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

We'll now hear from the Canadian Federation of Agriculture, Mr. Bob Friesen.

Welcome.

Mr. Bob Friesen (President, Canadian Federation of Agriculture): Thank you very much, Chair, for this privilege to present to the Standing Committee on Finance.

We submitted a brief to this committee in August, I believe. You should have that in front of you. I will not read that brief or go through it in any great detail, but I will certainly make some comments, and will be happy to answer some questions later on.

As many of you may know, the Canadian Federation of Agriculture represents approximately 200,000 farmers across Canada. We're a federation of farm organizations. We have member organizations in every province, as well as numerous national commodity organizations as members. Through that representation, we represent every commodity that is being produced in Canada.

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We represent an agriculture and agrifood industry that contributes as much as $110 billion of revenue to the Canadian economy every year, almost 9% of the GDP, around 13% of employment, $22 billion in exports, and, in the recent past, as much as 26% of Canada's trade surplus.

I am very proud to say I believe we have a lot of potential in our agriculture industry in Canada. While I am going to make some comments about some of the stress that farmers have had to go through, I would like to tell you right up front that this is about much more than just farmers. This is about rural communities, rural infrastructure, small town businesses, and small town job opportunities.

Recently, I talked to the mayor of a small town of 1,600 people in Manitoba. That town's success is contingent on the success of agriculture, and it has lost 13 businesses in the last 16 months. So I think you have to realize that this is about much more than just farmers.

I would like to refer you to a statement the Prime Minister made in his throne speech, and I would like to applaud him for making that statement. He talked about moving agriculture beyond crisis management. We couldn't agree with him more, and I believe there are several ways we can do that.

First of all, we totally support the action plan in the federal-provincial agriculture ministers' agreement that came out of Whitehorse. They talked about a long-term action plan. For quite some time we have called on the government to create what we call an overarching Canadian agricultural policy.

We have a lot of what I call micro-policies, but I believe the success of those policies is contingent on building very strong crosswalks between them. All too often in the past we developed policies that undermined the utility of other policies. We have to get much better at synchronizing or harmonizing these policies into an overarching Canadian agriculture policy, and I believe the Whitehorse agreement went a long way toward that.

We applaud the government for entertaining the thought of stabilizing, setting, or building on the current safety net package that is offered to agriculture in Canada, adding funding for environmental farm plans, food safety programs, and perhaps animal welfare programs.

I can assure you that farmers have worked very hard on all three of those. But I believe if we can package everything in such a way that we have that overarching policy, including the economic contribution we make, environmental sustainability, and food safety programs, we can offer the domestic consumer and the international consumer a package that should tell the public that agriculture is worth investing in; agriculture is here to stay; it's here to be successful; and it is here to move beyond crisis management.

Whenever we develop a policy, it has to pass three very important tests: the test of economic sustainability, the test of social sustainability, and the test of environmental sustainability. To that end, I would again like to say we support the concept of a long-term agricultural framework that includes very solid and stable safety net funding; that is built on credible programs that work; and that is also built on funding for environmental sustainability and food safety programs.

I would also like to tell you that farmers prefer to get their money from the marketplace. Safety net programs should never be considered the tool that makes farmers profitable. A safety net is just that, a safety net.

Let me use the analogy of a trapeze artist. While a trapeze artist practises his act and has the tools to do his act, he still needs the safety net. That safety net is there only when his tools break down. That's how we would like to refer to safety nets. So farmers definitely would like to get their money from the marketplace.

I would also like to say that farmers have suffered a great deal, and not only this year. I can assure you—and I know you've heard this before—we had an incredible drought in almost every province in Canada this year. Not only did we have a weather-related production disaster, but that fell on top of a protracted period of very low prices, especially in the grains and oilseeds industry, and a protracted period where our farmers have found themselves competing against government treasuries in other countries.

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So while we support 100% the concept of a long-term agricultural framework, we will need to get farmers from today to the implementation of that framework.

I would also like to suggest at the same time, when our safety net programs do not pay out all the money in any one given year, that we would like to see a rollover provision so we can roll over that money and continue to build what we have and continue to rely on credible programs, but at the same time know we are developing or building a kitty so farmers will not find themselves in any one given year where there isn't adequate funding.

Let me briefly highlight some of the areas, and I should also say that moving agriculture beyond crisis management is much more than just asking for more actual money investment in agriculture. We believe we can also provide farmers with better tools, tools that simply result in farmers having something they can work with that will increase their chances of being viable and successful.

Perhaps it could be a reduction in input costs. One example is grain transportation, for example, the elimination of excise tax on agriculture-related fuels, which would do a tremendous amount in the agricultural community. I don't have to remind you that the 45% increase in some farm fuels over the last little while was a tremendous hit for many of our farmers. In fact, by our calculation, every 10% increase in farm fuel results in a potential 6% decrease in that farm income.

So we have tools we can offer farmers. We have tools we can offer farmers in the way of environmental sustainability, perhaps capital cost allowance, some type of incentive program for farmers to be able to... because environmental sustainability very often is not a capital investment that has any return accrued to the farmer. We can provide farmers with the incentive, capital cost allowance, etc.

I would also like to direct your attention to cost recovery. When the current cost-recovery regime was implemented, we realized very quickly that revenue targets were set. Very often the fee that was charged farmers for cost recovery did not reflect the service provided. In fact, I can tell you that since agriculture has grown in many of our commodities, currently many of the cost-recovery fees have generated revenue far beyond the revenue targets that were set. I believe Treasury Board is reviewing cost recovery, and I believe we should scrutinize that very closely to ensure the fee charged reflects the service provided, and that this is not a way to generate extra revenue when it isn't related to the service provided.

I already mentioned taxation—the elimination of excise tax and tax incentives for environmental initiatives. We would also like to see the agricultural community be able to avail themselves of the same opportunity that industry can in research tax credits. Currently, agricultural organizations cannot do that. We believe that would be a way of encouraging more research, research that is readily available to the farm community.

Of course, you realize that over the last while our research funding has decreased in public funding and gone much more to private funding. I believe ownership of and accessibility to research results is a key issue for farmers, especially given the consolidation in upstream and downstream industry, where farmers find themselves again struggling and being pitted against very huge corporations. We would like to see the research funding be increased by way of more public funding.

I've already mentioned environment. I mentioned briefly food safety earlier. Again, I believe food safety and environmental sustainability are important to a long-term plan and to be able to provide consumers with that package.

Then, of course, another very important issue—and I'll end it at that—is the trade issue. You know very well that Canada has an initial trade position. It is supported by the Canadian Federation of Agriculture. I would like to say we need to make sure we flow enough resources into trade in two areas. I believe very strongly that we have a trade position we need to try to sell to other countries. We need to tell other countries that what we are trying to do in the next round of the WTO are policies that might work for them as well.

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I believe we have to provide resources to market our trade position so that Canada does not find itself victimized in the next round. I believe we also have to provide adequate resources to defend ourselves against what we very often call unfair trade challenges from other countries. I can assure you that Canada has complied with the spirit and the rules of the last round. We find that other countries, while they may belly-up to the bar in trade negotiations and talk about trade liberalization, find all types of innovative ways to create non-tariff trade barriers. Canada needs to provide adequate resources to make sure we can be a player in world trade.

Thank you very much, Mr. Chair.

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

We'll now hear from the Insurance Bureau of Canada, senior vice-president, policy development, and chief economist, Mr. Paul Kovacs. We also have Suzanne Sabourin, executive director, government relations. Welcome.

Mr. Paul Kovacs (Senior Vice-President, Policy Development, Chief Economist, Insurance Bureau of Canada): Thank you, Mr. Chair. Good morning, ladies and gentlemen.

The Insurance Bureau of Canada is the national trade association representing private property and casualty insurance companies in Canada. Our members represent about 90% of the auto, home, and business insurance sold in Canada last year. Last year we paid out over $15 billion in claims to help Canadians repair homes and vehicles, replace stolen goods, and rehabilitate people injured in vehicle accidents.

Our industry directly employs about 100,000 people in communities across Canada, and there are numerous other professions and business undertakings that involve tens of thousands of jobs that are also supported by the insurance industry.

At the outset, I want to commend the federal government for its prudent management of the Canadian economy since taking office in 1993. The federal government's fiscal strategy, blending tax relief, debt retirement, and targeted program spending, has restored a state of balance to the nation's finances. We're also very encouraged by the specific vision of this committee, setting the outline of the tone for the discussions for the next budget, including talking about creation of an environment where Canadians can enjoy the best quality of life and standard of living.

Our pre-budget submission was tabled with you back in August, as requested. It touches on four issues: taxation, investing in disaster prevention, the need to reduce the regulatory burden, and the importance of debt retirement. This morning I'm going to focus my comments on disaster prevention and regulatory burden, but I'd be pleased to answer questions on any part of this submission.

Each fall stakeholders come before the committee to discuss top-of-mind issues. This year is a year like no other. The chilling and tragic events of September 11 are on our minds. The tragic loss of life and colossal property damage has galvanized public concern and focused attention around the world on the possibility of extreme events, including the risk here in Canada. Indeed, Canadians recognize the need for improved security measures and disaster prevention initiatives.

Following the horrific events of September 11, our organization has been active on a number of fronts. We established a task force on terrorism. We're looking to assess the impact on our industry and our customers. Early estimates show that the international insurance industry will face claims of more than $40 billion U.S., perhaps much more. This is the largest event in our history, as an industry. Despite the magnitude of this event, we've communicated to the government, the media, and others our knowledge that Canada's insurers are financially sound and fully capable of doing our job. We will pay the claims that come to us.

Our task force is now looking forward. We're looking to ensure that Canada's insurers are ready for future events. In particular, we have to be very clear that our contract wordings can be understood by customers, so they know what is and what is not covered by insurance going forward. We very strongly support the efforts by the government to focus national efforts on increasing public security, in particular through the prevention of future terrorist attacks. As insurers, we are prepared to do our job, and we welcome supporting the national effort.

Prevention is the best approach to the management of terrorism and terrorism risk. In our submission to this committee, we've also encouraged the government to invest in prevention for natural disasters. Experience shows that prevention is the best approach for public safety and security.

Disaster recovery payments by insurance companies and by taxpayers have been doubling every five to ten years for several decades. This is an alarming and unsustainable trend. In the late 1990s the Canadian government spent over half a billion dollars a year on average to repair damage caused by natural disasters.

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We believe that dedicated funds to support disaster prevention will lead to improvements in productivity, improvements in the standard of living for all Canadians, and reduce government payments for disaster recovery. Most importantly, investments in prevention would reduce human suffering caused by disasters.

We're very grateful for the support that this committee has offered over several years now to talk about the importance of investing in disaster prevention. This support has led to a recent statement by the federal government committing that there will be national discussions toward the development of a natural disaster mitigation strategy. This is a very welcome development, and we look forward to turning this commitment into specific actions that will affect greater public confidence in our ability as a nation to manage disaster risk.

Our submission also summarized concerns in our industry about government regulatory practices. We recognize that government regulation is an integral part of maintaining public confidence in the financial system. However, we are all too aware of the negative impact well-intentioned regulatory practices can have on the financial performance of insurers and other financial institutions.

We strongly support an appropriate balance between government regulation and reliance on market forces. A balanced system can be efficient and effective and it can deliver good value to customers and businesses alike. It reduces the risk of insolvency and enhances public confidence in the system as a whole.

While federal regulators and financial institutions have carried out their mandate in an acceptable manner over a number of years, recently there's growing evidence that the system is out of balance. Concerns are being expressed in the financial services sector, in particular in the insurance industry, about growing regulatory requirements that are reducing the competitiveness of businesses and resulting in unnecessary costs for consumers.

While insurance providers are experiencing their lowest earnings on record, the extent of regulatory intervention continues to escalate. Greater attention is needed to ensure the continuing and future health of Canada's financial services sector.

We believe that institutions demonstrating strong capitalization and sound business practices should be subject to less intrusive monitoring and reduced regulatory intervention. It is essential that regulatory and other public policy actions reflect the importance of re-establishing a supportive business environment, and promoting innovation and lasting competition.

Nicholas Le Pan, the new Superintendent of Financial Institutions, has given us his assurance that the federal regulator will work with the bureau and others to identify and work to resolve the problems. He has also offered, where appropriate, to help us secure greater attention from provincial regulators, in addition to focusing on federal issues.

In closing, my comments this morning provide an overview of the recommendations provided in our written submission. These recommendations are intended to foster a more supportive environment in which citizens and businesses alike can realize their full potential.

We appreciate the opportunity to contribute to the discussions toward the next budget.

Thank you.

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

We will move to the question and answer session.

We will begin with Mr. Epp. Mr. Epp, you have ten minutes.

Mr. Ken Epp (Elk Island, Canadian Alliance): Thank you very much, Mr. Chairman, and thank you to the presenters this morning.

We get a constant stream of challenging thought from our witnesses in this committee and it's quite a delight to participate in it. I'd like to begin with the insurance and financial advisers, I believe the first and the third presenters.

With respect to disasters, we're very aware of it these days because of the events of September 11. I don't even know—does that impact you here in Canada at all in terms of your immediate costs or premiums? Also, it seems to me that many of the insurance policies I've seen say that we're not covered if it's an act of war, and what happened in Washington and in New York seems to be an act of war. Does this mean insurance companies are exempt from that coverage?

I've read in the paper in the last couple of days that a lot of people are now buying insurance, both for property damage and life insurance, at increased numbers. This is a boost to your business, in that sense. But are these people actually covered? Because an act of terrorism is considered an act of war, are you then exempt from actually paying the benefits?

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That's my first question. It has not much to do with the budget, but it's a curiosity question I want answered from the experts.

Mr. Paul Kovacs: It is quite common in insurance policies, and I would think likely in all insurance policies, that acts of war are excluded.

The events in New York are widely seen by the industry as not an act of war. We did not have two countries declare war. They were horrific events, but they were not, by legal definition, an act of war.

So it is our sense that there are many billions of insurance dollars that will be paid as legitimate claims because of what happened in the United States. Some of those claims will be paid by Canadian companies. Life insurance companies in Canada sell a lot of policies to Americans. Property and casualty insurance companies sell policies to Canadians who travel in the United States.

If your vehicle was near that building, it was likely covered by an insurance policy, which will be paid by your insurer. Your homeowner's coverage covers a number of travel events. That would be paid by your insurer. So many Canadians who were travelling in the United States when that event happened are making insurance policies and they are being paid.

Mr. Ken Epp: I think that answers my question sufficiently. I want to get onto the pre-budget consultation stuff, which is what we're really here for.

First of all, Mr. Thibaudeau, you talked a little bit at the beginning of your presentation about participation in the health care. Obviously, health care is a very high priority for most Canadians. We have come to accept in this country that the publicly funded health care system is the model we're following primarily in this country. However, when it comes to vision care and dental care, I think the insurance companies handle a lot of it, and a lot of it is self-funded.

What are your thoughts about getting insurance companies involved in providing health care for people?

Mr. David Thibaudeau: To respond to that question, I don't think I will try to suggest where the insurance companies play a role. But first of all, looking at the whole health care system, which we appear to be doing right now in this country, and examining how it works and finding out what Canadian people think about it, is probably the key place we ought to be.

Whatever has to happen to make it better... Are the Canadian people telling us—I'm not sure, but I suspect they may be—that it isn't working the way it ought to work? If that's the case, then we ought to have everybody involved in trying to figure out what the answer is to bring some form of reform to it, rather than cutting and pasting and fiddling around.

From our perspective, we feel that whatever the environment is from a Finance tax standpoint, it should favour people being able to continually take care of themselves as well, rather than throwing everything back at the government.

Mr. Ken Epp: Thank you very much.

I would like to go to another question. This would apply, again, to both of your groups.

We've heard in a number of presentations that RRSP limits should be increased from the current $13,000 to $14,000 range up to $27,000, which is almost a doubling of the limits. The number of people who can actually contribute to the max is somewhat limited because of income and demands on incomes of ordinary Canadians.

What is the rationale for wanting to increase those limits to this huge extent?

Mr. Bill Strain (Chair, Taxation, Conference for Advanced Life Underwriting (CALU), Canadian Association of Insurance and Financial Advisors): I'd be pleased to address that.

In the submission we put forward, we said the genesis of the increasing contribution limits came out of the green paper a number of years ago. Those actions emanating out of that plan have been delayed and deferred and delayed and deferred.

We think it's important to encourage Canadians to be self-reliant. We think as the limits have been capped and kept down, the inability to save meaningfully for retirement has moved further and further down the income levels. We have any number of individuals now who are affected and who cannot make the contributions they would like to make to see those retirement funds at a level where they can sustain their retirement in a fashion that would be acceptable, at the same time reducing dependence on government in the future.

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I think we've got to realize that the tax deferrals that arise from contributions to RRSPs and the deferral of the tax on the income within retirement savings plans are not only tax deferral savings for individuals, they are deferred tax revenues for government. As that pendulum moves back, the withdrawals from retirement savings plans are going to generate tax revenues for governments at the same time we have this burgeoning demographic change as the baby boom generation reaches its senior years. That line is becoming ever closer to being crossed, where the tax cost—if I can call it that—to government will be overshadowed by the tax revenues that will be coming out of those plans.

Mr. Ken Epp: Mr. Kovacs, do you have anything to add to that or not?

Mr. Paul Kovacs: I have a very small contribution to make. As an economist and by my training, I think that once a public policy decision is made, to include indexation is a good public policy tool. If the numbers fail to increase with the rate of inflation, you're eroding a decision that was made in the past, and I think it's good to at least make an adjustment for inflation.

Mr. Ken Epp: Thank you very much.

I'd like to talk to you guys for another half an hour, but my chairman here will, I'm sure, interrupt me.

I need to talk to Mr. Friesen about agriculture. One of the statements you made and a fact I have known for a long time because a lot of farmers have told me—I have a lot of farmers in my own riding, and I also have a lot of relatives in Saskatchewan who are farmers, so I'm very aware of this—is that farmers would much prefer to have their income come from the sale of the their product. This makes so much sense that I'm surprised that we can't get a government policy that would actually arrange for that.

Now, in view of the fact that other countries are subsidizing the agricultural production in their own countries so much and we are competing against it... as you said, farmers here are competing with the treasuries of other countries, and you have some very, very good recommendations. For example, you said the federal government should actually allocate money to start going to the tribunals and challenging this in a very substantial way. Do you have any hope that this will happen in the near future, and what is the short-term solution to this while we're waiting for this very sensible long-term solution to occur?

Mr. Bob Friesen: You make an excellent point.

Currently there is not a lot of optimism that we will be able to get the U.S.A. to decrease their subsidies in any substantial way. Part of the problem is that technically the U.S.A. is not contravening the Uruguay Round Agreement on Agriculture. The reason for this is that they're... I shouldn't say well within their amber limits, but they're getting much closer to their ceiling, and they are still within their amber light limits from the last round. Much of the very high level of money they're paying to farmers in direct payments is considered green according to the definition in the agreement on agriculture. A green program is defined as being non-trade-distorting. However, the high levels they're paying farmers has actually created the trade distortion. When it comes to paying subsidies to that extent, it basically becomes an export subsidy as well. It just ends up in different pockets.

Any optimism as to their decreasing their subsidies is not very high. They have started talking as if they will be decreasing their subsidies, but again they're developing their next farm bill, and we've been told that the agricultural community couldn't afford to have them substantially decrease those subsidies because they've become reliant on them.

But yes, our government is committed to fighting those in the next round. We believe our agricultural industry is in a situation now, though, where if we can't achieve closer equity, we're going to lose much of our agricultural industry, in several ways. Farmers will no longer be able to afford... I should say that we rely on export markets. Probably well over 50% in Canada and, in a province like Saskatchewan, close to 80% of their production relies on export markets, so we will either lose farmers or we will lose our agricultural industry as the U.S. can afford to come into Canada and buy up our processing industry. They can buy up our grain-handling industry. So we're going to lose on two fronts. We will have to achieve much closer equity with those subsidies, either by getting a decrease in their subsidies very quickly or by continuing to move to get ours increased.

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Mr. Ken Epp: Good. Thank you.

Just before my time is up, Mr. Chairman—

The Chair: It is up already.

Mr. Ken Epp: —I would like to thank you, but I would also like to explain and apologize, because although I now have to leave for another commitment, it is not for a lack of interest in your talk. I would rather stay here, but I also like to keep my word. We'll read the blues, the preliminary transcripts, and see what else you have to say. Thanks.

The Chair: Thank you, Mr. Epp, for the great 15-minute intervention.

Mr. Ken Epp: It was 12 minutes and 36 seconds.

The Chair: That's right, but we always round it off.

This five-minute round will be for Mr. Murphy, Mr. Pillitteri, Mr. McCallum, and Mr. Cullen.

Mr. Shawn Murphy (Hillsborough, Lib.): Thank you very much, Mr. Chairman.

My question is for Mr. Kovacs. Your paper was done, I believe, back in August. You probably heard yesterday a fairly significant media announcement that the United States has announced—when you take into account all the levels of funding—something in excess of $100 billion. It seems to me that is being done to reimburse business losses, to protect displaced workers, to stimulate the economy, and to restore business and consumer confidence. This has been supported by both the Republicans and the Democrats in the House down in the United States. It's going to create a deficit, I understand, in the United States budget.

There's going to be pressure on our government to follow a similar pattern. I assume that pressure will probably start today. Do you have any comments as to how, or advice to this government as to how, we should proceed?

Mr. Paul Kovacs: I think the government has been extremely clear that there is a new priority, namely to focus on the prevention of terrorist acts here in Canada and to contribute to the international effort to prevent terrorist acts. I think that is extremely appropriate. That is what the Canadian public is looking for, and the government is committed to acting on that.

When the final price of that comes in, I believe it will be stimulative. It's going to cost money to do what's being talked about. Those closer to it will be the only ones who know exactly how much is involved. I certainly believe there is a stimulation that will come out of the correct actions the government is determining right now with respect to the prevention of terrorists acts.

Beyond that, in my opinion, it is still too early to determine specifically what the right actions are for Canada. Given the incomplete information available to any of us to offer full counsel, it's a challenge. This government always has the option of doing an early budget or acting outside of a budget context, as they will, on the terrorism prevention initiative and security exercise. Perhaps there will be enough information. There has certainly already been an announcement with respect to the airline industry that in specific areas action can be taken.

I still believe that in the Canadian circumstance, which is different from the American, we did not experience the losses the Americans did and that there is some more time available to us to do the proper research and make the decision.

Mr. Shawn Murphy: So what you're basically saying is to take a go-slow, cautious approach?

Mr. Paul Kovacs: I'm not certain I'd describe it as go-slow. True, it takes more time. The tone I have heard from this government leaves me comfortable that they are doing the right thing: they're talking to the right people, they're listening, and they're getting the advice. When enough information is available—which may come sooner instead of later—I am confident the government will act.

Mr. Shawn Murphy: The next question is for Mr. Friesen.

In your brief you didn't comment too much on the existing stabilization program. Would you care to elaborate? Is it underfunded or are there cashflow issues? That seems to be the one program that underpins—or is supposed to underpin, having that stated intention—the income of Canadian farmers.

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Perhaps I'll give you a second area. You have many things in your proposal; if there is one thing you'd like to see this government do in this budget round, what would it be?

Mr. Bob Friesen: Let me address your first question. I'll speak to the different components in our safety net package.

The FIDP program, which is the income disaster program, is probably not going to spend all the money for the year 2000, for the reason that, because of the definition of green programs in the agreement on agriculture, we had to stick to either a three-year reference margin or a five-year Olympic average reference margin. What happens is, if you have a long protracted period where the price is very low, as we've had in the grain and oilseeds sector, a farmer's reference margin ratchets down. It's a 70% program. You're eligible for funding up to 70% of your, say, three-year reference margin. If the reference margin is at zero, then 70% of zero does not trigger any money for the farmer, and that's where that program is running into serious problems for the grain and oilseeds sector.

If you look at the hog industry, we had a terrible year back in 1998. However, they'd had several good years before that. We had a sharp, downward deep spike. FIDP kicked in. It worked fairly well, and in fact, the hog industry then moved back up. So for a commodity where you have short cycles, the FIDP program works.

We've been trying and I believe we have the department at a place now where they are very determined that they are going to try to improve the definition at the WTO so that we can extend the reference margin. That should help to include more good years. Even if you have, say, three bad years, perhaps you can add on seven good years, at least, and then that would help to bring the reference margin up. That's the failure there.

As far as crop insurance is concerned, you may have heard producers say they didn't buy crop insurance because it didn't do what they needed it to do. I'm not going to address that, but what I would like to address—and I mentioned this earlier—is that because the drought came during a time when grain and oilseeds producers had already suffered four or five years with very low prices, a 70% crop insurance program did not help as much as it could if they had had three or four good years. The reason I'm saying that is if they experience a 30% reduction in margins, they can't afford that, because they've already had terrible margins over the past four or five years. So while it may be at a 70% or 75% level, crop insurance cannot help to sustain a farmer who in the previous four years has already been kneecapped on the price.

As to the most important issue I brought up, that is a very tough question. Perhaps this is a political answer, but I would have to say it would be a combination of a long-term action plan, as I mentioned earlier, together with short-term funding to get farmers there, to the implementation of the action plan, and yet inside that, at the same time, providing farmers with better tools to work with that may not necessarily be an actual flow of money to the farm gate but rather tools that will help to reduce input costs.

The other point I would like to make is that we're determined that we will work much more closely with all the ministers involved on this file so that we can avoid having happen what happened in February after the announcement of the $500 million. The reaction after that $500 million left a bad taste in everybody's mouths. We've told the ministers we'd like to do our shouting inside the room and when we leave the room we look like a team.

The Chair: Thank you, Mr. Friesen and Mr. Murphy.

Mr. Pillitteri.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you very much, Mr. Chair.

I have a couple of questions. The first is to Mr. Friesen.

Thank you very much for the presentation. Your first remark was about excise tax on fuel, and if I recall, in my past life, or my present life still, being a farmer, in bulk fuel purchases by a farmer, we were able to get the excise tax back in filing a business form at the end of a season. I don't know if it's right across the country, but I do remember filing those—being the provincial tax and the federal tax. Is it still in existence, or is there a limit on what rebate goes back from that?

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Mr. Bob Friesen: If my information is correct, you're right, the provinces have repealed the excise tax, but the federal excise tax is still being charged.

Mr. Gary Pillitteri: But can a farmer, at the end of a season, ask for it back under the business factor by claiming how much he has purchased on bulk purchase only?

Mr. Bob Friesen: I believe that applies only to the provincial excise tax.

Mr. Gary Pillitteri: Only the provincial excise tax? Well, then, the federal tax must have been relieved, because a portion of the federal tax used to be in there at one time. I remember filing those.

But I'd like to ask you another question. Maybe it doesn't relate to the pre-budget consultation, but just for the information of our members and respective parties, there is a bill coming forward by one of our members about genetically modified foods and the labelling of those and what effect it really would have in the farming communities, specifically here in Canada, whereas in the understanding of other countries, specifically the Europeans, they are not taking the same stance on genetically modified and what effect it actually would have, indirectly opening up the doors for them, because they don't consider some products to be genetically modified. If they were to label, they would not put anything on the label, whereas in Canada, on the other hand, in anything that is altered, we would be really in a devastated position in the cost factor and losing the marketplace to some imports. What do you feel about that?

Mr. Bob Friesen: I'm glad you asked that question.

I've been talking to so many MPs over the last few days that I don't recall any more what I said at this meeting or at yesterday's meeting. But you're absolutely right; it's one thing to allocate, say, $500 million to the agricultural community over here and then have a bill that in fact would very likely cost farmers more than the $500 million they received.

Bill C-287 is a typical example. If it passed and became law, it would devastate the agricultural industry, for several reasons. First, the food processors have told us that if we go to mandatory labelling, they will walk away from the technology the way they did in Europe. They will no longer source their products from Canadian farmers.

I believe it has implications for trade. Because it's an informational issue and not a safety issue, the Americans would have a very good case to challenge if we went to mandatory labelling and imposed mandatory labelling requirements on products coming into Canada from the U.S. They would challenge it as a non-tariff trade barrier. I believe we would lose, and then we would find ourselves in a situation where we had regulations for Canadian farmers that didn't apply to products coming in from the U.S.

So that bill has tremendous implications, and while this is probably not a forum to lobby, I would challenge everybody to make sure that bill does not pass, because it could virtually shut down a large part of our agricultural industry.

Having said that, we support the development of voluntary labelling standards and in fact have been involved in the CGSB committee in doing exactly that. We do not want to prevent consumers from having all the information they want, but we need to manage it in such a way that we give them the information they want and do it in a way that doesn't devastate the industry that's going to be supplying them with the products.

Mr. Gary Pillitteri: Thank you.

I have a little question for Mr. Thibaudeau about RRSPs.

In the last few years, of course, the RRSPs have been frozen. But in a budget three years ago, we brought in the Registered Education Savings Plan, and I understand it has been going through the roof, with families with young children putting in so much money.

If you had a choice of increasing one, which would you increase? You've just brought forward the RRSPs. Or would you increase the other sector where families with children are putting money away to educate their children in college? You never know today how far they will be able to educate their children 20 years from now.

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Mr. David Thibaudeau: I think the question you're asking is a matter of priorities, but I think it comes down to one, retirement, for a whole lot of people, a whole lot of Canadians. Putting money aside for education for children is a very important issue. There's no doubt about it. And it's likely been on the uptake. I don't have numbers to substantiate that, but perhaps you do. But in terms of retirement, you have these statutes set out today to provide for retirement and assistance for people to provide for their own retirement, which I think is a bigger issue given where we're at today and the demographic movement of who is where. I think you're going to have a larger group of people coming into retirement than you will, perhaps, of future generations of those who need to save now for when their children will be going to university.

The Chair: In terms of the answer to his question, which one would you choose, it would be both, right? You would raise both?

Mr. David Thibaudeau: For sure. But if there were only one—I think that's what he's asking.

Mr. Gary Pillitteri: But, Mr. Thibaudeau, to go go one step further, I think we left room in there for the education of a child if that money is not used to go to RRSPs anyway.

Mr. David Thibaudeau: Yes.

Mr. Gary Pillitteri: I think I would prefer to see it more towards the family, and if no room was used, later on one could apply it to one's own RRSPs.

Mr. David Thibaudeau: Yes.

The Chair: Thank you, Mr. Thibaudeau.

Mr. David Thibaudeau: Just to go back on that, if that limit were larger it would even enhance it further.

The Chair: Thank you, Mr. Pillitteri.

Mr. McCallum.

Mr. John McCallum (Markham, Lib.): Thank you. I enjoyed the presentations, especially the comment from the insurance industry that September 11 was not an act of war, and even so there was no request for a bailout of any kind. So that's good news.

I have two questions and the first is to Mr. Kovacs. It's not exactly to do with the budget, but it speaks to your point about regulation and bureaucracy. It is regarding the ombudsman or ombudsperson. The government had hoped very much that we could have one-stop shopping for the consumer and a single ombudsperson for the whole financial services industry. It seems now we have silos. We're going to have one for banking, one for insurance, or maybe two for insurance, life and non-life.

It seems to me that if we can't get our act together, and this is more an industry thing than a government thing, in efficiencies in that area, which should be relatively easy, it's going to be pretty hard in the overall provincial-federal morass of regulation of the financial services industry. So do you have any thoughts or comments on that issue, the ombudsperson issue?

Mr. Paul Kovacs: Absolutely.

Certainly, with respect to September 11, the industry has not been asking for a bailout; we're fine and that's not an issue at all. We may need to talk about future terrorism coverage at some point, but there is no financial problem for the industry.

In terms of the ombudsman proposal, once again we're into a federal-provincial responsibility discussion, in my opinion, and definitely in areas related to banking and in large part for the life insurance industry, the federal role is supreme. It is where most activities are determined—certainly in banking.

On the property and casualty industry and certainly the auto insurance product, there are such large differences from one part of the country to another, determined by provincial legislation, and under the current federal-provincial arrangements to be directed by the provinces. They in effect say the product is different in one part of the country compared to another and the relationship with the public is to be managed differently.

Our industry is concerned about how regulatory issues are impeding on the performance of the industry as it's trying to best serve the public. We don't believe the answer is that the federal government assume all regulatory practices. There are areas where the provinces appropriately lead. Consumer relations for insurance issues are provincially led, and we welcome that the federal regulator has offered to help us sort some of these issues out with the provincial regulators.

We certainly found with consumer issues that we do believe we can link our process in with the ombudsman. There's a single phone number to call if you have a problem with a financial issue. If it happens to be an insurance issue the number takes you outside to the provincial person who knows the answer to the question. It may be at the Insurance Bureau of Canada, because we have a national system of answering consumer issues, which the provincial regulators often defer to, and we think it's working well. But we don't think we need another federal bureaucracy of consumer specialists who start to learn about insurance matters. That simply doesn't exist now because it's being managed by other systems.

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We think there are ways to hook into a national system through technology, like one single phone number, one single Internet access, that covers the entire sector. But at the same time the actual implementation does not need to be another group of people in Ottawa who learn about province of Ontario auto insurance and province of Quebec auto insurance and whatever. That's being handled right now. We think it's being handled very well. There have not been a lot of consumer issues on the insurance side.

Mr. John McCallum: I don't want to belabour the point, but my understanding is that this is not a federal power grab. The ombudsperson group is totally non-governmental, and so it's a question of the industry, whether or not the various sectors of financial services could have a single one-stop shopping area, which we seem not to be able to do.

My second question is similar to Mr. Murphy's. It's about deficits and surpluses, but I'd like to direct it to Mr. Thibaudeau and Mr. Strain. I agree with you 100% that we need to get our debt down because of an aging population. Here we're talking about 10 years plus before the baby boomers retire en masse.

We now have a much more pressing situation in the short run where the U.S. is about to run deficits. I think we've given our fiscal stimulus, bigger than the U.S. has had to date, early, and we should avoid deficits unless things get far worse than people are anticipating. I'd like to ask you, for this year and next year, do you think we should aim for large surpluses, small surpluses, or deficits?

Mr. Bill Strain: I'll comment, Mr. McCallum, on that question. As you probably know better than me, it's been a long, tough fight to get the deficit under control, to reverse the trend line of increasing debt loads, increasing debt-to-GDP ratios. We've finally seen the turning point and the beginning of some success in that area. I would comment that I don't believe the fight is over by any stretch.

Yes, we've had a huge impact from September 11, and we have to address that. Mr. Martin, in his budgets over the last number of years, has built in contingency funds. If there was ever a need for a contingency fund, this is it, there's no question about that. I think those issues have to be addressed.

I think to not take our focus off the necessity for a continuing no-deficit approach and the continuing trend to pay down the debt is absolutely essential, unless, as you stated, matters get far worse than is anticipated at the moment. I would strongly urge the government not to move back into a deficit position.

The Chair: Thank you.

Five minutes for Mr. Cullen.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chair. Thank you, gentlemen, Ms. Sabourin.

I have a question for Mr. Kovacs and Mr. Thibaudeau, and I'll put it in lay terms, so you'll correct me if I'm wrong. On September 11 the insurance market for airline companies in Canada, or worldwide, I'm not sure, collapsed, and the federal government has basically stepped in and is self-insuring those risks right now.

My understanding is that the insurance companies are saying, we're going to make an assessment and make an evaluation of risks and then, presumably, that will reflect itself in either... The market has to develop again, I suspect, but at an increased price. How long is this going to go on? Right now the Government of Canada is exposed; the taxpayers of Canada are exposed. If this is self-insured, how long is this going to go on, and how much are premiums going to go up?

Mr. Paul Kovacs: I'd be pleased to speak to that. It's a property and casualty issue, and I think this particular issue has fewer implications than in other areas.

This is a particular element within the insurance industry that's been challenged for a while. My understanding is that it collects about a billion dollars a year, which is internationally considered a small part of the industry. It's a little niche industry. Each of those four airplanes had about a billion and a half of insurance on them, so there's $6 billion of payouts in one morning.

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The industry had been questioning for a while if it was running itself the best way. But it's very much an international industry. This is a group who—none of them are actually based in Canada—are supporting that particular part of the world's economy. They certainly have recognized that everything that happened on September 11 was covered by insurance. That's never been an issue.

But going forward after September 11, they had so much uncertainty they said they were going to need to do a great rethink, and they've been trying hard to get the information. I've never heard any of them offer a specific answer to your question about how long it will take for them to feel comfortable again going forward. This was not only in Canada; it was an international issue. It was done by the same group of companies to every airline around the world. It will take some time to sort out.

One important lesson was in the U.K., where there was a great deal of terrorist action taking place over many years, in many circumstances beyond the airlines, there was actually a need to come up with a whole new mechanism that involved a government partnership with the industry, formalizing all of that into a new mechanism that is in place and has been operating for a while there.

It will be intriguing if that becomes an international discussion—is terrorism now something that is more likely worldwide, in many other countries, like Canada and the United States? We'll also have to think beyond the airline industry about how we handle this going forward.

Anyway, the industry does have a habit of solving things fairly quickly, but it's very hard, because none of these people have said what time, for me to give you an actual sense of how long it will take. I hope it will come soon.

Mr. Roy Cullen: And costs will probably go up, not surprisingly.

Mr. Paul Kovacs: The situation before September 11 was probably not sustainable, and now with September 11 being seen as an increase in the risk, I think the costs will go up. It's very important for the airlines. Everything other than terrorism costs is very marginal, little adjustments, but this is one absolutely critical element that was greatly underestimated.

Mr. Roy Cullen: Can we turn quickly to financial guarantee insurance? It's been a bit of a pet project of mine.

If you look at the banking system in Canada, we have a system where if you don't meet the bank's risk threshold, they don't deal with you, basically. In the United States there are some institutions, like Wells Fargo, who equate risk and return, so it's prime plus six or seven—if you're still interested.

Now financial guarantee insurance would be a mechanism whereby, for someone to insure that additional risk... There have been issues with Prudential and OSFI, and there's a little bit of a history there. But if you could reinsure the top ends of any kind of risk, if you were able to develop some interest in financial guarantee insurance, it might help the financing of the growth of businesses, which is always a challenge we're preoccupied with here.

Is there any appetite or any market that could develop for financial guarantee insurance? I know that OSFI would have to bless something in the end, but I know that Palmer, at least, was interested in exploring it if there were an appetite. Is there any appetite there?

Mr. Paul Kovacs: Financial guarantee insurance is again a product of the property and casualty industry worldwide. It is available to Canadian businesses, but it is currently not being written by Canadian-based companies. So if a Canadian business wanted to pursue this, they would have to acquire it from a company outside of Canada.

It's a type of specialty insurance. It's very challenging. There have been examples in the past where it was not managed well, and that's quite appropriately why the federal superintendent is carefully looking at this. At the moment, the federal superintendent is not providing the framework to make this a product. They're being cautious that the framework would have to be one that really made this a viable, healthy, well-managed industry before it was widely used here.

So it is a product that is available to Canadian companies if they buy it outside of the country. As for the amount of interest within Canada, we've been specifically polling our companies, going back to our companies to see. It's certainly not broadly based.

We have had one or two starting to talk about it, and we've encouraged them to hook up directly with OSFI to try to describe what their interests might be. So there are some companies expressing some interest, but at the moment it is limited interest, and September 11 will be something that will make them rethink how this development will affect their desire or their interest here.

Mr. Roy Cullen: When you say companies in Canada could access it, let's say in the U.S. market or elsewhere, are these lenders?

Mr. Paul Kovacs: If your company would like financial guarantee insurance, you can buy it.

Mr. Roy Cullen: My company meaning XYZ bank?

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Mr. Paul Kovacs: Yes, whatever business you're operating. That's my understanding. But you would not get it from the 230 active companies in Canada. You would call one of the American or European companies.

Mr. Roy Cullen: I was thinking more of the banks saying,“Oh, look, this is above our risk threshold, but if you're prepared to pay the freight, we're prepared to take out financial guarantee insurance and reinsure the top end if we feel we need to”. There's no movement or interest in that by the banks?

Mr. Paul Kovacs: I wouldn't know enough about the banking side of it. It is my understanding that insurers who are willing to stand up and say, “Yes, I'd like part of that, I think it's a good business” are just a few, looking at it at the edge.

Mr. Roy Cullen: Okay. Thank you.

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

We have a five-minute round for Mr. Nystrom and Mr. Brison.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): I have a couple of questions, Mr. Friesen. The big problem with western grain farmers now, of course, is the subsidies in the United States and Europe. Can you give the committee an idea of what size the subsidies are? I know the U.S.'s farm bill, recently introduced, has increased these once again. How big are their subsidies compared to ours?

I remember we used to use the statistic that 38¢ on the dollar to a farmer in North Dakota, who is five miles south of the border, would come from the U.S. government; a farmer in Europe would get 55¢ or 56¢ on the dollar; and the Canadian farmer five miles away from this guy in South Dakota would be getting 8¢ or 9¢ on the dollar. Is there any update on those statistics, or can you give us an idea of how severe a problem we have? There's no level playing field whatsoever, we know that. If you could give us an update as to the challenge we face as a country, it might be very helpful.

Mr. Bob Friesen: Your numbers are quite right. Even on a per-capita basis of the entire population, the U.S. spends over twice what we do on agriculture. In their last notification at the WTO, their 1998 notification, they notified 29% of the value of their farm gate production as subsidies.

Mr. Lorne Nystrom: What percent?

Mr. Bob Friesen: Twenty-nine percent. And in Canada it's 9%.

Mr. Lorne Nystrom: That's for grain producers.

Mr. Bob Friesen: No, it's the value of all farm gate production in the country.

Mr. Lorne Nystrom: And in Europe?

Mr. Bob Friesen: I'm not sure what it is in Europe. It's more than 29%. If I remember correctly, it's around 35% or 40%.

Mr. Lorne Nystrom: So it's no wonder we have farmers going out of business. Mr. Pillitteri, here, could be farming two miles from the North Dakota border, with his brother two miles south of him in North Dakota, and with equal efficiencies and farms of equal quality, look at the price difference.

Short of trying to persuade the Europeans and the Americans to reduce their subsidy rates, how much flexibility does our government have, in your opinion, to move our subsidies higher, keeping in mind, of course, the farmers really don't want subsidies, they want to get paid for the products they produce? I grew up on a farm, and I know of what I speak.

On the other hand, there's no level playing field. When I go to all my small towns, I see them disappearing all over the place. It's just unfair competition, prodded, of course, by the big drought we're having in the prairies now, and low grain prices and so on.

How much more flexibility do we have? We saw in the paper the other day that Bush is putting this extra $60 billion into the American economy, on top of the $40 billion that went in before, and the $15 billion for the airlines—this could be $75 billion, so it's well over $100 billion. If we did the same thing here, we'd be injecting 10% of that, which would be maybe about $13 billion—in Canadian dollars it would amount to maybe $20 billion. How much do we need in agriculture, in terms of what the farmers need, which could act, of course, as a stimulus to the economy?

Mr. Bob Friesen: First of all, let me say one more thing about the programs in the U.S. When they introduced their last farm bill, they included a component called flexibility contracts. This is the green spending they do. You can't base your subsidies on current price and production. That makes it amber spending, and it's countervailable. So what they did is based it on a base period. They implemented it in 1995, and it was a seven-year program, I believe. For the next seven years, the farmer knew exactly how big a cheque he was going to get every year, regardless of whether he planted a crop. You didn't have to plant a crop to get the cheque. You got the cheque anyway.

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On top of that they also have what they call a loan deficiency program. That loan deficiency program guarantees them a minimum price. In talking to the president of the American Farm Bureau Federation some time ago, he told me the cheque he got in the mail was for around $50,000. He had between 600 and 700 acres. He got a cheque for $50,000, plus he got a minimum price guaranteed. That was at the amount they established back in 1995. But, as you well know, they've topped up those flexibility contracts every year for the last three years at least, which for this gentleman ended up doubling his cheque.

We have essentially a free trade agreement with the U.S. If a farmer lives near the border, they can bring that grain into Canada, and you can imagine for how much less they can sell that grain in Canada. It has put tremendous pressure on our industry.

As far as how much more Canada can spend within the agreement is concerned, first of all, in amber spending we could spend another $3 billion to $4 billion and still be within our limits from the last round. In green spending there's no limit at all. The government could send every farmer in Canada a cheque for $1 million and it would be green spending.

Mr. Lorne Nystrom: And they call that the land of free enterprise, and rugged individuals live down there. Is that right, Scott?

An hon. member: That's Nova Scotia.

Some hon. members: Oh, oh!

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

Mr. Brison is our final questioner.

Mr. Scott Brison (Kings—Hants, PC/DR): Thank you very much for all your interventions today.

My first question is for Mr. Friesen, and it's on the design of our farm aid programs. Many of the groups I've met with have expressed the view that there are some fundamental design flaws in the programs. The government will allocate the money and say, we've put so much money into these programs and thus we've addressed the problem. But by design these programs are difficult for farmers to access. Some are based on 70% of the last three years' production. It stands to reason that if a farmer has had three or four years of drought, 70% of nothing is exactly that.

I would appreciate your feedback on NISA and AIDA. I'd also like you to compare them to the previous program, GRIP, as to whether or not it was better designed in that regard.

Mr. Bob Friesen: If you talk to farmers, you'll find that farmers were much happier with GRIP. The problem with GRIP now is that it's based on current production and price, so it could be challenged by the U.S., and most certainly would be.

One of the things we've decided is given the diversity in commodities and in interests across Canada, we want to make sure we keep all our programs as green as possible. We simply cannot afford trade challenges, because we rely on the export market.

As far as the programs are concerned, as I said earlier, the CFIP program doesn't work if you have a protracted downturn.

I'm not sure what your question was on the programs, though.

Mr. Scott Brison: Some of these programs are based on a percentage of the last three years' production. Clearly, if you've had three or four years of sustained downturn, it's difficult to have a program based on that kind of notion.

Mr. Bob Friesen: If you look at the figures, in 1998 and 1999 only about 50% of the applications that were sent in actually triggered money. The rest were ineligible because the reference margins were too low.

What we're finding as the program goes on is that number is decreasing all the time. In fact, you may have heard some people say that farmers aren't applying for CFIP this year. Perhaps that means there isn't a need out there. The reason their application doesn't land on the desk at the CFIP office is because their accountants have done a preliminary review and have told them, don't spend any more money on us doing a full application because you won't be eligible anyway.

Mr. Scott Brison: I have a general question on the issue of capital taxes. There have been some recommendations that we continue to reduce corporate taxes and some of the distortions.

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But in terms of capital taxes, I didn't hear a recommendation on that. Some arguments have been made to this committee that Canada's high capital tax burden has had an impact on productivity by reducing investment. Of course, reducing productivity ultimately has reduced the value of our dollar and has had numerous negative impacts. I'd appreciate your feedback on what we should be doing and what direction we should be pursuing relative to capital taxes, a different tax but still one that has a significant impact on locking up capital and investment. I'd appreciate your feedback. I know the farmers have a perspective on the $500,000, but I'd like to hear about it in a general sense.

Mr. Paul Kovacs: That was certainly an important part of our written submission, although I didn't touch on it in my words today. Certainly from the insurance point of view we think that capital taxes in the financial sector are really holding back the sector from performing as it should. They are out of line with what other countries are doing, and it is interfering with performance and the ability to give consumers what they want. We think the federal government has a role to get rid of the capital taxes in Ottawa, but it has also tried to play a leadership role in pushing the provinces that have capital taxes and using various tools to try to convince the provinces that it would also be good for them to get rid of capital taxes. It's definitely very high on our list of where tax improvements could happen right now.

Mr. Bill Strain: I would simply support the comments Mr. Kovacs has made. I think capital taxes are counterproductive and that the emphasis in the tax policy should be on an income tax base and not on a capital tax base.

Mr. Scott Brison: I have one last question for Mr. Friesen. With, I believe, four years of drought or near-drought conditions in most of the country for agriculture, are proposals being developed for an infrastructure approach to try to address what seems to be a long-term problem? We can't be going back to bailout programs every year. If there is a long-term problem related to drought, is an infrastructure approach being developed? I know that in my riding, the Annapolis Valley, we've had four years of drought-like conditions, and proposals are being developed there to access some of the aquifers that are currently not accessible and to have some level of federal, provincial, and municipal cost sharing in that. Is a macro program being developed in this regard across the country, or are there approaches you are aware of in this regard?

Mr. Bob Friesen: We are currently in discussion with both the department and the minister on whether there is a better way to deal with the programs. By that I mean, should we have just one program? Should we lump all the programs together and design something that will work better and that may be based on actual expenses on a farm-specific basis? We don't want to go as far as cost-of-production insurance because again that would be countervailable. But is there a way, perhaps through premiums, of insuring negative margins? Is there a way of perhaps even providing higher than the 70% insurance?

There are also things we could do to greatly reduce administrative costs. Currently, crop insurance across Canada costs about $75 million in administration. As you know, the first two years of CFIP cost us about $75 million in administration. Currently, it's about $30 million a year. There are ways we can reduce administrative costs and use that money much better. We believe there are also ways of improving the programs to ensure that farmers have a much more stable program that will give them a little more assurance.

Having said that, that will insure them to some extent against low prices and production failures, but it does nothing to mitigate the damage that the high subsidy levels are doing in the U.S. and Europe. Because over half of our products are exported, most of our commodities sell their products in the world market at the world price. So that becomes a problem, kind of off to the side, that really we can't deal with unless we create some type of equity.

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Mr. Paul Kovacs: Just to add to that, some of the research that the insurance companies have been commissioning looks at what we call natural disasters, trying to identify the magnitude of the risks today but also going forward. There's no question that drought is fairly high on our list. I know with other people they think about ice storms and floods, but in terms of payments, agricultural and other, made by the Government of Canada and by the provinces, drought has been extremely costly for governments. Our research is saying that this risk, due to changes in climate, will increase quite a bit in the years going ahead.

We've tried to talk about prevention mechanisms and overall tools, and to some extent this can be a restructuring of existing tools, but I think in other cases we have to go beyond that. Programs and infrastructure mechanisms to deal with drought fit very well into this broader concept that we've been putting forward.

Mr. Bob Friesen: If I may, Mr. Chair, another example of something we can't insure ourselves against is what happened in the potato industry in Atlantic Canada last year—one of the most blatant non-tariff trade barriers ever created by the United States. Canada complied perfectly within the SPS agreement at the WTO, and the Americans, who simply did not want our potatoes in their market, created what they did just to keep the potatoes out.

That's why I suggested earlier that we need to allocate more funding in that area. We need to make sure that we can defend ourselves. That said, the Americans can do almost anything they want because we can't afford to tick them off. Very often we can't afford to counter-challenge them because we're so dependent on their markets.

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

I want to ask a very quick question just to see if this reflects the mood of the country as you see it. Would you agree with the statement that Canadians do not want to go back into a deficit environment?

Mr. Paul Kovacs: Yes, absolutely. We worked very hard to get out of the deficit mindset in this country. It was a hard effort and a big challenge. We're out now and nobody wants to go back.

The Chair: Do you think Canadians would want us to remain committed to the $100 billion tax cut?

Mr. Paul Kovacs: Yes, absolutely. I don't mind speaking up. I mean, that was a commitment, and plans have been built around that.

The Chair: So that basically reflects the feeling of everybody.

Does that go for the investments we made in health care and education, and the commitment?

Mr. Paul Kovacs: Yes. Those are enormous priorities.

Mr. Bob Friesen: Perhaps I can address those questions as well and give our response.

Number one, how important is the $110 billion of revenue being generated by agriculture? Agriculture was a large part of, and contributed a lot to, deficit cutting, but over the years of deficit cutting it cost us probably $14 billion to $15 billion. Eventually, then, if you invest in agriculture, the benefits will again accrue back. The question is, do we want that industry to survive? Can we afford to allow the U.S. to target agricultural sectors in Canada and around the world and to buy the industry around the world?

The Chair: I agree, and Mr. Nystrom made some good points about some of the investments the Americans are making. I think they also have the flexibility because they also have lowered their debt-to-GDP ratio. That type of flexibility is very important.

One of the issues that has come up in the last few weeks has been the importance of having in fact reduced the debt as much as we did. It has freed up $2.5 billion that now can be used for a national security package, for example.

The point I'm making is that the contributions you have made over the years to both the finance committee and the Minister of Finance, taking such a fiscally responsible, prudent, and disciplined approach, is certainly bearing fruit. It's something we will keep in mind when we write the report.

Once again, on behalf of the committee I thank you very much for your contributions.

The meeting is adjourned.