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37th PARLIAMENT, 2nd SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Wednesday, October 30, 2002

1300

The Chair (Mrs. Sue Barnes (London West, Lib.))

1305

Hon. John Manley (Deputy Prime Minister and Minister of Finance)

1310

The Chair

Mr. John Manley

1320

1325

1330

1335

1340

1345

1350

The Chair

Mr. Charlie Penson (Peace River, Canadian Alliance)

Mr. John Manley

1355

Mr. Charlie Penson

Mr. John Manley

1400

The Chair

Mr. Pierre Paquette (Joliette, BQ)

1405

Mr. John Manley

Mr. Pierre Paquette

Mr. John Manley

Mr. Pierre Paquette

Mr. John Manley

1410

Mr. Pierre Paquette

Mr. John Manley

Mr. Pierre Paquette

Mr. John Manley

Mr. Pierre Paquette

Mr. John Manley

Mr. Pierre Paquette

The Chair

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)

Mr. John Manley

Mr. Nick Discepola

Mr. John Manley

Mr. Nick Discepola

1415

Mr. John Manley

Mr. Nick Discepola

Mr. John Manley

Mr. Nick Discepola

Mr. John Manley

1420

Mr. Nick Discepola

Mr. John Manley

The Chair

Mr. Bryon Wilfert (Oak Ridges, Lib.)

1425

Mr. John Manley

Mr. Bryon Wilfert

The Chair

Mr. Gary Pillitteri (Niagara Falls, Lib.)

1430

Mr. John Manley

The Chair

Ms. Alexa McDonough (Halifax, NDP)

Mr. John Manley

Ms. Alexa McDonough

1435

Mr. John Manley

Ms. Alexa McDonough

Mr. John Manley

1440

Ms. Alexa McDonough

Mr. John Manley

The Chair

Mr. Roy Cullen (Etobicoke North, Lib.)

1445

Mr. John Manley

The Chair

Mr. John Manley

The Chair

Mr. Shawn Murphy (Hillsborough, Lib.)

1450

Mr. John Manley

The Chair

Mr. Scott Brison (Kings—Hants, PC)

1455

Mr. John Manley

Mr. Scott Brison

Mr. John Manley

Mr. Scott Brison

Mr. John Manley

Mr. Scott Brison

Mr. John Manley

1500

Mr. Scott Brison

Mr. John Manley

Mr. Scott Brison

Mr. John Manley

Mr. Scott Brison

Mr. John Manley

Mr. Scott Brison

Mr. John Manley

The Chair

Ms. Maria Minna (Beaches—East York, Lib.)

1505

Mr. John Manley

The Chair

Mr. Tony Valeri (Stoney Creek, Lib.)

1510

Mr. John Manley

The Chair

CANADA

Standing Committee on Finance

NUMBER 010

2nd SESSION

37th PARLIAMENT

EVIDENCE

Wednesday, October 30, 2002

[Recorded by Electronic Apparatus]

· (1300)

[English]

The Chair (Mrs. Sue Barnes (London West, Lib.)): Order.

Welcome, Minister Manley. We're happy to have you at committee today.

Pursuant to Standing Order 83(1), as part of our pre-budget discussions we now will hear your economic and fiscal update. You can start your presentation.

· (1305)

Hon. John Manley (Deputy Prime Minister and Minister of Finance): Thank you very much, Madam Chair, and thank you to members of the committee for inviting me today for the annual update.

[Translation]

Good afternoon and welcome, everyone.

[English]

I'd also like to extend my gratitude to the City of Halifax for welcoming us here today. I'll note that we are in Ms. McDonough's own constituency, and it's a beautiful place in Canada.

We meet here in fact at one of Canada's great historic landmarks, Pier 21. From 1928 to 1971, more than one million immigrants and refugees from all corners of the world passed through these buildings on their way to a new life in Canada. Their reasons for choosing Canada were as different as the people themselves. Some came fleeing political and religious persecution in their homelands, while others came to escape poverty or the ravages of war to search for new opportunities in a country that promised fertile land, clear skies, and freedom from fear.

For hundreds of thousands of new Canadians, Pier 21 stood as the symbol of hope and the starting point for opportunity. All of them shared a dream: to build a better life in Canada for themselves and their families. It's the same dream that brings succeeding generations of newcomers to our shores every year. It nourishes and enriches our country, because it brings with it not only the traditions of the past, but the spirit, talent, and drive of the present and the future. That dream built the Canada that we cherish, and it will help to build the Canada that we all want in the 21st century.

Madam Chair, this is my second appearance before this committee as Minister of Finance.

[Translation]

In the four months since I last spoke to you, Canada has continued to post strong economic growth, surprising many analysts with our resilience and leading major economic forecasting agencies to predict that our nation will continue to lead the G-7 in growth.

But we are also very cognizant of the global risks we face, both now and in the future.

· (1310)

[English]

The Chair: I'm sorry, but the translation isn't working for some people, so we're just going to get that corrected. We'll suspend for a minute.

· (1314)

· (1315)

The Chair: We are now back in session. Sorry for the interruption due to those technical difficulties.

Go ahead, Mr. Minister.

Mr. John Manley: Thank you, Madam Chair.

I have to say that Mr. Brison tells me he understands my French well enough that he doesn't need the translation. I don't know whether that's a compliment or not.

[Translation]

Global uncertainties have been rising. Economic growth is turning out to be weaker than expected in a number of industrialized countries. The decline in equity markets, the impacts of corporate scandals in the U.S., the possibility of armed conflict in Irak and anxieties over global terrorism—these have all further increased the level of global uncertainty.

Against this backdrop, I am here today to provide an overview of Canada's economic and fiscal forecast for the next five years, which the government will use for planning purposes and which will help frame pre-budget consultations.

[English]

It's against this backdrop—a strong Canadian performance, but much global uncertainty—that I'm here today to provide an overview of Canada's economic and fiscal forecast for the next five years. It is that overview that the government will use for planning purposes and that will help to frame pre-budget consultations.

Madam Chair, this committee's deliberations have played a key role in establishing the government's fiscal and economic agenda. Your report, based on consultations held across the country, provides the government and me, as finance minister, with a clear sense of the fiscal and economic issues that Canadians find important and we as parliamentarians must address. Over the coming weeks, you and I will hear from a wide range of individuals and organizations, all with their own specific ideas about what the upcoming budget should contain.

We know Canadians are not shy in bringing their views to their elected officials, particularly when it comes to their economic well-being. Canadians told us to eliminate the deficit and get the nation's finances in order. This government listened. We balanced the budget in 1997-98 for the first time in 28 years, and we've kept the books balanced ever since.

Canadians told us to pay down the national debt. Over the past five years, we have reduced the debt by $46.7 billion.

Canadians told us they wanted governments to work together to improve health care. In the September 2000 health accord, the federal government provided an additional $23.4 billion to the provinces for health care and early childhood development.

Canadians told us they wanted to reduce their tax burden. In October 2000, we delivered a five-year, $100-billion tax-cut package for both personal and corporate taxes.

Canadians have made it clear that they want a policy of balanced books and a balanced approach to our nation's finances. We agree, because we know and Canadians know that sound fiscal management and a prudent approach to spending are the surest path to a better standard of living for our citizens and a higher quality of life for every Canadian. It's how we ensure that Canada is a society of prosperity and opportunity for all. It's how we realize our potential as a northern tiger.

[Translation]

Madam Chair, when I met the Finance Committee in June, I stated that Canada would not deviate from the fiscal and economic policies that have created the most rapidly growing economy in the G-7.

We will stay on course and on target. We will manage the hard-earned tax dollars of Canadians with care and caution. Our approach must be no different from that of Canadian families balancing their household budgets. We must spend wisely and live within our means.

The reasons are convincing and compelling. Sound fiscal management has allowed Canada to record five consecutive budget surpluses and pay down $46.7 billion of our national debt.

In simple dollar terms, our debt reduction efforts mean we are now paying almost $3 billion less annually in interest payments. Our debt-to-GDP ratio has now fallen from its peak of 71% in 1995-96 to its current level of 49%, the largest decline recorded by any G-7 country in the same period.

[English]

To reiterate, this is an important measure of how far we have come to date. Canada's debt-to-GDP ratio has now fallen from its peak of 71% in 1995-96 to its current level of 49%. This is the largest decline recorded by any G-7 country in the same period. This remarkable progress has been recognized by two leading international credit rating agencies. Earlier this year, Moody's Investors Service and Standard & Poor's restored Canada's credit rating to AAA, the highest rating these agencies give to a country.

Our clear commitment to fiscal responsibility through economic ups and downs is paying dividends. It protected the historic October 2000 personal and corporate income tax cuts, as well as the new funding under the September 2000 health accord. Coupled with Canada's excellent track record on inflation, it allowed the Bank of Canada to sharply reduce interest rates last year. This prudent approach kept the government's finances in surplus during the recent economic downturn.

Canadians' accomplishments in the area of fiscal responsibility are all the more remarkable when you consider the situation in the United States. Less than two years ago, the U.S. government forecasted a budget surplus of $231 billion for the fiscal year that just ended in September 2002. Now, figures released recently show the final result was in fact a deficit of $159 billion, with no early return to surplus in sight.

But while we have reason to be pleased with Canada's fiscal performance, I believe there is more for us to do. We must continue to pay down the debt. Despite the paydowns of recent years, our national debt still stands at more than $536 billion. In the last fiscal year, we paid $37 billion in interest charges on our debt. It's still the largest single expenditure item in our budget. It costs us some 22¢ out of every revenue dollar that we take in. This is money that I'd rather see spent on the needs of Canadians. Moreover, it also means Canada is vulnerable to economic shocks outside our borders that drive up interest rates. But beyond the arguments about the consequences of debt today, we must also look to the future. We must not saddle our children and grandchildren with today's high debt burden.

[Translation]

Prudent planning, coupled with the hard work and commitment to fiscal discipline by Canadians from all walks of life, have been crucial elements in our success.

In the past, the government's approach to budget planning has included setting aside a contingency reserve and additional prudence to guard against the risks of unforeseen circumstances.

In the 2001 federal budget, the government used the economic prudence and a portion of the contingency reserve to deal with the exceptional fiscal pressures caused by the September 11 terrorist attacks and the global economic downturn. At that time we said that we would restore the full contingency reserve as soon as possible.

Therefore, today I am pleased to announce that the government has restored the $3 billion annual contingency reserve, effective this fiscal year.

· (1320)

[English]

Prudent planning, together with the hard work and commitment of fiscal discipline demonstrated by Canadians, has been a key element of our success. For this reason, I am pleased to announce that the government has restored the $3 billion annual contingency reserve, effective this fiscal year. This money will provide a buffer against unforeseen circumstances. As usual, any year-end surplus goes to pay down debt. Further, we will provide an additional degree of economic prudence in our budget planning to help ensure that the government will not return to deficit.

But sound fiscal management means more than simply avoiding deficits and reducing debt. It also means managing tax dollars well and responsibly and delivering cost-effective and efficient government services. This is why the government must assess its programs on an ongoing basis. This is more than just good management; it's good common sense. Just as Canadians adjust their budgets to stretch their hard-earned dollars, the government must also reassess its spending to ensure it best meets the needs of Canadians.

So what does this mean in practice? It means that in preparing the next budget, we will find opportunities to realign existing spending and improve efficiency. It means that, where appropriate, the government will reallocate money to programs that meet the immediate needs of Canadians, away from those that have already served their purpose. Such reallocation will not be used for debt reduction. Instead, moneys freed up will be used to help address new and pressing needs. I believe this approach is based on a straightforward premise that governments, at all levels, must constantly reinvent themselves. This means we must always strive to find new ways to meet the needs of Canadians in a cost-effective and efficient manner, while supporting the programs and services that make us a caring and compassionate society.

When I appeared before this committee in June, I stated that Canadians had good reason to be optimistic about their economic future and that of the country as a whole. Despite global weakness and uncertainties, Canada has not only emerged from the slowdown of 2001; it now finds itself in the midst of a much better than expected recovery.

Consider the facts. In the first half of this year, the Canadian economy grew at an annualized rate of more than 5%, the strongest in the G-7. In the nine-month period from January through September, the Canadian economy created 427,000 new jobs. The majority of these were full time, with gains in every region of the country and across all age groups. In fact, 77,000 young Canadians found new jobs during this period.

Not only are more Canadians working, but they're also seeing an improvement in their personal financial situation. Real personal disposable income per person has increased 2.9% over the last 12 months. That means an average of $600 for each Canadian.

Canada's net foreign debt as a share of GDP is now at its lowest level in 50 years, and it's below that of the United States for the first time in our history. Growth in business investment, in machinery and equipment in Canada, a key element for sustained economic growth, has rebounded in 2002 and is outpacing the United States.

[Translation]

To further illustrate our solid economic performance this year, let us compare how the Canadian and the U.S. economies have responded during previous economic slowdowns.

In the past, slowdowns tended to be more severe in Canada than in the U.S. and our recoveries weaker.

· (1325)

Indeed, in the 1980s and 1990s Canada had longer and deeper recessions than the U.S.

But times have changed. For the first time in more than 20 years, the Canadian economy outperformed the U.S. economy during a downturn. The U.S. economy had three consecutive quarters of negative growth last year, while Canada avoided recession.

Equally important, we are outpacing the U.S. in the current recovery. The growth in our economy was almost twice that of the U.S. in the first half of this year. And our record of creating over 400,000 jobs so far this year compares with a loss of almost 40,000 jobs in the U.S.

[English]

Again, Madam Chair, we have seen, for the first time in 20 years, the Canadian economy outperform the U.S. economy during a downturn. Our record of creating over 400,000 jobs in Canada so far this year compares to a loss of almost 40,000 jobs in the United States during the same period.

Thus, while our economic performance remains closely dependent upon the health of the global economy, particularly that of the United States, the progress we have made has improved the resilience and flexibility of our economy and has given us considerable economic momentum. Canadians should be proud of this accomplishment, mainly because it is their own. The people of Canada made clear nine years ago that they wanted a change in how national finances were run. They have worked hard, they have sacrificed, they have accepted difficult choices, and they've made it possible for us to be in this position today. The credit belongs to them.

Madam Chair, let me now turn to the economic and fiscal outlook. First, I would like to explain how we've arrived at the figures I am presenting to you today. To gauge Canada's growth prospects, the Department of Finance follows a rigorous and transparent process. It has surveyed a group of 20 private sector economists and used their average forecast of economic growth as the basis for our fiscal planning. Three macroeconomic modelling firms then used this economic forecast to general fiscal projections over the next five years. I've also met with a group of key private sector economists to seek their views on the projections, as well as the risks and uncertainties of the outlook. These private sector forecasters expect growth to average 3.4% in 2002. This is more than double the 1.5% growth rate recorded in 2001. For 2003 private sector forecasters now expect economic growth of 3.5%. Both the IMF and OECD are in broad agreement with the views of the forecasts.

[Translation]

They project that Canada will outperform all of its G-7 counterparts in economic growth, both this year and next.

Private sector forecasters expect solid job creation going forward, thanks to ongoing strength in business investment and consumer spending. Over the medium term they project that economic growth will average roughly 3%.

But they also stressed that, despite the positive Canadian outlook, there are clouds on the horizon. We face a period of global uncertainty in the months to come.

European growth is forecast to be lower this year than last. Japan remains mired in a protracted slowdown.

· (1330)

The fragile financial situation in emerging markets, especially in parts of Latin America, needs to be monitored closely. And most importantly for Canada, the U.S. recovery has been very uneven.

[English]

Corporate scandals, notably those involving Enron and WorldCom, have damaged investor confidence, not only in the United States but globally, and contributed to large equity market declines. Finally, the continuing threat of terrorism and the growing possibility of conflict in Iraq add to global uncertainty. Taken together, these underscore the importance of remaining prudent in our budget planning.

Madam Chair, I would like to turn now to our fiscal situation and outlook. As announced earlier this month in our annual financial report, we have closed the books on fiscal year 2001-02. We realized a surplus of $8.9 billion, every penny of which went to reduce Canada's debt. This is our fifth consecutive budget surplus, the first time this has happened in my lifetime. Moreover, Canada is the only G-7 country expected to achieve a surplus this year.

Looking ahead, the average private sector projections of fiscal surplus for planning purposes are as follows: 2002-03, $1 billion; 2003-04, $3.1 billion; 2004-05, $3.5 billion; 2005-06, $6.8 billion; 2006-07, $10.5 billion; and 2007-08, $14.6 billion. These planning surpluses take into account the $3 billion annual contingency reserve and an additional degree of economic prudence.

These private sector fiscal planning projections indicate relatively small surpluses in the near term. This is due to two main factors: first, the ongoing impact of last year's economic slowdown upon tax revenues; and second, the effect of previously announced policy initiatives, particularly the $100-billion five-year tax reduction plan and the $23.4-billion health accord, both of which are still coming on stream.

Madam Chair, I should note that these figures were calculated using the government's current modified accrual method of accounting. As indicated in the 2001 budget and supported by the Auditor General, the government will switch to the full accrual accounting system. We are planning that this will take place with the upcoming budget, provided we are able to verify the annual accounting amounts with sufficient assurance.

Canadians know that maintaining balanced budgets and reducing our debt burden are crucial to our long-term economic health, and thus to our broad national aspirations. They are not ends in themselves. They are a very necessary means to achieve our fundamental goal, improving the standard of living and quality of life of Canadians. These efforts are important to all of us as Canadians, not only because improving our standard of living puts more money into our pockets, but also because it provides more people with greater choices and opportunities. Our efforts in this area are yielding results.

Since we eliminated the deficit, we have made significant strides in boosting the growth in our standard of living. Over the past five years both employment and productivity growth have been important contributors to the improvement in our standard of living. From 1997 to 2001 Canada recorded the fastest rate of growth in GDP per capita, which represents the best measure of living standards among the world's leading industrialized countries, including the United States.

[Translation]

While we have made good progress, the message is clear: if we want the kind of long-term durable economic growth that will continue to boost our standard of living and our quality of life, we must improve our productivity growth as a nation.

· (1335)

We have been talking about productivity for some time. Some people might see it as an abstract economic term which has nothing to do with real people and their day-to-day lives.

I disagree. Improving productivity is about attaining that higher standard of living that we all want, and that our country deserves. It is not about people working harder and for less pay. That would defeat the purpose. Rather, it means working more effectively thanks to improved skills, equipment and education.

Improved productivity does more than boost a company's bottom line. It means more income and better jobs for employees. It means that more and more Canadians, wherever they live, will have the chance to learn and have more opportunities for personal growth and development.

[English]

Recognizing this, the Speech from the Throne outlined initiatives the government will undertake to ensure that Canada's productivity growth continues to rise and, with it, the Canadian standard of living. A key element in raising productivity growth will be to make Canada a magnet for talent and investment, a critical part of how we position ourselves as a northern tiger.

To encourage investment and entrepreneurship, we will review existing policies to ensure that our regulatory environment is as efficient, transparent, and cost-effective as possible. To protect the integrity and efficiency of our capital markets, we will work with all stakeholders and the provinces to implement new standards of corporate governance and to reform our current system of securities regulation.

Canadians understand that investment in people is the intersection between our economic and social policies, and nowhere is this integration of economic and social policy more important than in health care. That is why we will work with all stakeholders to ensure that Canada's health care system can continue meeting the needs of Canadians in the 21st century and provide Canadians with a distinct advantage in the world. Last week Senator Michael Kirby and his colleagues released a wide-ranging report on options for health care in Canada. In the coming weeks the Commission on the Future of Health Care in Canada, led by former Saskatchewan Premier Roy Romanow, will table its report. Both reports will help governments in their future deliberations to develop a national approach to meeting Canada's health care needs. Our government will do its part. The Prime Minister has indicated that we will work with the provinces and territories to agree on a long-term plan to modernize medicare, with a first ministers meeting early in the new year. We will provide resources to support implementation of that plan in the upcoming budget.

Madam Chair, our future depends on providing the best possible opportunities for our children. As a society, we must strive to ensure that every Canadian child, no matter where they live, has the best possible start in life and the chance to achieve their full potential. This is why we have committed ourselves to further increasing the national child benefit for low-income families, building on our reinvestments in recent years. Our challenge is nothing less than to equip our children with what they need to succeed in a rapidly changing world. Nowhere is this need more urgent than with Canada's aboriginal children.

Our challenge is also to invest in our nation's infrastructure, building for ourselves and our children competitive cities and healthy, safe communities. But that is not all.

[Translation]

Madam Chair, in the interest of future generations, it falls to this generation of Canadians to confront the issue of improving our environment. Canadians want clean air and clean water and they are concerned about the impact of climate change.

· (1340)

On this, our government is working with the provinces and industry to ensure that Canada lives up to its international responsibilities on climate change, as embodied in the Kyoto Accord.

These are important steps that must be a continuous effort to shape our economy to meet the needs of both today's citizens and future generations.

[English]

Statistics and percentages can shed a lot of light on where we stand as an economy, but we must never allow them to obscure what we stand for as a government and as members of Parliament, and that is to make the lives of individual Canadians and their families better and more secure than ever.

Madam Chair, there is a whole new generation of Canadians ready to take on the challenge of building an even stronger, more prosperous, and more generous Canada. Their view is global, and their dedication to this country and the values it stands for is inspiring--people like Carla MacQuarrie of West Chezzetcook, Nova Scotia. Carla and her husband, Peter Lenihan, and their other partners, Dave and Joanne Roberts, own and operate Future Aqua Farms Ltd. This company has attracted worldwide attention for its unique use of aquaculture technology, and Carla herself was one of 18 young businesspeople between the ages of 19 and 30 who were recently awarded the Business Development Bank of Canada's Young Entrepreneur Award. These young Canadians, confident, well-educated, globally sensitive, and technologically savvy, are our best hope for making Canada represent not only what is good but what is best in the world.

[Translation]

Madam Chair, Canadians will be asked by this committee to offer their views on the priorities the government should focus on in its next budget. Over the coming weeks you will hear from groups and individuals across Canada who have a wide range of opinions.

[English]

I too will be travelling across the country in the days ahead to hear the views of Canadians. Undoubtedly you and I will hear many good ideas, but you know just as I know that the business of government is about making choices. If all of the ideas that we will hear over the coming weeks were to be implemented, our small surpluses would rapidly become large deficits once again. We simply cannot allow this to happen, and so choices will have to be made. With this in mind, I would ask the committee to provide input to the government in particular on the following questions.

In June I asked for the committee's views on how the government can best control expenditures and focus priorities. Further to this issue, I would seek the committee's input on how the government can best realign its spending to meet the highest priorities of Canadians.

Second, as I mentioned earlier, the government has restored the $3 billion contingency reserve. To further guard against going back into deficit, what additional amount of economic prudence should be included in the upcoming budget?

[Translation]

The idea of making Canada a Northern Tiger has captured the imagination of citizens across the country. What policies do Canadians think we need to make our country a magnet for investment, for skilled knowledge workers, and for cutting-edge research and innovation?

[English]

Madam Chair, the consultations this committee is pursuing with Canadians are not just about what should be contained in the next budget; they are also about the kind of Canada that we want. I believe the Canada we want is fiscally healthy so that we are free to choose our own path and to shape our own destiny.

[Translation]

It is a Canada where economic and social policies work hand in hand.

It is a Canada that is more productive, more innovative and more competitive than ever, so we can generate the resources needed to invest in our future priorities--health care, the environment and our children.

It is a Canada that embraces a fair and competitive tax system.

· (1345)

[English]

It is a Canada that plays an important role on the world stage, helping to build a more stable and more just global community. It is a Canada that is a magnet for talent and investment, a northern tiger, confident it can take on the world and win. In short, it is a Canada that strives to give its citizens not only a better standard of living but the best standard of living in the world, not only a better quality of life but the best quality of life in the world, a Canada that continues to earn its reputation as one of the most compassionate, inclusive, and progressive nations on earth.

I began my remarks today by referring to the debt, the debt that present generations of Canadians owe to those who passed through this building on their way to a new life in a new land. Just like the hundreds of thousands of Canadians who came through Pier 21 believing that tomorrow can be better than today, I too believe in the great potential of this great place called Canada.

Thank you very much. Je vous remercie.

· (1350)

The Chair: Thank you, Minister.

We'll commence questioning. There will be ten-minute rounds; ten minutes for each opposition member and the first government member, Mr. Discepola, and then all the other members will split the ten minutes, so five minutes each when the ten-minute round comes over.

Mr. Penson, please go ahead, sir.

Mr. Charlie Penson (Peace River, Canadian Alliance): Thank you, Madam Chair.

Minister Manley, thank you for your comments today in bringing us up to date on Canada's current situation in terms of our economic outlook.

I was interested, though, to hear you following the footsteps of your predecessor in regard to the five-year forecast. I hope you do a better job in forecasting than he did, because I don't think he ever met those. They were out pretty badly and didn't give Canadians too much confidence in regard to the forecast.

I do want to say I think it's great that the Canadian economy has performed as well as it has. I'm concerned that, as you have stated, there is some gloom in terms of the international outlook. The United States' economy has not recovered to the extent that many of us had hoped it would. Canada's economy is tied to the U.S. in many respects.

So I think the update you've given us today is a good look at what has happened to us in the past year. It's a look at where we are currently. I would compare it with Canadians going out for a drive in their family car, seeing what's happening as they drive by, looking out their window, looking in their rear-view mirror to see what has happened. But what you failed to give us today is a look ahead, a look at the curves in the road and what we might be facing in dealing with things like all of the programs that were announced, the initiatives that were announced in the throne speech.

I think Canadians are waiting for the other shoe to drop. They want to know how you intend to fund those programs and what it's going to cost them. It seems to me that by giving a second economic update instead of a budget in 2002, you have failed. I challenge you, Mr. Manley, to give us that kind of perspective we need in order to make the choices that Canadians need to make. How does the Liberal government intend to fund the dozens of initiatives that were announced in the throne speech, such as health care, such as maybe a reduced revenue flow as the result of Kyoto or government initiatives that are going to pay for that and all of the other programs?

So I'm asking you today, will you not have another look at bringing in a budget this year? We've had a long tradition in this country of trying to keep the budgetary framework within a one-year basis, and this year the anniversary will be, I think, December 6. I'm not sure when you're intending to bring it down, but it could spread to 14 or 15 months. It's a long time for Canadians to wait to understand how you intend for them to pay for those.

You raised the issue of looking at the department spending in terms of setting priorities, and I think that's a noble objective, one that I endorse. But will you also commit, then, because the Canadian economy can't act in isolation to the world economy and we're not sure where that is going, to exercise prudence and announce today to the Canadian public that there will be no new taxes, no increase in taxes? Canadians, as you know, are very heavily taxed right now and are feeling the pinch, and they want to see some tax relief, if anything.

So that's my first question for you, Mr. Minister, and I welcome your response.

Mr. John Manley: Thank you very much, Mr. Penson. Let me try to touch on what I identified as about three things that you specifically asked.

First of all, with respect to the reliability of the forecast, I think economists will agree that forecasting is a notoriously hazardous occupation, whether it's for the economy or the weather. There are a number of risks to the forecast, and I identified those. However, it would be difficult for me to think of a better way to go about providing some kind of framework within which we can look forward, other than the one we're using. In other words, it's a broadly based consultation.

We draw on the best forecasters available. We come to a consensus view and we use their numbers. We plug them into three modelling formats provided by private sector modelling firms, and then we check those results yet again with another group of economic specialists and give the numbers.

I'm not sure there's a better way to go about it. We obviously would like to see the numbers come in bang on with what we'd forecast, but if they did, that probably would only happen once. We give you the best judgment that we have on the direction of the economy—I think it should be looked at as more directional than specific—but we do have to have a planning framework.

In terms of the timing of the budget and dealing with a number of the demands for additional spending, some of which you've identified, some of which were in the Speech from the Throne—of course, the Speech from the Throne sets a broad agenda, but it doesn't set a timetable—there is a key fiscal anchor in the Speech from the Throne. It is that we will continue to balance our budget and that we will continue to see the debt-to-GDP ratio fall.

You have to have a fiscal anchor. Everything else really comes from that. And I've reiterated today other aspects of that fiscal anchor. In other words, we're building back in the contingency reserve and prudence factors, really to make sure that we don't find ourselves stumbling into deficit. I've given the example of the United States, where in one year there's a turnaround of almost $400 billion U.S. between the forecast and the outcome.

I don't think Canadians want to see us take the chance of slipping into deficit because we didn't have enough prudence. Therefore, the key element is to maintain the prudence, to maintain the fiscal course, because over time that will enable us to achieve our other objectives more reliably than if we simply tried to speed on without pause.

Finally, you asked a question about tax increases. I'm not planning tax increases. I'm committed to delivering the legislated package of tax cuts that we announced in October 2000. They're continuing to come on stream. I think they contributed significantly to the performance that we had last year when the global economy was slowing and Canada's economy grew quickly, and that's our commitment: to reduce, and not to increase taxes.

· (1355)

Mr. Charlie Penson: Thank you.

Mr. Manley, over the past while, you've made a number of references to Canada as the northern tiger. While I'd certainly like to think so, I think we may be the northern tiger cub right now, rather than the northern tiger. Hopefully that will happen, though. If we nurture this little being enough, it will become the tiger that you're describing, the full-grown tiger.

I do think you have to look at where we are realistically. We've had some fairly good times in the last year. Historically, though, our standard of living—and I think you've said it yourself—has dropped to about 70% of that of the United States, with a 20% difference in productivity levels. And unfortunately, it's not just the United States anymore. We're lagging behind. I see the OECD has just issued a study that says we're now behind Norway, Switzerland, Ireland, Iceland, and Denmark.

I put it to you that we've had a fairly long time of economic decline and we need to get back on track. I hope this last year was the start of that process, but you will know, Mr. Minister, that a lot of people are asking for further tax cuts, and not just to match the levels in the United States—and we have to compare ourselves with the United States because they're one of our biggest competitors and a big place where we do business. We can't just match them, we have to be better in order to attract the kind of investment it takes to grow this Canadian economy.

So I guess I'm asking for a commitment from you, as the finance minister, that you will undertake that challenge of not only matching the United States but being better in a number of tax areas in order to allow that to happen.

Mr. John Manley: In my recent visit to New York, I met with a lot of the investment community. It alarmed me to discover that not only did many not know some of the statistics I presented today in terms of our recent economic performance, but that they did not know that by the time our corporate income tax reductions announced in October 2000 are fully implemented in 2004-05, the average corporate income tax rate in Canada will in fact be 5% below the average corporate income tax rate in the United States. Also, our capital gains rates are lower than capital gains rates in the United States.

I agree with the premise of your question, Mr. Penson, because I think we have to do better if we want to attract investment and attract the best talent within the United States in some of these areas. We also compete, however, on the basis of quality of life, and I think that's an important factor for us to take into consideration in trying to ensure that we put the best package together to really be the northern tiger.

I would say this—and I even accept your analysis: we're moving in the right direction. We've narrowed the gap, but we haven't eliminated the gap. The GDP per capita gap between Canada and the U.S. is about 15% now, so it is narrowing. We've improved over the last few years, but, yes, we absolutely have to continue to improve. That's what we're determined to do.

¸ (1400)

The Chair: Thank you.

[Translation]

Mr. Paquette, please.

Mr. Pierre Paquette (Joliette, BQ): Thank you, Madam Chair.

Mr. Manley, I would like to thank you for your presentation, but I must say from the outset that I am disappointed.

In June, you appeared before this committee and spoke about transparency. And now, I see no transparency at all. There are a lot of figures and information, but let's take as an example the surplus you forecast for 2002-2003. As far as I can tell, you just took the average from the private sector. You talked about a surplus of 4 billion dollars, of which 3 billion would go to a contingency fund. That's double what Mr. Martin had forecast, but I think it is unrealistic.

It is an important issue because when surpluses are not forecast, they go directly to paying down the debt. The former minister made mistakes totaling 65 billion dollars, money that should have been the object of public debate. That is why this issue is important.

On page 74, for example, there is a summary report for 2002-2003 and your plan. I am looking at the revenues. You used a growth rate of 3 per cent, whereas everyone is talking about a 3.4 per cent growth rate, but let's take 3 per cent. The revenues are grossly underestimated even if you factor in the tax reductions that were announced in the December 2001 Budget. Forecasted revenues are expected to increase by only 600 million dollars despite the fact that profits are currently on the rise--whereas last year there was a drop in revenue caused in part by reduced profits--despite the fact that interest rates will probably drop because the recovery is sluggish in the United States, despite the fact that you will get instalments that were deferred in the December 2001 Budget, and despite the fact that you have imposed a new tax on tobacco and a tax for airport security. Moreover, revenues for 2001-2002 were lower than in 2000-2001. So in my view, you are underestimating revenues by at least 5 billion dollars.

Therefore, even if I don't have a sophisticated calculator, I can none the less predict that in six months, the surpluses will probably reach 10 billion dollars and not 4 billion dollars as you forecast. That money will go directly to paying down the debt. I do not object to that, but there has to be a plan and public debate on it. We will see in six months which one of us is right.

That said, the budget surplus you did forecast increases tremendously throughout the entire period referred to in the chart on page 74. I see here a cumulative surplus of 71 billion dollars. That is not insignificant.

Let's say that every year 3 billion dollars are set aside for contingencies for the sake of prudence. That leave 53 billion dollars of federal government surplus. How much of that money will be transferred to the provinces? What percentage will go to the debt? Will the government keep the promise it made in November 2000 of sharing 50-50? I want an answer to that. We may well be the Northern Tigers, but if we are paper tigers because the provinces are financially hamstrung, we will be no further ahead.

¸ (1405)

Mr. John Manley: I would first like to say that I hope your predictions are better than mine, because that would give us a lot of—

Mr. Pierre Paquette: [Editor's Note: Inaudible]... situation.

Mr. John Manley: Good luck.

In fact, we report not only predictions for economic growth, but also revenue forecasts to that group of economists because they help us with our forecasting. They all agree that these estimates are accurate. As I said, I hope that government revenues increase even more than expected, but we just don't know.

Secondly, these forecasts do not reflect the decisions that will be made in the coming months and years. For example, there was the Kirby Report and there will be the Romanow Report. Mr. Chrétien said he wanted to call a first ministers' meeting early next year. There may be an agreement to increase federal health funding, but that is not reflected in these figures. If there is an agreement, the surplus will be lower. We cannot say today that there will not be any expenditures for the Kyoto Project, for example, to allay climate change. Such expenditures would also reduce the surplus.

There are choices to be made and I think it is important that this committee take the time to hear Canadians in order to reflect on these choices. The figures serve merely as a tool in the planning process. They give us an idea of the context in which the choices must be made.

Mr. Pierre Paquette: I have a second question, Madam Chair.

This morning, the Auditor General spoke about the government and the employment insurance fund, and stated that in her opinion, the government was not respecting the spirit of the Employment Insurance Act by charging excessive premiums to employees and employers. You know that currently it is $2.20 per $100 of insurable earnings for employees and $3.08 per $100 of insurable earnings for employers.

We know that this generated a $45 billion surplus that was spent on paying down the debt. According to the actuary, to keep the plan at its current level, premiums of $1.75 for employees and $2.38 for employers would be sufficient.

Two years ago, the government made a commitment to hold consultations to ensure that the mechanism for setting premium rates be fairer and more transparent. Besides, last October 11, you received a letter from the Canadian Federation of Independent Business which said that: “The main concern is with the lack of fairness and transparency in the management of this program.” It also said:

Despite the government's commitment, made over two years ago, to review the way in which EI premiums are set, nothing has been done. Therefore we urge you to take the necessary steps to immediately begin this review, which was promised a long time ago.

How do you intend to deal with the rates this year? And with regard to the future, will you keep your government's commitment to consult and to have a much more transparent mechanism for setting employment insurance premium rates? We know that this is a heavy burden for small and medium-sized businesses. I am not saying that it is useless, because I believe we need a good employment insurance fund, but nonetheless, I think that we have currently gone too far.

Mr. John Manley: That is a good question. I am well aware of the commitment made regarding a consultation process on the procedure for determining premium rates. We will be announcing that fairly soon. However, there is a system in place that we can use to set the rate. Frankly, I am aware of the problem and I am very aware of the Federation's opinion. However, we should not forget that we have reduced the rates every year since 1993.

¸ (1410)

Mr. Pierre Paquette: [Editor's note: inaudible]... the Auditor General. She has never been consulted.

Mr. John Manley: Yes, I am well aware of that, but it should be mentioned that the rate started at $3.09 and is now $2.20. Some time in November, as is the practice, we will be announcing the rate for next year, and the consultation process on the review of the procedure.

Mr. Pierre Paquette: During the consultation process, might consideration be given to the establishment of an independent employment insurance fund, as is being called for by both the management and union partners in the labour force?

Mr. John Manley: I do not want to prejudge the results of the consultation, but I am open to suggestions.

Mr. Pierre Paquette: But it is possible that this would be...

Mr. John Manley: I think it will be a genuine consultation. I'm therefore prepared to examine any proposals about the future system. The House of Commons Finance Committee also made some recommendations on this matter two or three years ago, and we have taken them into account.

Mr. Pierre Paquette: Thank you.

The Chair: Thank you, Mr. Paquette.

Mr. Discepola, 10 minutes.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you, Madam Chair.

[English]

Minister Manley, I want to congratulate you, first of all, on re-establishing the contingency reserve. One of the weaknesses in our last budget, I felt, was that it took away the flexibility you would have had in the eventual downturn of the economy. So that reassures me.

One thing that doesn't reassure me, however, is your five-year projection. It seems to me we've missed targets, as the opposition has claimed, consistently over the past three or four years--in my opinion, for the better, because I'd much rather underestimate revenue and have surpluses than to overestimate and go into a deficit position. But I wonder what your rationale is for going to a five-year projection. Although you've stated those guidelines in terms of “for planning purposes only”--and I'm quoting you--are you not worried that if you put them on paper you're going to be judged by them and again the opposition will cry foul and say your five-year forecasts are now no longer useful? I'm wondering what your rationale is for establishing the five-year time zone.

Mr. John Manley: I've returned to the practice that was followed at the time of the last fall update, which was actually in 1999, because in 2000 and 2001 the budgets essentially both fell in the fall. In the last update in 1999, five-year numbers were used. They're not budget planning numbers; they're really forecasts that give us an overall, longer-term framework. They also enable us to reflect the fact that some commitments are longer-term. For example, in 2000 we made a five-year tax reduction commitment, we did a five-year health commitment. So some of those commitments actually are being made on the basis of a longer timeframe. That's the purpose of doing it, to re-establish the practice that had been there before.

Undoubtedly, the farther out your forecast goes, the less reliable it's going to be, just as we're better able to guess tomorrow's weather than we are to guess the weather that'll come next Monday.

Mr. Nick Discepola: Thank you.

On the question of your projected surpluses, am I to believe you have not projected any costs for Kyoto implementation in those surpluses, and as well, that there are no projected costs for the increased demands the Romanow report may propose?

Mr. John Manley: It reflects of course the green initiatives that have already been announced, which is about $1.7 billion; it doesn't reflect any new or additional amounts that may be proposed as a result of Kyoto ratification. It reflects of course the September 2000 health accord; it doesn't reflect any amounts that might be increased for health care as a result of Kirby or Romanow.

Mr. Nick Discepola: So if we look at a $3-billion or $4-billion projection, if we implement the $5 billion that's asked for by some proponents, we're looking at possibly going into a deficit position, then.

¸ (1415)

Mr. John Manley: We would need your advice on some tough choices to manage exactly how to--

Mr. Nick Discepola: Let me give you some advice, then, because you ask in one of your recommendations how the government can best realign its spending to meet the highest priorities of Canadians. I think we went through that exercise, Minister, and this is another disturbing trend that upsets and concerns me more.

In 1995-96, we went through an exhaustive program review process, and we reduced spending by 6.4% that year. But if you look at the figures over the past four or five years, notwithstanding that our debt charges have been decreased significantly, almost to the tune of $7 billion, notwithstanding that our revenues have gone up anywhere from 6% to 8% some years, our program spending has increased almost 6%--2%, 3%. So if there's one area that I think we are lax in, it's making sure that we don't revert back to pre-1995-96. As you recall, Minister, there was an awful lot of tension during that time. I think Canadians made great sacrifices.

So my recommendation to you would be, other than Kyoto and health care, then, let's look at program spending and make sure that we don't let it get out of line, because I see the trend right now. The provinces are lining up. Our Prime Minister has often said it's going to be much more difficult to govern with surpluses. They are lining up, and they're going to ask for their fair share because they see the revenues and the surpluses being generated at the federal level.

I also see ministers lining up, whether it's defence or other areas. The opposition will say leadership issues are going to be driven. So can you resist the temptation, as Minister of Finance, to give in to the demands to increase spending?

One other concern I would ask about is, are you going to make sure that the effects of Kyoto, whether they be positive or negative, are all distributed equitably throughout the provinces?

Mr. John Manley: First, let me say that I think it's crucial for the government to maintain its commitment to a fiscal framework as a top priority. The elements of that framework, I've tried to lay out. They include balancing the budget, debt-to-GDP in a continuing downward trend, and having sufficient contingency and prudence in our forecast that if there is a downturn or a change in circumstances of some sort or other, when items arise we have the room to accommodate without falling into deficit. I think that's fundamental, and everything else begins and ends there.

So, yes, I said in my remarks there are going to be some difficult choices, and we will have to make difficult choices. We will have to say no to some very worthwhile things, and we will have to delay doing some things that would be nice to do right away. I think Canadians understand that instinctively, because that's how we manage our own household finances. We can only spend what we have. There may be lots of things we want, but sometimes we have to wait for them.

We learned a very difficult lesson in getting into a situation where we had continuing, rising large deficits. You remember. You were there when we had to make some of those decisions in program review. I was the Minister of Industry. I lost almost half my budget and laid off almost a quarter of my people. Mr. Lynch here was my deputy at the time.

By the way, many of those people we laid off were my constituents in the national capital region. It was tough, and I don't ever want to have to do that again. That's one of the reasons we've said, let's look at building a culture that says there has to be something we do in our $170 billion worth of spending that has outlived its usefulness and we can redirect that money to new priorities that people need.

Mr. Nick Discepola: Doesn't it worry you to see that program expenditures have gone up increasingly over the past five or six years? I can justify probably 1% for population, 2% for annual inflation, so that justifies 3%, but not the 6% or 8% in some years.

Mr. John Manley: Yes, but you have to remember what you're looking at in those numbers. Yes, it was up $7.3 billion in 2001-02, but 80% of that was either EI benefits or transfers to provinces. It wasn't government departments that were just spending out of control. Much of the increase to provinces, of course, is what was in the health accord.

What we can't allow ourselves to do is have to go back to the financial markets to finance what we want to consume on a current basis. We just can't do that. If we keep ourselves at a balanced budget, we'll bring our debt-to-GDP below 40% within five years. Then we're getting more ability to make the kinds of choices people want us to make. But we're still constrained by the fact that our debt is awfully heavy in relation to our GDP compared to most other countries.

¸ (1420)

Mr. Nick Discepola: What about the question of the increasing pressures and demands from the provincial ministers, asking for Ottawa to chip in more and demanding more than their fair share, as I think was said?

Mr. John Manley: I think we have a clear responsibility to work on some of the programs we do share jointly. That's why I think the health care initiatives are very important. Canadians expect us to deal with it; it's their top priority. Everybody you ask, every poll we do says health care is the number one concern of Canadians. We have to deal with that. I think we need to deal with it in a responsible manner. We have to see that we are meeting real needs and not just putting in more money without seeing improvement in the outcomes. Canadians want results, they want outcomes, they want to see that they get better service, they want to see that health outcomes improve. That's an important consideration.

But I understand why the provinces are feeling pressure, because it's such a big element of their budgets, and it is something in which we share. I don't agree with the statistics they're using. I think it's outrageous that they're trying to tell Canadians the federal contribution is only 14%. It's flatly untrue, and I don't think that creates a positive environment for us to work on a common solution. Canadians want us to work together, they don't want to see us quarrelling with each other. But I understand that pressure, and I think it's important for us to do our part. At the same time, I don't think provinces should look at the federal surpluses and ask how come they're not getting a share of it unless they send me a letter saying, we're really sorry we didn't kick in when you were running a big deficit. After all, our debt is about twice the size of the average debt of the provinces.

The Chair: Now we'll go to a ten-minute round shared between Mr. Wilfert and Mr. Pillitteri. Five minutes, Mr. Wilfert.

Mr. Bryon Wilfert (Oak Ridges, Lib.): Thank you, Chair, and welcome, Minister.

Minister, you talk a lot about the northern tiger, and I say we need to send the right signals. I would say today, as I understand your comments, a key element is certainly returning to the lack of a deficit--no deficit, very important. I think debt reduction is the one area we need to continue to move on aggressively. You talk about the $37 billion in interest it costs us each year. I think everyone can relate, Minister, to your comments about running your household. You have to be prudent.

Those are key elements, but one area that has been noted by some other questioners is the health care system. We are going to be providing you with a report, with Romanow in the background, but we won't necessarily have Romanow before us in respect of specific recommendations. I think Canadians will have to decide what type of health care system we want in the long term. The next question will be how we are going to pay for it. Obviously, that is a concern to me, and I'm sure to others, given some of the figures you've presented and the issue of Kyoto.

I also note, Minister, the comparisons to other G-7 states. Sometimes it's convenient for us not to do so, but you've certainly outlined how the change has occurred in regard to our better standard of living, GDP growth, etc. I think those are very important elements for us, certainly as a government. There are going to be a lot of pushes and strains.

With program assessment, one of the things I would like you to look at, though not necessarily giving me an answer today, is this. I am concerned--you can correct me if I'm wrong--that in 1995 we stopped requiring foreign-controlled companies to provide year-end audits. My concern is the issue of the transfer pricing system. This has become, as one former president of the Canadian Institute of Chartered Accountants stated, the fastest growing taxation specialty in the country, the issue of untaxed profits leaving this country, which are in the billions of dollars. Foreign-owned companies load up their Canadian operations with expenses, and their profits don't necessarily show in Canada. This is an issue I think we need to look at. I know this is not just a Canadian issue, it's an issue other states have as well, but I think it's an issue we need to look at very carefully, untaxed profits that leave Canada. Obviously the shortfall affects the average Canadian. I think that is important. We've seen some issues that have been before Revenue Canada. If you're looking for additional dollars, I think we need to look at that. I'm all for foreign investment, but there's a difference, in my view, between investment and control. That's an issue I'd like you to take away.

Thank you.

¸ (1425)

Mr. John Manley: I think you're quite right. Transfer pricing has always been an issue. When you've got differential income tax rates, there's going to be a tendency to try to ensure that profits are realized in the jurisdiction where the lowest rate is. That's an enforcement issue, and it's one the revenue agency regularly deals with. Whether they do it often enough or whether they hit all the right companies or do it with enough vigour is something you may want to take up with the revenue minister at some point.

I can say this. As we move to a time when our corporate income tax rates are, as I said to Mr. Penson, on average, 5% lower than rates in the United States, the incentive is reversed. In other words, it becomes more favourable to generate the profits in Canada than in the United States. I think that's the kind of balance we want to begin to see. You can see examples in other countries in the world, where just getting the rates on a more competitive basis has resulted in significant increases in corporate income tax as a percentage of GDP, without a particular increase in investment. It's just that the profits tend to be realized, where there's any ability to do so, in the lower tax jurisdiction. I think we're creating that comparative advantage, and it should be helpful to us, but there is still an audit provision that needs to be dealt with by the revenue agency.

Mr. Bryon Wilfert: Thank you.

The Chair: Mr. Pillitteri, five minutes.

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

Mr. Minister, your choosing to deliver your economic update here in Pier 21, you don't know what it means to some of us, especially to me. I landed at this pier 54 years ago, in 1948.

Come to think of it, much has changed here from the time I arrived. Taking a look at the picture window of Halifax, much has changed too. In pre-budget consultations across the country, individuals from the provinces make demands. From what I saw this morning and yesterday, I say, Mr. Minister, equalization payment works, transfer payment works. I see no difference in the picture window of Halifax from that in Toronto or Vancouver or Winnipeg.

We did put in a recommendation in 1999, I believe, about the EI fund. Of course, now the Auditor General only talks about the surpluses, but never talks about the deficits that were in there before. It's an account, it goes through general revenues. Why not realistically tell it as it is, charge what it really costs to maintain unemployment, which could be anywhere between $1.50 and $1.80--I'm not an economist--and start afresh? I don't call it a tax; it's just a way of doing business, an equalization of the haves and have-nots, and also in job creation. That's one part.

Second, we signed a social union a few years ago with the provinces, and somehow we've forgotten what it's about and who is responsible. Who's going to hold us accountable for what we have done in transfers to the provinces, where and how they are spending that money? Some choose to have tax cuts. That really holds up our end of the agreements we've made with the provinces under the social agreement.

¸ (1430)

Mr. John Manley: As I said in French a few minutes ago, I'm certainly aware of the Auditor General's concerns and of this committee's report on the EI fund from the past and on the mechanisms for setting the rates. It's a piece of unfinished business, quite frankly, that's been around for too long. I do take some pride in the fact that we have reduced rates consistently and repeatedly since 1993. You remember, in the slowdown of 1990 to 1992 the rates were going up at the same time as the unemployment rate was going up and the economy was slowing. We've been able to reverse that, and they have come down every year. In fact, when we came into office in 1993 they were scheduled to go up to $3.30, and we cut it off, kept them at $3.09, and have brought them down consistently ever since. I think we can take some satisfaction in that, but the work is unfinished, and I'm aware of that. We promised a consultation, and it will be launched shortly, so that by the time the rates are being set for the 2004 calendar year, we should have a new rate-setting mechanism in place.

You mentioned the social union framework agreement and the importance you feel should be placed on meeting the standards of performance on both sides. That's certainly true, and I think we've had some good experience in some social policy innovation since that time. We take a lot of pride, for example, in the effect the national child tax benefit has had in beginning the process of reducing child poverty. It sure hasn't come close to eliminating it, but it's putting money into the hands of poor families, thereby enabling children in those families to have a better chance at getting a good start in life. That's why we're going to try to enhance it. That's part of what we need to do in cooperation with the provinces. We do a lot more by cooperating than we do by squabbling with one another.

The Chair: Ms. McDonough, ten minutes.

Ms. Alexa McDonough (Halifax, NDP): Thank you very much.

[Translation]

Welcome to Nova Scotia, Minister.

You expressed your appreciation for this very special, extraordinary project known as Pier 21. I would like to take this opportunity to say that the Pier 21 project needs not only congratulations, but also resources to run its operations and programs.

[English]

Before I turn to today's presentation, I want to ask whether your budget will include for the first time some core funding and multi-year funding for Pier 21, to translate those good wishes into something concrete.

Mr. John Manley: You've brought a new need to my attention this afternoon.

Ms. Alexa McDonough: Good. It makes it worth your being here.

Mr. John Manley: I certainly want to give it very careful consideration, because I think this is wonderful. It's great that two of our members of Parliament actually came through here when they arrived in Canada. I think it's a treasure for us, and it's very inspirational to be here.

Ms. Alexa McDonough: I have a second short snapper before I turn to the presentation. It concerns what we've learned today about the PMO bringing to a halt a master plan to allow the bank mega-mergers to go ahead. I know finance ministers are always big on clearing up economic uncertainty. I'd like to ask if you today will indicate that as finance minister, you too are not in favour of launching another whole round of bank merger mania in this country. I think it's important to clear that matter up.

¸ (1435)

Mr. John Manley: I want to be clear on it, because we've asked this committee, as well as the Senate committee, to clarify some unfinished business that exists as a result of the enactment of Bill C-8 a year or so ago. It created a three-part review process for any mergers that were proposed, including prudential issues, competition issues, and the broader public interest.

The latter is not well-defined. I hope this committee can help us, as the Senate committee can help us, create a better understanding of what factors need to be taken into account in determining the public interest if a merger is proposed.

Bill C-8 did not make mergers illegal or impossible to do. It set some standards for them, and recognized that they can be valid business strategies. It's really a matter of clarifying what the rules are for everybody, rather than encouraging or trying to send any particular messages to those who might want to propose a merger. If they do, there is a formal process for them to do so, and it will be dealt with under the provisions of Bill C-8.

Ms. Alexa McDonough: I guess we'll take that as a maybe.

Mr. Minister, you've presented some glowing figures, and certainly some glossy charts here. I think there are some accomplishments here that we can all take pride in. I am certainly glad you have acknowledged that some Canadians have paid a terrible price to begin to get our fiscal house in order.

But I have to say I am very disappointed that in that glossy presentation there really has been a glossing over of the enormous social deficit that's been created. A great deal of hardship has been created as a result of the massive cutbacks that have occurred. We have heard from witnesses before this committee this morning about problems generated by them.

I know you're well aware that your predecessor consistently and deliberately overestimated projected deficits and underestimated projected surpluses. Unbelievably, surpluses that were projected to be in the range of $7.5 billion for the last three years in fact came in at $39.5 billion. I find there to be a real credibility gap in the presentation you made about doubling our growth rates over a two-year period on the one hand, and on the other hand, despite a $40-billion surplus just over the last three years, a projection of a $1-billion surplus.

It worries me that I think, once again, that is designed to create tremendous pressure to further squeeze program spending, although, as you know, your government has bragged about bringing program spending to its lowest level in 50 years. The possibly intended, possibly unintended consequence of doing this is that ironically the government may create a fiscal squeeze of its own doing if we don't begin to deal with this in a different way.

I want to ask, in your indication that it is the government's intention to review all spending, whether you are also going to be reviewing the five-year, $100-billion tax reduction plan. If we are headed for a further fiscal squeeze, surely that should also come under extensive review before we just blindly, automatically, and blithely proceed with stages four and five of that tax reduction program of $100 billion.

Mr. John Manley: As I said in response to another question, I know going through the period of cuts following 1994-95 was tough. People experienced it in a real way, whether they were students, whether they were using the health care system, or whether they were employed. Some of that continues, but I don't think those problems arose because of the cuts. I think they arose because for literally 20 years we allowed ourselves to live beyond our means, so by the time we had to start dealing with this, 25% of our spending was being borrowed from bankers in Tokyo and New York. That's no way to run a country.

I think people felt the impact of the cutbacks because we got ourselves into an unsustainable situation. I have this job for who knows how long, but I'm determined not to see that happen again. We just can't allow ourselves to let that recur.

So our best hope for improving the quality of life, for improving services, is to maintain that fiscal integrity. And it's the kind of thing your party was known for. Tommy Douglas was known for it in Saskatchewan. He didn't run big deficits. Somehow or other in Canada, in the seventies and eighties, we just thought that we could spend, and it was going to keep on going.

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Ms. Alexa McDonough: But my question, Mr. Minister, is not in the direction of arguing for bigger deficits; it's saying that in order to make sure we don't end up in a further fiscal squeeze of our own making, are you prepared to look at the possibility that one of the changes that may need to be made is to cut back on a portion of that $100-billion tax reduction program, which benefits not those who are really hurting severely as a result of the massive program cuts but those who least need those cuts?

Mr. John Manley: I know that's the question, and I want to come to that, because I think we do need to have certain principles upon which we believe we can make the quality of life better for Canadians. One of those is that we really solidly maintain an appropriate fiscal balance, which means that we balance the budget. Another is that we are capable of attracting investment and talent to Canada. That's where the jobs come from.

Why is it we've had such a strong job creation record? In part, it's because we've been able to create a positive cycle that sees growth followed by more growth. More revenue comes in because of the growth. And I'd rather increase our revenues by growth than by raising tax rates. I'll tell you, some of those tax rates do have a positive effect on the people who have noticed the cut in services, because they're middle-income families who are finding that they have to pay for more services at the local school, who are finding that the services they used to count on just aren't there anymore. Those are some of the people who have received the benefit of the tax cuts.

So I think we need to keep that balance in mind. What is it that attracts people? What is it that attracts investment? And, no, we legislated the tax cuts; it's one of the items that I'm committed to, seeing that we don't renege on that promise to Canadians that we will reduce the taxes over the five-year period that we promised them.

The Chair: Thank you.

Mr. Cullen for five minutes.

Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Madam Chair.

Thank you, Minister. Unlike the members opposite today, I'm not disappointed by what you've presented; I'm quite encouraged.

I would like to talk about corporate governance, if we have a chance, because I think a lot of Canadians have invested in the market, whether that's through pension plans or mutual funds and some retirement plans that are at risk. Enron and WorldCom are not limited to the United States. I'm interested in your views on the balance of legislative response, regulatory response, and the private sector response.

However, I'd like to come back to this household analogy. When my wife and I sit down and do our budget, the further we look out, the easier it looks. We figure that we must have left something out, because it doesn't ever seem that easy. We go over the numbers again and again and find, when we get there, that we've forgotten something, or something has come up.

I guess my general point is that, if you look at the planning surpluses now in your chart, they go up quite steeply. I know that the process you use is far more rigorous than the process my wife and I use, but I'm just concerned that we don't look at....

There are a number of expenditure pressures--we've talked about Kyoto and we've talked about health care--and we're looking at back-end loading some of these expenditures in future years. In fact, some of the expenditures would logically require some front-end loading. If you look at health care, we've talked for ages about health prevention, promotion, and education. We've talked about creating some lower-cost capacity like home care, which means some front-end loading of costs if you do it realistically. I talked to a local doctor who told me 25% of the acute-care beds in our local hospital are occupied by people who should be in lower-cost care alternatives. That means some front-end loading of costs, through the provinces, of course.

I know you've asked the committee for our views on prudence, and I hope the committee does give you some advice on that. I'm encouraged by the fact that, if you look at the last three years, you can see $6 billion to $7 billion worth of prudence. That's a good healthy chunk, and my own sense would be, the more, the better, frankly, because looking out at those years, it's going to be tougher rather than easier. If you would, please comment on that and perhaps on the governance issue.

In the United States, they brought in some legislation. If you look at it, you may think that perhaps it's overreacting, that it's a political response rather than a real response in order to create some confidence. But Mr. Tellier of CN then came out the other day and said it was the benchmark that we should be looking at. So what is the appropriate mix conceptually between regulatory, legislative, and private sector response to governance?

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Mr. John Manley: I think this is an important question. It's one we're spending a lot of time on and considering carefully.

You're right, the U.S. has moved quickly with a legislative response. Partly because our regulatory system is more decentralized in Canada than theirs is in the U.S., we have not taken that step immediately, although it remains open to us in some degree. For example, at the federal level, through the Canada Business Corporations Act, it would be possible to establish a regime that would apply to those companies and that would be parallel. But we've really put more of our effort into working with the provinces, with the securities regulators, with the stock exchanges, and with some of the professional associations in determining the best Canadian approach to dealing with this.

I think there will be a discipline that capital markets themselves impose on the behaviour of companies. For example, although Sarbanes-Oxley required CEOs to certify financial statements, whether you have that kind of law in place in Canada or not, I don't think any public Canadian company is going to fail to have its CEOs certify the financial statements. I think the CEOs will meet the standards of that with or without a legislated base, simply because that's what capital markets are going to require of them.

So I think we need to reflect carefully on this. I think confidence in the markets is a very key ingredient of maintaining a strong economic performance. So far, we haven't seen what you might call the real economy impacted by the decline in equity values that has been brought on to some extent by the loss of confidence. But it's not impossible that consumer behaviour could be affected by it. Certainly, in many cases, individuals' own personal wealth has been affected, and that could affect their retirement income at a certain point in their lives.

So these are important issues and they need more work.

The Chair: Mr. Murphy.

Mr. John Manley: I'll talk to you about your other question later.

The Chair: Sorry about that, but that's the time.

Go ahead.

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

Mr. Minister, like my colleague, I want to congratulate you in regard to the prudence and sound management path that we're on. I believe the monetary and fiscal stabilizers that have been put into the system—the low interest rates, the low inflation, the GDP growth, and the tax reductions—are working, and that they got us through the difficulties of last fall.

I want to get your comment on one of the biggest areas of frustration as a member of this committee, and that's the whole area of federal-provincial relations. We talked about health care, which, as you've indicated, does need additional resources from the federal government, as does education. But there are a lot of areas—and we get questions on this issue every time we have a panel—that don't seem to be working when we enter into some form of program with the provincial governments. One example that comes to mind is the millennium scholarship fund in certain provinces, involving moneys that the federal government put on the table. We heard testimony this morning that certain provinces were able to remove this from the table, and this province in particular.

Another example is the affordable housing initiative that was implemented last year in order to meet a need. The object was that the provinces were to come with 50¢ dollars. You know from personal experience that the provinces really haven't done that. The only province that I'm aware of as having done so is the Province of Quebec. Your own province, the Province of Ontario, really hasn't been forthcoming with its 50¢ dollars.

The Speech from the Throne has identified two new areas—and they're not really new areas—one of which is the national child benefit. In my own province and, I believe, in other provinces, Mr. Minister, that money is clawed right back from the people who need it most. I'd be very disappointed if that were increased and such behaviour were allowed to continue.

Another initiative is the cities. Again, cities are creatures of provincial legislatures, and they get their taxing power from provincial legislatures.

My point is that when we enter these areas as a federal government, we have to have discipline and guidelines to ensure that the money goes where it is needed, and not into the coffers of the provincial governments. I'd like your comment on that point.

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Mr. John Manley: I think you raise an essential point, which is that when we either devise a program or agree to a contribution of some sort that involves cooperation with other levels of government, we should be looking at mechanisms for clear and transparent accountability. In some cases, that may not have followed as readily as it should. Of course, if you're receiving the money, you want as much flexibility as you can get. I suspect that in our enthusiasm to achieve the objectives, we have been less demanding of our partners in some cases than perhaps we should have been in order to ensure that we get the performance we want. We need to take that into account going forward.

The issue you raise that is particularly worrisome is the clawback of the national child tax benefit. The whole objective there was not to transfer a burden from one level of government to the other, but rather to ensure that we improve the state of well-being of low-income families with children.

The Chair: Mr. Brison, for ten minutes, please.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Madam Chair. I want to welcome Mr. Manley to Nova Scotia, and also welcome Deputy Minister Lynch back to Nova Scotia. Like many other bright, talented people who make a difference in Canada, he hails from this province.

During uncertain times in the capital markets, and when Canadians see their retirement savings reduced almost on a monthly basis—people don't want to open their statements—the government has a role to play in providing stability. I would assert that a full budget would do more to create stability and reassurance in the capital markets and in the economy in general than these sorts of feel-good statements.

You're part of the first government in the history of Canada to have twice as many throne speeches as budgets. Although Canadians like to hear from our Governor General and our Queen, of course, they're hearing from the Governor General twice as much as they're hearing from the finance minister in terms of budgets. I would therefore suggest that a full budget this fall would have been a more appropriate way to reassure Canadians about the future of the economy.

No sector is probably more important to the Canadian investor, to Canadian small business people, and to the Canadian economy in general, than the Canadian banking sector. This summer, according to senior representatives of the Bank of Montreal and Scotiabank, you were aware of and in fact quietly encouraged merger discussions. Two weeks ago, the Prime Minister derailed these discussions by saying there would be no bank mergers until after his retirement in 2004.

Last week, you made a request to the House of Commons finance committee, seeking clarification of the merger rules. Some speculation—and I'll quote from today's Globe and Mail—from the people within the banks says that statement or that request last week was a result of trying to mollify the two banks and to help you save face on Bay Street after having encouraged a process during the summer that your boss, the Prime Minister, derailed two weeks ago.

When you made that request last week, which incidentally led to about a 3% gain in the bank stocks in Canada in one day of trading, were you aware of the Prime Minister's ban on mergers a week before that?

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Mr. John Manley: First, you'll understand, Mr. Brison, why in preparing a budget we prefer to have the opportunity for the committee to do its consultation, to get the views of Canadians, and to get numbers that are going to be more reliable by being closer to the year for which the budget is being prepared. That's why, for the most part, over the last number of years, budgets have been presented in the winter.

On your first question, when we present the budget we'll have the benefit of this committee having consulted, we'll have the views of Canadians, and I'll have more opportunity myself to have full consultation. We'll have the better vantage point of a later period of projections and numbers upon which to found a budget. Normally the budgets, as you know, have been in February or the beginning of March, and I think that will be an adequate time for dealing with the issues before us.

As for banks, first of all, you'll understand I would never want to comment on what anybody told me in a confidential discussion; that wouldn't be appropriate. But I can say the law is there. Bill C-8 was adopted by Parliament a year ago. There have been a number of commentators--bank CEOs and others--who have complained that the public interest test was not clear. In my view, it's a piece of unfinished business, and we were in the process of determining how best it could be clarified.

Mr. Scott Brison: Were you aware of the Prime Minister's ban on mergers, Mr. Manley, when you made that statement?

Mr. John Manley: There's no such ban. The possibility of mergers was recognized at the time of Bill C-8. The policy recognizes that mergers can be a viable business strategy. If somebody wants to bring a formal application, it will be dealt with in accordance with the law. I have responsibilities as Minister of Finance under the Bank Act, and I will fulfill them.

Mr. Scott Brison: The apparent chasm between the finance minister of the country and the Prime Minister of the country on bank policy makes Canada look more like a banana republic than a northern tiger.

You've described the reallocation of existing funds to better reflect the priorities of Canadians. That's heartening to hear, but would you consider reallocating $100 million for new luxury jets for the Prime Minister, from money that could have gone toward new helicopters for the military, to be an appropriate reallocation of funding that reflects the priorities of Canadians?

Mr. John Manley: There's no reallocation there, Mr. Brison. We're really trying to create the culture, as I said earlier, within the bureaucracy we deal with, for programs on a continuing basis. The full-scale program review process we went through in 1994-95 was a difficult and painful one, in part because it was so long overdue because it hadn't been done by the previous government. But it is disruptive and painful, and undoubtedly, when you take on that many changes that quickly, mistakes are made.

What I hope to see come from this is an ongoing process where programs that are no longer meeting current needs yield their resources to programs that are of more immediate need to Canadians. That requires a cultural change.

Mr. Scott Brison: Are you calling the cancellation of the helicopter contract a mistake, or are you referring to the purchase of the $100-million jets for the Prime Minister as a mistake?

Mr. John Manley: The cancellation of the helicopter contract in 1993 occurred at a time when the previous government, led by a party of which you are a member, was running a deficit of over 6% of GDP. Quite frankly we were broke, Mr. Brison. We couldn't afford helicopters or airplanes. We could barely afford a piece of chewing gum.

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Mr. Scott Brison: The deficit that government inherited was 9% of GDP.

Mr. John Manley: So we did cancel it, for very sound fiscal reasons. Now we have a program in place to replace the ship-borne helicopters. We've already made a decision and are receiving delivery of the search and rescue helicopters. But you know, if the country hadn't been so badly managed for the nine years before we came into office, those helicopters would probably already be acquired.

Mr. Scott Brison: As a point of clarification--I'm certain you'd be interested in knowing this--the Mulroney government inherited a deficit of 9% of GDP.

Mr. John Manley: What was the level of the debt?

Mr. Scott Brison: It was $38 billion at the time.

Mr. John Manley: How much of the dollar went into service charges? Come on, Mr. Brison.

Mr. Scott Brison: What was your position on the GST?

As foreign affairs minister, you described Canada's commitment to our NATO partners in terms of military funding. I think you compared Canada's role with NATO as being similar to the fellow who sits in the restaurant at the table, dines with his friends, and then when the cheque is brought, goes to the restroom. This week we've heard from Mr. McCallum--another division, it seems, within cabinet--emphasizing the need for significant reinvestment in the Canadian military. You, as finance minister now, can effect change in that more directly than you could as foreign affairs minister. Is your position consistent today with your position when you were foreign affairs minister, that the Canadian military needs significant reinvestment, and will there be significant reinvestment in the Canadian military in the next budget?

Mr. John Manley: First, you mangled the reference a little bit. Let me be clear on what I believe and what I continue to believe. Canada has a very important role to play in the world. I believe we are one of the countries that can make the world work, and literally there are only a few. That requires that we meet tests, not only in defence but also in overseas development assistance and in diplomacy, and diplomacy skills are ones we have been renowned for. I think in all those areas we have to measure up. I think we have a responsibility to the world to do so, and yes, I believe that.

As to what will be done in this budget as opposed to the next budget or another budget, that's something I'm seeking your views on. You know, as other committee members do, there has been additional money allocated to the defence department. Mr. McCallum is conducting a review. I think that's important, and I think the advice on what direction defence needs to go in the future in order to meet, literally, the challenges.... Some of them we didn't even know were coming. When I made my comment, we were facing sending troops to Afghanistan. Two months before, who would ever have thought we'd be sending troops to Afghanistan? It just wasn't on the radar screen. So the demands are changing, the requirements are changing, it's expensive. This isn't a light area. The equipment and the cost of soldiers are an onerous burden, and I think we have a duty to try to get it right. So we'll see what we can do.

The Chair: Thank you.

Our next questioner is Ms. Minna, five minutes.

Ms. Maria Minna (Beaches—East York, Lib.): Thank you, Madam Chair.

I must say, Minister, having arrived at Pier 21 as a child, I find sitting here today quite an interesting experience.

I want to make your life more difficult by going back to the surplus situation that others had picked up on earlier. I'm going to mention some figures that I just got from the Canadian Centre for Policy Alternatives. As you know, they've given us an alternative budget every time.

In the last four years, they predicted a $40 billion surplus, and we actually came in at $39.7 billion. They're now predicting $10 billion, although we're predicting much lower. Last year we predicted very low and came in at $8.9 billion, which went to debt, not to the 50-50, which I think to some degree we've discussed in terms of the commitment we had.

My question to you is, are these figures going to be reviewed? I have to tell you that personally I'm skeptical about the reality of the low prediction. As well, I'd like to know if we're going to go back to at least acknowledging the social investment, the 50-50, which we didn't do in the last budget.

My next question, and I'll be very quick, is on productivity. One of the main factors that goes into productivity is skills training, flexibility of labour force, mobility of labour force, and so on. I know that unfortunately in Canada our companies don't do as well as other companies in other parts of the world in terms of training and retraining their labour force. One recommendation made to this body by a labour organization was that, instead of lowering the EI premium further this year, in the next budget we should use the portion that we would have lowered and dedicate it to labour training and upgrading skills.

I just wonder what you would think of that, given the fact that it seems the private sector is not really keeping up with that side of things.

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Mr. John Manley: On the 50-50 rule--in other words, that 50% of surpluses would go to tax reduction and debt reduction and 50% to new spending--it of course was always anticipated that it would be over a period of time. So far, since we went into surplus for the first time, in 1997, we haven't really been that far off. We're at about 55-45, with debt reduction and tax reduction at 55% and increased spending at 45%. So it's not hugely off. It's within a range. I mean, you can't be mathematically accurate, because you're always dealing with projections and numbers that change.

As I said earlier, I would be really happy if our numbers came in bigger than what we're forecasting, but I would not like to be in a situation where our numbers came in worse than what we're forecasting.

I can tell you, when I was on this committee during the 1988 to 1993 period, when the finance ministers of the time came in, every year they missed the target. Every year the deficit was going to go down and every year it went up. Quite frankly, I would rather be in a situation where I can tell you, yes, we paid down more debt last year than we expected, $8.9 billion. And do you know what? That saves us, this year, $400 million in interest costs. Not only that, but it saves us $400 million in interest costs next year and another $400 million the year after.

That's not bad. If we're going to go wrong, I'd much rather go wrong on that side than on the other. But we do need to try to make projections as accurate as possible; otherwise, it's hard to plan.

As well, over the last few years, just to be fair to the forecasters and to Mr. Martin, economic growth was much stronger than anyone had reason to expect. But nobody is arguing now that we're going to have another real surge of that level of growth, so I think it's better to be cautious. That's my take on it.

On productivity, the issue of training and skills development is crucial to this, absolutely. This is where we try to convey that productivity gains don't mean people working harder or longer; they're working smarter. When you work smarter you get better pay, and you can accomplish more, but fundamentally, in a modern economy such as ours, that is dependent on the ability to produce and to get the skills and the training necessary.

It's largely a provincial responsibility. We have been partners on it in some cases, but to move forward we're going to have to be clever about how we give people the skills and training they need.

The Chair: Mr. Valeri, please, the final five minutes.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Madam Chair.

Mr. Minister, I want to congratulate you on your presentation today.

I want to focus on the last question you posed in the deck with regard to policies to make Canada a magnet for investment. I think the approach we should be taking is one where we position ourselves to take advantage of the fact that we're poised to become the best performing economy in North America. I like the reference to northern tiger and to making Canada a magnet for investment.

The one thing I found missing in the deck--which I think is very important, and I would ask you to comment on it--is the North American integration issue, the North American economic space we find ourselves in. Increasing integration is a fact of life. It's a reality for Canada. I think the biggest risk is not having an approach to this. I think all of your numbers really rest on ensuring access, being able to take advantage of the largest market, and having magnets in place to attract the kind of investment we need.

Recent news reports have emphasized a focus on the plumbing, a step-by-step approach. You've been quoted as preferring that sort of approach. Wendy Dobson talks about a big idea and a four-pillar approach, including doing our part on defence; mutual recognition; and external trade barriers, such as countervail and anti-dumping. I think it's a critical issue, because the numbers don't work unless we have an approach to the North American economic space that does not jeopardize our trade and our prosperity and wealth. It's all about creating a better standard of living and quality of life. I think that's what we're all talking about.

I'd like to hear your comments on the approach to the North American economic space.

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Mr. John Manley: I plead guilty to the notion of being a plumber on some of this. It's part of the skills development issue that Ms. Minna was raising.

Some hon. members: Oh, oh!

Mr. John Manley: We had a big idea, and it was called NAFTA. Yet we're dealing with limited infrastructure and with the issue of crossing the border for customs and other purposes that delay shipments, and that can be a factor in investment decisions. My view is that before I embark on a new big idea, it would be really good if we got the last one working properly.

Under the other hat I wear, we've been handed a wonderful opportunity to make progress on that thanks to the personal attention given to it by Governor Ridge as director of the Office of Homeland Security in the U.S. The FAST program, the NEXUS program, and some of the other things you've seen in your neighbourhood will improve the ability of Canadian firms and business people to get access to that market.

I don't know if there's a trade-off to be made there. We have a major incomplete item in the trade file with the United States, and that's the application of trade remedy laws to our exports. We're currently going through the battle on softwood lumber. If you could tell me that a significant increase in defence spending would get us an agreement with the United States that would put an end to trade remedy laws, I'd say we should grab it, because we'd generate enough income from the improved trade access to well pay for tanks and equipment. I don't know that there's a deal that can be structured around those notions.

I think we have a process that we need to reinvigorate in NAFTA. We need to do that at the same time--in other words, walking and chewing gum at the same time--as we're dealing with the FTAA. We have a bilateral relationship that's a subset of that, which is just making the existing border work under the current laws. I think we can accommodate many of those simultaneously.

Mr. Tony Valeri: Thank you.

The Chair: On behalf of all the committee members, Minister, we are very grateful for your presentation today and for your taking the questions and providing us with the input, while adding more tasks to our list. Thank you very much.

Mr. John Manley: Thank you.

The Chair: We are adjourned.