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37th PARLIAMENT, 1st SESSION

Standing Committee on Finance

EVIDENCE

CONTENTS

Thursday, June 6, 2002

0940

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

Mr. Peter Smith (President, Aerospace Industries Association of Canada)

0945

Mr. Peter Boag (Vice-President, Strategic Planning and Communications, Aerospace Industries Association of Canada)

0950

The Chair

Mr. Michael Atkinson (President, Canadian Construction Association)

The Chair

Mr. Michael Atkinson

0955

Mr. Jeff Morrison (Director of Communications, Canadian Construction Association)

Mr. Michael Atkinson

1000

Mr. Jeff Morrison

Mr. Michael Atkinson

The Chair

Greg Christenson

1005

David Wassmansdorf (Member, Executive Board, Canadian Home Builders' Association)

Mr. Greg Christenson

Ms. Mary Lawson (Member, Executive Board, Canadian Home Builders' Association)

1010

Greg Christenson

1015

The Chair

Mr. Rahim Jaffer (Edmonton—Strathcona, Canadian Alliance)

1020

Mr. Peter Smith

Mr. Rahim Jaffer

The Chair

Mr. Rahim Jaffer

1025

The Chair

Mr. Michael Atkinson

The Chair

Mr. Greg Christenson

1030

Mr. John Kenward (Chief Operating Officer, Canadian Home Builders' Association)

The Chair

Mr. Discepola

1035

The Chair

Mr. Peter Smith

Mr. Discepola

Mr. Peter Smith

The Chair

Mr. Michael Atkinson

1040

Mr. Discepola

Mr. Michael Atkinson

Mr. Discepola

The Chair

Greg Christenson

David Wassmansdorf

The Chair

Mr. John Kenward

1045

The Chair

Mr. Discepola

Mr. Peter Smith

Mr. Discepola

Mr. Peter Smith

Mr. Nick Discepola

Mr. Michael Atkinson

1050

Mr. Discepola

Mr. Michael Atkinson

The Chair

Mr. Jeff Morrison

The Chair

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

Mr. Greg Christenson

Ms. Maria Minna

Mr. Greg Christenson

Mr. John Kenward

The Chair

Mr. Greg Christenson

Ms. Maria Minna

1055

Mr. Greg Christenson

The Chair

Mr. John Kenward

Ms. Maria Minna

Mr. John Kenward

Ms. Maria Minna

Mr. John Kenward

Ms. Maria Minna

The Chair

David Wassmansdorf

1100

Ms. Maria Minna

Greg Christenson

The Chair

Mr. David Wassmansdorf

The Chair

Mr. Greg Christenson

Ms. Maria Minna

1105

The Chair

Mr. John Kenward

Mr. Discepola

Mr. Jeff Morrison

Ms. Maria Minna

Mr. Jeff Morrison

1110

Mr. Michael Atkinson

The Chair

Mr. Peter Smith

Ms. Maria Minna

The Chair

Mr. Peter Boag

Ms. Maria Minna

Mr. Michael Atkinson

The Chair

Mr. Gary Pillitteri (Niagara Falls, Lib.)

1115

1120

The Chair

Mr. John Kenward

The Chair

Mr. Michael Atkinson

1125

The Chair

Mr. Rahim Jaffer

Mr. Discepola

Mr. Rahim Jaffer

Mr. Michael Atkinson

The Chair

Mr. Peter Smith

1130

Mr. Jeff Morrison

Greg Christenson

Mr. John Kenward

The Chair

Mr. Discepola

Mr. Peter Smith

1135

Mr. Peter Boag

The Chair

Mr. Michael Atkinson

The Chair

Mr. Greg Christenson

The Chair

CANADA

Standing Committee on Finance

NUMBER 110

1st SESSION

37th PARLIAMENT

EVIDENCE

Thursday, June 6, 2002

[Recorded by Electronic Apparatus]

¿ (0940)

[English]

The Chair (Mrs. Sue Barnes (London West, Lib.)): Welcome. The order of the day, pursuant to Standing Order 108(2), is pre-budget discussions.

We're very pleased to have with us today witnesses from the Aerospace Industries Association of Canada, Peter Smith, the president, and Peter Boag, the vice-president, strategic planning and communications. Welcome to you both and thank you for joining us.

From the Canadian Construction Association we have Michael Atkinson, president, and Jeff Morrison, director of communications. Thank you for joining us this morning.

And from the Canadian Home Builders' Association we have John Kenward, chief operating officer; Greg Christenson, president; Mary Lawson, on the executive; and David Wassmansdorf, member of the executive board. Welcome to all of you.

I would invite you to make ten-minute presentations before we go to questioning, and we will go in the order of the agenda.

Mr. Smith, please go ahead.

Mr. Peter Smith (President, Aerospace Industries Association of Canada): Madam Chairman, members, it's a pleasure to be here today to appear before the finance committee again.

I want to use this opportunity to outline briefly how the aerospace industry is responding to the government's innovation agenda and to update you on how Canada's aerospace industry is faring following the most recent economic slowdown and the terrorist attacks last September.

Today's success and market strength alone are insufficient to guarantee leadership tomorrow. The industry's recent strong performance masks vulnerabilities that threaten its future competitive advantage. We consider the innovation agenda as an opportunity to sustain and strengthen Canada's position as a leader in aerospace.

Canada's aerospace industry is a national and diversified industry with over 300 firms in every region of the country employing over 95,000 Canadians. It is an integral component of the global aerospace industry and our sales this year have more than doubled that of the past decade, reaching $23 billion in the year 2001.

Canada now ranks third in sales volume after the United States and the European Union, and we should not forget that the aerospace industry is an incubator of advanced technologies that are applied in almost every sector of the economy, notably medicine, agriculture, the auto industry, and sports to name a few.

AIAC has been operating for the last 41 years and it operates under a board of directors and six strategic councils who oversee the setting of an agenda in critical issue portfolios such as trade, technology, supplier development, defence procurement, aftermarket, and space. Our current priorities include increasing the innovation capacity of Canada's aerospace industry, encouraging a rules-based trade regime that allows Canadian firms to compete on a level playing field, strengthening export sales, financing support, advancing DND procurement plans and procurement reform initiatives, and advocating tax policies and rates and a regulatory environment that encourage investment in Canada.

Next, the global context in 2002. The global economic slowdown has softened aerospace demand. Canadian industry sales are expected to decrease to approximately $20.7 billion, which is about a 10% reduction over the achievement last year, and employment should fall to about 90,000, which represents about a 5% reduction. The downturn, however, is expected to be short-lived, as there are signs of a turnaround already evident and we expect new growth opportunities will be quite significant. However, the cyclical downtown will also accelerate ongoing global industry restructuring and cause additional challenges in the competitive landscape.

The competitive drivers today are safer, cleaner, quieter, and more affordable aircraft, product and process innovation, and international partnerships. The growth opportunities that exist for Canada include such things as the Boeing supersonic aircraft, the Airbus A380, and the joint strike fighter program, to name a few.

Aerospace innovation is unique. Characteristics of the industry include high-cost, high-risk long development cycles, but sharing risk and public investment leverage are commonplace throughout the world, and the government is a critical stimulator, coordinator, and performer of aerospace R and D.

¿ (0945)

Mr. Peter Boag (Vice-President, Strategic Planning and Communications, Aerospace Industries Association of Canada): Madam Chair, I'm going to continue with the rest of the presentation now.

Mr. Smith, with his opening remarks, really indicates that we face a significant challenge in the aerospace industry in Canada. As we look ahead over the next few years, clearly the status quo is not an option. We must be quick to adapt to the challenge of a constantly changing global market for aerospace products and services.

In this context, the government industry partnership that has been a pillar of Canada's success today takes on, I think, added importance. Over the past number of years we see that the government spending in aerospace R and D has begun to lag well behind other countries with which we compete. In addition, we see systemic problems with the mechanisms used to fund aerospace R and D that act as a disincentive. And in this context, in particular, SMEs, small and medium-sized enterprises in aerospace, face unique challenges due to many of the structural changes that are happening in the global supply chain.

In this context, we see three priorities for innovation in terms of investment in aerospace.

One, we need to stimulate a higher degree of early stage research and pre-competitive technology development in Canada. Two, we also need to facilitate a greater degree of collaboration in both technology development and in technology demonstration. Three, we need to provide effective access to international R and D initiatives, given the highly global nature of the industry.

Again, with respect to SMEs, we really need to find a way to stimulate a higher level of innovation within the SME community. And at the same time as we look to earlier-stage R and D, we need to sustain our support for technology exploitation and product development.

We outlined many of these challenges in a September AIAC innovation paper, and really, the conclusion there was that we saw the need to substantially reinvent and reinvigorate Canada's aerospace industry innovation system.

The goal was a renewed, coordinated, and cohesive partnership between government and the private sector. The strategy was clearly aimed at making aerospace a priority for new federal investments aimed at making Canada one of the top five countries in the world in R and D performance.

We saw the action in the context of announcements made by the federal government as a doubling of the annual federal government investment in aerospace R and D by the year 2005, with a longer-term goal of achieving an annual federal government R and D investment level of $1 billion by the year 2010.

These were general, broad parameters that we saw as the cornerstones of that reinvigorated and reinvented R and D partnership. What we saw further was the need to move to a very collaborative approach between government and industry. We proposed a government oversight group for aerospace innovation that would really look at developing a comprehensive and more detailed aerospace innovation investment and restructuring plan.

The investment priorities were early-stage, pre-competitive research, platform technology development and demonstration, and sustaining the technology exploitation and product development investment that currently exists.

As we scoped out the need within those areas, we see a need for, at the early stage, pre-competitive research, a research investment of somewhere in the neighbourhood of $75 million to $100 million a year over the next five years. On this early-stage basic research, we see the relative ratios of government and industry contribution to be 75% government, 25% industry.

As we move on to the next stage in the research and development continuum to platform technology development and demonstration, $100 million to $150 million per year over the next five years we see as the investment requirement. Here we see the investment contribution ratio of government decreasing to 50%.

Notably, in both of these, unlike the later-stage investment, we see the government's contribution being a non-repayable contribution as opposed to the technology exploitation and product development support, where we see a requirement for $200 million to $300 million per year over five years. Here the government's contribution ratio is decreased to 25% to 30%, and it's based on a repayable basis. This is primarily the TPC model, which we see working actually quite well within industry. Where the gaps are in the earlier-stage research, we're not taking the opportunities that are there and we need a new commitment there.

¿ (0950)

From our perspective, we're prepared to move forward and work very closely with the government. Clearly, the lion's share of new investment in aerospace R and D needs to come from the private sector, but throughout the world, government investment is a very critical lever of private sector investment. Certainly in Canada the experience has shown that for every dollar the government invests in aerospace R and D, the private sector invests anywhere from $3 to $5. So it's a critical lever of private sector investment.

For us, then, as we move forward with the government in its innovation agenda, the bottom line is that we're looking for a commitment to aerospace and further consultation in developing the details of how we reinvigorate and reinvent our partnership. Clearly, increased funding is part of that. But in addition to that, we see the need for substantial structural change in the way the government does fund aerospace R and D. Current programs are stovepiped and limited in application. Often we're trying to fit a square peg into a round hole in terms of how we support a specific kind of research.

Beyond that, we need to work together with government on an implementation plan that's going to deliver what we see as the requisites for an innovation agenda in aerospace that will allow aerospace to continue to be one of the principal pillars of Canadian innovation and of our knowledge-based growth in the economy.

Thank you very much for your attention. Mr. Smith and I will be happy to answer any questions you may have.

The Chair: We're sure to have some questions for you. Thank you.

Next is the Canadian Construction Association. Please go ahead, Mr. Atkinson.

Mr. Michael Atkinson (President, Canadian Construction Association): Thank you, Madam Chair and committee members. We are very thankful to have this opportunity to present our views on the federal budget.

The Canadian Construction Association represents the interests of the non-residential construction sector. We represent some 20,000 member firms from all regions of Canada, the vast majority of which are small businesses. Our industry is one of Canada's largest employers, whose output comprises a significant portion of Canada's total gross domestic product.

You have copies of our submission. We will use our time to highlight a few points.

Madam Chair, this committee has asked witnesses to address two major themes--namely, how Canada can best assure a greater level of economic prosperity that is widely shared by all Canadians, and how the government can best assure the highest quality of life for all Canadians.

In order to attempt to answer these questions, the Canadian Construction Association believes it is necessary to balance seemingly competing demands on our nation's resources. While not an easy task, we believe that striking this delicate balance is key to assuring Canada's future economic prosperity and the high quality of life Canadians have come to expect.

Madam Chair, the last time we appeared before this committee you somewhat mildly chastized us for dwelling on the negative rather than talking about the positive. So at the outset, perhaps I can offer this bit of apology--

The Chair: Did I really do that?

Voices: Oh, oh!

Mr. Michael Atkinson: We're going to use these 10 minutes maybe not so much to praise the government's efforts but to suggest that the government's efforts should raise the bar slightly.

We believe you are on the right path in many areas in this balanced approach we speak about, which has often been a platform of this government's approach to fiscal and economic challenges. For example, there is a need to balance our continuing efforts to reduce the nation's debt, while at the same time recognizing the need for strategic long-term planning and reinvestment in our essential physical infrastructure. We must also continue to strive for a business corporate tax environment that is competitive and encourages business growth and reinvestment. Likewise, a delicate balance must be achieved to address the serious environmental challenges of the 21st century, but without unduly taxing or endangering our economic prosperity. Ultimately, our ability as a nation to continue to address serious environmental challenges is directly proportional to our continuing economic prosperity. The two are inextricably linked.

I'd now like to turn the microphone over to my colleague, Mr. Morrison, to look at the issue of how this delicate balance can be achieved.

¿ (0955)

[Translation]

Mr. Jeff Morrison (Director of Communications, Canadian Construction Association): Good morning, Madam Chair.

We must continue to pay down our national debt in accordance with a plan that sets ambitious yet achievable targets similar to the approach used to balance our annual budgets. We must, however, at the same time recognize the additional growing debt we have accumulated due to the past neglect of our nation's essential, physical insfrastructure. The need to re-invest and maintain our key physical infrastructure is not a discretionary matter. It is an accumulating debt that we cannot continue to let mount for it threatens our future economic well-being and quality of life just as insidiously as our fiscal debt.

While positive steps have been taken in the last few years to begin to address both our fiscal and infrastructure debt, as Mr. Atkinson mentioned, CCA is concerned, particularly with respect to the latter, that there continues to be no serious long-term plan or resolve.

The announcement in last year's federal budget of the creation of the Strategic Infrastructure Foundation gave CCA hope that the need for a long-term plan and commitment to the upgrading and maintenance of our key physical infrastructure had finally been recognized. The subsequent conversion of that initiative to a fund, however, has raised some concern that we have regressed to the short-term, piecemeal approaches of the past.

I now give the floor to Mr. Atkinson.

[English]

Mr. Michael Atkinson: What should Canada's national highway system look like 10 years from now? What improvements need to be made to that system? What improvements need to be made to our court facilities, our airports, our border crossings, and our sewage treatment and water distribution systems, to ensure not only that they are efficient--and provide the economic prosperity and quality that Canadians are seeking--but also that they also meet the high standards that this country is going to be establishing for the environment, health, and safety?

The sad fact remains that there is no plan. That is why the CCA calls upon the federal government to develop and invest in a long-term, strategic infrastructure policy that ensures continuing reinvestment in the upgrading and maintenance of Canada's essential physical infrastructure, including both our national highway system and key municipal infrastructure.

Madam Chair, the committee is also seeking input on how the government can better foster innovation. The CCA concurs with the committee's suggestion that this can best be achieved through the creation of a business climate that encourages investment in new technologies, and in lifelong training and skills upgrading. For, after all, who knows better than business owners themselves where and when to invest in new technologies, and employee training, to achieve maximum productivity, competitiveness, and prosperity for their individual businesses?

An excellent incentive to Canadian small business to reinvest in their businesses and their people already exists. But it has been rendered ineffective by neglect. More than 20 years ago, Canadian-controlled private corporations were afforded a reduced tax rate by means of a tax credit, the so-called small business deduction. This lower tax was introduced in part to provide these companies with more after-tax income for reinvestment purposes. It is actually a tax deferral. However, it is only available on the first $200,000 of active business income.

This threshold of $200,000 was established in 1982, and has not been increased since then. Inflation has eroded the value of this valuable incentive. That is why the CCA is recommending that the $200,000 limit for the small business deduction be increased to $500,000 immediately, and thereafter be indexed to inflation.

Mr. Morrison.

À (1000)

[Translation]

Mr. Jeff Morrison: Madam Chair, let me take a moment to mention the facts and environmental challenges.

Our resolve to address serious environmental challenges such as climate change must not override nor jeopardize our ability to compete and prosper economically.

Nor should the cost of environmental challenges unfairly impact upon any one sector or region of our economy.

Our response must also weigh the ability of our nation to compete and thrive in an international environment in which our major trading partner and other nations of the world may choose different or less dramatic solutions.

Madam Chair, I know this might not be the time to talk about environmental measures such as the Kyoto Accord, but I want to say that our industry is not afraid of environmentally sound changes. As proof thereof, we have received statistics from the Department of Natural Resources that show that between 1990 and 2000, we reduced our energy consumption by 17%, which is nearly 2% per year. That shows that the voluntary measures taken by our industry are effective. If the government offered financial incentives to promote those voluntary methods, perhaps our measures could be improved.

The point I want to make is that government regulations will not work. What does work is the voluntary method.

So, Madam Chair, the CCA recommends that Canada's commitment to reducing carbon emissions be achieved through voluntary measures which reward rather than penalize and which take into consideration international competitiveness.

[English]

Mr. Michael Atkinson: In conclusion, Madam Chair, the recommendations that we are making today are neither revolutionary nor without precedent. They are realistic measures that build upon current policies and programs. They seek a balanced approach, which has been the cornerstone of this government's budgetary philosophy.

Thank you, once again, for this opportunity. We would welcome your questions and comments.

The Chair: Thank you very much.

Now we have the Canadian Home Builders' Association.

You have a number of speakers. I'll let you present in that order. Go ahead.

Mr. Greg Christenson (President, Canadian Home Builders' Association): Thank you very much, Madam Chair, ladies and gentlemen of the committee.

We represent the Canadian residential construction industry, new home builders, renovators, developers, manufacturers, suppliers, lenders, and all other service providers. I believe you've been provided with two documents on taxation positions by the Canadian Home Builders.

I'd like to start by briefly introducing the other speakers--John Kenward is our chief operating officer; Mary Lawson is a builder from the greater Toronto area, from rural Toronto, involved in adult communities, and is our first vice-president; and David Wassmansdorf is from the Burlington area, a builder of semi-custom and custom homes in that area. They'll be participating.

I'd like to focus our discussions today on an overview of housing affordability, regulatory reform, the renovation sector, the underground economy, some comments on the rental sector, and the key issue of skilled labour shortages.

Presently, as you know, the new housing market is very strong and is encouraging high rates of record starts in recent years, and resale housing is doing very well. Although this a very positive development, we'd like to emphasize the fact that this is, we feel, very short-term in nature and basically is a result of historic low interest rates. We have some very real concerns about housing affordability into the future and how this housing affordability is going to affect quality of life for all Canadians and residents of our country.

Housing works well when the economic fundamentals are in place--employment, consumer confidence, low interest rates, etc.--and housing is currently seen as a good investment. Housing is valued by Canadians but it's not without challenges. I mentioned skilled labour shortages. As our population ages we are increasingly, and not just because of the intensity of the marketplace activity right now, having a shortage of skilled labour right across the country, even in slower markets. This is becoming more serious and is leading to inflation at a higher rate than the standard rate of inflation.

Tax reform is another issue that we're dealing with. As interest rates go up, it's clear that the tax environment has not adapted sufficiently to support housing affordability. Studies have shown, through CMHC and other groups, that rising taxes at all levels have been one of the biggest penalties on the cost of housing. So we feel that now is the time, in this time of low interest rates and high marketplace activity, to take strong initiatives in this area, more systemic long-term initiatives, particularly focusing on a number of areas, including GST thresholds and GST indexation.

The age of our home ownership and our environment has been going up, and I think the real impact of this rising housing cost is going to be felt by low-income Canadians and by Canadians who have indexed incomes. As I said, because of wages increasing and development cost charges, etc., housing costs are rising faster than the rate of inflation. Municipalities have become more and more prone to taxing new development through development cost charges and other forms of direct costs on new homes. A minority of Canadians each year buy new homes, but eventually these rising costs affect the cost of housing for all Canadians. So increasingly these taxes are being directly borne by new home purchasers but are going to eventually be, and have been, affecting all Canadians.

On housing and home ownership, as to taxation, we believe that there's a lack of deliberate policy analysis and that an unbalanced tax system has come to reflect this lack of a balanced policy. This declining affordability will affect social needs and probably create some impetus for direct interventionist things in the social housing area. We'd rather work on the systemic problems. Regulatory reform is a very important issue for our industry; we are very much seeing increasing levels of regulation. We feel that a trust environment, a more efficient environment, can be encouraged.

I'd like to ask Mr. Wassmansdorf to comment on regulatory reform and how it's affecting our industry.

À (1005)

Mr. David Wassmansdorf (Member, Executive Board, Canadian Home Builders' Association): As a home builder and developer, we are always on the front line of dealing with regulations at all different levels--federal, provincial, and municipal. As in the case of taxes, regulations are placing a burden by taking public policy objectives and putting them on the shoulders of new home purchasers. Recently we've been hearing more with respect to Kyoto and how we can reach the targets of Kyoto, and the thought is that perhaps we can do this through changes to the building codes.

CCA mentioned earlier about voluntary work done in their industry. In our industry voluntary initiatives have been taken through the R-2000 program. Our industry has led the way in terms of reducing greenhouse gas emissions and we've been doing it voluntarily. Our consumers are encouraged by home builders to do so, and it's working. But if we try to do it through public policy objectives, we will be undermining housing affordability.

As well, the regulatory environment is impeding productivity improvements. It's obstructing innovation and ingenuity. Our past president, Dick Miller, spoke to this committee and has spoken across the country. He talked about himself and his organization and how much time he spent dealing with regulation rather than dealing with innovation and trying to move his company forward in a positive manner.

It also increases liability exposure for everyone and it's undermining some of the public-private partnerships that Greg will be talking more about later on. Through the combination of tax and the regulatory environment we feel there's a real threat to the housing affordability. We think it really is time to try to get on the front line and to get ahead of it.

We're encouraged by what the FTP ministers are committed to doing. They've met several times and are committed to continue to meet through CMHC and work through housing affordability and choice, support responsible growth, support employment, try to deal with the notion of penalizing growth through regulation, and try to deal with home ownership, job creation, and private investment.

Mr. Greg Christenson: Thank you, David.

Again, to carry on, we believe that tax reform and regulatory reform are better than interventionalist capital policies. I would like to ask Mary to comment on the renovations sector and the underground economy's budget and how its regulatory environment would affect it.

Ms. Mary Lawson (Member, Executive Board, Canadian Home Builders' Association): First of all, there has been a briefing paper circulated this morning--a briefing paper on GST rebate for renovation. It should be in front of you.

The issues that face the renovation market are very similar to the new home construction market. But what's interesting is that the renovation market represents a huge national asset--our own and existing housing stock. The size of the renovations sector far exceeds the new home housing activity. Consider renovation beyond just a total renovation of a house, which we see in major centres, where we basically gut a building. Think of all of the maintenance-type levels of renovation that are also going on right across the country and all of the people who are involved in that.

It's an incredibly important sector from a policy priority front. The same issues and concerns relate to renovation. They are housing affordability, energy efficiency, the environment, human health, quality of air within the homes--a big issue in many of the older properties--and employment opportunities. This is an area that has huge growth possibilities.

I'm involved in one of the downtown colleges in Toronto, and their renovation education area is growing in leaps and bounds. People want to be part of this industry. We have to make it a professional group and support and encourage this.

Another issue is renewal and redevelopment of our urban centres, where the services are existing. This is where people want to live, so we need to support renovation in those areas. There is no national public policy strategy to support the renovation sector, and we feel this is very important.

The tax environment is not sensitive to the renovation sector, and this leads directly into another issue--the underground economy. The underground economy continues to be growing and directly attacking legitimate businesses. It continues to be a growing and direct attack on housing quality. It continues to be a serious impediment to realizing the employment potential in the housing industry for skilled trades and for other professionals. To date, the efforts to address the underground economy activity have had no significant effect. The contract payment reporting system has been a futile exercise and has placed an unjustifiable burden on legitimate contractors.

À (1010)

Mr. Greg Christenson: On other items that have tax implications and budget implications, we would like to focus your attention on the rental sector. The rental sector is a part of the marketplace that is not working effectively and requires systemic tax reform. This is an example where we'd like to see less capital intrusion and more systemic change, particularly focusing on the areas of unfair and punitive taxes that impede the marketplace's delivery of affordable rental housing.

Skilled labour shortages, as I mentioned earlier, constitute one of the key areas for our members across the country, again, across the country. We're pleased with progress being made on immigration policies. We've been struggling with HRDC to get a national strategy for labour across the country. There are a lot of anecdotal success stories locally as I travel across the country, but this has a huge impact and will only get worse in the future because of our aging population. Many of our tradespeople are in their fifties and will soon be retiring and moving to a less active role in the housing industry.

Basically, in terms of responses, tax- and budget-wise, we'd like to see things that encourage income responses related to rental housing, and not capital intrusion trying to get the cost of housing down. Fundamentally, we are suggesting the form we'd like to see in the budget process is regulatory reform and tax reform to encourage the marketplace to work. We'd like to see the federal government support provincial, territorial, and municipal initiatives in these areas. We'd like to see recognition that three levels of government are required to attract housing industries and the involvement of the private sector, in the areas of taxation, regulation, development charges, house financing, skilled labour shortages.

We believe these things must happen quickly. If we don't get a handle on these when the market is good and costs are going up very rapidly, affordability is going out the door. This, I believe, in the future will impact our global competitiveness and our attractiveness as communities for young Canadians, and our quality of life in general.

I think we have to leverage our resources. The issue is not about injecting money. The issue is about taking the resources and the capacities we have, and through creative partnerships--we heard allusions to private-public partnerships, other vehicles--to put up more of a carrot approach, where capital can be leveraged between three levels of government and the private sector. We think money will be, because of a reluctance to raise taxes, in short supply. We'd like to see more proactive, leveraged kinds of initiatives that will basically help the efficiencies of the marketplace that already exist.

We've heard debates about smart growth in our major Canadian cities. We believe many of these discussions are to do with the smart delivery of services--how to make, as Mary said, our mature neighbourhoods and older cities more efficient, and to revitalize them. It really comes down to expanding capacity, to a tax environment that encourages creativity and activity and is not intrusionary by nature.

On the positive side, we have a very good relationship with CMHC. They have been doing work on productivity, profitability, monitoring the housing industry through their observatory initiative, reviewing mortgage insurance. We're very pleased with the efforts of the federal government in the area of the National Research Council's role in supporting less prescriptive and more performance-based building codes, which we think in the future will raise productivity and the quality of housing. We have support for innovation programs through the National Research Council's infrastructure guide.

The federal government has a huge role, not just in terms of capital investment but also in setting the procedural and policy environment for investment and infrastructure and community development. Presently, across the country, many communities are struggling in the infrastructure area, and this has long-term impact on housing affordability as these costs get passed on to new home purchasers.

In summary, the central issue is that the housing sector is strong at the moment, but we cannot afford to be complacent. The problems and challenges have not disappeared. They may, in fact, be getting worse. We don't mean to be negative; it's a very good industry right now, but we're saying now is the time to capitalize on more long-term, systemic policy changes. Housing requires attention. It needs a national game plan for the future. We do not want to lose opportunities. Public policy should not be based on temporary, interim, crisis-management-type policies but on long-term systemic planning that will encourage strong and positive cities and work and living environments for Canadians in the future.

Fundamentally, housing is a very key component in urban development and the urban environment and the quality of life, as I suggested.

To summarize, we look forward to a progressive environment in this country where taxes are not punitive and do not restrict the marketplace, but actually are fair and balanced, and where investment policies and capital contributions to the housing industry are leveraged with other resources, and we look less to capital-grant or intrusive-type policies. But we'd like to make the point that the time is now to act, to set these policies in motion and not become complacent because of the strength of our housing markets.

Thank you.

À (1015)

The Chair: Thank you very much, all of you, for your presentations.

I'm now going to go to ten-minute rounds of questioning. We'll start with the official opposition, Mr. Jaffer.

Mr. Rahim Jaffer (Edmonton—Strathcona, Canadian Alliance): Thanks Madam Chairman, and thanks to all of you for being here. Sorry I was a little late this morning.

I would like to start with the aerospace industries, if I could, because I missed your presentation.

There is one thing that I think would be useful to address, just looking over your brief. Clearly, you're calling for government's attention to increase some of its investment in the high-tech sector, the aerospace industry, through its various abilities to do so.

I have a concern, though, and it's something that clearly needs to be done if we want to have a high-tech sector that's competitive around the world with the U.S., or even grow one here at home. Investment is one side of it. But one of the things that I think we tend not to address--and I'm not sure if you addressed it in your brief--is how that has to be a full cycle. You need to not only balance investment but also look at the tax side and the effects of some of the things in our economy that maybe aren't allowing your industry to be able to grow as quickly as it can, or even evaluate certain things that are being done currently. For instance, we have some of the most aggressive R and D tax credits for high-tech industries in the world, yet for some reason they don't seem to be developing the sort of investment we'd like to see to the levels we'd like to see, and obviously government investment is part of that.

We need to try to address the investment issue with the other sides of the economy--for instance, the fact that our low dollar is causing the Canadian economy to become a branch plant economy in relation to the U.S.; the tax environment, and many of you mentioned the fact that we still have to address the high-tax issue; access to venture capital, which is another big part of the economy that I think many high-tech businesses find difficult; or even the size of our market compared to the U.S., trying to create a competitive market here at home but being able to address the challenges in dealing with one of our largest trading partners as well.

I'm wondering if you can comment on some of these things, because clearly investment is an important part of it, but unless we finish the full financial policy when it comes to the economic cycle and getting the other things in balance, we won't grow the high-tech industry--and your industry--as quickly as we'd like, or make that part of the industry competitive.

Maybe you'd like to comment. I'd like to hear your thoughts on that part of it.

À (1020)

Mr. Peter Smith: Thank you, Mr. Jaffer.

Perhaps I can talk about the tax environment first. There is certainly a very competitive tax environment for Canada when it comes to the research tax credits, and certainly we are grateful to the government for that particular regime. However, before you become taxable you have to be profitable and you have to ensure that you have products to sell. We are suggesting to you that at the back end of that continuum we are relatively satisfied that there are fairly competitive corporate tax rates and certainly an attractive research grant tax rate as well.

The concern we have in the aerospace industry is when you take a look at the competitiveness of countries like the United States and Europe, in its entirety. At this moment in time we are competing against aerospace sectors that are heavily invested in by their respective governments. In the United States, for instance, it's around 66%. In Europe it's around 50%, and relatively speaking, in Canada it's around 25%.

That said, these particular investments we have made in our statement must be dedicated at the front end of the R and D side, because it's a long cycle in the aerospace industry, somewhere between 8 and 10 years, if you're thinking of the development of an aircraft or a sophisticated aircraft engine.

We are suggesting that in the innovation agenda the investment should be made more in the front end in the pure research, in a collaborate way with international partners, in platform technology. What we are all familiar with now, of course, is that the last form of that investment is in the Technology Partnerships Canada type of program, which is next to product development. And we find this has been working relatively well. Obviously, we would never suggest that it is sufficient, but there are all kinds of other priorities that the government needs to attend to.

Talking about the Canadian dollar, if you are familiar with the aerospace industry, we are highly export-oriented. Therefore, the current pegging of the dollar is an advantage to us in the sense that we trade in U.S. dollars. It makes us slightly more competitive in the sense of the wage rates that are being paid in either the United States or Europe.

However, the Canadian content is a very important issue in the sense of the absolute manufacturing content of an aircraft. So although you may take some advantage on the labour rates in relative exchange rates, we do have to pay in U.S. dollars for input into the aircraft if it happens to be built in either the United States or Europe.

In total, then, when you consider the accessibility of venture capital or interest on venture capital institutions in the aerospace industry, it's not like the IT field, because it's a long cycle compared with the software development in the IT field. Therefore, it has become, whether we like it or not, a requirement for governments to invest in the aerospace industry in their respective countries simply because it's such a long, high-risk cycle.

Once that development has been completed, and we've seen the success, for instance, of Regional Jet in Bombardier's case, there is a prestige associated with it. There is a very fantastic payback in the sense of employment, in the sense of corporate tax, in the sense of sophistication in the technology that can be applied in other areas.

Mr. Rahim Jaffer: Do I still have some time left?

The Chair: Yes, go ahead.

Mr. Rahim Jaffer: I'm curious to know whether anyone else wants to comment on that first half of my question or not.

No? That's all right.

My second one was directed to both the Construction Association and the Home Builders' Association.

I notice in the Canadian Construction Association brief there's a section that talks about the need to address the infrastructure deficit and the need to balance debt reduction with strategic infrastructure investment. And I think most Canadians feel that's an important aspect, whether you're looking at the building side of things or whether you're just looking at the infrastructure and addressing the roads and everything else that comes with infrastructure when it comes to dealing with our borders and with the type of trade flow across the border.

Looking at the heading here, and looking over your brief, you're calling for tax cuts as well as an infrastructure investment. Clearly, that should hopefully be able to be achieved by government. Would you like to see those sorts of changes being made with government potentially taking on more deficit? Or do you fundamentally see a way that governments could change their spending habits potentially and be able to balance both strategic investment with tax reduction and debt reduction at the same time?

Perhaps you'd like to elaborate on that.

À (1025)

The Chair: Mr. Atkinson.

Mr. Michael Atkinson: Certainly, it is a delicate balance, but it's a balance that must be achieved. This isn't a case of either-or. It's not, don't reinvest in our infrastructure. I've never heard anyone suggest, let's let the bridges collapse, let's let our water distribution systems fail, or let's let our sewage treatment facilities spoil. Nobody's ever said that. From that perspective, then, it's a case of not “if” but of “when and how much?”

What we're really pushing for here is not just throwing a bunch of money at “a problem” but putting a plan in place, a long-term plan. The House of Commons Standing Committee on Transport, under the leadership of Mr. Alcock, came out with an excellent 10-year program for rehabilitating our national highway system. Part of the strategy was using private sector investment. We had a day-long meeting with private sector financiers, who all said that if governments--plural--in this country would commit themselves to a long-term plan, we would be there 10 years from now. That in itself would help to leverage private capital.

At least with a plan in place we know what we're looking to do three or four or five years out. If fiscally the kind of contribution that's required from the public sector isn't there--or even from the private sector because of other economic circumstances--you can at least have the benefit of revising the plan.

Unfortunately, right now there is no plan in this country. We don't know what government is planning to do with the infrastructure six months out. That has been a failing in our system for a number of years, unlike with our major competitors, particularly the United States.

With respect to funding, the Transportation Association of Canada, which is comprised of ministers of transport from the various levels of government, has put out a 10-year program. They've decided on a 10-year program identifying the needs, the priorities, and the funding. The federal contribution to that particular program requires the designation--I didn't say dedication--of about a cent or a cent and a half of the current excise tax on gasoline.

A number of budgets ago, about four or five, an increase in the excise tax of a cent and a half per litre was placed on gasoline to fight the deficit. While we have, hopefully, vanquished the deficit, if you redirected that current tax revenue as the federal contribution to a long-term program with provincial governments for national highways, you'd be done. It wouldn't have to be a case of having to go for increased tax revenues.

The other important thing to understand as well is that reinvestment in our infrastructure, making it more efficient, making it more environmentally friendly, and making it more healthy and safe for all Canadians has a tremendous spinoff benefit for the rest of the economy in terms of job creation, business growth, and prosperity. That results in more tax revenues for government.

It's not a case of either-or. This is something we must do as a country to remain competitive, and there's a prudent way to do it and an imprudent way to do it. Unfortunately, without a long-term plan, we're doing it imprudently.

If I just might add one other benefit to having a plan...and I know my colleagues from the CHBA have mentioned the concern about the future labour supply. Here we are representing what is arguably the largest employer in Canada together--and government and consumers are certainly major clients of ours--yet in our case, with respect to the governments in this country, we don't know what they're doing six months out. They have no plan with respect to our essential physical assets. How are we, arguably the country's largest employers, supposed to make our plan for training? How will we know what kind of workers we're going to need five to ten years from now when one of our major clients is not doing that kind of planning?

The Chair: You want to add something, Mr. Christenson.

Mr. Greg Christenson: I very much concur that good fiscal planning and good infrastructure planning are not mutually exclusive. They are in fact the same thing. Infrastructure is quite a different category as far as investment and expenditure are concerned. It's usually a long-term capital style of investment. It can be supported by debt in certain situations and not really take away from the ability to balance short-term operating budgets.

I think that the federal government and the provincial governments need to take a leadership role with our municipalities, coaching and guiding them on the business principles of managing what I call smart debt or asset-backed debt. Without that, what we end up having with these short-term programs and funding is that it seems as if infrastructure is always the first thing in the budget to get cut. Hence the lack of this sustainable funding and program. We end up with our existing infrastructure and with an unfunded liability that is a deteriorating physical asset.

In the case of new infrastructure we're really just carrying forward the costs to young Canadians in the future through higher housing and infrastructure costs. Historically, the government has had a role in infrastructure, and that's one of the reasons the country is where it is, but this is rapidly evaporating because of the absence of this sustainable funding and long-term planning.

One of the issues is that as our population ages, people are reluctant to see their taxes go up. They don't always relate to things 20 and 30 years out, and I think this discussion has to bring forward the interests of young Canadians and what the impact is going to be on our global competitiveness, our quality of life, the state of our environment, and the desirability of working in it. We have to get that message out about the needed leadership role to both our industry groups and the federal and provincial governments.

Dr. John Kenward would like to comment too, if you don't mind.

À (1030)

Mr. John Kenward (Chief Operating Officer, Canadian Home Builders' Association): Madam Chair, I agree with everything that is being said. I just wanted to add that, indeed, it is a good thing that the federal government has returned to the infrastructure field. I remember that the CHBA fought very hard in the early 1990s to get the federal government to see that it had a role to play in municipal infrastructure investment. So that's a positive thing.

I would suggest that, at the moment, there has perhaps been a little exuberance here. Perhaps we're bordering on the possibility of some confusion. We do have Infrastructure Canada. We have the Strategic Infrastructure Fund. We have the Green Fund. We have the border funds. It's getting to the point that a lot of people, including our members, don't see how it's all coming together.

I'm not meaning to be critical here; I'm just saying, thoughtfully, that maybe it's time to see how this package comes together.

The other question that has arisen within our industry is, where is the money actually going? In other words, with an industry like ours, builders are living every single day with the realities of what we refer to as hard services, meaning water, sewer, and things of that kind. This is where the problems are. This is where we would suggest the priorities lie. And yet, at the same time, we're not necessarily saying--or we feel that we're not saying--that the infrastructure investment is flowing into these key strategic areas. So we become somewhat unsure of our ground.

We certainly believe the federal government should be investing. We're pleased that it is. We also believe the federal government might spend more, which would be a good thing. But we might caution the federal government to find out how effective its expenditures are right now, and whether or not it is hitting the key priority areas, thereby allowing it to take the leadership on this.

So where is the money going, and what does this tell us? And can people on the ground necessarily easily read what the federal government is doing, given the increasing array of initiatives?

We're suggesting that there's potential here for some rationalization.

The Chair: Mr. Discepola, please go ahead.

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

I'd like to thank our panelists, because I think they've brought together a huge list of suggestions for our plate. I want to get to some of them very quickly.

One of the things that nobody touched upon is the objective of our innovation agenda. I'll grant you that we lag behind. This has been a concern of ours and mine also. But I don't understand why we're lagging behind. If you take a look at everything that we've done as a government, at the generous R and D tax credits, and at all the agreements that we've signed--which have been very favourable to business-- I'm wondering if more can be done by the government.

Mr. Smith, when you refer to motivating innovation among SMEs and to tax policies and rates, they're all excellent suggestions. But is it really up to the government to do more, or is it maybe up to business to do more?

The real concern I have is that none of you touched on our objective, which is to increase Canada's place to the fifth position by the year 2010. My preoccupation is that 2010 is far away. It's an eternity for a politician. I'm wondering if you think that 2010 is a realistic objective. Should we be upping that? And how can we help business? I don't think we're doing enough to reduce that lag, and I'm not sure what more we have to do.

As I said, I gave you some examples. I'd like to hear your opinions, please.

À (1035)

The Chair: We'll start with Mr. Smith.

Mr. Peter Smith: Mr. Discepola, I'll respond to your first question with respect to the government's contributions. As I mentioned to Mr. Jaffer, Canada's situation right now is really determined by the amount of government investment seen in our two major competitors, the U.S. and Europe. There is no question that Canada has been generous--and certainly to our sector. But it has not equalled, or been anywhere close to what is happening in, the U.S. and Europe. So there is a gap in the investment. We have seen--

Mr. Nick Discepola: Can you quantify that gap?

Mr. Peter Smith: Yes, 66% of the R and D in the aerospace industry in the United States is government funded, and 50% in Europe, as opposed to 25% in Canada.

That said, when we saw the government's innovation agenda to look at moving from fifteenth to fifth, we thought the decade they had chosen to do so in was a realistic one, but we also mentioned that at this moment in time, we felt it would be helpful to double the current investment between now and 2005. So we did it in stages.

I think you also need to take a look at Canada's uniqueness in the sense that much of the investment that is found in both the United States and Europe is defence related, whereas Canada's is not. Our aerospace industry in Canada is about 85% commercial, versus 10% or 15% defence.

So we have to consciously choose to ensure, if we're going to stay in that particular competitive regime, that the government, by necessity, will invest heavily.

You mentioned, as many of the government publications mentioned, that it's now a requirement for industry to invest, and we are particularly proud in our industry that we are probably one of the heaviest investors in research and development in this entire country. If you look at companies like Pratt and Whitney and others, they are certainly in the top 10 investors in R and D in Canada.

It was interesting to note the government publication, I guess a week or two ago, looking at the investments overall. If I'm not mistaken--and perhaps my colleague, Peter Boag, can give the accurate numbers--I recall a number of about $41 billion being used in this particular study, of which $19 billion was invested by industry, and about $3 billion by government.

Our challenge--if the Canadian government responds positively to our request to increase its investment in R and D--will be to ensure industry investment is equal to that of the government. At this moment in time, we feel we have a very high investment level, so obviously we have to ensure that in investing in such a large amount, there will be a payback.

We certainly have seen the success over the last decade in doing so, and we have every confidence we can do it.

The Chair: Mr. Atkinson, and then Mr. Christenson.

Mr. Michael Atkinson: I think we did somewhat well on what has to happen in order for business in general in Canada to be more innovative. I certainly agree with you that government cannot make business more innovative. It can create a climate in which innovation is rewarded, but one of the things we are emphasizing in our budget has a great deal to do with innovation, with productivity, and that is the state of our infrastructure. Essentially, our roadways, our highways, our border crossings, etc., are what make our economy efficient. Certainly, that's the case in other developed nations, that the state of one's infrastructure is often an indication of how efficient, how competitive you are. So that's very important.

The second point I'd like to make is that we do not feel the construction industry is lagging behind. There is a KPMG study that came out in January 2002 that showed, when our industry was compared with the construction industry in the other G-8 countries, our costs were second only to Italy, interestingly enough, but we beat the Americans as far as business costs go in our industry. Our industry is extremely innovative because it's extremely competitive.

Yes, it's true there are more things we can do as partners, private and public sector, to encourage research and reward innovation in our country, but I think we should not miss the point that innovation, productivity--those are big words--cannot be looked at in a very narrow manner. And there are a number of things that are wholly dependent on that. You cannot be innovative if you do not have a state-of-the-art, quality infrastructure. There's absolutely no way. You cannot be innovative if you don't have a human resource policy and well-trained workers.

I mentioned earlier that one of the problems we have...and this is where government can help, by sitting down with us and doing some planning. What are your needs going to be, and what are our needs as a country in our infrastructure as we go out? How should we be training our workers? What are the new skill sets they're going to need given the priorities for our country with respect to its physical infrastructure? I think that's key.

One of the things we fight daily is this poor image people have of the construction industry in referring to us as low tech. The construction industry builds the electronic highway. The skill sets of our workers have to be more sophisticated every day.

So from that perspective, I think it's important that when you're looking at research, innovation, and productivity, it is not something in a vacuum. You have to look at the other factors. Certainly planning is a key one, as to what you need to do for the future. And you cannot plan when one of your clients--quite frankly, one of your major clients--is not doing any planning in that area.

À (1040)

Mr. Nick Discepola: Do you agree with the 2010 timeline? Is that sufficient for your industry?

Mr. Michael Atkinson: In the construction industry, right now we're number two, so we don't have far to go.

Mr. Nick Discepola: Okay.

The Chair: Mr. Christenson wanted to add to that. I'll give you a couple more minutes.

Mr. Greg Christenson: Thank you. I'd like to just have these comments supplemented.

I think Canada's been very good at improving its corporate and personal tax structure in a fiscal sense, but I think in a regulatory sense, it's done virtually nothing to improve productivity or to enhance performers. In fact, often the regulations are growing, not declining, and housing--

Mr. Nick Discepola: Is that provincial as well?

Mr. Greg Christenson: It could be, not just federal. It's at all levels. In this innovative environment, we need to reward performers and provide incentive-type funding, not just capital-grant.

I'll pass it over to David.

Mr. David Wassmansdorf: I mentioned briefly the notion of the F/P/T ministers trying to deal with the notion of working together, and it is all three levels. No matter what the federal government does to try to encourage things, if CCA or a member of our association hits a roadblock at the provincial or the municipal level, the initiative of the federal government is lost. That's where the interrelationship is so important.

On innovation, in our industry one of the concerns is the liability of trying to be innovative. We need to deal with the liability issues related to trying to move forward and trying to be creative. We also mentioned skilled labour. In that respect, we agree with CCA as well that we need skilled labour to help to do that.

In the residential sector, as an example, we had a commitment from HRDC to help fund and direct a strategy for dealing with human resources within the residential construction industry. HRDC reneged on that last week. That needs to be addressed. When you're trying to deal with the notion of trying to be innovative, we need skilled people, but we need that strategy and that plan. We thought we were moving forward on it, and it got lost last week.

The Chair: Did you wish to say something?

Mr. John Kenward: Yes, very quickly, Madam Chair.

We have just completed a report with the Institute for Research in Construction on innovation in residential construction, so I'll make sure the committee gets it.

I just want to say that the two agencies of the federal government that are most supportive and, in our view, have this targeted well in relation to us, are IRC and CMHC. One of the intriguing things about the piece of research was that the consultant who did the work said that we do have a problem in Canada with what he referred to as the egoistic need to claim success for innovation. What he was referring to there was that the public service in Canada, at any level of government, has not necessarily bought into this notion of government being a facilitator and supporter. There is still the problem of government needing to make the claim to be the innovator, and this is a very real impediment to moving the agenda forward. That is not to tar all public servants or to say anything critical, but innovation, we have concluded, also requires cultural change and a different way of thinking about the world.

À (1045)

The Chair: If you get your report in to our clerk, he'll circulate it amongst our members. That will make it easier.

Mr. Discepola, go ahead.

Mr. Nick Discepola: Mr. Smith, you referred to the success of the government investing in Bombardier with Regional Jet. Which program was that? Was that TPC?

Mr. Peter Smith: It started with the defence industry productivity program and was followed on by TPC, but Bombardier has not used TPC since 1996.

Mr. Nick Discepola: Very good. That's the program, I believe, that the opposition wanted to cancel because it was favouring Quebec.

Mr. Peter Smith: That's correct.

Mr. Nick Discepola: All right.

My next question is really to the Construction Association. You've given us excellent ideas. I support you fully on increasing the $200,000 limit to $500,000. I think it's much overdue and I don't think it will cost the government very much, because I know small business people, having been one for 20 years; they'll take the profits and reinvest it in their own companies. So I support you fully on that and I think it's an excellent suggestion.

For Mr. Kenward, I'd just like to clarify—and I understand it can be confusing—the creation of these funds arrived at an ingenious way for the ministry of finance to not be obligated to appropriate every single cent that was accumulated in any particular year in terms of a surplus to the debt, because that's the law. It's been used, every successive year where we've had surpluses, for targeted areas, much like you suggested that we should probably have a one and a half cent tax for infrastructure.

So that's why they are done--and now we're being criticized by the opposition because we're doing that--because it all would have had to go to the debt otherwise.

To the association, you mentioned a whole series of things. I have very little time, and if I have a chance I'll come to Kyoto, because that's another area. You talked about debt and then you made a whole bunch of other recommendations. This is where I believe our debate fundamentally is going to go from here on in. When we see the economy booming again at 6% and we see the provinces almost salivating at the money they want the federal government to transfer to them, our debate is going to be fundamentally, as a government for sure and as a party, where do we head from here? Where do we take these additional monies? There's going to be a debate from some who will want to spend and go back to the lavish days of spending. I prefer a more prudent approach where we address some of the tax issues and the debt issues.

When people say “the debt”, I just don't know what level is sufficient. I mean, you can't eliminate it. It's something that you have to manage, much like the household debt--for example, a mortgage, where they look at you and say, okay, 30% of your annual revenue is good. That's what we're trying to get. I believe that with the economy growing we'll be able to achieve a sufficient debt load in itself.

So why is especially your industry fixating on that when we know that we're $17 billion short in infrastructure, and there are so many other things? Should we concentrate on tax reduction, corporate tax, and personal tax deduction--other areas--or should we allot it to new spending?

Mr. Michael Atkinson: It isn't easy. Nobody said it is. That's why we've said there's a balance here. There's definitely a balance. I don't think we're fixated on debt. We're concerned that it not be forgotten. Really what we're looking for is again putting some kind of plan in place similar to what was done with the deficit to ensure that at least something is going to pay the mortgage even when the economy is not as rosy as it is now, so that at least it's there. We're more concerned about the infrastructure deficit or debt than we are--

À (1050)

Mr. Nick Discepola: Do you have a GDP-to-debt target that you think we should be striving for?

Mr. Michael Atkinson: As long as it's going down every year, that's great. More importantly we should be looking at the fact that it's not something we can forget about. The other reason for doing that is we've all mentioned the need also to get the private sector and private sector monies involved in addressing big problems such as infrastructure. In order to do that, they have to have access to capital. Unfortunately, one of the problems when governments have large debts is that accessibility to capital isn't there.

So I don't think we're fixated, but we certainly recognize that this is something we cannot forget about.

The Chair: Mr. Morrison.

Mr. Jeff Morrison: Just quickly to add to that, we also understand that there are such things as business cycles, and that the amount government can put towards the debt in any one year will differ from year to year based on where we are in that cycle. But as Mr. Atkinson stated, what we're really looking for is more of a long-term planning cycle similar to what the government did with the deficit when it set, I believe it was, the 3% of GDP figure in the 1993 election. We're looking for a similar sort of level based on the business cycle--something so that we know there is serious commitment on the part of government to reduce debt. We do not want to be faced with the situation, which quite frankly we were this past year, when government had said that they would put $3 billion based on the contingency fund into debt, but then based on the December budget that amount was reduced by half to roughly $1.5 billion. And we now realize that may not in fact be the case. At least with a plan in place those cycles can be addressed.

The Chair: Ms. Minna, go ahead.

Ms. Maria Minna (Beaches—East York, Lib.): I want to touch base on a number of areas. The first one, the underground economy, was mentioned but I don't think we actually got into it. Maybe in your papers you do. I suspect that to some degree the GST and PST and other things are fuelling it, but it existed before that as well.

I wonder if you could give me some suggestions as to, apart from the actual sales tax, what you would recommend, and what we could do to curtail the underground economy as much as possible.

Mr. Greg Christenson: I'll make some brief comments, and I'd like John to comment.

It's a huge impediment, particularly in renovation markets and smaller house-building markets, where there is a significant market impact from people who don't file income tax returns at all and don't pay GST, HST, or PST. So some of our members are dealing with 45% and 55% cost disadvantages. We're changing the way business is done. We're encouraging that model.

Ms. Maria Minna: So what would be your solution?

Mr. Greg Christenson: There are some things on the regulatory side.

John, do you want to comment?

Mr. John Kenward: I can give one illustration, Madam Chair, of one strong recommendation we've made over the years, which would help settle a couple of things, and that is the federal government's GST rebate for substantial renovations. We have suggested that the definition of “substantial renovation” be broadened to include more renovation work than it does now. In expanding it you would create an incentive for people to participate in the legitimate economy to get the GST rebate. You would then have a paper trail. That would have the effect of lessening the benefit to the consumer of participating in the underground economy.

The biggest push in relation to the underground economy actually comes from the consuming public. It is the public that expects to have work done on a cash basis and with a deal, and the deal necessarily involves avoidance of tax and other costs. So we're saying provide the incentive through the redefinition of substantial renovation. The customer gets a rebate, and CCRA gets a paper trail.

The Chair: Mr. Christenson.

Mr. Greg Christenson: Just to finish that thought, one fundamental principle is rather than reward the person who goes underground, find ways to reward the long-term performers and meet their consumer obligations. Right now we have a situation where if you go outside of the circuit, you're rewarded. If you go into the legitimate circuit, as David described, there are liability charges, inspection charges, and regulatory charges. It really is an unlevel playing field. As much as we're against regulation of a pervasive nature, we think there must be a level playing field, and you must reward the professional builders of Canada and not the opposite.

Ms. Maria Minna: Going to affordability of rental housing, I know there is the issue, which you have presented, of the GST and other taxes and the rebate for renovations. Is PST also involved in that? Does that also have to be paid?

Mr. Greg Christenson: Yes.

Ms. Maria Minna: So that's also a problem.

Putting aside the GST, PST, other tax rebates, and so on, would the industry go back to building rental housing? My observation is that over the last number of years in Ontario--I can't speak for the rest of the country--rent control was blamed for the fact that builders moved away from building rental housing. When you have a good supply on the market, the price goes down. Now builders are building condominiums. They're not building rental housing. It was believed that if the geared-to-income rent controls were removed, builders would come back to that.

I want to get from you a better understanding of that situation. I haven't seen that happen. Are the taxes the only thing preventing builders from going back to building rental housing?

À (1055)

Mr. Greg Christenson: No. One example of an initiative that could have a big impact is the rollover provision commonly available for farms and other commercial businesses.

I've been a rental builder, and my father was a rental builder. Often the builder is a proactive business owner, possibly middle-aged, and he would build a rental project and sell it to doctors, lawyers, and passive investors. For anybody who did build rental housing 20 years back in Ontario and Alberta and across the country, many of those landlords aren't participating in the construction of new rental housing. If they were to sell those properties and reinvest that capital in new rental housing, they would be in the 50% tax bracket. So their business decision is to sit and hold and not reinvest their capital in rental housing.

So there are a number of initiatives policy-wise, plus the punitive ones you described, where sometimes the mill rates and the taxes, not just federally but provincially and municipally, are higher for rental housing. We have a situation in Canada where even though it's high-density housing and the consumer is actually providing a societal benefit by consuming less government services, they're often taxed higher and charged for those services. So there's a disconnect between service delivery and taxes paid. And it's not just at the federal level, as you can probably imagine.

The Chair: Mr. Kenward, did you want to add something there?

Mr. John Kenward: Yes, thank you.

If in fact the economics of rental construction returned, I think the investment would go. There are some memories of rent control, but I don't think that's a primary force against it.

I wanted to make the one point in terms of looking at the tax impact. All of these taxes are pyramiding in relation to GST, and that is something that's not always thought about. This is that as these other taxes come in, development charges and others, then the GST is put on top, and in fact there's a pyramiding effect. The GST goes up as the other taxes go up. It's a tax on tax. We have often argued as an industry that this makes absolutely no sense at all, and one of our recommendations has been, in relation to indexation and increasing the thresholds, to compensate for that particular unfair aspect of the tax system, because it is tax on tax.

Ms. Maria Minna: Then my next question would be, as you're requesting us to address the issue of GST, are you also asking the provinces to address the issue of PST?

Mr. John Kenward: Absolutely.

Ms. Maria Minna: You're doing all of that down the road to try to get some sort of....

Sorry, did you want to say something?

Mr. John Kenward: Absolutely. I just wanted to reassure you that right now what we're doing is referring to the affordability of the affordable housing program, which the federal government has committed $680 million to, as a crisis mitigation measure, because it can only be short term, since these other barriers to rental construction have to be dealt with. But it's not solely a federal responsibility. It's provincial and municipal as well.

Ms. Maria Minna: As you know, unfortunately in Ontario the province has tended to--

Mr. John Kenward: Be difficult.

The Chair: Mr. Wassmansdorf.

Mr. David Wassmansdorf: Thank you, Madam Chair.

I wanted illustrate your point about the condominiums being built. Many of them are actually being used as rentals, and it's because of the tax treatment of condominium projects versus the rental projects. That's where this interrelation is so important.

Á (1100)

Ms. Maria Minna: This is an area I have a great deal of interest in. As you know, the housing problem is enormous, especially in the large urban centres. There are families and children not being able to afford housing, and I know that it's not just a matter of finding social housing, subsidized housing, it's a matter of finding basic affordable rental and of there being enough of it on the market. There's not enough of it being built. So this is an area I have a great deal of interest in, and wanted to understand a little bit more about.

One of you mentioned a little bit earlier, I forget whether it was Mr. Christenson or not, something with respect to the partnership of the three levels of government working together and then of course public-private partnerships. There's a lot of discussion sometimes among my colleagues and I as to the different models that can.... Have you thought of a couple of models of private-public that would work well?

Mr. Greg Christenson: I've been involved in some on the seniors health care side, seniors housing, and I think it would have been great if the $680 million had been done on a carrot approach, saying, okay, show how you can leverage this money, basically compete for the money, and show how you can make regulatory reforms or taxation reforms.

You say, well, that's impossible. I think it's impossible for people working within the government, but often, I think, if somebody comes forward with a good policy suggestion, my personal perspective is that if you can't make policy decisions when there are good public policy benefits, you're never going to eliminate these impediments, just as a general market thing. I believe that through successful prototypes, often what happens on new concepts is 1%, or 2%, or 10% of the marketplace champions these new concepts.

So I think we need to set an environment where these funds are not prescriptively handed down to agencies. Once they have the money, it's the golden rule: If you have the gold, you make the rules. I think it should be the carrot approach whereby you compete for the money and you show sustainability, market-driven responses, innovation in financing, and building technologies, which creates a whole different culture to pursue and to remedy these problems. The private sector would look greatly upon this.

Right now our members are not looking at things that way. In fact, there are initiatives with the government, and the feelings of many of our members have become tainted, I would suggest, about the process, about competing for these government funds, and do not look at themselves as actively participating in the leverage of those government funds.

So I think there's a cultural change that can take place in “triple P”, and we're seeing it in various jurisdictions across the country starting to happen.

The Chair: Mr. Wassmansdorf.

Mr. David Wassmansdorf: This money is thrown at the problem to try to alleviate it in the short term. One project may gain some of that money, and the guy down the street who might be delivering almost the same product does not have the opportunity to get that money, and it's creating an unlevel playing field, rather than dealing with the systemic problem that exists so that all housing can benefit and bring the affordability down.

That's the problem with throwing money at it on a short-term basis.

The Chair: Go ahead, Mr. Christenson.

Mr. Greg Christenson: I think one of the concepts is that as an industry we debate these principles of subsidies and inequities. The money should be used to encourage a culture of removing these inequities, not of artificially subsidizing one or two projects or whatever. Often if a municipality is inequitably charging, you want to avoid a downloading of that capital to them--left pocket, right pocket, and the consumer gets nothing.

Here's a situation where we all need to work together to facilitate the elimination of bad practices and bad taxes, and as those things are eliminated, the marketplace will kick back in. There was a day when we used to way oversupply the rental market on a frequent basis.

Ms. Maria Minna: I remember that--the good old days.

I'd like to switch a little over to the issue of Kyoto, and I think my colleagues will probably continue with it afterwards.

Before I do, on the shortage of skilled labour, I had a chat with most of you prior to the meeting. I'm disheartened to hear that things have fallen apart, and I intend to follow through on some of that.

I want to go into the Kyoto issue because of some earlier comments with respect the environment. Some of you stated that it should be voluntary rather than regulatory, yet if we look at Kyoto, it's a much broader thing. If we ratify Kyoto, we would have to look at all kinds of things in housing--retrofitting, possibly--to address the issue of fuel emissions, transportation....

Roads are great, and I'm not suggesting we don't have to address the issue of keeping our roads and infrastructure up. At the same time we also need to look at the railways, which are another means of transportation that also addresses the issue of Kyoto.

Can some of you tell me a little about your position on the ratification of Kyoto, what that means, and whether at this point you're in the position of saying, forget it, do all of it; forget Kyoto, it should simply be all voluntary; or let's ratify Kyoto, but let's make sure that we have an understanding of what that means in all the different sectors?

Á (1105)

The Chair: I'll start with Mr. Kenward.

Mr. John Kenward: Madam Chair, the Canadian Home Builders' Association has had a commitment on this front since 1985, when we signed a multi-year agreement with the then-Department of Energy, Mines and Resources to work with them to deliver the R-2000 program. The end result of that has been a substantial improvement in the energy efficiency of homes built in Canada since 1985, substantial to the point where we as an industry can claim that we are singularly above the line in relation to Kyoto. We've made incredible progress on the energy efficiency front in relation to our own industry. Consequently, we want to see the R-2000 program, as David Wassmansdorf suggested earlier, continue as a voluntary, market-driven program--extraordinarily successful.

We have suggested that the real issue in making further improvements in our industry relates to what we do about the old stock, the houses that were built before 1980. What we need is a good game plan to encourage people, when they renovate that stock, to improve energy efficiency. That's where the real gains are to be made in our sector.

This is not to say that things are happy between ourselves and the government on this point. Recently the climate change consultation paper that came out went and again recommended provincial adoption of the model national energy code for houses and over time the R-2000 standard. I think I was mentioning the need for cultural change in Canada. Given the evidence in place of substantial improvement, the knowledge that this is going to continue, and the marginal improvement that one could expect through regulation, this would be a bad way to go. We're suggesting that the renovation fund be given the focus.

We're having an intellectual battle again with those who would, as Greg says, offer prescriptions rather than performance-based approaches. But we're pretty happy with where we're at today in relation to Kyoto.

The Vice-Chair (Mr. Nick Discepola): Mr. Morrison, did you want to add something?

Mr. Jeff Morrison: Yes. As I mentioned in my comments, what I would call a responsible industry would recognize that climate change is absolutely an important issue. I don't think there's anyone left out there who believes that climate change is not happening.

Ms. Maria Minna: I think there are still a few, unfortunately.

Mr. Jeff Morrison: Earlier this week, even the Bush administration came forth and published a paper that stated, yes, we understand climate change is a problem. Slowly the views, at least on that fundamental question, are changing. However, just in Winnipeg a few days ago, we had a meeting of our CCA environment committee where we discussed what our views were, and the conclusion was we didn't have enough information. Although the government released its options paper a few weeks ago, even those options, although narrowing down the list of prescriptions available, still did not provide enough information on exactly what the impact would be on various sectors.

I give, just by way of example, the proposal on the domestic emissions trading program, whereby companies would have to buy permits--essentially permits to pollute, permits to emit greenhouse gases. We still don't know whether those permits would be available on a free basis, would be auctioned off, what the cost would be, what the cost would be to sell, and therefore it's very difficult as an industry to make any sort of conclusion about whether, as an industry, we can support those measures.

My last point, though, as mentioned in my presentation, is we do feel as though we are, on a voluntary basis, addressing climate change issues. I mentioned the figure supplied by Natural Resources Canada about the 17% reduction in energy intensity. Recently CCA also joined another program, through Natural Resources Canada, called CIPEC, the Canadian Industrial Program for Energy Conservation, whose mandate is to encourage industry sectors to lower energy emissions and therefore greenhouse gas emissions.

I think the observations that can be concluded here are that voluntary action does work, at least in our sector, and that when government comes in with the heavy stick to try to impose certain regulations, it will face opposition and ultimately may have more problems meeting those climate change objectives than in solving them.

Á (1110)

Mr. Michael Atkinson: I'm just going to simply add that I think the most important thing here is knowledge, and I'm sure we are acting to fulfil environmental objectives--and I would say not political ones. In fact, I was encouraged by the debate our association had. It was about addressing climate change; it wasn't about whether to endorse a particular international treaty or not. That's the way it should be.

What we have to be careful about is that when regulation and mandatory requirements are the solution, often they're arbitrary. Often they come nowhere near achieving the very objective they're supposed to be in support of. As an industry we want to sit down, yes, with government; we want to sit down with the scientists. We want to make sure we're on a path that makes a contribution to resolving these environmental challenges, not through arbitrary regulation that does not achieve environmental objectives--it may achieve other non-environmental objectives--but we want to ensure what we do as an industry meets the environmental objectives.

The Chair: Mr. Smith.

Mr. Peter Smith: Finally, from the aerospace industry's perspective, notwithstanding the fact that we're a highly regulated industry, I wanted to reiterate the point I made during the opening remarks, that we sincerely believe the competitive drivers to the success of the Canadian aerospace industry are safer, cleaner, quieter, and more affordable aircraft. The issue raised almost two days ago at our board meeting was that if any of our industry members could come up with a green air engine, or green aircraft, this would give them the competitive edge. That's why we're basically tying many of the comments you made into the innovation agenda that would lead to the--

Ms. Maria Minna: This is all interconnected, and there's a lot of money to be made in the green, innovative--

The Chair: Mr. Boag.

Mr. Peter Boag: I would only add that our global competitors are already in this game. To a certain extent Canada has been in this game, certainly on the engine side; the work of Pratt and Whitney is highly focused now on environmental issues, whether it's emissions or whether it's noise.

But as we look ahead at what our European competitors are doing, what our American competitors are doing--and the very, very aggressive research agenda is highly funded by governments, because they see not only the benefits to the individual companies and the industrial development advantages, but they see the broader “public good” objectives of the cleaner environment, whether it's directly related to Kyoto or not--those countries are doing it. We need to be in that game, with the leverage of government incentive, and particularly in early-stage research, whether it's at the university level, or with universities collaborating with the private sector, or government labs in collaboration, and through the platform development activities. Those are really the key knowledge-creation areas that Canada needs to get aggressively into in aerospace, if it's going to continue to be a competitor globally, because environmental issues constitute one of the key market pull areas right now.

Ms. Maria Minna: But in other sectors as well, whether it's sewage treatment or what have you, innovation in new technologies is a growing economy, and innovation in environmental or green economy is really a plus-plus; the two go together.

Mr. Michael Atkinson: If we were self-serving, we'd be here telling you to put very strict stringent mandatory regulations in place because of all the factory retrofits we would do.

The Chair: Next is Mr. Pillitteri for ten minutes. Then I propose five minutes for Mr. Jaffer and five minutes for Mr. Discepola, and then we'll close the meeting.

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

Good morning, everyone. I'm sorry that I missed some of your presentations, being late. Your presentations were well done; I've read through some of them. But sometimes you really have to be reminded, I think, with all of a sudden the packages coming forward about debt reduction and the issue on the taxation....

Maybe I should go back a little bit and say that I remember a previous government here used to balance the budget every five years, but that was only on paper. It was never done. I remember also that they accumulated a debt of over $300 billion. I remember when we came into office. With the 1994 budget we beat our expectations by reducing the deficit by more than 3% and excelled in eliminating the deficit in 1997 totally. And by then--1998 on--we paid down some $34 billion of the debt. There was only one year in which the $3 billion was not put in, Mr. Morrison, because of September 11, and that was last year's budget. I'm pretty sure with the strength of the Canadian economy that we'll possibly go into surpluses again.

That's where we've met all our expectations, rather than not meeting them as the previous government had done.

Now let's go back to the infrastructure. The infrastructure I think is why this government... and I think some of us on this committee have been looking at an infrastructure that has been from the bottom up rather than from the top down. It is to the municipalities. It is really their preferences for where they wish to spend their money.

If we look at the first infrastructure, it worked quite well. Basically as politicians you have to also understand that we all want our pound of flesh with that money or want it to be spent equally across the country. Therefore, we had to make sure that we were getting our fair share. And it's no different today.

As to infrastructure in the long term, yes, we put in over $2 billion last year for over the next five years in infrastructure. How can we speed up the program? Even in my own province, the province of Ontario, they didn't really want to come up with a deal until March. I recall it wasn't until this March that we started to really come up with an agreement and announce some of the infrastructure programs.

Now, Mr. Kenward, you said, yes, there's infrastructure here, and, yes, there's infrastructure there, but there's nothing coming up yet. Well, sir, even as late as yesterday, I was looking in my own area of the Niagara Peninsula and there were some 14 projects of an expenditure of over $21 million. That is in the Niagara Peninsula alone. I couldn't name them for you because I haven't got them off the top of my head, but they're just coming on now.

The first recommendation from the municipality and the province was green; it had to do with sewer, water, taking on this initiative in order that we could do something for the environment. Of course there again it's boundaries where this money is being spent.

Talking about border crossing and infrastructure, there's a whole other $600 million there. But how can we spend this money when the Americans have not? Yes, we've agreed on a 30-point, but what have they done about it? They've put nothing on the table to cooperate with what we are to do in some of this infrastructure. We won't want to spend it alone without really accommodating them in a sense that...we possibly misspent the money instead of properly spending it? I think we have to look at the long term in how this money is spent as far as the infrastructure.

The money was put in there. Yes, and my colleague said that in accounting we...it was squandered. But, no, it was put in there. It could have also gone towards the debt, because it was not budgeted.

Á (1115)

So if the province has this initiative, how can we come up with agreements on how and where to spend the money?

If I take a look at the infrastructure and ask where we should spend, in Ontario, there's not been one project in which the federal government did not agree with the provinces or the municipalities. Not one. All of the projects the municipality put forward and the province okayed, the federal government agreed to.

Yes, we do hear you. We understand you. But are you putting as much pressure on local levels, on provincial levels? And when we're talking about debt reduction, are the provinces equal to that of the federal government? I don't think they are.

Since I represent an area like Niagara Falls, I would like to see this infrastructure money, especially in the border crossing, move as fast as possible so we can accommodate and facilitate the movement of people, goods, and services right across the country as fast as we can.

Á (1120)

The Chair: We've left five minutes for comments.

We'll start with Mr. Kenward.

Mr. John Kenward: Madam Chair, I think I should say something, because I think at least two members may have misread what I said. My remarks were intended actually to compliment the federal government for returning to the infrastructure field, because I can recall the days when it wasn't there.

My suggestion was that now that you have this array of funds, if you want to look at some of the strategic connections, now is probably the time. And it would be very important to have an eye open for allies like the home building industry in relation to future strategic developments, rather than have us where we are on the periphery.

In other words, you have a very close relationship in many respects with the Federation of Canadian Municipalities, which is really a governmental agency. I'm suggesting that in the spirit of public-private partnership, strategically you might want to connect with the private sector.

When it comes to housing affordability and rental construction, there's a huge connection here. To the extent that the federal government provides municipalities with funds for their infrastructure, it provides them with breathing room in relation to things like development charges. They can, in fact, reduce the development charges, which opens up the field, actually, to being more creative in relation to moving the rental agenda along and securing housing affordability.

So what I'm suggesting--and perhaps I'm being a little bit more precise, not to say anything critical of the government--is that from our perception, you have created a sound base to develop the strategic leverage capacity with the private sector with what you're doing, and I'm admitting that our builders don't see it, because they're somewhat on the periphery right now.

So we're here, if you like, to join in partnership, and that's what's missing right now. This is not a criticism. This is an offer to be more helpful than we've been in the past in relation to these initiatives, and we hope not to be turned away in the process.

The Chair: Mr. Atkinson.

Mr. Michael Atkinson: I'd like to echo what Mr. Kenward said. The same goes for the non-residential side of the equation. We want to be your partners.

For example, the Transportation Association of Canada has put a national highway program together. These are people who are in the transportation business--users and builders--and departmental people from all levels of government who said, here's where the need is, here are the priorities, here's what we have to do. So there is already a plan there that answers those questions of how to do it.

We were encouraged when the last budget announced the creation of an infrastructure foundation--not a fund, a foundation. We were encouraged by that because we thought not only was this the first recognition of it being long term, but also it recognized the need to have some kind of third-party body involved that brings in the private sector as a partner.

In fact, the report of the House of Commons Standing Committee on Transportation that I mentioned earlier, which Mr. Alcock chaired, called for the establishment of a third-party committee, body, or foundation--call it what you want--that would bring the private sector in to insist on ensuring that the technical standards--rather than political standards--ran where the priorities were as far as the infrastructure needs of the country go--what would give us the biggest bang for the buck--and would involve the private sector from the financing side of things.

It's important to understand how we can better plan. We have to plan together, and we have to plan with the private sector there. We were hoping the announcement of a foundation would give us the base for that kind of partnership to grow. Unfortunately, the return to a fund suggests to us--perhaps it's not the case--that it's business as usual.

Á (1125)

The Chair: Mr. Jaffer, you have time for one question.

Mr. Rahim Jaffer: Madam Chair, I just wanted to return to that question or issue of the debt. I was a bit surprised when my colleague, Mr. Discepola, said something along the lines of how we will never be able to pay down the debt--I believe he said something along those lines in his comment.

Mr. Nick Discepola: We can't pay off the whole thing in my lifetime, anyway--maybe in yours.

Mr. Rahim Jaffer: Well, maybe we can, that's the thing. This government can pat itself on the back for making an effort to eliminate the deficit. When you look at it, I think it is obviously progress. It's moving forward. On a road thousands of miles long, it's an inch towards paying down what we really have to do when it comes to the cost of the debt. That's what we have to remind ourselves.

While we're all looking for different areas where we can reinvest, we have to return to the fact that the debt, which is still close to $600 billion, is the single largest cost to this government when you look at the transfers it has to make. The $40 billion-odd amount it costs the government in interest payments could be well directed into a lot of different areas if we substantially looked at legislating the paydown of the debt, which some provinces have done and done effectively.

That's something I'd like to hear some of you comment on. I still think this government has taken the issue of debt too lightly, the effect it has on its own budgets.

The other thing I wanted to hear about was the issue of earmarking funds from certain revenues. I believe Mr. Morrison mentioned it, or maybe it was Mr. Atkinson. Clearly the government levies certain taxes for certain purposes. That's what I think when you look at the fuel tax or the tobacco tax or other things clearly supposed to be going towards certain programs, whether infrastructure or health programs or whatever they might be. Unfortunately, many of these taxes levied go into general revenues and there's no real accounting for them.

What would you propose in order to create greater accountability in that area so we could maybe earmark certain funds for the areas where you're proposing investment?

Mr. Michael Atkinson: First of all, to start with your last question first, we've never been successful in convincing any federal government, no matter what its political stripe, to get involved in dedicated taxes. Our inability to persuade this government to get involved in dedicated fuel taxes, such as they have in the United States, for example, is consistent with the previous Progressive Conservative government. We talk in terms now of designation. There have been some dedicated taxes.

But your point is well taken about being, quite frankly, honest with Canadians, and we refer to it in our brief. Don't tell them their employment insurance premiums are going into employment insurance initiatives when the surplus is going to pay down the debt or the deficit; be honest with them. That's the kind of discussion we're trying to get across.

When you put fuel taxes up, excise taxes on motor fuels, when you're taxing the users of our highways, don't pretend those funds are going back into a reinvestment in the highways, etc., when the federal government is collecting close to $5 billion a year in motor fuel taxes and reinvesting less than 4% on the highways. Let's not pretend any more. It's all going into the big pot, as you're suggesting.

That's why I was very careful with my choice of words with respect to the cent and a half. I said “designate” towards that. I think this is what we're getting at. We'd love to see dedicated fuel taxes like those in the United States. But if we can't get there, let's at least designate a portion of those revenues to reinvestment in our highways.

The Chair: Now it's Mr. Smith, first of all, followed by Mr. Morrison, Mr. Christenson, and then to Mr. Discepola.

Mr. Peter Smith: Mr. Jaffer, I'd just like to have it reiterated, certainly for the record, that the aerospace industry of Canada has consistently appealed to the government to allow for a balanced approach of tax reduction, debt reduction, and strategic investments. I think any business person with a challenge ahead of them would ensure a responsible approach be made; one can't consider any one of those three as the ultimate goal for the simple reason that if you eliminated the debt and didn't have any investment, or eliminated the tax and considered the debt and no investment, it just doesn't work.

All we are looking for is the chance to work in partnership with the government of the day and the opposition to ensure there is a responsible and planned approach that addresses all three issues. We can't ignore any one of them because we need to continue to ensure that the economy grows. We can't give one or the other any particular preference.

Certainly new investments are very dependent upon...and we were encouraging the government to address the issue of the deficit reduction first. Then there was some room to believe that new strategic investments could occur. That was there target and we fully supported it. The debt issue will never be one with a singular objective; a balanced approach is certainly required.

Á (1130)

Mr. Jeff Morrison: First of all, as Mr. Pillitteri mentioned, the government, in all fairness, deserves some credit for the fact that they've repaid something like $35 billion in debt over the past couple of years. I think that is worthy of credit. However, Mr. Jaffer, you and I are probably about the same age, and as Mr. Discepola mentioned, at 31 years of age, I would like to see the debt repaid at some point in my lifetime as well.

Our point is that all too often we see the government's reaction to debt as an afterthought. It's something that's dealt with at the end of a fiscal cycle, and if in fact there are surpluses that can be put towards it, then great; let's do it.

Mr. Pillitteri mentioned that in fact the debt in the 2001 December federal budget had gone from $3 billion to $1.5 billion due to September 11. That's true, but that's true because that $3 billion was there as a contingency fund, which was to be used in the event of unexpected circumstances, which in all fairness September 11 was. However, what was not contained there was any commitment to put money towards debt reduction. It was only more as an afterthought if funds happened to be left over at the end of a fiscal year.

What we're really saying is don't treat that as an afterthought. Put in place a plan. Put in place targets that governments can meet on a year-by-year basis. Keep in mind that, yes, there is a business cycle, and therefore if the government put $10 billion towards the debt in one year, maybe they can't put that towards it the next year. We can be realistic. As I think the federal government showed with its deficit fight, it can be done and in fact should be done.

Mr. Greg Christenson: We of course agree with a balance between paying down a debt and investment in future infrastructure, etc. In previous finance committees we've spoken to good fiscal management as key for a strong environment for job security and a foundation for home buying. But if you're hearing us, one of the things we're promoting is the idea of a smarter agenda, better regulatory efficiencies, more leverage, and capacity building. We believe there's a lot of potential in the system to grow our capacity by working together. That's the optimum vision. We can put a negative connotation on it. We elect not to go there. We think there's a huge opportunity to take the resources that are there to leverage and grow.

I'd like John to comment.

Mr. John Kenward: That's exactly the point.

The Chair: I'll give Mr. Discepola the last question of the day.

Mr. Nick Discepola: I've done a quick calculation. Even if you took $10 billion out of program spending, which means you're going to affect other areas, it would take you 60 years. So I won't be around, but maybe you will be around.

The Chair: I doubt Mr. Morrison will be around either.

Mr. Nick Discepola: I'd like to conclude by allowing all our panelists to answer this following question. As we move forward with our innovative agenda, I'm wondering what you feel the government has to do for your sector not only to remain competitive but to become world leaders. I recall so vividly when I saw the CBC special on the Arrow and I said to myself, wow, if only the government had done the right thing back then, maybe the first person in space would have been a Canadian, not an American.

I know how important the aerospace industry is. I'd like to correct something, because I gave the impression before that it was only important to Quebec, but it really is pan-Canadian. I know that out west and in Winnipeg, for example, the aerospace industry is very important.

What do we have to do to make your sector very competitive as we move forward with the innovation agenda?

Mr. Peter Smith: Our particular stance, Mr. Discepola, would be to ensure that the government is in a position today to double the annual federal government investment in aerospace research and development by 2005, to achieve an annual federal government R and D investment level of $1 billion by 2010. Those investments would be dedicated to early-stage pre-competitive research, platform technology development and demonstration, and technology exploitation and product development.

I think if you recognize the success the aerospace industry has had over the last decade as a result of those particular issues, then as far as I'm concerned, we would ensure that the innovation agenda that the government is talking about will indeed be delivered by the aerospace industry in Canada over the next decade.

Á (1135)

Mr. Peter Boag: I'd just like to add one point that responds to one of your earlier questions, Mr. Discepola, about whether we can achieve that target in 10 years. I think we can. The issue is that we need to be decisive. We need to be aggressive, have a clear vision and some clear objectives, and set an aggressive strategy that needs to move forward quickly.

I look at the examples of countries like Finland and Ireland and what they've been able to achieve in a very short period of time. If Canada is serious about this and we work collaboratively between industry and government on an aggressive agenda, yes, it can be achieved.

The Chair: Mr. Atkinson, I'll give you the very last word.

Mr. Michael Atkinson: I'll try to make it simple and brief: Partner with us.

And partner with us not just when it's appropriate. It's always appropriate. In infrastructure planning and planning for the future, work for us and partner with us.

The Chair: Mr. Christenson wants me to give him the last word.

Go ahead.

Mr. Greg Christenson: Thank you.

Again, I think we're very supportive of the innovation initiative, and I think it will come down to regulatory reform, cultural changes, or performance creativity, including a liability environment that's equitable, fair, and definable. But it really comes down to leveraging our resources and rewarding performers.

So I think the strategy can be eminently successful.

The Chair: Thank you, ladies and gentlemen.

On behalf of all of my colleagues--some of whom are in a finance debate in the House right now--thank you very much for your testimony here today. You've given us materials that we can review in our deliberations, not only this summer but also in the fall. So I thank you very much for your time and attention to our committee.

And to my colleagues, I just want to say, take a look at the amended notice coming to your offices, probably by late today. It's just being worked out now.

There will be no meetings next week, but there may be the week after.

Thank you.