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Chapter 1: The Record Until Now


When the present Government took office in 1993, Canada faced immense challenges. The national debt was approaching $500 billion and growing 2.7 times as fast as the national economy.

Immediate action was required or the well-being and future prospects of every Canadian would suffer as an ever increasing proportion of government revenues had to be diverted to servicing the national debt, which in turn had to be financed increasingly by foreign lenders.

The Government acted quickly in its first budget to deal with the most immediate crisis, a budgetary deficit that was far worse than forecast and in danger of running out of control. It also signalled a new approach to budget making -- seeking changes that ranged from a new, more-credible way to develop budgetary forecasts to the manner in which it involved Canadians in the budgetary processes.

In the course of 1994, with the close involvement of this Committee, the Government developed a clear set of objectives within a new framework for economic policy. At its core, this framework was aimed at producing "durable economic growth and job creation".

Through this Committee, as well, the influence of Canadians over the budgets affecting their lives was dramatically increased. Pre-budget planning was opened up for the first time to publicly engage Canadians in budget building.

"International investors I talk to every day are looking at Canada as though we've risen from the ashes."

Ms Maureen Farrow (Executive Vice-President and Director of Economics and Equity Strategy; Loewen, Ondaatje, McCutcheon Limited)
Because of the fundamental character of the changes required, the Committee's role in defining and developing in advance the underlying consensus that was essential for ultimate success was pivotal in the preparation of the February 1995 budget, now unquestioned as the most important economic document of the post-war years. The consultative process developed by the Committee has remained in place since then.

As the Government prepares for its fourth budget, the record since then provides an important context for both measuring the progress that has been made and charting the work that remains to be done to finish the job.

A. The Hard Realities of 1993-94

The Government's approach was set out in the context of the hard realities that prevailed in the first months of its mandate.

The Government faced debt that was at a record level, mounting deficits and an increasing proportion of Canada's debt in the hands of foreign lenders, a situation that was rapidly eroding Canada's economic sovereignty and leaving it captive to foreign exchange and international financial markets.

(a) The Debt-and-Deficit Crisis

As of March 31, 1994, the beginning of the first full fiscal year under the Government's stewardship, the following situation prevailed:

"I believe the debt-to-GDP ratio is the fundamental ratio by which you should be judging fiscal policy. I would argue that the main indication you get from that ratio is your ability to borrow for stabilization purposes the next time the economy turns down. I would say that was a rather more urgent thing than burdens upon future generations."

Professor David Laidler (Faculty of Economics, University of Western Ontario)
Apart from the numbers for 1993-94, the direction of the numbers was of over-riding concern.

In particular, the debt was climbing. It was $390.8 billion in 1990-91, $425.1 billion in 1991-92 and $466 billion 1992-93.

(b) The Forecasting Record

To this was added an approach to budgetary forecasting that had helped to create a profound scepticism about the Government's economic estimates.

The April 27, 1989 budget forecast a $28 billion deficit for 1990-91. The actual deficit was $30.6 billion.

The February 20, 1990 budget forecast a $26.8 billion deficit for 1991-92. The actual deficit was $31.6 billion.

The February 26, 1991 budget forecast a $24 billion deficit for 1992-93. The actual deficit was $35.5 billion.

And for 1993-94, the preceding Government predicted on April 26, 1992 that the deficit would be $32.6 billion. This forecast was subsequently raised to the $44 billion to $46 billion range and ultimately came in at $42 billion, nearly $10 billion above the original forecast.

"If you look at program spending, we're about 34% (of GDP) or 35%(for the United States) compared to 30%. I'd suggest to you that most of that gap, in fact all of it, would be explained by the fact that we deliver health care through the public sector rather than privately.

This notion that somehow we have an outsized public sector in Canada is just ideological nonsense."

Mr. Andrew Jackson (Chief Economist, Canadian Labour Congress)
This was more than an accounting inconvenience. It conveyed the impression that the finances of the national Government were out of control. Increasingly, the prospect of failure to hit targets was being built into planning within the Government and outside it, particularly in foreign exchange and debt markets which were becoming increasingly pivotal in their effect on Canadian public finances.

Apart from the disruption caused by unplanned spending cuts and other measures to make up for overspending and revenue shortfalls, the lack of credible budget estimates raised the risk of holding Canadian debt.

This resulted in foreign exchange markets effectively "betting" against the Canadian dollar, forcing the Government and Bank of Canada to defend the dollar against speculation, often with higher interest rates which exacerbated the problem, not just for the federal Government but throughout the economy.

This fiscal strait-jacket, moreover, reduced the range of choices the Government had for dealing with other problems, such as the high rate of unemployment, high levels of dislocation and social distress because of recession and the industrial restructuring taking hold, and the need for new investment in high-technology, high-skill industries where new employment prospects would emerge. These were problems considered fundamental by Canadians and the Government, but the solutions to them could no longer lie in increased spending.

The lack of credible forecasts, in essence, had become an important contributor to a growing loss of national economic sovereignty and to the vicious circle of rising deficits from rising interests costs producing more rising deficits.

B. The First Steps to Recovery

(a) Monetary Policy

The explosive inflation of the 1970s and early 1980s associated with high rates of monetary expansion and exacerbated by the oil price shocks of 1973 and 1980-81 had been contained by a decisive move in 1981 by monetary authorities in Canada and other countries following the lead of the U.S. Federal Reserve.

This helped to bring on the 1981-82 recession, the worst since the Great Depression, and brought Canadian inflation levels down from more than 12 per cent in late 1981 to 4 per cent by 1984. However, inflation began to regain momentum in the late 1980s and Canadian monetary policy, rather than following the U.S. lead, was mobilized in a pre-emptive strike against inflation, in part because fiscal policy was considered to be too lax.

The tight squeeze of Canadian monetary policy deepened the 1991 recession. This tightening had two other consequences: it eventually led to the low-inflation environment that now prevails, but also the high unemployment and high debt servicing costs that now prevail as a result of the high interest rates associated with the policy.

However, the low inflation environment would not translate into a low interest rate environment, particularly with regard to real rates of interest, which remained high compared to the United States despite lower inflation, until financial markets regained confidence in Canadian fiscal management.

Canadian monetary policy has been directed to keeping Canada's inflation within a band from 1 per cent to 3 per cent and to reducing interest rates as the Government's fiscal policy has provided increasing room for the Bank to manoeuvre.

(b) Confronting the Deficit Crisis

The transformation of low inflation into a low-interest rate environment depended on establishing clear, achievable and believable targets coupled with decisive action to demonstrate the Government's resolve to hit or exceed the targets.

Of particular importance was the government's commitment in the 1993 election to reduce the ratio of the federal deficit to gross domestic product to 3 per cent by 1996-97. This ratio was vital because it represented the deficit level at which the Canadian economy would begin to grow faster on a sustained basis than the national debt. Reaching this point was critical to stabilizing the national debt as a percentage of GDP and eventually reducing it.

The Committee, under the new, open consultative processes for budget-making put in place in 1994, endorsed the following deficit-reduction track:

Subsequently, prior to the March 1996 budget, the Committee endorsed a target of $17 billion for 1997-98, or 2 per cent of GDP.

At the outset of the consultations for the 1997 budget, the subject of this report, the Minister of Finance proposed to the Committee in his Economic and Fiscal Update a target of $9 billion for 1998-99, or one per cent of GDP.

In addition to these targets, the Committee also recommended the following measures to transform the budgetary process and increase the likelihood that deficit targets would be met or exceeded in future years:

(i) The Contingency Reserve

In addition to a deficit-reduction track based on achievable and believable targets, a new weapon was added to the Government's arsenal.

The Government proposed, and the Committee endorsed, creating a contingency reserve that would be used in the event of unexpected adversity to ensure that the Government's targets could still be met. It would not be used to finance new spending measures, as so often happens to contingency funds or to any large amount that is not committed to a specific purpose.

The new reserve was created in large measure by expenditure reductions above and beyond those needed to reach deficit targets. This was to cover the unavoidable risks arising from the inaccuracies in all forecasting models, no matter how prudent, and from unpredictable events. New spending measures, on the other hand, were to be financed from within existing budgets. As the pre-budget report of the Committee said of the new contingency reserve, "It is there in the event the government has been unable to spend less, not in the event it wishes to spend more."

The Committee, in its first report, recommended that the reserve be $2.5 billion for 1995-96 and $3.0 billion for 1996-97. These were adopted in the 1995 budget but the reserve was not required to meet the 1995-96 target, nor has it been required since.

(ii) Two-Year Deficit Targets

A second shift in approach involved the planning horizon of the Government.

As the Government had grappled in the 1970s with the problems of planning its own finances, it adopted a five-year plan approach. This approach was always a matter of controversy because, it was argued, the plan could serve to entrench inflationary expectations and set up a dynamic based on self-fulfilling predictions.

The experience since the 1970s had exposed another problem. The five-year budgetary projections that came into use then and were in use until the 1994 budget meant that budgets could be and often were structured or "profiled" so that difficult deficit-reduction decisions could be deferred until the later years of a plan without seeming to jeopardize the ultimate achievement of its objectives.

What this meant, in the reality of a parliamentary system where governments are constitutionally required to hold elections at least every five years, was that hard decisions, particularly those involving spending cuts, were often deferred past the end of a government's mandate. The Minister of Finance believed that this was destructive of fiscal discipline.

The Minister resolved to change this, limiting projections to two years, and the Committee endorsed his approach. This has not been done without opposition. A number of intervenors at Committee consultations insisted from the outset, and still insist, that the Government should set out its longer term targets for eliminating the deficit and for reducing the national debt, both in absolute terms and as a percentage of GDP.

As the two year targets have not only been met but exceeded two years in a row, the advocates of a return to multiple-year projections have lost much of their support.

(iii) Building in a `Prudence Factor'

To restore fiscal health, it was essential that a new approach be taken that would restore the credibility of the Government's budgetary forecasts.

The previous approach used only Department of Finance forecasts.

The problem with this approach is straight-forward. A projection has about an equal chance of being too high or too low. Because interest rates had come to impact so heavily on debt servicing costs and thus, the deficit, an average forecast that was too high on growth and/or low on interest rates would be low on the actual size of the deficit. Increasingly, the forecast had underestimated the adverse impact of interest rates and, as set out above, the gap between forecast and result had not only been growing wider but had been consistently on the side of targets missed rather than targets hit.

Each missed target not only drew attention to Canada's deteriorating economic fundamentals but also became a test in financial markets of the Government's fiscal resolve, heightening the sense of risk surrounding Canadian finances and giving financial markets inordinate influence over our economic decision making.

This would continue, and the power to make economic choices -- the essence of economic sovereignty -- would increasingly pass from elected governments to financial arbiters, until Canada both turned the fiscal corner in real terms and began to re-establish that the Government was more likely to exceed its targets than fall short.

To re-establish forecasting credibility, the Minister of Finance convened a roundtable of economists which met in December of 1993 to consider new approaches.

As a result of this work, the Minister signalled to this Committee, at the start of the preparatory processes for the February 1995 budget, that it was his intention to abandon the old approach and adopt a new one, based on the average of private sector forecasts, that placed a premium on prudence. He proposed a "prudence factor" of 50 basis points to be added to the average forecast for both short and long-term rates.

The Committee endorsed this approach but recommended that the Government be more prudent still. The Committee recommended that the Government "use the average private sector forecast plus a prudence factor of between 50 and 100 basis points" and adapt its growth, revenue and expenditure projections to reflect this more prudent interest rate forecast.

(c) Spending Cuts versus Tax Increases

Since its first hearings, the Committee has found a continuing consensus for restoring the federal Government's fiscal health.

But, equally, it has found a continuing conflict over how to do so. The argument between those advocating spending cuts versus tax increases and those advocating the reverse has continued and is unlikely to end any time soon.

"You have savings of about $4 billion. Our immediate suggestion is that in this budget you put that $4 billion back into the economy."

Mr. Jordan B. Grant (Chairperson, Bank of Canada for Canadians Coalition)
If anything, the success of the Government's approach has intensified the debate and transformed it. Advocates of spending cuts now argue that even deeper cuts can be and should be made to create room to reduce taxes on the deficit. On the other side of the spectrum, the advocates of higher taxes on corporations and "the rich" to finance deficit reduction now argue more vigorously for this approach and for the restoration of spending programs.

The Committee has preferred to avoid these extremes, supporting instead the approaches that are working and which are supported by the broad mainstream of opinion as demonstrated in its hearings.

On the choice between spending cuts and tax increases, the Committee has endorsed the principle that deficit reduction should come primarily from expenditure reductions rather than tax increases.

In its first report on pre-budget consultations, the Committee set out a combination of spending and revenue measures that were tilted overwhelmingly to expenditure cuts -- $7.70 in spending cuts for each dollar from new revenue measures.

In its second report, the Committee again endorsed the principle that reduced spending was the preferred approach to deficit reduction.

A principal concern of the Committee in endorsing this approach is that Canada must be internationally competitive if its businesses are to create the jobs needed to reduce unemployment and generate new investment in high-growth, high-skill, globally competitive industries.

Corporate and individual tax levels are at or near the upper levels of competitiveness. A shift to a higher-tax approach could very easily cost the Canadian economy more than the higher taxes would bring in deficit relief, not least because of the doubt it would raise as to Canada's resolve to finish the job it started in 1993.

On the other side, the advocates of overall tax cuts, as opposed to targeted or selective tax cuts, have generated very little support in the Committee's consultations.

"If you're running a marathon, ...you don't stop to eat lunch. I would suggest that a tax cut is exactly a pause for refreshment that we don't need at this point in the fiscal program."

Mr. Tim O'Neill (Chief Economist, Bank of Montreal)
To the contrary, the Committee has found widespread awareness that the job of deficit reduction is not yet done and that some of the pain of the cuts has yet to be felt. Canadians recognize that the deficit is still high (despite the progress made) and that the level of debt is still too great. While there is widespread acceptance that deficit reduction primarily through spending cuts is necessary, and growing pride and relief that are starting to turn the corner, there is also reluctance to cut any deeper into valued programs and services.

Most Canadians recognize that finding the wherewithal for a tax cut now means either cutting deeper into programs they value or slowing the pace of deficit reduction. Neither is acceptable and, for now, the proposals for overall tax cuts are outside the mainstream of workable policy possibilities.

Now is not the time to undermine success or broad public support by either huge new spending programs or costly across-the-board tax cuts.

Most Canadians have told us not to abandon the job, but to finish the job and that is the Committee's most basic recommendation in this report: Finish the job!

C. A Record of Success

How well have we done in restoring our fiscal health and our international reputation for being both a sensible and a caring country?

The proof of the progress lies in the results.

(a) Targets Met and Surpassed

Starting from a deficit approaching 5.9 per cent of gross domestic product, and following four consecutive years beginning 1990-91 in which the federal Government had missed its deficit targets by $2.6 billion, $4.8 billion, $11.5 billion and $9.4 billion, the present Government met and surpassed the targets for the two full years of its mandate that are complete.

In 1994-95, the Government bettered its target of $39.7 billion by $2.2 billion and in 1995-96 surpassed its target of $32.7 billion by $4.1 billion. As a proportion of economic output, the deficit for 1995-96 was 3.7 per cent, well under the 4 per cent target and the lowest since 1976-77.

This year, with the fiscal year two thirds complete, it is virtually certain that the Government will better its target of $24.3 billion or 3 per cent of GDP.

Should this target be surpassed for the third year running, and there is no reason to expect it will not, it will represent an achievement unequalled in this generation.

(b) Inflation

The Canadian inflation rate, which spiked toward 7 per cent in early 1991, hovered around 1.5 per cent as the Committee conducted its work preparatory to the 1997 budget. This is toward the bottom of the 1 per cent - 3 per cent target range of the Bank of Canada.

"Indeed the housing industry in and of itself can become a more powerful force in this economy..., but in order to achieve that, government has to sit down with the private sector and the industry to work out strategically how we're going to do it. That we have not done and that is a central message today. It's time to do it.

Mr. John Kenward (Chief Operating Officer, Canadian Home Builders' Association
Since early 1995, following 20 straight reductions in the Bank Rate, Canadian short-term rates have swung from nearly 2½ percentage points above American rates to 2¼ points below. This represents a dramatic turnaround.

This decline in interest rates, apart from being a declaration of confidence in Canadian fiscal and monetary policy, also represents a cut in costs to Canadians in all sectors of the economy, decisively reducing one of the principal costs of major purchases like homes and automobiles, the cost of money for investment in plant and equipment and the cost of carrying private and public debt alike. The Prime Minister and the Minister of Finance have both underlined the powerful and positive effect of this cut on family finances -- a saving of more than $3,600 a year on a one-year, $100,000 mortgage or $525 a year on a $15,000 car. Similarly, it would save a small business more than $34,000 a year on a $1 million loan.

In brief, reduced interest rates have had the advantages of a tax cut without the risk involved in a tax cut that investors and financial markets might consider it a weakening of the resolve to restore Canada's fiscal health. Any perception of weakening could quickly turn investors against the Canadian dollar and Canadian investments. Alternatively, there would have to be further financial pain in the form of new, major spending cuts that would add to the pain that has already been borne by Canadians. This could well undermine the consensus in favor of the spending cuts already scheduled.

(c) Interest Rates

Interest rates moved sharply higher in 1994 and remained high through early 1995 as the Canadian dollar came under pressure. As a result, economic activity weakened significantly.

But the Government's February 1995 budget, in which the Government set out its deficit targets and its spending reduction plans, helped to restore confidence in the Government's commitment to restoring Canada's fiscal health. This allowed the Bank of Canada to let interests rates fall and prepare the way for Canadians to begin to capitalize on low inflation and the growing strength of Canada's economic fundamentals.

By November of this year, the Bank of Canada had reduced its trend-setting rate 20 times in succession, setting the stage for a period of sustained and healthy growth in which Canada is set to outgrow other major industrial economies. Of particular importance is the Canadian interest rate performance relative to the U.S. where inflation has been higher. In the first ten months of 1996, Canadian short-term rates have fallen over 200 basis points and are now below U.S. rates for the first time since 1983. Medium and longer-term rates have also fallen and are now below U.S. rates at terms to maturity up to ten years.

Real interest rates are lower today than in 1993 and substantially below their peaks in early 1995. Real short-term rates are today about 1.4 per cent compared to 3 per cent in the summer of 1993 and 7 per cent in January 1995. The same pattern holds for long-term rates, although they are higher. American real rates are generally below those in Canada. Although Canadian real short-term rates have recently fallen below their American counterparts, our long-term rates are substantially higher. Thus, there are further gains to be achieved from a continuation of the fiscal record.

As RBC Dominion Securities said in its September letter: "This dramatic outperformance in the fixed income market (once thought impossible, then an anomaly, then bizarre) should be considered normal. A virtuous circle is now in place which will begin to undo the economic damage of the last 20 years."

(d) Merchandise Trade and Current Account

Canada's trade performance increasingly reflects the underlying health of the country's economic fundamentals and fiscal prospects.

Low inflation, coupled with the depreciation of the dollar after its peaks in the late 1980s, has sharply improved Canada's merchandise trade account.

The merchandise trade account records exports and imports of tangible goods. Canada traditionally runs a surplus in merchandise trade but the seasonally adjusted balance (expressed at an annual rate) of $40 billion in the second quarter of 1996 was a record, amounting to about 5 per cent of GDP. This quarterly surplus is more than 2½ times the average quarterly surplus in 1994.

"The Alliance shares the Minister of Finance's conviction that the best strategy for increasing consumer spending and kick-starting the domestic economy is to ensure real interest rates remain low and to contain inflation."

Mr. Manuel Dussault (Research Director, Alliance des manufacturiers et des exportateurs du Québec)
Aside from the extent of the trade turnaround, the improvements in trade were also broadly based, with three-quarters of the increase in exports coming from manufactured goods including automobiles, including machinery and equipment.

The same combination of factors -- a competitive dollar and low inflation -- has improved Canada's travel balance, cutting in half the travel deficit as a percentage of GDP since 1990, which was also a positive factor in the shift of the current account into positive ground.

Of particular importance is the fact that our competitiveness relative to the United States is near its best level in 46 years. This performance compared to that of Canada's largest and most important trade partner and competitor is a key reason why our merchandise trade balance has its strongest surpluses in history.

The magnitude of the trade surplus is evident from the fact that it helped to generate an overall current account surplus, something Canada rarely enjoys.

The current account is the sum of merchandise trade and the service account, which records payments related to trade in services as well as interest and dividend flows. Canada traditionally has a substantial service account deficit, primarily because we have been a capital importer.

(e) Productivity, Competitiveness and Investment

In the ten years prior to 1973, labour productivity in Canada rose at an average rate of 2.3 per cent a year. For the next six years, it averaged less than a quarter of that rate. By the early 1980s, there was little if any productivity improvement. As productivity declined, average unemployment rose from 5.2 per cent through the 1960s to about 10 per cent currently.

Because of its relationship to growth and job creation, productivity has been a policy priority for the Government and forms a critical element in the new framework for economic policy which was laid out as a basis for its action and a context for its fiscal decisions.

With unit labour costs growing at just over half of one per cent per year so far in 1996, substantially lower than the core rate of inflation, and with wage increases, import prices and commodity prices relatively restrained, there are virtually no price pressures throughout the economy.

Trends in unit labour costs in manufacturing have given Canada a significant advantage over the United States, where productivity growth has been basically flat since 1991. The same is true of Canada's position vis-à-vis the other G-7 economies, where manufacturing costs are up roughly 25 per cent in U.S. dollar terms, while Canada's have declined by 20 per cent.

It is important to underline that improved competitiveness depends on more than labour costs. What is vital is the productivity of all economic inputs and a key component of rising productivity is investment. Better than one Canadian job in 10 and more than half of Canada's exports are the result of foreign direct investment in Canada. In its report tabled in January 1996, the Committee recommended that the Government make a concerted effort to attract foreign direct investment to Canada, comparable to the efforts made to sell Canadian goods and services abroad.

Foreign direct investment in Canada is increasing. In 1995, foreign direct investment as a percentage of GDP reached its highest level since 1980. Meanwhile the value of Canadian exports has soared by 38 per cent since the end of 1993.

(f) Economic Growth

Since 1993, the investment in economic growth and the strengthening fundamentals of the Canadian economy have set the stage for a sustained period of real growth and job creation.

The Governor of the Bank of Canada expects the Canadian economy to grow by 4 per cent in 1997. This is higher than most private sector forecasts -- the average forecast for real growth is 3.1 per cent -- but private forecasts of Canadian economic growth are also higher than six months previously. Virtually all forecasts expect Canada to grow significantly faster than the U.S. in the coming year.

Aside from the low-inflation and low-interest rate environment, a number of other factors favor an end to slower growth. Last year, for example, businesses sought to reduce inventories to more normal levels and this slowed employment, income and consumer sales growth. This inventory correction now appears to be over.

As well, sales of both new and existing homes, which have not yet returned to their pre-recession peaks, are now beginning to reflect lower mortgage rates. Business investment intentions have risen. Non-residential investment is expected to end 1996 some 4.4 per cent higher rather than the 2.3 per cent decline expected at the beginning of the year.

"...the policies of the current Government of Quebec are doing inestimable damage to the prospect of growth, jobs, and our ability as Quebeckers and as people across this country to tackle the country's most serious and enduring problem - the problem of debt."

Mr. Thomas d'Aquino (President and Chief Executive, Business Council on National Issues)
Canada is now expected to have the strongest growth in the G-7 countries. A significant problem, however, is that Ontario and the West will likely benefit more from this growth than Quebec and the Atlantic Provinces. Quebec, in particular, continues to reflect investment uncertainties and an unemployment rate of 12.4 per cent even as it moves into a period of extensive cutbacks in provincial government spending later than other provinces.

(g) Jobs

Canada is faced with the anomalous situation where employment growth has been strong, but unemployment has persisted at an unacceptably high rate.

(i) The Job Creation Experience Since 1993

Since the autumn of 1993, some 664,000 net new jobs have been created and, since November 1995, the economy has added 197,000 jobs. By next year, depending on growth in the economy, the possibility of one million net new jobs created from the autumn of 1993 to the end of 1997 will be in view.

In terms of international comparisons, Canada already has an outstanding performance. From the fourth quarter of 1993 to the second quarter of 1996, Canada created 87,000 more new jobs than the European members of the G-7 combined.

The economic boom in the United States, meanwhile, generated six million jobs which, given the difference in the size of the two economies, represented roughly the same pace of job creation as in Canada during the same period.

"Today aboriginal women are unemployed at a rate of 17.7%, women of colour at a rate of 13.4%, women with disabilities at a rate of 16%; and 70% of women work in part-time jobs. We are overrepresented in the 10 lowest-paying jobs in this country. We do not have the promised national child care program and we do not believe the child benefit scheme the government is currently negotiating with the provinces is going to deal with this issue"

Ms Joan Grant-Cummings (President, National Action Committee on the Status of Women)
At the same time, the Canadian unemployment rate has hovered between 9 and 10 per cent, far above what is acceptable. This problem is compounded by the uneven distribution of the unemployed and of growth and job prospects throughout the country.

On unemployment rates, comparison with the U.S. is not so attractive and represents a significant challenge. The U.S. unemployment rate, which is near 5 per cent, is hovering at its lowest levels in a generation as U.S. growth has translated into a higher proportion of their work force finding work and a higher proportion of Americans participating in the work force.

(ii) The Canada-U.S. Unemployment Gap

Why the gap between Canadian and US rates of Unemployment?

Dr. Andrew Sharpe, Executive Director of the Centre for the Study of Living Standards (CSLS), appeared before the Committee and summarized the results of research presented to a recent conference on the gap between Canadian and US unemployment rates.

Canada-US Labour Market Trends

Based on figures from 1948 through 1996, the gap has increased over time, from -0.3 percentage points in the 1950s, to 0.2 points in the 1960s, to 0.5 points in the 1970s, to 2.1 points in the 1980s and to 3.8 points in the 1990s. The gap has existed on a sustained basis only since 1981. It increased during the 1981-82 and 1990-92 recessions which were more severe in Canada than the United States.

During the 1980s, the gap went up, not because of an increase in the unemployment rate in Canada, but because of a decrease in the American rate, where employment growth was 0.3 percentage points higher than in Canada.

In the 1990s, the gap increased as unemployment rose in Canada from 7.5 per cent in 1989 to 9.6 per cent in 1995. During this same period, it rose from 5.3 per cent to 5.6 per cent in the United States which enjoyed both faster employment growth (0.5 percentage points) and faster output growth (1.8 per cent per year versus 1.3 per cent in Canada).

Explanation for the Gap

In brief, Dr. Sharpe suggested that the current 4 percentage point Canada-US unemployment rate gap could be explained as follows:

"Despite the enormous benefit of low interest rates, many consumers continue to lack the confidence to purchase a home. They're afraid of losing a job, they're not confident that levels of income will continue or they're not sure about the economy. Unemployment remains too high."

Mr. Pierre Beauchamp (Chief Executive Officer, Canadian Real Estate Association)
The Committee heard with great interest as well from its own member Dr. Herb Grubel, Reform Party Finance Critic, who has done extensive academic research on the issue of unemployment. He stated that structural differences such as unemployment insurance, minimum wage rates and the degree of unionization were a much greater cause of the gap than suggested by Dr. Sharpe.

The Committee did agree with Dr. Sharpe that a return to stronger economic growth will go a long way to reduce the Canada-US unemployment rate gap and that current monetary and fiscal policies of the government were already contributing to the stronger economic growth we are seeking.

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