FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 17, 2001

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[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this morning.

As we all know, the order of the day is the economic update by the Minister of Finance.

Minister, welcome. You may begin at any time.

Hon. Paul Martin (Minister of Finance): Thank you very much, Mr. Chairman.

Before beginning, I simply would like to advise all of the opposition parties that I have the ultimate weapon. If any of you ask me questions that cause me discomfort, I will breathe on you.

Some hon. members: Oh, oh.

Mr. Paul Martin: You've been forewarned.

An hon. member: As long as the economy doesn't catch it.

Mr. Paul Martin: Yes, the economy should not catch my cold.

[Translation]

Thank you, Mr. Chairman.

First of all, allow me to thank the Committee for this opportunity to appear before you today.

In the months leading up to today's Update, I have had the opportunity to participate in extensive discussions on the global economy with the G-7 and G-20 Finance Ministers, the International Monetary Fund and the World Bank; on the North American economy with members of the business community from both sides of the border; and on our economy with a group of key Canadian economists.

Most importantly, since January, I've travelled to every region of the country, meeting with Canadians, participating in informal consultations, town hall meetings and locally based round tables. In one community after another, the participants were kind enough to share their ideas, their insights, their hopes and concerns, and I want to thank all of those who took the time to do so.

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[English]

Mr. Chairman, sometimes in analysing data it is easy to get caught up in the language of economists and statisticians, but we must never forget that while economic activity is measured in numbers, it is experienced in the lives of Canadian families. After all, the economy is not some abstract concept, out there, somewhere, sometime. It is the fabric of everyday life. It is the plans people make, the confidence they have and the activities they enjoy.

It is certainly understandable that when Canadians speak about the economy it is not in the language of rates and ratios. They speak of affording a home, of buying groceries, of planning their children's education. They talk about their wish for a secure retirement and a health care system that is there when they need it. They speak of the need to direct the economic strength of our nation to improving the lives of our people. They tell us that economic growth must be aimed at a higher purpose and that this is why a balanced approach is just as important as a balanced budget.

Most Canadians I met expressed their confidence in the overall direction of our economy, but naturally they were concerned about how the current slowdown, which started in the United States, will affect them and their families. Today I want to speak to those concerns. Specifically, I want to update Canadians on how the global changes that have taken place since last October's statement have affected our nation's finances and economic prospects, and I want to to outline the measures we are taking to support growth.

[Translation]

Mr. Chairman, let me begin with the broader international picture. For an open economy like Canada's, with more than 40 per cent of our gross domestic product generated by exports, what happens outside our borders has a direct impact on what happens inside.

At its meeting last month, the International Monetary Fund said that short-term prospects for global growth have weakened and, as a result, projections for growth were lowered from 4.2 per cent to 3.2 per cent for this year. In Europe, the pace of economic activity has slowed and is below potential. In Japan, the world's second largest economy, low consumer confidence and fundamental problems in the financial system continue to prevent a sustained recovery.

[English]

In the United States, the economy that affects us most, the slowdown has turned out to be steeper than expected. The U.S. economy started growing at an annual rate of 5% last year, but by the final quarter it was growing at just 1%. While preliminary estimates for the first quarter of this year show some improvement, the near-term outlook remains unclear. Indeed, the most recent labour force statistics, which showed a decline in U.S. employment, point to this uncertainty.

Private sector economists are now projecting that growth in the U.S. will average 2% in 2001. This reflects the widely held view that significantly lower interest rates will pave the way for renewed growth this year. We hope that this proves to be the case, but we remain cautious and are taking nothing for granted.

Clearly the Canadian economy is feeling the effects of its weaker U.S. counterpart. Growth in our country in the final quarter of last year was considerably less than in the preceding quarter, primarily reflecting much slower activity in the automobile industry and in the information and communications technology sectors. Both industries, which depend heavily on exports, have faced falling demand from the U.S. In response, both have had to cut back production to deal with excess inventories. These actions in turn have had their effect on the Canadian economy, postponing investment decisions and reducing near-term growth.

At the same time, however, there have been a number of encouraging developments that have helped to offset this weakness. First, other export Canadian industries, such as aerospace and energy, have continued to grow at a strong pace. Service industries and construction, which are domestically oriented, have also continued their solid performance, particularly the housing sector. This strength in services, aerospace, energy, and construction is important, because together they produce more that 75% of Canada's total economic output.

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Second, Canada's external balance has improved substantially, from a deficit of $28 billion in 1993 to a surplus of $19 billion in 2000. This in turn has resulted in a sharp decline in our foreign indebtedness, from 44% of GDP in 1993 to 23% last year, its lowest level since the early 1950s. This strength in foreign indebtedness is significant. Reducing the amount of money we pay to international creditors gives us greater flexibility to manage our own affairs and to keep our interest rates low. This is all the more welcome in today's uncertain global environment.

Third, and most importantly, employment continues to grow and Canadians are beginning to see their disposable incomes rise again. This, combined with large tax cuts and lower interest rates, is supporting solid consumer spending this year.

Given the mixed signals on the health of the economy, it is not surprising that there are differing perceptions about its present state, but what is important is to put these differing opinions into context, for in summary, what is clear is that all the available facts and figures show that, albeit at a slower pace than last year, the longest Canadian economic expansion since the 1960s, some 22 quarters of growth, is continuing.

[Translation]

Mr. Chairman, since taking office in 1993, we have consistently budgeted on a rolling two-year basis. Given the uncertainty inherent in long-term projections, this approach has served us well in the past and will do so again in the future. As part of this approach, the Department of Finance surveys some 19 private sector forecasters to obtain their best estimates of the economic outlook. Based on that survey, we then meet with the chief economists of Canada's major chartered banks and four leading forecasting firms to make doubly sure the average of private sector forecasts is a reasonable basis upon which to plan. This approach ensures that the assumptions we use are realistic and credible. In preparation for this Update, we have again conducted this process.

[English]

Looking ahead to the next two years, the economists have projected that while the deceleration in economic growth is sharper than previously anticipated, the economy will continue to expand. Where there is less agreement is on the extent of that growth. Indeed, the forecasts for 2001 range from a high of 2.8% to a low of 1.6%, with an average of 2.4%. For next year, 2002, the economists expect a rebound, with forecasts ranging from a growth of 2.5% to 4% and an average of 3.4%.

The question is, what do these forecasts mean for the finances of the nation? Specifically, what do they mean for our projections of balanced budgets, for the tax cuts promised in budget 2000 and the October statement, and for the health accord reached with the provinces and territories last year?

Let me begin by reminding you of the situation at the time of the October statement and what we had projected for each of the next two years.

In October, after funding our tax cuts and expenditures such as the health accord, we projected a total surplus of $8.3 billion for 2001-02. This was made up of $4.3 billion, a non-allocated surplus to cover priorities such as those outlined in the red book, the $3 billion contingency reserve, and $1 billion in economic prudence.

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Based on the revised average of the private sector forecast of 2.4% in 2001, offset by lower interest rates and the ongoing impact of higher than expected revenues last year, the budgetary balance will decline by $1.1 billion. This leaves a surplus for the current fiscal year of $7.2 billion for prudence to cover our $3 billion contingency reserve and to deal with policy measures, of which $600 million has been committed to date.

For 2002-03 we projected a total surplus of $7.6 billion. This was made up of $2.6 billion in non-allocated surplus, the $3 billion contingency reserve, and $2 billion in economic prudence. Using the revised average of the private sector forecast of 3.4% for 2002 and again taking into account offsets similar to those of the previous year, the budgetary balance will decline by some $0.3 billion. This leaves a surplus for 2002-03 of $7.3 billion for prudence, the contingency reserve, and the policy measures, of which $400 million has been committed to date.

Let me now go one step further. The aforementioned numbers are derived from the average of the total range of the private sector forecasters. Let me now use the average of the most pessimistic of the private sector forecasters. Even here—1.8% growth in 2001 and 2.9% growth in 2002—the net impact would result in an adjusted budgetary surplus of $6.2 billion this fiscal year and $5.1 billion next fiscal year. In other words, despite the economic slowdown and even assuming the more pessimistic average private sector forecast, the health accord is protected, the $100 billion in tax cuts is protected, and we will not fall back into deficit.

This is the payoff for the prudent approach we have adopted from the beginning. In the past some have suggested that we were being overly cautious. However, we have never assumed that the business cycle had been abolished. We have always believed that it is better to prepare for rain even in the sunniest of forecasts. Now that the clouds have appeared, Canada has not been caught unprepared.

[Translation]

In other words, Mr. Chairman, despite the economic slowdown, and even assuming the more pessimistic average private sector forecasts, the Health Accord is protected; the $100 billion in tax cuts is protected. And we will not fall back into deficit.

[English]

That being said, while our fiscal situation allows us to ride out the current economic slowdown, we are very conscious of the reality that many Canadians are feeling its effects. It is of little comfort to them to hear that the government is doing fine. They need to know that we have acted and will continue to act in ways that will benefit them.

[Translation]

In the February 2000 Budget and the October Statement, we outlined a number of actions which are part of our ongoing strategy to protect Canadians, a strategy to invest in the social fabric of our country, reduce taxes and pay down debt. These actions are not only the kind of initiatives that will contribute to the long-term strength of our economy—they also provide stimulus in the short term when we need now, by putting more money into the hands of Canadians, by spurring business, sparking investment and creating jobs.

First and foremost, there are tax cuts—the largest in Canadian history.

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Last October, we reduced the tax on capital gains and increased the investment amounts for tax-free rollovers. In January, we took a second step in creating a new Canadian advantage for investment and job creation. We cut corporate income tax rates by 1 percentage point, and further cuts—2 points in each of the next three years—will bring corporate rates below levels in the U.S. Because these corporate tax cuts are being fully legislated, businesses can—and should—factor them into their investment plans starting immediately.

[English]

In terms of personal income taxes, our actions have been even more dramatic. In January of this year we reduced income taxes at all income levels by 21% on average, putting more money into the hands of Canadians, especially moderate income families with children. As well, the earlier reintroduction of indexation increased personal credits and tax brackets so that Canadians will be forever protected from inflation. Finally, in July of this year, a further $900 million of stimulus will come with the increase in the Canada child tax benefit, bringing significant help to families with children.

What do all these tax measures mean for Canadians? A typical two-earner family of four with a combined income of $60,000 will see its federal taxes drop by $1,000 this year. That's an 18% tax cut. A single parent with one child and $25,000 in income is receiving an additional $800 this year, for a total benefit of $2,500.

This year alone these tax measures will provide the Canadian economy with $17 billion in added stimulus. Furthermore, in addition to the tax reductions which are largely focused on middle- and low-income earners, a number of strategic investments are being made in areas that are of great importance to Canadians, areas like health care, education and innovation.

As mentioned earlier, last September the federal, provincial and territorial governments signed a five-year health accord to which the Canadian government contributed $21.1 billion. This included $2.2 billion for early childhood development, which will help to ensure that our children get the best possible start in life, arriving at school ready to learn and equipped to succeed.

This year alone as a result of the accord, the Canadian government will provide an additional $2.8 billion to the provinces and territories for health, for education, and for children. In addition, $1 billion has just been provided to the provinces and territories to purchase medical equipment, along with $500 million for investments in health information technology and $200 million per year for each of the next four years for the health transition fund, which supports innovation in primary health care reform.

[Translation]

Also, Mr. Chairman, a further $800 million in equalization payments will flow this year as a result of the lifting of the ceiling for 1999-2000. This is in addition to the recently announced $1 billion increase in equalization payments for 2000-2001.

In Budget 2000, we announced a five-year program consisting of $2 billion for infrastructure, particularly in the area of the environment, and $600 million for highways. Because this funding will be provided on a cost-shared basis, it will leverage more than $6 billion for infrastructure and $1.2 billion for highways. These investments will benefit communities right across Canada. Agreements on the infrastructure portion have now been reached with all of the provinces and two of the three territories. As a result, we expect more than $1 billion in new capital investment this year alone.

[English]

Finally, one of the most consistent threads that has run through our policies in recent years has been a recognition that innovation is key, both to the strength of our economy and the quality of our lives. Budget 2000 and the October statement built on that imperative in making large, long-term investments in the knowledge infrastructure of our country, our universities, and our research institutes. Thus, this year alone, $500 million will be injected into the economy through the Canada Foundation for Innovation, Genome Canada, and the Atlantic Investment Partnership.

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Taken together, all of the expenditure initiatives announced in budget 2000 and the October statement amount to almost $7 billion in stimulus for the Canadian economy this fiscal year alone. When combined with the $17 billion in tax measures, the total impact this year will be close to $24 billion. This is one of the—if not the—most stimulative packages introduced into its economy by any government of a major industrial country this year.

[Translation]

Mr. Chairman, taken together, all of the expenditure initiatives announced in Budget 2000 and the October Statement amount to almost $7 billion in stimulus for the Canadian economy this fiscal year. When combined with the $17 billion in tax measures, the total impact this year alone will be close to $24 billion—this is one of the most, if not the most, stimulative packages introduced in its economy by any government of a major industrialized country this year.

[English]

Finally, and very significantly, reinforcing these fiscal actions have been the steps taken by the Bank of Canada to lower interest rates. The bank rate has fallen by a full percentage point in the last four months alone, providing real relief to Canadian families. One year mortgage rates, while volatile, for example, have fallen significantly since last December. This means it is easier for young couples to buy that first home or for families to trade up to a larger one. It means cars and other major items are less expensive to finance and it means lower borrowing costs for those wanting to start or expand businesses.

[Translation]

Mr. Chairman, so far I have talked about the state of the economy, the impact the current slowdown is having on our finances and some of the measures we are taking to stimulate growth. Looking ahead to the longer term and to the underlying fundamentals of our economy, let me now address two other issues.

First, the anchor of a low interest rate policy is the establishment of a low-inflation regime. The Bank of Canada and the federal government have achieved success in this respect through three-year agreements on inflation targets. The existing agreement is due to expire this year. To maintain low inflation, lower interest rates and continued growth, I am pleased to announce today that we have agreed with the Bank of Canada not only to extend the current agreement on inflation targets, but to do so for five years. That means our target range for inflation will remain between 1 per cent and 3 per cent. Maintaining these targets will allow markets and investors to plan with confidence, knowing that Canada will remain a low-inflation environment.

[English]

The Bank of Canada and the federal government have achieved success in maintaining low interest rates through three-year agreements on inflation targets. The existing agreement is due to expire this year. To maintain low inflation, lower interest rates, and continued growth, I'm pleased to announce today that we have agreed with the Bank of Canada not only to extend the current agreement on inflation targets but to do so for five years. That means our target range for inflation will remain between 1% and 3%.

Second, in terms of the national debt, Canada has reduced its federal debt-to-GDP ratio from a peak of 71% in 1995-96 to below 53% at the end of last year. In recent years, no country has reduced this ratio as much as has Canada.

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Furthermore, in absolute terms we have paid down the federal debt at an unparalleled pace. When times are slow, the rate of debt reduction will naturally slow, but when times are good, as they were last year, we should take advantage of that fact to reduce the burden on future generations. In the October statement the government committed to paying down at least $10 billion worth of debt.

Now, Mr. Chairman, comes the announcement that has kept you all on the edge of your seats all morning. Because our revenues were higher than expected, I'm pleased to confirm today that we now expect to pay down at least $15 billion of debt for the year just ended. This means that we will have retired more than $33 billion of debt in the last four years. In the last two years alone, $27 billion of debt has been retired. This is saving Canadians close to $2 billion a year in interest payments. That's money that can be used for other priorities, such as health care and education, year in and year out.

[Translation]

Mr. Chairman, in the October Statement, the Government committed to paying down at least $10 billion of debt in 2000-2001. Because our revenues were higher than expected, I am pleased to announce today that we now expect to pay down at least $15 billion of debt for the year just ended. This means that we will have retired more than $33 billion of debt in the last four years—$27 billion in the last two years alone—saving Canadians close to $2 billion a year in interest payments—money that can be used for other priorities, such as health care and education, year in and year out.

[English]

Mr. Chairman, let me just say in closing that it's clear that the global economy is slowing and has slowed. Our job is to enable Canadians to ride through the downturns in order to be able to take advantage of the upturns. Therefore, we will continue to report to Canadians on the trends we see. And let there be no doubt, we will remain vigilant.

However, there are those who say that to counter the slowdown now, we should cut taxes more, or that we should spend more—in other words, that we should take the chance of going back into deficit. Well, that we will not do. We will not put at risk all that Canadians have worked so hard to achieve over the last few years. Rather, we will maintain the approach that has seen us through the peso crisis of 1994 and the Asian crisis of 1997, and which will see us through the current slowdown.

Looking ahead, our long-term plan means we will continue to cut taxes. It means we will continue to cut debt and it means we will continue to control spending. But as well, it means that we will never forget that in the knowledge economy the real engine of growth is the human mind, and that how we equip our people today to learn, to invest, to create will determine this nation's ability to produce jobs that generate growth, raise living standards, and provide opportunity for tomorrow.

For this reason, we will continue to invest in education and innovation. We must overcome the shortage of skilled workers right across the economy and we must help those who are having difficulty with the transition. We must never forget that the society we build is just as important as the economy we create.

That is why, Mr. Chairman, when challenges come, we must keep our eyes fixed on the purposes that we have set and remind ourselves not only of what we have already done together, but above all of what we can do together.

Thank you, Mr. Chairman.

The Chair: Thank you very much, Minister.

We'll now proceed to the question and answer session. We'll begin with the Canadian Alliance for a ten-minute round. Mr. Day.

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[Translation]

Mr. Stockwell Day (Okanagan—Coquihalla, CA): Thank you, Mr. Chairman.

Minister, two or three years ago, you and I were both Ministers of Finance. We sat at the same table together at meetings of federal and provincial Ministers of Finance. Although we have not always agreed, I think it is important for you to be clear and transparent. So, it is based on that conviction—the need for you to be clear and transparent—that I put my questions to you today.

[English]

We will want to take the time to go through some of the fine detail you've brought out here. Your presentation today makes my questions, I believe, as compelling as they may have been in past days.

The Canadian Alliance identified several months ago—back as far as October and November—after subjecting our projections and casting them on to yours, that there's a very real possibility within three years of running into a planning deficit and eating up the contingency reserve.

Of course at that time that concern was largely dismissed. That concern has now been brought back to light not by us but by a number of reports. I agree that there are differing views among economists, but when your former ADM, who is very familiar with the workings of your department and how you operate, is one, among others, who says, according to one headline last week, “Deficit three years away”... It's for that reason we have concern when we see a departure, Mr. Minister, from a precedent that you were setting quite properly of having five-year projections. Now we see a change to two-year projections, which make it difficult to ascertain whether one economist, among others, who is quoted as saying that “the government never added the numbers together—you're in the hole by 2004”... It's difficult for us when your update today omits the projections even three years out. That causes us some concern.

You also talk about the $15 billion surplus. Let me first say that any time any government puts even $1 of surplus toward the debt, I say that's a good thing to do. I don't want to diminish what has been done here. It is of concern to us, though, both on the very specific pathway of numbers here as economists, or even taking the public view where it's almost legendary that as governments approach their year end, massive spending increases take place.

You can talk, sir, about the $15 billion surplus today, but just a few months ago it was $20 billion. You're announcing $15 billion. It's important to note that half of that $15 billion is the result of a $7.7 billion EI overpayment. I appreciate your sensitivity of hardworking people. It's on the backs of hardworking people and also of small-business people that this overpayment on EI is occurring.

So I would like the following specific questions addressed. Why did you omit this very crucial year, 2004, departing from a precedent you were setting quite properly of five-year projections? And what happened in the last two months to so drastically see that surplus, which could have been $20 billion, drop to $15 billion? How much of that $5 billion included things like election promises? Since leaving a population and an opposition some two years without a full and final budget would be somewhat unprecedented, I think, in western democracies, will you change your course and acutally bring in a full budget rather than going two years, as you're indicating now, sir?

If those questions could be addressed, I would appreciate that.

The Chair: Minister.

Mr. Paul Martin: Thank you very much, Mr. Day.

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Actually, I think you're quite right that while we have sat around a table such as this many times in the past and obviously have seen each other across the House of Commons, this is the first time we've been back at this kind of a table. It's a pleasure to see you and welcome you to this committee.

Let me deal with your points as I have taken them down.

Mr. Day, you're mistaken. We are being very consistent with the approach we have set out since the very beginning. One of the things that became manifestly evident to us upon taking office in 1993-94 was that the habit of governments of issuing and then relying on four-year or five-year forecasts contained really two fatal flaws. Number one, you can't project five years out with any degree of certainty. We're seeing what's happening now. The economists are having trouble forecasting five months out with a degree of certainty.

What happens when governments do that—and this was the problem the previous government found itself in and the reason it was unable to deal with the deficit at the time—is that when you have this five-year projection... Normally a hockey stick, by the way, shows much better times out. When something happens, the normal tendency of a government is to say we'll just push that off, because the economy's going to skate us onside in the third, the fourth, or the fifth year out. As a result, no corrective action is taken. Of course, what happens in the fifth year out is a very bad set of numbers, which we've lived with in this country for many years.

It was and is our strongly held view that the only way you keep a government's feet to the fire is if that government is forced to hit a rolling series of short-term targets—one-year and two-year targets—because then there is no excuse. If you don't hit your targets, you can't say you're going to be skated onside in three or four years. There is no escape hatch.

To lose that discipline would be, in my opinion, to lose one of the principal innovations that has given this country one of the most remarkable fiscal turnarounds it has seen.

Now, when we met with the economists about two years ago, the economists confirmed overwhelmingly that this is the approach they wanted us to follow. But what they then said to us was they don't want us to make decisions to budget or to go out more than two years, but they would like to see a set of notional numbers that over a longer time period—in this case five years—would help frame the public debate across the country in the pre-budget consultations. That's what they asked for. At the most recent meeting with the economists, they overwhelmingly agreed that this approach should stay.

So we will be providing five-year numbers in the fall, Mr. Day, as has been our case. Those five-year numbers will be for the purposes of the pre-budget discussion. We will continue to budget on a two-year basis.

There are areas where we will provide five-year expenditure numbers. When you sign a five-year health accord with the provinces, you should do that. You build it right into your planning numbers. When you do a five-year tax plan, you will do that, because it reduces your revenues over that period.

But let me explain, Mr. Day, that the question you're asking is whether we are going to abandon a process that keeps the government's feet to the fire and makes sure that government hits its targets. The answer is that we will not. But we will provide for planning purposes—for debating purposes—in the fall the five-year numbers you're looking for.

Now, as to the question on the full budget, I don't know, Mr. Day, what you want to call the October update. We didn't call it a budget. A lot of people called it a mini-budget. We called it an economic update. The truth of the matter is you can call it an orange. The fact is that in that economic update there were the largest tax cuts in Canadian history, there was the largest investment in health care in Canadian history, and we previewed the largest single-year pay-down of the national debt in Canadian history.

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Mr. Day, there have been very few budgets that have been as significant as that, call it what you will. So I don't think it is true that there has been that long a time between budgets, and I will tell you that we will bring down a budget when the circumstances warrant it. That's why I'm saying we will continue to be very vigilant and we'll continue to monitor the trends.

I'm sorry, were you asking me questions about the third and fourth year out?

Mr. Stockwell Day: Yes, because as recently as last fall that was the history you established.

Mr. Paul Martin: Let me say to that a couple of things.

The first point is that the red book commitments, which are over the whole course of the mandate, total some $5.9 billion. In the year 2004-2005, based on last year's projections, that one year, there are $6.8 billion of unallocated surplus, of contingency reserve, and of prudence. So if you look at the year-by-year slice, there is ample coverage for the amounts that are there.

Nobody is saying we're going to run the risk of having a deficit. You were saying that we're going to touch upon the contingency reserve, and economists are saying it is conceivable that we might touch the prudence. I know I'm going a long time, but I think it's important if you don't mind—thank you, Mr. Chairman. It's important to understand that in fact we use the prudence every year, because the prudence goes down every year it's not required. It goes up by a billion dollars a year, if you take a look at the projections.

But on the most important point of all, Mr. Day—and on this I will close—let me just quote from the red book. After they have outlined the notional spending, they go on to say:

All commitments in this platform will be financed in accordance with our undertaking for sound fiscal management and balanced budgets.

What does that mean? There are three budgets between now and then, and it says we are not going to do anything that's going to imperil the finances of the country. We will make decisions year by year—that's the benefit of the rolling two-year targets—that will in fact protect those numbers.

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

Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Thank you, Mr. Chairman.

When we hear it announced that there will be a surplus of $19 billion this year, that is certainly good, indeed, excellent news. The only problem, Minister, is that it is not really news, given that in February of last year, when you tabled your main budget, it would have been easy enough to project that the surplus would exceed $20 billion. That's exactly what we did. We adjusted our February 2000 estimates to reflect the tax cuts and new programs, as well as the new expenditures you announced last October when you tabled your mini-budget. Using that information, we arrived at realistic estimates in terms of government revenues, expenditures and the growth rate, as well a figure of $18.2 billion for this year's surplus. You arrived at a figure of slightly more than $19 billion. So, what you have announced is not really news.

As a matter of fact, I did a little exercise on my own. From 1996 to the present time—it might be a good idea to add a few columns to this document—you made forecasting errors totalling $45 billion, compared to $4 billion in our case. Now we have to add on another $15 billion discrepancy for the environment, in the bar chart, compared to what you had forecast as a surplus for this year.

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Earlier, you were right when you said that this exercise could be called, not an economic update or budget statement... In fact, it could be apples and oranges. This is absolute rubbish. This exercise is totally lacking in credibility. Would you like to know why, Minister? Because your strategy, since becoming Minister, has been to hide the truth. The only strategy you have ever followed financially has involved underestimating the surpluses, because whatever is not appropriated automatically goes to the debt. We have nothing against paying down part of the debt, but this whole approach denotes a lack of transparency and a lack of honesty. That is something you have done deliberately every single year. If we were able to arrive at realistic forecasts and be dead on, give or take 5 or 6 per cent, using just a calculator, you also should be able to manage that with the number of people you have working for you and your sophisticated equipment.

How is it that you have managed to get certain economists to play your game? Previously, John McCallum, who we all know has become a Liberal Member of Parliament, used to justify and support your totally unrealistic surplus forecasts. Now, it's Drummond, your former Assistant Deputy Minister, who is spreading some sort of psychotic fear by telling people that in the next few years, the situation may not be quite so rosy, which has prompted you to present even more unrealistic forecasts for the next two years, including forecasting a surplus of a little more than $7 billion each year, when in actual fact—even using conservative assumptions in terms of revenue growth and economic growth—our calculations point to a surplus of about $18 billion this year and $20 billion next year.

Minister, why play this game? Why hide the truth? And why remove billions of dollars from the public debate, when there are health care and education needs to be met?

I would remind you that federal transfers for postsecondary education have never been lower in the last 30 years than they are now, and that health care spending is still not back to 1993 levels, even though requirements are rising by 5 per cent a year.

Why this petty game, Minister? Why take people for what they aren't?

Mr. Paul Martin: Mr. Loubier, these are not petty games. If you look at the forecasts produced by the U.S. Congressional Budget Office, if you look at the forecasts of the U.S. Treasurer, you will note exactly the same differences over the same period between their actual results and their forecasts. In the United Kingdom, the situation is no different. Also, most Canadian provinces recorded much higher surpluses than they were expecting. Although I cannot confirm this, I do believe that was the case in Alberta. I know for a fact that this occurred in Quebec, yet I don't think Mr. Landry was playing any petty games. Mr. Landry announced surpluses higher than what he had forecast. You will see that exactly the same thing happened in Ontario and the Atlantic provinces.

What is happening here is quite clear: the economy was much stronger than what we expected, yet no one was willing to bet that this economic strength could be sustained forever. So people thought it best to be fairly prudent. That's the first point. Canada is in exactly the same position as the United States, the United Kingdom, the vast majority of European economies and the vast majority of provinces.

Secondly, yes, I am prudent. Mr. Loubier, I am more prudent than you are when you prepare forecasts and I am also more prudent than most economists are. Why? Because if you make an error, all you have to do is redo your calculations. But if I make an error, Canadians will suffer because we will be forced to make cuts and we won't be able to honour our commitments.

Mr. Loubier, I cannot take a lax attitude towards possible errors. Otherwise, that could happen one day; that's the problem.

Mr. Yvan Loubier: It's not a matter of taking a lax attitude, Minister; it's simply a matter of being realistic. If you don't want there to be any public debate about how the surpluses will be allocated, then all you have to do is proceed exactly as you have for the last four years. You laid the groundwork for guys like Drummond, the Minister of Finance's former right-hand man, with extremely pessimistic assumptions: we have to be careful, we have to be extremely prudent. You seek out the views of certain economists—mainly the ones working for the major banks, who are obsessed with debt and can think of nothing else. Issues like education and health care are of no concern to them. So, you laid the groundwork and ultimately, you don't have a balanced approach, because you are devoting more than 75 per cent of the surplus to paying down the debt. Even last year, 84 per cent of the surplus was used to pay down the debt. That's what we're doing.

• 1155

And let's talk about Mr. Landry. He made a forecasting error of 1 per cent in relation to actual government revenues in Quebec. You made errors nine times higher than that.

By the way, I just wanted you to know that since we in the Bloc have been engaging in this little exercise since 1996, we have always used your assumptions with respect to growth. Every year, we have looked at what is coming in in terms of revenues, because there is a gap between economic growth and growth in tax revenues. Sometimes, revenues flow in at twice the rate of economic growth. By analyzing public finance data over the last seven years—I have been the critic for seven and a half years—we have been able to arrive at forecasts that are within 4 or 5 per cent of the actual figures. In October, Minister, I invited you to a debate during the election campaign. You refused all debate. Even with your new forecasts for a $12 billion surplus, I was convinced that you were underestimating the surplus, even after including your tax cuts and new spending.

Now, we are at the end of the fiscal year, and like every year—because you play this game every single year—miraculously, the surpluses turn out to be almost double what they were forecast to be. I think it's about time you stopped treating people like fools, Minister. There are other priorities in the provinces.

I would remind you that if you were able to accumulate those surpluses, it is certainly not because of your good management. You are taking them directly from the Employment Insurance Fund, in particular, as well as from provincial coffers, since you have yet to totally restore transfer payments for health care, education and income security to 1993 levels. You certainly can't take most of the credit for sound management of the government's finances.

Minister, I would like to hear you admit today that you have considerably underestimated your surpluses for next year and the following year, as we have been accustomed to seeing in the last four years. And you are the sole master on board. You alone decide, with the complicity of a few economists working for the major banks, how you are going to allocate the so-called unexpected surpluses, that you in fact deliberately underestimated. I put the question to you: Don't you think you could change your routine somewhat this year, compared to past years? It looks to me like the game is over.

Mr. Paul Martin: Mr. Loubier, if you were the only person to get it right in the last five years, perhaps you should be giving advice to the U.S. Government, the British Government and governments in Europe. Mr. Loubier...

Mr. Yvan Loubier: You choose your economists, Minister. You choose your friends.

Mr. Paul Martin: Let me explain to you how it works.

Mr. Yvan Loubier: You choose your friends, and they...

Mr. Paul Martin: The way it works is you speak and then you let the other person respond.

[English]

The Chair: Minister.

[Translation]

Mr. Paul Martin: If you're interested, I could have a word with my counterpart, Mr. O'Neill, and let him know that we have a genius back home who has never been wrong that he may want to consult. Then I could talk to Gordon Brown, Laurent Fabius and my counterparts in all the other countries that find themselves in the same situation as Canada. That's the first thing.

Secondly, you say that economists with some of the major banks have been giving us forecasts that are too pessimistic. But if you compare those forecasts to the ones from Desjardins or any other institution, you will see that the forecasts put together by every economist in Canada... It's not just the ones from the major banks; we get advice from 19 forecasters in Canada as part of this process. And it is quite clear that economic forecasts back in October were too optimistic. That's why they have now been lowered.

Mr. Yvan Loubier: What do you intend to do, Minister?

[English]

The Chair: Thank you, Minister.

Mr. Loubier, we'll have to move to other questioners.

Mr. Shepherd.

Mr. Alex Shepherd (Durham, Lib.): Thank you very much.

I'm very fascinated by your presentation here, and I certainly applaud your commitment to pay down our debt.

The economists have been predicting and studying wage settlements in the last six months. My question is directed towards inflation. I think the average wage settlement in the last six months is something like 3.6%. Your growth statistics here are averaging about 2.5%. In other words, it would show that wage settlements are exceeding the growth of the economy.

• 1200

I note you also made a number of statements about the importance of increasing disposable income and the stimulus that would have on the economy. So I'm wondering, with all that stimulus going in, tax cuts, and possibly the underpinning of consumer demand, how you see inflation unfolding in the economy in the future.

Mr. Paul Martin: Obviously, the institution that follows this more closely than anybody in this town is the Bank of Canada, and the bank is very confident about the control of inflationary pressures. I must say, with most of the private sector forecasters I have seen, there would appear to be no worry out there about inflationary pressures. Indeed, people felt the most recent wage settlements would actually add to disposable income, they did not see it as a pressure. I think people are a little concerned about the ongoing flow-through of rising gas prices and whether that will have an effect, but even there, the discussions that I've had would indicate that people feel inflation is well within the acceptable range, and the projections are that it will remain that way.

Mr. Alex Shepherd: Thank you, sir.

The Chair: Mrs. Barnes.

Mrs. Sue Barnes (London West, Lib.): Thank you.

Minister, I think Canadians will be very happy with the debt pay-down, and certainly we're equally happy with our tax proposals earlier. In my own riding they're going to applaud the commitment to the research, as I know they will across Canada.

While I understand the necessity of the two-year rolling debt, I think there are some things that challenge governments everywhere that actually have to look at the longer-term horizons, and there are some changes going on, not only in Canada, but around the world. For instance, we deal more and more with internal treaties that affect different provinces and the federal government, treaties that affect our aboriginal peoples and the federal government, and international treaties and commitments that we have to make. That is not something you can budget for over one year or two years. In dealing with them from the municipal to the provincial, national, international, how do you focus on being ready to accept commitments that have to be made? And do you feel that this changing structure is a challenge you can meet in your budgeting process?

Mr. Paul Martin: The question is very pertinent, because there are two kinds of such events. One of them consists of those things that are inevitable, but you don't know when, and the others are the totally unexpected. Essentially—and again it goes back to the prudence—what we attempt to do for the unexpected is just have a reserve, so that if something like this happens to us, we are covered for it. On some of those you know are inevitable, government will make a provision for that kind of payment. If you know the liability is eventually going to come, you will try to set something aside for it and hope you guessed right. That's the only way you can do it.

Mrs. Sue Barnes: To pursue that a little further, we know demographically—and with the new census we'll have more data, obviously—one of the challenges within a few decades is going to be the bulk of the population, nearly 30% of it, being over 65 in this country. Then you look at the other extreme, the native population of this country, an explosion, and the youth. One of the issues that flows out of the aid for the aging population would be the social and health services they will require. On the other end, the youth population explosion, I'm very concerned with a potential inequality of wealth amongst Canadians, especially for a lack of training or education that's available or needed, a need the federal government perhaps isn't fulfilling totally at this time.

Mr. Paul Martin: There are two questions in there. On the second question, when you see that there is a skill shortage in this country, while at the same time there are high unemployment levels among youth, you really do understand, as you're pointing out, that there's a lot more we should do in that area.

• 1205

Minister Stewart has spoken out quite eloquently on this. I very much agree with what you're saying and I very much agree with her. It's something that has to be a priority, and that's why I alluded to it at the end of my remarks.

Government has major responsibilities going ahead. You can deal with them by specific programs, but what you also really have to do is to make sure that successive governments are going to have the room to manoeuvre. We don't know what those problems are going to be in 10 or 15 years. I think one of the mistakes governments made in the past was to totally concern themselves with their own generation and not with the generations to follow. That's really one of the reasons it is so important to get the debt down.

Perhaps I could just explain that further. We have built up a huge debt in this country, much of it incurred simply to pay interest on the previous debt because the governments of the day did not deal with the fundamental problems. Now, when I say that we've paid down $33 billion of debt and we've freed up $2 billion a year each and every year, that can now go to something else. That's $2 billion a year that would not be available for something else.

So when you then raise the issue of aboriginal Canadians, the fastest-growing segment of our population, when you raise the question of the aging population, where the baby boom is going to take off in essentially 2011, we have a major responsibility, for the governments that are going to have to deal with that, to give them a balance sheet that is as strong as possible. Because they may have to start to borrow again. If they're going to start borrowing again, let them borrow on a much lower borrowing set of commitments than what in fact we have today.

So I think your point is, yes, we have to bring in specific programs, but we also very much owe it to govern today not just for this generation but for the second, third, fourth, and fifth generations to come.

Mrs. Sue Barnes: My point is specifically directed towards the inequality of wealth that could happen between populations in this country, which I don't think anybody wants to see.

Mr. Paul Martin: That's right. There's no doubt that when governments get tight, it isn't the rich who suffer, it's the poor.

Mrs. Sue Barnes: Thank you.

I'll pass, Mr. Chair.

The Chair: Thank you, Ms. Barnes.

Ms. Leung.

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

Mr. Martin, I'm very pleased to hear officially from you the report that the debt was cut by $15 billion. It's great. Canadians can save close to $2 billion a year. Certainly that's good news for all of us and for B.C.

Now, you talk about maintaining low inflation and low interest rates, working with the Bank of Canada for five years to maintain the inflation target of 1% to 3%. However, I understand that just recently we discovered, last April, the inflation rate reached 3.6%. Can you comment on how you would maintain the inflation target at between 1% to 3%? What's your plan on how to maintain that?

Mr. Paul Martin: That really is a combination of fiscal policy and monetary policy. In terms of fiscal policy, it is a function of governments not crowding out the private sector. It's governments not necessarily overstimulating if in fact there's huge demand, or it's governments stimulating when there is not huge demand. So in many ways, as much as possible government should operate in counter-cyclical ways.

Second, on the whole question of the Bank of Canada, if I get into that I know I'm going to get into real trouble, so I think I'll leave the Bank of Canada for Mr. Dodge when he is here.

But there's no doubt that it is a combination of fiscal and monetary policy. What's happened—and this is why the targets you referred to are so important—is that essentially this agreement links both institutions to working together to maintain inflation within that. It's said that it recognizes the joint responsibility of both institutions.

• 1210

Ms. Sophia Leung: As I understand it, the increase in the inflation rate is also based on the increase in fuel costs and energy costs, for instance. This is sometimes beyond government control. How would you see us really being able to maintain the low inflation rate?

Mr. Paul Martin: Again, where there are inflationary pressures in an economy, what government must not do is add to them. I also think we have to recognize that there are times when it is in fact the opposite of inflationary pressures, and then government must make sure there is sufficient demand.

As for why we work in partnership, in most countries the institution that is most responsible for price stability is in fact the central bank. In Canada we have worked quite well over the last number of years to maintain this. Of course, the central bank does that through the use of interest rates, liquidity in the money supply, and just how much money is floating around. If you have a lot of money floating around, you're going to get inflation. If you have a much lesser amount of money floating around, you're going to get less inflation, because there's going to be less demand.

But I'm very reluctant to get into how the bank should operate lest I get a phone call, when I leave here, from the governor.

Ms. Sophia Leung: Thank you.

The Chair: Thank you very much, Ms. Leung.

We'll go to Mr. Discepola.

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

Minister Martin, I'm not at all concerned with your prudence. I think it's paid us well as Canadians, and I encourage you to continue in that vein. I am concerned, though, with one aspect that perhaps you haven't touched on.

We see in your report that we have a slowdown in business investment. We see inflation creeping up towards the 3% mark. We see excess inventories and we see lower consumer confidence. I'm wondering why you chose to apply all of the money to reducing the debt.

Now, I don't want you to jump on me because I'm the one who's been hounding you for years that this is where it should go, but in view of the economic slowdown that's happening and in view of what President Bush is undertaking with his tax reductions, I'm wondering why you didn't choose to maybe accelerate tax decreases to help stimulate consumer demand and thus maybe slow down the economic downturn we have.

The other concern I have is speaking more as a parliamentarian, perhaps. We're running a $130 billion company—“country”, I mean—

Voices: Oh, oh.

Mr. Nick Discepola: —and it seems we might go two years without a budget. Even the president of Nortel gives us updates every quarter, if not every month. We know what he's doing—he's looking for a job—so maybe that's the wrong approach.

At any rate, I'm just wondering how you can assure Canadians that big decisions aren't being made around just the cabinet table, that we do have a say despite the long drought in between budgets.

Mr. Paul Martin: I think perhaps you're a little too pessimistic about the state of the economy. You're a very knowledgeable person, certainly, in a number of areas, but I do believe a number of the indicators in terms of consumer confidence and inventory correction would cause probably a little more optimism.

Where you're absolutely right is on the question of investment. What's really happening—in fact, it's happening in the United States worse than here—is that the consumers are doing their share. The real problem is that business investment is way off. In fact, what the Fed has said in the States is that one of the reasons for the dramatic decline in interest rates that they brought about has been to stimulate investment decisions.

That's very important, and it's very important that it stay up in Canada, because that of course is where the productivity improvements come from. I think your analysis is very good from that point of view.

• 1215

You asked why we wouldn't have accelerated taxes versus paying down debt. There really are two answers to your question. First of all, a tax cut has a long-term effect that comes in year in and year out. You have to make sure when you do a tax cut, which cuts the government's revenues, that in fact year in and year out for the foreseeable future you can afford it, whereas when you pay down debt, what that actually does is improve the government's revenues. So therein lies the fundamental difference. At the year end, when you're faced with that choice, if the choice you're asking is between a tax cut or debt, if you suddenly took that one year's bonus surplus—and nobody thinks we're going to have the same thing next year we had this year, because the economy isn't that strong—and projected it out for five years, then you'd suddenly find yourself in a major deficit. That's the reason it would go to debt. But when you cut debt and project that out five years, in fact it helps the government situation substantially, because it provides you with a lot more money.

On the final question, we will do a budget when the circumstances are... There's no ideology here. We are monitoring the situation very closely. Canada is coming through this downturn in reasonably good shape. No doubt there's a slowdown. No doubt Canadians are being impacted, but there is a massive amount of stimulus, as I said before, coming from the Canadian government and from the provinces. I don't believe that further action is required. By the way, when we met with the economists, they all said no further action is required. They all said don't do a budget now.

Mr. Nick Discepola: So you're saying stay the course.

Mr. Paul Martin: Stay the course.

Mr. Nick Discepola: Thank you, Chair.

The Chair: Thank you.

Ms. McDonough.

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

Mr. Minister, I'd like to go directly to the issue of how you've chosen to use what you call the bonus surplus. I don't want to engage in a whole discussion about the analysis and the assumptions about past practices or forecasts, but I do find it very worrisome that you focused so much on the uncertainty and the mixed signals with respect to the health of the economy. You've talked about what the various forecasts mean for the financial health of the nation, but you seem to have tunnel vision when it comes to focusing on some of the really serious and growing crises around the environmental health of the nation and the health of our citizens.

It's well known to you, and I know that in the past—I want to be fair—you've had something of a record about expressing concerns about environmental priorities and also about the growth in poverty and the growing gap in this country. Yet you try to persuade us that you're being absolutely prudent in making the decision to use that so-called bonus surplus almost exclusively for accelerating the debt retirement.

I want to ask you to think about an analogy for a moment here. I'm in a family with a house where the roof is leaking, where there is sewage seeping into the basement, literally. I'm having trouble feeding my kids nutritious food or helping my aging parents to pay for their prescription drugs. From whatever source I get what you've described as a bonus surplus in my annual income this year, do I choose to double up my mortgage payments? Because that's essentially what you've decided to do. You've decided to double up the debt retirement rather than pay a plumber to fix the sewage that's seeping into my basement, or rather than repair the leaky roof or make sure the kids are getting what you've described in another context as making sure our kids get the best possible start in life.

Why have you taken the decision to so ignore the growing environmental crises and the growing gap, both of which are amenable to federal intervention?

• 1220

Mr. Paul Martin: I think what we'd better do is look at the facts.

The first thing is that the way the government's books are accounted for, surpluses at the year end go automatically to the debt—period. There's not a choice that they go to something else. They go to the debt. It's not a decision by government. And if you don't want it to go to the debt, then what you have to do is decide in advance of that what you think those ongoing surpluses are going to be, and then you can dedicate them to where you believe the priorities are going to be.

In fact, that's what we have done. If you look, for the sake of discussion, at what we had done in budget 2000, the October update, one of our major long-term commitments in fact was in the area of environmental infrastructure, recognizing the huge problems that exist in municipalities right across the country—the water problems that have now become so manifest in so many of these communities. That's why we did it. We basically didn't do it as a year-end thing. We said this is where it's at; this is what we have to do. We need this infrastructure program and we specifically said we want it in that area.

When we put together the health accord, the whole question of the information technologies, we recognized that health is simply not a function of hospitals or doctors; it is also air quality and the quality of the water we drink. When we put the money at the year end into the Canada Foundation for Innovation, one of the things the Canada Foundation for Innovation has as a crucial part of its mandate is in fact the whole question of environmental research, which is so important. We increased the aid base for environmental inspection.

So the answer to your question is yes, we did pay down debt, but on a long-term basis we invested very heavily, and will continue to do so, on environment for the very strong reasons that you've given. Now, if somebody can project that in fact we're going to have these kinds of massive year-end surpluses every year, under those circumstances we clearly should be taking a look at other alternatives for those, of which debt would be one. But take a look in the last four years: in the first year the debt repayment was just slightly above the contingency reserve; in the second year it was lower than the contingency; then we had these two boom years.

If you look at the projections that are out there, nobody right now expects that this year is going to be as great as last year. If we did what you suggest, we would be spending this year's money on the basis of this year's boom, and next year we would go into deficit. And I have to tell you, Ms. McDonough, that is not what Canadians want. Canadians do not want to see us mortgaging our future any more.

The Chair: Thank you, Mr. Minister. Thank you, Ms. McDonough.

Ms. Alexa McDonough: A very brief supplementary.

Nobody's arguing we should go into deficit, but to say that the infrastructure program begins to make a dent in the magnitude of the problem we have... The government's own estimate is that $4 billion annually for the next 15 years is needed just to maintain our water and waste water systems to deal with the contamination of the water and the deteriorating waste water system. Yet the federal government commitment to that is less than 10% in the infrastructure program that has been signed, and that's only over a five-year period.

I just think that you haven't begun to come to grips with what a priority claim it needs to be. This isn't something that has just happened. We've had it well established that we're facing a growing crisis here, and I'm just protesting the lack of priority it has been given.

Mr. Paul Martin: Ms. McDonough, that the need is great is beyond dispute. And that all governments at all three levels have to come to the table on this is again beyond dispute. There's no doubt about that. If governments had any doubts about it, certainly the events of the last year have demonstrated that.

The Chair: Thank you, Ms. McDonough. Thank you, Minister.

Mr. Brison.

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

Minister, in 1990 you said—and I quote—that if given the opportunity you would “manage the decline of the Canadian dollar so that it settles at its true value of between 78 and 81 cents U.S.” You've exceeded expectations in this regard as you manage the decline of the Canadian dollar to the 63¢ range. This is despite the Bank of Canada maintaining what could be described as a high-dollar policy with inflation targets lower than those of the Federal Reserve in the U.S.

• 1225

Firstly, do you still believe that the dollar's true value is in the 78¢ to 80¢ range? And before you answer that, I have some other questions relative to the dollar.

There is a strong correlation between the dollar and productivity. We also know there's a strong relationship between productivity and investment, and of course a strong relationship between investment and tax policy.

Tax reform can be a vehicle for economic growth, greater levels of investment, ultimately better productivity, and hopefully a strengthened dollar. This finance committee—your own committee—studied productivity in a report tabled in 1999. We made productivity a priority as a committee.

There has been a recent announcement that the Minister of Industry plans to present a white paper on productivity sometime in the fall. It is reported that this white paper will serve as a blueprint for policies on tax reform. It seems strange that a white paper focused on tax reform is being led by the industry department rather than the finance department. Does this reflect some lack of confidence on the part of the industry minister in the effectiveness of your tax policies? And why are you allowing your leadership role as Minister of Finance in terms of tax policy to be usurped in this case by the industry minister?

Mr. Paul Martin: As far as the question of the value of the dollar, Mr. Brison, you know that I cannot comment on that.

Mr. Scott Brison: I wouldn't if I were you either.

Mr. Paul Martin: No. I won't ask you then why you asked me.

Let me say we do not have a weak-dollar policy. There is no doubt about the value of any country's currency in terms of its productivity and in terms of its own well-being, which is why I think it is so important to note that over the course of the last two years, and indeed since the beginning of this year, the Canadian dollar has in fact risen against every other major currency except that of the United States. We've risen against the yen, the euro, the pound, and obviously against a number of currencies such as the Australian dollar.

Now, ultimately the value of a currency is going to be determined by a number of things, the most important of which are the basic fundamentals of its economy—level of its debt, which is still too high but which is coming down, its taxes, and its productivity. And the fact is that Canada is making striking improvements in all of those areas. I would believe that will be reflected ultimately in the value of our currency.

Essentially what we're dealing with is the great paradox. When the Asian crisis occurred, the U.S. economy was the last refuge. Now the international problem is the slowdown in the U.S. economy and it is still the last refuge. That's the way the international markets are operating. But I do believe that the fundamentals of our economy will eventually come through.

Now, the innovation paper is not going to be dealing with tax policy. The innovation paper is going to be dealing with a number of areas, essentially, which fall within the purview of Mrs. Stewart and Mr. Tobin. However, there are a multitude of other government departments that are also going to have input into that paper, and which are also going to be impacted, because it's going to go far beyond those two departments.

There is no doubt that the finance department is part of that committee and is going to play a very important role in that. In the end, there is no doubt that tax policy and innovation go hand in hand. That's why we cut the capital gains tax. That's why we did the rollover in the last budget.

• 1230

Mr. Scott Brison: We agree that tax reform is a very important part of the recipe to create greater levels of productivity in the long run. That being the case, why aren't you leading the effort for tax reform, significant tax reform, in order to create greater levels of productivity? Mr. Tobin is indicating that a significant part of this paper will be focused on tax reform. That should be led by you.

Mr. Paul Martin: Innovation has a wide segment of sources that either make us an innovative economy or do not. There's no doubt about the role of taxes there. We've already begun on that work. There was the cut in capital gains taxes, there were the rollovers, and there were the cuts in corporate taxes for exactly that reason. We will proceed upon on this basis.

There's no doubt that we are working very closely with Mr. Tobin on the issues of what he is doing and tax reform, because they are so interlinked. For example, there is whole question of R and D tax credits: how do you encourage research and development? One of the tools is the R and D credit, which is of course a tax measure. There is a multitude of tax measures which will be a part of that.

Mr. Scott Brison: Do you see any relationship between the industry minister scooping you, some would say, on the tax reform issue, and the Prime Minister scooping you on the debt repayment announcement earlier this week?

Mr. Paul Martin: Let me tell you that I watch question period, and I watched question period that day.

Mr. Scott Brison: You should have been there.

Mr. Paul Martin: I'll tell you something. You would not have wanted to see me that day. I was lying there in bed full of flu. At that point, somebody could have given this entire speech. I wouldn't have cared.

Some hon. members: Oh, oh!

The Chair: Thank you.

Ms. Guarnieri.

Ms. Albina Guarnieri (Mississauga East, Lib.): When there's some good news it's hard to keep a secret.

Thank you, Minister, for another economic statement that is certain to spur consumers' economic confidence. I'm sure the lineups at restaurants are going to be excessively long this weekend as a result.

Canadians certainly feel very fortunate that their finance minister was able to deliver a tax cut at just the right time to boost the economy and hopefully deflect the impact of the U.S. slowdown.

Perhaps less fortunate, however, was the fact that just as people were opening their pay stubs to find a bonus from the tax man, they opened their investment report to find that their Nortel stock had nearly vanished, as Nick alluded to earlier. To what extent do you think the Nortel impact has offset the benefits of your tax cut?

Mr. Paul Martin: I spoke not long ago to an association of financial advisers and financial planners. I asked them what reduction of the wealth effect in Canada there had been. I was quite surprised by their answer. These people advise a wide range of clients right across the country. They told me that it had not been that great, for a number of reasons.

First of all, they said Canadian mutual funds were slightly more conservative than most American mutual funds and did not have the same degree of high-tech investment that was represented in the United States. They said that their individual clients who invested in the market directly shared that and had nowhere near the same exposure that investors in the United States did.

There's no doubt that when you look at the tremendous percentage of Nortel in terms of the TSE there is an effect there, but I've asked this question right across the country, as I've asked it in the States, and I think the answer is clearly that the lowering of the wealth effect has had its consequences, but nowhere near as much as in the United States and really not as much as one would think off the top of one's head.

Ms. Albina Guarnieri: Again, I'm sure there were some Canadians who wished that you'd managed Nortel for them in your spare time.

An hon. member: The job's open.

Mr. Paul Martin: Well, I—

An hon. member: With a much higher salary.

Mr. Paul Martin: Yes.

• 1235

Ms. Albina Guarnieri: Minister, I know that you're aware of the Ipsos-Reid poll released in April, which showed a remarkably high level of confidence in the economy across the country despite media reports about slowdowns in the United States and mounting job losses. More than 80% believe the economy will continue to grow, with a significant group expecting no slowdown at all. But strangely enough, one province has half as many optimists as the other regions, half the percentage of people who believe the economy will continue to grow at the current rate. Why do you think it is that Quebec residents, for instance, seem to have less confidence in the future? How much of that confidence deficit has been caused by the lack of economic focus by the Landry government in recent months, do you suppose? How long do you think consumer confidence can remain buoyant without a visible recovery south of the border?

Mr. Paul Martin: I have already expressed the opinion that governments right around the world, national and sub-national governments, are focusing on the economy. When the most important economy in the world—25% of GDP, the United States—and the second most important economy get into difficulty at the same time, it's obviously going to have a substantial effect on individual countries. None will be immune.

It's quite interesting to see, for instance, how six months ago the Europeans felt that they were going to be immune from what was happening in the United States. They have learned that they are not. Their economies are being affected by this.

What you now see right around the world are governments that are very clearly focusing on the economy, and that tends to give their people some confidence that at least the priorities are right.

It is my own belief that the agenda of the PQ is elsewhere. I don't think that's a secret. I think that's not where the agenda of Quebeckers is. Quebeckers themselves want to focus on the economy. Quebec is a highly entrepreneurial, highly dynamic society and Quebeckers are really looking for their government leaders to basically share their aspirations, which is how you build a stronger economy, which is what everybody else is doing. I think that does have an effect.

What's happening in the Canadian economy is that the slowdown has been very heavily focused. As I mentioned, the slowdown has occurred in the automobile industry, which is showing a bit of an uptake, and in those high-tech companies servicing largely U.S. telcos, and that's of course what happened to Nortel and, in the States, to Cisco, JDS Uniphase and a number of them.

That's where a lot of the growth in the economy was occurring, so I don't think we should discount it, but that is where the slowdown has occurred. If you look at a vast segment of the economy, if you go across the country in terms of energy, in terms of small and medium-sized businesses, you will see that the Canadian Federation of Independent Business came out with a survey about a month ago that shows an incredible amount of confidence among its membership. It showed a desire to hire. I think what we're seeing really right across the country is a lot of business confidence and a lot of consumer confidence, and I think that is justified.

Clearly this is going to be impacted by the length and duration of the U.S. slowdown. As I mentioned, we have be cautious, and we have to be cautious about that assessment. We're going to continue to watch the situation very closely. There is a fine line that you have to walk.

Ms. Albina Guarnieri: Thank you, Minister. I know Canadians appreciate your hard work.

The Chair: Thank you, Ms. Guarnieri.

Mr. Cullen.

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

Thank you, Minister. I'm sure that Canadians will be pleased to know that because of the prudence you've built into the budgeting and planning process the $100 billion tax cut is protected, the huge investments in health care and the children's agenda are protected, and, even if you look at the worst case scenario, there's a huge cushion there to deal with any shocks that might hit the economy down the road.

I was going to say that if Mr. Kenney and Mr. Day want to look at three or four years hence, they might want to borrow Mr. Loubier's laptop, because it sounds like it has some kind of fifth-generational, crystal ball capabilities, except when he comes into the House of Commons and is calculating the tax savings for individual Canadians. I must say that it seems to have a few bugs in that regard.

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Minister, you talked a lot about moving forward and looking at the need for Canada to be innovative and for Canadians to have the right skill sets. Michael Porter recently did a retrospective on the report he did ten years ago, Canada at the Crossroads, in which he looked at how Canada should be or could be more competitive. He just did an update report and basically said that on the macroeconomic front, which seems to me to be an area that you would have a large responsibility for, we've made some tremendous, huge strides. I congratulate you for that. You'd be the first to acknowledge that there's more to do and I'm sure you'll be at that job and making it even better.

He also commented that at the microeconomic level there was some work to do at the provincial government level, the business strategy level and the local government level. In regard to the provincial level, it could mean interprovincial barriers to trade, the regulatory burden at the provincial or local government levels, or lack of support for what they call clusters and that kind of thing.

Without getting too philosophical, if we look at Canada we've had many things that you've put in budgets to encourage the richness of the capital market: risk-taking, innovation, entrepreneurship and investments in R and D. Moving forward, how can we engage all Canadians at all levels of government and in the private sector to move forward, to be more innovative, and to be more entrepreneurial so that we can reap the advantages of the new economy?

Mr. Paul Martin: There are two ways to answer the question, Mr. Cullen. One of them is that there are a number of problems. Barriers to trade between provinces are just simply nonsensical. What's really important is that the provinces themselves should understand the degree to which the Canadian market is being balkanized. We're only 30 million people.

There is one thing I find in all the dealings I have outside. I know that Pierre Pettigrew would say it and I know all of you on your various trips see it. Essentially our market is too small. That's why we need access to the bigger markets. On top of that, to balkanize it down again just simply makes no sense. You're very right: the provinces really should come to the table on this issue.

On the issue of clusters, again, there is no doubt that in the way in which one is going to build a modern economy, the ability to use our research institutes, our universities, together with our best entrepreneurial minds, is tremendous.

Sue Barnes is here. That kind of thing is happening in London all the time. Albina has talked about it in terms of Toronto. Actually every member here has that kind of reflection.

What we also have to do, I believe, is take these clusters, and not only at the big university level. We have to recognize what the smaller universities and the community colleges can do. We have to recognize that there's a tremendous dynamic in the country and that it can be made to work. That is the modern industrial policy. That's what the Atlantic Investment Partnership is all about. It says that Atlantic Canada could do really well and in fact basically be a leader in the new economy if it has the capacity of doing it.

In regard to the second part of your question, we succeeded with the deficit because there was extensive consultation with Canadians. Not only did they feel part of that, but they were a very important part of the process. Here is what I believe on the kinds of things you're talking about now, like how you create an innovative economy, how you essentially make people chuck conventional wisdom. That's what we have to do. We basically have to say the old way of looking at things doesn't work any more. The fact is, if there is a knowledge economy then it is based on a very different set of economic and social structures than the old one was, and we have to put that in place.

That means we have to stop fighting old wars. That means we have to be able to anticipate where change is coming from. You only do that if you go across the country engaging people in this kind of discussion. That's what I know the finance committee has done and it's so important.

I know it's what you've done and what we all have to do. That's what it's all about.

The Chair: Thanks, Mr. Cullen.

I have a couple of questions. One is related to the whole issue of North American integration as it relates to the issue of productivity. Productivity here in Canada does matter when we compete with United States of America, for example. I know that your government has taken some measures in reference to creating the type of climate that enhances productivity, but what do you think we, as a government, still need to do?

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Secondly, one of the recommendations made by this committee referred to the issue of program review, and I wonder whether you felt this program should be one that keeps going forever—in other words, we should have program review every year.

Mr. Paul Martin: Whether it should be a program review such as the one we went through in 1995 is one issue, but that there should be an ongoing automatic evaluation of programs within government departments and through Treasury Board is something I do believe in. It's also something the Treasury Board president believes in, and she is in the process of putting in place just that.

Government has to be able to measure the outputs of its programs. You have to be able to judge whether in fact the programs are delivering what in fact you said they would deliver. We have to have much better measurements and targets, and we have to hold people to account. Accountability is what is incredibly important in the end.

I've had extensive discussions with Madame Robillard on this whole issue. It's one she's really seized with, and it's something we have to do.

The Chair: And the productivity issue...

Mr. Paul Martin: There are two kinds of productivity. There is the cyclical productivity, when you have growth and you get greater productivity, which feeds on itself, so it's important to maintain growth. But the second, obviously, is the structural productivity, which is largely the result of investment.

There are two kinds of investment. The first is investment in plant and equipment, which is why when you see a slowing of capital investment you have to be quite worried about it. The great productivity boom in the United States and the return—not as great as the States, but better than most countries—the return to productivity growth in Canada over the last two to three years has been the result of this huge investment in plant and equipment.

The second kind of investment—and this goes back to the questions, which we really have to talk about a lot more—is investment in people. You can invest in all the machinery and equipment you want, but if you don't have the most educated, most knowledgeable, open work force, then you're not going to be nearly as productive. So it goes back to the fact that we have to invest in the kinds of skills training that will give Canadians the ability to compete with anybody. Put those two things together, and we will be as productive as anybody.

The Chair: Thank you.

Mr. Kenney, you have five minutes, and then we'll go to Mr. Loubier for five minutes.

Mr. Jason Kenney (Calgary Southeast, CA): Thank you, Mr. Chairman.

Minister, what are you doing watching question period when you're sick? That's really perverse, you know.

Mr. Paul Martin: I have to say, sometimes it makes you sicker.

Mr. Jason Kenney: I would find other viewing pleasure.

I want to pursue this question of the planning deficit, which is in the out years of your fiscal plan and which you're not fully revealing to us today. You did say, under questioning from my leader, that it's conceivable that we might touch the prudence. That sounds like a yes to me, an admission that it's in the out years.

I want to make it clear that it's not just cynical opposition politicians saying this. Heaven forbid. It's also a lot of credible economists. There's a fellow I think you're familiar with, John McCallum, who said “The Liberal proposal does eat into part of the prudence reserve...”.

Robert Fairholm at Standard & Poor's said, “I was surprised when I saw the numbers. Year by year, their plan just doesn't quite add up.”

Don Drummond, who you know as your former ADM, now at TD, said, “The government just never added those numbers together”, so they're in the hole by $1.5 billion in 2004-05.

And Dale Orr, at WEFA, said, “Things do get pretty tight out in 2003-04 and 2004-05, and that's why it's very important to make sure spending is well restrained.”

I'm sure you can understand our skepticism and our concern, particularly our concern about how spending is running out of control and driving this need for your government to eat into the emergency reserves.

Isn't it true that the emergency reserves are there just for that, for an unexpected downturn, and aren't you jeopardizing the so-called prudence factor by demonstrating a willingness to eat into it in the out years?

Secondly, after having tried very hard around your cabinet table to manage and control the big spenders in the early years of your ministry, haven't you lost that fight now? We're moving from program spending increases of 2% or 3% to 5% or 6%.

For instance, if you were to restrain program spending over the next four years to CPI plus population growth of about 3%, as opposed to the 5% tracking nominal GDP, which is what you plan to do... Incidentally, that 5% growth track is exactly what one of the most reckless finance ministers in modern Canadian history, Mr. Chrétien, had it at in the late 1970s. So going back to Chrétien-style spending levels, as opposed to maintaining Martin-style prudence, you're going to blow about $60 billion in money that would otherwise be available for further tax relief and debt reduction.

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First, isn't the emergency reserve there just for emergencies and not to be spent? Secondly, why have you lost the fight on spending to the big spenders around the cabinet table, and why have you lost, in this particular year, $5 billion to the big spenders, money that would otherwise be in the surplus, available for debt reduction?

As my third and final question, you talk a lot about your much-advertised tax cuts, but yesterday we released a scientific poll conducted by Pollara among 1,200 Canadians, asking if they had noticed a reduction in the amount of federal taxes taken from their paycheque. Across every income group, cohort, and region of the country, 75% said no, they had not noticed a reduction in the amount of federal taxes they pay. So where is this tax relief if Canadians haven't noticed it?

Mr. Paul Martin: Mr. Kenney, you asked the questions, but in the course of asking the questions you made a number of affirmations in the preamble to which I really think I have to reply.

First of all, let's be very clear, the red book states, and we have always operated on this basis, that when the time comes we will make decisions that are appropriate to the economic circumstances, and we are not going to jeopardize our fiscal track. That's stated in the red book, and I confirm it here today, so any projections that are made three, four, and five years out are governed by that overriding caveat.

Secondly, in terms of the prudence, we have always used the prudence. The prudence goes $1 billion, $2 billion, $3 billion, $3.5 billion, $4 billion; it goes up in that way. The reason for it is because it's so difficult to make a projection way out there. But as each year comes up, basically that prudence drops, and always, right from the beginning of our time, it has been used for spending, for debt reduction, or for tax reduction, and the same thing will happen in the future. So there's nothing new there.

Thirdly, we have close to $7 billion worth of prudence contingency reserve in our allocated surplus in that fourth year, which fully covers any such demands that are out there. So any statement that that year is in some jeopardy is simply not accurate.

On the question of the spending, when we took office this country's program spending, apart from interest, was about $120 billion a year. Today, seven or eight years later, it's $120 billion a year. The fact is that you're talking about inflation plus population. We've increased spending less than population plus inflation since we've taken office. So we've done better than what the Alliance, or the Reform Party previously, put up, as we have done better than they would have done in terms of debt reduction.

Further, you talk about spending increasing at 5%. I don't know where that number comes from. Nobody is projecting that spending is going to increase at 5% a year. In fact, the spending is projected to increase at a substantially lower rate than that.

As I've pointed out, there was an increase in spending in the month of January of this year, but take a look at what it was. It was mostly one-shot spending. It was the increase in equalization, the increase in the home heating rebate, and the billion dollars for medical equipment. But if you take that out, in fact our spending is increasing roughly 3.8%.

So the issue is, if you want to make those projections, sure, if you take a 5%, 6%, or a 7% projection as to spending and say that's what's going to happen, then of course you can have any scenario you want. But I'm telling you, Mr. Kenney, that is simply not what's going to happen.

I would then ask you a question—I'm sure you'll be given a chance to answer. If you're so worried about the third and fourth year out, why did you project $25 billion of additional spending in tax measures in that fourth year out? If you're worried about our $2 billion to $3 billion of spending, what would your $25 billion of spending have done to that third or fourth year out?

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The Chair: I don't think he was able to answer that question the last time it was asked, but go ahead, Mr. Kenney.

Mr. Paul Martin: It's the tax-and-spend Canadian Alliance I'm interested in.

Mr. Jason Kenney: Of course, Minister, what we've proposed isn't a net increase in spending, but a reallocation and keeping it constant with inflation and population. You're going well beyond that in your plan, and that's money. Every additional dollar of spending is a dollar that is not available for tax relief or debt reduction. When you talk about your debt reduction plan, sir, I'm looking through the next five years, and debt interest cost remains constant at over $40 billion. It's not saving taxpayers any significant money. Even $15 billion on a $550 billion debt is not a significant downpayment.

So I don't accept your assessment of our plan. What I do accept is that your government has decided to spend more rather than give taxpayers much-needed relief and debt reduction to secure our long-term economic future. You haven't talked to us at all today about the aging population, the demographic crisis we face 20 years down the road, and how we're going to deal with those issues.

Once again the debt reduction plan here is just money that might happen to be left over at the end of the year if it gets past your friends Ms. Copps and Mr. Tobin.

The Chair: Thank you, Mr. Kenney.

Mr. Paul Martin: If you take a look at where the increases are occurring, Mr. Chairman, the increases are occurring in health care. The increases are occurring in increased old age pensions. There was the increase in farm payments to the farmers. I think what Mr. Kenney or the Canadian Alliance have to answer is which of those are they prepared to cut, because that's where the real increases are taking place.

The Chair: Thank you.

Mr. Loubier, final questioner.

[Translation]

Mr. Yvan Loubier: Minister, towards the end of our discussion earlier, you called me a genius.

[Editor's Note: Inaudible]

...no longer has a monopoly in that area.

Mr. Paul Martin: One is allowed sarcasm.

Mr. Yvan Loubier: Sometimes when you treat me that way, I feel like shutting you up in a bottle, but that's a whole other debate.

Minister, I would like to get back to the matter of forecasting errors. With your forecasting error this year, we are now up to $60 billion in forecasting errors by the Finance Department for surpluses and deficits over six years, compared to approximately $5 billion for the Bloc. That has nothing to do with genius, Minister. All it takes is skill, experience and realism. And most importantly, we have never hidden anything since 1996. Every year, we made our estimates public. At one point, you even congratulated us on our excellent work.

We base ourselves on exactly the same figures for GDP growth as you do. Figures that come from the Royal Bank, the Bank of Montreal, the Bank of Nova Scotia, the Toronto Dominion Bank, the National Bank and the Mouvement Desjardins—except that we don't stop there. We look at the difference between GDP growth, as presented by the forecasters, and growth in tax revenues. As we have gained experience, we have become more expert, year after year, in terms of knowing which adjustments to make.

How is it we are able to arrive at results that fall pretty close to the mark, whereas you always seem to make forecasting errors of between 130 per cent and 400 per cent, depending on the year?

I am asking you a question, Minister. You are a democrat, you are transparent and you have a concern for truth. I am making two requests, and I would ask that you respond to those requests. Out of a concern for transparency, honesty and full democratic debate, would it be possible for you to put in place a formal process whereby your estimates for revenues, expenditures, surpluses and growth in those three areas would be submitted for review to a committee completely independent from the Department of Finance, and from some of your good friends, including Don Drummond and, previously, McCallum?

Secondly, following this public review of your estimates, would it be possible, when we actually arrive at a realistic estimate that will be a little more in keeping with reality, to put a real process in place whereby parliamentarians can debate the use of future surpluses and the adoption, following such a debate, of a balanced approach? We don't want everything to go to paying down the debt. We have to pay down the debt, but we also have to meet health care and education needs, and the needs of the unemployed, who are being deprived of the $6 or $7 billion a year in employer-employee contributions you are taking out of the Employment Insurance Fund.

Would you be willing to respond to those two requests: that there be a public process independent of your Department and your economist friends, who are spreading a kind of psychotic fear and thus advising extreme prudence with respect to the future, and a real debate in Parliament on the use of the surpluses, so that in future, you will not be the only person, along with your economist friends from the big banks, to be deciding how those surpluses should be used?

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Mr. Paul Martin: First of all, Mr. Loubier, I pointed out earlier, and I repeat, that it is ridiculous to talk about our friends being the major banks. There are 19 forecasters in Canada, and Desjardins is one of them.

Mr. Yvan Loubier: Yes.

Mr. Paul Martin: If you want to dismiss Desjardins...

Mr. Yvan Loubier: No, no. I use them. I use the same growth forecasts as you...

Mr. Paul Martin: Well, the first thing...

Mr. Yvan Loubier: ...except that I don't overestimate spending, nor do I underestimate revenues, the way you do.

Mr. Paul Martin: Would you like me to respond?

[English]

The Chair: You have to let the minister answer the question.

[Translation]

Mr. Paul Martin: The first thing I want to say is that we do not deal only with economists from the major banks. There are 19 forecasters in Canada.

Secondly, when we present our figures with respect to the surpluses, we first have them examined by third parties—in other words, economists who are with the major Canadian banks, in order to have an opinion completely independent from that of government.

Thirdly—and this is very important—we are in exactly the same position as most other countries. When things are going well, surpluses tend to be underestimated, and when things are not going well, unfortunately, in most countries—not in Canada, I am happy to say—there is a gap between revenues and spending.

However, Mr. Chairman, I am certainly prepared to come before this Committee, because you are the Finance Committee. If the Committee wants to question us about the forecasts, it has every right to do that. So, for the most part, you already have the ability to do whatever you would like to do with those forecasts. All the information is there and you can debate it as you see fit.

Debating the choices made by government is precisely the reason I am here and the reason you hold national consultations. Mr. Chairman, as I just said, we need to spend more on health care, education, innovation and the environment. Those are priorities. However, I am perfectly prepared to appear before the Committee at any time to take part in the discussion Mr. Loubier is asking that we have.

Mr. Yvan Loubier: On what basis...

[English]

The Chair: Thank you. Your time is up, Mr. Loubier. We'll have to go to Mr. Nystrom.

The time is perfect here. We have equal distribution according to the number of seats, of course.

Mr. Nystrom.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): I want to ask one question that some others may ask today.

I think probably as Minister of Finance your two biggest failures have been first of all in the environment, on which many studies have shown we have one of the worst records now in the OECD; and the second one, according to Statistics Canada, is the income gap or the wealth gap has widened in the last number of years—the rich are getting richer and the poor are getting poorer.

Yet I look at your speech today, and you don't mention the word “equality” once; you don't mention the word “poverty” once; and you don't mention the word “water” once. You mentioned the word “environment” twice—you refer to the inflation environment, and one is the actual environment.

So I wanted to ask you, why didn't you spend more of the $15 billion in terms of environmental concerns and issues, and some of that $15 billion in terms of trying to reduce the wealth gap in this country? One way of doing that is by establishing what one might call a fiscal stabilization fund, which some provinces have. With these the money doesn't automatically go down to pay the national debt, but you have some choices and flexibility at the end of the year as to where to allocate that money—some to the debt, some to taxes, some to social spending.

We have two major failures here: one is the environment, and the other one is that the gap between the rich and the poor has gotten wider. I'm sure you must be concerned about those. Why aren't they a greater priority?

Mr. Paul Martin: Mr. Nystrom, I agree with you on both priorities, so there's no disagreement there.

The problem is that the fiscal stabilization fund doesn't work. If you take a look, for instance, in the provinces where it does, their respective auditor generals, when they audit the books, ignore them. Let me tell you, I tried this one. I'm not unsympathetic to it, but essentially the conventional accounting practice is that at the end of the year you have surplus money, it goes against the debt, and that's it.

Provinces can set up these fiscal stabilization funds, as you've just said, but if you look at the bottom-line books that are audited—and having our books audited in an acceptable fashion is incredibly important for interest rates and the financial credibility of the country—they ignore them. They ignore them. Let me tell you, I have tried; and you can take a look at what the Auditor General has criticized me about in the past. So it's the accounting principle.

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The Chair: We'll have one final question. Mr. Epp hasn't asked a question yet, so this will be the final question.

Mr. Ken Epp (Elk Island, CA): I really appreciate that, Mr. Chair.

Mr. Minister, I appreciate your being here.

Mr. Minister, you talk a lot about reducing the debt. I want to applaud you for applying $15 billion to the debt. At least you're going in the right direction instead of spending it all. But my question has to do with interest rates. Interest rates have held solid. Our total indebtedness to the Americans, I believe, is down. So the lowering of our dollar shouldn't affect it. Yet the interest payments, the public debt charges, are up. To me that's an anomaly. Can you explain that?

Mr. Paul Martin: Yes. There are two reasons, Mr. Epp. Number one, the government is extending the term of its debt for safety reasons. We had far too much short-term debt, versus medium-term and longer-term debt. It was obviously a risk for the country. So the government is extending the term, and as you extend the term there is an interest rate increase. That's the first reason.

The second thing, and again it is an anomaly, is we are also retiring a lot of debt that is not being renewed. But some of the debt that's being retired is old debt, because that's the debt that comes new, and it actually was quite low-interest-rate debt. So unfortunately what's happening is that we're retiring it—that's low-interest-rate debt that's going off, and that increases the average interest rate on the debt.

Your question's a very good one, but those are the two reasons for it.

Mr. Ken Epp: I thank you.

The Chair: Minister, thank you very much for your economic update. You've provided us and indeed all Canadians with valuable information, and for that we are very grateful.

Mr. Paul Martin: Thank you very much, Mr. Chairman.

The Chair: The meeting is adjourned.