FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, May 28, 1998

• 0910

[English]

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

As you know, the order of the day is pursuant to Standing Order 81(4) and the order of reference of the House of February 26, 1998, study of the main estimates for the fiscal year ending March 31, 1999, votes 1, 5, L10, L15, 20, 25, 35 and 40, finance; and pursuant to Standing Order 81(7) and the order of reference of the House of March 25, 1998, study of the 1998-1999 estimates, reports on plans and priorities for the Department of Finance.

This morning we have the pleasure to have with us the Minister of Finance. Welcome, Minister. We also have Associate Deputy Minister Don Drummond.

You have some time to make some introductory remarks, and thereafter we will engage in a question and answer session. Welcome.

The Honourable Paul Martin (Minister of Finance): Thank you very much, Mr. Chairman. Thank you for giving me this opportunity to speak and exchange views with the committee.

As many of you know, this year marks a turning point in the history of Canada's finances. When the final numbers are signed off later this year, they will show that Canada had a balanced budget in 1997-1998. It's the first time we've been in the black since 1969. We'll also balance the budget this year and the year after that. That's the first time in almost 50 years the budget will be balanced for three consecutive years.

The annual budget, Mr. Chairman, is without a doubt the most visible thing the Department of Finance does, but it is far from the whole story. In fact, it is only the tip of the iceberg. The department is relatively small, with about 706 full-time people, including professional economists, support staff and everyone. I think probably half the department's here today. It has an annual operating budget of about $71 million. But its scope of responsibility is wide-ranging, and touches on almost every aspect of the government's agenda, whether it's jobs and growth, science and technology, health care, or child poverty.

[Translation]

Mr. Chairman, let me take a few moments to describe some of that work to provide some context for your deliberations today.

The department's fundamental purpose is to assist the government in developing and implementing economic, social and fiscal policies and programs that create jobs and foster growth.

It serves as the government's primary source of analyses and advice on the broad economic, social and financial affairs of Canada. And it works with other departments and levels of government to ensure that these policies are coordinated and work in harmony.

[English]

The department provides analysis, advice and recommendations on issues that range from tax and trade policy to borrowing and balance of payments; from social policy and economic development to privatization and financial sector policy. This wide-ranging advice, which is crucial to every part of the government's agenda, comes from a relatively small number of professional economists and public policy experts.

In addition to advice and recommendations, the department is responsible for a number of financial areas. For instance, the department develops and evaluates all federal taxation policies, as well as legislation. It operates two statutory programs: the public debt program, which manages some $500 billion in net public debt; and the federal-provincial transfers program, which involves annual growth transfers to the provinces of over $20 billion.

In recent years, the department has undertaken projects that have significantly increased its workload.

[Translation]

In 1995, for example, the department revitalized the government's retail debt program by establishing a special operating agency now called Canada Investment and Savings.

In 1996, it concluded a federal-provincial agreement to implement the harmonized sales tax in three Atlantic provinces.

In that same year it also undertook extensive cross-Canada consultations on the Canada Pension Plan and later negotiated a federal-provincial agreement that culminated in legislation which was passed last year to secure the future of the CPP.

• 0915

[English]

Over the past year the department undertook extensive consultations with the affected parties to develop new financing arrangements for the new territory of Nunavut. The department's agenda for the years ahead is just as ambitious. For instance, as agreed with the provincial governments, work has already begun on the so-called track two for reforming the Canada Pension Pan.

The equalization program comes up for renewal every five years. I see Mr. Harris took a note of that. The department has begun consultations with the provinces on renewing it. Legislation will be tabled in 1998-99 in terms of a rate equalization, and regulations will be drafted to give effect to the new agreement when it is reached.

[Translation]

The department is making changes to the government's debt management strategy to reflect a new era of declining government of Canada financing requirements. Although market debt is on the decline, it is still significant. That is why the department raised the portion of fixed rate debt to provide greater cost stability.

For example, a 100 basis point increase in interest rates today would now raise public debt charges by $1 billion in the first year, compared with $1.8 billion in the mid-1990s.

[English]

Significant resources are already being devoted to the department's work on the future of Canada's financial services sector. Clearly, the issue of major bank mergers is important. It is only one aspect of the work that has to be done to ensure that we have a 21st century policy framework for a 21st century financial services sector. As you know, the special task force headed by Harold MacKay is examining the future of the financial services sector and it will report in the fall.

This won't be the end of the process. It will lead to extensive consultations and parliamentary debate over the next year, and ultimately to a government response. Mr. Chairman, this committee will obviously play a very important role in those deliberations.

The department has also played a leading role in shaping Canada's response to the recent turbulence on Asian financial markets. In fact, I had the privilege to put forward Canada's proposal for international action to fill the gap in global financial sector regulatory and supervisory surveillance through a coordinating secretariat. This proposal received support from the other G-8 countries at the recent Birmingham summit.

I also discussed this proposal with the Asia-Pacific finance ministers, whom I met in Kananaskis just a few days ago, having had previous discussions with the Latin American finance ministers in San Diego in the fall. More work will be done by my department as we flesh out the details.

[Translation]

Mr. Chairman, I could go on. I simply wanted to highlight the scope and volume of work undertaken by my department, and the increased workload it has undertaken and will continue to undertake in the future. These facts, I believe, are important to your deliberations today.

I would be happy to answer any questions at this point.

[English]

Thank you, Mr. Chairman.

The Chairman: Thank you very much, Minister.

We'll now move to the question and answer session, beginning with Mr. Harris.

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Mr. Minister, thank you for coming. We always appreciate your direct, forthright answers, and I'm sure we won't be disappointed today.

Mr. Minister, in your opening comments you talked about basically all the aspects of your department. Certainly everything that goes on in your department in the form of revenue and spending plays a big role in the estimates. So I would like to talk about a part that plays a role in your estimates and in your budget.

You talked about balancing the budget last year, and this year you expect another balanced budget. It is very apparent that the surplus in the EI fund played a huge role in getting your budgetary figures in the black.

There are many people in the country who have a problem with the use of these EI funds, specifically because, as I understand it, the spirit of the Employment Insurance Act is that all EI contribution funds should be used for programs specifically laid out under the guidelines of EI: the training, the benefits, etc.

• 0920

So I want to ask the following question. It appears to me and to many that the scooping of the EI surplus has in fact broken the spirit of the intent of the act. Why have you broken the spirit of the intent of the act?

Secondly, because the money has in fact been taken into consolidated revenue, there is no cash in the EI surplus, simply a book entry that can be considered an IOU. I would like to know how you justify that.

Thirdly, your own department has said that you have far more money in a surplus than what's required to meet any emergencies or contingencies that we could foresee in the future. In fact, the EI premiums could be down around the $2 level and you could manage quite well. It's still around, as I understand it, the $2.80 level. The extra funds can be probably quite appropriately considered a taxation on the payrolls of Canadian business and workers. How would you justify that? This is in fact another tax increase that we all have to live with, and we're not very happy about it.

Mr. Paul Martin: The spirit of the act obviously must be interpreted in light of the decisions or the context that apply historically. In 1986, at the continued insistence of the Auditor General, the UI fund, as it was called at that time, was consolidated into the government's consolidated revenue accounts. And as a result of that, you're absolutely right, the money comes in as revenue. What we had done is simply conform to the practice that had been established over the course of the last 12 years at the demand of the Auditor General.

Secondly, the purpose of the account is to see it balanced over the cycle. This means it can go into substantial deficit and it can go into substantial surplus. In fact, when we took office in 1993 you may remember that the fund itself was in substantial deficit to the extent of some $6 billion. That was reflected in the government's deficit accounts. Effectively what is happening now is really no different from what happened in 1993, except that happily that deficit has turned into a surplus.

Mr. Dick Harris: Mr. Minister, may I just interrupt you here? I understand what you're saying, but my point is that you're using this surplus in your consolidated revenue in a time of what can be considered a reasonably good economic situation. It could be anticipated that the only time you would need that money to go back into benefits and to prop up the EI fund would be at a time when the economy took a downturn. In that case your other revenue would be down as well, so that means you're going to have to borrow money at that time to pay back the EI surplus you've taken now.

Don't you think it would make more sense to secure that EI fund? Because after all, that money really belongs to the workers and the business of this country and not the government. It's an insurance fund they pay into. So right now you're robbing Peter to pay Paul, but you're going to have to borrow from Paul to pay back Peter down the road when those funds are required.

• 0925

Mr. Paul Martin: I think there are a number of ways of answering that.

First of all, one would certainly hope, if one takes a look at the very significant improvement in the country's finances, that in fact if a downturn does occur at some point in the future, the country will be in a much better position to handle it and we'll be in a much better position, obviously, to finance the UI account than was in fact the case, let's say, some six or seven years ago.

Also, on the issue that all the money in here belongs to the workers, it's my view that in fact all of the money that comes into the government's accounts belongs to the Canadian taxpayers and Canadian workers. That is true in case of personal income taxes, sales taxes, and whatever moneys happen to come in. I think it is the reason that all of us feel that we really have a major fiduciary responsibility to spend those moneys wisely and to take in only what we absolutely need to take in.

If I could also answer your last question about the tax increase, in fact, of course, what has happened since we have taken office is we have reduced the premiums. It is not a tax increase. Last year alone, as you know, there was a $1.4 billion reduction in premiums. That's a tax decrease.

The Chairman: Mr. Williams.

Mr. John Williams (St. Albert, Ref.): Thank you.

Mr. Minister, I don't think you can have it both ways. You either have a payroll tax by another name, or you're setting yourself up to have a surplus to cover off an economic downturn of monstrous proportions.

The 1991 recession was a very serious recession, and at that time the UI fund or the EI fund ran a deficit of a maximum of $6.2 billion. Now you're talking about a surplus of $19 billion, and growing, as we stay in an economic growth pattern. This could reach $25 billion before it stops growing.

How big a recession are you planning for, or is it really just a tax on jobs?

Mr. Paul Martin: Mr. Williams, I answered Mr. Harris' questions quite specifically, so you've now taken it to a different tack.

It really comes down to a question of choice. I think it was very important to Canadians that we eliminate the deficit. I think Canadians understand the difficult financial condition the country was in at the time we took office.

The choices involve personal income tax reductions, EI premium reductions, funding of our basic social programs, and making sure the books stay in the black.

If the position you're putting forth is in fact that we should much more dramatically decrease EI premiums, then you are making a choice.

Mr. John Williams: I didn't suggest that, Mr. Minister. I asked you, which one are you doing? Are you having a payroll tax by another name, or are you planning for an economic recession of monstrous proportions?

It seems to me that you're leaning towards a tax by another name as part of your mix of taxes that you collect and your reducing them across the board in order to maintain your balanced budget. But that has nothing whatsoever to do with a surplus that is only large enough to cover off the next recession, which is the spirit of the EI fund, that it only builds a surplus large enough to cover off the next recession. It seems to me you've gone way beyond that, so I think we do have your admission that it's a tax by another name.

Mr. Paul Martin: Mr. Williams, what we have as a government—and I stated this really quite clearly yesterday and have actually stated it now for quite some time—is revenues and expenditures, and the way in which we're going to maintain ourselves in balance is if we in fact adopt a balanced approach.

The Chairman: Mr. Ritz.

Mr. Gerry Ritz (Battlefords—Lloydminster, Ref.): Thank you, Mr. Chairman, and thank you, Mr. Minister, for appearing this morning.

To follow along on this EI thing, one of your own Department of Finance economists has said that the rate could be allowed to fall to $2.30. That's another 50¢ off what we're seeing today.

You talked about the decrease you've implemented of $1.4 billion, and I would say to you, sir, that has been more than offset by the CPP increases we've seen retroactive to 1997 and we will see continued.

• 0930

You have allowed in this budget an EI holiday for youth 18 to 24, and you seem to realize at that juncture that payroll taxes kill jobs. So I say to you, sir, why would you not allow that to drop to the $2.30 immediately, in order to stimulate jobs for the rest of the labour force?

Mr. Paul Martin: It was just pointed out to me that the rate is down to $2.70.

I think there are two things. First of all, on your comment in terms of the Canada Pension Plan, the Canada Pension Plan, at the time the provinces and ourselves undertook the reforms, had a $600 billion liability. That liability has existed for a long time, and what we and the provinces did was to face up to it.

The CPP premiums are a joint federal-provincial responsibility. They're not only the responsibility of the federal government, and essentially what we had done is to make it possible for young Canadians not only to see that the plan will be sustained, but we have basically lowered their premiums, because in fact my generation is going to have to pay more. So as far as the young people are concerned, while there is an increase, it's a lot less than it would have been.

As far as your question in terms of the holiday, there's a lot of debate as to whether this kind of a measure is going to work. We think this is a very important project to determine whether in fact more youth will be hired. As you know, we have had a previous project in which there was a reduction in the rates, and I think the answer will have to wait until we've seen what happens over the course of the next two years in terms of this youth project.

[Translation]

The Chairman: Mr. Loubier.

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Minister, I must admit that I have trouble following your arguments. I don't understand you very well and I have a great deal of difficulty with your arguments when you talk about employment insurance, because you've only discussed the past. You're talking about a situation that existed when you arrived but that no longer exists today. I'm also wondering why you are so proud of your record, because anyone could have balanced the budget exactly as you have done, with the savage cutbacks that you've implemented, by cutting transfer payments to the provinces and by helping yourself to the money of workers and employers that happened to be in the employment insurance fund. There's nothing to be proud of in all that.

Minister, I think you should stop laughing, because this is not funny at all. The reality is that only 42% of the unemployed can now receive unemployment insurance benefits and 75% of the young are excluded from the employment insurance system. This is why you're going to have a surplus of $19 million. That was the main factor in the reduction of the deficit in the past, with the cutbacks to transfers to the provinces, and this will continue to feed your surplus because there will be real surpluses of several billion dollars in the next few years.

We just don't believe in the figures you bandied about when you made your forecast during the last budget. We're not stupid enough to believe that the surpluses for the next three years will be zero, zero and zero.

Therefore, you are excluding thousands of Quebeckers and Canadians from employment insurance in order to pocket a surplus of $19 billion. You're told that you're stealing from workers and employers. You're told that you're cooking the books. You're also told that the way you're using the employment insurance fund constitutes misappropriation of funds. Personally, I consider you one of the main individuals responsible for the human misery experienced by thousands of people who are no longer entitled to employment insurance.

Let me ask you one first question, Minister. Can you still look at yourself in the mirror in the morning without being ashamed?

Mr. Paul Martin: Mr. Loubier, we all know that during question period, we often lose our tempers because of the arguments and the atmosphere in the House of Commons. However, my experience in committees is that we hold the sane discussions here, discussions that are sometimes partisan, but still discussions on substance during which members try to discover the facts. They exchange views and there may be differences of opinion, but they try to arrive at a consensus and a vision that is quite clear. In a committee, it is very rare to hear a member of Parliament make comments like those you've just made. When it happens, it may be because the member is not familiar with the issues or is so partisan that he cannot discuss a complex subject with the required depth.

• 0935

I will simply say that there's certainly a reason why there has been a reserve in the fund since 1993. One million two hundred thousand new jobs were created and 453,000 Canadians obtained new jobs since the beginning of last year. The main reason for that is that the economy is in better shape.

Secondly, you stated that we would do better than a zero deficit in the next two years. That's what we've said. That's nothing new. We said that our projections were not the least of what we were going to do, and that we hoped to do even better. Perhaps you were not in the House when I said so, but I did say it on many occasions. Let's hope we will do better, Mr. Loubier.

Mr. Yvan Loubier: Yes, but you're not answering my questions. With the $11 billion dollar cutbacks that you imposed on social programs and higher education, after the systematic theft of the premiums employers and employees paid into the employment insurance fund, are you still able to look at yourself in the mirror in the morning without being ashamed? I think that what you're doing right now is shameful. What I'm saying to you is not partisan. Is Mr. Audet a member of the Bloc Québécois or the Parti Québécois? Is Mr. Harris a member of the Bloc Québécois? Mr. Harris lost his temper today, and quite rightly so, in accusing you of stealing from workers and employers. It's not the Bloc Québécois that said so.

With regard to knowledge of the issues, you're way out of line. While you may have said that there would be surpluses in the next few years, that's not what you wrote in your forecast in the last budget. With regard to the creative accounting you've used in the past four years, people aren't fooled by that either. You posted the $2.5 billion for the Millennium Scholarships under the 1997-1998 fiscal year whereas the scholarships will only start being paid out in the year 2000. People aren't crazy. Is the Auditor General partisan?

I put my question again: are you ashamed when you look at yourself in the mirror? You're not ashamed?

Mr. Paul Martin: No, Mr. Loubier. The only time...

Mr. Yvan Loubier: When are you going to stop helping yourself to workers' and employers' money? In other words, when are you going to substantially reduce employer and employee premiums and give back to the workers the benefits they used to enjoy? Those are not jokes or partisan figures. Those are figures from Statistics Canada. Only 42 per cent of the unemployed are entitled to employment insurance whereas before you came to power, it went beyond 80 per cent. Therefore, there is a problem here.

Three quarters of the young are excluded, but they also pay premiums. Everyone pays premiums. That's the beauty of the reform you and Pettigrew cooked up. Everyone pays, but over half the people are excluded and three quarters of the young are.

Therefore, let me ask you my two questions again.

Mr. Paul Martin: But you asked me...

Mr. Yvan Loubier: Are you capable of looking at yourself in the mirror without being ashamed? When are you going to stop stealing employment insurance funds and when will you reduce the premium rate and give benefits to the unemployed who are experiencing hardship because of you?

Mr. Paul Martin: Mr. Loubier, the only time I'm ever ashamed is when I realize that there is member of Parliament, the Bloc Québécois critic, who has such poor knowledge of the issues that he can't even have a rational discussion about them.

Mr. Yvan Loubier: Stop being a demagogue and answer the question I asked you.

Mr. Paul Martin: I just answered it.

Mr. Yvan Loubier: When are you going to reduce the premium rate?

[English]

The Chairman: Mr. Loubier, order.

Mr. Yvan Loubier: I have a question for the minister.

The Chairman: You've already stated the question. He hasn't been given a chance to answer, so let him answer the question and we'll get back to you. Don't waste any time or you'll run out of it.

Go ahead.

[Translation]

Mr. Yvan Loubier: If his answers weren't so trivial, Mr. Chairman, he would have time to give us genuine answers.

[English]

The Chairman: Mr. Martin.

[Translation]

Mr. Paul Martin: If the answers are trivial, it is because some of the questions...

Mr. Yvan Loubier: No, no, this is serious! There are thousands of workers who are excluded from the employment insurance system.

Mr. Paul Martin: Mr. Loubier...

Mr. Yvan Loubier: Stop laughing at people's hardship.

Mr. Paul Martin: I can hear you. It's not necessary to shout.

Mr. Yvan Loubier: Well, you don't seem to be hearing the questions.

He's smiling. It's not funny.

[English]

The Chairman: Are there any further questions?

Ms. McDonough.

Ms. Alexa McDonough (Halifax, NDP): Thanks very much for the opportunity to appear this morning with the committee.

I'd like to explore a little with the Minister of Finance his notion of deficits and surpluses. I have to say the lecture we first had to be subjected to here this morning sounded pretty condescending, on the merits of balanced budgets, and then the lecture on undue partisanship when expressing concerns about what's happening in this country today.

I want to accept at face value what the Minister of Finance has outlined in his opening statement, except his responsibility as Minister of Finance, and I quote directly, is to “develop policies and programs that create jobs and foster economic growth”.

• 0940

You know, I think most Canadians are discovering that continuing environmental degradation, increasing poverty, continuing very high levels of unemployment, the gutting of social programs, and the erosion of our health and education are all just another form of deficit financing.

The finance minister has referred to the unemployment insurance fund as just creating new surpluses. But of course it's the government's policies that have created those surpluses. They've created the surpluses by reducing unemployment benefits and eligibility to the point where we're on a par with Alabama.

We have fewer than 40% of unemployed Canadians eligible for unemployment insurance benefits today, instead of 87% who were eligible less than a decade ago.

My question to the finance minister is whether he sees any connection between those policies and the fact that we have over five million Canadians living in poverty today. We have an increase in poverty putting us at a higher level than at any time in two decades.

Does the finance minister see any connection between his government's policies and that appalling growth of poverty, and the amount of human misery and suffering that's going on as a result of those policies?

Mr. Paul Martin: The first point the leader of the NDP made was in terms of environmental degradation, and, if I'm interpreting her comment correctly, that in fact when we look at deficits, we have to look at much more than simply financial deficits. I think it was in that context that you dealt with environmental degradation, and you dealt with the necessity of protecting our social programs.

I very much share that view. I certainly believe that the human deficit is more important than the financial deficit. Essentially I do not regard the elimination of the financial deficit as an end in itself, but simply a means of allowing the government to be put in a position to deal with the social programs the honourable member has referred to.

On her second point, the question of poverty, again I think that all of us are very concerned that in the age of globalization we're seeing greater and greater inequality. It's a problem all of us have to deal with.

I guess perhaps the only difference of opinion I might have with the leader of the NDP on that issue is that I don't believe the solution is to see the governments go further and further into the red. In fact the only way governments can deal with those social programs is if in fact they and Main Street are free from the strictures placed on them by Wall Street. In fact that's what we as a government have been able to do.

Ms. Alexa McDonough: I guess I find it just really difficult—and I think a lot of Canadians do, as well—to hear how smug and self-congratulatory you are as the Minister of Finance about the books being in the black when you know that the deficit heaped on the backs of families in this country is just horrendous—my kids would say humongous.

Let me go directly to the question about this government's responsibility to create jobs. Those were your words, not my words. You stated that as a fundamental purpose of the finance department and the finance minister.

I've just come back from the United Kingdom, where unemployment is below 5%. A massive commitment to generate jobs is being driven in that country by the Chancellor of the Exchequer, the finance minister. He understands that trickled-down finances that trickle down are an economic fiction. He understands that there is massive marginalization, social marginalization, in that country, particularly among young people. He has set out to mobilize the entire nation, starting with employers, to do something about the horrendous unemployment toll, which is part of the deficit this government won't face up to.

• 0945

How can you bring in a statement today about this government's priorities, this government's record it's so pleased with, and this government's intended focus for the future, and never even mention unemployment, let alone set out what the government is going to do to address this problem?

Mr. Paul Martin: Well, first of all, I was asked to come and speak to the estimates. That is—

Ms. Alexa McDonough: I'm talking about the estimates.

Mr. Paul Martin: No, but that is—

Ms. Alexa McDonough: Are we going to put any money into tackling this problem, or aren't we?

Mr. Paul Martin: The purpose for which I am here is to deal with the estimates, which are an historical document.

Let me simply respond to your questions. I want to assure the leader of the NDP that the government, and certainly this minister, is by no means smug. This has been a tremendous victory in balancing the books for Canadians.

Ms. Alexa McDonough: And a tremendous hardship for the people who've been punished in the process.

Mr. Paul Martin: The hardship you describe has existed, and in fact it is only now... We would not be able to deal with that. We would not have been able to put $1.7 billion into the child tax benefit, as an example, if in fact we had not cleaned up the books. If deficits and interest rates had kept rising, we would not have had the flexibility to do what we did, to use one example, in terms of the child tax benefit.

So let's understand that balancing the books is a precondition to being able to deal with the very real social programs the honourable member refers to.

Ms. Alexa McDonough: But putting people back to work is the—

Mr. Paul Martin: Okay, then let's deal with that, putting people back to work. Since we've taken office in fact the unemployment rate has dropped from 11.5% to 8.4%. I wish it were a lot lower. What had happened is that the unemployment rate had been rising, and since we have taken office, the unemployment rate has consistently come down. At the present time we are creating jobs at a faster rate than any other G-7 country, including most recently the United States.

Now, you're going to say to me that we have to do more. I agree. But I have to tell you that this is a pretty dramatic turnaround.

Just one last thing. The honourable member refers to her discussions in England with the Labour Party. I think there are a couple of things. I have had many discussions with Gordon Brown, the Chancellor of the Exchequer.

First of all, the unemployment level in the United Kingdom at the present time occurred under a Conservative government, much as I... You see Mr. Brison smiling, but the fact is that this is where that occurred.

Second, the Labour government in the United Kingdom is very much a modern government, having adopted modern tools. The policies it is using are very similar to the policies the federal Liberal government is using.

With all due respect to the leader of the NDP, I must say that the NDP has by no means evolved the way Labour has. The NDP is a party that—I hate to say it—is considerably rooted in a time past, compared to the Labour Party, which is very much a party heading into the next millennium.

Ms. Alexa McDonough: I'm sure these partisan comments are entirely in order, in view of the minister's attack on partisanship.

I have a final concern I'd like to—

Mr. Paul Martin: There's intelligent partisanship and unintelligent partisanship.

Ms. Alexa McDonough: I'd like to pursue the intention that inequality is growing in all other countries. We're here talking about Canada. You're here as the Canadian finance minister.

I'd like to ask you to address the fact that Canada has jumped from 17th or 18th place to the number two position among the nations in the world in terms of the gap between the wealthiest and the lowest income segment. We've jumped to number two, second only to the United States when it comes to the poverty index and the inequality index that is universally accepted.

Mr. Paul Martin: Well, let me just say that I'm not aware of those particular numbers, but obviously I've certainly seen a number of inequality numbers, and I don't dispute the basic point the leader of the NDP is putting forth. We are very concerned about inequality. It is one of the reasons we so much want to adopt a balanced approach in everything we do.

For instance, when we did the reduction of income taxes in the last budget, we took 400,000 people off the tax rolls, those with the lowest income. We used all the available tax room we had to eliminate the 3% surtax for people under $50,000 for precisely the reason the leader of the NDP is putting forth.

• 0950

I agree with her that no society can be sustained where you have rising rates of inequality, and that it has to be a major objective of government. I can assure her that it is a major objective of government.

And by the way, I don't think we are trying to be partisan here. I think that we have very similar goals. We may have different ways of getting there, and that is the debate, but I think that the leader of the NDP is absolutely right: the rising rates of inequality are not something that any modern society can tolerate.

The Chairman: Thank you.

Ms. Alexa McDonough: Well, I assume this is a discussion about what policies and programs we would pursue if we wanted to remove the shame and the horror of being number two in the world now, in terms of inequality.

Mr. Paul Martin: Well, it's certainly a discussion about those policies. I'm not aware... I'd like to see those statistics.

Ms. Alexa McDonough: Well, probably the fact that you're not aware is some explanation of why we continue down that road.

Mr. Paul Martin: No, it's that there are many ways of calculating, and those calculations have been made.

The Chairman: Thank you, Miss McDonough.

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chairman. First of all, I'd like to thank the minister for defending a previous Conservative government and sound economic policies that have led to a low unemployment rate in the U.K. I would like to see that same spirit of non-partisanship extended to his evaluation of the previous government in Canada—

An hon. member: Oh, oh.

Mr. Scott Brison: —which, through policies like free trade, the GST, deregulation of financial services and transportation and other structural change in the Canadian economy, effectively laid the groundwork that he was astute enough to continue under his stewardship.

My first question is a very simple one relative to the EI surplus. Will you be amending the act to allow for greater surpluses, or will you provide dramatic EI payroll tax reductions?

Mr. Paul Martin: As I mentioned earlier, certainly the course of action we have been on is a balanced approach. That means that we would be reducing EI consistent with the other financial needs of the country. But we're also going to be reducing taxes, spending money on major priorities such as health care or education.

We will pursue that course as long as we can. At the present time I'm not in any position to say how that will work out in the future. There obviously has to be pretty extensive discussions as to what the exact mechanics are.

Mr. Scott Brison: Now, in Halifax in March when you spoke—and I was present—you stated that there's very little evidence to suggest that reducing EI premiums will spur job growth. Yet in your budget there were dramatic eliminations, for instance, a holiday for youth, so you obviously feel that there's at least a certain amount of change. I'm not talking specifically about Canada, but there is significant quantitative evidence globally to suggest that in fact reducing payroll taxes will spur job growth, and that the most odious form of taxation, in terms of its impact on jobs, is the payroll tax. That makes a lot of sense.

Why is there the continued reluctance to reduce payroll taxes significantly? Some economists are saying that in Canada it would be sustainable, and we could have a reasonable surplus at $1.85, as opposed to $2.70. Why are you still fighting that important reduction that could spur a significant job growth in Canada?

Mr. Paul Martin: Well, I think there are two things. The finance critic for the Conservative Party will remember that at that meeting in Halifax what happened was that I put a question to the audience. There were about 500 business people in the audience, and I asked the question. I said we just reduced the rates by 20 cents. I think they were asking for about a 50-cent reduction. I can't remember the... But basically I asked what would happen if we were to reduce them by another 50 cents—would all those who say that this will create one job in their companies raise their hands—and not one person raised their hands.

So I think one can ask the question whether in fact people hire because they need people, or whether they will hire simply because there has been that drop. Analysis has shown that dropping rates does not add to jobs, but increasing rates kills jobs. That's essentially what the analysis shows.

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Let me just deal with your last question, which I think is a very important one, on the comparison. In fact Canada's payroll taxes are lower than those in most other countries. I think it's really important to understand that, for instance, when you compare this to the United States, our payroll taxes are substantially lower. Our personal income taxes are higher. Therefore, the question that ought to be addressed in the debate is that if we're in competition with the United States and our payroll taxes are lower than theirs, and our personal income taxes are higher, are our payroll taxes the first thing we should be looking at, or should we not be looking at the greater weight being put on personal income taxes? I think that's really the debate, Mr. Brison.

Mr. Scott Brison: Well, it's interesting. I realized and I'd read that the Liberal Party is doing focus group sessions to determine things like economic policy, but I was hoping they would be more sophisticated than asking for a show of hands at a chamber of commerce meeting.

A voice: Oh, oh.

Mr. Scott Brison: Beyond that, in terms of the deficit, you have stated that there was a $6 billion deficit when your party took power in 1993. At that time, given that there had been a recession, would you agree that during a recession or a downturn it is in fact reasonable to run deficits in funds for things like the EI fund? I mean, that is a tenet of economic policy that is fairly reasonable as long as it's paid down, as you have been doing during upturns.

Second, haven't you increased the surplus simply by reducing benefits, and by maintaining the same tax effectively? I mean, it's not that difficult.

Mr. Paul Martin: Well, let me just perhaps go back in reverse order on what you said. Essentially with respect to the main reason for the increase in the surplus, quite clearly there was an EI reform, but the main reason is obviously the increased economic activity in the country.

It's important to understand that what happened in the recession of 1989-92, when the previous government—unmentioned—was in power, was that while they went into deficit, they also raised the premium rates. What you really got was not... What the honourable member has just described would be absolutely right if in fact you were in a position in a recession not to raise the rates but to decrease the premiums—if that was possible—or at least to maintain them. That would be a good thing. But what happened was that the government got itself into such a deficit, up to $6 billion, that it actually increased the premium rates, and at that point it may well have caused further job loss.

I guess the second thing is your comment about focus groups. I think I had mentioned that we have done extensive analysis on the effect of payroll taxes. That's where I get the basic information that essentially says that it's the increase in rates that kills the jobs; stability is what you need.

I guess the final thing is that if the allegation is that business will create jobs if you drop the rates, it's probably not a bad idea to ask business if in fact they think that's true.

Mr. Scott Brison: A final question?

The Chairman: Yes.

Mr. Scott Brison: First, I would be very interested in seeing any study that indicates that raising rates will impact negatively on job creation but reducing them would not affect it.

Beyond that, what do you credit...? You were saying that there has been some economic growth since 1993, so I have two partial questions. First, how long do you feel economic policy takes to really have an impact? Second, what policies would you credit for that economic growth since 1993, that significant growth you've mentioned?

Mr. Paul Martin: Oh, I think there are a number of things that have led to it.

Mr. Scott Brison: In the spirit of non-partisanship that you've—

Mr. Paul Martin: Of course.

Mr. Scott Brison: —brought here this morning.

Mr. Paul Martin: I think there are a number of things. As an open trading nation, clearly we benefit from ease of trade. Agreements that lead us to that are going to do that. I have no difficulty in saying that. It was, after all, the Liberal government that signed NAFTA.

An hon. member: Oh, oh.

Mr. Paul Martin: Probably the single most important thing I would point out has been the reduction in interest rates. Clearly that has had a major stimulative effect on the Canadian economy.

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Our biggest problem—I'm sure you appreciate this—is that for so long we had a one-legged stool. In other words, our economy was growing based on exports, but what's really helping us now is the domestic demand.

The Chairman: Thank you, Mr. Brison.

Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): Thank you, Mr. Chairman.

I have a couple of questions. My first is a partisan one, though.

We have had some terrific job growth. I wonder how our success has compared with what the policies were during the election period of the opposition parties. Take the NDP, for instance. They said they were going to have a million jobs over four years. The Tories were talking about 750,000 jobs.

Mr. Paul Martin: In fact, as a government and as a country, we have been able to surpass the job projections of any of the opposition parties. I think that's due to a lot of hard work by Canadians.

Ms. Paddy Torsney: Thank you, Minister.

There are a couple of things I wanted to know. What's happening with the seniors benefit?

The second question is this. On Tuesday we heard from Professor Mintz about his report. I wondered what your plans were for the information that he presented to us. Certainly it demanded some federal-provincial cooperation. He was talking about some pretty fundamental changes to the taxation of corporations in Canada. Obviously, that's of interest to all of us.

Mr. Paul Martin: As far as the seniors benefit is concerned, our basic goal is to ensure the sustainability of the public pension system and make sure that those who are unable to save in fact have a decent pension.

We have been in extensive consultation, and we are continuing on it. There will undoubtedly be substantial modifications to the original concept because I think there are better ways of doing it and we have learned a great deal from the consultation. When we're ready, we will be prepared to make an announcement on that issue.

Professor Mintz's report deals with corporate income tax. One of the things that I think governments have learned is that certainly in terms of income tax, massive overnight changes really create more problems than they solve. It would be our view that the first priority ought to be a reduction in personal income taxes. We ought to start with the lowest income and then move up the income scale. That will be our priority.

So while Profession Mintz' report is a very valuable report, we're not going to move on it until such time as we've effectively dealt with the personal income tax side. But we're very interested in having the public debate take place on Professor Mintz's report, because essentially—I suppose we learned this with the seniors benefit—the more public, open, and transparent the debate, the better the public policy that results.

Ms. Paddy Torsney: Thank you.

The Chairman: Thank you, Ms. Torsney.

Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, Mr. Chairman.

Thank you for your comments, Mr. Minister.

I've been listening carefully to the dialogue around the table, and I wanted to stay with the EI issue. From the standpoint of yesterday's QP, there was the allegation that the government was stealing from the EI fund. I think it's important that you're here to dispel the myth that there is some cash sitting somewhere. In fact, although the Auditor General is often used to argue that certain accounting should take place, I don't see that argument being used by some to say that the EI funds should be segregated. In fact, the Auditor General has clearly stated that the EI fund should be part of general revenue.

There was one statement though that I want you to either repeat or clarify for me. It has to do with basically the beneficial ownership of EI funds. You used the terminology of “all taxpayers”. When you said that, I started thinking about something more than a simple program where people paid into an insurance plan and the insurance plan paid out benefits if you needed it. In fact, there are many more dynamics going on.

In fact, I thought of manpower training and the fact that we've transferred out of that. I thought of sector imbalance in which some sectors are drawing out more than they put in. I thought of regional economic development, which isn't specifically EI activity, but in fact is directed either directly or indirectly at helping the job creation situation, which in fact is consistent with EI programs. I thought of departmental spending on direct or indirect job creation initiatives, such as overhead or administration or somehow the impacts of those, and how none of these ever do hit the EI fund.

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So there seems to be a need to think of the comprehensive or the integrated activity of the government when you talk about job creation and unemployment in the country, and to look at the EI fund as a linear instrument seems to be somewhat narrow.

I wanted to ask you then specifically if my thinking is reasonable on that. Have we come to the point where we have taken care of being able to provide general stability of rates for businesses, which I think is desirable? Have we reasonably taken care of worst-case scenarios in terms of economic downturns? I think a recession in the U.S. was a possibility or suspected maybe as early as 1999. I don't know where that is right now. Have we taken into account those scenarios of worst cases, which I think Canadians would want to know we're providing for?

Having done that, have we then also considered whether it's time to, in fact, as someone raised, look at the act dealing with the EI fund to determine whether or not we're incorporating all of the costs associated with employment-related initiatives into that fund?

Mr. Paul Martin: You raised quite a number of points, Mr. Szabo, so let me see if I can deal with them in order.

First of all, your opening comments were about some of the things that Mr. Harris said. His use of language was—let's put it this way—a little extreme. I think that we really have to understand that Mr. Harris is in election mode and he has obviously decided that it's easier for him to run against the federal government than to defend his own record. That is the approach that he has decided to take. It doesn't make for a lot of good dialogue, but it's clear that this what he has decided.

On the issue of the EI fund and the regional disparity, you're quite right that the fund does many things. Your comment about reflecting the regional disparities is accurate.

Ms. Torsney's earlier comments about Professor Mintz I suspect were also referring to things like experience rating and whether we shouldn't be looking at that. I think that's a valid comment. I think it's the kind of thing we should be looking at.

Your wondered whether we were at a point at which there's a stability of rates, or if they're not stable, then they would not be going up, as they will be going down. I think is accurate.

I think we have probably protected ourselves against an important economic downturn. I guess the one problem that one always finds is that when one says you're protected against the absolute worst case, it's amazing how reality can impinge on that. But I think that we are pretty well protected, certainly historically, against any kind of a worst case.

I also think that your comment about looking at the act as a whole is a very valid comment. I think that's the kind of thing the government should do, and it may well, Mr. Chairman, be the kind of thing this committee might want to do. I think that's dead on.

An instrument set for one time and one kind of an economy may well be required to be a different instrument. The nature of the Canadian economy, the transition to jobs, the transition to the information economy, the whole changes that have occurred in Canada, I think, have given a great deal of credence to the point you just raised.

The Chairman: Thank you, Mr. Szabo.

Mrs. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman.

Minister, I have two questions. One of them is about the MacKay report, which is the task force on the future of Canadian financial services. I'm actually surprised that none of the members opposite have asked about it because it seems to me as if there's been a lot of wind at your back lately.

I guess I'm just wondering what the parliamentary format will be around this specific issue and what the public consultation will look like.

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Mr. Paul Martin: Certainly members of this committee are going to be very actively involved, and there is going to be, we would expect, major public consultation. This is going to be probably the most fundamental restructuring we have ever seen in the Canadian financial sector, and I suspect that you'll not only be dealing with the MacKay report, but that you may well be dealing with certain individual instances that have arisen.

As to the exact nature, I think that remains to be determined. I think that this committee and the chairman will have to meet with the chairman of the Senate committee, and I think there will have to be discussions between the two committees as to how in fact you're going to work that out, and I know that has not yet been decided.

Mrs. Karen Redman: Thank you.

The other question I have is on some of the questions that have been raised around the effectiveness of international financial organizations such as the IMF, the World Bank, or the European Bank for Reconstruction and Development. Can you explain what is planned, and how effective you feel these organizations are? Are there any plans to have any improvements made to them?

Mr. Paul Martin: There certainly ought to be. I think that what has really happened—and we certainly saw this in the Asia crisis—is that reality has outstripped the capacity of national governments, and in fact the international financial institutions, to deal with what's happened.

What really happened in Thailand and Indonesia and Korea should never have happened. If there had been adequate transparency and adequate oversight, at a minimum the consequences would have been substantially diminished or mitigated, and perhaps the whole thing could have been prevented.

We think that there is a substantial change needed in the way in which we oversee capital flows and banking systems, and that's certainly one change that we would bring in.

There's another change as well that we feel very strongly about, and I was really delighted that Canada brought it forth at the meeting in Kananaskis. There was great support around the table, and the president of the World Bank was very articulate on the issue. That is, what normally what happens when a country gets into trouble is that the IMF is called in at the last minute. The IMF's major motivation is to create confidence in markets so that the whole social situation doesn't deteriorate. The World Bank doesn't come in until much later; the regional banks don't come in until much later. In fact, the World Bank is an essential part of the package because they are the people who deal with alleviating the social problems. Most of us, I think, feel a lot more strongly about the problems that women and children face than we do about the problems the bankers do.

One of the things we said was that when these kinds of things happen in the future, there has to be coordination, and we want the World Bank and the regional development banks in there at exactly the same time, so that whatever hardship is occurring over here can be mitigated over here.

I have to say that I think we really made major strides ahead at Kananaskis on this issue, and we certainly intend to deal with it at the IMF meetings in the fall.

Mrs. Karen Redman: Thank you.

The Chairman: Thank you, Mrs. Redman.

Mr. Pillitteri.

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

Mr. Martin, a few years ago, when we were still dealing with the deficit, I recall that I had asked you a question. When we were...instead of going down to 2% of GDP on the deficit, I said, “Mr. Minister, can we go down to 1% instead of down to 2%?” You said you would not make any commitments.

The question is about the debt-to-GDP ratio that we established. We are quite high—not as high as some of the countries in the G-7, but surely we have to be taking a look at the debt-to-GDP ratio. Do you have any targets, and would you elaborate on that, if you can, Mr. Minister?

Mr. Paul Martin: Mr. Pillitteri, as you know, the debt-to-GDP ratio is now just below 70:1. It will, in the next couple of years, based on our projections, get down to 62:1. The United States is in the neighbourhood of 40:1. When you look at the volatility of capital markets, I think that one should expect that Canada at a minimum should be no worse than the United States, so we have a ways to go.

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It's important to understand that the country congratulates itself, and with justification, on the elimination of the deficit, but we still have a very large debt, and the debt-to-GDP ratio, as you've just indicated, is way too high. That is one of the reasons that in the discussion we're having about the UI surplus, we have to understand that in fact we're not in a position where all of a sudden we can declare victory all over the place and just go back to normal. We have to deal with that debt-to-GDP ratio, because as high as it is, it renders us vulnerable to the volatility of markets. We have to get ourselves in a position where we are as insulated as possible. That's an important factor to bear in mind when one is discussing, for instance, as we were earlier, the EI surplus.

Mr. Gary Pillitteri: I have another follow-up on a different topic, talking about job creation. I do know, being a businessman, that the interest rates have been such a great factor, being at least 2% lower than those of the United States. Some people have been asking, shouldn't we be raising interest rates in the short term to prop up our dollar? Not that I really like the idea, especially being from the area I live in, bordering the United States. It's so fantastic to see the community benefit. Years ago we used to have cross-border shopping. Now they're coming the other way, and I don't like to see it go. But are there any plans to work towards that end, propping up the dollar?

Mr. Paul Martin: Mr. Pillitteri, I'm sure you understand the difficulty a Minister of Finance has in responding to that kind of question. I could talk for about 15 minutes and not say anything or I could just say I'm going to duck. I think I'll just say I'm going to duck.

The Chairman: Thank you, Mr. Pillitteri.

Ms. Cohen.

Ms. Shaughnessy Cohen (Windsor—St. Clair, Lib.): Minister, one of the nice things about the estimates process is that it's pretty far-ranging in terms of the subject matter we can approach, and I choose not to be partisan today, but I want to talk to you about Windsor, a community you know better than most.

As your department is managing debt and as you're managing our budget generally, can you tell me what impact your policies are going to have on the industries that are important in Windsor, namely tourism, the automotive industry of course, and the production of distilled spirits?

And you know I have another question on that, so you might want to get everybody busy. I think you know where that question's going to go.

Mr. Paul Martin: Yes.

Well, as far as tourism is concerned, number one, as you know, the government has set up and funded the Canadian Tourism Commission, which has really done very good service. In fact, as a result of our funding, it is advertising heavily. I think it is one of the reasons for the dramatic increase in tourism. Obviously a region such as where the minister comes from will benefit greatly, because whether it's Pelee Island or Jack Miner or whatever you want, we're dealing with one of the prettiest parts of the world, so obviously that will benefit.

Also in terms of tourism, as the honourable member knows, because she never lets me forget it, the casino is important. The government has not taken any action that would in any way detract from that, and the honourable member has made sure that is in fact the case.

In terms of the automobile industry, Windsor is going great guns, and that is really due to the productivity of Canadian workers. It's also because of the Canadian health care system, which obviously provides Canada with a major competitive advantage. Anything we can do to support health care is not only good for Canadians in terms of their own lives but is a very important competitive advantage, and the automobile industry does that.

I understand where the member is coming from in terms of distilled spirits. We have perhaps not been able to be as accommodating to her there as we would have wanted to be, but I am sure I will continue to hear from the honourable member on that issue.

Ms. Shaughnessy Cohen: Thank you, Minister.

The Chairman: Ms. Torsney.

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Ms. Paddy Torsney: Building on what Mr. Pillitteri was discussing, one of the concerns about the volatility of this debt is that not a big enough portion of it is fixed. I know we're making some moves with the Canada Investment and Savings Group to increase that share. I think we're looking at something like two thirds.

I have two questions. First, is that the right number? And second, I hear from some of the big Canadian banks that apparently they're not big enough to have the bonds placed through them and that we've been using some U.S. banks. I wonder if that is a concern, or just what about those rates, and for people who don't understand the issue of fixed versus other kinds of debt, why that's important to them.

Mr. Paul Martin: When we came in, the government had a goal of having the fixed-to-floating established at about 63%. We moved that up to 65% when we took office, and we have attained that level.

That's really important, because what it means is that unfortunately interest rates go up and down, and you really want to be protected against fluctuations. When we took office, every 1% rise in interest rates would have cost us $1.8 billion, and today it will cost us $1 billion. So that's $800 million to our advantage, as a result, really, of fixing at 65%.

You've asked, is 65% the right number? I think you can ask 20 economists and you'll get 20 different opinions. Certainly it is within the right range.

On your second question, Jacquie Orange, who is the head of Canada Investment and Savings, will attempt to place as much as she possibly can through Canadian banks, and does so. I think we also recognize that to a certain extent banks have also competitive instruments of their own that are being sold. So in a way you're asking the banks to sell, but we think Canadian debt instruments are so competitive and so attractive that in fact the banks will do a reasonable job selling ours.

The Chairman: Thank you, Ms. Torsney.

Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman.

Mr. Minister, you said a few moments ago that there was no substantive evidence that showed that decreasing taxes, payroll taxes, did not add to job creation. I'm sure you know very well that there's abundant historical evidence that shows that in a low taxation regime there is a buoyant job creation situation. As a matter of fact, when you brought in your 20% reduction in EI premiums, you wasted no time in telling the world just how many new jobs this reduction was going to create. So I want to point out the contradiction of your line of response there.

You did say, however, as well, that while you weren't aware that lowering taxes would create jobs, you did clearly say that in fact raising taxes, in your opinion, was a way to reduce jobs. Given that—and I appreciate that comment and I take you at your word—could you please tell us, then, exactly how many jobs your 73% CPP increase is going to kill in this country? Surely your officials and your actuaries and economists have worked out those numbers, because by your own admission, increasing premiums and taxes does kill jobs.

Mr. Paul Martin: I think it's important that we be clear. What I said was the studies have not demonstrated that reducing payroll taxes creates jobs.

Mr. Dick Harris: But, Mr. Minister, when you announced the 20¢ EI premium—

Mr. Paul Martin: If I could just—

The Chairman: Go ahead, Mr. Minister.

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Mr. Paul Martin: I certainly believe there's no doubt about the low taxation regime's ability to create jobs. In other words, you have a regime where you have lower personal taxes, where you have lower corporate taxes, as an example, compared to high tax regimes. The best example of that is the United Kingdom versus, for instance, France or Germany. In fact, overall it is one of the reasons we want to get our personal taxes down. So it is very important to make the distinction between payroll taxes per se and a low tax regime.

Secondly, the evidence does show and the studies do show that raising payroll taxes will initially hurt job creation. Over about a five-year period it apparently evens out, and what happens, in other words, is the system can absorb it. It does do that; it's a fact.

On the federal-provincial increase in the CPP, again, there were pretty extensive studies done in this whole area. Mr. Harris, there's no doubt if we had not had to increase those CPP premiums...we wished we would not have had to do it. Essentially, we had a $600 billion liability, and as a member of your own party has stated it was either going to take an increase in personal income taxes or an increase in the CPP premiums. There was no alternative.

It's important to understand that the vast majority of the CPP premiums are in fact savings. And the studies have shown that the confidence in the Canada Pension Plan will be there and we're now beginning to see this. In fact, it does help job creation, because people know that just as medicare is there for them, there is a base savings plan there for them too.

Mr. Dick Harris: Mr. Minister, people in your own department have clearly stated that it would require only 68% of the current EI premiums coming in to maintain, sustain and secure the EI fund that would look after any future contingencies. So given that, it has to be clear to you that the other 32% is simply a tax. If it is simply a tax or an overcharge, by any other name—and I'm sure you have to agree with that—why don't you simply recognize that and—

Mr. Paul Martin: Can I just interrupt, please? I just want a point of clarification. I am not disputing what you have said. I missed something you said. Would you just go back to your division again.

Mr. Dick Harris: Your own department has said in their numbers that 68% of the current premiums coming in would sustain the EI fund, it would sustain enough surplus to look after any future contingencies. Given that, the other 32%, by any other name, has to be a tax or an overcharge. So here's an opportunity for you to give Canadian workers and business a real gift by reducing this overcharge or this 32% tax. The question is, why won't you do it?

Mr. Paul Martin: In the spirit of the dialogue I would simply have to go back and say to you that we were able to reduce the EI premiums last year by $1.4 billion. We were able to reduce personal income taxes by $1.4 billion as well.

We only have so much money, and in the end we believe that the Canadian economy and the Canadian workers benefit far more from that $1.4 billion decrease in personal income taxes. It's a choice.

Unfortunately, I wish that we were swimming in money; I wish that we had not inherited one terrible mess. The real issue is we only have so much money and we have to make the choices. We do not believe that it's sound economic policy to put all of our eggs in one basket. We do not in fact believe that the economy will be better and workers will be better if in fact we're able to spread that out a bit.

The Chairman: Mr. Williams.

Mr. John Williams: Last year the Auditor General, who is an independent officer of Parliament, qualified your financial statements. He didn't like the fact that you unilaterally took a charge of $800 million for the Foundation for Innovation.

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By the sounds of it, you have every intention of doing much the same this year with $2.5 billion...to take a charge of $2.5 billion on your financial statements for the year ending March 31, even though the organization that is going to receive the money doesn't exist, just because you've made an announcement.

If the Auditor General stands his ground, and I hope he does, are you going to back down and show a surplus this year, or are you going to take another qualification on your financial statements?

Mr. Paul Martin: Mr. Chairman, I most certainly hope we are able to show a surplus this year. That being said, it is our intention to book the millennium fund in the year that ended March 31st. Essentially, the decision has been taken; the money has been allocated. Prior to the books being closed for the year, which is a very important distinction, the structure will be in place.

In a different committee, Mr. Williams, you saw the letters I'm about to refer to.

If you would like us to, Mr. Chairman, we could table two letters with this committee that demonstrate two things. The first is a letter from Ernst & Young, which essentially says that in the private sector this kind of a booking would in all likelihood be made, because when you have incurred liability, or when there is a reasonable anticipation that the liability will be incurred, it is sound accounting practice to book it.

I would be prepared to table the second letter. Do you have the letters now?

The Chairman: Yes.

Mr. Paul Martin: Okay, then the second letter, which I don't have to table and which this committee has, is a letter from Coopers & Lybrand. The Coopers & Lybrand letter says that the difference of opinion between the Auditor General and ourselves—and there is a difference of opinion between the Auditor General and ourselves on this issue—is in a grey area. It is a legitimate difference of opinion dealing with public sector accounting principles. The final decision on whether it should be booked should be up to the government, it should be up to management.

Mr. Chairman or Mr. Williams, what we're dealing with here is a difference of opinion between accountants.

Mr. John Williams: Mr. Minister, you referred to another committee, and let me refer to another department, the Department of National Revenue. It would never allow a business to make this type of deduction, just because it makes a unilateral announcement that it intends to spend money to reduce its profits and its tax liability.

The Minister of National Revenue would never allow that. Your department issues the directives for the Income Tax Act, so why are you having a double standard saying you can't do it for taxation purposes, but you want to be able to do it for management purposes just to make your financial statements look the way you want them to look?

Mr. Paul Martin: Mr. Williams, I believe you are an accountant. You know full well, then, as an accountant that bookkeeping for tax purposes and bookkeeping for accounting purposes are often quite different. The best example I can simply give you is accelerated depreciation, which on a tax basis will be one way and on a bookkeeping basis will be done another way.

We are not talking about bookkeeping for tax purposes; we are talking about bookkeeping according to generally accepted accounting principles. And on that basis, Mr. Williams, I believe that what the government has done is perfectly accceptable. I think both the Ernst & Young and the Coopers & Lybrand letters confirm that.

The Chairman: Thank you, Mr. Williams.

Mr. Ritz.

Mr. Gerry Ritz: Thank you, Mr. Chairman.

Mr. Minister, a short time ago one of the colleagues opposite mentioned the Mintz report, and your statement basically discounted the Mintz report in that you thought personal income tax was a priority over corporate income tax. Part of the findings of the Mintz report is that most of the corporations are privately helped...one person, non-growth corporations, that type of thing. So would a corporate income tax deduction at that level not just necessarily correlate into a personal tax deduction? It's one and the same thing, again, under different bookkeeping practices.

Mr. Paul Martin: Yes, I think that's right, where you're dealing essentially with one- or two-person companies. Is that what you're talking about?

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Mr. Gerry Ritz: Yes, singly held, one or two people, small incomes...it's basically the same thing. It's done for tax purposes, but it's basically a personally held private corporation.

Mr. Paul Martin: One point made in the Mintz report was that the small business deduction should be really made available to those small businesses that employ people, as opposed to sole ownerships as you've just described. Is that the point you're making?

Mr. Gerry Ritz: I'm talking about a taxation deduction; he talked about getting back to 33% and so on. If you do that on these small privately held corporations, you're basically giving it to the private sector, you're basically giving it to personal income tax, because that's really their only source of income, their privately held company.

Mr. Paul Martin: I'm not disputing your point; I'm just trying to understand where you're going with it.

Mr. Gerry Ritz: You're saying that you're going to give a preference to personal tax cuts rather than to corporate tax cuts, and I'm saying they're one and the same. One is a single-person-owned corporation. So these people are being held back, in your mind, because it's a corporate structure.

Mr. Paul Martin: Yes, I'm not disputing it. What I think Mintz says is that our small business tax system is now very favourable. He would want to bias the small business tax preferences in favour of those small businesses that in fact employ people.

Mr. Gerry Ritz: He also talked about expanding the small business tax deduction that you just mentioned. Are you entertaining this idea? I know we've put many submissions to this committee to that extent. Most people would like to see it doubled; it's been mired in that $200,000 target forever.

Mr. Paul Martin: I was at a meeting of the chamber of commerce where in fact there was quite a debate on whether they would prefer to see reduced EI premiums or in fact an increase in the small business deduction. There was no consensus around the table, and these were all chamber of commerce people. There was a great deal of difference of opinion.

We're certainly prepared to look at suggestions that will in fact lead to job creation. When I was talking about the preference given to personal taxes versus corporate taxes, I was talking in a general way. It does not mean that if there was a very good idea that would lead to greater job creation we wouldn't look at it.

The Chairman: Thank you, Mr. Ritz.

[Translation]

Mr. Loubier.

Mr. Yvan Loubier: In table 1, on page 2-5 of part III, there's a reference to a reduction in cash payments to the provinces on the order of 430 million dollars again this year.

Given that the government's last financial review stated, for the last fiscal year that ended March 31, 199...

Mr. Paul Martin: Just a minute. Where is that? You say 430 million dollars?

Mr. Yvan Loubier: It's where you talk about expenditure forecasts for 1997-98 and anticipated expenditures for 1998-99, namely 19.451 billion dollars.

Mr. Paul Martin: On what page?

Mr. Yvan Loubier: On table 1, on page 2-5. It's the expenditure plan.

Mr. Paul Martin: Yes.

Mr. Yvan Loubier: It refers to a reduction in transfer payments of 430 million dollars for the current fiscal year, 1998-99. The transfers would go from 19.880 billion dollars to 19,451 billion dollars.

The government's last financial review, which is issued by your department, referred to a surplus for the previous fiscal year ending March 31, 1997, a surplus in the neighbourhood of 4.2 billion dollars.

If you're already ending up with a surplus in 1997-98 and an even greater surplus which will certainly go beyond 4.2 billion dollars in 1998-99, why are you still cutting back the transfers to the provinces whereas at the same time you talk about compassion and the importance of education?

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Mr. Paul Martin: There is no doubt that we must continue the reductions that we implemented throughout our programs, be it in transfers to the provinces or our own expenditures. Having said that, there are certainly cases where we have reversed the trend. Moreover, on the issue of transfer payments to the provinces, as you know, instead of reducing the transfers to 11 billion dollars in the budget, we added 1.5 billion dollars to set a new floor of 12.5 billion dollars, exactly for the reason you have just given me.

Mr. Yvan Loubier: You are admitting something which you have never admitted to date. As regards the cuts which you projected in 1995 when tabling your budget, cuts which were to be implemented every year until 2003, you will continue to make them even if the cumulative surplus over the next three years were to come to 24 or 25 billion dollars. You would continue those cuts to social programs and transfer payments used to fund higher education, health and social assistance. We were right to maintain that by the year 2003 you will have taken 32 or 33 billion dollars away from the provinces. You've just admitted that you are continuing your cuts until the year 2003 despite the country's sound fiscal position.

Mr. Paul Martin: No. I just said that, unless a decision to the contrary is taken, we will certainly continue the policy decisions made in previous budgets. However, in the case of transfers to the provinces for example, a decision has already been reversed and the cuts were not continued with. First, there will be no further cuts in transfers to the provinces. A ceiling of 12.5 billion dollars has been established, which means an increase of 1.5 billion dollars.

I therefore clearly stated that, if we are able to improve the situation for the provinces or enhance other programs, we will certainly continue to do so. The proof is there: we've just done so in the case of transfers to the provinces.

Mr. Yvan Loubier: Mr. Minister, in the same table there are projections for the Public Debt Program. The public debt has begun to drop. Last year, 10 billion dollars of public debt money was repaid. Also, interest rates for the next few months and the next years will be quite stable. If there's one thing which has been stable for a year and half or two years, it is certainly interest rates. In this context, despite the fact that the debt will be reduced over the next few years and that interest rates are relatively low and stable, how can you project increases of 4.8 per cent and 3.5 per cent in the cost of servicing the debt over the next two years, whereas one would normally expect those figures to drop rather than increase by the year 2000? Is this another one of your special projections like the one you made for the surplus, or are you just playing with figures as you are doing with the Millennium Scholarship Funds? What does that mean? Is this a surplus trap?

Mr. Paul Martin: Mr. Loubier, as you've been a member of this committee for a very long time you should certainly know the answer to that question. We ourselves do not make projections. As regards projections for growth or interest rates, we follow the consensus among Canadian private sector economists.

It is quite possible that interest rates may be stable or drop, but the majority of economists in Canada project that interest rates will follow the pattern we have here. We said from the outset that we would be cautious and maintain a reserve. As projections indicate a future increase of between 80 and 100 base points, we have maintained a reserve on the basis of that consensus. Therefore, it's not we who set the pattern for interest rates; it's based on a consensus of private sector economists.

Mr. Yvan Loubier: Mr. Minister, what I have seen in projections for the next few months and years indicates stable or lower interest rates.

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We are therefore in a situation where interest rates remain stable or may drop, and also where there are enormous surpluses. We will not discuss again the way the surpluses are achieved, which we are against, but you are producing enormous surpluses every year and such surpluses should be used in part to repay the debt, but the cost of servicing that debt will increase next year by 4.8 per cent over this year's figure, and by 3.5 per cent the year after that.

I would be grateful if you would explain to me why such a projection was made. The reason I'm asking this is that you told me that there had to be a cushion, that caution was needed. However, that does not allow you to exaggerate projections on servicing the debt. If that's what you've done, as you have in the past for certain other items, well that is no longer acceptable.

Mr. Paul Martin: Unfortunately, Mr. Loubier, you are not right. For example, for three-month government bonds, private sector projections in 1997 were 3.2 per cent. The consensus from the private sector indicates to us that in 1998 the figure will increase to 4.6 per cent, and in 1999 to 4.6 per cent. Those are not my figures, but based on the consensus of the private sector. If you look at the budget, you will find them in Table 2-3.

Mr. Yvan Loubier: Mr. Minister, you will agree that this is difficult to accept when you are in such a situation. The debt is decreasing, interest rates are stable, and since your budget was tabled projections are being revised and we now find that the cost of servicing the debt is increasing. You have to wonder why this is happening.

Mr. Paul Martin: That is not the case, Mr. Loubier. As I explained to you, the private sector consensus indicates that interest rates will not be stable. It is the economists who are saying that 3-month bonds are going to increase.

If you don't agree with their projections, that is certainly your right, you should make your point to the private sector economists, not to us. One thing is clear. I didn't want to put the government in the position it found itself in before, when it was making projections with varying degrees of optimism or pessimism. I stated that, as a basic principle, we would accept the consensus of the private sector, and that's what we've done.

Mr. Yvan Loubier: Yes, Mr. Minister, but the effect of that is that no one believes your projections any longer. Look at the projections for the surplus. Alain Dubuc, who is not yet a member of the Bloc Québécois—and we will deal with any issue of partisan politics before you accuse me of being politically biased—criticized you the very day after the budget because he considered that the projections made no sense.

The financial statements of the government are no longer reliable. It's a game of smoke and mirrors, as was the case with the Millennium Scholarship Fund, by charging under the 1997-98 fiscal year the 2.5 billion dollars which will be spent only in the year 2000. You did that with the harmonization of the GST and provincial taxes in the case of the Maritimes, for an amount of 800 million dollars, and you did the same thing with the innovation fund. At some point in time, the figures lose their credibility.

Furthermore, the Auditor General of Canada told the committee that until very recently Canada's international reputation for its financial statements was good, but at the present time, because of such measures and statements talking about caution while making projections that make little sense, you are taking away a credibility that the federal government's financial statements might have. You will have to correct that situation, as you know full well.

Mr. Paul Martin: The caution we have shown is exactly the same as at the beginning. Moreover, if we have been cautious in our budgets, it was on the recommendation of this committee.

Mr. Loubier, it was you who recommended that we be cautious with our figures, and that's what we've done. You are contradicting what you said yourself.

Mr. Yvan Loubier: There is a difference between caution and...

Mr. Paul Martin: May I continue, Mr. Chairman? I am very happy that we are exceeding our goals. I'm very happy about that. The province of Ontario has done the same thing. The other provinces have achieved their goals earlier than projected. The United States revised their position upwards four times last year. Therefore, if we are able to continue to exceed our goals, we shall do so.

[English]

The Chairman: Thank you, Minister.

Ms. McDonough.

Ms. Alexa McDonough: Thank you very much. I have four quick questions. I know time is short, so let me see how quickly I can put them forward.

The finance minister challenged me to demonstrate that Canada's social democrats are prepared to be a modern party, providing leadership, as is the Blair government, in harnessing the challenges of the globalized economy.

I have a challenge I'm going to put directly to the minister. I'm sure he'll be aware that not just the U.K., but in fact all of the European Parliament, which is dominated by social democratic governments these days, has unapologetically declared that their twin priorities in public policy for the forthcoming period is jobs and the very related question of income security.

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I read through the statement this morning from the minister and see no such indication, yet the minister said that really the Liberal government in Canada is more like the social democratic government of the U.K. I'd like to challenge the minister to respond directly to whether he's prepared to make jobs and income security the number one priority.

Secondly, with respect to the issue of growing inequality, the minister said this is a serious problem. He doesn't have to be very progressive to recognize that even the World Bank has said that growing inequalities will slow growth, in addition to creating more and more poverty. I want to know what the minister is planning to do about this problem.

If you recognize that the top 100 CEOs in 1996 experienced an income increase of 56%, while the average worker in Canada, during the same period, after 10 straight years of effective decline in real income, experienced an increase of 2%, what's the government prepared to do to address this question?

Thirdly, I listened with interest to the member from Windsor raising concerns about the economy of Windsor, and when she said she wanted to know what the federal government's policies were going to do to the economy of Windsor, I thought she was going to ask the minister if he could give the assurance that he won't be eliminating tariffs on auto imports to Canada. I'd like to hear the minister's response on that question.

Mr. Paul Martin: I seem to have a bit of a problem, and maybe you might help me out here.

I was taking notes as fast as I could. You said there were four questions. I have only three. What is the second question?

Ms. Alexa McDonough: I actually considered I might get cut off. The fourth, quickly—

Mr. Paul Martin: Oh, you didn't ask it. That's why I don't have it.

Ms. Alexa McDonough: With respect to EI surplus, I notice that your colleagues were doing the same thing you did earlier this morning and saying, well, what can you do; it's just an outcome of new accounting practices.

Would the minister not agree that, at least in major part, the reason for the UI surplus is because there has been a massive reduction of benefits, a severe set of restrictions on eligibility introduced?

Related to that, it reminded us that the point of the new accounting practices is for the UI fund to balance out over time, which leads me to my final and fourth question, which is that you must be planning for one hell of a big recession if you think we need to continue building the fund.

Mr. Paul Martin: Could you just help me with the second question?

Ms. Alexa McDonough: The second question is what government policies are going to be put in place to deal with the growing inequalities, starting with the obscene executive compensation packages, on the one hand, that have to be compared, if you're concerned about inequality, with ten straight years of income decline for the average worker.

Mr. Paul Martin: Perhaps I can deal with them in reverse order.

There are many reasons for the EI reserve. Certainly the most important reason is in fact the increased economic activity, the stronger economy, the fact that far more Canadians are working. There are other reasons, as well, but by far the major reason is in fact the much better job growth we are now enjoying.

Ms. Alexa McDonough:

[Editor's Note: Inaudible]...punish the unemployed.

Mr. Paul Martin: Hold it. Let me answer your questions.

On the issue of the auto tariff, as the member knows, Mr. Manley has said that he will be making the announcement on that in due course, and I would certainly leave that to him.

On the question of inequality, again, as I have mentioned earlier, it is a major concern to us. Certainly the best thing we can do in terms of inequality is to make sure that when we proceed to income tax reductions, we begin with those at the lowest end of the income scale, which is what we did—the elimination of 400,000 from the tax rolls, and the elimination of the 3% for those up to $50,000.

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Then the second thing is to make sure our social programs are targeted to those who need it most, and of course the child tax benefit is a classic example of that.

All of the studies have demonstrated that in fact one of the reasons we do not have the inequality in Canada that they have in the United States is that our social programs have really alleviated, and so there's a great difference between pre-tax and post-tax inequalities.

On your first question, I would say to you two things. First of all, you asked why we did not deal with income security and jobs in the opening statement. If you look at the budget and if you look at the fall update of last year, you will see a very extensive discussion about how the government intends to pursue jobs and growth and why that is a priority of the government.

Essentially the purpose of today's meeting was to describe and talk about the estimates, although I was under no illusion that that's what we were going to in fact do after I began, but that is the basic purpose. So if you're asking “Where do you talk about jobs?”, the answer is that the place to do that of course is in the budget and in the fall update.

Having said that, the member is not accurate when she says we did not deal... And don't forget that what I gave was a very quick overview; I did not go into any depth on anything, because I think what people wanted was to have a period of questions. What the member perhaps missed was that in the overview I did state that the government's fundamental objective was the question of jobs.

She may have missed it, because I said it in French. Perhaps I could just translate very quickly, Mr. Chairman, my remarks from about an hour and a half ago. I said that the fundamental objective the department has is to help the government set out and put in place its policies and its economic programs, its social programs, and its fiscal programs that have as their prime objective the creation of jobs and growth.

The Chairman: Thank you, Minister.

Thank you, Ms. McDonough.

Mr. Brison, you have a couple of questions?

Mr. Scott Brison: Yes, I have two general things.

First of all, since 1993 there's been a decrease in personal disposable income. Last year there was an unprecedented rate of personal bankruptcies in Canada. We have a brain-drain issue in Canada, where we're losing a significant number of our best and brightest people to the U.S. Why are they leaving if we are doing so well in Canada? If conditions are so rosy in Canada, why are we losing some of our brightest citizens? Could it have something to do with the fact that our taxes are egregiously high in Canada and that these taxes are creating a direct impediment to personal wealth and prosperity in this country?

On the corporate tax side, the Mintz report said there has been a tremendous amount of activity in terms of Canadian companies, for instance, registering offshore to avoid paying Canadian taxes, and I recognize that you have some understanding of that issue. Beyond that, not all Canadians are in a position to register companies offshore to avoid paying Canadian taxes, and individuals are now leaving to avoid paying Canadian taxes.

You refer to the health care system and you refer to why they should stay. The fact is that when we talk about the social contract that exists between the Canadian government and the people of Canada, that contract was broken over the past four years with cuts to CHST transfers, which resulted in the devastation of our health care system and of our education system on a primary and secondary level in a much more profound way than a millennium scholarship fund, which will benefit 7% of the students seeking higher education in two years, can ever repair.

So I would suggest to you that the quality of life you refer to that exists in Canada and that should be keeping Canadians here can be purchased in the U.S., and the net result is that Canadians are voting with their feet. That's the one question on the brain-drain issue.

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The second question is on the bank mergers issue, and I recognize these questions are not necessarily tied to the direct topic you were brought here for today. Perhaps if you were to spend more time in the stand of non-partisanship to discuss issues in a non-partisan, productive, and constructive way, we would probably not be as compelled to discuss these other broader issues.

The big banks are not necessarily going to be better banks. In Australia, when a task force similar to the MacKay task force reported and recommended that the mergers be allowed to proceed, the government effectively said no.

I would suggest that the pressure from the banks to merge is more motivated by stock options at the senior executive level than by what is really good for Canadians.

If the MacKay task force says yes, you're going to have an opportunity to say no. Will you stand up for Main Street when you are provided with that opportunity and take on Bay Street? There is a lot of skepticism about what you will actually do. The buck will stop with you ultimately.

Mr. Paul Martin: Mr. Brison, on the issue of disposable income, essentially what the numbers show is that there has been a decline in family disposable income since the end of the 1980s, the beginning of the 1990s. It also shows that this year the reduction has been arrested. In fact, the anticipation now is that there will be an increase in disposable income.

The fact it has been arrested and is now going to increase is very good news. That we have a way to go before we make up for the reduction that's occurred over the course of the last decade is obviously of very great concern to us.

If I relate it to the issue you raised—is it possible that our taxes on a comparative basis are too high?—this is a point that has been made by a number of people. The main reason that we in this debate over the EI surplus versus personal income taxes want to get personal income taxes down is that we want to make sure we get more money back into the hands of Canadian families so as to accelerate that return to higher and higher disposable incomes within those families.

You raised the issue of the brain drain. I think you know that is a debatable issue. There are strong views on either side. There are those who say that the brain drain is there and it's happening. There are other people who will say if there is a brain drain, it's occurring because there are opportunities in specialized fields, or, as the C.D. Howe Institute has said, the brain drain is not as major an issue as others allege.

All I'm saying to you is that the brain drain itself is an issue that is worth discussing, but as far as we are concerned, the reason we want to get taxes down is to get more money into the hands of Canadian families.

On the issue of the cuts to CHST, I think it's important to understand that since we took office those reductions were less than 3% of provincial revenues. The provinces were given two years' advance notice. In most cases those reductions were less than what the provinces did to their municipalities without any notice at all. They were absorbable.

You also understand that those reductions in transfers to the provinces began long before we took office. They were part and parcel of the previous government's activities. To be quite honest, they may have been even part and parcel of the government before that. I'm not trying to be partisan here. I'm just saying those reductions in transfers began many years ago.

On the issue of the bank mergers, the answer to your question is—I'm very clear on this—this is a government decision. This is not a decision that is going to be made by any financial institution. It is going to be made here in this building by the Government of Canada. You can rest assured of that.

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I am a little, I must say, quizzical at the nature of your question, because if I remember the original comments that were made by the leader of the time, I was given the impression that he was much more open to these bank mergers than your question would seem to indicate.

The Chairman: Thank you, Mr. Brison.

Before we conclude, Minister, I'd like to ask you a question about the future financial services sector. As this committee prepares for the study, we're expecting profound changes in the financial industries over the next few years. I think our approach will be to ensure that Canadians have access to a world-class financial services sector and to provide basically the best services to consumer as well as consumer protection. On the other hand, there is a recognition by members of this committee that we are talking about a sector that employs over 500,000 people and this sector also requires opportunities here at home and abroad.

As Minister of Finance, what do you think should be the characteristics of a world-class financial services sector here in this country?

Mr. Paul Martin: First, one of the things we're going to have to ask the banks to do is to give us a definition of what they talk about as international. Are they in fact talking about being a strong North American bank—in other words, taking on the major American banks within the American market—or are they talking about a global reach, extending to the markets of Asia and Europe and Latin America? Certainly based on what I have seen and read, there is a difference of opinion among the banks themselves on that issue.

I think the second thing, which is very clear, is that an international bank must be able to handle the vast multitude of new banking services that are being opened. Goldman Sachs and Merrill Lynch are examples of what global reach means to a banking institution as opposed to simply lending money to a sovereign state many thousands of miles away.

Quite clearly the ability to handle the huge costs of technology, the vast multitudes of services that Canadian businesses require to go abroad and to export, and the investment needs of Canadians businesses that have invested abroad is part and parcel of that answer.

I have to say, however, Mr. Chairman, that while you're quite right to point out that it's important to have a strong and vibrant financial sector in this country, which means it has to be able to deal on the basis you have just described, what is every bit as important is to ensure that Canadian consumers and Canadian small and medium-sized business, both in major centres and in rural Canada, are also served. Essentially a banking system, for example, that was globally competitive but did not adequately serve consumers in rural parts of Canada or in major cities, consumers who had small needs as opposed to big needs, would not be acceptable to us. What we're looking for very clearly is a banking system that is modern and evolved but serves the needs of today's Canadians.

The Chairman: Mr. Minister, perhaps you could help us here for a second.

Whenever I see the word “future”, I think of a time line. The banking needs and financial service needs I have as an individual are quite different, or I'm sure would be quite different, from those of my children. Should this committee be looking at this issue as the immediate future, or should be we thinking generationally?

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Mr. Paul Martin: There is no doubt, Mr. Chairman, that the committee has to look at both. You have to look ahead.

I hope the MacKay report will be looking ahead. It will provide you with a very good basis, because the evolution is occurring so quickly that if you don't look ahead, you're going to suddenly find yourself behind the eight ball.

There's no doubt about it, but having said it, if looking ahead—let me give you the best example. There's no doubt that changing technology is going to mean a huge change in the way in which financial institutions are going to act. There's no doubt that global competition, which will be coming more and more into this country, is going to change the way that people are going to act—and you've got to deal with it.

At the same time, there are generations of Canadians who are not going to use the newer technology and there are people in rural parts of the country who are not going to see these changes. If what we do, Mr. Chairman, is concentrated only on the future, to the extent that we abandon the present, we will have failed as well. That's the balance that I know this committee is capable of bringing to these debates.

The Chairman: I know we'd like to express to you our warmest and sincerest gratitude for your appearance here. It has certainly answered many questions, and I know the members of the committee will find that useful.

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

The Chairman: Thank you.

The meeting is adjourned.