SUPPLEMENTARY REPORT OF THE OFFICIAL OPPOSITION

For the Official Opposition, this debate is not just about improving productivity for productivity's sake. It's about creating wealth in our economy. It's about raising the standard of living for all Canadians. It's about replacing those public policies that impede wealth creation with those that foster it. And since Canada does not exist in isolation in the world economy, these goals need to be measured relative to our political and economic partners, such as the United States, the G7 countries and the OECD, along with our historical performance and our present potential.

Canada's recent productivity record has been dismal. Productivity growth (as measured as GDP/hours worked) was very weak over the 1990's relative to previous decades. More recently, productivity growth was very weak in 1998 and is forecast to be weak again this year.

And in terms of real productivity levels, our productivity (GDP/hour worked), as well as our standard of living (GDP/capita) are both about 20% lower than the Americans', with the gap widening.

However, one reason our standard of living shrank during the 1990's was because our employment ratio as well as our rate of labor force participation fell in Canada while it increased in the U.S. So, while a long-term direct link does exist between productivity levels and shrinking standards of living, we need to recognise that other factors may also come into play. If we limit this debate to a narrow definition of "productivity", we risk ignoring many of the real economic problems before us, all of which have contributed to lowering our standard of living.

A Budget focussed on productivity alone ignores many other economic problems¯The government has signalled their desire to enter into a "productivity covenant" and make the issue of productivity a major theme of their next budget. We are concerned that this is more a reaction to the latest economic fad than a true commitment to fixing the problems related to our shrinking standard of living.

Some witnesses also indicated that using productivity alone as the criteria for evaluating Budget proposals would be too narrow. For example, tax reductions stimulate GDP as well as employment. In such case tax cuts can be expected to increase economic growth and improve our standard of living. Therefore tax reductions are recommended by many parties. However whether a tax reduction can be expected to increase productivity (GDP/hours worked) depends on the specific characteristics of the tax cut.

Wealth creation is the best prescription for improving our standard of living ¯ With the understanding that "standard of living" is defined by economists to be GDP/capita, we believe this is a much more appropriate focus for our next Budget. Technically, GDP/capita is a measure of economic growth or wealth creation.

The Official Opposition recommends that the government move beyond the narrower definition of productivity to a broader goal of economic growth or wealth creation. By changing the focus from income distribution to wealth creation, we will shift the policy debate to "growing the pie rather than sharing the pie." More importantly, this larger tent will allow us to focus on all the policy changes needed to actually raise our standard of living in Canada.

Building a Framework for Wealth Creation ¯ Once we accept that wealth creation is the most effective vehicle for improving our overall standard of living, we need to look at ways of implementing this at the policy level.

As a start, we believe the government needs to develop core principles as a framework towards this end. Only with such a framework will they be able to impose discipline on their policy decisions and avoid repeating the previous hodgepodge of counter-productive policies that limited economic growth and contributed to today's shrinking standard of living.

Our lack of a principled framework explains why today we have got "industrial development strategies" that encourage corporate welfare and dependency. It explains why, on one hand, we finance government R & D, but still maintain a tax system that discourages R & D in the private sector. It explains why we spend billions to educate high technology and medical professionals, only to watch them leave our borders because our income taxes are too high. And it explains why, over the past twenty years, we've fallen further and further behind our American neighbours in virtually every meaningful economic indicator¯ tax levels, income levels, job creation, unemployment rates, research and development, capital formation, etc.

We believe this wealth creation framework needs to include the following two principles:

1. A dollar in the hands of a taxpayer is more effective than a dollar in the hands of government

Why? Because people have many different wants and needs and one size government programs don't fit all. In a complex economy the most qualified people to make decisions about scarce resources are the private sector and entrepreneurs.

Therefore, government surpluses should be regarded as overpayments from the taxpayers;

2. Incentives Matter

If we want companies and individuals to invest in:

• research and development,
• innovation technology,
• skill development, and
• capital improvements to businesses;

we have to offer them an incentive for doing so. Our current high tax system acts as a massive disincentive for all of these wealth creation activities.

3. A small, limited and focussed government creates the best environment for wealth creation

• Governments that grow beyond an optimal size "crowd out" private investment and impede wealth creation;
• Limiting the powers of the federal government to intervene in other jurisdictions and the private economy strengthens national unity and provides a more stable environment for investment.
• Government should focus it's limited resources on doing a few things and doing them well, such as preserving the rule of law, ensuring a sound banking system, stable monetary policy, and enlightened investment in healthcare and education.

In conclusion, the Official Opposition agrees with many of the recommendations contained in the Finance Committee's main report. We do, however, remain skeptical that the government will adopt them at a time when government is becoming larger and more interventionist, taxes continue to mount and when previous government¯sponsored studies of the need for tax reform have gone unheeded.