CHAIRMAN'S FOREWORD

Since 1993, when the federal government inherited a $42 billion deficit, the Canadian economy has achieved a remarkable comeback. The deficit has been eliminated and the debt is being paid down, while unemployment has fallen from more than 11% to 8.1%. Now that the recovery is well underway, it is time to consider some of the longer-term challenges facing Canadians.

As we reflect upon the challenges and opportunities of the new millennium, it is clear that innovative and modern policies will be needed to meet the needs of the future.

Canadians have worked hard and sacrificed much in the past decade. In doing so they have helped to set the stage for a sound and more prosperous economy. We believe that priority should be given to individual Canadians, in reaping the benefits of that prosperity. In other words, we believe that Canadians deserve a higher standard of living and deserve the prospects of an ever increasing standard of living.

Economic growth, fuelled by productivity increases, is the key to that higher standard of living. This is not something that can be achieved overnight. It requires policies that are farsighted, and that will produce long-lasting benefits far into the future.

Thus, the Committee has undertaken this study to understand the key elements of productivity enhancement and to enable us to make recommendations in our pre-budget report next fall that will position the Government of Canada to facilitate productivity growth.

There is much about productivity that we do not know. Our measurement of this phenomenon is less than perfect. Even the experts disagreed on some fundamental issues. Nevertheless, it is quite apparent to the Committee and to Canadians as a whole that our standard of living could be higher and our productivity could be better.

Indeed, not only could our standard of living be higher, it should be higher, and it must be higher.

We must build on those factors that made Canada a prosperous nation in the past, by developing those that will make us a prosperous nation in the future. Our wealth will be found in our minds. It will reside in our businesses, our schools and laboratories. Our wealth will rest with individual Canadians. We will have to create these sources of wealth, attract them, and keep them in Canada.

If Canada is to remain a healthy and vibrant society it needs a sound and prosperous economy, one that benefits all Canadians. Economic growth and a high standard of living will in many respects be the solution to a variety of challenges now facing Canadians. It will lead to better opportunities for families with children. It is a solution to the increasing demands for health care that will come from an ageing population. It will allow the disposable income of families to increase. And it will lead to less unemployment and greater income security.

Productivity growth that promotes a higher standard of living does not arrive overnight. The results will be seen only after some time. Thus it will require that the government look far into the future, and resist the temptation to seek quick fixes.

Our greatest rewards come from investments for the future. We must have patience. However, those rewards can be astounding. The results of enhanced productivity are long-lasting and cumulative. A small increase in the long-run rate of productivity may not have a large impact, initially; but, maintained year after year, its long-run effects can be substantial. This is why productivity enhancement requires a longer-term focus on the part of government; looking only at short-term consequences will invariably mask its true benefits.

Productivity is essentially about the manner in which the economy operates. As a result, it is primarily determined by the direct actions of the private sector. Nevertheless, productivity will be affected by the policies of government because it sets the framework within which the private sector operates. Our goal, as a committee, is to discover the appropriate framework that will have a positive impact on increasing productivity.

In undertaking this study, we learned that the topic is subject to a great deal of uncertainty. The measures of productivity tend to be imprecise and for a variety of reasons, fail to give an accurate picture. The relationship between productivity growth and other economic variables is also not known with certainty.

Nevertheless, we do know that our productivity performance in the last two decades has deteriorated. We do know that there are certain policy measures that clearly favour productivity growth. Waiting for perfect certainty, and perfect measures, would only serve to maintain a rate of economic growth that clearly can be improved upon.

The most important element of this framework is the monetary and fiscal environment facing the private sector. Today that environment is dramatically different than it was a decade ago. We have low inflation, low interest rates, and declining government debt. Indeed, we have attained the same policy environment that existed when we experienced our "golden years" of economic growth. While more is needed, the federal government has clearly succeeded with this necessary and important first step.

The other important element of this framework is the manner in which product, capital and labour markets work. Competition forces firms to be efficient and dynamic. It helps to enable economic resources to be channelled to their most productive uses.

I referred earlier to the longer-term focus that is needed if government were to pursue a policy of productivity enhancement. This longer-term focus is the result of the nature of productivity. It is like an investment. As a result, initiatives must be undertaken today so as to receive benefits tomorrow.

These investments are wide-ranging. They include investments in machinery and equipment, R&D and new technologies. They also entail investments in public infrastructure, human and social capital. Investments also need to be made in new ways of organizing capital and labour in business firms.

How do we encourage such investments? Canadians, whether individuals or firms, need to have confidence that they will reap sufficient benefits from those investments. We must ensure that success is rewarded. They must have confidence in the prospects of the economy and they must have a feeling that the tax system enables them to earn an adequate rate of return on their investments. Thus an efficient tax system is an important element influencing productivity.

Canadians must also have the ability to react to economic opportunities. They need an economy that is vibrant and flexible, comprising individuals who have the skills needed for the new economy. Education and life-long learning are the key ingredients in creating the essential human capital that will be the basis of our well being.

An economy is also made vibrant and flexible when it is subject to strong competition and is free of unnecessary regulatory burden. Free trade, internationally and within Canada, is vital to promoting competition. A regulatory environment that subjects the economy to regulations only where and when needed is also vital to the creation of a vibrant and flexible economy.

The Committee's concern with productivity is not a new one. We started to deal with the matter in a serious way in last year's Pre-Budget Consultations Report. Moreover, our report on the Task Force on the Future of the Financial Services Sector in Canada was very much a report concerned with enhancing productivity in that sector.

Thus productivity is not a subject that stands apart from the other priorities of the government. Instead, it is a subject that complements other policies of government. Enhanced productivity will improve our standard of living and provide Canadians and their governments with the resources needed to satisfy their wants and meet their policy objectives. This is precisely the way in which we view the subject.

As Chairman of the House of Commons Standing Committee on Finance, I would like to take this opportunity to thank the Members of the Committee for participating in this study. At times the subject matter seemed almost unfathomable. But productivity is a vital topic, one that is at the heart of our future well-being, and the well-being of our children. This study could not have been a success without their dedication and persistence.

I would also like to thank the witnesses who helped to make understandable this complex subject matter.

Finally I would like to thank the staff. This study and Report could not have been undertaken without their contribution. In particular, I would like to thank Pat Steenberg, the Clerk of the Committee. She was ably assisted by Lise Tierney and Denyse Croteau. My Special Assistant Jennifer Demers deserves mention for her tireless efforts. Also, the research staff deserve mention. These are, from the Parliamentary Research Branch, Julie Cusson and Rose Pelletier. Special thanks go to Marion G. Wrobel for his devotion, dedication and commitment to the work of the Finance Committee. His contribution is greatly appreciated.

CARPE DIEM

Maurizio Bevilacqua