INDU Committee Meeting

STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 30, 1999

• 0905

[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I call the meeting to order. Pursuant to the committee's mandate under Standing Order 108(2), our order of the day is a study concerning productivity, innovation, and competitiveness.

I'm very pleased to welcome here today, from the Canadian Chamber of Commerce, Mr. Michael Murphy, the senior vice-president of policy, and Mr. Peter Tzanetakis, director of policy; from WEFA Canada Inc., Mr. Dale Orr, economist; and Mr. David Slater, the former chairman of the Economic Council of Canada.

My proposal would be that unless you come to a different arrangement, your opening statements would be as listed in front of you. So I'll turn it over to the Chamber of Commerce.

Mr. Michael Murphy (Senior Vice-President, Policy, Canadian Chamber of Commerce): Thank you, Madam Chair. I am delighted to be here this morning on behalf of the chamber with my colleague. It's an important subject. The Canadian Chamber of Commerce obviously welcomes the opportunity to express its views on this important issue.

As you mentioned, my name is Mike Murphy, and I am the senior vice-president of policy at the Canadian Chamber of Commerce. My colleague Peter Tzanetakis is the chamber's directory of policy and our staff economist.

[Translation]

The Canadian Chamber of Commerce is one of Canada's most important and representative business associations. Our members represent a complete range of businesses in Canada, which allows the Chamber to be a spokesperson for businesses from all sectors.

[English]

The chamber strongly believes that enhancing Canada's productivity is one of the fundamental drivers of growth, job creation, and prosperity, and as such must be fully understood. Government policy plays a vital role in enhancing the economic environment that is conducive to strong productivity growth, sustained GDP growth, enhanced international competitiveness, and therefore a higher standard of living for all Canadians.

[Translation]

It is well understood that improved productivity is the key to sustained increases in our standard of living. It is for this reason that the Canadian Chamber fully supports the government's recent emphasis on productivity. Our standard of living (GDP/population) is determined by productivity and labour market factors. Labour market factors can influence our standard of living significantly over the medium term. Indeed over the 1990's, the main reason why our standard of living performance was very week was due to a decrease in our labour force participation rate. It was not due to weak productivity performance. Indeed recent data suggest our productivity performance over the 1990's was comparable to the American's. Increased productivity is, indeed, the only route to increased living standards over the longer term.

[English]

It is also extremely important to recognize that economic policy decisions must be made to enhance Canada's competitiveness. The degree of global economic integration leaves us no choice but to peg our performance against that of our competitors—that is, there is no question that we must continue to keep pace with our fiercest competitors, particularly the United States, if Canada hopes to take full advantage of its economic potential in the new economy.

Comparisons of our productivity on a historical basis, or relative to the U.S., can be very useful in indicating whether we have lived up to our potential, and for indicating where to look for improvements. However, the bottom line is that we must adopt whatever policies are required to perform up to our potential.

Despite the debate surrounding estimates for Canada's productivity, which show that Canada has in fact slightly outperformed the U.S., Canada's standard of living has faltered, and our productivity growth has deteriorated considerably since the 1960s and 1970s. Since productivity is one of the keys to a higher standard of living for Canadians, Canada still needs to focus economic policy at boosting productivity and sustaining strong economic growth while ensuring that we become more competitive internationally.

• 0910

The Canadian Chamber of Commerce fully supports the government's efforts to increase productivity. However, in our view, the government should focus on policies that put top priority on the incentives for economic growth. This should be done regardless of what any statistics are telling us, since a higher rate of productivity growth will result, as I mentioned earlier, in a higher standard of living. Economic policies that support this objective should become a key priority for the government.

[Translation]

The government has indicated that improving productivity and Canada's standard of living are important building blocks for its economic policies. The Prime Minister stated in his speech to the Canadian Chamber of Commerce during its 1998 Annual General Meeting that productivity is the key to improving the nation's standard of living and that the government would focus many of its efforts to this issue.

In his April 22, 1999 speech in Toronto, the Minister of industry stated that while our quality of life is good, there is a huge gap between American and Canadian standards of living. Although some of this can be attributed to lower employment rates, he suggested that the majority of this is a result of lower productivity.

[English]

One of our main concerns surrounding the government's productivity agenda is that it might attempt to use it as a buzzword to justify a wide range of program spending initiatives in future budgets. As a necessary condition for sustained economic growth, the government should continue to improve the country's fiscal condition. On that front, it should control spending. The way to a more productive and healthy economy is not through dramatic increases in overall program spending.

Furthermore, the government must make a bigger commitment to paying down the debt in a systematic fashion. At 61%, the debt-to-GDP ratio still remains very high. It must be reduced to at least 50% in a reasonable period of time before the government considers any significant program spending initiatives beyond what is necessary to maintain our social programs and cover off the pressures resulting from inflation and population growth.

Most importantly, tax reduction must become a top fiscal priority, especially in this new era of significant surpluses. The Canadian Chamber strongly believes the government should place the same degree of importance on tax reduction now as it did on eliminating the deficit just a few years ago. The benefits of doing this will be equally impressive as the ones we now enjoy from eliminating the deficit.

The government certainly has a vital role to play in other policy areas that directly impact competitiveness, productivity, and growth. The development of new technology, the diffusion of this technology and best practice techniques, and education and training are among the more important ones.

However, if Canada's tax system continues to dampen Canadians' incentives to be more productive, entrepreneurs' incentives to take risks and invest, businesses' incentives to hire, and highly skilled workers' incentives to stay in the country, other policy initiatives will become ineffective in achieving their objectives.

[Translation]

There is no question that the business community has an important role in enhancing productivity. Firms invest in plant and equipment, hire people, develop and adopt new technologies, and drive economic growth. However, if the policies that create a climate conductive to productivity growth are not in place, their full potential to expand and create jobs is somewhat limited.

[English]

Reducing taxes is therefore important from the standpoint of competitiveness. Although Canada's relative tax burden is in line with the OECD average, this is definitely not the case when compared to the United States. The significant tax burden gap between Canada and the U.S. is negatively impacting our competitiveness.

High personal income taxes are one of the biggest challenges we face. Comparing marginal tax rates demonstrates the extent of the gap between Canada and the U.S. Canada's top combined marginal tax rate of 52% kicks in at $65,000, while in the U.S. the top rate of 42% is applied to an individual making $275,000 U.S., about $400,000 Canadian. Canada's personal income tax as a proportion of GDP is 14.6%, the highest level in the G-7.

Huge differentials in personal income tax have put Canada at a serious disadvantage in trying to prevent the emigration of its tax base, particularly south of the border. The important factor to keep in mind is that these individuals tend to be well educated, highly skilled professionals and are highly productive and highly mobile. These are precisely the individuals who are required to take on the high-value-added jobs in innovative growth industries. Losing this calibre of professional results in a huge negative rate of return on education investment.

• 0915

Reducing personal taxes would improve Canadians' incentive to work harder and participate in the labour force, resulting in higher economic growth. High tax rates do not reward effort and deter entrepreneurs from taking risks. Furthermore, substantial gaps in tax rates induce more productive individuals to move to lower tax jurisdictions. Cutting taxes will increase disposable incomes and boost consumer spending. The recent experience in the U.S. demonstrates how strong consumer spending can boost economic growth and job creation. This in turn has resulted in higher income growth and a return in the form of government revenues over the medium to long term.

I'd like to turn the microphone over for a moment, if I could, to my colleague, Mr. Tzanetakis, who will briefly outline the highlights of some of our proposals that are specific to the productivity improvement area.

Mr. Peter Tzanetakis (Director of Policy, Canadian Chamber of Commerce): Thank you, Mike.

I'm extremely pleased to be here on behalf of the Canadian Chamber of Commerce to express the views of its members to this important set of committee hearings.

We've provided the committee with a brief on the issue of productivity and competitiveness that my colleague has summarized for you. As well, we have provided you with a copy of our 1999 policy resolution, entitled “Rate of Growth of Productivity in Canada”, which was unanimously passed at our annual general meeting earlier this fall in Edmonton. This of course provides the chamber with the guiding principles behind its policies. I would like to draw your attention to the four key recommendations: reform and reduce both personal and business taxes; continue to eliminate internal trade barriers; investigate the source of the mismatch between education and the workplace in Canada; and support the growth in the knowledge-based economy in Canada through policies designed to strengthen Canadian R and D.

For the most part these proposals have been at the forefront of the economic policy debate in this new era of fiscal surpluses. The members of the chamber movement believe that fulfilling these objectives will have tremendous long-term benefits for Canada's productivity, competitiveness, economic growth, and standard of living. Productivity can be enhanced in many ways: the diffusion and adoption of new and innovative technologies, lifelong learning alongside an improved education system, through the free flow of goods and services both internationally and internally, increasing the free flow of labour mobility and improving transportation and communication systems. While all of these initiatives can support long-term productivity growth, it is the chamber's view that Canada's tax system should not act as a deterrent to achieving the full potential of economic growth, job creation, and improved standards of living for all Canadians.

This issue is so pressing for our members that we launched a national tax reduction strategy in July, which is also the basis of our 2000 pre-budget submission released last week. However, I must point out that our strategy, “A Sound Approach to Tax Reduction”, is not simply a wish list of tax reduction recommendations. It provides a set of guiding principles for an economic vision for Canada that is intended to improve our future economic prospects, put more money in the hands of hard-working Canadians, make the economic environment more conducive to higher productivity growth, enhance the incentive structure in Canada, make Canadian firms more competitive, and increase Canadians' sagging standard of living.

The chamber has often been wrongfully accused of having a one-track agenda. Let me set the record straight today.

Our economic vision goes beyond simply cutting taxes. It starts with a solid commitment to ensure that Canada's fiscal condition improves. Lowering our unacceptably high national debt must remain the fundamental priority for the government. Continuing to pay 26 cents of every tax dollar to service the debt limits our options substantially. This is why we recommend that the contingency fund, plus any unanticipated surpluses resulting from additional prudence the government builds into its budget projections, should go toward debt reduction.

On the tax front, the chamber believes that broad-based personal tax cuts should take the top priority. This directly addresses the issue of Canada's standard of living. Our tax-cutting proposals address all income levels. This is why we recommend increases to the basic personal amounts, increasing the thresholds of the middle as well as the upper-income levels, eliminating the 5% deficit reduction surtax, and reducing the marginal tax rate of every tax bracket.

The Canadian Chamber continues to be a strong proponent of employment insurance premium reductions toward their break-even point. The fact that $6 billion to $7 billion surplus is amassed annually in the EI account implies that the government has the flexibility to cut EI premiums as well as the ability to put more money in the hands of Canadians through personal tax reductions.

• 0920

Although top priority has been placed on reducing personal taxes, the government should commence a process of comprehensive tax reform to Canada's outdated business tax structure. A strategic goal of tax reform must be to improve Canada's competitiveness in tax policy. This should include reductions to corporate income tax rates with the view of making Canada's corporate taxes more internationally competitive.

The chamber, in developing its fiscal policy priorities, has accepted the new program spending levels that the government has significantly increased over the past three years. This is an increase from $104.5 billion to $111.5 billion. Next year proposed program spending is expected to rise to $113.5 billion, and to $118 billion in fiscal 2001-2002. This is nearly a $7 billion increase over the next two years, on top of the previous increases.

In developing its recommendations to the government, the Canadian Chamber never once asked it to consider cutting programs or program spending levels to make room for tax cuts, or debt reduction for that matter. The debate is clear and simple: What is the best use of future planning surpluses, given the pressing need for tax relief and the pressures of a huge debt load? Programs can certainly be maintained, while new and emerging needs can be prioritized within a growing program spending framework. The debt can be lowered to free up our future fiscal options. And most importantly, Canadians can be rewarded through a serious commitment by the government to deliver significant broad-based personal income tax relief.

Thank you.

The Chair: Thank you very much.

I'm now going to turn to Mr. Dale Orr. Mr. Orr, please.

Mr. Dale Orr (Economist, WEFA Canada Inc.): Thank you. I'm pleased to be here.

At the beginning of the 1990s Canada's productivity, that is, our output per worker, as well as our standard of living, that is, our GDP per capita, were about 20% below those of the U.S. As we close out the 1990s, our productivity is still about 20% below the U.S., but our standard of living has slipped to about 25% below. It's always important to realize our full potential performance, regardless of what the Americans are doing. However, their performance is indicative of our potential and it's crucial to our ability to compete.

A strong productivity performance is the only route to sustained improvements in our standard of living. I suspect that's a statement you've heard from everybody who's come up to you. We therefore have two obvious problems: first, a level of productivity and standard of living that is lower than it should be; and second, a growth of standard of living that is slower than it should be.

Our productivity—that is, output per worker—is lower than it should be primarily because of a poor performance in manufacturing, as opposed to services. Manufacturing productivity is low largely due to a relatively poor performance in information technology industries, which in turn is partly due to a slowness to adapt to new technology and best-practice technology, as well as managerial practices. I've highlighted what I think are among the most important reasons. This is obviously a very complex issue, and there are quite a few reasons, but if you have to put your finger on one place to highlight, that's where I would do it.

Our standard of living is relatively low primarily because our productivity is relatively low. Besides having a relatively low output per worker—that is, productivity—we also have a relatively smaller fraction of our population employed than the Americans. The main reasons why relatively fewer Canadians are employed are a lack of aggregate demand and relatively weak geographic mobility. People sit around year after year after year where unemployment rates are high and are unlikely to change.

The reasons why our standard of living fell relative to that of the Americans over the 1990s was a relatively weaker labour market performance, not a relatively weaker productivity performance. We kept up with the Americans with respect to productivity over the 1990s, but we did not keep up to them with respect to standard of living. That is, our problem in the 1990s was not so much a weak growth in output per employee; it was relatively fewer Canadians employed. While the unemployment rate did improve steadily over the 1990s, unfortunately the rate of participation in the labour force in Canada fell. It fell from 1990 through about 1996. Fortunately, in the last two years it slowly started to edge back up again, whereas the American participation rate pretty much moved upward from 1990.

• 0925

To improve our standard of living in the future, not only do we need increased output per worker, we also need a significant increase in the portion of Canadians willing and able to work and finding productive employment.

The key policies for increased productivity are policies that provide increased incentives for an increased pace of adoption of new technology and best-practice techniques into the Canadian workplace. The answer to how to improve productivity is obviously a fairly wide menu of policies, but if we have to start by looking somewhere first, I would say that's it.

Personal income tax reductions can increase productivity by increasing take-home pay at the margin and by increasing the savings available for investment. Increasing take-home pay increases the incentive to seek work, to work, to train, to become educated for higher-paying occupations, and to stay in Canada. Reductions in corporate income taxes can increase productivity, economic growth, and job creation by increasing the incentive to invest and the incentive to take business risks. Reductions in EI premiums—we've had some, but unfortunately not nearly enough—increase the incentive to work as well as the incentive to hire.

Increased spending by the federal government is more likely to set our productivity backward than forward, most importantly because any increased spending would be at the expense of much-needed tax reduction. The key to increased productivity is increased adaptation, innovation, most effectively encouraged by tax reduction, increased competition, increased foreign direct investment and stronger international linkages. And I can't stress that too much. Really key to increasing productivity is better adaptation and better innovation of all the knowledge that's out there in the world, getting it into Canadian offices and factories, adopting best-practice techniques. It's that transmission-of-information mechanism.

We need tax reductions much more than we need new or expanded government programs or subsidies.

Thanks.

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

Now I'm going to turn it over to Mr. David Slater. Mr. Slater, please.

Mr. David Slater (Individual Presentation): I am pleased to participate in your deliberations about productivity. I come to you not as a current researcher of the subject, but as what I call an “old reflector”. My first paper on the subject was an essay for a class at the University of Chicago about fifty years ago.

I understand that your main focus is on micro rather than macro issues, but the two are intertwined.

One of the things I could perhaps do for you, since you people are all so busy you don't have time to read everything, is point to some things I have encountered recently that I think are particularly helpful on this subject. I'll pick out four items that I think are particularly helpful.

First, Richard Harris of Simon Fraser University presented a paper at the Industry Canada Centre for Living Standards conference in September under the title “Determinants of Canadian Productivity Growth: Issues and Prospects”. That's an extraordinarily good paper. I'll come back to that.

Secondly, there's Pierre Fortin's C.D. Howe benefactors lecture given about a month ago on “The Canadian Standard of Living: Is There A Way Up?”.

Next is the Daniel Trefler—who's a professor at the University of Toronto—1990 paper in Policy Options, July-August, “Does Canada Need a Productivity Budget?”.

And finally, there is John Helliwell's recent prize-winning book published by the Brookings Institution Press in 1998: How Much Do National Borders Matter?

• 0930

I could also mention many other things—Andrew Sharpe's recent paper, Dale's work, Richard Lipsey's work, and so on.

Because of the topicality, I also draw your attention to and leave with the clerk copies of Paul Krugman's SLATE article, “Enemies of the WTO'. I will leave these with the clerk, and they can be reproduced for you. It's a gem.

Now I'll turn to Harris's paper. Harris's paper is an excellent survey and evaluation of the state of knowledge on Canadian productivity growth. His most general conclusion is:

Looking at the broad record we recognize that trade, investment and human capital formation are the broadest drivers of productivity growth, within an overall framework in which knowledge creation creates the opportunities for growth. Within these parameters there remains considerable debate as to what levers should be pulled that might lead to higher productivity growth.

If, as most observers agree, Canada has had a slower productivity growth than the United States and many European countries for the last decade, then we should examine the experience with the broadest drivers, that is, the trade, investment, and human capital formation, and the framework in which knowledge creation creates the opportunities for growth.

First, I think we must never lose sight of the fact that even if Canada is a very successful creator of new knowledge, 97%, 98% or 99% of the new knowledge that's relevant to Canada is, and will be indefinitely into the future, created outside Canada. You take that as a starting point. Therefore, if Canadian productivity growth is relatively slow, the first place to look is the networking of knowledge flow into Canada and the adaptation to Canadian circumstances.

When I was with the Economic Council—and this goes back now to the earliest 1980s—we launched the first innovation survey. We got a survey to find out, on a whole bunch of practices, when was the first introduction of that practice into Canada, when did it spread and become part of the general use, and so on. We found then, of course, both slowness in picking up new ideas and slowness in spreading the knowledge around and getting it right into the bowels and details of the work of the system.

Since so many of the jobs in Canada are in small to medium-sized enterprises, how is the relevant knowledge and its application brought to bear on such enterprises? Don't worry too much about the big companies. Worry much more about how you can get these things into the small and medium-sized companies.

While Canada has had a relatively successful development of external and internal trade, a number of serious impediments to taking full advantage of the potentialities of trade and specialization still exist. Since the peak of U.S. hegemony and world production is probably already behind us, expanding Canadian trade with other areas will be increasingly important in the long run.

Despite some recent efforts in these directions, much remains to be done. Internal Canadian trade is enormously important too, as Helliwell's book shows, despite the continuation of substantial interprovincial barriers.

Helliwell's book indicates that when you make allowances for differences of size of areas and distance between them, interprovincial trade in Canada is somewhere between 12 and 20 times as large as the comparable trade in the United States, that borders really do matter, and he spells it out in great detail.

It's a wonderful piece of work. I have talked it up so much that the editors of Canadian Business Economics said “All right, Mr. Smart Guy, write us a review of this book”, which I've done. I cleared the text yesterday and it will be out in the next issue of Canadian Business Economics. So you'll get a handy summary of John Helliwell's book very soon.

• 0935

As to investment, the Canadian record of the last decade shows a relatively smaller investment expenditure in proportion to our size than some other countries, notably the United States, particularly in machinery and equipment, which is so crucial to productivity growth. Many factors have contributed to this performance, including a more severe recession in the 1990s, the structure of Canadian business taxation, the political uncertainty in Canada, and the decline in Canadian national savings rates.

When it comes to the matter of business taxation, I really do press you to look seriously at the Mintz report for several reasons. First, because a business taxation that matters is much broader than the corporate tax. There is a lot of other taxation on business, and in fact pieces other than corporate tax have been the pieces that have been growing over the last decade, rather than the corporate tax.

Secondly, and this again confirms what we turned up in the Economic Council, the structure of our business taxation leads to a great deal of inefficiencies and inequities. When I was with the council we did a study on the taxation of capital income, and what we found was that there were certain sectors that were getting astoundingly generous treatment and other sectors getting very poor treatment. What we were doing was steering investment into some sectors and steering it away from other sectors by virtue of the structural aspects of business taxation. So it's not just a matter of reducing corporate taxes as a lump and that will produce magic changes and so on; you really have to look at the structure of business taxation as well as the levels.

The weakness of investment appears to be greater for small and medium-sized enterprises in Canada than for large ones. This is partly due, I believe, to the continuing difficulties of financing such enterprises. My youngest daughter is in the business of business advising and so on for small and medium-sized enterprises and so on, and the tales she tells of trying to get money out of banks for perfectly good customers just scare the heck out of me.

I remember once talking to Gordon Sharwood, who is in the business of raising capital for new enterprises and so on, and he told me a tale. He said that he worked out a scheme to raise $1 million in new capital for a firm. At the very same time, the banks called the loans and shut them down. He said the reason there's no point in banks shutting down bankrupt organizations is they won't get any money out of them. It's only if they get enterprises that have some money they can lay your hands on that it's worth while for a bank to shut somebody down.

That's a little bit of black humour about the banking system, but there's a touch of truth about it.

Also with respect to investment, I believe that Canada has allowed its social capital to deteriorate during the last decade. Anybody who has driven on Ontario highways over the last ten years can see what's happened to that piece of social capital. This is important not just for social amenities, but as a basis for more effective returns from private capital.

The performance of human capital formations takes the third of Harris' main drivers. I think it's been a mixed bag in Canada. On the positive side, the proportion of Canada's youth who complete high school has increased, and the proportion with college and university degrees and diplomas has also increased a great deal. Those are positive things.

But there are other more negative experiences of relevance to productivity growth in the short and long run. These include the astoundingly high proportion of Canadians with low levels of functional literacy. There is increasingly impressive evidence that early childhood nurturing and care makes an astounding difference to functional abilities in older children and adults. As Bill Robson's new book on the Ontario school system shows, the educational attainments of the Ontario grade school students is well below that in some other provinces, and they're even more below that in many other countries.

• 0940

The failure in Canada to develop a sufficiently large cadre of technicians, technologists, and trades people to replace those who brought these skills to Canada as immigrants in the 1950s, 1960s, and early 1970s, and the limited support in Canada for both fundamental and applied research.... One of my jobs in university work was deaning graduate school and the research operations at Queen's University, and I can attest to the difficulties of raising research money in what I still believe is a very good university.

Regarding the levers to pull to improve Canada's productivity growth, Harris' paper offers wise but cautious advice and I think you ought to have a look at it. Between the two extremes of government intervention to pick and promote winners on the one hand and at the other extreme the development of new entrepreneurs, I lean toward the latter. Grubstaking lots of new entrepreneurs in the same way as prospects for new mineral finds has always appealed to me as a good approach. If you bat 50%, or 25% or even 10%, when you're grubstaking, you're getting some overall net winners. But I agree with Harris that the effectiveness of specific policies is inherently fraught with uncertainty.

Briefly, I'll speak about Fortin's lecture. Much of Fortin's lecture is concerned with the adverse effects of Canadian central bank policy and fiscal policy, and he gives them a pretty good clawing over, but some parts are concerned with industry and productivity. In those parts his diagnosis and prescriptions overlap Harris. Fortin notes, as have others, in examining Canadian and U.S. productivity performance in manufactures that except for two sectors Canadian productivity levels are below those in the U.S., but the gap is closing a bit. He noted that for two important sectors this is not so: the electronic and electrical machinery sector, including computers, and commercial and industrial machinery. These are things Dale has pointed toward.

These sectoral comparisons have led Trefler to conclude that Canadians lag badly in product innovation but do quite well in process innovation, and that's a difference that really matters for a longer-term improvement of productivity.

As Fortin puts it,

Trefler's argument is that we do not invest enough in R & D, that we fail to tap as much as we could into the existing technological knowledge base, and that we are slower than other countries in adopting new technologies.

He continues:

Since productivity gains are closely linked to human capital, knowledge capital and tangible capital investments, it clearly pays off to also look at more details at three broad types of investment: education, R & D, and machinery and equipment.

Fortin points to ways to improve each of these areas. The concepts of R and D that are used in Canadian tax policy are far too narrow. Canadian tax policy with respect to R and D and business taxation are working at cross-purposes. The R and D is supposed to be trying to promote research and development, and business taxation I think by and large, in the judgment of Mintz and the Mintz committee, is working against that.

As the Mintz report shows, business taxation is a much broader issue than corporate income tax. Also, the structure of business taxation is a serious deterrent to efficiency and productivity in Canada.

Thank you very much.

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

We're now going to turn to questions. We'll begin with you, Mr. Penson.

Mr. Charlie Penson (Peace River, Ref.): Thank you, Madam Chair.

I would like to welcome the panel here this morning. Personally, I've been waiting for you for some time to come and give us your views on the problem with the productivity gap with the United States. I think Canadians may not know there's a problem with productivity, but they certainly know that their standard of living is going down. But I don't know that they realize, unless they travel extensively, how much difference there is with people living in the United States and how much that's been widening in the last few years.

• 0945

On the panel this morning it seemed to me there was a common theme, and the common theme was that first of all we have to recognize we have a problem. I suggest that there are still a lot of people in denial in this country, especially in government. But if we accept that there is a problem, some of the major things I picked up this morning as a route to correct it were that we need a substantial tax cut, particularly in personal income tax, but also on the corporate and business side, and debt repayment. At the rate we're at, 191 years is my calculation for paying off our national debt.

The reason I raise that is it seems to me that those two things would send a very strong signal to entrepreneurs, to people wanting to invest in our country. If we were to increase the pace of both tax cuts and debt repayment in order to attract that new investment, which brings with it the knowledge—I think Mr. Slater talked about the knowledge industries, the investment in that side.... It seems to me that this is just a common-sense prescription. I'm not sure that it's going to be picked up, however, even though the Minister of Industry has sounded the alarm bells himself.

The question I have for the panel here is if we do not set priorities in this direction, what does the future look like in five or ten years, given the divergence between the U.S. standard of living and ours?

The Chair: I think that question is addressed to the entire panel.

Mr. Murphy, did you care to start?

Mr. Michael Murphy: I think the fundamentals of your question are critically important to our economic future. While we have in the last several years maintained our position with respect to the United States in terms of productivity, there's still a tremendous gap, and we talked a little bit in our brief and in our submission this morning about what some of the impacts of that are.

Our view is that clearly from a solution standpoint, because of the manifestation here you have to look to tax from the first order, because the manifestations of the problem are essentially twofold. One is in terms of that productivity gap we have and how it effects income levels, both in Canada and the United States—and there is a significant gap there. There are a number of folks in government who put together some numbers that can tell you what the gaps are in terms of income, so that you're not just looking at it as a tax problem but as an income problem.

So from our standpoint, it's essential to look at it in terms of maintaining Canadians, keeping the kinds of jobs that you want in this country to ensure future economic growth, and looking at personal disposable income. I think the numbers there show that we're probably in around the same kind of position now as we were ten years ago, maybe even slightly worse off. So that's a story that basically says you have to focus on priorities, and that's the toughest thing about decision-making: you have to make some tough decisions here.

Clearly, we look at personal income taxes in the overall scheme of things that need to be done. You mention high debt levels; you have to continue to put an emphasis there. But in terms of generating economic activity, personal income tax reductions of the kind of order we have suggested we think would be the most productive thing we could do.

The Chair: Thank you, Mr. Murphy.

Mr. Orr.

Mr. Dale Orr: I agree with you. If we don't get significant reduction of income taxes in this budget it would be a big step in the wrong direction. I don't want to be claiming the sky will fall in or anything like that, but it's really important. And given everything the minister has said, still the proof of the pudding is in the eating. He could say everything he said, and here's your one billion in tax deduction. You'd say a billion is a lot of money, isn't it? But it's not nearly enough.

Just to be clear, what I'm saying and what a lot of economists are saying—and this is consistent with the minister's recent update—is there's an underlying surplus of about $11 billion that he will be able to deal with in the next budget. He'll set aside about $4 billion with the contingency plan and prudent economics, which leaves $7 billion. He's actually already spent $1 billion of that $7 billion with the EI reductions, which leaves $6 billion to deal with in this next budget. So that's it, that's the decision: there's $6 billion to allocate.

• 0950

I think he should allocate about $5 billion to personal income tax reductions, and if he doesn't allocate about $5 billion in personal income taxes in the next budget, that's not enough. If he does that from the $11 billion, if the forecast goes as told, then $5 billion would go to personal income tax reductions, $1 billion would go to EI, and $5 billion would go at the end of the year to debt reduction.

Now, behind all of that is the 1999 budget plan where program spending is forecasted to go up by $2 billion. So when we talk about an underlying surplus, it's very clear for everybody to understand that this surplus is calculated after program spending has been increasing to fully cover inflation and fully cover population growth.

This is very important: when the Department of Finance talks about the surplus, any dollar of that surplus that goes to program spending is a dollar after inflation has been covered and after population growth has been covered. So in terms of tax cuts again, the proof of the pudding is in the eating, and I think $5 billion would be about right.

I think we've all said to make personal income tax reductions effective on productivity you have to impact personal disposable income on the margin, and you have to affect it for all taxpayers. Now, it's very politically correct to say we'll take care of lower and middle income, they're the ones that need it most. If we keep doing that, as we have in recent years, who's going to be left to pay taxes? You've heard the numbers. The brain drainers are strongly disproportionately people of above-average income. It's really important that in this $5 billion income tax reduction you include all Canadians. It's really important to include Canadians of above-average income; they're the guys that are paying the income taxes.

Mr. Charlie Penson: You're suggesting we have to have a sort of similar tax structure to the United States, otherwise we're going to continue to lose some of our brightest people to the United States, because in that higher income bracket, with the mobility they have, they're going to disappear on us?

Mr. Dale Orr: You say similar. I wouldn't want to overstate the case. In fact it's probably for our own productivity purposes very important to decrease income taxes on higher-income people just to increase our own productivity, no matter what the Americans are doing.

The Chair: Why don't we give Mr. Slater an opportunity to respond as well? Mr. Slater.

Mr. David Slater: I would make three points.

First, I think the evidence, when you put it all together, no matter how you cut it, no matter how many factors you factor in, shows it's pretty clear that both on business taxation and on personal taxation we're currently offside in relation to the U.S.

The Department of Finance's visiting scholar, Bob Brown—before he ever went to the Department of Finance he was a former chief officer of a great accounting firm—did a very careful comparison, not just of income taxes but of taxes, health care costs, etc., etc. Factor all these in and the evidence is very clear that we're offside, and especially at the higher income levels.

A second point I think I would make, however, is I don't think you should focus all of your attention on reducing taxes in the dealing with this fiscal dividend. There are a lot of unfair and inequitable and inefficient elements in our tax system and in our expenditure programs that need a lot of attention. Unfortunately, to fix them up you've got to tax some people more and tax other people less. So there are winners and losers when you get into dealing with the structural things. But the structural things really matter.

In Jack Mintz's handling of the business taxation, for example, he recommended not that you take away from the people who have some concessionary taxation now, but that you in a sense bring other people more or less into line with them, that you some have uniformity of the taxation. Now, this of course would cost a little money. I think it would be quite wrong, and I'm quite prepared to argue this with the minister, to delay any attention to business taxation in the broad sense, and focus only on personal income taxation.

• 0955

The third point is this. In our social policies and in our tax policies, we have had, I strongly support, a strong orientation toward providing some ease and relief and so on for the less-well-off people. But at the same time, when we do that, we've built into our tax structure so many damn disincentive things—clawbacks, this, that, and the next thing—that although we support the lowest-income and the less-well-off people, we sure don't want them to climb up very far. When you start moving from $20,000 of income, up to $25,000 and $27,000 and $28,000, which is below the average industrial wage, you find the marginal tax rates for many people in those income classes are 50%, 60%, 70%.

So my proposition to you is lower taxes, as these gentlemen have suggested, yes, but pay some attention to the structure.

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

Mr. Malhi, please.

Mr. Gurbax Singh Malhi (Bramalea—Gore—Malton—Springdale, Lib.): Thank you, Madam Chair.

According to Dale Orr, agreed spending by the federal government has set productivity backward. So you think the government spending is a waste of money? If it's not a waste of money, where should the government spend that money? And could you explain how they can improve productivity by tax reduction?

Mr. Dale Orr: Thanks.

Yes, I certainly believe the federal government wastes money. We these days of course talk about the $3.6 million tunnel, and hardly a month goes by that there isn't more evidence of the federal government wasting money. There are a lot of new emerging priorities. Certainly some of them are related to productivity, and I think they should be accommodated one of two ways.

Within the last budget there was a schedule for program spending. It goes up at about 3% per year. So for the sorts of things we're talking about here, particularly things that can help us bring best-practice techniques into the office and factory, there's about $3 billion increased program spending allowed for within the budget. I think that's about appropriate for increases in overall program spending, and I think that's also the view of the chamber. So there is that.

Secondly, yes, the government wastes money, and one thing I never see coming out of the government—and this particularly includes ministers—is I never hear ministers standing up and talking about low priorities. Surely, if there are new emerging high priorities, and ministers always talk about those, where are the things that are falling into low priority that can be cut back or cut out to accommodate some of these new emerging needs?

So as I say, I do think there are a lot of important new emerging priorities, but the budget, as well as focusing in on cutting back on lower priorities, should provide sufficient money to take care of those.

Mr. Gurbax Singh Malhi: Could you explain a little bit about any priority on spending to improve productivity?

Mr. Dale Orr: Yes, how can we do that?

• 1000

What I've said is we don't need new federal government fancy programs. I don't think anybody, hardly anybody at least, wants to see that. I think what we've said here, and I know it's consistent with the research, is we should focus on the transmission of new knowledge information, inventions, and innovations into the Canadian marketplace. I think David said that 98% of all of the new inventions come from outside of Canada. So we should do whatever we can to improve that.

Increasing the incentive for businessmen to adopt those things and be successful is key, and tax reductions are going to work in that direction. They're one of the levers that can be pulled. Increased management training is another. But I think the focus should be on getting everything that's happening out there in the world into the Canadian factory and marketplace.

Mr. Gurbax Singh Malhi: But how can tax reductions increase productivity? If they reduce the tax, then employees will spend whatever they are saving on their own expenses. They're not going to increase productivity because of that reduction.

Mr. Dale Orr: Yes, they will, through quite a few different mechanisms. The most important one is increasing incentives. When you reduce taxes, people can make their own choice as to how they spend that money. If they're entrepreneurs, it's obvious. If they are workers facing a choice as to whether or not to work overtime, they get to take home more of the money. If he's a young person wondering whether he should go through all the arduous education to become a doctor, a lawyer, or a professor or just drop out of high school and live off everybody else, if taxes are reduced, the incentive to go into higher-paying professions is greater. For all the best and brightest people coming out of our law schools and computer software programmers and wondering whether they should stay in Canada or move to the U.S., a tax reduction would be helpful in encouraging them to stay here.

Very clearly, the way tax reductions can impact incentives can be expected to increase productivity. They increase saving. David talked about corporate tax reductions and how they can make more money available for investment and provide higher incentives for risk-taking and for entrepreneurs. It's very clear that the way tax reductions can work on incentives can be very helpful for productivity.

The Chair: Thank you.

[Translation]

Mr. Brien, please.

Mr. Pierre Brien (Témiscamingue, BQ): In your presentations, you all agreed on this productivity gap, particularly between Canada and the United states. Governments and many businesses seem to be aware of this productivity gap and to believe that our low dollar makes up for this gap to a large extent. If the gap between our productivity and US productivity is from 40% to 50% and if there is a similar gap between the Canadian dollar and the US dollar, there is a sort of temporary plaster which ensures that, in the short term, the problem is less urgent for some businesses. I am not saying that this problem will not be there in the longer term, and I would like to ask you if you are concerned about the fact that some businesses seem to get used to the idea that our lower dollar is making up anyway for this productivity gap in the short term. It is a matter of concern to me and I would like to hear your views on this.

[English]

The Chair: Mr. Murphy.

[Translation]

Mr. Michael Murphy: You raised another important issue. Yes, we are concerned about this. Briefly, I could tell you that Canada's economic growth is seen at the export level and that we should ask ourselves what is at the source of this growth. Our low dollar is certainly one on the factors. If it were to increase in value, would our exports continue to grow? We should ask ourselves what other steps Canada should take to ensure a good productivity. This is why we mentioned the importance of reducing taxes, in particular at the personal income tax level. We will see what the government will do, but we maintain that tax reductions remains the most important issue.

• 1005

[English]

The Chair: Mr. Orr.

Mr. Dale Orr: I think there are two relationships between the Canadian dollar and productivity. The first is a hypothesis that because the dollar has fallen and reduced the unit costs in Canada, giving a bit of an advantage to Canadian exporters, it has given them a false sense of security, and it hasn't put the pressure on them to be as efficient as they should be. That's a hypothesis. If Gordon Thiessen were in front of you, he'd tell you he doesn't believe it at all. I'd say the economic evidence on the importance of that hypothesis is mixed. Some people believe the low dollar has been a bit of an umbrella that has lulled some people to sleep. Others don't believe that.

The other impact, though, is very important and I think very clear. The fact is that the low dollar has made us more competitive, has given us more exports than we otherwise would have had, has pushed some factories closer to capacity than they otherwise would have been, has put people to work who otherwise wouldn't have been to work, and has given us economic growth we would not have had otherwise. Clearly, exports to the U.S. are what have been driving the Canadian economy over the last three or four years, and that's very much because of the low dollar.

Whether that low dollar that has caused output to be higher than otherwise and employment to be higher than otherwise has caused productivity to be higher than otherwise is a little bit debatable. Don't forget, productivity is output over employment, so the low dollar has caused both numerator and denominator to go up. Has it caused productivity to go up? You could debate that a little bit, but I think it probably has.

One thing that's very clear is that by increasing employment and output, the low dollar has made our standard of living higher than otherwise. Standard of living is our real GDP per person, and it has unambiguously made our GDP go up, but it hasn't changed our population at all. So the low dollar has unambiguously made our standard of living higher than it otherwise would have been.

Mr. David Slater: Could I add a couple of points? The first point I would make is that the low Canadian dollar is a temporary phenomenon. The Canadian dollar is not going to stay down there. One of the clear factors in making it low has been what has happened to primary commodity prices. Canada's terms of international trade have deteriorated more severely in this period than in almost any other period in our history, but that's not going to last forever. Terms of trade go up and down.

Secondly, we also have to keep in mind about the Canadian dollar that we are still dependent on importing capital from abroad. This country has a deficiency of saving relative to investment. Even investment isn't all that high. Our national saving has been deficient. We therefore have had to continue to import capital. A lot of it has been done, of course, in rather subtle and little understood ways. Much of the capital has come in by making Canadian bonds sufficiently attractive to foreigners so that even if they're denominated in Canadian dollars, they're a good buy. So Americans, Germans, Japanese, and so on were great buyers of Canadian bonds. That kind of deficiency in our saving relative to our investment is something that I believe is temporary and certainly should be temporary. Of course nothing will do more to reduce the deficiency than getting the national debt levels down. So I just make that point.

Undoubtedly, there are some people who get comfort out of the low Canadian dollar, but lots of others get opportunities to develop markets that they will then continue to serve when the Canadian dollar is at a more normal and reasonable level.

• 1010

The Chair: Thank you very much.

Mr. Lastewka.

Mr. Walt Lastewka (St. Catharines, Lib.): Thank you, Madam Chair.

Mr. Tzanetakis, you read from an additional paper. I wonder if we could get copies of that, rather than waiting for the minutes to come out—your numbers and so forth.

The chamber has put out a lot of materials once again, and I'd like to narrow it down. If you only had two priorities from all the data you presented today, what would be the two priorities, priority one and priority two?

Mr. Michael Murphy: Well, let me take a shot at that.

I think number one, in looking at the broad perspective here, personal income tax reductions are at the top of our list, there's no question about that. You have an economic and fiscal framework here that has a number of priority areas, but we certainly place personal income tax reductions, broad-based personal income tax reductions, at the top of that list, for a number of the reasons we outlined and you heard from some of the other speakers today.

Right up there is the requirement to reduce the national debt. We fully agree with the priorities the government has assigned by assigning the contingency to debt. From our perspective, the impact the debt has and the amount of money we're spending on the interest payments on that debt annually reduces our flexibility to do other things.

So when you combine those two you clearly have, from our standpoint, the two most important things you could focus on.

Mr. Walt Lastewka: Okay, you mentioned internal trade in your presentation, and I hear it all the time from chambers of commerce, but I never hear of them doing anything. Having been involved with the workshops on internal trade, I find the chamber of commerce talks about it but doesn't say let's tackle that one, let's fix it.

Mr. Michael Murphy: The subject is an important one. Prior to and during the time this agreement was put in place, back in the mid-1990s, this organization—while I wasn't here personally I am well aware of this fact—played an active role, and certainly our members view this as a high-priority item. For a number of reasons, not just including waiver mobility that we highlighted today, we were very, very active in terms of trying to get this on the agenda, and recognize the political difficulties here of doing agreements between levels of government. So we continue to view this as a high priority.

The question is, which items are you going to want to tackle? For us right now, as I talked about earlier, we obviously are focused on the tax situation, on the debt situation.

Peter, why don't I just ask you to comment on that a little bit more if you have any additional background?

Mr. Peter Tzanetakis: I just wanted to add one important point here. It's not an issue of doing one over the other. I think it's extremely important to recognize that the chamber's position in this era of surpluses has been to maintain programs. We have accepted the government's program spending level increases and we are accepting the projected increases in program spending over the next five years that the Minister of Finance himself outlined earlier this month in his fiscal and economic update.

It's not an issue of saying we want major personal income tax reductions, and cut other programs to do that. I think it's very, very doable. And I think in outlining, as Mike suggested, our priorities, it's extremely important to note we are talking about fiscal surpluses above and beyond what has already been scheduled for program spending increases, above and beyond what—

Mr. Walt Lastewka: I think you're getting away from my question. I mean, I've heard your speech. Because I'm limited in time, I want my questions answered or not answered, one or the other.

• 1015

I'd like to go to Mr. Orr. You said businesses, to apply new technology, should have incentives. That caught me by surprise. Normally businesses put in new technology because it's cost-effective and it's a return for them. Did I misunderstand you on that? What did you mean by business should get incentives or subsidies for business to apply new technology?

Mr. Dale Orr: There are incentives now. But if we were, for example, to reduce the corporate income tax, the amount of profit they would be able to keep if and when they're successful would be improved.

For small entrepreneurs who are paying on the individual income tax basis, obviously the sorts of reductions in personal income tax would increase the incentive to them.

Mr. Walt Lastewka: But don't businesses apply new technology because there's a return on it, there's a proper return on it, rather than the incentive?

Mr. Dale Orr: Well, exactly. They do it because of the expected return. If you lower their rate of taxation, their expected return would be greater. That's the point I'm making.

Mr. Walt Lastewka: Okay.

Do I have time for one more question?

The Chair: Yes.

Mr. Walt Lastewka: Mr. Slater, you talked very clearly about the importance of product innovation and so forth. Maybe the other two could add to it also. Product innovation requires research and development and so forth.

Canada's businesses are the poorest as far as investing in research and development is concerned. They're right at the bottom of the list, all right? Why? Why do businesses not invest in research and development? Why are we so low on that chart? And we've got good tax incentives, I thought.

Mr. David Slater: Yes, yes.

I think it's important to distinguish between very large business and medium and smaller business. Medium or smaller business is not often in a strong financial position. It's a risky business for them to break out and take on a new product. It happens, but the question is, how much of it happens? I think the evidence is fairly strong that the combination of tax and the availability of finance makes it difficult for the small and medium-sized business.

One of the programs that has been of greatest help to businesses is the IRAP program of the NRC. It's the sort of thing that's not big and flashy. It's got people out in the field. They're helping this business and helping that business and so on. I think the record is that for the money that's been put into it, it has probably done more good than anything else.

Again, to think about the question you put to Dale, new investment is a bit of a crap shoot. There's always risk involved. There's so much risk you could take and accept and finance and so on, depending on what your capital is, what the tax treatment is, and so on.

Even the businessman who makes the best calculations and has the best business plan is still engaged in a risky enterprise. I think we don't give our small and medium-sized business enough incentives or ability to take on these risks.

The Chair: Are there any other comments? Mr. Orr.

Mr. Dale Orr: Yes, I spent a bit of time researching this question of why is R and D so low in Canada. There are two key elements there. One is foreign ownership and the other is small business.

• 1020

There are two impacts of foreign ownership. One is that companies are prone to do R and D, like other central-office functions, at home, as opposed to where they move around the world. This is true of the American companies in Canada, and it is very true of Nortel. They do a disproportionate amount of R and D in Canada relative to what they sell between Canada and the U.S. So this is not the evil Americans keeping all the R and D at home.

That explains part of it. Because we have such a high level of foreign ownership, those people are doing their R and D at home. It's all part of the central-office way in which companies organize, Canadian and American companies.

The other impact is that foreign ownership is disproportionately high in technologically intensive industries, partly because the Americans are the technological leaders. So that's yet another element. Also, R and D is relatively lower in small businesses than it is in large businesses. We have more small businesses relative to the Americans. So that's a part of it.

The question is, what do you do about all that? Do you try to discourage small business in Canada because they don't do R and D? I don't think so. Do you try to discourage foreign ownership because when we get a company that's foreign owned, like a General Motors or whatever, they're unlikely to bring their R and D with them? No, I don't think so. So there it is.

I really want to emphasize that to increase productivity and the standard of living in Canada, increasing R and D in Canada is not that critical. We already have the best tax structure for increasing R and D. The key thing is, let's make sure that all those inventions and best-practice techniques being developed out there in the world are brought into the Canadian factory and brought into the Canadian workplace. I can't say that too often.

I don't want to belittle the importance of R and D. There are mounds of information that say there are spillover effects and whatever, but let's keep things in perspective: 2% of all of these new inventions and ideas out there are coming from Canada; 98% are coming from elsewhere. We could double the amount of R and D done in Canada; it's not going to have near the wallop on our productivity and our standard of living as it will if we just improve this adaptation mechanism.

Mr. David Slater: Could I add one tiny point?

The tax treatment of R and D, defined in a certain way, is generous. But the bounds are much too narrow. So a lot of things that are important from an innovation point of view don't fall under the R and D provisions of our tax system. But the problem, of course, is once you start broadening the definition, you do some good, but you open up the opportunity for scams by crowds of accountants and lawyers out there, as we know very well out of the scientific tax credit experience.

The Chair: Mr. Slater, can you give us an example of something that doesn't fit within the bounds that should qualify?

Mr. David Slater: As I understand it, if you think about an idea and the process of getting it in, adapting it, doing pilot studies, and so on, from the time you get a thing in, in the first instance, do the immediate R and D on it, to the time when you have a successful application is often five years. It's an investment process. A large chunk of that investment process—pilot studies and all that sort of stuff—doesn't fall under the R and D provisions.

The Chair: Thank you.

Mr. Murphy, you have a brief comment.

Mr. Michael Murphy: Yes, I have two quick points.

I certainly agree with the notion that a lot of innovation that occurs in Canada might not fit the definitions of, for example, the scientific research experimental development criteria we have, and there are examples of that.

The other point I would mentioned is that the broad statement that Canadian businesses are not investing in R and D needs to be qualified, because we have very important sectors in the economy here, like telecom and aerospace, and new and innovative sectors like biotechnology, that are making significant investments in Canada. On the telecom side, both services and equipment are at play here, and these are significant, not just from Canadian firms but from foreign firms as well. So you really have to drill down beyond the sort of broad statement of what corporate Canada is doing and get into some of these sectors.

• 1025

Mr. Walt Lastewka: The reality is, when comparing apples with apples, we're still at the bottom of the list.

The Chair: Thank you, Mr. Lastewka.

Mr. Riis.

Mr. Nelson Riis (Kamloops, Thompson and Highland Valleys, NDP): Thank you.

It has been a fascinating morning in terms of points of view, and very informative. Gentlemen, I've appreciated your presentations and your reaction to the questioning.

I spent last week with a group of Norwegian economists. I noticed in the chamber's presentation that they were talking about the growth in Norway of 22% in terms of their standard of living compared to the other countries, which are abysmally low, including our own.

I think all of us innately know the structure of those Nordic countries. They have very high levels of taxation. Gasoline costs $1.60 a litre, most of which is taxation. There are high levels of personal tax, and so on and so forth, a very advanced welfare state, and they are still able to grow like that.

What is it they do so different from what we do to get that kind of growth, and presumably productivity attached to it? That's just a general question, but I have two or three others I'll get out, and then whoever wants to respond to them can respond.

Dale, this is to you on the issue about the need to have some kind of very significant tax break in this next budget. I know you're all here talking about productivity and therefore obviously there is a very clear bias in your presentations. The finance committee has been touring the country, and I suspect they're getting all sorts of good suggestions from other groups.

Dale, I suggest you plan on a holiday in February, because I think you're going to be really disappointed in your $5 billion tax-setting-aside. However, that's just a personal view.

In order to include all Canadians, which you really emphasized, I'm curious as to why you haven't included a reduction in the GST, which of course would apply even to children, as opposed to those who pay income tax. That's my question to you.

David, you've indicated, and I think we all agree, that getting the information, new technologies, and R and D into that SME sector is crucial but so difficult. In my experience, most of the people participating in SMEs distrust government by definition. What advice would you have for us? How can we overcome this deficit of information flow that is so significant in terms of productivity in those sectors particularly? I agree that the larger corporations probably can take care of themselves, but for those small and medium enterprises, how do we overcome this bias against government in terms of getting this information flow to them?

Those are three general questions.

Mr. Peter Tzanetakis: If I could respond to the first question, when you're comparing two countries, you don't just look at the overall level of taxation; you look at the structure of taxes. I think that's extremely important. Some of those countries, Germany and France, tend to have higher payroll taxes. We may be more competitive on payroll taxes than we are on personal taxes, and that could have a significant impact on standards of living and long-term growth.

The second point is the corporate tax structure. We're taking a look at a number of countries that are now significantly reducing their corporate income tax rates and a number of other business taxes.

So I don't think it's an issue of just asking what our overall tax burden is. We might be similar to the OECD average. Is that good enough? No, I think we have to drill down to the individual elements and try to determine where we're not competitive in specific areas.

Mr. Nelson Riis: I really appreciate your point there. On this term “drilling down”, which Michael mentioned earlier, we tend not to drill down when we compare ourselves to the United States. We obviously have our tax structures out of whack.

Mr. Peter Tzanetakis: Yes.

Mr. Nelson Riis: We just start with corporate and personal and leave it at that, pretty well. That's where the demand is. So if you're talking about drilling down, presumably we need to do drilling in that area too. Do you agree?

Mr. Peter Tzanetakis: Certainly. One of the points we've raised in our brief is that one of the biggest challenges is the personal tax side, where we're in the neighbourhood of 13% or 14% of GDP, versus the United States, which is in the area of 8.5% or 9%.

I do think we do some of that, and I think it's extremely important. It's not just an overall exercise; it's an issue of looking at the individual components.

The Chair: Mr. Orr.

• 1030

Mr. Dale Orr: I appreciate your questions, thanks. I think they're really important. But I'm going to focus in on one of them with the little preface that the $5 billion in PIT reductions is, as I think we both understand, my recommendation, not my expectation.

I do want to bring to your attention a bit of arithmetic. A $5 billion tax reduction spread over 30.5 million people is a measly $170 per person. If Paul Martin spends virtually all the money he will have at his disposal on a personal income tax reduction in February, that's only $170 per person. So I don't think I'll be the only person who's disappointed.

Now, on to the GST, because I think that's very interesting—

Mr. Nelson Riis: Can I go back and ask a quick question?

Mr. Dale Orr: Yes, please do.

Mr. Nelson Riis: What you describe is correct, Dale. It's a pitiful reduction. The point being made by all three presenters, I think, is that we need to get some spending power back into the system. By your definition, this is almost an irrelevant injection of funds back into the economy. Am I correct?

Mr. Dale Orr: It's a first small step. It's about what he can do this year.

With regard to the GST, I don't think there's any chance the government will move on the GST this year. I would think that's correct, because in terms of personal income tax, we've all talked about the potential for increasing incentive when you increase personal income tax and thereby increase our productivity.

An increase in the GST wouldn't do much for productivity, so I don't think he'll move on the GST for that reason, but I don't think that is the reason he won't move on the GST. I believe he won't move on the GST because one point of GST costs $2.5 billion. I think he feels that you can spend $2.5 billion and get a lot more political kudos than with one point on the GST. So I think he's going to come in at the right place for the wrong reason.

Mr. David Slater: Nelson, when Dale was talking about $170 a person, I went back to thinking of that old Bing Crosby song, Pennies from Heaven.

I would love to talk about Norway, but I won't, because you've put another question to me.

I do not think, Nelson, there is a uniform detestation of government. The service of the agriculture representative, or ag rep, has long been a government-financed cornerstone of improving agriculture. The ag rep is often the most highly respected person in a rural community. The IRAP person is also one the most highly respected persons. Even the Federal Business Development Bank is now regarded as just another bank, or they keep talking that way, instead of being the much more friendly filler-in of gaps and so on.

As well, some universities have been successful. I remember being interviewed once for a job at the University of Saskatchewan. The people there told me that one thing I had to understand if I got a post there was that I was going to have to go out on the circuit, out in the province. It was going to be part of my job to get out on the extension circuit and to talk up this, that, and the next thing.

I guess my feeling is that if we don't try to make grand and glorious answers to everything, we could enrich government and government-stimulated communication devices and hand-holding and encouragement and so on to people. I think it would be very worthwhile. But it doesn't make headlines. Ministers can't get out there cutting ribbons and boasting about this, that, and the next thing.

Those things, then, are really worth while. I think the model of the IRAP and so on, and encouraging the extension services of universities and so on, ought to be given a lot of encouragement.

• 1035

The Chair: Thank you, Mr. Riis.

Members, we really have to try to be a little more succinct here. We're running out of time. Another committee is scheduled to be in here at 11 o'clock, and I still have about six people who want to ask questions.

Mr. Murray, please.

Mr. Ian Murray (Lanark—Carleton, Lib.): Thanks, Madam Chairman.

It's easy for me, actually, because Mr. Riis neatly anticipated two of my questions.

The Chair: Good. We can move on.

Mr. Ian Murray: I have just two others.

My impression from listening to all of our witnesses is that an element of tough love, if you will, is required here as a country.

Dr. Orr, you mentioned that one of the problems is the question of labour mobility in Canada. Are you referring essentially to federal programs that tend to keep people in these so-called have-not provinces or are you talking about labour mobility in the rest of the country—in Ontario, say, or out west?

Mr. Dale Orr: I was referring to purely the arithmetics of the situation as opposed to the policies. Every year since 1990 the unemployment rate has been higher in every province east of Ontario than in Ontario or the west. There might have been one year in there where B.C. was as high as Quebec or something, but otherwise it's very marked.

My point was that, year after year, people stay where unemployment is way above, and too much above, the Canadian average. Simple calculations will tell you we simply cannot get our unemployment rate anywhere near the 4.5% the Americans are enjoying unless and until we solve that problem.

Why do we have that problem? It's partly because of equalization payments. It's partly because of EI payments. If each were less generous, that problem would be less severe. You could argue that other problems might be more severe, but my point was directed to the fact of it. Yes, lots of people move, but it's not enough to allow us to get into those nice levels of unemployment that the Americans have been enjoying for the last three or four years.

Mr. Ian Murray: It's always struck me as strange that we, as a nation of immigrants, a lot of whose forebears came on the equivalent of cattle boats, are now afraid to move even within Canada. I think it's a little strange.

At any rate, I'm still wrestling with the question of the adoption or adaptation of technology. What do you think we should be doing to encourage that, or are we essentially dealing with a difference between, say, American entrepreneurs, because we're focusing a lot on the United States, and Canadian-style business people in terms of the willingness to take risks?

If the tax system is changed so that you feel you have a bit more cash in your pocket, I understand that you can afford to take some risks, and that makes a difference, but I still don't think, in any reasonably foreseeable period, that is going to induce Canadian business people to start adopting technologies much more than they have been in the past.

I'd like to extend this to the chamber of commerce as well. A number of manufacturers, I believe, are members of the chamber of commerce. As you've identified in your own paper, productivity problems tend to be greatest in the manufacturing sector. To echo Mr. Lastewka, what is your chamber, as an organization that does provide services to its membership, doing about that problem?

I'll end with that and throw it out to the economists, Dr. Slater and Dr. Orr, as well as the chamber.

Mr. Dale Orr: Can I leap in first?

Certainly there's one area that's fully within the government's control and where, in my view, the government is shooting itself in the foot. With all of the interest in productivity, and everything Industry Canada has been doing on productivity, why in the world do we have foreign ownership restrictions on AT&T?

Historically, AT&T has been responsible for more inventions than virtually any other corporation in the world. It's one of the most innovative companies in one of the most innovative and important sectors. We just imposed this upon ourselves. We put a foreign ownership restriction on AT&T's operations in Canada. Why do we do that?

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I was absolutely appalled a couple of weeks ago when reading about airline policy. I think I heard the minister saying that one of the objectives was to keep Air Canada in Canadian hands. I thought, gosh, those horrible policies of the 1970s—hopefully we'd learn from those.

Why in the world would we do that? Airlines are a very innovative, high-tech type of operation. Why in the world would we impose restrictions on the ability of American Airlines to come in here, compete, and bring what they can? For heaven's sakes, the chief executive officer of Air Canada is an American, so why in the world were people saying that an objective was to keep Air Canada in Canadian hands? In some senses, we're shooting ourselves in the foot. There are things we can do.

Mr. David Slater: One of the things that occurs to me is this: in this matter of innovation, new technology, and adaptation, Canada is not a basket case—far from that. We have a lot of successes in this country. What I would dearly love is to be able to analyse why some of those successes are what they are and why we were slow at something else and so on. Just to take an example, in the technology of in situ oil sands extraction, the techniques that are enormously efficient were developed in Calgary and are now being applied in a whole series of in situ arrangements.

Or if you take another situation, just a very simple one, when I still had a house, I had to get the roof redone. Well, there's nobody with shingles and nails any more. There's nobody with a hammer any more. A nailing machine is used. When did the nailing machine come into general use in Canada? How many roofing contractors now use nailing machines?

I can go on and on in this way. What I dearly would like to see is something more than just an anecdotal piece in this area. I would like to see something systematic that says, here are successes, clear successes, and here's how they came about, and here are things we've not done and here's why. What's the difference? What makes them tick?

The Chair: Thank you.

Mr. Murphy, do you have a brief comment?

Mr. Michael Murphy: Yes. I'll just mention the policy and regulatory environment. If the government can play a role, as we've been urging, in the fiscal and economic area, we also think it can play a very effective role in terms of the policy and regulatory framework.

I'll use one specific example, briefly, which talks to the issue of developing electronic commerce in Canada. I know that many of our members and members of other organizations have worked quite effectively over the last year or year and a half to bring about a framework. Legislation is currently working its way through Parliament in that area. This can have a profound impact not only on large companies in Canada but on small and medium enterprises as well, because if you build the right kind of framework you get to apply the kind of innovation that can develop there.

If we become an e-com leader within the western world, from our standpoint we have a wonderful opportunity, I think, to use that kind of framework to apply innovation throughout our economy. One of the traps we get into with some of these discussions is that e-commerce becomes a discussion about companies that deliver those services. It's a much bigger issue than that and it's one that you can push through to the rest of the economy as well—particularly smaller players.

The Chair: Thank you, Mr. Murphy.

Mr. Jones, please.

Mr. Jim Jones (Markham, PC): Thanks, Madam Chair.

Thank you very much, all of you, for being here. I have a few questions. First, over the last few years, the world economy has grown fairly substantially. Why can the U.S. grow their GDP as a percentage of the world economy while we haven't kept pace even with our own GDP as a percentage of the world economy? We have shrunk.

Secondly, if you could differentiate between the government approaches of the U.S. and Canada, what is the difference between the U.S. approach to business and the Canadian approach to business?

• 1045

My third question is for Dale. You have said that you believe we should have personal income tax reduction versus corporate tax reduction. How can you explain the phenomenon in Ireland, where they have gone in with a low corporate tax reduction and have attracted businesses, research facilities, and programming labs? If you don't attract those things, the jobs and the wealth creation.... What's the sense of reducing personal income tax if you're not going to grow jobs?

My last question is to the chamber. You said that there is a serious problem in Canada in regard to education and that it is something that must be addressed. I would like that answered in particular in regard to the high-tech sector and what has to be done there.

Mr. Dale Orr: Thanks. Three questions, with the first one being Canada's growth versus U.S. growth.

I'd say there are two general reasons why the U.S. economy has grown more rapidly than Canada's over the last few years—and it is a phenomenon of the last few years, because over the fifties, sixties, and seventies, the opposite was true.

Over the last couple of years, first, the U.S. growth has been very much related to their information technology sector. Why has it grown more rapidly than ours? I think we've covered some of those points. Secondly, David did talk about Pierre Fortin's article, not that I agree with everything in his piece, but I agree with much that's in his piece. Pierre Fortin and other people say that tight monetary policy is one reason why we haven't grown as rapidly as we could have otherwise.

As for the approach to business, well, the Americans' approach to business is very different from ours. They're much more “open for business”. Mike was talking a few minutes ago about beyond taxes, and we know how our personal taxes compare to the Americans'; we're in serious trouble and we're getting into worse trouble. Right now our corporate taxes aren't too bad relative to the Americans', but if we don't do something in a year, not only are we going to fall behind the Americans on the corporate tax, we're going to fall behind most of the other OECD countries on the corporate side. The Americans are much more open for business, taxes, regulation...you name it.

Incidentally, it's very interesting that the poles of growth in Canada in the last few years have been Ontario and Alberta, the two provinces that are the most tax friendly and the most open for business.

In regard to your point on personal versus corporate, let me be very clear. There are a lot of good arguments for corporate income tax reductions, many of them covered by Jack Mintz's report. The only reason I'm saying personal income taxes this year is that, first, it's a question of priorities. As we were saying before, if you put all of the money into personal income taxes, it's still under $200 a person. I'm hoping that we hear a lot of good things about intentions on corporate income taxes in this upcoming budget and, then, in the next year and the year after, some real action. I'm a firm believer in its importance.

It is a question of how we just don't have enough money to do everything we would like to do this year—and personal income tax cuts should create jobs. They do increase the incentive for people to enter the labour force, so there is some reasonable job creation potential from reductions in personal income tax.

The Chair: Thank you, Dr. Orr.

Mr. Murphy.

Mr. Michael Murphy: I'll deal with the question of the importance of education, particularly in the high-technology sector. I think it's important. We've raised the issue. We look at education as one of the critical components in terms of increasing Canadian productivity. There's no question about it, because the whole value of your human pool of capital is one of the key drivers.

Do we have enough knowledge workers in Canada? I think there are data showing that we are producing an awful lot of them—and they are very attractive to our competitors. I think that's the second key point here. Our high-tech sector, which is telecommunications, computing, biotechnology.... We have some significant competitive advantages in those areas, and I'm just plucking those as examples. We compete globally in those sectors. These are not domestic businesses, they're not even North American businesses; they're global. So your competition for resources is crucial.

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I don't think the issue from an education standpoint is a question of needing to throw more money at it. I think—I don't have the data with me—if you look at the dollars that Canadians spend, both federally and provincially, and total them up on education, we're right up there within the OECD. I think it's fair to say that. We're right up there. So it's a question of how you use those dollars.

I think it's also a question of what kind of matching we can have between the corporate sector and the kinds of graduates we're producing. I'm a graduate of a much broader educational background—I'm not a computer engineer or a computer software specialist—so I can appreciate the value of that kind of education. But I think in terms of meeting the needs of the economy we have today, we have to do a better job of targeting, and we need to understand that we need more focus in the sector.

I'll leave it at that.

The Chair: Thank you.

Dr. Slater.

Mr. David Slater: Can I add something on the education side? I'm a former university professor.

I have two or three observations. First, our universities by and large have been rather insular. That is, people were frowned upon if they did outside work, even in the engineering schools. I think it's changed a bit, but the mores of Canadian academia are very slow to change.

I contrast that with when I was a very junior teacher at Stanford. My neighbour was a brand-new PhD physicist out of Princeton. The terms of his initial contract at Stanford were that he was expected to earn a third of his income from outside the university. That was a condition of the appointment. Whereas an young engineer appointed to Queen's...you know, it's what do you mean getting out there and doing this consulting on the side instead of paying attention to your academic things?

The second point I'd make is that while we've developed colleges of applied arts and technology, with some exceptions we've tended to treat them as second-class places. If you ask parents if they're going to send their child to a college of applied arts and technology or a university, they say they want Johnny to go to university. The attitude is that colleges of applied arts and technology are second-class places. There are some exceptions, but I think that kind of selectivity of parents and so on continues.

Thirdly, we have been absolutely dreadful in the development of technologists, and technologists are terribly important. It's not just the PhD physicists and so on, but highly skilled technologists are very critical in this whole business. I think we've not been very good in that.

Those are just a few thoughts on the education side.

The Chair: Thank you very much, Dr. Slater.

I have Mr. Cannis and Ms. Jennings, who still would like to ask a question and who haven't had a chance to participate. I'm going to ask Mr. Cannis to be extremely brief, so Ms. Jennings can have an opportunity also.

Mr. John Cannis (Scarborough Centre, Lib.): I know we're pressed for time.

The quick question I have is whether somebody could tell us what percentage of our debt is foreign held and what is domestically held—just a quick figure.

Mr. Dale Orr: It's about one-third at the federal level and about half at the provincial level.

Mr. John Cannis: Of what?

Mr. Dale Orr: Of our total debt.

Mr. John Cannis: Foreign held?

Mr. Dale Orr: Yes.

Mr. John Cannis: The other quick question is that Mr. Slater said our low dollar has given us economic growth and employment, and I'll go back to some of the initial comments that were made by the presenters. I think Mr. Murphy said the lack of labour and participation is one of the reasons we're not competitive and we won't have an increased standard of living. Further on he said Canada has slightly outperformed the U.S., but our standard of living has not improved, even though—and I quote—“quality of life is good compared to the U.S.” This doesn't gel for me, because if indeed the low dollar, as Mr. Slater said, has given us more economic growth, and as a result more employment, then having employment or labour participation, would that not be improved?

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The last question, Madam Chair, and I'll be quick, is that in terms of payroll contributions, there were two variations here that had me even more confused, because of Mr. Nelson's comments with respect to payroll contributions in some European or Balkan countries compared to what we have done. And if indeed that's the case, that our payroll contributions are the lowest, why is that an impediment to getting people back into the labour force?

I'll close with a comment from Mr. Slater, who just said let's talk about successes. Maybe it's also a mindset, gentlemen. We have to talk about some of the successes, like the 3% surtax that was eliminated. I agree with Mr. Tzanetakis.

Mr. David Slater: Could I come in on this dollar and growth? The thing you have to keep in mind is that if we hadn't had the Canadian dollar go down, if we had been pegging it at 70 cents, 72 cents, or 75 cents, we would have had a much worse time. So it's not that it's been such a great fillip to us, but it's helped prevent what would have been a hell of a lot worse. I think that's very important to remember.

The Chair: Did you want to make a comment?

Mr. Michael Murphy: I'll just mention very briefly that I think the point we were trying to raise here is that while we have a significant gap between ourselves and the Americans in productivity, what we were able to do in the last number of years is not let the gap get any bigger. So while we've improved, we haven't done anything to catch up, let alone try to get by the Americans. That in itself really has to be the objective here. This is an economy, as I just mentioned earlier, that's going to require us to compete beyond our borders in order to drive an increase in standard of living here. That was the issue we were trying to come to grips with.

The Chair: Okay.

Ms. Jennings, briefly, please.

Ms. Marlene Jennings (Notre-Dame-de-Grâce—Lachine, Lib.): Yes.

You've mentioned several times that one of the problems, in terms of R and D, is that there are a lot of innovative ideas that are developed outside of Canada, and that it takes time for those ideas to be introduced into Canada, adapted to our experience, and then spread out or fertilized throughout the industries, etc. Can you give us—and I don't expect you to do it now, because we're one minute before having to end—some actual concrete examples and comparisons of ideas that were introduced into the United States, and how the different taxation systems, both on the personal income side and on the business side, had an impact on how quickly they were adopted—how quickly they had an impact on increased productivity growth, for instance?

That's it. Thank you.

The Chair: Thank you very much, Madam Jennings.

Mr. Slater.

Mr. David Slater: I'll give you one concrete example: the introduction of concrete pumpers. Concrete pumpers are the things that are used to pump concrete up, which permitted the development, cheaply, of reinforced concrete high-rise buildings, for example. It came from outside Canada. The first use came at a certain time, and you could trace the gradual application of that in Canada. Whether taxation had anything to do with it, I have no idea.

The Chair: Okay. Thank you.

Dr. Orr, did you wish to make a comment?

Mr. Dale Orr: Yes. I was going to say one of the main reasons I was making that comment is a piece of work that was done by Industry Canada—and they've probably already brought it to your attention. If not, I have it here.

The Chair: Thank you very much, Dr. Orr.

I want to thank all the witnesses for being here, and all the committee members. I want to leave you with another thought, which you may wish to respond to in writing.

In the business community, we often hear that time is money. And we heard some examples of government expenditures that were not very useful, such as the tunnel. I would suggest to you that government is trying to be efficient. Time is money, and MPs' time is money as well, just as your time is worth money. So for MPs to stand around and wait and to not be able to effectively move between buildings and be able to allow committee meetings to continue while the bells are ringing....

I can ensure that MPs do not have to go outside, do not have to put their coats on, do not have to put their boots on, and we don't stand outside and wait.... On average, we wait an hour a day for different transportation modes on the Hill. I'd comment as well that yesterday there was a report released about the necessity for MPs to reduce their stress to make us more effective, and walking and exercise is a good thing.

So I just throw that out there, that there's a lot of time and money, and we should not look at just the dollars, but also the overall effects.

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The meeting is now adjourned. Thank you.