EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 21, 1995

.0934

[English]

The Chair: Could we come to order?

The finance committee is continuing its pre-budget investigations. We are pleased to have with us today some of Canada's leading business representatives, persons who represent a very high portion of our gross national product.

We have with us Mr. Peter Smith, president of the Aerospace Industries Association of Canada; Mr. Thomas d'Aquino from the Business Council on National Issues, no stranger to our committee; Mr. Dale Orr, chair of the economic policy committee of the Canadian Chamber of Commerce, again no stranger to us; Mr. Steve Stinson, director of finance and business issues for the Canadian Pulp and Paper Association; Mr. Ron Bulmer, the president of the Fisheries Council of Canada; Mr. Bob Keyes from the Mining Association of Canada; and Mr. Patrick McNeil from the Canadian Electrical Association.

.0935

We're very pleased to have you with us. We'll have opening statements from each of you and then we can turn to questions. Thank you.

Perhaps you could start, Mr. Smith.

Mr. Peter R. Smith (President, Aerospace Industries Association of Canada): Thank you very much, Mr. Chairman.

As mentioned, I'm president of the Aerospace Industries Association of Canada. I'm delighted that you invited us here today to discuss the three questions that were put to us by the clerk.

As far as an opening statement is concerned, I simply want to state that the private sector creates wealth, sustains jobs, develops export markets and ensures a return on investment to the national economy.

The Canadian aerospace sector is a prime example. Sales in 1995 were projected to be $10.3 billion, and here, after only eleven months, we're exceeding $10.9 billion and expect to close out the year in excess of $11 billion. Forecasts show that by 1999 it should be $15 billion, this despite headlines that suggest the complete opposite is occurring in our competitor nations such as the U.S., Germany, France and the U.K.

More impressive and more particular to this committee is the fact that our exports represent approximately 70% of those sales currently, and we forecast that by 1998 they will exceed 80%.

How does this happen? Through investment and risk-sharing in R and D by both government and industry. This year alone, over $1.4 billion was invested by the aerospace sector in R and D. For every dollar government invested, industry invested $4, creating $25 in sales, $18 of which have been exported.

It is interesting to note that accumulatively the defence industry productivity program invested, since 1959, $3.4 billion in assistance, which has generated a total of $149 billion in sales over that same period. Jobs in 1984 were 42,000; in 1994 they are in excess of 53,000.

You asked what our deficit reduction target should be. We are very supportive of the way in which the government has addressed this particular issue. We suggest we should stay the course of 3% of GDP or better. We need to keep confidence in the marketplace. We need to maintain an aggressive enough stance to allow for contingencies, and we are setting the example for the provinces so the accumulated debt of this nation is within means.

How might budget measures be used to create an environment for jobs and growth? Maintain stability in the marketplace, develop programs that invest in risk-sharing and are repayable, tighten some of the social programs and transfer payments, and certainly rethink government operations in phase two. We cannot afford to increase personal or corporate tax at this stage.

In areas of federal activity for further cuts, certainly the fine-tuning has been exemplary in the sense of the first phase of program review. I think there's a necessity to take a look at environment, regional development, health and education and sports. There are overhead functions in government departments that need to be re-examined as well.

With this particular course in mind, we feel further developments with respect to commercialization or privatization would do this nation a tremendous service. We've seen examples with respect to air navigation, CN Rail and VIA Rail, and we can see examples in the Department of National Defence, with alternate service delivery, and also within other departments where this may apply.

We are very pleased to be able to be supportive of what we see to ensure that our aerospace industry is successful in contributing wealth to this nation and is sustaining the jobs that are necessary to contribute to that wealth.

Thank you very much.

The Chair: Thank you, Mr. Smith.

Mr. d'Aquino, please.

.0940

Mr. Thomas d'Aquino (President and Chief Executive Officer, Business Council on National Issues): Mr. Chairman and members of the House of Commons Standing Committee on Finance, thank you once again for inviting the Business Council on National Issues back to share our views with you. It's something we always look forward to.

The council, as you know, is made up of the chief executives of our largest 150 companies, which represent all sectors of the economy and roughly about 75% of private sector GDP in Canada.

I'm particularly looking forward to being able to share some views with you, together with my colleagues on this side of the table, Mr. Chairman. I think between us all we should cover most of the issues that are of concern to business today.

I would like to focus on a couple of issues specifically that you've asked us to address, namely, the 1997-98 deficit reduction target. I'll also offer a general outline of what areas should be considered for further fiscal action.

I'm happy to report that there are increasing signs that Canada will experience a modest economic growth in 1996 and in 1997. Indeed, a stagnant economy in the first part of 1995, which worried all of us, has given way to stronger economic growth in the fourth quarter.

Real growth of between 2.5% to 3% is expected in 1996. Even more encouraging is that this economic growth will take place in a very low-inflation environment, something that's relatively new to the economy of Canada. As you know, this was a dampening factor in the ``fifteen years'' of the 1970s and 1980s.

Inflation, we expect, will remain in the 2% range next year. We continue to be very supportive of the policies and the leadership of the central bank, as we always have, Mr. Chairman. We expect employment to grow at about 2%.

There are several reasons for this relative optimism that I'm expressing regarding the economy next year. First, the inflation environment of the United States remains stable in the 3% range. This is good news. The outlook for interest rates in the United States is neutral, and there might even be some scope for a further decline in interest rates next year. That, of course, would be good news for the Canadian economy.

While experiencing a comparative lull after a long period of powerful growth, Canada's export sector is well placed, in our view, to take advantage of stronger growth in the United States in 1996. I remind the chairman and members of this committee just how strong and advantageous a factor export growth has been over the last five years in an environment made more attractive by the Canada-United States Free Trade Agreement. I know it's an agreement that the chairman supports very strongly today, I expect.

While world economic growth prospects, on the other hand, have brightened considerably from earlier this year, the global economic slowdown experienced in 1995 has now been characterized as a mid-cycle pause, as the economists call it. The outlook is for sustained non-inflationary growth, particularly given the realignment in foreign currency markets.

Canadian short-term interest rates have declined significantly since the referendum, I'm pleased to say. Three-month interest rates have decreased by more than 100 basis points since October 30. However, long-term interest rates remain at pre-referendum levels.

The declines in short-term rates will provide some stimulative impact, I believe, upon growth in the domestic interest-sensitive sectors of the Canadian economy in 1996. The more favourable interest rate climate will have a positive effect on consumer confidence, which will hopefully fuel some degree of a consumer rebound. However, post-referendum uncertainties will keep long-term rates higher than necessary, and this will dampen investment and growth prospects.

The members of the BCNI share what I suppose one would call this cautious optimism for 1996. Indeed, private sector balance sheets are in quite good shape. Earnings are generally robust. Profit levels continue to improve from near-disastrous levels two years ago.

I remind the members of this committee that when they look at those numbers on the front page of the The Globe and Mail that are looking very good, keep in mind that they are still considerably below the historically high levels of the past.

.0945

I have to say that the recent stagnant period of economic growth combined with the referendum result is almost certain to have some effect on private sector investment intentions in machinery, equipment and capital investment, particularly, Mr. Chairman and members of the committee, in the province of Quebec, I'm sorry to say.

However, despite the possible moderation, those sectors of the economy that are open to foreign competition will have to continue to restructure, invest and upgrade in order to remain competitive on global markets.

The prospect of recession in the United States and in Canada therefore remains relatively low in 1996, but will rise as we move beyond 1997. In fact, the downturn that is certain to come has implications for the 1996 budget and argues for determined action to eliminate the deficit over the next three years.

I'll just say a quick word about the 1997-98 fiscal target. We are encouraged with the final deficit results for 1994-95 fiscal year of $37.5 billion, which is $400 million below target. That is encouraging.

Also encouraging is the fact that the 1995-96 federal deficit shows definite signs of coming in below the government's $32.7-billion target despite weaker than expected economic growth.

Finally, without any significant negative economic effects such as a recession in the United States over the next two years or a constitutional crisis in Canada, the 1996-97 deficit is likely to be significantly under target as well.

As you know, Mr. Chairman, the BCNI has repeatedly called for a balanced budget in advance of the next downturn in the business cycle. Specifically, we have recommended that the federal government should put a credible plan in place to achieve a balance no later than 1998-99.

This continues to be our position, particularly in light of the Quebec referendum results, which raise a very significant degree of uncertainty with the possibility that there could be heavy political turbulence ahead of us.

In other words, when I appeared before this committee last year and suggested that we should balance the budget by 1998-99 at the latest, we did not anticipate that we would have the kind of referendum result that we have had. This is a reason to move more quickly, rather than more slowly.

Let me just turn to the issue of federal debt for a moment. The restructuring program put into place in the 1995 federal budget will, at best, stabilize the debt-to-GDP ratio at about 74% in the 1996-97 fiscal year.

This is not enough, Mr. Chairman. The upcoming budget is very important from our perspective because it must firmly establish a declining trend in the debt-to-GDP ratio. We must all, I think, turn more of our attention to the problem of the debt, rather than be mesmerized by the problem of ongoing deficits.

On economic growth and job creation, I would just like to say a couple of things. First, there does appear to be a general consensus in Canada that governments need to reduce and eventually eliminate their budget deficits. This is a far cry from the Canada of five years ago.

What is less known, however, is that there is a linkage between deficits and debt and economic growth and job creation. The linking factor is interest rates, Mr. Chairman. Right now the Canada-United States rate differential is about 160 basis points, which is back to where it was just before the referendum.

Furthermore, the long-term bond yield is about 8%, while our inflation rate is only at about 2.5%. Consequently, real interest rates, Mr. Chairman, in Canada are at about 5.5%. This compares with average real long-term bond yields in the United States of about 3% currently. This is much too high for job creation, investment and the kind of growth that we need in this country over the next decade.

My point is that Canada is paying a heavy price for both political instability and recalcitrance to deal with its debt problems. The heavy price is in the form of higher real interest rates, higher government dissaving, and lower private sector saving. This translates into lost job opportunities, delayed or forgone future investment decisions, and lower levels of input and output.

.0950

In fact, countries with clearly unsustainable fiscal policies, such as Canada, Sweden, and Italy, are suffering from what the IMF has termed ``confidence effects''. In essence, these are risk premiums attached to debt instruments as a result of extraordinarily high levels of indebtedness, and as such, credible plans to put the country's finances on a firmer footing are very urgently needed. This would translate into lower risk premiums and possibly even to a stronger exchange rate.

So let me conclude, Mr. Chairman, by saying that the export-oriented part of Canada's private sector has restructured and reoriented itself to be more competitive on global markets. Our exports have contributed significantly to economic growth, as I said earlier, while the domestic interest-sensitive sectors of our economy have remained stagnant, with only nominal growth.

Let me leave you with this thought. Simply put, our domestic economy needs lower interest rates as quickly as possible to stimulate stronger economic growth and job creation. In our view, the federal government must boldly announce a fiscal strategy to balance the books within the next two fiscal years. In effect, this will increase the level of confidence that our debt levels have stabilized and the debt-to-GDP ratio will soon be on a downward trajectory.

I have to say to you, Mr. Chairman, that I've been president of this organization for some time and I've heard many finance ministers tell me over the last fifteen years that the trend on the debt-to-GDP ratio would trend downwards. It has yet to happen in fifteen years, at enormous cost to jobs and growth in this country.

I know, Mr. Chairman, you'll want to deal, hopefully, this morning with unemployment insurance, the Canada health and social transfer, Canada's retirement system, further restructuring efforts, and the goods and services tax, and I'll be happy to speak to any of those points in the general discussion. Thank you very much.

The Chair: Thank you, Mr. d'Aquino.

Mr. Orr, please.

Mr. Dale Orr (Chair, Economic Policy Committee, Canadian Chamber of Commerce): Thank you, Mr. Peterson, and thank you to the members of your committee. We're once again pleased to be here.

The Canadian Chamber of Commerce is the most broadly based voice of the business community. At our annual meeting in September we discussed with great care our position on the debt and the deficit. The voting delegates from all across Canada solidly supported a resolution for continued and significant reductions in the deficit without any increases in taxes. Recognizing that they, too, must share in the budget cuts, they supported still further reductions in business subsidies.

The chamber's position is consistent with what you heard from the round table of economists several weeks ago. This morning I want to expand on and emphasize several points.

The fundamental problem of economic policy is not the deficit, nor the deficit-to-GDP ratio; it's the level of the debt relative to our ability to finance the debt. Everybody seems to recognize this. This was very clear in the report from your committee last year. However, the policy of the government is not consistent with recognizing that, and that's what I want to dwell on this morning.

The appropriate highest-profile target for fiscal policy should be changed. Instead of targeting a 3% deficit-to-GDP ratio in 1996-97, we should be giving highest profile to targeting a debt-to-GDP ratio in the 55% to 60% range several years later. In the upcoming budget, we should identify as the next high-profile target a debt-to-GDP ratio of 71% for 1997-98.

The theme of fiscal policy must be continued expenditure restraint with no tax increases until the debt problem is in hand. This means that reaching the 3% deficit-to-GDP target in 1996-97 and eliminating the deficit several years later are benchmarks along the route to getting our financial house in order. These are appropriate interim targets - no more, no less. Attaining them will be no reason for any complacency or shift in government priorities.

The ultimate objective of fiscal policy is to get the government into a position where it can once again have the flexibility to be responsive to the needs of the public. This day will not arrive until the debt-to-GDP ratio has fallen significantly from the current level. Any backing off from program expenditure restraint will simply mean that the government will be even less equipped to serve those in need in the future.

.0955

Canadians of the past decade consumed all of the government's revenues in program expenditures. Those two sums were virtually equal over the last decade. Neither present nor future Canadians, not for at least another decade, will be able to draw as heavily on government revenues.

Annual debt-servicing costs are destined to stay in the $50 billion range for most of the next decade. Therefore there is no way government program expenditures can approach the level of government revenues for the next decade.

The only way the government can get itself in the position of being able to allocate most of its revenues to program expenditures, as it has over the past decade, is to reduce the level of the debt significantly.

The 70¢-dollar will take on a new meaning for Canadians. For the next decade, for every dollar Canadians pay into the federal government, they will get back only 70¢ in program services from the government. For the next decade, Canadians are destined to pay more in taxes than our counterparts in most developed countries and at the same time receive back less from the government in program services.

Apart from the debt problem, Canadians already feel overtaxed. Medium- and higher-income Canadians pay significantly more in income taxes than do their American counterparts, and American taxes are on the way down. Today many Canadians are left with only 40¢ from each extra dollar they earn, after paying income and sales taxes.

This is the good news, believe it or not. The bad news is that any backing off from the current budget targets, any failure to eliminate the deficit in this political mandate, and any failure to bring the debt-to-GDP ratio down to the 55% range several years later will only make this problem much worse and stretch the problem beyond the next decade.

Thank you.

The Chair: I'm not sure I understood exactly what you meant, Mr. Orr, when you said 71% of GDP target for 1997-98.

Mr. Orr: That's debt-to-GDP.

The Chair: I understand that, but what does that mean in terms of the actual deficit that year? We were targeting 3%, or about $24 billion, the year before.

Mr. Orr: Roughly speaking, if you hit about $20 billion instead of $24 billion that year, and about $10 billion the following year, you'd be in the range. You'd have a debt-to-GDP ratio of about 71%.

The Chair: Just so we all understand the figures, you're saying our next rolling target, instead of $24 billion, should be $10 billion.

Mr. Orr: No, instead of $24 billion it should be about $20 billion.

The Chair: No, no. Just bear with me. Our target for 1996-97 was $24 billion. You don't like that target; you think we should be more aggressive. But for the following year we should reach $10 billion in terms of the deficit.

Mr. Orr: That's right, yes.

The Chair: Thank you, Mr. Orr.

Mr. Stinson, please.

Mr. Steve Stinson (Director, Finance and Business Issues, Canadian Pulp and Paper Association): Thank you, Mr. Chairman. I'd first like to thank you and the members of the committee for the opportunity to address you today.

I represent member companies of the Canadian Pulp and Paper Association, which accounts for the bulk of production in Canada's forest products sector.

The forest products industry is of critical importance to the Canadian economy, with almost one million well-paying jobs dependent on the forest sector. Moreover, the forest products industry is one of Canada's largest exporters, contributing approximately $27 billion in net exports last year.

Our members went through an extremely difficult period during the past recession, but after huge losses and the significant restructuring these losses brought on, pulp and paper companies are for the most part once again profitable.

However, we see the federal government's weak fiscal position as one of the major threats to the ongoing prosperity of our industry, particularly in light of its negative impacts on the investment climate and the cost of capital.

The main priority we would like to see addressed in the coming budget would be to achieve a balanced budget within the next three years. Given the likelihood of another economic downturn within the next five years, we think it prudent to move quickly in restoring the nation's finances. If action is not taken, we risk seriously jeopardizing the living standards of all Canadians and the ability of government to deliver the programs and services on which Canadians depend.

The Chair: Excuse me, Mr. Stinson. What do you mean by a balanced budget within three years - three years from today?

Mr. Stinson: By the 1998-99 fiscal year.

.1000

The Chair: So under our program, that would go from $24 billion, to something in between, to zero.

Mr. Stinson: Right. In achieving this objective, we would see a target deficit of no more than 2.5% of GDP in the coming fiscal year, 1996-97, and a balanced budget by 1998-99. The objective should be achieved through cuts in program spending, and no new taxes or tax increases should be contemplated. As most Canadians see it, tax burdens are already excessive.

The general principles that should be applied in reviewing programs for cuts would be: first, to abandon unnecessary and ineffective programs; secondly, to eliminate overlap of federal and provincial programs; thirdly, to concentrate and consolidate resources to ensure the cost-effective delivery of remaining programs; and finally, to let the private sector deliver programs where government involvement is unwarranted or has proven ineffective.

The question of what specific spending to cut, however, is a difficult one, but presumably that is why we elect politicians, although the problem has not been made any easier by their failure to deal with this issue in the past. As a trade association, we are not in a position to speak on many areas of social spending, but we can offer some examples of where to look.

First, we repeat our recommendation to eliminate business subsidies. Although significant cuts have been made, there's still more room to go.

Secondly, we must tackle the problem of overlap at the federal and provincial levels of government. Not only is this an inefficient use of our tax dollars, but it also imposes a significant burden on the private sector.

For example, the environment is one area where our members expend considerable resources complying with the demands of two levels of government that often duplicate each other's work or, even worse, work at cross purposes.

Thirdly, where feasible, government should work to recover its costs from the beneficiaries of the services it provides. In effect, the user should pay. However, in implementing this principle, we need some assurance that if government is to be the monopoly provider, such services will be delivered efficiently and at cost. Moreover, it is essential that the principle of cost recovery not be subverted to become simply another form of taxation or a disguised method of income redistribution. It would be unacceptable if user fees are levied on some groups but not on others.

Finally, we would advise the government to resist the urge to tamper with the tax treatment of RRSPs and pension fund contributions, particularly any move to tax the assets or earnings within these plans. If anything, government should be encouraging more retirement savings, not less.

On the question of jobs, we believe the sustainable expansion of employment stems from sound economic growth based on three fundamental conditions: first, the establishment of a stable and consistent macroeconomic policy environment; secondly, an institutional and policy environment that encourages and allows enterprises to start up and prosper in a free and competitive market; and thirdly, a flexible regulatory framework that enables both employers and employees to adapt to economic change.

It is clear that many government policies and measures work against the realization of these conditions, but fortunately, indications are that we are beginning to move in the right direction. Any budget measures should keep these conditions clearly in mind.

In conclusion, the basis of sound economic policy is not rocket science but common sense. There is a growing consensus that restoring the nation's finances should remain the main priority of the government; otherwise all government programs on which we depend will be in jeopardy. We only hope that the federal government has the resolve to do what is necessary.

The Chair: Thank you, Mr. Stinson.

Mr. Bulmer, please.

Mr. Ronald Bulmer (President, Fisheries Council of Canada): Thank you, Mr. Chairman and committee members.

The Fisheries Council of Canada represents firms that harvest, process or distribute seafood in markets from Ontario through Atlantic Canada.

The fishing industry is supportive of the direction of fiscal restraint. Certainly the 3% deficit-to-GDP would be a minimum benchmark as we move ahead. Because our industry is concentrated in Atlantic Canada, we are very supportive of the need for job creation and economic alternatives in regional development. But even as we say that, we are certainly supportive of policies that say you can't buy them. You have to create the business climate, whether it's fish or any other business that is looking to move to the less advantaged regions of Canada, small or large. You have to focus on those job-killers, such as payroll taxes, training for people, and education levels that encourage people to put business out there.

.1005

We are, within that, supportive of a smaller government with fewer programs, but because we are an 80% export-oriented industry and must be world competitive, and we have no levers out there, we as an industry must resist the government pushing inefficiencies onto the industry, sending us new costs and reducing our competitiveness in world markets, even if that position makes us unpopular.

Those are my general remarks, sir.

The Chair: Thanks, Mr. Bulmer.

Mr. Keyes, please.

Mr. Robert J. Keyes (Vice-President, Economic Affairs, Mining Association of Canada): Thank you, Mr. Chairman.

I apologize for George Miller, the president of the Mining Association of Canada, who unfortunately is not able to be here this morning.

The Chair: We're very pleased to have you in his place, Mr. Keyes.

Mr. Keyes: Thank you.

On behalf of the members of the association, we are happy to be here this morning to take part in these pre-budget discussions, as we move towards a very critical budget for the country.

The committee's questions to witnesses sought views on three topics.

First, on deficit reduction, it's beyond our scope of expertise to say exactly what a deficit reduction target should be or to give an exact number. Suffice it to say our members strongly support the priority the government has given to deficit reduction and to putting the federal fiscal house in order. We recognize this process has some short-term costs to Canadians, but the long-term consequences will be far greater if appropriate actions are not continued.

In terms of your question on budget measures to create an environment for jobs and growth, we feel strongly that the next budget must underline and reinforce the federal government's stated intentions to achieve concrete progress on regulatory reform. Canada's regulatory jungle is an impediment not only to the economic health of industry and to our investment climate but to good government. Moreover, it's costly for both the public and the private sectors.

In December 1994 the secretary of the Treasury Board announced ``Building a More Innovative Economy''. This regulatory reform program targeted areas of specific improvement to the federal regulatory regime. Unfortunately progress in the intervening year has been minimal.

Our analysis shows that the current regulatory system continues to be choked with red tape. Regulations, guidelines and decision-making processes duplicate and contradict each other, not only one department to another, but also between levels of government.

I hasten to stress that in making suggestions for regulatory improvement, I am not suggesting a decrease in environmental protection or lower standards. Our industry is unequivocally committed to environmental excellence and to the concept of sustainable development. We support effective and efficient regulation that maintains high standards of protection in a cost-efficient way. However, the current situation is far from cost-effective.

I don't have the time this morning to go through our ideas in detail, but if you and your committee would wish, I can table our recent submission to the Standing Committee on Natural Resources, in which we went through a variety of regulatory problems and areas where we think concrete progress can be made.

The Chair: We would welcome that, Mr. Keyes.

Mr. Keyes: Okay. I'll give it to the clerk after I'm through.

Some proposals involve the use of administrative arrangements. These would allow federal and provincial governments to work more effectively while leaving existing legislation and powers in place. But administrative arrangements can only go so far. Real progress requires the overhaul of costly and old-style regulatory systems that are process-based rather than performance- or results-oriented.

Your third question on federal activities to be cut further, commercialized, privatized or devolved flows from what I have just discussed. The federal government must let go of some of its outdated and expensive centralist systems. We simply can't afford to have two levels of government, or multiple departments of the federal government, work in their traditional ways.

The budget is the government's flagship statement on economic direction, philosophy and action. It's therefore an appropriate place for the Minister of Finance to reinforce commitment to regulatory reform and to announce specific measures to ensure it happens. Just as importantly, it's an opportunity to send a signal that the government intends significant and meaningful reforms.

.1010

In closing, I reiterate our key message this morning is that this committee should recommend to the Minister of Finance that he bolster the commitment to regulatory reform in the next budget. We think the benefits can be twofold: a more efficient and effective government, and, in the end, a more dynamic private sector creating jobs, growth and income for Canadians.

Thank you.

The Chair: Thank you, Mr. Keyes.

Mr. McNeil, please.

Mr. D. Patrick McNeil (Vice-President, Public Affairs, Canadian Electrical Association): Thank you, Mr. Chairman, and members of the committee. Good morning, bonjour.

First of all, let me start by thanking you for allowing the Canadian Electrical Association the opportunity to join with you and my fellow representatives from Canadian industry in this morning's discussions.

The Canadian Electrical Association is the national voice of Canada's electric power industry. Our members include all the major generation, transmission and distribution utilities in Canada. Together they account for over 97% of this country's installed electricity-generating capacity.

Our members also include many of the industry's major suppliers. The electrical utilities sector is one of those sectors from which the finance committee has not heard all that much in the past during your pre-budget consultations. You may recall, however, the protest of several of our private sector members after Minister Martin's last budget.

The elimination of the corporate income tax rebates that used to exist under the Public Utilities Income Tax Transfer Act has had a significant negative impact on several of those companies and their customers.

Under the Canadian Constitution, electricity is primarily under the jurisdiction of the provinces. Many of our larger members are in fact provincial crown corporations that are not subject to the federal Income Tax Act and have had their borrowings guaranteed by their provincial governments.

As such, our members have traditionally had a limited need to talk to the federal level of government about taxation or borrowing; however, times, our markets and the electrical industry are changing. Global competitive forces have had major impacts on our members' industrial customers. Those customers are now extremely cost-conscious and have become very demanding with respect to what they are charged for their electrical services.

Competitive forces are also causing changes to the way the electric utility industry is operating. Recent changes proposed by the U.S. Federal Energy Regulatory Commission in response to the Energy Policy Act, 1992 are starting to affect the way Canadian utilities do business in the export marketplace.

Many provincial governments are currently reviewing and rethinking how the electrical consumer will be best served in the future. Some of the reviews include consideration of whether ongoing public ownership of utilities is essential or even desired.

The Government of Ontario recently announced the formation of a special advisory committee to evaluate options for phasing in competition in Ontario in three areas: structural changes to the electrical industry; regulatory reforms to ensure a healthy, competitive environment; and the introduction of private equity in the electrical utility sector.

New ownership models are likely to be considered and debated in many jurisdictions as the industry restructuring continues. It is conceivable that some public sector utilities could become investor-held. As these companies become subject to federal tax treatment and the normal rules for borrowing capital, there will be a need to more accurately define the fiscal and past expenditures needs of the industry.

Mr. Chairman, the electrical utility industry in Canada is changing quite rapidly, a major change that will affect existing utilities and their customers. You can be sure that the Canadian Electrical Association will take the time to more fully brief your committee about the changes and its new needs and requirements.

Finally, to give you some indication of the potential extent of those changes, I would like to leave with you just a few descriptors of our industry. The electric power industry in Canada employs 93,000 people, just less than 1% of total Canadian employment.

The industry's contribution to Canada's gross domestic product reached almost 4% in 1993. The total assets of the Canadian electrical industry are over $140 billion or 7.5% of the capital stock of the economy, excluding the residential sector.

Three utilities - Hydro-Québec, Ontario Hydro and B.C. Hydro - are ranked second, third and seventh amongst all Canadian companies in terms of assets.

Total electrical utility debt in 1993 was some $88 billion, with 36% of that held by investors outside Canada. Electrical utilities have always been responsible borrowers, and our ability to repay our borrowings has made Canada one of the safest and most stable places to invest.

.1015

Thank you, Mr. Chairman. I look forward to this morning's discussions.

The Chair: Thank you, Mr. McNeil.

Mr. Smith, you didn't set any particular deficit target beyond 1996-97. Do you have one in mind?

Mr. Smith: We expect that it would be under $20 billion for 1997-98 and hopefully zero by 1999 to the turn of the century.

The Chair: So any of you who have expressed views on the ultimate target say that we must balance our budget by 1998-99. Is that correct?

Mr. Smith: Yes.

The Chair: Let me ask one other question. How do you people see the job situation going in your particular industries over that period from now until 1998-99?

You represent big business, and big business has not really been a great source of new job creation. Or perhaps we're wrong, and perhaps we can look forward to big business in Canada creating a lot of new jobs, which would be very helpful to all of us.

Mr. Smith: Mr. Chairman, certainly during the early 1990s it did look very troublesome for the aerospace business. We were affected as much as other sectors were during the recession. You're seeing a consolidation of mergers in the aerospace business, acquisitions and economies that are being realized as a result of implementation of much more efficient manufacturing capabilities.

I'm delighted to say, however, that certainly through the figures I had indicated to you in my opening statement - the forecast this year of $11 billion, forecasting up to $15 billion by 1999 - you're beginning to see growth in the employment sector.

In fact even as recently as yesterday Pratt & Whitney, as an example, won a job to provide engines called JPATS to the U.S. military. They are currently advertising for 350 engineers. This is unprecedented in the sense of the types of employment being looked at, in the sense of high tech, plus the numbers.

If you'll look at any of our member companies, of which we have 120, every one of them has shown a growth rate, some around 11%, some as high as 48%. All are today in the recruitment business for high-tech jobs.

I simply want to -

The Chair: So you see an increasing employment rate up to 1998-99?

Mr. Smith: I do, but it's contingent upon a position that the Aerospace Industries Association has been taking over the last 8 to 10 months. As a result of the government's budget announcements in February of last year, at which time the defence industry productivity program was cut, I simply want to reinforce that some of the comments made by my colleagues this morning about cutting business subsidies....

I believe there has been a correction made that the position the Aerospace Industries Association -

The Chair: No, we'll come to that.

Mr. Smith: No, but I'm simply saying it's contingent upon an investment, and that the growth rates you're seeing in the aerospace sector are based on R and D investments five, six, seven years ago.

This is very important in the sense of maintaining the competitive nature of the industry. So I think we should talk about these mechanisms -

The Chair: The Business Council on National Issues and the Chamber of Commerce have called for elimination of all business subsidies.

Mr. Smith: I think the Business Council has a correction to make on that one.

The Chair: Mr. d'Aquino, just on the employment issue, do you see your 150 members increasing employment over the next 4 years, and to what extent?

Mr. d'Aquino: The answer to that is yes, Mr. Chairman.

Let me make what I think is a very important statement with regard to job creation. This country, your committee, this government, those in opposition - virtually everybody in political office - have bought into the idea that big business is not only not creating jobs, but is not interested in creating jobs.

The hard reality is this -

The Chair: We are here to hear from you.

Mr. d'Aquino: - if one looks back over the 1980s, jobs have been a very strong suit of Canada as a country.

If one looks at where those jobs have come from, it is true that large enterprises.... Let's be very careful here, because in most cases large enterprises in the context of the globe mean that our enterprises are in fact very small. So this idea of big and small in a world that is globally competitive is a problem we have for starters.

.1020

Second, a tremendous amount of the restructuring has resulted in the spinning off of countless numbers of businesses and jobs. So this idea of somehow putting big business into a box over here -

The Chair: No, no, Mr. d'Aquino, I'm sorry, I didn't mean to open up a broad discussion; I wanted to get to members very quickly.

Mr. d'Aquino: But the answer is yes, jobs will be created because jobs will be created vicariously and jobs will be created by satellite activity, and the linkage has to be made. Otherwise, you will just simply say that one is doing nothing and small business is creating all the jobs. There's a very powerful linkage, and that's the only point I wanted to make.

Mr. Orr: I'll just make two points, Mr. Chairman. With the policies we're recommending there should be steady but not spectacular increases in job creation.

What happens to the level of the unemployment rate is a little bit of a different question. That also takes into account the size of the labour force. With unemployment rates being reasonably high, what will likely happen over the next few years, with reasonably steady job growth, is that the unemployment rate won't fall that much because people who are not now registered as being in the labour force will be drawn into the labour force.

Mr. Stinson: It's a difficult question, but I see that, at least over the next couple of years, current employment will be sustained within the forest products sector.

Most firms, at least on the pulp and paper side, are running fairly close to capacity. We're in a bit of a lull right now because of an inventory correction, but the outlook is for the demand for pulp and paper products to remain relatively strong over the next couple of years.

As our members make incremental additions to capacity, that should perhaps offset some of the ongoing restructuring and productivity improvements they have been making over time.

So I would see employment perhaps creeping up a little.

The Chair: You've had a major downsizing in your industry over the past five years?

Mr. Stinson: There has been, yes.

The Chair: So steady or slightly increasing over the next five years?

Mr. Stinson: That's right.

Mr. Bulmer: In any scenario the fishery has nowhere to go but down, given the resource base available to it. It's only a question of how much money and what government programs are committed to easing the slide.

Both on the water and on the shore there is vast overcapacity that has to be removed. You're looking at thousands of people who are going to have to find some other economic reason to be in the coastal regions.

Mr. Keyes: As to the plus and minus scenario, on the minus side there will be continuing productivity enhancement through technology, which means fewer people, and we will have some closures as deposits are exhausted.

On the very plus side, we have exciting developments in Yukon, Labrador, northern Quebec and the Northwest Territories in regard to diamonds. A lot of these projects are in the planning and environmental process.

If they can get through, they'll be up and running, and there is going to be a major stimulus there. Don't forget the approximately three-to-one multiplier effect and the spin-off of jobs from those created in the industry.

So I'm hopeful that the long-term slide we have seen may be halted as a result of these new developments when they get up and running.

Mr. McNeil: Mr. Chairman, unfortunately I'd say that the outlook for employment within the electricity sector is poor. As the companies become much more cost-conscious and our customers become much more cost-conscious, and with the decline in the number of major capital expansions in our industry, we don't expect employment within the industry to be that bright in the coming years, over the short term.

The whole reason, however, that the electrical industry is restructuring is to better serve our customers and retain their jobs.

The Chair: Thank you. Could we take a two-minute break and come back so that members can spend some time working with you on various issues?

We'll break for two minutes.

.1033

The Chair: Can we come to order? We will now turn to members of Parliament for questions and comments. Before we conclude, each of our panellists will have an opportunity to make a closing statement.

We are going to start with Mr. Silye, please.

Mr. Silye (Calgary Centre): Thank you, Mr. Chairman. I would like to thank everybody who made a presentation this morning.

It's interesting - this pre-budgetary consultation period - the difference between what is said by everybody, how it's summed together and eventually sees its way in some format or other in a budget.

I believe the one last year did work relatively well, and the one this year hopefully will work well again.

What I've been hearing from the round table we had with the ten leading economists, and also what I'm hearing today, is music to my ears, because I believe, with Mr. Orr, that the debt is the problem. Everybody else has recognized that working on the deficit is the solution, and so they all talk about deficit targets in terms of the deficit. You're the first person who has said anything about debt being the problem. If you recognize the debt as a problem, that would require a different strategy because then you would be in more of a hurry to balance your budget.

.1035

As part of an opposition party, my job is to constructively criticize the current finance minister. That's what I've been trying to do, to get him to recognize that they're rolling targets, and setting targets, while they're good and beneficial for the economy...if the targets are soft, eventually the economy will see through that. It's better to err on the quicker side than the slow side, and getting to a balanced budget is important. I challenge him to present one, because he's always laughing at the Reform Party's zero-in-three, and that's his prerogative.

I like what Mr. Orr had to say, and therefore, with respect to your presentation, I'd just like to say thank you. It's a good one, and I hope the finance department listens to that.

With respect to Mr. Stinson's presentation, I have a clarification to make, which also concerns our chairman here. I feel there might be a misunderstanding.

I'm not sure, but in your presentation, Mr. Stinson, you said you felt that the deficit target should be a balanced budget over the next three years. Then the chairman talked you into...or asked you to clarify it, and basically you said yes to 1998-99, whereas I really don't believe that's what you meant. So I'd like to go back a step as to what we're talking about here. I feel you meant two years sooner than where the chairman is.

Right now, we have received the 1995...which is $37.5 billion. We're in the year 1995-96 with a projected $32 billion, so that would be one year. Two years, three years...I'm suggesting that you might be considering 1997-98, that at the end of fiscal 1998 we should be at a balance, whereas this government will only be at 3% of GDP.

Mr. Stinson: My intent was within the next three fiscal years, so indeed by 1998-99. I would certainly welcome any efforts to move more quickly, but -

Mr. Silye: So you've moved ahead then on the year 1995-96. You've accepted the $32 billion deficit for the end of this current year.

Mr. Stinson: Yes.

Mr. Silye: So three years from then.

Mr. Stinson: Yes.

Mr. Silye: Then the chairman's version is correct.

Mr. Stinson: Recognizing the difficulty in terms of mobilizing public opinion and the work that needs to be done in terms of implementing the cuts, I think within three fiscal years is probably the most reasonable.

Mr. Silye: All right.

Mr. d'Aquino, I found your presentation kind of confusing in that you started out by saying that you were encouraged by having reached the deficit target of $37.5 billion. I gather that meant because it's on its way down as opposed to up, and not getting into the kind of accounting that was used to hit these numbers from the first year to the second year.

You talked about being satisfied with the target of $32 billion for 1995-96 and it would probably beat that. You were satisfied with the target after that, and then you rolled into a conversation where you said you were looking into a balanced budget. Then you said you'd like to see a balanced budget within two fiscal years.

How on the one hand can you be complimenting this government for their deficit targets, which I call soft deficit targets, for the next three years and then you turn around and say it should be within the next two fiscal years, which goes in tune with what a lot of the economists said here a couple of weeks ago that the targets as of 1995-96 should be 3%, 1.5% and 0% over the next three years and that's what they should be doing?

So I'd like to have a clarification from you, Mr. d'Aquino. I see a contradiction there.

Mr. d'Aquino: There is no contradiction. What I did say was that the government would exceed the deficit targets it has set for itself. As it has in this past year, it will in this year, and we've complimented them for doing that. But in effect what we have argued is that there should be a deficit target of 1.5% of GDP - not any more than that - by 1997-98 and 0% by 1998-99.

That has been our historic position; it really hasn't changed. What we've said on that is it's the bare bones minimum. We should do better than that.

I'm prepared to bet the hon. member that this government will not do better than that. That's no reason why we should not put an enormous amount of pressure on them, but on that we're perfectly clear. What that really means is that we would end up having a deficit of about $13 billion to $14 billion in 1997-98, and then zero the following year, and on those numbers we have been crystal clear. If it was not clear when I made my presentation, I ask you to reconsider what I just said.

.1040

Mr. Silye: Okay, thank you.

Most of the presenters talked about no new taxes and doing it through spending cuts or spending restraint. I gather that you meant just individual and corporate taxes. Certainly this government has stayed away from raising individual taxes, but they have looked for every way and means to milk extra taxes through excise taxes and such. What is your position on all forms of taxes? Does anybody wish to comment on that?

Mr. Keyes: There has been a real shift in tax load in this country from profit to non-profit taxes, or to payroll-based taxes. Last year's budget contained an increase in the capital tax, which we thought most unfair. You make your investments, and once you have a capital investment they tax you on the capital you have accumulated. That seemed a bit unfair and counter-productive.

All the macroeconomic numbers show a distinct shift from profit to non-profit. The work we have done shows that the non-profit tax element has been growing far faster than the rate of inflation since the late 1980s. In our business you cannot pass those costs on to your customer, because we sell our products according to a world set price. So increases in taxes of these sorts are really damaging to our competitive position.

Whenever I got around to further remarks, I was going to reinforce the need for a government to look very, very carefully before increasing anything like this. It really does put us behind the competitive eight ball.

Mr. Smith: I suggested that we should not be tinkering with taxes, either corporate or personal. What may not necessarily be realized by all the members is that the aerospace industry is about 60% foreign owned, and in this regard we are seeing considerable difficulty in the transfer of employees from various headquarters to Canada and vice versa. The biggest impediment happens to be personal income tax, and obviously the investments the corporate headquarters will make in their Canadian subsidiaries will depend very much on the corporate tax rate paid in Canada.

Mr. Silye: I have one final question for Mr. Smith. It might be a tough question, so I would appreciate your paying attention here.

You indicated in your presentation that you favoured no new taxes but that you favoured some spending cuts. You said that you were against regional development. Then you talked about privatization, which is fine. Then you said cuts to sports. I can't believe that a gentleman like you, who believes in sports so much, would make cuts to sports. I would like you to justify that for me. I would also like you to tell me why you believe in subsidization.

Mr. Smith: To respond to your question, what I was referring to was basically the duplicity of areas of responsibility and, in some cases, triplicity, I suppose, between the federal, provincial, and municipal governments.

To be more specific with respect to regional development, as I understand it now, as a result of the budgetary cutbacks that have occurred over time, which we were very supportive of in order to achieve the targets set out by the current administration, it would appear that the regional agencies as they exist today have far less money to do what they intended to do a number of years ago, and that is not necessarily wrong. I think they basically did what they had to do.

The difficulty that I guess I see now, Mr. Silye, is the fact that with less money, they are in the policy area. I am suggesting that there are other federal administrations, Industry Canada and others, that are doing the same thing.

I think it requires an examination. I am not suggesting their elimination. I simply say that when I look at the fine-tuning required between the various departments.... I mentioned Environment as one, I mentioned sports as another, only to the extent that it would appear there are ways and means by which perhaps we could divide the responsibility and avoid the duplicity in that requirement.

With respect to subsidies, I too might surprise you. I am totally against subsidies with respect to assistance to business, and what I am suggesting is the approach the federal government needs to take with respect to risk sharing, which would be totally repayable....

.1045

In the aerospace business, the investment is far too large for any company to sustain itself. But collectively, I think the Minister of Finance and this government has repeatedly said that they need to ensure there is a level playing field.

In this regard, if you take a look at our competitors - by the way, every one of our competitors' sales are down and are projected to be down for the next four to five years, primarily because they're defence related.

The Canadian aerospace business has only 20% to 25% related to defence today. We have the business aircraft, the commuter aircraft, avionics, electronics, CAE and its simulator business, all of which are commercial applications and I'm proud to say are dual applications.

What I'm suggesting is that we're not looking for handouts, we're not looking for subsidies, but that the large amount of money required and the long timeframes for product development necessitate a partnership. I think there's an appreciation by this administration that they have to address this issue. It's not a matter of taking a look at new money. It's a matter, I think, of realizing economies within the current government expenditure envelopes to allow the use of that money.

I further reiterate, Mr. Silye, that I don't know of any other sector in the room today that can proudly say they invested $1.4 billion of their own dollars last year in research and development.

Mr. Silye: Well, thank you, Mr. Smith. I also want to thank you for all those blocks you threw for me at the University of Ottawa. Don't forget the CFL.

The Chair: Thank you, Mr. Silye.

Ms Stewart, please.

Mrs. Stewart (Brant): Thank you, Mr. Peterson, and thank you all, gentlemen, for being so direct with your recommendations on deficit and debt strategies for us.

You all recommended that we move quickly to zero deficit and concentrate on the debt, particularly or mainly through spending cuts with no new taxes.

I noted specifically, and I think it was Mr. Stinson - and you can correct me, Mr. Stinson - that you identified specifically, as did others, cuts to business subsidies. But then I think you said also cuts to programs of redistribution, such as training. You mentioned other...I don't know whether it was unemployment insurance. It may not have been you, but it was someone in that centre category.

Then we admit that job growth has been a tough row to hoe, that we have, as we know, huge unemployment. We're making improvements. Somebody said that we would never come under double digits - the former Prime Minister - and we have. But we still have a significant and huge problem in this country when it comes to re-employment of disenfranchised workers or displaced workers.

One of the things the finance minister says time and time again is that we want people who can do the job best to do the job. We've always had unemployment insurance. We as a party have been focusing on making sure that the government is there to support people in time of need. But if we make cuts to programs that support training, particularly when we know that even with the spin-off jobs we're talking about, which are being created, we need to retrain people.... We need to refocus them. We know that there are Canadians who probably - and they're generally older workers - will never be re-employed again but aren't eligible for pensionable earnings for another five or seven years.

Are there things that you, as business, can do that are more creative at this time, while we are revamping, redesigning, retooling, downsizing, right sizing, whatever, to help those who are caught in the middle?

You're asking us to spend less money to help Canadians who are caught in the middle. Are there other strategies we can tackle? And don't tell me to get rid of the cheaters and that sort of stuff, because that's not a huge part of the population we're dealing with here. We know that. Do you have some ideas in that regard?

Mr. d'Aquino: Mr. Chairman, I wonder if I could just begin the discussion on this.

This is of course the great question facing all western industrialized societies. Contrary to what some people think, that business is only concerned about downsizing, that is not the case. The toughest decision any business has to make is telling somebody they're no longer needed. That is by far the thing one wants to avoid, because it is so difficult and because it has such a big human family cost attached to it.

.1050

As a result of that, we have struggled over the last ten years, as you have, with the issue of how you deal with employment or putting people back to work who become unemployed. So have countries. If one looks at the jobs summit in Detroit and the jobs summit that the president of France will convene in Lyons, it's interesting that the best minds in the industrialized world have gone after this very issue.

We always seem to come back to the same point, which is that spending more is clearly not the answer. If you look at the level of indebtedness of countries in western Europe and North America, why are we still running double-digit unemployment? Spending more is not the answer.

Secondly, there seems to be a genuine consensus that part of the problem is structural - taxes, the impediments in the labour market. What is it that makes a small business person choose not to employ someone as opposed to employing someone? We come back again to a great plethora of payroll taxes. I draw your attention to the fact that the Bank of Canada pointed out - and I was so pleased that it did so - that increases in supplementary labour income, payroll taxes such as employers' contribution to UI, health insurance, workers' compensation, Canada and Quebec pension contributions, reduced the level of employment by about 1% in 1993. So we have to look at the structural side.

Business has to do more on the training side. What we're doing is not good enough. We all acknowledge that. We have to do more.

Mrs. Stewart: Are you spending any time thinking about that?

Mr. d'Aquino: Yes, we are spending time thinking about that. If one looks at the real numbers - and to some extent I have to offer a mea culpa here - when you look at training numbers, they are lower than in fact they are. Part of the reason for that is that we have not been terribly good yet at taking everything that is done in an enterprise, small or large, and equating that to training of one kind or another. But more has to be done.

Remember that after every single recession we've had, the unemployment levels have come down but have remained slightly higher than the recession prior to that. Why is that happening? I suggest to you that part of it is structural; part of it is the impediments to job creation that public policy has created; part of it is jobs being lost to economies in the United States and elsewhere. There is no single solution to this. As the job summits have pointed out, it's many things.

In conclusion, I would say one of the reasons we've been so critical of training as it has been done by governments is that it is universally seen to be not effective. It's not that I disagree with you that more training should not be done, but the real question is who it should be done by and whether we are using taxpayers' dollars effectively in the training programs we currently have.

I think there is a general view, not only in the business community but in the academic community, and by many premiers in provinces that have high unemployment, that the training practices of the past have not been successful. That's why we have to try to use some -

Mrs. Stewart: That's precisely my question. If we accept that to be true, what is the business community prepared to do in this trade-off for control of fiscal spending, to think differently about the responsibility to Canadians of providing that all-important thing, a job?

Mr. d'Aquino: Employers will always want to employ people who are well educated and who can make a contribution to the workforce.

Mrs. Stewart: [Inaudible - Editor]

Mr. d'Aquino: I know that now is not the time to get into it, but the single greatest contribution to job creation is education. We know that, and we know that this is not going to deal with the 55-year-old unemployed steelworker to whom you say, just go off and take a training course and maybe we'll recycle you.

Mrs. Stewart: How do you deal with people who say to cut government spending because -

Mr. d'Aquino: Why is it that we've had high levels of unemployment if we're running massive, massive debt in this country? Obviously government spending has not been the solution. All I'm saying is that the solution lies in many places: in the educational community, in the business community, in many areas. There is no simple answer to how we're going to deal with that problem.

.1055

But you're absolutely right; it would be unconscionable if public authorities did not deal particularly with that problem of the 45- and 55-year-olds who become displaced. You can't tell them to go back to school, K to 12, and relearn it all. That's the most difficult area; those people need help and must have help. They must have help from government primarily, because it's going to be very difficult for businesses to go out and spend money to retrain 55-year-olds.

Where business is spending a lot of money, and you'll see increasing amounts of money spent, is on younger people. That's the source of jobs in the future and that's the source of growth and prosperity in the future.

Mrs. Stewart: Any way that we can actually crystallize those investments and understand where business can suggest new strategies - and as you said, it's the business community, it's public policy, it's all those things - is going to be very important to us as we try to do what you're asking us to do, but at the same time do what we're supposed to do, which is look after Canadians.

Mr. Smith: I'd like to add a comment, if I might. You no doubt would appreciate that the level of expertise and the highly skilled nature of the aerospace industry is quite different from any of the other sectors. But I would encourage the government to take a look at a number of impediments I've seen. Many of the lay-offs in the aerospace business have resulted in some pretty interesting offshoots of small businesses in the repair and overhaul of engines and things of this kind.

One thing continually frustrates me, and I must say that representing business, I haven't examined it terribly carefully other than hearing the complaints I've heard. There is a tier of middle management that may have lost their jobs throughout the recession who could be a tremendous assistance to small and medium-sized enterprise. I believe there are systemic impediments to allowing them to take the benefit of whatever the bridging would be, either in the form of severance or unemployment insurance or whatever. Rather than formal education, the experience these people can bring to grow the small and medium-sized enterprise would be a tremendous asset to this nation.

Mrs. Stewart: Would you consider paying them for a while if they do that?

Mr. Smith: Yes, exactly. I think we have to examine these ways and means. Obviously it would be potentially fraught with abuse and things of this kind. But I certainly feel from our sector, looking at the successful spin-offs that have occurred in small and medium-sized enterprise, that we must look at the skills pool that's there. It may remain idle for two or three months, and it could be just the necessary stimulant to a business that would put a business plan together and seek out equity or things of this kind that they don't have either the time or the expertise to deal with. Perhaps there's merit in exploring those particular aspects. There's a workforce out there that does have the skills that have been disrupted as a result of economic situations.

Mrs. Stewart: I have one other quick question, if I may, Chair. Focusing specifically on cutting business subsidies, I think you've all to a person agreed that's one area we can cut. I'm wondering what your respective memberships and individuals think about that. Quite frankly, in my own riding when businesses are out looking, they're still saying, so what are you going to give me? What are you going to give me to come to your area? I'm wondering how long it's going to take to change that public policy we have created over a number of years.

Mr. Orr: We've had discussions for several years in the chamber and with respect to resolutions at the annual meeting on business subsidies, and it's fairly clear that most of the dollars spent on business subsidies do occur to members of the chamber as their income. So they don't recommend their cut without considerable pain and thought. But the reason the people in the chamber recommend cuts in business subsidies is that they realize the debt problem has to be taken very seriously, and they are willing to bear their share of the load.

Mrs. Stewart: And to help educate their membership on why they're suggesting that?

.1100

Mr. Orr: Yes, there have been a lot of discussions, meetings, and so on, on business subsidies. But I'm just making the point that these subsidies are in fact directly or indirectly income of these members, and they have agreed to a resolution. The business subsidies, as you know, are scheduled to be reduced by 60% over the next couple of years to 1996-97. That's against general government program expenditures that are going down about 9%.

At the annual meeting this year, the chamber members recommended that the government go even further and be more aggressive in reducing business subsidies. The resolution read ``a complete elimination of most of these subsidies''. So there might be a few subsidies around for particular activities, but if the resolution of the chamber was followed, business subsidies would be a pale shadow of what they were several years ago.

Mr. Bulmer: To add a comment to that, we're an industry that has seen ACOA budgets go down. Our industry used it. The transport subsidy coming out of Atlantic Canada was a great benefit, and so on.

We can support all of those going away, but the concern we have is that nobody in government seems to be adding all of this up as a cumulative effect, because if those go away and those then become new real cost to a business, there may not be enough money to pay some of the other kinds of things - added taxes.

So the caution we have been trying to put forward to government is that you can't have it in all directions; you can't have new fees, new taxes, and take away the subsidies that become real cost if we're still going to get to market, and so on. Really, there hasn't been the concern or the structure inside government to focus on how all of this adds up to fishing, or forestry, or mining, or whatever.

Mrs. Stewart: So there has to be a balanced approach that recognizes that, as you go through change, you want it done in a controlled and stable fashion as opposed to all at once when you're left hung out to dry to deal with it all at once.

Mr. Bulmer: You're going to have to choose. If there's only so much margin in the bottom line, somebody is going to have to choose whether they want it in a subsidy reduced or a new tax levied. But you can't have it both ways.

The other thing I was going to say on the training situation was that one of the things we found helpful was to use business to take training to the people. Particularly in small communities where our businesses reside, the problem is you can't get people in a car to get to St. John's to go to a structure. What we found is if you take the school to the plant cafeteria and put the people there, they're among their peers and they're comfortable. So putting training through business seems to be a lot more productive way to go than turning it over to schools and existing structures, who like it because it adds money to their bottom line, but we don't think it's nearly as effective.

Mrs. Stewart: We must have your help on those things.

The Chair: Do you want to say more about this particular issue, or shall we go on? Very briefly, Mr. d'Aquino.

Mr. d'Aquino: Mrs. Stewart, the reason why business wants subsidies to a large extent eliminated is because they are patently unfair to business. That is, if you get a subsidy in one industry and the other person doesn't, that creates a problem. When people have said to me, but why do you keep asking for it, it's because the money is there.

Now, Mr. Chairman, for the record, it has been stated here that the business council supports the total elimination of subsidies. I've written to you on this subject, and it's very important to be very clear that, longer than most people, we have argued for the total elimination of handouts to business. But we've also made the point that where companies have to compete in the global economic environment on a level playing field, the principle, not of subsidy as we've known it as a handout but - I won't even us the word ``subsidy'' - repayable loans or where partnerships can be established between government and business, where business not only will repay but will repay it many times over, is a very important nuance on that argument. I know in the great rush to cut subsidies, people on your side of the House have perhaps rethought that maybe that nuance or subtlety should be taken more into account, and I hope that it will.

The Chair: I must say, I agree completely with what you've just said, Mr. d'Aquino. We have to be aware of international competitive realities. I'm sure Mr. Smith would take great heart from what you've just said.

Mr. Campbell, please.

Mr. Campbell (St. Paul's): Thank you, Mr. Chairman.

The comments about the availability of subsidies reminds me of that old joke about the pigeons in the skinner box. One pigeon turns to the other and says, every time I push on this button they feed me. I think the psychologists thought they were training the pigeons.

.1105

Often in this committee we have to play devil's advocate in the absence of voices for another perspective, and today is no different. In the absence of an actual dialogue that might occur between you and others who have different views, let's engage in a virtual dialogue. There's a group of people out there who would have rolled their eyes upon hearing what you said. They would say you're suggesting that any further cuts be on the spending side, but what about corporate taxes?

Let's come back to the tax question, as you all spoke to it. We've heard and we will continue to hear throughout these consultations that corporate taxes are not high enough, that individual income taxes as a percentage of the overall tax take have gone up, and individuals have suffered in this compression of tax ranges, so why isn't corporate Canada doing more, why are you not prepared to absorb more taxes? On behalf of those people who would advance that view and want to hear your answer, that is my first question.

Mr. Orr: I think the answer is fairly simple. It's a competitive question, and on this question I want to point out that we should be looking at how taxes in Canada compare to those in the United States. Once in awhile someone compares Canada to a range of developing and developed countries, and we don't look too bad, but that isn't what counts. Of our trade, 80% is with the U.S., and when you look at investment and all sorts of other comparisons, that may underestimate the importance of being competitive with the Americans.

Current studies show that corporate taxes are roughly equal to the U.S. There's not a large difference at present, but as I mentioned, corporate taxes in the U.S. are destined to go down over the next couple of years. If we don't do the same, we're going to lose jobs. We were talking earlier about what we can do for job creation, and one thing we absolutely must do is keep the corporate tax environment competitive with the Americans. If we don't, there's no better way to lose jobs than that.

Mr. d'Aquino: As a quick supplementary to what Mr. Orr just said, remember that an enterprise does not just pay corporate taxes. It also pays property taxes and a great variety of payroll taxes, so the committee must always look at the cost of a company doing business. If you add the corporate and payroll taxes you'll see that not only are we way out of line with the United States, we're increasingly out of line with our other G-7 partners. It's going up rather than down, and as the Bank of Canada study that I quoted a few minutes ago showed, the quickest way to kill jobs is to ensure that trend line continues to go up.

Mr. Smith: To add to Mr. Orr's statement, we should also look at competitiveness. As I mentioned, in excess of 70% of aerospace business products are destined for export. I mentioned that about 60% of our companies are foreign-owned subsidiaries working in Canada, but I'd like to remind the committee that they immediately see the difference between their corporate and subsidiary operations. We have a number of indigenous companies such as Bombardier-Canadair, for example, who own Learjet in the United States and Shorts in Ireland, and Pratt & Whitney are joint-partnered in Russia. These people are able to see where it is most advantageous to operate, whether in terms of a relationship to government, to labour rates or to corporate taxes.

I think our sector and a number of the other sectors represented around the table today are global industries. It doesn't take long to figure out where the most cost advantageous position is. I do not want to portray the industry as being footloose, but obviously they're all businessmen and women who are looking at the best way of ensuring growth in their respective sectors.

.1110

Mr. Campbell: To conclude the virtual dialogue on that question, let me respond by saying that people with a different perspective would say you're talking about tax rates, but we should be talking about percentage of overall tax revenue. If you look at that chart you will see that the overall share of corporate tax revenue has fallen as compared to what's happened to individual revenue. No doubt you would be quick to point out that if you measure that in years of falling profits, that's what's going to happen.

That's another issue, but I want to get it on the table that those are the kinds of comments we hear from the other side.

Mr. Keyes: The last point you made is the point I was going to bring up. You can't look at individual years; you must look at rates of return on capital, on investment, and look at it over the cycle, and I don't think things are out of whack when you look at it on that basis.

Mr. Campbell: I have one other quick question. Mr. d'Aquino spoke about partnerships, yet as a group you spoke about privatization and increased privatization. I don't think you meant to suggest, Mr. d'Aquino, that as a government we would be partners with the business community as shareholders. Is that what you meant, or did you mean something else?

Mr. d'Aquino: No, that's not what I meant.

Mr. Campbell: Did you want to elaborate on what you meant?

Mr. d'Aquino: I don't know that I have to elaborate. As I think we are seeing with the Petro-Canadas and CNs, there seems to be conventional wisdom at last that things can be done better in the private sector - by your party and almost all others.

The partnerships that I am referring to are partnerships where we can have a marriage of ideas, of efforts. What better example of partnership can I give you than something that you have helped invent called Team Canada?

Mr. Campbell: That brings me to my last point, which picks up on the intriguing discussion that took place following Ms Stewart's questions.

A partnership in what? Setting goals, objective strategies to achieve goals, monitoring performance, industry councils - is that the sort of model? If it is, could that model not be replicated in the area of labour mobility, educational standards and all those things that contribute to Canada being a strong international competitor, which is something all of you have spoken of?

Then is there a role for the federal government? People have suggested that in the absence of money that we clearly don't have in abundance to throw at problems, there are a couple of alternatives. We can get out of the way, or we can play a new role with more limited resources. I suggest that more limited role may involve what I've just described - setting goals, monitoring performance, setting objectives to reach goals in the area.... I presume you all agree that labour mobility is essential to international competitiveness, and education standards is something you've all spoken to.

Does anybody want to respond to those comments?

Mr. Smith: I would like to say that the committee shouldn't lose sight of the potential prospects of a public-private partnership in its truest sense. I think Mr. d'Aquino stated that we don't want a partnership with government in the sense of ownership, but I think there have been examples such as the P.E.I. link.

I think there are other examples where a true private-public partnership could occur, where business could come to the table in an assisting mode and ownership could be determined at a later stage. I agree with you in the sense of the partnerships that are required to ensure that the country progresses in the way we've discussed this morning - in the truest sense of setting objectives, etc. - but don't discount the option of.... For example, when the government is contemplating divesting itself of operations that it feels it shouldn't be in, there may require a partnership to allow for that bridging to occur.

Mr. d'Aquino: Mr. Chairman, in answer to Mr. Campbell's comment, which I think gets us even closer to a debate that the country is rapidly plunging into, are we not in danger - if we rush headlong into massive devolution of, if not powers then responsibility - of fragmenting not only labour markets, but the economic union? The answer is yes, there is a real danger.

.1115

I want you to know that the chief executives of this country have already sat down and are hard at work. In fact, we went to work the day after the referendum to try to address these very issues, because the mantra of a wholesale decentralization, devolution - call it whatever you may - has also to be looked at in terms of what it does to the economic union. I want you to know we will be very vigilant on that, and we are not among those who are going to say decentralization at any cost because that will carry a very heavy price.

Mr. Campbell: Mr. Chairman, in conclusion, Mr. d'Aquino took me where I was going to go with my questions. I was going to ask you as business leaders to consider the implications of what you've said for that very debate because we are going to be in that debate. As business leaders who look at these things regionally and nationally, you have to ask yourself the vital question of what legitimate role exists for government and which level of government should play that role.

The Chair: Mr. Grubel.

Mr. Grubel (Capilano - Howe Sound): Mr. Chairman, I was very interested to note your recommendation for the elimination of the deficit was very much like that of business economists who came here last week. The zero by the end of this electoral mandate seems to be the ideal. I hope the government will follow suit, but in the process you can help us.

When we have other groups meeting here, they express concern over that target and there are two reasons. One of them is that there will be reduced services for their constituents who are single mothers and constituents of this sort. That's essentially a political problem and we have to work out whether we are still in the position to afford the same level or not. But it is, I'm glad, the responsibility of the Liberal Party to deal with that.

I wonder about a second aspect that is always brought up, and that is that there will be a tremendous effect on the demand for labour, a decrease in the demand for labour. Therefore, these kinds of targets would add to unemployment and make things worse than they would be otherwise.

Finally, there's the argument being made that it would be counter-productive and that it raises unemployment because people get worried and don't spend and all that kind of thing.

We heard from one group that decisive action like this would result in increased confidence - and you mentioned this, Mr. d'Aquino, or Mr. Orr - in the rest of the world that Canada is getting its house in order and we might expect a decrease in the risk premium, in the confidence effect, and that the reduction in the interest rate would have a stimulative effect on demand.

So we have these two countervailing effects. I'm just wondering, with your expertise, whether you can tell us which of those two will dominate and over what time horizons.

While I have the floor, I'd like to bring up just one other point that has not been brought up. As you are well aware, we've had now several initiatives to reform the unemployment insurance program, and I think there will be more. Many economists believe that in fact generous unemployment insurance and welfare programs add to the unemployment rate by affecting the supply of labour. I can give you citations from highly respected economists who believe this is a very serious problem.

We know that both the federal government and especially the provinces are engaged in reform of welfare programs. Do you have any view as to the extent to which those labour market reforms also advocated by the OECD will in fact deal with the problem that is of such great concern to Ms Stewart? The best training program is firms needing workers willing to train them for the job that is there.

So I wonder whether you could react to these two points: one, the two effects on employment due to the lower interest rates that would come with incisive action on the budget versus the Keynesian effects of decreased demand; and two, the effect on the unemployment rate and general economic prosperity that may be expected from change in the unemployment and welfare system.

.1120

The Chair: They are two very critical questions. Do you want to start, Mr. Orr?

Mr. Orr: With respect to your first point, Mr. Grubel, the reduced services for lower income people, I think there are two points in response.

One is the reason why we're recommending the debt be reduced and that is so the government will again be in a position to be able to cater to these needs. It's obvious that they do not now have that flexibility. So this is the way to put them in that position. To be very shortsighted about it would create problems that would be even worse than those I described in my opening comments.

The other point is that a lot of government spending is scheduled right now. Within the schedule the Minister of Finance put out last year, $108 billion will be spent on program expenditures in 1996-97. A lot of that money does not go to low income people. For example, even according to that program for 1996-97, the reductions in Parliament and the Governor General were below average. It doesn't seem to me that those are low income people. Reductions in the defence department were below average.

So I don't think we should be thinking we can't meet this program of debt reduction without making some cuts that won't affect the needy people. Hopefully if we keep to this program, we'll be in a position to help them in the future.

On your second point about the impact on unemployment, a steady and quite consistent parade of economists have commented on this. I'm just going to say the same thing I've said three or four times before and that virtually every economist who's been up here has said. That is, the way to improve labour markets is to reduce the debt. That's the way eventually to get interest rates down: create a better investment climate and create jobs. That can't be said too many times or too strongly.

On that one, I think it's not just economists. In surveying the business people in the Chamber of Commerce, the business people said the very same thing. Another way, if you're still not convinced, is to turn it around and ask what happens if we just ignore the debt. Surely the interest rates will go up, the investment climate will sour, and the number of jobs will be reduced. That's very clear to most people.

The Chair: Do you have any further questions, Mr. Grubel?

Mr. Grubel: I would just like to raise one other issue that was not brought up but is related to the question of the large debt. I attended a conference last week on the future of CPP. A very disturbing figure was brought up. Within a short 20 to 25 years the three pillars of support for retired people, OAS, CPP and medicare, will require, because of the aging baby boomers, increased expenditures equivalent to about $50 billion, which means a 50% increase in the income taxes on the generation of people who are working in a short 20 to 25 years from now. This will be on top of the burden we leave this generation in terms of the 30% of tax revenue that has to go to service the debt that you mentioned in your own presentation.

I believe these facts strengthen the case even more for a prompt elimination of the deficit and a decrease in the debt. I think we are blind. We are acting totally irresponsibly to future generations. It is a shame this subject is not brought up regularly in the context of that particular area.

Mr. d'Aquino: Mr. Chairman, I'd like to say a quick word about that. Professor Grubel has really pointed a finger at what in fact is a huge time bomb. What is of great surprise, frankly, to me is that this issue has not become a central issue of debate in Canada yet or, thank goodness, that it has not caught the attention of international capital markets who are looking at Canada. This is a time bomb.

.1125

I have to tell you it obviously will mean, at the very least, that a higher retirement age will have to be part of the solution, Professor Grubel, certainly higher premium rates, and also tighter eligibility requirements for a pension based on disability claims. But these are only some of the things that will have to be done in order to tackle that issue. We all will be most unhappy if that issue becomes the centre of attention, particularly of the people outside this country, because up until now it has really attracted very little.

The Chair: Mr. St. Denis.

Mr. St. Denis (Algoma): Thank you, Mr. Chairman.

Thank you, gentlemen, for being here. I'd like to redirect the discussion for a few minutes to the resource sector. My riding of Algoma in northern Ontario has provided me with some little experience with forestry, and mining in particular, but my question would include the fisheries as well,

I'd like a few of you to comment on the degree of non-Canadian ownership in the sector you represent and the degree or the percentage of R and D within the sector you represent that is done outside the country.

My point is this. When I listened to Mr. Smith and heard the glowing report of investment in the aerospace sector, which is very high tech, and the jobs that come with that, I'm aware that in the mining sector, Canada has the best miners in the world, quite frankly. Part of that is because of the technology.

If the future is, as we can agree, in high technology and information, how well are we getting to that next step of going from just being the extractors of the resource to using our excellence to be the extractors? Are we developing the equipment that allows us to get the minerals out of the ground and the trees out of the forest and the fish out of the sea? Are we developing equipment in this country, thereby creating that second level of jobs? Are we exporting the expertise?

In mining, I would like to add, in Elliot Lake, for example, I have 100 to 150 miners who were laid off at the mines there and who are now commuting to different parts of Canada to share...because they are good miners. So we have lots to offer.

How effectively are we getting to that next step of transforming our historical ability and advantage in terms of resources to the next level of expertise in terms of technology and highly skilled workers?

Mr. Smith: If I could simply comment on one of your questions there, whether we are developing the equipment, I think I can speak for the aerospace industry and indicate that certainly the launch of RADARSAT is an indicator of where you will find it will be of assistance to forestry, fishery and other surveillance requirements.

If you look at the commercial applications of the robotic arm that has been developed by Spar Aerospace - you've seen it in space - and the generation capability of companies like General Electric and others, they all have been contributors to both of those sectors. I believe, truly, the dual applications of technology from the aerospace business are complementing many of the other sectors here at the table.

The Chair: Mr. Keyes.

Mr. Keyes: Mr. St. Denis posed several questions in his one question. Maybe I'll just try to tackle them very quickly.

On the degree of Canadian ownership, I don't have numbers with me, but I seem to recall that the last numbers I saw made it somewhere between 65% and 70%. That's a number that will change with stock markets and corporate manoeuvres and mergers and acquisitions, this type of thing, but I believe that's the number that is generally used.

In terms of R and D, Canadian industry does a lot of R and D that may not be recognized as R and D. You do R and D on site. You do a lot of experimentation within your own process. That doesn't always get reflected in the R and D figures. A lot of exploration we think is R and D, because we're investing in the future, but that's an expenditure of a different category.

In Canadian industry, some companies develop their own technology; some companies import technology. You cannot be all things to all people, and the Canadian mining industry has generally developed expertise in certain niches and is regarded as a world leader.

.1130

For example, in the exploration/geoscience end, we are front runners. We have leading-edge technology in some aspects of mine reclamation, and we are exporting that. We've developed smelter technology that's now being used around the world. We've developed techniques and applied them to very site-specific situations. We've taken general mining techniques and adapted those. Some of the work that companies in Sudbury, for example, are doing on automated systems is leading-edge technology.

Are we producing the big trucks, the big shovels, the big-dollar capital equipment? We are not because that market is a global market. That base is not here. The R and D for that is not done primarily here, even though we do manufacture large, off-highway trucks through General Motors in London.

We are taking our technology, our techniques, our knowledge and expertise abroad. That's why you see Canadian companies having such success. It's one of the reasons they're having such success in Latin and South America. They are taking their Canadian expertise with them and using it from that base.

The level of R and D may not be as high as you might think it would be for an industry that's world scale. But that's the nature of the global industry, and technology is developed globally in an industry that operates globally, and it's increasingly that way.

The Chair: There was a very good study done by the Science Council of Canada that pointed that out, that there are certain industries that by their very nature do not have a high level of R and D as such.

Mr. Stinson.

Mr. Stinson: I think Mr. St. Denis raises a very good point, and I think if you look at the development of the forest products industry in Canada, it's a rather curious development that there hasn't been this development of a machinery industry side by side. Michael Porter points to that as being one of the weaknesses of the forest products cluster within this country.

For the most part it's very much a global industry in the sense that machinery suppliers are in large part from the Scandinavian countries and yet any foreign ownership within Canada, although it's not dominated by foreign owners, is largely American.

I think there's also the issue of what counts as R and D. Many of our member companies, in their disputes with Revenue Canada about R and D tax credits and the like, look at their paper machines as the laboratory. They're getting leading-edge technologies from these Finnish equipment suppliers, for example - new paper machines. They're having to adapt it to the resource they have, and they're playing with the recipe and trying to get the thing to work. There's an awful lot of engineering expertise that goes into that.

Also, I think it's important not to overlook the fact that there are some leading consulting firms in this country that are responsible for overseeing the setting up of paper machines in countries such as Indonesia and around the world, where much of the new investment is going.

I think it's really a historical legacy, and I'm not sure it would be prudent to try to support the industry in this country, but it is important that the industry have access to the leading technology, and for the most part that's from foreign suppliers.

Also, I think it's important to note that the fibre constraints are a very motivating factor for the kinds of product development that some companies are looking at, and that's how to use the resource more efficiently. Canada is a leader in bleached chemi-thermomechanical pulp, I think accounting for up to 70% of international capacity. This is a high-yield pulp for which the process was developed in the Scandinavian countries but has been perfected within Canada. Also, you have a lot of work going towards composite wood products, and that's to use the waste from the milling process. They're coming up with marketable products that are displacing more conventional products and they're providing a base for their future development.

Mr. St. Denis: What is the percent of foreign ownership in the industry?

Mr. Stinson: I'm not sure, but if you look at the largest firms like MacMillan Bloedel, Avenor, they're not foreign owned. There are Weyerhaeuser and others that have interests in Canada, but I don't think it's dominated by foreign owners.

.1135

Mr. St. Denis: Thanks, Mr. Chairman.

The Chair: Mr. Discepola.

Mr. Discepola (Vaudreuil): Thank you, Mr. Peterson. I have two quick questions and one that needs a little bit more discussion.

Mr. Stinson, you brought up the question of overlapping and its elimination. One of the examples you used was the environment department, where there's an awful lot of duplication of services, or activities are overlapping. I wonder if your organization has done any studies on overlapping as to how much the federal government could save. I also want your opinion on whether the federal government should withdraw totally from the areas of forestry and mining.

Mr. Stinson: With respect to the question of overlap, a number of our member companies are working in a project with Industry Canada right now under the business impact tests. They are looking at harmonization of environmental regulations as one of the issues. So they're investigating that. Industry Canada, through their consultant, will be conducting interviews shortly with participating companies. We've also undertaken a report and hired some consultants to look at issues affecting competitiveness of our inputs, of which environment would be one issue. So we're looking at that.

In discussing it with the people who have to deal with it, there are varying levels of expertise in the different provinces. Some provinces, in effect, sort of vacate the field and let the federal government more or less enforce their regulations. But they're also having to deal with two groups that.... There are federal regulations that sort of oversee everything and -

Mr. Discepola: My question is more direct. Are you in favour of the federal government withdrawing totally from mining and forestry?

Mr. Stinson: Well, okay, I was addressing the environmental side and the overlap.

On the resource side, I'm not sure I'm prepared to indicate a preference. But certainly, clear responsibilities are what we would prefer. It might be questionable whether or not the federal government should be involved.

Mr. Discepola: There's also an awful lot of debate on large businesses and the impact that transfer pricing has on the ability of corporations to pay their fair share of taxes, where they use exorbitant raw material pricing to transfer profits from one country to the other or where they feel it's more...or the use of management fees. Is the business sector, or big business especially, which uses this practice, prepared to recommend to this committee the closing of any unfair advantages or loopholes in this area of transfer pricing, or is the practice not used?

Mr. Keyes: Let me take your last one first. In the mineral business, most metals are sold at a posted price on the London Metal Exchange, which reflects demand and supply conditions of the day. That's the way our products are sold. We have no control over our prices. We take the price off the London Metal Exchange afternoon or morning fix, as the case may be, and that's the way prices -

Mr. Discepola: I know a concrete example. The pharmaceutical industry, for example, takes their raw materials from the United States at overinflated prices to their Canadian counterparts.

Mr. Keyes: That may be the pharmaceutical industry; that's not the mineral industry.

Mr. Discepola: You're just speaking for your industry -

Mr. Keyes: Oh, absolutely.

Mr. Discepola: - but in general, the practice is used. Do you think it's fair or unfair for the government to look at that and look at ways of restricting its use?

Mr. Keyes: I can't comment on that. I can only comment on my own industry.

I want to come back to your question about the federal government and mining. I can do that now or after.

Mr. Discepola: I have one more question, so it's at the discretion of the chair.

Mr. Keyes: Okay, let me deal with the federal government and mining.

The federal government is not in mining. Natural Resources Canada plays a role that is entirely consistent with federal jurisdiction. The day-to-day decisions and planning and control and regulation of mining regulations are handled by the provinces.

Natural Resources Canada's expertise in science, in mineral economics and policy, and especially in the international arena, is not inconsistent with its proper jurisdictional responsibilities. The NRCan and its counterparts in the provinces complement each other; they do not overlap. There can always be streamlining and there can always be improvements. That is a continuing process. But those two levels of government in that area work very well together.

.1140

The exception is the environment. I have given the clerk our submission to the Standing Committee on Natural Resources dealing with regulatory overlap and duplication, which is primarily directed to the environmental area. If you look at that, you'll certainly get our views on that side.

But the federal government is not in mining to any significant degree.

Mr. Discepola: My last question, Chair, has to do with obsession. For two years I've been sitting here and I see this obsession of business and big business with controlling our deficit and our debt. I understand and I share some of it. Obviously the interest for big business is to try to control our deficit and debt. It will hopefully control our interest rates. In lowering our interest rates, we hope to stimulate economic activity. In hoping to stimulate economic activity, we hope to get the repercussions and benefits of that as a government, which is job creation.

However, if I look at big business in my riding alone, I've lost over 600 or 800 jobs through big business because big businesses are restructuring drastically. Just yesterday we had an announcement from CP Rail, where 480 jobs are located in the Montreal area. Pratt & Whitney, which before the referendum promised 250 jobs, is having trouble recruiting those people.

I look at it as a politician. When I see the Minister of Finance announcing a $2.2 billion surplus above and beyond his projections, I hold back and ask what is so magical about a 3% GDP ratio. I understood it and I accepted it. But now we're saying let's go to zero. I can just see next year's debate: let's go to minus two or minus three. To me there has to be an equilibrium point where we look at our political and economic responsibilities but do not forget our socio-political responsibilities also.

What do you feel you would be prepared to accept? It seems that after two years, despite this concerted attack - and I can just see what the repercussions would have been if we hadn't attacked the deficit as drastically as we did. I don't see the big business sector, for example, creating those jobs. I don't see the lower interest rates. Mr. d'Aquino touched on it: our real interest rates are now 5.5%. Are we going to achieve this desired impact of everybody in a win-win situation? Why do we have to go to less than 3% GDP?

Mr. d'Aquino: Mr. Chairman, this is a point that comes up all the time. There are people who appear before this committee who say it's not important. There have been people in this country over the last fifteen years who consistently argued that deficits were unimportant or that rising debt was really not important.

Let's take a good, hard look at what we're talking about here. It isn't...3% isn't nearly good enough. I'm not suggesting to you that it's an attack on the part of anyone, and certainly not an attack on the part of big business. It is an attack on behalf of people across this country. Today, if you take the debt of the federal government - which is rising, not falling - and that of the provinces and combine it, the debt-to-GDP ratio is about 100%. We are second only to Italy among the G-7 in the size of that debt. The amount of money we are paying in interest is greater than what we spend on most of our social programs and defence combined, and that is rising as well. Taxes are rising. Investment is leaving. People are unhappy.

I would add one other dimension to it. We would not have a national unity crisis in this country, in my view, were it not for the fact that a party in Quebec has successfully argued during the last four and five years, why stay with this country when it's bankrupt? We can do better ourselves. I suggest that it's led to high interest rates and a corrosion of federal-provincial relations. You ask why interest rates are high. They are high because our indebtedness is so high.

The answer to your question is that unless we wake up to the fact that 3% is not nearly enough, that we must go to zero and begin to pay down the debt, then all we're going to do is get ourselves deeper and deeper into hawk. And do you know what's going to happen? The people of Canada, in repeated election after election, punish politicians who do not recognize this.

.1145

Five years ago, sir, people before this committee laughed when I suggested that we had to have a balanced budget. Today governments across this country are falling all over themselves, including New Democratic governments, I might add, to see who can more quickly not only balance their deficit but also get their pay-down on debt started. That's the hard reality. It will create jobs, reduce taxes and make us all a lot wealthier.

Mr. Discepola: What you're proposing, Mr. d'Aquino, is not going to come at a political and a social price and a cost. You used the words in your preamble of constitutional prices, post-referendum uncertainty, risk premium for political instability. I am saying that if we are on target with our figures, we should maybe take some of that $2 billion, tell Mr. Martin that he can keep $1 billion, but let's take $1 billion and reinvest in education, reinvest in retraining programs, reinvest in other positive job creation measures.

The same rationale you're using of the threat of separation to Canadian unity, Mr. d'Aquino, is the same rationale for why I saw a lot of people who were federalists vote yes this time. When you're unemployed, you have nothing to lose. When you're on welfare, you have nothing to lose. You're willing to take the risk. Should we not be reinvesting some of this money as opposed to having a fixation on reaching this magical zero or 3% target as soon as possible?

Mr. d'Aquino: Mr. Chairman, I suggest that responsible political leadership requires telling people the truth. The truth is that the more indebted we become, and the more of the taxpayers' money you use to simply pay interest, which creates no jobs and does nothing for necessary programs such as child care, the environment or anything else, it is something future generations are going to hold us all responsible for.

To tell Mr. Martin to just take an extra $1 billion and spend it when we are...and let me frighten you if I haven't been able to frighten you. We are in the fifth year of an economic cycle. We may have another year, if we're lucky another two, and then we go into recession. It's not because big business creates it or wants it, but because that is the law of economics. What are you going to say to your constituents when the next recession begins two years from now and you watch your deficit, which you've worked so hard to bring down to $20 billion and hopefully $13 billion and $8 billion, soar up to another $50 billion and we become indebted another $20 billion or $30 billion? What are you going to say?

The Swedes and the Italians have learned the lesson. They hit the wall. They paid a huge social and political price. Is that really what you're asking taxpayers and your constituents to do? I hope not.

The Chair: We've now come to the time when I would ask our participants briefly to sum up their positions. We'll start with Mr. McNeil.

Mr. McNeil: The utility industry supports the government's initiatives in reducing its debt. As I said in my opening remarks, the utilities across this country have over a period of time amassed a debt load totalling some $88 billion. Clearly the utilities in this country have learned that if you don't pay attention to your debt, your choices for the future are small. We recommend to this committee that in your deliberations you consider the debt a major item to be dealt with.

Mr. Keyes: In closing, I will just reinforce my earlier comments on regulatory reform. You have our other brief. I think there's a window of opportunity for the finance minister to reinforce directions that have been started, but we need some progress.

To pick up quickly on three items that have been discussed around the table, tax levels on Canadians are high and we can't afford any more. Second, one gentleman mentioned cost recovery and the danger of creating a system with built-in inefficiencies and in essence creating taxes of another sort. We have to be very careful about the cost-recovery system and how we apply that so that it does not just become tax increases in another form. Third, I mention non-profit taxes briefly. This is a rapidly growing area. There has been a distinct shift in taxation and government revenues. It does have a major competitive impact, and I think anything you can say to the Minister of Finance to tread with care in that area would be worthwhile.

The Chair: Mr. Bulmer had to leave to catch a plane and he asked me to pass on his regrets.Mr. Stinson.

.1150

Mr. Stinson: It think it's fairly clear that there's a consensus, at least on this side of the table, about the need for the government to continue on the track of deficit reduction and move ultimately towards a balanced budget. It's a chief concern of the members of the Canadian Pulp and Paper Association, particularly as it relates to their cost to capital. We see that as a major impediment to maintaining our international competitiveness and undertaking the amount of investment we would like.

We recognize that the government is in quite a predicament in terms of having to make the decisions to cut, but I would advise the government that there is a growing consensus on the part of most Canadian society. There will be voices of dissent, but I think it would be short-sighted for them to relent in this task. I think the price we would pay down the road would be much higher and could lead to the wholesale disruption of many of the programs that Canadians hold dear.

The Chair: Thank you, Mr. Stinson.

Mr. Orr.

Mr. Orr: I'll touch on three areas in conclusion, Mr. Chairman.

I recommended that the government focus on the debt-to-GDP ratio. I recommended that because that's the appropriate principle. I recommended that the target for 1997-98 be 71% of the ratio of debt to GDP. In our discussion it was clear that would be consistent with the deficit in 1996-97 being about $20 billion rather than the $24 billion that's now planned.

In the following year, 1997-98, if the deficit was about $10 billion, that would hit it. We would hope that you could do better, but hitting a debt-to-GDP ratio of about 71% in 1997-98 is an achievable, reasonable target.

The second point is about payroll taxes. In a year or so the amount in the unemployment insurance fund will reach $5 billion. Most people, including the Department of Finance, feel that is cyclically balanced. It's important that at that point any further money that comes into the UI fund be refunded by reductions in payroll taxes. This is very important. That's one of the most important things the Minister of Finance will be able to do over the next couple of years to create jobs. Tom d'Aquino mentioned a quote from the Bank of Canada, which was fully supportive of this point. Other analysis has shown that if you increase payroll taxes by about 1%, you reduce employment by about 40,000. This is a very important lever that's coming into the hands of the Minister of Finance for job creation.

The third point is this. Last year in your report from this committee, Mr. Chairman, you recommended a deficit reduction surtax as sort of a contingency possibility.

The Chair: We didn't recommend it. We said it was a possibility, if all other measures failed.

Mr. Orr: Yes, I describe that as a contingency.

The Chair: All right.

Mr. Orr: I hope that you don't visit that same possible contingency in the report of this year. I don't think tax increases should be used. We should be on the expenditure side in meeting the deficit targets.

The Chair: Mr. d'Aquino.

Mr. d'Aquino: Mr. Chairman, I'm just going to leave you with the four points I would hope that you would all think about very carefully and that after having thought about them very carefully you would take them to the Minister of Finance.

We're at a very critical stage now in the country, economically and politically. I think it's very important that you tell yourselves that you've made many good decisions, you've made many good sacrifices, so now while the finish line - the finish line being a balanced budget - is in sight, you don't give up and that you do something very important, that you ensure that you're in balance before the next economic downturn begins. Incidentally, that could be coterminous with when your party has to go back to the Canadian people.

You're not going to want to go back to the Canadian people and say that you subjected them to all this pain and suffering but now have to tell them regrettably that we're into a downturn and are going to watch the deficit rise again, which is going to mean even more sacrifice. Say to Mr. Martin, without getting into the highly specific numbers, to please balance his budget and have a credible plan in place for dealing with rolling back the debt before the next economic downturn.

.1155

The second point I would urge you to bring to the minister is, in 1996 in particular, let's have a plan in place to deal with the potential of political instability. On October 30 we came within a hair of catastrophe. What I mean by within a hair of catastrophe is that the price all of us would have had to have paid if 50,000 votes had gone the other way at this point in time is incalculable, but it would have been extremely severe.

What Canadians need, and not just the business community, is a plan to deal with any eventual instability. That plan must be able to deal with any province that seeks accession to sovereignty or independence. There must be an orderly process for dealing with that so that we're not caught with our collective pants down, as we came close to being caught on October 30. So we need a plan to deal with political stability.

Third, please continue with the important structural reforms that have already started, the political structural reforms that the House no doubt will debate. Of course, there is room for improvement on overlap and duplication and there is room for simplification. There may even be room for some devolution of power that will make a great deal of sense, but let's not only think of it one way. The federal government has an important responsibility, not only to the business community but to all citizens. We don't want to see anything that will in any way weaken the economic union.

Think about how the trade and commerce power can be used more creatively. Think about how the federal government can be more proactive in defending the economic union. Think about whether we really need eight or ten securities regulators or whether we should have one. In other words, in this process of restructuring, think of it going both ways.

Finally, I think we really need to tell Canadians the truth about where we stand on our economics. Unemployment will come down slowly, for a whole variety of reasons. Mrs. Stewart asked us to give you some of those reasons. There are many reasons why it will come down slowly, but only by dealing with the problem of our finances in the first order will we be able to bring some of the relief necessary.

Mr. Chairman, twelve years ago, at a time when we were calling for balanced budgets and committees prior to yours laughed and said it was outrageous, unnecessary right-wing stuff, if our advice had been accepted, today this country would be in surplus, we would not be paying all of this money in interest rates, and we'd have plenty of money to deal with the kind of programs we should be addressing. So we failed, but let's not fail for the next fifteen years. Let's try to get it together.

Mr. Chairman, one issue that was not talked about, and it is a picayune subject in comparison to these big issues that we're talking about, is that the business community of Canada is 100% behind any effort of this government to move aggressively towards the integration of the GST with our provincial sales taxes. It's absolutely important, and it wasn't raised so I raise it now.

The Chair: Thank you, Mr. d'Aquino.

Mr. Smith.

Mr. Smith: I want to congratulate the government on their performance to date and encourage them to continue, as aggressively as possible, to address the deficit situation. I think the use of the contingencies that were put in place is.... I differ in opinion with the hon. member from Montreal. I sympathize with his situation, but I think we need to provide the stability in the marketplace to ensure that those with whom we are competing thoroughly understand that we are serious about addressing this situation and hopefully can eliminate both the deficit and the debt in a reasonable period of time.

I also encourage the committee to seriously look at the performance of the aerospace sector and perhaps apply that model to other sectors. It is a necessity to not only look aggressively at the issue of the deficit and the debt, but also to add some encouraging news to the Canadian taxpayer. The national government must show that it will assist those sectors that compete in the world marketplace and need a level playing field. Perhaps through the fine-tuning of program expenditure reductions, a fund such as the new technology investment fund could be instituted to encourage those sectors beyond the aerospace sector to create the jobs and wealth that this administration is so desperately looking for.

.1200

Finally, as my colleagues have stated, I don't think it's the time to tinker with the tax system, either with respect to corporate or personal.

The Chair: Thank you, Mr. Smith. On behalf of all members, I thank you for your remarks today.

It's obvious there is a consensus among all of you that we must reach zero deficit by 1998-99. I think Mr. Stinson put it rather succinctly when he said we have to get there, but it's not your job to tell us how to do it. I disagree, Mr. Stinson. It will be our decision, but we need the help of all of you. You've said we can't increase taxes. Let's assume we accept that. Except for one of your sectors, employment will not be buoyant; it'll be going down. Unemployment will not abate quickly over this period, so it will contribute to our efforts to reach that target, whatever that may be.

We need your help. You have employees. You have children. You have families. You live in communities. You see unemployment. You see people on welfare. We want to know which of those programs we should be cutting. We want to know where we can get that money out of cutting expenditures that we will need to reach your targets.

We would like you not only to give us the targets and the goals, but to work with us in a constructive way, as you have in the past, to help us find those areas where we can cut in a way that will not destroy what I think Mr. d'Aquino talked about so eloquently - the need to have a sense of nationhood in Canada, but in a way that will not blow this country apart and create centrifugal forces that we will not be able to control politically.

Let us assume that we're prepared to accept your challenge of getting to zero by 1998-99. Could you be good enough to put in writing to us those areas where we would make further cuts in expenditures? Who would be the winners and who would be the losers? That would be of great help to us.

Last year when we went about having our pre-budget consultations for the first time, everybody said we must get the deficit under control - everybody, with the exception of two witnesses out of over 600, who said not in their backyard.

We've gone through a tough process. We've started along the road. It'll be harder for us because there is less and less fat and we're getting closer to the muscle and bone. This is why it's important to have your input, because you are important players in our economic mosaic, as to exactly how we do it.

On behalf of all of the members, I thank you for your partnership in being here with us and for sharing your ideas. We look forward to working with you in the days ahead.

Members, we have a little bit of housekeeping. We'll going into a quick business meeting and then we'll be able to close off.

We have a motion that the committee contract for the services of a writer and an editor from today until December 12 - the maximum would be $11,000 for the writer and $8,800 for the editor - and for a media firm to assist us in contacting the media prior to our trips east and west next week. That would be a very minimal amount because there would be no one travelling with us. We would just use them to make the initial contacts for us. It would certainly be less than $5,000. Could I have a motion to that effect?

.1205

Mr. Campbell: I so move.

Motion agreed to

The Chair: Thank you very much. The meeting is adjourned.