[Recorded by Electronic Apparatus]
Monday, December 4, 1995
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[English]
The Chair: Could we please come to order.
The finance committee is pleased to be sitting in Ottawa today. With us we have a group of distinguished Canadians who will be dealing with a number of issues, all of them relating directly or indirectly to future jobs in Canada.
Here from the Canadian Advanced Technology Association, Shirley-Anne George; from the Canadian Chamber of Commerce, Dale Orr and Michelle Banning; from the coalition of National Voluntary Organizations, Rose Potvin and Al Hatton; from Koskie & Minsky, R. Michael Steplock, chairman of the board and chief executive officer and Ray Koskie; from the National Oilsands Task Force, Al Hyndman; from NSERC, Dr. Tom Brzustowski, president; from Wood Gundy Limited, John Brooks; from Arthur Donner Consultants Inc., Arthur Donner; from Pratt & Whitney Canada Inc., David Caplan, and from SPAR Aerospace Limited, James Mackay.
Did I miss anybody or did I mess it up in any way?
Thank you for being with us. The format provides for three minutes for an opening presentation. You will each have an opportunity to summarize before we close. There will be lots of time in between, through questions and other exchanges, for you to put other points on the table that you do not have a chance to present in your opening remarks.
Perhaps we could start with you, please, Mr. Koskie.
Mr. Ray Koskie (Legal Counsel, Koskie & Minsky): Thank you, Mr. Chairman and members of the committee.
I'm here today in my capacity as director of and legal counsel to a labour-sponsored venture capital fund. We've filed certain materials with you, but I don't know if they've been distributed yet. As you can see, Retrocomm Growth Fund Inc. is a labour-sponsored venture fund established only in April of this year. It is truly a joint labour-management initiative and was established to deal with the chronic unemployment and bankruptcies in the construction industry in Ontario. This is a joint labour-management initiative designed to get the industry back on its feet and to get people working again.
I'm pleased to say the union sponsors in this fund have in effect put their money where their mouth is. They have contributed well over $800,000 to launch this venture capital fund.
The focus of the fund is job creation for the members of the construction union sponsors. This will be accomplished through the investment in small and medium-sized businesses that will specialize in a retrofit of both government and private sector buildings, and also in general construction activities. The venture fund will invest in companies involved in start-up, growth, expansion and mature stages of development.
I should tell you that unlike many other venture funds in existence today, we've already made our first investment - and keep in mind that this fund was only launched in April of this year, after the RRSP season - of $2.5 million in connection with the construction of the York University sportsplex. It is a skating rink complex with six NHL-sized skating rinks. It created well over a hundred construction and related industry projects. There are $180 million worth of investment applications being reviewed today, with another $600 million waiting to enter the review process.
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The problem that Retrocomm has is unlike many other venture funds. Other venture funds have the money, but they're not making the investments, or it takes them a long time to make the investments. Retrocomm has the potential investments, but lacks the necessary cash from the sale of A shares to the public. Again, keep in mind that this fund was just launched in April.
Unlike many other venture funds in which the due-diligence process can take well over a year, Retrocomm has shown that it can expedite the process. The first investment, for example, took four months from beginning to end. I think that will set a record in the labour-sponsored field.
Of course, the other problem we have is in the construction and retrofit industries. Companies wanting to do this work are starved for capital.
So our solution, insofar as the budget is concerned, involves two main recommendations. One, we would ask this committee to recommend to the Minister of Finance that the budget should establish a program that will provide no- or low-interest loans to labour-sponsored venture capital companies during the three-year start-up period.
In the proposal we have circulated today, our request for a loan is for $1.8 million, which will be earmarked strictly for marketing and education purposes, with the objective of encouraging the public to purchase the A shares, which will in turn give Retrocomm more money for job creation investments.
The unique aspect of our submission is that this loan should be a conditional loan, not an outright loan, other than in the first year of the loan, which we suggest be made unconditionally. The drawdown in the second- and third-year parts of the loan would be conditional on Retrocomm investing in job creation investments. So it could draw down on the loan on the basis of $1 for every $20 that's invested in a job creation investment. In other words, if we don't make the investments, we can't draw down on the loan.
We would have to satisfy the appropriate government department that we have made job creation investments. Once we have satisfied them, then we are entitled to draw down on the loan on the basis of $1 for every $20 invested. For example, with $1 million investment in a job creation investment, we would be entitled to draw down $50,000.
We are willing to pay, as I said. Hopefully, there would be no interest, but dealing with today's realities, even a low-interest loan would go a long way to help labour-sponsored venture funds like Retrocomm that are focused only on job creation.
The government benefits from this sort of loan, because the more money that Retrocomm can place in job creation investments, the quicker the government earns back the tax credits it gave out in the first place.
Second, of course, the government would be directly assisting small- and medium-sized businesses to gain access to much-needed capital.
Third, there would be the job creation element itself, which is obvious. There would be the resulting tax revenues. There would also be lower unemployment, etc.
It's a win-win situation. Just to summarize -
The Chair: Mr. Koskie, I'm sorry, we'll give you a chance to summarize shortly. We'll give you lots of other chances to explain the deal, but you've given us the idea of what you're interested in. We understand that. We can go into some of the reasons later on. Thank you.
Mr. Brzustowski.
Mr. Thomas A. Brzustowski (President, Natural Sciences and Engineering Research Council of Canada): Thank you, Mr. Chairman. I'm very happy to be included in this round table conversation. I hope some of our ideas are useful.
In three sentences, I will tell the members what NSERC is. There's one page on that, which you may find useful. Then I will move on to give an explicit answer to the question that was in the letter of invitation. Then I'll explain the answer. I'll do all of this with due regard for your time.
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Mr. Chairman, the Natural Sciences and Engineering Research Council of Canada - the first word is ``natural'', not ``national'' - is the national instrument for making strategic investments in Canada's capability in science and technology. NSERC is a granting council that supports both basic university research through research grants, and project research through partnerships of universities with industry. NSERC also supports the advanced training of highly qualified people in both areas. As I said, Mr. Chairman, there's a one-page handout which provides some useful information about the council.
The question that was put in the letter of invitation was ``how may budget measures be used to create an environment for jobs and growth?'' That's a huge question, Mr. Chairman. From my perspective from NSERC, I will focus in on one fragment of the answer.
I will focus in on innovation. By innovation I mean narrowly the process of bringing new goods and services to market. Not just having a new idea, not just proving a new concept, but the process of bringing new goods and services to market.
The answer then to your question is, what can the government do with budget measures? It is to create the most favourable environment for innovation. Obviously from NSERC's perspective we are qualified to talk only about innovation that is grounded in new ideas in science and technology, new knowledge in that area - not innovations and marketing or distribution or whatever.
In the area of science and technology there are two kinds of innovations, and I think both are essential, Mr. Chairman. One is to maintain the financial health and viability of our existing enterprises - process innovation, which helps them to improve productivity and stay competitive.
Then, Mr. Chairman, as a consequence of growing productivity in the economy, where people are displaced from the workforce - even trained people with experience - we need product innovation, which is the creation of entirely new economic activity that will absorb these people back into the workforce, bringing entirely new goods, entirely new services to market that don't exist yet, but that are made possible by the new results in science and technology.
Since all of this, Mr. Chairman, begins with people and ideas and moves on to existing corporations and start-ups, which might be encouraged by government through procurement standards and all sorts of other activities, the environment can't be described in simple terms. But an environment which consciously addresses all elements of the innovation process, from the research right through to bringing goods to market, which does include some of the points that have been made about financing, which includes the help with business planning, includes good management, includes university support - all of that, we think, is not the whole answer by any means to your question, but an important piece of it.
I'll stop there.
The Chair: Thank you very much, Mr. Brzustowski.
From the Coalition of National Voluntary Organizations, we will now hear from Rose Potvin, no stranger to our committee.
Ms Rose Potvin (Executive Director, Coalition of National Voluntary Organizations): Thank you very much, Mr. Chairman. I have a problem for which I apologize, Mr. Chairman. I seem to be one meeting behind you all the way along. When I was here a few weeks ago, you had asked us to speak to charities and tax incentives and we didn't have our paper ready. I did bring it with me today, and am tabling it with you.
In order to get caught up with this group, I've brought my colleague Al Hatton around and he'll speak to the topic of the day.
The Chair: Thank you, Rose. Welcome, Mr. Hatton.
Mr. Al Hatton (Director of External Relations, YMCA of Canada): Thanks, Mr. Peterson.
I'm coming at this from a bit of a different perspective than a lot of the other participants here in that I'm representing the voluntary and charitable not-for-profit sector.
That may strike one as funny - ``Well, what do you know about growth and job creation?'' In fact, we make up about 12% of the business and economic activity in this country. We haven't so well represented ourselves in the past in terms of the job creation side and the economic contribution and the employment side.
I wanted to focus on a couple of things. The first is community-based initiatives that marry economic and social objectives. I think that in a sense this area has been traditionally characterized in poorer communities, marginalized communities, and poorer communities in both rural and urban areas.
There are several models across the country, some with economic development corporations targeted at specific low-income areas, where the use of volunteers, the use of keeping resources at the local level, a process that involves citizens identifying economic opportunities, cultural and social opportunities, and building the wherewithal to be able to create jobs and keep resources at the local level is part of what I'm focusing on.
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In a sense the process is empowering. It gets citizens to start to look at economic opportunities using self-employment techniques and focusing on how you train people and keep jobs at the local level.
During the 1970s, the former Department of Employment and Immigration pioneered a lot of examples, and there have been changes in these over the years.
Right now, with all the changes going on in human resources development, there are very few resources targeted at this. I think it's a major concern and it is one of the instruments that will be viable and of possible use in building community capacity. It will, I think, marry both the social and economic objectives you would have as a committee.
I guess the recommendation we would be bringing forth is that the community sector and the voluntary sector and the organizations at the local level should be given a bit of a reprieve in this budget. We've been facing cuts with the Government of Ontario's announcements last week, last year's budget and probably this budget.
In a sense, I think the message is clear. At the local level, major change has to take place and we're going to need a year or two to retool and be able to be in a position where we can continue with these sorts of models.
So that's what I wanted to say.
The Chair: Thank you, Mr. Hatton.
Arthur Donner, please.
Mr. Arthur Donner (President, Arthur Donner Inc.): Thank you, Mr. Chairman. Thank you for the invitation to attend the round table. What I will try to do is very quickly run through a series of important points I would enjoy elaborating on.
I should mention to the members of your committee that I've provided two handouts. One deals with work time redistribution and employment opportunities, and the second asks whether Canada should consider pegging the Canadian dollar to the U.S. dollar.
With respect to some of my basic recommendations and policy thrusts, I guess I would start off by saying it would be useful to the public if deficit management was looked at from a the point of view of a total balance sheet. We do spent an awful lot of time on the deficit and GNP. We tend to ignore public sector assets.
For example, investments in education, health and infrastructure are not only public sector assets. They are assets that truly show up more on the private sector than even a known public sector balance sheet. The reason I raise this as an issue is that it is very rational and understandable that private firms would borrow to expand their physical capital. I think there may be a raison d'être for relooking at our fiscal problems in this light.
Secondly, and this leads directly to the economy, I truly believe the labour market is in crisis. This is partly because the economy has been underperforming ever since the last recession ended. We now have an unemployment rate of 9.4%. We have approximately 1.4 million Canadians who are unemployed and an additional 2.5 million to 3 million who are probably on social assistance. We know over 700,000 Canadians want to work full-time but are working part-time and are counted as full-level employed.
All this suggests there is something holding back the job creation engine. If you look at what is holding back the job creation engine in Canada, I cannot help but conclude it is fiscal drag. The combined weight of cutbacks at the federal and provincial governments is throttling economic growth and ultimately job creation.
In that light, I'd like to relay a quotation that a friend of mine told me. The quotation is from The Economist magazine in 1992, and said basically that no modern government would be stupid enough to massively deflate an economy already in trouble.
I would suggest our economy truly is in trouble and we are experiencing massive deflation. The deflation is originating quite understandably from the fiscal side. I would suggest what we're missing is the offsetting stimulants from the monetary side.
What I regret is missing from this entire discussion is a concept that was very popular in the 1950s and 1960s, and that is the concept of economic policy mix. How does the combined blend of monetary policy, fiscal policy and, of course, the impact on exchange rate all blend together in terms of the economic impact?
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Let me throw out a few specific and limited fiscal ideas.
Understanding that the budget situation is still limited in view of the fact that the labour market perspective is so bleak, I would suggest the reintroduction of some sort of capital works project, perhaps something like what we had years ago, called the old winter work project.
One thing about the construction industry is you have very large multipliers. The multipliers tend to work largely internally and the job creation impact tends to be fairly speedy.
With respect to some other facets, I would suggest the committee examine some of the proposals and issues we discussed in the Advisory Group on Working Time and the Redistribution of Work.
One idea we suggested was an econometric simulation of what would happen to the Canadian economy if those people working abnormally long hours and those people working regular hours took on average a 25% reduction in their working time. It turns out, when you look at that and allow enough adjustment periods to go forward, that it's a win-win situation for society. Certainly the recorded unemployment rate goes down, and you would see on balance the fiscal position and the welfare position of all governments improve.
I think I should be winding up on that note. Thank you.
The Chair: Thanks, Mr. Donner.
Mr. Brooks.
Mr. John Brooks (Senior Financial Consultant, Wood Gundy): Thank you, Mr. Chairman, for inviting me here today.
Before I begin, I'd like to point out the opinions I express are my own and not necessarily those of my employer.
Today I want to talk about economic prosperity.
I'm a senior financial consultant with Wood Gundy, and with my wife Brenda I have just written a book entitled Catching the Wave: How to Profit From Canada's Four Prosperity Trends.
As a stockbroker, I've seen a profound change over the last fifteen years in the general attitudes of my clients. This change is identical to the weak link or what is missing in terms of job creation and economic growth, and that is the issue of confidence in the future. We cannot expect any business to hire new employees if they're not confident it's going to be successful.
The book details survey after survey that shows Canadians think things are far worse than they really are, be it on the issue of crime, how happy families are or, most especially, economic performance. Our statistics don't account for the dramatic improvement we've seen in our day-to-day living, primarily through technology. It's easy to think of examples, such as arthroscopic surgery, automatic cameras, computers and telecommunications.
I hasten to add that StatsCan is tops in its field; it's just the world is sometimes moving too fast to measure all of this.
Yet, despite all this pessimism out there, there are some fundamental trends that are going to make us prosperous. I'd like to mention what these are: our changing demographics, our advances in technology, the growth of international trade and changes in government.
With demographics, think of the baby boom as a mini-tornado, so massive in numbers that wherever they move through life, they're kicking up the dust. We saw the scramble to build schools in the 1960s and the rush with the housing shortages in the late 1970s and early 1980s. Now the baby boomers are entering their most productive years in the workforce, where they're going to bring in their collective judgment and experience.
If this is not good news enough, we have the dependency ratio, that is, the measure of the number of people who are under age 20 or over 65. That's declining and will be at record lows over the next fifteen years.
We add in less cost to the economy of dependants, the massive numbers of baby boomers and the beneficial effects of immigration, and we have a can't-miss formula for prosperity.
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The second factor is technology. As I said, the new techno-economy is creating improvements faster, in many ways, than our statistics can measure them. Biotechnology, materials science, superconductors, photonics, virtual reality - all these things are going to revolutionize the way we live within the next decade. It's coming very quickly.
International trade: The reduction of trade barriers is giving us access to foreign markets we never had before. As global consumers, we're enjoying a variety of cheap goods from all around the world. Think of it. Variety itself is a form of wealth.
Finally, governments: Governments are getting better. The rapid pace of privatization is a world trend. The evidence is pretty clear that the economy operates better through open competition than when we have active government ownership or control.
I'll be making copies of my book available to you so you can see how these factors have been documented. Keep in mind that Canada ranks as the best nation in the world to live in. We're second in wealth per capita. By my calculations, we're the best place to invest in terms of business.
If you share my belief in Canada, let's get this good-news message out. Let's start a public discussion on Canada's prosperity. Get Canadians thinking confidently. Let's get started now. I ask that these measures be included in your budget consultations.
The Chair: Thank you very much, Mr. Brooks.
Mr. Dale Orr, I'm sure you share the optimism of Mr. Brooks.
Mr. Dale Orr (Chairman, Economy Policy, Canadian Chamber of Commerce): A little.
Thanks for the invitation, Mr. Peterson. Your committee has asked how budget measures may be used to create an environment for jobs and growth. The Canadian Chamber of Commerce, representing businesses all across Canada, is pleased to provide its views.
My comments today will reflect the views in two documents familiar to your committee. The first document, on the chamber's Aim for a Million project, surveyed over 1,000 entrepreneurs in 1994, specifically to ask them what actions need to be taken to create one million new jobs in Canada. The second document, A New Framework for Economic Policy, was presented to your committee by the Minister of Finance Mr. Martin in October 1994.
There are two recommendations I'd like to note in my opening comments. The first - and you won't be surprised - is to reduce the deficit. There's one budget measure that overwhelms all others in its ability to create an environment for jobs and growth. I quote from the chamber's Aim for a Million project:
- Businesses of all sizes and in all regions identified government debt/deficit reduction as the
most important issue to help them build a sustainable business and hire additional employees.
- ...are among the necessary means toward the overarching objective of providing more and
better jobs for Canadians.
- The key is to foster an economy that is more productive because that is the only way to provide
better jobs and a rising standard of living.
The Chair: Thanks, Mr. Orr.
The chairman and chief executive officer of Pratt & Whitney, Mr. David Caplan, please.
Mr. David Caplan (Chairman and Chief Executive Officer, Pratt & Whitney Canada): Thank you, Mr. Chairman. I am pleased to be here today. Thank you for giving me the opportunity.
I'd like to give you a backgrounder on Pratt & Whitney, because it's relevant to the points I'll try to make.
Pratt & Whitney is a wholly owned subsidiary of United Technologies of the U.S., but we do have a very true world product mandate to design, develop, manufacture, market, and support gas turbines for regional and business aircraft and helicopters, as well as other products, throughout the world. We employ about 8,000 people, of which 6,300 people are in Quebec. We also have important facilities in Mississauga, Halifax, and Lethbridge. Our sales forecast for this year is about $1.7 billion.
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The important point is we are traditionally the second-largest spender on R and D in the private sector in the country. This year we'll spend about $250 million, and we forecast this expenditure to increase by 15% to 20% next year. The other important point is 90% of what we manufacture is exported.
Today's growth at Pratt & Whitney, as well as in the industry as a whole, is the direct result of investment by both the Canadian government and the industry over many years. Pratt & Whitney and the industry are very concerned about the removal of new risk-sharing repayable - and I want to emphasize the word ``repayable'' - support to the industry in the 1995 budget by the central elimination of the DIPP.
Success of the industry today has grown faster than in other leading aerospace countries we compete with. I might add that the aerospace industry in the last decade has grown twice as fast as Canada's GDP. This success is based on the investments of five and ten years ago, and perhaps even longer, because the aerospace industry has a very long product development cycle. It also has one of the longest product lives; in our case it could be 25 or more years.
For every dollar invested by the government, $4 was invested by industry and created $25 or more of sales.
I would like to remind the committee that most of the government's contribution is subject to repayment, based on royalties and total repayments that can exceed the initial contribution.
Canadian government support has been significantly below the level of both direct and indirect support provided by other leading aerospace countries. This is both in absolute terms and as a percentage of the total investment. Nevertheless the Canadian formula of more modest repayable support has been leveraged to create the sixth-largest aerospace industry in the world, with 70% of sales to export markets, creating 53,000 direct, high-tech, well-paying jobs.
There's no doubt in my mind that unless the form of R and D support to the aerospace industry through repayable risk-sharing activity as we knew it under DIPP is replaced by an equivalent program in the 1996 budget, it will be the beginning of the end of the Canadian aerospace industry as we know it today. It may not be obvious for a year or two or three because of existing commitments and the long-term cycle I mentioned earlier, but there is no doubt it will begin to decline and will not be recoverable.
The question was put as to how budget measures may be used to create an environment for jobs and growth. I submit that the 1996 budget should stay the course on deficit reduction, but the priorities within these budget limits should be to use its funds with the priority of supporting programs that create high-tech, high-paying, and most importantly, long-term jobs. This means it must invest its funds in the programs that have long-term viability. I agree very much on the question of being competitive from a productivity point of view. We should be careful of investing in short-term projects, which don't have that type of payback.
I submit that the aerospace industry provides such an opportunity and more, and I strongly urge the government to replace the DIPP by what has recently been called the national investment technology program. Such a program would allow Canada to build on its success and to both create new jobs and maintain the jobs we have today.
Thank you, Mr. Chairman.
The Chair: Thank you, Mr. Caplan.
From SPAR Aerospace, we have Mr. Clifford Mackay.
Mr. James Clifford Mackay (Senior Vice-President, Space Systems and Corporate Development, SPAR Aerospace Limited): Thank you, Chairman, for the invitation.
Before I make one or two comments, I'd like to take the opportunity to say that this year is probably the most historic year for Canada in space that we have had since we got into the business in the 1960s. Three major events have already happened, and there's one more to come.
Canada, in cooperation with some U.S. companies, launched the first truly mobile communications satellite earlier this year. We just very recently launched the world's first commercial radar satellite - and I must say it's operating extremely well - about a month and a half ago, and then very recently Chris Hadfield became the first Canadian to actually operate the Canadarm in space. Frankly, the mission was nothing short of exceptional in terms of its success.
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I make those points, Mr. Chairman, to make a very simple point, because it doesn't get said in this country very often, that there are many things Canadians do that they can be truly proud of and that are world-class. I think that needs to be said more often.
Turning to the subject at hand, I won't repeat what my colleague Mr. Caplan just said with regard to the absolutely critical nature of a long-term view and a partnership between government and industry if you're going to participate in industries like aerospace. There are a number of other ideas we could talk about in that context, everything from partnerships or teaming arrangements in international markets to better contracting procedures, to partnerships for contracting out, or for the delivery of services of a high-tech nature.
But I want to leave you with just one critical thought for today, and it is that I think it is absolutely imperative that our policy-makers keep in the forefront of their mind, when they're struggling with the issues that I know you're struggling with, the difference between making an investment in the country and making an expenditure, or consuming something, if I can put it in economic terms.
What Dave Caplan talked about in SPAR is a classic example of what can happen when the country invests in the future of research and development and innovation, which one of our colleagues mentioned earlier in the presentation. I think it is absolutely critical from a policy-making point of view that you keep that thought in mind. SPAR is a creature of good policy-making in the past, where people understood investment and it's now, frankly, something that I think we can all be proud of. It's growing, and I think it's a truly Canadian company.
So I want to leave you with that one thought, when you think about jobs and growth in a budgetary context.
Thank you, Mr. Chairman.
The Chair: Thank you, Mr. Mackay.
Anne George, please.
Ms Shirley-Anne George (Executive Director, Canadian Advanced Technology Association (CATA)): Thank you, Mr. Chairman.
The Canadian Advanced Technology Association represents a broad range of technology-based companies that are already creating thousands of jobs and original wealth through export sales. They generally get greater than 80% of their revenues from offshore.
They build world-class niche products that require heavy investments in research and development to ensure that they remain competitive in a world of shorter and shorter product life cycles. Nuala Beck, a Canadian economist, estimates that these companies have created 800,000 jobs over the last 10 years. The average employment growth for these companies is 16%, and most are experiencing a critical shortage in finding highly skilled, world-class employees who they need to compete on a global scale. Our problems are in some respects the reverse of your problems.
Most of these companies and employees are highly mobile and they are actively recruited, almost on a daily basis, to move part or all of their businesses out of Canada, and their employees are recruited on a daily basis to move out of Canada. Since the executives in these companies travel extensively, they're fully aware of the advantages of being Canadian. Overall, they are very eager to keep their businesses in Canada.
What they need is a globally - and I stress globally - competitive business environment for their companies, for their investment and for their employees. To keep these companies and to ensure the right environment for the next wave of Newbridges and Corels, the agenda for a competitive Canada is really quite straightforward, perhaps much easier said than done. The magic three words are competitive, stable and predictable. The overall business climate must be competitive, and that includes the marginal corporate tax rate.
The research and development tax credits in Canada have been directly responsible for balancing off the higher corporate tax rates in Canada. These tax credits must remain and they must be brought back to the stage of being both stable and predictable.
Our CATA annual survey shows that these ``tax credits'' also are responsible for raising about 14 times their expenditures in direct taxation back to Canada. I wish we all had expenditures of that nature.
Our primary asset is our people. We must ensure that Canadian universities and colleges have the flexibility to graduate world-class, not Canadian-class, knowledge workers, and then we must keep them in Canada.
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Our biggest challenge today is finding the right senior-level employees. Because of our very high personal marginal tax rate it has become nearly impossible to recruit outside of Canada, especially from the U.S. Where this was a problem a year or 18 months ago, it's now literally on the agenda of every CEO I talk to every day.
We must look for a short-term, interim measure that will reduce the tax rate for a very limited number of employees per company, and Quebec has a model that you might want to consider. Without this tax relief for just the few right people that they need to recruit into Canada to be their vice-president of marketing or their lead researcher, these organizations will be forced to move part or all of their operations out of Canada.
Last, and perhaps of equal importance, the federal government, and indeed all governments, must get their fiscal house in order. They must do less, spend less, and meet every one of their financial commitments.
Thank you.
The Chair: Thank you. I'm sorry, I missed that, Ms George. Did you say the biggest problem Canadian companies have is recruiting high-level executives?
Ms George: For advanced technology companies, yes. When you build a world-class niche product, there's not going to be a lot of people who are able to run a piece of your organization. Of course, you always try to find them in Canada, and when you can't, then you start combing the world for them. There may only be a half a dozen in the world who are capable. When we go to recruit them, we bring them in, we make sure it's a nice warm day and we show them lots of wonderful things about being in Canada. At the end of the day, when we give them a package, they seriously consider it. But they're turning it down again and again and again, because if they're in the higher income tax bracket we get blown out of the water with the personal marginal tax rate. We're so far from being competitive that it's a very sad story.
The Chair: It's also tough to show them a warm day in Ottawa in December, isn't it?
Ms George: This year.
The Chair: Thank you, Ms George.
Last, Mr. Hyndman.
Mr. Al Hyndman (Chair, Fiscal and Socio-Economic Subcommittee, National Oilsands Task Force): Thank you very much, Chairman Peterson. It's a pleasure to join your discussion on jobs and the economy.
Many Canadians are clearly concerned about their employment and the future for their children, but there's been a great deal of competition for the attention of policy-makers. We're frequently preoccupied with other important national issues. So we were very encouraged by Prime Minister Chrétien's recent statement that economic growth and job creation is now the nation's number one priority.
We all seek a robust economy, prosperity and job opportunity creation for our youth. As we know, these will come from business expansions spurred by innovation and new investment. While much is often made of the job creation in the small business sector, we must remember that much small business is built around providing services to our core industries. Industries like my own and like Mr. Caplan's.
In many instances, providers of goods and services become export ready by honing their skills on domestic industry. Prosperity will only be possible if economic expansion occurs in Canada's tradable goods and service sector. For example, our industry purchases goods and services from 3,500 Canadian businesses.
Our economy is undergoing profound changes. Governments, public institutions, and the private sector are all knee-deep in rationalization, restructuring and downsizing. All of these mean job reductions.
The challenge of achieving real employment growth is something that certainly merits the attention of your committee. I would suggest we scan for potential investment-ready real growth opportunities and for barriers that might impede their prospects for success.
As you heard in Calgary - and this is where the oil sands come in - last week, an independent study prepared for the National Oilsands Task Force concluded that an investment of $21 billion to $25 billion would produce 44,000 new mainly skilled jobs across Canada by the year 2025, and this is illustrated in chart 1 of the handout. About 60% of the jobs will be outside of Alberta in many small and medium-sized businesses. This is an excellent reason to think about moving now on this important opportunity.
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Employment will come both from the primary investment in industry expansion and when the Canadian manufacturing and service sectors gear up and expand to meet the new demand the industry will create. This wave will be sustained for a long time because of the staged growth of oil sands expansion.
You may reasonably ask where the policy-maker fits in this equation. From our perspective, we have three suggestions. First, the same intellectual juices and effort that are applied to the government's attack on the deficit, program review, fisheries, and the like need to be applied to the stimulation of an economic growth culture among government departments. It's rare that one leaves a meeting where economic growth and job creation are the principal preoccupation. Too often the issue is diverted by process and other matters. So if our first priority is economic expansion and job creation, then let's act accordingly.
Lessons from the international Team Canada effort may be applicable domestically. Just thinking about what the Japanese, Korean, or German policy-makers would do if the oil sands were located in any of those countries can be inspiring.
Second, in the next budget Canada should finalize an oil sands generic fiscal regime. The results in jobs will be almost instant. The impact on tax revenues, if we use the task force's proposed regime, is illustrated in chart 2 in the attachment. Informetrica has forecast a positive impact on the federal fiscal balance from day one, and the total is forecast at $58 billion positive over thirty years. That's shown on chart 3.
A generic regime will attract capital, grow jobs at home, and end tax ad hockery and one-off megaproject deals. Last Thursday afternoon Alberta responded to the task force's recommendation with Premier Klein's announcement of a standard oil sands royalty formula. It remains for the Government of Canada to complete the task, to put in place a regime that will spawn development and yet retain a share of profit for governments exceeding that from most other sectors of the Canadian economy. That's shown on chart 4.
Third, one of the companies in the task force has become the leading Canadian business employer of native Canadians. This did not happen by chance. The 325 native employees on the payroll, plus another 250 working on site with contractors, are the result of two decades of dedication to aboriginal development programs, education, economic self-sufficiency, and community self-reliance. This success story may be transferable to other parts of Canada.
I've made three points, Mr. Chairman. There must be a stronger public policy focus and a developed culture for economic growth, a policy for investment-ready opportunities such as the oil sands, and a replication of successes such as the one I mentioned for native employment.
[Translation]
The Chair: We will now start the question period. We will begin with Mr. Loubier.
Mr. Loubier (Saint-Hyacinthe - Bagot): I thought there was going to be a debate between the witnesses but I suppose you have put that aside.
The Chair: There was not much opposition.
Mr. Loubier: Very well. In any case, I have already prepared my question.
The Chair: Everybody agrees with...
Mr. Loubier: Employment and virtue.
The Chair: ...a very tough budget, as long as nobody is personally affected.
Mr. Loubier: My question, to start the debate, is for Mr. Orr. I did not hear him recommend very strongly the elimination of grants to business, whereas the Conseil patronal du Québec made such a recommendation during its testimony, last Friday, in Montreal.
I would like to know what you think about that because last year, when I asked the same question to the Canadian Chamber of Commerce, I was told that we should indeed cut grants to business since they distort competitiveness between industries, but that we should not eliminate them completely. I believe that the Minister of Finance answered your request last year since direct grants to business still total about $2.5 billion a year. I would like to have your opinion on that, after which I will ask another question.
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[English]
Mr. Orr: Sure, I'd be glad to, Mr. Loubier.
I did comment on this when I was here about two weeks ago talking about budget measures in general. I made the point that in the last budget Mr. Martin had followed very closely the recommendation that was made by the Canadian Chamber of Commerce. Business subsidies were reduced 60%; they go down from something like $3.8 billion to $1.8 billion.
At the annual meeting of the chamber this September, the chamber members recommended that this amount of reduction be accelerated and that there be a complete elimination of most business subsidies. That's a reduction in business subsidies of 60%, where program expenditures in the last budget went down on average about 9%. There's a lot of recognition among the business community that they're willing to bear much more than their share of the load of reductions, and they want that to be continued.
[Translation]
Mr. Loubier: If I understand correctly, Mr. Orr, you would accept that all direct grants to companies be fully eliminated in the next budget, considering the enormous sacrifices that are being asked of individuals, especially the unemployed and people on welfare.
It would be somewhat immoral to maintain those grants, which total $2.5 billion at the present time, when Minister Axworthy is making terrible cuts in the Unemployment Insurance fund financed by employers and employees.
[English]
Mr. Orr: I think I basically answered the question by saying the chamber recognizes that when they argue for deficit reduction very consistently, loudly and clearly, they're saying they will bear their share of the load; they're not one of NIMBY groups.
Thanks, Mr. Loubier.
[Translation]
Mr. Loubier: Rightly or wrongly, people have had the impression, for about seven or eight years, that they are the only ones paying to correct our fiscal situation. They have been the only ones to pay since 1984, mainly through tax increases, and you know that our taxes are nearly twice as high as ten years ago. People feel that they are the only ones being asked to contribute, the only ones who have been asked for two years to reduce considerably their expectations, even though many companies are also doing their share. I should tell you that I am absolutely convinced that many companies are paying their share as far as taxes are concerned. However, there are undoubtedly some which do not.
I would remind you that, until 1988, the Department of Finance kept saying that statistics showed that several thousand companies did not pay anything to Revenue Canada. In other words, even though they were very profitable, they were not paying a cent of income tax.
After 1987, the Department stopped compiling such statistics because it realized that the number was increasing nearly exponentially. I have here the last figures available, Mr. Orr. In 1980, we were told that 62,619 profitable Canadian companies which made close to $10 billion in profit had not paid one cent in income tax. In 1987, the figures were then 93 405 profitable Canadian companies, which made $27.1 billion in profit before tax, that did not pay one cent in income tax.
Considering those figures, as well as the conclusions of a study published last September by Professors Bernard, Lauzon and Poirier of the Université du Québec, according to whom half the companies included in their sample did not pay any income tax at all, would you agree that the federal government should very quickly start a very serious review of our whole taxation system? This would allow us to know what is the situation at the present time, since this system has not been seriously changed for about 25 years, and it would allow us to fill the gaps, if any, and to make sure that each company pays its fair share of income tax, which would be fair vis-à-vis those which do pay their share and which would make sure that sure that everybody, companies as well as individuals, is treated in the same manner.
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[English]
Mr. Orr: I have a couple of comments. Because we've been around this corporate tax question many times, I'll highlight a couple of the responses that are often made.
Corporations may be having a tax break because in previous years they had large losses. That may explain one of your observations. Of course, in years when business picks up, often the amount of corporate taxes goes up much more than the level of taxation in general.
The other point is that businesses pay a lot of taxes apart from income tax, such as payroll taxes. That has been one of the more rapidly growing taxes.
Another point is in recognition of who ultimately bears the burden of a corporate tax. Often, of course, it's the consumers. It could be the employees or whatever. Somehow or other, in what you're saying, it's the old image that corporations are entities up there by themselves and these taxes are just to be had if only the government would try to get them. I am just saying that corporations are employees, shareholders, etc.
[Translation]
Mr. Loubier: I am not trying to say that companies do not pay their taxes, Mr. Orr. As a matter of fact, when we meet with representatives of the private sector - and we do meet some in our ridings - they tell us that they do pay their income tax. I am sure that most of them do, but we all know that some of them manage not to pay any income tax.
I am not asking you if we should increase or not the tax burden of corporations. I am rather asking you if the Canadian Chamber of Commerce agrees, like some other Chambers of commerce in Eastern Canada and in Western Canada, that the government, through a parliamentary committee made up of representatives of all three major parties, should start reviewing in depth the tax regime of Canadian corporations. The objective would be to see if there are by any chance some steps that could be taken to make the tax system fairer, not only from corporation to corporation, but also from corporations on the whole as compared to individuals. It has been a long time since we last looked at that.
I am not talking about increasing the tax rates. I am not saying that all companies do not pay their fair share. I am just saying that we have to make sure that all of them do, that there are no loopholes, such as those that allow to postpone paying any tax for ten years or those relating to accelerated depreciation. The point would be to make sure that no corporation, especially the largest ones, would be able to avoid paying some tax, even during the ten-year period I have been referring to.
That is my question.
[English]
Mr. Orr: There's usually not a lot of harm from looking at things. The point has been made many times that when you look at personal taxes and corporate taxes and other taxes, two areas where we seem to be hitting very hard in Canada are income tax on the person of middle and above income, the point that was made there, as well as the taxes that corporations are paying apart from income taxes.
Those are points that have been made, and if you're recommending that somebody should get in and look at that in more detail, that's consistent with what the chamber has said today and on previous occasions and with what other people have said.
Mr. Grubel (Capilano - Howe Sound): I have a question for both Ms George and Mr. Caplan.
Ms George, about two weeks ago, ironically, there was a person sitting in the chair in which you are sitting now who urged this committee to ensure that people with high incomes will pay more taxes. They said that they aren't paying their fair share. I made the point you made.
In response, I received information that a survey had been taken by Canadian companies. It was published by one of the major management houses, Ernst & Young or somebody like that, who said that these high tax rates didn't play any role at all in the decision to locate or to stay in Canada.
How do you reconcile these two bits of information?
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Ms George: I'd definitely like to see a copy of that report, because whoever did it didn't talk to any of our members.
Let me give you one example. There is a large Canadian telecommunications company that has its middle- to senior-level executives routinely recruited by perhaps the largest software company in the U.S. The bottom line is very simple. An individual who goes down and gets paid the same wages in the U.S. takes home $70,000 more. Now, that's pretty hard to argue against.
Mr. Grubel: I know. It's the same thing with my wife, who is a physician. She gets letters all the time, and there are people she used to work with who have gone. They get about the same pay, maybe somewhat higher, but the take-home pay is just enormously different.
I just wanted to reaffirm that this is a constraint we should work on, and it is very interesting for me to hear it from you with all this first-hand experience.
Ms George: It's very real and it's happening. I can't think of one of our board members who hasn't brought this up as a critical issue to their organization.
Mr. Grubel: I can assure you that on our trip through the west I took an article comparing the experience in high-tech between Seattle and Vancouver, where the conclusion was reached. But when we spoke to people who believe the government should spend more, we could not raise the belief that this is the way to go. They will simply not accept this fact. So we now have this contrary evidence.
I will just go on to Mr. Caplan and Mr. Mackay. Is it correct that Pratt & Whitney and SPAR are globally integrated corporations?
Mr. Caplan: Pratt & Whitney's centre of excellence is here in Canada. We market to global markets and we support our products worldwide. To some degree we are in the process now of developing joint ventures and other partnerships worldwide to penetrate markets, let's say in Russia or China and from Russia or China, because we believe it's the only way we'll be able to access those markets.
Mr. Grubel: Yes, but you have a global -
Mr. Caplan: We have a full global product mandate. We do everything in our product category from here. We do nothing for our parent company and they do nothing for us, other than the fact that we benefit from the exchange of technology. They do not manufacture any components for us and we don't for them. Everything we do is done from our base in Canada.
I'd like to make two comments on what Shirley-Anne George said. First, we don't even try to recruit in the U.S. because it would be a waste of recruiting money and because of the issues that were raised. But I think there's another side of the coin we should not overlook.
Currently we are trying to grow our engineering organization, as I mentioned. We will recruit across Canada and we may recruit from certain parts of Europe where history has said we can bring people in from. At the same time, we're quite concerned because some of our competitors from the U.S. are recruiting our people. We just cannot compete because, as was said earlier, our tax levels, the exchange rate differentials, and the cost of living issues become overwhelming. So it's a concern from both sides of the coin and should not be overlooked.
Mr. Grubel: I have a question, Mr. Caplan. How do the global parent plus all the subsidiaries of Pratt & Whitney in Canada, the United States, and elsewhere allocate the research and development budget? To what extent is it shared globally?
Mr. Caplan: At the present time essentially all the R and D I talked about is done here in Canada. This is the centre of excellence for our product mandate. We are investing a very small amount of money in a joint venture in Russia to develop and localize some gas turbine engines for the Russian market from Russia, but that is a minor investment. Fundamentally the $250 million per year I talked about - and next year it will be closer to $300 million - is managed, spent, and sourced right here in Canada, and the strategic development of programs behind that is from the Canadian organization.
Mr. Grubel: Excuse me. Pratt & Whitney has U.S. operations.
Mr. Caplan: Yes, but Pratt & Whitney in the U.S. is in the business of large engines, which go on the large Boeing 747s, the McDonnell Douglas planes, and the Airbuses. What we develop in Canada and market are small gas turbines, which are on things such as Dash 8s, De Havilland planes, the Canadair water bomber, Bell helicopters, which I'm sure we're all familiar with, all the Beech and Cessna corporate aircraft, and many regional aircraft throughout the world. These are examples.
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Mr. Grubel: You assured us here a minute ago you're repaying all the investment in research and development.
Mr. Caplan: The program we got the majority of the funding under, DIPP, is a risk-sharing program in which there are royalties against our future deliveries, forever. The limit on those royalties does not exist. It's really linked to the success of the programs. We have repaid tens, if not hundreds, of millions of dollars of prior support back to the government, based, in the old days, on repayment through profitability, and currently on royalties. The amount of money we pay now, each and every year, is quite sizeable.
Keep in mind what I said earlier. The product life cycle in our case could be 25 years plus.
Mr. Grubel: Nevertheless, if this is the case, could you explain to me why you couldn't go to New York or to Toronto and raise the money for that? Why do you have to go to Ottawa?
Mr. Caplan: When you develop a brand-new program on its own merit and look at it on its own risk level, you are assessing a brand-new investment that really has nothing to do with the rest of the business. You're looking to the future.
In the aerospace industry there is not one aerospace company that isn't heavily...and in this case I'll use ``subsidized'' - in our case it is not subsidy, because it's repayable - by its governments. This is a strategic decision by most of the leading industrial countries. It is no accident that the seven leading industrial countries of the world are also the seven leading aerospace countries of the world. In the case of the U.S. it's done through direct procurement, direct funding, with profit, of research and development activities, plus procurement. In the case of Europe it's a combination of that plus ownership. For any aerospace company in the world to compete, it must either get significant programs and contracts through its military establishment, which is the formula in most countries, or some alternate that allows it to compete on a level playing field.
Canada has developed a very unique and very beneficial and effective formula of risk-sharing support, fully repayable based on royalties. It has allowed Canada to become the sixth-leading aerospace country in the world, and it's all export. It's a unique formula, and it's really a decision by the Canadian government whether this type of industry provides the benefits to participate on a risk-sharing basis.
I will add one more thing. The ratio of investment by the government has been about one to four, or about 20%. In countries such as the U.S. and Europe it's well over 50%. In the case of some of our competitors it's significantly higher than that.
I'll make one more point, unless you have another question. We do not compete with a single engine in the world that has not initially been supported by its government, mostly through full payment of its development and by initial procurement.
The Chair: Mr. Campbell, please.
Mr. Campbell (St. Paul's): Thank you, Mr. Chair. My question is for Mr. Koskie.
I'm looking at your rather fulsome presentation here. You're appearing before us principally to seek, as you express it, a ``loan'' from the federal government to assist Retrocomm in undertaking certain education and marketing activities on a scale - and I'm quoting from your brief - ``that will be needed to ensure Retrocomm's success''. I must confess to a bit of surprise in these times at that sort of request, given, if I understand correctly, the extent of tax credit available to investors in Retrocomm. I wonder if you'd like to address that.
Mr. Koskie: The problem is that a lot of venture funds in existence today, particularly in the province of Ontario, are competing for the same dollar. This competition requires intensified marketing among the taxpayers to get them to purchase shares in Retrocomm as opposed to purchasing shares in another venture fund or as opposed to not purchasing shares in any venture fund.
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Mr. Campbell: When you're speaking of other venture funds, you're not speaking of labour-sponsored funds. Am I correct?
Mr. Koskie: I am speaking of labour-sponsored venture funds. That's right.
Mr. Campbell: They are competing with Retrocomm.
Mr. Koskie: They are competing with Retrocomm, which is a labour-sponsored venture fund. You have to also keep in mind that the types of investments Retrocomm makes are in companies involved in very large projects where the capital requirements are very substantial indeed. Therefore, in order for Retrocomm to be successful it has to attract very large amounts of capital in order to support the companies involved in retrofitting the buildings and in the building of new projects.
Mr. Campbell: In effect, you're saying that because the sorts of investments Retrocomm would make are of such value in job creation, it should be favoured with an interest-free loan, as I think you've called it, in addition to the tax credits available at the federal and provincial level.
Mr. Koskie: We've asked for an interest-free loan, but of course we're in tune with the realities of today. I suppose beggars cannot be choosers. We would certainly entertain any loan from the government, whether it's interest-free or low-interest.
Mr. Campbell: Do I take it then, Mr. Koskie - not to get into a negotiation here - that was an opening gambit and that in fact you're prepared to pay market rates for that loan from whatever source and maybe you'll throw in an equity kicker along with it for the federal government to benefit?
Mr. Koskie: It's a good investment for the government. The equity kicker is the job creation aspect.
Mr. Campbell: And what do you think competing labour-sponsored funds will have to say about that?
Mr. Koskie: I think the other labour-sponsored venture funds that are out there, like Working Ventures, have a problem that is the reverse of ours. They have $500 million ready to invest with very few investments to show for their business history.
Our problem is the reverse. We have almost $1 billion in investments we are looking at but unfortunately will not be able to place unless we are more successful in selling the shares in the upcoming season.
Mr. Campbell: I'm hard-pressed to understand why you wouldn't be in a position to use some of the funds invested in Retrocomm for the very same education and marketing purposes you're suggesting.
Mr. Koskie: Yes, we could do that. The problem is that if we use that money for marketing it means there's less money to meet the capital demands for investment purposes. I don't think that would fulfil the goal of job creation Retrocomm is dedicated to. We seek loans so we don't have to use our own money for marketing. We put that money to better use and create much needed jobs in today's beleaguered construction industry.
Mr. Campbell: Thank you.
Mr. Chairman, my other question really concerns DIPP, but I know some of my colleagues want to get into that in more detail so I'll pass it to them.
The Chair: Thank you, Mr. Campbell.
Mr. St. Denis, please.
Mr. St. Denis (Algoma): Thank you, Mr. Chairman, and thank you all for being here.
I'd like to ask about productivity. I appreciated all the remarks and particularly the remarks of Mr. Brooks and Mr. Donner. Maybe I can address my two small questions to you. If anybody else wants to jump in, please feel free to do so.
It seems to me that Canadians do hear a lot of the bad news associated with various aspects of our economy. I think, as Mr. Brooks has pointed out, there are a lot of good-news stories underlying the total picture.
Is there some good news for Canadians on the side of productivity? How do we rate as a country in terms of employing our human resources to convert our natural resources into usable goods for domestic use and for export? Should Canadians feel good about how productive they are or are there some problems in that area that we need to deal with, possibly in the context of your work on work-time redistribution? Is there a productivity aspect to that as well, Mr. Donner? Either Mr. Brooks or Mr. Donner can answer. Thank you.
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Mr. Donner: Thank you very much for the question. I have a couple of general observations with respect to productivity.
I agree with what Mr. Brooks said. We economists have difficulty in measuring it properly at the macro level, particularly in the area of high technology.
But, in general, one has to be struck with the fact that when an economy grows perpetually slow - ``perpetually'' may be too strong a word - you tend to see a commensurately slower increase in the standard measures of productivity. What's used most often is output per worker.
I think what we've seen in recent years is that productivity has been growing, on average in the whole of the western world, at a much lower rate since the mid-1970s than one would have expected. Certainly, it's slower than one would have expected based on coming off the faster rates of increase after World War II.
In addition to having relatively lower productivity growth, which means your standard of living can continue to increase, we've seen real wages in Canada and also in the U.S. - you would normally expect this to expand at about the same rate - grow at a far worse rate than productivity. In fact, I do believe that on average real wages are lower today than they were five years ago in Canada.
With respect to our ability to compete, my sense is that the major restructuring we've seen at the industrial level has helped make us more competitive. The lower-priced Canadian dollar has helped. Obviously, the scaling down of wage and salary increases has helped as well.
I do believe that with respect to the large seven industrial countries, on balance we're quite competitive. Obviously, we're not going to be completely competitive with some of the Third World countries that pay extremely low wages.
With respect to the implications of this productivity in terms of some of our work-sharing analyses and recommendations, we discovered - I think the research bears us out - that when firms and overall economies experience major reductions in average working time, there is an additional productivity dividend that you would not have otherwise received. For example, in the econometric simulations I cited, we assumed that work time, on average, would decline for the overall Canadian economy by about 10% over a five- or six-year period.
We didn't then assume that the 10% average reduction in work time - these are the freed-up jobs and hours of work - would all go into jobs for other people. Our rough assumption would be that roughly half of that would go into employment for other people. So we're not assuming an increase in output; we're just assuming a change in the distribution of work.
Once again, what comes out of that assumption or exercise, assuming that unit labour costs remain unchanged, is a fairly nice solution, I think, for the total economy. I think that suggests that the direction of reduced working time, which really kind of became arrested or stagnant over the last 20 or 25 years, should be something to be looked at in terms of this job creation problem that we're facing.
It's not what I call the first-best solution, but it's not a bad series of second-best alternatives. Frankly, as I look at the economic outlook and the unemployment rate, the first-best solutions aren't working very well at this time.
Mr. Brooks: I'll respond briefly. Productivity will increase both as better technologies come forward to help us and also with the demographics. As the baby boomers, who created a bulk wherever they went, age and bring more maturity and judgment to the workforce, that will increase productivity.
I would like to quote a study made by Professor Nordhaus at Yale University. He measured light as a commodity over a 200-year period. Whether it comes from a kerosene lamp or a fluorescent or incandescent light -
The Chair: Or from these hearings.
Mr. Brooks: - it's a simple commodity to measure. He found that over that period there was a 1,000% error in measurement from standard economic analysis. Then he turned his attention to wages and found similar discrepancies.
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We just can't keep up with the changes technology makes in terms of traditional measures such as productivity.
Mrs. Stewart (Brant): This has been a fascinating round table, with all kinds of interesting perspectives. I just have to follow, though, with Mr. Koskie.
A person might assume, from the comments that you made in response to my colleagueMr. Campbell, that we have too many labour venture capital funds and that perhaps the better strategy would be for you to combine your initiatives with Working Ventures. May I suggest that to you?
Mr. Koskie: Except that Working Ventures, interestingly enough, in a recent article in the newspapers, which is part of the media releases, don't have the same objective as Retrocomm, which is job creation investment. If you look at the media relations, which we have in the -
Mrs. Stewart: That is where they got their 40% tax expenditure.
Mr. Koskie: This is a fairly interesting phenomenon, but a lot of these venture funds do not have that objective.
Mr. McCambly said: ``The fund'' - referring to Retrocomm - ``only invests in the building industry and they put money in to create jobs''. I congratulate them for that, but that's not for us.
I think this is systematic. Many of the venture funds today are not focused towards job creation investments. That is one of the reasons why Retrocomm was established, in order to fill that particular void.
Mrs. Stewart: That's funny. I thought that was why the tax expenditures were granted to them, so that there would be job creation.
Having said that, I can appreciate your point of view.
Coming back to the area of R and D and investment, both from NSERC's point of view and from the aerospace and the oil sands perspectives, we've had DIPP, which you in the aerospace industry have identified as being a very successful model of repayable loans and royalties. Is that model attractive to you in the oil sands? I see that in your report you're asking us for a $25 billion investment.
Mr. Hyndman: No, no. We're proposing that a framework be set up that will allow that level of investment to be made.
In our sector we take advantage of the regular tax provisions that Canada has for research and development. Those are generally quite generous compared to those in other sectors of the world, and they've served the country well. But I'd like to pick up on the next phase of development.
It comes to something Mr. Loubier mentioned about whether the tax system needs a fundamental overhaul. One of the things we've learned in going through the course of this analysis for the oil sands, where today the companies represented in this effort are all on three different tax systems and six different royalty systems, is that it is very much made up of a patchwork of a system. We've had to shape our recommendations to live with minor adaptations of existing regulations.
In what Mr. Loubier was pointing to, our economy and our tax structure are biased against innovation. We can demonstrate this. You can take, from an investor's perspective, in an operating business two equal present value costs, one of them that involves change and one of them that involves carrying on with existing costs. The tax system today is biased against the change.
Quebec's system of capital allowances that is provided to their entire manufacturing sector is a more enlightened approach and ought to be considered for this country. If we want to drive change in our industrial sector, then we really need to look at how capital costs are treated.
I have to put our recommendation in perspective. We're trying to design a system here that has a marginal rate of combined tax and provincial royalties of 60%. This would probably driveMs George to a state of horror, but that's necessary in our sector in order to have stability, because we know that if we didn't have a reasonable rate like that, price excursions would cause the whole thing to be opened up again.
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To look at what drives innovation after the successful research is completed, you do have to then make investments. Particularly if it's investment in production, method change or process change rather than in new product, then you're into the guts of a productivity investment. Our current system is biased away from that today.
Mrs. Stewart: So for you, key support comes with structural changes to the tax regime, at the phase you're in at this point?
Mr. Hyndman: Yes, at the investment phase.
Mrs. Stewart: Coming back to the aerospace industry, with all the successes we're starting to read about - they're becoming commonplace - do you expect that your need to focus on government support is going to continue to be the same as it was as you were developing?
You point out that everything you do is new and creative and you have to count on governments to take the risk. As you've had a historical record of successes, isn't the private sector going to say, ``Gee whiz, this is where we should be putting our bucks''? Or is it going to be from here to eternity that the aerospace industry is going to be a fledgling industry that needs -
Mr. Mackay: Let me answer that in two ways.
First, I have some good news. More and more there's a cross-fertilization of technology into more commercial products. For example, what's going on in the communications and information technology world has a lot of crosswalks in a company like mine. We're now just as big a company in communications as we are in space. So there are increasingly crosswalks between what would be called traditional aerospace technology and that technology being used in other marketplaces.
The remote sensing market, which is a brand-new industry just now being born, frankly, I believe is going to be a multibillion-dollar market around the world in the very near future. All of that technology comes out of the traditional aerospace world. So, yes, the economics are changing.
The big problem we have going forward has to do with the product life cycles, as Dave has said, and what we in the business call the level playing field. My company builds antennas that go onto satellites. That's one of our products. Every company in the world I compete against for that product has been subsidized, usually through military programs in their home countries. Not only do they get their product development paid for, but they get profit for doing it.
So we have a level playing field problem. That problem won't go away unless the whole world changes its practices. It's unlikely that will happen.
The good news is that there are many more opportunities to leverage the technology into more commercial markets than historically has been the case. So there are opportunities for us to try to derive business cases that improve the returns so we can invest more as a relative proportion. The bad news is that as long as those practices are standard practices in the G-7 countries, and that's who we're talking about here, then the level playing field problem will be there.
I very much share Dave's view. In the face of that problem, the thing Canada has been able to do that is unique in the world is develop an extremely efficient and effective means of participating with the industry. No other country in the world even comes close in terms of the pay-off for those government investments. Study after study, going back, frankly, to the early 1960s, proves that. So it's not all downside.
Mr. Caplan: I'd like to add a couple of things, one on the word ``subsidy'' and one on productivity, if I may.
In the area of subsidy, as I said earlier, this is a repayable risk-sharing participation by the government. Even organizations such as the BCNI and CMA, I believe, have clarified their positions to ensure that the government understands they differentiate between that type of government participation and the word ``subsidy''. I think it's worth emphasizing, because there was a lot of publicity around their position last year, and the distinction got lost in the shuffle.
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In the area of productivity, it is by no accident that Canada's aerospace industry has been able to grow faster than anybody else's in the world. It's also partly a result of the military cutbacks in most of the western countries. Since Canada's aerospace industry has not been leveraged to its military, as I said earlier, it's also had that benefit. But I believe it's largely because we have been more effective and productive; in our case we have a leading market share worldwide. Between 1985 and today we have more than doubled that market share, which has brought us to the lead.
I'm also pleased to say that in the last three to four years, even as the down cycle started in the early 1990s, we have reinvested well over $100 million in modernizing not only all of our facilities to the 21st century but, more importantly, re-engineering all of our processes that we work by, from the shop floor right through management, to become more effective and productive.
I agree with the comment made earlier that it's very difficult to measure productivity. Let me give you a few measurements that are not understood in the statistics.
We have cut our lead time for production from 24 months to 9 months, with a goal of 6 months in two years and 4.5 months by the year 2000. This is productivity that doesn't get caught up in Statistics Canada. We've reduced the cycle of time to develop a new product from 5 years to 3 years, with a goal of 2.5 years by the year 2000.
The only way we're doing this is not by working faster, but by working smarter and re-engineering all the processes we do to bring a product to the marketplace. In fact, under DIPP we had obligations to share this capability and understanding with other Canadian industry, and we do that. We share this technique of what we're using to improve productivity with Canadian companies throughout our industry, and it's also available outside our industry.
The Chair: Thanks, Mrs. Stewart.
Mr. Pillitteri, you had a question?
Mr. Pillitteri (Niagara Falls): Yes, Mr. Chairman. Last week some of us travelled to different parts of the country. Of course you were out west and some of us were out east. The traditional questions were asked: there are no jobs out here; what's the government doing?
My question is for Mr. Brooks. Mr. Brooks, where do you think the jobs of the future will come from?
Mr. Brooks: The future jobs will largely be in the service area as opposed to traditional hard manufacturing areas, although we'll always have a certain number of manufacturing jobs. Technology will be creating more jobs. There's a myth that technology takes away jobs, but in fact the net result of studies done is that for every job technology takes away they tend to add a little more than one job - 1.1 or so - to the mix.
It's not an easy question, but generally I would say the service sector would be the prime area where jobs will be found more and more.
Mr. Pillitteri: Mr. Chairman, coming from a part of the country like the Niagara Peninsula and Niagara Falls, it seems to me that all of my problems are solved, at least. The growth, then, will all be in the service area; in the tourism industry it will great.
Thank you for the answer.
The Chair: What will it do to the wine industry in the Niagara region, Mr. Pillitteri? What will it do to Pillitteri Estates?
Mr. Pillitteri: It'll do wonders.
The Chair: Thank you.
Mrs. Brushett, please.
Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chair.
I would like to make one comment to Mr. Koskie about those labour-sponsored venture capital funds. We've heard from several groups here at this finance committee, which have lots of money, as you've suggested, but don't know where to park it. I would say, as my colleagues have said just previous to me, that maybe you should form an alliance with some of them rather than solicit the government for a loan. The money is there and we've already given the tax credit, which is substantial, and I think the opportunity under the policy is to create jobs for all of them, so I don't think we should be remiss and forget the mandate of that policy.
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Mr. Koskie: I fully agree with you that is the mandate behind labour-sponsored investment funds. But I repeat that these other venture funds are not carrying out that mandate, and Retrocomm is. Its sole purpose is to create jobs for the members of the sponsoring unions.
Mrs. Brushett: Thank you.
I want to turn to Mr. Caplan and Mr. Mackay and to comment on research and development. We've been on the road, and it's almost a unanimous theme out there that corporations aren't paying their fair share; it's on the backs of the little people across this nation. We're overtaxed. It's a theme. Whether it's perception or reality, it was a constant theme throughout our hearings.
I am familiar with Pratt & Whitney in Nova Scotia, and I know we have invested in this sector. We actually did develop robotic technology at the Nova Scotia Institute of Technology to enhance research and development, in the name of job creation. Yet today, a few years later, we hear that Pratt & Whitney has a lot of jobs out there but no one in Nova Scotia is trained for them. It has to go outside to find people, maybe even outside the country. I'm wondering, when we do invest, if we're getting a good return on that in job creation and as an investment.
Mr. Caplan: I can answer that specifically, because we're very proud of what has happened in Nova Scotia. I'm pleased to clarify this.
When we established in Nova Scotia, we started with a green field. We have established there, I believe, the most modern, high-tech, computer-integrated manufacturing facility in the world. Essentially, it's all run by Nova Scotians. We worked closely with the Nova Scotia Institute of Technology and others in the region to develop a curriculum such that the local people would be trained and would be trainable to come in and do the jobs we would have in the future. That has been a huge success.
Today we've well over 400 people in that facility. It has doubled in size since we first started the activity in Nova Scotia. In Nova Scotia we have not been limited in that expansion or the current hiring activity by the availability of trainable or trained people.
I said we are in a cross-country search. These are experienced professional engineers, with eight or ten or more years of mechanical and aeronautical engineering experience. We could hire new graduates, but as we expand an organization, as we're doing significantly, we need a blend of experience and new graduates. It's the experienced people who are the difficult ones to go out and capture in short order.
But I want to emphasize that the Nova Scotia experience has been a total success. It continues to be a success.
Mrs. Brushett: Thank you. I would agree with you.
My query is simply this. As we hear from the tar sands...and the National Oil Sands Task Force, the job creation you're talking about is costing almost $600,000 per job created. This is a very substantial number. So when we hear from all citizens, we have to evaluate whether we get a return on this investment from the government, at this level. Can we train these young people and put our young people to work? Dealing with this budget and determining where job creation is coming from and how to get good value are the questions of the day.
As I see it, the research is the easy and simple part, because it's being done all over the world. It's the development, getting that product to the marketplace and being able to compete globally.... My query is how can we do it? The prices we're looking at are substantial numbers.
Mr. Mackay: I simply make the point that life is relative; and relative to how every other country has done it historically, Canada's pay-off for investments in these areas has been significantly greater than that of everyone else.
But let me come to the very fundamental point, which is the job point. Like all high-tech companies, we are constantly searching for high-quality talent. The engineers we have the toughest time hiring these days are in the software and digital engineering areas. We are constantly being raided.
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We do everything from co-op programs with universities - we have some associated with Polytechnique in Montreal, with Waterloo, and with a number of universities across the country - on up to essentially trying to go into the world market and buy the best talent we can buy, frankly. At that level, that is all you can do, because you are competing globally and you must try to hire the best people in the world.
Just by way of example, one of the things that's been very helpful to us as a company has been a very open immigration policy, particularly with very bright young engineers coming out of universities in Asia and coming to Canada to work in graduate and post-graduate programs. They have become some of the best and brightest in our industry in the last ten years; they're very bright people. So it's a combination of things.
In terms of the investment and what the pay-off is, the kinds of jobs we're talking about creating here are for what I think some people in the economics and policy world are now referring to as knowledge workers. These are people who have an ability to contribute to your economy over the next 30 to 50 years. They tend to be highly skilled and they tend to be mobile.
That doesn't mean they're always going to work for Pratt & Whitney or SPAR, but they are becoming the people who are probably going to make the maximum contribution to the Canadian standard of living in the future. They are going to be the people who pay most of the taxes and do those sorts of things. Their earnings start at $50,000 or better. They tend to be highly skilled, highly paid people.
When you look at it from the point of view of trying to make the very difficult trades on where to make the investments, I sympathize. I spent a number of years in government myself and I sympathize with your problem. I think the thing I would strongly suggest you try to keep in mind is that the creation of that kind of a job is an investment for the next 20, 30, or 40 years in the future of the country, not in the next 2 years. It's a difficult trade-off, but I just leave you with the thought.
Mrs. Brushett: Thank you.
The Chair: Yes, Mr. Hyndman?
Mr. Hyndman: I just need to correct one perception. The $21 billion to $25 billion -
Mrs. Brushett: It's mathematically used.
Mr. Hyndman: - is certainly not the tax impact. That's the total investment in the industry. As has been discussed over here, if we want high-productivity workers, then our capital investment per employee and our economic output per employee are going to be high. That's the definition of increased productivity.
In the proposal we have recommended, the total tax cost of regularizing the system amounts to a few tens of millions of dollars over the next decade. The $21 million to $25 million is the investment that would be made in the industry, most of it by a cashflow from the industry itself or by investment from outside the country or from other Canadians.
I'd also like to add that when it comes to jobs and relocation, there's really nothing wrong with Canadians moving from one part of the country to the other to accept employment. We're very happy with the 12,000 Newfoundlanders who live in Fort McMurray, the third largest Newfoundland city in the country. We suspect that by living there, their contribution to the Canadian tax roles might be a little better than it would be if they had to stay back home.
Mrs. Brushett: Thank you for those comments.
The Chair: Thank you, Mrs. Brushett.
We turn now to a new member of our committee, Mr. Leon Benoit.
Mr. Benoit (Vegreville): Thank you, Mr. Chairman. Welcome to all the witnesses here today.
I'd like to direct my first question to Mr. Orr from the Canadian Chamber of Commerce.
You talked about the importance to business of reducing the deficit. I want to ask you how important you feel it is that the finance minister set a target of zero deficit and that it's done within this mandate. I ask that because of government's very poor record of following up on a promise made in one mandate when we get into the next mandate.
Mr. Orr: I think that's very important, Mr. Benoit. We would certainly encourage Mr. Martin to do that. I think if he did, there would be a favourable reaction in financial markets. Interest rates lower than otherwise, investment higher than otherwise, and more jobs than otherwise are some of the things that could result if we could talk Mr. Martin into setting a date whereby he would eliminate the deficit.
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Mr. Benoit: I appreciate the very concise, well-worded comment in your brief on the connection between jobs and reducing this deficit quickly.
My second question pertains to job creation programs. One of your statements was to eliminate government-funded direct job creation programs. In Mr. Axworthy's reforms to UI, he is in fact proposing spending more tax dollars on direct job creation. How do you respond to that?
Mr. Orr: Rather than being specific, I would have to respond in a general way toMr. Axworthy's recent proposals. To just re-emphasize this point, the way to accomplish solid job creation is through focusing on productivity and competitiveness. The job creation will then follow.
I think the big mistake that we've made for years has been that people in the public have put pressure on their politicians to create jobs in their ridings. Politicians have been very anxious to cater to that and they take a high profile in taking credit for job creation in their ridings. The history is that this type of job creation generally is very inefficient, and the taxpayers simply cannot afford that way of doing business any longer.
Mr. Benoit: I appreciate your statement on that.
My next question is to you, Mr. Donner. You made a statement somewhere along the line that you can't help thinking government cutbacks have contributed to reducing economic growth - and I'd like you to say so if I'm not accurate in my statement, but that's what I have in my notes. There are those who actually believe government cutbacks can be stimulative to the economy. I would just like to ask you what evidence you have that government cutbacks would in fact slow growth rather than stimulating it.
Mr. Donner: Mr. Benoit, you quoted me accurately. I truly believe the evidence is overwhelming. If you look around, it's no surprise that consumer spending, for example, has been in the doldrums for the last four or five years. The consumer is very insecure. It's not only a question of the growth of real earnings, it's related to the insecurity and the extremely high unemployment rate. I think the evidence is overwhelming that this has happened. I would also suggest that the belief that further government cutbacks won't have an employment impact is living in an Alice in Wonderland world. I wish it were true.
Given a long enough adjustment period, it may well be that you will reduce the deficit through very tight fiscal cutbacks and you will ultimately create jobs. But believe me, within your political mandate and within the mandate of the last five years of the 20th century, I don't think that will be the case at all. To be precise, I think fiscal policy is strangling the Canadian economy and has a lot to do with the lack of jobs.
Mr. Benoit: So you're attributing what you say is slow growth over the past five years to federal government cutbacks.
Mr. Donner: Well, most of the cutbacks did originate at the federal level and ultimately filtered down to the provincial level.
I should add that the problems we face in the 1990s can also be traced to the 1980s. Economic policy, in my mind, was completely unbalanced in the 1980s. The imbalances resulted in incredible stresses in the 1990s, but I'm not going to blindly close my eyes to the problems that are created on the job front as you very notably try to reduce your budget deficit. I think the two are clearly linked.
Mr. Benoit: From what I understand, there really haven't been any net government cutbacks at all, certainly not over the past four or five years. Government spending has increased continually.
Mr. Donner: Mr. Benoit, when the federal government shifts from a basically balanced position to a $30 billion program surplus - program surplus is a surplus excluding interest payments - I have to believe you've taken $30 billion of purchasing power out of the economy. This is going on at the same time as the provincial governments are shifting in the very same direction, and some of them are going to go even further.
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The Government of Ontario is taking $8.3 billion out of the provincial economy of Ontario over the next three years. I can assure you, when you reduce government spending in Ontario by 2% or 3% of provincial GDP and add the federal government reduction as a percentage of GDP, you will destroy jobs.
I think all the efforts of various industries around the table trying to create jobs is very noble. I suggest the basic problem is a very macroeconomic problem. It is one of economic policy being completely out of balance.
Mr. Benoit: Mr. Donner, if you are suggesting the government shouldn't cut back, how -
Mr. Donner: I'm not saying that, sir. I'm suggesting if you're going to cut back so heavily on the fiscal side, you must offer some counter-stimulus on the monetary side. I do not see the stimulus coming on the monetary side.
Mr. Benoit: What type of stimulus are you talking about?
Mr. Donner: There are time-lag issues and so on with a stimulus on the monetary side and the economic impacts of an easier monetary policy compared to a tight fiscal policy, but stimulus on the monetary side simply hasn't come. In my view this really means completely abandoning any idea that there's a certain appropriate level for the Canadian dollar. We should let it play itself out.
It's also likely that a stimulus on the monetary side when an economy is so depressed might not be particularly effective at this time.
Mr. Benoit: Since the Liberal government has taken office, interest payments on the debt have increased from roughly $39 billion to about $52 billion at the end of this three-year period.
How do you suggest those ever-increasing interest payment be dealt with?
Mr. Donner: I think this problem was largely created in the 1980s when we ran an extremely easy fiscal policy. Right at the top of the 1980s boom, which was roughly 1988-89, we should have tightened up the fiscal budget. At the same time we ran an extremely tight monetary policy. You may or may not accept that diagnosis, but I think it had a lot to do with the huge debt build-up.
I'm quite sympathetic to the Government of Canada being in this interest payment trap, and I recognize that you want to get out of this trap. I share that view. I'm just going to come back to my point. To get out of that trap, considering the fiscal policy you're pursuing, with the current level of monetary policy you will only make the job creation situation different.
I respect everybody around the table and I respect your attention, but you are tinkering at the margin. The major problem is a macroeconomic problem and I would trace that to problems that were created in the 1980s. I don't have a quick fix, but I suggest the macroeconomic policy mix is out of balance.
Mr. Benoit: I guess we can look back. The real question is how do we deal with the problem now.
Mr. Donner: Let me just leave you with this one passing comment. Please recognize that we are in a crisis and the policies you are pursuing, as noble as they are, to reduce the budget deficit will make the job crisis worse, not better.
The Chair: Thank you, Mr. Benoit.
Mr. Grubel, you indicated you wanted to add something.
Mr. Grubel: I have just a couple of quick points on your analysis. I am very familiar with this monetary fiscal policy mix argument, but there's also the argument that as a small country we are losing our independence because the interest rates we have in Canada are made abroad, and we really can't do anything about that. We have learned that if we stop playing around with the interest rates, we set up expectations that will be counter-productive. I think there is a difficulty there.
I have just one last point. I think there's increasing evidence around the world that the Keynesian reduction in income and employment that comes from cutbacks under normal circumstances is different from when you have an incisive cutback in a country that has a debt crisis. The action itself of signalling to the public that the government is prepared to take the political costs in order to restore confidence will have that effect. It has happened in several European countries. I know of a paper that has systematically studied those effects.
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I think Canada is in the position that if tomorrow we had an announcement - and we heard several witnesses who agree with this, and in fact suggested it - of decisive, quick elimination of the deficit, then the interest rates would drop, because the risk premium that we now have over the American interest rates would be reduced as a result of that.
Mr. Donner: I appreciate your comments. I certainly agree with the point that we are paying an extremely high risk premium as reflected in the normal interest rates, particularly longer-term ones. That's why I also circulated to the finance committee a very brief note that I wrote on the argument that perhaps we would have been better off over the last 15 years if we had pegged the Canadian dollar.
I'll just draw to the committee's attention that when we had stable, or nearly fixed, exchange rates internationally and within Canada, we never heard of a discussion of high real interest rates. I suspect that one of the reasons for that is that, overall, the markets assumed that the currency risk was much reduced.
Normally I'm not a supporter of fixed exchange rates. However, looking back and looking at where we are, I'm beginning to wonder whether or not we would indeed be better off by fixing the Canadian dollar against the U.S. dollar, at a fairly low competitive price - I'm comfortable with a 75¢ to 80¢ Canadian dollar - and holding it there. I truly believe that in the totality, or at least in the short term, we'd be better off for that.
Mr. St. Denis: I'd like to ask a question of either Ms Potvin or Mr. Hatton.
We've had representatives of the voluntary sector appear before our committee a number of times, including you, Ms Potvin. There's no question of the importance of the charitable and voluntary sector to our society. I've often used your example about the calls and faxes in Japan - in remarks to my riding, as a matter of fact - as examples of how maybe in a way we take for granted the infrastructure that we have in Canada for charitable giving and volunteerism. So it's very important.
I'd like to challenge you a little bit on the paper that you presented. You stated that it was a paper for the last round table, but I think it's relevant now.
I don't want to appear to be defensive about political donations. It's really just an interest I have in understanding the issue better.
A voice: I have a friend who is interested in the question.
Mr. St. Denis: My colleague here is interested.
What's the total amount of charitable giving, not from minor, small donors but from large donors, in the country, let's say in the last year you would know? I think we have an idea of what the total amount of political giving would be in the year. Are we talking about similar numbers? Are we saying that there is a competition for a political dollar versus a charitable dollar? For smaller donors you are arguing that the political contribution is a handicap, and for the large donors the status of crown agencies is a handicap. For our benefit, could you draw the linkage between those constituencies?
Ms Potvin: I'm sorry, but I don't have the figures about the gross. Maybe Al can answer on how much money is collected from charities. I use them every time I turn around, but I don't have them in front of me right now.
The first point we try to make in this paper is, of course, if we can have a better deal when we try to collect money for charitable donations, and here is an example, which is the political one. The point we're trying to make here is how Canadians see it. They don't quite understand this two-tier thing and the 29% and the something percent with the charitable thing. Then they get to the last page and they see what happens with ``political'' and they say, ``Hey, this is all out of whack. There's an absolutely huge, monstrous, difference between the two. How come?''
That's why we would like to see a way of first of all bringing it closer into line so we can argue that it's similar. That's the first point.
We would also like to see something that is much clearer on the income tax form so we'll be able to explain and everybody will be able to see much better how much money they will get back if they make a contribution.
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Have I answered that part of the question?
Mr. St. Denis: Not really. In the absence of the figures, I'm going to guess total donations would be in the $50 million to $100 million a year range, and total political contributions would be less than $10 million. I'm going to guess it's five to one, or even twenty to one, in favour of the charitable sector.
With the greatest of respect, we're talking about different constituencies. A political donation and a charitable donation - and I make both; many people make both - are for different reasons entirely. I think, quite frankly, you hurt your argument in comparing the two.
But I want to give you the chance to make the relationship.
Ms Potvin: If it is twenty to one - and I don't know that, but Mr. Walker says it's true - what we have to remember, of course, is that you have to take all the charitable giving to institutions, such as universities and hospitals. When we're talking about the charitable sector we're talking about the people we represent, who receive, I think, 5% of all charitable donations. I'm not saying you don't have a problem when you're looking at how you change this and who it applies to, but I don't think we're talking about a whole lot more money going to our charitable sector, if we take away hospitals, universities, and institutions of that kind, than what you now get for political contributions. I'd say it's closer to equal.
Mr. St. Denis: Just a concluding comment. Our committee would certainly want to support whatever could be done in support of the voluntary and charitable sector. But I can tell you that, for example in my riding - I am speaking for my association - the annual amount of contributions is quite modest in relation to any club in the community. So in fairness to the public, I don't think we really do have a great competition for those dollars.
That said, we are supportive of the sector.
The Chair: Mr. Campbell, please.
Mr. Campbell: Just a quick question about NSERC for Mr. Brzustowski.
I think it's fair to say you're among friends here. I don't believe in the many things we as a committee recommended last year we recommended a cut in NSERC's budget, although regrettably that is what occurred at the end of the day: as you point out, a 14% cut over three years, or $70 million by 1997-98.
You've provided us with information that shows the budget for NSERC from 1990-91 through to 1997-98, at its height, almost half a billion dollars down, as you point out, in 1997-98. What's the right level? You've dealt with government after government that's looked at this and said it's too much, it's too little. Help us out here. If we were starting over, how would you judge what the right amount is to put into the very worthwhile activities you help fund? How would you advise a government, if we were starting over, to divvy up its budget and provide some of it to that versus the other worthwhile endeavours that have been described around this table?
Perhaps it's not a fair question, but it's an important one.
Mr. Brzustowski: No, it's a very fair question; and one of the most difficult to try to answer. I think I would have to focus on the outcomes one might try to achieve.
I distilled from some of the comments from this side of the table, particularly from the aerospace industry, that there's a need to make strategic investments - investments made today to try to gain some advantage in the long term. We really feel that's the main role of NSERC. Those investments are in people, in their capability to generate knowledge, to use knowledge from other sources; in Drucker's words, putting knowledge to productive use in the economy.
I don't know what the right number is. There's no question NSERC has had to cut a number of its programs in the last few years to fit within the budget, and there's no question there is pressure for more, all the more because now the provinces are cutting their side of this implicit partnership.
NSERC grants don't pay for the salary of a principal investigator; the professors are paid university salaries from provincial grants. They don't pay for heat, power, and light. They don't pay for basic bookkeeping, purchasing, and cleaning services in the university, the library and all of that. Those are meant to be paid for from provincial operating grants to the universities.
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Those grants are being cut back and we're starting to see a trickle turning into a flow, with notice that it'll be a flood of.... Please, can you give us an interpretation? Is this an allowable expense under NSERC because we're not getting this money any more from the university? This is a time when our total budget is declining. Every time one says yes to that, there's even less for everything else.
What is the right amount? I wish I knew. At this stage of the game I can say only that we can begin to measure the valuable things we have to give up to move it by increments downward from where we are.
If you'll let me, though, I'd like to tack a comment onto that. I would like to draw a distinction, which I hope you'll share with me, between business subsidies and what we've been doing to counteract some of the budget cuts, and that is to develop partnerships among universities, industry and two levels of government that lever some additional funds which can be focused on research. But these have the strategic dimension, and they deal with a five-year to ten-year commitment.
For example, in the NSERC industry chairs, a company commits several hundred thousand dollars and sometimes more over that period. More than that, it commits its attention to that piece of research and its own resources to possibly using it. All of these are strategic. I hope that particular activity doesn't get caught up in the image of business subsidy because of its long-term strategic dimension.
This is one of the things we do to try to counteract the decline of NSERC's own budget and to maintain that critical mass of people, activity and competence through the university system and, additionally, to develop the useful products and the outcomes for industry.
What is the right amount? I can only tell that by the pain caused by decreasing from where we are. You can't compare us with other countries because our structure is different. Our investigators' salaries are paid by the universities, not from our budgets, so to compare us with NSF in the United States makes it look worse than it actually is.
Mr. Campbell: The problem we have as a government, that any government has in choosing how to allocate scarce resources, is to develop or identify rational and objective criteria for judging one competing claim on those resources against another.
One might argue that it is the number of jobs created at the end of the day, but others would assert that it isn't the number of jobs, it's the kind of jobs. Others would assert that it's none of the above, it's the atmosphere you create. Others would say it's whether or not it contributes to strategic partnerships and the like or to exports and on and on.
I wondered if you had a particular number or those particular criteria in mind.
Mr. Brzustowski: May I quote an outcome? Let me quote one of the provincial premiers because this is very fresh in my mind. Mr. Wells made this comment about three weeks ago at the launching of the NSERC industry chair in fisheries conservation in St. John's at Memorial University. Mr. Wells spoke first, Mr. Tobin spoke second, and then I had a chance to say something.
Mr. Wells said that fisheries conservation and research, funded by the province, by Fisheries Products International, indirectly by the Department of Fisheries and Oceans and by NSERC...that this research had an enormous impact on the quality of life and the well-being of people in Newfoundland and Labrador. The outcome might be the revival of an industry, perhaps in a better form.
Mr. Wells went on to say that he's well aware that this research and research in other areas where knowledge is needed now couldn't begin if people hadn't invested in basic research two decades earlier.
I immediately congratulated him on that comment and promised to quote him at every opportunity. This is the first.
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As for strategic thinking, I'd say given today's conditions and the maturity of our programs, if we could go back to that peak at $500 million, it would be very hard to justify any additional increases.
Mr. Campbell: I guess you wouldn't want me to conclude, then, that we'll know when we've spent too little when it's too late to correct it.
Mr. Brzustowski: Mr. Chairman, that is one of the great difficulties, in fact, in the very desirable basing of policy on outcomes, because there is a time lag.
The Chair: Thank you, Mr. Campbell.
We'll be concluding with brief 30-second statements by each one of you. Is there anybody who, before we get to that point, would like to put something else on the record, something we haven't had a chance to deal with?
Mr. Krishna.
Mr. Vern Krishna (Tax Counsel, Koskie & Minsky): Thank you, Mr. Chairman. I just want to briefly address this matter of the labour-sponsored fund, which has generated some hostile questions. One of the great difficulties with tax incentives - and this is one of them - is that they involve tax expenditures, and tax expenditures should be efficiently targeted.
One of the problems we are encountering and that we intended to address here is that this credit - which is a remarkably generous credit indeed, and a very expensive credit - is not, in our view, fully and efficiently targeted at job creation and labour-intensive industries. The funds have tended to go into support of other investment activities that may not well have been contemplated in the original legislation.
The only point we make here today is to repeat that in a reconsideration of issues of these types and matters, that target efficiency of tax expenditures should be given some priority, particularly - in the context that we appear here today - labour-sponsored funds. Thank you.
The Chair: Thank you, Mr. Krishna.
Yes, Ms George.
Ms George: One of the points that was raised several times was that you've been hearing loud voices across the country saying that personal tax rates are too high and that people feel they're paying more than their fair share. I can tell you absolutely, personal tax rates are too high. But you're not going to get the money from other sources. You're going to have to cut programs and cut spending. There is no other choice.
Business has given up 60% of its subsidies and has done so generally without complaining. You will find that at the personal level, I'm going to pay more to send my kids to university, I'm going to start paying health care fees at some point, no matter what the government likes to think otherwise - that's the reality at a personal level. We will get less because you will spend less.
The Chair: Thanks, Ms George.
Would anybody else like to add anything before we do our brief summing-up?
Would you like to start, Mr. Koskie?
Mr. Koskie: Thank you, Mr. Chairman.
In summary, I perhaps can best refer to an article that appeared in The Toronto Star this morning saying that venture capital is a good source of jobs. That is the subject of the question before today's round table.
There is reference in our brief and in this article to a survey by the Business Development Bank of Canada that says that labour-sponsored venture capital funds and other funds create an average of 30% more jobs each year. I think that's what venture funds like ours are aimed at.
I respectfully urge that the committee give every consideration to providing additional incentives so that venture funds that are targeted towards job creation can indeed succeed in fulfilling this government's mandate of creating more jobs. Thank you.
The Chair: Thank you, Mr. Koskie.
Mr. Grubel: [Inaudible - Editor] ...an estimate of the cost per job created is 33% more every year?
Mr. Koskie: The venture fund capital investment creates an average of 30% more jobs each year.
Mr. Grubel: But wouldn't you think that for the finance committee it is important to know what the cost is per extra job created? Wouldn't that be valuable?
Mr. Koskie: I think that is also in that particular report.
Mr. Grubel: It is? I see.
Mr. Koskie: It is, yes.
Mr. Grubel: But you don't know what it is.
Mr. Koskie: It's in the report. I think they talk about the fact that one new job is created for every $47,000 of venture capital invested, as compared to $70,000 equity invested in Canada's biggest 100 firms.
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Mr. Grubel: But how much of that is government money versus ordinary private sector money?
Mr. Koskie: I don't believe any of that would be government money.
Mr. Grubel: Well, you can understand that the reason for the existence of these funds is so that there's a subsidy.
Mr. Koskie: That's right.
Mr. Grubel: We're concerned about the subsidies. If you put enough money into it, you can create millions and millions of jobs with the right amount of subsidies. Therefore, what we need to know here is - maybe it is in these figures and maybe you can send it to us, Mr. Chairman - that we can get these numbers to provide evidence of what it costs to create new jobs in terms of government subsidies.
Thank you.
The Chair: Thank you, Mr. Koskie.
Mr. Brzustowski.
Mr. Brzustowski: Mr. Chairman, thank you.
Just to reiterate my initial plea, I hope the committee in its wisdom will recommend some measures that will create an environment conducive to innovation, both to increase the productivity of existing enterprises and to create new economic activity to bring people who have been displaced through downsizing back into the workforce. While research and development and the activities of NSERC are certainly part of what's required, there's a great deal more that has to do with a number of the things we've heard around the table.
So a climate supportive of innovation is terribly important, Mr. Chairman and that's my plea.
The Chair: Thanks, Mr. Brzustowski.
Ms Potvin.
Ms Potvin: I would like to ask the government to consider making use of the infrastructure that already exists across this country through the voluntary and charitable sector, and to look at ways in which we, together, could do some job creation, especially among the youth - the 16-to-25 age group. I think if we put our heads together, we could certainly work something out to get those kids their first jobs.
Thank you.
The Chair: Thank you very much.
Mr. Hatton.
Mr. Hatton: Just following up on the same thing, we've talked a lot today about the high-tech sector, technology and productivity. I think we've talked about the positive side of that, and I think Canadians need to hear more of those positives. There is another side, though, and that's the human.
There's a process of change that we're going through at the community level and in many organizations. A little bit of the implication of what I was picking up - and if I'm wrong, please correct me - is that productivity only takes place in the private sector. The fact is that every organization in this country, both inside and outside of government, is going through the same massive change. We're following the best we can of what the private sector has learned. As the government, we have another responsibility, and that's the human side. The problem is that we need time.
I'd say a year or two of space is needed for large organizations and community-based entities to work together in partnership with the private sector and with government to pick up the slack. The assumption is that government can cut - I agree with Mr. Donner - but that we're not worried about it because the numbers are going down and everybody's happy, including the population. The side that's not spoken about enough is that there are a lot of people being hurt in that process. Who's going to pick up the slack?
The assumption is that the private sector will give money to community groups and we will automatically give better service. Number one, the private sector is not really in a position to give more right now because, for the very reasons we've heard, they're strapped and they're trying to respond to conditions both nationally and globally. I think they're doing that reasonably well and very quickly.
The community side is only waking up to this, just like government. We need a bit of space, and I'm not talking about being unproductive and not worrying about the bottom line. So I'd just make a plea that you give that some thought.
As you think about how you're solving the economic deficit, also think about the social deficit, because it's the other side of the equation. We haven't spent but about four minutes talking about it in the last two hours. It's absolutely critical. If we want the values in this country that we started out with as Canadians - business, labour, the government and the community - to continue and to be enhanced, there's a whole sector out there that has to be supported in this process. I'm very worried now about the changes in Ontario because this is not being factored in, so we would hope this committee and the federal government keep it in mind, because you've always had that balance.
The Chair: Thanks, Mr. Hatton.
Mr. Donner.
Mr. Donner: Thank you, Mr. Chairman.
My recommendations would start off with a clear statement from your committee that there truly is a jobs crisis and the jobs crisis is likely going to become worse rather than better over the next several years. I've already stated that I think the further fiscal cuts that are likely to come will make the jobs situation worse than it is.
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I urge the committee to evaluate the full deflationary effects of the macroeconomic policies that are currently going on. If you continue on with such heavy levels of fiscal restraint - and I'm not only talking about federal, but I'm also including provincial in this - there should be a really strong message to the Bank of Canada to try to compensate on the monetary side.
Finally, I believe it's in all our interests to ensure that work is spread around more equitably, particularly towards the young.
Thank you.
The Chair: Thank you.
Mr. Brooks.
Mr. Brooks: Fifteen years ago my clients complained about 25% plus interest rates, OPEC oil shortages and the deep recession, but there was not a crisis of confidence. Today there is. I think you know there is.
We need to start talking about what the good things are in this society. The facts are there. As our elected leaders, I would urge you to create forums to bring in experts who can talk about these things and to use the forums you yourself have to talk about the positives that are in the society. We need that. Work with facts; they're there. That will do more good than spending countless millions of dollars on various programs.
The Chair: Thank you, Mr. Brooks.
Mr. Orr.
Mr. Orr: When you receive proposals for government to finance job creation, please ask, if the payback is so promising, why won't bankers or shareholders finance it? Why should the risk be forced upon taxpayers? There are examples where the pay-off to the public can exceed that to private investors.
The best way to account for these exceptions is to support basic research - for example, the R and D tax credit or NSERC funding - not special programs and not grants for specific projects. That's the most effective way to create a broad environment of solid economic policies for jobs and growth.
The Chair: Thank you, Mr. Orr.
Mr. Caplan, I'm sure you'll agree with the last speaker.
Mr. Caplan: Let me go back to a couple of points I made.
One was the importance of long-term liability to job creation. We shouldn't look for the quick, short fix. The program money should be invested in activities that create jobs over the long term, where there's demonstrated viability.
Over the last twenty to thirty years Canada has developed a world-competitive and world-leading aerospace industry. As you said, what the last speaker is forgetting to note is that we're not competing with banks; we're competing with other countries who would love to see the activity Canada has developed be moved to their country and would pay and participate to do that.
The competition for private industry isn't between Canada and the banks. It is really a decision by countries as to what the success factors are from many perspectives - social, educational, technical and quality of life - and what they bring to a country, and the ability to sustain that in the long term for the benefit of the country.
Aerospace has demonstrated that benefit over and over again, through many studies conducted in Canada and elsewhere, and that's why the competition for the aerospace industry is so fierce worldwide. I might add, it's also why the newly developing countries actively seek to participate in this industry. It's because they know what the payback is.
The Chair: Thank you, Mr. Caplan.
Mr. Mackay.
Mr. Mackay: I'd echo what Mr. Caplan just said and leave you with the thought I opened with. Please remember the distinction between an expenditure and an investment. The Canadian government is looking at a program now to replace DIPP. I would ask the committee to consider it very seriously and favourably when it comes forward.
Thank you.
The Chair: Thank you, Mr. Mackay.
Lastly, Ms George.
Ms George: Thank you, Mr. Chairman.
The two gentlemen on my right are not CATA members, although some of their competitors are. I can tell you quite clearly that no DIPP means the loss of thousands of jobs. What you need to do is consider the cost of keeping those jobs in Canada versus the benefits of keeping them. It's an unfortunate situation that you and others in the government are going to have to make a very tough decision on.
Technology companies will continue to grow more jobs and increase their exports as long as you continue to reduce the cost of government while building a business environment that is globally competitive. This means, without a doubt, that there can be absolutely no increases in taxes, because the environment today is such that we are just barely competitive.
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As long as you can create that competitive environment, the businesses in Canada that have many options will stay in Canada. They'll continue actively to recruit and to hire from our universities. If you look into who these people who are employed are, you will find that they're highly skilled payers of large taxes and relatively small users of your benefits.
I believe strongly that if the business environment is right, a lot more jobs can be created in Canada.
The Chair: Mr. Koskie and Mr. Krishna, you represent workers who are seriously underemployed in Canada, particularly in my area of Toronto, where probably half the construction trades are out. We on this side of the table know that one of the great ways to get people back to work is through the construction industry. You've given us one alternative today.
Others at the table, Mr. Brzustowski, represent the really deep investment in human capital at a very important level. We've seen the results of some of these investments in human capital that you've made being represented at this table.
Rose Potvin and Al Hatton, as we cut back we turn more and more to the voluntary sector, and you have a right to expect that if we expect something from you, then you should expect something from us. All I can say to you is that I suspect that we're going to need you more and more in the days ahead.
Mr. Donner, you've said some things to us that we have not heard before, going back to a fixed exchange rate. You have expressed concern about what all of these fiscal measures will do, over the short term anyway, in terms of jobs. This is one of the reasons why we invited you and it's one of the reasons why we are here discussing this topic.
Mr. Brooks, you've given us a delightfully optimistic view of the future in what I found to be an interesting book worth reading, Catching the Wave, showing a little bit about where we are going and where the opportunities are going to be and that maybe things are not as bad as a lot of people would like to think. I'm glad that we had that counter view today.
Mr. Orr, you've suggested the macro approaches to it, and one of your concerns has always been no business subsidies as a way of getting our deficit down. That's still the major concern of the chamber.
We see sitting beside you three witnesses who say that certain types of business ``subsidies'' or investments are critical in order to keep us competitive internationally. We see in SPAR Aerospace and in Pratt & Whitney world leaders who have put us on the map and are creating high-value-added jobs in Canada.
We are looking to the high-tech sector as one of the areas that John Brooks and others have talked about so forcefully as being a way for creating wealth in Canada in the future. This is why you people have been critical to our discussions and will be critical to our economic future.
On behalf of all members here, I thank our witnesses, who were, as always, never in total agreement on everything, but certainly bring to the table a great deal of expertise and capacity to deal with the issue of our economic future and jobs within it.
We stand adjourned.